10-Q 1 upl-10q_20180331.htm 10-Q upl-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to

Commission file number 001-33614

 

ULTRA PETROLEUM CORP.

(Exact name of registrant as specified in its charter)

 

 

Yukon, Canada

N/A

(State or other jurisdiction of

incorporation or organization)

(I.R.S. employer

identification number)

 

 

400 North Sam Houston Parkway East,

Suite 1200, Houston, Texas

77060

(Address of principal executive offices)

(Zip code)

(281) 876-0120

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES      NO 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES      NO 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

◻  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES      NO 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distributions of securities under a plan confirmed by a court. YES      NO 

The number of shares outstanding, without par value, of Ultra Petroleum Corp., outstanding as of April 25, 2018 was 197,053,583.

 

 


TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Financial Statements

 

3

 

 

 

 

 

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

38

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

41

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

42

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

42

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

 

 

 

 

 

ITEM 3.

 

Defaults upon Senior Securities

 

42

 

 

 

 

 

ITEM 4.

 

Mine Safety Disclosures

 

42

 

 

 

 

 

ITEM 5.

 

Other Information

 

42

 

 

 

 

 

ITEM 6.

 

Exhibits

 

43

 

 

 

 

 

 

 

Signatures

 

44

 

 

 

 


 

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

ULTRA PETROLEUM CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

For the Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

(Amounts in thousands of U.S. dollars, except per share data)

 

Revenues:

 

 

 

 

 

 

 

 

Natural gas sales

 

$

181,462

 

 

$

188,851

 

Oil sales

 

 

41,284

 

 

 

31,348

 

Other revenues

 

 

2,628

 

 

 

759

 

Total operating revenues

 

 

225,374

 

 

 

220,958

 

Expenses:

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

21,764

 

 

 

23,136

 

Facility lease expense

 

 

6,156

 

 

 

5,226

 

Production taxes

 

 

23,270

 

 

 

22,132

 

Gathering fees

 

 

23,055

 

 

 

20,929

 

Depletion, depreciation and amortization

 

 

50,540

 

 

 

31,753

 

General and administrative

 

 

12,688

 

 

 

1,051

 

Total operating expenses

 

 

137,473

 

 

 

104,227

 

Operating income

 

 

87,901

 

 

 

116,731

 

Other income (expense), net:

 

 

 

 

 

 

 

 

Interest expense

 

 

(35,837

)

 

 

(85,447

)

Loss on commodity derivatives

 

 

(6,530

)

 

 

(13,218

)

Deferred gain on sale of liquids gathering system

 

 

2,638

 

 

 

2,638

 

Contract settlement expense

 

 

 

 

 

(52,707

)

Other income (expense), net

 

 

(245

)

 

 

(147

)

Total other (expense) income, net

 

 

(39,974

)

 

 

(148,881

)

Reorganization items, net

 

 

 

 

 

(57,546

)

Income (loss) before income tax provision

 

 

47,927

 

 

 

(89,696

)

Income tax provision

 

 

434

 

 

 

2

 

Net income (loss)

 

$

47,493

 

 

$

(89,698

)

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

Net income (loss) per common share - basic

 

$

0.24

 

 

$

(1.12

)

Fully diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

Net income (loss) per common share - fully diluted

 

$

0.24

 

 

$

(1.12

)

Weighted average common shares outstanding - basic

 

 

196,550

 

 

 

80,018

 

Weighted average common shares outstanding - fully diluted

 

 

196,550

 

 

 

80,018

 

 

See accompanying notes to consolidated financial statements.

3


 

ULTRA PETROLEUM CORP.

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

 

 

(Amounts in thousands of

U.S. dollars, except share data)

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,782

 

 

$

16,631

 

Restricted cash

 

 

1,573

 

 

 

1,638

 

Oil and gas revenue receivable

 

 

69,638

 

 

 

86,487

 

Joint interest billing and other receivables

 

 

20,603

 

 

 

16,616

 

Derivative assets

 

 

25,118

 

 

 

16,865

 

Income tax receivable

 

 

6,431

 

 

 

10,091

 

Inventory

 

 

18,962

 

 

 

13,450

 

Other current assets

 

 

4,161

 

 

 

5,647

 

Total current assets

 

 

164,268

 

 

 

167,425

 

Oil and gas properties, net, using the full cost method of accounting:

 

 

 

 

 

 

 

 

Proven

 

 

1,415,948

 

 

 

1,325,068

 

Property, plant and equipment, net

 

 

10,215

 

 

 

9,569

 

Other assets

 

 

14,959

 

 

 

10,920

 

Total assets

 

$

1,605,390

 

 

$

1,512,982

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

54,688

 

 

$

59,951

 

Accrued liabilities

 

 

72,628

 

 

 

80,268

 

Production taxes payable

 

 

74,974

 

 

 

51,352

 

Interest payable

 

 

41,578

 

 

 

24,406

 

Derivative liabilities

 

 

21,036

 

 

 

 

Capital cost accrual

 

 

24,434

 

 

 

32,513

 

Total current liabilities

 

 

289,338

 

 

 

248,490

 

Long-term debt

 

 

2,118,515

 

 

 

2,116,211

 

Deferred gain on sale of liquids gathering system

 

 

102,551

 

 

 

105,189

 

Other long-term obligations

 

 

191,721

 

 

 

197,728

 

Total liabilities

 

 

2,702,125

 

 

 

2,667,618

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock - no par value; authorized - unlimited; issued and outstanding - 197,053,583 and 196,346,736 at March 31, 2018 and December 31, 2017, respectively

 

 

2,126,727

 

 

 

2,116,018

 

Treasury stock

 

 

(49

)

 

 

(49

)

Retained loss

 

 

(3,223,413

)

 

 

(3,270,605

)

Total shareholders' deficit

 

 

(1,096,735

)

 

 

(1,154,636

)

Total liabilities and shareholders' equity

 

$

1,605,390

 

 

$

1,512,982

 

 

See accompanying notes to consolidated financial statements.

