ITEM 1. FINANCIAL STATEMENTS

See accompanying notes to unaudited consolidated financial statements.

  

See accompanying notes to unaudited consolidated financial statements

 

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Company Description

Erin Energy Corporation (NYSE MKT: ERN; JSE: ERN), formerly CAMAC Energy, Inc., is an independent oil and gas exploration and production company focused on energy resources in Africa. The Company’s asset portfolio consists of nine licenses across four countries covering an area of approximately 43,000 square kilometers (approximately 10 million acres). The Company owns producing properties and conducts exploration activities offshore Nigeria, conducts exploration activities onshore and offshore Kenya, conducts exploration activities offshore The Gambia, and conducts exploration activities offshore Ghana.

In April 2015, the Company changed its name to Erin Energy Corporation from CAMAC Energy Inc. The Company is headquartered in Houston, Texas and has offices in Lagos, Nigeria, Nairobi, Kenya, Banjul, The Gambia, Accra, Ghana and Johannesburg, South Africa.

The Company’s operating subsidiaries include CAMAC Petroleum Limited (“CPL”), CAMAC Energy Kenya Limited, CAMAC Energy Gambia Ltd, and CAMAC Energy Ghana Limited. The terms “we,” “us,” “our,” “the Company,” and “our Company” refer to Erin Energy Corporation and its subsidiaries.

The Company also conducts certain business transactions with its majority shareholder, CAMAC Energy Holdings Limited (“CEHL”), and its affiliates, which include Allied Energy Plc (“Allied”). See Note 8 - Related Party Transactions for further information.

The Company’s Executive Chairman of the Board of Directors, and Chief Executive Officer, is a director of each of the above listed related parties. He indirectly owns 27.7% of CEHL, which is the majority shareholder of the Company. As a result, he may be deemed to have an indirect material interest in transactions contemplated with any of the above companies and their affiliates.

2. Basis of Presentation and Recently Issued Accounting Standards

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned direct and indirect subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). All significant intercompany transactions and balances have been eliminated in consolidation. The unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and results of operations for the indicated periods. All such adjustments are of a normal recurring nature. This Form 10-Q should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 16, 2015.

Effective April 22, 2015, the Company implemented a reverse stock split, whereby each six shares of outstanding common stock pre-split was converted into one share of common stock post-split (the “reverse stock split”). All share and per share amounts for all periods presented herein have been adjusted to reflect the reverse stock split as if it had occurred at the beginning of the first period presented.

Capitalized Interest

The Company capitalizes interest costs for qualifying oil and gas properties. The capitalization period begins when expenditures are incurred on qualified properties, activities begin which are necessary to prepare the property for production, and interest costs have been incurred. The capitalization period continues as long as these events occur. Capitalized interest is added to the cost of the underlying assets and is depleted using the unit-of-production method in the same manner as the underlying assets.

During the three months ended March 31, 2015, the Company capitalized $1.3 million interest cost as additions to property, plant and equipment related to the Oyo field redevelopment campaign.

Net Earnings (Loss) Per Common Share

Basic net earnings or loss per common share is computed by dividing net earnings or loss by the weighted average number of shares of common stock outstanding at the end of the reporting period. Diluted net earnings or loss per share is computed by dividing net earnings or loss by the fully dilutive common stock equivalent, which consists of shares outstanding, augmented by potentially dilutive shares issuable upon the exercise of stock options, unvested restricted stock awards, warrants, and conversion of the Convertible Subordinated Note, calculated using the treasury stock method.

Upon the occurrence of certain events, the Company is also contingently liable to make additional payments to Allied, under the Transfer Agreement, up to an additional amount totaling $50.0 million in cash, or the equivalent in shares of the Company’s common stock, at Allied’s option. See Note 9 - Commitments and Contingencies for further information.

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between willing market participants at the measurement date.

