EX-99.1 2 exhibit991scoop_stackupdat.htm EXHIBIT 99.1 Exhibit


EXHIBIT 99.1

Unaudited pro forma condensed combined consolidated financial information of Vanguard,
as adjusted for the SCOOP/STACK Divestiture as of and for the nine months ended September 30, 2016, and as adjusted for the LRE Merger, the Eagle Rock Merger and the SCOOP/STACK Divestiture for the year ended December 31, 2015

On October 5, 2015, Vanguard Natural Resources, LLC (“Vanguard” or the “Company”) completed the transactions contemplated by the Purchase Agreement and Plan of Merger, dated as of April 20, 2015 (the “LRE Merger Agreement”), by and among Vanguard, Lighthouse Merger Sub, LLC, Vanguard’s wholly owned subsidiary (“LRE Merger Sub”), Lime Rock Management LP (“LR Management”), Lime Rock Resources A, L.P. (“LRR A”), Lime Rock Resources B, L.P. (“LRR B”), Lime Rock Resources C, L.P. (“LRR C”), Lime Rock Resources II-A, L.P. (“LRR II-A”), Lime Rock Resources II-C, L.P. (“LRR II-C”), and, together with LRR A, LRR B, LRR C, LRR II-A and LR Management, the “GP Sellers”), LRR Energy, L.P. (“LRE”) and LRE GP, LLC (“LRE GP”), the general partner of LRE.
Pursuant to the terms of the LRE Merger Agreement, LRE Merger Sub was merged with and into LRE, with LRE continuing as the surviving entity and as Vanguard’s wholly owned subsidiary (the “LRE Merger”), and, at the same time, Vanguard acquired all of the limited liability company interests in LRE GP from the GP Sellers in exchange for common units representing limited liability company interests in Vanguard. Under the terms of the LRE Merger Agreement, each common unit representing interests in LRE (the “LRE common units”) was converted into the right to receive 0.550 newly issued Vanguard common units.
As consideration for the LRE Merger, Vanguard issued approximately 15.4 million Vanguard common units valued at $123.3 million based on the closing price per Vanguard common unit of $7.98 at October 5, 2015 and assumed $290.0 million in debt. The debt assumed was extinguished using borrowings under the Company’s Reserve-Based Credit Facility following the close of the LRE Merger. As consideration for the purchase of the limited liability company interests in LRE GP, Vanguard issued 12,320 Vanguard common units.

The LRE Merger was completed following approval, at a Special Meeting of LRE unitholders on October 5, 2015, of the LRE Merger Agreement and the LRE Merger by holders of a majority of the outstanding LRE Common Units.

On October 8, 2015, Vanguard completed the transactions contemplated by the Agreement and Plan of Merger, dated as of May 21, 2015 (the “Eagle Rock Merger Agreement”), by and among Vanguard, Talon Merger Sub, LLC, Vanguard’s wholly owned subsidiary (“Eagle Rock Merger Sub”), Eagle Rock Energy Partners, L.P. (“Eagle Rock”) and Eagle Rock Energy GP, L.P. (“Eagle Rock GP”). Pursuant to the terms of the Eagle Rock Merger Agreement, Eagle Rock Merger Sub was merged with and into Eagle Rock with Eagle Rock continuing as the surviving entity and as Vanguard’s wholly owned subsidiary (the “Eagle Rock Merger”).

Under the terms of the Eagle Rock Merger Agreement, each common unit representing limited partner interests in Eagle Rock (“Eagle Rock common unit”) was converted into the right to receive 0.185 newly issued Vanguard common units or, in the case of fractional Vanguard common units, cash (without interest and rounded up to the nearest whole cent).

As consideration for the Eagle Rock Merger, Vanguard issued approximately 27.7 million Vanguard common units valued at $258.3 million based on the closing price per Vanguard common unit of $9.31 at October 8, 2015 and assumed $156.6 million in debt. The Company extinguished $122.3 million of the debt assumed using borrowings under its Reserve-Based Credit Facility following the close of Eagle Rock Merger.

The Eagle Rock Merger was completed following (i) approval by holders of a majority of the outstanding Eagle Rock common units, at a Special Meeting of Eagle Rock unitholders on October 5, 2015, of the Eagle Rock Merger Agreement and the Eagle Rock Merger and (ii) approval by Vanguard unitholders, at Vanguard’s 2015 Annual Meeting of Unitholders, of the issuance of Vanguard common units to be issued as Eagle Rock Merger Consideration to the holders of Eagle Rock common units in connection with the Eagle Rock Merger.

The pro forma financial statements presented below have been prepared using the acquisition method of accounting for business combinations under U.S. GAAP. Under the acquisition method of accounting, the assets acquired and liabilities assumed from LRE and Eagle Rock were recorded as of the acquisition date at their respective fair values.





