Form 8-K/A NORTHERN OIL & GAS, INC. For: Jul 01
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 1, 2019
NORTHERN OIL AND GAS, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 001-33999 | 95-3848122 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) | (IRS Employer Identification No.) |
601 Carlson Parkway, Suite 990 Minnetonka, Minnesota |
55305 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code (952) 476-9800
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
Common Stock, par value $0.001 | NOG | NYSE American |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
EXPLANATORY NOTE
On July 1, 2019, Northern Oil and Gas, Inc. (the Company) completed its acquisition (the VEN Bakken Acquisition) of certain oil and gas properties and interests from VEN Bakken, LLC (VEN Bakken), a wholly-owned subsidiary of Flywheel Bakken, LLC (Flywheel Bakken).
This Amendment No. 1 on Form 8-K/A is being filed by the Company to amend its current report on Form 8-K filed with the Securities and Exchange Commission (SEC) on July 2, 2019 (the Original Report), solely to provide the disclosures required by Item 9.01 of Form 8-K that were omitted from the Original Report, including the required audited and unaudited financial statements of Flywheel Bakken as well as the required pro forma financial information. Except as otherwise provided herein, the disclosures made in the Original Report remain unchanged.
Item 9.01. | Financial Statements and Exhibits. |
(a) Financial Statements of Businesses Acquired.
The audited consolidated financial statements of Flywheel Bakken as of December 31, 2018 and 2017, and for the year ended December 31, 2018 and the period from March 27, 2017 (inception) to December 31, 2017, are filed as Exhibit 99.2 and incorporated by reference herein.
The unaudited consolidated financial statements of Flywheel Bakken as of June 30, 2019 and for the three and six month periods ended June 30, 2019 and 2018 are filed as Exhibit 99.3 and incorporated by reference herein.
(b) Pro Forma Financial Information.
The unaudited pro forma financial statements of the Company for the year ended December 31, 2018, and as of and for the six months ended June 30, 2019, are furnished as Exhibit 99.4 hereto and incorporated herein by reference. The unaudited pro forma financial statements furnished herewith give effect to the VEN Bakken Acquisition.
(d) Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: September 13, 2019 | NORTHERN OIL AND GAS, INC. | |||||
By | /s/ Erik J. Romslo | |||||
Erik J. Romslo | ||||||
Executive Vice President, General Counsel and Secretary |
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following registration statements:
(1) | Registration Statement (Form S-3 No. 333-225828) |
(2) | Registration Statement (Form S-3 No. 333-225832) |
(3) | Registration Statement (Form S-3 No. 333-225835) |
(4) | Registration Statement (Form S-3 No. 333-227945) |
(5) | Registration Statement (Form S-4 No. 333-216887) |
(6) | Registration Statement (Form S-8 No. 333-188999) |
(7) | Registration Statement (Form S-8 No. 333-205617) |
(8) | Registration Statement (Form S-8 No. 333-212929) |
(9) | Registration Statement (Form S-8 No. 333-227948) |
of our report dated April 26, 2019, with respect to the consolidated financial statements of Flywheel Bakken, LLC as of December 31, 2018 and 2017, and for the year ended December 31, 2018 and the period from March 27, 2017 (inception) to December 31, 2017, included in this Current Report on Form 8-K/A of Northern Oil and Gas, Inc.
/s/ Ernst & Young LLP
Tulsa, Oklahoma
September 13, 2019
EXHIBIT 99.2
Report of Independent Auditors
The Members
Flywheel Bakken, LLC
We have audited the accompanying consolidated financial statements of Flywheel Bakken, LLC and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of operations, members equity and cash flows for the year ended December 31, 2018 and for the period from March 27, 2017 (inception) to December 31, 2017, and the related notes to the consolidated financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Flywheel Bakken, LLC and subsidiaries, at December 31, 2018 and 2017, and the consolidated results of their operations and their cash flows for the year ended December 31, 2018 and for the period from March 27, 2017 (inception) to December 31, 2017 in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Tulsa, OK
April 26, 2019
Flywheel Bakken, LLC
Consolidated Balance Sheet
December 31, 2018 |
December 31, 2017 |
|||||||
(in thousands) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,416 | $ | 3,462 | ||||
Accounts receivable oil, natural gas, and NGLs |
18,880 | 9,230 | ||||||
Accounts receivable affiliated parties |
2,125 | | ||||||
Commodity derivatives |
9,471 | | ||||||
Other current assets |
618 | 315 | ||||||
|
|
|
|
|||||
Total current assets |
32,510 | 13,007 | ||||||
|
|
|
|
|||||
Property and equipment: |
||||||||
Oil and gas properties, successful efforts method |
302,551 | 272,270 | ||||||
Less: accumulated depreciation, depletion and amortization |
(42,098 | ) | (2,751 | ) | ||||
|
|
|
|
|||||
Oil and gas properties, net |
260,453 | 269,519 | ||||||
Other property and equipment, net |
| 197 | ||||||
Other noncurrent assets: |
||||||||
Commodity derivatives |
9,764 | | ||||||
Other assets |
631 | 903 | ||||||
|
|
|
|
|||||
Total assets |
$ | 303,358 | $ | 283,626 | ||||
|
|
|
|
|||||
Liabilities and members equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 7,211 | $ | 11,307 | ||||
Commodity derivatives |
| 10,469 | ||||||
|
|
|
|
|||||
Total current liabilities |
7,211 | 21,776 | ||||||
|
|
|
|
|||||
Long-term liabilities: |
||||||||
Revolving credit facility |
137,885 | 141,105 | ||||||
Asset retirement obligations |
974 | 857 | ||||||
Commodity derivatives |
1,386 | 9,676 | ||||||
|
|
|
|
|||||
Total long-term liabilities |
140,245 | 151,638 | ||||||
|
|
|
|
|||||
Members capital |
155,902 | 110,212 | ||||||
|
|
|
|
|||||
Total liabilities and members capital |
$ | 303,358 | $ | 283,626 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Flywheel Bakken, LLC
Consolidated Statement of Operations
For the year ended December 31, 2018 |
Period From March 27, 2017 (inception) to December 31, 2017 |
|||||||
(in thousands) | ||||||||
Revenues and other |
||||||||
Oil, natural gas, and NGL sales |
$ | 183,563 | $ | 10,501 | ||||
Gain (loss) on derivatives, net |
19,402 | (20,170 | ) | |||||
|
|
|
|
|||||
Total revenue |
202,965 | (9,669 | ) | |||||
Operating costs and expenses |
||||||||
Lease operating expense |
23,037 | 764 | ||||||
Transportation, gathering, and processing |
19,355 | 1,111 | ||||||
Production and ad valorem taxes |
15,458 | 873 | ||||||
Exploration and other expense |
8 | 50 | ||||||
General and administrative expense |
4,967 | 4,392 | ||||||
Depreciation, depletion, amortization, and accretion |
39,473 | 2,811 | ||||||
Acquisition costs |
| 1,123 | ||||||
|
|
|
|
|||||
Total operating costs and expenses |
102,298 | 11,124 | ||||||
Other income (expense), net: |
||||||||
Other income |
723 | 4 | ||||||
Interest expense |
(7,561 | ) | (526 | ) | ||||
|
|
|
|
|||||
Other income (expense), net: |
(6,838 | ) | (522 | ) | ||||
|
|
|
|
|||||
Net income (loss) |
$ | 93,829 | $ | (21,315 | ) | |||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Flywheel Bakken, LLC
Consolidated Statement of Members Capital
Total | ||||
(in thousands) | ||||
Balance at inception, March 27, 2017 |
$ | | ||
Capital contributions |
131,527 | |||
Net loss |
(21,315 | ) | ||
|
|
|||
Balance at December 31, 2017 |
110,212 | |||
Distributions |
(48,139 | ) | ||
Net income |
93,829 | |||
|
|
|||
Balance at December 31, 2018 |
$ | 155,902 | ||
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Flywheel Bakken, LLC
Consolidated Statement of Cash Flows
For the year ended December 31, 2018 |
Period From March 27, 2017 (inception) to December 31, 2017 |
|||||||
(in thousands) | ||||||||
Operating activities |
||||||||
Net income (loss) |
$ | 93,829 | $ | (21,315 | ) | |||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
Depreciation, depletion, and amortization |
39,400 | 2,805 | ||||||
Accretion of asset retirement obligations |
73 | 6 | ||||||
Amortization of debt issuance costs |
395 | 32 | ||||||
Gain (loss) on derivatives, net |
(20,091 | ) | 20,170 | |||||
Settlement paid on derivatives |
(18,352 | ) | (114 | ) | ||||
Changes in assets and liabilities: |
||||||||
Increase in accounts receivable |
(11,775 | ) | (8,530 | ) | ||||
Decrease (increase) in other current and non-current assets |
419 | (269 | ) | |||||
(Decrease) increase in accounts payable and accrued liabilities |
(3,772 | ) | 2,823 | |||||
Increase in ARO liability |
44 | | ||||||
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
80,170 | (4,392 | ) | |||||
Investing activities |
||||||||
Additions to oil and natural gas properties acquisitions |
| (263,281 | ) | |||||
Additions to oil and natural gas properties operations |
(30,604 | ) | (397 | ) | ||||
Proceeds from distribution of other property and equipment, net |
143 | (250 | ) | |||||
|
|
|
|
|||||
Net cash used in investing activities |
(30,461 | ) | (263,928 | ) | ||||
Financing activities |
||||||||
(Distributions to) contributions from members, net of notes receivable |
(48,139 | ) | 130,710 | |||||
Borrowings on revolving credit facility |
63,100 | 143,000 | ||||||
Payments on revolving credit facility |
(66,600 | ) | | |||||
Debt issuance costs |
(116 | ) | (1,928 | ) | ||||
|
|
|
|
|||||
Net cash (used in) provided by financing activities |
(51,755 | ) | 271,782 | |||||
|
|
|
|
|||||
Net increase in cash and cash equivalents |
(2,046 | ) | 3,462 | |||||
Cash and cash equivalents at beginning of period |
3,462 | | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of year |
$ | 1,416 | $ | 3,462 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Flywheel Bakken, LLC
Notes to Consolidated Financial Statements
1. Organization and Business
Flywheel Bakken, LLC (Flywheel Bakken or the Company), previously Valorem Energy, LLC, a Delaware limited liability company, is a privately-owned exploration and production company formed on March 27, 2017 (Inception), to acquire, develop, and produce oil and gas properties. Flywheel Bakkens wholly owned subsidiaries include Flywheel Bakken Operating, LLC (Flywheel Bakken Operating), previously Valorem Energy Operating, LLC, Valorem Energy Member, LLC (Valorem Member), Valorem Energy Management, LLC (Valorem Management), and VEN Bakken, LLC (VEN Bakken), all of which are Delaware limited liability companies.
Funding sources for the Companys operations and acquisitions of properties are accomplished through member contributions by the Kayne Private Energy Income Fund, L.P. (KPEIF), affiliates of KPEIF, and members of management (Management), (collectively the Members), the utilization of its own cash resources, or any combination of these sources. The Companys oil and gas properties are primarily located in the state of North Dakota with some minor interests in South Dakota and Montana.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Flywheel Bakken and its wholly owned subsidiaries, Flywheel Bakken Operating, Valorem Member, Valorem Management, and VEN Bakken. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S. 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates of oil and gas reserves, as determined by independent petroleum engineers, are continually subject to revision based on price, production history, and other factors. Changes in the estimated oil and gas reserves utilized for depreciation, depletion, and amortization or the estimated future cash flows attributable to the reserves that are utilized for impairment assessments could have a significant impact on the future results of operations. Actual results could differ from those estimates.
Financial Instruments
The Companys financial instruments are measured at fair value and consist primarily of cash and cash equivalents, an interest swap, commodity derivative contracts, accounts receivable, accounts payable, and the revolving credit facility. The Companys derivative instruments are measured at fair value on a recurring basis, see Note 8 for further discussion. The carrying amount for the Companys revolving credit facility is considered to be representative of fair market value due to the floating interest rate. The carrying amounts of the Companys other financial instruments are considered to be representative of their fair market value due to their short-term nature.
