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EX-32.2 - EX-32.2 - Alta Mesa Holdings, LPc403-20170630xex32_2.htm
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EX-31.2 - EX-31.2 - Alta Mesa Holdings, LPc403-20170630xex31_2.htm
EX-31.1 - EX-31.1 - Alta Mesa Holdings, LPc403-20170630xex31_1.htm



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended: June 30, 2017

FOR

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, a smaller reporting company or an emerging growth company. See definition 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 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   

 

 

1


 

 

Table of Contents







 



Page Number

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

 

Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016

3

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016

4

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016

5

Notes to the Condensed Consolidated Financial Statements

6

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

20

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

33

Item 4. Controls and Procedures 

34

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings 

34

Item 1A. Risk Factors 

34

Item 6. Exhibits 

34

Signatures 

35



















2


 

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

ALTA MESA HOLDINGS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) 

 





 

 

 

 

 



 

 

 

 

 



June 30,

 

December 31,



2017

 

2016



 

 

 

 

 



(in thousands)

ASSETS

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

$

5,279 

 

$

7,185 

Short-term restricted cash

 

805 

 

 

433 

Accounts receivable, net of allowance of $774 and $889, respectively

 

49,089 

 

 

37,611 

Other receivables

 

3,780 

 

 

8,061 

Receivables due from affiliate

 

1,688 

 

 

8,883 

Prepaid expenses and other current assets

 

1,899 

 

 

3,986 

Derivative financial instruments

 

15,002 

 

 

83 

Total current assets

 

77,542 

 

 

66,242 

PROPERTY AND EQUIPMENT

 

 

 

 

 

Oil and natural gas properties, successful efforts method, net

 

822,498 

 

 

712,162 

Other property and equipment, net

 

9,690 

 

 

9,731 

Total property and equipment, net

 

832,188 

 

 

721,893 

OTHER ASSETS

 

 

 

 

 

Investment in LLC — cost

 

9,000 

 

 

9,000 

Deferred financing costs, net

 

2,299 

 

 

3,029 

Notes receivable due from affiliate

 

10,393 

 

 

9,987 

Deposits and other long-term assets

 

16,707 

 

 

2,977 

Derivative financial instruments

 

8,873 

 

 

723 

Total other assets

 

47,272 

 

 

25,716 

TOTAL ASSETS

$

957,002 

 

$

813,851 

LIABILITIES AND PARTNERS' CAPITAL

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable and accrued liabilities

$

130,225 

 

$

84,234 

Advances from non-operators

 

3,165 

 

 

4,058 

Advances from related party

 

 —

 

 

42,528 

Asset retirement obligations

 

1,006 

 

 

376 

Derivative financial instruments

 

 —

 

 

21,207 

Total current liabilities

 

134,396 

 

 

152,403 

LONG-TERM LIABILITIES

 

 

 

 

 

Asset retirement obligations, net of current portion

 

60,663 

 

 

61,128 

Long-term debt, net

 

685,526 

 

 

529,905 

Notes payable to founder

 

27,556 

 

 

26,957 

Derivative financial instruments

 

 —

 

 

4,482 

Other long-term liabilities

 

7,154 

 

 

6,870 

Total long-term liabilities

 

780,899 

 

 

629,342 

TOTAL LIABILITIES 

 

915,295 

 

 

781,745 

Commitments and Contingencies (Note 11)

 

 

 

 

 

PARTNERS' CAPITAL

 

41,707 

 

 

32,106 

TOTAL LIABILITIES AND PARTNERS' CAPITAL

$

957,002 

 

$

813,851 



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

3


 

ALTA MESA HOLDINGS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



June 30,

 

June 30,



2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 



(in thousands)

OPERATING REVENUES AND OTHER

 

 

 

 

 

 

 

 

 

 

 

Oil

$

55,071 

 

$

43,843 

 

$

114,416 

 

$

75,087 

Natural gas

 

13,136 

 

 

5,796 

 

 

25,821 

 

 

10,487 

Natural gas liquids

 

7,076 

 

 

4,010 

 

 

14,695 

 

 

6,115 

Other revenues

 

86 

 

 

174 

 

 

202 

 

 

301 

Total operating revenues

 

75,369 

 

 

53,823 

 

 

155,134 

 