On May 19, 2016, pursuant to a Purchase and Sale Agreement dated March 29, 2016 (the “Purchase Agreement”), Vanguard, and its wholly owned subsidiary Vanguard Operating, LLC (“Vanguard Operating”), completed the divestiture of natural gas, oil and natural gas liquids assets in the SCOOP/STACK area in Oklahoma to NonOp Solutions III, L.P. and NonOp Solutions IV LP, entities managed by Titanium Exploration Partners, LLC for an adjusted purchase price of $270.5 million (the “SCOOP/STACK Divestiture”) with an effective date of January 1, 2016. The Company used $268.4 million of the cash received to reduce borrowings under our reserve-based credit facility and $2.1 million to pay for some of the transaction fees related to the sale.

The SCOOP/STACK Divestiture was treated as a recovery of costs and therefore was recorded as an adjustment to oil and natural gas properties, with no gain or loss recognized. Vanguard determined that the resulting adjustment did not significantly alter the relationship between the remaining oil and natural properties and the related proved reserves of its reporting unit.

The historical financial information included in the columns entitled “Historical Vanguard” was derived from the unaudited financial statements included in Vanguard’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 and the audited financial statements in Vanguard's Annual Report on Form 10-K for the year ended December 31, 2015.

Vanguard’s unaudited pro forma combined statement of operations for the nine months ended September 30, 2016 and year ended December 31, 2015, have been presented based on Vanguard’s statements of operations, and reflect the pro forma operating results attributable to the LRE Merger, the Eagle Rock Merger and the SCOOP/STACK Divestiture, as if the LRE Merger, the Eagle Rock Merger, the SCOOP/STACK Divestiture and the related transactions had occurred on January 1, 2015.

Pro forma data is based on currently available information and certain estimates and assumptions as explained in the notes to the unaudited pro forma combined financial statements. Pro forma data is not necessarily indicative of the financial results that would have been attained had the LRE Merger, the Eagle Rock Merger, the SCOOP/STACK Divestiture and the related transactions had occurred on January 1, 2015. As actual adjustments may differ from the pro forma adjustments, the pro forma amounts presented should not be viewed as indicative of operations in future periods.

The unaudited pro forma combined financial information presented is based on assumptions that Vanguard believes are reasonable under the circumstances and are intended for informational purposes only. Actual results may differ from the estimates and assumptions used. The unaudited pro forma combined financial information presented is not necessarily indicative of the financial results that would have occurred if these transactions had taken place on the dates indicated, nor is it indicative of future consolidated results.






Unaudited Pro Forma Combined Statement of Operations
 For the Nine Months Ended September 30, 2016
(in thousands, except per unit data)
 
Historical Vanguard
 
Pro Forma
adjustments
(Note 2)
 
Vanguard/
LRE/Eagle Rock/SCOOP-STACK Divestiture
Pro Forma Combined
 
 
 
Revenues:
 
 
 
 
 
 
Oil sales
 
$
127,594

 
$
(8,873
)
(a) 
$
118,721

Natural gas sales
 
121,756

 
(5,339
)
(a) 
116,417

NGLs sales
 
30,752

 
(3,330
)
(a) 
27,422

Net losses on commodity derivative contracts
 
(15,752
)
 
—

 
(15,752
)
Total revenues
 
264,350

 
(17,542
)
 
246,808

Costs and expenses:
 
 
 
 
 
 
Production:
 
 
 
 
 
 
Lease operating expenses
 
120,228

 
(1,670
)
(b) 
118,558

Production and other taxes
 
29,967

 
(594
)
(b) 
29,373

Depreciation, depletion, amortization, and accretion
 
118,935

 
(10,352
)
(c) 


 
 
 
 
(94
)
(c) 
108,489

Impairment of oil and natural gas properties
 
365,658

 
—

 
365,658

Impairment of goodwill
 
252,676

 
—

 
252,676

Selling, general and administrative expenses
 
35,884

 
—

 
35,884

Total costs and expenses
 
923,348

 
(12,710
)
 
910,638

Loss from operations
 
(658,998
)
 
(4,832
)
 
(663,830
)
Other income (expense):
 
 
 
 
 
 
Interest expense
 
(72,612
)
 
3,078

(d) 
(69,534
)
Net losses on interest rate derivative contracts
 
(6,061
)
 
—

 
(6,061
)
Loss on acquisition of oil and natural gas properties
 
(3,782
)
 
—

 
(3,782
)
Gain on termination of debt
 
89,714

 
—

 
89,714

Other
 
363

 
—

 
363

Total other income
 
7,622

 
3,078

 
10,700

Net loss
 
(651,376
)
 
