tat-10q_20180331.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: March 31, 2018

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  

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 May 7, 2018, the registrant had 50,384,698 common shares outstanding.

 

 

 


TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

 

 

Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

3

 

 

Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2018 and 2017

4

 

 

Consolidated Statement of Equity for the Three Months Ended March 31, 2018

5

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

6

 

 

Notes to Consolidated Financial Statements

7

 

 

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

23

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28

 

 

Item 4. Controls and Procedures

28

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

30

 

 

Item 1A. Risk Factors

30

 

 

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

30

 

 

Item 3. Defaults Upon Senior Securities

30

 

 

Item 4. Mine Safety Disclosures

30

 

 

Item 5. Other Information

30

 

 

Item 6. Exhibits

31

 

 

 


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

TRANSATLANTIC PETROLEUM LTD.

Consolidated Balance Sheets

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

 

 

March 31, 2018

 

 

December 31, 2017

 

ASSETS

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

16,251

 

 

$

18,926

 

Accounts receivable, net

 

 

 

 

 

 

 

Oil and natural gas sales

 

15,554

 

 

 

15,808

 

Joint interest and other

 

1,569

 

 

 

1,576

 

Related party

 

1,269

 

 

 

1,023

 

Prepaid and other current assets

 

4,957

 

 

 

3,866

 

Inventory

 

7,158

 

 

 

7,494

 

Total current assets

 

46,758

 

 

 

48,693

 

Property and equipment:

 

 

 

 

 

 

 

Oil and natural gas properties (successful efforts method)

 

 

 

 

 

 

 

Proved

 

194,577

 

 

 

193,647

 

Unproved

 

19,359

 

 

 

24,445

 

Equipment and other property

 

14,223

 

 

 

14,075

 

 

 

228,159

 

 

 

232,167

 

Less accumulated depreciation, depletion and amortization

 

(127,894

)

 

 

(129,183

)

Property and equipment, net

 

100,265

 

 

 

102,984

 

Other long-term assets:

 

 

 

 

 

 

 

Other assets

 

571

 

 

 

2,247

 

Note receivable - related party

 

6,507

 

 

 

6,726

 

Total other assets

 

7,078

 

 

 

8,973

 

Total assets

$

154,101

 

 

$

160,650

 

LIABILITIES, SERIES A PREFERRED SHARES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

5,082

 

 

$

4,853

 

Accounts payable - related party

 

4,554

 

 

 

3,141

 

Accrued liabilities (1)

 

11,131

 

 

 

10,014

 

Derivative liability

 

1,633

 

 

 

2,215

 

Asset retirement obligations - current

 

2

 

 

 

-

 

Loans payable

 

15,100

 

 

 

15,625

 

Total current liabilities

 

37,502

 

 

 

35,848

 

Long-term liabilities:

 

 

 

 

 

 

 

Asset retirement obligations less current portion

 

4,680

 

 

 

4,727

 

Accrued liabilities

 

8,721

 

 

 

8,810

 

Deferred income taxes

 

19,161

 

 

 

19,611

 

Loans payable

 

9,400

 

 

 

13,000

 

Total long-term liabilities

 

41,962

 

 

 

46,148

 

Total liabilities

 

79,464

 

 

 

81,996

 

Commitments and contingencies

 

 

 

 

 

 

 

Series A preferred shares, $0.01 par value, 426,000 shares authorized; 426,000 shares issued and outstanding with a liquidation preference of $50 per share as of March 31, 2018 and December 31, 2017, respectively

 

21,300

 

 

 

21,300

 

Series A preferred shares-related party, $0.01 par value, 495,000 shares authorized; 495,000 shares issued and outstanding with a liquidation preference of $50 per share as of March 31, 2018 and December 31, 2017, respectively

 

24,750

 

 

 

24,750

 

Shareholders' equity:

 

 

 

 

 

 

 

Common shares, $0.10 par value, 100,000,000 shares authorized; 50,383,870 shares and 50,319,156 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively

 

5,038

 

 

 

5,032

 

Treasury stock

 

(970

)

 

 

(970

)

Additional paid-in-capital

 

575,506

 

 

 

575,411

 

Accumulated other comprehensive loss

 

(127,109

)

 

 

(124,766

)

Accumulated deficit

 

(423,878

)

 

 

(422,103

)

Total shareholders' equity

 

28,587

 

 

 

32,604

 

Total liabilities, Series A preferred shares and shareholders' equity

$

154,101

 

 

$

160,650

 

 

(1)

Includes income tax payable of $6.7 million and $6.2 million at March 31, 2018 and December 31, 2017, respectively.

