Matador Resources Company
Exhibit 99.2
Matador Resources Company
Unaudited Pro Forma Condensed Combined Financial Information
On January 24, 2023, MRC Hat Mesa, LLC (“Purchaser”), a wholly-owned subsidiary of Matador Resources Company (“Matador” or the “Company”), and, solely for the purposes of guaranteeing the obligations of Purchaser, MRC Energy Company (“MRC Energy”), entered into a Securities Purchase Agreement (the “Purchase Agreement”) with AEP EnCap HoldCo, LLC (“AEP EnCap”), Ameradvance Management LLC (“ManagementCo” and, together with AEP EnCap, each a “Seller” and collectively, the “Sellers”) and Advance Energy Partners Holdings, LLC (“Advance”), pursuant to which, among other things, Sellers agreed to sell to Purchaser, and Purchaser agreed to purchase from Sellers, all of the issued and outstanding membership interests of Advance, which owned interests in certain oil and natural gas producing properties and undeveloped acreage located primarily in Lea County, New Mexico and Ward County, Texas (the “Advance Acquisition”), for an aggregate purchase price consisting of (i) an amount in cash equal to $1.60 billion (subject to certain customary adjustments, including for working capital and for title defects and environmental defects) (the “Cash Consideration”) and (ii) for each calendar month during calendar year 2023 in which the average of the daily settlement price for the West Texas Intermediate (WTI) light sweet crude oil prompt month futures contract for such calendar month exceeds $85.00 per barrel, a payment equal to $7.5 million (all such payments for the 12 calendar months in 2023, the “Contingent Consideration”).
On April 12, 2023, Matador consummated the Advance Acquisition pursuant to the Purchase Agreement with an effective date of January 1, 2023, including payment of the Cash Consideration (which amount is subject to certain customary post-closing adjustments). Based on estimates as of April 12, 2023, including an approximate fair value of the Contingent Consideration of $21.2 million, the estimated total fair value of consideration to be paid to the Sellers is approximately $1.62 billion.
The Cash Consideration was funded by cash on hand and by amending the Company’s existing credit facility to increase the elected commitment under the credit facility from $775.0 million to $1.25 billion. The borrowing base under the credit facility remained unchanged at $2.25 billion.
The Advance Acquisition will be accounted for under the acquisition method of accounting for business combinations in accordance with Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). Under the acquisition method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values as of the acquisition date, with any excess purchase price allocated to goodwill. Matador has made a preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date of April 12, 2023, which is based on Matador’s preliminary valuation of the tangible and intangible assets acquired and liabilities assumed using information currently available. A final determination of the fair value of the assets and liabilities acquired in the Advance Acquisition will be based on an analysis of Advance’s actual assets and liabilities as of the closing date. Such analysis has not been completed at this time. As a result, the unaudited pro forma purchase price adjustments related to the Advance Acquisition are preliminary and subject to further adjustments as additional information becomes available and as additional analyses are performed. The final valuation of assets acquired and liabilities assumed may be materially different than the estimated values assumed in the unaudited pro forma condensed combined financial statements (the “pro forma financial statements”). Costs directly related to the Advance Acquisition are expensed in the period in which they are incurred. The pro forma financial statements presented herein have been prepared to reflect the transaction accounting adjustments to Xxxxxxx’s historical condensed consolidated financial information in order to account for the Advance Acquisition, the assumption of assets and liabilities acquired in the Advance Acquisition and the additional debt incurred to fund the Advance Acquisition.
The Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31, 2022 gives effect to the Advance Acquisition and the related financing as if each had been completed on December 31, 2022. The Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2022 give effect to the Advance Acquisition and the related financing as if each had been completed on January 1, 2022. Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the pro forma financial statements.
The pro forma financial statements and related notes have been prepared by management in accordance with Article 11 of Regulation S-X, are provided for illustrative purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of Matador would have been had the Advance Acquisition and the related financing occurred on the dates noted above, nor are they necessarily indicative of future consolidated results of operations or
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Unaudited Pro Forma Condensed Combined Financial Information
consolidated financial position. Future results may vary significantly from the results reflected because of various factors. The pro forma adjustments are based on currently available information and certain estimates and assumptions that Matador believes provide a reasonable basis for presenting the significant effects of the Advance Acquisition.
