NOTE 1
—
DESCRIPTION OF BUSINESS
Alta Mesa Resources, Inc., together with its consolidated subsidiaries (“AMR,” “we,” “us,” “our,” or the “Company”), is an independent energy company focused on the acquisition, development, exploration and exploitation of unconventional onshore oil and natural gas reserves in the eastern portion of the Anadarko Basin in Oklahoma. Our activities are primarily directed at the horizontal development of an oil and liquids-rich resource play in an area of the basin commonly referred to as the Sooner Trend Anadarko Basin Canadian and Kingfisher County (“STACK”).
We also operate a midstream services business through Kingfisher Midstream LLC (“Kingfisher”), a Delaware limited liability company. Kingfisher has natural gas gathering and processing and crude oil gathering and storage assets located in the Anadarko Basin that generate revenue primarily through long-term, fee-based contracts. The Kingfisher assets are integral to our oil and natural gas operations and are strategically positioned to provide similar services to other producers in the area.
We were originally incorporated in Delaware in November 2016 as a special purpose acquisition company under the name Silver Run Acquisition Corporation II for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving the Company and one or more businesses.
On March 29, 2017, we consummated our initial public offering (“IPO”), generating net proceeds of approximately
$1.035 billion
, as well as the private sale of
15,133,333
warrants (the “Private Placement Warrants”) to Silver Run Sponsor II, LLC (the “Sponsor”) for
$22.7
million. Proceeds from the IPO were placed in a trust account in 2017. The amounts deposited to the trust account, including interest, were utilized to fund a business combination (the “Business Combination”), as described in
Note 4
— Business Combination,
on February 9, 2018 in which the Company acquired interests in Alta Mesa Holdings, LP (“Alta Mesa”), Alta Mesa Holdings GP, LLC (“Alta Mesa GP”) and Kingfisher through a newly formed subsidiary, SRII Opco, LP (“SRII Opco”).
In connection with the closing of the Business Combination, Alta Mesa distributed its non-STACK assets and liabilities to High Mesa Holdings, LP (the “AM Contributor”), and the Company changed its name from “Silver Run Acquisition Corporation II” to “Alta Mesa Resources, Inc.” and continued the listing of its Class A Common Stock and public warrants (which were originally sold as part of the units issued in our initial public offering) on NASDAQ under the symbols “AMR” and “AMRWW,” respectively.
NOTE 2
—
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
.
As a result of the Business Combination, the Company is the acquirer for accounting purposes and Alta Mesa and Kingfisher are the acquirees. Alta Mesa is our accounting predecessor. The Company’s financial statement presentation reflects Alta Mesa as the “Predecessor” for periods prior to the Business Combination. The Company is the “Successor” for periods after the Business Combination, which includes the consolidation of Alta Mesa and Kingfisher concurrent with the Business Combination on
February 9, 2018
. The Business Combination was accounted for using the acquisition method of accounting, and the Successor financial statements reflect a new basis of accounting that is based on the fair value of Alta Mesa and Kingfisher’s net assets acquired as of the acquisition date. See
Note 4 — Business Combination
for further information related to the Business Combination. As a result of the Business Combination and the transactions contemplated by the Contribution Agreements, the financial statements and certain footnote presentations separate the Company’s presentations into two distinct periods, the period before the consummation of the Transactions and the period on or after that date, to indicate that the financial statements presented are those of different entities and reflect the application of the different basis of accounting between the periods presented. The Successor periods presented herein are for the three months ended
September 30, 2018
and from
February 9, 2018
to
September 30, 2018
(collectively, “Successor Periods”); and the Predecessor periods presented herein are from
January 1, 2018
to
February 8, 2018
(“2018 Predecessor Period”), the three months ended
September 30, 2017
and the
nine
months ended
September 30, 2017
(“2017 Predecessor Period,” and, together with the 2018 Predecessor Period, the “Predecessor Periods”).
Prior to the Business Combination, Alta Mesa distributed its non-STACK assets and liabilities to the AM Contributor. The distribution of its non-STACK assets and liabilities in 2018 and the sale of its Weeks Island field during the fourth quarter of 2017 (collectively, the “non-STACK assets”) were part of Alta Mesa’s overall strategic shift to operate only in the eastern Anadarko Basin. As a result, we have classified the assets and liabilities and operating results of the non-STACK assets as
discontinued operations during the Predecessor Periods within the consolidated financial statements. See
Note 6 — Discontinued Operations
(Predecessor)
for further discussion.
Principles of Consolidation and Reporting
.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain reclassifications of prior period consolidated financial statements have been made to conform to current reporting practices. The consolidated financial statements include the accounts of the Company and its subsidiaries, including SRII Opco, after eliminating all significant intercompany transactions and balances. The Company’s interests in oil and natural gas exploration and production ventures and partnerships are proportionately consolidated. Noncontrolling interest represents third-party ownership interests in SRII Opco and is presented as a component of equity. See
Note 16 — Stockholders’ Equity and Partners’ Capital
for further discussion.
The consolidated financial statements included herein are unaudited, and in the opinion of management, the information furnished reflects all material adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of consolidated financial position and of the results of operations for the interim periods presented. The consolidated results of operations for interim periods are not necessarily indicative of results to be expected for a full year.
Segment Reporting (Successor)
.
The Company operates in
two
business segments. Alta Mesa operates in
one
industry segment, which is the exploration and production of oil and natural gas. Kingfisher operates in the midstream segment as the owner and operator of gas gathering and processing assets and crude oil gathering and transportation assets. Both operations are conducted in
one
geographic area of the United States and all revenues are derived from customers located in the United States. The Company reports its consolidated financial results under
two
reportable segments: (1) Exploration & Production and (2) Midstream. See
Note 21 — Business Segment Information
for financial information about our segments.
Use of Estimates
.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Reserve estimates significantly impact depreciation, depletion, and amortization expense and potential impairments of oil and natural gas properties and are subject to change based on changes in oil and natural gas prices and trends and changes in estimated reserve quantities. Other estimates are utilized to determine amounts related to oil and natural gas revenues, product sales and gathering and processing sales, the value of oil and natural gas properties, the value of pipeline equipment, bad debts, goodwill, intangible assets, asset retirement obligations, derivative contracts, accounting for business combinations, federal and state taxes, share-based compensation and contingencies and litigation. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. We review estimates and underlying assumptions on a regular basis. Actual results may differ from these estimates.
Cash and Cash Equivalents
.
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains cash balances at financial institutions in the United States of America, which at times exceed federally insured amounts. The Federal Deposit Insurance Corporation provides insurance up to
$250,000
per depositor. We monitor the financial condition of the financial institutions we use and have experienced no losses to date associated with these accounts.
Restricted Cash.
The Company classifies cash balances as restricted cash when cash is legally, contractually or otherwise restricted as to withdrawal or usage. As of
September 30, 2018
, and
December 31, 2017
, the restricted cash represents cash received by the Company from production sold where the final division of ownership of the production is in dispute or there is unclaimed property for pooling orders in Oklahoma.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets and the consolidated statements of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
September 30,
2018
|
|
|
December 31,
2017
|
Cash and cash equivalents
|
$
|
32,185
|
|
|
|
$
|
3,660
|
|
Restricted cash
|
872
|
|
|
|
1,269
|
|
Cash from discontinued operations
|
—
|
|
|
|
61
|
|
Total cash, cash equivalents and restricted cash
|
$
|
33,057
|
|
|
|
$
|
4,990
|
|
Accounts Receivable
.
Our receivables arise primarily from (i) the sale of oil, natural gas and NGLs, (ii) joint interest owners’ properties in which we serve as the operator, and (iii) for services rendered to non-affiliated customers. Our customers are concentrated in the oil and gas industry which may impact our overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions affecting the industry. Accounts receivable are generally not collateralized. We may have the ability to withhold future revenue disbursements to recover non-payment of joint interest billings on properties of which we are the operator. Accounts receivable are stated at amounts due, net of an allowance for doubtful accounts.
Accounts receivable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
September 30,
2018
|
|
|
December 31,
2017
|
Oil, natural gas and natural gas liquids sales
|
$
|
54,978
|
|
|
|
$
|
26,916
|
|
Joint interest billings
|
44,548
|
|
|
|
13,821
|
|
Pooling interest
(1)
|
23,367
|
|
|
|
35,839
|
|
Allowance for doubtful accounts
|
(65
|
)
|
|
|
(415
|
)
|
Total accounts receivable, net
|
$
|
122,828
|
|
|
|
$
|
76,161
|
|
|
|
(1)
|
Pooling interest relates to Oklahoma’s forced pooling process which requires the Company to offer mineral interest owners the option to participate in the drilling of proposed wells. The pooling interest listed above represents costs associated with unbilled interests on wells which the Company incurred before the pooling process was completed. Depending upon the outcome of the pooling process, these costs may be billed to potential working interest owners or added to oil and gas properties.
|
Allowance for Doubtful Accounts
.
We routinely assess the recoverability of all material trade and other receivables to determine their collectability. We establish a reserve when, based on the judgment of management, it is probable that a receivable will not be collected and the amount of the reserve can be reasonably estimated. Our assessment is based upon several factors including, but not limited to, historical experience, the length of time an invoice has been outstanding, responses from customers relating to demands for payment and the current and projected financial condition of specific customers.
Property, Plant and Equipment
.
Oil and natural gas producing activities are accounted for using the successful efforts method of accounting. Under the successful efforts method, lease acquisition costs and all development costs, including unsuccessful development wells, are capitalized. In conjunction with the Business Combination, our property, plant and equipment was measured at fair value as of the acquisition date, which also impacted how values were assigned between the categories within property, plant, and equipment. See
Note 4 — Business Combination
for further discussion. Policies regarding various categories of Property, Plant and Equipment follows:
Unproved Properties
— Costs associated with the acquisition of leases are recorded as unproved properties and capitalized as incurred. These costs consist of amounts incurred to obtain a mineral interest or right in a property, such as a lease, in addition to options to lease, and for broker fees, recording fees and other similar costs related to activities in acquiring properties. Properties are classified as unproved until proved reserves are discovered, at which time the related costs are transferred to proved oil and natural gas properties.
Proved Oil and Natural Gas Properties
— Costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering, and storing oil and natural gas are capitalized. All costs incurred to drill and equip successful exploratory wells, development wells, development-type stratigraphic test wells, and service wells, including unsuccessful development wells, are capitalized.
Other Property, Plant and Equipment
—
Other property, plant and equipment, such as land, buildings, plant equipment, assets associated with salt water disposal, office furniture and equipment and vehicles, are recorded at cost, or fair value, if impaired. Maintenance, repairs and minor renewals are expensed as incurred. Plant and equipment includes costs incurred to build a cryogenic natural gas processing facility along with natural gas gathering pipelines and compression, including rights of way, and a crude oil gathering system and crude oil storage facility.
Impairment
— Our unproved properties consist of leasehold costs and allocated value to probable and possible reserves resulting from acquisitions. We assess unproved properties acquired after the Business Combination for impairment on a quarterly basis and would recognize a loss at the time of impairment in our consolidated statement of operations by providing an impairment allowance against unproved properties. In determining whether an unproved property is impaired we consider numerous factors including, but not limited to, current exploration plans, favorable or unfavorable exploration activity on the property being evaluated and/or adjacent properties, our geologists' evaluation of the property, and the remaining months in the lease term for the property. When we have allocated fair value to an unproved property as the result of a transaction accounted for as a business combination, we use a future cash flow analysis to assess the unproved property for impairment. Cash flows used in the impairment analysis are determined based on management’s estimates of crude oil, natural gas and NGL reserves, future commodity prices and future costs to produce the reserves. Cash flow estimates related to probable and possible reserves are reduced by additional risk-weighting factors.
No
impairment of unproved properties was recognized in the Successor Periods or the Predecessor Periods.
The capitalized costs of proved oil and natural gas properties are reviewed quarterly for impairment following the guidance provided in Account Standards Codification (“ASC”) 360-10-35,
Property, Plant and Equipment, Subsequent Measurement
, or whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset or asset group exceeds its fair value and is not recoverable. The determination of recoverability is based on comparing the estimated undiscounted future net cash flows at a producing field level to the carrying value of the assets. If the future undiscounted cash flows, based on estimates of anticipated production from proved and risk-adjusted unproved reserves and future crude oil and natural gas prices and operating costs, are lower than the carrying cost, the carrying cost of the asset or group of assets is reduced to fair value. For our proved oil and natural gas properties, we estimate fair value by discounting the projected future cash flows at an appropriate risk-adjusted discount rate.
Our evaluation of the Company’s proved properties resulted in
no
impairment in the Successor Periods, the 2018 Predecessor Period and the three months ended
September 30, 2017 (Predecessor)
. For the
2017 Predecessor Period
, the evaluation of proved properties resulted in an impairment charge of
$1.2 million
.
Management evaluates whether the carrying value of all other long-lived assets, including our midstream assets, have been impaired when circumstances indicate the carrying value of those assets may not be recoverable. This evaluation is based on undiscounted cash flow projections. The carrying amount is not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the assets. Management considers various factors, both qualitative and quantitative, when determining if these assets should be evaluated for impairment.
If the carrying value is not recoverable on an undiscounted basis, an impairment loss is measured as the excess of the asset’s carrying value over its fair value. Management assesses the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third-party comparable sales, an internally-developed discounted cash flow analysis or an analysis from outside advisors. Significant changes in market conditions resulting from events such as the condition of an asset or a change in management’s intent to utilize the asset would generally require management to reassess the cash flows related to the long-lived assets. The Company did
not
record any impairment related to other long-lived assets for the Successor Periods or the Predecessor Periods.
Depreciation, Depletion and Amortization
— Depreciation, depletion and amortization (“DD&A”) of capitalized costs of proved oil and natural gas properties is computed using the unit-of-production method based upon estimated proved reserves. Assets are grouped for DD&A based on a reasonable aggregation of properties with a common geological structural feature or stratigraphic condition, such as a reservoir or field. The reserve base used to calculate DD&A for leasehold acquisition costs and the cost to acquire proved properties is total proved reserves. The reserve base used to calculate DD&A for lease and well equipment costs, which include development costs and successful exploration drilling costs, includes only proved developed reserves.
For the three months ended
September 30, 2018
(Successor) and 2017 (Predecessor), DD&A expense related to oil and natural gas properties was
$44.6 million
and
$22.8
million, respectively. DD&A expense related to oil and natural gas properties was
$81.5
million,
$11.2 million
, and
$59.4 million
for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. DD&A expense related to our midstream tangible assets was $
1.4
million and
$4.5
million for the three
months ended
September 30, 2018
(Successor) and the Successor Period, respectively. There was
no
such DD&A expense for midstream assets for the 2018 and 2017 Predecessor Periods.
Leasehold improvements to offices are depreciated using the straight-line method over the life of the lease. Other property and equipment is depreciated using the straight-line method over periods ranging from
three years
to
seven years
. Our midstream assets are depreciated using the straight-line method over their expected useful lives. The Company uses estimated lives of
35 years
for its processing plant and pipelines.
For the three months ended
September 30, 2018
(Successor) and 2017 (Predecessor), depreciation expense for other property, plant and equipment was
$1.8 million
and
$1.4
million, respectively. Depreciation expense for non-oil and natural gas properties was
$2.3
million,
$0.6 million
, and
$3.8 million
for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively.
See
Note 9 — Intangible Assets
for information related to amortization of our intangible assets.
Exploration Expense
.
Exploration expenses, other than exploration drilling costs, are charged to expense as incurred. These expenses include seismic expenditures and other geological and geophysical costs, expired leases, delay rentals, gains or losses on settlement of asset retirement obligations and lease rentals. The costs of drilling exploratory wells and exploratory-type stratigraphic wells are initially capitalized, or “suspended” on the balance sheet pending determination of whether the well has discovered proved commercial reserves. If the exploratory well is determined to be unsuccessful, the cost of the well is expensed. Exploratory well drilling costs may continue to be capitalized if the reserve quantity is sufficient to justify completion as a producing well and sufficient progress in assessing the reserves and the economic and operating viability of the project is being made. Assessments of such capitalized costs are made quarterly.
Equity Method of Accounting
.
We account for investments that we do not control, but have the ability to exercise significant influence using the equity method of accounting. Under this method, our equity investments are originally recorded at our acquisition cost, which approximates fair value, increased by our proportionate share of the investee’s net income and by contributions made, and decreased by our proportionate share of the investee’s net losses, and by distributions received. Our income from equity investments also includes amortization expense associated with the difference in basis, if any, between the initial carrying value of our equity investments in our consolidated balance sheets and our proportionate share of the underlying net assets of our investee.
Deferred financing costs
. Deferred financing costs reflect fees paid to lenders and third parties that are directly related to the establishment of revolving credit facility agreements or the issuance of senior secured notes. Costs related to the establishment of the current Alta Mesa and Kingfisher secured revolving credit facilities have been deferred in other noncurrent assets and are being amortized over the term of each facility as additional interest expense. During the Predecessor Periods, costs associated with the issuance of senior secured notes were deferred as a reduction in the value of the outstanding debt and are being amortized as additional interest expense.
Acquisitions
.
Business combinations are accounted for using the acquisition method of accounting. Accordingly, the results of operations of the acquired businesses (Alta Mesa and Kingfisher) are included in our consolidated statements of operations from the closing date of the acquisitions, except in the case of our acquisition of Alta Mesa, as that entity was deemed to be our Predecessor for accounting purposes. The total cost of each acquisition is allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the time of the acquisition.
Goodwill (Successor)
.
Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. Under ASC 350,
Intangibles – Goodwill and Other
(“ASC 350”), goodwill is not amortized but is subject to periodic impairment testing. ASC 350 requires that an entity assign its goodwill to reporting units and test each reporting unit’s goodwill for impairment at least on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our reporting units for goodwill impairment evaluation purposes are the Exploration & Production and Midstream business segments. Our evaluation of goodwill for impairment, will be performed annually as of October 1 of each year. During the first quarter of 2018, the Company elected to early adopt Accounting Standards Update (“ASU”) No. 2017-04,
Intangibles - Goodwill and Other, Simplifying the Test for Goodwill Impairment.
This new
guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Accordingly, any identified impairment of goodwill will be recognized as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. During each annual evaluation, we will first assess qualitative factors to determine whether the existence of events or circumstances has led to a determination that it is more likely than not that the fair value of a reporting unit is less than
its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we are required to perform a quantitative goodwill impairment test.
As a result of the Business Combination, we recognized goodwill in the Midstream segment during the Successor Period. There was
no
goodwill prior to the Business Combination. Based mainly on declines in the Company’s stock price and market capitalization during the quarter ended
September 30, 2018
, we elected to perform a quantitative assessment to determine if the $
699.9
million of goodwill in the Midstream segment was impaired as of the end of the period. Our assessment included a calculation of the present value of estimated future discounted cash flows, a calculation of the value of the Midstream segment based on a market participant multiple applied to 2019 estimated earnings before interest, taxes, depreciation and amortization (EBITDA) and a calculation of the value of the Midstream segment based on estimated future discounted cash flows plus a market participant multiple applied to terminal EBITDA at the end of a five-year period. The cash flows used in the model were determined based on expected growth in production volumes of the Company’s Exploration & Production segment, much of which is dedicated to the Midstream segment’s gathering and processing facilities, the inclusion of earnings from the transfer of salt water disposal assets from the Exploration & Production segment to the Midstream segment that occurred in the fourth quarter of 2018 (See
Note 22 — Subsequent Events
for further information), earnings associated with the expected completion of the Cimarron Express Pipeline joint venture in mid-2019 and anticipated growth from third parties’ production dedicated to the Midstream segment’s gathering and processing facilities. Each scenario modeled indicated there was no impairment of goodwill as of
September 30, 2018
. The Company also analyzed the impact that changes in our assumptions would have on the estimated value of the Midstream segment by increasing and decreasing the discount rate, increasing and decreasing the exit EBITDA multiples and increasing and decreasing the terminal growth rate assumptions.
No
goodwill impairment was determined under any of the varying scenarios analyzed by the Company as of
September 30, 2018
. Each of our assumptions regarding earnings, cash flows and discount rates are based mainly on Level 3 unobservable inputs. Should the expected long-term growth in earnings and cash flows for the Midstream segment not occur due to adverse changes in commodity prices or market conditions or the inability of the Company to execute on its growth strategy, goodwill for the Midstream segment could become impaired in some future period.
Intangible Assets (Successor)
.
In connection with the acquisition of Kingfisher, the Company recorded the estimated fair value of acquired customer contracts and related customer relationships as intangible assets, which were valued using the income approach, and are presented as Intangible Assets, net in the accompanying consolidated balance sheet of the Successor. These intangible assets, all of which relate to the Midstream segment, have definite lives and are subject to amortization utilizing an accelerated attrition method over their economic lives. The weighted average remaining amortization period for our intangible assets at September 30, 2018 was
12 years
. We assess intangible assets for impairment together with related underlying long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If required, an impairment would be recognized in the consolidated statements of operations to reduce the carrying amount of an intangible asset to its fair value.
No
impairment was identified as of
September 30, 2018
.
Asset Retirement Obligations
.
We recognize liabilities for the future costs of dismantlement and abandonment of our wells, facilities, and other tangible long-lived assets along with an associated increase in the carrying amount of the related long-lived asset. The fair values of new asset retirement obligations are estimated using expected future costs discounted to present value. The cost of the tangible asset, including the asset retirement cost, is depleted over the useful life of the asset. Accretion expense is recognized as the discounted liability is accreted to its expected settlement value. Asset retirement obligations are subject to revision primarily for changes related to the estimated timing and cost of abandonment.
Asset retirement obligations for the Company’s midstream processing and pipeline facilities generally become firm at the time the facilities are permanently shut down and dismantled. These obligations may include the costs of asset disposal and additional soil remediation. However, these sites have indeterminate lives based on plans for continued operations and as such, the fair value of the conditional legal obligations cannot be measured due to the uncertainty associated with the future settlement dates of such obligations. As such, no obligation has been established for our midstream assets as of
September 30, 2018
.
Bond Premium on Senior Unsecured Notes
. In connection with the Business Combination, the Company estimated the fair value of Alta Mesa’s
$500.0 million
senior unsecured notes at
$533.6 million
as of the acquisition date. The amount in excess of the original principal balance was recorded as a bond premium, which is being amortized as a reduction to interest expense.
Derivative Financial Instruments
.
We use derivative contracts to economically hedge the effects of fluctuations in the prices of oil, natural gas and natural gas liquids. We account for such derivative instruments in accordance with ASC 815,
Derivatives and Hedging
(“ASC 815”), which establishes accounting and disclosure requirements for derivative instruments and requires them to be measured at fair value and recorded as assets or liabilities in the consolidated balance sheets (see
Note 7
—
Fair Value Measurements
for information on fair value).
Under ASC 815, hedge accounting can be used to defer recognition of unrealized changes in the fair value of such financial instruments, for those contracts which qualify as fair value or cash flow hedges, as defined in the guidance. Historically, we have not designated any of our derivative contracts as fair value or cash flow hedges. Accordingly, the changes in fair value of the contracts are included in “Gain (loss) on derivative contracts” in the consolidated statements of operations. Gains or losses from the settlement of matured derivatives contracts are also included in “Gain (loss) on derivatives contracts” in the consolidated statements of operations. Cash flows from settlements of derivative contracts are classified as operating cash flows.
Income Taxes (Successor)
.
Income taxes and uncertain tax positions are accounted for in accordance with ASC 740,
Accounting for Income Taxes
(“ASC 740”). Deferred income taxes are provided for the temporary differences between the bases of assets and liabilities for financial reporting and income tax purposes. We classify deferred tax assets and liabilities as noncurrent in our consolidated balance sheet as of
September 30, 2018
in accordance with ASU No. 2015-17,
Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes
.
Tax positions meeting the more-likely-than-not recognition threshold are measured pursuant to the guidance set forth in ASC 740. We assess the ability to realize our deferred tax assets on a quarterly basis. A valuation allowance is established to reduce deferred tax assets to the amount expected to be realized when it is determined that it is more likely than not that some or all of the deferred tax assets are not realizable.
The Company is also subject to the Texas margin tax, which is considered a state income tax, and is included in “Income tax provision (benefit)” on the consolidated statements of operations. The Company records state income tax (current and deferred) based on taxable income, as defined under the rules for the margin tax.
We follow guidance issued by the Financial Accounting Standards Board (“FASB”) in accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement.
We have considered our exposure under the standard at both the federal and state tax levels. We did not record any liabilities for uncertain tax positions as of
September 30, 2018
or
December 31, 2017
. We record income tax-related interest and penalties, if any, as a component of income tax expense. We did not incur any material interest or penalties on income taxes for the Successor Period.
Alta Mesa’s tax returns for the years ended December 31,
2014
and forward remain open for examination. None of the Company’s federal or state tax returns are currently under examination by the relevant authorities.
Income Taxes (Predecessor)
.
Alta Mesa historically elected to be treated as an individual partnership for tax purposes
under the provisions of the Internal Revenue Code of 1986, as amended. Accordingly, items of income, expense, gains and losses of the Predecessor flowed through to the partners and were taxed at the partner level. Accordingly, no tax provision for federal income taxes is included in the consolidated financial statements of the Predecessor.
