| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the Partnership have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with U.S. GAAP. Accordingly, the accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the Partnership’s and Predecessor’s financial statements for the years ended December 31, 2016 and 2015,which are included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of the Partnership’s management, the unaudited interim consolidated financial statements contain all adjustments of a normal recurring nature necessary to fairly present the financial position and results of operations for the interim periods in accordance with U.S. GAAP. The results of operations for the period from February 8, 2017 to March 31, 2017 are not necessarily indicative of the results to be expected for the full year.
Segment Reporting
The Partnership operates in a single operating and reportable segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The Partnership’s chief operating decision maker allocates resources and assesses performance based upon financial information at the Partnership level.
Management Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. The Partnership evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic and commodity price environment. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates. Significant estimates made in preparing these financial statements include the estimate of uncollected revenues and unpaid expenses from mineral and royalty interests in properties operated by nonaffiliated entities and the estimates of proved oil, natural gas and natural gas liquids reserves and related present value estimates of future net cash flows from those properties.
The discounted present value of the proved oil, natural gas and natural gas liquids reserves is a major component of the ceiling test calculation and requires many subjective judgments. Estimates of reserves are forecasts based on engineering and geological analyses. Different reserve engineers could reach different conclusions as to estimated quantities of oil, natural gas and natural gas liquids reserves based on the same information.
The passage of time provides more qualitative and quantitative information regarding reserve estimates, and revisions are made to prior estimates based on updated information. However, there can be no assurance that more significant revisions will not be necessary in the future. Significant downward revisions could result in an impairment representing a noncash charge to income. In addition to the impact on the calculation of the ceiling test, estimates of proved reserves are also a major component of the calculation of depletion.
Reclassification of Prior Period Presentation
Certain prior period amounts have been reclassified for consistency with the current period presentation.
Cash and Cash Equivalents
The Partnership considers all highly liquid instruments with a maturity date of three months or less at date of purchase to be cash and cash equivalents.
Accounts Receivable
Oil, natural gas and NGL receivables consists of revenue payments due to the Partnership from the mineral and royalty interests. The Predecessor’s other receivables are amounts due as reimbursement for costs incurred by the Predecessor. Under the terms of the contribution agreement entered into by and among the Partnership and the Contributing Parties prior to the IPO, the Partnership was entitled to receive royalty payments with respect to the acquired properties from and after February 1, 2017. Included in oil, natural gas and NGL receivables are payments due to us by our Contributing Parties for oil, natural gas and NGL production contained in operator checks dated after the effective date of our IPO and containing production related to months prior to the effective date of the IPO. As of March 31, 2017, amounts due to the Partnership from the Contributing Parties were $2.5 million. The Partnership estimates and records an allowance when failure to collect the receivable is considered probable based on the relevant facts and circumstances surrounding the receivable. As of March 31, 2017 and December 31, 2016, no allowance for doubtful accounts is deemed necessary based upon the lack of historical write offs and a review of current receivables.
Property and Equipment
Other property and equipment includes office furniture and equipment, leasehold improvements, and computer hardware and equipment and is stated at historical cost. Depreciation and amortization are calculated using the straight-line method over expected useful lives ranging from three to seven years. Leasehold improvements are depreciated over the shorter of the expected useful life or the term of the underlying lease. Depreciation expense for the period from January 1, 2017 to February 7, 2017 and for the period from February 8, 2017 to March 31, 2017 was $6,166 and $26,423, respectively, for a combined depreciation expense of $32,589 for the three months ended March 31, 2017. As of March 31, 2017 and December 31, 2016, property and equipment consisted of the following:
As of March 31,
As of December 31,
Computer hardware and equipment
$
9,148
$
8,927
Office furniture and equipment
27,684
42,337
Leasehold improvements
226,385
323,407
Less: accumulated depreciation
(26,423)
(113,103)
Property and equipment, net
$
236,794
$
261,568
Oil and Natural Gas Properties
The Partnership follows the full cost method of accounting for costs related to its oil and natural gas properties. Under this method, all such costs are capitalized and amortized on an aggregate basis over the estimated lives of the properties using the unit-of-production method.
