UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report
August 31, 2018
(Date of earliest event reported)
_______________________________________
Callon Petroleum Company
(Exact name of registrant as specified in its charter)
|
|
|
|
|
|
|
Delaware
|
001-14039
|
64-0844345
|
|
(State or other jurisdiction of
|
(Commission File Number)
|
(I.R.S. Employer
|
|
incorporation)
|
|
Identification Number)
|
200 North Canal St.
Natchez, Mississippi 39120
(Address of principal executive offices, including zip code)
(601) 442-1601
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
o
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
EXPLANATORY NOTE
As previously disclosed in its Current Report on Form 8-K, filed with the U.S. Securities and Exchange Commission on September 4, 2018 (the “Original Form 8-K”), Callon Petroleum Operating Company (CPOC”), a wholly owned subsidiary of Callon Petroleum Company (“Callon” or the “Company”), entered into a purchase and sale agreement (the “Cimarex Purchase Agreement”) with Cimarex Energy Company and certain of its subsidiaries (collectively, the “Seller”) for the purchase of certain oil and natural gas producing properties and undeveloped acreage in the Delaware Basin (the “Cimarex Acquisition”).
On August 31, 2018, CPOC completed the Cimarex Acquisition for total cash consideration of $538.6 million, including customary purchase price adjustments in accordance with the Cimarex Purchase Agreement. The acquired properties include approximately 28,000 net surface acres in Callon’s Spur operating area in the Delaware Basin, over 90% of which are held by production, that are primarily adjacent to its existing position.
This Current Report on Form 8-K/A amends and supplements the Original Form 8-K to provide (i) the Audited and Unaudited Statements of Revenue and Direct Operating Expenses for the Cimarex Acquisition (for the periods described in Item 9.01(a) below), the notes related thereto, and the Report of the Independent Auditors thereto and (ii) the Unaudited Pro Forma Consolidated Financial Statements described in Item 9.01(b) below. This Current Report on Form 8-K/A should be read in connection with the Original Form 8-K, which provides a more complete description of the Cimarex Acquisition.
Section 9 - Financial Statements and Exhibits
Item 9.01. Financial Statements and Exhibits.
(a)
Financial statements of businesses acquired.
Audited Statement of Revenues and Direct Operating Expenses of the Cimarex Acquisition for the year ended December 31, 2017 and Unaudited Statement of Revenues and Direct Operating Expenses of the Cimarex Acquisition for the six months ended June 30, 2018 and 2017, and the related notes thereto, are attached hereto as Exhibit 99.1.
(b)
Pro forma financial information
Unaudited Pro Forma Consolidated Financial Statements of the Company for the year ended December 31, 2017 and for the six months ended June 30, 2018, and the related notes thereto, are attached hereto as Exhibit 99.2.
(d)
Exhibits
|
|
|
|
|
|
|
|
|
|
|
Exhibit Number
|
|
Title of Document
|
|
|
|
|
|
23.1
|
|
|
|
99.1
|
|
|
|
99.2
|
|
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
|
|
Callon Petroleum Company
|
|
|
|
(Registrant)
|
|
|
|
|
|
November 14, 2018
|
|
/s/ James P. Ulm, II
|
|
|
|
James P. Ulm, II
|
|
|
|
Senior Vice President and Chief Financial Officer
|
Cimarex Acquisition
Statements of Revenues and Direct Operating Expenses
For the Year Ended December 31, 2017
For the Six Months Ended June 30, 2018 and 2017
|
|
|
|
|
|
Contents
|
|
|
Page
|
|
Independent Auditors' Report
|
|
|
|
|
|
Financial Statements
|
|
|
Statement of Revenues and Direct Operating Expenses
|
|
|
Notes to the Statement of Revenues and Direct Operating Expenses
|
|
|
Unaudited Statement of Revenues and Direct Operating Expenses
|
|
|
Notes to the Unaudited Statement of Revenues and Direct Operating Expenses
|
|
Independent Auditors’ Report
The Board of Directors
Callon Petroleum Company:
Report on the Financial Statement
We have audited the accompanying Cimarex Acquisition Statement of Revenue and Direct Operating Expenses (the Financial Statement) for the year ended December 31, 2017 and the related notes to the Financial Statement.
Management’s Responsibility for the Financial Statement
Management is responsible for the preparation and fair presentation of this Financial Statement in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the Financial Statement that is free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
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 Statement is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Financial Statement. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the Financial Statement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the Financial Statement 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 also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the Financial Statement.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the Financial Statement referred to above presents fairly in all material respects, the Cimarex Acquisition Statement of Revenue and Direct Operating Expenses for the year ended December 31, 2017, in accordance with U.S. generally accepted accounting principles.
Emphasis of Matter
We draw attention to the basis of presentation which describes that the Financial Statement was prepared for the purpose of complying with the rules and regulations under Rule 3-05 of the Securities and Exchange Commission Regulation S-X as described in Note 1 to the Financial Statement, and is not intended to be a complete presentation of the Cimarex Acquisition’s results of operations. Our opinion is not modified with respect to this matter.