The Company applies fair value accounting guidance to measure nonfinancial assets and liabilities, such as the acquisition or impairment of oil and natural gas properties and the inception value of asset retirement obligations. These assets and liabilities are subject to fair value adjustments only in certain circumstances and are not subject to recurring revaluations. See Notes 5 and 6 for further discussion.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A hierarchy exists for measuring fair value that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels:
Level 1: | Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities. This level has the highest priority. |
Level 2: | Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability. |
Level 3: | Valuations are based on prices of third-party or internal valuation models, which require inputs that are significant to the fair value measurement and are less observable and, thus, have the lowest priority. |
The Company classified the commodity derivative contracts and interest swap contracts outstanding as Level 2 in the fair value hierarchy based upon the data used to determine the fair values. See Note 8 for more information.
Asset retirement cost estimates are derived from historical costs, as well as managements expectation of future cost environments. As there is no corroborating market activity to support the assumptions used, the Company has designated these liabilities as Level 3.
Derivatives
The Company is exposed to certain risks relating to its ongoing business operations, including risks related to commodity prices. As discussed more fully below, the Company uses derivative instruments primarily to manage commodity price risk. The derivatives are entered into with banks that participate in the revolving credit facility described in Note 7, and, therefore, there are no margin requirements. The revolving credit facility included an affirmative covenant requiring the Company to be 80% hedged through November 2022 for expected proved producing oil volumes only within 30 days of November 30, 2017, the closing date of the Companys first acquisition of
properties. The Company is not subject to further hedging requirements under the revolving credit facility after November 30, 2022. All contracts have historically settled with cash and do not require the delivery of physical volumes. The Company does not intend to issue or hold derivative financial instruments for speculative trading purposes which are restricted by the revolving credit facility.
In conjunction with the acquisitions of oil and gas properties described in Note 4, the Company entered into derivative financial instruments with respect to a portion of its oil production to hedge future prices received. The instruments are used to manage the inherent uncertainty of future revenues resulting from commodity price volatility. Additionally, in conjunction with the financing of the acquisitions, the Company entered into an interest rate swap to manage the risk of interest rate volatility associated with the variable rate debt obtained to finance the acquisitions. The Companys derivative financial instruments consist of fixed-price swaps for oil and an interest rate swap. Under the terms of the price swaps, the Company receives a fixed-price for its production and pays a variable market price to the contract counterparty.
All derivative financial instruments are recognized at their current fair value as either assets or liabilities in the balance sheets. Changes in the fair value of these derivative financial instruments are recorded in earnings. Cash settlements with counterparties are also recorded in earnings. Cash settlements to which the Company is entitled are accrued in other current assets, and cash settlements the Company is obligated to pay are included in other current liabilities in the accompanying consolidated balance sheets. See Note 8 for further discussion.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. The Company currently maintains no cash equivalents or investments as available cash is used to pay down the revolving credit facility.
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its oil and gas properties; accordingly, exploration costs, other than the cost of drilling exploratory wells, are charged to expense as incurred. The costs of drilling exploratory wells are capitalized, pending determination of whether the wells discover proved commercial reserves. If proved commercial reserves are not discovered, such drilling costs are expensed. Other exploration costs, including geological and geophysical costs and delay rentals on unproved leaseholds, are charged to exploration expense as incurred. The costs of all development wells and related equipment used in the production of oil and gas are capitalized. Costs to operate and maintain field equipment are expensed as incurred.
Unproved oil and gas properties are periodically assessed for impairment, and any impairment is charged to expense. The costs of properties determined to be productive are transferred to proved oil and gas properties.
Proceeds from immaterial sales of properties are credited to property costs, and a gain or loss is recognized when a significant portion of an amortization base is sold or abandoned. As of December 31, 2018, there were no sales of properties.
Depletion, depreciation, and amortization of the cost of proved oil and gas properties and well equipment is calculated using the unit-of-production method. The reserve base used to calculate depletion, depreciation, and amortization is the sum of proved developed reserves and proved undeveloped reserves for leasehold acquisition cost and the cost to acquire proved properties. The reserve base used to calculate depletion, depreciation, and amortization for development costs is proved developed reserves. Estimated future dismantlement, restoration, abandonment cost, and net salvage values are taken into account.
The Company reviews its proved oil and gas properties for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amounts of such properties may not be recoverable. If it is determined that a propertys estimated future net cash flows will not be sufficient to recover its carrying amount, an impairment charge is recognized to reduce the carrying amount of the asset to its estimated fair value by discounting anticipated future net cash flows.
Asset Retirement Obligations
A liability for an assets retirement is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The corresponding cost is capitalized as part of the carrying amount of the related long-lived asset. The liability is accreted to its then-present value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded balance, a gain or loss is recognized.
Revenue Recognition
Oil and natural gas sales are recorded using the sales method, whereby the Company recognizes revenue based upon the amount of oil and gas sold and delivered to product purchasers on its behalf.
The Companys revenues are derived principally from uncollateralized sales to customers in the oil and gas industry; therefore, the Companys customers may be similarly affected by changes in economic and other conditions within the industry. The Company has experienced no credit losses on such sales.
Debt Issuance Costs
The Company incurred legal and bank fees in connection with obtaining the revolving credit facility, which was entered into on November 30, 2017. The fees were capitalized and are being amortized to interest expense over the term of the revolving credit facility utilizing the interest method. Debt issuance costs are included as a reduction to debt in the accompanying consolidated balance sheet. Amortization of debt issuance costs is included in interest expense in the accompanying consolidated statement of operations. When debt is retired before maturity, or modifications significantly change the cash flows, the related unamortized costs are expensed. See Note 7 for more information.
Long-Term Incentive Compensation
In March 2017, the Company created and authorized the issuance of up to 3,000,000 Series B Units (Incentive Units). To date, approximately 75% of the Series B units have been issued to employees. Series B Unit holders are not required to make cash capital contributions in return for Series B Units; rather, the Incentive Units are issued in consideration of services rendered and to be rendered by the holders for the benefit of the Company. The Incentive Units were determined to be profit interest awards and are within the scope of Accounting Standards Codification (ASC) 710, Compensation General. See Note 13 for further discussion on the Incentive units.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes most of the existing revenue recognition requirements in U.S. GAAP and requires (i) an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services and (ii) requires expanded disclosures regarding the nature, amount, timing, and certainty of revenue and cash flows from contracts with customers. The ASU will be effective for annual and interim reporting periods beginning after December 15, 2018. The ASU 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. The Company is currently evaluating the impact this ASU will have on its consolidated financial position, results of operations, or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset for all leases with a term greater than 12 months on the balance sheet, including operating leases. The provisions of ASU 2016-02 also modify the definition of a lease and outline the requirements for recognition, measurement, presentation, and disclosure of leasing arrangements by both lessees and lessors. This ASU is effective for financial statements issued for annual periods beginning after December 15, 2019, and for interim periods within annual periods beginning after December 15, 2020. The Company has not yet determined what the effects of adopting this updated ASU will be on its consolidated financial statements.
3. Income Taxes
The Company is not a taxpaying entity for federal or state income tax purposes, and, accordingly, it does not recognize any expense for such taxes. The income tax liability resulting from the Companys activities is the responsibility of the Members. In the event of an examination of the Companys tax return, the tax liability of the Members could be changed if an adjustment of the Companys income or loss is ultimately sustained by taxing authorities.
4. Asset Acquisition
On November 30, 2017 the Company acquired oil and natural gas producing properties located primarily in North Dakota for a purchase price of approximately $260.7 million. The acquisition had an effective date of March 1, 2017. The operating results of the acquired properties have been included in these consolidated financial statements since the November 30, 2017 acquisition date.
The acquisition was funded with approximately $131.5 million of equity contributions from Members and the net proceeds from the revolving credit facility of $140.0 million. Refer to Note 7 for discussion of the revolving credit facility.
The Company accounted for the acquisition of these properties using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.
The final allocation of the purchase price to the assets acquired and liabilities assumed is summarized as follows:
(in thousands) | ||||
Proved undeveloped properties |
$ | 85,389 | ||
Proved developed properties |
176,177 | |||
Asset retirement liability |
(851 | ) | ||
|
|
|||
Total purchase price |
$ | 260,715 | ||
|
|
5. Oil and Gas Properties
A summary of oil and gas properties is presented as follows:
December 31, 2018 |
December 31, 2017 |
|||||||
(in thousands) | ||||||||
Oil and gas properties and equipment: |
||||||||
Undeveloped leasehold costs |
$ | 56,600 | $ | 85,389 | ||||
Lease and well equipment |
41,706 | 36,728 | ||||||
Developed leasehold and intangible drilling costs |
204,245 | 150,153 | ||||||
|
|
|
|
|||||
302,551 | 272,270 | |||||||
Accumulated depreciation, depletion, and amortization |
(42,098 | ) | (2,751 | ) | ||||
|
|
|
|
|||||
$ | 260,453 | $ | 269,519 | |||||
|
|
|
|
6. Asset Retirement Obligations
A summary of the Companys asset retirement obligations is presented as follows:
For the year ended December 31, 2018 |
Period from March 27, 2017 (inception) to December 31, 2017 |
|||||||
(in thousands) | ||||||||
Balance at beginning of period |
$ | 857 | $ | | ||||
Liabilities acquired |
| 851 | ||||||
Liabilities incurred |
44 | | ||||||
Accretion expense |
73 | 6 | ||||||
Liabilities settled |
| | ||||||
|
|
|
|
|||||
Balance at end of year |
$ | 974 | $ | 857 | ||||
|
|
|
|
7. Indebtedness
The Company had the following long-term debt outstanding:
December 31, 2018 |
December 31, 2017 |
|||||||
(in thousands) | ||||||||
Revolving credit facility Long-term |
$ | 139,500 | $ | 143,000 | ||||
Debt issuance costs |
(1,615 | ) | (1,895 | ) | ||||
|
|
|
|
|||||
Total revolving credit facility |
$ | 137,885 | $ | 141,105 | ||||
|
|
|
|
Revolving Credit Facility
On November 30, 2017, the Company entered into a $500.0 million revolving credit facility between JPMorgan Chase Bank, N.A., Citigroup Global Markets, Inc., and Wells Fargo Securities, LLC, with JPMorgan Chase Bank, N.A. serving as administrative agent (collectively the Banks). The revolving credit facility is secured by substantially all of the Companys oil and gas assets and matures on November 30, 2022.
The Banks established an initial borrowing base of $160.0 million under the $500.0 million revolving credit facility, subject to semiannual redeterminations based on the Banks evaluation of the Companys oil and gas reserves. On November 30, 2017, the Company drew down $140.0 million under the revolving credit facility to partially fund the acquisition described in Note 4 and paid approximately $2.0 million in debt issuance costs in connection with the revolving credit facility. Outstanding borrowings under the revolving credit facility accrue interest at the London Interbank Offered Rate (LIBOR) plus a margin of 2.25%3.25% that varies based on the utilization of the facility. The unused portion of the borrowing base is subject to a commitment fee ranging from 0.375% to 0.500% paid per quarter based on the utilization percentage of the borrowing base.
On October 24, 2018, the Company entered into Amendment No. 1 to the revolving credit facility, which established an updated borrowing base of $185.0 million under the $500.0 million revolving credit facility, based on the Banks evaluation of the Companys oil and gas reserves. The outstanding balance on the revolving credit facility as of December 31, 2018, was $139.5 million, leaving $45.5 million of borrowing capacity available under the current borrowing base. The Company incurred and paid interest expense of $7.2 million in 2018 and $0.5 million in the period from November 30, 2017 to December 31, 2017.
The credit agreement also provides for the issuance of letters of credit, limited to the lesser of $25.0 million or availability under the credit agreement. There were no letters of credit outstanding at December 31, 2018.
Amortization of debt issuance costs totaled $395,000 for 2018 and $32,000 for the period from November 30, 2017 to December 31, 2017, and were included in interest expense. The Company had total unamortized debt issuance costs of $1.6 million and $1.9 million at December 31, 2018 and 2017, respectively, of which $0.4 million is expected to be amortized to interest expense each year over the next four years.
