rvra-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

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

For the Quarterly Period Ended 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: 333-225927

 

 

Riviera Resources, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

(State or other jurisdiction of incorporation or organization)

 

82-5121920

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

 

 

 

600 Travis Street, Suite 1700

Houston, Texas

(Address of principal executive offices)

 

77002

(Zip Code)

(281) 840-4000

(Registrant’s telephone number, including area code)

 

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 was 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.

 

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  

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

As of October 31, 2018, there were 69,774,073 shares of common stock, par value $0.01 per share, outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

Glossary of Terms

 

1

 

 

 

 

 

 

 

Part I – Financial Information

 

 

Item 1.

 

Financial Statements

 

 

 

 

Condensed Consolidated Balance Sheets

 

2

 

 

Condensed Consolidated and Combined Statements of Operations

 

4

 

 

Condensed Consolidated Statement of Equity

 

6

 

 

Condensed Consolidated and Combined Statements of Cash Flows

 

7

 

 

Notes to Condensed Consolidated and Combined Financial Statements

 

9

Item 2.

 

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

 

36

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

60

Item 4.

 

Controls and Procedures

 

61

 

 

 

 

 

 

 

Part II – Other Information

 

 

Item 1.

 

Legal Proceedings

 

62

Item 1A.

 

Risk Factors

 

62

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

62

Item 3.

 

Defaults Upon Senior Securities

 

63

Item 4.

 

Mine Safety Disclosures

 

63

Item 5.

 

Other Information

 

63

Item 6.

 

Exhibits

 

64

 

 

 

 

 

 

 

Signatures

 

66

 

 


Table of Contents

GLOSSARY OF TERMS

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

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

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

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

MBbls/d. MBbls per day.

Mcf.  One thousand cubic feet.

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

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

MMBtu.  One million British thermal units.

MMcf.  One million cubic feet.

MMcf/d. MMcf per day.

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

MMcfe/d. MMcfe per day.

MMMBtu.  One billion British thermal units.

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

 

1


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

(in thousands, except share amounts)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

156,917

 

 

$

464,477

 

Accounts receivable – trade, net

 

 

85,482

 

 

 

140,485

 

Derivative instruments

 

 

3,024

 

 

 

9,629

 

Restricted cash

 

 

27,130

 

 

 

56,445

 

Other current assets

 

 

19,688

 

 

 

76,683

 

Assets held for sale

 

 

12

 

 

 

106,963

 

Total current assets

 

 

292,253

 

 

 

854,682

 

Noncurrent assets:

 

 

 

 

 

 

 

 

Oil and natural gas properties (successful efforts method)

 

 

789,844

 

 

 

950,083

 

Less accumulated depletion and amortization

 

 

(71,684

)

 

 

(49,619

)

 

 

 

718,160

 

 

 

900,464

 

 

 

 

 

 

 

 

 

 

Other property and equipment

 

 

592,073

 

 

 

480,729

 

Less accumulated depreciation

 

 

(53,264

)

 

 

(28,658

)

 

 

 

538,809

 

 

 

452,071

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

 

328

 

 

 

469

 

Deferred income taxes

 

 

133,410

 

 

 

188,538

 

Other noncurrent assets

 

 

13,193

 

 

 

14,256

 

Noncurrent assets of discontinued operations

 

 

 

 

 

457,645

 

 

 

 

146,931

 

 

 

660,908

 

Total noncurrent assets

 

 

1,403,900

 

 

 

2,013,443

 

Total assets

 

$

1,696,153

 

 

$

2,868,125

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

169,860

 

 

$

253,975

 

Derivative instruments

 

 

5,507

 

 

 

10,103

 

Other accrued liabilities

 

 

25,277

 

 

 

58,130

 

Liabilities held for sale

 

 

 

 

 

43,302

 

Total current liabilities

 

 

200,644

 

 

 

365,510

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Derivative instruments

 

 

1,088

 

 

 

2,849

 

Asset retirement obligations and other noncurrent liabilities

 

