6.Property Acquisitions and Divestitures

The results of the Combination and the acquisitions described below are included in the accompanying Consolidated Statements of Operations since each acquisition’s respective close date.

On December 16, 2014, the Legacy Sabine Investors contributed the equity interests in Sabine O&G to Sabine Oil & Gas Corporation, which was then known as “Forest Oil Corporation.” In exchange for this contribution, the Legacy Sabine Investors received shares of Sabine common stock and Sabine Series A preferred stock, collectively representing approximately a 73.5% economic interest in Sabine and 40% of the total voting power in Sabine. Immediately following the contribution, Sabine O&G and related holding companies merged into Forest Oil Corporation (“Forest”), with Forest Oil Corporation surviving the mergers. Holders of Forest common stock immediately prior to the closing of the Combination continued to hold their common stock following the closing, which immediately following the closing represented approximately a 26.5% economic interest in Sabine and 60% of the total voting power in Sabine. On December 19, 2014, Forest Oil Corporation changed its name to “Sabine Oil & Gas Corporation.” Sabine Oil & Gas LLC was the accounting acquirer in the Combination. The business purpose for the Combination was to combine Forest and Sabine O&G’s complementary asset portfolios to create a larger company that would benefit from drilling optimization and economies of scale.

Calculation of Consideration Transferred

The following details the fair value of consideration used to effect the Combination:


Number of shares of Forest Oil Corporation outstanding as of the date of the Combination (in thousands)		118,863
Forest Oil Corporation closing stock price on December 16, 2014	$	0.34
Common stock equity consideration (in thousands)	$	40,413

Preliminary Allocation of Consideration Transferred to Net Assets Acquired

The following amounts represent the preliminary estimates of the fair value of identifiable assets acquired and liabilities assumes in the Combination. The final determination of fair value for certain assets and liabilities will be completed as soon as the information necessary to complete the analysis is obtained. These amounts will be finalized as soon as possible, but no later than one year from the date of the Combination.


	December 16,
	2014
(Stated in thousands of dollars)	(in thousands)
Cash		134,887
Account receivable		61,889
Prepaid expenses and other current assets		7,225
Derivative instruments		31,621
Oil and natural gas properties, proved		343,127
Oil and natural gas properties, unproved		189,877
Other long term assets		8,120
Other fixed assets		697
Net deferred tax asset		14,524
Accounts payable		(76,766)
Royalties payable		(7,446)
Accrued exploration and development		(27,982)
Accrued operating expense and other		(29,246)
Accrued interest		(4,730)
Other short-term obligations(1)		(15,191)
Revolving credit facility		(105,000)
Senior notes		(394,783)
Asset retirement obligations		(23,946)
Other long-term obligations		(66,464)
Total identifiable net assets and consideration transferred	$	40,413

(1)

Includes $9.4 million of asset retirement obligations.

All assets and liabilities including oil and gas properties were recorded at their fair value. In determining the fair value of the oil and gas properties, the Company prepared estimates of oil and natural gas reserves. The Company used estimated future prices to apply to the estimated reserve quantities acquired and the estimated future operating and development costs to arrive at the estimates of future net revenues. The valuations to derive the purchase price included the use of both proved and unproved categories of reserves, expectation for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk adjusted discount rates. Other significant estimates were used by management to calculate fair value of assets acquired and liabilities assumed. The Company may record purchase price adjustments as a result of changes in such estimates.

The actual impact of the Combination was an increase to “Total revenues” in the Consolidated Statement of Operations of $7.8 million for the year ended December 31, 2014 and a decrease to “Net loss” in the consolidated Statement of Operations of $5.3 million for the year ended December 31, 2014. The unaudited pro forma results presented below have been prepared to give the effect of the acquisition discussed above on our results of operations for the years ended December 31, 2014 and 2013 as if it had been consummated on January 1, 2013. The unaudited pro forma results do not purport to represent what our actual results of operations would have been if the acquisition had been completed on such date or to project our results of operations for any future date or period.


	Year Ended December 31, 2014		Year Ended December 31, 2013
	Actual	Pro forma	Actual	Pro forma
	(in thousands)
Pro forma (unaudited)
Total revenues	464,723	673,641	354,978	518,167
Net income/ (loss)	(326,720)	(286,052)	10,577	(8,226)

On June 10, 2014 and March 25, 2014, the Company acquired working interests in certain oil and natural gas properties in North Texas for a total of $38.0 million, net of purchase price adjustments. The Company recorded a fair value of $33.4 million for proved properties and $4.6 million for unproved properties. No material ARO liability was assumed. The valuations to derive the purchase price included both proved and unproved categories of reserves, expectation for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, risk adjusted discount rates and fair value of unevaluated leaseholds.

The total pro forma impact of the June 10, 2014 and March 25, 2014 acquisitions was an increase to “Total revenues” on the Consolidated Statement of Operations of $4.0 million for the year ended December 31, 2014, and an increase to “Net loss” on the Consolidated Statement of Operations of $2.4 million for the year ended December 31, 2014.

On December 18, 2013, the Company closed on the sale of its interests in certain oil and natural gas properties in the Texas Panhandle and surrounding Oklahoma area for $169.0 million, net of certain purchase price adjustments. The sale of the Texas Panhandle and surrounding Oklahoma properties was accounted for as an adjustment to the full cost pool with no gain or loss recognized. Subsequent to December 31, 2013, the Company has recorded purchase price adjustments of approximately $8.4 million in additional proceeds as a result of clearing title defects and adjusting post effective date estimates.

