(2) Acquisitions and Dispositions

The Hilcorp Acquisition

On October 31, 2012, we acquired the Hilcorp Properties for $550.0 million in cash, subject to customary adjustments to reflect an economic effective date of July 1, 2012. As of December 31, 2012, the Hilcorp Properties had estimated proved reserves of approximately 37.2 Mmboe, of which 49% were oil and 58% were proved developed reserves. The primary factors considered by management 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 cash on hand, the net proceeds from the sale of the 2012 Senior Notes and borrowings under our expanded senior credit facility. The 2012 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 7, “Indebtedness,” for more information regarding our 2012 Senior Notes.

The following allocation of the purchase price 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 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. In addition, the purchase price could change materially 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 management’s estimate of customary adjustments to purchase price provided for by the purchase and sale agreement of approximately $7.5 million to reflect an economic effective date of July 1, 2012.


(In thousands)	July 1, 2012
Oil and natural gas properties	$	671,310
Asset retirement obligations		(128,817)
Net assets acquired	$	542,493

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 “ST41 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. We estimate that the proved reserves as of the April 1, 2012 economic effective date totaled approximately 1.0 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 $0.7 million to reflect an economic effective date of April 1, 2012.


(In thousands)	April 1, 2012
Oil and natural gas properties	$	33,587
Asset retirement obligations		(1,878)
Net assets acquired	$	31,709

The ASOP Acquisition

On February 14, 2011, we acquired 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”) from ASOP for $200.7 million in cash, subject to purchase price adjustments to reflect an economic effective date of January 1, 2011. 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 management 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 $210.0 million in aggregate principal amount of the 2011 Senior Notes. After deducting the initial purchasers’ discount and offering expenses, we realized net proceeds of approximately $202.0 million. See Note 7, “Indebtedness” for more information regarding our 2011 Senior 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 of 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 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 96% of which were oil reserves. We funded the Main Pass Acquisition with cash on hand.


(In thousands)	November 1, 2011
Oil and natural gas properties	$	40,826
Asset retirement obligations		(2,991)
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 10, “Fair Value Measurements.”

Results of Operations and Pro Forma Information

Revenues and lease operating expenses attributable to the Hilcorp Properties, the ST41 Interests, the ASOP Properties and the Main Pass Interests were as follows:


	Year Ended December 31,
	2012		2011
	(In thousands)
Hilcorp Properties:
Revenues	$	37,978	$	-
Lease operating expenses	$	6,711	$	-
ST41 Interests:
Revenues	$	9,262	$	-
Lease operating expenses	$	1,760	$	-
ASOP Properties and Main Pass Interests:
Revenues	$	175,538	$	125,975
Lease operating expenses	$	26,467	$	17,161

We have determined that the presentation of net income attributable to the Hilcorp Properties, the ST41 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 $0.5 million related to the Hilcorp Acquisition and approximately $0.1 million related to the ST41 Acquisition, which were included in general and administrative expenses in the accompanying consolidated statement of operations for the year ended December 31, 2012. We incurred fees of approximately $0.5 million related to the ASOP Acquisition and approximately $0.1 million related to the Main Pass Acquisition, which were included in general and administrative expenses in the accompanying consolidated statement of operations for the year ended December 31, 2011.

The following supplemental pro forma information presents consolidated results of operations as if the Hilcorp Acquisition, the ST41 Acquisition, the ASOP Acquisition and the Main Pass Acquisition had occurred on January 1, 2011. The supplemental unaudited pro forma information was derived from a) our historical consolidated statements of operations, b) the statements of operations of Hilcorp Energy GOM, LLC, c) the statements of revenues and direct operating expenses for the ST41 Interests, which were derived from our historical accounting records, d) the statements of revenues and direct operating expenses for the ASOP Properties, which were derived from ASOP’s historical accounting records and e) 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.


	Year Ended December 31,
	Pro Forma		Pro Forma
	2012		2011
	(in thousands, except per share data)
Revenue	$	594,510	$	661,194
Net income	$	53,725	$	27,630
Basic earnings per share	$	1.37	$	0.69
Diluted earnings per share	$	1.37	$	0.69

Subsequent Events

On March 5, 2013 we executed a purchase and sale agreement to sell certain shallow water Gulf of Mexico shelf oil and natural gas interests located within the non-operated Bay Marchand field area (the “BM Interests”) to the property operator for $51.5 million in cash and the buyer’s assumption of liabilities recorded on our balance sheet of $10.8 million resulting in total consideration of $62.3 million, subject to customary adjustments to reflect the January 1, 2013 economic effective date. We expect to close the transaction by April 1, 2013. As of December 31, 2012, the net book value of the BM Interests was approximately $35.6 million.