Quarterly Report (10-q)

Date : 07/26/2019 @ 3:43PM
Source : Edgar (US Regulatory)
Stock : Cabot Oil and Gas Corp (COG)
Quote : 16.1  -0.06 (-0.37%) @ 10:14PM
After Hours
Last Trade
Last $ 15.90 ▼ -0.20 (-1.24%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM
10-Q
       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended  June 30, 2019
       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission file number 1-10447
 
CABOT OIL & GAS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
04-3072771
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
Three Memorial City Plaza
840 Gessner Road, Suite 1400, Houston, Texas 77024
(Address of principal executive offices including ZIP code)
( 281 ) 589-4600
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.10 per share
COG
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes   No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of July 24, 2019 , there were 418,390,612 shares of Common Stock, Par Value $0.10 Per Share, outstanding.



CABOT OIL & GAS CORPORATION
INDEX TO FINANCIAL STATEMENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION
ITEM 1.      Financial Statements
CABOT OIL  & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
(In thousands, except share amounts)
 
June 30,
2019
 
December 31,
2018
ASSETS
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
241,394

 
$
2,287

Accounts receivable, net
 
183,376

 
362,403

Income taxes receivable
 
121,859

 
109,251

Inventories
 
19,381

 
11,076

Derivative instruments
 
61,194

 
57,665

Other current assets
 
4,126

 
1,863

Total current assets
 
631,330

 
544,545

Properties and equipment, net (Successful efforts method)
 
3,699,575

 
3,463,606

Equity method investments
 
166,138

 
163,181

Other assets
 
66,686

 
27,497

 
 
$
4,563,729

 
$
4,198,829

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable
 
$
184,960

 
$
241,939

Accrued liabilities
 
29,184

 
25,227

Interest payable
 
19,882

 
20,098

Total current liabilities
 
234,026

 
287,264

Long-term debt, net
 
1,219,555

 
1,226,104

Deferred income taxes
 
611,163

 
458,597

Asset retirement obligations
 
54,356

 
50,622

Postretirement benefits
 
28,874

 
27,912

Other liabilities
 
70,951

 
60,171

Total liabilities
 
2,218,925

 
2,110,670

Commitments and contingencies
 

 

Stockholders' equity
 
 

 
 

Common stock:
 
 

 
 

Authorized — 960,000,000 shares of $0.10 par value in 2019 and 2018, respectively
 
 

 
 

Issued — 476,879,016 shares and 476,094,551 shares in 2019 and 2018, respectively
 
47,688

 
47,610

Additional paid-in capital
 
1,769,195

 
1,763,142

Retained earnings
 
1,983,733

 
1,607,658

Accumulated other comprehensive income
 
4,164

 
4,437

Less treasury stock, at cost:
 
 

 
 

58,490,638 shares and 53,409,705 shares in 2019 and 2018, respectively
 
(1,459,976
)
 
(1,334,688
)
Total stockholders' equity
 
2,344,804

 
2,088,159

 
 
$
4,563,729

 
$
4,198,829


The accompanying notes are an integral part of these condensed consolidated financial statements.

3


CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In thousands, except per share amounts)
 
2019
 
2018
 
2019
 
2018
OPERATING REVENUES
 
 

 
 

 
 

 
 

   Natural gas
 
$
470,482

 
$
364,660

 
$
1,103,656

 
$
776,768

   Crude oil and condensate
 

 

 

 
48,722

   Gain (loss) on derivative instruments
 
63,649

 
(3,668
)
 
71,906

 
1,909

   Brokered natural gas
 

 
92,576

 

 
97,526

   Other
 
(14
)
 
(121
)
 
236

 
1,749

 
 
534,117

 
453,447

 
1,175,798

 
926,674

OPERATING EXPENSES
 
 

 
 

 
 

 
 

   Direct operations
 
18,093

 
15,657

 
36,427

 
35,727

   Transportation and gathering
 
141,689

 
114,189

 
279,022

 
226,314

   Brokered natural gas
 

 
80,082

 

 
85,032

   Taxes other than income
 
3,640

 
5,392

 
9,487

 
12,582

   Exploration
 
4,504

 
54,500

 
10,548

 
58,117

   Depreciation, depletion and amortization
 
96,147

 
84,910

 
188,405

 
167,038

   General and administrative
 
22,889

 
21,228

 
53,979

 
45,288

 
 
286,962

 
375,958

 
577,868

 
630,098

Earnings (loss) on equity method investments
 
3,650

 
(4
)
 
7,334

 
(998
)
Gain (loss) on sale of assets
 

 
544

 
(1,500
)
 
