10-Q 1 rvra-10q_20180630.htm 10-Q rvra-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

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

For the Quarterly Period Ended June 30, 2018

OR

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

For the transition period from _______________ to _______________

Commission File Number: 333-225927

 

 

Riviera Resources, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

(State or other jurisdiction of incorporation or organization)

 

82-5121920

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

 

 

 

600 Travis Street

Houston, Texas

(Address of principal executive offices)

 

77002

(Zip Code)

(281) 840-4000

(Registrant’s telephone number, including area code)

Riviera Resources, LLC

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

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

As of August 7, 2018, there were 76,190,908 shares of common stock, par value $0.01 per share, outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

Glossary of Terms

 

1

 

 

 

 

 

 

 

Part I – Financial Information

 

 

Item 1.

 

Financial Statements

 

 

 

 

Condensed Consolidated Balance Sheets

 

2

 

 

Condensed Consolidated and Combined Statements of Operations

 

3

 

 

Condensed Consolidated Statement of Equity

 

5

 

 

Condensed Consolidated and Combined Statements of Cash Flows

 

6

 

 

Notes to Condensed Consolidated Financial Statements

 

8

Item 2.

 

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

 

34

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

59

Item 4.

 

Controls and Procedures

 

60

 

 

 

 

 

 

 

Part II – Other Information

 

 

Item 1.

 

Legal Proceedings

 

61

Item 1A.

 

Risk Factors

 

61

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

61

Item 3.

 

Defaults Upon Senior Securities

 

61

Item 4.

 

Mine Safety Disclosures

 

62

Item 5.

 

Other Information

 

62

Item 6.

 

Exhibits

 

63

 

 

 

 

 

 

 

Signatures

 

64

 

 


Table of Contents

GLOSSARY OF TERMS

As commonly used in the oil and natural gas industry and as used in this Quarterly Report on Form 10-Q, the following terms have the following meanings:

Bbl.  One stock tank barrel or 42 United States gallons liquid volume.

Btu.  One British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 degrees to 59.5 degrees Fahrenheit.

MBbls.  One thousand barrels of oil or other liquid hydrocarbons.

MBbls/d. MBbls per day.

Mcf.  One thousand cubic feet.

Mcfe.  One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.

MMBbls.  One million barrels of oil or other liquid hydrocarbons.

MMBtu.  One million British thermal units.

MMcf.  One million cubic feet.

MMcf/d. MMcf per day.

MMcfe.  One million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.

MMcfe/d. MMcfe per day.

MMMBtu.  One billion British thermal units.

NGL.  Natural gas liquids, which are the hydrocarbon liquids contained within natural gas.

 

1


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

June 30,

2018

 

 

December 31,

2017

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

301,365

 

 

$

464,477

 

Accounts receivable – trade, net

 

 

64,686

 

 

 

140,485

 

Derivative instruments

 

 

3,934

 

 

 

9,629

 

Restricted cash

 

 

43,387

 

 

 

56,445

 

Other current assets

 

 

45,760

 

 

 

76,683

 

Assets held for sale

 

 

22

 

 

 

106,963

 

Total current assets

 

 

459,154

 

 

 

854,682

 

Noncurrent assets:

 

 

 

 

 

 

 

 

Oil and natural gas properties (successful efforts method)

 

 

785,815

 

 

 

950,083

 

Less accumulated depletion and amortization

 

 

(59,870

)

 

 

(49,619

)

 

 

 

725,945

 

 

 

900,464

 

Other property and equipment

 

 

566,861

 

 

 

480,729

 

Less accumulated depreciation

 

 

(44,412

)

 

 

(28,658

)

 

 

 

522,449

 

 

 

452,071

 

Derivative instruments

 

 

1,254

 

 

 

469

 

Deferred income taxes

 

 

169,645

 

 

 

188,538

 

Equity method investments

 

 

473,269

 

 

 

464,926

 

Other noncurrent assets

 

 

5,264

 

 

 

6,975

 

 

 

 

649,432

 

 

 

660,908

 

Total noncurrent assets

 

 

1,897,826

 

 

 

2,013,443

 

Total assets

 

$

2,356,980

 

 

$

2,868,125

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

179,119

 

 

$

253,975

 

Share-based payment liability

 

 

111,792

 

 

 

 

Derivative instruments

 

 

5,536

 

 

 

10,103

 

Other accrued liabilities

 

 

19,807

 

 

 

58,130

 

Liabilities held for sale

 

 

 

 

 

43,302

 

Total current liabilities

 

 

316,254

 

 

 

365,510

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Derivative instruments

 

 

24

 

 

 

2,849

 

Asset retirement obligations and other noncurrent liabilities

 

 

105,531

 

 

 

160,720

 

Total noncurrent liabilities

 

 

105,555

 

 

 

163,569

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Net parent company investment

 

 

1,935,171

 

 

 

2,339,046

 

Total equity

 

 

1,935,171

 

 

 

2,339,046

 

Total liabilities and equity

 

$

2,356,980

 

 

$

2,868,125

 

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

 

 

2


Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Successor

 

 

 

Three Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands, except per share

amounts)

 

Revenues and other:

 

 

 

 

 

 

 

 

Oil, natural gas and natural gas liquids sales

 

$

87,004

 

 

$

243,167

 

Gains (losses) on oil and natural gas derivatives

 

 

(7,525

)

 

 

45,714

 

Marketing revenues

 

 

42,967

 

 

 

12,547

 

Other revenues

 

 

6,387

 

 

 

6,391

 

 

 

 

128,833

 

 

 

307,819

 

Expenses:

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

24,088

 

 

 

71,057

 

Transportation expenses

 

 

21,213

 

 

 

37,388

 

Marketing expenses

 

 

40,327

 

 

 

6,976

 

General and administrative expenses

 

 

92,395

 

 

 

34,260

 

Exploration costs

 

 

53

 

 

 

811

 

Depreciation, depletion and amortization

 

 

21,980

 

 

 

45,945

 

Taxes, other than income taxes

 

 

7,115

 

 

 

17,871

 

Gains on sale of assets and other, net

 

 

(101,777

)

 

 

(308,178

)

 

 

 

105,394

 

 

 

(93,870

)

Other income and (expenses):

 

 

 

 

 

 

 

 

Interest expense, net of amounts capitalized

 

 

(584

)

 

 

(7,551

)

Earnings (losses) from equity method investments

 

 

(9,327

)

 

 

91

 

Other, net

 

 

538

 

 

 

(1,166

)

 

 

 

(9,373

)

 

 

(8,626

)

Reorganization items, net

 

 

(1,259

)

 

 

(3,059

)

Income from continuing operations before income taxes

 

 

12,807

 

 

 

390,004

 

Income tax expense

 

 

5,610

 

 

 

161,544

 

Income from continuing operations

 

 

7,197

 

 

 

228,460

 

Income from discontinued operations, net of income taxes

 

 

 

 

 

5,302

 

Net income

 

$

7,197

 

 

$

233,762

 

Income per share:

 

 

 

 

 

 

 

 

Basic and diluted income from continuing operations per share

 

$

0.09

 

 

$

3.00

 

Basic and diluted income from discontinued operations per share

 

$

 

 

$

0.07

 

Basic and diluted net income per share

 

$

0.09

 

 

$

3.07

 

Basic and diluted weighted average shares outstanding

 

 

76,191

 

 

 

76,191

 

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

3


Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Successor

 

 

Predecessor

 

 

 

Six Months Ended

June 30,

2018

 

 

Four Months

Ended

June 30,

2017

 

 

Two Months

Ended

February 28,

2017

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other:

 

 

 

 

 

 

 

 

 

 

 

 

Oil, natural gas and natural gas liquids sales

 

$

223,880

 

 

$

323,492

 

 

$

188,885

 

Gains (losses) on oil and natural gas derivatives

 

 

(22,555

)

 

 

33,755

 

 

 

92,691

 

Marketing revenues

 

 

89,234

 

 

 

15,461

 

 

 

6,636

 

Other revenues

 

 

12,281

 

 

 

8,419

 

 

 

9,915

 

 

 

 

302,840

 

 

 

381,127

 

 

 

298,127

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

71,972

 

 

 

95,687

 

 

 

49,665

 

Transportation expenses

 

 

40,307

 

 

 

51,111

 

 

 

25,972

 

Marketing expenses

 

 

82,082

 

 

 

9,515

 

 

 

4,820

 

General and administrative expenses

 

 

137,174

 

 

 

44,668

 

 

 

71,745

 

Exploration costs

 

 

1,255

 

 

 

866

 

 

 

93

 

Depreciation, depletion and amortization

 

 

50,445

 

 

 

63,792

 

 

 

47,155

 

Taxes, other than income taxes

 

 

15,567

 

 

 

24,948

 

 

 

14,877

 

(Gains) losses on sale of assets and other, net

 

 

(207,852

)

 

 

(307,694

)

 

 

829

 

 

 

 

190,950

 

 

 

(17,107

)

 

 

215,156

 

Other income and (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of amounts capitalized

 

 

(988

)

 

 

(11,751

)

 

 

(16,725

)

Earnings from equity method investments

 

 

16,018

 

 

 

130

 

 

 

157

 

Other, net

 

 

368

 

 

 

(1,554

)

 

 

(149

)

 

 

 

15,398

 

 

 

(13,175

)

 

 

(16,717

)

Reorganization items, net

 

 

(3,210

)

 

 

(5,624

)

 

 

2,521,137

 

Income from continuing operations before income taxes

 

 

124,078

 

 

 

379,435

 

 

 

2,587,391

 

Income tax expense (benefit)

 

 

45,942

 

 

 

157,098

 

 

 

(166

)

Income from continuing operations

 

 

78,136

 

 

 

222,337

 

 

 

2,587,557

 

Income (loss) from discontinued operations, net of income taxes

 

 

 

 

 

5,759

 

 

 

(548

)

Net income

 

$

78,136

 

 

$

228,096

 

 

$

2,587,009

 

Income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income from continuing operations

    per share

 

$

1.03

 

 

$

2.91

 

 

$

33.96

 

Basic and diluted income (loss) from discontinued operations

    per share

 

$

 

 

$

0.08

 

 

$

(0.01

)

Basic and diluted net income per share

 

$

1.03

 

 

$

2.99

 

 

$

33.95

 

Basic and diluted weighted average shares outstanding

 

 

76,191

 

 

 

76,191

 

 

 

76,191

 

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

4


Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

 

 

Total Equity

 

 

 

(in thousands)

 

 

 

 

 

 

December 31, 2017

 

$

2,339,046

 

Net income

 

 

78,136

 

Net transfers to parent

 

 

(482,011

)

June 30, 2018

 

$

1,935,171

 

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

 

 

5


 

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Successor

 

 

Predecessor

 

 

 

Six Months

Ended

June 30,

2018

 

 

Four Months

Ended

June 30,

2017

 

 

Two Months

Ended

February 28,

2017

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

78,136

 

 

$

228,096

 

 

$

2,587,009

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

 

 

 

(5,759

)

 

 

548

 

Depreciation, depletion and amortization

 

 

50,445

 

 

 

63,792

 

 

 

47,155

 

Deferred income taxes

 

 

46,077

 

 

 

134,698

 

 

 

(166

)

Total (gains) losses on derivatives, net

 

 

22,555

 

 

 

(33,755

)

 

 

(92,691

)

Cash settlements on derivatives

 

 

(25,037

)

 

 

7,929

 

 

 

(11,572

)

Share-based compensation expenses

 

 

66,374

 

 

 

19,599

 

 

 

50,255

 

Amortization and write-off of deferred financing fees

 

 

824

 

 

 

82

 

 

 

1,338

 

(Gains) losses on sale of assets and other, net

 

 

(224,091

)

 

 

(295,100

)

 

 

1,069

 

Reorganization items, net

 

 

 

 

 

 

 

 

(2,456,074

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable – trade, net

 

 

76,465

 

 

 

27,212

 

 

 

(7,216

)

(Increase) decrease in other assets

 

 

33,654

 

 

 

(3,642

)

 

 

528

 

Increase (decrease) in accounts payable and accrued expenses

 

 

(52,538

)

 

 

(95,320

)

 

 

20,949

 

Increase (decrease) in other liabilities

 

 

(15,815

)

 

 

22,421

 

 

 

2,801

 

Net cash provided by operating activities – continuing operations

 

 

57,049

 

 

 

70,253

 

 

 

143,933

 

Net cash provided by operating activities – discontinued operations

 

 

 

 

 

13,966

 

 

 

8,781

 

Net cash provided by operating activities

 

 

57,049

 

 

 

84,219

 

 

 

152,714

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Development of oil and natural gas properties

 

 

(45,938

)

 

 

(61,534

)

 

 

(50,597

)

Purchases of other property and equipment

 

 

(87,377

)

 

 

(27,287

)

 

 

(7,409

)

Proceeds from sale of properties and equipment and other

 

 

369,489

 

 

 

697,829

 

 

 

(166

)

Net cash provided by (used in) investing activities – continuing

   operations

 

 

236,174

 

 

 

609,008

 

 

 

(58,172

)

Net cash used in investing activities – discontinued operations

 

 

 

 

 

(1,645

)

 

 

(584

)

Net cash provided by (used in) investing activities

 

 

236,174

 

 

 

607,363

 

 

 

(58,756

)

6


Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS - Continued

(Unaudited)

 

 

Successor

 

 

Predecessor

 

 

 

Six Months

Ended

June 30,

2018

 

 

Four Months

Ended

June 30,

2017

 

 

Two Months

Ended

February 28,

2017

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net transfers (to) from parent

 

 

(456,925

)

 

 

(458

)

 

 

636,000

 

Proceeds from borrowings

 

 

 

 

 

160,000

 

 

 

 

Repayments of debt

 

 

 

 

 

(876,570

)

 

 

(1,038,986

)

Payment to holders of claims under the Predecessor’s second lien notes

 

 

 

 

 

 

 

 

(30,000

)

Distributions to unitholders

 

 

(12,174

)

 

 

 

 

 

 

Other

 

 

(294

)

 

 

(3,060

)

 

 

(4,744

)

Net cash used in financing activities – continuing operations

 

 

(469,393

)

 

 

(720,088

)

 

 

(437,730

)

Net cash used in financing activities – discontinued operations

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(469,393

)

 

 

(720,088

)

 

 

(437,730

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(176,170

)

 

 

(28,506

)

 

 

(343,772

)

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

Beginning

 

 

520,922

 

 

 

144,022

 

 

 

487,794

 

Ending

 

$

344,752

 

 

$

115,516

 

 

$

144,022

 

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

 

 

 

7


Table of Contents

RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

Unless otherwise indicated or the context otherwise requires, references herein to the “Company” refer (i) prior to the Spin-off (as defined below) to Linn Energy, Inc. (“Parent”) and its consolidated subsidiaries, and (ii) after Spin-off, to Riviera Resources, Inc. (“Riviera”) and its consolidated subsidiaries. Unless otherwise indicated or the context otherwise requires, references herein to “LINN Energy” refer to Linn Energy, Inc. and its consolidated subsidiaries.

In April 2018, the Parent announced its intention to separate Riviera from LINN Energy.  Following the Spin-off, Riviera is a new independent oil and natural gas company with a strategic focus on efficiently operating its mature low-decline assets, developing its growth-oriented assets, and returning capital to shareholders.

To effect the separation, the Parent and certain of its then direct and indirect subsidiaries undertook an internal reorganization, (including the conversion of Riviera Resources, LLC from a limited liability company to a corporation named Riviera Resources, Inc.) following which Riviera holds, directly or through its subsidiaries, substantially all of the assets of LINN Energy, other than LINN Energy’s 50% equity interest in Roan Resources, LLC (“Roan”).  A subsidiary of the Company held the equity interest in Roan until the Parent’s internal reorganization on July 25, 2018 (the “Reorganization Date”).  Following the internal reorganization, the Parent distributed all of the outstanding shares of Riviera common stock to LINN Energy shareholders on a pro rata basis (the “Spin-off”).  Prior to the completion of the Spin-off, a then subsidiary of the Parent distributed $40 million to the Parent.  The Spin-off was completed on August 7, 2018.

Following the Spin-off, Riviera is an independent reporting company quoted for trading on the OTCQX Market under the ticker “RVRA”, and LINN Energy does not retain any ownership interest in Riviera. 

On August 7, 2018, Riviera entered into a Transition Services Agreement (the “TSA”) with the Parent to facilitate an orderly transition following the Spin-off, with a term to be determined based upon certain future specified events but to end no later than December 31, 2018.  Pursuant to the TSA, Riviera agreed to provide the Parent with certain finance, financial reporting, information technology, investor relations, legal, payroll, tax and other services. Riviera will reimburse the Parent for, or pay on the Parent’s behalf, all direct and indirect costs and expenses incurred by the Parent during the term of the agreement in connection with the fees for any such services. In addition, from time to time during the term of the agreement, Riviera and the Parent may mutually agree on additional services to be provided.

The accompanying condensed consolidated and combined financial statements have been prepared on a stand-alone basis and are derived from Linn Energy, Inc.’s consolidated financial statements and accounting records for the periods presented as the Company was historically managed as a subsidiary of Linn Energy, Inc.

During the reporting period, the Parent was a successor issuer of Linn Energy, LLC pursuant to Rule 15d-5 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  As discussed further in Note 2, on May 11, 2016 (the “Petition Date”), Linn Energy, LLC, certain of its direct and indirect subsidiaries, and LinnCo, LLC (collectively, the “LINN Debtors”) and Berry Petroleum Company, LLC (“Berry” and collectively with the LINN Debtors, the “Debtors”), filed voluntary petitions (“Bankruptcy Petitions”) for relief under Chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of Texas (“Bankruptcy Court”).  The Debtors’ Chapter 11 cases were administered jointly under the caption In re Linn Energy, LLC, et al., Case No. 16-60040.  During the pendency of the Chapter 11 proceedings, the Debtors operated their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.

Nature of Business

The Company’s upstream reporting segment properties are currently located in six operating regions in the United States (“U.S.”): the Hugoton Basin, East Texas, North Louisiana, Michigan/Illinois, the Uinta Basin and the Mid-Continent. The Blue Mountain reporting segment consists of the Chisholm Trail gas plant system which is comprised of the newly constructed cryogenic natural gas processing facility, a refrigeration plant, and a network of gathering pipelines located in the Merge/SCOOP/STACK play, each of which is owned by Blue Mountain Midstream LLC (“Blue Mountain Midstream”), a wholly owned subsidiary of the Company.  During 2018, the Company divested all of its properties located in the previous Permian Basin operating region.  During 2017, the Company divested all of its properties located in the previous California and South Texas operating regions.  The Company has classified the assets and liabilities, results of operations and cash flows

8


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of its California properties as discontinued operations on its consolidated and combined financial statements.  See Note 4 for additional information.

Historically, a subsidiary of the Company also owned a 50% equity interest in Roan.  The Company’s equity earnings (losses), consisting of its share of Roan’s earnings or losses, are included in the condensed consolidated financial statements.  However, following an internal reorganization in connection with the Spin-off, the equity interest in Roan is owned by the Parent and is no longer affiliated with Riviera.  As such, equity earnings (losses) in Roan will not be included in Riviera’s financial statements in periods subsequent to the Reorganization Date.

 

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - Continued

(Unaudited)

Principles of Consolidation and Combination

The information reported herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the results for the interim periods.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted under Securities and Exchange Commission rules and regulations; as such, this report should be read in conjunction with the financial statements and notes for the year ended December 31, 2017 included in the Company’s Registration Statement on Form S-1, as amended (File No. 333-225927).  The results reported in these unaudited condensed consolidated and combined financial statements should not necessarily be taken as indicative of results that may be expected for the entire year.

The condensed consolidated and combined financial statements for Predecessor periods represent the financial position and results of operations of entities held by the Company after the Spin-off that were historically under common control of the Parent, which exclude Linn Acquisition Company, LLC (“LAC”) and Berry.  On February 28, 2017, LINN Energy and Berry emerged from bankruptcy as standalone unaffiliated entities.  The condensed consolidated financial statements for the Successor period represent the financial position and results of operations of entities held by the Company after the Spin-off that were historically under the control of the Parent.  The Company presents its condensed consolidated and combined financial statements in accordance with U.S. GAAP.  The condensed consolidated and combined financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany transactions and balances have been eliminated. The condensed consolidated and combined financial statements were prepared on a carve-out basis and reflect significant assumptions and allocations.

Investments in noncontrolled entities over which the Company exercises significant influence are accounted for under the equity method.  See Note 6 for additional information about equity method investments.

Bankruptcy Accounting

Upon LINN Energy’s emergence from bankruptcy on February 28, 2017, the Parent adopted fresh start accounting which resulted in the Parent becoming a new entity for financial reporting purposes.  As a result of the adoption of fresh start accounting and the effects of the implementation of the Plan (as defined in Note 2), the Company’s condensed consolidated financial statements subsequent to February 28, 2017, are not comparable to its condensed consolidated and combined financial statements prior to February 28, 2017.  References to “Successor” relate to the financial position and results of operations of the reorganized Company subsequent to February 28, 2017.  References to “Predecessor” relate to the financial position of the Company prior to, and results of operations through and including, February 28, 2017.  The Company’s condensed consolidated and combined financial statements and related footnotes are presented with a black line division, which delineates the lack of comparability between amounts presented after February 28, 2017, and amounts presented on or prior to February 28, 2017.  See Note 2 for additional information.

Use of Estimates

The preparation of the accompanying condensed consolidated and combined financial statements in conformity with GAAP requires management of the Company to make estimates and assumptions about future events.  These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses.  The estimates that are particularly significant to the financial statements include estimates of the Company’s reserves of oil, natural gas and natural gas liquids (“NGL”), future cash flows from oil and natural gas properties, depreciation, depletion and amortization, asset retirement obligations, certain revenues and operating expenses, and fair values of commodity derivatives.  In addition, as part of fresh start accounting, the Company made estimates and assumptions related to its reorganization value, liabilities subject to compromise, the fair value of assets and liabilities recorded as a result of the adoption of fresh start accounting and income taxes.

As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use.  These estimates and assumptions are based on management’s best estimates and judgment.  Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances.  Such estimates and assumptions are

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - Continued

(Unaudited)

adjusted when facts and circumstances dictate.  As future events and their effects cannot be determined with precision, actual results could differ from these estimates.  Any changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Recently Adopted Accounting Standards

In November 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that is intended to address diversity in the classification and presentation of changes in restricted cash on the statement of cash flows.  The Company adopted this ASU on January 1, 2018, on a retrospective basis.  The adoption of this ASU resulted in the inclusion of restricted cash in the beginning and ending balances of cash on the statements of cash flows and disclosure reconciling cash and cash equivalents presented on the balance sheets to cash, cash equivalents and restricted cash on the statement of cash flows (see Note 16).

In May 2014, the FASB issued an ASU that is intended to improve and converge the financial reporting requirements for revenue from contracts with customers (“ASC 606”).  The Company adopted this ASU on January 1, 2018, using the modified retrospective transition method.  Accordingly, the comparative information for the six months ended June 30, 2017, has not been adjusted and continues to be reported under the previous revenue standard.  The adoption of this ASU impacted the Company’s gross revenues and expenses as reported on its condensed consolidated statements of operations (see below), and resulted in increased disclosures regarding the Company’s disaggregation of revenue (see Note 3).

Under ASC 606, the Company recognizes revenues based on a determination of when control of its commodities is transferred and whether it is acting as a principal or agent in certain transactions.  All facts and circumstances of an arrangement are considered and judgment is often required in making this determination.  For its natural gas contracts, the Company generally records its sales at the wellhead or inlet of the plant as revenues net of transportation, gathering and processing expenses if the processor is the customer and there is no redelivery of commodities to the Company.  Conversely, the Company generally records its sales at the tailgate of the plant on a gross basis along with the associated transportation, gathering and processing expenses if the processor is a service provider and there is redelivery of commodities to the Company.

In addition, the Company recognizes revenues for commodities received as noncash consideration in exchange for services provided by its midstream operations and revenues and associated cost of product for the subsequent sale of those same commodities.  This recognition results in an increase to revenues and expenses with no material impact on net income.

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - Continued

(Unaudited)

The items discussed above impacted the Company’s reported “oil, natural gas and natural gas liquids sales,” “marketing revenues,” “other revenues,” “transportation expenses,” “marketing expenses” and “interest expense.”  The impact of adoption on the Company’s current period results is as follows:

 

 

 

Three Months Ended June 30, 2018

 

 

 

Under

ASC 606

 

 

Under Prior

Rule

 

 

Increase/

(Decrease)

 

 

 

(in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas sales

 

$

53,662

 

 

$

53,285

 

 

$

377

 

Oil sales

 

 

10,919

 

 

 

10,919

 

 

 

 

NGL sales

 

 

22,423

 

 

 

22,280

 

 

 

143

 

Total oil, natural gas and NGL sales

 

 

87,004

 

 

 

86,484

 

 

 

520

 

Marketing revenues

 

 

42,967

 

 

 

25,406

 

 

 

17,561

 

Other revenues

 

 

6,387

 

 

 

6,003

 

 

 

384

 

 

 

 

136,358

 

 

 

117,893

 

 

 

18,465

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Transportation expenses

 

 

21,213

 

 

 

20,693

 

 

 

520

 

Marketing expenses

 

 

40,327

 

 

 

22,766

 

 

 

17,561

 

Interest expense

 

 

584

 

 

 

420

 

 

 

164

 

Net income

 

$

7,197

 

 

$

6,977

 

 

$

220

 

 

 

 

Six Months Ended June 30, 2018

 

 

 

Under

ASC 606

 

 

Under Prior

Rule

 

 

Increase/

(Decrease)

 

 

 

(in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas sales

 

$

116,990

 

 

$

117,794

 

 

$

(804

)

Oil sales

 

 

56,615

 

 

 

56,615

 

 

 

 

NGL sales

 

 

50,275

 

 

 

50,222

 

 

 

53

 

Total oil, natural gas and NGL sales

 

 

223,880

 

 

 

224,631

 

 

 

(751

)

Marketing revenues

 

 

89,234

 

 

 

53,521

 

 

 

35,713

 

Other revenues

 

 

12,281

 

 

 

11,676

 

 

 

605

 

 

 

 

325,395

 

 

 

289,828

 

 

 

35,567

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Transportation expenses

 

 

40,307

 

 

 

41,058

 

 

 

(751

)

Marketing expenses

 

 

82,082

 

 

 

46,369

 

 

 

35,713

 

Interest expense

 

 

988

 

 

 

824

 

 

 

164

 

Net income

 

$

78,136

 

 

$

77,695

 

 

$

441

 

 

New Accounting Standards Issued But Not Yet Adopted

In February 2016, the FASB issued an ASU that is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet.  This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those years (early adoption permitted).  The Company is currently evaluating the impact of the adoption of this ASU on its financial statements and related disclosures.  The Company expects the adoption of this ASU to impact its balance sheet resulting from an increase in both assets and liabilities related to the Company’s leasing activities.

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - Continued

(Unaudited)

Note 2 – Emergence From Voluntary Reorganization Under Chapter 11 and Fresh Start Accounting

On the Petition Date, the Debtors filed Bankruptcy Petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.  The Debtors’ Chapter 11 cases were administered jointly under the caption In re Linn Energy, LLC, et al., Case No. 16‑60040.

On December 3, 2016, the LINN Debtors filed the Amended Joint Chapter 11 Plan of Reorganization of Linn Energy, LLC and Its Debtor Affiliates Other Than Linn Acquisition Company, LLC and Berry Petroleum Company, LLC (the “Plan”).  The LINN Debtors subsequently filed amended versions of the Plan with the Bankruptcy Court.

On December 13, 2016, LAC and Berry filed the Amended Joint Chapter 11 Plan of Reorganization of Linn Acquisition Company, LLC and Berry Petroleum Company, LLC (the “Berry Plan” and together with the Plan, the “Plans”).  LAC and Berry subsequently filed amended versions of the Berry Plan with the Bankruptcy Court.

On January 27, 2017, the Bankruptcy Court entered an order approving and confirming the Plans (the “Confirmation Order”).  On February 28, 2017 (the “Effective Date”), the Debtors satisfied the conditions to effectiveness of the respective Plans, the Plans became effective in accordance with their respective terms and LINN Energy and Berry emerged from bankruptcy as stand-alone, unaffiliated entities.

Reorganization Items, Net

The Company incurred significant costs and recognized significant gains associated with the reorganization.  Reorganization items represent costs and income directly associated with the Chapter 11 proceedings since the Petition Date, and also include adjustments to reflect the carrying value of certain liabilities subject to compromise at their estimated allowed claim amounts, as such adjustments were determined.  The following table summarizes the components of reorganization items included on the condensed consolidated and combined statements of operations:

 

 

 

Successor

 

 

 

Three Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Legal and other professional fees

 

$

(1,255

)

 

$

(3,128

)

Other

 

 

(4

)

 

 

69

 

Reorganization items, net

 

$

(1,259

)

 

$

(3,059

)

 

 

 

Successor

 

 

Predecessor

 

 

 

Six Months

Ended June 30,

2018

 

 

Four Months

Ended June 30,

2017

 

 

Two Months

Ended February 28,

2017

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Gain on settlement of liabilities subject to compromise

 

$

 

 

$

 

 

$

3,914,964

 

Recognition of an additional claim for the Predecessor’s second lien

   notes settlement

 

 

 

 

 

 

 

 

(1,000,000

)

Fresh start valuation adjustments

 

 

 

 

 

 

 

 

(591,525

)

Income tax benefit related to implementation of the Plan

 

 

 

 

 

 

 

 

264,889

 

Legal and other professional fees

 

 

(3,207

)

 

 

(5,698

)

 

 

(46,961

)

Terminated contracts

 

 

 

 

 

 

 

 

(6,915

)

Other

 

 

(3

)