EX-99.3 4 ef20034266_ex99-3.htm EXHIBIT 99.3
Exhibit 99.3
 
Unaudited Pro Forma Condensed Combined Financial Information
 
Oaktree Capital Management, L.P. (“Oaktree”) Working Interest Asset Acquisition
 
On June 6, 2024, Diversified Energy Company, PLC (the “Company”) acquired Oaktree Capital Management, LP’s 100% membership interest in OCM Denali Holdings, LLC and its subsidiaries (the “Oaktree Transaction”), whose assets predominantly included non-operated working interests in producing wells and related facilities (the “Assets”) that are operated by the Company. The Company assessed the Assets and determined that the Oaktree Transaction was considered an asset acquisition rather than a business combination. When making this determination, management evaluated the Oaktree Transaction under International Financial Reporting Standards 3 (“IFRS 3”) and concluded that the acquired assets did not meet the definition of a business. The Company paid purchase consideration of $220.8 million, inclusive of transaction costs of $1.2 million and customary purchase price adjustments. As part of the Oaktree Transaction, the Company assumed Oaktree’s debt of $132.6 million. The Company funded the purchase through a combination of existing and expanded liquidity and issued approximately $83.3 million in notes payable to Oaktree.
 
Unaudited Pro Forma Condensed Combined Financial Statements
 
The following Unaudited Pro Forma Condensed Combined Financial Statements are derived from the historical consolidated financial statements of the Company and historical Statements of Revenues and Direct Operating Expenses related to the Oaktree Transaction.
 
The Company accounted for the Oaktree Transaction as an asset acquisition under IFRS, as the assets and operations acquired in the Oaktree Transaction do not meet the definition of a business under IFRS 3.
 
The Oaktree Transaction closed on June 6, 2024. Therefore, the Oaktree Transaction is included in the Company’s Condensed Consolidated Statement of Financial Position as of June 30, 2024. The Unaudited Pro Forma Condensed Combined Statements of Operations for the six-month period ended June 30, 2024 and the year ended December 31, 2023 presented below were prepared as if the Oaktree Transaction had occurred on January 1, 2023.
 
The Unaudited Pro Forma Condensed Combined Financial Statements reflect the following pro forma adjustments related to the Oaktree Transaction, based on available information and certain assumptions that the Company believes are reasonable:
 

 •
adjustments for additional interest expense for the Company’s related borrowing on its Credit Facility, the issuance of a note payable to Oaktree and the assumption of Oaktree’s debt;

•
adjustments for additional depletion expense related to the acquired producing properties;

•
adjustments for additional accretion expense associated with Oaktree’s proportionate working interest in the asset retirement obligations; and

•
the recognition of estimated tax impacts of the pro forma adjustments.
 
Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma condensed combined financial statement. In the Company’s opinion, all adjustments that are necessary to present fairly the pro forma information have been made. The historical consolidated financial statements have been adjusted in the Unaudited Pro Forma Condensed Combined Financial Statements to give effect to the Oaktree Transaction.
 
The unaudited pro forma condensed combined financial information is not intended to represent what the Company’s financial position or results of operations would have been had the Oaktree Transaction actually been consummated on the assumed date nor does it purport to project the future operating results of the combined company following the Oaktree Transaction. The unaudited pro forma condensed combined financial information does not reflect future events that may occur after the Oaktree Transaction, including, but not limited to, the anticipated realization of ongoing savings from potential operating efficiencies, asset dispositions, cost savings, or economies of scale that the combined company may achieve with respect to the combined operations. Specifically, the unaudited pro forma condensed combined statement of operations does not include projected synergies expected to be achieved as a result of the Oaktree Transaction and any associated costs that may be required to be incurred to achieve the identified synergies. The Unaudited Pro Forma Condensed Combined Statements of Operations also exclude the effects of costs of integration activities and asset dispositions that may result from the Oaktree Transaction.
 
The Unaudited Pro Forma Condensed Combined Financial Statements should be read in conjunction with the historical consolidated financial statements and accompanying notes contained in the Company’s annual report on Form 20-F for the year ended December 31, 2023 and interim report for the six months ended June 30, 2024 and the historical Oaktree Statements of Revenues and Direct Operating Expenses and accompanying notes thereto filed as Exhibits 99.1 and 99.2 to this report on Form 6-K of which this Exhibit 99.3 is a part.

