We have audited the accompanying consolidated financial statements
of Felix Energy Holdings II, LLC and its subsidiaries, which comprise the consolidated balance sheets as of December
31, 2019 and 2018, and the related consolidated statements of income, member’s equity, and cash flows for each of the three
years in the period ended December 31, 2019, and the related notes to the consolidated financial statements.
Management is responsible for the preparation and fair presentation
of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of
America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation
of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation
and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly,
we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of Felix Energy Holdings II, LLC and its subsidiaries
as of December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2019 in accordance with accounting principles generally accepted in the United States of America.
Felix Energy Holdings II, LLC
Consolidated
Statements of Cash Flows
|
|
|
Years Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
203,671
|
|
|
$
|
153,623
|
|
|
$
|
38,296
|
|
|
Adjustments to reconcile net
income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
|
214,486
|
|
|
|
82,786
|
|
|
|
40,844
|
|
|
Amortization of deferred financing costs included in interest
|
|
|
3,145
|
|
|
|
1,367
|
|
|
|
429
|
|
|
Accretion of discount on asset retirement obligation
|
|
|
236
|
|
|
|
134
|
|
|
|
98
|
|
|
Surrendered and expired acreage
|
|
|
12,401
|
|
|
|
910
|
|
|
|
-
|
|
|
Change in fair value of derivatives
|
|
|
9,128
|
|
|
|
(13,442
|
)
|
|
|
17,367
|
|
|
Gain on sale of oil and gas properties
|
|
|
-
|
|
|
|
(2,626
|
)
|
|
|
(19,626
|
)
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(41,431
|
)
|
|
|
(17,408
|
)
|
|
|
(21,710
|
)
|
|
Prepaid expenses and other assets
|
|
|
(1,347
|
)
|
|
|
(649
|
)
|
|
|
56
|
|
|
Inventory
|
|
|
(1,796
|
)
|
|
|
(22
|
)
|
|
|
(1,152
|
)
|
|
Accounts payable
|
|
|
(26,073
|
)
|
|
|
(11,849
|
)
|
|
|
13,973
|
|
|
Accrued expenses and other liabilities
|
|
|
3,984
|
|
|
|
16,401
|
|
|
|
(1,756
|
)
|
|
Revenues payable
|
|
|
15,962
|
|
|
|
2,971
|
|
|
|
6,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
392,366
|
|
|
|
212,196
|
|
|
|
73,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to oil and gas properties
|
|
|
(765,048
|
)
|
|
|
(658,123
|
)
|
|
|
(343,842
|
)
|
|
Additions to other property and equipment
|
|
|
(716
|
)
|
|
|
(73,472
|
)
|
|
|
(22,702
|
)
|
|
Change in prepaid drilling costs
|
|
|
-
|
|
|
|
(123
|
)
|
|
|
846
|
|
|
Proceeds from sale of oil and gas properties
|
|
|
-
|
|
|
|
3,228
|
|
|
|
42,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(765,764
|
)
|
|
|
(728,490
|
)
|
|
|
(323,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from credit facilities
|
|
|
306,545
|
|
|
|
535,086
|
|
|
|
244,669
|
|
|
Repayments on credit facilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(172,500
|
)
|
|
Proceeds from short-term borrowings - related party
|
|
|
-
|
|
|
|
-
|
|
|
|
45,000
|
|
|
Repayments of short-term borrowings - related party
|
|
|
-
|
|
|
|
-
|
|
|
|
(45,000
|
)
|
|
Deferred financing costs
|
|
|
(2,710
|
)
|
|
|
(3,751
|
)
|
|
|
(2,453
|
)
|
|
Capital contributions
|
|
|
100,000
|
|
|
|
-
|
|
|
|
193,712
|
|
|
Capital distributions
|
|
|
(26,577
|
)
|
|
|
(17,383
|
)
|
|
|
(7,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
377,258
|
|
|
|
513,952
|
|
|
|
256,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
3,860
|
|
|
|
(2,342
|
)
|
|
|
6,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of year
|
|
|
6,677
|
|
|
|
9,019
|
|
|
|
2,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year
|
|
$
|
10,537
|
|
|
$
|
6,677
|
|
|
$
|
9,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
47,334
|
|
|
$
|
10,163
|
|
|
$
|
3,163
|
|
|
Property additions associated with changes in current liabilities
|
|
$
|
104,410
|
|
|
$
|
89,594
|
|
|
$
|
47,833
|
|
|
See accompanying notes to these consolidated financial statements.
|
6
|
Felix Energy Holdings II, LLC
Notes to Consolidated Financial Statements
Note 1 – Organization and Summary of Significant Accounting
Policies
Nature of Business – Felix Energy Holdings II,
LLC (the Company), a Delaware limited liability company (LLC), was formed on August 28, 2015, for the purpose of acquiring,
developing, and operating oil and gas properties in the Permian Basin. As an LLC, the amount at risk for each individual member
is limited to the amount of capital contributed to the LLC, and unless otherwise noted, the individual member's liability for indebtedness
of an LLC is limited to the member's actual capital contribution.
In June 2017, the Company was conveyed to Felix Investments
Holdings II, LLC (HoldCo). HoldCo is directly and indirectly owned 100% by Felix Energy Investments II, LLC (Investments). Prior
to this conveyance, the Company was owned by Investments (99.9%) and Felix Energy II, Inc. (0.01%), a C Corporation,
which was wholly owned by Investments.
The Company has the following wholly owned subsidiaries:
|
|
·
|
Felix Water, LLC (Water), a Delaware LLC, was formed on April 5, 2016,
for the purpose of acquiring, developing, and operating produced water disposal wells and providing source water to both the Company
and third parties.
|
|
|
·
|
Felix Midstream, LLC (Midstream), a Delaware LLC, was formed on October
19, 2016, for the purpose of operating gathering assets to service both the Company and third parties.
|
|
|
·
|
Felix Administrative Services, LLC, a Delaware LLC, was formed on
December 10, 2015, to provide management services to entities within the Felix structure.
|
Basis of Presentation – The Company follows accounting
standards established by the Financial Accounting Standards Board (FASB). The FASB sets accounting principles generally accepted
in the United States of America (GAAP) to ensure consistent reporting of the Company’s financial condition, results of operations
and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (ASC
or Codification).