(40,505
)
INCOME FROM OPERATIONS
 
250,805

 
78,029

 
603,764

 
255,073

Interest expense, net
 
14,567

 
23,328

 
26,748

 
43,386

Other expense
 
143

 
118

 
287

 
232

Income before income taxes
 
236,095

 
54,583

 
576,729

 
211,455

Income tax expense
 
55,086

 
12,152

 
132,957

 
51,793

NET INCOME
 
$
181,009

 
$
42,431

 
$
443,772

 
$
159,662

 
 
 
 
 
 
 
 
 
Earnings per share
 
 

 
 

 
 

 
 

Basic
 
$
0.43

 
$
0.09

 
$
1.05

 
$
0.35

Diluted
 
$
0.43

 
$
0.09

 
$
1.05

 
$
0.35

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
 

 
 

 
 

 
 

Basic
 
422,141

 
451,055

 
422,626

 
455,361

Diluted
 
424,349

 
453,114

 
424,550

 
457,142

 
 
 
 
 
 
 
 
 
Dividends per common share
 
$
0.09

 
$
0.06

 
$
0.16

 
$
0.12

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
 
 
Six Months Ended 
 June 30,
(In thousands)
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

  Net income
 
$
443,772

 
$
159,662

  Adjustments to reconcile net income to cash provided by operating activities:
 
 

 
 

Depreciation, depletion and amortization
 
188,405

 
167,038

Deferred income tax expense
 
152,647

 
66,976

Loss on sale of assets
 
1,500

 
40,505

Exploratory dry hole cost
 
16

 
51,085

Gain on derivative instruments
 
(71,906
)
 
(1,909
)
Net cash received (paid) in settlement of derivative instruments
 
68,377

 
(20,312
)
(Earnings) loss on equity method investments
 
(7,334
)
 
998

Distribution of earnings from equity method investments
 
8,750

 

Amortization of debt issuance costs
 
2,464

 
2,390

Stock-based compensation and other
 
21,058

 
10,364

  Changes in assets and liabilities:
 
 

 
 

Accounts receivable, net
 
179,027

 
38,939

Income taxes
 
(5,577
)
 
12,107

Inventories
 
(8,305
)
 
(12,377
)
Other current assets
 
(2,263
)
 
(1,096
)
Accounts payable and accrued liabilities
 
(35,867
)
 
7,168

Interest payable
 
(216
)
 
(215
)
Other assets and liabilities
 
(22,611
)
 
25,337

Net cash provided by operating activities
 
911,937

 
546,660

CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(421,500
)
 
(387,271
)
Proceeds from sale of assets
 
2,346

 
646,868

Investment in equity method investments
 
(5,131
)
 
(62,905
)
Distribution of investment from equity method investments
 
758

 

Net cash (used in) provided by investing activities
 
(423,527
)
 
196,692

CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Borrowings from debt
 
95,000

 

Repayments of debt
 
(102,000
)
 

Treasury stock repurchases
 
(156,638
)
 
(419,654
)
Dividends paid
 
(67,697
)
 
(54,718
)
Tax withholdings on vesting of stock awards
 
(10,557
)
 
(8,033
)
Capitalized debt issuance costs
 
(7,411
)
 

Net cash used in financing activities
 
(249,303
)
 
(482,405
)
Net increase in cash and cash equivalents
 
239,107

 
260,947

Cash and cash equivalents, beginning of period
 
2,287

 
480,047

Cash and cash equivalents, end of period
 
$
241,394

 
$
740,994

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


CABOT OIL & GAS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
(In thousands, except per share  amounts)
 
Common Shares
 
Common Stock Par
 
Treasury Shares
 
Treasury Stock
 
Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total
Balance at December 31, 2018
 
476,095

 
$
47,610

 
53,410

 
$
(1,334,688
)
 
$
1,763,142

 
$
4,437

 
$
1,607,658

 
$
2,088,159

Net income
 

 

 

 

 

 

 
262,763

 
262,763

Stock amortization and vesting
 
682

 
68

 

 

 
(281
)
 

 

 
(213
)
Purchase of treasury stock
 

 

 

 
(28
)
 

 

 

 
(28
)
Cash dividends at $0.07 per share
 

 

 

 

 

 

 
(29,605
)
 
(29,605
)
Other comprehensive loss
 

 

 

 

 

 
(137
)
 

 
(137
)
Balance at March 31, 2019
 
476,777

 
$
47,678

 
53,410

 
$
(1,334,716
)
 
$
1,762,861

 
$
4,300

 
$
1,840,816

 
$
2,320,939

Net income
 

 

 

 

 

 

 
181,009

 
181,009

Stock amortization and vesting
 
102

 
10

 

 

 
6,334

 

 

 
6,344

Purchase of treasury stock
 

 

 
5,081

 
(125,260
)
 

 

 

 
(125,260
)
Cash dividends at $0.09 per share
 

 

 

 

 

 

 
(38,092
)
 
(38,092
)
Other comprehensive loss
 

 

 

 

 

 
(136
)
 

