Attached files
file | filename |
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EX-31.1 - EX-31.1 - Alta Mesa Holdings, LP | c403-20150930xex311.htm |
EX-31.2 - EX-31.2 - Alta Mesa Holdings, LP | c403-20150930xex312.htm |
EX-32.1 - EX-32.1 - Alta Mesa Holdings, LP | c403-20150930xex321.htm |
EX-32.2 - EX-32.2 - Alta Mesa Holdings, LP | c403-20150930xex322.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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: 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: 333-173751
ALTA MESA HOLDINGS, LP
(Exact name of registrant as specified in its charter)
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Texas |
20-3565150 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
15021 Katy Freeway, Suite 400, Houston, Texas |
77094 |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: 281-530-0991
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 ☒
(Explanatory Note: The registrant is a voluntary filer and is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. However, the registrant 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 would have been required to file such reports) as if it were subject to such filing requirements.)
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 definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
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Large accelerated filer |
☐ |
Accelerated filer |
☐ |
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 ☒
1
Page Number |
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PART I — FINANCIAL INFORMATION |
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3 | |
Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014 |
3 |
4 | |
5 | |
6 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 |
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
29 |
30 | |
PART II — OTHER INFORMATION |
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30 | |
30 | |
30 | |
30 | |
32 |
2
PART I — FINANCIAL INFORMATION
ALTA MESA HOLDINGS, LP AND SUBSIDIARIES
(in thousands)
September 30, |
December 31, |
||||
2015 |
2014 |
||||
(unaudited) |
|||||
ASSETS |
|||||
CURRENT ASSETS |
|||||
Cash and cash equivalents |
$ |
6,791 |
$ |
1,349 | |
Short-term restricted cash |
105 | 23,793 | |||
Accounts receivable, net of allowance of $1,397 and $1,449, respectively |
27,125 | 43,581 | |||
Other receivables |
134,194 | 8,238 | |||
Receivables due from affiliate |
1,375 | 25,500 | |||
Prepaid expenses and other current assets |
3,551 | 2,132 | |||
Derivative financial instruments |
53,324 | 59,803 | |||
Total current assets |
226,465 | 164,396 | |||
PROPERTY AND EQUIPMENT |
|||||
Oil and natural gas properties, successful efforts method, net |
611,298 | 686,176 | |||
Other property and equipment, net |
10,418 | 11,505 | |||
Total property and equipment, net |
621,716 | 697,681 | |||
OTHER ASSETS |
|||||
Long-term restricted cash |
— |
900 | |||
Investment in LLC — cost |
9,000 | 9,000 | |||
Deferred financing costs, net |
9,960 | 8,100 | |||
Notes receivable due from affiliate |
9,028 | 8,500 | |||
Advances to operators |
101 | 619 | |||
Deposits and other assets |
1,130 | 1,124 | |||
Derivative financial instruments |
39,778 | 27,271 | |||
Total other assets |
68,997 | 55,514 | |||
TOTAL ASSETS |
$ |
917,178 |
$ |
917,591 | |
LIABILITIES AND PARTNERS' DEFICIT |
|||||
CURRENT LIABILITIES |
|||||
Accounts payable and accrued liabilities |
$ |
94,839 |
$ |
117,560 | |
Current portion, asset retirement obligations |
688 | 1,136 | |||
Total current liabilities |
95,527 | 118,696 | |||
LONG-TERM LIABILITIES |
|||||
Asset retirement obligations, net of current portion |
63,443 | 61,736 | |||
Long-term debt |
814,557 | 767,608 | |||
Notes payable to founder |
25,444 | 24,540 | |||
Other long-term liabilities |
19,103 | 6,457 | |||
Total long-term liabilities |
922,547 | 860,341 | |||
TOTAL LIABILITIES |
1,018,074 | 979,037 | |||
Commitments and Contingencies (Note 10) |
|||||
PARTNERS' DEFICIT |
(100,896) | (61,446) | |||
TOTAL LIABILITIES AND PARTNERS' DEFICIT |
$ |
917,178 |
$ |
917,591 |
The accompanying notes are an integral part of these consolidated financial statements.