 

105,102

 

 

 

160,720

 

Total noncurrent liabilities

 

 

106,190

 

 

 

163,569

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS - Continued

(Unaudited)

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

(in thousands, except share amounts)

 

Equity:

 

 

 

 

 

 

 

 

Preferred Stock ($0.01 par value, 30,000,000 shares authorized and no shares issued at September 30, 2018; no shares authorized or issued at December 31, 2017)

 

 

 

 

 

 

Common Stock ($0.01 par value, 270,000,000 shares authorized and 75,836,252 shares issued at September 30, 2018; no shares authorized or issued at December 31, 2017)

 

 

758

 

 

 

 

Additional paid-in capital

 

 

1,394,215

 

 

 

 

Accumulated deficit

 

 

(5,654

)

 

 

 

Net parent company investment

 

 

 

 

 

2,339,046

 

Total equity

 

 

1,389,319

 

 

 

2,339,046

 

Total liabilities and equity

 

$

1,696,153

 

 

$

2,868,125

 

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

 

3


Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Successor

 

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands, except per share

amounts)

 

Revenues and other:

 

 

 

 

 

 

 

 

Oil, natural gas and natural gas liquids sales

 

$

89,653

 

 

$

206,318

 

Losses on oil and natural gas derivatives

 

 

(3,175

)

 

 

(14,497

)

Marketing revenues

 

 

67,246

 

 

 

38,493

 

Other revenues

 

 

5,877

 

 

 

6,368

 

 

 

 

159,601

 

 

 

236,682

 

Expenses:

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

22,930

 

 

 

61,272

 

Transportation expenses

 

 

22,304

 

 

 

34,541

 

Marketing expenses

 

 

63,149

 

 

 

34,099

 

General and administrative expenses

 

 

90,931

 

 

 

30,035

 

Exploration costs

 

 

2,487

 

 

 

171

 

Depreciation, depletion and amortization

 

 

21,515

 

 

 

37,766

 

Taxes, other than income taxes

 

 

7,162

 

 

 

12,368

 

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

 

 

221

 

 

 

(25,896

)

 

 

 

230,699

 

 

 

184,356

 

Other income and (expenses):

 

 

 

 

 

 

 

 

Interest expense, net of amounts capitalized

 

 

(594

)

 

 

(223

)

Other, net

 

 

105

 

 

 

(4,246

)

 

 

 

(489

)

 

 

(4,469

)

Reorganization items, net

 

 

(1,277

)

 

 

(2,605

)

Income (loss) from continuing operations before income taxes

 

 

(72,864

)

 

 

45,252

 

Income tax expense (benefit)

 

 

(39,628

)

 

 

1,646

 

Income (loss) from continuing operations

 

 

(33,236

)

 

 

43,606

 

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

 

 

(14,899

)

 

 

78,556

 

Net income (loss)

 

$

(48,135

)

 

$

122,162

 

Income (loss) per share:

 

 

 

 

 

 

 

 

Income (loss) from continuing operations per share ‒ Basic

 

$

(0.43

)

 

$

0.57

 

Income (loss) from continuing operations per share ‒ Diluted

 

$

(0.43

)

 

$

0.57

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations per share ‒ Basic

 

$

(0.20

)

 

$

1.03

 

Income (loss) from discontinued operations per share ‒ Diluted

 

$

(0.20

)

 

$

1.03

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share ‒ Basic

 

$

(0.63

)

 

$

1.60

 

Net income (loss) per share ‒ Diluted

 

$

(0.63

)

 

$

1.60

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding Basic

 

 

76,135

 

 

 

76,191

 

Weighted average shares outstanding Diluted

 

 

76,135

 

 

 

76,191

 

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

4


Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Successor

 

 

Predecessor

 

 

 

Nine Months Ended

September 30,

2018

 

 

Seven Months Ended September 30, 2017

 

 

Two Months Ended February 28, 2017

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other:

 

 

 

 

 

 

 

 

 

 

 

 

