10-Q 1 wll-20180331x10q.htm WHITING PETROLEUM CORP FORM 10-Q, 3-31-2018 20180331 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 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:  001‑31899

 

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 April 20,  2018:  90,927,193 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 March 31, 2018 and December 31, 2017



Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017



Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017



Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2018 and 2017



Notes to Condensed Consolidated Financial Statements

Item 2.

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

24 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35 

Item 4.

Controls and Procedures

37 



PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

38 

Item 1A.

Risk Factors

38 

Item 6.

Exhibits

38 









 

 

 


 

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.

“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.

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

1

 


 

“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 barrels of oil, NGLs, or other liquid hydrocarbons.

“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)





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

30,515 

 

$

879,379 

Accounts receivable trade, net

 

 

270,304 

 

 

284,214 

Prepaid expenses and other

 

 

27,710 

 

 

26,035 

Total current assets

 

 

328,529 

 

 

1,189,628 

Property and equipment:

 

 

 

 

 

 

Oil and gas properties, successful efforts method

 

 

11,473,492 

 

 

11,293,650 

Other property and equipment

 

 

134,790 

 

 

134,524 

Total property and equipment

 

 

11,608,282 

 

 

11,428,174 

Less accumulated depreciation, depletion and amortization

 

 

(4,429,947)

 

 

(4,244,735)

Total property and equipment, net

 

 

7,178,335 

 

 

7,183,439 

Other long-term assets

 

 

25,844 

 

 

29,967 

TOTAL ASSETS

 

$

7,532,708 

 

$

8,403,034 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

$

 -

 

$

958,713 

Accounts payable trade

 

 

86,222 

 

 

32,761 

Revenues and royalties payable

 

 

161,704 

 

 

171,028 

Accrued capital expenditures

 

 

76,456 

 

 

69,744 

Accrued interest

 

 

38,595 

 

 

40,971 

Accrued liabilities and other

 

 

76,033 

 

 

118,815 

Taxes payable

 

 

29,954 

 

 

28,771 

Derivative liabilities

 

 

99,020 

 

 

132,525 

Total current liabilities

 

 

567,984 

 

 

1,553,328 

Long-term debt

 

 

2,861,428 

 

 

2,764,716 

Asset retirement obligations

 

 

131,678 

 

 

129,206 

Other long-term liabilities

 

 

36,005 

 

 

36,642 

Total liabilities

 

 

3,597,095 

 

 

4,483,892 

Commitments and contingencies

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Common stock, $0.001 par value, 225,000,000 shares authorized; 92,326,188 issued and 90,927,193 outstanding as of March 31, 2018 and 92,094,837 issued and 90,698,889 outstanding as of December 31, 2017

 

 

92 

 

 

92 

Additional paid-in capital

 

 

6,406,949 

 

 

6,405,490 

Accumulated deficit

 

 

(2,471,428)

 

 

(2,486,440)

Total equity

 

 

3,935,613 

 

 

3,919,142 

TOTAL LIABILITIES AND EQUITY

 

$

7,532,708 

 

$

8,403,034 



 

 

 

 

 

 

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



 

March 31,



 

2018

 

2017

OPERATING REVENUES

 

 

 

 

 

 

Oil, NGL and natural gas sales

 

$

515,083 

 

$

371,317 

OPERATING EXPENSES

 

 

 

 

 

 

Lease operating expenses

 

 

92,572 

 

 

90,393 

Production taxes

 

 

37,838 

 

 

32,056 

Depreciation, depletion and amortization

 

 

187,919 

 

 

240,407 

Exploration and impairment

 

 

14,747 

 

 

20,841 

General and administrative

 

 

31,480 

 

 

30,617 

Derivative loss, net

 

 

52,664 

 

 

36,577 

Loss on sale of properties

 

 

2,576 

 

 

1,274 

Amortization of deferred gain on sale

 

 

(2,904)

 

 

(3,342)

Total operating expenses

 

 

416,892 

 

 

448,823 

INCOME (LOSS) FROM OPERATIONS

 

 

98,191 

 

 

(77,506)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

Interest expense

 

 

(52,899)

 

 

(48,011)

Loss on extinguishment of debt

 

 

(31,160)

 

 

(1,540)

Interest income and other

 

 

880 

 

 

610 

Total other expense

 

 

(83,179)

