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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~March~~June 3130, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number: 333-225927

Riviera Resources, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		82-5121920 (I.R.S. Employer Identification No.)
600 Travis Street, Suite 1700 Houston, Texas (Address of principal executive offices)		77002 (Zip Code)
717 Texas Avenue, Suite 2000 Houston, Texas (Address of principal executive offices)		77002 (Zip Code)

(281) 840-4000

(Registrant’s telephone number, including area code)

600 Travis Street, Suite 1700, Houston, Texas 77002

(Former address of principal executive offices)

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

Title of each class		Trading symbols(s)		Name of exchange on which registered
None		None		None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of ~~April~~July 3031, 2020, there were 57,907,609 shares of common stock, par value $0.01 per share, outstanding.

TABLE OF CONTENTS

		Page
	Glossary of Terms	1
	Part I – Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2529
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3951
Item 4.	Controls and Procedures	4052
	Part II – Other Information
Item 1.	Legal Proceedings	4154
Item 1A.	Risk Factors	4154
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4155
Item 3.	Defaults Upon Senior Securities	4255
Item 4.	Mine Safety Disclosures	4255
Item 5.	Other Information	4255
Item 6.	Exhibits	4356
	Signatures	4457

Table of Contents

GLOSSARY OF TERMS

As commonly used in the oil and natural gas industry and as used in this Quarterly Report on Form 10-Q, the following terms have the following meanings:

Bbl. One stock tank barrel or 42 United States gallons liquid volume.

Btu. One British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 degrees to 59.5 degrees Fahrenheit.

MBbls. One thousand barrels of oil or other liquid hydrocarbons.

MBbls/d. MBbls per day.

Mcf. One thousand cubic feet.

Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.

MMBbls. One million barrels of oil or other liquid hydrocarbons.

MMBtu. One million British thermal units.

MMcf. One million cubic feet.

MMcf/d. MMcf per day.

MMcfe. One million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.

MMcfe/d. MMcfe per day.

MMMBtu. One billion British thermal units.

NGL. Natural gas liquids, which are the hydrocarbon liquids contained within natural gas.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31, 2020			December 31, 2019
	June 30, 2020			December 31, 2019
	(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	~~165~~55,~~223~~641		$	116,237
Accounts receivable – trade, net		2822,~~474~~551			51,355
Derivative instruments		127,~~075~~059			7,283
Restricted cash		2924,~~090~~139			32,932
Other current assets		1413,~~549~~057			12,853
Assets held for sale		~~1,195~~—			104,773
Total current assets		~~250~~122,~~606~~447			325,433
Noncurrent assets:
Oil and natural gas properties (successful efforts method)		~~178~~173,~~738~~899			180,307
Less accumulated depletion and amortization		(~~128~~136,~~041~~566	)		(35,603	)
		50,697			144,704
		37,333			144,704
Other property and equipment		~~399~~397,~~905~~057			388,851
Less accumulated depreciation		(7072,~~272~~872	)		(50,381	)
		329,633			338,470
		324,185			338,470
Other noncurrent assets		65,~~675~~555			7,652
		6,675			7,652
		5,555			7,652
Total noncurrent assets		~~387~~367,~~005~~073			490,826
Total assets	$	~~637~~489,~~611~~520		$	816,259
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	5536,~~743~~294		$	80,579
Derivative instruments		14766			1,087
Other accrued liabilities		149,~~758~~490			26,728
Distributions payable		57,908			—
Liabilities held for sale		—			35,177
Liabilities held for sale		809			35,177
Total current liabilities		46,550			143,571
Total current liabilities		129,232			143,571
Noncurrent liabilities:
Credit facilities		7275,~~800~~400			69,800
Asset retirement obligations and other noncurrent liabilities		2219,~~684~~317			29,337
Total noncurrent liabilities		9594,~~484~~717			99,137
Commitments and contingencies (Note 10)
Equity:
Preferred Stock ($0.01 par value, 30,000,000 shares authorized; no shares issued at March 31, 2020, or December 31, 2019)		—			—
Preferred Stock ($0.01 par value, 30,000,000 shares authorized; no shares issued at June 30, 2020, or December 31, 2019)		—			—
Common Stock ($0.01 par value, 270,000,000 shares authorized; 57,907,609 shares and 58,168,756 shares issued at March 31, 2020, and December 31, 2019, respectively)		579			581
Common Stock ($0.01 par value, 270,000,000 shares authorized; 57,907,609 shares and 58,168,756 shares issued and outstanding at June 30, 2020, and December 31, 2019, respectively)		579			581
Additional paid-in capital		~~802~~759,~~616~~186			861,764
Retained (deficit) earnings		(390,300	)		(288,794	)
Accumulated deficit		(411,512	)		(288,794	)
Total equity		~~412~~348,~~895~~253			573,551
Total liabilities and equity	$	~~637~~489,~~611~~520		$	816,259

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

Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(in thousands, except per share amounts)
Revenues and other:
Oil, natural gas and natural gas liquids sales	$	1410,~~798~~934		$	7666,~~345~~757		$	25,732		$	143,102
Gains (losses) on commodity derivatives		8(1,~~079~~358	)		~~(13~~20,~~241~~249	)		6,721			7,008
Marketing revenues		3321,~~922~~864			6753,~~347~~394			55,786			120,741
Other revenues		319			65,~~003~~150			40			11,153
		56,830			136,454
		31,449			145,550			88,279			282,004
Expenses:
Lease operating expenses		42,~~951~~894			2423,~~052~~845			7,845			47,897
Transportation expenses		21,~~174~~209			1918,~~150~~053			3,383			37,203
Marketing expenses		2116,~~319~~828			5341,~~389~~811			38,147			95,200
General and administrative expenses		911,~~904~~219			1913,~~039~~489			21,123			32,480
Exploration costs		—			~~1,238~~969			—			2,207
Depreciation, depletion and amortization		104,~~319~~793			2123,~~772~~181			15,112			44,953
Impairment of assets held for sale and long-lived assets		~~106~~14,~~784~~874			—18,390			121,658			18,390
Taxes, other than income taxes		1,~~215~~375			62,~~300~~599			2,590			8,899
(Gains) losses on sale of assets and other, net		~~460~~(2,491	)		~~(27~~9,~~265~~885	)		(2,031	)		(17,380	)
		157,126			117,675
		50,701			152,222			207,827			269,849
Other income and (expenses):
Operating (loss) income		(19,252	)		(6,672	)		(119,548	)		12,155
Interest expense, net of amounts capitalized		(929	)		(971	)
Other income and (expenses):
Other, net		(60	)		(589	)
Interest expense, net of amounts capitalized		(739	)		(2,103	)		(1,668	)		(3,074	)
		(989	)		(1,560	)
Other, net		(948	)		476			(1,008	)		(113	)
Reorganization items, net		(221	)		—
		(1,687	)		(1,627	)		(2,676	)		(3,187	)
(Loss) income before income taxes		(101,506	)		17,219
Reorganization items, net		(273	)		(424	)		(494	)		(472	)
Income tax expense		—			4,493
(Loss) income before income taxes		(21,212	)		(8,723	)		(122,718	)		8,496
Net (loss) income	$	(101,506	)	$	12,726
Income tax (benefit) expense		—			(2,047	)		—			2,446
(Loss) income per share:
Net (loss) income	$	(21,212	)	$	(6,676	)	$	(122,718	)	$	6,050
Basic	$	(1.75	)	$	0.18
(Loss) income per share:
Diluted	$	(1.75	)	$	0.18
Basic	$	(0.37	)	$	(0.10	)	$	(2.11	)	$	0.09
Weighted average shares outstanding ‒ basic		58,162			68,817
Diluted	$	(0.37	)	$	(0.10	)	$	(2.11	)	$	0.09
Weighted average shares outstanding ‒ diluted		58,162			69,000
Weighted average shares outstanding ‒ basic		58,041			65,005			58,098			66,900
Distributions declared per share	$	1.00		$	—
Weighted average shares outstanding ‒ diluted		58,041			65,089			58,098			67,079
Distributions declared per share	$	0.75		$	—		$	1.75		$	—

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

Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

	Common Stock						Additional Paid in Capital			Accumulated Earnings (Deficit)			Total Equity
	Shares			Amount
	(in thousands)
December 31, 2019		58,169		$	581		$	861,764		$	(288,794	)	$	573,551
Net loss					—			—			(101,506	)		(101,506	)
Repurchases of common stock		(323	)		(3	)		(2,063	)		—			(2,066	)
Issuance of common stock		62			1			823			—			824
Accrued distributions to shareholders					—			(57,908	)		—			(57,908	)
Distributions to shareholders					—			(57,908	)		—			(57,908	)
March 31, 2020		57,908		$	579		$	802,616		$	(390,300	)	$	412,895
Net loss					—			—			(21,212	)		(21,212	)
Distributions to shareholders					—			(43,430	)		—			(43,430	)
June 30, 2020		57,908		$	579		$	759,186		$	(411,512	)	$	348,253
December 31, 2018		69,197		$	692		$	1,256,730		$	4,952		$	1,262,374
Net income					—			—			12,726			12,726
Repurchases of common stock		(2,488	)		(25	)		(34,412	)		—			(34,437	)
Issuance of common stock		82			1			1,485			—			1,486
March 31, 2019		66,791			668			1,223,803			17,678			1,242,149
Net loss					—			—			(6,676	)		(6,676	)
Repurchases of common stock		(3,170	)		(32	)		(43,275	)		—			(43,307	)
June 30, 2019		63,621		$	636		$	1,180,528		$	11,002		$	1,192,166

	Common Stock						Additional Paid in Capital			Accumulated Earnings (Deficit)		Total Equity
	Shares			Amount
	(in thousands)
December 31, 2018		69,197		$	692		$	1,256,730		$	4,952	$	1,262,374
Net income					—			—			12,726		12,726
Repurchases of common stock		(2,488	)		(25	)		(34,412	)		—		(34,437	)
Issuances of common stock		82			1			1,485			—		1,486
March 31, 2019		66,791		$	668		$	1,223,803		$	17,678	$	1,242,149

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

Table of Contents

RIVIERA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
	Six Months Ended June 30,
	2020			2019
	(in thousands)
Cash flow from operating activities:
Net (loss) income	$	(~~101~~122,~~506~~718	)	$	126,~~726~~050
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation, depletion and amortization		1015,~~319~~112			2144,~~772~~953
Impairment of assets held for sale and long-lived assets		~~106~~121,~~784~~658			—18,390
Deferred income taxes		—			42,~~493~~446
Total (gains) losses on derivatives, net		(8,079	)		15,421
Gains on derivatives, net		(6,721	)		(2,047	)
Cash settlements on derivatives		26,~~173~~843			(52,~~085~~169	)
Share-based compensation expenses		(3,~~575~~901	)		47,~~236~~885
(Gains) losses on sale of assets and other, net		~~181~~103			(2819,~~564~~631	)
Other		~~980~~(379	)		14,~~583~~220
Changes in assets and liabilities:
Decrease in accounts receivable – trade, net		1927,~~835~~210			2628,~~536~~361
(Increase) decrease in other assets		(1,358	)		9,257
Decrease in other assets		1,566			10,901
Decrease in accounts payable and accrued expenses		(2237,~~095~~295	)		(1532,~~840~~120	)
Decrease in other liabilities		(713,~~715~~763	)		(8,~~857~~438	)
Net cash provided by (used in) operating activities		(4,056	)		37,678
Net cash (used in) provided by operating activities		(12,285	)		58,801
Cash flow from investing activities:
Development of oil and natural gas properties		~~(1,337~~—	)		(3056,~~512~~078	)
Purchases of other property and equipment		(1625,~~322~~628	)		(2348,~~183~~597	)
Proceeds from sale of properties and equipment and other		66,~~512~~915			6095,~~141~~291
Net cash provided by investing activities		48,853			6,446
Net cash provided by (used in) investing activities		41,287			(9,384	)
Cash flow from financing activities:
Repurchases of shares		(2,653	)		(3477,~~130~~744	)
Proceeds from borrowings		35,~~000~~600			96115,225
Repayments of debt		—			(2426,~~300~~949	)
Debt issuance costs paid		—			(23,~~715~~040	)
Net cash provided by financing activities		347			35,080
Distributions to shareholders		(101,338	)		—
Net increase in cash, cash equivalents and restricted cash		45,144			79,204
Net cash (used in) provided by financing activities		(98,391	)		7,492
Net (decrease) increase in cash, cash equivalents and restricted cash		(69,389	)		56,909
Cash, cash equivalents and restricted cash:
Beginning		149,169			49,777
Ending	$	~~194~~79,~~313~~780		$	~~128~~106,~~981~~686

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

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

Unless otherwise indicated or the context otherwise requires, references herein to the “Company” refer to Riviera Resources, Inc. (“Riviera”) and its consolidated subsidiaries. Unless otherwise indicated or the context otherwise requires, references herein to “LINN Energy” refer to Linn Energy, Inc. and its consolidated subsidiaries.

Nature of Business

Riviera is an independent oil and natural gas company ~~with~~quoted afor ~~strategic~~trading ~~focus~~ on ~~efficiently~~the OTCQX Market under the ticker “RVRA.” The Company has two reporting segments: upstream and Blue Mountain. The Company’s upstream reporting segment properties are located in two operating ~~its~~regions ~~mature~~in ~~low-decline~~the ~~assets,~~United ~~developing~~States ~~its~~(“U.S.”): ~~growth~~the Mid-~~oriented~~Continent ~~assets~~and North Louisiana. The Blue Mountain reporting segment consists of a cryogenic natural gas processing facility, a network of gathering pipelines and ~~returning~~compressors ~~capital~~and toproduced ~~shareholders~~water services and a crude oil gathering system located in the Merge/SCOOP/STACK play, each of which is owned by Blue Mountain Midstream LLC (“Blue Mountain Midstream”), a wholly owned subsidiary of the Company. ~~Riviera~~During isthe ~~quoted~~first ~~for~~half ~~trading~~of on2020, the ~~OTCQX~~Company ~~Market~~divested ~~under~~all of its properties located in the ~~ticker~~Uinta ~~“RVRA~~Basin and East Texas operating regions.” During 2019, the Company divested all of its properties located in the Hugoton Basin and Michigan/Illinois operating regions. See Note 3 for additional information.

~~The~~Recent ~~Company~~Developments ~~has two reporting segments: upstream~~ and Blue Mountain. The Company’s upstream reporting segment properties are located in two operating regions in the United States (“U.S.”): the Mid-Continent and North Louisiana. The Blue Mountain reporting segment consists of a cryogenic natural gas processing facility, a network of gathering pipelines and compressors and produced water services and a crude oil gathering system located in the Merge/SCOOP/STACK play, each of which is owned by Blue Mountain Midstream LLC (“Blue Mountain Midstream”), a wholly owned subsidiary of the Company. During 2020, the Company divested all of its properties located in the Uinta Basin and East Texas operating regions. During 2019, the Company divested all of its properties located in the Hugoton Basin and Michigan/Illinois operating regions. See Note 3 for additional information.Outlook

The Company and the oil and gas industry has been adversely impacted by recent events, including the initial dramatic increase in output from the Organization of Petroleum Exporting Countries and other oil producing nations (“OPEC+”) in the first quarter of 2020 and the destruction of demand resulting from the unprecedented global health and economic crisis sparked by the novel coronavirus disease (“COVID-19”) global pandemic. While OPEC+ has agreed to cut production, downward pressure on commodity prices has continued. In order to reduce expenses, in April 2020, the Board of Directors of the Company made the decision to consolidate the management of Blue Mountain Midstream within the Company’s existing executive management team. The Company plans to further reduce expenses by integration of the operations of the two companies wherever practical. The Company incurred severance expenses of approximately $4 million and $5 million for the three months and six months ended June 30, 2020, respectively, in connection with these activities.

As described further below, the Company recorded impairments on oil and natural gas properties and property, plant and equipment for the three months and six months ended June 30, 2020, due to declines in commodity prices and expected future volumes. The COVID-19 pandemic is still evolving and identification of all trends, events and uncertainties, including a possible widespread resurgence in COVID-19 infections in the second half of 2020 without the availability of generally effective therapeutics or a vaccine for the disease, that may impact the Company’s financial condition and results of operations are unknown at this time, therefore the Company’s results of operations for the three months and six months ended June 30, 2020, may not be indicative of its future results. If the pandemic and low commodity price environment continues, it may have a material adverse effect on the Company’s operating cash flows, liquidity, and future development plans.

