Amplify Energy Corp.
Amplify Energy Corp (Form: 10-Q, Received: 05/10/2017 16:33:17)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10–Q

 

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

For the quarterly period ended March 31, 2017

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

 

AMPLIFY ENERGY CORP.

(Successor in interest to Memorial Production Partners LP)

(Exact name of registrant as specified in its charter)

 

Delaware

 

82-1326219

(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       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       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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     (Do not check if a smaller reporting company)

Smaller reporting company  

Emerging growth company

 

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

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes       No

As of May 5, 2017, the registrant had 25,000,000 outstanding shares of common stock, $0.0001 par value outstanding.

 

 

 


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS 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 March 31, 2017 and December 31, 2016

 

8

 

 

Unaudited Condensed Statements of Consolidated Operations for the Three Months Ended March 31, 2017 and 2016

 

9

 

 

Unaudited Condensed Statements of Consolidated Cash Flows for the Three Months Ended March 31, 2017 and 2016

 

10

 

 

Unaudited Condensed Statements of Consolidated Equity for the Three Months Ended March 31, 2017

 

11

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

Note 1 – Organization and Basis of Presentation

 

12

 

 

Note 2 – Chapter 11 Proceedings, Liquidity and Ability to Continue as a Going Concern

 

13

 

 

Note 3 – Summary of Significant Accounting Policies

 

17

 

 

Note 4 – Acquisitions and Divestitures

 

19

 

 

Note 5 – Fair Value Measurements of Financial Instruments

 

19

 

 

Note 6 – Risk Management and Derivative Instruments

 

21

 

 

Note 7 – Asset Retirement Obligations

 

23

 

 

Note 8 – Debt

 

23

 

 

Note 9 – Equity & Distributions

 

25

 

 

Note 10 – Earnings per Unit

 

26

 

 

Note 11 – Unit-Based Awards

 

26

 

 

Note 12 – Related Party Transactions

 

27

 

 

Note 13 – Commitments and Contingencies

 

28

 

 

Note 14 – Subsequent Events

 

29

 

 

 

 

 

Item 2.

 

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

 

30

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

39

Item 4.

 

Controls and Procedures

 

40

 

 

PART II—OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

41

Item 1A.

 

Risk Factors

 

41

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

Item 3.

 

Defaults Upon Senior Securities

 

41

Item 4.

 

Mine Safety Disclosures

 

41

Item 5.

 

Other Information

 

41

Item 6.

 

Exhibits

 

43

 

 

 

Signatures

 

44

 

 

 

i


G LOSSARY 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 Btu.

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.

1


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 occurrence.

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.

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. During the Predecessor period, we were generally not subject to federal or state income taxes and thus made no provision for federal or state income taxes in the calculation of the Predecessor’s standardized measure. Standardized measure does not give effect to derivative transactions.

2


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


N AMES OF ENTITIES

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

 

“Amplify Energy,” “Successor,” and “Reorganized Memorial,” refer to Amplify Energy Corp., the successor reporting company of Memorial Production Partners LP, individually and collectively with its subsidiaries, as the context requires;

 

“Memorial Production Partners,” “MEMP,” and “Predecessor” refer to Memorial Production Partners LP, individually and collectively with its subsidiaries;

 

“Company,” “we,” “our,” “us” or like terms refer to Memorial Production Partners LP for the period prior to emergence from bankruptcy and to Amplify Energy Corp. for the period after emergence from bankruptcy;

 

“Predecessor’s general partner” and “MEMP GP” refer to Memorial Production Partners GP LLC, the Predecessor’s general partner and wholly-owned subsidiary;

 

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

 

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

 

“Memorial Resource” refers collectively to Memorial Resource Development Corp., the former owner of the Predecessor’s general partner, and its subsidiaries;

 

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

 

“MRD Holdco” refers to MRD Holdco LLC, which together with a group controlled Memorial Resource; and

 

“NGP” refers to Natural Gas Partners.

 

 

 

4


C AUTIONARY NOTE REGARDING FORWARD–LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:

 

bankruptcy proceedings and the effect of those proceedings on our ongoing and future operations;

 

business strategies, including our business strategies post-emergence from bankruptcy;

 

cash flows and liquidity;

 

financial strategy;

 

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;

 

gathering, processing, and transportation;

 

general and administrative expenses;

 

future operating results;

 

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


All 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 o ur expectations include, but are not limited to, the following risks and uncertainties:

 

the results of our bankruptcy proceedings could differ from our expectations;

 

our future cash flows and their adequacy to fund our ongoing operations;

 

our inability to maintain relationships with suppliers, customers, employees and other third parties as a result of our Chapter 11 filing;

 

our indebtedness and our ability to satisfy our debt obligations and a potential inability to effect deleveraging transactions or otherwise reduce those risks;

 

risks related to a redetermination of the borrowing base under our revolving credit facility;

 

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;

 

the existence of unanticipated liabilities or problems relating to acquired or divested businesses or properties;

 

potential acquisitions, including our ability to make acquisitions on favorable terms or to integrate acquired properties;

 

the consequences of changes we have made, or may make from time to time in the future, to our capital expenditure budget, including the impact of those changes on our production levels, reserves, results of operations and liquidity;

 

potential shortages of, or increased costs for, drilling and production equipment and supply materials for production, such as CO 2 ;

 

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 the Predecessor’s 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; and

 

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

6


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 curr ently 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 assum ptions 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, 2016 filed with the SEC on March 10, 2017 (“2016 Form 10-K”) 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 per sons acting on our behalf.

