tat-10q_20190331.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, 2019

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 every Interactive Data File required to be submitted 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 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.

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

  

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  

Securities registered pursuant to Section 12(b) of the Act:

Title of each class 

 

 

 

 

 

 

 

Ticker Symbol

 

 

 

 

 

 

 

Name of each exchange on which registered 

Common shares, par value $0.10

 

 

 

 

 

 

 

TAT

 

 

 

 

 

 

 

NYSE American

As of May 3, 2019, the registrant had 52,496,666 common shares outstanding.

 

 


 


TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

 

 

Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018

4

 

 

Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three Months Ended March 31, 2019 and 2018

5

 

 

Unaudited Consolidated Statement of Shareholders’ Equity for the Three Months Ended March 31, 2019 and 2018

6

 

 

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

7

 

 

Notes to Unaudited Consolidated Financial Statements

8

 

 

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

24

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

29

 

 

Item 4. Controls and Procedures

29

 

 

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

31

 

 

Item 1A. Risk Factors

31

 

 

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

31

 

 

Item 3. Defaults Upon Senior Securities

31

 

 

Item 4. Mine Safety Disclosures

31

 

 

Item 5. Other Information

31

 

 

Item 6. Exhibits

32

 

 


2


Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of applicable U.S. and Canadian securities legislation. Additionally, forward-looking statements may be made orally or in press releases, conferences, reports, on our website or otherwise, in the future, by us or on our behalf. Such statements are generally identifiable by the terminology used such as “plans,” “expects,” “estimates,” “budgets,” “intends,” “anticipates,” “believes,” “projects,” “indicates,” “targets,” “objective,” “could,” “should,” “may,” or other similar words.

By their very nature, forward-looking statements require us to make assumptions that may not materialize or that may not be accurate. Forward-looking statements are subject to known and unknown risks and uncertainties and other factors that may cause actual results, levels of activity, and achievements to differ materially from those expressed or implied by such statements, including the factors discussed under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018. Such factors include, but are not limited to, the following: our ability to access sufficient capital to fund our operations; fluctuations in and volatility of the market prices for oil and natural gas products; the ability to produce and transport oil and natural gas; the results of exploration and development drilling and related activities; global economic conditions, particularly in the countries in which we carry on business, especially economic slowdowns; actions by governmental authorities including increases in taxes, legislative and regulatory initiatives related to fracture stimulation activities, changes in environmental and other regulations, and renegotiations of contracts; political uncertainty, including actions by insurgent groups or other conflicts; the negotiation and closing of material contracts or sale of assets; future capital requirements and the availability of financing; risks associated with drilling, operating and decommissioning wells; actions of third-party co-owners of interests in properties in which we also own an interest; and the other factors discussed in other documents that we file with or furnish to the U.S. Securities and Exchange Commission (the “SEC”) and Canadian securities regulatory authorities. The impact of any one factor on a particular forward-looking statement is not determinable with certainty as such factors are interdependent upon other factors and our course of action would depend upon our assessment of the future, considering all information then available. In that regard, any statements as to: future oil or natural gas production levels; capital expenditures; asset sales; the allocation of capital expenditures to exploration and development activities; sources of funding for our capital expenditure programs or operations; drilling of new wells; demand for oil and natural gas products; expenditures and allowances relating to environmental matters; dates by which certain areas will be developed or will come on-stream; expected finding and development costs; future production rates; ultimate recoverability of reserves, including the ability to convert probable and possible reserves to proved reserves; dates by which transactions are expected to close; future cash flows, uses of cash flows, collectability of receivables and availability of trade credit; expected operating costs; changes in any of the foregoing; and other statements using forward-looking terminology are forward-looking statements, and there can be no assurance that the expectations conveyed by such forward-looking statements will, in fact, be realized.

Although we believe that the expectations conveyed by the forward-looking statements are reasonable based on information available to us on the date such forward-looking statements were made, no assurances can be given as to future results, levels of activity, achievements or financial condition.

