NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
Basis of Presentation and Principles of Consolidation
Halcón Resources Corporation (Halcón or the Company) is an independent energy company focused on the acquisition,
production, exploration and development of onshore liquids-rich oil and natural gas assets in the United States. The unaudited condensed consolidated financial statements include the accounts of all
majority-owned, controlled subsidiaries. The Company operates in one segment which focuses on oil and natural gas acquisition, production, exploration and development. Allocation of capital is made
across the Company's entire portfolio without regard to operating area. All intercompany accounts and transactions have been eliminated. These unaudited condensed consolidated financial statements
reflect, in the opinion of the Company's management, all adjustments, consisting of normal and recurring adjustments, necessary to present fairly the financial position as of, and the results of
operations for, the periods presented. During interim periods, Halcón follows the accounting policies disclosed in its Annual Report on Form 10-K, as filed with the United States
Securities and Exchange Commission (SEC) on March 1, 2018. Please refer to the notes in the 2017 Annual Report on Form 10-K when reviewing interim financial results.
Use of Estimates
The preparation of the Company's unaudited condensed consolidated financial statements in conformity with accounting principles generally
accepted in the United States requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities, if any, at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Estimates and
assumptions that, in the opinion of the Company's management, are significant include oil and natural gas revenue accruals, capital and operating expense accruals, oil and natural gas reserves,
depletion relating to oil and natural gas properties, asset retirement obligations, fair value estimates, including estimates of the fair values of assets acquired and liabilities assumed in
connection with the Pecos County Acquisition and the fair value of assets sold in connection with the Williston Divestiture and the El Halcón Divestiture (see Note 3,
"Acquisitions and Divestitures,
"
for information on the Pecos County Acquisition, the Williston Divestiture and the El Halcón
Divestiture), including the gains on sales recorded and income taxes. The Company bases its estimates and judgments on historical experience and on various other assumptions and information believed
to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be predicted with certainty and, accordingly, these estimates may change as new events
occur, as more experience is acquired, as additional information is obtained and as the Company's operating environment changes. Actual results may differ from the estimates and assumptions used in
the preparation of the Company's unaudited condensed consolidated financial statements.
Interim
period results are not necessarily indicative of results of operations or cash flows for the full year and accordingly, certain information normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States, has been condensed or omitted. The Company has evaluated events or transactions through the date
of issuance of these unaudited condensed consolidated financial statements.
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. FINANCIAL STATEMENT PRESENTATION (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with a maturity of three months or less at the time of purchase to be cash
equivalents. These investments are carried at cost, which approximates fair value.
Accounts Receivable and Allowance for Doubtful Accounts
The Company's accounts receivable are primarily receivables from joint interest owners and oil and natural gas purchasers. Accounts receivable
are recorded at the amount due, less an allowance for doubtful accounts, when applicable. The Company establishes provisions for losses on accounts receivable if it determines that collection of all
or part of the outstanding balance is doubtful. The Company regularly reviews collectability and establishes or adjusts the allowance for doubtful accounts as necessary using the specific
identification method. As of June 30, 2018 and December 31, 2017, allowances for doubtful accounts were approximately $0.1 million and $0.7 million, respectively.
Other Operating Property and Equipment
Other operating property and equipment additions are recorded at cost. Depreciation is calculated using the straight-line method over the
following estimated useful lives: gas
and water gathering systems, thirty years; water disposal and recycling facilities, twenty years; automobiles and computers, three years; computer software, fixtures, furniture and equipment, five
years or the lesser of lease term; trailers, seven years; heavy equipment, eight to ten years; buildings, twenty years and leasehold improvements, lease term. Upon disposition, the cost and
accumulated depreciation are removed and any gains or losses are reflected in current operations. Maintenance and repair costs are charged to operating expense as incurred. Material expenditures which
increase the life or productive capacity of an asset are capitalized and depreciated over the estimated remaining useful life of the asset.
The
Company reviews its other operating property and equipment for impairment in accordance with Accounting Standards Codification (ASC) No. 360,
Property,
Plant, and Equipment
(ASC 360). ASC 360 requires the Company to evaluate other operating property and equipment for impairment as events occur or circumstances change that
would more likely than not reduce the fair value below the carrying amount. If the carrying amount is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment
loss for the difference between the carrying amount and the current fair value. Further, the Company evaluates the remaining useful lives of its other operating property and equipment at each
reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.
Income Taxes
On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of accounting
principles generally accepted in the United States in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail
to complete the accounting for certain income tax effects of the Tax Cuts Job Act of 2017. In accordance with SAB 118, the Company has determined that the $280.9 million income tax
provision and corresponding decrease in the Company's valuation allowance was a provisional amount and a reasonable estimate for the year ended December 31, 2017. Any subsequent adjustments to
these amounts will be recorded to current tax benefit (provision) in the quarter of 2018 when the analysis is complete.
10
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. FINANCIAL STATEMENT PRESENTATION (Continued)
Related Party Transactions
Gas Purchase and Processing Agreement
On November 16, 2017, a subsidiary of the Company entered into a gas purchase and processing agreement with Salt Creek
Midstream, LLC (Salt Creek) pursuant to which the Company agreed to dedicate, for a term of 15 years, all natural gas production from its acreage in Ward County, Texas (that is not
otherwise previously dedicated) and certain sections in Winkler County, Texas to a natural gas gathering pipeline and processing facilities to be constructed by Salt Creek. The facilities were
completed and placed in service in May 2018. As of June 30, 2018, the Company recorded a $0.3 million receivable from Salt Creek. For the three and six months ended June 30, 2018,
the Company received $0.4 million from Salt Creek under the gas purchase and processing agreement.
Certain
funds under the control of Ares Management LLC (Ares) are the majority owners and controlling parties of Salt Creek. Ares also controls other funds which own in excess of
ten percent (10%) of the stock of the Company. No Ares fund that is a stockholder of the Company has an interest in Salt Creek but one of the Company's directors, who is employed by Ares, also
serves on the board of directors of Salt Creek's parent company.
Crude Oil Gathering Agreement
On
July 27, 2018, a subsidiary of the Company entered into a crude oil gathering agreement with SCM Crude, LLC (SCM) pursuant to which the Company agreed to dedicate, for a
term of 15 years, production of crude oil from its currently owned, or later acquired acreage in designated areas in Ward and Winkler Counties, Texas (excluding certain specific wells) for the
receipt, gathering and transportation on a gathering system to be designed, engineered and constructed by SCM. The gathering system will be implemented in two phases with the first phase expected to
be operational by October 1, 2018 and the second phase expected to be operational December 1, 2018.
The
agreement with SCM was the culmination of a lengthy process during which the Company analyzed the most effective method of gathering and transportation of its future oil production
in these areas. During the course of its investigation, the Company considered a variety of alternatives and solicited and received numerous third party proposals. The Company received and evaluated
proposals
from eleven companies covering some or all of its oil production in the region and determined that among the proposals it received, SCM's was superior for economic and strategic reasons.
Because
certain funds under the control of Ares are the majority owners and controlling parties of SCM, the Audit Committee of the board of directors of the Company and the disinterested
members of the Company's board of directors evaluated and approved (in a vote that excluded the Company director who is employed by Ares) the process by which the Company determined the SCM proposal
to be superior to other alternatives, as well as the principal terms of the agreement, in accordance with applicable Company policies, including its Code of Conduct and Corporate Governance Guidelines
(copies of which are available through the company's website at
www.halconresources.com
) and the Company's procedures for the review and approval of
transactions with related parties. Ares also controls other funds which own in excess of ten percent (10%) of the stock of the Company. No Ares fund that is a stockholder of the Company has an
interest in SCM but one of the Company's directors, who is employed by Ares, also serves on the board of directors of SCM's parent company.
11
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. FINANCIAL STATEMENT PRESENTATION (Continued)
Charter of Aircraft
In the ordinary course of its business, the Company occasionally charters a private aircraft for business use. Floyd C. Wilson,
Halcón's Chairman, Chief Executive Officer and President, indirectly owns an aircraft which the Company has chartered from time to time. For a portion of 2017, Mr. Wilson's
aircraft was managed by an independent air charter company unaffiliated with both Mr. Wilson and Halcón. The aircraft in the air charter company's fleet are available to the
public for charter based upon a standard fee schedule established by the air charter company, with the fees dependent primarily upon the type and size of the aircraft utilized and the duration of the
flight. Because the air charter company established fees for the use of the aircraft in its fleet, Mr. Wilson did not receive any greater benefit from Halcón's charter of the
aircraft indirectly owned by him than he would have if any third party were to charter the aircraft. During the course of 2017, Mr. Wilson terminated the independent air charter company and
removed his aircraft from the charter company's fleet, pending his search for a new charter company to manage his aircraft. During the search period for a new charter company, fees for the use of
Mr. Wilson's aircraft by the Company were based upon comparable costs that the Company would have incurred in chartering the same type and size of aircraft from an independent third party
utilizing data from several independent third party aircraft leasing companies. The terms for this use were evaluated and approved by the Audit Committee of the Company, and subsequently by the
disinterested members of the Company's board of directors upon the recommendation of the Audit Committee, in accordance with the Company's procedures for the review and approval of transactions with
related parties. During the three and six months ended
June 30, 2018, the Company paid approximately $0.1 million and $0.6 million, respectively, to Mr. Wilson for the Company use of the aircraft. As of June 30, 2018,
the Company recorded a $0.2 million payable to Mr. Wilson.