Predecessor net income (loss) for financial statement purposes differed significantly from taxable income (loss) reported to limited partners as a result of differences between the tax bases and financial reporting bases of assets and liabilities and the taxable income allocation requirements under Alta Mesa’s amended and restated partnership agreement. As a result, the aggregate difference in the basis of net assets for financial and tax reporting purposes could not be readily determined as some tax basis differences are determined at the partner level and Alta Mesa did not have access to information about each unitholder’s tax attributes in Alta Mesa. However, with respect to Alta Mesa, the Predecessor’s book basis in its net assets exceeded Alta Mesa’s net tax basis by
$333.2 million
at
December 31, 2017
.
Revenue Recognition
.
We recognize oil, natural gas and natural gas liquids revenues when products are delivered at a fixed or determinable price, title has transferred and collectability is reasonably assured. We use the sales method of accounting for recognition of natural gas imbalances.
Gathering and processing revenues are generated by charging fees on a per unit basis for gathering crude oil and natural gas and processing natural gas. The Company recognizes revenue when services have been rendered, the prices are fixed or determinable and collectability is reasonably assured. In addition, revenue from sales of crude oil, natural gas and natural gas
liquids is recognized when title passes to the customer, which is when risk of ownership passes to the customer and physical delivery occurs, the price of the product is fixed or determinable and collectability is reasonably assured.
Equity-Based Compensation (Successor)
.
The Company recognizes compensation related to all stock-based awards in the consolidated financial statements based on their estimated grant-date fair value. The Company grants various types of stock-based awards including stock options, restricted stock and performance-based restricted stock units. The fair value of stock option awards is determined using the Black-Scholes option pricing model. Service-based restricted stock awards and performance-based restricted stock units are valued using the market price of the Company’s common stock on the grant date. Compensation cost is recognized ratably over the applicable vesting period. See
Note 17 — Equity-Based Compensation (Successor)
for additional information regarding the Company’s equity-based compensation.
Fair Value of Financial Instruments
.
The fair values of cash, accounts receivable and current liabilities approximate book value due to their short-term nature. The fair value of long-term debt under the Alta Mesa and Kingfisher senior secured revolving credit facilities is not considered to be materially different from carrying value due to short-term variable market rates of interest applicable to outstanding borrowings under each facility. Derivative financial instruments are carried at fair value. For further information on fair values of financial instruments see
Note 7
— Fair Value Measurements
and
Note 12
— Long-Term Debt, Net
.
Earnings (Loss) Per Share
.
Basic earnings (loss) per share is calculated by dividing earnings (loss) available to common stockholders by the weighted average number of shares outstanding during each period.
The Company uses the “if-converted” method to determine the potential dilutive effect of exchanges of outstanding SRII Opco Common Units and corresponding shares of its outstanding Class C Common Stock, and the treasury stock method to determine the potential dilutive effect of its outstanding warrants, restricted stock, restricted stock units and stock options.
The following table reflects the net income attributable to common stockholders and the earnings per share for the periods indicated based on a weighted average number of common shares outstanding for each period:
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Three Months Ended September 30, 2018
|
|
February 9, 2018 Through September 30, 2018
|
|
(in thousands, except shares and per share data)
|
Net income (loss) attributable to AMR Class A common stockholders
|
$
|
7,135
|
|
|
$
|
(12,544
|
)
|
Effect of dilutive Class C securities:
|
|
|
|
Net loss attributable to noncontrolling interests assumed to be redeemed for Class A Common Stock, net of tax
|
4,869
|
|
|
(5,227
|
)
|
Net income (loss) attributable to AMR Class A common stockholders after assumed redemption
|
$
|
12,004
|
|
|
$
|
(17,771
|
)
|
|
|
|
|
Weighted average Class A common shares outstanding (Basic)
|
178,078,132
|
|
|
174,364,715
|
|
Effect of dilutive securities:
|
|
|
|
Class A shares assumed issued to holders of noncontrolling interests upon redemption
|
132,428,358
|
|
|
59,006,903
|
|
Restricted stock and stock options
|
31,342
|
|
|
—
|
|
Weighted average common shares outstanding (Diluted)
|
310,537,832
|
|
|
233,371,618
|
|
|
|
|
|
Earnings (loss) per common share attributable to AMR common stockholders:
|
|
|
|
Basic
|
$
|
0.04
|
|
|
$
|
(0.07
|
)
|
Diluted
|
$
|
0.04
|
|
|
$
|
(0.08
|
)
|
For the three months ended
September 30, 2018
(Successor), approximately
63.0 million
warrants and
6.6 million
equity awards, consisting of stock options, restricted stock and restricted stock units, were excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive. During the Successor Period, approximately
63.0
million warrants and
6.0
million equity awards, consisting of stock options, restricted stock and restricted stock units, were excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive.
During the Successor Period, the limited partners of SRII Opco became eligible to exchange their Common Units in SRII Opco and their related shares of Class C common stock for Class A common shares of the Company. A total of
29,411,236
Common Units became eligible for exchange on May 10, 2018 and the remaining
175,510,652
became eligible for exchange on August 8, 2018. Under the if-converted method, the weighted average number of Class A common shares that became eligible for issuance upon conversion of the Common Units have been included in the calculation of diluted earnings per share. At September 30, 2018, all
204,921,888
outstanding Common Units of SRII Opco and the related shares of Class C common stock were eligible for exchange into our Class A common shares. Had such shares been exchanged, our total Class A common shares outstanding at September 30, 2018 would have been
380,879,071
.
Comprehensive Income
.
During the Successor Periods and the Predecessor Periods, the Company had no components of other comprehensive income. Accordingly, total comprehensive income for each period was equal to the amount of net income (loss) for those same periods as reflected in the accompanying consolidated statements of operations.
Going Concern
.
The Company’s management is required to evaluate an entity’s ability to continue as a going concern for a period of one year following the date of the issuance of the Company’s consolidated financial statements. Disclosure is required if substantial doubt exists about an entity’s ability to continue as a going concern during the evaluation period, including management’s plans to alleviate the conditions and events that raise substantial doubt of going concern, if applicable.
At the date of the issuance of these consolidated financial statements, management considers the Company to be a going concern and has prepared these consolidated financial statements on a going concern basis.
Recent Accounting Pronouncements Issued But Not Yet Adopted
. In August 2018, the FASB issued ASU No. 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
(“ASU 2018-15”). The amendments in this standard align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal-use software license). Under this new standard, a customer in a hosting arrangement that is a service contract is required to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as a prepaid asset related to the service contract and which costs to expense. The capitalized implementation costs are to be expensed over the term of the hosting arrangement and reflected in the same line in the consolidated statement of operations as the fees associated with the hosting element of the arrangement. Similarly, capitalized implementation costs are to be presented in the consolidated statement of cash flows in the same line as payments made for fees associated with the hosting element. The Company is required to adopt this new standard for fiscal years beginning after December 15, 2019, although early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial position and results of operations and has not yet determined when to adopt and whether to apply the new standard retrospectively or prospectively to implementation costs incurred after the date of adoption.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”), which seeks to provide a single, comprehensive revenue recognition model for all contracts with customers concerning the recognition, measurement and disclosure of revenue from those contracts. Subsequent to the issuance of ASU 2014-09, the FASB amended the standard to provide clarification and interpretive guidance to assist entities with implementation efforts, including guidance pertaining to the presentation of revenues on a gross basis (revenues presented separately from associated expenses) versus a net basis. The core principle of the new amended standard is that a company will recognize revenue when it transfers promised goods and services to customers in an amount that reflects the consideration to which the company is entitled in exchange for those services. In order to comply with the new standard, companies will need to (i) identify performance obligations in each contract, (ii) estimate the amount of variable consideration to include in the transaction price and (iii) allocate the transaction price to each separate performance obligation.
ASU 2014-09, as amended, is effective for interim and annual periods beginning after December 15, 2017, except for emerging growth companies that elect to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 7(a)(2)(b) of the Securities Act.
We are currently an emerging growth company and have elected to use the extended transition period. However, we expect to lose our emerging growth company status, effective December 31, 2018. Accordingly, we will be required to adopt ASU 2014-09 on December 31, 2018, with retroactive implementation as of January 1, 2018. ASU 2014-09 allows for either full retrospective adoption, meaning the standard is applied to all periods presented in the financial statements, or modified
retrospective adoption, meaning the standard is applied only to the most current period presented. We expect to adopt ASU 2014-09 using the modified retrospective method with a cumulative adjustment to retained earnings as necessary.
We are continuing our review of contracts for each of our revenue streams and evaluating the impact on our 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. In addition, we are evaluating the impact, if any, on the presentation of our revenues and expenses under the new gross-versus-net presentation guidance and on our current accounting policies, including the need to make changes to relevant accounting policies and internal controls, if needed. Based on assessments performed to date, we do not expect ASU 2014-09 to have an effect on the timing of revenue recognition or our financial position. In addition, we currently expect the impact regarding gross-versus-net presentation to involve certain presentation changes specifically related to natural gas processing revenues and expenses; however, the impact of such presentation changes will not impact our consolidated operating income, net income or cash flows.
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 (except for 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. ASU 2016-02 also requires disclosures designed to provide information on the amount, timing, and uncertainty of cash flows arising from leases. In January 2018, the FASB issued ASU No. 2018-01, Land easement practical expedient for transition to Topic 842 (“ASU 2018-01”), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under Topic 840, Leases. The standard, as amended, will be effective for interim and annual periods beginning after December 15, 2018. In the normal course of business, we enter into operating lease agreements to support our exploration and development operations and lease assets such as drilling rigs, well equipment, compressors, office space and other assets.
The standard provides several optional practical expedients in transition. We expect to elect the “package of practical expedients”, which permits us to forgo reassessment of our prior conclusions about lease identification, lease classification and initial direct costs for leases entered into prior to the effective date. We also expect to elect the land easement relief which permits us to forgo reassessment of existing or expired land easements not previously accounted for under ASC 840. Additionally, we expect to elect the practical expedient to not provide comparative reporting periods and therefore financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. We do not expect to elect the use-of-hindsight practical expedient.
At this time, we are evaluating the financial impact ASU 2016-02 will have on our financial statements; however, the adoption and implementation of ASU 2016-02 is expected to have an impact on our consolidated balance sheets resulting in an increase in both the assets and liabilities relating to our operating lease activities greater than twelve months. The adoption may also result in a change in the amount of lease expense recorded on our consolidated statements of operations, as well as add additional disclosures. We expect our implementation work team will complete its evaluation of this new standard by the end of 2018.
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 and interim periods within those fiscal years beginning after December 15, 2017. As an emerging growth company, we have elected to use the extended transition period to defer adoption of this standard until
2019
. However, we expect to lose our emerging growth status effective
December 31, 2018
. Accordingly, we will be required to adopt this new standard on December 31, 2018. The adoption of this guidance will not impact our financial position or results of operations but could result in presentational changes in our consolidated statements of cash flows.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. This standard requires the use of a new “expected credit loss” impairment model rather than the “incurred loss” model used today. With respect to its trade receivables and certain other financial instruments, the Company may be required to (i) maintain and use lifetime loss information rather than annual loss data and (ii) forecast future economic conditions and quantify the effect of those conditions on future expected losses. The standard, which will be effective for the Company in fiscal years beginning after December 15, 2019, also requires additional disclosures regarding the credit quality of the Company’s trade receivables and other financial instruments. No determination has yet been made of the impact of this new standard on the Company’s financial position or results of operations.
Reclassifications
.
Certain prior year amounts have been reclassified to conform to the current year presentation.
NOTE 3 — SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures and non-cash investing and financing activities are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
February 9, 2018
|
|
January 1, 2018
|
|
Nine
|
|
Through
|
|
Through
|
|
Months Ended
|
|
September 30, 2018
|
|
February 8, 2018
|
|
September 30, 2017
|
Supplemental cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
$
|
24,950
|
|
|
$
|
1,145
|
|
|
$
|
25,675
|
|
Cash paid for income taxes
|
1,573
|
|
|
—
|
|
|
—
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Increase in asset retirement obligations
|
4,652
|
|
|
—
|
|
|
3,778
|
|
Asset retirement obligations assumed, purchased properties
|
—
|
|
|
—
|
|
|
705
|
|
Increase in accruals or payables for capital expenditures
|
41,069
|
|
|
4,712
|
|
|
41,322
|
|
Distribution of non-STACK (assets) net liability
|
—
|
|
|
33,102
|
|
|
—
|
|
Equity issued in Business Combination
|
2,067,393
|
|
|
—
|
|
|
—
|
|
Release of Common stock from possible redemption
|
966,384
|
|
|
—
|
|
|
—
|
|
Exchange of Class B common stock to Class A
|
3
|
|
|
—
|
|
|
—
|
|
Tax effect of redemption of noncontrolling interests in SRII Opco for Class A common shares and other
|
(905
|
)
|
|
—
|
|
|
—
|
|
Increase in accounts receivable for sale of assets
|
(524
|
)
|
|
—
|
|
|
—
|
|
NOTE 4 — BUSINESS COMBINATION
On
February 9, 2018
(the “Closing Date”), we consummated the transactions contemplated by (i) the Contribution Agreement (“AM Contribution Agreement”), dated August 16, 2017, with Alta Mesa, the “AM Contributor, High Mesa Holdings GP, LLC, the sole general partner of the AM Contributor, Alta Mesa GP, and, solely for certain provisions therein, the equity owners of the AM Contributor, (ii) the Contribution Agreement (the “KFM Contribution Agreement”), dated August 16, 2017, with KFM Holdco, LLC, a Delaware limited liability company (the “KFM Contributor”), Kingfisher Midstream, LLC, and, solely for certain provisions therein, the equity owners of the KFM Contributor; and (iii) the Contribution Agreement (the “Riverstone Contribution Agreement” and, together with the AM Contribution Agreement and the KFM Contribution Agreement, the “Contribution Agreements”), dated August 16, 2017, with Riverstone VI Alta Mesa Holdings, L.P., a Delaware limited partnership (the “Riverstone Contributor” and together with the AM Contributor and the KFM Contributor, the “Contributors”).
Pursuant to the Contribution Agreements, SRII Opco acquired (a) (i) all of the limited partner interests in Alta Mesa and (ii)
100%
of the economic interests and
90%
of the voting interests in Alta Mesa GP, ((i) and (ii) collectively, the “AM Contribution”) and (b)
100%
of the economic interests in Kingfisher (the “Kingfisher Contribution”). The acquisition of Alta Mesa and Kingfisher pursuant to the Contribution Agreements is referred to herein as the “Business Combination” and the transactions contemplated by the Contribution Agreements are referred to herein as the “Transactions.” SRII Opco GP, LLC, a Delaware limited liability company (“SRII Opco GP”), the sole general partner of SRII Opco, is a wholly owned subsidiary of AMR. As a result of the Business Combination, our only significant asset is our ownership of an approximate
46.2%
partnership interest in SRII Opco. SRII Opco owns all of the economic interests in each of Alta Mesa and Kingfisher.
At the closing of the Business Combination:
|
|
•
|
the Company issued (i)
40,000,000
shares of Class A Common Stock and (ii) warrants to purchase
13,333,333
shares of Class A Common Stock to Riverstone VI SR II Holdings, L.P. (“Fund VI Holdings”) pursuant to the terms of that certain Forward Purchase Agreement, dated as of March 17, 2017 (the “Forward Purchase Agreement”) for cash proceeds of
$400 million
to us;
|
|
|
•
|
the Company contributed
$1,406.4 million
in cash (the proceeds from the Forward Purchase Agreement and the net proceeds (after redemptions) of the Trust Account) to SRII Opco, in exchange for (i)
169,371,730
of the common units (approximately
44.2%
) representing limited partner interests in SRII Opco (the “SRII Opco Common Units”) and (ii)
62,966,666
warrants to purchase SRII Opco Common Units (“SRII Opco Warrants”);
|
|
|
•
|
the Company caused SRII Opco to issue
213,402,398
SRII Opco Common Units (approximately
55.8%
) to the Contributors in exchange for the ownership interests in Alta Mesa, Alta Mesa GP and Kingfisher that were contributed to SRII Opco by the Contributors;
|
|
|
•
|
the Company agreed to cause SRII Opco to issue up to
59,871,031
SRII Opco Common Units to the AM Contributor and the KFM Contributor if the earn-out consideration provided for in the Contribution Agreements is earned by the AM Contributor or the KFM Contributor pursuant to the terms of the Contribution Agreements;
|
|
|
•
|
the Company issued to each of the Contributors a number of shares of Class C common stock, par value
$0.0001
per share (the “Class C Common Stock”), equal to the number of the SRII Opco Common Units received by each such Contributor at the closing;
|
|
|
•
|
SRII Opco distributed to the KFM Contributor cash in the amount of approximately
$814.8 million
in partial payment for the ownership interests in Kingfisher contributed by the KFM Contributor; and
|
|
|
•
|
SRII Opco entered into an amended and restated voting agreement with the owners of the remaining
10%
voting interests in Alta Mesa GP whereby such other owners agreed to vote their interests in Alta Mesa GP as directed by SRII Opco.
|
Holders of AMR’s Class C Common Stock, together with holders of Class A Common Stock, voting as a single class, have the right to vote on all matters properly submitted to a vote of the stockholders, but holders of Class C Common Stock are not entitled to any dividends or liquidating distributions from us. After a specified period of time following Closing, the Contributors will generally have the right to cause SRII Opco to redeem all or a portion of their SRII Opco Common Units in exchange for shares of our Class A Common Stock or, at SRII Opco’s option, an equivalent amount of cash. However, we may, at our option, effect a direct exchange of cash or Class A Common Stock for such SRII Opco Common Units in lieu of such a redemption by SRII Opco. Upon the future redemption or exchange of SRII Opco Common Units held by a Contributor, a corresponding number of shares of Class C Common Stock will be canceled.
During the second quarter of 2018, equity owners of the KFM Contributor elected to redeem
9,588,764
of its SRII Opco Common Units for an equal number of shares of Class A Common Stock. We elected to complete this redemption through a direct exchange, whereby the
9,588,764
SRII Opco Common Units are now owned by us, and we issued
9,588,764
shares of our Class A Common Stock to equity owners of the KFM Contributor and canceled
9,588,764
shares of our Class C Common Stock. Additionally, as described further in
Note 16
— Stockholders’ Equity and Partners’ Capital
, during the third quarter of 2018, we sold
3,101,510
of our Common Units in SRII Opco to SRII Opco to fund purchases of an equivalent number of our Class A common shares. As a result of these transactions, at
September 30, 2018
, we own
46.2%
of the limited partner interests in SRII Opco.
Pursuant to the AM Contribution Agreement and the KFM Contribution Agreement, for a period of
seven
years following the closing, the AM Contributor and the KFM Contributor may be entitled to receive additional SRII Opco Common Units (and acquire a corresponding number of shares of AMR’s Class C Common Stock) as earn-out consideration if the 20-day volume-weighted average price (“20-Day VWAP”) of our Class A Common Stock equals or exceeds the following prices (each such payment, an “Earn-Out Payment”):
|
|
|
|
|
|
|
20-Day VWAP
|
|
Earn-Out Consideration Payable to
AM Contributor
|
|
Earn-Out Consideration Payable to
KFM Contributor
|
$14.00
|
|
10,714,285 SRII Opco Common Units
|
|
7,142,857 SRII Opco Common Units
|
|
$16.00
|
|
9,375,000 SRII Opco Common Units
|
|
6,250,000 SRII Opco Common Units
|
|
$18.00
|
|
13,888,889 SRII Opco Common Units
|
|
—
|
|
$20.00
|
|
12,500,000 SRII Opco Common Units
|
|
—
|
|
Neither the AM Contributor nor the KFM Contributor will be entitled to receive a particular Earn-Out Payment on more than one occasion and, if on a particular date, the 20-Day VWAP entitles the AM Contributor or the KFM Contributor to more than one Earn-Out Payment (each of which has not been previously paid), the AM Contributor and/or the KFM Contributor will each be entitled to receive each such Earn-Out Payment. The AM Contributor and the KFM Contributor will be entitled to the earn-out consideration described above in connection with certain liquidity events of the Company, including a merger or sale of all or substantially all of our assets, if the consideration paid to holders of Class A Common Stock in connection with such a liquidity event is greater than any of the above-specified 20-Day VWAP hurdles.
We also contributed
$560 million
in net cash to Alta Mesa at the closing. Our source for these funds was from the sale of our securities to investors in a public offering and in private placements. Alta Mesa used a portion of the amount to repay its outstanding balance under its Alta Mesa Credit Facility described in
Note 12 — Long-Term Debt, Net
.
Pursuant to the Contribution Agreements, the AM Contributor and KFM Contributor delivered a final closing statement during the second quarter of 2018. Based on the final closing statement, the AM Contributor received an additional
1,197,934
SRII Opco Common Units and an equivalent number of shares of our Class C Common Stock and the KFM Contributor remitted back to the Company
$5.0 million
in cash and
89,680
SRII Opco Common Units and an equivalent number of shares of our Class C Common Stock.
The Business Combination has been accounted for using the acquisition method. The acquisition method of accounting is based on FASB ASC 805,
Business Combination
(“ASC 805”), and uses the fair value concepts defined in FASB ASC 820,
Fair Value Measurements
(“ASC 820”). ASC 805 requires, among other things, that our assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date by the Company. We have not completed the detailed valuation studies necessary to arrive at the final determination of the fair value of the assets acquired, the liabilities assumed and the related allocations of the purchase price in the Business Combination. As a result, the values of certain of our long-term assets and liabilities are preliminary in nature and are subject to change as additional information becomes available and as additional analysis is performed. Pursuant to ASC 805, finalization of the values is to be completed within one year of the acquisition date.
Preliminary Estimated Purchase Price for Alta Mesa
The preliminary estimated purchase price consideration for Alta Mesa was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 9, 2018
(As initially reported)
|
|
Measurement Period Adjustment
(1)
|
|
February 9, 2018 (As adjusted)
|
Preliminary Purchase Consideration:
(2)
|
|
|
|
|
|
SRII Opco Common Units issued
(3)
|
$
|
1,251,782
|
|
|
$
|
9,467
|
|
|
$
|
1,261,249
|
|
Estimated fair value of contingent earn-out purchase consideration
(4)
|
284,109
|
|
|
—
|
|
|
284,109
|
|
Settlement of preexisting working capital
(5)
|
5,476
|
|
|
—
|
|
|
5,476
|
|
Total purchase price consideration
|
$
|
1,541,367
|
|
|
$
|
9,467
|
|
|
$
|
1,550,834
|
|
_________________
|
|
(1)
|
The measurement period adjustment relates to the issuance of
1,197,934
of additional SRII Opco Common Units, valued at approximately
$7.90
per unit, to the AM Contributor
based on a final closing statement agreed to by the parties during the three months ended June 30, 2018 (Successor)
.
|
|
|
(2)
|
The preliminary purchase price consideration is for
100%
of the limited partner interests in Alta Mesa and
100%
of the economic interests and
90%
of the voting interests in Alta Mesa GP.
|
|
|
(3)
|
At closing, the Riverstone Contributor received consideration of
20,000,000
SRII Opco Common Units and the AM Contributor received consideration of
138,402,398
SRII Opco Common Units. The estimated fair value of an SRII Opco Common Unit was approximately
$7.90
per unit and reflects discounts for holding requirements and liquidity.
|
|
|
(4)
|
For a period of
seven years
following Closing, the AM Contributor will be entitled to receive an earn-
out
consideration to be paid in the form of SRII Opco Common Units (and a corresponding number of shares of Class C Common Stock) if the 20-day VWAP of our Class A Common Stock equals or exceeds the specified prices pursuant to the AM Contribution Agreement. Pursuant to ASC 805 and ASC 480,
Distinguishing Liabilities from Equity
(“ASC 480”), we have determined that the fair value of the earn-out consideration was approximately
$284.1 million
, which was classified as equity. The fair value of the contingent equity earn-out consideration was determined using the Monte Carlo simulation valuation method based on Level 3 inputs as defined in the fair value hierarchy. The key inputs included the listed market price for Class A Common Stock, market volatility of a peer group of companies similar to the Company (due to the lack of trading activity in the Class A Common Stock), no dividend yield, an expected life of each earn-out threshold based on the remaining contractual term of the contingent liability earn-out period and a risk-free rate based on U.S. dollar overnight indexed swaps with a maturity equivalent to the earn-out’s expected life.
|
|
|
(5)
|
Settlement of preexisting working capital balances between Alta Mesa and Kingfisher.
