memp-10q_20160630.htm

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10–Q

 

þ

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

For the quarterly period ended June 30, 2016

OR

¨

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

For the transition period from                      to                     .

Commission File Number: 001-35364

 

MEMORIAL PRODUCTION PARTNERS LP

(Exact name of registrant as specified in its charter)

 

Delaware

 

90-0726667

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

500 Dallas Street, Suite 1600, Houston, TX

 

77002

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (713) 490-8900

 

 

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  þ    No  ¨  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 was required to submit and post such files).    Yes  þ    No  ¨

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

 

Large accelerated filer  þ

Accelerated filer  ¨

Non-accelerated filer  ¨  (Do not check if a smaller reporting company)

Smaller reporting company  ¨

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

As of July 29, 2016, the registrant had 83,484,115 common units outstanding.

 

 

 


MemORIAL PRoducTION PARTNERS LP

Table of Contents

 

 

 

 

 

Page

 

 

 

 

 

 

 

 

 

 

 

 

Glossary of Oil and Natural Gas Terms

 

1

 

 

Names of Entities

 

4

 

 

Cautionary Note Regarding Forward-Looking Statements

 

5

 

 

PART I—FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

 

7

 

 

Unaudited Condensed Statements of Consolidated and Combined Operations for the Three and Six Months Ended June 30, 2016 and 2015

 

8

 

 

Unaudited Condensed Statements of Consolidated and Combined Cash Flows for the Six Months Ended June 30, 2016 and 2015

 

9

 

 

Unaudited Condensed Statements of Consolidated Equity for the Six Months Ended June 30, 2016

 

10

 

 

Notes to Unaudited Condensed Consolidated and Combined Financial Statements

 

11

 

 

Note 1 – Organization and Basis of Presentation

 

11

 

 

Note 2 – Summary of Significant Accounting Policies

 

12

 

 

Note 3 – Acquisitions and Divestitures

 

14

 

 

Note 4 – Fair Value Measurements of Financial Instruments

 

15

 

 

Note 5 – Risk Management and Derivative Instruments

 

17

 

 

Note 6 – Asset Retirement Obligations

 

20

 

 

Note 7 – Long-Term Debt

 

20

 

 

Note 8 – Equity & Distributions

 

22

 

 

Note 9 – Earnings per Unit

 

24

 

 

Note 10 – Unit-Based Awards

 

24

 

 

Note 11 – Related Party Transactions

 

25

 

 

Note 12 – Commitments and Contingencies

 

27

 

 

Note 13 – Subsequent Events

 

27

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

28

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

40

Item 4.

 

Controls and Procedures

 

41

 

 

PART II—OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

42

Item 1A.

 

Risk Factors

 

42

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

Item 3.

 

Defaults Upon Senior Securities

 

42

Item 4.

 

Mine Safety Disclosures

 

42

Item 5.

 

Other Information

 

42

Item 6.

 

Exhibits

 

42

 

 

 

Signatures

 

43

 

 

 

i


GLOSSARY OF OIL AND NATURAL GAS TERMS

Analogous Reservoir: Analogous reservoirs, as used in resource assessments, have similar rock and fluid properties, reservoir conditions (depth, temperature and pressure) and drive mechanisms, but are typically at a more advanced stage of development than the reservoir of interest and thus may provide concepts to assist in the interpretation of more limited data and estimation of recovery. When used to support proved reserves, analogous reservoir refers to a reservoir that shares all of the following characteristics with the reservoir of interest: (i) the same geological formation (but not necessarily in pressure communication with the reservoir of interest); (ii) the same environment of deposition; (iii) similar geologic structure; and (iv) the same drive mechanism.

API Gravity: A system of classifying oil based on its specific gravity, whereby the greater the gravity, the lighter the oil.

Bbl: One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to oil or other liquid hydrocarbons.

Bbl/d: One Bbl per day.

Bcfe: One billion cubic feet of natural gas equivalent.

BOEM: Bureau of Ocean Energy Management.

Btu: One British thermal unit, the quantity of heat required to raise the temperature of a one-pound mass of water by one degree Fahrenheit.

Development Project: A development project is the means by which petroleum resources are brought to the status of economically producible. As examples, the development of a single reservoir or field, an incremental development in a producing field or the integrated development of a group of several fields and associated facilities with a common ownership may constitute a development project.

Dry Hole or Dry Well: A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production would exceed production expenses and taxes.

Economically Producible: The term economically producible, as it relates to a resource, means a resource which generates revenue that exceeds, or is reasonably expected to exceed, the costs of the operation. For this determination, the value of the products that generate revenue are determined at the terminal point of oil and natural gas producing activities.

Exploitation: A development or other project which may target proven or unproven reserves (such as probable or possible reserves), but which generally has a lower risk than that associated with exploration projects.

Field: An area consisting of a single reservoir or multiple reservoirs, all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.

Gross Acres or Gross Wells: The total acres or wells, as the case may be, in which we have a working interest.

ICE: Inter-Continental Exchange.

MBbl: One thousand Bbls.

MBoe: One thousand barrels of oil equivalent. One Boe is calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Bbl of oil.

MBoe/d: One thousand Boe per day.

