Notes to Condensed Consolidated Financial Statements
Note 1 — Organization and Nature of Business
Resolute Energy Corporation (“Resolute” or the “Company”), is an independent oil and gas company engaged in the exploitation, development, exploration for and acquisition of oil and gas properties. The Company’s operating assets are comprised of properties in the Delaware Basin in west Texas (the “Delaware Basin Properties”) and Aneth Field located in the Paradox Basin in southeast Utah (the “Aneth Field Properties” or “Aneth Field”). The Company conducts all of its activities in the United States of America.
Resolute Energy Corporation, the stand-alone parent entity, has insignificant independent assets and no operations. There are no restrictions on the Company’s ability to obtain cash dividends or other distributions of funds from its subsidiaries, except those imposed by applicable law.
Note 2 — Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements include Resolute and its subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and Regulation S-X for interim financial reporting. Except as disclosed herein, there has been no material change in our basis of presentation from the information disclosed in the notes to Resolute’s consolidated financial statements for the year ended December 31, 2016. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation of the interim financial information have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. All intercompany transactions have been eliminated upon consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.
In connection with the preparation of the condensed consolidated financial statements, Resolute evaluated subsequent events that occurred after the balance sheet date, through the date of filing.
Significant Accounting Policies
The significant accounting policies followed by Resolute are set forth in Resolute’s consolidated financial statements for the year ended December 31, 2016. These unaudited condensed consolidated financial statements are to be read in conjunction with the consolidated financial statements appearing in Resolute’s Annual Report on Form 10-K and related notes for the year ended December 31, 2016.
Recent Accounting Pronouncements
In January 2017 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, which clarifies the definition of a business to assist entities with evaluating when a set of transferred assets and activities is deemed to be a business. Determining whether a transferred set constitutes a business is important because the accounting for a business combination differs from that of an asset acquisition. The definition of a business also affects the accounting for dispositions. Under the new standard, when substantially all of the fair value of assets acquired is concentrated in a single asset, or a group of similar assets, the assets acquired would not represent a business and business combination accounting would not be required. The standard is effective for interim and annual periods beginning after December 15, 2017 and shall be applied prospectively. Early adoption is permitted. The Company has elected to early adopt this standard in the second quarter of 2017.
In May 2014 the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which creates Topic 606 (“ASC 606”). ASC 606 supersedes existing revenue recognition requirements under GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which we expect to be entitled in exchange for transferring goods or services to a customer. Additional disclosures will be required as to the nature, timing and uncertainty of revenue and cash flows 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 annual reports beginning after December 15, 2017. Early adoption is permitted for fiscal years beginning after December 15, 2016.
5
In May 2016 the FASB issued ASU
2016-12
: Revenue from Contracts with Customers (Topic 606): Narrow Scope
Improvements and Practical Expedients
(“ASU 2016-12”), which updates ASU 2014-09 to clarify core recognition principles including collectability, sales tax presentation, noncash cons
ideration, contract modifications and completed contracts at transition. This ASU is required to be adopted using either the retrospective transition method, which requires restating previously reported results or the cumulative effect (modified retrospect
ive) transition method, which utilizes a cumulative-effect adjustment to retained earnings in the period of adoption to account for the prior period effects. We have aggregated and reviewed our contracts that are within the scope of ASC 606. Based on our e
valuation to date, there will not be a material impact on our financial statements. However, we anticipate the new standard will result in more robust footnote disclosures. We cannot currently determine the extent of the new footnote disclosures as further
clarification is needed for certain practices common to the industry. We will continue to evaluate the impacts that future contracts may have.
In February 2016 the FASB issued new authoritative guidance related to the accounting of leases. The main provisions require that lessees recognize both a lease liability and a right-of-use asset at the commencement date. This authoritative accounting guidance is effective for the annual period beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2018. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.
Assumptions, Judgments and Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make various assumptions, judgments and estimates to determine the reported amounts of assets, liabilities, revenue and expenses, and in the disclosures of commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events. Accordingly, actual results could differ from amounts previously established.
Significant estimates with regard to the condensed consolidated financial statements include proved oil and gas reserve volumes and the related present value of estimated future net cash flows used in the ceiling test applied to capitalized oil and gas properties; asset retirement obligations; valuation of derivative assets and liabilities; the estimated fair value and allocation of the purchase price related to business combinations; share-based compensation expense; cash-settled long-term incentive expense; depletion, depreciation and amortization; accrued liabilities; revenue and related receivables and income taxes.
Accounts Receivable
The Company’s accounts receivable consist of the following as of the dates indicated (in thousands):
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Trade receivables
|
|
$
|
24,564
|
|
|
$
|
14,898
|
|
Revenue receivables
|
|
|
40,323
|
|
|
|
32,817
|
|
Derivative receivables
|
|
|
1,098
|
|
|
|
5,695
|
|
Other receivables
|
|
|
7,458
|
|
|
|
1,818
|
|
Total accounts receivable
|
|
$
|
73,443
|
|
|
$
|
55,228
|
|
The Company’s accounts receivable consist mainly of receivables from oil, gas, and natural gas liquids (“NGL”) purchasers and from joint interest owners on properties the Company operates. For receivables from joint interest owners, the Company typically has the ability to withhold future revenue disbursements to recover non-payment of joint interest billings. Generally, the Company’s oil and gas receivables are due within fifteen days and are collected in less than two months, and the Company historically has had limited receivables that were not collected.
The Company routinely assesses the recoverability of all material trade and other receivables to determine their collectability. As of June 30, 2017 and December 31, 2016, the Company had no allowance for doubtful accounts recorded.
Oil and Gas Properties
Pursuant to full cost accounting rules, Resolute is required to perform a quarterly “ceiling test” calculation to test its oil and gas properties for possible impairment. The primary components impacting the calculation are commodity prices, reserve quantities and associated production, overall exploration and development costs and depletion expense. If the net capitalized cost of the Company’s oil and gas properties subject to amortization (the “carrying value”) exceeds the ceiling limitation, the excess would be charged to expense. The ceiling limitation is equal to the sum of the present value discounted at 10% of estimated future net cash flows from proved reserves, the cost of properties not being amortized, the lower of cost or estimated fair value of unproven properties included in the costs being amortized, and all related income tax effects.
6
No impairment was recorded for the three and six months ended June 30, 2017. For the three and six month
s ended June 30, 2016, the Company recorded non-cash impairments of its oil and gas properties of $0 and $58 million, respectively, as a result of the ceiling test limitation.
If in future periods a negative factor impacts one or more of the components of
the calculation, including market prices of oil and gas
(based on a trailing twelve-month unweighted average of the oil and gas prices in effect on the first day of each month)
, differentials from posted prices, future drilling and capital plans, operating
costs or expected production, the Company may incur further full cost ceiling impairment related to its oil and gas properties in such periods.