 

 

(48,941)

INCOME (LOSS) BEFORE INCOME TAXES

 

 

15,012 

 

 

(126,447)

INCOME TAX BENEFIT

 

 

 

 

 

 

Current

 

 

 -

 

 

(1,890)

Deferred

 

 

 -

 

 

(37,586)

Total income tax benefit

 

 

 -

 

 

(39,476)

NET INCOME (LOSS)

 

 

15,012 

 

 

(86,971)

Net loss attributable to noncontrolling interests

 

 

 -

 

 

14 



NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS

 

$

15,012 

 

$

(86,957)

INCOME (LOSS) PER COMMON SHARE (1)

 

 

 

 

 

 

Basic

 

$

0.17 

 

$

(0.96)

Diluted

 

$

0.16 

 

$

(0.96)

WEIGHTED AVERAGE SHARES OUTSTANDING (1)

 

 

 

 

 

 

Basic

 

 

90,892 

 

 

90,652 

Diluted

 

 

91,310 

 

 

90,652 

                                

(1)

All share and per share amounts have been retroactively adjusted for the 2017 period to reflect the Company’s one-for-four reverse stock split in November 2017, as described in Note 8 to these condensed consolidated financial statements.

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)





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,



 

2018

 

2017

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income (loss)

 

$

15,012 

 

$

(86,971)

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

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

187,919 

 

 

240,407 

Deferred income tax benefit

 

 

 -

 

 

(37,586)

Amortization of debt issuance costs, debt discount and debt premium

 

 

7,805 

 

 

7,605 

Stock-based compensation

 

 

4,563 

 

 

5,931 

Amortization of deferred gain on sale

 

 

(2,904)

 

 

(3,342)

Loss on sale of properties

 

 

2,576 

 

 

1,274 

Undeveloped leasehold and oil and gas property impairments

 

 

10,050 

 

 

14,703 

Loss on extinguishment of debt

 

 

31,160 

 

 

1,540 

Non-cash derivative loss

 

 

27,827 

 

 

38,047 

Payment for settlement of commodity derivative contract

 

 

(61,036)

 

 

 -

Other, net

 

 

1,764 

 

 

(5,157)

Changes in current assets and liabilities:

 

 

 

 

 

 

Accounts receivable trade, net

 

 

13,405 

 

 

(10,697)

Prepaid expenses and other

 

 

(1,675)

 

 

(4,744)

Accounts payable trade and accrued liabilities

 

 

4,542 

 

 

(66,214)

Revenues and royalties payable

 

 

(9,324)

 

 

(5,726)

Taxes payable

 

 

1,183 

 

 

(9,000)

Net cash provided by operating activities

 

 

232,867 

 

 

80,070 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Drilling and development capital expenditures

 

 

(172,845)

 

 

(132,522)

Acquisition of oil and gas properties

 

 

(3,105)

 

 

(1,589)

Other property and equipment

 

 

(2,370)

 

 

(400)

Proceeds from sale of oil and gas properties

 

 

873 

 

 

377,651 

Net cash provided by (used in) investing activities

 

 

(177,447)

 

 

243,140 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Borrowings under credit agreement

 

 

450,000 

 

 

660,000 

Repayments of borrowings under credit agreement

 

 

(360,000)

 

 

(760,000)

Redemption of 6.5% Senior Subordinated Notes due 2018

 

 

 -

 

 

(275,121)

Redemption of 5.0% Senior Notes due 2019

 

 

(990,023)

 

 

 -

Debt issuance costs

 

 

(1,157)

 

 

 -

Restricted stock used for tax withholdings

 

 

(3,104)

 

 

(4,885)

Net cash used in financing activities

 

$

(904,284)

 

$

(380,006)



 

 

 

 

 

 



 

 

 

 

 

(Continued)





6

 


 

WHITING PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)







 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended March 31,



 

2018

 

2017

NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

$

(848,864)

 

$

(56,796)



CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

 

 

 

 

Beginning of period

 

 

879,379 

 

 

73,225 

End of period

 

$

30,515 

 

$

16,429 



NONCASH INVESTING ACTIVITIES

 

 

 

 

 

 

Accrued capital expenditures and accounts payable related to property additions

 

$

92,969 

 

$

106,905 



 

 

 

 

 

 

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

 

 

