QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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: 001-38212
Oasis Midstream Partners LP
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1001 Fannin Street, Suite 1500
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the act:
Title of each class
Name of each exchange on which registered
Common units representing limited partner interests
New York Stock Exchange
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 ☒
At July 31, 2019, there were 33,795,196 units representing limited partner interests (consisting of 20,045,196 common units and 13,750,000 subordinated units) outstanding.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Organization and Nature of Operations
Organization. Oasis Midstream Partners LP (the “Partnership”) is a growth-oriented, fee-based master limited partnership formed by its sponsor, Oasis Petroleum Inc. (together with its subsidiaries, “Oasis Petroleum”) to own, develop, operate and acquire a diversified portfolio of midstream assets in North America that are integral to the crude oil and natural gas operations of Oasis Petroleum and are strategically positioned to capture volumes from other producers.
Contributed businesses. The Partnership conducts its business through its ownership of development companies: Bighorn DevCo LLC (“Bighorn DevCo”), Bobcat DevCo LLC (“Bobcat DevCo”) and Beartooth DevCo LLC (“Beartooth DevCo,” and collectively with Bighorn DevCo and Bobcat DevCo, the “DevCos”). Bobcat DevCo and Beartooth DevCo are jointly-owned with Oasis Petroleum through its wholly-owned subsidiary Oasis Midstream Services LLC (“OMS”).
As of June 30, 2019, the Partnership’s assets and ownership interests in the DevCos were as follows:
Wild Basin South Nesson
–Natural gas processing
–Crude oil stabilization
–Crude oil blending
–Crude oil and natural gas liquids storage
–Crude oil transportation
Wild Basin South Nesson
–Natural gas gathering
–Natural gas compression
–Crude oil gathering
–Produced and flowback water gathering
–Produced and flowback water disposal
Alger Cottonwood Hebron Indian Hills Red Bank Wild Basin
–Produced and flowback water gathering
–Produced and flowback water disposal
–Freshwater supply and distribution
Nature of business. The Partnership generates the majority of its revenues through 15-year, fee-based contractual arrangements with wholly-owned subsidiaries of Oasis Petroleum for midstream services. These services include (i) gas gathering, compression, processing, gas lift and natural gas liquids (“NGL”) storage services; (ii) crude oil gathering, stabilization, blending, storage and transportation services; (iii) produced and flowback water gathering and disposal services; and (iv) freshwater supply and distribution services. The revenue earned from these services is generally directly related to the volume of natural gas, crude oil, produced and flowback water and freshwater that flows through the Partnership’s systems.
The Partnership’s operations are supported by significant acreage dedications from Oasis Petroleum. In addition, the Partnership is party to a number of third party agreements across all three DevCos in which the Partnership has the right to provide its full suite of midstream services to support existing and future third party volumes.
The Partnership is not a taxable entity for United States federal income tax purposes and is not subject to income tax in any states in which the Partnership operates, as of June 30, 2019. As taxes are generally borne by its partners through the allocation of taxable income, the Partnership does not record deferred taxes related to the aggregate difference in the basis of its assets for financial and tax reporting purposes.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements of the Partnership have not been audited by the Partnership’s independent registered public accounting firm, except that the Condensed Consolidated Balance Sheet at December 31, 2018 is derived from audited financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for fair statement of the Partnership’s financial position have been included. Management has made certain estimates and assumptions that affect reported amounts in the condensed consolidated financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results.
These interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements and should be read in conjunction with the Partnership’s audited consolidated financial statements and notes thereto included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Annual Report”).
The Partnership’s condensed consolidated financial statements include its accounts and the accounts of the DevCos, each of which is controlled by OMP GP LLC (the “General Partner”). All intercompany balances and transactions have been eliminated upon consolidation.
