10-Q 1 amr-063018x10q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________________________________
FORM 10-Q
_______________________________________
(Mark One)
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2018
OR
o   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: 001-38040
_______________________________________
ALTA MESA RESOURCES, INC.
(Exact name of registrant as specified in its charter)
_______________________________________

 
Delaware
81-4433840
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
15021 Katy Freeway, Suite 400,
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: 281-530-0991
_______________________________________
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  x    No  o    
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  x    No  o 
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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
x
(Do not check if smaller reporting company)
Smaller reporting company
o
Emerging growth company
x
 
 
 
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.   o    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x 

As of July 31, 2018, there were 179,058,693 shares of Class A Common Stock and 204,921,888 shares of Class C Common Stock, par value $0.0001 per share outstanding. The shares of Class A Common Stock shown as outstanding do not include 1,671,513 nonvested restricted stock awards outstanding as of July 31, 2018.
 

1


Table of Contents

໿

2


Glossary of Terms

Certain terms and abbreviations used in this Quarterly Report on Form 10-Q are defined as follows:
bbl -
Barrels
bbl/d -
Barrels per day
BOE -
Barrels of oil equivalent
Btu -
British thermal units
Completion -
The installation of permanent equipment for the production of oil and gas
Dth -
A dekatherm is a unit of energy used primarily to measure natural gas and is equal to 1 million British thermal units
Dth/d -
Dekatherms per day
EBITDA -
Earnings before interest, taxes, depreciation, depletion, amortization
EBITDAX -
Earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses
Mbbls -
One thousand barrels
Mbbls/d -
One thousand barrels per day
MBoe/d -
One thousand barrels of oil equivalent per day
Mcf -
One thousand cubic feet
Mcf/d -
One thousand cubic feet per day
MMBtu -
One million British thermal units
MMcf -
One million cubic feet
MMcf/d -
One million cubic feet per day
NYMEX -
New York Mercantile Exchange
NGLs -
Natural gas liquids are a group of hydrocarbons including ethane, propane, normal butane, isobutane and natural gasoline
Wellbore -
A hole that is drilled to aid in the exploration and recovery of natural resources including oil or natural gas
Working interest -
An interest in a mineral property that entitles the owner of that interest to all of the share of the mineral production from the property, usually subject to a royalty
VWAP -
Volume weighted average price


3


Cautionary Statement Regarding Forward-Looking Statements

The information in this report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  All statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could”, “should”, “will”, “play”, “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, the negative of such terms and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Risk Factors” included in our 2017 Annual Report and Part II, Item 1A of this report. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.

Forward-looking statements may include statements about:
the benefits of the Business Combination;
the future financial performance of the combined company following the Business Combination;
our business strategy;
our reserve quantities and the present value of our reserves;
our estimated purchase price and purchase price allocations;
our exploration and drilling prospects, inventories, projects and programs;
our horizontal drilling, completion and production technology;
our ability to replace the reserves we produce through drilling and property acquisitions;
our financial strategy, liquidity and capital required for our development program;
future oil, and natural gas prices;
the supply and demand for natural gas, natural gas liquids, crude oil and midstream services;
the timing and amount of future production of oil and natural gas;
our hedging strategy and results;
the drilling and completion of wells, including statements about future horizontal drilling plans;
competition and government regulation;
our ability to obtain permits and governmental approvals;
changes in the Oklahoma forced pooling system;
pending legal and environmental matters;
our future drilling plans;
our marketing of oil, natural gas and natural gas liquids;
our leasehold or business acquisitions;
our costs of developing our properties;
our liquidity and access to capital;
our ability to hire, train or retain qualified personnel;
general economic conditions;
operating hazards and other risks incidental to transporting, storing, gathering and processing natural gas, natural gas liquids, crude oil and midstream products;
our future operating results, including initial production values and liquid yields in our type curve areas;
the costs, terms and availability of gathering, processing, fractionation and other midstream services; and
our plans, objectives, expectations and intentions contained in this report that are not historical.
We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the exploration for and development, production, gathering and sale of oil, natural gas and natural gas liquids.  Some factors that could cause actual results to differ materially from those expressed or implied by these forward looking statements include, but are not limited to, the ability of the combined company to realize the anticipated benefits of the Business Combination, costs related to the Business Combination, commodity price volatility, low prices for oil, natural gas and/or natural gas liquids, global economic conditions, inflation, increased operating costs, lack of availability of drilling and production equipment, supplies, services and qualified personnel, uncertainties related to new technologies, geographical concentration of our operations, environmental risks, weather risks, security risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating oil and natural gas reserves and in projecting future rates of production, reductions in cash flow, lack of access to capital, our ability to satisfy future cash obligations, restrictions in our debt agreements, the timing of development expenditures, managing our growth and integration of acquisitions, failure to realize expected value creation from property acquisitions, title defects, limited control

4


over non-operated properties, and the other risks described under “Item 1A. Risk Factors” in our 2017 Annual Report and in this report.

Reserve engineering is a process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reservoir engineers.  Specifically, future prices received for production and costs may vary, perhaps significantly, from the prices and costs assumed for purposes of these estimates.  In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil and natural gas that are ultimately recovered.

Should one or more of the risks or uncertainties described in the 2017 Annual Report or this report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.


5


PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

ALTA MESA RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except share and per share data) 

Successor
 
 
Predecessor

June 30,
2018
 
 
December 31, 2017
ASSETS
 
 
 
 
CURRENT ASSETS
 
 
 
 
Cash and cash equivalents
$
82,398

 
 
$
3,660

Restricted cash
1,022

 
 
1,269

Accounts receivable, net
115,222

 
 
76,161

Other receivables
226

 
 
1,388

Receivables due from related party
12,643

 
 
790

Note receivable due from related party
1,609

 
 

Prepaid expenses and other current assets
4,174

 
 
2,932

Current assets — discontinued operations

 
 
5,195

Derivative financial instruments

 
 
216

Total current assets
217,294

 
 
91,611

PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Oil and natural gas properties, successful efforts method, net
2,550,519

 
 
894,630

Other property, plant and equipment, net
343,357

 
 
32,140

Total property, plant and equipment, net
2,893,876

 
 
926,770

OTHER ASSETS
 
 
 
 
Equity method investment
6,956

 
 

Deferred financing costs, net
3,518

 
 
1,787

Notes receivable due from related party
11,262

 
 
12,369

Goodwill
699,898

 
 

Intangible assets, net
408,706

 
 

Deposits and other long-term assets
50

 
 
9,067

Non-current assets — discontinued operations

 
 
43,785

Deferred tax asset
11,954

 
 

Derivative financial instruments

 
 
8

Total other assets
1,142,344

 
 
67,016

TOTAL ASSETS
$
4,253,514


 
$
1,085,397


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

6


 
Successor
 
 
Predecessor
 
June 30,
2018
 
 
December 31, 2017
LIABILITIES, PARTNERS' CAPITAL AND STOCKHOLDERS' EQUITY
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Accounts payable and accrued liabilities
$
148,866

 
 
$
170,489

Accounts payable — affiliate

 
 
5,476

Advances from non-operators
6,283

 
 
5,502

Advances from related party
37,135

 
 
23,390

Asset retirement obligations
538

 
 
69

Current liabilities — discontinued operations

 
 
15,419

Derivative financial instruments
37,743

 
 
19,303

Total current liabilities
230,565

 
 
239,648

LONG-TERM LIABILITIES
 
 
 
 
Asset retirement obligations, net of current portion
6,439

 
 
10,400

Long-term debt, net
595,084

 
 
607,440

Noncurrent liabilities — discontinued operations

 
 
66,862

Derivative financial instruments
6,385

 
 
1,114

Deferred tax liability
4,893

 
 

Other long-term liabilities
6

 
 
5,488

Total long-term liabilities
612,807

 
 
691,304

TOTAL LIABILITIES 
843,372

 
 
930,952

PREFERRED STOCK, $0.0001 par value
 
 
 
 
Class A: 1,000,000 shares authorized; 3 shares issued and outstanding

 
 

Class B: 1,000,000 shares authorized; 1 share issued and outstanding

 
 

Commitments and Contingencies (Note 14)

 
 

PARTNERS' CAPITAL

 
 
154,445

STOCKHOLDERS' EQUITY
 
 
 
 
Common stock, $0.0001 par value
 
 
 
 
Class A: 1,200,000,000 shares authorized; 179,058,693 shares issued and outstanding
18

 
 

Class C: 280,000,000 shares authorized; 204,921,888 shares issued and outstanding
20

 
 

Additional paid in capital
1,498,023

 
 

Accumulated deficit
(27,793
)
 
 

Total stockholders' equity/partners' capital
1,470,268

 
 
154,445

Noncontrolling interest
1,939,874

 
 

Total equity
3,410,142

 
 
154,445

TOTAL LIABILITIES, PARTNERS' CAPITAL AND STOCKHOLDERS' EQUITY
$
4,253,514

 
 
$
1,085,397


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


7


ALTA MESA RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except share and per share data)


Successor
 
 
Predecessor
 
Successor
 
 
Predecessor

Three
 
 
Three
 
February 9, 2018
 
 
January 1, 2018
 
Six
 
Months Ended
 
 
Months Ended
 
Through
 
 
Through
 
Months Ended
 
June 30, 2018
 
 
June 30, 2017
 
June 30, 2018
 
 
February 8, 2018
 
June 30, 2017
OPERATING REVENUES AND OTHER
 
 
 
 
 
 
 
 
 
 
 
Oil
$
75,291

 
 
$
42,348

 
$
115,569

 
 
$
30,972

 
$
89,288

Natural gas
7,980

 
 
10,642

 
13,190

 
 
4,276

 
20,233

Natural gas liquids
10,241

 
 
6,581

 
14,955

 
 
