EXHIBIT 99.1
Acquisition of Texas Barnett Shale Properties
Table of Contents
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Report of Independent Auditors | 1 | ||||
Statements of Revenues and Direct Operating Expenses of the Barnett Properties for the year ended December 31, 2020 (audited) and for the three months ended March 31, 2021 (unaudited). | 2 | ||||
Notes to Statements of Revenues and Direct Operating Expenses | 2 | ||||
Supplemental Oil and Gas Reserve Information (unaudited) | 3-5 |
Report of Independent Auditors
The Board of Directors and Stockholders
Evolution Petroleum Corporation
Report on the Financial Statement
We have audited the accompanying statement of revenues and direct operating expenses of certain oil and gas properties of TG Barnett Resources, LP acquired by Evolution Petroleum Corporation (the “Barnett Properties”) for the year ended December 31, 2020 and the related notes to the financial statement (the “financial statement”).
Management’s Responsibility for the Financial Statement
Evolution Petroleum Corporation’s management is responsible for the preparation and fair presentation of the financial statement in conformity with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statement that is free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on the financial statement based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statement. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statement in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statement.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and direct operating expenses of the Barnett Properties of TG Barnett Resources, LP acquired by Evolution Petroleum Corporation for the year ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America using the basis of presentation described in Note 1.
Emphasis of Matter
As described in Note 1, the accompanying financial statement was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and is not intended to be a complete presentation of the financial position, results of operations, or cash flows of the Barnett Properties. Our opinion is not modified with respect to this matter.
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/s/ Moss Adams LLP
Houston, Texas
July 21, 2021
Barnett Properties
Statements of Revenues and Direct Operating Expenses
Year Ended | (Unaudited) Three Months Ended | |||||||||||||
December 31, 2020 | March 31, 2021 | |||||||||||||
Oil and gas revenues | $ | 17,273,503 | $ | 5,434,336 | ||||||||||
Direct operating expenses | 21,448,305 | 4,120,399 | ||||||||||||
Oil and gas revenues less direct operating expenses | $ | (4,174,802) | $ | 1,313,937 |
See Notes to Statements of Revenues and Direct Operating Expenses
Barnett Properties
Notes to Statements of Revenues and Direct Operating Expenses
1. | Basis of Presentation |
The accompanying Statements of Revenues and Direct Operating Expenses represent the non-operated interests in the revenue and direct operating expenses of oil and natural gas producing properties in the Texas Barnett Shale (the “Barnett Properties”) acquired by Evolution Petroleum Corporation (the “Company”), from TG Barnett Resources, LP (“TGBR” or the “Seller”), a wholly owned subsidiary of Tokyo Gas Americas, Ltd. (“Tokyo Gas”) on May 7, 2021 for $18.2 million, net of preliminary purchase price adjustments, and subject to final purchase price adjustments. The financial statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and are not intended to be a complete presentation of the financial position, results of operations, or cash flows of the Barnett Properties, as further discussed below.
The Statements of Revenues and Direct Operating Expenses have been derived from TGBR’s historical financial records and prepared on the accrual basis of accounting. For purposes of these statements, all properties identified in the purchase and sale agreement are included herein. During the periods presented, the acquired Barnett Properties were not accounted for or operated as a separate subsidiary or division by TGBR. The accompanying Statements of Revenues and Direct Operating Expenses vary from a complete income statement in accordance with accounting principles generally accepted in the United States of America (“GAAP”) in that they do not reflect certain expenses incurred in connection with the ownership and operation of the Barnett Properties, including but not limited to depreciation, depletion and amortization, impairments, accretion of asset retirement obligations, general and administrative expenses, interest expense and federal and state income taxes. These costs were not separately allocated to the working interests of the Barnett Properties in the accounting records of TGBR. In addition, these allocations, if made using historical general and administrative structures and tax burdens, would not produce allocations indicative of the historical performance of the Barnett Properties had they been the Company’s properties, due to the differing size, structure, operations and accounting policies of TGBR as compared to the Company. Furthermore, no balance sheet has been presented for the Barnett Properties because the acquired properties were not accounted for or operated as a separate subsidiary or division by TGBR and complete financial statements are not available, nor has information about the Barnett Properties’ operating, investing and financing cash flows been provided for similar reasons. Accordingly, the historical Statements of Revenues and Direct Operating Expenses of the Barnett Properties are presented in lieu of the full financial statements required under Item 3-05 of the Securities and Exchange Commission’s Regulation S-X.
These Statements of Revenues and Direct Operating Expenses are not indicative of the results of operations for the Properties on a go forward basis for the reasons including, but not limited to, the omission of various operating expenses.