Recently Issued Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-01,
Business Combinations (Topic
805): Clarifying the Definition of a Business
(ASU 2017-01). For public business entities, ASU 2017-01 is effective for fiscal years and interim periods within those fiscal
years, beginning after December 15, 2017. The amendments in this ASU should be applied prospectively on or after the effective date. The ASU was issued to clarify the definition of a business
with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The Company applied the provisions of ASU
2017-01 to the acquisition of the West Quito Draw Properties, which is discussed further in Note 3, "
Acquisitions and Divestitures.
"
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230)
(ASU 2016-15). For public business
entities, ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and early adoption is permitted. The areas for
simplification in this ASU involve addressing eight specific classification issues in the statement of cash flows. An entity should apply the amendments in this ASU using a retrospective transition
method. The adoption of ASU 2016-15 did not have an impact on the Company's unaudited condensed consolidated statement of cash flows.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(ASU 2016-02). For public business entities, ASU 2016-02 is
effective for fiscal years, and interim periods within those fiscal
12
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. FINANCIAL STATEMENT PRESENTATION (Continued)
years,
beginning after December 15, 2018 and early adoption is permitted. The FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease
assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In January 2018, ASU 2016-02 was updated with ASU No. 2018-01,
Lease (Topic 842)Land Easement Practical
Expedient for Transition to Topic 842
(ASU 2018-01), which provides an optional transition
practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under Topic 840,
Leases
. An entity that elects this practical
expedient should evaluate new or modified land easements under Topic
842 beginning at the date that the entity adopts Topic 842. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the
adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. An entity should apply the amendments in this ASU on a modified retrospective basis. The
transition will require application of the new guidance at the beginning of the earliest comparative period presented in the financial statements. The Company is in the early stages of assessing the
effects of the application of the new guidance and the financial statement and disclosure impacts. The Company will adopt ASU 2016-02 no later than January 1, 2019.
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09). ASU 2014-09 states that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange
for those goods or services. The standard provides five steps an entity should apply in determining its revenue recognition. In March 2016, ASU 2014-09 was updated with ASU No. 2016-08,
Revenue from Contracts with
Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
(ASU 2016-08), and
collectively with ASU 2014-09, ASC 606), which provides further clarification on the principal versus agent evaluation. The Company adopted ASC 606 effective January 1, 2018 using
the modified retrospective approach. See Note 2, "
Operating Revenues
," for further details.
2. OPERATING REVENUES
Adoption of ASC 606,
Revenue from Contracts with Customers
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective approach applied to all contracts as of the date of
adoption. Reporting periods beginning
after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for those periods. The
adoption of ASC 606 resulted in offsetting changes to revenues and expenses associated with certain natural gas gathering and processing agreements, and therefore there was no cumulative effect of
applying ASC 606 to the opening balance of "
Retained earnings (accumulated deficit)
." The net impact of adopting ASC 606 for the three and six months
ended June 30, 2018 was a decrease of $0.2 million and $0.4 million to "
Natural gas
" and an offsetting decrease of
$0.2 million and $0.4 million to "
Gathering and other
", respectively, on the unaudited condensed consolidated statements of operations.
These
changes result from principal versus agent considerations under ASC 606 for the Company's natural gas gathering and processing arrangements in place with midstream companies. Under
contracts where it is determined that control of the natural gas transfers at the wellhead, any fees incurred to gather or process the unprocessed natural gas are a reduction of the sales price of
unprocessed natural
13
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. OPERATING REVENUES (Continued)
gas,
and therefore revenues from such transactions are presented on a net basis. Under contracts where it is determined that control of the natural gas transfers at the tailgate of the midstream
entity's processing plant, the Company is the principal and the midstream entity is the agent in the sale transaction with the third party purchaser of processed commodities. In these instances,
revenues are presented on a gross basis for amounts expected to be received from the midstream company or third party purchasers through the gathering and treating process and presented as
"
Natural gas
" or "
Natural gas liquids
" and any fees incurred to gather or process the natural gas are
presented as "
Gathering and other
."
Revenue Recognition
Revenue is measured based on consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction that are collected by the Company from a customer are excluded from
revenue. Revenues from the sale of crude oil, natural gas and natural gas liquids are recognized, at a point in time, when a performance obligation is satisfied by the transfer of control of the
commodity to the customer. Because the Company's performance obligations have been satisfied and an unconditional right to consideration exists as of the balance sheet date, the Company recognized
amounts due from contracts with customers of $29.4 million and $24.1 million as of June 30, 2018 and December 31, 2017, respectively, as
"Accounts
Receivable"
on the unaudited condensed consolidated balance sheets.
Substantially
all of the Company's revenues are derived from its single basin operations, the Delaware Basin in Pecos, Reeves, Ward and Winkler Counties, Texas. The following table
disaggregates the Company's revenues by major source, in order to depict how the nature, timing, and uncertainty of revenue and cash flows are affected by economic factors in the Company's single
basin operations, for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
2017
(1)
|
|
2018
|
|
2017
(1)
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, natural gas and natural gas liquids sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
$
|
48,756
|
|
$
|
108,695
|
|
$
|
91,825
|
|
$
|
231,216
|
|
Natural gas
|
|
|
1,560
|
|
|
5,946
|
|
|
3,879
|
|
|
12,165
|
|
Natural gas liquids
|
|
|
4,991
|
|
|
5,306
|
|
|
8,703
|
|
|
11,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total oil, natural gas and natural gas liquids sales
|
|
|
55,307
|
|
|
119,947
|
|
|
104,407
|
|
|
254,712
|
|
Other
|
|
|
108
|
|
|
190
|
|
|
263
|
|
|
1,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
55,415
|
|
$
|
120,137
|
|
$
|
104,670
|
|
$
|
255,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
As noted above, prior period amounts have not been adjusted under the modified retrospective method of
adoption.
14
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. OPERATING REVENUES (Continued)
Oil Sales
The Company generally markets its crude oil production directly to the customer using two methods. Under the first method, crude oil is sold at
the wellhead at an index price adjusted for pricing differentials and other deductions. Revenue is recognized at the wellhead, where control of the crude oil transfers to the customer, at the net
price received. Under the second method, crude oil is delivered to the customer at a contractual delivery point at which the customer takes custody, title and risk of loss of the product. The Company
receives a specified index price from the customer, net of transportation costs and other market-related adjustments. Revenue is recognized when control of the crude oil transfers at the delivery
point at the net price received.
Settlement
statements for the Company's crude oil production are typically received within the month following the date of production and therefore the amount of production delivered to
the customer and the price that will be received for that production are known at the time the revenue is recorded. Payment under the Company's crude oil contracts is typically due on or before the
20
th
of the month following the delivery month.
Natural Gas and Natural Gas Liquids Sales
The Company evaluates its natural gas gathering and processing arrangements in place with midstream companies to determine when control of the
natural gas is transferred. Under contracts where it is determined that control of the natural gas transfers at the wellhead, any fees incurred to gather or process the unprocessed natural gas are
treated as a reduction of the sales price of unprocessed natural gas, and therefore revenues from such transactions are presented on a net basis. Under contracts where it is determined that control of
the natural gas transfers at the tailgate of the midstream entity's processing plant, revenues are presented on a gross basis for amounts expected to be received from the midstream company or third
party purchasers, and therefore any fees incurred to gather or process the natural gas are presented separately as "
Gathering and other
."
Under
certain contracts, the Company may elect to take its residue gas and/or natural gas liquids in-kind at the tailgate of the midstream entity's processing plant. The Company then
sells the products to a customer at contractual delivery points at prices based on an index. In these instances, revenues are presented on a gross basis and any fees incurred to gather, process or
transport the commodities are presented separately as "
Gathering and other
."
Settlement
statements for the Company's natural gas and natural gas liquids production are typically received 30 days after the date of production and therefore the Company
estimates the amount of production delivered to the customer and the price that will be received for that production. Historically, differences between the Company's estimates and the actual revenue
received have not been material. Payment under the Company's natural gas gathering and processing contracts is typically due on or before the fifth day of the second month following the delivery
month.
Concentrations of Credit Risk
The purchasers of the Company's oil and natural gas production consist primarily of independent marketers, major oil and natural gas companies
and gas pipeline companies. Historically, the Company has not experienced any significant losses from uncollectible accounts. For the six months ended June 30, 2018, two individual purchasers
of the Company's production, Sunoco, Inc. and Andeavor,
15
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. OPERATING REVENUES (Continued)
formerly
Western Refining, Inc., each accounted for more than 10% of total sales, collectively representing 86% of the Company's total sales for the period. In 2017, two individual purchasers
of the Company's production, Crestwood Midstream Partners, formerly Arrow Field Services, LLC, and Suncor Energy Marketing, Inc., each accounted for more than 10% of total sales,
collectively representing 58% of the Company's total sales for the year.
The
Company operates a substantial portion of its oil and natural gas properties. As the operator of a property, the Company makes full payments for costs associated with the property
and seeks reimbursement from the other working interest owners in the property for their share of those costs. The Company's joint interest partners consist primarily of independent oil and natural
gas producers. If the oil and natural gas exploration and production industry in general was adversely affected, the ability of the Company's joint interest partners to reimburse the Company could be
adversely affected.
Practical Expedients
The Company does not disclose the transaction price of unsatisfied performance obligations for i) contracts with an original expected
duration of one year or less and ii) contracts where variable consideration is allocated entirely to a wholly unsatisfied performance obligation (each unit of product typically represents a
separate performance obligation, and therefore, future volumes under the Company's long-term contracts are wholly unsatisfied).
