UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
☒x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
☐o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 000-53591
Ridgewood Energy X Fund, LLC |
(Exact name of registrant as specified in its charter) |
Delaware | 26-0870318 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
14 Philips Parkway, Montvale, NJ 07645 |
(Address of principal executive offices) (Zip code) |
(800) 942-5550 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Shares of LLC Membership Interest
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐o No ☒x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐o No ☒x
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 ☒x No ☐o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes☒x No☐o
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒x
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”,filer,” “smaller reporting company”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 | x o |
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 Act). Yes ☐o No ☒x
There is no market for the shares of LLC Membership Interest in the Fund. As of March 9, 20181, 2019, there were 477.8874 shares of LLC Membership Interest outstanding.
PAGE | |||
PART I | |||
ITEM 1 | 2 | ||
ITEM 1A | 10 | ||
ITEM 1B | 10 | ||
ITEM 2 | 10 | ||
ITEM 3 | |||
ITEM 4 | |||
PART II | |||
ITEM 5 | |||
ITEM 6 | |||
ITEM 7 | |||
ITEM 7A | |||
ITEM 8 | 18 | ||
ITEM 9 | 18 | ||
ITEM 9A | |||
ITEM 9B | |||
PART III | |||
ITEM 10 | |||
ITEM 11 | |||
ITEM 12 | |||
ITEM 13 | |||
ITEM 14 | |||
PART IV | |||
ITEM 15 | |||
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (“Annual Report”) and the documents Ridgewood Energy X Fund, LLC (the “Fund”) has incorporated by reference into this Annual Report, other than purely historical information, including estimates, projections and statements relating to the Fund’s business plans, strategies, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 that are based on current expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. You are therefore cautioned against relying on any such forward-looking statements. Forward-looking statements can generally be identified by words such as “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “target,” “pursue,” “may,” “will,” “will likely result,” and similar expressions and references to future periods. Examples of events that could cause actual results to differ materially from historical results or those anticipated include weather conditions, such as hurricanes, changes in market and other conditions affecting the pricing, production and demand of oil and natural gas, the cost and availability of equipment, and changes in domestic and foreign governmental regulations, as well as other risks and uncertainties discussed in this Annual Report in Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Examples of forward-looking statements made herein include statements regarding projects, investments, insurance, capital expenditures and liquidity. Forward-looking statements made in this document speak only as of the date on which they are made. The Fund undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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PART I
Overview
The Fund is a Delaware limited liability company (“LLC”) formed on August 30, 2007 to primarily acquire interests in oil and natural gas properties located in the United States offshore waters of Texas, Louisiana and Alabama in the Gulf of Mexico.
The Fund initiated its private placement offering on January 2, 2008, selling whole and fractional shares of membership interests (“Shares”), consisting of Limited Liability Shares of Membership Interests (“Limited Liability Shares”) and Investor GP Shares of Membership Interests (“Investor GP Shares”), primarily at $200 thousand per whole Share. The Limited Liability Shares and the Investor GP Shares constitute a single class of securities as defined in Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In January 2015, pursuant to the limited liability company agreement (the “LLC Agreement”), Ridgewood Energy Corporation, as manager of the Fund converted all then outstanding Investor GP Shares to Limited Liability Shares. There is no public market for the Shares and one is not likely to develop. In addition, the Shares are subject to material restrictions on transfer and resale and cannot be transferred or resold except in accordance with the Fund’s LLC Agreement and applicable federal and state securities laws. The private placement offering was terminated on April 30, 2008. The Fund raised $94.7 million and after payment of $15.4 million in offering fees, commissions and investment fees, the Fund had $79.3 million for investments and operating expenses.
Manager
Ridgewood Energy Corporation (the “Manager” or “Ridgewood Energy”) was founded in 1982. The Manager has direct and exclusive control over the management of the Fund’s operations. The Manager performs, or arranges for the performance of, the management, advisory and administrative services required for Fundthe Fund’s operations. Such services include, without limitation, the administration of shareholder accounts, shareholder relations, the preparation, review and dissemination of tax and other financial information and the management of the Fund’s investments in projects. In addition, the Manager provides office space, equipment and facilities and other services necessary for Fundthe Fund’s operations. The Manager also engages and manages contractual relations with unaffiliated custodians, depositories, accountants, attorneys, corporate fiduciaries, insurers, banks and others as required. Historically, when the Fund sought project investments, the Manager located potential projects, conducted due diligence, and negotiated the investment transactions with respect to those projects. Additional information regarding the Manager is available through its website at www.ridgewoodenergy.com. No information on such website shall be deemed to be included or incorporated by reference into this Annual Report.
As compensation for its services, the Manager is entitled to receive an annual management fee, payable monthly, equal to 2.5% of the total capital contributions made by the Fund’s shareholders, net of cumulative dry-hole and related well costs incurred by the Fund. The Manager is entitled to receive the management fee from the Fund regardless of the Fund’s profitability in that year. Management fees during each of the years ended December 31, 20172018 and 20162017 were $1.1 million. Additionally, the Manager is entitled to receive a 15% interest inof the cash distributions from operations made by the Fund. Distributions paid to the Manager during the years ended December 31, 2018 and 2017 were $0.7 million and 2016 were $0.4 million, and $0.1 million, respectively.
In addition to the management fee, the Fund is required to pay all other expenses it may incur, including insurance premiums, expenses of preparing periodic reports for shareholders and the Securities Exchange Commission (“SEC”), taxes, third-party legal, accounting and consulting fees, litigation expenses and other expenses.
Business Strategy
The Fund’s primary investment objective is to generate cash flow for distribution to its shareholders by generating returns across a portfolio of oil and natural gas projects. The frequency and amount of such distributions are within the Manager’s discretion, subject to available cash flow from operations. The Fund, along with other exploration and production companies, has invested in the drilling and development of both shallow and deepwater oil and natural gas projects in the U.S. offshore waters of Texas, Louisiana and Alabama in the Gulf of Mexico. The Fund’s ownership in its projects is recorded with the Bureau of Ocean Energy Management, an agency of the United States Department of Interior (“BOEM”), as a working interest, which is an undivided fractional interest in a lease block that provides the owner with the right to drill, produce and conduct operating activities and share in any resulting oil and natural gas production.
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The Fund’s capital has been fully invested in projects. As a result, the Fund will not invest in any new projects and will limit its investment activities, if any, to those projects in which it currently has a working interest, as discussed below under the heading “Properties” in this Item 1. “Business” of this Annual Report.