|
Preliminary Estimated Purchase Price Allocation for Alta Mesa
The allocation of the preliminary estimate of the purchase consideration to the assets acquired and liabilities assumed in the acquisition of Alta Mesa was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 9, 2018
(As initially reported)
|
|
Measurement Period Adjustment
(1)
|
|
February 9, 2018 (As adjusted)
|
Estimated Fair Value of Assets Acquired
(2)
|
|
|
|
|
|
Cash, cash equivalents and short term restricted cash
|
$
|
10,345
|
|
|
$
|
—
|
|
|
$
|
10,345
|
|
Accounts receivable
|
101,745
|
|
|
—
|
|
|
101,745
|
|
Other receivables
|
1,222
|
|
|
—
|
|
|
1,222
|
|
Receivables due from related party
|
907
|
|
|
—
|
|
|
907
|
|
Prepaid expenses and other current assets
|
1,405
|
|
|
—
|
|
|
1,405
|
|
Derivative financial instruments
|
352
|
|
|
—
|
|
|
352
|
|
Property and equipment:
(3)
|
|
|
|
|
|
Oil and natural gas properties, successful efforts
|
2,314,858
|
|
|
(1,479
|
)
|
|
2,313,379
|
|
Other property and equipment, net
|
43,318
|
|
|
—
|
|
|
43,318
|
|
Notes receivable due from related party
|
12,454
|
|
|
—
|
|
|
12,454
|
|
Deposits and other long-term assets
|
10,286
|
|
|
—
|
|
|
10,286
|
|
Total fair value of assets acquired
|
2,496,892
|
|
|
(1,479
|
)
|
|
2,495,413
|
|
Estimated Fair Value of Liabilities Assumed
(2)
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
210,867
|
|
|
(10,946
|
)
|
|
199,921
|
|
Advances from non-operators
|
6,803
|
|
|
—
|
|
|
6,803
|
|
Advances from related party
|
47,506
|
|
|
—
|
|
|
47,506
|
|
Asset retirement obligations
(3)
|
5,998
|
|
|
—
|
|
|
5,998
|
|
Derivative financial instruments
|
11,585
|
|
|
—
|
|
|
11,585
|
|
Long-term debt
(4)
|
667,700
|
|
|
—
|
|
|
667,700
|
|
Other long-term liabilities
|
5,066
|
|
|
—
|
|
|
5,066
|
|
Total fair value of liabilities assumed
|
955,525
|
|
|
(10,946
|
)
|
|
944,579
|
|
Total consideration and fair value
|
$
|
1,541,367
|
|
|
$
|
9,467
|
|
|
$
|
1,550,834
|
|
_________________
|
|
(1)
|
The measurement period adjustments are recognized in the reporting period in which the adjustments were determined and calculated as if the accounting had been completed at the acquisition date.
|
|
|
(2)
|
The assets acquired and liabilities assumed relate to Alta Mesa’s STACK assets.
|
|
|
(3)
|
The estimated fair values of oil and natural gas properties and asset retirement obligations were determined using valuation techniques that convert future cash flows to a single discounted amount and involve the use of certain inputs that are not observable in the market (Level 3 inputs). Significant inputs include, but are not limited to recoverable reserves, production rates, future operating and development costs, future commodity prices, appropriate risk-adjusted discount rates, and other relevant data. These inputs required significant judgments and estimates by management at the time of the valuation. Actual results may vary from these estimates.
|
|
|
(4)
|
Represents the approximate fair value as of the acquisition date of Alta Mesa’s
$500.0 million
aggregate principal amount of
7.875%
senior unsecured notes due December 15, 2024, totaling approximately
$533.6 million
, based on Level 1 inputs, and outstanding borrowings under the Alta Mesa Credit Facility (described in
Note 12 — Long Term Debt, Net
) of approximately
$134.1 million
as of the acquisition date.
|
Preliminary Estimated Purchase Price for Kingfisher
The estimated preliminary purchase price consideration for Kingfisher was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 9, 2018
(As initially reported)
|
|
Measurement Period Adjustments
(1)
|
|
February 9, 2018 (As adjusted)
|
Preliminary Purchase Consideration:
|
|
|
|
|
|
Cash
(2)
|
$
|
814,820
|
|
|
$
|
(5,008
|
)
|
|
$
|
809,812
|
|
SRII Opco Common Units issued
(3)
|
434,640
|
|
|
(709
|
)
|
|
433,931
|
|
Estimated fair value of contingent earn-out purchase consideration
(4)
|
88,105
|
|
|
—
|
|
|
88,105
|
|
Settlement of preexisting working capital
(5)
|
(5,476
|
)
|
|
—
|
|
|
(5,476
|
)
|
Total purchase price consideration
|
$
|
1,332,089
|
|
|
$
|
(5,717
|
)
|
|
$
|
1,326,372
|
|
_________________
|
|
(1)
|
The measurement period adjustments relate to the KFM Contributor remitting back to the Company
$5.0 million
in cash and
89,680
of SRII Opco Common Units valued at
$7.90
per unit
based on a final closing statement agreed to by the parties during the three months ended June 30, 2018 (Successor)
.
|
|
|
(2)
|
The cash consideration paid at February 9, 2018 is net of estimated net working capital adjustments, transaction expenses, capital expenditures and banking fees.
|
|
|
(3)
|
At closing, the KFM Contributor received consideration of
55,000,000
SRII Opco Common Units valued at approximately
$7.90
per unit, reflecting discounts for holding requirements and liquidity.
|
|
|
(4)
|
Pursuant to ASC 805 and ASC 480, the Kingfisher earn-out consideration has been valued at fair value as of the Closing Date and has been classified in stockholders’ equity. The fair value of the contingent equity earn-out consideration was determined using the Monte Carlo simulation valuation method based on Level 3 inputs using the fair value hierarchy. The key inputs included the quoted market price for the Company’s Class A Common Stock, market volatility of a peer group of companies similar to the Company (due to the lack of trading activity in the Company’s Class A Common Stock), no dividend yield, an expected life of each earn-out threshold based on the remaining contractual term of the contingent liability earn-out period and a risk-free rate based on U.S. dollar overnight indexed swaps with a maturity equivalent to the earn-out’s expected life.
|
|
|
(5)
|
Settlement of preexisting working capital between Alta Mesa and Kingfisher.
|
Preliminary Estimated Purchase Price Allocation for Kingfisher
The allocation of the preliminary estimate of the purchase consideration to the assets acquired and liabilities assumed in the acquisition of Kingfisher was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 9, 2018
(As initially reported)
|
|
Measurement Period Adjustments
(1)
|
|
February 9, 2018 (As adjusted)
|
Estimated Fair Value of Assets Acquired
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
7,648
|
|
|
$
|
—
|
|
|
$
|
7,648
|
|
Accounts receivable
|
4,334
|
|
|
—
|
|
|
4,334
|
|
Prepaid expenses
|
550
|
|
|
—
|
|
|
550
|
|
Property, plant and equipment:
(2)
|
|
|
|
|
|
Pipeline
|
272,442
|
|
|
—
|
|
|
272,442
|
|
Other property, plant and equipment
|
519
|
|
|
—
|
|
|
519
|
|
Intangible assets
(3)
|
472,432
|
|
|
(54,952
|
)
|
|
417,480
|
|
Goodwill
(4)
|
650,663
|
|
|
49,235
|
|
|
699,898
|
|
Total fair value of assets acquired
|
1,408,588
|
|
|
(5,717
|
)
|
|
1,402,871
|
|
Estimated Fair Value of Liabilities Assumed
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
33,499
|
|
|
—
|
|
|
33,499
|
|
Long-term debt
|
43,000
|
|
|
—
|
|
|
43,000
|
|
Total fair value of liabilities assumed
|
76,499
|
|
|
—
|
|
|
76,499
|
|
Total consideration and fair value
|
$
|
1,332,089
|
|
|
$
|
(5,717
|
)
|
|
$
|
1,326,372
|
|
_________________
|
|
(1)
|
The measurement period adjustments are recognized in the reporting period in which the adjustments were determined and calculated as if the accounting had been completed at the acquisition date. The measurement period adjustments relate to a change in the purchase price consideration based on a final closing statement agreed to by the parties during the three months ended June 30, 2018 and a revision in the value of Kingfisher’s customer relationship intangible assets resulting from an adjustment to the initial discount rate used.
|
|
|
(2)
|
The estimated fair values of crude oil, natural gas and NGL gathering, processing and storage assets are determined using valuation techniques that convert future cash flows to a single discounted amount and involved the use of certain inputs that are not observable in the market (Level 3 inputs). These valuations required significant judgments and estimates by management at the time of the valuation. Actual results may vary from these estimates.
|
|
|
(3)
|
The identifiable intangible assets acquired are primarily related to customer relationships held by Kingfisher prior to Closing and are reflected at their estimated fair values as of the acquisition date determined using valuation techniques that convert future cash flows to a single discounted amount and involve the use of certain inputs that are not observable in the market (Level 3 inputs). These valuations required significant judgments and estimates by management at the time of the valuation.
|
|
|
(4)
|
Goodwill reflected in the preliminary purchase price allocation includes expected synergies, including future cost efficiencies with continual flow of activity of Alta Mesa production into the Kingfisher processing facility as the basin expands, as well as other benefits that are expected to be generated.
|
Unaudited Pro Forma Operating Results
The following unaudited pro forma combined financial information has been prepared as if the Business Combination and other related transactions had taken place on January 1, 2017.
The information reflects pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including depletion of Alta Mesa’s proved oil and gas properties, and the estimated tax impacts of the pro forma adjustments. Additionally, pro forma earnings for the
2018
Predecessor Period and the
2017
Predecessor Periods, were adjusted to exclude
$65.2 million
of transaction-related costs incurred by the Company, Alta Mesa and Kingfisher. These costs are not included as they are directly related to the Business Combination and are nonrecurring.
The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have occurred had the Business Combination taken place on January 1, 2017; furthermore, the financial information is not intended to be a projection of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
January 1, 2018 Through
February 8, 2018
|
|
Nine Months Ended September 30, 2017
|
|
(in thousands)
|
Total operating revenues
|
$
|
80,140
|
|
|
$
|
49,500
|
|
|
$
|
230,763
|
|
Net income (loss)
|
(18,514
|
)
|
|
3,435
|
|
|
23,521
|
|
Net income (loss) attributable to Alta Mesa Resources, Inc. stockholders
|
(6,046
|
)
|
|
1,274
|
|
|
8,260
|
|
Basic net income (loss) per share
|
(0.04
|
)
|
|
0.01
|
|
|
0.05
|
|
Diluted net income (loss) per share
|
(0.04
|
)
|
|
0.01
|
|
|
0.05
|
|
NOTE 5
—
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
September 30,
2018
|
|
|
December 31,
2017
|
OIL AND NATURAL GAS PROPERTIES
|
|
|
|
|
Unproved properties
|
$
|
865,695
|
|
|
|
$
|
84,590
|
|
Accumulated impairment of unproved properties
|
—
|
|
|
|
—
|
|
Unproved properties, net
|
865,695
|
|
|
|
84,590
|
|
Proved oil and natural gas properties
|
1,913,526
|
|
|
|
1,061,105
|
|
Accumulated depreciation, depletion, amortization and impairment
|
(81,464
|
)
|
|
|
(251,065
|
)
|
Proved oil and natural gas properties, net
|
1,832,062
|
|
|
|
810,040
|
|
TOTAL OIL AND NATURAL GAS PROPERTIES, net
|
2,697,757
|
|
|
|
894,630
|
|
OTHER PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
Land
|
5,600
|
|
|
|
2,912
|
|
Salt water disposal system
|
88,176
|
|
|
|
30,990
|
|
Plant and equipment
|
311,354
|
|
|
|
—
|
|
Office furniture and equipment and vehicles
|
3,129
|
|
|
|
20,008
|
|
Accumulated depreciation
|
(6,835
|
)
|
|
|
(21,770
|
)
|
OTHER PROPERTY, PLANT AND EQUIPMENT, net
|
401,424
|
|
|
|
32,140
|
|
TOTAL PROPERTY, PLANT AND EQUIPMENT, net
|
$
|
3,099,181
|
|
|
|
$
|
926,770
|
|
NOTE 6 — DISCONTINUED OPERATIONS (Predecessor)
Alta Mesa distributed its non-STACK assets and related liabilities to the AM Contributor immediately prior to the Closing Date of the Business Combination. The distribution of Alta Mesa’s non-STACK assets and related liabilities and the sale of Alta Mesa’s Weeks Island field during the fourth quarter of 2017 were part of Alta Mesa’s overall strategic shift to operate only in the eastern Anadarko Basin. As a result, the Predecessor’s non-STACK assets and liabilities have been presented as discontinued operations in the consolidated balance sheets. The operating results directly related to non-STACK assets and liabilities have been segregated and presented as discontinued operations within the consolidated financial statements in the 2018 Predecessor Period and the 2017 Predecessor Periods.
Prior to the Business Combination, Alta Mesa had notes payable to its founder (“Founder Notes”) that bore simple interest at
10%
. In connection with the Transactions described in
Note 4 –
Business Combination
, the Founder Notes were converted into an equity interest in the AM Contributor immediately prior to the closing of the Business Combination as they were considered part of the non-STACK asset distribution. The balance of the Founder Notes at the time of conversion was approximately
$28.3
million
, including accrued interest. Interest on the Founder Notes was
$0.1 million
for the 2018 Predecessor Period and
$0.3 million
and
$0.9
million for the three months ended
September 30, 2017 (Predecessor)
and
2017 Predecessor Period
, respectively.
The assets and liabilities directly related to the non-STACK assets presented as discontinued operations in the consolidated balance sheets were as follows (in thousands):
|
|
|
|
|
|
Predecessor
|
|
December 31,
2017
|
Assets associated with discontinued operations:
|
|
Current assets
|
|
Cash
|
$
|
61
|
|
Accounts receivable
|
4,980
|
|
Other receivables
|
154
|
|
Total current assets
|
5,195
|
|
Noncurrent assets
|
|
Investments in LLC - Cost
|
9,000
|
|
Proved oil and natural gas properties, net
|
15,408
|
|
Unproved properties, net
|
15,504
|
|
Land
|
2,706
|
|
Other long-term assets
|
1,167
|
|
Total noncurrent assets
|
43,785
|
|
Total assets associated with discontinued operations
|
$
|
48,980
|
|
|
|
Liabilities associated with discontinued operations:
|
|
Current liabilities
|
|
Accounts payable and accrued liabilities
|
$
|
7,882
|
|
Asset retirement obligations
|
7,537
|
|
Total current liabilities
|
15,419
|
|
Noncurrent liabilities
|
|
Asset retirement obligations, net of current
|
37,049
|
|
Founder notes
|
28,166
|
|
Other long-term liabilities
|
1,647
|
|
Total noncurrent liabilities
|
66,862
|
|
Total liabilities associated with discontinued operations
|
$
|
82,281
|
|
The operating results directly related to the non-STACK assets and liabilities presented as discontinued operations within the consolidated financial statements were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Three
|
|
January 1, 2018
|
|
Nine
|
|
Months Ended
|
|
Through
|
|
Months Ended
|
|
September 30, 2017
|
|
February 8, 2018
|
|
September 30, 2017
|
Operating revenues and other:
|
|
|
|
|
|
Oil
|
$
|
10,994
|
|
|
$
|
1,617
|
|
|
$
|
36,122
|
|
Natural gas
|
2,376
|
|
|
1,023
|
|
|
7,964
|
|
Natural gas liquids
|
571
|
|
|
236
|
|
|
1,613
|
|
Other revenues
|
72
|
|
|
16
|
|
|
274
|
|
Total operating revenues
|
14,013
|
|
|
2,892
|
|
|
45,973
|
|
Loss on sale of assets
|
—
|
|
|
(1,923
|
)
|
|
—
|
|
Gain on acquisition of oil and gas properties
|
—
|
|
|
—
|
|
|
1,626
|
|
Total operating revenues and other
|
14,013
|
|
|
969
|
|
|
47,599
|
|
Operating expenses:
|
|
|
|
|
|
Lease operating expense
|
6,888
|
|
|
1,770
|
|
|
21,944
|
|
Marketing and transportation expense
|
352
|
|
|
83
|
|
|
1,080
|
|
Production taxes
|
1,443
|
|
|
167
|
|
|
5,100
|
|
Workover expense
|
273
|
|
|
127
|
|
|
1,981
|
|
Exploration expense
|
1,874
|
|
|
—
|
|
|
8,042
|
|
Depreciation, depletion and amortization
|
4,625
|
|
|
630
|
|
|
16,835
|
|
Impairment expense
|
82
|
|
|
5,560
|
|
|
28,018
|
|
Accretion expense
|
287
|
|
|
101
|
|
|
1,213
|
|
General and administrative expense
|
13
|
|
|
21
|
|
|
60
|
|
Total operating expenses
|
15,837
|
|
|
8,459
|
|
|
84,273
|
|
Other income (expense)
|
|
|
|
|
|
Interest expense
|
(305
|
)
|
|
(103
|
)
|
|
(904
|
)
|
Interest income and other
|
88
|
|
|
—
|
|
|
88
|
|
Total other income (expense)
|
(217
|
)
|
|
(103
|
)
|
|
(816
|
)
|
Loss from discontinued operations, net of state income taxes
|
$
|
(2,041
|
)
|
|
$
|
(7,593
|
)
|
|
$
|
(37,490
|
)
|
The total operating and investing cash flows of the non-STACK assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
January 1, 2018
Through
February 8, 2018
|
|
Nine Months Ended
September 30, 2017
|
Total operating cash flows of discontinued operations
|
$
|
(6,838
|
)
|
|
$
|
16,166
|
|
Total investing cash flows of discontinued operations
|
(570
|
)
|
|
(15,950
|
)
|
NOTE 7
—
FAIR VALUE MEASUREMENTS
We follow ASC 820, which 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.
In connection with the acquisition of Alta Mesa, we recorded the fair value of Alta Mesa’s
$500.0 million
unsecured senior notes at
$533.6 million
as of the acquisition date. We have estimated the fair value of the senior notes to be
$476.3 million
at
September 30, 2018
(Successor). This estimation was based on the most recent trading values of the senior notes at or near the reporting date, which is a Level 1 determination. See
Note 12
—
Long-Term Debt, Net
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 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 inputs used to determine fair values of all our oil, natural gas and natural gas liquids derivative contracts as Level 2.
Oil, natural gas, and midstream properties are subject to impairment testing and potential impairment write down, as discussed in
Note 2 — Summary of Significant Accounting Policies
. During the 2017 Predecessor Period, certain of Alta Mesa’s oil and natural gas properties with a carrying amount of
$3.3 million
were written down to their fair value of
$2.1 million
, resulting in an impairment charge of
$1.2 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 or acquired properties. Such estimations of fair value 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. These inputs are classified as Level 3. We recorded
$1.7 million
,
zero
and
$1.0 million
in additions to asset retirement obligations measured at fair value during the Successor Period, the 2018 Predecessor Period, and the 2017 Predecessor Period, respectively.
The following table presents information about our financial assets and liabilities measured at fair value on a recurring basis as of
September 30, 2018
and
December 31, 2017
, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
At September 30, 2018: (Successor)
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
Derivative contracts for oil and natural gas
|
—
|
|
|
$
|
5,670
|
|
|
—
|
|
|
$
|
5,670
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
Derivative contracts for oil and natural gas
|
—
|
|
|
$
|
47,144
|
|
|
—
|
|
|
$
|
47,144
|
|
At December 31, 2017: (Predecessor)
|
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
Derivative contracts for oil and natural gas
|
—
|
|
|
$
|
4,416
|
|
|
—
|
|
|
$
|
4,416
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
Derivative contracts for oil and natural gas
|
—
|
|
|
$
|
24,609
|
|
|
—
|
|
|
$
|
24,609
|
|
The amounts above are presented on a gross basis. We will net the value of assets and liabilities with the same counterparty for purposes of presentation in our consolidated balance sheets where master netting agreements are in place. For additional information on derivative contracts, see
Note 8
—
Derivative Financial Instruments
.
NOTE 8
—
DERIVATIVE FINANCIAL INSTRUMENTS
Alta Mesa has entered into forward-swap contracts and collar contracts to reduce its exposure to price risk in the spot market for oil, natural gas and natural gas liquids. From time to time, Alta Mesa also utilizes 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 Alta Mesa’s derivative contracts are executed by affiliates of its lenders under the Alta Mesa Credit Facility described in
Note 12 — Long-Term Debt, Net
, and are collateralized by the security interests of the respective affiliated lenders in certain of their assets under the Alta Mesa Credit Facility. The derivative 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 equivalent to volumes in gallons (gal) per month. The derivative contracts represent agreements between Alta Mesa 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, Alta Mesa enters into interest rate swap agreements with financial institutions to mitigate the risk of loss due to changes in interest rates.
As of
September 30, 2018
, Alta Mesa is not a party to any interest rate swap agreements.
Alta Mesa has not designated any of its derivative contracts as fair value or cash flow hedges. Accordingly, Alta Mesa uses mark-to-market accounting, recognizing changes in the fair value of derivative contracts in the 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 consolidated balance sheets. This netting can cause derivative assets to be ultimately presented in a liability account on the consolidated balance sheets. Likewise, derivative liabilities could be presented in a derivative asset account.
The following table summarizes the fair value and classification of Alta Mesa’s derivative instruments, none of which have been designated as hedging instruments under ASC 815:
Fair Values of Derivative Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 (Successor)
|
Balance sheet location
|
|
Gross
fair value
of assets
|
|
Gross liabilities
offset against assets
in the Balance Sheet
|
|
Net fair
value of assets
presented in
the Balance Sheet
|
|
|
(in thousands)
|
Derivative financial instruments, current assets
|
|
$
|
2,407
|
|
|
$
|
(2,407
|
)
|
|
$
|
—
|
|
Derivative financial instruments, long-term assets
|
|
3,263
|
|
|
(3,263
|
)
|
|
—
|
|
Total
|
|
$
|
5,670
|
|
|
$
|
(5,670
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet location
|
|
Gross
fair value
of liabilities
|
|
Gross assets
offset against liabilities
in the Balance Sheet
|
|
Net fair
value of liabilities
presented in
the Balance Sheet
|
|
|
(in thousands)
|
Derivative financial instruments, current liabilities
|
|
$
|
36,803
|
|
|
$
|
(2,407
|
)
|
|
$
|
34,396
|
|
Derivative financial instruments, long-term liabilities
|
|
10,341
|
|
|
(3,263
|
)
|
|
7,078
|
|
Total
|
|
$
|
47,144
|
|
|
$
|
(5,670
|
)
|
|
$
|
41,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017 (Predecessor)
|
Balance sheet location
|
|
Gross
fair value
of assets
|
|
Gross liabilities
offset against assets
in the Balance Sheet
|
|
Net fair
value of assets
presented in
the Balance Sheet
|
|
|
(in thousands)
|
Derivative financial instruments, current assets
|
|
$
|
1,406
|
|
|
$
|
(1,190
|
)
|
|
$
|
216
|
|
Derivative financial instruments, long-term assets
|
|
3,010
|
|
|
(3,002
|
)
|
|
8
|
|
Total
|
|
$
|
4,416
|
|
|
$
|
(4,192
|
)
|
|
$
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet location
|
|
Gross
fair value
of liabilities
|
|
Gross assets
offset against liabilities
in the Balance Sheet
|
|
Net fair
value of liabilities
presented in
the Balance Sheet
|
|
|
(in thousands)
|
Derivative financial instruments, current liabilities
|
|
$
|
20,493
|
|
|
$
|
(1,190
|
)
|
|
$
|
19,303
|
|
Derivative financial instruments, long-term liabilities
|
|
4,116
|
|
|
(3,002
|
)
|
|
1,114
|
|
Total
|
|
$
|
24,609
|
|
|
$
|
(4,192
|
)
|
|
$
|
20,417
|
|
The following table summarizes the effect of Alta Mesa’s derivative instruments in the consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Successor
|
|
|
Predecessor
|
Derivatives not
|
Three
|
|
|
Three
|
|
February 9, 2018
|
|
|
January 1, 2018
|
|
Nine
|
designated as hedging
|
Months Ended
|
|
|
Months Ended
|
|
Through
|
|
|
Through
|
|
Months Ended
|
instruments under ASC 815
|
September 30, 2018
|
|
|
September 30, 2017
|
|
September 30, 2018
|
|
|
February 8, 2018
|
|
September 30, 2017
|
Gain (loss) on derivative contracts
|
|
|
|
|
|
|
|
|
|
|
Oil commodity contracts
|
$
|
(12,339
|
)
|
|
|
$
|
(10,873
|
)
|
|
$
|
(63,630
|
)
|
|
|
$
|
5,431
|
|
|
$
|
31,665
|
|
Natural gas commodity contracts
|
1,127
|
|
|
|
1,035
|
|
|
553
|
|
|
|
1,867
|
|
|
6,763
|
|
Natural gas liquids commodity contracts
|
—
|
|
|
|
(630
|
)
|
|
—
|
|
|
|
—
|
|
|
(404
|
)
|
Total gain (loss) on derivative contracts
|
$
|
(11,212
|
)
|
|
|
$
|
(10,468
|
)
|
|
$
|
(63,077
|
)
|
|
|
$
|
7,298
|
|
|
$
|
38,024
|
|
The Company periodically monitors the creditworthiness of its counterparties. Although Alta Mesa’s counterparties provide no collateral, the master derivative agreements with each counterparty effectively allow Alta Mesa, under certain circumstances, to set-off an unpaid hedging agreement receivable against the interest of the counterparty in any outstanding balance under the Alta Mesa Credit Facility described in
Note 12 — Long-Term Debt, Net
.
If a counterparty were to default on payment of an obligation under the master derivative agreements, Alta Mesa could be exposed to commodity price fluctuations, and the protection intended by the derivative could be lost. The value of Alta Mesa’s derivative financial instruments would be impacted.