MBtu: One thousand Btu.

Mcf: One thousand cubic feet of natural gas.

Mcf/d: One Mcf per day.

MMBtu: One million British thermal units.

1


MMcf: One million cubic feet of natural gas.

MMcfe: One million cubic feet of natural gas equivalent.

Net Production: Production that is owned by us less royalties and production due to others.

NGLs: The combination of ethane, propane, butane and natural gasolines that when removed from natural gas become liquid under various levels of higher pressure and lower temperature.

NYMEX: New York Mercantile Exchange.

Oil: Oil and condensate.

Operator: The individual or company responsible for the exploration and/or production of an oil or natural gas well or lease.

OPIS: Oil Price Information Service.

Probabilistic Estimate: The method of estimation of reserves or resources is called probabilistic when the full range of values that could reasonably occur for each unknown parameter (from the geoscience and engineering data) is used to generate a full range of possible outcomes and their associated probabilities of occurrences.

Proved Developed Reserves: Proved reserves that can be expected to be recovered from existing wells with existing equipment and operating methods.

Proved Reserves: Those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible, from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations, prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced, or the operator must be reasonably certain that it will commence the project, within a reasonable time. The area of the reservoir considered as proved includes (i) the area identified by drilling and limited by fluid contacts, if any, and (ii) adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or natural gas on the basis of available geoscience and engineering data. In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons, as seen in a well penetration, unless geoscience, engineering or performance data and reliable technology establishes a lower contact with reasonable certainty. Where direct observation from well penetrations has defined a highest known oil elevation and the potential exists for an associated natural gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty. Reserves which can be produced economically through application of improved recovery techniques (including fluid injection) are included in the proved classification when (i) successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir, or an analogous reservoir or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (ii) the project has been approved for development by all necessary parties and entities, including governmental entities. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price used is the average price during the twelve-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.

Realized Price: The cash market price less all expected quality, transportation and demand adjustments.

Recompletion: The completion for production of an existing wellbore in another formation from that which the well has been previously completed.

Reliable Technology: Reliable technology is a grouping of one or more technologies (including computational methods) that has been field tested and has been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.

2


Reserves: Reserves are estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and natural gas or related substances to market and all permits and financing required to implement the project. Reserves should not be assigned to adjacent reservoirs isolated by major, potentially sealing, faults until those reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that are clearly separated from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low reservoir or negative test results). Such areas may contain prospective resources (i.e., potentially recoverable resources from undiscovered accumulations).

Reservoir: A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reserves.

Resources: Resources are quantities of oil and natural gas estimated to exist in naturally occurring accumulations. A portion of the resources may be estimated to be recoverable and another portion may be considered unrecoverable. Resources include both discovered and undiscovered accumulations.

Standardized Measure: The present value of estimated future net revenue to be generated from the production of proved reserves, determined in accordance with the rules, regulations or standards established by the United States Securities and Exchange Commission (“SEC”) and the Financial Accounting Standards Board (“FASB”) (using prices and costs in effect as of the date of estimation), less future development, production and income tax expenses, and discounted at 10% per annum to reflect the timing of future net revenue. Because we are a limited partnership, we are generally not subject to federal or state income taxes and thus make no provision for federal or state income taxes in the calculation of our standardized measure. Standardized measure does not give effect to derivative transactions.

Wellbore: The hole drilled by the bit that is equipped for oil or natural gas production on a completed well. Also called well or borehole.

Working Interest: An interest in an oil and natural gas lease that gives the owner of the interest the right to drill for and produce oil and natural gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations.

Workover: Operations on a producing well to restore or increase production.

WTI: West Texas Intermediate.

 

 

 

3


NAMES OF ENTITIES

As used in this Form 10-Q, unless we indicate otherwise:

 

·

“Memorial Production Partners,” “the Partnership,” “we,” “our,” “us” or like terms refer to Memorial Production Partners LP individually and collectively with its subsidiaries, as the context requires;

 

·

“our general partner” and “MEMP GP” refer to Memorial Production Partners GP LLC, our general partner and wholly-owned subsidiary;

 

·

“OLLC” refers to Memorial Production Operating LLC, our wholly-owned subsidiary through which we operate our properties;

 

·

“Finance Corp.” refers to Memorial Production Finance Corporation, our wholly-owned subsidiary, whose activities are limited to co-issuing our debt securities and engaging in other activities incidental thereto;

 

·

“Memorial Resource” refers collectively to Memorial Resource Development Corp. and its subsidiaries;

 

·

“the previous owners” for accounting and financial reporting purposes refers to certain oil and gas properties primarily located in the Joaquin Field in Shelby and Panola counties in East Texas and in West Louisiana acquired from Memorial Resource in February 2015 for periods after common control commenced through the date of acquisition;

 

·

“the Funds” refers collectively to Natural Gas Partners VIII, L.P., Natural Gas Partners IX, L.P. and NGP IX Offshore Holdings, L.P.; and

 

·

“NGP” refers to Natural Gas Partners, which manages the Funds.