 

91,990 

Gain on sale of assets

 

 —

 

 

1,083 

 

 

 —

 

 

3,731 

Gain on acquisition of oil and natural gas properties

 

1,626 

 

 

 —

 

 

1,626 

 

 

 —

Gain (loss) on derivative contracts

 

18,250 

 

 

(38,293)

 

 

48,492 

 

 

(27,478)

Total operating revenues and other

 

95,245 

 

 

16,613 

 

 

205,252 

 

 

68,243 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

Lease and plant operating expense

 

16,597 

 

 

13,452 

 

 

34,333 

 

 

30,577 

Marketing and transportation expense

 

6,857 

 

 

1,472 

 

 

12,900 

 

 

2,887 

Production and ad valorem taxes

 

3,039 

 

 

2,731 

 

 

6,107 

 

 

5,126 

Workover expense

 

2,015 

 

 

1,118 

 

 

3,398 

 

 

2,515 

Exploration expense

 

6,265 

 

 

3,428 

 

 

14,407 

 

 

6,714 

Depreciation, depletion, and amortization expense

 

26,494 

 

 

22,931 

 

 

51,298 

 

 

44,424 

Impairment expense

 

27,904 

 

 

11,555 

 

 

29,124 

 

 

13,319 

Accretion expense

 

480 

 

 

536 

 

 

1,052 

 

 

1,075 

General and administrative expense

 

8,328 

 

 

12,076 

 

 

18,076 

 

 

22,259 

Total operating expenses

 

97,979 

 

 

69,299 

 

 

170,695 

 

 

128,896 

INCOME (LOSS) FROM OPERATIONS

 

(2,734)

 

 

(52,686)

 

 

34,557 

 

 

(60,653)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(12,879)

 

 

(17,672)

 

 

(25,219)

 

 

(34,067)

Interest income

 

299 

 

 

227 

 

 

548 

 

 

433 

Total other income (expense)

 

(12,580)

 

 

(17,445)

 

 

(24,671)

 

 

(33,634)

INCOME (LOSS) BEFORE STATE INCOME TAXES

 

(15,314)

 

 

(70,131)

 

 

9,886 

 

 

(94,287)

Provision for state income taxes

 

 —

 

 

106 

 

 

285 

 

 

107 

NET INCOME (LOSS)

$

(15,314)

 

$

(70,237)

 

$

9,601 

 

$

(94,394)







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



 

4


 

ALTA MESA HOLDINGS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)





 

 

 

 

 



 

 

 

 

 



Six Months Ended



June 30,



2017

 

2016



 

 

 

 

 



(in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

$

9,601 

 

$

(94,394)

Adjustments to reconcile net (income) loss to net cash used in operating activities:

 

 

 

Depreciation, depletion, and amortization expense

 

51,298 

 

 

44,424 

Impairment expense

 

29,124 

 

 

13,319 

Accretion expense

 

1,052 

 

 

1,075 

Amortization of deferred financing costs

 

1,456 

 

 

1,965 

Amortization of debt discount

 

 —

 

 

255 

Dry hole expense

 

888 

 

 

215 

Expired leases

 

5,922 

 

 

2,435 

(Gain) loss on derivative contracts

 

(48,492)

 

 

27,478 

Settlements of derivative contracts

 

254 

 

 

65,991 

Premium paid on derivative contracts

 

(520)

 

 

 —

Interest converted into debt

 

599 

 

 

600 

Interest on notes receivable due from affiliates

 

(406)

 

 

(378)

Gain on sale of assets

 

 —

 

 

(3,731)

Gain on acquisition of oil and natural gas properties

 

(1,626)

 

 

 —

Changes in assets and liabilities:

 

 

 

 

 

Restricted cash

 

(372)

 

 

(121,935)

Accounts receivable

 

(11,478)

 

 

(6,927)

Other receivables

 

4,281 

 

 

14,377 

Receivables due from affiliate

 

(680)

 

 

(1,615)

Prepaid expenses and other non-current assets

 

(11,644)

 

 

(3,951)

Advances from related party

 

(42,528)

 

 

 —

Settlement of asset retirement obligation

 

(977)

 

 

(741)

Accounts payable, accrued liabilities, and other liabilities

 

7,655 

 

 