Variable interest entity (“VIE”). On November 19, 2018, the Partnership completed its acquisition of an additional 15% ownership interest in Bobcat DevCo and an additional 30% ownership interest in Beartooth DevCo. The Partnership determined its acquisition of additional ownership interests in Bobcat DevCo and Beartooth DevCo was a reconsideration event in accordance with the rules of the Financial Accounting Standards Board (“FASB”) for VIEs and completed a reassessment of its prior conclusions that Bobcat DevCo and Beartooth DevCo were each VIEs.
With respect to Bobcat DevCo, management determined that OMS’s equity at risk was established with non-substantive voting rights, making Bobcat DevCo a VIE under the rules of the FASB. Through its 100% ownership interest in OMP Operating LLC (“OMP Operating”), which owns a controlling interest in Bobcat DevCo, the Partnership has the authority to direct the activities that most significantly affect the economic performance of this entity and the obligation to absorb losses or the right to receive benefits that could be potentially significant. Therefore, the Partnership is considered the primary beneficiary of Bobcat DevCo and is required to consolidate this entity in its financial statements under the VIE consolidation model.
The Partnership has determined that Bighorn DevCo and Beartooth DevCo are not VIEs due to OMP Operating’s 100% and 70% ownership interest in Bighorn DevCo and Beartooth DevCo, respectively, which is proportional to its voting rights through its controlling interests. The Partnership has a controlling financial interest in Bighorn DevCo and Beartooth DevCo, through its 100% ownership interest in OMP Operating, and is required to consolidate Bighorn DevCo and Beartooth DevCo in its financial statements under the voting interest consolidation model.
Non-controlling interests. The non-controlling interests represent OMS’s retained ownership interests in Bobcat DevCo and Beartooth DevCo as of June 30, 2019 of 67.5% and 30%, respectively.
Significant Accounting Policies
There have been no material changes to the Partnership’s critical accounting policies and estimates from those disclosed in the 2018 Annual Report, other than as noted below.
Leases. In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use (“ROU”) asset and related liability on the balance sheet for leases with durations greater than twelve months and also requires certain quantitative and qualitative disclosures about leasing arrangements. Accounting Standards Codification 842, Leases (“ASC 842”), was subsequently amended by various Accounting Standards Updates, which provided additional implementation guidance.
The Partnership adopted the new standard as of January 1, 2019, using the required modified retrospective approach and elected the option to recognize a cumulative effect adjustment of initially applying the guidance to the opening balance of retained earnings in the period of adoption. Prior period amounts were not adjusted.
The Partnership elected the package of practical expedients under the transition guidance within the new standard, including the practical expedient to not reassess under the new standard any prior conclusions about lease identification, lease classification and initial direct costs; the use-of hindsight practical expedient; the practical expedient to not reassess the prior accounting treatment for existing or expired land easements; and the practical expedient pertaining to combining lease and non-lease components for all asset classes. In addition, the Partnership elected not to apply the recognition requirements of ASC 842 to short-term leases, and as such, recognition of lease payments for short-term leases are recognized in net income on a straight line basis. See Note 8 — Leases for the adoption impact and disclosures required by ASC 842.
The following table presents revenues associated with contracts with customers for the periods presented:
Three Months Ended June 30,
Six Months Ended June 30,
Crude oil and natural gas revenues
Produced and flowback water revenues
Total service revenues
Natural gas and NGL revenues
Total product revenues
Prior period performance obligations
The Partnership records revenue when the performance obligations under the terms of its customer contracts are satisfied. The Partnership measures the satisfaction of its performance obligations using the output method based upon the volume of crude oil, natural gas or water that flows through its systems. In certain cases, the Partnership is required to estimate these volumes during a reporting period and record any differences between the estimated volumes and actual volumes in the following reporting period. Such differences have historically not been significant. For the three and six months ended June 30, 2019 and 2018, revenue recognized related to performance obligations satisfied in prior reporting periods was not material.