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

 

3


 

 

TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)

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

 

 

For the Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

Oil and natural gas sales

$

16,661

 

 

$

15,768

 

Sales of purchased natural gas

 

-

 

 

 

654

 

Other

 

265

 

 

 

14

 

Total revenues

 

16,926

 

 

 

16,436

 

Costs and expenses:

 

 

 

 

 

 

 

Production

 

2,869

 

 

 

3,087

 

Transportation and processing

 

1,193

 

 

 

-

 

Exploration, abandonment and impairment

 

40

 

 

 

106

 

Cost of purchased natural gas

 

-

 

 

 

568

 

Seismic and other exploration

 

159

 

 

 

15

 

General and administrative

 

3,337

 

 

 

3,590

 

Depreciation, depletion and amortization

 

4,459

 

 

 

4,497

 

Accretion of asset retirement obligations

 

46

 

 

 

48

 

Total costs and expenses

 

12,103

 

 

 

11,911

 

Operating income (loss)

 

4,823

 

 

 

4,525

 

Other income (expense):

 

 

 

 

 

 

 

Loss on sale of TBNG

 

-

 

 

 

(15,226

)

Interest and other expense

 

(2,782

)

 

 

(2,371

)

Interest and other income

 

254

 

 

 

293

 

(Loss) gain on commodity derivative contracts

 

(725

)

 

 

988

 

Foreign exchange (loss)

 

(2,058

)

 

 

(2,123

)

Total other expense

 

(5,311

)

 

 

(18,439

)

Loss from continuing operations before income taxes

 

(488

)

 

 

(13,914

)

Income tax expense

 

(1,287

)

 

 

(2,135

)

Net loss

 

(1,775

)

 

 

(16,049

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(2,343

)

 

 

20,919

 

Comprehensive income (loss)

$

(4,118

)

 

$

4,870

 

 

 

 

 

 

 

 

 

Net loss per common share

 

 

 

 

 

 

 

Basic net loss per common share

 

 

 

 

 

 

 

Continuing operations

$

(0.04

)

 

$

(0.34

)

Weighted average common shares outstanding

 

50,374

 

 

 

47,298

 

Diluted net loss per common share

 

 

 

 

 

 

 

Continuing operations

$

(0.04

)

 

$

(0.34

)

Weighted average common and common equivalent shares outstanding

 

50,374

 

 

 

47,298

 

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

 

 

 

4


 

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, 2017

 

50,319

 

 

 

333

 

 

 

700

 

 

$

5,032

 

 

$

(970

)

 

$

575,411

 

 

$

(124,766

)

 

$

(422,103

)

 

$

32,604

 

Expiration of warrants

 

-

 

 

 

-

 

 

 

(700

)

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Issuance of restricted stock units

 

64

 

 

 

-

 

 

 

-

 

 

 

6

 

 

 

-

 

 

 

(6

)

 

 

-

 

 

 

-

 

 

 

-

 

Share-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

101

 

 

 

-

 

 

 

-

 

 

 

101

 

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,343

)

 

 

-

 

 

 

(2,343

)

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,775

)

 

 

(1,775

)

Balance at March 31, 2018

 

50,383

 

 

 

333

 

 

 

0

 

 

$

5,038

 

 

$

(970

)

 

$

575,506

 

 

$

(127,109

)

 

$

(423,878

)

 

$

28,587

 

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

 

 

 

5


 

TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands of U.S. Dollars)

 

 

For the Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

Net loss

$

(1,775

)

 

$

(16,049

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Share-based compensation

 

101

 

 

 

136

 

Foreign currency loss (gain)

