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EX-31.2 - EX-31.2 - TRANSATLANTIC PETROLEUM LTD.tat-ex312_11.htm
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EX-12.1 - EX-12.1 - TRANSATLANTIC PETROLEUM LTD.tat-ex121_7.htm
EX-32.1 - EX-32.1 - TRANSATLANTIC PETROLEUM LTD.tat-ex321_10.htm
EX-10.2 - EX-10.2 - TRANSATLANTIC PETROLEUM LTD.tat-ex102_125.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: March 31, 2016

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 May 9, 2016, the registrant had 41,336,966 common shares outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

 

 

Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

2

 

 

Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2016 and 2015

3

 

 

Consolidated Statement of Equity for the Three Months Ended March 31, 2016

4

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

5

 

 

Notes to Consolidated Financial Statements

6

 

 

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

21

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

27

 

 

Item 4. Controls and Procedures

28

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

29

 

 

Item 1A. Risk Factors

29

 

 

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

29

 

 

Item 3. Defaults Upon Senior Securities

29

 

 

Item 4. Mine Safety Disclosures

29

 

 

Item 5. Other Information

29

 

 

Item 6. Exhibits

31

 

 

 


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

TRANSATLANTIC PETROLEUM LTD.

Consolidated Balance Sheets

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

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

ASSETS

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

2,339

 

 

$

7,480

 

Restricted cash

 

10,742

 

 

 

3,758

 

Accounts receivable, net

 

 

 

 

 

 

 

Oil and natural gas sales

 

15,508

 

 

 

14,169

 

Joint interest and other

 

6,047

 

 

 

5,885

 

Related party

 

485

 

 

 

414

 

Prepaid and other current assets

 

2,624

 

 

 

2,807

 

Derivative asset

 

2,644

 

 

 

3,235

 

Assets held for sale

 

1,578

 

 

 

51,511

 

Total current assets

 

41,967

 

 

 

89,259

 

Property and equipment:

 

 

 

 

 

 

 

Oil and natural gas properties (successful efforts methods)

 

 

 

 

 

 

 

Proved

 

279,287

 

 

 

271,080

 

Unproved

 

31,894

 

 

 

31,135

 

Equipment and other property

 

36,930

 

 

 

36,708

 

 

 

348,111

 

 

 

338,923

 

Less accumulated depreciation, depletion and amortization

 

(160,294

)

 

 

(148,218

)

Property and equipment, net

 

187,817

 

 

 

190,705

 

Other long-term assets:

 

 

 

 

 

 

 

Other assets

 

3,231

 

 

 

3,025

 

Note receivable - related party

 

7,964

 

 

 

11,500

 

Derivative asset

 

3,504

 

 

 

3,370

 

Total other assets

 

14,699

 

 

 

17,895

 

Total assets

$

244,483

 

 

$

297,859

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

12,723

 

 

$

12,675

 

Accounts payable - related party

 

2,072

 

 

 

2,684

 

Accrued liabilities

 

13,999

 

 

 

10,583

 

Loans payable

 

34,341

 

 

 

36,676

 

Loans payable - related party

 

3,593

 

 

 

3,593

 

Liabilities held for sale - related party

 

 

 

 

3,540

 

Liabilities held for sale

 

16,004

 

 

 

65,649

 

Total current liabilities

 

82,732

 

 

 

135,400

 

Long-term liabilities:

 

 

 

 

 

 

 

Asset retirement obligations

 

9,590

 

 

 

9,237

 

Accrued liabilities

 

12,740

 

 

 

11,940

 

Deferred income taxes

 

27,919

 

 

 

27,360

 

Loans payable

 

34,350

 

 

 

34,400

 

Loans payable - related party

 

20,650

 

 

 

20,600

 

Total long-term liabilities

 

105,249

 

 

 

103,537

 

Total liabilities

 

187,981

 

 

 

238,937

 

Commitments and contingencies

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

Common shares, $0.10 par value, 100,000,000 shares authorized; 41,108,614 shares and 41,017,777 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively

 

4,111

 

 

 

4,102

 

Treasury stock

 

(970

)

 

 

(970

)

Additional paid-in-capital

 