Readers should not place undue reliance on any forward-looking statement and should recognize that the statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described above, as well as others not now anticipated. The foregoing statements are not exclusive and further information concerning us, including factors that potentially could materially affect our financial results, may emerge from time to time. We do not intend to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements, except as required by law.

 

3


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, 2019

 

 

December 31, 2018

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

19,734

 

 

$

9,892

 

Accounts receivable, net

 

 

 

 

 

 

 

Oil and natural gas sales

 

21,852

 

 

 

12,912

 

Joint interest and other

 

1,061

 

 

 

982

 

Related party

 

898

 

 

 

878

 

Prepaid and other current assets

 

9,304

 

 

 

8,696

 

Note receivable - related party

 

 

 

 

5,828

 

Inventory

 

4,830

 

 

 

5,167

 

Total current assets

 

57,679

 

 

 

44,355

 

Property and equipment:

 

 

 

 

 

 

 

Oil and natural gas properties (successful efforts method)

 

 

 

 

 

 

 

Proved

 

155,808

 

 

 

163,006

 

Unproved

 

15,195

 

 

 

15,695

 

Equipment and other property

 

13,559

 

 

 

14,408

 

 

 

184,562

 

 

 

193,109

 

Less accumulated depreciation, depletion and amortization

 

(102,607

)

 

 

(105,850

)

Property and equipment, net

 

81,955

 

 

 

87,259

 

Other long-term assets:

 

 

 

 

 

 

 

Other assets

 

3,380

 

 

 

986

 

Note receivable - related party

 

4,609

 

 

 

 

Total other assets

 

7,989

 

 

 

986

 

Total assets

$

147,623

 

 

$

132,600

 

LIABILITIES, SERIES A PREFERRED SHARES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

6,074

 

 

$

3,896

 

Accounts payable - related party

 

2,667

 

 

 

2,922

 

Accrued liabilities

 

16,877

 

 

 

13,073

 

Derivative liability

 

110

 

 

 

 

Loans payable

 

21,186

 

 

 

22,000

 

Total current liabilities

 

46,914

 

 

 

41,891

 

Long-term liabilities:

 

 

 

 

 

 

 

Asset retirement obligations

 

4,490

 

 

 

4,667

 

Accrued liabilities

 

9,620

 

 

 

7,259

 

Deferred income taxes

 

20,531

 

 

 

20,314

 

Loans payable

 

15,714

 

 

 

 

Total long-term liabilities

 

50,355

 

 

 

32,240

 

Total liabilities

 

97,269

 

 

 

74,131

 

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, 2019 and December 31, 2018

 

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, 2019 and December 31, 2018

 

24,750

 

 

 

24,750

 

Shareholders' equity:

 

 

 

 

 

 

 

Common shares, $0.10 par value, 200,000,000 shares authorized; 52,496,666 shares and 52,413,588 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

 

5,249

 

 

 

5,241

 

Treasury stock

 

(970

)

 

 

(970

)

Additional paid-in-capital

 

577,493

 

 

 

577,488

 

Accumulated other comprehensive loss

 

(146,247

)

 

 

(142,021

)

Accumulated deficit

 

(431,221

)

 

 

(427,319

)

Total shareholders' equity

 

4,304

 

 

 

12,419

 

Total liabilities, Series A preferred shares and shareholders' equity

$

147,623

 

 

$

132,600

 

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

 

 

4


TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Operations and Comprehensive (Loss) Income

(Unaudited)

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

 

 

For the Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

Oil and natural gas sales

$

18,861

 

 

$

16,661

 

Other

 

180

 

 

 

265

 

Total revenues

 

19,041

 

 

 

16,926

 

Costs and expenses:

 

 

 

 

 

 

 

Production

 

2,502

 

 

 

2,869

 

Transportation and processing

 

1,319

 

 

 

