ITEM 2
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial
condition and operating results of the Company should be read in conjunction with the Companys consolidated financial statements and related notes. Except as otherwise indicated, all amounts are expressed in U.S. dollars.
Overview
Ultra
Petroleum Corp. (the Company) is an independent exploration and production company focused on developing its long-life natural gas reserves in the Green River Basin of Wyoming the Pinedale and Jonah fields, its oil reserves in the
Uinta Basin in Utah and its natural gas reserves in the Appalachian Basin of Pennsylvania. The Company operates in one industry segment, natural gas and oil exploration and development, within one geographical segment, the United States.
The Company currently conducts operations exclusively in the United States. Substantially all of its oil and natural gas activities are
conducted jointly with others and, accordingly, amounts presented reflect only the Companys proportionate interest in such activities. The Company continues to focus on improving its drilling and production results through gaining efficiencies
with the use of advanced technologies, detailed technical analysis of its properties and leveraging its experience into improved operational efficiencies. Inflation has not had, nor is it expected to have in the foreseeable future, a material impact
on the Companys results of operations.
The Company currently generates its revenue, earnings and cash flow primarily
from the production and sales of natural gas and condensate from its properties in southwest Wyoming with a portion of the Companys revenues coming from oil sales from its properties in the Uinta Basin in Utah and gas sales from wells located
in the Appalachian Basin in Pennsylvania. In 2014, the Company repositioned its portfolio to higher returning assets in the western U.S. while divesting lower returning assets in the eastern U.S. Additionally, as part of the acquisition of assets in
the Pinedale Field in Sublette County, Wyoming in September 2014 (the SWEPI Transaction), the Company acquired contracts related to NGLs providing the opportunity to realize the benefit of the NGLs from the gas it produces in Wyoming
beginning in 2017.
The prices of oil and natural gas are critical factors to the Companys business. The prices of oil
and natural gas have historically been volatile, and this volatility could be detrimental to the Companys financial performance. As a result, and from time to time, the Company tries to limit the impact of this volatility on its results by
entering into swap agreements and/or fixed price forward physical delivery contracts for natural gas and oil. (See Note 6 to the Companys Consolidated Financial Statements).
During the quarter ended September 30, 2016, the average price realization for the Companys natural gas was $2.62 per Mcf
compared with $2.68 per Mcf during the quarter ended September 30, 2015. During the third quarter of 2015, the Companys average price realization for natural gas was $3.33 per Mcf, including realized gains and losses on commodity
derivatives. The Company does not currently have any open derivative contracts for natural gas production.
During the quarter
ended September 30, 2016, the average price realization for the Companys oil was $41.55 per barrel compared to $39.43 per barrel for the quarter ended September 30, 2015.
Chapter 11 Proceedings, Ability to Continue as a Going Concern
Chapter 11
Proceedings
On April 29, 2016 (the Petition Date), to restructure their respective obligations and
capital structures, the Company and each of its direct and indirect wholly owned subsidiaries (collectively, the Debtors) filed
30
voluntary petitions under chapter 11 of title 11 of the United States Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Southern District of Texas (the
Bankruptcy Court). The Debtors chapter 11 cases are being jointly administered for procedural purposes under the caption In re Ultra Petroleum Corp., et al, Case No. 16-32202 (MI) (Bankr. S.D. Tex.). Information about our
chapter 11 cases is available at our website (www.ultrapetroleum.com) and also at a website maintained by our claims agent, Epiq Systems (http://dm.epiq11.com/UPT/Docket).
We are currently operating our business as a debtor-in-possession in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. After we filed our chapter 11
petitions, the Bankruptcy Court granted certain relief we requested enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay
employee wages and benefits, pay taxes and certain governmental fees and charges, continue to operate our cash management system in the ordinary course, remit funds we hold from time to time for the benefit of third parties (such as royalty owners),
and pay the prepetition claims of certain of our vendors that hold liens under applicable non-bankruptcy law. For goods and services provided following the Petition Date, we intend to pay vendors in full under normal terms.
Subject to certain exceptions provided for in section 362 of the Bankruptcy Code, all judicial and administrative proceedings against us
or our property were automatically enjoined, or stayed, as of the Petition Date. In addition, the filing of new judicial or administrative actions against us or our property for claims arising prior to the date on which our chapter 11 cases were
filed were automatically enjoined. This prohibits, for example, our lenders or noteholders from pursuing claims for defaults under our debt agreements and our contract counterparties from pursuing claims for defaults under our contracts.
Accordingly, unless the Bankruptcy Court agrees to lift the automatic stay, all of our prepetition liabilities and obligations should be settled or compromised under the Bankruptcy Code as part of our chapter 11 proceedings.
Our operations and ability to execute our business remain subject to the risks and uncertainties described in Item 1A, Risk
Factors in our Annual Report on Form 10-K for our fiscal year ended December 31, 2015 and our Quarterly Report on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016. In addition, our assets, liabilities, including
our capital structure, shareholders, officers and/or directors could change materially because of our chapter 11 cases. In addition, the description of our operations, properties and capital plans included in this Quarterly Report on Form 10-Q may
not accurately reflect our operations, properties and capital plans after we emerge from chapter 11.
Creditors Committees
Appointment & Formation
On May 5, 2016, the United States Trustee for the Southern District of Texas
appointed an official committee for unsecured creditors of all of the Debtors (the UCC). On September 26, 2016, the United States Trustee for the Southern District of Texas filed a Notice of Reconstitution of the UCC. In addition,
certain other stakeholders have organized for purposes of participating in the Debtors chapter 11 cases: (i) on June 8, 2016, an informal ad hoc committee of unsecured creditors of our subsidiary, Ultra Resources, Inc., notified the
Bankruptcy Court it had formed and identified its members; (ii) on June 13, 2016, an informal ad hoc committee of the holders of senior notes issued by the Company notified the Bankruptcy Court it had formed and identified its members; and
(iii) on July 20, 2016, an informal ad hoc committee of shareholders of the Company notified the Bankruptcy Court it had formed and identified its members. We expect each of the committees to be involved in our chapter 11 cases, and any
disagreements with any of the committees may extend our chapter 11 cases, increase the cost of our chapter 11 cases, and/or delay our emergence from chapter 11.
Exclusivity; Plan of Reorganization
The Bankruptcy Code provides
chapter 11 debtors-in-possession with the exclusive right to file a plan of reorganization under chapter 11 through a period of time specified in the Bankruptcy Code, which period may be
31
extended by the Bankruptcy Court. On July 27, 2016, we filed a motion seeking an extension of the exclusive chapter 11 plan filing period. At a hearing conducted on August 25, 2016, the
Bankruptcy Court extended our exclusive right to file a plan of reorganization under chapter 11 through and including March 1, 2017, and to solicit acceptances of such plan through and including May 1, 2017, subject to our producing and
delivering a long-term business plan prior to December 1, 2016.
We plan to emerge from our chapter 11 cases after we
obtain approval from the Bankruptcy Court for a chapter 11 plan of reorganization. Among other things, a chapter 11 plan of reorganization will determine the rights and satisfy the claims of our prepetition creditors and security holders. The terms
and conditions of a chapter 11 plan of reorganization will be determined through negotiations with our stakeholders and, possibly, decisions by the Bankruptcy Court.
Under the absolute priority scheme established by the Bankruptcy Code, unless our creditors agree otherwise, all of our prepetition liabilities and postpetition liabilities must be satisfied in full
before the holders of our existing common stock can receive any distribution or retain any property under a chapter 11 plan of reorganization. The ultimate recovery to creditors and/or shareholders, if any, will not be determined until confirmation
and implementation of a plan or plans of reorganization. We can give no assurance that any recovery or distribution of any amount will be made to any of our creditors or shareholders. Our plan of reorganization could result in any of the holders of
our liabilities and/or securities, including our common stock, receiving no distribution on account of their interests and cancellation of their holdings. Moreover, a plan of reorganization can be confirmed, under the Bankruptcy Code, even if the
holders of our common stock vote against the plan and even if the plan provides that the holders of our common stock receive no distribution on account of their equity interests.