 

2,634

 

 

 

1,039

 

Loss (gain) on commodity derivative contracts

 

725

 

 

 

(988

)

Cash settlement on commodity derivative contracts

 

(1,339

)

 

 

-

 

Loss on sale of TBNG

 

-

 

 

 

15,226

 

Amortization on loan financing costs

 

10

 

 

 

37

 

Deferred income tax expense

 

767

 

 

 

1,251

 

Exploration, abandonment and impairment

 

40

 

 

 

106

 

Depreciation, depletion and amortization

 

4,459

 

 

 

4,497

 

Accretion of asset retirement obligations

 

46

 

 

 

48

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(548

)

 

 

(1,665

)

Prepaid expenses and other assets

 

(1,091

)

 

 

(1,151

)

Accounts payable and accrued liabilities

 

3,781

 

 

 

(628

)

Net cash provided by operating activities

 

7,810

 

 

 

1,859

 

Investing activities:

 

 

 

 

 

 

 

Additions to oil and natural gas properties

 

(6,337

)

 

 

(6,383

)

Additions to equipment and other properties

 

(677

)

 

 

(155

)

Proceeds from the sale of TBNG

 

-

 

 

 

17,779

 

Net cash provided by (used in) investing activities

 

(7,014

)

 

 

11,241

 

Financing activities:

 

 

 

 

 

 

 

Tax withholding on restricted share units

 

-

 

 

 

(35

)

Loan repayment

 

(4,125

)

 

 

(8,650

)

Loan repayment - related party

 

-

 

 

 

(2,694

)

Net cash used in financing activities

 

(4,125

)

 

 

(11,379

)

Effect of exchange rate on cash flows, cash equivalents, and restricted cash

 

(716

)

 

 

(369

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

(4,045

)

 

 

1,352

 

Cash, cash equivalents and restricted cash, beginning of period (1)

 

20,431

 

 

 

15,071

 

Cash, cash equivalents and restricted cash, end of period (2)

$

16,386

 

 

$

16,423

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid for interest

$

3,104

 

 

$

2,713

 

Cash paid for taxes

$

657

 

 

$

989

 

 

 

 

 

 

 

 

 

 

(1)

The beginning of period balance at December 31, 2016 includes cash and cash equivalents of $10 million, restricted cash of $3.5 million in other assets and TBNG cash held for sale of $1.6 million.  The beginning of period balance at December 31, 2017 includes cash and cash equivalents of $18.9 million and restricted cash of $1.5 million in other assets

 

 

(1)

The end of period balance at March 31, 2017 includes cash and cash equivalents of $15.3 million and restricted cash of $1.1 million in other assets. The end of period balance at March 31, 2018 includes cash and cash equivalents of $16.3 million and restricted cash of $0.1 million in other assets.

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

 

 


6


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 May 7, 2018, approximately 47% 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.

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.

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, 2017.

 

On February 24, 2017, we closed the sale of our ownership interests in our subsidiary Thrace Basin Natural Gas (Turkiye) Corporation (“TBNG”) for gross proceeds of $20.7 million, and approximate net cash proceeds of $16.1 million, which amounts reflect a $0.2 million post-closing purchase price adjustment.  

 

We classified the assets and liabilities of TBNG within the captions “Assets held for sale” and “Liabilities held for sale” on our consolidated balance sheets as of December 31, 2016. Although the sale of TBNG met the threshold to classify its assets and liabilities as held for sale, it didn’t meet the requirements to classify its operations as discontinued as the sale wasn’t considered a strategic shift in our operations. As such, TBNG’s results of operations are classified as continuing operations for all periods presented (See Note 13, “Assets and liabilities held for sale and discontinued operations”).

 

Revenue Recognition

 

As explained below, on January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), under the modified retrospective method.  Under this method, the Company recognizes the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings; however, no adjustment was required as a result of adopting the new revenue standard.  Results for reporting periods beginning after January 1, 2018 are presented under the new standard. The comparative information has not been restated and continues to be reported under the historic accounting standards in effect for those periods.  The Company does not expect any impact to its net income from the adoption of ASU 2014-09 on an ongoing basis.

