UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

 

For the quarterly period ended April 30, 2015

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

 

For the transition period from _________ to _________

 

Commission file number 001-34945

 

TRIANGLE PETROLEUM CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

1200 17th Street, Suite 2600

Denver, CO 80202

(Address of Principal Executive Offices)

 

(303) 260-7125

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes  ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐   No ☒

 

As of June 4, 2015, there were 75,385,334 shares of the registrant’s common stock outstanding.

 

 

 

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TRIANGLE PETROLEUM CORPORATION AND SUBSIDIARIES

 

INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2015

 

 

 

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this report and other materials we file with the U.S. Securities and Exchange Commission (“SEC”), or in other written or oral statements made or to be made by us, other than statements of historical fact, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect our current expectations or forecasts of future events. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “could,” “would,” “will,” “may,” “can,” “continue,” “potential,” “likely,” “should,” and the negative of these terms or other comparable terminology, often identify forward-looking statements. Statements in this quarterly report that are not statements of historical facts are hereby identified as forward-looking statements for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”).

 

These forward-looking statements include, but are not limited to, statements about our:

 

 

Actual results or developments may be different than we anticipate or may have unanticipated consequences to, or effects on, us or our business or operations. All of the forward-looking statements made in this report are qualified by the discussion of risks and uncertainties under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015, and in our other public filings with the SEC. Although the expectations reflected in the forward-looking statements are based on our current beliefs and expectations, undue reliance should not be placed on any such forward-looking statements due to the risks and uncertainties noted above and because such statements speak only as of the date hereof. Except as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this report and in our future reports filed with the SEC. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report may not occur.

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

 

Triangle Petroleum Corporation

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)

 

 

 

 

See notes to condensed consolidated financial statements.

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Triangle Petroleum Corporation

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)

 

 

 

 

See notes to condensed consolidated financial statements.

 

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Triangle Petroleum Corporation

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)

 

 

 

See notes to condensed consolidated financial statements.

 

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Triangle Petroleum Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

See notes to condensed consolidated financial statements.

 

 

 

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Triangle Petroleum Corporation

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)

For the Three Months Ended April 30, 2015

(in thousands, except share data)

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.   DESCRIPTION OF BUSINESS

 

Triangle Petroleum Corporation (“Triangle,” the “Company,” “we,” “us,” “our,” or “ours”) is an independent energy holding company with three principal lines of business: oil and natural gas exploration, development, and production; oilfield services; and midstream services.

 

We hold leasehold interests and conduct our operations in the Williston Basin of North Dakota and Montana.  Our core focus area is predominantly located in McKenzie and Williams Counties, North Dakota, and eastern Roosevelt and Sheridan Counties, Montana.  We conduct our exploration and production operations through our wholly-owned subsidiary, Triangle USA Petroleum Corporation (“TUSA”).

 

In June 2011, we formed RockPile Energy Services, LLC (“RockPile”), a wholly-owned subsidiary, which provides oilfield and complementary well completion services to oil and natural gas exploration and production companies predominantly in the Williston Basin.  RockPile began operations in July 2012.

 

In September 2012, through our wholly-owned subsidiary, Triangle Caliber Holdings, LLC, we formed Caliber Midstream Partners, L.P. (“Caliber”), an unconsolidated joint venture with First Reserve Energy Infrastructure Fund (“FREIF”).  Caliber was formed for the purpose of providing oil, natural gas and water transportation and related services to oil and natural gas exploration and production companies in the Williston Basin.

 

The Company, through its wholly-owned subsidiary, Elmworth Energy Corporation (“Elmworth”), previously conducted insignificant exploration and production activities in Canada.  Elmworth has since sold all leasehold interests except for acreage in the Maritimes Basin of Nova Scotia.  Elmworth has ceased all exploration and production activities in Canada except for reclaiming five wells, the drilling site and brine ponds on its Nova Scotia acreage.  Elmworth has no proved reserves and its oil and natural gas properties were fully impaired as of January 31, 2012.

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation.  These unaudited condensed consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and are expressed in U.S. dollars.  Preparation in accordance with GAAP requires us to (i) adopt accounting policies within accounting rules set by the Financial Accounting Standards Board (“FASB”) and by the Securities and Exchange Commission (“SEC”), and (ii) make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and other disclosed amounts.  

 

Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations. We believe the disclosures made are adequate to make the information not misleading. We recommend that these unaudited condensed consolidated financial statements be read in conjunction with our audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015, as filed with the SEC (“Fiscal 2015 Form 10-K”). In the opinion of management, all material adjustments considered necessary for a fair presentation of the Company’s interim results have been reflected. All such adjustments are considered to be of a normal recurring nature. The results for interim periods are not necessarily indicative of annual results.

 

No condensed consolidated statement of comprehensive income (loss) is presented because the Company had no comprehensive income or loss activity in the periods presented.

