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OFFON

ALTA MESA RESOURCES, INC.

(AMRQQ)
SummaryNewsCompanyFinancials 
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ALTA MESA RESOURCES : DE Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

03/05/2020 | 04:33pm EDT
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
Annual Report. The following discussion and analysis contains forward-looking
statements that reflect our future plans, estimates, beliefs and expected
performance. The forward-looking statements are dependent upon events, risks and
uncertainties that may be outside our control. Our actual results could differ
materially from those discussed in these forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, the Buyer's ability and willingness to close the Sale Transactions, the
volatility of oil and gas prices, production timing and volumes, our ability to
continue as a going concern, estimates of proved reserves, operating costs and
capital expenditures, economic and competitive conditions, regulatory changes
and other uncertainties, as well as those factors discussed below and elsewhere
in this Annual Report, all of which are difficult to predict. As a result of
these risks, uncertainties and assumptions, the forward-looking events discussed
may not occur.


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Overview


Alta Mesa Resources, Inc. ("AMR"), together with its consolidated subsidiaries
("we", "us", "our" or "the Company"), is an independent exploration and
production company focused on the development of unconventional onshore oil and
natural gas reserves in the eastern portion of the Anadarko Basin in Oklahoma.
We operate in two reportable business segments - Upstream and Midstream. Alta
Mesa Holdings, LP ("Alta Mesa") conducts our Upstream activities and owns our
proved and unproved oil and gas properties located in an area of the Anadarko
Basin commonly referred to as the STACK. We generate upstream revenue
principally by the production and sale of oil, gas and NGLs. Kingfisher
Midstream, LLC ("KFM") conducts our Midstream operations. KFM has a gas and oil
gathering network, a cryogenic gas processing plant with offtake capacity, field
compression facilities and a produced water disposal system in the Anadarko
Basin that generates revenue primarily through long-term, fee-based contracts.

On September 11, 2019, AMR, Alta Mesa and all of its subsidiaries (the "AMH Debtors" and together with AMR, the "Initial Debtors") filed voluntary petitions ("Initial Bankruptcy Petitions") for relief under Chapter 11 of the U.S. Bankruptcy Code ("Bankruptcy Code") in the U.S. Bankruptcy Court for the Southern District of Texas ("Bankruptcy Court").


On January 12, 2020, KFM and all of its subsidiaries (collectively, the "KFM
Debtors") filed voluntary petitions (" KFM Bankruptcy Petitions") for relief
under the Bankruptcy Code. On January 13, 2020, SRII Opco GP, LLC and SRII Opco
(collectively, the "SRII Debtors" and, together with the KFM Debtors, the
"Additional Debtors") filed voluntary petitions ("SRII Bankruptcy Petitions and,
together with the KFM Bankruptcy Petitions, the "Additional Bankruptcy
Petitions") for relief under the Bankruptcy Code. The Additional Debtors'
Chapter 11 cases are being jointly administered with the Initial Debtors'
Chapter 11 cases.

The Initial and Additional Debtors operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.


On December 31, 2019, the Initial Debtors entered into a Purchase and Sale
Agreement (as amended and restated in January 2020, the "AMH PSA") with BCE-Mach
III LLC (the "Buyer") pursuant to which the AMH Debtors agreed to sell to the
Buyer substantially all of our upstream assets for an unadjusted purchase price
of $232.0 million in cash, subject to customary purchase price adjustments (such
transaction, the "AMH Sale Transaction"). On December 31, 2019, the KFM Debtors
entered into a Purchase and Sale Agreement (as amended and restated in January
2020, the "KFM PSA" and, together with the AMH PSA, the "PSAs") with the Buyer
pursuant to which the KFM Debtors agreed to sell to the Buyer substantially all
of our midstream assets for an unadjusted purchase price of $88.0 million in
cash, subject to customary purchase price adjustments (such transaction, the
"KFM Sale Transaction" and, together with the AMH Sale Transaction, the "Sale
Transactions").

The Sale Transactions are expected to close no later than mid-April 2020, after
which we will no longer own any operating assets. Following the expected sale,
we intend to provide certain transition services to the Buyer for a limited
period of time and expect to wind down our remaining business during the first
half of 2020, which will result in the dissolution of AMR and its subsidiaries.

In March 2020, AMR, the AMH Debtors and the SRII Debtors expect to file a
Chapter 11 plan (collectively, the "AMR Plan"). The AMR Plan will generally
provide for the distribution of the proceeds of the AMH Sale Transaction to
AMH's creditors and transfer any remaining assets of the Initial Debtors and
SRII Opco Debtors into a liquidating trust to administer and monetize such
assets and to reconcile creditor claims against such debtors for the benefit of
their respective creditors. Pursuant to the AMR Plan, all outstanding shares of
class A common stock and class C common stock in the Company are expected to be
canceled.

The AMR Plan will be subject to approval by the Bankruptcy Court and the Initial
Debtors and the SRII Debtors are expected to solicit votes on the AMR Plan from
certain of their creditors entitled to vote thereon pursuant to the requirements
of the Bankruptcy Code. We expect the Bankruptcy Court to hold a hearing to
consider confirmation of the AMR Plan in April 2020. To the extent that the AMR
Plan is confirmed by the Bankruptcy Court, AMR expects the AMR Plan to become
effective and be consummated shortly thereafter.

In March 2020, the KFM Debtors filed a Chapter 11 plan (the "KFM Plan"). The KFM
Plan will generally provide for the (i) distribution of the proceeds of the KFM
Sale Transaction to creditors, (ii) liquidation of any remaining assets of the
KFM Debtors, and (iii) orderly wind-down of the KFM Debtors' estates. Under the
KFM Plan, the KFM Debtors will appoint a plan administr

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ator who will, among other things, oversee the wind-down of the KFM Debtors and
implement all provisions of the KFM Plan, including controlling and effectuating
claims reconciliation.

The KFM Plan is subject to approval by the Bankruptcy Court and the KFM Debtors
are expected to solicit votes on the KFM Plan from certain of the KFM Debtors'
creditors pursuant to the requirements of the Bankruptcy Code. We expect the
Bankruptcy Court to hold a hearing to consider confirmation of the KFM Plan in
April 2020. To the extent that the KFM Plan is confirmed by the Bankruptcy
Court, KFM expects the KFM Plan to become effective and be consummated shortly
thereafter.

Additional information relating to the formation of the Company and the
acquisition of Alta Mesa and KFM on February 9, 2018, may be found in Item 8.
Immediately prior to the Business Combination, Alta Mesa distributed its
non-STACK oil and gas assets and related liabilities to High Mesa. We have
reported these distributed assets as discontinued operations for all periods
presented.

Pursuant to the Business Combination, we recorded the acquired assets and
liabilities at their estimated fair values on the closing date, including
recording the fair values in the financial records of our respective
subsidiaries. This resulted in our financial presentation being separated into
two distinct periods, the period before the Business Combination ("Predecessor
Period") and the period after the Business Combination ("Successor Period"). The
Company's financial statement presentation reflects Alta Mesa as the
"Predecessor" for periods prior to February 9, 2018. The Company, including the
consolidated results of Alta Mesa and Kingfisher, is the "Successor" for periods
since February 9, 2018.

