Notes to Condensed Consolidated Financial Statements (Unaudited)
Swift Energy Company and Subsidiaries
(1) General Information
The condensed consolidated financial statements included herein are unaudited and have been prepared by the Company and reflect necessary adjustments, all of which were of a recurring nature unless otherwise disclosed herein, and are in the opinion of our management necessary for a fair presentation. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. We believe that the disclosures presented are adequate to allow the information presented not to be misleading. The condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2015
as filed with the Securities and Exchange Commission on March 4, 2016 though, as described below, such prior financial statements may not be comparable to our interim financial statements due to the adoption of fresh start accounting. Our independent registered public accounting firm for the year ended
December 31, 2015
expressed their audit opinion dated March 4, 2016 on such financial statements with a going concern uncertainty explanatory paragraph.
(1A) Emergence from Voluntary Reorganization under Chapter 11 Proceedings
On
December 31, 2015
, Swift Energy Company ("Swift Energy," the "Company" or "we") and eight of its U.S. subsidiaries (the "Chapter 11 Subsidiaries") filed voluntary petitions seeking relief under Chapter 11 of Title 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") in the U.S. Bankruptcy Court for the District of Delaware under the caption
In re Swift Energy Company, et al
(Case No. 15-12670). The Company and the Chapter 11 Subsidiaries received bankruptcy court confirmation of their joint plan of reorganization (the "Plan") on March 31, 2016, and subsequently emerged from bankruptcy on April 22, 2016 (the "Effective Date").
Effect of the Bankruptcy Proceedings.
During the bankruptcy proceedings, the Company conducted normal business activities and was authorized to pay and has paid (subject to caps applicable to payments of certain pre-petition obligations) pre-petition employee wages and benefits, pre-petition amounts owed to certain lienholders and critical vendors, pre-petition amounts owed to pipeline owners that transport the Company's production, and funds belonging to third parties, including royalty holders and partners.
In addition, subject to certain specific exceptions under the Bankruptcy Code, the Chapter 11 filings automatically stayed most judicial or administrative actions against the Company and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. As a result, we did not record interest expense on the Company’s senior notes for the period of January 1, 2016 through April 22, 2016 (as the predecessor). For that period, contractual interest on the senior notes totaled
$21.6 million
.
Plan of Reorganization
. Pursuant to the Plan, the significant transactions that occurred upon emergence from bankruptcy were as follows:
|
|
•
|
the approximately
$906 million
of indebtedness outstanding on account of the Company’s senior notes,
$75.0 million
in borrowings under the Company's DIP Credit Agreement (described below) and certain other unsecured claims were exchanged for
88.5%
of the post-emergence Company’s common stock;
|
|
|
•
|
the lenders under the DIP Credit Agreement (as defined and more fully described below) received an additional backstop fee consisting of
7.5%
of the post-emergence Company’s common stock;
|
|
|
•
|
the Company’s pre-petition common stock was canceled and the current shareholders received
4%
of the post-emergence Company’s common stock and warrants to purchase up to
30%
of the reorganized Company's equity. See Note 1B of these condensed consolidated financial statements for more information;
|
|
|
•
|
claims of other creditors were paid in full in cash, reinstated or otherwise treated in a manner acceptable to the creditors;
|
|
|
•
|
the Company entered into a registration rights agreement to provide customary registration rights to certain holders of the Company’s post-emergence common stock who, together with their affiliates received upon emergence
5%
or more of the outstanding common stock of the Company;
|
|
|
•
|
the Company sold (effective April 15, 2016) a portion of its interest in its Central Louisiana fields known as Burr Ferry and South Bearhead Creek to Texegy LLC, for net proceeds of approximately
$46.9 million
including deposits received prior to the closing date; and
|
|
|
•
|
the Company's previous credit facility (the "Prior First Lien Credit Facility") was terminated and a new senior secured credit facility (the "New Credit Facility") with an initial
$320 million
borrowing base was established. For more information refer to Note 5 of these condensed consolidated financial statements.
|
In accordance with the Plan, the post-emergence Company’s new board of directors was initially to be made up of seven directors consisting of the Chief Executive Officer, two directors appointed by Strategic Value Partners LLC ("SVP"), a former holder of the Company’s senior notes, two directors appointed by other former holders of the Company’s senior notes, one additional independent director and one independent new non-executive chairman of the Board. In addition, pursuant to the Plan, SVP and the other former holders of the Company’s senior notes were given certain continuing director nomination rights subject to minimum share ownership conditions.
DIP Credit Agreement.
In connection with the pre-petition negotiations of the restructuring support agreement, certain holders of the Company’s senior notes agreed to provide the Company and the Chapter 11 Subsidiaries a debtor-in-possession credit facility (the “DIP Credit Agreement"). The DIP Credit Agreement provided for a multi-draw term loan of up to
$75.0 million
, which became available to the Company upon the satisfaction of certain milestones and contingencies. Upon emergence from bankruptcy, the Company had drawn down the entire
$75.0 million
available. Pursuant to the Plan, the borrowings under the DIP Credit Agreement, at the option of the lenders to the DIP Credit Agreement, converted into the post-emergence Company’s common stock, which was part of the
88.5%
of the common stock distributed to the holders of the Company's senior notes and certain unsecured creditors. As such, the
$75.0 million
borrowed under the DIP Credit Agreement was not required to be repaid in cash and was terminated upon the Company’s exit from bankruptcy. For more information refer to Note 5 of these condensed consolidated financial statements.
Financial Statement Classification of Liabilities Subject to Compromise
. Our financial statements included amounts classified as liabilities subject to compromise, a majority of which were equitized upon emergence from bankruptcy on
April 22, 2016
. See Note 1B of these condensed consolidated financial statements for more information.
(1B) Fresh Start Accounting
Upon the Company's emergence from Chapter 11 bankruptcy, the Company adopted fresh start accounting, pursuant to Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 852, “
Reorganizations”
, and applied the provisions thereof to its financial statements. The Company qualified for fresh start accounting because (i) the holders of existing voting shares of the pre-emergence debtor-in-possession, referred to herein to as the "Predecessor" or "Predecessor Company," received less than 50% of the voting shares of the post-emergence successor entity, which we refer to herein as the "Successor" or "Successor Company" and (ii) the reorganization value of the Company's assets immediately prior to confirmation was less than the post-petition liabilities and allowed claims. The Company applied fresh start accounting as of April 22, 2016, when it emerged from bankruptcy protection. Adopting
fresh start accounting results in a new reporting entity for financial reporting purposes with no beginning retained earnings or deficit. The cancellation of all existing shares outstanding on the Effective Date and issuance of new shares of the Successor Company caused a related change of control of the Company under ASC 852. Upon the application of fresh start accounting, Swift allocated the reorganization value to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Successor Company's assets before considering liabilities. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan, the Consolidated Financial Statements on or after April 22, 2016, are not comparable with the Consolidated Financial Statements prior to that date. References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to April 22, 2016. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company prior to April 22, 2016.
Reorganization Value
. Reorganization value represents the fair value of the Successor Company’s total assets and is intended to approximate the amount a willing buyer would pay for the assets immediately after restructuring. Under fresh start accounting, we allocated the reorganization value to our individual assets based on their estimated fair values.
Our reorganization value is derived from an estimate of enterprise value. Enterprise value represents the estimated fair value of an entity’s long term debt and shareholders’ equity. In support of the Plan, the enterprise value of the Successor Company was estimated and approved by the bankruptcy court to be in the range of
$460 million
to
$800 million
. Based on the estimates and assumptions used in determining the enterprise value, as further discussed below, the Company estimated the enterprise value to be approximately
$474 million
. This valuation analysis was prepared using reserve information, development schedules, other financial information and financial projections and applying standard valuation techniques, including risked net asset value analysis and public comparable company analyses.
Valuation of Oil and Gas Properties.
The Company’s principal assets are its oil and gas properties, which the Company accounts for under the Full Cost Accounting method as described in Note 2. With the assistance of valuation experts, the Company determined the fair value of its oil and gas properties based on the discounted cash flows expected to be generated from these assets. The computations were based on market conditions and reserves in place as of the bankruptcy emergence date.
The Company’s Reserves Engineers developed full cycle production models for all of the Company’s developed wells and identified undeveloped drilling locations within the Company’s leased acreage. The undeveloped locations were categorized based on varying levels of risk using industry standards. The proved locations were limited to wells expected to be drilled in the Company’s five year plan. The locations were then segregated into geographic areas. Future cash flows before application of risk factors were estimated by using the New York Mercantile Exchange five year forward prices for West Texas Intermediate oil and Henry Hub natural gas with inflation adjustments applied to periods beyond five years. These prices were adjusted for typical differentials realized by the Company for location and product quality adjustments. Transportation cost estimates were based on agreements in place at the emergence date. Development and operating costs were based on the Company’s recent cost trends adjusted for inflation.
Risk factors were determined separately for each geographic area. Based on the geological characteristics of each area appropriate risk factors for each of the reserve categories were applied. The Company and its valuation experts considered production, geological and mechanical risk to determine the probability factor for each reserve category in each area.
The risk adjusted after tax cash flows were discounted at
12%
. This discount factor was derived from a weighted average cost of capital computation which utilized a blended expected cost of debt and expected returns on equity for similar industry participants. The after tax cash flow computations included utilization of the Company’s unamortized tax basis in the properties as of the emergence date. Plugging and abandonment costs were included in the cash flow projections for undeveloped reserves but were excluded for developed reserves since the fair value of this liability was determined separately and included in the emergence date liabilities reported on the balance sheet.