 

7


 

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except outstanding units)

 

 

March 31,

 

 

December 31,

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

80,022

 

 

$

15,373

 

Accounts receivable

 

30,823

 

 

 

34,584

 

Short-term derivative instruments

 

42,567

 

 

 

69,464

 

Prepaid expenses and other current assets

 

7,512

 

 

 

13,163

 

Total current assets

 

160,924

 

 

 

132,584

 

Property and equipment, at cost:

 

 

 

 

 

 

 

Oil and natural gas properties, successful efforts method

 

3,119,878

 

 

 

3,115,012

 

Support equipment and facilities

 

199,304

 

 

 

199,093

 

Other

 

15,394

 

 

 

15,344

 

Accumulated depreciation, depletion and impairment

 

(1,777,670

)

 

 

(1,749,747

)

Property and equipment, net

 

1,556,906

 

 

 

1,579,702

 

Long-term derivative instruments

 

34,797

 

 

 

102,630

 

Restricted investments

 

156,388

 

 

 

156,234

 

Other long-term assets

 

1,973

 

 

 

2,104

 

Total assets

$

1,910,988

 

 

$

1,973,254

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

2,483

 

 

$

4,353

 

Revenues payable

 

22,678

 

 

 

21,285

 

Accrued liabilities (see Note 3)

 

22,318

 

 

 

65,235

 

Current portion of long-term debt (see Note 8)

 

454,799

 

 

 

1,622,904

 

Total current liabilities

 

502,278

 

 

 

1,713,777

 

Liabilities subject to compromise (see Note 2)

 

1,162,305

 

 

 

 

Asset retirement obligations

 

157,390

 

 

 

154,913

 

Deferred tax liabilities

 

2,206

 

 

 

2,280

 

Other long-term liabilities

 

2,629

 

 

 

2,795

 

Total liabilities

 

1,826,808

 

 

 

1,873,765

 

Commitments and contingencies (see Note 13)

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Partners' equity:

 

 

 

 

 

 

 

Common units (83,800,287 units outstanding at March 31, 2017 and 83,827,920 units outstanding at December 31, 2016)

 

84,180

 

 

 

99,489

 

Total partners' equity

 

84,180

 

 

 

99,489

 

Total liabilities and equity

$

1,910,988

 

 

$

1,973,254

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

8


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS

(In thousands, except per unit amounts)

  

 

For the Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

Oil & natural gas sales

$

81,284

 

 

$

60,623

 

Other revenues

 

96

 

 

 

243

 

Total revenues

 

81,380

 

 

 

60,866

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Lease operating

 

25,986

 

 

 

35,696

 

Gathering, processing, and transportation

 

8,035

 

 

 

9,209

 

Exploration

 

16

 

 

 

122

 

Taxes other than income

 

4,266

 

 

 

4,008

 

Depreciation, depletion, and amortization

 

27,882

 

 

 

44,429

 

Impairment of proved oil and natural gas properties

 

 

 

 

8,342

 

General and administrative

 

23,370

 

 

 

13,524

 

Accretion of asset retirement obligations

 

2,495

 

 

 

2,707

 

(Gain) loss on commodity derivative instruments

 

(10,241

)

 

 

(51,745

)

(Gain) loss on sale of properties

 

 

 

 

(96

)

Other, net

 

(8

)

 

 

119

 

Total costs and expenses

 

81,801

 

 

 

66,315

 

Operating income (loss)

 

(421

)

 

 

(5,449

)

Other income (expense):

 

 

 

 

 

 

 

Interest expense, net

 

(8,400

)

 

 

(32,552

)

Other income (expense)

 

6

 

 

 

 

Total other income (expense)

 

(8,394

)

 

 

(32,552

)

Income (loss) before income taxes

 

(8,815

)

 

 

(38,001

)

Reorganization items, net

 

(7,653

)

 

 

 

Income tax benefit (expense)

 

91

 

 

 

(96

)

Net income (loss)

 

(16,377

)

 

 

(38,097

)

Net income (loss) attributable to Memorial Production Partners LP

$

(16,377

)

 

$

(38,097

)

 

 

 

 

 

 

 

 

Limited partners' interest in net income (loss):

 

 

 

 

 

 

 

Net income (loss) attributable to Memorial Production Partners LP

$

(16,377

)

 

$

(38,097

)

Net (income) loss allocated to general partner

 

 

 

 

40

 

Limited partners' interest in net income (loss)

$

(16,377

)

 

$

(38,057

)

 

 

 

 

 

 

 

 

Earnings per unit: (Note 10)

 

 

 

 

 

 

 

Basic and diluted earnings per unit

$

(0.20

)

 

$

(0.46

)

Weighted average limited partner units outstanding:

 

 

 

 

 

 

 

Basic and diluted

 

83,810

 

 

 

82,935

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

9


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(In thousands)

 

 

For the Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

$

(16,377

)

 

$

(38,097

)

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

 

 

 

 

 

 

 

Depreciation, depletion, and amortization

 

27,882

 

 

 

44,429

 

Impairment of proved oil and natural gas properties

 

 

 

 

8,342

 

(Gain) loss on derivative instruments

 

(10,241

)

 

 

(48,063

)

Cash settlements (paid) received on expired derivative instruments

 

10,826

 

 

 

79,691

 

Cash settlements (paid) on terminated derivatives

 

94,146

 

 

 

 

Deferred income tax expense (benefit)

 

(74

)

 

 

65

 

Amortization of deferred financing costs

 

 

 

 

1,202

 

Accretion of senior notes discount

 

 

 

 

605

 

Accretion of asset retirement obligations

 

2,495

 

 

 

2,707

 

Gain on sale of properties

 

 

 

 

(96

)

Unit-based compensation (see Note 11)

 

1,125

 

 

 

2,568

 

Settlement of asset retirement obligations

 

(113

)

 

 

(615

)

Reorganization items, net

 

3,767

 

 

 

 

Other

 

41

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

3,761

 

 

 