Liabilities Subject to Compromise
We have applied Accounting
Standards Codification (ASC) 852, Reorganizations, in preparing the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. In addition, the consolidated financial statements presented here include
amounts classified as liabilities subject to compromise. This amount represents estimates of known or potential prepetition claims expected to be resolved in connection with our chapter 11 proceedings. Additional amounts may be included
in liabilities subject to compromise in future periods if we elect to reject executory contracts and unexpired leases as part of our chapter 11 cases. Due to the uncertain nature of many of the potential claims, the magnitude of potential claims is
not reasonably estimable at this time. Potential claims not currently included with liabilities subject to compromise in our Consolidated Balance Sheets may be material. In addition, differences between amounts we are reporting as liabilities
subject to compromise in this Quarterly Report on Form 10-Q and the amounts attributable to such matters claimed by our creditors or approved by the Bankruptcy Court may be material. We will continue to evaluate our liabilities throughout the
chapter 11 process, and we plan to make adjustments in future periods as necessary and appropriate. Such adjustments may be material.
Under the Bankruptcy Code, we may assume, assign, or reject certain executory contracts and unexpired leases, subject to the approval of the Bankruptcy Court and certain other conditions. If we reject a
contract or lease, such rejection generally (1) is treated as a prepetition breach of the contract or lease, (2) subject to certain exceptions, relieves the Debtors of performing their future obligations under such contract or lease, and
(3) entitles the counterparty thereto to a prepetition general unsecured claim for damages caused by such deemed breach. If we assume an executory contract or unexpired lease, we are generally required to cure any existing monetary defaults
under such contract or lease and provide adequate assurance of future performance to the counterparty. Accordingly, any description of an executory contract or unexpired lease in this Quarterly Report on Form 10-Q, including any quantification of
our obligations under any such contract or lease, is wholly qualified by the rejection rights we have under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising
from the rejection of any executory contract or unexpired lease and we expressly preserve all of our rights with respect thereto.
32
The following table summarizes the components of liabilities subject to compromise included
in our Consolidated Balance Sheets as of September 30, 2016:
|
|
|
|
|
|
|
September 30, 2016
|
|
Accounts payable
|
|
$
|
1,251
|
|
Accrued liabilities
|
|
|
6,333
|
|
Accrued interest payable
|
|
|
99,774
|
|
Debt
|
|
|
3,759,000
|
|
Other terminated contracts
|
|
|
23,186
|
|
|
|
|
|
|
Liabilities subject to compromise
|
|
$
|
3,889,544
|
|
|
|
|
|
|
Schedules and Statements Magnitude of Potential Claims & Claims Resolution Process
On June 8, 2016, each of the Debtors filed a Schedule of Assets and Liabilities and Statement of Financial
Affairs (collectively, the Schedules and Statements) with the Bankruptcy Court setting forth, among other things, the assets and liabilities of the Debtors, subject to the assumptions filed in connection therewith. On October 14,
2016, Ultra Wyoming LGS, LLC (UWLGS), one of the Debtors and our indirect, wholly owned subsidiary, filed an amendment to its Schedules and Statements. The Schedules and Statements are subject to further amendment or modification.
Certain holders of prepetition claims were required to file proofs of claim by the deadline for filing certain proofs of claims in the Debtors Chapter 11 cases, which deadline was September 1, 2016, for prepetition general unsecured
claims and October 26, 2016, for governmental claims. Differences between amounts scheduled by the Debtors and claims by creditors will be investigated and resolved in connection with the claims resolution process. In light of the expected
number of creditors, the claims resolution process may take considerable time to complete and we expect will continue after our emergence from bankruptcy. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can
the ultimate recovery with respect to allowed claims be presently ascertained.
To the best of our knowledge, we have notified
all of our known current or potential creditors that the Debtors have filed chapter 11 cases. These documents set forth, among other things, the assets and liabilities of each of the Debtors, including executory contracts to which each of the
Debtors is a party, are subject to the qualifications and assumptions included therein, and are subject to amendment or modification as our chapter 11 cases proceed.
Through the claims resolution process, differences in amounts scheduled by the Debtors and claims filed by creditors will be investigated and resolved, including through the filing of objections with the
Bankruptcy Court where appropriate.
Many of the claims identified in the Schedules and Statements are listed as disputed,
contingent or unliquidated. In addition, there are differences between the amounts for certain claims listed in the Schedules and Statements and the amounts claimed by our creditors. Such differences, as well as other disputes and contingencies will
be investigated and resolved as part of our claims resolution process in our chapter 11 cases. Please refer to Note 8 for additional information about contingent matters and commitments reflected in the claims filed in our chapter 11 cases.
Pursuant to the Federal Rules of Bankruptcy Procedure, some creditors who wished to assert prepetition claims against us and
whose claim (i) was not listed in the Schedules and Statements or (ii) was listed in the Schedules and Statements as disputed, contingent, or unliquidated, were required to file a proof of claim with the Bankruptcy Court prior to the bar
date set by the court. The bar date for non-governmental creditors was September 1, 2016, and the bar date for governmental creditors was October 26, 2016.
The claims filed against the Debtors to date are voluminous. Further, it is possible that claimants will file amended or modified claims in the future, including modifications or amendments to assign
values to claims originally filed with no designated value. The amended or modified claims may be material.
33
We plan to investigate and evaluate all filed claims in connection with our plan of
reorganization. As a part of the claims resolution process, we anticipate working to resolve differences in amounts we listed in our Schedules and Statements and amounts of claims filed by our creditors. We have already identified, for example,
claims that we believe should be disallowed by the Bankruptcy Court because they are duplicative, have been later amended or superseded, are without merit, are overstated or for other reasons. We will file objections with the Bankruptcy Court as
necessary for claims we believe should be disallowed.
Tax Attributes; Net Operating Loss Carryforwards
We have substantial tax net operating loss carryforwards and other tax attributes. Under the U.S. Internal Revenue Code, our ability to
use these net operating losses and other tax attributes may be limited if we experience a change of control, as determined under the U.S. Internal Revenue Code. Accordingly, we obtained an order from the Bankruptcy Court that is intended to protect
our ability to use our tax attributes by imposing certain notice procedures and transfer restrictions on the trading of the Companys common stock.
In general, the order applies to any person or entity that, directly or indirectly, beneficially owns (or would beneficially own as a result of a proposed transfer) at least 4.5% of the Companys
common stock. Such persons are required to notify us and the Bankruptcy Court before effecting a transaction that might result in us losing the ability to use our tax attributes, and we have the right to seek an injunction to prevent the transaction
if it might adversely affect our ability to use our tax attributes.
Any purchase, sale or other transfer of our equity
securities in violation of the restrictions of the order is null and void ab initio as an act in violation of a Bankruptcy Court order and would therefore confer no rights on a proposed transferee.
Costs of Reorganization
We have incurred and will continue to incur significant costs associated with our reorganization and the chapter 11 proceedings. We expect these costs, which are being expensed as incurred, will
significantly affect our results of operations. In addition, a non-cash charge to write-off the unamortized debt issuance costs related to our funded indebtedness is included in Reorganization items, net as these debt instruments are
expected to be impacted by the pendency of the Companys chapter 11 cases. For additional information about the costs of our reorganization and chapter 11 proceedings, see Reorganization items, net below.
The following table summarizes the components included in Reorganization items, net in our Consolidated Statements of Operations for the
three and nine months ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
September 30, 2016
|
|
|
For the Nine
Months Ended
September 30, 2016
|
|
Professional fees(1)
|
|
$
|
3,215
|
|
|
$
|
6,797
|
|
Deferred financing costs(2)
|
|
|
|
|
|
|
18,742
|
|
Other(3)
|
|
|
(106
|
)
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
Total Reorganization items, net
|
|
$
|
3,109
|
|
|
$
|
25,292
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents professional fees related directly to the chapter 11 filings for the quarter and nine months ended September 30, 2016.
|
(2)
|
A non-cash charge to write-off all of the unamortized debt issuance costs related to the unsecured Credit Agreement, unsecured Senior Notes issued by Ultra Resources,
Inc., the unsecured 2018 Senior Notes issued by the Company and the unsecured 2024 Senior Notes issued by the Company is included in Reorganization items, net as these debt instruments are expected to be impacted by the pendency of the
Companys chapter 11 cases.
|
(3)
|
Cash interest income earned for the period after the Petition Date on excess cash over normal invested capital.
|
34
Ability to Continue as a Going Concern
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared on a going concern basis
of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not reflect any adjustments that
might result from the outcome of our chapter 11 proceedings. We have significant indebtedness, all of which we have reclassified to liabilities subject to compromise at September 30, 2016. Our level of indebtedness has adversely impacted and is
continuing to adversely impact our financial condition. As a result of our financial condition, the defaults under our debt agreements, and the risks and uncertainties surrounding our chapter 11 proceedings, substantial doubt exists that we will be
able to continue as a going concern.
Critical Accounting Policies
The discussion and analysis of the Companys financial condition and results of operations is based upon consolidated financial
statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). In addition, application of GAAP requires the use of estimates, judgments and assumptions that affect the reported amounts
of assets and liabilities as of the date of the financial statements as well as the revenues and expenses reported during the period. Changes in these estimates related to judgments and assumptions will occur as a result of future events, and,
accordingly, actual results could differ from amounts estimated. Set forth below is a discussion of the critical accounting policies used in the preparation of our financial statements which we believe involve the most complex or subjective
decisions or assessments.
Derivative Instruments and Hedging Activities.
The Company follows Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging (FASB ASC 815). The Company records the fair value of its commodity derivatives as an asset or liability
on the Consolidated Balance Sheets, and records the changes in the fair value of its commodity derivatives in the Consolidated Statements of Operations.
Fair Value Measurements.
The Company follows FASB ASC Topic 820, Fair Value Measurements and Disclosures (FASB ASC 820). Under FASB ASC 820, 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 measurement date and establishes a three level hierarchy for measuring fair value.
Asset Retirement Obligation.
The Companys asset retirement obligations (ARO) consist primarily of
estimated costs of dismantlement, removal, site reclamation and similar activities associated with its oil and natural gas properties. FASB ASC Topic 410, Asset Retirement and Environmental Obligations (FASB ASC 410) requires that the
fair value of a liability for an ARO be recognized in the period in which it is incurred with the associated asset retirement cost capitalized as part of the carrying cost of the oil and natural gas asset. The recognition of an ARO requires that
management make numerous estimates, assumptions and judgments regarding such factors as the existence of a legal obligation for an ARO, amounts and timing of settlements, the credit-adjusted, risk-free rate to be used, inflation rates, and future
advances in technology. In periods subsequent to initial measurement of the ARO, the Company must recognize period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original
estimate of undiscounted cash flows. Increases in the ARO liability due to the passage of time impact net income as accretion expense. The related capitalized costs, including revisions thereto, are charged to expense through depletion, depreciation
and amortization (DD&A). As a full cost company, settlements for asset retirement obligations for abandonment are adjusted to the full cost pool. The asset retirement obligation is included within other long-term obligations in the
accompanying Consolidated Balance Sheets.
Share-Based Payment Arrangements.
The Company applies FASB ASC
Topic 718, Compensation Stock Compensation (FASB ASC 718), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock
options,
35
based on estimated fair values. Share-based compensation expense recognized for the nine months ended September 30, 2016 and 2015 was $4.0 million and $5.5 million, respectively.
See Note 4 for additional information.
Property, Plant and Equipment.
Capital assets are recorded at
cost and depreciated using the declining-balance method based on their respective useful life.
Full Cost Method of
Accounting.
The Company uses the full cost method of accounting for oil and gas exploration and development activities as defined by the Securities and Exchange Commission (SEC) Release No. 33-8995, Modernization of Oil
and Gas Reporting Requirements (SEC Release No. 33-8995) and FASB ASC Topic 932, Extractive Activities Oil and Gas (FASB ASC 932). Under the full cost method of accounting, all costs associated with the
exploration for and development of oil and gas reserves are capitalized on a country-by-country basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling
both productive and non-productive wells and overhead charges directly related to acquisition, exploration and development activities. Substantially all of the oil and gas activities are conducted jointly with others and, accordingly, the amounts
reflect only the Companys proportionate interest in such activities.
Companies that use the full cost method of
accounting for oil and natural gas exploration and development activities are required to perform a ceiling test calculation each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The
ceiling test is performed quarterly, on a country-by-country basis, utilizing the average of prices in effect on the first day of the month for the preceding twelve month period in accordance with SEC Release No. 33-8995. The ceiling limits
such pooled costs to the aggregate of the present value of future net revenues attributable to proved crude oil and natural gas reserves discounted at 10% plus the lower of cost or market value of unproved properties less any associated tax effects.
If such capitalized costs exceed the ceiling, the Company will record a write-down to the extent of such excess as a non-cash charge to earnings. Any such write-down will reduce earnings in the period of occurrence and results in a lower DD&A
rate in future periods. A write-down may not be reversed in future periods even though higher oil and natural gas prices may subsequently increase the ceiling.
The calculation of the ceiling test is based upon estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves, in projecting the future rates of
production and in the timing of development activities. The accuracy of any reserve 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 estimate. Accordingly, reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered. The Company did not have any write-downs
related to the full cost ceiling limitation during the nine months ended September 30, 2016 or 2015.
Capitalized
Interest.
Interest is capitalized on the cost of unevaluated gas and oil properties that are excluded from amortization and actively being evaluated, if any (See Note 2).
Revenue Recognition.
The Company generally sells oil and natural gas under both long-term and short-term agreements at
prevailing market prices. The Company recognizes revenues when the oil and natural gas is delivered, which occurs when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable and
collectability is reasonably assured. The Company accounts for oil and natural gas sales using the entitlements method. Under the entitlements method, revenue is recorded based upon the Companys ownership share of volumes sold,
regardless of whether it has taken its ownership share of such volumes.
Make-up provisions and ultimate settlements of volume
imbalances are generally governed by agreements between the Company and its partners with respect to specific properties or, in the absence of such agreements,
36
through negotiation. The value of volumes over- or under-produced can change based on changes in commodity prices. The Company prefers the entitlements method of accounting for oil and natural
gas sales because it allows for recognition of revenue based on its actual share of jointly owned production, results in better matching of revenue with related operating expenses, and provides balance sheet recognition of the estimated value of
product imbalance. The Companys imbalance obligations as of September 30, 2016 and December 31, 2015 were immaterial.
Valuation of Deferred Tax Assets.
The Company uses the asset and liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are
determined based on differences between the financial statement carrying values and their respective income tax basis (temporary differences).
To assess the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment.
The Company has recorded a valuation allowance against
certain of its deferred tax assets as of September 30, 2016. Some or all of this valuation allowance may be reversed in future periods against future income.
Deferred Financing Costs.
During the quarter ended June 30, 2016, a non-cash charge to write-off all of the unamortized debt issuance costs related to the unsecured Credit
Agreement, unsecured Senior Notes issued by Ultra Resources, Inc., the unsecured 2018 Senior Notes issued by the Company and the unsecured 2024 Senior Notes issued by the Company is included in Reorganization items, net in the accompanying
Consolidated Statements of Operations as these debt instruments are expected to be impacted by the pendency of the Companys chapter 11 cases. At December 31, 2015, other current assets includes costs associated with the issuance of our
revolving credit facility while costs associated with the issuance of our Senior Notes, 2018 Notes and 2024 Notes are presented as a direct deduction from the carrying amount of the related debt liability.
Deposits and Retainers.
Deposits and retainers primarily consists of payments related to surety bonds.
Recent accounting pronouncements not yet adopted.
In March 2016, the FASB issued Accounting Standards Update
(ASU) 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(ASU No. 2016-09) to simplify some of the provisions in stock compensation accounting. The update
simplifies the accounting for a stock payments tax consequences and amends how excess tax benefits and a businesss payments to cover the tax bills for the shares recipients should be classified. The amendments allow companies to
estimate the number of stock awards expected to vest and revises the withholding requirements for classifying stock awards as equity. For public companies, the standard will take effect for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2016 with earlier application permitted. The Company is still evaluating the impact of ASU No. 2016-09 on its financial position and results of operations.
In February 2016, the FASB issued ASU2016-02,
Leases (ASU No. 2016-02)
. The guidance requires that lessees will
be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The ASU will also require disclosures designed to give financial statement users information
on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. For public companies, the standard will take effect for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018 with earlier application permitted. The Company is still evaluating the impact of ASU No. 2016-02 on its financial position and results of operations.
37
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the
Measurement of Inventory
(ASU No. 2015-11). Public companies will have to apply the amendments for reporting periods that start after December 15, 2016, including interim periods within those fiscal years. This ASU requires
an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The
company does not expect the adoption of ASU No. 2015-11 to have a material impact on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03,
Interest Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs.
In August 2015, the FASB issued ASU
2015-15,
Interest Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
. These ASUs require capitalized debt issuance costs, except
for those related to revolving credit facilities, to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, rather than as an asset. The Company adopted these ASUs on January 1, 2016,
using a retrospective approach. The adoption resulted in a reclassification that reduced current assets and current maturities of long-term debt by $19.4 million on the Companys Consolidated Balance Sheet at December 31, 2015. A non-cash
charge to write-off all of the unamortized debt issuance costs is included in Reorganization items, net at June 30, 2016 as the related debt instruments are expected to be impacted by the pendency of the Companys chapter 11 cases.
The FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, ASU 2016-08,
Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, and ASU 2016-10,
Revenues from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing
, which supersede the revenue recognition requirements in Topic 605,
Revenue Recognition
, and industry-specific guidance in Subtopic 932-605,
Extractive Activities-Oil and Gas-Revenue Recognition
and require
an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The Company is required to adopt
the new standards in the first quarter of 2018 using one of two retrospective application methods. The Company is continuing to evaluate the provisions of these ASUs, and has not determined the impact these standards may have on its consolidated
financial statements and related disclosures or decided upon the method of adoption.
In August 2014, the FASB issued ASU
No. 2014-15,
Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern
(ASU No. 2014-15) that requires management to evaluate whether there are conditions and events that raise substantial
doubt about the Companys ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management is required to provide certain footnote disclosures if it concludes that
substantial doubt exists or when its plans alleviate substantial doubt about the Companys ability to continue as a going concern. ASU No. 2014-15 becomes effective for annual periods beginning after December 15, 2016 and for interim
reporting periods thereafter. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
Conversion of Barrels of Oil to Mcfe of Gas
. The Company converts Bbls of oil and other liquid hydrocarbons to Mcfe at a ratio of one Bbl of oil or liquids to six Mcfe. This conversion
ratio, which is typically used in the oil and gas industry, represents the approximate energy equivalent of a barrel of oil or other liquids to an Mcf of natural gas. The sales price of one Bbl of oil or liquids has been much higher than the sales
price of six Mcf of natural gas over the last several years, so a six to one conversion ratio does not represent the economic equivalency of six Mcf of natural gas to a Bbl of oil or other liquids.
38
RESULTS OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
%
Variance
|
|
|
For the Nine Months
Ended September 30,
|
|
|
%
Variance
|
|
|
|
2016
|
|
|
2015
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(Amounts in thousands, except per unit data)
|
|
Production, Commodity Prices and Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (Mcf)
|
|
|
65,245
|
|
|
|
70,194
|
|
|
|
-7
|
%
|
|
|
200,286
|
|
|
|
200,039
|
|
|
|
0
|
%
|
Crude oil and condensate (Bbls)
|
|
|
680
|
|
|
|
863
|
|
|
|
-21
|
%
|
|
|
2,205
|
|
|
|
2,714
|
|
|
|
-19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total production (Mcfe)
|
|
|
69,325
|
|
|
|
75,375
|
|
|
|
-8
|
%
|
|
|
213,517
|
|
|
|
216,323
|
|
|
|
-1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas ($/Mcf, excluding hedges)
|
|
$
|
2.62
|
|
|
$
|
2.68
|
|
|
|
-2
|
%
|
|
$
|
2.13
|
|
|
$
|
2.68
|
|
|
|
-21
|
%
|
Natural gas ($/Mcf, including realized hedges)
|
|
$
|
2.62
|
|
|
$
|
3.33
|
|
|
|
-21
|
%
|
|
$
|
2.13
|
|
|
$
|
3.32
|
|
|
|
-36
|
%
|
Oil and condensate ($/Bbl)
|
|
$
|
41.55
|
|
|
$
|
39.43
|
|
|
|
5
|
%
|
|
$
|
35.98
|
|
|
$
|
41.75
|
|
|
|
-14
|
%
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas sales
|
|
$
|
170,996
|
|
|
$
|
188,457
|
|
|
|
-9
|
%
|
|
$
|
425,878
|
|
|
$
|
536,477
|
|
|
|
-21
|
%
|
Oil sales
|
|
|
28,257
|
|
|
|
34,046
|
|
|
|
-17
|
%
|
|
|
79,352
|
|
|
|
113,332
|
|
|
|
-30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
199,253
|
|
|
$
|
222,503
|
|
|
|
-10
|
%
|
|
$
|
505,230
|
|
|
$
|
649,809
|
|
|
|
-22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on commodity
derivatives-natural
gas
|
|
$
|
|
|
|
$
|
45,300
|
|
|
|
n/a
|
|
|
$
|
|
|
|
$
|
127,283
|
|
|
|
n/a
|
|
Unrealized (loss) on commodity derivatives
|
|
|
|
|
|
|
(35,910
|
)
|
|
|
n/a
|
|
|
|
|
|
|
|
(84,675
|
)
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain on commodity derivatives
|
|
$
|
|
|
|
$
|
9,390
|
|
|
|
n/a
|
|
|
$
|
|
|
|
$
|
42,608
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
$
|
19,934
|
|
|
$
|
28,567
|
|
|
|
-30
|
%
|
|
$
|
67,164
|
|
|
$
|
82,464
|
|
|
|
-19
|
%
|
Liquids gathering system operating lease expense
|
|
$
|
5,171
|
|
|
$
|
5,162
|
|
|
|
0
|
%
|
|
$
|
15,514
|
|
|
$
|
15,485
|
|
|
|
0
|
%
|
Production taxes
|
|
$
|
20,688
|
|
|
$
|
19,813
|
|
|
|
4
|
%
|
|
$
|
49,394
|
|
|
$
|
56,892
|
|
|
|
-13
|
%
|
Gathering fees
|
|
$
|
21,159
|
|
|
$
|
23,114
|
|
|
|
-8
|
%
|
|
$
|
65,112
|
|
|
$
|
65,359
|
|
|
|
0
|
%
|
Transportation charges
|
|
$
|
49
|
|
|
$
|
21,310
|
|
|
|
-100
|
%
|
|
$
|
23,750
|
|
|
$
|
62,577
|
|
|
|
-62
|
%
|
Depletion, depreciation and amortization
|
|
$
|
31,192
|
|
|
$
|
92,806
|
|
|
|
-66
|
%
|
|
$
|
93,274
|
|
|
$
|
279,762
|
|
|
|
-67
|
%
|
General and administrative expenses
|
|
$
|
1,595
|
|
|
$
|
4,567
|
|
|
|
-65
|
%
|
|
$
|
7,196
|
|
|
$
|
10,629
|
|
|
|
-32
|
%
|
|
|
|
|
|
|
|
Per Unit Costs and Expenses ($/Mcfe):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
$
|
0.29
|
|
|
$
|
0.38
|
|
|
|
-24
|
%
|
|
$
|
0.31
|
|
|
$
|
0.38
|
|
|
|
-18
|
%
|
Liquids gathering system operating lease expense
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
|
0
|
%
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
|
0
|
%
|
Production taxes
|
|
$
|
0.30
|
|
|
$
|
0.26
|
|
|
|
15
|
%
|
|
$
|
0.23
|
|
|
$
|
0.26
|
|
|
|
-12
|
%
|
Gathering fees
|
|
$
|
0.31
|
|
|
$
|
0.31
|
|
|
|
0
|
%
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
|
0
|
%
|
Transportation charges
|
|
$
|
|
|
|
$
|
0.28
|
|
|
|
n/a
|
|
|
$
|
0.11
|
|
|
$
|
0.29
|
|
|
|
-62
|
%
|
Depletion, depreciation and amortization
|
|
$
|
0.45
|
|
|
$
|
1.23
|
|
|
|
-63
|
%
|
|
$
|
0.44
|
|
|
$
|
1.29
|
|
|
|
-66
|
%
|
General and administrative expenses
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
|
-67
|
%
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
|
|
-40
|
%
|
39
Quarter Ended September 30, 2016 vs. Quarter Ended September 30, 2015
Production, Commodity Derivatives and Revenues:
Production.
During the quarter ended September 30, 2016, total production decreased on a gas equivalent basis to 69.3 Bcfe compared to 75.4 Bcfe for the same quarter in 2015. The
decrease is primarily attributable to decreased capital investment during the quarter ended September 30, 2016.
Commodity Prices Natural Gas.
Realized natural gas prices decreased 2% to $2.62 per Mcf in the third quarter of 2016 as
compared to $2.68 per Mcf for the same quarter of 2015. The Company does not currently have any open derivative contracts for natural gas production. During the three months ended September 30, 2015, the Companys average price for natural
gas including realized gains and losses on commodity derivatives was $3.33 per Mcf.
Commodity Prices Oil.
During the quarter ended September 30, 2016, the average price realization for the Companys oil was $41.55 per barrel compared to $39.43 per barrel for the same period in 2015. The Company does not currently have any open derivative
contracts for oil production.
Revenues.
The decrease in average natural gas prices and decreased total production
resulted in revenues decreasing to $199.3 million for the quarter ended September 30, 2016 as compared to $222.5 million for the same period in 2015.
Operating Costs and Expenses:
Lease Operating Expense.
Lease
operating expense (LOE) decreased to $19.9 million during the third quarter of 2016 compared to $28.6 million during the same period in 2015 largely related to lower costs due to improved efficiencies. On a unit of production
basis, LOE costs decreased to $0.29 per Mcfe during the third quarter of 2016 compared with $0.38 per Mcfe during the third quarter of 2015.
Liquids Gathering System Operating Lease Expense.
During December 2012, the Company sold a system of liquids gathering pipelines and central gathering facilities (the LGS) and certain
associated real property rights in the Pinedale Anticline in Wyoming. The Company entered into a long-term, triple net lease agreement with the buyer relating to the use of the LGS (the Lease Agreement). The Lease Agreement provides for
an initial term of 15 years, and annual rent for the initial term under the Lease Agreement is $20.0 million (as adjusted annually for changes based on the consumer price index) and may increase if certain volume thresholds are exceeded. The lease
is classified as an operating lease. For the three months ended September 30, 2016, the Company recognized operating lease expense associated with the Lease Agreement of $5.2 million, or $0.07 per Mcfe, as compared to $5.2 million, or $0.07 per
Mcfe for the same period in 2015.
Production Taxes.
During the three months ended September 30, 2016, production
taxes remained relatively flat at $20.7 million compared to $19.8 million during the same period in 2015, or $0.30 per Mcfe compared to $0.26 per Mcfe, respectively. Production taxes are primarily calculated based on a percentage of
revenue from production in Wyoming and Utah after certain deductions and were 10.4% of revenues for the quarter ended September 30, 2016 and 8.9% of revenues for the same period in 2015.
Gathering Fees.
Gathering fees decreased to $21.2 million for the three months ended September 30, 2016 compared to
$23.1 million during the same period in 2015 largely related to decreased production. On a per unit basis, gathering fees remained flat at $0.31 per Mcfe for the three months ended September 30, 2016 as compared to the same period in 2015.
Transportation Charges.
As a result of termination of the Rockies Express Pipeline (Rockies Express)
contract during the second quarter, there were no material transportation charges for the quarter ended September 30, 2016. Transportation charges were $21.3 million for the same period in 2015. See Note 8 for further discussion of the
Rockies Express contract.
40
Depletion, Depreciation and Amortization.
DD&A expenses decreased to
$31.2 million during the three months ended September 30, 2016 from $92.8 million for the same period in 2015, primarily attributable to a decreased DD&A rate on a unit of production basis as a result of the ceiling test
impairment during the fourth quarter of 2015. On a unit of production basis, the DD&A rate decreased to $0.45 per Mcfe for the quarter ended September 30, 2016 compared to $1.23 per Mcfe for the quarter ended September 30, 2015.
General and Administrative Expenses.
General and administrative expenses decreased to $1.6 million for the
quarter ended September 30, 2016 compared to $4.6 million for the same period in 2015 primarily related to corporate cost cutting measures. On a per unit basis, general and administrative expenses decreased to $0.02 per Mcfe for the
quarter ended September 30, 2016 compared to $0.06 per Mcfe for the quarter ended September 30, 2015.
Other Income and
Expenses:
Interest Expense.
During the quarter ended September 30, 2016, there was no interest expense
recognized compared to $43.1 million during the same period in 2015. No interest expense has been recognized subsequent to the petition date of April 29, 2016. (See Note 3).
Deferred Gain on Sale of Liquids Gathering System.
During the quarters ended September 30, 2016 and 2015, the Company
recognized $2.6 million in deferred gain on sale of the liquids gathering system relating to the sale of a system of pipelines and central gathering facilities and certain associated real property rights in the Pinedale Anticline in Wyoming during
December 2012.
Commodity Derivatives:
Gain/(Loss) on Commodity Derivatives.
The Company does not currently have any open commodity derivative contracts. During the quarter ended September 30, 2015, the Company recognized a gain of
$9.4 million related to commodity derivatives. Of this total, the Company recognized $45.3 million of realized gain on commodity derivatives during the quarter ended September 30, 2015. The realized gain or loss on commodity derivatives
relates to actual amounts received or paid or to be received or paid under the Companys derivative contracts. This amount also includes an unrealized loss on commodity derivatives of $35.9 million during the quarter ended September 30,
2015. The unrealized gain or loss on commodity derivatives represents the change in the fair value of these derivative instruments over the remaining term of the contract. See Note 6.
Reorganization Items:
Reorganization Items, Net.
Reorganization items, net of $3.1 million for the quarter ended September 30, 2016 are primarily made up of professional fees associated with the pendency of the Companys chapter 11 cases.
Income (Loss) from Continuing Operations:
Pretax Income (loss).
The Company recognized income before income taxes of $98.5 million for the quarter ended September 30, 2016 compared with a loss before income taxes of
$4.2 million for the same period in 2015. The increase in earnings is primarily due to decreased DD&A, reduced interest expense and reduced transportation costs during the three months ended September 30, 2016 and partially offset by
costs associated with the reorganization and decreased revenues as a result of decreased natural gas prices during the three months ended September 30, 2016.
Income Taxes.
The Company has recorded a valuation allowance against all deferred tax assets as of September 30, 2016. Some or all of this valuation allowance may be reversed in future periods
against future income.
41
Net Income (Loss).
For the three months ended September 30, 2016, the Company
recognized net income of $98.4 million, or $0.64 per diluted share, as compared with a net loss of $3.1 million or -$0.02 per diluted share, for the same period in 2015. The increase in earnings is primarily due to decreased DD&A,
reduced interest expense and reduced transportation costs during the three months ended September 30, 2016 and partially offset by costs associated with the reorganization and decreased revenues as a result of decreased natural gas prices and
total production during the three months ended September 30, 2016.
Nine Months Ended September 30, 2016 vs. Nine Months Ended
September 30, 2015
Production, Commodity Derivatives and Revenues:
Production.
During the nine months ended September 30, 2016, total production decreased slightly by -1% on a gas equivalent
basis to 213.5 Bcfe compared to 216.3 Bcfe for the same period in 2015.
Commodity Prices Natural Gas.
Realized natural gas prices decreased 21% to $2.13 per Mcf during the nine months ended September 30, 2016 as compared to $2.68 per Mcf for the same period in 2015. The Company does not currently have any open derivative contracts for natural
gas production. During the nine months ended September 30, 2015, the Companys average price for natural gas including realized gains and losses on commodity derivatives was $3.32 per Mcf.
Commodity Prices Oil.
During the nine months ended September 30, 2016, the average price realization for the
Companys oil was $35.98 per barrel compared with $41.75 per barrel during the same period in 2015. The Company does not currently have any open derivative contracts for oil production.
Revenues.
The decrease in average oil and natural gas prices resulted in revenues decreasing to $505.2 million for the nine
months ended September 30, 2016 as compared to $649.8 million for the same period in 2015.
Operating Costs and Expenses:
Lease Operating Expense.
LOE decreased to $67.2 million during the nine months ended September 30,
2016 compared to $82.5 million during the same period in 2015 largely related to lower costs due to improved efficiencies. On a unit of production basis, LOE costs decreased to $0.31 per Mcfe during the nine months ended September 30, 2016
compared to $0.38 per Mcfe during the same period in 2015.
Liquids Gathering System Operating Lease Expense.
During
December 2012, the Company sold the LGS and certain associated real property rights in the Pinedale Anticline in Wyoming and the Company entered into the Lease Agreement. The Lease Agreement provides for an initial term of 15 years, and annual rent
for the initial term under the Lease Agreement is $20.0 million (as adjusted annually for changes based on the consumer price index) and may increase if certain volume thresholds are exceeded. For the nine months ended September 30, 2016, the
Company recognized operating lease expense associated with the Lease Agreement of $15.5 million, or $0.07 per Mcfe, as compared to $15.5 million, or $0.07 per Mcfe, for the same period in 2015.
Production Taxes.
During the nine months ended September 30, 2016, production taxes were $49.4 million compared to
$56.9 million during the same period in 2015, or $0.23 per Mcfe compared to $0.26 per Mcfe. Production taxes are primarily calculated based on a percentage of revenue from production in Wyoming and Utah after certain deductions and were 9.8% of
revenues for the nine months ended September 30, 2016 and 8.8% of revenues for the same period in 2015. The decrease in per unit taxes is primarily attributable to decreased oil and natural gas prices during the nine months ended
September 30, 2016 as compared to the same period in 2015.
Gathering Fees.
Gathering fees decreased slightly to
$65.1 million for the nine months ended September 30, 2016 compared to $65.4 million during the same period in 2015. On a per unit basis, gathering fees remained flat at $0.30 per Mcfe for the nine months ended September 30, 2016
and 2015.
42
Transportation Charges.
Transportation charges decreased to $23.8 million for
the nine months ended September 30, 2016 as compared to $62.6 million for the same period in 2015 primarily as a result of the termination of the Rockies Express contract during the second quarter of 2016. See Note 8 for further discussion
of the Rockies Express contract.
Depletion, Depreciation and Amortization.
DD&A expenses decreased to
$93.3 million during the nine months ended September 30, 2016 from $279.8 million for the same period in 2015, primarily attributable to a decreased DD&A rate on a unit of production basis as a result of the ceiling test
impairment during the fourth quarter of 2015. On a unit of production basis, the DD&A rate decreased to $0.44 per Mcfe for the nine months ended September 30, 2016 compared to $1.29 per Mcfe for the nine months ended September 30,
2015.
General and Administrative Expenses.
General and administrative expenses decreased to $7.2 million for the
nine months ended September 30, 2016 compared to $10.6 million for the same period in 2015. The decrease in general and administrative expenses is primarily attributable to corporate cost cutting measures. On a per unit basis, general and
administrative expenses decreased to $0.03 per Mcfe for the nine months ended September 30, 2016 compared to $0.05 per Mcfe for the nine months ended September 30, 2015.
Other Income and Expenses:
Interest Expense.
Interest
expense decreased to $66.6 million during the nine months ended September 30, 2016 compared to $128.4 million during the same period in 2015. No interest expense has been recognized subsequent to the petition date of April 29,
2016. (See Note 3).
Litigation Expense.
During the nine months ended September 30, 2015, the Company recognized
litigation expenses of $4.4 million related to the resolution of litigation matters.
Restructuring Expenses.
During
the nine months ended September 30, 2016, the Company incurred $7.2 million in costs and fees in connection with its efforts to restructure its debt prior to filing the chapter 11 petitions.
Deferred Gain on Sale of Liquids Gathering System.
During the nine months ended September 30, 2016 and 2015, the Company
recognized $7.9 million in deferred gain on sale of the liquids gathering system relating to the sale of a system of pipelines and central gathering facilities and certain associated real property rights in the Pinedale Anticline in Wyoming during
December 2012.
Commodity Derivatives:
Gain (Loss) on Commodity Derivatives.
The Company does not currently have any open commodity derivative contracts. During the nine months ended September 30, 2015, the Company recognized a
gain of $42.6 million related to commodity derivatives. Of this total, the Company recognized $127.3 million of realized gain on commodity derivatives. The realized gain or loss on commodity derivatives relates to actual amounts received or
paid or to be received or paid under the Companys derivative contracts. This amount also includes an unrealized loss on commodity derivatives of $84.7 million. The unrealized gain or loss on commodity derivatives represents the change in
the fair value of these derivative instruments over the remaining term of the contract. See Note 6.
Reorganization Items:
Reorganization Items, Net.
Reorganization items, net of $25.3 million for the nine months ended
September 30, 2016 are primarily made up of professional fees and a non-cash charge to write-off all of the unamortized debt issuance costs totaling $18.7 million related to the unsecured Credit Agreement, unsecured Senior Notes issued by Ultra
Resources the unsecured 2018 Senior Notes issued by the Company and the unsecured 2024 Senior Notes issued by the Company as these debt instruments are expected to be impacted by the pendency of the Companys chapter 11 cases.
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Income (Loss) from Continuing Operations:
Pretax Income (loss).
The Company recognized income before income taxes of $90.3 million for the nine months ended
September 30, 2016 compared with a loss before income taxes of $6.0 million for the same period in 2015. The increase in earnings is largely due to decreased DD&A, reduced interest expense and reduced transportation costs during the
nine months ended September 30, 2016 and partially offset by costs associated with the reorganization and decreased revenues as a result of decreased oil and natural gas prices during the nine months ended September 30, 2016.
Income Taxes.
The Company has recorded a valuation allowance against all deferred tax assets as of September 30, 2016. Some
or all of this valuation allowance may be reversed in future periods against future income.
Net Income (Loss).
For the
nine months ended September 30, 2016, the Company recognized net income of $90.6 million, or $0.59 per diluted share, as compared with net loss of $2.6 million, or -$0.02 per diluted share, for the same period in 2015. The increase in
earnings is largely due to decreased DD&A, reduced interest expense and reduced transportation costs during the nine months ended September 30, 2016 and partially offset by costs associated with the reorganization and decreased revenues as
a result of decreased oil and natural gas prices during the nine months ended September 30, 2016.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Before Filing Under Chapter 11 of the United States Bankruptcy Code
We have historically funded our operations primarily through cash flows from operating activities, borrowings under the Credit Agreement,
proceeds from the issuance of debt and proceeds from asset sales. However, future cash flows are subject to a number of variables, and are highly dependent on the prices we receive for oil and natural gas. Oil and natural gas prices declined
severely during fiscal year 2015 and declined even further during the first quarter of 2016. The Henry Hub natural gas spot price dropped below $1.65 per MMBtu in March 2016 for the first time in 17 years. Although natural gas prices have improved
in recent months, there is still significant volatility in commodity prices and these prices are still lower than the industry has experienced in recent years. These lower commodity prices have negatively impacted revenues, earnings and cash flows,
and sustained low oil and natural gas prices will have a material and adverse effect on our liquidity position.
Liquidity After Filing
Under Chapter 11 of the United States Bankruptcy Code
As described in Note 1, the filing of the chapter 11 petitions
constituted an event of default with respect to our existing debt obligations. However, subject to certain exceptions under the Bankruptcy Code, the filing of the chapter 11 petitions automatically enjoined, or stayed, the continuation of any
judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the chapter 11 petitions. Thus, for example, most creditor actions to obtain
possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and
until the Bankruptcy Court lifts the automatic stay.
The Bankruptcy Court has approved payment of certain prepetition
obligations, including payments for employee wages, salaries and certain other benefits, customer programs, taxes, utilities, insurance, surety bond premiums as well as payments to possessory lien vendors. Despite the liquidity provided by our
existing cash on hand, our ability to maintain normal credit terms with our suppliers may become impaired. We may be required to pay cash in advance to certain vendors and may experience restrictions on the availability of trade credit, which would
further reduce our liquidity. If liquidity problems persist, our suppliers could refuse to provide key products and services in the future. In addition, due to the public perception of our financial condition and results of operations, in particular
with regard to our potential failure to meet our debt obligations, some vendors could be reluctant to enter into long-term agreements with us.
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Although we have lowered our capital budget as compared to 2015, our business remains
capital intensive. In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with our chapter 11 proceedings and expect that we will continue to incur
significant professional fees and costs throughout our chapter 11 proceedings. The Company believes it has sufficient liquidity, including approximately $343.5 million of cash on hand as of September 30, 2016 and funds generated from ongoing
operations, to fund anticipated cash requirements through the chapter 11 proceedings for operating and capital expenditures and for working capital purposes and excluding principal and interest payments on our outstanding debt.
The Company does not intend to seek debtor-in-possession (DIP) financing at this time. However, given the current level of
volatility in the market and the unpredictability of certain costs that could potentially arise in our operations, our liquidity needs could be significantly higher than we currently anticipate. There are no assurances that our current liquidity is
sufficient to allow us to satisfy our obligations related to the chapter 11 cases, proceed with the confirmation of a chapter 11 plan of reorganization and emerge from bankruptcy. We can provide no assurance that we will be able to secure additional
interim financing or exit financing sufficient to meet our liquidity needs or, if sufficient funds are available, offered to us on acceptable terms
.
Our ability to maintain adequate liquidity through the reorganization process and beyond depends on successful operation of our business, and appropriate management of operating expenses and capital
spending. Our anticipated liquidity needs are highly sensitive to changes in each of these and other factors.
Going
Concern.
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and
satisfaction of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of our chapter 11 proceedings. We have significant
indebtedness, all of which we have reclassified to liabilities subject to compromise at September 30, 2016. Our level of indebtedness has adversely impacted and is continuing to adversely impact our financial condition. As a result of our
financial condition, the defaults under our debt agreements, and the risks and uncertainties surrounding our chapter 11 proceedings, substantial doubt exists that we will be able to continue as a going concern.
Investors should review the disclosures and other information, including the risk factors, provided in our most recent Annual Report on
Form 10-K and our Quarterly Reports on Form 10-Q for the periods ended March 31, 2016 and June 30, 2016.
Capital Expenditures.
For the nine month period ended September 30, 2016, total capital expenditures were
$189.5 million. During this period, the Company participated in 78 gross (54.2 net) wells in Wyoming that were drilled to total depth and cased. No wells are scheduled to be drilled in Utah or Pennsylvania during 2016.
2016 Capital Investment Plan.
For 2016, our original capital budget was $260.0 million, reflecting the low commodity price
environment at the beginning of the year. On April 26, 2016, our Board of Directors approved an increase to our capital budget for 2016 from $260.0 million to $295.0 million. The additional capital in our increased budget will be used to drill
additional development wells in Wyoming and to complete some of our uncompleted wells in Utah. We expect to fund our 2016 capital expenditures budget through cash flows from operations and cash on hand.
Other Developments.
Trading in the Companys common stock on the NYSE was suspended on May 3, 2016 and the common
stock was delisted. The common stock of the Company currently trades on the OTC Pink marketplace under the symbol UPLMQ.
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Ultra Resources, Inc.
Bank indebtedness.
Ultra Resources, Inc. (Ultra Resources), a wholly owned subsidiary of the Company, is a party
to the Credit Agreement. Ultra Resources obligations under the Credit Agreement are guaranteed by the Company and UP Energy Corporation, a wholly owned subsidiary of the Company.
Ultra Resources filing of the chapter 11 petitions described in Note 1 constituted an event of default that accelerated its
obligations under the Credit Agreement. Other events of default are also present with respect to the Credit Agreement, including a failure to make interest payments and, as described below, a failure to deliver annual audited consolidated financial
statements without a going concern qualification, a failure to meet the minimum PV-9 ratio covenant and a failure to comply with the consolidated leverage covenant in the Credit Agreement at the end of the first quarter of 2016. The Credit Agreement
provides that upon the acceleration of Ultra Resources obligations under the Credit Agreement, the outstanding balance of loans extended under the Credit Agreement comes due, unpaid interest accrued as of the time of the acceleration comes
due, and any fees or other obligations of the borrower come due. Under the Bankruptcy Code, the creditors under the Credit Agreement are stayed from taking any action against Ultra Resources or any of the other Debtors as a result of the default.
Prior to April 29, 2016, loans under the Credit Agreement bore interest, at the borrowers option, based on
(A) a rate per annum equal to the prime rate or the weighted average fed funds rate on overnight transactions during the preceding business day plus a margin based on a grid of the borrowers consolidated leverage ratio, or (B) a base
Eurodollar rate, substantially equal to the LIBOR rate, plus a margin based on a grid of the borrowers consolidated leverage ratio.
The Credit Agreement requires us to deliver annual audited, consolidated financial statements for the Company without a going concern or like qualification or explanation. On March 15,
2016, we delivered an audit report with respect to the financial statements in our 2015 Annual Report on Form 10-K that included an explanatory paragraph expressing uncertainty as to our ability to continue as a going concern.
The Credit Agreement contains a consolidated leverage covenant, pursuant to which Ultra Resources is required to maintain a
maximum ratio of its total funded consolidated debt to its trailing four fiscal quarters EBITDAX of 3.5 to 1.0. Based on Ultra Resources EBITDAX for the trailing four fiscal quarters ended March 31, 2016, we were not in compliance
with this consolidated leverage covenant at March 31, 2016 (the ratio was 4.6 times at March 31, 2016).
The Credit
Agreement contains a PV-9 covenant, pursuant to which Ultra Resources is required to maintain a minimum ratio of the discounted net present value of its oil and gas properties to its total funded consolidated debt of 1.5 times. We were required to
report whether we were in compliance with this covenant on April 1, 2016. Based on the PV-9 of its oil and gas properties at December 31, 2015, Ultra Resources failed to comply with the PV-9 ratio covenant under the Credit Agreement (the
ratio was 0.9 times at December 31, 2015).
Senior Notes.
Ultra Resources has outstanding $1.46 billion of
Senior Notes which were issued pursuant to a certain Master Note Purchase Agreement dated as of March 6, 2008 (as amended, supplemented or otherwise modified, the MNPA). The Ultra Resources Senior Notes rank pari passu with
the Credit Agreement. Payment of the Senior Notes is guaranteed by the Company and by UP Energy Corporation. The Ultra Resources Senior Notes are subject to representations, warranties, covenants and events of default similar to those in the
Credit Agreement.
Ultra Resources filing of the chapter 11 petitions described in Note 1 constituted an event of
default that accelerated its obligations under the MNPA and the Senior Notes. Other events of default are also present with respect to the MNPA, including a failure to comply with the consolidated leverage covenant at the end of the first quarter of
2016 and a failure to make principal and interest payments due under the Ultra Resources Senior
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Notes. The MNPA provides that upon the acceleration of Ultra Resources obligations under the MNPA and the Senior Notes, among other matters, the Senior Notes are deemed to have matured, the
unpaid principal balance of the Senior Notes comes due, unpaid interest accrued as of the time of the acceleration comes due, and any applicable Make-Whole Amount (as determined pursuant to the MNPA) comes due. Under the Bankruptcy Code, the
creditors under the Senior Notes are stayed from taking any action against Ultra Resources or any of the other the Debtors as a result of the default.
The MNPA contains a consolidated leverage covenant, pursuant to which Ultra Resources is required to maintain a maximum ratio of its total funded consolidated debt to its trailing four fiscal
quarters EBITDAX of 3.5 to 1.0. Based on Ultra Resources EBITDAX for the trailing four fiscal quarters ended March 31, 2016, we were not in compliance with this consolidated leverage covenant at March 31, 2016 (the ratio was
4.6 times at March 31, 2016).
On March 1, 2016, we failed to make an interest payment of approximately $40.0
million and a principal payment of $62.0 million, each of which was due March 1, 2016 under the terms of the Ultra Resources Senior Notes. We entered into a forbearance agreement related to the failure to make these payments with the
holders of the Ultra Resources Senior Notes, and we filed the chapter 11 petitions without making the payments before the forbearance period expired.
Interest Expense.
No interest expense has been recognized with respect to the Credit Agreement or the Ultra Resources Senior Notes subsequent to the Petition Date.
Ultra Petroleum Corp. Senior Notes
The Companys filing of the chapter 11 petitions described in Note 1 constituted an event of default that accelerated the Companys obligations under the 2024 Notes and the 2018 Notes (defined
below). Additionally, other events of default, including cross-defaults, are present due to the failure to make interest payments and other matters. Under the indentures pursuant to which the 2024 Notes and the 2018 Notes, respectively, were issued,
upon the acceleration of the Companys obligations under the 2024 Notes and the 2018 Notes, among other matters, the 2024 Notes and the 2018 Notes, respectively, are deemed to have matured, the unpaid principal balance of the 2024 Notes and the
2018 Notes, respectively, comes due, unpaid interest accrued as of the time of the acceleration comes due, and any applicable premiums (as determined pursuant to the indentures) comes due. Under the Bankruptcy Code, the creditors under the 2024
Notes and the 2018 Notes are stayed from taking any action against the Debtors as a result of the default.
Senior Notes
due 2024:
On September 18, 2014, the Company issued $850.0 million of 6.125% Senior Notes due 2024 (2024 Notes). The 2024 Notes are general, unsecured senior obligations of the Company and mature on October 1, 2024. The
2024 Notes rank equally in right of payment to all existing and future senior indebtedness of the Company and effectively rank junior to all future secured indebtedness of the Company (to the extent of the value of the collateral securing such
indebtedness). The 2024 Notes are not guaranteed by the Companys subsidiaries and, as a result, are structurally subordinated to the indebtedness and other obligations of the Companys subsidiaries. The 2024 Notes are subject to covenants
that restrict the Companys ability to incur indebtedness, make distributions and other restricted payments, grant liens, use the proceeds of asset sales, make investments and engage in affiliate transactions.
Interest due under the 2024 Notes is payable each April 1 and October 1. On April 1, 2016, we elected to defer making an
interest payment on the 2024 Notes of approximately $26.0 million due April 1, 2016. The indenture governing the 2024 Notes provides a 30-day grace period for us to make this interest payment. We did not make this interest payment before the
end of the grace period, which resulted in an event of default under the indenture governing the 2024 Notes.
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Senior Notes due 2018:
On December 12, 2013, the Company issued $450.0
million of 5.75% Senior Notes due 2018 (2018 Notes). The 2018 Notes are general, unsecured senior obligations of the Company and mature on December 15, 2018. The 2018 Notes rank equally in right of payment to all existing and future
senior indebtedness of the Company and effectively rank junior to all future secured indebtedness of the Company (to the extent of the value of the collateral securing such indebtedness). The 2018 Notes are not guaranteed by the Companys
subsidiaries and, as a result, are structurally subordinated to the indebtedness and other obligations of the Companys subsidiaries. The 2018 Notes are subject to covenants that restrict the Companys ability to incur indebtedness, make
distributions and other restricted payments, grant liens, use the proceeds of asset sales, make investments and engage in affiliate transactions. Interest due under the 2018 Notes is payable each June 15 and December 15.
The Companys filing of the chapter 11 petitions described in Note 1 constituted an event of default that accelerated the
Companys obligations under the 2024 Notes and the 2018 Notes. Additionally, other events of default, including cross-defaults resulting from the acceleration of indebtedness outstanding under the Credit Agreement and the Ultra Resources
Senior Notes, are present due to the failure to make interest payments and other matters. Under the Bankruptcy Code, the creditors under the 2024 Notes and the 2018 Notes are stayed from taking any action against the Debtors as a result of the
bankruptcy filing.
Interest Expense
. No interest expense has been recognized with respect to the Credit
Agreement or the Ultra Resources Senior Notes subsequent to the Petition Date.
Nine Months Ended September 30, 2016 vs. Nine
Months Ended September 30, 2015 Cash Flow Impact
Operating Activities
.
During the nine
months ended September 30, 2016, net cash provided by operating activities was $170.8 million, a 58% decrease from net cash provided by operating activities of $411.2 million for the same period in 2015. The decrease in net cash
provided by operating activities is largely attributable to reduced interest expense and decreased revenues as a result of decreased oil and natural gas price realizations during the nine months ended September 30, 2016 as compared to the same
period in 2015 and net changes in working capital.
Investing Activities.
During the nine months ended
September 30, 2016, net cash used in investing activities was $200.1 million as compared to $405.0 million for the same period in 2015. The decrease in net cash used in investing activities is largely related to decreased capital
investments associated with the Companys drilling activities.
Financing Activities.
During the nine months
ended September 30, 2016, net cash provided by financing activities was $368.7 million compared to $10.5 million for the same period in 2015. The change in net cash provided by financing activities is primarily due to increased
borrowings during 2016 related to drawings under the Credit Agreement.
OFF BALANCE SHEET ARRANGEMENTS
The Company did not have any off-balance sheet arrangements as of September 30, 2016.
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CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This report contains or incorporates by reference forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this document,
including without limitation, statements in Managements Discussion and Analysis of Financial Condition and Results of Operations regarding the Companys financial position, estimated quantities and net present values of reserves, business
strategy, plans and objectives of the Companys management for future operations, covenant compliance and those statements preceded by, followed by or that otherwise include the words believe, expects,
anticipates, intends, estimates, projects, target, goal, plans, objective, should, or similar expressions or variations on such expressions
are forward-looking statements. The Company can give no assurances that the assumptions upon which such forward-looking statements are based will prove to be correct nor can the Company assure adequate funding will be available to execute the
Companys planned future capital program.
Other risks and uncertainties include, but are not limited to, fluctuations in
the price the Company receives for oil and gas production, reductions in the quantity of oil and gas sold due to increased industry-wide demand and/or curtailments in production from specific properties due to mechanical, marketing or other
problems, operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration and development
opportunities being greater or fewer than currently anticipated and increased financing costs due to a significant increase in interest rates. See the Companys Annual Report on Form 10-K for the year ended December 31, 2015 and our
Quarterly Report on Form 10-Q for the periods ended March 31, 2016 and June 30, 2016 for additional risks related to the Companys business.