4,000

 
13,653

Product sales
19,605

 
 

 
27,974

 
 

 

Gathering and processing revenue
7,073

 
 

 
10,484

 
 

 

Other revenues
2,229

 
 
1,979

 
2,784

 
 
888

 
3,213

Total operating revenues
122,419

 
 
61,550

 
184,956

 
 
40,136

 
126,387

Gain (loss) on sale of assets and other
(63
)
 
 

 
5,916

 
 

 

Gain (loss) on derivative contracts
(29,219
)
 
 
18,250

 
(51,865
)
 
 
7,298

 
48,492

Total operating revenues and other
93,137

 
 
79,800

 
139,007

 
 
47,434

 
174,879

OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
 
 
Lease operating expense
12,679

 
 
11,480

 
20,996

 
 
4,485

 
22,490

Marketing and transportation expense
2,173

 
 
6,510

 
3,194

 
 
3,725

 
12,172

Plant operating expense
3,313

 
 

 
3,900

 
 

 

Product expense
19,383

 
 

 
27,603

 
 

 

Gathering and processing expense
3,240

 
 

 
5,578

 
 

 

Production taxes
2,606

 
 
1,184

 
4,021

 
 
953

 
2,450

Workover expense
333

 
 
1,102

 
1,578

 
 
423

 
1,690

Exploration expense
8,083

 
 
3,192

 
13,038

 
 
3,633

 
8,239

Depreciation, depletion, and amortization expense
33,773

 
 
20,110

 
49,350

 
 
11,784

 
39,088

Impairment expense

 
 

 

 
 

 
1,188

Accretion expense
161

 
 
30

 
263

 
 
39

 
126

General and administrative expense
22,456

 
 
8,293

 
57,013

 
 
24,352

 
18,029

Total operating expenses
108,200

 
 
51,901

 
186,534

 
 
49,394

 
105,472

INCOME (LOSS) FROM OPERATIONS
(15,063
)
 
 
27,899

 
(47,527
)
 
 
(1,960
)
 
69,407

OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(11,779
)
 
 
(12,578
)
 
(17,223
)
 
 
(5,511
)
 
(24,620
)
Interest income and other
824

 
 
299

 
1,370

 
 
172

 
548

Total other income (expense), net
(10,955
)
 
 
(12,279
)
 
(15,853
)
 
 
(5,339
)
 
(24,072
)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(26,018
)
 
 
15,620

 
(63,380
)
 
 
(7,299
)
 
45,335

Income tax provision (benefit)
(3,678
)
 
 

 
(7,491
)
 
 

 
285

INCOME (LOSS) FROM CONTINUING OPERATIONS
(22,340
)
 
 
15,620

 
(55,889
)

 
(7,299
)

45,050

Loss from discontinued operations, net of tax

 
 
(30,934
)
 

 
 
(7,593
)
 
(35,449
)
NET INCOME (LOSS)
(22,340
)
 
 
(15,314
)
 
(55,889
)
 
 
(14,892
)
 
9,601

Net loss attributable to non-controlling interest
(15,896
)
 
 

 
(36,210
)
 
 

 

NET INCOME (LOSS) ATTRIBUTABLE TO ALTA MESA RESOURCES, INC. STOCKHOLDERS
$
(6,444
)
 
 
$
(15,314
)
 
$
(19,679
)

 
$
(14,892
)

$
9,601


 
 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO ALTA MESA RESOURCES INC. STOCKHOLDERS:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
(0.04
)
 
 
 
 
$
(0.11
)
 
 
 
 
 
Diluted
$
(0.04
)
 
 
 
 
$
(0.12
)
 
 
 
 
 

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

8


ALTA MESA RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)

Successor
 
 
Predecessor

February 9, 2018
 
 
January 1, 2018
 
Six
 
Through
 
 
Through
 
Months Ended
 
June 30, 2018
 
 
February 8, 2018
 
June 30, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net income (loss)
$
(55,889
)
 
 
$
(14,892
)
 
$
9,601

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
 
 
 
Depreciation, depletion, and amortization expense
49,350

 
 
12,414

 
51,298

Impairment expense

 
 
5,560

 
29,124

Accretion expense
263

 
 
140

 
1,052

Amortization of deferred financing costs
152

 
 
171

 
1,456

Amortization of debt premium
(2,051
)
 
 

 

Equity-based compensation expense
7,729

 
 

 

Dry hole expense

 
 
(45
)
 
888

Expired leases
10,658

 
 
1,250

 
5,922

(Gain) loss on derivative contracts
51,865

 
 
(7,298
)
 
(48,492
)
Settlements of derivative contracts
(18,969
)
 
 
(1,661
)
 
254

Premium paid on derivative contracts

 
 

 
(520
)
Interest converted into debt

 
 
103

 
599

Interest on notes receivable due from related party
(417
)
 
 
(85
)
 
(406
)
Deferred tax provision (benefit)
(7,491
)
 
 

 

Loss on sale of assets and other
63

 
 
1,923

 

Gain on acquisition of oil and gas properties

 
 

 
(1,626
)
Changes in assets and liabilities:
 
 
 
 
 
 
Accounts receivable
(8,585
)
 
 
(20,895
)
 
(11,478
)
Other receivables
996

 
 
(9,887
)
 
4,281

Receivables due from related party
(6,818
)
 
 
(117
)
 
(680
)
Prepaid expenses and other non-current assets
8,114

 
 
9,970

 
(11,644
)
Advances from related party
(10,371
)
 
 
24,116

 
(42,528
)
Settlement of asset retirement obligation
(806
)
 
 
(63
)
 
(977
)
Accounts payable, accrued liabilities, and other liabilities
(93,903
)
 
 
25,815

 
7,655

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
(76,110
)
 
 
26,519

 
(6,221
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
Capital expenditures for property, plant and equipment
(340,631
)
 
 
(38,096
)
 
(151,832
)
Acquisitions, net of cash acquired
(791,819
)
 
 

 
(6,251
)
Proceeds withdrawn from Trust Account
1,042,742

 
 

 

Investment in equity affiliate and other, net
4,343

 
 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(85,365
)
 
 
(38,096
)
 
(158,083
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
Proceeds from long-term debt
80,000

 
 
60,000

 
165,065

Repayments of long-term debt
(193,565
)
 
 
(43,000
)
 
(10,000
)
Additions to deferred financing costs
(3,670
)
 
 

 
(170
)
Capital distributions

 
 
(68
)
 

Capital contributions

 
 

 
7,875

Proceeds from issuance of Class A shares
400,000

 
 

 

Repayment of sponsor note
(2,000
)
 
 

 

Repayment of deferred underwriting compensation
(36,225
)
 
 

 

Redemption of Class A common shares
(33
)
 
 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES
244,507

 
 
16,932

 
162,770

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
83,032

 
 
5,355

 
(1,534
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
388

 
 
4,990

 
7,618

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
$
83,420

 
 
$
10,345

 
$
6,084

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

9


ALTA MESA RESOURCES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Successor) (Unaudited)
(in thousands)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Common Stock
 
 
 
 
 
Total
 
 
 
 

Class A
 
Class B
 
Class C
 
Paid-In
 
Accumulated
 
Stockholders'
 
Noncontrolling
 
Total

Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Deficit
 
Equity
 
Interests
 
Equity
Balance at February 8, 2018
3,862

 
$

 
25,875

 
$
3

 

 
$

 
$
3,106

 
$
(8,114
)
 
$
(5,005
)
 
$

 
$
(5,005
)
Conversion of common shares from Class B to Class A at closing of Business Combination
25,875

 
3

 
(25,875
)
 
(3
)
 

 

 

 

 

 

 

Class A common shares released from possible redemption
99,638

 
10

 

 

 

 

 
996,374

 

 
996,384

 

 
996,384

Class A common shares redeemed
(3
)
 

 

 

 

 

 
(33
)
 

 
(33
)
 

 
(33
)
Sale of Class A common shares
40,000

 
4

 

 

 

 

 
399,996

 

 
400,000

 

 
400,000

Class C common shares issued in connection with the closing of the Business Combination

 

 

 

 
213,402

 
21

 
(21
)
 

 

 

 

Noncontrolling interest in SRII Opco issued in the Business Combination

 

 

 

 

 

 

 

 

 
2,058,635

 
2,058,635

Balance at February 9, 2018
169,372

 
17

 

 

 
213,402

 
21

 
1,399,422

 
(8,114
)
 
1,391,346

 
2,058,635

 
3,449,981

Additional Class C common shares issued in connection with the settlement of the purchase consideration in the business combination

 

 

 

 
1,109

 

 

 

 

 

 

Noncontrolling interest in SRII Opco assumed in the business combination

 

 

 

 

 

 

 

 

 
8,758

 
8,758

Redemption of noncontrolling interests and Class C common shares for Class A common shares
9,589

 
1

 

 

 
(9,589
)
 
(1
)
 
90,872

 

 
90,872

 
(91,309
)
 
(437
)
Restricted stock awards vested
98

 

 

 

 

 

 

 

 

 

 

Equity based compensation

 

 

 

 

 

 
7,729

 
 
 
7,729

 

 
7,729

Net loss

 

 

 

 

 

 

 
(19,679
)
 
(19,679
)
 
(36,210
)
 
(55,889
)
Balance at June 30, 2018
179,059

 
$
18

 

 
$

 
204,922

 
$
20

 
$
1,498,023

 
$
(27,793
)
 
$
1,470,268

 
$
1,939,874

 
$
3,410,142

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


10


ALTA MESA RESOURCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS’ CAPITAL (Predecessor) (Unaudited)
(in thousands)

໿

Predecessor
BALANCE, DECEMBER 31, 2017
$
154,445

DISTRIBUTION OF NON-STACK ASSETS (NET LIABILITY)
33,102

NET LOSS
(14,892
)
BALANCE, FEBRUARY 8, 2018
$
172,655

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


11


ALTA MESA RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 DESCRIPTION OF BUSINESS

Alta Mesa Resources, Inc., together with its consolidated subsidiaries, (“AMR,” “we,” “us,” “our,” or the “Company”) is an independent oil and natural gas company focused on the acquisition, development, exploration and exploitation of unconventional onshore oil and natural gas reserves in the eastern portion of the Anadarko Basin in Oklahoma. Our activities are primarily directed at the horizontal development of an oil and liquids-rich resource play in an area of the basin commonly referred to as the Sooner Trend Anadarko Basin Canadian and Kingfisher County ("STACK"). We also operate a midstream services business through Kingfisher Midstream LLC ("Kingfisher"), a Delaware limited liability company. Kingfisher has natural gas gathering and processing and crude gathering assets located in the Anadarko Basin that generate revenue primarily through long-term, fee-based contracts. The Kingfisher assets are integral to our oil and natural gas operations and strategically positioned to provide similar services to other producers in the area.

