Notes to Condensed Consolidated Financial Statements
Note 1 — Organization and Nature of Business
Resolute Energy Corporation (“Resolute” or the “Company”), is an independent oil and gas company engaged in the exploitation, development, exploration for and acquisition of oil and gas properties. The Company’s operating assets are comprised primarily of properties in Aneth Field located in the Paradox Basin in southeast Utah (the “Aneth Field Properties” or “Aneth Field”) and the Permian Basin in west Texas and southeast New Mexico (the “Permian Properties” or “Permian Basin Properties”). The Company conducts all of its activities in the United States of America.
Resolute Energy Corporation, the stand-alone parent entity, has insignificant independent assets and no operations. There are no restrictions on the Company’s ability to obtain cash dividends or other distributions of funds from its subsidiaries, except those imposed by applicable law.
Note 2 — Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements include Resolute and its subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and Regulation S-X for interim financial reporting. Except as disclosed herein, there has been no material change in our basis of presentation from the information disclosed in the notes to Resolute’s consolidated financial statements for the year ended December 31, 2015. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation of the interim financial information have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. All significant intercompany transactions have been eliminated upon consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.
In connection with the preparation of the condensed consolidated financial statements, Resolute evaluated subsequent events that occurred after the balance sheet date, through the date of filing.
Significant Accounting Policies
The significant accounting policies followed by Resolute are set forth in Resolute’s consolidated financial statements for the year ended December 31, 2015. These unaudited condensed consolidated financial statements are to be read in conjunction with the consolidated financial statements appearing in Resolute’s Annual Report on Form 10-K and related notes for the year ended December 31, 2015.
Recent Accounting Pronouncements
In March 2016 the FASB issued new authoritative guidance related to the simplification of several aspects of accounting for share-based payment transactions. The main provisions require that all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement. The adoption of this guidance in the first quarter of 2016 had no prior period effect.
In February 2016 the FASB issued new authoritative guidance related to the accounting of leases. The main provisions require that lessees recognize both a lease liability and a right-of-use asset at the commencement date. This authoritative accounting guidance is effective for the annual period beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2018. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.
In August 2014 the FASB issued
new authoritative accounting guidance related to management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern. This authoritative accounting guidance is effective for the annual period beginning after December 15, 2016, and interim periods within annual periods beginning after December 31, 2016. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.
5
Assumptions, Judgments and Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make various assumptions, judgments and estimates to determine the reported amounts of assets, liabilities, revenue and expenses, and in the disclosures of commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events. Accordingly, actual results could differ from amounts previously established.
Significant estimates with regard to the condensed consolidated financial statements include proved oil and gas reserve volumes and the related present value of estimated future net cash flows used in the ceiling test applied to capitalized oil and gas properties; asset retirement obligations; valuation of derivative assets and liabilities; share-based compensation expense; depletion, depreciation and amortization; accrued liabilities; revenue and related receivables and income taxes.
Oil and Gas Properties
Pursuant to full cost accounting rules, Resolute is required to perform a quarterly “ceiling test” calculation to test its oil and gas properties for possible impairment. The primary components impacting the calculation are commodity prices, reserve quantities added and produced, overall exploration and development costs and depletion expense. If the net capitalized cost of the Company’s oil and gas properties subject to amortization (the “carrying value”) exceeds the ceiling limitation, the excess would be charged to expense. The ceiling limitation is equal to the sum of the present value discounted at 10% of estimated future net cash flows from proved reserves, the cost of properties not being amortized, the lower of cost or estimated fair value of unproven properties included in the costs being amortized, and all related income tax effects.
For the three and six months ended June 30, 2016 the Company recorded non-cash impairments of the carrying value of its oil and gas properties of $0 and $58 million, respectively, as a result of the ceiling test limitation. For the three and six months ended June 30, 2015 the Company recorded non-cash impairments of the carrying value of its oil and gas properties of $210 million and $430 million, respectively, as a result of the ceiling test limitation. If in future periods a negative impact continues on one or more of the components of the calculation, including market prices of oil and gas (based on a trailing twelve-month unweighted average of the oil and gas prices in effect on the first day of each month), differentials from posted prices, future drilling and capital plans, operating costs or expected production, the Company may incur further full cost ceiling impairment related to its oil and gas properties in such periods.
Note 3 — Acquisitions and Divestitures
Divestiture of Gardendale Properties in the Midland Basin
In December 2015, the Company sold its Gardendale properties in the Midland Basin in Midland and Ector counties, Texas, for approximately $172 million. The sale was consummated on December 22, 2015, with an effective date of September 1, 2015. The net proceeds of the sale were used to reduce debt under the Company’s revolving credit facility and secured term loan facility (both as defined in Note 5). As part of the sale, the Company was no longer liable for asset retirement obligations of $5.6 million at December 31, 2015.
Divestiture of Hilight Field Properties in the Powder River Basin
In October 2015, the Company sold its Hilight Field Properties in the Powder River Basin for approximately $55 million. The sale was consummated on October 6, 2015, with an effective date of July 1, 2015. The net proceeds under this sale were used to pay down amounts outstanding under the revolving credit facility (as defined in Note 5). As a part of the sale, the Company was no longer liable for asset retirement obligations of $8.1 million at December 31, 2015.
6
Divestiture of Howard and Martin County Properties
In May 2015, the Company sold its Howard and Martin County properties in the Permian Basin for approximately $42 million. The sale was consummated on May 1, 2015, with an effective date of March 1, 2015. The net proceeds under this sale were used to pay down amounts outstanding under the revolving credit facility (as defined in Note 5). As part of the sale, the Company was no longer liable for asset retirement obligations of $1.3 million at December 31, 2015.
