UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2016 |
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from _______________________to____________________________ |
Commission File No. 000-53591
Ridgewood Energy X Fund, LLC
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 26-0870318 (I.R.S. Employer Identification No.) |
14 Philips Parkway, Montvale, NJ 07645
(Address of principal executive offices) (Zip code)
(800) 942-5550
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer (Do not check if a smaller reporting company) | ☐ | Smaller reporting company | ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of August 9, 2016 the Fund had 477.8874 shares of LLC Membership Interest outstanding.
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| PART I - FINANCIAL INFORMATION | |||
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| 15 | |||
| 15 | |||
| PART II - OTHER INFORMATION | |||
| 15 | |||
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PART I – FINANCIAL INFORMATION
RIDGEWOOD ENERGY X FUND, LLC
(in thousands, except share data)
| June 30, 2016 | December 31, 2015 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 7,233 | $ | 6,950 | ||||
| Salvage fund | 1,185 | 1,185 | ||||||
| Production receivable | 284 | 343 | ||||||
| Other current assets | - | 3 | ||||||
| Total current assets | 8,702 | 8,481 | ||||||
| Salvage fund | 2,879 | 2,736 | ||||||
| Investment in Delta House | 572 | 572 | ||||||
| Oil and gas properties: | ||||||||
| Proved properties | 17,083 | 17,096 | ||||||
| Less: accumulated depletion and amortization | (9,771 | ) | (8,524 | ) | ||||
| Total oil and gas properties, net | 7,312 | 8,572 | ||||||
| Total assets | $ | 19,465 | $ | 20,361 | ||||
| Liabilities And Members' Capital | ||||||||
| Current liabilities: | ||||||||
| Due to operators | $ | 499 | $ | 356 | ||||
| Accrued expenses | 76 | 119 | ||||||
| Asset retirement obligations | 1,185 | 1,185 | ||||||
| Total current liabilities | 1,760 | 1,660 | ||||||
| Asset retirement obligations | 1,340 | 1,340 | ||||||
| Total liabilities | 3,100 | 3,000 | ||||||
| Commitments and contingencies (Note 3) | ||||||||
| Members' capital: | ||||||||
| Manager: | ||||||||
| Distributions | (4,936 | ) | (4,936 | ) | ||||
| Retained earnings | 3,965 | 3,943 | ||||||
| Manager's total | (971 | ) | (993 | ) | ||||
| Shareholders: | ||||||||
| Capital contributions (500 shares authorized; | ||||||||
| 477.8874 issued and outstanding) | 94,698 | 94,698 | ||||||
| Syndication costs | (11,080 | ) | (11,080 | ) | ||||
| Distributions | (30,146 | ) | (30,146 | ) | ||||
| Accumulated deficit | (36,136 | ) | (35,118 | ) | ||||
| Shareholders' total | 17,336 | 18,354 | ||||||
| Total members' capital | 16,365 | 17,361 | ||||||
| Total liabilities and members' capital | $ | 19,465 | $ | 20,361 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
RIDGEWOOD ENERGY X FUND, LLC
(in thousands, except per share data)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Revenue | ||||||||||||||||
| Oil and gas revenue | $ | 1,328 | $ | 796 | $ | 2,313 | $ | 1,131 | ||||||||
| Expenses | ||||||||||||||||
| Depletion and amortization | 588 | 638 | 1,247 | 704 | ||||||||||||
| Management fees to affiliate (Note 2) | 271 | 271 | 542 | 541 | ||||||||||||
| Operating expenses | 713 | 417 | 1,575 | 472 | ||||||||||||
| General and administrative expenses | 38 | 39 | 72 | 77 | ||||||||||||
| Total expenses | 1,610 | 1,365 | 3,436 | 1,794 | ||||||||||||
| Loss from operations | (282 | ) | (569 | ) | (1,123 | ) | (663 | ) | ||||||||
| Other income | ||||||||||||||||
| Dividend income | 66 | - | 123 | - | ||||||||||||
| Interest income | 2 | 3 | 4 | 6 | ||||||||||||
| Total other income | 68 | 3 | 127 | 6 | ||||||||||||
| Net loss | $ | (214 | ) | $ | (566 | ) | $ | (996 | ) | $ | (657 | ) | ||||
| Manager Interest | ||||||||||||||||
| Net income | $ | 52 | $ | 19 | $ | 22 | $ | 16 | ||||||||
| Shareholder Interest | ||||||||||||||||
| Net loss | $ | (266 | ) | $ | (585 | ) | $ | (1,018 | ) | $ | (673 | ) | ||||
| Net loss per share | $ | (556 | ) | $ | (1,224 | ) | $ | (2,129 | ) | $ | (1,408 | ) | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
RIDGEWOOD ENERGY X FUND, LLC
(in thousands)
| Six months ended June 30, | ||||||||
| 2016 | 2015 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (996 | ) | $ | (657 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| provided by operating activities: | ||||||||
| Depletion and amortization | 1,247 | 704 | ||||||
| Accretion expense | - | 140 | ||||||
| Changes in assets and liabilities: | ||||||||
| Decrease (increase) in production receivable | 6 | (86 | ) | |||||
| Decrease in other current assets | - | 42 | ||||||
| Increase (decrease) in due to operators | 143 | (62 | ) | |||||
| Increase in accrued expenses | 10 | 10 | ||||||
| Net cash provided by operating activities | 410 | 91 | ||||||
| Cash flows from investing activities | ||||||||
| Payments to operators for working interests | ||||||||
| and expenditures | - | (186 | ) | |||||
| Credits (capital expenditures) for oil and gas properties | ||||||||
| and investment in Delta House | 16 | (2,299 | ) | |||||
| Investments in salvage fund | (143 | ) | (1 | ) | ||||
