UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-34574

 

TRANSATLANTIC PETROLEUM LTD.

(Exact name of registrant as specified in its charter)

 

 

Bermuda

None

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

16803 Dallas Parkway

Addison, Texas

75001

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (214) 220-4323

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant is required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

As of November 3, 2014, the registrant had 37,483,306 common shares outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

 

 

Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

2

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2014 and 2013

3

 

 

Consolidated Statement of Equity for the Nine Months Ended September 30, 2014

4

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

5

 

 

Notes to Consolidated Financial Statements

6

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

31

 

 

Item 4. Controls and Procedures

31

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

33

 

 

Item 1A. Risk Factors

33

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

Item 3. Defaults Upon Senior Securities

35

 

 

Item 4. Mine Safety Disclosures

35

 

 

Item 5. Other Information

35

 

 

Item 6. Exhibits

36

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

TRANSATLANTIC PETROLEUM LTD.

Consolidated Balance Sheets

(in thousands of U.S. Dollars, except share data)

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

9,429

 

 

$

12,881

 

Accounts receivable

 

 

 

 

 

 

 

Oil and natural gas sales, net

 

30,837

 

 

 

30,619

 

Joint interest and other

 

12,168

 

 

 

15,348

 

Related party

 

396

 

 

 

1,004

 

Prepaid and other current assets

 

1,978

 

 

 

5,072

 

Deferred income taxes

 

912

 

 

 

2,239

 

Assets held for sale

 

28

 

 

 

536

 

Total current assets

 

55,748

 

 

 

67,699

 

Property and equipment

 

 

 

 

 

 

 

Oil and natural gas properties (successful efforts methods)

 

 

 

 

 

 

 

Proved

 

308,470

 

 

 

260,857

 

Unproved

 

58,003

 

 

 

54,392

 

Equipment and other property

 

40,467

 

 

 

39,916

 

 

 

406,940

 

 

 

355,165

 

Less accumulated depreciation, depletion and amortization

 

(132,391

)

 

 

(104,193

)

Property and equipment, net

 

274,549

 

 

 

250,972

 

Other long-term assets:

 

 

 

 

 

 

 

Other assets

 

8,915

 

 

 

8,880

 

Note receivable - related party

 

11,500

 

 

 

11,500

 

Goodwill

 

7,057

 

 

 

7,535

 

Total other assets

 

27,472

 

 

 

27,915

 

Total assets

$

357,769

 

 

$

346,586

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

12,357

 

 

$

16,712

 

Accounts payable - related party

 

15,913

 

 

 

23,090

 

Accrued liabilities

 

20,293

 

 

 

20,658

 

Derivative liabilities

 

1,424

 

 

 

3,737

 

Asset retirement obligations

 

377

 

 

 

610

 

Loan payable

 

33,577

 

 

 

43,284

 

Liabilities held for sale

 

7,095

 

 

 

7,559

 

Total current liabilities

 

91,036

 

 

 

115,650

 

Long-term liabilities:

 

 

 

 

 

 

 

Asset retirement obligations

 

10,202

 

 

 

10,286

 

Accrued liabilities

 

6,779

 

 

 

6,487

 

Deferred income taxes

 

20,064

 

 

 

16,134

 

Loan payable

 

58,066

 

 

 

26,482

 

Derivative liabilities

 

552

 

 

 

4,230

 

Total long-term liabilities

 

95,663

 

 

 

63,619

 

Total liabilities

 

186,699

 

 

 

179,269

 

Commitments and contingencies

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

Common stock, $0.10 par value, 100,000,000 shares authorized; 37,483,306 shares issued and outstanding as of September 30, 2014 and 37,340,206 shares issued and outstanding as

  of December 31, 2013

 

3,748

 

 

 

3,734

 

Additional paid-in-capital

 

542,966

 

 

 

542,091

 

Accumulated other comprehensive loss

 

(75,844

)

 

 

(64,985

)

Accumulated deficit

 

(299,800

)

 

 

(313,523

)

Total shareholders' equity

 