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, restricted cash, accounts receivable, inventory, deposits, accounts payable and accrued liabilities, and debts at floating interest rates, approximate their fair values at March 31, 2015, and December 31, 2014, respectively, principally due to the short-term nature, maturities or nature of interest rates of the above listed items.

Recently Issued Accounting Standards

In January 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU No. 2015-01 eliminates from US GAAP the concept of extraordinary items, and is effective for fiscal years beginning after December 15, 2015. The Company will adopt this standards update, as required, beginning with the first quarter of 2016. The adoption of this standards update is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU No. 2015-02 is effective for interim and annual periods beginning after December 15, 2015, and the Company will adopt this standards update, as required, beginning with the first quarter of 2016. The adoption of this standards update is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which is guidance for the reporting of debt issuance costs related to a recognized debt liability on an entity's balance sheet. Under the guidance, an entity must report debt issuance costs as a direct deduction from the carrying amount of that debt liability, consistent with the treatment for debt discounts. ASU No. 2015-03 is effective for interim and annual periods beginning after December 15, 2015; early adoption is permitted for financial statements that have not been previously issued. The Company will adopt this standards update beginning with the first quarter of 2016. The adoption of this standards update is not expected to have a material impact on the Company’s consolidated financial statements.

3. Liquidity Matters

The Company’s primary cash requirements are for capital expenditures for the redevelopment of the Oyo field in the OMLs, operating expenditures, exploration activities in its unevaluated leaseholds, working capital needs, and interest and principal payments under current indebtedness. Included in accounts payable and accrued liabilities at March 31, 2015, is approximately

$50.0 million of billings from vendors that the Company expects will be reversed upon the conclusion of ongoing negotiations with those vendors.

The Company commenced production from the Oyo-8 well in early May 2015 and anticipates beginning production from the Oyo-7 well later in May 2015 as well. The combined initial production rate from the two wells is expected to approximate 14,000 barrels of oil per day. If the Company experiences significant delays in bringing the Oyo-7 well onto production, if actual production rates are substantially below anticipated rates, or if oil prices decline significantly from current levels, the Company may need to seek additional sources of capital.

In February 2015, the Company received a term sheet from a trading company for a commodity-based Full Recourse Prepayment Facility (the “Prepayment Facility”). Based on the current status of negotiations, the Prepayment Facility would allow the Company to borrow an initial sum, up to $50.0 million , towards the Oyo field redevelopment program. Additional funds, up to a total $50.0 million , would be available for borrowings post-production. Negotiations regarding the terms are continuing. The Company expects the Prepayment Facility to be finalized in the second quarter of 2015.

In March 2015, the Company entered into a borrowing facility with Allied for a Convertible Note (the “2015 Convertible Note”), separate from the existing $25.0 million Promissory Note and the $50.0 million Convertible Subordinated Note, allowing the Company to borrow up to $50.0 million for general corporate purposes. Upon execution of the 2015 Convertible Note, the Company borrowed $20.0 million under the note. Subsequent to March 31, 2015, the Company borrowed an additional $15.0 million under the note. For further information, see Note 7 – Debt .

The Company’s majority shareholder has formally committed to provide the Company with additional funding, the form of which would be determined at the time of funding, sufficient to maintain the Company’s operations and to allow the Company to meet its current and future obligations as they become due for one year from March 12, 2015, the date of said commitment.

4. Property, Plant and Equipment

Property, plant and equipment were comprised of the following:

All of the Company’s oilfield assets are located offshore Nigeria in the OMLs. “Work-in-progress and other” includes ongoing drilling costs, suspended exploratory well costs, as well as warehouse inventory items purchased as part of the redevelopment plan of the Oyo field .

5. Suspended Exploratory Well Costs

In November 2013, the Company achieved both its primary and secondary drilling objectives for the Oyo-7 well. The primary drilling objective was to establish production from the existing Pliocene reservoir. The secondary drilling objective was to confirm the presence of hydrocarbons in the deeper Miocene formation. Hydrocarbons were encountered in three intervals totaling approximately 65 feet, as interpreted by logging-while-drilling (“LWD”) data. Management is making plans to further explore the

Miocene formation in future wells. Suspended exploratory well costs were $26.5 million at both March 31, 2015, and December 31, 2014, for the costs related to the Miocene exploratory drilling activities.  