Oil, natural gas and natural gas liquids sales

 

$

313,533

 

 

$

529,810

 

 

$

188,885

 

Gains (losses) on oil and natural gas derivatives

 

 

(25,730

)

 

 

19,258

 

 

 

92,691

 

Marketing revenues

 

 

156,480

 

 

 

53,954

 

 

 

6,636

 

Other revenues

 

 

18,158

 

 

 

14,787

 

 

 

9,915

 

 

 

 

462,441

 

 

 

617,809

 

 

 

298,127

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

94,902

 

 

 

156,959

 

 

 

49,665

 

Transportation expenses

 

 

62,611

 

 

 

85,652

 

 

 

25,972

 

Marketing expenses

 

 

145,231

 

 

 

43,614

 

 

 

4,820

 

General and administrative expenses

 

 

228,105

 

 

 

74,703

 

 

 

71,745

 

Exploration costs

 

 

3,742

 

 

 

1,037

 

 

 

93

 

Depreciation, depletion and amortization

 

 

71,960

 

 

 

101,558

 

 

 

47,155

 

Taxes, other than income taxes

 

 

22,729

 

 

 

37,316

 

 

 

14,877

 

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

 

 

(208,009

)

 

 

(333,720

)

 

 

672

 

 

 

 

421,271

 

 

 

167,119

 

 

 

214,999

 

Other income and (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of amounts capitalized

 

 

(1,582

)

 

 

(11,974

)

 

 

(16,725

)

Other, net

 

 

473

 

 

 

(5,800

)

 

 

(149

)

 

 

 

(1,109

)

 

 

(17,774

)

 

 

(16,874

)

Reorganization items, net

 

 

(4,487

)

 

 

(8,229

)

 

 

2,521,137

 

Income from continuing operations before income taxes

 

 

35,574

 

 

 

424,687

 

 

 

2,587,391

 

Income tax expense (benefit)

 

 

25,247

 

 

 

158,744

 

 

 

(166

)

Income from continuing operations

 

 

10,327

 

 

 

265,943

 

 

 

2,587,557

 

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

 

 

19,674

 

 

 

84,315

 

 

 

(548

)

Net income

 

$

30,001

 

 

$

350,258

 

 

$

2,587,009

 

Income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations per share ‒ Basic

 

$

0.13

 

 

$

3.49

 

 

$

33.96

 

Income from continuing operations per share ‒ Diluted

 

$

0.13

 

 

$

3.49

 

 

$

33.96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations per share ‒ Basic

 

$

0.26

 

 

$

1.11

 

 

$

(0.01

)

Income (loss) from discontinued operations per share ‒ Diluted

 

$

0.26

 

 

$

1.11

 

 

$

(0.01

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share ‒ Basic

 

$

0.39

 

 

$

4.60

 

 

$

33.95

 

Net income per share ‒ Diluted

 

$

0.39

 

 

$

4.60

 

 

$

33.95

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding ‒ Basic

 

 

76,171

 

 

 

76,191

 

 

 

76,191

 

Weighted average shares outstanding ‒ Diluted

 

 

76,518

 

 

 

76,191

 

 

 

76,191

 

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

5


Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

 

 

Common Stock

 

 

Additional Paid in Capital

 

 

Accumulated Deficit

 

 

Net Parent Company Investment

 

 

Total Equity

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

December 31, 2017

 

 

 

 

$

 

 

$

 

 

$

 

 

$

2,339,046

 

 

$

2,339,046

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

(5,654

)

 

 

35,655

 

 

 

30,001

 

Net transfers to parent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(967,571

)

 

 

(967,571

)

Spin-off related adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,620

)

 

 

(4,620

)

Issuances of common stock and reclassification of former parent company investment

 

 

76,191

 

 

 

762

 

 

 

1,401,748

 

 

 

 

 

 

(1,402,510

)

 

 

 

Repurchases of common stock

 

 

(355

)

 

 

(4

)

 

 

(7,533

)

 

 

 

 

 

 

 

 