569,513

 

 

 

569,365

 

Accumulated other comprehensive loss

 

(118,616

)

 

 

(121,590

)

Accumulated deficit

 

(397,536

)

 

 

(391,985

)

Total shareholders' equity

 

56,502

 

 

 

58,922

 

Total liabilities and shareholders' equity

$

244,483

 

 

$

297,859

 

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

 

 

March 31,

 

 

2016

 

 

2015

 

Revenues:

 

 

 

 

 

 

 

Oil and natural gas sales

$

14,526

 

 

$

25,408

 

Sales of purchased natural gas

 

1,026

 

 

 

298

 

Other

 

14

 

 

 

51

 

Total revenues

 

15,566

 

 

 

25,757

 

Costs and expenses:

 

 

 

 

 

 

 

Production

 

2,886

 

 

 

3,621

 

Exploration, abandonment and impairment

 

1,305

 

 

 

347

 

Cost of purchased natural gas

 

896

 

 

 

266

 

Seismic and other exploration

 

66

 

 

 

58

 

General and administrative

 

4,843

 

 

 

7,123

 

Depreciation, depletion and amortization

 

7,966

 

 

 

11,054

 

Accretion of asset retirement obligations

 

92

 

 

 

96

 

Total costs and expenses

 

18,054

 

 

 

22,565

 

Operating (loss) income

 

(2,488

)

 

 

3,192

 

Other income (expense):

 

 

 

 

 

 

 

Interest and other expense

 

(2,656

)

 

 

(3,108

)

Interest and other income

 

212

 

 

 

163

 

Gain on commodity derivative contracts

 

771

 

 

 

3,812

 

Foreign exchange gain (loss)

 

342

 

 

 

(6,451

)

Total other expense

 

(1,331

)

 

 

(5,584

)

Loss from continuing operations before income taxes

 

(3,819

)

 

 

(2,392

)

Income tax expense

 

(1,747

)

 

 

(1,631

)

Net loss from continuing operations

 

(5,566

)

 

 

(4,023

)

Loss from discontinued operations before income taxes

 

(938

)

 

 

(1,580

)

Gain on disposal of discontinued operations

 

749

 

 

 

-

 

Income tax benefit

 

204

 

 

 

109

 

Net gain (loss) from discontinued operations

 

15

 

 

 

(1,471

)

Net loss

$

(5,551

)

 

$

(5,494

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

2,974

 

 

 

(23,619

)

Comprehensive loss

$

(2,577

)

 

$

(29,113

)

 

 

 

 

 

 

 

 

Net loss per common share

 

 

 

 

 

 

 

Basic net loss per common share

 

 

 

 

 

 

 

Continuing operations

$

(0.14

)

 

$

(0.10

)

Discontinued operations

$

0.00

 

 

$

(0.04

)

Weighted average common shares outstanding

 

40,738

 

 

 

40,767

 

Diluted net loss per common share

 

 

 

 

 

 

 

Continuing operations

$

(0.14

)

 

$

(0.10

)

Discontinued operations

$

0.00

 

 

$

(0.04

)

Weighted average common and common equivalent shares outstanding

 

40,738

 

 

 

40,767

 

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, 2015

 

41,018

 

 

 

333

 

 

699

 

 

$

4,102

 

 

$

(970

)

 

$

569,365

 

 

$

(121,590

)

 

$

(391,985

)

 

$

58,922

 

Issuance of warrants

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Contingent payment event

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of restricted stock units

 

91

 

 

 

-

 

 

 

-

 

 

 

9

 

 

 

-

 

 

 

(9

)

 

 

-

 

 

 

-

 

 

 

-

 

Tax withholding on restricted stock units

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(21

)

 

 

-

 

 

 

-

 

 

 

(21

)

Repurchase of treasury stock

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Share-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

178

 

 

 

-

 

 

 

-

 

 

 

178

 

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,974

 

 

 

-

 

 

 

2,974

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,551

)

 

 

(5,551

)

Balance at March 31, 2016

 

41,109

 

 

 

333

 

 

 

699

 

 

$

4,111

 

 

$

(970

)

 

$

569,513

 

 

$

(118,616

)