3. ACQUISITIONS AND DIVESTITURES
Acquisitions
West Quito Draw Properties
On February 6, 2018, a wholly owned subsidiary of the Company entered into a Purchase and Sale Agreement (the Shell PSA) with
SWEPI LP (Shell), an affiliate of Shell Oil
Company, pursuant to which the Company purchased acreage and related assets in the Delaware Basin located in Ward County, Texas (the West Quito Draw Properties) for a total adjusted purchase price of
$199.1 million, subject to customary post-closing adjustments. The effective date of the acquisition was February 1, 2018, and the Company closed the transaction on April 4, 2018.
The Company funded the cash consideration for the acquisition of the West Quito Draw Properties with the net proceeds from the issuance of the Additional 2025 Notes and common stock, which are
discussed in Note 5, "
Long-term Debt
," and Note 10, "
Stockholders' Equity
," respectively.
Monument Draw Assets (Ward and Winkler Counties, Texas)
On December 9, 2016, the Company entered into an agreement with a private company, pursuant to which the Company acquired the rights to
purchase acreage in the Monument Draw area of the Delaware Basin, located in Ward and Winkler Counties, Texas (the Ward County Assets) prospective for the Wolfcamp and Bone Spring formations for an
initial purchase price of $11,000 per acre. The Ward County Assets are divided into two tracts (the Southern Tract and the Northern Tract) with separate options for each tract. The agreement was
subsequently amended on June 14, 2017 to increase the purchase price of the Southern Tract and the Northern Tract acreage, from $11,000 per acre to $13,000 per acre, for rights to additional
depths in the acreage under option. Pursuant to the terms of the agreement, on June 15, 2017, the Company purchased the Southern Tract acreage for
16
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. ACQUISITIONS AND DIVESTITURES (Continued)
approximately
$87.4 million and on January 9, 2018, the Company purchased the Northern Tract acreage for approximately $108.2 million.
Acquisition of Additional Properties in Monument Draw (Ward and Winkler Counties, Texas)
On December 13, 2017, the Company acquired undeveloped acreage and related assets in the Delaware Basin, in an area contiguous to the
western and southern areas of the Company's existing Monument Draw properties in Ward County, Texas from a private company, for a total cash purchase price of $101.6 million, subject to
customary post-closing adjustments. The effective date of the acquisition was September 1, 2017.
Hackberry Draw Assets (Pecos and Reeves Counties, Texas)
On January 18, 2017, Halcón Energy Properties, Inc., a wholly owned subsidiary of the Company, entered into a
Purchase and Sale Agreement with Samson Exploration, LLC (Samson), pursuant to which it acquired acreage and related assets in the Hackberry Draw area of the Delaware Basin located in Pecos and
Reeves Counties, Texas (collectively, the Pecos County Assets), for a total adjusted purchase price of $699.2 million (the Pecos County Acquisition). The Pecos County Acquisition closed on
February 28, 2017. The transaction had an effective date of November 1, 2016. The Company funded the Pecos County Acquisition with the net proceeds from the private placement of new 8%
automatically convertible preferred stock and borrowings under its Senior Credit Agreement. Refer to Note 10,
"Stockholders' Equity,"
for further
discussion of the Company's issuance of the preferred stock.
Pro Forma Impact of Acquisition (Unaudited)
As disclosed in the Company's Annual Report included in the Form 10-K for the year ended December 31, 2017, the acquisition of the
Pecos County Assets was accounted for as a business combination in accordance with ASC No. 805,
Business Combinations
(ASC 805) which, among
other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values. Certain assets and liabilities may be adjusted as additional information is
obtained, but no later than one year from the respective acquisition dates. During the six months ended June 30, 2018, there were no adjustments to the purchase price of the Pecos County
Assets. The purchase price allocation for the Pecos County Assets is complete.
The
following unaudited pro forma combined results of operations are provided for the six months ended June 30, 2017 as though the Pecos County Acquisition had been completed as
of the beginning of the comparable prior annual reporting period, or January 1, 2016. The pro forma combined results of operations for the six months ended June 30, 2017 have been
prepared by adjusting the historical results of the Company to include the historical results of the Pecos County Assets. These supplemental pro forma results of operations are provided for
illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the period presented or that may be achieved by the
combined company in the future. The pro forma results of operations do not include any cost savings or other synergies that resulted, or may result, from the Pecos County Acquisition, or any estimated
costs that will be incurred to integrate the Pecos County Assets. Future results may vary significantly from the results reflected in this unaudited pro forma financial information because of future
events and transactions, as well as other factors.
17
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. ACQUISITIONS AND DIVESTITURES (Continued)
The
Company's historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the Pecos County Acquisition, and that were
factually supportable. Adjustments and assumptions made for this pro forma calculation are consistent with those used in the Company's annual pro forma information, as more fully described in
Item 8.
Consolidated Financial Statements and Supplementary Data
Note 5, "
Acquisitions and
Divestitures
," to the Company's Annual Report on Form 10-K for the year ended December 31, 2017. Amounts included in the table below are rounded to thousands,
except per share amounts.
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|
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|
|
Six Months Ended
June 30, 2017
|
|
|
|
(Unaudited)
|
|
Revenue
|
|
$
|
263,637
|
|
Net income (loss)
|
|
|
216,553
|
|
Net income (loss) available to common stockholders
|
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168,546
|
|
Pro forma net income (loss) per share of common stock:
|
|
|
|
|
Basic
|
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$
|
1.43
|
|
Diluted
|
|
$
|
1.43
|
|
Divestitures
Williston Basin Non-Operated Assets
On September 19, 2017, certain wholly owned subsidiaries of the Company entered into an agreement with a privately-owned company pursuant
to which the Company sold its non-operated properties and related assets located in the Williston Basin in North Dakota and Montana (the Non-Operated Williston Assets) for a total adjusted sales price
of approximately $103.4 million. The effective date of the transaction was April 1, 2017 and the transaction closed on November 9, 2017. Proceeds from the sale were recorded as a
reduction to the carrying value of the Company's full cost pool with no gain or loss recorded.
Williston Basin Operated Assets
On July 10, 2017, the Company and certain of its subsidiaries entered into an agreement with Bruin Williston Holdings, LLC for the
sale of all of the Company's operated oil and natural gas leases, oil and natural gas wells and related assets located in the Williston Basin in North Dakota, as well as 100% of the membership
interests in two of its subsidiaries (the Williston Assets) for a total adjusted sales price of approximately $1.4 billion (the Williston Divestiture). The effective date of the sale was
June 1, 2017 and the transaction closed on September 7, 2017. The Company used the net proceeds from the sale to repay borrowings outstanding under its Senior Credit Agreement,
repurchase approximately $425.0 million principal amount of the then outstanding $850.0 million principal amount of its 6.75% senior notes, redeem all of its outstanding 12% senior
secured second lien notes and for general corporate purposes.
The
net proceeds from the sale were allocated between the Company's oil and natural gas properties, other operating property and equipment and liabilities transferred on a fair value
basis. Approximately $1.39 billion was allocated to the Company's oil and natural gas properties and approximately $10.9 million was allocated to other operating property and equipment.
18
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. ACQUISITIONS AND DIVESTITURES (Continued)
As
discussed further in Note 4, "
Oil and Natural Gas Properties
," the Company uses the full cost method of accounting for its
investment in oil and natural gas properties. Under this method of accounting, sales of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized,
unless the adjustment significantly alters the relationship between capitalized costs and proved reserves. If the Williston Divestiture was accounted for as an adjustment of capitalized costs with no
gain or loss recognized, the adjustment would have significantly altered the relationship between capitalized costs and proved reserves. Accordingly, the Company recognized a gain on the sale of the
Williston Assets of $485.9 million during the year ended December 31, 2017. This gain was reduced by $5.9 million during the six months ended June 30, 2018 as the result of
customary post-closing adjustments. The carrying value of the properties sold was determined by allocating total capitalized costs within the full cost pool between properties sold and properties
retained based on their relative fair values. The gain (loss) was recorded in
"Gain (loss) on sale of oil and natural gas properties,"
on the Company's
unaudited condensed consolidated statements of operations.
East Texas Eagle Ford Assets
On January 24, 2017, certain of the Company's subsidiaries entered into an agreement with a subsidiary of Hawkwood Energy, LLC
(Hawkwood) for the sale of all of its oil and natural gas properties and related assets located in the Eagle Ford formation of East Texas (the El Halcón Assets) for a total
adjusted sales price of $491.1 million (the El Halcón Divestiture). The effective date of the sale was January 1, 2017 and the transaction closed on March 9,
2017. The Company used the net proceeds from the sale to repay borrowings outstanding under its Senior Credit Agreement and for general corporate purposes.
The
net proceeds from the sale were allocated between the Company's oil and natural gas properties, other operating property and equipment and liabilities transferred on a fair value
basis. Approximately $484.1 million was allocated to the Company's oil and natural gas properties and $10.2 million was allocated to other operating property and equipment.