Principles of Consolidation and Reporting

The information reported herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the results for the interim periods. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted under Securities and Exchange Commission rules and regulations; as such, this report should be read in conjunction with the consolidated financial statements and notes in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2019. The results reported in these unaudited condensed consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year.

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated. The condensed consolidated financial statements for prior periods include certain reclassifications that were made to conform to current presentation. Such reclassifications have no impact on previously reported net income (loss), stockholders’ equity, or cash flows. Investments in noncontrolled entities over which the Company exercises significant influence are accounted for under the equity method.

Use of Estimates

The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management of the Company to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. The estimates that are particularly significant to the financial statements include estimates of the Company’s reserves of oil, natural gas and natural gas liquids (“NGL”), future cash flows from oil and natural gas properties, depreciation, depletion and amortization, asset retirement obligations, certain revenues and operating expenses, and fair values of commodity derivatives.

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

AsThere ~~fair~~have ~~value~~been isno amaterial ~~market-based~~changes ~~measurement,~~in itcritical isaccounting ~~determined~~policies ~~based~~during on the ~~assumptions~~six ~~that~~months ~~market~~ended participants would use. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factorsJune 30, ~~including the current economic environment~~2020, ~~which~~as ~~management~~compared ~~believes~~ to ~~be reasonable under~~ the ~~circumstances. Such~~critical ~~estimates~~accounting ~~and~~policies ~~assumptions~~described ~~are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Any changes~~ in ~~estimates~~Item 8 ~~resulting~~of ~~from continuing changes in~~ the ~~economic~~Company’s ~~environment~~Annual ~~will~~Report beon ~~reflected~~Form in10-K for the ~~financial~~year ~~statements~~ended inDecember 31, ~~future periods~~2019.

Use of Estimates

As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Any changes in estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

Fair Value of Financial Instruments

The carrying values of the Company’s receivables, payables and credit facilities are estimated to be substantially the same as their fair values at ~~March~~June 3130, 2020, and December 31, 2019. See Note 8 for details about the fair value of the Company’s derivative financial instruments.

Recently Issued Accounting Standards

The London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. At the end of 2021, banks will no longer be required to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. At the present time, the Blue Mountain Credit Facility (see Note 6) has terms that extend beyond 2021. In March 2020, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) which provides optional guidance to ease the transition from LIBOR to an alternative reference rate. The ASU intends to address certain concerns relating to accounting for contract modifications and hedge accounting. These optional expedients and exceptions to applying GAAP, assuming certain criteria are met, are allowed through December 31, 2022. The Company is currently evaluating the provisions of the ASU and does not expect the transition to an alternative rate to have a material impact on its results of operations or financial position.

Recently Adopted Accounting Standard

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

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses, current receivables aging, and existing industry and national economic data. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential recovery is remote. The balance in the Company’s allowance for doubtful accounts related to trade accounts receivable was approximately $1 million at both ~~March~~June 3130, 2020, and December 31, 2019.

Impairment of Assets Held for Sale and Long-Lived Assets

Proved Oil and Natural Gas Properties

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

Based on the analysis described above, for the three months ended March 31, 2020, the Company recorded a noncash impairment charge of approximately $87 million associated with proved oil and natural gas properties. Of this charge, approximately $85 million related to properties located in Oklahoma and approximately $2 million related to properties held for sale. The impairment charge was primarily due to a decline in commodity prices. The carrying values of the impaired proved properties were reduced to fair value, estimated using inputs characteristic of a Level 3 fair value measurement. The impairment charge is included in “impairment of assets held for sale and long-lived assets” on the condensed consolidated statement of operations and is associated with the upstream reporting segment.

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Impairment of Assets Held for Sale and Long-Lived Assets

Proved Oil and Natural Gas Properties

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

Based on the analysis described above, during the three months ended June 30, 2020, the Company recorded noncash impairment charges of approximately $14 million associated with proved oil and natural gas properties. Of this, approximately $12 million related to properties to be divested located in North Louisiana and approximately $2 million related to divested properties located in East Texas. During the six months ended June 30, 2020, the Company recorded noncash impairment charges of approximately $101 million associated with proved oil and natural gas properties. Of this, approximately $85 million related to properties located in Oklahoma, approximately $12 million related to properties located in North Louisiana, and approximately $4 million related to properties located in East Texas. During the three months and six months ended June 30, 2019, the Company recorded a noncash impairment charge of approximately $18 million associated with Michigan proved oil and natural gas properties held for sale at June 30, 2019. The impairment charges in both periods were primarily due to a decline in commodity prices. The carrying values of the impaired proved properties were reduced to fair value, estimated using inputs characteristic of a Level 3 fair value measurement. The impairment charges are associated with the upstream reporting segment and are included in “impairment of assets held for sale and long-lived assets” on the condensed consolidated statements of operations. See Note 3 for additional information about divestitures.

Unproved Oil and Natural Gas Properties

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

Based on the analysis described above, during the ~~three~~six months ended ~~March~~June 3130, 2020, the Company recorded a noncash impairment charge of approximately $3 million associated with unproved oil and natural gas properties located in Oklahoma. There was no such charge during the three months ended June 30, 2020. The impairment was primarily due to a decline in commodity prices. The impairment charge is associated with the upstream reporting segment and is included in “impairment of assets held for sale and long-lived assets” on the condensed consolidated statement of operations ~~and is associated with the upstream reporting segment~~.

Other Property and Equipment

The Company evaluates the impairment of its other property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying values of other property and equipment are reduced to fair value when the expected undiscounted future cash flows are less than net book value. Significant inputs used to determine the fair values of other property and equipment include estimates of future operating costs, future volumes and future commodity prices. These inputs require assumptions by the Company’s management at the time of the valuation and are the most sensitive and subject to change.

Based on the analysis described above, during the three months ended March 31, 2020, the Company recorded a noncash impairment charge of approximately $17 million associated with its crude oil gathering system assets. The impairment was primarily due to a decline in expected future volumes in the crude gathering business, related to the economics of customers drilling in the area. The impairment charge is included in “impairment of assets held for sale and long-lived assets” on the condensed consolidated statement of operations and is associated with the Blue Mountain reporting segment.8

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Based on the analysis described above, during the three months and six months ended June 30, 2020, the Company recorded noncash impairment charges of approximately $1 million and $18 million, respectively, associated with its crude oil gathering system assets. The impairments were primarily due to a decline in expected future volumes in the crude gathering business, related to the economics of customers drilling in the area. The impairment charges are associated with the Blue Mountain reporting segment and included in “impairment of assets held for sale and long-lived assets” on the condensed consolidated statements of operations.

Note 2 – Revenues

Disaggregation of Revenue

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

	Three Months Ended March 31, 2020
	Three Months Ended June 30, 2020
	Natural Gas			Oil			NGL			Oil, Natural Gas and NGL Sales			Marketing Revenues		Other Revenues			Total
	(in thousands)
Mid-Continent	$	23,~~608~~521		$	34,~~682~~030		$	~~649~~1,008		$	68,~~939~~559		$	—	$	4710		$	68,~~986~~569
East Texas (1)		~~2,829~~(308	)		~~298~~30			~~210~~234			~~3,337~~(44	)		~~1,627~~655		2—			~~4,966~~611
North Louisiana		32,~~140~~188			~~365~~148			~~138~~43			32,~~643~~379			~~225~~187		2(1	)		32,~~870~~565
Uinta Basin (1)		~~917~~2			(2	)		(8—	)		~~907~~4			—		—			~~907~~4
Other divested properties		~~(34~~36	)		27—			~~(21~~—	)		~~(28~~36	)		4—		~~(20~~—	)		~~(44~~36	)
Blue Mountain		—			—			—			—			3221,~~066~~022		—			3221,~~066~~022
Total	$	95,~~460~~439		$	4,~~370~~210		$	~~968~~1,285		$	1410,~~798~~934		$	3321,~~922~~864	$	319		$	4832,~~751~~807

⁽¹⁾	During 2020, the Company divested all of its properties located in these operating regions.

	Three Months Ended June 30, 2019
	Natural Gas		Oil		NGL		Oil, Natural Gas and NGL Sales		Marketing Revenues		Other Revenues		Total
	(in thousands)

Hugoton Basin ⁽¹⁾	$	15,037	$	417	$	7,312	$	22,766	$	9,460	$	5,104	$	37,330
Mid-Continent		4,033		7,153		1,884		13,070		—		13		13,083
East Texas		9,363		945		405		10,713		808		2		11,523
North Louisiana		9,017		961		306		10,284		482		1		10,767
Uinta Basin		3,102		—		—		3,102		—		—		3,102
Michigan/Illinois ⁽¹⁾		6,052		746		24		6,822		—		30		6,852
Blue Mountain		—		—		—		—		42,644		—		42,644
Total	$	46,604	$	10,222	$	9,931	$	66,757	$	53,394	$	5,150	$	125,301

⁽¹⁾	During 2019, the Company divested all of its properties located in these operating regions.

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

	Three Months Ended March 31, 2019
	Six Months Ended June 30, 2020
	Natural Gas		Oil		NGL			Oil, Natural Gas and NGL Sales		Marketing Revenues		Other Revenues			Total
	(in thousands)
Hugoton Basin (1)	$	22,899	$	376	$	9,970		$	33,245	$	23,692	$	5,968		$	62,905
Mid-Continent	$	6,129	$	7,712	$	1,657		$	15,498	$	—	$	57		$	15,555
Mid-Continent		4,736		2,967		2,438			10,141		—		11			10,152
East Texas (1)		2,521		328		444			3,293		2,282		2			5,577
East Texas		11,486		852		603			12,941		1,089		2			14,032
North Louisiana		5,328		513		181			6,022		412		1			6,435
North Louisiana		4,486		797		454			5,737		238		2			5,977
Uinta Basin (1)		919		—		(8	)		911		—		—			911
Uinta Basin		6,441		86		5			6,532		—		—			6,532
Other divested properties		2		27		(21	)		8		4		(20	)		(8	)
Michigan/Illinois (1)		7,089		650		10			7,749		—		20			7,769
Blue Mountain		—		—		—			—		53,088		—			53,088
Blue Mountain		—		—		—			—		42,328		—			42,328
Total	$	14,899	$	8,580	$	2,253		$	25,732	$	55,786	$	40		$	81,558
Total	$	57,137	$	5,728	$	13,480		$	76,345	$	67,347	$	6,003		$	149,695

⁽¹⁾	During 2020, the Company divested all of its properties located in these operating regions.

	Six Months Ended June 30, 2019
	Natural Gas		Oil		NGL		Oil, Natural Gas and NGL Sales		Marketing Revenues		Other Revenues		Total
	(in thousands)

Hugoton Basin ⁽¹⁾	$	37,936	$	793	$	17,282	$	56,011	$	33,152	$	11,072	$	100,235
Mid-Continent		8,769		10,120		4,322		23,211		—		24		23,235
East Texas		20,849		1,797		1,008		23,654		1,897		4		25,555
North Louisiana		13,503		1,758		760		16,021		720		3		16,744
Uinta Basin		9,543		86		5		9,634		—		—		9,634
Michigan/Illinois ⁽¹⁾		13,141		1,396		34		14,571		—		50		14,621
Blue Mountain		—		—		—		—		84,972		—		84,972
Total	$	103,741	$	15,950	$	23,411	$	143,102	$	120,741	$	11,153	$	274,996

⁽¹⁾	During 2019, the Company divested all of its properties located in these operating regions.

Contract Balances

Under the Company’s product sales contracts, customers are invoiced once the Company’s performance obligations have been satisfied, at which point payment is unconditional. Accordingly, the Company’s product sales contracts do not give rise to material contract assets or contract liabilities.

The Company had trade accounts receivable related to revenue from contracts with customers of approximately $2018 million and $43 million as of ~~March~~June 3130, 2020, and December 31, 2019, respectively.

Performance Obligations

~~The~~A majority of the Company’s sales are short-term in nature with a contract term of one year or less. For those contracts, the Company utilized the practical expedient in ASC 606-10-50-14 that exempts the Company from disclosure of the transaction ~~price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.~~

~~For the Company’s product sales that have a contract term greater than one year, the Company utilized the practical expedient in ASC 606-~~10-50-14(A), which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

Note 3 – Divestitures

Divestitures – First Quarter 2020

On January 15, 2020, the Company completed the sale of its interest in non-operated properties located in the Drunkards Wash field in the Uinta Basin. Cash proceeds from the sale of these properties were approximately $4 million (including a deposit of approximately $450,000 received in 2019), and the Company recorded a net gain of approximately $1 million.

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

For the Company’s product sales that have a contract term greater than one year, the Company utilized the practical expedient in ASC 606-10-50-14(A), which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these contracts, future revenue from the sale of products and services is dependent on future production or variable customer volume and variable commodity prices for that volume; therefore, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required.

Note 3 – Divestitures

Divestitures – 2020

On January 31, 2020, the Company completed the sale of its interest in properties located in the Overton field in East Texas. Cash proceeds from the sale of these properties were approximately $17 million (including a deposit of approximately $2 million received in 2019).

On February 14, 2020, the Company completed the sale of its interest in properties located in the Personville field in East Texas. Cash proceeds from the sale of these properties were approximately $28 million (including a deposit of approximately $3 million received in 2019).

On February 28, 2020, the Company completed the sale of its office building located in Oklahoma City, Oklahoma. Cash proceeds from the sale were approximately $21 million.

~~Divestitures~~On –April 2, ~~Subsequent~~2020, ~~Event~~the Company completed the sale of its remaining interest in properties located in East Texas. Cash proceeds from the sale of these properties were approximately $392,000.

OnDivestitures ~~April 2,~~– ~~2020,~~Subsequent the Company completed the sale of its remaining interest in properties located in East Texas. Cash proceeds from the sale of these properties were approximately $392,000. During the three months ended March 31, 2020, the Company recorded a noncash impairment charge of approximately $1 million to reduce the carrying value of these assets to fair value. These properties are included in “assets held for sale” and “liabilities held for sale” on the condensed consolidated balance sheet as of March 31, 2020.Events

On July 27, 2020, the Company signed a definitive agreement to sell its interest in properties located in North Louisiana for a contract price of approximately $27 million. The transaction is expected to close in the third quarter of 2020, subject to satisfactory completion of due diligence and the satisfaction of closing conditions. During the three months ended June 30, 2020, the Company recorded a noncash impairment charge of approximately $12 million to reduce the carrying value of these assets to fair value.

On August 4, 2020, the Company signed a definitive agreement to sell its interest in properties located in the Anadarko Basin in Oklahoma for a contract price of approximately $16 million. The transaction is expected to close in the fourth quarter of 2020, subject to satisfactory completion of due diligence and the satisfaction of closing conditions.

Divestitures – 2019

On November 22, 2019, the Company completed the sale of its interest in properties located in the Hugoton Basin (the “Hugoton Basin Assets Sale”). Cash proceeds from the sale of these properties were approximately $286 million. In connection with the Hugoton Basin Assets Sale, the buyer also acquired the Company’s interest in Mayzure, LLC, a wholly owned subsidiary of the Company, which was the counterparty to the volumetric production payment agreements based on helium produced from certain oil and natural gas properties in the Hugoton Basin. The Company recognized pre-tax loss of

~~The Company recognized pre-tax income of approximately $10 million for the three months ended March 31, 2019, from the Hugoton Basin.~~11

On September 5, 2019, the Company completed the sale of its interest in properties located in Illinois. Cash proceeds from the sale of these properties were approximately $4 million.

On August 30, 2019, the Company completed the sale of its interest in non-core assets located in North Louisiana. Cash proceeds from the sale were approximately $2 million.

On July 3, 2019, the Company completed the sale of its interest in properties located in Michigan. Cash proceeds from the sale of these properties were approximately $39 million.

On May 31, 2019, the Company completed the sale of its interest in non-operated properties located in the Hugoton Basin in Kansas. Cash proceeds from the sale of these properties were approximately $29 million.