14,977

 

Prepaid expenses and other assets

 

4,099

 

 

 

2,190

 

Payables and accrued liabilities

 

4,650

 

 

 

7,058

 

Other

 

(222

)

 

 

43

 

Net cash provided by operating activities

 

125,765

 

 

 

77,006

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Additions to oil and gas properties

 

(3,908

)

 

 

(22,537

)

Additions to restricted investments

 

(154

)

 

 

(2,136

)

Additions to other property and equipment

 

(50

)

 

 

(95

)

Proceeds from the sale of oil and natural gas properties, net of cash and cash equivalents sold

 

 

 

 

325

 

Other

 

(150

)

 

 

 

Net cash used in investing activities

 

(4,262

)

 

 

(24,443

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Advances on revolving credit facilities

 

16,600

 

 

 

28,000

 

Payments on revolving credit facilities

 

(73,453

)

 

 

(72,000

)

Deferred financing costs

 

 

 

 

(18

)

Contributions related to sale of assets to NGP affiliate

 

 

 

 

26

 

Distributions to partners

 

 

 

 

(8,304

)

Restricted units returned to plan

 

(1

)

 

 

(30

)

Net cash (used in) provided by financing activities

 

(56,854

)

 

 

(52,326

)

Net change in cash and cash equivalents

 

64,649

 

 

 

237

 

Cash and cash equivalents, beginning of period

 

15,373

 

 

 

599

 

Cash and cash equivalents, end of period

$

80,022

 

 

$

836

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

10


 

AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED EQUITY

(In thousands)

  

 

Partner's Equity

 

 

Limited Partners

 

 

Common

 

Balance at December 31, 2016

$

99,489

 

Net income (loss)

 

(16,377

)

Amortization of unit-based awards

 

1,069

 

Restricted units repurchased and other

 

(1

)

Balance at March 31, 2017

$

84,180

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

11


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

N ote 1. Organization and Basis of Presentation

General

When referring to Amplify Energy Corp. (formerly known as Memorial Production Partners LP and also referred to as “Successor,” “Reorganized Memorial,” “Amplify Energy,” or the “Company”), the intent is to refer to Amplify Energy, a newly formed Delaware corporation, and its consolidated subsidiaries as a whole or on an individual basis, depending on the context in which the statements are made. Amplify Energy is the successor reporting company of Memorial Production Partners LP (“MEMP”) pursuant to Rule 15d-5 of the Securities Exchange Act of 1934, as amended. When referring to the “Predecessor” or the “Company” in reference to the period prior to the emergence from bankruptcy, the intent is to refer to MEMP, the predecessor that was dissolved following the effective date of the Plan (as defined below) and resolution of all outstanding claims, and its consolidated subsidiaries as a whole or on an individual basis, depending on the context in which the statements are made.

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, Wyoming and offshore Southern California. Most of our oil and natural gas properties are located in large, mature oil and natural gas reservoirs. The Company’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 Predecessor’s general partner” and “MEMP GP” refer to Memorial Production Partners GP LLC, our Predecessor’s general partner and wholly-owned subsidiary; (ii) “Memorial Resource” refers collectively to Memorial Resource Development Corp., the former owner of our Predecessor’s general partner, and its subsidiaries; (iii) “the Funds” refers collectively to Natural Gas Partners VIII, L.P., Natural Gas Partners IX, L.P. and NGP IX Offshore Holdings, L.P., which collectively control MRD Holdco LLC; (iv) “OLLC” refers to Amplify Energy Operating LLC, formerly known as Memorial Production Operating LLC, our wholly-owned subsidiary through which we operate our properties; (v) “Finance Corp.” refers to Memorial Production Finance Corporation, our Predecessor’s wholly-owned subsidiary, whose activities were limited to co-issuing our debt securities and engaging in other activities incidental thereto; and (vi) “NGP” refers to Natural Gas Partners.

On April 27, 2016, we entered into an agreement pursuant to which the Predecessor agreed to acquire, among other things, all of the equity interests in our Predecessor’s 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 conjunction with the MEMP GP Acquisition, on April 27, 2016, we also entered into an agreement with an 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 Predecessor’s partnership agreement was amended and restated to, among other things, (i) convert the 0.1% general partner interest in the Predecessor held by MEMP GP into a non-economic general partner interest, (ii) cancel the IDRs, and (iii) provide that the limited partners of the Predecessor will have the ability to elect the members of MEMP GP’s board of directors. In addition, we terminated the omnibus agreement under which Memorial Resource provided management, administrative and operations personnel to us and our Predecessor’s general partner, and we entered into a transition services agreement with Memorial Resource to manage certain post-closing separation costs and activities. See Note 12 and Note 13 for additional information regarding the MEMP GP Acquisition and the transition services agreement.

Basis of Presentation

Our unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and guidelines of the Securities and Exchange Commission (the “SEC”). Our results of operations for the three months ended March 31, 2017 are not necessarily indicative of results expected for the full year. In our opinion, the accompanying unaudited condensed consolidated 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.

The inclusion of MEMP GP in our consolidated financial statements was effective June 1, 2016 due to the MEMP GP Acquisition. All material intercompany transactions and balances have been eliminated in preparation of our consolidated financial statements.

12


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Bankruptcy Accounting

On January 16, 2017, MEMP and certain of its subsidiaries (collectively with MEMP, the “Debtors”) filed voluntary petitions (the cases commenced thereby, the “Chapter 11 proceedings”) under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code” or “Chapter 11”) in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”).

During the Chapter 11 proceedings, the Debtors operated their businesses as “debtors-in-possession” under the Bankruptcy Code. The unaudited condensed consolidated financial statements have been prepared as if the Company is a going concern and reflect the application of Accounting Standards Codification 852 “Reorganizations.” This guidance requires that the financial statements, for the periods subsequent to the Chapter 11 proceedings, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. In addition, the guidance provides for changes in the accounting for and presentation of liabilities. See Note 2 for additional information related to the Chapter 11 proceedings.

