UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): July 2, 2014 (June 27, 2014)
MEMORIAL RESOURCE DEVELOPMENT CORP.
(Exact Name of Registrant as Specified in Charter)
| Delaware | 001-36490 | 46-4710769 | ||
| (State or Other Jurisdiction of Incorporation or Organization) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
| 1301 McKinney, Suite 2100 Houston, Texas |
77010 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: (713) 588-8300
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
| Item 1.02. | Termination of a Material Definitive Agreement. |
Pursuant to the Indenture, dated as of December 18, 2013 (as amended, modified or supplemented from time to time, the “Indenture”), among Memorial Resource Development Corp., as successor under the Indenture to Memorial Resource Development LLC (the “Company”), Memorial Resource Finance Corp. (together with the Company, the “Issuers”), each of the guarantors party thereto and U.S. Bank National Association, as trustee (the “Trustee”), the Issuers provided notice to the Trustee that they had elected to redeem all of the outstanding 10.00%/10.75% Senior PIK Toggle Notes due 2018 issued under the Indenture (the “Notes”), at a redemption price of 102% of the principal amount of the Notes plus accrued and unpaid interest thereon, on July 16, 2014 (the “Redemption”). On June 27, 2014, the Company irrevocably deposited with the Trustee approximately $360 million, which is the amount sufficient to fund the Redemption and to satisfy and discharge (the “Discharge”) the Issuers’ obligations under the Notes and the Indenture. The Discharge became effective upon the irrevocable deposit of the funds with the Trustee.
| Item 2.01. | Completion of Acquisition or Disposition of Assets. |
On July 1, 2014, Memorial Production Partners LP (the “Partnership”), a consolidating subsidiary of the Company, announced that the Partnership closed its previously announced acquisition of oil and natural gas liquids properties in Wyoming from Merit Energy Company, LLC and certain of its affiliates (the “Acquisition”). The Partnership acquired the properties for an adjusted purchase price of approximately $915.1 million, subject to customary post-closing adjustments. The Acquisition was funded with borrowings under the Partnership’s revolving credit facility.
The definitive purchase and sale agreement relating to the Acquisition, dated as of May 2, 2014, among Memorial Production Operating LLC, the Partnership’s wholly-owned subsidiary, and Merit Energy Company, LLC and certain of its affiliates (the “Purchase Agreement”), contains representations and warranties, covenants and indemnification provisions that are typical for transactions of this nature and that were made or agreed to, among other things, to provide the parties thereto with specified rights and obligations and to allocate risk among such parties. Accordingly, the Purchase Agreement should not be relied upon as constituting a description of the state of affairs of any of the parties thereto or their affiliates at the time it was entered into or otherwise.
The foregoing description of the Acquisition does not purport to be complete and is qualified in its entirety by reference to the Purchase Agreement, which was previously filed as Exhibit 2.1 to the Partnership’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2014 and is incorporated by reference in this Item 2.01.
The Company controls the Partnership through its ownership of the general partner the Partnership. The Partnership is a publicly traded limited partnership engaged in the acquisition, production and development of oil and natural gas properties in the United States. Due to the Company’s control of the Partnership through the ownership of its general partner, the Company is required to consolidate the Partnership for accounting and financial reporting purposes.
| Item 9.01. | Financial Statements and Exhibits. |
(a) Financial Statements of Businesses Acquired.
The unaudited statements of revenues and direct operating expenses for the Acquisition for the three months ended March 31, 2014 and 2013, and the audited statements of revenues and direct operating expenses for the Acquisition for each of the years in the three-year period ended December 31, 2013, including the related notes thereto, and the independent auditor’s report related thereto, are attached hereto as Exhibit 99.1 and incorporated herein by reference.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined balance sheet of the Company as of March 31, 2014 and the unaudited condensed combined pro forma statements of operations for the three months ended March 31, 2014 and for the year ended December 31, 2013, including notes thereto, which gives effect to the Acquisition and related financing transactions, are attached hereto as Exhibit 99.2 and incorporated herein by reference.
(d) Exhibits.
| Exhibit Number |
Description | |
| 2.1* | Purchase and Sale Agreement, dated as of May 2, 2014, among Merit Management Partners I, L.P., Merit Energy Partners III, L.P., Merit Pipeline Company, LLC and Merit Energy Company, LLC and Memorial Production Operating LLC (incorporated by reference to Exhibit 2.1 to Memorial Production Partners LP’s Current Report on Form 8-K (File No. 001-35364) filed on May 5, 2014) | |
| 23.1 | Consent of KPMG LLP | |
| 99.1 | Statements of Revenues and Direct Operating Expenses of the Oil and Gas Properties Under Contract for Purchase by Memorial Production Partners LP from Merit Energy for the three months ended March 31, 2014 and 2013 (unaudited) and the years ended December 31, 2013, 2012 and 2011 | |
| 99.2 | Memorial Resource Development Corp.’s Unaudited Pro Forma Condensed Combined Financial Statements as of March 31, 2014 and for the three months ended March 31, 2014 and year ended December 31, 2013 | |
| * | The schedules to this agreement have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K; copies of such schedules will be furnished to the Securities and Exchange Commission upon request. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| MEMORIAL RESOURCE DEVELOPMENT CORP. | ||||||
| Date: July 2, 2014 | By: | /s/ Kyle N. Roane | ||||
| Kyle N. Roane | ||||||
| Vice President, General Counsel & Corporate Secretary | ||||||
EXHIBIT INDEX
| Exhibit Number |
Description | |
| 2.1* | Purchase and Sale Agreement, dated as of May 2, 2014, among Merit Management Partners I, L.P., Merit Energy Partners III, L.P., Merit Pipeline Company, LLC and Merit Energy Company, LLC and Memorial Production Operating LLC (incorporated by reference to Exhibit 2.1 to Memorial Production Partners LP’s Current Report on Form 8-K (File No. 001-35364) filed on May 5, 2014) | |
| 23.1 | Consent of KPMG LLP | |
| 99.1 | Statements of Revenues and Direct Operating Expenses of the Oil and Gas Properties Under Contract for Purchase by Memorial Production Partners LP from Merit Energy for the three months ended March 31, 2014 and 2013 (unaudited) and the years ended December 31, 2013, 2012 and 2011 | |
| 99.2 | Memorial Resource Development Corp.’s Unaudited Pro Forma Condensed Combined Financial Statements as of March 31, 2014 and for the three months ended March 31, 2014 and year ended December 31, 2013 | |
| * | The schedules to this agreement have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K; copies of such schedules will be furnished to the Securities and Exchange Commission upon request. |
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTING FIRM
The Members
Merit Energy Company, LLC:
We consent to the incorporation by reference in the registration statement on Form S-8 (No. 333-196855) of Memorial Resource Development Corp. of our report dated May 30, 2014, with respect to the Statements of Revenues and Direct Operating Expenses of the Oil and Gas Properties Under Contract for Purchase by Memorial Production Partners LP from Merit Energy for the years ended December 31, 2013, 2012 and 2011, which report appears in the Current Report on Form 8-K.
