Roan Resources, Inc.
Condensed Consolidated Statements of Changes in Equity (Unaudited)
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
Common Stock (Shares)
|
Common Stock
|
Additional Paid-in Capital
|
Accumulated Deficit
|
Treasury Stock
|
Members’ Equity
|
Total Equity
|
|
(in thousands)
|
Balance at December 31, 2017
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,584,769
|
|
$
|
1,584,769
|
|
Acquisition of oil and natural gas properties in exchange for equity units
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
39,906
|
|
39,906
|
|
Equity-based compensation
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,292
|
|
2,292
|
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
35,081
|
|
35,081
|
|
Balance at March 31, 2018
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,662,048
|
|
$
|
1,662,048
|
|
Equity-based compensation
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,835
|
|
2,835
|
|
Net loss
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(22,757
|
)
|
(22,757
|
)
|
Balance at June 30, 2018
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,642,126
|
|
$
|
1,642,126
|
|
Equity-based compensation (1)
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—
|
|
—
|
|
192
|
|
—
|
|
—
|
|
2,741
|
|
2,933
|
|
Net loss (1)
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—
|
|
—
|
|
—
|
|
(299,765
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)
|
—
|
|
(1,475
|
)
|
(301,240
|
)
|
Issuance of common stock upon Reorganization
|
152,540
|
|
153
|
|
1,643,239
|
|
—
|
|
—
|
|
(1,643,392
|
)
|
—
|
|
Balance at September 30, 2018
|
152,540
|
|
$
|
153
|
|
$
|
1,643,431
|
|
$
|
(299,765
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
1,343,819
|
|
(1) Amounts were allocated to stockholders’ equity and members’ equity to reflect the Reorganization. See Note 10 – Equity for discussion of the Reorganization.
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|
|
|
|
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Balance at December 31, 2018
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152,540
|
|
$
|
153
|
|
$
|
1,646,401
|
|
$
|
(151,520
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
1,495,034
|
|
Equity-based compensation
|
—
|
|
—
|
|
3,065
|
|
—
|
|
—
|
|
—
|
|
3,065
|
|
Net loss
|
—
|
|
—
|
|
—
|
|
(58,056
|
)
|
—
|
|
—
|
|
(58,056
|
)
|
Balance at March 31, 2019
|
152,540
|
|
$
|
153
|
|
$
|
1,649,466
|
|
$
|
(209,576
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
1,440,043
|
|
Issuance of common stock in connection with Term Loan
|
1,525
|
|
1
|
|
2,317
|
|
—
|
|
—
|
|
—
|
|
2,318
|
|
Equity-based compensation
|
—
|
|
—
|
|
(3,222
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)
|
—
|
|
—
|
|
—
|
|
(3,222
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)
|
Net income
|
—
|
|
—
|
|
—
|
|
27,246
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|
—
|
|
—
|
|
27,246
|
|
Balance at June 30, 2019
|
154,065
|
|
$
|
154
|
|
$
|
1,648,561
|
|
$
|
(182,330
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
1,466,385
|
|
Vesting of restricted stock units
|
269
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Purchase of treasury stock
|
—
|
|
—
|
|
—
|
|
—
|
|
(128
|
)
|
—
|
|
(128
|
)
|
Equity-based compensation
|
—
|
|
—
|
|
2,995
|
|
—
|
|
—
|
|
—
|
|
2,995
|
|
Net income
|
—
|
|
—
|
|
—
|
|
19,295
|
|
—
|
|
—
|
|
19,295
|
|
Balance at September 30, 2019
|
154,334
|
|
$
|
154
|
|
$
|
1,651,556
|
|
$
|
(163,035
|
)
|
$
|
(128
|
)
|
$
|
—
|
|
$
|
1,488,547
|
|
|
|
|
|
|
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
Roan Resources, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
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Nine Months Ended
September 30,
|
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2019
|
|
2018
|
|
(in thousands)
|
Cash flows from operating activities
|
|
|
|
Net loss
|
$
|
(11,515
|
)
|
|
$
|
(288,916
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
Depreciation, depletion, amortization and accretion
|
141,969
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|
|
83,630
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|
Unproved leasehold amortization and impairment
|
35,932
|
|
|
25,642
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|
Gain on sale of other assets
|
(645
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)
|
|
—
|
|
Amortization of deferred financing costs
|
2,332
|
|
|
571
|
|
Loss on derivative contracts
|
5,913
|
|
|
100,920
|
|
Net cash received (paid) upon settlement of derivative contracts
|
20,006
|
|
|
(27,462
|
)
|
Equity-based compensation
|
2,838
|
|
|
8,060
|
|
Deferred income taxes
|
(3,589
|
)
|
|
299,662
|
|
Other
|
4,110
|
|
|
551
|
|
Changes in operating assets and liabilities increasing (decreasing) cash:
|
|
|
|
|
|
Accounts receivable and other assets
|
(31,775
|
)
|
|
(154,716
|
)
|
Accounts payable and other liabilities
|
4,422
|
|
|
158,702
|
|
Net cash provided by operating activities
|
169,998
|
|
|
206,644
|
|
Cash flows from investing activities
|
|
|
|
|
|
Acquisition of oil and natural gas properties
|
—
|
|
|
(22,935
|
)
|
Capital expenditures for oil and natural gas properties
|
(447,433
|
)
|
|
(485,580
|
)
|
Acquisition of other property and equipment
|
(83
|
)
|
|
(2,353
|
)
|
Proceeds from sale of other assets
|
1,475
|
|
|
—
|
|
Net cash used in investing activities
|
(446,041
|
)
|
|
(510,868
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
Proceeds from borrowings
|
263,000
|
|
|
309,300
|
|
Proceeds from borrowings - Affiliates
|
48,750
|
|
|
—
|
|
Repayment of borrowings
|
(45,000
|
)
|
|
—
|
|
Other
|
5,874
|
|
|
(2,647
|
)
|
Net cash provided by financing activities
|
272,624
|
|
|
306,653
|
|
Net (decrease) increase in cash and cash equivalents
|
(3,419
|
)
|
|
2,429
|
|
Cash and cash equivalents, beginning of period
|
6,883
|
|
|
1,471
|
|
Cash and cash equivalents, end of period
|
$
|
3,464
|
|
|
$
|
3,900
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest
|
$
|
22,172
|
|
|
$
|
4,024
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
Change in accrued capital expenditures
|
$
|
(61,408
|
)
|
|
$
|
38,593
|
|
Acquisition of oil and natural gas properties for equity
|
$
|
—
|
|
|
$
|
39,906
|
|
Right of use assets obtained in exchange for operating lease liabilities
|
$
|
6,336
|
|
|
$
|
—
|
|
Issuance of common stock in connection with Term Loan
|
$
|
2,317
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 – Business and Organization
Roan Resources, Inc. (“Roan Inc.” or the “Company”) was formed in September 2018 to facilitate a reorganization and to become the holding company for Roan Resources LLC (“Roan LLC”). In September 2018, a series of transactions were executed with Roan LLC’s members which resulted in Roan LLC becoming a wholly owned subsidiary of Roan Inc. These transactions are hereafter referred to as the “Reorganization.” See Note 10 – Equity for further discussion of the Reorganization transaction. The accompanying historical financial statements for the three and nine months ended September 30, 2018 are the financial statements of Roan LLC, our accounting predecessor. Following the Reorganization, the historical financial statements are the results of Roan Inc.
Roan LLC was initially formed by Citizen Energy II, LLC (“Citizen”) in May 2017. On August 31, 2017, a contribution agreement (the “Contribution Agreement”) by and among Roan LLC, Citizen, Linn Energy Holdings, LLC (“LEH”) and Linn Operating, LLC (together with LEH, “Linn”) was executed, pursuant to which, among other things, Citizen and Linn agreed to contribute oil and natural gas properties within an area-of-mutual-interest to Roan LLC (collectively the “Contribution”). In exchange for their contributions, Citizen and Linn each received a 50% equity interest in Roan LLC. In conjunction with the Contribution Agreement, Roan LLC entered into management services agreements with both Citizen and Linn (“MSAs”). See Note 12 –Transactions with Affiliates for additional discussion of the MSAs and transactions with Citizen and Linn.
The Company was formed to engage in the acquisition, exploration, development, production, and sale of oil and natural gas reserves. The Company’s oil and natural gas properties are located in Central Oklahoma. The Company’s corporate headquarters is located in Oklahoma City, Oklahoma.
On October 1, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among Citizen Energy Operating, LLC, a Delaware limited liability company (“Citizen Operating”), Citizen Energy Pressburg, Inc., a Delaware corporation and wholly owned subsidiary of Citizen Operating (“Merger Sub”) and the Company. The Merger Agreement provides for, among other things, the merger of the Company into Merger Sub with the Company as the surviving entity and a wholly owned subsidiary of Citizen Operating (the “Merger”). See Note 15 – Subsequent Events for additional discussion of the merger transaction.
Note 2 – Summary of Significant Accounting Policies
For a description of the Company’s significant accounting policies, refer to Note 2 to the Company’s 2018 audited financial statements included in the Annual Report on Form 10-K. The accompanying condensed consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Certain amounts in the prior period financial statements have been reclassified to conform to the 2019 presentation. These reclassifications had no impact on net income (loss), total stockholders’ equity or total cash flows.
Principles of Consolidation
The condensed consolidated financial statements of the Company include the accounts of Roan Inc. and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated.
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Interim Financial Statements
The accompanying condensed consolidated financial statements as of December 31, 2018 were derived from the annual financial statements included in the Annual Report on Form 10-K. The unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2019 and 2018 were prepared by the Company in accordance with the accounting policies stated in the audited financial statements. In the opinion of management, the Company’s unaudited condensed consolidated financial statements reflect all known adjustments necessary to fairly state the financial position of the Company and its results of operations and cash flows for such periods. All such adjustments are of a normal, recurring nature. Certain information and disclosures normally included in financial statements prepared in conformity with GAAP have been consolidated or omitted, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s annual financial statements and notes thereto.
Use of Estimates
The preparation of financial statements and related footnotes in conformity with GAAP requires that management formulate estimates and assumptions that affect revenues, expenses, assets, liabilities and the disclosure of contingent assets and liabilities. A significant item that requires management’s estimates and assumptions is the estimate of proved oil, natural gas and NGL reserves which are used in the calculation of depletion of the Company’s oil and natural gas properties and impairment, if any, of proved oil and natural gas properties. Changes in estimated quantities of its reserves could impact the Company’s reported financial results as well as disclosures regarding the quantities and value of proved oil and natural gas reserves. Although management believes these estimates are reasonable, actual results could differ from these estimates.
Recent Accounting Standards Issued
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASC 842”). This update applies to any entity that enters into a lease, with some specified scope exemptions. Under this update, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. While there were no major changes to the lessor accounting, changes were made to align key aspects with the revenue recognition guidance. The Company adopted the new standard using the simplified transition method described in ASU 2018-11 Leases (Topic 842): Targeted Improvements as of January 1, 2019 and did not retrospectively apply the new standard to periods before adoption. Accordingly, comparative information has not been adjusted and continues to be reported under the previous leasing standard. See Note 3 - Lease Accounting for additional information on the adoption of ASC 842.
Note 3 - Lease Accounting
The Company adopted ASC 842 on January 1, 2019 using the simplified transition method described in ASU 2018-11 Leases (Topic 842): Targeted Improvements. Accordingly, comparative information was not adjusted and will continue to be reported under the previous lease standard. The adoption did not require an adjustment to opening retained earnings for the cumulative effect adjustment. The Company further utilized the package of practical expedients within ASC 842 that allows an entity to not reassess the following prior to the effective date (i) whether any expired or existing contracts were or contained leases, (ii) the lease classification for any expired or existing leases or (iii) initial direct costs for any existing leases. The Company also elected
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
the practical expedient under ASU 2018-01 Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 that allows it to not evaluate existing or expired land easements not previously accounted for as leases prior to the effective date. Finally, the Company has elected the short-term lease recognition exemption for all leases that qualify and the practical expedient to not separate lease and non-lease components for all asset classes with multiple component types.
The Company enters into lease agreements to support its operations, such as office space, drilling rigs and field equipment. ASC 842 does not impact the accounting or financial presentation of the Company’s mineral leases and also does not apply to leases used in the exploration or use of oil and natural gas, including the rights to explore for those natural resources and rights to use the land in which those natural resources are contained.
To facilitate compliance with ASC 842, the Company evaluated its existing lease arrangements and enhanced its systems, processes and internal controls to identify, track and record applicable leases. The implementation and adoption of this standard resulted in the Company recognizing right-of-use assets and lease liabilities for certain of its operating leases on the accompanying condensed consolidated balance sheet as of September 30, 2019. The Company has no finance leases. The following table shows the impact of the adoption of ASC 842 on the Company’s current period balance sheet as compared to the previous lease accounting standard, ASC Topic 840, Leases (“ASC 840”):
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|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
Under ASC 842
|
Under ASC 840
|
Increase/(decrease)
|
|
(in thousands)
|
Other noncurrent assets
|
$
|
5,312
|
|
$
|
—
|
|
$
|
5,312
|
|
Other current liabilities
|
$
|
1,892
|
|
$
|
—
|
|
$
|
1,892
|
|
Other noncurrent liabilities
|
$
|
4,444
|
|
$
|
1,024
|
|
$
|
3,420
|
|
Lease Accounting Policies
The Company determines if an arrangement is a lease at the inception of the arrangement by (i) identifying any assets within the contract (ii) determining whether the Company has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use and (iii) if the Company has the right to direct how and for what purpose the identified asset is used throughout the period of use. To the extent that it is determined that an arrangement represents a lease, the lease is classified as an operating lease or a finance lease. The Company capitalizes both lease classifications on its consolidated balance sheets through a right-of-use (“ROU”) asset and a corresponding lease liability. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.
Operating leases are included in other noncurrent assets, other current liabilities, and other noncurrent liabilities in the consolidated balance sheets. Operating lease ROU assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. The operating lease ROU asset also includes any lease payments made to the lessor prior to lease commencement, less any lease incentives, and initial direct costs incurred. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Certain of the Company’s lease agreements include lease and non-lease components. For all asset classes with multiple component types, the Company has utilized the practical expedient that exempts it from separating lease components from non-lease components. Accordingly, the Company accounts for the lease and non-lease components in an arrangement as a single lease component.
