10-Q 1 c993-20190331x10q.htm 10-Q mcf_Current_Folio_10Q

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, 2019 

OR

 

 

 

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

 

For the transition period from              to             

Commission file number 001-16317 

 

CONTANGO OIL & GAS COMPANY

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

95-4079863

 

 

 

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

717 TEXAS AVENUE, SUITE 2900

HOUSTON, TEXAS

 

77002

(Address of principal executive offices)

 

(Zip Code)

 

(713) 236-7400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

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

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.04 per share

MCF

NYSE American

 

The total number of shares of common stock, par value $0.04 per share, outstanding as of May 3, 2019 was 34,400,594.

 

 


 

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED MARCH 31, 2019 

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

    

    

   

Page

 

PART I—FINANCIAL INFORMATION 

 

 

 

 

 

 

 

Item 1. 

 

Consolidated Financial Statements

 

 

 

 

 

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

 

3

 

 

 

Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2019 and 2018

 

4

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2019 and 2018

 

5

 

 

 

Consolidated Statement of Shareholders’ Equity (unaudited) for the three months ended March 31, 2019 and March 2018

 

6

 

 

 

Notes to the Consolidated Financial Statements (unaudited)

 

8

 

Item 2. 

 

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

 

24

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

32

 

Item 4. 

 

Controls and Procedures

 

32

 

 

 

 

 

 

 

PART II—OTHER INFORMATION 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

32

 

Item 1A. 

 

Risk Factors

 

32

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

 

Item 3. 

 

Defaults upon Senior Securities

 

33

 

Item 4. 

 

Mine Safety Disclosures

 

33

 

Item 5. 

 

Other Information

 

33

 

Item 6. 

 

Exhibits

 

34

 

 

All references in this Quarterly Report on Form 10-Q to the “Company”, “Contango”, “we”, “us” or “our” are to Contango Oil & Gas Company and its subsidiaries.

2


 

Item 1. Consolidated Financial Statements

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except shares)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

    

2018

  

 

 

 

 

 

 

(unaudited)

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

 —

 

Accounts receivable, net

 

 

11,530

 

 

11,531

 

Prepaid expenses

 

 

468

 

 

1,303

 

Current derivative asset

 

 

1,371

 

 

4,600

 

Other current assets

 

 

112

 

 

 —

 

Total current assets

 

 

13,481

 

 

17,434

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

 

 

 

 

Natural gas and oil properties, successful efforts method of accounting:

 

 

 

 

 

 

 

Proved properties

 

 

1,096,714

 

 

1,095,417

 

Unproved properties

 

 

35,538

 

 

34,612

 

Other property and equipment

 

 

1,331

 

 

1,314

 

Accumulated depreciation, depletion and amortization

 

 

(905,437)

 

 

(898,169)

 

Total property, plant and equipment, net

 

 

228,146

 

 

233,174

 

OTHER NON-CURRENT ASSETS:

 

 

 

 

 

 

 

Investments in affiliates

 

 

6,053

 

 

5,743

 

Deferred tax asset

 

 

 —

 

 

424

 

Other non-current assets

 

 

352

 

 

357

 

Total other non-current assets

 

 

6,405

 

 

6,524

 

TOTAL ASSETS

 

$

248,032

 

$

257,132

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

32,188

 

$

39,506

 

Current derivative liability

 

 

839

 

 

422

 

Current asset retirement obligations

 

 

1,373

 

 

1,329

 

Current portion of long-term debt

 

 

65,552

 

 

60,000

 

Total current liabilities

 

 

99,952

 

 

101,257

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

Long-term debt

 

 

 —

 

 

 —

 

Asset retirement obligations

 

 

12,108

 

 

12,168

 

Other long term liabilities

 

 

3,421

 

 

3,318

 

Total non-current liabilities

 

 

15,529

 

 

15,486

 

Total liabilities

 

 

115,481

 

 

116,743

 

COMMITMENTS AND CONTINGENCIES (NOTE 12)

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Common stock, $0.04 par value, 50 million shares authorized, 39,925,092 shares issued and 34,416,727 shares outstanding at March 31, 2019, 39,617,442 shares issued and 34,158,492 shares outstanding at December 31, 2018

 

 

1,585

 

 

1,573

 

Additional paid-in capital

 

 

340,935

 

 

339,981

 

Treasury shares at cost (5,508,365 shares at March 31, 2019 and 5,458,950 shares at December 31, 2018)

 

 

(129,216)

 

 

(129,030)

 

Retained earnings (deficit)

 

 

(80,753)

 

 

(72,135)

 

Total shareholders’ equity

 

 

132,551

 

 

140,389

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

248,032

 

$

257,132

 

 

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

3


 

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

 

 

 

(unaudited)

 

REVENUES:

 

 

 

 

 

 

 

Oil and condensate sales

 

$

6,406

 

$

8,811

 

Natural gas sales

 

 

5,642

 

 

8,609

 

Natural gas liquids sales

 

 

1,963

 

 

3,017

 

Total revenues

 

 

14,011

 

 

20,437

 

EXPENSES:

 

 

 

 

 

 

 

Operating expenses

 

 

5,192

 

 

6,927

 

Exploration expenses

 

 

224

 

 

469

 

Depreciation, depletion and amortization

 

 

7,556

 

 

10,485

 

Impairment and abandonment of oil and gas properties

 

 

587

 

 

3,327

 

General and administrative expenses

 

 

5,005

 

 

6,726

 

Total expenses

 

 

18,564

 