3
ALTA MESA HOLDINGS, LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended |
Nine Months Ended |
||||||||||
September 30, |
September 30, |
||||||||||
2015 |
2014 |
2015 |
2014 |
||||||||
(in thousands) |
|||||||||||
OPERATING REVENUES AND OTHER |
|||||||||||
Oil |
$ |
50,208 |
$ |
104,196 |
$ |
159,852 |
$ |
276,524 | |||
Natural gas |
8,382 | 16,165 | 24,804 | 52,705 | |||||||
Natural gas liquids |
2,517 | 4,787 | 8,334 | 14,653 | |||||||
Other revenues |
237 | 496 | 651 | 784 | |||||||
Total operating revenues |
61,344 | 125,644 | 193,641 | 344,666 | |||||||
Gain on sale of assets |
66,361 | 18,556 | 66,520 | 87,107 | |||||||
Gain — oil and natural gas derivative contracts |
72,019 | 39,911 | 83,618 | 4,483 | |||||||
Total operating revenues and other |
199,724 | 184,111 | 343,779 | 436,256 | |||||||
OPERATING EXPENSES |
|||||||||||
Lease and plant operating expense |
19,334 | 18,440 | 53,222 | 55,022 | |||||||
Production and ad valorem taxes |
4,377 | 8,357 | 12,914 | 22,985 | |||||||
Workover expense |
885 | 2,316 | 4,140 | 7,279 | |||||||
Exploration expense |
6,825 | 15,779 | 37,166 | 44,015 | |||||||
Depreciation, depletion, and amortization expense |
32,944 | 39,880 | 111,916 | 102,357 | |||||||
Impairment expense |
8,933 | 8,706 | 86,294 | 27,908 | |||||||
Accretion expense |
578 | 365 | 1,578 | 1,536 | |||||||
General and administrative expense |
15,779 | 17,243 | 45,438 | 55,854 | |||||||
Total operating expenses |
89,655 | 111,086 | 352,668 | 316,956 | |||||||
INCOME (LOSS) FROM OPERATIONS |
110,069 | 73,025 | (8,889) | 119,300 | |||||||
OTHER INCOME (EXPENSE) |
|||||||||||
Interest expense |
(16,782) | (13,701) | (46,397) | (41,621) | |||||||
Interest income |
107 | 2 | 536 | 11 | |||||||
Total other income (expense) |
(16,675) | (13,699) | (45,861) | (41,610) | |||||||
INCOME (LOSS) BEFORE STATE INCOME TAXES |
93,394 | 59,326 | (54,750) | 77,690 | |||||||
(Provision) for state income taxes |
(315) |
— |
(891) | (283) | |||||||
NET INCOME (LOSS) |
$ |
93,079 |
$ |
59,326 |
$ |
(55,641) |
$ |
77,407 |
The accompanying notes are an integral part of these consolidated financial statements.
4
ALTA MESA HOLDINGS, LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended |
|||||
September 30, |
|||||
2015 |
2014 |
||||
(in thousands) |
|||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|||||
Net income (loss) |
$ |
(55,641) |
$ |
77,407 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|||||
Depreciation, depletion, and amortization expense |
111,916 | 102,357 | |||
Impairment expense |
86,294 | 27,908 | |||
Accretion expense |
1,578 | 1,536 | |||
Amortization of loan costs |
2,453 | 2,158 | |||
Amortization of debt discount |
382 | 383 | |||
Dry hole expense |
22,600 | 24,911 | |||
Expired leases |
1,856 | 1,016 | |||
(Gain) — oil and natural gas derivative contracts |
(83,618) | (4,483) | |||
Settlements of derivative contracts |
77,591 | (3,905) | |||
Interest converted into debt |
904 | 904 | |||
Interest on notes receivable |
(528) |
— |
|||
(Gain) on sale of assets |
(66,520) | (87,107) | |||
Changes in assets and liabilities: |
|||||
Restricted cash unrelated to property divestiture |
— |
(105) | |||
Accounts receivable |
16,456 | (16,964) | |||
Other receivables |
(10,954) | 1,422 | |||
Receivable due from affiliate |
24,125 |
— |
|||
Prepaid expenses and other non-current assets |
(907) | 6,131 | |||
Settlement of asset retirement obligation |
(1,558) | (3,278) | |||
Accounts payable, accrued liabilities, and other long-term liabilities |
28,738 | 26,816 | |||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
155,167 | 157,107 | |||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|||||
Capital expenditures for property and equipment |
(184,467) | (269,827) | |||
Acquisitions |
(48,637) |
— |
|||
Proceeds from sale of property |
347 | 218,539 | |||
Investment in restricted cash related to property divestiture |
24,588 | (34,840) | |||
NET CASH USED IN INVESTING ACTIVITIES |
(208,169) | (86,128) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||
Proceeds from long-term debt |
227,500 | 97,500 | |||
Repayments of long-term debt |
(180,933) | (169,270) | |||
Additions to deferred financing costs |
(4,313) | (42) | |||
Capital distributions |
(3,810) |
— |
|||
Capital contributions |
20,000 |
— |
|||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
58,444 | (71,812) | |||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
5,442 | (833) | |||
CASH AND CASH EQUIVALENTS, beginning of period |
1,349 | 6,537 | |||
CASH AND CASH EQUIVALENTS, end of period |
$ |
6,791 |
$ |
5,704 | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|||||
Cash paid during the period for interest |
$ |
30,524 |
$ |
27,387 | |
Cash paid (received) during the period for state taxes |
$ |
750 |
$ |
(125) | |
Change in asset retirement obligations |
$ |
279 |
$ |
1,760 | |
Asset retirement obligations assumed, purchased properties |
$ |
746 |
$ |
— |
|
Change in accruals or liabilities for capital expenditures |
$ |
(38,248) |
$ |
20,056 | |
Receivable from Eagle Ford divestiture |
$ |
115,001 |
$ |
— |
The accompanying notes are an integral part of these consolidated financial statements.