Debt Covenants and Maturity
The revolving credit facility agreement contains certain financial and nonfinancial covenants that limit the Companys ability to, among other things, pay cash dividends, incur additional debt, sell assets, enter into certain hedging contracts, merge, consolidate, or make certain investments. In addition, the Company is required to maintain a ratio of EBITDAX to total debt (each as defined in the credit agreement) not to exceed 4.0 to 1.00 and a current ratio (as defined by the revolving credit facility) of not less than 1.00 to 1.00, both of which commenced with the fiscal quarter ending March 31, 2018. At December 31, 2018, the Company was in compliance with the covenants, and the Company expects to be in compliance for the next twelve months.
8. Derivative Instruments
The Company uses financial instruments to manage its exposure to market fluctuations in the price of crude oil and interest rates. The Companys general strategy is to mitigate oil price risk with fixed price swaps and to hedge interest rate risk with swaps. The Company entered into fixed price swaps during the years ended December 31, 2018 and 2017, to reduce price risk exposure related to sales of oil. The Company also entered into an interest rate swap to reduce exposure to floating interest rates.
At December 31, 2018, the Companys derivative instruments consisted of the following:
| Interest rate swaps The Company utilized a notional amount interest rate swap contract to manage the interest rate risk. The Companys interest rate swap contract serves to mitigate rate risk exposure by converting a portion of the Companys monthly floating rate on its borrowings under its revolving credit facility to monthly fixed-rate payments. |
| Fixed-price swaps The Company receives a fixed price and pays a floating market price to the counterparty for a specified volume of the hedged commodity. |
The Companys derivative instruments as of December 31, 2018 were as follows:
Oil Swaps (NYMEX/WTI indexed) |
||||||||
Period |
Volumes (Bbls) |
Weighted- Average Price ($/Bbl) |
||||||
2019 |
1,479,146 | 53.70 | ||||||
2020 |
1,184,414 | 52.08 | ||||||
2021 |
1,002,073 | 51.08 | ||||||
2022 |
872,864 | 51.15 | ||||||
2023 |
666,470 | 60.53 |
Interest Rate Swaps | ||||||||
Period |
Notional Amount |
Weighted- Average Fixed Rate |
||||||
2019 |
$ | 75,000 | 2.09 | % | ||||
2020 |
75,000 | 2.21 | ||||||
2021 |
75,000 | 2.27 | ||||||
2022 |
75,000 | 2.33 |
The Companys derivative instruments as of December 31, 2017 were as follows:
Oil Swaps (NYMEX/WTI indexed) |
||||||||
Period |
Volumes (Bbls) |
Weighted- Average Price ($/Bbl) |
||||||
2018 |
1,200,542 | 52.01 | ||||||
2019 |
903,032 | 50.41 | ||||||
2020 |
766,424 | 50.41 | ||||||
2021 |
688,604 | 50.28 | ||||||
2022 |
613,756 | 50.28 |
Interest Rate Swaps | ||||||||
Period |
Notional Amount |
Weighted- Average Fixed Rate |
||||||
2018 |
$ | 75,000 | 1.78 | % | ||||
2019 |
75,000 | 2.10 | ||||||
2020 |
75,000 | 2.21 | ||||||
2021 |
75,000 | 2.27 | ||||||
2022 |
75,000 | 2.33 |
The Company has not elected to designate its derivative instruments as cash flow hedging instruments; therefore, the changes in fair value are recognized each period in earnings as a component of revenue. The contracts are placed with major financial institutions deemed to be of high credit, each of which is a party to the revolving credit facility.
The following table summarizes the fair value, fair value hierarchy and location of each classification of the derivative instruments recorded in the consolidated balance sheet at December 31, 2018 and 2017, respectively:
As of December 31, 2018 | ||||||||
Consolidated Balance Sheet Classification (in thousands) |
Gross Fair Value (Level 2) |
Net Fair Value Presented in Consolidated Balance Sheet (Level 2) |
||||||
Short-term commodity derivative asset |
$ | 9,471 | $ | 9,471 | ||||
Short-term interest swap derivative asset(1) |
326 | 326 | ||||||
Long-term commodity derivative asset |
9,764 | 9,764 | ||||||
Long-term interest swap derivative asset(2) |
211 | 211 | ||||||
Long-term commodity derivative liability |
(1,386 | ) | (1,386 | ) | ||||
|
|
|
|
|||||
Total derivative contracts |
$ | 18,386 | $ | 18,386 | ||||
|
|
|
|
(1) | Short-term interest swap derivative asset is included within Other Current Assets on the Consolidated Balance Sheet. |
(2) | Long-term interest swap derivative asset is included within Other Assets on the Consolidated Balance Sheet. |
As of December 31, 2017 | ||||||||
Consolidated Balance Sheet Classification (in thousands) |
Gross Fair Value (Level 2) |
Net Fair Value Presented in Consolidated Balance Sheet (Level 2) |
||||||
Short-term interest swap derivative asset(1) |
$ | 3 | $ | 3 | ||||
Short-term commodity derivative liability |
(10,469 | ) | (10,469 | ) | ||||
Long-term interest swap derivative asset(2) |
86 | 86 | ||||||
Long-term commodity derivative liability |
(9,676 | ) | (9,676 | ) | ||||
|
|
|
|
|||||
Total derivative contracts |
$ | (20,056 | ) | $ | (20,056 | ) | ||
|
|
|
|
(1) | Short-term interest swap derivative asset is included within Other Current Assets on the Consolidated Balance Sheet. |
(2) | Long-term interest swap derivative asset is included within Other Assets on the Consolidated Balance Sheet. |
The following table summarizes gains and losses related to the derivatives reflected in the consolidated statement of operations for the year ended December 31, 2018 and for the period from March 27, 2017 (inception) to December 31, 2017.
For the year ended December 31, 2018 |
Period from March 27, 2017 (inception) to December 31, 2017 |
|||||||
(in thousands) | ||||||||
Commodity mark-to-market gains/(losses) |
$ | 37,906 | $ | (20,056 | ) | |||
Commodity settlements paid |
(18,504 | ) | (114 | ) | ||||
Interest swap mark-to-market gains/(losses) |
537 | | ||||||
Interest swap settlements paid |
152 | | ||||||
|
|
|
|
|||||
Total gain/(loss) on derivative instruments |
$ | 20,091 | $ | (20,170 | ) | |||
|
|
|
|
(1) | Interest swap mark-to-market and settlements paid are included within Other income on the Consolidated Statement of Operations. |
Concentration of Credit Risk
By using derivative instruments that are not traded on an exchange, the Company exposes itself to credit risk from its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is an asset, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, the Company enters into derivative contracts only with counterparties that are creditworthy financial institutions that are parties to the revolving credit facility, which were also deemed by management as competent and competitive market-makers. Refer to Note 2 for additional information on the valuation of derivative assets and liabilities.
9. Risks and Uncertainties
Historically, the market for oil and natural gas has experienced significant price fluctuations. Prices are impacted by supply and demand, both domestic and international; seasonal variations caused by changing weather conditions; political conditions; governmental regulations; the availability, proximity, and capacity of gathering systems for natural gas and numerous other factors. Increases or decreases in prices received could have a significant impact on the Companys future results of operations, reserves estimates, and financial position. The Company has certain commodity swap contracts in place with two counterparties to reduce its exposure to changes in commodity prices.
Estimating oil and gas reserves is complex and is not exact because of the numerous uncertainties inherent in the process. The process relies on interpretations of available geological, geophysical, engineering, and production data. The extent, quality, and reliability of both the data and the associated interpretations of that data can vary. The process also requires certain economic assumptions, including, but not limited to, oil and gas prices, drilling and operating expenses, capital expenditures, and taxes. Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses, and quantities of recoverable oil and gas most likely will vary from the Companys estimates. Any significant variance could materially affect the Companys future results of operations, reserves estimates, and financial position.
10. Commitments and Contingencies
All of the Companys operations are subject to federal, state, and local environmental regulations. To the best of managements knowledge, the Company is in compliance with such laws and regulations.
The Company is subject to potential lawsuits involving a variety of claims arising in the ordinary course of business. The Company also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal, or release of certain chemical, mineral, and petroleum substances at various active and inactive sites. The Company regularly assesses the need for accounting recognition or disclosure of contingencies. In the case of all known contingencies (other than those related to income taxes), a liability is accrued when the loss is probable, and the amount is reasonably estimable. If a range of the amounts can be reasonably estimated, but no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. These liabilities are not reduced for potential insurance or third-party recoveries. If applicable, receivables are accrued for probable insurance or other third-party recoveries.
11. Capital Structure
Initial funding for the Company was obtained by issuing common membership interests in the Company (Series A Units) at a purchase price of $1,000 per Series A Unit up to a total of approximately 301,000 units. The Companys Limited Liability Company (LLC) Agreement provides that the Company use the proceeds from the sale of the Series A Units for the acquisition and development of oil and gas properties, capital expenditures, working capital, and general Company purposes.
Management of its business affairs resides with the Company. Transfer of Series A Unit interests is only permitted if certain conditions specified in the LLC Agreement are met and is subject to approval of the Board of Directors.
Available cash flow after meeting operating requirements, property acquisition(s), and debt repayments may be used to make distributions to the partners according to their respective ownership interests.
As of December 31, 2018, approximately 131,000 Series A Units had been issued.
12. Affiliated-Party Transactions
On August 27, 2018, Valorem Energy, LLC entered into an Assignment Agreement with Flywheel Energy, LLC; Kayne Private Energy Income Fund, L.P.; and Kayne Private Energy Income Parallel Fund, L.P. whereby a special one-time $2.2 million contribution was approved from Flywheel Energy, LLC, an affiliated company.
Effective as of September 1, 2018, Flywheel Bakken entered into an Amended and Restated Management Agreement with Flywheel Energy Management, LLC and Flywheel Energy, LLC, whereby Flywheel Energy Management, LLC provides certain management services to Flywheel Bakken. In accordance with these services, Flywheel Bakken agreed to reimbursement Flywheel Energy Management, LLC for all direct costs, and an allocated portion of indirect costs attributable
to the business. Additionally, Flywheel Energy Management, LLC and Flywheel Energy, LLC agreed to reimburse Flywheel Bakken for direct costs, and an allocated portion of indirect costs attributable to the businesses. Total costs to be reimbursed by Flywheel Energy, LLC incurred in 2018 were $2.6 million. Net reimbursements received by Flywheel Bakken in 2018 were $0.5 million. The remaining amount due is shown on the balance sheets as accounts receivable affiliate.
Management investors have the opportunity to borrow and invest in the Company amounts equal to their cash equity contributions. The loans are recorded as notes receivable and shown on the balance sheets as other assets. Interest is charged at the lowest Internal Revenue Service rate in effect. Repayment and interest payments occur when equity distributions are made. Amounts due from management were $0.4 million and $0.8 million at December 31, 2018 and 2017, respectively.
13. Incentive Units
On March 27, 2017 (the Grant date), a total of 3,000,000 incentive units, made up of all Series B Units, were created and authorized for issuance by the Members to employees. The Series B Units are considered a profits interest and are accounted for under the deferred compensation guidance in ASC 710, Compensation General. These Series B Units do not represent a legal form of equity as there is no initial investment required to obtain the Series B Units. While the Series B Units allow employees to receive a portion of distributable cash after the Series A Members achieve certain returns on their contributions, the Series B Units are non-voting and subordinate to debt and Series A Units based on the waterfall distribution.
At December 31, 2018, management did not consider it probable that either (i) the payout thresholds necessary to trigger distributions to Series B Unitholders would be achieved or (ii) that a triggering event that would lead to full vesting of the Series B Units would occur. Therefore, management has assessed the present value of expected future benefits associated with the Series B Units to be zero at December 31, 2018.
14. Subsequent Events
On April 18, 2019, the Company entered into an agreement to sell all of the Companys oil and gas properties and associated working capital for approximately $310 million, subject to normal purchase price adjustments. The closing and effective date of this transaction is scheduled to occur on July 1, 2019.
Subsequent events have been evaluated through April 26, 2019, the date the consolidated financial statements were available to be issued.