Principles of Consolidation – The accompanying
consolidated financial statements include the accounts of the Company and its subsidiaries. In preparing the consolidated financial
statements, all inter-company accounts and transactions have been eliminated.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 1 – Organization and Summary of Significant Accounting
Policies (continued)
Use of Estimates – The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount
of expenses during the reporting period. Actual results could differ from those estimates. Significant judgments and estimates
include: estimates related to the oil and gas reserves held by the Company which directly impact the depletion calculation and
fair value of the oil and gas properties, assignment of fair value and allocation of purchase price in connection with business
combinations, valuation of derivative instruments, accrued revenue and related receivables, and accrued liabilities.
Cash and Restricted Cash – Cash and cash
equivalents include cash on hand, amounts held in banks and highly liquid investments purchased with an original maturity of three
months or less.
Accounts Receivable – The Company’s accounts
receivable are generated from oil and gas sales and from joint interest owners on properties that the Company operates. The Company’s
oil and gas receivables are typically collected within 1 to 2 months, and receivables from joint interest owners are due within
30 days of the billing date
The Company accrues an allowance on a receivable when, based
on the judgment of management, it is probable that a receivable will not be collected and the amount of any allowance may be reasonably
estimated. For receivables from joint-interest owners, the Company usually has the ability to withhold future revenue disbursements
to satisfy the outstanding balance. No allowance for bad debts has been recorded at December 31, 2019 or 2018.
Inventory – Inventory consists of pipe and supplies
maintained to support the Company’s water and midstream infrastructure and is stated at the lower of cost (determined on
a specific identification basis) or market. Management reviews inventory for items which are slow moving, damaged, or obsolete
to provide for a valuation reserve. No reserve has been deemed necessary as of December 31, 2019 and 2018.
Oil and Gas Properties – The Company accounts for
its oil and gas operations using the successful efforts method of accounting. Under this method, all costs associated with property
acquisitions, successful exploratory wells and all development wells are capitalized, including interest on capital costs associated
with the development of oil and gas properties during drilling and completion. Items charged to expense generally include geological
and geophysical costs, costs of unsuccessful exploratory wells, delay rentals, and oil and gas production costs. Capitalized costs
of proved leasehold costs are depleted on a field-by-field basis using the units-of-production method based upon total proved oil
and gas reserves. Other capitalized costs of producing properties are depleted based on proved developed reserves. All wells in
process as of December 31, 2019 and 2018 are expected to be completed within the next 12 months. Depletion expense for the
years ended December 31, 2019, 2018, and 2017 was $206.7 million, $78.5 million, and $39.6 million, respectively.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 1 – Organization and Summary of Significant Accounting
Policies (continued)
The Company assesses its proved oil and gas properties for impairment
whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. The impairment test compares
undiscounted future net cash flows to the assets’ net book value. If the net capitalized costs exceed future net cash flows,
then the cost of the property is written down to the estimated fair value. Fair value for oil and natural gas properties is generally
determined based on an analysis of discounted future net cash flows adjusted for certain risk factors. There were no impairments
of proved oil and gas properties during the years ended December 31, 2019, 2018, or 2017.
Unproved properties are assessed periodically on a project-by-project
basis to determine whether an impairment has occurred. Management’s assessment includes consideration of the results of exploration
activities, commodity price outlooks, planned future sales, or expiration of all or a portion of such projects which impact the
amount and timing of impairment provisions. Sales proceeds from unproved oil and gas properties are credited to related costs of
the prospect sold until all such costs are recovered and then to net gain or loss on sales of unproved oil and gas properties.
Management determined there were no impairments of unproved oil and gas properties during the years ended December 31, 2019, 2018,
or 2017.
Gains and losses arising from sales of oil and gas properties
are included in income. However, a partial sale of proved properties within an existing field that does not significantly affect
the unit-of-production depletion rate will be accounted for as a normal retirement with no gain or loss recognized. The sale of
a partial interest within a proved property is accounted for as a recovery of cost. The partial sale of unproved property is accounted
for as a recovery of cost when there is uncertainty of the ultimate recovery of the cost applicable to the interest retained.
Water Facilities and Disposal Systems – Water facilities
and disposal systems consist of disposal wells and facilities and source water ponds and pits. Amounts are recorded at cost and
depreciated using the straight-line method. The estimated useful lives are as follows:
|
Disposal wells
|
20 years
|
|
Source water ponds and pits
|
10 years
|
Water facilities and disposal systems comprise the following:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(in thousands)
|
|
|
Land and improvements
|
|
$
|
2,019
|
|
|
$
|
1,947
|
|
|
Facilities, wells, and equipment
|
|
|
137,180
|
|
|
|
101,510
|
|
|
Construction in progress
|
|
|
8,018
|
|
|
|
4,912
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
147,217
|
|
|
|
108,369
|
|
|
Accumulated depreciation
|
|
|
(12,549
|
)
|
|
|
(5,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total water facilities and disposal systems
|
|
$
|
134,668
|
|
|
$
|
103,195
|
|
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 1 – Organization and Summary of Significant Accounting
Policies (continued)
The Company recorded depreciation expense on the water facilities
and disposal systems of $7.4 million and $4 million for the years ended December 31, 2019 and 2018, respectively.
All costs necessary to place an asset into operation are capitalized.
Maintenance and repairs are expensed when incurred. The Company also capitalizes interest on capital costs during the construction
phase of disposal wells, facilities, source water ponds, and pits. When property is retired or otherwise disposed of, the cost
and accumulated depreciation are removed from the appropriate accounts, and any gain or loss is included in earnings.
Costs incurred for construction of produced water disposal assets
in progress and not operational are initially included in construction in progress. No depreciation is recorded for these assets
as they have not been placed in operations.
The Company evaluates impairment of its property and equipment
in accordance with ASC 360-10-35, Impairment or Disposal of Long-Lived Assets, which requires that an impairment analysis
is performed whenever events or circumstances indicate that the carrying value of an asset is less than its fair value. Based upon
this evaluation, no impairment was indicated at December 31, 2019 and 2018.
