tat-10q_20180930.htm

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended: September 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: 001-34574

 

TRANSATLANTIC PETROLEUM LTD.

(Exact name of registrant as specified in its charter)

 

 

Bermuda

None

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

16803 Dallas Parkway

Addison, Texas

75001

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (214) 220-4323

 

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

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

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

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 

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

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

As of November 9, 2018, the registrant had 50,605,587 common shares outstanding.

 

 

TABLE OF CONTENTS

 


 

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

 

 

Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017

3

 

 

Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2018 and 2017

4

 

 

Unaudited Consolidated Statement of Shareholders’ Equity for the Nine Months Ended September 30, 2018

5

 

 

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

6

 

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

34

 

 

Item 4. Controls and Procedures

35

 

 

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

36

 

 

Item 1A. Risk Factors

36

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

Item 3. Defaults Upon Senior Securities

36

 

 

Item 4. Mine Safety Disclosures

36

 

 

Item 5. Other Information

36

 

 

Item 6. Exhibits

37

 

2


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

TRANSATLANTIC PETROLEUM LTD.

Consolidated Balance Sheets

(in thousands of U.S. Dollars, except share data)

 

 

September 30, 2018

 

 

December 31, 2017

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

13,576

 

 

$

18,926

 

Accounts receivable, net

 

 

 

 

 

 

 

Oil and natural gas sales

 

21,563

 

 

 

15,808

 

Joint interest and other

 

907

 

 

 

1,576

 

Related party

 

1,112

 

 

 

1,023

 

Prepaid and other current assets

 

7,688

 

 

 

3,866

 

Inventory

 

4,719

 

 

 

7,494

 

Total current assets

 

49,565

 

 

 

48,693

 

Property and equipment:

 

 

 

 

 

 

 

Oil and natural gas properties (successful efforts method)

 

 

 

 

 

 

 

Proved

 

133,982

 

 

 

193,647

 

Unproved

 

16,942

 

 

 

24,445

 

Equipment and other property

 

12,008

 

 

 

14,075

 

 

 

162,932

 

 

 

232,167

 

Less accumulated depreciation, depletion and amortization

 

(90,134

)

 

 

(129,183

)

Property and equipment, net

 

72,798

 

 

 

102,984

 

Other long-term assets:

 

 

 

 

 

 

 

Other assets

 

775

 

 

 

2,247

 

Note receivable - related party

 

6,068

 

 

 

6,726

 

Total other assets

 

6,843

 

 

 

8,973

 

Total assets

$

129,206

 

 

$

160,650

 

LIABILITIES, SERIES A PREFERRED SHARES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

5,767

 

 

$

4,853

 

Accounts payable - related party

 

3,059

 

 

 

3,141

 

Accrued liabilities (1)

 

12,848

 

 

 

10,014

 

Derivative liability

 

3,661

 

 

 

2,215

 

Asset retirement obligations - current

 

4

 

 

 

-

 

Loans payable

 

20,750

 

 

 

15,625

 

Total current liabilities

 

46,089

 

 

 

35,848

 

Long-term liabilities:

 

 

 

 

 

 

 

Asset retirement obligations less current portion

 

3,353

 

 

 

4,727

 

Accrued liabilities

 

6,156

 

 

 

8,810

 

Deferred income taxes

 

16,894

 

 

 

19,611

 

Loans payable

 

5,450

 

 

 

13,000

 

Total long-term liabilities

 

31,853

 

 

 

46,148

 

Total liabilities

 

77,942

 

 

 

81,996

 

Commitments and contingencies

 

 

 

 

 

 

 

Series A preferred shares, $0.01 par value, 426,000 shares authorized; 426,000 shares issued and outstanding with a liquidation preference of $50 per share as of September 30, 2018 and December 31, 2017

 

21,300

 

 

 

21,300

 

Series A preferred shares-related party, $0.01 par value, 495,000 shares authorized; 495,000 shares issued and outstanding with a liquidation preference of $50 per share as of September 30, 2018 and December 31, 2017

 

24,750

 

 

 