| Net cash used in investing activities | (127 | ) | (2,486 | ) | ||||
| Cash flows from financing activities | ||||||||
| Distributions | - | (319 | ) | |||||
| Net cash used in financing activities | - | (319 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 283 | (2,714 | ) | |||||
| Cash and cash equivalents, beginning of period | 6,950 | 12,584 | ||||||
| Cash and cash equivalents, end of period | $ | 7,233 | $ | 9,870 | ||||
| Supplemental disclosure of non-cash investing activities | ||||||||
| Advances used for capital expenditures in oil and gas properties reclassified to proved properties | $ | - | $ | 390 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
RIDGEWOOD ENERGY X FUND, LLC
| 1. | Organization and Summary of Significant Accounting Policies |
Organization
The Ridgewood Energy X Fund, LLC (the “Fund”), a Delaware limited liability company, was formed on August 30, 2007 and operates pursuant to a limited liability company agreement (the “LLC Agreement”) dated as of January 2, 2008 by and among Ridgewood Energy Corporation (the “Manager”) and the shareholders of the Fund, which addresses matters such as the authority and voting rights of the Manager and shareholders, capitalization, transferability of membership interests, participation in costs and revenues, distribution of assets and dissolution and winding up. The Fund was organized to primarily acquire interests in oil and gas properties located in the United States offshore waters of Texas, Louisiana and Alabama in the Gulf of Mexico.
The Manager has direct and exclusive control over the management of the Fund’s operations. With respect to project investments, the Manager locates potential projects, conducts due diligence, and negotiates and completes the transactions. The Manager performs, or arranges for the performance of, the management, advisory and administrative services required for Fund operations. Such services include, without limitation, the administration of shareholder accounts, shareholder relations and the preparation, review and dissemination of tax and other financial information. In addition, the Manager provides office space, equipment and facilities and other services necessary for Fund operations. The Manager also engages and manages the contractual relations with unaffiliated custodians, depositories, accountants, attorneys, broker-dealers, corporate fiduciaries, insurers, banks and others as required. See Notes 2 and 3.
Basis of Presentation
These unaudited interim condensed financial statements have been prepared by the Fund’s management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Fund’s financial position, results of operations and cash flows for the periods presented. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in these unaudited interim condensed financial statements. The results of operations, financial position, and cash flows for the periods presented herein are not necessarily indicative of future financial results. These unaudited interim condensed financial statements should be read in conjunction with the Fund’s December 31, 2015 financial statements and notes thereto included in the Fund’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The year-end condensed balance sheet data was derived from audited financial statements for the year ended December 31, 2015, but does not include all disclosures required by GAAP.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an ongoing basis, the Manager reviews its estimates, including those related to the fair value of financial instruments, net property balances, determination of proved reserves, impairment of long-lived assets and asset retirement obligations. Actual results may differ from those estimates.
Fair Value Measurements
The fair value measurement guidance provides a hierarchy that prioritizes and defines the types of inputs used to measure fair value. The fair value hierarchy gives the highest priority to Level 1 inputs, which consists of unadjusted quoted prices for identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments. Level 3 inputs are unobservable inputs and include situations where there is little, if any, market activity for the instrument; hence, these inputs have the lowest priority.
Cash and Cash Equivalents
All highly liquid investments with maturities, when purchased, of three months or less, are considered cash equivalents. These balances, as well as cash on hand, are included in “Cash and cash equivalents” on the balance sheet. As of June 30, 2016, the Fund had no cash equivalents. At times, deposits may be in excess of federally insured limits, which are $250 thousand per insured financial institution. As of June 30, 2016, the Fund’s bank balances were maintained in uninsured bank accounts at Wells Fargo Bank, N.A.
Salvage Fund
The Fund deposits in a separate interest-bearing account, or salvage fund, money to provide for the dismantling and removal of production platforms and facilities and plugging and abandoning its wells at the end of their useful lives in accordance with applicable federal and state laws and regulations. Interest earned on the account will become part of the salvage fund. There are no restrictions on withdrawals from the salvage fund.
