Quarterly report pursuant to Section 13 or 15(d)

Organization and Basis of Presentation

Organization and Basis of Presentation
3 Months Ended
Mar. 31, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization and Basis of Presentation
Organization and Basis of Presentation

Rosehill Resources Inc. (the “Company” or “Rosehill”) is an independent oil and natural gas company focused on the acquisition, exploration, development and production of unconventional oil and associated liquids-rich natural gas reserves in the Permian Basin. The Company’s assets are concentrated in the Delaware Basin, a sub-basin of the Permian Basin.

Recent Developments

The adverse economic effects of COVID-19 have materially decreased demand for crude oil as a result of the restrictions implemented by governments trying to curb the outbreak and changes in consumer behavior. This has led to a significant global oversupply of oil and consequently a substantial decrease in crude oil prices. While global oil producers, including the Organization of Petroleum Exporting Countries (“OPEC”) and other oil producing nations (together with OPEC, “OPEC+”), have reached agreement to cut oil production to a limited extent, downward pressure on commodity prices has remained and could continue for the foreseeable future, particularly given concerns over available storage capacity for oil. The Company considered the impact of COVID-19 and the substantial decline in crude oil prices on the assumptions and estimates used in preparation of its financial statements and as a result has recognized a number of material charges during the three months ended March 31, 2020, including impairments to its capitalized costs for proved and unproved crude oil and natural gas properties. The Company has also recorded a full valuation allowance on its deferred tax assets and reduced its Tax Receivable Agreement liability. These items are discussed further in the following notes. In response to adverse effects of COVID-19 on the Company’s financial condition, the Company halted its capital drilling activities and reduced personnel. The full extent of the impact of COVID-19 on the Company’s operations is uncertain. A prolonged pandemic and low commodity prices could have a further material adverse effect on the Company’s results of operations, financial condition, and liquidity, including additional impairments to oil and natural gas properties.

On March 27, 2020, President Trump signed into U.S. federal law the “Coronavirus Aid, and Economic Security Act” (“CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. We have analyzed the different aspects of the CARES Act and determined that there is no impact on the Company’s financial statements.

Certain events of default under the Amended and Restated Credit Agreement and the Note Purchase Agreement (in each case, as defined below) have occurred, and the Company entered into a forbearance agreement with the lenders under the Amended and Restated Credit Agreement. On June 30, 2020, the Company entered into a Restructuring Support Agreement (“RSA”) with the stakeholders named therein, pursuant to which the Company expects to file for protection under Chapter 11 of the Bankruptcy Code for the purpose of confirming the Plan (as defined below). See further information, please read Note 3 - Liquidity and Note 20 - Subsequent Events.

Basis of Presentation

The condensed consolidated financial results of the Company consist of the financial results of Rosehill and Rosehill Operating Company, LLC (“Rosehill Operating”), its consolidated subsidiary. As of March 31, 2020, the Company owns approximately 64.7% of the common units of Rosehill Operating (the “Rosehill Operating Common Units”) and Tema Oil & Gas Company (“Tema”) owns approximately 35.3% of the Rosehill Operating Common Units.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, certain disclosures normally included in an Annual Report on Form 10-K have been condensed or omitted, although the company believes that the disclosures made are adequate to make the information not misleading. The condensed consolidated financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2019. Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2019. In the opinion of management, all normal, recurring adjustments and accruals considered necessary to present fairly, in all material respects, the Company’s interim financial results have been included. Operating results for the periods presented are not indicative of expected results for the full year. The Company has disclosed that it has substantial doubt about its ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued and the impact on the presentation of these condensed consolidated financial statements in Note 3 - Liquidity.

All intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current presentation on the accompanying consolidated financial statements. Such reclassifications had no impact on net income, cash flows or shareholders’ equity previously reported.

Variable Interest Entities

Rosehill Operating is a variable interest entity. The Company determined that it is the primary beneficiary of Rosehill Operating as the Company is the sole managing member and has the power to direct the activities most significant to Rosehill Operating’s economic performance as well as the obligation to absorb losses and receive benefits that are potentially significant and the Company now holds a majority of the ownership interest of Rosehill Operating. The Company consolidated 100% of Rosehill Operating’s assets and liabilities and results of operations in the Company’s consolidated financial statements. For further discussion, see Noncontrolling Interest in Note 16 - Stockholders’ Equity.