/s/ KPMG LLP
Denver, Colorado
November 14, 2018
Cimarex Acquisition
Statement of Revenues and Direct Operating Expenses
(in thousands)
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2017
|
|
Revenues
|
$
|
103,422
|
|
|
Direct operating expenses:
|
|
|
Lease operating expense
|
28,138
|
|
|
Production taxes
|
7,007
|
|
|
Total direct operating expenses
|
35,145
|
|
|
Revenues in excess of direct operating expenses
|
$
|
68,277
|
|
See accompanying Notes to the Statement of Revenues and Direct Operating Expenses.
Cimarex Acquisition
Notes to the Statement of Revenues and Direct Operating Expenses
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
On August 31, 2018, Callon Petroleum Operating Company, a wholly owned subsidiary of Callon Petroleum Company (“Callon” or the “Company”) completed the acquisition of certain oil and natural gas producing properties and undeveloped acreage within the Delaware Basin, from Cimarex Energy Company and certain of its subsidiaries (collectively, the “Seller”) for total cash consideration of $538.6 million, including customary purchase price adjustments (the “Cimarex Acquisition”). The acquired properties include approximately 28,000 net surface acres in Callon’s Spur operating area in the Delaware Basin, over 90% of which are held by production, that are primarily adjacent to its existing position.
The Cimarex Acquisition was not accounted for as a separate subsidiary or division during the periods presented. Accordingly, complete financial statements under U.S. generally accepted accounting principles (“GAAP”) are not available, or practicable to obtain for the Cimarex Acquisition. The Statement of Revenues and Direct Operating Expenses is not intended to be a complete presentation of the results of operations of the Cimarex Acquisition, and may not be representative of future operations as they do not include general and administrative expenses, effects of derivative transactions, interest income or expense, depreciation, depletion and amortization, provision for income taxes and other income and expense items not directly associated with revenues from oil and natural gas. The accompanying Statement of Revenues and Direct Operating Expenses is presented in lieu of the full financial statements required under Rule 3-05 of the Securities and Exchange Commission (the “SEC”) Regulation S-X.
Revenue Recognition and Natural Gas Balancing
Revenue is recognized under the entitlement method of accounting in the accompanying Statement of Revenues and Direct Operating Expenses. Under this method, revenue is deferred for deliveries in excess of the Cimarex Acquisition’s net revenue interest, while revenue is accrued for the undelivered volumes. The revenue received from the sale of natural gas liquids is included in natural gas sales. Revenues related to the sales of oil and natural gas totaled approximately
$103.4 million
for the year ended December 31, 2017. The Cimarex Acquisition had no significant imbalances during the periods presented.
Direct Operating Expenses
Direct operating expenses are recognized when incurred and include amounts incurred to bring oil and natural gas to the surface, gather, transport, field process, treat and store. Direct operating expenses also include expenses associated with support personnel, support services, equipment, and facilities related to oil and gas production activities.
Excluded Expenses
Indirect general and administrative expenses, interest expense, income taxes, and other indirect expenses have not been allocated to the Cimarex Acquisition by Cimarex Energy and as such, have been excluded from the accompanying statements. Any allocation of such indirect expenses may not be indicative of costs which would have been incurred by Callon on a stand-alone basis. Depreciation, depletion, and amortization expense has also been excluded from the accompanying statement of revenues and direct operating expenses as such amounts would not be indicative of the depletion calculated by Callon on the Cimarex Acquisition properties on a stand-alone basis.
Concentration of Credit Risk
Arrangements for oil and natural gas sales are evidenced by signed contracts with determinable market prices, and revenues are recorded when production is delivered. A significant majority of the purchasers of these products have investment grade credit rating and material credit losses have been rare.
Note 2 - Subsequent Events
The Company has evaluated subsequent events through November 14, 2018, the date the accompanying Statement of Revenues and Direct Operating Expenses was available to be issued. There were no material subsequent events that required recognition or additional disclosure in the accompanying Statement of Revenue and Direct Operating Expenses.
Note 3 - Contingencies
The activities of the Cimarex Acquisition’s working interest may become subject to potential claims and litigation in the normal course of operations. The Sellers do not believe that any liability resulting from any pending or threatened litigation will have a material adverse effect on the operations or financial results of the Cimarex Acquisition’s working interests.
Note 4 - Supplemental Oil and Natural Gas Information (Unaudited)
The following tables summarize the net ownership interest in the proved oil and natural gas reserves and the standardized measure of discounted future net cash flows related to the proved oil and natural gas reserves for the Cimarex Acquisition. Natural gas volumes include natural gas liquids.
Proved reserves as of December 31, 2017 were estimated by qualified petroleum engineers engaged by the Company using historical data and other information from the records of the Sellers.
Numerous uncertainties are inherent in establishing quantities of proved reserves. The following reserve data represents estimates only, and should not be deemed exact. In addition, the standardized measure of discounted future net cash flows should not be construed as the current market value of the Cimarex Acquisition or the cost that would be incurred to obtain equivalent reserves.