(1,754
)
 
(653,130
)
Less: Net income attributable to non-controlling interests
 
(91
)
 
—

 
(91
)
Net loss attributable to Vanguard unitholders
 
(651,467
)
 
(1,754
)
 
(653,221
)
Distributions to Preferred unitholders
 
(20,069
)
 
—

 
(20,069
)
Net loss attributable to Common and Class B unitholders
 
$
(671,536
)
 
$
(1,754
)
 
$
(673,290
)
 
 
 
 
 
 
 
Net loss per Common and Class B unit
 
 
 
 
 
 
    Basic and Diluted
 
$
(5.12
)
 
 
 
$
(5.13
)
Weighted average Common units outstanding
 
 
 
 
 
 
Common units – basic & diluted
 
130,862

 
 
 
130,862

Class B units – basic & diluted
 
420

 
 
 
420

See accompanying notes to consolidated financial statements




Unaudited Pro Forma Combined Statement of Operations
 For the Year Ended December 31, 2015

(in thousands, except per unit data)
 
Historical Vanguard
 
Historical LRE
 
Pro Forma
adjustments
(Note 2)
 
Historical Eagle Rock
 
Pro Forma
adjustments
(Note 2)
 
Vanguard/
LRE/Eagle
Rock Pro
Forma
Combined
 
Pro Forma
adjustments
(Note 2)
 
Vanguard/
LRE/Eagle Rock/SCOOP-STACK Divestiture
Pro Forma Combined
 
 
 
 
 
 
 
 
Revenues:
 
 
 
  

 
  

 
 
 
 
 
 
 
 
 
 
Oil sales
 
$
164,111

 
$
39,568

 
$
—

 
$
—

 
$
52,791

(n) 
$
256,470

 
$
(31,842
)
(a) 
$
224,628

Natural gas sales
 
193,496

 
12,097

 
71

(e) 
—

 
25,953

(n) 
231,761

 
(14,641
)
(a) 
217,120

 
 
 
 
 
 
 
 
 
 
144

(o) 
 
 
 
 
 
NGLs sales
 
39,620

 
3,803

 
—

 
—

 
13,632

(n) 
57,055

 
(11,311
)
(a) 
45,744

Natural gas, natural gas liquids, oil, condensate and sulfur
 
—

 
—

 
—

 
92,376

 
(92,376
)
(n) 
—

 
—

 
—

Net gains on commodity derivative contracts
 
169,416

 
38,948

 
—

 
50,914

 
—

 
259,278

 
—

 
259,278

Other income
 
 
 
71

 
(71
)
(e) 
144

 
(144
)
(o) 
—

 
—

 
—

Total revenues
 
566,643

 
94,487

 
—

 
143,434

 
—

 
804,564

 
(57,794
)
 
746,770

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Production:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease operating expenses
 
146,654

 
18,741

 
(281
)
(g) 
33,590

 
—

 
198,704

 
(10,443
)
(b) 
188,261

Production and other taxes
 
40,576

 
4,117

 
—

 
3,990

 
—

 
48,683

 
(2,154
)
(b) 
46,529

Depreciation, depletion, amortization, and accretion
 
247,119

 
27,589

 
(27,589
)
(h) 
47,426

 
(43,428
)
(q) 
293,289

 
(28,600
)
(c) 
264,462

 
 
 
 
 
 
12,535

(h) 
 
 
28,944

(q) 
 
 
(227
)
(c) 
 
 
 
 
 
 
 
1,198

(i) 
 
 
(505
)
(r) 
 
 
 
 
 
Impairment of oil and natural gas properties
 
1,842,317

 
132,296

 
—

 
75,313

 
—

 
2,049,926

 
—

 
2,049,926

Goodwill impairment loss
 
71,425

 
—

 
—

 
—

 
—

 
71,425

 
—

 
71,425

Accretion expense
 
—

 
1,556

 
(1,556
)
(i) 
—

 
—

 
—

 
—

 
—

Loss on settlement of asset retirement obligations
 
—

 
125

 
(125
)
(j) 
—

 
—

 
—

 
—

 
—

Selling, general and administrative expenses
 
55,076

 
19,055

 
16

(f) 
34,047

 
(412
)
(s) 
107,762

 
—

 
107,762

 
 
 
 
 
 
(20
)
(k) 
 
 
 
 
 
 
 
 
 
Total costs and expenses
 
2,403,167

 
203,479

 
(15,822
)
 
194,366

 
(15,401
)
 
2,769,789

 
(41,424
)
 
2,728,365

Income (loss) from operations
 
(1,836,524
)
 
(108,992
)
 
15,822

 
(50,932
)
 
15,401

 
(1,965,225
)
 