 
(136
)
Balance at June 30, 2019
 
476,879

 
$
47,688

 
58,491

 
$
(1,459,976
)
 
$
1,769,195

 
$
4,164

 
$
1,983,733

 
$
2,344,804


(In thousands, except per share  amounts)
 
Common Shares
 
Common Stock Par
 
Treasury Shares
 
Treasury Stock
 
Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total
Balance at December 31, 2017
 
475,547

 
$
47,555

 
14,936

 
$
(430,576
)
 
$
1,742,419

 
$
2,077

 
$
1,162,430

 
$
2,523,905

Net income
 

 

 

 

 

 

 
117,231

 
117,231

Stock amortization and vesting
 
534

 
53

 

 

 
249

 

 

 
302

Purchase of treasury stock
 

 

 
8,328

 
(207,135
)
 

 

 

 
(207,135
)
Cash dividends at $0.06 per share
 

 

 

 

 

 

 
(27,647
)
 
(27,647
)
Other comprehensive income
 

 

 

 

 

 
306

 

 
306

Cumulative impact from accounting change
 

 

 

 

 

 

 
(446
)
 
(446
)
Balance at March 31, 2018
 
476,081

 
$
47,608

 
23,264

 
$
(637,711
)
 
$
1,742,668

 
$
2,383

 
$
1,251,568

 
$
2,406,516

Net income
 
 

 

 

 

 

 
42,431

 
42,431

Exercise of stock appreciation rights
 
3

 
1

 

 

 

 

 

 
1

Stock amortization and vesting
 
2

 

 

 

 
6,769

 

 

 
6,769

Purchase of treasury stock
 

 

 
11,646

 
(274,337
)
 

 

 

 
(274,337
)
Cash dividends at $0.06 per share
 

 

 

 

 

 

 
(27,071
)
 
(27,071
)
Other comprehensive loss
 

 

 

 

 

 
(135
)
 

 
(135
)
Balance at June 30, 2018
 
476,086

 
$
47,609

 
34,910

 
$
(912,048
)
 
$
1,749,437

 
$
2,248

 
$
1,266,928

 
$
2,154,174


The accompanying notes are an integral part of these condensed consolidated financial statements.

6



CABOT OIL & GAS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Financial Statement Presentation
During interim periods, Cabot Oil & Gas Corporation (the Company) follows the same accounting policies disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018 (Form 10-K) filed with the Securities and Exchange Commission (SEC). The interim financial statements should be read in conjunction with the notes to the consolidated financial statements and information presented in the Form 10-K. In management’s opinion, the accompanying interim condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary for a fair statement. The results for any interim period are not necessarily indicative of the expected results for the entire year.
Recently Adopted Accounting Pronouncements
Leases. In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The new lease guidance supersedes Topic 840. The core principle of the guidance is that entities should recognize the assets and liabilities that arise from leases. This ASU does not apply to leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with an optional transition method that permits an entity to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The guidance is effective for interim and annual periods beginning after December 15, 2018. This ASU was adopted using a modified retrospective approach. The Company adopted this guidance effective January 1, 2019 by applying the optional transition approach as of the beginning of the period of adoption. Comparative periods, including the disclosures related to those periods, were not restated.
On the adoption date, the Company elected the following practical expedients which are provided in the lease standard:
an election not to apply the recognition requirements in the lease standard to short-term leases (a lease that at commencement date has a lease term of 12 months or less and does not contain a purchase option that the Company is reasonably certain to exercise);
a package of practical expedients to not reassess whether a contract is or contains a lease, lease classification and initial direct costs;
a practical expedient to use hindsight when determining the lease term;
a practical expedient that permits combining lease and non-lease components in a contract and accounting for the combination as a lease (elected by asset class); and
a practical expedient to not reassess certain land easements in existence prior to January 1, 2019.
On January 1, 2019, the Company recognized a right of use asset for operating leases and an operating lease liability of $44.6 million , representing the present value of the future minimum lease payment obligations associated with office leases, drilling rig commitments, surface use agreements and other leases. The adoption of this guidance did not have an impact on the Company’s results of operations or cash flows.
Refer to Note 8 for more details regarding leases.