5
ALTA MESA HOLDINGS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS
Alta Mesa Holdings, LP and its subsidiaries (“we,” “us,” “our,” the “Company,” and “Alta Mesa”) is an independent energy company engaged in the acquisition, exploration, development, and production of onshore oil and natural gas properties located primarily in Oklahoma, Louisiana, and Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company has provided a discussion of significant accounting policies in Note 2 in its Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Annual Report”). There have been no changes to the Company’s significant accounting policies since December 31, 2014.
Principles of Consolidation and Reporting
The consolidated financial statements reflect our accounts after elimination of all significant intercompany transactions and balances. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual consolidated financial statements for the year ended December 31, 2014, which were filed with the Securities and Exchange Commission in our 2014 Annual Report.
The consolidated financial statements included herein as of September 30, 2015, and for the three and nine months ended September 30, 2015 and 2014, are unaudited, and in the opinion of management, the information furnished reflects all material adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of consolidated financial position and of the results of operations for the interim periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Certain reclassifications of prior period consolidated financial statements have been made to conform to current reporting practices. The Company reclassified $25.5 million of other receivables as of December 31, 2014 to receivables due from affiliate to conform to current reporting presentation on the consolidated balance sheets. The $25.5 million was paid subsequent to year-end on January 2, 2015. The reclassifications had no impact on net income (loss) or partners’ (deficit). The consolidated results of operations for interim periods are not necessarily indicative of results to be expected for a full year.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Reserve estimates significantly impact depreciation, depletion and amortization expense and potential impairments of oil and natural gas properties and are subject to change based on changes in oil and natural gas prices and trends and changes in estimated reserve quantities. We analyze estimates, including those related to oil and natural gas reserves, oil and natural gas revenues, the value of oil and natural gas properties, bad debts, asset retirement obligations, derivative contracts, and contingencies and litigation. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The update provides guidance concerning the recognition and measurement of revenue from contracts with customers. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016. The standard is required to be adopted using either the full retrospective approach, with all prior periods presented adjusted, or the modified retrospective approach, with a cumulative adjustment to retained earnings on the opening balance sheet. In April 2015, the FASB proposed to delay the effective date one year, beginning in fiscal year 2018. The proposal will be subject to the FASB’s due process requirement, which includes a period for public comments. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a
6
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. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The guidance is effective for interim periods and annual periods beginning after December 15, 2015; however early adoption is permitted. The adoption of this guidance will not have a material impact on its financial position, results of operations or cash flows.
In August 2015, the FASB issued ASU No. 2015-15, Interest – Imputation of Interest (Subtopic 835-30: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”), which confirms that line-of-credit arrangements are not in the scope of ASU 2015-03. ASU 2015-15 states that, for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are outstanding borrowings under the line-of-credit arrangement.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”), which eliminates the requirement for an acquirer in a business combination to restate prior period financial statements for measurement period adjustments. ASU 2015-16 requires that the cumulative impact of measurement period adjustments on current and prior periods be recognized in the reporting period in which the adjustment amount is determined. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those years. The Company is currently evaluating the effect that adopting this guidance will have on its financial position, cash flows and results of operations.
