| Summary Of Significant Accounting Policies | 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Description of Busines s . Triangle Petroleum Corporation (“Triangle,” the “Company,” “we,” “us,” “our,” or “ours”) is an independent energy holding company with three principal lines of business: oil and natural gas exploration, development, and production; oilfield services; and midstream services.
We hold leasehold interests and conduct our operations in the Williston Basin of North Dakota and Montana. Our core focus area is predominantly located in McKenzie and Williams Counties, North Dakota, and eastern Roosevelt and Sheridan Counties, Montana. We conduct our exploration and production operations through our wholly-owned subsidiary, Triangle USA Petroleum Corporation (“TUSA”).
RockPile Energy Services, LLC (“RockPile”), a wholly-owned subsidiary, provides oilfield and complementary well completion services to oil and natural gas exploration and production companies predominantly in the Williston and Permian Basin s .
Caliber Midstream Partners, L.P. (“Caliber”), an unconsolidated joint venture with First Reserve Energy Infrastructure Fund, provides oil, natural gas and water transportation and related services to oil and natural gas exploration and production companies in the Williston Basin.
The Company, through its wholly-owned subsidiary, Elmworth Energy Corporation (“Elmworth”), previously conducted insignificant exploration and production activities in Canada. Elmworth has since sold all leasehold interests except for acreage in the Maritimes Basin of Nova Scotia. Elmworth has ceased all exploration and production activities in Canada except for reclaiming five wells, the drilling site and brine ponds on its Nova Scotia acreage. Elmworth has no proved reserves and its oil and natural gas properties were fully impaired as of January 31, 2012.
Basis of Presentation. These unaudited condensed consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and are expressed in U.S. dollars. Preparation in accordance with GAAP requires us to (i) adopt accounting policies within accounting rules set by the Financial Accounting Standards Board (“FASB”) and by the Securities and Exchange Commission (“SEC”), and (ii) make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and other disclosed amounts.
Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations. We believe the disclosures made are adequate to make the information not misleading. We recommend that these unaudited condensed consolidated financial statements be read in conjunction with our audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016, as filed with the SEC (“Fiscal 2016 Form 10-K”). In the opinion of management, all material adjustments considered necessary for a fair presentation of the Company’s interim results have been reflected. All such adjustments are considered to be of a normal recurring nature. The results for interim periods are not necessarily indicative of annual results.
No condensed consolidated statement of comprehensive income (loss) is presented because the Company had no comprehensive income or loss activity in the periods presented .
Liquidity and Ability to Continue as a Going Concern . The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business. As such, the accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.
Although the Company is continuing to minimize its capital expenditures, reduce costs and maximize cash flows from operations, continued low commodity prices are expected to result in significantly lower levels of cash flow from operating activities in the future and have limited the Company’s ability to access capital markets. These factors and the TUSA and RockPile covenant compliance issues discussed below raise substantial doubt about the Company’s ability to continue as a going concern.
TUSA Liquidity and Covenants . On April 28, 2016, TUSA’s credit facility lenders significantly reduced the borrowing base under the credit facility from $350.0 million to $225.0 million, which was a greater reduction than we had anticipated. As of April 30, 2016, TUSA had $347.5 million of outstanding borrowings and $2.5 million of outstanding letters of credit under the credit facility, or $125.0 million in excess of the redetermined borrowing base (referred to as a borrowing base deficiency). TUSA had cash on hand of approximately $152.3 million at April 30, 2016. TUSA elected to repay the borrowing base deficiency in three equal monthly installments of $41.7 million, the first payment of which was paid on May 31, 2016. Any non-payment of the borrowing base deficiency could result in an event of default.
As of April 30, 2016, TUSA was in breach of the credit facility’s minimum current ratio requirement. On May 27, 2016, TUSA entered into a Forbearance and Amendment No. 2 to Second Amended and Restated Credit Agreement (the “TUSA Forbearance Amendment”) with its credit facility lenders, pursuant to which the lenders agreed to forbear exercising any rights or remedies available to them arising from any breach related to the minimum required current ratio or the senior secured leverage ratio that may have occurred as of April 30, 2016. The forbearance is effective until the earlier of July 8, 2016 or specified forbearance termination events including the commencement of any bankruptcy or reorganization proceeding under applicable bankruptcy or insolvency law.