We were originally incorporated in Delaware in November 2016 as a special purpose acquisition company under the name Silver Run Acquisition Corporation II for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving the Company and one or more businesses.

On March 29, 2017, we consummated our initial public offering (“IPO”) generating net proceeds of approximately $1.0 billion. Simultaneously with the closing of our IPO, we completed the private sale of 15,133,333 warrants (the “Private Placement Warrants”) to Silver Run Sponsor II, LLC (the “Sponsor”) generating gross proceeds to us of $22.7 million. A total of $1.035 billion (which includes approximately $36.2 million in deferred underwriting commissions to the underwriters of the IPO), representing $1.0143 billion of the proceeds from the IPO after deducting upfront underwriting commissions of $20.7 million, and the proceeds of the sale of the Private Placement Warrants were placed in a trust account (the “Trust Account”) to be used to fund an initial business combination.

On February 9, 2018 (the “Closing Date”), we consummated the transactions contemplated by (i) the Contribution Agreement (“AM Contribution Agreement”), dated August 16, 2017, with Alta Mesa Holdings, LP (“Alta Mesa”), High Mesa Holdings, LP (the “AM Contributor”), High Mesa Holdings GP, LLC, the sole general partner of the AM Contributor, Alta Mesa Holdings GP, LLC, Alta Mesa’s sole general partner (“Alta Mesa GP”), and, solely for certain provisions therein, the equity owners of the AM Contributor, (ii) the Contribution Agreement (the “KFM Contribution Agreement”), dated August 16, 2017, with KFM Holdco, LLC, a Delaware limited liability company (the “KFM Contributor”), Kingfisher Midstream, LLC, and, solely for certain provisions therein, the equity owners of the KFM Contributor; and (iii) the Contribution Agreement (the “Riverstone Contribution Agreement” and, together with the AM Contribution Agreement and the KFM Contribution Agreement, the “Contribution Agreements”), dated August 16, 2017, with Riverstone VI Alta Mesa Holdings, L.P., a Delaware limited partnership (the “Riverstone Contributor” and together with the AM Contributor and the KFM Contributor, the “Contributors”).

Pursuant to the Contribution Agreements, SRII Opco, LP, our newly formed subsidiary (“SRII Opco”) acquired (a) (i) all of the limited partner interests in Alta Mesa and (ii) 100% of the economic interests and 90% of the voting interests in Alta Mesa GP, (with (i) and (ii) collectively, the “AM Contribution”) and (b) 100% of the economic interests in Kingfisher (the “Kingfisher Contribution”). The acquisition of Alta Mesa and Kingfisher pursuant to the Contribution Agreements is referred to herein as the “Business Combination” and the transactions contemplated by the Contribution Agreements are referred to herein as the “Transactions.” SRII Opco GP, LLC, a Delaware limited liability company (“SRII Opco GP”), the sole general partner of SRII Opco, is a wholly owned subsidiary of AMR.  As a result of the Business Combination, our only significant asset is our ownership of an approximate 46.6% partnership interest in SRII Opco. SRII Opco owns all of the economic interests in each of Alta Mesa and Kingfisher. 

In connection with the closing of the Business Combination, Alta Mesa distributed its non-STACK assets to the AM contributor and the Company changed its name from “Silver Run Acquisition Corporation II” to “Alta Mesa Resources, Inc.” and continued the listing of its Class A Common Stock and public warrants (which were originally sold as part of the units issued in our initial public offering) on NASDAQ under the symbols “AMR” and “AMRWW,” respectively. 




12


NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation. As a result of the Business Combination, the Company is the acquirer for accounting purposes and Alta Mesa and Kingfisher are the acquirees. Alta Mesa is our accounting predecessor. The Company’s financial statement presentation reflects Alta Mesa as the “Predecessor” for periods prior to the Business Combination. The Company is the “Successor” for periods after the Business Combination, which includes the consolidation of Alta Mesa and Kingfisher concurrent with the Business Combination on February 9, 2018. The Business Combination was accounted for using the acquisition method of accounting, and the Successor financial statements reflect a new basis of accounting that is based on the fair value of Alta Mesa and Kingfisher’s net assets acquired as of the acquisition date. See Note 4 — Business Combination (Successor) for further information related to the Business Combination.  As a result of the Business Combination and the transactions contemplated by the Contribution Agreements, the financial statements and certain footnote presentations separate the Company’s presentations into two distinct periods, the period before the consummation of the Transactions and the period on or after that date, to indicate that the financial statements presented are those of different entities and reflect the application of the different basis of accounting between the periods presented.  The Successor period presented herein is for the three months ended June 30, 2018 and from February 9, 2018 to June 30, 2018 (“Successor Period”), (collectively, “Successor Periods”); and the Predecessor periods presented herein are from January 1, 2018 to February 8, 2018 (“2018 Predecessor Period”), the three months ended June 30, 2017 and the six months ended June 30, 2017 (“2017 Predecessor Period”), (collectively, the “Predecessor Periods”).

Prior to the Business Combination, Alta Mesa distributed its non-STACK assets to the AM Contributor.  The distribution of its non-STACK assets in 2018 and the sale of its Weeks Island field during the fourth quarter of 2017 (collectively, the “non-STACK assets”) were part of Alta Mesa’s overall strategic shift to operate only in the eastern Anadarko Basin.  As a result of the strategic shift, we have classified the assets and liabilities and operating results of the non-STACK assets as discontinued operations during the Predecessor Periods within the consolidated financial statements.  See Note 6 — Discontinued Operations (Predecessor) for further discussion.

Principles of Consolidation and Reporting.  The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain reclassifications of prior period consolidated financial statements have been made to conform to current reporting practices.  The consolidated financial statements include the accounts of the Company and its subsidiaries, including SRII Opco, after eliminating all significant intercompany transactions and balances. The Company’s interests in oil and natural gas exploration and production ventures and partnerships are proportionately consolidated.  Noncontrolling interests represent third-party ownership interests in SRII Opco and are presented as a component of equity. See Note 16 — Stockholders' Equity and Partners' Capital for further discussion.

The consolidated financial statements included herein are unaudited, and in the opinion of management, the information furnished reflects all material adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of consolidated financial position and of the results of operations for the interim periods presented. The consolidated results of operations for interim periods are not necessarily indicative of results to be expected for a full year.

Segment Reporting (Successor)The Company operates in two business segments. Alta Mesa operates in one industry segment, which is the exploration and production of oil and natural gas. Kingfisher operates in the midstream segment as the owner and operator of gas gathering and processing assets. Both operations are conducted in one geographic area of the United States and all revenues are derived from customers located in the United States.  The Company reports its consolidated financial results under two reportable segments: (1) Exploration & Production and (2) Midstream.  See Note 21 — Business Segment Information for financial information about our segments.

Use of Estimates. The preparation of 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.

Reserve estimates significantly impact depreciation, depletion, and amortization expense and potential impairments of oil and natural gas properties and are subject to change based on changes in oil and natural gas prices and trends and changes in estimated reserve quantities. Other estimates are utilized to determine amounts related to oil and natural gas revenues, product sales and gathering and processing sales, the value of oil and natural gas properties, the value of pipeline equipment, bad debts, goodwill, intangible assets, asset retirement obligations, derivative contracts, accounting for business combinations, federal and state taxes, share-based compensation and contingencies and litigation. We base our estimates on historical experience and

13


various other assumptions that are believed to be reasonable under the circumstances. We review estimates and underlying assumptions on a regular basis.  Actual results may differ from these estimates.

Cash and Cash Equivalents. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains cash balances at financial institutions in the United States of America, which at times exceed federally insured amounts. The Federal Deposit Insurance Corporation provides insurance up to $250,000 per depositor. We monitor the financial condition of the financial institutions we use and have experienced no losses to date associated with these accounts. 

Restricted Cash. The Company classifies cash balances as restricted cash when cash is legally, contractually or otherwise restricted as to withdrawal or usage. As of June 30, 2018, and December 31, 2017, the restricted cash represents cash received by the Company from production sold where the final division of ownership of the production is in dispute or there is unclaimed property for pooling orders in Oklahoma. 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets and the consolidated statements of cash flows (in thousands):

໿

Successor
 
 
Predecessor

June 30,
2018
 
 
December 31, 2017
Cash and cash equivalents
$
82,398

 
 
$
3,660

Restricted cash
1,022

 
 
1,269

Cash of discontinued operations

 
 
61

Total cash, cash equivalents and restricted cash
$
83,420

 
 
$
4,990


Accounts Receivable. Our receivables arise primarily from (i) the sale of oil, natural gas and NGLs, (ii) joint interest owners' properties in which we serve as the operator, and (iii) for services rendered to non-affiliated customers. Our customers are concentrated in the oil and gas industry which may impact our overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions affecting the industry.  Accounts receivable are generally not collateralized.  We may have the ability to withhold future revenue disbursements to recover non-payment of joint interest billings on properties of which we are the operator. Accounts receivable are stated at amounts due, net of an allowance for doubtful accounts. 

