NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - The Company and Business
SM Energy Company, together with its consolidated subsidiaries (“SM Energy” or the “Company”), is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil and condensate, natural gas, and natural gas liquids (also respectively referred to as “oil,” “gas,” and “NGLs” throughout this report) in onshore North America.
Note 2 - Basis of Presentation, Significant Accounting Policies, and Recently Issued Accounting Standards
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of SM Energy and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Quarterly Report on Form 10-Q and Regulation S-X. These financial statements do not include all information and notes required by GAAP for annual financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to consolidated financial statements included in SM Energy’s Annual Report on Form 10-K for the year ended
December 31, 2016
(the “
2016
Form 10-K”). In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of interim financial information, have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year. In connection with the preparation of the Company’s unaudited condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of
March 31, 2017
, and through the filing of this report. Certain prior period amounts have been reclassified to conform to the current presentation on the accompanying condensed consolidated financial statements.
Significant Accounting Policies
The significant accounting policies followed by the Company are set forth in Note 1 to the Company’s consolidated financial statements in its
2016
Form 10-K, and are supplemented by the notes to the unaudited condensed consolidated financial statements in this report. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the
2016
Form 10-K.
Recently Issued Accounting Standards
Effective January 1, 2017, the Company adopted, using various transition methods, Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 is meant to simplify certain aspects of accounting for share-based payment arrangements, including income tax effects, accounting for forfeitures, and net share settlements. The Company adopted the various applicable amendments as summarized below:
|
|
•
|
ASU 2016-09 requires all future excess tax benefits and deficiencies related to share-based payment arrangements to be recognized as income tax benefit or expense as discrete events in the period in which they occur. The Company adopted this amendment under a modified retrospective transition method, which resulted in a
$44.3 million
cumulative-effect adjustment to retained earnings as of January 1, 2017, with a corresponding deferred tax asset recorded for previously unrecognized excess tax benefits. Consequentially, the Company’s diluted share count calculation changed prospectively beginning in the period ended March 31, 2017. Any future excess tax benefits and deficiencies are now being excluded from the assumed proceeds calculated under the treasury stock method for share-based payment arrangements. Lastly, this amendment requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, which the Company applied prospectively beginning in the period ended March 31, 2017. There are no periods presented that would require reclassification of cash flows had the Company elected to apply this amendment retrospectively.
|
|
|
•
|
ASU 2016-09 allows entities to elect whether to account for forfeitures of share-based payment awards by recognizing forfeitures of awards as they occur or by estimating the number of awards expected to be forfeited. This amendment is to be applied using a modified retrospective transition method. Upon adopting ASU 2016-09, the Company elected to change its policy to account for forfeitures of share-based payment awards as they occur effective January 1, 2017. This change in accounting policy resulted in a net
$0.7 million
cumulative-effect adjustment to retained earnings as of January 1, 2017, to adjust for actual forfeitures versus the previously estimated forfeiture rate. The corresponding impacts were an increase in additional paid-in capital and a decrease in deferred tax assets.
|
|
|
•
|
ASU 2016-09 allows entities to withhold an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction, without triggering liability classification of the award; however, the Company does not plan on changing its current withholding process as outlined in its share-based award agreements. Related to this amendment, ASU 2016-09 requires entities to present cash payments made to tax authorities on the employees’ behalf for withheld tax shares as a financing activity on the statement of cash flows retrospectively. However, this presentation is already consistent with the Company’s historical and current cash flow presentation of net share settlement from issuance of stock awards, and therefore, there was no impact from this amendment.
|
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
for the recognition of revenue from contracts with customers. Several additional related ASUs have been issued. The Company has established a cross-functional implementation team that is currently evaluating the provisions of each of these standards, analyzing their impact on the Company’s contract portfolio, reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements of these standards to the Company’s revenue contracts, and assessing their potential impact on the Company’s financial statements and disclosures. The Company currently plans to apply the modified retrospective method upon adoption and plans to adopt the guidance on the effective date of January 1, 2018.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842),
which changes the accounting for leases. The Company is currently establishing a cross-functional implementation team to analyze the impact of the standard on the Company’s contract portfolio by reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard. In addition, the Company is working to identify appropriate changes to the Company’s business processes, systems, and controls to support recognition and disclosure under the new standard. The Company currently plans to adopt the guidance on the effective date of January 1, 2019.
In March 2017, the FASB issued ASU No. 2017-07,
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
(“ASU 2017-07”). This ASU is intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost by providing additional guidance on the presentation of net benefit cost on the income statement and on the components eligible for capitalization in assets. As outlined in ASU 2017-07, certain amendments are to be applied using a retrospective method while others are required to be applied using a prospective method. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted as outlined in ASU 2017-07. The Company is currently evaluating the provisions of this guidance and assessing the potential impact on the Company’s financial statements and disclosures and does not intend to early adopt this guidance.
Other than as disclosed above or in the
2016
Form 10-K, there are no other accounting standards applicable to the Company that would have a material effect on the Company’s financial statements and related disclosures that have been issued but not yet adopted by the Company as of
March 31, 2017
, and through the filing of this report.
Note 3 – Divestitures, Assets Held for Sale, and Acquisitions
Divestitures
On
March 10, 2017
,
the Company divested its outside-operated Eagle Ford shale assets, including ownership interest in related midstream assets, for total cash received at closing, net of commissions (referred to throughout this report as “net divestiture proceeds”), of
$747.4 million
, subject to post-closing adjustments, and recorded a net estimated gain of
$398.1 million
for the three months ended
March 31, 2017
. These assets were classified as held for sale as of
December 31, 2016
.
The following table presents income (loss) before income taxes of the outside-operated Eagle Ford shale assets sold for the three months ended
March 31, 2017
, and
2016
. This divestiture is considered a disposal of a significant asset group.
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Income (loss) before income taxes
(1)
|
$
|
24,324
|
|
|
$
|
(286,399
|
)
|
____________________________________________
|
|
(1)
|
Income (loss) before income taxes reflects oil, gas, and NGL production revenue, less oil, gas, and NGL production expense and depletion, depreciation, amortization, and asset retirement obligation liability accretion. Additionally, income (loss) before income taxes included impairment of proved properties expense of approximately
$269.6 million
for the three months ended March 31, 2016.
|
Assets Held for Sale
Assets are classified as held for sale when the Company commits to a plan to sell the assets and there is reasonable certainty the sale will take place within
one
year. Upon classification as held for sale, long-lived assets are no longer depreciated or depleted, and a measurement for impairment is performed to identify and expense any excess of carrying value over fair value less estimated costs to sell. Any subsequent changes to the fair value less estimated costs to sell impact the measurement of assets held for sale, with any gain or loss reflected in the
net gain (loss) on divestiture activity
line item in the accompanying condensed consolidated statements of operations (“accompanying statements of operations”).