In addition, for all asset classes, the Company has made an accounting policy election not to apply the lease recognition requirements to its short-term leases (that is, a lease that, at commencement, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the Company is reasonably certain to exercise). Accordingly, the Company recognizes lease payments related to its short-term leases in profit or loss on a straight-line basis over the lease term. To the extent that there are variable lease payments, the Company recognizes those payments in profit or loss in the period in which the obligation for those payments is incurred. Refer to “Nature of Leases” below for further information regarding those asset classes that include material short-term leases.
Nature of Leases
The Company leases certain office space, drilling rigs and field equipment under cancelable and non-cancelable leases to support our operations.
Office Buildings. The Company leases its corporate office space in Oklahoma City, Oklahoma and additional office space for its field location in Oklahoma. In general, the Company’s office lease agreements contain provisions to extend the lease and contain protective provisions that allow for early termination. Beginning in March 2019, the Company began paying its portion of the building’s operating expenses, as defined in the corporate office lease agreement. These expenses are considered variable leases payments, which were not included in the measurement of the lease liability. The Company’s office building leases are long term leases reflected under ASC 842 on the accompanying condensed consolidated balance sheet as of September 30, 2019.
Drilling Rigs. The Company enters into daywork contracts for drilling rigs with third party service contractors to support the development and exploitation of undeveloped reserves. All of the Company’s current drilling contracts have a term of one year or less.
Field Equipment. The Company rents various field equipment, including compressors, from third parties in order to facilitate its operations. Compressor arrangements are typically structured with a non-cancelable primary term of twelve months and continue thereafter on a month-to-month basis subject to termination by either party with thirty days’ notice. The Company has concluded that its compressor rental agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreement subsequent to the primary term. Other field equipment arrangements are typically structured on a month-to-month basis subject to termination by either party.
To the extent that field equipment rental arrangements have a primary term of twelve months or less, the Company has elected to apply the practical expedient for short-term leases. For those short-term arrangements, the Company does not apply the lease recognition requirements, and recognizes lease payments related to these arrangements in profit or loss on a straight-line basis over the lease term. Refer to the “Lease Accounting Policies” section above for discussion of practical expedients applied.
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Discount Rate. The Company’s leases typically do not provide an implicit rate, and thus, it is required that the Company use its incremental borrowing rate in determining the present value of lease payments based on the information available at commencement date. The Company’s incremental borrowing rate reflects the rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company uses the implicit rate in the limited circumstances in which that rate is readily determinable.
Note 4 – Revenue from Contracts with Customers
Revenues from the sale of oil, natural gas and NGLs are recognized when control of the product has been transferred to the customer, all performance obligations have been satisfied and collectability is reasonably assured. We recognize revenues from the sale of oil, natural gas and NGLs based on our share of volumes sold.
Performance Obligations
The Company satisfies the performance obligations under its oil and natural gas sales contracts through delivery of its production and transfer of control to a customer. Upon delivery of production, the Company has the right to receive consideration from its customers in amounts that correspond with the value of the production transferred. The Company typically receives payment for oil, natural gas and NGL sales within 30 days of the month of delivery for operated properties and within 90 days of the month of delivery for non-operated properties.
The Company’s oil sales contracts are short-term in nature with a contract term of one year or less. For those contracts, the Company utilized the practical expedient in Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which provides an exemption from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
For the Company’s natural gas and NGL sales contracts that have a contract term greater than one year, the Company utilized the practical expedient in ASC 606 which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required.
Contract Balances
The Company recognizes sales of oil, natural gas, and NGLs at a point in time when it satisfies a performance obligation and at that point the Company has an unconditional right to receive payment. Accordingly, these contracts do not give rise to contract assets or contract liabilities under ASC 606. The Company had accounts receivable related to revenue from contracts with customers as of September 30, 2019 and December 31, 2018 of approximately $44.3 million and $65.2 million, respectively, which represent this unconditional right to receive payment.
Prior Period Performance Obligations
To record revenues for oil, natural gas and NGLs, the Company estimates the amount of production delivered at the end of each month and the prices expected to be received for those sales. Differences between estimated revenues and actual amounts received for all prior months are recorded in the month payment is received
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
from the customer. For the three and nine months ended September 30, 2019 and 2018, revenue recognized related to performance obligations satisfied in prior reporting periods was not material.
Note 5 – Oil and Natural Gas Properties
The Company’s oil and natural gas properties are in the continental United States. The oil and natural gas properties include the following:
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|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
(in thousands)
|
Oil and natural gas properties
|
|
|
|
Proved
|
$
|
1,991,687
|
|
|
$
|
1,538,379
|
|
Unproved
|
1,048,592
|
|
|
1,089,954
|
|
Less: accumulated depreciation, depletion, amortization and impairment
|
(400,710
|
)
|
|
(230,836
|
)
|
Oil and natural gas properties, net
|
$
|
2,639,569
|
|
|
$
|
2,397,497
|
|
The Company recorded amortization expense on its unproved oil and natural gas properties of $13.7 million and $11.2 million for the three months ended September 30, 2019 and 2018, respectively, and $35.9 million and $25.6 million for the nine months ended September 30, 2019 and 2018, respectively. Unproved leasehold amortization expense is reflected in exploration expense on the accompanying condensed consolidated statements of operations and reflects consideration of the Company’s drilling plans and the lease terms of its existing unproved properties. No impairment of proved oil and natural gas properties was recorded for the three and nine months ended September 30, 2019 or 2018.
Note 6 – Asset Retirement Obligations
The following is a reconciliation of the changes in the Company’s asset retirement obligation (“ARO”) for the nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
Asset retirement obligation, December 31, 2018
|
$
|
16,848
|
|
Liabilities incurred or acquired
|
1,024
|
|
Revisions in estimated cash flows
|
—
|
|
Liabilities settled
|
(80
|
)
|
Accretion expense
|
869
|
|
Asset retirement obligation, September 30, 2019
|
18,661
|
|
Less: current portion of obligations (1)
|
774
|
|
Asset retirement obligation – long term
|
$
|
17,887
|
|
(1) The current portion of the ARO liability is included in other current liabilities on the condensed consolidated balance sheet.
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 7 – Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
(in thousands)
|
Credit Facility
|
$
|
732,639
|
|
|
$
|
514,639
|
|
|
|
|
|
Term Loan
|
$
|
50,000
|
|
|
$
|
—
|
|
Unamortized original issue discount on Term Loan
|
(1,022
|
)
|
|
—
|
|
Repayment premium on Term Loan
|
97
|
|
|
—
|
|
Deferred financing costs on Term Loan
|
(3,480
|
)
|
|
—
|
|
Term Loan, net
|
$
|
45,595
|
|
|
$
|
—
|
|
Credit Facility
In September 2017, the Company entered into a $750.0 million credit agreement with a maturity date of September 5, 2022 (as amended, the “Credit Facility”). Redetermination of the borrowing base of the Credit Facility generally occurs semiannually on or about October 1 and April 1. In October 2019, the Company entered into an amendment to its Credit Facility to postpone the October 2019 redetermination to January 2020 as well as to limit the Company’s borrowings under the Credit Facility to the lesser of (i) $732.6 million, (ii) the borrowing base, (iii) the maximum aggregate amount (as defined in the credit agreement), or (iv) the total commitments (as defined in the agreement) until the January 2020 redetermination is effective.
As of September 30, 2019, the Company had $732.6 million of outstanding borrowings and no letters of credit outstanding under the Credit Facility. The Credit Facility is secured by substantially all of the assets of Roan LLC. As discussed below, the Company entered into a Term Loan in June 2019 and used a majority of the proceeds from the initial borrowing to pay down $45.0 million of outstanding borrowings under the Credit Facility.
The Company amended the Credit Facility in March 2019 to increase the borrowing base as well as to allow for (i) secured permitted additional debt of up to $250 million before any reduction in the borrowing base would occur and (ii) unsecured permitted additional debt of up to $400 million before any reduction in the borrowing base would occur.
Effective June 2019, the Credit Facility was amended to (i) reaffirm the borrowing base at $750.0 million, (ii) temporarily reduce the current ratio to 0.85 to 1.00 at June 30, 2019 and to 0.80 to 1.00 at September 30, 2019, (iii) increase the rates in the utilization grid for London Interbank Offered Rate (“LIBOR”) and alternate base rate (“ABR”) loans by 0.25% until the Company delivers a compliance certificate demonstrating a current ratio of not less than 1.00 to 1.00, (iv) increase the mortgage coverage requirements from 85% to 95%; and (v) restrict certain payments between Roan Inc. and Roan LLC in the event that Roan LLC transfers any of its oil and natural gas properties to Roan Inc.
Amounts borrowed under the Credit Facility bear interest at LIBOR or the ABR at the Company’s election. The rate used for ABR loans is based on the higher of the prime rate, the federal funds effective rate plus 0.50% or the one-month LIBOR rate plus 1%. Either rate is adjusted upward by an applicable margin, based on the utilization percentage of the Credit Facility. Additionally, the Credit Facility provides for a commitment fee, which is payable at the end of each calendar quarter. The pricing grid below shows the applicable margin
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
for LIBOR or ABR loans as well as the commitment fee depending on the Utilization Level (as defined in the credit agreement) for the Company during the nine months ended September 30, 2019.
|
|
|
|
|
|
Utilization Level
|
Utilization
|
LIBOR Margin
|
ABR Margin
|
Commitment Fee
|
Level I
|
<25%
|
2.00%
|
1.00%
|
0.375%
|
Level II
|
>25% but <50%
|
2.25%
|
1.25%
|
0.375%
|
Level III
|
>50% but <75%
|
2.50%
|
1.50%
|
0.500%
|
Level IV
|
>75% but <90%
|
2.75%
|
1.75%
|
0.500%
|
Level V
|
>90%
|
3.00%
|
2.00%
|
0.500%
|
Due to the Company’s current ratio at September 30, 2019 being less than 1.00 to 1.00, the LIBOR margin and ABR margin will increase by 0.25% from the amounts noted in the table above for the fourth quarter of 2019.
The Credit Facility contains representations, warranties, covenants, conditions and defaults customary for transactions of this type, including but not limited to: (i) limitations on liens and incurrence of debt covenants; (ii) limitations on the sale of property, mergers, consolidations and other similar transactions covenants; (iii) limitations on investments, loans and advances covenants; and (iv) limitations on dividends, distributions, redemptions and restricted payments covenants. Additionally, the Company is prohibited from hedging in excess of (a) 80% of reasonably anticipated projected production for the first thirty (30) month rolling period (based upon the Company’s internal projections) and (b) 80% of reasonably anticipated projected production from proved reserves for the second thirty (30) month rolling period of such sixty (60) month period (based on the most recently delivered reserve report). If the amount of borrowings outstanding exceed 50% of the borrowing base, the Company is required to hedge a minimum of 50% of the future production expected to be derived from proved developed reserves for the next eight quarters per its most recent reserve report.
The Credit Facility also contains financial covenants requiring the Company to comply with a leverage ratio of the Company’s consolidated debt to consolidated EBITDAX (as defined in the credit agreement) for the period of four fiscal quarters then ended of not more than 4.00 to 1.00 and a current ratio of the Company’s consolidated current assets to consolidated current liabilities (as defined in the credit agreement to exclude non-cash assets and liabilities under ASC Topic 815 Derivatives and Hedging and ASC Topic 410 Asset Retirement and Environmental Obligations) of not less than 0.80 to 1.00 for the quarter ended September 30, 2019 and not less than 1.00 to 1.00 for all quarters thereafter.
As of September 30, 2019, the Company was in compliance with the covenants under the Credit Facility and expects to remain in compliance for the next twelve months based on the current borrowing base. If the Company is not able to maintain compliance with the covenants under the Credit Facility in the future, it would be in default under the Credit Facility. A default, if not waived, could result in acceleration of the indebtedness outstanding under the Credit Facility and a default with respect to, and an acceleration of, the indebtedness outstanding under any other debt agreements, including the Term Loan.
Term Loan
In June 2019, Roan Inc. entered into a term loan facility (“Term Loan”) with initial commitments of $100.0 million and a potential incremental commitment of $50.0 million at the Company’s election. The lenders in the facility are funds affiliated with certain significant stockholders of Roan Inc. that are represented on the board of directors. The Term Loan matures in October 2020 and is secured by all of the assets of Roan Inc.
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Borrowings under the Term Loan bear interest at the three-month LIBOR rate plus 7.5% or ABR rate plus 6.5%, as elected by the Company. The ABR rate is the highest of the prime rate, the federal funds effective rate plus 0.50% and the one-month LIBOR rate plus 1%. The Company can elect, subject to certain conditions included in the Term Loan agreement, to pay the interest on the Term Loan in kind. Interest is payable semi-annually for LIBOR loans and quarterly for ABR loans. The borrowings under the Term Loan are issued at a discount of 2.5%. Additionally, in conjunction with the initial Term Loan commitment and any future incremental commitments, the Company is required to issue shares to the lenders equal to approximately 1% of the outstanding Class A common stock at the time of the commitment.
As of September 30, 2019, the Company had borrowed $50.0 million and received proceeds of $47.8 million, which were net of the issuance discount and certain issuance fees. These proceeds were primarily used to pay down amounts outstanding under the Credit Facility. As of September 30, 2019, the outstanding borrowings under the Term Loan have an interest rate of 9.60%. The Company issued 1,525,395 shares of Class A common stock in June 2019 to the lenders of the Term Loan and received cash equal to the par value of the shares issued in return. The difference between the fair market value of the shares issued and the amount paid for such shares was considered a fee paid to the lenders and was included as deferred financing costs that will be amortized over the term of the Term Loan. The initial discount and all related financing costs are being amortized over the term of the Term Loan using the effective interest method.
Under the Term Loan, any repayment of outstanding borrowings incurs a premium equal to 1% plus any interest that would have accrued on the repaid amount if it had been outstanding for a year; provided, that such additional interest is only due in the event of prepayment before the maturity date. This premium associated with the initial borrowing, or $0.5 million, is being amortized over the term of the Term Loan.
In September 2019, the Company amended the Term Loan to permit the transfer of specified wellbore rights from Roan Inc. to Roan LLC. Additionally, the Company amended the Term Loan to specify that while the Merger Agreement, as defined in Note 15 – Subsequent Events, is effective no repayment premium would be due on any loans made after the amendment date and to specify that payment of interest in kind would not qualify as an additional loan under the Term Loan.
