Attached files
file | filename |
---|---|
EX-32.2 - EX-32.2 - Evolve Transition Infrastructure LP | snmp-20180930ex3223fbcc0.htm |
EX-32.1 - EX-32.1 - Evolve Transition Infrastructure LP | snmp-20180930ex321f614b8.htm |
EX-31.2 - EX-31.2 - Evolve Transition Infrastructure LP | snmp-20180930ex312d5d8f7.htm |
EX-31.1 - EX-31.1 - Evolve Transition Infrastructure LP | snmp-20180930ex311549cf3.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 September 30, 2018
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 001-33147
Sanchez Midstream Partners LP
(Exact name of registrant as specified in its charter)
Delaware |
11-3742489 |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
1000 Main Street, Suite 3000 Houston, Texas |
77002 |
(Address of Principal Executive Offices) |
(Zip Code) |
(713) 783-8000
(Registrant’s Telephone Number, Including Area Code)
(Former name, former address and former fiscal year, if changed since last report)
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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, 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.
Large accelerated filer ☐ |
Accelerated filer ☒ |
Non‑accelerated filer ☐ |
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 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 ☒
Common units outstanding as of November 7, 2018: Approximately 16,188,926 units.
Page |
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6 | ||
7 | ||
8 | ||
Condensed Consolidated Statements of Changes in Partners’ Capital (Unaudited) |
9 | |
Notes to Condensed Consolidated Financial Statements (Unaudited) |
10 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
30 | |
45 | ||
45 | ||
45 | ||
45 | ||
45 | ||
45 | ||
45 | ||
46 | ||
46 | ||
46 | ||
47 |
2
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains “forward-looking statements” as defined by the United States Securities and Exchange Commission (the “SEC”) that are subject to a number of risks and uncertainties, many of which are beyond our control. These statements may include discussions about our business strategy; our acquisition strategy; our financing strategy; our ability to make, maintain and grow distributions; our future operating results; the ability of our customers to meet their drilling and development plans on a timely basis, or at all, and perform under gathering, processing and other agreements; the ability of our partners to perform under our joint ventures and partnerships; our future capital expenditures; and our plans, objectives, expectations, forecasts, outlook and intentions.
All of these types of statements, other than statements of historical fact included in this Form 10-Q, are forward-looking statements. These forward-looking statements may be found in Part I, Item 2. and other items within this Form 10-Q. In some cases, forward-looking statements can be identified by terminology such as “may,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology.
The forward-looking statements contained in this Form 10-Q are largely based on our expectations, which reflect estimates and assumptions made by the management of our general partner. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate.
Important factors that could cause our actual results to differ materially from the expectations reflected in the forward‑looking statements include, among others:
· |
our ability to successfully execute our business, acquisition and financing strategies; |
· |
our ability to make, maintain and grow distributions; |
· |
the ability of our customers to meet their drilling and development plans on a timely basis, or at all, and perform under gathering, processing and other agreements; |
· |
the ability of our partners to perform under our joint ventures and partnerships; |
· |
the availability, proximity and capacity of, and costs associated with, gathering, processing, compression and transportation facilities; |
· |
our ability to utilize the services, personnel and other assets of the sole member of our general partner, SP Holdings, LLC (“Manager”), pursuant to existing services agreements; |
· |
our ability to access the credit and capital markets to obtain financing on terms we deem acceptable, if at all, and to otherwise satisfy our capital expenditure requirements; |
· |
the credit worthiness and performance of our counterparties, including financial institutions, operating partners and other parties; |
· |
the timing and extent of changes in prices for, and demand for, natural gas, natural gas liquids (“NGLs”) and oil; |
· |
our ability to successfully execute our hedging strategy and the resulting realized prices therefrom; |
· |
the accuracy of reserve estimates, which by their nature involve the exercise of professional judgment and may, therefore, be imprecise; |
· |
competition in the oil and natural gas industry for employees and other personnel, equipment, materials and services and, related thereto, the availability and cost of employees and other personnel, equipment, materials and services; |
· |
the extent to which our assets operated by others are operated successfully and economically; |
· |
our ability to compete with other companies in the oil and natural gas industry; |
· |
the impact of, and changes in, government policies, laws and regulations, including tax laws and regulations, environmental laws and regulations relating to air emissions, waste disposal, hydraulic fracturing and access to and use of water, laws and |
3
