tat-10q_20160930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended: September 30, 2016

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      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      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

 

 

 

 

 

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  

As of November 8, 2016, the registrant had 47,206,998 common shares outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

 

 

Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

2

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015

3

 

 

Consolidated Statement of Equity for the Nine Months Ended September 30, 2016

4

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

5

 

 

Notes to Consolidated Financial Statements

6

 

 

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

23

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

34

 

 

Item 4. Controls and Procedures

34

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

36

 

 

Item 1A. Risk Factors

36

 

 

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

36

 

 

Item 3. Defaults Upon Senior Securities

36

 

 

Item 4. Mine Safety Disclosures

36

 

 

Item 5. Other Information

36

 

 

Item 6. Exhibits

38

 

 

 


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,

 

 

2016

 

 

2015

 

ASSETS

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

20,605

 

 

$

7,480

 

Restricted cash

 

 

 

 

3,758

 

Accounts receivable, net

 

 

 

 

 

 

 

Oil and natural gas sales

 

18,452

 

 

 

14,169

 

Joint interest and other

 

5,625

 

 

 

5,885

 

Related party

 

468

 

 

 

414

 

Prepaid and other current assets

 

5,177

 

 

 

2,807

 

Inventory

 

4,926

 

 

 

 

Derivative asset

 

 

 

 

3,235

 

Assets held for sale

 

 

 

 

51,511

 

Total current assets

 

55,253

 

 

 

89,259

 

Property and equipment:

 

 

 

 

 

 

 

Oil and natural gas properties (successful efforts methods)

 

 

 

 

 

 

 

Proved

 

265,145

 

 

 

271,080

 

Unproved

 

29,883

 

 

 

31,135

 

Equipment and other property

 

25,575

 

 

 

36,708

 

 

 

320,603

 

 

 

338,923

 

Less accumulated depreciation, depletion and amortization

 

(162,351

)

 

 

(148,218

)

Property and equipment, net

 

158,252

 

 

 

190,705

 

Other long-term assets:

 

 

 

 

 

 

 

Other assets

 

5,133

 

 

 

3,355

 

Note receivable - related party

 

7,911

 

 

 

11,500

 

Derivative asset

 

 

 

 

3,370

 

Total other assets

 

13,044

 

 

 

18,225

 

Total assets

$

226,549

 

 

$

298,189

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

11,695

 

 

$

12,675

 

Accounts payable - related party

 

2,764

 

 

 

2,684

 

Accrued liabilities

 

16,878

 

 

 

10,583

 

Loans payable

 

53,903

 

 

 

37,006

 

Loans payable - related party

 

24,143

 

 

 

3,593

 

Liabilities held for sale - related party

 

 

 

 

3,540

 

Liabilities held for sale

 

 

 

 

65,649

 

Total current liabilities

 

109,383

 

 

 

135,730

 

Long-term liabilities:

 

 

 

 

 

 

 

Asset retirement obligations

 

9,270

 

 

 

9,237

 

Accrued liabilities

 

12,203

 

 

 

11,940

 

Deferred income taxes

 

26,810

 

 

 

27,360

 

Loans payable

 

9,375

 

 

 

34,400

 

Loans payable - related party

 

 

 

 

20,600

 

Total long-term liabilities

 

57,658

 

 

 

103,537

 

Total liabilities

 

167,041

 

 

 

239,267

 

Commitments and contingencies

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

Common shares, $0.10 par value, 100,000,000 shares authorized; 47,205,034 shares and 41,017,777

   shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively

 

4,721

 

 

 

4,102

 

Treasury stock

 

(970

)

 

 

(970

)

Additional paid-in-capital

 

573,153

 

 

 

569,365

 

Accumulated other comprehensive loss

 

(124,867

)

 

 

(121,590

)

Accumulated deficit

 

(392,529

)

 

 

(391,985

)

Total shareholders' equity

 

59,508

 

 

 

58,922

 

Total liabilities and shareholders' equity

$

226,549

 

 

$

298,189

 

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,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

$

15,483

 

 

$

17,543

 

 

