| Basis of Presentation and Summary of Significant Accounting Policies | NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and the applicable rules and regulations of the Securities Exchange Commission regarding interim financial reporting and include all adjustments that are necessary for a fair presentation of our consolidated results of operations, financial condition and cash flows for the periods shown, including normal, recurring accruals and other items. The consolidated results of operations for the interim periods presented are not necessarily indicative of results for the full year. The year-end condensed consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. For a more complete discussion of our accounting policies and certain other information, refer to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31 2017. We determined that AGP is a variable interest entity (“VIE”) based on AGP’s partnership agreement; our power, as the general partner, to direct the activities that most significantly impact AGP’s economic performance; and our ownership of AGP’s incentive distribution rights. Accordingly, we consolidate the financial statements of AGP into our condensed consolidated financial statements. AGP’s operating results and asset balances are presented separately in Note 7 – Operating Segment Information. As the general partner for AGP, we have unlimited liability for the obligations of AGP except for those contractual obligations that are expressly made without recourse to the general partner. The non-controlling interest in AGP is reflected as (income) loss attributable to non-controlling interests in the condensed consolidated statements of operations and as a component of unitholders’ equity on the condensed consolidated balance sheets. All intercompany transactions have been eliminated. Liquidity, Capital Resources, and Ability to Continue as a Going Concern Our primary sources of liquidity are cash distributions received with respect to our ownership interests in AGP, Falcon Minerals, and Titan and AGP’s annual management fee. However, neither Titan nor AGP are currently paying distributions. Our primary cash requirements, in addition to normal operating expenses, are for debt service and capital expenditures, which we expect to fund through operating cash flow and cash distributions received. Accordingly, our sources of liquidity are currently not sufficient to satisfy the obligations under our credit agreements. The significant risks and uncertainties related to our primary sources of liquidity raise substantial doubt about our ability to continue as a going concern. We continue to face significant liquidity issues and are currently considering, and are likely to make, changes to our capital structure to maintain sufficient liquidity, meet our debt obligations and manage our balance sheet. Without a further extension from our lenders or other significant transaction or capital infusion, we do not expect to have sufficient liquidity to repay our first lien credit agreement at December 31, 2018, and as a result, there is substantial doubt regarding our ability to continue as a going concern. The amounts outstanding under our credit agreements were classified as current liabilities on our balance sheet as both obligations are due within one year from the balance sheet date. In total, we have $96.0 million of outstanding indebtedness under our credit agreements, net of $0.3 million of debt discounts and deferred financing costs, reflected as the current portion of long term debt, net on our condensed consolidated balance sheet as of September 30, 2018. We may make changes to our capital structure from time to time. For example, we could pursue options such as refinancing or reorganizing our indebtedness or capital structure to address our liquidity concerns and high debt levels. There is no certainty that we will be able to implement any such options, and we cannot provide any assurances that any changes to our debt or equity capital structure would be possible. Such options may result in a wide range of outcomes for our stakeholders, including cancellation of debt income (“CODI”) which would be directly allocated to our unitholders and reported on such unitholders’ separate returns. It is possible additional adjustments to our strategic plan and outlook may occur based on market conditions and our needs at that time, which could include selling assets or seeking additional partners to develop our assets. Our condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. Our condensed consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty. If we cannot continue as a going concern, adjustments to the carrying values and classification of our assets and liabilities and the reported amounts of income and expenses could be required and could be material. Use of Estimates The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities that exist at the date of our condensed consolidated financial statements, as well as the reported amounts of revenue and costs and expenses during the reporting