The pro forma financial statements and related notes do not reflect the benefits of projected synergies, potential cost savings or the costs that may be necessary to achieve such savings, opportunities to increase revenue generation or other factors that may result from the Advance Acquisition and, accordingly, do not attempt to predict or suggest future results. Management cannot identify the timing, nature and amount of such savings, costs or other factors, any of which could affect the future consolidated results of operations or consolidated financial position of the Company.
The unaudited pro forma financial statements have been developed from and should be read in conjunction with:
•The audited consolidated financial statements and accompanying notes of Matador contained in Matador’s Annual Report on Form 10-K for the year ended December 31, 2022; and
•The audited consolidated financial statements and related notes of Advance for the year ended December 31, 2022, which are filed as Exhibit 99.1 to the Current Report on Form 8-K/A.
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Unaudited Pro Forma Condensed Combined Financial Information
Matador Resources Company and Subsidiaries
PRO FORMA CONDENSED COMBINED BALANCE SHEET - UNAUDITED
| (In thousands) | Historical | Transaction Accounting Adjustments | ||||||||||||||||||||||||||||||
| Matador | Advance | Conforming and Reclassifications (e) | Advance Acquisition | Pro Forma Combined | ||||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||||
| Current assets | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 505,179 | $ | 7,479 | $ | — | $ | (439,028) | (d) | $ | 73,630 | |||||||||||||||||||||
| Restricted cash | 42,151 | — | — | — | 42,151 | |||||||||||||||||||||||||||
| Accounts receivable | — | 51,321 | (51,321) | — | — | |||||||||||||||||||||||||||
| Oil and natural gas revenues | 224,860 | — | 49,793 | (1,732) | (f) | 272,921 | ||||||||||||||||||||||||||
| Joint interest xxxxxxxx | 180,947 | — | 1,213 | (2,761) | (f) | 179,399 | ||||||||||||||||||||||||||
| Other | 48,011 | — | 315 | — | 48,326 | |||||||||||||||||||||||||||
| Derivative instruments | 3,930 | 11,170 | — | (11,170) | (a) | 3,930 | ||||||||||||||||||||||||||
| Lease and well equipment inventory | 15,184 | 32,924 | — | (20,903) | (a) | 27,205 | ||||||||||||||||||||||||||
| Prepaid expenses and other current assets | 51,570 | 7,615 | — | 1,789 | (h) | 58,656 | ||||||||||||||||||||||||||
| (2,318) | (f) | |||||||||||||||||||||||||||||||
| Total current assets | 1,071,832 | 110,509 | — | (476,123) | 706,218 | |||||||||||||||||||||||||||
| Property and equipment, at cost | ||||||||||||||||||||||||||||||||
| Oil and natural gas properties, successful efforts method, net | — | 1,468,880 | — | (1,468,880) | (b) | — | ||||||||||||||||||||||||||
| Oil and natural gas properties, full-cost method | ||||||||||||||||||||||||||||||||
| Evaluated | 6,862,455 | — | — | 1,347,087 | (c) | 8,209,542 | ||||||||||||||||||||||||||
| Unproved and unevaluated | 977,502 | — | — | 215,454 | (c) | 1,192,956 | ||||||||||||||||||||||||||
| Midstream properties | 1,057,668 | — | — | 63,644 | (c) | 1,121,312 | ||||||||||||||||||||||||||
| Other property and equipment | 32,847 | 24 | — | (24) | (b) | 32,847 | ||||||||||||||||||||||||||
| Less accumulated depletion, depreciation and amortization | (4,512,275) | — | — | — | (4,512,275) | |||||||||||||||||||||||||||
| Net property and equipment | 4,418,197 | 1,468,904 | — | 157,281 | 6,044,382 | |||||||||||||||||||||||||||
| Other assets | ||||||||||||||||||||||||||||||||
| Derivative instruments | — | 12,925 | — | (12,925) | (a) | — | ||||||||||||||||||||||||||
| Lease assets | — | 1,196 | (1,196) | — | — | |||||||||||||||||||||||||||
| Other long-term assets | 64,476 | 2,649 | 1,196 | (2,649) | (a) | 72,528 | ||||||||||||||||||||||||||
| 6,856 | (h) | |||||||||||||||||||||||||||||||