Exhibit 99.3
Flywheel Bakken, LLC
Consolidated Balance Sheets
(Unaudited)
June 30, 2019 |
December 31, 2018 |
|||||||
Assets | (in thousands) | |||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 825 | $ | 1,416 | ||||
Accounts receivable oil, natural gas, and NGLs |
13,739 | 18,880 | ||||||
Accounts receivable affiliated parties |
2,125 | 2,125 | ||||||
Commodity derivatives |
550 | 9,471 | ||||||
Other current assets |
737 | 618 | ||||||
|
|
|
|
|||||
Total current assets |
17,976 | 32,510 | ||||||
|
|
|
|
|||||
Property and equipment: |
||||||||
Oil and gas properties, successful efforts method |
314,280 | 302,551 | ||||||
Less: accumulated depreciation, depletion and amortization |
(57,779 | ) | (42,098 | ) | ||||
|
|
|
|
|||||
Oil and gas properties, net |
256,501 | 260,453 | ||||||
Other noncurrent assets: |
||||||||
Commodity derivatives |
1,063 | 9,764 | ||||||
Other assets |
253 | 631 | ||||||
|
|
|
|
|||||
Total assets |
$ | 275,793 | $ | 303,358 | ||||
|
|
|
|
|||||
Liabilities and members equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 10,458 | $ | 7,211 | ||||
Commodity derivatives |
3,814 | | ||||||
Other current liabilities |
243 | | ||||||
|
|
|
|
|||||
Total current liabilities |
14,515 | 7,211 | ||||||
|
|
|
|
|||||
Long-term liabilities: |
||||||||
Revolving credit facility |
134,591 | 137,885 | ||||||
Asset retirement obligations |
1,016 | 974 | ||||||
Commodity derivatives |
6,405 | 1,386 | ||||||
Other liabilities |
1,336 | | ||||||
|
|
|
|
|||||
Total long-term liabilities |
143,348 | 140,245 | ||||||
|
|
|
|
|||||
Members capital |
117,930 | 155,902 | ||||||
|
|
|
|
|||||
Total liabilities and members capital |
$ | 275,793 | $ | 303,358 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Flywheel Bakken, LLC
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, 2019 |
Three Months Ended June 30, 2018 |
Six Months Ended June 30, 2019 |
Six Months Ended June 30, 2018 |
|||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Revenues and other |
||||||||||||||||
Oil, natural gas, and NGL sales |
$ | 29,385 | $ | 48,343 | $ | 59,483 | $ | 95,210 | ||||||||
Realized loss on derivatives, net |
(2,219 | ) | (30,068 | ) | (2,607 | ) | (39,885 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
27,166 | 18,275 | 56,876 | 55,325 | ||||||||||||
Operating costs and expenses |
||||||||||||||||
Lease operating expense |
5,862 | 5,913 | 11,109 | 11,126 | ||||||||||||
Transportation, gathering, and processing |
3,799 | 5,564 | 7,977 | 9,694 | ||||||||||||
Production and ad valorem taxes |
2,505 | 3,958 | 4,777 | 8,004 | ||||||||||||
Exploration and other expense |
2 | 4 | 2 | 4 | ||||||||||||
General and administrative expense |
964 | 1,899 | 2,042 | 3,703 | ||||||||||||
Depreciation, depletion, amortization, and accretion |
5,855 | 8,946 | 15,723 | 19,732 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating costs and expenses |
18,987 | 26,284 | 41,630 | 52,263 | ||||||||||||
Other income (expense), net: |
||||||||||||||||
Other income |
1 | | 4 | | ||||||||||||
Interest expense |
(1,789 | ) | (1,856 | ) | (3,390 | ) | (3,693 | ) | ||||||||
Unrealized gain (loss) on Commodity derivatives |
9,083 | | (26,456 | ) | | |||||||||||
Unrealized loss on interest rate swap derivatives |
(1,342 | ) | | (2,094 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other income (expense), net: |
5,953 | (1,856 | ) | (31,936 | ) | (3,693 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 14,132 | $ | (9,865 | ) | $ | (16,690 | ) | $ | (631 | ) | |||||
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Flywheel Bakken, LLC
Consolidated Statements of Members Capital
(Unaudited)
Total | ||||
(in thousands) | ||||
Balance at December 31, 2017 |
$ | 110,212 | ||
Net income |
9,234 | |||
|
|
|||
Balance at March 31, 2018 |
119,447 | |||
Distributions |
(15,000 | ) | ||
Net loss |
(9,865 | ) | ||
|
|
|||
Balance at June 30, 2018 |
$ | 94,581 | ||
|
|
|||
Balance at December 31, 2018 |
155,902 | |||
Distributions |
(13,000 | ) | ||
Shares repurchased |
(262 | ) | ||
Net loss |
(30,822 | ) | ||
|
|
|||
Balance at March 31, 2019 |
111,818 | |||
Distributions |
(8,020 | ) | ||
Net income |
14,132 | |||
|
|
|||
Balance at June 30, 2019 |
$ | 117,930 | ||
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Flywheel Bakken, LLC
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June, 30 2019 |
Six Months Ended June, 30 2018 |
|||||||
(in thousands) | ||||||||
Operating activities |
||||||||
Net loss |
$ | (16,690 | ) | $ | (631 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Depreciation, depletion, and amortization |
15,682 | 19,695 | ||||||
Accretion of asset retirement obligations |
41 | 37 | ||||||
Amortization of debt issuance costs |
206 | 194 | ||||||
Loss on derivatives, net |
30,956 | 39,885 | ||||||
Settlement paid on derivatives |
(2,406 | ) | (10,257 | ) | ||||
Changes in assets and liabilities: |
||||||||
Decrease (increase) in accounts receivable |
4,226 | (17,350 | ) | |||||
(Increase) decrease in other current and non-current assets |
(258 | ) | 108 | |||||
Increase (decrease) in accounts payable and accrued liabilities |
947 | (4,143 | ) | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
32,704 | 27,538 | ||||||
Investing activities |
||||||||
Additions to oil and natural gas properties operations |
(8,638 | ) | (12,077 | ) | ||||
Additions to other property and equipment |
| (15 | ) | |||||
|
|
|
|
|||||
Net cash used in investing activities |
(8,638 | ) | (12,092 | ) | ||||
Financing activities |
||||||||
Distributions to members, net of notes receivable |
(20,895 | ) | (14,907 | ) | ||||
Shares repurchased |
(262 | ) | | |||||
Borrowings on revolving credit facility |
23,000 | 26,100 | ||||||
Payments on revolving credit facility |
(26,500 | ) | (28,800 | ) | ||||
Debt issuance costs |
| (35 | ) | |||||
|
|
|
|
|||||
Net cash used in by financing activities |
(24,657 | ) | (17,642 | ) | ||||
|
|
|
|
|||||
Net decrease in cash and cash equivalents |
(591 | ) | (2,196 | ) | ||||
Cash and cash equivalents at beginning of period |
1,416 | 3,462 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
$ | 825 | $ | 1,265 | ||||
|
|
|
|
|||||
Non-cash Items |
||||||||
Non-cash Distributions |
(125 | ) | | |||||
Net accrued additions to oil and natural gas properties |
1,006 | 5,725 |
The accompanying notes are an integral part of these consolidated financial statements.
Flywheel Bakken, LLC
Notes to Consolidated Financial Statements
1. | Organization and Business |
Flywheel Bakken, LLC (Flywheel Bakken or the Company), previously Valorem Energy, LLC, a Delaware limited liability company, is a privately-owned exploration and production company formed on March 27, 2017 (Inception), to acquire, develop, and produce oil and gas properties. Flywheel Bakkens wholly owned subsidiaries include Flywheel Bakken Operating, LLC (Flywheel Bakken Operating), previously Valorem Energy Operating, LLC, Valorem Energy Member, LLC (Valorem Member), Valorem Energy Management, LLC (Valorem Management), and VEN Bakken, LLC (VEN Bakken), all of which are Delaware limited liability companies.
Funding sources for the Companys operations and acquisitions of properties are accomplished through member contributions by the Kayne Private Energy Income Fund, L.P. (KPEIF), affiliates of KPEIF, and members of management (Management), (collectively the Members), the utilization of its own cash resources, or any combination of these sources. The Companys oil and gas properties are primarily located in the state of North Dakota with some minor interests in South Dakota and Montana.
2. | Summary of Significant Accounting Policies |
Principles of Consolidation
The consolidated financial statements include the accounts of Flywheel Bakken and its wholly owned subsidiaries, Flywheel Bakken Operating, Valorem Member, Valorem Management, and VEN Bakken. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S. 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates of oil and gas reserves, as determined by independent petroleum engineers, are continually subject to revision based on price, production history, and other factors. Changes in the estimated oil and gas reserves utilized for depreciation, depletion, and amortization or the estimated future cash flows attributable to the reserves that are utilized for impairment assessments could have a significant impact on the future results of operations. Actual results could differ from those estimates.
Financial Instruments
The Companys financial instruments are measured at fair value and consist primarily of cash and cash equivalents, an interest swap, commodity derivative contracts, accounts receivable, accounts payable, and the revolving credit facility. The Companys derivative instruments are measured at fair value on a recurring basis, see Note 7 for further discussion. The carrying amount for the Companys revolving credit facility is considered to be representative of fair market value due to the floating interest rate. The carrying amounts of the Companys other financial instruments are considered to be representative of their fair market value due to their short-term nature.
The Company applies fair value accounting guidance to measure nonfinancial assets and liabilities, such as the acquisition or impairment of oil and natural gas properties and the inception value of asset retirement obligations. These assets and liabilities are subject to fair value adjustments only in certain circumstances and are not subject to recurring revaluations. See Notes 4 and 5 for further discussion.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A hierarchy exists for measuring fair value that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels:
Level 1: | Valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities. This level has the highest priority. |
Level 2: | Valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability. |
Level 3: | Valuations are based on prices of third-party or internal valuation models, which require inputs that are significant to the fair value measurement and are less observable and, thus, have the lowest priority. |
The Company classified the commodity derivative contracts and interest swap contract outstanding as Level 2 in the fair value hierarchy based upon the data used to determine the fair values. See Note 7 for more information.
Asset retirement cost estimates are derived from historical costs, as well as managements expectation of future cost environments. As there is no corroborating market activity to support the assumptions used, the Company has designated these liabilities as Level 3.
Derivatives
The Company is exposed to certain risks relating to its ongoing business operations, including risks related to commodity prices. As discussed more fully below, the Company uses derivative instruments primarily to manage commodity price risk. The derivatives are entered into with banks that participate in the revolving credit facility described in Note 6, and, therefore, there are no margin requirements. The revolving credit facility included an affirmative covenant requiring the Company to be 80% hedged through November 2022 for expected proved producing oil volumes only within 30 days of November 30, 2017, the closing date of the Companys first acquisition of
properties. The Company is not subject to further hedging requirements under the revolving credit facility after November 30, 2022. All contracts have historically settled with cash and do not require the delivery of physical volumes. The Company does not intend to issue or hold derivative financial instruments for speculative trading purposes which are restricted by the revolving credit facility.
In conjunction with the acquisitions of oil and gas properties, the Company entered into derivative financial instruments with respect to a portion of its oil production to hedge future prices received. The instruments are used to manage the inherent uncertainty of future revenues resulting from commodity price volatility. Additionally, in conjunction with the financing of the acquisitions, the Company entered into an interest rate swap to manage the risk of interest rate volatility associated with the variable rate debt obtained to finance the acquisitions. The Companys derivative financial instruments consist of fixed-price swaps for oil and an interest rate swap. Under the terms of the price swaps, the Company receives a fixed-price for its production and pays a variable market price to the contract counterparty.
All derivative financial instruments are recognized at their current fair value as either assets or liabilities in the balance sheets. Changes in the fair value of these derivative financial instruments are recorded in earnings. Cash settlements with counterparties are also recorded in earnings. Cash settlements to which the Company is entitled are accrued in other current assets, and cash settlements the Company is obligated to pay are included in other current liabilities in the accompanying consolidated balance sheets. See Note 7 for further discussion.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. The Company currently maintains no cash equivalents or investments as available cash is used to pay down the revolving credit facility.
