Summary of Significant Accounting Policies | 12 Months Ended |
Dec. 31, 2013 |
SignificantAccountingPoliciesTextBlockAbstract | ' |
Summary of Significant Accounting Policies | ' |
Summary of Significant Accounting Policies |
Organization |
New Source Energy Partners L.P. (the “Partnership” or “NSLP”) is a Delaware limited partnership formed in October 2012 by New Source Energy Corporation (“New Source”) to own and acquire oil and natural gas properties in the United States in addition to converting the Partnership from a pure play exploration and production company to a more fully integrated oil and gas partnership that over time can provide more services and infrastructure to enhance safety and efficiencies in developing and producing natural resources. The Partnership is engaged in the development and production of its oil and natural gas properties portfolio that extends across conventional resource reservoirs in east-central Oklahoma ("Exploration and Production Segment"). In addition, the Partnership is engaged in oilfield services that specialize in increasing efficiencies and safety in drilling and completion processes ("Oilfield Services Segment") through its wholly owned subsidiary, MidCentral Energy Services, LLC ("MCE" or "MCE Entities"), which, on November 12, 2013, it acquired through the acquisition 100% of the equity interests in MCE, LP, a Delaware limited partnership, and its general partner, MCE GP, LLC, other than Class B units in MCE, LP that were retained by certain of the sellers. See Note 15 for further discussion regarding the Partnership’s reportable segments. |
On February 13, 2013, the Partnership completed its initial public offering (the “Offering”) of 4,000,000 common units representing limited partner interests in the Partnership at a price to the public of $20.00 per common unit. The Partnership received net proceeds of approximately $71.9 million from the Offering, after deducting underwriting discounts. The Partnership made a cash distribution of $15.8 million to New Source as consideration (together with its issuance to New Source of what then constituted approximately 50% of New Source Energy GP, LLC, which owns all of the Partnership general partner units, 777,500 common units, 2,205,000 subordinated units and a $25.0 million note payable) in exchange for the contribution by New Source of certain oil and gas natural properties (the “IPO Properties”) and certain commodity derivative contracts. Additionally, the Partnership assumed approximately $70.0 million of New Source's indebtedness previously secured by the IPO Properties, and used a portion of the net proceeds from the Offering to repay in full such assumed debt at the closing of the Offering. The Partnership also borrowed $15.0 million under a new revolving credit facility on February 13, 2013. On March 12, 2013, the Partnership received net proceeds of $4.7 million from the partial exercise, in the amount of 250,000 common units, of the underwriters’ overallotment option. |
The IPO Properties consist of interests in wells producing oil, natural gas and NGLs from the Misener-Hunton (the “Hunton”) formation in East-Central Oklahoma. The IPO Properties represent New Source’s working interest in certain Hunton formation producing wells located in Pottawatomie, Seminole and Okfuskee Counties, Oklahoma (the “Golden Lane Area”), which equates to approximately a 38% weighted average working interest in the Golden Lane Area. |
MCE is a limited liability company formed in June 2010 and is headquartered in and operates from Oklahoma City, Oklahoma. MCE offers full service blowout prevention installation and pressure testing services throughout the Mid-Continent region and has recently opened an additional field office in South Texas to focus on the Eagle Ford shale and in West Texas to focus on the Permian Basin. In addition, MCE offers short-term rentals out of Oklahoma City, Oklahoma of American Petroleum Institute (API) Certified irons such as: spacer spools; double-studded adapters; blowout preventers; ram blocks; choke manifolds; accumulators; and various other pressure components. |
Basis of Presentation |
The accompanying consolidated financial statements are prepared on a consolidated basis and present the financial position of the Partnership at December 31, 2013 and December 31, 2012 and the Partnership’s results of operations, partners' capital, and cash flows for the years ended December 31, 2013, 2012 and 2011. These consolidated financial statements include all adjustments, consisting of normal and recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position and the results of operations for the indicated periods in accordance with accounting principles generally accepted in the United States of America, or “GAAP,” for financial reporting. All intercompany transactions are eliminated during the consolidation process. These consolidated financial statements include all accounts of the Partnership and those related to the "Non-Controlling Interest" owner (See "Note 12 - Unitholders' Equity"). |