 

27,934

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

Gain from investment in affiliates, net of income taxes

 

 

30

 

 

707

 

Gain (loss) from sale of assets

 

 

(12)

 

 

9,447

 

Interest expense

 

 

(1,092)

 

 

(1,409)

 

Loss on derivatives, net

 

 

(2,878)

 

 

(1,032)

 

Other income (expense)

 

 

(86)

 

 

879

 

Total other income (expense)

 

 

(4,038)

 

 

8,592

 

NET INCOME (LOSS) BEFORE INCOME TAXES

 

 

(8,591)

 

 

1,095

 

Income tax provision

 

 

(27)

 

 

(158)

 

NET INCOME (LOSS)

 

$

(8,618)

 

$

937

 

NET INCOME (LOSS) PER SHARE:

 

 

 

 

 

 

 

Basic

 

$

(0.26)

 

$

0.04

 

Diluted

 

$

(0.26)

 

$

0.04

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

Basic

 

 

33,770

 

 

24,793

 

Diluted

 

 

33,770

 

 

24,841

 

 

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

4


 

 

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income (loss)

 

$

(8,618)

 

$

937

 

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

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

7,556

 

 

10,485

 

Impairment of natural gas and oil properties

 

 

483

 

 

3,097

 

Deferred income taxes

 

 

424

 

 

 —

 

Loss (gain) on sale of assets

 

 

12

 

 

(9,447)

 

Gain from investment in affiliates

 

 

(30)

 

 

(707)

 

Stock-based compensation

 

 

1,052

 

 

1,424

 

Unrealized loss on derivative instruments

 

 

3,646

 

 

519

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Decrease (increase) in accounts receivable & other receivables

 

 

146

 

 

(642)

 

Decrease in prepaids

 

 

835

 

 

940

 

Decrease in accounts payable & advances from joint owners

 

 

(4,299)

 

 

(6,053)

 

Decrease in other accrued liabilities

 

 

(826)

 

 

(1,921)

 

Increase in income taxes receivable, net

 

 

(424)

 

 

 —

 

Increase in income taxes payable, net

 

 

27

 

 

158

 

Other

 

 

(123)

 

 

3,279

 

Net cash provided by (used in) operating activities

 

$

(139)

 

$

2,069

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Natural gas and oil exploration and development expenditures

 

$

(5,124)

 

$

(16,244)

 

Additions to furniture & equipment

 

 

(17)

 

 

 —

 

Sale of oil & gas properties

 

 

 —

 

 

20,965

 

Net cash provided by (used in) investing activities

 

$

(5,141)

 

$

4,721

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Borrowings under credit facility

 

$

37,025

 

$

74,832

 

Repayments under credit facility

 

 

(31,473)

 

 

(81,551)

 

Net costs from equity offering

 

 

(86)

 

 

 —

 

Purchase of treasury stock

 

 

(186)

 

 

(71)

 

Net cash provided by (used in) financing activities

 

$

5,280

 

$

(6,790)

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

$

 —

 

$

 —

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

 —

 

 

 —

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

 —

 

$

 —

 

 

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

5


 

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the three months ended March 31, 2019

(in thousands, except number of shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

Treasury

 

Retained

 

Shareholders’

 

 

    

Shares

    

Amount

    

Capital

    

Stock

    

Earnings

    

Equity

 

 

 

(unaudited)

 

Balance at December 31, 2018

 

34,158,492

 

$

1,573

 

$

339,981

 

$

(129,030)

 

$

(72,135)

 

$

140,389

 

Equity offering costs

 

 —

 

 

 —

 

 

(86)

 

 

 —

 

 

 —

 

 

(86)

 

Treasury shares at cost

 

(49,415)

 

 

 —

 

 

 —

 

 

(186)

 

 

 —

 

 

(186)

 

Restricted shares activity

 

307,650

 

 

12

 

 

(12)

 

 

 —

 

 

 —

 

 

 —

 

Stock-based compensation

 

 —

 

 

 —

 

 

1,052

 

 

 —

 

 

 —

 

 

1,052

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8,618)

 

 

(8,618)

 

Balance at March 31, 2019

 

34,416,727

 

$

1,585

 

$

340,935

 

$

(129,216)

 

$

(80,753)

 

$

132,551

 

 

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

 

 

 

 

6


 

 

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the three months ended March 31, 2018

(in thousands, except number of shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

Treasury

 

Retained

 

Shareholders’

 

 

    

Shares

    

Amount

    

Capital

    

Stock

    

Earnings

    

Equity

 

 

 

(unaudited)

 

Balance at December 31, 2017

 

25,505,715

 

$

1,223

 

$

302,527

 

$

(128,583)

 

$

49,433

 

$

224,600

 

Treasury shares at cost

 

(16,032)

 

 

 —

 

 

 —

 

 

(71)

 

 

 —

 

 

(71)

 

Restricted shares activity

 

206,114

 

 

 8

 

 

(8)

 

 

 —

 

 

 —

 

 

 —

 

Stock-based compensation

 

 —

 

 

 —

 

 

1,424

 

 

 —

 

 

 —

 

 

1,424

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

937

 

 

937

 

Balance at March 31, 2018

 

25,695,797

 

$

1,231

 

$

303,943

 

$

(128,654)

 

$

50,370

 

$

226,890

 

 

 

 

 

7


 

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Organization and Business

 

Contango Oil & Gas Company (collectively with its subsidiaries, “Contango” or the “Company”) is a Houston, Texas based, independent oil and natural gas company. The Company’s business is to maximize production and cash flow from its offshore properties in the shallow waters of the Gulf of Mexico (“GOM”) and onshore properties in Texas and Wyoming and to use that cash flow to explore, develop, exploit, increase production from and acquire crude oil and natural gas properties in West Texas, the onshore Texas Gulf Coast and the Rocky Mountain regions of the United States.