The unaudited pro forma financial information for the three and six months ended June 30, 2015 reflects Resolute’s results as if the Gardendale, Hilight Field, and Howard and Martin County properties were sold on January 1, 2015 (in thousands, except per share amounts):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30, 2015
|
|
|
June 30, 2015
|
|
Revenue
|
$
|
38,610
|
|
|
$
|
69,667
|
|
Loss from operations
|
|
(222,970
|
)
|
|
|
(465,031
|
)
|
Net loss
|
|
(257,023
|
)
|
|
|
(460,035
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
$
|
(17.17
|
)
|
|
$
|
(30.83
|
)
|
Note 4 — Earnings per Share
The Company computes basic net income (loss) per share using the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock and, if dilutive, potential shares of common stock outstanding during the period. Potentially dilutive shares consist of the incremental shares and options issuable under the Company’s 2009 Performance Incentive Plan (the “Incentive Plan”). The treasury stock method is used to measure the dilutive impact of potentially dilutive shares.
The following table details the potential weighted average dilutive and anti-dilutive securities for the periods presented (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Potential dilutive restricted stock
|
|
917
|
|
|
|
326
|
|
|
|
663
|
|
|
|
387
|
|
Anti-dilutive securities
|
|
1,474
|
|
|
|
933
|
|
|
|
1,305
|
|
|
|
877
|
|
The following table sets forth the computation of basic and diluted net income (loss) per share of common stock for the periods presented (in thousands, except per share amounts):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net loss
|
$
|
(36,906
|
)
|
|
$
|
(259,107
|
)
|
|
$
|
(122,218
|
)
|
|
$
|
(467,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
15,155
|
|
|
|
14,965
|
|
|
|
15,096
|
|
|
|
14,922
|
|
Add: dilutive effect of non-vested restricted stock
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
|
15,155
|
|
|
|
14,965
|
|
|
|
15,096
|
|
|
|
14,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
$
|
(2.44
|
)
|
|
$
|
(17.30
|
)
|
|
$
|
(8.10
|
)
|
|
$
|
(31.30
|
)
|
7
Note 5 — Long Term Debt
As of the dates indicated, the Company’s long-term debt consisted of the following (in thousands):
|
Principal
|
|
|
Unamortized premium/
(discount)
|
|
|
Unamortized deferred financing costs
|
|
|
June 30, 2016
|
|
Revolving credit facility
|
$
|
30,000
|
|
|
$
|
—
|
|
|
$
|
(1,650
|
)
|
|
$
|
28,350
|
|
Secured term loan facility
|
|
128,303
|
|
|
|
(6,091
|
)
|
|
|
(1,698
|
)
|
|
|
120,514
|
|
8.50% senior notes
|
|
400,000
|
|
|
|
1,112
|
|
|
|
(4,492
|
)
|
|
|
396,620
|
|
Total long-term debt
|
$
|
558,303
|
|
|
$
|
(4,979
|
)
|
|
$
|
(7,840
|
)
|
|
$
|
545,484
|
|
|
Principal
|
|
|
Unamortized premium/
(discount)
|
|
|
Unamortized deferred financing costs
|
|
|
December 31, 2015
|
|
Revolving credit facility
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2,121
|
)
|
|
$
|
(2,121
|
)
|
Secured term loan facility
|
|
128,303
|
|
|
|
(7,223
|
)
|
|
|
(2,136
|
)
|
|
|
118,944
|
|
8.50% senior notes
|
|
400,000
|
|
|
|
1,233
|
|
|
|
(5,182
|
)
|
|
|
396,051
|
|
Total long-term debt
|
$
|
528,303
|
|
|
$
|
(5,990
|
)
|
|
$
|
(9,439
|
)
|
|
$
|
512,874
|
|
Unamortized deferred financing costs associated with the Revolving Credit Facility (as defined below) at June 30, 2016 and December 31, 2015, of $1.7 million and $2.1 million, respectively, have been included in other assets.
For the three months ended June 30, 2016 and 2015, the Company incurred interest expense on long-term debt of $13.0 million and $15.9 million, respectively. For the six months ended June 30, 2016 and 2015, the Company incurred interest expense on long-term debt of $26.1 million and $27.0 million, respectively. The Company capitalized $0.6 million and $0.5 million of interest expense during the three months ended June 30, 2016 and 2015, respectively. The Company capitalized $1.1 million and $5.0 million of interest expense during the six months ended June 30, 2016 and 2015, respectively.
Revolving Credit Facility
Resolute’s revolving credit facility is with a syndicate of banks led by Wells Fargo Bank, National Association, as Administrative Agent, and Bank of Montreal, as Syndication Agent (the “Revolving Credit Facility”) with Resolute as the borrower. The Revolving Credit Facility specifies a maximum borrowing base as determined by the lenders. The determination of the borrowing base takes into consideration the estimated value of Resolute’s oil and gas properties in accordance with the lenders’ customary practices for oil and gas loans. The borrowing base is redetermined semi-annually, and the amount available for borrowing could be increased or decreased as a result of such redeterminations. Under certain circumstances, either Resolute or the lenders may request an interim redetermination. The Revolving Credit Facility matures in March 2018.
The Revolving Credit Facility includes covenants that require, among other things, maintenance of certain ratios, measured on a quarterly basis, as follows: (i) secured debt to EBITDA of no more than 3.5 to 1.0, (ii) PV-10 of total proved reserves to total secured debt of at least 1.5 to 1.0, and (iii) PV-10 of proved developed reserves to total secured debt of at least 1.0 to 1.0. Our Revolving Credit Facility also requires us to enter into derivative agreements covering at least 70% of our anticipated production from proved developed producing properties on a rolling twenty-four month basis, but prohibits us from entering into derivative arrangements for more than (i) 85% of our anticipated production from proved properties in the subsequent two years and (ii) the greater of 75% of our anticipated production from proved properties or 85% of our production from projected proved developed producing properties after such two year period, using economic parameters specified in our Revolving Credit Facility.
In March 2016 the Company completed its spring borrowing base redetermination, and the borrowing base was set at $105 million. As of June 30, 2016, outstanding borrowings under the Revolving Credit Facility were $30 million with a weighted average interest rate of 2.56%. The borrowing base availability had been reduced by $3.6 million in conjunction with letters of credit issued at June 30, 2016.