From this analysis the Company concluded the fair value of its proved reserves was
$509.4 million
, and the value of its probable reserves was
$45.5 million
as of the effective date. The fair value of the possible reserves was determined to be de minimus and no value was therefore recognized. The value of probable reserves was classified as unevaluated costs. The Company also reviewed its undeveloped leasehold acreage and concluded that the fair value of its probable reserves appropriately captured the fair value of its undeveloped leasehold acreage. These amounts are reflected in the Fresh Start Adjustments item number 12 below.
The following table reconciles the enterprise value to the estimated fair value of the Successor Company's common stock as of the Effective Date (in thousands):
|
|
|
|
|
|
April 22, 2016
|
Enterprise Value
|
$
|
473,660
|
|
Plus: Cash and cash equivalents
|
8,739
|
|
Less: Fair value of debt
|
(253,000
|
)
|
Less: Fair value of warrants
|
(14,967
|
)
|
Fair value of Successor common stock
|
$
|
214,432
|
|
|
|
Shares outstanding at April 22, 2016
|
10,000
|
|
|
|
Per share value
|
$
|
21.44
|
|
Upon issuance of the New Credit Facility on April 22, 2016, the Company received net proceeds of approximately
$253 million
and incurred debt issuance costs of approximately
$7.0 million
.
In accordance with the Plan, the Company issued
two
series of warrants (each for up to
15%
of the reorganized Company's equity) to the former holders of the Company’s common stock, one to expire on the close of business on April 22, 2019 (the “2019 Warrants”) and the other to expire on the close of business on April 22, 2020 (the “2020 Warrants” and, together with the 2019 Warrants, the “Warrants”). Following the Effective Date, there were 2019 Warrants outstanding to purchase up to an aggregate of
2,142,857
shares of Common Stock at an initial exercise price of
$80.00
per share. Following the Effective Date, there were 2020 Warrants outstanding to purchase up to an aggregate of
2,142,857
shares of Common Stock at an initial exercise price of
$86.18
per share. All unexercised Warrants shall expire, and the rights of the holders of such Warrants (the “Warrant Holders”) to purchase
Common Stock shall terminate at the close of business on the first to occur of (i) their respective expiration dates or (ii) the date of completion of (A) any Fundamental Equity Change (as defined in the Warrant Agreement) or (B) an Asset Sale (as defined in the Warrant Agreement). The fair value of the 2019 and 2020 Warrants was
$3.26
and
$3.73
per warrant, respectively. A Black- Scholes pricing model with the following assumptions was used in determining the fair value: strike price of
$80
and
$86.18
; expected volatility of
70%
and
65%
; expected dividend rate of
0.0%
; risk free interest rate of
1.01%
and
1.19%
; and expiration date of
3
and
4
years, respectively. The fair value of these warrants was estimated using Level 2 inputs (for additional discussion of the Level 2 inputs, refer to Note 7 of these condensed consolidated financial statements).
The following table reconciles the enterprise value to the estimated reorganization value as of the Effective Date (in thousands):
|
|
|
|
|
|
April 22, 2016
|
Enterprise Value
|
$
|
473,660
|
|
Plus: Cash and cash equivalents
|
8,739
|
|
Plus: Other working capital liabilities
|
73,318
|
|
Plus: Other long-term liabilities
|
58,992
|
|
Reorganization value of Successor assets
|
$
|
614,709
|
|
Reorganization value and enterprise value were estimated using numerous projections and assumptions that are inherently subject to significant uncertainties and resolution of contingencies that are beyond our control. Accordingly, the estimates set forth herein are not necessarily indicative of actual outcomes, and there can be no assurance that the estimates, projections or assumptions will be realized.
Condensed Consolidated Balance Sheet.
The adjustments set forth in the following condensed consolidated balance sheet reflect the effect of the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”). The explanatory notes highlight methods used to determine fair values or other amounts of the assets and liabilities as well as significant assumptions.
The following table reflects the reorganization and application of ASC 852 on our condensed consolidated balance sheet as of
April 22, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
Reorganization Adjustments
|
|
Fresh Start Adjustments
|
|
Successor Company
|
ASSETS
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
57,599
|
|
|
$
|
(48,860
|
)
|
(1)
|
$
|
—
|
|
|
$
|
8,739
|
|
Accounts receivable
|
34,278
|
|
|
(597
|
)
|
(2)
|
—
|
|
|
33,681
|
|
Other current assets
|
3,503
|
|
|
—
|
|
|
—
|
|
|
3,503
|
|
Total current assets
|
95,380
|
|
|
(49,457
|
)
|
|
—
|
|
|
45,923
|
|
Property and equipment
|
6,007,326
|
|
|
—
|
|
|
(5,448,759
|
)
|
(12)
|
558,567
|
|
Less - accumulated depreciation, depletion and amortization
|
(5,676,252
|
)
|
|
—
|
|
|
5,676,252
|
|
(12)
|
—
|
|
Property and equipment, net
|
331,074
|
|
|
—
|
|
|
227,493
|
|
|
558,567
|
|
Other Long-term assets
|
4,629
|
|
|
6,388
|
|
(3)
|
(798
|
)
|
(13)
|
10,219
|
|
Total Assets
|
$
|
431,083
|
|
|
$
|
(43,069
|
)
|
|
$
|
226,695
|
|
|
$
|
614,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
Reorganization Adjustments
|
|
Fresh Start Adjustments
|
|
Successor Company
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
64,324
|
|
|
$
|
(4,666
|
)
|
(4)
|
$
|
(885
|
)
|
(14
|
)
|
$
|
58,773
|
|
Accrued capital costs
|
5,410
|
|
|
—
|
|
|
—
|
|
|
5,410
|
|
Accrued interest
|
768
|
|
|
(104
|
)
|
(5)
|
—
|
|
|
664
|
|
Undistributed oil and gas revenues
|
8,471
|
|
|
—
|
|
|
—
|
|
|
8,471
|
|
Current portion of debt
|
364,500
|
|
|
(364,500
|
)
|
(6)
|
—
|
|
|
—
|
|
Total current liabilities
|
443,473
|
|
|
(369,270
|
)
|
|
(885
|
)
|
|
73,318
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
—
|
|
|
253,000
|
|
(7)
|
—
|
|
|
253,000
|
|
Asset retirement obligation
|
51,800
|
|
|
—
|
|
|
6,101
|
|
(14
|
)
|
57,901
|
|
Other long-term liabilities
|
2,124
|
|
|
—
|
|
|
(1,033
|
)
|
(15
|
)
|
1,091
|
|
Liabilities subject to compromise
|
911,381
|
|
|
(911,381
|
)
|
(8)
|
—
|
|
|
—
|
|
Total Liabilities
|
1,408,778
|
|
|
(1,027,651
|
)
|
|
4,183
|
|
|
385,310
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock (Predecessor)
|
450
|
|
|
(450
|
)
|
(9)
|
—
|
|
|
—
|
|
Common stock (Successor)
|
—
|
|
|
100
|
|
(10)
|
—
|
|
|
100
|
|
Additional paid-in capital (Predecessor)
|
777,475
|
|
|
(777,475
|
)
|
(9)
|
—
|
|
|
—
|
|
Additional paid-in capital (Successor)
|
—
|
|
|
229,299
|
|
(10)
|
—
|
|
|
229,299
|
|
Treasury stock held at cost
|
(2,496
|
)
|
|
2,496
|
|
(9)
|
—
|
|
|
—
|
|
Retained earnings (accumulated deficit)
|
(1,753,124
|
)
|
|
1,530,612
|
|
(11)
|
222,512
|
|
(16
|
)
|
—
|
|
Total Stockholders' Equity (Deficit)
|
(977,695
|
)
|
|
984,582
|
|
|
222,512
|
|
|
229,399
|
|
Total Liabilities and Stockholders' Equity
|
$
|
431,083
|
|
|
$
|
(43,069
|
)
|
|
$
|
226,695
|
|
|
$
|
614,709
|
|
Reorganization Adjustments
|
|
1.
|
Reflects the net cash payments recorded as of the Effective Date from implementation of the Plan (in thousands):
|
|
|
|
|
|
Sources:
|
|
Net proceeds from New Credit Facility
|
253,000
|
|
Total Sources
|
$
|
253,000
|
|
Uses:
|
|
Repayment of Prior First Lien Credit Facility
|
289,500
|
|
Debt issuance costs
|
6,482
|
|
Predecessor accounts payable paid upon emergence
|
5,878
|
|
Total Uses
|
$
|
301,860
|
|
Net Uses
|
$
|
(48,860
|
)
|
|
|
2.
|
Reflects the impairment of a short-term leasehold improvement build-out receivable for
$0.6 million
that will no longer be reimbursed by the building lessor as the Company's office lease contract was rejected as part of the bankruptcy.
|
|
|
3.
|
Reflects the capitalization of debt issuance costs on the New Credit Facility for
$7.0 million
, of which
$6.5 million
was paid on emergence and
$0.5 million
included in accounts payable and accrued liabilities and paid in the subsequent month, as well as the impairment of a long-term leasehold improvement build-out receivable for
$0.6 million
relating to an office lease contract that was rejected in connection with the bankruptcy.
|
|
|
4.