14,619 

NET CASH USED IN OPERATING ACTIVITIES

 

(6,593)

 

 

(46,919)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures for property and equipment

 

(151,832)

 

 

(94,997)

Acquisitions

 

(6,251)

 

 

 —

Proceeds from sale of property

 

 —

 

 

1,358 

NET CASH USED IN INVESTING ACTIVITIES

 

(158,083)

 

 

(93,639)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from long-term debt

 

165,065 

 

 

141,935 

Repayments of long-term debt

 

(10,000)

 

 

 —

Additions to deferred financing costs

 

(170)

 

 

(799)

Capital contributions

 

7,875 

 

 

 —

NET CASH  PROVIDED BY FINANCING ACTIVITIES

 

162,770 

 

 

141,136 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(1,906)

 

 

578 

CASH AND CASH EQUIVALENTS, beginning of period

 

7,185 

 

 

8,869 

CASH AND CASH EQUIVALENTS, end of period

$

5,279 

 

$

9,447 









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



5


 

ALTA MESA HOLDINGS, LP AND SUBSIDIARIES

NOTES TO CONDENSED 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 exploration and production company engaged primarily in the acquisition, exploration, development, and production of oil and natural gas properties Our principal area of operation is in the eastern portion of the Anadarko Basin commonly referred to as the STACK.  The STACK is an acronym describing both its location – Sooner Trend Anadarko Basin Canadian and Kingfisher County – and the multiple, stacked productive formations present in the area.  Our operations also include other non-STACK oil and natural gas interests within the continental United States.



2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We have provided a discussion of significant accounting policies in Note 2 in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report”).  As of June 30, 2017,  our significant accounting policies are consistent with those discussed in Note 2 in the 2016 Annual Report.

Principles of Consolidation and Reporting

The condensed consolidated financial statements reflect our accounts after elimination of all significant intercompany transactions and balances. The condensed consolidated 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, 2016, which were filed with the Securities and Exchange Commission (the “SEC”) in our 2016 Annual Report.

The condensed consolidated financial statements included herein as of June 30, 2017, and for the three and six months ended June 30, 2017 and 2016, 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 condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Certain reclassifications of prior period condensed consolidated financial statements have been made to conform to current reporting practices. 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 condensed 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 condensed 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, state taxes, 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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”)Revenue from Contracts with Customers.  The update provides guidance concerning the recognition, measurement and disclosure of revenue from contracts with customers.  Its objective is to increase the usefulness of information in the financial statements regarding the nature, timing and uncertainty of revenues.  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 August 2015, the FASB issued ASU No. 2015-14, Deferral of the Effective Date (“ASU 2015-14”).  ASU 2015-14 deferred the effective date of the new revenue standard by one year, making it effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  We are in the process of assessing our contracts and evaluating the impact on the condensed consolidated financial statements.  We are continuing to evaluate the provisions of ASU 2014-09 as it relates to certain sales contracts, and in particular, as it relates to disclosure requirements.   

6


 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842)(“ASU 2016-02”), which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 “Leases. The amendments in this update require, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents a lessee's right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The amendments are effective for interim and annual reporting periods beginning after December 15, 2018. We enter into lease agreements to support our operations. These agreements are for leases on assets such as office space, vehicles, field services and equipment.  We continue to evaluate the impacts of the amendments to our financial statements and accounting practices for leases.    Although we are still in the process of evaluating the effect of adopting ASU 2016‑02, the adoption is expected to result in an increase in the assets and liabilities recorded on our condensed consolidated balance sheet.  We anticipate adoption of ASU 2016-02 effective January 1, 2019.



In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to reduce diversity in practice in how certain transactions are classified in the statements of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The adoption of this guidance will not impact our financial position or results of operations but could result in presentation changes on our condensed consolidated statements of cash flows.



In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash (“ASU 2016-18”), which requires an entity to explain the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents on the statements of cash flows and to provide a reconciliation of the totals in that statement to the related captions in the balance sheet when the cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance sheet. This ASU is effective for annual and interim periods beginning after December 15, 2017, and is required to be adopted using a retrospective approach, with early adoption permitted. The adoption of this guidance will not impact the Company’s financial position or results of operations but could result in presentation changes on its consolidated statements of cash flows.