Midstream Facilities – Midstream facilities include
gathering system assets, primarily pipelines and well connections, which service the Company’s wells. Amounts are recorded
at cost and depreciated using the units-of-production method consistent with the Company’s producing oil and gas properties.
Midstream facilities comprise the following:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(in thousands)
|
|
|
Gathering systems, terminals, and equipment
|
|
$
|
75,286
|
|
|
$
|
40,332
|
|
|
Construction in progress
|
|
|
2,833
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
78,119
|
|
|
|
40,832
|
|
|
Accumulated depreciation
|
|
|
(11,491
|
)
|
|
|
(2,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total midstream facilities
|
|
$
|
66,628
|
|
|
$
|
37,860
|
|
The Company recorded depreciation expense of $8.5 million and
$3 million for the years ended December 31, 2019 and 2018, respectively on these assets.
Costs incurred for construction of midstream facilities in progress
and not operational are initially included in construction in progress. No depreciation is recorded for these assets until they
have been placed in operations.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 1 – Organization and Summary of Significant Accounting
Policies (continued)
Other Property and Equipment – Other property and
equipment consists of office furniture and fixtures, leasehold improvements, and computer hardware and software. Other property
and equipment is recorded at cost and depreciated using the straight-line method over 3 to 5 years.
Prepaid Drilling Costs – Cash payments are made
to operators in advance of drilling and completion work on oil and gas properties that the Company has a working interest in but
does not operate. As work occurs on these properties, the balance is reduced and moved to oil and gas properties.
Accounts Payable and Accrued Liabilities – Costs
to drill, complete, and operate oil and gas properties are included in accounts payable when invoiced. Costs incurred for which
an invoice has not yet been received are included in accrued liabilities and are based on management’s estimate of amounts
expected to be paid.
Accrued liabilities comprise the following:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(in thousands)
|
|
|
Accrual for capital expenditures
|
|
$
|
69,471
|
|
|
$
|
85,990
|
|
|
Other
|
|
|
37,398
|
|
|
|
18,468
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
106,869
|
|
|
$
|
104,458
|
|
Revenues Payable – Revenues payable represents
amounts collected from purchasers for oil and gas sales which are due to other revenue interest owners. Generally, the Company
is required to remit amounts due under these liabilities within 60 days of the end of the month in which the related production
occurs. Revenues in suspense are also included in revenue payable.
Derivative Instruments – The Company uses derivative
contracts to reduce the risk associated with commodity price changes associated with its future oil and natural gas production,
typically fixed-price swaps and floating basis swaps. The Company’s derivative instruments are measured at fair value and
recorded on the consolidated balance sheets as an asset or a liability. Changes in the fair value and realized gains and losses
are recorded in Loss on derivative instruments in the consolidated statements of income.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 1 – Organization and Summary of Significant Accounting
Policies (continued)
Revenue Recognition – Effective January 1, 2019,
the Company adopted ASU 2014-09, Revenue from Contracts with Customers. Revenue from the sale of oil, NGLs, and gas are
recognized, as the product is delivered to the customers’ custody transfer points and collectability is reasonably assured.
The Company fulfills the performance obligations under the customer contracts through daily delivery of oil, NGLs, and gas to the
customers’ custody transfer points, and revenues are recorded on a monthly basis. The prices received for oil, NGLs, and
natural gas sales under the Company’s contracts are generally derived from stated market prices which are then adjusted to
reflect deductions, including transportation, fractionation and processing. As a result, the revenues from the sale of oil, natural
gas, and NGLs will decrease if market prices decline. The sales of oil, NGLs, and gas, as presented on the condensed consolidated
statements of income, represent the Company’s share of revenues, net of royalties and excluding revenue interests owned by
others. When selling oil, NGLs, and gas on behalf of royalty owners or working interest owners, the Company is acting as an agent
and thus reports the revenue on a net basis. To the extent actual volumes and prices of oil and natural gas sales are unavailable
for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices
for those properties are estimated and recorded.
Acquisitions – In accordance with ASC Topic 805,
Business Combinations, the Company determines whether an acquisition is a business combination, which requires that the
assets acquired and liabilities assumed constitute a business. Each business combination is then accounted for by applying the
acquisition method of accounting. If the assets acquired are not a business, the Company accounts for the transaction as an asset
acquisition. Under both methods, purchase prices are allocated to acquired assets and assumed liabilities based on their estimated
fair value at the time of the acquisition (adjusted for purchase price adjustments in business combinations). For transactions
that are business combinations, the Company evaluates the existence of goodwill or intangibles. The excess, if any, of the purchase
price over the net fair value amounts assigned to assets acquired and liabilities assumed is recognized as goodwill. The Company
capitalizes acquisition-related costs and fees associated with asset acquisitions and immediately expenses acquisition-related
costs and fees associated with business combinations.
The Company estimates the fair values of assets acquired and
liabilities assumed in acquisitions using various assumptions (all of which are Level 3 inputs within the fair value hierarchy).
The most significant assumptions typically relate to the estimated fair values assigned to proved and unproved oil and natural
gas properties. To estimate the fair values of the proved and unproved oil and natural gas properties, the Company develops estimates
of oil, natural gas, and NGL reserves. Estimates of reserves are based on the quantities of oil, natural gas, and NGLs that geological
and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Additionally, a risk factor is applied to reserves by reserve type based on industry standards.
The Company estimates future prices to apply to the estimated net quantities of reserves based on the applicable ownership percentage
acquired and estimates future operating and development costs to arrive at estimates of future net cash flows. The future net cash
flows are discounted using a market-based weighted-average cost of capital rate determined appropriate at the time of the acquisition.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 1 – Organization and Summary of Significant Accounting
Policies (continued)
Income Taxes – The Company is an LLC. Accordingly,
no provision for U.S. federal or state income taxes has been recorded as the income, deductions, expenses, and credits of the Company
are reported on the individual income tax returns of the Company’s member. The Company is, however, subject to the Texas
margin tax due to its operation within the state of Texas. Amounts incurred under the Texas margin tax during the years ended December
31, 2019, 2018, and 2017 were immaterial, and no amounts were due as of December 31, 2019 and 2018.