1,193

 

Exploration, abandonment and impairment

 

5,113

 

 

 

40

 

Seismic and other exploration

 

77

 

 

 

159

 

General and administrative

 

3,054

 

 

 

3,337

 

Depreciation, depletion and amortization

 

3,716

 

 

 

4,459

 

Accretion of asset retirement obligations

 

52

 

 

 

46

 

Total costs and expenses

 

15,833

 

 

 

12,103

 

Operating income (loss)

 

3,208

 

 

 

4,823

 

Other income (expense):

 

 

 

 

 

 

 

Interest and other expense

 

(2,478

)

 

 

(2,782

)

Interest and other income

 

174

 

 

 

254

 

Loss on derivative contracts

 

(110

)

 

 

(725

)

Foreign exchange loss

 

(1,273

)

 

 

(2,058

)

Total other expense

 

(3,687

)

 

 

(5,311

)

Loss from operations before income taxes

 

(479

)

 

 

(488

)

Income tax expense

 

(3,423

)

 

 

(1,287

)

Net loss

 

(3,902

)

 

 

(1,775

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(4,226

)

 

 

(2,343

)

Comprehensive loss

$

(8,128

)

 

$

(4,118

)

 

 

 

 

 

 

 

 

Net loss per common share

 

 

 

 

 

 

 

Basic net loss per common share

$

(0.07

)

 

$

(0.04

)

Weighted average common shares outstanding

 

52,483

 

 

 

50,374

 

Diluted net loss per common share

$

(0.07

)

 

$

(0.04

)

Weighted average common and common equivalent shares outstanding

 

52,483

 

 

 

50,374

 

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

 

 


5


TRANSATLANTIC PETROLEUM LTD.

Consolidated Statement of Equity for the Three Months Ended March 31, 2019 and 2018

(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

 

Tax effect of restricted stock

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,343

)

 

 

-

 

 

 

(2,343

)

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,775

)

 

 

(1,775

)

Balance at March 31, 2018

 

50,383

 

 

 

333

 

 

 

-

 

 

$

5,038

 

 

$

(970

)

 

$

575,506

 

 

$

(127,109

)

 

$

(423,878

)

 

$

28,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

52,413

 

 

 

333

 

 

 

 

 

$

5,241

 

 

$

(970

)

 

$

577,488

 

 

$

(142,021

)

 

$

(427,319

)

 

$

12,419

 

Issuance of restricted stock units

 

83

 

 

 

-

 

 

 

-

 

 

 

8

 

 

 

-

 

 

 

(8

)

 

 

-

 

 

 

-

 

 

 

-

 

Share-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

102

 

 

 

-

 

 

 

-

 

 

 

102

 

Tax effect of restricted stock

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(89

)

 

 

-

 

 

 

-

 

 

 

(89

)

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,226

)

 

 

-

 

 

 

(4,226

)

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,902

)

 

 

(3,902

)

Balance at March 31, 2019

 

52,496

 

 

 

333

 

 

 

-

 

 

$

5,249

 

 

$

(970

)

 

$

577,493

 

 

$

(146,247

)

 

$

(431,221

)

 

$

4,304

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


6


TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands of U.S. Dollars)

 

 

For the Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

Net loss

$

(3,902

)

 

$

(1,775

)

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

 

 

 

 

 

 

 

Share-based compensation

 

102

 

 

 

101

 

Foreign currency loss

 

1,637

 

 

 

2,634

 

Loss on derivative contracts

 

110

 

 

 

725

 

Cash settlement on derivative contracts

 

 

 

 

(1,339

)

Amortization on loan financing costs

 

10

 

 

 

10

 

Deferred income tax expense

 

1,769

 

 

 

767

 

Exploration, abandonment and impairment

 

5,113

 

 

 

40

 

Depreciation, depletion and amortization

 

3,716

 

 

 

4,459

 

Accretion of asset retirement obligations

 