3. ACQUISITION AND DIVESTITURES
Acquisition
On July 6, 2015, we acquired approximately 19,000 net acres of undeveloped leasehold interest in Kingfisher County, Oklahoma. The consideration for the purchase was approximately $46.2 million and is subject to customary purchase price adjustments. The effective date of the acquisition is April 1, 2015. The purchase was funded with borrowings under our Sixth Amended and Restated Credit Agreement, dated as of May 13, 2010 (as amended, the “credit facility”).
Divestitures
Eagleville Divestiture
On March 25, 2014, we closed the sale of certain of our properties located primarily in Karnes County, Texas to Memorial Production Operating LLC, comprising a portion of our Eagleville field (“Eagleville divestiture”). The properties sold included a working interest in all of our producing wells as of the effective date of January 1, 2014. We retained a net profits interest in these wells based on 50% of our original working interest in 2014, declining to 30% in 2015, 15% in 2016, and zero in 2017. Also included in the sale was a 30% undivided interest in all our Eagleville mineral leases and interests, and 30% of our working interest in all our wells in progress on December 31, 2013 or drilled after January 1, 2014. The Company received cash consideration of approximately $171 million after customary closing adjustments. We estimate the proved developed and undeveloped reserves sold were approximately 7.5 MMBOE, and we retained proved reserves of approximately 7.7 MMBOE, 67% of which were proved undeveloped as of December 31, 2014. We recorded a gain on sale from the Eagleville divestiture of $72.5 million during 2014, based on an allocation of basis between the properties sold and properties retained.
The portion of Eagleville field sold contributed approximately $6.6 million in pre-tax profit in the first quarter of 2014.
Alta Mesa Eagle, LLC Divestiture
On September 30, 2015, we closed the sale of all of the membership interests (the “Membership Interests”) in Alta Mesa Eagle, LLC (“AME”), our wholly owned subsidiary, to EnerVest Energy Institutional Fund XIV-A, L.P. and EnerVest Energy Institutional Fund XIV-WIC, L.P. (collectively, “EnerVest”) pursuant to a purchase and sale agreement (the “Sale Agreement”) entered into by us, AME and EnerVest on September 16, 2015 (the “Eagle Ford divestiture”). AME owned our remaining non-operated oil and natural gas producing properties located in the Eagle Ford shale play in Karnes County, Texas. In connection with the Eagle Ford divestiture, we disposed of all of our remaining interests in this area. The effective date of the transaction (the “Effective Date”) is July 1, 2015.
Pursuant to the Sale Agreement, the aggregate cash purchase price for the Membership Interests is $125 million subject to certain adjustments, consisting of $118 million (the “Base Purchase Price”), and additional contingent payments of approximately $7 million in the aggregate, payable to us by EnerVest by the 15th of each calendar month in which certain amounts owed to AME prior to the Effective Date have been received. The Sale Agreement provides for customary purchase price adjustments to the Base Purchase Price based on the Effective Date. On October 1, 2015, the cash purchase price paid to us was $82.6 million, equal to 70% of the Base Purchase Price. On November 2, 2015, we received 35.4 million, which represents the remainder of our sales proceeds. As of September 30, 2015, approximately $122.0 million of proceeds to be received from the sale, including $7.0 million of customary purchase price
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adjustments, was recorded in other receivables on the consolidated balance sheets. Cash received was utilized to pay down borrowings under our credit facility.
As of the Effective Date, the estimated net proved reserves sold were approximately 7.8 MMBOE. We recorded a preliminary gain on the sale of AME of approximately $66.3 million during the quarter ended September 30, 2015. The sale of AME contributed approximately $1.4 million in pre-tax loss for the three months ended September 30, 2015 and $15.1 million in pre-tax profit for the three months ended September 30, 2014. The sale of AME contributed approximately $0.4 million in pre-tax loss for the nine months ended September 30, 2015 and $112.8 million in pre-tax profit for the nine months ended September 30, 2014, which includes a $75.1 million gain on sale of assets for the first portion of the Eagleville divestiture as mentioned above. Subsequent to the Eagle Ford divestiture, we no longer own any assets in the Eagle Ford.