All information set forth herein relating to the proved reserves as of December 31, 2017, including the estimated future net cash flows and present values, from those dates, is taken or derived from the records of the Sellers of the Cimarex Acquisition. The estimates of reserves attributable to the Cimarex Acquisition may include development plans for those properties which are different from those that the Company will ultimately implement. These estimates were based upon review of historical production data and other geological, economic, ownership, and engineering data provided related to the reserves. No reports on these reserves have been filed with any federal agency. In accordance with the SEC’s guidelines, estimates of proved reserves and the future net revenues from which present values are derived were based on an unweighted 12-month average of the first-day-of-the-month price for the period, and held constant throughout the life of the Cimarex Acquisition. Operating costs, development costs, and certain production-related taxes, which are based on current information and held constant, were deducted in arriving at estimated future net revenues.
The proved reserves of the Cimarex Acquisition, all held within the United States, together with the changes therein are as follows:
|
|
|
|
|
|
|
|
For the year ended
|
|
Changes in Reserve Quantities
|
December 31, 2017
|
|
Oil (MBbls)
|
|
|
Beginning of period
|
22,755
|
|
|
Revisions to previous estimates
|
—
|
|
|
Extensions and discoveries
|
5,162
|
|
|
Production
|
(2,340
|
)
|
|
End of period
|
25,577
|
|
|
|
|
|
Natural Gas (MMcf)
|
|
|
|
Beginning of period
|
42,591
|
|
|
Revisions to previous estimates
|
—
|
|
|
Extensions and discoveries
|
8,531
|
|
|
Production
|
(1,918
|
)
|
|
End of period
|
49,204
|
|
|
|
|
|
MBoe
|
|
|
Beginning of period
|
29,854
|
|
|
Revisions to previous estimates
|
—
|
|
|
Extensions and discoveries
|
6,584
|
|
|
Production
|
(2,660
|
)
|
|
End of period
|
33,778
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
Reserve Quantities
|
December 31, 2017
|
|
Oil (MBbls)
|
|
|
Proved developed reserves:
|
|
|
Beginning of the period
|
17,433
|
|
|
End of period
|
16,752
|
|
|
Proved undeveloped reserves:
|
|
|
Beginning of the period
|
5,322
|
|
|
End of period
|
8,825
|
|
|
|
|
|
Natural Gas (MMcf)
|
|
|
Proved developed reserves:
|
|
|
Beginning of the period
|
28,830
|
|
|
End of period
|
30,189
|
|
|
Proved undeveloped reserves:
|
|
|
Beginning of the period
|
13,761
|
|
|
End of period
|
19,015
|
|
|
|
|
|
MBoe
|
|
|
Proved developed reserves:
|
|
|
Beginning of the period
|
22,238
|
|
|
End of period
|
21,784
|
|
|
Proved undeveloped reserves:
|
|
|
Beginning of the period
|
7,616
|
|
|
End of period
|
11,994
|
|
Future cash inflows are computed by applying a 12-month average of the first day of the month commodity price adjusted for location and quality differentials for 2017 to year-end quantities of proved reserves. Future development costs include future asset retirement costs. Future production costs do not include any general and administrative expenses. Future income taxes uses the Company's statutory tax rate for 2017 of 21%. A discount factor of 10% was used to reflect the timing of future net cash flows. The standardized measure of discounted future net cash flows is not intended to represent the replacement cost or fair value of the Cimarex Acquisition.
The discounted future cash flow estimates do not include the effects of derivative instruments. The average price used per commodity follows:
|
|
|
|
|
|
|
|
|
2017
|
|
Average 12-month price, net of differentials, per barrel of oil
|
$
|
48.06
|
|
|
Average 12-month price, net of differentials, per Mcf of natural gas
|
$
|
2.77
|
|
Standardized measure of discounted future net cash flows relating to proved reserves was as follows (in thousands):
|
|
|
|
|
|
|
|
|
Standardized Measure For the Year Ended December 31, 2017
|
|
Future cash inflows
|
$
|
1,365,528
|
|
|
Future costs -
|
|
|
Production
|
(481,632
|
)
|
|
Development and net abandonment
|
(124,080
|
)
|
|
Future net inflows before income taxes
|
759,816
|
|
|
Future income taxes
|
(88,684
|
)
|
|
Future net cash flows
|
671,132
|
|
|
10% discount factor
|
(357,150
|
)
|
|
Standardized measure of discounted future net cash flows
|
$
|
313,982
|
|
The principal changes in standardized measure of discounted future net cash flows were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Changes in Standardized Measure For the Year Ended December 31, 2017
|
|
Standardized measure at the beginning of the period
|
$
|
201,551
|
|
|
Changes
|
|
|
Sales and transfers, net of production costs
|
(68,277
|
)
|
|
Net change in sales and transfer prices, net of production costs
|
108,556
|
|
|
Extensions, discoveries, and improved recovery, net of future production and development costs incurred
|
59,570
|
|
|
Changes in future development cost
|
(16,099
|
)
|
|
Revisions of quantity estimates
|
7
|
|
|
Accretion of discount
|
23,367
|
|
|
Net change in income taxes
|
(4,702
|
)
|
|
Changes in production rates, timing and other
|
10,009
|
|
|
Aggregate change
|
112,431
|
|
|
Standardized measure at the end of the period
|
$
|
313,982
|
|
Cimarex Acquisition
Unaudited Statement of Revenues and Direct Operating Expenses
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
June 30, 2018
|
June 30, 2017
|
|
Revenues
|
$
|
60,469
|
|
$
|
51,934
|
|
|
Direct operating expenses:
|
|
|
|
Lease operating expense
|
18,899
|
|
14,934
|
|
|
Production taxes
|
2,886
|
|
2,508
|
|
|
Total direct operating expenses
|
21,785
|
|
17,442
|
|
|
Revenues in excess of direct operating expenses
|
$
|
38,684
|
|
$
|
34,492
|
|
See accompanying Notes to the Unaudited Statement of Revenues and Direct Operating Expenses.