Under
the full cost method of accounting, sales of oil and gas properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless the adjustment
significantly alters the relationship between capitalized costs and proved reserves. If the El Halcón Divestiture was accounted for as an adjustment of capitalized costs with no gain or
loss recognized, the adjustment would have significantly altered the relationship between capitalized costs and proved reserves. Accordingly, the Company initially recognized a gain on the sale of
$231.2 million during the three months ended March 31, 2017. This gain increased by $4.5 million during the three months ended June 30, 2017 as the result of customary
post-closing adjustments. The carrying value of the properties sold was determined by allocating total capitalized costs within the full cost pool between properties sold and properties retained based
on their relative fair values. The gain was recorded in
"Gain (loss) on sale of oil and natural gas properties,"
on the Company's unaudited condensed
consolidated statements of operations.
19
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. OIL AND NATURAL GAS PROPERTIES
The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under this method of accounting, all costs of acquisition, exploration and
development of oil and natural gas reserves (including such costs as leasehold acquisition costs, geological expenditures, dry hole costs, tangible and intangible development costs and direct internal
costs) are capitalized as the cost of oil and natural gas properties when incurred. To the extent capitalized costs of evaluated oil and natural gas properties, net of accumulated depletion, exceed
the discounted future net revenues of
proved oil and natural gas reserves, net of deferred taxes, such excess capitalized costs are charged to expense.
Additionally,
the Company assesses all properties classified as unevaluated property on a quarterly basis for possible impairment or reduction in value. The Company assesses properties
on an individual basis or as a group, if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term;
geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period
in which these factors indicate impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost
pool and are then subject to depletion and the full cost ceiling test limitation.
At
June 30, 2018, the ceiling test value of the Company's reserves was calculated based on the first-day-of-the-month average for the 12-months ended June 30, 2018 of the
West Texas Intermediate (WTI) crude oil spot price of $57.67 per barrel, adjusted by lease or field for quality, transportation fees, and regional price differentials, and the first-day-of-the-month
average for the 12-months ended June 30, 2018 of the Henry Hub natural gas price of $2.92 per million British thermal units (MMBtu), adjusted by lease or field for energy content,
transportation fees, and regional price differentials. Using these prices, the Company's net book value of oil and natural gas properties at June 30, 2018 did not exceed the ceiling amount.
At
June 30, 2017, the ceiling test value of the Company's reserves was calculated based on the first-day-of-the-month average for the 12-months ended June 30, 2017 of the
WTI crude oil spot price of $48.95 per barrel, adjusted by lease or field for quality, transportation fees, and regional price differentials, and the first-day-of-the-month average for the 12-months
ended June 30, 2017 of the Henry Hub natural gas price of $3.01 per MMBtu, adjusted by lease or field for energy content, transportation fees, and regional price differentials. Using these
prices, the Company's net book value of oil and natural gas properties at June 30, 2017 did not exceed the ceiling amount.
Changes
in commodity prices, production rates, levels of reserves, future development costs, transfers of unevaluated properties, capital spending, and other factors will determine the
Company's ceiling test calculations and impairment analyses in future periods.
20
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. LONG-TERM DEBT
Long-term debt as of June 30, 2018 and December 31, 2017, consisted of the following (in thousands):
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June 30,
2018
|
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December 31,
2017
|
|
Senior revolving credit facility
|
|
$
|
|
|
$
|
|
|
6.75% senior notes due 2025
(1)
|
|
|
612,353
|
|
|
409,168
|
|
|
|
|
|
|
|
|
|
|
|
$
|
612,353
|
|
$
|
409,168
|
|
|
|
|
|
|
|
|
|
|
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-
(1)
-
On February 15, 2018, the Company issued an additional $200.0 million aggregate principal amount of its 2025 Notes at 103.0% of
par. Amount includes a $7.7 million and $8.1 million unamortized discount at June 30, 2018 and December 31, 2017, respectively, associated with the 2025 Notes. Amount
includes a $5.7 million unamortized premium at June 30, 2018, associated with the Additional 2025 Notes. Additionally, these amounts are net of $10.7 million and
$7.7 million unamortized debt issuance costs at June 30, 2018 and December 31, 2017, respectively. Refer to "6.75% Senior Notes" below for further
details.
Senior Revolving Credit Facility
On September 7, 2017, the Company entered into an Amended and Restated Senior Secured Revolving Credit Agreement (the Senior Credit
Agreement) by and among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and certain other financial institutions party thereto, as lenders. Pursuant to the Senior Credit
Agreement, the lenders party thereto have agreed to provide the Company with a $1.0 billion senior secured reserve-based revolving credit facility with a current borrowing base of
$200.0 million. The maturity date of the Senior Credit Agreement is September 7, 2022. The borrowing base will be redetermined semi-annually, with the lenders and the Company each having
the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations. The borrowing base takes into account the estimated value of the Company's oil and
natural gas properties, proved reserves, total indebtedness, and other relevant factors consistent with customary oil and natural gas lending criteria. Amounts outstanding under the Senior Credit
Agreement bear interest at specified margins over the base rate of 1.25% to 2.25% for ABR-based loans or at specified margins over LIBOR of 2.25% to 3.25% for Eurodollar-based loans. These margins
fluctuate based on the Company's utilization of the facility. The Company may elect, at its option, to prepay any borrowings outstanding under the Senior Credit Agreement without premium or penalty
(except with respect to any break funding payments which may be payable pursuant to the terms of the Senior Credit Agreement). Amounts outstanding under the Senior Credit Agreement are guaranteed by
certain of the Company's direct and indirect subsidiaries and secured by a security interest in substantially all of the assets of the Company and its subsidiaries.
The
Senior Credit Agreement also contains certain financial covenants, including the maintenance of (i) a Total Net Indebtedness Leverage Ratio (as defined in the Senior Credit
Agreement), which was
recently revised by the Second and Fourth Amendments, as discussed below, and (ii) a Current Ratio (as defined in the Senior Credit Agreement) not to be less than 1.00:1.00.
The
Senior Credit Agreement also contains certain events of default, including non-payment; breaches of representations and warranties; non-compliance with covenants or other agreements;
cross-
21
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. LONG-TERM DEBT (Continued)
default
to material indebtedness; judgments; change of control; and voluntary and involuntary bankruptcy.
At
June 30, 2018, under the effective borrowing base of $200.0 million, the Company had no indebtedness outstanding, approximately $1.6 million letters of credit
outstanding and approximately $198.4 million of borrowing capacity available under the Senior Credit Agreement.
On
July 12, 2018, the Company entered into the Fourth Amendment (the Fourth Amendment) to the Senior Credit Agreement which provided for an increase in the ratio of Consolidated
Total Net Debt (as defined in the Senior Credit Agreement) to EBITDA (as defined in the Senior Credit Agreement) of (i) 4.75 to 1.0 for the fiscal quarter ending September 30, 2018,
(ii) 5.0 to 1.0 for the fiscal quarters ending December 31, 2018, March 31, 2019 and June 30, 2019, (iii) 4.25 to 1.0 for the fiscal quarter ending
September 30, 2019 and (iv) 4.0 to 1.0 for the fiscal quarter ending December 31, 2019 and any fiscal quarter thereafter; provided, however, that if the Company consummates a sale
of all or a material portion of its midstream assets, then the ratio of Consolidated Total Net Debt to EBITDA shall be reduced to 4.0 to 1.0 for each fiscal quarter ending after the fiscal quarter in
which such sale is consummated.
On
May 1, 2018, the Company entered into the Third Amendment (the Third Amendment) to the Senior Credit Agreement which provided for an assignment and reallocation of the Maximum
Credit Amounts (as defined in the Senior Credit Agreement) among certain of the lender financial institutions. The Third Amendment did not adjust the aggregate Maximum Credit Amounts, which remain at
$1.0 billion, or the borrowing base, which is currently $200.0 million following completion of the most recent redetermination.
On
February 2, 2018, the Company entered into the Second Amendment (the Second Amendment) to the Senior Credit Agreement by and among the Company, as borrower, JPMorgan Chase
Bank, N.A., as administrative agent, and certain other financial institutions party thereto, as lenders. The Second Amendment among other things, provided for (i) the use of annualized
financial data in determining EBITDA (as defined in the Senior Credit Agreement) for the fiscal quarters ending June 30, 2018,
September 30, 2018 and December 31, 2018, (ii) an increase in the ratio of Consolidated Total Net Debt (as defined in the Senior Credit Agreement) to EBITDA of 4.50:1.00 for the
fiscal quarter ending June 30, 2018, and a ratio of 4.00:1.00 for any fiscal quarter thereafter, (iii) a waiver of compliance with the covenant relating to the Total Net Indebtedness
Leverage Ratio (as defined in the Senior Credit Agreement) for the fiscal quarter ending March 31, 2018, and (iv) a waiver of the automatic reduction to the borrowing base that would
otherwise result due to the issuance of the Additional 2025 Notes (defined below).
After
giving effect to the Second Amendment at June 30, 2018, the Company was in compliance with the financial covenants under the Senior Credit Agreement.
6.75% Senior Notes
On February 16, 2017, the Company issued $850.0 million aggregate principal amount of new 6.75% senior unsecured notes due 2025
(the 2025 Notes) in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (Securities Act), Rule 144A and Regulation S, and
applicable state securities laws. The 2025 Notes were issued at par and bear interest at a rate of 6.75% per annum, payable semi-annually on February 15 and August 15
22
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. LONG-TERM DEBT (Continued)
of
each year. The 2025 Notes will mature on February 15, 2025. Proceeds from the private placement were approximately $834.1 million after deducting initial purchasers' discounts and
commissions and offering expenses. The Company used a portion of the net proceeds from the private placement to fund the repurchase and redemption of the then outstanding 8.625% senior secured second
lien notes due 2020 (the 2020 Second Lien Notes) and for general corporate purposes. Upon repurchase and redemption of the 2020 Second Lien Notes during the three months ended March 31, 2017,
the Company recorded a net loss on extinguishment of debt of approximately $56.9 million, representing a $30.9 million loss on the repurchase for the tender premium paid and a
$26.0 million loss on the write-off of the discount on the notes.