|
Reflects the settlement of predecessor accounts payable of
$5.2 million
partially offset by capitalized debt issuance costs of
$0.5 million
.
|
|
|
5.
|
Reflects the settlement of accrued interest on the Company's DIP Credit Agreement which was equitized upon emergence.
|
|
|
6.
|
On the Effective Date, the Company repaid in full all borrowings outstanding of
$289.5 million
under the Prior First Lien Credit Facility. In addition the Company equitized the outstanding DIP Credit Agreement borrowings of
$75 million
via the issuance of equity valued at
$142.3 million
.
|
|
|
7.
|
Reflects the
$253 million
in new borrowings under the New Credit Facility.
|
|
|
8.
|
Liabilities subject to compromise were settled as follows in accordance with the Plan (in thousands):
|
|
|
|
|
|
|
|
7.125% senior notes due 2017
|
$
|
250,000
|
|
8.875% senior notes due 2020
|
225,000
|
|
7.875% senior notes due 2022
|
400,000
|
|
Accrued interest
|
30,043
|
|
Accounts payable and accrued liabilities
|
1,713
|
|
Other long-term liabilities
|
4,625
|
|
Liabilities subject to compromise of the Predecessor Company (LSTC)
|
911,381
|
|
Fair value of equity issued to former holders of the senior notes of the Predecessor
|
(47,443
|
)
|
Gain on settlement of Liabilities subject to compromise
|
$
|
863,938
|
|
|
|
9.
|
Reflects the cancellation of the Predecessor Company equity to retained earnings.
|
|
|
10.
|
Reflects the issuance of
10.0 million
shares of common stock at a per share price of
$21.44
and
4.3 million
warrants to purchase up to
30%
of the reorganized Company's equity valued at
$15.0 million
with an average per unit value of
$3.49
. Former holders of the senior notes and certain unsecured creditors were issued
8.85 million
shares of common stock while the Backstop
|
Lenders (as defined in the DIP Credit Agreement) were issued
0.75 million
shares of common stock. Former shareholders received the warrants and
0.4 million
shares of common stock.
|
|
11.
|
Reflects the cumulative impact of the reorganization adjustments discussed above (in thousands):
|
|
|
|
|
|
|
|
Gain on settlement of Liabilities subject to compromise
|
$
|
863,938
|
|
Fair value of equity issued in excess of DIP principal
|
(67,329
|
)
|
Fair value of equity and warrants issued to Predecessor stockholders
|
(23,544
|
)
|
Fair value of equity issued to DIP lenders for backstop fee
|
(16,082
|
)
|
Other reorganization adjustments
|
(1,800
|
)
|
Cancellation of Predecessor Company equity
|
775,429
|
|
Net impact to accumulated deficit
|
$
|
1,530,612
|
|
Fresh Start Adjustments
|
|
12.
|
The following table summarizes the fair value adjustment on our oil and gas properties and accumulated depletion, depreciation and amortization (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
Fresh Start Adjustments
|
Successor Company
|
Oil and Gas Properties
|
|
|
|
Proved properties
|
$
|
5,951,016
|
|
$
|
(5,441,655
|
)
|
$
|
509,361
|
|
Unproved properties
|
12,057
|
|
33,448
|
|
45,505
|
|
Total Oil and Gas Properties
|
5,963,073
|
|
(5,408,207
|
)
|
554,866
|
|
Less - Accumulated depletion and impairments
|
(5,638,741
|
)
|
5,638,741
|
|
—
|
|
Net Oil and Gas Properties
|
324,332
|
|
230,534
|
|
554,866
|
|
|
|
|
|
Furniture, Fixtures, and other equipment
|
44,252
|
|
(40,551
|
)
|
3,701
|
|
Less - Accumulated depreciation
|
(37,510
|
)
|
37,510
|
|
—
|
|
Net Furniture, Fixtures and other equipment
|
$
|
6,742
|
|
$
|
(3,041
|
)
|
$
|
3,701
|
|
Net Oil and Gas Properties, Furniture and fixtures and accumulated depreciation
|
$
|
331,074
|
|
$
|
227,493
|
|
$
|
558,567
|
|
|
|
13.
|
Reflects the adjustment of other non-current assets to fair value.
|
|
|
14.
|
Reflects the current and long-term portion of the Company’s asset retirement obligation computed in accordance with ASC 410-20, applying the appropriate discount rate to future costs as of the emergence date, which the Company has determined to be a reasonable fair value estimate.
|
|
|
15.
|
Reflects the adjustment of other non-current liabilities to fair value.
|
|
|
16.
|
Reflects the cumulative impact of fresh start adjustments as discussed above.
|
Reorganization Items
Reorganization items represent liabilities settled, net of amounts incurred subsequent to the Chapter 11 filing as a direct result of the Plan and are classified as “(Gain) Loss on Reorganization items, net” in the Condensed Consolidated Statements of Operations. The following table summarizes reorganization items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Period from April 23, 2016 through September 30, 2016
|
|
|
Period from January 1, 2016 through April 22, 2016
|
Gain on settlement of liabilities subject to compromise
|
$
|
—
|
|
|
|
$
|
(863,938
|
)
|
Fair value of equity issued in excess of DIP principal
|
—
|
|
|
|
67,329
|
|
Fresh start adjustments
|
—
|
|
|
|
(222,512
|
)
|
Reorganization legal and professional fees and expenses
|
1,595
|
|
|
|
25,573
|
|
Fair value of equity issued to DIP lenders for backstop fee
|
—
|
|
|
|
16,082
|
|
Other reorganization items
|
(126
|
)
|
|
|
21,324
|
|
(Gain) Loss on Reorganization items, net
|
$
|
1,469
|
|
|
|
$
|
(956,142
|
)
|
(2) Summary of Significant Accounting Policies
Fresh Start Accounting.
Upon emergence from bankruptcy the Company adopted Fresh Start Accounting, see Note 1B for further details.
Principles of Consolidation
. The accompanying condensed consolidated financial statements include the accounts of Swift Energy and its wholly owned subsidiaries, which are engaged in the exploration, development, acquisition, and operation of oil and gas properties, with a focus on inland waters and onshore oil and natural gas reserves in Louisiana and Texas. Our undivided interests in oil and gas properties are accounted for using the proportionate consolidation method, whereby our proportionate share of each entity’s assets, liabilities, revenues, and expenses are included in the appropriate classifications in the accompanying condensed consolidated financial statements. Intercompany balances and transactions have been eliminated in preparing the accompanying condensed consolidated financial statements.
Reclassifications
. Certain reclassifications have been made to prior periods’ reported amounts in the Consolidated Statement of Cash Flows in order to conform to the current period presentation. These reclassifications did not impact the Company’s net loss, stockholders’ equity or cash flows.
Use of Estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the reported amounts of certain revenues and expenses during each reporting period. We believe our estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties that may cause actual results to differ materially from such estimates. Significant estimates and assumptions underlying these financial statements include:
|
|
•
|
the estimates of reorganization value, enterprise value and fair value of assets and liabilities upon emergence from bankruptcy and application of fresh start accounting,
|
|
|
•
|
the estimated quantities of proved oil and natural gas reserves used to compute depletion of oil and natural gas properties, the related present value of estimated future net cash flows there-from, and the ceiling test impairment calculation,
|
|
|
•
|
estimates related to the collectability of accounts receivable and the credit worthiness of our customers,
|
|
|
•
|
estimates of the counterparty bank risk related to letters of credit that our customers may have issued on our behalf,
|
|
|
•
|
estimates of future costs to develop and produce reserves,
|
|
|
•
|
accruals related to oil and gas sales, capital expenditures and lease operating expenses,
|
|
|
•
|
estimates in the calculation of share-based compensation expense,
|
|
|
•
|
estimates of our ownership in properties prior to final division of interest determination,
|
|
|
•
|
the estimated future cost and timing of asset retirement obligations,
|
|
|
•
|
estimates made in our income tax calculations,
|
|
|
•
|
estimates of the Liabilities subject to compromise versus not subject to compromise,
|
|
|
•
|
estimates in the calculation of the fair value of hedging assets and liabilities,
|
|
|
•
|
estimates in the assessment of current litigation claims against the Company, and
|
|
|
•
|
estimates in amounts due with respect to open state regulatory audits.
|
While we are not aware of any material revisions to any of our estimates, there will likely be future revisions to our estimates resulting from matters such as new accounting pronouncements, changes in ownership interests, payouts, joint venture audits, re-allocations by purchasers or pipelines, or other corrections and adjustments common in the oil and gas industry, many of which require retroactive application. These types of adjustments cannot be currently estimated and are expected to be recorded in the period during which the adjustments are known.
We are subject to legal proceedings, claims, liabilities and environmental matters that arise in the ordinary course of business. We accrue for losses when such losses are considered probable and the amounts can be reasonably estimated.
Property and Equipment.
We follow the “full-cost” method of accounting for oil and natural gas property and equipment costs. Under this method of accounting, all productive and nonproductive costs incurred in the exploration, development, and acquisition of oil and natural gas reserves are capitalized. Such costs may be incurred both prior to and after the acquisition of a property and include lease acquisitions, geological and geophysical services, drilling, completion, and equipment. Internal costs incurred that are directly identified with exploration, development, and acquisition activities undertaken by us for our own account, and which are not related to production, general corporate overhead, or similar activities, are also capitalized. For
the three months ended September 30, 2016 (successor) and the three months ended September 30, 2015 (predecessor)
, such internal costs capitalized totaled
$2.0 million
and
$3.1 million
, respectively. For the
period of January 1, 2016 through April 22, 2016 (predecessor), period of April 23, 2016 through September 30, 2016 (successor) and the nine months ended September 30, 2015 (predecessor)
, such internal capitalized costs totaled
$2.9 million
,
$3.5 million
and
$10.1 million
, respectively. Interest costs are also capitalized to unproved oil and natural gas properties (refer to Note 5 of these condensed consolidated financial statements for further discussion on capitalized interest costs).
