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 12, 2019. Please refer to the notes in the 2018 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 management of the Company, 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, and income taxes. The Company bases its estimates and judgments on historical experience and
on various other assumptions and information that are 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.
Ability to Continue as a Going Concern
The Company's strategic decision to transform into a pure-play, single basin company focused on the Delaware Basin in West Texas resulted in the
Company divesting producing properties located in other areas and acquiring primarily undeveloped acreage in the Delaware Basin. The Company's drilling activities since acquiring the assets required
significant capital expenditure outlays to replace lost production and related EBITDA. These and other factors adversely impacted the Company's ability
10
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. FINANCIAL STATEMENT PRESENTATION (Continued)
to
comply with its debt covenants under the Senior Credit Agreement. Anticipating that it might be challenging to comply with the covenants under the Senior Credit Agreement, the Company has
periodically sought and obtained amendments and consents from the lenders under the Senior Credit Agreement. Most recently, on May 8, 2019, the Company entered into an amendment to the Senior
Credit Agreement in which its lenders waived compliance with the Consolidated Total Net Debt to EBITDA Ratio covenant contained in the Senior Credit Agreement for the three months ended
March 31, 2019, while raising the applicable margin on the Company's borrowings and imposing certain reporting and other obligations upon the Company. The waiver extends, as to compliance at
March 31, 2019, until August 1, 2019; provided that it may be terminated on July 1, 2019 by the majority lenders in their sole discretion and earlier upon the occurrence of
certain other events (an Early Termination). The lenders under the Senior Credit Agreement concurrently redetermined the borrowing base to $225.0 million, a reduction from $275.0 million
at December 31, 2018. At March 31, 2019, the Company had borrowings of $105.0 million outstanding under the Senior Credit Agreement. The Company's current internal projections
show that it will not be in compliance with the Consolidated Total Net Debt to EBITDA Ratio and the Current Ratio covenants in certain future periods, beginning with the three months ended
June 30, 2019. The Company sought amendment of the covenants for the twelve month period following the issuance date of the unaudited condensed consolidated financial statements included in
this report, which the lenders did not approve. As a consequence, if the Company fails to comply with the financial covenants under the Senior Credit Agreement for the three months ended
June 30, 2019, as projected, or there is an Early Termination, it will be in default under the Senior Credit Agreement. An Event of Default (as defined in the Senior Credit Agreement) would
permit the lenders to accelerate any indebtedness outstanding under the Senior Credit Agreement, making it immediately due and payable. If the indebtedness under the Senior Credit Agreement is
accelerated, then an Event of Default (as defined in the indenture governing the Company's senior notes) under the senior notes would occur, which, if continued beyond any applicable cure period,
would result in the entire principal under the senior notes being due and payable immediately. If the lenders, and subsequently noteholders, accelerate the outstanding indebtedness (the aggregate
principal amount of which was approximately $730.0 million as of March 31, 2019), all such indebtedness will become immediately due and payable. The Company currently does not have
sufficient liquidity to repay those amounts. In addition, should amounts under the Senior Credit Agreement become due and payable, the Company's derivatives that are in a net liability position could
also become due and payable. As a
result of the Company's expected inability to comply with its Consolidated Total Net Debt to EBITDA Ratio and its Current Ratio covenants contained in its Senior Credit Agreement within one year from
the issuance date of the unaudited condensed consolidated financial statements for the three months ended March 31, 2019, the Company has determined that there are conditions and events that
raise substantial doubt about the Company's ability to continue as a going concern.
The
Company has engaged advisors to evaluate strategic and financial alternatives and is pursuing options to maintain sufficient liquidity and to address its Senior Credit Agreement
covenant compliance, including (i) working with the bank syndicate to amend the Senior Credit Agreement and/or obtain waivers of covenant compliance for future periods, (ii) seeking
alternative sources of capital, (iii) divesting assets, (iv) exploring strategic merger and acquisition options and (v) reducing operating costs. There can be no assurance that
the Company will be able to comply with the covenants in its Senior Credit Agreement, that the lenders will provide any covenant relief or fail to exercise their right to Early Termination or that the
Company will be able to obtain alternative financing on a timely basis and on satisfactory terms, or at all. In addition, no assurance can be given that any such financing,
11
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. FINANCIAL STATEMENT PRESENTATION (Continued)
if
obtained, will be adequate to meet its capital needs and support its business plans while paying or refinancing the existing debt obligations. If alternative financing cannot be obtained on a
timely basis and on satisfactory terms, then the Company's operations would be materially negatively impacted.
Accordingly,
the Company classified outstanding borrowings under its Senior Credit Agreement as a current liability on its unaudited condensed consolidated balance sheet as of
March 31, 2019. The unaudited condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of
assets, and satisfaction of liabilities and commitments in the normal course of business. The unaudited condensed consolidated financial statements do not include any adjustments that might result
from the outcome of the going concern uncertainty. If the Company cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the
reported amounts of income and expenses could be required and could be material.
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 March 31, 2019 and December 31, 2018, allowances for doubtful accounts were approximately $0.1 million and $0.2 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 gathering systems, thirty years; gas treating systems and buildings, twenty years; automobiles and computers, three years; computer software, fixtures, furniture
and equipment, the lesser of lease term or five years; trailers, seven years; heavy equipment, eight to ten 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
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. FINANCIAL STATEMENT PRESENTATION (Continued)
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.
Leases
Effective January 1, 2019, the Company accounts for leases in accordance with ASC No. 842, Leases, (ASC 842). The Company
determines if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of identified asset for a period of time in exchange
for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset, and (2) the customer has the
right to control the use of the identified asset.
The
Company leases equipment and office space pursuant to net operating leases. Operating leases where the Company is the lessee are included in
"Operating lease
right of use assets"
and
"Operating lease liabilities"
on our unaudited condensed consolidated balance sheets. The lease
liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.
Key
estimates and judgments include how the Company determined (1) the discount rate used to discount the unpaid lease payments to present value, (2) lease term and
(3) lease payments. ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental
borrowing rate. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date to
determine the present value of lease payments. The incremental borrowing rate for a lease is the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to
the lease payments under similar terms. The Company uses the implicit rate when readily determinable. The lease term includes the noncancellable period of the lease plus any additional periods covered
by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.
