ITEM 2
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion of the financial condition and operating results of the Company should be read in conjunction with the Companys consolidated financial statements and related notes. Except as otherwise indicated, all amounts are expressed
in U.S. dollars.
Overview
Ultra Petroleum Corp. is an independent exploration and production company focused on developing its long-life natural gas reserves in the Green River Basin of Wyoming the Pinedale and Jonah
fields, its oil reserves in the Uinta Basin in Utah and its natural gas reserves in the Appalachian Basin of Pennsylvania. The Company operates in one industry segment, natural gas and oil exploration and development, with one geographical segment,
the United States.
The Company currently conducts operations exclusively in the United States. Substantially all of its oil
and natural gas activities are conducted jointly with others and, accordingly, amounts presented reflect only the Companys proportionate interest in such activities. The Company continues to focus on improving its drilling and production
results through gaining efficiencies with the use of advanced technologies, detailed technical analysis of its properties and leveraging its experience into improved operational efficiencies. Inflation has not had, nor is it expected to have in the
foreseeable future, a material impact on the Companys results of operations.
The Company currently generates its
revenue, earnings and cash flow primarily from the production and sales of natural gas and condensate from its properties in southwest Wyoming with a portion of the Companys revenues coming from oil sales from its properties in the Uinta Basin
in Utah and gas sales from wells located in the Appalachian Basin in Pennsylvania. In 2014, the Company repositioned its portfolio to higher returning assets in the western U.S. while divesting lower returning assets in the eastern U.S.
Additionally, as part of the acquisition of assets in the Pinedale Field in Sublette County, Wyoming in September 2014 (the SWEPI Transaction), the Company acquired contracts related to NGLs providing the opportunity to realize the
benefit of the NGLs from the gas it produces in Wyoming beginning in 2017.
The prices of oil and natural gas are critical
factors to the Companys business. The prices of oil and natural gas have historically been volatile, and this volatility could be detrimental to the Companys financial performance. As a result, and from time to time, the Company tries to
limit the impact of this volatility on its results by entering into swap agreements and/or fixed price forward physical delivery contracts for natural gas and oil. (See Note 6 to the Companys Consolidated Financial Statements).
During the quarter ended June 30, 2016, the average price realization for the Companys natural gas was $1.76 per Mcf compared with
$2.52 per Mcf during the quarter ended June 30, 2015. During the second quarter of 2015, the Companys average price realization for natural gas was $3.33 per Mcf, including realized gains and losses on commodity derivatives. The Company does
not currently have any open derivative contracts for natural gas production.
During the quarter ended June 30, 2016, the
average price realization for the Companys oil was $40.54 per barrel compared to $48.64 per barrel for the quarter ended June 30, 2015.
Chapter 11 Proceedings, Ability to Continue as a Going Concern
Chapter 11 Proceedings
On April 29, 2016 (the Petition
Date), to restructure their respective obligations and capital structures, Ultra Petroleum Corp. (the Company) and each of its direct and indirect wholly-owned subsidiaries
28
(collectively, the Debtors) filed voluntary petitions under chapter 11 of title 11 of the United States Code (the Bankruptcy Code) in the United States Bankruptcy Court
for the Southern District of Texas (the Bankruptcy Court). The Debtors chapter 11 cases are being jointly administered for procedural purposes under the caption In re Ultra Petroleum Corp., et al, Case No. 16-32202 (MI) (Bankr.
S.D. Tex.). Information about our chapter 11 cases is available at our website (www.ultrapetroleum.com) and also at a website maintained by our claims agent, Epiq Systems (http://dm.epiq11.com/UPT/Docket).
We are currently operating our business as a debtor-in-possession in accordance with the applicable provisions of the Bankruptcy Code and
orders of the Bankruptcy Court. After we filed our chapter 11 petitions, the Bankruptcy Court granted certain relief requested by the Debtors enabling us to conduct our business activities in the ordinary course, including, among other things and
subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, to remit funds
we hold from time to time for the benefit of third parties (such as royalty owners), and to pay the prepetition claims of certain of our vendors that hold liens under applicable non-bankruptcy law. For goods and services provided following the
Petition Date, we intend to pay vendors in full under normal terms.
Subject to certain exceptions provided for in section 362
of the Bankruptcy Code, all judicial and administrative proceedings against us or our property were automatically enjoined, or stayed, as of the Petition Date. In addition, the filing of new judicial or administrative actions against us or our
property for claims arising prior to the date on which our chapter 11 cases were filed were automatically enjoined. This prohibits, for example, our lenders or noteholders from pursuing claims for defaults under our debt agreements and our contract
counterparties from pursuing claims for defaults under our contracts. Accordingly, unless the Bankruptcy Court agrees to lift the automatic stay, all of our prepetition liabilities and obligations should be settled or compromised under the
Bankruptcy Code as part of our chapter 11 proceedings.
Our operations and ability to execute our business remain subject to
the risks and uncertainties described in Item 1A, Risk Factors in our Annual Report on Form 10-K for our fiscal year ended December 31, 2015, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, and this Quarterly
Report on Form 10-Q. These include risks and uncertainties arising as a result of our chapter 11 proceedings, and the number and nature of our outstanding shares and shareholders, assets, liabilities, officers and/or directors could change
materially because of our chapter 11 cases. In addition, the description of our operations, properties and capital plans included in this Quarterly Report on Form 10-Q may not accurately reflect our operations, properties and capital plans after we
emerge from chapter 11.
Creditors Committees Appointment & Formation
On May 5, 2016, the United States Trustee for the Southern District of Texas appointed an official committee for unsecured creditors of
all of the Debtors (the UCC). In addition, certain other stakeholders have organized for purposes of participating in the Debtors chapter 11 cases: on June 8, 2016, an informal ad hoc committee of unsecured creditors of our
subsidiary, Ultra Resources, Inc., notified the Bankruptcy Court it had formed and identified its members and, on June 13, 2016, an informal ad hoc committee of the holders of senior notes issued by the Company notified the Bankruptcy Court it had
formed and identified its members. A group of unaffiliated holders of the Companys common stock has also advised the Company that it may participate in the Debtors chapter 11 cases. We expect each of the committees to be involved in our
chapter 11 cases, and any disagreements with any of the committees may extend our chapter 11 cases, increase the cost of our chapter 11 cases, and/or delay our emergence from chapter 11.
Magnitude of Potential Claims
On June 8, 2016, the Debtors filed
with the Bankruptcy Court schedules and statements (the Schedules and Statements) setting forth, among other things, the assets and liabilities of the Debtors, subject to the assumptions
29
filed in connection therewith. The Schedules and Statements may be subject to further amendment or modification after filing. Certain holders of prepetition claims are required to file proofs of
claim by the deadline for filing certain proofs of claims in the Debtors Chapter 11 cases, which deadline is September 1, 2016, for prepetition general unsecured claims and October 26, 2016, for governmental claims. Differences between amounts
scheduled by the Debtors and claims by creditors will be investigated and resolved in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete
and we expect will continue after our emergence from bankruptcy. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently ascertained.
Exclusivity; Plan of Reorganization
Under the Bankruptcy Code, we have the exclusive right to file a plan of reorganization under chapter 11 through and including August 29, 2016, and to solicit acceptances of such plan through October 26,
2016. On July 27, 2016, we filed a motion seeking an extension of the exclusive chapter 11 plan filing period through and including February 28, 2017, and the exclusive plan solicitation period through and including April 30, 2017, and to allow us
adequate time to complete the critical tasks necessary and appropriate for the development and negotiation of a plan of reorganization. A hearing to address our request for the extension is scheduled for August 25, 2016.
We plan to emerge from our chapter 11 cases after we obtain approval from the Bankruptcy Court for a chapter 11 plan of reorganization.
Among other things, a chapter 11 plan of reorganization will determine the rights and satisfy the claims of our creditors and security holders. The terms and conditions of a chapter 11 plan of reorganization will be determined through negotiations
with our stakeholders and, possibly, decisions by the Bankruptcy Court.
Under the absolute priority scheme established by the
Bankruptcy Code, unless our creditors agree otherwise, all of our prepetition liabilities and postpetition liabilities must be satisfied in full before the holders of our existing common stock can receive any distribution or retain any property
under a plan of reorganization. The ultimate recovery to creditors and/or shareholders, if any, will not be determined until confirmation and implementation of a plan or plans of reorganization. We can give no assurance that any recovery or
distribution of any amount will be made to any of our creditors or shareholders. Our plan of reorganization could result in any of the holders of our liabilities and/or securities, including our common stock, receiving no distribution on account of
their interests and cancellation of their holdings. Moreover, a plan of reorganization can be confirmed, under the Bankruptcy Code, even if the holders of our common stock vote against the plan and even if the plan provides that the holders of our
common stock receive no distribution on account of their equity interests.
Liabilities Subject to Compromise
We have applied Accounting Standards Codification (ASC) 852, Reorganizations, in preparing the Condensed Consolidated
Financial Statements included in this Quarterly Report on Form 10-Q. In addition, the consolidated financial statements presented here include amounts classified as liabilities subject to compromise. This amount represents estimates of
known or potential prepetition claims expected to be resolved in connection with our chapter 11 proceedings. Additional amounts may be included in liabilities subject to compromise in future periods if we elect to reject executory contracts and
unexpired leases as part of our chapter 11 cases. Due to the uncertain nature of many of the potential claims, the magnitude of potential claims is not reasonably estimable at this time. Potential claims not currently included with liabilities
subject to compromise in our Consolidated Balance Sheets may be material. In addition, differences between amounts we are reporting as liabilities subject to compromise in this Quarterly Report on Form 10-Q and the amounts attributable to such
matters claimed by our creditors or approved by the Bankruptcy Court may be material. We will continue to evaluate our liabilities throughout the chapter 11 process, and we plan to make adjustments in future periods as necessary and appropriate.
Such adjustments may be material.
30
Under the Bankruptcy Code, we may assume, assign, or reject certain executory contracts and
unexpired leases, subject to the approval of the Bankruptcy Court and certain other conditions. If we reject a contract or lease, such rejection generally (1) is treated as a prepetition breach of the contract or lease, (2) subject to certain
exceptions, relieves the Debtors of performing their future obligations under such contract or lease, and (3) entitles the counterparty thereto to a prepetition general unsecured claim for damages caused by such deemed breach. If we assume an
executory contract or unexpired lease, we are generally required to cure any existing monetary defaults under such contract or lease and provide adequate assurance of future performance to the counterparty. Accordingly, any description of an
executory contract or unexpired lease in this Quarterly Report on Form 10-Q, including any quantification of our obligations under any such contract or lease, is wholly qualified by the rejection rights we have under the Bankruptcy Code. Further,
nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and we expressly preserve all of our rights with respect thereto.
The following table summarizes the components of liabilities subject to compromise included in our Consolidated Balance Sheets as of June
30, 2016:
|
|
|
|
|
|
|
June 30, 2016
|
|
Accounts payable
|
|
$
|
2,717
|
|
Accrued liabilities
|
|
|
9,328
|
|
Accrued interest payable
|
|
|
99,774
|
|
Debt
|
|
|
3,759,000
|
|
Other terminated contracts
|
|
|
23,186
|
|
Other
|
|
|
383
|
|
|
|
|
|
|
Liabilities subject to compromise
|
|
$
|
3,894,388
|
|
|
|
|
|
|
Schedules and Statements Claims & Claims Resolution Process
To the best of our knowledge, we have notified all of our known current or potential creditors that the Debtors have filed chapter 11
cases. In addition, on June 8, 2016, each of the Debtors filed a Schedule of Assets and Liabilities and Statement of Financial Affairs (collectively, the Schedules and Statements) with the Bankruptcy Court. These documents set forth,
among other things, the assets and liabilities of each of the Debtors, including executory contracts to which each of the Debtors is a party, are subject to the qualifications and assumptions included therein, and are subject to amendment or
modification as our chapter 11 cases proceed.
Many of the claims identified in the Schedules and Statements are listed as
disputed, contingent or unliquidated. In addition, there may be differences between the amounts for certain claims listed in the Schedules and Statements and the amounts claimed by our creditors. We anticipate that such differences, as well as other
disputes and contingencies will be investigated and resolved as part of our claims resolution process in our chapter 11 cases.
Pursuant to the Federal Rules of Bankruptcy Procedure, creditors who wish to assert prepetition claims against us and whose claim (i) is
not listed in the Schedules and Statements or (ii) is listed in the Schedules and Statements as disputed, contingent, or unliquidated, must file a proof of claim with the Bankruptcy Court prior to the bar date set by the court. The bar dates are
September 1, 2016, for non-governmental creditors, and October 26, 2016, for governmental creditors.
As of July 31,
2016, approximately $13.2 million in claims have been filed with the Bankruptcy Court against the Debtors by 120 claimants. We expect additional claims to be filed prior to the bar dates. In addition, creditors who have already filed claims may
amend or modify their claims in ways we cannot now predict. The amounts of additional claims may be material. Similarly, amendments or modifications to claims already filed may be material.
31
We anticipate the claims filed against the Debtors in our chapter 11 proceedings will be
voluminous. We expect the process of resolving claims filed against the Debtors to be complex. We plan to investigate and evaluate all filed claims in connection with our plan of reorganization. As part of the process, we will work to resolve
differences in amounts scheduled by the Debtors and the amounts of claims filed by creditors, including through the filing of objections with the Bankruptcy Court where appropriate.
We anticipate the claims resolution process will take substantial time to complete, and it may continue after our emergence from
bankruptcy. Accordingly, the ultimate number and amount of claims that will be allowed against the Debtors is not presently known, nor can the ultimate recovery with respect to allowed claims be presently ascertained.
Tax Attributes; Net Operating Loss Carryforwards
We have substantial tax net operating loss carryforwards and other tax attributes. Under the U.S. Internal Revenue Code, our ability to use these net operating losses and other tax attributes may be
limited if we experience a change of control, as determined under the U.S. Internal Revenue Code. Accordingly, we obtained an order from the Bankruptcy Court that is intended to protect our ability to use our tax attributes by imposing certain
notice procedures and transfer restrictions on the trading of the Companys common stock.
In general, the order applies
to any person or entity that, directly or indirectly, beneficially owns (or would beneficially own as a result of a proposed transfer) at least 4.5% of the Companys common stock. Such persons are required to notify us and the Bankruptcy Court
before effecting a transaction that might result in us losing the ability to use our tax attributes, and we have the right to seek an injunction to prevent the transaction if it might adversely affect our ability to use our tax attributes.
Any purchase, sale or other transfer of our equity securities in violation of the restrictions of the order is null and void
ab initio as an act in violation of a Bankruptcy Court order and would therefore confer no rights on a proposed transferee.
Costs of
Reorganization
We have incurred and will continue to incur significant costs associated with our reorganization and
the chapter 11 proceedings. We expect these costs, which are being expensed as incurred, will significantly affect our results of operations. In addition, a non-cash charge to write-off the unamortized debt issuance costs related to our funded
indebtedness is included in Reorganization items, net as these debt instruments are expected to be impacted by the bankruptcy reorganization process. For additional information about the costs of our reorganization and chapter 11
proceedings, see Reorganization items, net below.
The following table summarizes the components included in
Reorganization items, net in our Consolidated Statements of Operations for the three and six months ended June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
June 30, 2016
|
|
|
For the Six
Months Ended
June 30, 2016
|
|
Professional fees(1)
|
|
$
|
3,582
|
|
|
$
|
3,582
|
|
Deferred financing costs(2)
|
|
|
18,742
|
|
|
|
18,742
|
|
Other(3)
|
|
|
(141
|
)
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
Total Reorganization items, net
|
|
$
|
22,183
|
|
|
$
|
22,183
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Non-cash item representing accrued, unpaid professional fees related directly to the chapter 11 filings for the quarter and six months ended June 30, 2016.
|
32
(2)
|
A non-cash charge to write-off all of the unamortized debt issuance costs related to the unsecured Credit Agreement, unsecured Senior Notes issued by Ultra Resources,
Inc., the unsecured 2018 Senior Notes issued by the Company and the unsecured 2024 Senior Notes issued by the Company is included in Reorganization items, net as these debt instruments are expected to be impacted by the bankruptcy reorganization
process.
|
(3)
|
Cash interest income earned for the period after the Petition Date on excess cash over normal invested capital.
|
Ability to Continue as a Going Concern
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared on a going concern basis of accounting, which contemplates continuity of operations,
realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of our chapter 11 proceedings.
We have significant indebtedness, all of which we have reclassified to liabilities subject to compromise at June 30, 2016. Our level of indebtedness has adversely impacted and is continuing to adversely impact our financial condition. As a result of
our financial condition, the defaults under our debt agreements, and the risks and uncertainties surrounding our chapter 11 proceedings, substantial doubt exists that we will be able to continue as a going concern.
Critical Accounting Policies
The discussion and analysis of the Companys financial condition and results of operations is based upon consolidated financial statements, which have been prepared in accordance with
U.S. Generally Accepted Accounting Principles (GAAP). In addition, application of GAAP requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the
financial statements as well as the revenues and expenses reported during the period. Changes in these estimates related to judgments and assumptions will occur as a result of future events, and, accordingly, actual results could differ from amounts
estimated. Set forth below is a discussion of the critical accounting policies used in the preparation of our financial statements which we believe involve the most complex or subjective decisions or assessments.
Derivative Instruments and Hedging Activities.
The Company follows Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging (FASB ASC 815). The Company records the fair value of its commodity derivatives as an asset or liability on the Consolidated Balance Sheets, and
records the changes in the fair value of its commodity derivatives in the Consolidated Statements of Operations.
Fair
Value Measurements.
The Company follows FASB ASC Topic 820, Fair Value Measurements and Disclosures (FASB ASC 820). Under FASB ASC 820, fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at measurement date and establishes a three level hierarchy for measuring fair value.
Asset Retirement Obligation.
The Companys asset retirement obligations (ARO) consist primarily of estimated costs of dismantlement, removal, site reclamation and similar
activities associated with its oil and natural gas properties. FASB ASC Topic 410, Asset Retirement and Environmental Obligations (FASB ASC 410) requires that the fair value of a liability for an ARO be recognized in the period in which
it is incurred with the associated asset retirement cost capitalized as part of the carrying cost of the oil and natural gas asset. The recognition of an ARO requires that management make numerous estimates, assumptions and judgments regarding such
factors as the existence of a legal obligation for an ARO, amounts and timing of settlements, the credit-adjusted, risk-free rate to be used, inflation rates, and future advances in technology. In periods subsequent to initial measurement of the
ARO, the Company must recognize period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of
33
undiscounted cash flows. Increases in the ARO liability due to the passage of time impact net income as accretion expense. The related capitalized costs, including revisions thereto, are charged
to expense through depletion, depreciation and amortization (DD&A). As a full cost company, settlements for asset retirement obligations for abandonment are adjusted to the full cost pool. The asset retirement obligation is included
within other long-term obligations in the accompanying Consolidated Balance Sheets.
Share-Based Payment
Arrangements.
The Company applies FASB ASC Topic 718, Compensation Stock Compensation (FASB ASC 718), which requires the measurement and recognition of compensation expense for all share-based payment awards made
to employees and directors, including employee stock options, based on estimated fair values. Share-based compensation expense recognized for the six months ended June 30, 2016 and 2015 was $2.7 million and $2.8 million, respectively. See
Note 4 for additional information.
Property, Plant and Equipment.
Capital assets are recorded at cost and
depreciated using the declining-balance method based on their respective useful life.
Full Cost Method of
Accounting.
The Company uses the full cost method of accounting for oil and gas exploration and development activities as defined by the Securities and Exchange Commission (SEC) Release No. 33-8995, Modernization of Oil and Gas
Reporting Requirements (SEC Release No. 33-8995) and FASB ASC Topic 932, Extractive Activities Oil and Gas (FASB ASC 932). Under the full cost method of accounting, all costs associated with the exploration for and
development of oil and gas reserves are capitalized on a country-by-country basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and
non-productive wells and overhead charges directly related to acquisition, exploration and development activities. Substantially all of the oil and gas activities are conducted jointly with others and, accordingly, the amounts reflect only the
Companys proportionate interest in such activities.
Companies that use the full cost method of accounting for oil and
natural gas exploration and development activities are required to perform a ceiling test calculation each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is performed
quarterly, on a country-by-country basis, utilizing the average of prices in effect on the first day of the month for the preceding twelve month period in accordance with SEC Release No. 33-8995. The ceiling limits such pooled costs to the
aggregate of the present value of future net revenues attributable to proved crude oil and natural gas reserves discounted at 10% plus the lower of cost or market value of unproved properties less any associated tax effects. If such capitalized
costs exceed the ceiling, the Company will record a write-down to the extent of such excess as a
non-cash
charge to earnings. Any such write-down will reduce earnings in the period of occurrence and results in
a lower DD&A rate in future periods. A write-down may not be reversed in future periods even though higher oil and natural gas prices may subsequently increase the ceiling.
The calculation of the ceiling test is based upon estimates of proved reserves. There are numerous uncertainties inherent in estimating
quantities of proved reserves, in projecting the future rates of production and in the timing of development activities. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological
interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and natural gas that
are ultimately recovered. The Company did not have any write-downs related to the full cost ceiling limitation during the six months ended June 30, 2016 or 2015.
Capitalized Interest.
Interest is capitalized on the cost of unevaluated gas and oil properties that are excluded from amortization and actively being evaluated, if any (See Note 2).
Revenue Recognition.
The Company generally sells oil and natural gas under both long-term and short-term
agreements at prevailing market prices. The Company recognizes revenues when the oil and natural gas is
34
delivered, which occurs when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. The
Company accounts for oil and natural gas sales using the entitlements method. Under the entitlements method, revenue is recorded based upon the Companys ownership share of volumes sold, regardless of whether it has taken its
ownership share of such volumes.
Make-up provisions and ultimate settlements of volume imbalances are generally governed by
agreements between the Company and its partners with respect to specific properties or, in the absence of such agreements, through negotiation. The value of volumes over- or under-produced can change based on changes in commodity prices. The Company
prefers the entitlements method of accounting for oil and natural gas sales because it allows for recognition of revenue based on its actual share of jointly owned production, results in better matching of revenue with related operating expenses,
and provides balance sheet recognition of the estimated value of product imbalance. The Companys imbalance obligations as of June 30, 2016 and December 31, 2015 were immaterial.
Valuation of Deferred Tax Assets.
The Company uses the asset and liability method of accounting for income taxes.
Under this method, future income tax assets and liabilities are determined based on differences between the financial statement carrying values and their respective income tax basis (temporary differences).
To assess the realization 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 those 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.
The Company has recorded a valuation allowance against certain of its deferred tax assets as of June 30, 2016. Some or all of this valuation allowance may be reversed in future periods against future
income.
Deferred Financing Costs.
During the quarter ended June 30, 2016, a non-cash charge to write-off
all of the unamortized debt issuance costs related to the unsecured Credit Agreement, unsecured Senior Notes issued by Ultra Resources, Inc., the unsecured 2018 Senior Notes issued by the Company and the unsecured 2024 Senior Notes issued by the
Company is included in Reorganization items, net in the accompanying Consolidated Statements of Operations as these debt instruments are expected to be impacted by the bankruptcy reorganization process. At December 31, 2015, other current assets
includes costs associated with the issuance of our revolving credit facility while costs associated with the issuance of our Senior Notes, 2018 Notes and 2024 Notes are presented as a direct deduction from the carrying amount of the related debt
liability.
Deposits and Retainers.
Deposits and retainers primarily consists of payments related to surety
bonds.
Recent accounting pronouncements not yet adopted.
In March 2016, the FASB issued Accounting Standards
Update (ASU) 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(ASU No. 2016-09) to simplify some of the provisions in stock compensation accounting. The
update simplifies the accounting for a stock payments tax consequences and amends how excess tax benefits and a businesss payments to cover the tax bills for the shares recipients should be classified. The amendments allow
companies to estimate the number of stock awards expected to vest and revises the withholding requirements for classifying stock awards as equity. For public companies, the standard will take effect for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2016 with earlier application permitted. The Company is still evaluating the impact of ASU No. 2016-09 on its financial position and results of operations.
In February 2016, the FASB issued ASU2016-02,
Leases (ASU No. 2016-02)
. The guidance requires that lessees will
be required to recognize assets and liabilities on the balance sheet for the rights and obligations
35
created by all leases with terms of more than 12 months. The ASU will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of
cash flows arising from leases. These disclosures include qualitative and quantitative information. For public companies, the standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2018 with earlier application permitted. The Company is still evaluating the impact of ASU No. 2016-02 on its financial position and results of operations.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
(ASU No. 2015-11). Public companies will have to apply the amendments for
reporting periods that start after December 15, 2016, including interim periods within those fiscal years. This ASU requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The company does not expect the adoption of ASU No. 2015-11 to have a material impact on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03,
Interest Imputation of Interest (Subtopic 835-30) Simplifying
the Presentation of Debt Issuance Costs.
In August 2015, the FASB issued ASU 2015-15,
Interest Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit
Arrangements
. These ASUs require capitalized debt issuance costs, except for those related to revolving credit facilities, to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, rather
than as an asset. The Company adopted these ASUs on January 1, 2016, using a retrospective approach. The adoption resulted in a reclassification that reduced current assets and current maturities of long-term debt by $19.4 million on the
Companys Consolidated Balance Sheet at December 31, 2015. A non-cash charge to write-off all of the unamortized debt issuance costs is included in Reorganization items, net at June 30, 2016 as the related debt instruments are expected to be
impacted by the bankruptcy reorganization process.
The FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606)
,
ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, and ASU 2016-10,
Revenues from Contracts with Customers
(Topic 606): Identifying Performance Obligations and Licensing
, which supersede the revenue recognition requirements in Topic 605,
Revenue Recognition
, and industry-specific guidance in Subtopic 932-605,
Extractive
Activities-Oil and Gas-Revenue Recognition
and require an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange
for those goods or services. The Company is required to adopt the new standards in the first quarter of 2018 using one of two retrospective application methods. The Company is continuing to evaluate the provisions of these ASUs, and has not
determined the impact these standards may have on its consolidated financial statements and related disclosures or decided upon the method of adoption.
In August 2014, the FASB issued ASU No. 2014-15,
Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern
(ASU No. 2014-15) that requires management to
evaluate whether there are conditions and events that raise substantial doubt about the Companys ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management
is required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Companys ability to continue as a going concern. ASU No. 2014-15 becomes effective for
annual periods beginning after December 15, 2016 and for interim reporting periods thereafter. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
Conversion of Barrels of Oil to Mcfe of Gas
. The Company converts Bbls of oil and other liquid hydrocarbons to Mcfe at
a ratio of one Bbl of oil or liquids to six Mcfe. This conversion ratio, which is typically used in the oil and gas industry, represents the approximate energy equivalent of a barrel of oil or other liquids to
36
an Mcf of natural gas. The sales price of one Bbl of oil or liquids has been much higher than the sales price of six Mcf of natural gas over the last several years, so a six to one
conversion ratio does not represent the economic equivalency of six Mcf of natural gas to a Bbl of oil or other liquids.
RESULTS OF
OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended June 30,
|
|
|
%
Variance
|
|
|
For the Six Months
Ended June 30,
|
|
|
%
Variance
|
|
|
|
2016
|
|
|
2015
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(Amounts in thousands, except per unit data)
|
|
Production, Commodity Prices and Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (Mcf)
|
|
|
66,436
|
|
|
|
65,140
|
|
|
|
2
|
%
|
|
|
135,041
|
|
|
|
129,845
|
|
|
|
4
|
%
|
Crude oil and condensate (Bbls)
|
|
|
735
|
|
|
|
900
|
|
|
|
-18
|
%
|
|
|
1,525
|
|
|
|
1,851
|
|
|
|
-18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total production (Mcfe)
|
|
|
70,846
|
|
|
|
70,540
|
|
|
|
0
|
%
|
|
|
144,191
|
|
|
|
140,952
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas ($/Mcf, excluding hedges)
|
|
$
|
1.76
|
|
|
$
|
2.52
|
|
|
|
-30
|
%
|
|
$
|
1.89
|
|
|
$
|
2.68
|
|
|
|
-29
|
%
|
Natural gas ($/Mcf, including realized hedges)
|
|
$
|
1.76
|
|
|
$
|
3.33
|
|
|
|
-47
|
%
|
|
$
|
1.89
|
|
|
$
|
3.31
|
|
|
|
-43
|
%
|
Oil and condensate ($/Bbl)
|
|
$
|
40.54
|
|
|
$
|
48.64
|
|
|
|
-17
|
%
|
|
$
|
33.50
|
|
|
$
|
42.83
|
|
|
|
-22
|
%
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas sales
|
|
$
|
116,780
|
|
|
$
|
164,226
|
|
|
|
-29
|
%
|
|
$
|
254,882
|
|
|
$
|
348,020
|
|
|
|
-27
|
%
|
Oil sales
|
|
|
29,811
|
|
|
|
43,772
|
|
|
|
-32
|
%
|
|
|
51,095
|
|
|
|
79,286
|
|
|
|
-36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
146,591
|
|
|
$
|
207,998
|
|
|
|
-30
|
%
|
|
$
|
305,977
|
|
|
$
|
427,306
|
|
|
|
-28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on commodity
derivatives-natural
gas
|
|
$
|
|
|
|
$
|
52,625
|
|
|
|
100
|
%
|
|
$
|
|
|
|
$
|
81,984
|
|
|
|
100
|
%
|
Unrealized (loss) on commodity derivatives
|
|
|
|
|
|
|
(56,271
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
(48,765
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (loss) gain on commodity derivatives
|
|
$
|
|
|
|
$
|
(3,646
|
)
|
|
|
100
|
%
|
|
$
|
|
|
|
$
|
33,219
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
$
|
21,836
|
|
|
$
|
27,785
|
|
|
|
-21
|
%
|
|
$
|
47,230
|
|
|
$
|
53,896
|
|
|
|
-12
|
%
|
Liquids gathering system operating lease expense
|
|
$
|
5,171
|
|
|
$
|
5,162
|
|
|
|
0
|
%
|
|
$
|
10,343
|
|
|
$
|
10,323
|
|
|
|
0
|
%
|
Production taxes
|
|
$
|
13,474
|
|
|
$
|
17,184
|
|
|
|
-22
|
%
|
|
$
|
28,706
|
|
|
$
|
37,079
|
|
|
|
-23
|
%
|
Gathering fees
|
|
$
|
21,504
|
|
|
$
|
22,488
|
|
|
|
-4
|
%
|
|
$
|
43,954
|
|
|
$
|
42,245
|
|
|
|
4
|
%
|
Transportation charges
|
|
$
|
146
|
|
|
$
|
21,076
|
|
|
|
-99
|
%
|
|
$
|
23,701
|
|
|
$
|
41,267
|
|
|
|
-43
|
%
|
Depletion, depreciation and amortization
|
|
$
|
31,234
|
|
|
$
|
92,366
|
|
|
|
-66
|
%
|
|
$
|
62,083
|
|
|
$
|
186,956
|
|
|
|
-67
|
%
|
General and administrative expenses
|
|
$
|
1,381
|
|
|
$
|
2,422
|
|
|
|
-43
|
%
|
|
$
|
5,600
|
|
|
$
|
6,062
|
|
|
|
-8
|
%
|
|
|
|
|
|
|
|
Per Unit Costs and Expenses ($/Mcfe):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
$
|
0.31
|
|
|
$
|
0.39
|
|
|
|
-21
|
%
|
|
$
|
0.33
|
|
|
$
|
0.38
|
|
|
|
-13
|
%
|
Liquids gathering system operating lease expense
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
|
0
|
%
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
|
0
|
%
|
Production taxes
|
|
$
|
0.19
|
|
|
$
|
0.24
|
|
|
|
-21
|
%
|
|
$
|
0.20
|
|
|
$
|
0.26
|
|
|
|
-23
|
%
|
Gathering fees
|
|
$
|
0.30
|
|
|
$
|
0.32
|
|
|
|
-6
|
%
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
|
0
|
%
|
Transportation charges
|
|
$
|
|
|
|
$
|
0.30
|
|
|
|
-100
|
%
|
|
$
|
0.16
|
|
|
$
|
0.29
|
|
|
|
-45
|
%
|
Depletion, depreciation and amortization
|
|
$
|
0.44
|
|
|
$
|
1.31
|
|
|
|
-66
|
%
|
|
$
|
0.43
|
|
|
$
|
1.33
|
|
|
|
-68
|
%
|
General and administrative expenses
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
|
-33
|
%
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
|
0
|
%
|
37
Quarter Ended June 30, 2016 vs. Quarter Ended June 30, 2015
Production, Commodity Derivatives and Revenues:
Production.
During the quarter ended June 30, 2016, total production increased slightly on a gas equivalent basis to 70.8 Bcfe compared to 70.5 Bcfe for the same quarter in
2015.
Commodity Prices Natural Gas.
Realized natural gas prices decreased 30% to $1.76 per Mcf in the second
quarter of 2016 as compared to $2.52 per Mcf for the same quarter of 2015. The Company does not currently have any open derivative contracts for natural gas production. During the three months ended June 30, 2015, the Companys average price
for natural gas including realized gains and losses on commodity derivatives was $3.33 per Mcf.
Commodity Prices
Oil.
During the quarter ended June 30, 2016, the average price realization for the Companys oil was $40.54 per barrel compared to $48.64 per barrel for the same period in 2015. The Company does not currently have any open derivative
contracts for oil production.
Revenues.
The decrease in average oil and natural gas prices resulted in revenues
decreasing to $146.6 million for the quarter ended June 30, 2016 as compared to $208.0 million for the same period in 2015.
Operating Costs and Expenses:
Lease Operating Expense.
Lease operating expense (LOE) decreased to $21.8 million during the second quarter of 2016 compared to $27.8 million during the same period in 2015
largely related to lower lifting costs due to improved efficiencies. On a unit of production basis, LOE costs decreased to $0.31 per Mcfe during the second quarter of 2016 compared with $0.39 per Mcfe during the second quarter of 2015.
Liquids Gathering System Operating Lease Expense.
During December 2012, the Company sold a system of liquids gathering pipelines
and central gathering facilities (the LGS) and certain associated real property rights in the Pinedale Anticline in Wyoming. The Company entered into a long-term, triple net lease agreement with the buyer relating to the use of the LGS
(the Lease Agreement). The Lease Agreement provides for an initial term of 15 years, and annual rent for the initial term under the Lease Agreement is $20.0 million (as adjusted annually for changes based on the consumer price index) and
may increase if certain volume thresholds are exceeded. The lease is classified as an operating lease. For the three months ended June 30, 2016, the Company recognized operating lease expense associated with the Lease Agreement of $5.2 million, or
$0.07 per Mcfe as compared to $5.2 million, or $0.07 per Mcfe for the same period in 2015.
Production Taxes.
During
the three months ended June 30, 2016, production taxes were $13.5 million compared to $17.2 million during the same period in 2015, or $0.19 per Mcfe compared to $0.24 per Mcfe. Production taxes are primarily calculated based on a
percentage of revenue from production in Wyoming and Utah after certain deductions and were 9.2% of revenues for the quarter ended June 30, 2016 and 8.3% of revenues for the same period in 2015. The decrease in per unit taxes is primarily
attributable to decreased oil and natural gas prices during the quarter ended June 30, 2016 as compared to the same period in 2015.
Gathering Fees.
Gathering fees decreased to $21.5 million for the three months ended June 30, 2016 compared to $22.5 million during the same period in 2015 largely related to decreased
gathering rates. On a per unit basis, gathering fees decreased to $0.30 per Mcfe for the three months ended June 30, 2016 as compared to $0.32 per Mcfe during the same period in 2015.
Transportation Charges.
Transportation charges decreased to $0.1 million for the quarter ended June 30, 2016 as
compared to $21.1 million for the same period in 2015 primarily as a result of termination of the Rockies Express Pipeline (REX) contract during the second quarter. See Note 8 for further discussion of the REX contract.
38
Depletion, Depreciation and Amortization.
DD&A expenses decreased to
$31.2 million during the three months ended June 30, 2016 from $92.4 million for the same period in 2015, primarily attributable to a decreased DD&A rate on a unit of production basis as a result of the ceiling test impairment during
the fourth quarter of 2015. On a unit of production basis, the DD&A rate decreased to $0.44 per Mcfe for the quarter ended June 30, 2016 compared to $1.31 per Mcfe for the quarter ended June 30, 2015.
General and Administrative Expenses.
General and administrative expenses decreased to $1.4 million for the quarter ended June
30, 2016 compared to $2.4 million for the same period in 2015 primarily related to corporate cost cutting measures. On a per unit basis, general and administrative expenses decreased to $0.02 per Mcfe for the quarter ended June 30, 2016
compared to $0.03 per Mcfe for the quarter ended June 30, 2015.
Other Income and Expenses:
Interest Expense.
During the quarter ended June 30, 2016, interest expense was $16.7 million compared to $42.6 million
during the same period in 2015. No interest expense has been recognized subsequent to the petition date of April 29, 2016.
Litigation Expense.
During the quarter ended June 30, 2015, the Company recognized litigation expenses of $0.7 million related to
the resolution of litigation matters.
Restructuring Expenses.
During the quarter ended June 30, 2016, the Company
incurred $1.6 million in costs and fees in connection with its efforts to restructure its debt prior to filing the chapter 11 petitions.
Deferred Gain on Sale of Liquids Gathering System.
During the quarters ended June 30, 2016 and 2015, the Company recognized $2.6 million in deferred gain on sale of the liquids gathering system
relating to the sale of a system of pipelines and central gathering facilities and certain associated real property rights in the Pinedale Anticline in Wyoming during December 2012.
Commodity Derivatives:
Gain/(Loss) on Commodity
Derivatives.
The Company does not currently have any open commodity derivative contracts. During the
quarter ended June 30, 2015, the Company recognized a loss of $3.6 million related to commodity derivatives. Of this total,
the Company recognized $52.6 million of realized gain on commodity derivatives during the quarter ended June 30, 2015. The realized gain or loss on commodity derivatives relates to actual amounts received or paid or to be received or paid under
the Companys derivative contracts. This amount also includes an unrealized loss on commodity derivatives of $56.3 million during the quarter ended June 30, 2015. The unrealized gain or loss on commodity derivatives represents the change in the
fair value of these derivative instruments over the remaining term of the contract. See Note 6.
Reorganization Items:
Reorganization Items, Net.
Reorganization items, net of $22.2 million for the quarter ended June 30, 2016 are
primarily made up of a non-cash charge to write-off all of the unamortized debt issuance costs totaling $18.7 million related to the unsecured Credit Agreement, unsecured Senior Notes issued by Ultra Resources, Inc., the unsecured 2018 Senior Notes
issued by the Company and the unsecured 2024 Senior Notes issued by the Company as these debt instruments are expected to be impacted by the bankruptcy reorganization process.
Income (Loss) from Continuing Operations:
Pretax Income
(loss).
The Company recognized income before income taxes of $13.8 million for the quarter ended June 30, 2016 compared with a loss before income taxes of $24.9 million for the same period in 2015. The increase in earnings is primarily
due to decreased DD&A, reduced interest expense and reduced transportation
39
costs during the three months ended June 30, 2016 and partially offset by costs associated with the reorganization and decreased revenues as a result of decreased oil and natural gas prices
during the three months ended June 30, 2016 as compared to the same period in 2015.
Income Taxes.
The
Company has recorded a valuation allowance against all deferred tax assets as of June 30, 2016. Some or all of this valuation allowance may be reversed in future periods against future income.
Net Income
(Loss).
For the three months ended June 30, 2016, the Company recognized net income of
$14.0 million or $0.09 per diluted share as compared with a net loss of $24.7 million or -$0.16 per diluted share for the same period in 2015. The increase in earnings is primarily due to decreased DD&A, reduced interest expense and
reduced transportation costs during the three months ended June 30, 2016 and partially offset by costs associated with the reorganization and decreased revenues as a result of decreased oil and natural gas prices during the three months ended June
30, 2016 as compared to the same period in 2015.
Six Months Ended June 30, 2016 vs. Six Months Ended June 30, 2015
Production, Commodity Derivatives and Revenues:
Production.
During the six months ended June 30, 2016, total production increased 2% on a gas equivalent basis to 144.2 Bcfe compared to 141.0 Bcfe for the same period in
2015. The increase is primarily attributable to the completion of 25 drilled but uncompleted wells carried over from our 2015 drilling program.
Commodity Prices Natural Gas.
Realized natural gas prices decreased 29% to $1.89 per Mcf during the six months ended June 30, 2016 as compared to $2.68 per Mcf for the same period in 2015.
The Company does not currently have any open derivative contracts for natural gas production. During the six months ended June 30, 2015, the Companys average price for natural gas including realized gains and losses on commodity derivatives
was $3.31 per Mcf.
Commodity Prices Oil.
During the six months ended June 30, 2016, the average price
realization for the Companys oil was $33.50 per barrel compared with $42.83 per barrel during the same period in 2015. The Company does not currently have any open derivative contracts for oil production.
Revenues.
The decrease in average oil and natural gas prices, offset by increased production from our drilling program, resulted
in revenues decreasing to $306.0 million for the six months ended June 30, 2016 as compared to $427.3 million for the same period in 2015.
Operating Costs and Expenses:
Lease Operating Expense.
LOE
decreased to $47.2 million during the six months ended June 30, 2016 compared to $53.9 million during the same period in 2015 largely related to lower lifting costs due to improved efficiencies. On a unit of production basis, LOE costs
decreased to $0.33 per Mcfe during the six months ended June 30, 2016 compared to $0.38 per Mcfe during the same period in 2015.
Liquids Gathering System Operating Lease Expense.
During December 2012, the Company sold the LGS and certain associated real property rights in the Pinedale Anticline in Wyoming and the Company
entered into the Lease Agreement. The Lease Agreement provides for an initial term of 15 years, and annual rent for the initial term under the Lease Agreement is $20.0 million (as adjusted annually for changes based on the consumer price index) and
may increase if certain volume thresholds are exceeded. For the six months ended June 30, 2016, the Company recognized operating lease expense associated with the Lease Agreement of $10.3 million, or $0.07 per Mcfe as compared to $10.3 million, or
$0.07 per Mcfe for the same period in 2015.
Production Taxes.
During the six months ended June 30, 2016, production
taxes were $28.7 million compared to $37.1 million during the same period in 2015, or $0.20 per Mcfe compared to $0.26 per Mcfe.
40
Production taxes are primarily calculated based on a percentage of revenue from production in Wyoming and Utah after certain deductions and were 9.4% of revenues for the six months ended June 30,
2016 and 8.7% of revenues for the same period in 2015. The decrease in per unit taxes is primarily attributable to decreased oil and natural gas prices during the six months ended June 30, 2016 as compared to the same period in 2015.
Gathering Fees.
Gathering fees increased to $44.0 million for the six months ended June 30, 2016 compared to
$42.2 million during the same period in 2015 largely related to production increases in Wyoming. On a per unit basis, gathering fees remained flat at $0.30 per Mcfe for the six months ended June 30, 2016 and 2015.
Transportation Charges.
Transportation charges decreased to $23.7 million for the six months ended June 30, 2016
as compared to $41.3 million for the same period in 2015 primarily as a result of the termination of the REX contract during the second quarter of 2016. See Note 8 for further discussion of the REX contract.
Depletion, Depreciation and Amortization.
DD&A expenses decreased to $62.1 million during the six months ended June 30,
2016 from $187.0 million for the same period in 2015, primarily attributable to a decreased DD&A rate on a unit of production basis as a result of the ceiling test impairment during the fourth quarter of 2015. On a unit of production basis,
the DD&A rate decreased to $0.43 per Mcfe for the six months ended June 30, 2016 compared to $1.33 per Mcfe for the six months ended June 30, 2015.
General and Administrative Expenses.
General and administrative expenses decreased to $5.6 million for the six months ended June 30, 2016 compared to $6.1 million for the same period in
2015.The decrease in general and administrative expenses is primarily attributable to corporate cost cutting measures. On a per unit basis, general and administrative expenses remained flat at $0.04 per Mcfe for the six months ended June 30, 2016
and 2015.
Other Income and Expenses:
Interest Expense.
Interest expense decreased to $66.6 million during the six months ended June 30, 2016 compared to $85.3 million during the same period in 2015. No interest expense has
been recognized subsequent to the petition date of April 29, 2016. (See Note 3).
Litigation Expense.
During the six
months ended June 30, 2015, the Company recognized litigation expenses of $4.4 million related to the resolution of litigation matters.
Restructuring Expenses.
During the six months ended June 30, 2016, the Company incurred $7.1 million in costs and fees in connection with its efforts to restructure its debt prior to filing the
chapter 11 petitions.
Deferred Gain on Sale of Liquids Gathering System.
During the six months ended June 30, 2016 and
2015, the Company recognized $5.3 million in deferred gain on sale of the liquids gathering system relating to the sale of a system of pipelines and central gathering facilities and certain associated real property rights in the Pinedale Anticline
in Wyoming during December 2012.
Commodity Derivatives:
Gain (Loss) on Commodity Derivatives.
The Company does not currently have any open commodity derivative contracts.
During
the
six months ended June 30, 2015, the Company recognized a gain of $33.2 million related to commodity derivatives. Of this total, the Company recognized $82.0 million of realized gain on commodity derivatives. The realized gain or loss
on commodity derivatives relates to actual amounts received or paid or to be received or paid under the Companys derivative contracts. This amount also includes an unrealized loss on commodity derivatives of $48.8 million. The unrealized
gain or loss on commodity derivatives represents the change in the fair value of these derivative instruments over the remaining term of the contract. See Note 6.
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Reorganization Items:
Reorganization Items, Net.
Reorganization items, net of $22.2 million for the six months ended June 30, 2016 are primarily made up of a non-cash charge to write-off all of the unamortized debt
issuance costs totaling $18.7 million related to the unsecured Credit Agreement, unsecured Senior Notes issued by Ultra Resources, Inc., the unsecured 2018 Senior Notes issued by the Company and the unsecured 2024 Senior Notes issued by the Company
as these debt instruments are expected to be impacted by the bankruptcy reorganization process.
(Loss) Income from Continuing
Operations:
Pretax (Loss).
The Company recognized a loss before income taxes of $8.2 million for the six
months ended June 30, 2016 compared with a loss before income taxes of $1.8 million for the same period in 2015. The decrease in earnings is largely due to decreased revenues as a result of decreased oil and natural gas prices and costs
associated with the reorganization and partially offset by decreased DD&A, reduced interest expense and reduced transportation costs during the six months ended June 30, 2016.
Income Taxes.
The Company has recorded a valuation allowance against all deferred tax assets as of June 30, 2016.
Some or all of this valuation allowance may be reversed in future periods against future income.
Net (Loss)
Income.
For the six months ended June 30, 2016, the Company recognized net loss of $7.8 million or $0.05 per diluted share as compared with net income of $0.5 million or $0.00 per diluted share for the same period in 2015.
The decrease in earnings is largely due to decreased revenues as a result of decreased oil and natural gas prices and costs associated with the reorganization and partially offset by decreased DD&A, reduced interest expense and reduced
transportation costs during the six months ended June 30, 2016.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Before Filing Under Chapter 11 of the United States Bankruptcy Code
We have historically funded our operations primarily through cash flows from operating activities, borrowings under the Credit Agreement,
proceeds from the issuance of debt and proceeds from asset sales. However, future cash flows are subject to a number of variables, and are highly dependent on the prices we receive for oil and natural gas. Oil and natural gas prices declined
severely during fiscal year 2015 and declined even further during the first quarter of 2016. The Henry Hub natural gas spot price dropped below $1.65 per MMBtu in March 2016 for the first time in 17 years. Although natural gas prices have improved
in recent weeks, there is still significant volatility in commodity prices and these prices are still lower than the industry has experienced in recent years. These lower commodity prices have negatively impacted revenues, earnings and cash flows,
and sustained low oil and natural gas prices will have a material and adverse effect on our liquidity position.
Liquidity After Filing
Under Chapter 11 of the United States Bankruptcy Code
As described in Note 1, the filing of the chapter 11 petitions
constituted an event of default with respect to our existing debt obligations. However, subject to certain exceptions under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined, or stayed, the continuation of any
judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the Bankruptcy Petitions. Thus, for example, most creditor actions to obtain
possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and
until the Bankruptcy Court lifts the automatic stay.
The Bankruptcy Court has approved payment of certain prepetition
obligations, including payments for employee wages, salaries and certain other benefits, customer programs, taxes, utilities, insurance, surety bond premiums as well as payments to possessory lien vendors. Despite the liquidity provided by our
existing cash on
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hand, our ability to maintain normal credit terms with our suppliers may become impaired. We may be required to pay cash in advance to certain vendors and may experience restrictions on the
availability of trade credit, which would further reduce our liquidity. If liquidity problems persist, our suppliers could refuse to provide key products and services in the future. In addition, due to the public perception of our financial
condition and results of operations, in particular with regard to our potential failure to meet our debt obligations, some vendors could be reluctant to enter into long-term agreements with us.
Although we have lowered our capital budget as compared to 2015, our business remains capital intensive. In addition to the cash
requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with our chapter 11 proceedings and expect that we will continue to incur significant professional fees and costs
throughout our chapter 11 proceedings. The Company believes it has sufficient liquidity, including approximately $269.5 million of cash on hand as of June 30, 2016 and funds generated from ongoing operations, to fund anticipated cash requirements
through the chapter 11 proceedings for operating and capital expenditures and for working capital purposes and excluding principal and interest payments on our outstanding debt.
The Company does not intend to seek debtor-in-possession (DIP) financing at this time. However, given the current level of
volatility in the market and the unpredictability of certain costs that could potentially arise in our operations, our liquidity needs could be significantly higher than we currently anticipate. There are no assurances that our current liquidity is
sufficient to allow us to satisfy our obligations related to the chapter 11 Cases, allow us to proceed with the confirmation of a chapter 11 plan of reorganization and allow us to emerge from bankruptcy. We can provide no assurance that we will be
able to secure additional interim financing or exit financing sufficient to meet our liquidity needs or, if sufficient funds are available, offered to us on acceptable terms
.
Our ability to maintain adequate liquidity through the reorganization process and beyond depends on successful operation of our business,
and appropriate management of operating expenses and capital spending. Our anticipated liquidity needs are highly sensitive to changes in each of these and other factors.
Going Concern.
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared on a going concern basis of accounting, which contemplates
continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of
our chapter 11 proceedings. We have significant indebtedness, all of which we have reclassified to liabilities subject to compromise at June 30, 2016. Our level of indebtedness has adversely impacted and is continuing to adversely impact our
financial condition. As a result of our financial condition, the defaults under our debt agreements, and the risks and uncertainties surrounding our chapter 11 proceedings, substantial doubt exists that we will be able to continue as a going
concern.
Investors should review the disclosures and other information, including the risk factors, provided in our most
recent Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the period ended March 31, 2016 and this Quarterly Report on Form 10-Q.
Capital Expenditures.
For the six month period ended June 30, 2016, total capital expenditures were $121.5 million. During this period, the Company participated in 57 gross (40.3 net)
wells in Wyoming that were drilled to total depth and cased. No wells are scheduled to be drilled in Utah or Pennsylvania during 2016.
2016 Capital Investment Plan.
For 2016, our original capital budget was $260.0 million, reflecting the low commodity price environment at the beginning of the year. On April 26, 2016, our
Board of Directors approved an increase to our capital budget for 2016 from $260.0 million to $295.0 million. We anticipate using the additional capital in our increased budget to drill additional development wells in Wyoming and to complete some of
our uncompleted wells in Utah. We expect to fund our 2016 capital expenditures budget through cash flows from operations and cash on hand.
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Other Developments.
Trading in the Companys common stock on the NYSE was
suspended on May 3, 2016 and the common stock was delisted. The common stock of the Company currently trades on the OTC Pink marketplace under the symbol UPLMQ.
Ultra Resources, Inc.
Bank indebtedness.
Ultra
Resources, Inc. (Ultra Resources), a wholly-owned subsidiary of the Company, is a party to the Credit Agreement. Ultra Resources obligations under the Credit Agreement are guaranteed by the Company and UP Energy Corporation, a
wholly-owned subsidiary of the Company.
Ultra Resources filing of the chapter 11 petitions described in Note 1
constituted an event of default that accelerated the obligations under the Credit Agreement. Other events of default are also present with respect to the Credit Agreement, including a failure to make interest payments and, as described below, a
failure to deliver annual audited consolidated financial statements without a going concern qualification, a failure to meet the minimum PV-9 ratio covenant and a failure to comply with the consolidated leverage covenant in the Credit Agreement at
the end of the first quarter of 2016.
Prior to April 29, 2016, loans under the Credit Agreement bore interest, at the
Borrowers option, based on (A) a rate per annum equal to the prime rate or the weighted average fed funds rate on overnight transactions during the preceding business day plus a margin based on a grid of the Borrowers consolidated
leverage ratio, or (B) a base Eurodollar rate, substantially equal to the LIBOR rate, plus a margin based on a grid of the Borrowers consolidated leverage ratio.
The Credit Agreement requires us to deliver annual audited, consolidated financial statements for the Company without a going concern or like qualification or explanation. On March 15, 2016,
we delivered an audit report with respect to the financial statements in our 2015 Annual Report on Form 10-K that included an explanatory paragraph expressing uncertainty as to our ability to continue as a going concern.
The Credit Agreement contains a consolidated leverage covenant, pursuant to which Ultra Resources is required to maintain a maximum ratio
of its total funded consolidated debt to its trailing four fiscal quarters EBITDAX of 3.5 to 1.0. Based on Ultra Resources EBITDAX for the trailing four fiscal quarters ended March 31, 2016, we were not in compliance with this
consolidated leverage covenant at March 31, 2016 (the ratio was 4.6 times at March 31, 2016).
The Credit Agreement contains a
PV-9 covenant, pursuant to which Ultra Resources is required to maintain a minimum ratio of the discounted net present value of its oil and gas properties to its total funded consolidated debt of 1.5 times. We were required to report whether we were
in compliance with this covenant on April 1, 2016. Based on the PV-9 of Ultra Resources oil and gas properties at December 31, 2015, Ultra Resources failed to comply with the PV-9 ratio covenant under the Credit Agreement (the ratio was 0.9
times at December 31, 2015).
Senior Notes
. Ultra Resources has outstanding $1.46 billion of Senior Notes which
were issued pursuant to a certain Master Note Purchase Agreement dated as of March 6, 2008 (as amended, supplemented or otherwise modified, the MNPA). The Ultra Resources Senior Notes rank pari passu with the Credit Agreement.
Payment of the Senior Notes is guaranteed by the Company and by UP Energy Corporation. The Ultra Resources Senior Notes are subject to representations, warranties, covenants and events of default similar to those in the Credit Agreement.
Ultra Resources filing of the chapter 11 petitions described in Note 1 constituted an event of default that accelerated
the obligations under the MNPA. Other events of default are also present with respect to the MNPA, including a failure to make principal and interest payments due under the Ultra Resources Senior Notes and a failure to comply with the
consolidated leverage covenant at the end of the first quarter of 2016.
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On March 1, 2016, we failed to make an interest payment of approximately $40.0 million and a
principal payment of $62.0 million, each of which was due March 1, 2016 under the terms of the Ultra Resources Senior Notes. We entered into a forbearance agreement related to the failure to make these payments with the holders of the Ultra
Resources Senior Notes, and we filed the chapter 11 petitions without making the payments before the forbearance period expired.
The MNPA contains a consolidated leverage covenant, pursuant to which Ultra Resources is required to maintain a maximum ratio of its total funded consolidated debt to its trailing four fiscal
quarters EBITDAX of 3.5 to 1.0. Based on Ultra Resources EBITDAX for the trailing four fiscal quarters ended March 31, 2016, we were not in compliance with this consolidated leverage covenant at March 31, 2016 (the ratio was 4.6 times at
March 31, 2016).
Interest Expense
. No interest expense has been recognized with respect to the Credit Agreement
or the Ultra Resources Senior Notes subsequent to the Petition Date.
Ultra Petroleum Corp. Senior Notes
The Companys filing of the chapter 11 petitions described in Note 1 constituted an event of default that
accelerated the Companys obligations under the 2024 Notes and the 2018 Notes (defined below). Additionally, other events of default, including cross-defaults, are present due to the failure to make interest payments and other matters. Under
the Bankruptcy Code, the creditors under the 2024 Notes and the 2018 Notes (defined below) are stayed from taking any action against the Debtors as a result of the default.
Senior Notes due 2024
: On September 18, 2014, the Company issued $850.0 million of 6.125% Senior Notes due 2024 (2024 Notes). The 2024 Notes are general, unsecured senior
obligations of the Company and mature on October 1, 2024. The 2024 Notes rank equally in right of payment to all existing and future senior indebtedness of the Company and effectively rank junior to all future secured indebtedness of the Company (to
the extent of the value of the collateral securing such indebtedness). The 2024 Notes are not guaranteed by the Companys subsidiaries and, as a result, are structurally subordinated to the indebtedness and other obligations of the
Companys subsidiaries. The 2024 Notes are subject to covenants that restrict the Companys ability to incur indebtedness, make distributions and other restricted payments, grant liens, use the proceeds of asset sales, make investments and
engage in affiliate transactions.
Interest due under the 2024 Notes is payable each April 1 and October 1. On April 1,
2016, we elected to defer making an interest payment on the 2024 Notes of approximately $26.0 million due April 1, 2016. The indenture governing the 2024 Notes provides a 30-day grace period for us to make this interest payment. We did not make this
interest payment before the end of the grace period, which resulted in an event of default under the indenture governing the 2024 Notes.
Senior Notes due 2018
: On December 12, 2013, the Company issued $450.0 million of 5.75% Senior Notes due 2018 (2018 Notes). The 2018 Notes are general, unsecured senior
obligations of the Company and mature on December 15, 2018. The 2018 Notes rank equally in right of payment to all existing and future senior indebtedness of the Company and effectively rank junior to all future secured indebtedness of the Company
(to the extent of the value of the collateral securing such indebtedness). The 2018 Notes are not guaranteed by the Companys subsidiaries and, as a result, are structurally subordinated to the indebtedness and other obligations of the
Companys subsidiaries. The 2018 Notes are subject to covenants that restrict the Companys ability to incur indebtedness, make distributions and other restricted payments, grant liens, use the proceeds of asset sales, make investments and
engage in affiliate transactions. Interest due under the 2018 Notes is payable each June 15 and December 15.
The
Companys filing of the chapter 11 petitions described in Note 1 constituted an event of default that accelerated the Companys obligations under the 2024 Notes and the 2018 Notes. Additionally, other events of
45
default, including cross-defaults resulting from the acceleration of indebtedness outstanding under the Credit Agreement and the Ultra Resources Senior Notes, are present due to the failure
to make interest payments and other matters. Under the Bankruptcy Code, the creditors under the 2024 Notes and the 2018 Notes are stayed from taking any action against the Debtors as a result of the bankruptcy filing.
Interest Expense
. No interest expense has been recognized with respect to the 2024 Notes or the 2018 Notes subsequent to
the Petition Date.
Operating Activities.
During the six months ended June 30, 2016, net cash provided by
operating activities was $31.7 million, an 87% decrease from net cash provided by operating activities of $243.3 million for the same period in 2015. The decrease in net cash provided by operating activities is largely attributable to
decreased revenues as a result of decreased oil and natural gas price realizations during the six months ended June 30, 2016 as compared to the same period in 2015 and net changes in working capital.
Investing Activities.
During the six months ended June 30, 2016, net cash used in investing activities was
$135.1 million as compared to $279.3 million for the same period in 2015. The decrease in net cash used in investing activities is largely related to decreased capital investments associated with the Companys drilling activities.
Financing Activities.
During the six months ended June 30, 2016, net cash provided by financing activities was
$368.7 million compared to $32.5 million for the same period in 2015. The change in net cash provided by financing activities is primarily due to increased borrowings during 2016 related to drawings under the Credit Agreement.
OFF BALANCE SHEET ARRANGEMENTS
The Company did not have any off-balance sheet arrangements as of June 30, 2016.
CAUTIONARY
STATEMENT PURSUANT TO SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains
or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of
1995. All statements other than statements of historical facts included in this document, including without limitation, statements in Managements Discussion and Analysis of Financial Condition and Results of Operations regarding the
Companys financial position, estimated quantities and net present values of reserves, business strategy, plans and objectives of the Companys management for future operations, covenant compliance and those statements preceded by,
followed by or that otherwise include the words believe, expects, anticipates, intends, estimates, projects, target, goal, plans,
objective, should, or similar expressions or variations on such expressions are forward-looking statements. The Company can give no assurances that the assumptions upon which such forward-looking statements are based will
prove to be correct nor can the Company assure adequate funding will be available to execute the Companys planned future capital program.
Other risks and uncertainties include, but are not limited to, fluctuations in the price the Company receives for oil and gas production, reductions in the quantity of oil and gas sold due to increased
industry-wide demand and/or curtailments in production from specific properties due to mechanical, marketing or other problems, operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost
of identified projects varied from original estimates and/or from the number of exploration and development opportunities being greater or fewer than currently anticipated and increased financing costs due to a significant increase in interest
rates. See the Companys Annual Report on Form 10-K for the year ended December 31, 2015, Quarterly Report on Form 10-Q for the period ended March 31, 2016, and the risk factors provided in this Quarterly Report on Form 10-Q for
additional risks related to the Companys business.
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