To the extent that the borrowing base, as adjusted from time to time, exceeds the outstanding balance, no repayments of principal are required prior to maturity. However, should the borrowing base be set at a level below the outstanding balance, Resolute would be required to eliminate that excess within 120 days following that determination. The Revolving Credit Facility is guaranteed by all of Resolute’s subsidiaries and is collateralized by substantially all of the proved oil and gas assets of Resolute Aneth, LLC and Resolute Natural Resources Southwest, LLC, which are wholly-owned subsidiaries of the Company.
8
Each base rate borrowing under the Revolving Credit Facility accrues interest at either (a) the London Interbank Offered Rate (“LIBOR”), plus a margin which varies from 1.50% to 2
.50% or (b) the alternative Base Rate defined as the greater of (i) the Administrative Agent’s Prime Rate (ii) the Federal Funds effective Rate plus 0.5% or (iii) an adjusted London Interbank Offered Rate plus a margin which ranges from 0.50% to 1.50%. Eac
h such margin is based on the level of utilization under the borrowing base.
The Revolving Credit Facility includes customary terms and covenants that place limitations on certain types of activities, the payment of dividends, and require satisfaction of certain financial tests. Resolute was in compliance with the terms and covenants of the Revolving Credit Facility at June 30, 2016.
Secured Term Loan Agreement
On December 30, 2014, Resolute and certain of its subsidiaries, as guarantors, entered into a second lien Secured Term Loan Agreement with Bank of Montreal, as administrative agent, and the lenders party thereto, pursuant to which the Company borrowed $150 million (the “Secured Term Loan Facility”). Initial funding of the Secured Term Loan Facility occurred on December 31, 2014, with net proceeds of approximately $135 million after payment of transaction-related fees, expenses and discounts. Net proceeds were used to repay amounts outstanding under the Revolving Credit Facility. The Secured Term Loan Facility will mature on the date that is six months after the maturity of the Company’s existing Revolving Credit Facility, but in no event later than November 1, 2019.
On May 18, 2015, Resolute and certain of its subsidiaries, as guarantors, entered into an Amendment to the Secured Term Loan Agreement and Increased Facility Activation Notice-Incremental Term Loans (the “Amendment”) with Bank of Montreal, as administrative agent, and the lenders party thereto, pursuant to which the Company borrowed an additional $50 million of second lien term debt (the “Incremental Term Loans”) under its Secured Term Loan Agreement dated December 30, 2014. Funding of the Incremental Term Loans occurred on May 19, 2015. The Incremental Term Loans have the same terms as the existing second lien borrowings under the Secured Term Loan Agreement, adjusted for the date of the closing. The $50 million of Incremental Term Loans was placed with the same lenders that participated in the initial $150 million second lien closing in December 2014. Net proceeds from the Incremental Term Loans of approximately $46 million after payment of transaction-related fees, expenses and discounts, were used to repay amounts outstanding under the Revolving Credit Facility.
Obligations under the Secured Term Loan Facility are guaranteed by certain of the Company’s subsidiaries and secured by second priority liens on substantially all of the assets of the Company and its subsidiaries that serve as collateral under the Revolving Credit Facility.
Borrowings under the Secured Term Loan Facility will generally bear interest at adjusted LIBOR plus 10%, with a 1% LIBOR floor. The covenants in the Secured Term Loan Facility require, among other things, maintenance of certain ratios, measured on a quarterly basis, as follows: (i) secured debt to EBITDA of no more than 3.5 to 1.0, (ii) PV-10 of total proved reserves to total secured debt of at least 1.5 to 1.0, and (iii) PV-10 of proved developed reserves to total secured debt of at least 1.0 to 1.0. Resolute was in compliance with the terms and covenants of the Secured Term Loan Facility at June 30, 2016.
The Company may prepay all or a portion of the Secured Term Loan Facility at any time. The Secured Term Loan Facility is subject to mandatory prepayments of 75% of the net cash proceeds from asset sales after any mandatory repayment of first lien debt, subject to a limited right to reinvest proceeds in oil and gas activities and subject to the right of the lenders to waive prepayment. Prepayments made out of proceeds from asset sales are not subject to prepayment premiums. Mandatory repayments are required of 100% of the net cash proceeds of certain debt or equity issuances. Such prepayments are subject to a premium of between 10% declining to 2% during the first 36 months after closing. To the extent not otherwise achieved, aggregate repayments that substantially pay off principal amounts under the second lien facility shall include an additional payment sufficient to ensure that the lenders achieve a 1.25 to 1.0 minimum multiple of their invested capital. During December 2015, the Company retired $70 million of the amount outstanding under the Secured Term Loan Facility following the sale of the Gardendale properties in Midland Basin on December 22, 2015.
Due to the lack of an active market, quoted market prices for the Company’s Secured Term Loan Facility or similar debt are not available. The Company used valuation techniques that relied on unobservable inputs, current information including LIBOR interest rates and the specific terms of the Secured Term Loan Facility to estimate the fair value (a Level 3 fair value measurement). The fair value of the Company’s Secured Term Loan Facility at June 30, 2016, was estimated to be $122.2 million, which approximates the principal less the unamortized discount.
9
Senior Notes
In 2012 the Company consummated two private placements of senior notes with principal totaling $400 million (the “Senior Notes”). The Senior Notes are due May 1, 2020, and bear an annual interest rate of 8.50% with the interest on the Senior Notes payable semiannually in cash on May 1 and November 1 of each year.
The Senior Notes were issued under an Indenture (the “Indenture”) among the Company and the Company’s existing subsidiaries (the “Guarantors”) in a private transaction not subject to the registration requirements of the Securities Act of 1933. In March 2013, the Company registered the Senior Notes with the Securities and Exchange Commission by filing an amendment to the registration statement on Form S-4 enabling holders of the Senior Notes to exchange the privately placed Senior Notes for publically registered Senior Notes with substantially identical terms. The Indenture contains affirmative and negative covenants that, among other things, limit the Company’s and the Guarantors’ ability to make investments, incur additional indebtedness or issue preferred stock, create liens, sell assets, enter into agreements that restrict dividends or other payments by restricted subsidiaries, consolidate, merge or transfer all or substantially all of the assets of the Company, engage in transactions with the Company’s affiliates, pay dividends or make other distributions on capital stock or prepay subordinated indebtedness and create unrestricted subsidiaries. The Indenture also contains customary events of default. Upon occurrence of events of default arising from certain events of bankruptcy or insolvency, the Senior Notes shall become due and payable immediately without any declaration or other act of the trustee or the holders of the Senior Notes. Upon the occurrence of certain other events of default, the trustee or the holders of the Senior Notes may declare all outstanding Senior Notes to be due and payable immediately. The Company was in compliance with all financial covenants under its Senior Notes as of June 30, 2016.