 

The Company’s revenue consists of sales under two contracts, one for crude oil and one for natural gas.  The crude oil is delivered to the inlet of a processing center and control is passed through a custodian to the customer at that point.  The Company is paid for crude oil at the inlet plus or minus an adjustment for quality.  The Company’s natural gas is metered at the inlet of a transportation pipeline and control is passed at that point.  The Company records natural gas sales at the delivery point to the customer, net of any pricing differentials. There is no material inventory remaining at the end of each reporting period.

 

7


The Company has previously deducted any transportation costs, processing fees, or adjustments from revenue and recorded the net amount.  Under the new revenue guidance, on January 1, 2018, the Company now records the gross amount of the revenue and records any fees, or deductions as expenses.  The Company’s revenue excludes any amounts collected on behalf of third parties.

 

2. Recent accounting pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, its final standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers and requires significantly expanded disclosures about revenue recognition. ASU 2014-09 has been amended several times with subsequent ASUs including ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.

We have adopted the standard on January 1, 2018 using the modified retrospective approach. We have a small number of contracts with customers and have identified transactions within the scope of the standard. As a result of adoption of ASU 2014-09, we have determined that it will change our method of recording certain transportation and processing charges that were previously recorded as a reduction of revenues to record such charges as an expense under the new standard. The result of this change was an increase to both revenue and expenses of $1.2 million for the three months ended March 31, 2018. The application of the new standard has no impact on our retained earnings and no impact to our net income on an ongoing basis. As of the three months ended December 31, 2017, this change would have been an increase to both revenue and expenses of $1.1 million.

Contracts for the sale of natural gas and crude oil are evidenced by (1) base contracts for the sale and purchase of natural gas or crude oil, which document the general terms and conditions for the sale, and (2) transaction confirmations, which document the terms of each specific sale.

Revenue is measured based on consideration specified in the contract with the customer. The Company recognizes revenue in the amount that reflects the consideration it expects to be entitled to in exchange for transferring control of those goods to the customer. Revenues are recognized for the sale of the Company’s net share of production volumes. Sales on behalf of other working interest owners and royalty interest owners are not recognized as revenues. The contract consideration in the Company’s contracts are typically allocated to specific performance obligations in the contract according to the price stated in the contract which usually sets the base oil and gas prices based on benchmark prices based on volumes and adjustments for product quality. Payment is generally received one or two months after the sale has occurred.

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

 

 

2018

 

 

2017

 

 

 

 

 

(in thousands)

 

 

 

 

Disaggregation of revenue

 

 

 

 

 

 

 

 

 

 

Product type

 

 

 

 

 

 

 

 

 

 

Oil

$

16,324

 

 

$

15,827

 

 

 

 

Gas

 

337

 

 

 

298

 

 

 

 

Total revenue from customers

$

16,661

 

 

$

16,125

 

 

 

 

 

*As noted above, prior period amounts have not been adjusted under the modified retrospective method.

8


All of the Company’s revenues from contracts with customers represent products transferred at a point in time as control is transferred to the customer and are generated in Turkey.

Transaction Price Allocated to Remaining Performance Obligations. A significant number of the Company’s product sales are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

Contract Balances. Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $15.6 million and $15.8 million as of March 31, 2018 and December 31, 2017, respectively, and are reported in accounts receivable, net on the Consolidated Balance Sheet. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront or rights to deficiency payments.

Practical Expedients. The Company has made use of certain practical expedients in adopting the new revenue standard, including the value of unsatisfied performance obligations are not disclosed for (i) contracts with an original expected length of one year or less, (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice, (iii) variable consideration which is allocated entirely to a wholly unsatisfied performance obligation and meets the variable allocation criteria in the standard and (iv) only contracts that are not completed at transition. The Company has not adjusted the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires companies to recognize the assets and liabilities for the rights and obligations created by long-term leases of assets on the balance sheet. The guidance requires adoption by application of a modified retrospective transition approach for existing long-term leases and is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Oil and natural gas leases are excluded from the provisions of ASU 2016-02. As of March 31, 2018, we currently have 19 operating leases within the scope of this standard, the last lease expiring in 2022. The effect of ASU 2016-02 is expected to require additional disclosures, and we are currently evaluating the impact that ASU 2016-02 would have 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.

