Quarterly report pursuant to Section 13 or 15(d)

CRUDE OIL AND NATURAL GAS PROPERTIES

v3.19.2
CRUDE OIL AND NATURAL GAS PROPERTIES
6 Months Ended
Jun. 30, 2019
Oil and Gas Exploration and Production Industries Disclosures [Abstract]  
CRUDE OIL AND NATURAL GAS PROPERTIES CRUDE OIL AND NATURAL GAS PROPERTIES
The book value of the Company’s crude oil and natural gas properties consists of all acquisition costs (including cash expenditures and the value of stock consideration), drilling costs and other associated capitalized costs.  Acquisitions are accounted for as purchases and, accordingly, the results of operations are included in the accompanying condensed statements of operations from the closing date of the acquisition.  Acquired assets and liabilities assumed are recorded based on their estimated fair value at the time of the acquisition.  Acquisitions have been funded with internal cash flow, bank borrowings and the issuance of debt and equity securities.

2019 Acquisitions

The Company acquired oil and natural gas properties, through a number of independent transactions, for a total of $11.3 million and $19.7 million during the three and six months ended June 30, 2019, respectively.

2018 Acquisitions

W Energy Acquisition

On July 27, 2018, the Company entered into a purchase and sale agreement, which was subsequently amended on September 25, 2018 (as amended, the “W Energy Purchase Agreement”), with WR Operating LLC (“W Energy”), to acquire, effective as of July 1, 2018, approximately 27.2 net producing wells and 5.9 net wells in progress, as well as approximately 10,633 net acres in North Dakota (the “W Energy Acquisition”). On October 1, 2018, the Company closed on the acquisition for total estimated consideration of $341.6 million, consisting of (i) $97.8 million in cash (which reflects the $117.1 million in cash consideration under the W Energy Purchase Agreement, less $2.2 million of working capital adjustments made at closing and $17.0 million of additional estimated post-closing working capital adjustments), (ii) 51,476,961 shares of Company common stock valued at $220.8 million, based on the $4.29 per share closing price of Company common stock on the closing date of the acquisition, and (iii) $23.0 million in value attributable to potential additional contingent consideration in the future (described in more detail below). No material transaction costs were incurred in connection with this acquisition. The following table reflects the fair values of the net assets and liabilities as of the date of acquisition:

(In thousands)
Fair value of net assets:
Proved oil and natural gas properties $ 341,633 
Asset retirement cost 939 
Total assets acquired 342,572 
Asset retirement obligations (939)
Net assets acquired $ 341,633 
Fair value of consideration paid for net assets:
Cash consideration $ 97,838 
Issuance of common stock (51.5 million shares at $4.29 per share)
220,836 
Contingent consideration 22,959 
Total fair value of consideration transferred $ 341,633 

A contingent consideration liability arising from potential additional consideration in connection with the W Energy Acquisition has been recognized at its fair value. The amount of additional contingent consideration payable by the Company, if any, is dependent upon the performance of the Company’s share price over a thirteen-month period ending with October 2019. The acquisition date fair value of the potential additional consideration, totaling $23.0 million, was recorded within contingent consideration liabilities on the Company’s condensed balance sheets. Changes in the fair value of the liability (that were not accounted for as revisions of the acquisition date fair value) are recorded in other income (expense) on the Company’s condensed statement of operations.
Pivotal Acquisition

On July 17, 2018, the Company entered into purchase and sale agreements with Pivotal Williston Basin, LP and Pivotal Williston Basin II, LP, to acquire approximately 20.8 net producing wells and 2.2 net wells in process, as well as approximately 444 net acres in North Dakota (the “Pivotal Acquisition”). On September 17, 2018, the Company closed on the acquisition for total estimated consideration of $146.1 million, consisting of (i) $48.2 million in cash (which reflects the $68.4 million of aggregate cash consideration provided for in the purchase agreements, less $7.8 million of working capital adjustments made at closing and $12.4 million of additional estimated post-closing working capital adjustments), (ii) 25,753,578 shares of the Company’s common stock valued at $88.6 million, based on the $3.44 per share closing price of the Company’s common stock on the closing date of the acquisition, and (iii) $9.4 million in value attributable to potential additional contingent consideration (described in more detail below). No material transaction costs were incurred in connection with this acquisition. The following table reflects fair values of the net assets and liabilities as of the date of acquisition:

