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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, 2020

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.)

 

 

 

717 Texas Avenue, Suite 2000

Houston, Texas

(Address of principal executive offices)

 

77002

(Zip Code)

(281) 840-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading symbols(s)

 

Name of exchange on which registered

None

 

None

 

None

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, 2020, there were 57,907,609 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 Statements of Operations

 

3

 

 

Condensed Consolidated Statements of Equity

 

4

 

 

Condensed Consolidated Statements of Cash Flows

 

5

 

 

Notes to Condensed Consolidated Financial Statements

 

6

Item 2.

 

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

 

31

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

53

Item 4.

 

Controls and Procedures

 

54

 

 

 

 

 

 

 

Part II – Other Information

 

 

Item 1.

 

Legal Proceedings

 

56

Item 1A.

 

Risk Factors

 

56

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

Item 3.

 

Defaults Upon Senior Securities

 

58

Item 4.

 

Mine Safety Disclosures

 

59

Item 5.

 

Other Information

 

59

Item 6.

 

Exhibits

 

60

 

 

 

 

 

 

 

Signatures

 

61

 

 

i


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,

2020

 

 

December 31, 2019

 

 

 

(in thousands, except share amounts)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

94,548

 

 

$

116,237

 

Accounts receivable – trade, net

 

 

22,194

 

 

 

51,355

 

Derivative instruments

 

 

375

 

 

 

7,283

 

Restricted cash

 

 

24,887

 

 

 

32,932

 

Other current assets

 

 

11,925

 

 

 

12,853

 

Assets held for sale

 

 

 

 

 

104,773

 

Total current assets

 

 

153,929

 

 

 

325,433

 

Noncurrent assets:

 

 

 

 

 

 

 

 

Oil and natural gas properties (successful efforts method)

 

 

125,389

 

 

 

180,307

 

Less accumulated depletion and amortization

 

 

(111,480

)

 

 

(35,603

)

 

 

 

13,909

 

 

 

144,704

 

 

 

 

 

 

 

 

 

 

Other property and equipment

 

 

396,449

 

 

 

388,851

 

Less accumulated depreciation

 

 

(292,416

)

 

 

(50,381

)

 

 

 

104,033

 

 

 

338,470

 

 

 

 

 

 

 

 

 

 

Other noncurrent assets

 

 

4,690

 

 

 

7,652

 

 

 

 

4,690

 

 

 

7,652

 

Total noncurrent assets

 

 

122,632

 

 

 

490,826

 

Total assets

 

$

276,561

 

 

$

816,259

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

34,907

 

 

$

80,579

 

Derivative instruments

 

 

1,795

 

 

 

1,087

 

Other accrued liabilities

 

 

31,776

 

 

 

26,728

 

Liabilities held for sale

 

 

 

 

 

35,177

 

Total current liabilities

 

 

68,478

 

 

 

143,571

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Credit facilities

 

 

80,000

 

 

 

69,800

 

Asset retirement obligations and other noncurrent liabilities

 

 

16,209

 

 

 

29,337

 

Total noncurrent liabilities

 

 

96,209

 

 

 

99,137

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Preferred Stock ($0.01 par value, 30,000,000 shares authorized; no shares

   issued at September 30, 2020, or December 31, 2019)

 

 

 

 

 

 

Common Stock ($0.01 par value, 270,000,000 shares authorized;

   57,907,609 shares and 58,168,756 shares issued and outstanding at

   September 30, 2020, and December 31, 2019, respectively)

 

 

579

 

 

 

581

 

Additional paid-in capital

 

 

759,186

 

 

 

861,764

 

Accumulated deficit

 

 

(647,891

)

 

 

(288,794

)

Total equity

 

 

111,874

 

 

 

573,551

 

Total liabilities and equity

 

$

276,561

 

 

$

816,259

 

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

 

2


Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(in thousands, except per share amounts)

 

Revenues and other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil, natural gas and natural gas liquids sales

 

$

7,340

 

 

$

51,029

 

 

$

33,072

 

 

$

194,131

 

Gains (losses) on commodity derivatives

 

 

(2,948

)

 