On April 30, 2013, Sabine closed on the purchase of interests in approximately 5,000 net acres in South Texas for approximately $14.9 million. The acquisition does not qualify as a business combination because the assets acquired do not meet the definition of a business.

Total costs incurred for oil and natural gas property acquisitions for 2012 were approximately $737.1 million, net of purchase price adjustments, of which $145.1 million related to unproved property, $420.2 million related to proved property acquisitions, and $173.5 million related to goodwill. Total costs incurred for related gathering and processing facilities was approximately $5.7 million, net of purchase price adjustments. The goodwill resulted most significantly from movement in inputs used by Sabine, such as estimated type curves, recovery rates, and future rates of production that were updated in addition to applying risk adjustment discount rates, as well as expected synergies from combining operations of the acquiree and the acquirer.

On December 14, 2012, the Company closed the acquisition of certain oil and natural gas properties in the Texas Panhandle and surrounding Oklahoma area for $657.8 million, net of purchase price adjustments. The acquisition was funded in part by $181.6 million of equity contributed by Sabine O&G’s member with the remaining balance funded from the proceeds of the Term Loan Facility. This acquisition qualified as a business combination. The Company recorded a fair value of $340.9 million for proved property and $145.1 million for unproved acreage, net of the ARO liability assumed of $1.7 million. This transaction resulted in the recognition of $173.5 million of goodwill for the excess of the consideration transferred over the net assets received and represented the future economic benefits arising from assets acquired that could not be individually identified and separately recognized. See Note 3 – Goodwill. The valuation to derive the purchase price included both proved and unproved categories of reserves, expectation for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates.

The unaudited pro forma results presented below have been prepared to give effect of the acquisition discussed above on the Company’s results of operations for the year ended December 31, 2012 as if it had been consummated on January 1, 2011. The unaudited pro forma results do not purport to represent what the Company’s actual results of operations would have been if the acquisition had been completed on such date or to project the Company’s results of operations for any future date or period.


	Year ended December 31, 2012
	Actual		Pro forma
	(in thousands)
Pro forma (unaudited)
Total revenues	$	177,446	$	258,362
Net loss applicable to controlling interests	$	(686,782)	$	(637,985)

On December 17, 2012, the Company closed the acquisition of certain oil and natural gas properties in South Texas for $79.3 million, net of purchase price adjustments. This acquisition qualified as a business combination pursuant to ASC 805. The Company recorded a fair value of $79.3 million for proved property. The valuation to derive the purchase price included proved and unproved categories of reserves, expectation for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates.

The unaudited pro forma results presented below have been prepared to give the effect of the acquisition discussed above on our results of operations for the year ended December 31, 2012 as if it had been consummated on January 1, 2011. The unaudited pro forma results do not purport to represent what our actual results of operations would have been if the acquisition had been completed on such date or to project our results of operations for any future date or period.


	Year ended December 31, 2012
	Actual		Pro forma
	(in thousands)
Pro forma (unaudited)
Total revenues	$	177,446	$	181,197
Net loss applicable to controlling interests	$	(686,782)	$	(686,075)

Acquired properties that are considered to be business combinations are recorded at their fair value. In determining the fair value of the properties, the Company prepares estimates of oil and natural gas reserves. The Company uses estimated future prices to apply to the estimated reserve quantities acquired and the estimated future operating and development costs to arrive at the estimates of future net revenues. For the fair value assigned to proved reserves, the future net revenues are discounted using a market-based weighted average cost of capital rate determined appropriate at the time of the acquisition. To compensate for inherent risks of estimating and valuing reserves, proved undeveloped, probable and possible reserves are reduced by additional risk-weighting factors.

On August 31, 2012, the Company closed on the sale of its interests in Montana oil and natural gas properties for $15.8 million, net of purchase price adjustments. The sale of the Montana oil and natural gas properties was accounted for as an adjustment to the full cost pool with no gain or loss recognized. Concurrently with the sale of the Montana oil and natural gas properties, the Company closed on the sale of its controlling ownership interests in Montana gathering entities Lodge Creek Pipelines, LLC and Willow Creek Gathering, LLC for a combined $2.5 million, net of purchase price adjustments.

On May 22, 2012, the Company closed on the sale of its interests in Utah oil and natural gas properties for $18.2 million, net of purchase price adjustments. The sale of the Utah oil and natural gas properties was accounted for as an adjustment to the full cost pool with no gain or loss recognized.

The table below sets forth the cost of unproved properties excluded from the amortization base as of December 31, 2014 and the year in which the associated costs were incurred:


	Year of Acquisition
	2014		2013		2012		Prior		Total
	(in millions)
Unproved properties(1)	$	224.2	$	16.9	$	27.8	$	17.3	$	286.2
Development costs (2)		15.9		2.7		2.6		1.1		22.3
Capitalized interest		2.1		5.4		1.3		2.0		10.8
Total	$	242.2	$	25.0	$	31.7	$	20.4	$	319.3

(1)

Unproved properties consist of the fair value of unproved properties acquired in acquisitions as well as costs of acreage purchased through independent leasing.

(2)

Development costs excluded from the amortization base in accordance with full cost accounting rules. Substantially all of the development costs excluded from the amortization base as of December 31, 2014 relate to projects that will be completed in the first half of 2015 and either the determination of proved reserves or impairment will occur. The leasehold acquisition costs were incurred for leases which will be developed, impaired or will expire over approximately ten years.