The capitalized costs are subject to a ceiling test, which limits capitalized costs to the aggregate of the present value of future net revenues attributable to proved oil, natural gas and natural gas liquids reserves discounted at 10% plus the lower of cost or market value of unproved properties. The Partnership did not assign any value to unproved properties in which it holds an interest. The full cost ceiling is evaluated at the end of each period and additionally when events indicate possible impairment.
While the quantities of proved reserves require substantial judgment, the associated prices of oil, natural gas and natural gas liquids reserves that are included in the discounted present value of the reserves are objectively determined. The ceiling test calculation requires use of the unweighted arithmetic average of the first day of the month price during the 12‑month period ending on the balance sheet date and costs in effect as of the last day of the accounting period, which are generally held constant for the life of the properties. The present value is not necessarily an indication of the fair value of the reserves. Oil, natural gas and natural gas liquids prices have historically been volatile, and the prevailing prices at any given time may not reflect the Partnership’s or the industry’s forecast of future prices.
No impairment expense was recorded for the period from February 8, 2017 to March 31, 2017. The substantial majority of the Partnership’s proved oil and natural gas properties that were acquired at the time of the IPO were recorded at fair value as of the IPO. The fair value of these acquired assets was based on the value of the common units issued to the Contributing Parties, other than the Predecessor, multiplied by the IPO price plus the net proceeds of the IPO that were distributed to the Contributing Parties, other than the Predecessor. In accordance with Staff Accounting Bulletin Topic 12: D 3a., management determined the fair value of the acquired properties clearly exceeded the related full-cost ceiling limitation beyond a reasonable doubt at March 31, 2017, and requested and received an exemption from the SEC to exclude the recently acquired properties from the ceiling test calculation. In making this determination, the Partnership considered that the value was based on a transaction conducted in a public offering and that the common units issued by the Partnership as consideration for the properties were attributed the same value as those purchased in the Partnership’s IPO by third-party investors. Additionally, the fair value of these recently acquired properties was based on forward strip oil and natural gas pricing existing at the date of the IPO, and management affirmed that there has not been a material change to the fair value of these acquired assets since the IPO. The recently acquired properties have an unamortized cost at March 31, 2017 of $247.8 million. Had these recently acquired properties been subject to the full cost ceiling test, the Partnership would have recorded an impairment charge of $91.3 million for the period ending March 31, 2017. The Partnership will continue to assess the fair value of the acquired assets at each periodic reporting date to ensure inclusion in the ceiling calculation is not required through the December 31, 2017 reporting period, the period of the exemption provided by the SEC.
No impairment expense was recorded by the Predecessor for the period from January 1, 2017 to February 7, 2017. During the three months ended March 31, 2016, the Predecessor recorded a full cost ceiling impairment charge of $3.7 million for the three months ended March 31, 2016, as a result of reductions in estimated proved reserves and reduced commodity prices.
The Partnership’s properties are depleted on the unit-of-production method using estimates of proved oil, natural gas and natural gas liquids reserves. Sales or other dispositions of oil and gas properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded unless the ratio of cost to estimated proved reserves would significantly change.
Proceeds from other dispositions of oil, natural gas and natural gas liquids properties are credited to the full cost pool. No gains or losses were recorded for the periods from January 1, 2017 to February 7, 2017, from February 8, 2017 to March 31, 2017 or for the three months ended March 31, 2016.
Due to the nature of the Predecessor’s and the Partnership’s mineral and royalty interests, there are no exploratory activities pending determination, and no exploratory costs were charged to expense for the periods from January 1, 2017 to February 7, 2017, from February 8, 2017 to March 31, 2017 or for the three months ended March 31, 2016.
