EXHIBIT 99.3
Published on August 20, 2024
Exhibit 99.3
Unaudited Pro Forma Condensed Combined Financial Information
Oaktree Capital Management, L.P. (“Oaktree”) Working Interest Asset Acquisition
On June 6, 2024, Diversified Energy Company, PLC (the “Company”) acquired Oaktree Capital Management, LP’s 100% membership interest in OCM Denali Holdings, LLC and its subsidiaries (the “Oaktree Transaction”),
whose assets predominantly included non-operated working interests in producing wells and related facilities (the “Assets”) that are operated by the Company. The Company assessed the Assets and determined that the Oaktree Transaction was
considered an asset acquisition rather than a business combination. When making this determination, management evaluated the Oaktree Transaction under International Financial Reporting Standards 3 (“IFRS 3”) and
concluded that the acquired assets did not meet the definition of a business. The Company paid purchase consideration of $220.8 million, inclusive of transaction costs of $1.2 million and customary purchase price adjustments. As part of the
Oaktree Transaction, the Company assumed Oaktree’s debt of $132.6 million. The Company funded the purchase through a combination of existing and expanded liquidity and issued approximately $83.3 million in notes payable to Oaktree.
Unaudited Pro Forma Condensed Combined Financial Statements
The following Unaudited Pro Forma Condensed Combined Financial Statements are derived from the historical consolidated financial statements of the Company and historical Statements of Revenues and Direct Operating
Expenses related to the Oaktree Transaction.
The Company accounted for the Oaktree Transaction as an asset acquisition under IFRS, as the assets and operations acquired in the Oaktree Transaction do not meet the definition of a business under IFRS 3.
The Oaktree Transaction closed on June 6, 2024. Therefore, the Oaktree Transaction is included in the Company’s Condensed Consolidated Statement of Financial Position as of June 30, 2024. The Unaudited Pro Forma
Condensed Combined Statements of Operations for the six-month period ended June 30, 2024 and the year ended December 31, 2023 presented below were prepared as if the Oaktree Transaction had occurred on January 1, 2023.
The Unaudited Pro Forma Condensed Combined Financial Statements reflect the following pro forma adjustments related to the Oaktree Transaction, based on available information and certain assumptions that the
Company believes are reasonable:
|
|
• |
adjustments for additional interest expense for the Company’s related borrowing on its Credit Facility, the issuance of a note payable to Oaktree and the assumption of Oaktree’s debt;
|
|
|
• |
adjustments for additional depletion expense related to the acquired producing properties;
|
|
|
• |
adjustments for additional accretion expense associated with Oaktree’s proportionate working interest in the asset retirement obligations; and
|
|
|
• |
the recognition of estimated tax impacts of the pro forma adjustments.
|
Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma condensed combined financial statement. In
the Company’s opinion, all adjustments that are necessary to present fairly the pro forma information have been made. The historical consolidated financial statements have been adjusted in the Unaudited Pro Forma Condensed Combined Financial
Statements to give effect to the Oaktree Transaction.
The unaudited pro forma condensed combined financial information is not intended to represent what the Company’s financial position or results of operations would have been had the Oaktree Transaction actually been
consummated on the assumed date nor does it purport to project the future operating results of the combined company following the Oaktree Transaction. The unaudited pro forma condensed combined financial information does not reflect future events
that may occur after the Oaktree Transaction, including, but not limited to, the anticipated realization of ongoing savings from potential operating efficiencies, asset dispositions, cost savings, or economies of scale that the combined company
may achieve with respect to the combined operations. Specifically, the unaudited pro forma condensed combined statement of operations does not include projected synergies expected to be achieved as a result of the Oaktree Transaction and any
associated costs that may be required to be incurred to achieve the identified synergies. The Unaudited Pro Forma Condensed Combined Statements of Operations also exclude the effects of costs of integration activities and asset dispositions that
may result from the Oaktree Transaction.