(7,537

)

September 30, 2018

 

 

75,836

 

 

$

758

 

 

$

1,394,215

 

 

$

(5,654

)

 

$

 

 

$

1,389,319

 

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

 

 

6


Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Successor

 

 

Predecessor

 

 

 

Nine Months Ended

September 30,

2018

 

 

Seven Months Ended September 30, 2017

 

 

Two Months Ended

February 28, 2017

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

30,001

 

 

$

350,258

 

 

$

2,587,009

 

Adjustments to reconcile net income to net cash provided by

   (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

(Income) loss from discontinued operations

 

 

(19,674

)

 

 

(84,315

)

 

 

548

 

Depreciation, depletion and amortization

 

 

71,960

 

 

 

101,558

 

 

 

47,155

 

Deferred income taxes

 

 

25,382

 

 

 

115,739

 

 

 

(166

)

Total (gains) losses on derivatives, net

 

 

25,730

 

 

 

(19,258

)

 

 

(92,691

)

Cash settlements on derivatives

 

 

(25,341

)

 

 

19,638

 

 

 

(11,572

)

Share-based compensation expenses

 

 

16,105

 

 

 

25,876

 

 

 

50,255

 

Amortization and write-off of deferred financing fees

 

 

1,336

 

 

 

3,349

 

 

 

1,338

 

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

 

 

(204,644

)

 

 

(355,122

)

 

 

1,069

 

Reorganization items, net

 

 

 

 

 

 

 

 

(2,456,074

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable – trade, net

 

 

57,674

 

 

 

15,549

 

 

 

(7,216

)

(Increase) decrease in other assets

 

 

61,309

 

 

 

(1,218

)

 

 

528

 

Increase (decrease) in accounts payable and accrued expenses

 

 

(51,608

)

 

 

(90,073

)

 

 

20,949

 

Increase (decrease) in other liabilities

 

 

(15,750

)

 

 

56,460

 

 

 

2,801

 

Net cash provided by (used in) operating activities – continuing operations

 

 

(27,520

)

 

 

138,441

 

 

 

143,933

 

Net cash provided by operating activities – discontinued operations

 

 

 

 

 

2,566

 

 

 

8,781

 

Net cash provided by (used in) operating activities

 

 

(27,520

)

 

 

141,007

 

 

 

152,714

 

Cash flow from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Development of oil and natural gas properties

 

 

(56,116

)

 

 

(136,638

)

 

 

(50,597

)

Purchases of other property and equipment

 

 

(116,237

)

 

 

(60,656

)

 

 

(7,409

)

Proceeds from sale of properties and equipment and other

 

 

367,086

 

 

 

711,360

 

 

 

(166

)

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

   operations

 

 

194,733

 

 

 

514,066

 

 

 

(58,172

)

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

   operations

 

 

7,000

 

 

 

345,643

 

 

 

(584

)

Net cash provided by (used in) investing activities

 

 

201,733

 

 

 

859,709

 

 

 

(58,756

)

 

 

 

 

 

 

 

 

 

 

 

 

 

7


Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS - Continued

(Unaudited)

 

 

Successor

 

 

Predecessor

 

 

 

Nine Months Ended

September 30,

2018

 

 

Seven Months Ended September 30, 2017

 

 

Two Months Ended

February 28, 2017

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net transfers (to) from parent

 

 

(481,449

)

 

 

(154,176

)

 

 

636,000

 

Repurchases of shares

 

 

(7,576

)

 

 

 

 

 

 

Proceeds from borrowings

 

 

 

 

 

190,000

 

 

 

 

Repayments of debt

 

 

 

 

 

(1,090,000

)

 

 

(1,038,986

)

Debt issuance costs paid

 

 

(2,505

)

 

 

(7,229

)

 

 

(151

)

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

 

 

 

 

 

 

 

 

(30,000

)

Distributions to unitholders

 

 

(18,717

)

 

 

 

 

 

 

Other

 

 

(841

)

 

 

 

 

 

(4,593

)