Accordingly, for purposes of explaining our segment results, we have presented
the 2019 results with the 2018 Successor Period and the 2018 Predecessor Period
results of Alta Mesa, our Upstream segment. As KFM, our Midstream segment, was
acquired on February 9, 2018, our discussion of our Midstream segment results
covers the 2019 results and the 2018 Successor Period results.

Outlook, Market Conditions and Commodity Prices

Our revenue and profitability depend on many factors, particularly the prices of oil, gas and NGLs, which are beyond our control. Our business has been significantly affected by the price of oil due to its weighting in our production profile.


Factors affecting oil prices include worldwide economic conditions; geopolitical
activities in various regions of the world; worldwide supply and demand
conditions; weather conditions; actions taken by the Organization of Petroleum
Exporting Countries; and the value of the U.S. dollar in international currency
markets. Commodity prices remain at depressed levels compared to past years,
which have had a negative impact on the value of our oil and gas properties and
our midstream assets, and the future outlook for prices continues to be
unpredictable.

Ability to Continue as a Going Concern


AMR's only significant asset is its ownership of a partnership interest in SRII
Opco. As such, we have no meaningful cash available to meet our obligations
apart from cash held by our subsidiaries. As a result of the bankruptcy filings
by us and all of our subsidiaries, as described above, cash held by Alta Mesa
and KFM can only be used to satisfy their obligations to the extent authorized
by the Bankruptcy Code or by order of the Bankruptcy Court. The bankruptcy
filings by the Initial Debtors and the Additional Debtors (collectively, "the
Debtors") triggered defaults in the Alta Mesa RBL, the 2024 Notes and the KFM
Credit Facility, limiting our future borrowing ability and making our
outstanding obligations immediately due and payable, although the creditors are
currently stayed from taking any actions as a result of such defaults. The
Debtors are also subject to limitations imposed under Bankruptcy Court approved
cash collateral orders requiring us to (i) adhere to an approved budget with an
agreed-upon variance and (ii) meet certain milestones.

We expect to sell substantially all of our assets no later than mid-April 2020.
Following the expected sale, we intend to provide certain transition services to
the Buyer for a limited period of time and expect to wind down our remaining
business during the first half of 2020, which will result in the dissolution of
AMR and its subsidiaries.

These factors, including historic recurring operating losses, raise substantial doubt about our ability to continue as a going concern.

Delisting from Stock Exchange


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As a result of our failure to comply with the continued listing requirements of
the NASDAQ, trading in our Class A Common Stock and public warrants was
suspended in September 2019, and they are now traded over the counter under the
trading symbols "AMRQQ" and "AMRWQ", respectively. In February 2020, we filed
forms with the Securities and Exchange Commission to deregister our Class A
Common Stock and warrants under Section 12(g) of the Securities Exchange Act of
1934, as amended, (the "Exchange Act") and suspend our reporting obligations
under Sections 13 and 15(d) of the Exchange Act.

Derivatives


We previously operated a hedging program in accordance with requirements under
the Alta Mesa RBL. Settlements and fair value changes in our derivatives had
significant impacts on our results of operations. Our derivatives were reported
at fair value and were sensitive to changes in the price of oil and gas. Changes
in derivatives were reported as gain (loss) on derivatives, which include both
the unrealized increase and decrease in their fair value, as well as the effect
of realized settlements during the period.

In connection with Alta Mesa's bankruptcy filing, we cancelled (prior to
contract settlement date) all open derivative contracts in September 2019 for
net proceeds of approximately $4.0 million. Proceeds received were used to make
permanent repayments against our outstanding borrowings under the Alta Mesa RBL.
After September 2019, we held no open derivative positions.

For 2019, we recognized a net loss on our derivatives of $11.7 million, which includes $7.6 million in cash settlements received for derivatives.

Impairments

2019


As noted above, the Initial Debtors filed for bankruptcy protection in September
2019 and the Additional Debtors filed for bankruptcy protection in January 2020.
As a result of our bankruptcy filings and previous restrictions by our lenders
on our ability to access additional capital, our ability to incur the levels of
spending necessary to continue to develop our upstream properties and expand our
midstream operations were significantly restricted. This negatively impacted our
future drilling plans and our expectations regarding production levels, which
contributed to lower throughput expectations for our midstream processing
assets. In addition, the Sale Transactions reflect prices of $232.0 million for
substantially all of the upstream properties and assets and $88.0 million for
our midstream assets. As these prices were below the carrying value of the
respective assets, we adjusted our carrying values down to the expected sales
prices, after estimated direct sales costs, as we believe the Buyer has the
intent and ability to close the Sale Transactions.

Additionally, as a result of the expected sales of our assets described above
and our expectations of contracts that will be rejected in bankruptcy, we also
recognized impairments of our operating lease right-of-use assets and a
long-term prepaid asset due to our inability to recover the carrying value of
these assets.

2018

In late fourth quarter of 2018, the combination of depressed prevailing oil and
gas prices, changes to assumed spacing in conjunction with evolving views on the
viability of multiple benches and reduced individual well expectations resulted
in impairment charges of $2.0 billion to our proved and unproved oil and gas
properties.  Individual well expectations were impacted by reductions in
estimated reserve recovery of original oil and gas in place based on our 2018
drilling results.
In May 2018, a subsidiary of KFM entered into agreements with a third party to
jointly construct and operate a new crude oil pipeline via creation of Cimarron
that we accounted for under the equity method. Cimarron's proposed pipeline was
to extend from our processing plant to Cushing, Oklahoma and was to be
constructed and operated by Cimarron, which we determined was controlled by the
third-party.

As the late-2018 outlook for Alta Mesa volumes and third-party volume
opportunities in the area were significantly lower than initially projected, we
suspended future contributions to Cimarron and elected to abandon the project.
We conducted an impairment analysis resulting in the recognition of an
impairment charge of $16.0 million during the 2018 Successor Period to reduce
the carrying value of our investment in Cimarron to its estimated fair value at
December 31, 2018.

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Based on an estimation of the fair value of KFM utilizing an income approach
that took into consideration the late 2018-outlook for Alta Mesa and third-party
volumes available for processing, we determined that a portion of the value of
KFM's plant and equipment and all of KFM's intangible assets and goodwill were
impaired at December 31, 2018.
The summary of impairment expense follows (there was no impairment expense
during the 2018 Predecessor Period):
                                                                            February 9, 2018
                                                   Year Ended December           Through
(in millions)                                            31, 2019           December 31, 2018
Impairment attributable to:
Upstream
Unproved properties                                $             31.0     $             742.1
Proved properties                                               484.8                 1,291.6
Operating lease right-of-use assets                              13.3                       -
Other long-term assets                                           27.3                       -
Total Upstream                                                  556.4                 2,033.7
Midstream
Investment in Cimarron                                              -                    16.0
Property and equipment                                          348.6                    68.4
Operating lease right-of-use assets                               0.3                       -
Intangible assets                                                   -                   395.0
Goodwill                                                            -                   692.0
Total Midstream                                                 348.9                 1,171.4

Total impairment of assets                         $            905.3     $           3,205.1



Results of Operations

Business Segments

Our discussion of results of operations is presented on a segment basis. Our two
reportable segments are (1) Upstream and (2) Midstream, which separately feature
distinct revenue producing activities. We evaluate Upstream and Midstream
segment performance using Adjusted EBITDAX and Adjusted EBITDA, respectively.

