Attached files

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EX-12.1 - EX-12.1 - TRANSATLANTIC PETROLEUM LTD.tat-ex121_8.htm
EX-31.1 - EX-31.1 - TRANSATLANTIC PETROLEUM LTD.tat-ex311_9.htm
EX-32.1 - EX-32.1 - TRANSATLANTIC PETROLEUM LTD.tat-ex321_6.htm
EX-31.2 - EX-31.2 - TRANSATLANTIC PETROLEUM LTD.tat-ex312_7.htm
EX-10.1 - EX-10.1 - TRANSATLANTIC PETROLEUM LTD.tat-ex101_80.htm
EX-10.2 - EX-10.2 - TRANSATLANTIC PETROLEUM LTD.tat-ex102_79.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2015

OR

¨

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: 001-34574

 

TRANSATLANTIC PETROLEUM LTD.

(Exact name of registrant as specified in its charter)

 

 

Bermuda

None

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

16803 Dallas Parkway

Addison, Texas

75001

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (214) 220-4323

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 is required to submit and post such files).    Yes  x    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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

As of November 4, 2015, the registrant had 41,011,990 common shares outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

 

 

Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

2

 

 

Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2015 and 2014

3

 

 

Consolidated Statement of Equity for the Nine Months Ended September 30, 2015

4

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014

5

 

 

Notes to Consolidated Financial Statements

6

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

33

 

 

Item 4. Controls and Procedures

35

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

36

 

 

Item 1A. Risk Factors

36

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

Item 3. Defaults Upon Senior Securities

36

 

 

Item 4. Mine Safety Disclosures

37

 

 

Item 5. Other Information

37

 

 

Item 6. Exhibits

38

 

 

 


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

TRANSATLANTIC PETROLEUM LTD.

Consolidated Balance Sheets

(in thousands of U.S. Dollars, except share data)

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

ASSETS

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

10,576

 

 

$

35,132

 

Accounts receivable, net

 

 

 

 

 

 

 

Oil and natural gas sales

 

18,816

 

 

 

29,673

 

Joint interest and other

 

6,860

 

 

 

19,918

 

Related party

 

879

 

 

 

602

 

Prepaid and other current assets

 

9,620

 

 

 

8,930

 

Deferred income taxes

 

395

 

 

 

329

 

Derivative asset

 

15,853

 

 

 

12,518

 

Assets held for sale

 

27

 

 

 

28

 

Total current assets

 

63,026

 

 

 

107,130

 

Property and equipment:

 

 

 

 

 

 

 

Oil and natural gas properties (successful efforts methods)

 

 

 

 

 

 

 

Proved

 

343,289

 

 

 

424,031

 

Unproved

 

55,454

 

 

 

65,438

 

Equipment and other property

 

39,117

 

 

 

42,343

 

 

 

437,860

 

 

 

531,812

 

Less accumulated depreciation, depletion and amortization

 

(134,607

)

 

 

(141,977

)

Property and equipment, net

 

303,253

 

 

 

389,835

 

Other long-term assets:

 

 

 

 

 

 

 

Other assets

 

9,630

 

 

 

10,753

 

Note receivable - related party

 

11,500

 

 

 

11,500

 

Derivative asset

 

15,184

 

 

 

19,069

 

Deferred income taxes

 

1,039

 

 

 

1,181

 

Goodwill

 

5,284

 

 

 

6,935

 

Total other assets

 

42,637

 

 

 

49,438

 

Total assets

$

408,916

 

 

$

546,403

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

22,762

 

 

$

39,407

 

Accounts payable - related party

 

9,146

 

 

 

18,488

 

Accrued liabilities

 

23,477

 

 

 

31,238

 

Deferred income taxes

 

2,611

 

 

 

2,138

 

Asset retirement obligations

 

235

 

 

 

323

 

Loans payable

 

32,001

 

 

 

45,806

 

Loans payable - related party

 

 

 

 

6,800

 

Liabilities held for sale

 

6,506

 

 

 

6,928

 

Total current liabilities

 

96,738

 

 

 

151,128

 

Long-term liabilities:

 

 