 

The following table lists the Company’s primary producing areas as of March 31, 2019:

 

Location

    

Formation

Gulf of Mexico

 

Offshore Louisiana - water depths less than 300 feet

Southern Delaware Basin, Pecos County, Texas

 

Wolfcamp

Madison and Grimes counties, Texas

 

Woodbine (Upper Lewisville)

Zavala and Dimmit counties, Texas

 

Buda / Eagle Ford / Georgetown

San Augustine County, Texas

 

Haynesville shale, Mid Bossier shale and James Lime formations

Other Texas Gulf Coast

 

Conventional and smaller unconventional formations

Weston County, Wyoming

 

Muddy Sandstone

Sublette County, Wyoming

 

Jonah Field (1)


(1)

Through a 37% equity investment in Exaro Energy III LLC (“Exaro”). Production associated with this investment is not included in the Company’s reported production results for all periods shown in this report.

 

The Company has recently been focused on the development of its Southern Delaware Basin acreage in Pecos County, Texas, which is expected to continue to generate positive returns on its drilling investment in the current price environment. As of March 31, 2019, the Company was producing from twelve wells over its 17,700 gross operated (8,200 total net) acre position in this West Texas area,  prospective for the Wolfcamp A, Wolfcamp B and Second Bone Spring formations.

 

The Company currently expects this acreage in West Texas to be the primary focus of its drilling program for 2019. Until a sustained improvement in commodity prices occurs, the Company will commit drilling capital to West Texas, and other areas, only to fulfill leasehold commitments, preserve core acreage and, where determined appropriate to do so, expand its presence in those existing areas. The Company will continue to make balance sheet strength a priority in 2019 by limiting capital expenditures to a level that can be funded through internally generated cash flow and non-core asset sales.  Throughout all this, the Company will continue to identify opportunities for cost reductions and operating efficiencies in all areas of its operations, while also searching for new resource acquisition opportunities. Acquisition efforts will be focused on areas in which the Company can leverage its geological and operational experience and expertise to exploit identified drilling opportunities and where it can develop an inventory of additional drilling prospects that the Company believes will enable it to economically grow production and add reserves. 

 

2. Summary of Significant Accounting Policies

 

The accounting policies followed by the Company are set forth in the notes to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”). Please refer to the notes to the financial statements included in the 2018 Form 10-K for additional details of the Company’s financial condition, results of operations and cash flows. No material items included in those notes have changed except as a result of normal transactions in the interim or as disclosed within this report.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information,

8


 

pursuant to the rules and regulations of the SEC, including instructions to Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of the unaudited consolidated financial statements have been included. All such adjustments are of a normal recurring nature. The consolidated financial statements should be read in conjunction with the 2018 Form 10-K. These unaudited interim consolidated results of operations for the quarter ended March 31, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019.

 

The Company’s consolidated financial statements include the accounts of Contango Oil & Gas Company and its subsidiaries, after elimination of all material intercompany balances and transactions. All wholly owned subsidiaries are consolidated. The investment in Exaro by the Company’s wholly owned subsidiary, Contaro Company, is accounted for using the equity method of accounting, and therefore, the Company does not include its share of individual operating results or production in those reported for the Company’s consolidated results of operations.

 

Liquidity and Going Concern

 

Over the past several months, the Company has been in discussions with its current lenders and other sources of capital regarding a possible refinancing and/or replacement of its Credit Facility (as defined in Note 10 – “Indebtedness”), which matures on October 1, 2019. The refinancing or replacement of the Credit Facility could be made in conjunction with an issuance of unsecured or non-priority secured debt or preferred or common equity, non-core property monetization, potential monetization of certain midstream and/or water handling facilities, or a combination of the foregoing. These discussions have included a possible new, replacement or extended credit facility that would be expected to provide additional borrowing capacity for future capital expenditures. There is no assurance, however, that such discussions will result in a refinancing of the Credit Facility on acceptable terms, if at all, or provide any specific amount of additional liquidity for future capital expenditures. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. However, the accompanying financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying financial statements do not include adjustments that might result from the outcome of the uncertainty, including any adjustments to reflect the possible future effects of the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

Oil and Gas Properties - Successful Efforts

The Company’s application of the successful efforts method of accounting for its natural gas and oil exploration and production activities requires judgment as to whether particular wells are developmental or exploratory, since exploratory costs and the costs related to exploratory wells that are determined to not have proved reserves must be expensed whereas developmental costs are capitalized. The results from a drilling operation can take considerable time to analyze, and the determination that commercial reserves have been discovered requires both judgment and application of industry experience. Wells may be completed that are assumed to be productive and actually deliver natural gas and oil in quantities insufficient to be economic, which may result in the abandonment of the wells at a later date. On occasion, wells are drilled which have targeted geologic structures that are both developmental and exploratory in nature, and in such instances an allocation of costs is required to properly account for the results. Delineation seismic costs incurred to select development locations within a productive natural gas and oil field are typically treated as development costs and capitalized, but often these seismic programs extend beyond the proved reserve areas, and therefore, management must estimate the portion of seismic costs to expense as exploratory. The evaluation of natural gas and oil leasehold acquisition costs included in unproved properties requires management's judgment of exploratory costs related to drilling activity in a given area. Drilling activities in an area by other companies may also effectively condemn leasehold positions.

