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EX-32.1 - EX-32.1 - TRANSATLANTIC PETROLEUM LTD.tat-ex321_6.htm
EX-31.2 - EX-31.2 - TRANSATLANTIC PETROLEUM LTD.tat-ex312_8.htm
EX-31.1 - EX-31.1 - TRANSATLANTIC PETROLEUM LTD.tat-ex311_7.htm
EX-12.1 - EX-12.1 - TRANSATLANTIC PETROLEUM LTD.tat-ex121_10.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended: March 31, 2017

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      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      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  

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

As of May 8, 2017, the registrant had 47,337,805 common shares outstanding.

 

 

 


TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

 

 

Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

3

 

 

Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2017 and 2016

4

 

 

Consolidated Statement of Equity for the Three Months Ended March 31, 2017

5

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016

6

 

 

Notes to Consolidated Financial Statements

7

 

 

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

21

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

26

 

 

Item 4. Controls and Procedures

27

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

28

 

 

Item 1A. Risk Factors

28

 

 

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

28

 

 

Item 3. Defaults Upon Senior Securities

28

 

 

Item 4. Mine Safety Disclosures

28

 

 

Item 5. Other Information

28

 

 

Item 6. Exhibits

30

 

 

 


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, 2017

 

 

December 31, 2016

 

ASSETS

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

15,300

 

 

$

10,034

 

Restricted cash

 

 

 

 

2,555

 

Accounts receivable, net

 

 

 

 

 

 

 

Oil and natural gas sales

 

16,428

 

 

 

17,885

 

Joint interest and other

 

5,216

 

 

 

3,230

 

Related party

 

791

 

 

 

762

 

Prepaid and other current assets

 

6,239

 

 

 

4,756

 

Derivative asset

 

126

 

 

 

 

Inventory

 

3,527

 

 

 

3,647

 

Assets held for sale

 

 

 

 

25,217

 

Total current assets

 

47,627

 

 

 

68,086

 

Property and equipment:

 

 

 

 

 

 

 

Oil and natural gas properties (successful efforts method)

 

 

 

 

 

 

 

Proved

 

192,761

 

 

 

197,214

 

Unproved

 

24,821

 

 

 

21,109

 

Equipment and other property

 

18,723

 

 

 

20,273

 

 

 

236,305

 

 

 

238,596

 

Less accumulated depreciation, depletion and amortization

 

(121,362

)

 

 

(120,638

)

Property and equipment, net

 

114,943

 

 

 

117,958

 

Other long-term assets:

 

 

 

 

 

 

 

Other assets

 

2,208

 

 

 

2,725

 

Note receivable - related party

 

7,405

 

 

 

7,624

 

Derivative asset

 

24

 

 

 

 

Total other assets

 

9,637

 

 

 

10,349

 

Total assets

$

172,207

 

 

$

196,393

 

LIABILITIES, SERIES A PREFERRED SHARES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

5,667

 

 

$

7,036

 

Accounts payable - related party

 

1,961

 

 

 

1,844

 

Accrued liabilities

 

12,390

 

 

 

12,492

 

Derivative liability

 

 

 

 

596

 

Loans payable

 

25,950

 

 

 

34,750

 

Loan payable - related party

 

525

 

 

 

3,444

 

Liabilities held for sale

 

 

 

 

15,938

 

Total current liabilities

 

46,493

 

 

 

76,100

 

Long-term liabilities:

 

 

 

 

 

 

 

Asset retirement obligations

 

4,701

 

 

 

4,833

 

Accrued liabilities

 

8,304

 

 

 

8,126

 

Deferred income taxes

 

19,077

 

 

 

18,806

 

Loans payable

 

4,125

 

 

 

3,750

 

Derivative liability

 

 

 

 

242

 

Total long-term liabilities

 

36,207

 

 

 

35,757

 

Total liabilities

 

82,700

 

 

 

111,857

 

Commitments and contingencies

 

 

 

 

 

 

 

Series A preferred shares, $0.01 par value, 426,000 shares authorized; 426,000 shares issued and outstanding with a liquidation preference of $50 per share as of March 31, 2017 and December 31, 2016, respectively

 

21,300

 

 

 

21,300

 

Series A preferred shares-related party, $0.01 par value, 495,000 shares authorized; 495,000 shares issued and outstanding with a liquidation preference of $50 per share as of March 31, 2017 and December 31, 2016, respectively

 

24,750

 

 

 

24,750

 

