EX-99.2 2 h47990exv99w2.htm UNAUDITED PRO FORMA FINANCIAL STATEMENTS exv99w2
 

EXHIBIT 99.2
CALLON PETROLEUM COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On April 18, 2007, Callon Petroleum Company (the Company or Callon) closed the acquisition of BP Exploration and Production Company’s 80% working interest in the Entrada Field (the acquisition) for total cash consideration of $190 million. The purchase price included $150 million payable at closing and an additional $40 million payable after the achievement of certain production milestones. The purchased interests in the Gulf of Mexico included Garden Banks Blocks 738,782,785,826 and 827, subject to certain depth limitations. Callon now owns a 100% working interest in the Entrada Field and is the operator. In addition, the Company closed a seven-year, $200 million senior secured revolving credit facility with Merrill Lynch Capital Corporation ($200 million ML financing or ML financing), secured by a first priority lien on Callon’s Entrada properties, to finance the initial purchase price of the acquisition and a portion of the related development costs.
The following unaudited pro forma condensed consolidated financial information has been prepared by management utilizing the Company’s historical consolidated financial statements for the year ended December 31, 2006 with respect to the operating data and as of December 31, 2006 with respect to the balance sheet data. The unaudited pro forma condensed consolidated statement of operations gives effect to the acquisition as if the transaction had occurred on January 1, 2006. The transaction and the related adjustments are described in the accompanying notes.
The unaudited pro forma condensed consolidated financial information is presented for illustrative purposes only, and does not purport to be indicative of the results that would actually have occurred if the transaction described had occurred as presented in such statements or that may be obtained in the future. In addition, future results may vary significantly from the results reflected in such statements. The following unaudited pro forma condensed consolidated financial information should be read in conjunction with the Company’s historical consolidated financial statements and the notes thereto. The unaudited pro forma condensed consolidated financial information, in the opinion of management, reflects all adjustments necessary to present fairly the pro forma information.

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CALLON PETROLEUM COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2006
(IN THOUSANDS)
                         
            Pro Forma        
    Historical     Adjustments     Pro Forma  
ASSETS
                        
Current assets:
                        
Cash and cash equivalents
   $ 1,896     $ 8,710 (a)   $ 10,606  
Accounts receivable
     32,166       —       32,166  
Other current assets
     23,590       —       23,590  
 
                  
Total current assets
     57,652       8,710       66,362  
 
                  
 
                        
Evaluated oil and gas properties
     1,096,907       150,000 (a)     1,246,907  
Less accumulated depreciation, depletion and amortization
     (604,682 )     —       (604,682 )
Unevaluated properties
     54,802       —       54,802  
 
                  
Total oil and gas properties
     547,027       150,000       697,027  
 
                  
 
                        
Other assets, net
     20,848       6,290 (a)     27,138  
 
                  
 
                        
 
   $ 625,527     $ 165,000     $ 790,527  
 
                  
 
                        
LIABILITIES AND STOCKHOLDERS’ EQUITY
                        
 
                        
Current liabilities:
                        
Accounts payable and accrued liabilities
   $ 46,611     $ —     $ 46,611  
Asset retirement obligations
     14,355       —       14,355  
Current maturities of long-term debt
     213       —       213  
 
                  
Total current liabilities
     61,179       —       61,179  
Long-term debt
     225,521       165,000 (a)     390,521  
Asset retirement obligation
     26,824       —       26,824  
Deferred tax liability
     30,054       —       30,054  
Other
     586       —       586  
 
                  
Total liabilities
     344,164       165,000       509,164  
 
                  
 
                        
Stockholders’ equity:
                        
Preferred stock
     —       —       —  
Common stock
     207       —       207  
Additional paid-in capital
     220,785       —       220,785  
Accumulated other comprehensive income
     8,652       —       8,652  
Retained earnings
     51,719       —       51,719  
 
                  
Total stockholders’ equity
     281,363       —       281,363  
 
                  
 
                        
 
   $ 625,527     $ 165,000     $ 790,527  
 
                  

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CALLON PETROLEUM COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006
(IN THOUSANDS, EXCEPT PER SHARE DATA)
                         
            Pro Forma        
    Historical     Adjustments     Pro Forma  
Operating revenues:
                        
Oil
   $ 93,665     $ —     $ 93,665  
Gas
     88,603       —       88,603  
 
                  
 
     182,268       —       182,268  
 
                  
 
                        
Operating expenses:
                        
Lease operating expenses
     28,881       —       28,881  
Depreciation, depletion and amortization
     65,283       (7,533 )(b)     57,750  
General and administrative
     8,591       —       8,591  
Accretion
     4,960       —       4,960  
Derivatives
     150       —       150  
 
                  
Total operating expenses
     107,865       (7,533 )     100,332  
 
                  
 
                        
Income from operations
     74,403       7,533       81,936  
 
                  
 
                        
Other (income) expenses:
                        
Interest expense
     16,480       25,041  (c)     41,521  
Other (income)
     (1,869 )     —       (1,869 )
 
                  
 
     14,611       25,041       39,652  
 
                  
 
                        
Income before income taxes
     59,792       (17,508 )     42,284  
Income tax expense
     20,707       (6,128 )(d)     14,579  
 
                  
Income before equity in earnings of Medusa Spar LLC
     39,085       (11,380 )     27,705  
 
                        
Equity in earnings of Medusa Spar LLC, net of tax
     1,475       —       1,475  
 
                  
 