Contract balances are the result of timing differences between revenue recognition, billings and cash collections. Contract liabilities are recorded for consideration received from customers primarily related to (i) temporary deficiency quantities under minimum volume commitments which are recognized as revenue when the customer makes up the volumes or the deficiency makeup period expires and (ii) aid in construction payments received from customers which are recognized as revenue over the expected period of future benefit. The Partnership does not recognize contract assets or contract liabilities under its customer contracts for which invoicing occurs once the Partnership’s performance obligations have been satisfied and payment is unconditional. No material contract balances were recorded in the condensed consolidated financial statements for the three and six months ended June 30, 2019 or for the three and six months ended June 30, 2018.
Remaining performance obligations
The following table presents estimated revenue allocated to remaining performance obligations for contracted revenues that are unsatisfied (or partially satisfied) as of June 30, 2019:
2019 (excluding the six months ended June 30, 2019)
The partially and wholly unsatisfied performance obligations presented in the table above are generally limited to customer contracts which have fixed pricing and fixed volume terms and conditions, which generally include customer contracts with minimum volume commitment payment obligations.
The Partnership has elected practical expedients, pursuant to Accounting Standards Codification 606, Revenue from Contracts with Customers, to exclude from the presentation of remaining performance obligations: (i) contracts with index-based pricing or variable volume attributes in which such variable consideration is allocated entirely to a wholly unsatisfied performance
obligation or to a wholly unsatisfied promise to transfer a distinct service that forms part of a series of distinct services; (ii) contracts with an original expected duration of one year or less; and (iii) contracts for which the Partnership recognizes revenue under the right to invoice practical expedient.
4. Transactions with Affiliates
Revenues. ThePartnership generates the majority of its revenues through 15-year, fee-based contractual arrangements with wholly-owned subsidiaries of Oasis Petroleum for midstream services as described in Note 1 — Organization and Nature of Operations. In addition, the Partnership sells the residue gas and NGLs recovered from its gas processing plants attributable to its third party natural gas purchase agreements to Oasis Petroleum to market and sell to non-affiliated purchasers.
Expenses. Oasis Petroleum provides substantial labor and overhead support for the Partnership pursuant to a 15-year services and secondment agreement (the “Services and Secondment Agreement”). Oasis Petroleum performs centralized corporate, general and administrative services for the Partnership, such as legal, corporate recordkeeping, planning, budgeting, regulatory, accounting, billing, business development, treasury, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, investor relations, cash management and banking, payroll, internal audit, tax and engineering. Oasis Petroleum has also seconded to the Partnership certain of its employees to operate, construct, manage and maintain its assets. The Partnership reimburses Oasis Petroleum for direct and allocated general and administrative expenses incurred by Oasis Petroleum for the provision of these services. The expenses of executive officers and non-executive employees of Oasis Petroleum are allocated to the Partnership based on the amount of time spent managing its business and operations. The Partnership’s general and administrative expenses include $7.0 million and $5.4 million from affiliate transactions with Oasis Petroleum for the three months ended June 30, 2019 and 2018, respectively, and include $14.8 million and $10.8 million from affiliate transactions with Oasis Petroleum for the six months ended June 30, 2019 and 2018, respectively.
2019 Capital Expenditures Arrangement. On February 22, 2019, the Partnership entered into a memorandum of understanding (the “MOU”) with Oasis Petroleum regarding the funding of Bobcat DevCo’s capital expenditures for the 2019 calendar year (the “2019 Capital Expenditures Arrangement”). Pursuant to the Amended and Restated Limited Liability Company Agreement of Bobcat DevCo LLC, as amended (the “First A&R Bobcat LLCA”), the Partnership and Oasis Petroleum are each required to make pro-rata capital contributions to Bobcat DevCo in accordance with their respective percentage ownership interests in Bobcat DevCo.