The
2025 Notes are governed by an Indenture, dated as of February 16, 2017 (the February 2017 Indenture) by and among the Company, the Guarantors and U.S. Bank National
Association, as Trustee, which contains affirmative and negative covenants that, among other things, limit the ability of the Company and the Guarantors to incur indebtedness; purchase or redeem stock
or subordinated indebtedness; make investments; create liens; enter into transactions with affiliates; sell assets; refinance certain indebtedness; merge with or into other companies or transfer
substantially all of their assets;
and, in certain circumstances, to pay dividends or make other distributions on stock. The February 2017 Indenture also contains customary events of default. Upon the occurrence of certain events of
default, the Trustee or the holders of the 2025 Notes may declare all outstanding 2025 Notes to be due and payable immediately. The 2025 Notes are jointly and severally, fully and unconditionally
guaranteed on a senior unsecured basis by the Company's existing wholly-owned subsidiaries. Halcón, the issuer of the 2025 Notes, has no material independent assets or operations apart
from the assets and operations of its subsidiaries.
In
connection with the sale of the 2025 Notes, on February 16, 2017, the Company, the Guarantors and J.P. Morgan Securities LLC, on behalf of itself and as representative
of the initial purchasers, entered into a Registration Rights Agreement (the 2017 Registration Rights Agreement) pursuant to which the Company agreed to, among other things, use reasonable best
efforts to file a registration statement under the Securities Act and complete an exchange offer for the 2025 Notes within 365 days after closing. The Company filed the registration
statement on November 1, 2017 and it was declared effective by the SEC on December 21, 2017. In addition, the Company completed the exchange offer for the 2025 Notes on
February 1, 2018.
On
July 25, 2017, the Company concluded a consent solicitation of the holders of the 2025 Notes (the Consent Solicitation) and obtained consents to amend the February 2017
Indenture from approximately 99% of the holders of the 2025 Notes. As supplemented, the February 2017 Indenture amends provisions in order to exempt, among other things, the Williston Divestiture from
certain provisions therein triggered upon a sale of "all or substantially all of the assets" of the Company. Consenting holders of the 2025 Notes received a consent fee of 2.0% of principal, or
$16.9 million. The Company recorded the $16.9 million consent fees paid as a discount on the 2025 Notes.
On
September 7, 2017, the Company commenced an offer to purchase for cash up to $425.0 million of the $850.0 million outstanding aggregate principal amount of its
2025 Notes at 103.0% of principal plus accrued and unpaid interest. The consummation of the Williston Divestiture constituted a "Williston Sale" under the February 2017 Indenture, and the Company was
required to make an offer to all holders of the 2025 Notes to purchase for cash an aggregate principal amount up to $425.0 million of the 2025 Notes. The offer to purchase expired on
October 6, 2017, with notes
23
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. LONG-TERM DEBT (Continued)
representing
in excess of $425.0 million of principal amount validly tendered. As a result, on October 10, 2017, the Company repurchased approximately $425.0 million principal
amount of the 2025 Notes on a pro rata basis at 103.0% of par plus accrued and unpaid interest of approximately $4.1 million.
On
February 15, 2018, the Company issued an additional $200.0 million aggregate principal amount of its 2025 Notes at a price to the initial purchasers of 103.0% of par
(the Additional 2025 Notes). The
Additional 2025 Notes were issued in a private placement exempt from registration under the Securities Act pursuant to Rule 144A and Regulation S under the Securities Act and applicable
state securities laws. The net proceeds from the sale of the Additional 2025 Notes were approximately $202.4 million after deducting initial purchasers' premiums, commissions and offering
expenses and were used to fund the cash consideration for the acquisition of the West Quito Draw Properties, discussed further in Note 3,
"Acquisitions and
Divestitures,"
and for general corporate purposes, including to fund the Company's 2018 drilling program. These notes were issued under the February 2017 Indenture.
The
Additional 2025 Notes are treated as a single class with, and have the same terms as, the 2025 Notes, except that the Additional 2025 Notes will initially be subject to transfer
restrictions and have the benefit of certain registration rights and provisions for the payment of additional interest in the event of a breach with respect to such registration rights pursuant to the
terms of a Registration Rights Agreement, entered into on February 15, 2018 (the 2018 Registration Rights Agreement). Pursuant to the 2018 Registration Rights Agreement the Company agreed to,
among other things, use reasonable best efforts to file a registration statement under the Securities Act and complete an exchange offer for the 2025 Notes within 180 days after closing.
The Company filed the registration statement on March 20, 2018 and it was declared effective by the SEC on April 9, 2018.
The
remaining unamortized discount on the 2025 Notes was $7.7 million at June 30, 2018. The unamortized premium on the Additional 2025 Notes was $5.7 million at
June 30, 2018.
Debt Issuance Costs
The Company capitalizes certain direct costs associated with the issuance of debt and amortizes such costs over the lives of the respective
debt. During the six months ended June 30, 2018, the Company capitalized approximately $3.9 million of debt issuance costs related to the Senior Credit Agreement and the Additional 2025
Notes. At June 30, 2018 and December 31, 2017, the Company had approximately $11.6 million and $8.3 million, respectively, of unamortized debt issuance costs. The debt
issuance costs for the Company's Senior Credit Agreement are presented in "
Funds in escrow and other
" and the debt issuance costs for the Company's
senior unsecured debt are presented in
"Long-term debt, net"
on the unaudited condensed consolidated balance sheets.
6. FAIR VALUE MEASUREMENTS
Pursuant to ASC 820,
Fair Value Measurements
(ASC 820), the Company's determination of fair value incorporates not only the credit
standing of the counterparties involved in transactions with the Company resulting in receivables on the Company's unaudited condensed consolidated balance sheets, but also the impact of the Company's
nonperformance risk on its own liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price). ASC 820 establishes a
24
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. FAIR VALUE MEASUREMENTS (Continued)
fair
value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 measurements are inputs that are observable for assets or liabilities,
either directly or indirectly, other than quoted prices included within Level 1. The Company utilizes market data or assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The
Company classifies fair value balances based on the observability of those inputs.
As
required by ASC 820, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The
Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement
within the fair value hierarchy levels. There were no transfers between fair value hierarchy levels for any period presented. The following tables set forth by level within the fair value hierarchy
the Company's financial assets and liabilities that were accounted for at fair value as of June 30, 2018 and December 31, 2017 (in thousands):
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|
June 30, 2018
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from derivative contracts
|
|
$
|
|
|
$
|
20,837
|
|
$
|
|
|
$
|
20,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities from derivative contracts
|
|
$
|
|
|
$
|
74,486
|
|
$
|
|
|
$
|
74,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
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|
|
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from derivative contracts
|
|
$
|
|
|
$
|
677
|
|
$
|
|
|
$
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities from derivative contracts
|
|
$
|
|
|
$
|
26,999
|
|
$
|
|
|
$
|
26,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
Derivative
contracts listed above as Level 2 include collars, swaps and basis swaps that are carried at fair value. The Company records the net change in the fair value of these
positions in
"Net gain (loss) on derivative contracts"
on the unaudited condensed consolidated statements of operations. The Company is able to value
the assets and liabilities based on observable market data for similar instruments, which resulted in the Company reporting its derivatives as Level 2. This observable data includes the forward
curves for commodity prices based on quoted market prices and implied volatility factors related to changes in the forward curves. See Note 7,
"Derivative and Hedging
Activities,"
for additional discussion of derivatives.
25
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. FAIR VALUE MEASUREMENTS (Continued)
The Company's derivative contracts are with major financial institutions with investment grade credit ratings which are believed to have minimal credit risk. As such, the Company is
exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts; however, the Company does not anticipate such nonperformance.
The
following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of ASC 825,
Financial
Instruments
. The estimated fair value amounts have been determined at discrete points in time based on relevant market information. These estimates involve uncertainties and
cannot be determined with precision. The estimated fair value of cash and cash equivalents, accounts receivables and accounts payables approximate their carrying value due to their short-term nature.
The estimated fair value of the Company's Senior Credit Agreement approximates carrying value because the interest rates approximate current market rates. The following table presents the estimated
fair values of the Company's fixed interest rate debt instruments as of June 30, 2018 and December 31, 2017 (excluding discounts, premiums and debt issuance costs) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Debt
|
|
Principal
Amount
|
|
Estimated
Fair Value
|
|
Principal
Amount
|
|
Estimated
Fair Value
|
|
6.75% senior notes
|
|
$
|
625,005
|
|
$
|
584,380
|
|
$
|
425,005
|
|
$
|
443,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
fair value of the Company's fixed interest rate debt instruments was calculated using Level 1 criteria. The fair value of the Company's senior notes is based on quoted market
prices from trades of such debt.
The
Company follows the provisions of ASC 820 for nonfinancial assets and liabilities measured at fair value on a non-recurring basis. These provisions apply to the Company's initial
recognition of asset retirement obligations for which fair value is used. The asset retirement obligation estimates are derived from historical costs and management's expectation of future cost
environments; consequently, the Company has designated these liabilities as Level 3. See Note 8, "
Asset Retirement Obligations
," for a
reconciliation of the beginning and ending balances of the liability for the Company's asset retirement obligations.