Net cash used in financing activities – continuing operations

 

 

(511,088

)

 

 

(1,061,405

)

 

 

(437,730

)

Net cash used in financing activities – discontinued operations

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(511,088

)

 

 

(1,061,405

)

 

 

(437,730

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(336,875

)

 

 

(60,689

)

 

 

(343,772

)

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

Beginning

 

 

520,922

 

 

 

144,022

 

 

 

487,794

 

Ending

 

$

184,047

 

 

$

83,333

 

 

$

144,022

 

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

 

 

 

8


Table of Contents

RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

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

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

To effect the separation, the Parent and certain of its then direct and indirect subsidiaries undertook an internal reorganization (including the conversion of Riviera Resources, LLC from a limited liability company to a corporation named Riviera Resources, Inc.), following which Riviera holds, directly or through its subsidiaries, substantially all of the assets of LINN Energy, other than LINN Energy’s 50% equity interest in Roan Resources LLC (“Roan”).  A subsidiary of the Company held the equity interest in Roan until the Parent’s internal reorganization on July 25, 2018 (the “Reorganization Date”).  Following the internal reorganization, the Parent distributed all of the outstanding shares of Riviera common stock to the Parent’s shareholders on a pro rata basis (the “Spin-off”).  The Spin-off was completed on August 7, 2018.  Prior to the completion of the Spin-off, a then subsidiary of the Parent distributed $40 million to the Parent to pay the Parent’s obligations during the transition period under the TSA (as defined below).  Linn Energy, Inc. returned such $40 million to Riviera on September 24, 2018, which included approximately $7 million for the reimbursement of cash paid to settle the Parent’s restricted stock units (“LINN RSUs”) held by Riviera’s employees and approximately $1 million for the payment of income taxes on shares withheld from participants upon vesting (see Note 12).

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

On August 7, 2018, Riviera entered into a Transition Services Agreement (the “TSA”) with the Parent to facilitate an orderly transition following the Spin-off.  Pursuant to the TSA, Riviera agreed to provide the Parent with certain finance, financial reporting, information technology, investor relations, legal, payroll, tax and other services during the term of the TSA.  Riviera reimbursed the Parent for, or paid on the Parent’s behalf, all direct and indirect costs and expenses incurred by the Parent during the term of the TSA in connection with the fees for any such services.  The TSA terminated in accordance with its terms on September 24, 2018.

Prior to the Spin-off, the accompanying condensed consolidated and combined financial statements were prepared on a stand-alone basis and derived from Linn Energy, Inc.’s consolidated financial statements and accounting records for the periods presented as the Company was historically managed as a subsidiary of Linn Energy, Inc.  After the Spin-off, Riviera is an independent company.

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

9


Table of Contents

RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - Continued

(Unaudited)

Nature of Business

The Company’s upstream reporting segment properties are currently located in six operating regions in the United States (“U.S.”): the Hugoton Basin, East Texas, North Louisiana, Michigan/Illinois, the Uinta Basin and the Mid-Continent.  The Blue Mountain reporting segment consists of the Cryo 1 gas plant system, which is comprised of the newly constructed cryogenic natural gas processing facility, a network of gathering pipelines and compressors located in the Merge/SCOOP/STACK play, each of which is owned by Blue Mountain Midstream LLC (“Blue Mountain Midstream”), a wholly owned subsidiary of the Company.  During 2018, the Company divested all of its properties located in the previous Permian Basin operating region.  During 2017, the Company divested all of its properties located in the previous California and South Texas operating regions.  The Company has classified the results of operations and cash flows of its California properties as discontinued operations on its consolidated and combined financial statements.  See Note 4 for additional information.

Historically, a subsidiary of the Company also owned a 50% equity interest in Roan.  The Company’s equity earnings (losses), consisting of its share of Roan’s earnings or losses, are included in the condensed consolidated financial statements through the Reorganization Date.  However, on the Reorganization Date, the equity interest in Roan was distributed to the Parent and is no longer affiliated with Riviera.  As such, the Company has classified the investment and equity earnings (losses) in Roan as discontinued operations on its condensed consolidated financial statements.  See Note 4 for additional information.