regulations imposing conditions and restrictions on drilling and completion operations and laws and regulations with respect to derivatives and hedging activities; |
· |
the use of competing energy sources and the development of alternative energy sources; |
· |
unexpected results of litigation filed against us; |
· |
disruptions due to extreme weather conditions, such as extreme rainfall, hurricanes or tornadoes; |
· |
the extent to which we incur uninsured losses and liabilities or losses and liabilities in excess of our insurance coverage; and |
· |
the other factors described under “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part II, Item 1A. Risk Factors” and elsewhere in this Form 10-Q and in our other public filings with the SEC. |
Management cautions all readers that the forward-looking statements contained in this Form 10-Q are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in forward-looking statements. The forward-looking statements speak only as of the date made, and other than as required by law, we do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
4
COMMONLY USED DEFINED TERMS
As used in this Form 10-Q, unless the context indicates or otherwise requires, the following terms have the following meanings:
· |
“Sanchez Midstream Partners,” “SNMP,” “the Partnership,” “we,” “us,” “our” or like terms refer collectively to Sanchez Midstream Partners LP, its consolidated subsidiaries and, where the context provides, the entity in which we have a 50% or more ownership interest. |
· |
“Bbl” means a barrel of 42 U.S. gallons of oil. |
· |
“Boe” means one barrel of oil equivalent, calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Bbl of oil. |
· |
“Boe/d” means one Boe per day. |
· |
“MBbl” means one thousand barrels of oil or other liquid hydrocarbons. |
· |
“MBoe” means one thousand Boe. |
· |
“Mcf” means one thousand cubic feet of natural gas. |
· |
“MMBtu” means one million British thermal units. |
· |
“MMcf/d” means one million cubic feet of natural gas per day. |
· |
“NGLs” refers to the combination of ethane, propane, butane, natural gasolines and other components that when removed from natural gas become liquid under various levels of higher pressure and lower temperature. |
· |
“our general partner” refers to Sanchez Midstream Partners GP LLC, our general partner. |
· |
“Sanchez Energy” refers to Sanchez Energy Corporation (NYSE: SN) and its consolidated subsidiaries. |
· |
“SOG” refers to Sanchez Oil & Gas Corporation, an entity that provides operational support to us. |
· |
“SP Holdings” or “Manager” refers to SP Holdings, LLC, the sole member of our general partner. |
5
SANCHEZ MIDSTREAM PARTNERS LP and SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except unit data)
(Unaudited)
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
September 30, |
|
September 30, |
||||||||
|
2018 |
|
2017 |
|
2018 |
|
2017 |
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
Natural gas sales |
$ |
166 |
|
$ |
787 |
|
$ |
865 |
|
$ |
5,818 |
Oil sales |
|
2,848 |
|
|
3,061 |
|
|
7,894 |
|
|
22,520 |
Natural gas liquid sales |
|
408 |
|
|
514 |
|
|
1,403 |
|
|
1,473 |
Gathering and transportation sales |
|
1,582 |
|
|
14,234 |
|
|
4,931 |
|
|
39,621 |
Gathering and transportation lease revenues |
|
13,148 |
|
|
— |
|
|
38,634 |
|
|
— |
Total revenues |
|
18,152 |
|
|
18,596 |
|
|
53,727 |
|
|
69,432 |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses |
|
1,905 |
|
|
1,735 |
|
|
5,883 |
|
|
10,599 |
Transportation operating expenses |
|
3,061 |
|
|
2,661 |
|
|
8,979 |
|
|
8,989 |
Cost of sales |
|
— |
|
|
— |
|
|
— |
|
|
77 |
Production taxes |
|
292 |
|
|
340 |
|
|
901 |
|
|
1,166 |
General and administrative expenses |
|
5,109 |
|
|
5,614 |
|
|
17,193 |
|
|
17,576 |
Unit-based compensation expense |
|
155 |
|
|
631 |
|
|
2,940 |
|
|
1,951 |
Gain on sale of assets |
|
(238) |
|
|
(2,546) |
|
|
(2,626) |
|
|
(2,546) |
Depreciation, depletion and amortization |
|
6,507 |
|
|
6,899 |
|
|
19,680 |
|
|
28,017 |
Asset impairments |
|
— |
|
|
— |
|
|
— |
|
|
4,688 |
Accretion expense |
|
123 |
|
|
149 |
|
|
372 |
|
|
647 |
Total operating expenses |
|
16,914 |
|
|
15,483 |
|
|
53,322 |
|
|
71,164 |
Other (income) expense |
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
2,786 |
|
|
2,215 |
|
|
8,165 |
|
|
5,994 |
Earnings from equity investments |
|
(2,313) |
|
|
(2,873) |
|
|
(9,696) |
|
|
(4,397) |
Other expense |
|
352 |
|
|
— |
|
|
1,876 |
|
|
— |
Total other (income) expenses |
|
825 |
|
|
(658) |
|
|
345 |
|
|
1,597 |
Total expenses |
|
17,739 |
|
|
14,825 |
|
|
53,667 |
|
|
72,761 |
Income (loss) before income taxes |
|
413 |
|
|
3,771 |
|
|
60 |
|
|
(3,329) |
Income tax expense |
|
— |
|
|
— |
|
|
— |
|
|
— |
Net income (loss) |
|
413 |
|
|
3,771 |
|
|
60 |
|
|
(3,329) |
Less |
|
|
|
|
|
|
|
|
|
|
|
Preferred unit paid-in-kind distributions |
|
— |
|
|
— |
|
|
(3,500) |
|
|
(2,625) |
Preferred unit distributions |
|
(8,838) |
|
|
(8,750) |
|
|
(24,588) |
|
|
(24,500) |
Preferred unit amortization |
|
(608) |
|
|
(463) |
|
|
(1,707) |
|
|
(1,300) |
Net loss attributable to common unitholders |
$ |
(9,033) |
|
$ |
(5,442) |
|
$ |
(29,735) |
|
$ |
(31,754) |
Net loss per unit |
|
|
|
|
|
|
|
|
|
|
|
Common units - Basic and Diluted |
$ |
(0.59) |
|
$ |
(0.38) |
|
$ |
(1.97) |
|
$ |
(2.29) |
Weighted Average Units Outstanding |
|
|
|
|
|
|
|
|
|
|
|
Common units - Basic and Diluted |
|
15,398,453 |
|
|
14,313,999 |
|
|
15,114,671 |
|
|
13,888,057 |
See accompanying notes to condensed consolidated financial statements.