Use of Estimates

The preparation of the accompanying unaudited condensed consolidated 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 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. Chapter 11 Proceedings, Liquidity and Ability to Continue as a Going Concern

Chapter 11 Proceedings

On January 16, 2017 (the “Petition Date”), the Debtors filed voluntary petitions under the Bankruptcy Code in the Bankruptcy Court to pursue a Joint Chapter 11 Plan of Reorganization for the Debtors. The Debtors’ Chapter 11 proceedings were jointly administered under the caption In re Memorial Production Partners LP, et al. (Case No. 17-30262). The Bankruptcy Court granted all of the first day motions filed by the Debtors, which were designed primarily to minimize the impact of the Chapter 11 proceedings on the Company’s operations, customers and employees. The Debtors operated their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Debtors continued their operations without interruption during the pendency of the Chapter 11 proceedings.

The commencement of the Chapter 11 proceedings resulted in the acceleration of our revolving credit facility, dated as of December 14, 2011 (as the context may require, as amended, supplemented or otherwise modified, the “revolving credit facility”), and the indentures governing the 7.625% senior notes due May 2021 (“2021 Senior Notes”) and 6.875% senior notes due August 2022 (“2022 Senior Notes” and collectively, the “Notes”). Under the Bankruptcy Code, the creditors under these debt agreements were automatically stayed from taking any action against MEMP as a result of an event of default.

On April 14, 2017, the Bankruptcy Court entered an order (the “Confirmation Order”) approving the Second Amended Joint Plan of Reorganization of Memorial Production Partners LP and its affiliated Debtors, dated April 13, 2017 (as amended and supplemented, the “Plan”). On May 4, 2017 (the “Effective Date”), the Debtors satisfied the conditions to effectiveness of the Plan, the Plan became effective in accordance with its terms and the Company emerged from bankruptcy. Although the Company is no longer a debtor-in-possession, the Company was a debtor-in-possession for part of the quarter ended March 31, 2017 and through May 3, 2017, the date immediately prior to the Effective Date. As such, certain aspects of the Chapter 11 proceedings and related matters are described below in order to provide context to the Company’s financial condition and results of operations for the period presented.

13


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Plan of Reorganization

In accordance with the Plan, on the Effective Date:

 

The Successor issued (i) 25,000,000 new common shares (the “New Common Shares”) and (ii) warrants (the “Warrants”) to purchase up to 2,173,913 shares of the Company’s common stock exercisable for a five-year period commencing on the Effective Date entitling their holders upon exercise thereof, on a pro rata basis, to 8% of the total issued and outstanding New Common Shares (including New Common Shares issuable upon full exercise of the Warrants, but excluding any New Common Shares issuable under the Management Incentive Plan (“MIP”)), at a per share exercise price equal to the principal and accrued interest on the Notes as of December 31, 2016, divided by the number of issued and outstanding New Common Shares (including New Common Shares issuable upon exercise of the Warrants, but excluding any New Common Shares issuable under the MIP), which New Common Shares and Warrants were distributed as set forth below.

 

The holders of claims under the revolving credit facility received a full recovery, consisting of a cash paydown and their pro rata share of the $1 billion exit senior secured reserve-based revolving credit facility (the “Exit Credit Facility”), as further discussed below.

 

The Notes were cancelled and the Predecessor’s liability thereunder discharged, and the holders of the Notes received (directly or indirectly) their pro rata share of New Common Shares representing, in the aggregate, 98% of the New Common Shares on the Effective Date (subject to dilution by the MIP and the New Common Shares issuable upon exercise of the Warrants). Additionally, the holders of the Notes received their pro rata share of a $24.6 million cash distribution.

 

The Predecessor common units were cancelled, and each common unitholder received its pro rata share of: (i) 2% of the New Common Shares, (ii) the Warrants, and (iii) cash in an aggregate amount of approximately $1.3 million.

 

The holders of administrative expense claims, priority tax claims, other priority claims and general unsecured creditors of the Predecessor will receive in exchange for their claims payment in full in cash or otherwise have their rights unimpaired under Title 11 of the United States Code.

 

The Successor entered into a stockholders agreement (the “Stockholders Agreement”) with certain parties in which the Successor agreed to, at the direction of such stockholders, use commercially reasonable efforts to effect the sale of their New Common Shares.

 

The Successor entered into a registration rights agreement (the “Registration Rights Agreement”) with certain parties in which the Successor agreed to, among other things, file a registration statement with the SEC within 90 days of the receipt of a request from the stockholders party thereto covering the offer and resale of the New Common Shares held by such stockholders.

 

The Company’s MIP became effective, in which an aggregate of 2,322,404 shares of the Company’s common stock are available for grant pursuant to awards under the MIP.

 

The terms of the Predecessor’s general partner’s board of directors automatically expired on the Effective Date. The Successor formed a new seven-member board of directors consisting of the President & Chief Executive Officer, one director of the Predecessor, and five new members designated by certain parties of the Noteholder PSA.

Exit Credit Facility

On May 4, 2017, Amplify Energy Operating LLC, as borrower (the “Borrower”), entered into the Amended and Restated Credit Agreement (the “Credit Agreement” or the “Exit Credit Facility”) among Amplify Acquisitionco Inc., a Delaware corporation (“Acquisitionco”), as parent guarantor, the lenders from time to time party thereto and Wells Fargo Bank, National Association, as Administrative Agent. Pursuant to the Credit Agreement the lenders party thereto agreed to provide the Borrower with a $1 billion exit senior secured reserve-based revolving credit facility (the “Exit Facility” and the loans thereunder, the “Loans”). The aggregate principal amount of Loans outstanding under the Credit Agreement as of the Effective Date was $430 million.