Accounts receivable consisted of the following (in thousands): 


Successor
 
 
Predecessor

June 30,
2018
 
 
December 31,
2017
Oil, natural gas and natural gas liquids sales
$
40,680

 
 
$
26,916

Joint interest billings
34,762

 
 
13,821

Pooling interest (1)
39,843

 
 
35,839

Allowance for doubtful accounts
(63
)
 
 
(415
)
Total accounts receivable, net
$
115,222

 
 
$
76,161

_________________
(1)
Pooling interest relates to Oklahoma’s forced pooling process which requires the Company to offer mineral interest owners the option to participate in the drilling of proposed wells.  The pooling interest listed above represents costs associated with unbilled interests on wells which the Company incurred before the pooling process was completed.  Depending upon the outcome of the pooling process, these costs may be billed to potential working interest owners or added to oil and gas properties.

Allowance for Doubtful Accounts. We routinely assess the recoverability of all material trade and other receivables to determine their collectability. We establish a reserve when, based on the judgment of management, it is probable that a receivable will not be collected and the amount of the reserve can be reasonably estimated. Our assessment is based upon several factors including, but not limited to, historical experience, the length of time an invoice has been outstanding, responses from customers relating to demands for payment and the current and projected financial condition of specific customers.


14


Property, Plant and Equipment. Oil and natural gas producing activities are accounted for using the successful efforts method of accounting. Under the successful efforts method, lease acquisition costs and all development costs, including unsuccessful development wells, are capitalized.  In conjunction with the Business Combination, our property, plant and equipment was measured at fair value as of the acquisition date, which also impacted how values were assigned between the categories within property, plant, and equipment.  See Note 4 — Business Combination (Successor) for further discussion.

Unproved Properties — Acquisition costs associated with the acquisition of leases are recorded as unproved properties and capitalized as incurred. These costs consist of amounts incurred to obtain a mineral interest or right in a property, such as a lease, in addition to options to lease, and for broker fees, recording fees and other similar costs related to activities in acquiring properties. Unproved properties are classified as unproved until proved reserves are discovered, at which time the related costs are transferred to proved oil and natural gas properties.

Exploration Expense — Exploration expenses, other than exploration drilling costs, are charged to expense as incurred. These expenses include seismic expenditures and other geological and geophysical costs, expired leases, delay rentals, gains or losses on settlement of asset retirement obligations and lease rentals. The costs of drilling exploratory wells and exploratory-type stratigraphic wells are initially capitalized, or “suspended” on the balance sheet pending determination of whether the well has discovered proved commercial reserves.  If the exploratory well is determined to be unsuccessful, the cost of the well is expensed. Exploratory well drilling costs may continue to be capitalized if the reserve quantity is sufficient to justify completion as a producing well and sufficient progress in assessing the reserves and the economic and operating viability of the project is being made. Assessments of such capitalized costs are made quarterly. 

Proved Oil and Natural Gas Properties — Costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering, and storing oil and natural gas are capitalized. All costs incurred to drill and equip successful exploratory wells, development wells, development-type stratigraphic test wells, and service wells, including unsuccessful development wells, are capitalized.

Impairment — The capitalized costs of proved oil and natural gas properties are reviewed quarterly for impairment following the guidance provided in Account Standards Codification (“ASC”) 360-10-35, Property, Plant and Equipment, Subsequent Measurement, or whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset or asset group exceeds its fair value and is not recoverable. The determination of recoverability is based on comparing the estimated undiscounted future net cash flows at a producing field level to the carrying value of the assets. If the future undiscounted cash flows, based on estimates of anticipated production from proved and risk-adjusted unproved reserves and future crude oil and natural gas prices and operating costs, are lower than the carrying cost, the carrying cost of the asset or group of assets is reduced to fair value. For our proved oil and natural gas properties, we estimate fair value by discounting the projected future cash flows at an appropriate risk-adjusted discount rate.

Our evaluation of the Company’s proved properties resulted in no impairment in the Successor Periods, the 2018 Predecessor Period and the three months ended June 30, 2017 (Predecessor).  For the 2017 Predecessor Period, our evaluation of the Company’s proved properties resulted in an impairment charge of $1.2 million.

Unproved properties are assessed at least annually to determine whether they have been impaired. Individually significant properties are assessed for impairment on a property-by-property basis, while individually insignificant unproved properties may be assessed in the aggregate. If unproved properties are found to be impaired, an impairment allowance is provided and a loss is recognized in the consolidated statements of operations. No impairment of unproved properties was recognized in the Successor Periods, or the Predecessor Periods.

Management evaluates whether the carrying value of all other long-lived assets, including our midstream assets, have been impaired when circumstances indicate the carrying value of those assets may not be recoverable. This evaluation is based on undiscounted cash flow projections. The carrying amount is not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the assets. Management considers various factors both qualitative and quantitative when determining if these assets should be evaluated for impairment.

If the carrying value is not recoverable on an undiscounted basis, an impairment loss is measured as the excess of the asset’s carrying value over its fair value. Management assesses the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party comparable sales, an internally developed discounted cash flow analysis or an analysis from outside advisors. Significant changes in market conditions resulting from events such as the condition of an asset or a change in management’s intent to utilize the asset would generally require management to reassess the cash flows related to the long-lived assets. The Company did not record any impairment related to other long-lived assets for the Successor Periods or the Predecessor Periods.

15



Other Property, Plant and Equipment — Other property, plant and equipment, such as plant equipment, a salt water disposal system, office furniture and equipment, buildings, and vehicles, are recorded at cost, or fair value, if impaired.  Maintenance, repairs and minor renewals are expensed as incurred.  Plant and equipment include costs incurred to build a cryogenic processing facility along with gathering pipelines, including rights of way, a crude oil gathering system, and compressors.

Depreciation, Depletion and Amortization — Depreciation, depletion, and amortization (“DD&A”) of capitalized costs of proved oil and natural gas properties is computed using the unit-of-production method based upon estimated proved reserves. Assets are grouped for DD&A based on a reasonable aggregation of properties with a common geological structural feature or stratigraphic condition, such as a reservoir or field. The reserve base used to calculate DD&A for leasehold acquisition costs and the cost to acquire proved properties is total proved reserves. The reserve base used to calculate DD&A for lease and well equipment costs, which include development costs and successful exploration drilling costs, includes only proved developed reserves. 

For the three months ended June 30, 2018 (Successor) and 2017 (Predecessor), DD&A expense related to oil and natural gas properties was $26.1 million and $18.3 million, respectively. DD&A expense related to oil and natural gas properties was $36.9 million, $11.2 million, and $36.6 million for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. DD&A expense related to our midstream tangible assets was $2.0 million and $3.1 million for the three months ended June 30, 2018 (Successor) and the Successor Period, respectively.  There was no such DD&A expense for midstream assets for the 2018 and 2017 Predecessor Periods.

Leasehold improvements to offices are depreciated using the straight-line method over the life of the lease.  Other property and equipment is depreciated using the straight-line method over periods ranging from three years to seven years.  Our midstream assets are depreciated using the straight-line method over their expected useful lives. The Company uses estimated lives of 35 years for its processing plant and pipelines.

For the three months ended June 30, 2018 (Successor) and 2017 (Predecessor), depreciation expense for other property, plant and equipment was $0.4 million and $1.8 million, respectively. Depreciation expense for non-oil and natural gas properties was $0.6 million, $0.6 million, and $2.4 million for the Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period, respectively. 

Deferred financing costs. Deferred financing costs reflect fees paid to lenders and third parties that are directly related to the establishment of revolving credit facility agreements or the issuance of senior secured notes. Costs related to the establishment of the current Alta Mesa and Kingfisher secured revolving credit facilities have been deferred in other noncurrent assets and are being amortized over the term of each facility as additional interest expense. During the Predecessor Periods, costs associated with the issuance of senior secured notes were deferred as a reduction in the value of the outstanding debt and amortized as additional interest expense.

Goodwill (Successor). Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. Under ASC 350, Intangibles – Goodwill and Other (“ASC 350”), goodwill is not amortized but is subject to periodic impairment testing.  ASC 350 requires that an entity assign its goodwill to reporting units and test each reporting unit’s goodwill for impairment at least on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  Our reporting units for goodwill impairment evaluation purposes are the Exploration and Production and Midstream business segments. Our evaluation of goodwill for impairment, will be performed annually as of October 1 of each year. During the first quarter of 2018, the Company elected to early adopt Accounting Standards Update ("ASU") No. 2017-04, Intangibles - Goodwill and Other, Simplifying the Test for Goodwill Impairment. This new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Any future identified impairment of goodwill will be recognized as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. During each annual evaluation, we will first assess qualitative factors to determine whether the existence of events or circumstances has led to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we are required to perform a quantitative goodwill impairment test.

As a result of the Business Combination, we recognized goodwill during the Successor Period. There was no goodwill prior to the Business Combination. All of the Company’s goodwill relates to the midstream segment and we did not identify any impairment of that goodwill as of June 30, 2018.


16


Intangible Assets (Successor). In connection with the acquisition of Kingfisher, the Company recorded the estimated fair value of acquired customer contracts and related customer relationships as intangible assets, which were valued using the income approach, and are presented as Intangible Assets, net in the accompanying consolidated balance sheet of the Successor. These intangible assets, all of which relate to the midstream segment, have definite lives and are subject to amortization utilizing an accelerated attrition method over their economic lives, currently ranging between 10 years and 15 years. We assess intangible assets for impairment together with related underlying long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  If required, an impairment would be recognized in the consolidated statements of operations to reduce the carrying amount of an intangible asset to its fair value.  No impairment was identified as of June 30, 2018.