 

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Use of Estimates.  In the course of preparing its condensed consolidated financial statements, management makes various assumptions, judgments, and estimates to determine the reported amount of assets, liabilities, revenue, and expenses, and in the disclosures of commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events and, accordingly, actual results could differ from amounts initially established. Significant areas requiring the use of assumptions, judgments and estimates include (i) oil and natural gas reserves; (ii) cash flow estimates used in ceiling tests of oil and natural gas properties; (iii) depreciation and amortization; (iv) impairment of undeveloped properties and other assets; (v) assigning fair value and allocating purchase price in connection with business combinations; (vi) accrued revenue and related receivables; (vii) valuation of commodity derivative instruments and equity derivative instruments; (viii) accrued liabilities; (ix) valuation of share-based payments and (x) income taxes. Although management believes these estimates are reasonable, actual results could differ from these estimates. The Company has evaluated subsequent events and transactions for matters that may require recognition or disclosure in these condensed consolidated financial statements.

 

Principles of Consolidation.  The accounts of Triangle and its wholly-owned subsidiaries are presented in the accompanying condensed consolidated financial statements.  All significant intercompany transactions and balances are eliminated in consolidation.  Triangle generally uses the equity method of accounting for investments in entities in which Triangle has an ownership between 20% and 50% and exercises significant influence. The investment in Caliber is accounted for utilizing the equity method of accounting.  

 

Oil and Natural Gas Properties.  The Company follows the full-cost method of accounting for its oil and natural gas properties. Under this method of accounting, all costs incurred for both successful and unsuccessful exploration and development activities, including salaries, benefits and other internal costs directly identified with these activities, and oil and natural gas property acquisitions are capitalized. The net book value of oil and natural gas properties, less related deferred income taxes, may not exceed a calculated “ceiling.” The ceiling limitation is the estimated after-tax future net cash flows from proved oil and natural gas reserves, discounted at ten percent per annum.  Estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous twelve months, held flat for the life of the production, except where prices are defined by contractual arrangements.

 

Any excess of the net book value of proved oil and natural gas properties, less related deferred income taxes, over the ceiling is charged to expense and reflected as “Impairment of oil and natural gas properties” in the accompanying condensed consolidated statements of operations. The ceiling limitation is evaluated quarterly.

 

At April 30, 2015, the carrying value of our oil and natural gas properties exceeded the calculated value of the ceiling limitation resulting in an impairment of $192.0 million.  Triangle will likely be required to recognize an additional impairment of oil and natural gas properties in future periods if oil and natural gas prices remain at current levels or continue to decline and such impairment will likely be material.

 

Oilfield Services Equipment and Other Property and Equipment.  Oilfield services equipment and other property and equipment consisted of the following as of:

 

 

 

Income Taxes.  The Company computes its quarterly tax provision using the effective tax rate method based on applying the anticipated annual effective rate to its year-to-date income or loss, except for discrete items.  Income tax on discrete items is computed and recorded in the period in which the specific transaction occurs.

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As noted above, the carrying value of our oil and natural gas properties exceeded the calculated value of the ceiling limitation resulting in an impairment of $192.0 million.  This impairment results in Triangle having three years of cumulative historical pre-tax losses and a net deferred tax asset position.  Additionally, Triangle will likely be required to recognize additional impairments of its oil and natural gas properties in future periods if oil and natural gas prices remain at current levels or continue to decline and such impairments will likely be material. Triangle also had net operating loss carryovers ("NOLs") for federal income tax purposes of $136.9 million at January 31, 2015.  These losses and expected future losses were a key consideration that led Triangle to provide a valuation allowance against its net deferred tax assets as of April 30, 2015 since it cannot conclude that it is more likely than not that its net deferred tax assets will be fully realized in future periods.

 

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  At each reporting period, management considers the scheduled reversal of deferred tax liabilities, available taxes in carryback periods, tax planning strategies and projected future taxable income in making this assessment.  Future events or new evidence which may lead the Company to conclude that it is more likely than not that its net deferred tax assets will be realized include, but are not limited to, cumulative historical pre-tax earnings; sustained or continued improvements in oil prices; and taxable events that could result from one or more transactions.  The Company will continue to evaluate whether the valuation allowance is needed in future reporting periods.

 

In the current period the Company recorded the benefit of reversing its net deferred tax liability.  As long as the Company concludes that it will continue to have a need for a valuation allowance against its net deferred tax assets, the Company likely will not have any additional income tax expense or benefit other than for federal alternative minimum tax expense, a release of a portion of the valuation allowance for net operating loss carryback claims or for state income taxes.

 

As of April 30, 2015, the Company had no unrecognized tax benefits.  The Company’s management does not believe that there are any new items or changes in facts or judgments that should impact the Company’s position during the first three months of fiscal year 2016.  Given the substantial net operating loss carryforwards at both the federal and state levels, neither significant interest expense nor penalties charged for any examining agents’ tax adjustments of income tax returns are anticipated, as any such adjustments would very likely only adjust net operating loss carryforwards.