24,750

 

Shareholders' equity:

 

 

 

 

 

 

 

Common shares, $0.10 par value, 100,000,000 shares authorized; 50,605,587 shares and 50,319,156 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

5,061

 

 

 

5,032

 

Treasury stock

 

(970

)

 

 

(970

)

Additional paid-in-capital

 

575,711

 

 

 

575,411

 

Accumulated other comprehensive loss

 

(147,983

)

 

 

(124,766

)

Accumulated deficit

 

(426,604

)

 

 

(422,103

)

Total shareholders' equity

 

5,215

 

 

 

32,604

 

Total liabilities, Series A preferred shares and shareholders' equity

$

129,206

 

 

$

160,650

 

 

(1)

Includes income tax payable of $8.9 million and $6.2 million at September 30, 2018 and December 31, 2017, respectively.

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

 

 

3


TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Operations and Comprehensive (Loss) Income

(Unaudited)

(U.S. Dollars and shares in thousands, except per share amounts)

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

$

20,098

 

 

$

12,424

 

 

$

54,859

 

 

$

40,475

 

Sales of purchased natural gas

 

-

 

 

 

-

 

 

 

1

 

 

 

654

 

Other

 

42

 

 

 

251

 

 

 

404

 

 

 

323

 

Total revenues

 

20,140

 

 

 

12,675

 

 

 

55,264

 

 

 

41,452

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

2,307

 

 

 

2,997

 

 

 

7,979

 

 

 

8,798

 

Transportation and processing

 

1,054

 

 

 

-

 

 

 

3,385

 

 

 

-

 

Exploration, abandonment and impairment

 

162

 

 

 

141

 

 

 

393

 

 

 

249

 

Cost of purchased natural gas

 

-

 

 

 

-

 

 

 

1

 

 

 

568

 

Seismic and other exploration

 

122

 

 

 

2,966

 

 

 

340

 

 

 

3,046

 

General and administrative

 

2,539

 

 

 

2,532

 

 

 

9,662

 

 

 

9,303

 

Depreciation, depletion and amortization

 

2,938

 

 

 

4,272

 

 

 

10,673

 

 

 

13,024

 

Accretion of asset retirement obligations

 

35

 

 

 

49

 

 

 

124

 

 

 

144

 

Total costs and expenses

 

9,157

 

 

 

12,957

 

 

 

32,557

 

 

 

35,132

 

Operating income (loss)

 

10,983

 

 

 

(282

)

 

 

22,707

 

 

 

6,320

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on sale of TBNG

 

-

 

 

 

-

 

 

 

-

 

 

 

(15,226

)

Interest and other expense

 

(2,776

)

 

 

(2,322

)

 

 

(7,649

)

 

 

(6,981

)

Interest and other income

 

211

 

 

 

182

 

 

 

842

 

 

 

663

 

(Loss) gain on derivative contracts

 

(1,290

)

 

 

(1,365

)

 

 

(5,156

)

 

 

299

 

Foreign exchange (loss) gain

 

(2,991

)

 

 

(48

)

 

 

(6,987

)

 

 

(1,055

)

Total other expense

 

(6,846

)

 

 

(3,553

)

 

 

(18,950

)

 

 

(22,300

)

Income (loss) from operations before income taxes

 

4,137

 

 

 

(3,835

)

 

 

3,757

 

 

 

(15,980

)

Income tax expense

 

(5,857

)

 

 

(518

)

 

 

(8,258

)

 

 

(3,856

)

Net loss

 

(1,720

)

 

 

(4,353

)

 

 

(4,501

)

 

 

(19,836

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(11,765

)

 

 

(1,223

)

 

 

(23,217

)

 

 

21,828

 

Comprehensive (loss) income

$

(13,485

)

 

$

(5,576

)

 

$

(27,718

)

 

$

1,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net loss per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(0.03

)

 

$

(0.09

)

 

$

(0.09

)

 

$

(0.42

)

Weighted average common shares outstanding

 

50,597

 

 

 

47,725

 

 

 

50,465

 

 

 

47,480

 

Diluted net loss per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(0.03

)

 

$

(0.09

)

 

$

(0.09

)

 

$

(0.42

)

Weighted average common and common equivalent shares outstanding

 

50,597

 

 

 

47,725

 

 

 

50,465

 

 

 

47,480

 

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

 

 


4


TRANSATLANTIC PETROLEUM LTD.