 

5,665

 

 

 

3,773

 

 

 

12,673

 

Marketing revenues

 

 

29,054

 

 

 

45,828

 

 

 

84,840

 

 

 

166,569

 

Other revenues

 

 

29

 

 

 

5,532

 

 

 

69

 

 

 

16,685

 

 

 

 

33,475

 

 

 

108,054

 

 

 

121,754

 

 

 

390,058

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

2,367

 

 

 

18,307

 

 

 

10,212

 

 

 

66,204

 

Transportation expenses

 

 

818

 

 

 

16,275

 

 

 

4,201

 

 

 

53,478

 

Marketing expenses

 

 

20,284

 

 

 

37,688

 

 

 

58,431

 

 

 

132,888

 

General and administrative expenses

 

 

16,871

 

 

 

16,954

 

 

 

37,994

 

 

 

49,434

 

Exploration costs

 

 

413

 

 

 

1,947

 

 

 

413

 

 

 

4,154

 

Depreciation, depletion and amortization

 

 

3,915

 

 

 

20,060

 

 

 

19,027

 

 

 

65,013

 

Impairment of assets held for sale and

   long-lived assets

 

 

219,606

 

 

 

95,080

 

 

 

341,264

 

 

 

113,470

 

Taxes, other than income taxes

 

 

846

 

 

 

5,111

 

 

 

3,436

 

 

 

14,010

 

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

 

 

3,515

 

 

 

(7,587

)

 

 

1,484

 

 

 

(24,967

)

 

 

 

268,635

 

 

 

203,835

 

 

 

476,462

 

 

 

473,684

 

Operating loss

 

 

(235,160

)

 

 

(95,781

)

 

 

(354,708

)

 

 

(83,626

)

Other income and (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of amounts capitalized

 

 

(700

)

 

 

(2,329

)

 

 

(2,368

)

 

 

(5,403

)

Other, net

 

 

(309

)

 

 

(595

)

 

 

(1,317

)

 

 

(708

)

 

 

 

(1,009

)

 

 

(2,924

)

 

 

(3,685

)

 

 

(6,111

)

Reorganization items, net

 

 

(210

)

 

 

(284

)

 

 

(704

)

 

 

(756

)

Loss before income taxes

 

 

(236,379

)

 

 

(98,989

)

 

 

(359,097

)

 

 

(90,493

)

Income tax expense

 

 

 

 

 

126,646

 

 

 

 

 

 

129,092

 

Net loss

 

$

(236,379

)

 

$

(225,635

)

 

$

(359,097

)

 

$

(219,585

)

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(4.07

)

 

$

(3.76

)

 

$

(6.18

)

 

$

(3.40

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding ‒ basic and

   diluted

 

 

58,044

 

 

 

60,004

 

 

 

58,080

 

 

 

64,576

 

Distributions declared per share

 

$

 

 

$

 

 

$

1.75

 

 

$

 

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

 

 

3


Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

 

Common Stock

 

 

Additional Paid in Capital

 

 

Accumulated Earnings (Deficit)

 

 

Total Equity

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

58,169

 

 

$

581

 

 

$

861,764

 

 

$

(288,794

)

 

$

573,551

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(101,506

)

 

 

(101,506

)

Repurchases of common stock

 

 

(323

)

 

 

(3

)

 

 

(2,063

)

 

 

 

 

 

(2,066

)

Issuance of common stock

 

 

62

 

 

 

1

 

 

 

823

 

 

 

 

 

 

824

 

Distributions to shareholders

 

 

 

 

 

 

 

 

 

(57,908

)

 

 

 

 

 

(57,908

)

March 31, 2020

 

 

57,908

 

 

 

579

 

 

 

802,616

 

 

 

(390,300

)

 

 

412,895

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(21,212

)

 

 

(21,212

)

Distributions to shareholders

 

 

 

 

 

 

 

 

 

(43,430

)

 

 

 

 

 

(43,430

)

June 30, 2020

 

 

57,908

 

 

 

579

 

 

 

759,186

 

 

 

(411,512

)

 

 

348,253

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(236,379

)

 

 