| Total other assets | 64,476 | 16,770 | — | (8,718) | 72,528 | |||||||||||||||||||||||||||
| Total assets | $ | 5,554,505 | $ | 1,596,183 | $ | — | $ | (327,560) | $ | 6,823,128 | ||||||||||||||||||||||
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Unaudited Pro Forma Condensed Combined Financial Information
Matador Resources Company and Subsidiaries
PRO FORMA CONDENSED COMBINED BALANCE SHEET - UNAUDITED (Continued)
| (In thousands) | Historical | Transaction Accounting Adjustments | ||||||||||||||||||||||||||||||
| Matador | Advance | Conforming and Reclassifications (e) | Advance Acquisition | Pro Forma Combined | ||||||||||||||||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||||||||||||||
| Accounts payable | $ | 58,848 | $ | 69,932 | $ | — | $ | (2,761) | (f) | $ | 126,019 | |||||||||||||||||||||
| Accrued liabilities | 261,310 | — | 9,158 | (4,631) | (a) | 266,687 | ||||||||||||||||||||||||||
| 850 | (i) | |||||||||||||||||||||||||||||||
| Accrued capital expenditures | — | 3,899 | (3,899) | — | — | |||||||||||||||||||||||||||
| Accrued and other liabilities | — | 6,191 | (6,191) | — | — | |||||||||||||||||||||||||||
| Current portion of asset retirement obligations | — | 219 | (219) | — | — | |||||||||||||||||||||||||||
| Current portion of lease liabilities | — | 447 | (447) | — | — | |||||||||||||||||||||||||||
| Royalties payable | 117,698 | 7,913 | — | (1,732) | (f) | 123,879 | ||||||||||||||||||||||||||
| Amounts due to affiliates | 32,803 | — | — | — | 32,803 | |||||||||||||||||||||||||||
| Derivative instruments | — | 32,271 | — | (32,271) | (a) | — | ||||||||||||||||||||||||||
| Advances from joint interest owners | 52,357 | — | 1,151 | (2,318) | (f) | 51,190 | ||||||||||||||||||||||||||
| Other current liabilities | 52,857 | — | 447 | 21,151 | (g) | 74,455 | ||||||||||||||||||||||||||
| Total current liabilities | 575,873 | 120,872 | — | (21,712) | 675,033 | |||||||||||||||||||||||||||
| Long-term liabilities | ||||||||||||||||||||||||||||||||
| Long term debt | — | 460,000 | — | (460,000) | (a) | — | ||||||||||||||||||||||||||
| Borrowings under Credit Agreement | — | — | — | 1,150,000 | (d) | 1,150,000 | ||||||||||||||||||||||||||
| Borrowings under San Mateo Credit Facility | 465,000 | — | — | — | 465,000 | |||||||||||||||||||||||||||
| Senior unsecured notes payable | 695,245 | — | — | — | 695,245 | |||||||||||||||||||||||||||
| Asset retirement obligations | 52,985 | 15,289 | — | (6,509) | (c) | 61,765 | ||||||||||||||||||||||||||
| Deferred income taxes | 428,351 | — | — | — | 428,351 | |||||||||||||||||||||||||||
| Derivative instruments | — | 17,081 | — | (17,081) | (a) | — | ||||||||||||||||||||||||||
| Lease liabilities | — | 771 | (771) | — | — | |||||||||||||||||||||||||||
| Deferred income | — | 2,117 | (2,117) | — | — | |||||||||||||||||||||||||||
| Other long-term liabilities | 19,960 | — | 2,888 | — | 22,848 | |||||||||||||||||||||||||||
| Total long-term liabilities | 1,661,541 | 495,258 | — | 666,410 | 2,823,209 | |||||||||||||||||||||||||||
| Shareholders’ equity | ||||||||||||||||||||||||||||||||
| Common stock | 1,190 | — | — | — | 1,190 | |||||||||||||||||||||||||||
| Additional paid-in capital | 2,101,999 | — | — | 8,645 | (h) | 2,110,644 | ||||||||||||||||||||||||||
| Retained earnings | 1,007,642 | — | — | (850) | (i) | 1,006,792 | ||||||||||||||||||||||||||
| Treasury stock | (34) | — | — | — | (34) | |||||||||||||||||||||||||||
| Members’ capital | — | 980,053 | — | (980,053) | (a) | — | ||||||||||||||||||||||||||
| Total Matador Resources Company shareholders’ equity | 3,110,797 | 980,053 | — | (972,258) | 3,118,592 | |||||||||||||||||||||||||||
| Non-controlling interest in subsidiaries | 206,294 | — | — | — | 206,294 | |||||||||||||||||||||||||||
| Total shareholders’ equity | 3,317,091 | 980,053 | — | (972,258) | 3,324,886 | |||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 5,554,505 | $ | 1,596,183 | $ | — | $ | (327,560) | $ | 6,823,128 | ||||||||||||||||||||||