6
SANCHEZ MIDSTREAM PARTNERS LP and SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except unit data)
|
September 30, |
|
December 31, |
||
|
2018 |
|
2017 |
||
ASSETS |
|
(Unaudited) |
|
|
|
Current assets |
|
|
|
|
|
Cash and cash equivalents |
$ |
2,311 |
|
$ |
321 |
Accounts receivable |
|
65 |
|
|
495 |
Accounts receivable - related entities |
|
6,682 |
|
|
13,099 |
Prepaid expenses |
|
1,001 |
|
|
2,670 |
Fair value of commodity derivative instruments |
|
13 |
|
|
942 |
Assets held for sale |
|
914 |
|
|
— |
Total current assets |
|
10,986 |
|
|
17,527 |
Oil and natural gas properties and related equipment |
|
|
|
|
|
Oil and natural gas properties, equipment and facilities (successful efforts method) |
|
112,516 |
|
|
170,750 |
Gathering and transportation assets |
|
185,953 |
|
|
184,969 |
Less: accumulated depreciation, depletion, amortization and impairment |
|
(97,472) |
|
|
(142,574) |
Oil and natural gas properties and equipment, net |
|
200,997 |
|
|
213,145 |
Other assets |
|
|
|
|
|
Intangible assets, net |
|
162,071 |
|
|
172,166 |
Fair value of commodity derivative instruments |
|
85 |
|
|
1,318 |
Equity investments |
|
117,677 |
|
|
123,715 |
Other non-current assets |
|
452 |
|
|
552 |
Total assets |
$ |
492,268 |
|
$ |
528,423 |
|
|
|
|
|
|
LIABILITIES AND PARTNERS' CAPITAL |
|
|
|
|
|
Current liabilities |
|
|
|
|
|
Accounts payable and accrued liabilities |
$ |
4,253 |
|
$ |
1,782 |
Accounts payable and accrued liabilities - related entities |
|
5,570 |
|
|
10,353 |
Royalties payable |
|
370 |
|
|
371 |
Fair value of commodity derivative instruments |
|
2,710 |
|
|
756 |
Other liabilities |
|
444 |
|
|
151 |
Total current liabilities |
|
13,347 |
|
|
13,413 |
Other liabilities |
|
|
|
|
|
Asset retirement obligation |
|
6,386 |
|
|
6,074 |
Long-term debt, net of debt issuance costs |
|
182,300 |
|
|
187,808 |
Fair value of commodity derivative instruments |
|
2,894 |
|
|
273 |
Other liabilities |
|
7,834 |
|
|
6,251 |
Total other liabilities |
|
199,414 |
|
|
200,406 |
Total liabilities |
|
212,761 |
|
|
213,819 |
Commitments and contingencies (See Note 12) |
|
|
|
|
|
Mezzanine equity |
|
|
|
|
|
Class B preferred units, 31,310,896 and 31,000,887 units issued and outstanding as of September 30, 2018 and December 31, 2017, respectively |
|
349,207 |
|
|
343,912 |
Partners' deficit |
|
|
|
|
|
Common units, 16,195,816 and 14,965,134 units issued and outstanding as of September 30, 2018 and December 31, 2017, respectively |
|
(69,700) |
|
|
(29,308) |
Total partners' deficit |
|
(69,700) |
|
|
(29,308) |
Total liabilities and partners' capital |
$ |
492,268 |
|
$ |
528,423 |
See accompanying notes to condensed consolidated financial statements.
7
SANCHEZ MIDSTREAM PARTNERS LP and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
|
Nine Months Ended |
||||
|
September 30, |
||||
|
2018 |
|
2017 |
||
Cash flows from operating activities: |
|
|
|
|
|
Net income (loss) |
$ |
60 |
|
$ |
(3,329) |
Adjustments to reconcile net income (loss) to cash provided by operating activities: |
|
|
|
|
|
Depreciation, depletion and amortization |
|
9,585 |
|
|
17,813 |
Amortization of debt issuance costs |
|
498 |
|
|
391 |
Asset impairments |
|
— |
|
|
4,688 |
Accretion expense |
|
372 |
|
|
647 |
Distributions from equity investments |
|
18,572 |
|
|
5,329 |
Equity earnings in affiliate |
|
(9,696) |
|
|
(4,397) |
Gain on sale of assets |
|
(2,626) |
|
|
(2,386) |
Net (gains) losses on commodity derivative contracts |
|
8,083 |
|
|
(7,584) |
Net cash settlements received (paid) on commodity derivative contracts |
|
(1,306) |
|
|
5,093 |
Cash settlements on terminated commodity derivative contracts |
|
— |
|
|
3,602 |
Unit-based compensation |
|
2,940 |
|
|
2,646 |
Loss on earnout derivative |
|
1,876 |
|
|
— |
Amortization of intangible assets |
|
10,095 |
|
|
10,204 |
Costs for plug and abandon activities |
|
— |
|
|
(46) |
Changes in Operating Assets and Liabilities: |
|
|
|
|
|
Accounts receivable |
|
196 |
|
|
159 |
Accounts receivable - related entities |
|
6,364 |
|
|
(1,042) |
Prepaid expenses |
|
1,669 |
|
|
(348) |
Other assets |
|
62 |
|
|
124 |
Accounts payable and accrued liabilities |
|
10,307 |
|
|
6,416 |
Accounts payable and accrued liabilities- related entities |
|
(4,932) |
|
|
(1,033) |
Royalties payable |
|
(1) |
|
|
(301) |
Net cash provided by operating activities |
|
52,118 |
|
|
36,646 |
Cash flows from investing activities: |
|
|
|
|
|
Final settlement of oil and natural gas properties acquisition |
|
— |
|
|
1,468 |
Development of oil and natural gas properties |
|
(169) |
|
|
(148) |
Proceeds from sale of assets |
|
6,209 |
|
|
5,510 |
Construction of gathering and transportation assets |
|
(1,959) |
|
|
(29,058) |
Purchases of and contributions to equity affiliates |
|
(2,838) |
|
|
(10,380) |
Net cash provided by (used in) investing activities |
|
1,243 |
|
|
(32,608) |
Cash flows from financing activities: |
|
|
|
|
|
Payments for offering costs |
|
(50) |
|
|
(611) |
Proceeds from issuance of debt |
|
2,000 |
|
|
45,500 |
Repayment of debt |