 

$

(397,536

)

 

$

56,502

 

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 Three Months Ended

 

 

March 31,

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

Net loss

$

(5,551

)

 

$

(5,494

)

Adjustment for net (gain) loss from discontinued operations

 

(15

)

 

 

1,471

 

Net loss from continuing operations

 

(5,566

)

 

 

(4,023

)

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

 

 

 

 

 

 

 

Share-based compensation

 

178

 

 

 

267

 

Foreign currency (gain) loss

 

(155

)

 

 

4,599

 

Gain on commodity derivative contracts

 

(771

)

 

 

(3,812

)

Cash settlement on commodity derivative contracts

 

1,228

 

 

 

4,384

 

Amortization on loan financing costs

 

190

 

 

 

172

 

Deferred income tax expense

 

407

 

 

 

110

 

Exploration, abandonment and impairment

 

1,305

 

 

 

347

 

Depreciation, depletion and amortization

 

7,966

 

 

 

11,054

 

Accretion of asset retirement obligations

 

92

 

 

 

96

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(949

)

 

 

12,691

 

Prepaid expenses and other assets

 

94

 

 

 

681

 

Accounts payable and accrued liabilities

 

2,490

 

 

 

(5,867

)

Net cash provided by operating activities from continuing operations

 

6,509

 

 

 

20,699

 

Net cash used in operating activities from discontinued operations

 

(84

)

 

 

(6,907

)

Net cash provided by operating activities

 

6,425

 

 

 

13,792

 

Investing activities:

 

 

 

 

 

 

 

Additions to oil and natural gas properties

 

(2,205

)

 

 

(6,329

)

Restricted cash

 

(6,619

)

 

 

 

Additions to equipment and other properties

 

(139

)

 

 

(3,374

)

Net cash used in investing activities from continuing operations

 

(8,963

)

 

 

(9,703

)

Net cash used in investing activities from discontinued operations

 

 

 

 

(527

)

Net cash used in investing activities

 

(8,963

)

 

 

(10,230

)

Financing activities:

 

 

 

 

 

 

 

Tax withholding on restricted share units

 

(21

)

 

 

(78

)

Loan proceeds

 

 

 

 

7,600

 

Loan repayment

 

(2,588

)

 

 

(4,450

)

Net cash (used in) provided by financing activities from continuing operations

 

(2,609

)

 

 

3,072

 

Net cash used in financing activities from discontinued operations

 

 

 

 

(12,277

)

Net cash used in financing activities

 

(2,609

)

 

 

(9,205

)

Effect of exchange rate on cash flows and cash equivalents

 

6

 

 

 

(1,338

)

Net decrease in cash and cash equivalents

 

(5,141

)

 

 

(6,981

)

Cash and cash equivalents, beginning of period

 

7,480

 

 

 

35,132

 

Cash and cash equivalents, end of period

$

2,339

 

 

$

28,151

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid for interest

$

998

 

 

$

1,823

 

Cash paid for taxes

$

96

 

 

$

738

 

Supplemental non-cash financing activities:

 

 

 

 

 

 

 

Repayment of the prepayment agreement

$

 

 

$

609

 

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 and Bulgaria. As of May 9, 2016, 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 two operating segments – Turkey and Bulgaria.  Its assets consist of its ownership interests in subsidiaries that primarily own assets in Turkey and Bulgaria.

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 the 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, 2015.

2. Going concern

These consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern. These principles assume that we will be able to realize our assets and discharge our obligations in the normal course of operations for the foreseeable future.

We incurred a net loss of $5.6 million for the three months ended March 31, 2016, which included net gain from discontinued operations of $15,000. At March 31, 2016, the outstanding principal amount of our debt was $94.3 million (excluding unamortized deferred financing costs), and we had a working capital deficit (excluding assets and liabilities held for sale) of $26.3 million.

Due to the significant decline in Brent crude oil prices during 2015, the borrowing base under our senior credit facility (the “Senior Credit Facility”) with BNP Paribas (Suisse) SA (“BNP Paribas”) and the International Finance Corporation (“IFC”, and together with BNP Paribas, the “Lenders”) was decreased to $16.6 million effective December 30, 2015. The decline in the borrowing base resulted in a $15.5 million borrowing base deficiency under the Senior Credit Facility as of December 30, 2015.

