EXHIBIT 99.2

 

Acquired Lynden USA Inc. Properties

Statements of Revenues and Direct Operating Expenses

For the Year Ended December 31, 2012 and the Nine Months Ended

September 30, 2012 and 2013

 

 

 

	JOHNSON MILLER & CO., CPA’s		Midland, Texas
	Certified Public Accountants		Odessa, Texas
	A Professional Corporation		Hobbs, New Mexico
	An Independent Member Of BDO Seidman Alliance

 

Independent Auditors’ Report

 

To the Board of Directors

of Lynden USA Inc.

Suite 2480, 1055 West Georgia Street

Vancouver, BC V6E0B6

 

We have audited the accompanying Statement of Revenues and Direct Operating Expenses of the Acquired Lynden Properties (the “Statement” or “Company”), for the year ended December 31, 2012.

 

Management’s Responsibility for the Financial Statement

 

Management is responsible for the preparation and fair presentation of this financial statement in accordance 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 from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free from 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 Company’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.

 

The accompanying Statement was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note A. The presentation is not intended to be a complete presentation of the results of operations of the Acquired Lynden Properties.

 

550 West Texas, Suite 1000 · Midland, Texas 79701 · (432) 683-1835 (432) 563-5085 · Fax (432) 686-0571

jmcpa.com

 

 

Opinion

 

In our opinion, the Statement referred to above presents fairly, in all material respects, the Revenues and Direct Operating Expenses of the Acquired Lynden Properties for the year ended December 31, 2012, in accordance with accounting principles generally accepted in the United States of America.

 

Midland, Texas February 21, 2014

  

  

Acquired Lynden USA Inc. Properties

Statements of Revenues and Direct Operating Expenses

For the Year Ended December 31, 2012 and the Nine Months Ended

September 30, 2012 and 2013

  

		Year Ended				Nine Months Ended (Unaudited)
		December 31,				September 30,
(In thousands)		2012				2012				2013
Revenues
Oil Sales		$	964			$	334			$	3,143
Natural gas sales		$	216			$	38			$	696
Total revenues		$	1,180			$	372			$	3,839
Direct operating expenses:
Lease operating expenses		$	56			$	30			$	279
Production Taxes		$	59			$	16			$	186
Total direct operating expenses		$	115			$	46			$	465
Revenues in excess of direct operating expenses		$	1,065			$	326			$	3,374

  

See accompanying notes to these statements of revenues and direct operating expenses.

  

Acquired Lynden USA Inc. Properties

Notes to Statements of Revenues and Direct Operating Expenses

For the Year Ended December 31, 2012 and the Nine Months Ended

September 30, 2012 and 2013

 

A.

Summary of Significant Accounting Policies

 

Basis of presentation

 

On December 11, 2013, Lynden USA Inc. (the “Company”) executed an agreement to sell approximately 1,000 gross (430 net) acres of developed and undeveloped oil and natural gas properties along with working interest in 12 gross (4.7 net) developed wells in the Wolfberry play in West Texas to BreitBurn Operating, L.P. (“BreitBurn”) for $19.3 million in cash subject to customary purchase price adjustments. The effective date of the sale was December 30, 2013. The transaction closed on December 30, 2013.

 

The accompanying statements present revenues and direct operating expenses of working interests in these oil and natural gas producing properties acquired by BreitBurn. The properties are referred to herein as the “Acquired Lynden USA Properties.”

 

The accompanying statements of operating revenues and direct operating expenses were derived from the historical accounting records of the Company and are presented on the accrual basis of accounting. Such amounts may not be representative of future operations. The statements do not include depreciation, depletion and amortization, general and administrative expenses, income taxes or interest expense as these costs may not be comparable to the expenses expected to be incurred by BreitBurn on a prospective basis.

 

Historical financial statements reflecting financial position, results of operations and cash flows required by accounting principles generally accepted in the United States of America are not presented as such information is not readily available on an individual property basis and not meaningful to the Lynden USA Inc. properties acquired. Accordingly, the historical statements of revenues and direct operating expenses are presented in lieu of the financial statements required under Rule 3-05 of the Securities and Exchange Commission Regulation S-X.

 

The statements of revenues and direct operating expenses of the Acquired Lynden USA Inc. Properties for the nine months ended September 30, 2012 and September 30, 2013 are unaudited. In the opinion of the Company’s management, such statements include the adjustments and accruals which are necessary for a fair presentation of results for the properties. These interim results are not necessarily indicative of results for a full year.

 

Use of estimates

 

Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. The estimates include oil and natural gas reserve quantities. Management emphasizes that reserve estimates are inherently imprecise and that estimates of more recent reserve discoveries are more imprecise than those for properties with long production histories. Actual results could differ from these estimates.

  

 

Revenue recognition

 

The Company uses the accrual method of accounting for crude oil and natural gas revenues. Sales of crude oil, natural gas liquids (“NGL”) and natural gas are recognized when the delivery to the purchaser has occurred and title has been transferred. This occurs when oil or natural gas has been delivered to a pipeline or a tank lifting has occurred. Crude oil is priced on the average monthly settlement price during the calendar month of the delivery month based upon prevailing prices published by purchasers with certain adjustments related to oil quality and physical location. Virtually all of the Company’s natural gas contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of natural gas, and prevailing supply and demand conditions, so that the price of the natural gas fluctuates to remain competitive with other available natural gas supplies.