| /s/ KPMG LLP |
| Dallas, Texas |
| July 1, 2014 |
Exhibit 99.1
INDEX TO FINANICAL STATEMENTS
| Page | ||||
| WYOMING ACQUISITION |
||||
| STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES OF THE OIL AND GAS PROPERTIES UNDER CONTRACT FOR PURCHASE BY MEMORIAL PRODUCTION PARTNERS LP FROM MERIT ENERGY THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011 | ||||
| Independent Auditors’ Report |
F-2 | |||
| Statements of Revenues and Direct Operating Expenses |
F-3 | |||
| Notes to Statements of Revenues and Direct Operating Expenses |
F-4 | |||
F-1
Independent Auditors’ Report
The Members
Merit Energy Company, LLC:
We have audited the accompanying statements of revenues and direct operating expenses of Merit Energy Company’s oil and gas properties under contract for purchase by Memorial Production Partners LP (the Properties) for each of the years in the three-year period ended December 31, 2013.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly in all material respects, the revenues and direct operating expenses of Merit Energy Company’s oil and gas properties under contract for purchase by Memorial Production Partners LP for each of the years in the three-year period ended December 31, 2013, in accordance with U.S. generally accepted accounting principles.
| /s/ KPMG LLP |
| Dallas, TX |
| May 30, 2014 |
F-2
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
OF THE OIL AND GAS PROPERTIES UNDER CONTRACT FOR PURCHASE BY
MEMORIAL PRODUCTION PARTNERS LP FROM MERIT ENERGY
(In thousands)
| Three Months Ended March 31, |
Year Ended December 31, | |||||||||||||||||||
| 2014 | 2013 | 2013 | 2012 | 2011 | ||||||||||||||||
| (Unaudited) | ||||||||||||||||||||
| Revenues: |
||||||||||||||||||||
| Oil Sales |
$ | 39,760 | $ | 39,708 | $ | 156,981 | $ | 164,124 | $ | 172,828 | ||||||||||
| NGL Sales |
7,638 | 8,213 | 29,440 | 30,363 | 33,101 | |||||||||||||||
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| 47,398 | 47,921 | 186,421 | 194,487 | 205,929 | ||||||||||||||||
| Direct Operating Expenses: |
||||||||||||||||||||
| Lease Operating Expenses |
12,306 | 12,982 | 53,104 | 53,250 | 52,010 | |||||||||||||||
| Production and Ad Valorem Taxes |
6,206 | 6,275 | 26,810 | 23,757 | 25,244 | |||||||||||||||
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| 18,512 | 19,257 | 79,914 | 77,007 | 77,254 | ||||||||||||||||
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| Excess of Revenues over Direct Operating Expenses |
$ | 28,886 | $ | 28,664 | $ | 106,507 | $ | 117,480 | $ | 128,675 | ||||||||||
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See accompanying Notes to Statements of Revenues and Direct Operating Expenses
F-3
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
OF THE OIL AND GAS PROPERTIES UNDER CONTRACT FOR PURCHASE BY
MEMORIAL PRODUCTION PARTNERS LP FROM MERIT ENERGY
THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
NOTE 1 – BASIS OF PRESENTATION
On May 5, 2014, Memorial Production Partners LP (“Memorial”) entered into a Purchase and Sale agreement (“PSA”) with Merit Energy Company and certain of its affiliates (“Merit Energy”) to purchase oil and gas properties and related facilities located in the Lost Soldier and Wertz fields in Wyoming as further defined in the PSA (the “Properties”) for approximately $935 million, subject to normal closing adjustments, with an effective date of April 1, 2014. The accompanying statements of revenues and direct operating expenses relate only to the Properties.
Historical financial statements prepared in accordance with accounting principles generally accepted in the United States of America have never been prepared for the Properties. During the periods presented, the Properties were not accounted for or operated as a consolidated entity or as a separate division by Merit Energy. The accompanying statements of revenues and direct operating expenses related to the Properties were prepared from the historical accounting records of Merit Energy.
Certain indirect expenses, as further described in Note 4, were not allocated to the Properties and have been excluded from the accompanying statements. Any attempt to allocate these expenses would require significant and judgmental allocations, which would be arbitrary and may not be indicative of the performance of the properties on a stand-alone basis.
These statements of revenues and direct operating expenses do not represent a complete set of financial statements reflecting the financial position, results of operations, stakeholder’s equity and cash flows of the Properties and are not necessarily indicative of the results of operations for the Properties going forward.
The accompanying statements of revenues and direct operating expenses for the three months ended March 31, 2014 and 2013 are unaudited but, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of the revenues and direct operating expenses of the Properties for those periods.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Merit Energy utilizes the sales method of accounting for oil and natural gas liquids revenues whereby revenues, net of royalties, are recognized based on the actual volumes of oil and natural gas liquids production sold to purchasers. The amount of natural gas liquids sold may differ from the amount to which Merit Energy is entitled based on its revenue interests in the properties.