171,070

 

 

 

167,317

 

Total liabilities and shareholders' equity

$

357,769

 

 

$

346,586

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

2


TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(U.S. Dollars and shares in thousands, except per share amounts)

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

$

35,537

 

 

$

31,648

 

 

$

108,962

 

 

$

93,828

 

Sales of purchased natural gas

 

397

 

 

 

553

 

 

 

1,433

 

 

 

2,078

 

Other

 

143

 

 

 

144

 

 

 

389

 

 

 

999

 

Total revenues

 

36,077

 

 

 

32,345

 

 

 

110,784

 

 

 

96,905

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

4,521

 

 

 

4,591

 

 

 

13,318

 

 

 

13,446

 

Exploration, abandonment and impairment

 

582

 

 

 

2,243

 

 

 

8,498

 

 

 

17,992

 

Cost of purchased natural gas

 

342

 

 

 

479

 

 

 

1,267

 

 

 

1,810

 

Seismic and other exploration

 

29

 

 

 

5,052

 

 

 

4,215

 

 

 

6,385

 

Revaluation of contingent consideration

-

 

 

 

-

 

 

 

(2,500

)

 

 

(5,000

)

General and administrative

 

6,648

 

 

 

6,367

 

 

 

20,660

 

 

 

20,783

 

Depreciation, depletion and amortization

 

14,026

 

 

 

11,487

 

 

 

36,704

 

 

 

30,044

 

Accretion of asset retirement obligations

 

103

 

 

 

114

 

 

 

307

 

 

 

367

 

Total costs and expenses

 

26,251

 

 

 

30,333

 

 

 

82,469

 

 

 

85,827

 

Operating income

 

9,826

 

 

 

2,012

 

 

 

28,315

 

 

 

11,078

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other expense

 

(1,440

)

 

 

(919

)

 

 

(4,412

)

 

 

(2,764

)

Interest and other income

 

252

 

 

 

282

 

 

 

852

 

 

 

964

 

Gain (loss) on commodity derivative contracts

 

10,993

 

 

 

(3,137

)

 

 

2,433

 

 

 

365

 

Foreign exchange loss

 

(6,542

)

 

 

(2,923

)

 

 

(5,392

)

 

 

(5,953

)

Total other income (expense)

 

3,263

 

 

 

(6,697

)

 

 

(6,519

)

 

 

(7,388

)

Income (loss) from continuing operations before income taxes

 

13,089

 

 

 

(4,685

)

 

 

21,796

 

 

 

3,690

 

Current income tax (expense) benefit

 

(291

)

 

 

1,284

 

 

 

(1,198

)

 

 

(583

)

Deferred income tax expense

 

(4,485

)

 

 

(1,417

)

 

 

(6,855

)

 

 

(1,990

)

Net income (loss) from continuing operations

 

8,313

 

 

 

(4,818

)

 

 

13,743

 

 

 

1,117

 

Net loss from discontinued operations

 

-

 

 

 

(155

)

 

 

(20

)

 

 

(248

)

Net income (loss)

$

8,313

 

 

$

(4,973

)

 

$

13,723

 

 

$

869

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(12,656

)

 

 

(10,626

)

 

 

(10,859

)

 

 

(27,005

)

Comprehensive income (loss)

$

(4,343

)

 

$

(15,599

)

 

$

2,864

 

 

$

(26,136

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

0.22

 

 

$

(0.13

)

 

$

0.37

 

 

$

0.03

 

Discontinued operations

$

-

 

 

$

(0.00

)

 

$

(0.00

)

 

$

(0.01

)

Weighted average common shares outstanding

 

37,483

 

 

 

37,150

 

 

 

37,429

 

 

 

36,978

 

Diluted net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

0.22

 

 

$

(0.13

)

 

$

0.37

 

 

$

0.03

 

Discontinued operations

$

-

 

 

$

(0.00

)

 

$

(0.00

)

 

$

(0.01

)

Weighted average common and common equivalent shares outstanding

 

37,607

 

 

 

37,150

 

 

 

37,574

 

 

 

36,978

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

3


 

TRANSATLANTIC PETROLEUM LTD.

