10-Q 1 a12-14568_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x

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

 

For the quarterly period ended June 30, 2012

 

OR

 

o

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: 001-35467

 


 

Halcón Resources Corporation

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

1311

 

20-0700684

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial
Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

1000 Louisiana Street, Suite 6700, Houston, TX 77002

(Address of principal executive offices)

 

(832) 538-0300

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 


 

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 twelve 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  x  No  o

 

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   x  No  o

 

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

 

Large Accelerated Filer o

 

Accelerated Filer x

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

At August 1, 2012, 211,836,319 shares of the Registrant’s Common Stock were outstanding.

 

 

 



Table of Contents

 

Second Quarter 2012 Form 10-Q Report

 

TABLE OF CONTENTS

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

ITEM 1. FINANCIAL STATEMENTS (unaudited)

 

 

 

Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2012 and 2011

5

 

 

Condensed Consolidated Balance Sheets —June 30, 2012 and December 31, 2011

6

 

 

Condensed Consolidated Statements of Stockholders’ Equity — Six Months Ended June 30, 2012 and Year Ended December 31, 2011

7

 

 

Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2012 and 2011

8

 

 

Notes to Condensed Consolidated Financial Statements

10

 

 

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

35

 

 

PART II — OTHER INFORMATION

 

 

 

ITEM 1. LEGAL PROCEEDINGS

36

 

 

ITEM 1A. RISK FACTORS

36

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

40

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

40

 

 

ITEM 4. MINE SAFETY DISCLOSURES

40

 

 

ITEM 5. OTHER INFORMATION

40

 

 

ITEM 6. EXHIBITS

40

 

 

SIGNATURES

43

 

2



Table of Contents

 

Special note regarding forward-looking statements

 

This Quarterly Report on Form 10-Q contains, and we may from time to time otherwise make in other public filings, press releases and presentations, forward-looking statements within the meaning of the federal securities laws. All statements, other than statements of historical facts, concerning, among other things, planned capital expenditures, potential increases in oil and natural gas production, the number and location of wells to be drilled in the future, future cash flows and borrowings, pursuit of potential acquisition opportunities, our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. One should consider carefully the statements under the “Risk Factors” section of the previously filed Annual Report on Form 10-K for the year ended December 31, 2011, and the other disclosures contained herein and therein, which describe factors that could cause our actual results to differ from those anticipated in the forward-looking statements, including, but not limited to, the following factors:

 

·                  volatility in commodity prices for oil and natural gas;

 

·                  our ability to successfully identify and acquire oil and natural gas properties, prospects and leaseholds, including undeveloped acreage in new and emerging resource plays;

 

·                  our ability to successfully integrate acquired oil and natural gas businesses and operations, including our recently closed acquisition of GeoResources, Inc. (“GeoResources”) and the East Texas Assets;

 

·                  our ability to profitably deploy our capital;

 

·                  the possibility that our industry may be subject to future regulatory or legislative actions (including any additional taxes and changes in environmental regulation);

 

·                  the presence or recoverability of estimated oil and natural gas reserves and the actual future production rates and associated costs;

 

·                  the potential for production decline rates on our wells to be greater than we expect;

 

·                  our ability to generate sufficient cash flow from operations, borrowings or other sources to enable us to develop our undeveloped acreage positions;

 

·                  our ability to economically replace oil and natural gas reserves;

 

·                  environmental risks;

 

·                  drilling and operating risks;

 

·                  exploration and development risks;

 

·                  competition, including competition for acreage in resource play areas;

 

·                  management’s ability to execute our plans to meet our goals;

 

·                  our ability to attract and retain key members of senior management and key technical employees;

 

·                  the cost and availability of goods and services, such as drilling rigs, fracture stimulation services and tubulars;

 

·                  access to and availability of water and other treatment materials to carry out planned fracture stimulations of our wells;

 

·                  access to adequate gathering systems and transportation take-away capacity to handle our expected production;