(236,379

)

September 30, 2020

 

 

57,908

 

 

$

579

 

 

$

759,186

 

 

$

(647,891

)

 

$

111,874

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

69,197

 

 

$

692

 

 

$

1,256,730

 

 

$

4,952

 

 

$

1,262,374

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

12,726

 

 

 

12,726

 

Repurchases of common stock

 

 

(2,488

)

 

 

(25

)

 

 

(34,412

)

 

 

 

 

 

(34,437

)

Issuance of common stock

 

 

82

 

 

 

1

 

 

 

1,485

 

 

 

 

 

 

1,486

 

March 31, 2019

 

 

66,791

 

 

 

668

 

 

 

1,223,803

 

 

 

17,678

 

 

 

1,242,149

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(6,676

)

 

 

(6,676

)

Repurchases of common stock

 

 

(3,170

)

 

 

(32

)

 

 

(43,275

)

 

 

 

 

 

(43,307

)

June 30, 2019

 

 

63,621

 

 

 

636

 

 

 

1,180,528

 

 

 

11,002

 

 

 

1,192,166

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(225,635

)

 

 

(225,635

)

Repurchases of common stock

 

 

(4,989

)

 

 

(50

)

 

 

(65,303

)

 

 

 

 

 

(65,353

)

Other

 

 

 

 

 

 

 

 

 

258

 

 

 

 

 

 

258

 

September 30, 2019

 

 

58,632

 

 

$

586

 

 

$

1,115,483

 

 

$

(214,633

)

 

$

901,436

 

 

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

 

 

 

4


Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(359,097

)

 

$

(219,585

)

Adjustments to reconcile net loss to net cash (used in) provided

   by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

19,027

 

 

 

65,013

 

Impairment of assets held for sale and long-lived assets

 

 

341,264

 

 

 

113,470

 

Deferred income taxes

 

 

 

 

 

129,092

 

Gains on derivatives, net

 

 

(3,773

)

 

 

(6,386

)

Cash settlements on derivatives

 

 

11,389

 

 

 

5,740

 

Share-based compensation expenses

 

 

(3,381

)

 

 

10,624

 

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

 

 

1,510

 

 

 

(27,366

)

Other

 

 

2,602

 

 

 

8,897

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease in accounts receivable – trade, net

 

 

23,416

 

 

 

37,305

 

Decrease in other assets

 

 

2,666

 

 

 

5,367

 

Decrease in accounts payable and accrued expenses

 

 

(34,824

)

 

 

(29,997

)

Decrease in other liabilities

 

 

(5,885

)

 

 

(4,331

)

Net cash (used in) provided by operating activities

 

 

(5,086

)

 

 

87,843

 

Cash flow from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property, plant and equipment

 

 

 

 

 

(3,380

)

Development of oil and natural gas properties

 

 

(292

)

 

 

(67,864

)

Purchases of other property and equipment

 

 

(31,242

)

 

 

(82,232

)

Proceeds from sale of properties and equipment and other

 

 

100,677

 

 

 

177,907

 

Net cash provided by investing activities

 

 

69,143

 

 

 

24,431

 

Cash flow from financing activities:

 

 

 

 

 

 

 

 

Repurchases of shares

 

 

(2,653

)

 

 

(143,097

)

Proceeds from borrowings

 

 

11,200

 

 

 

142,825

 

Repayments of debt

 

 

(1,000

)

 

 

(29,615

)

Debt issuance costs paid

 

 

 

 

 

(3,246

)

Distributions to shareholders

 

 

(101,338

)

 

 

 

Net cash used in financing activities

 

 

(93,791

)

 

 

(33,133

)

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(29,734

)

 

 

79,141

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Beginning

 

 

149,169

 

 

 

49,777

 

Ending

 

$

119,435

 

 

$

128,918

 

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

 

 

5


Table of Contents

RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

Unless otherwise indicated or the context otherwise requires, references herein to the “Company” refer 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.