(16,370
)
 
(1,981,595
)
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(87,573
)
 
(9,150
)
 
9,150

(l) 
(6,477
)
 
2,337

(t) 
(99,542
)
 
7,844

(d) 
(91,698
)




 
 
 
 
 
 
(5,329
)
(l) 
 
 
(2,500
)
(t) 
 
 
 
 
 
Net losses on interest rate derivative contracts
 
153

 
(2,421
)
 
—

 
(5,728
)
 
—

 
(7,996
)
 
—

 
(7,996
)
Net gain on acquisition of oil and natural gas properties
 
40,533

 
—

 
—

 
—

 
(40,817
)
(u) 
(284
)
 
—

 
(284
)
Net income (loss) from short term investments
 
—

 
—

 
—

 
(5,754
)
 
3,179

(p) 
(2,575
)
 
—

 
(2,575
)
Other
 
237

 
—

 
—

 
3,207

 
(3,179
)
(p) 
265

 
—

 
265

Total other income (expense)
 
(46,650
)
 
(11,571
)
 
3,821

 
(14,752
)
 
(40,980
)
 
(110,132
)
 
7,844

 
(102,288
)
Income (loss) before taxes
 
(1,883,174
)
 
(120,563
)
 
19,643

 
(65,684
)
 
(25,579
)
 
(2,075,357
)
 
(8,526
)
 
(2,083,883
)
Income tax benefit (expense)
 
—

 
(16
)
 
16

(f) 
2,489

 
—

 
2,489

 
—

 
2,489

Loss from continuing operations
 
(1,883,174
)
 
(120,579
)
 
19,659

 
(63,195
)
 
(25,579
)
 
(2,072,868
)
 
(8,526
)
 
(2,081,394
)
Distributions to Preferred unitholders
 
(26,759
)
 
—

 
—

 
—

 
—

 
(26,759
)
 
—

 
(26,759
)
Loss from continuing operations attributable to Common and Class B unitholders
 
$
(1,909,933
)
 
$
(120,579
)
 
$
19,659

 
$
(63,195
)
 
$
(25,579
)
 
$
(2,099,627
)
 
$
(8,526
)
 
$
(2,108,153
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from continuing operations per Common and Class B unit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Basic and Diluted
 
$
(19.80
)
 
 
 
 
 
 
 
 
 
$
(16.15
)
 
 
 
$
(16.22
)
Weighted average Common units outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common units – basic & diluted
 
96,048

 
 
 
11,724

(m) 
 
 
21,800

(v) 
129,572

 
 
 
129,572

Class B units – basic & diluted
 
420

 
 
 
 
 
 
 
 
 
420

 
 
 
420






Notes to the Unaudited Pro Forma Combined Financial Statements

Note 1 Basis of Presentation

On October 5, 2015, Vanguard Natural Resources, LLC (“Vanguard” or the “Company”) completed the transactions contemplated by the Purchase Agreement and Plan of Merger, dated as of April 20, 2015 (the “LRE Merger Agreement”), by and among Vanguard, Lighthouse Merger Sub, LLC, Vanguard’s wholly owned subsidiary (“LRE Merger Sub”), Lime Rock Management LP (“LR Management”), Lime Rock Resources A, L.P. (“LRR A”), Lime Rock Resources B, L.P. (“LRR B”), Lime Rock Resources C, L.P. (“LRR C”), Lime Rock Resources II-A, L.P. (“LRR II-A”), Lime Rock Resources II-C, L.P. (“LRR II-C”), and, together with LRR A, LRR B, LRR C, LRR II-A and LR Management, the “GP Sellers”), LRR Energy, L.P. (“LRE”) and LRE GP, LLC (“LRE GP”), the general partner of LRE.
Pursuant to the terms of the LRE Merger Agreement, LRE Merger Sub was merged with and into LRE, with LRE continuing as the surviving entity and as Vanguard’s wholly owned subsidiary (the “LRE Merger”), and, at the same time, Vanguard acquired all of the limited liability company interests in LRE GP from the GP Sellers in exchange for common units representing limited liability company interests in Vanguard. Under the terms of the LRE Merger Agreement, each common unit representing interests in LRE (the “LRE common units”) was converted into the right to receive 0.550 newly issued Vanguard common units.
As consideration for the LRE Merger, Vanguard issued approximately 15.4 million Vanguard common units valued at $123.3 million based on the closing price per Vanguard common unit of $7.98 at October 5, 2015 and assumed $290.0 million in debt. The debt assumed was extinguished using borrowings under the Company’s Reserve-Based Credit Facility following the close of the LRE Merger. As consideration for the purchase of the limited liability company interests in LRE GP, Vanguard issued 12,320 Vanguard common units.