The Unaudited Pro Forma Condensed Combined Financial Statements should be read in conjunction with the historical consolidated financial statements and accompanying notes contained in the Company’s annual report on
Form 20-F for the year ended December 31, 2023 and interim report for the six months ended June 30, 2024 and the historical Oaktree Statements of Revenues and Direct Operating Expenses and accompanying notes thereto filed as Exhibits 99.1 and
99.2 to this report on Form 6-K of which this Exhibit 99.3 is a part.
1
Exhibit 99.3
Diversified Energy Company PLC Pro Forma Condensed Combined Statement of Operations For the Six Months Ended June 30, 2024 (Unaudited)
|
(In thousands, except per share data)
|
DEC Historical
|
Oaktree
Historical (a)
|
Oaktree
Transaction
Adjustments
|
Pro Forma
Combined
|
|||||||||||||
|
Revenue
|
$
|
368,674 $
|
35,398
|
$
|
20,891
|
(b)
|
$
|
424,963
|
|||||||||
|
Operating expense
|
(196,112
|
)
|
(19,344
|
)
|
(8,562
|
)
|
(b)
|
(224,018
|
)
|
||||||||
|
Depreciation, depletion and amortization
|
(119,220
|
)
|
—
|
(14,887
|
)
|
(c)
|
(134,097
|
)
|
|||||||||
|
Gross profit
|
53,342
|
16,054
|
(2,548
|
)
|
|
66,848
|
|||||||||||
|
General and administrative expense
|
(58,326
|
)
|
—
|
—
|
|
(58,326
|
)
|
||||||||||
|
Gain (loss) on natural gas and oil property and equipment
|
7,210
|
—
|
—
|
|
7,210
|
||||||||||||
|
Unrealized gain (loss) on investment
|
2,433
|
—
|
—
|
|
2,433
|
||||||||||||
|
Gain (loss) on derivative financial instruments
|
(2,268
|
)
|
—
|
—
|
|
(2,268
|
)
|
||||||||||
|
Operating profit (loss)
|
2,391
|
16,054
|
(2,548
|
)
|
|
15,897
|
|||||||||||
|
Finance costs
|
(60,581
|
)
|
—
|
(10,684 | ) | (d) | (71,265 | ) | |||||||||
|
Accretion of asset retirement obligation
|
(14,667
|
)
|
—
|
(754 | ) | (e) | (15,421 | ) | |||||||||
|
Loss on early retirement of debt
|
(10,649
|
)
|
—
|
— |
|
(10,649
|
)
|
||||||||||
|
Other income (expense)
|
1,254
|
—
|
— |
|
1,254
|
||||||||||||
|
Income (loss) before taxation
|
(82,252
|
)
|
16,054
|
(13,986
|
)
|
(80,184 | ) | ||||||||||
|
Income tax benefit (expense)
|
97,997
|
—
|
(497
|
)
|
(f) | 97,500 | |||||||||||
|
Net income (loss)
|
15,745
|
16,054
|
(14,483
|
)
|
|
17,316
|
|||||||||||
|
Other comprehensive income (loss)
|
(1,905
|
)
|
—
|
—
|
|
(1,905
|
)
|
||||||||||
|
Total comprehensive income (loss)
|
$
|
13,840
|
$
|
16,054
|
$
|
(14,483
|
)
|
|
$
|
15,411
|
|||||||
|
Net income (loss) attributable to owners of the parent
|
|||||||||||||||||
|
Diversified Energy Company PLC
|
$
|
15,061
|
$
|
16,054
|
$
|
(14,483
|
)
|
|
$
|
16,632
|
|||||||
|
Non-controlling interest
|
684
|
—
|
—
|
|
684 | ||||||||||||
|
Net income (loss)
|
$
|
15,745
|
$
|
16,054
|
$
|
(14,483
|
)
|
|
$
|
17,316
|
|||||||
|
Earnings (loss) per share attributable to owners of the parent
|
|||||||||||||||||
|
Earnings (loss) per share - basic
|
$
|
0.32
|
$ | — | $ | — |
$
|
0.35
|
|||||||||
|
Earnings (loss) per share - diluted
|
$
|
0.32
|
$ | — | $ | — |
$
|
0.35
|
|||||||||
|
|
|||||||||||||||||
|
Weighted average shares outstanding - basic
|
47,202 | — |
— |
47,202 | |||||||||||||
|
Weighted average shares outstanding - diluted
|
47,561
|
— |
— |
47,561 | |||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial information.