$

46,171

 

 

$

67,464

 

Sales of purchased natural gas

 

1,171

 

 

 

756

 

 

 

3,717

 

 

 

1,544

 

Other

 

5

 

 

 

38

 

 

 

35

 

 

 

139

 

Total revenues

 

16,659

 

 

 

18,337

 

 

 

49,923

 

 

 

69,147

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

3,070

 

 

 

3,104

 

 

 

9,025

 

 

 

10,059

 

Exploration, abandonment and impairment

 

1,531

 

 

 

3,762

 

 

 

2,964

 

 

 

8,202

 

Cost of purchased natural gas

 

1,027

 

 

 

668

 

 

 

3,264

 

 

 

1,403

 

Seismic and other exploration

 

3

 

 

 

177

 

 

 

84

 

 

 

328

 

General and administrative

 

2,659

 

 

 

4,849

 

 

 

11,401

 

 

 

18,664

 

Depreciation, depletion and amortization

 

7,280

 

 

 

8,173

 

 

 

23,053

 

 

 

28,183

 

Accretion of asset retirement obligations

 

97

 

 

 

88

 

 

 

285

 

 

 

277

 

Total costs and expenses

 

15,667

 

 

 

20,821

 

 

 

50,076

 

 

 

67,116

 

Operating income (loss)

 

992

 

 

 

(2,484

)

 

 

(153

)

 

 

2,031

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other expense

 

(3,836

)

 

 

(3,159

)

 

 

(9,106

)

 

 

(9,610

)

Interest and other income

 

1,009

 

 

 

332

 

 

 

1,411

 

 

 

683

 

(Loss) gain on commodity derivative contracts

 

(187

)

 

 

24,892

 

 

 

(2,419

)

 

 

25,430

 

Foreign exchange loss

 

(390

)

 

 

(1,221

)

 

 

(659

)

 

 

(6,867

)

Total other (expense) income

 

(3,404

)

 

 

20,844

 

 

 

(10,773

)

 

 

9,636

 

(Loss) income from continuing operations before income taxes

 

(2,412

)

 

 

18,360

 

 

 

(10,926

)

 

 

11,667

 

Income tax expense

 

(2,224

)

 

 

(2,727

)

 

 

(5,820

)

 

 

(5,746

)

Net (loss) income from continuing operations

 

(4,636

)

 

 

15,633

 

 

 

(16,746

)

 

 

5,921

 

Income (loss) from discontinued operations before income taxes

 

6,886

 

 

 

(16,912

)

 

 

5,830

 

 

 

(20,627

)

Gain on disposal of discontinued operations

 

9,419

 

 

 

-

 

 

 

10,168

 

 

 

-

 

Income tax benefit

 

-

 

 

 

6,181

 

 

 

204

 

 

 

6,864

 

Net income (loss) from discontinued operations

 

16,305

 

 

 

(10,731

)

 

 

16,202

 

 

 

(13,763

)

Net income (loss)

$

11,669

 

 

$

4,902

 

 

$

(544

)

 

$

(7,842

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(3,986

)

 

 

(21,743

)

 

 

(3,277

)

 

 

(50,279

)

Comprehensive income (loss)

$

7,683

 

 

$

(16,841

)

 

$

(3,821

)

 

$

(58,121

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(0.10

)

 

$

0.38

 

 

$

(0.39

)

 

$

0.14

 

Discontinued operations

$

0.35

 

 

$

(0.26

)

 

$

0.38

 

 

$

(0.34

)

Weighted average common shares outstanding

 

46,854

 

 

 

40,943

 

 

 

42,879

 

 

 

40,895

 

Diluted net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(0.10

)

 

$

0.38

 

 

$

(0.39

)

 

$

0.14

 

Discontinued operations

$

0.35

 

 

$

(0.26

)

 

$

0.38

 

 

$

(0.34

)

Weighted average common and common equivalent shares

   outstanding

 

46,854

 

 

 

40,956

 

 

 

42,879

 

 

 

40,895

 

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

 

 

Treasury

 

 

 

 

 

 

Common

 