Nature of Business

The Company is incorporated under Delaware law and its headquarters are in Houston, Texas.  Prior to the recent sales of interests in oil and natural gas properties and the sale of its wholly owned subsidiary Blue Mountain Midstream LLC (“Blue Mountain Midstream”), discussed below, Riviera was an independent oil and natural gas company.  The Company had two reporting segments, upstream and Blue Mountain.  The upstream reporting segment was engaged in the exploration, development, production, and sale of oil, natural gas, and natural gas liquids (“NGL”) and its properties were all located in the United States (“U.S.”).  The Blue Mountain reporting segment consisted of a cryogenic natural gas processing facility, a network of gathering pipelines and compressors and produced water services and a crude oil gathering system located in the Merge/SCOOP/STACK play.

Recent Developments

Section 271 Sale

In July 2020, the Company signed definitive agreements to sell substantially all of its interests located in its two upstream operating regions, North Louisiana and the Mid-Continent, and in August 2020, signed a definitive agreement to sell Blue Mountain Midstream (the “Blue Mountain Divestiture”).  The Blue Mountain Divestiture, together with the sales of interests in properties located in North Louisiana and the Mid-Continent (collectively, the “271 Sale”), constituted a sale of substantially all of the consolidated assets of the Company for purposes of Section 271(a) of the Delaware General Corporate Law, as amended.  Therefore, on August 23, 2020, the Company elected to obtain shareholder approval and authorization of the 271 Sale.  Holders of a majority of the Company’s issued and outstanding shares of common stock (the “Majority Stockholders”) executed and delivered to the Company a written consent in lieu of a special meeting.  The written consent delivered by the Majority Stockholders authorized and approved the 271 Sale.  On September 1, 2020, and October 1, 2020, the Company completed the sales of its interests in properties located in North Louisiana and the Mid-Continent, respectively.  In addition, on October 8, 2020, the Company completed the Blue Mountain Divestiture.  See Note 3 for additional information about divestitures.

Plan of Liquidation

On August 24, 2020, following approval of the 271 Sale, the Company announced that it was evaluating the process of winding-up and of returning the majority of its remaining capital to its shareholders.  On October 12, 2020, the Board of Directors of the Company (the “Board”), approved the dissolution, winding up and liquidation of the Company (the “Plan of Liquidation”) and adopted the Plan of Liquidation.  Also, on October 12, 2020, the required percentage of the Company’s shareholders approved, through written consent in accordance with the bylaws of the Company, the Plan of Liquidation.  The Plan of Liquidation contemplates the orderly sale of the Company’s remaining assets and the discharge of all outstanding liabilities to third parties and, after the establishment of appropriate reserves, the distribution of any remaining cash to shareholders.  See Note 18 for more information.

Other Recent Developments

The Company and the oil and gas industry have been adversely impacted by certain events, including the initial dramatic increase in output from the Organization of Petroleum Exporting Countries and other oil producing nations (“OPEC+”) in the first quarter of 2020 and the destruction of demand resulting from the unprecedented global health and economic crisis sparked by the novel coronavirus disease (“COVID-19”) global pandemic.  While OPEC+ has agreed to cut production, downward pressure on commodity prices has continued.  In order to reduce expenses, in April 2020, the Board made the decision to consolidate the management of Blue Mountain Midstream within the Company’s existing executive management team and further reduced expenses by integration of the operations of the two companies wherever practical.  The Company incurred severance expenses of approximately $10 million and $15 million for the three months and nine months ended September 30, 2020, respectively, in connection with integration activities, divestitures and the Plan of Liquidation.

6


Table of Contents

RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

As described further below, the Company recorded impairments on oil and natural gas properties and property, plant and equipment for the nine months ended September 30, 2020.  The impairment charges recorded in the three months ended September 30, 2020, were primarily due to the Company’s exit from the midstream business.  The impairment charges recorded in the first quarter and second quarter of 2020 were primarily due to declines in commodity prices and declines in expected future volumes.  The COVID-19 pandemic continues to evolve and identification of all trends, events and uncertainties, including a possible widespread resurgence in COVID-19 infections in the remainder of 2020 without the availability of generally effective therapeutics or a vaccine for the disease, that may impact the Company’s financial condition and results of operations are unknown at this time. Due to the adoption of the Plan of Liquidation, the Company’s results of operations for the three months and nine months ended September 30, 2020, are not indicative of its future results.

