Quarterly report pursuant to Section 13 or 15(d)

CRUDE OIL AND NATURAL GAS PROPERTIES

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CRUDE OIL AND NATURAL GAS PROPERTIES
6 Months Ended
Jun. 30, 2020
Oil and Gas Exploration and Production Industries Disclosures [Abstract]  
CRUDE OIL AND NATURAL GAS PROPERTIES CRUDE OIL AND NATURAL GAS PROPERTIES
The Company follows the full cost method of accounting for crude oil and natural gas operations whereby all costs related to the exploration and development of crude oil and natural gas properties are capitalized into a single cost center (“full cost pool”).  Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling directly related to acquisition, and exploration activities.  Internal costs that are capitalized are directly attributable to acquisition, exploration and development activities and do not include costs related to production, general corporate overhead or similar activities.  Costs associated with production and general corporate activities are expensed in the period incurred.

Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter.  The test determines a limit, or ceiling, on the book value of the proved oil and gas properties.  Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes, or the cost center ceiling.

As a result of low commodity prices and their effect on the proved reserve values of properties, the Company recorded a non-cash ceiling test impairment of $762.7 million for both the three and six months ended June 30, 2020. The Company did not have any impairment of its proved oil and gas properties during 2019.

At June 30, 2020, the Company’s impairment review used prices that reflect an average of the trailing 12-month prices as prescribed pursuant to the SEC’s guidelines. The average prices used in the June 30, 2020 impairment review are significantly higher than the actual and currently forecasted prices for 2020. As lower average monthly pricing is reflected in the trailing 12-month average pricing calculation for future fiscal quarters, the present value of the Company’s future net revenues is expected to decline and additional impairments are expected to be recognized. Given the current oil and natural gas pricing environment, the Company expects it will have additional noncash ceiling test write-downs of its oil and natural gas properties in 2020.

The book value of the Company’s crude oil and natural gas properties consists of all acquisition costs (including cash expenditures and the value of stock consideration), drilling costs and other associated capitalized costs.  Acquisitions are accounted for as purchases and, accordingly, the results of operations are included in the accompanying condensed statements of operations from the closing date of the acquisition.  Acquired assets and liabilities assumed are recorded based on their estimated fair value at the time of the acquisition.  Acquisitions have been funded with internal cash flow, bank borrowings and the issuance of debt and equity securities.
2020 Acquisitions

The Company acquired oil and natural gas properties, through a number of independent transactions, for a total of $0.4 million and $25.9 million during the three and six months ended June 30, 2020, respectively. These amounts include $0.1 million and $18.4 million, respectively, of development costs that occurred prior to the closings of the acquisitions.

2019 Acquisitions

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

VEN Bakken Acquisition

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

The total estimated consideration paid by the Company was $315.3 million, consisting of (i) $174.9 million in cash, (ii) 5,602,147 shares of Company common stock valued at $11.7 million, based on the $2.09 per share closing price of Company common stock on the closing date of the acquisition and (iii) $128.7 million of value attributable to a 6.0% unsecured promissory note due July 1, 2022 issued by the Company to VEN Bakken in the aggregate principal amount of $130.0 million (the “Unsecured VEN Bakken Note”). The Company incurred $1.8 million of transactions costs in connection with the acquisition, which are included in general and administrative expense in the condensed statement of operations. The following table reflects the fair values of the net assets and liabilities as of the date of acquisition:

(In thousands)
Fair value of net assets:
  Proved oil and natural gas properties $ 324,974   
  Asset retirement cost 2,680   
Total assets acquired 327,654   
  Asset retirement obligations (2,680)  
  Derivative instruments (9,694)  
Net assets acquired $ 315,280   
Fair value of consideration paid for net assets:
  Cash consideration $ 174,912   
  Issuance of common stock (5.6 million shares at $2.09 per share)
11,708   
  Unsecured VEN Bakken Note 128,660   
Total fair value of consideration transferred $ 315,280   

Pro Forma Information

The following summarized unaudited pro forma condensed statement of operations information for the three and six months ended June 30, 2019, assumes that the VEN Bakken Acquisition occurred as of January 1, 2019. There is no pro forma information included for the three and six months ended June 30, 2020, because the Company’s actual financial results for such periods fully reflect this acquisition. The Company prepared the following summarized unaudited pro forma financial results for comparative purposes only. The summarized unaudited pro forma information may not be indicative of the results that would have occurred had the Company completed the acquisition as of January 1, 2019, or that would be attained in the future.
Three Months Ended Six Months Ended
(In thousands) June 30, 2019 June 30, 2019
Revenues $ 221,347    $ 207,832   
Net Income (Loss) 54,468    (85,275)  

Unproved Properties

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

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

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

Capitalized costs associated with impaired unproved properties, which includes leases that have expired or have been deemed uneconomic, and capitalized costs related to properties having proved reserves, plus the estimated future development costs and asset retirement costs, are depleted and amortized on the unit-of-production method. Under this method, depletion is calculated at the end of each period by multiplying total production for the period by a depletion rate. The depletion rate is determined by dividing the total unamortized cost base plus future development costs by net equivalent proved reserves at the beginning of the period. The costs of unproved properties are withheld from the depletion base until such time as they are either developed or abandoned. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion and full cost ceiling calculations. For the three months ended June 30, 2020 and 2019, unproved properties of $0.4 million and $1.0 million, respectively, were impaired. For the six months ended June 30, 2020 and 2019, unproved properties of $2.0 million and $1.8 million, respectively, were impaired.