Investment Committee
Ridgewood Energy maintains an investment committee consisting of fivesix employees of the Manager (the “Investment Committee”). The members of the Investment Committee provide operational, financial, scientific and technical oil and gas expertise to the Fund. Two members of the Investment Committee are based out of the Manager’s Montvale, New Jersey office and threefour members are based out of the Manager’s Houston, Texas office. The Investment Committee’s current activities with respect to the Fund are principally related to the development and operation of properties in which it already has a working interest.
Participation and Joint Operating Agreements
On behalf of the Fund, and with respect to the Fund’s projects, the Manager negotiated participation and joint operating agreements with the operators of each project. Under each joint operating agreement, proposals and decisions with respect to a project and related activities are generally made based on percentage ownership approvals and, although an operator’s percentage ownership may constitute a majority ownership, operators generally seek consensus relating to project decisions.
Project Information
The Fund’s existing projects are located in the waters of the Gulf of Mexico on the Outer Continental Shelf (“OCS”). The Outer Continental Shelf Lands Act (“OCSLA”), which was enacted in 1953, governs certain activities with respect to working interests and the exploration of oil and natural gas in the OCS. See further discussion under the heading “Regulation” in this Item 1. “Business” of this Annual Report.
Leases in the OCS are generally issued for a primary lease term of 5, 7 or 10 years, depending on the water depth of the lease block. Once a lessee drills a well and begins production, the lease term is extended for the duration of commercial production.
The lessee of a particular block, for the term of the lease, has the right to drill and develop exploratory wells and conduct other activities throughout the block. If the initial well on the block is successful, a lessee, or third-party operator for a project, may conduct additional geological studies and may determine to drill additional exploratory or development wells. If a development well is to be drilled in the block, each lessee owning working interests in the block must be offered the opportunity to participate in, and cover the costs of, the development well up to that particular lessee’s working interest ownership percentage.
Royalty Payments
Generally, and depending on the lease, working interest owners of an offshore oil and natural gas lease under the OCSLA pay a royalty of 12.5%, 16.67% or 18.75% to the U.S. Government through the Office of Natural Resources Revenue (“ONRR”). Other than the ONRR royalties, the Fund does not have material royalty burdens.
Deep Gas Royalty Relief
On January 26, 2004, the BOEM promulgated a rule providing incentives for companies to increase deep natural gas production in the Gulf of Mexico (the “Royalty Relief Rule”).
The Fund does not currently have any projects that are eligible for royalty relief under the Royalty Relief Rule. The Royalty Relief Rule does not extend to deep waters of the Gulf of Mexico off the OCS nor does it apply if the price of natural gas exceedsDeepwater Royalty Relief
In addition to the Royalty Relief Rule, t
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Properties
Productive Wells
The following table sets forth the number of productive oil and natural gas wells in which the Fund owned ana working interest as of December 31, 2017.2018. Productive wells are producing wells and wells mechanically capable of production. Gross wells are the total number of wells in which the Fund owns a working interest. Net wells are the sum of the Fund’s fractional working interests owned in the gross wells. All of the wells, each of which produces both oil and natural gas, are located in the offshore waters of the Gulf of Mexico and are operated by third-party operators.
Total Productive Wells | ||||||||
Gross | Net | |||||||
Oil and natural gas | 6 | 0.09 |
Acreage Data
The following table sets forth the Fund’s working interests in developed and undeveloped oil and natural gas acreage as of December 31, 2017.2018. Gross acres are the total number of acres in which the Fund owns a working interest. Net acres are the sum of the fractional working interests owned in gross acres. Ownership interests generally take the form of working interests in oil and natural gas leases that have varying terms. All of the Fund’s oil and natural gas acreage is located in the offshore waters of the Gulf of Mexico.
Developed Acres | Undeveloped Acres | ||||||||||||
Gross | Net | Gross | Net | ||||||||||
23,040 | 440 | 17,280 | 152 |
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Developed Acres | Undeveloped Acres | ||||||||||
Gross | Net | Gross | Net | ||||||||
23,040 | 440 | 28,800 | 253 |
Information regarding the Fund’s current projects, all of which are located in the offshore waters of the Gulf of Mexico, is provided in the following table.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report under the heading “Liquidity Needs” for information regarding the funding of the Fund’s capital commitments.Total Spent | Total | |||||||||||
Working | through | Fund | ||||||||||
Project | Interest | December 31, 2017 | Budget | Status | ||||||||
(in thousands) | ||||||||||||
Producing Properties | ||||||||||||
Diller Project | 0.88% | $ | 2,768 | $ | 3,689 | The Diller Project is expected to include the development of two wells. Well #1 commenced production in 2015. Well #2 is expected to commence production in 2019. Well #1, which was shut-in during late-2016 due to well hydrate remediation work, resumed production in mid-January 2017. The Fund expects to spend $0.7 million for additional development costs and $0.2 million for asset retirement obligations. | ||||||
Liberty Project | 5.0% | $ | 7,510 | $ | 8,171 | The Liberty Project, a single-well project, commenced production in 2010. After being shut-in during early-2016 due to third-party facilities' repair and maintenance activities, the well resumed production in early-May 2016. The well was shut-in again in late-June 2017 due to gas dehydration unit work, resuming production in late-September 2017. The operator is currently flowing the well's current zone together with the behind-pipe zone at no cost to the Fund. The Fund expects to spend $0.7 million for asset retirement obligations. | ||||||
Marmalard Project | 0.88% | $ | 5,548 | $ | 8,242 | The Marmalard Project is expected to include the development of six wells. Four wells commenced production in 2015. Additional wells are expected to commence production in 2021. Two wells, which were shut-in during early-December 2017 awaiting replacement of well jumpers, are expected to resume production in second quarter 2018. The Fund expects to spend $2.2 million for additional development costs and $0.5 million for asset retirement obligations. |
Total Spent | Total | |||||||||||||
Working | through | Fund | ||||||||||||
Project | Interest | December 31, 2018 | Budget | Status | ||||||||||
(in thousands) | ||||||||||||||
Producing Properties | ||||||||||||||
Diller Project | 0.88% | $ | 2,995 | $ | 4,450 | The Diller Project is expected to include the development of three wells. Well #1 commenced production in 2015. Well #2, which completed drilling in third quarter 2018, is expected to commence production in first quarter 2020. Well #3 is expected to commence production in third quarter 2020. The Fund expects to spend $1.2 million for additional development costs and $0.3 million for asset retirement obligations. | ||||||||
Liberty Project | 5.0% | $ | 7,510 | $ | 8,171 | The Liberty Project, a single-well project, commenced production in 2010. The Fund expects to spend $0.7 million for asset retirement obligations. | ||||||||
Marmalard Project | 0.88% | $ | 5,610 | $ | 7,873 | The Marmalard Project is expected to include the development of six wells. Four wells commenced production in 2015. Additional wells are expected to commence production in 2020 and 2021. Two wells, which were shut-in during early-December 2017 due to replacement of well jumpers, resumed production in third quarter 2018. The Fund expects to spend $1.8 million for additional development costs and $0.5 million for asset retirement obligations. |
Marketing/Customers
The Manager, on behalf of the Fund, markets the Fund’s oil and natural gas to third parties consistent with industry practice. The Fund utilizes DH Sales and Transport, LLC (“DH S&T”), a wholly-owned subsidiary of the Manager, acts as an aggregator to and as an accommodation for the Fund and other funds managed by the Manager to facilitate the transportation and sale of oil and natural gas produced from the Diller and Marmalard projects. DuringIn 2016, the Fund entered into a master agreement with DH S&T pursuant to which DH S&T is obligated to purchase from the Fund all of its interests in oil and natural gas produced from the Diller and Marmalard projects and sell such volumes to unrelated third party purchasers. The number of customers purchasing the Fund’s oil and natural gas may vary from time to time. Currently, and during 2017, the Fund hadhas three major customers in the public market. Because a ready market exists for oil and natural gas, the Fund does not believe that the loss of any individual customer would have a material adverse effect on its financial position or results of operations. The Fund’s current producing projects are near existing transportation infrastructure and pipelines.
