Exhibit 99.1
Table of Contents
Page
---------
Independent Auditors' Report 5
Financial Statements
Statements of Revenues and Direct Operating Expenses 6
Notes to Statements of Revenues and Direct Operating
Expenses 8
4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members of
Orr Energy LLC
We have audited the accompanying statements of revenues and direct operating
expenses of the properties (the "Orr Assets") acquired by Synergy Resources
Corporation (the "Company"), from Orr Energy LLC for the years ended December
31, 2011, 2010 and 2009. These statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
statements based on our audits.
We conducted our audits 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 statements
are free of material misstatement. The auditor considers internal control
relevant to the entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the statements. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities of Exchange Commission as described in Note 2 to the statements and
are not intended to be a complete financial presentation of the Company's
interest in the Orr Assets.
In our opinion, the statements referred to above present fairly, in all material
respects, the revenues and direct operating expenses, described in Note 2, of
the Orr Assets for the years ended December 31, 2011, 2010 and 2009, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ EKS&H LLLP
---------------
EKS&H LLLP
Denver, Colorado
February 13, 2013
5
Acquired Orr Assets
Statements of Revenues and Direct Operating Expenses For the
years ended December 31, 2011, 2010, and 2009
(in thousands)
December 31, December 31, December 31,
2011 2010 2009
------------- ------------- ---------------
Revenues:
Oil and gas revenues $ 9,159 $ 5,720 $ 3,481
------------- ------------- ---------------
Total revenues 9,159 5,720 3,481
Direct operating expenses:
Lease operating expenses
470 353 312
Severance and ad valorem
taxes 916 537 348
------------- ------------- ---------------
Total direct operating
expenses 1,386 890 660
------------- ------------- ---------------
------------- ------------- ---------------
Revenues in excess of direct $ 7,773 $ 4,830 $ 2,821
operating expenses ============= ============= ===============
The accompanying notes are an integral part of these financial
statements.
6
Acquired Orr Assets
Statements of Revenues and Direct Operating Expenses For the
nine months ended September 30, 2012 and 2011
(in thousands)
September 30, September 30,
2012 2011
--------------- -------------------
(Unaudited) (Unaudited)
Revenues:
Oil and gas revenues $ 5,037 $ 7,126
--------------- -------------------
Total revenues 5,037 7,126
Direct operating expenses:
Lease operating expenses 204 380
Severance and ad valorem taxes 504 713
--------------- -------------------
Total direct oper 708 1,093
--------------- -------------------
--------------- -------------------
Revenues in excess of direct $ 4,329 $ 6,033
operating expenses =============== ===================
The accompanying notes are an integral part of these financial
statements.
7
ACQUIRED ORR ASSETS
For the years ended December 31, 2011, 2010 and 2009
and the nine months ended September 30, 2012 and 2011
1. Orr Assets and Summary of Significant Accounting Policies
Orr Assets: On October 23, 2012, Synergy Resources Corporation (the "Company")
entered into a definitive purchase and sale agreement ("the Agreement"), with
Orr Energy, LLC ("Orr"), for its interests in 36 producing oil and gas wells and
approximately 3,933 gross (3,196 net) mineral acres ("the Orr Assets"). On
December 5, 2012, the Company closed the transaction for a combination of cash
and stock. Orr received 3.1 million shares of Synergy's common stock valued at
$13.5 million and cash consideration of approximately $28.5 million. The
accompanying Statements represent the acquired interest in the revenues and
direct operating expenses of the Orr Assets.
Oil and Gas Reserves: Oil and gas reserves represent theoretical, estimated
quantities of crude oil and natural gas which geological and engineering data
estimate with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. There are numerous
uncertainties inherent in estimating oil and gas reserves and their values,
including many factors beyond Orr's control. Accordingly, reserve estimates are
different from the future quantities of oil and gas that are ultimately
recovered and the corresponding lifting costs associated with the recovery of
these reserves.
Oil and Gas Sales: Orr derives revenue from the sale of produced crude oil and
natural gas produced. Revenues from production from wells in which Orr shares an
economic interest with other owners are recognized on the basis of Orr's
pro-rata interest. Revenues are reported on a gross basis for the amounts
received before taking into account production taxes and lease operating costs,
which are reported as direct operating expenses.