On January 17, 2019, the Company completed the sale of its interest in properties located in the Arkoma Basin in Oklahoma. Cash proceeds from the sale of these properties were approximately $64 million (including a deposit of approximately $5 million received in 2018), and the Company recorded a net gain of approximately $28 million.

The 2020 and 2019 divestitures discussed above are not presented as discontinued operations because they do not represent a strategic shift that will have a major effect on the Company’s operations and financial results. The gains and losses on these divestitures are included in “(gains) losses on sale of assets and other, net” on the condensed consolidated statements of operations and were included in the upstream reporting segment.

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

~~The~~approximately ~~following~~$1 ~~table~~million ~~presents~~and ~~carrying~~pre-tax ~~amounts~~income of ~~the~~approximately ~~assets~~$9 ~~and~~million ~~liabilities~~for of the ~~Company’s~~three ~~properties~~months ~~classified~~and assix ~~held~~months ~~for~~ended ~~sale~~June 30, on2019, ~~the~~respectively, ~~condensed~~from ~~consolidated~~the ~~balance~~Hugoton ~~sheets:~~Basin.

	March 31, 2020		December 31, 2019
	(in thousands)
Assets:
Oil and natural gas properties	$	179	$	17,732
Other property and equipment		1,011		85,798
Other		5		1,243
Total assets held for sale	$	1,195	$	104,773
Liabilities:
Asset retirement obligations	$	744	$	33,542
Other		65		1,635
Total liabilities held for sale	$	809	$	35,177

On September 5, 2019, the Company completed the sale of its interest in properties located in Illinois. Cash proceeds from the sale of these properties were approximately $4 million and the Company recorded a net gain of approximately $4 million.

On August 30, 2019, the Company completed the sale of its interest in non-core assets located in North Louisiana. Cash proceeds from the sale were approximately $2 million and the Company recorded a net gain of approximately $376,000.

On July 3, 2019, the Company completed the sale of its interest in properties located in Michigan. Cash proceeds from the sale of these properties were approximately $39 million. The Company recorded a noncash impairment charge to reduce the carrying value of these assets to fair value of approximately $18 million.

The following table presents carrying amounts of the assets and liabilities of the Company’s properties classified as held for sale on the condensed consolidated balance sheet:

	December 31, 2019
	(in thousands)
Assets:
Oil and natural gas properties	$	17,732
Other property and equipment		85,798
Other		1,243
Total assets held for sale	$	104,773
Liabilities:
Asset retirement obligations	$	33,542
Other		1,635
Total liabilities held for sale	$	35,177

Other assets primarily include inventories and other liabilities primarily include accounts payable.

Note 4 – Equity (Deficit)

Share Repurchase Program

On July 18, 2019, the Board of Directors of the Company authorized the repurchase of up to $150 million of the Company’s outstanding shares of common stock. During the ~~three~~six months ended ~~March~~June 3130, 2020, the Company repurchased an aggregate of 282,742 shares of common stock at an average price of $7.31 per share for a total cost of approximately $2 million. At April 30, 2020, approximately $22 million was available for share repurchases under the program. Any share repurchases are subject to restrictions in the Riviera Credit Facility (as defined in Note 6).

~~Dividends~~12

Although the Company paid cash distributions in 2019 and 2020, the Company is not paying a regular cash dividend. The Board of Directors periodically reviews the Company’s liquidity position to evaluate whether or not to pay a cash dividend. Any future payment of cash dividends would be subject to the restrictions in the Riviera Credit Facility (as defined in Note 6).

Cash Distributions

On March 9, 2020, the Board of Directors of the Company declared a cash distribution of $1.00 per share. A cash distribution totaling approximately $58 million was paid on April 22, 2020, to shareholders of record as of the close of business on April 8, 2020. At March 31, 2020, the Company recorded “distributions payable” of approximately $58 million on the condensed consolidated balance sheet. In addition, approximately $12 million and $11 million for potential future distributions was recorded in restricted cash at March 31, 2020, and December 31, 2019, respectively. At March 31, 2020, and December 31, 2019, distributions payable of approximately $1 million and $2 million, respectively, related to outstanding share-based compensation awards was also recorded. These amounts are included in “other accrued liabilities” and “asset retirement obligations and other noncurrent liabilities” on the condensed consolidated balance sheets.

Cash Distributions – Subsequent Event

On April 23, 2020, the Board of Directors of the Company approved a cash distribution of $0.75 per share. The distribution totaling approximately $45 million is payable on or around May 12, 2020, to all shareholders of record as of the close of business on May 7, 2020.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

July 31, 2020, approximately $22 million was available for share repurchases under the program. Any share repurchases are subject to restrictions in the Riviera Credit Facility (as defined in Note 6).

Dividends

Cash Distributions

On March 9, 2020, the Board of Directors of the Company declared a cash distribution of $1.00 per share. A cash distribution totaling approximately $58 million was paid on April 22, 2020, to shareholders of record as of the close of business on April 8, 2020. On April 23, 2020, the Board of Directors of the Company declared a cash distribution of $0.75 per share. The distribution totaling approximately $43 million was paid on May 11, 2020, to shareholders of record as of the close of business on May 7, 2020. In addition, approximately $13 million and $11 million for potential future distributions related to nonvested share-based compensation awards was voluntarily recorded in restricted cash at June 30, 2020, and December 31, 2019, respectively. At June 30, 2020, and December 31, 2019, distributions payable, based on the vesting schedule of awards, of approximately $819,000 and $2 million, respectively, related to outstanding share-based compensation awards was also recorded. These amounts are included in “other accrued liabilities” and “asset retirement obligations and other noncurrent liabilities” on the condensed consolidated balance sheets.

Note 5 – Oil and Natural Gas Properties

Oil and Natural Gas Capitalized Costs

Aggregate capitalized costs related to oil, natural gas and NGL production activities with applicable accumulated depletion and amortization are presented below:

	March 31, 2020			December 31, 2019
	June 30, 2020			December 31, 2019
	(in thousands)
Proved properties	$	~~173~~168,~~317~~478		$	174,845
Unproved properties		5,421			5,462
		178,738			180,307
		173,899			180,307
Less accumulated depletion and amortization		(~~128~~136,~~041~~566	)		(35,603	)
	$	5037,~~697~~333		$	144,704

Note 6 – Debt

Fair Value

The Company’s debt is recorded at the carrying amount on the condensed consolidated balance sheets. The carrying amounts of the credit facilities approximate fair value because the interest rates are variable and reflective of market rates.

Riviera Credit Facility

At the Company’s election, interest on borrowings under the Riviera Credit Facility is determined by reference to either the London Interbank Offered Rate (“LIBOR”) plus an applicable margin ranging from 2.00% to 3.00% per annum or the alternate base rate (“ABR”) plus an applicable margin ranging from 1.00% to 2.00% per annum, depending on utilization of the borrowing base. Interest is generally payable in arrears quarterly for loans bearing interest based at the ABR and at the end of the applicable interest period for loans bearing interest at the LIBOR, or if such interest period is longer than three months, at the end of the three-month intervals during such interest period. The Company is required to pay a commitment fee to the lenders under the Riviera Credit Facility, which accrues at a rate per annum of 0.50% on the average daily unused amount of the available revolving loan commitments of the lenders.

The obligations under the Riviera Credit Facility are secured by mortgages covering approximately 85% of the total value of the proved reserves of the oil and natural gas properties of the Company and certain of its subsidiaries, along with liens on substantially all personal property of the Company and certain of its subsidiaries excluding Blue Mountain Midstream, and are guaranteed by the Company and certain of its subsidiaries, subject to customary exceptions. Under the Riviera Credit Facility, the Company is required to maintain (i) a maximum total net debt to last twelve months EBITDA ratio of 4.0 to 1.0, and (ii) a minimum adjusted current ratio of 1.0 to 1.0.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Redetermination of the borrowing base under the Riviera Credit Facility, based primarily on reserve reports using lender commodity price expectations at such time, occurs semi-annually, in April and October. On June 1, 2020, the Company entered into a Fifth Amendment (the “Amendment”) to the Riviera Credit Facility. Pursuant to the Amendment, the borrowing base was reduced from $90 million to $30 million and the applicable margin for interest on borrowings was increased by 0.25%.

During the three months and six months ended June 30, 2020, the Company recorded a finance fee expense of approximately $468,000 related to the write-off of a portion of unamortized deferred financing fees due to the reduction of the Riviera Credit Facility borrowing base.

At the Company’s election, interest on borrowings under the Riviera Credit Facility is determined by reference to either the LIBOR plus an applicable margin ranging from 2.25% to 3.25% per annum or the alternate base rate (“ABR”) plus an applicable margin ranging from 1.25% to 2.25% per annum, depending on utilization of the borrowing base. Interest is generally payable in arrears quarterly for loans bearing interest based at the ABR and at the end of the applicable interest period for loans bearing interest at the LIBOR, or if such interest period is longer than six months, at the end of the three-month intervals during such interest period. The Company is required to pay a commitment fee to the lenders under the Riviera Credit Facility, which accrues at a rate per annum of 0.50% on the average daily unused amount of the available revolving loan commitments of the lenders.

The obligations under the Riviera Credit Facility are secured by mortgages covering approximately 85% of the total value of the proved reserves of the oil and natural gas properties of the Company and certain of its subsidiaries, along with liens on substantially all personal property of the Company and certain of its subsidiaries excluding Blue Mountain Midstream, and are guaranteed by the Company and certain of its subsidiaries, subject to customary exceptions. Under the Riviera Credit Facility, the Company is required to maintain (i) a maximum total net debt to last twelve months EBITDA ratio of 3.5 to 1.0, and (ii) a minimum adjusted current ratio of 1.0 to 1.0.

The Riviera Credit Facility also contains affirmative and negative covenants, including compliance with laws (including environmental laws, ERISA and anti-corruption laws), maintenance of required insurance, delivery of quarterly and annual financial statements, oil and gas engineering reports and budgets, maintenance and operation of property (including oil and gas properties), restrictions on the incurrence of liens and indebtedness, mergers, consolidations and sales of assets, paying dividends or other distributions in respect of, or repurchasing or redeeming, the Company’s capital stock, making certain investments and transactions with affiliates.

The Riviera Credit Facility contains events of default and remedies customary for credit facilities of this nature. Failure to comply with the financial and other covenants in the Riviera Credit Facility would allow the lenders, subject to customary cure rights, to require immediate payment of all amounts outstanding under the Riviera Credit Facility. As of June 30, 2020, the Company was in compliance with all financial and other covenants of the Riviera Credit Facility. A reduction to the borrowing base, in whole or in part, is expected should the Company close the sale of its interests in properties in North Louisiana and Oklahoma as currently anticipated. See Note 3.

Blue Mountain Credit Facility

Blue Mountain Midstream’s credit agreement provides for a senior secured revolving loan facility (the “Blue Mountain Credit Facility”), with a borrowing base and a borrowing ~~commitment~~commitments of $200 million at ~~March~~June 3130, 2020. The Blue Mountain Credit Facility together with the Riviera Credit Facility, are referred to as the “Credit Facilities”).

The Blue Mountain Credit Facility provides for the ability to increase the aggregate commitments of the lenders to up to $400 million, subject to obtaining commitments for any such increase, which may result in an increase in Blue Mountain Midstream’s available borrowing capacity. As of ~~March~~June 3130, 2020, total borrowings outstanding under the Blue Mountain Credit Facility were approximately $7375 million and there was approximately $115 million of available borrowing capacity (which includes a reduction of approximately $1210 million for outstanding letters of credit), subject to covenant restrictions in the Blue Mountain Credit Facility. As of ~~April~~July 3031, 2020, total borrowings outstanding under the Blue Mountain Credit Facility were approximately $7576 million and there was approximately $114 million of available capacity (which includes a reduction ~~of approximately $11 million reduction for outstanding letters of credit), subject to covenant restrictions in the Blue Mountain Credit Facility. The maturity date is August 10, 2023.~~

At Blue Mountain Midstream’s election, interest on borrowings under the Blue Mountain Credit Facility is determined by reference to either the LIBOR plus an applicable margin ranging from 2.00% to 3.00% per annum or the ABR plus an applicable margin ranging from 1.00% to 2.00% per annum, both depending on Blue Mountain Midstream’s consolidated total leverage ratio. Interest is generally payable in arrears on the last day of March, June, September and December for loans bearing interest based at the ABR and at the end of the applicable interest period for loans bearing interest at the LIBOR, or if such interest period is longer than three months, at the end of three-month intervals during such interest period.14

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

of approximately $10 million reduction for outstanding letters of credit), subject to covenant restrictions in the Blue Mountain Credit Facility. The maturity date is August 10, 2023.

At Blue Mountain Midstream’s election, interest on borrowings under the Blue Mountain Credit Facility is determined by reference to either the LIBOR plus an applicable margin ranging from 2.00% to 3.00% per annum or the ABR plus an applicable margin ranging from 1.00% to 2.00% per annum, both depending on Blue Mountain Midstream’s consolidated total leverage ratio. Interest is generally payable in arrears on the last day of March, June, September and December for loans bearing interest based at the ABR and at the end of the applicable interest period for loans bearing interest at the LIBOR, or if such interest period is longer than six months, at the end of three-month intervals during such interest period.

Blue Mountain Midstream is required under the Blue Mountain Credit Facility to pay a commitment fee to the lenders, which accrues at a rate per annum of 0.375% or 0.50% (depending on Blue Mountain Midstream’s consolidated total leverage ratio) on the average daily unused amount of the available revolving loan commitments of the lenders.

The Blue Mountain Credit Facility is secured by a first priority lien on substantially all the assets of Blue Mountain Midstream. Under the Blue Mountain Credit Facility, Blue Mountain Midstream is required to maintain (i) a ratio of consolidated EBITDA to consolidated interest expense no less than 2.50 to 1.00, (ii) a ratio of consolidated net debt to consolidated EBITDA (the “consolidated total leverage ratio”) no greater than 4.50 to 1.00 or 5.00 to 1.00, as applicable, and (iii) in case certain other kinds of indebtedness are outstanding, a ratio of consolidated net debt secured by a lien on property of Blue Mountain Midstream to consolidated EBITDA no greater than 3.00 to 1.00.

The Blue Mountain Credit Facility also contains affirmative and negative covenants customary for credit facilities of this nature, including compliance with laws (including environmental laws, ERISA and anti-corruption laws), maintenance of required insurance, delivery of quarterly and annual financial statements, budgets, maintenance and operation of property, restrictions on the incurrence of liens and indebtedness, mergers, consolidations and sales of assets and transactions with affiliates.

13The Blue Mountain Credit Facility contains events of default and remedies customary for credit facilities of this nature. If Blue Mountain Midstream does not comply with the covenants in the Blue Mountain Credit Facility, the lenders may, subject to customary cure rights, require immediate payment of all amounts outstanding under the Blue Mountain Credit Facility. As of June 30, 2020, the Company was in compliance with all financial and other covenants of the Blue Mountain Credit Facility.

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

The Blue Mountain Credit Facility contains events of default and remedies customary for credit facilities of this nature. If Blue Mountain Midstream does not comply with the covenants in the Blue Mountain Credit Facility, the lenders may, subject to customary cure rights, require immediate payment of all amounts outstanding under the Blue Mountain Credit Facility.

Note 7 – Derivatives

Commodity Derivatives

The following table presents derivative positions for the periods indicated as of ~~March~~June 3130, 2020:

	2020			2021
Natural gas positions:
Fixed price swaps (NYMEX Henry Hub):
Hedged volume (MMMBtu)		85,~~250~~520			3,650
Average price ($/MMBtu)	$	2.82		$	2.44
Oil positions:
Fixed price swaps (NYMEX WTI):
Hedged volume (MBbls)		~~138~~92			—
Average price ($/Bbl)	$	64.63		$	—
Natural gas basis differential positions: (1)
PEPL basis swaps:
Hedged volume (MMMBtu)		53,~~500~~680			—
Hedge differential	$	(0.45	)	$	—

⁽¹⁾	Settled or to be settled, as applicable, on the indicated pricing index to hedge basis differential to the NYMEX Henry Hub natural gas price.