 

Treasury

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders'

 

 

Shares

 

 

Shares

 

 

Warrants

 

 

Shares

 

 

Stock

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2015

 

41,018

 

 

 

333

 

 

 

699

 

 

$

4,102

 

 

$

(970

)

 

$

569,365

 

 

$

(121,590

)

 

$

(391,985

)

 

$

58,922

 

Issuance of common shares

 

5,998

 

 

 

-

 

 

 

-

 

 

 

600

 

 

 

-

 

 

 

3,370

 

 

 

-

 

 

 

-

 

 

 

3,970

 

Issuance of restricted stock units

 

189

 

 

 

-

 

 

 

-

 

 

 

19

 

 

 

-

 

 

 

(19

)

 

 

-

 

 

 

-

 

 

 

-

 

Tax withholding on restricted stock units

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(59

)

 

 

-

 

 

 

-

 

 

 

(59

)

Share-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

496

 

 

 

-

 

 

 

-

 

 

 

496

 

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,277

)

 

 

-

 

 

 

(3,277

)

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(544

)

 

 

(544

)

Balance at September 30, 2016

 

47,205

 

 

 

333

 

 

 

699

 

 

$

4,721

 

 

$

(970

)

 

$

573,153

 

 

$

(124,867

)

 

$

(392,529

)

 

$

59,508

 

 

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,

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

Net loss

$

(544

)

 

$

(7,842

)

Adjustment for net (income) loss from discontinued operations

 

(16,202

)

 

 

13,763

 

Net (loss) income from continuing operations

 

(16,746

)

 

 

5,921

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Share-based compensation

 

496

 

 

 

1,334

 

Foreign currency loss

 

593

 

 

 

7,026

 

Loss (gain) on commodity derivative contracts

 

2,419

 

 

 

(25,430

)

Cash settlement on commodity derivative contracts

 

4,188

 

 

 

27,560

 

Amortization on loan financing costs

 

1,015

 

 

 

684

 

Bad debt expense

 

 

 

 

320

 

Deferred income tax expense

 

1,239

 

 

 

2,635

 

Exploration, abandonment and impairment

 

2,964

 

 

 

8,202

 

Depreciation, depletion and amortization

 

23,053

 

 

 

28,183

 

Accretion of asset retirement obligations

 

285

 

 

 

277

 

Gain on sale of gas gathering facility

 

(620

)

 

 

 

Derivative put costs

 

 

 

 

(1,580

)

Vendor settlements

 

 

 

 

(236

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(4,643

)

 

 

13,596

 

Prepaid expenses and other assets

 

(1,528

)

 

 

1,226

 

Accounts payable and accrued liabilities

 

6,892

 

 

 

(16,838

)

Net cash provided by operating activities from continuing operations

 

19,607

 

 

 

52,880

 

Net cash used in operating activities from discontinued operations

 

(822

)

 

 

(14,718

)

Net cash provided by operating activities

 

18,785

 

 

 

38,162

 

Investing activities:

 

 

 

 

 

 

 

Additions to oil and natural gas properties

 

(4,664

)

 

 

(18,734

)

Restricted cash

 

6,398

 

 

 

(198

)

Proceeds from asset sale

 

1,104

 

 

 

 

Additions to equipment and other properties

 

(139

)

 

 

(4,664

)

Net cash provided by (used in) investing activities from continuing operations

 

2,699

 

 

 

(23,596

)

Net cash used in investing activities from discontinued operations

 

-

 

 

 

(9,715

)

Net cash provided by (used in) investing activities

 

2,699

 

 

 

(33,311

)

Financing activities:

 

 

 

 

 

 

 

Issuance of common shares

 

1,658

 

 

 

-

 

Tax withholding on restricted share units

 

(59

)

 

 

(383

)

Treasury stock repurchases

 

-

 

 

 

(943

)

Loan proceeds

 

30,076

 

 

 

12,348

 

Loan repayment

 

(39,517

)

 

 

(24,878

)

Loan financing costs

 

-

 

 

 

(30

)

Net cash used in financing activities from continuing operations

 