The Company has not recorded any liabilities as of December
31, 2019 related to uncertain tax provisions. As of December 31, 2019, the Company made no provision for interest or penalties
related to uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various states. There
are currently no federal or state income tax examinations underway for these jurisdictions.
Asset Retirement Obligations – The Company accounts
for asset retirement obligations by recognizing the fair value of a liability for an asset retirement obligation in the period
in which it is incurred, if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying
amount of the associated asset. This additional carrying amount is then depreciated over the life of the asset. The liability increases
due to the passage of time based on the time value of money until the obligation is settled.
The Company’s asset retirement obligations relate primarily
to the retirement of oil and gas properties and related equipment used at the wellsite. The following table summarizes the changes
in the Company’s asset retirement obligations for the years ended December 31, 2019 and 2018:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(in thousands)
|
|
|
Asset retirement obligations, beginning of year
|
|
$
|
3,298
|
|
|
$
|
2,738
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities incurred during the year
|
|
|
1,858
|
|
|
|
621
|
|
|
Liabilities settled during the year
|
|
|
(54
|
)
|
|
|
(195
|
)
|
|
Accretion of discount
|
|
|
235
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations, end of year
|
|
$
|
5,337
|
|
|
$
|
3,298
|
|
Fair Value of Financial Instruments – The Company’s
financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, revenues payable,
derivative instruments, and long-term debt. The carrying value of the Company’s financial instruments approximate fair value
due to their short maturities, interest rates that approximate market rates, or recurring fair value measurements (Note 5).
Concentrations of Credit Risk – The Company maintains
cash balances at a financial institution that is insured by the Federal Deposit Insurance Corporation (FDIC) for amounts up to
$250,000. At any point in time, the Company may have amounts on deposit that are in excess of federally insured limits.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 1 – Organization and Summary of Significant Accounting
Policies (continued)
Recently Issued Accounting Pronouncements – In
February 2016, the FASB issued ASU 2016-02, Leases. The FASB issued the guidance to increase the transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about
leasing arrangements. This will be required for all leases that have a term longer than one year. For nonpublic entities, ASU 2016-02
is effective for annual reporting periods beginning after December 15, 2019. Early application of the standard is permitted upon
issuance. The Company is in the process of evaluating the impact this standard will have on its financial statements.
Note 2 – Sale of Subsidiaries
In December 2019, WPX Energy, Inc. and HoldCo entered into a
Securities Purchase Agreement pursuant to which HoldCo will sell, and WPX Energy, Inc. will purchase, one hundred percent of the
issued and outstanding membership interests of the Company for a purchase price of $2.5 billion consisting of $900 million in cash
and $1.6 billion in shares of stock in WPX Energy, Inc. Under the terms of this purchase agreement, the Company’s wholly
owned subsidiaries, Felix Water, LLC, Felix Midstream, LLC, and Felix Administrative Services, LLC are excluded from the transaction
and will either be (i) distributed to HoldCo or (ii) disposed of in a third-party sale prior to the closing of this purchase agreement.
The closing date of this sale is pending as of February 6, 2020.
Additionally, the Company entered into an agreement on December
13, 2019, to sell its oil gathering business, Felix Midstream, LLC, to a third party effective January 31, 2020. The Company is
also actively marketing Water to third parties, and transferred the ownership rights of Water to HoldCo effective February 3, 2020.
The Company analyzed these transactions under ASC 205-20, Discontinued Operations, and determined for Midstream it did not
meet the qualifications as a strategic shift resulting in a major change in its operations. In addition, the sale of Midstream
would not have a significant effect on its financial results. For Water, the ownership transfer to HoldCo does not result in a
change in presentation within the consolidated financial statements.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 3 – Property Dispositions
There were no significant property dispositions during the years
ended December 31, 2019 and 2018. In January 2017, the Company sold its entire interest in certain oil and gas properties located
in Oklahoma to a related party for $42.0 million (net of transaction costs of $0.4 million). The properties had a carrying value
of $22.2 million, resulting in a gain of $19.8 million included in the Company’s consolidated statement of income for the
year ended December 31, 2017.
Note 4 – Related Party Transactions
Short-Term Borrowing – The Unit Purchase Agreement
between Investments and members of Investments allowed for additional funding up to $100 million. In March and May 2017, the Company
received $20 million and $25 million, respectively, under this additional funding stipulation. Such amounts may be repaid under
the terms of Investment’s LLC Agreement at 11% interest per annum. The outstanding amount of $45 million was repaid in August
2017, plus accrued interest of $1.3 million. The agreement was terminated when repaid.
HoldCo Note – In August 2017, HoldCo closed on
$300 million of senior secured first lien notes due 2022 (the HoldCo Note). The $300 million facility includes a $100 million
delay draw. The HoldCo Note is collateralized by substantially all of HoldCo’s assets and equity interests, which includes
the equity of the Company. As of December 31, 2019, the Company has received $300 million sourced from the HoldCo Note and has
classified the amounts as capital contributions.
The HoldCo Note accrues interest at LIBOR (London Interbank
Offered Rate) plus 6.50%. Interest payments are made by the Company to HoldCo in the form of distributions. During the years ended
December 31, 2019 and 2018, the Company made distributions of $26.6 and $17.4 million, respectively, in connection with the interest.
Refer to Note 3 regarding the Company’s sale of oil and
gas properties to a related party.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 5 – Long-Term Debt
The carrying amounts of the Company’s long-term debt are
as follows:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(in thousands)
|
|
|
Holdings Facility
|
|
|
|
|
|
|
|
|
|
Amount outstanding
|
|
$
|
859,000
|
|
|
$
|
567,000
|
|
|
Unamortized deferred financing charges
|
|
|
(3,734
|
)
|
|
|
(4,481
|
)
|
|
|
|
|
855,266
|
|
|
|
562,519
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Facility
|
|
|
|
|
|
|
|
|
|
Amount outstanding
|
|
|
94,300
|
|
|
|
79,755
|
|
|
Unamortized deferred financing charges
|
|
|
(940
|
)
|
|
|
(627
|
)
|
|
|
|
|
93,360
|
|
|
|
79,128
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
948,626
|
|
|
$
|
641,647
|
|
Holdings Facility – In July 2016, the Company entered
into a five-year, $500 million credit facility with a third-party financial institution (the Holdings Facility). The borrowing
base is redetermined periodically based on the Company’s proved reserves. As of December 31, 2019, the borrowing base had
been increased to $1.125 billion. Except in the case of a continuing event of default, amounts borrowed under the Holdings Facility
are due on the maturity date of July 1, 2021.