As of March 31, 2016, we had $30.8 million outstanding under the Senior Credit Facility and no availability, and we were not in compliance with the current ratio financial covenant in the Senior Credit Facility.

On April 19, 2016, we entered into a second waiver and consent to credit agreement (the “Second Waiver and Consent”) with BNP Paribas and IFC, which granted us a conditional waiver of defaults under the Senior Credit Facility and the current ratio financial covenant non-compliance at December 31, 2015 and March 31, 2016.  The Second Waiver and Consent also permitted the borrowers to make certain limited transfers and withdrawals from the collection accounts pledged to the Lenders under the Senior Credit Facility.

6


The Second Waiver and Consent included certain conditions, including the following:

 

(i)

The borrowing base deficiency must be repaid by September 30, 2016 (provided that the Lenders may, in their sole and absolute discretion, agree in writing to extend such date to December 31, 2016) (the “Waiver Period”);

 

(ii)

All monthly hedge settlement proceeds shall be used to pay down debt outstanding under the Senior Credit Facility;

 

(iii)

Net proceeds from certain asset sales shall be used to prepay loans outstanding under the Senior Credit Facility;

 

(iv)

By June 30, 2016, the Lenders shall be granted a security interest over all of the equity interest in, and assets and property of, Thrace Basin Natural Gas (Turkiye) Corporation (“TBNG”); and

 

(v)

On or before September 30, 2016, all holders of our 13.0% convertible notes due 2017 (the “Convertible Notes”) shall either (a) convert their debt interest under the Convertible Notes into equity interest, or (b) agree to extend the maturity of the Convertible Notes to April 1, 2019 or later on substantially identical terms.

As of May 10, 2016, we had a borrowing base deficiency of $20.4 million and no availability.

Even if we obtain the funds to repay our borrowing base deficiency, we will need some form of debt restructuring, capital raising effort or asset sale in order to fund our operations and meet our substantial debt service obligations of approximately $39.3 million in 2016 and $55.0 million in 2017.  We have engaged Seaport Global Inc. as an independent advisor, and our management is actively pursuing improving our working capital position and/or restructuring our future debt service obligations in order to remain a going concern for the foreseeable future.

As a result there is substantial doubt regarding our ability to continue as a going concern.

Management believes the going concern assumption to be appropriate for these consolidated financial statements. If the going concern assumption was not appropriate, adjustments would be necessary to the carrying values of assets and liabilities, reported revenues and expenses and in the balance sheet classifications used in these consolidated financial statements.

 

 

3. Recent accounting pronouncements

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.  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.  As of March 31, 2016, we adopted ASU 2015-03 with no material impact on our consolidated financial statements and 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 March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”).  ASU 2016-08 does not change the core principle of Topic 606 but clarifies the implementation guidance on principal versus agent considerations.  ASU 2016-08 is effective for the annual and interim periods beginning after December 15, 2017.  We are currently assessing the potential impact of ASU 2016-08 on our consolidated financial statements and results of operations.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”).  ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.  ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted.  We are currently assessing the potential impact of ASU 2016-09 on our consolidated financial statements and results of operations.

7


In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”).  ASU 2016-10 does not change the core principle of Topic 606 but clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas.  ASU 2016-10 is effective for annual and interim periods beginning December 15, 2017.  We are currently assessing the potential impact of ASU 2016-10 on our consolidated financial statements and results of operations.

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.

 

 

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:

 

 

March 31, 2016

 

 

December 31, 2015

 

 

(in thousands)

 

Oil and natural gas properties, proved:

 

 

 

 

 

 

 

Turkey

$

278,778

 

 

$

270,591

 

Bulgaria

 

509

 

 

 

489

 

Total oil and natural gas properties, proved

 

279,287

 

 

 

271,080

 

Oil and natural gas properties, unproved:

 

 

 

 

 

 

 

Turkey

 

31,894

 

 

 

31,135

 

Total oil and natural gas properties, unproved

 

31,894

 

 

 

31,135

 

Gross oil and natural gas properties

 

311,181

 

 

 

302,215

 

Accumulated depletion

 

(150,535

)

 

 

(139,002

)

Net oil and natural gas properties

$

160,646

 

 

$

163,213

 

For the three months ended March 31, 2016, we recorded foreign currency translation adjustments, which increased proved properties and reduced accumulated other comprehensive loss within shareholders’ equity on our consolidated balance sheet.