The LRE Merger was completed following approval, at a Special Meeting of LRE unitholders on October 5, 2015, of the LRE Merger Agreement and the LRE Merger by holders of a majority of the outstanding LRE Common Units.

On October 8, 2015, Vanguard completed the transactions contemplated by the Agreement and Plan of Merger, dated as of May 21, 2015 (the “Eagle Rock Merger Agreement”), by and among Vanguard, Talon Merger Sub, LLC, Vanguard’s wholly owned subsidiary (“Eagle Rock Merger Sub”), Eagle Rock Energy Partners, L.P. (“Eagle Rock”) and Eagle Rock Energy GP, L.P. (“Eagle Rock GP”). Pursuant to the terms of the Eagle Rock Merger Agreement, Eagle Rock Merger Sub was merged with and into Eagle Rock with Eagle Rock continuing as the surviving entity and as Vanguard’s wholly owned subsidiary (the “Eagle Rock Merger”).

Under the terms of the Eagle Rock Merger Agreement, each common unit representing limited partner interests in Eagle Rock (“Eagle Rock common unit”) was converted into the right to receive 0.185 newly issued Vanguard common units or, in the case of fractional Vanguard common units, cash (without interest and rounded up to the nearest whole cent).

As consideration for the Eagle Rock Merger, Vanguard issued approximately 27.7 million Vanguard common units valued at $258.3 million based on the closing price per Vanguard common unit of $9.31 at October 8, 2015 and assumed $156.6 million in debt. The Company extinguished $122.3 million of the debt assumed using borrowings under its Reserve-Based Credit Facility following the close of Eagle Rock Merger.

The Eagle Rock Merger was completed following (i) approval by holders of a majority of the outstanding Eagle Rock common units, at a Special Meeting of Eagle Rock unitholders on October 5, 2015, of the Eagle Rock Merger Agreement and the Eagle Rock Merger and (ii) approval by Vanguard unitholders, at Vanguard’s 2015 Annual Meeting of Unitholders, of the issuance of Vanguard common units to be issued as Eagle Rock Merger Consideration to the holders of Eagle Rock common units in connection with the Eagle Rock Merger.

The pro forma financial statements presented below have been prepared using the acquisition method of accounting for business combinations under U.S. GAAP. Under the acquisition method of accounting, the assets acquired and liabilities assumed from LRE and Eagle Rock were recorded as of the acquisition date at their respective fair values.






On May 19, 2016, pursuant to a Purchase and Sale Agreement dated March 29, 2016 (the “Purchase Agreement”), Vanguard, and its wholly owned subsidiary Vanguard Operating, LLC (“Vanguard Operating”), completed the divestiture of natural gas, oil and natural gas liquids assets in the SCOOP/STACK area in Oklahoma to NonOp Solutions III, L.P. and NonOp Solutions IV LP, entities managed by Titanium Exploration Partners, LLC for an adjusted purchase price of $270.5 million (the “SCOOP/STACK Divestiture”) with an effective date of January 1, 2016. The Company used $268.4 million of the cash received to reduce borrowings under our reserve-based credit facility and $2.1 million to pay for some of the transaction fees related to the sale.

The SCOOP/STACK Divestiture was treated as a recovery of costs and therefore was recorded as an adjustment to oil and natural gas properties, with no gain or loss recognized. Vanguard determined that the resulting adjustment did not significantly alter the relationship between the remaining oil and natural properties and the related proved reserves of its reporting unit.

The historical financial information included in the columns entitled “Historical Vanguard” was derived from the unaudited financial statements included in Vanguard’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 and the audited financial statements in Vanguard's Annual Report on Form 10-K for the year ended December 31, 2015.

Vanguard’s unaudited pro forma combined statement of operations for the nine months ended September 30, 2016 and year ended December 31, 2015, have been presented based on Vanguard’s statements of operations, and reflect the pro forma operating results attributable to the LRE Merger, the Eagle Rock Merger and the SCOOP/STACK Divestiture, as if the LRE Merger, the Eagle Rock Merger, the SCOOP/STACK Divestiture and the related transactions had occurred on January 1, 2015.

Pro forma data is based on currently available information and certain estimates and assumptions as explained in the notes to the unaudited pro forma combined financial statements. Pro forma data is not necessarily indicative of the financial results that would have been attained had the LRE Merger, the Eagle Rock Merger, the SCOOP/STACK Divestiture and the related transactions had occurred on January 1, 2015. As actual adjustments may differ from the pro forma adjustments, the pro forma amounts presented should not be viewed as indicative of operations in future periods.