The accompanying Statement of Revenues and Direct Operating Expenses for the three-month period ended March 31, 2021 is unaudited and has been prepared on the same basis as the annual Statement of Revenues and Direct Operating Expenses
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for the year ended December 31, 2020 and, in the opinion of management, reflects all adjustments necessary to fairly state the Barnett Properties’ excess of revenue over direct operating expenses for the three-month period ended March 31, 2021.
2. | Summary of Significant Accounting Policies |
Use of Estimates
The Statements of Revenues and Direct Operating Expenses are derived from the historical operating statements of TGBR. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Statements of Revenues and Direct Operating Expenses. Actual results could be different from those estimates.
Revenue Recognition
Natural gas and NGLs Sales - Under most of the natural gas processing contracts related to the Barnett Properties, natural gas is delivered to a midstream processing entity at the inlet of the midstream processing entity’s system. The midstream processing entity gathers and processes the natural gas and delivers residue gas and plant products to the operator at specified delivery points. In these scenarios, an evaluation is made as to whether the seller is a principal or an agent in the transaction. For those contracts, revenue is recognized on a gross basis, with transportation, gathering, processing and compression fees presented as an expense in the statement of revenues and direct operating expenses.
Through the marketing process, product is delivered to the ultimate third-party purchaser at a contractually agreed-upon delivery point and a specified index price is received from the purchaser. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the index price received from the purchaser. For the year ended December 31, 2020, natural gas, NGL and oil condensate revenues derived from the Barnett Properties were approximately $11.2 million, $5.7 million and $0.4 million, respectively. For the three months ended March 31, 2021, natural gas, NGL and oil condensate revenues derived from the Barnett Properties were approximately $3.1 million, $2.1 million and $0.2 million, respectively.
Transaction price allocated to remaining performance obligations - For product sales that have a contract term greater than one year, the practical expedient in ASC 606-10-50-14(a) is utilized which eliminates the requirement to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
Oil, gas and NGL revenues are recognized when production is sold to a purchaser at a fixed or determinable price, when control has transferred, and if collectability of the revenue is probable. Revenues are reported net of overriding and other royalties due to third parties. There were no significant imbalances with other revenue interest owners during the year ended December 31, 2020 and the three months ended March 31, 2021.
Concentration of Credit Risk - Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company is a non-operator and the operators of the asset are the key counterparty. Any asset related credit risks are managed through various provisions of joint operating agreements dealing with counterparty default and delays in payments.
The Barnett Properties have exposure to credit risk in the event of nonpayment of oil and natural gas receivables by joint interest operators of its properties and purchasers of produced quantities of oil and natural gas. The following table presents purchasers that accounted for 10% or more of the Barnett Properties total revenue in at least one of the periods presented:
Year ended December 31, 2020 | Three months ended March 31, 2021 | |||||||||||||||||||||||||
Joint interest operators | ||||||||||||||||||||||||||
A | 99 | % | 98 | % |
Direct Operating Expenses
Direct operating expenses are recognized when incurred and consist of the direct expenses associated with the non-operated interests in the Barnett Properties. Direct operating expenses include lease operating expenses, production taxes,
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compression expenses, and gathering and transportation expenses. Lease operating expenses include lifting costs, well repair expenses, facility maintenance expenses, well workover costs and other field-related expenses. Lease operating expenses also include expenses directly associated with support personnel, support services, equipment and facilities directly related to oil and natural gas production activities. Direct operating expenses do not include corporate overhead, interest expense and income taxes.
3. | Contingencies |
The activities of the Barnett Properties may become subject to potential claims and litigation in the normal course of operations. The Company does not believe that any liability resulting from any pending or threatened litigation will have a material adverse effect on the operations or financial results of the Barnett Properties.
4. | Subsequent Events |
The Company has evaluated subsequent events through July 21, 2021, the date the Statements of Revenues and Direct Operating Expenses were available to be issued, and has concluded that no events need to be reported in relation to this period.
5. Supplemental Oil and Gas Reserve Information — Unaudited
The following tables summarize the net ownership interest in the proved oil and natural gas reserves and the standardized measure of discounted future net cash flows (“Standardized Measure”) of the Barnett Properties at December 31, 2020. The proved oil and natural gas reserve estimates and other components of the Standardized Measure were prepared by the Company’s reserve engineers, in accordance with the authoritative guidance of the Financial Accounting Standards Board and the Securities and Exchange Commission. All of the oil and natural gas producing activities related to the Barnett Properties were conducted within the continental United States.
The estimated net proved reserves and related future net revenues and Standardized Measure for the Barnett Properties were determined using index prices for oil and natural gas, and were held constant throughout the life of the Barnett Properties. The unweighted arithmetic average first-day-of-the-month prices for the prior twelve months were $39.54/Bbl for oil and $1.99/MMBtu for natural gas for the year ended December 31, 2020. These prices were adjusted by lease for quality, transportation fees, geographical differentials, marketing bonuses or deductions and other factors affecting the price received at the wellhead.