Lease payments included in the measurement of the lease asset or liability comprise the following, when applicable: fixed payments (including in-substance fixed payments), variable payments that
depend on index or rate, and the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise.
The
right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date,
plus any initial
direct costs incurred less any lease incentives received. For the Company's operating leases, the right of use asset is subsequently measured throughout the lease term at the carrying amount of the
lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized
on a straight-line basis over the lease term.
Variable
lease payments associated with the Company's leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs.
Variable lease payments, when applicable, are presented as
"Gathering and other"
or
"General and
administrative"
in our unaudited condensed consolidated statements of operations in the same line item as the expense arising from the fixed lease payments on the operating
leases.
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. FINANCIAL STATEMENT PRESENTATION (Continued)
The
Company has lease agreements which include lease and nonlease components and the Company has elected to combine lease and nonlease components, when fixed, for all lease contracts.
Nonlease components include common area maintenance charges on office leases and, when applicable, services associated with equipment leases. The Company determines whether the lease or nonlease
component is the predominant component on a case-by-case basis.
The
Company reviews its right of use assets for impairment in accordance with ASC 360. ASC 360 requires the Company to evaluate right of use assets 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.
The
Company monitors for events or changes in circumstances that would require a reassessment of a lease. When a reassessment results in the remeasurement of a lease liability, a
corresponding adjustment is made to the carrying amount of the corresponding right of use asset unless doing so would reduce the carrying amount of the right of use asset to an amount less than zero.
In that case, the amount of the adjustment that would result in a negative right of use asset balance is recorded in the unaudited condensed consolidated statements of operations.
The
Company elected not to recognize right of use assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. The Company recognizes the
lease payments associated with its short-term leases as an expense on a straight-line basis over the lease term. Variable lease payments associated with these leases are recognized and presented in
the same manner as for all other leases.
Additionally,
the Company applies a portfolio approach to determine the discount rate (the incremental borrowing rate for leases with similar characteristics).
Restructuring
During the three months ended March 31, 2019, four executives of the Company resigned from their positions. These were considered
terminations without cause under their respective employment agreements, which entitled them to certain benefits. Additionally during the period, the Company had reductions in its workforce due to a
decrease in drilling and developmental activities planned for 2019. Consequently, for the three months ended March 31, 2019, the Company incurred approximately $11.3 million in severance
costs which were recorded in "
Restructuring
" on the unaudited condensed consolidated statements of operations.
Related Party Transactions
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. In the fourth quarter of 2018, the Company
began selling its crude oil to SCM while the gathering system was under construction. The gathering system was completed and placed into service in March 2019. For the three
14
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. FINANCIAL STATEMENT PRESENTATION (Continued)
months
ended March 31, 2019, the Company earned $39.2 million from SCM under the crude oil gathering agreement and as of March 31, 2019 recorded an $11.2 million receivable
from SCM for its crude oil sales.
Certain
funds under the control of Ares Management LLC (Ares) are the majority owners and controlling parties of SCM. Ares also controls other funds which own in excess of ten
percent (10%) of the common 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.
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 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. For the three months ended March 31, 2019, the Company earned $0.2 million from Salt Creek under the gas purchase and processing agreement and as of
March 31, 2019 recorded a $0.8 million receivable from Salt Creek for its natural gas sales.
Certain
funds under the control of 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, and is a director of the Company,
also serves on the board of directors of Salt Creek.
Pipeline Testing Services
In February 2019, the Company entered into an agreement with Cima Inspection LLC (Cima), a company specializing in advanced,
non-destructive methods of testing pipes
and tubing, pursuant to which Cima will inspect various Company gathering and transportation assets. One of the Company's directors owns a minority interest in Cima and currently serves, without
compensation, as its chief executive officer. The engagement of Cima was the result of a lengthy process during which Halcón investigated the most cost-effective method of conducting
testing on its gathering and transportation assets. Halcón considered the performance and cost of various alternatives and solicited proposals from third parties before determining that
Cima's proposal offered the most timely cost efficient solution to the Company's needs. As a result of the relationship of one of the Company's directors with Cima, the process by which the Company
determined Cima's proposal to be superior to others, as well as the terms of the agreement, were evaluated and approved by the Audit Committee and the disinterested members of Halcón's
board, in a vote that excluded that director 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. For
the three months ended March 31, 2019, the Company incurred charges of approximately $0.3 million for services provided by Cima. As of March 31, 2019, the Company recorded a $0.2
million payable to Cima. The
15
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. FINANCIAL STATEMENT PRESENTATION (Continued)
payable
is recorded in "
Accounts payable and accrued liabilities
," on the Company's unaudited condensed consolidated balance sheet.
Charter of Aircraft
In the ordinary course of business, Halcón occasionally chartered a private aircraft for business use. Floyd C. Wilson,
Halcón's former Chairman, Chief Executive Officer and President, indirectly owns an aircraft which the Company chartered from time to time. During 2019, 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, and subsequently by the disinterested members
of the Company's board 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
months ended March 31, 2019, the Company paid approximately $0.2 million related to use of the aircraft indirectly owned by Mr. Wilson during 2018. In 2019, the Company terminated
all charter arrangements with Mr. Wilson relating to the use of his aircraft.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (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 years,
beginning after December 15, 2018. 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. The Company adopted ASU 2016-02 effective January 1, 2019 using the modified retrospective approach as of the
adoption date. See
"Leases"
above and Note 2,
"Leases,"
below for further details.