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its oil and gas properties; accordingly, exploration costs, other than the cost of drilling exploratory wells, are charged to expense as incurred. The costs of drilling exploratory wells are capitalized, pending determination of whether the wells discover proved commercial reserves. If proved commercial reserves are not discovered, such drilling costs are expensed. Other exploration costs, including geological and geophysical costs and delay rentals on unproved leaseholds, are charged to exploration expense as incurred. The costs of all development wells and related equipment used in the production of oil and gas are capitalized. Costs to operate and maintain field equipment are expensed as incurred.
Unproved oil and gas properties are periodically assessed for impairment, and any impairment is charged to expense. The costs of properties determined to be productive are transferred to proved oil and gas properties.
Proceeds from immaterial sales of properties are credited to property costs, and a gain or loss is recognized when a significant portion of an amortization base is sold or abandoned. During the periods ended June 30, 2019 and 2018, there were no sales of properties. On April 18, 2019, the Company entered into an agreement to sell all of the Companys oil and gas properties and associated working capital for approximately $310 million, subject to normal purchase price adjustments. The closing and effective date of this transaction occurred on July 1, 2019.
Depletion, depreciation, and amortization of the cost of proved oil and gas properties and well equipment is calculated using the unit-of-production method. The reserve base used to calculate depletion, depreciation, and amortization is the sum of proved developed reserves and proved undeveloped reserves for leasehold acquisition cost and the cost to acquire proved properties. The reserve base used to calculate depletion, depreciation, and amortization for development costs is proved developed reserves. Estimated future dismantlement, restoration, abandonment cost, and net salvage values are taken into account.
The Company reviews its proved oil and gas properties for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amounts of such properties may not be recoverable. If it is determined that a propertys estimated future net cash flows will not be sufficient to recover its carrying amount, an impairment charge is recognized to reduce the carrying amount of the asset to its estimated fair value by discounting anticipated future net cash flows.
Asset Retirement Obligations
A liability for an assets retirement is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The corresponding cost is capitalized as part of the carrying amount of the related long-lived asset. The liability is accreted to its then-present value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded balance, a gain or loss is recognized.
Revenue Recognition
Oil and natural gas sales are recorded using the sales method, whereby the Company recognizes revenue based upon the amount of oil and gas sold and delivered to product purchasers on its behalf.
The Companys revenues are derived principally from uncollateralized sales to customers in the oil and gas industry; therefore, the Companys customers may be similarly affected by changes in economic and other conditions within the industry. The Company has experienced no credit losses on such sales.
Debt Issuance Costs
The Company incurred legal and bank fees in connection with obtaining the revolving credit facility, which was entered into on November 30, 2017. The fees were capitalized and are being amortized to interest expense over the term of the revolving credit facility utilizing the interest method. Debt issuance costs are included as a reduction to debt in the accompanying consolidated balance sheet. Amortization of debt issuance costs is included in interest expense in the accompanying consolidated statement of operations. When debt is retired before maturity, or modifications significantly change the cash flows, the related unamortized costs are expensed. See Note 6 for more information.
Long-Term Incentive Compensation
In March 2017, the Company created and authorized the issuance of up to 3,000,000 Series B Units (Incentive Units). To date, approximately 75% of the Series B units have been issued to employees. Series B Unit holders are not required to make cash capital contributions in return for Series B Units; rather, the Incentive Units are issued in consideration of services rendered and to be rendered by the holders for the benefit of the Company. The Incentive Units were determined to be profit interest awards and are within the scope of Accounting Standards Codification (ASC) 710, Compensation General. See Note 12 for further discussion on the Incentive units.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes most of the existing revenue recognition requirements in U.S. GAAP and requires (i) an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services and (ii) requires expanded disclosures regarding the nature, amount, timing, and certainty of revenue and cash flows from contracts with customers. The ASU will be effective for annual and interim reporting periods beginning after December 15, 2018. The ASU 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. The Company is currently evaluating the impact this ASU will have on its consolidated financial position, results of operations, or cash flows. The companys adoption of ASU 2014-09 is not expected to have a material impact.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset for all leases with a term greater than 12 months on the balance sheet, including operating leases. The provisions of ASU 2016-02 also modify the definition of a lease and outline the requirements for recognition, measurement, presentation, and disclosure of leasing arrangements by both lessees and lessors. This ASU is effective for financial statements issued for annual periods beginning after December 15, 2019, and for interim periods within annual periods beginning after December 15, 2020. The Company has not yet determined what the effects of adopting this updated ASU will be on its consolidated financial statements. The companys adoption of ASU 2016-02 is not expected to have a material impact.
3. | Income Taxes |
The Company is not a taxpaying entity for federal or state income tax purposes, and, accordingly, it does not recognize any expense for such taxes. The income tax liability resulting from the Companys activities is the responsibility of the Members. In the event of an examination of the Companys tax return, the tax liability of the Members could be changed if an adjustment of the Companys income or loss is ultimately sustained by taxing authorities.
4. | Oil and Gas Properties |
A summary of oil and gas properties is presented as follows:
June 30, 2019 | December 31, 2018 |
|||||||
(in thousands) | ||||||||
Oil and gas properties and equipment: |
||||||||
Undeveloped leasehold costs |
$ | 56,600 | $ | 56,600 | ||||
Lease and well equipment |
44,379 | 41,706 | ||||||
Developed leasehold and intangible drilling costs |
213,301 | 204,245 | ||||||
|
|
|
|
|||||
314,280 | 302,551 | |||||||
Accumulated depreciation, depletion, and amortization |
(57,779 | ) | (42,098 | ) | ||||
|
|
|
|
|||||
$ | 256,501 | $ | 260,453 | |||||
|
|
|
|
5. | Asset Retirement Obligations |
A summary of the Companys asset retirement obligations is presented as follows:
For the six months ended June 30, 2019 |
For the year ended December 31, 2018 |
|||||||
(in thousands) | ||||||||
Balance at beginning of period |
$ | 974 | $ | 857 | ||||
Liabilities incurred |
1 | 44 | ||||||
Accretion expense |
41 | 73 | ||||||
Liabilities settled |
| | ||||||
|
|
|
|
|||||
Balance at end of period |
$ | 1,016 | $ | 974 | ||||
|
|
|
|
6. | Indebtedness |
The Company had the following long-term debt outstanding:
June 30, 2019 | December 31, 2018 |
|||||||
(in thousands) | ||||||||
Revolving credit facility Long-term |
$ | 136,000 | $ | 139,500 | ||||
Debt issuance costs |
(1,409 | ) | (1,615 | ) | ||||
|
|
|
|
|||||
Total revolving credit facility |
$ | 134,591 | $ | 137,885 | ||||
|
|
|
|
Revolving Credit Facility
On November 30, 2017, the Company entered into a $500.0 million revolving credit facility between JPMorgan Chase Bank, N.A., Citigroup Global Markets, Inc., and Wells Fargo Securities, LLC, with JPMorgan Chase Bank, N.A. serving as administrative agent (collectively the Banks). The revolving credit facility is secured by substantially all of the Companys oil and gas assets and matures on November 30, 2022.
The Banks established an initial borrowing base of $160.0 million under the $500.0 million revolving credit facility, subject to semiannual redeterminations based on the Banks evaluation of the Companys oil and gas reserves. Outstanding borrowings under the revolving credit facility accrue interest at the London Interbank Offered Rate (LIBOR) plus a margin of 2.25%3.25% that varies based on the utilization of the facility. The unused portion of the borrowing base is subject to a commitment fee ranging from 0.375% to 0.500% paid per quarter based on the utilization percentage of the borrowing base.
On April 23, 2019, the Company entered into Amendment No. 2 to the revolving credit facility, which established an updated borrowing base of $160.0 million under the $500.0 million revolving credit facility, based on the Banks evaluation of the Companys oil and gas reserves. The outstanding balance on the revolving credit facility as of June 30, 2019, was $136.0 million, leaving $24.0 million of borrowing capacity available under the current borrowing base. The Company incurred and paid interest expense of $3.2 million and $3.5 million at June 30, 2019 and 2018, respectively.
The credit agreement also provides for the issuance of letters of credit, limited to the lesser of $25.0 million or availability under the credit agreement. There were no letters of credit outstanding at June 30, 2019.
Amortization of debt issuance costs totaled $0.2 million at June 30, 2019 and 2018. The Company had total unamortized debt issuance costs of $1.4 million and $1.7 million at June 30, 2019 and 2018, respectively, of which $0.4 million is expected to be amortized to interest expense each year over the next four years.
Debt Covenants and Maturity
The revolving credit facility agreement contains certain financial and nonfinancial covenants that limit the Companys ability to, among other things, pay cash dividends, incur additional debt, sell assets, enter into certain hedging contracts, merge, consolidate, or make certain investments. In addition, the Company is required to maintain a ratio of EBITDAX to total debt (each as defined in the credit agreement) not to exceed 4.0 to 1.00 and a current ratio (as defined by the revolving credit facility) of not less than 1.00 to 1.00, both of which commenced with the fiscal quarter ending March 31, 2018. At June 30, 2019, the Company was in compliance with debt covenants.
7. | Derivative Instruments |
The Company uses financial instruments to manage its exposure to market fluctuations in the price of crude oil and interest rates. The Companys general strategy is to mitigate oil price risk with fixed price swaps and to hedge interest rate risk with swaps. The Company entered into fixed price swaps during the periods ended June 30, 2019 and December 31, 2018, to reduce price risk exposure related to sales of oil. The Company also entered into an interest rate swap to reduce exposure to floating interest rates.
At June 30, 2019 and December 31, 2018, the Companys derivative instruments consisted of the following:
| Interest rate swap The Company utilized a notional amount interest rate swap contract to manage the interest rate risk. The Companys interest rate swap contract serves to mitigate rate risk exposure by converting a portion of the Companys monthly floating rate on its borrowings under its revolving credit facility to monthly fixed-rate payments. |
| Fixed-price swaps The Company receives a fixed price and pays a floating market price to the counterparty for a specified volume of the hedged commodity. |
The Companys derivative instruments as of June 30, 2019 were as follows:
Oil Swaps (NYMEX/WTI indexed) |
||||||||
Period |
Volumes (Bbls) | Weighted- Average Price ($/Bbl) |
||||||
2019 |
726,575 | 56.17 | ||||||
2020 |
1,365,414 | 54.18 | ||||||
2021 |
1,002,074 | 51.08 | ||||||
2022 |
872,864 | 51.15 | ||||||
Interest Rate Swaps | ||||||||
Period |
Notional Amount (thousands) |
Weighted- Average Fixed Rate |
||||||
2019 |
$ | 75,000 | 2.09 | |||||
2020 |
75,000 | 2.21 | ||||||
2021 |
75,000 | 2.27 | ||||||
2022 |
75,000 | 2.33 |
The Companys derivative instruments as of December 31, 2018 were as follows:
Oil Swaps (NYMEX/WTI indexed) |
||||||||
Period |
Volumes (Bbls) | Weighted- Average Price ($/Bbl) |
||||||
2019 |
1,479,146 | 53.70 | ||||||
2020 |
1,184,414 | 52.08 | ||||||
2021 |
1,002,074 | 51.08 | ||||||
2022 |
872,864 | 51.18 | ||||||
2023 |
666,470 | 60.53 |
Interest Rate Swaps | ||||||||
Period |
Notional Amount (thousands) |
Weighted- Average Fixed Rate |
||||||
2019 |
75,000 | 2.09 | ||||||
2020 |
75,000 | 2.21 | ||||||
2021 |
75,000 | 2.27 | ||||||
2022 |
75,000 | 2.33 |
The Company has not elected to designate its derivative instruments as cash flow hedging instruments; therefore, the changes in fair value are recognized each period in earnings as a component of revenue. The contracts are placed with major financial institutions deemed to be of high credit, each of which is a party to the revolving credit facility.