 

Impairment of Long-Lived Assets

 

Pursuant to GAAP, when circumstances indicate that proved properties may be impaired, the Company compares expected undiscounted future cash flows on a field by field basis to the unamortized capitalized cost of the asset. If the estimated future undiscounted cash flows based on the Company’s estimate of future reserves, natural gas and oil prices, operating costs and production levels from oil and natural gas reserves, are lower than the unamortized capitalized cost, then the capitalized cost is reduced to fair value. The factors used to determine fair value include, but are not limited to, estimates of proved, probable and possible reserves, future commodity prices, the timing of future

9


 

production and capital expenditures and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and gas properties. Additionally, the Company may use appropriate market data to determine fair value. No impairment of proved properties was recognized during the quarter ended March 31, 2019. During the quarter ended March 31, 2018, the Company recognized $2.3 million in non-cash proved property impairment charges related to its Vermilion 170 offshore property, which was subsequently sold effective December 1, 2018.

 

Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the period. The Company recognized impairment expense of approximately $0.5 million and approximately $0.8 million for quarters ended March 31, 2019 and 2018, respectively, related to impairment of certain non-core unproved properties primarily due to expiring leases.

 

Net Income (Loss) Per Common Share 

 

Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potentially dilutive securities, including unexercised stock options, performance stock units and unvested restricted stock, have not been considered when their effect would be antidilutive. For the quarter ended March 31, 2019, the Company excluded 526,309 shares or units of potentially dilutive securities, as they were antidilutive. For the quarter ended March 31, 2018, the Company excluded 670,210 shares or units of potentially dilutive securities, as they were antidilutive.

 

Subsidiary Guarantees

 

Contango Oil & Gas Company, as the parent company (the “Parent Company”), has filed a registration statement on Form S-3 with the SEC to register, among other securities, debt securities that the Parent Company may issue from time to time. Any such debt securities would likely be guaranteed on a full and unconditional basis by each of the Company’s current subsidiaries and any future subsidiaries specified in any future prospectus supplement (each a “Subsidiary Guarantor”). Each of the Subsidiary Guarantors is wholly owned by the Parent Company, either directly or indirectly. The Parent Company has no assets or operations independent of the Subsidiary Guarantors, and there are no significant restrictions upon the ability of the Subsidiary Guarantors to distribute funds to the Parent Company. The Parent Company has one wholly owned subsidiary that is inactive and not a Subsidiary Guarantor. The Parent Company’s wholly owned subsidiaries do not have restricted assets that exceed 25% of net assets as of the most recent fiscal year end that may not be transferred to the Parent Company in the form of loans, advances or cash dividends by such subsidiary without the consent of a third party.

 

 

 

Revenue Recognition

 

Adoption of ASC 606

As of January 1, 2018, the Company adopted Accounting Standards Codification Topic 606 – Revenue from Contracts with Customers (“ASC 606”), which supersedes the revenue recognition requirements and industry-specific guidance under Accounting Standards Codification Top 605 – Revenue Recognition (“ASC 605”). The Company adopted ASC 606 using the modified retrospective method which allows the Company to apply the new standard to all new contracts entered into after December 31, 2017 and all existing contracts for which all (or substantially all) of the revenue has not been recognized under legacy revenue guidance prior to December 31, 2017. The Company identified no material impact on its historical revenues upon initial application of ASC 606, and as such has not recognized any cumulative catch-up effect to the opening balance of the Company’s shareholders’ equity as of January 1, 2018. ASC 606 supersedes previous revenue recognition requirements in ASC 605 and 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 the Company expects to be entitled in exchange for those goods or services.

 

Revenue from Contracts with Customers

 

Sales of oil, condensate, natural gas and natural gas liquids (“NGLs”) are recognized at the time control of the products are transferred to the customer. Based upon the Company’s current purchasers’ past experience and expertise in the market, collectability is probable, and there have not been payment issues with the Company’s purchasers over the

10


 

past year or currently. Generally, the Company’s gas processing and purchase agreements indicate that the processors take control of the gas at the inlet of the plant and that control of residue gas is returned to the Company at the outlet of the plant. The midstream processing entity gathers and processes the natural gas and remits proceeds to the Company for the resulting sales of NGLs. The Company delivers oil and condensate to the purchaser at a contractually agreed-upon delivery point at which the purchaser takes custody, title and risk of loss of the product. 

 

When sales volumes exceed the Company’s entitled share, a production imbalance occurs. If production imbalance exceeds the Company’s share of the remaining estimated proved natural gas reserves for a given property, the Company records a liability. Production imbalances have not had and currently do not have a material impact on the financial statements, and this did not change with the adoption of ASC 606.

 

Transaction Price Allocated to Remaining Performance Obligations

 

Generally, the Company’s contracts have an initial term of one year or longer but continue month to month unless written notification of termination in a specified time period is provided by either party to the contract. The Company has used the practical expedient in ASC 606 which states that the Company is not required to disclose that transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligation is not required.

 

Contract Balances

 

The Company receives purchaser statements from the majority of its customers, but there are a few contracts where the Company prepares the invoice. Payment is unconditional upon receipt of the statement or invoice. Accordingly, the Company’s product sales contracts do not give rise to contract assets or liabilities under ASC 606. The majority of the Company’s contract pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of the oil or natural gas, and supply and demand conditions. The price of these commodities fluctuates to remain competitive with supply.