The terms and conditions under the Credit Agreement include (but are not limited to) the following:

 

a borrowing base is approximately $490.0 million (which borrowing base amount will be reduced by $2.5 million each month until the next scheduled redetermination of the borrowing base to occur in November 2017);

 

a maturity date of March 19, 2021 for the Exit Credit Facility;

 

the Loans shall bear interest at a rate per annum equal to (i) the alternative base rate plus an applicable margin of 2.00% to 3.00% or (ii) adjusted LIBOR plus an applicable margin of 3.00% to 4.00%, in each case based on the borrowing base utilization percentage under the Exit Credit Facility;

14


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

the unused commitments under the Exit Credit Facility will accrue a commitment fee of 0.50%, payable quarterly in arrears;

 

the obligations under the Credit Agreement are guaranteed by Acquisitionco and substantially all of the Borrower’s subsidiaries (the “Guarantors”), subject to limited exceptions, and secured on a first-priority basis by substantially all of the Borrower’s and the Guarantors’ assets, including, without limitation, liens on at least 95% of the total value of the Borrower’s and the Guarantors’ oil and gas properties, a non-recourse pledge by the Company of the capital stock of Acquisitionco, a pledge by Acquisitionco of the capital stock of the Borrower and pledges of stock of all other direct and indirect subsidiaries of the Borrower, subject to certain limited exceptions; and

 

certain financial covenants, including the maintenance of (i) an interest coverage ratio not to exceed 2.50 to 1.00, determined as of the last day of each fiscal quarter for the four fiscal-quarter period then ending, commencing with the fiscal quarter ending September 30, 2017, (ii) a current ratio, determined as of the last day of each fiscal quarter for the four fiscal-quarter period then ending, commencing with the fiscal quarter ending September 30, 2017, of not less than 1.00 to 1.00 and (iii) a total leverage ratio, determined as of the last day of each fiscal quarter for the four fiscal-quarter period then ending, commencing with the fiscal quarter ending September 30, 2017, of less than or equal to 4.00 to 1.00.

 

The Credit Agreement also contains certain events of default, including, without limitation: non-payment; breaches of representations and warranties; non-compliance with covenants or other agreements; cross-default to material indebtedness; judgments; change of control; and voluntary and involuntary bankruptcy.

The foregoing description of the Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the Credit Agreement filed as Exhibit 10.4 to this Quarterly Report on Form 10-Q and incorporated into this Note 2 by reference.

Plan Support Agreements

On December 22, 2016, the Predecessor entered into a Plan Support Agreement (“Noteholder PSA”) with certain holders of the Notes, as well as reached an agreement-in-principle with the administrative agent under our revolving credit facility on the terms of a financial restructuring. Under the terms of the Noteholder PSA, the financial restructuring would be effected through the Plan.

A summary of the Noteholder PSA is set forth in our Current Report on Form 8-K filed with the SEC on December 23, 2016 and our 2016 Form 10-K. On March 25, 2017, the requisite noteholders, pursuant to the Plan, elected to receive the approximately $24.6 million cash distribution in accordance with the Plan.

On January 13, 2017, the Predecessor entered into a Plan Support Agreement (the “RBL PSA”) with lenders holding 100% of the loans under our revolving credit facility. The RBL PSA was entered into on terms substantially similar to those of the Noteholder PSA. In addition, among other things, the RBL PSA provided that (i) the consenting lenders (as defined in the RBL PSA) may terminate the RBL PSA upon the termination of the Noteholder PSA or if there is an amendment to the Noteholder PSA that is, or would reasonably be expected to be, adverse to the administrative agent under our revolving credit facility or the consenting lenders and (ii) each of the Debtors agreed to not file a voluntary petition for relief under Chapter 11 of the Bankruptcy Code until the Debtors terminated certain swap agreements identified in the RBL PSA and used the net proceeds thereof to repay outstanding amounts under the revolving credit facility.

A summary of the RBL PSA is set forth in our Current Report on Form 8-K filed with the SEC on January 17, 2017 and in our 2016 Form 10-K.  

Effect of Filing on Creditors and Unitholders

Subject to certain exceptions, under the Bankruptcy Code, the filing of bankruptcy petitions automatically stayed the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the Petition Date. Absent an order of the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities were subject to settlement under the Bankruptcy Code. Although the filing of bankruptcy petitions triggered defaults on the Debtors’ debt obligations, creditors were stayed from taking any actions against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. The Company did not record interest expense on the Notes for the period from January 17, 2017 through March 31, 2017. For that period, unrecorded contractual interest was approximately $16.7 million.

Under the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities and post-petition liabilities must be satisfied in full before the holders of the Predecessor’s existing common units are entitled to receive any settlement or retain any property under a plan of reorganization. On the Effective Date, creditors and unitholders received the distributions detailed above under “Chapter 11 Proceedings — Plan of Reorganization.”

15


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Liabilities Subject to Compromise

Liabilities subject to compromise represent liabilities incurred prior to the Petition Date which are affected by the Chapter 11 proceedings. These amounts represent the Debtors’ allowed claims and its best estimate of claims expected to be allowed which will be resolved as part of the Chapter 11 proceedings. The difference between the liabilities the Company has estimated and the claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 proceedings and adjust amounts as necessary. Such adjustments may be material.