Asset Retirement Obligations
Prior to the formation transactions that were completed in connection with the IPO of the Partnership, the Predecessor assigned its non-operated working interests and associated asset retirement obligations to an affiliated company. The Predecessor’s asset retirement obligation (‘‘ARO’’) reflects the present value of estimated costs of dismantlement, removal, site reclamation, and similar activities associated with the Predecessor’s non-operated working interests in oil and natural gas properties.
Fair values of legal obligations to retire and remove long-lived assets were recorded when the obligation was incurred. When the liability was initially recorded, the Predecessor capitalized this cost by increasing the carrying amount of the related property and equipment. Over time, the liability was accreted for the change in its present value and the capitalized cost in oil and natural gas properties was depleted based on units of production consistent with the related asset.
Other Long-Term Liabilities
The Predecessor’s other long-term liabilities consist of a tenant improvement allowance granted at the effective date of the lease for the Partnership’s office space. This allowance was accounted for as a deferred incentive and was being amortized over the term of the lease as a reduction to rent expense. The deferred incentive was fully realized through the formation transactions that were completed in connection with the IPO of the Partnership and is not recognized in the Partnership’s financial statements.
Income Taxes
The Partnership is a master limited partnership and is taxed as a partnership under the Internal Revenue Code whereby the Partnership’s partners are taxed on their proportionate share of taxable income. The financial statements, therefore, do not include a provision for federal income taxes.
Texas imposes a franchise tax (commonly referred to as the Texas margin tax, which is considered an income tax) at a rate of 0.75% on gross revenues less certain deductions, as specifically set forth in the Texas margin tax statute. During the periods from January 1, 2017 to February 7, 2017 and from February 8, 2017 to March 31, 2017, the Predecessor and the Partnership did not pay any state income taxes. The Predecessor and the Partnership incurred state income taxes during the periods from January 1, 2017 to February 7, 2017 and from February 8 to March 31, 2017, respectively, however, such amounts were de minimis during the periods from January 1, 2017 to February 7, 2017 and from February 8, 2017 to March 31, 2017. For the three months ended March 31, 2016, the Predecessor incurred income taxes in Texas and other states amounting to $5,885.
Uncertain tax positions are recognized in the financial statements only if that position is more-likely-than-not of being sustained upon examination by taxing authorities, based on the technical merits of the position. The Partnership and the Predecessor had no uncertain tax positions at March 31, 2017 and December 31, 2016, respectively.
The Predecessor and the Partnership recognizes interest and penalties related to uncertain tax positions in income tax expense. For the period from January 1, 2017 to February 7, 2017, the period from February 8, 2017 to March 31, 2017 and for the three months ended March 31, 2016, the Predecessor and the Partnership did not recognize any interest or penalty expense related to uncertain tax positions.
The Partnership has filed all tax returns to date that are currently due. Tax years after December 31, 2013 remain subject to possible examination by taxing authorities although no such examination has been requested.
Concentration of Credit Risk
The Partnership has no involvement or operational control over the volumes and method of sale of oil, natural gas and natural gas liquids produced and sold from the properties. It is believed that the loss of any single customer would not have a material adverse effect on the results of operations.
At times, the Partnership maintains deposits in federally insured financial institutions in excess of federally insured limits. Management monitors the credit ratings and concentration of risk with these financial institutions on a continuing basis to safeguard cash deposits. The Partnership has not experienced any losses related to amounts in excess of federally insured limits.
Revenue Recognition
The Partnership recognizes revenue when it is realized or realizable and earned. Revenues are considered realized or realizable and earned when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.
As an owner of mineral and royalty interests, the Partnership is entitled to a portion of the revenues received from the production of oil, natural gas and associated natural gas liquids from the underlying acreage, net of post-production expenses and taxes. The pricing of oil, natural gas and natural gas liquids sales from the properties is primarily determined by supply and demand in the marketplace and can fluctuate considerably. The Partnership has no involvement or operational control over the volumes and method of sale of oil, natural gas and natural gas liquids produced and sold from the properties.