Cimarex Acquisition
Notes to the Unaudited Statement of Revenues and Direct Operating Expenses
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
On August 31, 2018, Callon Petroleum Operating Company, a wholly owned subsidiary of Callon Petroleum Company (“Callon” or the “Company”) completed the acquisition of certain oil and natural gas producing properties and undeveloped acreage within the Delaware Basin, from Cimarex Energy Company and certain of its subsidiaries (collectively, the “Seller”) for total cash consideration of $538.6 million, including customary purchase price adjustments (the “Cimarex Acquisition”). The acquired properties include approximately 28,000 net surface acres in Callon’s Spur operating area in the Delaware Basin, over 90% of which are held by production, that are primarily adjacent to its existing position.
The Cimarex Acquisition was not accounted for as a separate subsidiary or division during the periods presented. Accordingly, complete financial statements under U.S. generally accepted accounting principles (“GAAP”) are not available or practicable to obtain for the Cimarex Acquisition. The Statement of Revenues and Direct Operating Expenses is not intended to be a complete presentation of the results of operations of the Cimarex Acquisition and may not be representative of future operations as they do not include general and administrative expenses, effects of derivative transactions, interest income or expense, depreciation, depletion and amortization, provision for income taxes and other income and expense items not directly associated with revenues from oil and natural gas. The accompanying Statement of Revenues and Direct Operating Expenses is presented in lieu of the full financial statements required under Rule 3-05 of the Securities and Exchange Commission (the “SEC”) Regulation S-X.
In the opinion of management, the accompanying unaudited Statement of Revenues and Direct Operating Expenses reflect all adjustments, including normal recurring adjustments, necessary to present fairly the Cimarex Acquisition’s revenues and direct operating expenses for the periods indicated.
Revenue Recognition and Natural Gas Balancing
Revenue is recognized under the entitlement method of accounting in the accompanying Statement of Revenues and Direct Operating Expenses. Under this method, revenue is deferred for deliveries in excess of the Cimarex Acquisition’s net revenue interest, while revenue is accrued for the undelivered volumes. The revenue received from the sale of natural gas liquids is included in natural gas sales. The Cimarex Acquisition had no significant imbalances during the periods presented.
Direct Operating Expenses
Direct operating expenses are recognized when incurred and include amounts incurred to bring oil and natural gas to the surface, gather, transport, field process, treat and store. Direct operating expenses also include expenses associated with support personnel, support services, equipment, and facilities related to oil and gas production activities.
Excluded Expenses
Indirect general and administrative expenses, interest expense, income taxes, and other indirect expenses have not been allocated to the Cimarex Acquisition by Cimarex Energy and as such, have been excluded from the accompanying statements. Any allocation of such indirect expenses may not be indicative of costs which would have been incurred by Callon on a stand-alone basis. Depreciation, depletion, and amortization expense has also been excluded from the accompanying statement of revenues and direct operating expenses as such amounts would not be indicative of the depletion calculated by Callon on the Cimarex Acquisition properties on a stand-alone basis.
Concentration of Credit Risk
Arrangements for oil and natural gas sales are evidenced by signed contracts with determinable market prices, and revenues are recorded when production is delivered. A significant majority of the purchasers of these products have investment grade credit rating and material credit losses have been rare.
Note 2 - Subsequent Events
The Company has evaluated subsequent events through November 14, 2018, the date the accompanying Statement of Revenues and Direct Operating Expenses were available to be issued. There were no material subsequent events that required recognition or additional disclosure in the accompanying Statement of Revenue and Direct Operating Expenses.
Note 3 – Contingencies
The activities of the Cimarex Acquisition’s working interest may become subject to potential claims and litigation in the normal course of operations. The Sellers do not believe that any liability resulting from any pending or threatened litigation will have a material adverse effect on the operations or financial results of the Cimarex Acquisition properties’ working interests.
CALLON PETROLEUM COMPANY, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
On August 31, 2018, Callon Petroleum Operating Company, a wholly owned subsidiary of Callon Petroleum Company (“Callon” or the “Company”) completed the acquisition of certain oil and natural gas producing properties and undeveloped acreage within the Delaware Basin, from Cimarex Energy Company and certain of its subsidiaries, for total cash consideration of $538.6 million, including customary purchase price adjustments (the “Cimarex Acquisition”). The acquired properties include approximately 28,000 net surface acres in Callon’s Spur operating area in the Delaware Basin, over 90% of which are held by production, that are primarily adjacent to its existing position.