 

 

 

4


CAUTIONARY NOTE REGARDING FORWARD–LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:

 

·

business strategies;

 

·

ability to replace the reserves we produce through drilling and property acquisitions;

 

·

drilling locations;

 

·

oil and natural gas reserves;

 

·

technology;

 

·

realized oil, natural gas and NGL prices;

 

·

production volumes;

 

·

lease operating expenses;

 

·

general and administrative expenses;

 

·

future operating results;

 

·

cash flows and liquidity;

 

·

ability to procure drilling and production equipment;

 

·

ability to procure oil field labor;

 

·

planned capital expenditures and the availability of capital resources to fund capital expenditures;

 

·

ability to access capital markets;

 

·

marketing of oil, natural gas and NGLs;

 

·

expectations regarding general economic conditions;

 

·

competition in the oil and natural gas industry;

 

·

effectiveness of risk management activities;

 

·

environmental liabilities;

 

·

counterparty credit risk;

 

·

expectations regarding governmental regulation and taxation;

 

·

expectations regarding distributions and distribution rates;

 

·

expectations regarding developments in oil-producing and natural-gas producing countries; and

 

·

plans, objectives, expectations and intentions.

5


These types of statements, other than statements of historical fact included in this report, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “outlook,” “continue,” the negative of such terms or other comparable terminology. These statements discuss future expectations, contain projections of results of operations or of financial condition or include other “forward-looking” information. These forward-looking statements involve risks and uncertainties. Important factors that could cause our actual results or financial condition to differ materially from our expectations include, but are not limited to, the following risks and uncertainties:

 

·

our ability to generate sufficient cash to pay the current quarterly distribution or any other amount on our common units;

 

·

risks related to our level of indebtedness, including our ability to satisfy our debt obligations;

 

·

our ability to access funds on acceptable terms, if at all, because of the terms and conditions governing our indebtedness;

 

·

volatility in the prices for oil, natural gas, and NGLs, including further or sustained declines in commodity prices;

 

·

the potential for additional impairments due to continuing or future declines in oil, natural gas and NGL prices;

 

·

the uncertainty inherent in estimating quantities of oil, natural gas and NGLs reserves;

 

·

our substantial future capital requirements, which may be subject to limited availability of financing;

 

·

the uncertainty inherent in the development and production of oil and natural gas;

 

·

our need to make accretive acquisitions or substantial capital expenditures to maintain our declining asset base;

 

·

potential shortages of, or increased costs for, drilling and production equipment and supply materials for production, such as CO2;

 

·

potential difficulties in the marketing of oil and natural gas;

 

·

changes to the financial condition of counterparties;

 

·

uncertainties surrounding the success of our secondary and tertiary recovery efforts;

 

·

competition in the oil and natural gas industry;

 

·

general political and economic conditions, globally and in the jurisdictions in which we operate;

 

·

the impact of legislation and governmental regulations, including those related to climate change, hydraulic fracturing and our status as a partnership for federal income tax purposes;

 

·

the risk that our hedging strategy may be ineffective or may reduce our income;

 

·

the cost and availability of insurance as well as operating risks that may not be covered by an effective indemnity or insurance;

 

·

actions of third-party co-owners of interests in properties in which we also own an interest; and

 

·

risks related to potential acquisitions, including our ability to make acquisitions on favorable terms or to integrate acquired properties.

The forward-looking statements contained in this report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. All readers are cautioned that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or that the events or circumstances described in any forward-looking statement will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors described in “Part I—Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”), our Current Report on Form 8-K filed with the SEC on May 25, 2016 and “Part II—Item 1A. Risk Factors” appearing within this report and elsewhere in this report. All forward-looking statements speak only as of the date of this report. We do not intend to update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

 

 

 

6


PART I—FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS.

MEMORIAL PRODUCTION PARTNERS LP

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except outstanding units)

 

 

June 30,

 

December 31,

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

 

$

599

 

Accounts receivable

 

46,087

 

 

60,239

 

Short-term derivative instruments

 

140,492

 

 

272,320

 

Prepaid expenses and other current assets

 

12,040

 

 

7,028

 

Total current assets

 

198,619

 

 

340,186

 

Property and equipment, at cost:

 

 

 

 

 

 

Oil and natural gas properties, successful efforts method

 

3,128,180

 

 

3,616,325

 

Support equipment and facilities

 

198,645

 

 

205,876

 

Other

 

15,024

 

 

2,671

 

Accumulated depreciation, depletion and impairment

 

(1,521,606

)

 

(1,878,549

)

Property and equipment, net

 

1,820,243

 

 

1,946,323

 

Long-term derivative instruments

 

329,231

 

 

461,810

 

Restricted investments

 

156,873

 

 

152,631

 

Assets held for sale (Note 3)

 

30,143

 

 

 

Other long-term assets

 

4,974

 

 

5,053

 

Total assets

$

2,540,083

 

$

2,906,003

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

12,447

 

$

8,792

 

Accounts payable - affiliates

 

 

 

3,339

 

Revenues payable

 

23,509

 

 

25,504

 

Accrued liabilities (Note 2)

 

52,174

 

 

52,923

 

Assets held for sale (Note 3)

 

599

 

 

 

Short-term derivative instruments

 

2,140

 

 

2,850

 

Total current liabilities

 