Consolidated Statement of Equity for the Nine Months Ended September 30, 2018

(Unaudited)

(U.S. Dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

Common

 

 

Treasury

 

 

 

 

 

 

Common

 

 

Treasury

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders'

 

 

Shares

 

 

Shares

 

 

Warrants

 

 

Shares

 

 

Stock

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2017

 

50,319

 

 

 

333

 

 

 

700

 

 

$

5,032

 

 

$

(970

)

 

$

575,411

 

 

$

(124,766

)

 

$

(422,103

)

 

$

32,604

 

Expiration of warrants

 

-

 

 

 

-

 

 

 

(700

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of restricted stock units

 

286

 

 

 

-

 

 

 

-

 

 

 

28

 

 

 

-

 

 

 

(28

)

 

 

-

 

 

 

-

 

 

 

-

 

Share-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

340

 

 

 

-

 

 

 

-

 

 

 

340

 

Tax effect of restricted stock

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11

)

 

 

-

 

 

 

-

 

 

 

(11

)

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(23,217

)

 

 

-

 

 

 

(23,217

)

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,501

)

 

 

(4,501

)

Balance at September 30, 2018

 

50,605

 

 

 

333

 

 

 

0

 

 

$

5,061

 

 

$

(970

)

 

$

575,711

 

 

$

(147,983

)

 

$

(426,604

)

 

$

5,215

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


5


TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands of U.S. Dollars)

 

 

For the Nine Months Ended

 

 

September 30,

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

Net loss

$

(4,501

)

 

$

(19,836

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Share-based compensation

 

340

 

 

 

556

 

Foreign currency loss

 

20,748

 

 

 

434

 

Loss (gain) on commodity derivative contracts

 

5,156

 

 

 

(299

)

Cash settlement on derivative contracts

 

(3,710

)

 

 

32

 

Loss on sale of TBNG

 

-

 

 

 

15,226

 

Amortization on loan financing costs

 

31

 

 

 

72

 

Deferred income tax expense

 

5,577

 

 

 

2,780

 

Exploration, abandonment and impairment

 

393

 

 

 

249

 

Depreciation, depletion and amortization

 

10,673

 

 

 

13,024

 

Accretion of asset retirement obligations

 

124

 

 

 

144

 

Interest on Series A Preferred Shares

 

 

 

 

1,842

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(14,920

)

 

 

5,546

 

Prepaid expenses and other assets

 

(6,831

)

 

 

901

 

Accounts payable and accrued liabilities

 

12,136

 

 

 

(4,592

)

Net cash provided by operating activities

 

25,216

 

 

 

16,079

 

Investing activities:

 

 

 

 

 

 

 

Additions to oil and natural gas properties

 

(17,708

)

 

 

(14,317

)

Additions to equipment and other properties

 

(3,254

)

 

 

(366

)

Proceeds from the sale of TBNG

 

-

 

 

 

17,779

 

Net cash (used in) provided by investing activities

 

(20,962

)

 

 

3,096

 

Financing activities:

 

 

 

 

 

 

 

Tax withholding on restricted share units

 

(15

)

 

 

(92

)

Loan proceeds

 

10,000

 

 

 

-

 

Loan repayment

 

(12,425

)

 

 

(26,350

)

Loan repayment - related party

 

-

 

 

 

(3,219

)

Net cash used in financing activities

 

(2,440

)

 

 

(29,661

)

Effect of exchange rate on cash flows, cash equivalents, and restricted cash

 

(8,535

)

 

 

(118

)

Net decrease in cash, cash equivalents and restricted cash

 

(6,721

)

 

 

(10,604

)

Cash, cash equivalents and restricted cash, beginning of period (1)

 