The “Property and Equipment” balances on the accompanying condensed consolidated balance sheets are summarized for presentation purposes. The following is a detailed breakout of our “Property and Equipment” balances (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
As of September 30, 2016
|
|
|
Predecessor
As of December 31, 2015
|
Property and Equipment
|
|
|
|
|
Proved oil and gas properties
|
$
|
518,289
|
|
|
|
$
|
5,972,666
|
|
Unproved oil and gas properties
|
47,310
|
|
|
|
18,839
|
|
Furniture, fixtures, and other equipment
|
3,726
|
|
|
|
44,252
|
|
Less – Accumulated depreciation, depletion, amortization & impairment
|
(160,117
|
)
|
|
|
(5,577,854
|
)
|
Property and Equipment, Net
|
$
|
409,208
|
|
|
|
$
|
457,903
|
|
No gains or losses are recognized upon the sale or disposition of oil and natural gas properties, except in transactions involving a significant amount of reserves or where the proceeds from the sale of oil and natural gas properties would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a cost center. Internal costs associated with selling properties are expensed as incurred.
We compute the provision for depreciation, depletion, and amortization (“DD&A”) of oil and natural gas properties using the unit-of-production method. Under this method, we compute the provision by multiplying the total unamortized costs of oil and gas properties-including future development costs, gas processing facilities, and both capitalized asset retirement obligations and undiscounted abandonment costs of wells to be drilled, net of salvage values, but excluding costs of unproved properties-by an overall rate determined by dividing the physical units of oil and natural gas produced (which excludes natural gas consumed in operations) during the period by the total estimated units of proved oil and natural gas reserves (which excludes natural gas consumed in operations) at the beginning of the period. Future development costs are estimated on a property-by-property basis based on current economic conditions and are amortized to expense as our capitalized oil and gas property costs are amortized. The period over which we will amortize these properties is dependent on our production from these properties in future years.
Furniture, fixtures, and other equipment are recorded at cost and are depreciated by the straight-line method at rates based on the estimated useful lives of the property, which range between
two
and
20
years. Repairs and maintenance are charged to expense as incurred.
Geological and geophysical (“G&G”) costs incurred on developed properties are recorded in “Proved properties” and therefore subject to amortization. G&G costs incurred that are directly associated with specific unproved properties are capitalized in “Unproved properties” and evaluated as part of the total capitalized costs associated with a prospect. The cost of unproved properties not being amortized is assessed quarterly, on a property-by-property basis, to determine whether such properties have been impaired. In determining whether such costs should be impaired, we evaluate current drilling results, lease expiration dates, current oil and gas industry conditions, economic conditions, capital availability, and available geological and geophysical information. Any impairment assessed is added to the cost of proved properties being amortized.
Full-Cost Ceiling Test
. At the end of each quarterly reporting period, the unamortized cost of oil and natural gas properties (including natural gas processing facilities, capitalized asset retirement obligations, net of related salvage values and deferred income taxes) is limited to the sum of the estimated future net revenues from proved properties (excluding cash outflows from recognized asset retirement obligations, including future development and abandonment costs of wells to be drilled, using the preceding 12-months’ average price based on closing prices on the first day of each month, adjusted for price differentials, discounted at
10%
, and the lower of cost or fair value of unproved properties) adjusted for related income tax effects (“Ceiling Test”).
The calculations of the Ceiling Test and provision for DD&A are based on estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting the future rates of production, timing, and plan of development. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing, and production subsequent to the date of the estimate may justify revision of such estimates. Accordingly, reserves estimates are often different from the quantities of oil and natural gas that are ultimately recovered.
Primarily due to pricing differences between the 12-month average oil and gas prices used in the Ceiling Test and the forward strip prices used to estimate the initial fair value of oil and gas properties on the Company’s April 22, 2016 (successor) balance sheet, we incurred a non-cash impairment write-down for the
period of April 23, 2016 through September 30, 2016 (successor)
of
$133.5 million
. As the full amount of this write-down was incurred at June 30, 2016, there was
no
such write-down for the
three months ended September 30, 2016
(successor). Write-downs in prior periods were primarily the result of declining historical prices along with timing changes and reduction of projects and changes in our reserves product mix. For the
three months ended September 30, 2015
(predecessor), we reported a non-cash impairment write-down of
$321.5 million
on our oil and natural gas properties. For the period of January 1, 2016 through April 22, 2016 (predecessor) and the nine months ended September 30, 2015 (predecessor), we reported non-cash impairment write-downs of
$77.7 million
, and
$1.1 billion
, respectively, on our oil and natural gas properties.
If future capital expenditures outpace future discounted net cash flows in our reserve calculations, if we have significant declines in our oil and natural gas reserves volumes (which also reduces our estimate of discounted future net cash flows from proved oil and natural gas reserves) or if oil or natural gas prices decline, it is possible that non-cash write-downs of our oil and natural gas properties will occur in the future. We cannot control and cannot predict what future prices for oil and natural gas will be, thus we cannot estimate the amount or timing of any potential future non-cash write-down of our oil and natural gas properties due to decreases in oil or natural gas prices.
Revenue Recognition
. Oil and gas revenues are recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and if collectability of the revenue is probable. The Company uses the entitlement method of accounting in which we recognize our ownership interest in production as revenue. If our sales exceed our ownership share of production, the natural gas balancing payables are reported in “Accounts payable and accrued liabilities” on the accompanying condensed consolidated balance sheets. Natural gas balancing receivables are reported in “Other current assets” on the accompanying condensed consolidated balance sheets when our ownership share of production exceeds sales. As of
September 30, 2016
and
December 31, 2015
, we did not have any material natural gas imbalances.
Accounts Receivable.
We assess the collectability of accounts receivable, and based on our judgment, we accrue a reserve when we believe a receivable may not be collected. At
September 30, 2016
and
December 31, 2015
, we had an allowance for doubtful accounts of less than
$0.1 million
and approximately
$0.1 million
, respectively. The allowance for doubtful accounts has been deducted from the total “Accounts receivable” balance on the accompanying condensed consolidated balance sheets.
At
September 30, 2016
, our “Accounts receivable” balance included
$15.7 million
for oil and gas sales,
$2.6 million
for joint interest owners,
$2.1 million
for severance tax credit receivables and
$0.9 million
for other receivables. At
December 31, 2015
, our “Accounts receivable” balance included
$14.9 million
for oil and gas sales,
$4.9 million
for joint interest owners,
$1.2 million
for severance tax credit receivables and
$0.7 million
for other receivables.
Supervision Fees.
Consistent with industry practice, we charge a supervision fee to the wells we operate, including our wells, in which we own up to a
100%
working interest. Supervision fees are recorded as a reduction to “General and administrative, net”, on the accompanying condensed consolidated statements of operations. Our supervision fees are allocated to each well based on general and administrative costs incurred for well maintenance and support. The amount of supervision fees charged for the
three months ended September 30, 2016 (successor), the three months ended September 30, 2015 (predecessor), the period of January 1, 2016 through April 22, 2016 (predecessor), period of April 23, 2016 through September 30, 2016 (successor) and the nine months ended September 30, 2015 (predecessor)
did not exceed our actual costs incurred. The total amount of supervision fees charged to the wells we operated were
$1.7 million
and
$2.1 million
for
the three months ended September 30, 2016 (successor) and the three months ended September 30, 2015 (predecessor)
, respectively, and were
$2.7 million
,
$3.0 million
and
$7.0 million
for the
period of January 1, 2016 through April 22, 2016 (predecessor), period of April 23, 2016 through September 30, 2016 (successor) and the nine months ended September 30, 2015 (predecessor)
, respectively.
Other Current Assets.
Included in "Other current assets" on the accompanying condensed consolidated balance sheets are prepaid expenses totaling
$2.5 million
and
$4.4 million
at
September 30, 2016
and
December 31, 2015
, respectively. These prepaid amounts cover well insurance, drilling contracts and various other prepaid expenses. Additionally inventories, which consist primarily of tubulars and other equipment and supplies, totaled
$0.4 million
at
September 30, 2016
and
$0.6 million
at
December 31, 2015
.
Income Taxes.
Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, given the provisions of the enacted tax laws.
Tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than fifty percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Our policy is to record interest and penalties relating to uncertain tax positions in income tax expense. At
September 30, 2016
, we did not have any accrued liability for uncertain tax positions and do not anticipate recognition of any significant liabilities for uncertain tax positions during the next 12 months.
Our U.S. Federal and state income tax returns for years prior to 2015 are subject to examination to the extent of our net operating loss (NOL) carryforwards. There are no material unresolved items related to periods previously audited by these taxing authorities.