The Fund’s oil and natural gas generally is sold to its customers at prevailing market prices, which fluctuate with demand as a result of related industry variables. The markets for, and prices of, oil and natural gas have been volatile, and they are likely to continue to be volatile in the future. This volatility is caused by numerous factors and market conditions that the Fund cannot control or influence; therefore, it is impossible to predict the future price of oil and natural gas with any certainty. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report under the headings “Commodity Price Changes”, “Results of Operations – Overview” and “Results of Operations – Oil and Gas Revenue” for information regarding the impact of prices on the Fund’s oil and gas revenue. In the past, the Fund has entered, and in the future, may enter into transactions or derivative contracts that fix the future prices or establish a price floor for portions of its oil or natural gas production.
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Seasonality
Generally, the Fund’s business operations are not subject to seasonal fluctuations in the demand for oil and natural gas that would result in more of the Fund’s oil and natural gas being sold, or likely to be sold, during one or more particular months or seasons. Once a project is producing, the operator of the project extracts oil and natural gas reserves throughout the year. Once extracted, oil and natural gas can be sold at any time during the year.
However, notwithstanding the ability of the Fund’s projects to produce year-round, the Fund’s properties are located in the Gulf of Mexico; therefore, its operations and cash flows may be significantly impacted by hurricanes and other inclement weather. Such events may also have a detrimental impact on third-party pipelines and processing facilities, upon which the Fund relies to transport and process the oil and natural gas it produces. The National Hurricane Center defines hurricane season in the Gulf of Mexico as June through November.
The Fund did not experience any significant damage, shut-ins, or production stoppages due to hurricane activity inOperators
The projects in which the Fund has invested are operated and controlled by unaffiliated third-party entities acting as operators. The operators are responsible for drilling, administration and production activities for leases jointly owned by working interest owners and act on behalf of all working interest owners under the terms of the applicable joint operating agreement. In certain circumstances, operators will enter into agreements with independent third-party subcontractors and suppliers to provide the various services required for operating leases. Currently, the Fund's properties are operated by LLOG Exploration Offshore, L.L.C.
Because the Fund does not operate any of the projects in which it has acquired a working interest, shareholders have to rely on the Manager to continue to manage the projects prudently, efficiently and fairly.
Insurance
The Manager has obtained what it believes to be adequate insurance for the funds that it manages to cover the risks associated with the funds’ passive investments, including those of the Fund. Although the Fund is not an operator, the Manager has, nonetheless, obtained hazard, property, general liability and other insurance in commercially reasonable amounts to cover its projects, as well as general liability, directors’ and officers’ liability and similar coverage for its business operations. However, there is no assurance that such insurance will be adequate to protect the Fund from material losses related to its projects. In addition, the Manager’s practice is to obtain insurance as a package that is intended to cover most, if not all, of the fundsentities under its management. The Manager re-evaluates its insurance coverage on an annual basis. While the Manager believes it has obtained adequate insurance in accordance with customary industry practices, the possibility exists, depending on the extent of the insurable incident, that insurance coverage may not be sufficient to cover all losses. In addition, depending on the extent, nature and payment of any claims during a particular policy period to the Fund or its affiliates, yearly insurance coverage may be exhausted and become insufficient to cover a claim by the Fund in a given year.
Salvage Fund
The Fund deposits cash in a separate interest-bearing account, or salvage fund, to provide for its proportionate share of the cost of dismantling and removal of production platforms and facilities and plugging and abandoning the wells at the end of their useful lives, in accordance with applicable federal and state laws and regulations. As of December 31, 2017,2018, the Fund has $3.4had $1.6 million invested in a salvage fund. Any portion of the salvage fund that remains after the Fund has paid for all of its asset retirement obligations will be distributed to the shareholders and the Manager.
Competition
Competition exists in the acquisition of oil and natural gas leases and in all sectors of the oil and natural gas exploration and production industry. The Fund, through the Manager, has competed with other companies for the acquisition of leases, as well as percentage ownership interests in oil and natural gas working interests in the secondary market. The Fund does not anticipate the acquisition of any additional ownership interests in oil and natural gas working interests as its capital has been fully allocated to current and past projects.
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Employees
The Fund has no employees. The Manager operates and manages the Fund.
Offices
The administrative office of both the Fund and the Manager is located at 14 Philips Parkway, Montvale, NJ 07645, and their phone number is 800-942-5550. The Manager leases additional office space at 1254 Enclave Parkway, Houston, TX 77077 and 125 Worth Avenue, Suite 318, Palm Beach, Florida, 33480. In addition, the Manager maintains leases for other offices that are used for administrative purposes for the Fund and other funds managed by the Manager.
Regulation
Oil and natural gas exploration, development, production and transportation activities are subject to extensive federal and state laws and regulations. Regulations governing exploration and development activities require, among other things, the Fund’s operators to obtain permits to drill projects and to meet bonding, insurance and environmental requirements in order to drill, own or operate projects. In addition, the location of projects, the method of drilling and casing projects, the restoration of properties upon which projects are drilled, and the plugging and abandoning of projects are also subject to regulations. The Fund owns projects that are located in the offshore waters of the Gulf of Mexico on the OCS. The Fund’s operations and activities are therefore governed by the OCSLA and certain other laws and regulations.
