0001255474-17-000029.txt : 20171026 0001255474-17-000029.hdr.sgml : 20171026 20171026161314 ACCESSION NUMBER: 0001255474-17-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 79 CONFORMED PERIOD OF REPORT: 20170930 FILED AS OF DATE: 20171026 DATE AS OF CHANGE: 20171026 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WHITING PETROLEUM CORP CENTRAL INDEX KEY: 0001255474 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 200098515 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31899 FILM NUMBER: 171156451 BUSINESS ADDRESS: STREET 1: 1700 BROADWAY, SUITE 2300 CITY: DENVER STATE: CO ZIP: 80290 BUSINESS PHONE: 303-837-1661 MAIL ADDRESS: STREET 1: 1700 BROADWAY STREET 2: STE 2300 CITY: DENVER STATE: CO ZIP: 80290-2300 FORMER COMPANY: FORMER CONFORMED NAME: WHITING PETROLEUM HOLDINGS INC DATE OF NAME CHANGE: 20030721 10-Q 1 wll-20170930x10q.htm WHITING PETROLEUM CORP FORM 10-Q, 9-30-2017 20170930 10Q

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 September 30, 2017

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:  001‑31899

 

Picture 1

 

WHITING PETROLEUM CORPORATION

 



(Exact name of registrant as specified in its charter)

 







 

 

Delaware

 

20‑0098515

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer
Identification No.)



 

 

1700 Broadway, Suite 2300
Denver, Colorado

 

80290‑2300

(Address of principal executive offices)

 

(Zip code)







 

 



(303) 837‑1661

 



(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 (§232.405 of this chapter) 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.



 

 

 

 

 

 

 

 

Large accelerated filer

 

Smaller reporting company 

Accelerated filer

 

Emerging growth company

Non-accelerated filer

(Do not check if a smaller reporting 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 Exchange Act).    Yes      No  

Number of shares of the registrant’s common stock outstanding at October 13,  2017:  362,793,720 shares.

 

 


 





 

 



TABLE OF CONTENTS

 

Glossary of Certain Definitions 



PART I – FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)



Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016



Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016



Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016



Condensed Consolidated Statements of Equity for the Nine Months Ended September 30, 2017 and 2016



Notes to Condensed Consolidated Financial Statements

Item 2.

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

25 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

41 

Item 4.

Controls and Procedures

42 



PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

43 

Item 1A.

Risk Factors

43 

Item 6.

Exhibits

43 









 

 

 


 

Glossary of Certain Definitions

Unless the context otherwise requires, the terms “we, “us, “our” or “ours” when used in this Quarterly Report on Form 10-Q refer to Whiting Petroleum Corporation, together with its consolidated subsidiaries.  When the context requires, we refer to these entities separately.

We have included below the definitions for certain terms used in this report:

“ASC” Accounting Standards Codification.

“Bbl” One stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to oil, NGLs and other liquid hydrocarbons.

“Bcf” One billion cubic feet, used in reference to natural gas.

“BOE” One stock tank barrel of oil equivalent, computed on an approximate energy equivalent basis that one Bbl of crude oil equals six Mcf of natural gas and one Bbl of crude oil equals one Bbl of natural gas liquids.

“Btu” or “British thermal unit” The quantity of heat required to raise the temperature of one pound of water one degree Fahrenheit.

“CO2”  Carbon dioxide.

“completion” The process of preparing an oil and gas wellbore for production through the installation of permanent production equipment, as well as perforation and fracture stimulation to optimize production.

“costless collar” An option position where the proceeds from the sale of a call option at its inception fund the purchase of a put option at its inception.

“deterministic method” The method of estimating reserves or resources using a single value for each parameter (from the geoscience, engineering or economic data) in the reserves calculation.

“development well”  A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.

“differential” The difference between a benchmark price of oil and natural gas, such as the NYMEX crude oil spot price, and the wellhead price received.

“dry hole” A well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.

“exploratory well” A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir.

“FASB” Financial Accounting Standards Board.

“field” An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.  There may be two or more reservoirs in a field that are separated vertically by intervening impervious strata, or laterally by local geologic barriers, or both.  Reservoirs that are associated by being in overlapping or adjacent fields may be treated as a single or common operational field.  The geological terms “structural feature” and “stratigraphic condition” are intended to identify localized geological features as opposed to the broader terms of basins, trends, provinces, plays, areas of interest, etc.

“GAAP” Generally accepted accounting principles in the United States of America.

“gross acres or “gross wells” The total acres or wells, as the case may be, in which a working interest is owned.

“ISDA”  International Swaps and Derivatives Association, Inc.

“lease operating expense” or “LOE” The expenses of lifting oil or gas from a producing formation to the surface, constituting part of the current operating expenses of a working interest, and also including labor, superintendence, supplies, repairs, short-lived assets, maintenance, allocated overhead costs and other expenses incidental to production, but not including lease acquisition or drilling or completion expenses.

“LIBOR” London interbank offered rate.

1

 


 

“MBbl” One thousand barrels of oil, NGLs or other liquid hydrocarbons.

“MBbl/d” One MBbl per day.

“MBOE” One thousand BOE.

“MBOE/d” One MBOE per day.

“Mcf” One thousand cubic feet, used in reference to natural gas.

“MMBbl” One million Bbl.

“MMBOE” One million BOE.

“MMBtu” One million British Thermal Units, used in reference to natural gas.

“MMcf” One million cubic feet, used in reference to natural gas.

“MMcf/d” One MMcf per day.

“net acres” or “net wells” The sum of the fractional working interests owned in gross acres or wells, as the case may be.

“net production” The total production attributable to our fractional working interest owned.

“NGL” Natural gas liquid.

“NYMEX” The New York Mercantile Exchange.

“plug-and-perf technology” A horizontal well completion technique in which hydraulic fractures are performed in multiple stages, with each stage utilizing a bridge plug to divert fracture stimulation fluids through the casing perforations into the formation within that stage.

“plugging and abandonment” Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface.  Regulations of most states legally require plugging of abandoned wells.

“prospect” A property on which indications of oil or gas have been identified based on available seismic and geological information.

“proved developed reserves” Proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well.

“proved reserves” Those reserves which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.  The project to extract the hydrocarbons must have commenced, or the operator must be reasonably certain that it will commence the project, within a reasonable time.

The area of the reservoir considered as proved includes all of the following:

a.

The area identified by drilling and limited by fluid contacts, if any, and

b.

Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.

Reserves that can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when both of the following occur:

a.

Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based, and

b.

The project has been approved for development by all necessary parties and entities, including governmental entities.

2

 


 

Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined.  The price shall be the average price during the 12-month period before the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.

“reasonable certainty” If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered.  If probabilistic methods are used, there should be at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimate.  A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as changes due to increased availability of geoscience (geological, geophysical and geochemical) engineering, and economic data are made to estimated ultimate recovery with time, reasonably certain estimated ultimate recovery is much more likely to increase or remain constant than to decrease.