The acquisition of the IPO Properties discussed above was a transaction between businesses under common control. The accounts relating to the IPO Properties have been reflected retroactively in the Partnership’s financial statements at carryover basis. As such, for periods prior to the Offering, the accompanying financial statements have been prepared on a "carve-out" basis from New Source's financial statements and reflect the historical accounts directly attributable to the IPO Properties together with allocations of expenses from New Source. Therefore, for periods prior to February 13, 2013, the accompanying consolidated financial statements may not be indicative of the Partnership’s future performance and may not reflect what its financial position, results of operations, and cash flows would have been had it been operated as an independent company during the periods presented. Prior to February 13, 2013, New Source performed certain corporate functions on behalf of the IPO Properties, and the consolidated financial statements reflect an allocation of the costs New Source incurred. These functions included executive management, information technology, tax, insurance, accounting, legal and treasury services. The costs of such services were allocated based on the most relevant allocation method to the service provided, primarily based on relative book value of assets, among other factors. Management believes such allocations are reasonable; however, they may not be indicative of the actual expense that would have been incurred had the Partnership been operated as an independent company for all of the periods presented. The charges for these functions are included primarily in general and administrative expenses. |
New Source became the owner of the IPO Properties on August 12, 2011 and reflected the IPO Properties in its financial statements retroactively because the acquisition of the IPO Properties was a transaction between businesses under common control. Prior to that date, the IPO Properties were owned by a nontaxable entity. New Source was a taxable entity. Accordingly, on August 12, 2011, New Source accrued deferred income taxes attributable to differences in the book and tax bases in the IPO Properties and subsequent to the August 12, 2011 acquisition has accounted for income taxes using the asset and liability method until the Offering. The Partnership will not be a taxable entity. Accordingly, when New Source contributed the IPO Properties to the Partnership in 2013, the Partnership reversed the related deferred income taxes, and subsequently the Partnership will not reflect income taxes in its financial statements. |
As part of the MCE Acquisition on November 12, 2103, certain owners of MCE retained Class B Units in MCE ("Class B Units"), which entitle the holders to receive incentive distributions of cash distributed by MCE above specified thresholds. Distributions to the Class B Units will be recognized in the period earned and recorded as a reduction to net income attributable to New Source Energy Partners L.P. on the Consolidated Statements of Operations. |
Use of Estimates in the Preparation of the Consolidated Financial Statements |
Preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Depletion of oil and natural gas properties is determined using estimates of proved oil and natural gas reserves. There are numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and natural gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves. Other significant estimates include, but are not limited to: the valuation of commodity derivatives; the allocation of general and administrative expenses; asset retirement obligations; goodwill/intangible impairment analysis; valuation of the consideration transferred for the MCE Acquisition; and the valuation of assets acquired and liabilities assumed in business combinations. |
Acquisitions |
The Partnership accounts for acquired businesses using the acquisition method of accounting, which requires that the assets acquired, liabilities assumed, contractual contingencies and contingent consideration be recorded at the date of acquisition at their respective fair values. Goodwill represents the excess of the purchase price, including any contingent consideration, over the fair value of the identifiable net assets acquired. It further requires acquisition related costs to be recognized separately from the acquisition and expensed as incurred. |
The fair value of identifiable long-lived assets is based on significant judgments made by management of the Partnership. The Partnership typically engages third party valuation appraisal firms to assist in determining the fair values and useful lives of the identifiable long-lived assets acquired in the Oilfield Services Segment. Such valuations and useful life determinations require the Partnership to make significant estimates and assumptions. These estimates and assumptions are based on historical experience and information obtained from management, and also include, but are not limited to, future expected cash flows and discount rates applied in determining the present value of those cash flows. Unanticipated events and circumstances may occur that could affect the accuracy or validity of such assumptions, estimates or actual results. Acquired identifiable intangible assets are amortized on a pattern that is consistent with the net cash flows they are expected to produce over their estimated economic lives. |
Accounts Receivable |
Accounts receivable consist of the following as of December 31, (in thousands): |
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| 2013 | | 2012 |