 

Prior Period Performance Obligations

 

The Company records revenue in the month production is delivered to the purchaser. Settlement statements may not be received for 30 to 90 days after the date production is delivered, and therefore the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. Differences between the Company’s estimates and the actual amounts received for product sales are generally recorded in the following month that payment is received. Any differences between the Company’s revenue estimates and actual revenue received historically have not been significant. The Company has internal controls in place for its revenue estimation accrual process.

 

Impact of Adoption of ASC 606

 

The Company has reviewed all of its natural gas, NGLs, residue gas, condensate and crude oil sales contracts to assess the impact of the provisions of ASC 606. Based upon the Company’s review, there were no required changes to the recording of residue gas or condensate and crude oil contracts. Certain NGL and natural gas contracts would require insignificant changes to the recording of transportation, gathering and processing fees as net to revenue or as an expense. The Company concluded that these minor changes were not material to its operating results on a quantitative or qualitative basis. Therefore, there was no impact to its results of operations for the quarter ended March 31, 2019. The Company has modified procedures to its existing internal controls relating to revenue by reviewing for any significant increase in sales level, primarily on gas processing or gas purchasing contracts, on a quarterly basis to monitor the significance of gross revenue versus net revenue and expenses under ASC 606. As under previous revenue guidance, the Company will continue to review all new or modified revenue contracts on a quarterly basis for proper treatment.

 

Recent Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13 – Fair Value Measurement (Topic 820). The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements in Topic 820. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after

11


 

December 15, 2019. The provisions of this update are not expected to have a material impact on the Company’s financial position or results of operations.

 

3. Acquisitions and Dispositions  

 

On March 28, 2018, the Company sold its operated Eagle Ford Shale assets located in Karnes County, Texas for a cash purchase price of $21.0 million. The Company recorded a net gain of $9.4 million, prior to final closing adjustments.

 

4. Fair Value Measurements

 

Pursuant to Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company's determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company's consolidated balance sheets, but also the impact of the Company's nonperformance risk on its own liabilities. ASC 820 defines fair value 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 the measurement date (exit price). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.

 

The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value as of March 31, 2019. As required by ASC 820, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There have been no transfers between Level 1,  Level 2 or Level 3.

 

Fair value information for financial assets and liabilities was as follows as of March 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Fair Value Measurements Using

 

 

    

Carrying Value

    

Level 1

    

Level 2

    

Level 3

 

Derivatives

 

 

 

 

 

 

 

 

 

Commodity price contracts - assets

 

$

1,371

 

$

 —

 

$

1,371

 

$

 —

 

Commodity price contracts - liabilities

 

$

(839)

 

$

 —

 

$

(839)

 

$

 —

 

 

Derivatives listed above are recorded in “Current derivative asset or liability” on the Company’s consolidated balance sheet and include swaps and costless collars that are carried at fair value. The Company records the net change in the fair value of these positions in "Loss on derivatives, net" in its consolidated statements of operations. The Company is able to value the assets and liabilities based on observable market data for similar instruments, which resulted in reporting its derivatives as Level 2. This observable data includes the forward curves for commodity prices based on quoted market prices and implied volatility factors related to changes in the forward curves. See Note 5 - "Derivative Instruments" for additional discussion of derivatives.

 

As of March 31, 2019, the Company's derivative contracts were all with certain members of its Credit Facility lending group, which are major financial institutions with investment grade credit ratings which are believed to have minimal credit risk. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed above; however, the Company does not anticipate such nonperformance.

 

Estimates of the fair value of financial instruments are made in accordance with the requirements of Accounting Standards Codification Topic 825, Financial Instruments. The estimated fair value amounts are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of cash, accounts receivable and accounts payable approximates their carrying

12


 

value due to their short-term nature. The estimated fair value of the Company's Credit Facility approximates carrying value because the facility interest rate approximates current market rates and is reset at least every quarter. See Note 10 - "Indebtedness" for further information.

 

Impairments

 

The Company tests proved oil and natural gas properties for impairment when events and circumstances indicate a decline in the recoverability of the carrying value of such properties, such as a downward revision of the reserve estimates or lower commodity prices. The Company estimates the undiscounted future cash flows expected in connection with the oil and gas properties on a field by field basis and compares such future cash flows to the unamortized capitalized costs of the properties. If the estimated future undiscounted cash flows are lower than the unamortized capitalized cost, the capitalized cost is reduced to its fair value. The factors used to determine fair value include, but are not limited to, estimates of proved, probable and possible 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 gas properties. Additionally, the Company may use appropriate market data to determine fair value. Because these significant fair value inputs are typically not observable, impairments of long-lived assets are classified as a Level 3 fair value measure.

 

Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the period.

 

Asset Retirement Obligations

 

The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. The factors used to determine fair value include, but are not limited to, estimated future plugging and abandonment costs and expected lives of the related reserves. As there is no corroborating market activity to support the assumptions used, the Company has designated these liabilities as Level 3.