(In thousands)
Fair value of net assets:
  Proved oil and natural gas properties $ 146,134 
  Asset retirement cost 644 
Total assets acquired 146,778 
  Asset retirement obligations (644)
Net assets acquired $ 146,134 
Fair value of consideration paid for net assets:
  Cash consideration $ 48,189 
  Issuance of common stock (25.8 million shares at $3.44 per share)
88,592 
  Contingent consideration 9,353 
Total fair value of consideration transferred $ 146,134 

A contingent consideration liability arising from potential additional consideration in connection with the Pivotal Acquisition has been recognized at its fair value. The amount of additional contingent consideration payable by the Company, if any, is dependent upon the performance of the Company’s share price over a thirteen month period ending with October 2019. The acquisition date fair value of the potential additional consideration, totaling $9.4 million, was recorded within contingent consideration liabilities on the Company’s condensed balance sheets. Changes in the fair value of the liability (that were not accounted for as revisions of the acquisition date fair value) are recorded in other income (expense) on the Company’s condensed statement of operations.

The following summarized unaudited pro forma condensed statement of operations information for the three and six months ended June 30, 2018 assumes that both the W Energy Acquisition and the Pivotal Acquisition occurred as of January 1, 2017. The Company prepared the following summarized unaudited pro forma financial results for comparative purposes only. The summarized unaudited pro forma information may not be indicative of the results that would have occurred had the Company completed both of these acquisitions as of January 1, 2017, or that would be attained in the future.

(In thousands) 2018 2018
Revenues $ 107,465  $ 205,092 
Net Income (Loss) (80,590) (137,317)
Salt Creek Acquisition

On April 25, 2018, the Company entered into a purchase and sale agreement with Salt Creek Oil and Gas, LLC, to acquire 64 gross, 5.5 net producing (PDP) wells, 31 gross, 1.5 net drilling and completing (PDNP) wells and 1,319 net acres located in McKenzie and Mountrail counties of North Dakota. On June 4, 2018, the Company closed the transaction for consideration of $60.0 million which is comprised of $44.7 million of cash consideration and $15.2 million of common stock consideration.  No material transaction costs were incurred in connection with this acquisition. The following table reflects the fair values of the net assets and liabilities as of the date of acquisition:
(In thousands)
Fair value of net assets:
  Proved oil and natural gas properties $ 59,978 
  Asset retirement cost 154 
Total assets acquired 60,132 
  Asset retirement obligations (154)
Net assets acquired $ 59,978 
Fair value of consideration paid for net assets:
  Cash consideration $ 44,738 
  Issuance of common stock (6.0 million shares at $2.54 per share)
15,240 
Total fair value of consideration transferred $ 59,978 

Unproved Properties

All properties that are not classified as proved properties are considered unproved properties and, thus, the costs associated with such properties are not subject to depletion. Once a property is classified as proved, all associated acreage and drilling costs are subject to depletion.

The Company historically has acquired unproved properties by purchasing individual or small groups of leases directly from mineral owners, landmen, or lease brokers, which leases historically have not been subject to specified drilling projects, and by purchasing lease packages in identified project areas controlled by specific operators.  The Company generally participates in drilling activities on a heads up basis by electing whether to participate in each well on a well-by-well basis at the time wells are proposed for drilling.

The Company believes that the majority of its unproved costs will become subject to depletion within the next five years by proving up reserves relating to the acreage through exploration and development activities, by impairing the acreage that will expire before the Company can explore or develop it further or by determining that further exploration and development activity will not occur.  The timing by which all other properties will become subject to depletion will be dependent upon the timing of future drilling activities and delineation of its reserves.

Capitalized costs associated with impaired unproved properties and capitalized costs related to properties having proved reserves, plus the estimated future development costs and asset retirement costs, are depleted and amortized on the unit-of-production method. Under this method, depletion is calculated at the end of each period by multiplying total production for the period by a depletion rate. The depletion rate is determined by dividing the total unamortized cost base plus future development costs by net equivalent proved reserves at the beginning of the period. The costs of unproved properties are withheld from the depletion base until such time as they are either developed or abandoned. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion and full cost ceiling calculations. For the three months ended June 30, 2019 and 2018, the Company expired leases of $1.0 million and $1.2 million, respectively. For the six months ended June 30, 2019 and 2018, the Company expired leases of $1.8 million and $5.0 million, respectively.