7


2. Properties and Equipment, Net
Properties and equipment, net are comprised of the following:
(In thousands)
 
June 30,
2019
 
December 31,
2018
Proved oil and gas properties
 
$
6,138,447

 
$
5,717,145

Unproved oil and gas properties
 
178,204

 
194,435

Land, building and other equipment
 
98,534

 
94,797

 
 
6,415,185

 
6,006,377

Accumulated depreciation, depletion and amortization
 
(2,715,610
)
 
(2,542,771
)
 
 
$
3,699,575

 
$
3,463,606


At June 30, 2019 , the Company did not have any projects that had exploratory well costs capitalized for a period of greater than one year after drilling.
3. Equity Method Investments
The Company holds a 25 percent equity interest in Constitution Pipeline Company, LLC (Constitution) and a 20 percent equity interest in Meade Pipeline Co LLC (Meade). Activity related to these equity method investments is as follows:
 
 
Constitution
 
Meade
 
Total
 
 
Six Months Ended June 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
 
$

 
$
732

 
$
163,181

 
$
85,345

 
$
163,181

 
$
86,077

Contributions
 
500

 
250

 
4,631

 
62,655

 
5,131

 
62,905

Distributions
 

 

 
(9,508
)
 

 
(9,508
)
 

Earnings (loss) on equity method investments
 
(500
)
 
(982
)
 
7,834

 
(16
)
 
7,334

 
(998
)
Balance at end of period
 
$

 
$

 
$
166,138

 
$
147,984

 
$
166,138

 
$
147,984


For further information regarding the Company’s equity method investments, refer to Note 4 of the Notes to the Consolidated Financial Statements in the Form 10-K.
4. Debt and Credit Agreements
The Company’s debt and credit agreements consisted of the following:
(In thousands)
 
June 30,
2019
 
December 31,
2018
6.51% weighted-average senior notes
 
$
124,000

 
$
124,000

5.58% weighted-average senior notes
 
175,000

 
175,000

3.65% weighted-average senior notes
 
925,000

 
925,000

Revolving credit facility
 

 
7,000

Unamortized debt issuance costs
 
(4,445
)
 
(4,896
)
 
 
$
1,219,555

 
$
1,226,104


At June 30, 2019 , the Company was in compliance with all restrictive financial covenants for both its revolving credit facility and senior notes.
Revolving Credit Agreement
On April 22, 2019, the Company entered into a second amended and restated credit agreement (the revolving credit facility). The Company's revolving credit facility is unsecured and the borrowing base is redetermined annually on April 1. In addition, either the Company or the banks may request an interim redetermination twice a year or in connection with certain acquisitions or divestitures of oil and gas properties. The Company’s borrowing base and available commitments under the revolving credit facility were $3.2 billion  and  $1.5 billion , respectively. The maximum revolving credit available to the Company is the lesser of the available commitments or the difference of the borrowing base less outstanding senior notes. The

8


Company's revolving credit facility matures in April 2024 and can be extended by one year upon the agreement of the Company and lenders holding at least 50 percent of the commitments under the revolving credit facility.
Interest rates under the revolving credit facility are based on LIBOR or ABR indications, plus a margin which ranges from  150  to  225  basis points for LIBOR loans and from 50 to 125 basis points for ABR loans when not in an Investment Grade Period (as defined in the amended and restated credit agreement) and from 112.5 to 175 basis points for LIBOR loans and from 12.5 to 75 basis points for ABR loans during an Investment Grade Period. The revolving credit facility also provides for a commitment fee on the unused available balance and is calculated at annual rates ranging from  30 to  42.5 basis points when not in an Investment Grade Period and from 12.5 to 27.5 basis points during an Investment Grade Period. The Company is currently not in an Investment Grade Period.
The revolving credit facility contains various customary covenants, which include the following (with all calculations based on definitions co ntained in the amended and restated credit agreement):
Maintenance of a minimum asset coverage ratio of 1.75 to 1.0;
Maintenance of a minimum annual coverage ratio of consolidated cash flow to interest expense for the trailing four quarters of 2.8 to 1.0; and
Maintenance of a minimum current ratio of 1.0 to 1.0.
At June 30, 2019, the Company had no borrowings outstanding under its revolving credit facility and had unused commitments of  $1.5 billion .
The Company incurred $7.4 million of debt issuance costs in connection with the amended and restated credit agreement, which were capitalized and will be amortized over the term of the amended and restated agreement. The remaining unamortized costs of $3.4 million will also be amortized over the term of the amended and restated agreement in accordance with ASC 470-50, Debt Modifications and Extinguishments.
5. Derivative Instruments
As of June 30, 2019 , the Company had the following outstanding financial commodity derivatives:
 
 
 
 
 
 
Swaps
 
Basis Swaps
Type of Contract
 
Volume (Mmbtu)
 
Contract Period
 
Weighted-Average ($/Mmbtu)
 
Weighted-Average ($/Mmbtu)

Natural gas (IFERC TRANSCO Z6 non-NY)
 
5,520,000

 
Jul. 2019 - Dec. 2019
 


 
$
0.41

Natural gas (IFERC TRANSCO Z6 non-NY)
 
18,450,000

 
Jul. 2019 - Oct. 2019
 
$
2.61

 

Natural gas (IFERC TRANSCO Leidy Line Receipts)
 
27,600,000

 
Jul. 2019 - Dec. 2019
 


 
$
(0.53
)
Natural gas (NYMEX)
 