Investment in Delta House
The Fund has investments in Delta House Oil and Gas Lateral, LLC and Delta House FPS, LLC (collectively “Delta House”), legal entities that own interests in a deepwater floating production system operated by LLOG Exploration Company. The Fund accounts for its investment in Delta House using the cost method of accounting for investments as it does not have the ability to exercise significant influence over such investment. Under the cost method, the Fund recognizes an investment in the equity of an investee at cost. The Fund recognizes as income dividends received that are distributed from net accumulated earnings of the investee since the date of acquisition by the Fund. Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions of cost of the investment. The Fund reviews its cost method investment for impairment at each reporting period and when an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. As of June 30, 2016, there are no such events or changes in circumstances that indicate that the Fund’s investment in Delta House is impaired.
Oil and Gas Properties
The Fund invests in oil and gas properties, which are operated by unaffiliated entities that are responsible for drilling, administering and producing activities pursuant to the terms of the applicable operating agreements with working interest owners. The Fund’s portion of exploration, drilling, operating and capital equipment expenditures is billed by operators.
Exploration, development and acquisition costs are accounted for using the successful efforts method. Costs of acquiring unproved and proved oil and natural gas leasehold acreage, including lease bonuses, brokers’ fees and other related costs are capitalized. Costs of drilling and equipping productive wells and related production facilities are capitalized. The costs of exploratory wells are capitalized pending determination of whether proved reserves have been found. If proved commercial reserves are not found, exploratory well costs are expensed as dry-hole costs. At times, the Fund receives adjustments to certain wells from their respective operators upon review and audit of the wells’ costs. Annual lease rentals and exploration expenses are expensed as incurred. All costs related to production activity, transportation expense and workover efforts are expensed as incurred.
Once a well has been determined to be fully depleted or upon the sale, retirement or abandonment of a property, the cost and related accumulated depletion and amortization, if any, is eliminated from the property accounts, and the resultant gain or loss is recognized.
As of June 30, 2016 and December 31, 2015, amounts recorded in due to operators totaling $37 thousand related to capital expenditures for oil and gas properties.
Advances to Operators for Working Interests and Expenditures
The Fund may be required to advance its share of the estimated succeeding month’s expenditures to the operator for its oil and gas properties. As the costs are incurred, the advances are reclassified to proved properties.
Asset Retirement Obligations
For oil and gas properties, there are obligations to perform removal and remediation activities when the properties are retired. Upon the determination of a property to be either proved or dry, a retirement obligation is incurred. The Fund recognizes the fair value of a liability for an asset retirement obligation in the period incurred. Plug and abandonment costs associated with unsuccessful projects are expensed as dry-hole costs. As indicated above, the Fund maintains a salvage fund to provide for the funding of asset retirement obligations.
Syndication Costs
Syndication costs are direct costs incurred by the Fund in connection with the offering of the Fund’s shares, including professional fees, selling expenses and administrative costs payable to the Manager, an affiliate of the Manager and unaffiliated broker-dealers, which are reflected on the Fund’s balance sheet as a reduction of shareholders’ capital.
Revenue Recognition and Imbalances
Oil and gas revenues are recognized when oil and gas is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and collectability of the revenue is reasonably assured. The Fund uses the sales method of accounting for gas production imbalances. The volumes of gas sold may differ from the volumes to which the Fund is entitled based on its interests in the properties. These differences create imbalances that are recognized as a liability only when the properties’ estimated remaining reserves net to the Fund will not be sufficient to enable the underproduced owner to recoup its entitled share through production. The Fund’s recorded liability, if any, would be reflected in other liabilities. No receivables are recorded for those wells where the Fund has taken less than its share of production.
Impairment of Long-Lived Assets
The Fund reviews the carrying value of its oil and gas properties annually and when management determines that events and circumstances indicate that the recorded carrying value of properties may not be recoverable. Impairments are determined by comparing estimated future net undiscounted cash flows to the carrying value at the time of the review. If the carrying value exceeds the estimated future net undiscounted cash flows, the carrying value of the asset is written down to fair value, which is determined using estimated future net discounted cash flows from the asset. The fair value determinations require considerable judgment and are sensitive to change. Different pricing assumptions, reserve estimates or discount rates could result in a different calculated impairment. Given the volatility of oil and natural gas prices, it is reasonably possible that the Fund’s estimate of discounted future net cash flows from proved oil and natural gas reserves could change in the near term.
Significant declines in oil and natural gas prices since fourth quarter 2014 have impacted the fair value of the Fund’s oil and gas properties. If oil and natural gas prices continue to decline, even if only for a short period of time, it is possible that impairments of oil and gas properties will occur.