In August 2014, the Oyo-8 well was drilled to a total vertical depth of approximately 6,059 feet (approximately 1,847 meters) and successfully encountered four new oil and gas reservoirs in the eastern fault block, with total gross hydrocarbon thickness of 112 feet, based on results from the LWD data, reservoir pressure measurement, and reservoir fluid sampling. Management has commenced a detailed evaluation of the results and plans to further explore the Pliocene formation in the eastern fault block and establish the size of the incremental additions. Suspended exploratory well costs were $6.5 million at both March 31, 2015, and December 31, 2014, for the costs related to the Pliocene exploration drilling activities in the eastern fault block.

6. Asset Retirement Obligations

The Company’s asset retirement obligations primarily represent the estimated fair value of the amounts that will be incurred to plug, abandon and remediate certain oil and gas properties at the end of their productive lives. Significant inputs used in determining such obligations include, but are not limited to, estimates of plugging and abandonment costs, estimated future inflation rates and changes in property lives. The inputs are calculated based on historical data as well as current estimated costs.

On a quarterly basis, the Company reviews the assumptions used to estimate the expected cash flows required to settle the asset retirement obligations, including changes in estimated probabilities, amounts and timing of the settlement of the asset retirement obligations, as well as changes in the legal obligation for each of its properties. Changes in any one or more of these assumptions may cause revisions in the estimated liabilities for the corresponding assets.

The following summarizes changes in the Company’s asset retirement obligations during the period:

During the three months ended March 31, 2015, the Company incurred approximately $6.3 million costs towards plug and abandonment activities for well Oyo-6.

The table below shows the current and long-term portions of the Company's asset retirement obligations as of the end of each period:

Accretion expense is recognized as a component of depreciation, depletion and amortization expense in the accompanying consolidated statements of operations.

7. Debt

Promissory Note – Long-Term

The Company has a $25.0 million borrowing facility under a Promissory Note (the “Promissory Note”) with Allied. Interest accrues on the outstanding principal under the Promissory Note at a rate of the 30 -day London Interbank Offered Rate (“LIBOR”) plus 2%  per annum, payable quarterly. The obligations under the Promissory Note have been guaranteed by the Company. In March

2015, the Promissory Note was amended to extend the maturity date by one year to July 2016 . The entire $25.0 million facility amount can be utilized for general corporate purposes. As of March 31, 2015, the Company owed $25.0 million under the Promissory Note.  

Convertible Subordinated Note – Long-Term

As partial consideration in connection with the February 2014 closing of the Allied Transaction, the Company issued a $50.0 million Convertible Subordinated Note in favor of Allied (the “Convertible Subordinated Note”). Interest on the Convertible Subordinated Note accrues at a rate per annum of one-month LIBOR plus 5% , payable quarterly in cash until the maturity of the Convertible Subordinated Note five years from the closing of the Allied Transaction.

At the election of the holder, the Convertible Subordinated Note is convertible into shares of the Company’s common stock at an initial conversion price of $4.2984 per share, subject to anti-dilution adjustments. The Convertible Subordinated Note is subordinated to the Company’s existing and future senior indebtedness and is subject to acceleration upon an Event of Default (as defined in the Convertible Subordinated Note). The Company may, at its option, prepay the Convertible Subordinated Note in whole or in part, at any time, without premium or penalty, and is subject to mandatory prepayment upon (i) the Company’s issuance of capital stock or incurrence of indebtedness, the proceeds of which the Company does not apply to repayment of senior indebtedness or (ii) any capital markets debt issuance to the extent the net proceeds of such issuance exceed $250.0 million . Allied may assign all or any part of its rights and obligations under the Convertible Subordinated Note to any person upon written notice to the Company. As of March 31, 2015, the Company owed $50.0 million under the Convertible Subordinated Note.