Revenue is recorded using the sales method, which occurs in the month production
is delivered to the purchaser, at which time ownership of the oil is transferred
to the purchaser. Payment is generally received within thirty days after the
date of production. Provided that reasonable estimates can be made, revenue and
receivables are accrued to recognize delivery of product to the purchaser.
Differences between estimates and actual volumes and prices, if any, are
adjusted upon final settlement.
Direct Operating Expenses: Costs incurred to operate and maintain wells and
related equipment and facilities are expensed as incurred. Direct operating
expenses include the costs of labor to operate the wells and related equipment,
repairs and maintenance, materials, supplies, and fuel consumed and supplies
utilized in operating the wells and related equipment and facilities, property
taxes and insurance applicable to producing properties and wells and related
equipment and facilities, and severance taxes.
Use of Estimates: The preparation of financial statements in conformity with
United States generally accepted accounting principles (US GAAP) requires the
use of estimates and assumptions regarding certain types of revenues and direct
expenses. Such estimates primarily relate to unsettled transactions as of the
date of the financial statements. Accordingly, upon settlement, actual results
may differ from these estimates.
2. Basis of Presentation, Omitted Financial Information, and Interim Financial
Information
The accompanying statements of revenues and direct operating expenses relate to
8
the operations of the Orr Assets and have been derived from the historical
accounting records maintained by Orr. Certain costs such as depreciation,
depletion, and amortization, accretion of asset retirement obligations, general
and administrative expenses, interest and corporate income taxes are omitted. As
such, this financial information is not intended to be a complete presentation
of the revenues and expenses of the Orr Assets. Furthermore, the information may
not be representative of future operations due to changes in the business and
the exclusion of the omitted information. The historical statements of revenues
and direct operating expenses of the Orr Assets are presented in lieu of the
full financial statements required under Item 3-05 of the SEC Regulation S-X.
The Company believes that it is appropriate to provide historical statements of
revenues and direct operating expenses for the Orr Assets in lieu of complete
financial statements for the following reasons:
o Financial statements prepared in accordance with generally accepted
accounting principles were never prepared for the Orr Assets. Certain
financial calculations, such as calculation of depreciation,
depletion, and amortization expense under the full cost method of
accounting, and the estimation of asset retirement obligations, were
not prepared. Indirect expenses were not allocated to individual
assets. Certain expenses related to the assets were recorded on a
commingled basis with expenses related to other assets owned by
various Orr entities;
o The acquisition of the Orr Assets does not include the acquisition of
any indirect assets or systems used by Orr. The Orr Assets will be
integrated with other assets owned by Synergy, and any future indirect
activities will be performed by Synergy employees. None of the
managers or other personnel performing indirect activities for Orr
will be employed by Synergy;
o Historical depreciation, depletion and amortization attributable to
the Orr Assets is irrelevant to Synergy investors as future
calculations will be based upon the fair value of the Orr Assets at
the date of acquisition and costs incurred in prior periods will have
no impact on the calculation.
Interim Financial Information: The financial information for the nine months
ended September 30, 2012 and 2011 is unaudited. In the opinion of management,
this information contains all adjustments, consisting only of normal recurring
accruals necessary for a fair statement of the revenues and direct operating
expenses for the periods presented in accordance with the indicated basis of
presentation. The revenues and direct operating expenses for interim periods are
not necessarily indicative of the revenues and direct operating expenses for the
full fiscal year.
3. Commitments and Contingencies
Pursuant to the terms of the Agreement, there are no claims, litigation or
disputes pending as of the effective date, or any matters arising in connection
with indemnifications, and the parties to the Agreement are not aware of any
legal, environmental or other commitments or contingencies that would have a
material adverse effect on the statements of revenues and direct operating
expenses.
4. Unaudited Oil and Gas Reserves Information
Oil and Natural Gas Reserve Information: Proved reserves are the estimated
quantities of crude oil, natural gas, and natural gas liquids which geological
and engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions (prices and costs held constant as of the date the estimate is made).
Proved developed reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Proved
9
undeveloped reserves are reserves that are expected to be recovered from new
wells on undrilled acreage, or from existing wells where a relatively major
expenditure is required for recompletion.
Proved oil and natural gas reserve information as of December 31, 2011, and the
related discounted future net cash flows excluding income taxes are based on
engineering estimates. Reserve information for the properties was prepared in
accordance with guidelines established by the SEC. Proved oil and gas reserves
were calculated based on the prices for oil and gas during the 12 month period
before the respective reporting date, determined as the unweighted arithmetic
average of the first day of the month price for each month within such period.