The Company's management believes Adjusted EBITDAX and Adjusted EBITDA are
useful because they allow users to more effectively evaluate our operating
performance, compare the results of our operations from period to period and
against our peers without regard to our financing methods or capital structure
and because it highlights trends in our business that may not otherwise be
apparent when relying solely on GAAP measures. Adjusted EBITDAX and Adjusted
EBITDA should not be considered as an alternative to our segments' net income
(loss), operating income (loss) or other performance measures derived in
accordance with GAAP and may not be comparable to similarly titled measures in
other companies' reports.  The Company's applicable corporate activities have
also been allocated to the supported business segments.

For the year ended December 31, 2019 compared to the periods from February 9, 2018 through December 31, 2018 (2018 Successor Period) and January 1, 2018 through February 8, 2018 (Predecessor Period)


The tables included below set forth financial information for the year ended
December 31, 2019. The 2018 Successor Period and the Predecessor Period are
distinct reporting periods as a result of the Business Combination. The
Predecessor Period amounts below exclude operating results related to
discontinued operations. We refer to the combined 2018 Successor Period from
February 9, 2018 through December 31, 2018 and the Predecessor Period from
January 1, 2018 through February 8, 2018 as the "2018 Period".


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Upstream Segment Results of Operations


Our Upstream segment was impacted by the Business Combination, which caused our
2018 results to be separately presented between Successor and Predecessor
Periods. In preparing the following discussion, we have provided a combined
total to arrive at a full year 2018 amount and context for the change of such
full year amount to the 2019 comparable amount. We view 2018 as a single
reporting period since the impact of the Business Combination was limited to the
items described below. We believe that this approach:

• allows readers of our financial statements to see how management has

evaluated the operating results; and

• provides readers of our financial statements with adequate context for

their analysis of our operating results.




The impact to our Upstream results following the Business Combination primarily
relates to increased depletion expense associated with a step-up for proved oil
and gas properties and to impairment expense which is associated with the
step-up for both unproved and proved oil and gas properties. We do not believe
that the presentation of full pro forma segment results is more preferable than
the information that follows.
Revenue

Our oil, gas and NGLs revenue varies as a result of changes in commodity prices
and production volumes. The following table summarizes our revenue and
production data for the periods presented:
?
                                                         Successor                      Predecessor
                                                                  February 9,
                                                                     2018
                                                Year Ended          Through           January 1, 2018
                                               December 31,      December 31,             Through
(in thousands, except per unit data)               2019              2018             February 8, 2018
Net production:
Oil (Mbbl)                                            5,885             5,053                      494
Natural gas (MMcf)                                   24,802            16,913                    1,609
NGLs (Mbbl)                                           2,760             2,268                      151
Total (MBoe)                                         12,779            10,140                      914

Average net daily production volume:
Oil (Mbbld)                                            16.1              15.4                     12.7
Natural gas (MMcfd)                                    67.9              51.9                     41.2
NGLs (Mbbld)                                            7.6               7.0                      3.9
Total (MBoed)                                          35.0              31.1                     23.4

Average sales prices before hedging:
Oil (per bbl)                                $        55.79     $       63.99       $            62.68
Natural gas (per Mcf)                        $         2.16     $        2.57       $             2.66
NGLs (per bbl)                               $        14.50     $       18.98       $            26.41

Revenue
Oil sales                                    $      328,386     $     323,299       $           30,972
Natural gas sales                                    53,693            43,407                    4,276
NGL sales                                            40,026            43,039                    4,000
Total Upstream sales revenue                 $      422,105     $     409,745       $           39,248

Gain on sale of assets                       $        1,488     $       4,751       $              840



Oil revenue for 2019 decreased compared to the 2018 Period due to a decrease in
average market prices in 2019, which was partially offset by an increase in
production. The increase in production in 2019 was due to an increase in the
number of wells drilled and new wells on production as a consequence of the
significant 2018 capital expenditure program.

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NGL revenue for 2019 decreased compared to the 2018 Period due to a decrease in
average market prices in 2019, which was partially offset by an increase in
production. The pricing reduction primarily relates to our election of the
treatment of ethane volumes in our contract with KFM. Under our gathering
contract with KFM, we have an ability to determine ethane recovery volumes as
either a fixed recovery or at the actual levels that the plant can recover. In
2019, we elected to recover ethane volumes at a fixed rate until August, which
had the impact of increasing the NGLs volume but decreasing the price received
per barrel as the total sales value remained unchanged. Beginning in August
2019, we elected to recover actual ethane volumes. The increase in production
volume was primarily due to our 2018 development activities.

Gain on sale of assets primarily includes gains from the sale of seismic data in
2019 and the 2018 Period.
                                                             Successor                        Predecessor
                                                                    February 9, 2018        January 1, 2018
                                             Year Ended December         Through                Through
(in thousands)                                    31, 2019          December 31, 2018       February 8, 2018
Gain (loss) on derivatives:
Realized gains (losses) -
Oil                                          $        6,858        $         (36,505 )     $         (3,819 )
Natural gas                                             784                   (2,456 )                1,523
Total realized gains (losses)                         7,642                  (38,961 )               (2,296 )
Unrealized gains (losses)                           (19,386 )                 28,714                  8,959
Total gain (loss) on derivatives             $      (11,744 )      $        

(10,247 ) $ 6,663




Decreases and increases in future commodity prices during each period compared
to futures prices in effect at the time of execution of our outstanding
derivatives resulted in the gains and losses recognized, respectively, during
each twelve month period.

In connection with Alta Mesa's bankruptcy filing, we cancelled (prior to contract settlement date) all open derivative contracts in September 2019 for net proceeds of approximately $4.0 million.

Operating Expenses

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                                                         Successor                     Predecessor
                                                                 February 9,
                                                                     2018
                                                Year Ended         Through           January 1, 2018
                                               December 31,      December 31,            Through
(in thousands, except per unit data)               2019              2018            February 8, 2018
Operating expenses:
Lease operating                              $       79,884     $     60,547       $            4,408
Transportation and marketing                         70,324           50,038                    3,725
Production taxes                                     19,455           16,865                      953
Workovers                                             2,652            5,563                      423
Exploration                                          52,354           34,085                    7,003
Depreciation, depletion and amortization            120,617          133,554                   11,670
Impairment of assets                                556,427        2,033,712                        -
General and administrative                           59,897          114,735                   21,234
Total Upstream operating expense             $      961,610     $  2,449,099       $           49,416

Select operating expenses per BOE:
Lease operating                              $         6.25     $       5.97       $             4.82
Transportation and marketing                           5.50             4.93                     4.08
Production taxes                                       1.52             1.66                     1.04
Workovers                                              0.21             0.55                     0.46
Depreciation, depletion and amortization               9.44            13.17                    12.77



Lease operating expense for 2019 increased primarily due to an increase in net
production coupled with the impact of additional costs for produced water
disposal after our asset sale to KFM in the fourth quarter of 2018 and a
non-cash charge to reduce the carrying value of certain supplies to realizable
value.

Transportation and marketing expense for 2019 increased primarily due to increase in net production. The fee we pay per unit reflects the firm processing capacity at the plant, as well as firm transport for our residue gas at the tailgate of the plant. The increase is also due to an increase in committed capacity which went unused during 2019.