52

 

 

 

46

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(10,216

)

 

 

(548

)

Prepaid expenses and other assets

 

(3,757

)

 

 

(1,091

)

Accounts payable and accrued liabilities

 

9,880

 

 

 

3,781

 

Net cash provided by operating activities

 

4,514

 

 

 

7,810

 

Investing activities:

 

 

 

 

 

 

 

Additions to oil and natural gas properties

 

(9,326

)

 

 

(6,337

)

Additions to equipment and other properties

 

 

 

 

(677

)

Net used in provided by investing activities

 

(9,326

)

 

 

(7,014

)

Financing activities:

 

 

 

 

 

 

 

Tax withholding on restricted share units

 

(88

)

 

 

 

Note receivable - related party

 

1,000

 

 

 

 

Loan proceeds

 

20,000

 

 

 

 

Loan repayment

 

(5,100

)

 

 

(4,125

)

Net cash provided by (used in) financing activities

 

15,812

 

 

 

(4,125

)

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

 

(1,018

)

 

 

(716

)

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

 

9,982

 

 

 

(4,045

)

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

 

9,892

 

 

 

20,431

 

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

$

19,874

 

 

$

16,386

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid for interest

$

526

 

 

$

3,104

 

Cash paid for taxes

$

1,178

 

 

$

657

 

 

 

 

 

 

 

 

 

 

(1)

 The beginning of period balance at December 31, 2018 includes cash and cash equivalents of $9.9 million and restricted cash of $0.1 million in other assets.  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

 

 

(2)

The end of period balance at March 31, 2019 includes cash and cash equivalents of $19.7 million and restricted cash of $0.1 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 unaudited consolidated financial statements.

 

 


7


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 3, 2019, approximately 48% of our outstanding common shares were beneficially owned by N. Malone Mitchell 3rd, our chief executive officer and chairman of our board of directors.

We are a holding company with two operating segments – Turkey and Bulgaria. Our assets consist of our ownership interests in subsidiaries that primarily own assets in Turkey and Bulgaria.

Basis of presentation

Our consolidated financial statements are expressed in U.S. Dollar (“USD”) 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 USD unless otherwise indicated. The unaudited consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 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 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, 2018.

Liquidity

During the three months ended March 31, 2019, we repaid $5.1 million of outstanding debt and entered into the 2019 Term Loan with DenizBank, A.S. (“DenizBank”) for $20.0 million (see Note 7 “Loans Payable”).  

As of March 31, 2019, we had $15.7 million of long-term debt, $21.2 million of short-term debt, $19.7 million in cash and a $10.8 million work capital surplus.  

Based on current forecasted oil prices for 2019 and beyond, we believe that our cash flows from operations and existing cash on hand are sufficient to conduct our planned operations and meet our contractual requirements, including license obligations through June 30, 2020.

2. Recent accounting pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for leases. The most significant changes include the clarification of the definition of a lease, the requirement for lessees to recognize for all leases a right-of-use asset and a lease liability in the consolidated balance sheet, and additional quantitative and qualitative disclosures which are designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. Expenses are recognized in the consolidated statement of income in a manner similar to current accounting guidance. Lessor accounting under the new standard is substantially unchanged. The new standard became effective for us beginning with the first quarter of 2019. We adopted the accounting standard using a prospective transition approach, which applied the provisions of the new guidance at the effective date without adjusting the comparative periods presented. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. We also made an accounting policy election to keep leases with an initial term of

8


twelve months or less off of the consolidated balance sheet. On January 1, 2019, we also recognized $2.7 million of additional right-of-use assets and liabilities on our consolidated balance sheet.

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 May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which clarifies Topic 718, Compensation – Stock Compensation (“ASU 2017-09”), 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 adopted ASU 2017-09 effective January 1, 2018.  The adoption of this update had no impact our consolidated financial statements and results of operations.  