Consolidated Statement of Equity

(Unaudited)

(U.S. Dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

Common

 

 

Common

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders'

 

 

(shares)

 

 

Shares ($)

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2013

 

37,340

 

 

$

3,734

 

 

$

542,091

 

 

$

(64,985

)

 

$

(313,523

)

 

$

167,317

 

Issuance of restricted stock units

 

143

 

 

 

14

 

 

 

(14

)

 

 

-

 

 

 

-

 

 

 

-

 

Share-based compensation

 

-

 

 

 

-

 

 

 

957

 

 

 

-

 

 

 

-

 

 

 

957

 

Tax withholding on restricted stock units

 

-

 

 

 

-

 

 

 

(68

)

 

 

-

 

 

 

-

 

 

 

(68

)

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

(10,859

)

 

 

-

 

 

 

(10,859

)

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

13,723

 

 

 

13,723

 

Balance at September 30, 2014

 

37,483

 

 

$

3,748

 

 

$

542,966

 

 

$

(75,844

)

 

$

(299,800

)

 

$

171,070

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

4


 

TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands of U.S. Dollars)

 

 

For the Nine Months Ended

 

 

September 30,

 

 

2014

 

 

2013

 

Operating activities:

 

 

 

 

 

 

 

Net income

$

13,723

 

 

$

869

 

Adjustment for net loss from discontinued operations

 

20

 

 

 

248

 

Net income from continuing operations

 

13,743

 

 

 

1,117

 

Adjustments to reconcile net income to net cash provided in operating activities:

 

 

 

 

 

 

 

Share-based compensation

 

957

 

 

 

1,329

 

Foreign currency loss

 

5,224

 

 

 

5,053

 

Gain on commodity derivative contracts

 

(2,433

)

 

 

(365

)

Cash settlement on commodity derivative contracts

 

(3,559

)

 

 

(2,655

)

Amortization on loan financing costs

 

894

 

 

 

383

 

Deferred income tax expense

 

6,855

 

 

 

1,990

 

Exploration, abandonment and impairment

 

8,498

 

 

 

17,992

 

Depreciation, depletion and amortization

 

36,704

 

 

 

30,044

 

Accretion of asset retirement obligations

 

307

 

 

 

367

 

Revaluation of contingency consideration

 

(2,500

)

 

 

(5,000

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable - net

 

583

 

 

 

5,657

 

Prepaid expenses and other assets

 

2,934

 

 

 

(1,547

)

Accounts payable and accrued liabilities

 

1,974

 

 

 

15,431

 

Net cash provided by operating activities of continuing operations

 

70,181

 

 

 

69,796

 

Net cash used in operating activities of discontinued operations

 

(63

)

 

 

(1,224

)

Net cash provided by operating activities

 

70,118

 

 

 

68,572

 

Investing activities:

 

 

 

 

 

 

 

Additions to oil and natural gas properties

 

(88,508

)

 

 

(76,435

)

Additions to equipment and other properties

 

(4,653

)

 

 

(11,538

)

Restricted cash

 

-

 

 

 

(194

)

Net cash used in investing activities of continuing operations

 

(93,161

)

 

 

(88,167

)

Net cash provided by investing activities of discontinued operations

 

500

 

 

 

1,016

 

Net cash used in investing activities

 

(92,661

)

 

 

(87,151

)

Financing activities:

 

 

 

 

 

 

 

Tax withholding on restricted stock units

 

(68

)

 

 

(40

)

Loan proceeds

 

38,045

 

 

 

40,856

 

Loan repayment

 

(16,168

)

 

 

(23,642

)

Loan financing costs

 

(2,176

)

 

 

-

 

Net cash provided by financing activities from continuing operations

 

19,633

 

 

 

17,174

 

Effect of exchange rate on cash flows and cash equivalents

 

(542

)

 

 

(1,092

)

Net decrease in cash and cash equivalents

 

(3,452

)