The Senior Notes are general unsecured senior obligations of the Company and guaranteed on a senior unsecured basis by the Guarantors. The Senior Notes rank equally in right of payment with all existing and future senior indebtedness of the Company, will be subordinated in right of payment to all existing and future senior secured indebtedness of the Guarantors, will rank senior in right of payment to any future subordinated indebtedness of the Company and will be fully and unconditionally guaranteed by the Guarantors on a senior basis.
The Senior Notes are redeemable by the Company on not less than 30 or more than 60 days’ prior notice, at redemption prices set forth in the Indenture. If a change of control occurs, each holder of the Senior Notes will have the right to require that the Company purchase all of such holder’s Senior Notes in an amount equal to 101% of the principal of such Senior Notes, plus accrued and unpaid interest, if any, to the date of the purchase.
The fair value of the Senior Notes at June 30, 2016, was estimated to be $236.1 million based upon data from independent market makers (Level 2 fair value measurement).
Note 6 — Income Taxes
Income tax benefit (expense) during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income (loss), plus any significant unusual or infrequently occurring items that are recorded in the interim period. The provision for income taxes for the three and six months ended June 30, 2016 and 2015, differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 35% to income before income taxes. This difference relates primarily to the valuation allowance established, in addition to state income taxes and estimated permanent differences.
The following table summarizes the components of the provision for income taxes (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Current income tax benefit (expense)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred income tax benefit (expense)
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,354
|
|
Total income tax benefit (expense)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,354
|
|
10
The Company had no reserve for uncertain tax positions as of June 30, 2016
. The Company assesses the recoverability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The Company considers all available evidence (both positiv
e and negative) in determining whether a valuation allowance is required. As a result of the Company’s analysis, it was concluded that as of June 30, 2016 a valuation allowance should be established against the Company’s net deferred tax asset. The Company
recorded a valuation allowance as of June 30, 2016 of $296 million on its long-term deferred tax asset. The Company will continue to monitor facts and circumstances in the reassessment of the likelihood that the deferred tax assets will be realized.
Note 7 — Stockholders’ Equity and Long-term Employee Incentive Plan
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of preferred stock, par value $0.0001 with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. No shares were issued and outstanding as of June 30, 2016, or December 31, 2015.
Common Stock
The authorized common stock of the Company consists of 45,000,000 shares. The holders of the common shares are entitled to one vote for each share of common stock. In addition, the holders of the common stock are entitled to receive dividends when, as and if declared by the Board of Directors. At June 30, 2016 and December 31, 2015, the Company had 15,407,881 and 15,442,147 shares of common stock issued and outstanding, respectively.
In May 2016, Resolute adopted a stockholder rights plan and in connection with such plan declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.0001 per share. The Rights trade with, and are inseparable from, the common stock until such time as they become exercisable on the Distribution Date (described below). The Rights are evidenced only by certificates that represent shares of common stock and not by separate certificates. New Rights will accompany any new shares of common stock we issue after May 27, 2016, until the earlier of the Distribution Date described below and the redemption or expiration of the rights.
Each Right allows its holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock
(a “Preferred Share”) for $4.50, once the Rights become exercisable. Prior to exercise, the Right does not give its holder any dividend, voting or liquidation rights. The Rights will not be exercisable until 10 days after the public announcement that a person or group has become an “Acquiring Person” by obtaining beneficial ownership of 20% or more of our outstanding common stock, or, if earlier, 10 business days (or a later date determined by the Board before any person or group becomes an Acquiring Person) after a person or group begins a tender or exchange offer which, if completed, would result in that person or group becoming an Acquiring Person.
In June 2016, Resolute filed a certificate of amendment to its certificate of incorporation to effect the previously-announced reverse stock split of the Company’s common stock, par value $0.0001 per share, at a ratio of 1-for-5 (the “Reverse Stock Split”). The certificate of amendment also reduced the number of authorized shares of common stock from 225,000,000 to 45,000,000. The Reverse Stock Split, including the certificate of amendment, was approved by stockholders at the Company’s 2016 annual meeting of stockholders and by the Company’s Board of Directors. As a result, the Company is now in compliance with the $1.00 per share minimum price requirement of the New York Stock Exchange (the “NYSE”). All historical share amounts disclosed have been retroactively adjusted to reflect this Reverse Stock Split.
Resolute received notification on November 30, 2015, from the NYSE that the Company’s market capitalization was below the NYSE’s continued listing standard. The Company is considered below criteria established by the NYSE because the Company’s average market capitalization fell below $50 million over a trailing consecutive 30 trading-day period and its last reported stockholders’ equity was less than $50 million. In accordance with NYSE procedures, the Company had 45 days from the receipt of the notice to submit a business plan to the NYSE demonstrating how it intends to regain compliance with the NYSE’s continued listing standards within eighteen months. Resolute developed and submitted such a business plan within the required time frame and the NYSE accepted the plan. The Company will be subject to quarterly monitoring for compliance with the business plan and the Company’s common stock will continue to trade on the NYSE during the eighteen month period, subject to the Company’s compliance with other NYSE continued listing requirements. The NYSE may choose to shorten the usual compliance period if prior to the end of the eighteen months the Company’s market capitalization is over $50 million for two consecutive quarters.
11
Long Term Employee Incentive Plan
The Company accounts for share-based compensation in accordance with FASB ASC Topic 718,
Stock Compensation
.