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. The Company adopted this standard effective January 1, 2019. The adoption of this update had no impact our consolidated financial statements and results of operations.    

In June 2018, the FASB issued ASU 2018-07, Stock Compensation - Improvements to Nonemployee Share-Based Payment Accounting.  This update applied the existing employee guidance to nonemployee share-based transactions, with the exception of specific guidance related to the attribution of compensation cost. This update is effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted this standard effective January 1, 2019. The adoption of this update had no impact on our consolidated financial statements and results of operations.

In November 2018, the FASB ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. This update clarifies that receivables arising from operating leases are not in scope of this topic, but rather Topic 842, Leases. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This update will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company does not believe the adoption of this standard will have an impact on its consolidated financial statements.

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, 2019 and 2018, 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, 2019, there were $21.3 million of Series A Preferred Shares and $24.8 million of Series A Preferred Shares – related party outstanding (See Note 13. “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

9


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%

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, 2019 and 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.

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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, 2019

 

 

December 31, 2018

 

 

(in thousands)

 

Oil and natural gas properties, proved:

 

 

 

 

 

 

 

Turkey

$

155,306

 

 

$

162,494

 

Bulgaria

 

502

 

 

 

512

 

Total oil and natural gas properties, proved

 

155,808

 

 

 

163,006

 

Oil and natural gas properties, unproved:

 

 

 

 

 

 

 

Turkey

 

15,195

 

 

 

14,965

 

Bulgaria

 

 

 

 

730

 

Total oil and natural gas properties, unproved

 

15,195

 

 

 

15,695

 

Gross oil and natural gas properties

 

171,003

 

 

 

178,701

 

Accumulated depletion

 

(97,449

)

 

 

(100,582

)

Net oil and natural gas properties

$

73,554

 

 

$

78,119

 

The decline in oil and natural gas properties during the three months ended March 31, 2019 was primarily driven by the devaluation of the New Turkish Lira (“TRY”) versus the USD. From December 31, 2018 to March 31, 2019, the TRY to the USD declined 7.0%. At March 31, 2019, the exchange rate was 5.6284 as compared to 5.2609 at December 31, 2018. For the three months ended March 31, 2019, foreign currency translations reduced oil and natural gas properties and increased accumulated other comprehensive loss within shareholders’ equity on our consolidated balance sheet.

At March 31, 2019 and December 31, 2018, we excluded $0.3 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, 2019, the capitalized costs of our oil and natural gas properties, net of accumulated depletion, included $6.9 million relating to acquisition costs of proved properties, which are being depleted by the unit-of-production method using total proved reserves, and $51.2 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, 2018, the capitalized costs of our oil and natural gas properties included $6.5 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 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, 2019 and 2018, we recorded $5.1 million of exploratory dry-hole costs and $0.1 million of impairment of proved properties, respectively, which are primarily measured using Level 3 inputs.

Capitalized cost greater than one year

As of March 31, 2019, there were no exploratory well costs greater than one year.

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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, 2019

 

 

December 31, 2018

 

 

(in thousands)

 

Other equipment

$

1,159

 

 

$

1,240

 

Land

 

140

 

 

 

149

 

Inventory

 

6,323

 

 

 

6,791

 

Gas gathering system and facilities

 

182

 

 

 

194

 

Vehicles

 

317

 

 

 

336

 

Leasehold improvements, office equipment and software

 

5,438

 

 

 

5,698

 

Gross equipment and other property

 

13,559

 

 

 

14,408

 

Accumulated depreciation

 

(5,158

)

 

 

(5,268

)

Net equipment and other property

$

8,401

 

 

$

9,140

 

 

At March 31, 2019, in addition to the above, we have classified $4.8 million of inventory as a current asset, which represents our expected inventory consumption during the next twelve months. We classify our remaining 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, 2019 and December 31, 2018, we excluded $11.2 million and $12.0 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, 2019 and for the year ended December 31, 2018:

 

 

March 31, 2019

 

 

December 31, 2018

 

 

(in thousands)

 

Asset retirement obligations at beginning of period

$

4,667

 

 

$

4,727

 

Liabilities settled

 

-

 

 

 

 

Foreign exchange change effect

 

(288

)

 

 

(1,270

)

Additions

 

59

 

 

 

1,036

 

Accretion expense

 

52

 

 

 

174

 

Asset retirement obligations at end of period

$

4,490

 

 

$

4,667

 

 

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.