Depletion and Amortization
Depletion and amortization of the cost of proved oil and gas properties are calculated using the units-of-production method. Proved developed reserves are used as the base for depleting capitalized costs associated with successful exploratory well costs, development costs and related facilities. The sum of proved developed and proved undeveloped reserves is used as the base for depleting or amortizing leasehold acquisition costs. During the three and six months ended June 30, 2015, the Fund recorded $0.4 million of depletion expense related to adjustments to asset retirement obligations for fully depleted properties.
Income Taxes
No provision is made for income taxes in the financial statements. The Fund is a limited liability company, and as such, the Fund’s income or loss is passed through and included in the tax returns of the Fund’s shareholders. The Fund files U.S. Federal and State tax returns and the 2013 through 2015 tax returns remain open for examination by tax authorities.
Income and Expense Allocation
Profits and losses are allocated to shareholders and the Manager in accordance with the LLC Agreement.
Distributions
Distributions to shareholders are allocated in proportion to the number of shares held. The Manager determines whether available cash from operations, as defined in the LLC Agreement, will be distributed. Such distributions are allocated 85% to the shareholders and 15% to the Manager, as required by the LLC Agreement.
Available cash from dispositions, as defined in the LLC Agreement, will be paid 99% to shareholders and 1% to the Manager until the shareholders have received total distributions equal to their capital contributions. After shareholders have received distributions equal to their capital contributions, 85% of available cash from dispositions will be distributed to shareholders and 15% to the Manager.
Recent Accounting Pronouncements
In January 2016, the Financial Accounting Standards Board (“FASB”) issued accounting guidance that requires, among other things, companies to measure investments in other entities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income unless an election is made to record the investment at cost, less impairment and plus or minus subsequent adjustments for observable price changes with change in basis reported in current earnings. This pronouncement is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, with early adoption not permitted. The Fund is currently evaluating the impact of this guidance on its financial statements.
In 2014, the FASB issued accounting guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In May 2016, the FASB issued final amendments which provided narrow scope improvements and practical expedients related to the implementation of the guidance. The Fund is currently evaluating the impact of this guidance on its financial statements.
| 2. | Related Parties |
Pursuant to the terms of the LLC Agreement, the Manager renders management, administrative and advisory services to the Fund. For such services, the Manager is entitled to an annual management fee, payable monthly, of 2.5% of total capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund. Management fees during each of the three and six months ended June 30, 2016 and 2015 were $0.3 million and $0.5 million, respectively.
The Manager is entitled to receive a 15% interest in cash distributions from operations made by the Fund. The Fund did not pay distributions during the three and six months ended June 30, 2016 and during the three months ended June 30, 2015. Distributions paid to the Manager during the six months ended June 30, 2015 were $48 thousand.
At times, short-term payables and receivables, which do not bear interest, arise from transactions with affiliates in the ordinary course of business.
None of the amounts paid to the Manager have been derived as a result of arm’s length negotiations.
The Fund has working interest ownership in certain projects to acquire and develop oil and natural gas projects with other entities that are likewise managed by the Manager.
| 3. | Commitments and Contingencies |
Capital Commitments
The Fund has entered into multiple agreements for the acquisition, drilling and development of its oil and gas properties. The estimated capital expenditures associated with these agreements vary depending on the stage of development on a property-by-property basis. As of June 30, 2016, the Fund’s estimated capital commitments related to its oil and gas properties were $7.2 million (which include asset retirement obligations for the Fund’s projects of $3.8 million), of which $1.2 million is expected to be spent during the next twelve months.
Based upon its current cash position and its current reserve estimates, the Fund expects cash flow from operations to be sufficient to cover its commitments, as well as ongoing operations. Reserve estimates are projections based on engineering data that cannot be measured with precision, require substantial judgment, and are subject to frequent revision.
Environmental Considerations
The exploration for and development of oil and natural gas involves the extraction, production and transportation of materials which, under certain conditions, can be hazardous or cause environmental pollution problems. The Manager and operators of the Fund’s properties are continually taking action they believe appropriate to satisfy applicable federal, state and local environmental regulations and do not currently anticipate that compliance with federal, state and local environmental regulations will have a material adverse effect upon capital expenditures, results of operations or the competitive position of the Fund in the oil and gas industry. However, due to the significant public and governmental interest in environmental matters related to those activities, the Manager cannot predict the effects of possible future legislation, rule changes, or governmental or private claims. As of June 30, 2016 and December 31, 2015, there were no known environmental contingencies that required adjustment to, or disclosure in, the Fund’s financial statements.
During the past several years, the United States Congress, as well as certain regulatory agencies with jurisdiction over the Fund’s business, have considered or proposed legislation or regulation relating to the upstream oil and gas industry both onshore and offshore. If any such proposals were to be enacted or adopted they could potentially materially impact the Fund’s operations. It is not possible at this time to predict whether such legislation or regulation, if proposed, will be adopted as initially written, if at all, or how legislation or new regulation that may be adopted would impact the Fund’s business. Any such future laws and regulations could result in increased compliance costs or additional operating restrictions, which could have a material adverse effect on the Fund’s operating results and cash flows.