(Concluded)





















 

7

 


 

WHITING PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)

(in thousands)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 



 

 

 

 

 

 

Additional

 

 

 

Whiting

 

 

 

 

 

 



 

Common Stock

 

Paid-in

 

Accumulated

 

Shareholders'

 

Noncontrolling

 

Total



 

Shares (1)

 

Amount

 

Capital

 

Deficit

 

Equity

 

Interest

 

Equity

BALANCES - January 1, 2017

 

91,793 

 

$

367 

 

$

6,389,435 

 

$

(1,248,572)

 

$

5,141,230 

 

$

7,962 

 

$

5,149,192 

Net loss

 

 -

 

 

 -

 

 

 -

 

 

(86,957)

 

 

(86,957)

 

 

(14)

 

 

(86,971)

Restricted stock issued

 

527 

 

 

 

 

(2)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Restricted stock forfeited

 

(220)

 

 

(1)

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Restricted stock used for tax withholdings

 

(98)

 

 

 -

 

 

(4,885)

 

 

 -

 

 

(4,885)

 

 

 -

 

 

(4,885)

Stock-based compensation

 

 -

 

 

 -

 

 

5,931 

 

 

 -

 

 

5,931 

 

 

 -

 

 

5,931 

Cumulative effect of change in accounting principle

 

 -

 

 

 -

 

 

220 

 

 

(220)

 

 

 -

 

 

 -

 

 

 -

BALANCES - March 31, 2017

 

92,002 

 

$

368 

 

$

6,390,700 

 

$

(1,335,749)

 

$

5,055,319 

 

$

7,948 

 

$

5,063,267 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES - January 1, 2018

 

92,095 

 

$

92 

 

$

6,405,490 

 

$

(2,486,440)

 

$

3,919,142 

 

$

 -

 

$

3,919,142 

Net income

 

 -

 

 

 -

 

 

 -

 

 

15,012 

 

 

15,012 

 

 

 -

 

 

15,012 

Restricted stock issued

 

432 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Restricted stock forfeited

 

(96)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Restricted stock used for tax withholdings

 

(105)

 

 

 -

 

 

(3,104)

 

 

 -

 

 

(3,104)

 

 

 -

 

 

(3,104)

Stock-based compensation

 

 -

 

 

 -

 

 

4,563 

 

 

 -

 

 

4,563 

 

 

 -

 

 

4,563 

BALANCES - March 31, 2018

 

92,326 

 

$

92 

 

$

6,406,949 

 

$

(2,471,428)

 

$

3,935,613 

 

$

 -

 

$

3,935,613 

                                

(1)

All common share amounts have been retroactively adjusted for the 2017 period to reflect the Company’s one-for-four reverse stock split in November 2017, as described in Note 8 to these condensed consolidated financial statements.

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, 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 10K for the period ended December 31, 2017.  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 2017 Annual Report on Form 10‑K.

ReclassificationsCertain prior period balances in the condensed consolidated balance sheets 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. 201409, Revenue from Contracts with Customers (“ASU 2014‑09”).  The FASB subsequently issued various ASUs which deferred the effective date of ASU 2014-09 and provided additional implementation guidance,  and these ASUs collectively make up FASB ASC Topic 606 – Revenue from Contracts with Customers (“ASC 606”).  The objective of ASC 606 is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards.  ASC 606 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.  The standard permits 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 adopted ASC 606 effective January 1, 2018 using the modified retrospective approach.  The adoption did not have an impact on the Company’s net income or cash flows, and the Company did not record a cumulative-effect adjustment to retained earnings as a result.   However, the adoption did result in changes to the classification of certain fees incurred under pipeline gathering and transportation agreements and gas processing agreements, as well as certain costs attributable to non-operated properties, which led to an overall decrease in total revenues with a corresponding decrease in lease operating expenses under the new standard.    Refer to the “Revenue Recognition” footnote for further information on the Company’s implementation of this standard.

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 arrangementsThe FASB subsequently issued various ASUs which provided additional implementation guidance.  ASU 2016-02 and its amendments are 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 March 31, 2018, the Company had approximately $80 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 this standard.

In March 2018, the FASB issued Accounting Standards Update No. 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”).  The objective of this ASU is to codify the guidance provided by Staff Accounting Bulletin No. 118 regarding the accounting for the income tax effects of the Tax Cuts and Jobs Act (the “TCJA”) passed by Congress in

9

 


 

December 2017 if such accounting is not complete by the time a company issues its financial statements that include the reporting period in which the TCJA was enacted.  ASU 2018-05 was effective upon addition to the FASB Codification in March 2018.

2.           OIL AND GAS PROPERTIES

Net capitalized costs related to the Company’s oil and gas producing activities at March 31, 2018 and December 31, 2017 are as follows (in thousands):





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017

Proved leasehold costs

 

$

2,623,654 

 

$

2,622,576 

Unproved leasehold costs

 

 

132,759 

 

 

137,694 

Costs of completed wells and facilities

 

 

8,468,966 

 

 

8,288,591 

Wells and facilities in progress

 

 

248,113 

 

 

244,789 

Total oil and gas properties, successful efforts method

 

 

11,473,492 

 

 

11,293,650 

Accumulated depletion

 

 

(4,368,947)

 

 

(4,185,301)

Oil and gas properties, net

 

$

7,104,545 

 

$

7,108,349 











3.           ACQUISITIONS AND DIVESTITURES

2018 Acquisitions and Divestitures

There were no significant acquisitions or divestitures during the three months ended March 31, 2018.

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, 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.



There were no significant acquisitions during the year ended December 31, 2017.

10

 


 

4.           LONG-TERM DEBT

Long-term debt, including the current portion, consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017

Credit agreement

 

$

90,000 

 

$

 -

5.0% Senior Notes due 2019

 

 

 -

 

 

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 

6.625% Senior Notes due 2026

 

 

1,000,000 

 

 

1,000,000 

Total principal

 

 

2,933,980 

 

 

3,805,389 

Unamortized debt discounts and premiums

 

 

(45,572)

 

 

(50,945)

Unamortized debt issuance costs on notes

 

 

(26,980)

 

 

(31,015)

Total debt

 

 

2,861,428 

 

 

3,723,429 

Less current portion of long-term debt

 

 

 -

 

 

(958,713)

Total long-term debt

 

$

2,861,428 

 

$

2,764,716 

Credit Agreement

Whiting Oil and Gas, the Company’s wholly owned subsidiary, has a credit agreement with a syndicate of banks that as of March 31, 2018 had a borrowing base and aggregate commitments of $2.3 billion.  As of March 31, 2018, the Company had $2.2 billion of available borrowing capacity, which was net of $90 million in borrowings and $2 million in letters of credit outstanding.  On April 12, 2018, the Company entered into a Seventh Amended and Restated Credit Agreement, which replaced its existing credit agreement on that date.  This amended credit agreement, among other things, (i) increased the borrowing base under the facility from $2.3 billion to $2.4 billion, (ii) reduced the aggregate commitments from $2.3 billion to $1.75 billion, (iii) extended the principal repayment date from December 2019 to April 2023, (iv) decreased the applicable margin based on the borrowing base utilization percentage by 50 basis points per annum, (v) decreased the commitment fee to 37.5 basis points per annum for certain ratios of outstanding borrowings to the borrowing base as shown in the table below, (vi) modified certain financial covenants as discussed below, and (vii) removed the ability of the Company and certain of its subsidiaries to issue second lien indebtedness of up to $1.0 billion.

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.

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 March 31, 2018,  $48 million was available for additional letters of credit under the agreement.

The credit agreement provides for interest only payments until maturity, when the credit agreement expires and all outstanding borrowings are due.  Interest under the amended credit agreement 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 also incurs commitment fees as set forth in the table below on the unused portion of the aggregate commitments of the lenders under the amended credit agreement, which are included as a component of interest expense.  At March 31, 2018, the weighted average interest rate on the outstanding principal balance under the credit agreement was 3.9%.



11

 


 



 

 

 

 

 

 



 

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

 

0.50%

 

1.50%

 

0.375%

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

 

0.75%

 

1.75%

 

0.375%

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

 

1.00%

 

2.00%

 

0.50%

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

 

1.25%

 

2.25%

 

0.50%

Greater than or equal to 0.90 to 1.0

 

1.50%

 

2.50%

 

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.  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 March 31, 2018, there were no retained earnings free from restrictions.  As of March 31, 2018, the existing credit agreement required 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 and (iii) a ratio of the last four quarters’ EBITDAX to consolidated cash interest charges of not less than 2.25 to 1.0.  The amended credit agreement requires the Company, as of the last day of any quarter, to maintain the following ratios (as defined in the amended 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 and (ii) a total debt to last four quarters’ EBITDAX ratio of less than 4.0 to 1.0.  The Company was in compliance with its covenants under the credit agreement as of March 31, 2018.

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 March 31, 2018:  









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

2020

 

 

 

 

 

 



 

Convertible

 

2021

 

2023

 

2026



 

Senior Notes

 

Senior Notes

 

Senior Notes

 

Senior Notes

Outstanding principal (in thousands)

 

$ 562,075

 

$ 873,609

 

$ 408,296

 

$ 1,000,000

Interest rate

 

1.25%

 

5.75%

 

6.25%

 

6.625%

Maturity date

 

Apr 1, 2020

 

Mar 15, 2021

 

Apr 1, 2023

 

Jan 15, 2026

Interest payment dates

 

Apr 1, Oct 1

 

Mar 15, Sep 15

 

Apr 1, Oct 1

 

Jan 15, Jul 15

Make-whole redemption date (1)

 

N/A (2)

 

Dec 15, 2020

 

Jan 1, 2023

 

Oct 15, 2025

                                

(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 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.

12

 


 

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

In December 2017, the Company issued at par $1.0 billion of 6.625% Senior Notes due January 2026 (the “2026 Senior Notes” and together with the 2021 Senior Notes and the 2023 Senior Notes, the “Senior Notes”).  The Company used the net proceeds from this offering to redeem on January 26, 2018 all of the outstanding 2019 Senior Notes.  Refer to “Redemption of 2019 Senior Notes” below for more information on the redemption of the 2019 Senior Notes.

Exchange of Senior Notes and Senior Subordinated Notes for Convertible Notes.  During 2016, the Company exchanged (i) $75 million aggregate principal amount of its 2018 Senior Subordinated Notes, (ii) $139 million aggregate principal amount of its 2019 Senior Notes, (iii) $326 million aggregate principal amount of its 2021 Senior Notes, and (iv) $342 million aggregate principal amount of its 2023 Senior Notes, for the same aggregate principal amount of convertible notes.  Subsequently during 2016, all $882 million aggregate principal amount of these convertible notes was converted into approximately 21.6 million shares of the Company’s common stock pursuant to the terms of the notes.

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.

Redemption of 2019 Senior Notes.  On January 26, 2018, the Company paid $1.0 billion to redeem all of the remaining $961 million aggregate principal amount of the 2019 Senior Notes, which payment consisted of the 102.976% redemption price plus all accrued and unpaid interest on the notes.  The Company financed the redemption with proceeds from the issuance of the 2026 Senior Notes and borrowings under its credit agreement.  As a result of the redemption, the Company recognized a $31 million loss on extinguishment of debt, which included the redemption premium and a non-cash charge for the acceleration of unamortized debt issuance costs on the notes.  As of March 31, 2018, no 2019 Senior 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.  During 2016, the Company exchanged $688 million aggregate principal amount of its 2020 Convertible Senior Notes for the same aggregate principal amount of new mandatory convertible senior notes.  Subsequently during 2016, all $688 million aggregate principal amount of these mandatory convertible notes was converted into approximately 17.8 million shares of the Company’s common stock pursuant to the terms of the notes.

For the remaining $562 million aggregate principal amount of 2020 Convertible Senior Notes outstanding as of March 31, 2018, 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 scheduled trading day immediately preceding the April 1, 2020 maturity date of the notes.  The notes will be convertible at a current conversion rate of 6.4102 shares of Whiting’s common stock per $1,000 principal amount of the notes, which is equivalent to a current conversion price of approximately $156.00.  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 March 31, 2018, 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 liability component 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

13

 


 

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 March 31, 2018 and December 31, 2017 (in thousands):





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017

Liability component

 

 

 

 

 

 

Principal

 

$

562,075 

 

$

562,075 

Less: unamortized note discount

 

 

(46,241)

 

 

(51,666)

Less: unamortized debt issuance costs

 

 

(3,721)

 

 

(4,178)

Net carrying value

 

$

512,113 

 

$

506,231 

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.

Interest expense recognized on the 2020 Convertible Senior Notes related to the stated interest rate and amortization of the debt discount totaled $7 million for each of the three months ended March 31, 2018 and 2017.

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 March 31, 2018 and December 31, 2017 were $6 million and $5 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 three months ended March 31, 2018 (in thousands):







 

 

 



 

 

 

Asset retirement obligation at January 1, 2018

 

$

134,237 

Additional liability incurred

 

 

1,449 

Revisions to estimated cash flows

 

 

68 

Accretion expense

 

 

2,708 

Liabilities settled

 

 

(1,142)

Asset retirement obligation at March 31, 2018

 

$

137,320 







14

 


 

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 primarily enters into derivative contracts such as crude oil costless collars and swaps, as well as 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 and Swaps.  Costless collars are designed to establish floor and ceiling prices on anticipated future oil or gas production, while swaps establish a fixed price for 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 and swap derivatives entered into to hedge forecasted crude oil production revenues as of March 31, 2018.





 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 

Derivative

 

 

 

Contracted Crude

 

Weighted Average NYMEX Price

Instrument

 

Period

 

Oil Volumes (Bbl)

 

for Crude Oil (per Bbl)

Three-way collars (1)

 

Apr - Dec 2018

 

13,050,000 

 

$37.07 - $47.07 - $57.30

Swaps

 

Apr - Dec 2018

 

3,600,000 

 

$61.74

Collars (2)

 

Jan - Jun 2019

 

1,500,000 

 

$50.00 - $65.90



 

Total

 

18,150,000 

 

 

                                

(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 March 31, 2018, the Company entered into additional costless collar contracts for 900,000 Bbl of crude oil volumes for the six months ended June 30, 2019.

Crude Oil Sales and Delivery Contract.  As of December 31, 2017, the Company had 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 had 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 December 31, 2017, the estimated fair value of this derivative contract was a liability of $63 million.    On February 1, 2018, Whiting paid $61 million to the counterparty to settle all future minimum volume commitments under this agreement.  Accordingly, this crude oil sales and delivery contract was fully terminated, and the fair value of this corresponding derivative was therefore zero as of that date.

Embedded DerivativesIn 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 in the consolidated financial statements.  On July 19, 2017, 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 December 31, 2017 and March 31, 2018.

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 table summarizes the effects of derivative instruments on the consolidated statements of operations for the three months ended March 31, 2018 and 2017 (in thousands):

15

 


 





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

Loss Recognized in Income

Not Designated as

 

Statement of Operations

 

Three Months Ended March 31,

ASC 815 Hedges

 

Classification

 

2018

 

2017

Commodity contracts

 

Derivative loss, net

 

$

52,664 

 

$

23,351 

Embedded derivatives

 

Derivative loss, net

 

 

 -

 

 

13,226 

Total

 

 

 

$

52,664 

 

$

36,577 

Offsetting of Derivative Assets and Liabilities.  The Company nets its financial derivative instrument fair value amounts executed with the same counterparty pursuant to ISDA master agreements, which provide for net settlement over the term of the contract and in the event of default or termination of the contract.  The following tables summarize the location and fair value amounts of all the Company’s derivative instruments in the consolidated balance sheets, as well as the gross recognized derivative assets, liabilities and amounts offset in the consolidated balance sheets (in thousands):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

March 31, 2018 (1)



 

 

 

 

 

 

 

 

 

Net



 

 

 

Gross

 

 

 

 

Recognized



 

 

 

Recognized

 

Gross

 

Fair Value

Not Designated as

 

 

 

Assets/

 

Amounts

 

Assets/

ASC 815 Hedges

 

Balance Sheet Classification

 

Liabilities

 

Offset

 

Liabilities

Derivative assets

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts - current

 

Prepaid expenses and other

 

$

6,038 

 

$

(6,038)

 

$

 -

Commodity contracts - non-current

 

Other long-term assets

 

 

1,925 

 

 

(1,925)

 

 

 -

Total derivative assets 

 

 

 

$

7,963 

 

$

(7,963)

 

$

 -

Derivative liabilities

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts - current

 

Derivative liabilities

 

$

105,058 

 

$

(6,038)

 

$

99,020 

Commodity contracts - non-current

 

Other long-term liabilities

 

 

2,221 

 

 

(1,925)

 

 

296 

Total derivative liabilities

 

 

 

$

107,279 

 

$

(7,963)

 

$

99,316 







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

December 31, 2017 (1)



 

 

 

 

 

 

 

 

 

Net



 

 

 

Gross

 

 

 

 

Recognized



 

 

 

Recognized

 

Gross

 

Fair Value

Not Designated as

 

 

 

Assets/

 

Amounts

 

Assets/

ASC 815 Hedges

 

Balance Sheet Classification

 

Liabilities

 

Offset

 

Liabilities

Derivative assets

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts - current

 

Prepaid expenses and other

 

$

9,829 

 

$

(9,829)

 

$

 -

Total derivative assets 

 

 

 

$

9,829 

 

$

(9,829)

 

$

 -

Derivative liabilities

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts - current

 

Derivative liabilities

 

$

142,354 

 

$

(9,829)

 

$

132,525 

Total derivative liabilities

 

 

 

$

142,354 

 

$

(9,829)

 

$

132,525 

                                

(1)

Because counterparties to the Company’s financial derivative contracts subject to master netting arrangements are lenders under Whiting Oil and Gas’ credit agreement, which eliminates its need to post or receive collateral associated with its derivative positions, columns for cash collateral pledged or received have not been presented in these tables.

Contingent Features in Financial Derivative InstrumentsNone of the Company’s derivative instruments contain credit-risk-related contingent features.  Counterparties to the Company’s financial derivative contracts are high credit-quality financial institutions that are lenders under Whiting’s credit agreement.  The Company uses only credit agreement participants to hedge with, since these institutions are secured equally with the holders of Whiting’s bank debt, which eliminates the potential need to post collateral when Whiting is in a derivative liability position.  As a result, the Company is not required to post letters of credit or corporate guarantees for its derivative counterparties in order to secure contract performance obligations.

7.           FAIR VALUE MEASUREMENTS

The Company follows FASB ASC Topic 820, Fair Value Measurement and Disclosure, which establishes a three-level valuation hierarchy for disclosure of fair value measurements.  The valuation hierarchy categorizes assets and liabilities measured at fair value

16

 


 

into one of three different levels depending on the observability of the inputs employed in the measurement.  The three levels are defined as follows:

·

Level 1:  Quoted Prices in Active Markets for Identical Assets – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

·

Level 2:  Significant Other Observable Inputs – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

·

Level 3:  Significant Unobservable Inputs – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.  The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level.

Cash, cash equivalents, restricted cash, accounts receivable and accounts payable are carried at cost, which approximates their fair value because of the short-term maturity of these instruments.  The Company’s credit agreement has a recorded value that approximates its fair value since its variable interest rate is tied to current market rates and the applicable margins represent market rates.

The Company’s senior notes are recorded at cost and the Company’s convertible senior notes are recorded at fair value at the date of issuanceThe following table summarizes the fair values and carrying values of these instruments as of March 31, 2018 and December 31, 2017 (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2018

 

December 31, 2017



 

Fair

 

Carrying

 

Fair

 

Carrying



 

Value (1)

 

Value (2)

 

Value (1)

 

Value (2)

5.0% Senior Notes due 2019

 

$

 -

 

$

 -

 

$

985,444 

 

$

958,713 

1.25% Convertible Senior Notes due 2020

 

 

528,351 

 

 

512,113 

 

 

517,109 

 

 

506,231 

5.75% Senior Notes due 2021

 

 

882,345 

 

 

869,592 

 

 

897,633 

 

 

869,284 

6.25% Senior Notes due 2023

 

 

412,889 

 

 

404,115 

 

 

418,503 

 

 

403,940 

6.625% Senior Notes due 2026

 

 

1,007,500 

 

 

985,608 

 

 

1,025,000 

 

 

985,261 

Total

 

$

2,831,085 

 

$

2,771,428 

 

$

3,843,689 

 

$

3,723,429 

                                

(1)

Fair values are based on quoted market prices for these debt securities, and such fair values are therefore designated as Level 1 within the valuation hierarchy.

(2)

Carrying values are presented net of unamortized debt issuance costs and debt discounts or premiums.

The Company’s derivative financial instruments are recorded at fair value and include a measure of the Company’s own nonperformance risk or that of its counterparty, as appropriate.    The following tables present information about the Company’s financial liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values (in thousands):