 

·                  our ability to secure firm transportation and other marketing outlets for the natural gas, natural gas liquids and crude oil and condensate we produce and to sell these products at market prices;

 

·                  general economic conditions, whether internationally, nationally or in the regional and local market areas in which we do business, may be less favorable than expected, including the possibility that the economic conditions in the United States will worsen and that capital markets are disrupted, which could adversely affect demand for oil and natural gas and/or make it difficult to access financial markets;

 

3



Table of Contents

 

·                  our merger with GeoResources not achieving its intended results or benefits, such as cost savings and operating efficiencies, or failure of effective integration resulting in increased costs, decreases in the amount of expected revenues generated by the combined company and diversion of management’s time and energy and could have an adverse effect on the combined company’s financial position, results of operations or cash flows;

 

·                  difficulty attracting, motivating and retaining key employees in light of the GeoResources merger, as employees may feel uncertain about their future roles with the combined company, and resulting potential departure of certain employees could reduce the anticipated benefits of the merger;

 

·                  our stockholders were diluted by the merger with GeoResources as we have incurred substantial transaction and merger-related costs in connection with the merger, and the net benefit of the elimination of certain duplicative costs, as well as the realization of efficiencies related to the integration of the two businesses offsetting the incremental merger-related costs over time, may not be achieved in the near-term or at all;

 

·                  social unrest, political instability, armed conflict, or acts of terrorism or sabotage in oil and natural gas producing regions, such as the Middle East and Africa, or our markets; and

 

·                  other economic, competitive, governmental, legislative, regulatory, geopolitical and technological factors that may negatively impact our business, operations or pricing.

 

All forward-looking statements are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this document. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

 

4



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

HALCÓN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Operating revenues:

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

 

 

 

 

 

 

 

 

 

Oil

 

$

20,383

 

$

22,783

 

$

43,380

 

$

43,195

 

Natural gas

 

1,240

 

2,812

 

2,908

 

5,704

 

NGLs

 

1,623

 

2,523

 

3,792

 

4,938

 

Total oil and natural gas sales

 

23,246

 

28,118

 

50,080

 

53,837

 

Other

 

35

 

34

 

71

 

85

 

Total operating revenues

 

23,281

 

28,152

 

50,151

 

53,922

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Production:

 

 

 

 

 

 

 

 

 

Lease operating

 

8,663

 

7,812

 

16,610

 

15,653

 

Workover

 

540

 

362

 

1,261

 

896

 

Taxes

 

1,352

 

1,478

 

2,922

 

2,889

 

Restructuring

 

903

 

 

1,007

 

 

General and administrative

 

13,087

 

4,621

 

33,421

 

9,168

 

Depletion, depreciation and accretion

 

5,956

 

5,608

 

11,935

 

11,283

 

Total operating expenses

 

30,501

 

19,881

 

67,156

 

39,889

 

Income (loss) from operations

 

(7,220

)

8,271

 

(17,005

)

14,033

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

 

 

 

 

Net gain (loss) on derivative contracts

 

13,671

 

8,268

 

8,726

 

(5,982

)

Interest expense and other, net

 

(4,179

)

(4,361

)

(17,176

)

(10,863

)

Total other income (expenses)

 

9,492

 

3,907

 

(8,450

)

(16,845

)

Income (loss) before income taxes

 

2,272

 

12,178

 

(25,455

)

(2,812

)

Income tax provision (benefit)

 

(5,387

)

3,242

 

208

 

(1,837

)

Net income (loss)

 

7,659

 

8,936

 

(25,663

)

(975

)

Non-cash preferred dividend

 

(87,343

)

 

(88,445

)

 

Net income (loss) available to common stockholders

 

$

(79,684

)

$

8,936

 

$

(114,108

)

$

(975

)

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.59

)

$

0.34

 

$

(1.11

)

$

(0.04

)

Diluted

 

$

(0.59

)