To the extent actual volumes and prices of oil, natural gas and natural gas liquids are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volume and prices for these properties are estimated and recorded within oil, natural gas and NGL receivables in the accompanying consolidated balance sheet. Differences between estimates of revenue and the actual amounts are adjusted and recorded in the period that the actual amounts are known.
Fair Value Measurements
The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable, as reflected in the consolidated balance sheets, approximate fair value because of the short-term maturity of these instruments. The carrying amount reported for long-term debt represents fair value as the interest rates approximate current market rates. These estimated fair values may not be representative of actual values of the financial instruments that could have been realized or that will be realized in the future.
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The three input levels of the fair value hierarchy are as follows:
·
Level 1—quoted market prices for identical assets or liabilities in active markets.
·
Level 2—quoted market prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data by correlation or other means.
·
Level 3—unobservable inputs for the asset or liability.
The Predecessor’s ARO is classified within Level 3 as the fair value is estimated using discounted cash flow projections using numerous estimates, assumptions and judgments regarding such factors as the existence of a legal obligation for an ARO, estimated amounts and timing of settlements, the credit-adjusted risk-free rate to be used and inflation rates. See Note 7 for the summary of changes in the fair value of the Predecessor’s ARO for the period from January 1, 2017 to February 7, 2017.
Recently Issued Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017‑04, "Simplifying the Test of Goodwill Impairment." ASU 2017‑04 simplifies the quantitative goodwill impairment test requirements by eliminating the requirement to calculate the implied fair value of goodwill (Step 2 of the current goodwill impairment test). Instead, a company would record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value (measured in Step 1 of the current goodwill impairment test). This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. Entities will apply the standard’s provisions prospectively. The Partnership does not believe this standard will have a material quantitative effect on the financial statements.
In June 2016, the FASB issued ASU 2016‑13, "Measurement of Credit Losses on Financial Instruments." ASU 2016‑13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowances for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Partnership does not believe this standard will have a material impact on its financial statements.
In March 2016, the FASB issued ASU 2016‑09, "Improvements to Employee Share-Based Payment Accounting." ASU 2016‑09 simplifies several aspects of the accounting for share-based payment transactions, including accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as certain classification changes in the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2016, including interim periods within that fiscal year. The Partnership does not believe this standard will have a material impact on its financial statements.
In February 2016, the FASB issued ASU 2016‑02, "Leases." ASU 2016‑02 requires the recognition of lease assets and lease liabilities by lessees for those leases currently classified as operating leases and makes certain changes to the way lease expenses are accounted for. This update is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. This update should be applied using a modified retrospective approach, and early adoption is permitted. The Partnership is evaluating the new guidance and has not determined the impact this standard may have on its financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue From Contracts with Customers’ (TOPIC 606).” an accounting standards update on a comprehensive new revenue recognition standard that will supersede Accounting Standards Codification (‘‘ASC’’) 605, Revenue Recognition. The new accounting guidance creates a framework under which an entity will allocate the transaction price to separate performance obligations and recognize revenue when each performance obligation is satisfied. Under the new standard, entities will be required to use judgment and make estimates, including identifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation, and determining when an entity satisfies its performance obligations. The standard allows for either ‘‘full retrospective’’ adoption, meaning that the standard is applied to all of the periods presented with a cumulative catch-up as of the earliest period presented, or ‘‘modified retrospective’’ adoption, meaning the standard is applied only to the most current period presented in the financial statements with a cumulative catch-up as of the current period.
The Partnership has not identified any revenue streams that would be materially impacted and does not expect the adoption of this standard to have a material effect on the Partnership’s financial statements. The Partnership is still evaluating the impact that the new accounting guidance will have on its financial statements and related disclosures and has not yet determined the method by which it will adopt the standard. |