 

 

(2,497

)

Cash and cash equivalents, beginning of period

 

12,881

 

 

 

14,768

 

Cash and cash equivalents, end of period

$

9,429

 

 

$

12,271

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid for interest

$

2,546

 

 

$

2,263

 

Cash paid for taxes

$

-

 

 

$

2,387

 

Supplemental non-cash financing activities:

 

 

 

 

 

 

 

Repayment of amended and restated credit facility from refinancing

$

49,766

 

 

$

-

 

Issuance of common shares - amendment to purchase agreement

$

-

 

 

$

2,500

 

The accompanying notes are an integral part of these consolidated financial statements.

5


 

 

Transatlantic Petroleum Ltd.

Notes to Consolidated Financial Statements

(Unaudited)

 

1. General

Nature of operations

TransAtlantic Petroleum Ltd. (together with its subsidiaries, “we,” “us,” “our,” the “Company” or “TransAtlantic”) is an international oil and natural gas company engaged in acquisition, exploration, development and production. We have focused our operations in countries that have established, yet underexplored petroleum systems, have stable governments, are net importers of petroleum, have an existing petroleum transportation infrastructure and provide favorable commodity pricing, royalty rates and tax rates to exploration and production companies. We hold interests in developed and undeveloped oil and natural gas properties in Turkey and Bulgaria. As of November 1, 2014, approximately 40% of our outstanding common shares were beneficially owned by N. Malone Mitchell 3rd, our chief executive officer and chairman of our board of directors.

Basis of presentation

Our consolidated financial statements are expressed in U.S. Dollars and have been prepared by management in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All amounts in these notes to the consolidated financial statements are in U.S. Dollars unless otherwise indicated. In preparing financial statements, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews estimates, including those related to fair value measurements associated with acquisitions and financial derivatives, the recoverability and impairment of long-lived assets and goodwill, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2013.

 

 

2. Recent accounting pronouncements

In April 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Components of an Entity (“ASU 2014-08”). ASU 2014-08 revises the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results, removing the lack of continuing involvement criteria and requiring discontinued operations reporting for the disposal of an equity method investment that meets the definition of discontinued operations. The update also requires expanded disclosures for discontinued operations, including disclosure of pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. The update is effective prospectively to all periods beginning after December 15, 2014. Currently, we do not expect the adoption of ASU 2014-08 to have a material impact on our consolidated financial statements or results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 amends the existing accounting standards for revenue recognition and is based on the principle that revenue should be recognized to depict the transfer of goods or services to a customer at an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The update is effective for periods beginning after December 15, 2016. We are currently assessing the potential impact of ASU 2014-09 on our consolidated financial statements and results of operations.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU 2014-15"), an amendment to FASB Accounting Standards Codification ("ASC") Topic 205, Presentation of Financial Statements.  This update provides guidance on management's responsibility in evaluating whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its financial statement disclosures.

6


We have reviewed other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on our consolidated results of operations, financial position and cash flows. Based on that review, we believe that none of these pronouncements will have a significant effect on current or future earnings or operations.

 

3. Property and equipment

Oil and natural gas properties

The following table sets forth the capitalized costs under the successful efforts method for our oil and natural gas properties as of:

 

 

September 30, 2014

 

 

December 31, 2013

 

 

(in thousands)

 

Oil and natural gas properties, proved:

 

 

 

 

 

 

 

Turkey

$

307,898

 

 

$

260,232

 

Bulgaria

 

572

 

 

 

625

 

Total oil and natural gas properties, proved

 

308,470

 

 

 

260,857

 

Oil and natural gas properties, unproved:

 

 

 

 

 

 

 

Turkey

 

53,890

 

 

 

51,273

 

Bulgaria

 

4,113

 

 

 

3,119

 

Total oil and natural gas properties, unproved

 

58,003

 

 

 

54,392

 

Gross oil and natural gas properties

 

366,473

 

 

 

315,249

 

Accumulated depletion

 

(124,007

)

 

 

(96,958

)

Net oil and natural gas properties

$

242,466

 

 

$

218,291

 

At September 30, 2014 and December 31, 2013, we excluded $5.2 million and $1.5 million, respectively, from the depletion calculation for proved development wells currently in progress and for costs associated with fields currently not in production.