Shareholders' equity:

 

 

 

 

 

 

 

Common shares, $0.10 par value, 100,000,000 shares authorized; 47,312,231 shares and 47,220,525 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively

 

4,731

 

 

 

4,722

 

Treasury stock

 

(970

)

 

 

(970

)

Additional paid-in-capital

 

573,370

 

 

 

573,278

 

Accumulated other comprehensive loss

 

(119,397

)

 

 

(140,316

)

Accumulated deficit

 

(414,277

)

 

 

(398,228

)

Total shareholders' equity

 

43,457

 

 

 

38,486

 

Total liabilities, Series A preferred shares and shareholders' equity

$

172,207

 

 

$

196,393

 

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

 

 

3


 

 

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,

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

Oil and natural gas sales

$

15,768

 

 

$

14,526

 

Sales of purchased natural gas

 

654

 

 

 

1,026

 

Other

 

14

 

 

 

14

 

Total revenues

 

16,436

 

 

 

15,566

 

Costs and expenses:

 

 

 

 

 

 

 

Production

 

3,087

 

 

 

2,886

 

Exploration, abandonment and impairment

 

106

 

 

 

1,305

 

Cost of purchased natural gas

 

568

 

 

 

896

 

Seismic and other exploration

 

15

 

 

 

66

 

General and administrative

 

3,590

 

 

 

4,843

 

Depreciation, depletion and amortization

 

4,497

 

 

 

7,966

 

Accretion of asset retirement obligations

 

48

 

 

 

92

 

Total costs and expenses

 

11,911

 

 

 

18,054

 

Operating income (loss)

 

4,525

 

 

 

(2,488

)

Other income (expense):

 

 

 

 

 

 

 

Loss on sale of TBNG

 

(15,226

)

 

 

-

 

Interest and other expense

 

(2,371

)

 

 

(2,656

)

Interest and other income

 

293

 

 

 

212

 

Gain on commodity derivative contracts

 

988

 

 

 

771

 

Foreign exchange (loss) gain

 

(2,123

)

 

 

342

 

Total other expense

 

(18,439

)

 

 

(1,331

)

Loss from continuing operations before income taxes

 

(13,914

)

 

 

(3,819

)

Income tax expense

 

(2,135

)

 

 

(1,747

)

Net loss from continuing operations

 

(16,049

)

 

 

(5,566

)

Loss from discontinued operations before income taxes

 

-

 

 

 

(938

)

Gain on disposal of discontinued operations

 

-

 

 

 

749

 

Income tax benefit

 

-

 

 

 

204

 

Net income from discontinued operations

 

-

 

 

 

15

 

Net loss

$

(16,049

)

 

$

(5,551

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

20,919

 

 

 

2,974

 

Comprehensive income (loss)

$

4,870

 

 

$

(2,577

)

 

 

 

 

 

 

 

 

Net loss per common share

 

 

 

 

 

 

 

Basic net loss per common share

 

 

 

 

 

 

 

Continuing operations

$

(0.34

)

 

$

(0.14

)

Discontinued operations

$

0.00

 

 

$

0.00

 

Weighted average common shares outstanding

 

47,298

 

 

 

40,738

 

Diluted net loss per common share

 

 

 

 

 

 

 

Continuing operations

$

(0.34

)

 

$

(0.14

)

Discontinued operations

$

0.00

 

 

$

0.00

 

Weighted average common and common equivalent shares outstanding

 

47,298

 

 

 

40,738

 

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

 

 

 

4


 

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, 2016

 

47,220

 

 

 

333

 

 

699

 

 

$

4,722

 

 

$

(970

)

 

$

573,278

 

 

$

(140,316

)

 

$

(398,228

)

 

$

38,486

 

Issuance of restricted stock units

 

92

 

 

 

-

 

 

 

-

 

 

 

9

 

 

 

-

 

 

 

(9

)

 

 

-

 

 

 

-

 

 

 

-

 

Tax withholding on restricted stock units

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(35

)

 

 

-

 

 

 

-

 

 

 

(35

)

Share-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

136

 

 

 

-

 

 

 

-

 

 

 

136

 

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

20,919

 

 

 

-

 

 

 

20,919

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(16,049

)

 

 

(16,049

)

Balance at March 31, 2017

 

47,312

 

 

 

333

 

 

 

699

 

 

$

4,731

 

 

$

(970

)

 

$

573,370

 

 

$

(119,397

)

 

$

(414,277

)

 