 

 

 

 

 

Asset retirement obligations

 

9,044

 

 

 

11,053

 

Accrued liabilities

 

11,317

 

 

 

12,336

 

Deferred income taxes

 

48,585

 

 

 

54,430

 

Loans payable

 

76,849

 

 

 

85,192

 

Loans payable - related party

 

20,800

 

 

 

20,800

 

Total long-term liabilities

 

166,595

 

 

 

183,811

 

Total liabilities

 

263,333

 

 

 

334,939

 

Commitments and contingencies

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

Common shares, $0.10 par value, 100,000,000 shares authorized; 41,010,133 shares and 40,708,120 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively

 

4,101

 

 

 

4,071

 

Treasury stock

 

(943

)

 

 

 

Additional paid-in-capital

 

569,020

 

 

 

571,150

 

Accumulated other comprehensive loss

 

(129,589

)

 

 

(79,310

)

Accumulated deficit

 

(297,006

)

 

 

(284,447

)

Total shareholders' equity

 

145,583

 

 

 

211,464

 

Total liabilities and shareholders' equity

$

408,916

 

 

$

546,403

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

2


 

 

TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)

(U.S. Dollars and shares in thousands, except per share amounts)

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

$

19,421

 

 

$

35,537

 

 

$

74,018

 

 

$

108,962

 

Sales of purchased natural gas

 

756

 

 

 

397

 

 

 

1,544

 

 

 

1,433

 

Other

 

38

 

 

 

143

 

 

 

139

 

 

 

389

 

Total revenues

 

20,215

 

 

 

36,077

 

 

 

75,701

 

 

 

110,784

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

5,630

 

 

 

4,521

 

 

 

18,319

 

 

 

13,318

 

Transportation costs

 

95

 

 

 

-

 

 

 

499

 

 

 

-

 

Exploration, abandonment and impairment

 

17,312

 

 

 

582

 

 

 

21,752

 

 

 

8,498

 

Cost of purchased natural gas

 

668

 

 

 

342

 

 

 

1,403

 

 

 

1,267

 

Seismic and other exploration

 

179

 

 

 

29

 

 

 

330

 

 

 

4,215

 

Revaluation of contingent consideration

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,500

)

General and administrative

 

7,095

 

 

 

6,648

 

 

 

23,558

 

 

 

20,660

 

Depreciation, depletion and amortization

 

8,586

 

 

 

14,026

 

 

 

29,755

 

 

 

36,704

 

Accretion of asset retirement obligations

 

103

 

 

 

103

 

 

 

321

 

 

 

307

 

Total costs and expenses

 

39,668

 

 

 

26,251

 

 

 

95,937

 

 

 

82,469

 

Operating (loss) income

 

(19,453

)

 

 

9,826

 

 

 

(20,236

)

 

 

28,315

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other expense

 

(3,317

)

 

 

(1,440

)

 

 

(10,300

)

 

 

(4,412

)

Interest and other income

 

332

 

 

 

252

 

 

 

2,153

 

 

 

852

 

Gain on commodity derivative contracts

 

24,892

 

 

 

10,993

 

 

 

25,430

 

 

 

2,433

 

Foreign exchange loss

 

(1,006

)

 

 

(6,542

)

 

 

(6,007

)

 

 

(5,392

)

Total other income (expense)

 

20,901

 

 

 

3,263

 

 

 

11,276

 

 

 

(6,519

)

Income (loss) from continuing operations before income taxes

 

1,448

 

 

 

13,089

 

 

 

(8,960

)

 

 

21,796

 

Income tax expense

 

(1,263

)

 

 

(4,776

)

 

 

(3,599

)

 

 

(8,053

)

Net income (loss) from continuing operations

 

185

 

 

 

8,313

 

 

 

(12,559

)

 

 

13,743

 

Net loss from discontinued operations

 

-

 

 

 

-

 

 

 

-

 

 

 

(20

)

Net income (loss)

$

185

 

 

$

8,313

 

 

$

(12,559

)

 

$

13,723

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(21,743

)

 

 

(12,656

)

 

 

(50,279

)

 