The following table summarizes the components of liabilities subject to compromise included on the accompanying unaudited condensed consolidated balance sheet at the date indicated (in thousands):

 

 

March 31, 2017

 

Accounts payable

$

1,257

 

Accrued interest payable

 

49,796

 

Debt

 

1,111,252

 

Liabilities subject to compromise

$

1,162,305

 

 

Reorganization Items, Net

The Company has incurred and is expected to continue to incur significant costs associated with the reorganization. These costs, which are expensed as incurred, are expected to significantly affect the Company’s results of operations. Reorganization items, net represent costs and income directly associated with the Chapter 11 proceedings since the Petition Date.

The following table summarizes the components of reorganization items, net included in the accompanying unaudited condensed statements of consolidated operations (in thousands):

 

For the Three Months Ended

 

 

March 31, 2017

 

Legal and other professional advisory fees

$

7,585

 

Other

 

68

 

Reorganization items, net

$

7,653

 

 

Fresh Start Accounting

Upon emergence from Chapter 11 proceedings on May 4, 2017, we adopted fresh start accounting as required by GAAP. We meet the requirements of fresh start accounting which include: (i) the holders of the voting common units of the Predecessor prior to the Effective Date received less than 50% of the voting shares of the Company and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims. Adopting fresh-start accounting resulted in a new financial reporting entity with no beginning or ending retained earnings or deficit balances as of the fresh-start reporting date. Upon the adoption of fresh-start accounting, our assets and liabilities will be recorded at their fair values as of the fresh-start reporting date. Our adoption of fresh-start accounting may materially affect our results of operations following the fresh-start reporting date, as we have a new basis in our assets and liabilities.  

Liquidity and Ability to Continue as a Going Concern

Continued low commodity prices during 2016 resulted in significantly lower levels of cash flow from operating activities and limited the Company’s ability to access the capital markets. Low commodity prices also adversely impacted our redeterminations of our borrowing base under our revolving credit facility during 2016. On January 13, 2017, we monetized certain hedge positions and used a portion of the cash proceeds to repay outstanding borrowings under our revolving credit facility and kept the remaining portion as cash on hand for general partnership purposes. In connection with the hedge monetization, our borrowing base under our revolving credit facility was reduced from $530.7 million at December 31, 2016 to $457.2 million, with outstanding borrowings totaling $454.8 million. The reduced borrowing base had a significant negative impact on the Company’s liquidity and ability to remain in compliance with certain financial covenants.

In 2016, in order to decrease the Company’s level of indebtedness and maintain the Company’s liquidity at levels sufficient to meet its commitments, the Company undertook a number of actions, including divesting certain non-core assets, minimizing capital expenditures and further reducing its recurring operating expenses. Despite taking these actions, the Company did not have sufficient liquidity to satisfy its debt service obligations, meet other financial obligations and comply with its debt covenants. As a result, the Debtors filed bankruptcy petitions under Chapter 11 of the Bankruptcy Code on January 16, 2017.

16


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Debtors’ Chapter 11 proceedings accelerated the Predecessor’s obligations under its revolving credit fac ility, 2021 Senior Notes and 2022 Senior Notes. In addition, various other defaults existed prior to the filing of the bankruptcy petitions, including: (i) failure to pay the interest payment on the 2021 Senior Notes, which constituted a default and event of default under our revolving credit facility, (ii) our inability to comply with certain financial covenants contained in our revolving credit facility, (iii) the effect of the default and cross default provisions in the indenture governing the Notes, and (iv) the receipt of a going concern explanatory paragraph from the Company’s independent registered public accounting firm on the Company’s consolidated financial statements for the year ended December 31, 2016.

The significant risks and uncertainties related to the Company’s liquidity and Chapter 11 proceedings described above raise substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty. If the Company cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material.

On May 4, 2017, the Company emerged from bankruptcy and entered into an Exit Credit Facility with an initial borrowing base of $490.0 million. Refer to the Exit Credit Facility discussion noted above for additional information.

Note 3. Summary of Significant Accounting Policies

A discussion of our significant accounting policies and estimates is included in our 2016 Form 10-K.

Accrued Liabilities

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

 

March 31,

 

 

December 31,

 

 

2017

 

 

2016

 

Accrued lease operating expense

$

7,860

 

 

$

10,411

 

Accrued general and administrative expenses

 

5,745

 

 

 

3,040

 

Accrued capital expenditures

 

2,738

 

 

 

1,826

 

Accrued reorganization items, net

 

2,414

 

 

 

 

Accrued ad valorem tax

 

969

 

 

 

977

 

Asset retirement obligation

 

789

 

 

 

789

 

Accrued interest payable (1)

 

53

 

 

 

46,417

 

Other

 

1,750

 

 

 

1,775

 

Accrued liabilities

$

22,318

 

 

$

65,235

 

 

 

(1)

As a result of the Chapter 11 proceedings, the accrued interest related to the Notes has been reclassified from accrued interest payable to liabilities subject to compromise at March 31, 2017. See Note 2 for additional information.

Supplemental Cash Flows

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

 

For the Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

Supplemental cash flows:

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

$

4,777

 

 

$

22,793

 

Cash paid for reorganization items, net

 

3,887

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

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

 

912

 

 

 

1,875

 

Asset retirement obligation removal related to divestitures

 

 

 

 

(451

)

17


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

New Accounting Pronouncements

Definition of a Business. In January 2017, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update to clarify the definition of a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments provide a more robust framework to use in determining when a set of assets and activities is a business. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted and the guidance is to be applied on a prospective basis to purchases or disposals of a business or an asset. The Company is currently assessing the impact the adoption of this new guidance will have on our consolidated financial statements and related disclosures.

Statement of Cash Flows – Restricted Cash a consensus of the FASB Emerging Issues Task Force. In November 2016, the FASB issued an accounting standards update to clarify the guidance on the classification and presentation of restricted cash in the statement of cash flows. The changes in restricted cash and restricted cash equivalents that result from the transfers between cash, cash equivalents, and restricted cash and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows. The new guidance is effective for reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The new guidance requires transition under a retrospective approach for each period presented. The Company is currently assessing the impact the adoption of this new guidance will have on our consolidated financial statements and related disclosures.

Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued an accounting standards update to address eight specific cash flow issues with the objective of reducing the current and potential future diversity in practice. The new guidance is effective for reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The new guidance requires transition under a retrospective approach for each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company 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 Company is the lessee under various agreements for office space, compressors, equipment, and surface rentals that are currently accounted for as operating leases. As a result, these new rules will increase reported assets and liabilities. The Company will not early adopt this standard. The Company will apply the revised lease rules for our interim and annual reporting periods starting January 1, 2019 using a modified retrospective approach, including several optional practical expedients related to leases commenced before the effective date. The Company is currently evaluating the impact of these rules on its financial statements and has started the assessment process by evaluating the population of leases under the revised definition. The quantitative impacts of the new standard are dependent on the leases in force at the time of adoption. As a result, the evaluation of the effect of the new standards will extend over future periods.

Revenue from Contracts with Customers . In May 2014, the FASB issued guidance regarding the accounting for revenue from contracts with customers. This standard includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Among other things, the standard also eliminates industry-specific revenue guidance and requires enhanced disclosures related to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for interim and annual reporting periods starting January 1, 2018, and early adoption is permitted. The Company will not early adopt the standard and plans to use a modified retrospective approach upon adoption with the cumulative effect of initial application recognized at the date of initial application subject to certain additional disclosures. The Company is currently evaluating its revenue streams and contracts under the revised standard to determine the impact it is expected to have on the consolidated financial statements and related disclosures.

18


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 Company’s financial position, results of operations and cash flows.

N ote 4. Acquisitions and Divestitures

Related Party Acquisitions

See Note 12 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 unaudited condensed statements of consolidated operations for the periods indicated below (in thousands):

For the Three Months Ended

 

March 31,

 

2017

 

 

2016

 

$

 

 

$

86

 

 

Acquisitions and Divestitures

There were no material acquisitions or divestitures during the three months ended March 31, 2017.

On July 14, 2016, we closed a transaction to divest certain assets located in Colorado and Wyoming (the “Rockies Divestiture”) to a third party for total proceeds of approximately $16.4 million, including final post-closing adjustments. This disposition did not qualify as a discontinued operation.

On June 14, 2016, we closed a transaction to divest certain assets located in the Permian Basin (the “Permian Divestiture”) to a third party for a total purchase price of approximately $36.7 million including estimated post-closing adjustments. This disposition did 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 Rockies Divestiture which is included in the accompanying unaudited condensed statements of consolidated operations of the Company, is as follows (in thousands):

 

For the Three Months Ended

 

 

March 31, 2016

 

Permian Divestiture

$

2,020

 

Rockies Divestiture

 

1,761

 

 

Note 5. 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 unaudited condensed consolidated 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 unaudited condensed consolidated balance sheets approximated fair value at March 31, 2017 and December 31, 2016. 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 8 for the estimated fair value of our outstanding fixed-rate debt.

19


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED 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 accompanying unaudited condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016 were based on estimated forward commodity prices. 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 March 31, 2017 and December 31, 2016 for each of the fair value hierarchy levels:

 

Fair Value Measurements at March 31, 2017 Using

 

 

Quoted Prices in

 

 

Significant Other

 

 

Significant

 

 

 

 

 

 

Active Market

 

 

Observable Inputs

 

 

Unobservable Inputs

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Fair Value

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

$

 

 

$

91,630

 

 

$

 

 

$

91,630

 

Total assets

$

 

 

$

91,630

 

 

$

 

 

$

91,630

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

$

 

 

$

14,266

 

 

$

 

 

$

14,266

 

Total liabilities

$

 

 

$

14,266

 

 

$

 

 

$

14,266

 

 

 

Fair Value Measurements at December 31, 2016 Using

 

 

Quoted Prices in

 

 

Significant Other

 

 

Significant

 

 

 

 

 

 

Active Market

 

 

Observable Inputs

 

 

Unobservable Inputs

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Fair Value

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

$

 

 

$

189,851

 

 

$

 

 

$

189,851

 

Total assets

$

 

 

$

189,851

 

 

$

 

 

$

189,851

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

$

 

 

$

17,757

 

 

$

 

 

$

17,757

 

Total liabilities

$

 

 

$

17,757

 

 

$

 

 

$

17,757

 

See Note 6 for additional information regarding our derivative instruments.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are reported at fair value on a nonrecurring basis as reflected on the accompanying unaudited condensed consolidated balance sheets. The following methods and assumptions are used to estimate the fair values:

 

The fair value of asset retirement obligations (“AROs”) is based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding factors such as the existence of a legal obligation for an ARO; amounts and timing of settlements; the credit-adjusted risk-free rate; and inflation rates. See Note 7 for a summary of changes in AROs.

 

If sufficient market data is not available, the determination of the fair values of proved and unproved properties acquired in transactions accounted for as business combinations are prepared by utilizing estimates of discounted cash flow projections. The factors to determine fair value include, but are not limited to, estimates of: (i) economic reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital.

 

Proved oil and natural gas properties are reviewed for impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such properties. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, estimates of probable reserves, future commodity prices, the timing of future production and capital expenditures and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and natural gas properties.

20


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

No impairments were recognized during the three months ended March 31, 2017. During the three months ended March 31, 2016, we recognized approximately $8. 3 million of impairments related to certain properties located in East Texas. The estimated future cash flows expected from these properties were compared to their carrying values and determined to be unrecoverable primarily as a result of declining commod ity prices. As a result of the impairments, the carrying value of these properties was reduced to approximately $11.0 million.