90,869

 

 

93,408

 

Long-term debt (Note 7)

 

1,824,604

 

 

2,000,579

 

Asset retirement obligations

 

149,865

 

 

162,989

 

Long-term derivative instruments

 

2,220

 

 

1,441

 

Deferred tax liabilities

 

2,223

 

 

2,094

 

Assets held for sale (Note 3)

 

11,819

 

 

 

Other long-term liabilities

 

4,240

 

 

 

Total liabilities

 

2,085,840

 

 

2,260,511

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Partners' equity:

 

 

 

 

 

 

Common units (83,488,304 units outstanding at June 30, 2016 and 82,906,400 units

   outstanding at December 31, 2015)

 

454,243

 

 

644,644

 

General partner (86,797 units outstanding at December 31, 2015)

 

 

 

848

 

Total partners' equity

 

454,243

 

 

645,492

 

Total liabilities and equity

$

2,540,083

 

$

2,906,003

 

 

See Accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.

 

 

 

7


MEMORIAL PRODUCTION PARTNERS LP

UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED AND COMBINED OPERATIONS

(In thousands, except per unit amounts)

  

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil & natural gas sales

 

$

67,780

 

 

$

97,221

 

 

$

128,403

 

 

$

189,170

 

 

Other revenues

 

 

286

 

 

 

917

 

 

 

529

 

 

 

1,786

 

 

Total revenues

 

 

68,066

 

 

 

98,138

 

 

 

128,932

 

 

 

190,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating

 

 

29,354

 

 

 

44,888

 

 

 

65,050

 

 

 

85,366

 

 

Gathering, processing, and transportation

 

 

8,823

 

 

 

9,548

 

 

 

18,032

 

 

 

18,214

 

 

Exploration

 

 

15

 

 

 

32

 

 

 

137

 

 

 

122

 

 

Taxes other than income

 

 

3,485

 

 

 

6,058

 

 

 

7,493

 

 

 

12,713

 

 

Depreciation, depletion, and amortization

 

 

44,413

 

 

 

46,286

 

 

 

88,842

 

 

 

97,552

 

 

Impairment of proved oil and natural gas properties

 

 

 

 

 

 

 

 

8,342

 

 

 

251,347

 

 

General and administrative

 

 

15,246

 

 

 

14,377

 

 

 

28,770

 

 

 

28,888

 

 

Accretion of asset retirement obligations

 

 

2,712

 

 

 

1,686

 

 

 

5,419

 

 

 

3,320

 

 

(Gain) loss on commodity derivative instruments

 

 

124,580

 

 

 

61,403

 

 

 

72,835

 

 

 

(84,056

)

 

(Gain) loss on sale of properties

 

 

(3,539

)

 

 

 

 

 

(3,635

)

 

 

 

 

Other, net

 

 

(52

)

 

 

(943

)

 

 

67

 

 

 

(943

)

 

Total costs and expenses

 

 

225,037

 

 

 

183,335

 

 

 

291,352

 

 

 

412,523

 

 

Operating income (loss)

 

 

(156,971

)

 

 

(85,197

)

 

 

(162,420

)

 

 

(221,567

)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(32,143

)

 

 

(27,910

)

 

 

(64,695

)

 

 

(57,150

)

 

Other income (expense)

 

 

 

 

 

124

 

 

 

 

 

 

284

 

 

Gain on extinguishment of debt

 

 

41,664

 

 

 

 

 

 

41,664

 

 

 

422

 

 

Total other income (expense)

 

 

9,521

 

 

 

(27,786

)

 

 

(23,031

)

 

 

(56,444

)

 

Income (loss) before income taxes

 

 

(147,450

)

 

 

(112,983

)

 

 

(185,451

)

 

 

(278,011

)

 

Income tax benefit (expense)

 

 

(100

)

 

 

(876

)

 

 

(196

)

 

 

1,494

 

 

Net income (loss)

 

 

(147,550

)

 

 

(113,859

)

 

 

(185,647

)

 

 

(276,517

)

 

Net income (loss) attributable to noncontrolling interest

 

 

 

 

 

65

 

 

 

 

 

 

224

 

 

Net income (loss) attributable to Memorial Production Partners LP

 

$

(147,550

)

 

$

(113,924

)

 

$

(185,647

)

 

$

(276,741

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited partners' interest in net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Memorial Production Partners LP

 

$

(147,550

)

 

$

(113,924

)

 

$

(185,647

)

 

$

(276,741

)

 

Net (income) loss allocated to previous owners

 

 

 

 

 

 

 

 

 

 

 

2,268

 

 

Net (income) loss allocated to general partner

 

 

128

 

 

 

90

 

 

 

168

 

 

 

228

 

 

Net (income) loss allocated to NGP IDRs

 

 

 

 

 

(28

)

 

 

 

 

 

(56

)

 

Limited partners' interest in net income (loss)

 

$

(147,422

)

 

$

(113,862

)

 

$

(185,479

)

 

$

(274,301

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per unit: (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per unit

 

$

(1.78

)

 

$

(1.36

)

 

$

(2.24

)

 

$

(3.26

)

 

Weighted average limited partner units outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

83,007

 

 

 

83,902

 

 

 

82,971

 

 

 

84,119

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.