Direct Operating Expenses
Direct operating expenses, which are recognized on an accrual basis, relate to the direct expenses of operating the Properties. The direct operating expenses include lease operating, ad valorem tax and production tax expense. Lease operating expenses include lifting costs, well repair expenses, surface repair expenses, well workover costs and other field expenses. Lease operating expenses also include expenses directly associated with support personnel, support services, equipment and facilities directly related to oil and natural gas production activities.
F-4
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
OF THE OIL AND GAS PROPERTIES UNDER CONTRACT FOR PURCHASE BY
MEMORIAL PRODUCTION PARTNERS LP FROM MERIT ENERGY
THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
NOTE 3 – CONTINGENCIES
The activities of the Properties are subject to potential claims and litigation in the normal course of operations. Merit Energy management does not believe that any liability resulting from any pending or threatened litigation will have a material adverse effect on the operations or financial results of the Properties.
NOTE 4 – EXCLUDED EXPENSES
The Properties are part of a much larger enterprise prior to their sale by Merit Energy to Memorial. Indirect general and administrative expenses, interest, income taxes, and other indirect expenses were not allocated to the Properties and have been excluded from the accompanying statements. In addition, any allocation of such indirect expenses may not be indicative of costs which would have been incurred by the Properties on a stand-alone basis.
Depreciation, depletion, and amortization have been excluded from the accompanying statements of revenues and direct operating expenses as such amounts would not be indicative of the depletion calculated on the Properties on a stand-alone basis.
NOTE 5 – SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED)
Estimated Net Quantities of Oil and Natural Gas Reserves
The estimates of Proved Oil and Gas Reserves as of December 31, 2013, 2012, 2011 and 2010 were prepared for Merit Energy utilizing year-end estimates of reserve quantities provided by third-party independent petroleum engineering consultants. The estimated proved net recoverable reserves presented below include only those quantities that were expected to be commercially recoverable at the SEC applicable prices and costs for each year under the then existing regulatory practices and with conventional equipment and operating methods. Proved Developed Reserves represent only those reserves estimated to be recovered through existing wells. Proved Undeveloped Reserves include those reserves that may be recovered from new wells on undrilled acreage or from existing wells on which a relatively major expenditure for recompletion or secondary recovery operation is required. All of the Properties’ Proved Reserves set forth herein are located in Wyoming. The estimate of reserves, and the standardized measure of discounted future net cash flows shown below reflect Merit Energy’s development plan for the Properties rather than Memorial’s development plan for those Properties.
Discounted future cash flow estimates like those shown below are not intended to represent estimates of the fair value of our oil and natural gas properties. Estimates of fair value should also consider unproved reserves, anticipated future oil and natural gas prices, interest rates, changes in development and production costs and risks associated with future production. Because of these and other considerations, any estimate of fair value is subjective and imprecise.
The following table sets forth estimates of the proved oil and natural gas liquids reserves (net of royalty interests) for the Properties and changes therein, for the periods indicated. The Properties do not contain any natural gas reserves.
| Oil (BBLS) |
NGLs (BBLS) |
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| Proved Reserves: |
||||||||
| Balance at December 31, 2010 |
30,000,203 | 4,930,909 | ||||||
| Production |
(1,914,904 | ) | (400,732 | ) | ||||
| Revisions |
3,513,342 | 351,376 | ||||||
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| Balance at December 31, 2011 |
31,598,641 | 4,881,553 | ||||||
| Production |
(1,851,220 | ) | (401,615 | ) | ||||
| Revisions |
169,319 | 416,981 | ||||||
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| Balance at December 31, 2012 |
29,916,740 | 4,896,919 | ||||||
| Production |
(1,691,073 | ) | (390,554 | ) | ||||
| Revisions |
349,622 | 72,830 | ||||||
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| Balance at December 31, 2013 |
28,575,289 | 4,579,195 | ||||||
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F-5
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
OF THE OIL AND GAS PROPERTIES UNDER CONTRACT FOR PURCHASE BY
MEMORIAL PRODUCTION PARTNERS LP FROM MERIT ENERGY
THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
| Oil (BBLS) |
NGLs (BBLS) |
|||||||
| Proved Developed Reserves: |
||||||||
| Balance at December 31, 2011 |
28,508,789 | 4,881,553 | ||||||
| Balance at December 31, 2012 |
27,684,578 | 4,896,919 | ||||||
| Balance at December 31, 2013 |
26,839,275 | 4,579,195 | ||||||
Standardized Measure of Discounted Future Net Cash Flows
We have summarized the Standardized Measure related to our proved oil and natural gas liquids reserves. We have based the following summary on a valuation of Proved Reserves using discounted cash flows based on SEC pricing applicable for each year, costs and economic conditions and a 10% discount rate. The additions to Proved Reserves from the purchase of reserves in place and new discoveries and extensions could vary significantly from year to year; additionally, the impact of changes to reflect current prices and costs of reserves proved in prior years could also be significant. Accordingly, you should not view the information presented below as an estimate of the fair value of our oil and natural gas properties, nor should you consider the information indicative of any trends.
Standardized Measure of Oil and Gas
| December 31, | ||||||||||||
| In Thousands |
2013 | 2012 | 2011 | |||||||||
| Future Cash Inflows |
$ | 2,977,811 | $ | 3,058,631 | $ | 3,264,063 | ||||||
| Future Production Costs |
(1,266,229 | ) | (1,384,561 | ) | (1,449,956 | ) | ||||||
| Future Development Costs |
(76,400 | ) | (92,700 | ) | (90,300 | ) | ||||||
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| Future Net Cash Flows |
1,635,182 | 1,581,370 | 1,723,807 | |||||||||
| Discount of 10% per annum |
(741,493 | ) | (758,071 | ) | (850,438 | ) | ||||||
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| Standardized Measure of Discounted Future Net Cash Flows |
$ | 893,689 | $ | 823,299 | $ | 873,369 | ||||||
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During recent years, prices paid for oil and natural gas have fluctuated significantly. Estimated discounted future net cash flows in the table above for December 31, 2013, 2012 and 2011 were computed using NYMEX prices of $96.90, $94.68, and $95.84 per barrel of oil, and $3.67, $2.76, and $4.15 per MMBTU of natural gas, respectively.