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Unaudited Pro Forma Condensed Combined Financial Information
Matador Resources Company and Subsidiaries
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS - UNAUDITED
| (In thousands, except per share data) | Historical | Transaction Accounting Adjustments | ||||||||||||||||||||||||||||||
| Matador | Advance | Conforming and Reclassifications | Advance Acquisition | Pro Forma Combined | ||||||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||
| Oil and natural gas | $ | 2,905,738 | $ | — | $ | 760,741 | (a) | $ | — | $ | 3,666,479 | |||||||||||||||||||||
| Oil and condensate | — | 637,946 | (637,946) | (a) | — | — | ||||||||||||||||||||||||||
| Gas | — | 71,379 | (71,379) | (a) | — | — | ||||||||||||||||||||||||||
| Plant products | — | 51,416 | (51,416) | (a) | — | — | ||||||||||||||||||||||||||
| Third-party midstream services | 90,606 | — | — | — | 90,606 | |||||||||||||||||||||||||||
| Sales of purchased natural gas | 200,355 | — | — | — | 200,355 | |||||||||||||||||||||||||||
| Realized loss on derivatives | (157,483) | — | — | — | (157,483) | |||||||||||||||||||||||||||
| Unrealized gain on derivatives | 18,809 | — | — | — | 18,809 | |||||||||||||||||||||||||||
| Total revenues | 3,058,025 | 760,741 | — | — | 3,818,766 | |||||||||||||||||||||||||||
| Expenses | ||||||||||||||||||||||||||||||||
| Production taxes, transportation and processing | 282,193 | — | 76,436 | (b) | — | 358,629 | ||||||||||||||||||||||||||
| Production | — | 153,160 | (153,160) | (b) | — | — | ||||||||||||||||||||||||||
| Exploration | — | 92 | — | (92) | (d) | — | ||||||||||||||||||||||||||
| Lease operating | 157,105 | — | 76,724 | (b) | — | 233,829 | ||||||||||||||||||||||||||
| Plant and other midstream services operating | 95,522 | — | — | — | 95,522 | |||||||||||||||||||||||||||
| Purchased natural gas | 178,937 | — | — | — | 178,937 | |||||||||||||||||||||||||||
| Depletion, depreciation and amortization | 466,348 | 120,491 | — | 47,744 | (h) | 634,583 | ||||||||||||||||||||||||||
| Accretion of asset retirement obligations | 2,421 | 572 | — | (204) | (h) | 2,789 | ||||||||||||||||||||||||||
| General and administrative | 116,229 | 15,384 | — | 850 | (g) | 132,463 | ||||||||||||||||||||||||||
| Impairment of inventory | — | 5,308 | — | (5,308) | (i) | — | ||||||||||||||||||||||||||
| Loss on disposal of oil and gas properties | — | 92 | (92) | (b) | — | — | ||||||||||||||||||||||||||
| Total expenses | 1,298,755 | 295,099 | (92) | 42,990 | 1,636,752 | |||||||||||||||||||||||||||
| Operating income | 1,759,270 | 465,642 | 92 | (42,990) | 2,182,014 | |||||||||||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||||||||
| Change in unrealized gain on derivative contracts, net | — | 38,554 | — | (38,554) | (i) | — | ||||||||||||||||||||||||||
| Realized loss on commodity derivative contracts, net | — | (119,575) | — | 119,575 | (i) | — | ||||||||||||||||||||||||||
| Net loss on impairment | (1,311) | — | (92) | (b) | — | (1,403) | ||||||||||||||||||||||||||
| Interest expense | (67,164) | (21,239) | — | 21,239 | (c) | (115,499) | ||||||||||||||||||||||||||
| (46,546) | (e) | |||||||||||||||||||||||||||||||
| (1,789) | (f) | |||||||||||||||||||||||||||||||
| Other income (expense) | (5,121) | 264 | — | — | (4,857) | |||||||||||||||||||||||||||
| Total other expense | (73,596) | (101,996) | (92) | 53,925 | (121,759) | |||||||||||||||||||||||||||
| Income before income taxes | 1,685,674 | 363,646 | — | 10,935 | 2,060,255 | |||||||||||||||||||||||||||
| Total income tax provision | 399,357 | — | — | 92,709 | (j) | 492,066 | ||||||||||||||||||||||||||
| Net income | 1,286,317 | 363,646 | — | (81,774) | 1,568,189 | |||||||||||||||||||||||||||
| Net income attributable to non-controlling interest in subsidiaries | (72,111) | — | — | — | (72,111) | |||||||||||||||||||||||||||