$

43,457

 

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

 

 

 

5


 

TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands of U.S. Dollars)

 

 

For the Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

Net loss

$

(16,049

)

 

$

(5,551

)

Adjustment for net income from discontinued operations

 

 

 

 

(15

)

Net loss from continuing operations

 

(16,049

)

 

 

(5,566

)

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

 

 

 

 

 

 

 

Share-based compensation

 

136

 

 

 

178

 

Foreign currency loss (gain)

 

1,039

 

 

 

(155

)

Gain on commodity derivative contracts

 

(988

)

 

 

(771

)

Cash settlement on commodity derivative contracts

 

 

 

 

1,228

 

Loss on sale of TBNG

 

15,226

 

 

 

 

Amortization on loan financing costs

 

37

 

 

 

190

 

Deferred income tax expense

 

1,251

 

 

 

407

 

Exploration, abandonment and impairment

 

106

 

 

 

1,305

 

Depreciation, depletion and amortization

 

4,497

 

 

 

7,966

 

Accretion of asset retirement obligations

 

48

 

 

 

92

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(1,665

)

 

 

(949

)

Prepaid expenses and other assets

 

(1,151

)

 

 

94

 

Accounts payable and accrued liabilities

 

(628

)

 

 

2,490

 

Net cash provided by operating activities from continuing operations

 

1,859

 

 

 

6,509

 

Net cash used in operating activities from discontinued operations

 

 

 

 

(84

)

Net cash provided by operating activities

 

1,859

 

 

 

6,425

 

Investing activities:

 

 

 

 

 

 

 

Additions to oil and natural gas properties

 

(6,383

)

 

 

(2,205

)

Additions to equipment and other properties

 

(155

)

 

 

(139

)

Restricted cash

 

2,166

 

 

 

(6,619

)

Proceeds from the sale of TBNG

 

17,779

 

 

 

 

Net cash provided by (used in) investing activities

 

13,407

 

 

 

(8,963

)

Financing activities:

 

 

 

 

 

 

 

Tax withholding on restricted share units

 

(35

)

 

 

(21

)

Loan repayment

 

(8,650

)

 

 

(2,588

)

Loan repayment - related party

 

(2,694

)

 

 

 

Net cash used in financing activities

 

(11,379

)

 

 

(2,609

)

Effect of exchange rate on cash flows and cash equivalents

 

(172

)

 

 

6

 

Net increase (decrease) in cash and cash equivalents

 

3,715

 

 

 

(5,141

)

Cash and cash equivalents, beginning of period (1)

 

11,585

 

 

 

7,480

 

Cash and cash equivalents, end of period

$

15,300

 

 

$

2,339

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid for interest

$

2,713

 

 

$

998

 

Cash paid for taxes

$

989

 

 

$

96

 

 

 

 

 

 

 

 

 

(1) Includes TBNG cash held for sale of $1.6 million at December 31, 2016.

 

 

 

 

 

 

 

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

 

 


6


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, 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 and an operated interest in a joint venture in Albania. As of May 8, 2017, approximately 48% 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 and an operated interest in a joint venture in Albania.

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, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.  During the three months ended March 31, 2017, we reclassified certain balance sheet amounts previously reported on our consolidated balance sheet at December 31, 2016 to conform to current year presentation.  

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, 2016.

 

On February 24, 2017, we closed the sale of our ownership interests in our subsidiary Thrace Basin Natural Gas (Turkiye) Corporation (“TBNG”) for gross proceeds of $20.9 million, and approximate net cash proceeds of $16.3 million, effective as of March 31, 2016. The purchase price was subject to post-closing adjustments, and we agreed to escrow $3.1 million of the purchase price for 30 days to satisfy any agreed upon purchase price adjustments.  We agreed to a $0.2 million reduction to the purchase price and, as of March 31, 2017, escrowed funds of $2.9 million were classified as “Joint interest and other” accounts receivable on our consolidated balance sheets.  On April 10, 2017, we collected the $2.9 million of escrowed funds.  

 

We classified the assets and liabilities of TBNG within the captions “Assets held for sale” and “Liabilities held for sale” on our consolidated balance sheets as of December 31, 2016.  Although the sale of TBNG met the threshold to classify its assets and liabilities as held for sale, it didn’t meet the requirements to classify its operations as discontinued as the sale wasn’t considered a strategic shift in the Company’s operations. As such, TBNG’s results of operations are classified as continuing operations for all periods presented (See Note 13, “Assets and liabilities held for sale and discontinued operations”).