In July 2009, the Company adopted the Incentive Plan, providing for long-term share-based awards intended as a means for the Company to attract, motivate, retain and reward directors, officers, employees and other eligible persons through the grant of awards and incentives for high levels of individual performance and improved financial performance of the Company. The share-based awards are also intended to further align the interests of award recipients and the Company’s stockholders. The maximum number of shares of common stock that may be issued under the Incentive Plan is 3,451,548 (which includes the additional 620,000 shares under Amendment No. 2 to the incentive plan approved by the Company’s stockholders in June 2015 and the 1,000,000 shares under Amendment No. 3 in the incentive plan approved by the Company’s stockholders in May 2016).
In May 2015, the Board and its Compensation Committee approved a long-term incentive program for 2015 under the Incentive Plan consisting of grants of (i) options to purchase shares of common stock of the Company, vesting in equal annual installments on each of the first three anniversaries of the date of grant, with an exercise price of $6.75 per share and a ten year term, (ii) time-vested restricted cash awards of $5.2 million, vesting in equal annual installments on each of the first three anniversaries of the date of grant, and (iii) performance-vested restricted cash awards of $2.9 million, as described below.
In September 2015, the Board and its Compensation Committee approved a grant consistent with the terms defined above of options to purchase shares of common stock of the Company, vesting in equal annual installments on each of the first three anniversaries of the date of grant, with an exercise price of $2.10 per share and a ten year term.
In February 2016, the Board of Directors and Compensation Committee of the Company approved long-term incentive awards to employees and non-employee directors for 2016 consisting of a combination of stock options, cash-settled stock appreciation rights and restricted cash grants under the Incentive Plan. The 2016 long-term incentive awards to employees and non-employee directors consisted of grants of (i) options to purchase 741,450 shares of common stock of the Company with a ten-year term, vesting in three equal annual installments on March 8 of 2017, 2018 and 2019, with exercise prices of $2.65 per share (as to 335,375 shares) and $2.915 per share (as to 406,075 shares), (ii) 1,702,852 cash-settled stock appreciation rights with a ten-year term, vesting in three equal annual installments on March 8 of 2017, 2018 and 2019, with a base price of $2.65 per share (as to 486,373 rights) and $2.915 per share (as to 1,216,479 rights), (iii) $5,329,870 time-vested restricted cash awards, vesting in three equal annual installments on March 8 of 2017, 2018 and 2019, and (iv) 45,148 shares of restricted stock vesting on March 8, 2017.
For the three and six months ended June 30, 2016 and 2015, the Company recorded expense related to the Incentive Plan as follows (in thousands):
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Time-based restricted stock awards
|
$
|
941
|
|
|
$
|
2,121
|
|
|
$
|
2,719
|
|
|
$
|
4,402
|
|
TSR awards
|
|
219
|
|
|
|
710
|
|
|
|
556
|
|
|
|
1,412
|
|
Stock appreciation awards
|
|
—
|
|
|
|
11
|
|
|
|
—
|
|
|
|
22
|
|
Stock option awards
|
|
247
|
|
|
|
84
|
|
|
|
436
|
|
|
|
84
|
|
Time-based restricted cash awards
|
|
1,040
|
|
|
|
224
|
|
|
|
1,690
|
|
|
|
224
|
|
Performance-based restricted cash awards
|
|
89
|
|
|
|
123
|
|
|
|
127
|
|
|
|
123
|
|
Cash-settled stock appreciation awards
|
|
306
|
|
|
|
—
|
|
|
|
416
|
|
|
|
—
|
|
Total Incentive Plan compensation expense
|
$
|
2,842
|
|
|
$
|
3,273
|
|
|
$
|
5,944
|
|
|
$
|
6,267
|
|
As of June 30, 2016 the Company held unrecognized share-based compensation expense (in thousands) which is expected to be recognized over a weighted-average period as follows:
|
|
|
|
|
Weighted
|
|
|
Unrecognized
|
|
|
Average
|
|
|
Compensation
|
|
|
Years
|
|
|
Expense
|
|
|
Remaining
|
|
Time-based restricted stock awards
|
$
|
2,665
|
|
|
|
0.8
|
|
TSR awards
|
|
1,106
|
|
|
|
0.7
|
|
Stock option awards
|
|
2,224
|
|
|
|
2.4
|
|
Total unrecognized compensation expense
|
$
|
5,995
|
|
|
|
|
|
12
Equity Awards
Equity awards consist of service-based and performance-based restricted stock units and stock options under the Incentive Plan. All historical exercise, base and threshold prices disclosed have been retroactively adjusted to reflect the Reverse Stock Split.
Stock Option Awards
Options issued to employees to purchase shares of common stock vest in three equal annual installments at specified dates based on continued employment with a ten year term. The compensation expense to be recognized for the option awards was measured based on the Company’s estimated fair value at the date of grant using a Black-Scholes pricing model as well as estimated forfeiture rates between 0% and 15%, no dividends, expected stock price volatility ranging from 63% to 67% and a risk free rate ranging between 1.75% and 2.27%.
The following table summarizes the option award activity for the six months ended June 30, 2016:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
Intrinsic Value
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
(in thousands)
|
|
Outstanding, beginning of period
|
|
396,440
|
|
|
$
|
6.40
|
|
|
|
|
|
|
|
Granted
|
|
741,450
|
|
|
|
2.80
|
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Forfeited
|
|
(14,910
|
)
|
|
|
3.97
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
1,122,980
|
|
|
$
|
4.05
|
|
|
9.4
|
|
$
|
152
|
|
Exercisable, end of period
|
|
121,899
|
|
|
$
|
6.75
|
|
|
8.9
|
|
$
|
—
|
|
The weighted average grant date fair value of options granted during the six months ended June 30, 2016 and 2015, was $1.93 and $4.84, respectively.
Time-Based Restricted Stock Awards
Shares of time-based restricted stock issued to employees generally vest in three or four equal annual installments at specified dates based on continued employment. Shares issued to non-employee directors vest in one year based on continued service. The compensation expense to be recognized for the time-based restricted stock awards was measured based on the Company’s closing stock price on the dates of grant, utilizing estimated forfeiture rates between 0% and 15% which are updated periodically based on actual employee turnover. During the six months ended June 30, 2016 the Company granted 45,148 shares of time-based restricted stock to non-employee directors, pursuant to the Incentive Plan.
