Quarterly report pursuant to Section 13 or 15(d)

CRUDE OIL AND NATURAL GAS PROPERTIES

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CRUDE OIL AND NATURAL GAS PROPERTIES
9 Months Ended
Sep. 30, 2019
Oil and Gas Exploration and Production Industries Disclosures [Abstract]  
CRUDE OIL AND NATURAL GAS PROPERTIES CRUDE OIL AND NATURAL GAS PROPERTIES
The Company follows the full cost method of accounting for crude oil and natural gas operations whereby all costs related to the exploration and development of crude oil and natural gas properties are capitalized into a single cost center (“full cost pool”).  Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling directly related to acquisition, and exploration activities.  Internal costs that are capitalized are directly attributable to acquisition, exploration and development activities and do not include costs related to production, general corporate overhead or similar activities.  Costs associated with production and general corporate activities are expensed in the period incurred.

Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter.  The test determines a limit, or ceiling, on the book value of the proved oil and gas properties.  Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes, or the cost center ceiling. The Company did not have any ceiling test impairment for the three and nine months ended September 30, 2019 and 2018, respectively.
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

Not including the VEN Bakken Acquisition described below, the Company acquired oil and natural gas properties, through a number of independent transactions, for a total of $19.1 million and $36.3 million during the three and nine months ended September 30, 2019, respectively. These amounts include $9.2 million and $11.3 million, respectively, of development costs that occurred prior to the closings of the acquisitions.

VEN Bakken Acquisition

On July 1, 2019, the Company completed its acquisition (the “VEN Bakken Acquisition”) of certain oil and gas properties and interests from VEN Bakken, LLC (“VEN Bakken”), effective as of July 1, 2019. VEN Bakken is a wholly-owned subsidiary of Flywheel Bakken, LLC. At closing the acquired assets consisted of approximately 90.1 net producing wells and 3.3 net wells in process, as well as approximately 18,000 net acres substantially all in North Dakota. The Company also assumed certain crude oil derivative contracts from VEN Bakken as part of the acquisition. The VEN Bakken Acquisition was completed pursuant to the purchase and sale agreement between the Company and VEN Bakken, dated as of April 18, 2019.

The total estimated consideration paid by the Company was $312.4 million, consisting of (i) $172.1 million in cash, (ii) 5,602,147 shares of Company common stock valued at $11.7 million, based on the $2.09 per share closing price of Company common stock on the closing date of the acquisition and (iii) $128.7 million of value attributable to a 6.0% unsecured promissory note due July 1, 2022 issued by the Company to VEN Bakken in the aggregate principal amount of $130.0 million (the “Unsecured VEN Bakken Note”). The results of operations from the July 1, 2019 closing date through September 30, 2019, represented approximately $26.1 million of revenue and $10.0 million of income from operations. The Company incurred $1.8 million of transactions costs in connection with the acquisition, which are included in general and administrative expense in the condensed statement of operations. The following table reflects the preliminary 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 $ 322,128   
  Asset retirement cost 2,680   
Total assets acquired 324,808   
  Asset retirement obligations (2,680)  
  Derivative instruments (9,694)  
Net assets acquired $ 312,434   
Fair value of consideration paid for net assets:
  Cash consideration $ 172,066   
  Issuance of common stock (5.6 million shares at $2.09 per share)
11,708   
  Unsecured VEN Bakken Note 128,660   
Total fair value of consideration transferred $ 312,434   
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.

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   
Pro Forma Information

The following summarized unaudited pro forma condensed statement of operations information for the three and nine months ended September 30, 2018, and for the nine months ended September 30, 2019, assumes that the VEN Bakken Acquisition, the W Energy Acquisition and the Pivotal Acquisition each occurred as of January 1, 2018. There is no pro forma information included for the three months ended September 30, 2019, because the Company’s actual financial results for such period fully reflect these acquisitions. 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 all of these acquisitions as of January 1, 2018, or that would be attained in the future.
Nine Months Ended Three Months Ended Nine Months Ended
(In thousands) September 30, 2019 September 30, 2018 September 30, 2018
Revenues $ 441,716    $ 176,312    $ 436,727   
Net Income (Loss) 11,564    34,725    (41,221)  

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 September 30, 2019 and 2018, the Company expired leases of $0.8 million and $3.1 million, respectively. For the nine months ended September 30, 2019 and 2018, the Company expired leases of $2.5 million and $8.1 million, respectively.