Outer Continental Shelf Lands Act
Under the OCSLA, the United States federal government has jurisdiction over oil and natural gas development on the OCS. As a result, the United States Secretary of the Interior is empowered to sell exploration, development and production leases of a defined submerged area of the OCS, or a block, through a competitive bidding process. Such activity is conducted by the BOEM. Federal offshore leases are managed both by the BOEM and the Bureau of Safety and Environmental Enforcement (“BSEE”) pursuant to regulations promulgated under the OCSLA.
The OCSLA authorizes regulations relating to safety and environmental protection applicable to lessees and permittees operating on the OCS. Specific design and operational standards may apply to OCS vessels, rigs, platforms, vehicles and structures. BSEE regulates the design and operation of well control and other equipment at offshore production sites, implementation of safety and environmental management systems, and mandatory third-party compliance audits, among other requirements. BSEE adopted strict requirements for subsea drilling production equipment and had proposed new requirements to implement equipment reliability improvements, building upon enhanced industry standards for blowout preventers and blowout prevention technologies, and reforms in well design, well control, casing, cementing, real-time well monitoring and subsea containment. BSEE has also published a policy statement on safety culture with nine characteristics of a robust safety culture. In April 2016, BSEE adopted a final rule establishing updated standards for blowout prevention systems and other well controls pertaining to offshore activities (the “Well Control Rule”). The Well Control Rule became effective July 28, 2016, however compliance with certain provisions7 |
BOEM Notice to Lessees on Supplemental Bonding
On July 14, 2016, the BOEM issued a Notice to Lessees (“NTL”) that discontinued and materially replaced existing policies and procedures regarding financial security (i.e. supplemental bonding) for decommissioning obligations of lessees of federal oil and gas leases and owners of pipeline rights-of-way, rights-of use and easements on the OCS (“Lessees”). Generally, the new NTL (i) ended the practice of excusing Lessees from providing such additional security where co-lessees had sufficient financial strength to meet such decommissioning obligations, (ii) established new criteria for determining financial strength and additional security requirements of such Lessees, (iii) provided acceptable forms of such additional security and (iv) replaced the waiver system with one of self-insurance. The new rule became effective as of September 12, 2016; however on January 6, 2017, the BOEM announced that it was suspending the implementation timeline for six months in certain circumstances. On June 22, 2017, the BOEM announced that the implementation timeline extension will remain in effect pending the completion of its review of the new NTL. The Fund,However, as well as other industry participants, are working withof December 31, 2018, the BOEM has not completed its operators and working interest partners to determine and agree uponreview nor has the correct level of decommissioning obligations to which they may be liable and the manner in which such obligations will be secured.NTL been enforced. The impact of the NTL, if enforced without change or amendment, may require the Fund to fully secure all of its potential abandonment liabilities to the BOEM’s satisfaction using one or more of the enumerated methods for doing so. Potentially this could increase costs to the Fund if the Fund is required to obtain additional supplemental bonding, fund escrow accounts or obtain letters of credit.
Sales and Transportation of Oil and Natural Gas
The Fund, directly or indirectly through affiliated entities, sells its proportionate share of oil and natural gas to the market and receives market prices from such sales. These sales are not currently subject to regulation by any federal or state agency. However, in order for the Fund to make such sales, it is dependent upon unaffiliated pipeline companies whose rates, terms and conditions of transport are subject to regulation by the Federal Energy Regulatory Commission. Generally, depending on certain factors, pipelines can charge rates that are either market-based or cost-of-service-based. In some circumstances, rates can be agreed upon pursuant to settlement. Thus, the rates that pipelines charge the Fund, although regulated, are beyond the Fund’s control. Nevertheless, such rates would apply uniformly to all transporters on that pipeline and, as a result, management does not anticipate that the impact to the Fund of any changes in such rates, terms or conditions would be materially different than the impact to other oil or natural gas producers and marketers.
Environmental Matters and Regulation
The Fund’s operations are subject to pervasive environmental laws and regulations governing the discharge of materials into the air and water, the handling and managing of waste materials, and the protection of aquatic species and habitats. While most of the activities to which these federal, state and local environmental laws and regulations apply are conducted by the operators on the Fund’s behalf, the Fund shares the liability along with its other working interest owners for any environmental damage.damage attributable to the Fund’s operations. The environmental laws and regulations to which its operations are subject may require the Fund, or the operator, to acquire permits to commence drilling operations, restrict or prohibit the release of certain materials or substances into the environment, impose the installation of certain environmental control devices, require certain remedial measures to prevent pollution and other discharges such as the plugging of abandoned projects and, finally, impose in some instances severe penalties, fines and liabilities for the environmental damage that may be caused by the Fund’s projects.
Some of the environmental laws that apply to oil and natural gas exploration and production are described below:
Oil Pollution Act.
The Oil Pollution Act of 1990, as amended (the “OPA”), amends Section 311 of the Federal Water Pollution Control Act of 1972, as amended (the “Clean Water Act”) and was enacted in response to the numerous tanker spills, including the Exxon Valdez spill, that occurred in the 1980s. Among other things, the OPA clarifies the federal response authority to, and8 |
Clean Water Act.
Generally, the Clean Water Act, as well as analogous state requirements, imposes liability for the unauthorized discharge of pollutants, including petroleum products, into the surface and coastal U.S. waters, except in strict conformance with discharge permits issued by the federal or delegated stateClean Air Act.
The Federal Clean Air Act of 1970, as amended (the “Clean Air Act”), as well as analogous state requirements, restricts the emission of certain air pollutants. Prior to constructing new facilities, permits may be required before work can commence and existing facilities may be required to incur additional capital costs to add equipment to ensure and maintain compliance. As a result, the Fund’s operations may be required to incur additional costs to comply with the Clean AirClimate Change. The oil and gas industry is subject to federal and state greenhouse gas monitoring, reporting and emissions control requirements. The current state of international climate initiatives and federal and state actions presents challenges to assessing the impact to the Fund’s operations in relation to future international agreements, federal and state legislation, and other new requirements. Future restrictions on emissions of greenhouse gases could have an impact on future operations.