The following table summarizes the fair value, fair value hierarchy and location of each classification of the derivative instruments recorded in the consolidated balance sheet at June 30, 2019 and December 31, 2018, respectively:
As of June 30, 2019 | ||||||||
Consolidated Balance Sheet Classification (in thousands) |
Gross Fair Value (Level 2) |
Net Fair Value Presented in Consolidated Balance Sheet (Level 2) |
||||||
Short-term commodity derivative asset |
$ | 550 | $ | 550 | ||||
Short-term interest swap derivative asset1 |
22 | 22 | ||||||
Short-term commodity derivative liability |
(3,814 | ) | (3,814 | ) | ||||
Short-term interest swap derivative liability2 |
(243 | ) | (243 | ) | ||||
Long-term commodity derivative asset |
1,063 | 1,063 | ||||||
Long-term commodity derivative liability |
(6,405 | ) | (6,405 | ) | ||||
Long-term interest rate derivative liability3 |
(1,336 | ) | (1,336 | ) | ||||
|
|
|
|
|||||
Total derivative contracts |
$ | (10,163 | ) | $ | (10,163 | ) | ||
|
|
|
|
1 | Short-term interest swap derivative asset is included within Other Current Assets on the Consolidated Balance Sheet. |
2 | Short-term interest swap derivative liability is included within Other Current Liabilities on the Consolidated Balance Sheet. |
3 | Long-term interest swap derivative liabilities is included within Other Liabilities on the Consolidated Balance Sheet. |
As of December 31, 2018 | ||||||||
Consolidated Balance Sheet Classification (in thousands) |
Gross Fair Value (Level 2) |
Net Fair Value Presented in Consolidated Balance Sheet (Level 2) |
||||||
Short-term commodity derivative asset |
$ | 9,471 | $ | 9,471 | ||||
Short-term interest swap derivative asset |
326 | 326 | ||||||
Long-term commodity derivative asset |
9,764 | 9,764 | ||||||
Long-term interest swap derivative asset |
211 | 211 | ||||||
Long-term commodity derivative liability |
(1,386 | ) | (1,386 | ) | ||||
|
|
|
|
|||||
Total derivative contracts |
$ | 18,386 | $ | 18,386 | ||||
|
|
|
|
The following table summarizes gains and losses related to the derivatives reflected in the consolidated statement of operations for the six months ended June 30, 2019 and 2018, respectively.
For the six months ended June 30, 2019 |
For the six months ended June 30, 2018 |
|||||||
(in thousands) | ||||||||
Commodity mark-to-market gains/(losses) |
$ | (26,456 | ) | $ | (29,628 | ) | ||
Commodity settlements paid |
(2,607 | ) | (10,261 | ) | ||||
Interest swap mark-to-market gains/(losses) |
(2,094 | ) | | |||||
Interest swap settlements paid |
200 | 4 | ||||||
|
|
|
|
|||||
Total gain/(loss) on derivative instruments |
$ | (30,957 | ) | $ | (39,885 | ) | ||
|
|
|
|
1 | Interest swap mark-to-market and settlements paid are included within Other income on the Consolidated Statement of Operations. |
Concentration of Credit Risk
By using derivative instruments that are not traded on an exchange, the Company exposes itself to credit risk from its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is an asset, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, the Company enters into derivative contracts only with counterparties that are creditworthy financial institutions that are parties to the revolving credit facility, which were also deemed by management as competent and competitive market-makers. Refer to Note 2 for additional information on the valuation of derivative assets and liabilities.
8. | Risks and Uncertainties |
Historically, the market for oil and natural gas has experienced significant price fluctuations. Prices are impacted by supply and demand, both domestic and international; seasonal variations caused by changing weather conditions; political conditions; governmental regulations; the availability, proximity, and capacity of gathering systems for natural gas and numerous other factors. Increases or decreases in prices received could have a significant impact on the Companys future results of operations, reserves estimates, and financial position. The Company has certain commodity swap contracts in place with three counterparties to reduce its exposure to changes in commodity prices.
Estimating oil and gas reserves is complex and is not exact because of the numerous uncertainties inherent in the process. The process relies on interpretations of available geological, geophysical, engineering, and production data. The extent, quality, and reliability of both the data and the associated interpretations of that data can vary. The process also requires certain economic assumptions, including, but not limited to, oil and gas prices, drilling and operating expenses, capital expenditures, and taxes. Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses, and quantities of recoverable oil and gas most likely will vary from the Companys estimates. Any significant variance could materially affect the Companys future results of operations, reserves estimates, and financial position.
9. | Commitments and Contingencies |
All of the Companys operations are subject to federal, state, and local environmental regulations. To the best of managements knowledge, the Company is in compliance with such laws and regulations.
The Company is subject to potential lawsuits involving a variety of claims arising in the ordinary course of business. The Company also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal, or release of certain chemical, mineral, and petroleum substances at various active and inactive sites. The Company regularly assesses the need for accounting recognition or disclosure of contingencies. In the case of all known contingencies (other than those related to income taxes), a liability is accrued when the loss is probable, and the amount is reasonably estimable. If a range of the amounts can be reasonably estimated, but no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. These liabilities are not reduced for potential insurance or third-party recoveries. If applicable, receivables are accrued for probable insurance or other third-party recoveries.
10. | Capital Structure |
Initial funding for the Company was obtained by issuing common membership interests in the Company (Series A Units) at a purchase price of $1,000 per Series A Unit up to a total of approximately 301,000 units. The Companys Limited Liability Company (LLC) Agreement provides that the Company use the proceeds from the sale of the Series A Units for the acquisition and development of oil and gas properties, capital expenditures, working capital, and general Company purposes.
Management of its business affairs resides with the Company. Transfer of Series A Unit interests is only permitted if certain conditions specified in the LLC Agreement are met and is subject to approval of the Board of Directors.
Available cash flow after meeting operating requirements, property acquisition(s), and debt repayments may be used to make distributions to the partners according to their respective ownership interests.
As of June 30, 2019, approximately 131,000 Series A Units had been issued.
11. | Affiliated-Party Transactions |
On August 27, 2018, Valorem Energy, LLC entered into an Assignment Agreement with Flywheel Energy, LLC; Kayne Private Energy Income Fund, L.P.; and Kayne Private Energy Income Parallel Fund, L.P. whereby a special one-time $2.2 million contribution was approved from Flywheel Energy, LLC, an affiliated company.
Effective as of September 1, 2018, Flywheel Bakken entered into an Amended and Restated Management Agreement with Flywheel Energy Management, LLC and Flywheel Energy, LLC, whereby Flywheel Energy Management, LLC provides certain management services to Flywheel Bakken. In accordance with these services, Flywheel Bakken agreed to reimbursement Flywheel Energy Management, LLC for all direct costs, and an allocated portion of indirect costs attributable to the business. Additionally, Flywheel Energy Management, LLC and Flywheel Energy, LLC agreed to reimburse Flywheel Bakken for direct costs, and an allocated portion of indirect costs attributable to the businesses. Total costs to be reimbursed by Flywheel Energy, LLC incurred in 2018 were $2.6 million. Net reimbursements received by Flywheel Bakken in 2019 were $1.0 million. The remaining amount due is shown on the balance sheets as accounts receivable affiliate.
Management investors have the opportunity to borrow and invest in the Company amounts equal to their cash equity contributions. The loans are recorded as notes receivable and shown on the balance sheets as other assets. Interest is charged at the lowest Internal Revenue Service rate in effect. Repayment and interest payments occur when equity distributions are made. Amounts due from management were $0.2 million and $0.7 million at June 30, 2019 and 2018, respectively.
12. | Incentive Units |
On March 27, 2017 (the Grant date), a total of 3,000,000 incentive units, made up of all Series B Units, were created and authorized for issuance by the Members to employees. The Series B Units are considered a profits interest and are accounted for under the deferred compensation guidance in ASC 710, Compensation General. These Series B Units do not represent a legal form of equity as there is no initial investment required to obtain the Series B Units. While the Series B Units allow employees to receive a portion of distributable cash after the Series A Members achieve certain returns on their contributions, the Series B Units are non-voting and subordinate to debt and Series A Units based on the waterfall distribution.
At December 31, 2018, management did not consider it probable that either (i) the payout thresholds necessary to trigger distributions to Series B Unitholders would be achieved or (ii) that a triggering event that would lead to full vesting of the Series B Units would occur. Therefore, management has assessed the present value of expected future benefits associated with the Series B Units to be zero at December 31, 2018.
13. | Subsequent Events |
On April 18, 2019, the Company entered into an agreement to sell all of the Companys oil and gas properties and associated working capital for approximately $310 million, subject to normal purchase price adjustments. The closing and effective date of this transaction occurred on July 1, 2019.
Subsequent events have been evaluated through September 12, 2019, the date the consolidated financial statements were available to be issued.
EXHIBIT 99.4
UNAUDITED PRO FORMA FINANCIAL STATEMENTS AND OTHER DATA
On July 1, 2019, Northern Oil and Gas, Inc. (Northern, the Company, we, and our) completed the acquisition of certain oil and gas properties and interests from VEN Bakken, LLC (Seller), a wholly-owned subsidiary of Flywheel Bakken, LLC (Flywheel Bakken), with an effective date of July 1, 2019 (the VEN Bakken Acquisition). At closing the acquired assets consisted of approximately 87.8 net producing wells and 4.1 net wells in process, as well as approximately 18,000 net acres in North Dakota. The Company paid closing consideration to Seller consisting of $170.1 million in cash, 5,602,147 shares of the Companys common stock, and a 6.0% Senior Unsecured Promissory Note due 2022 in the aggregate principal amount of $130.0 million (the Promissory Note). The cash and Promissory Note portions of the consideration are net of preliminary and customary purchase price adjustments and remain subject to final post-closing settlement between the Company and Seller.
The following unaudited pro forma financial statements present (i) our unaudited pro forma balance sheet as of June 30, 2019, (ii) our unaudited pro forma statement of operations for the year ended December 31, 2018, and (iii) our unaudited pro forma statement of operations for the six months ended June 30, 2019. The unaudited pro forma balance sheet has been developed by applying pro forma adjustments to our historical balance sheet to give effect to the VEN Bakken Acquisition as if it had occurred on June 30, 2019. The unaudited pro forma statements of operations have been developed by applying pro forma adjustments to our historical statements of operations to give effect to the VEN Bakken Acquisition as if it had occurred on January 1, 2018.
The unaudited pro forma financial statements are for illustrative and informational purposes only and are not intended to represent or be indicative of what our results of operations would have been had the above transactions occurred as of or on the dates indicated. The unaudited pro forma financial statements also should not be considered representative of our future results of operations.
The pro forma adjustments related to the VEN Bakken Acquisition are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable and are subject to change. Accordingly, these pro forma adjustments are preliminary and have been made solely for the purpose of providing these unaudited pro forma financial statements. Differences between these preliminary estimates and the final acquisition accounting may occur and these differences could be material. The differences, if any, could have a material impact on the accompanying unaudited pro forma financial statements and our future results of operations.
NORTHERN OIL AND GAS, INC.