Principles of Consolidation and Reporting

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 consolidated financial statements and notes in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2019.  The results reported in these unaudited condensed consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year.

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany transactions and balances have been eliminated.  Investments in noncontrolled entities over which the Company exercises significant influence are accounted for under the equity method.

There have been no material changes in critical accounting policies during the nine months ended September 30, 2020, as compared to the critical accounting policies described in Item 8. “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.  Based on the approval of the Plan of Liquidation in October 2020, discussed above, the Company plans to adopt the liquidation basis of accounting in the fourth quarter of 2020.  See Note 18.

Use of Estimates

The preparation of the accompanying condensed consolidated 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 impairment evaluations, estimates of the Company’s reserves of oil, natural gas and 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.

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 consolidated financial statements in future periods.

Fair Value of Financial Instruments

The carrying values of the Company’s receivables, payables and credit facilities are estimated to be substantially the same as their fair values at September 30, 2020, and December 31, 2019.  See Note 8 for details about the fair value of the Company’s derivative financial instruments.

7


Table of Contents

RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Recently Adopted Accounting Standard

In June 2016, the FASB issued an ASU that is intended to change the impairment model for trade receivables, net investments in leases, debt securities, loans and certain other instruments.  The Company adopted this ASU effective January 1, 2020, using the modified retrospective effective date method.  The Company’s trade receivables due in one year or less represent substantially all the items that are within the scope of the new standard.  The adoption of this ASU did not have a material impact on the Company’s results of operations or financial position.

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.  The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio.  In establishing the required allowance, management considers historical losses, current receivables aging, and existing industry and national economic data.  Account balances are charged off against the allowance after all means of collection have been exhausted and the potential recovery is remote.  The balance in the Company’s allowance for doubtful accounts related to trade accounts receivable was approximately $4 million and $1 million at September 30, 2020, and December 31, 2019, respectively.

Impairment of Assets Held for Sale and Long-Lived Assets

Proved Oil and Natural Gas Properties

The Company evaluates the impairment of its proved oil and natural gas properties on a field-by-field basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  The carrying values of proved properties are reduced to fair value when the expected undiscounted future cash flows of proved and risk-adjusted probable and possible reserves are less than net book value or there are alternative indications of impairment.  The fair values of proved properties are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount, or the Company takes into consideration contract prices from executed definitive agreements.  Significant inputs used to determine the fair values of proved properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate.  These assumptions represent Level 3 inputs.  These inputs require assumptions by the Company’s management at the time of the valuation and are the most sensitive and subject to change.  The underlying commodity prices embedded in the Company’s estimated cash flows are the product of a process that begins with New York Mercantile Exchange (“NYMEX”) forward curve pricing, adjusted for estimated location and quality differentials, as well as other factors that Company management believes will impact realizable prices.

Based on the analysis described above, during the nine months ended September 30, 2020, the Company recorded noncash impairment charges of approximately $101 million associated with proved oil and natural gas properties.  Of this, approximately $85 million related to divested properties located in Oklahoma, approximately $12 million to divested properties located in North Louisiana, and approximately $4 million to divested properties located in East Texas.  There was no such charge during the three months ended September 30, 2020.  During the three months and nine months ended September 30, 2019, the Company recorded noncash impairment charges of approximately $95 million and $113 million, respectively, associated with divested proved oil and gas properties located in the Hugoton Basin and Michigan.  The impairment charges in both periods were primarily due to a decline in commodity prices.  The carrying values of the impaired proved properties were reduced to fair value, estimated using inputs characteristic of a Level 3 fair value measurement.  The charges are associated with the upstream reporting segment and are included in “impairment of assets held for sale and long-lived assets” on the condensed consolidated statements of operations.  See Note 3 for additional information about divestitures.

Unproved Oil and Natural Gas Properties

The Company evaluates the impairment of its unproved oil and natural gas properties whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  The carrying values of unproved properties are reduced to fair value based on management’s experience in similar situations and other factors such as the lease terms of the properties and the relative proportion of such properties on which proved reserves have been found in the past.