Other Environmental Laws
. In addition to the above, the Fund’s operations may be subject to theResource Conservation and Recovery Act of 1976,as amended, which regulates the generation, transportation, treatment, storage, disposal and cleanup of certain hazardous wastes, as well as theComprehensive Environmental Response, Compensation, and Liability Act of 1980,as amended, which imposes joint and several liability without regard to fault or legality of conduct on classes of persons who are considered responsible for the release of a hazardous substance into the environment.The above represents a brief outline of significant environmental laws that may apply to the Fund’s operations. The Fund believes that its operators are in compliance with each of these environmental laws and the regulations promulgated thereunder. The Fund does not believe that its environmental, health and safety risks are materially different from those of comparable companies in the United States in the offshore oil and gas industry. However, there are no assurances that the environmental regulationslaws described above will not result in curtailment of production; material increases in the costs of production, development or exploration; enforcement actions or other penalties as a result of any non-compliance with any such regulations; or otherwise have a material adverse effect on the Fund’s operating results and cash flows.
Dodd-Frank
Act.The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), among other provisions, establishes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market and, in addition, requires certain additional SEC reporting requirements.On February 3, 2017, the “Presidential Executive Order on Core Principles for Regulating the United States Financial System” (the “Order”) was issued to review the Dodd-Frank Act. A series of reports were issued by the U.S. Department of the Treasury in 2017 pursuant to the Order generally recommending the harmonization, balancing and streamlining of rules and regulations relating to, among other things, the over-the-counter derivativederivatives market. The Fund cannot predict at this time what regulations or portions of the law, if any, will be changed as a result of the Order.
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Currently, under the LLC Agreement, the Fund has the authority to utilize derivative instruments to manage the price risk attributable to its oil and gas production. The Dodd-Frank Act mandates that many derivatives be executed in regulated markets and submitted for clearing to regulated clearinghouses. Derivatives will be subject to minimum daily margin requirements set by the relevant clearinghouse and, potentially, by the SEC or the U.S. Commodity Futures Trading Commission (“CFTC”), and derivatives dealers may demand the unilateral ability to increase margin requirements beyond any regulatory or clearinghouse minimums. In addition, as required by the Dodd-Frank Act, the CFTC has set “speculative position limits” (which are limits imposed on the maximum net long or net short speculative positions that a person may hold or control with respect to futures or options contracts traded on the U.S. commodities exchange) with respect to most energy contracts. These requirements under the Dodd-Frank Act could significantly increase the cost of any derivatives transactions of the Fund (including through requirements to post collateral, which could adversely affect the Fund’s liquidity), materially alter the terms of derivatives transactions and make it more difficult for the Fund to enter into customized transactions, cause the Fund to liquidate certain positions it may hold, reduce the ability of the Fund to protect against price volatility and other risks by making certain hedging strategies impossible or so costly that they are not economical to implement, and increase the Fund’s exposure to less creditworthy counterparties. If as a result of the legislation and regulations, the Fund alters any hedging program that may be in effect from time to time, the Fund’s operations may become more volatile and its cash flows may be less predictable, which could adversely affect the Fund’s performance. The Fund is not currently, and has not been during 2017,2018, or at any time since 2012, a party to any derivative instruments or hedging programs.
The Dodd-Frank Act also required the SEC to issue rules requiring resource extraction issuers to disclose annually information relating to certain payments made by the issuer to the U.S. federal government or a foreign government for the purpose of the commercial development of oil, natural gas or minerals. Rules issued by the SEC in 2012 were subsequently vacated in federal court in 2013. On June 27, 2016, the SEC adopted amended resource extraction disclosure rules pursuant to Section 1504 of the Dodd-Frank Act. However, on February 14, 2017, a bill was passed by the United States Congress eliminating the SEC resource extraction disclosure rules. The SEC had one year to issue replacement rules to implement Section 1504 of the Dodd-Frank Act. The Fund cannot predict whether the SEC will issueNo replacement rules have been proposed or if it does, whether such rules will remain in effect.
Not required.
None.
The information regarding the Fund’s properties that is contained in Item 1. “Business” of this Annual Report under the headings “Project Information” and “Properties,” is incorporated herein by reference.
Drilling Activity
The following table sets forth the Fund’s drilling activity during the years ended December 31, 2018 and 2017. Gross wells are the total number of wells in which the Fund has a working interest. Net wells are the sum of the Fund’s fractional working interests owned in the gross wells. The developmental well in-progress at December 31, 2018 is expected to produce both oil and natural gas and is located in the offshore waters of the Gulf of Mexico. During the years ended December 31, 20172018 and 2016,2017, the Fund had no drilling activity for exploratory or developmental wells. See Item 1. “Business” of this Annual Report under the heading “Properties” for more information about the well in-progress as of December 31, 2018.
2018 | 2017 | |||||||||||||||
Gross | Net | Gross | Net | |||||||||||||
Development wells: | ||||||||||||||||
In-progress | 1 | 0.01 | - | - | ||||||||||||
Development well total | 1 | 0.01 | - | - |
10 |
Unaudited Oil and Gas Reserve Quantities
The preparation of the Fund’s oil and gas reserve estimates are completed in accordance with the Fund’s internal control procedures over reserve estimation. Such control procedures include: 1) verification of input data that is provided to an independent petroleum engineering firm; 2) engagement of well-qualified and independent reservoir engineers for preparation of reserve reports annually in accordance with SEC reserve estimation guidelines; and 3) a review of the reserve estimates by the Manager.
The Manager’s primary technical person in charge of overseeing the Fund’s reserve estimates has a B.S. degree in Petroleum Engineering and is a member of the Society of Petroleum Engineers, the Association of American Drilling Engineers and the American Petroleum Institute. With over thirty years of industry experience, he is currently responsible for reserve reporting, engineering and economic evaluation of exploration and development opportunities, and the oversight of drilling and production operations.
The Fund’s reserve estimates as of December 31, 20172018 and 20162017 were prepared by Netherland, Sewell & Associates, Inc. (“NSAI”), an independent petroleum engineering firm. The information regarding the qualifications of the petroleum engineer is included within the report from NSAI, which is filed as Exhibit 99.1 to this Annual Report, and is incorporated herein by reference.