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Oil and natural gas sales receivables | $ | 8,417 | | | $ | 5,621 | |
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Oil and natural gas sales receivables - related parties | 228 | | | 42 | |
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Oilfield services receivables | 3,964 | | | — | |
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Total accounts receivable | $ | 12,609 | | | $ | 5,663 | |
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Accounts receivable are customer obligations due under normal trade terms and are presented on the Consolidated Balance Sheets net of allowances for doubtful accounts. Customers are granted credit in the ordinary course of business and generally do not require collateral. Based on management’s best estimate of the amount of probable credit losses in the Partnership's existing accounts receivable, it has concluded that realization of losses on balances outstanding at December 31, 2013 and 2012 will be immaterial; therefore, no allowance for doubtful accounts is deemed necessary. However, actual write-offs may occur. As part of the factoring payable mentioned below, certain of MCE's accounts receivable are pledged as collateral. |
Property and Equipment |
Property and equipment are capitalized and recorded at cost, while maintenance and repairs are expensed. Depreciation of property and equipment is provided when assets are placed in service using the straight-line method based on estimated useful lives ranging from three to ten years. Depreciation expense for property and equipment was $0.2 million for the year ended December 31, 2013. The Partnership did not incur any depreciation expense for property and equipment for the years ended December 31, 2012 and 2011. |
Oil and Natural Gas Properties |
The Partnership utilizes the full cost method of accounting for oil and natural gas properties whereby productive and nonproductive costs incurred in connection with the acquisition, exploration, and development of oil and natural gas reserves are capitalized. All capitalized costs of oil and natural gas properties and equipment, including the estimated future costs to develop proved reserves, are amortized to depreciation, depletion and amortization ("DD&A") expense using the units-of-production method based on total proved reserves. Historically, full cost pool amortization was recorded on a carve-out basis based on relative production from the Partnership compared to total production of New Source. No gains or losses are recognized upon the sale or other disposition of oil and natural gas properties except in transactions that would significantly alter the relationship between capitalized costs and proved reserves. Under the full cost method, the net book value of oil and natural gas properties may not exceed the estimated after-tax future net revenues from proved oil and natural gas properties, discounted at 10% (the ceiling limitation). In arriving at estimated after-tax future net revenues, estimated lease operating expenses, development costs, and certain production-related and ad valorem taxes are deducted. In calculating future net revenues, prices and costs in effect at the time of the calculation are held constant indefinitely, except for changes that are fixed and determinable by existing contracts. The net book value is compared to the ceiling limitation on a quarterly and yearly basis. The excess, if any, of the net book value above the ceiling limitation is charged to expense in the period in which it occurs and is not subsequently reinstated. Reserve estimates used in determining estimated future net revenues have been prepared by an external petroleum engineering firm. Future net revenues were computed based on reserves using prices calculated as the unweighted arithmetical average oil and natural gas prices on the first day of each month within the latest twelve-month period. Subsequent to February 13, 2013, the ceiling limitation computation is determined without regard to income taxes due to the Partnership being a non-income tax paying entity. There were no full cost ceiling write-downs recorded for the years ended December 31, 2013, 2012 and 2011. |
Intangible Asset - Customer Relationships |
As part of the MCE Acquisition on November 12, 2013, $36.8 million of customer relationships intangible assets were recognized as part of the purchase price allocation (see Note 2). The amortization of customer relationships reflects a pattern in which the economic benefits of the assets will be consumed or used up. Amortization was estimated by using an accelerated method over 7 years similar to the expected cash flow pattern of the acquired customer relationships, estimated for each of the five succeeding years ending December 31, as follows (in thousands): |
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| | Total | | | |
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2014 | | $ | 12,366 | | | | |
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2015 | | 8,689 | | | | |
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2016 | | 5,264 | | | | |
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2017 | | 3,425 | | | | |
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2018 | | 1,839 | | | | |
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Thereafter | | 3,426 | | | | |