Pursuant to the MOU, the Partnership agreed to make up to $80.0 million of capital expenditures to Bobcat DevCo that Oasis Petroleum would otherwise be required to contribute under the First A&R Bobcat LLCA. In connection with execution of the MOU, the Partnership and Oasis Petroleum amended the First A&R Bobcat LLCA and entered into the Second Amended and Restated Limited Liability Company Agreement of Bobcat DevCo LLC (the “Second A&R Bobcat LLCA”). The Second A&R Bobcat LLCA includes provisions applicable to the disproportionate capital contributions that the Partnership will make to Bobcat DevCo in connection with the 2019 Capital Expenditures Arrangement. Pursuant to the Second A&R Bobcat LLCA, upon the occurrence of a disproportionate capital contribution, the percentage interests of the Partnership and Oasis Petroleum in Bobcat DevCo will be adjusted to take into account the amount of the disproportionate capital contribution. During the three and six months ended June 30, 2019, the Partnership made capital contributions to Bobcat DevCo pursuant to the 2019 Capital Expenditures Arrangement of $35.8 million and $52.8 million, respectively. As a result, the Partnership’s ownership interest in Bobcat DevCo increased from 25% as of December 31, 2018 to 32.5% as of June 30, 2019.
Property, plant and equipment consists of the following:
June 30, 2019
December 31, 2018
Natural gas processing plants
Produced and flowback water facilities
Other property and equipment
Construction in progress
Total property, plant and equipment
Less: accumulated depreciation and amortization
Total property, plant and equipment, net
7. Long-Term Debt
The Partnership has a revolving credit facility with OMP Operating as borrower (the “Revolving Credit Facility”) which is available to fund working capital and to finance acquisitions and other capital expenditures of the Partnership. On May 6, 2019, the Partnership entered into an amendment to its Revolving Credit Facility to (i) increase the aggregate amount of commitments from $400.0 million to $475.0 million; (ii) provide for the ability to further increase commitments to $675.0 million; and (iii) add a new lender to the bank group. As of June 30, 2019, the aggregate amount of commitments under the Revolving Credit Facility were $475.0 million. The Revolving Credit Facility matures on September 25, 2022.
At June 30, 2019, the Partnership had $408.0 million of borrowings outstanding under the Revolving Credit Facility, at a weighted average interest rate of 4.2%, and an $8.2 million outstanding letter of credit, resulting in an unused borrowing capacity of $58.8 million. The unused portion of the Revolving Credit Facility is subject to a commitment fee ranging from 0.375% to 0.500%. The fair value of the Revolving Credit Facility approximates book value since borrowings under the Revolving Credit Facility bear interest at rates which are tied to current market rates.
The Partnership was in compliance with the financial covenants under the Revolving Credit Facility at June 30, 2019.
As discussed in Note 2 — Summary of Significant Accounting Policies, the Partnership adopted ASC 842 as of January 1, 2019 using the modified retrospective method, which resulted in the Partnership recognizing offsetting operating ROU assets and lease liabilities of $4.1 million. The Partnership did not have any finance leases as of the date of adoption. There was no impact to the opening equity balance as a result of the adoption of ASC 842. Prior period amounts were not adjusted and continue to be reported in accordance with previous guidance, Accounting Standards Codification 840 (“ASC 840”).
In accordance with the adoption of ASC 842, management determines whether an arrangement is a lease at its inception. The Partnership’s operating and finance leases consist primarily of equipment and land easements. The Partnership considers renewal and termination options in determining the lease term used to establish its ROU assets and lease liabilities to the extent the Partnership is reasonably certain to exercise the renewal or termination. The Partnership’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As most of the Partnership’s leases do not provide an implicit rate, the Partnership uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future lease payments. The Partnership has determined the respective incremental borrowing rates based upon the rate of interest that would have been paid on a collateralized basis over similar tenors to that of the leases.