periods. Our condensed consolidated financial statements are based on a number of significant estimates, including revenue and expense accruals, depletion of gas and oil properties and the fair value of derivative instruments and our investment in Lightfoot. The oil and natural gas industry principally conducts business by processing actual transactions as many as 60 days after the month of delivery. Consequently, the most recent two months’ financial results were recorded using estimated volumes and contract market prices. Actual results may differ from those estimates. Derivative Instruments We enter into certain financial contracts to manage our exposure to movement in commodity prices. The derivative instruments recorded in the condensed consolidated balance sheets are measured as either an asset or liability at fair value. Changes in the fair value of derivative instruments are recognized in the current period within gain (loss) on mark-to-market derivatives in our condensed consolidated statements of operations. We use a market approach fair value methodology to value the assets and liabilities for our outstanding derivative instruments. We manage and report derivative assets and liabilities on the basis of our exposure to market risks and credit risks by counterparty. Commodity derivative instruments are valued based on observable market data related to the change in price of the underlying commodity and are therefore defined as Level 2 assets and liabilities within the same class of nature and risk. These derivative values were calculated by utilizing commodity indices, quoted prices for futures and options contracts traded on open markets that coincide with the underlying commodity, expiration period, strike price (if applicable) and pricing formula utilized in the derivative instrument. The following table summarizes the commodity derivative activity for the period indicated (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Gains (losses) recognized on cash settlement
$
44
$
(53
)
$
(333
)
$
489
Changes in fair value on open derivative contracts
(70
)
(396
)
(271
)
453
Gain (loss) on mark-to-market derivatives
$
(26
)
$
(449
)
$
(604
)
$
942
As of September 30 2018, we had commodity derivatives for 17,900 barrels at an average fixed price of $52.66 which mature throughout the remainder of 2018. The fair value of our commodity derivatives resulted in a liability of $0.4 million as of September 30, 2018. Revenue Recognition On January 1, 2018, we adopted ASU No. 2014–09, Revenue from Contracts with Customers Oil, Natural Gas, and NGL Revenues Our revenues are derived from the sale of oil, natural gas, and NGLs, which is recognized in the period that the performance obligations are satisfied. We generally consider the delivery of each unit (Bbl or MMBtu) to be separately identifiable and the delivery of each unit represents a distinct performance obligation that is satisfied at a point-in-time once control of the product has been transferred to the customer upon delivery to an agreed upon delivery point. Transfer of control typically occurs when the products are delivered to the purchaser, and title has transferred. Revenue is recognized net of royalties due to third parties in an amount that reflects the consideration we expect to receive in exchange for those products. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, and that are collected by us from a customer, are excluded from revenue. Payment is generally received one month after the sale has occurred. Our oil production is primarily sold under market-sensitive contracts that are typically priced at a differential to the New York Mercantile Exchange (“NYMEX”) price or at purchaser posted prices for the producing area. For oil contracts, we generally record sales based on the net amount received. Our natural gas production is primarily sold under market-sensitive contracts that are typically priced at a differential to the published natural gas index price for the producing area due to the natural gas quality and the proximity to major consuming markets. For natural gas contracts, we generally record wet gas sales (which consists of natural gas and NGLs based on end products after processing) at the wellhead or inlet of the plant as revenues net of transportation, gathering and processing expenses if the processor is the customer and there is no redelivery of commodities to us at the tailgate of the plant. Conversely, we generally record residual natural gas and NGL sales at the tailgate of the plant on a gross basis along with the associated transportation, gathering and processing expenses if the processor is a service provider and there is redelivery of commodities to us at the tailgate of the plant. All facts and circumstances of an arrangement are considered and judgment is often required in making this determination. Transaction Price Allocated to Remaining Performance Obligations A significant number of our product sales are short-term in nature with contract terms of one year or less, though generally subject to customary evergreen clauses