Borrowings under the Holdings Facility bear interest at a variable
interest rate based on the higher of (a) the prime rate set by the Holdings Facility’s administrative agent, (b) the
Federal Funds Rate plus 0.50%, or (c) the rate for LIBOR loans for a one-month interest period plus 1% (Alternate Base Rate
Loans). Interest is payable quarterly.
As of December 31, 2019, the Company had $859 million outstanding
under the Holdings Facility, and the applicable interest rate was 4.25%.
Under the provisions of the Holdings Facility, the Company is
subject to a number of restrictions and covenants, including maintaining a consolidated current ratio greater than 1.0 to 1.0 and
a consolidated leverage ratio less than 4.0 to 1.0 The Company believes it was in compliance with all of the covenants under the
Holdings Facility as of December 31, 2019.
Water Facility – In April 2019, Felix Water, LLC,
a wholly owned subsidiary of the Company, entered into a three-year, $150 million credit facility with a third-party financial
institution (the Water Facility). The borrowing base is redetermined periodically based on the Water’s produced water disposal
properties. As of December 31, 2019, the borrowing base was $150 million. Except in the case of a continuing event of default,
amounts borrowed under the Water Facility are due on the maturity date of April 23, 2022.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 5 – Long-Term Debt (continued)
Borrowings under the Water Facility bear interest at a variable
rate. As of December 31, 2019, the Company has $94.3 million outstanding under the Water Facility, and the applicable interest
rate was 4.5%.
Under the provisions of the Water Facility, the Company is subject
to a number of restrictions and covenants, including maintaining an interest coverage ratio greater than 2.75 to 1.0 and a leverage
ratio less than 3.5 to 1.0 for Felix Water, LLC. The Company believes it was in compliance with all of the covenants under the
Water Facility as of December 31, 2019.
Interest Expense – Interest expense consists of
the following components:
|
|
|
Years Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(in thousands)
|
|
|
Interest on outstanding debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings Facility
|
|
$
|
37,257
|
|
|
$
|
16,373
|
|
|
$
|
2,140
|
|
|
Water Facility
|
|
|
4,815
|
|
|
|
3,137
|
|
|
|
479
|
|
|
Short-term borrowing (Note 4)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,343
|
|
|
Amortization of deferred financing costs
|
|
|
3,145
|
|
|
|
1,367
|
|
|
|
429
|
|
|
Commitment fees and other
|
|
|
-
|
|
|
|
-
|
|
|
|
2,343
|
|
|
Total interest incurred
|
|
|
45,217
|
|
|
|
20,877
|
|
|
|
6,734
|
|
|
Less capitalized interest
|
|
|
(11,212
|
)
|
|
|
(8,948
|
)
|
|
|
(2,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
34,005
|
|
|
$
|
11,929
|
|
|
$
|
4,283
|
|
Note 6 – Derivative Instruments
The following table sets forth the Company’s outstanding
derivative contracts as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Unit of
|
|
Average
|
|
|
Commodity
|
|
Period
|
|
Volume
|
|
|
Measure
|
|
Contract Price
|
|
|
Oil price swaps
|
|
1/1/2020 - 3/31/2020
|
|
|
1,001,000
|
|
|
Barrels
|
|
$
|
55.77
|
|
|
Oil price swaps
|
|
1/1/2020 - 6/30/2020
|
|
|
2,730,000
|
|
|
Barrels
|
|
$
|
57.39
|
|
|
Oil price swaps
|
|
4/1/2020 - 12/31/2020
|
|
|
3,025,000
|
|
|
Barrels
|
|
$
|
57.87
|
|
|
Oil price swaps
|
|
1/1/2020 - 12/31/2020
|
|
|
1,464,000
|
|
|
Barrels
|
|
$
|
57.89
|
|
|
Oil basis swaps
|
|
1/1/2020 - 12/31/2020
|
|
|
6,222,000
|
|
|
Barrels
|
|
$
|
0.82
|
|
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 6 – Derivative Instruments (continued)
The following table sets forth the Company’s outstanding
derivative contracts as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Unit of
|
|
Average
|
|
|
Commodity
|
|
Period
|
|
Volume
|
|
|
Measure
|
|
Contract Price
|
|
|
Oil basis swaps
|
|
1/1/2019 - 6/30/2019
|
|
|
2,261,000
|
|
|
Barrels
|
|
$
|
(7.30
|
)
|
|
Natural gas price swaps
|
|
1/1/2019 - 6/30/2019
|
|
|
1,739,750
|
|
|
MMBtu
|
|
$
|
3.71
|
|
|
Natural gas basis swaps
|
|
1/1/2019 - 6/30/2019
|
|
|
1,739,750
|
|
|
MMBtu
|
|
$
|
(2.15
|
)
|
The following table discloses the Company’s derivative
instruments as of December 31, 2019 and 2018:
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
December 31,
|
|
|
Commodity
|
|
Balance Sheet Location
|
|
2019
|
|
|
|
|
|
|
(in thousands)
|
|
|
Oil price swaps
|
|
Derivate liability - current
|
|
$
|
(12,191
|
)
|
|
Oil basis swaps
|
|
Derivate liability - current
|
|
|
(862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(13,053
|
)
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
December 31,
|
|
|
Commodity
|
|
Balance Sheet Location
|
|
2018
|
|
|
|
|
|
|
(in thousands)
|
|
|
Oil basis swaps
|
|
Derivate liability - current
|
|
$
|
(3,982
|
)
|
|
Natural gas price swaps
|
|
Derivate asset - current*
|
|
|
1,277
|
|
|
Natural gas basis swaps
|
|
Derivate liability - current
|
|
|
(1,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,925
|
)
|
|
|
|
|
|
|
|
*
|
The natural gas price swaps are in an asset position and are subject to a master netting agreement.