As of
March 31, 2017
, the accompanying condensed consolidated balance sheets (“accompanying balance sheets”) present
$455.9 million
of assets held for sale, net of accumulated depletion, depreciation, and amortization expense, which consisted primarily of the Company’s remaining Williston Basin assets in Divide County, North Dakota (referred to as “Divide County” throughout this report). A corresponding asset retirement obligation liability of
$16.1 million
was separately presented. The Company expects to close the divestiture of these assets during the second quarter of 2017. These assets were written down by
$359.6 million
to reflect fair value less estimated costs to sell upon classification as held for sale during the three months ended
March 31, 2017
.
The following table presents loss before income taxes of the Company’s Divide County assets held for sale for the three months ended
March 31, 2017
, and
2016
:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Loss before income taxes
(1)
|
$
|
(335,561
|
)
|
|
$
|
(16,813
|
)
|
____________________________________________
|
|
(1)
|
Loss before income taxes reflects oil, gas, and NGL production revenue less oil, gas, and NGL production expense and depletion, depreciation, amortization, and asset retirement obligation liability accretion. Additionally, loss before income taxes for the three months ended March 31, 2017, included the
$359.6 million
write-down on these assets held for sale as discussed above, and loss before income taxes for the three months ended March 31, 2016, included
$1.6 million
of unproved property impairments.
|
Acquisitions
During the first quarter of 2017, the Company acquired approximately
2,900
net acres of proved and unproved properties in the Midland Basin for
$59.6 million
, subject to post-closing adjustments. Under authoritative accounting guidance, this transaction was considered an asset acquisition, and therefore, the properties were recorded based on the fair value of the total consideration transferred on the acquisition date and transaction costs were capitalized as a component of the cost of the assets acquired.
The Company finalized the 2016 acquisition of Midland Basin properties from Rock Oil Holdings, LLC (referred to as the “Rock Oil Acquisition”) during the first quarter of 2017 by paying an additional
$7.4 million
of cash consideration, resulting in total consideration of
$998.4 million
paid after final closing adjustments. There were no material changes to the recorded basis of the proved and unproved properties acquired as a result of the final settlement.
Also, during the first quarter of 2017, and subsequent to March 31, 2017, the Company completed trades of properties, primarily unproved, in Howard and Martin Counties, Texas resulting in the Company acquiring approximately
3,020
net acres in exchange for
2,310
net acres. There was no cash consideration for the trade that was completed during the three months ended March 31, 2017, and this trade was recorded at the fair value of the assets surrendered with no gain or loss recognized.
Note 4 - Income Taxes
The
income tax (expense) benefit
recorded for the
three
months ended
March 31, 2017
, and
2016
, differs from the amounts that would be provided by applying the statutory United States federal income tax rate to income or loss before income taxes primarily due to the effect of state income taxes, changes in valuation allowances, excess tax benefits and deficiencies from share-based payment awards, and accumulated impacts of other smaller permanent differences. The quarterly rate can also be affected by the proportional impacts of forecasted net income or loss as of each period end presented.
The provision for income taxes for the three months ended March 31, 2017, and 2016, consisted of the following:
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|
|
|
|
|
For the Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Current portion of income tax (expense) benefit:
|
|
|
|
Federal
|
$
|
(7,439
|
)
|
|
$
|
—
|
|
State
|
(3,842
|
)
|
|
(164
|
)
|
Deferred portion of income tax (expense) benefit
|
(33,225
|
)
|
|
195,039
|
|
Income tax (expense) benefit
|
$
|
(44,506
|
)
|
|
$
|
194,875
|
|
Effective tax rate
|
37.4
|
%
|
|
35.9
|
%
|
On a year-to-date basis, a change in the Company’s effective tax rate between reported periods will generally reflect differences in its estimated highest marginal state tax rate due to changes in the composition of income or loss from Company activities among multiple state tax jurisdictions. Cumulative effects of state tax rate changes are reflected in the period that legislation is enacted. As a result of adopting ASU 2016-09, excess tax benefits and deficiencies from share-based payment awards are expected to impact the Company’s effective tax rate between periods. Please refer to
Note 2 - Basis of Presentation, Significant Accounting Policies, and Recently Issued Accounting Standards
.
The change in the current portion of income tax expense relates to the effect of anticipated utilization of carryover net operating losses, deferred expenses, and carryover tax credits. The Company is generally no longer subject to United States federal or state income tax examinations by tax authorities for years before 2013, with the exception of its 2003 tax year.
Note 5 - Long-Term Debt
Credit Facility
The Company’s Fifth Amended and Restated Credit Agreement, as amended (the “Credit Agreement”), provides for a maximum loan amount of
$2.5 billion
and has a maturity date of
December 10, 2019
.
On
March 31, 2017
, the Company entered into a Ninth Amendment to the Credit Agreement (the “Ninth Amendment”) with its lenders. Pursuant to the Ninth Amendment, and as part of the regular, semi-annual borrowing base redetermination process, the borrowing base and aggregate lender commitments were reduced to
$925 million
. This expected reduction was primarily due to the sale of the Company’s outside-operated Eagle Ford shale assets in the first quarter of 2017 and the decrease in the value of the Company’s proved reserves at December 31, 2016. The borrowing base redetermination process considers the value of both the Company’s (a) proved oil and gas properties reflected in the Company’s most recent reserve report and (b) commodity derivative contracts, each as determined by the Company’s lender group. Additionally, the Ninth Amendment modified the Credit Agreement to allow the Company to enter into derivative contracts for an increased percentage of projected production volumes. As a result of the reduction to the Company’s borrowing base and aggregate lender commitments, the Company recorded approximately
$1.1 million
of expense related to the acceleration of unamortized deferred financing costs for the three months ended
March 31, 2017
. The next scheduled redetermination date is
October 1, 2017
.
The Company must comply with certain financial and non-financial covenants under the terms of the Credit Agreement, including covenants limiting dividend payments and requiring the Company to maintain certain financial ratios, as defined by the Credit Agreement. Financial covenants under the Credit Agreement require, as of the last day of each of the Company’s fiscal quarters, the Company’s (a) ratio of senior secured debt to 12-month trailing adjusted EBITDAX to be not more than
2.75
to 1.0; (b) adjusted current ratio to be not less than
1.0
to 1.0; and (c) ratio of 12-month trailing adjusted EBITDAX to interest expense to be not less than
2.0
to 1.0. The Company was in compliance with all financial and non-financial covenants under the Credit Agreement as of
March 31, 2017
, and through the filing of this report.
Interest and commitment fees are accrued based on a borrowing base utilization grid set forth in the Credit Agreement and presented in
Note 5 – Long-Term Debt
to the Company’s consolidated financial statements in its 2016 Form 10-K. Eurodollar loans accrue interest at the London Interbank Offered Rate plus the applicable margin from the utilization table, and Alternate Base Rate and swingline loans accrue interest at the prime rate, plus the applicable margin from the utilization table. Commitment fees are accrued on the unused portion of the aggregate lender commitment amount and are included in interest expense in the accompanying statements of operations.
The following table presents the outstanding balance, total amount of letters of credit outstanding, and available borrowing capacity under the Credit Agreement as of
April 26, 2017
,
March 31, 2017
, and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 26, 2017
|
|
As of March 31, 2017
|
|
As of December 31, 2016
|
|
(in thousands)
|
Credit facility balance
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Letters of credit
(2)
|
200
|
|
|
200
|
|
|
200
|
|
Available borrowing capacity
|
924,800
|
|
|
924,800
|
|
|
1,164,800
|
|
Total aggregate lender commitment amount
|
$
|
925,000
|
|
|
$
|
925,000
|
|
|
$
|
1,165,000
|
|
____________________________________________
|
|
(1)
|
Unamortized deferred financing costs attributable to the credit facility are presented as a component of other noncurrent assets on the accompanying balance sheets and totaled
$4.3 million
and
$5.9 million
as of
March 31, 2017
, and
December 31, 2016
, respectively.
|
|
|
(2)
|
Letters of credit outstanding reduce the amount available under the credit facility on a dollar-for-dollar basis.
|
Senior Notes
The Company’s Senior Notes consist of
6.50%
Senior Notes due 2021,
6.125%
Senior Notes due 2022,
6.50%
Senior Notes due 2023,
5.0%
Senior Notes due 2024,
5.625%
Senior Notes due 2025, and
6.75%
Senior Notes due 2026 (collectively referred to as “Senior Notes”). The Senior Notes, net of unamortized deferred financing costs line on the accompanying balance sheets as of
March 31, 2017
,
and
December 31, 2016
,
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
As of December 31, 2016
|
|
Principal Amount
|
|
Unamortized Deferred Financing Costs
|
|
Senior Notes, Net of Unamortized Deferred Financing Costs
|
|
Principal Amount
|
|
Unamortized Deferred Financing Costs
|
|
Senior Notes, Net of Unamortized Deferred Financing Costs
|
|
(in thousands)
|
6.50% Senior Notes due 2021
(1) (2)
|
$
|
344,611
|
|
|
$
|
3,176
|
|
|
$
|
341,435
|
|
|
$
|
346,955
|
|
|
$
|
3,372
|
|
|
$
|
343,583
|
|
6.125% Senior Notes due 2022
(2)
|
561,796
|
|
|
6,684
|
|
|
555,112
|
|
|
561,796
|
|
|
6,979
|
|
|
554,817
|
|
6.50% Senior Notes due 2023
(2)
|
394,985
|
|
|
4,254
|
|
|
390,731
|
|
|
394,985
|
|
|
4,436
|
|
|
390,549
|
|
5.0% Senior Notes due 2024
|
500,000
|
|
|
6,302
|
|
|
493,698
|
|
|
500,000
|
|
|
6,533
|
|
|
493,467
|
|
5.625% Senior Notes due 2025
|
500,000
|
|
|
7,393
|
|
|
492,607
|
|
|
500,000
|
|
|
7,619
|
|
|
492,381
|
|
6.75% Senior Notes due 2026
|
500,000
|
|
|
7,869
|
|
|
492,131
|
|
|
500,000
|
|
|
8,078
|
|
|
491,922
|
|
Total
|
$
|
2,801,392
|
|
|
$
|
35,678
|
|
|
$
|
2,765,714
|
|
|
$
|
2,803,736
|
|
|
$
|
37,017
|
|
|
$
|
2,766,719
|
|
____________________________________________
|
|
(1)
|
During the first quarter of 2017, the Company repurchased a total of
$2.3 million
in aggregate principal amount of
6.50%
Senior Notes due 2021 in open market transactions at a slight premium. The Company canceled all of these repurchased Senior Notes upon cash settlement.
|
|
|
(2)
|
During the first quarter of 2016, the Company repurchased a total of
$46.3 million
in aggregate principal amount of certain of its Senior Notes in open market transactions for a settlement amount of
$29.9 million
, excluding interest, of which
$19.9 million
was paid during the three months ended March 31, 2016, with the remaining
$10.0 million
settlement amount being accrued at March 31, 2016, and paid in the second quarter of 2016. The Company recorded a net gain on extinguishment of debt of approximately
$15.7 million
for the three months ended March 31, 2016. This amount includes a gain of approximately
$16.4 million
associated with the discount realized upon repurchase, which was partially offset by approximately
$0.7 million
related to the acceleration of unamortized deferred financing costs. The Company canceled all of these repurchased Senior Notes upon cash settlement.
|
The Senior Notes are unsecured senior obligations and rank equal in right of payment with all of the Company’s existing and any future unsecured senior debt, and are senior in right of payment to any future subordinated debt. There are no subsidiary guarantors of the Senior Notes. The Company is subject to certain covenants under the indentures governing the Senior Notes and was in compliance with all covenants as of
March 31, 2017
, and through the filing of this report. The Company may redeem some or all of its Senior Notes prior to their maturity at redemption prices based on a premium, plus accrued and unpaid interest as described in the indentures governing the Senior Notes.
Senior Convertible Notes
On
August 12, 2016
, the Company issued
$172.5 million
in aggregate principal amount of
1.50%
Senior Convertible Notes due
July 1, 2021
(the “Senior Convertible Notes”). The Senior Convertible Notes are unsecured senior obligations and rank equal in right of payment with all of the Company’s existing and any future unsecured senior debt, and are senior in right of payment to any future subordinated debt.
The Senior Convertible Notes mature on
July 1, 2021
, unless earlier converted. Holders may convert their Senior Convertible Notes at their option at any time prior to January 1, 2021, only under certain circumstances as outlined in the indenture governing the Senior Convertible Notes and in
Note 5 – Long-Term Debt
to the Company’s consolidated financial statements in its 2016 Form 10-K. On or after January 1, 2021, until the maturity date, holders may convert their Senior Convertible Notes at any time. The Company may not redeem the Senior Convertible Notes prior to the maturity date. Upon conversion, the Senior Convertible Notes may be settled, at the Company’s election, in shares of the Company’s common stock, cash, or a combination of cash and common stock. Holders may convert their notes based on a conversion rate of
24.6914
shares of the Company’s common stock per
$1,000
principal amount of the Senior Convertible Notes, which is equal to an initial conversion price of approximately
$40.50
per share, subject to adjustment.
The Company has initially elected a net-settlement method to satisfy its conversion obligation. Under the net-settlement method, upon conversion, the Senior Convertible Notes will be settled, at the Company’s election, in shares of the Company’s common stock, cash, or a combination of cash and common stock. The Senior Convertible Notes were not convertible at the option of holders as of
March 31, 2017
, or through the filing of this report. Notwithstanding the inability to convert, the if-converted value of the Senior Convertible Notes as of
March 31, 2017
, did not exceed the principal amount.
At issuance, the Company recorded
$132.3 million
as the initial carrying amount of the debt component, which approximated its fair value at issuance, and was estimated by using an interest rate for nonconvertible debt with terms similar to the Senior Convertible Notes. The effective interest rate used was
7.25 percent
. The
$40.2 million
excess of the principal amount of the Senior Convertible Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount and debt-related issuance costs are amortized to the carrying value of the Senior Convertible Notes as interest expense through the maturity date of July 1, 2021. Interest expense recognized on the Senior Convertible Notes related to the stated interest rate and amortization of the debt discount totaled
$2.4 million
for the three months ended
March 31, 2017
.
The net carrying amount of the liability component of the Senior Convertible Notes, as reflected on the accompanying balance sheets as of
March 31, 2017
, and
December 31, 2016
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
As of December 31, 2016
|
|
(in thousands)
|
Principal amount of Senior Convertible Notes
|
$
|
172,500
|
|
|
$
|
172,500
|
|
Unamortized debt discount
|
(35,713
|
)
|
|
(37,513
|
)
|
Unamortized deferred financing costs
|
(3,898
|
)
|
|
(4,131
|
)
|
Net carrying amount
|
$
|
132,889
|
|
|
$
|
130,856
|
|
The Company is subject to certain covenants under the indenture governing the Senior Convertible Notes and was in compliance with all covenants as of
March 31, 2017
, and through the filing of this report.
Capped Call Transactions
In connection with the issuance of the Senior Convertible Notes, the Company entered into capped call transactions with affiliates of the underwriters of such issuance. The capped call transactions are generally expected to reduce the potential dilution upon conversion of the Senior Convertible Notes and/or partially offset any cash payments the Company is required to make in excess of the principal amount of converted Senior Convertible Notes in the event that the market price per share of the Company’s common stock is greater than the strike price of the capped call transactions, which initially corresponds to the approximate
$40.50
per share conversion price of the Senior Convertible Notes. The cap price of the capped call transactions is initially
$60.00
per share. If the market price per share exceeds the cap price of the capped call transactions, there could be dilution or there would not be an offset of such potential cash payments.
Note 6 - Commitments and Contingencies
Commitments
During the first quarter of 2017, the Company completed the divestiture of its outside-operated Eagle Ford shale assets. Upon closing of the sale, the Company is no longer subject to gathering, processing, and transportation throughput commitments totaling
514
Bcf of natural gas,
52
MMBbl of oil, and
13
MMBbl of NGLs, or
$501.9 million
of the potential undiscounted deficiency payments as of December 31, 2016.
As of
March 31, 2017
, the Company had total gathering, processing, and transportation throughput commitments with various third parties that require delivery of a minimum amount of
915
Bcf of natural gas,
17
MMBbl of crude oil, and
25
MMBbl of water through 2028. If the Company delivers no product, the aggregate undiscounted deficiency payments total approximately
$458.8 million
. As of the filing of this report, the Company does not expect to incur any material shortfalls with regard to its remaining gathering, processing, and transportation throughput commitments.
Additionally, the Company entered into drilling rig contracts during the first quarter of 2017, and subsequent to March 31, 2017. As of the filing of this report, the Company’s total drilling rig commitment was
$30.1 million
; however, if the Company terminated these rig contracts early, penalties of
$19.0 million
would be incurred instead.
There were no other material changes in commitments during the
first
quarter of
2017
. Please refer to
Note 6 - Commitments and Contingencies
in the Company’s
2016 Form 10-K
for additional discussion of the Company’s commitments.
Contingencies
The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the expected results of any pending litigation and claims will not have a material effect on the results of operations, the financial position, or the cash flows of the Company.
Note 7 - Compensation Plans
Performance Share Units Under the Equity Incentive Compensation Plan
The Company grants performance share units (“PSUs”) to eligible employees as part of its long-term equity compensation program. The number of shares of the Company’s common stock issued to settle PSUs ranges from
0%
to
200%
of the number of PSUs awarded and is determined based on certain performance criteria over a
three
-year measurement period. The performance criteria for PSUs are based on a combination of the Company’s annualized Total Shareholder Return (“TSR”) for the performance period and the relative performance of the Company’s TSR compared with the annualized TSR of certain peer companies for the performance period. For the
three
months ended
March 31, 2017
, and
2016
, total compensation expense recorded for PSUs was
$2.5 million
and
$2.9 million
, respectively, within general and administrative and exploration expense. As of
March 31, 2017
, there was
$14.2 million
of total unrecognized compensation expense related to unvested PSU awards, which is being amortized through
2019
. There have been no material changes to the outstanding and non-vested PSUs during the three months ended
March 31, 2017
.
Restricted Stock Units Under the Equity Incentive Compensation Plan
The Company grants restricted stock units (“RSUs”) as part of its long-term equity compensation program. Each RSU represents a right to receive
one
share of the Company’s common stock upon settlement of the award at the end of the specified vesting period. For the
three
months ended
March 31, 2017
, and
2016
, total compensation expense recorded for RSUs was
$2.5 million
and
$3.2 million
, respectively, within general and administrative expense and exploration expense. As of
March 31, 2017
, there was
$12.9 million
of total unrecognized compensation expense related to unvested RSU awards, which is being amortized through
2019
. There have been no material changes to the outstanding and non-vested RSUs during the three months ended
March 31, 2017
.
Note 8 - Pension Benefits
Pension Plans
The Company has a non-contributory defined benefit pension plan covering substantially all of its employees who joined the Company prior to January 1, 2015, and who meet age and service requirements (the “Qualified Pension Plan”). The Company also has a supplemental non-contributory pension plan covering certain management employees (the “Nonqualified Pension Plan” and together with the Qualified Pension Plan, the “Pension Plans”). The Company froze the Pension Plans to new participants, effective as of December 31, 2015. Employees participating in the Pension Plans as of December 31, 2015, continue to earn benefits.
Components of Net Periodic Benefit Cost for the Pension Plans
The following table presents the components of the net periodic benefit cost for the Pension Plans:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Service cost
|
$
|
2,050
|
|
|
$
|
1,987
|
|
Interest cost
|
727
|
|
|
624
|
|
Expected return on plan assets that reduces periodic pension cost
|
(559
|
)
|
|
(545
|
)
|
Amortization of prior service cost
|
4
|
|
|
4
|
|
Amortization of net actuarial loss
|
396
|
|
|
372
|
|
Net periodic benefit cost
|
$
|
2,618
|
|
|
$
|
2,442
|
|
Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of
10 percent
of the greater of the benefit obligation or the market-related value of assets are amortized over the average remaining service period of active participants.
Contributions
The Company contributed
$3.0 million
to the Qualified Pension Plan during the
three
months ended
March 31, 2017
.
Note 9 - Earnings Per Share
Basic net income or loss per common share is calculated by dividing net income or loss available to common stockholders by the basic weighted-average number of common shares outstanding for the respective period. Diluted net income or loss per common share is calculated by dividing adjusted net income or loss by the diluted weighted-average number of common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for this calculation consist of unvested RSUs, contingent PSUs, and shares into which the Senior Convertible Notes are convertible, which are measured using the treasury stock method.
PSUs represent the right to receive, upon settlement of the PSUs after the completion of the
three
-year performance period, a number of shares of the Company’s common stock that may range from
zero
to
two
times the number of PSUs granted on the award date. The number of potentially dilutive shares related to PSUs is based on the number of shares, if any, that would be issuable at the end of the respective reporting period, assuming that date was the end of the contingency period applicable to such PSUs.
On August 12, 2016, the Company issued
$172.5 million
in aggregate principal amount of Senior Convertible Notes due 2021. Upon conversion, the Senior Convertible Notes may be settled, at the Company’s election, in shares of the Company’s common stock, cash, or a combination of cash and common stock. The Company has initially elected a net-settlement method to satisfy its conversion obligation, which allows the Company to settle the principal amount of the Senior Convertible Notes in cash and to settle the excess conversion value in shares, as well as cash in lieu of fractional shares. However, the Company has not made this a formal legal irrevocable election and thereby reserves the right to settle the Senior Convertible Notes in any manner allowed under the indenture as business conditions warrant. Shares of the Company’s common stock traded at an average closing price below the
$40.50
conversion price for the three months ended
March 31, 2017
, and therefore, had no dilutive impact. In connection with the offering of the Senior Convertible Notes, the Company entered into capped call transactions with affiliates of the underwriters that would effectively prevent dilution upon settlement up to the
$60.00
cap price. The capped call transactions are not reflected in diluted net income per share, nor will they ever be, as they are anti-dilutive. Please refer to
Note 5 - Long-Term Debt
for additional discussion.
When the Company recognizes a loss from continuing operations, as was the case for
three
months ended
March 31, 2016
, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per common share.
The following table details the weighted-average dilutive and anti-dilutive securities for the periods presented:
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Dilutive
|
71
|
|
|
—
|
|
Anti-dilutive
|
—
|
|
|
49
|
|
The following table sets forth the calculations of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in thousands, except per share amounts)
|
Net income (loss)
|
$
|
74,434
|
|
|
$
|
(347,210
|
)
|
Basic weighted-average common shares outstanding
|
111,258
|
|
|
68,077
|
|
Add: dilutive effect of unvested RSUs and contingent PSUs
|
71
|
|
|
—
|
|
Add: dilutive effect of 1.50% Senior Convertible Notes
|
—
|
|
|
—
|
|
Diluted weighted-average common shares outstanding
|
111,329
|
|
|
68,077
|
|
Basic net income (loss) per common share
|
$
|
0.67
|
|
|
$
|
(5.10
|
)
|
Diluted net income (loss) per common share
|
$
|
0.67
|
|
|
$
|
(5.10
|
)
|
Note 10 - Derivative Financial Instruments
Summary of Oil, Gas, and NGL Derivative Contracts in Place
The Company has entered into various commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows. As of
March 31, 2017
, all derivative counterparties were members of the Company’s credit facility lender group and all contracts were entered into for other-than-trading purposes. The Company’s derivative contracts consist of swap and collar arrangements for oil, gas, and NGLs. In a typical commodity swap agreement, if the agreed upon published third-party index price (“index price”) is lower than the swap fixed price, the Company receives the difference between the index price and the agreed upon swap fixed price. If the index price is higher than the swap fixed price, the Company pays the difference. For collar arrangements, the Company receives the difference between an agreed upon index and the floor price if the index price is below the floor price. The Company pays the difference between the agreed upon ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and ceiling prices.
As of
March 31, 2017
, the Company had commodity derivative contracts outstanding as summarized in the tables below.
Oil Swaps
|
|
|
|
|
|
|
|
|
Contract Period
|
|
NYMEX WTI Volumes
|
|
Weighted-Average
Contract Price
|
|
|
(MBbls)
|
|
(per Bbl)
|
Second quarter 2017
|
|
1,444
|
|
|
$
|
46.44
|
|
Third quarter 2017
|
|
1,340
|
|
|
$
|
46.66
|
|
Fourth quarter 2017
|
|
1,254
|
|
|
$
|
46.35
|
|
Total
|
|
4,038
|
|
|
|
Oil Collars
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Period
|
|
NYMEX WTI
Volumes
|
|
Weighted-
Average Floor
Price
|
|
Weighted-
Average Ceiling
Price
|
|
|
(MBbls)
|
|
(per Bbl)
|
|
(per Bbl)
|
Second quarter 2017
|
|
636
|
|
|
$
|
45.00
|
|
|
$
|
54.10
|
|
Third quarter 2017
|
|
583
|
|
|
$
|
45.00
|
|
|
$
|
54.05
|
|
Fourth quarter 2017
|
|
540
|
|
|
$
|
45.00
|
|
|
$
|
54.01
|
|
2018
|
|
3,343
|
|
|
$
|
50.00
|
|
|
$
|
58.55
|
|
2019
|
|
2,660
|
|
|
$
|
50.00
|
|
|
$
|
59.31
|
|
Total
|
|
7,762
|
|
|
|
|
|
Oil Basis Swaps
|
|
|
|
|
|
|
|
|
Contract Period
|
|
Midland-Cushing Volumes
|
|
Weighted-Average
Contract Price
(1)
|
|
|
(MBbls)
|
|
(per Bbl)
|
2018
|
|
2,080
|
|
|
$
|
(1.27
|
)
|
2019
|
|
1,588
|
|
|
$
|
(1.45
|
)
|
Total
|
|
3,668
|
|
|
|
____________________________________________
|
|
(1)
|
Represents the price differential between WTI prices at Midland, Texas and WTI prices at Cushing, Oklahoma.
|
Natural Gas Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Period
|
|
Sold
Volumes
|
|
Weighted-Average
Contract Price
|
|
Purchased Volumes
(1)
|
|
Weighted- Average Contract Price
|
|
Net
Volumes
|
|
|
(BBtu)
|
|
(per MMBtu)
|
|
(BBtu)
|
|
(per MMBtu)
|
|
(BBtu)
|
Second quarter 2017
|
|
26,205
|
|
|
$
|
3.98
|
|
|
—
|
|
|
$
|
—
|
|
|
26,205
|
|
Third quarter 2017
|
|
23,657
|
|
|
$
|
4.01
|
|
|
—
|
|
|
$
|
—
|
|
|
23,657
|
|
Fourth quarter 2017
|
|
22,001
|
|
|
$
|
3.98
|
|
|
—
|
|
|
$
|
—
|
|
|
22,001
|
|
2018
|
|
75,778
|
|
|
$
|
3.54
|
|
|
(30,606
|
)
|
|
$
|
4.27
|
|
|
45,172
|
|
2019
|
|
32,016
|
|
|
$
|
4.02
|
|
|
(24,415
|
)
|
|
$
|
4.34
|
|
|
7,601
|
|
Total
(2)
|
|
179,657
|
|
|
|
|
(55,021
|
)
|
|
|
|
124,636
|
|
____________________________________________
|
|
(1)
|
During 2016, the Company restructured certain of its gas derivative contracts by buying fixed price volumes to offset existing 2018 and 2019 fixed price swap contracts totaling
55.0 million
MMBtu. The Company then entered into new 2017 fixed price swap contracts totaling
38.6 million
MMBtu with a contract price of
$4.43
per MMBtu. No other cash or other consideration was included as part of the restructuring.
|
|
|
(2)
|
Total net volumes of natural gas swaps are comprised of
IF El Paso Permian
(
2%
),
IF HSC
(
95%
), and
IF NNG Ventura
(
3%
).
|
NGL Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPIS Purity Ethane Mont Belvieu
|
|
OPIS Propane Mont Belvieu Non-TET
|
|
OPIS Normal Butane Mont Belvieu Non-TET
|
|
OPIS Isobutane Mont Belvieu Non-TET
|
|
OPIS Natural Gasoline Mont Belvieu Non-TET
|
Contract Period
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
|
(MBbls)
|
(per Bbl)
|
|
(MBbls)
|
(per Bbl)
|
|
(MBbls)
|
(per Bbl)
|
|
(MBbls)
|
(per Bbl)
|
|
(MBbls)
|
(per Bbl)
|
Second quarter 2017
|
|
787
|
|
$
|
8.86
|
|
|
634
|
|
$
|
21.90
|
|
|
182
|
|
$
|
32.53
|
|
|
157
|
|
$
|
33.38
|
|
|
249
|
|
$
|
48.47
|
|
Third quarter 2017
|
|
736
|
|
$
|
9.14
|
|
|
588
|
|
$
|
21.91
|
|
|
163
|
|
$
|
32.42
|
|
|
140
|
|
$
|
33.28
|
|
|
222
|
|
$
|
48.43
|
|
Fourth quarter 2017
|
|
692
|
|
$
|
9.10
|
|
|
550
|
|
$
|
21.91
|
|
|
149
|
|
$
|
32.34
|
|
|
128
|
|
$
|
33.23
|
|
|
203
|
|
$
|
48.41
|
|
2018
|
|
2,434
|
|
$
|
10.18
|
|
|
1,442
|
|
$
|
22.86
|
|
|
138
|
|
$
|
35.41
|
|
|
119
|
|
$
|
35.44
|
|
|
189
|
|
$
|
49.40
|
|
2019
|
|
2,176
|
|
$
|
11.95
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
2020
|
|
539
|
|
$
|
11.13
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Total
|
|
7,364
|
|
|
|
3,214
|
|
|
|
632
|
|
|
|
544
|
|
|
|
863
|
|
|
Summary of Oil, Gas, and NGL Derivative Contracts Entered Into Subsequent to
March 31, 2017
Subsequent to
March 31, 2017
, and through April 26, 2017, the Company entered into various derivative commodity contracts as summarized in the tables below.
Oil Collars
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Period
|
|
NYMEX WTI
Volumes
|
|
Weighted-
Average Floor
Price
|
|
Weighted-
Average Ceiling
Price
|
|
|
(MBbls)
|
|
(per Bbl)
|
|
(per Bbl)
|
Fourth quarter 2017
|
|
546
|
|
|
$
|
50.00
|
|
|
$
|
58.08
|
|
2018
|
|
1,687
|
|
|
$
|
50.00
|
|
|
$
|
57.12
|
|
2019
|
|
468
|
|
|
$
|
50.00
|
|
|
$
|
56.20
|
|
Total
|
|
2,701
|
|
|
|
|
|
Oil Basis Swaps
|
|
|
|
|
|
|
|
|
Contract Period
|
|
Midland-Cushing Volumes
|
|
Weighted-Average
Contract Price
(1)
|
|
|
(MBbls)
|
|
(per Bbl)
|
Third quarter 2017
|
|
566
|
|
|
$
|
(1.62
|
)
|
Fourth quarter 2017
|
|
1,403
|
|
|
$
|
(1.55
|
)
|
2018
|
|
3,584
|
|
|
$
|
(1.50
|
)
|
2019
|
|
2,375
|
|
|
$
|
(1.45
|
)
|
Total
|
|
7,928
|
|
|
|
____________________________________________
|
|
(1)
|
Represents the price differential between WTI prices at Midland, Texas and WTI prices at Cushing, Oklahoma.
|
Natural Gas Swaps
|
|
|
|
|
|
|
|
|
Contract Period
|
|
IF HSC
Volumes
|
|
Weighted-Average
Contract Price
|
|
|
(BBtu)
|
|
(per MMBtu)
|
2018
|
|
17,236
|
|
|
$
|
2.87
|
|
2019
|
|
9,378
|
|
|
$
|
2.88
|
|
Total
|
|
26,614
|
|
|
|
NGL Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPIS Purity Ethane Mont Belvieu
|
|
OPIS Propane Mont Belvieu Non-TET
|
|
OPIS Normal Butane Mont Belvieu Non-TET
|
|
OPIS Isobutane Mont Belvieu Non-TET
|
|
OPIS Natural Gasoline Mont Belvieu Non-TET
|
Contract Period
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
|
(MBbls)
|
(per Bbl)
|
|
(MBbls)
|
(per Bbl)
|
|
(MBbls)
|
(per Bbl)
|
|
(MBbls)
|
(per Bbl)
|
|
(MBbls)
|
(per Bbl)
|
Second quarter 2017
|
|
105
|
|
$
|
10.97
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Third quarter 2017
|
|
170
|
|
$
|
10.98
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Fourth quarter 2017
|
|
274
|
|
$
|
11.04
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
2018
|
|
1,157
|
|
$
|
12.23
|
|
|
345
|
|
$
|
26.04
|
|
|
87
|
|
$
|
31.71
|
|
|
69
|
|
$
|
30.35
|
|
|
116
|
|
$
|
47.36
|
|
Total
|
|
1,706
|
|
|
|
345
|
|
|
|
87
|
|
|
|
69
|
|
|
|
116
|
|
|
Derivative Assets and Liabilities Fair Value
The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities. The fair value of the commodity derivative contracts was a net asset of
$23.1 million
as of
March 31, 2017
, and a net liability of
$91.7 million
as of
December 31, 2016
.
The following tables detail the fair value of derivatives recorded in the accompanying balance sheets, by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Balance Sheet
Classification
|
|
Fair Value
|
|
Balance Sheet
Classification
|
|
Fair Value
|
|
(in thousands)
|
Commodity contracts
|
Current assets
|
|
$
|
73,978
|
|
|
Current liabilities
|
|
$
|
53,809
|
|
Commodity contracts
|
Noncurrent assets
|
|
84,195
|
|
|
Noncurrent liabilities
|
|
81,306
|
|
Derivatives not designated as hedging instruments
|
|
|
$
|
158,173
|
|
|
|
|
$
|
135,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Balance Sheet
Classification
|
|
Fair Value
|
|
Balance Sheet
Classification
|
|
Fair Value
|
|
(in thousands)
|
Commodity contracts
|
Current assets
|
|
$
|
54,521
|
|
|
Current liabilities
|
|
$
|
115,464
|
|
Commodity contracts
|
Noncurrent assets
|
|
67,575
|
|
|
Noncurrent liabilities
|
|
98,340
|
|
Derivatives not designated as hedging instruments
|
|
|
$
|
122,096
|
|
|
|
|
$
|
213,804
|
|
Offsetting of Derivative Assets and Liabilities
As of
March 31, 2017
, and
December 31, 2016
, all derivative instruments held by the Company were subject to master netting arrangements with various financial institutions. In general, the terms of the Company’s agreements provide for offsetting of amounts payable or receivable between it and the counterparty, at the election of both parties, for transactions that settle on the same date and in the same currency. The Company’s agreements also provide that in the event of an early termination, the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. The Company’s accounting policy is to not offset these positions in its accompanying balance sheets.
The following table provides a reconciliation between the gross assets and liabilities reflected on the accompanying balance sheets and the potential effects of master netting arrangements on the fair value of the Company’s derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
As of
|
|
As of
|
Offsetting of Derivative Assets and Liabilities
|
March 31, 2017
|
|
December 31, 2016
|
|
March 31, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Gross amounts presented in the accompanying balance sheets
|
$
|
158,173
|
|
|
$
|
122,096
|
|
|
$
|
(135,115
|
)
|
|
$
|
(213,804
|
)
|
Amounts not offset in the accompanying balance sheets
|
(88,952
|
)
|
|
(118,080
|
)
|
|
88,952
|
|
|
118,080
|
|
Net amounts
|
$
|
69,221
|
|
|
$
|
4,016
|
|
|
$
|
(46,163
|
)
|
|
$
|
(95,724
|
)
|
The following table summarizes the components of the net derivative gain presented in the accompanying statements of operations:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Derivative settlement (gain) loss:
|
|
|
|
Oil contracts
|
$
|
9,084
|
|
|
$
|
(99,992
|
)
|
Gas contracts
|
(17,506
|
)
|
|
(41,053
|
)
|
NGL contracts
|
8,415
|
|
|
(5,983
|
)
|
Total derivative settlement gain
|
$
|
(7
|
)
|
|
$
|
(147,028
|
)
|
|
|
|
|
Total net derivative (gain) loss:
|
|
|
|
Oil contracts
|
$
|
(49,590
|
)
|
|
$
|
(10,432
|
)
|
Gas contracts
|
(44,468
|
)
|
|
(24,023
|
)
|
NGL contracts
|
(20,716
|
)
|
|
20,227
|
|
Total net derivative gain
|
$
|
(114,774
|
)
|
|
$
|
(14,228
|
)
|
Credit Related Contingent Features
As of
March 31, 2017
, and through the filing of this report, all of the Company’s derivative counterparties were members of the Company’s credit facility lender group. Under the Credit Agreement and derivative contracts, the Company is required to secure mortgages on assets having a value equal to at least
90 percent
of the total PV-9 of the Company’s proved oil and gas properties evaluated in the most recent reserve report.
Note 11 - Fair Value Measurements
The Company follows fair value measurement accounting guidance for all assets and liabilities measured at fair value. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The fair value hierarchy for grouping these assets and liabilities is based on the significance level of the following inputs:
|
|
•
|
Level 1 – quoted prices in active markets for identical assets or liabilities
|
|
|
•
|
Level 2 – quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable
|
|
|
•
|
Level 3 – significant inputs to the valuation model are unobservable
|
The following table summarizes the Company’s assets and liabilities that are measured at fair value in the accompanying balance sheets and where they are classified within the fair value hierarchy as of
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
Derivatives
(1)
|
$
|
—
|
|
|
$
|
158,173
|
|
|
$
|
—
|
|
Total property and equipment, net
(2)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
443,772
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives
(1)
|
$
|
—
|
|
|
$
|
135,115
|
|
|
$
|
—
|
|
____________________________________________
|
|
(1)
|
This represents a financial asset or liability that is measured at fair value on a recurring basis.
|
|
|
(2)
|
This represents a non-financial asset that is measured at fair value on a nonrecurring basis.
|
The following table summarizes the Company’s assets and liabilities that are measured at fair value in the accompanying balance sheets and where they were classified within the fair value hierarchy as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
Derivatives
(1)
|
$
|
—
|
|
|
$
|
122,096
|
|
|
$
|
—
|
|
Total property and equipment, net
(2)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
88,205
|
|
Liabilities:
|
|
|
|
|
|
Derivatives
(1)
|
$
|
—
|
|
|
$
|
213,804
|
|
|
$
|
—
|
|
____________________________________________
|
|
(1)
|
This represents a financial asset or liability that is measured at fair value on a recurring basis.
|
|
|
(2)
|
This represents a non-financial asset that is measured at fair value on a nonrecurring basis.
|
Both financial and non-financial assets and liabilities are categorized within the above fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used by the Company as well as the general classification of such instruments pursuant to the above fair value hierarchy.
Derivatives
The Company uses Level 2 inputs to measure the fair value of oil, gas, and NGL commodity derivatives. Fair values are based upon interpolated data. The Company derives internal valuation estimates taking into consideration forward commodity price curves, counterparties’ credit ratings, the Company’s credit rating, and the time value of money. These valuations are then compared to the respective counterparties’ mark-to-market statements. The considered factors result in an estimated exit-price that management believes provides a reasonable and consistent methodology for valuing derivative instruments. The derivative instruments utilized by the Company are not considered by management to be complex, structured, or illiquid. The oil, gas, and NGL commodity derivative markets are highly active.
Generally, market quotes assume that all counterparties have near zero, or low, default rates and have equal credit quality. However, an adjustment may be necessary to reflect the credit quality of a specific counterparty to determine the fair value of the instrument. The Company monitors the credit ratings of its counterparties and may require counterparties to post collateral if their ratings deteriorate. In some instances, the Company will attempt to novate the trade to a more stable counterparty. All of the Company’s derivative counterparties are members of the Company’s credit facility lender group.
Valuation adjustments are necessary to reflect the effect of the Company’s credit quality on the fair value of any derivative liability position. This adjustment takes into account any credit enhancements, such as collateral margin that the Company may have posted with a counterparty, as well as any letters of credit between the parties. The methodology to determine this adjustment is consistent with how the Company evaluates counterparty credit risk, taking into account the Company’s credit rating, current credit facility margins, and any change in such margins since the last measurement date.
The methods described above may result in a fair value estimate that may not be indicative of net realizable value or may not be reflective of future fair values and cash flows. While the Company believes that the valuation methods utilized are appropriate and consistent with authoritative accounting guidance and with other marketplace participants, the Company recognizes that third parties may use different methodologies or assumptions to determine the fair value of certain financial instruments that could result in a different estimate of fair value at the reporting date.
Refer to
Note 10 - Derivative Financial Instruments
for more information regarding the Company’s derivative instruments.
Proved and Unproved Oil and Gas Properties and Other Property and Equipment
Property and equipment, net measured at fair value within the accompanying balance sheets totaled
$443.8 million
as of
March 31, 2017
, and related to assets held for sale as further discussed below. Property and equipment, net measured at fair value totaled
$88.2 million
as of
December 31, 2016
, and related primarily to downward performance reserve revisions on the Company’s Powder River Basin assets at year-end.
Proved oil and gas properties.
Proved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication the carrying costs may not be recoverable. The Company uses Level 3 inputs and the income valuation technique, which converts future amounts to a single present value amount, to measure the fair value of proved properties through an application of discount rates and price forecasts representative of the current operating environment, as selected by the Company’s management. The calculation of the discount rates are based on the best information available and the rates used ranged from
10 percent
to
15 percent
based on the reservoir specific weightings of future estimated proved and unproved cash flows as of
March 31, 2017
, and
December 31, 2016
. The Company believes the discount rates are representative of current market conditions and consider estimates of future cash payments, reserve categories, expectations of possible variations in the amount and/or timing of cash flows, the risk premium, and nonperformance risk. The prices for oil and gas are forecast based on NYMEX strip pricing, adjusted for basis differentials, for the first
five
years, after which a flat terminal price is used for each commodity stream. The prices for NGLs are forecast using OPIS Mont Belvieu pricing, for as long as the market is actively trading, after which a flat terminal price is used. Future operating costs are also adjusted as deemed appropriate for these estimates. There were
no
impairments on proved properties during the
three
months ended
March 31, 2017
. For the three months ended March 31, 2016, the Company recorded
$269.8 million
of proved property impairments related primarily to the Company’s outside-operated Eagle Ford shale assets and the decline in expected reserve cash flows driven by commodity price declines during the first quarter of 2016.
Unproved oil and gas properties.
Unproved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs may not be recoverable. To measure the fair value of unproved properties, the Company uses a market approach, which takes into account the following significant assumptions: remaining lease terms, future development plans, risk weighted potential resource recovery, estimated reserve values, and estimated acreage value based on price(s) received for similar, recent acreage transactions by the Company or other market participants. There were
no
material abandonments or impairments of unproved properties during the three months ended
March 31, 2017
, or 2016.
Oil and gas properties held for sale.
Proved and unproved properties and other property and equipment classified as held for sale, including the corresponding asset retirement obligation liability, are valued using a market approach based on an estimated net selling price, as evidenced by the most current bid prices received from third parties, if available, or by recent, comparable market transactions. If an estimated selling price is not available, the Company utilizes the various income valuation techniques discussed above. Any initial write-down and subsequent changes to the fair value less estimated cost to sell is included within the
net gain (loss) on divestiture activity
line item in the accompanying statements of operations. For the three months ended March 31, 2017, write-downs to fair value less estimated costs to sell on the Divide County assets held for sale totaled
$359.6 million
. For the three months ended March 31, 2016, write-downs to fair value less estimated costs to sell on certain assets held for sale totaled
$68.3 million
. Certain of these assets were subsequently sold in the third quarter of 2016 for a small net gain due to successful marketing efforts. Please refer to
Note 3 – Divestitures, Assets Held for Sale, and Acquisitions
for additional discussion
.
Long-Term Debt
The following table reflects the fair value of the Senior Notes and Senior Convertible Notes measured using Level 1 inputs based on quoted secondary market trading prices. These notes were not presented at fair value on the accompanying balance sheets as of
March 31, 2017
, or
December 31, 2016
, as they were recorded at carrying value, net of any unamortized discounts and deferred financing costs. Please refer to
Note 5 - Long-Term Debt
for additional discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
As of December 31, 2016
|
|
Principal Amount
|
|
Fair Value
|
|
Principal Amount
|
|
Fair Value
|
|
(in thousands)
|
6.50% Senior Notes due 2021
|
$
|
344,611
|
|
|
$
|
353,657
|
|
|
$
|
346,955
|
|
|
$
|
354,546
|
|
6.125% Senior Notes due 2022
|
$
|
561,796
|
|
|
$
|
572,330
|
|
|
$
|
561,796
|
|
|
$
|
570,925
|
|
6.50% Senior Notes due 2023
|
$
|
394,985
|
|
|
$
|
403,378
|
|
|
$
|
394,985
|
|
|
$
|
403,134
|
|
5.0% Senior Notes due 2024
|
$
|
500,000
|
|
|
$
|
472,500
|
|
|
$
|
500,000
|
|
|
$
|
475,975
|
|
5.625% Senior Notes due 2025
|
$
|
500,000
|
|
|
$
|
479,550
|
|
|
$
|
500,000
|
|
|
$
|
485,000
|
|
6.75% Senior Notes due 2026
|
$
|
500,000
|
|
|
$
|
503,750
|
|
|
$
|
500,000
|
|
|
$
|
516,565
|
|
1.50% Senior Convertible Notes due 2021
|
$
|
172,500
|
|
|
$
|
171,355
|
|
|
$
|
172,500
|
|
|
$
|
202,189
|
|
The carrying value of the Company’s credit facility approximates its fair value, as the applicable interest rates are floating and based on prevailing market rates.