pursuant to which these contracts typically automatically renew under the same terms and conditions. For those contracts, we have utilized the practical expedient allowed in the new revenue standard that exempts us from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. For product sales that have a contract term greater than one year, we have utilized the practical expedient that exempts us from disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, our product sales that have a contractual term greater than one year have no long-term fixed consideration. Contract Balances Under our sales contracts, customers are invoiced once performance obligations have been satisfied, at which point our right to payment is unconditional. Accordingly, our product sales contracts do not give rise to contract assets or liabilities. Accounts receivable attributable to our revenue contracts with customers was $0.9 million and $0.6 million at September 30, 2018 and December 31, 2017, respectively. Equity Method Investments Investment in Titan . Titan is a VIE based on its limited liability company agreement and the delegation of management and omnibus agreements between Titan and Titan Management, which provide us the power to direct activities that most significantly impact Titan’s economic performance, but we do not have a controlling financial interest. As a result, we do not consolidate Titan but rather apply the equity method of accounting as we have the ability to exercise significant influence over Titan’s operating and financial decisions. At September 30, 2018, we had a 2% Series A Preferred interest in Titan. As of September 30, 2018 and December 31, 2017, the net carrying amount of our investment in Titan was zero. During the three months ended September 30, 2018 and 2017, we recognized equity method loss of zero and $0.3 million, respectively, within other revenues, net on our condensed consolidated statements of operations. During the nine months ended September 30, 2018 and 2017, we recognized equity method income of zero and $0.2 million, respectively, within other revenues, net on our condensed consolidated statements of operations. Investment in Lightfoot. At September 30, 2018, we had an approximate 12.0% interest in Lightfoot L.P. and an approximate 15.9% interest in Lightfoot G.P., the general partner of Lightfoot L.P. We account for our investment in Lightfoot under the equity method of accounting due to our ability to exercise significant influence over Lightfoot’s operating and financial decisions. On August 29, 2017, Lightfoot G.P., Lightfoot L.P. and Lightfoot’s subsidiary, Arc Logistics Partners LP (NYSE: ARCX) (“Arc Logistics”), entered into a Purchase Agreement and Plan of Merger (the “Merger Agreement”) with Zenith Energy U.S., L.P. (together with its affiliates, “Zenith”), a portfolio company of Warburg Pincus, pursuant to which Zenith will acquire Arc Logistics GP LLC (“Arc GP”), the general partner of Arc Logistics (the “GP Transfer”), and all of the outstanding common units of Arc Logistics (the “Merger” and, together with the GP Transfer, the “Proposed Transaction”). Under the terms of the Merger Agreement, Lightfoot L.P. received $14.50 per common unit of Arc Logistics in cash for the approximately 5.2 million common units held by it. Lightfoot G.P. received $94.5 million for 100% of the membership interests in Arc GP. In December 2017, Lightfoot closed on a portion of the Proposed Transaction which resulted in a net distribution to us of $21.6 million. We used the net proceeds to pay down $21.6 million of our first lien credit agreement. The remaining part of the Proposed Transaction was subject to the closing of the purchase by Zenith of a 5.51646 % interest (and, subject to certain conditions, an additional 4.16154% interest) in Gulf LNG Holdings Group, LLC (“Gulf LNG”), which owns a liquefied natural gas regasification and storage facility in Pascagoula, Mississippi, from LCP LNG Holdings, LLC, a subsidiary of Lightfoot L.P. (“LCP”). In July 2018, an arbitration panel rejected a Gulf LNG customer contract, and therefore Zenith will not proceed with the remaining part of the Proposed Transaction. Accordingly, we will not receive any further proceeds from the Proposed Transaction. During the three months ended September 30, 2018 and 2017, we recognized equity method income of zero and $0.2 million, respectively, within other revenues, net on our condensed consolidated statements of operations. During the nine months ended September 30, 2018 and 2017, we recognized equity method income of $5.7 million and $0.7 million, respectively, within other revenues, net on our condensed consolidated statements of operations. The $5.7 million of equity method income recognized during the nine months ended September 30, 2018 included $5.6 million of equity method income resulting from Lightfoot’s accounting for the Proposed Transaction in the fourth quarter of 2017, which was recorded in our condensed consolidated statements of operations on a two quarter lag. During the nine months ended September 30, 2018, we