Proved Reserves
. Proved oil and gas reserves are estimated quantities of oil and natural gas, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are proved reserves expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped oil and gas reserves are proved reserves expected to be recovered through new wells on undrilled acreage, or through existing wells where a relatively major expenditure is required for recompletion. The information regarding the Fund’s proved reserves, which is contained in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report under the heading “Critical Accounting Estimates – Proved Reserves”, is incorporated herein by reference. The information regarding the Fund’s unaudited net quantities of proved developed and undeveloped reserves, which is contained in Table III in the “Supplementary Financial Information – Information about Oil and Gas Producing Activities – Unaudited” included in Item 8. “Financial Statements and Supplementary Data” of this Annual Report, is incorporated herein by reference.Proved Undeveloped Reserves
. As of December 31,During the year ended December 31, 2017,2018, the Fund did not incur costs to advance the development of its proved undeveloped reserves related to the Marmalard Project. The Fund currently expects to develop the proved undeveloped reserves relating to the Marmalard Project over the next several years. Information regarding estimated future development costs relating to the Diller and Marmalard Project,projects, which is contained in Item 1. “Business” of this Annual Report under the heading “Properties”, is incorporated herein by reference. Estimated future development costs include capital spending on major development projects, some of which will take several years to complete. Provedcomplete due to long life sequential production and host facility capacity restraints. The proved undeveloped reserves relatedrelating to major development projectsthe Marmalard Project have been undeveloped since their initial booking in 2015. These proved undeveloped reserves will be reclassified to proved developed reserves when production commences.
Production and Prices
The information regarding the Fund’s production of oil and natural gas, and certain price and cost information during the years ended December 31, 20172018 and 20162017 that is contained in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report under the headings “Results of Operations – Overview” and “Results of Operations – Operating Expenses” is incorporated herein by reference.
Delivery Commitments
As of December 31, 2017,2018, the Fund had no delivery obligations or delivery commitments under any existing contracts.
11 |
ITEM 3. | LEGAL PROCEEDINGS |
None.
ITEM 4. | MINE SAFETY DISCLOSURES |
None.
12 |
Table of Contents |
PART II
There is currently no established public trading market for the Shares. As of January 31, 2018,2019, there were 1,3341,342 shareholders of record of the Fund.
Distributions are made in accordance with the provisions of the LLC Agreement. At various times throughout the year, the Manager determines whether there is sufficient available cash, as defined in the LLC Agreement, for distribution to shareholders. Due to the future capital required to develop the Diller and Marmalard projects, distributions may be impacted by amounts reserved to provide for their development costs and funding of their estimated asset retirement obligations. There is no requirement to distribute available cash and, as such, available cash is distributed to the extent and at such times as the Manager believes is advisable. During the years ended December 31, 20172018 and 2016,2017, the Fund paid distributions totaling $4.6 million and $3.0 million, and $0.9 million, respectively.
Not required.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview of the Fund’s Business
The Fund was organized primarily to acquire interests in oil and natural gas properties located in the United States offshore waters of Texas, Louisiana and Alabama in the Gulf of Mexico. The Fund’s primary investment objective is to generate cash flow for distribution to its shareholders by generating returns across a portfolio of oil and natural gas projects. Distributions to shareholders are made in accordance with the Fund’s LLC Agreement. The frequency and amount of such distributions are within the Manager’s discretion, subject to available cash flow from operations. The Fund’s remaining capital has been fully allocated to its projects. As a result, the Fund will not invest in any new projects.
The Manager performs, or arranges for the performance of, the management, advisory and administrative services required for Fundthe Fund’s operations. The Fund does not currently, nor is there any plan to, operate any project in which the Fund participates. The Manager enters into operating agreements with third-party operators for the management of all development and producing operations, as appropriate.
Commodity Price Changes
Changes in oil and natural gas commodity prices may significantly affect liquidity and expected operating results. Declines in oil and natural gas commodity prices not only reduce revenues and profits, but could also reduce the quantities of reserves that are commercially recoverable. Significant declines in prices couldrecoverable and result in non-cash charges to earnings due to impairment.
Oil and natural gas commodity prices have been subject to significant fluctuations during the past several years. The Fund anticipates price cyclicality in its planning and believes it is well positioned to withstand price volatility. The Fund continues to conserve cash to provide for the additional development costs for the Diller and Marmalard projects as budgeted.
See13 |
Market pricing for oil and natural gas is volatile, and is likely to continue to be volatile in the future. This volatility is caused by numerous factors and market conditions that the Fund cannot control or influence. Therefore, it is impossible to predict the future price of oil and natural gas with any certainty. Factors affecting market pricing for oil and natural gas include:
· | weather conditions; |
· | economic conditions, including demand for petroleum-based products; |
· | actions by OPEC, the Organization of Petroleum Exporting Countries; |
· | political instability in the Middle East and other major oil and gas producing regions; |
· | governmental regulations, both domestic and foreign; |
· | domestic and foreign tax policy; |
· | the pace adopted by foreign governments for the exploration, development, and production of their national reserves; |
· | the supply and price of foreign oil and gas; |
· | the cost of exploring for, producing and delivering oil and gas; |
· | the discovery rate of new oil and gas reserves; |
· | the rate of decline of existing and new oil and gas reserves; |
· | available pipeline and other oil and gas transportation capacity; |
· | the ability of oil and gas companies to raise capital; |
· | the overall supply and demand for oil and gas; and |
· | the price and availability of alternate fuel sources. |
Critical Accounting Estimates
The discussion and analysis of the Fund’s financial condition and results of operations are based upon the Fund’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In preparing these financial statements, the Fund is required to make certain estimates, judgments and assumptions. These estimates, judgments and assumptions affect the reported amounts of the Fund’s assets and liabilities, including the disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of its revenues and expenses during the periods presented. The Fund evaluates these estimates and assumptions on an ongoing basis. The Fund bases its estimates and assumptions on historical experience and on various other factors that the Fund believes to be reasonable at the time the estimates and assumptions are made. However, future events and actual results may differ from these estimates and assumptions and such differences may have a material impact on the results of operations, financial position or cash flows. See Note 1 of “Notes to Financial Statements” – “Organization and Summary of Significant Accounting Policies” contained in Item 8. “Financial Statements and Supplementary Data” within this Annual Report for a discussion of the Fund’s significant accounting policies. The followingis a discussion of the accounting policies and estimates the Fund believes are most significant.
Accounting for Acquisition, Exploration and Development Costs
Acquisition, exploration and development costs are accounted for using the successful efforts method. Costs of acquiring unproved and proved oil and natural gas leasehold acreage, including lease bonuses, brokers’ fees and other related costs, are capitalized. Costs of drilling and equipping productive wells and related production facilities are capitalized. Annual lease rentals and exploration expenses are expensed as incurred.