 

(10,859

)

Comprehensive (loss) income

$

(21,558

)

 

$

(4,343

)

 

$

(62,838

)

 

$

2,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

0.00

 

 

$

0.22

 

 

$

(0.31

)

 

$

0.37

 

Discontinued operations

$

0.00

 

 

$

0.00

 

 

$

0.00

 

 

$

0.00

 

Weighted average common shares outstanding

 

40,943

 

 

 

37,483

 

 

 

40,895

 

 

 

37,429

 

Diluted net (loss) income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

0.00

 

 

$

0.22

 

 

$

(0.31

)

 

$

0.37

 

Discontinued operations

$

0.00

 

 

$

0.00

 

 

$

0.00

 

 

$

0.00

 

Weighted average common and common equivalent shares outstanding

 

40,956

 

 

 

37,607

 

 

 

40,895

 

 

 

37,574

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

3


 

TRANSATLANTIC PETROLEUM LTD.

Consolidated Statement of Equity

(Unaudited)

(U.S. Dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

Common

 

 

Treasury

 

 

 

 

 

 

Common

 

 

Treasury

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders'

 

 

Shares

 

 

Shares

 

 

Warrants

 

 

Shares ($)

 

 

Stock

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2014

 

40,708

 

 

 

-

 

 

233

 

 

$

4,071

 

 

$

-

 

 

$

571,150

 

 

$

(79,310

)

 

$

(284,447

)

 

$

211,464

 

Issuance of warrants

 

-

 

 

 

-

 

 

 

466

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Contingent payment event

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,188

)

 

 

-

 

 

 

-

 

 

 

(4,188

)

Issuance of restricted stock units

 

302

 

 

 

-

 

 

 

-

 

 

 

30

 

 

 

-

 

 

 

1,107

 

 

 

-

 

 

 

-

 

 

 

1,137

 

Tax withholding on restricted stock units

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(383

)

 

 

-

 

 

 

-

 

 

 

(383

)

Repurchase of treasury stock

 

-

 

 

 

323

 

 

 

-

 

 

 

-

 

 

 

(943

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(943

)

Share-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,334

 

 

 

-

 

 

 

-

 

 

 

1,334

 

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(50,279

)

 

 

-

 

 

 

(50,279

)

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(12,559

)

 

 

(12,559

)

Balance at September 30, 2015

 

41,010

 

 

 

323

 

 

 

699

 

 

$

4,101

 

 

$

(943

)

 

$

569,020

 

 

$

(129,589

)

 

$

(297,006

)

 

$

145,583

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

4


 

TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands of U.S. Dollars)

 

 

For the Nine Months Ended

 

 

September 30,

 

 

2015

 

 

2014

 

Operating activities:

 

 

 

 

 

 

 

Net (loss) income

$

(12,559

)

 

$

13,723

 

Adjustment for net loss from discontinued operations

 

 

 

 

20

 

Net (loss) income from continuing operations

 

(12,559

)

 

 

13,743

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Share-based compensation

 

1,334

 

 

 

957

 

Foreign currency loss

 

7,026

 

 

 

5,224

 

(Gain) loss on commodity derivative contracts

 

(25,430

)

 

 

(2,433

)

Cash settlement on commodity derivative contracts

 

27,560

 

 

 

(3,559

)

Amortization on loan financing costs

 

684

 

 

 

894

 

Bad debt expense

 

1,820

 

 

 

 

Deferred income tax (benefit) expense

 

488

 

 

 

6,855

 

Exploration, abandonment and impairment

 

21,752

 

 

 

8,498

 

Depreciation, depletion and amortization

 

29,755

 

 

 

36,704

 

Accretion of asset retirement obligations

 

321

 

 

 

307

 

Derivative put costs

 

(1,580

)

 

 

 

Vendor settlements

 

(1,731

)

 

 

 

Revaluation of contingency consideration

 

 

 

 

(2,500

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

11,080

 

 

 

583

 

Prepaid expenses and other assets

 

(2,207

)

 

 

2,934

 

Accounts payable and accrued liabilities

 

(20,151

)

 

 

