(2) Acquisitions

Subsequent Event - The Hilcorp Acquisition

On October 31, 2012, we acquired the Hilcorp Properties for $550 million in cash, subject to customary adjustments to reflect an economic effective date of July 1, 2012. As of July 1, 2012, the Hilcorp Properties had estimated proved reserves of approximately 38.7 Mmboe of which 49% were oil and 59% were proved developed reserves. The primary factors considered by the Company in acquiring the Hilcorp Properties include the belief that the Hilcorp Acquisition provides an opportunity to significantly increase our reserves, production volumes and drilling portfolio, while maintaining our focus on oil-weighted assets in our core area of expertise on the Gulf of Mexico shelf. The Hilcorp Acquisition also provides us with access to infrastructure and extensive acreage, with significant exploitation and development potential.

The Hilcorp Acquisition was financed with the net proceeds from the sale of the Senior Notes and borrowings under our expanded senior credit facility. The Senior Notes were offered in a private placement only to qualified institutional buyers under Rule 144A promulgated under the Securities Act of 1933, as amended (the “Securities Act”), or to persons outside of the United States in compliance with Regulation S promulgated under the Securities Act. After deducting the initial purchasers’ discount, we realized net proceeds of $289.5 million. See Note 5, “Indebtedness,” for more information regarding our Senior Notes.

The Hilcorp Acquisition will be accounted for using the purchase method of accounting for business combinations. The following allocation of purchase price as of October 31, 2012 is preliminary and includes significant use of estimates. This preliminary allocation is based on information that was available to management at the time these condensed consolidated financial statements were prepared and takes into account current market conditions and estimated market prices for oil and natural gas. Management has not yet had the opportunity to complete its assessment of fair values of the assets acquired and liabilities assumed. Accordingly, the allocation may change materially as additional information becomes available and is assessed by management. In addition, the purchase price could change materially as management finalizes adjustments to purchase price provided for by the purchase and sale agreement.

The following table summarizes the estimated values of assets acquired and liabilities assumed and reflects management’s estimate of customary adjustments to purchase price provided for by the purchase and sale agreement of approximately $13.0 million to reflect an economic effective date of July 1, 2012.


(In thousands)	October 31, 2012
Oil and natural gas properties	$	666,000
Asset retirement obligations		(129,000)
Net assets acquired	$	537,000

The South Timbalier Acquisition

On May 15, 2012, we acquired from W&T Offshore, Inc. (“W&T”) an asset package consisting of certain shallow-water Gulf of Mexico shelf oil and natural gas interests in our South Timbalier 41 field (the “ST 41 Interests”) located in the Gulf of Mexico for $32.4 million in cash, subject to customary adjustments to reflect an economic effective date of April 1, 2012 (the “ST 41 Acquisition”). We estimate that the proved reserves as of the April 1, 2012 economic effective date totaled approximately 1.2 Mmboe, of which 51% were oil and 84% were proved developed reserves. Prior to the ST41 Acquisition, we owned a 60% working interest in these properties, and W&T owned a 40% working interest. As a result of the ST41 Acquisition, we have become the sole working interest owner of the South Timbalier 41 field. We funded the ST41 Acquisition with cash on hand.

The following allocation of the purchase price as of April 1, 2012 is preliminary and includes estimates. This preliminary allocation is based on information that was available to management at the time these consolidated financial statements were prepared and is subject to revision as management finalizes adjustments to purchase price provided for by the purchase and sale agreement. Accordingly, the allocation may change materially as additional information becomes available and is assessed by management.

The following table summarizes the estimated values of assets acquired and liabilities assumed and reflects adjustments to purchase price provided for by the purchase and sale agreement of approximately $1.5 million to reflect an economic effective date of April 1, 2012.


(In thousands)	April 1, 2012
Oil and natural gas properties	$	32,766
Asset retirement obligations		(1,878)
Net assets acquired	$	30,888

The ASOP Acquisition

On February 14, 2011, we acquired from Anglo-Suisse Offshore Partners, LLC (“ASOP”) an asset package consisting of certain shallow-water Gulf of Mexico shelf oil and natural gas interests surrounding the Mississippi River delta and a related gathering system (the “ASOP Properties”) for $200.7 million in cash, subject to purchase price adjustments to reflect an economic effective date of January 1, 2011 (the “ASOP Acquisition”). As of December 31, 2010, the ASOP Properties had estimated proved reserves of approximately 8.1 Mmboe, of which 84% were oil and 76% were proved developed reserves. The primary factors considered by the Company in acquiring the ASOP Properties include the belief that the ASOP Acquisition provided an opportunity to significantly increase our reserves, production volumes and drilling portfolio, while maintaining our focus on oil-weighted assets in our core area of expertise in the Gulf of Mexico shelf. We financed the ASOP Acquisition with the proceeds from the sale of $210 million in aggregate principal amount of the 8.25% senior notes due 2018 (the “Original Notes”). After deducting the initial purchasers’ discount and offering expenses, we realized net proceeds of approximately $202 million. See Note 5, “Indebtedness,” for more information regarding our Original Notes.