During the ~~three~~six months ended ~~March~~June 3130, 2020, the Company entered into commodity derivative contracts consisting of natural gas fixed price swaps for 2021. In addition, the Company unwound certain of its oil fixed price swaps associated with Blue Mountain Midstream for 2020 and received proceeds of approximately $377,000. During the ~~three~~six months ended ~~March~~June 3130, 2019, the Company entered into commodity derivative contracts consisting of natural gas fixed price swaps and NGL fixed price swaps for 2019 and natural gas basis swaps for 2020.

The natural gas derivatives are settled based on the closing price of NYMEX Henry Hub natural gas on the last trading day for the delivery month, which occurs on the third business day preceding the delivery month, or the relevant index prices of natural gas published in Inside Federal Energy Regulatory Commission’s Gas Market Report on the first business day of the delivery month. The oil derivatives are settled based on the average closing price of NYMEX WTI crude oil for each day of the delivery month. The NGL derivatives are settled based on the average effective price of natural gas liquids for each day of the delivery month, published in the issue of Oil Price Information Service.

14Balance Sheet Presentation

The Company’s commodity derivatives are presented on a net basis in “derivative instruments” and “asset retirement obligations and other noncurrent liabilities” on the condensed consolidated balance sheets. See Note 8 for fair value disclosures about commodity derivatives. The following table summarizes the fair value of derivatives outstanding on a gross basis:

	June 30, 2020		December 31, 2019
	(in thousands)
Assets:
Commodity derivatives	$	7,252	$	7,439
Liabilities:
Commodity derivatives	$	1,178	$	1,243

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Balance Sheet Presentation

The Company’s commodity derivatives are presented on a net basis in “derivative instruments” and “other noncurrent assets” on the condensed consolidated balance sheets. See Note 8 for fair value disclosures about commodity derivatives. The following table summarizes the fair value of derivatives outstanding on a gross basis:

	March 31, 2020		December 31, 2019
	(in thousands)
Assets:
Commodity derivatives	$	12,462	$	7,439
Liabilities:
Commodity derivatives	$	361	$	1,243

By using derivative instruments to economically hedge exposures to changes in commodity prices, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk. A majority of the Company’s counterparties are participants in its Credit Facilities. The Credit Facilities are secured by certain of the Company’s and its subsidiaries’ oil, natural gas and NGL reserves and personal property. The Company is not required to post any collateral. The Company does not receive collateral from its counterparties.

The maximum amount of loss due to credit risk that the Company would incur if its counterparties failed completely to perform according to the terms of the contracts, based on the gross fair value of financial instruments, was approximately $127 million at ~~March~~June 3130, 2020. The Company minimizes the credit risk in derivative instruments by: (i) limiting its exposure to any single counterparty; (ii) entering into derivative instruments only with counterparties that meet the Company’s minimum credit quality standard, or have a guarantee from an affiliate that meets the Company’s minimum credit quality standard; and (iii) monitoring the creditworthiness of the Company’s counterparties on an ongoing basis. In accordance with the Company’s standard practice, its commodity derivatives are subject to counterparty netting under agreements governing such derivatives and therefore the risk of loss due to counterparty nonperformance is somewhat mitigated.

Gains and Losses on Derivatives

A summary of gains and losses on derivatives included on the condensed consolidated statements of operations is presented below:

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020		2019
	(in thousands)
Gains (losses) on commodity derivatives	$	8(1,~~079~~358	)	$	~~(13~~20,~~241~~249	)	$	6,721	$	7,008
Marketing expenses		—			(2,~~180~~781	)		—		(4,961	)
Gains (losses) on commodity derivatives	$	8(1,~~079~~358	)	$	~~(15~~17,~~421~~468	)	$	6,721	$	2,047

The Company received net cash settlements of approximately $25 million and $57 million for the three months and six months ended ~~March~~June 3130, 2020, ~~and~~respectively. The ~~March~~Company received net cash settlements of approximately $3 million for the three months ended June 3130, 2019, ~~respectively~~and paid net cash settlements of approximately $2 million for the six months ended June 30, 2019.

15Note 8 – Fair Value Measurements

Fair Value Measurements on a Recurring Basis

The Company accounts for its commodity derivatives at fair value (see Note 7) on a recurring basis. The Company determines the fair value of its commodity derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those instruments trade in active markets. Assumed credit risk adjustments, based on published credit ratings and public bond yield spreads, are applied to the Company’s commodity derivatives.

In accordance with applicable accounting standards, the Company has categorized its financial instruments into a three-level fair value hierarchy based on the priority of inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Note 8 – Fair Value Measurements on a Recurring Basis

Fair Value Hierarchy

The following presents the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis:

March 31, 2020

June 30, 2020

Level 2

Netting (1)

Total

(in thousands)

Assets:

Commodity derivatives

127,~~462~~252

(~~347~~193

)

127,~~115~~059

Liabilities:

Commodity derivatives

~~361~~1,178

(~~347~~193

)

14985

⁽¹⁾	Represents counterparty netting under agreements governing such derivatives.

	December 31, 2019
	Level 2		Netting ⁽¹⁾			Total
	(in thousands)
Assets:
Commodity derivatives	$	7,439	$	(156	)	$	7,283
Liabilities:
Commodity derivatives	$	1,243	$	(156	)	$	1,087

⁽¹⁾	Represents counterparty netting under agreements governing such derivatives.

Fair Value Measurements on a Nonrecurring Basis

Non-financial assets and liabilities that are initially measured at fair value include asset retirement obligations (see Note 9) and impairments (see Note 1).

Note 9 – Asset Retirement Obligations

The Company has the obligation to plug and abandon oil and natural gas wells and related equipment at the end of production operations. Estimated asset retirement costs are recognized as liabilities with an increase to the carrying amounts of the related long-lived assets when the obligation is incurred. The liabilities are included in “other accrued liabilities” and “asset retirement obligations and other noncurrent liabilities” on the condensed consolidated balance sheets. Accretion expense is included in “depreciation, depletion and amortization” on the condensed consolidated statements of operations. The fair value of additions to the asset retirement obligations is estimated using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) plug and abandon costs per well based on existing regulatory requirements; (ii) remaining life per well; (iii) future inflation factors; and (iv) a credit-adjusted risk-free interest rate. These assumptions represent Level 3 inputs. These inputs require significant judgments and estimates by the Company’s management at the time of the valuation and are the most sensitive and subject to change.

16In addition, there is insufficient information to reasonably determine the timing and/or method of settlement for purposes of estimating the fair value of the asset retirement obligation of the majority of Blue Mountain Midstream’s assets. In such cases, asset retirement obligation cost is considered indeterminate because there is no data or information that can be derived from past practice, industry practice, management’s experience, or the asset’s estimated economic life. Indeterminate asset retirement obligation costs associated with Blue Mountain Midstream will be recognized in the period in which sufficient information exists to reasonably estimate potential settlement dates and methods.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

In addition, there is insufficient information to reasonably determine the timing and/or method of settlement for purposes of estimating the fair value of the asset retirement obligation of the majority of Blue Mountain Midstream’s assets. In such cases, asset retirement obligation cost is considered indeterminate because there is no data or information that can be derived from past practice, industry practice, management’s experience, or the asset’s estimated economic life. Indeterminate asset retirement obligation costs associated with Blue Mountain Midstream will be recognized in the period in which sufficient information exists to reasonably estimate potential settlement dates and methods.

The following table presents a reconciliation of the Company’s asset retirement obligations (in thousands):

Asset retirement obligations at December 31, 2019	$	21,497
Liabilities added from drilling		209
Liabilities associated with assets divested		(~~702~~3,586	)
Liabilities associated with assets held for sale		(744	)
Current year accretion expense		601
Current year accretion expense		307
Settlements		(964	)
Settlements		(182	)
Revision of estimates		299
Asset retirement obligations at March 31, 2020	$	20,385
Asset retirement obligations at June 30, 2020	$	18,056

Note 10 – Commitments and Contingencies

In 2016, Linn Energy, LLC, certain of its direct and indirect subsidiaries, and LinnCo, LLC (collectively, the “LINN Debtors”) filed Bankruptcy Petitions for relief under Chapter 11 of the Bankruptcy Code. The LINN Debtors emerged from bankruptcy in 2017. In 2018, LINN Energy completed the spin-off of Riviera from LINN Energy. On May 11, 2016, the LINN Debtors and Berry Petroleum Company, LLC (“Berry” and collectively with the LINN Debtors, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Debtors’ Chapter 11 cases were administered jointly under the caption In re Linn Energy, LLC, et al., Case No. 16‑60040. On January 27, 2017, the Bankruptcy Court entered an order approving and confirming the plan (the “Plan”) of reorganization of the Debtors (the “Confirmation Order”). Consummation of the Plan was subject to certain conditions set forth in the Plan. On February 28, 2017, all of the conditions were satisfied or waived and the Plan became effective and was implemented in accordance with its terms. On September 27, 2018, the Bankruptcy Court closed the LINN Debtors’ Chapter 11 cases, but retained jurisdiction as provided in the Confirmation Order.

The commencement of the Chapter 11 proceedings automatically stayed certain actions against the Company, including actions to collect prepetition liabilities or to exercise control over the property of the Company’s bankruptcy estates. However, the Company is, and will continue to be until the final resolution of all claims, subject to certain contested matters and adversary proceedings stemming from the Chapter 11 proceedings, which are not affected by the closure of the LINN Debtors’ Chapter 11 cases.

The Company is not currently a party to any litigation or pending claims that it believes would have a material adverse effect on its overall business, financial position, results of operations or liquidity; however, cash flow could be significantly impacted in the reporting periods in which such matters are resolved.

Note 11 – Operating Leases

Lessee

The Company leases office space and other property and equipment under lease agreements expiring on various dates through 2022. During the three months and six months ended ~~March~~June 3130, 2020, the Company recorded lease expenses of approximately $1 million and $2 million, respectively. During the three months and six months ended June 30, 2019, the Company recorded lease expenses of approximately $1 million and $2 million, respectively.

17As of June 30, 2020, undiscounted future minimum lease payments were as follows (in thousands):

2020	$	1,292
2021		2,333
2022		1,296
	$	4,921

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

AsThe ofweighted-average ~~March 31~~remaining lease term is two years. The future minimum lease payments above include an office building under a two-year lease with the option to cancel the lease after one year. If the Company exercises its option to cancel the lease after year one, ~~2020~~total future minimum lease payments will be reduced by approximately $734,000. Of the Company’s total future minimum lease payments, ~~were~~approximately as$3 ~~follows~~million ~~(in~~relates ~~thousands):~~to Blue Mountain Midstream.

2020	$	2,550
2021		1,693
2022		916
2023		—
2024		—
Thereafter		—
	$	5,159

Lessor

The Company previously leased a building located in Oklahoma to third parties under lease agreements. The Company sold the building in the first quarter of 2020, and the leases were terminated effective with the close of the sale. Lease income for both the three months and six months ended June 30, 2019, was approximately $1 million. The Company has no other lease agreements for which it is the lessor. It determines if an arrangement is a lease at inception.

Note 12 – Share-Based Compensation

Riviera Omnibus Incentive Plan

Under the Riviera Resources, Inc. 2018 Omnibus Incentive Plan (the “Riviera Omnibus Incentive Plan”) employees, consultants and non-employee directors of the Company and its affiliates are eligible to receive stock options, restricted stock, dividend equivalents, performance awards, other stock-based awards and other cash-based awards.

As of ~~March~~June 3130, 2020, 2,~~143~~135,~~413~~918 shares were issuable under the Riviera Omnibus Incentive Plan pursuant to outstanding Riviera RSUs, including (i) the Riviera Legacy RSUs, (ii) ~~293~~286,~~183~~006 restricted stock units of the Company granted to certain employees of the Company (the “Restricted Shares” and together with Riviera Legacy RSUs, the “Riviera RSUs”), (iii) 1,847,950 restricted stock units of the Company granted as performance units to certain employees of the Company (the “Riviera Performance Shares”) that, in the case of the Riviera Performance Shares, vest, if at all, based on the achievement of certain performance conditions specified in the award agreements.

The Committee (as defined in the Riviera Omnibus Incentive Plan) has broad authority under the Riviera Omnibus Incentive Plan to, among other things: (i) select participants; (ii) determine the types of awards that participants receive and the number of shares that are subject to such awards; and (iii) establish the terms and conditions of awards, including the price (if any) to be paid for the shares or the award. As of ~~March~~June 3130, 2020, up to 1,~~812~~819,~~415~~910 shares of common stock were available for issuance under the Riviera Omnibus Incentive Plan within the share reserve established under the Riviera Omnibus Incentive Plan, ~~214~~222,~~876~~053 of which the Committee has designated for issuance as Restricted Shares and 89,958 of which the Committee has designated for issuance as Riviera Performance Shares. If any stock option or other stock-based award granted under the Riviera Omnibus Incentive Plan expires, terminates or is canceled for any reason without having been exercised in full, the number of shares of common stock underlying any unexercised award shall again be available for the purpose of awards under the Riviera Omnibus Incentive Plan. If any shares of restricted stock, performance awards or other stock-based awards denominated in shares of common stock awarded under the Riviera Omnibus Incentive Plan are forfeited for any reason, the number of forfeited shares shall again be available for purposes of awards under the Riviera Omnibus Incentive Plan. Any award under the Riviera Omnibus Incentive Plan settled in cash shall not be counted against the maximum share limitation.

As is customary in incentive plans of this nature, each share limit and the number and kind of shares available under the Riviera Omnibus Incentive Plan and any outstanding awards, as well as the exercise or purchase prices of awards, and performance targets under certain types of performance-based awards, are subject to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, stock splits, stock dividends or other similar events that change the number or kind of shares outstanding, and extraordinary dividends or distributions of property to the Company’s shareholders.

18Blue Mountain Midstream Omnibus Incentive Plan

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

are held by Linn Holdco II (a wholly owned subsidiary of Riviera) and Class B Units. Pursuant to the BMM LLC Agreement, Blue Mountain Midstream ~~Omnibus~~has ~~Incentive~~the ~~Plan~~authority to issue an unlimited number of Class A Units and up to 58,750 Class B Units. As of June 30, 2020, Blue Mountain Midstream has issued 738,213 Class A Units and no Class B Units.

Blue Mountain Midstream is governed by its Second Amended and Restated Limited Liability Operating Agreement (as amended, the “BMM LLC Agreement”), which provides for two classes of membership units: Class A Units, of which 100% are held by Linn Holdco II (a wholly owned subsidiary of Riviera) and Class B Units. Pursuant to the BMM LLC Agreement, Blue Mountain Midstream has the authority to issue an unlimited number of Class A Units and up to 58,750 Class B Units. As of March 31, 2020, Blue Mountain Midstream has issued 701,350 Class A Units and no Class B Units.

Under the Blue Mountain Midstream LLC 2018 Omnibus Incentive Plan (as amended, the “BMM Incentive Plan”) employees and consultants of Blue Mountain Midstream and its affiliates are eligible to receive unit options, restricted units, dividend equivalents, performance awards, other unit-based awards and other cash-based awards. The Committee (as defined in the BMM Incentive Plan) has broad authority under the BMM Incentive Plan to, among other things: (i) select participants; (ii) determine the types of awards that participants receive and the number of units that are subject to such awards; and (iii) establish the terms and conditions of awards, including the price (if any) to be paid for the units or the award. The aggregate number of units available for issuance under the BMM Incentive Plan matches the maximum number of Class B Units issuable by Blue Mountain Midstream.

As of ~~March~~June 3130, 2020, under the BMM Incentive Plan, Blue Mountain Midstream had granted awards that could result in the issuance of 5545,~~257~~335 Class B Units or an equivalent value in cash, at the Board’s discretion. The issued awards include 109,~~825~~023 restricted security units (“BMM RSUs”) and 2218,~~216~~156 performance stock units (“BMM PSUs”) (4436,~~432~~312 at 200% of target). The BMM RSUs can be paid, at the Board’s discretion, in cash or an equivalent number of Class B Units. Payment for the BMM PSUs only occurs upon the achievement by Blue Mountain Midstream of a certain equity value (subject to certain adjustments) specified in the award agreements. If such equity value is achieved, the recipient of the BMM PSU will receive a number of Class B Units (or an equivalent value in cash, at the Board’s discretion) equal to 50% to 200% of the target number of BMM PSUs held by such individual, as specified in the award agreements.