1,974

 

Net cash provided by operating activities from continuing operations

 

38,162

 

 

 

70,181

 

Net cash used in operating activities from discontinued operations

 

 

 

 

(63

)

Net cash provided by operating activities

 

38,162

 

 

 

70,118

 

Investing activities:

 

 

 

 

 

 

 

Additions to oil and natural gas properties

 

(27,970

)

 

 

(88,508

)

Additions to equipment and other properties

 

(5,143

)

 

 

(4,653

)

Restricted cash

 

(198

)

 

 

 

Net cash used in investing activities from continuing operations

 

(33,311

)

 

 

(93,161

)

Net cash provided by investing activities from discontinued operations

 

 

 

 

500

 

Net cash used in investing activities

 

(33,311

)

 

 

(92,661

)

Financing activities:

 

 

 

 

 

 

 

Tax withholding on restricted share units

 

(383

)

 

 

(68

)

Treasury stock repurchases

 

(943

)

 

 

 

Loan proceeds

 

12,348

 

 

 

38,045

 

Loan repayment

 

(31,787

)

 

 

(16,168

)

Loan repayment - related party

 

(6,800

)

 

 

 

Loan financing costs

 

(30

)

 

 

(2,176

)

Net cash (used in) provided by financing activities

 

(27,595

)

 

 

19,633

 

Effect of exchange rate on cash flows and cash equivalents

 

(1,812

)

 

 

(542

)

Net decrease in cash and cash equivalents

 

(24,556

)

 

 

(3,452

)

Cash and cash equivalents, beginning of period

 

35,132

 

 

 

12,881

 

Cash and cash equivalents, end of period

$

10,576

 

 

$

9,429

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid for interest

$

7,318

 

 

$

2,546

 

Cash paid for taxes

$

2,481

 

 

$

 

Supplemental non-cash financing activities:

 

 

 

 

 

 

 

Repayment of the Prepayment Agreement

$

2,739

 

 

$

 

Contigent payment event

$

(4,188

)

 

$

 

Repayment of Senior Credit Facility from refinancing

$

 

 

$

49,766

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 


5


Transatlantic Petroleum Ltd.

Notes to Consolidated Financial Statements

(Unaudited)

 

1. General

Nature of operations

TransAtlantic Petroleum Ltd. (together with its subsidiaries, “we,” “us,” “our,” the “Company” or “TransAtlantic”) is an international oil and natural gas company engaged in acquisition, exploration, development and production. We have focused our operations in countries that have established, yet underexplored petroleum systems, have stable governments, are net importers of petroleum, have an existing petroleum transportation infrastructure and provide favorable commodity pricing, royalty rates and tax rates to exploration and production companies. We hold interests in developed and undeveloped oil and natural gas properties in Turkey, Albania and Bulgaria. As of November 4, 2015, approximately 36% of our outstanding common shares were beneficially owned by N. Malone Mitchell 3rd, our chief executive officer and chairman of our board of directors.

TransAtlantic is a holding company with three operating segments – Turkey, Bulgaria and Albania. Its assets consist of its ownership interests in subsidiaries that primarily own:

 

·

assets in Turkey;

 

·

assets in Albania that were acquired in November 2014; and

 

·

assets in Bulgaria.

On a consolidated basis, as of September 30, 2015, TransAtlantic had $129.7 million of indebtedness, not including $31.9 million of trade payables, as further described below.  Excluding its Albanian operations, TransAtlantic believes that its cash flow from operations will be sufficient to meet its normal operating requirements and to fund planned capital expenditures during the next 12 months.

 

Stream Liquidity Discussion

 

The operations of our Albania segment are conducted solely through a Cayman Island subsidiary of Stream Oil & Gas Ltd., which we purchased in November 2014 (including its subsidiaries, “Stream”).  Stream had $6.4 million of indebtedness, $21.2 million of trade payables and $10.9 million of other obligations as of September 30, 2015 and currently produces insufficient cash flow to fund its operations in Albania.