(7,842

)

 

 

(13,886

)

Net cash used in financing activities from discontinued operations

 

-

 

 

 

(13,709

)

Net cash used in financing activities

 

(7,842

)

 

 

(27,595

)

Effect of exchange rate on cash flows and cash equivalents

 

(517

)

 

 

(1,812

)

Net increase (decrease) in cash and cash equivalents

 

13,125

 

 

 

(24,556

)

Cash and cash equivalents, beginning of period

 

7,480

 

 

 

35,132

 

Cash and cash equivalents, end of period

$

20,605

 

 

$

10,576

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid for interest

$

4,057

 

 

$

7,318

 

Cash paid for taxes

$

3,423

 

 

$

2,481

 

Supplemental non-cash financing activities:

 

 

 

 

 

 

 

Issuance of common shares

$

2,312

 

 

$

-

 

Contingent payment event

$

-

 

 

$

(4,188

)

Repayment of the prepayment agreement

$

-

 

 

$

2,739

 

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, 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 8, 2016, approximately 39% of our outstanding common shares were beneficially owned by N. Malone Mitchell 3rd, our chief executive officer and chairman of our board of directors.

TransAtlantic is a holding company with two operating segments – Turkey and Bulgaria.  Its assets consist of its ownership interests in subsidiaries that primarily own assets in Turkey and Bulgaria, and an operated interest in a joint venture in Albania.

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 the 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, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.  During the nine months ended September 30, 2016, we reclassified certain balance sheet amounts previously reported on our consolidated balance sheet at December 31, 2015 to conform to current year presentation.

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, 2015.

 

 

2. Going concern

These consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern. These principles assume that we will be able to realize our assets and discharge our obligations in the normal course of operations for the foreseeable future.

We had net a loss of $0.5 million for the nine months ended September 30, 2016, which included net income from discontinued operations of $16.2 million.  At September 30, 2016, the outstanding principal amount of our debt was $87.4 million and we had a working capital deficit of $54.1 million.

On August 23, 2016, the Turkish branch of TransAtlantic Exploration Mediterranean International Pty Ltd (“TEMI”), entered into a general credit agreement (the “Credit Agreement”) with DenizBank, A.S. (“DenizBank”).  On August 31, 2016, DenizBank entered into a $30.0 million term loan (the “Term Loan”) with TEMI under the Credit Agreement.  TEMI is a wholly-owned subsidiary of TransAtlantic.  

On September 7, 2016, TEMI used approximately $22.9 million of the proceeds from the Term Loan to repay in full (including accrued interest) the Company’s senior credit facility (the “Senior Credit Facility”) with BNP Paribas (Suisse) SA (“BNP”) and the International Finance Corporation (“IFC”), which was terminated upon repayment.  In connection with the repayment of the Senior Credit Facility, the Company unwound its oil hedges with BNP, receiving proceeds of $2.6 million.

6


The Term Loan bears interest at a fixed rate of 5.25% (plus 0.2625% for Banking and Insurance Transactions Tax per the Turkish government) per annum and is payable in six monthly installments of $1.25 million each through February 2017 and thereafter in twelve monthly installments of $1.88 million each through February 2018.  The Term Loan matures in February 2018. Of the $28.8 million outstanding under the Term Loan at September 30, 2016, $19.4 million is classified as short-term debt. In addition, the Company’s $55.0 million of outstanding 13.0% convertible notes due 2017 (the “2017 Notes”) are due in full on July 1, 2017.      

Consequently, we will need some form of debt restructuring, capital raising effort or asset sale in order to fund our operations and meet our substantial debt service obligations of approximately $7.3 million during the fourth quarter of 2016 and $76.3 million in 2017.  As a result, there is substantial doubt regarding our ability to continue as a going concern.  The Company continues to focus on the sale of assets to raise cash, capital raising and restructuring, and repaying or refinancing its debt obligations.  See Note 14. “Subsequent Events.”