2
Exhibit 99.3
Diversified Energy Company PLC Pro Forma Condensed Combined Statement of Operations For the Year Ended December 31, 2023 (Unaudited)
| (In thousands, except per share data) |
DEC Historical
|
Oaktree Historical (g) |
Oaktree
Transaction
Adjustments
|
Pro Forma
Combined
|
|||||||||||||
|
Revenue
|
$
|
868,263 $
|
152,521
|
$
|
—
|
$ | 1,020,784 | ||||||||||
|
Operating expense
|
(440,562
|
)
|
(87,210
|
)
|
—
|
(527,772 | ) | ||||||||||
|
Depreciation, depletion and amortization
|
(224,546
|
)
|
—
|
(38,720
|
)
|
(c) | (263,266 | ) | |||||||||
|
Gross profit
|
203,155
|
65,311
|
(38,720
|
)
|
229,746
|
||||||||||||
|
General and administrative expense
|
(119,722
|
)
|
—
|
—
|
(119,722
|
)
|
|||||||||||
|
Allowance for expected credit losses
|
(8,478
|
)
|
—
|
—
|
(8,478
|
)
|
|||||||||||
|
Gain (loss) on natural gas and oil property and equipment
|
24,146
|
—
|
—
|
24,146
|
|||||||||||||
|
Gain (loss) on sale of equity interest
|
18,440
|
—
|
—
|
18,440
|
|||||||||||||
|
Unrealized gain (loss) on investment
|
4,610
|
—
|
—
|
4,610
|
|||||||||||||
|
Gain (loss) on derivative financial instruments
|
1,080,516
|
—
|
—
|
1,080,516
|
|||||||||||||
|
Impairment of proved properties
|
(41,616
|
)
|
—
|
—
|
(41,616
|
)
|
|||||||||||
|
Operating profit (loss)
|
1,161,051
|
65,311
|
(38,720
|
)
|
1,187,642
|
||||||||||||
|
Finance costs
|
(134,166
|
)
|
—
|
(29,605 | ) | (d) | (163,771 | ) | |||||||||
|
Accretion of asset retirement obligation
|
(26,926
|
)
|
—
|
(1,809 | ) | (e) | (28,735 | ) | |||||||||
|
Other income (expense)
|
385
|
—
|
— |
385 | |||||||||||||
|
Income (loss) before taxation
|
1,000,344
|
65,311
|
(70,134
|
)
|
995,521 | ||||||||||||
|
Income tax benefit (expense)
|
(240,643
|
)
|
—
|
1,160
|
(f) |
(239,483 | ) | ||||||||||
|
Net income (loss)
|
759,701
|
65,311
|
(68,974
|
)
|
756,038
|
||||||||||||
|
Other comprehensive income (loss)
|
(270
|
)
|
—
|
—
|
(270
|
)
|
|||||||||||
|
Total comprehensive income (loss)
|
$
|
759,431
|
$
|
65,311
|
$
|
(68,974
|
)
|
$
|
755,768
|
||||||||
|
Net income (loss) attributable to owners of the parent
|
|||||||||||||||||
|
Diversified Energy Company PLC
|
$
|
758,018
|
$
|
65,311
|
$
|
(68,974
|
)
|
$
|
754,355
|
||||||||
|
Non-controlling interest
|
1,683
|
—
|
—
|
1,683
|
|||||||||||||
|
Net income (loss)
|
$
|
759,701
|
$
|
65,311
|
$
|
(68,974
|
)
|
$
|
756,038
|
||||||||
|
Earnings (loss) per share attributable to owners of the parent
|
|||||||||||||||||
|
Earnings (loss) per share - basic
|
$
|
16.07
|
$
|
—
|
$ | — |
|
$ | 15.99 | ||||||||
|
Earnings (loss) per share - diluted
|
$
|
15.95
|
$
|
—
|
$ | — |
|
$ | 15.88 | ||||||||
|
|
|||||||||||||||||
|
Weighted average shares outstanding - basic
|
47,165
|
—
|
— |
|
47,165 | ||||||||||||
|
Weighted average shares outstanding - diluted
|
47,514
|
—
|
—
|
|
47,514 | ||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial information.