| Net income attributable to Matador Resources Company shareholders | $ | 1,214,206 | $ | 363,646 | $ | — | $ | (81,774) | $ | 1,496,078 | ||||||||||||||||||||||
| Earnings per common share | ||||||||||||||||||||||||||||||||
| Basic | $ | 10.28 | $ | — | $ | — | $ | — | $ | 12.67 | ||||||||||||||||||||||
| Diluted | $ | 10.11 | $ | — | $ | — | $ | — | $ | 12.45 | ||||||||||||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||||||||||||||||||
| Basic | 118,122 | — | — | — | 118,122 | |||||||||||||||||||||||||||
| Diluted | 120,131 | — | — | — | 120,131 | |||||||||||||||||||||||||||
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Unaudited Pro Forma Condensed Combined Financial Information
1. Basis of Presentation
The accompanying unaudited pro forma condensed combined financial information was prepared based on the audited historical consolidated financial statements of Matador and the audited historical consolidated financial statements of Advance, in each case, as of and for the year ended December 31, 2022. The Advance Acquisition has been accounted for as a business combination in accordance with ASC 805. The fair value of the consideration paid by Xxxxxxx and allocation of that amount to the underlying assets acquired and liabilities assumed will be recorded by Matador as of the date of the closing of the Advance Acquisition. Costs directly related to the Advance Acquisition are expensed as incurred.
The Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2022 were prepared assuming the Advance Acquisition occurred on January 1, 2022. The Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31, 2022 was prepared as if the Advance Acquisition occurred on December 31, 2022.
The unaudited pro forma condensed combined financial information and related notes are presented for illustrative purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of Matador would have been had the Advance Acquisition and the related financing occurred on the dates noted above, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position. If the Advance Acquisition, the related financing and the other transactions contemplated by the Purchase Agreement had occurred in the past, the Company’s operating results might have been materially different from those presented in the unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined financial information should not be relied upon as an indication of operating results that the Company would have achieved if the Advance Acquisition, the related financing and the other transactions contemplated by the Purchase Agreement had taken place on the dates noted above. In addition, future results may vary significantly from the results reflected in the unaudited pro forma condensed combined financial statement of operations and should not be relied upon as an indication of the future results the Company will have after the consummation of the Advance Acquisition and the other transactions contemplated by the Purchase Agreement. The pro forma adjustments are based on currently available information and certain estimates and assumptions that Matador believes provide a reasonable basis for presenting the significant effects of the Advance Acquisition.
2. Consideration and Purchase Price Allocation
The preliminary allocation of the total purchase price in the Advance Acquisition is based upon management’s estimates of and assumptions related to the fair value of assets to be acquired and liabilities to be assumed as of April 12, 2023, the closing date of the transaction, using the latest available information. Due to the unaudited pro forma condensed combined financial information being prepared based on preliminary estimates of the net assets acquired and balances as of December 31, 2022, the final purchase price allocation and the resulting effect on financial position and results of operations may differ significantly from the pro forma amounts included herein.