8


Table of Contents

RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Based on the analysis described above, during the nine months ended September 30, 2020, the Company recorded a noncash impairment charge of approximately $3 million associated with unproved oil and natural gas properties located in Oklahoma.  There was no such charge during the three months ended September 30, 2020.  The impairment was primarily due to a decline in commodity prices.  The charge is associated with the upstream reporting segment and is included in “impairment of assets held for sale and long-lived assets” on the condensed consolidated statement of operations.

Other Property and Equipment and Other Assets

The Company evaluates the impairment of its other property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  The carrying values of other property and equipment are reduced to fair value when the expected undiscounted future cash flows are less than net book value or there are alternative indications of impairment.  The fair values of other property and equipment are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount, or the Company takes into consideration contract prices from executed definitive agreements.  Significant inputs used to determine the fair values of other property and equipment and other assets include estimates of future operating costs, future volumes and future commodity prices.  These inputs require assumptions by the Company’s management at the time of the valuation and are the most sensitive and subject to change.

At September 30, 2020, because of the Blue Mountain Divestiture, the Company performed an impairment evaluation of Blue Mountain Midstream’s other property and equipment and other assets.  Based on the analysis described above, during the three months and nine months ended September 30, 2020, the Company recorded impairment charges of approximately $220 million and $237 million, respectively, to reduce the carrying value of Blue Mountain Midstream’s assets to fair value less cost to sell using Level 3 inputs. The impairment charges recorded in the three months ended September 30, 2020, were primarily triggered by the Company’s exit from the midstream business, with the fair value being predominantly driven by the contract price of the Blue Mountain Divestiture.  The impairment charges recorded in the first quarter and second quarter of 2020 were primarily due to a decline in expected future volumes in the crude gathering business, related to the economics of customers drilling in the area.  The charges are primarily associated with the Blue Mountain reporting segment, with $1 million of the charges associated with the upstream reporting segment and are included in “impairment of assets held for sale and long-lived assets” on the condensed consolidated statements of operations.

Note 2 – Revenues

Disaggregation of Revenue

Substantially all of the revenues reported on the Company’s unaudited condensed consolidated statements of operations included herein relates to properties that were divested either prior or subsequent to September 30, 2020.  See Note 1, Note 3 and Note 18 for information about divestitures.

9


Table of Contents

RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

The following tables present the Company’s disaggregated revenues by source and geographic area:

 

 

 

Three Months Ended September 30, 2020

 

 

 

Natural

Gas

 

 

Oil

 

 

NGL

 

 

Oil, Natural Gas and NGL Sales

 

 

Marketing

Revenues

 

 

Other

Revenues

 

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-Continent

 

$

2,140

 

 

$

2,657

 

 

$

645

 

 

$

5,442

 

 

$

 

 

$

30

 

 

$

5,472

 

East Texas

 

 

(11

)

 

 

 

 

 

 

 

 

(11

)

 

 

 

 

 

 

 

 

(11

)

North Louisiana

 

 

1,675

 

 

 

187

 

 

 

53

 

 

 

1,915

 

 

 

113

 

 

 

 

 

 

2,028

 

Uinta Basin

 

 

(13

)

 

 

 

 

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

(13

)

Other divested

   properties

 

 

5

 

 

 

 

 

 

2

 

 

 

7

 

 

 

 

 

 

(1

)

 

 

6

 

Blue Mountain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,941

 

 

 

 

 

 

28,941

 

Total

 

$

3,796

 

 

$

2,844

 

 

$

700

 

 

$

7,340

 

 

$

29,054

 

 

$

29

 

 

$

36,423

 

 

 

 

Three Months Ended September 30, 2019

 

 

 

Natural

Gas

 

 

Oil

 

 

NGL

 

 

Oil, Natural Gas and NGL Sales

 

 

Marketing

Revenues

 

 

Other

Revenues

 

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hugoton Basin

 

$

12,057

 

 

$

405

 

 

$

5,561

 

 

$

18,023

 

 

$

9,810

 

 

$

5,413