Equity Method of Accounting. We account for investments that we do not control, but have the ability to exercise significant influence using the equity method of accounting. Under this method, our equity investments are originally recorded at our acquisition cost, which approximates fair value, increased by our proportionate share of the investee’s net income and by contributions made, and decreased by our proportionate share of the investee’s net losses and by distributions received. Our income from equity investments also includes amortization expense associated with the difference in basis between the initial carrying value of our equity investments in our consolidated balance sheets and our proportionate share of the underlying net assets of our investee.

Bond Premium on Senior Unsecured Notes.  In connection with the Business Combination, the Company estimated the fair value of Alta Mesa’s $500 million senior unsecured notes at $533.6 million as of the acquisition date.  The amount in excess of the principal amount was recorded as a bond premium, which is being amortized as a reduction to interest expense. 

Asset Retirement Obligations. We recognize liabilities for the future costs of dismantlement and abandonment of our wells, facilities, and other tangible long-lived assets along with an associated increase in the carrying amount of the related long-lived asset.  The fair values of new asset retirement obligations are estimated using expected future costs discounted to present value.  The cost of the tangible asset, including the asset retirement cost, is depleted over the useful life of the asset.  Accretion expense is recognized as the discounted liability is accreted to its expected settlement value.  Asset retirement obligations are subject to revision primarily for changes to the estimated timing and cost of abandonment.

Asset retirement obligations for the Company’s midstream processing and pipeline facilities generally become firm at the time the facilities are permanently shut down and dismantled.  These obligations may include the costs of asset disposal and additional soil remediation.  However, these sites have indeterminate lives based on plans for continued operations and as such, the fair value of the conditional legal obligations cannot be measured due to the uncertainty associated with the future settlement dates of such obligations. As such, no obligation has been established as of June 30, 2018.

Derivative Financial Instruments. We use derivative contracts to hedge the effects of fluctuations in the prices of oil, natural gas and natural gas liquids. We account for such derivative instruments in accordance with ASC 815, Derivatives and Hedging (“ASC 815”), which establishes accounting and disclosure requirements for derivative instruments and requires them to be measured at fair value and recorded as assets or liabilities in the consolidated balance sheets (see Note 7 Fair Value Disclosures for information on fair value).

Under ASC 815, hedge accounting is used to defer recognition of unrealized changes in the fair value of such financial instruments, for those contracts which qualify as fair value or cash flow hedges, as defined in the guidance. Historically, we have not designated any of our derivative contracts as fair value or cash flow hedges. Accordingly, the changes in fair value of the contracts are included in gain (loss) on derivative contracts in the consolidated statement of operations.  Gains or losses from the settlement of matured derivatives contracts are also included in gain (loss) on derivatives contracts in the consolidated statements of operations.  Cash flows from settlements of derivative contracts are classified as operating cash flows. 

Income Taxes (Successor). Income taxes and uncertain tax positions are accounted for in accordance with ASC 740, Accounting for Income Taxes (“ASC 740”). Deferred income taxes are provided for the temporary differences between the bases of assets and liabilities for financial reporting and income tax purposes. We classify deferred tax assets and liabilities as noncurrent in our consolidated balance sheet as of June 30, 2018.

Tax positions meeting the more-likely-than-not recognition threshold are measured pursuant to the guidance set forth in ASC 740. We assess the ability to realize our deferred tax assets on a quarterly basis. A valuation allowance is established to reduce deferred tax assets to the amount expected to be realized when it is determined that it is more likely than not that some or all of the deferred tax assets are not realizable.


17


The Company is also subject to the Texas margin tax, which is considered a state income tax, and is included in “Income tax provision (benefit)” on the consolidated statements of operations. The Company records state income tax (current and deferred) based on taxable income, as defined under the rules for the margin tax.

We follow guidance issued by the FASB in accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement.

We have considered our exposure under the standard at both the federal and state tax levels.  We did not record any liabilities for uncertain tax positions as of June 30, 2018 or December 31, 2017. We record income tax-related interest and penalties, if any, as a component of income tax expense. We did not incur any material interest or penalties on income taxes for the Successor Period.

Alta Mesa’s tax returns for the years ended December 31, 2014 forward remain open for examination. None of the Company’s federal or state tax returns are currently under examination by the relevant authorities.

Income Taxes (Predecessor). Alta Mesa historically elected to be treated as an individual partnership for tax purposes
under the provisions of the Internal Revenue Code of 1986, as amended. Accordingly, items of income, expense, gains and losses of the Predecessor flowed through to the partners and were taxed at the partner level. Accordingly, no tax provision for federal income taxes is included in the consolidated financial statements of the Predecessor.

Predecessor net income (loss) for financial statement purposes differed significantly from taxable income (loss) reported to limited partners as a result of differences between the tax bases and financial reporting bases of assets and liabilities and the taxable income allocation requirements under Alta Mesa’s amended and restated partnership agreement.  As a result, the aggregate difference in the basis of net assets for financial and tax reporting purposes could not be readily determined as some tax basis differences are determined at the partner level and Alta Mesa did not have access to information about each unitholder’s tax attributes in Alta Mesa. However, with respect to Alta Mesa, the Predecessor’s book basis in its net assets exceeded Alta Mesa’s net tax basis by $333.2 million at December 31, 2017.

Revenue Recognition. We recognize oil, natural gas and natural gas liquids revenues when products are delivered at a fixed or determinable price, title has transferred and collectability is reasonably assured. We use the sales method of accounting for recognition of natural gas imbalances.

Gathering and processing revenues are generated by charging fees on a per unit basis for gathering crude oil and natural gas and processing natural gas.  The Company recognizes revenue when services have been rendered, the prices are fixed or determinable and collectability is reasonably assured.  In addition, revenue from sales of crude oil, natural gas and natural gas liquids is recognized when title passes to the customer, which is when risk of ownership passes to the customer and physical delivery occurs, the price of the product is fixed or determinable and collectability is reasonably assured.

Equity-Based Compensation (Successor)The Company recognizes compensation related to all stock-based awards in the financial statements based on their estimated grant-date fair value. The Company grants various types of stock-based awards including stock options, restricted stock, and performance-based restricted stock units. The fair value of stock option awards is determined using the Black-Scholes option pricing model. Service-based restricted stock and restricted stock awards are valued using the market price of the Company’s common stock on the grant date. Compensation cost is recognized ratably over the applicable vesting period. See Note 17 — Equity Based Compensation (Successor) for additional information regarding the Company’s equity-based compensation.

Fair Value of Financial Instruments. The fair values of cash, accounts receivable and current liabilities approximate book value due to their short-term nature. The fair value of long-term debt under the Alta Mesa and Kingfisher senior secured revolving credit facilities is not considered to be materially different from carrying value due to variable market rates of interest.  Derivative financial instruments are carried at fair value. For further information on fair values of financial instruments see Note 7 —  Fair Value Disclosures and Note 12 —  Long-Term Debt, Net.  

Acquisitions. Business combinations are accounted for using the acquisition method of accounting. Accordingly, the results of operations of the acquired businesses (Alta Mesa and Kingfisher) are included in our consolidated statements of operations

18


from the closing date of the acquisitions, except in the case of our acquisition of Alta Mesa, as that entity was deemed to be our Predecessor for accounting purposes. The total cost of each acquisition is allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the time of the acquisition.

Earnings (Loss) Per Share Basic earnings (loss) per share is calculated by dividing earnings (loss) available to common stockholders by the weighted average number of shares outstanding during each period.

The Company uses the "if-converted" method to determine the potential dilutive effect of exchanges of outstanding SRII Opco Common Units and corresponding shares of its outstanding Class C Common Stock, and the treasury stock method to determine the potential dilutive effect of its outstanding warrants, restricted stock, restricted stock units and stock options.

The following table reflects the net income attributable to common stockholders and earnings per share for the periods indicated based on a weighted average number of common shares outstanding for the period:

໿

Successor

Three Months Ended June 30, 2018
 
February 9, 2018 Through June 30, 2018

(in thousands, except shares and per share data)
Net loss attributable to AMR Class A common stockholders
$
(6,444
)
 
$
(19,679
)
Effect of dilutive Class C securities:
 
 
 
Net loss attributable to noncontrolling interests assumed to be redeemed for Class A Common Stock, net of tax
(2,157
)
 
(4,914
)
Net loss attributable to AMR Class A common stockholders after assumed redemption
$
(8,601
)
 
$
(24,593
)

 
 
 
Weighted average Class A common shares outstanding (Basic)
173,345,982

 
171,908,486

Effect of dilutive securities:
 
 
 
Class A shares assumed issued to holders of noncontrolling interests upon redemption
34,619,947

 
36,204,221

Weighted average common shares outstanding (Diluted)
207,965,929

 
208,112,707


 
 
 
Loss per common share attributable to AMR common stockholders:
 
 
 
Basic
$
(0.04
)
 
$
(0.11
)
Diluted
$
(0.04
)
 
$
(0.12
)

For the three months ended June 30, 2018 (Successor), approximately 63.0 million of warrants and 5.9 million of stock awards, consisting of stock options, restricted stock and restricted stock units, were excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive. During the Successor Period, approximately 63.0 million of warrants and 5.7 million of stock awards, consisting of stock options, restricted stock and restricted stock units, were excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive. Additionally, 174.4 million shares of Class C Common Stock were excluded from the calculation of diluted earnings per share during the Successor Periods due to restrictions on noncontrolling interest holders of those shares at June 30, 2018 to exercise their right to cause SRII Opco to redeem a portion of their Common Units, along with an equal number of Class C shares held by noncontrolling interest holders, for the Company's Class A Common Stock.