|
(7,000) |
|
|
(9,500) |
Issuance of common units |
|
— |
|
|
1,290 |
Distributions to common unitholders |
|
(20,815) |
|
|
(18,530) |
Class B preferred unit cash distributions |
|
(24,500) |
|
|
(22,750) |
Debt issuance costs |
|
(1,006) |
|
|
(27) |
Net cash used in financing activities |
|
(51,371) |
|
|
(4,628) |
Net increase (decrease) in cash and cash equivalents |
|
1,990 |
|
|
(590) |
Cash and cash equivalents, beginning of period |
|
321 |
|
|
957 |
Cash and cash equivalents, end of period |
$ |
2,311 |
|
$ |
367 |
Supplemental disclosures of cash flow information: |
|
|
|
|
|
Change in accrued capital expenditures |
$ |
450 |
|
$ |
2,414 |
Asset retirement obligation |
$ |
288 |
|
$ |
198 |
Earnout derivative |
$ |
— |
|
$ |
221 |
Cash paid during the period for interest |
$ |
7,316 |
|
$ |
5,494 |
See accompanying notes to condensed consolidated financial statements.
8
SANCHEZ MIDSTREAM PARTNERS LP and SUBSIDIARIES
Condensed Consolidated Statements of Changes in Partners’ Capital
(In thousands, except unit data)
(Unaudited)
|
Common Units |
|
Total |
||||
|
Units |
|
Amount |
|
Capital |
||
Partners' Deficit, December 31, 2017 |
14,965,134 |
|
$ |
(29,308) |
|
$ |
(29,308) |
Unit-based compensation programs |
575,148 |
|
|
2,940 |
|
|
2,940 |
Issuance of common units, net of offering costs of $0.1 million |
655,534 |
|
|
7,218 |
|
|
7,218 |
Cash distributions to common unit holders |
— |
|
|
(20,815) |
|
|
(20,815) |
Distributions - Class B preferred units |
— |
|
|
(29,795) |
|
|
(29,795) |
Net income |
— |
|
|
60 |
|
|
60 |
Partners' Deficit, September 30, 2018 |
16,195,816 |
|
$ |
(69,700) |
|
$ |
(69,700) |
See accompanying notes to condensed consolidated financial statements.
|
Common Units |
|
Total |
||||
|
Units |
|
Amount |
|
Capital |
||
Partners' Capital, December 31, 2016 |
13,447,749 |
|
$ |
16,744 |
|
$ |
16,744 |
Unit-based compensation programs |
212,481 |
|
|
2,648 |
|
|
2,648 |
Issuance of common units, net of offering costs of $0.6 million |
719,671 |
|
|
9,124 |
|
|
9,124 |
Cash distributions to common unit holders |
— |
|
|
(18,530) |
|
|
(18,530) |
Common units issued as Class B Preferred distributions |
393,291 |
|
|
5,250 |
|
|
5,250 |
Distributions - Class B preferred units |
— |
|
|
(28,425) |
|
|
(28,425) |
Net loss |
— |
|
|
(3,329) |
|
|
(3,329) |
Partners' Deficit, September 30, 2017 |
14,773,192 |
|
$ |
(16,518) |
|
$ |
(16,518) |
See accompanying notes to condensed consolidated financial statements.
9
SANCHEZ MIDSTREAM PARTNERS LP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS
Organization
We are a growth-oriented publicly-traded limited partnership focused on the acquisition, development, ownership and operation of midstream and other energy-related assets in North America. The Partnership has ownership stakes in oil and natural gas gathering systems, natural gas pipelines and natural gas processing facilities, all located in the Western Eagle Ford in South Texas. We also own production assets in Texas and Louisiana. We have entered into a shared services agreement (the “Services Agreement”) with Manager, the sole member of our general partner, pursuant to which Manager provides services that the Partnership requires to operate its business, including overhead, technical, administrative, marketing, accounting, operational, information systems, financial, compliance, insurance, acquisition, disposition and financing services. On June 2, 2017, we changed our name to Sanchez Midstream Partners LP. Manager owns the general partner of SNMP and all of SNMP’s incentive distribution rights. Our common units are currently listed on the NYSE American under the symbol “SNMP.”
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Accounting policies used by us conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). These unaudited condensed consolidated financial statements include the accounts of us and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Our business consists of two reportable segments: Production and Midstream. Midstream includes Western Catarina Midstream (defined in Note 10 “Intangible Assets”), the Carnero JV (defined in Note 11 “Investments”) and Seco Pipeline (defined in Note 13 “Related Party Transactions”). Our management evaluates performance based on these two segments.
These unaudited condensed consolidated financial statements have been prepared pursuant to the rules of the SEC. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with U.S. GAAP, have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the interim condensed consolidated financial statements have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire year.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of SNMP and its subsidiaries included in our Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on March 12, 2018.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), which are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not effective, will not have a material impact on our condensed consolidated financial statements upon adoption.