The preliminary purchase price allocation is subject to change due to several factors, including but not limited to changes in the estimated fair value of assets acquired and liabilities assumed as of the closing date of the transaction, which could result from changes in future oil and natural gas commodity prices, reserve estimates, interest rates, as well as other factors.
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Unaudited Pro Forma Condensed Combined Financial Information
The consideration transferred and the fair value of assets acquired and liabilities assumed by Matador are as follows (in thousands):
Consideration | Allocation | ||||
Cash | $1,597,534 | ||||
Fair value of contingent consideration at April 12, 2023 | 21,151 | ||||
Total consideration given | $1,618,685 | ||||
Allocation of purchase price | |||||
Current assets | $80,131 | ||||
Oil and natural gas properties | |||||
Evaluated | 1,347,087 | ||||
Unproved and unevaluated | 215,454 | ||||
| Midstream properties | 63,644 | ||||
| Non-current assets | 1,196 | ||||
| Current liabilities | (77,159) | ||||
| Asset retirement obligations | (8,780) | ||||
Other liabilities | (2,888) | ||||
Net assets acquired | $ | 1,618,685 | |||
The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair value of oil and natural gas properties and asset retirement obligations were measured using the discounted cash flow technique of valuation.
Significant unobservable inputs included future commodity prices adjusted for differentials, projections of estimated quantities of recoverable reserves, forecasted production based on decline curve analysis, estimated timing and amount of future operating and development costs, and a weighted average cost of capital.
3. Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet and Unaudited Pro Forma Condensed Combined Statements of Operations
The unaudited pro forma condensed combined financial information has been compiled in a manner consistent with the accounting policies adopted by Xxxxxxx. Actual results may differ materially from the assumptions and estimates contained herein.
The pro forma adjustments are based on currently available information and certain estimates and assumptions that Matador believes provide a reasonable basis for presenting the significant effects of the Advance Acquisition. General descriptions of the pro forma adjustments are provided below.
Unaudited Pro Forma Condensed Combined Balance Sheet
The following reclassifications and adjustments were made in the preparation of the Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31, 2022:
(a) Adjustment to remove assets and liabilities not acquired as part of the Advance Acquisition.
(b) Adjustment to eliminate the historical book value of Advance’s assets and liabilities as of December 31, 2022 when the historical book value is different than the fair value on the date of the acquisition.
(c) Adjustment to reflect the preliminary allocation of the estimated fair value of assets acquired in the Advance Acquisition and the adjustment to decrease the related asset retirement obligations, which was required to conform cost of abandonment and other key assumptions with those of Matador.
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Unaudited Pro Forma Condensed Combined Financial Information
(d) Adjustment to record consideration and changes in working capital for the Advance Acquisition, including cash and the new borrowings under the credit facility. Cash on hand of $447.5 million and $1.15 billion in new borrowings under the credit facility funded the Cash Consideration used in the Advance Acquisition, which was partially offset by $8.5 million of changes in working capital.
(e) Reclassification to conform Advance’s assets and liabilities presentation to the presentation of assets and liabilities for Matador.
(f) Adjustment to eliminate the payables and receivables between Matador and Advance as of December 31, 2022 related to joint interest in certain xxxxx.
(g) Adjustment to reflect the fair value of the Contingent Consideration.
(h) Adjustment for the additional costs related to the increase in the elected commitment under the credit facility in order to finance the Advance Acquisition.
(i) Adjustment to retained earnings to reflect the estimated nonrecurring transaction costs related to the Advance Acquisition that are expected to be incurred by Matador, including advisory, legal, regulatory, accounting, valuation and other professional fees that are not capitalized.
Unaudited Pro Forma Condensed Combined Statements of Operations
The following reclassifications and adjustments were made in the preparation of the Unaudited Pro Forma Condensed Combined Statements of Operations for the Year Ended December 31, 2022:
(a) Reclassification to conform Advance’s presentation of revenues to the presentation of revenues for Matador.
(b) Reclassification to align the presentation of production taxes, transportation and processing expenses, operating lease expenses and net loss on impairment for Advance to the presentation by Matador.
(c) Adjustment to remove Advance’s historical interest expense prior to the Advance Acquisition.