Comprehensive Income. During the Successor Periods and the Predecessor Periods, the Company had no components of other comprehensive income. Accordingly, total comprehensive income for each period was equal to the amount of net income (loss) for those same periods as reflected in the accompanying consolidated statements of operations.
Going Concern. The Company's management is required to evaluate an entity’s ability to continue as a going concern for a period of one year following the date of the issuance of the Company’s consolidated financial statements. Footnote disclosure is required if substantial doubt exists about an entity’s ability to continue as a going concern during the evaluation period, including management’s plans to alleviate the conditions and events that raise substantial doubt of going concern, if applicable.
At the date of the issuance of these consolidated financial statements, management considers the Company to be a going concern and has prepared these consolidated financial statements on a going concern basis.

19


Recent Accounting Pronouncements Issued But Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which seeks to provide a single, comprehensive revenue recognition model for all contracts with customers concerning the recognition, measurement and disclosure of revenue from those contracts. Subsequent to the issuance of ASU 2014-09, the FASB amended the standard to provide clarification and interpretive guidance to assist entities with implementation efforts, including guidance pertaining to the presentation of revenues on a gross basis (revenues presented separately from associated expenses) versus a net basis. The core principle of the new amended standard is that a company will recognize revenue when it transfers promised goods and services to customers in an amount that reflects the consideration to which the company is entitled in exchange for those services. In order to comply with the new standard, companies will need to (i) identify performance obligations in each contract, (ii) estimate the amount of variable consideration to include in the transaction price and (iii) allocate the transaction price to each separate performance obligation.

ASU 2014-09, as amended, is effective for interim and annual periods beginning after December 15, 2017, except for emerging growth companies that elect to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 7(a)(2)(b) of the Securities Act.

We are currently an emerging growth company and have elected to use the extended transition period. However, we expect to lose our emerging growth company status, effective December 31, 2018. Accordingly, we will be required to adopt ASU 2014-09 on December 31, 2018, with retroactive implementation as of January 1, 2018. ASU 2014-09 allows for either full retrospective adoption, meaning the standard is applied to all periods presented in the financial statements, or modified retrospective adoption, meaning the standard is applied only to the most current period presented. We expect to adopt ASU 2014-09 using the modified retrospective method with a cumulative adjustment to retained earnings as necessary.  
We are in the process of assessing our contracts and evaluating the impact on our consolidated financial statements. We are continuing to evaluate the provisions of ASU 2014-09, as it relates to certain sales contracts, and in particular, as it relates to disclosure requirements. In addition, we are evaluating the impact, if any, on the presentation of our revenues and expenses under the new gross-versus-net presentation guidance and on our current accounting policies, including the need to make changes to relevant business practices and internal controls, if needed.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 “Leases.” The amendments in this update require, among other things, that lessees recognize the following for all leases (except for short-term leases) at the commencement date: (i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents a lessee's right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. ASU 2016-02 also requires disclosures designed to provide information on the amount, timing, and uncertainty of cash flows arising from leases.  In January 2018, the FASB issued ASU No. 2018-01, Land easement practical expedient for transition to Topic 842 (“ASU 2018-01”), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under Topic 840, Leases.  The standard will be effective for interim and annual periods beginning after December 15, 2018. In the normal course of business, we enter into operating lease agreements to support our exploration and development operations and lease assets such as drilling rigs, well equipment, compressors, office space and other assets.
At this time, we are evaluating the financial impact ASU 2016-02 will have on our financial statements; however, the adoption and implementation of ASU 2016-02 is expected to have an impact on our consolidated balance sheets resulting in an increase in both the assets and liabilities relating to our operating lease activities greater than twelve months.  The adoption is also expected to result in a change in the amount of lease expense recorded on our consolidated statement of operations, and additional disclosures.  As part of our assessment to date, we have formed an implementation work team and will complete our evaluation in 2018.  As we continue to evaluate and implement the standard, we will provide additional information about the expected financial impact at a future date.  
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to reduce diversity in practice in how certain transactions are classified in the statements of cash flows. ASU 2016-15 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. As an emerging growth company, we have elected to use the extended transition period to defer adoption of this standard until 2019.  However, we expect to lose our emerging growth status effective December 31, 2018.  Accordingly, we will be required to adopt this new standard on December 31, 2018. The adoption of this guidance will not impact our financial position or results of operations but could result in presentational changes in our consolidated statements of cash flows. 

20


In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard requires the use of a new “expected credit loss” impairment model rather than the “incurred loss” model used today. With respect to its trade receivables and certain other financial instruments, the Company may be required to (i) maintain and use lifetime loss information rather than annual loss data and (ii) forecast future economic conditions and quantify the effect of those conditions on future expected losses. The standard, which will be effective for the Company in fiscal years beginning after December 15, 2019, also requires additional disclosures regarding the credit quality of the Company’s trade receivables and other financial instruments. No determination has yet been made of the impact of this new standard on the Company’s financial position or results of operations.
Reclassifications. Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 3 — SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow disclosures and non-cash investing and financing activities are presented below (in thousands):

໿

 
Successor
 
Predecessor

 
February 9, 2018
 
January 1, 2018
 
Six

 
Through
 
Through
 
Months Ended

 
June 30, 2018
 
February 8, 2018
 
June 30, 2017
Supplemental cash flow information:
 
 
 
 
 
 
Cash paid for interest
 
$
22,996

 
$
1,145

 
$
23,452

Cash paid for income taxes
 
1,573

 

 

Non-cash investing and financing activities:
 
 
 
 
 
 
Change in asset retirement obligations
 
877

 

 
235

Asset retirement obligations assumed, purchased properties
 

 

 
89

Change in accruals or liabilities for capital expenditures
 
(25,798
)
 
4,712

 
37,494

Distribution of non-STACK assets (net liability)
 

 
33,102

 

Equity issued in Business Combination
 
2,067,393

 

 

Release of Common stock from possible redemption
 
966,384

 

 

Exchange of Class B common stock to Class A
 
3

 

 

Tax effect of redemption of noncontrolling interests in SRII Opco for Class A common shares and other
 
(437
)
 

 


NOTE 4 — BUSINESS COMBINATION

As discussed in Note 1, on February 9, 2018, we consummated the Transactions contemplated by the Contribution Agreements.

Pursuant to the AM Contribution Agreement and Kingfisher Contribution Agreement, SRII Opco acquired (a) (i) all of the limited partner interests in Alta Mesa and (ii) 100% of the economic interests and 90% of the voting interests in Alta Mesa GP and (b) 100% of the economic interests in Kingfisher. 

At the closing of the Business Combination:
the Company issued (i) 40,000,000 shares of Class A Common Stock and (ii) warrants to purchase 13,333,333 shares of Class A Common Stock to Riverstone VI SR II Holdings, L.P. (“Fund VI Holdings”) pursuant to the terms of that certain Forward Purchase Agreement, dated as of March 17, 2017 (the “Forward Purchase Agreement”) for cash proceeds of $400 million to us;
the Company contributed $1,406.4 million in cash (the proceeds from the Forward Purchase Agreement and the net proceeds (after redemptions) of the Trust Account) to SRII Opco, in exchange for (i) 169,371,730 of the common units (approximately 44.2%) representing limited partner interests in SRII Opco (the “SRII Opco Common Units”) and (ii) 62,966,666 warrants to purchase SRII Opco Common Units (“SRII Opco Warrants”);
the Company caused SRII Opco to issue 213,402,398 SRII Opco Common Units (approximately 55.8%) to the Contributors in exchange for the ownership interests in Alta Mesa, Alta Mesa GP and Kingfisher that were contributed to SRII Opco by the Contributors;

21


the Company agreed to cause SRII Opco to issue up to 59,871,031 SRII Opco Common Units to the AM Contributor and the KFM Contributor if the earn-out consideration provided for in the Contribution Agreements is earned by the AM Contributor or the KFM Contributor pursuant to the terms of the Contribution Agreements;
the Company issued to each of the Contributors a number of shares of Class C common stock, par value $0.0001 per share (the “Class C Common Stock”), equal to the number of the SRII Opco Common Units received by each such Contributor at the closing;
SRII Opco distributed to the KFM Contributor cash in the amount of approximately $814.8 million in partial payment for the ownership interests in Kingfisher contributed by the KFM Contributor; and
SRII Opco entered into an amended and restated voting agreement with the owners of the remaining 10% voting interests in Alta Mesa GP whereby such other owners agreed to vote their interests in Alta Mesa GP as directed by SRII Opco.

Holders of AMR’s Class C Common Stock, together with holders of Class A Common Stock, voting as a single class, have the right to vote on all matters properly submitted to a vote of the stockholders, but holders of Class C Common Stock are not entitled to any dividends or liquidating distributions from us. After a specified period of time after Closing, the Contributors will generally have the right to cause SRII Opco to redeem all or a portion of their SRII Opco Common Units in exchange for shares of our Class A Common Stock or, at SRII Opco’s option, an equivalent amount of cash. However, we may, at our option, effect a direct exchange of cash or Class A Common Stock for such SRII Opco Common Units in lieu of such a redemption by SRII Opco. Upon the future redemption or exchange of SRII Opco Common Units held by a Contributor, a corresponding number of shares of Class C Common Stock will be canceled.

During the second quarter of 2018, equity owners of the KFM Contributor elected to redeem 9,588,764 of its SRII Opco Common Units for an equal number of shares of Class A Common Stock. We elected to complete this redemption through a direct exchange, whereby the 9,588,764 SRII Opco Common Units are now owned by us, and we issued 9,588,764 shares of our Class A Common Stock to equity owners of the KFM Contributor and canceled 9,588,764 shares of our Class C Common Stock. As a result, at June 30, 2018, we own 46.6% of the limited partner interests in SRII Opco.
 
Pursuant to the AM Contribution Agreement and the KFM Contribution Agreement, for a period of seven years following the closing, the AM Contributor and the KFM Contributor may be entitled to receive additional SRII Opco Common Units (and acquire a corresponding number of shares of AMR’s Class C Common Stock) as earn-out consideration if the 20-day volume-weighted average price (“20-Day VWAP”) of our Class A Common Stock equals or exceeds the following prices (each such payment, an “Earn-Out Payment”):

໿
20-Day VWAP
 
Earn-Out Consideration Payable to
AM Contributor
 
Earn-Out Consideration Payable to
KFM Contributor
$14.00
 
10,714,285 SRII Opco Common Units
 
7,142,857 SRII Opco Common Units

$16.00
 
9,375,000 SRII Opco Common Units
 
6,250,000 SRII Opco Common Units

$18.00
 
13,888,889 SRII Opco Common Units
 

$20.00
 
12,500,000 SRII Opco Common Units
 


໿
Neither the AM Contributor nor the KFM Contributor will be entitled to receive a particular Earn-Out Payment on more than one occasion and, if, on a particular date, the 20-Day VWAP entitles the AM Contributor or the KFM Contributor to more than one Earn-Out Payment (each of which has not been previously paid), the AM Contributor and/or the KFM Contributor will each be entitled to receive each such Earn-Out Payment. The AM Contributor and the KFM Contributor will be entitled to the earn-out consideration described above in connection with certain liquidity events of the Company, including a merger or sale of all or substantially all of our assets, if the consideration paid to holders of Class A Common Stock in connection with such a liquidity event is greater than any of the above-specified 20-Day VWAP hurdles.

We also contributed $560 million in net cash to Alta Mesa at the closing. Our source for these funds was from the sale of our securities to investors in a public offering and in private placements.  Alta Mesa used a portion of the amount to repay its outstanding balance under its Alta Mesa Credit Facility described in Note 12 — Long Term Debt, Net.  

Pursuant to the Contribution Agreements, the AM Contributor and KFM Contributor delivered a final closing statement during the second quarter of 2018.  Based on the final closing statement, the AM Contributor received an additional 1,197,934 SRII Opco Common Units and an equivalent number of shares of our Class C Common Stock and the KFM Contributor remitted back to the Company $5.0 million in cash and 89,680 SRII Opco Common Units and an equivalent number of shares of our Class C Common Stock.

22



The Business Combination has been accounted for using the acquisition method. The acquisition method of accounting is based on FASB ASC 805, Business Combination (“ASC 805”), and uses the fair value concepts defined in FASB ASC 820, Fair Value Measurements (“ASC 820”). ASC 805 requires, among other things, that our assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date by the Company. We have not completed the detailed valuation studies necessary to arrive at the final determination of the fair value of the assets acquired, the liabilities assumed and the related allocations of the purchase price in the Business Combination. As a result, the values of certain of our long-term assets and liabilities are preliminary in nature and are subject to change as additional information becomes available and as additional analysis is performed.  Pursuant to ASC 805, finalization of the values is to be completed within one year of the Acquisition Date.

Preliminary Estimated Purchase Price for Alta Mesa

The preliminary estimated purchase price consideration for Alta Mesa was as follows (in thousands):

February 9, 2018
(As initially reported)
 
Measurement Period Adjustment (1)
 
February 9, 2018 (As adjusted)
Preliminary Purchase Consideration: (2)
 
 
 
 
 
SRII Opco Common Units issued (3)
$
1,251,782

 
$
9,467

 
$
1,261,249

Estimated fair value of contingent earn-out purchase consideration (4)
284,109

 

 
284,109

Settlement of preexisting working capital (5)
5,476

 

 
5,476

Total purchase price consideration
$
1,541,367

 
$
9,467

 
$
1,550,834

_________________
(1)
The measurement period adjustment relates to the issuance of 1,197,934 of additional SRII Opco Common Units, valued at approximately $7.90 per unit, to the AM Contributor based on a final closing statement agreed to by the parties during the three months ended June 30, 2018 (Successor).
(2)
The preliminary purchase price consideration is for 100% of the limited partner interests in Alta Mesa and 100% of the economic interests and 90% of the voting interests in Alta Mesa GP.  
(3)
At closing, the Riverstone Contributor received consideration of 20,000,000 SRII Opco Common Units and the AM Contributor received consideration of 138,402,398 SRII Opco Common Units. The estimated fair value of an SRII Opco Common Unit was approximately $7.90 per unit and reflects discounts for holding requirements and liquidity.
(4)
For a period of seven years following Closing, the AM Contributor will be entitled to receive an earn-out consideration to be paid in the form of SRII Opco Common Units (and a corresponding number of shares of Class C Common Stock) if the 20-day VWAP of our Class A Common Stock equals or exceeds the specified prices pursuant to the AM Contribution Agreement. Pursuant to ASC 805 and ASC 480, Distinguishing Liabilities from Equity (“ASC 480”), we have determined that the fair value of the earn-out consideration was approximately $284.1 million, which was classified as equity. The fair value of the contingent equity earn-out consideration was determined using the Monte Carlo simulation valuation method based on Level 3 inputs as defined in the fair value hierarchy. The key inputs included the listed market price for Class A Common Stock, market volatility of a peer group of companies similar to the Company (due to the lack of trading activity in the Class A Common Stock), no dividend yield, an expected life of each earn-out threshold based on the remaining contractual term of the contingent liability earn-out period and a risk-free rate based on U.S. dollar overnight indexed swaps with a maturity equivalent to the earn-out’s expected life.
(5)
Settlement of preexisting working capital balances between Alta Mesa and Kingfisher.


23


Preliminary Estimated Purchase Price Allocation for Alta Mesa

The following table summarizes the allocation of the preliminary estimate of the purchase consideration to the assets acquired and liabilities assumed in connection with the acquisition of Alta Mesa in the Business Combination.  The allocation is as follows (in thousands):
໿

February 9, 2018
(As initially reported)
 
Measurement Period Adjustment (1)
 
February 9, 2018 (As adjusted)
Estimated Fair Value of Assets Acquired (2)
 
 
 
 
 
Cash, cash equivalents and short term restricted cash
$
10,345

 
$

 
$
10,345

Accounts receivable
101,745

 

 
101,745

Other receivables
1,222

 

 
1,222

Receivables due from related party
907

 

 
907

Prepaid expenses and other current assets
1,405

 

 
1,405

Derivative financial instruments
352

 

 
352

Property and equipment: (3)
 
 
 
 
 
Oil and natural gas properties, successful efforts
2,314,858

 
9,467

 
2,324,325

Other property and equipment, net
43,318

 

 
43,318

Notes receivable due from related party
12,454

 

 
12,454

Deposits and other long-term assets
10,286

 

 
10,286

Total fair value of assets acquired
2,496,892

 
9,467

 
2,506,359

Estimated Fair Value of Liabilities Assumed (2)
 
 
 
 
 
Accounts payable and accrued liabilities
210,867

 

 
210,867

Advances from non-operators
6,803

 

 
6,803

Advances from related party
47,506

 

 
47,506

Asset retirement obligations (3)
5,998

 

 
5,998

Derivative financial instruments
11,585

 

 
11,585

Long-term debt (4)
667,700

 

 
667,700

Other long-term liabilities
5,066

 

 
5,066

Total fair value of liabilities assumed
955,525

 

 
955,525

Total consideration and fair value
$
1,541,367

 
$
9,467

 
$
1,550,834

_________________
(1)
The measurement period adjustment is recognized in the reporting period in which the adjustment was determined and calculated as if the accounting had been completed at the acquisition date.
(2)
The assets acquired and liabilities assumed relate to Alta Mesa’s STACK assets.
(3)
The estimated fair values of oil and natural gas properties and asset retirement obligations were determined using valuation techniques that convert future cash flows to a single discounted amount and involve the use of certain inputs that are not observable in the market (Level 3 inputs). Significant inputs include, but are not limited to recoverable reserves, production rates, future operating and development costs, future commodity prices, appropriate risk-adjusted discount rates, and other relevant data. These inputs required significant judgments and estimates by management at the time of the valuation. Actual results may vary from these estimates.
(4)
Represents the approximate fair value as of the acquisition date of Alta Mesa’s $500 million aggregate principal amount of 7.875% senior unsecured notes due December 15, 2024, totaling approximately $533.6 million, based on Level 1 inputs, and outstanding borrowings under the Alta Mesa Credit Facility (described in Note 12 — Long Term Debt, Net) of approximately$134.1 million as of the acquisition date.


24


Preliminary Estimated Purchase Price for Kingfisher

The estimated preliminary purchase price consideration for Kingfisher is as follows (in thousands):
໿
໿

February 9, 2018
(As initially reported)
 
Measurement Period Adjustments (1)
 
February 9, 2018 (As adjusted)
Preliminary Purchase Consideration:
 
 
 
 
 
Cash (2)
$
814,820

 
$
(5,008
)
 
$
809,812

SRII Opco Common Units issued (3)
434,640

 
(709
)
 
433,931

Estimated fair value of contingent earn-out purchase consideration (4)
88,105

 

 
88,105

Settlement of preexisting working capital (5)
(5,476
)
 

 
(5,476
)
Total purchase price consideration
$
1,332,089

 
$
(5,717
)
 
$
1,326,372

_________________
(1)
The measurement period adjustments relate to the KFM Contributor remitting back to the Company $5.0 million in cash and 89,680 of SRII Opco Common Units valued at $7.90 per unit based on a final closing statement agreed to by the parties during the three months ended June 30, 2018 (Successor).
(2)
The cash consideration paid at February 9, 2018 is net of estimated net working capital adjustments, transaction expenses, capital expenditures and banking fees.
(3)
At closing, the KFM Contributor received consideration of 55,000,000 SRII Opco Common Units valued at approximately $7.90 per unit, reflecting discounts for holding requirements and liquidity.
(4)
Pursuant to ASC 805 and ASC 480, the Kingfisher earn-out consideration has been valued at fair value as of the Closing Date and has been classified in stockholders’ equity. The fair value of the contingent equity earn-out consideration was determined using the Monte Carlo simulation valuation method based on Level 3 inputs using the fair value hierarchy. The key inputs included the quoted market price for the Company’s Class A Common Stock, market volatility of a peer group of companies similar to the Company (due to the lack of trading activity in the Company’s Class A Common Stock), no dividend yield, an expected life of each earn-out threshold based on the remaining contractual term of the contingent liability earn-out period and a risk-free rate based on U.S. Dollars overnight indexed swaps with a maturity equivalent to the earn-out’s expected life.
(5)
Settlement of preexisting working capital between Alta Mesa and Kingfisher.