In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13 “Fair Value Measurement (ASC 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements,” which modifies the disclosure requirements on fair value measurements. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2019. We are currently in the process of evaluating the impact of adoption of this guidance on our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07 “Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic 718, Compensation – Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. This ASU is effective for public business entities for
10
annual and interim periods in fiscal years beginning after December 15, 2018. We are currently in the process of evaluating the impact of adoption of this guidance on our condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01 “Business Combinations (Topic 805) - Clarifying the Definition of a Business,” which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The Partnership adopted this ASU on January 1, 2018, using a prospective method.
In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This ASU is now effective for public business entities beginning after December 15, 2017. The Partnership does not currently have restricted cash.
In October 2016, the FASB issued ASU 2016-16 “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which eliminates a current exception in U.S. GAAP to the recognition of the income tax effects of temporary differences that result from intra-entity transfers of non-inventory assets. The intra-entity exception is being eliminated under the ASU. The standard is required to be applied on a modified retrospective basis and is now effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The adoption of ASU 2016-16 did not have an impact on the Partnership’s unaudited condensed consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2019, and earlier adoption is permitted. We are currently in the process of evaluating the impact of adoption of this guidance on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842),” effective for annual and interim periods for public companies beginning after December 15, 2018. Additionally, in July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842 (Leases),” which provides narrow amendments to clarify how to apply certain aspects of ASU 2016-02. The Partnership plans on electing the practical expedients disclosed in ASU 2018-10. The effective date in ASU 2018-10 is the same as that of ASU 2016-02. The standards update the previous lease guidance by requiring the recognition of a right-to-use asset and lease liability on the statement of financial position for those leases previously classified as operating leases under the old guidance. In addition, ASU 2016-02 updates the criteria for a lessee’s classification of a finance lease. The Partnership will not early adopt this standard and will apply the revised lease rules for our interim and annual reporting periods starting January 1, 2019. The Partnership is currently evaluating the impact of these rules on its consolidated financial statements and has identified the population of leases under the revised definition. The Partnership is also in the process of implementing a lease accounting software to properly account for lease data upon adoption. Concurrent with the software implementation, the Partnership is implementing necessary updates to its business processes and controls. The adoption of this standard will result in an increase in the assets and liabilities on the Partnership’s consolidated balance sheets. The quantitative impacts of the new standard are dependent on the leases in force at the time of adoption. As a result, the evaluation of the effect of the new standards will extend over future periods.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” In March, April, May and December of 2016, the FASB issued rules clarifying several aspects of the new revenue recognition standard. The new guidance is effective for fiscal years and interim periods beginning after December 15, 2017. This guidance outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods and services. The new standard also requires more detailed disclosures related to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Partnership adopted the standard effective January 1, 2018. For more information, see Note 3 “Revenue Recognition.”
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Partnership’s financial position, results of operations and cash flows.
Estimates
The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which requires management to
11
make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying footnotes. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. The estimates that are particularly significant to our financial statements include estimates of our reserves of natural gas, NGLs and oil; future cash flows from oil and natural gas properties; depreciation, depletion and amortization; asset retirement obligations; certain revenues and operating expenses; fair values of derivatives; and fair values of assets and liabilities. As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. These estimates and assumptions are based on management’s best judgment using the data available. Management evaluates its estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from the estimates. Any changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
3. REVENUE RECOGNITION
Adoption of Topic 606
Effective January 1, 2018, the Partnership adopted the new Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, and all the related amendments (collectively referred to as “Topic 606”) to all open contracts using the modified retrospective approach. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
For contracts that have a contract term of one year or less, we elected to utilize the practical expedient permitted under the rules of adoption whereby a Company is not required to disclose the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
Adoption of this guidance resulted in financial statement presentation changes whereby revenue from the Gathering Agreement and revenue from the Seco Pipeline Transportation Agreement (as each term is defined in Note 13 “Related Party Transactions”) are shown as separate line items within our condensed consolidated statements of operations. There was no cumulative adjustment to retained earnings or any other changes to our January 1, 2018 condensed consolidated balance sheet.
Revenue from Contracts with Customers
Beginning in 2018, we account for revenue from contracts with customers in accordance with Topic 606. The unit of account in Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided over a period of time. Topic 606 requires that a contract’s transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.
Disaggregation of Revenue
We disaggregate revenue based on type of revenue and product type. In selecting the disaggregation categories, we considered a number of factors, including disclosures presented outside the financial statements, such as in our earnings release and investor presentations, information reviewed internally for evaluating performance, and other factors used by the Partnership or the users of its financial statements to evaluate performance or allocate resources. We have concluded that disaggregating revenue by type of revenue and product type appropriately depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Midstream Segment
The Seco Pipeline Transportation Agreement is our only contract that we account for under Topic 606. The Catarina Midstream Gathering Agreement was classified as an operating lease at inception and is accounted for under ASC 840, Leases, and is reported as gathering and transportation lease revenue in our condensed consolidated statements of operations. Both of these contracts are further discussed in Note 13 “Related Party Transactions.”
We account for income from our unconsolidated equity method investments as earnings from equity investments in our condensed consolidated statements of operations. Earnings from these equity method investments are further discussed in Note 11 “Investments.”
12
Production Segment
Our oil, natural gas, and NGL revenue is marketed and sold on our behalf by the respective asset operators. We are not party to the contracts with the third-party customers. However, we are party to joint operating agreements, which we account for under ASC 808, and revenue for these arrangements is recognized based on the information provided to us by the operators.