If any unit option or other unit-based award granted under the BMM Incentive Plan expires, terminates or is canceled for any reason without having been exercised in full, the number of units underlying any unexercised award shall again be available for the purpose of awards under the BMM Incentive Plan. If any restricted units, performance awards or other unit-based awards denominated in units awarded under the BMM Incentive Plan are forfeited for any reason, the number of forfeited units shall again be available for purposes of awards under the BMM Incentive Plan. Any award under the BMM Incentive Plan settled in cash shall not be counted against the maximum unit limitation.

As is customary in incentive plans of this nature, each unit limit and the number and kind of units available under the BMM Incentive Plan and any outstanding awards, as well as the exercise or purchase prices of awards, and performance targets under certain types of performance-based awards, are subject to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, unit dividends or other similar events that change the number or kind of units outstanding, and extraordinary dividends or distributions of property to Blue Mountain Midstream’s unitholders.

Accounting for Share-Based Compensation

The condensed consolidated financial statements include 100% of employee-related expenses. Compensation cost related to the grant of share-based awards has been recorded at the subsidiary level with a corresponding credit to liability or equity.

As a result of the Company’s history of cash settling awards, all unvested share-based compensation awards are liability classified. The Company recorded a liability of approximately $31 million and $10 million at ~~March~~June 3130, 2020, and December 31, 2019, respectively, related to unvested share-based compensation awards included in “other accrued liabilities” and “asset retirement obligations and other noncurrent liabilities” on the condensed consolidated balance sheets. All cash settlements of liability classified awards are classified as operating activities on the condensed consolidated statements of cash flows.

1921

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

A summary of share-based compensation expenses included on the condensed consolidated statements of operations is presented below:

	Three Months Ended March 31,
	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
	(in thousands)
Marketing expenses	$	(~~125~~2	)	$	~~107~~55	$	(127	)	$	162
General and administrative expenses		(~~2,900~~323	)		63,~~200~~625		(3,223	)		9,825
Total share-based compensation expenses	$	(~~3,025~~325	)	$	63,~~307~~680	$	(3,350	)	$	9,987
Income tax benefit	$	—		$	~~1,045~~639	$	—		$	1,684

Riviera Restricted Stock Units

During the ~~three~~six months ended ~~March~~June 3130, 2020, upon vesting of Riviera RSUs and at the election of participants, the Company repurchased 8296,~~664~~212 Riviera RSUs for a total cost of approximately $~~643~~697,000. In addition, 61,645 shares of common stock were issued to participants (net of statutory tax withholdings) upon vesting of Riviera RSUs. During the ~~three~~six months ended ~~March~~June 3130, 2020, the Company granted 15,357 RSUs with a fair value of approximately $125,000, that vest ratably in two tranches over approximately two years.

Performance Shares

As of ~~March~~June 3130, 2020, there were 1,847,950 Riviera Performance Shares outstanding at 200% of target. The fair value of Riviera Performance Shares was not material as of ~~March~~June 3130, 2020. The vesting of these awards is determined based on the Company’s equity value (subject to adjustment for distributions to shareholders and certain other items) at a specified time. ~~To date, no performance targets have been met. The cost is expected to be recognized over the life of the award.~~

As of ~~March~~June 3130, 2020, there were 4436,~~432~~312 BMM PSUs outstanding at 200% of target. The fair value of BMM PSUs was not material as of ~~March~~June 3130, 2020. The vesting of these awards is determined based on Blue Mountain Midstream’s equity value (subject to certain adjustments) at a specified time. ~~To date, no performance targets have been met. The cost is expected to be recognized over the life of the award.~~

Note 13 – (Loss) Earnings Per Share

Basic (loss) earnings per share is computed by dividing net (loss) income by the weighted average number of shares outstanding during the period. Diluted (loss) earnings per share is computed by adjusting the average number of shares outstanding for the dilutive effect, if any, of potential common shares.

2022

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

The following tables provide a reconciliation of the numerators and denominators of the basic and diluted per share computations for net (loss) income:

	Three Months Ended March 31,
	Three Months Ended June 30,
	2020			2019
	(in thousands, except per share amounts)
Net (loss) income	$	(101,506	)	$	12,726
Net loss	$	(21,212	)	$	(6,676	)
(Loss) income per share:
Loss per share:
Basic	$	(10.7537	)	$	(0.1810	)
Diluted	$	(10.7537	)	$	(0.1810	)
Weighted average shares outstanding ‒ basic		58,~~162~~041			6865,~~817~~005
Dilutive effect of unit equivalents		—			~~183~~84
Weighted average shares outstanding ‒ diluted		58,~~162~~041			6965,~~000~~089

The diluted earnings per share calculation excludes the Riviera Performance Shares for the three months ended March 31, 2020, and March 31, 2019, because no performance targets have been met. The diluted earnings per share calculation excludes approximately 184,000 restricted stock units that were anti-dilutive for the three months ended March 31, 2020. No restricted stock units were anti-dilutive for the three months ended March 31, 2019.

	Six Months Ended June 30,
	2020			2019
	(in thousands, except per share amounts)

Net (loss) income	$	(122,718	)	$	6,050
(Loss) income per share:
Basic	$	(2.11	)	$	0.09
Diluted	$	(2.11	)	$	0.09

Weighted average shares outstanding ‒ basic		58,098			66,900
Dilutive effect of unit equivalents		—			179
Weighted average shares outstanding ‒ diluted		58,098			67,079

The diluted (loss) earnings per share calculation excludes the Riviera Performance Shares for the three months and six months ended June 30, 2020, and June 30, 2019, because no performance targets have been met and excludes approximately 206,000 and 9,000 restricted stock units that were anti-dilutive for the three months and six months ended June 30, 2020, respectively.

Note 14 – Income Taxes

Amounts recognized as income taxes are included in “income tax expense” on the condensed consolidated statements of operations. The Company recognized no income tax expense during the three months and six months ended ~~March~~June 3130, 2020, because of the full valuation allowance recorded in 2019. The Company’s effective income tax rate was approximately 0% ~~and 26%~~ for both the three months ~~ended~~and ~~March 31,~~six ~~2020,~~months ~~and~~ended ~~March~~June 3130, ~~2019, respectively~~2020. The Company’s federal and state statutory rate net of the federal tax benefit was approximately 25% ~~and 24%~~ for both the three months and six months ended ~~March~~June 3130, 2020,. The Company’s effective income tax rate was approximately 23% and ~~March~~29% for the three months and six months ended June 3130, 2019, respectively.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. During the third quarter of 2019, and for the first time since Riviera’s inception, the Company’s earnings were a cumulative loss which is primarily due to losses generated during 2019. Based on the cumulative loss and projections of future taxable income for the periods in which the deferred tax assets are deductible, the Company recorded a valuation allowance against all of its deferred tax assets as of both March 31, 2020, and December 31, 2019. The Company intends to continue maintaining a full valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. The amount of deferred tax assets considered realizable could materially increase in the future, and the amount of valuation allowance recorded could materially decrease, if estimates of future taxable income are increased.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. During the third quarter of 2019, and for the first time since Riviera’s inception, the Company’s earnings were a cumulative loss which is primarily due to losses generated during 2019. Based on the cumulative loss and projections of future taxable income for the periods in which the deferred tax assets are deductible, the Company recorded a valuation allowance of approximately $200 million and $171 million against all of its deferred tax assets as of June 30, 2020, and December 31, 2019, respectively. The Company intends to continue maintaining a full valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. The amount of deferred tax assets considered realizable could materially increase in the future, and the amount of valuation allowance recorded could materially decrease, if estimates of future taxable income are increased.

As of December 31, 2019, the Company had approximately $246 million of indefinite lived net operating loss (“NOL”) carryforwards for U.S. federal income tax purposes. Based on activity through June 30, 2020, the Company estimates that a significant amount of additional NOLs will be generated through December 31, 2020. As discussed above, the Company maintains a full valuation allowance against all of its deferred tax assets which includes deferred tax assets associated with NOLs.

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that was enacted March 27, 2020, includes income tax provisions that allow NOLs to be carried back, allows interest expense to be deducted up to a higher percentage of adjusted taxable income, and modifies tax depreciation of qualified improvement property, among other provisions. These provisions have no material impact on the Company.

Note 15 – Supplemental Disclosures to the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows

“Other current assets” reported on the condensed consolidated balance sheets include the following:

	March 31, 2020		December 31, 2019
	June 30, 2020		December 31, 2019
	(in thousands)
Prepaids	$	95,~~415~~389	$	9,152
Other receivables		4,038		2,585
Inventories		7,197		1,116
Inventories		1,096		1,116
Other receivables		471		2,585
Other current assets	$	1413,~~549~~057	$	12,853

“Accounts payable and accrued expenses” reported on the condensed consolidated balance sheets include the following:

	June 30, 2020		December 31, 2019
	(in thousands)

Accounts payable	$	26,207	$	50,601
Accrued operating expenses		4,848		16,828
Accrued capital expenditures		2,115		10,087
Accrued general and administrative expenses		1,389		2,448
Other accrued expenses		1,735		615
Accounts payable and accrued expenses	$	36,294	$	80,579

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

“Other accrued liabilities” reported on the condensed consolidated balance sheets include the following:

	March 31, 2020		December 31, 2019
	June 30, 2020		December 31, 2019
	(in thousands)
Accrued compensation	$	57,~~266~~006	$	11,314
Asset retirement obligations (current portion)		1,184		1,184
Deposits		1,~~176~~086		6,111
Other		~~7,132~~214		8,119
Other accrued liabilities	$	149,~~758~~490	$	26,728

The following table provides a reconciliation of “cash and cash equivalents” reported on the condensed consolidated balance sheets to “cash, cash equivalents and restricted cash” reported on the condensed consolidated statement of cash flows:

	March 31, 2020		December 31, 2019
	June 30, 2020		December 31, 2019
	(in thousands)
Cash and cash equivalents	$	~~165~~55,~~223~~641	$	116,237
Restricted cash		2924,~~090~~139		32,932
Cash, cash equivalents and restricted cash	$	~~194~~79,~~313~~780	$	149,169

Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:

	Three Months Ended March 31,
	Six Months Ended June 30,
	2020		2019
	(in thousands)
Cash payments for interest, net of amounts capitalized	$	~~673~~1,174	$	~~219~~1,471
Cash payments for income taxes	$	—	$	—
Cash payments for reorganization items, net	$	~~249~~494	$	—472
Noncash investing activities:
Accrued capital expenditures	$	72,~~076~~115	$	2011,~~120~~140

22For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. At June 30, 2020, “restricted cash” on the condensed consolidated balance sheet consisted of approximately $10 million that will be used to settle certain claims in accordance with the Plan (which is the remainder of approximately $80 million transferred to restricted cash in February 2017 to fund such items), approximately $1 million related to deposits and approximately $13 million related to potential future distributions for nonvested share-based compensation awards. At December 31, 2019, “restricted cash” on the condensed consolidated balance sheet consisted of approximately $16 million that will be used to settle certain claims in accordance with the Plan, approximately $6 million related to deposits and approximately $11 million related to potential future distributions for nonvested share-based compensation awards.

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

For purposes of the condensed consolidated statements of cash flows, the Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. At March 31, 2020, “restricted cash” on the condensed consolidated balance sheet consisted of approximately $16 million that will be used to settle certain claims in accordance with the Plan (which is the remainder of approximately $80 million transferred to restricted cash in February 2017 to fund such items), approximately $1 million related to deposits and approximately $12 million related to distributions. At December 31, 2019, “restricted cash” on the condensed consolidated balance sheet consisted of approximately $16 million that will be used to settle certain claims in accordance with the Plan, approximately $6 million related to deposits and approximately $11 million related to distributions.

Note 16 – Related Party Transactions

Roan Resources LLC

During 2019, through December 6, 2019, certain members of the Board of Directors of the Company were also members of the board of directors of Roan Resources, Inc. Additionally, certain of the Company’s principal stockholders were also significant stockholders of Roan Resources, Inc.

For both the three months and six months ended ~~March~~June 3130, 2019, the Company recorded revenue from Roan Resources LLC of approximately $8 million included in “marketing revenues” on the condensed consolidated statements of operations. For the three months and six months ended June 30, 2019, the Company made natural gas purchases from Roan Resources LLC of approximately $3425 million and $59 million, respectively, included in “marketing expenses” on the condensed consolidated statements of operations.

Note 17 – Segments

The Company has two reporting segments: upstream and Blue Mountain. The upstream reporting segment is engaged in the exploration, development, production, and sale of oil, natural gas, and NGLs. The Company’s upstream reporting segment properties are located in two operating regions in the U.S.: the Mid-Continent and North Louisiana. The Blue Mountain reporting segment consists of a cryogenic natural gas processing facility, a network of gathering pipelines and compressors and produced water services and a crude oil gathering system located in the Merge/SCOOP/STACK play. During 2020, the Company divested all of its properties located in the Uinta Basin and East Texas operating regions. During 2019, the Company divested all of its properties located in the Hugoton Basin and Michigan/Illinois operating regions. See Note 3 for additional information about divestitures.

To assess the performance of the Company’s reporting segments, the Company’s Chief Operating Decision Maker (“CODM”) analyzes field level cash flow, a non-GAAP financial metric. The Company defines field level cash flow as revenues less direct operating expenses. Other indirect income (expenses) include “general and administrative expenses,” “exploration costs,” “depreciation, depletion and amortization,” “(gains) on sale of assets and other, net,” “impairment of long-lived assets,” “other income and (expenses)” and “reorganization items, net.” Information regarding total assets by reporting segment is not presented because it is not reviewed by the CODM.

During the first quarter of 2020, the definition of field level cash flow analyzed by the Company’s CODM was revised to report within segment results, expenses previously reported as unallocated to segments. Information presented for the prior period has been recast to conform to current presentation.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

The following tables present the Company’s financial information by reporting segment:

	Three Months Ended March 31, 2020
	Three Months Ended June 30, 2020
	Upstream			Blue Mountain			Consolidated
	(in thousands)
Oil, natural gas and natural gas liquids sales	$	1410,~~798~~934		$	—		$	1410,~~798~~934
Marketing revenues		~~1,856~~842			3221,~~066~~022			3321,~~922~~864
Other revenues		319			—			319
		16,685			32,066			48,751
		11,785			21,022			32,807
Lease operating expenses		42,~~951~~894			—			42,~~951~~894
Transportation expenses		21,~~174~~209			—			21,~~174~~209
Marketing expenses		5410			2116,~~265~~818			2116,~~319~~828
Taxes other than income taxes		~~624~~1,097			~~591~~278			1,~~215~~375
Total direct operating expenses		75,~~803~~210			2117,~~856~~096			2922,~~659~~306
Field level cash flow		86,~~882~~575			103,~~210~~926			1910,~~092~~501
Gains on commodity derivatives		7,613			466			8,079
Losses on commodity derivatives		(1,358	)		—			(1,358	)
Other indirect income (expenses)		(107,709	)		(20,968	)		(128,677	)
Other indirect income (expenses), net		(23,776	)		(6,579	)		(30,355	)
Loss before income taxes	$	(9118,~~214~~559	)	$	(102,~~292~~653	)	$	(~~101~~21,~~506~~212	)

	Three Months Ended March 31, 2019
	Three Months Ended June 30, 2019
	Upstream			Blue Mountain			Consolidated
	(in thousands)
Oil, natural gas and natural gas liquids sales	$	7666,~~345~~757		$	—		$	7666,~~345~~757
Marketing revenues		2510,~~019~~750			42,~~328~~644			6753,~~347~~394
Other revenues		65,~~003~~150			—			65,~~003~~150
		107,367			42,328			149,695
		82,657			42,644			125,301
Lease operating expenses		2423,~~052~~845			—			2423,~~052~~845
Transportation expenses		1918,~~150~~053			—			1918,~~150~~053
Marketing expenses		197,~~784~~836			33,~~605~~975			5341,~~389~~811
Taxes other than income taxes		51,~~625~~891			~~675~~708			62,~~300~~599
Total direct operating expenses		6851,~~611~~625			34,~~280~~683			~~102~~86,~~891~~308
Field level cash flow		3831,~~756~~032			87,~~048~~961			4638,~~804~~993
Losses on commodity derivatives		(12,445	)		(796	)		(13,241	)
Gains on commodity derivatives		19,284			965			20,249
Other indirect income (expenses)		(6,024	)		(10,320	)		(16,344	)
Other indirect income (expenses), net		(59,670	)		(8,295	)		(67,965	)
(Loss) income before income taxes	$	20(9,~~287~~354	)	$	~~(3,068~~631	)	$	17(8,~~219~~723	)

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RIVIERA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

	Six Months Ended June 30, 2020
	Upstream			Blue Mountain			Consolidated
	(in thousands)

Oil, natural gas and natural gas liquids sales	$	25,732		$	—		$	25,732
Marketing revenues		2,698			53,088			55,786
Other revenues		40			—			40
		28,470			53,088			81,558

Lease operating expenses		7,845			—			7,845
Transportation expenses		3,383			—			3,383
Marketing expenses		64			38,083			38,147
Taxes other than income taxes		1,721			869			2,590
Total direct operating expenses		13,013			38,952			51,965
Field level cash flow		15,457			14,136			29,593
Gains on commodity derivatives		6,255			466			6,721
Other indirect income (expenses), net		(131,485	)		(27,547	)		(159,032	)
Loss before income taxes	$	(109,773	)	$	(12,945	)	$	(122,718	)

	Six Months Ended June 30, 2019
	Upstream			Blue Mountain			Consolidated
	(in thousands)

Oil, natural gas and natural gas liquids sales	$	143,102		$	—		$	143,102
Marketing revenues		35,769			84,972			120,741
Other revenues		11,153			—			11,153
		190,024			84,972			274,996

Lease operating expenses		47,897			—			47,897
Transportation expenses		37,203			—			37,203
Marketing expenses		27,620			67,580			95,200
Taxes other than income taxes		7,516			1,383			8,899
Total direct operating expenses		120,236			68,963			189,199
Field level cash flow		69,788			16,009			85,797
Gains on commodity derivatives		6,839			169			7,008
Other indirect income (expenses), net		(65,694	)		(18,615	)		(84,309	)
(Loss) income before income taxes	$	10,933		$	(2,437	)	$	8,496

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Item 2.

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

The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2019. The following discussion contains forward-looking statements based on expectations, estimates and assumptions. Actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, volatility of oil, natural gas and natural gas liquids (“NGL”) prices or a prolonged period of low oil, natural gas or NGL prices and the effects of actions by, or disputes among or between, members of the Organization of Petroleum Exporting Countries and other oil producing nations (“OPEC+”), such as Saudi Arabia, and other oil and natural gas producing countries, such as Russia, with respect to production levels or other matters related to the price of oil, the effects of excess supply of oil and natural gas resulting from the reduced demand caused by the novel coronavirus disease (“COVID-19”) global pandemic and the actions by certain oil and natural gas producing countries, market prices for oil, natural gas and NGLs, production volumes, estimates of proved reserves, capital expenditures, the capacity and utilization of midstream facilities, economic and competitive conditions, credit and capital market conditions, regulatory changes and other uncertainties, as well as those factors set forth in “Cautionary Statement Regarding Forward-Looking Statements” below and in Item 1A. “Risk Factors” in this Quarterly Report on Form 10‑Q and in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2019, and elsewhere in the Annual Report.

The reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1. “Financial Statements.”

Riviera is an independent oil and natural gas company ~~with a strategic focus on efficiently operating its mature low-decline assets, developing its growth-oriented assets, and returning capital to shareholders. Riviera is~~ quoted for trading on the OTCQX Market under the ticker “RVRA.”

Executive Overview

The Company has two reporting segments: upstream and Blue Mountain. The Company’s upstream reporting segment properties are located in two operating regions in the United States (“U.S.”):

•

Mid-Continent, which includes properties in the Northwest STACK in northwestern Oklahoma and various other oil and natural gas producing properties and mineral acreage throughout Oklahoma; and

•

North Louisiana, which includes oil and natural gas properties producing primarily from the Hosston, Cotton Valley Bossier and Smackover formations.

During the first half of 2020, the Company divested all of its properties located in the Uinta Basin and East Texas operating regions and is pursuing divestiture of its remaining oil and natural gas properties by the end of 2020. During 2019, the Company divested all of its properties located in the Hugoton Basin and Michigan/Illinois operating regions. See Note 3 for additional information.

The Blue Mountain reporting segment consists of a state of the art cryogenic natural gas processing facility, a network of gathering pipelines and compressors and produced water services and a crude oil gathering system located in the Merge/SCOOP/STACK play, each of which is owned by Blue Mountain Midstream LLC (“Blue Mountain Midstream”), a wholly owned subsidiary of the Company. In addition to the upstream divestiture activity noted above, the Company is working with an investment bank to explore a potential sale or merger of Blue Mountain Midstream.

InFor ~~addition to~~ the ~~activities~~three ~~described~~months ~~above~~ended June 30, ~~during the first quarter of~~ 2020, the Company’s ~~engaged~~results anincluded ~~investment~~the ~~bank to explore a potential sale or merger of Riviera or Blue Mountain Midstream.~~following:

25• oil, natural gas and NGL sales of approximately $11 million compared to $67 million for the three months ended June 30, 2019;

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

~~For~~• ~~the~~average ~~three~~daily ~~months~~production ~~ended~~of ~~March 31,~~approximately ~~2020,~~52 ~~the~~MMcfe/d ~~Company’s~~compared ~~results~~to ~~included~~286 MMcfe/d for the ~~following:~~three months ended June 30, 2019;

• ~~oil,~~net ~~natural~~loss ~~gas and NGL sales~~ of approximately $1521 million compared to $767 million for the three months ended ~~March~~June 3130, 2019;

• ~~average~~noncash ~~daily~~impairment ~~production~~charges of approximately 72$15 ~~MMcfe/d~~million compared to ~~265~~$18 ~~MMcfe/d~~million for the three months ended ~~March~~June 3130, 2019;

• ~~net~~no ~~loss~~capital ofexpenditures ~~approximately $102 million~~ compared to ~~net income of~~ $1341 million for the three months ended ~~March~~June 3130, 2019; and

• ~~noncash~~no ~~impairment~~wells ~~charge~~drilled ofcompared ~~approximately~~to ~~$107~~22 ~~million;~~wells drilled (all successful) for the three months ended June 30, 2019.

•For ~~capital~~the ~~expenditures~~six ofmonths ~~approximately~~ended ~~$14~~June 30, ~~million~~2020, ~~compared~~the toCompany’s ~~$61~~results ~~million~~included ~~for~~ the ~~three months ended March 31, 2019; and~~following:

• 11oil, ~~wells~~natural ~~drilled~~gas ~~(all~~and ~~successful)~~NGL ~~compared~~sales toof 13approximately ~~wells~~$26 ~~drilled~~million ~~(all~~compared ~~successful)~~to $143 million for the ~~three~~six months ended ~~March~~June 3130, 2019.;

~~Divestitures~~• –average ~~First~~daily ~~Quarter~~production ~~2020~~of approximately 62 MMcfe/d compared to 275 MMcfe/d for the six months ended June 30, 2019;

•

net loss of approximately $123 million compared to net income of $6 million for the six months ended June 30, 2019;

•

noncash impairment charges of approximately $122 million compared to $18 million for the six months ended June 30, 2019;

•

capital expenditures of approximately $14 million compared to $102 million for the six months ended June 30, 2019; and

•

11 wells drilled (all successful) compared to 35 wells drilled (all successful) for the six months ended June 30, 2019.

Divestitures – 2020

On January 15, 2020, the Company completed the sale of its interest in non-operated properties located in the Drunkards Wash field in the Uinta Basin (the “Drunkards Wash Asset Sale”). Cash proceeds from the sale of these properties were approximately $4 million (including a deposit of approximately $450,000 received in 2019), and the Company recorded a net gain of approximately $1 million.

On January 31, 2020, the Company completed the sale of its interest in properties located in the Overton field in East Texas (the “Overton Assets Sale”). Cash proceeds from the sale of these properties were approximately $17 million (including a deposit of approximately $2 million received in 2019).

On February 14, 2020, the Company completed the sale of its interest in properties located in the Personville field in East Texas (the “Personville Assets Sale”). Cash proceeds from the sale of these properties were approximately $28 million (including a deposit of approximately $3 million received in 2019).

On February 28, 2020, the Company completed the sale of its office building located in Oklahoma City, Oklahoma. Cash proceeds from the sale were approximately $21 million.

~~Divestitures~~On –July 27, ~~2019~~2020, the Company signed a definitive agreement to sell its interest in properties located in North Louisiana for a contract price of approximately $27 million. The transaction is expected to close in the third quarter of 2020, subject to satisfactory completion of due diligence and the satisfaction of closing conditions. During the three months ended June 30, 2020, the Company recorded a noncash impairment charge of approximately $12 million to reduce the carrying value of these assets to fair value.

On ~~November~~August 224, ~~2019~~2020, the Company ~~completed~~signed ~~the~~a ~~sale~~definitive ofagreement to sell its interest in properties located in the ~~Hugoton~~Anadarko Basin ~~(the~~in ~~“Hugoton~~Oklahoma ~~Basin~~for ~~Assets~~a ~~Sale”). Cash~~contract ~~proceeds~~price ~~from the sale~~ of ~~these properties were~~ approximately $~~286~~16 million. InThe ~~connection~~transaction ~~with~~is ~~the~~expected ~~Hugoton~~to ~~Basin~~close ~~Assets~~in ~~Sale,~~ the ~~buyer~~fourth ~~also~~quarter ~~acquired the Company’s interest in Mayzure, LLC (“Mayzure”), a wholly owned subsidiary~~ of ~~the Company~~2020, ~~which~~subject ~~was the counterparty~~ to ~~the~~satisfactory ~~volumetric~~completion ~~production~~of ~~payment~~due ~~agreements~~diligence ~~based on helium produced from certain oil~~ and ~~natural~~the ~~gas~~satisfaction ~~properties~~of inclosing ~~the Hugoton Basin~~conditions.

~~On September 5, 2019, the Company completed the sale of its interest in properties located in Illinois. Cash proceeds from the sale of these properties were approximately $4 million.~~30

On August 30, 2019, the Company completed the sale of its interest in non-core assets located in North Louisiana. Cash proceeds from the sale were approximately $2 million.

On July 3, 2019, the Company completed the sale of its interest in properties located in Michigan. Cash proceeds from the sale of these properties were approximately $39 million.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

OnDivestitures ~~May 31,~~– 2019~~, the Company completed the sale of its interest in non-operated properties located in the Hugoton Basin in Kansas. Cash proceeds from the sale of these properties were approximately $29 million.~~

On ~~January~~November 1722, 2019, the Company completed the sale of its interest in properties located in the ~~Arkoma~~Hugoton Basin in(the ~~Oklahoma~~“Hugoton Basin Assets Sale”). Cash proceeds from the sale of these properties were approximately $64286 million. In ~~(including~~connection awith ~~deposit~~the ofHugoton ~~approximately~~Basin $5Assets ~~million~~Sale, ~~received~~the buyer also acquired the Company’s interest in ~~2018~~Mayzure, LLC (“Mayzure”), a wholly owned subsidiary of the Company, which was the counterparty to the volumetric production payment agreements based on helium produced from certain oil and natural gas properties in the Hugoton Basin. The Company ~~recorded~~recognized apre-tax ~~net~~loss ~~gain~~of approximately $1 million and pre-tax income of approximately $289 million for the three months and six months ended June 30, 2019, respectively, from the Hugoton Basin.

On January 17, 2019, the Company completed the sale of its interest in properties located in the Arkoma Basin in Oklahoma (the “Arkoma Assets Sale”). Cash proceeds from the sale of these properties were approximately $64 million (including a deposit of approximately $5 million received in 2018), and the Company recorded a net gain of approximately $28 million.

Impact of Decline in Commodity Prices

The Company and the oil and gas industry has been ~~critically~~adversely impacted by recent events, including the initial dramatic increase in output from ~~the~~OPEC+ ~~Organization~~in of the ~~Petroleum~~first ~~Exporting~~quarter ~~Countries~~of 2020 and the destruction of demand resulting from the unprecedented global health and economic crisis sparked by the COVID-19 pandemic. In order to reduce expenses, in April 2020, the Board of Directors of the Company made the decision to consolidate the management of Blue Mountain Midstream within the Company’s existing executive management team. The Company plans to further reduce expenses by integration of the operations of the two companies wherever practical. The Company incurred severance expenses of approximately $4 million and $5 million for the three months and six months ended June 30, 2020, respectively, in connection with these activities.

Impairment of Assets Held for Sale and Long-Lived Assets

During the ~~three~~six months ended ~~March~~June 3130, 2020, the Company recorded a noncash impairment ~~charge~~charges of approximately $~~107~~122 million. Of this ~~charge~~, approximately $88 million related to proved and unproved oil and natural gas properties located in Oklahoma, approximately $212 million related to properties ~~held~~to ~~for~~be ~~sale~~divested located in North Louisiana, and approximately $174 million related to divested properties located in East Texas. In addition, approximately $18 million related to Blue Mountain Midstream’s crude oil gathering system assets. The impairment ~~charge~~charges ~~was~~were primarily due to a decline in commodity prices and a decline in expected future volumes. See Note 1 for additional information.

2020 Oil and Natural Gas and Midstream Capital Budget

~~During~~For ~~the three months ended March 31,~~ 2020, ~~based on market prices,~~ the Company ~~deferred~~estimates its ~~operated~~total ~~drilling~~capital ~~program~~expenditures, inexcluding ~~North Louisiana~~acquisitions, ~~reducing~~will ~~2020~~be ~~budgeted capital by~~ approximately $2122 million~~. Because~~, ~~these~~including ~~wells~~approximately ~~were~~$3 ~~not~~million ~~expected~~related to ~~come~~its onoil ~~line~~and ~~until~~natural ~~the~~gas ~~fourth~~capital ~~quarter~~program ofand ~~2020,~~approximately ~~the~~$19 ~~impact~~million onrelated ~~the~~to ~~Company’s~~Blue ~~results~~Mountain ofMidstream. This ~~operations~~estimate ~~for~~is ~~the~~under ~~year~~continuous ~~ended~~review ~~December 31,~~and ~~2020,~~subject ~~is not expected~~ to beongoing ~~material~~adjustments.

For 2020, the Company estimates its total capital expenditures, excluding acquisitions, will be approximately $28 million, including approximately $3 million related to its oil and natural gas capital program and approximately $25 million related to Blue Mountain Midstream. This estimate is under continuous review and subject to ongoing adjustments.

Impact of COVID-19 Pandemic

Certain remote work arrangements implemented by the Company in response to the COVID-19 pandemic have not adversely affected ~~the~~its ~~Company’s~~ ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures. However, the COVID-19 pandemic is still evolving and identification of all trends, events and uncertainties that may impact the Company’s financial condition and results of operations are unknown at this time, therefore the Company’s results of operations for the three months ended March 31, 2020, may not be indicative of its future results.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

events and uncertainties, including a possible widespread resurgence in COVID-19 infections in the second half of 2020 without the availability of generally effective therapeutics or a vaccine for the disease, that may impact the Company’s financial condition and results of operations are unknown at this time, therefore the Company’s results of operations for the three months and six months ended June 30, 2020, may not be indicative of its future results. If the pandemic and low commodity price environment continues, it may have a material adverse effect on the Company’s operating cash flows, liquidity, and future development plans.

Financing Activities

Riviera Credit Facility

Riviera’s credit agreement provides for a senior secured reserve-based revolving loan facility (the “Riviera Credit Facility”) with a borrowing base and borrowing commitments of $9030 million at ~~March~~June 3130, 2020. On June 1, 2020, the Company entered into a Fifth Amendment (the “Amendment”) to the Riviera Credit Facility. Pursuant to the Amendment, the borrowing base was reduced from $90 million to $30 million and the applicable margin for interest on borrowings was increased by 0.25%. A reduction to the borrowing base, in whole or in part, is expected ~~with~~should the ~~April~~Company ~~redetermination~~close the sale of its interests in properties in North Louisiana and Oklahoma as currently anticipated. See Note 3. During the three months and six months ended June 30, 2020, the Company recorded a finance fee expense of approximately $468,000 related to the write-off of a portion of unamortized deferred financing fees due to the reduction of the Riviera Credit Facility borrowing base.