 

Earnings per Share.  Basic earnings per common share is computed by dividing net income (loss) attributable to the common stockholders by the weighted average number of common shares outstanding during the reporting period.  Diluted net income per common share reflects increases in average shares outstanding from the potential dilution, under the treasury stock method, that could occur upon (i) exercise of stock options, (ii) vesting of restricted stock units, and (iii) conversion of convertible debt. The treasury stock method assumes exercise, vesting or conversion at the beginning of a period for securities outstanding at the end of a period. Also, the treasury stock method for calculating dilution assumes that the increase in the number of shares is reduced by the number of shares which could have been repurchased by the Company at the quarter’s average stock price using assumed proceeds from (a) the exercise cost of the options and (b) the foregone future compensation expense of hypothetical early vesting of the outstanding restricted stock units.  The assumed proceeds are adjusted for income tax effects.  In the event of a net loss, no potential common shares are included in the calculation of shares outstanding, as their inclusion would be anti-dilutive.

 

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The following table details the weighted average dilutive and anti-dilutive securities, which consist of options and unvested restricted stock, for the periods presented:

 

The table below sets forth the computations of net income (loss) per common share (basic and diluted) for the periods presented:

 

Reclassifications.  Certain amounts in our unaudited condensed consolidated statement of operations for the three months ended April 30, 2014 have been reclassified to conform to the financial statement presentation for the period ended April 30, 2015.  The unaudited condensed consolidated statement of operations reclassifications relate to the break out of amortization of deferred loan costs from interest expense and amounts related to revisions in the Elmworth abandonment obligation that were reclassified from accretion of asset retirement obligations to depreciation and amortization expense. Such reclassifications had no impact on consolidated total assets, stockholders’ equity or net income previously reported.

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3.  SEGMENT REPORTING

 

We conduct our operations within two reportable operating segments.  We identified each segment based on management’s responsibility and the nature of their products, services, and costs.  There are no major distinctions in geographical areas served as nearly all operations are in the Williston Basin of the United States.  The Exploration and Production operating segment, consisting of TUSA and several insignificant oil and natural gas subsidiaries, is responsible for finding and producing oil and natural gas.  The Oilfield Services segment, consisting of RockPile and its subsidiaries, is responsible for a variety of oilfield and complementary services for both TUSA-operated wells and wells operated by third-parties.  Corporate and Other includes our corporate office and several subsidiaries that management does not consider to be part of the Exploration and Production or Oilfield Services segments.  Also included in Corporate and Other are our results from our investment in Caliber, including any changes in the fair value of our equity investment derivatives. 

 

Management evaluates the performance of our segments based upon net income (loss) before income taxes.  The following tables present selected financial information for our operating segments for the three months ended April 30, 2015 and 2014.

 

 

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Certain income statement reclassifications were made as previously noted, as well as changes to reflect the Exploration and Production depreciation and amortization expense gross rather than net of consolidating eliminations.

 

Eliminations and Other.  For consolidation, intercompany revenues and expenses are eliminated with a corresponding reduction in Triangle’s capitalized well costs.

 

Under the full cost method of accounting, we defer recognition of oilfield services income (intersegment revenues less cost of oilfield services and related depreciation) for wells that we operate and this deferred income is credited to proved oil and natural gas properties. In addition, we eliminate our non-operating partners’ share of oilfield services income for well completion activities on properties we operate. We also defer Caliber gross profit from our share of its income associated with services it provided that were capitalized by TUSA, by charging such gross profit against income from equity investment and crediting proved oil and natural gas properties.

 

The above deferred income is indirectly recognized in future periods through a lower amortization rate as proved reserves are produced. For the three months ended April 30, 2015 and 2014, $0.5 and $1.4 million, respectively, of the depreciation and amortization elimination relates to the Exploration and Production segment and the balance relates to the Oilfield Services segment.

 

These differences, as well as differing amounts for impairments, result in basis differences between the net oil and gas property amounts presented in Triangle’s financial statements compared to those presented in TUSA’s standalone financial statements.

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4.   LONG-TERM DEBT

 

The Company’s long-term debt consisted of the following as of January 31, 2015 and April 30, 2015:

 

 

Convertible Note.  On July 31, 2012, the Company sold to NGP Triangle Holdings, LLC a 5% convertible note with an initial principal amount of $120.0 million (the “Convertible Note”) that became convertible after November 16, 2012 into the Company’s common stock at a conversion rate of one share per $8.00 of note principal.

 

The Convertible Note accrues interest at a rate of 5.0% per annum, compounded quarterly, on each December 31, March 31, June 30 and September 30, and on the date of any redemption, conversion or exchange of the Convertible Note.  Such interest is paid-in-kind by adding to the principal balance of the Convertible Note, provided that, after October 31, 2017, the Company has the option to make such interest payments in cash.  As of April 30, 2015,  $17.6 million of accrued interest has been added to the principal balance of the Convertible Note.