3
Exhibit 99.3
Notes to Unaudited Pro Forma Condensed Combined Financial Information
Note 1 - Basis of Pro Forma Presentation
The accompanying unaudited pro forma condensed combined financial information was prepared based on the historical consolidated financial statements of the Company for the year ended December 31, 2023 and the six
months ended June 30, 2024, the historical Oaktree Statements of Revenues and Direct Operating Expenses and the historical financial activity of Oaktree from April 1, 2024 through June 6, 2024, the closing date of the Oaktree Transaction. The
unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2024 and the year ended December 31, 2023 were prepared assuming the Oaktree Transaction occurred on January 1, 2023. The Oaktree Transaction closed on
June 6, 2024. Therefore, the Oaktree Transaction is already included in the Company's condensed consolidated statement of financial position as of June 30, 2024.
The unaudited pro forma condensed combined financial information reflects pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions that the
Company believes are reasonable, however, actual results may differ from those reflected in this statement. In the Company’s opinion, all adjustments that are necessary to present fairly the pro forma information have been made. The unaudited pro
forma condensed combined financial information does not purport to represent what the Company’s results of operations would have been if the Oaktree Transaction had actually occurred on the date indicated above, nor is it indicative of the
Company’s future results of operations. The unaudited pro forma condensed combined financial information should be read in conjunction with the historical consolidated financial statements and related notes of the Company, as applicable, for the
period presented.
Note 2 - Pro Forma Adjustments
The Company accounted for the Oaktree Transaction as an asset acquisition under International Financial Reporting Standards (“IFRS”), as the assets and operations acquired in the Oaktree Transaction do not meet the
definition of a business under IFRS 3. The allocation of the purchase price is based upon management’s estimates of and assumptions related to the relative fair value of assets acquired and liabilities assumed as of June 6, 2024.
The following adjustments have been made to the accompanying unaudited pro forma condensed combined financial information:
| (a) |
Amounts are derived from the Oaktree historical Statement of Revenues and Direct Operating Expenses for the three months ended March 31, 2024 included as Exhibit 99.1.
|
| (b) |
Adjustments are for the period April 1, 2024 through June 6, 2024, the date the Oaktree Transaction closed.
|
| (c) |
Depletion expense associated with the acquired producing properties for the respective 6 and 12 month periods presented.
|
| (d) |
Interest expense for the Company’s related $172 million borrowing on its Credit Facility and ABS Warehouse Facility using current interest rates, the issuance of an $83 million note payable to Oaktree and the assumption of Oaktree’s
$133 million proportionate share of the ABS VI debt.
|
| (e) |
Accretion of asset retirement obligation associated with Oaktree’s proportionate working interest in the asset retirement obligations.
|
| (f) |
Adjustments to the income tax provision reflect the historical and adjusted income (loss) before taxation multiplied by an approximate 24% effective tax rate for the periods presented.
|
| (g) |
Amounts are derived from the Oaktree historical Statement of Revenues and Direct Operating Expenses for the year ended December 31, 2023 included as Exhibit 99.2.
|
Note 3 - Supplemental Oil & Gas Reserve Information
Estimated Quantities of Proved Oil and Natural Gas Reserves
The following tables present information regarding net proved oil and natural gas reserves attributable to the Company's interests in proved properties as of December 31, 2023. The information set forth in the tables
regarding historical reserves of the Company is based on proved reserves reports prepared in accordance with Securities and Exchange Commission’s (“SEC”) rules. The Company's petroleum engineers prepared the proved reserves reports as of December
31, 2023.