Note 3 — Acquisitions and Divestitures
Acquisition of Reeves County Properties in the Delaware Basin
Delaware Basin Bronco Acquisition
On March 3, 2017, Resolute Natural Resources Southwest, LLC (“Resolute Southwest”), a wholly owned subsidiary of the Company, entered into a Purchase and Sale Agreement with CP Exploration II, LLC and Petrocap CPX, LLC pursuant to which Resolute Southwest agreed to acquire certain undeveloped and developed oil and gas properties in the Delaware Basin in Reeves County, Texas (the “Delaware Basin Bronco Acquisition”). The closing of the Delaware Basin Bronco Acquisition occurred on May 15, 2017, with an effective date of May 1, 2017.
The acquisition was accounted for as 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 acquired these properties for $161.3 million, which it financed substantially with proceeds received from the offering of $125 million of 8.50% Senior Notes due 2020 (as defined in Note 5) that closed in May 2017. The Company recorded $144.8 million of the total consideration transferred as unproved oil and gas property.
The properties acquired include approximately 4,600 net acres in Reeves County, Texas, which were considered predominantly unproved, consisting of 2,187 net acres adjacent to the Company’s existing operating area in Reeves County and 2,405 net acres in southern Reeves County.
Delaware Basin Firewheel Acquisition
In October 2016 Resolute and Resolute Southwest entered into a Purchase and Sale Agreement with Firewheel Energy, LLC (“Firewheel”) pursuant to which Resolute Southwest agreed to acquire certain oil and gas interests in the Delaware Basin in Reeves County, Texas (the “Firewheel Properties”), for consideration to Firewheel consisting of $90 million in cash and 2,114,523 shares of common stock of the Company, par value $0.0001 per share, issued to Firewheel upon the closing of the purchase of the Firewheel Properties (the “Delaware Basin Firewheel Acquisition”). The closing of the Delaware Basin Firewheel Acquisition occurred on October 7, 2016.
The Company acquired the Firewheel Properties for $153.2 million. Revenue and expenses related to the acquired properties are included in the consolidated statement of operations on the closing date of the transaction. The Delaware Basin Firewheel Acquisition was accounted for as a business combination using the acquisition method.
The Company completed its assessment of the fair values of the assets acquired and liabilities assumed. Accordingly, the following table presents the purchase price allocation of the Delaware Basin Firewheel Acquisition at the indicated date below, based on the fair values of assets acquired and liabilities assumed (in thousands):
|
|
December 31, 2016
|
|
Proved oil and gas properties
|
|
$
|
40,900
|
|
Unproved oil and gas properties
|
|
|
112,800
|
|
Asset retirement obligations assumed
|
|
|
(500
|
)
|
Total purchase price
|
|
$
|
153,200
|
|
Divestiture of Southeast New Mexico Properties in the Permian Basin
In February 2017 the Company closed on the sale of its Denton and South Knowles properties in the Northwest Shelf project area in Lea County, New Mexico, for approximately $14.5 million in cash, subject to customary purchase price adjustments. The effective date of this sale was October 1, 2016. The proceeds of the sale were used to reduce amounts outstanding under the Company’s Revolving Credit Facility (as defined in Note 5) and for other corporate purposes. As part of the sale, the Company was also no longer liable for asset retirement obligations of $3.6 million at March 31, 2017.
7
Divestiture of Midstream Assets in the Delaware Basin
In July 2016 Resolute Southwest entered into a definitive Purchase and Sale Agreement (the “Mustang Agreement”) with Caprock Permian Processing LLC and Caprock Field Services LLC, as buyers (collectively, “Caprock”) pursuant to which Resolute Southwest and an existing minority interest holder agreed to sell certain gas gathering and produced water handling and disposal systems owned by them in the Mustang project area in Reeves County, Texas, (“Mustang”) for a cash payment of $35 million, plus certain earn-out payments described below.
In July 2016 Resolute Southwest also entered into a definitive Purchase and Sale Agreement (the “Appaloosa Agreement”) with Caprock, pursuant to which Resolute Southwest agreed to sell certain gas gathering and produced water handling and disposal systems owned by Resolute Southwest in the Appaloosa project area in Reeves County, Texas, (“Appaloosa”) for a cash payment of $15 million, plus certain earn-out payments described below.
In August 2016 Resolute Southwest closed the transactions contemplated by the Mustang Agreement and the Appaloosa Agreement. Resolute Southwest received aggregate consideration of approximately $36 million (including earn-out payments earned as of the closing). As the sale did not significantly alter the relationship between capital costs and proved reserves, no gain or loss was recognized.
The net proceeds of the midstream sale were used to repay amounts outstanding under the Company’s Revolving Credit Facility (as defined in Note 5) and for general corporate purposes.
In July 2016, in connection with the Appaloosa Agreement and the Mustang Agreement, Resolute Southwest also entered into a definitive Earn-out Agreement (the “Earn-out Agreement”), pursuant to which Resolute Southwest will be entitled to receive certain earn-out payments based on drilling and completion activity in Appaloosa and Mustang through 2020 that will deliver gas and produced water into the system. Earn-out payments for each qualifying well will vary depending on the lateral length of the well and the year in which the well is drilled and completed. In March 2017 the Earn-out Agreement was amended by the parties to provide for an increase in earn-out payments for the wells drilled and completed in 2017. Earn-out payments are contingent on future drilling, and therefore will be recognized when earned.
In connection with the closing of the transactions contemplated by the Appaloosa Agreement and the Mustang Agreement, Resolute Southwest entered into fifteen year commercial agreements with Caprock for gas gathering services and water handling and disposal services for all current and future gas and water produced by Resolute Southwest in Mustang and Appaloosa in exchange for customary fees based on the volume of gas and water produced and delivered. Resolute Southwest has agreed to dedicate and deliver all gas and water produced from its acreage in Mustang and Appaloosa to Caprock for gathering, processing, compression and disposal services for a term of fifteen years.
In April 2017, Resolute Southwest entered into a Crude Oil Connection and Dedication Agreement with Caprock Permian Crude LLC (“Caprock Crude”), an affiliate of Caprock. The agreement provides that Caprock Crude will construct the gathering systems, pipelines and other infrastructure for the gathering of crude oil from our Mustang and Appaloosa operating areas in exchange for customary fees based on the volume of crude oil produced and delivered. Resolute Southwest has agreed to dedicate and deliver all crude oil produced from its acreage in Mustang and Appaloosa to Caprock Crude for gathering for a term through July 31, 2031, coterminous with our other commercial agreements with Caprock Crude. For the first five years of the agreement, the crude oil will be delivered to Midland Station under a joint tariff arrangement between Caprock Crude and Plains Pipeline, L.P. In April 2017, Resolute Southwest also entered into a Crude Oil Purchase Contract with Plains Marketing, L.P. providing for the sale to Plains of substantially all of the crude oil produced from the Mustang and Appaloosa areas for a price equal to an indexed market price less a $1.75 transportation differential that will cover the joint tariff payable to Caprock Crude under the Crude Oil Connection and Dedication Agreement.
8
Pro
Forma Financial Information
The unaudited pro forma financial information for the three and six months ended June 30, 2016 reflects Resolute’s results as if the Delaware Basin Firewheel Acquisition and the sale of the Delaware Basin Midstream Assets had occurred on January 1, 2016 (in thousands, except per share amounts):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2016
|
|
Revenue
|
|
$
|
38,319
|
|
|
$
|
58,723
|
|
Loss from operations
|
|
|
(4,142
|
)
|
|
|
(81,783
|
)
|
Net loss
|
|
|
(36,865
|
)
|
|
|
(123,929
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(2.13
|
)
|
|
$
|
(7.20
|
)
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
17,270
|
|
|
|
17,211
|
|
Note 4 — Earnings per Share
The Company computes basic net income (loss) per share using the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock and, if dilutive, potential shares of common stock outstanding during the period. Net income (loss) available to common stockholders is computed by deducting both the dividends declared in the period on preferred stock and the dividends accumulated for the period on cumulative preferred stock from net income. Potentially dilutive shares consist of the incremental shares and options issuable under the Company’s 2009 Performance Incentive Plan (the “Incentive Plan”) as well as common shares issuable upon the assumed conversion of the Convertible Preferred Stock (as defined in Note 7). The treasury stock method is used to measure the dilutive impact of potentially dilutive shares.
The following table details the potential weighted average dilutive and anti-dilutive securities for the periods presented (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Potential dilutive restricted stock
|
|
3,782
|
|
|
|
917
|
|
|
|
3,704
|
|
|
|
663
|
|
Anti-dilutive securities
|
|
2,116
|
|
|
|
1,474
|
|
|
|
2,116
|
|
|
|
1,305
|
|
The following table sets forth the computation of basic and diluted net income (loss) per share of common stock for the periods presented (in thousands, except per share amounts):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income (loss) available to common stockholders
|
$
|
10,690
|
|
|
$
|
(36,906
|
)
|
|
$
|
10,766
|
|
|
$
|
(122,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
21,917
|
|
|
|
15,155
|
|
|
|
21,828
|
|
|
|
15,096
|
|
Add: dilutive effect of non-vested restricted stock
|
|
118
|
|
|
|
—
|
|
|
|
138
|
|
|
|
—
|
|
Add: dilutive effect of options
|
|
859
|
|
|
|
—
|
|
|
|
870
|
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
|
22,894
|
|
|
|
15,155
|
|
|
|
22,836
|
|
|
|
15,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
$
|
0.49
|
|
|
$
|
(2.44
|
)
|
|
$
|
0.49
|
|
|
$
|
(8.10
|
)
|
Diluted net income (loss) per common share
|
$
|
0.47
|
|
|
$
|
(2.44
|
)
|
|
$
|
0.47
|
|
|
$
|
(8.10
|
)
|
9
Note 5 — Long Term Debt
As of the dates indicated, the Company’s long-term debt consisted of the following (in thousands):
|
Principal
|
|
|
Unamortized premium/
(discount)
|
|
|
Unamortized deferred financing costs
|
|
|
June 30, 2017
|
|
Revolving credit facility
|
$
|
100,000
|
|
|
$
|
—
|
|
|
$
|
(3,117
|
)
|
|
$
|
96,883
|
|
8.50% senior notes
|
|
525,000
|
|
|
|
2,650
|
|
|
|
(4,652
|
)
|
|
|
522,998
|
|
Total long-term debt
|
$
|
625,000
|
|
|
$
|
2,650
|
|
|
$
|
(7,769
|
)
|
|
$
|
619,881
|
|
|
Principal
|
|
|
Unamortized premium/
(discount)
|
|
|
Unamortized deferred financing costs
|
|
|
December 31, 2016
|
|
Revolving credit facility
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
(1,179
|
)
|
|
$
|
8,821
|
|
Secured term loan facility
|
|
128,303
|
|
|
|
(4,882
|
)
|
|
|
(1,282
|
)
|
|
|
122,139
|
|
8.50% senior notes
|
|
400,000
|
|
|
|
985
|
|
|
|
(3,831
|
)
|
|
|
397,154
|
|
Total long-term debt
|
$
|
538,303
|
|
|
$
|
(3,897
|
)
|
|
$
|
(6,292
|
)
|
|
$
|
528,114
|
|
Current portion of secured term loan facility
|
|
128,303
|
|
|
|
(4,882
|
)
|
|
|
(1,282
|
)
|
|
|
122,139
|
|
Long-term debt
|
$
|
410,000
|
|
|
$
|
985
|
|
|
$
|
(5,010
|
)
|
|
$
|
405,975
|
|
For the three months ended June 30, 2017 and 2016, the Company incurred interest expense on long-term debt of $8.8 million and $13.0 million, respectively. For the six months ended June 30, 2017 and 2016, the Company incurred interest expense on long-term debt of $26.5 million and $26.1 million, respectively. Approximately $9.7 million in interest expense was incurred in 2017 as a result of the extinguishment of the Secured Term Loan Facility (as defined below) on January 3, 2017. Additionally, $1.0 million in interest expense was incurred in 2017 as a result of the fees associated with the $100 million unsecured bridge facility with BMO Capital Markets that terminated because the facility was never drawn in connection with the Delaware Basin Bronco Acquisition. The Company capitalized $3.7 million and $0.6 million of interest expense during the three months ended June 30, 2017 and 2016, respectively. The Company capitalized $6.2 million and $1.1 million of interest expense during the six months ended June 30, 2017 and 2016, respectively. During the three months ended June 30, 2017 and 2016, the Company paid cash for interest expense in the amount of $14.7 million and $20.1 million, respectively. During the six months ended June 30, 2017 and 2016, the Company paid cash for interest expense in the amount of $16.2 million and $23.4 million, respectively.
Revolving Credit Facility
On
February 17, 2017, the Company entered into the Third Amended and Restated Credit Agreement with a syndicate of banks led by Bank of Montreal, as Administrative Agent, Capital One, National Association, as syndication agent, and Barclays Bank PLC, ING Capital LLC and SunTrust Bank, as
co-documentation agents (the “Revolving Credit Facility”). In connection with entering into the Revolving Credit Facility, the Company repaid all amounts outstanding under the Second Amended and Restated Credit Agreement, dated as of April 15, 2015, by and among Resolute Energy Corporation, as borrower, certain subsidiaries of Resolute Energy Corporation, as Guarantors, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto, as amended, and terminated that agreement.
The Revolving Credit Facility specifies a maximum borrowing base as determined by the lenders, which was initially set at $150 million. The determination of the borrowing base takes into consideration the estimated value of Resolute’s oil and gas properties in accordance with the lenders’ customary practices for oil and gas loans. The borrowing base is redetermined semi-annually, and the amount available for borrowing could be increased or decreased as a result of such redeterminations. Under certain circumstances, either Resolute or the lenders may request an interim redetermination. The Revolving Credit Facility matures in February 2021, unless there is a maturity of material indebtedness prior to such date.
Pursuant to the spring borrowing base redetermination, the borrowing base was increased to $225 million, effective April 17, 2017.
10
On May 8, 2017, the Company entered into the First Amendment to the Third Amended and Restated Credit Agreement.
The First Amendment, among other things, amended the leverage ratio covenant to increase the maximum ratio to (a) 4.50:1.00 for the fiscal quarter ending June 30, 2017, (b) 4.25:1.00 for the fiscal quarter ending September 30, 2017 and (c) 4.00:1.00 for th
e fiscal quarters ending thereafter. Furthermore, the amendment provided that the borrowing base shall automatically be reduced by 25% of all unsecured indebtedness of the Company in excess of $500 million. As a result of the issuance of the
I
ncremental Se
nior Notes (defined below) on May 9, 2017, the borrowing base was reduced to $218.8 million.
The Revolving Credit Facility includes other covenants that require, among other things, that Resolute maintains a ratio of current assets to current liabilities o
f no less than 1.00 to 1.00. The Revolving Credit Facility prohibits us from entering into derivative arrangements for more than (i) 85% of our anticipated production from proved properties in the next two years and (ii) the greater of 75% of our anticipat
ed production from proved properties or 85% of our production from projected proved developed producing properties after such two year period (not to exceed a term of 60 months for any such derivative arrangement). The Revolving Credit Facility also includ
es customary additional terms and covenants that place limitations on certain types of activities, the payment of dividends, and that require satisfaction of certain financial tests.
Resolute was in compliance with the terms and covenants of the Revolving
Credit Facility at June 30, 2017.
As of June 30, 2017, outstanding borrowings under the Revolving Credit Facility were $100 million with a weighted average interest rate of 4.64%, under a borrowing base of $218.8 million.
To the extent that the borrowing base, as adjusted from time to time, exceeds the outstanding balance, no repayments of principal are required prior to maturity. However, should the borrowing base be set at a level below the outstanding balance, Resolute would be required to eliminate that excess within 120 days following that determination. The Revolving Credit Facility is guaranteed by all of Resolute’s subsidiaries and is collateralized by substantially all of the assets of the Company’s Aneth Field and Delaware Basin assets held by Resolute Aneth, LLC and Resolute Natural Resources Southwest, LLC, which are wholly-owned subsidiaries of the Company.
Each base rate borrowing under the Revolving Credit Facility accrues interest at either (a) the London Interbank Offered Rate (“LIBOR”), plus a margin that ranges from 3.0% to 4.0% or (b) the Alternative Base Rate defined as the greater of (i) the Administrative Agent’s Prime Rate (ii) the Federal Funds effective Rate plus 0.5% or (iii) an adjusted London Interbank Offered Rate plus a margin that ranges from 2.0% to 3.0%. Each such margin is based on the level of utilization under the borrowing base.
Secured Term Loan Agreement
In December 2014 Resolute and certain of its subsidiaries, as guarantors, entered into a second lien Secured Term Loan Agreement with Bank of Montreal, as administrative agent, and the lenders party thereto, pursuant to which the Company borrowed $150 million (the “Secured Term Loan Facility”). In May 2015 Resolute and certain of its subsidiaries, as guarantors, entered into an Amendment to the Secured Term Loan Agreement and Increased Facility Activation Notice-Incremental Term Loans (the “Amendment”) with Bank of Montreal, as administrative agent, and the lenders party thereto, pursuant to which the Company borrowed an additional $50 million of second lien term debt (the “Incremental Term Loans”) under its Secured Term Loan Facility.
In December 2015 the Company retired $70 million of the amount outstanding under the Secured Term Loan Facility following the sale of certain properties in the Midland Basin in accordance with mandatory prepayment provisions stipulated in the Secured Term Loan Facility.
On January 3, 2017, the Company repaid approximately $132 million constituting all amounts due under the Secured Term Loan Facility (including prepayment fees of $3.5 million), with a portion of the proceeds from its previously announced common stock offering that closed on December 23, 2016. In addition $6.2 million of deferred financing costs and original issue discount were expensed as part of the extinguishment. The Secured Term Loan Facility was terminated in connection with the repayment.
Senior Notes
In 2012 the Company consummated two private placements of senior notes with principal totaling $400 million (the “Original Senior Notes”). The Original Senior Notes are due May 1, 2020, and bear an annual interest rate of 8.50% with the interest on the Original Senior Notes payable semiannually in cash on May 1 and November 1 of each year.
On May 9, 2017, the Company consummated a private placement of senior notes totaling an additional $125 million aggregate principal amount of the Company’s 8.50% Senior Notes due 2020 (the “Incremental Senior Notes”), under the same indenture as the Original Senior Notes that were previously issued (collectively referred to as the “Senior Notes”). The net proceeds of the offering of the Incremental Senior Notes, after reflecting the purchasers’ discounts and commissions, and estimated offering expenses, were approximately $125.4 million. The closing of the Incremental Senior Notes occurred on May 12, 2017.
11
The Senior Notes were issued under an Indenture (the “Indenture”) among the Company and the Company’s existing subsidiaries (the “Guarantors”) in a private transaction not sub
ject to the registration requirements of the Securities Act of 1933. In March 2013 and July 2017 the Company registered
the exchange of
the Original Senior Notes and the Incremental Senior Notes, respectively, with the Securities and Exchange Commission
pu
rsuant to
registration statement
s
on Form S-4
that enabled
holders of the Senior Notes to exchange the privately placed Senior Notes for registered Senior Notes with substantially identical terms.
All of the Original Senior Notes and Incremental Senior Notes have been exchanged for publically registered Senior Notes.
The Indenture contains affirmative and negative covenants that, among other things, limit the Company’s and the Guarantors’ ability t
o make investments, incur additional indebtedness or issue certain types of preferred stock, create liens, sell assets, enter into agreements that restrict dividends or other payments by restricted subsidiaries, consolidate, merge or transfer all or substa
ntially all of the assets of the Company, engage in transactions with the Company’s affiliates, pay dividends or make other distributions on capital stock or prepay subordinated indebtedness and create unrestricted subsidiaries. The Indenture also contains
customary events of default. Upon occurrence of events of default arising from certain events of bankruptcy or insolvency, the Senior Notes shall become due and payable immediately without any declaration or other act of the trustee or the holders of the
Senior Notes. Upon
the
occurrence of certain other events of default, the trustee or the holders of the Senior Notes may declare all outstanding Senior Notes to be due and payable immediately. The Company was in compliance with all financial covenants unde
r its Senior Notes as of June 30, 2017.
The Senior Notes are general unsecured senior obligations of the Company and guaranteed on a senior unsecured basis by the Guarantors. The Senior Notes rank equally in right of payment with all existing and future senior indebtedness of the Company, will be subordinated in right of payment to all existing and future senior secured indebtedness of the Guarantors, will rank senior in right of payment to any future subordinated indebtedness of the Company and will be fully and unconditionally guaranteed by the Guarantors on a senior basis.
The Senior Notes are redeemable by the Company on not less than 30 or more than 60 days’ prior notice, at redemption prices set forth in the Indenture. If a change of control occurs, each holder of the Senior Notes will have the right to require that the Company purchase all of such holder’s Senior Notes in an amount equal to 101% of the principal of such Senior Notes, plus accrued and unpaid interest, if any, to the date of the purchase.
The fair value of the Senior Notes at June 30, 2017, was estimated to be $522.5 million based upon data from independent market makers (Level 2 fair value measurement).
Note 6 — Income Taxes
Income tax benefit (expense) during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income (loss), plus any significant, unusual or infrequently occurring items that are recorded in the interim period. The provision for income taxes for the three and six months ended June 30, 2017 and 2016, differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 35% to income before income taxes. This difference relates primarily to the valuation allowance established, in addition to state income taxes and estimated permanent differences.
There was no provision for income taxes during the three and six months ended June 30, 2017 and 2016.
The Company had no reserve for uncertain tax positions as of June 30, 2017. The Company assesses the recoverability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The Company considers all available evidence (both positive and negative) in determining whether a valuation allowance is required. As a result of the Company’s analysis, it was concluded that as of June 30, 2017, a valuation allowance should be established against the Company’s net deferred tax asset. The Company recorded a valuation allowance as of June 30, 2017 and December 31, 2016, of $304.2 million and $309.6 million, respectively, on its long-term deferred tax asset. The Company will continue to monitor facts and circumstances in the reassessment of the likelihood that the deferred tax assets will be realized.
Note 7 — Stockholders’ Equity and Long-term Employee Incentive Plan
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of preferred stock, par value $0.0001 with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. At June 30, 2017 and December 31, 2016, the Company had 62,500 shares of preferred stock issued and outstanding.
In October 2016, the Company entered into a Purchase Agreement (the “Preferred Stock Purchase Agreement”) with BMO Capital Markets Corp. (“Initial Purchaser”), pursuant to which the Company agreed to issue and sell to Initial Purchaser 55,000 shares (the “Firm Securities”) of the Company’s 8⅛% Series B Cumulative Perpetual Convertible Preferred Stock, par value $0.0001 per share (the “Convertible Preferred Stock”) and, at Initial Purchaser’s option, up to 7,500 additional shares of Convertible Preferred
12
Stock (together with the Firm S
ecurities, collectively, the “Securities”). The Initial Purchaser exercised its over-allotment option to purchase the additional 7,500 shares of Convertible Preferred Stock in full, bringing the total shares of Convertible Preferred Stock purchased by Init
ial Purchaser to 62,500, for an aggregate net consideration of $60 million, before offering expenses.
Each holder has the right at any time, at its option, to convert, any or all of such holder’s shares of Convertible Preferred Stock at an initial conversion rate of 33.8616 shares of fully paid and nonassessable shares of Common Stock, per share of Convertible Preferred Stock. Additionally, at any time on or after October 15, 2021, the Company shall have the right, at its option, to elect to cause all, and not part, of the outstanding shares of Convertible Preferred Stock to be automatically converted into that number of shares of Common Stock for each share of Convertible Preferred Stock equal to the conversion rate in effect on the mandatory conversion date as such terms are defined in the Certificate of Designation.
A preferred dividend of $1.3 million was declared on June 19, 2017, and paid on July 17, 2017, to holders of record at the close of business on July 1, 2017.
Common Stock
The authorized common stock of the Company consists of 45,000,000 shares. The holders of the common shares are entitled to one vote for each share of common stock. In addition, the holders of the common stock are entitled to receive dividends when, as and if declared by the Board of Directors. At June 30, 2017 and December 31, 2016, the Company had 22,465,108 and 21,932,842 shares of common stock issued and outstanding, respectively.
In May 2016, Resolute adopted a stockholder rights plan and in connection with such plan declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.0001 per share. The Rights trade with, and are inseparable from, the common stock until such time as they become exercisable on the distribution date. The Rights are evidenced only by certificates that represent shares of common stock and not by separate certificates. New Rights will accompany any new shares of common stock issued after May 27, 2016, until the earlier of the distribution date and the redemption or expiration of the rights.
Each Right allows its holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock
(a “Preferred Share”) for $4.50, once the Rights become exercisable. Prior to exercise, the Right does not give its holder any dividend, voting or liquidation rights. The Rights will not be exercisable until 10 days after the public announcement that a person or group has become an “Acquiring Person” by obtaining beneficial ownership of 20% or more of our outstanding common stock, or, if earlier, 10 business days (or a later date determined by the Board before any person or group becomes an Acquiring Person) after a person or group begins a tender or exchange offer which, if completed, would result in that person or group becoming an Acquiring Person. The stockholder rights plan was approved by the Company’s stockholders at the 2017 annual meeting in May 2017.
In June 2016 Resolute filed a certificate of amendment to its certificate of incorporation to effect the previously-announced reverse stock split of the Company’s common stock, par value $0.0001 per share, at a ratio of 1-for-5 (the “Reverse Stock Split”). The certificate of amendment also reduced the number of authorized shares of common stock from 225,000,000 to 45,000,000. The Reverse Stock Split, including the certificate of amendment, was approved by stockholders at the Company’s 2016 annual meeting of stockholders and by the Company’s Board of Directors. As a result, the Company is now in compliance with the $1.00 per share minimum price requirement of the New York Stock Exchange (the “NYSE”). All historical share amounts disclosed have been retroactively adjusted to reflect this Reverse Stock Split.
During the fourth quarter of 2016, the Company issued 4,370,000 shares of common stock in a public offering at $38.00 per share for net proceeds of $160.9 million, after deducting fees and estimated expenses. The net proceeds were used to repay outstanding borrowings under the Secured Term Loan Facility and Revolving Credit Facility.
Long Term Employee Incentive Plan
The Company accounts for share-based compensation in accordance with FASB ASC Topic 718, Stock Compensation.
In July 2009, the Company adopted the 2009 Long Term Performance Incentive Plan, providing for long-term share-based awards intended as a means for the Company to attract, motivate, retain and reward directors, officers, employees and other eligible persons through the grant of awards and incentives for high levels of individual performance and improved financial performance of the Company. The share-based awards are also intended to further align the interests of award recipients and the Company’s stockholders. The maximum number of shares of common stock that may be issued under the Incentive Plan is 4,901,548 (which includes the 1,000,000 shares under Amendment No. 3 to the Incentive Plan approved by the Company’s stockholders in May 2016 and the 1,450,000 shares under Amendment No. 4 to the Incentive Plan approved by the Company’s stockholders in May 2017).
13
For the three and six months ended June 30, 2017 and 2016, the Company recorded expense related to the Incentive Plan as follows (in thousands):
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Time-based restricted stock awards
|
$
|
1,551
|
|
|
$
|
941
|
|
|
$
|
3,051
|
|
|
$
|
2,719
|
|
TSR awards
|
|
1,387
|
|
|
|
219
|
|
|
|
2,303
|
|
|
|
556
|
|
Stock option awards
|
|
39
|
|
|
|
247
|
|
|
|
496
|
|
|
|
436
|
|
Total share-based compensation expense
|
|
2,977
|
|
|
|
1,407
|
|
|
|
5,850
|
|
|
|
3,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-based restricted cash awards
|
|
627
|
|
|
|
1,040
|
|
|
|
906
|
|
|
|
1,690
|
|
Performance-based restricted cash awards
|
|
698
|
|
|
|
89
|
|
|
|
1,205
|
|
|
|
127
|
|
Cash-settled stock appreciation awards
|
|
(2,738
|
)
|
|
|
306
|
|
|
|
1,903
|
|
|
|
416
|
|
Total cash-based compensation expense
|
|
(1,413
|
)
|
|
|
1,435
|
|
|
|
4,014
|
|
|
|
2,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Incentive Plan compensation expense
|
$
|
1,564
|
|
|
$
|
2,842
|
|
|
$
|
9,864
|
|
|
$
|
5,944
|
|
As of June 30, 2017, the Company held unrecognized share-based compensation expense (in thousands) which is expected to be recognized over a weighted-average period as follows:
|
|
|
|
|
Weighted
|
|
|
Unrecognized
|
|
|
Average
|
|
|
Compensation
|
|
|
Years
|
|
|
Expense
|
|
|
Remaining
|
|
Time-based restricted stock awards
|
$
|
13,187
|
|
|
|
2.5
|
|
TSR awards
|
|
7,915
|
|
|
|
2.7
|
|
Stock option awards
|
|
1,227
|
|
|
|
1.5
|
|
Total unrecognized compensation expense
|
$
|
22,329
|
|
|
|
|
|
Equity Awards
Equity awards consist of service-based and performance-based restricted stock and stock options under the Incentive Plan. All historical exercise, base and threshold prices disclosed have been retroactively adjusted to reflect the Reverse Stock Split.
Time-Based Restricted Stock Awards
Shares of time-based restricted stock issued to employees generally vest in three equal annual installments at specified dates based on continued employment. Shares issued to non-employee directors vest in one year based on continued service. The compensation expense to be recognized for the time-based restricted stock awards was measured based on the Company’s closing stock price on the dates of grant, utilizing estimated forfeiture rates between 0% and 15% which are updated periodically based on actual employee turnover. During the six months ended June 30, 2017, the Company granted 372,720 shares of time-based restricted stock to employees and non-employee directors, pursuant to the Incentive Plan.
The following table summarizes the changes in non-vested time-based restricted stock awards for the six months ended June 30, 2017:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested, beginning of period
|
|
151,781
|
|
|
$
|
25.07
|
|
Granted
|
|
372,720
|
|
|
|
43.92
|
|
Vested
|
|
(115,264
|
)
|
|
|
28.70
|
|
Forfeited
|
|
(2,117
|
)
|
|
|
43.91
|
|
Non-vested, end of period
|
|
407,120
|
|
|
$
|
41.20
|
|
14
TSR Awards
In February 2017 the Board and its Compensation Committee awarded performance-based restricted shares to senior employees and executive officers of the Company under the Incentive Plan. The restricted stock grants vest only upon achievement of thresholds of cumulative total shareholder return (“TSR”) as compared to a specified peer group (the “Performance-Vested Shares”). A TSR percentile (the “TSR Percentile”) is calculated based on the change in the value of the Company’s common stock between the grant date and the applicable vesting date, including any dividends paid during the period, as compared to the respective TSRs of a specified group of twelve peer companies. The Performance-Vested Shares vest in three installments to the extent that the applicable TSR Percentile ranking thresholds are met upon the one-, two- and three-year anniversaries of the grant date. Performance-Vested Shares that are eligible to vest on a vesting date, but do not qualify for vesting, become eligible for vesting again on the next vesting date. All Performance-Vested Shares that do not vest as of the final vesting date will be forfeited on such date.
The Board and its Compensation Committee also granted rights to earn additional shares of common stock upon achievement of a higher TSR Percentile (“Outperformance Shares”). The Outperformance Shares are earned in increasing increments based on a TSR Percentile attained over a specified threshold. Outperformance Shares may be earned on any vesting date to the extent that the applicable TSR Percentile ranking thresholds are met in three installments on the one-, two- and three-year anniversaries of the grant date. Outperformance Shares that are earned at a vesting date will be issued to the recipient; however, prior to such issuance, the recipient is not entitled to stockholder rights with respect to Outperformance Shares. Outperformance Shares that are eligible to be earned but remain unearned on a vesting date become eligible to be earned again on the next vesting date. The right to earn any unearned Outperformance Shares terminates immediately following the final vesting date. The Performance-Vested Shares and the Outperformance Shares are referred to as the “TSR Awards.”
The compensation expense to be recognized for the TSR Awards was measured based on the estimated fair value at the date of grant using a Monte Carlo simulation model and utilizes estimated forfeiture rates between 0% and 2% which are updated periodically based on actual employee turnover.
The valuation model for TSR Awards used the following assumptions:
Grant Year
|
|
Average Expected
Volatility
|
|
Expected Dividend
Yield
|
|
|
Risk-Free
Interest Rate
|
2017
|
|
49.07% - 108.21%
|
|
|
0%
|
|
|
0.83% - 1.45%
|
The following table summarizes the changes in non-vested TSR Awards for the six months ended June 30, 2017:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested, beginning of period
|
|
97,561
|
|
|
$
|
66.60
|
|
Granted
|
|
131,379
|
|
|
|
77.23
|
|
Vested
|
|
(97,561
|
)
|
|
|
66.60
|
|
Forfeited
|
|
(481
|
)
|
|
|
77.21
|
|
Non-vested, end of period
|
|
130,898
|
|
|
$
|
77.23
|
|
There were no TSR awards granted during the six months ended June 30, 2016. In addition to the vested TSR awards above, 63,024 outperformance shares were also earned and vested during the six months ended June 30, 2017, related to the TSR awards granted in 2014.
Stock Option Awards
Options issued to employees to purchase shares of common stock vest in three equal annual installments at specified dates based on continued employment with a ten year term. The compensation expense to be recognized for the option awards was measured based on the Company’s estimated fair value at the date of grant using a Black-Scholes pricing model as well as estimated forfeiture rates between 0% and 15%, no dividends, expected stock price volatility ranging from 63% to 67% and a risk-free rate ranging between 1.75% and 2.27%.
15
The following table summarizes the option award activity for the six months ended June 30, 2017:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic Value
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
(in thousands)
|
|
Outstanding, beginning of period
|
|
1,052,513
|
|
|
$
|
4.03
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(55,438
|
)
|
|
|
4.07
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(11,033
|
)
|
|
|
3.52
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
986,042
|
|
|
$
|
4.03
|
|
|
|
8.4
|
|
|
$
|
25,376
|
|
Exercisable, end of period
|
|
397,719
|
|
|
$
|
4.75
|
|
|
|
8.2
|
|
|
$
|
9,949
|
|
The weighted average grant date fair value of options granted during the six months ended June 30, 2016, was $1.93. No options were granted during the six months ended June 30, 2017. The total intrinsic value for options exercised during the six months ended June 30, 2017, was $2.0 million. No options were exercised during the six months ended June 30, 2016.
Liability Awards
Liability awards consist of awards that are settled in cash instead of shares, as discussed below. The fair value of those instruments at a single point in time is not a forecast of what the estimated fair value of those instruments may be in the future.
Cash-settled Stock Appreciation Rights
A stock appreciation right is the right to receive an amount in cash equal to the excess, if any, of the fair market value of a share of common stock on the date on which the right is exercised over its base price. The February 2016 grants of cash-settled stock appreciation rights hold base prices of $2.65 per share (as to 486,373 rights) and $2.915 per share (as to 1,216,479 rights). The awards granted to employees vest in three equal annual installments and have a ten-year term. The awards granted to non-employee directors vest in one year based on continued service and also have a ten-year term. The compensation expense to be recognized for the cash-settled stock appreciation rights was measured utilizing estimated forfeiture rates between 0% and 15% which will be updated periodically based on actual employee turnover. The fair value of the cash-settled stock appreciation rights as of June 30, 2017, was $45.7 million, of which $20.0 million has been expensed.
Time-Based Restricted Cash Awards
Awards of time-based restricted cash issued to employees vest in three equal annual increments at specified dates based on continued employment. Time-based restricted cash issued to non-employee directors vests in one year based on continued service. The compensation expense to be recognized for the time-based restricted cash awards was measured utilizing estimated forfeiture rates between 0% and 25% which will be updated periodically based on actual employee turnover. The total estimated future liability of the time-based restricted cash awards as of June 30, 2017, was $9.5 million, of which $5.6 million has been expensed.
Performance-Based Restricted Cash Awards
The performance criteria for the performance-based restricted cash awards granted in May 2015 are based on future prices of the Company’s common stock trading at or above specified thresholds. If and as certain stock price thresholds are met, using a 60 trading day average, various multiples of the performance-vested cash award will be attained. The first stock price hurdle was at $10.00 at which the award was payable at 1x, and the highest stock price hurdle was $40.00 at which the award was payable at a multiple of 6x. Interim hurdles and multiples between these end points are set forth in the governing agreements. As of June 30, 2017, all of the stock price hurdles up to $40.00 have been met. A time vesting element will apply to the performance-vested cash awards such that attained multiples will not be paid out earlier than upon satisfaction of a three-year vesting timetable from the date of grant. In order for an award to be paid, both the performance criteria and the time criteria would need to be satisfied. Once a time vesting date passes, the employee is entitled to be paid one third, two thirds or 100%, as applicable, of whatever multiples have been achieved provided the employee continues to be employed by the Company. Any multiples achieved following 100% time vesting would be paid within 60 days of such achievement.
The estimated fair value of the performance-based restricted cash awards as of June 30, 2017, was $16.8 million of which $15.2 million has been expensed, based upon the three-year vesting. The fair value was estimated using an option pricing model for a cash or nothing call, an estimated forfeiture rate of 5% and an average effective term of less than one year. As the fair value of liability awards is required to be re-measured at each period end, amounts recognized in future periods will vary.
16
Note 8 — Asset Retirement Obligation
Resolute’s estimated asset retirement obligation liability is based on estimated economic lives, estimates as to the cost to abandon the wells and facilities in the future, and federal and state regulatory requirements. The liability is discounted using a credit-adjusted risk-free rate estimated at the time the liability is incurred or revised, that ranges between 7% and 12%. Revisions to the liability could occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells. Asset retirement obligations are valued utilizing Level 3 fair value measurement inputs.
The following table provides a reconciliation of Resolute’s asset retirement obligations for the periods presented (in thousands):
|
Six Months Ended
|
|
|
June 30,
|
|
|
2017
|
|
|
2016
|
|
Asset retirement obligations at beginning of period
|
$
|
20,352
|
|
|
$
|
19,238
|
|
Additional liability incurred / acquired
|
|
168
|
|
|
|
15
|
|
Accretion expense
|
|
814
|
|
|
|
882
|
|
Liabilities settled / sold
|
|
(3,822
|
)
|
|
|
—
|
|
Revisions to previous estimates
|
|
677
|
|
|
|
—
|
|
Asset retirement obligations at end of period
|
|
18,189
|
|
|
|
20,135
|
|
Less: current asset retirement obligations
|
|
(1,354
|
)
|
|
|
(1,069
|
)
|
Long-term asset retirement obligations
|
$
|
16,835
|
|
|
$
|
19,066
|
|
Note 9 — Derivative Instruments
Resolute enters into commodity derivative contracts to manage its exposure to oil and gas price volatility. Resolute has not elected to designate derivative instruments as hedges under the provisions of FASB ASC Topic 815,
Derivatives and Hedging
. As a result, these derivative instruments are marked to market at the end of each reporting period and changes in the fair value are recorded in the accompanying condensed consolidated statements of operations. Gains and losses on commodity derivative instruments from Resolute’s price risk management activities are recognized in other income (expense). The cash flows from derivatives are reported as cash flows from operating activities unless the derivative contract is deemed to contain a financing element. Derivatives deemed to contain a financing element are reported as financing activities in the condensed consolidated statement of cash flows.
The Company utilizes fixed price swaps, basis swaps, option contracts and two- and three-way collars. These instruments generally entitle Resolute (the floating price payer in most cases) to receive settlement from the counterparty (the fixed price payer in most cases) for each calculation period in amounts, if any, by which the settlement price for the scheduled trading days applicable to each calculation period is less than the fixed strike price or floor price. The Company would pay the counterparty if the settlement price for the scheduled trading days applicable to each calculation period exceeds the fixed strike price or ceiling price. The amount payable by Resolute, if the floating price is above the fixed or ceiling price is the product of the notional contract quantity and the excess of the floating price over the fixed or ceiling price per calculation period. The amount payable by the counterparty, if the floating price is below the fixed or floor price, is the product of the notional contract quantity and the excess of the fixed or floor price over the floating price per calculation period. A three-way collar consists of a two-way collar contract combined with a put option contract sold by the Company with a strike price below the floor price of the two-way collar. The Company receives price protection at the purchased put option floor price of the two-way collar if commodity prices are above the sold put option strike price. If commodity prices fall below the sold put option strike price, the Company receives the cash market price plus the variance between the two put option strike prices. This type of instrument captures more value in a rising commodity price environment, but limits the benefits in a downward commodity price environment. Basis swaps, when used in connection with fixed price swaps, are used to fix the price differential between the NYMEX commodity price and the index price at which the production is sold.
As of June 30, 2017, the fair value of the Company’s commodity derivatives was a net asset of $5.0 million (Level 2 fair value measurement).
17
The following table represents Resolute’s commodity swap contracts as of
June 30, 2017
:
|
|
Oil (NYMEX WTI)
|
|
|
Gas (NYMEX Henry Hub)
|
|
|
NGL (Mont Belvieu)
|
|
Remaining Term
|
|
Bbl per Day
|
|
|
Weighted Average Swap Price per Bbl
|
|
|
MMBtu per Day
|
|
|
Weighted Average Swap Price per MMBtu
|
|
|
Bbl per Day
|
|
|
Weighted Average Swap Price per Bbl
|
|
Jul – Dec 2017
|
|
|
3,000
|
|
|
$
|
53.93
|
|
|
|
13,000
|
|
|
$
|
3.431
|
|
|
|
300
|
|
|
$
|
19.53
|
|
The following table represents Resolute’s two-way commodity collar contracts as of June 30, 2017:
|
|
Oil (NYMEX WTI)
|
|
|
Gas (NYMEX Henry Hub)
|
|
Remaining Term
|
|
Bbl per Day
|
|
|
Weighted Average Floor Price per Bbl
|
|
|
Weighted Average Ceiling Price per Bbl
|
|
|
MMBtu per Day
|
|
|
Weighted Average Floor Price per MMBtu
|
|
|
Weighted Average Ceiling Price per MMBtu
|
|
Jul – Dec 2017
|
|
|
2,500
|
|
|
$
|
47.80
|
|
|
$
|
60.19
|
|
|
|
9,250
|
|
|
$
|
2.477
|
|
|
$
|
3.263
|
|
The following table represents Resolute’s three-way oil collar contracts as of June 30, 2017:
|
|
|
|
|
|
Oil (NYMEX WTI)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
Remaining Term
|
|
|
|
|
|
Bbl per Day
|
|
|
Short Put
Price per Bbl
|
|
|
Floor Price
per Bbl
|
|
|
Ceiling Price
per Bbl
|
|
Jul – Dec 2017
|
|
|
|
|
|
|
1,500
|
|
|
$
|
40.00
|
|
|
$
|
50.00
|
|
|
$
|
60.10
|
|
The following table represents Resolute’s three-way gas collar contracts as of June 30, 2017:
|
|
|
|
|
|
Gas (NYMEX Henry Hub)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Short
|
|
|
Weighted Average Floor
|
|
|
Weighted Average
|
|
Remaining Term
|
|
|
|
|
|
MMBtu per Day
|
|
|
Put Price
per MMBtu
|
|
|
Price per MMBtu
|
|
|
Ceiling Price per MMBtu
|
|
Jul – Dec 2017
|
|
|
|
|
|
|
1,750
|
|
|
$
|
2.721
|
|
|
$
|
3.221
|
|
|
$
|
3.850
|
|
The following table represents Resolute’s commodity option contracts as of June 30, 2017:
|
|
|
|
|
|
|
|
|
|
Oil (NYMEX WTI)
|
|
Remaining Term
|
|
|
|
|
|
|
|
|
|
Bbl per Day
|
|
|
Weighted Average Sold Call Price per Bbl
|
|
Jan – Dec 2018
|
|
|
|
|
|
|
|
|
|
|
1,100
|
|
|
$
|
55.00
|
|
Jan – Dec 2019
|
|
|
|
|
|
|
|
|
|
|
1,100
|
|
|
$
|
62.85
|
|
Subsequent to June 30, 2017, Resolute entered into additional oil swap contracts as summarized below:
|
|
|
|
|
|
Oil (NYMEX WTI)
|
|
Commodity Swaps
|
|
|
|
|
|
Bbl per Day
|
|
|
Weighted Average Swap Price per Bbl
|
|
Jan – Dec 2018
|
|
|
|
|
|
|
1,500
|
|
|
|
50.07
|
|
The table below summarizes the location and amount of commodity derivative instrument gains and losses reported in the condensed consolidated statements of operations (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative settlement gain
|
|
$
|
1,656
|
|
|
$
|
20,544
|
|
|
$
|
1,406
|
|
|
$
|
48,292
|
|
Mark-to-market gain (loss)
|
|
|
5,802
|
|
|
|
(40,096
|
)
|
|
|
16,892
|
|
|
|
(64,003
|
)
|
Commodity derivative instruments gain (loss)
|
|
$
|
7,458
|
|
|
$
|
(19,552
|
)
|
|
$
|
18,298
|
|
|
$
|
(15,711
|
)
|
18
Credit Risk in Derivative Instruments
Resolute is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed above. All counterparties are current or former lenders under Resolute’s Revolving Credit Facility. Accordingly, Resolute is not required to provide any credit support to its counterparties other than cross collateralization with the properties securing the Revolving Credit Facility. Resolute’s derivative contracts are documented with industry standard contracts known as a Schedule to the Master Agreement and International Swaps and Derivative Association, Inc. Master Agreement (“ISDA”). Typical terms for each ISDA include credit support requirements, cross default provisions, termination events, and set-off provisions. Resolute generally has set-off provisions with its lenders that, in the event of counterparty default, allow Resolute to set-off amounts owed under the Revolving Credit Facility or other general obligations against amounts owed for derivative contract liabilities.
Resolute does not offset the fair value amounts of commodity derivative assets and liabilities with the same counterparty for financial reporting purposes. The following is a listing of Resolute’s commodity derivative assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of June 30, 2017, and December 31, 2016 (in thousands):
|
|
Level 2
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Derivative instruments, current
|
|
$
|
7,770
|
|
|
$
|
218
|
|
Derivative instruments, long term
|
|
|
412
|
|
|
|
—
|
|
Total assets
|
|
$
|
8,182
|
|
|
$
|
218
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative instruments, current
|
|
$
|
1,217
|
|
|
$
|
8,014
|
|
Derivative instruments, long term
|
|
|
1,974
|
|
|
|
4,104
|
|
Total liabilities
|
|
$
|
3,191
|
|
|
$
|
12,118
|
|
As of June 30, 2017, the maximum amount of loss in the event of all counterparties defaulting was $5.0 million.
Note 10 — Commitments and Contingencies
CO
2
Take-or-Pay Agreements
Resolute is party to a take-or-pay purchase agreement with Kinder Morgan CO
2
Company L.P., under which Resolute has committed to buy specified volumes of CO
2
. The purchased CO
2
is for use in Resolute’s enhanced tertiary recovery projects in Aneth Field. Resolute is obligated to purchase a minimum daily volume of CO
2
or pay for any deficiencies at the price in effect when delivery was to have occurred. The ultimate CO
2
volumes planned for use on the enhanced recovery projects exceed the minimum daily volumes provided in these take-or-pay purchase agreements. Although the Company may incur deficiency payments from time to time, Resolute expects to avoid any payments for deficiencies over the term of the agreement.
Future minimum CO
2
purchase commitments as of June 30, 2017, under this purchase agreement, based on prices and volumes in effect at June 30, 2017, are as follows (in thousands):
|
CO
2
Purchase
|
|
Year
|
Commitments
|
|
2017
|
|
2,760
|
|
2018
|
|
5,475
|
|
Total
|
$
|
8,235
|
|
19
The terms of the CO
2
contract, as amended in Amendment No. 3 to the Kinder Morgan Product Sale and Purchase Contract dated July 1, 2007, contains a unit price floor, below which the price cannot fall. As a result, the Company is exposed to the risk of paying higher than the market rate for CO
2
in a climate of declining oil and CO
2
prices. Based on this floor pricing term, the Company has determined that this contract contains an embedded derivative. However, assuming the prices in effect as of June 30, 2017, the fair value of this embedded derivative would be immaterial.
Cooperative Agreement with Navajo Nation Oil and Gas Company
Resolute is party to a cooperative agreement with Navajo Nation Oil and Gas Company (“NNOGC”) related to the Aneth Field Properties (the “Cooperative Agreement”). Pursuant to the Cooperative Agreement, as modified on March 9, 2017, NNOGC holds an option to purchase an additional 10% of Resolute’s interest in the Aneth Field Properties. The option is exercisable until 60 days following July 1, 2017, or ten days following the determination of fair value, at the fair market value of such interest.
20