43,050,000

 
Jul. 2019 - Oct. 2019
 
$
2.85

 
 
Natural gas (NYMEX)
 
55,200,000

 
Jul. 2019 - Dec. 2019
 
$
2.82

 


Effect of Derivative Instruments on the Condensed Consolidated Balance Sheet
 
 
 
 
Derivative Assets
 
Derivative Liabilities
(In thousands)
 
Balance Sheet Location
 
June 30,
2019
 
December 31,
2018
 
June 30,
2019
 
December 31,
2018
Commodity contracts
 
Derivative instruments (current)
 
$
61,194

 
$
57,665

 
$

 
$

 
 
 
 
$
61,194

 
$
57,665

 
$

 
$



9


Offsetting of Derivative Assets and Liabilities in the Condensed Consolidated Balance Sheet
(In thousands)
 
June 30,
2019
 
December 31,
2018
Derivative assets
 
 

 
 

Gross amounts of recognized assets
 
$
62,808

 
$
60,105

Gross amounts offset in the statement of financial position
 
(1,614
)
 
(2,440
)
Net amounts of assets presented in the statement of financial position
 
61,194

 
57,665

Gross amounts of financial instruments not offset in the statement of financial position
 

 

Net amount
 
$
61,194

 
$
57,665

 
 
 
 
 
Derivative liabilities
 
 

 
 

Gross amounts of recognized liabilities
 
$
1,614

 
$
2,440

Gross amounts offset in the statement of financial position
 
(1,614
)
 
(2,440
)
Net amounts of liabilities presented in the statement of financial position
 

 

Gross amounts of financial instruments not offset in the statement of financial position
 

 

Net amount
 
$

 
$


Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Cash received (paid) on settlement of derivative instruments
 
 

 
 

 
 

 
 

Gain (loss) on derivative instruments
 
$
15,397

 
$
5,819

 
$
68,377

 
$
(20,312
)
Non-cash gain (loss) on derivative instruments
 
 

 
 

 
 

 
 

Gain (loss) on derivative instruments
 
48,252

 
(9,487
)
 
3,529

 
22,221

 
 
$
63,649

 
$
(3,668
)
 
$
71,906

 
$
1,909


6. Fair Value Measurements
The Company follows the authoritative guidance for measuring fair value of assets and liabilities in its financial statements. For further information regarding the fair value hierarchy, refer to Note 1 of the Notes to the Consolidated Financial Statements in the Form 10-K.
Financial Assets and Liabilities
The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis:
(In thousands)
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Balance at  
 June 30, 2019
Assets
 
 

 
 

 
 

 
 

Deferred compensation plan
 
$
16,962

 
$

 
$

 
$
16,962

Derivative instruments
 

 
48,571

 
14,237

 
62,808

     Total assets
 
$
16,962

 
$
48,571

 
$
14,237

 
$
79,770

Liabilities
 
 
 
 

 
 

 
 

Deferred compensation plan
 
$
28,345

 
$

 
$

 
$
28,345

Derivative instruments
 

 

 
1,614

 
1,614

     Total liabilities
 
$
28,345

 
$

 
$
1,614

 
$
29,959


10


(In thousands)
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Balance at  
 December 31, 2018
Assets
 
 

 
 

 
 

 
 

Deferred compensation plan
 
$
14,699

 
$

 
$

 
$
14,699

Derivative instruments
 

 
35,689

 
24,416

 
60,105

     Total assets
 
$
14,699

 
$
35,689

 
$
24,416

 
$
74,804

Liabilities
 
 
 
 

 
 

 
 

Deferred compensation plan
 
$
25,780

 
$

 
$

 
$
25,780

Derivative instruments
 

 

 
2,440

 
2,440

     Total liabilities
 
$
25,780

 
$

 
$
2,440

 
$
28,220


The Company's investments associated with its deferred compensation plan consist of mutual funds and deferred shares of the Company's common stock that are publicly traded and for which market prices are readily available.
The derivative instruments were measured based on quotes from the Company's counterparties and/or internal models. Such quotes and models have been derived using an income approach that considers various inputs including current market and contractual prices for the underlying instruments, quoted forward commodity prices, basis differentials, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. Estimates are derived from or verified using relevant NYMEX futures contracts and/or are compared to multiple quotes obtained from counterparties for reasonableness. The determination of the fair values presented above also incorporates a credit adjustment for non-performance risk. The Company measured the non-performance risk of its counterparties by reviewing credit default swap spreads for the various financial institutions with which it has derivative transactions while non-performance risk of the Company is evaluated using a market credit spread provided by the Company's bank. The Company has not incurred any losses related to non-performance risk of its counterparties and does not anticipate any material impact on its financial results due to non-performance by third parties.
The most significant unobservable inputs relative to the Company's Level 3 derivative contracts are basis differentials. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties' valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided.
The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:
 