20,432

 

 

 

15,071

 

Cash, cash equivalents and restricted cash, end of period (2)

$

13,711

 

 

$

4,467

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid for interest

$

7,333

 

 

$

5,353

 

Cash paid for taxes

$

2,847

 

 

$

2,065

 

 

 

 

 

 

 

 

 

 

(1)

The beginning of period balance at December 31, 2016 includes cash and cash equivalents of $10.0 million, restricted cash of $3.5 million in other assets and TBNG cash held for sale of $1.6 million.  The beginning of period balance at December 31, 2017 includes cash and cash equivalents of $18.9 million and restricted cash of $1.5 million in other assets

 

 

(2)

The end of period balance at September 30, 2017 includes cash and cash equivalents of $2.8 million and restricted cash of $1.8 million in other assets. The end of period balance at September 30, 2018 includes cash and cash equivalents of $13.6 million and restricted cash of $0.1 million in other assets.

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

 

 


6


Transatlantic Petroleum Ltd.

Notes to Consolidated Financial Statements

(Unaudited)

 

1. General

Nature of operations

TransAtlantic Petroleum Ltd. (together with its subsidiaries, “we,” “us,” “our,” the “Company” or “TransAtlantic”) is an international oil and natural gas company engaged in acquisition, exploration, development and production. We have focused our operations in countries that have established, yet underexplored petroleum systems, are net importers of petroleum, have an existing petroleum transportation infrastructure and provide favorable commodity pricing, royalty rates and tax rates to exploration and production companies. We hold interests in developed and undeveloped oil and natural gas properties in Turkey and Bulgaria. As of November 9, 2018, approximately 47% of our outstanding common shares were beneficially owned by N. Malone Mitchell 3rd, our chief executive officer and chairman of our board of directors.

We are a holding company with two operating segments – Turkey and Bulgaria.  Our assets consist of our ownership interests in subsidiaries that primarily own assets in Turkey and Bulgaria.

Basis of presentation

Our consolidated financial statements are expressed in U.S. Dollars and have been prepared by management in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All amounts in the notes to the consolidated financial statements are in U.S. Dollars unless otherwise indicated. The unaudited consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In preparing financial statements, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews estimates, including those related to fair value measurements associated with acquisitions and financial derivatives, the recoverability and impairment of long-lived assets, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2017.

 

On February 24, 2017, we closed the sale of our ownership interests in our subsidiary Thrace Basin Natural Gas (Turkiye) Corporation (“TBNG”) for gross proceeds of $20.7 million, and approximate net cash proceeds of $16.1 million, which amounts reflect a $0.2 million post-closing purchase price adjustment.  

 

Although the sale of TBNG met the threshold to classify its assets and liabilities as held for sale, it didn’t meet the requirements to classify its operations as discontinued as the sale wasn’t considered a strategic shift in our operations. As such, TBNG’s results of operations are classified as continuing operations for all periods presented (See Note 13. “Assets and liabilities held for sale and discontinued operations”).

 

Revenue recognition

 

As explained below, on January 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), under the modified retrospective method.  Under this method, we recognize the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings; however, no adjustment was required as a result of adopting the new revenue standard.  Results for reporting periods beginning after January 1, 2018 are presented under the new standard. The comparative information has not been restated and continues to be reported under the historic accounting standards in effect for those periods.  We do not expect any impact to our net income from the adoption of ASU 2014-09 on an ongoing basis.

 

Our revenue consists of sales under two contracts, one for crude oil and one for natural gas.  The crude oil is delivered to the inlet of a processing center and control is passed through a custodian to the customer at that point.  We are paid for crude oil at the inlet plus or minus an adjustment for quality.  Our natural gas is metered at the inlet of a transportation pipeline and control is passed at that point.  We record natural gas sales at the delivery point to the customer, net of any pricing differentials. There is no material inventory remaining at the end of each reporting period.

 

7


We have previously deducted any transportation costs, processing fees, or adjustments from revenue and recorded the net amount.  Under the new revenue guidance, on January 1, 2018, we now record the gross amount of the revenue and records any fees, or deductions as expenses.  Our revenue excludes any amounts collected on behalf of third parties.

