NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2017
1. Organization
Bill Barrett Corporation, a Delaware corporation, together with its wholly-owned subsidiaries (collectively, the "Company"), is an independent oil and gas company engaged in the exploration, development and production of oil, natural gas and natural gas liquids ("NGLs"). Since its inception in January 2002, the Company has conducted its activities principally in the Rocky Mountain region of the United States.
2
. Summary of Significant Accounting Policies
Basis of Presentation.
The accompanying Unaudited Consolidated Financial Statements include the accounts of the Company. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements include all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly, in all material respects, the Company's interim results. However, operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. The Company's Annual Report on Form 10-K includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report on Form 10-Q. Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated financial statements included in the Company's
2016
Annual Report on Form 10-K.
Use of Estimates.
In the course of preparing the Company's consolidated financial statements in accordance with GAAP, management makes various assumptions, judgments and estimates to determine the reported amount of assets, liabilities, revenues and expenses and in the disclosure 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 and, accordingly, actual results could differ from amounts initially established.
Areas requiring the use of assumptions, judgments and estimates relate to volumes of oil, natural gas and NGL reserves used in calculating depreciation, depletion and amortization ("DD&A"), the amount of expected future cash flows used in determining possible impairments of proved oil and gas properties and the amount of future capital costs used in these calculations. Assumptions, judgments and estimates also are required in determining asset retirement obligations, the timing of dry hole costs, impairments of unproved oil and gas properties, valuing deferred tax assets and estimating fair values of derivative instruments and stock-based payment awards.
Accounts Receivable.
Accounts receivable is comprised of the following:
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
As of December 31, 2016
|
|
(in thousands)
|
Accrued oil, gas and NGL sales
|
$
|
19,675
|
|
|
$
|
26,542
|
|
Due from joint interest owners
|
9,793
|
|
|
4,366
|
|
Other
|
41
|
|
|
1,952
|
|
Allowance for doubtful accounts
|
(259
|
)
|
|
(23
|
)
|
Total accounts receivable
|
$
|
29,250
|
|
|
$
|
32,837
|
|
Oil and Gas Properties.
The Company's oil, gas and NGL exploration and production activities are accounted for using the successful efforts method. Under this method, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether the well has found proved reserves. If an exploratory well does not find proved reserves, the costs of drilling the well are charged to expense and remain within cash flows from investing activities in the Unaudited Consolidated Statements of Cash Flows. If an exploratory well does find proved reserves, the costs remain capitalized and are included within additions to oil and gas properties and remain within cash flows from investing activities in the Unaudited Consolidated Statements of Cash Flows. The costs of development wells are capitalized whether
proved reserves are added or not. Oil and gas lease acquisition costs are also capitalized. Upon sale or retirement of depreciable or depletable property, the cost and related accumulated DD&A are eliminated from the accounts and the resulting gain or loss is recognized.
Other exploration costs, including certain geological and geophysical expenses and delay rentals for oil and gas leases, are charged to expense as incurred. The sale of a partial interest in a proved property is accounted for as a cost recovery and no gain or loss is recognized as long as this treatment does not significantly affect the unit-of-production amortization rate. Maintenance and repairs are charged to expense, and renewals and betterments are capitalized to the appropriate property and equipment accounts.
Unproved oil and gas property costs are transferred to proved oil and gas properties if the properties are subsequently determined to be productive or are assigned proved reserves. Proceeds from sales of partial interests in unproved leases are accounted for as a recovery of cost without recognizing any gain until all costs are recovered. Unproved oil and gas properties are assessed periodically for impairment based on remaining lease terms, drilling results, reservoir performance, commodity price outlooks, future plans to develop acreage, recent sales prices of comparable properties and other relevant matters.
Materials and supplies consist primarily of tubular goods and well equipment to be used in future drilling operations or repair operations and are carried at the lower of cost or market.
The following table sets forth the net capitalized costs and associated accumulated DD&A and non-cash impairments relating to the Company's oil, natural gas and NGL producing activities:
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
As of December 31, 2016
|
|
(in thousands)
|
Proved properties
|
$
|
316,396
|
|
|
$
|
306,075
|
|
Wells and related equipment and facilities
|
1,209,817
|
|
|
1,164,354
|
|
Support equipment and facilities
|
63,252
|
|
|
63,238
|
|
Materials and supplies
|
5,960
|
|
|
5,706
|
|
Total proved oil and gas properties
|
$
|
1,595,425
|
|
|
$
|
1,539,373
|
|
Unproved properties
|
32,284
|
|
|
27,790
|
|
Wells and facilities in progress
|
30,792
|
|
|
31,040
|
|
Total unproved oil and gas properties, excluded from amortization
|
$
|
63,076
|
|
|
$
|
58,830
|
|
Accumulated depreciation, depletion, amortization and impairment
|
(580,319
|
)
|
|
(543,154
|
)
|
Total oil and gas properties, net
|
$
|
1,078,182
|
|
|
$
|
1,055,049
|
|
The Company reviews oil and natural gas properties for impairment on a quarterly basis or whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred. The Company estimates the expected undiscounted future net cash flows of its oil and gas properties using proved and risked probable and possible reserves based on the Company's best estimate of development plans, future production, commodity pricing, reserve risking, gathering and transportation deductions, production tax rates, lease operating expenses and future development costs. The Company compares such undiscounted future net cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount is recoverable. If the undiscounted future net cash flows exceed the carrying amount of the oil and gas properties, no impairment is taken. If the carrying amount of a property exceeds the undiscounted future net cash flows, the Company will impair the carrying value to fair value based on an analysis of quantitative and qualitative factors existing as of the balance sheet date. The Company does not believe that the undiscounted future net cash flows of its oil and gas properties represent the applicable market value. The factors used to determine fair value include, but are not limited to, recent sales prices of comparable properties, indications from marketing activities, the present value of future revenues, net of estimated operating and development costs using estimates of reserves, future commodity pricing, future production estimates, anticipated capital expenditures and various discount rates commensurate with the risk and current market conditions associated with realizing the projected cash flows.
In addition, oil and gas properties are assessed for impairment once they meet the criteria to be classified as held for sale. Assets held for sale are carried at the lower of carrying cost or fair value less costs to sell. The fair value of the assets is determined using a market approach, based on an estimated selling price, as evidenced by current marketing activities, if possible. If an estimated selling price is not available, the Company utilizes the income valuation technique, which involves
calculating the present value of future revenues as discussed above. If the carrying amount of the assets exceeds the fair value less costs to sell, an impairment will result to reduce the value of the properties down to fair value less costs to sell.
The Company recognized non-cash impairment, dry hole costs and abandonment expense in the Unaudited Consolidated Statements of Operations, as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Non-cash impairment of unproved oil and gas properties
|
$
|
8,010
|
|
(1)
|
$
|
183
|
|
Dry hole costs
|
2
|
|
|
57
|
|
Abandonment expense and lease expirations
|
62
|
|
|
318
|
|
Total non-cash impairment, dry hole costs and abandonment expense
|
$
|
8,074
|
|
|
$
|
558
|
|
|
|
(1)
|
The Company recognized impairment related to unproved oil and gas properties in the Cottonwood Gulch area of the Piceance Basin. The Company has no current plan to develop this acreage.
|
The provision for DD&A of oil and gas properties is calculated on a field-by-field basis using the unit-of-production method. Natural gas and NGLs are converted to an oil equivalent, Boe, at the standard rate of six Mcf to one Boe and forty-two gallons to one Boe, respectively. Estimated future dismantlement, restoration and abandonment costs are taken into consideration by this calculation.
Accounts Payable and Accrued Liabilities.
Accounts payable and accrued liabilities are comprised of the following:
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
As of December 31, 2016
|
|
(in thousands)
|
Accrued drilling, completion and facility costs
|
$
|
25,268
|
|
|
$
|
15,594
|
|
Accrued lease operating, gathering, transportation and processing expenses
|
4,297
|
|
|
4,261
|
|
Accrued general and administrative expenses
|
3,165
|
|
|
6,375
|
|
Accrued interest payable
|
25,225
|
|
|
12,264
|
|
Trade payables
|
12,036
|
|
|
7,900
|
|
Other
|
2,506
|
|
|
3,053
|
|
Total accounts payable and accrued liabilities
|
$
|
72,497
|
|
|
$
|
49,447
|
|
Environmental Liabilities.
Environmental expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation are expensed. Environmental liabilities are accrued when environmental assessments and/or clean-ups are probable, and the costs can be reasonably estimated. Recent case law in Wyoming has exposed us to potential obligations for plugging and abandoning wells, and associated reclamation, for assets that were sold to other industry parties in prior years. If such third parties become unable to fulfill their contract obligations to the Company as provided for in purchase and sale agreements, regulatory agencies and landowners may demand that the Company perform such activities. The Company recognized
$0.8 million
associated with these obligations in other operating expenses in the Consolidated Statement of Operations for the three months ended
March 31, 2017
.
Revenue Recognition.
Oil, gas and NGL 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 collectability of the revenue is reasonably assured. The Company uses the sales method to account for gas and NGL imbalances. Under this method, revenues are recorded on the basis of gas and NGLs actually sold by the Company. In addition, the Company records revenues for its share of gas and NGLs sold by other owners that cannot be volumetrically balanced in the future due to insufficient remaining reserves. The Company also reduces revenues for other owners' volumetric share of gas and NGLs sold by the Company that cannot be volumetrically balanced in the future due to insufficient remaining reserves. The Company's remaining over- and under-produced gas and NGLs balancing positions are taken into account in determining the Company's proved oil, gas and NGL reserves. Imbalances at
March 31, 2017
and
2016
were not material.
Derivative Instruments and Hedging Activities.
The Company periodically uses derivative financial instruments to achieve a more predictable cash flow from its oil, natural gas and NGL sales by reducing its exposure to price fluctuations. Derivative instruments are recorded at fair market value and are included in the Unaudited Consolidated Balance Sheets as assets or liabilities and in the Unaudited Consolidated Statements of Operations as commodity derivative gain (loss).
Income Taxes.
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently payable plus deferred income taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred income tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when assets are recovered or liabilities are settled. Deferred income taxes also include tax credits and net operating losses that are available to offset future income taxes. Deferred income taxes are measured by applying currently enacted tax rates. Deferred tax assets are regularly reviewed, considering all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, taxable strategies and results of recent operations. The assumptions about future taxable income require significant judgment to determine whether it is more likely than not that the deferred tax asset will be realized. If it is determined that the deferred tax asset will not be realized, then a valuation allowance will be recorded against the deferred tax asset.
The Company accounts for uncertainty in income taxes for tax positions taken or expected to be taken in a tax return. Only tax positions that meet the more-likely-than-not recognition threshold are recognized. The Company does not have any uncertain tax positions recorded as of
March 31, 2017
.
Earnings/Loss Per Share.
Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common stock by the weighted average number of common shares outstanding during each period. Diluted net income per common share is calculated by dividing net income attributable to common stock by the weighted average number of common shares outstanding and other dilutive securities. Potentially dilutive securities for the diluted net income per common share calculations consist of nonvested equity shares of common stock, in-the-money outstanding stock options to purchase the Company's common stock and shares into which the Convertible Notes are convertible. No potential common shares are included in the computation of any diluted per share amount when a net loss exists, as was the case for the
three
months ended
March 31, 2017
and
2016
.
The following table sets forth the calculation of basic and diluted income (loss) per share:
|
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|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in thousands, except per share amounts)
|
Net income (loss)
|
$
|
(13,115
|
)
|
|
$
|
(46,496
|
)
|
Basic weighted-average common shares outstanding in period
|
74,544
|
|
|
48,499
|
|
Diluted weighted-average common shares outstanding in period
|
74,544
|
|
|
48,499
|
|
Basic net income (loss) per common share
|
$
|
(0.18
|
)
|
|
$
|
(0.96
|
)
|
Diluted net income (loss) per common share
|
$
|
(0.18
|
)
|
|
$
|
(0.96
|
)
|
New Accounting Pronouncements.
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-01,
Business Combinations: Clarifying the definition of a business
. The objective of this update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company does not expect the standard to have a significant impact on the Company's financial statements or disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows-Classification of Certain Cash Receipts and Cash Payments
. The objective of this update is to address eight specific cash flow issues in order to reduce the existing diversity in practice. ASU 2016-15 is effective for the annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company is currently evaluating the impact of adopting this standard.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. The objective of this update is to simplify the current guidance for stock compensation. The areas for simplification involve several aspects of the accounting for 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. ASU 2016-09 is effective for the annual
periods beginning after December 15, 2016, and interim periods within those annual periods. The standard was adopted effective January 1, 2017 and did not have a significant impact on the Company's disclosures or financial statements. As of March 31, 2017, the Company did not have excess tax benefits associated with its stock compensation, and therefore, there was no tax impact upon adoption of this standard. In addition, the employee taxes paid on the statement of cash flows when shares were withheld for taxes have already been classified as a financing activity, therefore, there was no cash flow statement impact upon adoption of this standard. The Company elected to account for forfeitures as they occur as opposed to estimating the number of awards that are expected to vest. Per ASU 2016-09, the election is considered a change in accounting principle, with the cumulative effect of the change reported as an adjustment to the beginning equity balance. The Company reported an increase to accumulated deficit and additional paid in capital ("APIC") of
$0.2 million
related to equity award compensation and an increase to accumulated deficit and derivative and other noncurrent liabilities of
$0.3 million
related to liability award compensation. The cumulative effect of accounting change is reported in the Consolidated Statement of Stockholders' Equity as of March 31, 2017.
In February 2016, the FASB issued ASU 2016-02,
Leases
. The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company has performed an initial assessment by compiling and analyzing contracts and leasing arrangements that may be affected. The Company is still evaluating the impact of adopting this standard.
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
. The objective of this update is to require deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The standard was adopted prospectively for this interim period ended March 31, 2017 and did not have a significant impact on the Company's disclosures and financial statements. Prior periods were not retrospectively adjusted.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers.
The objective of this update is to clarify the principles for recognizing revenue and to develop a common revenue standard. The FASB subsequently issued ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, which provided additional implementation guidance and deferred the effective date of ASU 2014-09. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The standard will be adopted using the modified retrospective transition method, effective January 1, 2018. The Company has performed an initial assessment of its current existing revenue contracts and does not expect the standard to have a significant impact on the Company's financial statements or disclosures.
3. Supplemental Disclosures of Cash Flow Information
Supplemental cash flow information is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Cash paid for interest
|
$
|
430
|
|
|
$
|
480
|
|
Cash paid for income taxes
|
—
|
|
|
—
|
|
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
Accrued liabilities - oil and gas properties
|
36,976
|
|
|
17,518
|
|
Change in asset retirement obligations, net of disposals
|
9,395
|
|
|
(60
|
)
|
Retirement of treasury stock
|
(967
|
)
|
|
(384
|
)
|
Fair value of properties exchanged in non-cash transactions
|
11,790
|
|
|
—
|
|
4
. Acquisitions, Exchanges and Divestitures
On February 28, 2017, the Company acquired acreage in the DJ Basin for
$12.0 million
, after initial closing adjustments. Under authoritative accounting guidance, the transaction was considered an asset acquisition, and therefore, the properties were recorded based on the fair value of the total consideration transferred on the acquisition date and transaction costs were capitalized as a component of the cost of the assets acquired. The acquisition included
$9.1 million
and
$11.6 million
of proved and unevaluated properties, respectively, and asset retirement obligations of
$8.7 million
.
During the three months ended March 31, 2017, the Company completed two acreage exchange transactions to consolidate certain acreage positions in the DJ Basin. Pursuant to the transactions, the Company exchanged leasehold acreage and, to a lesser extent, interests in certain proved undeveloped acreage. The assets exchanged were all in the same unit of production for property considerations, so it was concluded that this transaction was outside of the scope of the accounting requirements for recording the transaction at fair value and determining gain or loss on the non-monetary exchanges. The new acreage and underlying property costs were recorded at the previous historical cost of the assets the Company exchanged.
On July 14, 2016, the Company sold certain non-core assets in the Uinta Basin. The Company received
$27.8 million
in cash proceeds, after closing adjustments. In addition to the cash proceeds, the Company recognized non-cash proceeds of
$4.8 million
related to the relief from the Company's asset retirement obligation. Assets sold included
$30.6 million
in proved oil and gas properties, net of accumulated depreciation, depletion, amortization and impairment, and
$2.0 million
in unproved oil and gas properties. Liabilities sold included
$4.8 million
of asset retirement obligations. The transaction was accounted for as a cost recovery, therefore, no gain or loss was recognized.
5
. Long-Term Debt
The Company's outstanding debt is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
As of December 31, 2016
|
|
Maturity Date
|
Principal
|
|
Debt Issuance Costs
|
|
Carrying
Amount
|
|
Principal
|
|
Debt Issuance Costs
|
|
Carrying
Amount
|
|
|
(in thousands)
|
Amended Credit Facility
|
April 9, 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Convertible Notes
(1)(2)
|
March 15, 2028
|
579
|
|
|
—
|
|
|
579
|
|
|
579
|
|
|
—
|
|
|
579
|
|
7.625% Senior Notes
(3)
|
October 1, 2019
|
315,300
|
|
|
(1,972
|
)
|
|
313,328
|
|
|
315,300
|
|
|
(2,169
|
)
|
|
313,131
|
|
7.0% Senior Notes
(4)
|
October 15, 2022
|
400,000
|
|
|
(4,046
|
)
|
|
395,954
|
|
|
400,000
|
|
|
(4,227
|
)
|
|
395,773
|
|
Lease Financing Obligation
(5)
|
August 10, 2020
|
2,670
|
|
|
(3
|
)
|
|
2,667
|
|
|
2,782
|
|
|
(3
|
)
|
|
2,779
|
|
Total Debt
|
|
$
|
718,549
|
|
|
$
|
(6,021
|
)
|
|
$
|
712,528
|
|
|
$
|
718,661
|
|
|
$
|
(6,399
|
)
|
|
$
|
712,262
|
|
Less: Current Portion of Long-Term Debt
(6)
|
|
1,037
|
|
|
—
|
|
|
1,037
|
|
|
454
|
|
|
—
|
|
|
454
|
|
Total Long-Term Debt
|
|
$
|
717,512
|
|
|
$
|
(6,021
|
)
|
|
$
|
711,491
|
|
|
$
|
718,207
|
|
|
$
|
(6,399
|
)
|
|
$
|
711,808
|
|
|
|
(1)
|
The aggregate estimated fair value of the Convertible Notes was approximately
$0.5 million
as of both
March 31, 2017
and
December 31, 2016
based on reported market trades of these instruments.
|
|
|
(2)
|
The Company has the right at any time, with at least 30 days' notice, to call the remaining Convertible Notes, and the holders have the right to require the Company to purchase the notes on each of March 20, 2018 and March 20, 2023.
|
|
|
(3)
|
The aggregate estimated fair value of the
7.625%
Senior Notes was approximately
$312.9 million
and
$314.5 million
as of
March 31, 2017
and
December 31, 2016
, respectively, based on reported market trades of these instruments.
|
|
|
(4)
|
The aggregate estimated fair value of the
7.0%
Senior Notes was approximately
$379.5 million
and
$384.5 million
as of
March 31, 2017
and
December 31, 2016
, respectively, based on reported market trades of these instruments.
|
|
|
(5)
|
The aggregate estimated fair value of the Lease Financing Obligation was approximately
$2.5 million
and
$2.6 million
as of
March 31, 2017
and
December 31, 2016
, respectively. As there is no active, public market for the Lease Financing Obligation, the aggregate estimated fair value was based on market-based parameters of comparable term secured financing instruments.
|
|
|
(6)
|
The current portion of long-term debt as of
March 31, 2017
includes the current portion of the Lease Financing Obligation and the principal amount of the Convertible Notes, as the holders may require the Company to purchase the Convertible Notes on March 20, 2018. The current portion of long-term debt as of
December 31, 2016
includes the current portion of the Lease Financing Obligation.
|
Amended Credit Facility
The Company's amended revolving credit facility ("Amended Credit Facility") had commitments from
13
lenders and a borrowing base of
$300.0 million
as of
March 31, 2017
. As credit support for future payments under a contractual obligation, a
$26.0 million
letter of credit was issued under the Amended Credit Facility, which reduced the available borrowing capacity of
the Amended Credit Facility as of
March 31, 2017
to
$274.0 million
. There have not been any borrowings under the Amended Credit Facility in 2017 or 2016.
Interest rates are LIBOR plus applicable margins of
1.5%
to
2.5%
or ABR plus
0.5%
to
1.5%
and the unused commitment fee is between
0.375%
and
0.5%
based on borrowing base utilization.
The borrowing base under the Amended Credit Facility is determined at the discretion of the lenders, based on the collateral value of the Company's proved reserves that have been mortgaged to the lenders, and is subject to regular re-determinations on or about April 1 and October 1 of each year, as well as following any property sales. Future borrowing bases will be computed based on proved oil, natural gas and NGL reserves, hedge positions and estimated future cash flows from those reserves calculated using future commodity pricing provided by the Company's lenders, as well as any other outstanding debt. Lower commodity prices could result in a decreased borrowing base.
The Amended Credit Facility contains certain financial covenants. The Company is currently in compliance with all financial covenants and has complied with all financial covenants since issuance. If the Company fails to comply with the covenants or other terms of any agreements governing the Company's debt, the Company's lenders and holders of the Company's convertible notes and senior notes may have the right to accelerate the maturity of that debt and foreclose upon the collateral, if any, securing that debt. The occurrence of any such event would adversely affect the Company's financial condition. In September 2015, the Company obtained an amendment to the Amended Credit Facility that replaced the Company's debt-to-EBITDAX (earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses) covenant in the facility with a secured debt-to-EBITDAX covenant and an EBITDAX-to-interest covenant through March 31, 2018. There can be no assurance that the Company will be able to obtain similar amendments, or waivers of covenant breaches, in the future if needed.
5% Convertible Senior Notes Due 2028
On March 12, 2008, the Company issued
$172.5 million
aggregate principal amount of Convertible Notes. On March 20, 2012,
$147.2 million
of the outstanding principal amount, or approximately
85%
of the outstanding Convertible Notes, were put to the Company and redeemed by the Company at par. On March 20, 2015,
$24.8 million
of the remaining outstanding principal amount, or approximately
98%
of the remaining outstanding Convertible Notes, were put to the Company and redeemed by the Company at par. As of
March 31, 2017
,
$0.6 million
aggregate principal amount of the Convertible Notes was outstanding. The Convertible Notes mature on
March 15, 2028
, unless earlier converted, redeemed or purchased by the Company. The Convertible Notes are senior unsecured obligations and rank equal in right of payment to all of the Company's existing and future senior unsecured indebtedness, are senior in right of payment to all of the Company's future subordinated indebtedness, and are effectively subordinated to all of the Company's secured indebtedness with respect to the collateral securing such indebtedness. The Convertible Notes are structurally subordinated to all present and future secured and unsecured debt and other obligations of the Company's subsidiaries. The Convertible Notes are fully and unconditionally guaranteed by the subsidiaries that guarantee the Company's indebtedness under the Amended Credit Facility, the
7.625%
Senior Notes and the
7.0%
Senior Notes.
The Convertible Notes bear interest at a rate of
5%
per annum, payable semi-annually in arrears on March 15 and September 15 of each year. Holders of the remaining Convertible Notes may require the Company to purchase all or a portion of their Convertible Notes for cash on each of March 20, 2018 and March 20, 2023 at a purchase price equal to
100%
of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, up to but excluding the applicable purchase date. The Company has the right with at least
30
days' notice to call the Convertible Notes.
7.625% Senior Notes Due 2019
On September 27, 2011, the Company issued
$400.0 million
in principal amount of
7.625%
Senior Notes due October 1, 2019 at par. On June 3, 2016, the Company completed a debt exchange with a holder of the
7.625%
Senior Notes (the "Debt Exchange"). The holder exchanged
$84.7 million
principal amount of the
7.625%
Senior Notes for
10,000,000
newly issued shares of the Company’s common stock. Based on the fair value of the shares issued, the Company recognized an
$8.7 million
gain on extinguishment of debt on the Consolidated Statement of Operations for the year ended
December 31, 2016
. As of
March 31, 2017
,
$315.3 million
aggregate principal amount of the
7.625%
Senior Notes was outstanding.
The
7.625%
Senior Notes mature on
October 1, 2019
, unless earlier redeemed or purchased by the Company. Interest is payable in arrears semi-annually on April 1 and October 1 of each year. The
7.625%
Senior Notes are senior unsecured obligations of the Company and rank equal in right of payment with all of the Company's other existing and future senior unsecured indebtedness, including the Company's Convertible Notes and
7.0%
Senior Notes. The
7.625%
Senior Notes are
redeemable at the Company's option at a redemption price of
101.906%
of the principal amount of the notes until October 1, 2017 when they become redeemable at
100.000%
. The
7.625%
Senior Notes are fully and unconditionally guaranteed by the subsidiaries that guarantee the Company's indebtedness under the Amended Credit Facility, the Convertible Notes and the
7.0%
Senior Notes. The
7.625%
Senior Notes include certain covenants that limit the Company's ability to incur additional indebtedness, make restricted payments, create liens or sell assets and that generally prohibit the Company from paying dividends. The Company is currently in compliance with all financial covenants and has complied with all financial covenants since issuance.
7.0% Senior Notes Due 2022
On March 12, 2012, the Company issued
$400.0 million
in aggregate principal amount of
7.0%
Senior Notes due October 15, 2022 at par. The
7.0%
Senior Notes mature on
October 15, 2022
, unless earlier redeemed or purchased by the Company. Interest is payable in arrears semi-annually on April 15 and October 15 of each year. The
7.0%
Senior Notes are senior unsecured obligations and rank equal in right of payment with all of the Company's other existing and future senior unsecured indebtedness, including the Convertible Notes and
7.625%
Senior Notes. The
7.0%
Senior Notes will become redeemable at the Company's option on October 15, 2017 at an initial redemption price of
103.5%
of the principal amount of the notes. The
7.0%
Senior Notes are fully and unconditionally guaranteed by the subsidiaries that guarantee the Company's indebtedness under the Amended Credit Facility, the Convertible Notes and the
7.625%
Senior Notes. The
7.0%
Senior Notes include certain covenants that limit the Company's ability to incur additional indebtedness, make restricted payments, create liens or sell assets and that generally prohibit the Company from paying dividends. The Company is currently in compliance with all financial covenants and has complied with all financial covenants since issuance.
Nothing in the
7.625%
Senior Notes, the
7.0%
Senior Notes, or the Convertible Notes prohibits the Company from repurchasing any of the notes from time to time at any price in open market purchases or negotiated transactions or by tender offer or otherwise without any notice to or consent of the holders.
Lease Financing Obligation Due 2020
The Company has a lease financing obligation with a balance of
$2.7 million
as of
March 31, 2017
resulting from the Company's sale and subsequent lease back of certain compressors and related facilities owned by the Company (the "Lease Financing Obligation"). The Lease Financing Obligation expires on
August 10, 2020
, and the Company has the option to purchase the equipment at the end of the lease term for the then current fair market value. The Lease Financing Obligation also contains an early buyout option pursuant to which the Company may purchase the equipment for
$1.8 million
on February 10, 2019. The lease payments related to the equipment are recognized as principal and interest expense based on a weighted average implicit interest rate of
3.3%
. See Note
12
for a discussion of aggregate minimum future lease payments.
6. Asset Retirement Obligations
A reconciliation of the Company's asset retirement obligations for the
three
months ended
March 31, 2017
is as follows (in thousands):
|
|
|
|
|
As of December 31, 2016
|
$
|
11,238
|
|
Liabilities incurred
(1)
|
8,963
|
|
Liabilities settled
|
(3
|
)
|
Accretion expense
|
224
|
|
Revisions to estimate
|
435
|
|
As of March 31, 2017
|
$
|
20,857
|
|
Less: current asset retirement obligations
|
970
|
|
Long-term asset retirement obligations
|
$
|
19,887
|
|
|
|
(1)
|
Includes
$8.7 million
associated with properties acquired in the DJ Basin during the three months ended March 31, 2017. See Note 4 for additional information regarding this acquisition.
|
7. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company uses market data or assumptions
that market participants would use in pricing the asset or liability, including assumptions about risk. These inputs can be readily observable, market corroborated or generally unobservable. A fair value hierarchy was established that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Level 1
– Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2
– Quoted prices are available in active markets for similar assets or liabilities and in non-active markets for identical or similar instruments. Model-derived valuations have inputs that are observable or whose significant value drivers are observable. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
Level 3 –
Pricing inputs include significant inputs that are generally less observable than objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value. At each balance sheet date, the Company performs an analysis of all applicable instruments and includes in Level 3 all of those whose fair value is based on significant unobservable inputs.
The following tables set forth by level within the fair value hierarchy the Company's assets and liabilities that were measured at fair value in the Unaudited Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
(1)
|
$
|
180,113
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
180,113
|
|
Deferred compensation plan
(1)
|
1,597
|
|
|
—
|
|
|
—
|
|
|
1,597
|
|
Commodity derivatives
(1)
|
—
|
|
|
17,313
|
|
|
—
|
|
|
17,313
|
|
Liabilities
|
|
|
|
|
|
|
|
Commodity derivatives
(1)
|
$
|
—
|
|
|
$
|
1,328
|
|
|
$
|
—
|
|
|
$
|
1,328
|
|
Unproved oil and gas properties
(2)
|
—
|
|
|
—
|
|
|
1,088
|
|
|
1,088
|
|
|
|
(1)
|
This represents a financial asset or liability that is measured at fair value on a recurring basis.
|
|
|
(2)
|
This represents a non-financial asset or liability that is measured at fair value on a nonrecurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
(1)
|
$
|
40,115
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,115
|
|
Deferred compensation plan
(1)
|
1,447
|
|
|
—
|
|
|
—
|
|
|
1,447
|
|
Commodity derivatives
(1)
|
—
|
|
|
13,156
|
|
|
—
|
|
|
13,156
|
|
Liabilities
|
|
|
|
|
|
|
|
Commodity derivatives
(1)
|
$
|
—
|
|
|
$
|
10,003
|
|
|
$
|
—
|
|
|
$
|
10,003
|
|
|
|
(1)
|
This represents a financial asset or liability that is measured at fair value on a recurring basis.
|
Cash equivalents
– The highly liquid cash equivalents are recorded at carrying value. Carrying value approximates fair value, which represents a Level 1 input.
Deferred compensation plan
– The Company maintains a non-qualified deferred compensation plan which allows certain management employees to defer receipt of a portion of their compensation. The Company maintains assets for the deferred compensation plan in a rabbi trust. The assets of the rabbi trust are invested in publicly traded mutual funds and are recorded in other current and other long-term assets in the Unaudited Consolidated Balance Sheets. The deferred compensation plan financial assets are reported at fair value based on active market quotes, which represent Level 1 inputs.
Commodity derivatives
– The fair value of crude oil, natural gas and NGL forwards and options are estimated using a combined income and market valuation methodology with a mid-market pricing convention based upon forward commodity price and volatility curves. The curves are obtained from independent pricing services reflecting broker market quotes. The Company did not make any adjustments to the obtained curves. The pricing services publish observable market information from multiple brokers and exchanges. No proprietary models are used by the pricing services for the inputs. The Company utilized the counterparties' valuations to assess the reasonableness of the Company's valuations. The inputs discussed above all represent Level 2 inputs.
The commodity derivatives have been adjusted for non-performance risk. For applicable financial assets carried at fair value, the credit standing of the counterparties is analyzed and factored into the fair value measurement of those assets. In addition, the fair value measurement of a liability has been adjusted to reflect the nonperformance risk of the Company.
Oil and gas properties
–
Oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs may not be recoverable. If an impairment is necessary, the fair value is estimated by using either a market approach based on recent sales prices of comparable properties and/or indications from marketing activities or by using the income valuation technique, which involves calculating the present value of future revenues. The present value, net of estimated operating and development costs, is calculated using estimates of reserves, future commodity pricing, future production estimates, anticipated capital expenditures and various discount rates commensurate with the risk and current market conditions associated with realizing the projected cash flows, predominantly all of which are designated as Level 3 inputs within the fair value hierarchy. During the
three
months ended
March 31, 2017
, the Company reduced its Cottonwood Gulch assets in the Piceance Basin to a fair value of
$1.1 million
, resulting in a non-cash impairment charge of
$8.0 million
. During the year ended
December 31, 2016
,
no
properties were measured at fair value.
Acquisitions of proved and unproved properties
– Assets acquired and liabilities assumed under transactions that meet the criteria of a business combination under ASC Topic 805,
Business Combinations
are recorded at fair value on the acquisition date using an income valuation technique based on inputs that are not observable in the market and therefore represent Level 3 inputs. Significant inputs to the valuation of acquired oil and gas properties include estimates of reserves, production rates, future operating and development costs, future commodity prices including price differentials, future cash flows and a market participant-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Company’s management at the time of the valuation.
Assets acquired and liabilities assumed under transactions that do not meet the criteria of a business combination under ASC Topic 805,
Business Combinations
are accounted for as asset acquisitions and are recorded based on the fair value of the total consideration transferred on the acquisition date using the lowest observable inputs available. The Company acquired proved and unproved properties in the DJ Basin for total cash consideration of
$12.0 million
during the three months ended March 31, 2017. See Note 4 for additional information regarding this asset acquisition.
Long-term Debt
– Long-term debt is not presented at fair value on the Unaudited Consolidated Balance Sheets, as it is recorded at carrying value, net of unamortized debt issuance costs. The fair values of the Company's fixed rate
7.625%
Senior Notes and
7.0%
Senior Notes totaled
$692.4 million
as of
March 31, 2017
. The fair values of the Company's fixed rate
7.625%
Senior Notes and
7.0%
Senior Notes totaled
$699.0 million
as of
December 31, 2016
. The fair values of the Company's fixed rate Senior Notes are based on active market quotes, which represent Level 1 inputs.
There is no active, public market for the Amended Credit Facility, Convertible Notes or Lease Financing Obligation. The recorded value of the Amended Credit Facility approximates its fair value due to its floating rate structure based on the LIBOR spread, secured interest, and the Company's borrowing base utilization. The Amended Credit Facility had a balance of
zero
as of
March 31, 2017
and
December 31, 2016
. The Convertible Notes had a fair value of
$0.5 million
as of both
March 31, 2017
and
December 31, 2016
. The fair value of the Convertible Notes is measured based on market-based parameters of the various components of the Convertible Notes and over the counter trades. The Lease Financing Obligation fair values of
$2.5 million
and
$2.6 million
as of
March 31, 2017
and
December 31, 2016
, respectively, are measured based on market-based parameters of comparable term secured financing instruments. The fair value measurements for the Amended Credit Facility, Convertible Notes and Lease Financing Obligation represent Level 2 inputs.
8. Derivative Instruments
The Company uses financial derivative instruments as part of its price risk management program to achieve a more predictable cash flow from its production revenues by reducing its exposure to commodity price fluctuations. The Company has entered into financial commodity swap contracts related to the sale of a portion of the Company's production. The Company does not enter into derivative instruments for speculative or trading purposes.
In addition to financial contracts, the Company may at times be party to various physical commodity contracts for the sale of oil, natural gas and NGLs that have varying terms and pricing provisions. These physical commodity contracts qualify for the normal purchase and normal sale exception and, therefore, are not subject to hedge or mark-to-market accounting. The financial impact of physical commodity contracts is included in oil, natural gas and NGL production revenues at the time of settlement.
All derivative instruments, other than those that meet the normal purchase and normal sale exception as mentioned above, are recorded at fair value and included in the Unaudited Consolidated Balance Sheets as assets or liabilities. The following table summarizes the location, as well as the gross and net fair value amounts, of all derivative instruments presented in the Unaudited Consolidated Balance Sheets as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
Balance Sheet
|
Gross Amounts of
Recognized Assets
|
|
Gross Amounts
Offset in the Balance
Sheet
|
|
Net Amounts of Assets Presented in the
Balance Sheet
|
|
|
(in thousands)
|
|
Derivative assets (current)
|
$
|
15,331
|
|
|
$
|
(1,285
|
)
|
(1)
|
$
|
14,046
|
|
|
Derivative assets (noncurrent)
|
1,982
|
|
|
(43
|
)
|
(1)
|
1,939
|
|
|
Total derivative assets
|
$
|
17,313
|
|
|
$
|
(1,328
|
)
|
|
$
|
15,985
|
|
|
|
Gross Amounts of
Recognized Liabilities
|
|
Gross Amounts
Offset in the Balance
Sheet
|
|
Net Amounts of Liabilities Presented in
the Balance Sheet
|
|
|
(in thousands)
|
|
Derivative liabilities
|
$
|
(1,285
|
)
|
|
$
|
1,285
|
|
(1)
|
$
|
—
|
|
|
Derivatives and other noncurrent liabilities
|
(43
|
)
|
|
43
|
|
(1)
|
—
|
|
(2)
|
Total derivative liabilities
|
$
|
(1,328
|
)
|
|
$
|
1,328
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Balance Sheet
|
Gross Amounts of
Recognized Assets
|
|
Gross Amounts
Offset in the Balance
Sheet
|
|
Net Amounts of Assets Presented in the
Balance Sheet
|
|
|
(in thousands)
|
|
Derivative assets (current)
|
$
|
13,156
|
|
|
$
|
(4,758
|
)
|
(1)
|
$
|
8,398
|
|
|
Derivative assets (noncurrent)
|
—
|
|
|
—
|
|
|
—
|
|
|
Total derivative assets
|
$
|
13,156
|
|
|
$
|
(4,758
|
)
|
|
$
|
8,398
|
|
|
|
Gross Amounts of
Recognized
Derivative
Liabilities
|
|
Gross Amounts
Offset in the Balance
Sheet
|
|
Net Amounts of Derivative
Liabilities Presented in
the Balance Sheet
|
|
|
(in thousands)
|
|
Derivative liabilities
|
$
|
(9,104
|
)
|
|
$
|
4,758
|
|
(1)
|
$
|
(4,346
|
)
|
|
Derivatives and other noncurrent liabilities
|
(899
|
)
|
|
—
|
|
|
(899
|
)
|
(2)
|
Total derivative liabilities
|
$
|
(10,003
|
)
|
|
$
|
4,758
|
|
|
$
|
(5,245
|
)
|
|
|
|
(1)
|
Asset and liability balances with the same counterparty are presented as a net asset or liability on the Unaudited Consolidated Balance Sheets.
|
|
|
(2)
|
As of
March 31, 2017
and
December 31, 2016
, this line item on the Unaudited Consolidated Balance Sheet included
$4.7 million
and
$5.4 million
, respectively, of other noncurrent liabilities.
|
As of
March 31, 2017
, the Company had financial derivative instruments in place related to the sale of a portion of the Company's production for the following volumes for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April – December 2017
|
|
For the year 2018
|
|
Derivative
Volumes
|
|
Weighted Average Price
|
|
Derivative Volumes
|
|
Weighted Average Price
|
Oil (Bbls)
|
1,913,875
|
|
|
$
|
58.56
|
|
|
954,750
|
|
|
$
|
55.00
|
|
Natural Gas (MMbtu)
|
2,750,000
|
|
|
$
|
2.96
|
|
|
—
|
|
|
$
|
—
|
|
The Company's derivative financial instruments are generally executed with major financial or commodities trading institutions. The instruments expose the Company to market and credit risks and may, at times, be concentrated with certain counterparties or groups of counterparties. The Company had derivatives in place with
six
different counterparties as of
March 31, 2017
. Although notional amounts are used to express the volume of these contracts, the amounts potentially subject to credit risk, in the event of non-performance by the counterparties, are substantially smaller. The creditworthiness of counterparties is subject to continual review by management, and the Company believes all of these institutions currently are acceptable credit risks. Full performance is anticipated, and the Company has no past due receivables from any of these counterparties.
It is the Company's policy to enter into derivative contracts with counterparties that are lenders in the Amended Credit Facility or affiliates of lenders in the Amended Credit Facility. The Company's derivative contracts are documented using an industry standard contract known as a Schedule to the Master Agreement and International Swaps and Derivative Association, Inc. Master Agreement or other contracts. Typical terms for these contracts include credit support requirements, cross default provisions, termination events and set-off provisions. The Company is not required to provide any credit support to its counterparties other than cross collateralization with the properties securing the Amended Credit Facility. The Company has set-off provisions in its derivative contracts with lenders under its Amended Credit Facility which, in the event of a counterparty default, allow the Company to set-off amounts owed to the defaulting counterparty under the Amended Credit Facility or other obligations against monies owed to the Company under the derivative contracts. Where the counterparty is not a lender under the Company's Amended Credit Facility, the Company may not be able to set-off amounts owed by it under the Amended Credit Facility, even if such counterparty is an affiliate of a lender under such facility. The Company does not have any derivative balances that are offset by cash collateral.
9. Income Taxes
The Company accounts for uncertainty in income taxes for tax positions taken or expected to be taken in a tax return in accordance with the FASB’s rules on income taxes. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities. During the
three
months ended
March 31, 2017
, the Company had no uncertain tax positions.
The Company’s policy is to classify accrued penalties and interest related to unrecognized tax benefits in the Company’s income tax provision. The Company did not record any accrued interest or penalties associated with unrecognized tax benefits during the
three
months ended
March 31, 2017
and
2016
.
Income tax benefit for the
three
months ended
March 31, 2017
and
2016
differs from the amounts that would be provided by applying the U.S. statutory income tax rates to pretax income or loss principally due to the effect of deferred tax asset valuation allowances, stock-based compensation, political lobbying expense, political contributions, nondeductible officer compensation and state income taxes. For the
three
months ended
March 31, 2017
, the effective tax rate remains at
zero
as a result of recording a full valuation allowance against our deferred tax asset balance. The Company considers all available evidence (both positive and negative) to estimate whether sufficient future taxable income will be generated to permit the use of the existing deferred tax assets. Such evidence includes the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment, and judgement is required in considering the relative weight of negative and positive evidence. The Company continues to monitor facts and circumstances in the reassessment of the likelihood that operating loss carryforwards, credits and other deferred tax assets will be utilized prior to their expiration.
10. Stockholders' Equity
On June 10, 2015, the Company entered into an Equity Distribution Agreement (the "Agreement") with Goldman, Sachs and Co. (the "Manager"). Pursuant to the terms of the Agreement, the Company may sell, from time to time through or to the Manager, shares of its common stock having an aggregate gross sales price of up to
$100.0 million
. Sales of the shares, if any,
will be made by means of ordinary brokers' transactions through the facilities of the New York Stock Exchange, at market prices, in block transactions, to or through a market maker, through an electronic communications network or as otherwise agreed by the Company and the Manager. As of
March 31, 2017
, and the date of this filing,
no
shares have been sold pursuant to the Agreement.
On June 3, 2016, the Company issued
10,000,000
shares of common stock pursuant to a debt exchange with a holder of the Company's
7.625%
Senior Notes. The holder exchanged
$84.7 million
principal amount of the
7.625%
Senior Notes for
10,000,000
newly issued shares of the Company’s common stock.
On December 12, 2016, the Company completed a public offering of its common stock, selling
15,525,000
shares at a price of
$7.40
per share, par value
$0.001
per share. The sale included the full exercise by the underwriters of their option to purchase
2,025,000
shares of common stock. Net proceeds from the sale of common stock, after deducting fees and estimated expenses, were approximately
$109.8 million
.
11. Equity Incentive Compensation Plans and Other Long-term Incentive Programs
The Company maintains various stock-based compensation plans and other employee benefits as discussed below. Stock-based compensation is measured at the grant date based on the value of the awards, and the fair value is recognized on a straight-line basis over the requisite service period (usually the vesting period). Cash-based compensation is measured at fair value at each reporting date and is recognized on a straight-line basis over the requisite service period (usually the vesting period).
The following table presents the long-term cash and equity incentive compensation related to awards for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in thousands)
|
Common stock options
(1)
|
$
|
—
|
|
|
$
|
69
|
|
Nonvested common stock
(1)
|
1,450
|
|
|
2,404
|
|
Nonvested common stock units
(1)
|
170
|
|
|
290
|
|
Nonvested performance-based shares
(1)
|
469
|
|
|
678
|
|
Nonvested performance cash units
(2)(3)
|
(961
|
)
|
|
485
|
|
Total
|
$
|
1,128
|
|
|
$
|
3,926
|
|
|
|
(1)
|
Unrecognized compensation cost as of
March 31, 2017
was
$9.7 million
, which related to grants of nonvested shares of common stock that are expected to be recognized over a weighted-average period of
2.0 years
.
|
|
|
(2)
|
The nonvested performance-based cash units are accounted for as liability awards with
$2.3 million
and
$2.9 million
in derivatives and other noncurrent liabilities in the Unaudited Consolidated Balance Sheets as of
March 31, 2017
and
December 31, 2016
, respectively.
|
|
|
(3)
|
Liability awards are fair valued at each reporting date. The weighted average fair value share price decreased from
$8.89
as of December 31, 2016 to
$4.55
as of March 31, 2017.
|
Nonvested Equity and Cash Awards.
The following table presents the equity and cash awards granted pursuant to the Company's various stock compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Three Months Ended March 31, 2016
|
Equity Awards
|
|
Number of
Shares
|
|
Weighted Average
Grant Date Fair
Value Per Share
|
|
Number of
Shares
|
|
Weighted Average
Grant Date Fair
Value Per Share
|
Nonvested common stock
|
|
749,227
|
|
|
$
|
6.10
|
|
|
686,500
|
|
|
$
|
5.11
|
|
Nonvested common stock units
|
|
3,571
|
|
|
$
|
4.55
|
|
|
3,014
|
|
|
$
|
6.22
|
|
Total granted
|
|
752,798
|
|
|
|
|
689,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Three Months Ended March 31, 2016
|
Cash Awards
|
|
Number of
Units
|
|
Fair Value
Per Unit
|
|
Number of
Units
|
|
Fair Value
Per Unit
|
Nonvested performance cash units
|
|
633,141
|
|
|
$
|
4.55
|
|
|
646,572
|
|
|
$
|
6.22
|
|
Performance Cash Program
2017 Program.
In February 2017, the Compensation Committee approved a performance cash program (the "2017 Program") granting performance cash units that will settle in cash. The performance-based awards contingently vest in February 2020, depending on the level at which the performance goal is achieved. The performance goal, which will be measured over the
three
-year period ending December 31, 2019, will be the Company's total shareholder return ("TSR") based on a matrix measurement of (1) the Company's absolute performance and (2) the Company's ranking relative to a defined peer group's individual TSRs ("Relative TSR"). The Company's absolute performance is measured against the December 30, 2016 closing share price of
$6.99
. If the Company's absolute performance is lower than the
$6.99
share price, the payout is
zero
for this portion. If the Company's absolute performance is greater than the
$6.99
share price, the performance cash units will vest
1%
for each
1%
in growth, up to
100%
of the original grant. If the Company's Relative TSR is less than the median, the payout is
zero
for this portion. If the Company's Relative TSR is above the median, the payout is equal to twice the Company's percentile rank above the median, up to
100%
of the original grant. The Company's combined absolute performance and Relative TSR have a maximum vest of up to
200%
of the original grant. A total of
633,141
units were granted under this program during the three months ended
March 31, 2017
.
12
. Commitments and Contingencies
Lease Financing Obligation.
The Company has a Lease Financing Obligation with Bank of America Leasing & Capital, LLC as the lead bank as discussed in Note
5
. The aggregate undiscounted minimum future lease payments, including both principal and interest components, are presented below. The Lease Financing Obligation contains an early buyout option pursuant to which the Company may purchase the equipment for
$1.8 million
on February 10, 2019.
|
|
|
|
|
|
As of March 31, 2017
|
|
(in thousands)
|
2017
|
$
|
403
|
|
2018
|
537
|
|
2019
|
1,825
|
|
Total
|
$
|
2,765
|
|
Transportation Charges
. The Company is party to
two
firm transportation contracts, through July 2021, to provide capacity on natural gas pipeline systems. The contracts require the Company to pay transportation charges regardless of the amount of pipeline capacity utilized by the Company. These monthly transportation payments are included in unused commitments expense in the Unaudited Consolidated Statements of Operations. As a result of previous divestitures in 2013 and 2014, the Company will likely not utilize the firm capacity on the natural gas pipelines.
The amounts in the table below represent the Company's future minimum transportation charges:
|
|
|
|
|
|
As of March 31, 2017
|
|
(in thousands)
|
2017
|
$
|
14,018
|
|
2018
|
18,691
|
|
2019
|
18,691
|
|
2020
|
18,691
|
|
2021
|
10,902
|
|
Thereafter
|
—
|
|
Total
|
$
|
80,993
|
|
Lease and Other Commitments.
The Company leases office space, vehicles and certain equipment under non-cancelable operating leases. Additionally, the Company has entered into various long-term agreements for telecommunication services as well as other drilling and throughput commitments.
Future minimum annual payments under lease and other agreements are as follows:
|
|
|
|
|
|
As of March 31, 2017
|
|
(in thousands)
|
2017
|
$
|
2,547
|
|
2018
|
2,942
|
|
2019
|
972
|
|
2020
|
71
|
|
2021
|
6
|
|
Thereafter
|
—
|
|
Total
|
$
|
6,538
|
|
Litigation.
The Company is subject to litigation, claims and governmental and regulatory proceedings arising in the ordinary course of business. It is the opinion of the Company's management that current claims and litigation involving the Company are not likely to have a material adverse effect on its Unaudited Consolidated Balance Sheet, Cash Flows or Statements of Operations.
13. Guarantor Subsidiaries
In addition to the Amended Credit Facility, the
7.625%
Senior Notes,
7.0%
Senior Notes and Convertible Notes, which have been registered under the Securities Act of 1933, are jointly and severally guaranteed on a full and unconditional basis by the Company's
100%
owned subsidiaries ("Guarantor Subsidiaries"). Presented below are the Company's condensed consolidating balance sheets, statements of operations, statements of other comprehensive income (loss) and statements of cash flows, as required by Securities and Exchange Commission ("SEC") Rule 3-10 of Regulation S-X.
The following unaudited condensed consolidating financial statements have been prepared from the Company's financial information on the same basis of accounting as the Unaudited Consolidated Financial Statements. Investments in the subsidiaries are accounted for under the equity method. Accordingly, the entries necessary to consolidate the Company and the Guarantor Subsidiaries are reflected in the intercompany eliminations column.
Condensed Consolidating Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
Parent
Issuer
|
|
Guarantor
Subsidiaries
|
|
Intercompany
Eliminations
|
|
Consolidated
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
|
Current assets
|
$
|
311,454
|
|
|
$
|
112
|
|
|
$
|
—
|
|
|
$
|
311,566
|
|
Property and equipment, net
|
1,079,424
|
|
|
5,654
|
|
|
—
|
|
|
1,085,078
|
|
Intercompany receivable
|
20,510
|
|
|
—
|
|
|
(20,510
|
)
|
|
—
|
|
Investment in subsidiaries
|
(14,803
|
)
|
|
—
|
|
|
14,803
|
|
|
—
|
|
Noncurrent assets
|
5,100
|
|
|
—
|
|
|
—
|
|
|
5,100
|
|
Total assets
|
$
|
1,401,685
|
|
|
$
|
5,766
|
|
|
$
|
(5,707
|
)
|
|
$
|
1,401,744
|
|
Liabilities and Stockholders' Equity:
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
106,410
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
106,410
|
|
Intercompany payable
|
—
|
|
|
20,510
|
|
|
(20,510
|
)
|
|
—
|
|
Long-term debt
|
711,491
|
|
|
—
|
|
|
—
|
|
|
711,491
|
|
Other noncurrent liabilities
|
24,563
|
|
|
59
|
|
|
—
|
|
|
24,622
|
|
Stockholders' equity
|
559,221
|
|
|
(14,803
|
)
|
|
14,803
|
|
|
559,221
|
|
Total liabilities and stockholders' equity
|
$
|
1,401,685
|
|
|
$
|
5,766
|
|
|
$
|
(5,707
|
)
|
|
$
|
1,401,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Parent
Issuer
|
|
Guarantor
Subsidiaries
|
|
Intercompany
Eliminations
|
|
Consolidated
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
|
Current assets
|
$
|
318,274
|
|
|
$
|
178
|
|
|
$
|
—
|
|
|
$
|
318,452
|
|
Property and equipment, net
|
1,056,343
|
|
|
5,806
|
|
|
—
|
|
|
1,062,149
|
|
Intercompany receivable
|
20,678
|
|
|
—
|
|
|
(20,678
|
)
|
|
—
|
|
Investment in subsidiaries
|
(14,751
|
)
|
|
—
|
|
|
14,751
|
|
|
—
|
|
Noncurrent assets
|
4,740
|
|
|
—
|
|
|
—
|
|
|
4,740
|
|
Total assets
|
$
|
1,385,284
|
|
|
$
|
5,984
|
|
|
$
|
(5,927
|
)
|
|
$
|
1,385,341
|
|
Liabilities and Stockholders' Equity:
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
85,018
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
85,018
|
|
Intercompany payable
|
—
|
|
|
20,678
|
|
|
(20,678
|
)
|
|
—
|
|
Long-term debt
|
711,808
|
|
|
—
|
|
|
—
|
|
|
711,808
|
|
Other noncurrent liabilities
|
16,915
|
|
|
57
|
|
|
—
|
|
|
16,972
|
|
Stockholders' equity
|
571,543
|
|
|
(14,751
|
)
|
|
14,751
|
|
|
571,543
|
|
Total liabilities and stockholders' equity
|
$
|
1,385,284
|
|
|
$
|
5,984
|
|
|
$
|
(5,927
|
)
|
|
$
|
1,385,341
|
|
Condensed Consolidating Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Parent
Issuer
|
|
Guarantor
Subsidiaries
|
|
Intercompany
Eliminations
|
|
Consolidated
|
|
(in thousands)
|
Operating and other revenues
|
$
|
50,425
|
|
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
50,536
|
|
Operating expenses
|
(56,858
|
)
|
|
(163
|
)
|
|
—
|
|
|
(57,021
|
)
|
General and administrative
|
(9,349
|
)
|
|
—
|
|
|
—
|
|
|
(9,349
|
)
|
Interest income and other income (expense)
|
2,719
|
|
|
—
|
|
|
—
|
|
|
2,719
|
|
Income (loss) before income taxes and equity in earnings of subsidiaries
|
(13,063
|
)
|
|
(52
|
)
|
|
—
|
|
|
(13,115
|
)
|
(Provision for) benefit from income taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity in earnings (loss) of subsidiaries
|
(52
|
)
|
|
—
|
|
|
52
|
|
|
—
|
|
Net income (loss)
|
$
|
(13,115
|
)
|
|
$
|
(52
|
)
|
|
$
|
52
|
|
|
$
|
(13,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Parent
Issuer
|
|
Guarantor
Subsidiaries
|
|
Intercompany
Eliminations
|
|
Consolidated
|
|
(in thousands)
|
Operating and other revenues
|
$
|
29,266
|
|
|
$
|
168
|
|
|
$
|
—
|
|
|
$
|
29,434
|
|
Operating expenses
|
(56,305
|
)
|
|
(164
|
)
|
|
—
|
|
|
(56,469
|
)
|
General and administrative
|
(12,420
|
)
|
|
—
|
|
|
—
|
|
|
(12,420
|
)
|
Interest and other income (expense)
|
(7,041
|
)
|
|
—
|
|
|
—
|
|
|
(7,041
|
)
|
Income (loss) before income taxes and equity in earnings of subsidiaries
|
(46,500
|
)
|
|
4
|
|
|
—
|
|
|
(46,496
|
)
|
(Provision for) benefit from income taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity in earnings (loss) of subsidiaries
|
4
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
Net income (loss)
|
$
|
(46,496
|
)
|
|
$
|
4
|
|
|
$
|
(4
|
)
|
|
$
|
(46,496
|
)
|
Condensed Consolidating Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Parent
Issuer
|
|
Guarantor
Subsidiaries
|
|
Intercompany
Eliminations
|
|
Consolidated
|
|
(in thousands)
|
Net income (loss)
|
$
|
(13,115
|
)
|
|
$
|
(52
|
)
|
|
$
|
52
|
|
|
$
|
(13,115
|
)
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Comprehensive income (loss)
|
$
|
(13,115
|
)
|
|
$
|
(52
|
)
|
|
$
|
52
|
|
|
$
|
(13,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Parent
Issuer
|
|
Guarantor
Subsidiaries
|
|
Intercompany
Eliminations
|
|
Consolidated
|
|
(in thousands)
|
Net income (loss)
|
$
|
(46,496
|
)
|
|
$
|
4
|
|
|
$
|
(4
|
)
|
|
$
|
(46,496
|
)
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Comprehensive income (loss)
|
$
|
(46,496
|
)
|
|
$
|
4
|
|
|
$
|
(4
|
)
|
|
$
|
(46,496
|
)
|
Condensed Consolidating Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Parent
Issuer
|
|
Guarantor
Subsidiaries
|
|
Intercompany
Eliminations
|
|
Consolidated
|
|
(in thousands)
|
Cash flows from operating activities
|
$
|
37,930
|
|
|
$
|
168
|
|
|
$
|
—
|
|
|
$
|
38,098
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Additions to oil and gas properties, including acquisitions
|
(57,963
|
)
|
|
—
|
|
|
—
|
|
|
(57,963
|
)
|
Additions to furniture, fixtures and other
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
Proceeds from sale of properties and other investing activities
|
11,225
|
|
|
—
|
|
|
—
|
|
|
11,225
|
|
Intercompany transfers
|
168
|
|
|
—
|
|
|
(168
|
)
|
|
—
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Principal payments on debt
|
(112
|
)
|
|
—
|
|
|
—
|
|
|
(112
|
)
|
Proceeds from sale of common stock, net of offering costs
|
(224
|
)
|
|
—
|
|
|
—
|
|
|
(224
|
)
|
Intercompany transfers
|
—
|
|
|
(168
|
)
|
|
168
|
|
|
—
|
|
Other financing activities
|
(967
|
)
|
|
—
|
|
|
—
|
|
|
(967
|
)
|
Change in cash and cash equivalents
|
(9,954
|
)
|
|
—
|
|
|
—
|
|
|
(9,954
|
)
|
Beginning cash and cash equivalents
|
275,841
|
|
|
—
|
|
|
—
|
|
|
275,841
|
|
Ending cash and cash equivalents
|
$
|
265,887
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
265,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Parent
Issuer
|
|
Guarantor
Subsidiaries
|
|
Intercompany
Eliminations
|
|
Consolidated
|
|
(in thousands)
|
Cash flows from operating activities
|
$
|
40,419
|
|
|
$
|
96
|
|
|
$
|
—
|
|
|
$
|
40,515
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Additions to oil and gas properties, including acquisitions
|
(61,261
|
)
|
|
—
|
|
|
—
|
|
|
(61,261
|
)
|
Additions to furniture, fixtures and other
|
(782
|
)
|
|
—
|
|
|
—
|
|
|
(782
|
)
|
Proceeds from sale of properties and other investing activities
|
(1,238
|
)
|
|
—
|
|
|
—
|
|
|
(1,238
|
)
|
Intercompany transfers
|
96
|
|
|
—
|
|
|
(96
|
)
|
|
—
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Principal payments on debt
|
(109
|
)
|
|
—
|
|
|
—
|
|
|
(109
|
)
|
Intercompany transfers
|
—
|
|
|
(96
|
)
|
|
96
|
|
|
—
|
|
Other financing activities
|
(398
|
)
|
|
—
|
|
|
—
|
|
|
(398
|
)
|
Change in cash and cash equivalents
|
(23,273
|
)
|
|
—
|
|
|
—
|
|
|
(23,273
|
)
|
Beginning cash and cash equivalents
|
128,836
|
|
|
—
|
|
|
—
|
|
|
128,836
|
|
Ending cash and cash equivalents
|
$
|
105,563
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
105,563
|
|
14. Subsequent Event
On April 28, 2017, the Company closed on an offering of
$275.0 million
in aggregate principal amount of
8.75%
senior unsecured notes due 2025, at par ("2017 Debt Offering"). The Company intends to use the net proceeds from the offering, together with available cash on hand, to fund the redemption and repurchase of all of its outstanding 7.625% Senior Notes due 2019 and all of its outstanding 5% Convertible Senior Notes due 2028.