 

During the three and nine months ended September 30, 2015, Stream generated revenue of $1.9 million and $6.6 million, respectively.  During the three and nine months ended September 30, 2015, Stream incurred $13.6 million of exploration and impairment expenses and $1.5 million of bad debt expense. Additionally, during the three and nine months ended September 30, 2015, Stream incurred $0.4 million and $1.6 million of depletion expense, respectively.  All of these expenses were non-cash charges.  This resulted in Stream generating a net loss before income taxes of $16.8 million and $19.9 million for the three and nine months ended September 30, 2015, respectively.  We are considering strategic plans for deleveraging Stream and resolving its financial condition.  

 

See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for a discussion of liquidity and capital resources of TransAtlantic on a consolidated basis.  The following discusses Stream’s liquidity on a standalone basis.

 

In November 2014, we entered the Albanian market through our purchase of Stream (See Note 3, “Acquisitions”).  The Albanian assets owned by Stream require the investment of a significant amount of capital in order to increase production in Albania and increase cash flow.  However, our access to capital has been severely restricted due to the significant and continued decline in oil prices and the reluctance of credit and equity participants in energy markets due to the ongoing conflict and turmoil near Turkey in Syria and Iraq.  In addition, Stream has a history of, and has continued to experience, substantial net losses and operating losses.  Because of the foregoing, we do not currently expect that Stream’s cash flow from operations will be sufficient to fund its operations and repay its indebtedness and trade payables.   Further, due to restrictions in our senior secured credit agreement (“Senior Credit Facility”) with BNP Paribas (Suisse) SA (“BNP Paribas”) and the International Finance Corporation (“IFC”), we have limited ability to use cash flow from our operations in Turkey to fund our operations in Albania.  We plan to pursue additional financing, or seek a refinancing, strategic transaction, sale of all or a portion of the assets (including operating control), joint venture or private restructuring or pursue a reorganization or liquidation of Stream under applicable governing laws.  As of September 30, 2015, Stream’s assets and liabilities were $117.1 million and $68.8 million, respectively.  In addition, a default by Stream on the payment of principal or interest on the term loan related to our Albanian operations could result in a cross-default under our Senior Credit Facility.  We currently believe we will be able to pay the principal and interest on this term loan when due.  We are currently working with BNP Paribas and IFC to eliminate any potential of a cross-default related to Stream’s indebtedness.

6


Basis of presentation

Our consolidated financial statements are expressed in U.S. Dollars and have been prepared by management in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All amounts in these notes to the consolidated financial statements are in U.S. Dollars unless otherwise indicated. In preparing financial statements, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews estimates, including those related to fair value measurements associated with acquisitions and financial derivatives, the recoverability and impairment of long-lived assets and goodwill, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2014.

Decline in Oil Prices, Reduced Development Plan and Effect on Liquidity

As a result of the decline in prices for Brent crude since December 2014, we have reduced our planned capital expenditures and deferred a significant amount of our planned exploration and development until prices for Brent crude improve. In order to mitigate the impact of reduced prices on our 2015 cash flows and liquidity, we have implemented cost reduction measures and will continue to implement cost-cutting initiatives to reduce our operating costs and general and administrative expenses.  Our reduced development plan consists of maintaining our acreage position by drilling obligation wells and performing low cost, high return well optimizations.

During the first three quarters of 2015, we have undertaken significant cost saving efforts including (i) staff reductions, (ii) office relocations, (iii) negotiations with several key vendors to reduce exploration and development expenses and operating costs, and (iv) optimization of well designs.  Additionally, at current Brent crude prices, our current hedge positions provide additional liquidity on a monthly recurring basis.  On September 14, 2015 and October 14, 2015, we unwound a combined total of two-thirds of the volume of our crude oil hedges for the periods September 14, 2015 through March 31, 2019 and October 14, 2015 through March 31, 2019, respectively, for total net proceeds of $25.8 million, which was used to pay down indebtedness under the Senior Credit Facility.