7. DERIVATIVE AND HEDGING ACTIVITIES
The Company is exposed to certain risks relating to its ongoing business operations, such as commodity price risk and interest rate risk. Derivative contracts are utilized to hedge the
Company's exposure to price fluctuations and reduce the variability in the Company's cash flows associated with anticipated sales of future oil, natural gas and natural gas liquids production. When
derivative contracts are available at terms (or prices) acceptable to the Company, it generally hedges a substantial, but varying, portion of anticipated oil, natural gas and natural gas liquids
production for future periods. Derivatives are carried at fair value on the unaudited condensed consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the
unaudited condensed consolidated statements of operations for the period in which the change occurs. The Company's hedge policies and objectives
may change significantly as its operational profile changes and/or commodities prices change. The Company does not enter into derivative contracts for speculative trading purposes.
26
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. DERIVATIVE AND HEDGING ACTIVITIES (Continued)
It
is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions determined by management as competent and competitive
market makers. The Company did not post collateral under any of its derivative contracts as they are secured under the Company's Senior Credit Agreement or are uncollateralized trades.
The
Company's crude oil, natural gas and natural gas liquids derivative positions at any point in time may consist of swaps, basis swaps and costless put/call "collars." Swaps are
designed so that the Company receives or makes payments based on a differential between fixed and variable prices for crude oil and natural gas. Basis swaps effectively lock in a price differential
between regional prices (i.e. Midland) and the relevant price index at which the oil production is sold (i.e. Cushing). A costless collar consists of a sold call, which establishes a
maximum price the Company will receive for the volumes under contract and a purchased put that establishes a minimum price. The Company has elected not to designate any of its derivative contracts for
hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of these derivative contracts, as well as payments and receipts on settled derivative contracts, in
"Net gain (loss) on
derivative contracts"
on the unaudited condensed consolidated statements of operations.
At
June 30, 2018, the Company had 66 open commodity derivative contracts summarized in the following tables: seven natural gas collar arrangements, seven natural gas basis swaps,
three natural gas liquids basis swaps, 18 crude oil basis swaps and 31 crude oil collar arrangements.
At
December 31, 2017, the Company had 34 open commodity derivative contracts summarized in the following tables: three natural gas collar arrangements, 12 crude oil basis swaps
and 19 crude oil collar arrangements.
All
derivative contracts are recorded at fair market value in accordance with ASC 815,
Derivatives and Hedging
(ASC 815) and ASC 820 and
included in the unaudited condensed consolidated balance sheets as assets or liabilities. The following table summarizes the location and fair value amounts of all derivative contracts in the
unaudited condensed consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivative
contracts
|
|
|
|
Liability derivative
contracts
|
|
Derivatives not
designated as hedging
contracts under
ASC 815
|
|
Balance sheet location
|
|
June 30,
2018
|
|
December 31,
2017
|
|
Balance sheet location
|
|
June 30,
2018
|
|
December 31,
2017
|
|
Commodity contracts
|
|
Current assetsreceivables from derivative contracts
|
|
$
|
19,391
|
|
$
|
677
|
|
Current liabilitiesliabilities from derivative contracts
|
|
$
|
(53,513
|
)
|
$
|
(19,248
|
)
|
Commodity contracts
|
|
Other noncurrent assetsreceivables from derivative contracts
|
|
|
1,446
|
|
|
|
|
Other noncurrent liabilitiesliabilities from derivative contracts
|
|
|
(20,973
|
)
|
|
(7,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging contracts under ASC 815
|
|
$
|
20,837
|
|
$
|
677
|
|
|
|
$
|
(74,486
|
)
|
$
|
(26,999
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. DERIVATIVE AND HEDGING ACTIVITIES (Continued)
The
following table summarizes the location and amounts of the Company's realized and unrealized gains and losses on derivative contracts in the Company's unaudited condensed
consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or
(loss) recognized in
income on derivative
contracts for the
|
|
Amount of gain or
(loss) recognized in
income on derivative
contracts for the
|
|
|
|
|
|
Three Months
Ended June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
Location of gain or (loss) recognized
in income on derivative contracts
|
|
Derivatives not designated as hedging
contracts under ASC 815
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Commodity contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on commodity contracts
|
|
Other income (expenses)net gain (loss) on derivative contracts
|
|
$
|
(37,874
|
)
|
$
|
18,005
|
|
$
|
(26,761
|
)
|
$
|
42,219
|
|
Realized gain (loss) on commodity contracts
|
|
Other income (expenses)net gain (loss) on derivative contracts
|
|
|
25,774
|
|
|
6,151
|
|
|
20,564
|
|
|
8,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gain (loss) on derivative contracts
|
|
$
|
(12,100
|
)
|
$
|
24,156
|
|
$
|
(6,197
|
)
|
$
|
50,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
June 30, 2018 and December 31, 2017, the Company had the following open crude oil and natural gas derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
Floors
|
|
Ceilings
|
|
Basis Differential
|
|
Period
|
|
Instrument
|
|
Commodity
|
|
Volume in
Mmbtu's/
Bbl's
|
|
Price /
Price Range
|
|
Weighted
Average
Price
|
|
Price /
Price Range
|
|
Weighted
Average
Price
|
|
Price /
Price Range
|
|
Weighted
Average
Price
|
|
July 2018 - December 2018
|
|
Basis Swap
|
|
Natural Gas
|
|
|
2,760,000
|
|
$
|
|
$
|
|
|
$
|
|
$
|
|
|
$(1.05) - $(1.19)
|
|
$
|
(1.10
|
)
|
July 2018 - December 2018
|
|
Basis Swap
|
|
Crude Oil
|
|
|
1,472,000
|
|
|
|
|
|
|
|
|
|
|
|
(10.75) - (12.50)
|
|
|
(11.69
|
)
|
July 2018 - December 2018
|
|
Collars
|
|
Crude Oil
|
|
|
1,840,000
|
|
45.00 - 53.00
|
|
|
48.96
|
|
50.00 - 60.00
|
|
|
55.98
|
|
|
|
|
|
|
July 2018 - December 2018
|
|
Collars
|
|
Natural Gas
|
|
|
1,380,000
|
|
3.00 - 3.03
|
|
|
3.01
|
|
3.22 - 3.38
|
|
|
3.30
|
|
|
|
|
|
|
October 2018 - December 2018
|
|
Collars
|
|
Crude Oil
|
|
|
276,000
|
|
50.65 - 55.80
|
|
|
53.82
|
|
55.65 - 63.00
|
|
|
59.82
|
|
|
|
|
|
|
January 2019 - March 2019
|
|
Collars
|
|
Crude Oil
|
|
|
90,000
|
|
46.75
|
|
|
46.75
|
|
51.75
|
|
|
51.75
|
|
|
|
|
|
|
January 2019 - June 2019
|
|
Basis Swap
|
|
Crude Oil
|
|
|
2,172,000
|
|
|
|
|
|
|
|
|
|
|
|
(0.98) - (6.50)
|
|
|
(3.02
|
)
|
January 2019 - December 2019
|
|
Basis Swap
|
|
Natural Gas
|
|
|
9,307,500
|
|
|
|
|
|
|
|
|
|
|
|
(1.05) - (1.40)
|
|
|
(1.18
|
)
|
January 2019 - December 2019
|
|
Collars
|
|
Natural Gas
|
|
|
7,300,000
|
|
2.52 - 2.62
|
|
|
2.59
|
|
3.00 - 3.02
|
|
|
3.00
|
|
|
|
|
|
|
January 2019 - December 2019
|
|
Collars
|
|
Crude Oil
|
|
|
5,110,000
|
|
50.00 - 58.00
|
|
|
53.12
|
|
55.00 - 63.00
|
|
|
58.98
|
|
|
|
|
|
|
January 2019 - December 2019
|
|
Swap
|
|
Natural Gas Liquids
|
|
|
912,500
|
|
29.08 - 29.10
|
|
|
29.09
|
|
|
|
|
|
|
|
|
|
|
|
April 2019 - December 2019
|
|
Collars
|
|
Crude Oil
|
|
|
275,000
|
|
55.00
|
|
|
55.00
|
|
62.85
|
|
|
62.85
|
|
|
|
|
|
|
July 2019 - December 2019
|
|
Basis Swap
|
|
Crude Oil
|
|
|
736,000
|
|
|
|
|
|
|
|
|
|
|
|
(0.98) - (6.50)
|
|
|
(3.95
|
)
|
July 2019 - December 2019
|
|
Collars
|
|
Crude Oil
|
|
|
184,000
|
|
55.00
|
|
|
55.00
|
|
69.00
|
|
|
69.00
|
|
|
|
|
|
|
January 2020 - December 2020
|
|
Collars
|
|
Crude Oil
|
|
|
549,000
|
|
50.00
|
|
|
50.00
|
|
70.00
|
|
|
70.00
|
|
|
|
|
|
|
January 2020 - December 2020
|
|
Basis Swap
|
|
Crude Oil
|
|
|
2,196,000
|
|
|
|
|
|
|
|
|
|
|
|
2.00 - 3.60
|
|
|
2.56
|
|
28
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. DERIVATIVE AND HEDGING ACTIVITIES (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Floors
|
|
Ceilings
|
|
Basis Differential
|
|
Period
|
|
Instrument
|
|
Commodity
|
|
Volume in
Mmbtu's/
Bbl's
|
|
Price /
Price Range
|
|
Weighted
Average
Price
|
|
Price /
Price Range
|
|
Weighted
Average
Price
|
|
Price /
Price Range
|
|
Weighted
Average
Price
|
|
January 2018 - December 2018
|
|
Basis Swap
|
|
Crude Oil
|
|
|
2,555,000
|
|
$
|
|
$
|
|
|
$
|
|
$
|
|
|
$(1.05) - $(1.50)
|
|
$
|
(1.29
|
)
|
January 2018 - December 2018
|
|
Collars
|
|
Crude Oil
|
|
|
2,920,000
|
|
45.00 - 53.00
|
|
|
49.29