  

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 requires entities to use a screen test to determine when an integrated set of assets and activities is not a business or if the integrated set of assets and activities needs to be further evaluated against the framework. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. We are currently evaluating the effect that adopting this guidance will have on our financial position, cash flows and results of operations.



3. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow disclosures and non-cash investing and financing activities are presented below:







 

 

 

 

 



Six Months Ended June 30,



2017

 

2016



 

 

 

 

 



(in thousands)

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

$

23,452 

 

$

31,071 

Cash paid for state income taxes

 

 —

 

 

422 

Non-cash investing and financing activities:

 

 

 

 

 

Change in asset retirement obligations

 

235 

 

 

577 

Asset retirement obligations assumed, purchased properties

 

89 

 

 

 —

Change in accruals or liabilities for capital expenditures

 

37,494 

 

 

(4,869)













7


 

4. ACQUISITIONS



During the second quarter of 2017, we entered into a purchase and sale agreement with an unaffiliated third party to acquire certain oil and natural gas properties in OklahomaThe acquired oil and natural gas properties were primarily unproved leasehold in Oklahoma.  We made a deposit concurrently with the execution of the purchase and sale agreement of approximately $4.6 million, which is recorded in oil and natural gas properties on our condensed consolidated balance sheet as of June 30, 2017.  On July 7, 2017, we closed and funded the remaining purchase price of the acquisition for approximately $40.4 million, net of customary post-closing adjustments, with borrowings under our senior secured revolving credit facility.    



In April 2017, we completed an acquisition of certain non-STACK proved oil and natural gas properties from Setanta Energy, LLC (“Setanta”) for a purchase price, net of customary purchase price adjustments, of approximately $0.9 million.  We funded the acquisition with borrowings under our senior secured revolving credit facilityThis purchase increases our working interest in various wells in which we already hold an interestThe acquisition was accounted for using the acquisition method under ASC 805, “Business Combinations,” which requires acquired assets and liabilities to be recorded at fair value as of the acquisition date. 



A summary of the consideration paid and the allocation of the total purchase price to the assets acquired and the liabilities assumed in the Setanta acquisition based on the preliminary fair value at the acquisition date are as follows:





 

 



(in thousands)

Summary of Consideration

 

 

Cash

$

890 

Total consideration paid

 

890 



 

 

Summary of Purchase Price Allocation

 

 

Plus: fair value of liabilities assumed

 

 

Asset retirement obligations assumed

 

89 

Total fair value liabilities assumed

 

89 

Less: fair value of assets acquired

 

 

Proved oil and natural gas properties

 

2,605 

Unproved oil and natural gas properties

 

 —

Total fair value assets acquired

 

2,605 



 

 

Bargain Purchase Gain

$

(1,626)



The fair value of the net assets acquired was approximately $2.6 million.  As the fair value of the net assets acquired exceeded the total consideration paid, we recorded a bargain purchase gain of approximately $1.6 million.  The bargain purchase gain is reflected in gain on acquisition of oil and natural gas properties on our condensed consolidated statement of operations.  



In accordance with ASC 805, the following unaudited pro forma results of operations for the six months ended June 30, 2017 and 2016 have been prepared to give effect to the Setanta acquisition on our condensed consolidated results of operations as if it had occurred on January 1, 2016.    Therefore, the bargain purchase gain on acquisition of $1.6 million has been included in pro forma income (loss) for the six months ended June 30, 2016.  The difference between the historical results of operations and the unaudited pro forma results of operations for the three months ended June 30, 2017 and 2016 was determined to be de minimus and therefore not provided.     







 

 

 

 

 



 

 

 

 

 



Total Operating

 

Income



Revenues

 

(Loss)



 

 

 

 

 



(in thousands)



 

 

 

 

 

Pro forma results of operations for the six months ended June 30, 2017

$

155,474 

 

$

8,016 

Pro forma results of operations for the six months ended June 30, 2016

$

92,033 

 

$

(92,864)



This unaudited pro forma information has been derived from historical information and is for illustrative purposes only. The unaudited pro forma financial information does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during this period.