In addition, the following tables also set forth information as of December 31, 2023 about the estimated net proved oil and natural gas reserves attributable to the Oaktree Transaction, and the pro forma estimated
net proved oil and natural gas reserves as if the Oaktree Transaction had occurred on January 1, 2023. The reserve estimates attributable to the Oaktree Transaction at December 31, 2023 presented in the table below were prepared in accordance with
the authoritative guidance of the SEC on oil and natural gas reserve estimation and disclosures.
Reserve estimates are inherently imprecise and are generally based upon extrapolation of historical production trends, analogy to similar properties and volumetric calculations. Accordingly, reserve estimates are
expected to change, and such changes could be material and occur in the near term as future information becomes available.
4
Exhibit 99.3
|
|
Natural Gas (MMcf)
|
|||||||||||
|
|
Oaktree
|
|
||||||||||
| Transaction |
Pro Forma
|
|||||||||||
|
DEC Historical
|
Adjustments
|
Combined
|
||||||||||
|
Total proved reserves, beginning of period
|
4,349,611
|
555,228
|
4,904,839
|
|||||||||
|
Revisions of previous estimates
|
(658,917
|
)
|
(146,142
|
)
|
(805,059
|
)
|
||||||
|
Extensions, discoveries and other additions
|
712
|
3,383
|
4,095
|
|||||||||
|
Production
|
(256,378
|
)
|
(39,539
|
)
|
(295,917
|
)
|
||||||
|
Purchase of reserves in place
|
105,713
|
—
|
105,713
|
|||||||||
|
Sales of reserves in place
|
(340,697
|
)
|
—
|
(340,697
|
)
|
|||||||
|
Total proved reserves, end of period
|
3,200,044
|
372,930
|
3,572,974
|
|||||||||
|
Proved developed reserves
|
||||||||||||
|
Beginning of period
|
4,340,779
|
555,228
|
4,896,007
|
|||||||||
|
End of period
|
3,184,499
|
372,930
|
3,557,429
|
|||||||||
|
Proved undeveloped reserves:
|
||||||||||||
|
Beginning of period
|
8,832
|
—
|
8,832
|
|||||||||
|
End of period
|
15,545
|
—
|
15,545
|
|||||||||
|
NGLs (MBbls)
|
||||||||||||
| Oaktree | ||||||||||||
|
Transaction
|
Pro Forma
|
|||||||||||
|
DEC Historical
|
Adjustments
|
Combined
|
||||||||||
|
Total proved reserves, beginning of period
|
101,931
|
13,352
|
115,283
|
|||||||||
|
Revisions of previous estimates
|
153
|
(3,737
|
)
|
(3,584
|
)
|
|||||||
|
Extensions, discoveries and other additions
|
—
|
50
|
50
|
|||||||||
|
Production
|
(5,832
|
)
|
(949
|
)
|
(6,781
|
)
|
||||||
|
Purchase of reserves in place
|
2,592
|
—
|
2,592
|
|||||||||
|
Sales of reserves in place
|
(3,143
|
)
|
—
|
(3,143
|
)
|
|||||||
|
Total proved reserves, end of period
|
95,701
|
8,716
|
104,417
|
|||||||||
|
Proved developed reserves
|
||||||||||||
|
Beginning of period
|
101,931
|
13,352
|
115,283
|
|||||||||
|
End of period
|
94,391
|
8,716
|
103,107
|
|||||||||
|
Proved undeveloped reserves:
|
||||||||||||
|
Beginning of period
|
— | — | — |
|||||||||
|
End of period
|
1,310
|
— |
1,310
|
|||||||||
|
Oil (MBbls)
|
||||||||||||
| Oaktree | ||||||||||||
|
Transaction
|
Pro Forma
|
|||||||||||
|
DEC Historical
|
Adjustments
|
Combined
|
||||||||||
|
Total proved reserves, beginning of period
|
14,830
|
6,469
|
21,299
|
|||||||||
|
Revisions of previous estimates
|
(230
|
)
|
(616
|
)
|
(846
|
)
|
||||||
|
Extensions, discoveries and other additions
|
50
|
83
|
133
|
|||||||||
|
Production
|
(1,377
|
)
|
(657
|
)
|
(2,034
|
)
|
||||||
|
Purchase of reserves in place
|
923
|
—
|
923
|
|||||||||
|
Sales of reserves in place
|
(1,580
|
)
|
—
|
(1,580
|
)
|
|||||||
|
Total proved reserves, end of period
|
12,616
|
5,279
|
17,895
|
|||||||||
|
Proved developed reserves
|
||||||||||||
|
Beginning of period
|
14,830
|
6,469
|
21,299
|
|||||||||
|
End of period
|
12,380
|
5,279
|
17,659
|
|||||||||
|
Proved undeveloped reserves:
|
||||||||||||
|
Beginning of period
|
— | — | — | |||||||||
|
End of period
|
236 | — | 236 | |||||||||
5
Exhibit 99.3
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
The following table presents the standardized measure of discounted future net cash flows relating to the proved oil and natural gas reserves of the Company and the Oaktree Transaction on a pro forma combined basis
as of December 31, 2023. The standardized measure shown below represents estimates only and should not be construed as the current market value of the Company’s estimated oil and natural gas reserves or those acquired estimated oil and natural
gas reserves attributable to the Oaktree Transaction.