 

During the three months ended March 31, 2019 and 2018, we recorded accretion expense of $0.1 million and $0.1 million, respectively.

6. Derivative instruments

We use derivative instruments to manage certain risks related to commodity prices and foreign currency exchange rates. The use of derivative instruments for risk management is covered by operating policies and is closely monitored by our senior management. We do not hold any derivatives for speculative purposes and do not use derivatives with leveraged or complex features. 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.

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Foreign currency derivatives

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 foreign exchange derivative contracts are settled based upon the contract rate. 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 derivative contracts.” Settlements of derivative contracts are included in operating activities on our consolidated statements of cash flows under the caption “Cash settlement on derivative contracts.”

At March 31, 2019, we had outstanding foreign exchange derivative contracts as set forth in the tables below:

 

Fair Value of Foreign Exchange Derivative Instruments as of March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Buy

 

 

 

 

Sell

 

 

Estimated Fair

 

Type

 

Buy/Sell

 

Rate

 

 

Settlement Date

 

Buy Currency

 

Currency Amount

 

 

Sell Currency

 

Currency Amount

 

 

Value of Asset (Liability)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

FXOPT

 

Buy

 

 

5.750

 

 

04/29/19

 

TRY

 

 

8,625,000

 

 

USD

 

 

1,500,000

 

 

 

8

 

FXOPT

 

Sell

 

 

5.750

 

 

04/29/19

 

USD

 

 

2,250,000

 

 

TRY

 

 

12,937,500

 

 

 

(59

)

FXOPT

 

Buy

 

 

5.750

 

 

06/03/19

 

TRY

 

 

8,625,000

 

 

USD

 

 

1,500,000

 

 

 

8

 

FXOPT

 

Sell

 

 

5.750

 

 

06/03/19

 

USD

 

 

2,250,000

 

 

TRY

 

 

12,937,500

 

 

 

(41

)

FXOPT

 

Buy

 

 

5.750

 

 

07/01/19

 

TRY

 

 

8,625,000

 

 

USD

 

 

1,500,000

 

 

 

7

 

FXOPT

 

Sell

 

 

5.750

 

 

07/01/19

 

USD

 

 

2,250,000

 

 

TRY

 

 

12,937,500

 

 

 

(33

)

Total Estimated Fair Value of Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(110

)

 

During the three months ended March 31, 2019 and 2018, we recorded a net loss on derivative contracts of $0.1 million and $0.7 million, respectively.

Balance sheet presentation

The following table summarizes both: (i) the gross fair value of our derivative instruments by the appropriate balance sheet classification even when the derivative instruments are subject to netting arrangements and qualify for net presentation in our consolidated balance sheets at March 31, 2019, and (ii) the net recorded fair value as reflected on our consolidated balance sheet at March 31, 2019.

 

 

 

 

 

As of March 31, 2019

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Net Amount of

 

 

 

 

 

Gross

 

 

Offset in the

 

 

Liabilities

 

 

 

 

 

Amount of

 

 

Consolidated

 

 

Presented in the

 

 

 

Location on Consolidated

 

Recognized

 

 

Balance

 

 

Consolidated

 

Type of Derivative Contract

 

Balance Sheets

 

Liabilities

 

 

Sheets

 

 

Balance Sheets

 

 

 

 

 

(in thousands)

 

Foreign exchange

 

Current liabilities

 

$

133

 

 

$

(23

)