25


Preliminary Estimated Purchase Price Allocation for Kingfisher
The following table summarizes the allocation of the preliminary estimate of the purchase consideration to the assets acquired and liabilities assumed in connection with the acquisition of Kingfisher in the Business Combination.  The allocation is as follows (in thousands):

໿

February 9, 2018
(As initially reported)
 
Measurement Period Adjustments (1)
 
February 9, 2018 (As adjusted)
Estimated Fair Value of Assets Acquired
 
 
 
 
 
Cash and cash equivalents
$
7,648

 
$

 
$
7,648

Accounts receivable
4,334

 

 
4,334

Prepaid expenses
550

 

 
550

Property, plant and equipment: (2)
 
 
 
 
 
Pipeline
272,442

 

 
272,442

Other property, plant and equipment
519

 

 
519

Intangible assets (3)
472,432

 
(54,952
)
 
417,480

Goodwill (4)
650,663

 
49,235

 
699,898

Total fair value of assets acquired
1,408,588

 
(5,717
)
 
1,402,871

Estimated Fair Value of Liabilities Assumed
 
 
 
 
 
Accounts payable and accrued liabilities
33,499

 

 
33,499

Long-term debt
43,000

 

 
43,000

Total fair value of liabilities assumed
76,499

 

 
76,499

Total consideration and fair value
$
1,332,089

 
$
(5,717
)
 
$
1,326,372

_________________
(1)
The measurement period adjustments are recognized in the reporting period in which the adjustments were determined and calculated as if the accounting had been completed at the acquisition date. The measurement period adjustments relate to a change in the purchase price consideration based on a final closing statement agreed to by the parties during the three months ended June 30, 2018 (Successor) and a revision in the value of Kingfisher's customer relationship intangible assets resulting from an adjustment to the initial discount rate used.
(2)
The estimated fair values of crude oil, natural gas and NGL gathering, processing and storage assets are determined using valuation techniques that convert future cash flows to a single discounted amount and involved the use of certain inputs that are not observable in the market (Level 3 inputs). These valuations required significant judgments and estimates by management at the time of the valuation. Actual results may vary from these estimates.
(3)
The identifiable intangible assets acquired are primarily related to customer relationships held by Kingfisher prior to Closing and are reflected at their estimated fair values as of the acquisition date determined using valuation techniques that convert future cash flows to a single discounted amount and involve the use of certain inputs that are not observable in the market (Level 3 inputs). These valuations required significant judgments and estimates by management at the time of the valuation. The intangible assets have definite lives and are subject to amortization over their economic lives, currently ranging from approximately 10-15 years.
(4)
Goodwill reflected in the preliminary purchase price allocation includes expected synergies, including future cost efficiencies with continual flow of activity of Alta Mesa production into the Kingfisher processing facility as the basin expands, as well as other benefits that are expected to be generated.

Unaudited Pro Forma Operating Results

The following unaudited pro forma combined financial information has been prepared as if the Business Combination and other related transactions had taken place on January 1, 2017.

The information reflects pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including depletion of Alta Mesa’s proved oil and gas properties, and the estimated tax impacts of the pro forma adjustments. Additionally, pro forma earnings for the 2018 Predecessor Period and the 2017 Predecessor Periods, were adjusted to exclude $65.2 million of transaction-related costs incurred by the Company, Alta Mesa and Kingfisher. These costs are not included as they are directly related to the Business Combination and are nonrecurring.


26


The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Business Combination taken place on January 1, 2017; furthermore, the financial information is not intended to be a projection of future results.
໿

 
Three Months Ended June 30, 2017
 
February 9, 2018
Through
June 30, 2018
 
Six Months Ended June 30, 2017

 
(in thousands)
Total operating revenues
 
$
75,171

 
$
234,456

 
$
150,623

Net income (loss)
 
11,492

 
(34,440
)
 
36,757

Net income (loss) attributable to Alta Mesa Resources, Inc.
 
3,753

 
(11,725
)
 
11,971

Basic and diluted net income (loss) per share
 
0.02

 
(0.07
)
 
0.07


NOTE 5 PROPERTY, PLANT AND EQUIPMENT

Property and equipment consists of the following (in thousands):

Successor
 
 
Predecessor

June 30,
2018
 
 
December 31,
2017
OIL AND NATURAL GAS PROPERTIES
 
 
 
 
Unproved properties
$
891,787

 
 
$
84,590

Accumulated impairment of unproved properties

 
 

Unproved properties, net
891,787

 
 
84,590

Proved oil and natural gas properties
1,695,596

 
 
1,061,105

Accumulated depreciation, depletion, amortization and impairment
(36,864
)
 
 
(251,065
)
Proved oil and natural gas properties, net
1,658,732

 
 
810,040

TOTAL OIL AND NATURAL GAS PROPERTIES, net
2,550,519


 
894,630

OTHER PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Land
5,600

 
 
2,912

Salt water disposal system
44,028

 
 
30,990

Plant and equipment
295,337

 
 

Office furniture and equipment, vehicles
2,105

 
 
20,008

Accumulated depreciation
(3,713
)
 
 
(21,770
)
OTHER PROPERTY, PLANT AND EQUIPMENT, net
343,357

 
 
32,140

TOTAL PROPERTY, PLANT AND EQUIPMENT, net
$
2,893,876


 
$
926,770

 
NOTE 6 — DISCONTINUED OPERATIONS (Predecessor)

Alta Mesa distributed its non-STACK assets and related liabilities to the AM Contributor immediately prior to the Closing Date of the Business Combination. The distribution of Alta Mesa’s non-STACK assets and related liabilities and the sale of Alta Mesa’s Weeks Island field during the fourth quarter of 2017 were part of Alta Mesa’s overall strategic shift to operate only in the eastern Anadarko Basin.  As a result, the Predecessor’s non-STACK assets and liabilities have been presented as discontinued operations in the consolidated balance sheets.  The operating results directly related to non-STACK assets and liabilities have been segregated and presented as discontinued operations within the consolidated financial statements in the 2018 Predecessor Period and the 2017 Predecessor Periods. 

Prior to the Business Combination, Alta Mesa had notes payable to its founder (“Founder Notes”) that bear simple interest at 10%. In connection with the Transactions described in Note 1 – Description of Business, the Founder Notes were converted into an equity interest in the AM Contributor immediately prior to the closing of the Business Combination as they were considered part of the non-STACK asset distribution.  The balance of the Founder Notes at the time of conversion was approximately $28.3 million, including accrued interest.  Interest on the Founder Notes was $0.1 million for the 2018 Predecessor Period and $0.3 million and $0.6 million for the three months ended June 30, 2017 (Predecessor) and 2017 Predecessor Period, respectively.

27



The assets and liabilities directly related to the non-STACK assets presented as discontinued operations in the consolidated balance sheets were as follows (in thousands):

Predecessor

December 31,
2017
Assets associated with discontinued operations:
 
Current assets
 
Cash
$
61

Accounts receivable
4,980

Other receivables
154

Total current assets
5,195

Noncurrent assets
 
Investments in LLC - Cost
9,000

Proved oil and natural gas properties, net
15,408

Unproved properties, net
15,504

Land
2,706

Other long-term assets
1,167

Total noncurrent assets
43,785

Total assets associated with discontinued operations
$
48,980


 
Liabilities associated with discontinued operations:
 
Current liabilities
 
Accounts payable and accrued liabilities
$
7,882

Asset retirement obligations 
7,537

Total current liabilities
15,419

Noncurrent liabilities
 
Asset retirement obligations, net of current
37,049

Founder's note
28,166

Other long-term liabilities
1,647

Total noncurrent liabilities
66,862

Total liabilities associated with discontinued operations
$
82,281



28


The operating results directly related to the non-STACK assets and liabilities presented as discontinued operations within the consolidated financial statements were as follows (in thousands):

Predecessor

Three
 
January 1, 2018
 
Six
 
Months Ended
 
Through
 
Months Ended
 
June 30, 2017
 
February 8, 2018
 
June 30, 2017
Operating revenues and other:
 
 
 
 
 
Oil
$
12,723

 
$
1,617

 
$
25,128

Natural gas
2,494

 
1,023

 
5,588

Natural gas liquids
495

 
236

 
1,042

Other revenues
86

 
16

 
202

Total operating revenues
15,798

 
2,892

 
31,960

Loss on sale of assets

 
(1,923
)
 

Gain on acquisition of oil and gas properties
1,626

 

 
1,626

Total operating revenues and other
17,424

 
969

 
33,586

Operating expenses:
 
 
 
 
 
Lease operating expense
7,096

 
1,770

 
15,056

Marketing and transportation expense
347

 
83

 
728

Production taxes
1,855

 
167

 
3,657

Workover expense
913

 
127

 
1,708

Exploration expense
3,073

 

 
6,168

Depreciation, depletion and amortization
6,384

 
630