Although it is difficult to forecast future operations in this low commodity price environment, TUSA may not comply with all of the financial covenants contained in its credit facility in future periods unless those requirements are waived or amended or unless TUSA can obtain new capital or equity cure financing. The greater than expected reduction in the borrowing base contributed to the breach of the minimum current ratio requirement at April 30, 2016, and will have a negative impact on TUSA’s expected financial covenant performance for the remainder of fiscal year 2017 and increase the amount of any needed equity cure. TUSA remains in discussions regarding strategic alternatives , but there are no guarantees these discussions or negotiations will be successful. If TUSA is unable to reach agreement with its lenders, obtain waivers, find acceptable alternative financing or obtain equity cure contributions, TUSA’s credit facility lenders could elect to declare some or all of the amounts outstanding under the facility to be immediately due and payable after the forbearance period ends. If this happens, the Company does not currently have sufficient liquidity to make the equity cure s for the credit facility that we expect may be necessary in the next 12 months.
As more fully described in Note 3, i f the TUSA credit facility lenders declare any financial covenant breach or non-payment of the borrowing base deficiency an event of default, there are cross-default provisions in the Indenture of the TUSA 6.75% Notes (as defined below) that could enable holders of the TUSA 6.75% Notes to also declare some or all of the amounts outstanding under the TUSA 6.75% Notes to be immediately due and payable. TUSA does not have sufficient liquidity to repay the credit facility and the TUSA 6.75% Notes . Therefore, the condensed consolidated balance sheet reflects all of the amounts outstanding under the TUSA credit facility and the balance outstanding of the TUSA 6.75% Notes as current liabilities as of April 30, 2016. TUSA could then be required to pursue in- and out-of-court restructuring transactions and Triangle could lose control of TUSA. Triangle has not guaranteed TUSA’s obligations under the TUSA credit facility or the TUSA 6.75% Notes.
RockPile Liquidity and Covenants . On April 13, 2016, RockPile entered into Amendment No. 2 to Credit Agreement ( the “ RockPile Waiver Amendment”), which waived any default or event of default in connection with the financial covenants that occurred as of January 31, 2016 and April 30, 2016. Following the execution of the RockPile Waiver Amendment, RockPile is precluded from drawing additional funds absent further amendment of the facility. Beginning with the second quarter and for the remainder of fiscal year 2017, RockPile does not expect to comply with all of the financial covenants contained in its credit facility unless those requirements are also waived or amended or unless RockPile can obtain new capital or equity cure financing as discussed further in Note 3. RockPile remains in discussions regarding strategic alternatives , but the success of these discussions and negotiations is uncertain. In addition, if RockPile is unable to reach agreement with its lenders, obtain waivers, find acceptable alternative financing or obtain equity cure contributions, RockPile’s credit facility lenders could elect to declare some or all of the amounts outstanding under the facility to be immediately due and payable. If this happens, the Company does not currently have sufficient liquidity to make the equity cure and RockPile does not have sufficient cash on hand to repay this outstanding debt. Therefore, the condensed consolidated balance sheet reflects all of the amounts outstanding under the RockPile credit facility as current liabilities as of April 30, 2016. RockPile could then be required to pursue in- and out-of-court restructuring transactions and Triangle could lose control of RockPile.
Triangle has not guaranteed RockPile’s obligations under the credit facility, and there are no cross-default provisions in Triangle’s or TUSA’s other debt agreements that could cause the acceleration of such indebtedness as a result of the RockPile credit facility default.
Triangle Liquidity . Triangle recently engaged certain professional advisors to assist it in the process of analyzing various strategic alternatives to address our liquidity and capital structure, including: (i) obtaining waivers or amendments from RockPile’s and TUSA’s lenders; (ii) obtaining additional sources of capital from asset sales, issuances of debt or equity securities, debt for equity swaps, or any combination thereof; and (iii) pursuing in- and out-of-court restructuring transactions. In connection with a debt restructuring or refinancing, we may seek to convert a significant portion of our outstanding debt to equity, including the exchange of debt for shares of our common stock or for shares of TUSA or RockPile . In addition, we may seek to reduce our cash interest cost and extend debt maturity dates by negotiating the exchange of outstanding debt for new debt with modified terms or other measures. While we anticipate engaging in active dialogue with our creditors, at this time we are unable to predict the outcome of such discussions, the outcome of any strategic transactions that we may pursue or whether any such efforts will be successful.
As a result of the above, substantial doubt exists regarding the ability of Triangle to continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business.