1
Exhibit 99.3
Diversified Energy Company PLC Pro Forma Condensed Combined Statement of Operations For the Six Months Ended June 30, 2024 (Unaudited)

(In thousands, except per share data)
  
DEC Historical
    
Oaktree
Historical (a)
    
Oaktree
Transaction
Adjustments
      
Pro Forma
Combined
  
Revenue
  
$
368,674 $
      
35,398
    
$
20,891
  
(b)
  
$
424,963
  
Operating expense
    
(196,112
)
    
(19,344
)
    
(8,562
)
(b)
    
(224,018
)
Depreciation, depletion and amortization
    
(119,220
)
    
—
      
(14,887
)
(c)
    
(134,097
)
Gross profit
    
53,342
      
16,054
      
(2,548
)

   
66,848
  
General and administrative expense
    
(58,326
)
    
—
      
—
  

   
(58,326
)
Gain (loss) on natural gas and oil property and equipment
    
7,210
      
—
      
—
  
   
7,210
  
Unrealized gain (loss) on investment
    
2,433
      
—
      
—
  

   
2,433
  
Gain (loss) on derivative financial instruments
    
(2,268
)
    
—
      
—
  

   
(2,268
)
Operating profit (loss)
    
2,391
      
16,054
      
(2,548
)

   
15,897
  
Finance costs
    
(60,581
)
    
—
       (10,684 ) (d)     (71,265 )
Accretion of asset retirement obligation
    
(14,667
)
    
—
       (754 ) (e)     (15,421 )
Loss on early retirement of debt
    
(10,649
)
    
—
       —  

   
(10,649
)
Other income (expense)
    
1,254
      
—
       —  
   
1,254
  
Income (loss) before taxation
    
(82,252
)
    
16,054
      
(13,986
)
       (80,184 )
Income tax benefit (expense)
    
97,997
      
—
      
(497
)
 (f)     97,500  
Net income (loss)
    
15,745
      
16,054
      
(14,483
)
   
17,316
  
Other comprehensive income (loss)
    
(1,905
)
    
—
      
—
  
   
(1,905
)
Total comprehensive income (loss)
  
$
13,840
    
$
16,054
    
$
(14,483
)
 
$
15,411
  
Net income (loss) attributable to owners of the parent
                                  
Diversified Energy Company PLC
  
$
15,061
    
$
16,054
    
$
(14,483
)
 
$
16,632
  
Non-controlling interest
    
684
      
—
      
—
  
    684  
Net income (loss)
  
$
15,745
    
$
16,054
    
$
(14,483
)
 
$
17,316
  
Earnings (loss) per share attributable to owners of the parent
                                  
Earnings (loss) per share - basic
  
$
0.32
     $ —     $ —      
$
0.35
  
Earnings (loss) per share - diluted
  
$
0.32
     $ —     $ —      
$
0.35
  
 
                                  
Weighted average shares outstanding - basic
     47,202       —
       —
         47,202  
Weighted average shares outstanding - diluted
    
47,561
       —
       —
         47,561  

See accompanying notes to unaudited pro forma condensed combined financial information.

2
Exhibit 99.3
Diversified Energy Company PLC Pro Forma Condensed Combined Statement of Operations For the Year Ended December 31, 2023 (Unaudited)
 
(In thousands, except per share data)  
DEC Historical
     Oaktree
 Historical (g)		    
Oaktree
Transaction
Adjustments
  
Pro Forma
Combined
  
Revenue
  
$
868,263 $
      
152,521
    
$
—
       $ 1,020,784  
Operating expense
    
(440,562
)
    
(87,210
)
    
—
         (527,772 )
Depreciation, depletion and amortization
    
(224,546
)
    
—
      
(38,720
)
 (c)     (263,266 )
Gross profit
    
203,155
      
65,311
      
(38,720
)
      
229,746
  
General and administrative expense
    
(119,722
)
    