 

TUSA Credit Facility.  On April 11, 2013, TUSA entered into an Amended and Restated Credit Agreement, which was subsequently amended on various dates.  On November 25, 2014, TUSA entered into a Second Amended and Restated Credit Agreement, which provides for a $1.0 billion senior secured revolving credit facility, with a sublimit for the issuance of letters of credit equal to $15.0 million.  The TUSA credit facility has a maturity date of October 16, 2018.

 

On April 30, 2015, TUSA entered into Amendment No. 1 to its Second Amended and Restated Credit Agreement (“Amendment No. 1”) to, among other things, replace the existing total funded debt leverage ratio with a senior secured leverage ratio, add an interest coverage ratio, and add an equity cure right for non-compliance with financial covenants.  The May 2015 semi-annual redetermination of the borrowing base was conducted concurrently with the execution of Amendment No. 1, and the borrowing base was adjusted from $435.0 million to $350.0 million.

 

Borrowings under the TUSA credit facility bear interest, at TUSA’s option, at either (i) the adjusted base rate (the highest of (A) the administrative agent’s prime rate, (B) the federal funds rate plus 0.50%, or (C) the one month Eurodollar rate (as defined in the agreement) plus 1.0%), plus an applicable margin that ranges between 0.50% and 1.50%, depending on TUSA’s utilization percentage of the then effective borrowing base, or (ii) the Eurodollar rate plus an applicable margin that ranges between 1.50% and 2.50%, depending on TUSA’s utilization percentage of the then effective borrowing base.

 

The lenders will redetermine the borrowing base under the TUSA credit facility on a semi-annual basis by May 1 and November 1.  In addition, each of TUSA and the lenders may request an unscheduled borrowing base redetermination twice during each calendar year.  If at any time the borrowing base is less than the amount of outstanding credit exposure under the TUSA credit facility, TUSA will be required to (i) prepay the principal amount of the loans in an amount sufficient to eliminate the excess, (ii) pledge additional collateral, (iii) prepay the excess in three equal monthly installments, or (iv) any combination of options (i) through (iii).  TUSA will pay a commitment fee that ranges between 0.375% and 0.50% per annum on the unused availability under the TUSA credit facility. The TUSA credit facility is collateralized by certain of TUSA’s assets, including (1) at least 80% of the adjusted engineered value of TUSA’s oil and natural gas interests evaluated in determining the borrowing base for the facility, and (2) all of the personal property of TUSA and its subsidiaries.  The obligations under the TUSA credit facility are guaranteed by TUSA’s domestic subsidiaries, but Triangle is not a guarantor.

 

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The TUSA credit facility contains various covenants and restrictive provisions that may, among other things, limit TUSA’s ability to sell assets, incur additional indebtedness, pay dividends, make investments or loans and create liens.  In addition, the facility contains financial covenants requiring TUSA to maintain specified ratios of consolidated current assets to consolidated current liabilities, consolidated senior secured debt to consolidated EBITDAX, and interest to consolidated EBITDAX.  As of April 30, 2015, TUSA was in compliance with all covenants under the TUSA credit facility.

 

RockPile Credit Facility.  On March 25, 2014, RockPile entered into a Credit Agreement to provide a $100.0 million senior secured revolving credit facility.  On November 13, 2014, RockPile entered into Amendment No. 1 to Credit Agreement and Incremental Commitment Agreement, which amended the credit facility to increase the borrowing capacity under the facility from $100.0 million to $150.0 million.  The RockPile credit facility has a maturity date of March 25, 2019.

 

Borrowings under the RockPile credit facility bear interest, at RockPile’s option, at either (i) the alternative base rate (the highest of (a) the administrative agent’s prime rate, (b) the federal funds rate plus 0.5%, or (c) the one-month adjusted Eurodollar rate (as defined in the agreement) plus 1.0%), plus an applicable margin that ranges between 1.5% and 2.25%, depending on RockPile’s leverage ratio as of the last day of RockPile’s most recently completed fiscal quarter, or (ii) the Eurodollar rate plus an applicable margin that ranges between 2.50% and 3.25%, depending on RockPile’s leverage ratio as of the last day of RockPile’s most recently completed fiscal quarter.

 

RockPile will pay a commitment fee that ranges between 0.375% and 0.50% per annum on the unused availability under the RockPile credit facility.  RockPile will also pay a per annum fee on all letters of credit issued under the RockPile credit facility, which will equal the applicable margin for loans accruing interest based on the Eurodollar rate and a fronting fee to the issuing lender equal to 0.125% of the letter of credit amount.  Triangle is not a guarantor under the RockPile credit facility.  

 

The RockPile credit facility contains financial covenants requiring RockPile to maintain specified ratios of consolidated debt to EBITDA and Adjusted EBITDA to Fixed Charges.  Amendment No. 1 also modified covenants in the RockPile credit facility related to certain restrictions on the payment of dividends and distributions and increased the amount of permitted capital expenditures.  As of April 30, 2015, RockPile was in compliance with all financial covenants under the RockPile credit facility.