At September 30, 2014, the capitalized costs of our oil and natural gas properties, net of accumulated depletion, included $31.0 million relating to acquisition costs of proved properties, which are being depleted by the unit-of-production method using total proved reserves, and $148.2 million relating to well costs and additional development costs, which are being depleted by the unit-of-production method using proved developed reserves.

At December 31, 2013, the capitalized costs of our oil and natural gas properties, net of accumulated depletion, included $35.5 million relating to acquisition costs of proved properties, which are being depleted by the unit-of-production method using total proved reserves, and $126.9 million relating to well costs and additional development costs, which are being depleted by the unit-of-production method using proved developed reserves.

Impairment and dry hole costs

During the three and nine months ended September 30, 2014, we recorded $0.6 million and $8.5 million, respectively, of impairment and exploratory dry-hole costs. Of the $8.5 million of costs incurred during the nine months ended September 30, 2014, $3.5 million related to impairment on one well in the first quarter of 2014 and $2.8 million related to impairment of the Kazanci-5 well in the second quarter of 2014. Of the $8.5 million of costs incurred during the nine months ended September 30, 2014, $1.9 million was cash spent during the period.

Capitalized cost greater than one year

As of September 30, 2014, we had $1.6 million of exploratory well costs capitalized for the Hayrabolu-10 well, which we spud in February 2013. The Hayrabolu-10 well continues to be evaluated for completion pending more analysis and comparable well results.

7


Equipment and other property

The historical cost of equipment and other property, presented on a gross basis with accumulated depreciation, is summarized as follows:

 

 

September 30, 2014

 

 

December 31, 2013

 

 

(in thousands)

 

Other equipment

$

4,719

 

 

$

2,678

 

Inventory

 

23,887

 

 

 

24,318

 

Gas gathering system and facilities

 

4,200

 

 

 

4,485

 

Vehicles

 

379

 

 

 

321

 

Leasehold improvements, office equipment and software

 

7,282

 

 

 

8,114

 

Gross equipment and other property

 

40,467

 

 

 

39,916

 

Accumulated depreciation

 

(8,384

)

 

 

(7,235

)

Net equipment and other property

$

32,083

 

 

$

32,681

 

 

We classify our materials and supply inventory, including steel tubing and casing, as long-term assets because such materials will ultimately be classified as long-term assets when the material is used in the drilling of a well.

At September 30, 2014, we excluded $23.9 million of inventory and $1.9 million of software from depreciation as the inventory and software had not been placed into service. At December 31, 2013, we excluded $24.3 million of inventory and $0.7 million of software from depreciation as the inventory and software had not been placed into service.

 

4. Asset retirement obligations

The following table summarizes the changes in our asset retirement obligations (“ARO”) for the nine months ended September 30, 2014 and for the year ended December 31, 2013:

 

 

September 30, 2014

 

 

December 31, 2013

 

 

(in thousands)

 

Asset retirement obligations at beginning of period

$

10,896

 

 

$

11,958

 

Change in estimates

 

-

 

 

 

(7

)

Liabilities settled

 

(338

)

 

 

(296

)

Foreign exchange change effect

 

(707

)

 

 

(2,258

)

Additions

 

421

 

 

 

991

 

Accretion expense

 

307

 

 

 

508

 

Asset retirement obligations at end of period

 

10,579

 

 

 

10,896

 

Less: current portion

 

377

 

 

 

610

 

Long-term portion

$

10,202

 

 

$

10,286

 

 

Our ARO is measured using primarily Level 3 inputs. The significant unobservable inputs to this fair value measurement include estimates of plugging costs, remediation costs, inflation rate and well life. The inputs are calculated based on historical data as well as current estimated costs.