On December 31, 2016, our Class B partner, High Mesa, Inc. (“High Mesa”) purchased from BCE-STACK Development LLC (“BCE”) and contributed interests in 24 producing wells (the “Contributed Wells”) drilled under the joint development agreement to us.  The Company accounted for the Contributed Wells as a business combination in the prior year and the results of operations from

8


 

the acquisition is reflected in the consolidated statement of operations for the three and six months ended June 30, 2017The difference between the historical results of operations and the unaudited pro forma results of operations for the three and six months ended June 30, 2016 was determined to be de minimus and therefore not provided.



5. PROPERTY AND EQUIPMENT



Property and equipment consists of the following:  



 

 

 

 

 



 

 

 

 

 



June 30,

 

December 31,



2017

 

2016



 

 

 

 

 



(in thousands)

OIL AND NATURAL GAS PROPERTIES

 

 

 

 

 

Unproved properties

$

102,922 

 

$

116,311 

Accumulated impairment of unproved properties

 

(18,893)

 

 

(65)

Unproved properties, net

 

84,029 

 

 

116,246 

Proved oil and natural gas properties

 

1,814,057 

 

 

1,611,249 

Accumulated depreciation, depletion, amortization and impairment

 

(1,075,588)

 

 

(1,015,333)

Proved oil and natural gas properties, net

 

738,469 

 

 

595,916 

TOTAL OIL AND NATURAL GAS PROPERTIES, net

 

822,498 

 

 

712,162 

OTHER PROPERTY AND EQUIPMENT

 

 

 

 

 

Land

 

5,339 

 

 

4,730 

Office furniture and equipment, vehicles

 

20,135 

 

 

19,446 

Accumulated depreciation

 

(15,784)

 

 

(14,445)

OTHER PROPERTY AND EQUIPMENT, net

 

9,690 

 

 

9,731 

TOTAL PROPERTY AND EQUIPMENT, net

$

832,188 

 

$

721,893 



  

























6. FAIR VALUE DISCLOSURES

The Company follows ASC 820, “Fair Value Measurements and Disclosures.” 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, and we estimate the fair value of the senior notes for disclosure purposes. We have estimated the fair value of our $500 million senior notes payable to be $507.5 million at June 30, 2017.  This estimation is based on the most recent trading values of the senior notes at or near the reporting dates, which is a Level 1 determination. See Note 9 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, natural gas and natural gas liquids 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, natural gas and natural gas liquids prices. We have classified the fair values of all our oil, natural gas and natural gas liquids 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 $36.2 million were written down to their fair value of $7.1 million, resulting in an impairment charge of $29.1 million for the six months ended June 30, 2017For the six months ended June 30, 2016, oil and natural gas properties with a carrying amount of $27.5 million were written down to their fair value of $14.2 million, resulting in an impairment charge of $13.3 million. Oil and natural gas properties with a carrying amount of $32.8 million were written down to their fair value of $4.9 million, resulting in an impairment charge of $27.9 million for the three months ended June 30, 2017For the three months ended June 30, 2016, oil and natural gas properties with a carrying amount of $24.2 million were written down to their fair value of $12.6 million,

9


 

resulting in an impairment charge of $11.6 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 $0.7 million and $0.6 million in additions to asset retirement obligations measured at fair value during the six months ended June 30, 2017 and 2016,  respectively.

The following table presents information about our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, 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 June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

 —

 

$

36,073 

 

 

 —

 

$

36,073 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

 —

 

$

12,198 

 

 

 —

 

$

12,198 

At December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

 —

 

$

15,773 

 

 

 —

 

$

15,773 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

 —

 

$

40,656 

 

 

 —

 

$

40,656 

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 7.  



7. 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, natural gas and natural gas liquids. From time to time, we also utilize financial basis swap contracts, which address the price differential between market-wide benchmark prices and other benchmark pricing referenced in certain of our oil, natural gas and natural gas liquids sales contracts. Substantially all of our hedging agreements are executed by affiliates of our lenders under the senior secured revolving credit facility described in Note 9, and are collateralized by the security interests of the respective affiliated lenders in certain of our assets under the senior secured revolving credit facility. The contracts settle monthly and are scheduled to coincide with oil production equivalent to barrels (Bbl) per month, natural gas production equivalent to volumes in millions of British thermal units (MMBtu) per month, and natural gas liquids production to volumes in gallons (Gal) per month. The contracts represent agreements between us and the counterparties 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. 