2. LEASES
Adoption of Accounting Standards Codification 842,
Leases
On January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach as of the adoption date. Reporting
periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported under the accounting
16
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. LEASES (Continued)
standards
in effect for those periods. The table below details the impact of adoption on the Company's unaudited condensed consolidated balance sheet as of January 1, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
Impact of adoption
of ASC 842
|
|
January 1,
2019
|
|
Other noncurrent assets:
|
|
|
|
|
|
|
|
|
|
|
Operating lease right of use assets
|
|
$
|
|
|
$
|
5,462
|
|
$
|
5,462
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
157,848
|
|
$
|
(85
|
)
|
$
|
157,763
|
|
Operating lease liabilities
|
|
|
|
|
|
2,103
|
|
|
2,103
|
|
Other noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
|
|
|
|
3,444
|
|
|
3,444
|
|
Practical Expedients
The Company elected the following practical expedients for transition to, and ongoing accounting under, ASC 842: i) the Company does not
separate lease and non-lease components of a contract, ii) the Company does not reassess whether expired or existing contracts contain leases, nor does it reassess the lease classification for
expired or existing leases and does not reassess whether previously capitalized initial direct costs would qualify for capitalization under ASC 842, iii) the Company applies a single discount
rate to a portfolio of leases with reasonably similar characteristics and iv) the Company does not assess whether existing or expired land easements that were not previously accounted for as
leases are or contain a lease under ASC 842.
Leases
The Company leases equipment and office space under operating leases. The operating leases have initial lease terms ranging from 1 to
5 years, some of which include options to extend or renew the leases for one year. Payments due under the lease contracts include fixed payments plus, in some instances, variable payments. The
table below summarizes the Company's leases for the three months ended March 31, 2019 (in thousands, except years and discount rate):
|
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
|
Lease cost
|
|
|
|
|
Operating lease costs
|
|
$
|
644
|
|
Short-term lease costs
|
|
|
5,718
|
|
Variable lease costs
|
|
|
425
|
|
|
|
|
|
|
Total lease costs
|
|
$
|
6,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
1,229
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
|
5,462
|
|
Weighted-average remaining lease termoperating leases
|
|
|
3.6 years
|
|
Weighted-average discount rateoperating leases
|
|
|
4.83
|
%
|
17
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. LEASES (Continued)
Future
minimum lease payments associated with the Company's non-cancellable operating leases for office space and equipment as of March 31, 2019, are presented in the table below
(in thousands):
|
|
|
|
|
|
|
March 31,
2019
|
|
Remaining period in 2019
|
|
$
|
1,672
|
|
2020
|
|
|
1,360
|
|
2021
|
|
|
876
|
|
2022
|
|
|
574
|
|
2023
|
|
|
585
|
|
Thereafter
|
|
|
345
|
|
|
|
|
|
|
Total operating lease payments
|
|
|
5,412
|
|
|
|
|
|
|
Less: discount to present value
|
|
|
449
|
|
|
|
|
|
|
Total operating lease liabilities
|
|
|
4,963
|
|
|
|
|
|
|
Less: current operating lease liabilities
|
|
|
1,868
|
|
|
|
|
|
|
Noncurrent operating lease liabilities
|
|
$
|
3,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
to the adoption of ASC 842, future obligations, including variable nonlease components, associated with the Company's non-cancellable operating leases for office space and
equipment as of December 31, 2018, are presented in the table below (in thousands):
|
|
|
|
|
|
|
December 31,
2018
|
|
2019
|
|
$
|
3,792
|
|
2020
|
|
|
2,350
|
|
2021
|
|
|
1,899
|
|
2022
|
|
|
968
|
|
2023
|
|
|
999
|
|
Thereafter
|
|
|
599
|
|
|
|
|
|
|
Total operating lease payments
|
|
$
|
10,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. OPERATING REVENUES
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
18
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HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. OPERATING REVENUES (Continued)
$30.7 million
and $26.4 million as of March 31, 2019 and December 31, 2018, 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 product, 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
March 31,
|
|
|
|
2019
|
|
2018
|
|
Operating revenues:
|
|
|
|
|
|
|
|
Oil, natural gas and natural gas liquids sales:
|
|
|
|
|
|
|
|
Oil
|
|
$
|
45,517
|
|
$
|
43,069
|
|
Natural gas
|
|
|
1,461
|
|
|
2,319
|
|
Natural gas liquids
|
|
|
4,945
|
|
|
3,712
|
|
|
|
|
|
|
|
|
|
Total oil, natural gas and natural gas liquids sales
|
|
|
51,923
|
|
|
49,100
|
|
Other
|
|
|
(7
|
)
|
|
155
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
51,916
|
|
$
|
49,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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
19
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. OPERATING REVENUES (Continued)
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"
on the unaudited condensed consolidated statements of operations.
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"
on the unaudited condensed consolidated statement of operations.
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.
4. 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 $198.5 million. 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 additional 6.75% senior notes due 2025 and common
stock, which are discussed in Note 6, "
Debt
," and Note 11, "
Stockholders' Equity
,"
respectively.
Monument Draw Assets (Ward and Winkler Counties, Texas)
On January 9, 2018, the Company purchased acreage in the Monument Draw area of the Delaware Basin, located in Ward and Winkler Counties,
Texas (the Ward County Assets) that is prospective for the Wolfcamp and Bone Spring formations from a private company for $108.2 million in cash.
20
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. ACQUISITIONS AND DIVESTITURES (Continued)
Divestitures
Water Infrastructure Assets
On December 20, 2018, the Company sold its water infrastructure assets located in the Delaware Basin (the Water Assets) to WaterBridge
Resources LLC (the Purchaser) for a total adjusted purchase price of $211.9 million in cash (the Water Infrastructure Divestiture). The effective date of the transaction was
October 1, 2018. Additional incentive payments of up to $25.0 million per year for the next five years are available based on the Company's ability to meet certain annual incentive
thresholds relating to the number of wells connected to the Water Assets per year. The Company's ability to achieve the incentive thresholds will be driven by, among other things, its development
program which will consider future market conditions and is subject to change.
Upon
closing, the Company dedicated all of the produced water from its oil and natural gas wells within its Monument Draw, Hackberry Draw and West Quito Draw operating areas to the
Purchaser. There are no drilling or throughput commitments associated with the Water Infrastructure Divestiture. The Purchaser will receive a current market price, subject to annual adjustments for
inflation, in exchange for the transportation, disposal and treatment of such produced water, and the Purchaser will receive a market price for the supply of freshwater and recycled produced water to
the Company.