The unaudited pro forma combined financial information presented is based on assumptions that Vanguard believes are reasonable under the circumstances and are intended for informational purposes only. Actual results may differ from the estimates and assumptions used. The unaudited pro forma combined financial information presented is not necessarily indicative of the financial results that would have occurred if these transactions had taken place on the dates indicated, nor is it indicative of future consolidated results.





Note 2 Pro Forma Adjustments to the Unaudited Combined Statements of Operations

SCOOP/STACK Divestiture

Adjustments (a) – (d) to the unaudited pro forma combined statement of operations for the nine months and year ended September 30, 2016 and December 31, 2015, respectively, are to reflect the SCOOP/STACK Divestiture.

(a)
Represents the decrease in oil, natural gas and natural gas liquids sales resulting from the SCOOP/STACK Divestiture.
(b)
Represents the decrease in lease operating expenses and production and other taxes resulting from the SCOOP/STACK Divestiture.
(c)
Represents the decrease in depreciation, depletion, amortization and accretion resulting from the SCOOP/STACK Divestiture.
(d)
Represents the adjustment to interest expense arising from the reduction of the outstanding borrowings and the related borrowing base under Vanguard’s reserve-based credit facility due to the SCOOP/STACK Divestiture.

LRE Merger

Adjustments (e) – (f) to the unaudited pro forma combined statement of operations for the year ended December 31, 2015 include reclassifications required to conform LRE’s revenue and expense items to Vanguard’s presentation as follows:

(e)
Represents the reclassification of LRE’s other income sales to conform to Vanguard’s natural gas product sales presentation.

(f)
Represents the reclassification of LRE’s income tax expense to conform to Vanguard’s presentation.

Adjustments (g) – (m) to the unaudited pro forma combined statements of operations for the year ended December 31, 2015 are to reflect the LRE Merger and the conversion of LRE’s method of accounting for oil and natural gas properties from the successful efforts method of accounting to the full cost method of accounting.

(g)
Represents the capitalization of unsuccessful exploration costs, geological and geophysical costs and delay rentals attributable to the development of oil and natural gas properties in accordance with the full cost method of accounting for oil and natural gas properties.

(h)
Represents the change in depreciation, depletion and amortization primarily resulting from the pro forma calculation of the combined entity’s depletion expense under the full cost method of accounting for oil and natural gas properties.

(i)
Represents the change in accretion expense using Vanguard’s asset retirement obligations estimates.

(j)
Represents the adjustment to eliminate the loss on settlement of asset retirement obligations to conform to Vanguard’s full cost method of accounting for oil and natural gas properties.

(k)
Represents the elimination of certain general and administrative expenses resulting from LRE not being a separate public company after the completion of the LRE Merger, including NYSE listing fees and SEC filing fees.

(l)
Represents the adjustment to interest expense arising from borrowings under Vanguard’s reserve-based credit facility used to terminate LRE’s credit agreement and term loan agreement and the extinguishment of the related debt outstanding. We eliminated the interest expense recorded by LRE and calculated pro forma interest expense based on the long-term debt assumed of $290.0 million and Vanguard’s variable interest rate as of October 5, 2015 of 2.45%. The effect on net income of a 1/8 percent variance in interest rates would be $0.7 million for the year ended December 31, 2015.

(m)
Represents the adjustment for the weighted average number of units from the issuance of approximately 15.4 million Vanguard common units under the terms of the LRE Merger, which consists of 15.4 million common units issued to the former LRE unitholders and 12,320 common units issued to the former members of LRE GP, whereby LRE’s




public unitholders received 0.550 Vanguard common units for each LRE common unit held at closing.

Eagle Rock Merger

Adjustments (n) – (p) to the unaudited pro forma combined statements of operations for the year ended December 31, 2015 include reclassifications required to conform Eagle Rock’s revenue and expense items to Vanguard’s presentation as follows:

(n)
Represents the reclassification of Eagle Rock’s natural gas, natural gas liquids, oil, condensate and sulfur revenues to conform to Vanguard’s oil sales, natural gas sales and NGLs sales presentation.

(o)
Represents the reclassification of Eagle Rock’s other income sales to conform to Vanguard’s natural gas product sales presentation.

(p)
Represents the reclassification of Eagle Rock’s income on short term investments to conform to Vanguard’s presentation.

Adjustments (q) – (v) to the unaudited pro forma combined statements of operations for the year ended December 31, 2015 are to reflect the Eagle Rock Merger.

(q)
Represents the change in depreciation, depletion and amortization primarily resulting from the pro forma calculation of the combined entity’s depletion expense under the full cost method of accounting for oil and natural gas properties.

(r)
Represents the change in accretion expense using Vanguard’s asset retirement obligations estimates.

(s)
Represents the elimination of certain general and administrative expenses resulting from Eagle Rock not being a separate public company after the completion of the Eagle Rock Merger, including NASDAQ listing fees and SEC filing fees.