4


 

ULTRA PETROLEUM CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in thousands of U. S. dollars, except share data)

 

 

 

Shares

Issued and

Outstanding

(000's)

 

 

Common

Stock

 

 

Retained

Loss

 

 

Treasury

Stock

 

 

Total

Shareholders'

(Deficit)

Equity

 

Balances at December 31, 2016

 

 

80,017

 

 

$

510,063

 

 

$

(3,438,165

)

 

$

(49

)

 

$

(2,928,151

)

Equitization of Holdco Notes

 

 

70,579

 

 

 

978,230

 

 

 

 

 

 

 

 

 

978,230

 

Rights Offering, including Backstop

 

 

44,390

 

 

 

573,774

 

 

 

 

 

 

 

 

 

573,774

 

Employee stock plan grants

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock plan grants

 

 

2,191

 

 

 

26,673

 

 

 

 

 

 

 

 

 

26,673

 

Net share settlements

 

 

(840

)

 

 

 

 

 

(9,580

)

 

 

 

 

 

(9,580

)

Fair value of employee stock plan grants

 

 

 

 

 

27,278

 

 

 

 

 

 

 

 

 

27,278

 

Net income

 

 

 

 

 

 

 

 

177,140

 

 

 

 

 

 

177,140

 

Balances at December 31, 2017

 

 

196,347

 

 

$

2,116,018

 

 

$

(3,270,605

)

 

$

(49

)

 

$

(1,154,636

)

Stock plan grants

 

 

1,226

 

 

 

 

 

 

 

 

 

 

 

 

 

Net share settlements

 

 

(519

)

 

 

 

 

 

(2,061

)

 

 

 

 

 

(2,061

)

Fair value of employee stock plan grants

 

 

 

 

 

10,709

 

 

 

 

 

 

 

 

 

10,709

 

Net income

 

 

 

 

 

 

 

 

47,493

 

 

 

 

 

 

47,493

 

Initial adoption of ASC 606

 

 

 

 

 

 

 

 

1,760

 

 

 

 

 

 

1,760

 

Balances at March 31, 2018

 

 

197,054

 

 

$

2,126,727

 

 

$

(3,223,413

)

 

$

(49

)

 

$

(1,096,735

)

 

See accompanying notes to consolidated financial statements.

 

 

5


 

ULTRA PETROLEUM CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

(Amounts in thousands of U.S. dollars)

 

Operating activities - cash provided by (used in):

 

 

 

 

 

 

 

 

Net income (loss) for the period

 

$

47,493

 

 

$

(89,698

)

Adjustments to reconcile net income (loss) to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depletion, depreciation and amortization

 

 

50,540

 

 

 

31,753

 

Unrealized loss on commodity derivatives

 

 

7,606

 

 

 

13,218

 

Deferred gain on sale of liquids gathering system

 

 

(2,638

)

 

 

(2,638

)

Stock compensation

 

 

8,810

 

 

 

851

 

Non-cash reorganization items, net

 

 

 

 

 

43,576

 

Amortization of deferred financing costs

 

 

2,727

 

 

 

 

Other

 

 

209

 

 

 

172

 

Net changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

12,561

 

 

 

14,680

 

Other current assets

 

 

2,485

 

 

 

203

 

Other non-current assets

 

 

30

 

 

 

 

Accounts payable

 

 

(5,263

)

 

 

22,968

 

Accrued liabilities

 

 

(7,486

)

 

 

38,691

 

Production taxes payable

 

 

23,622

 

 

 

18,512

 

Interest payable

 

 

17,172

 

 

 

85,339

 

Other long-term obligations

 

 

(12,708

)

 

 

(8,292

)

Income taxes payable/receivable

 

 

6,836

 

 

 

2,099

 

Net cash provided by operating activities

 

 

151,996

 

 

 

171,434

 

Investing Activities - cash provided by (used in):

 

 

 

 

 

 

 

 

Oil and gas property expenditures

 

 

(134,500

)

 

 

(89,360

)

Change in capital cost accrual

 

 

(8,079

)

 

 

(919

)

Inventory

 

 

(5,074

)

 

 

(2,302

)

Purchase of capital assets

 

 

(1,196

)

 

 

(234

)

Net cash used in investing activities

 

 

(148,849

)

 

 

(92,815

)

Financing activities - cash provided by (used in):

 

 

 

 

 

 

 

 

Borrowings under Credit Agreement

 

 

191,000

 

 

 

 

Payments under Credit Agreement

 

 

(191,000

)

 

 

 

Repurchased shares/net share settlements

 

 

(2,061

)

 

 

(44

)

Net cash used in financing activities

 

 

(2,061

)

 

 

(44

)

Increase in cash during the period

 

 

1,086

 

 

 

78,575

 

Cash, cash equivalents, and restricted cash, beginning of period

 

 

18,269

 

 

 

405,049

 

Cash, cash equivalents and restricted cash, end of period

$

19,355

 

 

$

483,624

 

 

See accompanying notes to consolidated financial statements.

 

 

6


 

ULTRA PETROLEUM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(All amounts in this Quarterly Report on Form 10-Q are expressed in thousands of U.S. dollars (except per share data) unless otherwise noted).

DESCRIPTION OF THE BUSINESS:

Ultra Petroleum Corp. (the “Company”) is an independent oil and gas company engaged in the development, production, operation, exploration and acquisition of oil and natural gas properties. The Company is incorporated under the laws of Yukon, Canada. The Company’s principal business activities are developing its long-life natural gas reserves in the Pinedale and Jonah fields of the Green River Basin of Wyoming and its oil reserves in the Uinta Basin in Utah.

 

1.  SIGNIFICANT ACCOUNTING POLICIES:

The accompanying financial statements, other than the balance sheet data as of December 31, 2017, are unaudited and were prepared from the Company’s records, but do not include all disclosures required by U.S. Generally Accepted Accounting Principles (“GAAP”). Balance sheet data as of December 31, 2017 was derived from the Company’s audited financial statements. The Company’s management believes that these financial statements include all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All adjustments are of a normal and recurring nature unless specifically noted. The Company prepared these statements on a basis consistent with the Company’s annual audited statements and Regulation S-X. Regulation S-X allows the Company to omit some of the footnote and policy disclosures required by GAAP and normally included in annual reports on Form 10-K. You should read these interim financial statements together with the financial statements, summary of significant accounting policies and notes to the Company’s most recent annual report on Form 10-K.

(a) Basis of Presentation and Principles of Consolidation:  The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company presents its financial statements in accordance with GAAP. All inter-company transactions and balances have been eliminated upon consolidation.

(b) Cash and Cash Equivalents:  The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

(c) Restricted Cash:  Restricted cash represents cash received by the Company from production sold where the final division of ownership of the production is unknown or in dispute.

The Company follows ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash and reports the change in cash, cash equivalents, and restricted cash in total on the Consolidated Statements of Cash Flows.  See the following table for a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same amounts shown in the Consolidated Statements of Cash Flows.