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| | $ | 35,009 | | | | |
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Amortization expense was $1.8 million for the year ended December 31, 2013. The Partnership did not incur any amortization expense for customer relationships for the years ended December 31, 2012 and 2011. |
The Partnership evaluates for potential impairment of long-lived assets, including intangible assets, subject to amortization when indicators of impairment are present. Circumstances that could indicate a potential impairment include losses of significant customers, significant adverse changes in industry trends, economic climate, legal factors, and an adverse action or assessment by a regulator. More specifically, significant adverse changes in industry trends, including oil and natural gas market prices could indicate a potential impairment. In performing an impairment evaluation, the Partnership estimates the future undiscounted net cash flows from the use and eventual disposition of the intangible asset grouped at the lowest level that cash flows can be identified. If the sum of the estimated future undiscounted net cash flows is less than the carrying amount, an impairment charge would be measured as the difference between the carrying amount and the fair value of these assets. The assumptions used in the impairment evaluation for long-lived assets are inherently uncertain and require management judgment. The Partnership did not record any impairment of long-lived assets for the years ended December 31, 2013, 2012 or 2011. |
Goodwill |
Goodwill represents consideration paid in excess of the fair value of the identifiable assets acquired in a business combination. In connection with the acquisition of MCE on November 12, 2013 (see Note 2), the Partnership recorded $24.0 million of goodwill, which represents the goodwill balance at December 31, 2013. Goodwill is not amortized, but is reviewed for impairment annually based on the carrying values as of November 1, or more frequently if impairment indicators arise that suggest the carrying value of goodwill may not be recovered. |
In evaluating possible impairment of goodwill, the Partnership performs a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is impaired. Management uses all available information to make these determinations, including evaluating the macroeconomic environment, industry specific conditions, cost factors, overall financial performance and unit price, at the assessment date. The Partnership did not record any impairment of goodwill for the years ended December 31, 2013, 2012 or 2011. |
Contingent Consideration Payable to Related Parties |
Contingent consideration, which includes earnout payments in connection with the Partnership’s acquisitions, is recognized at fair value on the acquisition date and remeasured each reporting period with subsequent adjustments recognized in our Consolidated Statements of Operations. The Partnership estimates the fair value of contingent consideration liabilities based on certain performance milestones of the acquired companies or properties, and estimated probabilities of achievement, then discounts the liabilities to present value using the Partnership’s cost of debt. Contingent consideration is valued using significant inputs that are not observable in the market which are defined as Level 3 inputs pursuant to fair value measurement accounting. The Partnership believes its estimates and assumptions are reasonable, however, there is significant judgment involved. At each reporting date, the contingent consideration liability is revalued to estimated fair value. |
Changes in the fair value of contingent consideration liabilities may result from changes in discount periods, changes in the timing and amount of sales and/or other specific milestone estimates and changes in probability assumptions with respect to the likelihood of achieving the various earnout criteria. These changes could cause a material impact to, and volatility in our operating results. Earnout payments, if any, will be reflected in cash flows from financing activities and the changes in fair value are reflected in cash flows from operating activities in our Consolidated Statements of Cash Flows. See Note 10 for contingent consideration activity. |
Environmental |
Oil and natural gas properties are subject to extensive federal, state and local environmental laws and regulations. These laws, which are often changing, regulate the discharge of materials into the environment and may require the removal or mitigation of the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments is fixed and readily determinable. |
Revenue Recognition |
Oil and natural gas sales are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, title has transferred, and collectability of the revenue is probable. Delivery occurs and title is transferred when production has been delivered to a pipeline, railcar or truck, or a tanker lifting has occurred. The sales method of accounting is used for oil and natural gas sales such that revenues are recognized based on the actual proceeds from the oil and natural gas sold to purchasers. Oil and natural gas imbalances are generated on properties for which two or more owners have the right to take production “in-kind” and, in doing so, take more or less than their respective entitled percentage. For the years ended December 31, 2013, 2012 and 2011 there were no significant oil and natural gas imbalances. |