 

 

 

 

8


MEMORIAL PRODUCTION PARTNERS LP

UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED AND COMBINED CASH FLOWS

(In thousands)

 

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(185,647

)

 

$

(276,517

)

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

 

 

 

 

 

 

 

 

Depreciation, depletion, and amortization

 

 

88,842

 

 

 

97,552

 

Impairment of proved oil and natural gas properties

 

 

8,342

 

 

 

251,347

 

(Gain) loss on derivative instruments

 

 

78,361

 

 

 

(80,970

)

Cash settlements (paid) received on expired derivative instruments

 

 

146,817

 

 

 

112,315

 

Cash settlements on terminated commodity derivatives

 

 

39,299

 

 

 

27,063

 

Premiums paid for commodity derivatives

 

 

 

 

 

(27,063

)

Bad debt expense

 

 

1,601

 

 

 

 

Deferred income tax expense (benefit)

 

 

129

 

 

 

(1,637

)

Amortization of deferred financing costs

 

 

2,550

 

 

 

3,116

 

Gain on extinguishment of debt

 

 

(41,664

)

 

 

(422

)

Accretion of senior notes net discount

 

 

1,201

 

 

 

1,204

 

Accretion of asset retirement obligations

 

 

5,419

 

 

 

3,320

 

Unit-based compensation (see Note 10)

 

 

5,299

 

 

 

4,906

 

Settlement of asset retirement obligations

 

 

(869

)

 

 

(780

)

Gain on sale of properties

 

 

(3,635

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

13,414

 

 

 

9,668

 

Prepaid expenses and other assets

 

 

(2,268

)

 

 

(849

)

Payables and accrued liabilities

 

 

(4,460

)

 

 

(11,056

)

Other

 

 

3,241

 

 

 

521

 

Net cash provided by operating activities

 

 

155,972

 

 

 

111,718

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisitions of oil and natural gas properties

 

 

 

 

 

(6,095

)

Acquisition post-closing adjustments receipts

 

 

 

 

 

9,570

 

Additions to oil and gas properties

 

 

(36,553

)

 

 

(128,323

)

Additions to other property and equipment

 

 

(7,265

)

 

 

(83

)

Additions to restricted investments

 

 

(4,242

)

 

 

(2,735

)

Deposits and proceeds from the sale of oil and natural gas properties

 

 

37,918

 

 

 

 

Net cash used in investing activities

 

 

(10,142

)

 

 

(127,666

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Advances on revolving credit facilities

 

 

94,358

 

 

 

252,000

 

Payments on revolving credit facilities

 

 

(191,000

)

 

 

(22,000

)

Deferred financing costs

 

 

(1,075

)

 

 

(235

)

Repurchase of senior notes

 

 

(40,470

)

 

 

(2,914

)

Capital contributions from previous owners

 

 

 

 

 

1,912

 

Contributions related to sale of assets to NGP affiliate

 

 

26

 

 

 

 

Transfer of operating subsidiary from Memorial Resource

 

 

2,363

 

 

 

 

Proceeds from the issuance of common units

 

 

1,703

 

 

 

 

Costs incurred in conjunction with issuance of common units

 

 

(146

)

 

 

 

Distributions to partners

 

 

(10,797

)

 

 

(92,628

)

Distribution to Memorial Resource (see Note 1)

 

 

 

 

 

(78,396

)

Acquisition of General Partner (see Note 1)

 

 

(750

)

 

 

 

Acquisition of IDRs from NGP (see Note 1)

 

 

(50

)

 

 

 

Restricted units returned to plan

 

 

(591

)

 

 

(7

)

Repurchases under unit repurchase program

 

 

 

 

 

(42,591

)

Net cash (used in) provided by financing activities

 

 

(146,429

)

 

 

15,141

 

Net change in cash and cash equivalents

 

 

(599

)

 

 

(807

)

Cash and cash equivalents, beginning of period

 

 

599

 

 

 

970

 

Cash and cash equivalents, end of period

 

$

 

 

$

163

 

 

See Accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.

 

 

 

9


 

MEMORIAL PRODUCTION PARTNERS LP

UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED EQUITY

(In thousands)

  

 

Partner's Equity

 

 

 

 

 

 

Limited Partners

 

 

General

 

 

 

 

 

 

Common

 

 

Partner

 

 

Total

 

Balance, December 31, 2015

$

644,644

 

 

$

848

 

 

$

645,492

 

Net income (loss)

 

(185,479

)

 

 

(168

)

 

 

(185,647

)

Distributions

 

(10,786

)

 

 

(11

)

 

 

(10,797

)

Purchase of equity interest of general partner (Note 1)

 

(81

)

 

 

(669

)

 

 

(750

)

Acquisition of IDRs from NGP (Note 1)

 

(50

)

 

 

 

 

 

(50

)

Net proceeds from issuance of common units

 

1,557

 

 

 

 

 

 

1,557

 

Amortization of equity-based awards

 

4,999

 

 

 

 

 

 

4,999

 

Restricted units repurchased and other

 

(561

)

 

 

 

 

 

(561

)

Balance at June 30, 2016

$

454,243

 

 

$

 

 

$

454,243

 

 

See Accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements.