—
      
—
        
(119,722
)
Allowance for expected credit losses
    
(8,478
)
    
—
      
—
        
(8,478
)
Gain (loss) on natural gas and oil property and equipment
    
24,146
      
—
      
—
        
24,146
  
Gain (loss) on sale of equity interest
    
18,440
      
—
      
—
        
18,440
  
Unrealized gain (loss) on investment
    
4,610
      
—
      
—
        
4,610
  
Gain (loss) on derivative financial instruments
    
1,080,516
      
—
      
—
        
1,080,516
  
Impairment of proved properties
    
(41,616
)
    
—
      
—
        
(41,616
)
Operating profit (loss)
    
1,161,051
      
65,311
      
(38,720
)
      
1,187,642
  
Finance costs
    
(134,166
)
    
—
       (29,605 ) (d)     (163,771 )
Accretion of asset retirement obligation
    
(26,926
)
    
—
       (1,809 ) (e)     (28,735 )
Other income (expense)
    
385
      
—
       —
         385  
Income (loss) before taxation
    
1,000,344
      
65,311
      
(70,134
)
       995,521  
Income tax benefit (expense)
    
(240,643
)
    
—
      
1,160
   (f) 
    (239,483 )
Net income (loss)
    
759,701
      
65,311
      
(68,974
)
      
756,038
  
Other comprehensive income (loss)
    
(270
)
    
—
      
—
        
(270
)
Total comprehensive income (loss)
  
$
759,431
    
$
65,311
    
$
(68,974
)
    
$
755,768
  
Net income (loss) attributable to owners of the parent
                                  
Diversified Energy Company PLC
  
$
758,018
    
$
65,311
    
$
(68,974
)
    
$
754,355
  
Non-controlling interest
    
1,683
      
—
      
—
        
1,683
  
Net income (loss)
  
$
759,701
    
$
65,311
    
$
(68,974
)
    
$
756,038
  
                                   
Earnings (loss) per share attributable to owners of the parent
                            
Earnings (loss) per share - basic
  
$
16.07
    
$
—
     $ —  

  $ 15.99  
Earnings (loss) per share - diluted
  
$
15.95
    
$
—
     $ —  

  $ 15.88  
 
                                  
Weighted average shares outstanding - basic
    
47,165
      
—
       —  

    47,165  
Weighted average shares outstanding - diluted
    
47,514
      
—
      
—
  
    47,514  
 
See accompanying notes to unaudited pro forma condensed combined financial information.

3
Exhibit 99.3
Notes to Unaudited Pro Forma Condensed Combined Financial Information
 
Note 1 - Basis of Pro Forma Presentation
 
The accompanying unaudited pro forma condensed combined financial information was prepared based on the historical consolidated financial statements of the Company for the year ended December 31, 2023 and the six months ended June 30, 2024, the historical Oaktree Statements of Revenues and Direct Operating Expenses and the historical financial activity of Oaktree from April 1, 2024 through June 6, 2024, the closing date of the Oaktree Transaction. The unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2024 and the year ended December 31, 2023 were prepared assuming the Oaktree Transaction occurred on January 1, 2023. The Oaktree Transaction closed on June 6, 2024. Therefore, the Oaktree Transaction is already included in the Company's condensed consolidated statement of financial position as of June 30, 2024.
 
The unaudited pro forma condensed combined financial information reflects pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions that the Company believes are reasonable, however, actual results may differ from those reflected in this statement. In the Company’s opinion, all adjustments that are necessary to present fairly the pro forma information have been made. The unaudited pro forma condensed combined financial information does not purport to represent what the Company’s results of operations would have been if the Oaktree Transaction had actually occurred on the date indicated above, nor is it indicative of the Company’s future results of operations. The unaudited pro forma condensed combined financial information should be read in conjunction with the historical consolidated financial statements and related notes of the Company, as applicable, for the period presented.
 
Note 2 - Pro Forma Adjustments
 
The Company accounted for the Oaktree Transaction as an asset acquisition under International Financial Reporting Standards (“IFRS”), as the assets and operations acquired in the Oaktree Transaction do not meet the definition of a business under IFRS 3. The allocation of the purchase price is based upon management’s estimates of and assumptions related to the relative fair value of assets acquired and liabilities assumed as of June 6, 2024.
 
The following adjustments have been made to the accompanying unaudited pro forma condensed combined financial information:

(a)
Amounts are derived from the Oaktree historical Statement of Revenues and Direct Operating Expenses for the three months ended March 31, 2024 included as Exhibit 99.1.

(b)
Adjustments are for the period April 1, 2024 through June 6, 2024, the date the Oaktree Transaction closed.

(c)
Depletion expense associated with the acquired producing properties for the respective 6 and 12 month periods presented.

(d)
Interest expense for the Company’s related $172 million borrowing on its Credit Facility and ABS Warehouse Facility using current interest rates, the issuance of an $83 million note payable to Oaktree and the assumption of Oaktree’s $133 million proportionate share of the ABS VI debt.

(e)
Accretion of asset retirement obligation associated with Oaktree’s proportionate working interest in the asset retirement obligations.

(f)
Adjustments to the income tax provision reflect the historical and adjusted income (loss) before taxation multiplied by an approximate 24% effective tax rate for the periods presented.

(g)
Amounts are derived from the Oaktree historical Statement of Revenues and Direct Operating Expenses for the year ended December 31, 2023 included as Exhibit 99.2.
 
Note 3 - Supplemental Oil & Gas Reserve Information

Estimated Quantities of Proved Oil and Natural Gas Reserves

The following tables present information regarding net proved oil and natural gas reserves attributable to the Company's interests in proved properties as of December 31, 2023. The information set forth in the tables regarding historical reserves of the Company is based on proved reserves reports prepared in accordance with Securities and Exchange Commission’s (“SEC”) rules. The Company's petroleum engineers prepared the proved reserves reports as of December 31, 2023.
 
In addition, the following tables also set forth information as of December 31, 2023 about the estimated net proved oil and natural gas reserves attributable to the Oaktree Transaction, and the pro forma estimated net proved oil and natural gas reserves as if the Oaktree Transaction had occurred on January 1, 2023. The reserve estimates attributable to the Oaktree Transaction at December 31, 2023 presented in the table below were prepared in accordance with the authoritative guidance of the SEC on oil and natural gas reserve estimation and disclosures.
 
Reserve estimates are inherently imprecise and are generally based upon extrapolation of historical production trends, analogy to similar properties and volumetric calculations. Accordingly, reserve estimates are expected to change, and such changes could be material and occur in the near term as future information becomes available.

4
Exhibit 99.3

  
Natural Gas (MMcf)
  

       
Oaktree
   

 
          Transaction    
Pro Forma
  
   
DEC Historical
    
Adjustments
    
Combined
  
Total proved reserves, beginning of period
    
4,349,611
      
555,228
      
4,904,839
  
Revisions of previous estimates
    
(658,917
)
    
(146,142
)
    
(805,059
)
Extensions, discoveries and other additions
    
712
      
3,383
      
4,095
  
Production
    
(256,378
)
    
(39,539
)
    
(295,917
)
Purchase of reserves in place
    
105,713
      
—
      
105,713
  
Sales of reserves in place
    
(340,697
)
    
—
      
(340,697
)
Total proved reserves, end of period
    
3,200,044
      
372,930
      
3,572,974
  
Proved developed reserves
                        
Beginning of period
    
4,340,779
      
555,228
      
4,896,007
  
End of period
    
3,184,499
      
372,930
      
3,557,429
  
Proved undeveloped reserves:
                        
Beginning of period
    
8,832
      
—
      
8,832
  
End of period
    
15,545
      
—
      
15,545
  

   
NGLs (MBbls)
  
          Oaktree        
         
Transaction
    
Pro Forma
  
   
DEC Historical
    
Adjustments
    
Combined
  
Total proved reserves, beginning of period
    
101,931
      
13,352
      
115,283
  
Revisions of previous estimates
    
153
      
(3,737
)
    
(3,584
)
Extensions, discoveries and other additions
    
—
      
50
      
50
  
Production
    
(5,832
)
    
(949
)
    
(6,781
)
Purchase of reserves in place
    
2,592
      
—
      
2,592
  
Sales of reserves in place
    
(3,143
)
    
—
      
(3,143
)
Total proved reserves, end of period
    
95,701
      
8,716
      
104,417
  
Proved developed reserves
                        
Beginning of period
    
101,931
      
13,352
      
115,283
  
End of period
    
94,391
      
8,716
      
103,107
  
Proved undeveloped reserves:
  
Beginning of period
     —       —       —
 
End of period
    
1,310
       —      
1,310
  

   
Oil (MBbls)
  
          Oaktree        
         
Transaction
    
Pro Forma
  
   
DEC Historical
    
Adjustments
    
Combined
  
Total proved reserves, beginning of period
    
14,830
      
6,469
      
21,299
  
Revisions of previous estimates
    
(230
)
    
(616
)
    
(846
)
Extensions, discoveries and other additions
    
50
      
83
      
133
  
Production
    
(1,377
)
    
(657
)
    
(2,034
)
Purchase of reserves in place
    
923
      
—
      
923
  
Sales of reserves in place
    
(1,580
)
    
—
      
(1,580
)
Total proved reserves, end of period
    
12,616
      
5,279
      
17,895
  
Proved developed reserves
                        
Beginning of period
    
14,830
      
6,469
      
21,299
  
End of period
    
12,380
      
5,279
      
17,659
  
Proved undeveloped reserves:
                        
Beginning of period
     —       —       —  
End of period
     236       —       236  

5
Exhibit 99.3
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
 
The following table presents the standardized measure of discounted future net cash flows relating to the proved oil and natural gas reserves of the Company and the Oaktree Transaction on a pro forma combined basis as of December 31, 2023. The standardized measure shown below represents estimates only and should not be construed as the current market value of the Company’s estimated oil and natural gas reserves or those acquired estimated oil and natural gas reserves attributable to the Oaktree Transaction.

    December 31, 2023  
 
 
(In thousands)
  
DEC Historical
    
Oaktree
Transaction
Adjustments
    
Pro Forma
Combined
  
Future cash inflows
  
$
10,900,742
    
$
1,371,293
    
$
12,272,035
  
Future production costs
  
(5,345,117
)
  
(725,738
)
  
(6,070,855
)
Future development costs
  
(1,937,293
)
  
(174,796
)
  
(2,112,089
)
Future income tax expense
  
(653,216
)
  
(1,621
)
  
(654,837
)
Future net cash flows
  
2,965,116
    
469,138
    
3,434,254
  
10% annual discount for estimated timing of cash flows
  
(1,219,580
)
  
(140,870
)
  
(1,360,450
)
Standardized Measure
   $
1,745,536


$
328,268


$
2,073,804
  

The following table sets forth the principal changes in the standardized measure of discounted future net cash flows applicable to estimated net proved oil and natural gas reserves of the Company and the Oaktree Transaction on a pro forma combined basis as of December 31, 2023:

    December 31, 2023  
          Oaktree        
          Transaction     Pro Forma
 
(In thousands)   DEC Historical     Adjustments    
 Combined
  
Standardized Measure, beginning of year
  
$
6,743,100
    
$
1,324,614
    
$
8,067,714
  
Sales and transfers of natural gas and oil produced, net of production costs
    
(431,629
)
    
(65,311
)
    
(496,940
)
Net changes in prices and production costs
    
(5,850,625
)
    
(760,888
)
    
(6,611,513
)
Extensions, discoveries, and other additions, net of future production and development costs
    
(13,682
)
    
5,027
      
(8,655
)
Acquisition of reserves in place
    
122,613
      
—
      
122,613
  
Divestiture of reserves in place
    
(377,097
)
    
—
      
(377,097
)
Revisions of previous quantity estimates
    
(1,224,544
)
    
(342,713
)
    
(1,567,257
)
Net change in income taxes
    
1,688,208
      
1,842
      
1,690,050
  
Changes in production rates (timing) and other
    
206,646
      
32,965
      
239,611
  
Accretion of discount
    
882,546
      
132,732
      
1,015,278
  
Standardized Measure, end of year
  
$
1,745,536
    
$
328,268
    
$
2,073,804
  


6