 

2. Recent accounting pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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 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

7


the related principles for those areas.  ASU 2016-10 is effective for annual and interim periods beginning after December 15, 2017.  We are currently assessing the potential impact of ASU 2016-10 on our consolidated financial statements and results of operations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”).  ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing the potential impact of ASU 2016-13 on our consolidated financial statements and results of operations.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU 2016-15 provide guidance on specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. We are currently assessing the potential impact of ASU 2016-15 on our consolidated financial statements and results of operations.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”).  ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The amended guidance will be effective for annual periods beginning after December 15, 2017. The amendments should be applied using a retrospective transition method to each period presented. Early adoption is permitted for any entity in any interim or annual period. We are currently evaluating the potential impact of ASU 2016-18 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.

 

3. Series A Preferred Shares

 

Series A Preferred Shares

 

On November 4, 2016, we issued 921,000 shares of our 12.0% Series A Convertible Redeemable Preferred Shares (“Series A Preferred Shares”). Of the 921,000 Series A Preferred Shares, (i) 815,000 shares were issued in exchange for $40.75 million of our 13.0% Convertible Notes due 2017 (“2017 Notes”), at an exchange rate of 20 Series A Preferred Shares for each $1,000 principal amount of 2017 Notes, and (ii) 106,000 shares were issued and sold for $5.3 million of cash to certain holders of the 2017 Notes. All of the Series A Preferred Shares were issued at a value of $50.00 per share. We used $4.3 million of the gross proceeds to redeem a portion of the remaining 2017 Notes on January 1, 2017. The remaining proceeds were used for general corporate purposes. The Series A Preferred Shares contain a substantive conversion option, are mandatorily redeemable and convert into a fixed number of common shares. As a result, under U.S GAAP, we have classified the Series A Preferred Shares within mezzanine equity in our consolidated balance sheets. As of March 31, 2017, there were $21.3 million of Series A Preferred Shares and $24.8 million of Series A Preferred Shares – related party outstanding.

 

Pursuant to the Certificate of Designations for the Series A Preferred Shares (the “Certificate of Designations”), each Series A Preferred Share may be converted at any time, at the option of the holder, into 45.754 common shares of the Company (which is equal to an initial conversion price of approximately $1.0928 per common share and is subject to customary adjustments for stock splits, stock dividends, recapitalizations or other fundamental changes). During the period ending on November 4, 2017, the conversion rate will be adjusted on an economic weighted average anti-dilution basis for the issuance of common shares for cash at a price below the conversion price then in effect. Such anti-dilution protection excludes (i) dividends paid on the Series A Preferred Shares in common shares, (ii) issuances of common shares in connection with acquisitions, (iii) issuances of common shares under currently outstanding convertible notes and warrants and (iv) issuances of common shares in connection with employee compensation arrangements and employee benefit plans. This non-standard dilution adjustment clause results in a contingent beneficial conversion feature.  

 

8


If not converted sooner, on November 4, 2024, we are required to redeem the outstanding Series A Preferred Shares in cash at a price per share equal to the liquidation preference plus accrued and unpaid dividends. At any time on or after November 4, 2020, we may redeem all or a portion of the Series A Preferred Shares at the redemption prices listed below (expressed as a percentage of the liquidation preference amount per share) plus accrued and unpaid dividends to the date of redemption, if the closing sale price of the common shares equals or exceeds 150% of the conversion price then in effect for at least 10 trading days (whether or not consecutive) in a period of 20 consecutive trading days, including the last trading day of such 20 trading day period, ending on, and including, the trading day immediately preceding the business day on which we issue a notice of optional redemption. The redemption prices for the 12-month period starting on the date below are:

 

Period Commencing

Redemption Price

November 4, 2020

105.000%

November 4, 2021

103.000%

November 4, 2022

101.000%

November 4, 2023 and thereafter

100.000%

 

Additionally, upon the occurrence of a change of control, we are required to offer to redeem the Series A Preferred Shares within 120 days after the first date on which such change of control occurred, for cash at a redemption price equal to the liquidation preference per share, plus any accrued and unpaid dividends.  