Hilltop Divestiture
On September 19, 2014, we sold our remaining interests in the Hilltop field for cash payment of $41.6 million, which was subsequently adjusted to $38.9 million for customary purchase price adjustments. We recorded a gain on the sale of approximately $15.9 million. The Hilltop interests contributed approximately $2.0 million and $7.2 million in net pre-tax income during the three months and nine months ended September 30, 2014, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30, |
December 31, |
||||
2015 |
2014 |
||||
(in thousands) |
|||||
(unaudited) |
|||||
OIL AND NATURAL GAS PROPERTIES |
|||||
Unproved properties |
$ |
124,290 |
$ |
84,620 | |
Accumulated impairment |
(1,959) | (3,749) | |||
Unproved properties, net |
122,331 | 80,871 | |||
Proved oil and natural gas properties |
1,454,105 | 1,417,785 | |||
Accumulated depreciation, depletion, amortization and impairment |
(965,138) | (812,480) | |||
Proved oil and natural gas properties, net |
488,967 | 605,305 | |||
TOTAL OIL AND NATURAL GAS PROPERTIES, net |
611,298 | 686,176 | |||
LAND |
2,822 | 2,820 | |||
OTHER PROPERTY AND EQUIPMENT |
|||||
Office furniture and equipment, vehicles |
18,408 | 17,302 | |||
Accumulated depreciation |
(10,812) | (8,617) | |||
OTHER PROPERTY AND EQUIPMENT, net |
7,596 | 8,685 | |||
TOTAL PROPERTY AND EQUIPMENT, net |
$ |
621,716 |
$ |
697,681 |
Suspended exploratory well costs
Our net changes in deferred exploratory well costs for the nine month period ended September 30, 2015, are presented below (unaudited):
Nine Months Ended |
||
September 30, 2015 |
||
(in thousands) |
||
Balance, beginning of year |
$ |
4,547 |
Additions to capitalized well costs pending determination of proved reserves |
3,111 | |
Reclassifications to proved properties based on determination of proved reserves |
(2,886) | |
Capitalized exploratory well costs charged to expense |
(1,209) | |
Balance, September 30, 2015 |
$ |
3,563 |
The ending balance in deferred capitalized exploratory well costs includes the costs of four wells in one prospect. At September 30, 2015, approximately $1.5 million of capitalized exploratory well costs had been capitalized for periods greater than one year.
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5. FAIR VALUE DISCLOSURES
We follow the guidance of ASC 820, “Fair Value Measurements and Disclosures,” in the estimation of fair values. ASC 820 provides a hierarchy of fair value measurements, based on the inputs to the fair value estimation process. It requires disclosure of fair values classified according to defined “levels,” which are based on the reliability of the evidence used to determine fair value, with Level 1 being the most reliable and Level 3 the least reliable. Level 1 evidence consists of observable inputs, such as quoted prices in an active market. Level 2 inputs typically correlate the fair value of the asset or liability to a similar, but not identical item which is actively traded. Level 3 inputs include at least some unobservable inputs, such as valuation models developed using the best information available in the circumstances.
The fair value of cash, accounts receivable, other current assets, and current liabilities approximate book value due to their short-term nature. The estimate of fair value of long-term debt under our senior secured revolving credit facility is not considered to be materially different from carrying value due to market rates of interest. The fair value of the notes payable to our founder is not practicable to determine because the transactions cannot be assumed to have been consummated at arm’s length, the terms are not deemed to be market terms, there are no quoted values available for this instrument, and an independent valuation would not be practicable due to the lack of data regarding similar instruments, if any, and the associated potential costs.
Our senior notes are carried at historical cost, net of amortized discount; we estimate the fair value of the senior notes for disclosure purposes. We have estimated the fair value of our $450 million senior notes payable to be $237.4 million at September 30, 2015. This estimation is based on the most recent trading values of the notes at or near the reporting dates, which is a Level 1 determination. See Note 8 for information on long-term debt.
We utilize the modified Black-Scholes and the Turnbull Wakeman option pricing models to estimate the fair values of oil and natural gas derivative contracts. Inputs to these models include observable inputs from the New York Mercantile Exchange (“NYMEX”) for futures contracts, and inputs derived from NYMEX observable inputs, such as implied volatility of oil and natural gas prices. We have classified the fair values of all our oil and natural gas derivative contracts as Level 2.