The Company has elected to net the asset against its liability position.
|
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 6 – Derivative Instruments (continued)
The following table reconciles the Company’s loss on its
derivative instruments:
|
|
|
Years Ending December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(in thousands)
|
|
|
Realized loss on settlements
|
|
$
|
(7,389
|
)
|
|
$
|
(15,004
|
)
|
|
Mark-to-market gain (loss)
|
|
|
(9,128
|
)
|
|
|
13,442
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on derivative instruments
|
|
$
|
(16,517
|
)
|
|
$
|
(1,562
|
)
|
Note 7 – Fair Value Measurements
The Company follows ASC 820, Fair Value Measurements and
Disclosures, which establishes a hierarchy for the inputs utilized in measuring fair value. The hierarchy maximizes the use
of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
Level 1 – Quoted prices for identical
assets or liabilities in active markets;
Level 2 – Quoted prices for similar
assets or liabilities in active markets;
Level 3 – Unobservable inputs for the
asset or liability such as discounted cash models.
The following tables present the Company’s assets and
liabilities that are measured at fair value on a recurring basis as of December 31, 2019 and 2018:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil price swaps
|
|
$
|
-
|
|
|
$
|
(12,191
|
)
|
|
$
|
-
|
|
|
Oil basis swaps
|
|
|
-
|
|
|
|
(862
|
)
|
|
|
-
|
|
|
Natural gas basis swaps
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
(13,053
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil basis swaps
|
|
$
|
-
|
|
|
$
|
(3,982
|
)
|
|
$
|
-
|
|
|
Natural gas price swaps
|
|
|
-
|
|
|
|
1,277
|
|
|
|
-
|
|
|
Natural gas basis swaps
|
|
|
-
|
|
|
|
(1,220
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
(3,925
|
)
|
|
$
|
-
|
|
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 7 – Fair Value Measurements (continued)
Assets acquired and liabilities assumed in business combinations
are recorded at fair value at the acquisition date. The inputs used to determine such fair value are primarily based upon cash
flow models and would be classified within Level 3. Additionally, we use fair value to determine the inception value of our asset
retirement obligations. The inputs used to determine such fair value are primarily based upon costs incurred historically for similar
work, as well as estimates from third parties, and would be classified within Level 3.
Note 8 – Commitments and Contingencies
Office Lease – The Company leases various office
space in Denver, Colorado under non-cancellable operating leases through May 31, 2023. Future minimum payments under these leases
are $2.4 million as of December 31, 2019. The Company’s rent expense for the years ended December 31, 2019, 2018, and 2017
totaled $0.7 million, $0.6 million, and $0.4 million, respectively.
Environmental Issues – The Company is engaged in
oil and gas exploration and production and may become subject to certain liabilities as they relate to environmental clean-up of
well sites or other environmental restoration procedures as they relate to the drilling of oil and gas wells and the operation
thereof. In the Company’s acquisition of existing or previously drilled well bores, the Company may not be aware of what
environmental safeguards were taken at the time such wells were drilled or during such time the wells were operated. Should it
be determined that a liability exists with respect to any environmental clean-up or restoration, the liability to cure such a violation
could fall upon the Company. Management believes its properties are operated in conformity with local, state, and federal regulations.
No claim has been made, nor is the Company aware of any uninsured liability which the Company may have, as it relates to any environmental
clean-up, restoration, or the violation of any rules or regulations relating thereto.
Note 9 – Subsequent Events
Effective February 3, 2020, the Company’s full ownership
of Felix Water, LLC was transferred to Felix Energy Investments II, LLC.
Additionally, the Company sold its oil gathering business, Felix
Midstream, LLC, to a third party with an effective date of January 31, 2020.
The Company has evaluated subsequent events through February
6, 2020, the date the consolidated financial statements were available to be issued, and determined there were no items requiring
additional disclosure.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 10 – Supplemental Oil and Gas Disclosures
(unaudited)
Net Capitalized Costs – The following table reflects
the capitalized costs of natural gas and oil properties and the related accumulated depreciation, depletion, and amortization as
of December 31, 2019 and 2018:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(in thousands)
|
|
|
Proved properties, subject to depletion
|
|
$
|
2,009,596
|
|
|
$
|
1,273,672
|
|
|
Unproved properties, not subject to depletion
|
|
|
15,167
|
|
|
|
29,633
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalized cost
|
|
|
2,024,763
|
|
|
|
1,303,305
|
|
|
Less accumulated depletion
|
|
|
(318,273
|
)
|
|
|
(120,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net capitalized cost
|
|
$
|
1,706,490
|
|
|
$
|
1,183,258
|
|
Cost Incurred in Oil and Natural Gas Property Acquisition,
Exploration, and Development – The following table reflects costs incurred in oil, natural gas, and NGL property acquisition,
development, and exploratory activities.
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(in thousands)
|
|
|
Acquisition of costs and properties
|
|
|
|
|
|
|
|
|
|
|
Proved properties
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Unproved properties (1)
|
|
|
4,676
|
|
|
|
7,329
|
|
|
|
34,454
|
|
|
Development and exploratory cost
|
|
|
751,134
|
|
|
|
717,908
|
|
|
|
335,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
$
|
755,810
|
|
|
$
|
725,237
|
|
|
$
|
369,915
|
|
(1) Activity above excludes transfers from unproved
to proved properties during the year.
Results of Operations for Oil, Natural Gas, and NGL Producing
Activities – The Company’s results of operations for oil, natural gas, and NGL producing activities for the years
ended December 31, 2019, 2018, and 2017 are appropriately reflected on the consolidated income statement.