The following table summarizes the estimated values of assets acquired and liabilities assumed and reflects adjustments to purchase price provided for by the purchase and sale agreement totaling approximately $3.8 million to reflect an economic effective date of January 1, 2011.


(In thousands)	January 1, 2011
Oil and natural gas properties	$	221,751
Asset retirement obligations		(24,858)
Net assets acquired	$	196,893

The Main Pass Acquisition

On November 17, 2011, we acquired certain interests in producing oil and natural gas assets in the shallow-water central Gulf of Mexico shelf (the “Main Pass Interests”) from Stone Energy Offshore, L.L.C. (the “Seller”) for $38.6 million in cash, subject to customary adjustments to reflect the economic effective date of November 1, 2011 (the “Main Pass Acquisition”). The Main Pass Interests consist of additional interests in the Main Pass 296/311 complex that was included in the ASOP Acquisition, along with other unit interests in the Main Pass complex and an interest in a Main Pass 295 primary term lease. We estimate that the proved reserves as of the November 1, 2011 economic effective date totaled approximately 1.3 Mmboe, all of which were proved developed reserves and approximately 96% of which were oil reserves. We funded the Main Pass Acquisition with cash on hand.

The following allocation of the purchase price as of November 1, 2011 is preliminary and includes estimates. This preliminary allocation is based on information that was available to management at the time these consolidated financial statements were prepared and is subject to revision. Accordingly, the allocation may change materially as additional information becomes available and is assessed by management.

The following table summarizes the estimated values of assets acquired and liabilities assumed and reflects adjustments to purchase price provided for by the purchase and sale agreement of approximately $0.7 million to reflect an economic effective date of November 1, 2011.


(In thousands)	November 1, 2011
Oil and natural gas properties	$	39,412
Asset retirement obligations		(1,577)
Net assets acquired	$	37,835

We have accounted for our acquisitions using the purchase method of accounting for business combinations, and therefore we have estimated the fair value of the assets acquired and the liabilities assumed as of their respective acquisition dates. In the estimation of fair value, management uses various valuation methods including (i) comparable company analysis, which estimates the value of the acquired properties based on the implied valuations of other similar operations; (ii) comparable asset transaction analysis, which estimates the value of the acquired operations based upon publicly announced transactions of assets with similar characteristics; (iii) comparable merger transaction analysis, which, much like comparable asset transaction analysis, estimates the value of operations based upon publicly announced transactions with similar characteristics, except that merger analysis analyzes public to public merger transactions rather than solely asset transactions; and (iv) discounted cash flow analysis. The fair value is based on subjective estimates and assumptions, which are inherently subject to significant uncertainties which are beyond our control. These assumptions represent Level 3 inputs, as further discussed in Note 7, “Fair Value Measurements.”

Results of Operations and Pro Forma Information

Revenues and lease operating expenses attributable to the ST 41 Interests, the ASOP Properties and the Main Pass Interests for the three and nine months ended September 30, 2012 and 2011 were as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
	(in thousands)
ST 41 Interests:
Revenues	$	3,559	$	-	$	5,496	$	-
Lease operating expenses	$	709	$	-	$	1,001	$	-
ASOP Properties and Main Pass Interests:
Revenues	$	39,939	$	33,572	$	126,614	$	85,578
Lease operating expenses	$	7,757	$	5,732	$	19,840	$	11,959

We have determined that the presentation of net income attributable to the ST 41 Interests, the ASOP Properties and the Main Pass Interests is impracticable due to the integration of the related operations upon acquisition. We incurred fees of approximately $0.1 million related to the ST 41 Acquisition, which were included in general and administrative expenses in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2012. We incurred fees of approximately $0.5 million related to the ASOP Acquisition, which were included in general and administrative expenses in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2011.

The following supplemental pro forma information presents consolidated results of operations as if the ST 41 Acquisition, the ASOP Acquisition and Main Pass Acquisition had occurred on January 1, 2011. Pro forma results of operations for the Hilcorp Acquisition are not included because the historical results for the three months ended September 30, 2012 were not available at the time these condensed consolidated financial statements were prepared. The supplemental unaudited pro forma information was derived from a) our historical consolidated statements of operations, b) the statements of revenues and direct operating expenses for the ST 41 Interests, which were derived from our historical accounting records, c) the statements of revenues and direct operating expenses for the ASOP Properties, which were derived from ASOP’s historical accounting records and d) the statements of revenues and direct operating expenses for the Main Pass Interests, which were derived from the historical accounting records of the Seller. This information does not purport to be indicative of results of operations that would have occurred had the acquisitions occurred on January 1, 2011, nor is such information indicative of any expected future results of operations.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	Historical		Pro Forma		Pro Forma		Pro Forma
	2012		2011		2012		2011
		(in thousands, except per share data)
Revenue	$	86,668	$	92,457	$	293,547	$	281,643
Net income (loss)	$	(2,247)	$	25,699	$	37,921	$	42,461
Basic earnings (loss) per share	$	(0.06)	$	0.64	$	0.97	$	1.06
Diluted earnings (loss) per share	$	(0.06)	$	0.64	$	0.96	$	1.05