Estimated Quantities of Proved Oil and Natural Gas Reserves
Proved oil and natural gas reserves are the estimated quantities of oil and natural gas which geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions (i.e., prices and costs) existing at the time the estimate is made. Proved developed oil and natural gas reserves are proved reserves that can be expected to be recovered through existing wells and equipment in place and under operating methods being utilized at the time the estimates were made.
The following table sets forth the estimated net proved, proved developed and proved undeveloped oil and natural gas reserves related to the Barnett Properties at December 31, 2020.
Gas (Mcf) | Oil (Bbl) | NGL (Bbl) | BOE | |||||||||||||||||||||||
2020 | ||||||||||||||||||||||||||
Proved reserves | ||||||||||||||||||||||||||
Net proved reserves at January 1, 2020 | 44,273,372 | 69,032 | 4,259,086 | 11,707,013 | ||||||||||||||||||||||
Revisions of previous estimates | (18,680,958) | 3,568 | (1,462,767) | (4,572,692) | ||||||||||||||||||||||
Extensions, discoveries and other additions | — | — | — | — | ||||||||||||||||||||||
Production | (6,592,572) | (11,775) | (406,544) | (1,517,081) | ||||||||||||||||||||||
Net proved reserves at December 31, 2020 | 18,999,842 | 60,825 | 2,389,775 | 5,617,240 | ||||||||||||||||||||||
Proved developed reserves, December 31, 2020 | 18,999,842 | 60,825 | 2,389,775 | 5,617,240 | ||||||||||||||||||||||
Proved undeveloped reserves, December 31, 2020 | — | — | — | — |
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During the periods presented, revisions of previous estimates were primarily attributable to changes in commodity prices. There are numerous uncertainties in estimating quantities of proved reserves, which incorporate estimates of the future rates of production, the timing of development expenditures and other assumptions. The above reserve data represents estimates only, which are inherently imprecise, and estimates of new discoveries and undeveloped locations are more imprecise than estimates of established proved producing oil and natural gas properties. Accordingly, these estimates are subject to substantial revisions as additional information becomes available, such as reservoir performance, additional drilling, technological advancements and other factors. Decreases in the prices of oil or natural gas could have an adverse effect on reserve volumes and discounted future net cash flows related to the proved reserves.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
The Standardized Measure represents the present value of estimated future net cash flows from estimated net proved oil and natural gas reserves, less future development, production, plugging and abandonment costs, and income tax expenses, discounted at 10% per annum to reflect timing of future cash flows. Production costs do not include depreciation, depletion and amortization of capitalized acquisition, exploration and development costs.
The Standardized Measure does not purport, nor should be interpreted, to present the fair market value of the Barnett Properties’ proved reserves. It is intended to present a standardized disclosure concerning possible future net cash flows from proved reserves that would result under the assumptions used and ignores future changes in prices and costs and the risks inherent in reserve estimates, among other things. The various assumptions used, including prices, costs, production rates and discount rates, are inherently imprecise. Further, since prices and costs do not remain static, the results are not necessarily indicative of the fair market value of estimated proved reserves. Accordingly, the estimates of future net cash flows from proved reserves and the present value thereof may be materially different than actual subsequent results, and the results may not be comparable to estimates disclosed by other oil and natural gas producers.
The following table sets forth the Standardized Measure of discounted future net cash flows related to the Barnett Properties’ estimated net oil and natural gas reserves at December 31, 2020.
At December 31, | ||||||||
2020 | ||||||||
Future cash inflows | $ | 59,698,860 | ||||||
Future production costs | (51,303,352) | |||||||
Future development costs | (5,580,486) | |||||||
Future income tax expense | (313,419) | |||||||
Future net cash flows | 2,501,603 | |||||||
10% annual discount for estimating timing of cash flows | (12,810) | |||||||
Standardized Measure of discounted future net cash flows | $ | 2,488,793 |
The following table sets forth the changes in Standardized Measure of discounted future net cash flows applicable to estimated net proved oil and natural gas reserves of the Barnett Properties for the period presented:
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Net proved reserves at January 1, 2020 | $ | 15,920,743 | ||||||
Net changes in prices and production costs | (13,421,622) | |||||||
Net changes in future development costs | — | |||||||
Sales of oil and natural gas, net of production costs | 4,174,802 | |||||||
Extensions | — | |||||||
Discoveries | — | |||||||
Purchases of reserves in place | — | |||||||
Sales of reserves in place | — | |||||||
Revisions of previous quantity estimates | (6,371,759) | |||||||
Previously estimated development costs incurred | — | |||||||
Net change in taxes | 267,619 | |||||||
Accretion of discount | 1,650,018 | |||||||
Changes in timing and other | 268,992 | |||||||
Net proved reserves at December 31, 2020 | $ | 2,488,793 |
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