We additionally recognize and present changes in the fair value of our commodity derivative instruments within natural gas sales and oil sales in the condensed consolidated statements of operations. As this income is accounted for under ASC 815, Derivatives and Hedging, it is not subject to Topic 606.
We recognized revenue of $18.2 million for three months ended September 30, 2018. The following table displays revenue disaggregated by type of revenue and product type (in thousands):
|
|
|
Three Months Ended September 30, 2018 |
|||||||
|
|
|
Production |
|
Midstream |
|
Total |
|||
Revenues: |
|
|
|
|
|
|
|
|
|
|
Natural gas sales |
|
|
$ |
166 |
|
$ |
— |
|
$ |
166 |
Oil sales |
|
|
|
2,848 |
|
|
— |
|
|
2,848 |
Natural gas liquid sales |
|
|
|
408 |
|
|
— |
|
|
408 |
Gathering and transportation sales |
|
|
|
— |
|
|
1,582 |
|
|
1,582 |
Gathering and transportation lease revenues |
|
|
|
— |
|
|
13,148 |
|
|
13,148 |
Total revenues |
|
|
$ |
3,422 |
|
$ |
14,730 |
|
$ |
18,152 |
We recognized revenue of $53.7 million for nine months ended September 30, 2018. The following table displays revenue disaggregated by type of revenue and product type (in thousands):
|
|
|
Nine Months Ended September 30, 2018 |
|||||||
|
|
|
Production |
|
Midstream |
|
Total |
|||
Revenues: |
|
|
|
|
|
|
|
|
|
|
Natural gas sales |
|
|
$ |
865 |
|
$ |
— |
|
$ |
865 |
Oil sales |
|
|
|
7,894 |
|
|
— |
|
|
7,894 |
Natural gas liquid sales |
|
|
|
1,403 |
|
|
— |
|
|
1,403 |
Gathering and transportation sales |
|
|
|
— |
|
|
4,931 |
|
|
4,931 |
Gathering and transportation lease revenues |
|
|
|
— |
|
|
38,634 |
|
|
38,634 |
Total revenues |
|
|
$ |
10,162 |
|
$ |
43,565 |
|
$ |
53,727 |
Performance Obligations
Under the Seco Pipeline Transportation Agreement, we agreed to provide transportation services of certain quantities of natural gas from the receipt point to the delivery point. Each MMBtu of natural gas transported is distinct and the transportation services performed on each distinct molecule of product is substantially the same in nature. As such, we applied the series guidance and treat these services as a single performance obligation satisfied over time using volumes delivered as the measure of progress. The Seco Pipeline Transportation Agreement requires payment within 30 days following the calendar month of delivery.
The Seco Pipeline Transportation Agreement contains variable consideration in the form of volume variability. As the distinct goods or services (rather than the series) are considered for the purpose of allocating variable consideration, we have taken the optional exception under ASC 606-10-50-14A(b) which is available only for wholly unsatisfied performance obligations for which the criteria in ASC 606-10-32-40 have been met. Under this exception, neither estimation of variable consideration nor disclosure of the transaction price allocated to the remaining performance obligations is required. Revenue is alternatively recognized in the period that control is transferred to the customer and the respective variable component of the total transaction price is resolved.
For forms of variable consideration that are not associated with a specific volume (such as late payment fees) and thus do not meet allocation exception, estimation is required. These fees, however, are immaterial to our condensed consolidated financial statements and have a low probability of occurrence. As significant reversals of revenue due to this variability are not probable, no estimation is required.
13
Contract Balances
Under our sales contracts, we invoice customers after our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities under Topic 606. At January 1, 2018 and September 30, 2018, our receivables from contracts with customers were $1.1 million and $0.7 million, respectively, and are presented within accounts receivable – related entities on the condensed consolidated balance sheets.
Reconciliation of Statements of Operations
The impact of adopting Topic 606 on our condensed consolidated statements of operations is as follows (in thousands):
|
|
|
Three Months Ended September 30, 2018 |
|||||||
|
|
|
As reported |
|
Balances without Adoption Topic 606 |
|
Effect of change Higher/(Lower) |
|||
Statement of Operations |
|
|
|
|
|
|
|
|
|
|
Gathering and transportation sales |
|
|
$ |
1,582 |
|
$ |
14,730 |
|
$ |
(13,148) |
Gathering and transportation lease revenues |
|
|
|
13,148 |
|
|
— |
|
|
13,148 |
Net earnings |
|
|
$ |
14,730 |
|
$ |
14,730 |
|
$ |
— |
|
|
|
Nine Months Ended September 30, 2018 |
|||||||
|
|
|
As reported |
|
Balances without Adoption Topic 606 |
|
Effect of change Higher/(Lower) |
|||
Statement of Operations |
|
|
|
|
|
|
|
|
|
|
Gathering and transportation sales |
|
|
$ |
4,931 |
|
$ |
43,565 |
|
$ |
(38,634) |
Gathering and transportation lease revenues |
|
|
|
38,634 |
|
|
— |
|
|
38,634 |
Net earnings |
|
|
$ |
43,565 |
|
$ |
43,565 |
|
$ |
— |
We expect the impact of the adoption of Topic 606 to be immaterial to our net income (loss) on an ongoing basis.