We derived the unaudited pro forma consolidated financial statements from the historical consolidated financial statements of the Company and the Statements of Revenues and Direct Operating Expenses for the Cimarex Acquisition for the respective periods. The unaudited pro forma consolidated statements of operations for the year ended December 31, 2017 and six months ended June 30, 2018 give effect to the Cimarex Acquisition as if the transaction occurred on January 1, 2017. A pro forma consolidated balance sheet has been omitted from this filing, as a historical balance sheet reflecting the Cimarex Acquisition has already been filed within the Company's quarterly report on Form 10-Q for the period ended September 30, 2018.
The pro forma adjustments are based on available information and certain assumptions that we believe are reasonable as of the date of this Current Report on Form 8-K/A. Assumptions underlying the pro forma adjustments related to the Cimarex Acquisition are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma consolidated financial statements. The pro forma adjustments reflected herein are based on management’s expectations regarding the Cimarex Acquisition. The Cimarex Acquisition will be accounted for under the acquisition method of accounting, which involves determining the fair values of assets acquired and liabilities assumed. The preliminary purchase price allocation is subject to change based on numerous factors, including the final adjusted purchase price and the final estimated fair value of the assets acquired and liabilities assumed. The unaudited pro forma consolidated financial statements are presented for illustrative purposes only and do not purport to indicate the results of operations of future periods or the results of operations that actually would have been realized had the Cimarex Acquisition been consummated on the dates or for the periods presented.
The unaudited pro forma consolidated financial statements should not be relied upon as an indication of operating results that the Company would have achieved if the transactions contemplated herein had taken place on the specified date. In addition, future results may vary significantly from the results reflected in the unaudited pro forma consolidated statements of operations and should not be relied on as an indication of the future results the Company will have after the completion of the transactions noted in these unaudited pro forma consolidated financial statements.
The unaudited pro forma consolidated financial statements should be read in conjunction with the audited December 31, 2017 consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed on February 28, 2018, the unaudited June 30, 2018 consolidated financial statements contained in the Company’s Quarterly Report on Form 10-Q filed on August 7, 2018, the unaudited September 30, 2018 consolidated financial statements contained in the Company's Quarterly Report on Form 10-Q filed on November 7, 2018, and the unaudited statements of revenues and direct operating expenses for the Cimarex Acquisition for the year ended December 31, 2017 and six months ended June 30, 2018 filed with this Current Report on Form 8-K/A.
CALLON PETROLEUM COMPANY
Unaudited Pro forma Consolidated Statements of Operations for the Year Ended December 31, 2017
($ in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
Cimarex Acquisition
|
|
Pro forma Adjustments
|
|
Pro forma
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
Oil sales
|
$
|
322,374
|
|
|
$
|
93,452
|
|
(a)
|
$
|
—
|
|
|
$
|
415,826
|
|
|
Natural gas sales
|
44,100
|
|
|
9,970
|
|
(a)
|
—
|
|
|
54,070
|
|
|
Total operating revenues
|
366,474
|
|
|
103,422
|
|
|
—
|
|
|
469,896
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
49,907
|
|
|
28,138
|
|
(a)
|
—
|
|
|
78,045
|
|
|
Production taxes
|
22,396
|
|
|
7,007
|
|
(a)
|
—
|
|
|
29,403
|
|
|
Depreciation, depletion and amortization
|
115,714
|
|
|
—
|
|
|
22,606
|
|
(b)
|
138,320
|
|
|
General and administrative
|
27,067
|
|
|
—
|
|
|
—
|
|
|
27,067
|
|
|
Settled share-based awards
|
6,351
|
|
|
—
|
|
|
—
|
|
|
6,351
|
|
|
Accretion expense
|
677
|
|
|
—
|
|
|
10
|
|
(b)
|
687
|
|
|
Acquisition expense
|
2,916
|
|
|
—
|
|
|
—
|
|
|
2,916
|
|
|
Total operating expenses
|
225,028
|
|
|
35,145
|
|
|
22,616
|
|
|
282,789
|
|
|
Income (loss) from operations
|
141,446
|
|
|
68,277
|
|
|
(22,616
|
)
|
|
187,107
|
|
|
Other (income) expenses:
|
|
|
|
|
|
|
|
|
Interest expense, net of capitalized amounts
|
2,159
|
|
|
—
|
|
|
—
|
|
|
2,159
|
|
|
(Gain) loss on derivative contracts
|
18,901
|
|
|
—
|
|
|
—
|
|
|
18,901
|
|
|
Other income
|
(1,311
|
)
|
|
—
|
|
|
—
|
|
|
(1,311
|
)
|
|
Total other (income) expense
|
19,749
|
|
