Business Combination | BUSINESS COMBINATION On February 9, 2018 (the “Closing Date”), we consummated the transactions contemplated by the Contribution Agreement, dated August 16, 2017, with AMR (formerly Silver Run Acquisition Corporation II), AM Contributor, High Mesa Holdings GP, LLC, the sole general partner of the AM Contributor, Alta Mesa Holdings GP, LLC, our sole general partner (“AMH GP”), and, solely for certain provisions therein, the equity owners of the AM Contributor (“AM Contribution Agreement”). Simultaneous with the execution of the AM Contribution Agreement, AMR entered into (i) a Contribution Agreement, dated August 16, 2017, with KFM Holdco, LLC, a Delaware limited liability company (the “KFM Contributor”), Kingfisher Midstream, LLC, a Delaware limited liability company (“Kingfisher”), and, solely for certain provisions therein, the equity owners of the KFM Contributor (the “KFM Contribution Agreement”); and (ii) a Contribution Agreement (the “Riverstone Contribution Agreement” and, together with the AM Contribution Agreement and the KFM Contribution Agreement, the “Contribution Agreements”) with Riverstone VI Alta Mesa Holdings, L.P., a Delaware limited partnership (the “Riverstone Contributor”). Pursuant to the Contribution Agreements, SRII Opco, LP, a newly formed subsidiary of AMR (“SRII Opco”), acquired (a) (i) all of the limited partner interests in us and (ii) 100% of the economic interests and 90% of the voting interests in AMH GP ((i) and (ii) together, the “AM Contribution”) and (b) 100% of the economic interests in Kingfisher (the “Kingfisher Contribution”). The acquisition of us and Kingfisher pursuant to the Contribution Agreements is referred to herein as the “Business Combination” and the transactions contemplated by the Contribution Agreements are referred to herein as the “Transactions.” As a result of the Transactions, AMR has obtained control over the management of AMH GP and, consequently, us. At the closing of the Transactions, the AM Contributor received 138,402,398 common units representing limited partner interests (the “Common Units”) in SRII Opco. The AM Contributor also acquired from AMR a number of newly issued shares of non-economic capital stock of AMR, designated as Class C common stock, par value $0.0001 per share (the “Class C Common Stock”), corresponding to the number of Common Units received by the AM Contributor at closing. Additionally, for a period of seven years following the closing, the AM Contributor will be entitled to receive additional SRII Opco Common Units (and acquire a corresponding number of shares of AMR’s Class C Common Stock) as earn-out consideration if the 20 -day volume-weighted average price (“20-Day VWAP”) of the Class A Common Stock of AMR equals or exceeds the following prices (each such payment, an “Earn-Out Payment”): 20-Day VWAP Earn-Out Consideration $14.00 10,714,285 Common Units $16.00 9,375,000 Common Units $18.00 13,888,889 Common Units $20.00 12,500,000 Common Units The AM Contributor will not be entitled to receive a particular Earn-Out Payment on more than one occasion and, if, on a particular date, the 20-Day VWAP entitles the AM Contributor to more than one Earn-Out Payment (each of which has not been previously paid), the AM Contributor will be entitled to receive each such Earn-Out Payment. The AM Contributor will be entitled to the earn-out consideration described above in connection with certain liquidity events of AMR, including a merger or sale of all or substantially all of AMR’s assets, if the consideration paid to holders of Class A Common Stock in connection with such liquidity event is greater than any of the above-specified 20-Day VWAP hurdles. AMR also contributed $560 million in net cash to us at the closing. AMR’s source for these funds was from the sale of its securities to investors in a public offering and in private placements. We used a portion of the amount to repay all outstanding balance under the senior secured revolving credit facility described in Note 11 — Long-Term Debt, Net . Pursuant to the AM Contribution Agreement, AM Contributor delivered a final closing statement during the second quarter of 2018. Based on the final closing statement, the AM Contributor received an additional 1,197,934 SRII Opco Common Units and an equivalent number of shares of AMR’s Class C Common Stock. The Business Combination has been accounted for using the acquisition method. The acquisition method of accounting is based on FASB ASC 805, Business Combination (“ASC 805”) , and uses the fair value concepts defined in FASB ASC 820, Fair Value Measurements (“ASC 820”). ASC 805 requires, among other things, that our assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date by AMR, who was determined to be the accounting acquirer. We have not completed the detailed valuation studies necessary to arrive at the final determination of the fair value of the assets acquired, the liabilities assumed and the related allocations of the purchase price in the Business Combination. As a result, the values of certain of our long-term assets and liabilities are preliminary in nature and are subject to change as additional information becomes available and as additional analysis is performed. Pursuant to ASC 805, finalization of the values is to be completed within one year of the acquisition date. Preliminary Estimated Purchase Price AMR’s preliminary estimated purchase price consideration for Alta Mesa was as follows (in thousands): February 9, 2018 (As initially reported) Measurement Period Adjustment (1) February 9, 2018 (As adjusted) Preliminary Purchase Consideration: (2) SRII Opco Common Units issued (3) $ 1,251,782 $ 9,467 $ 1,261,249 Estimated fair value of contingent earn-out purchase consideration (4) 284,109 — 284,109 Total purchase price consideration $ 1,535,891 $ 9,467 $ 1,545,358 _________________ (1) The measurement period adjustment relates to the issuance of 1,197,934 of additional SRII Opco Common Units, valued at approximately $7.90 per unit, to the AM Contributor based on a final closing statement agreed to by the parties during the three months ended June 30, 2018 (Successor). (2) The preliminary purchase price consideration is for 100% of the limited partner interests in us and 100% of the economic interests and 90% of the voting interests in AMH GP. (3) At closing, the Riverstone Contributor received consideration of 20,000,000 SRII Opco Common Units and the AM Contributor received consideration of 138,402,398 SRII Opco Common Units. The estimated fair value of an SRII Opco Common Unit was approximately $7.90 per unit and reflects discounts for holding requirements and liquidity. (4) For a period of seven years following Closing, the AM Contributor will be entitled to receive an earn-out consideration to be paid in the form of SRII Opco Common Units (and a corresponding number of shares of AMR Class C Common Stock) if the 20-day VWAP of the Class A Common Stock of AMR equals or exceeds the specified prices pursuant to the AM Contribution Agreement. Pursuant to ASC 805 and ASC 480, Distinguishing Liabilities from Equity (“ASC 480”), we have determined that the fair value of the earn-out consideration was approximately $284.1 million , which was classified as equity. The fair value of the contingent equity earn-out consideration was determined using the Monte Carlo simulation valuation method based on Level 3 inputs as defined in the fair value hierarchy. The key inputs included the listed market price for Class A Common Stock, market volatility of a peer group of companies similar to AMR (due to the lack of trading activity in the Class A Common Stock), no dividend yield, an expected life of each earn-out threshold based on the remaining contractual term of the contingent liability earn-out period and a risk-free rate based on U.S. dollar overnight indexed swaps with a maturity equivalent to the earn-out’s expected life. Preliminary Estimated Purchase Price Allocation The allocation of AMR’s preliminary estimate of the purchase consideration to the assets acquired and liabilities assumed in the acquisition of Alta Mesa was as follows (in thousands): February 9, 2018 (As initially reported) Measurement Period Adjustment (1) February 9, 2018 (As adjusted) Estimated Fair Value of Assets Acquired (2) Cash, cash equivalents and short term restricted cash $ 10,345 $ — $ 10,345 Accounts receivable 101,745 — 101,745 Other receivables 1,222 — 1,222 Receivables due from related party 907 — 907 Prepaid expenses and other current assets 1,405 — 1,405 Derivative financial instruments 352 — 352 Property and equipment: (3) Oil and natural gas properties, successful efforts 2,314,858 (1,479 ) 2,313,379 Other property and equipment, net 43,318 — 43,318 Notes receivable due from related party 12,454 — 12,454 Deposits and other long-term assets 10,286 — 10,286 Total fair value of assets acquired 2,496,892 (1,479 ) 2,495,413 Estimated Fair Value of Liabilities Assumed (2) Accounts payable and accrued liabilities 210,867 (10,946 ) 199,921 Accounts payable — affiliate 5,476 — 5,476 Advances from non-operators 6,803 — 6,803 Advances from related party 47,506 — 47,506 Asset retirement obligations (3) 5,998 — 5,998 Derivative financial instruments 11,585 — 11,585 Long-term debt (4) 667,700 — 667,700 Other long-term liabilities 5,066 — 5,066 Total fair value of liabilities assumed 961,001 (10,946 ) 950,055 Total consideration and fair value $ 1,535,891 $ 9,467 $ 1,545,358 _________________ (1) The measurement period adjustments are recognized in the reporting period in which the adjustments were determined and calculated as if the accounting had been completed at the acquisition date. (2) The assets acquired and liabilities assumed relate to Alta Mesa’s STACK assets. (3) The estimated fair values of oil and natural gas properties and asset retirement obligations were determined using valuation techniques that convert future cash flows to a single discounted amount and involve the use of certain inputs that are not observable in the market (Level 3 inputs). Significant inputs include, but are not limited to recoverable reserves, production rates, future operating and development costs, future commodity prices, appropriate risk-adjusted discount rates and other relevant data. These inputs required significant judgments and estimates by management at the time of the valuation. Actual results may vary from these estimates. (4) Represents the approximate fair value as of the acquisition date of Alta Mesa’s $500.0 million aggregate principal amount of 7.875% senior unsecured notes due December 15, 2024 , totaling approximately $533.6 million , based on Level 1 inputs, and outstanding borrowings under the Eighth A&R credit facility (described in Note 11 — Long-Term Debt, Net ) of approximately $134.1 million as of the acquisition date. |