Management believes the going concern assumption to be appropriate for these consolidated financial statements. If the going concern assumption was not appropriate, adjustments would be necessary to the carrying values of assets and liabilities, reported revenues and expenses, and in the balance sheet classifications used in these consolidated financial statements.

 

 

3. Recent accounting pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”), an amendment to Accounting Standards Codification (“ASC”) Subtopic 330-10.  The amendment states that entities should measure inventory at the lower of cost and net realizable value.  The amendment does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method.  The amendment applies to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost.  ASU 2015-11 is effective for fiscal years beginning after December 31, 2016, including interim periods within those fiscal years.  We are currently assessing the potential impact of ASU 2015-11 on our consolidated financial statements and results of operations.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”).  ASU 2016-08 does not change the core principle of Topic 606 but clarifies the implementation guidance on principal versus agent considerations.  ASU 2016-08 is effective for the annual and interim periods beginning after December 15, 2017.  We are currently assessing the potential impact of ASU 2016-08 on our consolidated financial statements and results of operations.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”).  ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.  ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted.  We are currently assessing the potential impact of ASU 2016-09 on our consolidated financial statements and results of operations.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”).  ASU 2016-10 does not change the core principle of Topic 606 but clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas.  ASU 2016-10 is effective for annual and interim periods beginning after December 15, 2017.  We are currently assessing the potential impact of ASU 2016-10 on our consolidated financial statements and results of operations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”).  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 allowance 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. We are currently assessing the potential impact of ASU 2016-13 on our consolidated financial statements and results of operations.

7


In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU 2016-15 provide guidance on specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. We are currently assessing the potential impact of ASU 2016-15 on our consolidated financial statements and results of operations.

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.

 

 

4. 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, 2016

 

 

December 31, 2015

 

 

(in thousands)

 

Oil and natural gas properties, proved:

 

 

 

 

 

 

 

Turkey

$

264,646

 

 

$

270,591

 

Bulgaria

 

499

 

 

 

489

 

Total oil and natural gas properties, proved

 

265,145

 

 

 

271,080

 

Oil and natural gas properties, unproved:

 

 

 

 

 

 

 

Turkey

 

29,883

 

 

 

31,135

 

Total oil and natural gas properties, unproved

 

29,883

 

 

 

31,135

 

Gross oil and natural gas properties

 

295,028

 

 

 

302,215

 

Accumulated depletion

 

(156,210

)

 

 

(139,002

)

Net oil and natural gas properties

$

138,818

 

 

$

163,213

 

 

At September 30, 2016 and December 31, 2015, we excluded $0.1 million and $0.7 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, 2016, the capitalized costs of our oil and natural gas properties, net of accumulated depletion, included $17.7 million relating to acquisition costs of proved properties, which are being depleted by the unit-of-production method using total proved reserves, and $91.2 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, 2015, the capitalized costs of our oil and natural gas properties included $20.0 million relating to acquisition costs of proved properties, which are being amortized by the unit-of-production method using total proved reserves, and $111.4 million relating to well costs and additional development costs, which are being amortized by the unit-of-production method using proved developed reserves

Impairments of proved properties and impairment of exploratory well costs

Proved oil and natural gas properties are reviewed for impairment when events and circumstances indicate the carrying value of such properties may not be recoverable. We primarily use Level 3 inputs to determine fair value, including but are not limited to, estimates of proved reserves, future commodity prices, the timing and amount of future production and capital expenditures and discount rates commensurate with the risk reflective of the lives remaining for the respective oil and natural gas properties.

During the three and nine months ended September 30, 2016, we recorded $1.5 million and $3.0 million, respectively, of impairment of proved properties and exploratory well costs, which are primarily measured using Level 3 inputs.  We recorded $0.7 million of exploratory well costs related to the Guney Residere well during the three and nine months ended September 30, 2016.  

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Capitalized cost greater than one year

As of September 30, 2016, we had $1.2 million and $2.1 million of exploratory well costs capitalized for the Hayrabolu-10 and Pinar-1 wells, respectively, in Turkey, which we spud in February 2013 and March 2014, respectively. The Hayrabolu-10 and Pinar-1 wells continue to be held for completion.