 

2. Recent accounting pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, its final standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers and requires significantly expanded disclosures about revenue recognition. ASU 2014-09 has been amended several times with subsequent ASUs including ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.

We adopted ASU 2014-09 on January 1, 2018 using the modified retrospective approach. We have a small number of contracts with customers and have identified transactions within the scope of the standard. As a result of adoption of ASU 2014-09, we have determined that it will change our method of recording certain transportation and processing charges that were previously recorded as a reduction of revenues to record such charges as an expense under the new standard. The result of this change was an increase to both revenue and expenses of $3.4 million for the nine months ended September 30, 2018. The application of the new standard has no impact on our retained earnings and no impact to our net income on an ongoing basis. During the nine months ended September 30, 2017, this standard would have increased both revenue and expenses by $3.3 million.

Contracts for the sale of natural gas and crude oil are evidenced by (1) base contracts for the sale and purchase of natural gas or crude oil, which document the general terms and conditions for the sale, and (2) transaction confirmations, which document the terms of each specific sale.

Revenue is measured based on consideration specified in the contract with the customer. We recognize revenue in the amount that reflects the consideration we expect to be entitled to in exchange for transferring control of those goods to the customer. Revenues are recognized for the sale of our net share of production volumes. Sales on behalf of other working interest owners and royalty interest owners are not recognized as revenues. The contract consideration in our contracts are typically allocated to specific performance obligations in the contract according to the price stated in the contract, which usually sets the base oil and natural gas prices based on benchmark prices based on volumes and adjustments for product quality. Payment is generally received one or two months after the sale has occurred.

 

The following table displays the disaggregation of revenue by product type for the three and nine months ended September 30, 2018 and 2017:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2018

 

 

2017

 

 

2017

 

 

(in thousands)

 

Disaggregation of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

$

19,908

 

 

$

54,063

 

 

$

13,137

 

 

$

42,281

 

Natural gas

 

191

 

 

 

797

 

 

 

278

 

 

 

1,508

 

Total revenue from customers

$

20,098

 

 

$

54,859

 

 

$

13,415

 

 

$

43,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8


All of our revenues from contracts with customers represent products transferred at the point in time control is transferred to the customer and are generated in Turkey.

Transaction price allocated to remaining performance obligations. A significant number of our product sales are short-term in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient exempting us from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

Contract balances. Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $21.6 million and $15.8 million as of September 30, 2018 and December 31, 2017, respectively, and are reported in accounts receivable, net on our consolidated balance sheets. We currently have no assets or liabilities related to our revenue contracts, including no upfront or rights to deficiency payments.

Practical expedients. We have made use of certain practical expedients in adopting the new revenue standard, including the value of unsatisfied performance obligations are not disclosed for (i) contracts with an original expected length of one year or less, (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice, (iii) variable consideration which is allocated entirely to a wholly unsatisfied performance obligation and meets the variable allocation criteria in the standard and (iv) only contracts that are not completed at transition. We have not adjusted the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer a promised good or service to the customer and when the customer pays for that good or service will be one year or less.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires companies to recognize the assets and liabilities for the rights and obligations created by long-term leases of assets on the balance sheet. The guidance requires adoption by application of a modified retrospective transition approach for existing long-term leases and is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Oil and natural gas leases are excluded from the provisions of ASU 2016-02. As of September 30, 2018, we currently have 22 operating leases within the scope of this standard, with the last lease expiring in 2022. The effect of ASU 2016-02 will require us to disclose the right of use asset and the related liability. We are currently evaluating the impact that ASU 2016-02 would have on our consolidated financial statements and results of operations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”).  ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing the potential impact of ASU 2016-13 on our consolidated financial statements and results of operations.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU 2016-15 provide guidance on specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. We adopted ASU 2016-15 effective January 1, 2018.  The adoption of ASU 2016-15 had no impact on our retained earnings or net income.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”).  ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. We adopted ASU 2016-18 effective January 1, 2018. The adoption of ASU 2016-18 had no impact on our retained earnings, and no impact to our net income on an ongoing basis. The amendments have been applied using a retrospective transition method to each period presented, as required.  The period ended September 30, 2017 has been reclassified to reflect this change.