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 have adopted ASU 2016-15, effective January 1, 2018.  The adoption of ASU 2016-15 had no impact on our retained earnings or net income.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”).  ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows.

We adopted ASU 2016-18 effective January 1, 2018. The adoption of ASU 2016-18 had no impact on our retained earnings, and no impact to our net income on an ongoing basis. Adoption of the new standard requires that a statement of cash flows explain the change

9


during the period in the total of cash, cash equivalents and amounts generally described as restricted cash, or restricted cash equivalents.  The amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The amendments have been applied using a retrospective transition method to each period presented, as required.  The period ended March 31, 2017 has been reclassified to reflect this change.

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which clarifies Topic 718, Compensation – Stock Compensation, such that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the modification and the ASU indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification. The ASU is effective for fiscal years beginning after December 15, 2017. We expect the adoption of this ASU will only impact consolidated financial statements if there is a modification to our share-based award agreements in the future.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements in Accounting Standards Codification (“ASC”) Topic 815. The new standard provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in income. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and for interim periods therein. Early adoption as of the date of issuance is permitted. The new standard does not impact accounting for derivatives that are not designated as accounting hedges. We do not currently account for any of our derivative position as accounting hedges.

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. Series A Preferred Shares

 

Series A Preferred Shares

 

As of March 31, 2018 and 2017, we had 921,000 outstanding shares of our 12.0% Series A Convertible Redeemable Preferred Shares (“Series A Preferred Shares”). The Series A Preferred Shares contain a substantive conversion option, are mandatorily redeemable and convert into a fixed number of common shares. As a result, under U.S GAAP, we have classified the Series A Preferred Shares within mezzanine equity in our consolidated balance sheets. As of March 31, 2018, there were $21.3 million of Series A Preferred Shares and $24.8 million of Series A Preferred Shares – related party outstanding (see Note 12 “Related party transactions”).

 

Pursuant to the Certificate of Designations for the Series A Preferred Shares (the “Certificate of Designations”), each Series A Preferred Share may be converted at any time, at the option of the holder, into 45.754 common shares (which is equal to an initial conversion price of approximately $1.0928 per common share and is subject to customary adjustments for stock splits, stock dividends, recapitalizations or other fundamental changes).  

 

If not converted sooner, on November 4, 2024, we are required to redeem the outstanding Series A Preferred Shares in cash at a price per share equal to the liquidation preference plus accrued and unpaid dividends. At any time on or after November 4, 2020, we may redeem all or a portion of the Series A Preferred Shares at the redemption prices listed below (expressed as a percentage of the liquidation preference amount per share) plus accrued and unpaid dividends to the date of redemption, if the closing sale price of the common shares equals or exceeds 150% of the conversion price then in effect for at least 10 trading days (whether or not consecutive) in a period of 20 consecutive trading days, including the last trading day of such 20 trading day period, ending on, and including, the trading day immediately preceding the business day on which we issue a notice of optional redemption. The redemption prices for the 12-month period starting on the dates below are:

 

Period Commencing

Redemption Price

November 4, 2020

105.000%

November 4, 2021

103.000%

November 4, 2022

101.000%

November 4, 2023 and thereafter

100.000%

10


 

Additionally, upon the occurrence of a change of control, we are required to offer to redeem the Series A Preferred Shares within 120 days after the first date on which such change of control occurred, for cash at a redemption price equal to the liquidation preference per share, plus any accrued and unpaid dividends.  