                        
Net income
   $ 40,560     ($ 11,380 )   $ 29,180  
 
                  
 
                        
Basic earnings per share
   $ 2.00     ($ 0.56 )   $ 1.44  
 
                  
 
                        
Diluted earnings per share
   $ 1.90     ($ 0.53 )   $ 1.37  
 
                  
 
                        
Shares used in computing net income per share:
                        
Basic
     20,270       20,270       20,270  
 
                  
 
                        
Diluted
     21,363       21,363       21,363  
 
                  

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CALLON PETROLEUM COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION
1. PRO FORMA ADJUSTMENTS
The unaudited pro forma condensed consolidated financial information reflects the following adjustments:
  a.   To record the fair value of the acquisition based on the initial purchase price of $150 million. The Company may record the additional $40 million as additional purchase price in the future when certain production milestones are achieved, in accordance with the terms of the agreement. The initial purchase price was funded using borrowings from the $200 million ML financing. This adjustment includes a payment of $35 million on the senior secured credit facility with Union Bank of California, N.A. made with a portion of the proceeds from the ML financing and payment of $6.3 million in deferred financing costs associated with the ML financing.
 
  b.   To adjust depreciation, depletion and amortization expense using the units-of-production method under the full cost method of accounting for oil and gas properties as a result of the acquisition.
 
  c.   To adjust interest expense for the ML financing and the payment of $35 million on the senior secured credit facility.
 
  d.   To adjust income tax expense for the effects of pro forma adjustments based on an effective tax rate of 35%.
2. SUPPLEMENTAL PRO FORMA OIL AND GAS RESERVE DATA
The following pro forma supplemental information concerning the Company’s proved oil and natural gas reserves is presented pursuant to the disclosure requirements of Statement of Financial Accounting Standards No. 69 “Disclosures About Oil and Gas Producing Activities.” The following tables set forth the changes in the net quantities of oil and natural gas reserves on a pro forma basis giving effect to the acquisition as if it had occurred on January 1, 2006. There are numerous uncertainties inherent in estimating the quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data represents estimates only and should not be construed as being exact:

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PROVED OIL AND NATURAL GAS RESERVES
                         
            Crude Oil (MBbls)    
    Historical   Acquisition   Pro Forma
 
Proved reserves at January 1, 2006
     18,428       13,657       32,085  
Extensions, discoveries and other additions
     204       —       204  
Revisions
     (3,733 )     —       (3,733 )
Production
     (1,634 )     —       (1,634 )
 
                        
 
                        
Proved reserves at December 31, 2006
     13,265       13,657       26,922  
 
                        
                         
            Natural Gas (MMcf)    
    Historical   Acquisition   Pro Forma
 
Proved reserves at January 1, 2006
     78,021       68,069       146,090  
Extensions, discoveries and other additions
     14,550       —       14,550  
Revisions
     (15,557 )     —       (15,557 )
Production
     (10,977 )     —       (10,977 )
 
                        
 
                        
Proved reserves at December 31, 2006
     66,037       68,069       134,106  
 
                        

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CALLON PETROLEUM COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION – (CONTINUED)
The following table sets forth the components of the changes in the standardized measure of discounted future net cash flows from proved oil and natural gas reserves of the Company on a combined pro forma basis for the year ended December 31, 2006. Cash flows relating to the acquisition are based on our evaluation of reserves. The information should be viewed only as a form of standardized disclosure concerning possible future cash flows that would result under the assumptions used but should not be viewed as indicative of fair market value. Refer to the Consolidated Financial Statements and related notes for the year ended December 31, 2006 included in the Company’s Annual Report on Form 10-K for a discussion of the assumptions used in preparing the information presented.
The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves is as follows:
                         
    Historical     Acquisition     Pro Forma  
    (In thousands)  
Futures cash inflows
   $ 1,101,182     $ 1,162,762     $ 2,263,944  
Future production costs
     (243,740 )     (168,142 )     (411,882 )
Future development and abandonment costs
     (81,700 )     (351,655 )     (433,355 )
Future income tax expense
     (119,685 )     (225,612 )     (345,297 )
 
                  
 
                        
Future net cash flows after income taxes
     656,057       417,353       1,073,410  
10% annual discount for estimated timing of cash flows
     (185,266 )     (233,337 )     (418,603 )
 
                  
 
                        
Standard measure of discounted future net cash flows
   $ 470,791     $ 184,016     $ 654,807  
 
                  

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A summary of the changes in the standardized measure of discounted future net cash flows applicable to proved oil and natural gas reserves is as follows:
                         
    Historical     Acquisition     Pro Forma  
    (In thousands)  
As of January 1, 2006
   $ 837,552     $ 281,285     $ 1,118,837  
 
                        
Sales and transfers, net of production costs
     (153,387 )     —       (153,387 )
Net change in sales and transfer prices, net of production costs
     (347,193 )     (145,409 )     (492,602 )
 
                        
Purchases, extensions, discoveries and improved recovery, net of future production and development costs incurred
     122,862       —       122,862  
 
                        
Revisions of quantity estimates
     (155,342 )     —       (155,342 )
Accretion of discount
     108,871       —       108,871  
 
                        
Net change in income taxes
     187,209       48,140       235,349  
 
                        
Changes in production rates, timing and other
     (129,781 )     —       (129,781 )
 
                  
 
                        
As of December 31, 2006
   $ 470,791     $ 184,016     $ 654,807  
 
                  

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