|
—
|
|
|
—
|
|
|
19,749
|
|
|
Income (loss) before income taxes
|
121,697
|
|
|
68,277
|
|
|
(22,616
|
)
|
|
167,358
|
|
|
Income tax expense
|
1,273
|
|
|
—
|
|
|
—
|
|
(c)
|
1,273
|
|
|
Net income (loss)
|
120,424
|
|
|
68,277
|
|
|
(22,616
|
)
|
|
166,085
|
|
|
Preferred stock dividends
|
(7,295
|
)
|
|
—
|
|
|
—
|
|
|
(7,295
|
)
|
|
Income (loss) available to common stockholders
|
$
|
113,129
|
|
|
$
|
68,277
|
|
|
$
|
(22,616
|
)
|
|
$
|
158,790
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.56
|
|
|
|
|
|
|
$
|
0.79
|
|
|
Diluted
|
$
|
0.56
|
|
|
|
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
201,526
|
|
|
|
|
|
|
201,526
|
|
|
Diluted
|
202,102
|
|
|
|
|
|
|
202,102
|
|
CALLON PETROLEUM COMPANY
Unaudited Pro forma Consolidated Statements of Operations for the Six Months Ended June 30, 2018
($ in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
Cimarex Acquisition
|
|
Pro forma Adjustments
|
|
Pro forma
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
Oil sales
|
$
|
237,898
|
|
|
$
|
55,693
|
|
(d)
|
$
|
—
|
|
|
$
|
293,591
|
|
|
Natural gas sales
|
26,617
|
|
|
4,776
|
|
(d)
|
—
|
|
|
31,393
|
|
|
Total operating revenues
|
264,515
|
|
|
60,469
|
|
|
—
|
|
|
324,984
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
26,179
|
|
|
18,899
|
|
(d)
|
—
|
|
|
45,078
|
|
|
Production taxes
|
16,002
|
|
|
2,886
|
|
(d)
|
—
|
|
|
18,888
|
|
|
Depreciation, depletion and amortization
|
74,151
|
|
|
—
|
|
|
10,385
|
|
(e)
|
84,536
|
|
|
General and administrative
|
17,057
|
|
|
—
|
|
|
—
|
|
|
17,057
|
|
|
Accretion expense
|
424
|
|
|
—
|
|
|
5
|
|
(e)
|
429
|
|
|
Acquisition expense
|
2,315
|
|
|
—
|
|
|
(39
|
)
|
(f)
|
2,276
|
|
|
Total operating expenses
|
136,128
|
|
|
21,785
|
|
|
10,351
|
|
|
168,264
|
|
|
Income from operations
|
128,387
|
|
|
38,684
|
|
|
(10,351
|
)
|
|
156,720
|
|
|
Other (income) expenses:
|
|
|
|
|
|
|
|
|
Interest expense, net of capitalized amounts
|
1,053
|
|
|
—
|
|
|
—
|
|
|
1,053
|
|
|
(Gain) loss on derivative contracts
|
21,036
|
|
|
—
|
|
|
—
|
|
|
21,036
|
|
|
Other income
|
(914
|
)
|
|
—
|
|
|
—
|
|
|
(914
|
)
|
|
Total other (income) expense
|
21,175
|
|
|
—
|
|
|
—
|
|
|
21,175
|
|
|
Income before income taxes
|
107,212
|
|
|
38,684
|
|
|
(10,351
|
)
|
|
135,545
|
|
|
Income tax expense
|
976
|
|
|
—
|
|
|
—
|
|
(g)
|
976
|
|
|
Net income
|
106,236
|
|
|
38,684
|
|
|
(10,351
|
)
|
|
134,569
|
|
|
Preferred stock dividends
|
(3,647
|
)
|
|
—
|
|
|
—
|
|
|
(3,647
|
)
|
|
Income available to common stockholders
|
$
|
102,589
|
|
|
$
|
38,684
|
|
|
$
|
(10,351
|
)
|
|
$
|
130,922
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.50
|
|
|
|
|
|
|
$
|
0.63
|
|
|
Diluted
|
$
|
0.50
|
|
|
|
|
|
|
$
|
0.63
|
|
|
Shares used in computing income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
206,309
|
|
|
|
|
|
|
206,309
|
|
|
Diluted
|
207,027
|
|
|
|
|
|
|
207,027
|
|
Cimarex Acquisition
Notes to the Unaudited Pro Forma Consolidated Financial Statements
Note 1 - Basis of Presentation
On August 31, 2018, Callon Petroleum Operating Company, a wholly owned subsidiary of Callon Petroleum Company (“Callon” or the “Company”) completed the acquisition of certain oil and natural gas producing properties and undeveloped acreage within the Delaware Basin, from Cimarex Energy Company and certain of its subsidiaries, for total cash consideration of $538.6 million, including customary purchase price adjustments (the “Cimarex Acquisition”). The acquired properties include approximately 28,000 net surface acres in Callon’s Spur operating area in the Delaware Basin, over 90% of which are held by production, that are primarily adjacent to its existing position.
The unaudited consolidated pro forma financial statements are presented for illustrative purposes only and do not purport to represent what the Company’s results of operations would have been if the Cimarex Acquisition had occurred as presented, or to project the Company’s results of operations for any future periods. The pro forma adjustments related to the Cimarex Acquisition are based on available information and certain assumptions that management believes are reasonable. The pro forma adjustments related to the Cimarex Acquisition are directly attributable to the transaction and are expected to have a continuing impact on the Company’s results of operations. In the opinion of management, all adjustments necessary to present fairly the unaudited consolidated pro forma financial statements have been made. A pro forma consolidated balance sheet has been omitted from this filing, as a historical balance sheet reflecting the Cimarex Acquisition has already been filed within the Company's quarterly report on Form 10-Q for the period ended September 30, 2018.