Insurance Coverage
The Fund is subject to all risks inherent in the exploration for and development of oil and natural gas. Insurance coverage as is customary for entities engaged in similar operations is maintained, but losses may occur from uninsurable risks or amounts in excess of existing insurance coverage. The occurrence of an event that is not insured or not fully insured could have a material adverse impact upon earnings and financial position. Moreover, insurance is obtained as a package covering all of the funds managed by the Manager. Claims made by other funds managed by the Manager can reduce or eliminate insurance for the Fund.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the documents Ridgewood Energy X Fund, LLC (the “Fund”) has incorporated by reference into this Quarterly Report, other than purely historical information, including estimates, projections, statements relating to the Fund’s business plans, strategies, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the US Private Securities Litigation Reform Act of 1995 that are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. You are therefore cautioned against relying on any such forward-looking statements. Forward-looking statements can generally be identified by words such as “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “target,” “pursue,” “may,” “will,” “will likely result,” and similar expressions and references to future periods. Examples of events that could cause actual results to differ materially from historical results or those anticipated include weather conditions, such as hurricanes, changes in market conditions affecting the pricing and production of oil and natural gas, the cost and availability of equipment, and changes in governmental regulations. Examples of forward-looking statements made herein include statements regarding projects, investments, insurance, capital expenditures and liquidity. Forward-looking statements made in this document speak only as of the date on which they are made. The Fund undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Critical Accounting Policies and Estimates
The discussion and analysis of the Fund’s financial condition and results of operations are based upon the Fund’s financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In preparing these financial statements, the Fund is required to make certain estimates, judgments and assumptions. These estimates, judgments and assumptions affect the reported amounts of the Fund’s assets and liabilities, including the disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of its revenues and expenses during the periods presented. The Fund evaluates these estimates and assumptions on an ongoing basis. The Fund bases its estimates and assumptions on historical experience and on various other factors that the Fund believes to be reasonable at the time the estimates and assumptions are made. However, future events and actual results may differ from these estimates and assumptions and such differences may have a material impact on the results of operations, financial position or cash flows. See Note 1 of “Notes to Unaudited Condensed Financial Statements” – “Organization and Summary of Significant Accounting Policies” contained in Item 1. “Financial Statements” within Part I of this Quarterly Report for a discussion of the Fund’s significant accounting policies. No changes have been made to the Fund’s critical accounting policies and estimates disclosed in its 2015 Annual Report on Form 10-K.
Overview of the Fund’s Business
The Fund is a Delaware limited liability company formed on August 30, 2007 to primarily acquire interests in oil and natural gas properties located in the United States offshore waters of Texas, Louisiana and Alabama in the Gulf of Mexico. The Fund’s primary investment objective is to generate cash flow for distribution to its shareholders by generating returns across a portfolio of exploratory or development oil and natural gas projects. Distributions to shareholders are made in accordance with the Fund’s limited liability company agreement (the “LLC Agreement”). The Fund does not expect in the future to investigate or invest in any additional projects other than those in which it currently has a working interest. The Fund’s remaining capital has been fully allocated to complete such projects.
Ridgewood Energy Corporation (the “Manager” or “Ridgewood Energy”) is the Manager, and as such, has direct and exclusive control over the management of the Fund’s operations. The Manager performs or arranges for the performance of, the management, advisory and administrative services required for Fund’s operations. As compensation for its services, the Manager is entitled to an annual management fee, payable monthly, equal to 2.5% of the total capital contributions made by the Fund’s shareholders, net of cumulative dry-hole and related well costs incurred by the Fund. The Fund does not currently, nor is there any plan to, operate any project in which the Fund participates. The Manager enters into operating agreements with third-party operators for the management of all exploration, development and producing operations, as appropriate. The Manager also participates in distributions.
Commodity Price Changes
Changes in commodity prices may significantly affect liquidity and expected operating results. Reductions in oil and gas prices not only reduce revenues and profits, but could also reduce the quantities of reserves that are commercially recoverable. Significant declines in prices could result in non-cash charges to earnings due to impairment.
Since fourth quarter 2014, there has been a significant decline in oil and natural gas prices. See “Results of Operations” under this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report for more information on the average oil and natural gas prices received by the Fund during the three and six months ended June 30, 2016 and 2015 and the effect of such decreased average prices on the Fund’s results of operations. If oil and natural gas prices continue to decline, even if only for a short period of time, the Fund’s results of operations and liquidity will continue to be adversely impacted.
Market pricing for oil and natural gas is volatile, and is likely to continue to be volatile in the future. This volatility is caused by numerous factors and market conditions that the Fund cannot control or influence. Therefore, it is impossible to predict the future price of oil and natural gas with any certainty. Factors affecting market pricing for oil and natural gas include:
| · | weather conditions; |
| · | economic conditions, including demand for petroleum-based products; |
| · | actions by OPEC, the Organization of Petroleum Exporting Countries; |
| · | political instability in the Middle East and other major oil and gas producing regions; |
| · | governmental regulations, both domestic and foreign; |
| · | domestic and foreign tax policy; |
| · | the pace adopted by foreign governments for the exploration, development, and production of their national reserves; |
| · | the price of foreign imports of oil and gas; |
| · | the cost of exploring for, producing and delivering oil and gas; |
| · | the discovery rate of new oil and gas reserves; |
| · | the rate of decline of existing and new oil and gas reserves; |
| · | available pipeline and other oil and gas transportation capacity; |
| · | the ability of oil and gas companies to raise capital; |
| · | the overall supply and demand for oil and gas; and |
| · | the availability of alternate fuel sources. |
Business Update
Information regarding the Fund’s current projects, all of which are located in the offshore waters of the Gulf of Mexico, is provided in the following table. See “Liquidity Needs” under this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report for information regarding the funding of the Fund’s capital commitments.
| Total Spent | Total | ||||||||||||
| Working | through | Fund | |||||||||||
| Project | Interest | June 30, 2016 | Budget | Status | |||||||||
| (in thousands) | |||||||||||||
| Producing Properties | |||||||||||||
| Diller Project | 0.88 | % | $ | 2,781 | $ | 3,930 | The Diller Project is expected to include the development of two wells. Well #1 commenced production during third quarter 2015. Well #2 is expected to commence production in 2018. The well is currently shut-in due to a mechanical issue and is expected to remain shut-in until remediation plans can be finalized and implemented, which will likely take one to three months. The Fund expects to spend $0.7 million for additional development costs and $0.4 million for asset retirement obligations. | ||||||
| Liberty Project | 5.0 | % | $ | 7,510 | $ | 8,762 | The Liberty Project, a single-well project, commenced production in 2010. After various shut-ins in late-2015 and early-2016, due to third-party facilities' repair and maintenance activities, the well resumed production in early-May 2016. A recompletion is planned for 2017 at an estimated cost of $0.2 million. The Fund expects to spend $1.1 million for asset retirement obligations. | ||||||
| Marmalard Project | 0.88 | % | $ | 5,624 | $ | 9,235 | The Marmalard Project is expected to include the development of six wells. Wells #1, #2 and #3 commenced production during second quarter 2015. Well #4 commenced production during fourth quarter 2015. Additional wells are expected to commence production in 2017 and 2020. The Fund expects to spend $2.5 million for additional development costs and $1.1 million for asset retirement obligations. | ||||||
Results of Operations
The following table summarizes the Fund’s results of operations during the three and six months ended June 30, 2016 and 2015, and should be read in conjunction with the Fund’s financial statements and notes thereto included within Item 1. “Financial Statements” in Part I of this Quarterly Report.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Revenue | ||||||||||||||||
| Oil and gas revenue | $ | 1,328 | $ | 796 | $ | 2,313 | $ | 1,131 | ||||||||
| Expenses | ||||||||||||||||
| Depletion and amortization | 588 | 638 | 1,247 | 704 | ||||||||||||
| Management fees to affiliate | 271 | 271 | 542 | 541 | ||||||||||||
| Operating expenses | 713 | 417 | 1,575 | 472 | ||||||||||||
| General and administrative expenses | 38 | 39 | 72 | 77 | ||||||||||||
| Total expenses | 1,610 | 1,365 | 3,436 | 1,794 | ||||||||||||
| Loss from operations | (282 | ) | (569 | ) | (1,123 | ) | (663 | ) | ||||||||
| Other income | ||||||||||||||||
| Dividend income | 66 | - | 123 | - | ||||||||||||
| Interest income | 2 | 3 | 4 | 6 | ||||||||||||
| Total other income | 68 | 3 | 127 | 6 | ||||||||||||
| Net loss | $ | (214 | ) | $ | (566 | ) | $ | (996 | ) | $ | (657 | ) | ||||
Overview. The following table provides information related to the Fund’s oil and gas production and oil and gas revenue during the three and six months ended June 30, 2016 and 2015. Natural gas liquid (“NGL”) sales are included within gas sales.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Number of wells producing | 6 | 4 | 6 | 4 | ||||||||||||
| Total number of production days | 435 | 173 | 886 | 257 | ||||||||||||
| Oil sales (in thousands of barrels) | 26 | 12 | 52 | 19 | ||||||||||||
| Average oil price per barrel | $ | 43 | $ | 59 | $ | 37 | $ | 55 | ||||||||
| Gas sales (in thousands of mcfs) | 67 | 27 | 134 | 45 | ||||||||||||
| Average gas price per mcf | $ | 2.21 | $ | 2.36 | $ | 2.10 | $ | 2.29 | ||||||||
The increases noted in the above table were primarily related to the commencement of production of the Marmalard and Diller projects, partially offset by the Liberty Project, which has been shut-in for the majority of 2016. See additional discussion in “Business Update” section above.
Oil and Gas Revenue. The Fund generally sells oil, gas and NGLs under two types of agreements, which are common in the oil and gas industry. Both types of agreements may include transportation charges. One type of agreement is a netback agreement, under which the Fund sells oil and gas at the wellhead and receives a price, net of transportation expense incurred by the purchaser. In this case, the Fund records revenue at the net price received from the purchaser. The second type of agreement is one whereby the Fund pays transportation expense directly. In that case, transportation expense is included within operating expense in the statements of operations.
Oil and gas revenue during the three months ended June 30, 2016 was $1.3 million, an increase of $0.5 million from the three months ended June 30, 2015. The increase was attributable to increased sales volume totaling $0.9 million, partially offset by decreased oil and gas prices totaling $0.4 million.
Oil and gas revenue during the six months ended June 30, 2016 was $2.3 million, an increase of $1.2 million from the six months ended June 30, 2015. The increase was attributable to increased sales volume totaling $2.0 million, partially offset by decreased oil and gas prices totaling $0.9 million.
See “Overview” above for factors that impact the oil and gas revenue volume and rate variances.
Depletion and Amortization. Depletion and amortization during the three months ended June 30, 2016 was $0.6 million, a decrease of $0.1 million from the three months ended June 30, 2015. The decrease was attributable to adjustments to asset retirement obligations related to fully depleted properties totaling $0.4 million, which were recorded in second quarter 2015, partially offset by increases in production volumes totaling $0.3 million and the average depletion rate totaling $0.1 million during second quarter 2016.
Depletion and amortization during the six months ended June 30, 2016 was $1.2 million, an increase of $0.5 million from the six months ended June 30, 2015. The increase was attributable to increases in production volumes totaling $0.5 million and the average depletion rate totaling $0.4 million during second quarter 2016, partially offset by adjustments to asset retirement obligations related to fully depleted properties totaling $0.4 million, which were recorded in second quarter 2015.
The increases in the average depletion rates were primarily attributable to the onset of production of the Diller and Marmalard projects, which have higher cost of reserves. See “Overview” above for certain factors that impact the depletion and amortization volume and rate variances. Depletion and amortization rates may also be impacted by changes in reserve estimates provided annually by the Fund’s independent petroleum engineers.
Management Fees to Affiliate. An annual management fee, totaling 2.5% of total capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund, is paid monthly to the Manager.
Operating Expenses. Operating expenses represent costs specifically identifiable or allocable to the Fund’s wells, as detailed in the following table.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Lease operating expense | $ | 597 | $ | 268 | $ | 1,380 | $ | 365 | ||||||||
| Transportation expense | 79 | - | 169 | - | ||||||||||||
| Insurance expense | 3 | 43 | 19 | 60 | ||||||||||||
| Accretion expense | - | 140 | - | 140 | ||||||||||||
| Workover expense and other | 34 | (34 | ) | 7 | (93 | ) | ||||||||||
| $ | 713 | $ | 417 | $ | 1,575 | $ | 472 | |||||||||
Lease operating expense and transportation expense relates to the Fund’s producing properties. Insurance expense represents premiums related to the Fund’s properties, which vary depending upon the number of wells producing or drilling. Accretion expense related to the asset retirement obligations established for the Fund’s proved properties. Workover expense represents costs to restore or stimulate production of existing reserves.
The average production cost, which includes lease operating expense, transportation expense and insurance expense, was $18.47 per barrel of oil equivalent (“BOE”) and $20.95 per BOE during the three and six months ended June 30, 2016, respectively, compared to $18.23 per BOE and $15.79 per BOE during the three and six months ended June 30, 2015, respectively. The increases are primarily attributable to the impact of costs associated with the commencement of production for the Diller Project in third quarter during 2015.
General and Administrative Expenses. General and administrative expenses represent costs specifically identifiable or allocable to the Fund, such as accounting and professional fees and insurance expenses.
Dividend Income. Dividend income is related to the Fund’s investment in Delta House. See Note 1 of “Notes to Unaudited Condensed Financial Statements” - “Organization and Summary of Significant Accounting Policies” contained in Item 1. “Financial Statements” within Part I of this Quarterly Report for more information regarding the Investment in Delta House.
Interest Income. Interest income is comprised of interest earned on cash and cash equivalents and salvage fund.
Capital Resources and Liquidity
Operating Cash Flows
Cash flows provided by operating activities during the six months ended June 30, 2016 were $0.4 million, related to revenue received of $2.3 million and dividend income received of $0.1 million, partially offset by operating expenses of $1.4 million, management fees of $0.5 million and general and administrative expenses of $0.1 million.
Cash flows provided by operating activities during the six months ended June 30, 2015 were $0.1 million, related to revenue received of $1.0 million, partially offset by management fees of $0.5 million and operating expenses of $0.4 million.