The following table sets forth the Partnership’s components of lease costs for the periods presented:
Three Months Ended June 30, 2019
Six Months Ended June 30, 2019
Operating lease costs
Variable lease costs (1)
Short-term lease costs
Finance lease costs:
Amortization of ROU assets
Interest on lease liabilities
Total lease costs
(1) Based on payments made by the Partnership to lessors for the right to use an underlying asset that vary because of changes in circumstances occurring after the commencement date, other than the passage of time, such as property taxes, operating and maintenance costs.
The operating lease costs disclosed above are included in operating and maintenance expenses on the Partnership’s Condensed Consolidated Statement of Operations. The finance lease costs for the amortization of ROU assets and the interest on lease liabilities disclosed above are included in depreciation and amortization and interest expense, net of capitalized interest, respectively, on the Partnership’s Condensed Consolidated Statements of Operations.
As of June 30, 2019, maturities of the Partnership’s lease liabilities are as follows:
2019 (excluding the six months ended June 30, 2019)
Total future lease payments
Less: Imputed interest
Present value of future lease payments
As of December 31, 2018, future minimum annual rental commitments under non-cancelable leases under ASC 840 were as follows:
Total future minimum lease payments
Supplemental balance sheet information related to the Partnership’s leases are as follows:
Balance Sheet Classification
June 30, 2019
Operating lease assets
Operating lease right-of-use assets
Finance lease assets
Total lease assets
Operating lease liabilities
Current operating lease liabilities
Finance lease liabilities
Other current liabilities
Operating lease liabilities
Operating lease liabilities
Finance lease liabilities
Total lease liabilities
Supplemental cash flow information and non-cash transactions related to the Partnership’s leases are as follows:
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
ROU assets obtained in exchange for lease obligations
Weighted-average remaining lease term and discount rate for the Partnership’s leases are as follows:
As of June 30, 2019
Weighted average remaining lease term
Weighted average discount rate
Weighted average remaining lease term
Weighted average discount rate
9. Commitments and Contingencies
The Partnership has various contractual obligations in the normal course of its operations. As of June 30, 2019, there have been no material changes to the Partnership’s future commitments as disclosed in Note 10 — Commitments and Contingencies in the Partnership’s 2018 Annual Report, except as noted below.
Volume commitment agreements. As of June 30, 2019, the Partnership had certain agreements with an aggregate requirement to either deliver or purchase a minimum quantity of approximately 16.0 million barrels of water, prior to any applicable volume credits, within specified timeframes, all of which are ten years or less. The estimable future commitments under these agreements were approximately $10.3 million as of June 30, 2019.
Litigation. The Partnership is party to various legal and/or regulatory proceedings from time to time arising in the ordinary course of business. When the Partnership determines that a loss is probable of occurring and is reasonably estimable, the Partnership accrues an undiscounted liability for such contingencies based on its best estimate using information available at the time. The Partnership discloses contingencies where an adverse outcome may be material, or where in the judgment of management, the matter should otherwise be disclosed.
Mirada litigation. On March 23, 2017, Mirada filed a lawsuit against Oasis Petroleum, Oasis Petroleum America LLC (“OPNA”), and OMS, seeking monetary damages in excess of $100.0 million, declaratory relief, attorneys’ fees and costs (Mirada Energy, LLC, et al. v. Oasis Petroleum North America LLC, et al.; in the 334th Judicial District Court of Harris County, Texas; Case Number 2017-19911). In its original lawsuit, Mirada asserts that it is a working interest owner in certain acreage owned and operated by Oasis Petroleum in Wild Basin. Specifically, Mirada asserts that Oasis Petroleum has breached certain agreements by: (1) failing to allow Mirada to participate in Oasis Petroleum’s midstream operations in Wild Basin; (2) refusing to provide Mirada with information that Mirada contends is required under certain agreements and failing to provide information in a timely fashion; (3) failing to consult with Mirada and failing to obtain Mirada’s consent prior to drilling more than one well at a time in Wild Basin; and (4) overstating the estimated costs of proposed well operations in Wild Basin. Mirada seeks a declaratory judgment that OPNA be removed as operator in Wild Basin at Mirada’s election and that Mirada be allowed to elect a new operator; that certain agreements apply to Oasis Petroleum and Mirada and Wild Basin with respect to this dispute; that Oasis Petroleum be required to provide all information within its possession regarding proposed or ongoing operations in Wild Basin; and that OPNA not be permitted to drill, or propose to drill, more than one well at a time in Wild Basin without obtaining Mirada’s consent. Mirada also seeks a declaratory judgment with respect to Oasis Petroleum’s current midstream operations in Wild Basin. Specifically, Mirada seeks a declaratory judgment that Mirada has a right to participate in Oasis Petroleum’s Wild Basin midstream operations, consisting of produced and flowback water disposal, crude oil gathering and gas gathering and processing; that, upon Mirada’s election to participate, Mirada is obligated to pay its proportionate costs of Oasis Petroleum’s midstream operations in Wild Basin; and that Mirada would then be entitled to receive a share of revenues from the midstream operations and would not be charged any amount for its use of these facilities for production from the “Contract Area.”
On June 30, 2017, Mirada amended its original petition to add a claim that Oasis Petroleum has breached certain agreements by charging Mirada for midstream services provided by its affiliates and to seek a declaratory judgment that Mirada is entitled to be paid its share of total proceeds from the sale of hydrocarbons received by OPNA or any affiliate of OPNA without deductions for midstream services provided by OPNA or its affiliates.
On February 2, 2018 and February 16, 2018, Mirada filed a second and third amended petition, respectively. In these filings, Mirada alleged new legal theories for being entitled to enforce the underlying contracts, and added Bighorn DevCo LLC, Bobcat DevCo LLC and Beartooth DevCo LLC as defendants, asserting that these entities were created in bad faith in an effort to avoid contractual obligations owed to Mirada. Mirada may further amend its petition from time to time to assert additional claims as well as defendants.
On March 2, 2018, Mirada filed a fourth amended petition that described Mirada’s alleged ownership and assignment of interests in assets purportedly governed by agreements at issue in the lawsuit. On August 31, 2018, Mirada filed a fifth amended petition that added the Partnership as a defendant, asserting that it was created in bad faith in an effort to avoid contractual obligations owed to Mirada.
Oasis Petroleum believes that Mirada’s claims are without merit, that Oasis Petroleum has complied with its obligations under the applicable agreements and that some of Mirada’s claims are grounded in agreements which do not apply to Oasis Petroleum. Oasis Petroleum filed answers denying all of Mirada’s claims and intends to continue to vigorously defend against Mirada’s claims.
On July 2, 2019, Oasis Petroleum, OPNA, Oasis Midstream Services LLC, Oasis Midstream Partners LP, Bighorn DevCo LLC, Bobcat DevCo LLC and Beartooth DevCo LLC (collectively “Oasis Entities”) counterclaimed against Mirada for a judgment declaring that Oasis Entities are not obligated to purchase, manage, gather, transport, compress, process, market, sell or otherwise handle Mirada’s proportionate share of oil and gas produced from OPNA-operated wells. The counterclaim also seeks attorney’s fees, costs and expenses.
Discovery is ongoing, and each of the parties has made a number of procedural filings and motions, and additional filings and motions can be expected over the course of the claim. Trial is scheduled for February 2020. Neither we nor Oasis Petroleum can predict or guarantee the ultimate outcome or resolution of such matter. If such matter were to be determined adversely to our or Oasis Petroleum’s interests, or if we or Oasis Petroleum were forced to settle such matter for a significant amount, such resolution or settlement could have a material adverse effect on our business, results of operations, financial condition and cash flows. Such an adverse determination could materially impact Oasis Petroleum’s ability to operate its properties in Wild Basin or develop its identified drilling locations in Wild Basin on its current development schedule. A determination that Mirada has a right to participate in Oasis Petroleum’s midstream operations could materially reduce the interests of Oasis Petroleum and us in our current assets and future midstream opportunities and related revenues in Wild Basin. Under the Omnibus Agreement the Partnership entered into with Oasis Petroleum in connection with the closing of the initial public offering, Oasis Petroleum agreed to indemnify the Partnership for any losses resulting from this litigation. However, the Partnership cannot guarantee that such indemnity will fully protect the Partnership from the adverse consequences of any adverse ruling.
The Oasis Midstream Partners LP 2017 Long Term Incentive Plan (“LTIP”) provides for the grant, at the discretion of the Board of Directors of the General Partner, of options, unit appreciation rights, restricted units, phantom units, and other unit or cash-based awards. The purpose of awards under the LTIP is to provide additional incentive compensation to individuals providing services to the Partnership and to align the economic interests of such individuals with the interests of the Partnership’s unitholders.
As of June 30, 2019, the aggregate number of common units that may be issued pursuant to any and all awards under the LTIP is equal to 2,455,408 common units, subject to adjustment due to recapitalization or reorganization, or related to forfeitures or expiration of awards, as provided under the LTIP. On January 1 of each calendar year following the adoption and prior to the expiration of the LTIP, the total number of common units that may be issued pursuant to the LTIP automatically increases by a number of common units equal to one percent of the number of common units outstanding on a fully diluted basis as of the close of business on the immediately preceding December 31 (calculated by adding to the number of common units outstanding, all outstanding securities convertible into common units on such date on an as converted basis).
Phantom unit awards. In 2017, the Partnership granted under its LTIP 101,500 phantom unit awards to certain employees of Oasis Petroleum who are non-employees of the Partnership. Each phantom unit represents the right to receive a cash payment equal to the fair market value of one common unit on the day prior to the date it vests. Award recipients are also entitled to distribution equivalent rights, which represent the right to receive a cash payment equal to the value of the distributions paid on one common unit between the grant date and the vesting date. The phantom units vest in equal amounts each year over a three-year period. The phantom units are accounted for as liability-classified awards since the awards will settle in cash, and equity-based compensation expense is accounted for under the fair value method in accordance with GAAP. Under the fair value method for liability-classified awards, compensation expense is remeasured each reporting period at fair value based upon the closing price of a publicly traded common unit. Oasis Petroleum reimburses the Partnership for the cash settlement amount of these awards.
No phantom unit awards were granted under the LTIP during the six months ended June 30, 2019. Equity-based compensation expense related to phantom unit awards is recorded on the Condensed Consolidated Balance Sheets in accounts receivable from Oasis Petroleum, for the portion which will be reimbursed from Oasis Petroleum, and accrued liabilities, for the portion which will be owed to award holders. Equity-based compensation expense recorded on the Condensed Consolidated Balance Sheets related to phantom unit awards was $0.6 million and $0.1 million as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019, unrecognized equity-based compensation expense for all outstanding phantom units was $0.8 million, which is expected to be recognized over a weighted average period of 1.4 years.
Restricted unit awards. The Partnership has granted to independent directors of the General Partner restricted unit awards under the LTIP, which vest over a one-year period. These awards are accounted for as equity-classified awards since the awards will settle in common units upon vesting. Equity-based compensation expense is accounted for under the fair value method in accordance with GAAP. Under the fair value method for equity-classified awards, equity-based compensation expense is measured at the grant date based on the fair value of the award and is recognized over the vesting period.
During the six months ended June 30, 2019, certain independent directors of the Partnership were granted 16,170 restricted unit awards which vest over a one-year period with a weighted-average grant date fair value of $18.57 per common unit. Equity-based compensation expense recorded for restricted unit awards was $0.1 million for the three months ended June 30, 2019 and $0.1 million for the three months ended June 30, 2018. Equity-based compensation expense recorded for restricted unit awards was $0.2 million for the six months ended June 30, 2019 and $0.2 million for the six months ended June 30, 2018. Equity-based compensation expense is included in general and administrative expenses on the Partnership’s Condensed Consolidated Statements of Operations.