Note 2 - Pro Forma Adjustments
Pro forma Statement of Operations for the year ended December 31, 2017
|
|
|
|
(a)
|
To record the historical revenues and direct operating expenses related to the Cimarex Acquisition.
|
|
|
|
|
(b)
|
To record depreciation, depletion, and amortization and accretion of the asset retirement obligations related to the Cimarex Acquisition.
|
|
|
|
|
(c)
|
The Company typically provides for income taxes at a statutory rate of 35% (21% beginning in 2018). However, as the Company had incurred a cumulative three year loss as of the most recent fiscal year end, December 31, 2017, and has an established valuation allowance, the effective tax rate approximates 1% related to states taxes, net of federal benefit. Effectively, the tax provision related to the Cimarex Acquisition and accompanying pro forma adjustments is de minimis.
|
Pro forma Statement of Operations for the six months ended June 30, 2018
|
|
|
|
(d)
|
To record the historical revenues and direct operating expenses related to the Cimarex Acquisition.
|
|
|
|
|
(e)
|
To record depreciation, depletion, and amortization and accretion of the asset retirement obligations related to the Cimarex Acquisition.
|
|
|
|
|
(f)
|
To record a $39 thousand reduction in acquisition expenses incurred during the six months ended June 30, 2018 that were directly attributable to the Cimarex Acquisition.
|
|
|
|
|
(g)
|
The Company typically provides for income taxes at a statutory rate of 35% (21% beginning in 2018). However, as the Company had incurred a cumulative three year loss as of the of most recent fiscal year end, December 31, 2017, and has an established valuation allowance, the effective tax rate approximates 1% related to states taxes, net of federal benefit. Effectively, the tax provision related to the Cimarex Acquisition and accompanying pro forma adjustments is de minimis.
|
Note 3 - Supplemental Oil and Natural Gas Disclosures
The following table sets forth unaudited pro forma information with respect to the Company’s estimated proved reserves, including changes therein, and proved developed and proved undeveloped reserves for the year ended December 31, 2017, giving effect to Cimarex Acquisition as if it occurred on January 1, 2017. There are numerous uncertainties inherent in estimating the quantities of proved reserves and projecting future rates of production and timing of development costs. Further, the volumes considered to be commercially recoverable fluctuate with changes in prices and operating costs. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and natural gas properties. Accordingly, these estimates are expected to change as additional information becomes available in the future. The estimates of reserves and the standardized measure of discounted future net cash flows (shown below) attributable to the Cimarex Acquisition may include development plans for those properties which are different from those that the Company will ultimately
implement. Reserve estimates are inherently imprecise, require extensive judgments of reservoir engineering data and are generally less precise than estimates made in connection with financial disclosures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cimarex
|
|
|
|
Changes in Reserve Quantities
|
Historical
|
|
Acquisition
|
|
Pro forma
|
|
Oil (MBbls)
|
|
|
|
|
|
|
Proved reserves as of December 31, 2016
|
71,145
|
|
|
22,755
|
|
|
93,900
|
|
|
Revisions to previous estimates
|
(5,171
|
)
|
|
—
|
|
|
(5,171
|
)
|
|
Purchase of reserves in place
|
8,388
|
|
|
—
|
|
|
8,388
|
|
|
Extensions and discoveries
|
39,267
|
|
|
5,162
|
|
|
44,429
|
|
|
Production
|
(6,557
|
)
|
|
(2,340
|
)
|
|
(8,897
|
)
|
|
Proved reserves as of December 31, 2017
|
107,072
|
|
|
25,577
|
|
|
132,649
|
|
|
|
|
|
|
|
|
|
|
Natural Gas (MMcf)
|
|
|
|
|
|
|
|
|
Proved reserves as of December 31, 2016
|
122,611
|
|
|
42,591
|
|
|
165,202
|
|
|
Revisions to previous estimates
|
6,336
|
|
|
—
|
|
|
6,336
|
|
|
Purchase of reserves in place
|
12,711
|
|
|
—
|
|
|
12,711
|
|
|
Extensions and discoveries
|
48,648
|
|
|
8,531
|
|
|
57,179
|
|
|
Production
|
(10,896
|
)
|
|
(1,918
|
)
|
|
(12,814
|
)
|
|
Proved reserves as of December 31, 2017
|
179,410
|
|
|
49,204
|
|
|
228,614
|
|
|
|
|
|
|
|
|
|
|
MBoe
|
|
|
|
|
|
|
|
Proved reserves as of December 31, 2016
|
91,580
|
|
|
29,854
|
|
|
121,434
|
|
|
Revisions to previous estimates
|
(4,115
|
)
|
|
—
|
|
|
(4,115
|
)
|
|
Purchase of reserves in place
|
10,507
|
|
|
—
|
|
|
10,507
|
|
|
Extensions and discoveries
|
47,375
|
|
|
6,584
|
|