Production taxes for 2019 increased primarily due to an increase in production volumes and an increase in the Oklahoma severance tax rate from 2% to 5%, effective in the third quarter of 2018, for wells in their first 3 years of production.


Workovers for 2019 decreased primarily due to less workover projects undertaken
due to our efforts to reduce costs. Workovers are associated with maintenance
and other efforts to increase production.

                                                         Successor                      Predecessor
                                                                  February 9,
                                                                     2018
                                                Year Ended          Through           January 1, 2018
                                               December 31,      December 31,             Through
(in thousands)                                     2019              2018             February 8, 2018
Exploration expense:
Geological and geophysical costs             $        1,246     $       6,755       $            2,440
Exploratory dry hole expense                             23             1,954                        -
Other exploration expense, including expired
leases                                               51,010            24,374                    4,504
ARO settlements in excess of recorded
liabilities                                              75             1,002                       59
Total exploration expense                    $       52,354     $      34,085       $            7,003



Exploration expense for 2019 increased primarily due to an increase in expired
and expiring leases, primarily for those in Major and Kingfisher counties in
Oklahoma. Geological and geophysical costs decreased as a result of headcount
reductions.


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Depreciation, depletion and amortization expense for 2019 decreased as a result
of a significantly lower depletable base due to impairments recorded during 2018
and 2019.
                                                              Successor                     Predecessor
                                                                      February 9,
                                                                          2018
                                                     Year Ended         Through           January 1, 2018
                                                    December 31,      December 31,            Through
(in thousands)                                          2019              2018            February 8, 2018
Impairment of assets:
Impairment of unproved properties                 $       31,023     $    742,065       $                -
Impairment of proved properties                          484,830        1,291,647                        -
Impairment of operating lease right-of-use assets         13,245                -                        -
Impairment of other long-term assets                      27,329                -                        -
Total impairment of assets                        $      556,427     $  2,033,712       $                -



Impairment of assets for 2019 consisted of impairment of our proved and unproved
properties, operating lease right-of-use assets and a long-term prepaid asset.
Our oil and gas properties were impaired during the third quarter of 2019 based
on our impairment analysis resulting from our bankruptcy filing and further
impaired during the fourth quarter of 2019 after taking into consideration the
expected purchase price of the AMH Sale Transaction, net of estimated direct
costs, for substantially all of our upstream assets. Operating lease
right-of-use assets were impaired during the second quarter 2019 based on our
inability to fully recover cash outflows due to lessors for certain unused
office space. A further impairment of the remaining value of our operating lease
right-of-use assets, as well as significant portion of a long-term prepaid
asset, was taken as of December 31, 2019, due to the expected sale of
substantially all of our assets and the expected rejection of certain leases and
contracts that indicated we would not be able to fully recover the carrying
value of those assets. We believe the Buyer has the intent and ability to close
the Sale Transactions.

For the 2018 Period, impairment largely related to a decrease in commodity
prices, as well as the results of exploratory and development drilling and well
performance, which reduced the value of our assets. A significant decline in
spot and future estimated commodity prices late in the fourth quarter of 2018,
and the impact of changes in our individual well reserve recovery estimates
triggered a downward revision in the future cash flows expected to be generated
by our oil and gas properties, which required us to reduce the carrying value of
those properties to estimated fair value.
                                                         Successor                      Predecessor
                                                                  February 9,
                                                                     2018
                                                Year Ended          Through           January 1, 2018
                                               December 31,      December 31,             Through
(in thousands)                                     2019              2018             February 8, 2018
General and administrative expense:
Employee-related costs                       $       22,018     $      18,203       $            1,032
Equity-based compensation                             5,718            20,000                        -
Professional fees                                     8,289            12,981                    1,019
Strategic costs                                       8,116                 -                        -
Business Combination                                      -            23,717                   17,040
Severance costs                                       4,865             8,357                        -
Information technology                                4,002             4,654                        -
Operating leases                                      4,193             3,267                      208
Provision for uncollectible receivables               1,218            22,438                        -
Other                                                 1,478             1,118                    1,935

Total general and administrative expense $ 59,897 $ 114,735 $

           21,234



General and administrative expense for 2019 decreased compared to the 2018
Period primarily due to (i) nonrecurring expenses in the 2018 Period related to
the Business Combination and professional fees for various advisors, (ii) a
$22.4 million provision for certain related party receivables (including notes
receivable) we assessed as uncollectible, and (iii) higher equity-based
compensation expense and severance costs associated with the departure of
certain members of executive management in late 2018. General and administrative
expense during 2019 also included costs for legal and strategic financial
advisory services associated with financial restructuring activities, including
negotiations with representatives of our lenders and other third

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parties, as well as severance costs associated with a reduction in force in early 2019. All professional fees incurred from the filing of the Initial Bankruptcy Petitions forward, and directly related to the bankruptcy, are reported in Reorganization items, net.

Below is a reconciliation of our loss from continuing operations before income taxes to Upstream Adjusted EBITDAX:

                                                            Successor                        Predecessor
                                                                   February 9, 2018        January 1, 2018
                                                Year Ended             Through                 Through
(in thousands)                               December 31, 2019    December 31, 2018        February 8, 2018
Loss from continuing operations before
income taxes                                 $    (597,510 )     $       (2,076,370 )     $         (7,116 )

Interest expense                                    49,823                   38,265                  5,511
Depreciation, depletion and amortization           120,617                  133,554                 11,670
Exploration                                         52,354                   34,085                  7,003
Loss (gain) on unrealized hedges                    19,386                  (28,714 )               (8,959 )
Loss (gain) on sale of property and
equipment                                                -                      388                      -
Impairment of assets                               556,427                2,033,712                      -
Equity-based compensation                            5,718                   20,000                      -
Provision for uncollectible related party
receivables(1)                                         886                   22,438                      -
Severance costs                                      4,865                        -                      -
Strategic costs                                      8,116                        -                      -
Business combination                                     -                   23,717                 17,040
Non-cash lease operating expense                     3,835                        -                      -
Reorganization items, net                             (449 )                      -                      -
Upstream Adjusted EBITDAX                    $     224,068       $          

201,075 $ 25,149

_________________

(1) Represents a provision for the estimated uncollectibility of certain related

    party receivables (including notes receivable).




Other (Income) Expense
                                                             Successor                        Predecessor
                                                                    February 9, 2018        January 1, 2018
                                             Year Ended December         Through                Through
(in thousands)                                    31, 2019          December 31, 2018       February 8, 2018
Alta Mesa RBL                                $       24,541        $           2,807       $            815
2024 Notes                                           27,453                   35,273                  3,281
Bond premium amortization                            (3,432 )                 (4,512 )                    -
Deferred financing cost amortization                    195                      221                    171
Other                                                 1,066                    4,476                  1,244
Total interest expense                               49,823                   38,265                  5,511
Interest income                                        (154 )                 (1,983 )                 (172 )
Reorganization items, net                              (449 )                      -                      -
Total other (income) expense, net            $       49,220        $        

36,282 $ 5,339



Interest expense for 2019 increased due to higher average debt balances
outstanding under the Alta Mesa RBL coupled with higher default and borrowing
base deficiency interest rates beginning in September 2019. We ceased accruing
interest on the 2024 Notes effective upon filing of the Initial Bankruptcy
Petitions as payment was unlikely to occur. Unrecorded contractual interest on
the 2024 Notes was approximately $12.0 million through December 31, 2019.