At March 31, 2016 and December 31, 2015, we excluded $0.4 million and $0.7 million, respectively, from the depletion calculation for proved development wells currently in progress and for costs associated with fields currently not in production.

At March 31, 2016, the capitalized costs of our oil and natural gas properties, net of accumulated depletion, included $19.9 million relating to acquisition costs of proved properties, which are being depleted by the unit-of-production method using total proved reserves, and $108.5 million relating to well costs and additional development costs, which are being depleted by the unit-of-production method using proved developed reserves.

At December 31, 2015, the capitalized costs of our oil and natural gas properties included $20.0 million relating to acquisition costs of proved properties, which are being amortized by the unit-of-production method using total proved reserves, and $111.4 million relating to well costs and additional development costs, which are being amortized by the unit-of-production method using proved developed reserves

Impairments of proved properties and impairment of exploratory well costs

Proved oil and natural gas properties are reviewed for impairment when events and circumstances indicate the carrying value of such properties may not be recoverable. We primarily use Level 3 inputs to determine fair value, including but are not limited to, estimates of proved reserves, future commodity prices, the timing and amount of future production and capital expenditures and discount rates commensurate with the risk reflective of the lives remaining for the respective oil and natural gas properties.

During the three months ended March 31, 2016 and 2015, we recorded $1.3 million and $0.3 million, respectively, of impairment of proved properties and exploratory well costs which are primarily measured using Level 3 inputs.  Of the $1.3 million of impairment recorded during the three months ended March 31, 2016, $0.2 million was related to cash spent during the three months ended March 31, 2016.

8


Capitalized cost greater than one year

As of March 31, 2016, we had $1.3 million and $2.2 million of exploratory well costs capitalized for the Hayrabolu-10 and Pinar-1 wells, respectively, in Turkey, which we spud in February 2013 and March 2014, respectively. The Hayrabolu-10 and Pinar-1 wells continue to be held for completion.

Equipment and other property

The historical cost of equipment and other property, presented on a gross basis with accumulated depreciation, is summarized as follows:

 

 

March 31, 2016

 

 

December 31, 2015

 

 

(in thousands)

 

Inventory

$

21,192

 

 

$

21,338

 

Leasehold improvements, office equipment and software

 

7,965

 

 

 

7,794

 

Gas gathering system and facilities

 

4,923

 

 

 

4,798

 

Other equipment

 

2,441

 

 

 

2,378

 

Vehicles

 

409

 

 

 

400

 

Gross equipment and other property

 

36,930

 

 

 

36,708

 

Accumulated depreciation

 

(9,759

)

 

 

(9,216

)

Net equipment and other property

$

27,171

 

 

$

27,492

 

 

We classify our materials and supply inventory, including steel tubing and casing, as long-term assets because such materials will ultimately be classified as long-term assets when the material is used in the drilling of a well.

At March 31, 2016 and December 31, 2015, we excluded $21.2 million and $21.3 million of inventory, respectively, from depreciation as the inventory had not been placed into service.

 

5. Asset retirement obligations

The following table summarizes the changes in our asset retirement obligations (“ARO”) for the three months ended March 31, 2016 and for the year ended December 31, 2015:

 

 

March 31, 2016

 

 

December 31, 2015

 

 

(in thousands)

 

Asset retirement obligations at beginning of period

$

9,237

 

 

$

10,543

 

Change in estimates

 

 

 

 

385

 

Foreign exchange change effect

 

261

 

 

 

(2,137

)

Additions

 

 

 

 

78

 

Accretion expense

 

92

 

 

 

368

 

Asset retirement obligations at end of period

 

9,590

 

 

 

9,237

 

Less: current portion

 

 

 

 

 

Long-term portion

$

9,590

 

 

$

9,237

 

 

Our ARO is measured using primarily Level 3 inputs. The significant unobservable inputs to this fair value measurement include estimates of plugging costs, remediation costs, inflation rate and well life. The inputs are calculated based on historical data as well as current estimated costs.