 

5. Derivative Instruments

 

The Company is exposed to certain risks relating to its ongoing business operations, such as commodity price risk. Derivative contracts are typically utilized to hedge the Company's exposure to price fluctuations and reduce the variability in the Company's cash flows associated with anticipated sales of future oil and natural gas production. The Company typically hedges a substantial, but varying, portion of anticipated oil and natural gas production for future periods. The Company believes that these derivative arrangements, although not free of risk, allow it to achieve a more predictable cash flow and to reduce exposure to commodity price fluctuations. However, derivative arrangements limit the benefit of increases in the prices of crude oil, natural gas and natural gas liquids sales. Moreover, because its derivative arrangements apply only to a portion of its production, the Company’s strategy provides only partial protection against declines in commodity prices. Such arrangements may expose the Company to risk of financial loss in certain circumstances. The Company continuously reevaluates its hedging programs in light of changes in production, market conditions and commodity price forecasts.

 

As of March 31, 2019, the Company’s natural gas and oil derivative positions consisted of swaps and costless collars.  Swaps are designed so that the Company receives or makes payments based on a differential between fixed and variable prices for crude oil and natural gas. A costless collar consists of a purchased put option and a sold call option, which establishes a minimum and maximum price, respectively, that the Company will receive for the volumes under the contract.

 

It is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy institutions deemed by management as competent and competitive market makers. The Company does not post collateral, nor is it exposed to potential margin calls, under any of these contracts, as they are secured under the Credit Facility. See Note 10 – “Indebtedness” for further information regarding the Credit Facility.

 

The Company has elected not to designate any of its derivative contracts for hedge accounting. Accordingly, derivatives are carried at fair value on the consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the consolidated statements of operations for the period in which the change occurs. The Company

13


 

records the net change in the mark-to-market valuation of these derivative contracts, as well as all payments and receipts on settled derivative contracts, in “Loss on derivatives, net” on the consolidated statements of operations.

 

As of March 31, 2019, the following financial derivative instruments were in place (fair value in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity

    

Period

    

Derivative

    

Volume/Month

    

Price/Unit

    

Fair Value

 

Natural Gas

 

April 2019 - July 2019

 

Swap

 

600,000

Mmbtus

 

$

2.75

(1)

 

$

98

 

Natural Gas

 

Aug 2019 - Oct 2019

 

Swap

 

100,000

Mmbtus

 

$

2.75

(1)

 

$

(14)

 

Natural Gas

 

Nov 2019 - Dec 2019

 

Swap

 

500,000

Mmbtus

 

$

2.75

(1)

 

$

(170)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

April 2019 - Dec 2019

 

Collar

 

7,000

Bbls

 

$

50.00

-

58.00

(2)

 

$

(499)

 

Oil

 

April 2019 - Dec 2019

 

Collar

 

4,000

Bbls

 

$

52.00

-

59.45

(3)

 

$

(103)

 

Oil

 

April 2019 - June 2019

 

Collar

 

12,000

Bbls

 

$

70.00

-

76.25

(3)

 

$

350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

April 2019 - July 2019

 

Swap

 

6,000

Bbls

 

$

66.10

(3)

 

$

137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

July 2019

 

Swap

 

12,000

Bbls

 

$

72.10

(3)

 

$

138

 

Oil

 

Aug 2019 - Oct 2019

 

Swap

 

9,000

Bbls

 

$

72.10

(3)

 

$

311

 

Oil

 

Nov 2019 - Dec 2019

 

Swap

 

12,000

Bbls

 

$

72.10

(3)

 

$

284

 

 

 

 

 

Total net fair value of derivative instruments

 

 

$

532

 


(1)

Based on Henry Hub NYMEX natural gas prices.

(2)

Based on Argus Louisiana Light Sweet crude oil prices.

(3)

Based on West Texas Intermediate crude oil prices.

 

The following summarizes the fair value of commodity derivatives outstanding on a gross and net basis as of March 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

Netting (1)

    

Total

 

Assets

 

$

1,371

 

$

 —

 

$

1,371

 

Liabilities

 

$

(839)

 

$

 —

 

$

(839)

 


(1)   Represents counterparty netting under agreements governing such derivatives.

 

The following summarizes the fair value of commodity derivatives outstanding on a gross and net basis as of December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

Netting (1)

    

Total

 

Assets

 

$

4,600

 

$

 —

 

$

4,600

 

Liabilities

 

$

(422)

 

$

 —

 

$

(422)

 


(1)   Represents counterparty netting under agreements governing such derivatives.

 

 

14


 

The following table summarizes the effect of derivative contracts on the consolidated statements of operations for the quarters ended March 31, 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2019

    

2018

    

Crude oil contracts

 

$

655

 

$

(588)

 

Natural gas contracts

 

 

113

 

 

75

 

Realized gain (loss)

 

$

768

 

$

(513)

 

 

 

 

 

 

 

 

 

Crude oil contracts

 

$

(3,443)

 

$

(284)

 

Natural gas contracts

 

 

(203)

 

 

(235)

 

Unrealized loss

 

$

(3,646)

 

$

(519)

 

Loss on derivatives, net

 

$

(2,878)

 

$

(1,032)

 

 

In May 2019, the Company entered into the following additional financial derivative contracts with a third party counterparty under an unsecured line of credit with no margin call provisions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity

    

Period

    

Derivative

    

Volume/Month

    

Price/Unit

Natural Gas

 

Jan 2020 - March 2020

 

Swap

 

425,000

Mmbtus

 

$

2.84

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural Gas

 

April 2020 - July 2020

 

Swap

 

400,000

Mmbtus

 

$

2.53

(1)

Natural Gas

 

Aug 2020 - Oct 2020

 

Swap

 

40,000

Mmbtus

 

$

2.53

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural Gas

 

Nov 2020 - Dec 2020

 

Swap

 

375,000

Mmbtus

 

$

2.70

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

May 2019 - Dec 2019

 

Swap

 

2,400

Bbls

 

$

61.72

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

Jan 2020 - June 2020

 

Swap

 

22,000

Bbls

 

$

57.74

(2)

Oil

 

July 2020 - Dec 2020

 

Swap

 

15,000

Bbls

 

$

57.74

(2)


(1)

Based on Henry Hub NYMEX natural gas prices.