The Company has evaluated the full impact of the reorganization on our carryover tax attributes and believes it will not incur an immediate cash income tax liability as a result of emergence from bankruptcy. The Company will be able to fully absorb cancellation of debt income with NOL carryforwards. The amount of remaining NOL carryforward available will be limited under IRC Sec. 382 due to the change in control. The Company’s amortizable tax basis exceeded the book carrying value of its assets at April 22 and
September 30, 2016
, leaving the Company in a net deferred tax asset position. Management has determined that it is not more likely than not that the Company will realize future cash benefits from this additional tax basis and remaining carryover items and accordingly has taken a full valuation allowance to offset its tax assets.
The Company expects to incur a net taxable loss in the current taxable period thus no current income taxes are anticipated to be paid and no benefit will be recorded due to the full valuation allowance of their tax assets.
Accounts Payable and Accrued Liabilities
. The “Accounts payable and accrued liabilities” balances on the accompanying condensed consolidated balance sheets are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
As of September 30, 2016
|
|
|
Predecessor
As of December 31, 2015
|
Trade accounts payable
(1)
|
$
|
5,056
|
|
|
|
$
|
—
|
|
Accrued operating expenses
(1)
|
3,126
|
|
|
|
—
|
|
Accrued compensation costs
(1)
|
3,513
|
|
|
|
—
|
|
Asset retirement obligation – current portion
|
2,922
|
|
|
|
7,165
|
|
Accrued non-income based taxes
(1)
|
6,505
|
|
|
|
—
|
|
Accrued price risk liabilities
(1)
|
5,373
|
|
|
|
—
|
|
Accrued corporate and legal fees
(1)
|
4,472
|
|
|
|
—
|
|
Other payables
(1)(2)
|
2,427
|
|
|
|
498
|
|
Total accounts payable and accrued liabilities
|
$
|
33,394
|
|
|
|
$
|
7,663
|
|
(1) Classified as Liabilities subject to compromise as of
December 31, 2015
. Total Liabilities subject to compromise were
$984.4 million
as of
December 31, 2015
.
(2) Total balance at
December 31, 2015
was
$5.3 million
, of which
$4.8 million
was classified as Liabilities subject to compromise with the remaining portion classified as "Other payables".
Cash and Cash Equivalents.
We consider all highly liquid instruments with an initial maturity of three months or less to be cash equivalents. These amounts do not include cash balances that are contractually restricted.
Treasury Stock.
Our treasury stock repurchases are reported at cost and are included “Treasury stock held, at cost" on the accompanying condensed consolidated balance sheets. All treasury stock was canceled upon emergence from bankruptcy and
no
new treasury stock existed at
September 30, 2016
.
Recognition of Severance Expense for Executive Retirements
. On August 9, 2016, the Company announced that the Chief Executive Officer and Chief Financial Officer for the Company would be retiring. In the third quarter of 2016 we accrued
$2.1 million
for severance payments that will be paid out in accordance with their employment agreement. This amount was expensed in "General and administrative, net" in the condensed consolidated statement of operations for the
three months ended September 30, 2016
(successor) and the
period of April 23, 2016 through September 30, 2016 (successor)
, respectively. Additionally we accelerated expense related to the equity awards held by the retiring Chief Executive Officer and Chief Financial Officer. See Note 3 for more details.
New Accounting Pronouncements.
In May 2014, the FASB issued ASU 2014-09, providing a comprehensive revenue recognition standard for contracts with customers that supersedes current revenue recognition guidance. The guidance requires entities to recognize revenue using the following five-step model: identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue as the entity satisfies each performance obligation. Adoption of this standard could result in retrospective application, either in the form of recasting all prior periods presented or a cumulative adjustment to equity in the period of adoption. In August 2015, the FASB issued ASU 2015-14 which defers the effective date of previously issued ASU 2014-09 by one year for both public and private companies. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. We are currently reviewing the new requirements to determine the impact of this guidance on our financial statements.
In August 2014, the FASB issued ASU 2014-15, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.
In February 2016, the FASB issued ASU 2016-02, which requires lessees to record most leases on the balance sheet. Under the new guidance, lease classification as either a finance lease or an operating lease will determine how lease-related revenue and expense are recognized. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. We are currently reviewing these new requirements to determine the impact of this guidance on our financial statements.
In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for employee share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. This standard was adopted by the Company as of the bankruptcy emergence date April 22, 2016. The adoption of this guidance did not result in any adjustments.
In August 2016, the FASB issued ASU 2016-15, which provides greater clarity to preparers on the treatment of eight specific items within an entity’s statement of cash flows with the goal of reducing existing diversity on these items. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the ASU in an interim period, adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We are currently reviewing these new requirements to determine the impact of this guidance on our financial statements.
(3) Share-Based Compensation
Emergence from Voluntary Reorganization
Upon the Company's emergence from bankruptcy on April 22, 2016, as discussed in Note 1A, the Company’s common stock was canceled and new common stock was issued. The Company's previous share-based compensation awards were either vested or canceled upon the Company's emergence from bankruptcy.
Share-Based Compensation Plans
Upon the Company's emergence from bankruptcy on April 22, 2016, as discussed in Note 1A, the Company's previous share-based compensation plans were canceled and the new Swift Energy Company 2016 Equity Incentive Plan was approved in accordance with the joint plan of reorganization. Under the previous share-based compensation plan the outstanding restricted stock awards and restricted stock unit awards for most employees vested under on an accelerated basis while awards issued to certain officers of the Company and the Board of Directors were canceled.
For awards granted after emergence from bankruptcy, the Company does not estimate the forfeiture rate during the initial calculation of compensation cost but rather has elected to account for forfeitures in compensation cost when they occur. For the predecessor periods the Company had estimated the forfeiture rate for share-based compensation during the initial calculation of compensation cost.
The Company computes a deferred tax benefit for restricted stock awards, unit awards and stock options expected to generate future tax deductions by applying its effective tax rate to the expense recorded. For restricted stock units the Company's actual tax deduction is based on the value of the units at the time of vesting. For the
period of April 23, 2016 through September 30, 2016 (successor)
no
units vested. For the
period of January 1, 2016 through April 22, 2016 (predecessor)
the tax deduction realized was significantly less than the associated deferred tax asset, however the tax asset had been fully offset with a valuation allowance in prior periods so
no
incremental tax expense was realized. For the nine months ended September 30, 2015 (predecessor), we did recognize an income tax shortfall in earnings of
$1.4 million
, primarily related to restricted stock awards that vested at a price lower than the grant date fair value.
Share-based compensation for the predecessor and successor periods are not comparable. The expense for awards issued to both employees and non-employees, which was recorded in “General and administrative, net” in the accompanying condensed consolidated statements of operations was
$2.9 million
and
$1.1 million
for the three months ended September 30, 2016 (successor) and the three months ended September 30, 2015 (predecessor). For the period of January 1, 2016 through April 22, 2016 (predecessor) and the period of April 23, 2016 through September 30, 2016 (successor) the expense was
$0.9 million
and
$3.1 million
, respectively, while during the nine months ended September 30, 2015 (predecessor) the expense was
$3.1 million
.
We have
no
t capitalized any share-based compensation for the
three months ended September 30, 2016
(successor) and the
period of April 23, 2016 through September 30, 2016 (successor)
. We capitalized
$0.4 million
and
$1.0 million
of share-based compensation for
three and nine months ended September 30, 2015
(predecessor), respectively, and capitalized
$0.2 million
of share-based compensation for the period of January 1, 2016 through April 22, 2016 (predecessor). We view stock option awards
and restricted stock unit awards with graded vesting as single awards with an expected life equal to the average expected life of component awards, and we amortize the awards on a straight-line basis over the life of the awards.
Stock Option Awards
On June 8, 2016,
105,811
stock option awards were granted to various officers and directors with an exercise price of
$23.25
. The compensation cost related to these awards is based on the grant date fair value and is typically expensed over the vesting period (generally
one
to
three
years). We use the Black-Scholes-Merton option pricing model to estimate the fair value of stock option awards with the following assumptions for stock option awards issued during the
period of April 23, 2016 through September 30, 2016 (successor)
:
|
|
|
|
|
|
Stock Option Valuation Assumptions
|
Expected Dividend
|
—
|
|
Expected volatility
|
69.3
|
%
|
Risk-free interest rate
|
1.42
|
%
|
Expected life of stock option awards (in years)
|
4
|
|
Weighted average grant-date fair value
|
$
|
12.64
|
|
To estimate expected volatility of our 2016 stock option grants we used the historical volatility of stock prices based on a group of our peer companies.
Restricted Stock Unit Awards
The 2016 equity incentive compensation plan allows for the issuance of restricted stock unit awards that generally may not be sold or otherwise transferred until certain restrictions have lapsed. The compensation cost related to these awards is based on the grant date fair value and is typically expensed over the requisite service period (generally
one
to
three years
).
On June 8, 2016,
254,905
restricted stock unit awards were granted to various officers and directors with a grant-date fair value of
$23.25
. These grants generally vest over a period of
one
to
three
years.
The following table represents restricted stock unit award activity for the
period of April 23, 2016 through September 30, 2016 (successor)
:
|
|
|
|
|
|
|
|
|
Shares
|
|
Grant Date Price
|
Restricted stock units outstanding, beginning of period (successor)
|
—
|
|
|
$
|
—
|
|
Restricted stock units granted
|
254,905
|
|
|
$
|
23.25
|
|
Restricted stock units canceled
|
—
|
|
|
$
|
—
|
|
Restricted stock units vested
|
—
|
|
|
—
|
|
Restricted stock units outstanding, end of period (successor)
|
254,905
|
|
|
$
|
23.25
|
|
In accordance with their employment agreements, the Chief Executive Officer and Chief Financial Officer will vest in all of their share-based compensation awards in conjunction with their retirements. As such, all expense for their stock option awards and restricted stock unit awards was accelerated and is included in the share-based compensation expense for the
three months ended September 30, 2016
(successor). The total expense included in the period for such awards was
$1.6 million
for
76,058
restricted stock unit awards and
$0.7 million
for
60,847
stock option awards. No shares were canceled or vested during the
three months ended September 30, 2016
(successor).
(4) Earnings Per Share
Upon the Company's emergence from bankruptcy on April 22, 2016, as discussed in Note 1A, the Company’s then outstanding common stock was canceled and new common stock and warrants were issued.
Basic earnings per share (“Basic EPS”) has been computed using the weighted average number of common shares outstanding during each period. Diluted earnings per share ("Diluted EPS") assumes, as of the beginning of the period, exercise
of stock options and restricted stock grants using the treasury stock method. Diluted EPS also assumes conversion of performance-based restricted stock units to common shares based on the number of shares (if any) that would be issuable, according to predetermined performance and market goals, if the end of the reporting period was the end of the performance period. As we recognized a net loss for the
period of April 23, 2016 through September 30, 2016 (successor)
and the
three and nine months ended September 30, 2015
(predecessor), the unvested share-based payments and stock options were not recognized in Diluted EPS calculations as they would be antidilutive. Certain of our stock options and restricted stock grants that would potentially dilute Basic EPS in the future were also antidilutive for the
period of January 1, 2016 through April 22, 2016 (predecessor)
, and are discussed below.
The following is a reconciliation of the numerators and denominators used in the calculation of Basic and Diluted EPS for the periods indicated below (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Three Months Ended September 30, 2016
|
|
|
Predecessor Three Months Ended September 30, 2015
|
|
Net Income (Loss)
|
|
Shares
|
|
Per Share
Amount
|
|
|
Net Income (Loss)
|
|
Shares
|
|
Per Share
Amount
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) and Share Amounts
|
$
|
394
|
|
|
10,000
|
|
|
$
|
0.04
|
|
|
|
$
|
(354,588
|
)
|
|
44,546
|
|
|
$
|
(7.96
|
)
|
Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
Restricted Stock Unit Awards
|
|
|
255
|
|
|
|
|
|
|
|
—
|
|
|
|
|
Stock Option Awards
|
|
|
106
|
|
|
|
|
|
|
|
—
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) and Assumed Share Conversions
|
$
|
394
|
|
|
10,361
|
|
|
$
|
0.04
|
|
|
|
$
|
(354,588
|
)
|
|
44,546
|
|
|
$
|
(7.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor from April 23, 2016 through September 30, 2016
|
|
|
Predecessor from January 1, 2016 through April 22, 2016
|
|
Nine Months Ended September 30, 2015
|
|
Net Income (Loss)
|
|
Shares
|
|
Per Share
Amount
|
|
|
Net Income (Loss)
|
|
Shares
|
|
Per Share
Amount
|
|
Net Income (Loss)
|
|
Shares
|
|
Per Share
Amount
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) and Share Amounts
|
$
|
(149,207
|
)
|
|
10,000
|
|
|
$
|
(14.92
|
)
|
|
|
$
|
851,611
|
|
|
44,692
|
|
|
$
|
19.06
|
|
|
$
|
(1,124,532
|
)
|
|
44,431
|
|
|
$
|
(25.31
|
)
|
Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
|
—
|
|
|
|
|
|
|
|
1,005
|
|
|
|
|
|
|
—
|
|
|
|
Restricted Stock Unit Awards
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
|
Stock Option Awards
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) and Assumed Share Conversions
|
$
|
(149,207
|
)
|
|
10,000
|
|
|
$
|
(14.92
|
)
|
|
|
$
|
851,611
|
|
|
45,697
|
|
|
$
|
18.64
|
|
|
$
|
(1,124,532
|
)
|
|
44,431
|
|
|
$
|
(25.31
|
)
|
All stock options to purchase shares and restricted stock unit awards were dilutive for the
three months ended September 30, 2016
(successor) and were included in the table above.
Approximately
1.3 million
stock options to purchase shares were not included in the computation of Diluted EPS for the
period of January 1, 2016 through April 22, 2016 (predecessor)
, because the exercise price was out of the money, while
1.3 million
stock options to purchase shares were not included in the computation of Diluted EPS for the
three and nine months ended September 30, 2015
(predecessor), respectively, because these stock options were antidilutive.
Approximately
0.3 million
restricted stock awards for the
period of January 1, 2016 through April 22, 2016 (predecessor)
, and approximately
1.0 million
and
0.8 million
restricted stock awards for the
three and nine months ended September 30, 2015
(predecessor), respectively, were not included in the computation of Diluted EPS because they were antidilutive.
Approximately
0.8 million
shares for the
period of January 1, 2016 through April 22, 2016 (predecessor)
and approximately
1.2 million
shares for the
three and nine months ended September 30, 2015
(predecessor) related to performance-based restricted stock units that could be converted to common shares based on predetermined performance and market goals were not included in the computation of Diluted EPS because the performance and market conditions had not been met.
(5) Long-Term Debt
Bankruptcy Filing
. The Chapter 11 filing of the Company and the Chapter 11 Subsidiaries constituted an event of default with respect to our then-existing debt obligations. As a result, the Company's pre-petition unsecured senior notes and secured debt under the Prior First Lien Credit Facility became immediately due and payable, but any efforts to enforce such payment obligations were automatically stayed as a result of the Chapter 11 filing. On April 22, 2016, upon the Company's emergence from bankruptcy, the senior notes and borrowing under the DIP Credit Agreement (along with certain unsecured claims) were exchanged for
88.5%
of the common stock of the reorganized entity. Additional information regarding the bankruptcy proceedings is included in Note 1A of these condensed consolidated financial statements.
Our debt balances as of
September 30, 2016
and
December 31, 2015
, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
As of September 30, 2016
|
|
|
Predecessor
As of December 31, 2015
|
7.125% senior notes due 2017
(1)
|
$
|
—
|
|
|
|
$
|
—
|
|
8.875% senior notes due 2020
(1)
|
—
|
|
|
|
—
|
|
7.875% senior notes due 2022
(1)
|
—
|
|
|
|
—
|
|
Bank Borrowings
|
254,000
|
|
|
|
324,900
|
|
Total Debt
|
$
|
254,000
|
|
|
|
$
|
324,900
|
|
Less: Current portion of long-term debt
(2)
|
$
|
—
|
|
|
|
$
|
(324,900
|
)
|
Long-Term Debt
|
$
|
254,000
|
|
|
|
$
|
—
|
|
(1) Classified as Liabilities subject to compromise as of December 31, 2015.
|
(2) As a result of our Chapter 11 filing, we classified our Prior First Lien Credit Agreement borrowings and DIP Credit Agreement borrowings as current as of December 31, 2015.
|
New Credit Facility.
As discussed in Note 1A of these condensed consolidated financial statements, on the Effective Date, the Prior First Lien Credit Facility was terminated and paid in full, and the Company entered the New Credit Facility among the Company, as borrower, JPMorgan Chase Bank, National Association, as administrative agent, and certain lenders party thereto. The New Credit Facility matures on April 22, 2019 and provides for advancing loans of up to the maximum credit amount that the lenders, in the aggregate, make available, subject to the Company meeting certain financial requirements, including certain financial tests. As of the Effective Date, the maximum credit amount was
$500.0 million
with an initial borrowing base of
$320.0 million
. The obligations under the New Credit Facility are secured, subject to certain exceptions, by a first priority lien of the Company's, and certain of its subsidiaries, oil and natural gas properties containing at least
95%
of the Company's estimated proved producing reserves. The terms of the New Credit Facility also include the following, based on terms as defined in the New Credit Facility agreement:
|
|
•
|
As of the Effective Date, the initial borrowing base of
$320.0 million
is allocated between a non-conforming borrowing base of
$70 million
, which terminates on November 1, 2017, and a conforming borrowing base of
$250 million
. Until November 1, 2017 if the conforming borrowing base is re-determined and increased or decreased, the non-conforming borrowing base will be automatically revised so that the amount of the overall borrowing base will equal the total borrowing base in effect immediately prior to such redetermination. Upon termination of the non-conforming borrowing base on November 1, 2017, all borrowings and interest under the non-conforming borrowing base are payable in full. As of
|
September 30, 2016
, the Company had borrowings of
$4 million
and
$250 million
on the non-conforming borrowing base and conforming borrowing base, respectively.
|
|
•
|
Borrowing base redeterminations are scheduled to occur semi-annually in November and May and are determined by the lenders in their discretion and in the usual and customary manner.
|
|
|
•
|
The interest rate for Alternative Base Rate ("ABR") loans will be based on the ABR plus the applicable margin, and the interest rate for Eurodollar loans will be based on the adjusted London Interbank Offered Rate (“LIBOR”), plus the applicable margin.
|
|
|
•
|
The applicable margins vary and have escalating rates of either (a)
500
to
600
basis points for ABR loans and
600
to
700
basis points for Eurodollar loans, during the non-conforming period, and depending on the level of the non-conforming borrowing base and the non-conforming borrowing base loans outstanding, or (b)
200
to
300
basis points for ABR loans and
300
to
400
basis points for Eurodollar loans depending on the borrowing base utilization percentage, after the non-conforming period or when the non-conforming borrowing base is zero. As of
September 30, 2016
, our average borrowing rate was
7.5%
.
|
|
|
•
|
Certain covenants, including (a) a ratio of total debt to EBITDA as defined in the agreement not to exceed
6.5
to 1.0 for the quarter ending September 30, 2016, declining gradually over time to
3.5
to 1.0 for the quarter ending March 31, 2019, and thereafter, (b) a current ratio of not less than
1.0
to 1.0 at the end of each quarter beginning June 30, 2016, and (c) a minimum liquidity requirement of
$10 million
. As of
September 30, 2016
, the Company was in compliance with these new covenants and liquidity requirements.
|
Interest expense on the New Credit Facility, including commitment fees and amortization of debt issuance costs, totaled
$6.1 million
and
$10.4 million
for the
three months ended September 30, 2016
(successor) and the
period of April 23, 2016 through September 30, 2016 (successor)
, respectively. The amount of commitment fee amortization included in interest expense, net was less than
$0.1 million
and
$0.1 million
for the
three months ended September 30, 2016
(successor) and the
period of April 23, 2016 through September 30, 2016 (successor)
, respectively.
Additionally, we capitalized interest on our unproved properties in the amount
$0.3 million
for both the
three months ended September 30, 2016
(successor) and the
period of April 23, 2016 through September 30, 2016 (successor)
.
Senior Notes Liabilities
. Senior Notes due in 2017 of
$250.0 million
, Senior Notes due in 2020 of
$225.0 million
and Senior Notes due in 2022 of
$400.0 million
are included in Liabilities subject to compromise in the Condensed Consolidated Balance Sheet as of
December 31, 2015
. These notes were canceled upon emergence from bankruptcy.
Prior First Lien Credit Facility Liabilities
. Amounts outstanding under our pre-petition Prior First Lien Credit Facility due in 2017 of
$324.9 million
were classified as a current liability in the Condensed Consolidated Balance Sheet dated as of
December 31, 2015
due to cross-default provisions as a result of the bankruptcy filings.
Debtor-In-Possession Financing
. As part of the Chapter 11 filings, we entered into the DIP Credit Agreement. The proceeds of borrowings under the DIP Credit Agreement were primarily used to pay down the pre-petition Prior First Lien Credit Facility upon emergence from bankruptcy, and were also used to pay certain costs, fees and expenses related to the Chapter 11 cases, authorized pre-petition claims, and amounts due in connection with the DIP Credit Agreement, including on account of certain “adequate protection” obligations. Pursuant to the Plan, the DIP Credit Agreement, at the option of the lenders, converted into the post-emergence Company’s common stock, which was part of the
88.5%
of the common stock distributed to the then current holders of the senior notes and certain unsecured creditors upon emergence from the bankruptcy proceedings. As a result, the
$75.0 million
borrowed under the DIP Credit Agreement was not required to be repaid and terminated upon the Company’s exit from bankruptcy.
We paid the lenders under the DIP Credit Agreement a
3.0%
commitment fee, at the time funds were made available under the facility, totaling
$0.9 million
. The commitment fee was included in interest expense during the
period of January 1, 2016 through April 22, 2016 (predecessor)
. Total interest expense on the DIP Credit Agreement was
$6.4 million
during the
period of January 1, 2016 through April 22, 2016 (predecessor)
.
Prior First Lien Credit Facility Bank Borrowings
. We had
$324.9 million
in outstanding borrowings under our Prior First Lien Credit Facility at
December 31, 2015
. The interest rate on our Prior First Lien Credit Facility was either (a) the lead bank’s prime rate plus an applicable margin or (b) the Eurodollar rate plus an applicable margin. However with respect to (a), if the lead bank’s prime rate was not higher than each of the federal funds rate plus
0.5%
, and the adjusted London Interbank Offered Rate (“LIBOR”) plus
1%
, the greatest of these three rates then applied. The applicable margins varied depending on the level of outstanding debt with escalating rates of
100
to
200
basis points above the Alternative Base Rate and escalating rates of
200
to
300
basis points above the Eurodollar rate loans. The commitment fee terms associated with the Prior First Lien Credit Facility were
0.50%
. During the bankruptcy proceedings we paid interest on our Prior First Lien Credit Facility in the normal course.
Interest expense on the Prior First Lien Credit Facility, including commitment fees and amortization of debt issuance costs, totaled
$2.3 million
for the
three months ended September 30, 2015
(predecessor) and
$6.8 million
and
$6.3 million
for the
period of January 1, 2016 through April 22, 2016 (predecessor)
and
nine months ended September 30, 2015
(predecessor), respectively. The amount of commitment fees included in interest expense, net was
$0.1 million
for the
three months ended September 30, 2015
(predecessor) and
no
t material for the
period of January 1, 2016 through April 22, 2016 (predecessor)
and
$0.5 million
for the
nine months ended September 30, 2015
(predecessor).
Additionally, we capitalized interest on our unproved properties in the amount
$1.2 million
and
$3.6 million
for the
three and nine months ended September 30, 2015
(predecessor), respectively. Capitalized interest on our unproved properties would have been immaterial for the
period of January 1, 2016 through April 22, 2016 (predecessor)
and therefore we did
no
t capitalize any interest.
Senior Notes Due 2022.
These notes consisted of
$400.0 million
of
7.875%
senior notes due 2022 that were scheduled to mature on March 1, 2022. The filing of the petition for bankruptcy protection constituted an “event of default” under the indenture governing these senior notes. On April 22, 2016, the obligations of the Company and the Chapter 11 Subsidiaries with respect to these notes were canceled pursuant to the plan of reorganization and the holders thereof were issued common stock of the post-emergence entity in exchange therefor.
Senior Notes Due 2020
. These notes consisted of
$225.0 million
of
8.875%
senior notes due 2020 issued at
98.389%
of par, which equated to an effective yield to maturity of
9.125%
. The filing of the petition for bankruptcy protection constituted an “event of default” under the indenture governing these senior notes. On April 22, 2016, the obligations of the Company and the Chapter 11 Subsidiaries with respect to these notes were canceled pursuant to the plan of reorganization and the holders thereof were issued common stock of the post-emergence entity in exchange therefor.
Senior Notes Due 2017
. These notes consisted of
$250.0 million
of
7.125%
senior notes due in 2017, which were issued on June 1, 2007 at
100%
of the principal amount and were scheduled to mature on June 1, 2017. The filing of the petition for bankruptcy protection constituted an “event of default” under the indenture governing these senior notes. On April 22, 2016, the obligations of the Company and the Chapter 11 Subsidiaries with respect to these notes were canceled pursuant to the plan of reorganization and the holders thereof were issued common stock of the post-emergence entity in exchange therefor.
Debt Issuance Costs
. Our policy is to capitalize legal fees, accounting fees, underwriting fees, printing costs, and other direct expenses associated with our senior notes, amortizing those costs on an effective interest basis over the term of the senior notes, while issuance costs related to a line of credit arrangement are capitalized and then amortized ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings.
Interest Expense on Senior Notes
. There was
no
interest expense on the senior notes, for the
period of January 1, 2016 through April 22, 2016 (predecessor)
due to our bankruptcy proceedings. Contractual interest on the senior notes for the
period of January 1, 2016 through April 22, 2016 (predecessor)
totaled
$21.6 million
. Interest expense on the senior notes totaled
$17.7 million
and
$53.0 million
for the
three and nine months ended September 30, 2015
(predecessor).
(6) Acquisitions and Dispositions
On April 15, 2016, we closed our transaction with Texegy LLC for the sale of a
75%
working interest share of the Company's holdings in the South Bearhead Creek and Burr Ferry field areas located in Central Louisiana. The net proceeds of
$46.9 million
received by the Company in this transaction, including deposits received prior to the closing date, were credited to the full cost pool and used primarily to reduce the amount of borrowings under the Company’s Prior First Lien Credit Facility, and for other general corporate purposes. This disposition also included the buyer's assumption of approximately
$6.5 million
of plugging and abandonment liability. No gain or loss was recorded on the sale of this property.
Effective April 25, 2016, we disposed of our Masters Creek field in Central Louisiana. We received net proceeds of less than
$0.1 million
and the buyer's assumption of approximately
$8.1 million
of plugging and abandonment liability. No gain or loss was recorded on the sale of this property.
Effective September 30, 2016, we closed our transaction with Blue Marble Resources LLC for the sale of the Company's holdings in our Sun TSH field located in South Texas. We received net proceeds of approximately
$0.9 million
and the buyer
assumed approximately
$1.8 million
of plugging and abandonment liability. No gain or loss was recorded on the sale of the property.
There were no other material acquisitions or dispositions during the
period of January 1, 2016 through April 22, 2016 (predecessor)
, the
period of April 23, 2016 through September 30, 2016 (successor)
or the
nine months ended September 30, 2015
(predecessor).
(7) Price-Risk Management Activities
Derivatives are recorded on the balance sheet at fair value with changes in fair value recognized in earnings. The changes in the fair value of our derivatives are recognized in "Price-risk management and other, net" on the accompanying condensed consolidated statements of operations. We have a price-risk management policy to use derivative instruments to protect against declines in oil and natural gas prices, mainly through the purchase of price swaps.
During the
three months ended September 30, 2016
(successor) and for the
period of April 23, 2016 through September 30, 2016 (successor)
there was a
$2.6 million
gain and
$7.3 million
loss
, respectively. There were no cash settlements for derivatives during the period of April 23, 2016 through June 30, 2016. The Company made net cash payments of
$1.1 million
for settled derivative contracts during the
three months ended September 30, 2016
(successor). During the
three and nine months ended September 30, 2015
(predecessor) there was a net gain of less than
$0.1 million
and a net gain of
$0.3 million
, respectively, related to our derivative activities. There were no derivative instruments outstanding during the period of January 1, 2016 through April 22, 2016.
At
September 30, 2016
, we had
$0.1 million
in receivables for settled derivatives which were recognized on the accompanying condensed consolidated balance sheet in “Accounts receivable” and were subsequently collected in October 2016. At
September 30, 2016
, we also had
$0.4 million
in payables for settled derivatives which were recognized on the accompanying condensed consolidated balance sheet in "Accounts payable and accrued liabilities" and were subsequently paid in October 2016.
The fair values of our derivatives are computed using commonly accepted industry-standard models and are periodically verified against quotes from brokers. There was
$0.2 million
in current unsettled derivative assets, while our long-term unsettled derivative assets were
no
t material. There was
$5.0 million
and
$1.1 million
in current and long-term unsettled derivative liabilities, respectively, as of
September 30, 2016
.
The Company uses an International Swap and Derivatives Association "ISDA" master agreement for our derivative contracts. This is an industry standardized contract containing the general conditions of our derivative transactions including provisions relating to netting derivative settlement payments under certain circumstances (such as default). For reporting purposes, the Company has elected to not offset the asset and liability fair value amounts of its derivatives on the accompanying balance sheets. Under the right of set-off, there was
$5.9 million
in net fair value liability at
September 30, 2016
. For further discussion related to the fair value of the Company's derivatives, refer to Note 8 of these condensed consolidated financial statements.
The following tables summarize the weighted average prices as well as future production volumes for our unsettled derivative contracts in place as of
September 30, 2016
:
|
|
|
|
|
|
|
|
Oil Derivative Swaps
(NYMEX WTI Settlements)
|
Total Volumes
(Bbls)
|
|
Weighted Average Price
|
2016 Contracts
|
|
|
|
4Q16
|
155,997
|
|
|
$
|
48.28
|
|
|
|
|
|
2017 Contracts
|
|
|
|
1Q17
|
106,245
|
|
|
$
|
48.04
|
|
2Q17
|
97,401
|
|
|
$
|
48.13
|
|
3Q17
|
90,000
|
|
|
$
|
48.16
|
|
4Q17
|
84,798
|
|
|
$
|
48.18
|
|
|
|
|
|
|
|
|
|
Natural Gas Derivative Swaps
(NYMEX Henry Hub Settlements)
|
Total Volumes
(MMBtu)
|
|
Weighted Average Price
|
2016 Contracts
|
|
|
|
4Q16
|
3,500,002
|
|
|
$
|
2.75
|
|
|
|
|
|
2017 Contracts
|
|
|
|
1Q17
|
3,975,000
|
|
|
$
|
2.89
|
|
2Q17
|
3,625,005
|
|
|
$
|
2.80
|
|
3Q17
|
3,339,999
|
|
|
$
|
2.81
|
|
4Q17
|
3,125,001
|
|
|
$
|
2.83
|
|
|
|
|
|
|
|
|
|
Natural Gas Basis Derivative Swap
(East Texas Houston Ship Channel vs NYMEX Settlements)
|
Total Volumes
(MMBtu)
|
|
Weighted Average Price
|
2016 Contracts
|
|
|
|
4Q16
|
3,500,002
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
2017 Contracts
|
|
|
|
1Q17
|
3,975,000
|
|
|
$
|
(0.06
|
)
|
2Q17
|
3,625,005
|
|
|
$
|
(0.04
|
)
|
3Q17
|
3,339,999
|
|
|
$
|
(0.04
|
)
|
4Q17
|
3,125,001
|
|
|
$
|
(0.05
|
)
|
(8) Fair Value Measurements
Fair Value on a Recurring Basis
. Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, bank borrowings, and senior notes. The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximate fair value due to the highly liquid or short-term nature of these instruments.
The carrying amount of the revolving long-term debt approximates fair value because the Company's current borrowing base rate does not materially differ from market rates for similar bank borrowings.
Based upon quoted market prices as of
December 31, 2015
, the fair value and carrying value of our senior notes was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Predecessor
As of December 31, 2015
|
|
Fair Value
|
|
Carrying Value
|
7.125% senior notes due 2017
|
$
|
23.0
|
|
|
$
|
250.0
|
|
8.875% senior notes due 2020
|
$
|
21.4
|
|
|
$
|
225.0
|
|
7.875% senior notes due 2022
|
$
|
34.5
|
|
|
$
|
400.0
|
|
Our senior notes due in 2017, 2020 and 2022 were stated at carrying value on our accompanying condensed consolidated balance sheets until they were canceled as part of the Company's plan of reorganization and emergence from bankruptcy. If we had recorded these notes at fair value they would have been Level 1 in our fair value hierarchy as they were traded in an active market with quoted prices for identical instruments until they were canceled.
The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value (in millions):
Level 1 – Uses quoted prices in active markets for identical, unrestricted assets or liabilities. Instruments in this category have comparable fair values for identical instruments in active markets.
Level 2 – Uses quoted prices for similar assets or liabilities in active markets or observable inputs for assets or liabilities in non-active markets. Instruments in this category are periodically verified against quotes from brokers and include our commodity derivatives that we value using commonly accepted industry-standard models which contain inputs such as contract prices, risk-free rates, volatility measurements and other observable market data that are obtained from independent third-party sources.
Level 3 – Uses unobservable inputs for assets or liabilities that are in non-active markets.
T
he following table presents our assets and liabilities that are measured on a recurring basis at fair value as of
September 30, 2016
, and are categorized using the fair value hierarchy. As of December 31, 2015, all of the Company's hedging agreements had settled. For additional discussion related to the fair value of the Company's derivatives, refer to Note 7 of these condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
Total
|
|
Quoted Prices in
Active markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
September 30, 2016
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Natural Gas Basis Derivatives
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
Oil Derivatives
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Natural Gas Derivatives
|
4.4
|
|
|
—
|
|
|
4.4
|
|
|
—
|
|
Natural Gas Basis Derivatives
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
Oil Derivatives
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
|
$
|
—
|
|
Our current and long-term unsettled derivative assets and liabilities in the table above are measured at gross fair value and are shown on the accompanying condensed consolidated balance sheets in “Other current assets”, "Other long-term assets", "Accounts payable and accrued liabilities" and "Other long-term liabilities", respectively.
(9) Asset Retirement Obligations
Liabilities for legal obligations associated with the retirement obligations of tangible long-lived assets are initially recorded at fair value in the period in which they are incurred. When a liability is initially recorded, the carrying amount of the related asset is increased. The liability is discounted from the expected date of abandonment. Over time, accretion of the liability is recognized each period, and the capitalized cost is depreciated on a unit-of-production basis as part of depreciation, depletion, and amortization expense for our oil and gas properties. Upon settlement of the liability, the Company either settles the obligation for its recorded amount or incurs a gain or loss upon settlement which is included in the “Property and Equipment” balance on our accompanying condensed consolidated balance sheets. This guidance requires us to record a liability for the fair value of our dismantlement and abandonment costs, excluding salvage values.
Upon the Company's emergence from bankruptcy on April 22, 2016, as discussed in Note 1A, the Company applied fresh start accounting. This included adjusting the Asset Retirement Obligations based on the estimated fair values at April 22, 2016. The following provides a roll-forward of our asset retirement obligations (in thousands):
|
|
|
|
|
|
2016
|
Asset Retirement Obligations recorded as of January 1 (Predecessor)
|
$
|
63,555
|
|
Accretion expense
|
1,610
|
|
Liabilities incurred for new wells and facilities construction
|
1
|
|
Reductions due to sold wells and facilities
|
(6,545
|
)
|
Reductions due to plugged wells and facilities
|
(85
|
)
|
Revisions in estimates
|
488
|
|
Asset Retirement Obligations as of April 22 (Predecessor)
|
$
|
59,024
|
|
Fair value fresh start adjustment
|
$
|
5,216
|
|
|
|
|
|
Asset Retirement Obligations as of April 22 (Successor)
|
$
|
64,240
|
|
Accretion expense
|
1,931
|
|
Liabilities incurred for new wells and facilities construction
|
15
|
|
Reductions due to sold wells and facilities
|
(9,971
|
)
|
Reductions due to plugged wells and facilities
|
(916
|
)
|
Revisions in estimates
|
2,984
|
|
Asset Retirement Obligations as of September 30 (Successor)
|
$
|
58,283
|
|
At
September 30, 2016
and
December 31, 2015
, approximately
$2.9 million
and
$7.2 million
of our asset retirement obligations were classified as a current liability in “Accounts payable and accrued liabilities” on the accompanying condensed consolidated balance sheets.
(10) Commitments and Contingencies
In the ordinary course of business, we are party to various legal actions, which arise primarily from our activities as operator of oil and natural gas wells. In management's opinion, the outcome of any such currently pending legal actions will not have a material adverse effect on our financial position or results of operations.
We had no material changes in our contractual commitments during the
three months ended September 30, 2016
(successor).