Investing Cash Flows
Cash flows used in investing activities during the six months ended June 30, 2016 were $0.1 million, primarily related to investments in salvage fund.
Cash flows used in investing activities during the six months ended June 30, 2015 were $2.5 million, primarily related to capital expenditures for oil and gas properties and investment in Delta House, inclusive of advances.
Financing Cash Flows
There were no cash flows from financing activities during the six months ended June 30, 2016.
Cash flows used in financing activities during the six months ended June 30, 2015 were $0.3 million, related to manager and shareholder distributions.
Estimated Capital Expenditures
Capital Commitments
The Fund has entered into multiple agreements for the acquisition, drilling and development of its oil and gas properties. The estimated capital expenditures associated with these agreements vary depending on the stage of development on a property-by-property basis. See “Business Update” under this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report for information regarding the Fund’s current projects. See “Liquidity Needs” below for additional information.
Capital expenditures for oil and gas properties have been funded with the capital raised by the Fund in its private placement offering. The number of projects in which the Fund could invest was limited, and each unsuccessful project the Fund experienced exhausted its capital and reduced its ability to generate revenue.
Liquidity Needs
The Fund’s primary short-term liquidity needs are to fund its operations and capital expenditures for its oil and gas properties. Such needs are funded utilizing operating income and existing cash on-hand.
As of June 30, 2016, the Fund’s estimated capital commitments related to its oil and gas properties were $7.2 million (which include asset retirement obligations for the Fund’s projects of $3.8 million), of which $1.2 million is expected to be spent during the next twelve months.
Based upon its current cash position and its current reserve estimates, the Fund expects cash flow from operations to be sufficient to cover its commitments, as well as ongoing operations. Reserve estimates are projections based on engineering data that cannot be measured with precision, require substantial judgment, and are subject to frequent revision.
The Manager is entitled to receive an annual management fee from the Fund regardless of the Fund’s profitability in that year.
Distributions, if any, are funded from available cash from operations, as defined in the LLC Agreement, and the frequency and amount are within the Manager’s discretion. Due to the significant capital required to develop the Diller and Marmalard projects, distributions have been impacted, and will be impacted in the future, by amounts reserved to provide for their ongoing development costs and funding their estimated asset retirement obligations.
Off-Balance Sheet Arrangements
The Fund had no off-balance sheet arrangements as of June 30, 2016 and December 31, 2015 and does not anticipate the use of such arrangements in the future.
Contractual Obligations
The Fund enters into participation and joint operating agreements with operators. On behalf of the Fund, an operator enters into various contractual commitments pertaining to exploration, development and production activities. The Fund does not negotiate such contracts. No contractual obligations exist as of June 30, 2016 and December 31, 2015, other than those discussed in “Estimated Capital Expenditures” above.
Recent Accounting Pronouncements
See Note 1 of “Notes to Unaudited Condensed Financial Statements” – “Organization and Summary of Significant Accounting Policies” contained in Item 1. “Financial Statements” within Part I of this Quarterly Report for a discussion of recent accounting pronouncements.
Not required.
In accordance with Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Fund’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Fund’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Fund’s disclosure controls and procedures were effective as of June 30, 2016.
There has been no change in the Fund’s internal control over financial reporting that occurred during the three months ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control over financial reporting.
PART II – OTHER INFORMATION
None.
Not required.
None.
None.
None.
None.
EXHIBIT NUMBER | TITLE OF EXHIBIT | METHOD OF FILING |
| 31.1 | Certification of Robert E. Swanson, Chief Executive Officer of the Fund, pursuant to Exchange Act Rule 13a-14(a) | Filed herewith |
| 31.2 | Certification of Kathleen P. McSherry, Executive Vice President and Chief Financial Officer of the Fund, pursuant to Exchange Act Rule 13a-14(a) | Filed herewith |
| 32 | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Robert E. Swanson, Chief Executive Officer of the Fund and Kathleen P. McSherry, Executive Vice President and Chief Financial Officer of the Fund | Filed herewith |
| 101.INS | XBRL Instance Document | Filed herewith |
| 101.SCH | XBRL Taxonomy Extension Schema | Filed herewith |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | Filed herewith |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | Filed herewith |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | Filed herewith |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RIDGEWOOD ENERGY X FUND, LLC | ||||||
| Dated: | August 9, 2016 | By: | /s/ | ROBERT E. SWANSON | ||
| Name: | Robert E. Swanson | |||||
| Title: | Chief Executive Officer | |||||
| (Principal Executive Officer) | ||||||
| Dated: | August 9, 2016 | By: | /s/ | KATHLEEN P. MCSHERRY | ||
| Name: | Kathleen P. McSherry | |||||
| Title: | Executive Vice President and Chief Financial Officer | |||||
(Principal Financial and Accounting Officer) |
16