(2)

Based on West Texas Intermediate crude oil prices.

 

In May 2019, the Company also entered into a costless swap agreement with a Mid-Cushing oil differential swap price of $0.05 per barrel of crude oil. The agreement fixes the Company’s exposure to that differential on 12,000 barrels of crude oil per month for January 2020 through June 2020 and 10,000 barrels per month for July 2020 through December 2020. 

 

 

6. Stock-Based Compensation

 

Restricted Stock 

 

During the quarter ended March 31, 2019, the Company granted 307,650 shares of restricted common stock, which vest over three years, to employees and executive officers as part of their overall compensation package. The weighted average fair value of the restricted shares granted during the quarter ended March 31, 2019, was $3.20 per share, with a total fair value of approximately $1.0 million and no adjustment for an estimated weighted average forfeiture rate. There were no forfeitures of restricted stock during the quarter ended March 31, 2019.  The Company recognized approximately $1.0 million in restricted stock compensation expense during the quarter ended March 31, 2019 related to restricted stock granted to its officers, employees and directors. As of March 31, 2019, an additional $1.9 million of compensation expense related to restricted stock remained to be recognized over the remaining weighted-average vesting period of 2.0 years.  Approximately 1.2 million shares remained available for grant under the Second Amended and Restated 2009 Incentive Compensation Plan as of March 31, 2019, assuming PSUs (as defined below) are settled at 100% of target.

 

During the quarter ended March 31, 2018, the Company granted 225,782 shares of restricted common stock, which vest over three years, to executive officers as part of their overall compensation package. The weighted average fair value of the restricted shares granted during the quarter ended March 31, 2018, was $3.57 per share,  with a total fair

15


 

value of approximately $0.8 million and no adjustment for an estimated weighted average forfeiture rate. During the quarter ended March 31, 2018,  19,668 restricted shares were forfeited by former employees. The aggregate intrinsic value of restricted shares forfeited during the quarter ended March 31, 2018 was approximately $0.2 million.  The Company recognized approximately $1.0 million in restricted stock compensation expense during the quarter ended March 31, 2018 related to restricted stock granted to its officers, employees and directors.

 

Performance Stock Units

 

Performance stock units (“PSUs”) represent the opportunity to receive shares of the Company's common stock at the time of settlement. The number of shares to be awarded upon settlement of these PSUs may range from 0% to 300% of the targeted number of PSUs stated in the agreement, contingent upon the achievement of certain share price appreciation targets as compared to a peer group index. The PSUs vest and settlement is determined after a three year period.

Compensation expense associated with PSUs is based on the grant date fair value of a single PSU as determined using the Monte Carlo simulation model which utilizes a stochastic process to create a range of potential future outcomes given a variety of inputs. As it is contemplated that the PSUs will be settled with shares of the Company's common stock after three years, the PSU awards are accounted for as equity awards, and the fair value is calculated on the grant date. The simulation model calculates the payout percentage based on the stock price performance over the performance period. The concluded fair value is based on the average achievement percentage over all the iterations. The resulting fair value expense is amortized over the life of the PSU award.

 

During the quarter ended March 31, 2019, the Company granted 117,105 PSUs to executive officers and employees as part of their overall compensation package, which will be measured between January 1, 2019 and December 31, 2021, and were valued at a weighted average fair value of $6.42 per unit. All fair value prices were determined using the Monte Carlo simulation model. During the quarter ended March 31, 2019,  49,773 PSUs were forfeited due to the resignations of the Company’s former Senior Vice President of Exploration and Senior Vice President of Operations and Engineering in February 2019. The Company only recognized approximately $14 thousand in stock compensation expense related to PSUs during the quarter ended March 31, 2019, primarily due to the expiration of PSUs which failed to meet their target as of December 31, 2018 and the above referenced forfeitures. As of March 31, 2019, an additional $1.5 million of compensation expense related to PSUs remained to be recognized over the remaining weighted-average vesting period of 2.2 years. 

 

During the quarter ended March 31, 2018, the Company granted 190,782 PSUs to executive officers as part of their overall compensation package, which will be measured between January 1, 2018 and December 31, 2020, and were valued at a weighted average fair value of $7.69 per unit. All fair value prices were determined using the Monte Carlo simulation model. During the quarter ended March 31, 2018, 16,900 PSUs were forfeited by former employees.  The Company recognized approximately $0.4 million in stock compensation expense related to PSUs during the quarter ended March 31, 2018.

 

Stock Options

 

Under the fair value method of accounting for stock options, cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) are classified as financing cash flows. For the quarters ended March 31, 2019 and 2018, there was no excess tax benefit recognized.

 

Compensation expense related to stock option grants are recognized over the stock option’s vesting period based on the fair value at the date the options are granted. The fair value of each option is estimated as of the date of grant using the Black-Scholes options-pricing model. No stock options were granted during the quarters ended March 31, 2019 or 2018.

 

During the quarter ended March 31, 2019,  no stock options were exercised and  stock options for 12,052 shares were forfeited by former employees. During the quarter ended March 31, 2018,  no stock options were exercised or forfeited.