Alta Mesa had the following open derivative contracts for crude oil at
September 30, 2018
:
OIL DERIVATIVE CONTRACTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
Weighted
|
|
Range
|
Settlement Period and Type of Contract
|
|
in bbls
|
|
Average
|
|
High
|
|
Low
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Swap Contracts
|
|
552,000
|
|
|
$
|
53.55
|
|
|
$
|
61.26
|
|
|
$
|
50.27
|
|
Collar Contracts
|
|
|
|
|
|
|
|
|
Short Call Options
|
|
552,000
|
|
|
61.28
|
|
|
64.60
|
|
|
60.50
|
|
Long Put Options
|
|
552,000
|
|
|
51.67
|
|
|
60.00
|
|
|
50.00
|
|
Short Put Options
|
|
552,000
|
|
|
42.08
|
|
|
52.50
|
|
|
40.00
|
|
2019
|
|
|
|
|
|
|
|
|
Price Swap Contracts
|
|
182,500
|
|
|
63.03
|
|
|
63.03
|
|
|
63.03
|
|
Collar Contracts
|
|
|
|
|
|
|
|
|
Short Call Options
|
|
2,701,000
|
|
|
66.31
|
|
|
75.20
|
|
|
56.50
|
|
Long Put Options
|
|
2,883,500
|
|
|
53.80
|
|
|
62.00
|
|
|
50.00
|
|
Short Put Options
|
|
2,883,500
|
|
|
42.72
|
|
|
52.00
|
|
|
37.50
|
|
2020
|
|
|
|
|
|
|
|
|
Collar Contracts
|
|
|
|
|
|
|
|
|
Short Call Options
|
|
366,000
|
|
|
67.00
|
|
|
73.80
|
|
|
60.20
|
|
Long Put Options
|
|
1,317,600
|
|
|
56.46
|
|
|
62.50
|
|
|
50.00
|
|
Short Put Options
|
|
1,317,600
|
|
|
45.83
|
|
|
50.00
|
|
|
40.00
|
|
Alta Mesa had the following open derivative contracts for natural gas at
September 30, 2018
:
NATURAL GAS DERIVATIVE CONTRACTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume in
|
|
Weighted
|
|
Range
|
Settlement Period and Type of Contract
|
|
MMBtu
|
|
Average
|
|
High
|
|
Low
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Swap Contracts
|
|
1,842,500
|
|
|
$
|
2.95
|
|
|
$
|
3.09
|
|
|
$
|
2.75
|
|
Collar Contracts
|
|
|
|
|
|
|
|
|
Short Call Options
|
|
1,832,500
|
|
|
3.36
|
|
|
3.75
|
|
|
3.14
|
|
Long Put Options
|
|
1,527,500
|
|
|
2.89
|
|
|
2.90
|
|
|
2.75
|
|
Short Put Options
|
|
610,000
|
|
|
2.40
|
|
|
2.40
|
|
|
2.40
|
|
2019
|
|
|
|
|
|
|
|
|
Price Swap Contracts
|
|
10,905,000
|
|
|
2.69
|
|
|
3.09
|
|
|
2.64
|
|
Collar Contracts
|
|
|
|
|
|
|
|
|
Short Call Options
|
|
4,000,000
|
|
|
3.31
|
|
|
3.75
|
|
|
3.17
|
|
Long Put Options
|
|
3,550,000
|
|
|
2.81
|
|
|
2.90
|
|
|
2.70
|
|
Short Put Options
|
|
2,425,000
|
|
|
2.27
|
|
|
2.40
|
|
|
2.20
|
|
2020
|
|
|
|
|
|
|
|
|
Collar Contracts
|
|
|
|
|
|
|
|
|
Short Call Options
|
|
2,275,000
|
|
|
3.19
|
|
|
3.20
|
|
|
3.17
|
|
Long Put Options
|
|
9,150,000
|
|
|
2.57
|
|
|
2.70
|
|
|
2.50
|
|
Short Put Options
|
|
9,150,000
|
|
|
2.07
|
|
|
2.20
|
|
|
2.00
|
|
2021
|
|
|
|
|
|
|
|
|
Collar Contracts
|
|
|
|
|
|
|
|
|
Long Put Options
|
|
2,250,000
|
|
|
2.65
|
|
|
2.65
|
|
|
2.65
|
|
Short Put Options
|
|
2,250,000
|
|
|
2.15
|
|
|
2.15
|
|
|
2.15
|
|
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 index or may reflect a mix of positions settling on various combinations of these benchmarks.
Alta Mesa had the following open financial basis swaps at
September 30, 2018
:
NATURAL GAS BASIS SWAP DERIVATIVE CONTRACTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume in MMBtu
(1)
|
|
Reference Price 1
(1)
|
|
Reference Price 2
(1)
|
|
Period
|
|
Weighted
Average Spread
($ per MMBtu)
|
460,000
|
|
OneOK
|
|
NYMEX Henry Hub
|
|
Jul '19
|
|
—
|
|
|
Dec '19
|
|
$
|
(0.93
|
)
|
4,445,000
|
|
Tex/OKL Panhandle Eastern Pipeline
|
|
NYMEX Henry Hub
|
|
Oct '18
|
|
—
|
|
|
Dec '18
|
|
(0.63
|
)
|
17,950,000
|
|
Tex/OKL Panhandle Eastern Pipeline
|
|
NYMEX Henry Hub
|
|
Jan '19
|
|
—
|
|
Dec '19
|
|
(0.68
|
)
|
910,000
|
|
Tex/OKL Panhandle Eastern Pipeline
|
|
NYMEX Henry Hub
|
|
Jan '20
|
|
—
|
|
Mar '20
|
|
(0.49
|
)
|
152,500
|
|
San Juan
|
|
NYMEX Henry Hub
|
|
Nov '18
|
|
—
|
|
Dec '18
|
|
(0.47
|
)
|
2,365,000
|
|
San Juan
|
|
NYMEX Henry Hub
|
|
Jan '19
|
|
—
|
|
Oct '19
|
|
(0.78
|
)
|
_________________
|
|
(1)
|
Represents short swaps that fix the basis differentials between OneOK, T
ex/OKL Panhandle Eastern Pipeline (“PEPL”), San Juan
and NYMEX Henry Hub.
|
OIL BASIS SWAP DERIVATIVE CONTRACTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume in bbl
(1)
|
|
Reference Price 1
(1)
|
|
Reference Price 2
(1)
|
|
Period
|
|
Weighted
Average Spread
($ per bbl)
|
552,000
|
|
CMA Oil
|
|
WTI
|
|
Oct '18
|
|
—
|
|
|
Dec '18
|
|
$
|
(0.54
|
)
|
_________________
|
|
(1)
|
Represents basis swaps for the basis differentials between NYMEX CMA (Calendar Monthly Average) Roll that reconcile the trade month versus the delivery month for physical contract pricing and West Texas Intermediate (“WTI”).
|
NOTE 9 — INTANGIBLE ASSETS
Our intangible assets with finite lives include customer relationships within the
Midstream segment acquired as part of the Business Combination. Intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
Successor
|
|
September 30, 2018
|
Customer contracts and related customer relationships
|
$
|
417,480
|
|
Accumulated amortization
|
(13,928
|
)
|
Intangibles, net
|
$
|
403,552
|
|
Weighted average remaining amortization period (years)
|
12
|
|
Amortization expense was
$5.1 million
and
$13.9
million for the three months ended
September 30, 2018 (Successor)
and the Successor Period, respectively. There was
no
amortization expense for the 2018 Predecessor Period and the 2017 Predecessor Periods, as there were
no
intangible assets as of those dates. Estimated amortization expense for each of the subsequent five years and thereafter is as follows (in thousands):
|
|
|
|
|
|
Successor
|
Fiscal Year:
|
September 30, 2018
|
Remainder of 2018
|
$
|
5,223
|
|
2019
|
34,663
|
|
2020
|
40,998
|
|
2021
|
39,637
|
|
2022
|
38,490
|
|
2023
|
36,433
|
|
Thereafter
|
208,108
|
|
Total amortization
|
$
|
403,552
|
|
NOTE 10 — EQUITY METHOD INVESTMENT
We account for our investment in unconsolidated affiliates under the equity method (See
Note 2 — Summary of Significant Accounting Policies
). The carrying value of the Company’s investment in unconsolidated affiliates is recorded in the consolidated balance sheets as “Equity method investments” and the Company records its share of such earnings (loss), if any, in the consolidated statements of operations as “Income (loss) from equity investments.”
On May 10, 2018, a subsidiary of Kingfisher and Blueknight Energy Partners, L.P. (“Blueknight”), an unaffiliated third party, entered into definitive agreements for the purpose of constructing and operating a new crude oil pipeline serving STACK producers in central Oklahoma. The crude oil pipeline, which is owned by Cimarron Express Pipeline, LLC (“Cimarron Express”) and constructed and operated by Blueknight, will extend from northeastern Kingfisher County, Oklahoma, to Blueknight’s crude oil terminal in Cushing, Oklahoma. Cimarron Express is owned
50%
by an affiliate of Kingfisher and
50%
by an affiliate of Ergon, Inc. During the
nine
months ended
September 30, 2018
(Successor), we invested
$9.3
million in Cimarron Express.
NOTE 11 — ASSET RETIREMENT OBLIGATIONS
A summary of the changes in asset retirement obligations is included in the table below (in thousands):
|
|
|
|
|
|
2018
|
Balance, as of January 1 (Predecessor)
|
$
|
10,469
|
|
Liabilities settled
|
(63
|
)
|
Revisions to estimates
|
63
|
|
Accretion expense
|
39
|
|
Balance, as of February 8 (Predecessor)
|
$
|
10,508
|
|
|
|
Balance, as of February 9 (Successor)
|
$
|
—
|
|
Liabilities assumed from Business Combination
|
5,998
|
|
Liabilities incurred
|
1,689
|
|
Liabilities settled
|
(1,249
|
)
|
Liabilities transferred in sale of properties
|
(20
|
)
|
Revisions to estimates
(1)
|
3,562
|
|
Accretion expense
|
489
|
|
Balance, as of September 30 (Successor)
|
10,469
|
|
Less: Current portion
|
1,300
|
|
Long-term portion
|
$
|
9,169
|
|
(1)
The total revisions included
$3.0 million
related to additions to property, plant and equipment for the Successor Period.
NOTE 12 — LONG-TERM DEBT, NET
Long-term debt, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
September 30, 2018
|
|
|
December 31, 2017
|
Alta Mesa senior secured revolving credit facility
|
$
|
80,000
|
|
|
|
$
|
117,065
|
|
Kingfisher senior secured revolving credit facility
|
66,000
|
|
|
|
—
|
|
7.875% senior unsecured notes due 2024
|
500,000
|
|
|
|
500,000
|
|
Unamortized premium on senior unsecured notes
|
30,354
|
|
|
|
—
|
|
Unamortized deferred financing costs
|
—
|
|
|
|
(9,625
|
)
|
Total long-term debt, net
|
$
|
676,354
|
|
|
|
$
|
607,440
|
|
Alta Mesa Senior Secured Revolving Credit Facility
.
In connection with the consummation of the Business Combination, all indebtedness at that time under the Alta Mesa senior secured revolving credit facility was repaid in full. On
February 9, 2018
, and in connection with the closing of the AM Contribution Agreement (as described in
Note 4
—
Business Combination
), Alta Mesa entered into the Eighth Amended and Restated Credit Agreement with Wells Fargo Bank, National Association, as the administrative agent (the “Alta Mesa Credit Facility”). The Alta Mesa Credit Facility is for an aggregate maximum credit amount of
$1.0 billion
with an initial
$350.0 million
borrowing base. In April 2018, the borrowing base was increased to
$400.0 million
. This borrowing base was reaffirmed by the lenders subsequent to September 30, 2018. The next scheduled redetermination will occur in April 2019, at which time the borrowing base may be increased, lowered or stay the same. The Alta Mesa Credit Facility does not permit Alta Mesa to borrow funds if, at the time of such borrowing, it is not in compliance with the financial covenants set forth in the Alta Mesa Credit Facility. As of
September 30, 2018
, Alta Mesa had
$80.0 million
of borrowings outstanding under the Alta Mesa Credit Facility and had
$21.9 million
of outstanding letters of credit, leaving a total borrowing capacity of
$298.1
million remaining available for future use.
The principal amounts borrowed are payable on the maturity date of February 9, 2023. Alta Mesa has a choice of borrowing in Eurodollars or at the reference rate, with such borrowings bearing interest, payable quarterly for reference rate loans or, for Eurodollar loans, in one, three or six-month tranches. Eurodollar loans bear interest at a rate per annum equal to the applicable LIBOR rate, plus a margin ranging from
2.00%
to
3.00%
. Reference rate loans bear interest at a rate per annum equal to the greater of (i) the agent bank’s reference rate, (ii) the federal funds effective rate plus
50
basis points or (iii) the rate for one-month Eurodollar loans plus
1.00%
, plus a margin ranging from
1.00%
to
2.00%
.
The amounts outstanding under Alta Mesa Credit Facility are secured by first priority liens on substantially all of Alta Mesa’s, and its material operating subsidiaries’, oil and natural gas properties and associated assets and all of the equity of our material operating subsidiaries that are guarantors of the Alta Mesa Credit Facility. Additionally, SRII Opco and Alta Mesa GP have pledged their respective limited partner interests in Alta Mesa as security for its obligations. If an event of default occurs under the Alta Mesa Credit Facility, the administrative agent will have the right to proceed against the pledged collateral and take control of substantially all of Alta Mesa’s assets and its material operating subsidiaries that are guarantors.
The Alta Mesa Credit Facility, as amended effective August 13, 2018, contains restrictive covenants that may limit Alta Mesa’s ability to, among other things, incur additional indebtedness, sell assets, guaranty or make loans to others, make investments, enter into mergers, make certain payments and distributions in excess of specific amounts, enter into or be party to hedge agreements, amend organizational documents, incur liens and engage in certain other transactions without the prior consent of the lenders. The Alta Mesa Credit Facility permits Alta Mesa to make distributions to any parent entity (i) to pay for reimbursement of third party costs and general and administrative expenses (“G&A”) incurred in the ordinary course of business by such parent entity or (ii) in order to permit such parent entity to (x) make permitted tax distributions and (y) pay the obligations under the Tax Receivable Agreement. See
Note 18 — Income Taxes
for further information regarding the Tax Receivable Agreement.
The Alta Mesa Credit Facility also requires Alta Mesa to maintain the following two financial ratios:
|
|
•
|
a current ratio, subject to various adjustments as defined in the Alta Mesa Credit Facility, tested quarterly, commencing with the fiscal quarter ended June 30, 2018, of Alta Mesa’s consolidated current assets to its consolidated current liabilities of not less than
1.0
to 1.0 as of the end of each fiscal quarter; and
|
|
|
•
|
a leverage ratio, tested quarterly, commencing with the fiscal quarter ended June 30, 2018, of Alta Mesa’s consolidated debt (other than obligations under hedge agreements) as of the end of such fiscal quarter to Alta Mesa’s consolidated EBITDAX annualized by multiplying EBITDAX for the period of (a) the fiscal quarter ended June 30, 2018 times 4, (b) the two fiscal quarter periods ended September 30, 2018 times 2, (c) the three fiscal quarter periods ending December 31, 2018 times 4/3rds and (d) for each fiscal quarter on or after March 31, 2019, EBITDAX for the four-fiscal quarter period then ended, of not greater than
4.0
to
1.0
.
|
As of
September 30, 2018
, Alta Mesa was in compliance with the financial ratios described above.
Senior Secured Revolving Credit Facility (Predecessor)
.
As of
December 31, 2017
, Alta Mesa had
$117.1 million
of borrowings outstanding. At the date of the Business Combination, the outstanding balance under the credit facility was paid off.
Kingfisher Senior Secured Revolving Credit Facility
.
Prior to May 30, 2018, Kingfisher was party to a
$200.0 million
Revolving credit facility with ABN AMRO Capital USA, LLC, as administrative agent, and certain other financial institutions as lenders (the “prior credit facility”). The prior credit facility was initially entered into on August 8, 2017 and was scheduled to mature in
August 2021
. The principal amount of borrowings outstanding under this credit facility at May 30, 2018 totaled
$59.5
million.
Effective May 30, 2018, Kingfisher entered into a
$300.0
million amended and restated senior secured revolving credit facility with Wells Fargo Bank, National Association, as the administrative agent and letter of credit issuer, and certain other financial institutions, as lenders (“the Kingfisher Credit Facility”) which replaced the prior credit facility with ABN AMRO. The Kingfisher Credit Facility matures on May 30, 2023. Initial borrowings of
$62.5
million under this new facility were utilized to repay amounts outstanding under the prior credit facility, including accrued interest and various fees due the new lenders, as well as third parties involved in the establishment of the new credit facility.
Availability under the Kingfisher Credit Facility will be redetermined each fiscal quarter as the lesser of (1) the
$300.0
million commitment under the Kingfisher Credit Facility and (2) the maximum amount that, together with the aggregate amount of all then-outstanding consolidated funded indebtedness (other than indebtedness under the Kingfisher Credit Facility) would result in Kingfisher being in pro forma compliance with all applicable leverage ratios at such time.
The amounts outstanding under the Kingfisher Credit Facility are secured by first priority liens on substantially all of Kingfisher’s and its subsidiaries’ real property and associated assets and all of the stock of Kingfisher’s operating subsidiaries that are guarantors of the new credit facility. Additionally, SRII Opco, LP has pledged its membership interests in Kingfisher as security for Kingfisher’s obligations. If an event of default occurs under the new credit facility, the administrative agent will have the right to proceed against the pledged membership interests and take control of substantially all of the assets of Kingfisher and its subsidiaries that are guarantors.
Kingfisher has a choice of borrowing in Eurodollars or at the reference rate, with such borrowings bearing interest, payable quarterly for reference rate loans or, for Eurodollar loans, in one, three or six-month tranches. Eurodollar loans bear interest at a rate per annum equal to the applicable LIBOR rate, plus a margin ranging from
2.00%
to
3.25%
(which changes to
1.75%
to
2.75%
from and after a qualifying IPO). Reference rate loans bear interest at a rate per annum equal to the greater of (i) the agent bank’s reference rate, (ii) the federal funds effective rate plus
50
basis points or (iii) the rate for one-month Eurodollar loans plus
1.00%
, plus an applicable margin ranging from
1.00%
to
2.25%
(which changes to
0.75%
to
1.75%
from and after a qualifying IPO).
The Kingfisher Credit Facility also contains restrictive covenants that may limit Kingfisher’s ability to, among other things, incur additional indebtedness (but with a carve-out that allows Kingfisher to incur indebtedness under senior unsecured notes, subject to certain restrictions, including pro forma financial covenant compliance), sell assets, guaranty or make loans to others, make investments, enter into mergers, make certain payments and distributions, enter into or be party to hedge agreements, amend its organizational documents, incur liens and engage in certain other transactions without the prior consent of the lenders. The credit facility permits Kingfisher to (i) make distributions to pay its parent entity for reimbursement of general corporate operating and overhead costs and expenses incurred in the ordinary course of business of such parent entity pursuant to its management services agreement, (ii) make permitted tax distributions, and (iii) make cash distributions so long as certain requirements relating to Kingfisher’s consolidated earnings before interest, taxes, depreciation, amortization and material projects (“Consolidated Adjusted EBITDA”), its leverage ratio, and Kingfisher Credit Facility usage are satisfied, in addition to other customary requirements.
The Kingfisher Credit Facility also requires it to maintain the following financial ratios, which utilize Consolidated Adjusted EBITDA annualized by multiplying the Consolidated Adjusted EBITDA for the period of (A) the fiscal quarter ended June 30, 2018 times 4, (B) the two fiscal quarter periods ended September 30, 2018 times 2, (C) the three fiscal quarter periods ending December 31, 2018 times 4/3rds and (D) for each fiscal quarter on or after March 31, 2019, Consolidated Adjusted EBITDA for the four-fiscal quarter period then ended:
|
|
•
|
a total leverage ratio, tested quarterly, commencing with the fiscal quarter ended June 30, 2018, of its consolidated funded indebtedness as of the end of such fiscal quarter to its Consolidated Adjusted EBITDA for such rolling fiscal quarter period, of not greater than
4.5
to 1.0 (which increases to
4.75
after Consolidated EBITDA equal to or greater than
$75.0 million
is achieved for a rolling fiscal quarter period or a qualifying IPO occurs);
|
|
|
•
|
from and after the incurrence of indebtedness under senior unsecured notes, a senior secured leverage ratio, tested quarterly, of its consolidated funded secured indebtedness as of the end of such fiscal quarter to its Consolidated Adjusted EBITDA for such rolling fiscal quarter period, of not greater than
3.5
to 1.0; and
|
|
|
•
|
a minimum interest coverage ratio, tested quarterly, commencing with the fiscal quarter ended June 30, 2018, of its Consolidated Adjusted EBITDA for such rolling fiscal quarter period to its consolidated interest expense for such rolling fiscal quarter period, of not less than
2.5
to 1.0.
|
As of
September 30, 2018
, outstanding borrowings under the Kingfisher Credit Facility totaled
$66.0 million
and there were no outstanding letters of credit, leaving a total borrowing capacity of
$234.0
million remaining available for future use. Kingfisher was also in compliance with the financial ratios specified in the KFM Credit Facility at that date.
Senior Unsecured Notes
.
Alta Mesa has
$500.0 million
in aggregate principal amount of
7.875%
senior unsecured notes (the “senior notes”) which were issued at par by Alta Mesa and its wholly owned subsidiary Alta Mesa Finance Services Corp. (collectively, the “Issuers”) during the fourth quarter of 2016. The senior notes were issued in a private placement but were exchanged for substantially identical registered senior notes in November 2017.
The senior notes will mature on
December 15, 2024
, and interest is payable semi-annually on
June 15
and
December 15
of each year. At any time prior to December 15, 2019, Alta Mesa may, from time to time, redeem up to
35%
of the aggregate principal amount of the senior notes for an amount of cash not greater than the net cash proceeds from certain equity offerings at a redemption price of
107.875%
of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption, if at least
65%
of the aggregate principal amount of the senior notes remains outstanding after such redemption and the redemption
occurs within
120 days
of the closing date of such equity offering. At any time prior to December 15, 2019, Alta Mesa may, on any one or more occasions, redeem all or part of the senior notes for cash at a redemption price equal to
100%
of their principal amount of the senior notes redeemed plus an applicable make-whole premium and accrued and unpaid interest, if any, to the date of redemption. Upon the occurrence of certain kinds of change of control, each holder of the senior notes may require Alta Mesa to repurchase all or a portion of the senior notes for cash at a price equal to
101%
of the aggregate principal amount of the senior notes, plus accrued and unpaid interest, if any, to the date of repurchase. On and after December 15, 2019, Alta Mesa may redeem the senior notes, in whole or in part, at redemption prices (expressed as percentages of principal amount) equal to
105.906%
for the twelve-month period beginning on December 15, 2019,
103.938%
for the twelve-month period beginning on December 15, 2020,
101.969%
for the twelve-month period beginning on December 15, 2021 and
100.000%
beginning on December 15, 2022, plus accrued and unpaid interest, if any, to the date of redemption.
The senior notes are fully and unconditionally guaranteed on a senior unsecured basis by each of Alta Mesa’s material subsidiaries, subject to certain customary release provisions. Accordingly, they will rank equal in right of payment to all of Alta Mesa’s existing and future senior indebtedness; senior in right of payment to all of Alta Mesa’s existing and future indebtedness that is expressly subordinated to the senior notes or the respective guarantees; effectively subordinated to all of Alta Mesa’s existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness, including amounts outstanding under the Alta Mesa Credit Facility; and structurally subordinated to all existing and future indebtedness and obligations of any of Alta Mesa’s subsidiaries that do not guarantee the senior notes.
The senior notes contain certain covenants limiting the Issuers’ ability and the ability of the Restricted Subsidiaries (as defined in the indenture governing the senior notes) to, under certain circumstances, prepay subordinated indebtedness, pay distributions, redeem stock or make certain restricted investments; incur indebtedness; create liens on the Issuers’ assets to secure debt; restrict dividends, distributions or other payments; enter into transactions with affiliates; designate subsidiaries as unrestricted subsidiaries; sell or otherwise transfer or dispose of assets, including equity interests of restricted subsidiaries; effect a consolidation or merger; and change Alta Mesa’s line of business.
Under the terms of the indenture for the senior notes, if Issuers experience certain specific change of control events, unless the Issuers have previously or concurrently exercised their right to redeem all of the senior notes under the optional redemption provision, such holder has the right to require Alta Mesa to purchase such holder’s senior notes at
101%
of the principal amount plus accrued and unpaid interest to the date of the purchase. The closing of the Business Combination did not constitute a change of control under the indenture governing the senior notes because certain existing owners of Alta Mesa and SRII Opco entered into an amended and restated voting agreement with respect to the voting interests in Alta Mesa GP. See
Note 4 — Business Combination
to the consolidated financial statements for further detail.
The indenture contains customary events of default, including:
|
|
•
|
default in any payment of interest on the senior notes when due, continued for 30 days;
|
|
|
•
|
default in the payment of principal or premium, if any, on the senior notes when due;
|
|
|
•
|
failure by the Issuers or any subsidiary guarantor to comply with its obligations under the indenture;
|
|
|
•
|
default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Issuers or restricted subsidiaries;
|
|
|
•
|
certain events of bankruptcy, insolvency or reorganization of the Issuers or restricted subsidiaries; and
|
|
|
•
|
failure by the Issuers or certain subsidiaries that would constitute a payment of final judgment aggregating in excess of
$20.0 million
.
|
If an event of default occurs and is continuing, the holders of such indebtedness may elect to declare all the funds borrowed to be immediately due and payable with accrued and unpaid interest. Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may also be accelerated and become due and payable.
As of
September 30, 2018
, Alta Mesa was in compliance with the indentures governing the senior notes.
Bond Premium (Successor)
.
As discussed in
Note 7
— Fair Value Measurements,
the fair value of the Alta Mesa senior notes as of the acquisition date was
$533.6 million
. The bond premium of
$33.6 million
is being amortized over the respective term of the Alta Mesa senior notes. The bond premium amortization recognized in interest expense was
$1.2 million
and
$3.3
million for the three months ended
September 30, 2018 (Successor)
and the Successor Period, respectively. The unamortized bond premium related to the senior notes is included as a component of long-term debt in the consolidated balance sheet as of
September 30, 2018
.