Proved Reserves
Estimates of proved reserves are key components of the Fund’s most significant financial estimates involving its rate for recording depletion and amortization. Annually, the Fund engages an independent petroleum engineering firm to perform a comprehensive study of the Fund’s proved properties to determine the quantities of reserves and the period over which such reserves will be recoverable. The Fund’s estimates of proved reserves are based on the quantities of oil and natural gas that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under existing economic and operating conditions. However, there are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future revenues, rates of production and timing of development expenditures, including many factors beyond the Fund’s control. The estimation process is very complex and relies on assumptions and subjective interpretations of available geologic, geophysical, engineering and production data and the accuracy of reserve estimates is a function of the quality and quantity of available data, engineering and geological interpretation and judgment. In addition, as a result of volatility and changing market conditions, oil and natural gas commodity prices and future development costs will change from period to period, causing estimates of proved reserves and future net revenues to change.
14 |
Asset Retirement Obligations
Asset retirement obligations include costs to plug and abandon the Fund’s wells and to dismantle and relocate or dispose of the Fund’s production platforms and related structures and restoration costs of land and seabed. The Fund develops estimates of these costs based upon the type of production structure, water depth, reservoir depth and characteristics and ongoing discussions with the wells’ operators and, at times, with information provided by third-party abandonment consultants specializing in the oil and gas industry.operators. Because these costs typically extend many years into the future, estimating these future costs is difficult and requires significant judgment that is subject to future revisions based upon numerous factors such as the timing of settlements, the credit-adjusted risk-free rates used and inflation rates, including changing technology and the political and regulatory environment. Estimates are reviewed on a bi-annual basis,annually, or more frequently if an event occurs that would dictate a change in assumptions or estimates.
Impairment of Long-Lived Assets
The Fund reviews the carrying value of its oil and gas properties annually and when management determines thatwhenever events and circumstances indicate that the recorded carrying value of propertiesthe assets may not be recoverable. Impairments are determined by comparing estimated future net undiscounted cash flows to the carrying value of the assets at the time of the review. If the carrying value exceeds the estimated future net undiscounted cash flows, the carrying value of the asset is written down to fair value, which is determined using estimated future net discounted cash flows from the asset.a valuation technique that considers both market and income approaches and uses Level 3 inputs. The fair value determinations require considerable judgment and are sensitive to change. Different pricing assumptions, reserve estimates or discount rates could result in a different calculated impairment. Given the volatility of oil and natural gas prices, it is reasonably possible that the Fund’s estimate of future net discounted cash flows from proved oil and natural gas reserves could change in the near term.
Results of Operations
The following table summarizes the Fund’s results of operations during the years ended December 31, 20172018 and 2016,2017, and should be read in conjunction with the Fund’s financial statements and the notes thereto
Year ended December 31, | ||||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Revenue | ||||||||
Oil and gas revenue | $ | 7,605 | $ | 6,818 | ||||
Expenses | ||||||||
Depletion and amortization | 1,037 | 1,346 | ||||||
Management fees to affiliate | 1,065 | 1,066 | ||||||
Operating expenses | 1,508 | 1,732 | ||||||
General and administrative expenses | 176 | 181 | ||||||
Total expenses | 3,786 | 4,325 | ||||||
Income from operations | 3,819 | 2,493 | ||||||
Other income | ||||||||
Dividend income | 17 | 26 | ||||||
Interest income | 23 | 15 | ||||||
Total other income | 40 | 41 | ||||||
Net income | $ | 3,859 | $ | 2,534 |
15 |
Year ended December 31, | ||||||||
2017 | 2016 | |||||||
(in thousands) | ||||||||
Revenue | ||||||||
Oil and gas revenue | $ | 6,818 | $ | 5,045 | ||||
Expenses | ||||||||
Depletion and amortization | 1,346 | 2,017 | ||||||
Management fees to affiliate | 1,066 | 1,083 | ||||||
Operating expenses | 1,732 | 2,819 | ||||||
General and administrative expenses | 181 | 154 | ||||||
Total expenses | 4,325 | 6,073 | ||||||
Income (loss) from operations | 2,493 | (1,028 | ) | |||||
Other income (loss) | ||||||||
Loss on investment in Delta House | - | (114 | ) | |||||
Dividend income | 26 | 191 | ||||||
Interest income | 15 | 9 | ||||||
Total other income | 41 | 86 | ||||||
Net income (loss) | $ | 2,534 | $ | (942 | ) |
Overview
. The following table provides information related to the Fund’s oil and gas production and oil and gas revenue during the years ended December 31,Year ended December 31, | ||||||||
2017 | 2016 | |||||||
Number of wells producing | 6 | 6 | ||||||
Total number of production days | 1,872 | 1,779 | ||||||
Oil sales (in thousands of barrels) | 113 | 106 | ||||||
Average oil price per barrel | $ | 52 | $ | 41 | ||||
Gas sales (in thousands of mcfs) | 302 | 251 | ||||||
Average gas price per mcf | $ | 3.21 | $ | 2.36 |
Year ended December 31, | ||||||||
2018 | 2017 | |||||||
Number of wells producing | 6 | 6 | ||||||
Total number of production days | 1,528 | 1,872 | ||||||
Oil sales (in thousands of barrels) | 99 | 113 | ||||||
Average oil price per barrel | $ | 67 | $ | 52 | ||||
Gas sales (in thousands of mcfs) | 263 | 302 | ||||||
Average gas price per mcf | $ | 3.38 | $ | 3.21 |
The increasesproduction-related decreases in the above table were primarily related to the Diller Project, which was shut-in during late-2016, coupled with the Liberty Project, which was shut-in during early-2016. In addition, the increase in gas sales was also attributable to the Marmalard Project, which did not produce NGLs during the second half of 2016, while awaiting third-party facilities’ repair and maintenance activities. These increases were partially offset by twothree wells in the Marmalard Project, which were shut-intwo wells during early-December 2017, while awaitingfirst half of 2018 due to replacement of well jumpers. jumpers and one well during the majority of fourth quarter 2018 due to a mechanical issue. In addition, the Diller Project was shut-in periodically during second quarter 2018 due to hydrate issues. These decreases were partially offset by the Liberty Project, which experienced increased production as a result of recompletion work in third quarter 2017. See Item 1. “Business” of this Annual Report under the heading “Properties” for more information.
Oil and Gas Revenue
.See “Overview” above for factors that impact the oil and gas revenue volume and rate variances.
Depletion and Amortization
. Depletion and amortization during the year ended December 31,See “Overview” above for certain factors that impact the depletion and amortization volume and rate variances.
Management Fees to Affiliate.