PRO FORMA BALANCE SHEET
(in thousands)
(unaudited)
As of June 30, 2019 | ||||||||||||||||||
Historical Northern Oil and Gas |
Historical VEN Bakken Acquisition |
VEN Bakken Acquisition Adjustments |
Pro Forma Combined |
|||||||||||||||
Assets |
||||||||||||||||||
Current Assets: |
||||||||||||||||||
Cash and cash equivalents |
$ | 2,794 | $ | 825 | $ | (825 | ) | (b) | $ | 2,794 | ||||||||
Accounts receivable, net |
87,697 | 15,864 | (15,864 | ) | (b) | 87,697 | ||||||||||||
Advances to operators |
1,425 | | | 1,425 | ||||||||||||||
Prepaid expenses and other |
8,226 | 737 | (737 | ) | (b) | 8,226 | ||||||||||||
Derivative instruments |
32,531 | 550 | (550 | ) | (b) | 32,531 | ||||||||||||
Income tax receivable |
395 | | | 395 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
133,068 | 17,976 | (17,976 | ) | 133,068 | |||||||||||||
Oil and Natural Gas Properties, Full Cost Method of Accounting: |
||||||||||||||||||
Proved properties |
3,607,214 | 314,280 | 5,861 | (a), (c) | 3,927,355 | |||||||||||||
Unproved properties |
9,249 | | | 9,249 | ||||||||||||||
Other property and equipment |
1,609 | | | 1,609 | ||||||||||||||
Less accumulated depreciation, depletion, amortization and impairment |
(2,324,790 | ) | (57,779 | ) | 57,779 | (b) | (2,324,790 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Oil and natural gas properties, net |
1,293,282 | 256,501 | 63,640 | 1,613,423 | ||||||||||||||
Other Assets: |
||||||||||||||||||
Derivative instruments |
26,610 | 1,063 | (1,063 | ) | (b) | 26,610 | ||||||||||||
Deferred income taxes |
420 | | | 420 | ||||||||||||||
Acquisition deposit |
31,000 | | (31,000 | ) | (d) | | ||||||||||||
Other noncurrent assets, net |
10,012 | 253 | (253 | ) | (b) | 10,012 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total Assets |
$ | 1,494,391 | $ | 275,793 | $ | 13,348 | $ | 1,783,533 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and Stockholders Equity (Deficit)/Members Capital |
||||||||||||||||||
Current Liabilities: |
||||||||||||||||||
Accounts payable |
$ | 93,355 | $ | 10,458 | $ | (10,458 | ) | (b) | 93,355 | |||||||||
Accrued liabilities |
83,880 | | | 83,880 | ||||||||||||||
Accrued interest |
15,050 | | | 15,050 | ||||||||||||||
Debt exchange derivative |
2,791 | | | 2,791 | ||||||||||||||
Derivative instruments |
95 | 3,814 | 215 | (a), (e) | 4,124 | |||||||||||||
Contingent consideration |
36,992 | | | 36,992 | ||||||||||||||
Other current liabilities |
566 | 243 | (243 | ) | (b) | 566 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
232,726 | 14,515 | (10,486 | ) | 236,758 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Long-Term Liabilities: |
||||||||||||||||||
Long-term debt, net |
857,198 | 134,591 | 133,146 | (f) | 1,124,935 | |||||||||||||
Derivative instruments |
1,644 | 6,405 | (740 | ) | (a), (e) | 7,309 | ||||||||||||
Asset retirement obligations |
12,845 | 1,016 | (1,016 | ) | (b) | 12,845 | ||||||||||||
Other noncurrent liabilities |
329 | 1,336 | (1,336 | ) | (b) | 329 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total Liabilities |
1,104,742 | 157,863 | 119,568 | 1,382,176 | ||||||||||||||
Commitments and Contingencies |
||||||||||||||||||
Stockholders Equity/Members capital: |
||||||||||||||||||
Preferred stock, par value $.001; 5,000,000 authorized, no shares outstanding |
| | | | ||||||||||||||
Common stock, par value $.001; 675,000,000 authorized, 389,435,991 shares outstanding at 6/30/2019 |
389 | | 6 | (g) | 395 | |||||||||||||
Members capital |
| 117,930 | (117,930 | ) | (b) | | ||||||||||||
Additional paid-in capital |
1,248,906 | | 11,703 | (g) | 1,260,609 | |||||||||||||
Retained deficit |
(859,647 | ) | | | (859,647 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity/members capital |
389,649 | 117,930 | (106,221 | ) | 401,357 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total Liabilities and Stockholders Equity/Members Capital |
$ | 1,494,391 | $ | 275,793 | $ | 13,348 | $ | 1,783,533 | ||||||||||
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
NORTHERN OIL AND GAS, INC.
PRO FORMA STATEMENT OF OPERATIONS
(in thousands, except share and per share numbers)
(unaudited)
For the Year Ended December 31, 2018 | ||||||||||||||||||
Historical Northern Oil and Gas |
Historical VEN Bakken Acquisition |
VEN Bakken Acquisition Adjustments |
Pro Forma Combined |
|||||||||||||||
REVENUES |
||||||||||||||||||
Oil and Gas Sales |
$ | 493,909 | $ | 183,563 | $ | | $ | 677,472 | ||||||||||
Gain (Loss) on Derivative Instruments, Net |
185,006 | 19,402 | | 204,408 | ||||||||||||||
Other Revenue |
9 | | | 9 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total Revenues |
678,924 | 202,965 | | 881,889 | ||||||||||||||
OPERATING EXPENSES |
||||||||||||||||||
Production Expenses |
66,646 | 42,392 | | 109,038 | ||||||||||||||
Production Taxes |
45,302 | 15,458 | | 60,760 | ||||||||||||||
General and Administrative Expenses |
14,568 | 4,967 | | 19,535 | ||||||||||||||
Depletion, Depreciation, Amortization, and Accretion |
119,780 | 39,473 | 5,870 | (h) | 165,123 | |||||||||||||
Exploration and other expense |
| 8 | | 8 | ||||||||||||||
Impairment of Other Current Assets |
| | | | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total Expenses |
246,296 | 102,298 | 5,870 | 354,464 | ||||||||||||||
INCOME (LOSS) FROM OPERATIONS |
432,628 | 100,667 | (5,870 | ) | 527,425 | |||||||||||||
OTHER INCOME AND EXPENSE |
||||||||||||||||||
Interest Expense, Net of Capitalization |
(86,005 | ) | (7,561 | ) | (6,607 | ) | (i) | (100,173 | ) | |||||||||
Write-Off of Debt Issuance Costs |
| | | | ||||||||||||||
Loss on the Extinguishment of Debt |
(173,430 | ) | | | (173,430 | ) | ||||||||||||
Debt Exchange Derivative Gain/(Loss) |
(598 | ) | | | (598 | ) | ||||||||||||
Contingent Consideration Loss |
(28,968 | ) | | | (28,968 | ) | ||||||||||||
Financing Expense |
(884 | ) | | | (884 | ) | ||||||||||||
Other Income (Expense) |
891 | 723 | | 1,614 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total Other Income (Expense) |
(288,994 | ) | (6,838 | ) | (6,607 | ) | (302,439 | ) | ||||||||||
INCOME (LOSS) BEFORE TAXES |
143,634 | 93,829 | (12,477 | ) | 224,986 | |||||||||||||
INCOME TAX BENEFIT |
(55 | ) | | | (55 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME (LOSS) |
$ | 143,689 | $ | 93,829 | $ | (12,477 | ) | $ | 225,041 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net Income (Loss) Per Common Share - Basic |
$ | 0.61 | $ | 0.93 | ||||||||||||||
Net Income (Loss) Per Common Share - Diluted |
$ | 0.61 | $ | 0.93 | ||||||||||||||
Weighted Average Shares Outstanding - Basic |
236,206,457 | 5,602,147 | (j) | 241,808,604 | ||||||||||||||
Weighted Average Shares Outstanding - Diluted |
236,773,911 | 5,602,147 | (j) | 242,376,058 |
The accompanying notes are an integral part of these financial statements.
NORTHERN OIL AND GAS, INC.
PRO FORMA STATEMENT OF OPERATIONS
(in thousands, except share and per share numbers)
(unaudited)
For the Six Months Ended June 30, 2019 | ||||||||||||||||||
Historical Northern Oil and Gas |
Historical VEN Bakken Acquisition |
VEN Bakken Acquisition Adjustments |
Pro Forma Combined |
|||||||||||||||
REVENUES |
||||||||||||||||||
Oil and Gas Sales |
$ | 282,530 | $ | 59,483 | $ | | $ | 342,013 | ||||||||||
Gain (Loss) on Derivative Instruments, Net |
(103,031 | ) | (31,157 | ) | | (134,188 | ) | |||||||||||
Other Revenue |
7 | | | 7 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total Revenues |
179,506 | 28,326 | | 207,832 | ||||||||||||||
OPERATING EXPENSES |
||||||||||||||||||
Production Expenses |
50,799 | 19,086 | | 69,885 | ||||||||||||||
Production Taxes |
26,553 | 4,777 | | 31,330 | ||||||||||||||
General and Administrative Expenses |
11,300 | 2,042 | | 13,342 | ||||||||||||||
Depletion, Depreciation, Amortization, and Accretion |
91,225 | 15,723 | (5,480 | ) | (h) | 101,468 | ||||||||||||
Exploration and other expense |
| 2 | | 2 | ||||||||||||||
Impairment of Other Current Assets |
2,694 | | | 2,694 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total Expenses |
182,571 | 41,630 | (5,480 | ) | 218,721 | |||||||||||||
INCOME (LOSS) FROM OPERATIONS |
(3,065 | ) | (13,304 | ) | 5,480 | (10,889 | ) | |||||||||||
OTHER INCOME AND EXPENSE |
||||||||||||||||||
Interest Expense, Net of Capitalization |
(37,327 | ) | (3,390 | ) | (3,694 | ) | (i) | (44,411 | ) | |||||||||
Write-Off of Debt Issuance Costs |
| | | | ||||||||||||||
Loss on the Extinguishment of Debt |
(425 | ) | | | (425 | ) | ||||||||||||
Debt Exchange Derivative Gain/(Loss) |
1,413 | | | 1,413 | ||||||||||||||
Contingent Consideration Loss |
(23,371 | ) | | | (23,371 | ) | ||||||||||||
Financing Expense |
| | | | ||||||||||||||
Other Income (Expense) |
14 | 4 | | 18 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total Other Income (Expense) |
(59,696 | ) | (3,386 | ) | (3,694 | ) | (66,776 | ) | ||||||||||
INCOME (LOSS) BEFORE TAXES |
(62,762 | ) | (16,690 | ) | 1,786 | (77,665 | ) | |||||||||||
INCOME TAX BENEFIT |
| | | | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
NET INCOME (LOSS) |
$ | (62,762 | ) | $ | (16,690 | ) | $ | 1,786 | $ | (77,665 | ) | |||||||
|
|
|
|
|
|
|
|
|||||||||||
Net Income (Loss) Per Common Share - Basic |
$ | (0.17 | ) | $ | (0.20 | ) | ||||||||||||
Net Income (Loss) Per Common Share - Diluted |
$ | (0.17 | ) | $ | (0.20 | ) | ||||||||||||
Weighted Average Shares Outstanding - Basic |
374,927,630 | 5,602,147 | (j) | 380,529,777 | ||||||||||||||
Weighted Average Shares Outstanding - Diluted |
374,927,630 | 5,602,147 | (j) | 380,529,777 |
The accompanying notes are an integral part of these financial statements.
NOTE 1. BASIS OF PRO FORMA PRESENTATION
These financial statements present our unaudited pro forma balance sheet as of June 30, 2019, unaudited pro forma statement of operations for the year ended December 31, 2018 and unaudited pro forma statement of operations for the six months ended June 30, 2019. These unaudited statements have been developed by applying pro forma adjustments to our historical financial statements to give effect to the VEN Bakken Acquisition.
The unaudited pro forma financial statements were prepared in accordance with Regulation S-X Article 11 of the Securities and Exchange Commission.
The pro forma adjustments related to the purchase price allocation of the VEN Bakken Acquisition are preliminary and are subject to revisions as additional information becomes available. Revisions to the preliminary purchase price allocation may have a significant impact on the pro forma amounts of depreciation, depletion, amortization, and accretion expense. The pro forma adjustments related to the VEN Bakken Acquisition reflect the fair values of the assets as of July 1, 2019 (the closing date of the transaction). The pro forma adjustments do not necessarily reflect the fair values that would have been recorded if the acquisition had occurred on January 1, 2018 or June 30, 2019.
The unaudited pro forma financial statements should be read together with our historical financial statements and the related notes as of and for the year ended December 31, 2018 and the six months ended June 30, 2019, and the historical financial statements and related notes for Flywheel Bakken as of and for the year ended December 31, 2018, and the six months ended June 30, 2019.
The pro forma financial information presented gives effect to pro forma events that are (1) directly attributable to the VEN Bakken Acquisition, (2) factually supportable and (3) with respect to the pro forma statements of operations, expected to have a continuing impact. The pro forma financial information is not necessarily indicative of financial results that would have been attained had the VEN Bakken Acquisition occurred on the date indicated or which could be achieved in the future. The pro forma adjustments are based on currently available information and certain estimates and assumptions. However, our management believes that the assumptions provide a reasonable basis for presenting the significant effects of the transactions as contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma financial statements.