Oil and natural gas properties are subject to impairment testing and potential impairment write down. Oil and natural gas properties with a carrying amount of $295.7 million were written down to their fair value of $209.4 million, resulting in an impairment charge of $86.3 million for the nine months ended September 30, 2015. Oil and natural gas properties with a carrying amount of $74.1 million were written down to their fair value of $46.2 million, resulting in an impairment charge of $27.9 million for the nine months ended September 30, 2014. Oil and natural gas properties with a carrying amount of $15.5 million were written down to their fair value of $6.6 million, resulting in an impairment charge of $8.9 million for the three months ended September 30, 2015. For the three months ended September 30, 2014, oil and natural gas properties with a carrying amount of $13.8 million were written down to their fair value of $5.1 million, resulting in an impairment charge of $8.7 million. Significant Level 3 assumptions used in the calculation of estimated discounted cash flows in the impairment analysis included our estimate of future oil and natural gas prices, production costs, development expenditures, estimated timing of production of proved reserves, appropriate risk-adjusted discount rates, and other relevant data.
New additions to asset retirement obligations result from estimations for new properties, and fair values for them are categorized as Level 3. Such estimations are based on present value techniques that utilize company-specific information for such inputs as cost and timing of plugging and abandonment of wells and facilities. We recorded $1.7 million and $0.8 million in additions to asset retirement obligations measured at fair value during the nine months ended September 30, 2015 and 2014 respectively.
The following table presents information about our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value:
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||
(in thousands) |
|||||||||||
At September 30, 2015 (unaudited): |
|||||||||||
Financial Assets: |
|||||||||||
Derivative contracts for oil and natural gas |
— |
$ |
150,034 |
— |
$ |
150,034 | |||||
Financial Liabilities: |
|||||||||||
Derivative contracts for oil and natural gas |
— |
$ |
56,932 |
— |
$ |
56,932 | |||||
At December 31, 2014: |
|||||||||||
Financial Assets: |
|||||||||||
Derivative contracts for oil and natural gas |
— |
$ |
140,652 |
— |
$ |
140,652 | |||||
Financial Liabilities: |
|||||||||||
Derivative contracts for oil and natural gas |
— |
$ |
53,578 |
— |
$ |
53,578 |
9
The amounts above are presented on a gross basis; presentation on our consolidated balance sheets utilizes netting of assets and liabilities with the same counterparty where master netting agreements are in place. For additional information on derivative contracts, see Note 6.
6. DERIVATIVE FINANCIAL INSTRUMENTS
We account for our derivative contracts under the provisions of ASC 815, “Derivatives and Hedging.” We have entered into forward-swap contracts and collar contracts to reduce our exposure to price risk in the spot market for oil and natural gas. We also have utilized financial basis swap contracts, which address the price differential between market-wide benchmark prices and other benchmark pricing referenced in certain of our crude oil and natural gas sales contracts. Substantially all of our hedging agreements are executed by affiliates of our lenders under the credit facility described in Note 8, and are collateralized by the security interests of the respective affiliated lenders in certain of our assets under the credit facility. The contracts settle monthly and are scheduled to coincide with either oil production equivalent to barrels (Bbl) per month or gas production equivalent to volumes in millions of British thermal units (MMbtu) per month. The contracts represent agreements between us and the counter-parties to exchange cash based on a designated price, or in the case of financial basis hedging contracts, based on a designated price differential between various benchmark prices. Cash settlement occurs monthly. No derivative contracts have been entered into for trading or speculative purposes.
We have not designated any of our derivative contracts as fair value or cash flow hedges; accordingly we use mark-to-market accounting, recognizing changes in the fair value of derivative contracts in the consolidated statement of operations at each reporting date.
Derivative contracts are subject to master netting arrangements and are presented on a net basis in the consolidated balance sheets. This netting can cause derivative assets to be ultimately presented in a (liability) account on the consolidated balance sheets. Likewise, derivative (liabilities) could be presented in an asset account.
The following table summarizes the fair value (see Note 5 for further discussion of fair value) and classification of our derivative instruments, none of which have been designated as hedging instruments under ASC 815.