|
|
50.00 - 60.00
|
|
|
56.82
|
|
|
|
|
|
|
January 2018 - December 2018
|
|
Collars
|
|
Natural Gas
|
|
|
2,737,500
|
|
3.00 - 3.03
|
|
|
3.01
|
|
3.22 - 3.38
|
|
|
3.30
|
|
|
|
|
|
|
April 2018 - December 2018
|
|
Basis Swap
|
|
Crude Oil
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
|
(1.15)
|
|
|
(1.15
|
)
|
April 2018 - December 2018
|
|
Collars
|
|
Crude Oil
|
|
|
275,000
|
|
46.75
|
|
|
46.75
|
|
51.75
|
|
|
51.75
|
|
|
|
|
|
|
July 2018 - December 2018
|
|
Basis Swap
|
|
Crude Oil
|
|
|
1,012,000
|
|
|
|
|
|
|
|
|
|
|
|
(0.98) - (1.18)
|
|
|
(1.12
|
)
|
July 2018 - December 2018
|
|
Collars
|
|
Crude Oil
|
|
|
184,000
|
|
48.50
|
|
|
48.50
|
|
53.50
|
|
|
53.50
|
|
|
|
|
|
|
October 2018 - December 2018
|
|
Collars
|
|
Crude Oil
|
|
|
92,000
|
|
50.65
|
|
|
50.65
|
|
55.65
|
|
|
55.65
|
|
|
|
|
|
|
January 2019 - March 2019
|
|
Collars
|
|
Crude Oil
|
|
|
90,000
|
|
46.75
|
|
|
46.75
|
|
51.75
|
|
|
51.75
|
|
|
|
|
|
|
January 2019 - December 2019
|
|
Basis Swap
|
|
Crude Oil
|
|
|
4,380,000
|
|
|
|
|
|
|
|
|
|
|
|
(0.50) - (1.33)
|
|
|
(1.02
|
)
|
January 2019 - December 2019
|
|
Collars
|
|
Crude Oil
|
|
|
1,825,000
|
|
50.00 - 51.00
|
|
|
50.24
|
|
55.00 - 57.30
|
|
|
55.70
|
|
|
|
|
|
|
29
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. DERIVATIVE AND HEDGING ACTIVITIES (Continued)
The Company presents the fair value of its derivative contracts at the gross amounts in the unaudited condensed consolidated balance sheets. The following table shows the potential
effects of master netting arrangements on the fair value of the Company's derivative contracts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Offsetting of Derivative Assets and Liabilities
|
|
June 30,
2018
|
|
December 31,
2017
|
|
June 30,
2018
|
|
December 31,
2017
|
|
Gross Amounts Presented in the Consolidated Balance Sheet
|
|
$
|
20,837
|
|
$
|
677
|
|
$
|
(74,486
|
)
|
$
|
(26,999
|
)
|
Amounts Not Offset in the Consolidated Balance Sheet
|
|
|
(14,982
|
)
|
|
(231
|
)
|
|
14,982
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Amount
|
|
$
|
5,855
|
|
$
|
446
|
|
$
|
(59,504
|
)
|
$
|
(26,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company enters into an International Swap Dealers Association Master Agreement (ISDA) with each counterparty prior to a derivative contract with such counterparty. The ISDA is a
standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the
Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.
8. ASSET RETIREMENT OBLIGATIONS
The Company records an asset retirement obligation (ARO) on oil and natural gas properties when it can reasonably estimate the fair value of an obligation to perform site reclamation,
dismantle facilities or plug and abandon costs. For other operating property and equipment, the Company records an ARO when the system is placed in service and it can reasonably estimate the fair
value of an obligation to perform site reclamation and other necessary work when it is required. The Company records the ARO liability on the unaudited condensed consolidated balance sheets and
capitalizes a portion of the cost in "
Oil and natural gas properties
" or "
Other operating property and
equipment
" during the period in which the obligation is incurred. The Company records the accretion of its ARO liabilities in "
Depletion, depreciation
and accretion
" expense in the unaudited condensed consolidated statements of operations. The additional capitalized costs are depreciated on a unit-of-production basis or
straight-line basis.
The
Company recorded the following activity related to its ARO liability (in thousands):
|
|
|
|
|
Liability for asset retirement obligations as of December 31, 2017
|
|
$
|
4,368
|
|
Liabilities settled and divested
|
|
|
(110
|
)
|
Additions
|
|
|
544
|
|
Acquisitions
(1)
|
|
|
2,333
|
|
Accretion expense
|
|
|
131
|
|
Revisions in estimated cash flows
|
|
|
(720
|
)
|
|
|
|
|
|
Liability for asset retirement obligations as of June 30, 2018
|
|
$
|
6,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
See Note 3, "Acquisitions and Divestitures," for additional information on the Company's acquisition and divestiture
activities.
30
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases corporate office space in Houston, Texas and Denver, Colorado. Rent expense was approximately $1.9 million and
$2.0 million for the six months ended June 30, 2018 and 2017, respectively. Future obligations associated with the Company's operating leases are presented in the table below (in
thousands):
|
|
|
|
|
Remaining period in 2018
|
|
$
|
1,678
|
|
2019
|
|
|
2,990
|
|
2020
|
|
|
1,811
|
|
2021
|
|
|
1,497
|
|
2022
|
|
|
835
|
|
Thereafter
|
|
|
1,345
|
|
|
|
|
|
|
Total
|
|
$
|
10,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2018, the Company has the following active drilling rig commitments (in thousands):
|
|
|
|
|
Remaining period in 2018
|
|
$
|
6,949
|
|
2019
|
|
|
2,850
|
|
2020
|
|
|
|
|
2021
|
|
|
|
|
2022
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2018, termination of the Company's active drilling rig commitments would require early termination penalties of $8.7 million, which would be in lieu of
paying the remaining active drilling rig commitments of $9.8 million.
In
past years, with the sustained decline in crude oil prices, the Company stacked certain drilling rigs and amended previously entered into drilling contracts. In connection with the
early termination of a drilling contract from 2015, if certain requirements are not met by January 12, 2020, the Company may incur an additional $3.0 million. Rig stacking fees are
expensed as incurred within
"Gathering and other"
on the unaudited condensed consolidated statements of operations.
The
Company has entered into various long-term gathering, transportation and sales contracts with respect to its oil and natural gas production from the Delaware Basin in West Texas. As
of June 30, 2018, the Company had in place two long-term crude oil contracts and ten long-term natural gas contracts in this area and the sales price under these contracts are based on posted
market rates. Under the terms of these contracts, the Company has committed a substantial portion of its production from these areas for periods ranging from one to twenty years from the date of first
production.
Contingencies
From time to time, the Company may be a plaintiff or defendant in a pending or threatened legal proceeding arising in the normal course of its
business. While the outcome and impact of currently
31
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
pending
legal proceedings cannot be determined, the Company's management and legal counsel believe that the resolution of these proceedings through settlement or adverse judgment will not have a
material effect on the Company's unaudited condensed consolidated operating results, financial position or cash flows.
10. STOCKHOLDERS' EQUITY
Preferred Stock and Non-Cash Preferred Stock Dividend
On January 24, 2017 (the Commitment Date), the Company entered into a stock purchase agreement with certain accredited investors to sell,
in a private placement exempt from registration requirements of the Securities Act pursuant to Section 4(a)(2), approximately 5,518 shares of 8% Automatically Convertible Preferred Stock, par
value $0.0001 per share (the Preferred Stock), each share of which was convertible into 10,000 shares of common stock. Also on January 24, 2017, the Company received an executed written consent
in lieu of a stockholders' meeting authorizing and approving the conversion of the Preferred Stock into common stock. On February 27, 2017, the Company filed with the Delaware Secretary of
State a Certificate of Designation, Preferences, Rights and Limitations of the Preferred Stock (the Certificate of Designation), which created the series of preferred stock issued by the Company on
that same date. The Company issued the Preferred Stock at $72,500 per share. Gross proceeds were approximately $400.1 million, or $7.25 per share of common stock. The Company incurred
approximately $11.9 million in expenses associated with this offering, including placement agent fees. On March 16, 2017, the Company mailed a definitive information statement to its
common stockholders notifying them that a majority of its stockholders had consented to the issuance of common stock, par value $0.0001 per share, upon the conversion of the Preferred Stock. The
Preferred Stock automatically converted into 55.2 million shares of common stock on April 6, 2017 in accordance with the terms of the Certificate of Designation. No cash dividends were
paid on the Preferred Stock since, pursuant to the terms of the Certificate of Designation of the Preferred Stock, conversion occurred prior to June 1, 2017.