Maturities (Successor)
.
Future maturities of long-term debt, excluding unamortized bond premium, at
September 30, 2018
are as follows:
|
|
|
|
|
Fiscal Year
|
(in thousands)
|
2019
|
$
|
—
|
|
2020
|
—
|
|
2021
|
—
|
|
2022
|
—
|
|
2023
|
146,000
|
|
Thereafter
|
500,000
|
|
|
$
|
646,000
|
|
Deferred financing costs
.
As of
December 31, 2017
, Alta Mesa had
$11.4 million
of unamortized deferred financing costs related to both its senior secured notes and the Alta Mesa Credit Facility. As a result of the Business Combination, these unamortized deferred financing costs were adjusted to a fair value of
zero
at
February 9, 2018
. During the Successor Period, we incurred additional deferred financing costs related to the Alta Mesa Credit Facility and the Kingfisher Credit Facility of
$1.4 million
and
$2.3
million, respectively. These costs are reflected as deferred financing costs, net in other noncurrent assets in the consolidated balance sheets as of
September 30, 2018
(Successor). The amortization of the deferred financing costs is included in interest expense in the consolidated statements of operations. For the three months ended
September 30, 2018
(Successor) and 2017 (Predecessor), the amortization of deferred financing costs was
$0.2
million and
$0.7
million, respectively. For the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, the amortization of deferred financing costs was
$0.3
million,
$0.2 million
, and
$2.2
million, respectively.
NOTE 13 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following provides the details of accounts payable and accrued liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
September 30,
2018
|
|
|
December 31,
2017
|
Accruals for capital expenditures
|
$
|
86,514
|
|
|
|
$
|
48,771
|
|
Revenues and royalties payable
|
46,903
|
|
|
|
29,514
|
|
Accruals for operating expenses/taxes
|
12,105
|
|
|
|
14,632
|
|
Accrued interest
|
11,692
|
|
|
|
2,587
|
|
Derivative settlement payable
|
4,593
|
|
|
|
2,106
|
|
Other
|
3,951
|
|
|
|
4,301
|
|
Total accrued liabilities
|
165,758
|
|
|
|
101,911
|
|
Accounts payable
|
74,673
|
|
|
|
68,578
|
|
Accounts payable and accrued liabilities
|
$
|
240,431
|
|
|
|
$
|
170,489
|
|
NOTE 14 — COMMITMENTS AND CONTINGENCIES
Commitments
Office and Equipment Leases
.
We lease office space and certain field equipment such as compressors, under long-term operating lease agreements. On April 1, 2018, Alta Mesa amended its lease agreement for its corporate headquarters located in Houston, Texas. The amended lease agreement provides for additional office space and extends the original lease term through April 2028. Due to the amendment, Alta Mesa has additional lease commitment obligations of approximately
$17.6
million through April
2028
. Any initial rent-free months are amortized over the life of the lease. Equipment leases are generally for
two
years or less. For the three months ended
September 30, 2018
(Successor) and 2017 (Predecessor), total rent expense, net of sublease income, including office space and compressors, was approximately
$2.8
million and
$2.6
million, respectively. Total rent expense, net of sublease income, including office space and compressors, was approximately
$4.8
million,
$1.1 million
, and
$7.7 million
for the Successor Period, the 2018 Predecessor Period, and for the 2017 Predecessor Period, respectively.
At
September 30, 2018
, the future minimum base rentals for non-cancelable operating leases were as follows (in thousands)
:
|
|
|
|
|
|
Fiscal Year
|
|
Total
|
Remainder of 2018
|
|
$
|
702
|
|
2019
|
|
2,673
|
|
2020
|
|
2,753
|
|
2021
|
|
2,812
|
|
2022
|
|
3,009
|
|
2023
|
|
3,039
|
|
Thereafter
|
|
12,218
|
|
|
|
$
|
27,206
|
|
Firm transportation contracts
. The Company’s subsidiaries have entered into certain firm transportation contracts that extend through 2036. At
September 30, 2018
, the future minimum commitments related to these contracts were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Alta Mesa
|
|
Kingfisher
|
|
Total
|
Remainder of 2018
|
|
$
|
1,416
|
|
|
$
|
3,052
|
|
|
$
|
4,468
|
|
2019
|
|
5,666
|
|
|
9,216
|
|
|
14,882
|
|
2020
|
|
5,666
|
|
|
6,116
|
|
|
11,782
|
|
2021
|
|
5,666
|
|
|
6,116
|
|
|
11,782
|
|
2022
|
|
5,666
|
|
|
6,116
|
|
|
11,782
|
|
2023
|
|
5,666
|
|
|
5,676
|
|
|
11,342
|
|
Thereafter
|
|
25,022
|
|
|
70,004
|
|
|
95,026
|
|
|
|
$
|
54,768
|
|
|
$
|
106,296
|
|
|
$
|
161,064
|
|
Contingencies
Environmental claims
.
Various landowners have sued Alta Mesa in lawsuits concerning several fields in which Alta Mesa has, or historically had, operations. The lawsuits seek injunctive relief and other relief, including unspecified amounts in both actual and punitive damages for alleged breaches of mineral leases and alleged failure to restore the plaintiffs’ lands from alleged contamination and otherwise from its oil and natural gas operations. We are unable to express an opinion with respect to the likelihood of an unfavorable outcome of the various environmental claims or to estimate the amount or range of potential loss should the outcome be unfavorable. Therefore, we have not provided any material amounts for these claims in our consolidated financial statements at
September 30, 2018
.
Title/lease disputes
.
Title and lease disputes may arise in the normal course of our operations. These disputes are usually small but could result in an increase or decrease in reserves and/or other forms of settlement, such as cash, once a final resolution to the title dispute is made.
Litigation (Predecessor)
.
On April 13, 2005, Henry Sarpy and several other plaintiffs (collectively, “Plaintiffs”) filed a petition against Exxon, Extex, The Meridian Resource Corporation (“TMRC,” a former subsidiary of Alta Mesa), and the State of Louisiana for contamination of their land in the New Sarpy and/or Good Hope Field in St. Charles Parish. Plaintiffs claimed they are owners of land upon which oil field waste pits containing dangerous and contaminating substances are located. Plaintiffs alleged that they discovered in May 2004 that their property is contaminated with oil field wastes greater than represented by Exxon. The property was originally owned by Exxon and was sold to TMRC. TMRC subsequently sold the property to Extex. On April 14, 2015, TMRC entered into a Memorandum of Understanding with Exxon to settle the claims in this ongoing matter. On July 10, 2015, the settlement and comprised agreements were finalized and signed by the Plaintiffs and Exxon. On July 28, 2015, the State of Louisiana issued a letter of no objection to the settlement. In connection with the Business Combination, the liability was included in the distribution of our non-STACK assets to the AM Contributor.
On January 25, 2017, Bollenbach Enterprises Limited Partnership filed a class action petition in Kingfisher County, Oklahoma against Alta Mesa and Oklahoma Energy Acquisitions, LP and Alta Mesa Services, LP, each a wholly owned subsidiary of Alta Mesa, (collectively, the “AMH Parties”) claiming royalty underpayment or non-payment of royalty. The suit alleged that the AMH Parties made improper post-production deductions for midstream services that resulted in underpayment of royalties on natural gas and/or constituents of the gas stream produced from wells. The case was moved to federal court and stayed by the court pending the parties’ efforts to settle the case. In June 2017, the court administratively closed the case following mediation. As of December 31, 2017, Alta Mesa had accruals of approximately
$4.7 million
in accounts payable and accrued liabilities in its consolidated balance sheets and in general and administrative expense in its consolidated statements of operations as a result of this litigation. During January 2018, approximately
$4.7 million
was paid to fund the settlement. On March 12, 2018, the class settlement was approved by the Court.
Litigation (Successor)
.
On March 1, 2017, Mustang Gas Products, LLC (“Mustang”) filed suit in the District Court of Kingfisher County, Oklahoma, against Oklahoma Energy Acquisitions, LP, and eight other entities, including certain of our affiliates and subsidiaries. Mustang alleges that (1) Mustang is a party to gas purchase agreements with Oklahoma Energy containing gas dedication covenants that burden land, leases and wells in Kingfisher County, Oklahoma, and (2) Oklahoma Energy, in concert with the other defendants, has wrongfully diverted gas sales to Kingfisher in contravention of these agreements. Mustang asserts claims for declaratory judgment, anticipatory repudiation and breach of contract against Oklahoma Energy only. Mustang also claims tortious interference with contract, conspiracy and unjust enrichment/constructive trust against all defendants. We believe that the allegations contained in this lawsuit are without merit and intend to vigorously defend ourselves.
Other contingencies
.
We are subject to legal proceedings, claims and liabilities arising in the ordinary course of business. The outcomes cannot be reasonably estimated; however, in the opinion of management, such litigation and claims will be resolved without material adverse effect on our financial position, results of operations or cash flows. Accruals for losses associated with litigation are made when losses are deemed probable and can be reasonably estimated.
Performance appreciation rights
.
In the third quarter of 2014, Alta Mesa adopted the Alta Mesa Holdings, LP Amended and Restated Performance Appreciation Rights Plan (the “Plan”), effective September 24, 2014. The Plan was intended to provide incentive compensation to key employees and consultants who make significant contributions to Alta Mesa. Under the Plan, participants were granted performance appreciation rights (“PARs”) with a stipulated initial designated value. The Company accelerated the vesting and payment of all outstanding PARs in connection with the Business Combination described in Note 4. The value of the PARs that vested was approximately
$10.9 million
and such amount was recorded in general and administrative expense in the Successor Period. Following the closing of the Business Combination, the Plan was terminated.
Nonqualified Deferred Compensation
: In 2013, Alta Mesa established a nonqualified deferred compensation plan, the Alta Mesa Holdings, L.P. Supplemental Executive Retirement Plan (the “Retirement Plan”). The Retirement Plan was intended to provide additional flexibility and tax planning advantages to our senior executives and other key highly compensated employees. In connection with the Business Combination, we terminated the Retirement Plan resulting in approximately
$9.4 million
being recorded in general and administrative expense in the Successor Period.
NOTE 15 — SIGNIFICANT RISKS AND UNCERTAINTIES
Our business makes us vulnerable to changes in wellhead prices of oil and natural gas. Historically, world-wide oil and natural gas prices and markets have been volatile, and may continue to be volatile in the future. Prices for oil and natural gas can fluctuate widely in response to relatively minor changes in the global and regional supply of and demand for oil and natural gas, as well as market uncertainty, economic conditions and a variety of additional factors. The duration and magnitude of changes in oil and natural gas prices cannot be predicted. Declines in oil and/or natural gas prices, or any other unfavorable market conditions could have a material adverse effect on our financial condition and on the carrying value of our proved oil and natural gas reserves. Low prices may also reduce our cash available for distribution, acquisitions and for servicing our indebtedness.
We mitigate some of this vulnerability by entering into oil, natural gas and natural gas liquids price derivative contracts. See
Note 8
— Derivative Financial Instruments
for further details on derivatives.
NOTE 16 — STOCKHOLDERS’ EQUITY AND PARTNERS’ CAPITAL
Redeemable Preferred
Stock
and Stockholders’ Equity (Successor)
Class A Common Stock
.
Holders of our Class A Common Stock are entitled to
one
vote for each share held on all matters to be voted on by our stockholders. Holders of the Class A Common Stock and holders of the Class C Common Stock will vote together as a single class on all matters submitted to a vote of our stockholders, except as required by law. Unless specified in our certificate of incorporation (including any certificate of designation of preferred stock) or our Bylaws, or as required by applicable provisions of the Delaware General Corporation Law or applicable stock exchange rules, the affirmative vote of a majority of our shares of common stock that are voted is required to approve any such matter voted on by our stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than
50%
of the shares voted for the election of directors can elect all of the directors (subject to the right of the holders of our Series A Preferred Stock and Series B Preferred Stock to nominate and elect up to
seven
directors). Subject to the rights of the holders of any outstanding series of preferred stock, our stockholders are entitled to receive ratable dividends when, as and if declared by the board of directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of the Company, the holders of the Class A Common Stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the Class A Common Stock. Our stockholders have no preemptive or other subscription rights. There are no sinking fund provisions applicable to the Class A Common Stock.
On August 10, 2018, the Board of Directors authorized the repurchase of up to
$50.0
million of the Company’s outstanding Class A common stock, exclusive of any fees, commissions or other expenses related to such repurchases. Repurchases may be made at the Company’s discretion in accordance with applicable securities laws from time to time in open market or private transactions. The authorization has no expiration date. During the quarter ended
September 30, 2018
, the Company repurchased and retired
3,101,510
shares of Class A common stock. These shares remain authorized and are available for reissuance at a future date. The price paid for the shares repurchased, including commissions, that was in excess of par value has been recorded as a reduction of approximately
$14.8
million in additional paid in capital.
To fund the repurchase of its Class A shares of common stock, the Company sold
3,101,510
of its Common Units in SRII Opco to SRII Opco for the same price paid to the market for the Class A shares repurchased. This resulted in an increase during the third quarter of 2018 in the ownership position of the noncontrolling interest holders in SRII Opco, and an offsetting reduction in the Company’s additional paid in capital, totaling approximately
$10.8
million.
Class C Common Stock
.
In connection with the Business Combination, we issued
213,402,398
shares of Class C Common Stock to the Contributors,
204,921,888
of which are outstanding as of
September 30, 2018
.
Holders of Class C Common Stock, together with holders of Class A Common Stock voting as a single class, will have the right to vote on all matters properly submitted to a vote of the stockholders. In addition, the holders of Class C Common Stock, voting as a separate class, will be entitled to approve any amendment, alteration or repeal of any provision of our certificate of incorporation that would alter or change the powers, preferences or relative, participating, optional or other or special rights of the Class C Common Stock. Holders of Class C Common Stock will not be entitled to any dividends from the Company and will not be entitled to receive any of our assets in the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs.
Shares of Class C Common Stock may be issued only to the Contributors, their respective successors and assigns, as well as any permitted transferees of the Contributors. A holder of Class C Common Stock may transfer shares of Class C Common Stock to any transferee (other than the Company) only if such holder also simultaneously transfers an equal number of such holder’s SRII Opco Common Units to such transferee in compliance with the amended and restated limited partnership agreement of SRII Opco. The Contributors generally have the right to cause SRII Opco to redeem all or a portion of their SRII Opco Common Units in exchange for shares of our Class A Common Stock or, at SRII Opco’s option, an equivalent amount of cash. The Company may, however, at its option, effect a direct exchange of cash or Class A Common Stock for such SRII Opco Common Units in lieu of such a redemption by SRII Opco. Upon the future redemption or exchange of SRII Opco Common Units held by a Contributor, a corresponding number of shares of Class C Common Stock will be canceled. During the Successor Period, we issued
9,588,764
shares of our Class A common stock to equity owners of the KFM Contributors and canceled
9,588,764
shares of our Class C Common Stock as a result of the direct exchange of SRII Opco Common Units redemption. See
Note 4 — Business Combination
for further discussion.
Redeemable Series A Preferred Stock
.
As of
September 30, 2018
, Bayou City Energy Management LLC (“Bayou City”), HPS Investment Partners, LLC (“HPS”) and AM Equity Holdings, LP (“AM Management”) each own
one
of the
three
outstanding shares of our Series A Preferred Stock, and may not transfer the Series A Preferred Stock or any rights, powers, preferences or privileges thereunder except to an affiliate. The holders of the Series A Preferred Stock are not entitled to vote on any matter on which stockholders generally are entitled to vote. In addition, the holders are not entitled to any dividends from the Company but will be entitled to receive, after payment or provision for debts and liabilities and prior to any distribution in respect of our Class A Common Stock or any other junior securities, liquidating distributions in an amount equal to
$0.0001
per share of Series A Preferred Stock in the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs.
The Series A Preferred Stock is not convertible into any other security of the Company, but will be redeemable for the par value thereof by us upon the earlier to occur of (1) the fifth anniversary of the Closing Date, (2) the optional redemption of such Series A Preferred Stock at the election of the holder thereof or (3) upon a breach of the transfer restrictions described above. For so long as the Series A Preferred Stock remains outstanding, the holders of the Series A Preferred Stock will be entitled to nominate and elect directors to our board of directors for a period of up to
five
years following the closing of the Business Combination based on their and their affiliates’ beneficial ownership of common stock.
Redeemable Series B Preferred Stock
.
As of
September 30, 2018
, the Riverstone Contributor owns the only outstanding share of our Series B Preferred Stock, and may not transfer the Series B Preferred Stock or any rights, powers, preferences or privileges thereunder except to an affiliate (as defined in the limited partnership agreement of SRII Opco). The holder of the Series B Preferred Stock is not entitled to vote on any matter on which stockholders generally are entitled to vote. In addition, the holder is not entitled to any dividends from the Company but will be entitled to receive, after payment or provision for debts and liabilities and prior to any distribution in respect of our Class A Common Stock or any other junior securities, liquidating distributions in an amount equal to
$0.0001
per share of Series B Preferred Stock in the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs.
The Series B Preferred Stock is not convertible into any other security of the Company, but will be redeemable for the par value thereof by us upon the earlier to occur of (1) the fifth anniversary of the Closing Date, (2) the optional redemption of such Series B Preferred Stock at the election of the holder thereof or (3) upon a breach of the transfer restrictions described above. For so long as the Series B Preferred Stock remains outstanding, the holder of the Series B Preferred Stock will be entitled to nominate and elect directors to our board of directors for a period of up to
five
years following the closing of the Business Combination based on its and its affiliates’ beneficial ownership of common stock.
Warrants
.
As of
September 30, 2018
, the Company had
62,966,666
warrants outstanding, consisting of
34,500,000
public warrants originally sold as part of the Units in the IPO (“Public Warrants”),
15,133,333
Private Placement Warrants sold to the Company’s Sponsor and
13,333,333
Forward Purchase Warrants issued to Riverstone VI SR II Holdings, LP.
Each whole Public Warrant entitles the holder to purchase
one
whole share of our Class A Common Stock for
$11.50
per share. The warrants are currently exercisable and will expire February 9, 2023, or earlier upon redemption or liquidation. Pursuant to the warrant agreement, a warrant holder may exercise its Public Warrants only for a whole number of shares of Class A Common Stock. No fractional Public Warrants have been issued and only whole Public Warrants trade.
The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the Initial Public Offering, except the Private Warrants are non-redeemable so long as they are held by our Sponsor or its permitted transferees.
The Forward Purchase Warrants have terms and provisions that are identical to those of the Private Placement Warrants, including as to exercise price, exercisability and exercise period, except the Forward Purchase Warrants are non-redeemable so long as they are held by our Sponsor or its permitted transferees. The Forward Purchase Warrants were sold in a private placement pursuant to a purchase agreement between us and our Sponsor and have the terms set forth in a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and the Company.
Noncontrolling Interest
.
The noncontrolling interest relates to SRII Opco Common Units that were originally issued to the AM Contributor, the KFM Contributor and the Riverstone Contributor in connection with the Business Combination and continue to be held by holders other than the Company. At the date of the Business Combination, the noncontrolling interest owners held
55.8%
(AM Contributor
36.2%
, KFM Contributor
14.4%
, and Riverstone Contributor
5.2%
) of the limited partner interests in SRII Opco. The non-controlling interest percentage is affected by various equity transactions such as Class C Common Stock conversions and Class A Common Stock activities described above. As of
September 30, 2018
, the noncontrolling interest owners held
53.8%
of the limited partner interests in SRII Opco.
The Company has consolidated the financial position, results of operations and cash flows of SRII Opco, based on having control of SRII Opco, and reflected that portion retained by other holders of Common Units as a noncontrolling interest.
Management and Control (Predecessor)
.
Alta Mesa’s
amended and restated
partnership agreement currently provides for interests to be divided into economic units held by the partners referred to as “LP Units” and non-economic general partner interests owned by Alta Mesa GP referred to as “GP Units”. Alta Mesa GP owns all the GP Units and SRII Opco owns all the LP Units.
Since Alta Mesa is a limited partnership, its operations and activities are managed by the board of directors (the “Board of Directors”) of its general partner, Alta Mesa GP. The limited liability company agreement of Alta Mesa GP provides for two classes of interests: (i) Class A Units, which hold
100%
of the economic interests in Alta Mesa GP and (ii) Class B Units, which hold
100%
of the voting interests in Alta Mesa GP.
SRII Opco is the sole owner of Alta Mesa’s Class A Units and owns
90%
of the Class B Units. Harlan H. Chappelle, our President and Chief Executive Officer and a director, Michael Ellis, the founder of Alta Mesa, our Chief Operating Officer—Upstream and a director, and certain affiliates of Bayou City, and HPS, own an aggregate
10%
of the Class B Units. Alta Mesa GP’s Board of Directors are selected by the Class B members. Notwithstanding the foregoing, voting control of Alta Mesa GP is vested in SRII Opco pursuant to a voting agreement.
All distributions under Alta Mesa’s amended and restated partnership agreement are made to the limited partners pro rata when Alta Mesa GP so directs.
NOTE 17 — EQUITY-BASED COMPENSATION (Successor)
Following the closing of the Business Combination, we adopted the Alta Mesa Resources, Inc. 2018 Long Term Incentive Plan (the “LTIP”). A total of
50,000,000
shares of Class A Common Stock were reserved for issuance under the LTIP. The LTIP provides for the grant of stock options, including incentive stock options (“ISOs”), nonqualified stock options (“NSOs”), stock appreciation rights (“SARs”), restricted stock, dividend equivalents, restricted stock units (“RSUs”) and other stock-based awards in Class A Common Stock. Prior to the Business Combination, we did not have any equity-based compensation programs. Pursuant to the LTIP, certain grants of stock-based awards have been made to various employees of the Company since
February 9, 2018
. During the Successor Period, the Company recognized non-cash stock-based compensation expense of
$8.3 million
resulting from stock options, restricted stock and RSUs awards granted to our employees, which is included in general and administrative expense in the accompanying consolidated statements of operations. Historical amounts may not be representative of future amounts as the value of future awards may vary from historical amounts.
We recognize compensation expense on a straight-line basis for service-based grants to our employees over the vesting period. The fair value of restricted stock awards and performance-based restricted stock units is determined based on the estimated fair market value of our Class A Common Stock on the date of grant. As provided in ASU 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, the Company has elected to recognize actual forfeitures as they occur.
Stock options
.
Options that have been granted under the LTIP expire
seven
years from the grant date and generally vest in
one-third
increments each year on the anniversary date following the date of grant, based on continued employment. The exercise price for an option granted under the LTIP may not be below the fair value of the Company’s Class A Common Stock on the grant date.
Information about outstanding stock options is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Stock Options
|
|
Weighted Average Grant Date Fair Value
|
|
Weighted Average Remaining Term (in years)
|
|
Aggregate Intrinsic Value (in thousands)
|
Outstanding as of February 9, 2018
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
|
Granted
|
5,146,872
|
|
|
4.40
|
|
|
—
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Forfeited or expired
|
(97,607
|
)
|
|
4.52
|
|
|
—
|
|
|
|
Outstanding as of September 30, 2018
|
5,049,265
|
|
|
$
|
4.40
|
|
|
6.4
|
|
|
$
|
—
|
|
Exercisable as of September 30, 2018
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Compensation cost related to stock options is based on the grant-date fair value of the award, recognized ratably over the applicable
three
-year vesting period. The Company estimates the fair value using the Black-Scholes option-pricing model. Expected volatilities are based on the re-levered asset volatility implied by a set of comparable companies. Expected term is based on the simplified method, and is estimated as the average of the weighted average vesting term and the time to expiration as of the grant date. The Company uses U.S. Treasury bond rates in effect at the grant date for its risk-free interest rates.
The following summarizes the assumptions used to determine the fair value of those options:
|
|
|
|
|
Successor
|
|
February 9, 2018
Through
September 30, 2018
|
Expected term (in years)
|
4.5
|
|
Expected stock volatility
|
64.6
|
%
|
Dividend yield
|
—
|
|
Risk-free interest rate
|
2.5
|
%
|
As of
September 30, 2018
, there was
$17.7 million
of unrecognized compensation cost related to non-vested stock options. The Company expects to recognize that cost on a pro rata basis over a weighted average period of
2.4
years.
Restricted stock
.
Restricted stock granted to employees generally vests in
one-third
increments each year on the anniversary date following the date of grant, based on continued employment. Prior to vesting, no dividends are paid and the shares may not be traded. During the period from
February 9, 2018
to
September 30, 2018
, the Company granted
98,199
fully-vested restricted stock awards to certain of its directors and
2,077,867
restricted stock awards to employees. Shares granted to directors vest immediately upon grant.
The following table provides information about restricted stock awards granted during the Successor Period:
|
|
|
|
|
|
|
|
|
Successor
|
|
Restricted Stock Awards
|
|
Weighted Average Grant Date Fair Value per share
|
Outstanding as of February 9, 2018
|
—
|
|
|
$
|
—
|
|
Granted
|
2,176,066
|
|
|
7.67
|
|
Vested
|
(98,199
|
)
|
|
8.46
|
|
Forfeited or expired
|
(43,381
|
)
|
|
8.74
|
|
Outstanding as of September 30, 2018
|
2,034,486
|
|
|
$
|
7.61
|
|
Compensation cost for restricted shares is based upon the grant-date market value of the award, recognized ratably over the applicable vesting period, subject to the employee’s continued service. Unrecognized compensation cost related to unvested
restricted shares at
September 30, 2018
was
$12.5 million
, which the Company expects to recognize over a weighted average remaining period of
2.5
years.