From time to time, we enter into interest rate swap agreements with financial institutions to mitigate the risk of loss due to changes in interest rates. 

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 condensed consolidated statements of operations at each reporting date.

Derivative contracts are subject to master netting arrangements and are presented on a net basis in the condensed consolidated balance sheets. This netting can cause derivative assets to be ultimately presented in a liability account on the condensed consolidated balance sheets. Likewise, derivative liabilities could be presented in a derivative asset account. 

The following table summarizes the 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:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

June 30, 2017



 

 

 

 

 

Net Fair



 

Gross

 

Gross amounts

 

Value of Assets



 

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

 

$

19,405 

 

$

(4,403)

 

$

15,002 

Derivative financial instruments, long-term assets

 

 

16,668 

 

 

(7,795)

 

 

8,873 

Total

 

$

36,073 

 

$

(12,198)

 

$

23,875 







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

Net Fair



 

Gross

 

Gross amounts

 

Value of Liabilities



 

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

 

$

4,403 

 

$

(4,403)

 

$

 —

Derivative financial instruments, long-term liabilities

 

 

7,795 

 

 

(7,795)

 

 

 —

Total

 

$

12,198 

 

$

(12,198)

 

$

 —







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

December 31, 2016



 

 

 

 

 

Net Fair



 

Gross

 

Gross amounts

 

Value of Assets



 

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

 

$

3,296 

 

$

(3,213)

 

$

83 

Derivative financial instruments, long-term assets

 

 

12,477 

 

 

(11,754)

 

 

723 

Total

 

$

15,773 

 

$

(14,967)

 

$

806 







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

Net Fair



 

Gross

 

Gross amounts

 

Value of Liabilities



 

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

 

$

24,420 

 

$

(3,213)

 

$

21,207 

Derivative financial instruments, long-term liabilities

 

 

16,236 

 

 

(11,754)

 

 

4,482 

Total

 

$

40,656 

 

$

(14,967)

 

$

25,689 



11


 

The following table summarizes the effect of our derivative instruments in the condensed consolidated statements of operations:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not

 

Three Months Ended

 

Six Months Ended

designated as hedging

 

June 30,

 

June 30,

instruments under ASC 815

 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 



 

(in thousands)

Gain (loss) on derivative contracts

 

 

 

 

 

 

 

 

 

 

 

 

Oil commodity contracts

 

$

16,451 

 

$

(31,517)

 

$

42,537 

 

$

(23,371)



 

 

 

 

 

 

 

 

 

 

 

 

Natural gas commodity contracts

 

 

1,830 

 

 

(6,584)

 

 

5,728 

 

 

(3,770)



 

 

 

 

 

 

 

 

 

 

 

 

Natural gas liquids commodity contracts

 

 

(31)

 

 

(192)

 

 

227 

 

 

(337)

Total gain (loss) on derivative contracts

 

$

18,250 

 

$

(38,293)

 

$

48,492 

 

$

(27,478)



 

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 senior secured revolving 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 June 30, 2017:



OIL DERIVATIVE CONTRACTS









 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Volume

 

Weighted

 

Range

Period and Type of Contract

 

in Bbls

 

Average

 

High

 

Low

2017

 

 

 

 

 

 

 

 

 

 

 

Price Swap Contracts 

 

1,133,500 

 

$

50.39 

 

$

57.25 

 

$

46.00 

Collar Contracts

 

 

 

 

 

 

 

 

 

 

 

Long Call Options

 

92,000 

 

 

85.00 

 

 

85.00 

 

 

85.00 

Short Call Options

 

989,000 

 

 

60.47 

 

 

85.00 

 

 

54.40 

Long Put Options

 

835,000 

 

 

48.40 

 

 

50.00 

 

 

47.00 

Short Put Options

 

713,000 

 

 

36.97 

 

 

40.00 

 

 

35.00 

2018

 

 

 

 

 

 

 

 

 

 

 

Price Swap Contracts 

 

547,500 

 

 

57.22 

 

 

57.25 

 

 

57.20 

Collar Contracts

 

 

 

 

 

 

 

 

 

 

 

Long Call Options

 

365,000 

 

 

54.00 

 

 

54.00 

 

 

54.00 

Short Call Options

 