 

Dividends on the Series A Preferred Shares are payable quarterly at our election in cash, common shares or a combination of cash and common shares at an annual dividend rate of 12.0% of the liquidation preference if paid all in cash or 16.0% of the liquidation preference if paid in common shares. If paid partially in cash and partially in common shares, the dividend rate on the cash portion is 12.0%, and the dividend rate on the common share portion is 16.0%. Dividends are payable quarterly on March 31, June 30, September 30, and December 31 of each year. The holders of the Series A Preferred Shares also are entitled to participate pro-rata in any dividends paid on the common shares on an as-converted-to-common shares basis. For the three months ended March 31, 2018, we paid $1.3 million in cash dividends on the Series A Preferred Shares, which is recorded in our consolidated statements of comprehensive (loss) income under the caption “Interest and other expense”.  

 

Except as required by Bermuda law, the holders of Series A Preferred Shares have no voting rights, except that for so long as at least 400,000 Series A Preferred Shares are outstanding, the holders of the Series A Preferred Shares voting as a separate class have the right to elect two directors to our Board of Directors. For so long as between 80,000 and 399,999 Series A Preferred Shares are outstanding, the holders of the Series A Preferred Shares voting as a separate class have the right to elect one director to our Board of Directors. Upon less than 80,000 Series A Preferred Shares remaining outstanding, any directors elected by the holders of Series A Preferred Shares shall immediately resign from our Board of Directors.

 

The Certificate of Designation also provides that without the approval of the holders of a majority of the outstanding Series A Preferred Shares, we will not issue indebtedness for money borrowed or other securities which are senior to the Series A Preferred Shares in excess of the greater of (i) $100 million or (ii) 35% of our PV-10 of proved reserves as disclosed in our most recent independent reserve report filed or furnished by us on EDGAR.  

 

 

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:

 

 

March 31, 2018

 

 

December 31, 2017

 

 

(in thousands)

 

Oil and natural gas properties, proved:

 

 

 

 

 

 

 

Turkey

$

194,026

 

 

$

193,111

 

Bulgaria

 

551

 

 

 

536

 

Total oil and natural gas properties, proved

 

194,577

 

 

 

193,647

 

Oil and natural gas properties, unproved:

 

 

 

 

 

 

 

Turkey

 

19,359

 

 

 

24,445

 

Total oil and natural gas properties, unproved

 

19,359

 

 

 

24,445

 

Gross oil and natural gas properties

 

213,936

 

 

 

218,092

 

Accumulated depletion

 

(121,995

)

 

 

(123,225

)

Net oil and natural gas properties

$

91,941

 

 

$

94,867

 

For the three months ended March 31, 2018, we recorded foreign currency translation adjustments, which decreased proved properties and increased accumulated other comprehensive loss within shareholders’ equity on our consolidated balance sheets.

At March 31, 2018 and December 31, 2017, we excluded $3.0 million and $0.5 million, respectively, from the depletion calculation for proved development wells currently in progress and for costs associated with fields currently not in production.

At March 31, 2018, the capitalized costs of our oil and natural gas properties, net of accumulated depletion, included $10.1 million relating to acquisition costs of proved properties, which are being depleted by the unit-of-production method using total proved reserves, and $58.8 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, 2017, the capitalized costs of our oil and natural gas properties included $11.2 million relating to acquisition costs of proved properties, which are being amortized by the unit-of-production method using total proved reserves, and $58.7 million relating

11


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 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 months ended March 31, 2018 and 2017, we recorded $0.04 million and $0.1 million, respectively, of impairment of proved properties and exploratory well costs which are primarily measured using Level 3 inputs.  

Capitalized cost greater than one year

As of March 31, 2018, we had $2.3 million of exploratory well costs capitalized for the Pinar-1ST well in Turkey, which we spud in March 2014. The Pinar-1ST well started producing in the first quarter of 2018.

Equipment and other property

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

 

 

March 31, 2018

 

 

December 31, 2017

 

 

(in thousands)

 

Inventory

$

4,924

 

 

$

4,619

 

Leasehold improvements, office equipment and software

 

7,062

 

 

 

7,214

 

Gas gathering system and facilities

 

259

 

 

 

135

 

Vehicles

 

331

 

 

 

343

 

Other equipment

 

1,647

 

 

 

1,764

 

Gross equipment and other property

 

14,223

 

 

 

14,075

 

Accumulated depreciation

 

(5,899

)

 

 

(5,958

)

Net equipment and other property

$

8,324

 