 

TUSA 6.75% Notes.  On July 18, 2014, TUSA entered into an Indenture (the “Indenture”) among TUSA, a TUSA wholly-owned subsidiary as guarantor, and Wells Fargo Bank, National Association, as trustee, governing the terms of TUSA’s $450.0 million aggregate principal amount of 6.75% Notes due 2022 (the “TUSA 6.75% Notes”).

 

The TUSA 6.75% Notes were issued in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), to qualified institutional buyers in accordance with Rule 144A and to persons outside of the United States pursuant to Regulation S under the Securities Act.  The TUSA 6.75% Notes are senior unsecured obligations of TUSA and are guaranteed on a senior unsecured basis by the initial guarantor and another TUSA wholly-owned subsidiary that became a guarantor of the TUSA 6.75% Notes in early December 2014.  The TUSA 6.75% Notes have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

 

The TUSA 6.75% Notes bear interest at a rate of 6.75% per year, accruing from July 18, 2014.  Interest on the TUSA 6.75% Notes is payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2015.  The TUSA 6.75% Notes will mature on July 15, 2022, subject to earlier repurchase or redemption in accordance with the terms of the Indenture.  The Company incurred $10.5 million of offering costs which have been deferred and are being recognized on the effective interest method over the life of the notes.

 

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TUSA may redeem some or all of the TUSA 6.75% Notes at any time prior to July 15, 2017 at a price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest, if any, to the redemption date and a make-whole premium set forth in the Indenture.  On or after July 15, 2017, TUSA may redeem some or all of the TUSA 6.75% Notes at any time at redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to the redemption date.  In addition, at any time prior to July 15, 2017, TUSA may redeem up to 35% of the aggregate principal amount of the TUSA 6.75% Notes at a specified redemption price set forth in the Indenture plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds of certain equity offerings.  If TUSA experiences certain change of control events, TUSA must offer to repurchase the TUSA 6.75% Notes at 101% of their principal amount, plus accrued and unpaid interest, if any, to the redemption date.

 

The Indenture permits TUSA to purchase TUSA 6.75% Notes in the open market.  In fiscal year 2015, TUSA repurchased TUSA 6.75% Notes with a face value of $20.5 million for $13.9 million.  TUSA immediately retired the repurchased notes and recognized a gain on extinguishment of debt of $6.6 million.

 

The Indenture contains covenants that, among other things, restrict TUSA’s ability and the ability of any guarantor subsidiary to sell certain assets; make certain dividends, distributions, investments and other restricted payments; incur certain additional indebtedness and issue preferred stock; create certain liens; enter into transactions with affiliates; designate subsidiaries as unrestricted subsidiaries, and consolidate, merge or sell substantially all of TUSA’s assets.  These covenants are subject to a number of important exceptions and qualifications.  As of April 30, 2015, TUSA was in compliance with all covenants under the TUSA 6.75% Notes.

 

 

5.  HEDGING AND COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS

 

Through TUSA, the Company has entered into commodity derivative instruments utilizing costless collars and swaps to reduce the effect of price changes on a portion of our future oil production.  A collar requires us to pay the counterparty if the settlement price is above the ceiling price, and requires the counterparty to pay us if the settlement price is below the floor price.  The objective of the Company’s use of derivative financial instruments is to achieve more predictable cash flows in an environment of volatile oil and natural gas prices and to manage its exposure to commodity price risk.  While the use of these derivative instruments limits the downside risk of adverse price movements, such use may also limit the Company’s ability to benefit from favorable price movements.  The Company may, from time to time, add incremental derivatives to hedge additional production, restructure existing derivative contracts, or enter into new transactions to modify the terms of current contracts in order to realize the current value of the Company’s existing positions.  The Company does not enter into derivative contracts for speculative purposes.

 

The use of derivatives involves the risk that the counterparties to such instruments will be unable to meet the financial terms of such contracts.  The Company’s derivative contracts are currently with four counterparties.  The Company has netting arrangements with each counterparty that provide for the offset of payables against receivables from separate derivative arrangements with the same underlier with the counterparty in the event of contract termination.  The derivative contracts may be terminated by a non-defaulting party in the event of default by one of the parties to the agreement.

 

The Company’s commodity derivative instruments are measured at fair value.  The Company has not designated any of its derivative contracts as fair value or cash flow hedges.  Therefore, the Company does not apply hedge accounting to its commodity derivative instruments.  Net gains and losses on derivative activities are recorded based on the changes in the fair values of the derivative instruments.  Net gains and losses on derivative activities are recorded in the commodity derivatives gains (losses) caption on the consolidated statements of operations.  The Company’s cash flows are only impacted when the actual settlements under the commodity derivative contracts result in a payment to or from the counterparty.  These settlements under the commodity derivative contracts are reflected as operating activities in the Company’s consolidated statements of cash flows. 