(d) Adjustment to remove exploration and abandonment cost to align the presentation of such expenses by Advance with the full-cost method of accounting utilized by Xxxxxxx.
(e) Adjustment to reflect the estimated interest expense in the periods presented with respect to the incremental borrowings necessary to finance the Advance Acquisition. The interest rate utilized for the year ended December 31, 2022 was 3.98% for incremental borrowings of $1.15 billion. A one-eighth point change in interest rates as of December 31, 2022 would change interest expense by $2.9 million for the year ended December 31, 2022.
(f) Adjustment to reflect the amortization of financing costs of $8.6 million related to the increase in the elected commitment under the credit facility in order to finance the Advance Acquisition. Deferred financing costs are amortized straight-line over approximately 58 months, which corresponds to the October 2026 maturity date of Matador’s credit facility.
(g) Represents the estimated nonrecurring transaction costs related to the Advance Acquisition that are expected to be incurred by Matador, including advisory, legal, regulatory, accounting, valuation and other professional fees that are not capitalized.
(h) Represents additional depreciation, depletion, and amortization expense and accretion of asset retirement obligation expense resulting from the change in basis of property and equipment and asset retirement obligations, respectively, acquired as a result of the Advance Acquisition. The depletion adjustment was calculated using the unit-of-production method under the full-cost method of accounting using estimated proved reserves and production volumes attributable to the acquired assets.
(i) Adjustment to remove derivative gains and losses and inventory impairments that were related to derivatives and inventory, respectively, not acquired as part of the Advance Acquisition.
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Unaudited Pro Forma Condensed Combined Financial Information
(j) Adjustment to reflect the estimated incremental income tax expense that would have been recorded in the year ended December 31, 2022 if the Advance Acquisition had occurred on January 1, 2022 at Matador’s 2022 effective income tax rate of 24.75%. This effective tax rate represents the statutory federal income tax rate of 21% plus Matador’s apportioned state rate based upon the statutory Texas Margin tax rate of 0.75% and statutory New Mexico tax rate of 5.9%, which are the statutory rates in effect in those jurisdictions during 2022.
4. Supplemental Unaudited Pro Forma Combined Oil and Natural Gas Reserves and Standardized Measure Information
The following tables set forth information with respect to the historical and pro forma combined estimated oil and natural gas reserves as of December 31, 2022 for Matador and Advance. Advance reserve information has been prepared by Xxxxxx, Xxxxxxxxx & Associates, Inc., independent petroleum engineers. The following unaudited pro forma combined proved reserve information is not necessarily indicative of the results that might have occurred had the Advance Acquisition taken place on January 1, 2022, nor is it intended to be a projection of future results. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Periodic revisions or removals of estimated reserves and future cash flows may be necessary as a result of a number of factors, including reservoir performance, new drilling, oil and natural gas prices, changes in costs, technological advances, new geological or geophysical data, changes in business strategies, or other economic factors. Accordingly, proved reserve estimates may differ significantly from the quantities of oil and natural gas ultimately recovered. For both Matador and Advance the reserve estimates shown below were determined using the average first day of the month price for each of the preceding 12 months for oil and natural gas for the year ended December 31, 2022.
| As of December 31, 2022 | |||||||||||||||||||||||
| Matador | Advance | Pro Forma Combined | |||||||||||||||||||||
| Estimated Proved Developed Reserves: | |||||||||||||||||||||||
| Oil (MBbl) | 116,030 | 61,467 | 177,497 | ||||||||||||||||||||
| Natural gas (MMcf) | 632,858 | 218,392 | 851,250 | ||||||||||||||||||||
Total (MBOE)1 | 221,507 | 97,866 | 319,373 | ||||||||||||||||||||
| Estimated Proved Undeveloped Reserves: | |||||||||||||||||||||||
| Oil (MBbl) | 80,259 | 48,016 | 128,275 | ||||||||||||||||||||
| Natural gas (MMcf) | 329,736 | 210,317 | 540,053 | ||||||||||||||||||||
Total (MBOE)1 | 135,215 | 83,069 | 218,284 | ||||||||||||||||||||
| Estimated Proved Reserves: | |||||||||||||||||||||||
| Oil (MBbl) | 196,289 | 109,483 | 305,772 | ||||||||||||||||||||
| Natural gas (MMcf) | 962,594 | 428,709 | 1,391,303 | ||||||||||||||||||||
Total (MBOE)1 | 356,722 | 180,935 | 537,657 | ||||||||||||||||||||
_______________
(1)Natural gas is converted to oil equivalent using the ratio of one barrel of oil to six Mcf of natural gas.