The
Company recognized a gain of $118.1 million on the sale of the Water Assets on the unaudited condensed consolidated statements of operations in
"(Gain)
loss on sale of Water Assets."
The gain on the sale was reduced during the three months ended March 31, 2019 by approximately $0.9 million as a result of
customary post-closing adjustments.
5. 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
March 31, 2019, 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 March 31, 2019 of the
West Texas Intermediate (WTI) crude oil spot price of $63.06 per barrel, adjusted by lease or field for quality, transportation
21
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. OIL AND NATURAL GAS PROPERTIES (Continued)
fees,
and regional price differentials, and the first-day-of-the-month average for the 12-months ended March 31, 2019 of the Henry Hub natural gas price of $3.07 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 March 31, 2019 exceeded the ceiling amount by $275.2 million ($217.4 million after taxes) which resulted in a ceiling test impairment charge of that amount for the quarter. The
impairment was recorded in
"Full cost ceiling test impairment"
on the unaudited condensed consolidated statements of operations. The ceiling test
impairment was driven by a decrease in the first-day-of-the-month average price for crude oil used in the ceiling test calculation and the Company's intent to expend capital only on its most economic
areas. As such, the Company identified certain leases in the Hackberry Draw area with near-term expirations and transferred approximately $51.0 million of associated unevaluated property costs
to the full cost pool during the three months ended March 31, 2019.
At
March 31, 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 March 31, 2018 of the
WTI crude oil spot price of $53.49 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 March 31, 2018 of the Henry Hub natural gas price of $3.00 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 March 31, 2018 did not exceed the ceiling amount.
Changes
in commodity prices, production rates, levels of reserves, future development costs, transfers of unevaluated properties to the full cost pool, capital spending, and other
factors will determine the Company's ceiling test calculations and impairment analyses in future periods.
On
September 7, 2017, the Company and certain of its subsidiaries sold 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 for a total adjusted sales price of approximately $1.39 billion (the
Williston Divestiture). Under the full cost 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 $3.7 million during the three months ended March 31, 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.
22
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. DEBT
As of March 31, 2019 and December 31, 2018, the Company's current and long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
|
Senior revolving credit facility
(1)
|
|
$
|
105,000
|
|
$
|
|
|
6.75% senior notes due 2025
(2)
|
|
|
613,493
|
|
|
613,105
|
|
|
|
|
|
|
|
|
|
|
|
$
|
718,493
|
|
$
|
613,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Outstanding borrowings under the Company's Senior Credit Agreement as of March 31, 2019 were classified as a current liability. See
"Senior Revolving Credit Facility" below for more details.
-
(2)
-
Amount includes a $7.0 million and $7.2 million unamortized discount at March 31, 2019 and December 31, 2018,
respectively, associated with the 2025 Notes. Amount includes a $5.2 million and $5.4 million unamortized premium at March 31, 2019 and December 31, 2018, respectively,
associated with the Additional 2025 Notes. Additionally, these amounts are net of $9.7 million and $10.1 million unamortized debt issuance costs at March 31, 2019 and
December 31, 2018, 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
$225.0 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 1.75% to 2.75% for ABR-based loans or at specified margins over LIBOR of 2.75% to 3.75% 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 contains certain events of default, including non-payment; breaches of representations and warranties; non-compliance with covenants or other agreements;
cross-default to
material indebtedness; judgments; change of control; and voluntary and involuntary bankruptcy. The Senior Credit Agreement also contains certain financial covenants, including the maintenance of
(i) a
23
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. DEBT (Continued)
Consolidated
Total Net Debt to EBITDA Ratio (as defined in the Senior Credit Agreement), which was recently revised by the H2S Consent, the Severance and Office Payments Consent and the Eighth
Amendment, as discussed below, and (ii) a Current Ratio (as defined in the Senior Credit Agreement) not to be less than 1.00 to 1.00.
At
March 31, 2019, the Company had $105.0 million of indebtedness outstanding and approximately $1.8 million letters of credit outstanding. Under a borrowing base of
$225.0 million, the Company had $118.2 million of borrowing capacity available under the Senior Credit Agreement.
On
May 8, 2019, the Company entered into the Eighth Amendment (the Eighth Amendment) to the Senior Credit Agreement which, among other things, (i) waives any default or
event of default directly resulting from the potential Leverage Ratio Default (as defined in the Eighth Amendment) for the fiscal quarter ended March 31, 2019, (ii) increases interest
margins to 1.75% to 2.75% for ABR-based loans and 2.75% to 3.75% for Eurodollar-based loans, (iii) limits the Company's Consolidated Cash Balance (as defined in the Eighth Amendment) to
$5.0 million, and (iv) provides for periodic reporting of projected cash flows and accounts payable agings to the lenders. Under the Eighth Amendment, the waiver will terminate and an
Event of Default (as defined in the Senior Credit Agreement) will occur on August 1, 2019 unless certain requirements are satisfied and the lenders opt not to exercise their right to terminate
the waiver earlier on July 1, 2019.
On
February 28, 2019, the lenders party to the Senior Credit Agreement issued a consent (the Severance and Office Payments Consent) to the Company whereby Severance Payments and
Office Payments (as defined in the Severance and Office Payments Consent) may exceed the maximum level allowed for adding back non-recurring expenses and charges in the definition of EBITDA (as
defined in the Senior Credit Agreement) when calculating the ratio of Consolidated Total Net Debt to EBITDA (as defined in the Senior Credit Agreement) for the fiscal quarter ending March 31,
2019.
On
February 15, 2019, the Company entered into the Seventh Amendment (the Seventh Amendment) to the Senior Credit Agreement which, among other things, provides for (i) the
use of annualized financial data in determining EBITDA (as defined in the Senior Credit Agreement) for the fiscal quarters ending March 31, 2019, June 30, 2019 and September 30,
2019 and (ii) amends the ratio of Consolidated Total Net Debt (as defined in the Senior Credit Agreement) to EBITDA to be (a) 5.00 to 1.0 for the fiscal quarter ending
March 31, 2019, (b) 4.75 to 1.0 for the fiscal quarter ending June 30, 2019, (c) 4.5 to 1.0 for the fiscal quarter ending September 30, 2019, (d) 4.25 to 1.0
for the fiscal quarter
ending December 31, 2019, and (e) 4.0 to 1.0 for the fiscal quarter ending March 31, 2020 and any fiscal quarter thereafter.
