PARSLEY ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net income (loss)
|
$
|
38,290
|
|
|
$
|
(25,691
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
Depreciation, depletion and amortization
|
68,970
|
|
|
49,384
|
|
Accretion of asset retirement obligations
|
136
|
|
|
170
|
|
Gain on sale of property
|
—
|
|
|
(350
|
)
|
Loss on early extinguishment of debt
|
3,891
|
|
|
—
|
|
Amortization and write off of deferred loan origination costs
|
783
|
|
|
588
|
|
Amortization of bond premium
|
(129
|
)
|
|
(191
|
)
|
Stock-based compensation
|
4,209
|
|
|
2,759
|
|
Deferred income tax expense (benefit)
|
18,402
|
|
|
(9,568
|
)
|
Change in TRA liability
|
20,549
|
|
|
—
|
|
Gain on derivatives
|
(24,616
|
)
|
|
(2,088
|
)
|
Net cash (paid) received for derivative settlements
|
(1,188
|
)
|
|
21,988
|
|
Net cash paid for option premiums
|
(16,291
|
)
|
|
(488
|
)
|
Net premiums received on options that settled during the period
|
4,854
|
|
|
10,414
|
|
Other
|
118
|
|
|
82
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
Restricted cash
|
(239
|
)
|
|
(468
|
)
|
Accounts receivable
|
(7,025
|
)
|
|
(14,383
|
)
|
Accounts receivable—related parties
|
103
|
|
|
(857
|
)
|
Other current assets
|
(95,168
|
)
|
|
(14,108
|
)
|
Other noncurrent assets
|
(902
|
)
|
|
347
|
|
Accounts payable and accrued expenses
|
17,676
|
|
|
3,889
|
|
Revenue and severance taxes payable
|
9,363
|
|
|
(1,524
|
)
|
Net cash provided by operating activities
|
41,786
|
|
|
19,905
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Development of oil and natural gas properties
|
(161,003
|
)
|
|
(122,623
|
)
|
Acquisitions of oil and natural gas properties
|
(589,286
|
)
|
|
(208,832
|
)
|
Additions to other property and equipment
|
(10,628
|
)
|
|
(3,004
|
)
|
Net cash used in investing activities
|
(760,917
|
)
|
|
(334,459
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Borrowings under long-term debt
|
451,500
|
|
|
—
|
|
Payments on long-term debt
|
(66,328
|
)
|
|
(236
|
)
|
Debt issuance costs
|
(6,280
|
)
|
|
(1
|
)
|
Proceeds from issuance of common stock, net
|
2,123,486
|
|
|
36
|
|
Repurchase of common stock
|
(112
|
)
|
|
(19
|
)
|
Net cash provided by (used in) financing activities
|
2,502,266
|
|
|
(220
|
)
|
Net increase (decrease) in cash and cash equivalents
|
1,783,135
|
|
|
(314,774
|
)
|
Cash and cash equivalents at beginning of period
|
133,379
|
|
|
343,084
|
|
Cash and cash equivalents at end of period
|
$
|
1,916,514
|
|
|
$
|
28,310
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
Cash paid for interest
|
$
|
2,463
|
|
|
$
|
21,211
|
|
Cash paid for income taxes
|
$
|
200
|
|
|
$
|
315
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
|
|
|
|
Asset retirement obligations incurred, including changes in estimate
|
$
|
3,501
|
|
|
$
|
675
|
|
Additions (reductions) to oil and natural gas properties - change in capital accruals
|
$
|
27,463
|
|
|
$
|
(12,254
|
)
|
Additions to other property and equipment funded by capital lease borrowings
|
$
|
881
|
|
|
$
|
84
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS
Parsley Energy, Inc. (either individually or together with its subsidiaries, as the context requires, the "Company") was formed on December 11, 2013, pursuant to the laws of the State of Delaware, and is engaged in the acquisition and development of unconventional oil and natural gas reserves located in the Permian Basin, which is located in West Texas and Southeastern New Mexico.
Public Offerings of Common Stock
On January 10, 2017, the Company entered into an underwriting agreement to sell
25,300,000
shares of Class A Common Stock, par value
$0.01
per share ("Class A Common Stock") (including
3,300,000
shares issued pursuant to the underwriters’ option to purchase additional shares), at a price of
$35.00
per share in an underwritten public offering (the "January Offering"). The January Offering closed on
January 17, 2017
and resulted in gross proceeds to the Company of approximately
$885.5 million
and net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, of approximately
$863.0 million
.
On February 7, 2017, the Company entered into an underwriting agreement to sell
41,400,000
shares of Class A Common Stock (including
5,400,000
shares issued pursuant to the underwriters’ option to purchase additional shares) at a price of
$31.00
per share in an underwritten public offering (the "February Offering"). The February Offering closed on
February 13, 2017
and resulted in gross proceeds to the Company of approximately
$1,283.4 million
and net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, of approximately
$1,260.5 million
. As discussed in
Note 15—Subsequent Events
, a portion of the proceeds from the February Offering was used to partially fund the cash portion of the Double Eagle Acquisition (defined herein).
Private Placement of Senior Notes
Concurrently with the closing of the February Offering, on February 13, 2017, Parsley Energy LLC ("Parsley LLC") and Parsley Finance Corp. ("Finance Corp.") issued
$450.0 million
aggregate principal amount of
5.250%
senior unsecured notes due 2025 (the "New 2025 Notes") in an offering that was exempt from registration under the Securities Act (the "New 2025 Notes Offering"). The New 2025 Notes Offering resulted in gross proceeds to the Company of
$450.0 million
and net proceeds to the Company, after deducting initial purchaser discounts and commissions and offering expenses, of approximately
$443.8 million
. As discussed in
Note 15—Subsequent Events
, a portion of the proceeds from the New 2025 Notes Offering was used to partially fund the cash portion of the Double Eagle Acquisition (defined herein).
NOTE 2. BASIS OF PRESENTATION
These condensed consolidated financial statements include the accounts of Parsley Energy, Inc., its majority-owned subsidiary, Parsley LLC, and the direct and indirect wholly owned subsidiaries of Parsley LLC: (i) Parsley Energy, L.P. ("Parsley LP"), (ii) as applicable, Parsley Energy Management, LLC ("PEM"), a wholly owned subsidiary of Parsley LLC until its merger with Operations (as defined below) on October 7, 2016, and following such merger, Parsley GP, LLC, a wholly owned subsidiary of Operations and the general partner of Parsley LP, (iii) Parsley Energy Operations, LLC ("Operations"), (iv) Finance Corp., (v) Parsley Energy Aviation, LLC, a wholly owned subsidiary of Operations, and (vi) Parsley Minerals, LLC, a wholly owned subsidiary of Parsley LP. Operations also owns a
63.0%
interest in Pacesetter Drilling, LLC ("Pacesetter"). The Company includes the accounts of Pacesetter in its condensed consolidated financial statements. Parsley LP owns a
42.5%
noncontrolling interest in Spraberry Production Services, LLC ("SPS"). The Company accounts for its investment in SPS using the equity method of accounting. All significant intercompany and intra-company balances and transactions have been eliminated.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted in this Quarterly Report, as permitted by SEC rules and regulations. We believe the disclosures made in this Quarterly Report are adequate to make the information herein not misleading. We recommend that these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto included in the Annual Report.
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim period. The results of operations for the
three
months ended
March 31, 2017
are not necessarily indicative of the operating results of the entire fiscal year ending
December 31, 2017
.
Use of Estimates
These condensed consolidated financial statements and related notes are presented in accordance with GAAP. Preparation in accordance with GAAP requires us to (i) adopt accounting policies within accounting rules set by the Financial Accounting Standards Board ("FASB") and by the SEC and (ii) make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our management believes the major estimates and assumptions impacting our condensed consolidated financial statements are the following:
|
|
•
|
estimates of proved reserves of oil and natural gas, which affect the calculations of depletion, depreciation and amortization ("DD&A") and impairment of capitalized costs of oil and natural gas properties;
|
|
|
•
|
estimates of asset retirement obligations;
|
|
|
•
|
estimates of the fair value of oil and natural gas properties we own, particularly properties that we have not yet explored, or fully explored, by drilling and completing wells;
|
|
|
•
|
impairment of undeveloped properties and other assets;
|
|
|
•
|
depreciation of property and equipment; and
|
|
|
•
|
valuation of commodity derivative instruments.
|
Actual results may differ from estimates and assumptions of future events and these revisions could be material. Future production may vary materially from estimated oil and natural gas proved reserves. Actual future prices may vary significantly from price assumptions used for determining proved reserves and for financial reporting.
Significant Accounting Policies
For a complete description of the Company’s significant accounting policies, see
Note 2—Summary of Significant Accounting Policies
in the Annual Report.
Cash and Cash Equivalents
The Company considers all cash on hand, depository accounts held by banks, money market accounts, commercial paper and investments with an original maturity of three months or less to be cash equivalents. The Company’s cash and cash equivalents are held in financial institutions in amounts that exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers
, which supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") Topic 605,
Revenue Recognition
, and most industry-specific guidance. ASU 2014-09 provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. In addition, new qualitative and quantitative disclosure requirements aim to enable financial statement users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for one year to fiscal years beginning after December 15, 2017. Early adoption is permitted for fiscal years beginning after December 15, 2016. In May 2016, the FASB issued ASU 2016-11, which rescinds guidance from the SEC on accounting for gas balancing arrangements and will eliminate the use of the entitlements method. Entities have the option of using either a full retrospective or modified approach to adopt the new standards. The Company has selected the modified retrospective approach for transition and plans to implement the new guidance on January 1, 2018. The amended guidance is not expected to materially affect the Company's condensed consolidated financial statements or notes to the condensed consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments—Overall
, which addresses the fair value measurements, impairment assessment and disclosure requirements of equity securities, equity investments and other financial instruments and also clarifies current guidance to aid in the reduction of diversity in practice. For public business entities, the amended guidance is effective for fiscal years beginning after December 15, 2017 and for interim periods within those years. The amended guidance should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively. The Company has not yet determined the effect of the standard on its ongoing financial reporting.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which modifies lessees’ recognition of lease assets and lease liabilities for those leases classified as operating leases under previous GAAP. The amended guidance will be effective for the Company for annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the effect that ASU 2016-02 will have on its condensed consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230)
, which provides guidance on eight specific cash flow issues, including cash payments associated with debt and debt modification, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and corporate-owned life insurance policies, distributions made from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. The amended guidance will be effective for the Company for annual periods beginning after December 15, 2017. The amendments should be applied using a retrospective transition method to each period presented. Early adoption is permitted for any entity in any interim or annual period. The Company is evaluating the ASU and has not determined the effect of the standard on its ongoing financial reporting.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740)
, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU also eliminates the exception for an intra-entity transfer of an asset other than inventory. The amended guidance does not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes. The amended guidance will be effective for the Company for annual periods beginning after December 15, 2017. The amendments should be applied using a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted for any entity as of the beginning of an annual reporting period for which financial statements have not been issued or been made available for issuance. The Company is evaluating the ASU and has not yet determined the effect of the standard on its ongoing financial reporting.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230)
, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The amounts generally described as restricted cash and restricted cash
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The amended guidance will be effective for the Company for annual periods beginning after December 15, 2017. The amendments should be applied using a retrospective transition method to each period presented. Early adoption is permitted for any entity in any interim or annual period. The Company is evaluating the ASU and has not yet determined the effect of the standard on its ongoing financial reporting.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805)
, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this ASU provide a screen to determine when a set is not a business, which requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not considered a business. This reduces the number of transactions that require further evaluation. Further, this ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present as well as narrows the definition of the term output so that the term is consistent with how outputs are described in Topic 606. The amended guidance will be effective for the Company for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments should be applied prospectively on or after their effective date and no disclosures are required at transition. Early adoption is for transactions for which the acquisition date or disposal date occurs before the issuance date or effective date of the amendment, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The Company is evaluating the ASU and has not yet determined the effect of the standard on its ongoing financial reporting.
NOTE 3. DERIVATIVE FINANCIAL INSTRUMENTS
Commodity Derivative Instruments and Concentration of Risk
Objective and Strategy
The Company utilizes put spread options, three-way collars and basis swap contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects.
Oil Production Derivative Activities
All material physical sales contracts governing the Company's oil production are tied directly to, or are highly correlated with, NYMEX WTI oil prices. The Company uses put spread options and three-way collars to manage oil price volatility and basis swap contracts to reduce basis risk between NYMEX prices and the actual index prices at which the oil is sold.
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table sets forth the volumes associated with the Company's outstanding oil derivative contracts expiring during the periods indicated and the weighted average oil prices for those contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Options
|
Nine Months Ending December 31, 2017
|
|
Year Ending
December 31, 2018
|
|
Year Ending
December 31, 2019
|
Put spreads
|
|
|
|
|
|
Purchased:
|
|
|
|
|
|
Puts
(1)
|
|
|
|
|
|
Notional (MBbl)
|
8,406
|
|
|
9,000
|
|
|
—
|
|
Weighted average strike price
|
$
|
52.78
|
|
|
$
|
51.25
|
|
|
$
|
—
|
|
Sold:
|
|
|
|
|
|
Puts
(1)
|
|
|
|
|
|
Notional (MBbl)
|
(8,406
|
)
|
|
(9,000
|
)
|
|
—
|
|
Weighted average strike price
|
$
|
41.46
|
|
|
$
|
40.83
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Three-way collars
|
|
|
|
|
|
Purchased:
|
|
|
|
|
|
Puts
|
—
|
|
|
8,700
|
|
|
3,000
|
|
Notional (MBbl)
|
$
|
—
|
|
|
$
|
50.00
|
|
|
$
|
50.00
|
|
Weighted average strike price
|
|
|
|
|
|
Sold:
|
|
|
|
|
|
Puts
|
—
|
|
|
(8,700
|
)
|
|
(3,000
|
)
|
Notional (MBbl)
|
$
|
—
|
|
|
$
|
40.00
|
|
|
$
|
40.00
|
|
Weighted average strike price
|
|
|
|
|
|
Calls
|
—
|
|
|
(8,700
|
)
|
|
(3,000
|
)
|
Notional (MBbl)
|
$
|
—
|
|
|
$
|
75.40
|
|
|
$
|
80.40
|
|
Weighted average strike price
|
|
|
|
|
|
|
|
|
|
|
|
Basis swap contracts
(2)
|
|
|
|
|
|
Midland-Cushing index swap volume (MBbl)
|
3,270
|
|
|
360
|
|
|
—
|
|
Price differential ($/Bbl)
|
$
|
(1.03
|
)
|
|
$
|
(0.95
|
)
|
|
$
|
—
|
|
|
|
|
(1)
|
Excludes 4,452 notional MBbls with a fair value of $8.6 million related to amounts recognized under master netting agreements with derivative counterparties.
|
(2)
|
Represents swaps that fix the basis differentials between the index prices at which the Company sells its oil produced in the Permian Basin and the Cushing WTI price.
|
Natural Gas Production Derivative Activities
All material physical sales contracts governing the Company's natural gas production are tied directly or indirectly to NYMEX Henry Hub natural gas prices or regional index prices where the natural gas is sold. The Company uses three-way collars to manage natural gas price volatility.
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table sets forth the volumes associated with the Company's outstanding natural gas derivative contracts expiring during the period indicated and the weighted average natural gas prices for those contracts:
|
|
|
|
|
|
Natural Gas Three-Way Collars
|
|
Nine Months Ending December 31, 2017
|
Purchased:
|
|
|
Puts
|
|
|
Notional (MMbtu)
|
|
4,275
|
|
Weighted average strike price
|
|
$
|
2.75
|
|
Sold:
|
|
|
Puts
|
|
|
Notional (MMbtu)
|
|
(4.275
|
)
|
Weighted average strike price
|
|
$
|
2.36
|
|
Calls
|
|
|
Notional (MMbtu)
|
|
(4.275
|
)
|
Weighted Average Strike Price
|
|
$
|
4.02
|
|
Effect of Derivative Instruments on the Condensed Consolidated Financial Statements
All of the Company’s derivatives are accounted for as non-hedge derivatives and therefore all changes in the fair values of its derivative contracts are recognized as gains or losses in the earnings of the periods in which they occur. The Company recognized gains from its derivative positions of
$24.6 million
and
$2.1 million
for the
three
months ended
March 31, 2017
and
2016
, respectively. These gains are included in the condensed consolidated statements of operations line item,
Gain on derivatives
.
The fair value of the derivative instruments is discussed in
Note 14—Disclosures about Fair Value of Financial Instruments.
The Company classifies the fair value amounts of derivative assets and liabilities as gross current or noncurrent derivative assets or gross current or noncurrent derivative liabilities, whichever the case may be, excluding those amounts netted under master netting agreements. The Company has agreements in place with all of its counterparties that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, the Company maintains accounts with its brokers to facilitate financial derivative transactions in support of its risk management activities. Based on the value of the Company’s positions in these accounts and the associated margin requirements, the Company may be required to deposit cash into these broker accounts. During the
three
months ended
March 31, 2017
and
2016
, the Company did not receive or post any margins in connection with collateralizing its derivative positions.
The following table presents the Company’s net exposure from its offsetting derivative asset and liability positions, as well as cash collateral on deposit with the brokers as of the reporting dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount
|
|
Netting
Adjustments
|
|
Net
Exposure
|
March 31, 2017
|
|
|
|
|
|
Derivative assets with right of offset or
master netting agreements
|
$
|
183,488
|
|
|
$
|
(8,650
|
)
|
|
$
|
174,838
|
|
Derivative liabilities with right of offset or
master netting agreements
|
(143,989
|
)
|
|
8,650
|
|
|
(135,339
|
)
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
Derivative assets with right of offset or
master netting agreements
|
$
|
66,417
|
|
|
$
|
(10,293
|
)
|
|
$
|
56,124
|
|
Derivative liabilities with right of offset or
master netting agreements
|
(67,261
|
)
|
|
10,293
|
|
|
(56,968
|
)
|
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Concentration of Credit Risk
The financial integrity of the Company’s exchange-traded contracts is assured by NYMEX through financial safeguards and transaction guarantees, and is therefore subject to nominal credit risk. Over-the-counter traded options expose the Company to counterparty credit risk. These over-the-counter options are entered into with a large multinational financial institution with an investment grade credit rating or through brokers that require all the transaction parties to collateralize their open option positions. The gross and net credit exposure from our commodity derivative contracts as of
March 31, 2017
and
December 31, 2016
is summarized in the preceding table.
The Company monitors the creditworthiness of its counterparties, establishes credit limits according to the Company’s credit policies and guidelines and assesses the impact on fair values of its counterparties’ creditworthiness. The Company typically enters into International Swap Dealers Association Master Agreements ("ISDA Agreements") with its derivative counterparties. The terms of the ISDA Agreements provide the Company and its counterparties and brokers with rights of net settlement of gross commodity derivative assets against gross commodity derivative liabilities. The Company routinely exercises its contractual right to offset realized gains against realized losses when settling with derivative counterparties. The Company did not incur any losses due to counterparty bankruptcy filings during the
three
months ended
March 31, 2017
or the year ended
December 31, 2016
.
Credit Risk Related Contingent Features in Derivatives
Certain commodity derivative instruments contain provisions that require the Company to either post additional collateral or immediately settle any outstanding liability balances upon the occurrence of a specified credit risk related event. These events, which are defined by the existing commodity derivative contracts, are primarily downgrades in the credit ratings of the Company and its affiliates. None of the Company’s commodity derivative instruments were in a net liability position with respect to any individual counterparty at
March 31, 2017
or
December 31, 2016
.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Oil and natural gas properties:
|
|
|
|
Subject to depletion
|
$
|
2,713,122
|
|
|
$
|
2,376,712
|
|
Not subject to depletion
|
|
|
|
Incurred in 2017
|
566,364
|
|
|
—
|
|
Incurred in 2016
|
1,150,750
|
|
|
1,215,920
|
|
Incurred in 2015 and prior
|
414,435
|
|
|
470,785
|
|
Total not subject to depletion
|
2,131,549
|
|
|
1,686,705
|
|
Oil and natural gas properties, successful efforts method
|
4,844,671
|
|
|
4,063,417
|
|
Less accumulated depreciation, depletion and impairment
|
(573,099
|
)
|
|
(506,175
|
)
|
Total oil and natural gas properties, net
|
4,271,572
|
|
|
3,557,242
|
|
Other property, plant and equipment
|
84,485
|
|
|
73,382
|
|
Less accumulated depreciation
|
(15,932
|
)
|
|
(14,064
|
)
|
Other property, plant and equipment, net
|
68,553
|
|
|
59,318
|
|
Total property, plant and equipment, net
|
$
|
4,340,125
|
|
|
$
|
3,616,560
|
|
Costs subject to depletion are proved costs and costs not subject to depletion are unproved costs and current drilling projects. At
March 31, 2017
and
December 31, 2016
, the Company had excluded
$2,131.5 million
and
$1,686.7 million
, respectively, of capitalized costs from depletion.
As the Company’s exploration and development work progresses and the reserves on the Company’s properties are proven, capitalized costs attributed to the properties are subject to DD&A. Depletion of capitalized costs is provided using the
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
units-of-production method based on proved oil and natural gas reserves related to the associated reservoir. Depletion expense on capitalized oil and natural gas properties was
$66.7 million
and
$47.9 million
for the
three
months ended
March 31, 2017
and
2016
, respectively. The Company had
no
exploratory wells in progress at
March 31, 2017
or
December 31, 2016
.
NOTE 5. ACQUISITIONS OF OIL AND NATURAL GAS PROPERTIES
During the
three
months ended
March 31, 2017
, the Company incurred costs of
$35.5 million
related to the acquisition of leasehold acreage. The Company reflected the acquisition costs as part of costs not subject to depletion within its oil and natural gas properties for the
three
months ended
March 31, 2017
.
In addition, during the
three
months ended
March 31, 2017
, the Company acquired certain oil and natural gas properties as described below. These acquisitions were accounted for using the acquisition method under ASC Topic 805, "
Business Combinations,
" which requires the acquired assets and liabilities to be recorded at fair values as of the respective acquisition dates.
During the
three
months ended
March 31, 2017
, the Company acquired, from unaffiliated individuals and entities, interests in certain oil and natural gas properties through a number of separate, individually negotiated transactions for total cash consideration of
$553.8 million
. The Company reflected
$97.4 million
of the total consideration paid as part of its cost subject to depletion within its oil and natural gas properties and
$456.4 million
as unproved leasehold costs within its oil and natural gas properties for the three months ended
March 31, 2017
. The revenues and operating expenses attributable to these acquisitions during the
three
months ended
March 31, 2017
were not material.
During the three months ended
March 31, 2017
, the Company also exchanged certain unproved acreage and oil and natural gas properties with an unrelated third party, with no gain or loss recognized.
NOTE 6. ASSET RETIREMENT OBLIGATIONS
Asset retirement obligations relate to future plugging and abandonment expenses on oil and natural gas properties and related facilities disposal.
The following table summarizes the changes in the Company’s asset retirement obligations for the
three
months ended
March 31, 2017
(in thousands):
|
|
|
|
|
|
March 31, 2017
|
Asset retirement obligations, beginning of period
|
$
|
11,392
|
|
Additional liabilities incurred
|
3,492
|
|
Accretion expense
|
136
|
|
Liabilities settled upon plugging and abandoning wells
|
(109
|
)
|
Disposition of wells
|
—
|
|
Revision of estimates
|
9
|
|
Asset retirement obligations, end of period
|
$
|
14,920
|
|
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. DEBT
The Company’s debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
|
|
Revolving Credit Agreement
|
$
|
—
|
|
|
$
|
—
|
|
7.500% senior unsecured notes due 2022
|
—
|
|
|
61,846
|
|
6.250% senior unsecured notes due 2024
|
400,000
|
|
|
400,000
|
|
5.375% senior unsecured notes due 2025
|
650,000
|
|
|
650,000
|
|
5.250% senior unsecured notes due 2025
|
450,000
|
|
|
—
|
|
Capital leases
|
4,041
|
|
|
3,752
|
|
Other debt
|
5,000
|
|
|
3,500
|
|
Total debt
|
1,509,041
|
|
|
1,119,098
|
|
Debt issuance costs on senior unsecured notes
|
(20,080
|
)
|
|
(14,388
|
)
|
Premium on senior unsecured notes
|
3,699
|
|
|
3,828
|
|
Less: current portion
|
(2,638
|
)
|
|
(67,214
|
)
|
Total long-term debt
|
$
|
1,490,022
|
|
|
$
|
1,041,324
|
|
Redemption of 2022 Notes
On December 6, 2016, Parsley LLC and Finance Corp., each a subsidiary of the Company, issued a conditional notice of redemption to redeem any and all of their
7.500%
senior unsecured notes due 2022 (the "2022 Notes") that remained outstanding following the consummation of a cash tender offer (the "Tender Offer"). In connection therewith, on January 5, 2017, Parsley LLC and Finance Corp. redeemed the
$61.8 million
aggregate principal amount of the 2022 Notes that remained outstanding and made a cash payment of
$67.5 million
to the remaining holders of the 2022 Notes, which included principal of
$61.8 million
, prepayment premium on the extinguishment of debt of
$3.9 million
and accrued interest of
$1.8 million
.
On January 6, 2017, the indenture, as supplemented, dated as of February 5, 2014, by and among Parsley LLC, Finance Corp., certain subsidiaries of Parsley LLC, as guarantors, and U.S. Bank National Association, as trustee, governing the 2022 Notes was satisfied and discharged. The 2022 Notes, which bore interest at 7.500% per year, were scheduled to mature on February 15, 2022.
Revolving Credit Agreement
As of
March 31, 2017
, the Borrowing Base (as defined therein) under the Company's revolving credit agreement (as amended, the "Revolving Credit Agreement") was
$875.0 million
, with a commitment level of
$600.0 million
. There were
no
borrowings outstanding and
$2.3 million
in letters of credit outstanding as of
March 31, 2017
, resulting in availability of
$597.7 million
. See
Note 15—Subsequent Events
for information regarding the terms of the Third Amendment to the Revolving Credit Agreement, which was entered into on April 28, 2017.
As of
March 31, 2017
, letters of credit under the Revolving Credit Agreement bear a
2.0%
weighted average interest rate.
5.250%
Senior Unsecured Notes due 2025
On February 13, 2017, as discussed in
Note 1—Organization and Nature of Operations,
Parsley LLC and Finance Corp. issued
$450.0 million
aggregate principal amount of New 2025 Notes. The New 2025 Notes Offering resulted in gross proceeds to the Company of
$450.0 million
and net proceeds to the Company, after deducting initial purchaser discounts and commissions and offering expenses, of approximately
$443.8 million
. The Company used the net proceeds from the New 2025 Notes Offering, along with the net proceeds from the February Offering, to fund the cash portion of the purchase price for the Double Eagle Acquisition discussed in
Note 15—Subsequent Events
, and the remaining net proceeds will be used to fund a portion of the Company’s capital program and for general corporate purposes, including potential future acquisitions.
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Covenant Compliance
The Revolving Credit Agreement and the indentures governing the New 2025 Notes, the 5.375% senior unsecured notes due 2025 (the "2025 Notes") and the 6.250% senior unsecured notes due 2024 (the "2024 Notes" and, together with the 2025 Notes and New 2025 Notes, the "Notes") restrict our ability and the ability of certain of our subsidiaries to, among other things: (i) incur or guarantee additional indebtedness or issue certain types of preferred stock; (ii) pay dividends on capital stock or redeem, repurchase or retire our capital stock or subordinated indebtedness; (iii) transfer or sell assets; (iv) make investments; (v) create certain liens; (vi) enter into agreements that restrict dividends or other payments from our restricted subsidiaries to us; (vii) consolidate, merge or transfer all or substantially all of our assets; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications. If at any time the Notes are rated investment grade by either Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Services and no default or event of default (as defined in the indentures) has occurred and is continuing, many of the foregoing covenants pertaining to the Notes will be suspended. If the ratings on the Notes were to subsequently decline to below investment grade, the suspended covenants would be reinstated.
As of
March 31, 2017
, the Company was in compliance with all required covenants under the Revolving Credit Agreement and each of the indentures governing the Notes.
Principal Maturities of Debt
Principal maturities of debt outstanding at
March 31, 2017
are as follows (in thousands):
|
|
|
|
|
2017
|
$
|
2,027
|
|
2018
|
2,365
|
|
2019
|
4,547
|
|
2020
|
100
|
|
2021
|
2
|
|
Thereafter
|
1,500,000
|
|
Total
|
$
|
1,509,041
|
|
Interest Expense
The following amounts have been incurred and charged to interest expense for the
three
months ended
March 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Cash payments for interest
|
$
|
2,463
|
|
|
$
|
21,211
|
|
Change in interest accrual
|
16,219
|
|
|
(10,313
|
)
|
Amortization of deferred loan origination costs
|
783
|
|
|
588
|
|
Amortization of bond premium
|
(129
|
)
|
|
(191
|
)
|
Other interest income
|
(2,371
|
)
|
|
(101
|
)
|
Total interest expense, net
|
$
|
16,965
|
|
|
$
|
11,194
|
|
NOTE 8. EQUITY
Earnings per Share
Basic earnings per share ("EPS") measures the performance of an entity over the reporting period. Diluted earnings per share measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period. The Company uses the "if-converted" method to determine the potential dilutive effect of exchanges of outstanding PE Units (and corresponding shares of its outstanding Class B common stock, par value
$0.01
per share ("Class B Common Stock"), and the treasury stock method to determine the potential dilutive effect of vesting of its outstanding restricted stock and restricted stock units. For the
three months ended
March 31, 2017 and 2016, Class B
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Common Stock was not recognized in dilutive earnings per share calculations as the effect would have been antidilutive. For the
three months ended
March 31, 2016, time-based restricted stock was not recognized in dilutive earnings per share calculations as the effect would have been antidilutive.
The following table reflects the allocation of net income (loss) to common stockholders and EPS computations for the periods indicated based on a weighted average number of common stock outstanding for the period:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Basic EPS (in thousands, except per share data)
|
|
|
|
Numerator:
|
|
|
|
Basic net income (loss) attributable to Parsley Energy, Inc. Stockholders
|
$
|
29,442
|
|
|
$
|
(19,354
|
)
|
Denominator:
|
|
|
|
Basic weighted average shares outstanding
|
220,674
|
|
|
135,963
|
|
Basic EPS attributable to Parsley Energy, Inc. Stockholders
|
$
|
0.13
|
|
|
$
|
(0.14
|
)
|
Diluted EPS
|
|
|
|
Numerator:
|
|
|
|
Net income (loss) attributable to Parsley Energy, Inc. Stockholders
|
29,442
|
|
|
(19,354
|
)
|
Diluted net income (loss) attributable to Parsley Energy, Inc. Stockholders
|
$
|
29,442
|
|
|
$
|
(19,354
|
)
|
Denominator:
|
|
|
|
Basic weighted average shares outstanding
|
220,674
|
|
|
135,963
|
|
Effect of dilutive securities:
|
|
|
|
Time-Based Restricted Stock and Time-Based Restricted Stock Units
|
1,023
|
|
|
—
|
|
Diluted weighted average shares outstanding
(1)
|
221,697
|
|
|
135,963
|
|
Diluted EPS attributable to Parsley Energy, Inc. Stockholders
|
$
|
0.13
|
|
|
$
|
(0.14
|
)
|
|
|
(1)
|
As of
March 31, 2017
and
2016
, there were
640,062
and
453,863
shares, respectively, related to performance-based restricted stock units that could be converted to common shares in the future based on predetermined performance and market goals. These units were not included in the computation of EPS for the
three
months ended
March 31, 2017
and
2016
, respectively, because the performance and market conditions had not been met, assuming the end of the reporting period was the end of the contingency period.
|
Noncontrolling Interest
As a result of the January Offering and the February Offering, the Company’s ownership of Parsley LLC increased from
86.5%
to
89.8%
and the ownership of the other holders of PE Units (the "PE Unit Holders") of Parsley LLC decreased from
13.5%
to
10.2%
. Because the increase in the Company’s ownership interest in Parsley LLC did not result in a change of control, the transactions were accounted for as equity transactions under ASC Topic 810, "
Consolidation
," which requires that any differences between the amount by which the carrying value of the Company’s basis in Parsley LLC and the fair value of the consideration received are recognized directly in equity and attributed to the controlling interest.
The Company has consolidated the financial position and results of operations of Parsley LLC and reflected that portion retained by the PE Unit Holders as a noncontrolling interest.
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the noncontrolling interest income (loss):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Net income (loss) attributable to the noncontrolling interests of:
|
|
|
|
Parsley LLC
|
$
|
9,007
|
|
|
$
|
(6,357
|
)
|
Pacesetter Drilling, LLC
|
(159
|
)
|
|
20
|
|
Total net income (loss) attributable to noncontrolling interest
|
$
|
8,848
|
|
|
$
|
(6,337
|
)
|
NOTE 9. STOCK-BASED COMPENSATION
In connection with the Company’s initial public offering (the "IPO") in May 2014, the Company adopted the Parsley Energy, Inc. 2014 Long Term Incentive Plan for employees, consultants, and directors of the Company who perform services for the Company. Refer to "Compensation Discussion and Analysis—Elements of Compensation—2014 Long-Term Incentive Plan" in the Company’s Proxy Statement filed on Schedule 14A for the
2017
Annual Meeting of Stockholders for additional information related to this equity based compensation plan.
The following table summarizes the Company’s time-based restricted stock, time-based restricted stock unit, and performance-based restricted stock unit activity for the
three
months ended
March 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based Restricted Stock
|
|
Time-Based Restricted Stock Units
|
|
Performance-Based Restricted Stock Units
|
Outstanding at January 1, 2017
|
601
|
|
|
1,046
|
|
|
454
|
|
Awards granted
(1)
|
189
|
|
|
209
|
|
|
186
|
|
Vested
|
—
|
|
|
(11
|
)
|
|
—
|
|
Forfeited
|
—
|
|
|
(1
|
)
|
|
—
|
|
Outstanding at March 31, 2017
|
790
|
|
|
1,243
|
|
|
640
|
|
|
|
|
|
|
|
(1)
Weighted average grant date fair value
|
$
|
31.86
|
|
|
$
|
31.86
|
|
|
$
|
42.40
|
|
Stock-based compensation expense related to time-based restricted stock, time-based restricted stock units, and performance-based restricted stock units was
$4.2 million
and
$2.8 million
for the
three
months ended
March 31, 2017
and
2016
, respectively. There was approximately
$36.3 million
of unamortized compensation expense relating to outstanding time-based restricted stock, time-based restricted stock units, and performance-based restricted stock units at
March 31, 2017
.
NOTE 10. INCOME TAXES
The Company is a corporation and it is subject to U.S. federal income tax. The tax implications of the IPO and the Company’s concurrent corporate reorganization, and the tax impact of the Company’s status as a taxable corporation subject to U.S. federal income tax have been reflected in the accompanying condensed consolidated financial statements. The effective combined U.S. federal and state income tax rate applicable to the Company for the
three months ended
March 31, 2017
and
2016
were
32.5%
and
27.1%
, respectively. During the
three months ended
March 31, 2017
, the Company recognized an income tax expense of
$18.4 million
compared to an income tax benefit of
$9.6 million
during the three months ended March 31, 2016. Total income tax expense for the
three
months ended
March 31, 2017
differed from amounts computed by applying the U.S. federal statutory tax rate of
35%
due primarily to the impact of net income attributable to noncontrolling ownership interests as well as the impact of state income taxes and the reversal of a portion of the valuation allowance recorded in 2016.
As a result of the January Offering and the February Offering discussed in
Note 1—Organization and Nature of Operations
, the Company’s statutory rate related to certain tax and book basis timing differences increased by
1.2%
, calculated by multiplying the
3.3%
increase in the Company’s ownership of Parsley LLC by the Company’s federal tax rate of
35%
. As a result, the Company recorded additional deferred tax liability of
$13.1 million
during the three months ended
March 31, 2017
.
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Tax Receivable Agreement
In connection with the IPO, on May 29, 2014, the Company entered into a Tax Receivable Agreement (the "TRA") with Parsley LLC and certain PE Unit Holders prior to the IPO (each such person a "TRA Holder"), including certain executive officers. The TRA generally provides for the payment by the Company of
85%
of the net cash savings, if any, in U.S. federal, state, and local income tax or franchise tax that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the IPO as a result of (i) any tax basis increases resulting from the contribution in connection with the IPO by such TRA Holder of all or a portion of its PE Units to the Company in exchange for shares of Class A Common Stock, (ii) the tax basis increases resulting from the exchange by such TRA Holder of PE Units for shares of Class A Common Stock or, if either the Company or Parsley LLC so elects, cash, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under the TRA. The term of the TRA commenced on May 29, 2014, and continues until all such tax benefits have been utilized or expired, unless the Company exercises its right to terminate the TRA. If the Company elects to terminate the TRA early, it would be required to make an immediate payment equal to the present value of the anticipated future tax benefits subject to the TRA (based upon certain assumptions and deemed events set forth in the TRA). In addition, payments due under the TRA will be similarly accelerated following certain mergers or other changes of control.
The actual amount and timing of payments to be made under the TRA will depend upon a number of factors, including the amount and timing of taxable income generated in the future, changes in future tax rates, the use of loss carryovers and the portion of the Company's payments under the TRA constituting imputed interest. As of
March 31, 2017
, there have been no payments associated with the TRA.
As a result of the Company being in a net income position and expected utilization of deferred tax assets, the valuation allowance associated with the TRA of
$24.2
million that was recorded in 2016 has been reversed in the first quarter of 2017. The payable pursuant to the TRA is dependent on the realizability of the corresponding deferred tax assets. Accordingly, the payable pursuant to the TRA liability was increased by
$20.5
million, which is
85%
of the deferred tax asset that is expected to be realized. Due to the reduction in valuation allowance occurring during the first quarter of 2017,
$20.5 million
of the total increase to the TRA liability was recorded in
Change in TRA liability
in the Company's consolidated statements of operations and is included as an operating activity in the Company's consolidated statements of cash flows, included in this Quarterly Report.
As of
March 31, 2017
and
December 31, 2016
, the Company had recorded a TRA liability of
$114.9 million
and
$94.3 million
, respectively, for the estimated payments that will be made to the PE Unit Holders who have exchanged shares, net of valuation allowance, of
$135.1 million
and
$111.0 million
, respectively, as a result of the increase in tax basis arising from such exchanges.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company is party to proceedings and claims incidental to its business. While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to any such proceedings or claims will not have a material adverse effect, individually or in the aggregate, on the Company's condensed consolidated financial position as a whole or on its liquidity, capital resources or future results of operations. The Company will continue to evaluate proceedings and claims involving the Company on a regular basis and will establish and adjust any reserves as appropriate to reflect its assessment of the then-current status of the matters.
NOTE 12. RELATED PARTY TRANSACTIONS
Well Operations
During the
three
months ended
March 31, 2017
and
2016
, certain of the Company’s directors, officers, their immediate family members, and entities affiliated or controlled by such parties ("Related Party Working Interest Owners") owned non-operated working interests in certain of the oil and natural gas properties that the Company operates. The revenues disbursed to such Related Party Working Interest Owners for the
three
months ended
March 31, 2017
and
2016
totaled
$0.4 million
and
$0.8 million
, respectively.
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As a result of this ownership, from time to time, the Company will be in a net receivable or net payable position with these individuals and entities. The Company does not consider any net receivables from these parties to be uncollectible.
Spraberry Production Services, LLC
As discussed in
Note 2—Basis of Presentation
, the Company owns a
42.5%
interest in SPS. Using the equity method of accounting results in transactions between the Company and SPS and its subsidiaries being accounted for as related party transactions. During the
three
months ended
March 31, 2017
and
2016
, the Company incurred charges totaling
$2.1 million
and
$1.3 million
, respectively, for services performed by SPS for the Company’s well operations and drilling activities.
Lone Star Well Service, LLC
The Company makes purchases of equipment used in its drilling operations from Lone Star Well Service, LLC ("Lone Star"), which is controlled by SPS. During the
three
months ended
March 31, 2017
and
2016
, the Company incurred charges totaling
$2.6 million
and
$1.1 million
, respectively, for services performed by Lone Star for the Company’s well operations and drilling activities.
Exchange Right
In accordance with the terms of the Second Amended and Restated Limited Liability Company Agreement of Parsley LLC (the "Second A&R Parsley LLC Agreement"), the PE Unit Holders generally have the right to exchange their PE Units (and a corresponding number of shares of the Company’s Class B Common Stock) for shares of the Company’s Class A Common Stock at an exchange ratio of
one
share of Class A Common Stock for each PE Unit (and a corresponding share of Class B Common Stock) exchanged (subject to conversion rate adjustments for stock splits, stock dividends and reclassifications) or, if the Company or Parsley LLC so elects, cash. As a PE Unit Holder exchanges its PE Units, the Company’s interest in Parsley LLC will be correspondingly increased.
NOTE 13. SIGNIFICANT CUSTOMERS
For the
three
months ended
March 31, 2017
and
2016
, each of the following purchasers accounted for more than 10% of the Company’s revenue:
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Shell Trading (US) Company
|
66%
|
|
38%
|
Targa Pipeline Mid-Continent, LLC
|
13%
|
|
14%
|
BML, Inc.
|
4%
|
|
22%
|
TransOil Marketing, LLC
|
1%
|
|
11%
|
The Company does not require collateral and does not believe the loss of any single purchaser would materially impact its operating results, as crude oil and natural gas are fungible products with well-established markets and numerous purchasers.
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses a valuation framework based upon inputs that market participants use in pricing an asset or liability, which are classified into two categories: observable inputs and unobservable inputs. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. These two types of inputs are further prioritized into the following fair value input hierarchy:
|
|
|
|
Level 1
:
|
|
Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date.
|
Level 2
:
|
|
Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable as of the reporting date.
|
Level 3
:
|
|
Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. These assets and liabilities can include inventory, assets and liabilities acquired in a business combination or exchanged in non-monetary transactions, proved and unproved oil and natural gas properties, asset retirement obligations and other long-lived assets that are written down to fair value when they are impaired.
The Company periodically reviews its long-lived assets to be held and used, including proved oil and natural gas properties, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable (
e.g.
, if there was a sustained decline in commodity prices or the productivity of our wells). The Company reviews its oil and natural gas properties by field. An impairment loss is recognized if the sum of the expected undiscounted future net cash flows is less than the carrying amount of the assets. If the estimated undiscounted cash future net cash flows are less than the carrying amount of a particular asset, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset exceeds the estimated fair value of such asset.
Proved oil and natural gas properties.
During the
three
months ended
March 31, 2017
and
2016
, the Company did not recognize impairment charges, as the carrying amount of the assets exceeds the undiscounted future cash flows of the assets.
The Company calculates the estimated fair values using a discounted future cash flow model. Management’s assumptions associated with the calculation of discounted future cash flows include commodity prices based on NYMEX futures price strips (Level 1), as well as Level 3 assumptions including (i) pricing adjustments for differentials, (ii) production costs, (iii) capital expenditures, (iv) production volumes and (v) estimated reserves.
It is reasonably possible that the estimate of undiscounted future net cash flows may change in the future resulting in the need to impair carrying values. The primary factors that may affect estimates of future cash flows are (i) commodity futures prices, (ii) increases or decreases in production and capital costs, (iii) future reserve adjustments, both positive and negative, to proved reserves and (iv) results of future drilling activities.
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial Assets and Liabilities Measured at Fair Value
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The following tables set forth by level within the fair value hierarchy the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
1,750,580
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,750,580
|
|
Commodity derivative instruments
|
—
|
|
|
174,838
|
|
|
—
|
|
|
174,838
|
|
Total assets
|
$
|
1,750,580
|
|
|
$
|
174,838
|
|
|
$
|
—
|
|
|
$
|
1,925,418
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Commodity derivative instruments
|
$
|
—
|
|
|
$
|
(135,339
|
)
|
|
$
|
—
|
|
|
$
|
(135,339
|
)
|
Total liabilities
|
$
|
—
|
|
|
$
|
(135,339
|
)
|
|
$
|
—
|
|
|
$
|
(135,339
|
)
|
Net asset
|
$
|
1,750,580
|
|
|
$
|
39,499
|
|
|
$
|
—
|
|
|
$
|
1,790,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
49,230
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
49,230
|
|
Commodity derivative instruments
|
—
|
|
|
56,124
|
|
|
—
|
|
|
56,124
|
|
Total assets
|
$
|
49,230
|
|
|
$
|
56,124
|
|
|
$
|
—
|
|
|
$
|
105,354
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Commodity derivative instruments
|
$
|
—
|
|
|
$
|
(59,968
|
)
|
|
$
|
—
|
|
|
$
|
(59,968
|
)
|
Total liabilities
|
$
|
—
|
|
|
$
|
(59,968
|
)
|
|
$
|
—
|
|
|
$
|
(59,968
|
)
|
Net asset (liability)
|
$
|
49,230
|
|
|
$
|
(3,844
|
)
|
|
$
|
—
|
|
|
$
|
45,386
|
|
Money market funds in the preceding tables consist of money market funds included in cash and cash equivalents on the Company's condensed consolidated balance sheet at
March 31, 2017
. The Company's money market funds represent cash equivalents backed by the assets of high-quality major banks and financial institutions. The Company identifies the money market funds as Level 1 instruments because the money market funds have daily liquidity, quoted prices for the underlying investments can be obtained and there are active markets for the underlying investments. During the
three
months ended
March 31, 2017
and
2016
income related to these investments was
$2.3 million
and
$0.1 million
, respectively, and is recorded on our condensed consolidated statements of operations as
Interest expense, net.
Commodity derivative contracts are marked-to-market each quarter and are thus stated at fair value in the accompanying condensed consolidated balance sheets and in
Note 3—Derivative Financial Instruments
. The fair values of the Company’s commodity derivative instruments are classified as Level 2 measurements because they are calculated using industry standard models using assumptions and inputs which are substantially observable in active markets throughout the full term of the instruments. These include market price curves, contract terms and prices, credit risk adjustments, implied market volatility and discount factors.
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial Instruments Not Carried at Fair Value
The following table provides the fair value of financial instruments that are not recorded at fair value in the condensed consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Current portion of long-term debt:
|
|
|
|
|
|
|
|
7.500% senior unsecured notes due 2022
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
61,846
|
|
|
$
|
65,737
|
|
Long-term debt:
|
|
|
|
|
|
|
|
6.250% senior unsecured notes due 2024
|
400,000
|
|
|
425,596
|
|
|
400,000
|
|
|
422,548
|
|
5.375% senior unsecured notes due 2025
|
650,000
|
|
|
662,162
|
|
|
650,000
|
|
|
654,531
|
|
5.250% senior unsecured notes due 2025
|
450,000
|
|
|
456,854
|
|
|
—
|
|
|
—
|
|
Revolving Credit Agreement
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial paper
|
74,836
|
|
|
74,821
|
|
|
—
|
|
|
—
|
|
The fair values of the Notes were determined using the
March 31, 2017
quoted market price, a Level 1 classification in the fair value hierarchy. The book value of the Revolving Credit Agreement approximates its fair value as the interest rate is variable. As of
March 31, 2017
, there are no indicators for change in the Company’s market spread.
Periodically, the Company invests and commercial paper with investment grade rated entities. The investments are carried at amortized cost and classified as held-to-maturity because the Company has the intent and ability to hold them until they mature. The net carrying value of held-to-maturity investments is adjusted for amortization of premiums and accretion of discounts to maturity over the life of the investments. Income related to these investments is recorded on our condensed consolidated statements of operations as
Interest expense, net
. The fair value of the commercial paper was determined using Level 2 inputs in the fair value hierarchy and are considered cash and cash equivalents because the maturity date is less than 90 days at the date of purchase. The following table provides the components of the Company's cash and cash equivalents as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
Commercial Paper
|
|
Money Market Funds
|
|
Total
|
March 31, 2017
|
$
|
91,098
|
|
|
$
|
74,836
|
|
|
$
|
1,750,580
|
|
|
$
|
1,916,514
|
|
December 31, 2016
|
84,149
|
|
|
—
|
|
|
49,230
|
|
|
133,379
|
|
The Company has other financial instruments consisting primarily of accounts receivable, prepaid expenses, other current assets, accounts payable and accrued liabilities that approximate their fair value due to the short-term nature of these instruments.
NOTE 15. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date these financial statements were issued. The Company determined there were no events, other than as described below, that required disclosure or recognition in these financial statements.
Double Eagle Acquisition
On February 7, 2017, the Company entered into a Contribution Agreement (the "Double Eagle Contribution Agreement") by and among Parsley LLC, the Company, Double Eagle Energy Permian Operating LLC ("DE Operating"), Double Eagle Energy Permian LLC ("DE Permian") and Double Eagle Energy Permian Member LLC (together with DE Operating and DE Permian, "Double Eagle"), which provided for the contribution by Double Eagle of all of its interests in Double Eagle Lone Star LLC, DE Operating LLC, and Veritas Energy Partners, LLC, as well as certain related transactions with an affiliate of Double Eagle (collectively the "Double Eagle Acquisition"). The Double Eagle Acquisition closed on April 20, 2017 for an aggregate purchase price to Double Eagle of (i) approximately
$1.4 billion
in cash, which was funded by the February Offering and the New 2025 Notes Offering, and (ii) approximately
39.8 million
PE Units and a corresponding
PARSLEY ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
approximately
39.8 million
shares of the Company's Class B Common Stock, the issuance of which was made in reliance upon an exemption from registration provided under Section 4(2) of the Securities Act.
Second Amended and Restated Limited Liability Company Agreement of Parsley Energy, LLC
On April 20, 2017, in connection with the closing of the Double Eagle Acquisition, the Company and Parsley LLC entered into the Second A&R Parsley LLC Agreement. The Second A&R Parsley LLC Agreement amended and restated the First Amended and Restated LLC Agreement of Parsley LLC, dated as of May 29, 2014, to provide for the admission of the entities and individuals designated by DE Operating to receive the PE Units and shares of Class B Common Stock issued as consideration in connection with the closing of the Double Eagle Acquisition ("DE Operating’s Designees") as members of Parsley LLC, among other things.
Registration Rights Agreement
On April 20, 2017, in connection with the closing of the Double Eagle Acquisition, the Company entered into a Registration Rights and Lock-Up Agreement (the "Double Eagle RRA") with DE Operating’s Designees, pursuant to which, among other things and subject to certain restrictions, the Company is required to file with the SEC an automatically effective registration statement on Form S-3 (the "Double Eagle Resale Registration Statement") registering for resale the shares of Class A Common Stock issuable upon exchange of the PE Units (and a corresponding number of shares of Class B Common Stock) issued as consideration in connection with the closing of the Double Eagle Acquisition and to conduct certain underwritten offerings thereof. The holders of registrable securities under the Double Eagle RRA are subject to a 90-day lock-up period during which they may not directly or indirectly transfer any PE Units, shares of Class B common stock, or shares of Class A common stock, or any rights or economic interests pertaining thereto.
The Double Eagle Resale Registration Statement was filed with the SEC on May 3, 2017.
Second Amended and Restated Registration Rights Agreement
On April 20, 2017, in connection with the closing of the Double Eagle Acquisition, the Company entered into the Second Amended and Restated Registration Rights Agreement (the "Second A&R IPO RRA"), by and among the Company, Parsley LLC and the other parties thereto. The Second A&R IPO RRA amended and restated the Amended and Restated Registration Rights Agreement, dated as of May 29, 2014, by and among the Company, Parsley LLC and the other parties thereto, to, among other things, address the relative rights of the holders of registrable securities under the Double Eagle RRA and the holders of registrable securities under the Second A&R IPO RRA and to include such registrable securities in certain registration statements and underwritten offerings.
Third Amendment to the Revolving Credit Agreement
On April 28, 2017 the Company, Parsley LLC, each of the guarantors thereto, Wells Fargo Bank, National Association, as administrative agent, and the other lenders party thereto entered into the Third Amendment (the "Third Amendment") to the Revolving Credit Agreement. The Third Amendment, among other things, modified the terms of the Revolving Credit Agreement to (i) remove all anti-cash hoarding provisions, (ii) reduce the minimum mortgage and title coverage requirements from
90%
to
85%
of the total value of each of (a) Parsley's LLC's and its subsidiaries’ proved Oil and Gas Properties (as defined in the Revolving Credit Agreement) and (b) Parsley's LLC's and its subsidiaries’ proved, developed and producing reserves, in each case as evaluated in the most recent reserve report, and (iii) delete the applicable margin penalty, which increased the applicable margin by
0.5%
with respect to alternate base rate loans and Eurodollar loans if the Consolidated Leverage Ratio (as defined in the Revolving Credit Agreement) as of the last day of any fiscal quarter or fiscal year of the Borrower, as applicable, exceeded
3.50
to 1.00.
In addition, the Third Amendment increased the Aggregate Elected Borrowing Base Commitments (as defined in the Revolving Credit Agreement) from
$600.0 million
to
$1.0 billion
and increased the Borrowing Base (as defined in the Revolving Credit Agreement) from
$875.0 million
to
$1.4 billion
. The Third Amendment also adds Canadian Imperial Bank of Commerce, New York Branch, Capital One, National Association, Citibank, N.A., PNC, National Association, and UBS AG, Stamford Branch as lenders under the Revolving Credit Agreement.