Principles of Consolidation and Combination

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

The condensed consolidated and combined financial statements for Predecessor periods represent the results of operations of entities held by the Company after the Spin-off that were historically under common control of the Parent, which exclude Linn Acquisition Company, LLC (“LAC”) and Berry.  On February 28, 2017, LINN Energy and Berry emerged from bankruptcy as standalone unaffiliated entities.  The condensed consolidated financial statements for the Successor period represent the financial position and results of operations of entities held by the Company after the Spin-off that were historically under the control of the Parent.  The Company presents its condensed consolidated and combined financial statements in accordance with U.S. GAAP.  The condensed consolidated and combined financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany transactions and balances have been eliminated. Prior to the Spin-off, the condensed consolidated and combined financial statements were prepared on a carve-out basis and reflect significant assumptions and allocations.  The condensed consolidated and combined financial statements for previous periods include certain reclassifications that were made to conform to current presentation.  Such reclassifications have no impact on previously reported net income (loss), stockholders’ equity, or cash flows.

Investments in noncontrolled entities over which the Company exercises significant influence are accounted for under the equity method.

Bankruptcy Accounting

Upon LINN Energy’s emergence from bankruptcy on February 28, 2017, the Parent adopted fresh start accounting which resulted in the Parent becoming a new entity for financial reporting purposes.  As a result of the adoption of fresh start accounting and the effects of the implementation of the Plan (as defined in Note 2), the Company’s condensed consolidated financial statements subsequent to February 28, 2017, are not comparable to its condensed consolidated and combined

10


Table of Contents

RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - Continued

(Unaudited)

financial statements prior to February 28, 2017.  References to “Successor” relate to the financial position and results of operations of the reorganized Company subsequent to February 28, 2017.  References to “Predecessor” relate to the financial position of the Company prior to, and results of operations through and including, February 28, 2017.  The Company’s condensed consolidated and combined financial statements and related footnotes are presented with a black line division, which delineates the lack of comparability between amounts presented after February 28, 2017, and amounts presented on or prior to February 28, 2017.  See Note 2 for additional information.

Use of Estimates

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

As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use.  These estimates and assumptions are based on management’s best estimates and judgment.  Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances.  Such estimates and assumptions are adjusted when facts and circumstances dictate.  As future events and their effects cannot be determined with precision, actual results could differ from these estimates.  Any changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Recently Adopted Accounting Standards

In November 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that is intended to address diversity in the classification and presentation of changes in restricted cash on the statement of cash flows.  The Company adopted this ASU on January 1, 2018, on a retrospective basis.  The adoption of this ASU resulted in the inclusion of restricted cash in the beginning and ending balances of cash on the statements of cash flows and disclosure reconciling cash and cash equivalents presented on the balance sheets to cash, cash equivalents and restricted cash on the statement of cash flows (see Note 15).

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

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

11


Table of Contents

RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - Continued

(Unaudited)

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

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

 

 

 

Three Months Ended September 30, 2018

 

 

 

Under

ASC 606

 

 

Under Prior

Rule

 

 

Increase/

(Decrease)

 

 

 

(in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas sales

 

$

57,095

 

 

$

57,231

 

 

$

(136

)

Oil sales

 

 

9,658

 

 

 

9,658

 

 

 

 

NGL sales

 

 

22,900

 

 

 

22,348

 

 

 

552

 

Total oil, natural gas and NGL sales

 

 

89,653

 

 

 

89,237

 

 

 

416

 

Marketing revenues

 

 

67,246

 

 

 

36,584

 

 

 

30,662

 

Other revenues

 

 

5,877

 

 

 

5,574

 

 

 

303

 

 

 

 

162,776

 

 

 

131,395

 

 

 

31,381

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Transportation expenses

 

 

22,304

 

 

 

21,888

 

 

 

416

 

Marketing expenses