On
November 6, 2018, the lenders party to the Senior Credit Agreement issued a consent (the H2S Consent) to the Company whereby H2S Expenses (as defined in the H2S Consent) may
exceed the maximum level allowed for adding back non-recurring expenses and charges in the definition of EBITDA (as defined in the Senior Credit Agreement) when calculating the ratio of Consolidated
Total Net Debt to EBITDA (as defined in the Senior Credit Agreement) for the fiscal quarters ending September 30, 2018, December 31, 2018 and March 31, 2019.
After
giving effect to the H2S Consent, the Severance and Office Payments Consent, and the waiver contained in the Eighth Amendment, at March 31, 2019, the Company was in
compliance with the financial covenants under the Senior Credit Agreement. However, the Company's current internal projections show that it will not be in compliance with the Consolidated Total Net
Debt to EBITDA
24
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. DEBT (Continued)
Ratio
and the Current Ratio covenants in certain future periods, beginning with the three months ended June 30, 2019. As described in Note 1, "
Financial Statement
Presentation
", the Company classified outstanding borrowings under its Senior Credit Agreement as a current liability within
"Current portion of
long-term debt"
on its unaudited condensed consolidated balance sheet as of March 31, 2019.
6.75% Senior Notes
On February 16, 2017, the Company issued $850.0 million aggregate principal amount of new 6.75% senior 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 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 outstanding 8.625% senior secured second lien notes, and for general
corporate purposes.
The
2025 Notes are governed by an Indenture, dated as of February 16, 2017 (as supplemented, 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 100% 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 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 exempted, among other things, the Williston Divestiture from certain provisions
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.
25
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. DEBT (Continued)
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 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 net proceeds from the sale of the Additional 2025 Notes were approximately $202.4 million after deducting initial purchasers' premiums, commissions
and estimated offering expenses. The proceeds were used to fund the cash consideration for the acquisition of the West Quito Draw Properties, discussed further in Note 4,
"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.
The
remaining unamortized discount on the 2025 Notes was $7.0 million at March 31, 2019. The unamortized premium on the Additional 2025 Notes was $5.2 million at
March 31, 2019.
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. At March 31, 2019 and December 31, 2018, the Company had approximately $10.7 million and $11.1 million, respectively, of unamortized debt issuance costs. The debt
issuance costs for the Company's Senior Credit Agreement are presented in "
Prepaids 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.
7. 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 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
26
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE MEASUREMENTS (Continued)
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 March 31, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from derivative contracts
|
|
$
|
|
|
$
|
16,067
|
|
$
|
|
|
$
|
16,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities from derivative contracts
|
|
$
|
|
|
$
|
27,427
|
|
$
|
|
|
$
|
27,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from derivative contracts
|
|
$
|
|
|
$
|
69,717
|
|
$
|
|
|
$
|
69,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities from derivative contracts
|
|
$
|
|
|
$
|
12,907
|
|
$
|
|
|
$
|
12,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
contracts listed above as Level 2 include collars, puts, calls, fixed-price 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 8,
"Derivative and Hedging Activities,"
for additional discussion of derivatives.
The
Company's derivative contracts are with major financial and commodity hedging 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
27
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. FAIR VALUE MEASUREMENTS (Continued)
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, long-term debt instrument as of
March 31, 2019 and December 31, 2018 (excluding discounts, premiums and debt issuance costs) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Debt
|
|
Principal
Amount
|
|
Estimated
Fair Value
|
|
Principal
Amount
|
|
Estimated
Fair Value
|
|
6.75% senior notes
|
|
$
|
625,005
|
|
$
|
376,566
|
|
$
|
625,005
|
|
$
|
458,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
fair value of the Company's fixed interest debt instrument was calculated using Level 2 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; and therefore, the Company has designated these liabilities as Level 3. See Note 9, "
Asset Retirement Obligations
," for
a reconciliation of the beginning and ending balances of the liability for the Company's asset retirement obligations.
8. 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.
It
is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial or commodity hedging institutions deemed by management as competent
and competitive market makers. As of March 31, 2019, 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 fixed-price swaps, basis swaps, and costless put/call "collars".
Fixed-price swaps are designed so that the Company receives or makes payments based on a differential between fixed and
28
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. DERIVATIVE AND HEDGING ACTIVITIES (Continued)
variable
prices for crude oil and natural gas. Basis swaps effectively lock in a price differential between regional prices (i.e. Midland) where the product is sold and the relevant price index
under which the production is hedged (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 to not 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 all payments and receipts on settled derivative contracts, in
"Net gain (loss) on derivative
contracts"
on the unaudited condensed consolidated statements of operations.
At
March 31, 2019, the Company had 56 open commodity derivative contracts summarized in the following tables: six natural gas collar arrangements, seven natural gas basis swaps,
five natural gas liquids swaps, 17 crude oil basis swaps, 15 crude oil collar arrangements, two crude oil puts, two crude oil calls, one crude oil WTI NYMEX roll and one crude oil swap.
At
December 31, 2018, the Company had 86 open commodity derivative contracts summarized in the following tables: nine natural gas collar arrangements, seven natural gas basis
swaps, six natural gas liquids swaps, 26 crude oil basis swaps, 31 crude oil collar arrangements, two crude oil puts, four crude oil calls and one crude oil WTI NYMEX roll.
