EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Energy Partners, Ltd.:
We have audited the accompanying statement of revenues and direct
operating expenses of certain oil and natural gas properties (the Acquired
Properties) acquired from Castex Energy 1995, L.P. and Castex Energy, Inc.
(Castex) by Energy Partners, Ltd. (the Company) for the year ended December 31,
2004. This financial statement is the responsibility of Castex's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in that financial statement. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit of the financial statement provides a reasonable basis for our opinion.
The accompanying statement of revenues and direct operating expenses
was prepared as described in Note 1 for the purpose of complying with the rules
and regulations of the Securities and Exchange Commission and is not intended to
be a complete presentation of the revenues and expenses of the Acquired
Properties.
In our opinion, the financial statement referred to above presents
fairly, in all material respects, the revenues and direct operating expenses of
the Acquired Properties for the year ended December 31, 2004 in conformity with
accepted accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
New Orleans, Louisiana
March 31, 2005
ENERGY PARTNERS, LTD.
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES OF CERTAIN
OIL AND NATURAL GAS PROPERTIES ACQUIRED FROM CASTEX
FOR THE YEAR ENDED DECEMBER 31, 2004
(IN THOUSANDS)
<Table>
<Caption>
Revenues:
Oil and natural gas ......................................... $ 20,203
Direct operating expenses ........................................ (3,287)
----------
Revenues in excess of direct operating expenses .................. $ 16,916
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</Table>
See accompanying notes.
ENERGY PARTNERS, LTD.
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES OF CERTAIN
OIL AND NATURAL GAS PROPERTIES ACQUIRED FROM CASTEX
1. BACKGROUND AND BASIS OF PRESENTATION
On January 20, 2005, Energy Partners, Ltd. (the Company or EPL) closed
the acquisition of properties and reserves onshore in south Louisiana (the
Acquired Properties) from Castex Energy 1995, L.P. and Castex Energy, Inc.
(Castex) for $146.0 million in cash, after adjustments for the exercise of
preferential rights by third parties and preliminary closing adjustments. The
properties acquired include nine fields, four of which were producing at the
time of the closing through 14 wells, with estimated proved reserves of
approximately 51.2 Bcfe. Also included were interests in 22 exploratory
prospects scheduled to be drilled in 2005.
The accompanying financial statement varies from an income statement in
that it does not show certain expenses that were incurred in connection with
ownership and operation of the Acquired Properties, including exploration
expenses, general and administrative expenses, and income taxes. These costs
were not separately allocated to the properties in the accounting records of the
Acquired Properties and any pro forma allocation would not be a reliable
estimate of what these costs would actually have been had the Acquired
Properties been operated historically as a stand-alone entity. In addition,
these allocations, if made using historical general and administrative
structures and tax burdens, would not produce allocations that would be
indicative of the historical performance of the Acquired Properties had they
been the Company's assets due to the greatly differing size, structure,
operations and accounting of the two companies. The accompanying financial
statement also does not include provisions for depreciation, depletion, and
amortization, as such amounts would not be indicative of those costs which we
would incur after allocation of the purchase price to arrive at a new cost
basis in the properties.
As a result, primarily due to the lack of segregated or easily
obtainable reliable data on asset values and related liabilities, a balance
sheet is not presented for the Acquired Properties.
Revenues in the accompanying statement of revenues and direct operating
expenses are recognized on the entitlement method. Direct operating expenses are
recognized on the accrual basis and consist of monthly operator overhead costs
and of the direct costs of operating the Acquired Properties, which were charged
to the joint account of working interest owners by the operator of the wells.
Direct operating expenses include all costs associated with production,
marketing and distribution, including all selling and direct overhead other than
costs of general corporate activities.
2. SUPPLEMENTARY OIL AND NATURAL GAS DISCLOSURES (UNAUDITED)
The following reserve estimates present the estimate of the net proved
oil and natural gas reserves and cash flow of the Acquired Properties. Users of
this information should be aware that the process of estimating quantities of
"proved" and "proved developed" natural gas and crude oil reserves is very
complex, requiring significant subjective decisions in the evaluation of all
available geological, engineering and economic data for each reservoir. The data
for a given reservoir may also change substantially over time as a result of
numerous factors including, but not limited to, additional development activity,
evolving production history and continual reassessment of the viability of
production under varying economic conditions. Consequently, material revisions
to existing reserve estimates occur from time to time. Although every reasonable
effort is made to ensure that reserve estimates reported represent the most
accurate assessments possible, the significance of the subjective decisions
required and variances in available data for various reservoirs make these
estimates generally less precise than other estimates presented in connection
with financial statements disclosures. Proved reserves are estimated quantities
of natural gas, crude oil and condensate that geological and engineering data
demonstrate, with reasonable certainty, to be recoverable in future years from
known reservoirs under existing economic and operating conditions.
Proved-developed reserves are proved reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
ENERGY PARTNERS, LTD.
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES OF CERTAIN
OIL AND NATURAL GAS PROPERTIES ACQUIRED FROM CASTEX--(CONTINUED)
The following table sets forth the net proved reserves of the Acquired
Properties including changes therein, and proved developed reserves in thousands
of barrels (Mbbls) and millions of cubic feet (Mmcf) for the period indicated:
<Table>
<Caption>
CRUDE OIL NATURAL GAS
(Mbbls) (Mmcf)
--------- -----------
Proved reserves at January 1, 2004 .................... 902 34,674
Extensions, discoveries and other additions ......... 337 12,935
Revisions ........................................... 70 (749)
Production .......................................... (117) (2,306)
----- ------
Proved reserves at December 31, 2004 .................. 1,192 44,554
===== ======
Proved-developed reserves:
December 31, 2004 ................................... 762 24,163
</Table>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO RESERVES
The following information has been developed utilizing procedures
prescribed by Statement of Financial Accounting Standards No. 69 (Statement 69),
"Disclosures about Oil and Gas Producing Activities". It may be useful for
certain comparative purposes, but should not be solely relied upon in evaluating
the Acquired Properties or their performance. Further, information contained in
the following table should not be considered as representative of realistic
assessments of future cash flows, nor should the Standardized Measure of
Discounted Future Net Cash Flows (Standardized Measure) be viewed as
representative of the current value of the Acquired Properties.
The following factors should be taken into account in reviewing the
following information: (1) future costs and selling prices will probably differ
from those required to be used in these calculations; (2) due to future market
conditions and governmental regulations, actual rates of production achieved in
future years may vary significantly from the rate of production assumed in the
calculations; (3) selection of a 10% discount rate is arbitrary and may not be
reasonable as a measure of the relative risk inherent in realizing future net
oil and gas revenues; and (4) future net revenues may be subject to different
rates of income taxation.
Under the Standardized Measure, future cash inflows were estimated by
applying period end oil and natural gas prices adjusted for field and
determinable escalations to the estimated future production of period-end proved
reserves. Future cash inflows were reduced by estimated future development,
abandonment and production costs based on period-end costs in order to arrive at
net cash flow before tax. Future income tax expense has been computed by
applying period-end statutory tax rates to aggregate future net cash flows,
reduced by the tax basis of the properties involved and tax carryforwards. Use
of a 10% discount rate is required by Statement 69.
ENERGY PARTNERS, LTD.
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES OF CERTAIN
OIL AND NATURAL GAS PROPERTIES ACQUIRED FROM CASTEX--(CONTINUED)
The standardized measure of discounted future net cash flows related to
proved oil and natural gas reserves at December 31, 2004 follows (in thousands):
<Table>
Future cash inflows ........................................................... $ 354,137
Future production costs ..................................................... (42,990)
Future development and abandonment costs .................................... (21,350)
Future income tax expense ................................................... (53,426)
---------
Future net cash flows after income taxes ...................................... 236,371
10% annual discount for estimated timing of cash flows ........................ (73,198)
---------
Standardized measure of discounted future net cash flows ...................... $ 163,173
=========
</Table>
Changes in standardized measure of discounted future net cash flows
applicable to proved oil and natural gas reserves for the year ended December
31, 2004 (in thousands):
<Table>
As of December 31, 2003 ....................................................... $ 114,235
Sales and transfers of oil and natural gas produced, net of production costs .. (16,916)
Net changes in prices and production costs .................................... 18,579
Extensions, discoveries and improved recoveries, net of future production costs 49,980
Revision of quantity estimates ................................................ (1,339)
Previously estimated development costs incurred during the period ............. 376
Changes in estimated future development costs ................................. 3,670
Changes in production rates (timing) and other ................................ 7,189
Accretion of discount ......................................................... 12,540
Net change in income taxes .................................................... (25,141)
---------
Net increase .................................................................. 48,938
---------
As of December 31, 2004 ....................................................... $ 163,173
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</Table>