Note 6. Risk Management and Derivative Instruments

Derivative instruments are utilized to manage exposure to commodity price and interest rate fluctuations and achieve a more predictable cash flow in connection with natural gas and oil sales from production and borrowing related activities. These instruments limit exposure to declines in prices or increases in interest rates, but also limit the benefits that would be realized if prices increase or interest rates decrease.

Certain inherent business risks are associated with commodity and interest derivative contracts, including market risk and credit risk. Market risk is the risk that the price of natural gas or oil will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by the counterparty to a contract. It is our policy to enter into derivative contracts, including interest rate swaps, only with creditworthy counterparties, which generally are financial institutions, deemed by management as competent and competitive market makers. Some of the lenders, or certain of their affiliates, under our credit agreement are counterparties to our derivative contracts. While collateral is generally not required to be posted by counterparties, credit risk associated with derivative instruments is minimized by limiting exposure to any single counterparty and entering into derivative instruments only with creditworthy counterparties that are generally large financial institutions. Additionally, master netting agreements are used to mitigate risk of loss due to default with counterparties on derivative instruments. We have also entered into International Swaps and Derivatives Association Master Agreements (“ISDA Agreements”) with each of our counterparties. The terms of the ISDA Agreements provide us and each of our counterparties with rights of set-off upon the occurrence of defined acts of default by either us or our counterparty to a derivative, whereby the party not in default may set-off all liabilities owed to the defaulting party against all net derivative asset receivables from the defaulting party. At March 31, 2017, after taking into effect netting arrangements, we had no counterparty exposure related to our derivative instruments. As a result, had all counterparties failed completely to perform according to the terms of the existing contracts, we would have had the right to offset $77.4 million against amounts outstanding under our revolving credit facility at March 31, 2017. See Note 8 for additional information regarding our revolving credit facility.

Commodity Derivatives

We may use a combination of commodi ty derivatives (e.g., floating-for-fixed swaps, put options, and costless collars) to manage exposure to commodity price volatility. We recognize all derivative instruments at fair value.

In January 2017, in connection with our restructuring efforts, we monetized $94.1 million in commodity hedges and used a portion of the proceeds to reduce the amounts outstanding under our revolving credit facility and kept the remaining portion as cash on hand for general partnership purposes.

21


AMPLIFY ENERGY CORP. (FORMERLY KNOWN AS MEMORIAL PRODUCTION PARTNERS LP)

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We enter into natural gas d erivative contracts that are indexed to NYMEX-Henry Hub. We also enter into oil derivative contracts indexed to either NYMEX-WTI, or Inter-Continental Exchange (“ICE”) Brent. Our NGL derivative contracts are primarily indexed to OPIS Mont Belvieu. At March 31, 2017, we had the following open commodity positions:

 

 

Remaining

 

 

 

 

 

 

2017

 

 

2018

 

Natural Gas Derivative Contracts:

 

 

 

 

 

 

 

Fixed price swap contracts:

 

 

 

 

 

 

 

Average Monthly Volume (MMBtu)

 

1,295,000

 

 

 

1,102,000

 

Weighted-average fixed price

$

3.96

 

 

$

3.91

 

 

 

 

 

 

 

 

 

Crude Oil Derivative Contracts:

 

 

 

 

 

 

 

Fixed price swap contracts:

 

 

 

 

 

 

 

Average Monthly Volume (Bbls)

 

130,000

 

 

 

122,000

 

Weighted-average fixed price

$

71.53

 

 

$

75.69

 

 

 

 

 

 

 

 

 

Collar contracts:

 

 

 

 

 

 

 

Average Monthly Volume (Bbls)

 

10,000

 

 

 

 

Weighted-average floor price

$

45.00

 

 

$

 

Weighted-average ceiling price

$

54.50

 

 

$

 

 

 

 

 

 

 

 

 

NGL Derivative Contracts:

 

 

 

 

 

 

 

Fixed price swap contracts:

 

 

 

 

 

 

 

Average Monthly Volume (Bbls)

 

78,400

 

 

 

65,700

 

Weighted-average fixed price

$

30.29

 

 

$

24.13

 

 

Interest Rate Swaps

Periodically, we enter into interest rate swaps to mitigate exposure to market rate fluctuations by converting variable interest rates such as those in our credit agreement to fixed interest rates. From time to time we enter into offsetting positions to avoid being economically over-hedged. The Company did not have any interest rate swaps at March 31, 2017.

Balance Sheet Presentation

The following table summarizes both: (i) the gross fair value of derivative instruments by the appropriate balance sheet classification even when the derivative instruments are subject to netting arrangements and qualify for net presentation in the balance sheet and (ii) the net recorded fair value as reflected on the balance sheet at March 31, 2017 and December 31, 2016. There was no cash collateral received or pledged associated with our derivative instruments since most of the counterparties, or certain of their affiliates, to our derivative contracts are lenders under our credit agreement.

 

 

 

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

December 31,

 

Type

 

Balance Sheet Location

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

(In thousands)

 

Commodity contracts

 

Short-term derivative instruments

 

$

56,307

 

 

$

86,335

 

 

$

13,740

 

 

$

16,871

 

Gross fair value

 

 

 

 

56,307

 

 

 

86,335

 

 

 

13,740

 

 

 

16,871

 

Netting arrangements

 

Short-term derivative instruments

 

 

(13,740

)

 

 

(16,871

)

 

 

(13,740

)

 

 

(16,871

)

Net recorded fair value

 

Short-term derivative instruments

 

$

42,567

 

 

$

69,464

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Long-term derivative instruments

 

$

35,323

 

 

$

103,515

 

 

$

526

 

 

$

885

 

Gross fair value

 

 

 

 

35,323

 

 

 

103,515