Blue Mountain Midstream Credit Facility

Share Repurchase Program

On July 18, 2019, the Board of Directors of the Company authorized the repurchase of up to $150 million of the Company’s outstanding shares of common stock. During the ~~three~~six months ended ~~March~~June 3130, 2020, the Company repurchased an aggregate of 282,742 shares of common stock at an average price of $7.31 per share for a total cost of approximately $2 million. At July 31, 2020, approximately $22 million was available for share repurchases under the program. Any share repurchases are subject to restrictions in the Riviera Credit Facility.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

aggregate of 282,742 shares of common stock at an average price of $7.31 per share for a total cost of approximately $2 million. At April 30, 2020, approximately $22 million was available for share repurchases under the program. Any share repurchases are subject to restrictions in the Riviera Credit Facility.

Dividends

Cash Distributions

On March 9, 2020, the Board of Directors of the Company declared a cash distribution of $1.00 per share. A cash distribution totaling approximately $58 million was paid on April 22, 2020, to shareholders of record as of the close of business on April 8, 2020. AtOn ~~March~~April 3123, 2020, the Board of Directors of the Company ~~recorded~~declared ~~“distributions~~a ~~payable”~~cash distribution of $0.75 per share. The distribution totaling approximately $5843 million was paid on May 11, 2020, to shareholders of record as of the ~~condensed~~close ~~consolidated~~of ~~balance~~business ~~sheet~~on May 7, 2020. In addition, approximately $1213 million and $11 million for potential future distributions related to nonvested share-based compensation awards was voluntarily recorded in restricted cash at ~~March~~June 3130, 2020, and December 31, 2019, respectively. At ~~March~~June 3130, 2020, and December 31, 2019, distributions payable, based on the vesting schedule of awards, of approximately $1819,000 ~~million~~ and $2 million, respectively, related to outstanding share-based compensation awards was also recorded. These amounts are included in “other accrued liabilities” and “asset retirement obligations and other noncurrent liabilities” on the condensed consolidated balance sheets.

Cash Distributions – Subsequent Event

Commodity Derivatives

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Field Level Cash Flow

To assess the performance of the Company’s reporting segments, the Company’s Chief Operating Decision Maker (“CODM”) analyzes field level cash flow, a non-generally accepted accounting principles financial metric. The Company defines field level cash flow as revenues less direct operating expenses. Other indirect income (expenses) include “general and administrative expenses,” “exploration costs,” “depreciation, depletion and amortization,” “(gains) on sale of assets and other, net,” “impairment of long-lived assets,” “other income and (expenses)” and “reorganization items, net.” Field level cash flow is disclosed herein to provide financial information about the Company’s reporting segments in alignment with the information reviewed by its CODM. Information regarding total assets by reporting segment is not presented because it is not reviewed by the CODM.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Results of Operations

Three Months Ended ~~March~~June 3130, 2020, Compared to Three Months Ended ~~March~~June 3130, 2019

	Three Months Ended March 31,
	Three Months Ended June 30,
	2020			2019			Variance
	(in thousands)
Revenues and other:
Natural gas sales	$	95,~~460~~439		$	5746,~~137~~604		$	(4741,~~677~~165	)
Oil sales		4,~~370~~210			510,~~728~~222			(16,~~358~~012	)
NGL sales		~~968~~1,285			139,~~480~~931			(128,~~512~~646	)
Total oil, natural gas and NGL sales		1410,~~798~~934			7666,~~345~~757			(6155,~~547~~823	)
Gains (losses) on commodity derivatives		8(1,~~079~~358	)		~~(13~~20,~~241~~249	)		(21,~~320~~607	)
Marketing and other revenues		3321,~~953~~873			7358,~~350~~544			(3936,~~397~~671	)
		56,830			136,454			(79,624	)
		31,449			145,550			(114,101	)
Expenses:
Lease operating expenses		42,~~951~~894			2423,~~052~~845			(1920,~~101~~951	)
Transportation expenses		21,~~174~~209			1918,~~150~~053			(16,~~976~~844	)
Marketing expenses		2116,~~319~~828			5341,~~389~~811			(3224,~~070~~983	)
General and administrative expenses (1)		911,~~904~~219			1913,~~039~~489			(92,~~135~~270	)
Exploration costs		—			~~1,238~~969			(~~1,238~~969	)
Depreciation, depletion and amortization		104,~~319~~793			2123,~~772~~181			(1118,~~453~~388	)
Impairment of assets held for sale and long-lived assets		~~106~~14,~~784~~874			—18,390			~~106~~(3,~~784~~516	)
Taxes, other than income taxes		1,~~215~~375			62,~~300~~599			(51,~~085~~224	)
(Gains) losses on sale of assets and other, net		~~460~~(2,491	)		~~(27~~9,~~265~~885	)		27(12,~~725~~376	)
		157,126			117,675			39,451
		50,701			152,222			(101,521	)
Other income and (expenses)		(~~989~~1,687	)		(1,~~560~~627	)		~~571~~(60	)
Reorganization items, net		(~~221~~273	)		—(424	)		~~(221~~151	)
(Loss) income before income taxes		(101,506	)		17,219			(118,725	)
Loss before income taxes		(21,212	)		(8,723	)		(12,489	)
Income tax expense		—			4,493			(4,493	)
Income tax benefit		—			(2,047	)		2,047
Net (loss) income	$	(101,506	)	$	12,726		$	(114,232	)
Net loss	$	(21,212	)	$	(6,676	)	$	(14,536	)

(1) General and administrative expenses for the three months ended ~~March~~June 3130, 2020, and ~~March~~June 3130, 2019, include approximately $(3323,000) ~~million~~ and $64 million, respectively, of share-based compensation expenses.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

	Three Months Ended March 31,
	Three Months Ended June 30,
	2020		2019		Variance
Average daily production:
Natural gas (MMcf/d)		6037		~~216~~236		(7284	%)
Oil (MBbls/d)		1.13		1.29		(832	%)
NGL (MBbls/d)		01.91		6.94		(8783	%)
Total (MMcfe/d)		7252		~~265~~286		(7382	%)
Weighted average prices: (1)
Natural gas (Mcf)	$	1.7460	$	2.9417		(4126	%)
Oil (Bbl)	$	4534.6353	$	5358.2211		(1441	%)
NGL (Bbl)	$	1112.4736	$	2117.5615		(4728	%)
Average NYMEX prices:
Natural gas (MMBtu)	$	1.9572	$	32.1564		(3835	%)
Oil (Bbl)	$	4627.1785	$	5459.9081		(1653	%)
Costs per Mcfe of production:
Lease operating expenses	$	0.7661	$	10.0192		(2534	%)
Transportation expenses	$	0.3325	$	0.8069		(5964	%)
General and administrative expenses (2)	$	12.5235	$	0.8052		90352	%
Depreciation, depletion and amortization	$	1.5801	$	0.9189		7413	%
Taxes, other than income taxes	$	0.1929	$	0.2610		~~(27~~190	%)

⁽¹⁾	Does not include the effect of gains (losses) on derivatives.

(2) General and administrative expenses for the three months ended ~~March~~June 3130, 2020, and ~~March~~June 3130, 2019, include approximately $(3323,000) ~~million~~ and $64 million, respectively, of share-based compensation expenses.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Upstream Reporting Segment

	Three Months Ended March 31,
	Three Months Ended June 30,
	2020		2019		Variance
	(in thousands)
Oil, natural gas and NGL sales	$	1410,~~798~~934	$	7666,~~345~~757	$	(6155,~~547~~823	)
Marketing and other revenues		~~1,887~~851		3115,~~022~~900		(2915,~~135~~049	)
		16,685		107,367		(90,682	)
		11,785		82,657		(70,872	)
Lease operating expenses		42,~~951~~894		2423,~~052~~845		(1920,~~101~~951	)
Transportation expenses		21,~~174~~209		1918,~~150~~053		(16,~~976~~844	)
Marketing expenses		5410		197,~~784~~836		(197,~~730~~826	)
Taxes other than income taxes		624		5,625		(5,001	)
Taxes, other than income taxes		1,097		1,891		(794	)
Total direct operating expenses		75,~~803~~210		6851,~~611~~625		(6046,~~808~~415	)
Field level cash flow (1)	$	86,~~882~~575	$	3831,~~756~~032	$	(2924,~~874~~457	)

⁽¹⁾	Refer to Note 17 for a reconciliation of field level cash flow to (loss) income before income taxes.

Oil, Natural Gas and NGL Sales

Oil, natural gas and NGL sales decreased by approximately $6156 million or 8184% to approximately $1511 million for the three months ended ~~March~~June 3130, 2020, from approximately $7667 million for the three months ended ~~March~~June 3130, 2019, primarily due to lower natural gas and NGL volumes as a result of divestitures completed in 2019 and ~~the first quarter of~~ 2020 and lower commodity prices. Lower natural gas, ~~NGL~~ and oil prices resulted in a decrease in revenues of approximately $62 million, ~~$851,000~~ and $~~726~~3 million,~~000,~~ respectively.

Average daily production volumes decreased to approximately 7252 MMcfe/d for the three months ended ~~March~~June 3130, 2020, from ~~265~~286 MMcfe/d for the three months ended ~~March~~June 3130, 2019. Lower natural gas, NGL and oil production volumes resulted in a decrease in revenues of approximately $4140 million, $128 million and $~~632~~3 million,~~000,~~ respectively.

The following table sets forth average daily production by region:

	Three Months Ended March 31,
	Three Months Ended June 30,
	2020		2019		Variance
Average daily production (MMcfe/d):
Hugoton Basin		—		~~124~~114		(~~124~~114	)	(100	%)
Mid-Continent		2936		3040		(14	)	(310	%)
East Texas		18—		4643		(2843	)	(61100	%)
North Louisiana		2116		2043		1(27	)	5(63	%)
Uinta Basin		4—		18		(1418	)	(78100	%)
Michigan/Illinois		—		2728		(2728	)	(100	%)
		72		265		(193	)	(73	%)
		52		286		(234	)	(82	%)

Production volumes in the Mid-Continent ~~and North Louisiana~~ were consistent with the comparable period of the prior year. The ~~decreases~~decrease in average daily production ~~volumes~~in North Louisiana primarily reflects a reduction in ~~the~~production ~~Uinta~~due ~~Basin~~to reduced development drilling and ~~East~~natural ~~Texas~~decline ~~regions~~of ~~primarily~~2019 ~~reflect~~drilling ~~lower~~programs, ~~production~~plant ~~volumes~~downtime, asand athe ~~result~~divestiture of ~~divestitures~~non-core ~~completed~~assets ~~during~~in 2019. The Company completed the ~~first~~divestiture ~~quarter~~of all of its properties located in the East Texas and Uinta Basin operating regions in 2020. In addition, the Company completed the divestiture of all of its properties located in the Hugoton Basin and Michigan/Illinois operating regions ~~during~~in 2019. See Note 3 for additional information about divestitures.

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Marketing and Other Revenues

	Three Months Ended March 31,
	Three Months Ended June 30,
	2020		2019		Variance
	(in thousands)
Jayhawk plant and helium	$	16—	$	2914,~~169~~141	$	(2914,~~153~~141	)
Other		~~1,871~~851		1,~~853~~759		18(908	)
	$	~~1,887~~851	$	3115,~~022~~900	$	(2915,~~135~~049	)

Marketing and other revenues decreased by approximately $2915 million or 9495% to approximately $21 million for the three months ended ~~March~~June 3130, 2020, from approximately $3116 million for the three months ended ~~March~~June 3130, 2019. The decrease was primarily due to the Hugoton Basin Assets Sale, which included sale of the Jayhawk plant. Other primarily includes revenues from other midstream systems in the East Texas and North Louisiana operating regions. The Company completed the divestiture of all of its properties located in the East Texas region in 2020.

Lease Operating Expenses

Lease operating expenses include expenses such as labor, field office, vehicle, supervision, maintenance, tools and supplies, and workover expenses. Lease operating expenses decreased by approximately $1921 million or 7988% to approximately $53 million for the three months ended ~~March~~June 3130, 2020, from approximately $24 million for the three months ended ~~March~~June 3130, 2019. The decrease was primarily due to divestitures ~~during~~completed in 2019 and ~~the first quarter of~~ 2020 and lower service costs. Lease operating expenses per Mcfe decreased to $0.7661 per Mcfe for the three months ended ~~March~~June 3130, 2020, from $10.0192 per Mcfe for the three months ended ~~March~~June 3130, 2019, primarily driven by changes in the Company’s asset base as a result of divestitures.

Transportation Expenses

Transportation expenses decreased by approximately $17 million or 8993% to approximately $21 million for the three months ended ~~March~~June 3130, 2020, from approximately $1918 million for the three months ended ~~March~~June 3130, 2019. The decrease was primarily due to divestitures ~~during~~completed in 2019 and ~~the first quarter of~~ 2020. Transportation expenses per Mcfe decreased to $0.3325 per Mcfe for the three months ended ~~March~~June 3130, 2020, from $0.8069 per Mcfe for the three months ended ~~March~~June 3130, 2019, primarily driven by changes in the Company’s asset base as a result of divestitures.

Marketing Expenses

	Three Months Ended March 31,
	Three Months Ended June 30,
	2020			2019		Variance
	(in thousands)
Jayhawk plant	$	~~(120~~—	)	$	187,~~962~~171	$	(197,~~082~~171	)
Other		~~174~~10			~~822~~665		(~~648~~655	)
	$	5410		$	197,~~784~~836	$	(197,~~730~~826	)

Marketing expenses represent third-party activities associated with company-owned gathering systems, plants and facilities. Marketing expenses decreased by approximately $208 million or 100% to approximately $5410,000 for the three months ended ~~March~~June 3130, 2020, from approximately $208 million for the three months ended ~~March~~June 3130, 2019. The decrease was primarily due to the Hugoton Basin Assets Sale, which included sale of the Jayhawk plant. ~~The credit to expense during the three months ended March 31, 2020, was due to receipt of an electric co-op refund.~~

~~Severance~~Taxes, ~~and~~Other AdThan ~~Valorem~~Income Taxes

	Three Months Ended March 31,
	Three Months Ended June 30,
	2020		2019			Variance
	(in thousands)
Severance taxes	$	~~436~~827	$	2,~~161~~484		$	(1,~~725~~657	)
Ad valorem taxes		4566		3,~~362~~662			(3,~~317~~596	)
Other taxes		~~143~~204		~~102~~(4,255	)		414,459
	$	~~624~~1,097	$	51,~~625~~891		$	(~~5,001~~794	)

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Severance taxes, which are a function of revenues generated from production, decreased primarily due to lower production volumes due to divestitures completed ~~during~~in 2019 and ~~the first quarter of~~ 2020. Ad valorem taxes, which are based on the value of reserves and production equipment and vary by location, decreased primarily due to divestitures completed ~~during~~in 2019 and ~~the~~2020. Other ~~first~~taxes ~~quarter~~include a sales tax refund of ~~2020~~approximately $4 million during the three months ended June 30, 2019.

Field Level Cash Flow

Field level cash flow decreased by approximately $3024 million or 7779% to approximately $97 million for the three months ended ~~March~~June 3130, 2020, from approximately $3931 million for the three months ended ~~March~~June 3130, 2019. The decrease was primarily due to ~~the~~ divestitures completed ~~during~~in 2019 and ~~the first quarter of~~ 2020 and lower commodity prices.

Blue Mountain Reporting Segment

	Three Months Ended March 31,
	Three Months Ended June 30,
	2020		2019		Variance
	(in thousands)
Marketing revenues	$	3221,~~066~~022	$	42,~~328~~644	$	(1021,~~262~~622	)
Marketing expenses		2116,~~265~~818		33,~~605~~975		(1217,~~340~~157	)
Severance taxes and ad valorem taxes		591		675		(84	)
Taxes, other than income taxes		278		708		(430	)
Total direct operating expenses		2117,~~856~~096		34,~~280~~683		(1217,~~424~~587	)
Field level cash flow (1)	$	103,~~210~~926	$	87,~~048~~961	$	2(4,~~162~~035	)

(1) Refer to Note 17 for a reconciliation of field level cash flow to ~~net~~ (loss) income before income taxes.