 
Six Months Ended 
 June 30,
(In thousands)
 
2019
 
2018
Balance at beginning of period
 
$
21,976

 
$
(28,398
)
Total gain (loss) included in earnings
 
17,080

 
9,019

Settlement (gain) loss
 
(26,433
)
 
18,040

Balance at end of period
 
$
12,623

 
$
(1,339
)
 
 
 
 
 
Change in unrealized gains (losses) relating to assets and liabilities still held at the end of the period
 
$
7,252

 
$
(1,276
)

There were no transfers between Level 1 and Level 2 fair value measurements for the six months ended June 30, 2019 and 2018 .
Non-Financial Assets and Liabilities
The Company discloses or recognizes its non-financial assets and liabilities, such as impairments or acquisitions, at fair value on a nonrecurring basis. As none of the Company’s other non-financial assets and liabilities were measured at fair value as of June 30, 2019 , additional disclosures were not required.
The estimated fair value of the Company’s asset retirement obligations at inception is determined by utilizing the income approach by applying a credit-adjusted risk-free rate, which takes into account the Company’s credit risk, the time value of

11


money, and the current economic state to the undiscounted expected abandonment cash flows. Given the unobservable nature of the inputs, the measurement of the asset retirement obligations was classified as Level 3 in the fair value hierarchy.
Fair Value of Other Financial Instruments
The estimated fair value of other financial instruments is the amount at which the instrument could be exchanged currently between willing parties. The carrying amount reported in the Condensed Consolidated Balance Sheet for cash and cash equivalents approximates fair value due to the short-term maturities of these instruments. Cash and cash equivalents are classified as Level 1 in the fair value hierarchy and the remaining financial instruments are classified as Level 2.
The Company uses available market data and valuation methodologies to estimate the fair value of debt. The fair value of debt is the estimated amount the Company would have to pay a third party to assume the debt, including a credit spread for the difference between the issue rate and the period end market rate. The credit spread is the Company’s default or repayment risk. The credit spread (premium or discount) is determined by comparing the Company’s senior notes and revolving credit facility to new issuances (secured and unsecured) and secondary trades of similar size and credit statistics for both public and private debt. The fair value of all senior notes is based on interest rates currently available to the Company. The Company’s debt is valued using an income approach and classified as Level 3 in the fair value hierarchy.
The carrying amount and fair value of debt is as follows:
 
 
June 30, 2019
 
December 31, 2018
(In thousands)
 
Carrying
Amount
 
Estimated Fair
Value
 
Carrying
Amount
 
Estimated Fair
Value
Long-term debt
 
$
1,219,555

 
$
1,245,889

 
$
1,226,104

 
$
1,202,994




7. Asset Retirement Obligations
Activity related to the Company’s asset retirement obligations is as follows:
(In thousands)
 
Six Months Ended 
 June 30, 2019
Balance at beginning of period (1)
 
$
51,622

Liabilities incurred
 
3,159

Liabilities settled
 
(970
)
Liabilities divested
 
(188
)
Accretion expense
 
1,733

Balance at end of period (1)
 
$
55,356

_______________________________________________________________________________
(1)
Includes $1.0 million of current asset retirement obligations included in accrued liabilities at June 30, 2019 and December 31, 2018 .
8. Commitments and Contingencies
Contractual Obligations
The Company has various contractual obligations in the normal course of its operations. There have been no material changes to the Company’s contractual obligations described under “Transportation and Gathering Agreements” as disclosed in Note 9 of the Notes to Consolidated Financial Statements in the Form 10-K.

12


Lease Commitments (Topic 840)
Future minimum rental commitments under non-cancelable leases in effect at December 31, 2018 are as follows:
(In thousands)
 
2019
$
5,571

2020
5,684

2021
4,777

2022
1,659

2023
1,691

Thereafter
2,852

 
$
22,234



The table above was prepared under the guidance of Topic 840. As discussed in Note 1 above, the Company adopted the guidance of Topic 842 effective January 1, 2019.
Leases (Topic 842)
The Company determines if an arrangement is, or contains, a lease at inception based on whether that contract conveys the right to control the use of an identified asset in exchange for consideration for a period of time. Operating leases are included in operating lease right-of-use assets (ROU assets) and operating lease liabilities (current and noncurrent) on the Condensed Consolidated Balance Sheet. The Company does not have any finance leases at June 30, 2019 .
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of minimum lease payments over the lease term. Most leases do not provide an implicit interest rate; therefore, the Company used its incremental borrowing rate based on the information available at the inception date to determine the present value of the lease payments. Lease terms include options to extend the lease when it is reasonably certain that the Company will exercise that option. Lease cost for lease payments is recognized on a straight-line basis over the lease term. Certain leases have payment terms that vary based on the usage of the underlying assets. Variable lease payments are not included in ROU assets and lease liabilities.
For all operating leases, lease and non-lease components are accounted for as a single lease component.
The Company has operating leases for office space, drilling rig commitments, surface use agreements and other leases. The leases have remaining terms ranging from less than one month to 26.5 years, including options to extend leases that the Company is reasonably certain to exercise. During the six months ended June 30, 2019 , the Company recognized operating lease cost and variable lease cost of $6.0 million and $3.5 million , respectively.
Short-term leases. The Company leases drilling rigs, fracturing and other equipment under lease terms ranging from 30 days to one year . Lease cost of $157.7 million was recognized on short-term leases during the six months ended June 30, 2019 . Certain lease costs are capitalized and included in Properties and equipment, net in the Condensed Consolidated Balance Sheet because they relate to drilling and completion activities, while other costs are expensed because they relate to production and administrative activities.

13


As of June 30, 2019 , the Company’s future undiscounted minimum cash payment obligations for its operating lease liabilities are as follows:
(In thousands)
 
Year Ending December 31,
2019 (excluding the six months ended June 30, 2019)
 
$
5,302

2020
 
4,549

2021
 
4,575

2022
 
4,577

2023
 
4,613

Thereafter
 
29,824

Total undiscounted lease payments
 
53,440

Present value adjustment
 
(13,861
)
Net operating lease liabilities
 
$
39,579


Supplemental cash flow information related to leases was as follows:
(In thousands)
 
Three Months Ended 
 June 30, 2019
 
Six Months Ended 
 June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
Operating cash flows from operating leases
 
$
1,124

 
$
2,247

Investing cash flows from operating leases
 
$
1,811

 
$
3,602



Information regarding the weighted-average remaining lease term and the weighted-average discount rate for operating leases is summarized below:
 
 
June 30, 2019
Weighted-average remaining lease term (in years)
 
 
Operating leases
 
11.7

Weighted-average discount rate
 
 
Operating leases
 
4.9
%


Legal Matters
The Company is a defendant in various legal proceedings arising in the normal course of business. All known liabilities are accrued when management determines they are probable based on its best estimate of the potential loss. While the outcome and impact of these legal proceedings on the Company cannot be predicted with certainty, management believes that the resolution of these proceedings will not have a material effect on the Company’s financial position, results of operations or cash flows.
Contingency Reserves. When deemed necessary, the Company establishes reserves for certain legal proceedings. The establishment of a reserve is based on an estimation process that includes the advice of legal counsel and subjective judgment of management. While management believes these reserves to be adequate, it is reasonably possible that the Company could incur additional losses with respect to those matters in which reserves have been established. The Company believes that any such amount above the amounts accrued would not be material to the Condensed Consolidated Financial Statements. Future changes in facts and circumstances not currently foreseeable could result in the actual liability exceeding the estimated ranges of loss and amounts accrued.

14


9. Revenue Recognition
Disaggregation of Revenue
The following table presents revenues disaggregated by product:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
OPERATING REVENUES
 
 
 
 
 
 
 
 
   Natural gas
 
$
470,482

 
$
364,660

 
$
1,103,656

 
$
776,768

   Crude oil and condensate
 

 

 

 
48,722

   Brokered natural gas
 

 
92,576

 

 
97,526

   Other
 
(14
)
 
(121
)
 
236

 
1,749

Total revenues from contracts with customers
 
470,468

 
457,115

 
1,103,892

 
924,765

   Gain (loss) on derivative instruments
 
63,649

 
(3,668
)
 
71,906

 
1,909

Total operating revenues
 
$
534,117

 
$
453,447

 
$
1,175,798

 
$
926,674


All of the Company’s revenues from contracts with customers represent products transferred at a point in time as control is transferred to the customer and generated in the United States.
Transaction Price Allocated to Remaining Performance Obligations
A significant number of the Company’s product sales contracts are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
As of June 30, 2019 , the Company has $9.8 billion of unsatisfied performance obligations related to natural gas sales that have a fixed pricing component and a contract term greater than one year. The Company expects to recognize these obligations over periods ranging from five to 20 years.
Contract Balances
Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $183.7 million and $363.0 million as of June 30, 2019 and December 31, 2018 , respectively, and are reported in accounts receivable, net on the Condensed Consolidated Balance Sheet. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront or rights to deficiency payments.
10. Capital Stock
Treasury Stock
In July 2019, the Board of Directors authorized an increase of 25.0 million shares to the Company’s share repurchase program. After this authorization, the total number of shares available for repurchase is 31.5 million shares.
11. Stock-based Compensation
General
The Company grants certain stock-based compensation awards, including restricted stock awards, restricted stock units and performance share awards. Stock-based compensation expense associated with these awards was $6.7 million and $5.7 million in the second quarter of 2019 and 2018 , respectively, and $21.9 million and $11.1 million during the first six months of 2019 and 2018 , respectively. Stock-based compensation expense is included in general and administrative expense in the Condensed Consolidated Statement of Operations.
For the first six months of 2019, the Company recorded a decrease to tax expense of $0.9 million as a result of federal and state tax deductions exceeding the book compensation expense for employee stock-based compensation awards that vested during the period. For the first six months of 2018, the Company recorded an increase to tax expense of $0.2 million as a result