 

Dividends on the Series A Preferred Shares are payable quarterly at our election in cash, common shares or a combination of cash and common shares at an annual dividend rate of 12.0% of the liquidation preference if paid all in cash or 16.0% of the liquidation preference if paid in common shares. If paid partially in cash and partially in common shares, the dividend rate on the cash portion is 12.0%, and the dividend rate on the common share portion is 16.0%. Dividends are payable quarterly, on March 31, June 30, September 30, and December 31 of each year. The holders of the Series A Preferred Shares also are entitled to participate pro-rata in any dividends paid on the common shares on an as-converted-to-common shares basis. For the three months ended March 31, 2017, we paid $1.4 million in cash dividends on the Series A Preferred Shares, which is recorded in our consolidated statements of comprehensive (loss) income under the caption “Interest and other expense”.  

 

Except as required by Bermuda law the holders of Series A Preferred Shares have no voting rights, except that for so long as at least 400,000 Series A Preferred Shares are outstanding, the holders of the Series A Preferred Shares voting as a separate class have the right to elect two directors to our Board of Directors. For so long as between 80,000 and 399,999 Series A Preferred Shares are outstanding, the holders of the Series A Preferred Shares voting as a separate class have the right to elect one director to our Board of Directors. Upon less than 80,000 Series A Preferred Shares remaining outstanding, any directors elected by the holders of Series A Preferred Shares shall immediately resign from our Board of Directors.

 

The Certificate of Designation also provides that without the approval of the holders of a majority of the outstanding Series A Preferred Shares, we will not issue indebtedness for money borrowed or other securities which are senior to the Series A Preferred Shares in excess of the greater of (i) $100 million or (ii) 35% of our PV-10 of proved reserves as disclosed in our most recent independent reserve report filed or furnished by us on EDGAR. In addition, until our 2017 Notes are repaid in full, we will not issue indebtedness for money borrowed (other than ordinary trade indebtedness and up to $30.0 million borrowed from DenizBank, A.S. (“DenizBank”)), unless the net proceeds thereof are used (i) to redeem, retire or repay the 2017 Notes, (ii) spud, drill or complete two designated wells, or (iii) used in connection with collateralization or guarantees with respect to our hedging efforts.  

 

We have agreed to use commercially reasonable efforts to file a shelf registration statement for the resale of the Series A Preferred Shares and the common shares issuable upon conversion of the Series A Preferred Shares prior to November 5, 2017 and have such shelf registration statement declared effective by the Securities and Exchange Commission (the “SEC”) as soon as practicable after filing.

 

9


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, 2017

 

 

December 31, 2016

 

 

(in thousands)

 

Oil and natural gas properties, proved:

 

 

 

 

 

 

 

Turkey

$

192,283

 

 

$

196,743

 

Bulgaria

 

478

 

 

 

471

 

Total oil and natural gas properties, proved

 

192,761

 

 

 

197,214

 

Oil and natural gas properties, unproved:

 

 

 

 

 

 

 

Turkey

 

24,821

 

 

 

21,109

 

Total oil and natural gas properties, unproved

 

24,821

 

 

 

21,109

 

Gross oil and natural gas properties

 

217,582

 

 

 

218,323

 

Accumulated depletion

 

(116,011

)

 

 

(115,401

)

Net oil and natural gas properties

$

101,571

 

 

$

102,922

 

For the three months ended March 31, 2017, we recorded foreign currency translation adjustments, which decreased proved properties and increased accumulated other comprehensive loss within shareholders’ equity on our consolidated balance sheet.

At March 31, 2017 and December 31, 2016, we excluded $0.1 million and $1.9 million, respectively, from the depletion calculation for proved development wells currently in progress and for costs associated with fields currently not in production.

At March 31, 2017, the capitalized costs of our oil and natural gas properties, net of accumulated depletion, included $12.5 million relating to acquisition costs of proved properties, which are being depleted by the unit-of-production method using total proved reserves, and $64.2 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, 2016, the capitalized costs of our oil and natural gas properties included $13.2 million relating to acquisition costs of proved properties, which are being amortized by the unit-of-production method using total proved reserves, and $66.7 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, 2017 and 2016, we recorded $0.1 million and $1.3 million, respectively, of impairment of proved properties and exploratory well costs which are primarily measured using Level 3 inputs.  

Capitalized cost greater than one year

As of March 31, 2017, we had $1.9 million of exploratory well costs capitalized for the Pinar-1 well, in Turkey, which we spud in March 2014. We are currently sidetracking the Pinar-1 well.