This average price is also used in calculating the aggregate amount and changes
in future cash inflows related to the standardized measure of discounted future
cash flows. Undrilled locations are classified as having proved undeveloped
reserves only if a development plan has been implemented indicating that they
are scheduled to be drilled within five years.
As SEC compliant reserve studies were not prepared for periods prior to December
31, 2011, the December 31, 2010 and 2009, reserve estimates were based on
December 31, 2011 reserve estimates adjusted for actual 2011 production
(December 31, 2010) and actual 2010 production (December 31, 2009). As such, the
December 31, 2010 and 2009, reserve estimates do not include the impact, if any,
of timing, pricing or revisions of prior estimates.
The assumptions used to compute the standardized measure are those prescribed by
the FASB and the SEC. These assumptions do not necessarily reflect the Company's
expectations of actual revenues to be derived from those reserves, nor their
present value. The limitations inherent in the reserve quantity estimation
process, as discussed previously, are equally applicable to the standardized
measure computations since these reserve quantity estimates are the basis for
the valuation process.
An SEC compliant reserve study is not necessarily indicative of fair value under
the terms prescribed by ASC 805. An SEC compliant reserve report is based on
historical commodity prices while a fair value report is typically based on
forward looking prices. Additionally, the SEC method does not take into account
the uncertainty of developing reserves while the fair value method applies a
risk weighting to the different reserve classes.
10
The following table sets forth information regarding estimated quantities of
proved developed and undeveloped oil and gas reserve quantities of the Orr
Assets and changes therein for each of the fiscal years presented:
Oil (Bbl) Gas (McF)
---------- ------------
Balance January 1, 2009 810,378 7,079,606
Extensions, discoveries, and
other additions 340,239 2,286,915
Production (48,239) (263,383)
---------- ------------
December 31, 2009 1,102,378 9,103,138
Extensions, discoveries, and
other additions 131,194 551,577
Production (55,773) (388,846)
---------- ------------
December 31, 2010 1,177,799 9,265,869
Extensions, discoveries, and
other additions 253,097 1,096,157
Production (77,913) (460,348)
---------- ------------
December 31, 2011 1,352,983 9,901,678
========== ============
Proved developed reserves included above:
December 31, 2009 428,843 2,972,171
========== ============
December 31, 2010 707,813 3,957,789
========== ============
December 31, 2011 783,283 4,330,498
========== ============
Proved undeveloped reserves included above:
December 31, 2009 673,535 6,130,967
========== ============
December 31, 2010 469,986 5,308,080
========== ============
December 31, 2011 569,700 5,571,180
========== ============
Standardized Measure of Discounted Future Net Cash Flows: The following summary
sets forth the future net cash flows relating to proved oil and gas reserves of
the Orr Assets based on the standardized measure described earlier. The
disclosure excludes the impact, if any, of timing, pricing, or revisions of
prior estimates. As discussed above, December 31, 2010 and 2009 amounts were
based on the reserves as of December 31, 2011, with a backward adjustment for
actual sales and production costs during the respective period.
December 31,
--------------------------------
(in 2011 2010 2009
thousands)
---------- --------- ---------
Future oil and gas sales $ 173,110 $ 178,246 $ 183,966
Future production (31,693) (29,604) (30,495)
Future development costs (18,280) (17,555) (17,555)
---------- --------- ---------
Future net cash flows 123,137 131,087 135,916
10% annual discount (71,870) (82,507) (87,612)
---------- --------- ---------
Standardized measure of discounted future
net cash flows $ 51,267 $ 48,580 $ 48,304
========= ========= =========
11
Changes in the Standardized Measure of Discounted Future Net Cash Flows: An
analysis of the changes in the standardized measure of discounted future net
cash flows for the years ended December 31, 2011, 2010, and 2009 are as follows
and excludes the impact, if any, of timing, pricing or revisions of prior
estimates as discussed earlier:
December 31,
---------------------------------
(in thousands) 2011 2010 2009
--------- ---------- ---------
Standardized measure of future net cash
flows, beginning of year $ 48,580 $ 48,304 $37,837
Sales of oil and gas, net of
production costs and taxes (7,773) (4,830) (2,821)
Extensions, discoveries, and
improved recovery 10,460 5,106 13,288
---------- ------- -------
Standardized measure of future net cash
flows, end of year $ 51,267 $ 48,580 $48,304
========= ======== =========
12