$

0.34

 

$

(1.11

)

$

(0.04

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

136,066

 

26,278

 

102,441

 

26,199

 

Diluted

 

136,066

 

26,278

 

102,441

 

26,199

 

 

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

 

5



Table of Contents

 

HALCÓN RESOURCES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share and per share amounts)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Current assets:

 

 

 

 

 

Cash

 

$

219,208

 

$

49

 

Accounts receivable

 

9,340

 

10,288

 

Receivables from derivative contracts

 

4,507

 

260

 

Deferred income taxes

 

2,161

 

2,601

 

Inventory

 

4,477

 

4,310

 

Prepaids and other

 

2,513

 

2,729

 

Total current assets

 

242,206

 

20,237

 

Oil and natural gas properties (full cost method):

 

 

 

 

 

Evaluated

 

734,551

 

715,666

 

Unevaluated

 

461,620

 

 

Gross oil and natural gas properties

 

1,196,171

 

715,666

 

Less - accumulated depletion and impairment

 

(512,538

)

(501,993

)

Net oil and natural gas properties

 

683,633

 

213,673

 

Other operating property and equipment:

 

 

 

 

 

Other operating assets and equipment

 

12,825

 

9,979

 

Less - accumulated depreciation

 

(6,963

)

(7,133

)

Net other operating property and equipment

 

5,862

 

2,846

 

Other noncurrent assets:

 

 

 

 

 

Receivables from derivative contracts

 

2,719

 

 

Debt issuance costs, net of amortization

 

5,525

 

5,966

 

Deferred income taxes

 

24,405

 

24,102

 

Funds in escrow

 

29,945

 

560

 

Other

 

491

 

418

 

Total assets

 

$

994,786

 

$

267,802

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

36,774

 

$

25,061

 

Liabilities from derivative contracts

 

 

265

 

Asset retirement obligations

 

1,446

 

1,010

 

Total current liabilities

 

38,220

 

26,336

 

Long-term debt

 

242,579

 

202,000

 

Other noncurrent liabilities:

 

 

 

 

 

Liabilities from derivative contracts

 

 

805

 

Asset retirement obligations

 

33,088

 

32,703

 

Other

 

10

 

10

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock: 1,000,000 shares of $0.0001 par value authorized; no shares issued or outstanding

 

 

 

Common stock: 336,666,666 and 33,333,333 shares of $0.0001 par value authorized; 145,681,457 and 27,694,583 shares issued; 144,031,546 and 26,244,452 outstanding at June 30, 2012 and December 31, 2011, respectively

 

15

 

3

 

Additional paid-in capital

 

932,145

 

229,414

 

Treasury stock: 1,649,911 and 1,450,131 shares at June 30, 2012 and December 31, 2011, respectively, at cost

 

(9,298

)

(7,159

)

Accumulated deficit

 

(241,973

)

(216,310

)

Total stockholders’ equity

 

680,889

 

5,948

 

Total liabilities and stockholders’ equity

 

$

994,786

 

$

267,802

 

 

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

 

6



Table of Contents

 

HALCÓN RESOURCES CORPORATION

 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands)

 

 

 

Year Ended December 31, 2011 and

 

 

 

Six Months Ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid-In

 

Treasury Stock

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Shares

 

Amount

 

Deficit

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2010

 

 

$

 

27,533

 

$

3

 

$

226,047

 

1,404

 

$

(6,976

)

$

(214,907

)

$

4,167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long term incentive plan grants

 

 

 

280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long term incentive plan forefeitures

 

 

 

(118

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

(1,403

)

(1,403

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of stock

 

 

 

 

 

 

46

 

(183

)

 

(183

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

3,367

 

 

 

 

3,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2011

 

 

 

27,695

 

3

 

229,414

 

1,450

 

(7,159

)

(216,310

)

5,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants issued

 

 

 

 

 

43,590

 

 

 

 

43,590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of common stock

 