F-6
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
OF THE OIL AND GAS PROPERTIES UNDER CONTRACT FOR PURCHASE BY
MEMORIAL PRODUCTION PARTNERS LP FROM MERIT ENERGY
THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
The following table sets forth the changes in standardized measure of discounted future net cash flows relating to proved oil and natural gas liquids reserves for the period indicated.
Changes in Standardized Measure
| (In thousands) | ||||
| Balance at December 31, 2010 |
$ | 628,027 | ||
| Sales of oil and natural gas liquids produced, net |
(128,674 | ) | ||
| Net changes in prices and production costs |
156,678 | |||
| Net changes in future development costs |
(26,755 | ) | ||
| Revisions of previous quantity estimates |
97,372 | |||
| Previously estimated development costs incurred |
28,458 | |||
| Accretion of discount |
93,083 | |||
| Changes in timing and other |
25,180 | |||
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| Balance at December 31, 2011 |
$ | 873,369 | ||
| Sales of oil and natural gas liquids produced, net |
(117,480 | ) | ||
| Net changes in prices and production costs |
(29,259 | ) | ||
| Net changes in future development costs |
(22,330 | ) | ||
| Revisions of previous quantity estimates |
14,678 | |||
| Previously estimated development costs incurred |
40,490 | |||
| Accretion of discount |
106,533 | |||
| Changes in timing and other |
(42,702 | ) | ||
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| Balance at December 31, 2012 |
$ | 823,299 | ||
| Sales of oil and natural gas liquids produced, net |
(106,519 | ) | ||
| Net changes in prices and production costs |
63,290 | |||
| Net changes in future development costs |
(7,957 | ) | ||
| Revisions of previous quantity estimates |
11,919 | |||
| Previously estimated development costs incurred |
30,858 | |||
| Accretion of discount |
78,857 | |||
| Changes in timing and other |
(58 | ) | ||
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| Balance at December 31, 2013 |
$ | 893,689 | ||
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F-7
Exhibit 99.2
INDEX TO FINANICAL STATEMENTS
| Page | ||||
| MEMORIAL RESOURCE DEVELOPMENT CORP. |
||||
| Unaudited Pro Forma Condensed Combined Financial Statements |
||||
| Introduction |
F-2 | |||
| Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 2014 |
F-4 | |||
| Unaudited Pro Forma Condensed Combined Statement of Operations for the Three Months Ended March 31, 2014 and the Year Ended December 31, 2013 |
F-5 | |||
| Notes to Unaudited Pro Forma Condensed Combined Financial Statements |
F-7 | |||
F-1
MEMORIAL RESOURCE DEVELOPMENT CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Introduction
We are a Delaware corporation (“MRDC”) formed by Memorial Resource Development LLC (“MRD LLC”) in January 2014 to own and acquire oil and natural gas properties in North America. MRD LLC is a Delaware limited liability company formed on April 27, 2011 by Natural Gas Partners VIII, L.P. (“NGP VIII”), Natural Gas Partners IX, L.P. (“NGP IX”) and NGP IX Offshore Holdings, L.P. (“NGP IX Offshore”) (collectively, the “Funds”) to own, acquire, exploit and develop oil and natural gas properties. The Funds are private equity funds managed by Natural Gas Partners (“NGP”).
On June 18, 2014, we completed our initial public offering (“IPO”). In connection with the closing of our IPO, the Funds contributed all of their interests in MRD LLC to MRD Holdco LLC (“MRD Holdco”). MRD LLC and its consolidated subsidiaries, which is our accounting predecessor, contributed the following to us in exchange for shares of our common stock (which MRD LLC immediately distributed to MRD Holdco): (1) 100% of its ownership interests in Classic Hydrocarbons Holdings, L.P. (“Classic”), Classic Hydrocarbons GP Co., L.L.C. (“Classic GP”), Black Diamond Minerals, LLC (“Black Diamond”), Beta Operating Company, LLC (“Beta Operating”), MRD Operating LLC (“MRD Operating”) and Memorial Production Partners GP LLC (“MEMP GP”), which owns a 0.1% general partner interest and 50% of the incentive distribution rights in Memorial Production Partners LP (“MEMP”), and (2) its 99.9% membership interest in WildHorse Resources, LLC (“WildHorse Resources”). In addition, certain former management members of WildHorse Resources contributed to us the remaining 0.1% membership interest in WildHorse Resources as well as exchanged their incentive units in exchange for shares of our common stock and cash consideration. MRD LLC merged into MRD Operating on June 27, 2014 upon the discharge of the indenture governing the $350.0 million 10.00% / 10.75% Senior PIK toggle notes due 2018 (“PIK notes”). Prior to this merger, MRD LLC distributed the following to MRD Holdco: (i) its interests in BlueStone Natural Resources Holdings, LLC (“BlueStone Holdings”), Golden Energy Partners LLC (“Golden Energy”) and Classic Pipeline & Gathering, LLC (“Classic Pipeline”) as well as two immaterial subsidiaries that were formed subsequent to December 31, 2013, (ii) the MEMP subordinated units, (iii) the right to the remaining cash to be released from the debt service reserve account in connection with the redemption or earlier discharge of the PIK notes plus the cash received from us in reimbursement of the interest paid on June 15, 2014 in respect of the PIK notes and (iv) approximately $6.7 million of cash received by MRD LLC in connection with the sale of Golden Energy Partners LLC’s assets in May 2014.
We control MEMP through our ownership of MEMP GP. MEMP is a publicly traded limited partnership engaged in the acquisition, production and development of oil and natural gas properties in the United States. Due to our control of MEMP through the ownership of its general partner, we are required to consolidate MEMP for accounting and financial reporting purposes.
We have two reportable business segments, both of which are engaged in the acquisition, exploitation, development and production of oil and natural gas properties:
| • | MRD—reflects all of our consolidating subsidiaries except for MEMP and its subsidiaries. |
| • | MEMP—reflects the consolidated and combined operations of MEMP and its subsidiaries. |
On July 1, 2014, MEMP acquired certain oil producing properties and related facilities located in the Lost Soldier and Wertz fields in Wyoming from Merit Energy Company, LLC and certain of its affiliates (“Merit Energy”) for an adjusted purchase price of approximately $915.1 million, subject to customary post-closing adjustments, with an effective date of April 1, 2014 (the “Wyoming Acquisition”). The following unaudited pro forma condensed combined financial information reflects the historical financial statements of our predecessor adjusted on a pro forma basis to give effect to the Wyoming Acquisition.
The unaudited pro forma condensed combined balance sheet is based on the unaudited March 31, 2014 MRD LLC balance sheet and includes pro forma adjustments to give effect to the Wyoming Acquisition as if that transaction occurred on March 31, 2014. The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2014 is based on the unaudited statement of operations of MRD LLC and the unaudited statement of revenues and direct operating expenses of the Wyoming Acquisition for the three months ended March 31, 2014, and includes pro forma adjustments to give effect to the Wyoming Acquisition as if the transaction occurred on January 1, 2013. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2013 is based on the audited statement of operations of MRD LLC and the audited statement of revenues and direct operating expenses of the Wyoming Acquisition for the year ended December 31, 2013, and includes pro forma adjustments to give effect to the Wyoming Acquisition as if the transaction occurred on January 1, 2013.
F-2
The pro forma adjustments to our predecessor’s historical combined financial statements are based on currently available information and certain estimates and assumptions. The actual effect of the transactions discussed in the accompanying notes ultimately may differ from the unaudited pro forma adjustments included herein. However, management believes that the assumptions utilized to prepare the pro forma adjustments provide a reasonable basis for presenting the significant effects of the transactions and that the unaudited pro forma adjustments are factually supportable, give appropriate effect to the impact of events that are directly attributable to the transactions, and reflect those items expected to have a continuing impact on MRDC.
The unaudited pro forma combined financial statements of MRDC are not necessarily indicative of the results that actually would have occurred if MEMP had completed the Wyoming Acquisition or the related financing transactions on the dates indicated or which could be achieved in the future because they necessarily exclude various operating expenses.
F-3
MEMORIAL RESOURCE DEVELOPMENT CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
March 31, 2014
| MRD LLC Historical |
Pro Forma Adjustments |
MRDC Pro Forma Combined |
||||||||||
| ASSETS |
||||||||||||
| Current assets: |
||||||||||||
| Cash and cash equivalents |
$ | 39,519 | $ | 917,434 | (a) | $ | 39,519 | |||||
| (917,434 | )(b) | |||||||||||
| Restricted cash |
35,003 | — | 35,003 | |||||||||
| Accounts receivable: |
||||||||||||
| Oil and natural gas sales |
80,090 | — | 80,090 | |||||||||
| Joint interest owners and other |
21,885 | — | 21,885 | |||||||||
| Affiliates |
3,320 | — | 3,320 | |||||||||
| Short-term derivative instruments |
2,481 | — | 2,481 | |||||||||
| Prepaid expenses and other current assets |
20,122 | — | 20,122 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total current assets |
202,420 | — | 202,420 | |||||||||
| Property and equipment, at cost: |
||||||||||||
| Oil and natural gas properties, successful efforts method |
3,338,982 | 921,395 | (b) | 4,260,377 | ||||||||
| Other |
9,878 | — | 9,878 | |||||||||
| Accumulated depreciation, depletion and impairment |
(668,715 | ) | — | (668,715 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Oil and natural gas properties, net |
2,680,145 | 921,395 | (b) | 3,601,540 | ||||||||
| Long-term derivative instruments |
31,775 | — | 31,775 | |||||||||
| Restricted investments |
74,211 | — | 74,211 | |||||||||
| Restricted cash |
15,506 | — | 15,506 | |||||||||
| Other long–term assets |
35,034 | 2,334 | (b) | 37,368 | ||||||||
|
|
|
|
|
|
|
|||||||
| Total assets |
$ | 3,039,091 | $ | 923,729 | $ | 3,962,820 | ||||||
|
|
|
|
|
|
|
|||||||
| LIABILITIES AND EQUITY |
||||||||||||
| Current liabilities: |
||||||||||||
| Accounts payable |
$ | 19,491 | $ | — | $ | 19,491 | ||||||
| Accounts payable – affiliates |
3,727 | — | 3,727 | |||||||||
| Revenues payable |
69,209 | — | 69,209 | |||||||||
| Accrued liabilities |
119,426 | 2,796 | (b) | 122,222 | ||||||||
| Short-term derivative instruments |
27,378 | — | 27,378 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total current liabilities |
239,231 | 2,796 | 242,027 | |||||||||
| Long-term debt—MRD Segment |
939,496 | — | 939,496 | |||||||||
| Long-term debt—MEMP Segment |
988,435 | 917,434 | (a) | 1,905,869 | ||||||||
| Asset retirement obligations |
113,105 | 3,499 | (b) | 116,604 | ||||||||
| Long-term derivative instruments |
11,262 | — | 11,262 | |||||||||
| Other long-term liabilities |
5,249 | — | 5,249 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total liabilities |
2,296,778 | 923,729 | 3,220,507 | |||||||||
| Commitments and contingencies |
||||||||||||
| Equity: |
||||||||||||
| Members’ equity |
222,889 | — | 222,889 | |||||||||
| Noncontrolling interests |
519,424 | — | 519,424 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total equity |
742,313 | — | 742,313 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total liabilities and equity |
$ | 3,039,091 | $ | 923,729 | $ | 3,962,820 | ||||||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of this unaudited pro forma financial information.
F-4
MEMORIAL RESOURCE DEVELOPMENT CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2014
| MRD LLC Historical |
Wyoming Acquisition Historical |
Pro Forma Adjustments |
MRDC Pro Forma Combined |
|||||||||||||
| Revenues: |
||||||||||||||||
| Oil & natural gas sales |
$ | 189,917 | $ | 47,398 | $ | — | $ | 237,315 | ||||||||
| Pipeline tariff income and other |
911 | — | — | 911 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total revenues |
190,828 | 47,398 | — | 238,226 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Costs and expenses: |
||||||||||||||||
| Lease operating |
33,682 | 12,306 | — | 45,988 | ||||||||||||
| Pipeline operating |
489 | — | — | 489 | ||||||||||||
| Exploration |
146 | — | — | 146 | ||||||||||||
| Production and ad valorem taxes |
8,584 | 6,206 | — | 14,790 | ||||||||||||
| Depreciation, depletion, and amortization |
57,679 | — | 15,396 | (c) | 73,075 | |||||||||||
| General and administrative |
18,762 | — | — | 18,762 | ||||||||||||
| Accretion of asset retirement obligations |
1,521 | — | 70 | (c) | 1,591 | |||||||||||
| (Gain) loss on commodity derivative instruments |
59,482 | — | — | 59,482 | ||||||||||||
| (Gain) loss on sale of properties |
(110 | ) | — | — | (110 | ) | ||||||||||
| Other, net |
(12 | ) | — | — | (12 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total costs and expenses |
180,223 | 18,512 | 15,466 | 214,201 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Operating income (loss) |
10,605 | 28,886 | (15,466 | ) | 24,025 | |||||||||||
| Other income (expense): |
||||||||||||||||
| Interest expense, net |
(34,052 | ) | — | (4,610 | )(d) | (38,773 | ) | |||||||||
| (111 | )(e) | |||||||||||||||
| Other, net |
31 | — | — | 31 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total other income (expense) |
(34,021 | ) | — | (4,721 | ) | (38,742 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income (loss) before income taxes |
(23,416 | ) | 28,886 | (20,187 | ) | (14,717 | ) | |||||||||
| Income tax benefit (expense) |
(100 | ) | — | — | (100 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income (loss) |
$ | (23,516 | ) | $ | 28,886 | $ | (20,187 | ) | $ | (14,817 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
F-5
MEMORIAL RESOURCE DEVELOPMENT CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2013
| MRD LLC Historical |
Wyoming Acquisition Historical |
Pro Forma Adjustments |
MRDC Pro Forma Combined |
|||||||||||||
| Revenues: |
||||||||||||||||
| Oil & natural gas sales |
$ | 571,948 | $ | 186,421 | $ | — | $ | 758,369 | ||||||||
| Pipeline tariff income and other |
3,075 | — | — | 3,075 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total revenues |
575,023 | 186,421 | — | 761,444 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Costs and expenses: |
||||||||||||||||
| Lease operating |
113,640 | 53,104 | — | 166,744 | ||||||||||||
| Pipeline operating |
1,835 | — | — | 1,835 | ||||||||||||
| Exploration |
2,356 | — | — | 2,356 | ||||||||||||
| Production and ad valorem taxes |
27,146 | 26,810 | — | 53,956 | ||||||||||||
| Depreciation, depletion, and amortization |
184,717 | — | 58,868 | (c) | 243,585 | |||||||||||
| Impairment of proved oil and natural gas properties |
6,600 | — | — | 6,600 | ||||||||||||
| General and administrative |
125,358 | — | — | 125,358 | ||||||||||||
| Accretion of asset retirement obligations |
5,581 | — | 280 | (c) | 5,861 | |||||||||||
| (Gain) loss on commodity derivative instruments |
(29,294 | ) | — | — | (29,294 | ) | ||||||||||
| (Gain) on sale of properties |
(85,621 | ) | — | — | (85,621 | ) | ||||||||||
| Other, net |
649 | — | — | 649 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total costs and expenses |
352,967 | 79,914 | 59,148 | 492,029 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Operating income |
222,056 | 106,507 | (59,148 | ) | 269,415 | |||||||||||
| Other income (expense): |
||||||||||||||||
| Interest expense, net |
(69,250 | ) | — | (29,817 | )(d) | (99,512 | ) | |||||||||
| (445 | )(e) | |||||||||||||||
| Other, net |
145 | — | — | 145 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total other income (expense) |
(69,105 | ) | — | (30,262 | ) | (99,367 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income (loss) before income taxes |
152,951 | 106,507 | (89,410 | ) | 170,048 | |||||||||||
| Income tax benefit (expense) |
(1,619 | ) | — | — | (1,619 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income (loss) |
$ | 151,332 | $ | 106,507 | $ | (89,410 | ) | $ | 168,429 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
F-6
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
We are a Delaware corporation (“MRDC”) formed by Memorial Resource Development LLC (“MRD LLC”) in January 2014 to own and acquire oil and natural gas properties in North America. MRD LLC is a Delaware limited liability company formed on April 27, 2011 by Natural Gas Partners VIII, L.P. (“NGP VIII”), Natural Gas Partners IX, L.P. (“NGP IX”) and NGP IX Offshore Holdings, L.P. (“NGP IX Offshore”) (collectively, the “Funds”) to own, acquire, exploit and develop oil and natural gas properties. The Funds are private equity funds managed by Natural Gas Partners (“NGP”).