The Term Loan contains customary negative covenants including, but not limited to, restrictions on the Company’s ability to incur additional indebtedness or create certain liens on assets, restrictions on selling of assets and restrictions on investments, dividends and other specified transactions. These covenants are subject to a number of important exceptions and qualifications. The Term Loan also contains certain affirmative covenants which, among other things, require the Company to maintain $10.0 million of liquidity, defined in the agreement as unrestricted cash plus the available borrowings under the Credit Facility and require periodic financial and reserve reporting. In addition, the Term Loan agreement contains financial covenants consistent with those required by the Credit Facility.
As of September 30, 2019, the Company was in compliance with the covenants under the Term Loan and expects to remain in compliance for the next twelve months. If the Company is not able to maintain compliance with the covenants under the Term Loan in the future, it would be in default under the Term Loan. A default, if not waived, could result in acceleration of the indebtedness outstanding under the Term Loan and a default with respect to, and an acceleration of, the indebtedness outstanding under any other debt agreements, including the Credit Facility.
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 8 – Derivative Instruments
The Company utilizes fixed price swaps and basis swaps to manage the price risk associated with the sale of its oil, natural gas and NGL production. Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. Basis swaps are settled monthly based on differences between a fixed price differential and the applicable market price differential, the Panhandle Eastern Pipeline or Natural Gas Pipeline Company of America Mid Continent. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume.
The following table reflects the Company’s open commodity contracts at September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
Total
|
Oil fixed price swaps
|
|
|
|
|
|
|
|
Volume (Bbl)
|
1,200,730
|
|
|
3,429,500
|
|
|
1,730,000
|
|
|
6,360,230
|
|
Weighted-average price
|
$
|
60.75
|
|
|
$
|
60.57
|
|
|
$
|
56.08
|
|
|
$
|
59.38
|
|
Natural gas fixed price swaps
|
|
|
|
|
|
|
|
Volume (MMBtu)
|
11,040,000
|
|
|
19,665,000
|
|
|
7,250,000
|
|
|
37,955,000
|
|
Weighted-average price
|
$
|
2.90
|
|
|
$
|
2.63
|
|
|
$
|
2.65
|
|
|
$
|
2.71
|
|
Natural gas basis swaps
|
|
|
|
|
|
|
|
Volume (MMBtu)
|
7,360,000
|
|
|
10,980,000
|
|
|
—
|
|
|
18,340,000
|
|
Weighted-average price
|
$
|
0.52
|
|
|
$
|
0.49
|
|
|
$
|
—
|
|
|
$
|
0.50
|
|
Natural gas liquids fixed price swaps
|
|
|
|
|
|
|
|
Volume (Bbl)
|
460,000
|
|
|
1,281,000
|
|
|
730,000
|
|
|
2,471,000
|
|
Weighted-average price
|
$
|
28.66
|
|
|
$
|
23.22
|
|
|
$
|
21.90
|
|
|
$
|
23.84
|
|
The Company nets the fair value of derivative instruments by counterparty in the accompanying condensed consolidated balance sheets where the right to offset exists. See Note 9 – Fair Value Measurements for further information regarding the fair value measurement of the Company’s derivatives.
As the Company has elected to not account for commodity derivative instruments as hedging instruments, gains or losses resulting from the change in fair value along with the gains or losses resulting from settlement of derivative contracts are reflected in gain (loss) on derivative contracts included in the accompanying condensed consolidated statements of operations.
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table presents the Company’s gain (loss) on derivative contracts and net cash received (paid) upon settlement of its derivative contracts for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
Gain (loss) on derivative contracts
|
$
|
40,675
|
|
|
$
|
(36,704
|
)
|
|
$
|
(5,913
|
)
|
|
$
|
(100,920
|
)
|
Net cash received (paid) upon settlement of derivative contracts (1)
|
$
|
16,541
|
|
|
$
|
(13,551
|
)
|
|
$
|
29,284
|
|
|
$
|
(27,462
|
)
|
(1) Includes $0.4 million of cash received upon settlement of derivative contracts prior to their contractual maturity for the nine months ended September 30, 2018.
During 2018 and 2019, the Company modified certain existing derivative contracts to comply with hedging requirements under its Credit Facility. During the three and nine months ended September 30, 2019, $5.2 million and $9.3 million, respectively, of net cash received upon settlement was related to such modified derivative contracts. The cash settlements for these derivatives are classified as cash flows from financing activities in the accompanying condensed consolidated statement of cash flows due to the other-than-insignificant financing element contained in the modified derivative contract. There were no settlements received or paid related to modified contracts during the three and nine months ended September 30, 2018.
Note 9 – Fair Value Measurements
The Company measures and reports certain assets and liabilities on a fair value basis and has classified and disclosed its fair value measurements using the following levels of the fair value hierarchy:
Level 1— Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date.
Level 2— Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable as of the reporting date.
Level 3— Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.
Assets and liabilities that are measured at fair value are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values, stated below, considers the market for the Company’s financial assets and liabilities, the associated credit risk and other factors. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
The Company recognizes transfers between fair value hierarchy levels as of the end of the reporting period in which the event or change in circumstances causing the transfer occurred. During the three and nine months ended September 30, 2019 and 2018, the Company did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements.
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company’s recurring fair value measurements are performed for its commodity derivatives. Please refer to Note 8 – Derivative Instruments for additional discussion.
Commodity Derivative Instruments
Commodity derivative contracts are stated at fair value in the accompanying condensed consolidated balance sheets. The Company adjusts the valuations from the valuation model for nonperformance risk and for counterparty risk. The fair values of the Company’s commodity derivative instruments are classified as Level 2 measurements as they are calculated using industry standard models using assumptions and inputs which are substantially observable in active markets throughout the full term of the instruments. These include market price curves, contract terms and prices, credit risk adjustments, implied market volatility and discount factors.
The following table presents the amounts and classifications of the Company’s derivative assets and liabilities as of September 30, 2019 and December 31, 2018, as well as the potential effect of netting arrangements on contracts with the same counterparty (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Gross Fair Value
|
|
Netting
|
|
Carrying Value
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current commodity derivatives
|
$
|
—
|
|
|
$
|
48,521
|
|
|
$
|
—
|
|
|
$
|
48,521
|
|
|
$
|
(681
|
)
|
|
$
|
47,840
|
|
Noncurrent commodity derivatives
|
—
|
|
|
19,189
|
|
|
—
|
|
|
19,189
|
|
|
(395
|
)
|
|
18,794
|
|
Total assets
|
$
|
—
|
|
|
$
|
67,710
|
|
|
$
|
—
|
|
|
$
|
67,710
|
|
|
$
|
(1,076
|
)
|
|
$
|
66,634
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Current commodity derivatives
|
$
|
—
|
|
|
$
|
(681
|
)
|
|
$
|
—
|
|
|
$
|
(681
|
)
|
|
$
|
681
|
|
|
$
|
—
|
|
Noncurrent commodity derivatives
|
—
|
|
|
(395
|
)
|
|
—
|
|
|
(395
|
)
|
|
395
|
|
|
—
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
(1,076
|
)
|
|
$
|
—
|
|
|
$
|
(1,076
|
)
|
|
$
|
1,076
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Gross Fair Value
|
|
Netting
|
|
Carrying Value
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current commodity derivatives
|
$
|
—
|
|
|
$
|
85,728
|
|
|
$
|
—
|
|
|
$
|
85,728
|
|
|
$
|
(3,548
|
)
|
|
$
|
82,180
|
|
Noncurrent commodity derivatives
|
—
|
|
|
21,565
|
|
|
—
|
|
|
21,565
|
|
|
(927
|
)
|
|
20,638
|
|
Total assets
|
$
|
—
|
|
|
$
|
107,293
|
|
|
$
|
—
|
|
|
$
|
107,293
|
|
|
$
|
(4,475
|
)
|
|
$
|
102,818
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Current commodity derivatives
|
$
|
—
|
|
|
$
|
(4,393
|
)
|
|
$
|
—
|
|
|
$
|
(4,393
|
)
|
|
$
|
3,548
|
|
|
$
|
(845
|
)
|
Noncurrent commodity derivatives
|
—
|
|
|
(1,068
|
)
|
|
—
|
|
|
(1,068
|
)
|
|
927
|
|
|
(141
|
)
|
Total liabilities
|
$
|
—
|
|
|
$
|
(5,461
|
)
|
|
$
|
—
|
|
|
$
|
(5,461
|
)
|
|
$
|
4,475
|
|
|
$
|
(986
|
)
|
Non-Recurring Fair Value Measurements
The Company’s non‑recurring fair value measurements include the determination of the grant date fair value of the Company’s performance share units. The grant date fair value of the Company’s performance share
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
units is determined using a Monte Carlo simulation model and is classified as a Level 3 measurement. Please refer to Note 11 – Equity Compensation for additional discussion.
Other Financial Instruments
The Company’s financial instruments, not otherwise recorded at fair value, consist primarily of cash, trade receivables, trade payables, and long-term debt. The carrying values of cash and cash equivalents, accounts payable, revenue payable, and accounts receivable approximate fair values due to the short-term maturities of these instruments and the carrying value of long-term debt approximates fair value as the applicable interest rates are variable and reflective of market rates.
Note 10 – Equity
In connection with the Term Loan commitment, the Company issued 1,525,395 shares of its Class A common stock to the lenders. See further discussion in Note 7 – Long-Term Debt. The lenders paid cash equal to the par value of the shares issued or $1,525. The difference between the fair market value of the shares and the amount paid was considered a fee paid to the lenders that will be amortized over the term of the Term Loan. The fair market value of the shares was calculated as the closing price of the Company’s Class A common stock on the day before the subscription agreement was executed.
When restricted stock units vest and are settled in the Company’s common stock, the Company makes the required statutory tax payments on behalf of the restricted stock unit holder and withholds from the vested award a number of shares of common stock with a value on the date of settlement equal to the tax obligation associated with such vested restricted stock units. In September 2019, the Company withheld 112,945 shares of Class A common stock for the payment of taxes due with an associated value of approximately $0.1 million. These shares were accounted for as treasury stock when withheld.
Earnings per Share
The Company uses the treasury stock method to determine the diluted weighted average shares. All performance share unit and restricted stock unit awards were deemed anti-dilutive for all periods presented in the accompanying condensed consolidated statements of operations and were therefore excluded from dilutive weighted average shares. See further discussion of the Company’s equity awards in Note 11 – Equity Compensation.
Reorganization
In September 2018 and in conjunction with the Reorganization, the Company issued 152.5 million shares of its Class A common stock to the members of Roan LLC in exchange for their equity interest in Roan LLC. The Reorganization was accounted for as a reverse recapitalization with Roan Inc. as the accounting acquirer and therefore did not result in any change in the accounting basis for the underlying assets. Net income before taxes and equity-based compensation were allocated ratably to the members of Roan LLC and the stockholders of Roan Inc. for the period before and after the Reorganization, respectively. For comparative purposes, the issuance of the shares to the members of Roan LLC at the time of the Reorganization was reflected on a retroactive basis with the units outstanding during each period presented.
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Roan LLC Equity
For the period of September 1, 2017 through the date of the Reorganization, Roan LLC was governed by the Amended and Restated Limited Liability Company Agreement of Roan Resources LLC. In connection with the Contribution in August 2017, Roan LLC issued 1.5 billion membership units representing capital interests in Roan LLC (the “LLC Units”) for a 50% equity interest in Roan LLC, to Linn in exchange for the contribution of oil and natural gas properties. Additionally, Roan LLC issued 1.5 billion LLC Units, which represented a 50% equity interest, to Citizen in exchange for the contribution of oil and natural gas properties. The fair value of the LLC Units issued to Citizen was the same as that of the LLC Units issued to Linn.
In March 2018, Roan LLC issued 19.2 million LLC Units to each Citizen and Linn to settle amounts due for the leasehold acreage acquired on Roan LLC’s behalf during 2017.
Note 11 – Equity Compensation
In connection with the Reorganization, the Company adopted the Roan Resources, Inc. Amended and Restated Management Incentive Plan (the “Plan”), which provides for grants of options, stock appreciation rights, restricted stock unit, stock awards, dividend equivalents, other stock-based awards, cash awards and substitute awards.
Performance Share Units
Prior to the Reorganization, Roan LLC granted performance share units to certain of its employees under the Roan LLC Management Incentive Plan. The performance share units were converted into awards of performance share units under the Plan, hereafter referred to as the “Roan LLC PSUs,” and are subject to the terms of the Plan and individual award agreements. The amount of Roan LLC PSUs that can be earned range from 0% to 200% based on the Company’s market value on December 31, 2020 (“Performance Period End Date”). The Company’s market value on the Performance Period End Date will be determined by reference to the volume-weighted average price of the Company’s Class A common stock for the 30 consecutive trading days immediately preceding the Performance Period End Date. Each earned Roan LLC PSU will be settled through the issuance of one share of the Company’s Class A common stock. Other than the security in which the Roan LLC PSUs are settled, no terms of the Roan LLC PSUs were modified in connection with the conversion of the Roan LLC PSUs.
The following table presents activity for the Roan LLC PSUs during the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
PSUs
|
|
Weighted
Average Fair
Value
|
|
Total Fair
Value ($ in thousands)
|
Outstanding at December 31, 2018
|
1,158,750
|
|
|
$
|
30.95
|
|
|
$
|
35,864
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(518,750
|
)
|
|
29.71
|
|
|
(15,411
|
)
|
Outstanding at September 30, 2019
|
640,000
|
|
|
$
|
31.96
|
|
|
$
|
20,453
|
|
During the nine months ended September 30, 2019, the Company granted performance share units (“Roan Inc PSUs”) to certain of its employees under the Plan. The amount of Roan Inc PSUs that can be earned
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
range from 0% to 100% based on the 60-day volume weighted average price of the Company’s Class A common stock for any 60 consecutive trading days during the specified performance period beginning on the date of grant. There were no such grants during 2018.
The following table presents activity for the Roan Inc PSUs during the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
PSUs
|
|
Weighted
Average Fair
Value
|
|
Total Fair
Value ($ in thousands)
|
Outstanding at December 31, 2018
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Granted
|
2,716,636
|
|
|
1.58
|
|
|
4,301
|
|
Vested
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(190,735
|
)
|
|
2.55
|
|
|
(486
|
)
|
Outstanding at September 30, 2019
|
2,525,901
|
|
|
$
|
1.51
|
|
|
$
|
3,815
|
|
Compensation expense associated with the Roan LLC PSUs and Roan Inc PSUs for the three months ended September 30, 2019 and 2018 was $1.5 million and $2.9 million, respectively, and for the nine months ended September 30, 2019 and 2018 was $0.8 million and $8.1 million, respectively. During 2019, forfeitures of Roan LLC PSUs and Roan Inc PSUs resulted in the reversal of compensation expense of $6.5 million. Compensation expense is included in general and administrative expenses on the accompanying condensed consolidated statements of operations. Unrecognized expense as of September 30, 2019 for the outstanding Roan LLC PSUs and the outstanding Roan Inc PSUs was $12.1 million, which will be recognized over a weighted-average remaining period of 2.21 years.
The grant date fair value of both the Roan LLC PSUs and the Roan Inc PSUs was determined using a Monte Carlo simulation model, which results in an estimated percentage of performance share units earned and estimated Company value at the end of the performance period. The grant date fair value of the Roan LLC PSUs and the Roan Inc PSUs is expensed on a straight-line basis from the grant date to the end of the performance period.
The following assumptions were used for the Monte Carlo simulation model to determine the grant date fair value and associated compensation expense for the Roan Inc PSU awards granted in 2019:
|
|
|
|
Equity volatility
|
65.00
|
%
|
Weighted average risk-free interest rate
|
2.25
|
%
|
Restricted Stock Units
Under the Plan, the Company is authorized to issue restricted stock units, hereafter referred to as the “RSUs,” to eligible employees and other service providers. The Company estimates the fair values of RSUs as of the closing price of the Company’s Class A common stock on the grant date of the award, which is expensed over the applicable vesting period.
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table presents activity for the Company’s RSUs during the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
RSUs
|
|
Weighted
Average Fair
Value
|
|
Total Fair
Value ($ in thousands)
|
Outstanding at December 31, 2018
|
11,800
|
|
|
$
|
16.95
|
|
|
$
|
200
|
|
Granted
|
1,676,325
|
|
|
3.86
|
|
|
6,476
|
|
Vested
|
(381,764
|
)
|
|
4.65
|
|
|
(1,775
|
)
|
Forfeited
|
(187,235
|
)
|
|
4.60
|
|
|
(861
|
)
|
Outstanding at September 30, 2019
|
1,119,126
|
|
|
$
|
3.61
|
|
|
$
|
4,040
|
|
Compensation expense associated with the RSUs for three and nine months ended September 30, 2019 was $1.5 million and $2.1 million, respectively, and is included in general and administrative expenses on the accompanying condensed consolidated statements of operations. There were no RSUs issued prior to the Reorganization in 2018. Unrecognized expense as of September 30, 2019 for all outstanding RSUs was $3.7 million, which will be recognized over a weighted-average remaining period of 1.61 years.
Note 12 –Transactions with Affiliates
Natural Gas Dedication Agreement
The Company has a gas dedication agreement with Blue Mountain Midstream LLC (“Blue Mountain”), a subsidiary of Riviera Resources, Inc. (“Riviera”), which has directors and shareholders in common with the Company. Amounts due from Blue Mountain at September 30, 2019 and December 31, 2018 are reflected as Accounts receivable – Affiliates in the accompanying condensed consolidated balance sheets and represent accrued revenue for the Company’s portion of the production sold to Blue Mountain. Sales to Blue Mountain are reflected as Natural gas sales – Affiliates and Natural gas liquids sales – Affiliates in the accompanying condensed consolidated statements of operations. See further discussion of this gas dedication agreement in Note 14 – Commitments and Contingencies.
Water Management Services Agreement
In January 2019, the Company entered into a water management services agreement with a subsidiary of Blue Mountain, Wildcat Water Gathering LLC (“Wildcat Water”). Under this agreement, Wildcat Water will provide water management services including pipeline gathering, disposal, treatment and redelivery of recycled water. The agreement provides for an acreage dedication for water management services through January 2029. Wildcat Water began providing services under this agreement in April 2019. During the three and nine months ended September 30, 2019, the Company incurred costs of $8.7 million and $17.2 million, respectively, related to these services as operator of the related wells. For the three months ended September 30, 2019, the Company’s portion of these costs totaled $7.4 million, of which $5.4 million was included in production expenses in the accompanying condensed consolidated statements of operations and $2.0 million was capitalized in oil and natural gas properties on the accompanying condensed consolidated balance sheets. For the nine months ended September 30, 2019, the Company’s portion of these costs totaled $13.8 million, of which $10.0 million was included in production expenses in the accompanying condensed consolidated statements of operations and $3.8 million was capitalized in oil and natural gas properties on the accompanying condensed consolidated balance sheets. The remainder of the costs are billed out to third-party interest owners for their share of such costs. Amounts payable and accrued under this agreement at
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019 of $6.5 million are included in accounts payable and accrued liabilities - Affiliates on the accompanying condensed consolidated balance sheets.
Oil Gathering Agreement
In July 2019, the Company entered into an oil gathering agreement with a subsidiary of Blue Mountain, Wildcat Oil Gathering LLC (“Wildcat Oil”). This agreement provides for dedication of certain of the Company’s acreage for oil gathering services for a term of ten years. Wildcat Oil is expected to begin providing services under this agreement in the fourth quarter of 2019 or early 2020.
Corporate Office Lease
During 2018, the Company entered into a lease for office space in Oklahoma City, Oklahoma that is owned by a subsidiary of Riviera under a lease with an initial term of 5 years with an option to extend the lease for an additional 5 years at the end of the initial term. The Company paid $0.4 million and $1.1 million during the three and nine months ended September 30, 2019, respectively, under this lease. During the three and nine months ended September 30, 2018, the Company paid $0.2 million and $0.3 million, respectively. Total remaining payments under the lease are $6.7 million, excluding the Company’s portion of the operating expenses of the building.
Tax Matters Agreement
In conjunction with the Reorganization, the Company entered into a tax matters agreement (“TMA”) with Riviera. See Note 13 – Income Taxes for further discussion of the TMA. As a result of the TMA and the refund of an overpayment of estimated federal taxes by Linn Energy, Inc. related to the Riviera business that was received by the Company in November 2018, the Company paid $7.6 million to Riviera during the nine months ended September 30, 2019.
Term Loan
In June 2019, the Company entered into the Term Loan agreement with lenders affiliated with certain stockholders of the Company that are represented on the board of directors. See further discussion in Note 7 – Long-Term Debt. Interest expense related to the Term Loan agreement for the three and nine months ended September 30, 2019 was $2.3 million, including amortization of the discount of $0.3 million and deferred financing costs related to the Term Loan of $0.7 million and excluding any interest capitalized, and is included in interest expense - Affiliates on the accompanying condensed consolidated statements of operations. Accrued interest due on the Term Loan of $1.3 million at September 30, 2019 is included in accounts payable and accrued liabilities - Affiliates on the accompanying condensed consolidated balance sheets.
Management Service Agreements
Under the MSAs, Citizen and Linn provided certain services in respect to the oil and natural gas properties they contributed to Roan LLC. Such services included serving as operator of the oil and natural gas properties contributed, land administration, marketing, information technology and accounting services. As a result of Citizen and Linn continuing to serve as operator of the contributed assets and contracting directly with vendors for goods and services for operations, Citizen and Linn collected amounts due from joint interest owners for their share of costs and billed Roan LLC for its share of costs. The services provided under the MSAs ended in April 2018 when Roan LLC took over as operator for the oil and natural gas properties
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
contributed by Citizen and Linn. In conjunction with the conclusion of the MSAs in April 2018, Roan LLC assumed certain working capital accounts associated with the properties contributed from Citizen and Linn.
During the nine months ended September 30, 2018, Roan LLC incurred approximately $10.0 million for charges related to the services provided under the MSAs, which were recorded in general and administrative expenses in the condensed consolidated statements of operations. As the MSAs ended in April 2018, there were no such charges related to the MSAs in 2019 or the three months ended September 30, 2018.
Acquisition of Acreage
As provided for in the Contribution Agreement, Citizen and Linn acquired additional acreage totaling $63.0 million as of December 31, 2017 within an area of mutual interest on behalf of the Company. See Note 10 – Equity for further discussion of the settlement of the payable due to Citizen and Linn related to the additional acquired acreage.
Note 13 – Income Taxes
As discussed in Note 1 – Business and Organization, Roan Inc. was formed in September 2018 in connection with the Reorganization. Roan Inc.’s accounting predecessor, Roan LLC, was treated as a flow-through entity for income tax purposes. As a result, the net taxable income or loss of Roan LLC and any related tax credits, for income tax purposes, flowed through to its members. Accordingly, no tax provision was made in the historical financial statements of Roan LLC since the income tax was an obligation of its members. Roan Inc. is a corporation and subject to U.S. federal and state income tax.
The Company records its quarterly tax provision based on an estimate of the annual effective tax rate expected to apply to continuing operations for the various jurisdictions in which it operates. The Company’s effective combined U.S. federal and state income tax rate for the three and nine months ended September 30, 2019 was 23.4% and 23.8%, respectively, based on estimated net income for the year. The Company’s effective tax rate for three and nine months ended September 30, 2019 approximates the Company’s estimated annual effective tax rate which includes the federal and state income tax. The tax effects of certain items, such as tax rate changes, significant unusual or infrequent items, and certain changes in the assessment of the realizability of deferred taxes, are recognized as discrete items in the period in which they occur and are excluded from the estimated annual effective tax rate.
In conjunction with the Reorganization, the Company entered into the TMA with Riviera. The TMA, in part, provides for the indemnification of the Company and the entitlement of Riviera to refunds related to certain taxes of Linn Energy, Inc. prior to the spinoff of Riviera from Linn Energy, Inc.
Note 14 – Commitments and Contingencies
Lease Commitments
As discussed in Note 3 - Lease Accounting, the Company leases certain office buildings, drilling rigs, and field equipment under cancelable and non-cancelable leases to support our operations.
The Company’s lease costs for the three and nine months ended September 30, 2019 included operating lease costs of $0.6 million and $1.6 million, respectively, and short-term lease costs of $9.7 million and $56.8 million, respectively. Short-term lease costs exclude leases with a contract term of one month or less. Included in short-term lease costs is $8.4 million and $53.1 million, respectively, of gross costs related to the Company’s
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
drilling rig leases. The Company’s portion of the drilling rig costs are capitalized to oil and natural gas properties and the remainder is billed out to third-party interest owners for their share of such costs. Payments made for operating leases included in lease liabilities for the three and nine months ended September 30, 2019 were $0.5 million and $1.2 million, respectively.
The Company’s condensed consolidated balance sheet as of September 30, 2019 included lease assets and liabilities as follows (in thousands):
|
|
|
|
|
Operating Leases
|
|
Operating lease right of use assets
|
$
|
5,312
|
|
|
|
Current operating lease liabilities
|
$
|
1,892
|
|
Noncurrent operating lease liabilities
|
4,444
|
|
Total operating lease liabilities
|
$
|
6,336
|
|
The weighted average remaining lease term for our operating leases is 3.5 years and the weighted average discount rate is 8.5%.
The Company’s operating lease liabilities as of September 30, 2019 with enforceable contract terms that are greater than one year mature as follows (in thousands):
|
|
|
|
|
2019
|
$
|
478
|
|
2020
|
1,986
|
|
2021
|
2,073
|
|
2022
|
2,163
|
|
2023
|
445
|
|
Thereafter
|
171
|
|
Total lease payments
|
7,316
|
|
Less imputed interest
|
(980
|
)
|
Total
|
$
|
6,336
|
|
The Company’s future lease payments under ASC 840 as of December 31, 2018 were not materially different than those presented above.
Litigation
The Company is party to lawsuits arising in the ordinary course of business, including, but not limited to, commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. The Company cannot predict the outcome of any such lawsuits with certainty, but management does not currently believe that any pending or threatened legal matters will have a material adverse impact on the Company’s financial condition.
Due to the nature of its business, the Company is, from time to time, involved in other routine litigation or subject to disputes or claims related to its business activities, including workers’ compensation claims and employment related disputes. In the opinion of management, none of these other pending litigation disputes or claims against the Company, if decided adversely, will have a material adverse effect on the Company’s financial condition, cash flows or results of operations.
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Environmental Matters
The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. These laws, which are often changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and to comply with regulatory policies and procedures. At September 30, 2019, the Company had no environmental matters requiring specific disclosure or requiring the recognition of a liability.
Natural Gas Dedication Agreements
The Company has dedicated its natural gas production from the oil and natural gas properties contributed by Citizen under an agreement with a third party. Under this dedication agreement, the Company is required to deliver its natural gas production from the contract area, as defined in the agreement, through November 2030. There is no specified volume or volume penalty in the agreement.
For the oil and natural gas properties contributed by Linn, the Company assumed Linn’s dedication agreement with Blue Mountain. The agreement with Blue Mountain requires the Company to deliver its natural gas production from the contract area, as defined in the agreement, through November 2030. There is no specified volume or volume penalty in the agreement.
Volume Commitment
Under an agreement with a third party, the Company has a requirement to deliver a minimum volume of natural gas from a specified area, as defined in the agreement. In the event that the Company is unable to meet this natural gas volume delivery commitment, it would incur deficiency fees on any undelivered volumes as of November 2021. Based on expected production from currently producing wells in the specified area, the Company anticipates that it may not deliver the required minimum volume of natural gas by November 2021. As a result, the Company has accrued $1.0 million for its share of the estimated shortfall deficiency fees as of September 30, 2019. The accrued liability is included in other noncurrent liabilities in the accompanying condensed consolidated balance sheet. If the Company is unable to deliver any natural gas volumes subsequent to September 30, 2019 through November 2021, total shortfall deficiency fees of $6.4 million would be due at the end of the commitment period.
Note 15 – Subsequent Events
Merger Agreement
On October 1, 2019, the Company entered into the Merger Agreement by and among Citizen Operating, the Merger Sub, a wholly owned subsidiary of Citizen Operating, and the Company. The Merger Agreement provides for, among other things, the merger of the Company into Merger Sub with the Company as the surviving entity and a wholly owned subsidiary of Citizen Operating (the “Merger”). As consideration for the Merger, Citizen Operating will purchase all outstanding Class A common stock of the Company, as described in the Merger Agreement, for cash consideration of $1.52 per share. This would exclude shares that are held in treasury by the Company or owned by its wholly owned subsidiaries, shares owned by Citizen Operating or any of its wholly owned subsidiaries and shares held by stockholders who do not vote in favor of or consent to the adoption of the Merger Agreement and who properly demand appraisal of such shares
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
and complied in all respects with all the provisions of the Delaware General Corporation Law concerning the right of holders of shares to require appraisal.
Conditions to Close and Covenants
The Merger Agreement includes specified closing conditions that must be met or waived. These conditions include, but are not limited to, (i) the stockholders of the Company voting in favor of adopting the Merger Agreement, (ii) the expiration or termination of applicable waiting periods under applicable antitrust laws, (iii) the absence of any law, order, judgment or injunction by any governmental entity restraining, prohibiting or rendering the consummation of the Merger illegal, (iv) the Test Indebtedness of the Company, as defined in the Merger Agreement, being less than or equal to $760.0 million and (v) certain other customary closing conditions. The Merger Agreement also includes customary representations, warranties and covenants of the Company, Citizen Operating and Merger Sub. These include a covenant by the Company to enter into additional natural gas liquid, natural gas and oil hedging arrangements. See Commodity Contracts below for discussion of the additional derivative contracts entered into by the Company in October 2019.
Termination Fees
Either the Company or Citizen Operating may terminate the Merger Agreement if the Merger is not consummated by March 17, 2020. The Merger Agreement includes specifications regarding fees to be paid by either party should the agreement be terminated prior to March 17, 2020. The Company’s board of directors may terminate the Merger Agreement to enter into a superior proposal upon satisfaction of certain conditions, as specified in the Merger Agreement, and upon payment of a termination fee of $25.0 million. If Citizen Operating terminates the Merger Agreement, under certain circumstances as specified in the Merger Agreement, Citizen Operating would be obligated to pay a termination fee of $35.0 million. The Merger Agreement also contains a provision that would require Citizen Operating to pay for the cost (subject to a cap of $15.0 million) to unwind certain hedging arrangements if the transaction is terminated due to Citizen Operating’s breach or failure to obtain financing and the $35.0 million termination fee is insufficient to cover the unwind costs.
Roan Resources, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Commodity Contracts
Per the covenants of the Merger Agreement, the Company was required to enter into additional commodity contracts. The following table presents the additional derivative contracts entered into in October 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Oil fixed price swaps
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,261,500
|
|
|
1,047,000
|
|
|
686,500
|
|
Weighted-average price
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50.00
|
|
|
$
|
50.00
|
|
|
$
|
50.00
|
|
Natural gas fixed price swaps
|
|
|
|
|
|
|
|
|
|
|
|
Volume (MMBtu)
|
—
|
|
|
9,845,000
|
|
|
15,370,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average price
|
$
|
—
|
|
|
$
|
2.39
|
|
|
$
|
2.39
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Natural gas basis swaps
|
|
|
|
|
|
|
|
|
|
|
|
Volume (MMBtu)
|
—
|
|
|
18,580,000
|
|
|
22,610,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average price
|
$
|
—
|
|
|
$
|
0.45
|
|
|
$
|
0.38
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Natural gas liquids fixed price swaps
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
456,500
|
|
|
1,574,400
|
|
|
1,441,100
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average price
|
$
|
22.62
|
|
|
$
|
19.09
|
|
|
$
|
18.91
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Credit Facility Amendment
In October 2019, the Company entered into an amendment to its Credit Facility to postpone the October 2019 redetermination to January 2020 as well as to limit the Company’s borrowings to the lesser of (i) $732.6 million (ii) the borrowing base, (iii) the maximum aggregate amount (as defined in the credit agreement), or (iv) the total commitments (as defined in the agreement) until the January 2020 redetermination is complete. See Note 7 – Long-Term Debt for further discussion of the Credit Facility.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of the Company should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report as well as our audited consolidated financial statements and notes included in our Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are subject to risk and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the development, production, gathering and sale of oil, natural gas and NGLs. Please refer to Part II, Item 1A. “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for additional information regarding these risks and uncertainties. In light of these risks and uncertainties, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
Roan Inc. was incorporated in September 2018 to serve as a holding company, and prior to the Reorganization, had no operations, assets or liabilities. The historical financial and operating information included in this Quarterly Report, (i) on and after September 24, 2018, is that of Roan Inc., and (ii) prior to September 24, 2018, is the information of Roan LLC, our accounting predecessor.
Overview
We are an independent oil and natural gas company focused on the development of our assets throughout the eastern and southern Anadarko Basin. The Anadarko Basin, which spans from south-central Oklahoma to the northeast corner of the Texas panhandle, is one of the largest and most prolific onshore oil and natural gas basins in the United States, featuring multiple producing horizons and extensive well production history demonstrated over seven decades of development. We focus our development on formations where we believe we can apply our technical and operational expertise in order to increase production and cash flow to deliver compelling economic rates of return on a risk adjusted basis. Our acreage position is concentrated in areas that we believe demonstrate higher percentage production of oil and NGLs within the Merge play and provides us development opportunities through multiple stacked prospective development horizons.
Outlook
In October 2019, we entered into a Merger Agreement with Citizen Operating. The Merger Agreement provides for the merger of the Company into a wholly owned subsidiary of Citizen Operating with the Company as the surviving entity and a wholly owned subsidiary of Citizen Operating. As consideration for the merger, Citizen Operating will purchase all outstanding Class A common stock of the Company for cash consideration of $1.52 per share. The merger is expected to close in the fourth quarter of 2019 or first quarter of 2020, subject to satisfaction of the closing conditions contained in the Merger Agreement as discussed in Note 15 – Subsequent Events to the accompanying condensed consolidated financial statements.
In connection with the announcement of the Merger Agreement and appointment of a new Chief Executive Officer (“CEO”), we have temporarily reduced our drilling and development activity and suspended all completion activity. This reduction in activity allows our new CEO time to assess our operations plan. We currently anticipate exiting 2019 with no rigs running and are evaluating various operational plans in the event that the Merger Agreement does not close.
How We Evaluate Our Operations
We use a variety of financial and operational metrics to assess the performance of our oil and natural gas operations, including:
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•
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actual and projected reserve and production levels;
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•
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realized prices on the sale of oil, natural gas and NGLs, including the effect of our commodity derivative contracts;
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•
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lease operating expenses; and
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•
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capital expenditures on our oil and natural gas properties.
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Factors That Significantly Affect Comparability of Our Financial Condition and Results of Operations
Corporate Reorganization
On September 24, 2018, we completed the Reorganization, as a result of which Roan LLC, our accounting predecessor, became a wholly owned subsidiary of Roan Inc. Roan Inc. was incorporated to serve as a holding company and, prior to the Reorganization, had no previous operations, assets or liabilities. For more information on our Reorganization, please see Note 1 – Business and Organization.
The historical financial and operating information included in this Quarterly Report, (i) on and after September 24, 2018, is that of Roan Inc., and (ii) prior to September 24, 2018, is the information of Roan LLC, our accounting predecessor.
Public Company Expenses
Subsequent to the Reorganization, we incur direct, incremental general and administrative expenses as a result of being a publicly traded company, including but not limited to, costs associated with hiring new personnel, Sarbanes-Oxley compliance, implementation of compensation programs that are competitive with our public company peer group, costs associated with annual and quarterly reports and our other filings with the SEC, exchange listing fees, tax return preparation, independent auditor fees, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs and independent director compensation. These direct, incremental general and administrative expenses are not included in our historical results of operations.
Income Taxes
As a result of the Reorganization, we became subject to federal and state tax. Our accounting predecessor, Roan LLC, was treated as a flow-through entity for income tax purposes. As a result, the net taxable income or loss of Roan LLC and any related tax credits, for federal income tax purposes, flowed through to its members. Accordingly, no tax provision was made in the historical financial statements of Roan LLC since the income tax was an obligation of its members.
Financial and Operational Performance
Our financial and operational performance for the nine months ended September 30, 2019 included the following highlights:
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•
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Net loss of $11.5 million for the nine months ended September 30, 2019, as compared to net loss of $288.9 million for the nine months ended September 30, 2018. The decrease in the net loss was primarily due to:
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•
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$303.3 million decrease in income tax expense during the nine months ended September 30, 2019, primarily related to the income tax expense of $299.7 million in 2018 due to the recognition of a deferred tax liability upon becoming a taxable entity in conjunction with the Reorganization;
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•
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$95.0 million decrease in loss on derivative contracts during the nine months ended September 30, 2019 as a result of decreases in natural gas prices and, to a lesser extent, oil prices during this period;
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partially offset by:
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•
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$23.7 million decrease in total oil, natural gas and NGL sales, primarily as a result of a decrease in realized prices partially offset by an increase in production volumes during the nine months ended September 30, 2019;
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•
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$8.9 million increase in production expenses, primarily related to an increase in production volumes for the nine months ended September 30, 2019;
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•
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$8.3 million increase in exploration expenses, primarily related to increased unproved leasehold amortization during the nine months ended September 30, 2019; and
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•
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$58.3 million increase in depreciation, depletion, amortization and accretion, primarily due to an increase in production volumes and a higher depletion rate due to increases in capital expenditures.
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•
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Average daily sales volumes were 51.2 MBoe for the nine months ended September 30, 2019, an increase of 27% compared to 40.1 MBoe during the same period in 2018.
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•
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We drilled or participated in 96 gross (46 net) wells with first production during the first nine months of 2019.
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Sources of Revenue
Our revenues are derived from the sale of our oil and natural gas production, including the sale of NGLs that are extracted from our natural gas during processing. Revenues from product sales are a function of the volumes produced, product quality, market prices, and gas Btu content. Under our major gas dedication agreements, we have the ability to elect ethane recovery or rejection on a monthly basis. An election of ethane recovery typically results in higher NGL volumes and lower realized NGL prices while ethane rejection typically results in lower NGL volumes and higher realized NGL prices. Our revenues from oil, natural gas and NGL sales do not include the effects of derivatives. Our revenues may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices. The following table presents the sources of our revenues, excluding the effects of our derivative contracts, for the periods presented:
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2019
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|
2018
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
|
|
|
Oil sales
|
76
|
%
|
|
62
|
%
|
|
69
|
%
|
|
63
|
%
|
Natural gas sales
|
12
|
%
|
|
15
|
%
|
|
16
|
%
|
|
16
|
%
|
Natural gas liquid sales
|
12
|
%
|
|
23
|
%
|
|
15
|
%
|
|
21
|
%
|
Realized Prices on the Sales of Oil, Natural Gas and NGL Volumes
Our results of operations are heavily influenced by commodity prices. Commodity prices may fluctuate widely in response to (i) relatively minor changes in the supply of and demand for oil, natural gas and NGLs, (ii) market uncertainty and (iii) a variety of additional factors that are beyond our control. From time to time, we enter into derivative arrangements for our oil and natural gas production to mitigate the impact of price volatility on our business. See Item 3. Quantitative and Qualitative Disclosures About Market Risk – Commodity Price Risk for further discussion of the risks related to commodity price exposure and our derivative contracts.
Pricing for certain of our natural gas contracts are based on Oklahoma indexes, including ONEOK Gas Transportation, Natural Gas Pipeline Company of America Mid-Continent, Panhandle Eastern Pipeline and Southern Star Central Gas Pipeline due to the proximity of those pipelines to our producing properties. These indexes fluctuate from Henry Hub pricing due to a variety of reasons including the distance to the retail market, availability and capacity of pipelines to move the product to distribution hubs, customer demand, and competition between suppliers.
Oil and natural gas prices have been subject to significant fluctuations during the past several years. The following table sets forth the average NYMEX oil and natural gas prices for the three and nine months ended September 30, 2019 and 2018:
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2019
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2018
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|
2019
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|
2018
|
Average NYMEX prices
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|
|
|
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Oil (Bbl)
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$
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56.42
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$
|
69.55
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|
$
|
57.02
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$
|
66.75
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Natural gas (MMcf)
|
$
|
2.47
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|
|
$
|
3.04
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|
|
$
|
2.72
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|
|
$
|
3.06
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Results of Operations
Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018
The following table presents selected financial and operating information for the periods presented.
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Three Months Ended
September 30,
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2019
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|
2018
|
Production Data
|
|
|
|
Oil (MBbls)
|
1,291
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|
|
1,089
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Natural gas (MMcf)
|
13,820
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|
|
11,417
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Natural gas liquids (MBbls)
|
1,345
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|
|
1,286
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Total volumes (MBoe)
|
4,939
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|
4,278
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Average daily total volumes (MBoe/d)
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53.7
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|
46.5
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Average Prices - as reported
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Oil (per Bbl)
|
$
|
54.51
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|
$
|
68.86
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Natural gas (per Mcf)
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$
|
0.81
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|
|
$
|
1.58
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Natural gas liquids (per Bbl)
|
$
|
8.05
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|
|
$
|
21.08
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Total (per Boe)
|
$
|
18.70
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|
$
|
28.09
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Average Prices - including impact of derivative contract settlements
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Oil (per Bbl)
|
$
|
58.13
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|
$
|
55.71
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Natural gas (per Mcf)
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$
|
1.36
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|
$
|
1.62
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Natural gas liquids (per Bbl)
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$
|
11.17
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|
$
|
21.08
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Total (per Boe)
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$
|
22.05
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|
$
|
24.83
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Average Prices - excluding gathering, transportation and processing costs
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Oil (per Bbl)
|
$
|
54.57
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$
|
68.93
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Natural gas (per Mcf)
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$
|
1.49
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|
$
|
1.90
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Natural gas liquids (per Bbl)
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$
|
12.49
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$
|
27.37
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Total (per Boe)
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$
|
21.84
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$
|
30.86
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Revenues
Our operating revenues includes revenues from the sale of oil, natural gas and NGLs and gain (loss) on derivative contracts. The following table provides information on our operating revenues:
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Three Months Ended
September 30,
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|
2019
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|
2018
|
Revenues
|
(in thousands)
|
Oil sales
|
$
|
70,371
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|
|
$
|
74,987
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Natural gas sales
|
11,184
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|
|
18,059
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|
Natural gas liquid sales
|
10,825
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|
|
27,106
|
|
Gain (loss) on derivative contracts
|
40,675
|
|
|
(36,704
|
)
|
Total revenues
|
$
|
133,055
|
|
|
$
|
83,448
|
|
Oil sales. Our oil sales decreased by approximately $4.6 million, or 6%, to $70.4 million for the three months ended September 30, 2019 from $75.0 million for the three months ended September 30, 2018. This decrease was due to the decrease in the average sales prices received for produced volumes. The decrease in average sales prices received on our oil production for the three months ended September 30, 2019 reflects the decrease of approximately 19% in the index price for oil in the 2019 period as compared to the 2018 period. The decrease in oil sales from lower sales prices was partially offset by the increase in volumes produced. Our oil production increased during the three months ended September 30, 2019 by 202 MBbls, or 19%, to 1,291 MBbls for the three months ended September 30, 2019 from 1,089 MBbls for the three months ended September 30, 2018. This increase resulted from the new wells brought on line during the last quarter of 2018 and the first nine months of 2019.
Natural Gas sales. Our natural gas sales decreased by approximately $6.9 million, or 38%, to $11.2 million for the three months ended September 30, 2019 from $18.1 million for the three months ended September 30, 2018. This decrease was primarily due to the decrease in the average sales prices received for produced volumes. The decrease in average sales prices received on our natural gas production for the three months ended September 30, 2019 reflects the decrease of approximately 19% in the index price for natural gas in the 2019 period as compared to the 2018 period. The decrease in natural gas sales from lower sales prices was partially offset by an increase in production. Our natural gas production increased 2,403 MMcf, or 21%, to 13,820 MMcf for the three months ended September 30, 2019 from 11,417 MMcf for the three months ended September 30, 2018. This increase resulted from the new wells brought on line during the last quarter of 2018 and the first nine months of 2019.
NGL sales. Our NGL sales decreased by approximately $16.3 million, or 60%, to $10.8 million for the three months ended September 30, 2019 from $27.1 million for the three months ended September 30, 2018. This decrease was primarily due to the decrease in the average sales prices received for produced volumes partially offset by an increase in production. The decrease in average sales prices received on our NGL production for the three months ended September 30, 2019 reflects the weakening of market pricing for NGL products in the 2019 period as compared to the 2018 period. Our NGL production increased 59 MBbls, or 5%, to 1,345 MBbls for the three months ended September 30, 2019 from 1,286 MBbls for the three months ended September 30, 2018. This increase resulted from the new wells brought on line during the last quarter of 2018 and the first nine months of 2019.
Gain (loss) on derivative contracts. For the three months ended September 30, 2019, we had a gain on derivative contracts of $40.7 million compared with a loss on derivative contracts of $36.7 million for the three months ended September 30, 2018. For the three months ended September 30, 2019, our gain on derivative contracts included a favorable change in the fair value of derivative contracts of $24.2 million and a gain on settlement of derivatives contracts of $16.5 million. For the three months ended September 30, 2018, our loss on derivative contracts included an unfavorable change in the fair value of derivative contracts of $23.1 million and a loss on settlement of derivative contracts of $13.6 million. The change in the fair value of derivative contracts from the three months ended September 30, 2018 to the same period in 2019 was related to changes in the future price outlook for oil and natural gas prices that had a positive impact on the fair value of our derivative contracts. Additionally, we had settlements received during the three months ended September 30, 2019 for derivative contracts on all commodities due to favorable pricing compared to payments made during 2018 for oil derivative contracts due to unfavorable pricing.
Operating Expenses
Our operating expenses reflect costs incurred in the development, production and sale of oil, natural gas and NGLs. The following table provides information on our operating expenses:
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|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
2019
|
|
2018
|
|
(in thousands, except costs per Boe)
|
Operating Expenses
|
|
|
|
Production expenses
|
$
|
12,870
|
|
|
$
|
14,737
|
|
Production taxes
|
4,839
|
|
|
6,210
|
|
Exploration expenses
|
14,578
|
|
|
11,646
|
|
Depreciation, depletion, amortization and accretion
|
55,504
|
|
|
37,164
|
|
General and administrative (1)
|
8,752
|
|
|
13,177
|
|
Gain on sale of other assets
|
(31
|
)
|
|
—
|
|
Total
|
$
|
96,512
|
|
|
$
|
82,934
|
|
Average Costs per Boe
|
|
|
|
Production expenses
|
$
|
2.61
|
|
|
$
|
3.44
|
|
Production taxes
|
0.98
|
|
|
1.45
|
|
Exploration expenses
|
2.95
|
|
|
2.72
|
|
Depreciation, depletion, amortization and accretion
|
11.24
|
|
|
8.69
|
|
General and administrative (1)
|
1.77
|
|
|
3.08
|
|
Gain on sale of other assets
|
(0.01
|
)
|
|
—
|
|
Total
|
$
|
19.54
|
|
|
$
|
19.38
|
|
|
|
(1)
|
General and administrative expenses for the three months ended September 30, 2019 and 2018 include $3.0 million, or $0.61 per Boe, and $2.9 million, or $0.69 per Boe, of equity-based compensation expense, respectively. General and administrative expenses for the three months ended September 30, 2019 includes $(1.2) million, or $(0.25) per Boe, of reversal of bad debt expense due to a change in the allowance for doubtful accounts.
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Production expenses. Production expenses are the operating costs incurred to maintain production. Such costs include the cost of saltwater disposal, monitoring, pumping, chemicals, maintenance, repairs, workover expenses and direct labor and overhead related to production activities. Production expenses were $12.9 million, or $2.61 per Boe, for the three months ended September 30, 2019, which was a decrease of $1.9 million, or 13%, from $14.7 million, or $3.44 per Boe, for the three months ended September 30, 2018. The decrease in production expenses during 2019 compared to 2018 was primarily due to decreases in surface repairs incurred as well as decreases in water hauling and disposal costs as a result of favorable pricing under our current water hauling contracts during the three months ended September 30, 2019. These decreases were partially offset by an increase in variable costs related to an increase in total production of 15%.
Production taxes. Production taxes are paid on produced oil, natural gas, and NGLs based primarily on a percentage of sales revenues from production sold at fixed rates established by federal, state or local taxing authorities. Production taxes were $4.8 million for the three months ended September 30, 2019, a decrease of $1.4 million, or 22%, from $6.2 million for the three months ended September 30, 2018. Production taxes primarily decreased due to decreased revenue for the 2019 period.
Exploration expenses. These are primarily geological and geophysical costs that include seismic survey costs, amortization of the costs of unproved properties assessed for impairment on a group basis, costs of carrying and retaining unproved properties, and costs related to unsuccessful leasing efforts. Exploration expenses were $14.6 million for the three months ended September 30, 2019, an increase of $2.9 million, or 25%, from $11.6 million for the three months ended September 30, 2018. Exploration expenses for the three months ended September 30, 2019 included unproved leasehold amortization of $13.7 million and geological and geophysical expenses of $0.9 million. For the three months ended September 30, 2018, exploration expenses included unproved leasehold amortization of $11.2 million and geological and geophysical expenses of $0.5 million. Unproved leasehold amortization is calculated by considering our drilling plans and the lease terms of our existing unproved properties. The increase in unproved leasehold amortization for the 2019 period is primarily due to additional leasehold set to expire in upcoming periods.
Depreciation, depletion, amortization and accretion. Depreciation, depletion, amortization and accretion was $55.5 million, or $11.24 per Boe, for the three months ended September 30, 2019, compared to $37.2 million, or $8.69 per Boe, for the three months ended September 30, 2018, which is an increase of $18.3 million or 49%. The increase in depreciation, depletion, amortization and accretion was primarily due to an increase in the depletion rate for our oil and natural gas properties and, to a lesser extent, increased production. The per Boe increase in the depletion rate is attributable to capital expenditures during the period.
General and administrative. General and administrative expenses were $8.8 million, or $1.77 per Boe, for the three months ended September 30, 2019, a decrease of $4.4 million or 34% from $13.2 million, or $3.08 per Boe, for the three months ended September 30, 2018. This decrease is primarily due to lower salaries and benefits in the 2019 period based on fewer employees and the elimination of our bonus accrual as well as a reversal of a portion of the allowance for doubtful accounts of $1.2 million, partially offset by increases in legal and other professional services in 2019.
Other Expenses
Interest expense, net. Interest expense, net of capitalized interest, for the three months ended September 30, 2019 was $11.4 million as compared to $2.1 million for the three months ended September 30, 2018. This increase was due to increased borrowings outstanding, including those under the Term Loan, during the three months ended September 30, 2019 as compared to the three months ended September 30, 2018.
Income tax expense. The income tax expense for the three months ended September 30, 2019 was $5.9 million and is the result of our effective tax rate applied to net income for the quarter. Income tax expense for the three months ended September 30, 2018 was $299.7 million and relates to the recognition of a deferred tax liability upon becoming a taxable entity in conjunction with the Reorganization.
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
The following table presents selected financial and operating information for the periods presented.
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|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
2019
|
|
2018
|
Production Data
|
|
|
|
Oil (MBbls)
|
3,628
|
|
|
3,004
|
|
Natural gas (MMcf)
|
37,973
|
|
|
29,486
|
|
Natural gas liquids (MBbls)
|
4,013
|
|
|
3,042
|
|
Total volumes (MBoe)
|
13,970
|
|
|
10,960
|
|
Average daily total volumes (MBoe/d)
|
51.2
|
|
|
40.1
|
|
Average Prices - as reported
|
|
|
|
Oil (per Bbl)
|
$
|
55.16
|
|
|
$
|
65.70
|
|
Natural gas (per Mcf)
|
$
|
1.21
|
|
|
$
|
1.66
|
|
Natural gas liquids (per Bbl)
|
$
|
10.43
|
|
|
$
|
21.49
|
|
Total (per Boe)
|
$
|
20.62
|
|
|
$
|
28.44
|
|
Average Prices - including impact of derivative contract settlements
|
|
|
Oil (per Bbl)
|
$
|
58.56
|
|
|
$
|
55.70
|
|
Natural gas (per Mcf)
|
$
|
1.40
|
|
|
$
|
1.73
|
|
Natural gas liquids (per Bbl)
|
$
|
12.85
|
|
|
$
|
21.49
|
|
Total (per Boe)
|
$
|
22.71
|
|
|
$
|
25.90
|
|
Average Prices - excluding gathering, transportation and processing costs
|
|
|
Oil (per Bbl)
|
$
|
55.29
|
|
|
$
|
65.72
|
|
Natural gas (per Mcf)
|
$
|
1.91
|
|
|
$
|
2.07
|
|
Natural gas liquids (per Bbl)
|
$
|
14.78
|
|
|
$
|
27.53
|
|
Total (per Boe)
|
$
|
23.80
|
|
|
$
|
31.21
|
|
Revenues
Our operating revenues includes revenues from the sale of oil, natural gas and NGLs and loss on derivative contracts. The following table provides information on our operating revenues:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
2019
|
|
2018
|
Revenues
|
(in thousands)
|
Oil sales
|
$
|
200,138
|
|
|
$
|
197,356
|
|
Natural gas sales
|
46,054
|
|
|
48,956
|
|
Natural gas liquid sales
|
41,847
|
|
|
65,377
|
|
Loss on derivative contracts
|
(5,913
|
)
|
|
(100,920
|
)
|
Total revenues
|
$
|
282,126
|
|
|
$
|
210,769
|
|
Oil sales. Our oil sales increased by approximately $2.8 million, or 1%, to $200.1 million for the nine months ended September 30, 2019 from $197.4 million for the nine months ended September 30, 2018. This increase
was primarily due to the increase in volumes during the nine months ended September 30, 2019 of 624 MBbls, or 21%, which resulted from wells brought on line during the last quarter of 2018 and the first nine months of 2019. The increase in oil sales from higher volumes was partially offset by the decrease in the average sales prices received for produced volumes. The decrease in average sales prices received on our oil production for the nine months ended September 30, 2019 reflects the decrease of approximately 15% in the index price for oil in the 2019 period as compared to the 2018 period.
Natural Gas sales. Our natural gas sales decreased by approximately $2.9 million, or 6%, to $46.1 million for the nine months ended September 30, 2019 from $49.0 million for the nine months ended September 30, 2018. This decrease was primarily due to the decrease in the average sales prices received for produced volumes. The decrease in average sales prices received on our natural gas production for the nine months ended September 30, 2019 reflects the decrease of approximately 11% in the index price for natural gas in the 2019 period as compared to the 2018 period. The decrease in the average sales prices received for produced volumes was partially offset by an increase in production. Our natural gas production increased 8,487 MMcf, or 29%, to 37,973 MMcf for the nine months ended September 30, 2019 from 29,486 MMcf for the nine months ended September 30, 2018. This increase resulted from the new wells brought on line during the last quarter of 2018 and the first nine months of 2019.
NGL sales. Our NGL sales decreased by approximately $23.5 million, or 36%, to $41.8 million for the nine months ended September 30, 2019 from $65.4 million for the nine months ended September 30, 2018. This decrease was primarily due to the decrease in the average sales prices received for produced volumes partially offset by an increase in production. The decrease in average sales prices received on our NGL production for the nine months ended September 30, 2019 reflects the weakening of market pricing for NGL products in the 2019 period as compared to the 2018 period. Our NGL production increased 971 MBbls, or 32%, to 4,013 MBbls for the nine months ended September 30, 2019 from 3,042 MBbls for the nine months ended September 30, 2018. This increase resulted from the new wells brought on line during the last quarter of 2018 and the first nine months of 2019.
Loss on derivative contracts. For the nine months ended September 30, 2019, we had a loss on derivative contracts of $5.9 million compared to $100.9 million for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, our loss on derivative contracts included an unfavorable change in the fair value of derivative contracts of $35.2 million, partially offset by a gain on settlement of derivatives contracts of $29.3 million. For the nine months ended September 30, 2018, our loss on derivative contracts included an unfavorable change in the fair value of derivative contracts of $73.4 million and a loss on settlement of derivative contracts of $27.5 million. The change in the fair value of derivative contracts from the nine months ended September 30, 2018 to the same period in 2019 was related to changes in the future price outlook for oil and natural gas prices that had smaller negative impact on the fair value of our derivative contracts. Additionally, we had settlements received during 2019 for derivative contracts on all commodities due to favorable pricing compared to payments made during 2018 for oil derivative contracts due to unfavorable pricing.
Operating Expenses
Our operating expenses reflect costs incurred in the development, production and sale of oil, natural gas and NGLs. The following table provides information on our operating expenses:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
2019
|
|
2018
|
|
(in thousands, except costs per Boe)
|
Operating Expenses
|
|
|
|
Production expenses
|
$
|
39,019
|
|
|
$
|
30,111
|
|
Production taxes
|
14,943
|
|
|
10,892
|
|
Exploration expenses
|
38,472
|
|
|
30,129
|
|
Depreciation, depletion, amortization and accretion
|
141,969
|
|
|
83,630
|
|
General and administrative (1)
|
36,888
|
|
|
40,283
|
|
Gain on sale of other assets
|
(645
|
)
|
|
—
|
|
Total
|
$
|
270,646
|
|
|
$
|
195,045
|
|
Average Costs per Boe
|
|
|
|
Production expenses
|
$
|
2.79
|
|
|
$
|
2.75
|
|
Production taxes
|
1.07
|
|
|
0.99
|
|
Exploration expenses
|
2.75
|
|
|
2.75
|
|
Depreciation, depletion, amortization and accretion
|
10.16
|
|
|
7.63
|
|
General and administrative (1)
|
2.64
|
|
|
3.68
|
|
Gain on sale of other assets
|
(0.05
|
)
|
|
—
|
|
Total
|
$
|
19.36
|
|
|
$
|
17.80
|
|
|
|
(1)
|
General and administrative expenses for the nine months ended September 30, 2019 and 2018 include $2.8 million, or $0.20 per Boe, and $8.1 million, or $0.74 per Boe, of equity-based compensation expense, respectively. General and administrative expenses for the nine months ended September 30, 2019 includes $4.1 million, or $0.29 per Boe, of bad debt expense and $2.5 million, or $0.18 per Boe, of aborted offering costs.
|
Production expenses. Production expenses were $39.0 million, or $2.79 per Boe, for the nine months ended September 30, 2019, which was an increase of $8.9 million, or 30%, from $30.1 million, or $2.75 per Boe, for the nine months ended September 30, 2018. The increase in production expenses during 2019 compared to 2018 was due to increased total production of 27% and increases in water hauling and disposal costs as a result of higher water volumes as well as increases in compression services during the nine months ended September 30, 2019.
Production taxes. Production taxes were $14.9 million for the nine months ended September 30, 2019, an increase of $4.1 million, or 37%, from $10.9 million for the nine months ended September 30, 2018. Production taxes primarily increased due to increased production tax rates, which became effective in July 2018.
Exploration expenses. Exploration expenses were $38.5 million for the nine months ended September 30, 2019, an increase of $8.3 million, or 28%, from $30.1 million for the nine months ended September 30, 2018. Exploration expenses for the nine months ended September 30, 2019 included unproved leasehold
amortization of $35.9 million and geological and geophysical expenses of $2.2 million. For the nine months ended September 30, 2018, exploration expenses included unproved leasehold amortization of $25.6 million and geological and geophysical expenses of $4.5 million. The increase in unproved leasehold amortization for the 2019 period is primarily due to additional leasehold set to expire in upcoming periods.
Depreciation, depletion, amortization and accretion. Depreciation, depletion, amortization and accretion was $142.0 million, or $10.16 per Boe, for the nine months ended September 30, 2019, compared to $83.6 million, or $7.63 per Boe, for the nine months ended September 30, 2018, which is an increase of $58.3 million or 70%. The increase in depreciation, depletion, amortization and accretion was primarily due to an increase in the depletion rate for our oil and natural gas properties and to a lesser extent, increased production. The per Boe increase in the depletion rate is attributable to capital expenditures in the 2019 period.
General and administrative. General and administrative expenses were $36.9 million, or $2.64 per Boe, for the nine months ended September 30, 2019, a decrease of $3.4 million or 8% from $40.3 million, or $3.68 per Boe, for the nine months ended September 30, 2018. During the nine months ended September 30, 2019, general and administrative expenses included salaries and benefits of $18.4 million, equity-based compensation expense of $2.8 million, bad debt expense of $4.1 million, and aborted offering costs of $2.5 million. During the nine months ended September 30, 2018, general and administrative expenses included salaries and benefits of $13.7 million, equity-based compensation expense of $8.1 million and fees paid to Citizen and Linn under the MSAs of $10.0 million. The MSAs with Citizen and Linn concluded in April 2018. Equity-based compensation during 2019 was reduced by forfeitures that occurred in the period.
Other Expenses
Interest expense, net. Interest expense, net of capitalized interest, for the nine months ended September 30, 2019 was $26.6 million as compared to $5.0 million for the nine months ended September 30, 2018. This increase was due to increased borrowings outstanding during the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018.
Income tax (benefit) expense. The income tax benefit for the nine months ended September 30, 2019 was $3.6 million and is the result of our effective tax rate applied to the net loss for the period. Income tax expense for the three months ended September 30, 2018 was $299.7 million, which reflects the recognition of a deferred tax liability upon becoming a taxable entity in conjunction with the Reorganization.
Liquidity and Capital Resources
Our primary sources of liquidity have been borrowings under our Credit Facility and Term Loan and cash flows from operations. Our ability to fund planned capital expenditures depends in part on commodity prices, our future operating performance, availability of borrowings under our Credit Facility and Term Loan, the impact of redeterminations of our borrowing base, and, more broadly, on the availability of equity and debt financing, which is affected by prevailing economic conditions in our industry and financial, business and other factors, many of which are beyond our control. Our primary uses of capital have been for the exploration, development and acquisition of oil and natural gas properties.
As discussed in the Overview section above, we entered into a Merger Agreement which is expected to close in the fourth quarter of 2019 or early 2020. In the event that the Merger does not close, we will consider our current liquidity position as well as current market conditions in finalizing our operational plans for 2020.
Cash Flows
Our cash flows for the nine months ended September 30, 2019 and 2018 are presented below:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
2019
|
|
2018
|
|
(in thousands)
|
Net cash provided by operating activities
|
$
|
169,998
|
|
|
$
|
206,644
|
|
Net cash used in investing activities
|
(446,041
|
)
|
|
(510,868
|
)
|
Net cash provided by financing activities
|
272,624
|
|
|
306,653
|
|
Net (decrease) increase in cash and cash equivalents
|
$
|
(3,419
|
)
|
|
$
|
2,429
|
|
Cash flows provided by operating activities. Cash flows provided by operating activities for the nine months ended September 30, 2019 were $170.0 million compared to $206.6 million for the nine months ended September 30, 2018. The decrease in cash flows provided by operating activities in 2019 is primarily driven by changes in working capital accounts, decreased revenues and higher cash expenses due to a higher producing well count in 2019.
Cash flows used in investing activities. Cash flows used in investing activities for the nine months ended September 30, 2019 were $446.0 million compared to $510.9 million for the nine months ended September 30, 2018. The decrease in cash flows used in investing activities in 2019 is due to the decrease in capital expenditures on oil and natural gas properties resulting from the decrease in drilling and completion activities in 2019 compared to the same period in 2018.
Cash flows provided by financing activities. Cash flows provided by financing activities for the nine months ended September 30, 2019 were $272.6 million compared to $306.7 million for the nine months ended September 30, 2018. Cash flows provided by financing activities primarily consists of borrowings under our Credit Facility in both periods and our Term Loan in 2019. In 2019, we also had a repayment of a portion of the borrowings outstanding under the Credit Facility. The decrease in net activity on our debt facilities in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 is due to the decrease in drilling and completion activities in 2019 compared to the same period in 2018.
Credit Facility
Our Credit Facility is a $750.0 million credit agreement with a maturity date of September 5, 2022. As of September 30, 2019, the borrowing base is set at $750.0 million. Redetermination of the borrowing base generally occurs semiannually on or about October 1 and April 1. In October 2019, we entered into an amendment to our Credit Facility to postpone the October 2019 redetermination to January 2020 as well as to limit our borrowings under the Credit Facility to the lesser of (i) $732.6 million (ii) the borrowing base, (iii) the maximum aggregate amount (as defined in the credit agreement), or (iv) the total commitments (as defined in the agreement) until the January 2020 redetermination is effective.
As of September 30, 2019, we had $732.6 million of outstanding borrowings and no letters of credit outstanding under the Credit Facility. Our borrowing base is contingent upon a number of factors, including the value of our reserves, the level of our production and changes in capital and operating costs. As a result, continued low commodity prices and reductions in drilling and completion activity may adversely impact the results of future redeterminations, which could have a significant impact on our liquidity.
Effective June 2019, the Credit Facility was amended to (i) reaffirm the borrowing base at $750.0 million, (ii) temporarily reduce the current ratio to 0.85 to 1.00 at June 30, 2019 and to 0.80 to 1.00 at September 30, 2019, (iii) increase the rates in the utilization grid for LIBOR and ABR loans by 0.25% until the Company delivers a compliance certificate demonstrating a current ratio of not less than 1.00 to 1.00, (iv) increase the mortgage coverage requirements from 85% to 95%; and (v) restrict certain payments between Roan Inc. and Roan LLC in the event that Roan LLC transfers any of its oil and natural gas properties to Roan Inc.
Amounts borrowed under the Credit Facility bear interest at LIBOR or the ABR at our election. The rate used for ABR loans is based on the higher of the prime rate, the federal funds effective rate plus 0.50% or the one-month LIBOR rate plus 1%. Either rate is adjusted upward by an applicable margin (ranging from 2.00% to 3.00% for LIBOR and 1.00% to 2.00% for ABR; provided that the applicable margin will currently range from 2.25% to 3.25% for LIBOR and 1.25% to 2.25% for ABR if Roan LLC has delivered a compliance certificate demonstrating a current ratio of less than 1.00 to 1.00), based on the utilization percentage of the Credit Facility. As our current ratio at September 30, 2019 is less than 1.00 to 1.00, the applicable margin will increase by 0.25%, as noted above, for the fourth quarter of 2019. Additionally, the Credit Facility provides for a commitment fee of 0.375% to 0.50% based on utilization, which is payable at the end of each calendar quarter.
The Credit Facility contains representations, warranties, covenants, conditions and defaults customary for transactions of this type, including but not limited to: (i) limitations on liens and incurrence of debt covenants; (ii) limitations on the sale of property, mergers, consolidations and other similar transactions covenants; (iii) limitations on investments, loans and advances covenants; and (iv) limitations on dividends, distributions, redemptions and restricted payments covenants. Additionally, we are prohibited from hedging in excess of (a) 80% of reasonably anticipated projected production for the first thirty (30) month rolling period (based upon our internal projections) and (b) 80% of reasonably anticipated projected production from proved reserves for the second thirty (30) month rolling period of such sixty (60) month period (based on the most recently delivered reserve report). If the amount of borrowings outstanding exceed 50% of the borrowing base, we are required to hedge a minimum of 50% of the future production expected to be derived from proved developed reserves for the next eight quarters per our most recent reserve report.
The Credit Facility also contains financial covenants requiring us to comply with a leverage ratio of consolidated debt to consolidated EBITDAX (as defined in the credit agreement) for the period of four fiscal quarters then ended of not more than 4.00 to 1.00 and a current ratio of consolidated current assets to
consolidated current liabilities (as defined in the credit agreement to exclude non-cash assets and liabilities under ASC Topic 815 Derivatives and Hedging and ASC Topic 410 Asset Retirement and Environmental Obligations) of not less than 0.80 to 1.00 for the quarter ended September 30, 2019 and not less than 1.00 to 1.00 for all quarters thereafter.
As of September 30, 2019, we were in compliance with the covenants under the Credit Facility and expect to remain in compliance for the next twelve months based on our current borrowing base. If we are not able to maintain compliance with the covenants under the Credit Facility in the future, we would be in default under the Credit Facility. A default, if not waived, could result in acceleration of the indebtedness outstanding under the Credit Facility and a default with respect to, and an acceleration of, the indebtedness outstanding under any other debt agreements, including the Term Loan. See “Risk Factors - Restrictions in our Credit Facility and Term Loan could limit our growth and our ability to engage in certain activities.”
Term Loan
In June 2019, we entered into a term loan facility (“Term Loan”) with initial commitments of $100.0 million and a potential incremental commitment of $50.0 million at our election. The lenders in the facility are funds affiliated with certain of our significant stockholders that are represented on the board of directors. The Term Loan matures in October 2020 and is secured by all of the assets of Roan Inc.
Borrowings under the Term Loan bear interest at the three-month LIBOR rate plus 7.5% or ABR rate plus 6.5%, as elected by us. The ABR rate is the highest of the prime rate, the federal funds effective rate plus 0.50% and the one-month LIBOR rate plus 1%. We can elect, subject to certain conditions included in the Term Loan agreement, to pay the interest on the Term Loan in kind. Interest is payable semi-annually for LIBOR loans and quarterly for ABR loans. The borrowings under the Term Loan are issued at a discount of 2.5%. Additionally, in conjunction with the initial Term Loan commitment and any future incremental commitments, we are required to issue shares to the lenders equal to approximately 1% of the outstanding Class A common stock at the time of the commitment.
As of September 30, 2019, we had borrowed $50.0 million and received proceeds of $47.8 million, which were net of the discount and certain issuance fees. These proceeds were primarily used to pay down amounts outstanding under the Credit Facility. As of September 30, 2019, the outstanding borrowings under the Term Loan have an interest rate of 9.60%. We issued 1,525,395 shares of Class A common stock in June 2019 to the lenders of the Term Loan and received cash equal to the par value of the shares issued in return. The difference between the fair market value of the shares issued and the amount paid for such shares was considered a fee paid to the lenders that will be amortized over the term of the Term Loan. The initial discount and all related financing costs are being amortized over the term of the Term Loan using the effective interest method.
Under the Term Loan, any repayment of outstanding borrowings incurs a premium equal to 1% plus any interest that would have accrued on the repaid amount if it had been outstanding for a year; provided, that such additional interest is only due in the event of prepayment before the maturity date.
In September 2019, the Term Loan was amended to permit the transfer of specified wellbore rights from Roan Inc. to Roan LLC. Additionally, we amended the Term Loan to specify that while the Merger Agreement is in effect no repayment premium would be due on any loans made after the amendment date and to specify that payment of interest in kind would not qualify as an additional loan under the Term Loan.
The Term Loan contains customary negative covenants including, but not limited to, restrictions on our ability to incur additional indebtedness or create certain liens on assets, restrictions on selling of assets and restrictions on investments, dividends and other specified transactions. These covenants are subject to a number of important exceptions and qualifications. The Term Loan also contains certain affirmative covenants which, among other things, requires us to maintain $10.0 million of liquidity, defined in the agreement as unrestricted cash plus the available borrowings under the Credit Facility, and require periodic financial and reserve reporting. In addition, the Term Loan agreement contains financial covenants consistent with those required by the Credit Facility.