 

 

 

10


MEMORIAL PRODUCTION PARTNERS LP

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

Note 1. Organization and Basis of Presentation

General

Memorial Production Partners LP (the “Partnership”) is a publicly traded Delaware limited partnership, the common units of which are listed on the NASDAQ Global Market (“NASDAQ”) under the symbol “MEMP.” Unless the context requires otherwise, references to “we,” “us,” “our,” or “the Partnership” are intended to mean the business and operations of Memorial Production Partners LP and its consolidated subsidiaries.  

We operate in one reportable segment engaged in the acquisition, exploitation, development and production of oil and natural gas properties. Our management evaluates performance based on one reportable business segment as the economic environments are not different within the operation of our oil and natural gas properties. Our assets consist primarily of producing oil and natural gas properties and are located in Texas, Louisiana, Colorado, Wyoming and offshore Southern California. Most of our oil and natural gas properties are located in large, mature oil and natural gas reservoirs. The Partnership’s properties consist primarily of operated and non-operated working interests in producing and undeveloped leasehold acreage and working interests in identified producing wells.

Unless the context requires otherwise, references to: (i) “our general partner” or “MEMP GP” refer to Memorial Production Partners GP LLC, our general partner and wholly-owned subsidiary; (ii) “Memorial Resource” refer collectively to Memorial Resource Development Corp. and its subsidiaries; (iii) “the Funds” refer collectively to Natural Gas Partners VIII, L.P., Natural Gas Partners IX, L.P. and NGP IX Offshore Holdings, L.P.; (iv) “OLLC” refer to Memorial Production Operating LLC, our wholly-owned subsidiary through which we operate our properties; (v) “Finance Corp.” refer to Memorial Production Finance Corporation, our wholly-owned subsidiary, whose activities are limited to co-issuing our debt securities and engaging in other activities incidental thereto; and (vi) “NGP” refer to Natural Gas Partners.

On April 27, 2016, we entered into an agreement pursuant to which the Partnership agreed to acquire, among other things, all of the equity interests in our general partner, MEMP GP, from Memorial Resource (the “MEMP GP Acquisition”) for cash consideration of approximately $0.8 million. MEMP GP held an approximate 0.1% general partner interest and 50% of the incentive distribution rights ("IDRs") in us.  In connection with the MEMP GP Acquisition, on April 27, 2016, we also entered into an agreement with a NGP affiliate pursuant to which we agreed to acquire the other 50% of the IDRs. The acquisition was accounted for as an equity transaction and no gain or loss was recognized as a result of the acquisition.

In connection with the closing of the transactions on June 1, 2016, our partnership agreement was amended and restated to, among other things, (i) convert the 0.1% general partner interest in the Partnership held by MEMP GP into a non-economic general partner interest, (ii) cancel the IDRs, and (iii) provide that the limited partners of the Partnership will elect the members of MEMP GP’s board of directors beginning with the annual meeting in 2017.  In addition, we terminated the omnibus agreement under which Memorial Resource provided management, administrative and operations personnel to us and our general partner, and we entered into a transition services agreement with Memorial Resource to manage certain post-closing separation costs and activities. See Note 11 and Note 12 for additional information regarding the MEMP GP Acquisition and the transition services agreement.

Previous Owners

References to “the previous owners” for accounting and financial reporting purposes refer to certain oil and gas properties primarily located in East Texas and West Louisiana that the Partnership acquired on February 23, 2015 from certain operating subsidiaries of Memorial Resource in exchange for cash and certain of our oil and natural gas properties primarily located in North Louisiana for periods after common control commenced through the date of acquisition.  We refer to this transaction as the “Property Swap.”  The acquired East Texas oil and natural gas properties were owned by Classic Hydrocarbons Holdings, L.P. or its subsidiaries.  The Property Swap was accounted for as a transaction between entities under common control, similar to a pooling of interests, whereby the net assets acquired were recorded at historical cost and certain financial and other information were retrospectively revised to give effect to the Property Swap as if the Partnership owned the assets for periods after common control commenced through the acquisition date.

Basis of Presentation

Our consolidated results of operations are presented together with the combined results of operations pertaining to the previous owners.  The combined financial statements of the previous owners were derived from their historical accounting records and reflect their historical financial position, results of operations and cash flows.  The inclusion of MEMP GP in our consolidated financial statements was effective June 1, 2016 due to the MEMP GP Acquisition.  See Note 11 for more information.  Certain amounts in the prior year financial statements have been reclassified to conform to current presentation.

11


MEMORIAL PRODUCTION PARTNERS LP

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

Our results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of results expected for the full year. In our opinion, the accompanying unaudited condensed consolidated and combined financial statements include all adjustments of a normal recurring nature necessary for fair presentation. Although we believe the disclosures in these financial statements are adequate and make the information presented not misleading, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC.

All material intercompany transactions and balances have been eliminated in preparation of our consolidated and combined financial statements.

Use of Estimates

The preparation of the accompanying unaudited condensed consolidated and combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated and combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates include, but are not limited to, oil and natural gas reserves; depreciation, depletion, and amortization of proved oil and natural gas properties; future cash flows from oil and natural gas properties; impairment of long-lived assets; fair value of derivatives; fair value of equity compensation; fair values of assets acquired and liabilities assumed in business combinations and asset retirement obligations.

 

 

Note 2. Summary of Significant Accounting Policies

A discussion of our significant accounting policies and estimates is included in our 2015 Form 10-K.

Accrued Liabilities

Current accrued liabilities consisted of the following at the dates indicated (in thousands):

 

 

June 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Accrued interest payable

$

21,865

 

 

$

23,192

 

Accrued lease operating expense

 

13,469

 

 

 

16,843

 

Accrued capital expenditures

 

6,351

 

 

 

8,110

 

Accrued general and administrative expenses

 

3,657

 

 

 

1,961

 

Accrued ad valorem tax

 

3,927

 

 

 

1,426

 

Asset retirement obligation

 

830

 

 

 

1,175

 

Environmental liability

 

 

 

 

216

 

Other

 

2,075

 

 

 

 

 

$

52,174

 

 

$

52,923

 

Supplemental Cash Flows

Supplemental cash flow for the periods presented (in thousands):

 

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

 

2016

 

 

2015

 

Supplemental cash flows:

 

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

 

57,589

 

 

 

49,369

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Increase (decrease) in capital expenditures in payables and accrued liabilities

 

 

(1,759

)

 

 

1,434

 

(Increase) decrease in accounts receivable related to acquisitions

 

 

 

 

 

9,570

 

Repurchases under unit repurchase program

 

 

 

 

 

2,710

 

(Increase) decrease in accounts receivable related to divestitures

 

 

(856

)

 

 

 

Asset retirement obligation removal related to divestitures

 

 

6,212

 

 

 

 

Restricted units returned to plan

 

 

 

 

 

1,281

 

12


MEMORIAL PRODUCTION PARTNERS LP

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

New Accounting Pronouncements

Improvements to Employee Share-Based Payment Accounting.  In March 2016, the FASB issued an accounting standards update to reduce complexity involving several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Entities will no longer record excess tax benefits and certain tax deficiencies in equity. Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement.  In addition, the new guidance eliminates the requirement that excess tax benefits be realized before entities can recognize them and requires entities to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, the new guidance will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance requires an entity to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. In addition, entities will now have to elect whether to account for forfeitures on share-based payments by: (i) recognizing forfeitures of awards as they occur or (ii) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required.  

The new guidance is effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted, but all of the guidance must be adopted in the same period. For the amendments that change the recognition and measurement of share-based payment awards, the new guidance requires transition under a modified retrospective approach, with a cumulative-effect adjustment made to retained earnings as of the beginning of the fiscal period in which the guidance is adopted.  Prospective application is required for the accounting for excess tax benefits and tax deficiencies. Entities should apply the new guidance retrospectively for all periods presented related to the classification of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirements. Entities may apply the presentation changes for excess tax benefits in the statement of cash flows either prospectively or retrospectively.  The Partnership is currently assessing the impact the adoption of this new guidance will have on our consolidated financial statements and related disclosures.

Leases.  In February 2016, the FASB issued a revision to lease accounting guidance. The FASB retained a dual model, requiring leases to be classified as either direct financing or operating leases. The classification will be based on criteria that are similar to the current lease accounting treatment. The revised guidance requires lessees to recognize a right-of-use asset and lease liability for all leasing transactions regardless of classification. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments are effective for financial statements issued for annual periods beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The revised guidance must be adopted using a modified retrospective transition and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Partnership is currently evaluating the standard and the impact on the consolidated financial statements and related footnote disclosures.

Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions.  In April 2015, the FASB issued an accounting standards update that specifies that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method are also required.  The guidance was effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. We adopted this guidance on January 1, 2016. Since the Partnership has historically allocated the earnings (losses) of transferred businesses that occurred in periods before the date of the dropdown transaction entirely to affiliates of the general partner (i.e., the previous owners) and did not adjust previously reported earnings per unit of the limited partners, the impact of adopting this guidance was not material to the Partnership’s financial statements and related disclosures.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Partnership’s financial position, results of operations and cash flows.

 

 

13


MEMORIAL PRODUCTION PARTNERS LP

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

Note 3. Acquisitions and Divestitures

Related Party Acquisitions

See Note 11 for further information regarding related party acquisitions that have been accounted for as transactions between entities under common control that impact the basis of presentation for the periods presented.

Acquisition and Divestiture related Expenses

Acquisition and divestiture related expenses for both related party and third party transactions are included in general and administrative expenses in the accompanying statements of operations for the periods indicated below (in thousands):

 

For the Three Months Ended

 

 

For the Six Months Ended

 

June 30,

 

 

June 30,

 

2016

 

 

2015

 

 

2016

 

 

2015

 

$

927

 

 

$

297

 

 

$

1,013

 

 

$

1,596

 

2015 Acquisitions

 2015 Beta Acquisition. On November 3, 2015, we closed a transaction to acquire the noncontrolling interest in San Pedro Bay Pipeline Company (“SPBPC”) and the remaining interests in our oil and gas properties offshore Southern California (the “Beta Properties”) from a third party (the “2015 Beta Acquisition”), which was discussed in our 2015 Form 10-K.