Restricted stock units
. The Company also grants performance-based restricted stock units (“PSUs”) to key employees under the LTIP. PSUs granted during the period will vest over
three
years at
20%
during the first year,
30%
during the second year and
50%
during the third year. The number of PSUs vesting each year will be based on the achievement of annual company-specified performance goals and objectives applicable to each respective year of vesting. Based on achievement of those goals and objectives, the number of PSUs that vest can range from
0%
to
200%
of the target grant applicable to each vesting period. For accounting purposes, the Company will only recognize PSUs granted when the specified performance thresholds for future periods have been established. For PSUs granted during the period
February 9, 2018
to
September 30, 2018
, only the performance goals and objectives for 2018 have been established to date. Those 2018 performance goals are related to the Company achieving a specified level of EBITDAX for the period ended
December 31, 2018
.
The following summary provides information about the target number of PSUs granted during the Successor Period:
|
|
|
|
|
|
|
|
|
Successor
|
|
PSUs
|
|
Weighted Average Grant Date Fair Value per unit
|
Outstanding as of February 9, 2018
|
—
|
|
|
$
|
—
|
|
Granted
|
829,239
|
|
|
8.63
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited or expired
|
(4,519
|
)
|
|
8.48
|
|
Outstanding as of September 30, 2018
|
824,720
|
|
|
$
|
8.63
|
|
As of
September 30, 2018
, there was
no
material unrecognized compensation cost related to the unvested PSUs.
NOTE 18 — INCOME TAXES
As a result of the Business Combination, the Company’s wholly owned subsidiary, SRII Opco GP, is the general partner of SRII Opco which became the sole managing member of Alta Mesa GP and Kingfisher, and as a result, we began consolidating the financial results of Alta Mesa and Kingfisher. SRII Opco is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SRII Opco is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SRII Opco is passed through to and included in the taxable income or loss of its limited partners, including the Company, on a pro rata basis. The Company is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss of SRII Opco, as well as any stand-alone income or loss generated by the Company.
The income tax benefit recorded in the Successor Period is based on applying an estimated annual effective income tax rate to the net loss incurred from
February 9, 2018
through
September 30, 2018
. During the second quarter of 2018, there were
two
exchanges of SRII Common units made by the KFM contributors. The tax effects of these transactions were treated as discrete items for purposes of the annual effective income tax rate calculation. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the Successor’s expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, the effect of noncontrolling interests, permanent and temporary differences and the likelihood of recovering deferred tax assets in the current year. The accounting estimates used to compute the income tax benefit may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.
Income tax expense (benefit) included in the consolidated statements of operations is detailed below (in thousands):
|
|
|
|
|
|
Successor
|
|
February 9, 2018
Through
September 30, 2018
|
Current taxes:
|
|
Federal
|
$
|
(783
|
)
|
State
|
—
|
|
|
(783
|
)
|
Deferred taxes:
|
|
Federal
|
(4,146
|
)
|
State
|
(936
|
)
|
|
(5,082
|
)
|
Income tax benefit
|
$
|
(5,865
|
)
|
In connection with the completion of the Business Combination, we entered into the Tax Receivable Agreement with SRII Opco, the AM Contributor, and the Riverstone Contributor. This agreement generally provides for the payment by us of
85%
of the amount of net cash savings, if any, in U.S. federal, state and local income tax that we actually realize (or are deemed to realize in certain circumstances) in periods after the Business Combination as a result of (i) certain tax basis increases resulting from the exchange of SRII Opco Common Units for AMR Class A Common Stock (or, in certain circumstances, cash) pursuant to the redemption right or our right to effect a direct exchange of SRII Opco Common Units under the SRII Opco LPA, other than such tax basis increases allocable to assets held by Kingfisher or otherwise used in Kingfisher’s midstream business, and (ii) interest paid or deemed to be paid by us as a result of, and additional tax basis arising from, any payments we make under the Tax Receivable Agreement. We will retain the benefit of the remaining
15%
of these cash savings.
The payment obligations under the Tax Receivable Agreement are obligations of the Company and not obligations of SRII Opco, and we expect that the payments we will be required to make under the Tax Receivable Agreement may be substantial. For purposes of the Tax Receivable Agreement, cash savings in tax generally are calculated by comparing our actual tax liability to the amount we would have been required to pay had we not been entitled to any of the tax benefits subject to the Tax Receivable Agreement. In other words, we would calculate our federal, state and local income tax liabilities as if no tax attributes arising from a redemption or direct exchange of SRII Opco Common Units had been transferred to us. The term of the Tax Receivable Agreement will continue until all such tax benefits have been utilized or have expired, unless we exercise our right to terminate the Tax Receivable Agreement or the Tax Receivable Agreement is otherwise terminated.
As of
September 30, 2018
,
no exchange of SRII Common Units has occurred, which would trigger a payment under the Tax Receivable Agreement, and there has not been an early termination under the Tax Receivable Agreement; therefore, we have not recorded a Tax Receivable Agreement liability at this time.
The AM Contributor, the Riverstone Contributor, and their permitted transferees (together, the “TRA Holders”) will not reimburse us for any cash payments previously made under the Tax Receivable Agreement if any tax benefits initially claimed by us are challenged by the IRS or other relevant tax authority and are ultimately disallowed, except that excess payments made to TRA Holders will be netted against payments otherwise to be made, if any, to the TRA Holders after our determination of such excess. As a result, in such circumstances, we could make payments that are greater than our actual cash tax savings, if any, and may not be able to recoup those payments, which could adversely affect our liquidity.
Additionally, if the Tax Receivable Agreement terminates early (at our election or as a result of our material breach of our obligations under the Tax Receivable Agreement, whether as a result of our failure to make any payment when due, failure to honor any other material obligation under it or by operation of law as a result of the rejection of the Tax Receivable Agreement in a case commenced under the United States Bankruptcy Code or otherwise), we would be required to make a substantial, immediate lump-sum payment. This payment would equal the present value of hypothetical future payments that could be required to be paid under the Tax Receivable Agreement (calculated using a discount rate of
18%
). The calculation of the hypothetical future payments will be based upon certain assumptions and deemed events set forth in the Tax Receivable Agreement, including that (i) we have sufficient taxable income to fully utilize the tax benefits covered by the Tax Receivable Agreement, (ii) all taxable income of the Company is subject to the maximum applicable tax rates throughout the relevant period and (iii) certain loss or credit carryovers will be utilized through the expiration date of such carryovers.
Payments will generally be due under the Tax Receivable Agreement within 30 days following the finalization of the schedule with respect to which the payment obligation is calculated, although interest on such payments will begin to accrue from the due date (without extensions) of such tax return until such payment due date at a rate equal to LIBOR, plus
100
basis points. Except in cases where we elect to terminate the Tax Receivable Agreement early or we have available cash but fail to make payments when due, generally we may elect to defer payments due under the Tax Receivable Agreement if we do not have available cash to satisfy our payment obligations under the Tax Receivable Agreement or if our contractual obligations limit our ability to make these payments. Any such deferred payments under the Tax Receivable Agreement generally will accrue interest at a rate of LIBOR plus
500
basis points; provided, however, that interest will accrue at a rate of LIBOR plus
100
basis points if we are unable to make such payment as a result of limitations imposed by existing credit agreements.
Because we are a holding company with no operations of our own, our ability to make payments under the Tax Receivable Agreement is dependent on the ability of SRII Opco to make distributions to us in an amount sufficient to cover our obligations under the Tax Receivable Agreement; this ability, in turn, may depend on the ability of SRII Opco’s subsidiaries to make distributions to it. The ability of SRII Opco and its subsidiaries to make such distributions will be subject to, among other things, the applicable provisions of Delaware law that may limit the amount of funds available for distribution and restrictions in relevant debt instruments issued by SRII Opco and/or its subsidiaries. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments will be deferred and will accrue interest until paid.
NOTE 19 — RELATED PARTY TRANSACTIONS
On September 29, 2017, Alta Mesa entered into a
$1.5 million
promissory note receivable with its affiliate Northwest Gas Processing, LLC, a Delaware limited liability company (“NWGP”), which was subsequently transferred to High Mesa Services, LLC (“HMS”), a subsidiary of High Mesa, Inc. (“High Mesa”). The promissory note bears interest (or paid-in-kind interest from time to time) on the principal balance at a rate of
8%
per annum, with interest payable in quarterly installments beginning
January 1, 2018
, and maturing on
February 28, 2019
. At
September 30, 2018
and
December 31, 2017
, amounts due under the promissory note totaled
$1.6 million
and
$1.5 million
, respectively.
Alta Mesa also has an
$8.5 million
long-term note receivable from HMS. The long-term note receivable, which matures on December 31, 2019, bears interest at
8%
per annum, payable quarterly. As of
September 30, 2018
, and
December 31, 2017
, the balance of the note receivable amounted to
$11.5 million
and
$10.8 million
, respectively. The Company believes the promissory note to be fully collectible and accordingly has not recorded a reserve. For the three months ended
September 30, 2018 (Successor)
and 2017 (Predecessor), interest income on the note receivable from our affiliate amounted to approximately
$0.3
million and
$0.2
million, respectively. Interest income on the note receivable from our affiliate amounted to approximately
$0.7 million
,
$0.1 million
, and
$0.6 million
for the Successor Period, the 2018 Predecessor Period, and 2017 Predecessor Period, respectively. Such amounts have been added to the balance of the note receivable.
Effective June 1, 2018, we entered into a Marketing Services Agreement with ARM Energy Management, LLC (“AEM”) pursuant to which AEM markets our oil, natural gas and natural gas liquids and sells them under short-term contracts generally with month-to-month pricing based on published regional indices, with differentials for transportation, location and quality taken into account. AEM remits monthly collections on these sales to us, and receives a marketing fee. In addition, AEM markets our firm transportation on the ONEOK Gas Transportation, L.L.C. system and the Panhandle Eastern Pipeline Company, LP system for an asset management fee. The AM Contributor owns less than
10%
of AEM. For the period from June 1, 2018 to
September 30, 2018
, we paid AEM
$0.8
million for our share of the marketing fees.
David Murrell, our Vice President of Land, is the principal of David Murrell & Associates, which provides land consulting services to us. The primary employee of David Murrell & Associates is his spouse, Brigid Murrell. Services are provided at a pre-negotiated hourly rate based on actual time utilized by us. Total expenditures under this arrangement were approximately
$49,000
and
$46,000
for the three months ended
September 30, 2018 (Successor)
and 2017 (Predecessor), respectively. Total expenditures under this arrangement were approximately
$132,000
,
$28,000
, and
$126,000
for the Successor Period, the
2018
Predecessor Period, and the 2017 Predecessor Period, respectively. The contract may be terminated by either party without penalty upon
30
days’ notice. These amounts are recorded as general and administrative expenses in the consolidated statements of operations.
David McClure, Kingfisher Midstream Vice President of Planning and Water Systems, and the son-in-law of our Chief Executive Officer, Harlan H. Chappelle, received total compensation of approximately
$78,100
and
$67,300
for the three months ended
September 30, 2018 (Successor)
and 2017 (Predecessor), respectively. For the Successor Period, the
2018
Predecessor Period, and the
2017
Predecessor Period, David McClure received total compensation of approximately
$1,089,000
,
$938,500
, and
$192,300
, respectively. These amounts are recorded as general and administrative expenses in the consolidated statements of operations.
David Pepper, Surface Land Manager for Kingfisher, and the cousin of our Vice President of Land, David Murrell, received total compensation of
$40,400
and
$40,300
for the three months ended
September 30, 2018 (Successor)
and 2017 (Predecessor), respectively. For the Successor Period, the
2018
Predecessor Period, and the
2017
Predecessor Period, David Pepper received total compensation of approximately
$178,100
,
$153,100
, and
$113,600
for the Successor Period, the
2018
Predecessor Period, and the
2017
Predecessor Period, respectively. These amounts are recorded as general and administrative expenses in the consolidated statements of operations.
On January 13, 2016, Alta Mesa’s wholly owned subsidiary Oklahoma Energy Acquisitions, LP (“Oklahoma Energy”) entered into a Joint Development Agreement, as amended on June 10, 2016 and December 31, 2016, (the “Joint Development Agreement”), with BCE-STACK Development LLC (“BCE”), a fund advised by Bayou City, to fund a portion of Alta Mesa’s drilling operations and to allow Alta Mesa to accelerate development of our STACK acreage. The Joint Development Agreement, as amended, establishes a development plan of
60
wells in three tranches, and provides opportunities for the parties to potentially agree to an additional
20
wells.
Pursuant to the terms and provisions of the Joint Development Agreement, BCE committed to fund
100%
of Alta Mesa’s working interest share up to a maximum average well cost of
$3.2 million
in drilling and completion costs per well for any tranche
,
subject to modifications or adjustments proposed and approved by the parties. Alta Mesa is responsible for any drilling and completion costs exceeding approved amounts. In exchange for the payment of drilling and completion costs, BCE receives
80%
of our working interest in each wellbore, which BCE interest will be reduced to
20%
of our initial working interest upon BCE achieving a
15%
internal rate of return on the wells within a tranche and automatically further reduced to
12.5%
of our initial interest upon BCE achieving a
25%
internal rate of return. Following the completion of each joint well, Alta Mesa and BCE will each bear its respective proportionate working interest share of all subsequent costs and expenses related to such joint well. Mr. William McMullen, our director, is founder and managing partner of BCE. The approximate dollar value of the amount involved in this transaction, or Mr. McMullen’s interests in the transaction, depends on a number of factors outside his control and is not known at this time. During the 2018 Predecessor Period, BCE advanced us approximately
$39.5 million
to drill wells under the Joint Development Agreement. As of
September 30, 2018
,
55
joint wells have been drilled or spudded. As of
September 30, 2018
(Successor) and
December 31, 2017
(Predecessor),
$16.9 million
and
$23.4 million
, respectively, of net advances remaining from BCE for their working interest share of the drilling and development costs arising under the Joint Development Agreement were included as “Advances from related party” in our consolidated balance sheets. BCE may request refunds of certain advances from time to time if funded wells previously on the drilling schedule were subsequently removed.
In connection with the Closing, Alta Mesa entered into a management services agreement (the “High Mesa Agreement”) with High Mesa with respect to our non-STACK assets that were distributed to High Mesa’s subsidiary in connection with the business combination. Under the High Mesa Agreement, during the
180
-day period following the Closing (the “Initial Term”), we will provide certain administrative, management and operational services necessary to manage the business of High Mesa and its subsidiaries (the “Services”), in each case, subject to and in accordance with an approved budget. Thereafter, the High Mesa Agreement shall automatically renew for additional consecutive
180
-day periods (each a “Renewal Term”), unless terminated by either party upon at least
90
-days written notice to the other party prior to the end of the Initial Term or any Renewal Term. The automatic renewal of this agreement for an additional 180-day period occurred in the third quarter of 2018.
For a period of
60
days following the expiration of the term, we are obligated to assist High Mesa with the transition of the Services from Alta Mesa to a successor service provider. As compensation for the Services, including during any transition to a successor service provider, High Mesa will pay us each month (i) a management fee of
$10,000
, (ii) an amount equal to our costs and expenses incurred in connection with providing the Services as provided for in the approved budget and (iii) an amount equal to our costs and expenses incurred in connection with any emergency. As of
September 30, 2018
(Successor) and
December 31, 2017
(Predecessor), approximately
$0.9 million
and
$0.8 million
, respectively, were due from High Mesa for reimbursement of expenses which are recorded as “Receivables due from related party” in the consolidated balance sheets.
NOTE 20 — SUBSIDIARY GUARANTORS
All of Alta Mesa’s material wholly owned subsidiaries are guarantors under the terms of its senior notes and the Alta Mesa Credit Facility. The guarantees are full and unconditional (except for customary release provisions) and joint and several. Those subsidiaries which are not wholly owned by Alta Mesa and are not guarantors of its senior notes or the Alta Mesa Credit Facility, are immaterial subsidiaries. Kingfisher’s material wholly owned subsidiaries are a guarantor under the terms of the Kingfisher Credit Facility.
Our consolidated financial statements reflect the financial position of these subsidiary guarantors. As the parent company, we have no independent operations, assets, or liabilities. There are restrictions on dividends, distributions, loans or other transfers of funds from the subsidiary guarantors to us.
NOTE 21 — BUSINESS SEGMENT INFORMATION
We disclose the results of our reportable segments in accordance with ASC 280,
Segment Reporting
. As a result of the Business Combination, the Company has
two
reportable segments: (1) Exploration & Production and (2) Midstream
.
These segments represent the Company’s
two
operating units, each offering different products and services. Each segment is ultimately led by the Company’s President and Chief Executive Officer, who is also the Chief Operating Decision Maker (“CODM”). The CODM evaluates segment performance using operating income, which is defined as total operating and other revenue less total operating expenses. The Company’s applicable corporate activities have also been allocated to the supported business segments. During the 2018 Predecessor Period and the 2017 Predecessor Periods, all of the Company’s operations were in
one
reportable segment, Exploration & Production. Accordingly, no disclosure is provided below for those periods. For additional information regarding the Company’s reportable segments, see
Note 2
—
Summary of Significant Accounting Policies
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Three Months Ended September 30, 2018
|
|
Exploration &
Production
|
|
Midstream
|
|
Eliminations
|
|
Total
|
|
(in thousands)
|
Product line revenues from third-party customers
|
$
|
133,092
|
|
|
$
|
30,778
|
|
|
$
|
—
|
|
|
$
|
163,870
|
|
Inter-segment revenues
|
—
|
|
|
31,248
|
|
|
(31,248
|
)
|
|
—
|
|
Total segment product line revenues
|
$
|
133,092
|
|
|
$
|
62,026
|
|
|
$
|
(31,248
|
)
|
|
163,870
|
|
Other revenues
|
|
|
|
|
|
|
1,011
|
|
Total operating revenues
|
|
|
|
|
|
|
$
|
164,881
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
28,530
|
|
|
$
|
3,403
|
|
|
$
|
—
|
|
|
$
|
31,933
|
|
Other income (expense)
|
(10,686
|
)
|
|
(1,337
|
)
|
|
—
|
|
|
(12,023
|
)
|
Segment net income before tax
|
$
|
17,844
|
|
|
$
|
2,066
|
|
|
$
|
—
|
|
|
19,910
|
|
Corporate expenses
|
|
|
|
|
|
|
(529
|
)
|
Income from continuing operations before income taxes
|
|
|
|
|
|
|
$
|
19,381
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
$
|
169,967
|
|
|
$
|
13,047
|
|
|
$
|
—
|
|
|
$
|
183,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
February 9, 2018 Through September 30, 2018
|
|
Exploration &
Production
|
|
Midstream
|
|
Eliminations
|
|
Total
|
|
(in thousands)
|
Product line revenues from third-party customers
|
$
|
276,806
|
|
|
$
|
69,236
|
|
|
$
|
—
|
|
|
$
|
346,042
|
|
Inter-segment revenues
|
—
|
|
|
63,680
|
|
|
(63,680
|
)
|
|
—
|
|
Total segment product line revenues
|
$
|
276,806
|
|
|
$
|
132,916
|
|
|
$
|
(63,680
|
)
|
|
346,042
|
|
Other revenues
|
|
|
|
|
|
|
3,795
|
|
Total operating revenues
|
|
|
|
|
|
|
$
|
349,837
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
$
|
(14,320
|
)
|
|
$
|
156
|
|
|
$
|
—
|
|
|
$
|
(14,164
|
)
|
Other income (expense)
|
(24,877
|
)
|
|
(3,003
|
)
|
|
—
|
|
|
(27,880
|
)
|
Segment net loss before tax
|
$
|
(39,197
|
)
|
|
$
|
(2,847
|
)
|
|
$
|
—
|
|
|
(42,044
|
)
|
Corporate expenses
|
|
|
|
|
|
|
(1,955
|
)
|
Loss from continuing operations before income taxes
|
|
|
|
|
|
|
$
|
(43,999
|
)
|
|
|
|
|
|
|
|
|
Capital expenditures
|
$
|
489,009
|
|
|
$
|
34,636
|
|
|
$
|
—
|
|
|
$
|
523,645
|
|
The following tables summarize our revenue by product line for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Three Months Ended September 30, 2018
|
|
Exploration &
Production
|
|
Midstream
|
|
Eliminations
|
|
Total
|
|
(in thousands)
|
Product line revenues:
|
|
|
|
|
|
|
|
Oil sales
|
$
|
107,253
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
107,253
|
|
Natural gas sales
|
11,959
|
|
|
—
|
|
|
—
|
|
|
11,959
|
|
Natural gas liquids sales
|
13,880
|
|
|
—
|
|
|
—
|
|
|
13,880
|
|
Product sales
|
—
|
|
|
40,951
|
|
|
(18,275
|
)
|
|
22,676
|
|
Gathering and processing revenue
|
—
|
|
|
21,075
|
|
|
(12,973
|
)
|
|
8,102
|
|
Total product line revenues
|
$
|
133,092
|
|
|
$
|
62,026
|
|
|
$
|
(31,248
|
)
|
|
163,870
|
|
Other revenues
|
|
|
|
|
|
|
1,011
|
|
Total operating revenues
|
|
|
|
|
|
|
$
|
164,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
February 9, 2018 Through September 30, 2018
|
|
Exploration &
Production
|
|
Midstream
|
|
Eliminations
|
|
Total
|
|
(in thousands)
|
Product line revenues:
|
|
|
|
|
|
|
|
Oil sales
|
$
|
222,822
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
222,822
|
|
Natural gas sales
|
25,149
|
|
|
—
|
|
|
—
|
|
|
25,149
|
|
Natural gas liquids sales
|
28,835
|
|
|
—
|
|
|
—
|
|
|
28,835
|
|
Product sales
|
—
|
|
|
87,763
|
|
|
(37,113
|
)
|
|
50,650
|
|
Gathering and processing revenue
|
—
|
|
|
45,153
|
|
|
(26,567
|
)
|
|
18,586
|
|
Total product line revenues
|
$
|
276,806
|
|
|
$
|
132,916
|
|
|
$
|
(63,680
|
)
|
|
346,042
|
|
Other revenues
|
|
|
|
|
|
|
3,795
|
|
Total operating revenues
|
|
|
|
|
|
|
$
|
349,837
|
|
The following table summarizes total assets by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
September 30, 2018
|
|
|
Exploration &
Production
|
|
Midstream
|
|
Eliminations
|
|
Total
|
|
|
(in thousands)
|
Total segment assets
|
|
$
|
2,957,284
|
|
|
$
|
1,447,913
|
|
|
$
|
(14,496
|
)
|
|
$
|
4,390,701
|
|
Corporate assets
|
|
|
|
|
|
|
|
22,358
|
|
Total assets
|
|
|
|
|
|
|
|
$
|
4,413,059
|
|
NOTE 22
—
SUBSEQUENT EVENTS
Sale of Produced Water Assets
Effective
November 9, 2018, the Company’s Exploration & Production segment sold its produced water assets, consisting of over 200 miles of produced water gathering pipelines, and related facilities and equipment, along with 20 produced water disposal wells, surface leases, easements and other agreements, net of related obligations, to the Company’s Midstream segment
for a total purchase price of $
90.0
million in cash, subject to normal acquisition adjustments.
The purchase price was funded by the Midstream segment through additional borrowings under the Kingfisher Credit Facility.
As of
September 30, 2018
, the net book value of long-lived assets associated with these operations totaled $
86.9
million.
In conjunction with the sale, Alta Mesa entered into a new fifteen-year water gathering and disposal agreement with Kingfisher Midstream.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. In addition, such analysis should be read in conjunction with the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2017
(“
2017
Annual Report”). The following discussion and analysis contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the volatility of oil and natural gas prices, production timing and volumes, estimates of proved reserves, operating costs and capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed in “Cautionary Statement Regarding Forward-Looking Statements” at the beginning of this Quarterly Report and in our
2017
Annual Report, particularly in the section titled “Risk Factors,” all of which are difficult to predict. As a result of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.
Overview
Alta Mesa Resources, Inc., together with its consolidated subsidiaries (“AMR,” “we,” “us,” “our,” or the “Company”), is an independent energy company focused on the acquisition, development, exploration and exploitation of unconventional onshore oil and natural gas reserves in the eastern portion of the Anadarko Basin in Oklahoma. Our activities are primarily directed at the horizontal development of an oil and liquids-rich resource play in an area of the basin commonly referred to as the Sooner Trend Anadarko Basin Canadian and Kingfisher County (“STACK”).
As of
September 30, 2018
, we have assembled, through our subsidiary Alta Mesa Holdings, LP (“Alta Mesa”), a highly contiguous position of approximately 134,000 net acres in the up-dip, naturally-fractured oil portion of the STACK primarily in eastern Kingfisher County and Major County, Oklahoma. Our drilling locations primarily target the Osage, Meramec and Oswego formations. We continue to acquire acreage within and adjacent to our acreage footprint with the goal of operating the drilling, completion and production operations in such locations. At present, we are operating nine horizontal drilling rigs in the STACK.
We also operate a midstream services business through Kingfisher Midstream LLC (“Kingfisher”). Kingfisher has natural gas gathering and processing and crude oil gathering and storage assets located in the Anadarko Basin that generate revenue primarily through long-term, fee-based contracts. The Kingfisher assets are integral to our oil and natural gas operations and are strategically positioned to provide similar services to other producers in the area.