4. ACQUISITIONS AND DIVESTITURES
Louisiana Divestiture
In September 2018, we entered into a purchase and sale agreement to sell certain non-operated production assets located in Louisiana for cash consideration of approximately $1.3 million. The divestiture closed on October 22, 2018, and we anticipate recording a gain on the sale. As of September 30, 2018, we reclassified $0.9 million of oil and natural gas properties to assets held for sale on the condensed consolidated balance sheet related to the carrying amount of these assets.
Briggs Divestiture
In April 2018, we entered into a purchase and sale agreement to sell specified wellbores and other associated assets and interests in La Salle County Texas (the “Briggs Assets”) for a base purchase price of approximately $4.5 million which, after giving effect to purchase price adjustments, was reduced to approximately $4.2 million (the “Briggs Divestiture”). In addition, other than a limited amount of retained obligations, the buyer agreed to assume all obligations relating to the Briggs Assets, including all plugging and abandonment costs, that may arise on or after March 1, 2018. The Briggs Divestiture closed April 30, 2018, and we recorded a gain of approximately $1.8 million on the sale.
Cola Divestiture
In April 2018, we entered into a purchase and sale agreement to sell certain non-operated production assets located in Oklahoma for cash consideration of approximately $1.0 million. The divestiture closed on April 30, 2018, and we recorded a gain of approximately $1.1 million on the sale.
Texas Production Divestiture
In October 2017, we entered into a purchase and sale agreement to sell specified oil and gas wells, leases and other associated assets and interests located in Texas (the “Texas Production Assets”) for cash consideration of approximately $6.3 million (the “Texas
14
Production Divestiture”). In addition, the buyer agreed to assume all obligations relating to the Texas Production Assets, including all plugging and abandonment costs, that may arise on or after October 1, 2017. The Texas Production Divestiture closed on November 13, 2017, and we recorded a gain of approximately $1.4 million on the sale.
Oklahoma Non-Operated Production Divestiture
In July 2017, we entered into an agreement to assign our interest in certain non-operated production assets located in Oklahoma, as well as our equity interests in the entities that owned such assets, in exchange for agreeing upon the apportionment of certain shared litigation costs. The assignment became effective as of July 14, 2017.
Oklahoma Production Divestiture
In May 2017, we entered into a purchase and sale agreement to sell all of the Partnership’s equity interests in the entities that owned our remaining operated Oklahoma production assets for cash consideration of $5.5 million, and assumption by the buyer of all obligations relating to such assets arising after the closing date and all plugging and abandonment costs relating to the assets arising prior to the closing date (the “Oklahoma Production Divestiture”). The Oklahoma Production Divestiture closed on July 17, 2017, and we recorded a gain of $2.4 million on the sale.
5. FAIR VALUE MEASUREMENTS
Measurements of fair value of derivative instruments are classified according to the fair value hierarchy, which prioritizes the inputs to the valuation techniques used to measure fair value. Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following categories:
Level 1: Measured based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Measured based on quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. Substantially all of these inputs are observable in the marketplace throughout the term of the instrument, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.
Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity).
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Management's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
The following table summarizes the fair value of our assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2018 (in thousands):
|
|
Fair Value Measurements at September 30, 2018 |
|
||||||||||
|
|
Active Markets for |
|
Observable |
|
|
|
|
|
|
|||
|
|
Identical Assets |
|
Inputs |
|
Unobservable Inputs |
|
|
|
||||
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Fair Value |
|
||||
Commodity derivative instrument |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability |
|
$ |
— |
|
$ |
(5,506) |
|
$ |
— |
|
$ |
(5,506) |
|
Midstream derivative instrument |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnout derivative liability |
|
|
— |
|
|
— |
|
|
(8,278) |
|
|
(8,278) |
|
Total |
|
$ |
— |
|
$ |
(5,506) |
|
$ |
(8,278) |
|
$ |
(13,784) |
|
15
The following table summarizes the fair value of our assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2017 (in thousands):
|
|
Fair Value Measurements at December 31, 2017 |
|
||||||||||
|
|
Active Markets for |
|
Observable |
|
|
|
|
|
|
|||
|
|
Identical Assets |
|
Inputs |
|
Unobservable Inputs |
|
|
|
||||
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Fair Value |
|
||||
Commodity derivative instrument |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets |
|
$ |
— |
|
$ |
1,231 |
|
$ |
— |
|
$ |
1,231 |
|
Midstream derivative instrument |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnout derivative liability |
|
|
— |
|
|
— |
|
|
(6,402) |
|
|
(6,402) |
|
Total |
|
$ |
— |
|
$ |
1,231 |
|
$ |
(6,402) |
|
$ |
(5,171) |
|
As of September 30, 2018 and December 31, 2017, the estimated fair value of cash and cash equivalents, accounts receivable, other current assets and current liabilities approximated their carrying value due to their short-term nature.
Fair Value on a Non-Recurring Basis
The Partnership follows the provisions of Topic 820-10 for nonfinancial assets and liabilities measured at fair value on a non-recurring basis. The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs under the fair value hierarchy. We periodically review oil and natural gas properties for impairment when facts and circumstances indicate that their carrying values may not be recoverable.
A reconciliation of the beginning and ending balances of the Partnership’s asset retirement obligations is presented in Note 9 “Asset Retirement Obligation.”