Notwithstanding these measures, there remain risks and uncertainties that could negatively impact our results of operations and financial condition. For example, reductions in our borrowing capacity under our Senior Credit Facility as a result of a redetermination to our borrowing base could have a material impact on our capital resources and liquidity. The borrowing base redetermination process considers assumptions related to future commodity prices; therefore, our borrowing capacity could be negatively impacted by the recent decline or any further declines in oil prices. The borrowing base redetermination is ongoing and we expect it to be completed by mid-November 2015. As of October 1, 2015, the borrowing base was $59.2 million.  

 

2. Recent accounting pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 amends the existing accounting standards for revenue recognition and is based on the principle that revenue should be recognized to depict the transfer of goods or services to a customer at an amount that reflects the consideration a company expects to receive in exchange for those goods or services.  In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The new effective date is for annual reporting periods, and interim periods within that reporting period, beginning after December 15, 2017.  Reporting entities may choose to adopt the standard as of the original effective date.  We are currently assessing the potential impact of ASU 2014-09 on our consolidated financial statements and results of operations.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU 2014-15"), an amendment to FASB Accounting Standards Codification ("ASC") Topic 205, Presentation of Financial Statements.  This update provides guidance on management's responsibility in evaluating whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. We do not expect the adoption of ASU 2014-15 to have a material impact on our consolidated financial statements or results of operations.  If events occur in future periods that affect our ability to continue as a going concern, we will provide the disclosures required by ASU 2014-15.

7


In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. We currently recognize debt issuance costs as assets on our consolidated balance sheet. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. ASU 2015-03 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015 and early adoption is permitted.  Currently, we do not expect the adoption of ASU 2015-03 to have a material impact on our consolidated financial statements or results of operations.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”), an amendment to ASC Subtopic 330-10.  The amendment states that entities should measure inventory at the lower of cost and net realizable value.  The amendment does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method.  The amendment applies to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost.  ASU 2015-11 is effective for fiscal years beginning after December 31, 2016, including interim periods within those fiscal years.  We are currently assessing the potential impact of ASU 2015-11 on our consolidated financial statements and results of operations.

In September of 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments ("ASU 2015-16"). ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.  ASU 2015-16 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015.  The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of ASU 2015-16 with earlier application permitted for financial statements that have not been issued. As of September 30, 2015, we adopted ASU 2015-16 and have disclosed adjustments to our provisional amounts in Note 3, “Acquisitions”.

We have reviewed other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on our consolidated results of operations, financial position and cash flows. Based on that review, we believe that none of these pronouncements will have a significant effect on current or future earnings or operations.

 

 

8


3. Acquisitions

Stream

On November 18, 2014, we acquired Stream in exchange for (i) 3.2 million of our common shares issued at closing, and (ii) an additional 0.6 million of our common shares issuable if certain conditions were met on or before August 18, 2015 (at a deemed price of $7.41 per common share).  The conditions were not met within the prescribed period and, therefore, the Company did not pay the contingent consideration. We engaged independent valuation experts to assist in the determination of the fair value of the assets and liabilities acquired in the acquisition.  We are still assessing the assets acquired and liabilities assumed.  Thus, the final determination of the value of assets acquired and liabilities assumed may result in adjustments to the values presented below. The following tables summarize the consideration paid in the acquisition and the preliminary amounts of assets acquired and liabilities assumed that have been recognized at the acquisition date:

 

 

(in thousands)

 

Consideration:

 

 

 

Issuance of 3,218,641 common shares

$

23,850

 

Fair value of total consideration

$

23,850

 

Acquisition-Related Costs:

 

 

 

Included in general and administrative expenses on our consolidated statements of comprehensive income (loss) for the year ended December 31, 2014

$

1,129

 

 

 

 

 

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed at Acquisition:

 

 

 

Assets:

 

 

 

Cash

$

66

 

Accounts receivable

 

6,672

 

Other current assets

 

1,418

 

Total current assets

 

8,156

 

Oil and natural gas properties:

 

 

 

Proved properties

 

99,927

 

Unproved properties

 

7,883

 

Equipment and other property

 

2,386

 

Total oil and natural gas properties and other equipment

 

110,196

 

Total assets

$

118,352

 

Liabilities:

 

 

 

Accounts payable

 

20,673

 

Accounts payable - related party

 

2,820

 