recognized $5.7 million of other than temporary impairment on our equity method investment in Lightfoot within other revenues, net on our condensed consolidated statements of operations, due to an arbitration panel rejecting a Gulf LNG customer contract, which will significantly reduce Lightfoot’s future equity method income to us. During the three months ended September 30, 2018 and 2017, we received cash distributions from Lightfoot of zero and $0.4 million, respectively. During the nine months ended September 30, 2018 and 2017, we received cash distributions from Lightfoot of $0.1 million and $1.2 million, respectively. As of September 30, 2018 and December 31, 2017, the net carrying amount of our investment in Lightfoot was zero. Interest in Joliet Terminal In connection with the closing of the first portion of Lightfoot’s Proposed Transaction in December 2017, we acquired a 1.8% ownership interest in Zenith Energy Terminals Joliet Holdings, LLC (“Joliet Terminal”) for $3.3 million, which is included within other assets, net, on our condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017. Our investment in Joliet Terminal is classified as a nonmarketable equity security without a readily determinable fair value and is recorded at cost, less impairment, if any, in accordance with the accounting guidance measurement alternative. If an observable event occurs, we would estimate the fair value of our investment based on Level 2 inputs that could be derived from observable price changes of similar securities adjusted for insignificant differences in rights and obligations, and the changes in value would be recorded in other revenues, net on our condensed consolidated statement of operations. Interest in Osprey Sponsor Through September 17, 2018, we had owned a membership interest in Osprey Sponsor, which was previously the sponsor of Osprey. We received our membership interest in recognition of potential utilization, if any, of our office space, advisory services and personnel by Osprey. On July 26, 2017, Osprey, for which certain of our executives, namely Jonathan Cohen, Edward Cohen, and Daniel Herz, had served as CEO, Executive Chairman and President, respectively, consummated its initial public offering. Osprey was formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business transaction, one or more operating businesses or assets. The initial public offering, including the overallotment exercised by the underwriters, generated net proceeds of $275 million through the issuance of 27.5 million units, which were contributed to a trust account and were applied generally toward consummating a business combination. Our membership interest in Osprey Sponsor was an allocation of 1,250,000 founder shares, consisting of 1,250,000 shares of Class B common stock of Osprey that were automatically convertible into Class A common stock of Osprey upon the consummation of a business combination on a one-for-one basis. Additionally, another 125,000 founder shares had been allocated to our employees. Pursuant to the Osprey Sponsor limited liability company agreement, owners of the founder shares agreed to (i) vote their shares in favor of approving a business combination, (ii) waive their redemption rights in connection with the consummation of a business combination, and (iii) waive their rights to liquidating distributions from the trust account if Osprey failed to consummate a business combination. In addition, Osprey Sponsor agreed not to transfer, assign or sell any of the founder shares until the earlier of (i) one year after the date of the consummation of a business combination, or (ii) the date on which the last sales price of Osprey’s common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period commencing 150 days after a business combination, or earlier, in each case, if subsequent to a business combination, Osprey consummates a subsequent liquidation, merger, stock exchange, reorganization or other similar transaction which results in all of Osprey’s stockholders having the right to exchange their common stock for cash, securities or other property. On August 23, 2018, Osprey completed its acquisition of the assets of Royal Resources L.P. (“Royal”), an entity owned by funds managed by Blackstone Energy Partners and Blackstone Capital Partners (“Blackstone”), (the “Business Combination”). The acquired Royal assets represented the entirety of Blackstone’s mineral interests in the Eagle Ford Shale. In connection with the closing of the Business Combination, Osprey changed its name to Falcon Minerals and appointed Daniel Herz as the Chief Executive Officer and President. Blackstone retained a significant ownership stake at closing representing approximately 47% of outstanding common stock. Our membership interest in Osprey Sponsor’s 1,250,000 shares of Class B common stock of Osprey were automatically converted into Class A common stock of Osprey upon the consummation of the Business Combination on a one-for-one basis. As a result of the conversion, we recorded the Osprey common stock at fair value based on