10
Fair Values of Derivative Contracts
Net Fair |
|||||||||
Gross |
Gross amounts |
Value of Assets |
|||||||
September 30, 2015 |
Fair Value |
offset against assets |
presented in |
||||||
Balance sheet location |
of Assets |
in the Balance Sheet |
the Balance Sheet |
||||||
(in thousands) |
|||||||||
(unaudited) |
|||||||||
Derivative financial instruments, current assets |
$ |
73,066 |
$ |
(19,742) |
$ |
53,324 | |||
Derivative financial instruments, long-term assets |
76,968 | (37,190) | 39,778 | ||||||
Total |
$ |
150,034 |
$ |
(56,932) |
$ |
93,102 |
Net Fair |
|||||||||
Gross |
Gross amounts |
Value of Liabilities |
|||||||
September 30, 2015 |
Fair Value |
offset against liabilities |
presented in |
||||||
Balance sheet location |
of Liabilities |
in the Balance Sheet |
the Balance Sheet |
||||||
(in thousands) |
|||||||||
(unaudited) |
|||||||||
Derivative financial instruments, current liabilities |
$ |
19,742 |
$ |
(19,742) |
$ |
— |
|||
Derivative financial instruments, long-term liabilities |
37,190 | (37,190) |
— |
||||||
Total |
$ |
56,932 |
$ |
(56,932) |
$ |
— |
Net Fair |
|||||||||
Gross |
Gross amounts |
Value of Assets |
|||||||
December 31, 2014 |
Fair Value |
offset against assets |
presented in |
||||||
Balance sheet location |
of Assets |
in the Balance Sheet |
the Balance Sheet |
||||||
(in thousands) |
|||||||||
Derivative financial instruments, current assets |
$ |
91,341 |
$ |
(31,538) |
$ |
59,803 | |||
Derivative financial instruments, long-term assets |
55,325 | (28,054) | 27,271 | ||||||
Total |
$ |
146,666 |
$ |
(59,592) |
$ |
87,074 |
Net Fair |
|||||||||
Gross |
Gross amounts |
Value of Liabilities |
|||||||
December 31, 2014 |
Fair Value |
offset against liabilities |
presented in |
||||||
Balance sheet location |
of Liabilities |
in the Balance Sheet |
the Balance Sheet |
||||||
(in thousands) |
|||||||||
Derivative financial instruments, current liabilities |
$ |
31,538 |
$ |
(31,538) |
$ |
— |
|||
Derivative financial instruments, long-term liabilities |
28,054 | (28,054) |
— |
||||||
Total |
$ |
59,592 |
$ |
(59,592) |
$ |
— |
11
The following table summarizes the effect of our derivative instruments in the consolidated statements of operations:
Derivatives not |
Three Months Ended |
Nine Months Ended |
||||||||||||
designated as hedging |
Location of |
September 30, |
September 30, |
|||||||||||
instruments under ASC 815 |
Gain (Loss) |
2015 |
2014 |
2015 |
2014 |
|||||||||
(in thousands) |
||||||||||||||
(unaudited) |
||||||||||||||
Oil commodity contracts |
Gain — |
|||||||||||||
oil and natural gas |
||||||||||||||
derivative contracts |
$ |
69,329 |
$ |
33,035 |
$ |
75,525 |
$ |
4,525 | ||||||
Natural gas commodity contracts |
Gain (loss) — |
|||||||||||||
oil and natural gas |
||||||||||||||
derivative contracts |
2,690 | 6,876 | 8,093 | (42) | ||||||||||
Total gains from |
||||||||||||||
derivatives not designated as hedges |
$ |
72,019 |
$ |
39,911 |
$ |
83,618 |
$ |
4,483 |
Although our counterparties provide no collateral, the master derivative agreements with each counterparty effectively allow us, so long as we are not a defaulting party, after a default or the occurrence of a termination event, to set-off an unpaid hedging agreement receivable against the interest of the counterparty in any outstanding balance under the credit facility.
If a counterparty were to default in payment of an obligation under the master derivative agreements, we could be exposed to commodity price fluctuations, and the protection intended by the hedge could be lost. The value of our derivative financial instruments would be impacted.