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, 2016

 

 

December 31, 2015

 

 

(in thousands)

 

Inventory

$

15,067

 

 

$

21,338

 

Leasehold improvements, office equipment and software

 

7,632

 

 

 

7,794

 

Gas gathering system and facilities

 

-

 

 

 

4,798

 

Other equipment

 

2,487

 

 

 

2,378

 

Vehicles

 

389

 

 

 

400

 

Gross equipment and other property

 

25,575

 

 

 

36,708

 

Accumulated depreciation

 

(6,141

)

 

 

(9,216

)

Net equipment and other property

$

19,434

 

 

$

27,492

 

 

As of September 30, 2016, we have classified $4.9 million of inventory as a current asset, which represents our expected consumption in the next twelve months.  We classify the remainder of our materials and supply inventory as a long-term asset because such materials will ultimately be classified as a long-term asset when the material is used in the drilling of a well.

At September 30, 2016 and December 31, 2015, we excluded $20.0 million and $21.3 million of inventory, respectively, from depreciation as the inventory had not been placed into service.

 

 

5. Asset retirement obligations

The following table summarizes the changes in our asset retirement obligations (“ARO”) for the nine months ended September 30, 2016 and for the year ended December 31, 2015:

 

 

September 30, 2016

 

 

December 31, 2015

 

 

(in thousands)

 

Asset retirement obligations at beginning of period

$

9,237

 

 

$

10,543

 

Change in estimates

 

-

 

 

 

385

 

Foreign exchange change effect

 

(252

)

 

 

(2,137

)

Additions

 

-

 

 

 

78

 

Accretion expense

 

285

 

 

 

368

 

Asset retirement obligations at end of period

 

9,270

 

 

 

9,237

 

Less: current portion

 

-

 

 

 

-

 

Long-term portion

$

9,270

 

 

$

9,237

 

 

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.

 

 

6. Commodity derivative instruments

Historically, we have used derivative contracts to 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 have recorded the derivative contracts at fair value and recognize changes in fair value in earnings as they occur.

9


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 were 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 “(Loss) gain 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.”  

During the three months ended September 30, 2016 and 2015, we recorded a net loss on commodity derivative contracts of $0.2 million and a net gain of $24.9 million, respectively.  During the nine months ended September 30, 2016 and 2015, we recorded a net loss on commodity derivative contracts of $2.4 million and a net gain of $25.4 million, respectively.

On September 7, 2016 and September 9, 2016, we unwound all of our existing crude oil hedges for the periods September 10, 2016 through March 31, 2019.  The unwinding of these hedging transactions resulted in proceeds of $2.6 million and was used for general corporate purposes.  See Note 14. “Subsequent Events” for more information.  

At December 31, 2015, we had outstanding hedging contracts with respect to our future crude oil production as set forth in the table below:

 

Fair Value of Derivative Instruments as of December 31, 2015

 

 

 

 

 

Puts

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Estimated Fair

 

 

 

 

 

Quantity

 

 

Price

 

 

Value of

 

Type

 

Period

 

(Bbl/day)

 

 

(per Bbl)

 

 

Asset

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Put

 

January 1, 2016—

December 31, 2016

 

 

808

 

 

$

50.00

 

 

$

3,235

 

Put

 

January 1, 2017—

December 31, 2017

 

 

610

 

 

$

50.00

 

 

 

1,798

 

Put

 

January 1, 2018—

December 31, 2018

 

 

494

 

 

$

50.00

 

 

 

1,292

 

Put

 

January 1, 2019—

March 31, 2019

 

 

443

 

 

$

50.00

 

 

 

280

 

Total estimated fair value of asset

 

 

 

 

 

 

 

 

 

 

 

$

6,605

 

 

Balance sheet presentation

The following table summarizes both: (i) the gross fair value of our commodity derivative instruments by the appropriate balance sheet classification even when the commodity derivative instruments are subject to netting arrangements and qualify for net presentation in our consolidated balance sheets at December 31, 2015, and (ii) the net recorded fair value as reflected on our consolidated balance sheets at December 31, 2015.