 

The components of commodity derivative gains (losses) in the consolidated statements of operations are as follows (in thousands):

 

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The Company’s commodity derivative contracts as of April 30, 2015 are summarized below:

 

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The estimated fair values of commodity derivatives included in the consolidated balance sheets at January 31, 2015 and April 30, 2015 are summarized below. The Company does not offset asset and liability positions with the same counterparties within the consolidated financial statements; rather, all contracts are presented at their gross estimated fair value. As of the dates indicated, the Company’s derivative assets and liabilities are presented below (in thousands). These balances represent the estimated fair value of the contracts. The Company has not designated any of its derivative contracts as cash-flow hedging instruments for accounting purposes. The main headings represent the balance sheet captions for the contracts presented (in thousands).

 

 

 

 

 

6.  ACQUISITIONS

In June 2014, we acquired from Marathon Oil Company (“Marathon”) certain oil and natural gas leaseholds and related producing properties located in Williams County, North Dakota, Sheridan County, Montana, and Roosevelt County, Montana comprising approximately 41,100 net acres and various other related rights, permits, contracts, equipment and other assets for approximately $90.4 million in cash, net of certain closing adjustments of $9.6 million.  

The acquisition was accounted for using the acquisition method under ASC-805, Business Combinations, which requires the assets acquired and liabilities assumed to be recorded at fair value as of the acquisition date of June 30, 2014.  

 

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The following unaudited pro forma financial information represents the combined results for the Company and the properties acquired from Marathon, in June of 2014, as if the acquisitions had occurred on February 1, 2014.  

 

 

 

The pro forma information includes the effects of adjustments for depreciation and amortization expense of $2.0 million for the first quarter of fiscal year 2015. The pro forma results do not include any cost savings that may result from the acquisition or any estimated costs that have been or will be incurred by the Company to integrate the properties acquired.  The pro forma results are not necessarily indicative of what actually would have occurred if the transactions had been completed as of the beginning of the period, nor are they necessarily indicative of future results.

 

7.  EQUITY INVESTMENT AND EQUITY INVESTMENT DERIVATIVES

 

Equity Investment. On October 1, 2012, Triangle Caliber Holdings, LLC (“Triangle Caliber Holdings”), a wholly-owned subsidiary of Triangle, entered into a joint venture with FREIF Caliber Holdings LLC (“FREIF Caliber Holdings”), a wholly-owned subsidiary of FREIF. The joint venture entity, Caliber, was formed to provide crude oil, natural gas and water transportation and related services to the Company and third parties primarily within the Williston Basin of North Dakota and Montana.

 

On January 31, 2015, Triangle Caliber Holdings entered into a series of agreements modifying its joint venture with FREIF.  In connection with the modifications, Triangle Caliber Holdings entered into a Second Amended and Restated Contribution Agreement, dated January 31, 2015 (the “2nd A&R Contribution Agreement”), with FREIF and the general partner of Caliber, which is owned and controlled equally between Triangle Caliber Holdings and FREIF.  Pursuant to the terms of the 2nd A&R Contribution Agreement, FREIF agreed to contribute an additional $34.0 million to Caliber in exchange for 2,720,000 Class A Units.  FREIF funded the $34.0 million contribution, and the additional 2,720,000 Class A Units were issued, on February 2, 2015.  Triangle made no capital contribution to Caliber in connection with the 2nd A&R Contribution Agreement or the issuance of the 2,720,000 Class A Units.  Following the issuance, FREIF holds 17,720,000 Class A Units, representing an approximate 71.7% Class A Units ownership interest in Caliber, and Triangle Caliber Holdings holds 7,000,000 Class A Units, representing an approximate 28.3% Class A Units ownership interest in Caliber.  Triangle recognized a gain in the first quarter of fiscal year 2016 of $2.9 million related to Caliber’s issuance of these 2,720,000 Class A Units to FREIF.

 

Also pursuant to the terms of the 2nd A&R Contribution Agreement, Triangle Caliber Holdings received warrants for the purchase of an additional 3,626,667 Class A Units, and FREIF received warrants for the purchase of an additional 906,667 Class A Units.   The warrants received by Triangle Caliber Holdings on February 2, 2015 included 2,357,334 Class A (Series 1 through 4) Warrants at strike prices and expiration dates noted below and 1,269,333 Class A (Series 6) Warrants with a strike price of $12.50 and an expiration date of February 2, 2018.  Triangle also recognized a gain of $0.2 million in the first quarter of fiscal year 2016 related to the fair value of the warrants issued, which will be amortized over the lives of the related warrants.

 

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The following summarizes the Company’s equity investment holdings in Caliber as of January 31, 2015 and April 30, 2015 and the strike prices for exercising warrants as of April 30, 2015:

 

 

The following summarizes the activities related to the Company’s equity investment in Caliber for the three months ended April 30, 2015:

 

Equity Investment Derivatives.  At January 31, 2015 and April 30, 2015, the Company held Class A (Series 1 through Series 4 and Series 6) Warrants to acquire additional ownership in Caliber.  These instruments are considered to be equity investment derivatives and are valued at each reporting period using valuation techniques (a Monte Carlo Simulation (“MCS”) model) for which the inputs are generally less observable than from objective sources.