We had the following open derivative contracts for crude oil at September 30, 2015 (unaudited):
OIL DERIVATIVE CONTRACTS
Volume |
Weighted |
Range |
|||||||||
Period and Type of Contract |
in Bbls |
Average |
High |
Low |
|||||||
2015 |
|||||||||||
Price Swap Contracts |
800,450 |
$ |
66.76 |
$ |
93.00 |
$ |
55.56 | ||||
Collar Contracts |
|||||||||||
Short Call Options |
36,800 | 95.50 | 95.50 | 95.50 | |||||||
Long Put Options |
322,050 | 81.14 | 90.00 | 65.00 | |||||||
Short Put Options |
377,250 | 72.07 | 90.00 | 60.00 | |||||||
2016 |
|||||||||||
Price Swap Contracts |
1,771,300 | 68.17 | 94.92 | 60.00 | |||||||
Collar Contracts |
|||||||||||
Short Call Options |
1,042,700 | 102.18 | 130.00 | 75.00 | |||||||
Long Put Options |
1,042,700 | 81.95 | 95.00 | 63.00 | |||||||
Short Put Options |
1,225,700 | 68.67 | 75.00 | 60.00 | |||||||
2017 |
|||||||||||
Collar Contracts |
|||||||||||
Short Call Options |
1,595,150 | 90.17 | 113.83 | 71.35 | |||||||
Long Put Options |
1,412,650 | 72.27 | 90.00 | 60.00 | |||||||
Short Put Options |
1,412,650 | 54.63 | 70.00 | 45.00 | |||||||
2018 |
|||||||||||
Collar Contracts |
|||||||||||
Short Call Options |
1,183,000 | 80.51 | 104.65 | 72.00 | |||||||
Long Put Options |
1,183,000 | 67.05 | 80.00 | 62.50 | |||||||
Short Put Options |
1,183,000 | 48.90 | 60.00 | 45.00 | |||||||
2019 |
|||||||||||
Collar Contracts |
|||||||||||
Short Call Options |
821,250 | 75.17 | 75.70 | 74.50 | |||||||
Long Put Options |
821,250 | 62.50 | 62.50 | 62.50 | |||||||
Short Put Options |
821,250 | 45.00 | 45.00 | 45.00 |
12
We had the following open derivative contracts for natural gas at September 30, 2015 (unaudited):
NATURAL GAS DERIVATIVE CONTRACTS
Volume in |
Weighted |
Range |
|||||||||
Period and Type of Contract |
MMBtu |
Average |
High |
Low |
|||||||
2015 |
|||||||||||
Price Swap Contracts |
1,150,000 |
$ |
2.91 |
$ |
3.02 |
$ |
2.82 | ||||
Collar Contracts |
|||||||||||
Long Put Options |
85,250 | 3.50 | 3.50 | 3.50 | |||||||
Short Put Options |
85,250 | 3.50 | 3.50 | 3.50 | |||||||
2016 |
|||||||||||
Price Swap Contracts |
7,320,000 | 3.05 | 3.17 | 2.95 | |||||||
2017 |
|||||||||||
Collar Contracts |
|||||||||||
Short Call Options |
6,570,000 | 5.00 | 5.00 | 4.98 | |||||||
Long Put Options |
6,570,000 | 4.50 | 4.50 | 4.50 | |||||||
Short Put Options |
6,570,000 | 4.00 | 4.00 | 4.00 | |||||||
2018 |
|||||||||||
Collar Contracts |
|||||||||||
Short Call Options |
5,475,000 | 5.50 | 5.53 | 5.48 | |||||||
Long Put Options |
5,475,000 | 4.50 | 4.50 | 4.50 | |||||||
Short Put Options |
5,475,000 | 4.00 | 4.00 | 4.00 |
In those instances where contracts are identical as to time period, volume and strike price, and counterparty, but opposite as to direction (long and short), the volumes and average prices have been netted in the two tables above. Prices stated in the table above for oil may settle against either the NYMEX or Brent ICE indices or may reflect a mix of positions settling on these two indices.
7. ASSET RETIREMENT OBLIGATIONS
A summary of the changes in asset retirement obligations is included in the table below:
Nine Months Ended |
|||
September 30, 2015 |
|||
(in thousands) |
|||
(unaudited) |
|||
Balance, beginning of year |
$ |
62,872 | |
Liabilities incurred |
940 | ||
Liabilities assumed with acquired producing properties |
746 | ||
Liabilities settled |
(1,558) | ||
Liabilities transferred in sales of properties |
(353) | ||
Revisions to estimates |
(94) | ||
Accretion expense |
1,578 | ||
Balance, September 30, 2015 |
64,131 | ||
Less: Current portion |
688 | ||
Long-term portion |
$ |
63,443 |
The total revisions include $0.6 million related to reduction to oil and natural gas properties.
13
8. LONG-TERM DEBT AND NOTES PAYABLE TO FOUNDER
Long-term debt and notes payable to founder consists of the following:
September 30, |
December 31, |
||||
2015 |
2014 |
||||
(in thousands) |
|||||
(unaudited) |
|||||
Credit Facility |
$ |
241,087 |
$ |
319,520 | |
Senior Secured Term Loan |
125,000 |
— |
|||
Senior Notes, net of discount |
448,470 | 448,088 | |||
Total long-term debt |
$ |
814,557 |
$ |
767,608 | |
Notes payable to founder |
$ |
25,444 |
$ |