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Reorganization items, net
(in thousands)                                     Year Ended December 31, 2019
Unamortized deferred financing fees and premiums $                   (24,725 )
Terminated contracts                                                  (1,435 )
Legal and other professional advisory fees                            25,711
Reorganization items, net                        $                      (449 )


Midstream Segment Results of Operations

Revenue


Our Midstream revenue was primarily derived from product sales, gas gathering
and processing, crude oil gathering, and produced water gathering and disposal
fees.
                                                                              February 9,
                                                                                 2018
                                                            Year Ended          Through
                                                           December 31,      December 31,
(in thousands)                                                 2019              2018
Sales of gathered production                             $       37,195     $      31,506
Midstream revenue                                                84,763            63,199
Produced water disposal fees                                     24,988             5,320
Total Midstream revenue                                  $      146,946     $     100,025

KFM gas volumes (MMcf)                                           49,147            35,058
KFM crude oil gas volumes (Mbbls)                                 1,104     

1,739

KFM produced water gathering volumes (Mbbls)                     25,295     

5,320




Sales of gathered production for 2019 increased compared to the 2018 Successor
Period due to increased oil and gas gathering volumes and the impact of a second
cryogenic processing train commissioned in mid-2018. We process the gas on
behalf of the producer and sell the resulting gas, condensate and NGLs at a
market price. Product sales are recognized when sold to the third-party
purchaser. Amounts recognized in product sales are dependent on whether we are
acting in the role of a principal or agent in our contracts with our customers.
We remit to the producer an agreed-upon price from the resulting sales, which is
treated as product expense.

Midstream revenue for 2019 increased compared to the 2018 Successor Period due
to increased gas gathering volumes and the impact of a second cryogenic
processing train commissioned in mid-2018. The level of drilling and well
completion activity of our customers impacts the fees we earn from the
throughput of gas we gather and process and the volume of crude oil we gather
each period.

Produced water disposal fees resulted from the acquisition of produced water
disposal assets from Alta Mesa during the fourth quarter of 2018. The level of
drilling and well completion activity of our customers impacts the amount of
fees we generate from the produced water that we gather and dispose of.









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Expenses
                                                                             February 9,
                                                                                 2018
                                                            Year Ended         Through
                                                           December 31,      December 31,
(in thousands)                                                 2019              2018
Midstream operating                                      $       24,719     $     15,221
Cost of sales for purchased gathered production                  34,529           31,247
Transportation and processing                                     9,659            9,911
Workovers                                                           537                -
Depreciation and amortization                                    11,675           27,388
Impairment of assets:
Impairment of Cimarron investment                                     -     

15,963

Impairment of property and equipment                            348,597     

68,407

Impairment of operating lease right-of-use assets                   269                -
Impairment of intangible assets                                       -     

394,999

Impairment of goodwill                                                -     

691,970

Total Midstream impairment of assets                            348,866     

1,171,339

General and administrative                                       35,427           14,025
Total operating expenses                                 $      465,412     $  1,269,131



Midstream operating expense for 2019 increased compared to the 2018 Successor
Period due to operating expenses for the produced water disposal assets acquired
from Alta Mesa during the fourth quarter of 2018 and the impact of higher
volumes processed, which led to higher variable plant operating costs.

Cost of sales for purchased gathered production for 2019 increased compared to
the 2018 Successor Period due to increase in sales of gathered production. The
margin for net sales increased due to plant efficiency improvements during 2019.

Depreciation and amortization expense for 2019 decreased compared to the 2018
Successor Period due to amortization expense related to intangible customer
relationship assets that were fully impaired at December 31, 2018. This impact
was coupled with a decrease in tangible asset depreciation as a result of
significantly lower book asset values due to impairments recorded during 2018
and 2019, partially offset by depreciation on the produced water assets acquired
in the fourth quarter of 2018.

Impairment of assets for 2019 decreased compared to the 2018 Successor Period.
During 2019, property and equipment was impaired during the third quarter of
2019 as a result of our impairment analysis arising from the bankruptcy filing
by Alta Mesa. We further impaired these assets during the fourth quarter 2019,
after taking into consideration the expected purchase price of the KFM Sale
Transaction, net of estimated direct costs, for substantially all of our assets.
We believe the Buyer has the intent and ability to close the Sale Transactions.

During the 2018 Successor Period, impairment of assets consisted of write-downs
of our equity method investment in Cimarron, certain property and equipment and
full write-offs of the carrying amount of our intangible assets and goodwill.
The fair value of the Midstream segment was negatively impacted by a significant
decline in commodity prices in the fourth quarter of 2018 and the related impact
on our and other producers' future upstream operating plans. Our upstream
operations contribute a significant portion of the volumetric throughput to the
KFM plant. A decline in such throughput negatively impacts future expected
profitability, and thus, fair value of the Midstream segment.

We reduced the carrying amount of our investment in Cimarron to adjust its carrying value to fair value at December 31, 2018 due to our decision to abandon the project.



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                                                                              February 9,
                                                                                 2018
                                                            Year Ended          Through
                                                           December 31,      December 31,
(in thousands)                                                 2019              2018
General and administrative expenses:
Employee-related costs                                   $       14,569     $       8,199
Equity-based compensation                                           694             1,190
Professional fees                                                 2,092             1,743
Strategic costs                                                  11,479                10
Severance costs                                                   2,162                 -
Information technology                                              214               240
Operating leases                                                    348               253
Provision for uncollectible receivable                            2,310                 -
Other                                                             1,559     

2,390

Total general and administrative expense                 $       35,427     

$ 14,025




General and administrative expense for 2019 increased compared to the 2018
Successor Period primarily due to increased employee-related costs allocable to
KFM, increased costs for legal and strategic financial advisory services
associated with financial restructuring activities, and a provision to fully
reserve a receivable from KFM's former owner due to our assessment regarding
collectibility. Moreover, following a reassessment of 2019 activity levels, we
implemented a reduction in force program during 2019, which along with the
departure of our Vice President and Chief Operating Officer - Midstream,
resulted in severance costs during the period.

Below is a reconciliation of our loss from continuing operations before income taxes to Midstream Adjusted EBITDA:

                                                                               February 9, 2018
                                                            Year Ended             Through
(in thousands)                                           December 31, 2019    December 31, 2018
Loss from continuing operations before income taxes      $    (323,975 )     $       (1,174,131 )

Interest expense                                                11,636                    5,031
Depreciation and amortization                                   11,675                   27,388
Loss on sale of property and equipment                             106                        -
Impairment of assets                                           348,866                1,171,339
Equity-based compensation                                          694                    1,190
Severance costs                                                  2,162                        -
Strategic costs                                                 11,479                        -
Provision for uncollectible related party receivables            2,310                        -
Gain on equity method investment                                (5,503 )                      -
Adjusted EBITDA                                          $      59,450       $           30,817




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Other Income (Expense)
                                                                                February 9, 2018
                                                         Year Ended December         Through
(in thousands)                                                31, 2019          December 31, 2018
KFM Credit Facility                                      $       10,728        $           3,062
Deferred financing cost amortization                                463                      305
Other                                                               445                    1,664
Total interest expense                                           11,636                    5,031
Interest income                                                     (17 )                     (6 )
Equity in earnings of unconsolidated subsidiaries                (6,216 )                      -
Total other (income) expense                             $        5,403        $           5,025


Interest expense for 2019 increased primarily due to higher average debt balances outstanding under the KFM Credit Facility. Other interest primarily relates to commitment fees.