Term Loan Facility

In September 2014, the Company, through its wholly owned subsidiary CPL, entered into a credit facility with a Nigerian bank for a five -year senior secured term loan providing initial borrowing capacity of up to $100.0 million (the “Term Loan Facility”). U.S. dollar borrowings under the Term Loan Facility bear interest at the rate of LIBOR plus 7.5% , subject to a floor of 9.5% . The obligations under the Term Loan Facility include a legal charge over OMLs 120 and 121 and an assignment of proceeds from oil sales. The obligations of CPL have been guaranteed by the Company and rank in priority with all its other obligations. Proceeds from the Term Loan Facility were used for the further expansion and development of OMLs 120 and 121 offshore Nigeria, including the Oyo field.

Under the Term Loan Facility, the following events, among others, constitute events of default: CPL failing to pay any amounts due within thirty days of the due date; bankruptcy, insolvency, liquidation or dissolution of CPL; a material breach of the Loan Agreement by CPL that remains unremedied within thirty days of written notice by CPL; or a representation or warranty of CPL proves to have been incorrect or materially inaccurate when made. Upon any event of default, all outstanding principal and interest under any loans will become immediately due and payable.

The Term Loan Facility contains normal and customary covenants including the delivery of the Company’s annual audited financial information each year, and a provision of priority of interest, in which the Company is to procure that its obligations under the Term Loan Facility do and will rank in priority with all its other current and future unsecured and unsubordinated obligations. The Company is also to provide a production and lifting schedule each month displaying the daily production totals and quantities lifted respectively from OMLs 120 and 121. The Company was in compliance with all loan covenants as of March 31, 2015.

Upon executing the Term Loan Facility, the Company paid a $2.1 million commitment fee, which was recorded as debt issuance cost and is being amortized over the life of the Term Loan Facility using the effective interest method. As of March 31, 2015, $1.8 million of the debt issuance cost remain unamortized. As of March 31, 2015, the Company recognized an unrealized foreign currency gain of $1.5 million on the Naira portion of the loan, resulting in a net balance of $98.5 million under the Term Loan Facility. Of this amount, $86.2 million was classified as long-term and $12.3 million as short-term.

2015 Convertible Note

In March 2015, the Company entered into a new borrowing facility with Allied for a Convertible Note (the “2015 Convertible Note”) allowing the Company to borrow up to $50.0 million for general corporate purposes. The 2015 Convertible Note will mature in December 2016. Interest accrues at the rate of LIBOR plus 5% , and is payable quarterly. 

The 2015 Convertible Note is convertible into shares of the Company’s common stock upon the occurrence and continuation of an event of default, at the sole option of the holder. The number of shares issuable upon conversion is equal to the sum of the principal amount and the accrued and unpaid interest divided by the conversion price, defined as the volume weighted average of the closing sales prices on the NYSE MKT for a share of common stock for the five complete trading days immediately preceding the conversion date.

Upon execution of the 2015 Convertible Note in March 2015, the Company borrowed $20.0 million under the note and issued to Allied warrants to purchase approximately 1.6 million shares of the Company’s common stock at a price of $2.46 per share.  The fair market value of the warrants was determined using the Black-Scholes option pricing model. The fair value of the warrants was recorded as a discount from the note, and will be amortized using the effective interest method over the life of the note.

Additional warrants will be issuable in connection with future borrowings, with the per share price for those warrants determined based on the market price of the Company’s common stock at the time of such future borrowings. As of March 31, 2015, the Company owed $ 18.1 million under the 2015 Convertible Note, net of discount.

Subsequent to March 31, 2015, the Company borrowed an additional $15.0 million under the note and will issue to Allied warrants to purchase approximately 0.6 million shares of the Company's common stock.

8. Related Party Transactions

As of March 31, 2015 and December 31, 2014, the Company owed $15.6 million and $9.4 million , respectively, to an affiliate primarily for logistical and support services.