2,190,000 

 

 

60.87 

 

 

62.00 

 

 

60.50 

Long Put Options

 

1,825,000 

 

 

50.00 

 

 

50.00 

 

 

50.00 

Short Put Options

 

2,190,000 

 

 

40.26 

 

 

42.00 

 

 

40.00 

2019

 

 

 

 

 

 

 

 

 

 

 

Collar Contracts

 

 

 

 

 

 

 

 

 

 

 

Short Call Options

 

1,241,000 

 

 

62.90 

 

 

63.00 

 

 

62.75 

Long Put Options

 

1,241,000 

 

 

50.00 

 

 

50.00 

 

 

50.00 

Short Put Options

 

1,241,000 

 

 

37.50 

 

 

37.50 

 

 

37.50 







12


 

We had the following open derivative contracts for natural gas at June 30, 2017:



NATURAL GAS DERIVATIVE CONTRACTS







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Volume in

 

Weighted

 

Range

Period and Type of Contract

 

MMBtu

 

Average

 

High

 

Low

2017

 

 

 

 

 

 

 

 

 

 

 

Price Swap Contracts 

 

922,500 

 

$

3.40 

 

$

3.40 

 

$

3.39 

Collar Contracts

 

 

 

 

 

 

 

 

 

 

 

Short Call Options

 

6,072,000 

 

 

3.65 

 

 

4.11 

 

 

3.25 

Long Put Options

 

5,304,500 

 

 

3.14 

 

 

3.60 

 

 

3.00 

Long Call Options

 

615,000 

 

 

2.95 

 

 

2.95 

 

 

2.95 

Short Put Options

 

5,919,500 

 

 

2.59 

 

 

3.00 

 

 

2.50 

2018

 

 

 

 

 

 

 

 

 

 

 

Collar Contracts

 

 

 

 

 

 

 

 

 

 

 

Short Call Options

 

6,582,000 

 

 

5.26 

 

 

5.53 

 

 

4.00 

Long Put Options

 

5,925,000 

 

 

4.43 

 

 

4.50 

 

 

3.60 

Short Put Options

 

5,925,000 

 

 

3.92 

 

 

4.00 

 

 

3.00 



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 various of these benchmarks.

We had the following open derivative contracts for natural gas liquids at June 30, 2017:



NATURAL GAS LIQUIDS DERIVATIVE CONTRACTS





 

 

 

 

 

 

 

 

 

 

 



 

Volume

 

Weighted

 

Range

Period and Type of Contract

 

in Gal

 

Average

 

High

 

Low

2017

 

 

 

 

 

 

 

 

 

 

 

Price Swap Contracts

 

 

 

 

 

 

 

 

 

 

 

Short Price Swaps

 

3,091,200 

 

$

0.47 

 

$

0.47 

 

$

0.47 



We had the following open financial basis swaps at June 30, 2017:



BASIS SWAP DERIVATIVE CONTRACTS







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Weighted



 

 

 

 

 

 

 

 

 

Average Spread

Volume in MMBtu (1)

 

Reference Price 1 

 

Reference Price 2

 

Period

 

($ per MMBtu)

6,135,000

 

TEX/OKL Mainline (PEPL)

 

NYMEX Henry Hub

 

Jul'17

Dec '17

 

$

(0.25)

5,910,000

 

TEX/OKL Mainline (PEPL)

 

NYMEX Henry Hub

 

Jan '18

Oct '18

 

 

(0.27)





(1)

Represents short swaps that fix the basis differentials between Tex/OKL Panhandle Eastern Pipeline (“PEPL”) Inside FERC (“IFERC”) and NYMEX Henry Hub.











13


 



8. ASSET RETIREMENT OBLIGATIONS

A summary of the changes in asset retirement obligations is included in the table below:





 

 

 



 

Six



 

Months Ended



 

June 30, 2017



 

(in thousands)

Balance, beginning of year

 

$

61,504 

Liabilities incurred

 

 

584 

Liabilities assumed with acquired producing properties

 

 

89 

Liabilities settled

 

 

(977)

Revisions to estimates

 

 

(583)

Accretion expense

 

 

1,052 

Balance, June 30, 2017

 

 

61,669 

Less: Current portion

 

 

1,006 

Long-term portion