 

8.   CAPITAL STOCK

 

The Company had 106.5 million shares of common stock issued or reserved for issuance at April 30, 2015.  At April 30, 2015, the Company had 75.3 million shares of common stock issued and outstanding.  The Company also had 2.0 million shares of common stock reserved for issuance pursuant to outstanding awards under its 2011 Omnibus Incentive Plan and 2.9 million shares of common stock reserved for issuance pursuant to outstanding awards under its 2014 Equity Incentive Plan (the “2014 Plan”).  The Company also had 3.1 million shares of common stock reserved that remained available for issuance under the 2014 Plan, as well as 6.0 million shares of common stock reserved for issuance under the CEO Stand-Alone Stock Option Agreement.  Lastly, the Company had 17.2 million shares of common stock reserved for issuance pursuant to the Convertible Note at April 30, 2015.

 

The Company’s Board of Directors (the “Board”) approved a program authorizing the repurchase of outstanding shares of the Company’s common stock in amounts equal to the aggregate of (i) $25.0 million of the Company’s common stock (“Tranche 1”), (ii) up to the number of shares of common stock authorized for issuance under the Company’s 2014 Equity Incentive Plan and its CEO Stand-Alone Stock Option Agreement (“Tranche 2”), and (iii) up to the number of shares of common stock potentially issuable, at any given time, pursuant to the paid-in-kind interest accrued on the Convertible Note (“Tranche 3”).  The program stipulates that shares of common stock may be repurchased from time to time, in amounts and at prices that the Company deems appropriate, subject to market and business conditions and other considerations.   The repurchase program has no expiration date and may be suspended or discontinued at any time without prior notice.  There were no common stock repurchases for the three months ended April 30, 2015. As of April 30, 2015, the number of shares of common stock remaining available for repurchase under the Board approved program was 5,160,820 shares. 

 

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9.  SHARE-BASED COMPENSATION

 

The Company has granted equity awards to officers, directors, and certain employees of the Company including restricted stock units and stock options.  In addition, RockPile has granted Series B Units which represent interests in future RockPile profits.  The Company measures its awards based on the award’s grant date fair value which is recognized ratably over the applicable vesting period.

 

On May 27, 2014, the Board approved the 2014 Plan, which was approved by the Company’s stockholders on July 17, 2014.  No additional awards may be granted under prior plans but all outstanding awards under prior plans shall continue in accordance with their applicable terms and conditions.  The 2014 Plan authorizes the Company to issue stock options, SARs, restricted stock, restricted stock units, cash awards, and other awards to any employees, officers, directors, and consultants of the Company and its subsidiaries.  The maximum number of shares of common stock issuable under the 2014 Plan is 6.0 million shares, subject to adjustment for certain transactions.

 

For the three months ended April 30, 2014 and 2015, the Company recorded share-based compensation related to restricted stock units, stock options and RockPile Series B Units as follows:

 

Restricted Stock Units.  During the three months ended April 30, 2015, the Company granted 1,568,093 restricted stock units as compensation to employees, officers, and directors which generally vest over one to five years.  As of April 30, 2015, there was approximately $25.1 million of total unrecognized compensation expense related to unvested restricted stock units.  This compensation expense is expected to be recognized over the remaining vesting period of the related awards of approximately 3.6 years on a weighted average basis.  When restricted stock units vest, the holder has the right to receive one share of the Company’s common stock per vesting unit.  

 

The following table summarizes the activity for our restricted stock units during the three months ended April 30, 2015:  

 

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Stock Options.  There were no grants, exercises or forfeitures of stock options during the three months ended April 30, 2015.  The following table summarizes the stock options outstanding at April 30, 2015: 

 

 

 

As of April 30, 2015, there was approximately $17.9 million of total unrecognized compensation expense related to stock options.  This compensation expense is expected to be recognized over the remaining vesting period of the related awards of approximately 3.1 years.  

 

RockPile Share-Based Compensation.  RockPile currently has two classes of equity; Series A Units, which are voting units with an 8% preference, and Series B Units, which are non-voting equity awards. RockPile approved a plan that includes provisions allowing RockPile to make equity grants in the form of restricted units (“Series B Units”) pursuant to Restricted Unit Agreements. The plan authorizes RockPile to issue an aggregate of up to 6.0 million Series B Units in multiple series designated by a sequential number with the right to reissue forfeited or redeemed Series B Units.

 

The following table summarizes the activity for RockPile’s Series B Units for the three months ended April 30, 2015:

 

Series B Units currently have a 7 to 52 month vesting schedule. Compensation costs are determined using a Black-Scholes option pricing model based upon the grant date calculated fair market value of the award and is recognized ratably over the applicable vesting period.  As of April 30, 2015, there was approximately $2.3 million of unrecognized compensation expense related to unvested Series B Units.  We expect to recognize such expense on a pro-rata basis on the Series B Units’ vesting schedule during the next five fiscal years.