As of March 31, 2015 the Company had a long-term note payable balance of $93.1 million owed to an affiliate, consisting of a $50.0 million Convertible Subordinated Note, $25.0 million in borrowings under the Promissory Note, and $ 18.1 million in borrowings under the 2015 Convertible Note, net of discount. As of December 31, 2014, the Company had a long-term note payable balance of $61.2 million owed to an affiliate, consisting of a $50.0 million Convertible Subordinated Note and $11.2 million in borrowings under the Promissory Note. See Note 7 – Debt for further information relating to the notes payable transactions.

9. Commitments and Contingencies

Commitments

In February 2014, a long-term contract was signed for the floating, production, storage, and offloading vessel (“FPSO”) Armada Perdana, which is the vessel currently connected to the Company’s producing well Oyo-8 in OML 120. The contract provides for an initial term of seven years beginning January 1, 2014, with an automatic extension for an additional term of two years unless terminated by the Company with prior notice. The FPSO can process up to 40,000 barrels of liquid per day, with a storage capacity of approximately one million barrels. The annual minimum commitment per the terms of the agreement is approximately $48.4 million through 2020.

In December 2014, the Company entered into a short-term drilling contract for the semi-submersible drilling rig Sedco Express to complete the horizontal drilling portion of wells Oyo-7 and Oyo-8. As of March 31, 2015, the remaining contract commitment is for a 50 -day period, with a remaining minimum obligation of approximating $15.0 million .

The Company also has commitments related to four production sharing contracts with the Government of the Republic of Kenya (the “Kenya PSCs”), two Petroleum Exploration, Development & Production Licenses with the Republic of The Gambia (the “Gambia Licenses”), and one Petroleum Agreement with the Republic of Ghana. In all cases, the Company entered into these commitments through a subsidiary. To maintain compliance and ownership, the Company is required to fulfill certain minimum work obligations and to make certain payments as stated in each of the Kenya PSCs, the Gambia Licenses, and the Ghana Petroleum Agreement.

Contingencies

Legal Contingencies

From time to time, the Company may be involved in various legal proceedings and claims in the ordinary course of business. As of March 31, 2015, and through the filing date of this report, the Company does not believe the ultimate resolution of such actions or potential actions of which the Company is currently aware will have a material effect on its consolidated financial position or results of operations.

In January 2014, an affiliate of CEHL, the Company’s majority shareholder, and Northern Offshore International Drilling Company Ltd. (“Northern”) entered into an International Daywork Drilling Contract pursuant to which Northern agreed to provide the drillship Energy Searcher for the provision of drilling services offshore Nigeria. Pursuant to further contractual arrangements entered into in March 2014, the affiliate provided the drillship to CPL, with CPL assuming payment obligations under the drilling contract and receiving the right to enforce Northern’s obligations under the drilling contract. The Company guaranteed the performance by CPL of its obligations under these contractual arrangements. The Company, CPL and the CEHL affiliate are referred to hereinafter as the “Erin Parties.”

On January 2, 2015, the Erin Parties received a notice from Northern purporting to terminate the drilling contract for failure to provide the required letter of credit thereunder and stating that the Erin Parties are required to pay Northern all outstanding unpaid invoices, the early termination fee, the demobilization fee and amounts due but not yet invoiced for work performed up to the date of termination. On January 7, 2015, the Erin Parties responded to Northern disputing the validity of the purported Northern termination, which under English law we believe constitutes a renunciation of the drilling contract and wrongful repudiatory breach thereof because of, among other things, the course of conduct by the parties. Specifically, the Erin Parties arranged for, and Northern agreed to and performed work in exchange for, issuing monthly prepayment invoices in lieu of the letter of credit. Because of Northern’s repudiatory breach, the Erin Parties elected to terminate the contract with immediate effect.  In addition, the January 7, 2015 letter set out other grounds for termination and claims against Northern for numerous material breaches of the drilling contract.