The following table summarizes the changes in non-vested time-based restricted stock awards for the six months ended June 30, 2016:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested, beginning of period
|
|
285,704
|
|
|
$
|
42.10
|
|
Granted
|
|
45,148
|
|
|
|
2.65
|
|
Vested
|
|
(185,241
|
)
|
|
|
41.42
|
|
Forfeited
|
|
(2,866
|
)
|
|
|
45.19
|
|
Non-vested, end of period
|
|
142,745
|
|
|
$
|
30.43
|
|
13
Stock Appreciation Awards
At June 30, 2016, no share-settled stock appreciation awards remain outstanding as all remaining awards expired on December 31, 2015.
TSR Awards
In 2014 the Compensation Committee and Board awarded performance-based restricted shares to executive officers of the Company under the Incentive Plan. The restricted stock grants vest only upon achievement of thresholds of cumulative total shareholder return (“TSR”) as compared to a specified peer group (the “Performance-Vested Shares”). A TSR percentile (the “TSR Percentile”) is calculated based on the change in the value of the Company’s common stock between the grant date and the applicable vesting date, including any dividends paid during the period, as compared to the respective TSRs of a specified group of seventeen peer companies. The Performance-Vested Shares vest in three installments to the extent that the applicable TSR Percentile ranking thresholds are met upon the one-, two- and three-year anniversaries of the grant date. Performance-Vested Shares that are eligible to vest on a vesting date, but do not qualify for vesting, become eligible for vesting again on the next vesting date. All Performance-Vested Shares that do not vest as of the final vesting date will be forfeited on such date.
The Compensation Committee also granted rights to earn additional shares of common stock upon achievement of a higher TSR Percentile (“Outperformance Shares”). The Outperformance Shares are earned in increasing increments based on a TSR Percentile attained over a specified threshold. Outperformance Shares may be earned on any vesting date to the extent that the applicable TSR Percentile ranking thresholds are met in three installments on the one-, two- and three-year anniversaries of the grant date. Outperformance Shares that are earned at a vesting date will be issued to the recipient; however, prior to such issuance, the recipient is not entitled to stockholder rights with respect to Outperformance Shares. Outperformance Shares that are eligible to be earned but remain unearned on a vesting date become eligible to be earned again on the next vesting date. The right to earn any theretofore unearned Outperformance Shares terminates immediately following the final vesting date. The Performance-Vested Shares and the Outperformance Shares are referred to as the “TSR Awards.”
The compensation expense to be recognized for the TSR Awards was measured based on the estimated fair value at the date of grant using a Monte Carlo simulation model and utilizes estimated forfeiture rate of 4% which is updated periodically based on actual employee turnover.
The following table summarizes the changes in non-vested TSR Awards for the six months ended June 30, 2016:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested, beginning of period
|
|
152,916
|
|
|
$
|
71.29
|
|
Granted
|
|
—
|
|
|
|
—
|
|
Vested
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
—
|
|
|
|
—
|
|
Expired
|
|
(55,355
|
)
|
|
|
79.55
|
|
Non-vested, end of period
|
|
97,561
|
|
|
$
|
66.60
|
|
14
Liability Awards
Liability awards consist of awards that are settled in cash instead of shares, as discussed below.
Cash-settled Stock Appreciation Rights
A stock appreciation right is the right to receive an amount in cash equal to the excess, if any, of the fair market value of a share of common stock on the date on which the right is exercised over its base price. The February 2016 grants of cash-settled stock appreciation rights hold base prices of $2.65 per share (as to 486,373 rights) and $2.915 per share (as to 1,216,479 rights). These awards vest in three equal annual installments and have a ten-year term. The fair value of the cash-settled stock appreciation rights as of grant date and June 30, 2016, was $3.3 million and $3.6 million, respectively, of which $0.4 million has been accrued as of June 30, 2016.
Time-Based Restricted Cash Awards
Awards of time-based restricted cash issued to employees vest in three equal annual increments at specified dates based on continued employment. Time-based restricted cash issued to non-employee directors vests in one year based on continued service. The compensation expense to be recognized for the time-based restricted cash awards was measured utilizing estimated forfeiture rates between 0% and 15% which will be updated periodically based on actual employee turnover. The total estimated future liability of the time-based restricted cash awards as of June 30, 2016, was $9.9 million, of which $2.6 million has been accrued.
Performance-Based Restricted Cash Awards
The performance criteria for the performance-based restricted cash awards granted in May 2015 are based on future prices of the Company’s common stock trading at or above specified thresholds. If and as certain stock price thresholds are met, using a 60 trading day average, various multiples of the performance-vested cash award will be attained. The first stock price hurdle is at $10.00 at which the award would be payable at 1x, and the highest stock price hurdle would be $40.00 at which the award would be payable at a multiple of 6x. Interim hurdles and multiples between these end points are set forth in the governing agreements. The performance-based cash awards have a ten year term (
i.e.
, the Company’s obligation would be triggered at any time the defined stock price multiples are met over a ten year period, subject to the initial three year vesting period, described below, and provided the employee continues to be employed by the Company). A time vesting element will apply to the performance-vested cash awards such that attained multiples will not be paid out earlier than upon satisfaction of a three-year vesting timetable from the date of grant. In order for an award to be paid, both the performance criteria and the time criteria would need to be satisfied. Once a time vesting date passes, the employee is entitled to be paid one third, two thirds or 100%, as applicable, of whatever multiples have been achieved. Any multiples achieved following 100% time vesting would be paid within 60 days of such achievement.
The estimated fair value of the performance-based restricted cash awards as of June 30, 2016 was $0.5 million of which $0.4 million has been accrued as of June 30, 2016 based upon the three-year vesting. The fair value was estimated using an option pricing model for a cash or nothing call, an estimated forfeiture rate of 5% and an average effective term of seven years. As the fair value of liability awards is required to be re-measured at each period end, amounts recognized in future periods will vary.
15
Note 8 — Asset Retirement Obligation
Resolute’s estimated asset retirement obligation liability is based on estimated economic lives, estimates as to the cost to abandon the wells and facilities in the future, and federal and state regulatory requirements. The liability is discounted using a credit-adjusted risk-free rate estimated at the time the liability is incurred or revised, that ranges between 7% and 12%. Revisions to the liability could occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells. Asset retirement obligations are valued utilizing Level 3 fair value measurement inputs.