 

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10.  FAIR VALUE MEASUREMENTS

 

The FASB’s ASC 820, Fair Value Measurement and Disclosure, establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

 

 

The financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

 

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of January 31, 2015 and April 30, 2015, by level within the fair value hierarchy:

 

 

 

 

 

Commodity Derivative Instruments. The Company determines its estimate of the fair value of commodity derivative instruments using a market approach based on several factors, including quoted market prices in active markets, quotes from third-parties, the credit rating of each counterparty, and the Company’s own credit rating.  In considering counterparty credit risk, the Company assessed the possibility of whether the counterparty to the derivative would default by failing to make any contractually required payments.  The Company believes that each of its counterparties is creditworthy and has the financial resources and willingness to meet its potential repayment obligations associated with the derivative transactions.  At April 30, 2015, commodity derivative instruments utilized by the Company consist of costless collars and swaps.  The Company’s commodity derivative instruments are valued using public indices and are traded with third-party counterparties, but are not openly traded on an exchange.  As such, the Company has classified these commodity derivative instruments as Level 2.

 

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Caliber Class A (Series 1 through Series 4 and Series 6) Warrants.  The Company determines its estimate of the fair value of Caliber Class A Warrants using a MCS model.  For each MCS, the value of the Class A Units was forecasted at the end of each quarter based on a predetermined yield, and the strike price for the warrant is adjusted accordingly.  The fair value of the underlying Class A Units was estimated employing primarily a discounted cash flows analysis.  At April 30, 2015, the Company’s Caliber Class A Warrants are valued using valuation models that are generally less observable from objective sources.  As such, the Company has classified these instruments as Level 3.

 

Earn-out Liability.  The Company determined the estimated fair value of the earn-out liability relating to RockPile’s acquisition of Team Well Service, Inc. using a market approach based on information derived from an analysis performed for RockPile by an independent third-party. This analysis used publicly available information from market participants in the same industry, generally accepted methods for estimating an investor’s return requirements, and quoted market prices in active markets. As such, the earn-out liability has been classified as Level 2.

 

Summary of Level 3 Financial Assets and Liabilities.  The fair values of the Class A (Series 1 through Series 4 and Series 6) Warrants were estimated using a MCS model.  The fair value of the Company’s equity investment derivative assets was $0.5 million at January 31, 2015 and April 30, 2015.  

 

Fair Value of Financial Instruments.  The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable and payable, derivatives and Caliber Class A Warrants (discussed above) and long-term debt. The carrying values of cash equivalents and accounts receivable and payable are representative of their fair values due to their short-term maturities. The Convertible Note’s estimated fair value is based on discounted cash flows analysis and option pricing.  The carrying amount of the Company’s revolving credit facilities approximated fair value because the interest rate of the facilities is variable. The fair values of the other notes and mortgages payable is not significantly different than their carrying values.  The fair value of the TUSA 6.75% Notes is derived from quoted market prices. This disclosure does not impact our financial position, results of operations or cash flows.

 

The carrying values and fair values of the Company’s debt instruments are as follows:

 

 

 

11.   RELATED PARTY TRANSACTIONS

 

TUSA and an affiliate of Caliber have entered into certain midstream services agreements for (i) crude oil gathering, stabilization, treating and redelivery; (ii) natural gas compression, gathering, dehydration, processing and redelivery; (iii) produced water transportation and disposal services; and (iv) fresh water transportation for TUSA’s oil and natural gas drilling and production operations.  The agreements also include an acreage dedication from TUSA and a firm volume commitment by the Caliber affiliate for each service line.  TUSA has agreed to deliver minimum monthly revenues derived from the fees paid by TUSA to the Caliber affiliate for volumes of oil, natural gas, produced water, and fresh water for a primary term of 15 years beginning on the 2014 in-service dates for the Caliber facilities.  The aggregate minimum revenue commitment over the term of the agreements is $405.0 million, of which $347.0 million was outstanding at April 30, 2015.

 

TUSA and an affiliate of Caliber have also entered into a gathering services agreement, pursuant to which the Caliber affiliate will provide certain gathering-related measurement services to TUSA, and a fresh water sales agreement, that will make available certain volumes of fresh water for purchase by TUSA at a set per barrel fee for a primary term of five years from the in-service date anticipated to be in the first half of fiscal year 2016.  The fresh water sales agreement obligates TUSA to purchase all of the fresh water it requires for its drilling and operating activities exclusively from the Caliber affiliate, subject to availability, but it does not require TUSA to purchase a minimum volume of fresh water.

 

During the three months ended April 30, 2015, TUSA sold one salt water disposal well to an affiliate of Caliber for net proceeds of $6.0 million.

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12.   SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION