Quarterly report pursuant to Section 13 or 15(d)

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
6 Months Ended
Jun. 30, 2020
Accounting Policies [Abstract]  
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation

The financial information included herein is unaudited. The balance sheet as of December 31, 2019 has been derived from the Company’s audited financial statements for the year ended December 31, 2019. However, such information includes all adjustments (consisting of normal recurring adjustments and change in accounting principles) that are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of the results to be expected for an entire year.

Certain information, accounting policies, and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to certain rules and regulations of the Securities and Exchange Commission (“SEC”).  The condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2019, which were included in the Company’s 2019 Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The Company considered the impact of the novel coronavirus 2019 (“COVID-19”) pandemic on the assumptions and estimates used by management in the unaudited condensed financial statements for the reporting periods presented. As a result of the significant decline in current and expected future commodity prices, the Company recognized a material impairment charge during the three months ended June 30, 2020 (see Note 3). Management’s estimates and assumptions were based on historical data and consideration of future market conditions. Given the uncertainty inherent in any projection, which is heightened by the possibility of unforeseen additional impacts from the COVID-19 pandemic, actual results may differ from the estimates and assumptions used, and conditions may change, which could materially affect amounts reported in the unaudited condensed financial statements in the near term.

Use of Estimates

The preparation of financial statements under GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  

The most significant estimates relate to proved crude oil and natural gas reserves, estimates relating to certain crude oil and natural gas revenues and expenses, fair value of derivative instruments, fair value of contingent consideration, acquisition date fair values of assets acquired and liabilities assumed, impairment of oil and natural gas properties, asset retirement obligations and deferred income taxes.  Actual results may differ from those estimates.

Adopted and Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of credit losses on financial instruments, which requires a company immediately recognize management’s current estimated credit losses (“CECL”) for all financial instruments that are not accounted for at fair value through net income. Previously, credit losses on financial assets were only required to be
recognized when they were incurred. The Company adopted ASU 2016-13 on January 1, 2020. The guidance did not have a significant impact on the condensed financial statements or notes accompanying the condensed financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair value measurement (Topic 820) - Disclosure framework - Changes to the disclosure requirements for fair value measurement, which modifies the disclosure requirements on fair value measurements in Topic 820. The Company adopted ASU 2018-13 on January 1, 2020. The guidance did not have a significant impact on the condensed financial statements or notes accompanying the condensed financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as separate entity financial statements and interim recognition of enactment of tax laws or rate changes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim reporting periods within those years. The Company is currently evaluating the effect of ASU 2019-12, but does not expect the adoption of this guidance to have a material impact on its financial position, cash flows or result of operations.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform, which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate (LIBOR). The amendment provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging
relationships, and other transactions that reference LIBOR as a benchmark rate are modified. This amendment is effective upon issuance and expires on December 31, 2022. The Company is currently assessing the impact of the LIBOR transition and this ASU on the Company’s condensed financial statements.

Revenue Recognition

The Company’s revenues are primarily derived from its interests in the sale of oil and natural gas production. The Company recognizes revenue from its interests in the sales of oil and natural gas in the period that its performance obligations are satisfied. Performance obligations are satisfied when the customer obtains control of product, when the Company has no further obligations to perform related to the sale, when the transaction price has been determined and when collectability is probable.

A wellhead imbalance liability equal to the Company’s share is recorded to the extent that the Company’s well operators have sold volumes in excess of its share of remaining reserves in an underlying property. However, for the three and six months ended June 30, 2020 and 2019, the Company’s natural gas production was in balance, meaning its cumulative portion of natural gas production taken and sold from wells in which it has an interest equaled its entitled interest in natural gas production from those wells.

The Company’s disaggregated revenue has two revenue sources, which are oil sales and natural gas and NGL sales, and the Company only operates in one geographic area, the Williston Basin in the United States, primarily in North Dakota and Montana. Oil sales for the three months ended June 30, 2020 and 2019 were $28.8 million and $139.8 million, respectively. Natural gas and NGL sales for the three months ended June 30, 2020 and 2019 were $(8.1) million and $10.0 million, respectively. Oil sales for the six months ended June 30, 2020 and 2019 were $145.1 million and $263.4 million, respectively. Natural gas and NGL sales for the six months ended June 30, 2020 and 2019 were $5.7 million and $19.1 million, respectively.

Concentrations of Market, Credit and Other Risks

The future results of the Company’s crude oil and natural gas operations will be affected by the market prices of crude oil and natural gas.  The availability of a ready market for crude oil and natural gas products in the future will depend on numerous factors beyond the control of the Company, including weather, imports, marketing of competitive fuels, proximity and capacity of crude oil and natural gas pipelines and other transportation facilities, any oversupply or undersupply of crude oil, natural gas and liquid products, economic disruptions resulting from the COVID-19 pandemic, the regulatory environment, the economic environment, and other regional and political events, none of which can be predicted with certainty.

The Company operates in the exploration, development and production sector of the crude oil and natural gas industry.  The Company’s receivables include amounts due, indirectly via the third-party operators of the wells, from purchasers of its crude oil and natural gas production.  While certain of these customers, as well as third-party operators of the wells, are affected by periodic downturns in the economy in general or in their specific segment of the crude oil or natural gas industry, the Company believes that its level of credit-related losses due to such economic fluctuations have been immaterial.

As a non-operator, 100% of the Company’s wells are operated by third-party operating partners. As a result, the Company is highly dependent on the success of these third-party operators. If they are not successful in the development, exploitation,
production and exploration activities relating to the Company’s leasehold interests, or are unable or unwilling to perform, the Company’s financial condition and results of operation could be adversely affected. These risks are heightened in the current low commodity price environment, which may present significant challenges to these third-party operators. The Company’s third-party operators will make decisions in connection with their operations that may not be in the Company’s best interests, and the Company may have little or no ability to exercise influence over the operational decisions of its third-party operators. For the three and six months ended June 30, 2020, the Company’s top four operators made up 57% and 51%, respectively, of total oil and gas sales, compared to 55% and 57% for the three and six months ended June 30, 2019.

The Company faces concentration risk due to the fact that all of its oil and natural gas properties are located in the Williston Basin, primarily in North Dakota and Montana. As a result, the Company is disproportionately exposed to risks affecting its single geographic area of operations.

The Company manages and controls market and counterparty credit risk. In the normal course of business, collateral is not required for financial instruments with credit risk. Financial instruments which potentially subject the Company to credit risk consist principally of temporary cash balances and derivative financial instruments. The Company maintains cash and cash equivalents in bank deposit accounts which, at times, may exceed the federally insured limits. The Company has not experienced any significant losses from such investments. The Company attempts to limit the amount of credit exposure to any one financial institution or company. The Company believes the credit quality of its counterparties is generally high. In the normal course of business, letters of credit or parent guarantees may be required for counterparties which management perceives to have a higher credit risk.

Net Income (Loss) Per Common Share

Basic earnings per share (“EPS”) are computed by dividing net income (loss) available to common stockholders (the numerator) by the weighted average number of common shares outstanding for the period (the denominator). Diluted EPS is computed by dividing net income (loss) by the weighted average number of common shares and potential common shares outstanding (if dilutive) during each period. Potential common shares include shares issuable upon exercise of stock options and vesting of restricted stock awards, and shares issuable upon conversion of the Series A Preferred Stock (see Note 5). The number of potential common shares outstanding are calculated using the treasury stock or if-converted method.

The reconciliation of the denominators used to calculate basic EPS and diluted EPS for the three and six months ended June 30, 2020 and 2019 are as follows:

  Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands, except share and per share data) 2020 2019 2020 2019
Net Income (Loss) $ (899,200)   $ 44,399    $ (530,914)   $ (62,762)  
Less: Cumulative Dividends on Preferred Stock (3,788)   —    (7,517)   —   
Net Income (Loss) Attributable to Common Stock $ (902,988)   $ 44,399    (538,431)   (62,762)  
Weighted Average Common Shares Outstanding:
Weighted Average Common Shares Outstanding – Basic 415,356,043    378,368,462    409,509,292    374,927,630   
Plus: Dilutive Effect of Restricted Stock —    356,049    —    —   
Plus: Dilutive Effect of Preferred Shares —    —    —    —   
Weighted Average Common Shares Outstanding – Diluted 415,356,043    378,724,511    409,509,292    374,927,630   
Net Income (Loss) per Common Share:
Basic $ (2.17)   $ 0.12    $ (1.31)   $ (0.17)  
Diluted $ (2.17)   $ 0.12    $ (1.31)   $ (0.17)  
Shares Excluded from EPS Due to Anti-Dilutive Effect:
Restricted Stock 301,625    20,812    400,051    825,184   
Preferred Stock 100,208,753    —    96,747,545    —   
Supplemental Cash Flow Information

The following reflects the Company’s supplemental cash flow information:

Six Months Ended June 30,
(In thousands) 2020 2019
Supplemental Cash Items:
Cash Paid During the Period for Interest, Net of Amount Capitalized $ 29,117    $ 34,403   
Non-cash Investing Activities:
Oil and Natural Gas Properties Included in Accounts Payable and Accrued Liabilities 92,537    151,145   
Capitalized Asset Retirement Obligations 294    470   
Compensation Capitalized on Oil and Gas Properties 284    190   
Non-cash Financing Activities:
Issuance of 8.50% Second Lien Notes due 2023 - PIK Interest
—    3,480   
Issuance of Common Stock for 2L Notes Repurchase 29,615    —   
Issuance of Preferred Stock for 2L Notes Repurchase 81,212    —   
Debt Exchange Derivative Liability Settlements —    12,192   
Contingent Consideration Settlements —    21,462