The following table presents the Standardized Measure of Discounted Future Net Cash Flows relating to the proved oil and natural gas reserves of Matador and of the properties acquired in the Advance Acquisition on a pro forma combined basis as of December 31, 2022. The Pro Forma Combined Standardized Measure shown below represents estimates only and should not be construed as the market value of either Advance’s oil and natural gas reserves or the acquired oil and natural gas reserves attributable to the Advance Acquisition. Future estimated income tax expense of Advance was calculated based on Xxxxxxx’s tax assumptions as Advance was a limited liability company not subject to entity-level federal income taxation as of December 31, 2022 and 2021.
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Unaudited Pro Forma Condensed Combined Financial Information
| (in thousands) | As of December 31, 2022 | ||||||||||||||||||||||
| Matador | Advance | Pro Forma Combined | |||||||||||||||||||||
| Oil and natural gas producing properties: | |||||||||||||||||||||||
| Future cash inflows | $ | 24,952,118 | $ | 12,655,421 | $ | 37,607,539 | |||||||||||||||||
| Future production costs | (6,752,752) | (2,830,197) | (9,582,949) | ||||||||||||||||||||
| Future development costs | (1,776,029) | (957,838) | (2,733,867) | ||||||||||||||||||||
| Future income tax expense | (3,935,271) | (1,954,800) | (5,890,071) | ||||||||||||||||||||
| Future net cash flows | 12,488,066 | 6,912,586 | 19,400,652 | ||||||||||||||||||||
| 10% annual discount factor | (5,504,863) | (3,366,319) | (8,871,182) | ||||||||||||||||||||
| Standardized measure of discounted future net cash flows | $ | 6,983,203 | $ | 3,546,267 | $ | 10,529,470 | |||||||||||||||||
The following table sets forth the changes in the Standardized Measure of discounted future net cash flows attributable to estimated net proved oil and natural gas reserves of Matador and Advance on a pro forma combined basis for the year ending December 31, 2022. Future estimated income tax expense of Advance was calculated based on Xxxxxxx’s tax assumptions as Advance was a limited liability company not subject to entity-level federal income taxation as of December 31, 2022 and 2021.
| (in thousands) | As of December 31, 2022 | ||||||||||||||||||||||
| Matador | Advance | Pro Forma Combined | |||||||||||||||||||||
| Oil and natural gas producing properties: | |||||||||||||||||||||||
| Balance, beginning of year | $ | 4,375,425 | $ | 1,578,819 | $ | 5,954,244 | |||||||||||||||||
| Net change in sales and transfer prices in production (lifting) costs related to future production | 4,046,504 | 669,447 | 4,715,951 | ||||||||||||||||||||
| Changes in estimated future development costs | (744,687) | (302,904) | (1,047,591) | ||||||||||||||||||||
| Sales and transfers of oil and natural gas produced during the period | (2,466,440) | (611,470) | (3,077,910) | ||||||||||||||||||||
| Net purchases of reserves in place | 28,841 | 58,922 | 87,763 | ||||||||||||||||||||
| Net change due to extensions and discoveries | 2,017,170 | 2,542,818 | 4,559,988 | ||||||||||||||||||||
| Net change due to revisions in estimates of reserves quantities | (8,576) | (531,527) | (540,103) | ||||||||||||||||||||
| Previously estimated development costs incurred during the period | 434,336 | 523,943 | 958,279 | ||||||||||||||||||||
| Accretion of discount | 475,474 | 201,994 | 677,468 | ||||||||||||||||||||
| Other | 1,982 | (33,897) | (31,915) | ||||||||||||||||||||
| Net change in income taxes | (1,176,826) | (549,638) | (1,726,464) | ||||||||||||||||||||
| Standardized measure of discounted future net cash flows | $ | 6,983,203 | $ | 3,546,507 | $ | 10,529,710 | |||||||||||||||||
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