9


In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which clarifies Topic 718, Compensation – Stock Compensation, such that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the modification and the ASU indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification. The ASU is effective for fiscal years beginning after December 15, 2017. We expect the adoption of this ASU will only impact consolidated financial statements if there is a modification to our share-based award agreements in the future.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements in Accounting Standards Codification (“ASC”) Topic 815. The new standard provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in income. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and for interim periods therein. Early adoption as of the date of issuance is permitted. The new standard does not impact accounting for derivatives that are not designated as accounting hedges. We do not currently account for any of our derivative position as accounting hedges.

We have reviewed other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on our consolidated results of operations, financial position and cash flows. Based on that review, we believe that none of these pronouncements will have a significant effect on current or future earnings or operations.

 

3. Series A Preferred Shares

 

Series A Preferred Shares

 

As of September 30, 2018 and 2017, we had 921,000 outstanding shares of our 12.0% Series A Convertible Redeemable Preferred Shares (“Series A Preferred Shares”). The Series A Preferred Shares contain a substantive conversion option, are mandatorily redeemable and convert into a fixed number of common shares. As a result, under U.S GAAP, we have classified the Series A Preferred Shares within mezzanine equity in our consolidated balance sheets. As of September 30, 2018, there were $21.3 million of Series A Preferred Shares and $24.8 million of Series A Preferred Shares – related party outstanding (See Note 12. “Related party transactions”).

 

Pursuant to the Certificate of Designations for the Series A Preferred Shares (the “Certificate of Designations”), each Series A Preferred Share may be converted at any time, at the option of the holder, into 45.754 common shares (which is equal to an initial conversion price of approximately $1.0928 per common share and is subject to customary adjustments for stock splits, stock dividends, recapitalizations or other fundamental changes).  

 

If not converted sooner, on November 4, 2024, we are required to redeem the outstanding Series A Preferred Shares in cash at a price per share equal to the liquidation preference plus accrued and unpaid dividends. At any time on or after November 4, 2020, we may redeem all or a portion of the Series A Preferred Shares at the redemption prices listed below (expressed as a percentage of the liquidation preference amount per share) plus accrued and unpaid dividends to the date of redemption, if the closing sale price of the common shares equals or exceeds 150% of the conversion price then in effect for at least 10 trading days (whether or not consecutive) in a period of 20 consecutive trading days, including the last trading day of such 20 trading day period, ending on, and including, the trading day immediately preceding the business day on which we issue a notice of optional redemption. The redemption prices for the 12-month period starting on the dates below are:

 

Period Commencing

Redemption Price

November 4, 2020

105.000%

November 4, 2021

103.000%

November 4, 2022

101.000%

November 4, 2023 and thereafter

100.000%

 

Additionally, upon the occurrence of a change of control, we are required to offer to redeem the Series A Preferred Shares within 120 days after the first date on which such change of control occurred, for cash at a redemption price equal to the liquidation preference per share, plus any accrued and unpaid dividends.  

 

10


Dividends on the Series A Preferred Shares are payable quarterly at our election in cash, common shares or a combination of cash and common shares at an annual dividend rate of 12.0% of the liquidation preference if paid all in cash or 16.0% of the liquidation preference if paid in common shares. If paid partially in cash and partially in common shares, the dividend rate on the cash portion is 12.0%, and the dividend rate on the common share portion is 16.0%. Dividends are payable quarterly on March 31, June 30, September 30, and December 31 of each year. The holders of the Series A Preferred Shares also are entitled to participate pro-rata in any dividends paid on the common shares on an as-converted-to-common shares basis. For the three and nine months ended September 30, 2018, we paid $1.3 million and $4.0 million, respectively, in cash dividends on the Series A Preferred Shares, which is recorded in our consolidated statements of comprehensive (loss) income under the caption Interest and other expense.  