Current Presentation

 

March 31, 2018

 

 

March 31, 2017

 

Cash and Cash Equivalents

 

$

17,782

 

 

$

479,978

 

Restricted Cash

 

 

1,573

 

 

 

3,646

 

Total cash, cash equivalents, and restricted cash

 

$

19,355

 

 

$

483,624

 

 

(d) Accounts Receivable: Accounts receivable are stated at the historical carrying amount net of write-offs and an allowance for uncollectible accounts.  The carrying amount of the Company’s accounts receivable approximates fair value because of the short-term nature of the instruments. The Company routinely assesses the collectability of all material trade and other receivables.

(e) Property, Plant and Equipment:  Capital assets are recorded at cost and depreciated using the declining-balance method based on their respective useful life.

(f) Oil and Natural Gas Properties:  The Company uses the full cost method of accounting for 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 932, Extractive Activities – Oil and Gas (“FASB ASC 932”). Under this

7


ULTRA PETROLEUM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as oil and gas properties. This includes any internal costs that are directly related to exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. The carrying amount of oil and natural gas properties also includes estimated asset retirement costs recorded based on the fair value of the asset retirement obligation when incurred. Gain or loss on the sale or other disposition of oil and natural gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a country.

The sum of net capitalized costs and estimated future development costs of oil and natural gas properties are amortized using the units-of-production method based on the Company’s proved reserves. Oil and natural gas reserves and production are converted into equivalent units based on relative energy content. Asset retirement costs are included in the base costs for calculating depletion.

Under the full cost method, costs of unevaluated properties and major development projects expected to require significant future costs may be excluded from capitalized costs being amortized. The Company excludes significant costs until proved reserves are found or until it is determined that the costs are impaired. The Company reviews its unproved leasehold costs quarterly or when management determines that events or circumstances indicate that the recorded carrying value of the unevaluated properties may not be recoverable. The fair values of unproved properties are evaluated utilizing a discounted net cash flows model based on management’s assumptions of future oil and gas production, commodity prices, operating and development costs, as well as appropriate discount rates. The estimated prices used in the cash flow analysis are determined by management based on forward price curves for the related commodities, adjusted for average historical location and quality differentials. Estimates of cash flows related to probable and possible reserves are reduced by additional risk-weighting factors. The amount of any impairment is transferred to the capitalized costs being amortized.

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 depletion, depreciation and amortization (“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 Company did not incur a ceiling test write-down during the quarter ended March 31, 2018 or 2017.

(g) Inventories:  Inventory primarily includes $17.4 million in pipe and production equipment that will be utilized during the 2018 drilling program and $1.6 million in crude oil inventory for the quarter ended March 31, 2018.  Materials and supplies inventories are carried at lower of cost or market and include expenditures and other charges directly and indirectly incurred in bringing the inventory to its existing condition and location.  Selling expenses and general and administrative expenses are reported as period costs and excluded from inventory cost.  The Company uses the weighted average method of recording its materials and supplies inventory.  Crude oil inventory is valued at lower of cost or market.

(h) Deferred Financing Costs: The Company follows ASU No. 2015-3, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs and includes the costs for issuing debt, including issuance discounts, except those related to the Revolving Credit Facility (as defined below), as a direct deduction from the carrying amount of the related debt liability. Costs related to the issuance of the Revolving Credit Facility are recorded as an asset in the Consolidated Balance Sheets.

(i) Derivative Instruments and Hedging Activities:  The Company follows FASB ASC Topic 815, Derivatives and Hedging (“FASB ASC 815”). The Company records the fair value of its commodity derivatives as an asset or liability in the Consolidated Balance Sheets, and records the changes in the fair value of its commodity derivatives in the Consolidated Statements of Operations.  The Company does not offset the value of its derivative arrangements with the same counterparty. See Note 7 for additional details.

(j) Income Taxes:  Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of

8


ULTRA PETROLEUM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria described in FASB ASC Topic 740, Income Taxes.  In addition, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit.

(k) Earnings Per Share:  Basic earnings per share is computed by dividing net earnings attributable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed by adjusting the average number of common shares outstanding for the dilutive effect, if any, of common stock equivalents. The Company uses the treasury stock method to determine the dilutive effect.

 

Share-based payments subject to performance or market conditions are considered contingently issuable shares for purposes of calculating diluted earnings per share. Thus, they are not included in the diluted earnings per share denominator until the performance or market criteria are met. For the quarter ended March 31, 2018, the Company had 2.8 million contingently issuable shares that are not included in the diluted earnings per share denominator as the performance or market criteria have not been met. See Note 5 for additional details. There were no contingently issuable shares outstanding for the quarter ended March 31, 2017.

 

 

 

For the Quarter Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(Share amounts in 000's)

 

Net income (loss)

 

$

47,493

 

 

$

(89,698

)

Weighted average common shares outstanding - basic

 

 

196,550

 

 

 

80,018

 

Effect of dilutive instruments (1)

 

 

 

 

 

 

Weighted average common shares outstanding - diluted

 

 

196,550

 

 

 

80,018

 

Net income (loss) per common share - basic

 

$

0.24

 

 

$

(1.12

)

Net income (loss) per common share - diluted

 

$

0.24

 

 

$

(1.12

)

Number of shares not included in dilutive earnings per

   share that would have been anti-dilutive because the

   exercise price was greater than the average market

   price of the common shares

 

 

 

 

 

 

(1)  Due to the net loss for the quarter ended March 31, 2017, 0.5 million shares for options and restricted stock units were anti-dilutive and excluded from the computation of net loss per share.

(l) Use of Estimates:  Preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(m) Accounting for Share-Based Compensation:  The Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values in accordance with FASB ASC Topic 718, Compensation – Stock Compensation.

(n) Fair Value Accounting:  The Company follows FASB ASC Topic 820, Fair Value Measurements and Disclosures (“FASB ASC 820”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. This statement applies under other accounting topics that require or permit fair value measurements.  See Note 8 for additional details.

(o) Asset Retirement Obligation:  The initial estimated retirement obligation of properties is recognized as a liability with an associated increase in oil and gas properties for the asset retirement cost. Accretion expense is recognized over the estimated productive life of the related assets. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the asset retirement cost. Revisions in estimated liabilities can result from revisions of estimated inflation rates, changes in service and equipment costs and changes in the estimated timing of settling asset retirement obligations. As a full cost company, settlements for asset retirement obligations for abandonment are adjusted to

9


ULTRA PETROLEUM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

the full cost pool.  The asset retirement obligation is included within other long-term obligations in the accompanying Consolidated Balance Sheets.  

(p) Revenue Recognition:  The Company generally sells oil and natural gas under both long-term and short-term agreements at prevailing market prices.  On January 1, 2018, the Company adopted the new accounting standard, ASC 606, Revenue from Contracts with Customers and all related amendments.  See Note 2 for additional details and disclosures related to the Company’s adoption of this standard.

(q) Other revenues: Other revenue is comprised of fees paid to us by the operators of the gas processing plants where our gas is processed.

(r) Capital Cost Accrual: The Company accrues for exploration and development costs in the period incurred, while payment may occur in a subsequent period.

(s) Reclassifications:  Certain amounts in the financial statements of prior periods have been reclassified to conform to the current period financial statement presentation.

(t) Recent Accounting Pronouncements:

Leases.  In February 2016, the FASB issued ASU 2016-02, 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.  In January 2018, the FASB issued ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842 (“ASU No. 2018-01”), which permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of this ASU and that were not previously accounted for as leases. For public companies, the standards 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 and ASU No. 2018-01 on its consolidated financial statements.

Stock Compensation.  In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) (“ASU No. 2017-09”), which is intended to clarify and reduce diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award.  For public companies, the standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.  The Company adopted ASU 2017-09 on January 1, 2018 and is still evaluating the impact on the Company’s consolidated financial statements.

Derivatives.  In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) (“ASU No. 2017-12”), which makes significant changes to the current hedge accounting rules.  The new guidance impacts the designation of hedging relationships; measurement of hedging relationships; presentation of the effects of hedging relationships; assessment of hedge effectiveness; and disclosures.  The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods.  The Company does not expect the adoption of ASU No. 2017-12 to have a material impact on its consolidated financial statements. 

Revenue from Contracts with Customers.  In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and in 2016, the FASB issued 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. The new standard requires 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.

On January 1, 2018, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (the “new revenue standard”) using the modified retrospective method.  We recorded a net addition to beginning retained earnings of $1.8 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact related to changing from the entitlements method to the sales method to account for wellhead imbalances.  The impact to

10


ULTRA PETROLEUM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

revenues for the quarter ended March 31, 2018 is immaterial to the overall consolidated financial statements as a result of applying Topic 606.  The comparative information has not been restated and continues to be reported under the accounting standards for those periods.  See Note 2 for additional details related to the adoption of this standard. We expect the impact of the adoption of the new revenue standard to be immaterial to our net income on an on-going basis.

2.  IMPACT OF ASC 606 ADOPTION

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income statement for the quarter ended March 31, 2018 is as follows:

 

 

 

For the Quarter Ended March 31, 2018

 

 

 

Under ASC 606

 

 

Under ASC 605

 

 

Increase/ (Decrease)

 

 

 

(Amounts in 000's)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas sales

 

$

181,462

 

 

$

181,516

 

 

$

(54

)

Oil sales

 

 

41,284

 

 

 

41,284

 

 

 

 

Other revenues

 

 

2,628

 

 

 

2,628

 

 

 

 

Total operating revenues

 

 

225,374

 

 

 

225,428

 

 

 

(54

)

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Production taxes

 

 

23,270

 

 

 

23,275

 

 

 

(5

)

Gathering fees

 

 

23,055

 

 

 

23,061

 

 

 

(6

)

Net income

 

$

47,493

 

 

$

47,536

 

 

$

(43

)

 

 

 

The change to sales of natural gas is due to the change from using the entitlements method for production imbalances to the sales method.  The Company evaluated the contracts for sales of oil and natural gas utilizing the principal vs agent indicators, noting no change in revenue recognition resulted from the analysis.

 

Revenue Recognition

 

Revenue from Contracts with Customers

 

Sales of oil and natural gas are recognized at the point control of the product is transferred to the customer, collectability is reasonably assured, and the performance obligations are satisfied. Virtually all of our contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of the oil or natural gas, and prevailing supply and demand conditions. As a result, the price of the oil and natural gas fluctuates to remain competitive with other available oil and natural gas supplies.

 

Natural gas sales

We sell natural gas production at the tailgate of the processing plant or at a delivery point downstream, as specified in the contracts with our customers.  The production is sold at set volumes and we collect (i) an agreed upon index price, (ii) a specific index price adjusted for pricing differentials, or (iii) a set price.  We recognize revenue when control transfers to the purchaser at the tailgate of the processing plant or at the agreed-upon delivery point at the net price received. For these contracts, we have concluded that the Company is the principal for our net revenue interest share of the volumes being sold.  Gathering fees are performed prior to the customer taking control of the product, are not considered to be promised services, and are not included in the transaction price; thus, they are presented as expenses in the Consolidated Statement of Operations.

 

Our working interest partners are considered the principal for their working interest shares.  They have the option to take in kind their volumes.  The Company may act as an agent and market the other partners’ share of the natural gas production.  If it does so, the Company is considered the agent and revenue is recorded at the Company’s net revenue interest in the production.  

 

11


ULTRA PETROLEUM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

In conjunction with the adoption of ASC 606, for the quarter ended March 31, 2018, there was no material impact to the consolidated financial statements for natural gas sales.

 

Oil sales

We sell oil production at (a) the lease automatic custody transfer (LACT) meter for Wyoming condensate, (b) the tank battery for Utah wax/condensate, or (c) a delivery point downstream, as specified in the contracts with our customers.  The production is sold at set volumes and we collect (i) an agreed upon index price, net of pricing differentials or (ii) a set price.  We recognize revenue at the point when the customer takes control of the product.  For these contracts, we have concluded that the Company is the principal for its net revenue interest share of the volumes being sold.  Gathering fees are performed prior to the customer taking control of the product, are not considered to be promised services, and are not included in the transaction price; thus, they are presented as expenses in the Consolidated Statement of Operations.  In conjunction with the adoption of ASC 606, for the quarter ended March 31, 2018, there was no change to the method used to recognize oil sales and there was no impact to the consolidated financial statements for oil sales.

Our working interest partners are considered the principal for their working interest shares.  They have the option to take in kind their volumes.  The Company may act as an agent and market the other partners’ share of the oil production.  If it does so, the Company is considered the agent and revenue is recorded at the Company’s net revenue interest in the production.  

 

Other revenues

Our other revenue is comprised of fees paid to us by the operators of the gas processing plants where our gas is processed.  Control is transferred upon completion of the processing service.  The Company is considered the principal and revenue is recognized at the point in time that the control is transferred.  In conjunction with the adoption of ASC 606, for the quarter ended March 31, 2018, there was no change to the method used to recognize other processing revenues and there was no impact to the consolidated financial statements for other revenues.

 

Production imbalances

Previously, the Company elected to utilize the entitlements method to account for natural gas imbalances, which is no longer allowed under ASC 606.  In conjunction with the adoption of ASC 606, for the quarter ended March 31, 2018, there was no material impact to the consolidated financial statements due to this change in accounting for our production imbalances.

 

Transaction price allocated to remaining performance obligations

A significant number of our product sales are short-term in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

 

For our product sales that have a contract term greater than one year, we have utilized the practical expedient in ASC 606-10-50-14(a) which states that the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.


Contract balances

Under our product sales contracts, we invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our product sales contracts do not give rise to contract assets or liabilities under ASC 606.

 


12


ULTRA PETROLEUM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Prior-period performance obligations

We record revenue in the month production is delivered to the purchaser. However, settlement statements for certain natural gas may not be received for 30 to 90 days after the date production is delivered, and as a result, we are required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. We record the differences between our estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. We have existing internal controls for our revenue estimation process and related accruals, and any identified differences between our revenue estimates and actual revenue received historically have not been significant. For the quarter ended March 31, 2018, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material.

3.  OIL AND GAS PROPERTIES AND EQUIPMENT:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Proven Properties:

 

 

 

 

 

 

 

 

Acquisition, equipment, exploration, drilling and abandonment costs

 

$

11,353,426

 

 

$

11,215,563

 

Less:  Accumulated depletion, depreciation and amortization

 

 

(9,937,478

)

 

 

(9,890,495

)

 

 

$

1,415,948

 

 

$

1,325,068

 

 

4.  DEBT AND OTHER LONG-TERM OBLIGATIONS:

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Total Debt:

 

 

 

 

 

 

 

 

Term loan, secured due 2024

 

$

975,000

 

 

$

975,000

 

6.875% Senior, unsecured Notes due 2022

 

 

700,000

 

 

 

700,000

 

7.125% Senior, unsecured Notes due 2025

 

 

500,000

 

 

 

500,000

 

Credit Agreement

 

 

 

 

 

 

Long-term debt

 

 

2,175,000

 

 

 

2,175,000

 

Less: Deferred financing costs

 

 

(56,485

)

 

 

(58,789

)

Total long-term debt

 

$

2,118,515

 

 

$

2,116,211

 

Other long-term obligations:

 

 

 

 

 

 

 

 

Other long-term obligations

 

$

191,721

 

 

$

197,728

 

 

Ultra Resources, Inc.

Credit Agreement. In April 2017, Ultra Resources, Inc. (“Ultra Resources”), as the borrower, entered into a Credit Agreement (as amended, the “Credit Agreement”) with the Company and UP Energy Corporation, as parent guarantors, with Bank of Montreal, as administrative agent, and with the other lenders party thereto from time to time, providing for a revolving credit facility (the “Revolving Credit Facility”) for an aggregate amount of $400.0 million and an initial borrowing base of $1.2 billion (which limits the aggregate amount of first lien debt under the Revolving Credit Facility and the Term Loan Agreement (defined below)).  In September 2017, the administrative agent and the other lenders approved an increase in the borrowing base under the Credit Agreement from $1.2 billion to $1.4 billion as requested by the Company, which included an increase in the commitments under the Revolving Credit Facility to an aggregate amount of $425.0 million.  At March 31, 2018, Ultra Resources had no outstanding borrowings under the Revolving Credit Facility, total commitments under the Revolving Credit Facility of $425.0 million and a borrowing base of $1.4 billion.

As previously disclosed in the Company’s Current Report on Form 8-K filed on April 20, 2018, Ultra Resources, the Bank of Montreal, as administrative agent, and the other lenders party thereto, entered into an amendment to the Credit Agreement (the “Second Amendment”), dated April 19, 2018, which among other things, reaffirmed the borrowing base at $1.4 billion.  There

13


ULTRA PETROLEUM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

are no scheduled borrowing base redeterminations until October 1, 2018.  As of April 25, 2018, lender commitments remain at $425.0 million.  

The Revolving Credit Facility has capacity for Ultra Resources to increase the commitments subject to certain conditions, and has $50.0 million of the commitments available for the issuance of letters of credit.  The Company has currently utilized $34.5 million of the commitments available for the issuance of a letter of credit associated with the sale of the Pennsylvania assets that occurred during the fourth quarter of 2017. The Revolving Credit Facility bears interest either at a rate equal to (a) a customary London interbank offered rate plus an applicable margin that varies from 250 to 350 basis points or (b) the base rate plus an applicable margin that varies from 150 to 250 basis points.  The interest rate remained the same for the Revolving Credit Facility subsequent to the approved commitments increase noted above.  The Revolving Credit Facility loans mature on January 12, 2022.

The Revolving Credit Facility requires Ultra Resources to maintain (i) an interest coverage ratio of 2.50 to 1.00; (ii) a current ratio, including the unused portion of the Revolving Credit Facility, of 1.00 to 1.00; (iii) a consolidated net leverage ratio of  4.00 to 1.00, as of the last day of each fiscal quarter; and (iv) after the Company has obtained investment grade rating, an asset coverage ratio of 1.50 to 1.00. At March 31, 2018, Ultra Resources was in compliance with all of its debt covenants under the Revolving Credit Facility.  

As previously disclosed in the Company’s Current Report on Form 8-K filed on April 20, 2018, the Bank of Montreal, as administrative agent, and the other lenders party thereto, approved the Second Amendment, which among other things, amended the consolidated net leverage ratio covenant in the financial covenants portion of the Credit Agreement.  The changes to the consolidated net leverage ratio covenant provide that: (i) during the period beginning on the last day of the fiscal quarter ending June 30, 2018 and ending on the last day of the fiscal quarter ending June 30, 2019, the consolidated net leverage ratio cannot exceed 4.50 to 1.00; (ii) during the period beginning on the last day of the fiscal quarter ending September 30, 2019 and ending on the last day of the fiscal quarter ending December 31, 2019, the consolidated net leverage ratio cannot exceed 4.25 to 1.00; and (iii) beginning on the last day of the fiscal quarter ending March 31, 2020, the consolidated net leverage ratio cannot exceed 4.00 to 1.00.  

In addition, pursuant to the Second Amendment, the Company will be subject to certain minimum hedging requirements.  During the period (i) beginning on June 30, 2018 and ending on September 29, 2019, the Company is required to hedge a minimum of 65% of the quarterly projected volumes of natural gas from proved developed producing (“PDP”) reserves; and (ii) during the period beginning on September 30, 2019 and ending on March 30, 2020, the Company is required to hedge a minimum of 50% of the quarterly projected volumes of natural gas from PDP reserves.  Beginning April 1, 2020, the Company will no longer be subject to a minimum hedging requirement.  

The Second Amendment also amends the definition of the term “Applicable Margin” as such term is used in the Credit Agreement.  The changes to the term “Applicable Margin” provide that if borrowings are outstanding during a period that the Company’s consolidated net leverage ratio exceeds 4.00 to 1.00 at the end of any fiscal quarter, the interest rate on such borrowings shall be at a per annum rate that is 0.25% higher than the rate that would otherwise apply until the Company has provided financial statements indicating that the consolidated net leverage ratio no longer exceeds 4.00 to 1.00.

Ultra Resources is required to pay a commitment fee on the average daily unused portion of the Revolving Credit Facility, which varies based upon a borrowing base utilization grid. Ultra Resources is also required to pay customary letter of credit and fronting fees.

The Revolving Credit Facility also contains customary affirmative and negative covenants, including, among other things, as to compliance with laws (including environmental laws, ERISA and anti-corruption laws), delivery of quarterly and annual financial statements and oil and gas engineering reports, maintenance and operation of property (including oil and gas properties), restrictions on the incurrence of liens, indebtedness, asset dispositions, fundamental changes, restricted payments, hedging requirements and other customary covenants.

The Revolving Credit Facility contains customary events of default and remedies for credit facilities of this nature. If Ultra Resources does not comply with the financial and other covenants in the Revolving Credit Facility, the lenders may, subject to customary cure rights, require immediate payment of all amounts outstanding under the Revolving Credit Facility and any outstanding unfunded commitments may be terminated.

14


ULTRA PETROLEUM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Term Loan. In April 2017, Ultra Resources, as borrower, entered into a Senior Secured Term Loan Agreement with the Company and UP Energy Corporation, as parent guarantors, Barclays Bank PLC, as administrative agent, and the other lenders party thereto (the “Term Loan Agreement”), providing for senior secured first lien term loans for an aggregate amount of $800.0 million consisting of an initial term loan in the amount of $600.0 million and an incremental term loan in the amount of $200.0 million to be drawn immediately after the funding of the initial term loan.  In September 2017, the Company closed an incremental senior secured term loan offering of $175.0 million, increasing total borrowings under the Term Loan Agreement to $975.0 million.  As part of the Term Loan Agreement, Ultra Resources agreed to pay an original issue discount equal to one percent of the principal amount, which is included in the deferred financing costs noted above.  The Term Loan Agreement has capacity to increase the commitments subject to certain conditions.  At March 31, 2018, Ultra Resources had $975.0 million in outstanding borrowings under the Term Loan Agreement.

The Term Loan Agreement bears interest either at a rate equal to (a) a customary London interbank offered rate plus 300 basis points or (b) the base rate plus 200 basis points.  The Term Loan Agreement amortizes in equal quarterly installments in aggregate annual amounts equal to 0.25% of the aggregate principal amount beginning on June 30, 2019. The Term Loan Agreement matures on April 12, 2024.

The Term Loan Agreement is subject to mandatory prepayments and customary reinvestment rights. The mandatory prepayments include, without limitation, a prepayment requirement with the total net proceeds from certain asset sales and net proceeds on insurance received on account of any loss of Ultra Resources’ property or assets, in each case subject to certain exceptions. In addition, subject to certain exceptions, there is a prepayment requirement if the asset coverage ratio is less than 2.0 to 1.0. To the extent any mandatory prepayments are required, prepayments are applied to prepay the Term Loan Agreement.

The Term Loan Agreement also contains customary affirmative and negative covenants, including as to compliance with laws (including environmental laws, ERISA and anti-corruption laws), delivery of quarterly and annual financial statements and oil and gas engineering reports, maintenance and operation of property (including oil and gas properties), restrictions on the incurrence of liens, indebtedness, asset dispositions, fundamental changes, restricted payments and other customary covenants. At March 31, 2018, Ultra Resources was in compliance with all of its debt covenants under the Term Loan Agreement.

The Term Loan Agreement contains customary events of default and remedies for credit facilities of this nature. If Ultra Resources does not comply with the financial and other covenants in the Term Loan Agreement, the lenders may, subject to customary cure rights, require immediate payment of all amounts outstanding under the Term Loan Agreement.

Senior Notes. In April 2017, the Company issued $700.0 million of its 6.875% senior notes due 2022 (the “2022 Notes”) and $500.0 million of its 7.125% senior notes due 2025 (the “2025 Notes,” and together with the 2022 Notes, the “Notes”) and entered into an Indenture, dated April 12, 2017 (the “Indenture”), among Ultra Resources, as issuer, and the Company and its subsidiaries, as guarantors. The Notes are treated as a single class of securities under the Indenture.

The Notes have not been registered under the Securities Act of 1933, as amended (the “Securities Act”) or any state securities laws, and unless so registered, the securities may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. The Notes may be resold to qualified institutional buyers pursuant to Rule 144A under the Securities Act or to non-U.S. persons pursuant to Regulation S under the Securities Act.

The 2022 Notes will mature on April 15, 2022. The interest payment dates for the 2022 Notes are April 15 and October 15 of each year. The 2025 Notes will mature on April 15, 2025. The interest payment dates for the 2025 Notes are April 15 and October 15 of each year. Interest will be paid on the Notes from the issue date until maturity.  

Prior to April 15, 2019, Ultra Resources may, at any time or from time to time, redeem in the aggregate up to 35% of the aggregate principal amount of the 2022 Notes, in an amount no greater than the net cash proceeds of certain equity offerings at a redemption price of 106.875% of the principal amount of the 2022 Notes, plus accrued and unpaid interest, if any, to the date of redemption, if at least 65% of the original principal amount of the 2022 Notes remains outstanding and the redemption occurs within 180 days of the closing of such equity offering. In addition, before April 15, 2019, Ultra Resources may redeem all or a part of the 2022 Notes at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) a make-whole premium at the redemption date, plus accrued and unpaid interest, if any, to the redemption date. In addition, on or after April 15, 2019, Ultra Resources may redeem all or a part of the 2022 Notes at redemption prices (expressed as percentages of principal amount) equal to 103.438% for the twelve-month period beginning on April 15, 2019, 101.719% for the twelve-month period beginning

15


ULTRA PETROLEUM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

April 15, 2020, and 100.000% for the twelve-month period beginning April 15, 2021 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date on the 2022 Notes.

Prior to April 15, 2020, Ultra Resources may, at any time or from time to time, redeem in the aggregate up to 35% of the aggregate principal amount of the 2025 Notes, in an amount no greater than the net cash proceeds of certain equity offerings at a redemption price of 107.125% of the principal amount of the 2025 Notes, plus accrued and unpaid interest, if any, to the date of redemption, if at least 65% of the original principal amount of the 2025 Notes remains outstanding and the redemption occurs within 180 days of the closing of such equity offering. In addition, before April 15, 2020, Ultra Resources may redeem all or a part of the 2025 Notes at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) a make-whole premium at the redemption date, plus accrued and unpaid interest, if any, to the redemption date. In addition, on or after April 15, 2019, Ultra Resources may redeem all or a part of the 2025 Notes at redemption prices (expressed as percentages of principal amount) equal to 105.344% for the twelve-month period beginning on April 15, 2020, 103.563% for the twelve-month period beginning April 15, 2021, 101.781% for the twelve-month period beginning April 15, 2022, and 100.000% for the twelve-month period beginning April 15, 2023 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date on the 2025 Notes.

If Ultra Resources experiences certain change of control triggering events as set forth in the Indenture, each holder of the Notes may require Ultra Resources to repurchase all or a portion of its Notes for cash at a price equal to 101% of the aggregate principal amount of such Notes, plus any accrued but unpaid interest to the date of repurchase.

The Indenture contains customary covenants that restrict the ability of Ultra Resources and the guarantors and certain of its subsidiaries to: (i) sell assets and subsidiary equity; (ii) incur indebtedness; (iii) create or incur certain liens; (iv) enter into affiliate agreements; (v) enter into agreements that restrict distributions from certain restricted subsidiaries and the consummation of mergers and consolidations; (vi) consolidate, merge or transfer all or substantially all of the assets of the Company or any Restricted Subsidiary (as defined in the Indenture); and (vii) create unrestricted subsidiaries. The covenants in the Indenture are subject to important exceptions and qualifications. Subject to conditions, the Indenture provides that the Company and its subsidiaries will no longer be subject to certain covenants when the Notes receive investment grade ratings from any two of S&P Global Ratings, Moody’s Investors Service, Inc., and Fitch Ratings, Inc. At March 31, 2018, Ultra Resources was in compliance with all of its debt covenants under the Notes.

The Indenture contains customary events of default. Unless otherwise noted in the Indenture, upon a continuing event of default, the trustee under the Indenture (the “Trustee”), by notice to the Company, or the holders of at least 25% in principal amount of the then outstanding Notes, by notice to the Company and the Trustee, may, declare the Notes immediately due and payable, except that an event of default resulting from entry into a bankruptcy, insolvency or reorganization with respect to the Company, any Significant Subsidiary (as defined in the Indenture) or group of Restricted Subsidiaries (as defined in the Indenture), that taken together would constitute a Significant Subsidiary, will automatically cause the Notes to become due and payable.

Other long-term obligations:  These costs primarily relate to the long-term portion of production taxes payable and asset retirement obligations.

 


16


ULTRA PETROLEUM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

5.  SHARE BASED COMPENSATION:

Valuation and Expense Information 

 

 

 

For the Quarter Ended

 

 

 

Ended March 31,

 

 

 

2018

 

 

2017

 

Total cost of share-based payment plans

 

$

10,910

 

 

$

1,211

 

Amounts capitalized in oil and gas properties and equipment

 

$

2,100

 

 

$

360

 

Amounts charged against income, before income tax benefit

 

$

8,810

 

 

$

851

 

Amount of related income tax benefit recognized in income before valuation allowance

 

$

1,850

 

 

$

339

 

 

Performance Share Plans:

2017 Stock Incentive Plan.  In April 2017, the Ultra Petroleum Corp. 2017 Stock Incentive Plan (“2017 Stock Incentive Plan”) was established pursuant to which 7.5% of the equity in the Company (on a fully-diluted/fully-distributed basis) is reserved for grants to be made from time to time to the directors, officers, and other employees of the Company (the “Reserve”).  During 2017, Management Incentive Plan Grants (the “Initial MIP Grants”) were made to members of the board of directors (the “Board”), officers, and other employees of the Company subject to the conditions and performance requirements provided in the grants, including the limitations that one-third of the Initial MIP Grants will vest, if at all, at such time when the total enterprise value of the Company equals or exceeds $6.0 billion based upon the volume weighted average price of the common stock during a consecutive 30-day period, that one-third of the Initial MIP Grants will vest, if at all, at such time when the total enterprise value of the Company equals or exceeds 110% of $6.0 billion based upon the volume weighted average price of the common stock during a consecutive 30-day period, and, that if any Initial MIP Grants do not vest before the fifth anniversary of the Effective Date, as defined in Note 10, such Initial MIP Grants shall automatically expire.  The balance of the Reserve is available to be granted by the Board from time to time.

Stock-Based Compensation Cost:

Market-Based Condition Awards. When vesting of an award of stock-based compensation is dependent, at least in part, on the value of a company’s total equity, for purposes of FASB ASC 718, the award is considered to be subject to a “market condition”. Because the Company’s total equity value is a component of its enterprise value, the awards based on enterprise value are considered to be subject to a market condition. Unlike the valuation of an award that is subject to a service condition (i.e., time vested awards) or a performance condition that is not related to stock price, FASB ASC 718 requires the impact of the market condition to be considered when estimating the fair value of the award. As a result, we have used a Monte Carlo simulation model to estimate the fair value of the awards that include a market condition.

FASB ASC 718 requires the expense for an award of stock based compensation that is subject to a market condition that can be attained at any point during the performance period to be recognized over the shorter of (a) the period between the date of grant and the date the market condition is attained, and (b) the award’s derived service period. For purposes of FASB ASC 718, the derived service period represents the duration of the median of the distribution of share price paths on which the market condition is satisfied. That median is the middle share price path (the midpoint of the distribution of paths) on which the market condition is satisfied. The duration is the period of time from the service inception date to the expected date of market condition satisfaction. Compensation expense is recognized regardless of whether the market condition is actually satisfied.

 

Expense. For the quarter ended March 31, 2018, the Company recognized $8.8 million in pre-tax compensation expense, of which $8.6 million related to the Initial MIP Grants. During the quarter ended March 31, 2017, the Company recognized $0.9 million in pre-tax compensation expense, of which $0.7 million related to the awards of restricted stock units under the Company’s 2015 long-term incentive plan. The Company expects the total expense associated with the portion of the Initial MIP Grant that vests if the $6.0 billion total enterprise value performance requirement is satisfied to be $21.4 million and the portion of the Initial MIP Grant that vests if the $6.6 billion total enterprise value performance requirement is satisfied to be $20.3 million, respectively.

17


ULTRA PETROLEUM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

6.  INCOME TAXES:

The Company’s overall effective tax rate on pre-tax income was different than the statutory rate of 21% due primarily to valuation allowances. During the year ended December 31, 2017, the Company recorded an expected benefit for the recovery of the Company’s carryforward Alternative Minimum Tax (“AMT”) credits. During the quarter ended March 31, 2018, the Company recorded income tax expense of approximately $0.4 million related to the Internal Revenue Service effect of a 6.6% sequestration rate on the expected AMT credit.

The Company has recorded a valuation allowance against all deferred tax assets as of March 31, 2018.  Some or all of this valuation allowance may be reversed in future periods against future income. On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law.  The new legislation, which became effective on January 1, 2018, decreased the U.S. corporate federal income tax rate from 35% to 21%. The TCJA also included a number of provisions, including the elimination of loss carrybacks and limitations on the use of future losses, repeal of the AMT regime, the limitation on the deductibility of certain expenses, including interest expense, and changes in the way that capital costs are recovered.

Given the significant complexity of the TCJA and anticipated additional implementation guidance from the Internal Revenue Service, further implications of TCJA may be identified in future periods.  Amounts recorded in the consolidated financial statements are provisional.

7.  DERIVATIVE FINANCIAL INSTRUMENTS:

Objectives and Strategy:  The Company’s major market risk exposure is in the pricing applicable to its natural gas and oil production. Realized pricing is currently driven primarily by the prevailing price for the Company’s natural gas production. Historically, prices received for natural gas production have been volatile and unpredictable. Pricing volatility is expected to continue.  The prices we receive for our production depend on many factors outside of our control, including volatility in the differences between product prices at sales points and the applicable index price.  

The Company relies on various types of derivative instruments to manage its exposure to commodity price risk and to provide a level of certainty in the Company’s forward cash flows supporting the Company’s capital investment program.  These types of instruments may include fixed price swaps, costless collars, or basis differential swaps.  These contracts are financial instruments, and do not require or allow for physical delivery of the hedged commodity. While mitigating the effects of fluctuating commodity prices, these derivative contracts may limit the benefits we would receive from increases in commodity prices above the fixed hedge prices.

The Company’s hedging policy limits the volumes hedged to not be greater than 50% of its forecasted production volumes without Board approval. During the quarter ended March 31, 2018, the Board approved all commodity derivative hedge contracts for volumes exceeding 50% of forecasted production volumes.

Fair Value of Commodity Derivatives:  FASB ASC 815 requires that all derivatives be recognized on the Consolidated Balance Sheets as either an asset or liability and be measured at fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met.  The Company does not apply hedge accounting to any of its derivative instruments.

Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at fair value on the Consolidated Balance Sheets and the associated unrealized gains and losses are recorded as current income or expense in the Consolidated Statements of Operations. Unrealized gains or losses on commodity derivatives represent the non-cash change in the fair value of these derivative instruments and do not impact operating cash flows on the cash flow statement.


18


ULTRA PETROLEUM CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Commodity Derivative Contracts:  At March 31, 2018, the Company had the following open commodity derivative contracts to manage commodity price risks.  For the fixed price swaps, the Company receives the fixed price for the contract and pays the variable price to the counterparty.  For the basis swaps, the Company receives a fixed price for the difference between two sales points for a specified commodity volume over a specified time period.  The reference prices of these commodity derivative contracts are typically referenced to index prices as published by independent third parties.

 

Type

 

Commodity

Reference Price

 

Remaining

Contract Period

 

Volume -

MMBTU/Day

 

 

Average Price

/MMBTU

 

 

Fair Value -

March 31, 2018

 

Natural Gas

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset (Liability)

 

Fixed price swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NYMEX-Henry Hub

 

Apr - Oct 2018

 

 

770,000

 

 

$

2.88

 

 

$

13,951

 

 

 

NYMEX-Henry Hub

 

Nov - Dec 2018

 

 

290,000

 

 

$

2.87

 

 

 

(1,485

)

 

 

NYMEX-Henry Hub

 

Nov 2018 - Mar 2019

 

 

350,000

 

 

$

2.95

 

 

 

(2,734

)

 

 

NYMEX-Henry Hub

 

Jan - Mar 2019

 

 

250,000

 

 

$

3.02

 

 

 

(441

)

 

 

NYMEX-Henry Hub

 

Jan - Dec 2019

 

 

100,000

 

 

$

2.79

 

 

 

(217

)

 

 

NYMEX-Henry Hub

 

Nov 2018 - Dec 2019

 

 

70,000

 

 

$

2.80

 

 

 

(377

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type

 

Commodity

Reference Price

 

Remaining

Contract Period

 

Volume -

MMBTU/Day

 

 

Average Differential

/MMBTU

 

 

Fair Value -

March 31, 2018

 

Natural Gas

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset (Liability)

 

Basis swap contracts (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NW Rockies Basis Swap

 

Apr - Oct 2018

 

 

140,000

 

 

$

(0.62

)

 

$

4,640

 

 

 

NW Rockies Basis Swap

 

Apr - Dec 2018

 

 

50,000

 

 

$

(0.65

)

 

 

1,506

 

 

 

NW Rockies Basis Swap

 

Apr 2018- Dec 2019

 

 

70,000

 

 

$

(0.78

)

 

 

(112

)

 

 

NW Rockies Basis Swap

 

Jan-Dec 2019

 

 

50,000

 

 

$

(0.76

)

 

 

488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type

 

Commodity

Reference Price

 

Remaining

Contract Period

 

Volume -

Bbls/Day

 

 

Average Price

/Bbls

 

 

Fair Value -

March 31, 2018

 

Crude Oil

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset (Liability)

 

Fixed price swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NYMEX-WTI

 

Apr - Dec 2018

 

 

5,000

 

 

$

60.25

 

 

$

(4,075

)

 

 

NYMEX-WTI

 

Jan - Mar 2019

 

 

3,000

 

 

$

58.76

 

 

 

(422