Oil, Natural Gas, and NGL Reserves – Proved reserves
were estimated in accordance with guidelines established by the SEC, which require that reserve estimates be prepared under existing
economic and operating conditions based upon the 12-month unweighted average of the first day of the month prices. Proved reserves
are estimated volumes of oil, natural gas, and NGLs that geological and engineering data demonstrate with reasonable certainty
are recoverable in future years from known reservoirs under existing economic and operating conditions. There are numerous uncertainties
inherent in estimating quantities of proved reserves and projecting future production rates and timing of future development costs.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 10 – Supplemental Oil and Gas Disclosures (unaudited)
(continued)
The following table reflects changes in proved reserves during
the periods indicated:
|
|
|
Oil
|
|
|
Natural
|
|
|
NGLs
|
|
|
Total
|
|
|
|
|
(MBbls)
|
|
|
Gas (MMcf)
|
|
|
(MBbls)
|
|
|
(MBOE)
|
|
|
Proved reserves at December 31, 2016
|
|
|
28,049
|
|
|
|
22,897
|
|
|
|
3,683
|
|
|
|
35,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of reserves
|
|
|
90
|
|
|
|
119
|
|
|
|
7
|
|
|
|
117
|
|
|
Divestiture of reserves
|
|
|
(439
|
)
|
|
|
(2,059
|
)
|
|
|
(387
|
)
|
|
|
(1,169
|
)
|
|
Sales of oil and gas produced
|
|
|
(2,170
|
)
|
|
|
(1,865
|
)
|
|
|
(314
|
)
|
|
|
(2,795
|
)
|
|
Revisions
|
|
|
10,543
|
|
|
|
16,264
|
|
|
|
3,422
|
|
|
|
16,676
|
|
|
Extensions and discoveries
|
|
|
42,879
|
|
|
|
40,328
|
|
|
|
7,482
|
|
|
|
57,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves at December 31, 2017
|
|
|
78,952
|
|
|
|
75,684
|
|
|
|
13,893
|
|
|
|
105,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Sales of oil and gas produced
|
|
|
(5,547
|
)
|
|
|
(4,911
|
)
|
|
|
(874
|
)
|
|
|
(7,240
|
)
|
|
Revisions
|
|
|
(1,511
|
)
|
|
|
(6,576
|
)
|
|
|
2,895
|
|
|
|
288
|
|
|
Extensions and discoveries
|
|
|
366,776
|
|
|
|
269,186
|
|
|
|
67,627
|
|
|
|
479,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves at December 31, 2018
|
|
|
438,670
|
|
|
|
333,383
|
|
|
|
83,541
|
|
|
|
577,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of reserves
|
|
|
19
|
|
|
|
(93
|
)
|
|
|
(9
|
)
|
|
|
(6
|
)
|
|
Sales of oil and gas produced
|
|
|
(11,879
|
)
|
|
|
(13,021
|
)
|
|
|
(2,483
|
)
|
|
|
(16,532
|
)
|
|
Revisions
|
|
|
(178,227
|
)
|
|
|
(71,855
|
)
|
|
|
(27,105
|
)
|
|
|
(217,308
|
)
|
|
Extensions and discoveries
|
|
|
93,864
|
|
|
|
86,976
|
|
|
|
18,883
|
|
|
|
127,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves at December 31, 2019
|
|
|
342,447
|
|
|
|
335,390
|
|
|
|
72,827
|
|
|
|
471,172
|
|
At December 31, 2019, the Company had approximately 471,172
MBOE of proved reserves. As a result of the Company’s drilling program, there was an increase in extension and discoveries
of proved reserves totaling 127,243 MBOE, offset by revisions of 217,308 MBOE due primarily to decreased drilling activity. Reserves
as of December 31, 2018, were based on a seven development drilling rig plan in place at such time. The Company has since reduced
its drilling rigs from seven to five and as a result, Felix's proved undeveloped locations as of December 31, 2019 are less. The
Company’s current development plan reflects allocation of capital with a focus on efficiencies, recoveries, and rates of
return. The impact of pricing on revisions of previous estimates was minimal.
At December 31, 2018, the Company had approximately 577,775
MBOE of proved reserves. As a result of the Company’s drilling program, there was an increase in extension and discoveries
of proved reserves totaling 479,268 MBOE. The Company’s current development plan reflects allocation of capital with a focus
on efficiencies, recoveries, and rates of return. The impact of pricing on revisions of previous estimates was minimal.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 10 – Supplemental Oil and Gas Disclosures (unaudited)
(continued)
At December 31, 2017, the Company had approximately 105,459
MBOE of proved reserves. During 2017, due to the Company’s drilling program there was an increase in extension and discoveries
of proved reserves by 57,082 MBOE. The impact of pricing on revisions of previous estimates was minimal.
The following table sets forth the estimated quantities of proved
developed and proved undeveloped (PUD) oil, natural gas, and NGL reserves of the Company as of December 31, 2019, 2018, and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
Proved Developed Reserves (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbls)
|
|
|
94,237
|
|
|
|
65,992
|
|
|
|
24,077
|
|
|
Natural Gas (MMcf)
|
|
|
106,844
|
|
|
|
51,917
|
|
|
|
24,270
|
|
|
NGLs (MBbls)
|
|
|
23,139
|
|
|
|
12,743
|
|
|
|
4,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (MBoe)
|
|
|
135,183
|
|
|
|
87,388
|
|
|
|
32,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Undeveloped Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbls)
|
|
|
248,210
|
|
|
|
372,678
|
|
|
|
54,876
|
|
|
Natural Gas (MMcf)
|
|
|
228,547
|
|
|
|
281,467
|
|
|
|
51,414
|
|
|
NGLs (MBbls)
|
|
|
49,688
|
|
|
|
70,798
|
|
|
|
9,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (MBoe)
|
|
|
335,989
|
|
|
|
490,387
|
|
|
|
72,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Proved Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbls)
|
|
|
342,447
|
|
|
|
438,670
|
|
|
|
78,952
|
|
|
Natural Gas (MMcf)
|
|
|
335,390
|
|
|
|
333,383
|
|
|
|
75,684
|
|
|
NGLs (MBbls)
|
|
|
72,827
|
|
|
|
83,541
|
|
|
|
13,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (MBoe)
|
|
|
471,172
|
|
|
|
577,775
|
|
|
|
105,459
|
|
(1) As of December 31, 2019, 2018, and 2017, proved
developed reserves includes proved developed non-producing reserves of 9,675.9 MBbls, 231.7 MBbls, and 4,154.7 MBbls
of oil; 1,917.7 MBbls, 26.4 MBbls, and 791.8 MBbls of NGL; and 8,815.2 MMcf, 208.6 MMcf, and 4,267.5 MMcf of natural gas, respectively.
