NOTE 5 - ACQUISITIONS AND DIVESTITURES

Divestitures During 2019

On July 31, 2019, the Company entered into two agreements with Winkler Lea Royalty, L.P. (“WLR”) and Winkler Lea WI, L.P. (“WLWI”) for the sale of an overriding royalty interest and a non-operated working interest in undeveloped assets, respectively, for combined cash proceeds of $39.0 million, including WLWI’s drilling advance (the “Asset Sales”). WLR and WLWI are affiliates of Värde Partners, Inc., a related party (see Note 13 - Related Party Transactions).

The Company entered into a Purchase and Sale Agreement with WLR (the “ORRI Agreement”), pursuant to which the Company sold to WLR an overriding royalty interest (the “ORRI”) in approximately 1,446 net royalty acres in Winkler and Loving Counties, Texas, and Lea County, New Mexico. The ORRI is equal to the positive difference, if any, between 25% and existing royalties and other burdens, subject to proportionate reduction and the other terms and conditions set forth in the instrument of conveyance. The ORRI Agreement provides the Company with a right to repurchase all, but not less than all, of the ORRI for a period of three years and an obligation, at WLR’s election only upon a change of control, to repurchase all, but not less than all, of the ORRI, and also includes certain limitations on WLR’s right to transfer the ORRI during such three year period without the consent of the Company. The repurchase price for the first two years of the repurchase period is 1.5 times the purchase price paid by WLR, less the proportionate share of production paid by the Company. For the third year, the repurchase price is the same with the multiplier increased to 1.75. After the third year, the repurchase period expires.

The Company entered into a Purchase and Sale Agreement with WLWI (the “WI Agreement”), pursuant to which the Company sold an undivided 49% of its right, title and interest in certain undeveloped assets located in Winkler and Loving Counties, Texas, consisting of approximately 749 net acres. The WI Agreement provides that the Company must drill, complete and equip five commitment wells after closing (the “Development Plan”). Contemporaneously with the purchase, WLWI paid a drilling advance which funded its proportionate share of the development costs to drill, complete and equip such commitment wells. Any drilling cost overruns or costs incurred below estimated costs are the responsibility of the Company. As of December 31, 2019, three of the five commitment wells are producing, the fourth well is drilled and awaiting completion and the fifth well has not yet been drilled. Under the WI Agreement, the fourth and fifth wells are required to begin production mid-year 2020, subject to reasonable delays on account of Force Majeure or modifications or revisions to the Development Plan as approved by both parties. Should the Company otherwise breach the scheduled Development Plan, WLWI shall be entitled to liquidated damages of an amount equal to $150,000 plus $1,500 for each day beyond a 60-day period after Development Plan commitment date until the actual date of first production.

The WI Agreement provides the Company with a right to repurchase all, but not less than all, of the interest for a period of three years and an obligation, at WLWI’s election only upon a change of control, to repurchase all, but not less than all, of the interest, and also includes certain limitations on WLWI’s right to transfer the interest during such three year period without the consent of the Company. The repurchase price is 1.5 times the consideration paid by WLWI plus additional capital expenditures of WLWI. The repurchase period expires after three years.

As a result of the repurchase rights, the agreements with WLR and WLWI do not meet the criteria for a conveyance or sale of assets under ASC 932, “Extractive Activities - Oil & Gas”, and are accounted for as a financing arrangement. The net proceeds of the transaction of $39.0 million are included in long-term deferred revenue and other long-term liabilities on the Company’s consolidated balance sheet as of December 31, 2019. WLR’s proportionate share of revenue of $0.4 million and WLWI’s proportionate share of net revenues, (revenues less production costs), of $0.5 million for the year ended December 31, 2019 is included in interest expense on the Company’s consolidated statements of operations.

On August 16, 2019, we sold approximately 513 noncontiguous net acres in New Mexico for net cash proceeds of $16.7 million, which was recorded as a reduction to the full cost pool. The Company repurchased certain overriding royalty interests in the acreage previously sold to WLR under the ORRI Agreement for $2.6 million, resulting in a $1.3 million loss on extinguishment of a portion of the financing arrangement and is included in loss on early extinguishment of debt on the Company’s consolidated statements of operations.

On February 28, 2020, the Company closed on the sale of approximately 1,185 undeveloped net acres in Lea County, New Mexico, for net cash proceeds of approximately $24.1 million, subject to customary purchase price adjustments (the “Marlin Disposition”). The proceeds were used to fund a substantial portion of the Borrowing Base Deficiency with the balance to be used for general corporate purposes.

Acquisitions During 2018

During the year ended December 31, 2018, the Company acquired the following oil and natural gas properties:

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Certain leasehold acreage in the Delaware Basin in Lea County, New Mexico from OneEnergy Partners Operating, LLC for $40.0 million in cash and 6,940,722 shares of the Company’s common stock valued at approximately $24.9 million, for total consideration of approximately $64.9 million. Transaction costs associated with this acquisition were approximately $1.1 million. The transaction was recorded as an asset acquisition.


•	Certain leasehold interests and other oil and natural gas assets in Loving and Winkler Counties, Texas from VPD Texas, L.P. for total cash consideration of approximately $11.1 million, including approximately $0.5 million of related acquisition costs. The transaction was recorded as an asset acquisition.


•	Certain leasehold interests and other oil and natural gas assets in Loving and Winkler Counties, Texas from Anadarko for total cash consideration of $7.1 million. The transaction was recorded as an asset acquisition.


•	Certain leasehold interests and other oil and natural gas assets in Lea County, New Mexico from Ameradev II, LLC for total cash consideration of $7.2 million and was recorded as an adjustment to the full cost pool.


•	Certain leasehold interests and other oil and natural gas assets in Loving and Winkler Counties, Texas from Felix Energy Holdings II, LLC for total cash consideration of $0.4 million and was recorded as an adjustment to the full cost pool.

•

Proved property and certain leasehold interests located in Winkler County, Texas from Southwest Royalties, LLC for total consideration of approximately $17.0 million. The acquisition was accounted for as a business combination. Therefore the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated acquisition date fair values available at closing. Transaction costs associated for this acquisition were immaterial and were expensed in the Consolidated Statements for Operations during the year ended December 31, 2018. Revenues and operating expenses associated with the proved properties were insignificant to the December 31, 2018 Consolidated Statements of Operations. The following table presents the final allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date:



	As of October 16, 2018
	(In thousands)
Fair value of net assets:
Proved oil and natural gas properties	$	12,562
Unproved oil and natural gas properties	4,542
Total assets acquired	17,104
Asset retirement obligations assumed	(65		)
Fair value of net assets acquired	$	17,039