10


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, 2017

 

 

December 31, 2016

 

 

(in thousands)

 

Inventory

$

9,050

 

 

$

10,704

 

Leasehold improvements, office equipment and software

 

7,371

 

 

 

7,280

 

Vehicles

 

354

 

 

 

364

 

Other equipment

 

1,948

 

 

 

1,925

 

Gross equipment and other property

 

18,723

 

 

 

20,273

 

Accumulated depreciation

 

(5,351

)

 

 

(5,237

)

Net equipment and other property

$

13,372

 

 

$

15,036

 

 

At March 31, 2017, we have classified $3.5 million of inventory as a current asset, which represents our expected inventory consumption in the next twelve months. We classify our materials and supply inventory 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, 2017 and December 31, 2016, we excluded $12.6 million and $14.4 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, 2017 and for the year ended December 31, 2016:

 

 

March 31, 2017

 

 

December 31, 2016

 

 

(in thousands)

 

Asset retirement obligations at beginning of period

$

4,833

 

 

$

9,237

 

Liabilities settled

 

(37

)

 

 

(7

)

Foreign exchange change effect

 

(143

)

 

 

(1,604

)

Additions

 

 

 

 

16

 

Accretion expense

 

48

 

 

 

373

 

Asset retirement obligations at end of period

 

4,701

 

 

 

8,015

 

Less: TBNG

 

 

 

 

3,182

 

Long-term portion

$

4,701

 

 

$

4,833

 

 

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 “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.”

During the three months ended March 31, 2017 and 2016, we recorded a net gain on commodity derivative contracts of $1.0 million and $0.8 million, respectively.

11


At March 31, 2017 and December 31, 2016, we had outstanding derivative contracts with respect to our future crude oil production as set forth in the tables below (See Note 14, “Subsequent Events”):

Fair Value of Derivative Instruments as of March 31, 2017

 

 

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

 

 

 

Quantity

 

 

Minimum

 

 

Maximum Price

 

 

Estimated Fair

 

Type

 

Period

 

(Bbl/day)

 

 

Price (per Bbl)

 

 

(per Bbl)

 

 

Value of Asset

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Collar

 

April 1, 2017 — December 31, 2017

 

 

295

 

 

$

47.50

 

 

$

61.00

 

 

$

25

 

Collar

 

April 1, 2017 — December 31, 2017

 

 

442

 

 

$

50.00

 

 

$

61.50

 

 

 

101

 

Collar

 

January 1, 2018 — February 28, 2018

 

 

458

 

 

$

50.00

 

 

$

61.50

 

 

 

19

 

Collar

 

January 1, 2018 — May 31, 2018

 

 

298

 

 

$

47.50

 

 

$

61.00

 

 

 

5

 

Total Estimated Fair Value of Asset

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value of Derivative Instruments as of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

 

 

 

Quantity

 

 

Minimum

 

 

Maximum Price

 

 

Estimated Fair

 

Type

 

Period

 

(Bbl/day)

 

 

Price (per Bbl)

 

 

(per Bbl)

 

 

Value of Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Collar

 

January 1, 2017 — December 31, 2017

 

 

296

 

 

$

47.50

 

 

$

61.00

 

 

$

(289

)

Collar

 

January 2, 2017 — December 31, 2017

 

 

445

 

 

$

50.00

 

 

$

61.50

 

 

 

(307

)

Collar

 

January 1, 2018 — February 28, 2018

 

 

458

 

 

$

50.00

 

 

$

61.50

 

 

 

(74

)

Collar

 

January 1, 2018 — May 31, 2018

 

 

298

 

 

$

47.50

 

 

$

61.00

 

 

 

(168

)

Total Estimated Fair Value of Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(838

)

 

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, 2017 and December 31, 2016, and (ii) the net recorded fair value as reflected on our consolidated balance sheets at March 31, 2017 and December 31, 2016.

 

 

 

 

 

As of March 31, 2017

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Net Amount of

 

 

 

 

 

Gross

 

 

Offset in the

 

 

Assets

 

 

 

 

 

Amount of

 

 

Consolidated

 

 

Presented in the

 

 

 

Location on Consolidated

 

Recognized

 

 

Balance

 

 

Consolidated

 

Underlying Commodity

 

Balance Sheets

 

Assets

 

 

Sheets

 

 

Balance Sheets

 

 

 

 

 

(in thousands)

 

Crude oil

 

Current assets

 

$

126

 

 

$

-

 

 

$

126

 

Crude oil

 

Long-term assets

 

$

24

 

 

$

-

 

 

$

24

 

12


 

 

 

 

 

As of December 31, 2016

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Net Amount of</