(t)
Represents the adjustment to interest expense arising from borrowings under Vanguard’s reserve-based credit facility used to terminate Eagle Rock’s credit agreement and term loan agreement and the extinguishment of the related debt outstanding. Interest expense recorded by Eagle Rock included interest for its senior notes and revolving credit facility. We eliminated the interest expense recorded by Eagle Rock related to the revolving credit facility only and calculated pro forma interest expense. We applied Vanguard’s monthly variable interest rate, which ranged from 2.18% to 2.45% in 2015, to Eagle Rock’s monthly outstanding balance to calculate the pro forma interest expense adjustment. The effect on net income of a 1/8 percent variance in interest rates would be $0.3 million for the year ended December 31, 2015.

(u)
Represents the elimination of nonrecurring bargain purchase gain recognized in the Eagle Rock Merger.

(v)
Represents the adjustment for the weighted average number of units from the issuance of approximately 27.7 million Vanguard common units under the terms of the Eagle Rock Merger, whereby Eagle Rock’s public unitholders received 0.185 Vanguard common units for each Eagle Rock common unit held at closing. Since the combined results of operations after giving effect to the merger and the Eagle Rock merger results in a net loss, 0.16 million Vanguard phantom units were excluded from the calculation of pro forma diluted earnings per unit due to their anti-dilutive effect.


Note 3 Supplemental Oil and Gas Information (Unaudited)

The following tables set forth summary pro forma information with respect to Vanguard’s pro forma combined estimated net proved and proved developed natural gas, oil and natural gas liquids reserves for the year ended December 31, 2015. The pro forma information for the year ended December 31, 2015 gives effect to the LRE Merger and the Eagle Rock Merger (but not the SCOOP/STACK Divestiture) as if they occurred on January 1, 2015. Future exploration, exploitation and development expenditures, as well as future commodity prices and service costs, will affect the reserve volumes attributable to the acquired properties and the standardized measure of discounted future net cash flows.





Estimated changes in the quantities of natural gas, oil and natural gas liquids reserves for the year ended December 31, 2015 are as follows:

 
Natural Gas (in MMcf)
 
Vanguard Historical
 
LRE Historical
 
Eagle Rock Historical
 
Pro Forma Adjustments(a)
 
Vanguard/Pro forma Combined
Net proved reserves
 
 
 
 
 
 
 
 
 
January 1, 2015
1,475,867

 
96,725

 
169,093

 
—

 
1,741,685

Revisions of previous estimates
(133,234
)
 
(28,318
)
 
48,542

 
—

 
(113,010
)
Extensions, discoveries and other
46,664

 
—

 
—

 
—

 
46,664

Purchases of reserves
271,504

 
—

 
—

 
(271,504
)
 
—

Production
(106,615
)
 
(6,047
)
 
(13,180
)
 
4,689

 
(121,153
)
December 31, 2015
1,554,186

 
62,360

 
204,455

 
(266,815
)
 
1,554,186


 
Oil (in MBbls)
 
Vanguard Historical
 
LRE Historical
 
Eagle Rock Historical
 
Pro Forma Adjustments(a)
 
Vanguard/Pro forma Combined
Net proved reserves
 
 
 
 
 
 
 
 
 
January 1, 2015
50,049

 
13,106

 
11,017

 
—

 
74,172

Revisions of previous estimates
(4,208
)
 
(4,205
)
 
3,841

 
—

 
(4,572
)
Extensions, discoveries and other
640

 
—

 
—

 
—

 
640

Purchases of reserves
21,826

 
—

 
—

 
(21,826
)
 
—

Sales of reserves in place
(225
)
 
—

 
—

 
—

 
(225
)
Production
(4,008
)
 
(1,100
)
 
(1,468
)
 
635

 
(5,941
)
December 31, 2015
64,074

 
7,801

 
13,390

 
(21,191
)
 
64,074


 
Natural Gas Liquids (in MBbls)
 
Vanguard Historical
 
LRE Historical
 
Eagle Rock Historical
 
Pro Forma Adjustments(a)
 
Vanguard/Pro forma Combined
Net proved reserves
 
 
 
 
 
 
 
 
 
January 1, 2015
42,529

 
4,618

 
13,834

 
—

 
60,981

Revisions of previous estimates
(2,151
)
 
(1,473
)
 
5,116

 
—

 
1,492

Extensions, discoveries and other
659

 
—

 
—

 
—

 
659

Purchases of reserves
20,836

 
—

 
—

 
(20,836
)
 
—

Production
(3,489
)
 
(325
)
 
(1,321
)
 
387

 
(4,748
)
December 31, 2015
58,384

 
2,820

 
17,629

 
(20,449
)
 
58,384


(a) To adjust the amount of purchases of reserves representing the LRE Merger and the Eagle Rock Merger during 2015 included in Vanguard’s historical information. The pro forma effect of each acquisition is presented separately in the table above.






