The U.S. Securities and Exchange Commission (SEC) is investigating Oklahoma explorer Alta Mesa Resources Inc. for possible issues in its financial reporting, the Houston-based independent has disclosed.
The producer, led by Anadarko Petroleum Corp.’s former chief Jim Hackett, was formed with private equity money from Riverstone Holdings LLC initially as Silver Run Acquisition Corp. II. In 2017 Silver Run combined with Oklahoma-focused producer Alta Mesa Holdings LP and Kingfisher Midstream LLC, whose assets were concentrated in the STACK, aka the Sooner Trend of the Anadarko Basin, mostly in Canadian and Kingfisher counties.
Alta Mesa has been struggling, announcing across-the-board layoffs and recently disclosing it would write down $3.1 billion of assets because of undisclosed issues in its financial accounting.
The company launched as a public entity in 2018 with an estimated Wall Street value of $3.8 billion. Shares were trading for around 14 cents at midday Monday.
Although it has not issued its 1Q2019 results, the company indicated in an SEC filing that it expects to incur a $13 million loss. The company said it was continuing to make progress in finalizing its Form 10-K and 1Q2019 forms 10-Q for both Alta Mesa Resources and Alta Mesa Upstream, but it could not estimate when they would be completed.
First quarter production was estimated to be 37,800 boe/d, 71% liquids. Alta Mesa began the year with six rigs but it had reduced the rig count to zero by the end of January.
“A new development program was restarted in March,” with 16 wells completed and to rigs in operation. “The company’s objective with the development program is to improve economic returns through a revised well spacing pattern of four or five wells per section, improved lateral placement and lower well costs,” management said.
Under the “reinvigorated development program, Alta Mesa Upstream has drilled 10 wells completing eight patterns,” including drilled but uncompleted wells. Through last Friday (May 17), it had brought online 22 wells, all tied into the company’s Kingfisher Midstream system.
“The wells drilled and completed in 2019 have been averaging less than $3 million per well compared to $4.5 million per well experienced by the end of the previous drilling program,” Alta Mesa noted.
In February, the upstream business provided an initial estimate of 158 million boe in proved reserves as of year’s end 2018. However, based on an assessment in April of its ability to continue as a going concern “and the uncertainty of funding the related development costs,” an estimated 89 million boe of proved undeveloped, or PUD, reserves, were removed.
As a result, Alta Mesa recorded 69 million boe of proved developed reserves for the end of 2018, comprised of 25 million bbl of oil, 20 million bbl of natural gas liquids and 144 Bcf of natural gas.
If its ability to fund required development costs improve in the future, the upstream business expects to recognize all or a portion of the removed PUDs as proved.
Hackett, who was Anadarko CEO from 2004-2012, has chaired Alta Mesa since the company’s inception. He took over as interim CEO earlier this year after the previous CEO, COO and CFO resigned.
In December the company announced the immediate resignations of CEO/President Harlan H. Chappelle and COO Michael E. Ellis, who also resigned as board members. CFO Michael A. McCabe already had resigned by that time and was replaced by John C. Regan in early January.
Following the resignations, Alta Mesa entered into an agreement with private equity operator Meridian Energy LLC, led by Randy L. Limbacher, John H. Campbell and Mark P. Castiglione. Limbacher was appointed Alta Mesa’s president, with Campbell appointed COO-upstream and Castiglione named chief of staff to the president on a consulting basis.
At the beginning of May, Alta Mesa estimated its debt was $1.061 billion and said it had an estimated $144 million of total liquidity, including $110 million of cash.
The upstream unit’s total debt was $868 million, and as of April it had drawn “substantially all remaining capacity under its credit facility,” with liquidity estimated at $95 million of cash. Kingfisher Midstream had total borrowings $193 million at the start of May, within its available credit capacity of $225 million. Until Alta Mesa has delivered its audited 2018 and unaudited 1Q2019 financial statements, Kingfisher is limited to $225 million of borrowing capacity. Once the financials are delivered, the borrowing capacity would return to $300 million.
“Alta Mesa is currently in discussions with the lenders under its credit facility in order to seek relief, including with respect to the leverage ratio financial covenant,” management noted. “The company has determined that there is substantial doubt about its ability to continue as a going concern due to the uncertainty of the negotiations with its lenders.”
Alta Mesa said it is cooperating with the SEC investigation and is working to correct internal controls and financial reporting.