Use of Estimates. In the course of preparing its condensed consolidated financial statements, management makes various assumptions, judgments, and estimates to determine the reported amount of assets, liabilities, revenue, and expenses, and in the disclosures of commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events and, accordingly, actual results could differ from amounts initially established. Significant areas requiring the use of assumptions, judgments and estimates include (i) oil and natural gas reserves; (ii) cash flow estimates used in ceiling tests of oil and natural gas properties; (iii) depreciation and amortization; (iv) impairment of unproved properties, investment in equity method investees and other assets; (v) assigning fair value and allocating purchase price in connection with business combinations; (vi) accrued revenue and related receivables; (vii) valuation of commodity derivative instruments and equity derivative instruments; (viii) accrued expenses and related liabilities; (ix) valuation of share-based payments and (x) income taxes. Although management believes these estimates are reasonable, actual results could differ from these estimates. The Company has evaluated subsequent events and transactions for matters that may require recognition or disclosure in these condensed consolidated financial statements.
Principles of Consolidation. The accounts of Triangle and its wholly-owned subsidiaries are presented in the accompanying condensed consolidated financial statements. All significant intercompany transactions and balances are eliminated in consolidation. Triangle generally uses the equity method of accounting for investments in entities in which Triangle has an ownership between 20% and 50% and exercises significant influence. The investment in Caliber is accounted for utilizing the equity method of accounting.
Oil and Natural Gas Properties. We use the full cost method of accounting, which involves capitalizing all acquisition, exploration, exploitation and development costs of oil and natural gas properties. Once we incur costs, they are recorded in the amortizable pool of proved properties or in unproved properties, collectively, the full cost pool. We review our unproved oil and natural gas property costs on a quarterly basis to assess for impairment or the need to transfer unproved costs to proved properties as a result of extensions or discoveries from drilling operations.
At the end of each quarterly period, we must compute a limitation on capitalized costs, which is equal to the sum of the present value of estimated future net revenues from our proved reserves by applying the average price as prescribed by the SEC (unweighted arithmetic average of commodity prices in effect on the first day of each of the previous twelve months), less estimated future expenditures (based on current costs) to develop and produce the proved reserves, discounted at 10% , plus the cost of properties not being amortized and the lower of cost or estimated fair value of unproved properties included in the costs being amortized, net of income tax effects. We then conduct a “ceiling test” that compares the net book value of the full cost pool, after taxes, to the full cost ceiling limitation. In the event the full cost ceiling limitation is less than the full cost pool, we are required to record an impairment of our oil and natural gas properties.
The ceiling test for each period presented was based on the following average spot prices, in each case adjusted for quality factors and regional differentials to derive estimated future net revenues. Prices presented in the table below are the trailing 12 month simple average spot prices at the first of the month for natural gas at Henry Hub (“HH”) and West Texas Intermediate (“WTI”) crude oil at Cushing, Oklahoma. The fluctuations demonstrate the volatility in oil and natural gas prices between each of the periods and have a significant impact on our ceiling test limitation.
January 31, 2016
April 30, 2016
Oil (per Bbl)
$
$
Natural gas (per MMbtu)
$
$
Natural gas liquids (per Bbl)
$
$
We recognized impairments to our proved oil and natural gas properties of $79.0 million for the quarter ended April 30, 2016, primarily due to the decline in oil, natural gas and natural gas liquids prices. We will incur additional impairments to our oil and natural gas properties in future quarters if prices stay at current levels or decline further. The amount of any future impairment is difficult to predict, and will depend, in part, upon future oil, natural gas and natural gas liquids (“NGL”) prices to be utilized in the ceiling test, estimates of proved reserves and future capital expenditures and operating costs. The ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities but do adversely affect our net income and stockholders’ equity. Any recorded impairment of oil and natural gas properties is not reversible at a later date.
The evaluation of impairment of our oil and natural gas properties includes estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves, in projecting the future rates of production and in the timing of development activities. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revisions of such estimate. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered.
Oilfield Services Equipment and Other Property and Equipment . Oilfield services equipment and other property and equipment consisted of the following as of:
(in thousands)
January 31, 2016
April 30, 2016
Oilfield services equipment
$
$
Accumulated depreciation
Depreciable assets, net
Assets not placed in service
Total oilfield services equipment, net
$
$
Land
$
$
Building and leasehold improvements
Vehicles
Software, computers and office equipment
Capital leases
Accumulated depreciation
Depreciable assets, net
Assets not placed in service
Total other property and equipment, net
$
$
Income Taxes. The Company computes its quarterly tax provision using the effective tax rate method based on applying the anticipated annual effective rate to its year-to-date income or loss, except for discrete items. Income tax on discrete items is computed and recorded in the period in which the specific transaction occurs.