We had no non-recurring fair value measurements of our assets as of September 30, 2018. However, the following table summarizes the non-recurring fair value measurements of our assets as of December 31, 2017 (in thousands):
|
|
Fair Value Measurements at December 31, 2017 |
|||||||
|
|
Active Markets for |
|
Observable |
|
|
|||
|
|
Identical Assets |
|
Inputs |
|
Unobservable Inputs |
|||
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|||
Impairment(a) |
|
$ |
— |
|
$ |
— |
|
$ |
7,277 |
Total net assets |
|
$ |
— |
|
$ |
— |
|
$ |
7,277 |
(a) |
During the year ended December 31, 2017, we recorded a non-cash impairment charge of $4.7 million to impair our producing oil and natural gas properties. The carrying values of the impaired properties were reduced to a fair value of $7.3 million, estimated using inputs characteristic of a Level 3 fair value measurement. |
The fair values of oil and natural gas properties and related equipment were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties and related equipment include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; (iv) estimated future cash flows; (v) estimated throughput; and (vi) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Partnership’s management at the time of the valuation and are the most sensitive and subject to change.
Fair Value of Financial Instruments
The estimated fair value amounts of financial instruments have been determined using available market information and valuation methodologies described below.
Credit Agreement – We believe that the carrying value of long-term debt for our Credit Agreement (defined in Note 7 “Long-Term Debt”) approximates its fair value because the interest rates on the debt approximate market interest rates for debt with similar terms. The debt is classified as a Level 2 input in the fair value hierarchy and represents the amount at which the instrument could be valued in an exchange during a current transaction between willing parties. Our Credit Agreement is discussed further in Note 7 “Long-Term Debt.”
Derivative Instruments – The income valuation approach, which involves discounting estimated cash flows, is primarily used to determine recurring fair value measurements of our derivative instruments classified as Level 2 inputs. Our commodity derivatives are valued using the terms of the individual derivative contracts with our counterparties, expected future levels of oil and natural gas prices and an appropriate discount rate. Our interest rate derivatives are valued using the terms of the individual derivative contracts with our counterparties, expected future levels of the LIBOR interest rates and an appropriate discount rate. We did not have any interest rate
16
derivatives as of September 30, 2018. We prioritize the use of the highest level inputs available in determining fair value such that fair value measurements are determined using the highest and best use as determined by market participants and the assumptions that they would use in determining fair value.
Earnout Derivative – As part of the Carnero Gathering Transaction (defined in Note 11 “Investments”), we are required to pay Sanchez Energy an earnout based on natural gas received above a threshold volume and tariff at designated delivery points from Sanchez Energy and other producers. The earnout derivative was valued through the use of a Monte Carlo simulation model which utilized observable inputs such as the earnout price and volume commitment, as well as unobservable inputs related to the weighted probabilities of various throughput scenarios. We have therefore classified the fair value measurements of our earnout derivative as Level 3 and currently present it within the other liabilities lines on the condensed consolidated balance sheets.
The following table sets forth a reconciliation of changes in the fair value of the Partnership's earnout derivative classified as Level 3 in the fair value hierarchy (in thousands):
|
|
Nine Months Ended |
|
Year Ended |
||
|
|
September 30, 2018 |
|
December 31, 2017 |
||
Beginning balance |
|
$ |
(6,402) |
|
$ |
(4,270) |
Initial fair value of earnout derivative |
|
|
— |
|
|
221 |
Loss on earnout derivative |
|
|
(1,876) |
|
|
(2,353) |
Ending balance |
|
$ |
(8,278) |
|
$ |
(6,402) |
|
|
|
|
|
|
|
Loss included in earnings related to derivatives still held as of September 30, 2018 and December 31, 2017, respectively |
|
$ |
(1,876) |
|
$ |
(2,353) |
6. DERIVATIVE AND FINANCIAL INSTRUMENTS
To reduce the impact of fluctuations in oil and natural gas prices on our revenues, we periodically enter into derivative contracts with respect to a portion of our projected oil and natural gas production through various transactions that fix or modify the future prices to be realized. These hedging activities are intended to support oil and natural gas prices at targeted levels and to manage exposure to oil and natural gas price fluctuations. It is never our intention to enter into derivative contracts for speculative trading purposes.
Under Topic 815, “Derivatives and Hedging,” all derivative instruments are recorded on the condensed consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. We will net derivative assets and liabilities for counterparties where we have a legal right of offset. Changes in the derivatives’ fair values are recognized currently in earnings unless specific hedge accounting criteria are met. We have not elected to designate any of our current derivative contracts as hedges; however, changes in the fair value of all of our derivative instruments are recognized in earnings and included in natural gas sales and oil sales in the condensed consolidated statements of operations.
17
As of September 30, 2018, we had the following derivative contracts in place for the periods indicated, all of which are accounted for as mark-to-market activities:
Fixed Price Basis Swaps – West Texas Intermediate (WTI)
|
|
Three Months Ended (volume in Bbls) |
|||||||||||||||||||||||
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
Total |
|||||||||||||||
|
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|||||
|
|
Volume |
|
Price |
|
Volume |
|
Price |
|
Volume |
|
Price |
|
Volume |
|
Price |
|
Volume |
|
Price |
|||||
2018 |
|
— |
|
$ |
— |
|
— |
|
$ |
— |
|
— |
|
$ |
— |
|
59,704 |
|
$ |
59.84 |
|
59,704 |
|
$ |
59.84 |
2019 |
|
62,528 |
|
$ |
60.41 |
|
59,552 |
|
$ |
60.44 |
|
57,024 |
|
$ |
60.48 |
|
54,824 |
|
$ |
60.52 |
|
233,928 |
|
$ |
60.46 |
2020 |
|
52,776 |
|
$ |
53.50 |
|
50,960 |
|
$ |
53.50 |
|