 

16


 

7. Leases

As of January 1, 2019, the Company adopted Accounting Standards Codification Topic 842 – Leases (“ASC 842”), which requires lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term on the Company’s consolidated balance sheet. Expanded disclosures with additional qualitative and quantitative information are also required. 

ASC 842 contains several optional practical expedients upon adoption, one of which is referred to as the “package of three practical expedients”. The expedients must be taken together and allow entities to: (1) not reassess whether existing contracts contain leases, (2) carryforward the existing lease classification, and (3) not reassess initial direct costs associated with existing leases. The Company elected to apply this practical expedient package to all of its leases upon adoption. The Company also chose to implement the “short-term accounting policy election” which allows the Company to not include leases with an initial term of twelve months or less on the balance sheet. The Company recognizes payments on these leases within “Operating expenses” on its consolidated statement of operations. ASC 842 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption. The Company elected to apply ASC 842 as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. For new leases, the Company will determine if an arrangement is or contains a lease at inception. The Company has elected to combine and account for lease and non-lease contract components as a lease. Leases are included as right-of-use assets within “Other current assets” and “Other non-current assets” and a lease liability within “Accounts payable and accrued liabilities” and “Other long term liabilities” on the Company’s consolidated balance sheet.

As of January 1, 2019, the majority of the Company’s operating leases were for field equipment, such as compressors. The adoption of ASC 842 did not have a material effect on the Company’s financial results or disclosures.  Most of the Company’s compressor contracts are on a month-to-month basis, and while it is probable the contract will be renewed on a monthly basis, the compressors can be easily substituted or cancelled be either party, with minimal penalties.  Leases with these terms are not included on the Company’s balance sheet and are recognized on the statement of operations on a straight-line basis over the lease term.  During the quarter ended March 31, 2019, the Company entered into three new compressor contracts, with lease terms of twelve months or more, which qualify as operating leases under the new standard. The Company’s consolidated balance sheet as of March 31, 2019 includes a right of use asset of $0.2 million and lease liability of $0.2 million for these new operating leases. There were no cash payments related to these new operating leases during the quarter ended March 31, 2019.

The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. For operating leases existing prior to January 1, 2019, the incremental borrowing rate as of January 1, 2019 was used for the remaining lease term.

The weighted average discount rate and weighted average remaining lease term as of March 31, 2019 was 6.00% and 24.2 months, respectively.

Maturities for the Company’s operating lease liabilities on the consolidated balance sheet as of March 31, 2019, were as follows (in thousands):

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

2019 (remaining after March 31, 2019)

$

91

 

2020

 

101

 

2021

 

25

 

2022

 

9

 

Total future minimum lease payments

 

226

 

Less: imputed interest

 

(15)

 

17


 

Present value of lease liabilities

$

211

 

The following table summarizes expenses related to operating leases for the three months ended March 31, 2019 (in thousands):

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

Operating lease cost (1) (2)

$

371

 

Administrative lease cost (3)

 

19

 

Short-term lease cost (1) (4)

 

510

 

Total lease cost

$

900

 


(1)

This total does not reflect amounts that may be reimbursed by other third-parties in the normal course of business, such as non-operating working interest owners.

(2)

Includes operating expense related to office lease which expired on March 31, 2019.

(3)

Costs related primarily to office equipment and IT solutions with lease terms of more than one month and less than one year.

(4)

Costs related primarily to rig and compressor agreements with lease terms of more than one month and less than one year.

On April 1, 2019, the Company entered into a two year extension of its office lease, which will result in an estimated $0.5 million right of use asset and lease liability to be recognized on the Company’s consolidated balance sheet for the quarter ending June 30, 2019.

 

8. Other Financial Information

 

The following table provides additional detail for accounts receivable, prepaid expenses and other, and accounts payable and accrued liabilities which are presented on the consolidated balance sheets (in thousands):

 

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

December 31, 2018

 

Accounts receivable:

 

 

 

 

 

 

 

Trade receivables

 

$

5,371

 

$

6,052

 

Receivable for Alta Resources distribution

 

 

1,712

 

 

1,993

 

Joint interest billings

 

 

4,472

 

 

3,833

 

Income taxes receivable

 

 

848

 

 

424

 

Other receivables

 

 

121

 

 

223

 

Allowance for doubtful accounts

 

 

(994)

 

 

(994)

 

Total accounts receivable

 

$

11,530

 

$

11,531

 

 

 

 

 

 

 

 

 

Prepaid expenses and other:

 

 

 

 

 

 

 

Prepaid insurance

 

$

256

 

$

792

 

Other

 

 

212

 

 

511

 

Total prepaid expenses and other

 

$

468

 

$

1,303

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities:

 

 

 

 

 

 

 

Royalties and revenue payable

 

$

13,615

 

$

17,986

 

Advances from partners

 

 

2,101

 

 

1,785

 

Accrued exploration and development

 

 

2,531

 

 

4,751

 

Accrued acquisition costs

 

 

3,763

 

 

4,352

 

Trade payables

 

 

3,099

 

 

3,385

 

Accrued general and administrative expenses

 

 

2,403

 

 

2,545

 

Accrued operating expenses

 

 

1,229

 

 

1,801

 

Other accounts payable and accrued liabilities

 

 

3,447

 

 

2,901

 

Total accounts payable and accrued liabilities

 

$

32,188

 

$

39,506

 

 

18


 

Included in the table below is supplemental cash flow disclosures and non-cash investing activities during the quarters ended March 31, 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2019

    

 

2018

 

Cash payments: