(2) Acquisitions and Dispositions

The Hilcorp Acquisition

On October 31, 2012, we acquired from Hilcorp Energy GOM Holdings, LLC (“Hilcorp”) 100% of the membership interests of Hilcorp Energy GOM, LLC (the “Hilcorp Acquisition”), which owned certain shallow water Gulf of Mexico shelf oil and natural gas interests (the “Hilcorp Properties”), for $550 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 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 on the Gulf of Mexico shelf. The Hilcorp Acquisition also provided 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 $300.0 million in aggregate principal amount of 8.25% senior notes due 2018 (“the 2012 Senior Notes”) and borrowings under our expanded senior credit facility. See Note 5, “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 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.

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 $6.2 million to reflect an economic effective date of July 1, 2012.


(In thousands)
Oil and natural gas properties	$	684,900
Asset retirement obligations		(137,774)
Net assets acquired	$	547,126

Sale of Non-Operated Bay Marchand Asset

On April 2, 2013, we sold certain shallow water Gulf of Mexico shelf oil and natural gas interests located within the non-operated Bay Marchand field (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 $11.3 million resulting in total consideration of $62.8 million, subject to customary adjustments to reflect the January 1, 2013 economic effective date. Our results for the nine months ended September 30, 2013 reflect a pre-tax gain of $28.1 million from this sale. The following table summarizes the carrying amount of the net assets sold and reflects management’s estimates of customary adjustments to the sale price of approximately $0.7 million to reflect the economic effective date of January 1, 2013.


(In thousands)
Net property and equipment	$	35,298
Asset retirement obligations		(3,959)
Other liabilities		(7,311)
Net assets sold	$	24,028

The cash proceeds from this sale of assets were held on deposit with a qualified intermediary in contemplation of a potential tax-deferred exchange of properties and classified as restricted cash at June 30, 2013. On September 26, 2013, we used $16.5 million of these proceeds to fund the WD29 Acquisition (defined and described below), which was a qualifying purchase for tax-deferral purposes. On September 29, 2013, the underlying escrow agreement expired, and the remaining amount of the deposit became unrestricted.

The West Delta 29 Acquisition

On September 26, 2013, we acquired from W&T Offshore, Inc. (“W&T”) an asset package consisting of certain Gulf of Mexico shelf oil and natural gas interests in the West Delta 29 field (the “WD29 Interests”) for $21.8 million in cash, subject to customary adjustments to reflect an economic effective date of January 1, 2013 (the “WD29 Acquisition”). We estimate that the proved reserves as of the January 1, 2013 economic effective date totaled approximately 0.6 Mmboe, of which 90% were oil and 94% were proved developed reserves. The WD29 Acquisition was funded with a portion of the proceeds from the sale of the BM Interests held by the qualified intermediary as described above.

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 $4.7 million to reflect an economic effective date of January 1, 2013.


(In thousands)
Oil and natural gas properties	$	18,458
Asset retirement obligations		(1,398)
Net assets acquired	$	17,060

The South Timbalier Acquisition

On May 15, 2012, we acquired from 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 (the “ST41 Acquisition”). 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 became the sole working interest owner of the South Timbalier 41 field. We funded the ST41 Acquisition with cash on hand.

The following table summarizes the estimated values of assets acquired and liabilities assumed and reflects final adjustments to purchase price provided for by the purchase and sale agreement of approximately $0.4 million to reflect an economic effective date of April 1, 2012.


(In thousands)
Oil and natural gas properties	$	33,206
Asset retirement obligations		(1,878)
Net assets acquired	$	31,328

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

The following table sets forth revenues and lease operating expenses attributable to the Hilcorp Properties and the ST41 Interests.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(in thousands)
Hilcorp Properties:
Revenue	$	53,769	$	-		157,439		-
Lease operating expenses	$	19,896	$	-		59,027		-
ST41 Interests:
Revenue	$	2,816	$	3,559	$	8,746	$	5,496
Lease operating expenses	$	539	$	709	$	1,573	$	1,001

We have determined that the presentation of net income attributable to the Hilcorp Properties and the ST41 Interests is impracticable due to the integration of the related operations upon acquisition.

The following supplemental pro forma information presents consolidated results of operations as if the Hilcorp Acquisition and the ST41 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 and c) the statements of revenues and direct operating expenses for the ST41 Interests, which were derived from our historical accounting records. 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.


	Pro Forma		Pro Forma
	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2012		2012
	(in thousands, except for share data)
Revenue	$	136,324	$	437,026
Net income (loss)	$	(9,379)	$	32,949
Basic earnings (loss) per share	$	(0.24)	$	0.84
Diluted earnings (loss) per share	$	(0.24)	$	0.84