Other current liabilities

 

8,424

 

Viking International note - related party

 

6,800

 

Loans payable - current

 

11,732

 

Other non-current liabilities

 

5,036

 

Loans payable - non-current

 

6,123

 

Asset retirement obligations

 

827

 

Deferred income taxes

 

32,067

 

Total liabilities

 

94,502

 

Total identifiable net assets

$

23,850

 

9


During the three months ended September 30, 2015, we have recorded the following purchase accounting adjustments, as allowed under ASU 2015-16.  We (i) reversed the $4.2 million of contingent shares as a result of not achieving the contingent share event within the prescribed period, (ii) increased our equipment and oil inventory by $2.5 million based on more accurate values, and (iii) reduced our accrued liabilities by $1.6 million due to better estimates.  These amounts have been adjusted in our September 30, 2015 consolidated balance sheet and reduced our unproved property balance.

The following table presents our unaudited pro forma results of operations as though the acquisition of Stream had occurred as of January 1, 2014 (see our Annual Report on Form 10-K for the year ended December 31, 2014 for a discussion of this acquisition):

 

 

For the Three Months Ended September 30, 2014

 

 

For the Nine Months Ended September 30, 2014

 

 

(in thousands, except per share data)

 

Total revenues

$

41,089

 

 

$

128,179

 

Income from continuing operations before income taxes

 

13,751

 

 

 

25,569

 

Income from continuing operations

 

8,996

 

 

 

17,252

 

Loss from discontinued operations

 

-

 

 

 

(20

)

Net income

 

8,996

 

 

 

17,232

 

Net income per common share from continuing operations

 

 

 

 

 

 

 

Basic and diluted

$

0.22

 

 

$

0.42

 

 

Please see Note 1 above for a discussion of Stream’s current liquidity.

 

 

4. Property and equipment

Oil and natural gas properties

The following table sets forth the capitalized costs under the successful efforts method for our oil and natural gas properties as of:

 

 

September 30, 2015

 

 

December 31, 2014

 

 

(in thousands)

 

Oil and natural gas properties, proved:

 

 

 

 

 

 

 

Turkey

$

256,018

 

 

$

323,442

 

Albania

 

86,770

 

 

 

100,037

 

Bulgaria

 

501

 

 

 

552

 

Total oil and natural gas properties, proved

 

343,289

 

 

 

424,031

 

Oil and natural gas properties, unproved:

 

 

 

 

 

 

 

Turkey

 

35,388

 

 

 

43,090

 

Albania

 

20,066

 

 

 

18,301

 

Bulgaria

 

 

 

 

4,047

 

Total oil and natural gas properties, unproved

 

55,454

 

 

 

65,438

 

Gross oil and natural gas properties

 

398,743

 

 

 

489,469

 

Accumulated depletion

 

(126,279

)

 

 

(133,304

)

Net oil and natural gas properties

$

272,464

 

 

$

356,165

 

The decline in proved properties during the nine months ended September 30, 2015 was primarily driven by the devaluation of the Turkish Lira (“TRY”) versus the U.S. Dollar.  For the nine months ended September 30, 2015, we have recorded foreign currency translation adjustments which reduced proved properties and increased accumulated other comprehensive loss within shareholders’ equity on our consolidated balance sheet.

At September 30, 2015 and December 31, 2014, we excluded $8.9 million and $0.9 million, respectively, from the depletion calculation for proved development wells currently in progress and for costs associated with fields currently not in production.

At September 30, 2015, the capitalized costs of our oil and natural gas properties, net of accumulated depletion, included $104.2 million relating to acquisition costs of proved properties, which are being depleted by the unit-of-production method using total proved reserves, and $103.9 million relating to well costs and additional development costs, which are being depleted by the unit-of-production method using proved developed reserves.

10


At December 31, 2014, the capitalized costs of our oil and natural gas properties, net of accumulated depletion, included $129.0 million relating to acquisition costs of proved properties, which are being depleted by the unit-of-production method using total proved reserves, and $160.8 million relating to well costs and additional development costs, which are being depleted by the unit-of-production method using proved developed reserves.