All
derivative contracts are recorded at fair market value in accordance with 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 as of March 31, 2019
and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivative
contracts
|
|
|
|
Liability derivative
contracts
|
|
Derivatives not
designated as hedging
contracts under
ASC 815
|
|
Balance sheet location
|
|
March 31,
2019
|
|
December 31,
2018
|
|
Balance sheet location
|
|
March 31,
2019
|
|
December 31,
2018
|
|
Commodity contracts
|
|
Current assetsreceivables from derivative contracts
|
|
$
|
11,223
|
|
$
|
57,280
|
|
Current liabilitiesliabilities from derivative contracts
|
|
$
|
(20,086
|
)
|
$
|
(3,768
|
)
|
Commodity contracts
|
|
Other noncurrent assetsreceivables from derivative contracts
|
|
|
4,844
|
|
|
12,437
|
|
Other noncurrent liabilitiesliabilities from derivative contracts
|
|
|
(7,341
|
)
|
|
(9,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging contracts under ASC 815
|
|
|
|
$
|
16,067
|
|
$
|
69,717
|
|
|
|
$
|
(27,427
|
)
|
$
|
(12,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. 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
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
Location of gain or (loss) recognized in income
on derivative contracts
|
|
Derivatives not designated as hedging
contracts under ASC 815
|
|
2019
|
|
2018
|
|
Commodity contracts:
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on commodity contracts
|
|
Other income (expenses)net gain (loss) on derivative contracts
|
|
$
|
(68,169
|
)
|
$
|
11,113
|
|
Realized gain (loss) on commodity contracts
|
|
Other income (expenses)net gain (loss) on derivative contracts
|
|
|
3,370
|
|
|
(5,210
|
)
|
|
|
|
|
|
|
|
|
|
|
Total net gain (loss) on derivative contracts
|
|
|
|
$
|
(64,799
|
)
|
$
|
5,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
March 31, 2019 and December 31, 2018, the Company had the following open crude oil, natural gas liquids and natural gas derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
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
|
|
April 2019 - June 2019
|
|
Basis Swap
|
|
Crude Oil
|
|
|
182,000
|
|
$
|
|
$
|
|
|
$
|
|
$
|
|
|
$(1.00) - $(1.18)
|
|
$
|
(1.09
|
)
|
April 2019 - June 2019
|
|
Collars
|
|
Crude Oil
|
|
|
182,000
|
|
50.00 - 51.00
|
|
|
50.50
|
|
55.00 - 56.00
|
|
|
55.50
|
|
|
|
|
|
|
April 2019 - September 2019
|
|
Basis Swap
|
|
Crude Oil
|
|
|
366,000
|
|
|
|
|
|
|
|
|
|
|
|
(6.20) - (7.60)
|
|
|
(6.90
|
)
|
April 2019 - December 2019
|
|
Basis Swap
|
|
Natural Gas
|
|
|
7,012,500
|
|
|
|
|
|
|
|
|
|
|
|
(1.05) - (1.40)
|
|
|
(1.18
|
)
|
April 2019 - December 2019
|
|
Basis Swap
|
|
Crude Oil
|
|
|
1,464,000
|
|
|
|
|
|
|
|
|
|
|
|
(0.98) - (6.50)
|
|
|
(3.95
|
)
|
April 2019 - December 2019
|
|
Collars
|
|
Crude Oil
|
|
|
2,475,000
|
|
50.00 - 58.00
|
|
|
53.76
|
|
55.20 - 63.00
|
|
|
60.41
|
|
|
|
|
|
|
April 2019 - December 2019
|
|
Collars
|
|
Natural Gas
|
|
|
6,600,000
|
|
2.52 - 2.70
|
|
|
2.60
|
|
3.00 - 3.10
|
|
|
3.01
|
|
|
|
|
|
|
April 2019 - December 2019
|
|
Swap
|
|
Natural Gas Liquid
|
|
|
1,100,000
|
|
29.08 - 30.15
|
|
|
29.33
|
|
|
|
|
|
|
|
|
|
|
|
April 2019 - December 2019
|
|
WTI NYMEX ROLL
|
|
Crude Oil
|
|
|
1,375,000
|
|
0.35
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
April 2019 - December 2019
|
|
Swap
|
|
Crude Oil
|
|
|
483,967
|
|
56.80
|
|
|
56.80
|
|
|
|
|
|
|
|
|
|
|
|
July 2019 - December 2019
|
|
Collars
|
|
Crude Oil
|
|
|
552,000
|
|
50.00 - 55.00
|
|
|
53.00
|
|
55.00 - 69.00
|
|
|
61.00
|
|
|
|
|
|
|
October 2019 - December 2019
|
|
Basis Swap
|
|
Crude Oil
|
|
|
460,000
|
|
|
|
|
|
|
|
|
|
|
|
3.45 - 4.00
|
|
|
3.72
|
|
October 2019 - December 2019
|
|
Collars
|
|
Crude Oil
|
|
|
92,000
|
|
51.00
|
|
|
51.00
|
|
56.00
|
|
|
56.00
|
|
|
|
|
|
|
January 2020 - December 2020
|
|
Basis Swap
|
|
Crude Oil
|
|
|
3,294,000
|
|
|
|
|
|
|
|
|
|
|
|
2.00 - 4.00
|
|
|
2.95
|
|
January 2020 - December 2020
|
|
Collars
|
|
Crude Oil
|
|
|
549,000
|
|
50.00
|
|
|
50.00
|
|
70.00
|
|
|
70.00
|
|
|
|
|
|
|
January 2020 - December 2020
|
|
Calls
|
|
Crude Oil
|
|
|
2,342,400
|
|
|
|
|
|
|
70.00
|
|
|
70.00
|
|
|
|
|
|
|
January 2020 - December 2020
|
|
Puts
|
|
Crude Oil
|
|
|
915,000
|
|
55.00
|
|
|
55.00
|
|
|
|
|
|
|
|
|
|
|
|
January 2020 - December 2020
|
|
Swap
|
|
Crude Oil
|
|
|
620,549
|
|
56.80
|
|
|
56.80
|
|
|
|
|
|
|
|
|
|
|
|
January 2021 - December 2021
|
|
Swap
|
|
Crude Oil
|
|
|
611,537
|
|
56.80
|
|
|
56.80
|
|
|
|
|
|
|
|
|
|
|
|
January 2022 - March 2022
|
|
Swap
|
|
Crude Oil
|
|
|
152,104
|
|
56.80
|
|
|
56.80
|
|
|
|
|
|
|
|
|
|
|
|
30