15


of book compensation expense exceeding the federal and state tax deductions for employee stock-based compensation awards that vested during the period.
Refer to Note 13 of the Notes to the Consolidated Financial Statements in the Form 10-K for further description of the various types of stock-based compensation awards and the applicable award terms.
Restricted Stock Units
During the first six months of 2019 , 78,290 restricted stock units were granted to non-employee directors of the Company with a weighted-average grant date value of $25.01 per unit. The fair value of these units is measured based on the closing stock price on grant date and compensation expense is recorded immediately. These units immediately vest and are issued when the director ceases to be a director of the Company.
Performance Share Awards
The performance period for the awards granted during the first six months of 2019 commenced on January 1, 2019 and ends on December 31, 2021 . The Company used an annual forfeiture rate assumption ranging from zero percent to five percent for purposes of recognizing stock-based compensation expense for its performance share awards.
Performance Share Awards Based on Internal Performance Metrics
The fair value of performance share award grants based on internal performance metrics is based on the closing stock price on the grant date. Each performance share award represents the right to receive up to 100% of the award in shares of common stock. Based on the Company’s probability assessment at June 30, 2019 , it is considered probable that the criteria for all performance awards based on internal metrics awards will be met.
Employee Performance Share Awards. During the first six months of 2019 , 526,730 Employee Performance Share Awards were granted at a grant date value of $24.95 per share. The performance metrics are set by the Company’s compensation committee and are based on the Company’s average production, average finding costs and average reserve replacement over a three -year performance period.
Hybrid Performance Share Awards. During the first six months of 2019 , 315,029 Hybrid Performance Share Awards were granted at a grant date value of $24.95 per share. The 2019 awards vest 25% on each of the first and second anniversary dates and 50% on the third anniversary , provided that the Company has $100 million or more of operating cash flow for the year preceding the vesting date, as set by the Company’s compensation committee. If the Company does not meet the performance metric for the applicable period, then the portion of the performance shares that would have been issued on that anniversary date will be forfeited.
Performance Share Awards Based on Market Conditions
These awards have both an equity and liability component, with the right to receive up to the first 100% of the award in shares of common stock and the right to receive up to an additional 100% of the value of the award in excess of the equity component in cash. The equity portion of these awards is valued on the grant date and is not marked to market, while the liability portion of the awards is valued as of the end of each reporting period on a mark-to-market basis. The Company calculates the fair value of the equity and liability portions of the awards using a Monte Carlo simulation model.
TSR Performance Share Awards. During the first six months of 2019 , 536,673 TSR Performance Share Awards were granted and are earned, or not earned, based on the comparative performance of the Company’s common stock measured against a predetermined group of companies in the Company’s peer group over a three -year performance period.
The following assumptions were used to determine the grant date fair value of the equity component (February 19, 2019 ) and the period-end fair value of the liability component of the TSR Performance Share Awards:
 
 
Grant Date
 
June 30, 2019
Fair value per performance share award
 
$
20.63

 
$11.46 - $22.04
Assumptions:
 
 

 
 
     Stock price volatility
 
31.3
%
 
24.28% - 29.01%
     Risk free rate of return
 
2.46
%
 
1.72%-2.08%


16


12. Earnings per Common Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is similarly calculated except that the common shares outstanding for the period is increased using the treasury stock method to reflect the potential dilution that could occur if outstanding stock awards were vested at the end of the applicable period. Anti-dilutive shares represent potentially dilutive securities that are excluded from the computation of diluted income or loss per share as their impact would be anti-dilutive.
The following is a calculation of basic and diluted weighted-average shares outstanding:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Weighted-average shares - basic
 
422,141

 
451,055

 
422,626

 
455,361

Dilution effect of stock awards at end of period
 
2,208

 
2,059

 
1,924

 
1,781

Weighted-average shares - diluted
 
424,349

 
453,114

 
424,550

 
457,142


The following is a calculation of weighted-average shares excluded from diluted EPS due to the anti-dilutive effect:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Weighted-average stock awards excluded from diluted EPS due to the anti-dilutive effect calculated using the treasury stock method
 
14

 

 
948

 
956



17


13. Additional Balance Sheet Information
Certain balance sheet amounts are comprised of the following:
(In thousands)
 
June 30,
2019
 
December 31,
2018
Accounts receivable, net
 
 

 
 

Trade accounts
 
$
183,700

 
$
362,973