Attached files

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EX-31.1 - EX-31.1 - Alta Mesa Holdings, LPc403-20150930xex311.htm
EX-31.2 - EX-31.2 - Alta Mesa Holdings, LPc403-20150930xex312.htm
EX-32.1 - EX-32.1 - Alta Mesa Holdings, LPc403-20150930xex321.htm
EX-32.2 - EX-32.2 - Alta Mesa Holdings, LPc403-20150930xex322.htm

093harvesile] 

 

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)

 

 

 

 

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)

 

 

 

 

 

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


 

 

Table of Contents 

 

 

 

 

 

Page Number

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements 

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

Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014 

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

Notes to Consolidated Financial Statements (unaudited) 

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 

Item 4. Controls and Procedures 

30 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings 

30 

Item 1A. Risk Factors 

30 

Item 5. Other Information 

30 

Item 6. Exhibits 

30 

Signatures 

32 

 

 

 

 

 

2


 

PART I — FINANCIAL INFORMATION

ITEM  1. Financial Statements

ALTA MESA HOLDINGS, LP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(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 

 

 

 

 

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 proceedsAs of September 30, 2015, approximately $122.0 million of proceeds to be received from the sale, including $7.0 million of customary purchase price

7


 

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.

 

 

 

8


 

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, 2015For 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 

 

$

24,540 

 

Credit Facility.  On June 2, 2015, we entered into an Agreement and Amendment No. 11 (the “Eleventh Amendment”) to the credit facility, with Wells Fargo Bank, National Association, as administrative agent, and the lenders signatory thereto.  The Eleventh Amendment, among other things, (i) redetermined and decreased the borrowing base from $375 million to $300