“reserves” Estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations.  In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.

“reservoir” A porous and permeable underground formation containing a natural accumulation of producible crude oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

“royalty” The amount or fee paid to the owner of mineral rights, expressed as a percentage or fraction of gross income from crude oil or natural gas produced and sold, unencumbered by expenses relating to the drilling, completing or operating of the affected well.

“SEC” The United States Securities and Exchange Commission.

“working interest” The interest in a crude oil and natural gas property (normally a leasehold interest) that gives the owner the right to drill, produce and conduct operations on the property and to a share of production, subject to all royalties, overriding royalties and other burdens and to all costs of exploration, development and operations and all risks in connection therewith.

“workover” Operations on a producing well to restore or increase production.



3

 


 

PART I – FINANCIAL INFORMATION



Item 1.     Condensed Consolidated Financial Statements



WHITING PETROLEUM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share and per share data)





 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2017

 

2016

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,172 

 

$

55,975 

Restricted cash

 

 

 -

 

 

17,250 

Accounts receivable trade, net

 

 

225,291 

 

 

173,919 

Prepaid expenses and other

 

 

32,734 

 

 

26,312 

Assets held for sale

 

 

 -

 

 

349,146 

Total current assets

 

 

269,197 

 

 

622,602 

Property and equipment:

 

 

 

 

 

 

Oil and gas properties, successful efforts method

 

 

12,797,474 

 

 

13,230,851 

Other property and equipment

 

 

134,502 

 

 

134,638 

Total property and equipment

 

 

12,931,976 

 

 

13,365,489 

Less accumulated depreciation, depletion and amortization

 

 

(4,734,351)

 

 

(4,222,071)

Total property and equipment, net

 

 

8,197,625 

 

 

9,143,418 

Other long-term assets

 

 

35,756 

 

 

110,122 

TOTAL ASSETS

 

$

8,502,578 

 

$

9,876,142 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable trade

 

$

65,016 

 

$

32,126 

Revenues and royalties payable

 

 

130,447 

 

 

147,226 

Accrued capital expenditures

 

 

107,706 

 

 

56,830 

Accrued interest

 

 

24,124 

 

 

44,749 

Accrued lease operating expenses

 

 

37,554 

 

 

45,015 

Accrued liabilities and other

 

 

23,066 

 

 

63,538 

Taxes payable

 

 

23,096 

 

 

39,547 

Derivative liabilities

 

 

25,145 

 

 

17,628 

Accrued employee compensation and benefits

 

 

23,297 

 

 

31,134 

Liabilities related to assets held for sale

 

 

 -

 

 

538 

Total current liabilities

 

 

459,451 

 

 

478,331 

Long-term debt

 

 

2,931,443 

 

 

3,535,303 

Deferred income taxes

 

 

162,054 

 

 

475,689 

Asset retirement obligations

 

 

157,298 

 

 

168,504 

Other long-term liabilities

 

 

76,359 

 

 

69,123 

Total liabilities

 

 

3,786,605 

 

 

4,726,950 

Commitments and contingencies

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Common stock, $0.001 par value, 600,000,000 shares authorized; 368,020,048 issued and 362,793,720 outstanding as of September 30, 2017 and 367,174,542 issued and 362,013,928 outstanding as of December 31, 2016

 

 

368 

 

 

367 

Additional paid-in capital

 

 

6,403,767 

 

 

6,389,435 

Accumulated deficit

 

 

(1,688,162)

 

 

(1,248,572)

Total Whiting shareholders' equity

 

 

4,715,973 

 

 

5,141,230 

Noncontrolling interest

 

 

 -

 

 

7,962 

Total equity

 

 

4,715,973 

 

 

5,149,192 

TOTAL LIABILITIES AND EQUITY

 

$

8,502,578 

 

$

9,876,142 



 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

 


 

WHITING PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (unaudited)

(in thousands, except per share data)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2017

 

2016

 

2017

 

2016

OPERATING REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Oil, NGL and natural gas sales

 

$

324,191 

 

$

315,554 

 

$

1,007,023 

 

$

942,287 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

90,615 

 

 

87,982 

 

 

267,277 

 

 

307,530 

Production taxes

 

 

27,499 

 

 

26,372 

 

 

86,621 

 

 

79,125 

Depreciation, depletion and amortization

 

 

212,846 

 

 

284,569 

 

 

673,288 

 

 

900,877 

Exploration and impairment

 

 

17,657 

 

 

24,293 

 

 

63,793 

 

 

85,565 

General and administrative

 

 

30,084 

 

 

33,908 

 

 

92,644 

 

 

112,227 

Derivative (gain) loss, net

 

 

30,867 

 

 

(30,432)

 

 

47,281 

 

 

(28,432)

Loss on sale of properties

 

 

398,752 

 

 

189,934 

 

 

401,050 

 

 

193,729 

Amortization of deferred gain on sale

 

 

(3,175)

 

 

(3,490)

 

 

(9,757)

 

 

(11,111)

Total operating expenses

 

 

805,145 

 

 

613,136 

 

 

1,622,197 

 

 

1,639,510 

LOSS FROM OPERATIONS

 

 

(480,954)

 

 

(297,582)

 

 

(615,174)

 

 

(697,223)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(47,693)

 

 

(84,578)

 

 

(143,641)

 

 

(245,145)

Gain (loss) on extinguishment of debt

 

 

 -

 

 

46,541 

 

 

(1,540)

 

 

(42,236)

Interest income and other

 

 

(83)

 

 

115 

 

 

970 

 

 

1,146 

Total other expense

 

 

(47,776)

 

 

(37,922)

 

 

(144,211)

 

 

(286,235)

LOSS BEFORE INCOME TAXES

 

 

(528,730)

 

 

(335,504)

 

 

(759,385)

 

 

(983,458)

INCOME TAX EXPENSE (BENEFIT)

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

(3,161)

 

 

113 

 

 

(6,367)

 

 

115 

Deferred

 

 

(239,137)

 

 

357,438 

 

 

(313,634)

 

 

182,286 

Total income tax expense (benefit)

 

 

(242,298)

 

 

357,551 

 

 

(320,001)

 

 

182,401 

NET LOSS

 

 

(286,432)

 

 

(693,055)

 

 

(439,384)

 

 

(1,165,859)

Net loss attributable to noncontrolling interests

 

 

 -

 

 

 

 

14 

 

 

18 

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS

 

$

(286,432)

 

$

(693,052)

 

$

(439,370)

 

$

(1,165,841)

LOSS PER COMMON SHARE

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.79)

 

$

(2.47)

 

$

(1.21)

 

$

(4.92)

Diluted

 

$

(0.79)

 

$

(2.47)

 

$

(1.21)

 

$

(4.92)

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

362,794 

 

 

280,418 

 

 

362,713 

 

 

237,100 

Diluted

 

 

362,794 

 

 

280,418 

 

 

362,713 

 

 

237,100 



 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

















5

 


 

WHITING PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)





 

 

 

 

 

 



 

 

 

 

 

 



 

Nine Months Ended



 

September 30,



 

2017

 

2016

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(439,384)

 

$

(1,165,859)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

673,288 

 

 

900,877 

Deferred income tax expense (benefit)

 

 

(313,634)

 

 

182,286 

Amortization of debt issuance costs, debt discount and debt premium

 

 

22,927 

 

 

72,389 

Stock-based compensation

 

 

19,051 

 

 

19,512 

Amortization of deferred gain on sale

 

 

(9,757)

 

 

(11,111)

Loss on sale of properties

 

 

401,050 

 

 

193,729 

Undeveloped leasehold and oil and gas property impairments

 

 

44,270 

 

 

45,906 

Exploratory dry hole costs

 

 

 -

 

 

37 

Loss on extinguishment of debt

 

 

1,540 

 

 

42,236 

Non-cash derivative loss

 

 

57,937 

 

 

102,100 

Other, net

 

 

(7,008)

 

 

(4,732)

Changes in current assets and liabilities:

 

 

 

 

 

 

Accounts receivable trade, net

 

 

(51,319)

 

 

119,622 

Prepaid expenses and other

 

 

(6,441)

 

 

9,063 

Accounts payable trade and accrued liabilities

 

 

(68,881)

 

 

(104,579)

Revenues and royalties payable

 

 

(16,782)

 

 

(41,336)

Taxes payable

 

 

(16,451)

 

 

(1,885)

Net cash provided by operating activities

 

 

290,406 

 

 

358,255 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Drilling and development capital expenditures

 

 

(616,753)

 

 

(434,794)

Acquisition of oil and gas properties

 

 

(18,452)

 

 

(3,605)

Other property and equipment

 

 

(3,371)

 

 

(6,744)

Proceeds from sale of oil and gas properties

 

 

916,176 

 

 

304,291 

Net cash provided by (used in) investing activities

 

 

277,600 

 

 

(140,852)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Borrowings under credit agreement

 

 

1,630,000 

 

 

1,050,000 

Repayments of borrowings under credit agreement

 

 

(1,980,000)

 

 

(1,200,000)

Redemption of 6.5% Senior Subordinated Notes due 2018

 

 

(275,121)

 

 

 -

Early conversion payments for New Convertible Notes

 

 

 -

 

 

(41,919)

Debt issuance costs

 

 

 -

 

 

(22,499)

Restricted stock used for tax withholdings

 

 

(4,938)

 

 

(709)

Net cash used in financing activities

 

$

(630,059)

 

$

(215,127)



 

 

 

 

 

 



 

 

 

 

 

(Continued)





6

 


 

WHITING PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)







 

 

 

 

 

 



 

 

 

 

 

 



 

Nine Months Ended



 

September 30,



 

2017

 

2016

NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

$

(62,053)

 

$

2,276 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

 

 

 

 

Beginning of period

 

 

73,225 

 

 

16,053 

End of period

 

$

11,172 

 

$

18,329 

NONCASH INVESTING ACTIVITIES

 

 

 

 

 

 

Accrued capital expenditures and accounts payable related to property additions

 

$

147,084 

 

$

62,416 

NONCASH FINANCING ACTIVITIES (1)

 

 

 

 

 

 



 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

(Concluded)

                                

(1)

Refer to the “Long-Term Debt” footnote in the notes to condensed consolidated financial statements for a discussion of (i) the Company’s exchange of senior notes and senior subordinated notes for convertible notes and the subsequent conversions of such notes, and (ii) the Company’s exchange of senior notes, convertible senior notes and senior subordinated notes for mandatory convertible notes and the subsequent conversions of such notes. 













 

7

 


 

WHITING PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)

(in thousands)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Retained

 

Total

 

 

 

 

 

 



 

 

 

 

 

 

Additional

 

Earnings

 

Whiting

 

 

 

 

 

 



 

Common Stock

 

Paid-in

 

(Accumulated

 

Shareholders'

 

Noncontrolling

 

Total



 

Shares

 

Amount

 

Capital

 

Deficit)

 

Equity

 

Interest

 

Equity

BALANCES - January 1, 2016

 

206,441 

 

$

206 

 

$

4,659,868 

 

$

90,530 

 

$

4,750,604 

 

$

7,984 

 

$

4,758,588 

Net loss

 

 -

 

 

 -

 

 

 -

 

 

(1,165,841)

 

 

(1,165,841)

 

 

(18)

 

 

(1,165,859)

Issuance of common stock upon conversion of convertible notes

 

79,920 

 

 

80 

 

 

822,936 

 

 

 -

 

 

823,016 

 

 

 -

 

 

823,016 

Reduction of equity component of 2020 Convertible Senior Notes upon extinguishment, net

 

 -

 

 

 -

 

 

(63,330)

 

 

 -

 

 

(63,330)

 

 

 -

 

 

(63,330)

Recognition of beneficial conversion features on convertible notes

 

 -

 

 

 -

 

 

232,801 

 

 

 -

 

 

232,801 

 

 

 -

 

 

232,801 

Restricted stock issued

 

4,021 

 

 

 

 

(4)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Restricted stock forfeited

 

(615)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Restricted stock used for tax withholdings

 

(90)

 

 

 -

 

 

(709)

 

 

 -

 

 

(709)

 

 

 -

 

 

(709)

Stock-based compensation

 

 -

 

 

 -

 

 

19,512 

 

 

 -

 

 

19,512 

 

 

 -

 

 

19,512 

BALANCES - September 30, 2016

 

289,677 

 

$

290 

 

$

5,671,074 

 

$

(1,075,311)

 

$

4,596,053 

 

$

7,966 

 

$

4,604,019 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES - January 1, 2017

 

367,175 

 

$

367 

 

$

6,389,435 

 

$

(1,248,572)

 

$

5,141,230 

 

$

7,962 

 

$

5,149,192 

Net loss

 

 -

 

 

 -

 

 

 -

 

 

(439,370)

 

 

(439,370)

 

 

(14)

 

 

(439,384)

Conveyance of third party ownership interest in Sustainable Water Resources, LLC

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(7,948)

 

 

(7,948)

Restricted stock issued

 

2,271 

 

 

 

 

(2)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Restricted stock forfeited

 

(1,022)

 

 

(1)

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Restricted stock used for tax withholdings

 

(404)

 

 

 -

 

 

(4,938)

 

 

 -

 

 

(4,938)

 

 

 -

 

 

(4,938)

Stock-based compensation

 

 -

 

 

 -

 

 

19,051 

 

 

 -

 

 

19,051 

 

 

 -

 

 

19,051 

Cumulative effect of change in accounting principle

 

 -

 

 

 -

 

 

220 

 

 

(220)

 

 

 -

 

 

 -

 

 

 -

BALANCES - September 30, 2017

 

368,020 

 

$

368 

 

$

6,403,767 

 

$

(1,688,162)

 

$

4,715,973 

 

$

 -

 

$

4,715,973 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

































 

8

 


 

WHITING PETROLEUM CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



1.           BASIS OF PRESENTATION

Description of Operations—Whiting Petroleum Corporation, a Delaware corporation, is an independent oil and gas company engaged in the development, production, acquisition and exploration of crude oil, NGLs and natural gas primarily in the Rocky Mountains region of the United States.  Unless otherwise specified or the context otherwise requires, all references in these notes to “Whiting” or the “Company” are to Whiting Petroleum Corporation and its consolidated subsidiaries, Whiting Oil and Gas Corporation (“Whiting Oil and Gas”), Whiting US Holding Company, Whiting Canadian Holding Company ULC (formerly Kodiak Oil & Gas Corp., “Kodiak”), Whiting Resources Corporation and Whiting Programs, Inc.

Condensed Consolidated Financial Statements—The unaudited condensed consolidated financial statements include the accounts of Whiting Petroleum Corporation and its consolidated subsidiaries.  Investments in entities which give Whiting significant influence, but not control, over the investee are accounted for using the equity method.  Under the equity method, investments are stated at cost plus the Company’s equity in undistributed earnings and losses.  All intercompany balances and transactions have been eliminated upon consolidation.  These financial statements have been prepared in accordance with GAAP and the SEC rules and regulations for interim financial reporting.  In the opinion of management, the accompanying financial statements include all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly, in all material respects, the Company’s interim results.  However, operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year.  The condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q should be read in conjunction with Whiting’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2016.  Except as disclosed herein, there have been no material changes to the information disclosed in the notes to consolidated financial statements included in the Company’s 2016 Annual Report on Form 10‑K.

Reclassifications—Certain prior period balances in the condensed consolidated balance sheets and statements of operations have been reclassified to conform to the current year presentation.  Such reclassifications had no impact on net income, cash flows or shareholders’ equity previously reported.

Adopted and Recently Issued Accounting Pronouncements—In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014‑09”).  The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards.  The FASB subsequently issued various ASUs which deferred the effective date of ASU 2014-09 and provided additional implementation guidance.  ASU 2014-09 and its amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.  The standards permit retrospective application using either of the following methodologies: (i) restatement of each prior reporting period presented or (ii) recognition of a cumulative-effect adjustment as of the date of initial application.  The Company plans to adopt these ASUs effective January 1, 2018 using the modified retrospective approachThe Company is in the process of assessing its contracts with customers and evaluating the effect of adopting these standards on its financial statements, accounting policies and internal controls.   The adoption is not expected to have a significant impact on the Company’s net income or cash flows, however, the Company is currently evaluating the proper classification of certain pipeline gathering and transportation agreements as well as gas processing agreements to determine whether changes to total revenues and expenses will be necessary under the new standards.  In addition, the Company is also currently assessing the additional disclosures that will be required upon implementation of these ASUs.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”).  The objective of this ASU is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.  ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and should be applied using a modified retrospective approach.  Early adoption is permitted.  Although the Company is still in the process of evaluating the effect of adopting ASU 2016‑02, the adoption is expected to result in (i) an increase in the assets and liabilities recorded on its consolidated balance sheet, (ii) an increase in depreciation, depletion and amortization expense and interest expense recorded on its consolidated statement of operations, and (iii) additional disclosures.  As of September 30, 2017, the Company had approximately $87 million of contractual obligations related to its non-cancelable leases, drilling rig contracts and pipeline transportation agreements, and it will evaluate those contracts as well as other existing arrangements to determine if they qualify for lease accounting under ASU 2016-02.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”).  The objective of this ASU is to simplify several aspects of the accounting for employee share-based payment transactions, including income tax consequences, forfeitures, classification of awards as either equity or liabilities and classification in the statement of cash flows.  Portions of this ASU must be applied prospectively while other portions may be applied either prospectively or retrospectively.  ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning

9

 


 

after December 15, 2016, and the Company adopted this standard on January 1, 2017.  Upon adoption of ASU 2016-09, the Company (i) recorded $70 million of previously unrecognized excess tax benefits on a modified retrospective basis with a full valuation allowance, resulting in a net cumulative-effect adjustment to retained earnings of zero, (ii) prospectively removed excess tax benefits from its calculation of diluted shares, which had no impact on the Company’s diluted earnings per share for the three and nine months ended September 30, 2017, and (iii) elected to account for forfeitures of share-based awards as they occur, rather than by applying an estimated forfeiture rate to determine compensation expense, the effect of which was recognized using a modified retrospective approach and resulted in an immaterial cumulative-effect adjustment to retained earnings and additional paid-in capital.

2.           OIL AND GAS PROPERTIES

Net capitalized costs related to the Company’s oil and gas producing activities at September 30, 2017 and December 31, 2016 are as follows (in thousands):





 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2017

 

2016

Proved leasehold costs

 

$

2,658,889 

 

$

3,330,928 

Unproved leasehold costs

 

 

191,067 

 

 

392,484 

Costs of completed wells and facilities

 

 

9,432,776 

 

 

9,016,472 

Wells and facilities in progress

 

 

514,742 

 

 

490,967 

Total oil and gas properties, successful efforts method

 

 

12,797,474 

 

 

13,230,851 

Accumulated depletion

 

 

(4,676,819)

 

 

(4,170,237)

Oil and gas properties, net

 

$

8,120,655 

 

$

9,060,614 











3.           ACQUISITIONS AND DIVESTITURES

2017 Acquisitions and Divestitures

On September 1, 2017, the Company completed the sale of its interests in certain producing oil and gas properties located in the Fort Berthold Indian Reservation area in Dunn and McLean counties of North Dakota, as well as other related assets and liabilities, (the “FBIR Assets”) for aggregate sales proceeds of $500 million (before closing adjustments).  The sale was effective September 1, 2017 and resulted in a pre-tax loss on sale of $402 million.  The Company used the net proceeds from the sale to repay a portion of the debt outstanding under its credit agreement.    

On January 1, 2017, the Company completed the sale of its 50% interest in the Robinson Lake gas processing plant located in Mountrail County, North Dakota and its 50% interest in the Belfield gas processing plant located in Stark County, North Dakota, as well as the associated natural gas, crude oil and water gathering systems, effective January 1, 2017, for aggregate sales proceeds of $375 million (before closing adjustments).  The Company used the net proceeds from this transaction to repay a portion of the debt outstanding under its credit agreement.

The following table shows the components of assets and liabilities classified as held for sale as of December 31, 2016 (in thousands):





 

 

 



 

 

 



 

Carrying Value as of



 

December 31, 2016

Assets

 

 

 

Oil and gas properties, net

 

$

347,817 

Other property and equipment, net

 

 

475 

Total property and equipment, net

 

 

348,292 

Other long-term assets

 

 

854 

Total assets held for sale

 

$

349,146 



 

 

 

Liabilities

 

 

 

Asset retirement obligations

 

$

131 

Other long-term liabilities

 

 

407 

Total liabilities related to assets held for sale

 

$

538 

There were no significant acquisitions during the nine months ended September 30, 2017.

10

 


 

2016 Acquisitions and Divestitures

In July 2016, the Company completed the sale of its interest in its enhanced oil recovery project in the North Ward Estes field in Ward and Winkler counties of Texas, including Whiting’s interest in certain CO2 properties in the McElmo Dome field in Colorado and certain other related assets and liabilities (the “North Ward Estes Properties”) for a cash purchase price of $300 million (before closing adjustments).  The sale was effective July 1, 2016 and resulted in a pre-tax loss on sale of $187 million.  The Company used the net proceeds from the sale to repay a portion of the debt outstanding under its credit agreement.

In addition to the cash purchase price, the buyer agreed to pay Whiting $100,000 for every $0.01 that, as of June 28, 2018, the average NYMEX crude oil futures contract price for each month from August 2018 through July 2021 is above $50.00/Bbl up to a maximum amount of $100 million (the “Contingent Payment”).  The Company determined that this Contingent Payment was an embedded derivative and reflected it at fair value in the consolidated financial statements prior to settlementOn July 19, 2017, the buyer paid $35 million to Whiting to settle this Contingent Payment, resulting in a pre-tax gain of $3 million.  Refer to the “Derivative Financial Instruments” and “Fair Value Measurements” footnotes for more information on this embedded derivative instrument.

There were no significant acquisitions during the year ended December 31, 2016.

4.           LONG-TERM DEBT

Long-term debt consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):



 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2017

 

2016

Credit agreement

 

$

200,000 

 

$

550,000 

6.5% Senior Subordinated Notes due 2018

 

 

 -

 

 

275,121 

5.0% Senior Notes due 2019

 

 

961,409 

 

 

961,409 

1.25% Convertible Senior Notes due 2020

 

 

562,075 

 

 

562,075 

5.75% Senior Notes due 2021

 

 

873,609 

 

 

873,609 

6.25% Senior Notes due 2023

 

 

408,296 

 

 

408,296 

Total principal

 

 

3,005,389 

 

 

3,630,510 

Unamortized debt discounts and premiums

 

 

(56,151)

 

 

(71,340)

Unamortized debt issuance costs on notes

 

 

(17,795)

 

 

(23,867)

Total long-term debt

 

$

2,931,443 

 

$

3,535,303 

Credit Agreement

Whiting Oil and Gas, the Company’s wholly owned subsidiary, has a credit agreement with a syndicate of banks that as of September 30, 2017 had a borrowing base and aggregate commitments of $2.5 billion.  As of September 30, 2017, the Company had $2.3 billion of available borrowing capacity, which was net of $200 million in borrowings and $9 million in letters of credit outstanding.

The borrowing base under the credit agreement is determined at the discretion of the lenders, based on the collateral value of the Company’s proved reserves that have been mortgaged to such lenders, and is subject to regular redeterminations on May 1 and November 1 of each year, as well as special redeterminations described in the credit agreement, in each case which may reduce the amount of the borrowing base.  Upon a redetermination of the borrowing base, either on a periodic or special redetermination date, if borrowings in excess of the revised borrowing capacity were outstanding, the Company could be forced to immediately repay a portion of its debt outstanding under the credit agreement.  In October 2017, the borrowing base and aggregate commitments under the facility were reduced to $2.3 billion in connection with the November 1, 2017 regular borrowing base redetermination, and was primarily a result of the sale of the Company’s FBIR Assets on September 1, 2017.

A portion of the revolving credit facility in an aggregate amount not to exceed $50 million may be used to issue letters of credit for the account of Whiting Oil and Gas or other designated subsidiaries of the Company.  As of September 30, 2017,  $41 million was available for additional letters of credit under the agreement.

The credit agreement provides for interest only payments until December 2019, when the credit agreement expires and all outstanding borrowings are due.  Interest under the revolving credit facility accrues at the Company’s option at either (i) a base rate for a base rate loan plus the margin in the table below, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.5% per annum, or an adjusted LIBOR rate plus 1.0% per annum, or (ii) an adjusted LIBOR rate for a Eurodollar loan plus the margin in the table below.  Additionally, the Company incurs commitment fees as set forth in the table below on the unused portion of the aggregate commitments of the lenders under the revolving credit facility, which are included as a component of interest expense.    

11

 


 

At September 30, 2017 and December 31, 2016, the weighted average interest rate on the outstanding principal balance under the credit agreement was 3.2% and 4.0%, respectively.



 

 

 

 

 

 



 

 

 

 

 

 



 

Applicable

 

Applicable

 

 



 

Margin for Base

 

Margin for

 

Commitment

Ratio of Outstanding Borrowings to Borrowing Base

 

Rate Loans

 

Eurodollar Loans

 

Fee

Less than 0.25 to 1.0

 

1.00%

 

2.00%

 

0.50%

Greater than or equal to 0.25 to 1.0 but less than 0.50 to 1.0

 

1.25%

 

2.25%

 

0.50%

Greater than or equal to 0.50 to 1.0 but less than 0.75 to 1.0

 

1.50%

 

2.50%

 

0.50%

Greater than or equal to 0.75 to 1.0 but less than 0.90 to 1.0

 

1.75%

 

2.75%

 

0.50%

Greater than or equal to 0.90 to 1.0

 

2.00%

 

3.00%

 

0.50%

The credit agreement contains restrictive covenants that may limit the Company’s ability to, among other things, incur additional indebtedness, sell assets, make loans to others, make investments, enter into mergers, enter into hedging contracts, incur liens and engage in certain other transactions without the prior consent of its lenders.  However, the credit agreement permits the Company and certain of its subsidiaries to issue second lien indebtedness of up to $1.0 billion subject to certain conditions and limitations.  Except for limited exceptions, the credit agreement also restricts the Company’s ability to make any dividend payments or distributions on its common stock.  These restrictions apply to all of the Company’s restricted subsidiaries (as defined in the credit agreement).  As of September 30, 2017, there were no retained earnings free from restrictions.  The credit agreement requires the Company, as of the last day of any quarter, to maintain the following ratios (as defined in the credit agreement): (i) a consolidated current assets to consolidated current liabilities ratio (which includes an add back of the available borrowing capacity under the credit agreement) of not less than 1.0 to 1.0, (ii) a total senior secured debt to the last four quarters’ EBITDAX ratio of less than 3.0 to 1.0 during the Interim Covenant Period (defined below), and thereafter a total debt to EBITDAX ratio of less than 4.0 to 1.0, and (iii) a ratio of the last four quarters’ EBITDAX to consolidated cash interest charges of not less than 2.25 to 1.0 during the Interim Covenant Period.  Under the credit agreement, the “Interim Covenant Period” is defined as the period from June 30, 2015 until the earlier of (i) April 1, 2018 or (ii) the commencement of an investment-grade debt rating period (as defined in the credit agreement).  The Company was in compliance with its covenants under the credit agreement as of September 30, 2017.

The obligations of Whiting Oil and Gas under the credit agreement are collateralized by a first lien on substantially all of Whiting Oil and Gas’ and Whiting Resource Corporation’s properties.  The Company has guaranteed the obligations of Whiting Oil and Gas under the credit agreement and has pledged the stock of its subsidiaries as security for its guarantee.

Senior Notes, Convertible Senior Notes and Senior Subordinated Notes

The following table summarizes the material terms of the Company’s senior notes and convertible senior notes outstanding at September 30, 2017.









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

2020

 

 

 

 



 

2019

 

Convertible

 

2021

 

2023



 

Senior Notes

 

Senior Notes

 

Senior Notes

 

Senior Notes

Outstanding principal (in thousands)

 

$

961,409

 

$

562,075

 

$

873,609

 

$

408,296

Interest rate

 

 

5.0%

 

 

1.25%

 

 

5.75%

 

 

6.25%

Maturity date

 

 

Mar 15, 2019

 

 

Apr 1, 2020

 

 

Mar 15, 2021

 

 

Apr 1, 2023

Interest payment dates

 

 

Mar 15, Sep 15

 

 

Apr 1, Oct 1

 

 

Mar 15, Sep 15

 

 

Apr 1, Oct 1

Make-whole redemption date (1)

 

 

Dec 15, 2018

 

 

N/A (2)

 

 

Dec 15, 2020

 

 

Jan 1, 2023

                                

(1)

On or after these dates, the Company may redeem the applicable series of notes, in whole or in part, at a redemption price equal to 100% of the principal amount redeemed, together with accrued and unpaid interest up to the redemption date.  At any time prior to these dates, the Company may redeem the notes at a redemption price that includes an applicable premium as defined in the indentures to such notes.

(2)

The indenture governing our 1.25% Convertible Senior Notes due 2020 does not allow for optional redemption by the Company prior to the maturity date.

Senior Notes and Senior Subordinated Notes—In September 2010, the Company issued at par $350 million of 6.5% Senior Subordinated Notes due October 2018 (the “2018 Senior Subordinated Notes”).

In September 2013, the Company issued at par $1.1 billion of 5.0% Senior Notes due March 2019 (the “2019 Senior Notes”) and $800 million of 5.75% Senior Notes due March 2021, and issued at 101% of par an additional $400 million of 5.75% Senior Notes due

12

 


 

March 2021 (collectively, the “2021 Senior Notes”).  The debt premium recorded in connection with the issuance of the 2021 Senior Notes is being amortized to interest expense over the term of the notes using the effective interest method, with an effective interest rate of 5.5% per annum.

In March 2015, the Company issued at par $750 million of 6.25% Senior Notes due April 2023 (the “2023 Senior Notes” and together with the 2019 Senior Notes and 2021 Senior Notes, the “Senior Notes”).

Exchange of Senior Notes and Senior Subordinated Notes for Convertible Notes.  On March 23, 2016, the Company completed the exchange of $477 million aggregate principal amount of Senior Notes and 2018 Senior Subordinated Notes, consisting of (i) $49 million aggregate principal amount of its 2018 Senior Subordinated Notes, (ii) $97 million aggregate principal amount of its 2019 Senior Notes, (iii) $152 million aggregate principal amount of its 2021 Senior Notes, and (iv) $179 million aggregate principal amount of its 2023 Senior Notes, for $477 million aggregate principal amount of convertible senior notes and convertible senior subordinated notes (the “New Convertible Notes”).    This exchange transaction was accounted for as an extinguishment of debt for each portion of the Senior Notes and 2018 Senior Subordinated Notes that was exchanged.  As a result, Whiting recognized a $91 million gain on extinguishment of debt, which was net of a $4 million non-cash charge for the acceleration of unamortized debt issuance costs and debt premium on the original notes.  Each series of New Convertible Notes was recorded at fair value upon issuance, with the difference between the principal amount of the notes and their fair values, totaling $95 million, recorded as a debt discount.  The aggregate debt discount of $185 million recorded upon issuance of the New Convertible Notes also included $90 million related to the fair value of the holders’ conversion options, which were embedded derivatives that met the criteria to be bifurcated from their host contracts and accounted for separately.  Refer to the “Derivative Financial Instruments” and “Fair Value Measurements” footnotes for more information on these embedded derivatives.

During the second quarter of 2016, holders of the New Convertible Notes voluntarily converted all $477 million aggregate principal amount of the New Convertible Notes for approximately 41.8 million shares of the Company’s common stock.  Upon conversion, the Company paid $46 million in cash consisting of early conversion payments to the holders of the notes, as well as all accrued and unpaid interest on such notes.  As a result of the conversions, Whiting recognized a $188 million loss on extinguishment of debt, which consisted of a non-cash charge for the acceleration of unamortized debt issuance costs and debt discount on the notes.  As of June 30, 2016, no New Convertible Notes remained outstanding.

Exchange of Senior Notes and Senior Subordinated Notes for Mandatory Convertible Notes.  On July 1, 2016, the Company completed the exchange of $405 million aggregate principal amount of Senior Notes and 2018 Senior Subordinated Notes for the same aggregate principal amount of new mandatory convertible senior notes and mandatory convertible senior subordinated notes.  Refer to “Mandatory Convertible Notes” below for more information on these exchange transactions.

Redemption of 2018 Senior Subordinated Notes.  On February 2, 2017, the Company paid $281 million to redeem all of the then outstanding $275 million aggregate principal amount of 2018 Senior Subordinated Notes, which payment consisted of the 100% redemption price plus all accrued and unpaid interest on the notes.  The Company financed the redemption with borrowings under its credit agreement.  As a result of the redemption, Whiting recognized a $2 million loss on extinguishment of debt, which consisted of a non-cash charge for the acceleration of unamortized debt issuance costs on the notes.  As of March 31, 2017, no 2018 Senior Subordinated Notes remained outstanding.

2020 Convertible Senior Notes—In March 2015, the Company issued at par $1,250 million of 1.25% Convertible Senior Notes due April 2020 (the “2020 Convertible Senior Notes”) for net proceeds of $1.2 billion, net of initial purchasers’ fees of $25 million.  On June 29, 2016, the Company exchanged $129 million aggregate principal amount of its 2020 Convertible Senior Notes for the same aggregate principal amount of new mandatory convertible senior notes, and on July 1, 2016, the Company exchanged $559 million aggregate principal amount of its 2020 Convertible Senior Notes for the same aggregate principal amount of new mandatory convertible senior notes.  Refer to “Mandatory Convertible Notes” below for more information on these exchange transactions.

For the remaining $562 million aggregate principal amount of 2020 Convertible Senior Notes outstanding as of September 30, 2017, the Company has the option to settle conversions of these notes with cash, shares of common stock or a combination of cash and common stock at its election.  The Company’s intent is to settle the principal amount of the 2020 Convertible Senior Notes in cash upon conversion.  Prior to January 1, 2020, the 2020 Convertible Senior Notes will be convertible at the holder’s option only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the 2020 Convertible Senior Notes for each trading day of the measurement period is less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events.  On or after January 1, 2020, the 2020 Convertible Senior Notes will be convertible at any time until the second

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scheduled trading day immediately preceding the April 1, 2020 maturity date of the notes.  The notes will be convertible at an initial conversion rate of 25.6410 shares of Whiting’s common stock per $1,000 principal amount of the notes, which is equivalent to an initial conversion price of approximately $39.00.  The conversion rate will be subject to adjustment in some events.  In addition, following certain corporate events that occur prior to the maturity date, the Company will increase, in certain circumstances, the conversion rate for a holder who elects to convert its 2020 Convertible Senior Notes in connection with such corporate event.  As of September 30, 2017, none of the contingent conditions allowing holders of the 2020 Convertible Senior Notes to convert these notes had been met.

Upon issuance, the Company separately accounted for the liability and equity components of the 2020 Convertible Senior Notes.  The liability component was recorded at the estimated fair value of a similar debt instrument without the conversion feature.  The difference between the principal amount of the 2020 Convertible Senior Notes and the estimated fair value of the liability component was recorded as a debt discount and is being amortized to interest expense over the term of the notes using the effective interest method, with an effective interest rate of 5.6% per annum.  The fair value of the 2020 Convertible Senior Notes as of the issuance date was estimated at $1.0 billion, resulting in a debt discount at inception of $238 million.  The equity component, representing the value of the conversion option, was computed by deducting the fair value of the liability component from the initial proceeds of the 2020 Convertible Senior Notes issuance.  This equity component was recorded, net of deferred taxes and issuance costs, in additional paid-in capital within shareholders’ equity, and will not be remeasured as long as it continues to meet the conditions for equity classification. 

Transaction costs related to the 2020 Convertible Senior Notes issuance were allocated to the liability and equity components based on their relative fair values.  Issuance costs attributable to the liability component were recorded as a reduction to the carrying value of long-term debt on the consolidated balance sheet and are being amortized to interest expense over the term of the notes using the effective interest method.  Issuance costs attributable to the equity component were recorded as a charge to additional paid-in capital within shareholders’ equity.

The 2020 Convertible Senior Notes consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):





 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2017

 

2016

Liability component

 

 

 

 

 

 

Principal

 

$

562,075 

 

$

562,075 

Less: unamortized note discount

 

 

(57,015)

 

 

(72,622)

Less: unamortized debt issuance costs

 

 

(4,633)

 

 

(5,988)

Net carrying value

 

$

500,427 

 

$

483,465 

Equity component (1)

 

$

136,522 

 

$

136,522 

                                

(1)

Recorded in additional paid-in capital, net of $5 million of issuance costs and $50 million of deferred taxes as of September 30, 2017 and December 31, 2016.

The following table presents the interest expense recognized on the 2020 Convertible Senior Notes related to the stated interest rate and amortization of the debt discount for the three and nine months ended September 30, 2017 and 2016 (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2017

 

2016

 

2017

 

2016

Interest expense on 2020 Convertible Senior Notes

 

$

7,032 

 

$

6,745 

 

$

20,876 

 

$

36,068 

Mandatory Convertible NotesOn June 29, 2016, the Company completed the exchange of $129 million aggregate principal amount of its 2020 Convertible Senior Notes for the same aggregate principal amount of new mandatory convertible notes, and on  July 1, 2016, the Company completed the exchange of $964 million aggregate principal amount of Senior Notes, 2020 Convertible Senior Notes and 2018 Senior Subordinated Notes, consisting of (i) $26 million aggregate principal amount of 2018 Senior Subordinated Notes, (ii) $42 million aggregate principal amount of 2019 Senior Notes, (iii) $559 million aggregate principal amount of 2020 Convertible Senior Notes, (iv) $174 million aggregate principal amount of 2021 Senior Notes, and (v) $163 million aggregate principal amount of 2023 Senior Notes, for the same aggregate principal amount of new mandatory convertible notes (together the “Mandatory Convertible Notes”).

These transactions were accounted for as extinguishments of debt for the portions of Senior Notes, 2020 Convertible Senior Notes and 2018 Senior Subordinated Notes that were exchanged.  As a result, Whiting recognized a $57 million gain on extinguishment of debt, which was net of a $113 million charge for the non-cash write-off of unamortized debt issuance costs, debt discounts and debt premium on the original notes.  In addition, Whiting recorded a $63 million reduction to the equity component of the 2020 Convertible Senior

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Notes, which was net of deferred taxes.  The Mandatory Convertible Notes were recorded at fair value upon issuance with the difference between the principal amount of the notes and their fair values, totaling $69 million, recorded as a debt discount.  The Mandatory Convertible Notes contained contingent beneficial conversion features, the intrinsic value of which was recognized in additional paid-in capital at the time the contingency was resolved, resulting in an additional debt discount of $233 million.  The aggregate debt discount of $302 million was being amortized to interest expense over the term of the notes using the effective interest method.

The July 1, 2016 note exchange transactions triggered an ownership shift as defined under Section 382 of the Internal Revenue Code due to the “deemed share issuance” that resulted from the note exchanges.  This triggering event will limit the Company’s usage of certain of its net operating losses and tax credits in the future.  Refer to the “Income Taxes” footnote for more information.

In July 2016, $333 million aggregate principal amount of the Mandatory Convertible Notes were converted into approximately 33.2 million shares of the Company’s common stock pursuant to the terms of the notes, and the Company paid $3 million in cash consisting of all accrued and unpaid interest on such notes.  As a result of the conversions, Whiting recognized a $3 million gain on extinguishment of debt, which was net of a non-cash charge for the acceleration of unamortized debt issuance costs and debt discount on the notes.

In August 2016, the Company completed an induced exchange of $38 million aggregate principal amount of the Mandatory Convertible Notes for approximately 4.9 million shares of the Company’s common stock.  As a result of the exchange, the Company (i) paid $1 million in cash consisting of all accrued and unpaid interest on such notes, (ii) recognized $4 million of debt inducement expense related to the fair value of the incremental shares issued in the inducement offer over the original conversion terms of the notes, which expense was included in (gain) loss on extinguishment of debt in the condensed consolidated statements of operations, and (iii)  recognized a $14 million non-cash charge for the acceleration of unamortized debt discount on the notes, which was included in interest expense in the condensed consolidated statements of operations.

During the fourth quarter of 2016, the remaining $721 million aggregate principal amount of the Mandatory Convertible Notes were converted into approximately 77.6 million shares of the Company’s common stock pursuant to the terms of the notes.  As of December 31, 2016, no Mandatory Convertible Notes remained outstanding.

Security and Guarantees

The Senior Notes and the 2020 Convertible Senior Notes are unsecured obligations of Whiting Petroleum Corporation and these unsecured obligations are subordinated to all of the Company’s secured indebtedness, which consists of Whiting Oil and Gas’ credit agreement.

The Company’s obligations under the Senior Notes and the 2020 Convertible Senior Notes are guaranteed by the Company’s 100%-owned subsidiaries, Whiting Oil and Gas, Whiting US Holding Company, Whiting Canadian Holding Company ULC and Whiting Resources Corporation (the “Guarantors”).  These guarantees are full and unconditional and joint and several among the Guarantors.  Any subsidiaries other than these Guarantors are minor subsidiaries as defined by Rule 3-10(h)(6) of Regulation S‑X of the SEC.  Whiting Petroleum Corporation has no assets or operations independent of this debt and its investments in its consolidated subsidiaries.

5.           ASSET RETIREMENT OBLIGATIONS

The Company’s asset retirement obligations represent the present value of estimated future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage, and land restoration (including removal of certain onshore and offshore facilities in California) in accordance with applicable local, state and federal laws.  The current portions at September 30, 2017 and December 31, 2016 were $5 million and $8 million, respectively, and have been included in accrued liabilities and other in the consolidated balance sheets.  The following table provides a reconciliation of the Company’s asset retirement obligations for the nine months ended September 30, 2017 (in thousands):







 

 

 



 

 

 

Asset retirement obligation at January 1, 2017

 

$

177,004 

Additional liability incurred

 

 

5,302 

Revisions to estimated cash flows (1)

 

 

(21,219)

Accretion expense

 

 

10,502 

Obligations on sold properties

 

 

(6,997)

Liabilities settled

 

 

(2,777)

Asset retirement obligation at September 30, 2017

 

$

161,815 

                                

(1)

Revisions to estimated cash flows during the nine months ended September 30, 2017 are attributable to decreases in the estimates of future costs required to plug and abandon wells in certain fields in the Northern Rocky Mountains.  





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6.           DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risks relating to its ongoing business operations, and it uses derivative instruments to manage its commodity price risk.  In addition, the Company periodically enters into contracts that contain embedded features which are required to be bifurcated and accounted for separately as derivatives.

Commodity Derivative ContractsHistorically, prices received for crude oil and natural gas production have been volatile because of supply and demand factors, worldwide political factors, general economic conditions and seasonal weather patterns.  Whiting enters into derivative contracts such as crude oil costless collars, swaps and sales and delivery contracts to achieve a more predictable cash flow by reducing its exposure to commodity price volatility, thereby ensuring adequate funding for the Company’s capital programs and facilitating the management of returns on drilling programs and acquisitions.  The Company does not enter into derivative contracts for speculative or trading purposes.

Crude Oil Costless Collars.  Costless collars are designed to establish floor and ceiling prices on anticipated future oil or gas production.  While the use of these derivative instruments limits the downside risk of adverse price movements, they may also limit future revenues from favorable price movements.

The table below details the Company’s costless collar derivatives entered into to hedge forecasted crude oil production revenues as of September 30, 2017.





 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

Whiting Petroleum Corporation



 

 

 

 

 

 

Derivative

 

 

 

Contracted Crude

 

Weighted Average NYMEX Price

Instrument

 

Period

 

Oil Volumes (Bbl)

 

Collar Ranges for Crude Oil (per Bbl)

Three-way collars (1) (2)

 

Oct - Dec 2017

 

3,750,000 

 

$35.00 - $45.20 - $58.95



 

Jan - Dec 2018

 

12,600,000 

 

$36.67 - $46.67 - $56.95

Collars

 

Oct - Dec 2017

 

750,000 

 

$53.00 - $70.44



 

Total

 

17,100,000 

 

 

                                

(1)

A three-way collar is a combination of options: a sold call, a purchased put and a sold put.  The sold call establishes a maximum price (ceiling) Whiting will receive for the volumes under contract.  The purchased put establishes a minimum price (floor), unless the market price falls below the sold put (sub-floor), at which point the minimum price would be NYMEX plus the difference between the purchased put and the sold put strike price.

(2)

Subsequent to September 30, 2017, the Company entered into additional three-way collar contracts for 2,400,000 Bbl of crude oil volumes for the year ended December 31, 2018.

Crude Oil Sales and Delivery Contract.  The Company has a long-term crude oil sales and delivery contract for oil volumes produced from its Redtail field in Colorado.  Under the terms of the agreement, Whiting has committed to deliver certain fixed volumes of crude oil through April 2020.  The Company determined it was not probable that future oil production from its Redtail field would be sufficient to meet the minimum volume requirements specified in this contract; accordingly, the Company would not settle this contract through physical delivery of crude oil volumes.  As a result, Whiting determined that this contract would not qualify for the “normal purchase normal sale” exclusion and has therefore reflected the contract at fair value in the consolidated financial statements.  As of September 30, 2017 and December 31, 2016, the estimated fair value of this derivative contract was a liability of $57 million and $9 million, respectively.

Embedded DerivativesIn March 2016, the Company issued convertible notes that contained debtholder conversion options which the Company determined were not clearly and closely related to the debt host contracts, and the Company therefore bifurcated these embedded features and reflected them at fair value in the consolidated financial statements.  During the second quarter of 2016, the entire aggregate principal amount of these notes was converted into shares of the Company’s common stock, and  the fair value of these embedded derivatives as of September 30, 2017 and December 31, 2016 was therefore zero.

In July 2016, the Company entered into a purchase and sale agreement with the buyer of its North Ward Estes Properties, whereby the buyer agreed to pay Whiting additional proceeds of $100,000 for every $0.01 that, as of June 28, 2018, the average NYMEX crude oil futures contract price for each month from August 2018 through July 2021 is above $50.00/Bbl up to a maximum amount of $100 million.  The Company determined that this NYMEX-linked contingent payment was not clearly and closely related to the host contract, and the Company therefore bifurcated this embedded feature and reflected it at its estimated fair value of $51 million in the consolidated financial statements  as of December 31, 2016On July 19, 2017, however, the buyer paid $35 million to Whiting to settle this NYMEX-linked contingent payment, and accordingly, the embedded derivative’s fair value was zero as of September 30, 2017.

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Derivative Instrument ReportingAll derivative instruments are recorded in the consolidated financial statements at fair value, other than derivative instruments that meet the “normal purchase normal sale” exclusion or other derivative scope exceptions.  The following tables summarize the effects of derivative instruments on the consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 (in thousands):