 

6. Commodity derivative instruments

We use collar derivative contracts to economically hedge against the variability in cash flows associated with the forecasted sale of a portion of our future oil production. We have not designated the derivative contracts as hedges for accounting purposes, and accordingly, we record the derivative contracts at fair value and recognize changes in fair value in earnings as they occur.

To the extent that a legal right of offset exists, we net the value of our derivative contracts with the same counterparty in our consolidated balance sheets. All of our oil derivative contracts are settled based upon Brent crude oil pricing. We recognize gains and losses related to these contracts on a fair value basis in our consolidated statements of comprehensive (loss) income under the caption

9


“Gain on commodity derivative contracts.” Settlements of derivative contracts are included in operating activities on our consolidated statements of cash flows under the caption “Cash settlement on commodity derivative contracts.” We are required under our Senior Credit Facility to hedge at least 30% of our anticipated oil production volumes in Turkey.

During the three months ended March 31, 2016 and 2015, we recorded a net gain on commodity derivative contracts of $0.8 million and $3.8 million, respectively.

At March 31, 2016 and December 31, 2015, we had outstanding contracts with respect to our future crude oil production as set forth in the tables below:

Fair Value of Derivative Instruments as of March 31, 2016

 

 

 

 

 

Puts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

 

Estimated Fair

 

 

 

 

 

Quantity

 

 

Price

 

 

Value of

 

Type

 

Period

 

(Bbl/day)

 

 

(per Bbl)

 

 

Asset

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Put

 

April 1, 2016—

December 31, 2016

 

 

771

 

 

$

50.00

 

 

 

2,057

 

Put

 

January 1, 2017—

December 31, 2017

 

 

610

 

 

$

50.00

 

 

 

2,109

 

Put

 

January 1, 2018—

December 31, 2018

 

 

494

 

 

$

50.00

 

 

 

1,630

 

Put

 

January 1, 2019—

March 31, 2019

 

 

443

 

 

$

50.00

 

 

 

352

 

Total estimated fair value of asset

 

 

 

 

 

 

 

 

 

 

 

$

6,148

 

Fair Value of Derivative Instruments as of December 31, 2015

 

 

 

 

 

Puts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

 

Estimated Fair

 

 

 

 

 

Quantity

 

 

Price

 

 

Value of

 

Type

 

Period

 

(Bbl/day)

 

 

(per Bbl)

 

 

Asset

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Put

 

January 1, 2016—

December 31, 2016

 

 

808

 

 

$

50.00

 

 

 

3,235

 

Put

 

January 1, 2017—

December 31, 2017

 

 

610

 

 

$

50.00

 

 

 

1,798

 

Put

 

January 1, 2018—

December 31, 2018

 

 

494

 

 

$

50.00

 

 

 

1,292

 

Put

 

January 1, 2019—

March 31, 2019

 

 

443

 

 

$

50.00

 

 

 

280

 

Total estimated fair value of asset

 

 

 

 

 

 

 

 

 

 

 

$

6,605

 

10


Balance sheet presentation

The following table summarizes both: (i) the gross fair value of our commodity derivative instruments by the appropriate balance sheet classification even when the commodity derivative instruments are subject to netting arrangements and qualify for net presentation in our consolidated balance sheets at March 31, 2016 and December 31, 2015, and (ii) the net recorded fair value as reflected on our consolidated balance sheets at March 31, 2016 and December 31, 2015.

 

 

 

 

 

As of March 31, 2016

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Net Amount of

 

 

 

 

 

Gross

 

 

Offset in the

 

 

Assets

 

 

 

 

 

Amount of

 

 

Consolidated

 

 

Presented in the

 

 

 

 

 

Recognized

 

 

Balance

 

 

Consolidated

 

Underlying Commodity

 

Location on Balance Sheet

 

Assets

 

 

Sheet

 

 

Balance Sheet

 

 

 

 

 

(in thousands)

 

Crude oil