| December 31, 2023 | ||||||||||||
|
(In thousands)
|
DEC Historical
|
Oaktree
Transaction
Adjustments
|
Pro Forma
Combined
|
|||||||||
|
Future cash inflows
|
$
|
10,900,742
|
$
|
1,371,293
|
$
|
12,272,035
|
||||||
|
Future production costs
|
|
(5,345,117
|
)
|
|
(725,738
|
)
|
|
(6,070,855
|
)
|
|||
|
Future development costs
|
|
(1,937,293
|
)
|
|
(174,796
|
)
|
|
(2,112,089
|
)
|
|||
|
Future income tax expense
|
|
(653,216
|
)
|
|
(1,621
|
)
|
|
(654,837
|
)
|
|||
|
Future net cash flows
|
|
2,965,116
|
|
469,138
|
|
3,434,254
|
||||||
|
10% annual discount for estimated timing of cash flows
|
|
(1,219,580
|
)
|
|
(140,870
|
)
|
|
(1,360,450
|
)
|
|||
|
Standardized Measure
|
$ |
1,745,536
|
|
|
$ |
328,268
|
|
|
$ |
2,073,804
|
||
The following table sets forth the principal changes in the standardized measure of discounted future net cash flows applicable to estimated net proved oil and natural gas reserves of the Company and the Oaktree Transaction on a pro forma
combined basis as of December 31, 2023:
| December 31, 2023 | ||||||||||||
| Oaktree | ||||||||||||
| Transaction | Pro Forma |
|||||||||||
| (In thousands) | DEC Historical | Adjustments |
Combined
|
|||||||||
|
Standardized Measure, beginning of year
|
$
|
6,743,100
|
$
|
1,324,614
|
$
|
8,067,714
|
||||||
|
Sales and transfers of natural gas and oil produced, net of production costs
|
(431,629
|
)
|
(65,311
|
)
|
(496,940
|
)
|
||||||
|
Net changes in prices and production costs
|
(5,850,625
|
)
|
(760,888
|
)
|
(6,611,513
|
)
|
||||||
|
Extensions, discoveries, and other additions, net of future production and development costs
|
(13,682
|
)
|
5,027
|
(8,655
|
)
|
|||||||
|
Acquisition of reserves in place
|
122,613
|
—
|
122,613
|
|||||||||
|
Divestiture of reserves in place
|
(377,097
|
)
|
—
|
(377,097
|
)
|
|||||||
|
Revisions of previous quantity estimates
|
(1,224,544
|
)
|
(342,713
|
)
|
(1,567,257
|
)
|
||||||
|
Net change in income taxes
|
1,688,208
|
1,842
|
1,690,050
|
|||||||||
|
Changes in production rates (timing) and other
|
206,646
|
32,965
|
239,611
|
|||||||||
|
Accretion of discount
|
882,546
|
132,732
|
1,015,278
|
|||||||||
|
Standardized Measure, end of year
|
$
|
1,745,536
|
$
|
328,268
|
$
|
2,073,804
|
||||||
6