On June 18, 2014, we completed our initial public offering (“IPO”). In connection with the closing of our IPO, the Funds contributed all of their interests in MRD LLC to MRD Holdco LLC (“MRD Holdco”). MRD LLC and its consolidated subsidiaries, which is our accounting predecessor, contributed the following to us in exchange for shares of our common stock (which MRD LLC immediately distributed to MRD Holdco): (1) 100% of its ownership interests in Classic Hydrocarbons Holdings, L.P. (“Classic”), Classic Hydrocarbons GP Co., L.L.C. (“Classic GP”), Black Diamond Minerals, LLC (“Black Diamond”), Beta Operating Company, LLC (“Beta Operating”), MRD Operating LLC (“MRD Operating”) and Memorial Production Partners GP LLC (“MEMP GP”), which owns a 0.1% general partner interest and 50% of the incentive distribution rights in Memorial Production Partners LP (“MEMP”), and (2) its 99.9% membership interest in WildHorse Resources, LLC (“WildHorse Resources”). In addition, certain former management members of WildHorse Resources contributed to us the remaining 0.1% membership interest in WildHorse Resources as well as exchanged their incentive units in exchange for shares of our common stock and cash consideration. MRD LLC merged into MRD Operating on June 27, 2014 upon the discharge of the indenture governing the $350.0 million 10.00% / 10.75% Senior PIK toggle notes due 2018 (“PIK notes”). Prior to this merger, MRD LLC distributed the following to MRD Holdco: (i) its interests in BlueStone Natural Resources Holdings, LLC (“BlueStone Holdings”), Golden Energy Partners LLC (“Golden Energy”) and Classic Pipeline & Gathering, LLC (“Classic Pipeline”) as well as two immaterial subsidiaries that were formed subsequent to December 31, 2013, (ii) the MEMP subordinated units, (iii) the right to the remaining cash to be released from the debt service reserve account in connection with the redemption or earlier discharge of the PIK notes plus the cash received from us in reimbursement of the interest paid on June 15, 2014 in respect of the PIK notes and (iv) approximately $6.7 million of cash received by MRD LLC in connection with the sale of Golden Energy Partners LLC’s assets in May 2014.
We control MEMP through our ownership of MEMP GP. MEMP is a publicly traded limited partnership engaged in the acquisition, production and development of oil and natural gas properties in the United States. Due to our control of MEMP through the ownership of its general partner, we are required to consolidate MEMP for accounting and financial reporting purposes.
We have two reportable business segments, both of which are engaged in the acquisition, exploitation, development and production of oil and natural gas properties:
| • | MRD—reflects all of our consolidating subsidiaries except for MEMP and its subsidiaries. |
| • | MEMP—reflects the consolidated and combined operations of MEMP and its subsidiaries. |
On July 1, 2014, MEMP acquired certain oil producing properties and related facilities located in the Lost Soldier and Wertz fields in Wyoming from Merit Energy Company, LLC and certain of its affiliates (“Merit Energy”) for an adjusted purchase price of approximately $915.1 million, subject to customary post-closing adjustments, with an effective date of April 1, 2014 (the “Wyoming Acquisition”). The following unaudited pro forma condensed combined financial information reflects the historical financial statements of our predecessor adjusted on a pro forma basis to give effect to the Wyoming Acquisition.
MEMP funded the Wyoming Acquisition through borrowings under its $2.0 billion multi-year revolving credit facility. Upon the closing of the Wyoming Acquisition, the borrowing base under the Partnership’s revolving credit facility was increased from $870.0 million to $1.44 billion.
The unaudited pro forma condensed combined balance sheet is based on the unaudited March 31, 2014 MRD LLC balance sheet and includes pro forma adjustments to give effect to the Wyoming Acquisition as if that transaction occurred on March 31, 2014. The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2014 is based on the unaudited statement of operations of MRD LLC and the unaudited statement of revenues and direct operating expenses of the Wyoming Acquisition for the three months ended March 31, 2014, and includes pro forma adjustments to give effect to the Wyoming Acquisition as if the transaction occurred on January 1, 2013. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2013 is based on the audited statement of operations of MRD LLC and the audited statement of revenues and direct operating expenses of the Wyoming Acquisition for the year ended December 31, 2013, and includes pro forma adjustments to give effect to the Wyoming Acquisition as if the transaction occurred on January 1, 2013.
F-7
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The pro forma adjustments to our predecessor’s historical combined financial statements are based on currently available information and certain estimates and assumptions. The actual effect of the transactions discussed in the accompanying notes ultimately may differ from the unaudited pro forma adjustments included herein. However, management believes that the assumptions utilized to prepare the pro forma adjustments provide a reasonable basis for presenting the significant effects of the transactions and that the unaudited pro forma adjustments are factually supportable, give appropriate effect to the impact of events that are directly attributable to the transactions, and reflect those items expected to have a continuing impact on MRDC.