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. DERIVATIVE AND HEDGING ACTIVITIES (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
January 2019 - March 2019
|
|
Calls
|
|
Crude Oil
|
|
|
1,350,000
|
|
$
|
|
$
|
|
|
$62.64
|
|
$
|
62.64
|
|
$
|
|
$
|
|
|
January 2019 - March 2019
|
|
Calls
|
|
Crude Oil
|
|
|
(1,350,000
|
)
|
|
|
|
|
|
58.64
|
|
|
58.64
|
|
|
|
|
|
|
January 2019 - March 2019
|
|
Collars
|
|
Crude Oil
|
|
|
90,000
|
|
46.75
|
|
|
46.75
|
|
51.75
|
|
|
51.75
|
|
|
|
|
|
|
January 2019 - June 2019
|
|
Collars
|
|
Crude Oil
|
|
|
181,000
|
|
51.00
|
|
|
51.00
|
|
56.00
|
|
|
56.00
|
|
|
|
|
|
|
January 2019 - September 2019
|
|
Basis Swap
|
|
Crude Oil
|
|
|
546,000
|
|
|
|
|
|
|
|
|
|
|
|
(6.20) - (7.60)
|
|
|
(6.90
|
)
|
January 2019 - December 2019
|
|
Basis Swap
|
|
Crude Oil
|
|
|
2,448,000
|
|
|
|
|
|
|
|
|
|
|
|
(0.98) - (6.50)
|
|
|
(2.80
|
)
|
January 2019 - December 2019
|
|
Basis Swap
|
|
Natural Gas
|
|
|
9,307,500
|
|
|
|
|
|
|
|
|
|
|
|
(1.05) - (1.40)
|
|
|
(1.18
|
)
|
January 2019 - December 2019
|
|
Collars
|
|
Crude Oil
|
|
|
3,650,000
|
|
50.00 - 58.00
|
|
|
53.87
|
|
55.20 - 63.00
|
|
|
60.07
|
|
|
|
|
|
|
January 2019 - December 2019
|
|
Collars
|
|
Natural Gas
|
|
|
8,760,000
|
|
2.52 - 2.70
|
|
|
2.60
|
|
3.00 - 3.10
|
|
|
3.01
|
|
|
|
|
|
|
January 2019 - December 2019
|
|
Swap
|
|
Natural Gas Liquids
|
|
|
1,460,000
|
|
29.08 - 30.15
|
|
|
29.33
|
|
|
|
|
|
|
|
|
|
|
|
January 2019 - December 2019
|
|
WTI NYMEX ROLL
|
|
Crude Oil
|
|
|
1,825,000
|
|
0.35
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
April 2019 - June 2019
|
|
Collars
|
|
Crude Oil
|
|
|
91,000
|
|
50.00
|
|
|
50.00
|
|
55.00
|
|
|
55.00
|
|
|
|
|
|
|
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
|
|
|
460,000
|
|
|
|
|
|
|
|
|
|
|
|
(2.40) - (6.50)
|
|
|
(5.68
|
)
|
July 2019 - December 2019
|
|
Collars
|
|
Crude Oil
|
|
|
552,000
|
|
50.00 - 55.00
|
|
|
53.00
|
|
55.00 - 69.00
|
|
|
61.00
|
|
|
|
|
|
|
October 2019 - December 2019
|
|
Basis Swap
|
|
Crude Oil
|
|
|
460,000
|
|
|
|
|
|
|
|
|
|
|
|
3.45 - 4.00
|
|
|
3.72
|
|
October 2019 - December 2019
|
|
Collars
|
|
Crude Oil
|
|
|
92,000
|
|
51.00
|
|
|
51.00
|
|
56.00
|
|
|
56.00
|
|
|
|
|
|
|
October 2019 - December 2019
|
|
Swap
|
|
Natural Gas Liquids
|
|
|
92,000
|
|
32.50
|
|
|
32.50
|
|
|
|
|
|
|
|
|
|
|
|
January 2020 - December 2020
|
|
Basis Swap
|
|
Crude Oil
|
|
|
3,294,000
|
|
|
|
|
|
|
|
|
|
|
|
2.00 - 4.00
|
|
|
2.95
|
|
January 2020 - December 2020
|
|
Collars
|
|
Crude Oil
|
|
|
549,000
|
|
50.00
|
|
|
50.00
|
|
70.00
|
|
|
70.00
|
|
|
|
|
|
|
January 2020 - December 2020
|
|
Calls
|
|
Crude Oil
|
|
|
2,342,400
|
|
|
|
|
|
|
70.00
|
|
|
70.00
|
|
|
|
|
|
|
January 2020 - December 2020
|
|
Puts
|
|
Crude Oil
|
|
|
915,000
|
|
55.00
|
|
|
55.00
|
|
|
|
|
|
|
|
|
|
|
|
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 at March 31, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Offsetting of Derivative Assets and Liabilities
|
|
March 31, 2019
|
|
December 31, 2018
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Gross Amounts Presented in the Consolidated Balance Sheet
|
|
$
|
16,067
|
|
$
|
69,717
|
|
$
|
(27,427
|
)
|
$
|
(12,907
|
)
|
Amounts Not Offset in the Consolidated Balance Sheet
|
|
|
(12,807
|
)
|
|
(10,263
|
)
|
|
12,807
|
|
|
10,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Amount
|
|
$
|
3,260
|
|
$
|
59,454
|
|
$
|
(14,620
|
)
|
$
|
(2,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
9. 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
31
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. ASSET RETIREMENT OBLIGATIONS (Continued)
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 for the period indicated below (inclusive of the current portion) (in thousands):
|
|
|
|
|
Liability for asset retirement obligations as of December 31, 2018
|
|
$
|
6,914
|
|
Liabilities settled and divested
|
|
|
(229
|
)
|
Additions
|
|
|
186
|
|
Accretion expense
|
|
|
100
|
|
|
|
|
|
|
Liability for asset retirement obligations as of March 31, 2019
|
|
$
|
6,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. COMMITMENTS AND CONTINGENCIES
Commitments
As of March 31, 2019, the Company has the following active drilling rig commitments (in thousands):
|
|
|
|
|
|
|
March 31, 2019
|
|
Remaining period in 2019
|
|
$
|
1,321
|
|
2020
|
|
|
|
|
2021
|
|
|
|
|
2022
|
|
|
|
|
2023
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2019, termination of the Company's active drilling rig commitments would require early termination penalties of $1.1 million, which would be in lieu of
paying the remaining active drilling rig commitments of $1.3 million.