 

5. Commodity derivative instruments

We use collar derivative contracts to economically hedge against the variability in cash flows associated with the forecasted sale of a portion of our future oil production. We have not designated the derivative contracts as hedges for accounting purposes, and accordingly, we record the derivative contracts at fair value and recognize changes in fair value in earnings as they occur.

To the extent that a legal right of offset exists, we net the value of our derivative contracts with the same counterparty in our consolidated balance sheets. All of our oil derivative contracts are settled based upon Brent crude oil pricing. We recognize gains and losses related to these contracts on a fair value basis in our consolidated statements of comprehensive income (loss) under the caption “Gain (loss) on commodity derivative contracts.” Settlements of derivative contracts are included in operating activities on our consolidated statements of cash flows under the caption “Cash settlement on commodity derivative contracts.” We are required under

8


our senior secured credit facility (the “Senior Credit Facility”) with BNP Paribas (Suisse) SA (“BNP Paribas”) and the International Finance Corporation (“IFC”) to hedge at least 30% of our anticipated oil production volumes in Turkey.

In May 2014, we novated our existing commodity derivative contracts with Standard Bank Plc (“Standard Bank”) and BNP Paribas and entered into new commodity derivative contracts with BNP Paribas. During the nine months ended September 30, 2014, we recognized a $0.7 million realized loss on the unwinding of these commodity derivative contracts, which is included in our consolidated statements of comprehensive income (loss) under the caption “Gain (loss) on commodity derivative contracts”.

During the three months ended September 30, 2014 and 2013, we recorded a net gain on commodity derivative contracts of $11.0 million and a net loss of $3.1 million, respectively. During the nine months ended September 30, 2014 and 2013, we recorded a net gain on commodity derivative contracts of $2.4 million and $0.4 million, respectively.

At September 30, 2014 and December 31, 2013, we had outstanding contracts with respect to our future crude oil production as set forth in the tables below:

Fair Value of Derivative Instruments as of September 30, 2014

 

 

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

 

 

 

Quantity

 

 

Minimum

 

 

Maximum Price

 

 

Estimated Fair

 

Type

 

Period

 

(Bbl/day)

 

 

Price (per Bbl)

 

 

(per Bbl)

 

 

Value of Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Collar

 

October 1, 2014—December 31, 2014

 

 

1,747

 

 

$

85.00

 

 

$

97.25

 

 

$

(124

)

Collar

 

January 1, 2015—December 31, 2015

 

 

1,410

 

 

$

85.00

 

 

$

97.25

 

 

 

(1,760

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(1,884

)

 

 

 

 

 

 

Collars

 

 

Additional Call

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

 

Maximum

 

 

Maximum

 

 

Estimated Fair

 

 

 

 

 

Quantity

 

 

Price

 

 

Price

 

 

Price

 

 

Value of

 

Type

 

Period

 

(Bbl/day)

 

 

(per Bbl)

 

 

(per Bbl)

 

 

(per Bbl)

 

 

(Liability) Asset

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Three-way collar

   contract

 

January 1, 2016—December 31, 2016

 

 

1,066

 

 

$

85.00

 

 

$

97.25

 

 

$

114.25

 

 

$

(573

)

Three-way collar

   contract

 

January 1, 2017—December 31, 2017

 

 

888

 

 

$

85.00

 

 

$

97.25

 

 

$

114.25

 

 

 

(6

)

Three-way collar

   contract

 

January 1, 2018—December 31, 2018

 

 

726

 

 

$

85.00

 

 

$

97.25

 

 

$

114.25

 

 

 

365

 

Three-way collar

   contract

 

January 1, 2019—March 31, 2019

 

663

 

 

$

85.00

 

 

$

97.25

 

 

$

114.25

 

 

 

122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(92

)

9


Fair Value of Derivative Instruments as of December 31, 2013

 

 

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

 

 

 

Quantity

 

 

Minimum

 

 

Maximum Price

 

 

Estimated Fair

 

Type

 

Period

 

(Bbl/day)

 

 

Price (per Bbl)

 

 

(per Bbl)

 

 

Value of Liability