Additional information relating to the formation of the Company and the acquisition of Alta Mesa and Kingfisher on February 9, 2018, may be found in Notes 1 and 4 of the Notes to Consolidated Financial Statements. Immediately prior to the closing of the business combination involving Alta Mesa and Kingfisher, Alta Mesa also distributed its non-STACK assets and related liabilities to High Mesa Holdings, LP (the “AM Contributor”), which is more fully described in Note 6 of the Notes to Consolidated Financial Statements, relating to discontinued operations.
As a result of the acquisition of Alta Mesa and Kingfisher, and the consummation of the transactions described in Note 4 of the Notes to Consolidated Financial Statements, the Company’s financial statement presentation reflects Alta Mesa as the “Predecessor” for periods prior to February 9, 2018. The Company, including the consolidated results of Alta Mesa and Kingfisher, is the “Successor” for periods since February 9, 2018.
Outlook, Market Conditions and Commodity Prices
Our revenue, profitability and future growth rate depend on many factors, particularly the prices of oil, natural gas and natural gas liquids, which are beyond our control. The success of our business is significantly affected by the price of oil due to our current focus on development of oil reserves and exploration for oil.
Factors affecting oil prices include worldwide economic conditions; geopolitical activities in various regions of the world; worldwide supply and demand conditions; weather conditions; actions taken by the Organization of Petroleum Exporting Countries; and the value of the U.S. dollar in international currency markets. Commodity prices remain unpredictable and it is uncertain whether the increase in market prices experienced in recent months will be sustained. As a result, we cannot accurately predict future commodity prices and, therefore, cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our capital expenditures, production volumes or revenues. If oil, natural gas and NGLs prices were to significantly decrease, such decreases could have a material adverse effect on our financial condition, the carrying value of our oil and natural gas properties, goodwill and intangible assets, our proved reserves and our ability to finance operations, including the amount of the borrowing capacity under the Alta Mesa and Kingfisher senior secured revolving credit facilities. The following tables set forth the average New York Mercantile Exchange prices for oil and natural gas for the
three and nine months ended September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Change
|
|
%
|
Average NYMEX daily prices:
|
|
|
|
|
|
|
|
Oil (per bbl)
|
$
|
69.43
|
|
|
$
|
48.20
|
|
|
$
|
21.23
|
|
|
44
|
%
|
Natural gas (per MMBtu)
|
$
|
2.87
|
|
|
$
|
2.95
|
|
|
$
|
(0.08
|
)
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
Change
|
|
%
|
Average NYMEX daily prices:
|
|
|
|
|
|
|
|
Oil (per bbl)
|
$
|
66.73
|
|
|
$
|
49.36
|
|
|
$
|
17.37
|
|
|
35
|
%
|
Natural gas (per MMBtu)
|
$
|
2.85
|
|
|
$
|
3.05
|
|
|
$
|
(0.20
|
)
|
|
(7
|
)%
|
Our derivative contracts are reported at fair value on our consolidated balance sheets and are sensitive to changes in the price of oil, natural gas and NGLs. Changes in our derivative assets and liabilities are reported in our consolidated statements of operations as “Gain (loss) on derivative contracts”, which include both the non-cash increase or decrease in the fair value of derivative contracts, as well as the effect of cash settlements of derivative contracts during the period. For the three months ended
September 30, 2018
(Successor), we recognized a net loss on our derivative contracts of
$11.2
million, which includes
$13.9
million in cash settlements paid for derivative contracts. We recognized a net loss on our derivative contracts of
$63.1
million in the Successor Period, which includes
$32.8
million in cash settlements paid for derivative contracts. The objective of our hedging program is to produce, over time, relative revenue stability. However, in the short term, both settlements
and fair value changes in our derivative contracts can significantly impact our results of operations, and we expect these gains and losses to continue to reflect the impact of changes in oil and natural gas prices.
Operations Update
Our STACK properties consist largely of contiguous leased acreage in Kingfisher County and Major County, Oklahoma, which is the eastern portion of the Anadarko Basin referred to as the STACK. This position is characterized by multiple productive zones located at total vertical depths between 4,000 feet and 8,000 feet. The legacy operations within our acreage are primarily shallow-decline, long-lived oil fields developed on 80-acre vertical well spacing associated with waterfloods in the Oswego, Big Lime and Manning Limestones. We continue to maintain production in these historical field pay zones.
During the three months ended
September 30, 2018
, we brought
53
operated horizontal wells on production of which
two
were funded through our joint development agreement with BCE-STACK Development LLC (“BCE”). We had
38
operated horizontal wells in progress as of
September 30, 2018
, of which
three
were funded through our joint development agreement with BCE. As of November 1, 2018,
16
of the
38
operated horizontal wells in progress as of
September 30, 2018
were on production.
As of
September 30, 2018
, we had
eight
drilling rigs concurrently operating in the STACK focused on drilling wells targeting oil production and/or Company-owned saltwater disposal wells. At the beginning of November 2018, we had
nine
drilling rigs operating in the STACK. We plan to continue targeting the Mississippian-age Osage, Meramec, and Manning formations and the Pennsylvanian-age Oswego formation with horizontal drilling. We will also participate in other horizontal wells as a non-operator, primarily targeting the Oswego Lime, Meramec and Osage formations.
Production from our STACK assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Successor
|
|
|
Predecessor
|
|
Three
|
|
|
Three
|
|
February 9, 2018
|
|
|
January 1, 2018
|
|
Nine
|
|
Months Ended
|
|
|
Months Ended
|
|
Through
|
|
|
Through
|
|
Months Ended
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
September 30, 2018
|
|
|
February 8, 2018
|
|
September 30, 2017
|
Average, net to our interest (MBOE/d)
|
33.4
|
|
|
|
20.4
|
|
|
28.5
|
|
|
|
23.4
|
|
|
20.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of oil
|
50
|
%
|
|
|
50
|
%
|
|
50
|
%
|
|
|
54
|
%
|
|
50
|
%
|
Percentage of NGLs
|
22
|
%
|
|
|
17
|
%
|
|
22
|
%
|
|
|
17
|
%
|
|
17
|
%
|
Percentage of oil and NGLs
|
72
|
%
|
|
|
67
|
%
|
|
72
|
%
|
|
|
71
|
%
|
|
67
|
%
|
Kingfisher’s midstream assets include approximately 400 miles of existing low and high-pressure pipelines, two cryogenic natural gas processing plants with a combined 260 MMcf/d of gas processing capacity, 90 MMcf/d in offtake processing capacity, field compression facilities, 50,000 barrels of crude storage, 90,000 gallons of onsite NGL bullet storage and marketing capabilities. Additionally, Kingfisher owns 145,000 Dth/d of firm transport residue pipeline capacity on nearby interstate pipelines, with Alta Mesa owning an additional 100,000 Dth/d of firm transport residue pipeline capacity.
On May 10, 2018, Kingfisher announced a partnership to develop a long-haul crude oil pipeline project, the Cimarron Express Pipeline, from the existing crude oil storage tank located at the Kingfisher Lincoln Terminal to a crude oil terminal site at Cushing, Oklahoma. Kingfisher will have a 50% equity interest in the pipeline project which will have an initial capacity of 90,000 barrels per day, expandable to over 175,000 barrels per day. Kingfisher has also begun the expansion of its natural gas gathering system into Major County, Oklahoma, with a high-pressure line to connect the existing system in Kingfisher County, Oklahoma to new low-pressure gathering pipelines in southeastern Major County.
During the three months ended
September 30, 2018
, Kingfisher gathered gas volumes of 116 MMcf/d and connected 49 new wells to the system. Kingfisher also had deemed gathered crude volumes of 8,263 bbl/d.
As described in Note 22, on
November 9, 2018, the Company’s Exploration & Production segment sold its produced water assets, consisting of over 200 miles of produced water gathering pipelines, and related facilities and equipment, along with 20 produced water disposal wells, surface leases, easements and other agreements, net of related obligations, to the Company’s Midstream segment
for $90.0 million in cash, subject to normal acquisition adjustments.
The purchase price was funded by the Midstream segment through additional borrowings under the Kingfisher Credit Facility.
In conjunction with the sale, Alta Mesa entered into a new fifteen-year water gathering and disposal agreement with Kingfisher Midstream.
Results of Operations
Business Segments
Our discussion of results of operations is presented on a segment basis. Our two reportable segments are (1) Exploration & Production (“E&P”) and (2) Midstream, which separately offer different products and services. We evaluate segment performance using operating income, which is defined as total operating and other revenue less total operating expenses. See
Note 21 – Business Segment Information
to our consolidated financial statements for further detail.
For the
Three Months Ended September 30, 2018
(Successor) Compared to
Three Months Ended September 30, 2017
(Predecessor)
The tables included below set forth financial information for the three months ended
September 30, 2018 (Successor)
and
September 30, 2017 (Predecessor)
. The amounts below exclude operating results related to discontinued operations and are shown net of inter-segment eliminations.
Exploration & Production Segment Results
Revenues
Our oil, natural gas and NGLs revenues vary as a result of changes in commodity prices and production volumes. The following table summarizes our E&P revenues and production data for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Three Months Ended
September 30, 2018
|
|
|
Three Months Ended
September 30, 2017
|
Revenues (in thousands, except per unit data)
|
|
|
|
|
Oil sales
|
$
|
107,253
|
|
|
|
$
|
44,201
|
|
Natural gas sales
|
11,959
|
|
|
|
9,583
|
|
Natural gas liquids sales
|
13,880
|
|
|
|
7,548
|
|
Total E&P sales revenues
|
$
|
133,092
|
|
|
|
$
|
61,332
|
|
|
|
|
|
|
Net production:
|
|
|
|
|
Oil (Mbbls)
|
1,539
|
|
|
|
938
|
|
Natural gas (MMcf)
|
5,116
|
|
|
|
3,729
|
|
NGLs (Mbbls)
|
685
|
|
|
|
322
|
|
Total (MBoe)
|
3,077
|
|
|
|
1,881
|
|
|
|
|
|
|
Average net daily production volume:
|
|
|
|
|
Oil (Mbbls/d)
|
16.7
|
|
|
|
10.2
|
|
Natural gas (MMcf/d)
|
55.6
|
|
|
|
40.5
|
|
NGLs (Mbbls/d)
|
7.4
|
|
|
|
3.5
|
|
Total (MBoe/d)
|
33.4
|
|
|
|
20.4
|
|
|
|
|
|
|
Average sales prices:
|
|
|
|
|
Oil (per bbl)
|
$
|
69.67
|
|
|
|
$
|
47.15
|
|
Effect of derivative settlements on average price (per bbl)
|
(8.88
|
)
|
|
|
0.99
|
|
Oil, net of hedging (per bbl)
|
$
|
60.79
|
|
|
|
$
|
48.14
|
|
Percentage of unhedged realized oil price to NYMEX
|
100
|
%
|
|
|
98
|
%
|
|
|
|
|
|
Natural gas (per Mcf)
|
$
|
2.34
|
|
|
|
$
|
2.57
|
|
Effect of derivative settlements on average price (per Mcf)
|
(0.04
|
)
|
|
|
0.27
|
|
Natural gas, net of hedging (per Mcf)
|
$
|
2.30
|
|
|
|
$
|
2.84
|
|
Percentage of unhedged realized natural gas price to NYMEX
|
82
|
%
|
|
|
87
|
%
|
|
|
|
|
|
Natural gas liquids (per bbl)
|
$
|
20.26
|
|
|
|
$
|
23.44
|
|
Effect of derivative settlements on average price (per bbl)
|
—
|
|
|
|
(1.24
|
)
|
Natural gas liquids, net of hedging (per bbl)
|
$
|
20.26
|
|
|
|
$
|
22.20
|
|
Percentage of unhedged realized oil price to NYMEX
|
29
|
%
|
|
|
49
|
%
|
Oil revenues
were
81%
and
72%
of our total E&P sales revenues for the three months ended
September 30, 2018
(Successor) and
2017
(Predecessor), respectively. Oil revenues for the three months ended
September 30, 2018
(Successor)
increased
approximately
$63.1
million, or
143%
, as compared to the three months ended
September 30, 2017
(Predecessor) due to
higher
average prices and an
increase
in production. The
higher
average prices are tied to the overall
increase
in oil commodity prices as discussed above. The
increase
in production for the three months ended
September 30, 2018
(Successor) was due to an increase
in wells drilled and new wells on production, as compared to the same period in 2017. Oil production was
50%
and
50%
of total BOE production volume for the three months ended
September 30, 2018
(Successor) and
2017
(Predecessor), respectively.
Natural gas revenues
were
9%
and
16%
of our total E&P sales revenues for the three months ended
September 30, 2018
(Successor) and
2017
(Predecessor), respectively. Natural gas revenues for the three months ended
September 30, 2018
(Successor)
increased
approximately
$2.4
million, or
25%
, as compared to
September 30, 2017
(Predecessor) due to an
increase
in production, partially offset by
lower
average prices. Natural gas production was
28%
and
33%
of total BOE production volume for the three months ended
September 30, 2018
(Successor) and
2017
(Predecessor), respectively. The
lower
average prices are tied to the overall
decrease
in natural gas commodity prices as discussed above.
Natural gas liquids revenues
were
10%
and
12%
of our total E&P sales revenues for the three months ended
September 30, 2018
(Successor) and
2017
(Predecessor), respectively. Natural gas liquids revenues for the three months ended
September 30, 2018
(Successor)
increased
approximately
$6.3
million, or
84%
, as compared to
September 30, 2017
(Predecessor) due to an
increase
in production, partially offset by
lower
prices. Natural gas liquids production was
22%
and
17%
of total BOE production volume for the three months ended
September 30, 2018
(Successor) and
2017
(Predecessor), respectively. The
increase
in production volume was primarily due to (i) increased BOE production of oil and natural gas and (ii) an amended contract, commencing in the second quarter of 2018, which allows for a greater recovery of ethane.
Gain (loss) on derivative contracts
presented in the table below represents cash settlements related to the commodity as well as fair value changes on our open oil, natural gas and natural gas liquids derivative contracts. The changes in fair value resulted from new positions and settlements that occurred during each period, as well as the relationship between contract prices and the associated forward curves.
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Three Months Ended
September 30, 2018
|
|
|
Three Months Ended
September 30, 2017
|
Gain (loss) on derivative contracts (in thousands):
|
|
|
|
|
Oil
|
$
|
(13,663
|
)
|
|
|
$
|
925
|
|
Natural gas
|
(204
|
)
|
|
|
994
|
|
Natural gas liquids
|
—
|
|
|
|
(398
|
)
|
Total cash settlements
|
(13,867
|
)
|
|
|
1,521
|
|
Valuation changes
|
2,655
|
|
|
|
(11,989
|
)
|
Total gain (loss) on derivative contracts
|
$
|
(11,212
|
)
|
|
|
$
|
(10,468
|
)
|
Operating Expenses
The following table summarizes selected operating expenses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Three Months Ended
September 30, 2018
|
|
|
Three Months Ended
September 30, 2017
|
Operating expenses (in thousands, except per BOE data):
|
|
|
|
|
Lease operating expense
|
$
|
16,351
|
|
|
|
$
|
10,407
|
|
Marketing and transportation expense
(1)
|
2,847
|
|
|
|
8,314
|
|
Production taxes
|
6,311
|
|
|
|
1,262
|
|
Workover expense
|
1,065
|
|
|
|
1,441
|
|
Depreciation, depletion and amortization expense
|
45,623
|
|
|
|
24,159
|
|
|
|
|
|
|
Production cost per BOE:
|
|
|
|
|
Lease operating expense
|
$
|
5.31
|
|
|
|
$
|
5.53
|
|
Marketing and transportation expense
|
0.93
|
|
|
|
4.42
|
|
Production taxes
|
2.05
|
|
|
|
0.67
|
|
Workover expense
|
0.35
|
|
|
|
0.77
|
|
Depreciation, depletion and amortization expense
|
14.83
|
|
|
|
12.84
|
|
(1)
Total marketing and transportation expense before inter-segment eliminations was $15,820 thousand for the three months ended
September 30, 2018
(Successor).
Lease operating expense
primarily consists of costs related to compression, chemicals, fuel, power and water and associated labor. Lease operating expense for the three months ended
September 30, 2018
(Successor)
increased
approximately
$5.9
million, or
57%
, as compared to the three months ended
September 30, 2017
(Predecessor), primarily due to increased costs associated with salt water disposal and additional wells drilled. The decrease in cost per BOE was primarily due to increased NGL production resulting from higher plant recovery rates and from an amended contract which allows for a greater recovery of ethane, commencing in the second quarter 2018.
Marketing and transportation expense
in the Predecessor Period largely represents throughput for our properties in the STACK at the Kingfisher processing facility. Marketing and transportation expense for the three months ended
September 30, 2018
(Successor)
decreased
approximately
$5.5
million, or
66%
, as compared to
September 30, 2017
(Predecessor) primarily due to inter-segment elimination with our midstream segment.
Production taxes
for the three months ended
September 30, 2018
(Successor)
increased
approximately
$5.0
million, or
400%
, as compared to the three months ended
September 30, 2017
(Predecessor), primarily due to an increase in oil and natural gas liquids revenue and an increase in the severance tax rate effective in the third quarter of 2018.
Workover expenses
associated with maintenance and remedial efforts to increase production
decreased
approximately
$0.4
million during the three months ended
September 30, 2018
(Successor), as compared to the three months ended
September 30, 2017
(Predecessor), primarily due to the timing and extent of related projects during each period.
Depreciation, depletion and amortization expense
was
higher
on a per BOE basis for the three months ended
September 30, 2018
(Successor) as compared to the three months ended
September 30, 2017
(Predecessor), primarily due to an increase in capital spending and in production in relation to current reserves.
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Three Months Ended
September 30, 2018
|
|
|
Three Months Ended
September 30, 2017
|
Exploration expense (in thousands):
|
|
|
|
|
Geological and geophysical costs
|
$
|
947
|
|
|
|
$
|
1,203
|
|
Exploration expense
|
149
|
|
|
|
2,445
|
|
Loss on ARO settlement
|
(67
|
)
|
|
|
1
|
|
Total exploration expense
|
$
|
1,029
|
|
|
|
$
|
3,649
|
|
Exploration expense
consists primarily of geological and geophysical personnel and data costs, lease rental expenses, expired leases, dry hole costs and settlements of asset retirement obligations (“ARO”) in excess of recorded estimates. Total exploration expense
decreased
$2.6
million, primarily due to a decrease in expired leaseholds of $2.3 million that were recognized in the Predecessor period.
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Three Months Ended
September 30, 2018
|
|
|
Three Months Ended
September 30, 2017
|
General and administrative expenses (in thousands):
|
|
|
|
|
Equity-based compensation expense
|
$
|
325
|
|
|
|
$
|
—
|
|
General and administrative expenses
|
7,593
|
|
|
|
17,445
|
|
Total general and administrative expenses
|
$
|
7,918
|
|
|
|
$
|
17,445
|
|
General and administrative expense
(“G&A”).
For the three months ended
September 30, 2018
(Successor), G&A
decreased
approximately
$9.5
million, or
55%
, as compared to the three months ended
September 30, 2017
(Predecessor), primarily due to (i) lower legal costs associated with a 2017 legal settlement of $4.7 million, (ii) lower costs related to non-recurring consulting fees attributable to the Contribution Agreement with SRII Opco of approximately $2.5 million incurred during the third quarter of 2017 and (iii) a reduction in employee incentive compensation expense during the three months ended September 30, 2018 as compared to the Predecessor Period.
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Three Months Ended
September 30, 2018
|
|
|
Three Months Ended
September 30, 2017
|
Interest expense (in thousands):
|
|
|
|
|
Alta Mesa senior secured revolving credit facility
|
$
|
528
|
|
|
|
$
|
3,139
|
|
Senior unsecured notes
|
8,613
|
|
|
|
10,187
|
|
Other
|
1,867
|
|
|
|
219
|
|
Total interest expense
|
$
|
11,008
|
|
|
|
$
|
13,545
|
|
Interest expense.
For the three months ended
September 30, 2018
(Successor), interest expense
decreased
$2.5
million, or
19%
, as compared to the three months ended
September 30, 2017
(Predecessor), primarily due to (i) lower interest on Alta Mesa’s senior secured revolving credit facility of
$2.6
million, resulting from the repayment of the predecessor Alta Mesa senior secured revolving credit facility in connection with the Business Combination, and (ii) bond premium amortization of
$1.2
million. These decreases were partially offset by the increase in other interest expense of $1.2 million related our joint development agreement with BCE.
Midstream Segment Results
Revenues
Our midstream revenues are primarily derived from natural gas gathering and processing, and crude oil gathering and transportation.
The following table summarizes our midstream revenues, net of inter-segment eliminations (in thousands):
|
|
|
|
|
|
Successor
|
|
Three Months Ended
September 30, 2018
|
Product sales
|
$
|
40,951
|
|
Gathering and processing revenue
|
21,075
|
|
Total segment revenues
|
62,026
|
|
Inter-segment eliminations
|
(31,248
|
)
|
Total Midstream revenues, net of inter-segment eliminations
|
$
|
30,778
|
|
|
|
Kingfisher system gas volumes (MMcf)
|
10,710
|
|
Kingfisher crude oil volumes (Mbbls)
|
760
|
|
Product sales
were recognized from the sale of processed residue gas, condensate and natural gas liquids. We process the natural gas on behalf of the producer and sell the resulting gas, condensate and NGLs at a market price. We remit to the producer an agreed-upon price from the resulting sales, which is treated as product expense. The product sales are recognized when sold to the third-party purchaser. The Company acquired Kingfisher (our Midstream business) on February 9, 2018 pursuant to the Business Combination.
Gathering and processing revenues
were driven by natural gas volumes gathered and processed and crude oil volumes gathered under commercial agreements and the fees assessed for such services. Certain contracts provide for fee revenue, which may be charged to a producer customer even if the underlying production volumes are not flowing to Kingfisher. The throughput of natural gas gathered and processed and crude oil gathered is derived from the level of drilling and well completion activity of the producer customers.
Expenses
The following table summarizes our midstream expenses, net of inter-segment eliminations (in thousands):
|
|
|
|
|
|
Successor
|
|
Three Months Ended
September 30, 2018
|
Plant operating expense
|
$
|
4,507
|
|
Product expense
(1)
|
22,830
|
|
Gathering and processing expense
|
2,334
|
|
Depreciation and amortization
|
7,254
|
|
Interest expense
|
1,340
|
|
(1)
Total product expense before inter-segment eliminations was $41,105 thousand.
Plant operating expense
represents expenses incurred to operate the natural gas gathering and processing facilities and the crude oil gathering and storage facilities, which primarily includes company labor and plant maintenance
.
Product expense
represents payments to producers for their agreed-upon percent of proceeds from the sale of processed natural gas, condensate and NGLs.
Gathering and processing expense
includes compression, gathering, processing and deficiency fees for third-party offtakes, along with fees for unutilized firm transport capacity.
Depreciation and amortization expense
includes depreciation on the midstream facilities and gathering system and amortization of customer contracts and relationships, all recorded at fair value as part of the Business Combination.
|
|
|
|
|
|
Successor
|
|
Three Months Ended September 30, 2018
|
General and administrative expenses (in thousands):
|
|
Equity-based compensation expense
|
$
|
277
|
|
General and administrative expenses
|
3,146
|
|
Total general and administrative expenses
|
$
|
3,423
|
|
General and administrative expense
primarily includes charges for equity-based compensation awards, labor-related costs and insurance.
For the Periods from February 9, 2018 Through
September 30, 2018
(Successor) and January 1, 2018 Through February 8, 2018 (Predecessor) Compared to the
Nine Months Ended September 30, 2017
(Predecessor)
The tables included below set forth financial information for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, which are distinct reporting periods as a result of the Business Combination. The amounts below exclude operating results related to discontinued operations and are shown net of inter-segment eliminations.