 

 

73,333

 

7

 

274,993

 

 

 

 

275,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reverse-stock-split rounding

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of preferred stock

 

4

 

311,556

 

 

 

 

 

 

 

311,556

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock conversion

 

(4

)

(385,476

)

44,445

 

5

 

385,471

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offering costs

 

 

(14,525

)

 

 

(4,592

)

 

 

 

(19,117

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

(25,663

)

(25,663

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred beneficial conversion feature

 

 

 

 

 

88,445

 

 

 

 

88,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash preferred dividend

 

 

88,445

 

 

 

(88,445

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term incentive plan grants

 

 

 

204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of stock

 

 

 

 

 

 

200

 

(2,139

)

 

(2,139

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

3,269

 

 

 

 

3,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, June 30, 2012

 

 

$

 

145,681

 

$

15

 

$

932,145

 

1,650

 

$

(9,298

)

$

(241,973

)

$

680,889

 

 

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

 

7



Table of Contents

 

HALCÓN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(25,663

)

$

(975

)

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

 

 

 

 

 

Depletion, depreciation and accretion

 

11,935

 

11,283

 

Deferred income tax provision (benefit)

 

136

 

(1,953

)

Share-based compensation

 

2,465

 

1,355

 

Unrealized (gain) loss on derivatives contracts

 

(8,036

)

5,892

 

Amortization and write-off of deferred loan costs

 

6,299

 

2,990

 

Non-cash interest and amortization of discount

 

7,733

 

362

 

Other income

 

(17

)

(22

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

948

 

49

 

Inventory

 

(167

)

(430

)

Prepaid expenses and other

 

(1,646

)

222

 

Accounts payable and accrued liabilities

 

3,500

 

(5,012

)

Other

 

(195

)

(718

)

Net cash (used in) provided by operating activities

 

(2,708

)

13,043

 

Cash flows from investing activities:

 

 

 

 

 

Evaluated oil and natural gas capital expenditures

 

(14,996

)

(13,500

)

Unevaluated oil and natural gas capital expenditures

 

(453,201

)

 

Other operating property and equipment capital expenditures

 

(3,573

)

(469

)

Proceeds received from sales of property and equipment

 

346

 

473

 

Funds held in escrow

 

(29,385

)

 

Net cash used in investing activities

 

(500,809

)

(13,496

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from borrowings

 

237,410

 

231,166

 

Repayments of borrowings

 

(208,000

)

(223,185

)

Debt issuance costs

 

(5,053

)

(7,003

)

Offering costs

 

(18,133

)

 

Common stock repurchased

 

(2,139

)

(108

)

Preferred stock issued

 

311,556

 

 

Preferred beneficial conversion feature

 

88,445

 

 

Common stock issued

 

275,000

 

 

Warrants issued

 

43,590

 

 

Net cash provided by financing activities

 

722,676

 

870

 

Net increase in cash

 

219,159

 

417

 

Cash at beginning of period

 

49

 

37

 

Cash at end of period

 

$

219,208

 

$

454

 

 

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

 

8



Table of Contents

 

HALCÓN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Continued

(In thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for income taxes

 

$

199

 

$

481

 

Cash paid for interest

 

3,445

 

8,706

 

Disclosure of non-cash investing and financing activities:

 

 

 

 

 

Asset retirement obligations

 

46

 

(129

)

Preferred dividend

 

88,445

 

 

Payment-in-kind interest

 

8,865

 

362

 

 

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

 

9



Table of Contents

 

HALCÓN RESOURCES CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. FINANCIAL STATEMENT PRESENTATION

 

Halcón Resources Corporation (“Halcón” or the “Company”) is an independent energy company engaged in the exploration, development and production of crude oil and natural gas properties located in the United States. The unaudited condensed consolidated financial statements include the accounts of all subsidiaries. All intercompany accounts and transactions have been eliminated. These unaudited condensed consolidated financial statements reflect, in the opinion of the Company’s management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the financial position as of, and the results of operations for, the periods presented. During interim periods, Halcón follows the accounting policies disclosed in its 2011 Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission (“SEC”). Please refer to the notes in the 2011 Annual Report on Form 10-K, when reviewing interim financial results.