32
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. COMMITMENTS AND CONTINGENCIES (Continued)
As
of March 31, 2019, the Company has the following rig termination commitment related to a historical rig contract (in thousands):
|
|
|
|
|
|
|
March 31, 2019
|
|
Remaining period in 2019
|
|
$
|
|
|
2020
|
|
|
3,000
|
|
2021
|
|
|
|
|
2022
|
|
|
|
|
2023
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2019, the Company has the following purchase commitments related to equipment (in thousands):
|
|
|
|
|
|
|
March 31, 2019
|
|
Remaining period in 2019
|
|
$
|
7,997
|
|
2020
|
|
|
|
|
2021
|
|
|
|
|
2022
|
|
|
|
|
2023
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company has entered into various long-term gathering, transportation and sales contracts with respect to production from the Delaware Basin in West Texas. As of March 31,
2019, the Company had in place three long-term crude oil contracts and ten long-term natural gas contracts in this area and the sales prices 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 this area 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 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.
11. STOCKHOLDERS' EQUITY
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
33
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. STOCKHOLDERS' EQUITY (Continued)
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 of directors 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 March 31, 2019 and December 31, 2018, a maximum of 1.1 million
and 4.9 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 months ended March 31, 2019 and 2018 the Company recognized a credit of $6.8 million and expense of $3.6 million, respectively, related to stock-based
compensation. Stock-based compensation expense is recorded as a component of "
General and administrative
" on the unaudited condensed consolidated
statements of operations.
During
the three months ended March 31, 2019, four senior executives departed the Company. In accordance with the terms of these senior executives' employment agreements, unvested
stock options and unvested shares of restricted stock were modified to vest immediately upon termination. For the three months ended March 31, 2019, the Company recognized an incremental
reduction to stock-based compensation expense of $8.4 million associated with these modifications.
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.
34
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. STOCKHOLDERS' EQUITY (Continued)
No
stock options were granted during the three months ended March 31, 2019. At March 31, 2019, the Company had $1.5 million of unrecognized compensation expense
related to non-vested stock options to be recognized over a weighted-average period of 0.8 years.
During
the three months ended March 31, 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 per share. During the three months ended March 31, 2018, the Company received $0.3 million from the exercise of stock options. At
March 31, 2018, the Company had $13.1 million of unrecognized compensation expense related to non-vested stock options to be recognized over a weighted-average period of
1.2 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.
During
the three months ended March 31, 2019, the Company granted 4.2 million shares of restricted stock under the Plan to employees of the Company. These restricted shares
were granted at $1.29 per share. At March 31, 2019, the Company had $8.2 million of unrecognized compensation expense related to non-vested restricted stock awards to be recognized over
a weighted-average period of 1.8 years.
During
the three months ended March 31, 2018, the Company granted 1.9 million shares of restricted stock under the Plan to employees of the Company. These restricted shares
were granted at $5.65 per share. At March 31, 2018, the Company had $12.5 million of unrecognized compensation expense related to non-vested restricted stock awards to be recognized over
a weighted-average period of 1.7 years.
35
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EARNINGS PER COMMON SHARE
The following represents the calculation of earnings (loss) per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
Basic:
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(336,559
|
)
|
$
|
(2,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic number of common shares outstanding
|
|
|
158,549
|
|
|
153,884
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share of common stock
|
|
$
|
(2.12
|
)
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(336,559
|
)
|
$
|
(2,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic number of common shares outstanding
|
|
|
158,549
|
|
|
153,884
|
|
Common stock equivalent shares representing shares issuable upon:
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
Exercise of warrants
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
Vesting of restricted shares
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
|
|
|
|
|
|
|
|
Weighted average diluted number of common shares outstanding
|
|
|
158,549
|
|
|
153,884
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share of common stock
|
|
$
|
(2.12
|
)
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock equivalents, including stock options, restricted shares and warrants totaling 14.9 million shares for the three months ended March 31, 2019 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 loss.
Common
stock equivalents, including stock options, restricted shares and warrants totaling 13.2 million shares for the three months ended March 31, 2018 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 loss.
36
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. ADDITIONAL FINANCIAL STATEMENT INFORMATION
Certain balance sheet amounts are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
Oil, natural gas and natural gas liquids revenues
|
|
$
|
30,705
|
|
$
|
26,432
|
|
Joint interest accounts
|
|
|
7,470
|
|
|
7,369
|
|
Other
|
|
|
3,224
|
|
|
1,917
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,399
|
|
$
|
35,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaids and other:
|
|
|
|
|
|
|
|
Prepaids
|
|
$
|
3,646
|
|
$
|
3,503
|
|
Income tax receivable
|
|
|
1,250
|
|
|
1,250
|
|
Debt issuance costs
|
|
|
976
|
|
|
|
|
Other
|
|
|
2,768
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,640
|
|
$
|
4,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds in escrow and other:
|
|
|
|
|
|
|
|
Funds in escrow
|
|
$
|
573
|
|
$
|
570
|
|
Other
|
|
|
562
|
|
|
1,611
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,135
|
|
$
|
2,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
55,668
|
|
$
|
68,959
|
|
Accrued oil and natural gas capital costs
|
|
|
40,492
|
|
|
41,461
|
|
Revenues and royalties payable
|
|
|
20,241
|
|
|
20,526
|
|
Accrued interest expense
|
|
|
6,343
|
|
|
16,971
|
|
Accrued employee compensation
|
|
|
2,729
|
|
|
3,421
|
|
Accrued lease operating expenses
|
|
|
11,152
|
|
|
6,292
|
|
Other
|
|
|
391
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
$
|
137,016
|
|
$
|
157,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Table of Contents