MRDC believes that the assumptions used in the preparation of these unaudited pro forma condensed combined financial statements provide a reasonable basis for presenting the effects directly attributable to the transactions described above. These unaudited pro forma condensed combined financial statements and the notes thereto should be read in conjunction with:
| • | MRDC’s Registration Statement on Form S-1 and Form S-1/A; |
| • | MRDC’s prospectus filed pursuant to Rule 424(b)(4) and prospectus supplement filed pursuant to Rule 424(b)(3); and |
| • | Other information that MRDC has filed with the SEC. |
Note 2. Pro Forma Adjustments and Assumptions
Unaudited Pro Forma Condensed Combined Balance Sheet
The following adjustments were made in the preparation of the unaudited pro forma condensed combined balance sheet:
| (a) | Pro forma adjustment to reflect the cash proceeds related to borrowings by MEMP of $917.4 million, which includes $2.3 million of deferred financing costs, under its revolving credit facility. |
| (b) | Pro forma adjustments to record the use of the $917.4 million of borrowings under MEMP’s revolving credit facility to fund the Wyoming Acquisition: |
| (1) | To reflect estimated deferred financing costs of $2.3 million related to additional borrowings under the MEMP’s revolving credit facility; and |
| (2) | To reflect a $915.1 million cash payment to Merit Energy for the purchase price and record the estimated fair value of the assets acquired and liabilities assumed. |
Unaudited Pro Forma Condensed Combined Statements of Operations
The following adjustments were made in the preparation of the unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2014 and year ended December 31, 2013:
| (c) | Pro forma adjustment to reflect the depletion and depreciation on property and equipment and the accretion expense on asset retirement obligations. |
| (d) | Pro forma adjustment to reflect the incurrence of interest expense on $917.4 million of additional borrowings under MEMP’s revolving credit facility used to fund the Wyoming Acquisition. For the three months ended March 31, 2014 and year ended December 31, 2013, pro forma interest expense was based on a rate of 2.01% and 3.25%, respectively. A one-eighth percentage point change in the interest rate would change pro forma interest associated with these additional borrowings by $0.3 million and $1.1 million for the three months ended March 31, 2014 and year ended December 31, 2013, respectively. |
| (e) | Pro forma adjustment to reflect the amortization of deferred financing costs as if the borrowing costs associated with the Wyoming Acquisition were incurred on January 1, 2013. |
F-8
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 3. Pro Forma Proved Reserves and Standardized Measure of Discounted Future Net Cash Flows
Estimated Quantities of Proved Oil and Natural Gas Reserves
Users of this information should be aware that the process of estimating quantities of “proved” and “proved developed” oil and natural gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various reservoirs make these estimates generally less precise than other estimates included in the financial statement disclosures.
Proved reserves are those quantities of oil and natural gas that by analysis of geoscience and engineering data can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will continue the project within a reasonable time.
As of December 31, 2013, all of the proved reserves included in the “MRD Segment Historical” and “MEMP Segment Historical” columns in the table below were prepared by third party reserve engineers. The proved reserves related to the probable Wyoming Acquisition appearing in the “Wyoming Acquisition Historical” column were prepared for Merit Energy utilizing year-end estimates of reserve quantities provided by third-party independent petroleum engineering consultants.
In accordance with SEC regulations, reserves at December 31, 2013 were estimated using the unweighted arithmetic average first-day-of-the-month price for the preceding 12-month period. All proved reserves are located in the United States and all prices are held constant in accordance with SEC rules.
The following table sets forth estimates of the net reserves as of December 31, 2013:
| December 31, 2013 | ||||||||||||||||
| MRD Segment Historical |
MEMP Segment Historical |
Wyoming Acquisition Historical |
MRDC Pro Forma Combined |
|||||||||||||
| Proved developed and undeveloped reserves: |
||||||||||||||||
| Gas (MMcf) |
802,254 | 607,139 | — | 1,409,393 | ||||||||||||
| Oil (MBbls) |
11,311 | 39,149 | 28,575 | 79,035 | ||||||||||||
| NGLs (MBbls) |
42,576 | 28,846 | 4,579 | 76,001 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total proved (MMcfe) (1) |
1,125,577 | 1,015,105 | 198,924 | 2,339,606 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total proved developed (MMcfe) |
367,641 | 616,893 | 188,508 | 1,173,042 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total proved undeveloped (MMcfe) |
757,936 | 398,212 | 10,416 | 1,166,564 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | The MRDC pro forma combined reserves include 1,212,815 MMcfe related to the MEMP Segment and Wyoming Acquisition that would be attributable to noncontrolling interests based on a 0.1% ownership by MRDC. |
A variety of methodologies are used to determine proved reserve estimates. The principal methodologies employed are reservoir simulation, decline curve analysis, volumetric, material balance, advance production type curve matching, petro-physics/log analysis and analogy. Some combination of these methods is used to determine reserve estimates in substantially all of our fields.
Standardized Measure of Discounted Future Net Cash Flows from Proved Reserves
The standardized measure of discounted future net cash flows presented below is computed by applying first of month average prices, year-end costs and legislated tax rates and a discount factor of 10 percent to proved reserves. We do not believe the standardized measure provides a reliable estimate of MRDC’s expected future cash flows to be obtained from the development and production of its oil and gas properties or of the value of its proved oil and gas reserves. The standardized measure is prepared on the basis of certain prescribed assumptions including first of month average prices, which represent discrete points in time and therefore may cause significant variability in cash flows from year to year as prices change.
F-9
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The December 31, 2013 pro forma standardized measure of discounted future net cash flows is as follows (in thousands):
| December 31, 2013 | ||||||||||||||||
| MRD Segment Historical |
MEMP Segment Historical |
Wyoming Acquisition Historical |
MRDC Pro Forma Combined |
|||||||||||||
| Future cash inflows |
$ | 5,722,848 | $ | 6,892,150 | $ | 2,977,811 | $ | 15,592,809 | ||||||||
| Future production costs |
(1,587,374 | ) | (2,719,024 | ) | (1,266,229 | ) | (5,572,627 | ) | ||||||||
| Future development costs |
(1,352,945 | ) | (685,858 | ) | (76,400 | ) | (2,115,203 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Future net cash flows for estimated timing of cash flows |
2,782,529 | 3,487,268 | 1,635,182 | 7,904,979 | ||||||||||||
| 10% annual discount for estimated timing of cash flows |
(1,313,577 | ) | (1,879,156 | ) | (741,493 | ) | (3,934,226 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Standardized measure of discounted future net cash flows (1) |
$ | 1,468,952 | $ | 1,608,112 | $ | 893,689 | $ | 3,970,753 | ||||||||
|
|
|
|
|
|
|
|
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| (1) | The MRDC pro forma combined standardized measure of discounted future net cash flows include $2,499,299 related to the MEMP Segment and Wyoming Acquisition that would be attributable to noncontrolling interests based on a 0.1% ownership by MRDC. |
Both the MRD Segment and MEMP Segment were subject to the Texas franchise tax, which has a maximum effective rate of 0.7% of gross income apportioned to Texas. Due to immateriality, the impact of this tax has been excluded from the above table.
F-10