 

Risk and uncertainties

 

Historically, the market for oil and natural gas has experienced significant price fluctuations. Prices are impacted by supply and demand, both domestic and international, seasonal variations caused by changing weather conditions, political conditions, governmental regulations, the availability, proximity and capacity of gathering systems for natural gas, and numerous other factors. Increases or decreases in prices received could have a significant impact on BreitBurn’s future results of operations, reserves estimates and financial position.

 

Estimating oil and natural gas reserves is complex and is not exact because of the numerous uncertainties inherent in the process. The process relies on interpretations of available geological, geophysical, petrophysical, engineering and production data. The extent, quality and reliability of both the data and the associated interpretations of that data can vary. The process also requires certain economic assumptions, including, but not limited to, oil and natural gas prices, drilling and operating expenses, capital expenditures, and taxes. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas most likely will vary from the Company’s estimates. Any significant variance could materially affect the Company’s future results of operations, reserves estimates and financial position.

 

B.

Subsequent Events

 

In accordance with the Financial Accounting Standards Board, Accounting Standards Codification Topic 855, the Company’s management has evaluated subsequent events through February 21, 2014, the date the accompanying statements of revenues and direct operating expenses were available to be issued. There were no material subsequent events that required recognition or additional disclosure in the accompanying statements of revenues and direct operating expenses.

 

C.

Supplemental Information on Oil and Natural Gas Exploration and Production Activities (Unaudited)

 

Costs Incurred in Oil and Natural Gas Property Acquisition and Development Activities

 

Costs incurred in oil and natural gas property acquisition and development activities of the Acquired Lynden USA Properties Inc. are as follows for the year ended December 31, 2012:

 

(in thousands)
Property acquisition Costs:
Proved		$	-
Unproved			6
Development Costs			-
Exploration Costs			4,861
Total costs incurred for oil and natural gas properties		$	4,867

  

 

Oil and Natural Gas Reserves

 

The Company has presented the reserve estimates of the Acquired Lynden USA Properties utilizing an oil price of $91.21 per Bbl and a natural gas price of $2.76 per Mcf as of December 31, 2012.

 

The Company’s estimated reserves at December 31, 2012 were based on reserve reports prepared by a third party engineer. The proved oil and natural gas reserve estimates of the Company have been prepared in compliance with the Securities and Exchange Commission rules and accounting standards based on the 12-month un-weighted first-day-of-the-month average price.

 

The reserve disclosures that follow reflect estimates of proved reserves, proved developed reserves and proved undeveloped reserves, net of third-party royalty interests, of natural gas, crude oil and condensate, and NGLs owned at year end. Natural gas volumes are in millions of cubic feet (MMcf) at a pressure base of 14.73 pounds per square inch and volumes for oil are in thousands of barrels (MBbls).

 

The Company’s estimates of proved reserves are made using available production performance data, as well as pertinent geologic and reservoir data. These estimates are reviewed annually by an independent third party and revised, either upward or downward as warranted by additional data. Revisions are necessary due to changes in, among other things, reservoir performance, prices, economic conditions and governmental restrictions, as well as changes in the expected recovery associated with infill drilling.

 

The Acquired Lynden USA Properties and associated reserves are located in the continental United States. The following table provides a rollforward of the total proved reserves of the Acquired Lynden USA Inc. Properties for the year ended December 31, 2012. Oil volumes are expressed in MBbls and natural gas volumes are expressed in MMcf.

 

		Oil				Gas
		(MBbls)				(MMcf)
Proved reserves, beginning of year			33				72
Revisions of previous estimates			5				66
Extensions and discoveries			197				422
Acquisitions of minerals in place			456				1,646
Production			(11	)			(53	)
End of year			680				2,153
Proved developed reserves, end of year			247				1,000
Proved undeveloped reserves, end of year			433				1,153

 

Standardized Measure of Discounted Future Net Cash Flows

 

Reserve estimates and discounted future net cash flows are based on the unweighted average market prices for sales of oil and natural gas on the first calendar day of each month during the year. Cash flows are adjusted for transportation fees and regional price differentials, to the estimated future production of proved oil and natural gas reserves less estimated future expenditures to be incurred in developing and producing the proved reserves, discounted using an annual rate of 10% to reflect the estimated timing of the future cash flows. Income taxes are excluded due to the nature of the revenue and direct expense financial statements presented. Extensive judgments are involved in estimating the timing of production and the costs that will be incurred throughout the remaining lives of the properties.

  

 

Accordingly, the estimates of future net cash flows from proved reserves and the present value may be materially different from subsequent actual results. The standardized measure of discounted net cash flows does not purport to present, nor should it be interpreted to present, the fair value of the properties’ oil and natural gas reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, and anticipated future changes in prices and costs.

 

The table below reflects the standardized measure of discounted future net cash flows related to the Company’s interest in proved reserves of the Acquired Lynden USA Inc. Properties at December 31, 2012.

 

(in thousands)
Future cash inflows		$	76,725
Future costs:
Development			(13,473	)
Production			(23,955	)
10% discount to reflect timing of cash flows			(26,146	)
Standardized measure of discounted future net cash flows		$	13,151

 

Changes in Standardized Measure of Discounted Future Net Cash Flows

 

The following table provides a rollforward of the standardized measure of discounted future net cash flows of the Acquired Lynden USA Properties for the year ended December 31, 2012.

 

(in thousands)
Beginning of year		$	567
Purchase of reserves in place			10,214
Extensions, discoveries, and improved recoveries, net of future developmental costs			2,643
Revisions of quantity estimates			105
Changes in estimated future development costs, net			(6,294	)
Net changes in prices			(19	)
Oil and natural gas sales, net of production costs			(1,065	)
Changes of production rates and other			6,943
Accretion of discount			57
End of year		$	13,151