13.  Subsequent Events

2013 Acquisition.  On October 17, 2013, W&T entered into a purchase and sale agreement to acquire certain oil and natural gas property interests from Callon Petroleum Operating Company (“Callon”), referred to herein as the “Callon Properties.” Pursuant to the purchase and sale agreement, transactions covering the transfer of certain properties that had no preferential rights were consummated on November 5, 2013 (the “First Closing”).  The First Closing included the majority of the value of the Callon Properties.  A final close is expected to be consummated by the end of November 2013 for properties that have preferential rights which are not exercised.  The effective date of the transaction was July 1, 2013.  After customary effective date adjustments and closing adjustments, the cash consideration paid was $76.4 million, which is subject to further post-closing adjustments.  In addition, we assumed the related ARO, which is set forth in the table below.  The acquisition was funded from borrowings under our revolving bank credit facility and cash on hand. The First Closing of the Callon Properties consists of a 15% working interest in the Medusa field (deepwater Mississippi Canyon blocks 582 and 583), interest in associated production facilities and various interests in other non-operated fields. All of these properties are located in the Gulf of Mexico.   

The following table presents the preliminary purchase price allocation, including estimated adjustments, for the acquisition of the Callon Properties including in the First Closing (in thousands):

 

 

The acquisition was recorded at fair value, which was determined by applying the market and income approaches using Level 3 inputs.  The Level 3 inputs were: (i) analysis of comparable transactions obtained from various third-parties, (ii) estimates of ultimate recoveries of reserves and (iii) estimates of discounted cash flows based on estimated reserve quantities, reserve categories, timing of production, costs to produce and develop reserves, future prices, ARO and discount rates.  The estimates and assumptions were determined by management and third-parties.  The fair value is based on subjective estimates and assumptions, which are inherently imprecise, and the actual realized values could vary significantly from these estimates.  No goodwill was recorded for the Callon Properties acquisition related to the First Closing.      

Revenues, Net Income and Pro Forma Financial Information — Unaudited

The Callon Properties were not included in our consolidated results for the quarter ended September 30, 2013 as the acquisition closing date was subsequent to such date.   There were no expenses associated with acquisition activities and transition activities related to the acquisition of the Callon Properties for the nine months ended September 30, 2013.  

The unaudited pro forma financial information was computed as if the acquisition of the Callon Properties had been completed on January 1, 2012.  The financial information was derived from W&T’s unaudited historical condensed consolidated financial statements and Callon Properties’ unaudited historical financial statement for the periods presented.

The pro forma adjustments were based on estimates by management and information believed to be directly related to the purchase of the Callon Properties.  The pro forma financial information is not necessarily indicative of the results of operations had the purchase occurred on January 1, 2012.  If the transaction had been in effect for the periods indicated, the results may have been substantially different.  For example, we may have operated the assets differently than Callon; the realized sales prices for oil, NGLs and natural gas may have been different; and the costs of operating the Callon Properties may have been different.  The properties used in the pro forma financial information are from the First Closing and exclude properties with outstanding preferential rights by third parties. 

The following table presents a summary of our pro forma financial information (in thousands except earnings per share):

 

 

For the pro forma financial information, certain information was derived from financial records and certain information was estimated. 

 

The following table presents incremental items included in the pro forma information reported above for the Callon Properties included in the First Closing (in thousands):

 

The sources of information and significant assumptions are described below:

(a)              Revenues and direct operating expenses for the Callon Properties were derived from the unaudited historical financial records of Callon. 

(b)              Incremental costs for insurance were estimated from the incremental costs to add the Callon Properties included in the First Close to W&T’s insurance programs.  The direct operating expenses for the Callon Properties described above exclude insurance costs.   

(c)              DD&A was estimated using the full-cost method and determined as the incremental DD&A expense due to adding the Callon Properties’ costs, reserves and production into our currently existing full cost pool in order to compute such amounts.  The purchase price allocation included $7.2 million that was allocated to the pool of unevaluated properties for oil and natural gas interests.  Accordingly, no DD&A expense was estimated for the unevaluated properties.  ARO was estimated by W&T management. 

(d)              The acquisition was assumed to be funded entirely with borrowed funds.  Interest expense was computed using assumed borrowings of $76.4 million, which equates to the cash component of the transaction, and an interest rate of 2.0%, which equates to the rates applied to incremental borrowings on the revolving bank credit facility. 

(e)              The change to capitalized interest was computed for the addition to the pool of unevaluated properties and the capitalization interest rate was adjusted for the assumed borrowings.  Positive amounts represent increases to net expenses.  The negative amount represents a decrease to net expenses.  

(f)              Income tax expense was computed using the 35% federal statutory rate.

(g)              The 2012 periods above do not include any pro forma adjustments related to the 2012 acquisition as described in Note 2. 

Revolving Bank Credit Facility.  On November 8, 2013, the Company entered into the Fifth Amended and Restated Credit Agreement (the “New Credit Agreement”).  The New Credit Agreement increased the total credit facility amount from $900.0 million to $1.2 billion and matures on November 8, 2018.  The borrowing base was not changed and remains at $800.0 million.  The proved reserves associated with the Callon Properties were not considered for purposes of the redetermination of the borrowing base.  The New Credit Agreement increased the capacity to issue letters of credit from $100.0 million to $300.0 million.  The financial covenant for the maximum leverage ratio of total debt to EBITDA, as defined in the New Credit Agreement, was increased from 3.0 to 1.0 to 3.5 to 1.0.  The other financial covenant, the minimum current ratio, as defined in the New Credit Agreement, remains at 1.0 to 1.0.  Interest rates, or margins, were decreased for certain categories.  These categories are determined by the Company’s borrowing base utilization.  Interest rates were unchanged for all the other categories.  In addition, there were other minor changes from the previous Credit Agreement that were favorable to the Company.  All other terms and conditions were substantially the same as under the previous Credit Agreement.