Pro forma Information. The following unaudited pro forma combined results of operations are provided for the three and six months ended June 30, 2015 as though the 2015 Beta Acquisition had been completed on January 1, 2014. The unaudited pro forma financial information was derived from the historical consolidated and combined statements of operations of the Partnership and the previous owners and adjusted to include: (i) the revenues and direct operating expenses associated with oil and gas properties acquired, (ii) depletion expense applied to the adjusted basis of the properties acquired, (iii) accretion expense associated with asset retirement obligations recorded and (iv) interest expense on additional borrowings necessary to finance the acquisition. The unaudited pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transaction occurred on the basis assumed above, nor is such information indicative of expected future results of operations.    

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2015

 

 

 

(In thousands, except per unit amounts)

 

Revenues

 

$

106,769

 

 

$

205,849

 

Net income (loss)

 

 

(109,807

)

 

 

(272,113

)

Basic and diluted earnings per unit

 

 

(1.31

)

 

 

(3.21

)

Divestitures

On June 14, 2016, we closed a transaction to divest assets located in the Permian Basin (“Permian Divestiture”) for a total purchase price of approximately $37.2 million, which included $36.4 million in cash and $0.8 million in accounts receivable, subject to post-closing adjustments. We recognized a gain of $7.6 million on the sale of properties related to the Permian Divestiture in “(gain) loss on sale of properties” in the accompanying statement of operations.  The proceeds from this transaction were used to reduce borrowings under our revolving credit facility.  This disposition does not qualify as a discontinued operation.  There were no significant divestitures for the six months ended June 30, 2015.

14


MEMORIAL PRODUCTION PARTNERS LP

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

Assets Held for Sale

On June 17, 2016, we entered into a definitive agreement to divest certain of our non-core assets in Colorado and Wyoming (the “Rockies Divestiture”).  The assets held for sale are recorded at the lower of their carrying value or fair value less cost to sell. We recorded a loss as a result of the planned disposal of approximately $4.0 million during the three and six months ended June 30, 2016 in “(gain) loss on sale of properties” in the accompanying statement of operations. The major categories of assets and liabilities were:

 

 

 

 

June 30,

 

 

 

 

2016

 

Assets classified as held for sale

 

(In thousands)

 

Property and equipment, at cost:

 

 

 

 

 

Oil and natural gas properties, successful efforts method

 

$

128,375

 

 

Accumulated depreciation, depletion, and impairment

 

 

(98,232

)

Property and equipment, net

 

 

30,143

 

Total assets classified as held for sale

 

$

30,143

 

 

 

 

 

 

 

Liabilities associated with assets held for sale

 

 

 

 

Current Liabilities:

 

 

 

 

 

Revenue payable

 

$

414

 

 

Accrued liabilities

 

 

185

 

Total current liabilities

 

 

599

 

Asset retirement obligations

 

 

11,819

 

Total liabilities associated with assets held for sale

 

$

12,418

 

Subsequent Event. We closed the Rockies Divestiture on July 14, 2016 for total proceeds of approximately $18.1 million, subject to post-closing adjustments. Proceeds from this transaction were used to reduce borrowings under our revolving credit facility. This disposition does not qualify as a discontinued operation.

The income (loss) before income taxes, including the associated (gain) loss on sale of properties, related to the Permian Divestiture and the Rockies Divestiture included in the unaudited condensed statements of consolidated and combined operations of the Partnership is as follows (in thousands):

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Permian Divestiture

$

6,855

 

 

$

(3,686

)

 

$

4,832

 

 

$

(6,233

)

Rockies Divestiture

 

(5,860

)

 

 

670

 

 

 

(7,620

)

 

 

(55,733

)

 

 

Note 4. Fair Value Measurements of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a specified measurement date. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk. A three-tier hierarchy has been established that classifies fair value amounts recognized or disclosed in the financial statements. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). All of the derivative instruments reflected on the accompanying balance sheets were considered Level 2.

The carrying values of accounts receivables, accounts payables (including accrued liabilities), restricted investments and amounts outstanding under long-term debt agreements with variable rates included in the accompanying balance sheets approximated fair value at June 30, 2016 and December 31, 2015. The fair value estimates are based upon observable market data and are classified within Level 2 of the fair value hierarchy. These assets and liabilities are not presented in the following tables. See Note 7 for the estimated fair value of our outstanding fixed-rate debt.

15


MEMORIAL PRODUCTION PARTNERS LP

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair market values of the derivative financial instruments reflected on the balance sheets as of June 30, 2016 and December 31, 2015 were based on estimated forward commodity prices and forward interest rate yield curves. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement in its entirety. The significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

The following table presents the gross derivative assets and liabilities that are measured at fair value on a recurring basis at June 30, 2016 and December 31, 2015 for each of the fair value hierarchy levels:

 

 

Fair Value Measurements at June 30, 2016 Using

 

 

Quoted Prices in

 

 

Significant Other

 

 

Significant

 

 

 

 

 

 

Active Market