 

$

8,118

 

 

At March 31, 2018, we have classified $7.2 million of inventory as a current asset, which represents our expected inventory consumption in the next twelve months. We classify 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 March 31, 2018 and December 31, 2017, we excluded $12.1 million and $12.1 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 three months ended March 31, 2018 and for the year ended December 31, 2017:

 

 

March 31, 2018

 

 

December 31, 2017

 

 

(in thousands)

 

Asset retirement obligations at beginning of period

$

4,727

 

 

$

4,833

 

Liabilities settled

 

-

 

 

 

(37

)

Foreign exchange change effect

 

(182

)

 

 

(259

)

Additions

 

91

 

 

 

-

 

Accretion expense

 

46

 

 

 

190

 

Asset retirement obligations at end of period

$

4,682

 

 

$

4,727

 

 

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.

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6. Commodity derivative instruments

We use collar and put 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 (loss) income 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 March 31, 2018 and 2017, we recorded a net loss on commodity derivative contracts of $0.7 million and a net gain of $1.0 million, respectively.

At March 31, 2018 and December 31, 2017, we had outstanding derivative contracts with respect to our future crude oil production as set forth in the tables below:

Fair Value of Derivative Instruments as of March 31, 2018

 

 

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

Quantity

 

 

Minimum

 

 

Maximum Price

 

 

Additional Call

 

Estimated Fair

 

Type

 

Period

 

(Bbl/day)

 

 

Price (per Bbl)

 

 

(per Bbl)

 

 

Ceiling

 

Value of Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Collar

 

April 1, 2018 -

May 31, 2018

 

 

295

 

 

$

47.50

 

 

$

61.00

 

 

$

-

 

$

(200

)

Collar

 

April 1, 2018 -

June 30, 2018

 

 

742

 

 

$

47.50

 

 

$

57.10

 

 

$

-

 

 

(1,016

)

Collar

 

April 1, 2018 -

December 31, 2018

 

 

442

 

 

$

55.00

 

 

$

70.00

 

 

$

-

 

 

(229

)

Collar

 

April 1, 2018 -

December 31, 2018

 

 

491

 

 

$

56.00

 

 

$

70.00

 

 

$

84.00

 

 

(189

)

Total Estimated Fair Value of Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(1,633

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value of Derivative Instruments as of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

January 1, 2018 —

February 28, 2018

 

 

458

 

 

$

50.00

 

 

$

61.50

 

 

$

(178

)

 

 

 

Collar

 

January 1, 2018 —

March 31, 2018

 

 

500

 

 

$

47.00

 

 

$

59.65

 

 

 

(376

)

 

 

 

Collar

 

January 1, 2018 —

May 31, 2018

 

 

298

 

 

$

47.50

 

 

$

61.00

 

 

 

(286

)

 

 

 

Collar

 

January 1, 2018 —

June 30, 2018

 

 

746

 

 

$

47.50

 

 

$

57.10

 

 

 

(1,375

)

 

 

 

Total Estimated Fair Value of Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(2,215

)

 

 

 

13


 

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 March 31, 2018 and December 31, 2017, and (ii) the net recorded fair value as reflected on our consolidated balance sheets at March 31, 2018 and December 31, 2017.

 

 

 

 

 

As of March 31, 2018

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Net Amount of

 

 

 

 

 

Gross

 

 

Offset in the

 

 

Liabilities

 

 

 

 

 

Amount of

 

 

Consolidated

 

 

Presented in the

 

 

 

Location on Consolidated

 

Recognized

 

 

Balance

 

 

Consolidated

 

Underlying Commodity

 

Balance Sheets

 

Liabilities

 

 

Sheets

 

 

Balance Sheets

 

 

 

 

 

(in thousands)

 

Crude oil

 

Current liabilities

 

$

1,633

 

 

$

-

 

 

$

1,633

 

Crude oil

 

Long-term liabilities

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Net Amount of

 

 

 

 

 

Gross

 

 

Offset in the

 

 

Liabilities

 

 

 

 

 

Amount of

 

 

Consolidated

 

 

Presented in the

 

 

 

Location on C