An annual management fee, totaling 2.5% of total capital contributions, net of cumulative dry-hole and related well costs incurred by the Fund, is paid monthly to the Manager. Such fee may be temporarily waived by the Manager to accommodate the Fund’s short-termOperating Expenses.
Operating expenses represent costs specifically identifiable or allocable to the Fund’s wells,Year ended December 31, | ||||||||
2018 | 2017 | |||||||
(in thousands) | ||||||||
Lease operating expense | $ | 1,052 | $ | 1,065 | ||||
Transportation and processing expense | 297 | 397 | ||||||
Workover expense | 81 | 145 | ||||||
Insurance expense | 64 | 56 | ||||||
Accretion expense and other | 14 | 69 | ||||||
$ | 1,508 | $ | 1,732 |
16 |
Year ended December 31, | ||||||||
2017 | 2016 | |||||||
(in thousands) | ||||||||
Lease operating expense | $ | 1,065 | $ | 2,268 | ||||
Transportation and processing expense | 397 | 322 | ||||||
Workover expense | 145 | 121 | ||||||
Accretion expense | 65 | 64 | ||||||
Insurance expense | 56 | 56 | ||||||
Other | 4 | (12 | ) | |||||
$ | 1,732 | $ | 2,819 |
Lease operating expense and transportation and processing expense relatesrelate to the Fund’s producing properties.projects. Workover expense which represents costs to restore or stimulate production of existing reserves, primarily relatesreserves. Insurance expense represents premiums related to the Diller and Marmalard projects.Fund’s projects, which vary depending upon the number of wells producing or drilling. Accretion expense relates to the asset retirement obligations established for the Fund’s provedoil and gas properties. Insurance expense represents premiums related to the Fund’s properties,
Production costs, which vary depending upon the number of wells producing or drilling.
General and Administrative Expenses.
General and administrative expenses represent costs specifically identifiable or allocable to the Fund, such as accounting and professional fees and insurance expenses.Dividend Income.
Dividend income is related to the Fund’s investment in Delta House.Interest Income
. Interest income is comprised of interest earned on cash and cash equivalents and salvage fund.Capital Resources and Liquidity
Operating Cash Flows
Cash flows provided by operating activities during the year ended December 31, 2018 were $4.9 million, primarily related to revenue received of $7.8 million, partially offset by operating expenses of $1.6 million, management fees of $1.1 million and general and administrative expenses of $0.2 million.
Cash flows provided by operating activities during the year ended December 31, 2017 were $3.4 million, primarily related to revenue received of $6.5 million, partially offset by operating expenses of $1.7 million, management fees of $1.1 million, the settlement of an asset retirement obligation of $0.2 million and general and administrative expenses of $0.2 million.
Investing Cash Flows
Cash flows provided by operatinginvesting activities during the year ended December 31, 20162018 were $0.5$1.6 million, primarily related to revenue receivedproceeds from salvage fund of $4.9 million and dividend income received of $0.2$1.8 million, partially offset by operating expensescapital expenditures for oil and gas properties of $2.9 million, management fees of $1.1 million, the settlement of an asset retirement obligation of $0.5 million and general and administrative expenses of $0.1$0.3 million.
Cash flows provided by investing activities during the year ended December 31, 2017 were $0.2 million, primarily related to proceeds from salvage fund.
Financing Cash Flows
Cash flows provided by investingused in financing activities during the year ended December 31, 20162018 were $0.8$4.6 million, primarily related to proceeds from salvage fund of $0.4 million coupled with proceeds from the sale of investment in Delta House of $0.3 million.
Cash flows used in financing activities during the year ended December 31, 2017 were $3.0 million, related to manager and shareholder distributions.
Estimated Capital Expenditures
The Fund has entered into multiple agreements for the acquisition, drilling and development of its oil and gas properties. The estimated capital expenditures associated with these agreements vary depending on the stage of development on a property-by-property basis. See Item 1. “Business”“Business” of this Annual Report under the heading “Properties” and “Liquidity Needs” below for additional information.
Capital expenditures for oil and gas properties have been funded with the capital raised by the Fund in its private placement offering. The Fund’s remaining capital has been fully allocated to its projects. As a result, the Fund will not invest in any new projects and will limit its investment activities, if any, to those projects in which it currently has a working interest.
17 |
Liquidity Needs
The Fund’s primary short-term liquidity needs are to fund its operations and capital expenditures for its oil and gas properties. Such needs are funded utilizing operating income and existing cash on-hand.
As of December 31, 2017,2018, the Fund’s estimated capital commitments related to its oil and gas properties were $4.4$4.5 million (which include asset retirement obligations for the Fund’s projects of $1.5$1.6 million), of which $0.9$0.6 million is expected to be spent during the year ending December 31, 2018, primarily related to the settlement of asset retirement obligations for certain of the Fund’s projects. 2019.
Based upon its current cash position and its current reserve estimates, the Fund expects cash flow from operations to be sufficient to cover its commitments and ongoing operations. Reserve estimates are projections based on engineering data that cannot be measured with precision, require substantial judgment, and are subject to frequent revision.
The Manager is entitled to receive an annual management fee from the Fund regardless of the Fund’s profitability in that year. However, pursuant to the terms of the LLC Agreement, the Manager is also permitted to waive the management fee at its own discretion.
Distributions, if any, are funded from available cash from operations, as defined in the LLC Agreement, and the frequency and amount are within the Manager’s discretion. Due to the future capital required to develop the Diller and Marmalard projects, distributions may be impacted by amounts reserved to provide for their development costs and funding their estimated asset retirement obligations.
Off-Balance Sheet Arrangements
The Fund had no off-balance sheet arrangements as of December 31, 20172018 and 20162017 and does not anticipate the use of such arrangements in the future.
Contractual Obligations
The Fund enters into participation and joint operating agreements with operators. On behalf of the Fund, an operator enters into various contractual commitments pertaining to exploration, development and production activities. The Fund does not negotiate such contracts. No contractual obligations exist as of December 31, 20172018 and 2016,2017, other than those discussed in “Estimated Capital Expenditures” above.
Recent Accounting Pronouncements
See Note 1 of “Notes to Financial Statements” – “Organization and Summary of Significant Accounting Policies” contained in Item 8. “Financial Statements and Supplementary Data” within this Annual Report for a discussion of recent accounting pronouncements applicable to the Fund’s recent accounting pronouncements.
Not required.
All financial statements meeting the requirements of Regulation S-X and the supplementary financial information required by Item 302 of Regulation S-K are included in the financial statements listed in Item 15. “Exhibits and Financial Statement Schedules” and filed as part of this report.