11. Partnership Equity and Distributions
Cash distributions. On August 6, 2019, the Board of Directors of the General Partner declared the quarterly cash distribution for the second quarter of 2019 of $0.49 per unit. In addition, the General Partner will receive a cash distribution of $0.5 million attributable to incentive distribution rights (“IDRs”) related to the earnings for the second quarter of 2019. These distributions will be payable on August 28, 2019, to unitholders of record as of August 16, 2019.
The following table details the distributions paid in respect of each period in which the distributions were earned for the following periods:
Distribution per limited partner unit
May 17, 2018
May 29, 2018
August 16, 2018
August 28, 2018
November 9, 2018
November 27, 2018
February 15, 2019
February 28, 2019
May 17, 2019
May 29, 2019
August 16, 2019
August 28, 2019
(1) The cash distribution for the three months ended June 30, 2019 was determined based upon the number of units outstanding at July 31, 2019.
Minimum quarterly distribution. The partnership agreement requires that all of the Partnership’s available cash be distributed quarterly. Under the current cash distribution policy, the Partnership intends to distribute to the holders of common units and subordinated units on a quarterly basis at least the minimum quarterly distribution of $0.3750 per unit, or $1.50 on an annualized basis, to the extent the Partnership has sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to the General Partner and its affiliates.
Subordinated units. Oasis Petroleum owns all of the Partnership’s subordinated units. The partnership agreement provides that, during the subordination period, the common units have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. No arrearages will accrue or be payable on the subordinated units.
When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will thereafter participate pro rata with the other common units in distributions of available cash.
The subordination period will end on December 31, 2020, if each of the following tests are met:
•for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date, aggregate distributions from operating surplus equaled or exceeded the sum of the minimum quarterly distribution multiplied by the total number of common units and subordinated units outstanding in each quarter in each period;
•for the same three consecutive, non-overlapping four-quarter periods, the “adjusted operating surplus” (as defined in the partnership agreement) equaled or exceeded the sum of the minimum quarterly distribution multiplied by the total number of common units and subordinated units outstanding during each quarter on a fully diluted weighted average basis; and
•there are no arrearages in payment of the minimum quarterly distribution on the common units.
Notwithstanding the foregoing, the subordination period will automatically terminate, and all of the subordinated units will convert into common units on a one-for-one basis, on the first business day after the distribution to unitholders in respect of any quarter, beginning with the quarter ending December 31, 2018, if each of the following has occurred:
•for one four-quarter period immediately preceding that date, aggregate distributions from operating surplus exceeded 150% of the minimum quarterly distribution multiplied by the total number of common units and subordinated units outstanding in each quarter in the period;
•for the same four-quarter period, the “adjusted operating surplus” (as defined in the Partnership’s Amended and Restated Agreement of Limited Partnership) equaled or exceeded 150% of the sum of the minimum quarterly distribution multiplied by the total number of common units and subordinated units outstanding during each quarter on a fully diluted weighted average basis, plus the related distribution on the IDRs; and
•there are no arrearages in payment of the minimum quarterly distributions on the common units.
Incentive distribution rights. The General Partner owns all of the Partnership’s IDRs, which will entitle it to increasing percentages, up to a maximum of 50.0%, of the cash the Partnership distributes in excess of $0.4313 per unit per quarter. The
maximum distribution of 50.0% does not include any distributions that Oasis Petroleum may receive on common units or subordinated units that it owns.
Percentage allocations of available cash from operating surplus.For any quarter in which the Partnership has distributed cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum distribution, the Partnership will distribute any additional available cash from operating surplus for that quarter among the unitholders and the IDR holders in the following manner: