NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - The Company and Business
SM Energy Company, together with its consolidated subsidiaries (“SM Energy” or the “Company”), is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil and condensate, natural gas, and natural gas liquids (also respectively referred to as “oil,” “gas,” and “NGLs” throughout this report) in onshore North America.
Note 2 - Basis of Presentation, Significant Accounting Policies, and Recently Issued Accounting Standards
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of SM Energy and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Quarterly Report on Form 10-Q, and Regulation S-X. These financial statements do not include all information and notes required by GAAP for annual financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to consolidated financial statements included in SM Energy’s Annual Report on Form 10-K for the year ended
December 31, 2016
(the “
2016
Form 10-K”). In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of interim financial information, have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year. In connection with the preparation of the Company’s unaudited condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of
September 30, 2017
, and through the filing of this report. Certain prior period amounts have been reclassified to conform to the current presentation on the accompanying condensed consolidated financial statements.
Significant Accounting Policies
The significant accounting policies followed by the Company are set forth in
Note 1 - Summary of Significant Accounting Policies
to the Company’s consolidated financial statements in its
2016
Form 10-K, and are supplemented by the notes to the unaudited condensed consolidated financial statements included in this report. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the
2016
Form 10-K.
Recently Issued Accounting Standards
Effective January 1, 2017, the Company adopted, using various transition methods, Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 is meant to simplify certain aspects of accounting for share-based arrangements, including income tax effects, accounting for forfeitures, and net share settlements. The Company adopted the various applicable amendments, which are summarized as follows:
|
|
•
|
On January 1, 2017, a
$44.3 million
cumulative-effect adjustment was made to retained earnings and a corresponding deferred tax asset was recorded for previously unrecognized excess tax benefits using a modified retrospective transition method. Additionally, going forward excess tax benefits will be presented in operating activities on the condensed consolidated statement of cash flows.
|
|
|
•
|
Also on January 1, 2017, the Company elected to change its policy to account for forfeitures of share-based payment awards as they occur, rather than applying an estimated forfeiture rate. This change was made using a modified retrospective transition method and resulted in an increase in additional paid-in capital of
$1.1 million
, a decrease in deferred tax assets of
$0.4 million
, and a net
$0.7 million
cumulative effect adjustment decrease to retained earnings.
|
|
|
•
|
Under this new guidance, excess tax benefits and deficiencies from share-based payments impact the Company’s effective tax rate between periods. Please refer to
Note 4 - Income Taxes
for additional discussion
.
|
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”)
.
Under the new standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB issued several amendments to the standard which provided additional implementation guidance and deferred the effective date of ASU
2014-09. Based upon work performed as of
September 30, 2017
, and through the filing of this report, the Company does not currently anticipate a material impact to net income (loss) or cash flows. Further, the Company completed its initial assessment of certain pipeline gathering, transportation and gas processing agreements, and does not anticipate changes in how total revenues or total expenses will be recognized given where control transfers for these agreements. In addition, the Company is in the process of implementing appropriate changes to its business processes, systems, and controls to support the recognition and disclosure requirements of ASU 2014-09. The Company plans to adopt the guidance using the modified retrospective method on the effective date of January 1, 2018.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”)
,
which requires lessees to recognize a right-of-use asset and a lease liability for virtually all leases currently classified as operating leases. The Company is currently analyzing the impact this standard will have on the Company’s contract portfolio, including non-cancelable leases, drilling rig contracts, pipeline gathering, transportation and gas processing agreements, and other existing arrangements. Further, the Company is evaluating current accounting policies, applicable systems, controls, and processes to support the potential recognition and disclosure changes resulting from ASU 2016-02. Based upon an initial assessment, adoption of ASU 2016-02 is expected to result in an increase in assets and liabilities recorded. The Company plans to adopt the guidance on the effective date of January 1, 2019.
In March 2017, the FASB issued ASU No. 2017-07,
Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
(“ASU 2017-07”). ASU 2017-07 requires presentation of service cost in the same line item(s) as other compensation costs arising from services rendered by employees during the period and presentation of the remaining components of net benefit cost in a separate line item, outside operating items. In addition, only the service cost component of net benefit cost is eligible for capitalization. The Company plans to adopt ASU 2017-07 on the effective date of January 1, 2018, with retrospective application of the service cost component and the other components of net benefit cost in the consolidated statements of operations and prospective application for the capitalization of the service cost component of net benefit costs in assets. While ASU 2017-07 will result in the Company reclassifying certain amounts from operating expenses to non-operating expenses upon adoption, the Company does not currently anticipate ASU 2017-07 will result in a material impact to the Company’s consolidated financial statements or disclosures.
Other than as disclosed above or in the
2016
Form 10-K, there are no other ASUs applicable to the Company that would have a material effect on the Company’s financial statements and related disclosures that have been issued but not yet adopted by the Company as of
September 30, 2017
, and through the filing of this report.
Note 3 - Divestitures, Assets Held for Sale, and Acquisitions
Divestitures
On
March 10, 2017
,
the Company divested its outside-operated Eagle Ford shale assets, including its ownership interest in related midstream assets, for total cash received at closing, net of costs (referred to throughout this report as “net divestiture proceeds”), of
$747.4 million
. The Company finalized this divestiture subsequent to September 30, 2017, and recorded a final net gain of
$396.8 million
for the
nine
months ended
September 30, 2017
. These assets were classified as held for sale as of
December 31, 2016
.
The following table presents income (loss) before income taxes from the outside-operated Eagle Ford shale assets sold for the
three and nine
months ended
September 30, 2017
, and
2016
. This divestiture is considered a disposal of a significant asset group.
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Income (loss) before income taxes
(1)
|
$
|
—
|
|
|
$
|
22,116
|
|
|
$
|
24,324
|
|
|
$
|
(251,451
|
)
|
____________________________________________
|
|
(1)
|
Income (loss) before income taxes reflects oil, gas, and NGL production revenue, less oil, gas, and NGL production expense, and depletion, depreciation, amortization, and asset retirement obligation liability accretion. Additionally, income (loss) before income taxes included impairment of proved properties expense of approximately
$269.6 million
for the
nine
months ended
September 30, 2016
.
|
During the first nine months of 2017,
the Company divested certain non-core properties in its Rocky Mountain and Permian regions for net divestiture proceeds of
$31.0 million
.
During the third quarter of 2016, the Company divested certain non-core properties in its Rocky Mountain and Permian regions for net divestiture proceeds of
$165.2 million
. As of
September 30, 2016
,
$23.6 million
of accrued costs and payments to Net Profits Plan participants related to divestitures were included in accounts payable and accrued expenses in the Company’s condensed consolidated balance sheets. The Company recorded a
$22.4 million
net gain on divestiture activity for the three months ended
September 30, 2016
, which was a result of closing divestitures in the Company’s Rocky Mountain and Permian regions during the third quarter of
2016
. Certain of these sold assets were written down in the first quarter of
2016
and subsequently written up in the second quarter of
2016
based on changes in the estimated fair value less selling costs, resulting in a net gain of
$6.3 million
recorded for the nine months ended
September 30, 2016
.
Assets Held for Sale
Assets are classified as held for sale when the Company commits to a plan to sell the assets and it is probable the sale will take place within one year. Upon classification as held for sale, long-lived assets are no longer depreciated or depleted, and a measurement for impairment is performed to identify and expense any excess of carrying value over fair value less estimated costs to sell. When assets no longer meet the criteria of assets held for sale, they are measured at the lower of the carrying value of the assets before being classified as held for sale, adjusted for any depletion, depreciation, and amortization expense that would have been recognized, or the fair value at the date they are reclassified to assets held for use. Any gain or loss recognized on assets held for sale or on assets held for sale that are subsequently reclassified to assets held for use is reflected in the
net gain (loss) on divestiture activity
line item in the accompanying condensed consolidated statements of operations (“accompanying statements of operations”). As of
September 30, 2017
, there were
$7.1 million
of assets held for sale presented in the accompanying condensed consolidated balance sheets (“accompanying balance sheets”).
During the nine months ended
September 30, 2017
, the Company recorded a
$526.5 million
write-down on its retained Divide County, North Dakota, assets previously held for sale, of which
$359.6 million
was recorded in the first quarter of
2017
based on an estimated fair value less selling costs and an additional
$166.9 million
write-down was recorded in the second quarter of
2017
based on market conditions that existed on the date the Company decided to retain the assets.
Acquisitions
During the first nine months of
2017
, the Company acquired approximately
3,400
net acres of primarily unproved properties in Howard and Martin Counties, Texas, in multiple transactions for a total of
$72.2 million
of cash consideration. Under authoritative accounting guidance, these transactions were considered asset acquisitions and the properties were recorded based on the fair value of the total consideration transferred on the acquisition date and transaction costs were capitalized as a component of the cost of the assets acquired.
The Company finalized the
2016
acquisition of Midland Basin properties from Rock Oil Holdings, LLC (referred to as the “Rock Oil Acquisition”) during the first quarter of 2017 by paying an additional
$7.4 million
of cash consideration, resulting in total consideration of approximately
$1.0 billion
paid after final closing adjustments. The Company finalized the
2016
acquisition of Midland Basin properties from QStar LLC and RRP-QStar, LLC (referred to as the “QStar Acquisition”) during the third quarter of 2017 by paying an additional
$7.3 million
of cash consideration, with the majority of this payment being made in the first quarter of 2017, resulting in total consideration of approximately
$1.6 billion
paid after final closing adjustments. The Company funded these acquisitions with proceeds from divestitures, the Senior Convertible Notes issuance, the issuance of 6.75% Senior Notes due 2026 (“2026 Notes”), and equity offerings in
2016
. Please refer to
Note 5 - Long-Term Debt
and
Note 15 - Equity
in the Company’s 2016 Form 10-K for more information on the funding for these acquisitions. There were no material changes to the initial recorded basis of these proved and unproved properties acquired as a result of the final settlements.
Also, during the first nine months of 2017, the Company completed several non-monetary acreage trades of primarily unproved properties, in Howard and Martin Counties, Texas, resulting in the Company acquiring approximately
7,425
net acres in exchange for approximately
6,725
net acres with
$283.7 million
of value attributed to the properties assigned by the Company in such trades. These trades were recorded at carryover basis with no gain or loss recognized.
Note 4 - Income Taxes
The
income tax benefit
recorded for the
three and nine
months ended
September 30, 2017
, and
2016
, differs from the amounts that would be provided by applying the statutory United States federal income tax rate to income or loss before income taxes primarily due to the effect of excess tax benefits and deficiencies from share-based payment awards, state income taxes, changes in valuation allowances, and accumulated impacts of other smaller permanent differences. The quarterly rate can also be affected by the proportional impacts of forecasted net income or loss as of each period end presented.
The provision for income taxes for the
three and nine
months ended
September 30, 2017
, and
2016
, consisted of the following:
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|
|
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|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Current portion of income tax benefit (expense):
|
|
|
|
|
|
|
|
Federal
|
$
|
2,832
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
(230
|
)
|
|
(24
|
)
|
|
(1,633
|
)
|
|
(265
|
)
|
Deferred portion of income tax benefit
|
36,668
|
|
|
23,756
|
|
|
67,458
|
|
|
314,770
|
|
Income tax benefit
|
$
|
39,270
|
|
|
$
|
23,732
|
|
|
$
|
65,825
|
|
|
$
|
314,505
|
|
Effective tax rate
|
30.6
|
%
|
|
36.7
|
%
|
|
32.8
|
%
|
|
36.1
|
%
|
On a year-to-date basis, a change in the Company’s effective tax rate between reporting periods will generally reflect differences in its estimated highest marginal state tax rate due to changes in the composition of income or loss from Company activities among multiple state tax jurisdictions. Cumulative effects of state tax rate changes are reflected in the period legislation is enacted. As a result of adopting ASU 2016-09 on January 1, 2017, excess tax benefits and deficiencies from share-based payment awards impact the Company’s effective tax rate between periods. As discussed in
Note 7 - Compensation Plans
,
the Company settled various grants in the third quarter of 2017. As a result of these share-based award settlements, the Company recorded an
$8.2 million
excess tax deficiency in the third quarter of 2017 reducing the tax benefit and the tax benefit rate.
At the end of the third quarter 2017, the Company reevaluated various factors affecting deferred tax assets related to net operating losses and tax credits, and determined utilization would be appropriate. The change in the current portion of income tax benefit (expense) between periods reflects the effect of this determination. The Company is generally no longer subject to United States federal or state income tax examinations by tax authorities for years before 2013. Its 2003 to 2005 tax years have been reopened for net operating loss carryback claims and are currently under examination by the Internal Revenue Service (the “IRS”). During the quarter ended
September 30, 2017
, the Company received a
$5.5 million
refund in advance of the IRS completing its examination of the Company’s claims.
Note 5 - Long-Term Debt
Credit Agreement
The Company’s Fifth Amended and Restated Credit Agreement, as amended (the “Credit Agreement”), provides for a maximum loan amount of
$2.5 billion
and has a maturity date of
December 10, 2019
. On
March 31, 2017
, the Company entered into a Ninth Amendment to the Credit Agreement (the “Ninth Amendment”) with its lenders. Pursuant to the Ninth Amendment, and as part of the regular, semi-annual borrowing base redetermination process, the borrowing base and aggregate lender commitments were reduced to
$925 million
primarily due to the sale of the Company’s outside-operated Eagle Ford shale assets and the decrease in the value of the Company’s proved reserves at December 31, 2016. The borrowing base redetermination process considers the value of both the Company’s (a) proved oil and gas properties reflected in the Company’s most recent reserve report and (b) commodity derivative contracts, each as determined by the Company’s lender group. As of the filing of this report, the second semi-annual redetermination for
2017
was in progress and is expected to be completed prior to year-end.
The Company must comply with certain financial and non-financial covenants under the terms of the Credit Agreement and was in compliance with all such covenants as of
September 30, 2017
, and through the filing of this report.
Interest and commitment fees are accrued based on a borrowing base utilization grid set forth in the Credit Agreement and presented in
Note 5 - Long-Term Debt
to the Company’s consolidated financial statements in its
2016
Form 10-K. Eurodollar loans accrue interest at the London Interbank Offered Rate, plus the applicable margin from the utilization table, and Alternate Base Rate
and swingline loans accrue interest at the prime rate, plus the applicable margin from the utilization table. Commitment fees are accrued on the unused portion of the aggregate lender commitment amount and are included in interest expense in the accompanying statements of operations.
The following table presents the outstanding balance, total amount of letters of credit outstanding, and available borrowing capacity under the Credit Agreement as of
October 26, 2017
,
September 30, 2017
, and
December 31, 2016
:
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|
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|
|
|
|
|
|
As of October 26, 2017
|
|
As of September 30, 2017
|
|
As of December 31, 2016
|
|
(in thousands)
|
Credit facility balance
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Letters of credit
(2)
|
200
|
|
|
200
|
|
|
200
|
|
Available borrowing capacity
|
924,800
|
|
|
924,800
|
|
|
1,164,800
|
|
Total aggregate lender commitment amount
|
$
|
925,000
|
|
|
$
|
925,000
|
|
|
$
|
1,165,000
|
|
____________________________________________
|
|
(1)
|
Unamortized deferred financing costs attributable to the credit facility are presented as a component of other noncurrent assets on the accompanying balance sheets and totaled
$3.5 million
and
$5.9 million
as of
September 30, 2017
, and
December 31, 2016
, respectively.
|
|
|
(2)
|
Letters of credit outstanding reduce the amount available under the credit facility on a dollar-for-dollar basis.
|
Senior Notes
The Company’s Senior Notes consist of
6.50%
Senior Notes due 2021,
6.125%
Senior Notes due 2022,
6.50%
Senior Notes due 2023,
5.0%
Senior Notes due 2024,
5.625%
Senior Notes due 2025, and
6.75%
Senior Notes due 2026 (collectively referred to as “Senior Notes”). The Senior Notes, net of unamortized deferred financing costs line on the accompanying balance sheets as of
September 30, 2017
,
and
December 31, 2016
,
consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
As of December 31, 2016
|
|
Principal Amount
|
|
Unamortized Deferred Financing Costs
|
|
Senior Notes, Net of Unamortized Deferred Financing Costs
|
|
Principal Amount
|
|
Unamortized Deferred Financing Costs
|
|
Senior Notes, Net of Unamortized Deferred Financing Costs
|
|
(in thousands)
|
6.50% Senior Notes due 2021
(1) (2)
|
$
|
344,611
|
|
|
$
|
2,830
|
|
|
$
|
341,781
|
|
|
$
|
346,955
|
|
|
$
|
3,372
|
|
|
$
|
343,583
|
|
6.125% Senior Notes due 2022
(2)
|
561,796
|
|
|
6,095
|
|
|
555,701
|
|
|
561,796
|
|
|
6,979
|
|
|
554,817
|
|
6.50% Senior Notes due 2023
(2)
|
394,985
|
|
|
3,889
|
|
|
391,096
|
|
|
394,985
|
|
|
4,436
|
|
|
390,549
|
|
5.0% Senior Notes due 2024
|
500,000
|
|
|
5,841
|
|
|
494,159
|
|
|
500,000
|
|
|
6,533
|
|
|
493,467
|
|
5.625% Senior Notes due 2025
|
500,000
|
|
|
6,940
|
|
|
493,060
|
|
|
500,000
|
|
|
7,619
|
|
|
492,381
|
|
6.75% Senior Notes due 2026
(3)
|
500,000
|
|
|
7,451
|
|
|
492,549
|
|
|
500,000
|
|
|
8,078
|
|
|
491,922
|
|
Total
|
$
|
2,801,392
|
|
|
$
|
33,046
|
|
|
$
|
2,768,346
|
|
|
$
|
2,803,736
|
|
|
$
|
37,017
|
|
|
$
|
2,766,719
|
|
____________________________________________
|
|
(1)
|
During the first quarter of 2017, the Company repurchased a total of
$2.3 million
in aggregate principal amount of
6.50%
Senior Notes due 2021 in open market transactions at a slight premium. The Company canceled all of these repurchased Senior Notes upon cash settlement.
|
|
|
(2)
|
During the first quarter of 2016, the Company repurchased a total of
$46.3 million
in aggregate principal amount of certain of its Senior Notes in open market transactions for a settlement amount of
$29.9 million
, excluding interest. The Company recorded a net gain on extinguishment of debt of approximately
$15.7 million
for the
nine
months ended
September 30, 2016
. This amount includes a gain of approximately
$16.4 million
associated with the discount realized upon repurchase, which was partially offset by approximately
$0.7 million
related to the acceleration of unamortized deferred financing costs. The Company canceled all of these repurchased Senior Notes upon cash settlement.
|
|
|
(3)
|
On
September 12, 2016
, the Company issued
6.75%
Senior Notes due
September 15, 2026
. The Company received net proceeds of
$491.6 million
after deducting paid and accrued fees. The net proceeds were used to partially fund the Rock Oil Acquisition that closed on
October 4, 2016
.
|
The Senior Notes are unsecured senior obligations and rank equal in right of payment with all of the Company’s existing and any future unsecured senior debt, and are senior in right of payment to any future subordinated debt. There are no subsidiary guarantors of the Senior Notes. The Company is subject to certain covenants under the indentures governing the Senior Notes and was in compliance with all such covenants as of
September 30, 2017
, and through the filing of this report. The Company may redeem some or all of its Senior Notes prior to their maturity at redemption prices based on a premium, plus accrued and unpaid interest as described in the indentures governing the Senior Notes.
Senior Convertible Notes
On
August 12, 2016
, the Company issued
$172.5 million
in aggregate principal amount of
1.50%
Senior Convertible Notes due
July 1, 2021
(the “Senior Convertible Notes”). The Senior Convertible Notes are unsecured senior obligations and rank equal in right of payment with all of the Company’s existing and any future unsecured senior debt, and are senior in right of payment to any future subordinated debt.
The Senior Convertible Notes mature on
July 1, 2021
, unless earlier converted. Holders may convert their Senior Convertible Notes at their option at any time prior to January 1, 2021, only under certain circumstances as outlined in the indenture governing the Senior Convertible Notes and in
Note 5 – Long-Term Debt
to the Company’s consolidated financial statements in its
2016
Form 10-K. On or after January 1, 2021, until the maturity date, holders may convert their Senior Convertible Notes at any time. The Company may not redeem the Senior Convertible Notes prior to the maturity date. Upon conversion, the Senior Convertible Notes may be settled, at the Company’s election, in shares of the Company’s common stock, cash, or a combination of cash and common stock. Holders may convert their notes based on a conversion rate of
24.6914
shares of the Company’s common stock per
$1,000
principal amount of the Senior Convertible Notes, which is equal to an initial conversion price of approximately
$40.50
per share, subject to adjustment.
The Company has initially elected a net-settlement method to satisfy its conversion obligation, which would result in the Company settling the principal amount in cash with any excess value in shares of the Company’s common stock. The Senior Convertible Notes were not convertible at the option of holders as of
September 30, 2017
, or through the filing of this report. Notwithstanding the inability to convert, the if-converted value of the Senior Convertible Notes as of
September 30, 2017
, did not exceed the principal amount.
Upon the issuance of the Senior Convertible Notes, the Company recorded
$132.3 million
as the initial carrying amount of the debt component, which approximated its fair value at issuance, and was estimated by using an interest rate for nonconvertible debt with terms similar to the Senior Convertible Notes. The effective interest rate used was
7.25%
. The
$40.2 million
excess of the principal amount of the Senior Convertible Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount and debt-related issuance costs are amortized to the principal value of the Senior Convertible Notes as interest expense through the maturity date of July 1, 2021. Interest expense recognized on the Senior Convertible Notes related to the stated interest rate and amortization of the debt discount totaled
$2.5 million
and
$7.4 million
for the three and
nine
months ended
September 30, 2017
, respectively.
The net carrying amount of the liability component of the Senior Convertible Notes, as reflected on the accompanying balance sheets as of
September 30, 2017
, and
December 31, 2016
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
As of December 31, 2016
|
|
(in thousands)
|
Principal amount of Senior Convertible Notes
|
$
|
172,500
|
|
|
$
|
172,500
|
|
Unamortized debt discount
|
(32,048
|
)
|
|
(37,513
|
)
|
Unamortized deferred financing costs
|
(3,440
|
)
|
|
(4,131
|
)
|
Net carrying amount
|
$
|
137,012
|
|
|
$
|
130,856
|
|
The Company is subject to certain covenants under the indenture governing the Senior Convertible Notes and was in compliance with all such covenants as of
September 30, 2017
, and through the filing of this report.
Capped Call Transactions
In connection with the issuance of the Senior Convertible Notes, the Company entered into capped call transactions with affiliates of the underwriters of such issuance. The capped call transactions are generally expected to reduce the potential dilution upon conversion of the Senior Convertible Notes and/or partially offset any cash payments the Company is required to make in excess of the principal amount of converted Senior Convertible Notes in the event that the market price per share of the Company’s common stock is greater than the strike price of the capped call transactions, which initially corresponds to the approximate
$40.50
per share conversion price of the Senior Convertible Notes. The cap price of the capped call transactions is initially
$60.00
per share. If the market price per share exceeds the cap price of the capped call transactions, there could be dilution or there would not be an offset of such potential cash payments.
Note 6 - Commitments and Contingencies
Commitments
During the first quarter of 2017, the Company completed the divestiture of its outside-operated Eagle Ford shale assets. Upon closing of the sale, the Company is no longer subject to gathering, processing, and transportation throughput commitments totaling
514
Bcf of gas,
52
MMBbl of oil, and
13
MMBbl of NGLs, or
$501.9 million
of the potential undiscounted deficiency payments as of December 31, 2016. As of
September 30, 2017
, the Company had total gathering, processing, transportation throughput, and purchase commitments with various third parties that require delivery of a minimum quantity of
850
Bcf of gas,
15
MMBbl of oil, and
25
MMBbl of water through
2028
and a minimum purchase quantity of
16
MMBbl of water by
2022
. If the Company fails to deliver or purchase any product, as applicable, the aggregate undiscounted deficiency payments totaled approximately
$445.0 million
as of
September 30, 2017
. As of the filing of this report, the Company does not expect to incur any material shortfalls with regard to these commitments.
Additionally, the Company entered into new and amended drilling rig contracts during the first
nine
months of
2017
and subsequent to
September 30, 2017
. As of the filing of this report, the Company’s drilling rig commitments totaled
$30.4 million
; however, if the Company terminated these rig contracts immediately, it would incur penalties of
$17.5 million
.
There were no other material changes in commitments during the first
nine
months of
2017
. Please refer to
Note 6 - Commitments and Contingencies
to the Company’s consolidated financial statements in its
2016
Form 10-K for additional discussion of the Company’s commitments.
Contingencies
The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. On July 7, 2017, Michael Lirette filed a Collective Action Complaint against the Company in the Southern District of Texas, claiming damages related to unpaid overtime wages under the Federal Fair Labor Standards Act. This case involves complex legal issues and uncertainties, a potentially large class of plaintiffs, and an alleged class period commencing in 2014. Because the proceedings are in the early stages, with discovery yet to be completed, the Company is unable to estimate what impact, if any, the action will have on its financial condition, results of operations, or cash flows.
Note 7 - Compensation Plans
Performance Share Units Under the Equity Incentive Compensation Plan
The Company grants performance share units (“PSUs”) to eligible employees as part of its long-term equity compensation program. The number of shares of the Company’s common stock issued to settle PSUs ranges from
0%
to
200%
of the number of PSUs awarded and is determined based on certain performance criteria over a
three
-year measurement period. The performance criteria for PSUs are based on a combination of the Company’s annualized Total Shareholder Return (“TSR”) for the performance period and the relative performance of the Company’s TSR compared with the annualized TSR of certain peer companies for the performance period. Compensation expense for PSUs is recognized within general and administrative and exploration expense over the vesting periods of the respective awards.
Total compensation expense recorded for PSUs for the three months ended
September 30, 2017
, and
2016
, was
$2.6 million
and
$2.3 million
, respectively, and
$6.8 million
and
$8.2 million
for the
nine
months ended
September 30, 2017
, and
2016
, respectively. As of
September 30, 2017
, there was
$22.0 million
of total unrecognized compensation expense related to non-vested PSU awards, which is being amortized through 2020.
A summary of the status and activity of non-vested PSUs for the
nine
months ended
September 30, 2017
, is presented in the following table:
|
|
|
|
|
|
|
|
PSUs
(1)
|
|
Weighted-Average Grant-Date Fair Value
|
Non-vested at beginning of year
|
828,923
|
|
$
|
43.25
|
|
Granted
|
977,731
|
|
$
|
15.86
|
|
Vested
|
(94,338)
|
|
$
|
85.85
|
|
Forfeited
|
(168,658)
|
|
$
|
46.30
|
|
Non-vested at end of quarter
|
1,543,658
|
|
$
|
22.97
|
|
____________________________________________
|
|
(1)
|
The number of awards assumes a multiplier of
one
. The final number of shares of common stock issued may vary depending on the three-year performance multiplier, which ranges from
zero
to
two
.
|
During the
nine
months ended
September 30, 2017
, the Company granted
977,731
PSUs with a fair value of
$15.5 million
as part of its regular annual long-term equity compensation program. These PSUs generally vest on the third anniversary of the date of the grant. Also, during this period, the Company settled PSUs that were granted in 2014 with
no
shares issued upon settlement as the grant settled at a
zero
multiplier.
Restricted Stock Units Under the Equity Incentive Compensation Plan
The Company grants restricted stock units (“RSUs”) as part of its long-term equity compensation program. Each RSU represents a right to receive
one
share of the Company’s common stock upon settlement of the award at the end of the specified vesting period. Compensation expense for RSUs is recognized within general and administrative expense and exploration expense over the vesting periods of the respective awards.
Total compensation expense recorded for RSUs was
$2.9 million
and
$2.8 million
for the three months ended
September 30, 2017
, and
2016
, respectively, and
$7.5 million
and
$9.3 million
for the
nine
months ended
September 30, 2017
, and
2016
, respectively. As of
September 30, 2017
, there was
$22.8 million
of total unrecognized compensation expense related to non-vested RSU awards, which is being amortized through 2020.
A summary of the status and activity of non-vested RSUs for the
nine
months ended
September 30, 2017
, is presented in the following table:
|
|
|
|
|
|
|
|
RSUs
|
|
Weighted-Average Grant-Date Fair Value
|
Non-vested at beginning of year
|
604,116
|
|
$
|
37.39
|
|
Granted
|
1,020,780
|
|
$
|
16.64
|
|
Vested
|
(251,575)
|
|
$
|
44.00
|
|
Forfeited
|
(102,183)
|
|
$
|
28.43
|
|
Non-vested at end of quarter
|
1,271,138
|
|
$
|
20.14
|
|
During the
nine
months ended
September 30, 2017
, the Company granted
1,020,780
RSUs with a fair value of
$16.9 million
. These RSUs generally vest one-third of the total grant on each of the next three anniversary dates of the grant. Also, during the
nine
months ended
September 30, 2017
, the Company settled
246,025
RSUs that related to awards granted in previous years. The Company and the majority of grant participants mutually agreed to net share settle a portion of the awards to cover income and payroll tax withholdings, as provided for in the plan document and award agreements. As a result, the Company issued
171,278
net shares of common stock upon settlement of the awards. The remaining
74,747
shares were withheld to satisfy income and payroll tax withholding obligations that occurred upon delivery of the shares underlying those RSUs.
Director Shares
During the second quarter of
2017
, the Company issued
71,573
shares of restricted common stock to its non-employee directors under the Company’s Equity Incentive Compensation Plan, which fully vest on December 31, 2017. Also during the second quarter of
2017
, the Company issued
8,794
RSUs to a non-employee director, which fully vest on December 31, 2017, and settle upon the earlier to occur of May 25, 2027, or the director resigning from the board of directors. The Company did not issue any director shares during the third quarter of
2017
.
Employee Stock Purchase Plan
Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to
15 percent
of eligible compensation, without accruing in excess of
$25,000
in value from purchases for each calendar year. The purchase price of the stock is
85 percent
of the lower of the fair market value of the stock on either the first or last day of the purchase period. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended (“IRC”). There were
123,678
and
140,853
shares issued under the ESPP during the
nine
months ended
September 30, 2017
, and
2016
, respectively. The fair value of ESPP grants is measured at the date of grant using the Black-Scholes option-pricing model.
Note 8 - Pension Benefits
Pension Plans
The Company has a non-contributory defined benefit pension plan covering substantially all of its employees who joined the Company prior to January 1, 2015, and who meet age and service requirements (the “Qualified Pension Plan”). The Company also has a supplemental non-contributory pension plan covering certain management employees (the “Nonqualified Pension Plan” and together with the Qualified Pension Plan, the “Pension Plans”). The Company froze the Pension Plans to new participants, effective as of December 31, 2015. Employees participating in the Pension Plans as of December 31, 2015, continue to earn benefits.
Components of Net Periodic Benefit Cost for the Pension Plans
The following table presents the components of the net periodic benefit cost for the Pension Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Service cost
|
$
|
1,660
|
|
|
$
|
2,050
|
|
|
$
|
4,979
|
|
|
$
|
6,150
|
|
Interest cost
|
673
|
|
|
727
|
|
|
2,017
|
|
|
2,181
|
|
Expected return on plan assets that reduces periodic pension benefit cost
|
(561
|
)
|
|
(559
|
)
|
|
(1,683
|
)
|
|
(1,677
|
)
|
Amortization of prior service cost
|
4
|
|
|
4
|
|
|
13
|
|
|
13
|
|
Amortization of net actuarial loss
|
324
|
|
|
396
|
|
|
973
|
|
|
1,187
|
|
Net periodic benefit cost
|
$
|
2,100
|
|
|
$
|
2,618
|
|
|
$
|
6,299
|
|
|
$
|
7,854
|
|
Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of
10 percent
of the greater of the benefit obligation or the market-related value of assets are amortized over the average remaining service period of active participants.
Contributions
The Company contributed
$7.0 million
to the Qualified Pension Plan during the
nine
months ended
September 30, 2017
.
Note 9 - Earnings Per Share
Basic net income or loss per common share is calculated by dividing net income or loss available to common stockholders by the basic weighted-average number of common shares outstanding for the respective period. Diluted net income or loss per common share is calculated by dividing adjusted net income or loss by the diluted weighted-average number of common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for this calculation consist primarily of non-
vested RSUs, contingent PSUs, and shares into which the Senior Convertible Notes are convertible, which are measured using the treasury stock method.
PSUs represent the right to receive, upon settlement of the PSUs after the completion of the three-year performance period, a number of shares of the Company’s common stock that may range from
zero
to
two
times the number of PSUs granted on the award date. The number of potentially dilutive shares related to PSUs is based on the number of shares, if any, that would be issuable at the end of the respective reporting period, assuming that date was the end of the contingency period applicable to such PSUs.
On
August 12, 2016
, the Company issued
$172.5 million
in aggregate principal amount of Senior Convertible Notes due
2021
. Upon conversion, the Senior Convertible Notes may be settled, at the Company’s election, in shares of the Company’s common stock, cash, or a combination of cash and common stock. The Company has initially elected a net-settlement method to satisfy its conversion obligation, which would result in the Company settling the principal amount of the Senior Convertible Notes in cash and the excess conversion value in shares. However, the Company has not made this an irrevocable election and thereby reserves the right to settle the Senior Convertible Notes in any manner allowed under the indenture as business circumstances warrant. Shares of the Company’s common stock traded at an average closing price below the
$40.50
conversion price for the three and
nine
months ended
September 30, 2017
, and therefore, the Senior Convertible Notes had no dilutive impact. In connection with the offering of the Senior Convertible Notes, the Company entered into capped call transactions with affiliates of the underwriters that would effectively prevent dilution upon settlement up to the
$60.00
cap price. The capped call transactions are not reflected in diluted net income (loss) per share, nor will they ever be, as they are anti-dilutive. Please refer to
Note 5 - Long-Term Debt
for additional discussion.
When the Company recognizes a loss from continuing operations, as was the case for all periods presented, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per common share.
The following table details the weighted-average anti-dilutive securities for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Anti-dilutive
|
—
|
|
|
506
|
|
|
78
|
|
|
193
|
|
The following table sets forth the calculations of basic and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands, except per share amounts)
|
Net loss
|
$
|
(89,112
|
)
|
|
$
|
(40,907
|
)
|
|
$
|
(134,585
|
)
|
|
$
|
(556,798
|
)
|
Basic weighted-average common shares outstanding
|
111,575
|
|
|
78,468
|
|
|
111,366
|
|
|
71,574
|
|
Add: dilutive effect of non-vested RSUs and contingent PSUs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Add: dilutive effect of Senior Convertible Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted-average common shares outstanding
|
111,575
|
|
|
78,468
|
|
|
111,366
|
|
|
71,574
|
|
Basic net loss per common share
|
$
|
(0.80
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(7.78
|
)
|
Diluted net loss per common share
|
$
|
(0.80
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(7.78
|
)
|
Note 10 - Derivative Financial Instruments
Summary of Oil, Gas, and NGL Derivative Contracts in Place
The Company has entered into various commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows. As of
September 30, 2017
, all derivative counterparties were members of the Company’s credit facility lender group and all contracts were entered into for other-than-trading purposes. The Company’s commodity derivative contracts consist of swap and collar arrangements. In a typical commodity swap agreement, if the agreed upon published third-party index price (“index price”) is lower than the swap fixed price, the Company receives the difference between the index price and the agreed upon swap fixed price. If the index price is higher than the swap fixed
price, the Company pays the difference. For collar arrangements, the Company receives the difference between an agreed upon index and the floor price if the index price is below the floor price. The Company pays the difference between the agreed upon ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and ceiling prices.
As of
September 30, 2017
, the Company had commodity derivative contracts outstanding as summarized in the tables below:
Oil Swaps
|
|
|
|
|
|
|
|
|
Contract Period
|
|
NYMEX WTI Volumes
|
|
Weighted-Average
Contract Price
|
|
|
(MBbls)
|
|
(per Bbl)
|
Fourth quarter 2017
|
|
1,510
|
|
|
$
|
47.11
|
|
2018
|
|
6,272
|
|
|
$
|
49.82
|
|
2019
|
|
1,940
|
|
|
$
|
50.70
|
|
Total
|
|
9,722
|
|
|
|
Oil Collars
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Period
|
|
NYMEX WTI
Volumes
|
|
Weighted-
Average Floor
Price
|
|
Weighted-
Average Ceiling
Price
|
|
|
(MBbls)
|
|
(per Bbl)
|
|
(per Bbl)
|
Fourth quarter 2017
|
|
1,086
|
|
|
$
|
47.51
|
|
|
$
|
56.05
|
|
2018
|
|
5,030
|
|
|
$
|
50.00
|
|
|
$
|
58.07
|
|
2019
|
|
3,128
|
|
|
$
|
50.00
|
|
|
$
|
58.84
|
|
Total
|
|
9,244
|
|
|
|
|
|
Oil Basis Swaps
|
|
|
|
|
|
|
|
|
Contract Period
|
|
Midland-Cushing Volumes
|
|
Weighted-Average
Contract Price
(1)
|
|
|
(MBbls)
|
|
(per Bbl)
|
Fourth quarter 2017
|
|
1,856
|
|
|
$
|
(1.50
|
)
|
2018
|
|
8,734
|
|
|
$
|
(1.27
|
)
|
2019
|
|
3,963
|
|
|
$
|
(1.45
|
)
|
Total
|
|
14,553
|
|
|
|
____________________________________________
|
|
(1)
|
Represents the price differential between WTI prices at Midland, Texas and WTI prices at Cushing, Oklahoma.
|
Subsequent to
September 30, 2017
, the Company entered into Midland-Cushing basis swap contracts for 2018 for a total of
1.4 million
Bbls of oil production at a contract price of
($0.33)
per Bbl.
Natural Gas Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Period
|
|
Sold
Volumes
|
|
Weighted-Average
Contract Price
|
|
Purchased Volumes
(1)
|
|
Weighted- Average Contract Price
|
|
Net
Volumes
|
|
|
(BBtu)
|
|
(per MMBtu)
|
|
(BBtu)
|
|
(per MMBtu)
|
|
(BBtu)
|
Fourth quarter 2017
|
|
22,001
|
|
|
$
|
3.98
|
|
|
—
|
|
|
$
|
—
|
|
|
22,001
|
|
2018
|
|
102,900
|
|
|
$
|
3.37
|
|
|
(30,606
|
)
|
|
$
|
4.27
|
|
|
72,294
|
|
2019
|
|
41,394
|
|
|
$
|
3.76
|
|
|
(24,415
|
)
|
|
$
|
4.34
|
|
|
16,979
|
|
Total
(2)
|
|
166,295
|
|
|
|
|
(55,021
|
)
|
|
|
|
111,274
|
|
____________________________________________
|
|
(1)
|
During 2016, the Company restructured certain of its natural gas derivative contracts by buying fixed price volumes to offset existing 2018 and 2019 fixed price swap contracts totaling
55.0 million
MMBtu. The Company then entered into new 2017 fixed price swap contracts totaling
38.6 million
MMBtu with a contract price of
$4.43
per MMBtu. No other cash or other consideration was included as part of the restructuring.
|
|
|
(2)
|
Total net volumes of natural gas swaps are comprised of
IF El Paso Permian
(
1%
),
IF HSC
(
98%
), and
IF NNG Ventura
(
1%
).
|
NGL Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPIS Purity Ethane Mont Belvieu
|
|
OPIS Propane Mont Belvieu Non-TET
|
|
OPIS Normal Butane Mont Belvieu Non-TET
|
|
OPIS Isobutane Mont Belvieu Non-TET
|
|
OPIS Natural Gasoline Mont Belvieu Non-TET
|
Contract Period
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
Volumes
|
Weighted-Average
Contract Price
|
|
|
(MBbls)
|
(per Bbl)
|
|
(MBbls)
|
(per Bbl)
|
|
(MBbls)
|
(per Bbl)
|
|
(MBbls)
|
(per Bbl)
|
|
(MBbls)
|
(per Bbl)
|
Fourth quarter 2017
|
|
966
|
|
$
|
9.65
|
|
|
653
|
|
$
|
24.24
|
|
|
214
|
|
$
|
35.29
|
|
|
174
|
|
$
|
35.60
|
|
|
203
|
|
$
|
48.41
|
|
2018
|
|
4,017
|
|
$
|
11.00
|
|
|
2,464
|
|
$
|
24.74
|
|
|
391
|
|
$
|
35.14
|
|
|
308
|
|
$
|
34.72
|
|
|
427
|
|
$
|
48.44
|
|
2019
|
|
3,112
|
|
$
|
12.27
|
|
|
1,036
|
|
$
|
26.49
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
2020
|
|
539
|
|
$
|
11.13
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Total
|
|
8,634
|
|
|
|
4,153
|
|
|
|
605
|
|
|
|
482
|
|
|
|
630
|
|
|
Derivative Assets and Liabilities Fair Value
The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities. The fair value of the commodity derivative contracts was a net
liability
of
$31.7 million
as of
September 30, 2017
, and a net
liability
of
$91.7 million
as of
December 31, 2016
.
The following tables detail the fair value of derivatives recorded in the accompanying balance sheets, by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Balance Sheet
Classification
|
|
Fair Value
|
|
Balance Sheet
Classification
|
|
Fair Value
|
|
(in thousands)
|
Commodity contracts
|
Current assets
|
|
$
|
63,685
|
|
|
Current liabilities
|
|
$
|
87,791
|
|
Commodity contracts
|
Noncurrent assets
|
|
60,035
|
|
|
Noncurrent liabilities
|
|
67,676
|
|
Derivatives not designated as hedging instruments
|
|
|
$
|
123,720
|
|
|
|
|
$
|
155,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Balance Sheet
Classification
|
|
Fair Value
|
|
Balance Sheet
Classification
|
|
Fair Value
|
|
(in thousands)
|
Commodity contracts
|
Current assets
|
|
$
|
54,521
|
|
|
Current liabilities
|
|
$
|
115,464
|
|
Commodity contracts
|
Noncurrent assets
|
|
67,575
|
|
|
Noncurrent liabilities
|
|
98,340
|
|
Derivatives not designated as hedging instruments
|
|
|
$
|
122,096
|
|
|
|
|
$
|
213,804
|
|
Offsetting of Derivative Assets and Liabilities
As of
September 30, 2017
, and
December 31, 2016
, all derivative instruments held by the Company were subject to master netting arrangements with various financial institutions. In general, the terms of the Company’s agreements provide for offsetting of amounts payable or receivable between it and the counterparty, at the election of both parties, for transactions that settle on the same date and in the same currency. The Company’s agreements also provide that in the event of an early termination, the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. The Company’s accounting policy is to not offset these positions in its accompanying balance sheets.
The following table provides a reconciliation between the gross assets and liabilities reflected on the accompanying balance sheets and the potential effects of master netting arrangements on the fair value of the Company’s derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
|
As of
|
|
As of
|
Offsetting of Derivative Assets and Liabilities
|
|
September 30,
2017
|
|
December 31, 2016
|
|
September 30,
2017
|
|
December 31, 2016
|
|
|
(in thousands)
|
Gross amounts presented in the accompanying balance sheets
|
|
$
|
123,720
|
|
|
$
|
122,096
|
|
|
$
|
(155,467
|
)
|
|
$
|
(213,804
|
)
|
Amounts not offset in the accompanying balance sheets
|
|
(85,195
|
)
|
|
(118,080
|
)
|
|
85,195
|
|
|
118,080
|
|
Net amounts
|
|
$
|
38,525
|
|
|
$
|
4,016
|
|
|
$
|
(70,272
|
)
|
|
$
|
(95,724
|
)
|
The following table summarizes the components of the net derivative (gain) loss presented in the accompanying statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Derivative settlement (gain) loss:
|
|
|
|
|
|
|
|
Oil contracts
|
$
|
2,472
|
|
|
$
|
(49,241
|
)
|
|
$
|
14,310
|
|
|
$
|
(221,397
|
)
|
Gas contracts
|
(24,088
|
)
|
|
(10,096
|
)
|
|
(63,345
|
)
|
|
(82,588
|
)
|
NGL contracts
|
8,524
|
|
|
1,841
|
|
|
19,633
|
|
|
(2,249
|
)
|
Total derivative settlement gain
|
$
|
(13,092
|
)
|
|
$
|
(57,496
|
)
|
|
$
|
(29,402
|
)
|
|
$
|
(306,234
|
)
|
|
|
|
|
|
|
|
|
Total net derivative (gain) loss:
|
|
|
|
|
|
|
|
Oil contracts
|
$
|
45,874
|
|
|
$
|
(733
|
)
|
|
$
|
(41,910
|
)
|
|
$
|
49,608
|
|
Gas contracts
|
(6,068
|
)
|
|
(14,006
|
)
|
|
(56,574
|
)
|
|
24,460
|
|
NGL contracts
|
40,793
|
|
|
(13,298
|
)
|
|
9,120
|
|
|
47,018
|
|
Total net derivative (gain) loss
|
$
|
80,599
|
|
|
$
|
(28,037
|
)
|
|
$
|
(89,364
|
)
|
|
$
|
121,086
|
|
Credit Related Contingent Features
As of
September 30, 2017
, and through the filing of this report, all of the Company’s derivative counterparties were members of the Company’s credit facility lender group. Under the Credit Agreement and derivative contracts, the Company is required to secure mortgages on assets having a value equal to at least
90 percent
of the total PV-9 of the Company’s proved oil and gas properties evaluated in the most recent reserve report.
Note 11 - Fair Value Measurements
The Company follows fair value measurement accounting guidance for all assets and liabilities measured at fair value. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The fair value hierarchy for grouping these assets and liabilities is based on the significance level of the following inputs:
|
|
•
|
Level 1 – quoted prices in active markets for identical assets or liabilities
|
|
|
•
|
Level 2 – quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable
|
|
|
•
|
Level 3 – significant inputs to the valuation model are unobservable
|
The following table summarizes the Company’s assets and liabilities that are measured at fair value in the accompanying balance sheets and where they are classified within the fair value hierarchy as of
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
Derivatives
(1)
|
$
|
—
|
|
|
$
|
123,720
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
Derivatives
(1)
|
$
|
—
|
|
|
$
|
155,467
|
|
|
$
|
—
|
|
____________________________________________
|
|
(1)
|
This represents a financial asset or liability that is measured at fair value on a recurring basis.
|
The following table summarizes the Company’s assets and liabilities that are measured at fair value in the accompanying balance sheets and where they were classified within the fair value hierarchy as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
Derivatives
(1)
|
$
|
—
|
|
|
$
|
122,096
|
|
|
$
|
—
|
|
Total property and equipment, net
(2)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
88,205
|
|
Liabilities:
|
|
|
|
|
|
Derivatives
(1)
|
$
|
—
|
|
|
$
|
213,804
|
|
|
$
|
—
|
|
____________________________________________
|
|
(1)
|
This represents a financial asset or liability that is measured at fair value on a recurring basis.
|
|
|
(2)
|
This represents a non-financial asset that is measured at fair value on a nonrecurring basis.
|
Both financial and non-financial assets and liabilities are categorized within the above fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used by the Company as well as the general classification of such instruments pursuant to the above fair value hierarchy.
Derivatives
The Company uses Level 2 inputs to measure the fair value of oil, gas, and NGL commodity derivatives. Fair values are based upon interpolated data. The Company derives internal valuation estimates taking into consideration forward commodity price curves, counterparties’ credit ratings, the Company’s credit rating, and the time value of money. These valuations are then compared to the respective counterparties’ mark-to-market statements. The considered factors result in an estimated exit-price that management believes provides a reasonable and consistent methodology for valuing derivative instruments. The derivative instruments utilized by the Company are not considered by management to be complex, structured, or illiquid. The oil, gas, and NGL commodity derivative markets are highly active. Additionally, all of the Company’s derivative counterparties are members of the Company’s credit facility lender group.
Please refer to
Note 10 - Derivative Financial Instruments
above and to
Note 11 - Fair Value Measurements
in the Company’s 2016 Form 10-K for more information regarding the Company’s derivative instruments.
Proved and Unproved Oil and Gas Properties and Other Property and Equipment
The Company did not have property and equipment measured at fair value within the accompanying balance sheets as of
September 30, 2017
. Property and equipment, net measured at fair value totaled
$88.2 million
as of
December 31, 2016
, and primarily consisted of the Company’s Powder River Basin assets, which were impaired at year-end as a result of downward performance reserve revisions.
Proved oil and gas properties.
Proved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication the carrying costs may not be recoverable. The Company uses Level 3 inputs and the income valuation technique, which converts future amounts to a single present value amount, to measure the fair value of proved properties through an application of discount rates and price forecasts representative of the current operating environment, as selected by the Company’s management. The calculation of the discount rates are based on the best information available and the rates used ranged from
10 percent
to
15 percent
based on the reservoir specific weightings of future estimated proved and unproved cash flows as of
September 30, 2017
, and
December 31, 2016
. The Company believes the discount rates are representative of current market conditions and consider estimates of future cash payments, reserve categories, expectations of possible variations in the amount and/or timing of cash flows, the risk premium, and nonperformance risk. The prices for oil and gas are forecast based on NYMEX strip pricing, adjusted for basis differentials, for the first
five
years, after which a flat terminal price is used for each commodity stream. The prices for NGLs are forecast using OPIS Mont Belvieu pricing, for as long as the market is actively trading, after which a flat terminal price is used. Future operating costs are also adjusted as deemed appropriate for these estimates.
The Company did not recognize any material impairment of proved properties expenses for the three or
nine
months ended
September 30, 2017
, or for the three months ended
September 30, 2016
. The Company recorded impairment of proved properties expense of
$277.8 million
for the
nine
months ended
September 30, 2016
, primarily related to the decline in proved and risk-adjusted probable and possible reserve expected cash flows from the Company’s outside-operated Eagle Ford shale assets, driven by commodity price declines during the first quarter of 2016. These properties were sold during the first quarter of 2017. Please refer to
Note 3 - Divestitures, Assets Held for Sale, and Acquisitions
for more information regarding divestiture activity.
Unproved oil and gas properties.
Unproved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs may not be recoverable. To measure the fair value of unproved properties, the Company uses a market approach, which takes into account the following significant assumptions: remaining lease terms, future development plans, risk weighted potential resource recovery, estimated reserve values, and estimated acreage value based on price(s) received for similar, recent acreage transactions by the Company or other market participants.
There were
no
material abandonments or impairments of unproved properties expenses for the three or
nine
months ended
September 30, 2017
or 2016.
Oil and gas properties held for sale.
Proved and unproved properties and other property and equipment classified as held for sale, including the corresponding asset retirement obligation liability, are valued using a market approach based on an estimated net selling price, as evidenced by the most current bid prices received from third parties, if available, or by recent, comparable market transactions. If an estimated selling price is not available, the Company utilizes the various income valuation techniques discussed above. When assets no longer meet the criteria of assets held for sale, they are measured at the lower of the carrying value of the assets before being classified as held for sale, adjusted for any depletion, depreciation, and amortization expense that would have been recognized, or the fair value at the date they are reclassified to assets held for use.
There were no material assets held for sale that were recorded at fair value as of
September 30, 2017
. However, for the
nine
months ended
September 30, 2017
, the Company recorded a
$526.5 million
write-down on its Divide County, North Dakota, assets previously held for sale, of which
$359.6 million
was recorded in the first quarter of 2017 based on an estimated fair value less selling costs and
$166.9 million
was recorded in the second quarter of 2017 based on market conditions that existed on the date the Company decided to retain the assets. Please refer to
Note 3 - Divestitures, Assets Held for Sale, and Acquisitions
for additional discussion
.
Long-Term Debt
The following table reflects the fair value of the Senior Notes and Senior Convertible Notes measured using Level 1 inputs based on quoted secondary market trading prices. These notes were not presented at fair value on the accompanying balance sheets as of
September 30, 2017
, or
December 31, 2016
, as they were recorded at carrying value, net of any unamortized discounts and deferred financing costs. Please refer to
Note 5 - Long-Term Debt
for additional discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
As of December 31, 2016
|
|
Principal Amount
|
|
Fair Value
|
|
Principal Amount
|
|
Fair Value
|
|
(in thousands)
|
6.50% Senior Notes due 2021
|
$
|
344,611
|
|
|
$
|
349,780
|
|
|
$
|
346,955
|
|
|
$
|
354,546
|
|
6.125% Senior Notes due 2022
|
$
|
561,796
|
|
|
$
|
565,830
|
|
|
$
|
561,796
|
|
|
$
|
570,925
|
|
6.50% Senior Notes due 2023
|
$
|
394,985
|
|
|
$
|
397,947
|
|
|
$
|
394,985
|
|
|
$
|
403,134
|
|
5.0% Senior Notes due 2024
|
$
|
500,000
|
|
|
$
|
471,660
|
|
|
$
|
500,000
|
|
|
$
|
475,975
|
|
5.625% Senior Notes due 2025
|
$
|
500,000
|
|
|
$
|
477,350
|
|
|
$
|
500,000
|
|
|
$
|
485,000
|
|
6.75% Senior Notes due 2026
|
$
|
500,000
|
|
|
$
|
502,500
|
|
|
$
|
500,000
|
|
|
$
|
516,565
|
|
1.50% Senior Convertible Notes due 2021
|
$
|
172,500
|
|
|
$
|
163,240
|
|
|
$
|
172,500
|
|
|
$
|
202,189
|
|