 

Except as required by Bermuda law, the holders of Series A Preferred Shares have no voting rights, except that for so long as at least 400,000 Series A Preferred Shares are outstanding, the holders of the Series A Preferred Shares voting as a separate class have the right to elect two directors to our Board of Directors. For so long as between 80,000 and 399,999 Series A Preferred Shares are outstanding, the holders of the Series A Preferred Shares voting as a separate class have the right to elect one director to our Board of Directors. Upon less than 80,000 Series A Preferred Shares remaining outstanding, any directors elected by the holders of Series A Preferred Shares shall immediately resign from our Board of Directors.

 

The Certificate of Designation also provides that without the approval of the holders of a majority of the outstanding Series A Preferred Shares, we will not issue indebtedness for money borrowed or other securities which are senior to the Series A Preferred Shares in excess of the greater of (i) $100 million or (ii) 35% of our PV-10 of proved reserves as disclosed in our most recent independent reserve report filed or furnished by us on EDGAR.  

 

 

4. Property and equipment

Oil and natural gas properties

The following table sets forth the capitalized costs under the successful efforts method for our oil and natural gas properties as of:

 

 

September 30, 2018

 

 

December 31, 2017

 

 

(in thousands)

 

Oil and natural gas properties, proved:

 

 

 

 

 

 

 

Turkey

$

133,465

 

 

$

193,111

 

Bulgaria

 

518

 

 

 

536

 

Total oil and natural gas properties, proved

 

133,982

 

 

 

193,647

 

Oil and natural gas properties, unproved:

 

 

 

 

 

 

 

Turkey

 

16,942

 

 

 

24,445

 

Total oil and natural gas properties, unproved

 

16,942

 

 

 

24,445

 

Gross oil and natural gas properties

 

150,924

 

 

 

218,092

 

Accumulated depletion

 

(85,428

)

 

 

(123,225

)

Net oil and natural gas properties

$

65,496

 

 

$

94,867

 

The decline in oil and natural gas properties during the nine months ended September 30, 2018 was primarily driven by the devaluation of the Turkish Lira versus the U.S. Dollar. From December 31, 2017 to September 30, 2018, the Turkish Lira to the U.S. Dollar declined 58.8%. At September 30, 2018, the exchange rate was 5.9902 as compared to 3.7719 at December 31, 2017. For the nine months ended September 30, 2018, foreign currency translations reduced oil and natural gas properties and increased accumulated other comprehensive loss within shareholders’ equity on our consolidated balance sheet.

At September 30, 2018 and December 31, 2017, we included $2.2 million and excluded $0.5 million, respectively, from the depletion calculation for proved development wells currently in progress and for costs associated with fields currently not in production.

At September 30, 2018, the capitalized costs of our oil and natural gas properties, net of accumulated depletion, included $6.9 million relating to acquisition costs of proved properties, which are being depleted by the unit-of-production method using total proved reserves, and $47.4 million relating to well costs and additional development costs, which are being depleted by the unit-of-production method using proved developed reserves.

At December 31, 2017, the capitalized costs of our oil and natural gas properties included $11.2 million relating to acquisition costs of proved properties, which are being amortized by the unit-of-production method using total proved reserves, and $58.7 million relating to well costs and additional development costs, which are being amortized by the unit-of-production method using proved developed reserves.

11


Impairments of proved properties and impairment of exploratory well costs

Proved oil and natural gas properties are reviewed for impairment when events and circumstances indicate the carrying value of such properties may not be recoverable. We primarily use Level 3 inputs to determine fair value, including but not limited to, estimates of proved reserves, future commodity prices, the timing and amount of future production and capital expenditures and discount rates commensurate with the risk reflective of the lives remaining for the respective oil and natural gas properties.

During the nine months ended September 30, 2018 and 2017, we recorded $0.4 million and $0.2 million, respectively, of impairment of proved properties and exploratory well costs which are primarily measured using Level 3 inputs.  

Capitalized cost greater than one year

As of September 30, 2018, there were no exploratory well costs greater than one year.  