Level 1 inputs using quoted market prices and recognized a $16.3 million gain within other income on our condensed consolidated statements of operations for the three and nine months ended September 30, 2018. Interest in Falcon Minerals Common Stock On September 17, 2018, our 1,250,000 shares of Osprey Class A common stock were converted into Class A common stock of Falcon Minerals. As a result of the conversion, we recorded a $16.3 million loss on our Osprey common stock and recognized a $14 million gain our Falcon Minerals common stock at fair value based on Level 1 inputs using quoted market prices within other income on our condensed consolidated statements of operations for the three and nine months ended September 30, 2018. At September 30, 2018, our interest in Falcon Minerals common stock was $13.8 million, which is recorded at fair value based on Level 1 inputs using quoted market prices and reflected in investment in common stock on our condensed consolidated balance sheet. During the three and nine months ended September 30, 2018, we recognized a $0.3 million investment loss on adjustment to fair value of our Falcon Minerals common stock on our condensed consolidated statements of operations. Rabbi Trust In 2011, we established an excess 401(k) plan relating to certain executives. In connection with the plan, we established a “rabbi” trust for the contributed amounts. At September 30, 2018 and December 31, 2017, we reflected $0.2 million and $1.5 million, respectively, related to the value of the rabbi trust within other assets, net on our condensed consolidated balance sheets, and recorded corresponding liabilities of $0.2 million and $1.5 million, respectively, as of those same dates, within asset retirement obligations and other on our condensed consolidated balance sheets. During the nine months ended September 30, 2018 and 2017, we distributed $1.3 million and $2.1 million, respectively, to certain executives related to the rabbi trust. Accrued Liabilities We had $4.3 million and $6.6 million of accrued payroll and benefit items at September 30, 2018 and December 31, 2017, respectively, which were included within accrued liabilities on our condensed consolidated balance sheets. Net Income (Loss) Per Common Unit Basic net income (loss) attributable to common unitholders per unit is computed by dividing net income (loss) attributable to common unitholders, which is determined after the deduction of net income attributable to participating securities and the preferred unitholders’ interests, if applicable, by the weighted average number of common units outstanding during the period. Unvested unit-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities. A portion of our phantom unit awards, which consist of common units issuable under the terms of our long-term incentive plans and incentive compensation agreements, contain non-forfeitable rights to distribution equivalents. The participation rights result in a non-contingent transfer of value each time we declare a distribution or distribution equivalent right during the award’s vesting period. However, unless the contractual terms of the participating securities require the holders to share in the losses of the entity, net loss is not allocated to the participating securities. As such, the net income utilized in the calculation of net income (loss) per unit must be after the allocation of only net income to the phantom units on a pro-rata basis. The following is a reconciliation of net income (loss) allocated to the common unitholders for purposes of calculating net income (loss) attributable to common unitholders per unit (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Net income (loss)
$
8,116
$
(7,341
)
$
(6,488
)
$
(15,669
)
Preferred unitholders’ dividends
—
—
—
—
Income (loss) attributable to non-controlling interests
(167
)
1,022
1,704
1,646
Net income (loss) attributable to common unitholders
7,949
(6,319
)
(4,784
)
(14,023
)
Less: Net income attributable to participating securities – phantom units (1)
3
—
—
—
Net income (loss) utilized in the calculation of net loss attributable to common unitholders per unit – diluted
$
7,946
$
(6,319
)
$
(4,784
)
$
(14,023
)
(1)
Net income (loss) attributable to common unitholders for the net income (loss) attributable to common unitholders per unit calculation is net income (loss) attributable to common unitholders, less income allocable to participating securities. For the three months ended September 30, 2017, net loss attributable to common unitholder’s ownership interest was not allocated to 34,000 phantom units because the contractual terms of the phantom units as participating securities do not require the holders to share in the losses of the entity. For the three months ended September 30, 2018, phantom units are included in the computation of net income (loss) attributable to common unitholders because the inclusion would have been dilutive given our net income for the period. For the nine months ended September 30, 2018 and 2017, net loss attributable to common unitholder’s ownership interest