Equity in earnings of unconsolidated subsidiaries represents our share of
earnings due to our equity method investment in Cimarron. In November 2019, we
obtained control of Cimarron. As a result, we recognized a gain of $5.5 million
to adjust our investment to the fair value of the assets to be received upon
consolidating this entity.

Liquidity and Capital Resources


Our principal requirements for capital are to fund our day-to-day operations and
to satisfy our contractual obligations. During 2019, our main sources of
liquidity and capital resources came from cash on hand, operating cash flow and
borrowings under the Alta Mesa RBL and KFM Credit Facility.

On September 11, 2019, the Initial Debtors filed for bankruptcy protection,
which constituted an event of default under the Alta Mesa RBL that accelerated
Alta Mesa's obligations thereunder. Under the Bankruptcy Code, the lenders under
the Alta Mesa RBL are stayed from taking any action against the AMH Debtors as a
result of an event of default. As of December 31, 2019, we had $355.9 million in
outstanding borrowings under the Alta Mesa RBL, plus $1.9 million in outstanding
letters of credit.

In August 2019, our lenders elected to exercise their right to an off-cycle
borrowing base redetermination, whereby they reduced our borrowing base from
$370.0 million to $200.0 million. As a condition to the borrowing base
reduction, we were required to make monthly installments of $32.5 million for
five months, beginning in September 2019, to reduce our outstanding borrowings
to the revised borrowing base. AMR and the AMH Debtors filed for bankruptcy
protection prior to making any of these payments. Subsequent to Alta Mesa's
bankruptcy filing, we began operating under a cash collateral order issued by
the Bankruptcy Court that allows Alta Mesa to use its cash collateral. The terms
and conditions of the cash collateral order include, without limitation,
adherence to a lender approved budget with an agreed upon variance and provides
for certain monthly reporting obligations.

On September 23, 2019, KFM received a reservation of rights letter from its
lenders asserting an event of default under the KFM Credit Agreement, thereby
eliminating its ability to access capital under its revolver, pending a cure of
the alleged event of default. As a result, KFM utilized cash on hand and cash
flow from operations to fund required expenditures and satisfy contractual
obligations during the fourth quarter 2019.

On January 12, 2020, the KFM Debtors filed for bankruptcy protection under
Chapter 11 of the bankruptcy code, which constituted an event of default under
the KFM Credit Facility that accelerated KFM's obligations thereunder. Under the
Bankruptcy Code, the lenders under the KFM Credit Facility are stayed from
taking any action against the KFM Debtors as a result of an event of default. As
of December 31, 2019, outstanding borrowings under the KFM Credit Facility
totaled $224.0 million and there were no outstanding letters of credit.
Subsequent to KFM's bankruptcy filing, we began operating under a cash
collateral order issued by the Bankruptcy Court that allows KFM to use its cash
collateral. The terms and conditions of the cash collateral order include,
without limitation, adherence to a lender approved budget with an agreed upon
variance and provides for certain monthly reporting obligations.

Alta Mesa and KFM expect to sell substantially all of their assets no later than mid-April 2020 for a combined price of $320.0 million before deductions for direct costs. Following the expected sale, we intend to provide certain transition services to th

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e Buyer for a limited period of time and expect to wind down our remaining business during the first half of 2020, which will result in the dissolution of AMR and its subsidiaries.


2024 Notes

Alta Mesa has $500.0 million in aggregate principal amount of outstanding notes
bearing interest at 7.875% per annum, payable semi-annually each June 15 and
December 15. The 2024 Notes mature in December 2024.

Alta Mesa's filing of the Bankruptcy Petitions constituted an event of default
under the 2024 Notes that accelerated Alta Mesa's obligations thereunder. Under
the Bankruptcy Code, the holders of the 2024 Notes are stayed from taking any
action against Alta Mesa as a result of an event of default including
acceleration. We ceased accruing interest on the 2024 Notes effective upon
filing of the Initial Bankruptcy Petitions as payment was unlikely to occur.
Unrecorded contractual interest on the 2024 Notes was approximately $12.0
million through December 31, 2019.

Related Party Receivables


On September 29, 2017, Alta Mesa entered into a $1.5 million promissory note
receivable with its affiliate Northwest Gas Processing, LLC, which obligation
was subsequently transferred to High Mesa Services, LLC ("HMS"), a subsidiary of
HMI. The promissory note bears interest, which may be paid-in-kind and added to
the principal amount, at a rate of 8% per annum and matured on February 28,
2019. At December 31, 2019 and 2018, amounts due under the promissory note
totaled $1.7 million. HMS defaulted under the terms of that promissory note when
it was not paid when due on February 28, 2019, and HMS has failed to cure such
default. Alta Mesa subsequently declared all amounts owing under the note
immediately due and payable. Alta Mesa also has an $8.5 million promissory note
receivable from HMS which matures on December 31, 2019, and bears interest at 8%
per annum, which may be paid-in-kind and added to the principal amount. As of
December 31, 2019, and 2018, the note receivable amounted to $11.7 million. HMI
disputes its obligations under the $1.5 million note and $8.5 million note
referenced above as payable to Alta Mesa. We oppose HMI's claims and believe
HMI's obligation under the notes to be valid assets of Alta Mesa and that the
full amount is payable to Alta Mesa. We are pursuing remedies under both
promissory notes and under applicable law in connection with repayment of the
promissory note by HMS. We believe there is substantial doubt about HMI's
ability to make payment and honor its indemnification, which is further
complicated by HMI's filing for bankruptcy protection in January 2020. As a
result of the potential conflict of interest of certain of our directors who are
also controlling holders and directors of HMI, our disinterested directors will
address any potential conflicts of interest with respect to this matter. As of
December 31, 2019, we established an allowance for doubtful accounts for the
promissory notes totaling $13.4 million, the expense for which is included in
general and administrative expense in 2018.

Interest income on the promissory notes amounted to approximately $0.9 million
and $0.1 million for the 2018 Successor Period and the 2018 Predecessor Period,
respectively, all recorded as paid-in-kind and added to the balance due
thereunder. Due to our assessment of collectability, we did not recognize
interest income related to this receivable in 2019.

In connection with the Business Combination, we distributed our non-STACK oil
and gas assets to a subsidiary of HMI, and certain subsidiaries of HMI agreed to
indemnify and hold us harmless from any liabilities associated with those
non-STACK oil and gas assets, regardless of when those liabilities arose. We
also entered into a management services agreement (the "HMI Agreement") with HMI
with respect to its non-STACK assets. Under the HMI Agreement, during the
180-day period following the Closing (the "Initial Term"), we agreed to provide
certain administrative, management and operational services necessary to manage
the business of HMI and its subsidiaries (the "Services"). Thereafter, the HMI
Agreement automatically renewed for additional consecutive 180-day periods (each
a "Renewal Term"), unless terminated by either party upon at least 90-days
written notice to the other party prior to the end of the Initial Term or any
Renewal Term. As compensation for the Services, HMI agreed to pay us each month
(i) a management fee of $10,000, (ii) an amount equal to any and all costs and
expenses incurred in connection with providing the Services.
Although the automatic renewal of this agreement occurred in the third quarter
of 2018, the parties subsequently reached agreement to terminate the HMI
Agreement effective January 31, 2019. Through April 1, 2019, we were obligated
to take all actions that HMI reasonably requested to effect the transition of
the Services from Alta Mesa to a successor service provider. During the
transition period, HMI agreed to pay us (i) for all Services performed, (ii) an
amount equal to our costs and expenses incurred in connection with providing the
Services as provided for in the approved budget and (iii) an amount equal to our
costs and expenses reimbursable pursuant to the HMI Agreement. Prior to 2018, we
also incurred $0.8 million of costs for the direct benefit of HMI and the
non-STACK assets, outside of the HMI Agreement, and pursuant to the HMI
Agreement as "Receivables due from related party" in the balance sheets. As of
December 31, 2019 and December 31, 2018, we had receivables of approximately
$9.8 million and $10.1 million for costs and expenses incurred on HMI's behalf.
Subsequent to

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year-end 2018, we billed HMI $0.8 million for incremental MSA costs incurred and
have received approximately $1.1 million in payments. HMI has disputed certain
of these amounts billed by Alta Mesa. We are pursuing remedies under applicable
law in connection with repayment of this receivable. We believe there is
substantial doubt about HMI's ability to make payment and honor its
indemnification, which is further complicated by HMI's filing for bankruptcy
protection in January 2020. As a result, as of December 31, 2019, we have
recognized an allowance for uncollectible accounts of $9.8 million to fully
provide for the unremitted balance. We also may be subject to liabilities for
the non-STACK oil and gas assets for which we should have been indemnified. We
currently cannot estimate the extent of such liabilities and expect such
liabilities, if any, to be addressed in connection with our pending bankruptcy
proceedings.

Tax Receivable Agreement

We are party to a Tax Receivable Agreement ("TRA") with SRII Opco, High Mesa,
and Riverstone VI Alta Mesa Holdings, L.P. This agreement generally provides for
the payment by us of 85% of the amount of any realized net cash savings, in U.S.
federal, state and local income tax in periods after the Business Combination as
a result of (i) certain tax basis increases resulting from the exchange of SRII
Opco Common Units for AMR Class A Common Stock (or, in certain circumstances,
cash) pursuant to the redemption right or our right to effect a direct exchange
of SRII Opco Common Units under the SRII Opco LPA, other than such tax basis
increases allocable to assets held by KFM or otherwise used in KFM's midstream
business, and (ii) interest paid or deemed to be paid by us as a result of, and
additional tax basis arising from, any payments we make under the TRA. Also,
under the TRA, we retain the benefit of the remaining 15% of these cash savings.

As of December 31, 2019, there had been one exchange of SRII Common Units which
would trigger a payment under the TRA. This exchange occurred in November 2018
when 2,752,312 SRII Opco Common Units then held by High Mesa were converted into
the same number of shares of AMR Class A Common Stock. We have calculated the
tax basis increase resulting from this exchange, and the resulting potential
future net cash savings in U.S. federal, state and local income tax, multiplied
by 85% to arrive at a potential Tax Receivable Agreement liability. This amount
would be due and payable by us if we actually realized these future cash tax
savings. However, as of December 31, 2019, we have recorded a full valuation
allowance on our other deferred tax assets determined in accordance with GAAP,
and therefore we have not realized any savings and have not recorded a liability
for such at this time. As a result of our bankruptcy filings and the expected
sale of substantially all of our assets, we do not anticipate any payments being
required under the TRA.

Cash Flows
                                                 Successor                            Predecessor
                                                           February 9, 2018         January 1, 2018
                              Year Ended December 31,          Through                  Through
(in thousands)                          2019              December 31, 2018         February 8, 2018
Cash from operating
activities                    $           143,798        $           86,809       $           26,336
Cash from investing
activities                               (320,329 )                (560,547 )                (37,913 )
Cash from financing
activities                                244,724                   501,205                   16,932
Net increase in cash, cash
equivalents and restricted
cash                          $            68,193        $           27,467       $            5,355


Cash from operating activities


Cash provided by operating activities during 2019 increased compared to the 2018
Successor Period and the 2018 Predecessor Period primarily due to collection of
receivables, which were higher at December 31, 2018 as compared to December 31,
2019 due to our bankruptcy filing. Additionally, our 2018 operating cash flow
was burdened by nonrecurring costs associated with (i) certain administrative
services provided to HMI and its subsidiaries that were subsequently determined
to be uncollectible and (ii) the Business Combination. Partially offsetting
these factors was an increased use of cash in 2019 associated with prepayment of
legal and professional advisor fees relating to our bankruptcy filing as well as
a prepayment of transportation fees under a long-term customer contract.


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Cash from investing activities


Cash used in investing activities during 2019 decreased compared to the 2018
Successor Period and the 2018 Predecessor Period, primarily due to significantly
reduced capital expenditures resulting from the suspension of our development
activities in conjunction with Alta Mesa's bankruptcy filing in September 2019.
The 2018 Successor Period included activity relating to the Business
Combination, which was funded through proceeds withdrawn from a trust account
that was established upon the initial public offering of the Company in 2017.

Cash from financing activities


Cash provided by financing activities during 2019 decreased compared to the 2018
Successor Period and the 2018 Predecessor Period. Our ability to borrow funds
during 2019 was terminated upon Alta Mesa's bankruptcy filing in September 2019
and restrictions imposed by the lenders under the KFM Credit Facility due to an
alleged default. During the 2018 Successor Period, we received $400.0 million
from the sale of our Class A Common Stock and warrants pursuant to a forward
purchase agreement, which was partially offset by deferred underwriting payments
and certain other costs associated with the Business Combination plus
repurchases of our common stock.

Risk Management Activities - Commodity Derivative Instruments
In connection with Alta Mesa's bankruptcy filing, we cancelled (prior to
contract settlement date) all open derivative contracts in September 2019 for
net proceeds of approximately $4.0 million. Proceeds received were used to make
permanent repayments against our outstanding borrowings under the Alta Mesa RBL.
After September 2019, we held no open derivative positions.

Off-Balance Sheet Arrangements


As of December 31, 2019, other than as described below, we had no guarantees of
third-party obligations. Alta Mesa was contingently liable for bonds posted in
the aggregate amount of $1.3 million, primarily to cover future abandonment
costs, and $1.9 million in letters of credit provided under the Alta Mesa RBL.
Upon closing of the expected Sale Transactions, we would be released from these
obligations. We have no other off-balance sheet arrangements that are reasonably
likely to materially affect our liquidity and capital resources.

Alta Mesa and HMI are both parties to a payment and indemnity agreement with our
current surety provider in connection with regulatory bonds executed prior to
the Business Combination covering STACK and non-STACK assets. The surety bonds
in place covered by the payment and indemnity agreement for HMI non-STACK
properties total approximately $15 million. The surety asserts that Alta Mesa is
jointly and severally liable pursuant to the payment and indemnity agreement,
but Alta Mesa disputes that claim asserting that the Business Combination
evidenced separation between the STACK and non-STACK assets thereby removing any
exposure of Alta Mesa to liabilities associated with non-STACK assets. As a
result of the dispute, the surety has filed liens on Alta Mesa and KFM assets in
order to establish a claim against Alta Mesa in the event HMI is unable to post
collateral or otherwise satisfy its obligations with respect to the surety
bonds. The closing of the expected Sale Transactions is not expected to impact
these outstanding surety bonds.

Critical Accounting Policies and Estimates


Our financial statements are prepared in accordance with GAAP. In connection
with preparing our financial statements, we are required to make assumptions and
estimates about future events and apply judgments that affect the reported
amounts of assets, liabilities, revenue, expense and the related disclosures. We
base our assumptions, estimates and judgments on historical experience, current
trends and other factors that management believes to be relevant at the time we
prepare our consolidated financial statements. On a regular basis, we review the
accounting policies, assumptions, estimates and judgments to ensure that our
financial statements are presented fairly and in accordance with GAAP. However,
because future events and their effects cannot be determined with certainty,
actual results could differ materially from our assumptions and estimates.

Our significant accounting policies are discussed in our audited financial statements included elsewhere in this Annual Report. We believe that the following accounting estimates are those most critical to fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

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Oil and Gas Reserves
Policy Description

Proved oil and gas reserves are the estimated quantities of oil and 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. In calculating cash inflows for reserves, we use an
unweighted average of the preceding 12-month first-day-of-the-month prices for
determination of proved reserve values and for annual proved reserve
disclosures. We assume continued use of technologies with demonstrated success
of yielding expected results, including the use of drilling results, well
performance, well logs, seismic data, geological maps, well stimulation
techniques, well test data and reservoir simulation modeling.

In calculating cash outflows for reserves, we use well costs and operating costs
prevailing during the preceding year, but more heavily weighted toward recent
demonstration levels, which are then held constant into future periods. Our
estimates of proved reserves are determined and reassessed at least annually
using available geological and reservoir data as well as production performance
data. Revisions may result from changes in, among other things, reservoir
performance, prices, economic conditions and governmental policies.

We limit our future development program to only those wells that we expect to be developed within five years of their initial recognition.

Judgments and Assumptions


All of our reserve information is based on estimates. Estimates of gas reserves
are prepared in accordance with guidelines established by the SEC. Reservoir
engineering is a subjective process of estimating recoverable underground
accumulations of oil and gas. There are numerous uncertainties inherent in
estimating recoverable quantities of proved oil and gas reserves. Uncertainties
include the projection of future production rates and the expected timing of
development expenditures. The accuracy of any reserve estimate is a function of
the quality of available data and of engineering and geological interpretation
and judgment. As a result, proved reserve estimates may be different from the
quantities of oil and gas that are ultimately recovered.

The passage of time provides more qualitative information regarding estimates of
reserves, and revisions are made to prior estimates to reflect updated
information. We have used estimates of proved reserves in the past to assess for
impairment, and we also rely heavily on them in the calculation of depletion
expense. For example, if estimates of proved reserves decline, the depletion
rate and resulting expense will increase, resulting in a decrease in net income.
A decline in estimates of proved reserves have also caused us in previous
periods to perform an impairment analysis to determine whether the carrying
amount of oil and gas properties exceeds fair value, which would result in an
impairment charge, reducing net income.
Successful Efforts Method of Accounting for Oil and Gas Properties

Policy Description


Oil and gas producing activities are accounted for using the successful efforts
method under which lease acquisition costs and all development costs, including
unsuccessful development wells, are capitalized.

Accounting policies include:


Unproved Properties - Costs associated with the acquisition of leases are
capitalized as incurred. These costs consist of amounts incurred to obtain a
mineral interest or right in a property, such as a lease, options to lease, and
related broker and other fees. Properties are classified as unproved until
proved reserves are recognized, at which time the related costs are transferred
to proved oil and gas properties, or when leases expire or are sold.

Proved Oil and Gas Properties - Costs incurred to lease, drill, complete and
equip proved reserves are capitalized. All costs incurred to drill and equip
successful exploratory wells, development wells, development-type stratigraphic
test wells, and service wells, including unsuccessful development wells, are
capitalized.
Impairment - Our unproved properties consist of leasehold and other capital
costs incurred for properties for which no proved reserves have been identified.
In determining whether unproved property is impaired, we consider numerous
factors including recent leasing activity, recent drilling results in the area,
our geologists' evaluation of the property and the remaining

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Table of Contents

Index to Financial Statements



lease term for the property. If a potential impairment exists, we develop a cash
flow model based on estimated resource potential and, combined with a market
approach, estimate fair value of our properties. Our cash flow estimates for
probable and possible resource potential is reduced by additional risk-weighting
factors. We then reduce the carrying amount of unproved properties, if higher,
to estimated fair value.

The capitalized costs of proved oil and gas properties are reviewed at least
annually, or whenever events or changes in circumstances indicate that a
potential impairment may have occurred. The determination of recoverability is
based on comparing the estimated undiscounted future net cash flows at a
producing field level or the likely cash flow from sale of the assets to the
carrying value of the assets. If the carrying amount exceeds the estimated
undiscounted future net cash flows, we adjust the carrying amount of the
properties to fair value. For our proved oil and gas properties, we estimate
fair value by discounting the projected future cash flows at an appropriate
risk-adjusted discount rate.

Judgments and Assumptions


Our impairment analysis requires us to apply judgment in identifying impairment
indicators and estimating future cash flows of our oil and gas properties. If
actual results are not consistent with our assumptions and estimates or our
assumptions and estimates change due to new information, we may be exposed to an
impairment charge.

Key assumptions used to determine the undiscounted future cash flows could
include estimates of future production, timing of new wells coming on line,
differentials, net estimated operating costs, anticipated capital expenditures
and future commodity prices. Our discussion of the judgments inherent in reserve
estimation above has information with direct bearing on the judgments
surrounding our depletion calculation and impairment analysis. However, in
conducting our impairment analysis, we also replace pricing assumptions with
future price estimates and we include values for our probable and possible
resource potential in determining fair value.

Lower net undiscounted cash flows can result in the carrying amount of our oil
and gas properties exceeding the net undiscounted cash flows, which results in
an impairment expense. Changes in forward commodity prices and differentials,
changes in levels and timing of capital and operating expenses, and changes in
production among other items can result in lower net undiscounted cash flows.
Forward commodity prices can change quickly and unexpectedly which can
negatively impact forward commodity prices, causing lower undiscounted net cash
flows. Similarly, future capital and lease operating costs are uncertain and can
change quickly based on regional oil and gas drilling activity, steel and other
raw material prices, transportation costs and regulatory requirements, among
other factors. Increased capital and lease operating costs would result in lower
net undiscounted cash flows. Production estimates are determined based on field
activities and future drilling plans.

Drilling and field activities require significant judgments in the evaluation of
all available geological, geophysical, engineering and economic data. As such,
actual results may materially differ from predicted results, which could lower
production and net undiscounted cash flows.

Recent Accounting Pronouncements

Our audited financial statements in Item 8 contain a description of recent accounting pronouncements.

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