NOTE 2. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
The accompanying unaudited pro forma combined financial statements reflect the following pro forma adjustments:
(a) | Represents the preliminary purchase price allocation for the VEN Bakken Acquisition of $310.4 million, consisting of $320.1 million of proved oil and natural gas properties, which was reduced by $9.7 million of assumed derivative instrument liabilities. |
(b) | Represents the elimination of historical assets, liabilities, and members capital related to the VEN Bakken Acquisition that we are not acquiring or assuming. |
(c) | Represents the elimination of the historical VEN Bakken Acquisition proved oil and natural gas properties of $314.3 million, which was offset by additions of proved oil and natural gas properties from the VEN Bakken Acquisition of $320.1 million. |
(d) | Represents the elimination of the acquisition deposit for the VEN Bakken Acquisition, which was released to Seller at closing. |
(e) | Represents adjustments to the historical VEN Bakken Acquisition derivative instrument liabilities, which were assumed by the Company, to reflect their fair values at closing. |
(f) | Represents the elimination of the historical VEN Bakken Acquisition long-term debt, net of $134.6 million, which the Company did not assume, offset by a $267.7 million increase due to the issuance of the Promissory Note at closing and additional borrowing on our revolving credit facility to fund payment of the cash closing consideration. |
(g) | Represents the 5,602,147 shares of our common stock issued as part of the closing consideration, valued at $11.7 million based on the $2.09 per share closing price of our common stock on the closing date of the acquisition. |
(h) | Represents the increase (decrease) in depreciation, depletion, amortization, and accretion expense computed on a unit of production basis following the preliminary purchase price allocation to proved oil and natural gas properties, as if the VEN Bakken Acquisition was consummated on January 1, 2018. |
(i) | Represents the increase in interest expense due to the issuance of the Promissory Note at closing and additional borrowing on our revolving credit facility to fund payment of the cash closing consideration, as if the VEN Bakken Acquisition closed on January 1, 2018. |
(j) | Represents the impact on weighted average shares outstanding of the shares issued as consideration in the VEN Bakken Acquisition, as if the VEN Bakken Acquisition closed and thus the shares were issued on January 1, 2018 (rather than July 1, 2019). |
SUPPLEMENTAL PRO FORMA COMBINED OIL AND NATURAL GAS RESERVE AND
STANDARDIZED MEASURE INFORMATION (UNAUDITED)
The following unaudited supplemental pro forma oil and natural gas reserve tables present how the combined oil and natural gas reserves and standardized measure information of the Company and the VEN Bakken Acquisition may have appeared had the VEN Bakken Acquisition occurred on January 1, 2018. The supplemental pro forma combined oil and natural gas reserves and standardized measure information are for illustrative purposes only.
All of the reserves are located in the United States. Reserve estimates are based on the following:
(a) | For the Companys Historical Results: as reported in our Annual Report on Form 10-K for the year ended December 31, 2018, based upon a reserve report prepared by our independent petroleum engineers as of December 31, 2018; |
(b) | For the VEN Bakken Acquisition Historical Results: based upon a reserve report prepared by independent petroleum engineers as of December 31, 2018; |
Numerous uncertainties are inherent in estimating quantities and values of proved reserves and in projecting future rates of production and the amount and timing of development expenditures, including many factors beyond the property owners control. Reserve engineering is a subjective process of estimating the recovery from underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Because all reserve estimates are to some degree subjective, the quantities of oil and gas that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures and future oil and gas sales prices may each differ from those assumed in these estimates. In addition, different reserve engineers may make different estimates of reserve quantities and cash flows based upon the same available data. The standardized measure shown below represents an estimate only and should not be construed as the current market value of the estimated oil and natural gas reserves reported below.
The pro forma estimates of proved reserves presented below include only those quantities of oil and natural gas that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic, operating and regulatory practices. Proved developed reserves represent only those reserves estimated to be recovered through existing wells. Proved undeveloped reserves include those reserves that may be recovered from new wells on undrilled acreage or from existing wells on which a relatively major expenditure for recompletion or secondary recovery operation is required.
The following tables provide a summary of the changes in estimated proved reserves for the year ended December 31, 2018, as well as pro forma proved developed and proved undeveloped reserves as of the beginning and end of the year, giving effect to the VEN Bakken Acquisition as if it had occurred on January 1, 2018. The pro forma standardized measure does not include future income taxes attributable to the VEN Bakken Acquisition as the relevant entities are considered pass-through entities for tax purposes.
Estimated Pro Forma Combined Quantities of Proved Reserves
Historical Northern Oil and Gas | ||||||||||||
Natural Gas (MMcf) |
Oil (Mbbl) |
MBOE | ||||||||||
Proved Developed and Undeveloped Reserves at December 31, 2017 |
78,120 | 62,812 | 75,832 | |||||||||
|
|
|
|
|
|
|||||||
Revisions of Previous Estimates |
426 | 3,470 | 3,541 | |||||||||
Extensions, Discoveries and Other Additions |
28,348 | 28,516 | 33,241 | |||||||||
Purchases of minerals in place |
37,397 | 25,965 | 32,198 | |||||||||
Production |
(9,225 | ) | (7,790 | ) | (9,328 | ) | ||||||
|
|
|
|
|
|
|||||||
Proved Developed and Undeveloped Reserves at December 31, 2018 |
135,066 | 112,973 | 135,484 | |||||||||
|
|
|
|
|
|
|||||||
Proved Developed Reserves: |
||||||||||||
December 31, 2017 |
46,518 | 38,592 | 46,345 | |||||||||
|
|
|
|
|
|
|||||||
December 31, 2018 |
82,315 | 62,497 | 76,216 | |||||||||
|
|
|
|
|
|
|||||||
Proved Undeveloped Reserves: |
||||||||||||
December 31, 2017 |
31,602 | 24,220 | 29,487 | |||||||||
|
|
|
|
|
|
|||||||
December 31, 2018 |
52,752 | 50,476 | 59,268 | |||||||||
|
|
|
|
|
|
Historical VEN Bakken Acquisition | ||||||||||||
Natural Gas (MMcf) |
Oil (Mbbl) |
MBOE | ||||||||||
Proved Developed and Undeveloped Reserves at December 31, 2017 |
64,723 | 22,136 | 32,923 | |||||||||
|
|
|
|
|
|
|||||||
Revisions of Previous Estimates |
(1,236 | ) | 133 | (73 | ) | |||||||
Extensions, Discoveries and Other Additions |
7,575 | 3,165 | 4,428 | |||||||||
Purchases of minerals in place |
| | | |||||||||
Production |
(3,806 | ) | (2,614 | ) | (3,248 | ) | ||||||
|
|
|
|
|
|
|||||||
Proved Developed and Undeveloped Reserves at December 31, 2018 |
67,256 | 22,820 | 34,029 | |||||||||
|
|
|
|
|
|
|||||||
Proved Developed Reserves: |
||||||||||||
December 31, 2017 |
37,031 | 11,798 | 17,970 | |||||||||
|
|
|
|
|
|
|||||||
December 31, 2018 |
37,801 | 13,333 | 19,633 | |||||||||
|
|
|
|
|
|
|||||||
Proved Undeveloped Reserves: |
||||||||||||
December 31, 2017 |
27,692 | 10,338 | 14,953 | |||||||||
|
|
|
|
|
|
|||||||
December 31, 2018 |
29,455 | 9,487 | 14,396 | |||||||||
|
|
|
|
|
|
Pro Forma Combined | ||||||||||||
Natural Gas (MMcf) |
Oil (Mbbl) |
MBOE | ||||||||||
Proved Developed and Undeveloped Reserves at December 31, 2017 |
142,843 | 84,948 | 108,755 | |||||||||
|
|
|
|
|
|
|||||||
Revisions of Previous Estimates |
(810 | ) | 3,603 | 3,468 | ||||||||
Extensions, Discoveries and Other Additions |
35,923 | 31,681 | 37,669 | |||||||||
Purchases of minerals in place |
37,397 | 25,965 | 32,198 | |||||||||
Production |
(13,031 | ) | (10,404 | ) | (12,576 | ) | ||||||
|
|
|
|
|
|
|||||||
Proved Developed and Undeveloped Reserves at December 31, 2018 |
202,322 | 135,793 | 169,513 | |||||||||
|
|
|
|
|
|
|||||||
Proved Developed Reserves: |
||||||||||||
December 31, 2017 |
83,549 | 50,390 | 64,315 | |||||||||
|
|
|
|
|
|
|||||||
December 31, 2018 |
120,116 | 75,830 | 95,849 | |||||||||
|
|
|
|
|
|
|||||||
Proved Undeveloped Reserves: |
||||||||||||
December 31, 2017 |
59,294 | 34,558 | 44,440 | |||||||||
|
|
|
|
|
|
|||||||
December 31, 2018 |
82,207 | 59,963 | 73,664 | |||||||||
|
|
|
|
|
|
Pro Forma Combined Standardized Measure of Discounted Future Net Cash Flows
(in thousands)
As of December 31, 2018 | ||||||||||||
Historical Northern Oil and Gas |
Historical VEN Bakken Acquisition |
Pro Forma Combined |
||||||||||
Future Cash Inflows |
$ | 7,524,587 | $ | 1,711,364 | $ | 9,235,951 | ||||||
Future Production Costs |
(2,605,279 | ) | (734,266 | ) | (3,339,545 | ) | ||||||
Future Development Costs |
(784,615 | ) | (146,488 | ) | (931,103 | ) | ||||||
Future Income Tax Expense |
(611,989 | ) | (611,989 | ) | ||||||||
|
|
|
|
|
|
|||||||
Future Net Cash Flows |
3,522,704 | 830,610 | 4,353,314 | |||||||||
10% Annual Discount for Estimated Timing of Cash Flows |
(1,643,061 | ) | (366,552 | ) | (2,009,613 | ) | ||||||
|
|
|
|
|
|
|||||||
Standardized Measure of Discounted Future Net Cash Flows |
$ | 1,879,643 | $ | 464,058 | $ | 2,343,701 | ||||||
|
|
|
|
|
|
Pro Forma Combined Changes in the Standardized Measure of Discounted Future Net Cash Flows
(in thousands)
As of December 31, 2018 | ||||||||||||
Historical Northern Oil and Gas |
Historical VEN Bakken Acquisition |
Pro Forma Combined |
||||||||||
Standardized measure, beginning of period |
$ | 753,986 | $ | 297,660 | $ | 1,051,646 | ||||||
Sales of oil and natural gas produced, net of production costs |
(381,961 | ) | (125,705 | ) | (507,666 | ) | ||||||
Extensions and discoveries |
549,353 | 64,588 | 613,941 | |||||||||
Previously estimated development costs incurred |
115,542 | 25,364 | 140,906 | |||||||||
Net change of prices and production costs |
484,122 | 167,319 | 651,441 | |||||||||
Change in future development costs |
(91,829 | ) | (8,237 | ) | (100,066 | ) | ||||||
Revisions of previous quantity estimates |
66,185 | (1,145 | ) | 65,040 | ||||||||
Accretion of discount |
75,800 | 29,766 | 105,566 | |||||||||
Change in income taxes |
(296,571 | ) | | (296,571 | ) | |||||||
Acquisition of reserves |
502,193 | | 502,193 | |||||||||
Changes in timing and other |
102,825 | 14,448 | 117,273 | |||||||||
|
|
|
|
|
|
|||||||
Standardized measure, end of period |
$ | 1,879,643 | $ | 464,058 | $ | 2,343,703 | ||||||
|
|
|
|
|
|
Serious News for Serious Traders! Try StreetInsider.com Premium Free!
You May Also Be Interested In
- Midday movers: RH, Estee Lauder rise; Tesla falls
- FMCS Unveils 12-Part Video Series Showcasing Its Mission and Services in a Brand-New Way
- Cryptocurrency Mining and Renewable Energy: Bitcoin, BlockDAG Network, and Ethereum Lead Sustainability
Create E-mail Alert Related Categories
SEC FilingsSign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!