The carrying value of our oil and natural gas properties exceeded the calculated value of the ceiling limitation resulting in an impairment of $779.0 million for fiscal year 2016. This impairment resulted in Triangle having three years of cumulative historical pre-tax losses and a net deferred tax asset position. Triangle also had net operating loss carryovers (“NOLs”) for federal income tax purposes of $ 286.0 million at January 31, 2016. These losses and expected future losses resulting from the current low commodity price environment were a key consideration that led Triangle to provide a valuation allowance against its net deferred tax assets as of April 30, 2016, since it cannot conclude that it is more likely than not that its net deferred tax assets will be fully realized in future periods.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At each reporting period, management considers the scheduled reversal of deferred tax liabilities, available taxes in carryback periods, tax planning strategies and projected future taxable income in making this assessment. Future events or new evidence which may lead the Company to conclude that it is more likely than not that its net deferred tax assets will be realized include, but are not limited to, cumulative historical pre-tax earnings, sustained or continued improvements in oil prices, and taxable events that could result from one or more transactions. The Company will continue to evaluate whether the valuation allowance is needed in future reporting periods.
In the first quarter of fiscal year 2016 the Company recorded the benefit of reversing its net deferred tax liability. As long as the Company concludes that it will continue to have a need for a valuation allowance against its net deferred tax assets, the Company likely will not have any additional income tax expense or benefit other than for federal alternative minimum tax expense or for state income taxes.
As of April 30, 2016, the Company had no unrecognized tax benefits. The Company’s management does not believe that there are any new items or changes in facts or judgments that should impact the Company’s position during the first three months of fiscal year 2017. Given the substantial net operating loss carryforwards at both the federal and state levels, neither significant interest expense nor penalties charged for any examining agents’ tax adjustments of income tax returns are anticipated, as any such adjustments would very likely only adjust net operating loss carryforwards.
Earnings per Share. Basic earnings per common share is computed by dividing net income (loss) attributable to the common stockholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per common share reflects increases in average shares outstanding from the potential dilution, under the treasury stock method, that could occur upon (i) exercise of stock options, (ii) vesting of restricted stock units, and (iii) conversion of convertible debt. The treasury stock method assumes exercise, vesting or conversion at the beginning of a period for securities outstanding at the end of a period. Also, the treasury stock method for calculating dilution assumes that the increase in the number of shares is reduced by the number of shares which could have been repurchased by the Company at the quarter’s average stock price using assumed proceeds from (a) the exercise cost of the options and (b) the foregone future compensation expense of hypothetical early vesting of the outstanding restricted stock units. The assumed proceeds are adjusted for income tax effects. In the event of a net loss, no potential common shares are included in the calculation of shares outstanding, as their inclusion would be anti-dilutive.
The following table details the weighted average dilutive and anti-dilutive securities, which consist of options and unvested restricted stock, for the periods presented :
For the Three Months Ended April 30,
(in thousands)
2015
2016
Dilutive
—
—
Anti-dilutive shares
The table below sets forth the computations of net income (loss) per common share (basic and diluted) for the periods presented:
For the Three Months Ended April 30,
(in thousands, except per share data)
2015
2016
Net income (loss) attributable to common stockholders
$
$
Effect of 5% convertible note conversion
—
—
Net income (loss) attributable to common stockholders after effect of 5% convertible note conversion
$
$
Basic weighted average common shares outstanding
Effect of dilutive securities
—
—
Diluted weighted average common shares outstanding
Basic net income (loss) per share
$
$
Diluted net income (loss) per share
$
$
Adopted and Recently Issued Accounting Pronouncements . In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014 ‑ 09”). The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. ASU 2014-09 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 ; however, in August 2015, the FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date (“ASU 2015-14”), which deferred the effective date of ASU 2014 ‑ 09 for one year. ASU 2015-14 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The standards permit retrospective application using either of the following methodologies: (i) restatement of each prior reporting period presented or (ii) recognition of a cumulative-effect adjustment as of the date of initial application. The Company is currently evaluating the impact of adopting ASU 2014 ‑ 09 and ASU 2015-14, including the transition method to be applied, however the standards are not expected to have a significant effect on its condensed consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU No. 2016-02”). The guidance requires that lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The ASU also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. For public companies, the standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after Dec ember 15, 2018 with earlier application permitted. The Company is still evaluating the impact of ASU No. 2016-02 on its financial position and results of operations.
Reclassifications . Certain prior period balances in the unaudited condensed consolidated balance sheets and unaudited condensed consolidated statement of operations have been reclassified to conform to the current year presentation. Such reclassifications had no impact on net income, cash flows or shareholders’ equity previously reported. |