The following table provides a reconciliation of Resolute’s asset retirement obligations for the periods presented (in thousands):
|
Six Months Ended
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
Asset retirement obligations at beginning of period
|
$
|
19,238
|
|
|
$
|
31,340
|
|
Additional liability incurred / acquired
|
|
15
|
|
|
|
20
|
|
Accretion expense
|
|
882
|
|
|
|
1,452
|
|
Liabilities settled
|
|
—
|
|
|
|
(1,316
|
)
|
Revisions to previous estimates
|
|
—
|
|
|
|
235
|
|
Asset retirement obligations at end of period
|
|
20,135
|
|
|
|
31,731
|
|
Less: current asset retirement obligations
|
|
(1,069
|
)
|
|
|
(806
|
)
|
Long-term asset retirement obligations
|
$
|
19,066
|
|
|
$
|
30,925
|
|
Note 9 — Derivative Instruments
Resolute enters into commodity derivative contracts to manage its exposure to oil and gas price volatility. Resolute has not elected to designate derivative instruments as cash flow hedges under the provisions of FASB ASC Topic 815,
Derivatives and Hedging
. As a result, these derivative instruments are marked to market at the end of each reporting period and changes in the fair value are recorded in the accompanying consolidated statements of operations. Gains and losses on commodity derivative instruments from Resolute’s price risk management activities are recognized in other income (expense). The cash flows from derivatives are reported as cash flows from operating activities unless the derivative contract is deemed to contain a financing element. Derivatives deemed to contain a financing element are reported as financing activities in the condensed consolidated statement of cash flows.
The Company utilizes fixed price swaps, basis swaps, option contracts and two-and three-way collars. These instruments generally entitle Resolute (the floating price payer in most cases) to receive settlement from the counterparty (the fixed price payer in most cases) for each calculation period in amounts, if any, by which the settlement price for the scheduled trading days applicable to each calculation period is less than the fixed strike price or floor price. The Company would pay the counterparty if the settlement price for the scheduled trading days applicable to each calculation period exceeds the fixed strike price or ceiling price. The amount payable by Resolute, if the floating price is above the fixed or ceiling price is the product of the notional contract quantity and the excess of the floating price over the fixed or ceiling price per calculation period. The amount payable by the counterparty, if the floating price is below the fixed or floor price, is the product of the notional contract quantity and the excess of the fixed or floor price over the floating price per calculation period. A three-way collar consists of a two-way collar contract combined with a put option contract sold by the Company with a strike price below the floor price of the two-way collar. The Company receives price protection at the purchased put option floor price of the two-way collar if commodity prices are above the sold put option strike price. If commodity prices fall below the sold put option strike price, the Company receives the cash market price plus the variance between the put price and the floor price. This type of instrument captures more value in a rising commodity price environment, but limits the benefits in a downward commodity price environment. Basis swaps, when used in connection with fixed price swaps, to fix the price differential between the NYMEX Commodity price and the index price at which the gas production is sold.
As of June 30, 2016, the fair value of the Company’s commodity derivatives was a net asset of $31.9 million (Level 2 fair value measurement).
16
The following table represents Resolute’s commodity swap cont
racts as of June 30, 2016:
|
|
|
|
|
|
Oil (NYMEX WTI)
|
|
|
Gas (NYMEX Henry Hub)
|
|
Remaining Term
|
|
|
|
|
|
Bbl per Day
|
|
|
Weighted Average Swap Price per Bbl
|
|
|
MMBtu per Day
|
|
|
Weighted Average Swap Price per MMBtu
|
|
July – December 2016
|
|
|
|
|
|
|
6,575
|
|
|
$
|
80.11
|
|
|
|
5,100
|
|
|
$
|
2.975
|
|
January – December 2017
|
|
|
|
|
|
|
1,528
|
|
|
$
|
51.10
|
|
|
|
2,008
|
|
|
$
|
2.807
|
|
The following tables represent Resolute’s two-way commodity collar contracts as of June 30, 2016:
|
|
|
|
|
|
|
|
Oil (NYMEX WTI)
|
|
Remaining Term
|
|
|
|
|
|
|
|
Bbl per Day
|
|
|
Weighted Average Floor Price per Bbl
|
|
|
Weighted Average Ceiling Price per Bbl
|
|
July – December 2017
|
|
|
|
|
|
|
|
|
1,000
|
|
|
$
|
52.00
|
|
|
$
|
64.00
|
|
|
|
|
|
|
|
|
|
Gas (NYMEX Henry Hub)
|
|
Remaining Term
|
|
|
|
|
|
|
|
MMBtu per Day
|
|
|
Weighted Average Floor Price per MMBtu
|
|
|
Weighted Average Ceiling Price per MMBtu
|
|
July – December 2017
|
|
|
|
|
|
|
|
|
3,250
|
|
|
$
|
2.25
|
|
|
$
|
2.64
|
|
The following table represents Resolute’s commodity option contract as of June 30, 2016:
|
|
|
|
|
|
|
|
|
|
Oil (NYMEX WTI)
|
|
Remaining Term
|
|
|
|
|
|
|
|
|
|
Bbl per Day
|
|
|
Weighted Average Sold Call Price per Bbl
|
|
January – December 2018
|
|
|
|
|
|
|
|
|
|
|
1,100
|
|
|
$
|
50.00
|
|
The table below summarizes the location and amount of commodity derivative instrument gains and losses reported in the consolidated statements of operations (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative settlement gain
|
|
$
|
20,544
|
|
|
$
|
17,988
|
|
|
$
|
48,292
|
|
|
$
|
42,178
|
|
Mark-to-market loss
|
|
|
(40,096
|
)
|
|
|
(39,254
|
)
|
|
|
(64,003
|
)
|
|
|
(38,534
|
)
|
Commodity derivative instruments gain (loss)
|
|
$
|
(19,552
|
)
|
|
$
|
(21,266
|
)
|
|
$
|
(15,711
|
)
|
|
$
|
3,644
|
|
17
Credit Risk and Contingent Features in Derivative Instruments
Resolute is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed above. All counterparties are lenders under Resolute’s Revolving Credit Facility. Accordingly, Resolute is not required to provide any credit support to its counterparties other than cross collateralization with the properties securing the Revolving Credit Facility. Resolute’s derivative contracts are documented with industry standard contracts known as a Schedule to the Master Agreement and International Swaps and Derivative Association, Inc. Master Agreement (“ISDA”). Typical terms for each ISDA include credit support requirements, cross default provisions, termination events, and set-off provisions. Resolute generally has set-off provisions with its lenders that, in the event of counterparty default, allow Resolute to set-off amounts owed under the Revolving Credit Facility or other general obligations against amounts owed for derivative contract liabilities.