Estimated quantities of natural gas, oil and natural gas liquids reserves as of December 31, 2015 are as follows:
 
Vanguard Historical(a)
 
Estimated proved reserves:
 
 
Natural Gas (MMcf)
1,554,186

 
Oil (MBbls)
64,074

 
Natural Gas Liquids (MBbls)
58,384

 
MMcfe
2,288,934

 
Estimated proved developed reserves:
 
 
Natural Gas (MMcf)
1,069,942

 
Oil (MBbls)
54,945

 
Natural Gas Liquids (MBbls)
42,140

 
MMcfe
1,652,452

 

(a)
Includes Vanguard’s, the LRE Merger’s and the Eagle Rock Merger’s estimated net proved and proved developed oil, natural gas and natural gas liquids reserves as of December 31, 2015. Vanguard’s Historical estimated net proved and proved developed oil, natural gas and natural gas liquids reserves as of December 31, 2015 include 238,589 MMcfe related to the SCOOP/STACK Divestiture.

The standardized measure of discounted future net cash flows relating to the combined proved oil, natural gas and natural gas liquids reserves at December 31, 2015 is as follows (in thousands):
 
Vanguard Historical(a)
 
Future cash inflows
$
7,500,445

 
Future production costs
(3,105,260
)
 
Future development costs
(664,254
)
 
Future net cash flows
3,730,931

 
10% annual discount for estimated timing of
cash flows
(2,008,434
)
 
Standard measure of discounted future cash flows
$
1,722,497

 

(a) The historical standardized measure includes Vanguard, the LRE Merger and the Eagle Rock Merger.

For the December 31, 2015 calculations in the preceding table, estimated future cash inflows from estimated future production of proved reserves were computed using the average oil and natural gas price based upon the 12-month average price of $50.20 per barrel of crude oil and $2.62 per MMBtu for natural gas for Vanguard Historical, adjusted for quality, transportation fees and a regional price differential, and the volume-weighted average price of $16.14 per barrel of natural gas liquids for Vanguard Historical. The natural gas liquids prices were calculated using the differentials for each property to West Texas Intermediate reference price of $50.20 Vanguard Historical. Vanguard may receive amounts different than the standardize measure of discounted cash flow for a number of reasons, including price changes and the effects of Vanguard’s hedging activities.

The following are the principal sources of change in the combined standardized measure of discounted future net cash flows on a pro forma basis for the year ended December 31, 2015 (in thousands):




 
Vanguard Historical
 
LRE Historical
 
Eagle Rock Historical
 
Pro Forma Adjustments(a)
 
Vanguard Pro forma Combined(b)
Sales and transfers, net of production costs
$
(209,997
)
 
$
(38,639
)
 
$
(69,831
)
 
$
21,141

 
$
(297,326
)
Net changes in prices and production costs
(1,724,757
)
 
(235,874
)
 
(268,172
)
 
—

 
(2,228,803
)
Extensions discoveries and improved recovery, less related costs
17,039

 
—

 
—

 
—

 
17,039

Changes in estimated future development costs
278,883

 
19,821

 
(11,823
)
 
—

 
286,881

Previously estimated development costs incurred during the period
63,624

 
23,112

 
76,252

 
—

 
162,988

Revision of previous quantity estimates
(141,045
)
 
(80,444
)
 
145,458

 
—

 
(76,031
)
Accretion of discount
297,573

 
44,167

 
59,424

 
—

 
401,164

Purchases of reserves in place
526,245

 
—

 
—

 
(526,245
)
 
—

Sales of reserves
(4,468
)
 
—

 
—

 
—

 
(4,468
)
Change in production rates, timing and other
(356,327
)
 
(31,962
)
 
(162,296
)
 
—

 
(550,585
)
Net change in standardized measure
(1,253,230
)
 
(299,819
)
 
(230,988
)
 
(505,104
)
 
(2,289,141
)
Standardized measure, January 1, 2015
2,975,727

 
441,671

 
594,240

 
—

 
4,011,638

Standardized measure, December 31, 2015
$
1,722,497

 
$
141,852

 
$
363,252

 
$
(505,104
)
 
$
1,722,497


(a)
To adjust the amount of purchases of reserves representing the LRE Merger and the Eagle Rock Merger during 2015 included in Vanguard’s historical information. The pro forma effect of each acquisition is presented separately in the table above.
(b)
The pro forma standardized measure includes Vanguard, the LRE Merger and the Eagle Rock Merger.