Acquisitions and Divestitures

6 Months Ended

Jun. 30, 2020

Acquisitions and Divestitures

2020 Acquisitions and Divestitures

The Company did not have any material acquisitions or divestitures for the six months ended June 30, 2020.

2019 Acquisitions and Divestitures

Carrizo Oil & Gas, Inc. Merger. On December 20, 2019, the Company completed its acquisition of Carrizo in an all-stock transaction (the “Merger” or the “Carrizo Acquisition”). Under the terms of the Merger, each outstanding share of Carrizo common stock was converted into 1.75 shares of the Company’s common stock. The Company issued approximately 168.2 million shares of common stock at a price of $4.55 per share, resulting in total consideration paid by the Company to the former Carrizo shareholders of approximately $765.4 million. In connection with the closing of the Merger, the Company funded the redemption of Carrizo’s 8.875% Preferred Stock, repaid the outstanding principal under Carrizo’s revolving credit facility and assumed all of Carrizo’s senior notes.

The Merger was accounted for as a business combination, therefore, the purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated acquisition date fair values with information available at that time. A combination of a discounted cash flow model and market data was used by a third-party specialist in determining the fair value of the oil and gas properties. Significant inputs into the calculation included future commodity prices, estimated volumes of oil and gas reserves, expectations for timing and amount of future development and operating costs, future plugging and abandonment costs and a risk-adjusted discount rate. Certain data necessary to complete the purchase price allocation is not yet available, including final tax returns that provide the underlying tax basis of Carrizo’s assets and liabilities. The Company expects to complete the purchase price allocation during the 12-month period following the acquisition date.

The following table sets forth the Company’s preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date.


						Preliminary Purchase Price Allocation
						(In thousands)
Consideration:
Fair value of the Company’s common stock issued						$765,373
Total consideration						$765,373

Liabilities:
Accounts payable						$37,657
Revenues and royalties payable						52,449
Operating lease liabilities - current						29,924
Fair value of derivatives - current						61,015
Other current liabilities						88,627
Long-term debt						1,984,135
Operating lease liabilities - non-current						30,070
Asset retirement obligation						26,151
Fair value of derivatives - non-current						26,960
Other long-term liabilities						17,260
Common stock warrants						10,029
Total liabilities assumed						$2,364,277

Assets:
Accounts receivable, net						$48,479
Fair value of derivatives - current						17,451
Other current assets						11,137
Evaluated oil and natural gas properties						2,133,280
Unevaluated properties						683,366
Other property and equipment						9,614
Fair value of derivatives - non-current						4,518
Deferred tax asset						159,320
Operating lease right-of-use-assets						59,907
Other long term assets						2,578
Total assets acquired						$3,129,650

Approximately $86.9 million and $248.3 million of revenues and $47.7 million and $99.9 million of direct operating expenses attributed to the Carrizo Acquisition were included in the Company’s consolidated statements of operations for the three and six months ended June 30, 2020, respectively.

Pro Forma Operating Results (Unaudited). The following unaudited pro forma combined condensed financial data for the year ended December 31, 2019 was derived from the historical financial statements of the Company giving effect to the Merger, as if it had occurred on January 1, 2018. The below information reflects pro forma adjustments for the issuance of the Company’s common stock in exchange for Carrizo’s outstanding shares of common stock, as well as pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including (i) the Company’s common stock issued to convert Carrizo’s outstanding shares of common stock and equity awards as of the closing date of the Merger, (ii) the depletion of Carrizo’s fair-valued proved oil and natural gas properties and (iii) the estimated tax impacts of the pro forma adjustments.

Additionally, pro forma earnings were adjusted to exclude acquisition-related costs incurred by the Company of approximately $58.8 million for the year ended December 31, 2019 and acquisition-related costs incurred by Carrizo that totaled approximately $15.6 million for the year ended December 31, 2019. The pro forma results of operations do not include any cost savings or other synergies that may result from the Merger or any estimated costs that have been or will be incurred by the Company to integrate the Carrizo assets. The pro forma financial data does not include the pro forma results of operations for any other acquisitions made during the periods presented, as they were primarily acreage acquisitions and their results were not deemed material.

The pro forma consolidated statements of operations data has been included for comparative purposes only and is not necessarily indicative of the results that might have occurred had the Merger taken place on January 1, 2018 and is not intended to be a projection of future results.


						For the Year Ended
						December 31, 2019
						(In thousands)
Revenues						$1,620,357
Income from operations						614,668
Net income						369,777
Basic earnings per common share						0.89
Diluted earnings per common share						0.89

During the three and six months ended June 30, 2020, in conjunction with the Carrizo Acquisition, the Company incurred costs totaling $8.1 million and $23.9 million, respectively, comprised of severance costs of $2.4 million and $5.4 million, respectively, and other merger and integration expenses of $5.7 million and $18.5 million, respectively. Through June 30, 2020, the Company has incurred cumulative costs associated with the Carrizo Acquisition of $98.3 million comprised of severance costs of $34.2 million and other merger and integration expenses of $64.1 million. As of June 30, 2020, $23.0 million remained accrued and is included as a component of “Accounts payable and accrued liabilities” in the consolidated balance sheets.

Ranger Divestiture. In the second quarter of 2019, the Company completed its divestiture of certain non-core assets in the southern Midland Basin (the “Ranger Asset Divestiture”) for net cash proceeds of $244.9 million. The transaction also provided for potential additional contingent consideration in payments of up to $60.0 million based on West Texas Intermediate average annual pricing over a three-year period. See “Note 7 - Derivative Instruments and Hedging Activities” and “Note 8 - Fair Value Measurements” for further discussion of this contingent consideration arrangement. The divestiture encompasses the Ranger operating area in the southern Midland Basin which includes approximately 9,850 net Wolfcamp acres with an average 66% working interest. The net cash proceeds were recognized as a reduction of evaluated oil and gas properties with no gain or loss recognized.