Resolute does not offset the fair value amounts of commodity derivative assets and liabilities with the same counterparty for financial reporting purposes. The following is a listing of Resolute’s commodity derivative assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of June 30, 2016, and December 31, 2015 (in thousands):
|
|
Level 2
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Derivative instruments, current
|
|
$
|
36,952
|
|
|
$
|
92,431
|
|
Derivative instruments, long term
|
|
|
712
|
|
|
|
3,463
|
|
Total assets
|
|
$
|
37,664
|
|
|
$
|
95,894
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative instruments, current
|
|
$
|
855
|
|
|
$
|
—
|
|
Derivative instruments, long term
|
|
|
4,919
|
|
|
|
—
|
|
Total liabilities
|
|
$
|
5,774
|
|
|
$
|
—
|
|
Note 10 — Commitments and Contingencies
CO
2
Take-or-Pay Agreements
Resolute is party to a take-or-pay purchase agreement with Kinder Morgan CO
2
Company L.P., under which Resolute has committed to buy specified volumes of CO
2
. The purchased CO
2
is for use in Resolute’s enhanced tertiary recovery projects in Aneth Field. Resolute is obligated to purchase a minimum daily volume of CO
2
or pay for any deficiencies at the price in effect when delivery was to have occurred. The ultimate CO
2
volumes planned for use on the enhanced recovery projects exceed the minimum daily volumes provided in these take-or-pay purchase agreements. Although the Company may incur deficiency payments from time to time, Resolute expects to avoid any payments for deficiencies over the term of the agreement.
Future minimum CO
2
purchase commitments as of June 30, 2016, under this purchase agreement, based on prices and volumes in effect at June 30, 2016, are as follows (in thousands):
|
CO
2
Purchase
|
|
Year
|
Commitments
|
|
2016
|
|
4,968
|
|
2017
|
|
2,741
|
|
Total
|
$
|
7,709
|
|
Cooperative Agreement with Navajo Nation Oil and Gas Company
Resolute is party to a cooperative agreement with Navajo Nation Oil and Gas Company (“NNOGC”) related to the Aneth Field Properties (the “Cooperative Agreement”). Pursuant to the Cooperative Agreement, NNOGC holds an option to purchase an additional 10% of Resolute’s interest in the Aneth Field Properties. The option is exercisable in July 2017 at the then-current fair market value of such interest at that time.
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Note 11 — Subsequent Events
Divestiture of Midstream Assets in the Delaware Basin
On July 7, 2016, Resolute Natural Resources Southwest, LLC (“Resolute Southwest”), a wholly owned subsidiary of Resolute, entered into a definitive Purchase and Sale Agreement (the “Mustang Agreement”) with Caprock Permian Processing LLC and Caprock Field Services LLC, as buyers (collectively, “Caprock”) pursuant to which Resolute Southwest and an existing minority interest holder (collectively, the “Sellers”) agreed to sell certain gas gathering and produced water handling and disposal systems owned by them in the Mustang project area in Reeves County, Texas for a cash payment of $35 million, plus certain earn-out payments described below.
On July 7, 2016, Resolute Southwest also entered into a definitive Purchase and Sale Agreement (the “Appaloosa Agreement”) with Caprock, pursuant to which Resolute Southwest agreed to sell certain gas gathering and produced water handling and disposal systems owned by Resolute Southwest in the Appaloosa project area in Reeves County, Texas for a cash payment of $15 million, plus certain earn-out payments described below.
On July 7, 2016, in connection with the Appaloosa Agreement and the Mustang Agreement, Resolute Southwest also entered into a definitive Earn-out Agreement (the “Earn-out Agreement”), pursuant to which Resolute Southwest will be entitled to receive certain earn-out payments based on drilling and completion activity in the Appaloosa and Mustang areas through 2020 that will deliver gas and produced water into the system. Earn-out payments for each qualifying well will vary depending on the lateral length of the well and the year in which the well is drilled and completed. Aggregate earn-out payments for all wells drilled and completed in the Appaloosa and Mustang areas over the term of the Earn-out Agreement are capped at $60 million (gross). Earn-out payments for Appaloosa area wells will be paid entirely to Resolute Southwest and payments for Mustang area wells will be allocated 60% to Resolute Southwest and 40% to its partner.
On August 1, 2016, Resolute Southwest closed the transactions contemplated by the Mustang Agreement and the Appaloosa Agreement. Resolute Southwest received aggregate consideration of approximately $36 million (including earn-out payments earned as of the closing), of which approximately $2 million was placed in an escrow account for a period of time to secure Resolute’s indemnity obligations under the Mustang Agreement and the Appaloosa Agreement.
The net proceeds of the midstream sale were used to repay amounts outstanding under the Company’s Revolving Credit Facility and for general corporate purposes.
In connection with the closing of the transactions contemplated by the Appaloosa Agreement and the Mustang Agreement, Resolute Southwest entered into 15 year commercial agreements with Caprock for gas gathering services and water handling and disposal services for all current and future gas and water produced by Resolute Southwest and its partner in the Mustang and Appaloosa areas in exchange for customary fees based on the volume of gas and water produced and delivered. Resolute Southwest and its partner have agreed to dedicate and deliver all gas and water produced from their acreage within the Mustang and Appaloosa areas to Caprock for gathering, compression and disposal services for a term of fifteen years.
19