Equipment and other property

The historical cost of equipment and other property, presented on a gross basis with accumulated depreciation, is summarized as follows:

 

 

September 30, 2018

 

 

December 31, 2017

 

 

(in thousands)

 

Inventory

$

5,618

 

 

$

4,619

 

Leasehold improvements, office equipment and software

 

4,853

 

 

 

7,214

 

Gas gathering system and facilities

 

171

 

 

 

135

 

Vehicles

 

278

 

 

 

343

 

Other equipment

 

1,089

 

 

 

1,764

 

Gross equipment and other property

 

12,008

 

 

 

14,075

 

Accumulated depreciation

 

(4,706

)

 

 

(5,958

)

Net equipment and other property

$

7,302

 

 

$

8,118

 

 

At September 30, 2018, in addition to the above, we have classified $4.7 million of inventory as a current asset, which represents our expected inventory consumption during the next twelve months. We classify our remaining materials and supply inventory as a long-term asset because such materials will ultimately be classified as a long-term asset when the material is used in the drilling of a well.

At September 30, 2018 and December 31, 2017, we excluded $10.3 million and $12.1 million of inventory, respectively, from depreciation as the inventory had not been placed into service.

 

5. Asset retirement obligations

The following table summarizes the changes in our asset retirement obligations (“ARO”) for the nine months ended September 30, 2018 and for the year ended December 31, 2017:

 

 

September 30, 2018

 

 

December 31, 2017

 

 

(in thousands)

 

Asset retirement obligations at beginning of period

$

4,727

 

 

$

4,833

 

Liabilities settled

 

-

 

 

 

(37

)

Foreign exchange change effect

 

(1,642

)

 

 

(259

)

Additions

 

148

 

 

 

-

 

Accretion expense

 

124

 

 

 

190

 

Asset retirement obligations at end of period

$

3,357

 

 

$

4,727

 

 

Our ARO is measured using primarily Level 3 inputs. The significant unobservable inputs to this fair value measurement include estimates of plugging costs, remediation costs, inflation rate and well life. The inputs are calculated based on historical data as well as current estimated costs.

 

12


6. Derivative instruments

We use derivative instruments to manage certain risks related to commodity prices and foreign currency exchange rates. The use of derivative instruments for risk management is covered by operating policies and is closely monitored by our senior management. We do not hold any derivatives for speculative purposes and do not use derivatives with leveraged or complex features. We have not designated the derivative contracts as hedges for accounting purposes, and accordingly, we record the derivative contracts at fair value and recognize changes in fair value in earnings as they occur.

Commodity price derivatives

To the extent that a legal right of offset exists, we net the value of our derivative contracts with the same counterparty in our consolidated balance sheets. All of our oil derivative contracts are settled based upon Brent crude oil pricing. We recognize gains and losses related to these contracts on a fair value basis in our consolidated statements of comprehensive (loss) income under the caption “(Loss) gain on derivative contracts.” Settlements of derivative contracts are included in operating activities on our consolidated statements of cash flows under the caption “Cash settlement on derivative contracts.”

At September 30, 2018 and December 31, 2017, we had outstanding derivative contracts with respect to our future crude oil production as set forth in the tables below:

Fair Value of Commodity Derivative Instruments as of September 30, 2018

 

 

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantity

 

 

Minimum

 

 

Maximum Price

 

 

Additional Call

 

 

Estimated Fair

 

Type

 

Period

 

(Bbl/day)

 

 

Price (per Bbl)

 

 

(per Bbl)

 

 

Ceiling

 

 

Value of Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Collar

 

July 1, 2018 - December 31, 2018

 

 

220

 

 

$

55.00

 

 

$

70.00

 

 

$

-

 

 

$

(595

)

Collar

 

July 1, 2018 - December 31, 2018

 

 

245

 

 

$

56.00

 

 

$

70.00

 

 

$

84.00

 

 

 

(590

)

Total Estimated Fair Value of Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(1,185

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value of Commodity Derivative Instruments as of December 31, 2017