was not allocated to 12,000 and 82,000 phantom units, respectively, because the contractual terms of the phantom units as participating securities do not require the holders to share in the losses of the entity. Diluted net income (loss) attributable to common unitholders per unit is calculated by dividing net income (loss) attributable to common unitholders, less income allocable to participating securities, by the sum of the weighted average number of common unitholder units outstanding and the dilutive effect of unit option awards and convertible preferred units, as calculated by the treasury stock or if converted methods, as applicable. Unit options consist of common units issuable upon payment of an exercise price by the participant under the terms of our long-term incentive plan. The following table sets forth the reconciliation of our weighted average number of common units used to compute basic net loss attributable to common unitholders per unit with those used to compute diluted net loss attributable to common unitholders per unit (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Weighted average number of common units—basic
31,974
31,973
31,974
29,288
Add effect of dilutive incentive awards (1)
805
—
—
—
Add effect of dilutive convertible preferred units and warrants (2)
—
—
—
—
Weighted average number of common units—diluted
32,779
31,973
31,974
29,288
(1)
For the three months ended September 30, 2017, approximately 2,926,000 phantom units were excluded from the computation of diluted net income (loss) attributable to common unitholders per unit, because the inclusion of such units would have been anti-dilutive. For the three months ended September 30, 2018, phantom units are included in the computation of diluted earnings attributable to common units because the inclusion would have been dilutive given our net income for the period. For the nine months ended September 30, 2018 and 2017, approximately 1,398,000 and 3,195,000 phantom units, respectively, were excluded from the computation of diluted net income (loss) attributable to common unitholders per unit, because the inclusion of such units would have been anti-dilutive.
(2)
For the three and nine months ended September 30, 2018 and 2017, our warrants issued in connection with the second lien credit agreement were excluded from the computation of diluted earnings attributable to common unitholders per unit because the inclusion of such warrants would have been anti-dilutive. For the three and nine months ended September 30, 2017, our convertible Series A Preferred Units were excluded from the computation of diluted earnings attributable to common unitholders per unit, because the inclusion of such units would have been anti-dilutive. Recently Issued Accounting Standards In February 2016, the Financial Accounting Standards Board (“FASB”) updated the accounting guidance related to leases. The updated accounting guidance requires lessees to recognize a lease asset and liability at the commencement date of all leases (with the exception of short-term leases), initially measured at the present value of the lease payments. The updated guidance is effective for us as of January 1, 2019 and requires a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest period presented. In January 2018, the FASB issued additional amendments to provide an optional transition practical expedient to not evaluate existing or expired land easements that were not previously accounted for under current leasing guidance. An entity that elects this practical expedient should evaluate new or modified land easements beginning at the date of adoption. We do not currently account for any land easements under the current leasing guidance and plan to utilize this practical expedient in conjunction with the adoption the updated accounting guidance related to leases. We are currently in the process of determining the impact that the updated accounting guidance will have on our condensed consolidated financial statements and will continue to monitor relevant industry guidance regarding the implementation of the standard. In January 2016, the FASB updated the accounting guidance related to the recognition and measurement of financial assets and financial liabilities. The updated accounting guidance, among other things, requires that all nonconsolidated equity investments, except those accounted for under the equity method, be measured at fair value and that the changes in fair value be recognized in net income. The accounting guidance requires nonmarketable equity securities to be recorded at cost and adjusted to fair value at each reporting period. However, the guidance allows for a measurement alternative, which is to record the investments at cost, less impairment, if any, and subsequently adjust for observable price changes of identical or similar investments of the same issuer. We adopted the new accounting guidance on January 1, 2018 and applied the measurement alternative to our interest in Joliet Terminal as there is not a readily determinable fair value for our investment. |