On January 12, 2015, Northern issued a request for arbitration in the London Court of International Arbitration (“LCIA”). The request repeated the claims of Northern relating to the letter of credit as stated in the January 2, 2015 letter and asserted further breaches of contract, including for failure to pay invoices for work allegedly performed. The request seeks payment of outstanding unpaid invoices, the early termination fee and the demobilization fee. On February 10, 2015, the Erin Parties lodged their response

to the request and outlined claims against Northern for breaches of the drilling contract for, among other things, wrongful termination of the contract, failure to maintain the well control equipment in good condition (including the blowout preventer), failure to maintain and repair the drilling unit, breach of warranty, failure to provide adequately skilled and competent personnel, failure to perform as a reasonable and prudent operator, and failure to provide the drilling unit ready to commence operations by May 15, 2014. These breaches caused significant damages and loss to the Erin Parties, including wasted marine spread costs in excess of $50 million , the cost of other marine services that were accumulated while the rig incurred downtime, as recognized under English law, and delay damages in excess of $3 million due to delays in the commencement of operations.

Pursuant to the contract and LCIA rules, a tribunal of three arbitrators, one selected by each of Northern and the Erin Parties and the third appointed by the first two arbitrators, has been empaneled. A mediation took place in Houston, Texas on March 6, 2015, but no settlement was reached. Subsequently, each party has filed its own request for arbitration, superseding the prior request. A procedural hearing has been set for May 13, 2015.

 

Contingency under the Allied Transfer Agreement

As provided for under the Transfer Agreement with Allied, the Company is required to make the following additional payments upon the occurrence of certain future events: (i) $25.0 million cash or the equivalent in shares of the Company’s common stock within fifteen days following the approval of a development plan by the Nigerian Department of Petroleum Resources with respect to a first new discovery of hydrocarbons in a non-Oyo field area; and (ii) $25.0 million cash or the equivalent in shares of the Company’s common stock within fifteen days starting from the commencement of the first hydrocarbon production in commercial quantities in a non-Oyo field area. The number of shares to be issued shall be determined by calculating the average closing price of the Company’s common stock over a period of thirty days, counted back from the first business day immediately prior to the approval of a development plan by the Nigerian Department of Petroleum Resources or the date of the first hydrocarbon production in commercial quantities, where applicable.  

10. Stock-Based Compensation

Stock Options

During the three months ended March 31, 2015, the Company issued 5,000 shares of common stock as a result of the exercise of stock options.

Stock Warrants

In March 2015, in connection with the execution of the 2015 Convertible Note, the Company issued to Allied warrants to purchase approximately 1.6 million shares of the Company’s common stock at an exercise price of $2.46 per share. The warrants are exercisable at any time starting from the date of issuance and have a five year term.

During the three months ended March 31, 2015, 0.2 million previously issued warrants were forfeited.

Restricted Stock Awards

During the three months ended March 31, 2015, the Company granted officers, directors, and employees a total of approximately 0.8 million shares of restricted common stock, with vesting periods varying from immediate vesting to 36 months .

 

During the three months ended March 31, 2015, the Company granted performance-based restricted stock awards (PBRSA) to certain officers totaling 0.4 million shares. Each grant will vest if the individuals remain employed three years from the date of grant and the Company achieves specific performance objectives at the end of the designated performance period. Up to 50% additional shares may be awarded if performance objectives are exceeded. None of the PBRSAs will vest if certain minimum performance goals are not met. The performance conditions are based on the Company’s total shareholder return over the performance period compared to an industry peer group of companies. Total estimated compensation expense is $0.4 million over three years.

11. Segment Information

The Company’s current operations are based in Nigeria, Kenya, The Gambia, and Ghana. Management reviews and evaluates the operations of each geographic segment separately. Operations include exploration for and production of hydrocarbons where commercial reserves have been found and developed. Revenues and expenditures are recognized at the relevant geographical location. The Company evaluates each segment based on operating income (loss).  

Total assets by segment as of March 31, 2015 and December 31, 2014 are as follows: