Acquisitions

6 Months Ended

Jun. 30, 2011

Acquisitions

Acquisitions

2. Acquisitions

        On May 25, 2011, the Company acquired interests in producing properties on approximately 6,000 net acres in the Wolfberry trend in the Permian for an aggregate purchase price of $129.4 million, including an initial purchase price of $128.5 million and customary post-closing adjustments of approximately $0.9 million (the Wolfberry Acquisition). The Wolfberry Acquisition had an effective date of March 1, 2011, with operations from March 1, 2011 through May 24, 2011 resulting in purchase price adjustments. The acquisition was financed using the Company's senior secured revolving credit facility (Credit Agreement). The Company operates 98% of and has an average 93% working interest (70% net revenue interest) in the properties acquired in the Wolfberry Acquisition.

        Revenues of $1.4 million and operating costs of $0.3 million from the acquired properties from May 25, 2011 to June 30, 2011 have been included in the accompanying Condensed Statements of Operations.

        The following table summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed as of May 25, 2011:

		(in thousands)
Consideration paid to sellers:
Cash consideration		$	129,376
Recognized amounts of identifiable assets acquired and liabilities assumed:
	Proved developed and undeveloped properties		129,631
	Asset retirement obligation		(119	)
	Other liabilities assumed		(136	)
Total identifiable net assets		$	129,376

        In March, April and November 2010, the Company completed three separate acquisitions of producing properties located in the Wolfberry trend in the Permian for an aggregate purchase price of approximately $327 million (the Permian Acquisitions). The Permian Acquisitions were financed with net proceeds from the issuance in January 2010 of 8 million shares of the Company's Class A Common Stock, cash generated from operations and net proceeds from the issuance in November 2010 of $300 million aggregate principal amount of the Company's 6.75% senior notes due in November 2020 (2020 Notes).

        The Wolfberry Acquisition and the Permian Acquisitions qualify as business combinations and, as such, the Company estimated the fair value of each property as of each acquisition date (the date on which the Company obtained control of the properties). The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements also utilize assumptions of market participants. The Company used a discounted cash flow model based on an income approach and made market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates. Due to the unobservable nature of the inputs, business combinations are deemed to use Level 3 inputs.

        In the first quarter of 2011, the Company recorded a $1.0 million gain (net of deferred income taxes of $0.7 million) in conjunction with usual and customary post-closing adjustments to the purchase price of the November 2010 Permian acquisition. The gain was recorded in the Condensed Statements of Operations under the caption Gain on purchase.

        The following table summarizes the consideration paid to the sellers and the amounts of the assets acquired and liabilities assumed in the Permian Acquisitions:

		(in thousands)
Consideration paid to sellers:
Cash consideration		$	327,032
Recognized amounts of identifiable assets acquired and liabilities assumed:
	Proved developed and undeveloped properties		332,214
	Other assets acquired		342
	Asset retirement obligation		(3,498	)
	Deferred income tax liability		(647	)
	Other liabilities assumed		(333	)
Total identifiable net assets		$	328,078