|
53,959
|
|
|
Production
|
(8,373
|
)
|
|
(2,660
|
)
|
|
(11,033
|
)
|
|
Proved reserves as of December 31, 2017
|
136,974
|
|
|
33,778
|
|
|
170,752
|
|
The following tables present the unaudited pro forma standardized measure of future net cash flows related to proved oil and natural gas reserves together with changes therein, as defined by ASC Topic 932, for the year ended December 31, 2017, giving effect to the Cimarex Acquisition as if it occurred on January 1, 2017. Future production and development costs are based on current costs with no escalations. Estimated future cash flows have been discounted to their present values based on a 10% annual discount rate. We have assumed the federal tax rate of 21% on the Cimarex Acquisition. The disclosures below do not purport to present the fair market value of the Company’s oil and natural gas reserves. An estimate of the fair market value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs, a discount factor more representative of the time value of money, and risks inherent in reserve estimates. Estimates of economically recoverable oil and natural gas reserves and of future net revenues are based upon a number of variable factors and assumptions, all of which are to some degree subjective and may vary considerably from actual results. Therefore, actual production, revenues, development and operating expenditures may not occur as estimated. The reserve data are estimates only, are subject to many uncertainties and are based on data gained from production histories and on assumptions as to geologic formations and other matters. Actual quantities of oil and natural gas may differ materially from the amounts estimated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standardized Measure
|
|
|
|
For the Year Ended December 31, 2017
|
|
(in thousands)
|
|
Historical
|
|
Cimarex Acquisition
|
|
Pro forma
|
|
Future cash inflows
|
|
$
|
5,920,328
|
|
|
$
|
1,365,528
|
|
|
$
|
7,285,856
|
|
|
Future costs
|
|
|
|
|
|
|
|
Production
|
|
(1,692,871
|
)
|
|
(481,632
|
)
|
|
(2,174,503
|
)
|
|
Development and net abandonment
|
|
(680,948
|
)
|
|
(124,080
|
)
|
|
(805,028
|
)
|
|
Future net inflows before income taxes
|
|
3,546,509
|
|
|
759,816
|
|
|
4,306,325
|
|
|
Future income taxes
|
|
(166,985
|
)
|
|
(88,684
|
)
|
|
(255,669
|
)
|
|
Future net cash flows
|
|
3,379,524
|
|
|
671,132
|
|
|
4,050,656
|
|
|
10% discount factor
|
|
(1,822,842
|
)
|
|
(357,150
|
)
|
|
(2,179,992
|
)
|
|
Standardized measure of discounted future net cash flows
|
|
$
|
1,556,682
|
|
|
$
|
313,982
|
|
|
$
|
1,870,664
|
|
The following table presents unaudited pro forma changes in the standardized measure of discounted future net cash flows for the year ended December 31, 2017 relating to proved oil and natural gas reserves of the Company and the Cimarex Acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Standardized Measure For the Year Ended December 31, 2017
|
|
(in thousands)
|
|
Historical
|
|
Cimarex Acquisition
|
|
Pro forma
|
|
Standardized measure at the beginning of the period
|
|
$
|
809,832
|
|
|
$
|
201,551
|
|
|
$
|
1,011,383
|
|
|
Changes
|
|
|
|
|
|
|
|
Sales and transfers, net of production costs
|
|
(294,172
|
)
|
|
(68,277
|
)
|
|
(362,449
|
)
|
|
Net change in sales and transfer prices, net of production costs
|
|
176,234
|
|
|
108,556
|
|
|
284,790
|
|
|
Net change due to purchases and sales of in place reserves
|
|
129,454
|
|
|
—
|
|
|
129,454
|
|
|
Extensions, discoveries, and improved recovery, net of future production and development costs incurred
|
|
635,000
|
|
|
59,570
|
|
|
694,570
|
|
|
Changes in future development cost
|
|
36,983
|
|
|
(16,099
|
)
|
|
20,884
|
|
|
Revisions of quantity estimates
|
|
(79,325
|
)
|
|
7
|
|
|
(79,318
|
)
|
|
Accretion of discount
|
|
80,983
|
|
|
23,367
|
|
|
104,350
|
|
|
Net change in income taxes
|
|
(20,073
|
)
|
|
(4,702
|
)
|
|
(24,775
|
)
|
|
Changes in production rates, timing and other
|
|
81,766
|
|
|
10,009
|
|
|
91,775
|
|
|
Aggregate change
|
|
746,850
|
|
|
112,431
|
|
|
859,281
|
|
|
Standardized measure at the end of period
|
|
$
|
1,556,682
|
|
|
$
|
313,982
|
|
|
$
|
1,870,664
|
|
The historical twelve-month average prices of oil and natural gas used in determining standardized measure as of December 31, 2017, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
Cimarex Acquisition
|
|
Average 12-month price, net of differentials, per barrel of oil
|
|
$
|
49.48
|
|
|
$
|
48.06
|
|
|
Average 12-month price, net of differentials, per Mcf of natural gas
|
|
$
|
3.47
|
|
|
$
|
2.77
|
|