Marketing Revenues

Marketing revenues decreased by approximately $1022 million or 2451% to approximately $3221 million for the three months ended ~~March~~June 3130, 2020, from approximately $4243 million for the three months ended ~~March~~June 3130, 2019. The decrease was primarily due to lower commodity prices, ~~partially~~lower ~~offset~~volumes, byproduction ~~revenues~~curtailments and contract disputes during 2020. Average daily throughput volumes decreased to approximately 97 MMcf/d for the three months ended June 30, 2020, from 120 MMcf/d for the ~~water~~three ~~services~~months ~~business~~ended June 30, 2019.

Marketing Expenses

Marketing expenses decreased by approximately $1317 million or 3750% to approximately $2117 million for the three months ended ~~March~~June 3130, 2020, from approximately $34 million for the three months ended ~~March~~June 3130, 2019. The decrease was primarily due to lower commodity prices during 2020,. The decrease was partially offset by higher marketing expenses ~~related~~due to discounts on gathering fees offered to producers in the ~~water~~second ~~services~~quarter ~~business~~of 2020.

Field Level Cash Flow

Field level cash flow ~~increased~~decreased by approximately $24 million or 2751% to approximately $104 million for the three months ended ~~March~~June 3130, 2020, from approximately $8 million for the three months ended ~~March~~June 3130, 2019, primarily due to lower ~~costs~~revenues.

Indirect Income and Expenses

Gains (Losses) on Commodity Derivatives

~~Gains~~Losses on commodity derivatives were approximately $81 million for the three months ended ~~March~~June 3130, 2020, compared to ~~losses~~gains of approximately $1320 million for the three months ended ~~March~~June 3130, 2019. Gains and losses on commodity derivatives were primarily due to changes in fair value of the derivative contracts. The fair value on unsettled derivative contracts changes as future commodity price expectations change compared to the contract prices on the derivatives. If the expected future commodity prices increase compared to the contract prices on the derivatives, losses are recognized; and if the expected future commodity prices decrease compared to the contract prices on the derivatives, gains are recognized.

The Company determines the fair value of its commodity derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. See Item 3. “Quantitative and Qualitative Disclosures About Market Risk” and Note 7 and Note 8 for additional details about the Company’s commodity derivatives. For information about the Company’s credit risk related to derivative contracts, see “Counterparty Credit Risk” under “Liquidity and Capital Resources” below.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Note 7 and Note 8 for additional details about the Company’s commodity derivatives. For information about the Company’s credit risk related to derivative contracts, see “Counterparty Credit Risk” under “Liquidity and Capital Resources” below.

General and Administrative Expenses

General and administrative expenses are costs not directly associated with field operations and reflect the costs of employees including executive officers, related benefits, office leases and professional fees. General and administrative expenses decreased by approximately $92 million or 4817% to approximately $1011 million for the three months ended ~~March~~June 3130, 2020, from approximately $1913 million for the three months ended ~~March~~June 3130, 2019. The decrease was primarily due to lower share-based compensation expenses, ~~lower severance costs~~ and lower salaries and benefits related expenses resulting from lower headcount. Share-based compensation ~~expense~~expenses ~~was~~were a negative expense of approximately $3323,000 ~~million~~ for the three months ended ~~March~~June 3130, 2020, based on the fair value of outstanding awards. General and administrative expenses per Mcfe increased to $12.5235 per Mcfe for the three months ended ~~March~~June 3130, 2020, from $0.8052 per Mcfe for the three months ended ~~March~~June 3130, 2019, due to lower production volumes associated with divestitures and increased severance expenses. Severance expenses were approximately $4 million for the three months ended June 30, 2020, compared to none for the three months ended June 30, 2019.

Exploration Costs

No exploration costs were incurred during the three months ended ~~March~~June 3130, 2020. Exploration costs were approximately $1 million for the three months ended ~~March~~June 3130, 2019.

Depreciation, Depletion and Amortization

Depreciation, depletion and amortization decreased by approximately $1218 million or 5379% to approximately $105 million for the three months ended ~~March~~June 3130, 2020, from approximately $2223 million for the three months ended ~~March~~June 3130, 2019. Depreciation, depletion and amortization per Mcfe increased to $1.5801 per Mcfe for the three months ended ~~March~~June 3130, 2020, from $0.9189 per Mcfe for the three months ended ~~March~~June 3130, 2019.

Impairment of Assets Held for Sale and Long-Lived Assets

During the three months ended ~~March~~June 3130, 2020, the Company recorded a noncash impairment ~~charge~~charges of approximately $~~107~~15 million. Of this ~~charge~~, approximately $8812 million related to ~~proved and unproved~~ oil and natural gas properties to be divested located in ~~Oklahoma,~~North Louisiana and approximately $2 million related to divested properties ~~held~~located ~~for~~in ~~sale~~East ~~and~~Texas. In addition, approximately $171 million related to Blue Mountain Midstream’s crude oil gathering system assets. The impairment ~~charge~~charges ~~was~~were primarily due to a decline in commodity prices and a decline in expected future volumes. During the three months ended June 30, 2019, the Company recorded a noncash impairment charge of approximately $18 million associated with Michigan proved oil and natural gas properties held for sale at June 30, 2019. The impairment charge was primarily due to a decline in commodity prices. See Note 1 for additional information about impairment and Note 3 for information about divestitures.

(Gains) Losses on Sale of Assets and Other, Net

During the three months ended ~~March~~June 3130, 2020, the Company recorded a net gain of approximately $12 million, primarily related to divestitures, partially offset by a loss on ~~the~~disposal ~~Drunkards~~of ~~Wash~~furniture ~~Asset~~and ~~Sale~~equipment. ~~This~~During ~~gain~~the ~~was~~three ~~offset~~months byended ~~adjustments~~June 30, 2019, the Company recorded a net loss of approximately $10 million, primarily related to ~~prior~~a ~~year~~net ~~divestitures~~loss of approximately $9 million on the sale of its interest in non-operated properties located in the Hugoton Basin. See Note 3 for information about divestitures.

Other Income and (Expenses)

	Three Months Ended March 31,
	Three Months Ended June 30,
	2020			2019			Variance
	(in thousands)
Interest expense, net of amounts capitalized	$	(~~929~~739	)	$	(~~971~~2,103	)	$	421,364
Other, net		(60948	)		~~(589~~476	)		~~529~~(1,424	)
	$	(~~989~~1,687	)	$	(1,~~560~~627	)	$	~~571~~(60	)

Interest expense decreased primarily due to lower outstanding debt during the three months ended ~~March~~June 3130, 2020, compared to the same period of the prior year. For the three months ended ~~March~~June 3130, 2020, “other, net” is primarily related to ~~commitment~~the ~~fees~~write-off ~~for~~of ~~the~~a ~~undrawn~~ portion of ~~the~~unamortized ~~Credit~~deferred ~~Facilities,~~financing ~~partially~~fees ~~offset~~of byapproximately ~~interest income. “Other~~$468,000 ~~net”~~and commitment fees for the ~~three~~undrawn ~~months ended March 31, 2019, is also partially offset by rental income.~~

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

portion of the Credit Facilities. For the three months ended June 30, 2019, “other, net” is primarily related to interest and rental income, partially offset by commitment fees for the undrawn portion of the Credit Facilities. See “Debt” under “Liquidity and Capital Resources” below for additional details.

Reorganization Items, Net

Reorganization items represent costs directly associated with Chapter 11 proceedings since the petition date. During the three months ended ~~March~~June 3130, 2020, and June 30, 2019, reorganization items were approximately $~~221~~273,000 and $424,000, respectively, primarily related to legal and other professional fees.

34Income Tax Benefit

The Company recognized no income tax expense for the three months ended June 30, 2020, because of a full valuation allowance recorded in the third quarter of 2019, compared to an income tax benefit of approximately $2 million for the three months ended June 30, 2019.

Net Loss

A net loss of approximately $21 million was incurred for the three months ended June 30, 2020, compared to approximately $7 million for the three months ended June 30, 2019. See discussion above for explanations of variances.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Results of Operations

Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019

	Six Months Ended June 30,
	2020			2019			Variance
	(in thousands)
Revenues and other:
Natural gas sales	$	14,899		$	103,741		$	(88,842	)
Oil sales		8,580			15,950			(7,370	)
NGL sales		2,253			23,411			(21,158	)
Total oil, natural gas and NGL sales		25,732			143,102			(117,370	)
Gains on commodity derivatives		6,721			7,008			(287	)
Marketing and other revenues		55,826			131,894			(76,068	)
		88,279			282,004			(193,725	)
Expenses:
Lease operating expenses		7,845			47,897			(40,052	)
Transportation expenses		3,383			37,203			(33,820	)
Marketing expenses		38,147			95,200			(57,053	)
General and administrative expenses ⁽¹⁾		21,123			32,480			(11,357	)
Exploration costs		—			2,207			(2,207	)
Depreciation, depletion and amortization		15,112			44,953			(29,841	)
Impairment of assets held for sale and long-lived assets		121,658			18,390			103,268
Taxes, other than income taxes		2,590			8,899			(6,309	)
(Gains) losses on sale of assets and other, net		(2,031	)		(17,380	)		15,349
		207,827			269,849			(62,022	)
Other income and (expenses)		(2,676	)		(3,187	)		511
Reorganization items, net		(494	)		(472	)		(22	)
(Loss) income before income taxes		(122,718	)		8,496			(131,214	)
Income tax expense		—			2,446			(2,446	)
Net (loss) income	$	(122,718	)	$	6,050		$	(128,768	)

⁽¹⁾	General and administrative expenses for the six months ended June 30, 2020, and June 30, 2019, include approximately $(3) million and $10 million, respectively, of share-based compensation expenses.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

	Six Months Ended June 30,
	2020		2019		Variance
Average daily production:
Natural gas (MMcf/d)		49		226		(78	%)
Oil (MBbls/d)		1.2		1.6		(25	%)
NGL (MBbls/d)		1.0		6.7		(85	%)
Total (MMcfe/d)		62		275		(77	%)

Weighted average prices: ⁽¹⁾
Natural gas (Mcf)	$	1.68	$	2.54		(34	%)
Oil (Bbl)	$	39.42	$	56.25		(30	%)
NGL (Bbl)	$	11.96	$	19.44		(38	%)

Average NYMEX prices:
Natural gas (MMBtu)	$	1.83	$	2.89		(37	%)
Oil (Bbl)	$	37.01	$	57.36		(35	%)

Costs per Mcfe of production:
Lease operating expenses	$	0.69	$	0.96		(28	%)
Transportation expenses	$	0.30	$	0.75		(60	%)
General and administrative expenses ⁽²⁾	$	1.87	$	0.65		188	%
Depreciation, depletion and amortization	$	1.34	$	0.90		49	%
Taxes, other than income taxes	$	0.23	$	0.18		28	%

⁽¹⁾	Does not include the effect of gains (losses) on derivatives.

⁽²⁾	General and administrative expenses for the six months ended June 30, 2020, and June 30, 2019, include approximately $(3) million and $10 million, respectively, of share-based compensation expenses.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Upstream Reporting Segment

	Six Months Ended June 30,
	2020		2019		Variance
	(in thousands)

Oil, natural gas and NGL sales	$	25,732	$	143,102	$	(117,370	)
Marketing and other revenues		2,738		46,922		(44,184	)
		28,470		190,024		(161,554	)

Lease operating expenses		7,845		47,897		(40,052	)
Transportation expenses		3,383		37,203		(33,820	)
Marketing expenses		64		27,620		(27,556	)
Taxes, other than income taxes		1,721		7,516		(5,795	)
Total direct operating expenses		13,013		120,236		(107,223	)
Field level cash flow ⁽¹⁾	$	15,457	$	69,788	$	(54,331	)

⁽¹⁾	Refer to Note 17 for a reconciliation of field level cash flow to income (loss) before income taxes.

Oil, Natural Gas and NGL Sales

Oil, natural gas and NGL sales decreased by approximately $117 million or 82% to approximately $26 million for the six months ended June 30, 2020, from approximately $143 million for the six months ended June 30, 2019, primarily due to lower production volumes as a result of divestitures completed in 2019 and 2020 and lower commodity prices. Lower natural gas, NGL and oil prices resulted in a decrease in revenues of approximately $7 million, $1 million and $4 million, respectively.

Average daily production volumes decreased to approximately 62 MMcfe/d for the six months ended June 30, 2020, from 275 MMcfe/d for the six months ended June 30, 2019. Lower natural gas, NGL and oil production volumes resulted in a decrease in revenues of approximately $81 million, $20 million and $4 million, respectively.

The following table sets forth average daily production by region:

	Six Months Ended June 30,
	2020		2019		Variance
Average daily production (MMcfe/d):
Hugoton Basin		—		119		(119	)	(100	%)
Mid-Continent		33		36		(3	)	(8	%)
East Texas		8		44		(36	)	(82	%)
North Louisiana		19		31		(12	)	(39	%)
Uinta Basin		2		17		(15	)	(88	%)
Michigan/Illinois		—		28		(28	)	(100	%)
		62		275		(213	)	(77	%)

Production volumes in the Mid-Continent were consistent with the comparable period of the prior year. The decrease in average daily production in North Louisiana primarily reflects a reduction in production due to reduced development drilling and natural decline of 2019 drilling programs, plant downtime, and the divestiture of non-core assets in 2019. The decreases in average daily production volumes in the Uinta Basin and East Texas operating regions primarily reflect lower production volumes as a result of divestitures completed in 2020. In addition, the Company completed the divestiture of all of its properties located in the Hugoton Basin and Michigan/Illinois operating regions in 2019. See Note 3 for additional information about divestitures.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Marketing and Other Revenues

	Six Months Ended June 30,
	2020		2019		Variance
	(in thousands)

Jayhawk plant and helium	$	16	$	43,310	$	(43,294	)
Other		2,722		3,612		(890	)
	$	2,738	$	46,922	$	(44,184	)

Marketing and other revenues decreased by approximately $44 million or 94% to approximately $3 million for the six months ended June 30, 2020, from approximately $47 million for the six months ended June 30, 2019. The decrease was primarily due to the Hugoton Basin Assets Sale, which included sale of the Jayhawk plant. Other primarily includes revenues from other midstream systems in the East Texas and North Louisiana operating regions.

Lease Operating Expenses

Lease operating expenses include expenses such as labor, field office, vehicle, supervision, maintenance, tools and supplies, and workover expenses. Lease operating expenses decreased by approximately $40 million or 84% to approximately $8 million for the six months ended June 30, 2020, from approximately $48 million for the six months ended June 30, 2019. The decrease was primarily due to divestitures completed in 2019 and 2020 and lower service costs. Lease operating expenses per Mcfe decreased to $0.69 per Mcfe for the six months ended June 30, 2020, from $0.96 per Mcfe for the six months ended June 30, 2019.

Transportation Expenses

Transportation expenses decreased by approximately $34 million or 91% to approximately $3 million for the six months ended June 30, 2020, from approximately $37 million for the six months ended June 30, 2019. Transportation expenses per Mcfe decreased to $0.30 per Mcfe for the six months ended June 30, 2020, from $0.75 per Mcfe for the six months ended June 30, 2019, primarily driven by changes in the Company’s asset base as a result of divestitures.

Marketing Expenses

	Six Months Ended June 30,
	2020			2019		Variance
	(in thousands)

Jayhawk plant	$	(120	)	$	26,191	$	(26,311	)
Other		184			1,429		(1,245	)
	$	64		$	27,620	$	(27,556	)

Marketing expenses represent third-party activities associated with company-owned gathering systems, plants and facilities. Marketing expenses decreased by approximately $28 million or 100% to approximately $64,000 for the six months ended June 30, 2020, from approximately $28 million for the six months ended June 30, 2019. The decrease was primarily due to the Hugoton Basin Assets Sale, which included sale of the Jayhawk plant and a credit to expense from receipt of an electric co-op refund during the six months ended June 30, 2020.

Taxes, Other Than Income Taxes

Six Months Ended June 30,

2020

2019

Variance

(in thousands)

Severance taxes

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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