The
Company agreed to file a registration statement to register the resale of shares of common stock issuable upon conversion of the Preferred Stock and to pay penalties in the
event such registration was not effective by June 27, 2017. The Company filed such registration statement on March 3, 2017 and it was declared effective by the SEC on April 7,
2017.
In
accordance with ASC Topic 470,
Debt
(ASC 470), the Company determined that the conversion feature in the Preferred Stock represented a
beneficial conversion feature. The fair value of the Company's common stock of $8.12 per share on the Commitment Date was greater than the conversion price of $7.25 per share of common stock,
representing a beneficial conversion feature of $0.87 per share of common stock, or approximately $48.0 million in aggregate. Under ASC 470, $48.0 million (the intrinsic value of the
beneficial conversion feature) of the proceeds received from the issuance of the Preferred Stock was allocated to
"Additional paid-in capital,"
creating
a discount on the Preferred Stock (the Discount). The Discount was required to be amortized on a non-cash basis over the approximate 65-month period between the issuance date and the required
redemption date of July 28, 2022, or fully amortized upon an accelerated date of redemption or conversion, and recorded as a preferred dividend. As a result, approximately $0.8 million
of the Discount was amortized and a non-cash preferred dividend was recorded in the three months ended March 31, 2017 and due to the conversion date occurring on April 6, 2017, the
remaining $47.2 million of the amortization of the
32
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. STOCKHOLDERS' EQUITY (Continued)
Discount
was accelerated to the conversion date and fully amortized in the three months ended June 30, 2017. The Discount amortization is reflected in
"Non-cash
preferred dividend"
in the unaudited condensed consolidated statements of operations. The preferred dividend was charged against additional paid-in capital since no retained
earnings were available.
Common Stock
On February 9, 2018, the Company sold 9.2 million shares of common stock, par value $0.0001 per share, in a public offering at a
price of $6.90 per share. The net proceeds to the Company from the offering were approximately $60.4 million, after deducting the underwriters' discounts and offering expenses. The Company used
the net proceeds, together with the net proceeds from the issuance of the Additional 2025 Notes, to fund the cash consideration for the acquisition of the West Quito Draw Properties, and for general
corporate purposes, including funding the Company's 2018 drilling program.
Warrants
On September 9, 2016, the Company issued 4.7 million new warrants. The warrants can be exercised to purchase 4.7 million
shares of the Company's common stock at an exercise price of $14.04 per share. The holders are entitled to exercise the warrants in whole or in part at any time prior to expiration on
September 9, 2020.
Incentive Plans
On September 9, 2016, the Company's Board adopted the 2016 Long-Term Incentive Plan (the Plan). An aggregate of 10.0 million
shares of the Company's common stock were available for grant pursuant to awards under the Plan. On April 6, 2017, Amendment No. 1 to the Plan to increase, by 9.0 million shares,
the maximum number of shares of common stock that may be issued thereunder, i.e., a maximum of 19.0 million shares, became effective, which was 20 calendar days following the date the
Company mailed an information statement to all stockholders of record notifying them of approval of the amendment by written consent of holders of a majority of the Company's outstanding stock. As of
June 30, 2018 and December 31, 2017, a maximum of 4.9 million and 7.7 million shares, respectively, of the Company's common stock remained reserved for issuance under the
Plan.
The
Company accounts for stock-based payment accruals under authoritative guidance on stock compensation. The guidance requires all stock-based payments to employees and directors,
including grants of stock options and restricted stock, to be recognized in the financial statements based on their fair values. The Company has elected to not apply a forfeiture estimate and will
recognize a credit in compensation expense to the extent awards are forfeited.
For
the three and six months ended June 30, 2018, the Company recognized $4.2 million and $7.8 million, respectively, of stock-based compensation expense. For the
three and six months ended June 30, 2017, the Company recognized $12.9 million and $21.3 million, respectively, of stock-based compensation expense. Stock-based compensation
expense is recorded as a component of "
General and administrative
" on the unaudited condensed consolidated statements of operations.
33
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. STOCKHOLDERS' EQUITY (Continued)
Stock Options
From time to time, the Company grants stock options under the Plan covering shares of common stock to employees of the Company. Stock options,
when exercised, are settled through the payment of the exercise price in exchange for new shares of stock underlying the option. These awards typically vest over a three year period at a rate of
one-third on the annual anniversary date of the grant and expire ten years from the grant date.
During
the six months ended June 30, 2018, the Company granted stock options under the Plan covering 1.2 million shares of common stock to employees of the Company. These
stock options have an exercise price of $5.65. During the six months ended June 30, 2018, the Company received $0.3 million from the exercise of stock options. At June 30, 2018,
the Company had $9.9 million of unrecognized compensation expense related to non-vested stock options to be recognized over a weighted-average period of 1.0 years.
During
the six months ended June 30, 2017, the Company granted stock options under the Plan covering 1.8 million shares of common stock to employees of the Company. These
stock options have exercise prices ranging from $6.55 to $7.75 with a weighted average exercise price of $7.72. At June 30, 2017, the Company had $23.1 million of unrecognized
compensation expense related to non-vested stock options to be recognized over a weighted-average period of 1.4 years.
Restricted Stock
From time to time, the Company grants shares of restricted stock to employees and non-employee directors of the Company. Employee shares
typically vest over a three year period at a rate of one-third on the annual anniversary date of the grant, and the non-employee directors' shares vest six months from the date of grant. Certain
shares granted under the Plan, specifically related to the Company's emergence from chapter 11 bankruptcy, vested on or before September 30, 2017.
During
the six months ended June 30, 2018, the Company granted 2.2 million shares of restricted stock under the Plan to employees and non-employee directors of the Company.
These restricted shares were granted at prices ranging from $4.00 to $5.65 with a weighted average price of $5.53. At June 30, 2018, the Company had $11.0 million of unrecognized
compensation expense related to non-vested restricted stock awards to be recognized over a weighted-average period of 1.5 years.
During
the six months ended June 30, 2017, the Company granted 2.0 million shares of restricted stock under the Plan to employees and non-employee directors of the Company.
These restricted shares were granted at prices ranging from $6.08 to $7.75 with a weighted average price of $7.07. At June 30, 2017, the Company had $13.9 million of unrecognized
compensation expense related to non-vested restricted stock awards to be recognized over a weighted-average period of 0.8 years.
34
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. EARNINGS PER COMMON SHARE
The following represents the calculation of earnings (loss) per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
(16,274
|
)
|
$
|
(27,029
|
)
|
$
|
(18,872
|
)
|
$
|
161,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic number of common shares outstanding
|
|
|
157,943
|
|
|
143,545
|
|
|
155,925
|
|
|
117,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share of common stock
|
|
$
|
(0.10
|
)
|
$
|
(0.19
|
)
|
$
|
(0.12
|
)
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
(16,274
|
)
|
$
|
(27,029
|
)
|
$
|
(18,872
|
)
|
$
|
161,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic number of common shares outstanding
|
|
|
157,943
|
|
|
143,545
|
|
|
155,925
|
|
|
117,554
|
|
Common stock equivalent shares representing shares issuable upon:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
Exercise of warrants
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
Vesting of restricted shares
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
|
655
|
|
Conversion of preferred stock
|
|
|
|
|
|
Anti-dilutive
|
|
|
|
|
|
Anti-dilutive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted number of common shares outstanding
|
|
|
157,943
|
|
|
143,545
|
|
|
155,925
|
|
|
118,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share of common stock
|
|
$
|
(0.10
|
)
|
$
|
(0.19
|
)
|
$
|
(0.12
|
)
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock equivalents, including stock options, restricted shares, and warrants totaling 14.9 million and 14.0 million shares for the three and six months ended
June 30, 2018, respectively, were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive due to the net losses.
Common
stock equivalents, including stock options, restricted shares, warrants, and preferred stock totaling 18.1 million and 14.8 million shares for the three and six
months ended June 30, 2017, respectively, were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive.
35
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. ADDITIONAL FINANCIAL STATEMENT INFORMATION
Certain balance sheet amounts are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
Oil, natural gas and natural gas liquids revenues
|
|
$
|
29,406
|
|
$
|
24,110
|
|
Joint interest accounts
|
|
|
1,935
|
|
|
2,249
|
|
Other
|
|
|
5,541
|
|
|
10,057
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,882
|
|
$
|
36,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaids and other:
|
|
|
|
|
|
|
|
Prepaids
|
|
$
|
5,961
|
|
$
|
4,324
|
|
Income tax receivable
|
|
|
6,250
|
|
|
6,250
|
|
Other
|
|
|
29
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,240
|
|
$
|
10,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds in escrow and other:
|
|
|
|
|
|
|
|
Funds in escrow
|
|
$
|
566
|
|
$
|
563
|
|
Other
|
|
|
1,397
|
|
|
1,128
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,963
|
|
$
|
1,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
29,656
|
|
$
|
35,688
|
|
Accrued oil and natural gas capital costs
|
|
|
63,764
|
|
|
50,743
|
|
Revenues and royalties payable
|
|
|
17,353
|
|
|
20,256
|
|
Accrued interest expense
|
|
|
16,147
|
|
|
10,985
|
|
Accrued employee compensation
|
|
|
4,247
|
|
|
9,805
|
|
Accrued lease operating expenses
|
|
|
3,746
|
|
|
2,024
|
|
Deferred premium on derivative contracts
|
|
|
576
|
|
|
1,142
|
|
Other
|
|
|
52
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
|
$
|
135,541
|
|
$
|
131,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Table of Contents