In accordance with SEC regulations, the Company uses the 12-month
average price calculated as the unweighted arithmetic average of the spot price on the first day of each month within the 12-month
period prior to the end of the reporting period. The oil and natural gas prices used in computing the Company’s reserves
as of December 31, 2019, 2018, and 2017 were $55.85, $65.56, and $51.34 per barrel of oil, respectively, $2.58, $3.10, and $2.98
per MMBtu of natural gas, respectively, before consideration of price differentials.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 10 – Supplemental Oil and Gas Disclosures (unaudited)
(continued)
The proved reserve estimates for the years ended December 31,
2019, 2018, and 2017 were prepared by Netherland, Sewell & Associates, Inc. (NSAI), our independent reserve engineers. All
estimates of proved reserves are determined according to the rules prescribed by the SEC in existence at the time estimates were
made. These rules require that the standard of “reasonable certainty” be applied to proved reserve estimates, which
is defined as having a high degree of confidence that the quantities will be recovered. A high degree of confidence exists if the
quantity is much more likely to be achieved than not, and, as more technical and economic data becomes available, a positive or
upward revision or no revision is much more likely than a negative or downward revision. Estimates are subject to revision based
upon a number of factors, including many factors beyond the Company’s control such as reservoir performance, prices, economic
conditions, and government restrictions. In addition, results of drilling, testing, and production subsequent to the date of an
estimate may justify revision of that estimate.
Reserve estimates are often different from the quantities of
oil, and natural gas, that are ultimately recovered. Estimating quantities of proved oil and natural gas reserves is a complex
process that involves significant interpretations and assumptions and cannot be measured in an exact manner. It requires interpretations
and judgment of available technical data, including the evaluation of available geological, geophysical, and engineering data.
The accuracy of any reserve estimate is highly dependent on the quality of available data, the accuracy of the assumptions on which
they are based upon, economic factors, such as oil and natural gas prices, production costs, severance and excise taxes, capital
expenditures, workover and remedial costs, and the assumed effects of governmental regulation. In addition, due to the lack of
substantial, if any, production data, there are greater uncertainties in estimating PUD reserves, proved developed non-producing
reserves, and proved developed reserves that are early in their production life. As a result, the Company’s reserve estimates
are inherently imprecise.
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 10 – Supplemental Oil and Gas Disclosures (unaudited)
(continued)
Standardized Measure of Discounted Future Net Cash Flows
– The following table reflects the Company’s standardized measure of discounted future net cash flows relating
from its proved oil, natural gas, and NGL reserves.
|
|
|
Years Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(in millions)
|
|
|
Future cash inflows
|
|
$
|
19,223
|
|
|
$
|
30,057
|
|
|
$
|
4,431
|
|
|
Future production costs
|
|
|
(8,030
|
)
|
|
|
(10,890
|
)
|
|
|
(1,280
|
)
|
|
Future development costs
|
|
|
(2,628
|
)
|
|
|
(3,945
|
)
|
|
|
(605
|
)
|
|
Future income tax expense (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future net cash flows
|
|
|
8,565
|
|
|
|
15,222
|
|
|
|
2,546
|
|
|
Discount to present value at 10% annual rate
|
|
|
(4,664
|
)
|
|
|
(8,894
|
)
|
|
|
(1,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standardized measure of discounted future net cash flows
|
|
$
|
3,901
|
|
|
$
|
6,328
|
|
|
$
|
1,070
|
|
(1) The Company has elected to be treated as a partnership
for income tax purposes. Accordingly, federal taxable income and losses are reported on the income tax returns of the Company’s
Member, and no provision for federal income taxes has been recorded on the accompanying consolidated financial statements. The
Company is subject to margin/franchise taxes in Texas and reflected as “Future income tax expenses.”
Felix Energy Holdings II, LLC
Notes
to Consolidated Financial Statements
Note 10 – Supplemental Oil and Gas Disclosures (unaudited)
(continued)
The following table reflects the principal changes in the standardized
measure of discounted future net cash flows attributable to the Company’s proved reserves as follows:
|
|
|
Years Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(in millions)
|
|
|
Standardized measure of discounted future net cash flows at the beginning of the period
|
|
$
|
6,328
|
|
|
$
|
1,070
|
|
|
$
|
267
|
|
|
Sales of oil, natural gas, and NGLs, net of production costs
|
|
|
(504
|
)
|
|
|
(262
|
)
|
|
|
(90
|
)
|
|
Purchases of reserves in place
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
Extensions and discoveries, net of future development costs
|
|
|
1,073
|
|
|
|
5,281
|
|
|
|
580
|
|
|
Sales of reserves in place
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Changes in prices and production costs
|
|
|
(2,436
|
)
|
|
|
110
|
|
|
|
84
|
|
|
Changes in estimated future development costs
|
|
|
1,172
|
|
|
|
(444
|
)
|
|
|
(54
|
)
|
|
Revisions of previous quantity estimates
|
|
|
(2,738
|
)
|
|
|
(12
|
)
|
|
|
146
|
|
|
Previously estimated development costs incurred
|
|
|
402
|
|
|
|
59
|
|
|
|
199
|
|
|
Accretion of discount
|
|
|
583
|
|
|
|
91
|
|
|
|
26
|
|
|
Net change in income taxes (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net changes in timing of production and other
|
|
|
21
|
|
|
|
435
|
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standardized measure of discounted future net cash flows at the end of the period
|
|
$
|
3,901
|
|
|
$
|
6,328
|
|
|
$
|
1,070
|
|
(1) The Company has elected to be treated as a partnership
for income tax purposes. Accordingly, federal taxable income and losses are reported on the income tax returns of the Company’s
Member, and no provision for federal income taxes has been recorded on the accompanying consolidated financial statements. The
Company is subject to margin/franchise taxes in Texas and reflected as “Net change income taxes”.