Exploration & Production Segment Results
Revenues
Our oil, natural gas and NGLs revenues vary as a result of changes in commodity prices and production volumes. The following table summarizes our E&P revenues and production data for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
February 9, 2018 Through September 30, 2018
|
|
|
January 1, 2018
Through
February 8, 2018
|
|
Nine Months Ended
September 30, 2017
|
Revenues (in thousands, except per unit data)
|
|
|
|
|
|
|
Oil sales
|
$
|
222,822
|
|
|
|
$
|
30,972
|
|
|
$
|
133,489
|
|
Natural gas sales
|
25,149
|
|
|
|
4,276
|
|
|
29,816
|
|
Natural gas liquids sales
|
28,835
|
|
|
|
4,000
|
|
|
21,201
|
|
Total E&P sales revenues
|
$
|
276,806
|
|
|
|
$
|
39,248
|
|
|
$
|
184,506
|
|
|
|
|
|
|
|
|
Net production:
|
|
|
|
|
|
|
Oil (Mbbls)
|
3,313
|
|
|
|
494
|
|
|
2,783
|
|
Natural gas (MMcf)
|
11,308
|
|
|
|
1,609
|
|
|
10,732
|
|
NGLs (Mbbls)
|
1,462
|
|
|
|
151
|
|
|
911
|
|
Total (MBoe)
|
6,660
|
|
|
|
914
|
|
|
5,483
|
|
|
|
|
|
|
|
|
Average net daily production volume:
|
|
|
|
|
|
|
Oil (Mbbls/d)
|
14.2
|
|
|
|
12.7
|
|
|
10.2
|
|
Natural gas (MMcf/d)
|
48.3
|
|
|
|
41.2
|
|
|
39.3
|
|
NGLs (Mbbls/d)
|
6.2
|
|
|
|
3.9
|
|
|
3.3
|
|
Total (MBoe/d)
|
28.5
|
|
|
|
23.4
|
|
|
20.1
|
|
|
|
|
|
|
|
|
Average sales prices:
|
|
|
|
|
|
|
Oil (per bbl)
|
$
|
67.26
|
|
|
|
$
|
62.68
|
|
|
$
|
47.97
|
|
Effect of derivative settlements on average price (per bbl)
|
(10.02
|
)
|
|
|
(6.44
|
)
|
|
0.30
|
|
Oil, net of hedging (per bbl)
|
$
|
57.24
|
|
|
|
$
|
56.24
|
|
|
$
|
48.27
|
|
Percentage of unhedged realized oil price to NYMEX
|
100
|
%
|
|
|
99
|
%
|
|
97
|
%
|
|
|
|
|
|
|
|
Natural gas (per Mcf)
|
$
|
2.22
|
|
|
|
$
|
2.66
|
|
|
$
|
2.78
|
|
Effect of derivative settlements on average price (per Mcf)
|
0.03
|
|
|
|
0.94
|
|
|
0.16
|
|
Natural gas, net of hedging (per Mcf)
|
$
|
2.25
|
|
|
|
$
|
3.60
|
|
|
$
|
2.94
|
|
Percentage of unhedged realized natural gas price to NYMEX
|
79
|
%
|
|
|
87
|
%
|
|
91
|
%
|
|
|
|
|
|
|
|
Natural gas liquids (per bbl)
|
$
|
19.72
|
|
|
|
$
|
26.41
|
|
|
$
|
23.27
|
|
Effect of derivative settlements on average price (per bbl)
|
—
|
|
|
|
—
|
|
|
(0.87
|
)
|
Natural gas liquids, net of hedging (per bbl)
|
$
|
19.72
|
|
|
|
$
|
26.41
|
|
|
$
|
22.40
|
|
Percentage of unhedged realized oil price to NYMEX
|
29
|
%
|
|
|
42
|
%
|
|
47
|
%
|
Oil revenues
were
81%
,
79%
and
72%
of our total E&P net sales revenues for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. Oil revenues for the Successor Period and the 2018 Predecessor Period increased compared to the 2017 Predecessor Period due to
higher
average prices and an
increase
in production in 2018. The
higher
average prices are tied to the overall
increase
in oil commodity prices as discussed above. The
increase
in production in 2018 was due to an increase in wells drilled and new wells on production. Oil production was approximately
50%
,
54%
and
50%
of total BOE production volume in the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively.
Natural gas revenues
were
9%
,
11%
and
16%
of our total E&P net sales revenues for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. Natural gas revenues for the Successor Period and the 2018 Predecessor Period decreased slightly compared to the 2017 Predecessor Period due to
lower
average prices, partially offset by an
increase
in production in 2018. The
lower
average prices are tied to the overall
decrease
in natural gas commodity prices as discussed above. Natural gas production was approximately
28%
,
29%
and
33%
of total BOE production volume for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively.
Natural gas liquid revenues
were
10%
,
10%
and
12%
of our total E&P net sales revenues for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. Natural gas liquid revenues for the Successor Period and the 2018 Predecessor Period increased compared to the 2017 Predecessor Period due to an
increase
in production during the period, partially offset by
lower
average prices. Natural gas liquids production was approximately
22%
,
17%
and
17%
of total BOE production volume for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. The
increase
in production volume was primarily due to (i) increased BOE production of oil and natural gas and (ii) an amended contract, commencing in the second quarter of 2018, which allows for a greater recovery of ethane.
Gain (loss) on sale of assets and other
primarily includes a gain for the sale of seismic data totaling $5.9 million in the Successor Period.
Gain (loss) on derivative contracts
presented in the table below represents cash settlements related to the commodity as well as fair value changes in our oil, natural gas and natural gas liquids derivative contracts. The changes in fair value resulted from new positions and settlements that occurred during each period, as well as the relationship between contract prices and the associated forward curves.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
February 9, 2018 Through September 30, 2018
|
|
|
January 1, 2018
Through
February 8, 2018
|
|
Nine Months Ended
September 30, 2017
|
Gain (loss) on derivative contracts (in thousands):
|
|
|
|
|
|
|
Oil
|
$
|
(33,190
|
)
|
|
|
$
|
(3,184
|
)
|
|
$
|
846
|
|
Natural gas
|
354
|
|
|
|
1,523
|
|
|
1,719
|
|
Natural gas liquids
|
—
|
|
|
|
—
|
|
|
(790
|
)
|
Total cash settlements
|
(32,836
|
)
|
|
|
(1,661
|
)
|
|
1,775
|
|
Valuation changes
|
(30,241
|
)
|
|
|
8,959
|
|
|
36,249
|
|
Total gain (loss) on derivative contracts
|
$
|
(63,077
|
)
|
|
|
$
|
7,298
|
|
|
$
|
38,024
|
|
Operating Expenses
The following table summarizes selected operating expenses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
February 9, 2018 Through September 30, 2018
|
|
|
January 1, 2018
Through
February 8, 2018
|
|
Nine Months Ended
September 30, 2017
|
Operating expenses (in thousands, except per BOE data):
|
|
|
|
|
|
|
Lease operating expense
|
$
|
37,347
|
|
|
|
$
|
4,485
|
|
|
$
|
32,897
|
|
Marketing and transportation expense
(1)
|
6,041
|
|
|
|
3,725
|
|
|
20,486
|
|
Production taxes
|
10,332
|
|
|
|
953
|
|
|
3,712
|
|
Workover expense
|
2,643
|
|
|
|
423
|
|
|
3,131
|
|
Depreciation, depletion and amortization expense
|
83,068
|
|
|
|
11,784
|
|
|
63,247
|
|
|
|
|
|
|
|
|
Production cost per BOE:
|
|
|
|
|
|
|
Lease operating expense
|
$
|
5.61
|
|
|
|
$
|
4.91
|
|
|
$
|
6.00
|
|
Marketing and transportation expense
|
0.91
|
|
|
|
4.08
|
|
|
3.74
|
|
Production taxes
|
1.55
|
|
|
|
1.04
|
|
|
0.68
|
|
Workover expense
|
0.40
|
|
|
|
0.46
|
|
|
0.57
|
|
Depreciation, depletion and amortization expense
|
12.47
|
|
|
|
12.89
|
|
|
11.54
|
|
(1)
Total marketing and transportation expense before inter-segment eliminations was $32,608 thousand in the Successor Period.
Lease operating expense
primarily consists of costs related to compression, chemicals, fuel, power and water and associated labor. Lease operating expense for the Successor Period and the 2018 Predecessor Period increased compared to the 2017 Predecessor Period due to increased costs associated with salt water disposal and additional wells drilled. The lease operating expense cost per BOE for the Successor Period and 2018 Predecessor Period was lower as compared to the 2017 Predecessor Period primarily due to increased NGL production resulting from higher BOE production of oil and natural gas and from an amended contract which allows for a greater recovery of ethane, commencing in the second quarter of 2018.
Marketing and transportation expense
in the Predecessor Periods largely represents throughput for our properties in the STACK at the Kingfisher processing facility. Marketing and transportation expense in the Successor Period was lower due to inter-segment elimination with our midstream segment.
Production taxes
for the Successor Period and 2018 Predecessor Period are higher as compared to the 2017 Predecessor Period primarily due to the increase in oil and natural gas liquids revenue and an increase in the severance tax rate effective in the third quarter of 2018.
Workover expenses
associated with maintenance and remedial efforts to increase production
decreased
slightly for the Successor Period and 2018 Predecessor Period, as compared to the 2017 Predecessor Period primarily due to the timing and extent of related projects during each period.
Depreciation, depletion and amortization expense
was higher on a per BOE basis for the Successor Period as compared to the 2018 Predecessor Period and the 2017 Predecessor Period, primarily due to an increase in capital spending and in production in relation to current reserves.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
February 9, 2018 Through September 30, 2018
|
|
|
January 1, 2018
Through
February 8, 2018
|
|
Nine Months Ended
September 30, 2017
|
Exploration expense (in thousands):
|
|
|
|
|
|
|
Geological and geophysical costs
|
$
|
2,537
|
|
|
|
$
|
2,440
|
|
|
$
|
4,783
|
|
Exploratory dry hole costs
|
—
|
|
|
|
(45
|
)
|
|
—
|
|
Exploration expense
|
10,931
|
|
|
|
1,179
|
|
|
7,068
|
|
Loss on ARO settlements
|
599
|
|
|
|
59
|
|
|
37
|
|
Total exploration expense
|
$
|
14,067
|
|
|
|
$
|
3,633
|
|
|
$
|
11,888
|
|
Exploration expense
consists primarily of geological and geophysical personnel and data costs, lease rental expenses, expired leases, dry hole costs and settlements of asset retirement obligations in excess of recorded estimates. Total exploration expense for the Successor Period and the 2018 Predecessor Period increased compared to the 2017 Predecessor Period, primarily due to an increase in expired leaseholds of $5.2 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
February 9, 2018 Through September 30, 2018
|
|
|
January 1, 2018
Through
February 8, 2018
|
|
Nine Months Ended
September 30, 2017
|
General and administrative expense (in thousands):
|
|
|
|
|
|
|
Equity-based compensation expense
|
$
|
6,714
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
General and administrative expenses
|
50,474
|
|
|
|
24,352
|
|
|
35,474
|
|
Total general and administrative expenses
|
$
|
57,188
|
|
|
|
$
|
24,352
|
|
|
$
|
35,474
|
|
General and administrative expense
includes non-cash charges for equity-based compensation awards in the Successor Period. See
Note 17 — Equity-Based Compensation (Successor)
for further detail on equity-based compensation awards granted during the Successor Period. No such awards were made during the Predecessor Periods. G&A expenses for the Successor Period and the 2018 Predecessor Period included $25.7 million and $17.0 million, respectively, of transaction expenses primarily attributable to the consummation of the Business Combination.
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
February 9, 2018 Through September 30, 2018
|
|
|
January 1, 2018
Through
February 8, 2018
|
|
Nine Months Ended
September 30, 2017
|
Interest expense (in thousands):
|
|
|
|
|
|
|
Alta Mesa senior secured revolving credit facility
|
$
|
608
|
|
|
|
$
|
867
|
|
|
$
|
6,880
|
|
Senior unsecured notes
|
22,148
|
|
|
|
3,399
|
|
|
30,534
|
|
Other
|
3,809
|
|
|
|
1,245
|
|
|
751
|
|
Total interest expense
|
$
|
26,565
|
|
|
|
$
|
5,511
|
|
|
$
|
38,165
|
|
Interest expense.
Interest expense in the Successor Period includes amortization of our deferred financing cost related to Alta Mesa’s senior secured revolving credit facility, interest on Alta Mesa’s senior unsecured notes, net of bond premium amortization of $
3.3
million, and other interest, such as commitment fees and interest expense related our joint development agreement with BCE. The amounts outstanding under the Alta Mesa senior secured revolving credit facility during the Predecessor Periods were repaid in full at the time of the Business Combination.
Midstream Segment Results
Revenues
Our midstream revenues are primarily derived from natural gas gathering and processing, and crude oil gathering and transportation.
The following table summarizes our midstream revenues, net of inter-segment eliminations (in thousands):
|
|
|
|
|
|
Successor
|
|
February 9, 2018 Through September 30, 2018
|
Product sales
|
$
|
87,763
|
|
Gathering and processing revenue
|
45,153
|
|
Total segment revenues
|
132,916
|
|
Inter-segment eliminations
|
(63,680
|
)
|
Total Midstream revenues, net of inter-segment eliminations
|
$
|
69,236
|
|
|
|
Kingfisher gas volumes (MMcf)
|
23,654
|
|
Kingfisher crude oil gas volumes (Mbbls)
|
1,193
|
|
Product sales
were recognized from the sale of processed residue gas, condensate and NGLs. We process the natural gas on behalf of the producer and sell the resulting gas, condensate and NGLs at a market price. We remit to the producer an agreed-upon price from the resulting sales, which is treated as product expense. The product sales are recognized when sold to the third-party purchaser. The Company acquired Kingfisher (our Midstream business) on February 9, 2018 pursuant to the Business Combination.
Gathering and processing revenues
were driven by natural gas volumes gathered and processed and crude oil volumes gathered under its commercial agreements and the fees assessed for such services. Certain contracts provide for fee revenue, which may be charged to a producer customer even if the underlying production volumes are not flowing to Kingfisher. The throughput of natural gas gathered and processed and crude oil gathered is derived from level of drilling and well completion activity of the producer customers.
Expenses
The following table summarizes our midstream operating expense, net of inter-segment eliminations (in thousands):
|
|
|
|
|
|
Successor
|
|
February 9, 2018 Through September 30, 2018
|
Plant operating expense
|
$
|
8,407
|
|
Product expense
(1)
|
50,433
|
|
Gathering and processing expense
|
7,912
|
|
Depreciation and amortization
|
19,159
|
|
Interest expense
|
3,006
|
|
(1)
Total product expense before inter-segment eliminations was $87,546 thousand.
Plant operating expense
represents expenses incurred to operate the natural gas gathering and processing facilities and the crude oil gathering and storage facilities, which primarily includes company labor and plant maintenance
.
Product expense
represents payments to producers for their agreed-upon percent of proceeds from the sale of processed natural gas, condensate and NGLs.
Gathering and processing expense
includes compression, gathering, processing and deficiency fees for third-party offtakes, along with fees for unutilized firm transport capacity.
Depreciation and amortization expense
includes depreciation on the midstream facilities and gathering system and amortization of customer contracts and relationships, all recorded at fair value as part of the Business Combination.
|
|
|
|
|
|
Successor
|
|
February 9, 2018 Through September 30, 2018
|
General and administrative expenses (in thousands):
|
|
Equity-based compensation expense
|
$
|
784
|
|
General and administrative expenses
|
8,952
|
|
Total general and administrative expenses
|
$
|
9,736
|
|
General and administrative expense
primarily includes charges for equity-based compensation awards, labor-related costs and insurance.
Liquidity and Capital Resources
Our principal requirements for capital are to fund our day-to-day operations, exploration and development activities, and to satisfy our contractual obligations, primarily for the payment of interest on our debt and any amounts owed during the period related to our hedging positions. Our main sources of liquidity and capital resources come from cash flows generated from operations and borrowings under the Alta Mesa Credit Facility and the Kingfisher Credit Facility.
Our future drilling plans, plans of our drilling operators and capital budgets are subject to change based upon various factors, some of which are beyond our control, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, actions of our operators, gathering system and pipeline transportation constraints and regulatory approvals. A deferral of planned capital expenditures, particularly with respect to drilling and completing new wells, could result in a reduction in anticipated production, revenues and cash flows. Additionally, if we curtail our drilling program, we may lose a portion of our acreage through lease expirations. However, since a large percentage of our acreage is held for production, we have the ability to materially increase or decrease our drilling and recompletion budget in response to market conditions with decreased risk of losing significant acreage. In addition, we may be required to reclassify some portion of our reserves currently booked as proved undeveloped reserves to no longer be considered proved reserves if such a deferral of planned capital expenditures means we will be unable to develop such reserves within five years of their initial booking.
We strive to maintain financial flexibility and may access the debt or equity capital markets as necessary to facilitate drilling on our large undeveloped acreage position and permit us to selectively expand our acreage position. In the event our cash flows are materially less than anticipated and other sources of capital we historically have utilized are not available on acceptable terms, we may curtail our capital spending.
We expect to fund our capital budget for the remainder of 2018 predominantly with cash flows from operations, borrowings under the Alta Mesa Credit Facility and the Kingfisher Credit Facility and drilling and completion capital funded through our joint development agreement with BCE. As we execute our business strategy, we will continually monitor the capital resources available to meet future financial obligations and planned capital expenditures. We believe our cash flows provided by operating activities, cash on hand and availability under the Alta Mesa Credit Facility and the Kingfisher Credit Facility will provide us with the financial flexibility and wherewithal to meet our cash requirements, including normal operating needs, and to pursue our currently planned and future development activities. However, future cash flows are subject to a number of variables, including the level of oil and natural gas production and prices, and significant additional capital expenditures will be required to more fully develop our properties and acquire additional properties. We cannot assure you that operations and other needed capital will be available on acceptable terms, or at all.
Alta Mesa Senior Secured Revolving Credit Facility
In connection with the consummation of the Business Combination, all indebtedness at that time under the Alta Mesa senior secured revolving credit facility was repaid in full. On February 9, 2018, Alta Mesa entered into the Eighth Amended and Restated Senior Secured Revolving Credit Facility with Wells Fargo Bank, National Association, as the administrative agent (the “Alta Mesa Credit Facility”). The Alta Mesa Credit Facility, which will mature on February 9, 2023, is for an aggregate of $1.0 billion with a current borrowing base of
$400.0
million. The Alta Mesa Credit Facility does not permit Alta Mesa to borrow funds if at the time of such borrowing it is not in compliance with the financial covenants set forth in the Alta Mesa Credit Facility. As of
September 30, 2018
, Alta Mesa had
$80.0 million
of borrowings under the Alta Mesa Credit Facility and had
$21.9 million
of outstanding letters of credit, leaving a total borrowing capacity of
$298.1
million available for future use.
On November 13, 2018, the remaining amount available under the Alta Mesa Credit Facility totaled $270.1 million reflecting borrowings for capital spending and working capital needs, net of proceeds received from the sale of the produced water assets from the Exploration & Production segment to the Midstream segment as described further in Note 22 of the Notes to Consolidated Financial Statements.
As of
September 30, 2018
, Alta Mesa was in compliance with the financial ratios specified in the Alta Mesa Credit Facility.
Kingfisher Senior Secured Revolving Credit Facility
Effective May 30, 2018, Kingfisher entered into a
$300.0
million amended and restated senior secured revolving credit facility with Wells Fargo Bank, National Association, as the administrative agent and letter of credit issuer, and certain other financial institutions, as lenders (“the Kingfisher Credit Facility”) which replaced the prior credit facility with ABN AMRO. The Kingfisher Credit Facility matures on May 30, 2023.
As of
September 30, 2018
, there were
$66.0 million
of borrowings outstanding under the Kingfisher Credit Facility and no outstanding letters of credit, leaving a total borrowing capacity of
$234.0
million remaining available for future use. In November 2018, $90.0 million of additional borrowings were made under the Kingfisher Credit Facility to fund the acquisition of the produced water assets described further in Note 22 of the Notes to Consolidated Financial Statements.
Availability under the Kingfisher Credit Facility will be redetermined each fiscal quarter as the lesser of (1) the
$300.0
million commitment under the Kingfisher Credit Facility and (2) the maximum amount that, together with the aggregate amount of all then-outstanding consolidated funded indebtedness (other than indebtedness under the Kingfisher Credit Facility) would result in Kingfisher being in pro forma compliance with all applicable leverage ratios at such time.
Kingfisher was also in compliance with the financial ratios specified in the Kingfisher Credit Facility at
September 30, 2018
.
S
enior Unsecured Notes
Alta Mesa has
$500.0 million
in aggregate principal amount of
7.875%
senior unsecured notes (the “senior notes”), which were issued at par by Alta Mesa and its wholly owned subsidiary Alta Mesa Finance Services Corp. during the fourth quarter of 2016. The senior notes were issued in a private placement but were exchanged for substantially identical registered senior notes in November 2017.
The senior notes will mature on
December 15, 2024
, and interest is payable semi-annually on
June 15
and
December 15
of each year. As described further in Note 12 of the Notes to Consolidated Financial Statements, Alta Mesa may, from time to time, redeem certain amounts of the outstanding senior notes at specified amounts in relation to the principal balance of the notes redeemed.
As of
September 30, 2018
, Alta Mesa was in compliance with the indentures governing the senior notes.
Tax Receivable Agreement
. As described further in Note 12 of the Notes to Consolidated Financial Statements, we are party to a Tax Receivable Agreement with SRII Opco, the AM Contributor, and the Riverstone Contributor. This agreement generally provides for the payment by us of 85% of the amount of net cash savings, if any, in U.S. federal, state and local income tax that we actually realize (or are deemed to realize in certain circumstances) in periods after the Business Combination as a result of (i) certain tax basis increases resulting from the exchange of SRII Opco Common Units for AMR Class A Common Stock (or, in certain circumstances, cash) pursuant to the redemption right or our right to effect a direct exchange of SRII Opco Common Units under the SRII Opco LPA, other than such tax basis increases allocable to assets held by Kingfisher or otherwise used in Kingfisher’s midstream business, and (ii) interest paid or deemed to be paid by us as a result of, and additional tax basis arising from, any payments we make under the Tax Receivable Agreement. We will retain the benefit of the remaining 15% of these cash savings.
As of
September 30, 2018
,
no exchange of SRII Common Units has occurred, which would trigger a payment under the Tax Receivable Agreement, and there has not been an early termination under the Tax Receivable Agreement; therefore, we have not recorded a Tax Receivable Agreement liability at this time.
Cash flow provided by operating activities
Cash provided by operating activities was
$2.5
million,
$26.5
million and
$56.3
million for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. Cash-based items of net income (loss) including revenues (exclusive of unrealized commodity gains or losses), operating expenses and taxes, general and administrative expenses, and the cash portion of our interest expense were approximately
$105.2
million,
$(2.4)
million, and
$65.8
million for the Successor Period, 2018 Predecessor Period and the 2017 Predecessor Period, respectively. Changes in working capital and other assets and liabilities resulted in a decrease in cash of
$102.7
million and
$9.5
million for the Successor Period and the 2017 Predecessor Period, respectively. Changes in working capital and other assets and liabilities during the 2018 Predecessor Period resulted in an increase in cash of approximately
$28.9
million.
Cash flow used in investing activities
Investing activities used cash of approximately
$282.0
million in the Successor Period. Proceeds withdrawn from the Trust account provided cash of approximately
$1,042.7 million
, offset by net cash used of approximately
$791.8 million
attributable to the Business Combination. During the Successor Period, approximately
$523.6
million of cash was used to fund capital expenditures for property, plant and equipment and approximately
$9.3 million
was related to our investment in the Cimarron Express pipeline. Cash used for capital expenditures for property and equipment totaled approximately
$38.1
million during the 2018 Predecessor Period. During the 2017 Predecessor Period, cash used for capital expenditures for property and equipment totaled approximately
$244.3
million and acquisitions totaled
$55.2 million
. Additionally, during the 2017 Predecessor Period, we entered into an interest bearing promissory note receivable with our affiliate Northwest Gas Processing, LLC for approximately
$1.5 million
.
Cash flow provided by financing activities
Cash provided by financing activities was
$312.2
million in the Successor Period. Proceeds received from the issuance of Class A common stock and warrants pursuant to a forward purchase agreement were approximately
$400.0
million and proceeds from the issuance of long-term debt totaled
$162.5
million. This was offset by net cash used of approximately
$235.5
million for repayment of borrowings under the Alta Mesa and Kingfisher credit facilities, payments of deferred underwriting compensation, additional deferred financing costs, and repayment of a sponsor note. The Successor Period also included cash used for the repurchase and retirement of Class A common shares totaling approximately
$14.8 million
, pursuant to a
$50.0 million
Board authorized stock repurchase program. Cash provided by financing activities totaled
$16.9
million and
$242.1
million for the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. The 2018 Predecessor Period included proceeds from the issuance of long-term debt totaling
$60.0
million, offset by repayments of long-term debt totaling
$43.0
million. The 2017 Predecessor Period included proceeds from the issuance of long-term debt totaling
$286.1
million and capital contributions totaling
$207.9
million, partially offset by repayments of long-term debt totaling
$251.6
million.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
For information regarding our exposure to certain market risks, see “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our 2017 Annual Report. There have been no material changes to the disclosure regarding market risks other than as noted below. See Part I, Item 1,
Notes 7 and 8
to our consolidated financial statements for a description of our outstanding derivative contracts at the most recent reporting date.
The fair value of our commodity derivative contracts at
September 30, 2018
was a net liability of
$41.5
million. A 10% increase or decrease in oil, natural gas and natural gas liquids prices with all other factors held constant would result in a decrease or increase, respectively, in the estimated fair value (generally correlated to our estimated future net cash flows from such instruments) of our commodity derivative contracts of approximately $27.6 million (decrease in value) or $31.2 million (increase in value), respectively, as of
September 30, 2018
.
We are subject to interest rate risk on our variable interest rate borrowings. Although in the past we have used interest rate swaps to mitigate the effect of fluctuating interest rates on interest expense, we currently have no open interest rate derivative contracts. A 1% increase in interest rates would increase interest expense on Kingfisher’s senior secured credit facility by
$0.7
million and would increase interest expense on the Alta Mesa credit facility by $
0.8
million, based on the balances outstanding at
September 30, 2018
.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
September 30, 2018
to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
As discussed in this quarterly report, on February 9, 2018, we completed the acquisition of Alta Mesa and Kingfisher. We are currently integrating these acquisitions into our control environment. In executing this integration, we are analyzing, evaluating and, where appropriate, making changes in controls and procedures in a manner commensurate with the size, complexity and scale of operations subsequent to the acquisitions. We expect to complete the Kingfisher integration in fiscal year 2019 and consequently expect to exclude Kingfisher from our assessment of internal control over financial reporting as of December 31, 2018. The evaluation of internal controls over financial reporting for the Company has required and will continue to require significant time and resources from management and other personnel.
Kingfisher accounted for
33%
of our consolidated total assets at September 30, 2018 and
19%
and
20%
of our consolidated revenues for the three months ended September 30, 2018 and the Successor Period, respectively.
Other than the changes described above, there have been no changes in our internal control over financial reporting during the three months ended
September 30, 2018
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.