As of September 30, 2019, we were in compliance with the covenants under the Term Loan and expect to remain in compliance for the next twelve months. If we are not able to maintain compliance with the covenants under the Term Loan in the future, we would be in default under the Term Loan. A default, if not waived, could result in acceleration of the indebtedness outstanding under the Term Loan and a default with respect to, and an acceleration of, the indebtedness outstanding under any other debt agreements, including the Credit Facility. See “Risk Factors - Restrictions in our Credit Facility and Term Loan could limit our growth and our ability to engage in certain activities.”
Capital Expenditures
Our primary needs for cash are development, exploration and acquisition of oil and natural gas assets, payment of contractual obligations and working capital obligations. To date, funding for these cash needs has been provided by internally-generated cash flow and financing under our Credit Facility and Term Loan.
During the nine months ended September 30, 2019, capital expenditures were $418.1 million, including drilling and completion expenditures of $387.4 million. Our 2019 capital expenditures were more heavily weighted in the first half of the year as a result of increased completion activity as we developed our inventory of drilled but uncompleted wells from 2018.
In connection with the announcement of the Merger Agreement and appointment of our new CEO, we have temporarily reduced our drilling and development activity and suspended all completion activity. As a result of this reduction in activity, we expect our fourth quarter capital expenditures to be significantly lower than capital expenditures during the prior three quarters of 2019 due in part to the anticipation of exiting 2019 with no rigs running. Capital expenditures for our operated properties are largely discretionary and within our control. We evaluate commodity prices, our financial position and overall market conditions and can add rigs if beneficial. Based on the current supply and rig availability in the area, we believe we would be able to quickly respond to market changes.
While we expect the merger transaction to close in late 2019 or early 2020, we continue to plan and position the business to operate on a standalone basis. Based upon current oil and natural gas prices and production expectations for the fourth quarter of 2019 and full year 2020 and our current borrowing base under our Credit Facility, we believe our cash flow from operations and cash on hand will be sufficient to fund our operations for the next twelve months. However, future cash flows are subject to a number of variables, many of which are beyond our control, including the level of oil and natural gas production and commodity prices. Additionally, the current reduction in our drilling and completion activities could impact our future cash flows from operations more extensively than currently projected. The reduction in drilling and completion activities as well as oil and natural gas prices could also impact our borrowing base under our Credit Facility, which is scheduled to be redetermined in January 2020. The determination of the magnitude of our borrowing base as part of our recurring redeterminations is at the discretion of our lenders, who consider many factors, including commodity prices, the levels of our production and reserves and changes
in capital and operating costs. If our borrowing base under our Credit Facility is materially reduced as part of the January 2020 redetermination, we may have limited ability to obtain the capital necessary to sustain our operations.
Working Capital
At September 30, 2019, we had a working capital deficit of $26.5 million compared to $42.2 million at December 31, 2018. Current assets decreased by $71.4 million and current liabilities decreased by $87.0 million at September 30, 2019, compared to December 31, 2018. The primary factor contributing to the decrease in the working capital deficit is the decrease in our accrued liabilities and drilling advances due to the decrease in our drilling and completion activities in 2019. This was partially offset by a decrease in the derivative contract assets of $33.5 million, which reflects a negative impact of increases in oil prices on the fair value of our open oil contracts with maturity dates in the next twelve months.
Off-Balance Sheet Arrangements
We enter into certain off-balance sheet arrangements and transactions, including operating lease arrangements and undrawn letters of credit. In addition, we enter into other contractual agreements in the normal course of business for processing and transportation as well as for other oil and natural gas activities. Other than the items discussed above, there are no other arrangements, transactions or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect our liquidity or capital resource positions.
Contractual Obligations
Our contractual obligations include long-term debt, cash interest expense on debt, pipe and equipment purchase commitments, office building leases, and drilling rig commitments. Since December 31, 2018, our outstanding borrowings on our Credit Facility due in September 2022 have increased $218.0 million, which resulted in an increase in the estimated interest expense of $14.2 million based on a weighted average interest rate of 5.24%. In addition, we have outstanding borrowings of $50.0 million on the Term Loan with a maturity date in October 2020 with estimated total interest expense of $5.2 million based on an interest rate of 9.60%. There have been no other material changes in our contractual commitments and obligations from amounts listed under “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Contractual Obligations” in our Annual Report on Form 10‑K.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on the condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires that management formulate estimates and assumptions that affect revenues, expenses, assets, liabilities and the disclosure of contingent assets and liabilities. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that are believed to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. Although management believes they are reasonable, actual results could differ from these estimates and assumptions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a number of market risks including commodity price risk, credit risk and interest rate risk. The following information provides quantitative and qualitative information about our potential risks and how we seek to manage such risks.
Commodity Price Risk
The following table reflects our open commodity contracts as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
Total
|
Oil fixed prices swaps
|
|
|
|
|
|
|
|
Volume (Bbl)
|
1,200,730
|
|
|
3,429,500
|
|
|
1,730,000
|
|
|
6,360,230
|
|
Weighted-average price
|
$
|
60.75
|
|
|
$
|
60.57
|
|
|
$
|
56.08
|
|
|
$
|
59.38
|
|
Natural gas fixed price swaps
|
|
|
|
|
|
|
|
Volume (MMBtu)
|
11,040,000
|
|
|
19,665,000
|
|
|
7,250,000
|
|
|
37,955,000
|
|
Weighted-average price
|
$
|
2.90
|
|
|
$
|
2.63
|
|
|
$
|
2.65
|
|
|
$
|
2.71
|
|
Natural gas basis swaps
|
|
|
|
|
|
|
|
Volume (MMBtu)
|
7,360,000
|
|
|
10,980,000
|
|
|
—
|
|
|
18,340,000
|
|
Weighted-average price
|
$
|
0.52
|
|
|
$
|
0.49
|
|
|
$
|
—
|
|
|
$
|
0.50
|
|
Natural gas liquids fixed prices swaps
|
|
|
|
|
|
|
|
Volume (Bbl)
|
460,000
|
|
|
1,281,000
|
|
|
730,000
|
|
|
2,471,000
|
|
Weighted-average price
|
$
|
28.66
|
|
|
$
|
23.22
|
|
|
$
|
21.90
|
|
|
$
|
23.84
|
|
Per the covenants of the Merger Agreement, the Company was required to enter into additional commodity contracts. The following table presents the additional derivative contracts entered into in October 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Oil fixed price swaps
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,261,500
|
|
|
1,047,000
|
|
|
686,500
|
|
Weighted-average price
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50.00
|
|
|
$
|
50.00
|
|
|
$
|
50.00
|
|
Natural gas fixed price swaps
|
|
|
|
|
|
|
|
|
|
|
|
Volume (MMBtu)
|
—
|
|
|
9,845,000
|
|
|
15,370,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average price
|
$
|
—
|
|
|
$
|
2.39
|
|
|
$
|
2.39
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Natural gas basis swaps
|
|
|
|
|
|
|
|
|
|
|
|
Volume (MMBtu)
|
—
|
|
|
18,580,000
|
|
|
22,610,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average price
|
$
|
—
|
|
|
$
|
0.45
|
|
|
$
|
0.38
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Natural gas liquids fixed price swaps
|
|
|
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
456,500
|
|
|
1,574,400
|
|
|
1,441,100
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average price
|
$
|
22.62
|
|
|
$
|
19.09
|
|
|
$
|
18.91
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Our primary market risk exposure is in the price we receive for our oil, natural gas and NGL production. Pricing for oil, natural gas and NGL production has been volatile and unpredictable for several years, and we expect this volatility to continue in the future. To achieve more predictable cash flow and to reduce our exposure to adverse fluctuations in commodity prices, from time to time we enter into derivative arrangements for our oil and natural gas production. Our hedging instruments allow us to reduce, but not eliminate, the
potential effects of the variability in cash flow from operations due to fluctuations in oil and natural gas prices and provide increased certainty of cash flows. These derivatives are not designated as a hedging instrument for hedge accounting under GAAP and as such, gains or losses resulting from the change in fair value along with the gains or losses resulting from settlement of derivative contracts are reflected as gain or loss on derivative contracts included in the consolidated statements of operations.
There are a variety of hedging strategies and instruments used to hedge future price risk. We utilize fixed price swaps and basis swaps to manage the price risk associated with forecasted sale of our oil and natural gas production. Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. Basis swaps are settled monthly based on differences between a fixed price differential and the applicable market price differential. When the referenced settlement price is less than the price specified in the contract, we receive an amount from the counterparty based on the price difference multiplied by the volume. When the referenced settlement price exceeds the price specified in the contract, we pay the counterparty an amount based on the price difference multiplied by the volume.
At September 30, 2019, we had a net asset position of $66.6 million related to our derivative contracts. Utilizing actual derivative contractual volumes under our fixed price swaps as of September 30, 2019, an increase of 10% in the forward curves associated with the underlying commodity would have decreased our net asset position to $21.4 million, while a decrease of 10% in the forward curves associated with the underlying commodity would have increased our net asset position to $112.0 million.
Credit Risk
Our principal exposure to credit risk is through the sale of our oil, natural gas and NGL production, which we market to energy marketing companies and refineries, and to a lesser extent, our derivative counterparties.
We are subject to credit risk resulting from the concentration of oil, natural gas and NGL receivables with four purchasers that individually comprise 10% or more of our revenue. We do not believe the loss of any single purchaser would materially impact our results of operations because oil, natural gas and NGLs are fungible products with well-established markets and numerous purchasers.
Our derivative transactions have been carried out in the over-the-counter market. The entry into derivative transactions in the over-the-counter market involves the risk that the counterparties, which are financial institutions, may be unable to meet the financial terms of the transactions. We monitor on an ongoing basis the credit ratings of our derivative counterparties and consider their credit default risk ratings in determining the fair value of our derivative contracts. Our derivative contracts are with multiple counterparties to minimize our exposure to any individual counterparty. The counterparties to our derivative contracts at September 30, 2019 are also lenders under our Credit Facility. As a result, we do not require collateral or other security from counterparties nor are we required to post collateral to support derivative instruments. We have master netting agreements with all of our derivative counterparties, which allow us to net our derivative assets and liabilities with the same counterparty. As a result of the netting provisions, our maximum amount of loss under derivative transactions due to credit risk is limited to the net amounts due from the counterparties under the derivative contracts.
Interest Rate Risk
We are subject to market risk exposure related to changes in interest rates on our indebtedness under our Credit Facility and Term Loan. The terms of the Credit Facility and Term Loan provide for interest on
borrowings at LIBOR or ABR, in each case adjusted upward by an applicable margin as defined in each agreement.
As of September 30, 2019, we had $782.6 million in outstanding borrowings under our Credit Facility and Term Loan. At September 30, 2019, the weighted average interest rate on our debt was 5.52%. An increase or decrease of 1% in the interest rate would have a corresponding increase or decrease in our interest expense of approximately $7.8 million based on outstanding borrowings of $782.6 million as of September 30, 2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
As required by Rule 13a-15 and 15d-15 of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective at September 30, 2019 because of the material weaknesses in our internal control over financial reporting as further described below.
Identification of Material Weaknesses
As described in Item 9A of our 2018 Form 10-K, we have identified the following material weaknesses in our internal control over financial reporting.
We had an overall lack of qualified personnel within the organization who possessed an appropriate level of expertise, experience and training to effectively design, implement and maintain:
(i) Adequate controls to monitor and assess the control environment. Specifically, internal controls were not designed or operating effectively to ensure appropriate monitoring or assessment of the control environment, including utilizing an appropriate control framework.
(ii) Adequate controls to establish appropriate entity level controls. Specifically, internal controls were not designed or operating effectively to ensure a sufficient amount of entity level controls were in place and operating effectively.
(iii) Effective controls over our period-end financial reporting processes, including controls over the preparation, analysis and review of certain significant account reconciliations required to assess the appropriateness of account balances at period-end; and controls over segregation of duties and the review of manual journal entries. Specifically, we did not design and maintain effective controls to verify that journal entries were properly prepared with sufficient supporting documentation or were reviewed and approved to ensure the accuracy and completeness of the manual journal entries. Additionally, certain key accounting personnel have the ability to prepare and post journal entries, as well as review account reconciliations, without an independent review by someone other than the preparer.
(iv) Effective controls over information technology systems that are relevant to the preparation of the financial statements. Specifically, we did not design and maintain (a) user access controls to ensure appropriate segregation of duties and to adequately restrict user and privileged access to infrastructure,
financial applications, programs, and data to appropriate personnel, (b) program change management controls to ensure that information technology program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately, (c) computer operation controls to ensure all financially significant batch jobs are monitored for the completeness and accuracy of data transfer, and (d) program development controls to ensure that new software development is aligned with business and IT requirements. The deficiencies described in this clause (iv), when aggregated, could impact both maintaining effective segregation of duties and the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected in a timely manner.
(v) Effective controls over our reservoir engineering process for estimating proved oil, natural gas and NGL reserves, which are used in the calculation of depletion of the Company’s oil and natural gas properties. Specifically, we did not maintain effective controls to verify that the Company’s ownership interests in its oil and natural gas properties used in the reservoir engineering process are sufficiently reviewed to ensure completeness and accuracy of the information.
(vi) A sufficient complement of resources with an appropriate level of accounting knowledge, experience and training to develop and maintain an effective internal control environment.
These material weaknesses did not result in any material misstatements of our financial statements or disclosures. The material weaknesses could, however, result in a misstatement of relevant account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.
Remediation Plan for the Material Weaknesses
We have taken and will continue to take a number of actions to remediate these material weaknesses. We have implemented measures designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses. Specifically, we have (i) hired additional IT and accounting personnel with appropriate technical skillsets, (ii) initiated design and implementation of our control environment, including the expansion of formal accounting and IT policies and procedures and financial reporting controls, (iii) conducted a company-wide assessment of our control environment, (iv) implemented appropriate review and oversight responsibilities within the accounting, financial reporting, and reservoir engineering functions and (v) evaluated controls over our information technology environment. To remediate our existing material weaknesses, we require additional time to demonstrate the effectiveness of our remediation efforts. The material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We can give no assurance that these actions will remediate these material weaknesses in internal controls or that additional material weaknesses in our internal control over financial reporting will not be identified in the future.
Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2019, which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.