The Oilfield Services Segment's service and rental revenue is recognized when persuasive evidence of an arrangement exists, the product or service has been provided, the price is fixed or determinable and collection is reasonably assured, which is generally at the time the service is provided. |
Asset Retirement Obligations |
Liabilities associated with asset retirement obligations are recorded at fair value in the period in which they are incurred or when properties are acquired with a corresponding increase in the carrying amount of the related oil and natural gas properties. Subsequently, the asset retirement cost included in the carrying amount of the oil and natural gas properties and is allocated to expense through DD&A. Changes in the liability due to passage of time are recognized as an increase in the carrying amount of the liability and as corresponding accretion expense. |
Equity-Based Compensation |
Awards under the Partnership’s long-term incentive plan may consist of restricted stock grants, equity option awards, and other awards issuable to employees and non-employee directors. The Partnership recognizes in its consolidated financial statements the cost of employee services received in exchange for awards of equity instruments based on the fair value of those awards at their grant date. If an award has a fixed vesting date, the cost is recognized over the period from the grant date to the vesting date(s) of the award. If an award does not have a fixed vesting date, the cost is recognized at the time it vests. |
Income Taxes |
Income taxes are reflected in these consolidated financial statements during the periods in which the IPO Properties were owned by a taxable entity. Since the Partnership is not a taxable entity, no income taxes have been provided for the periods following completion of the Offering. Upon the Partnership becoming a non-taxable entity, the Partnership recognized a tax benefit related to the change in tax status of approximately $12.1 million for the year ended December 31, 2013. |
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The Company is a limited partnership for federal and state income tax purposes, with the exception of the state of Texas, in which income tax liabilities and/or benefits of the Company are passed through to its unitholders. Limited partnerships are subject to Texas margin tax. |
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In accordance with the applicable accounting standards, the Partnership recognizes only the impact of income tax positions that, based on their merits, are more likely than not to be sustained upon audit by a taxing authority. To evaluate its current tax positions in order to identify any material uncertain tax positions, the Partnership developed a policy of identifying and evaluating uncertain tax positions that considers support for each tax position, industry standards, tax return disclosures and schedules and the significance of each position. It is the Partnership’s policy to recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The Partnership had no material uncertain tax positions at December 31, 2013, and December 31, 2012. The tax years 2010 – 2012 remain open to examination for federal income tax purposes. |
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Net income for financial statement purposes may differ significantly from taxable income reportable to unitholders as a result of differences between the tax bases and financial reporting bases of assets and liabilities and the taxable income allocation requirements under the partnership agreement. In addition, individual unitholders have different investment bases depending upon the timing and price of acquisition of their common units, and each unitholder’s tax accounting, which is partially dependent upon the unitholder’s tax position, differs from the accounting followed in the consolidated financial statements. As a result, the aggregate difference in the basis of net assets for financial and tax reporting purposes cannot be readily determined as the Partnership does not have access to information about each unitholder’s tax attributes in the Partnership. However, with respect to the Partnership, the Partnership's book basis in its net assets exceeds the Partnership's net tax basis by $118.9 million at December 31, 2013. |
Fair Value of Financial Instruments |
The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between two willing parties. The carrying amount of cash, accounts receivable, prepaid expenses, accounts payable, accrued expenses reported on the balance sheet approximates fair value. The carrying amount of the borrowings under the credit facility and our other borrowings reported on the balance sheets approximates fair value (level 2) because the debt instruments carry a variable interest rate based on market interest rates. |
Derivatives |
All derivative instruments are recognized as either assets or liabilities in the balance sheet at fair value. None of such instruments have been designated as cash flow hedges. Accordingly, changes in the fair value of all derivative instruments have been recorded in the consolidated statements of operations. |