 

Use of Estimates

 

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Estimates and assumptions that, in the opinion of management of the Company, are significant include oil and natural gas reserves, amortization relating to oil and natural gas properties, asset retirement obligations, fair value estimates, beneficial conversion feature estimates and income taxes. The Company bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from the estimates and assumptions used in the preparation of the Company’s unaudited condensed consolidated financial statements.

 

Interim period results are not necessarily indicative of results of operations or cash flows for the full year and accordingly, certain information normally included in financial statements prepared in accordance with accounting principles, generally accepted in the United States, has been condensed or omitted. The Company has evaluated events or transactions through the date of issuance of these unaudited condensed consolidated financial statements.

 

Recently Issued Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in the U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Accounting Reporting Standards (“IFRS”)”. This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This update is effective for reporting periods beginning on or after December 15, 2011. The adoption of ASU 2011-04 on January 1, 2012 did not have a material impact on the Company’s financial position or results of operations.

 

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This update is effective for fiscal years, and interim periods within those years beginning after December 15, 2011. In December 2011, the FASB issued ASU No. 2011-12, which becomes effective at the same time as ASU 2011-05, to defer the effective date of provisions of ASU 2011-05 that relate to the presentation of reclassification adjustments. Adoption of ASU 2011-05 and ASU 2011-12 did not have an impact on the Company’s financial position or results of operations.

 

In December 2011, the FASB issued ASU No. 2011-11 which will enhance disclosures by requiring an entity to disclose information about netting arrangements, including rights of offset, to enable users of its financial statements to understand the effect of those arrangements on its financial position. This pronouncement was issued to facilitate comparison between financial statements prepared on the basis of GAAP and IFRS. This update is effective for annual and interim reporting periods

 

10



Table of Contents

 

beginning on or after January 1, 2013 and is to be applied retroactively for all comparative periods presented. The adoption of ASU 2011-11 is not expected to have a significant impact on the Company’s financial position or results of operations.

 

2. RECAPITALIZATION

 

On December 21, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with HALRES LLC (formerly, Halcón Resources, LLC). Pursuant to the Purchase Agreement, (i) HALRES LLC purchased and the Company sold 73,333,333 shares of the Company’s common stock (the “Shares”) for a purchase price of $275,000,000 and (ii) HALRES LLC purchased and the Company issued a senior convertible promissory note in the principal amount of $275,000,000 (the “8% Note”), together with five year warrants (the “Warrants”) to purchase 36,666,666 shares of the Company’s common stock at an exercise price of $4.50 per share, subject to adjustment under certain circumstances. The 8% Note is convertible after February 8, 2014 into 61,111,111 shares of common stock at a conversion price of $4.50 per share, subject to adjustment under certain circumstances. The Company and HALRES LLC closed the transaction contemplated by the Purchase Agreement on February 8, 2012 (the “Closing”).

 

During January 2012, shareholders holding a majority of the Company’s outstanding shares of common stock approved the issuance of the Shares, the 8% Note and the Warrants pursuant to the terms of the Purchase Agreement. Additionally, the Board of Directors approved, effective upon the Closing (i) the amendment of the Company’s certificate of incorporation to (A) increase the Company’s authorized shares of common stock from 100,000,000 shares to 1,010,000,000 shares, both of which are before the one-for-three reverse stock split; (B) a one-for-three reverse stock split of the Company’s common stock (which reduced the Company’s authorized shares of common stock from 1,010,000,000 to 336,666,666 shares); and (C) a name change from RAM Energy Resources, Inc. to Halcón Resources Corporation; (ii) the amendment of the Company’s 2006 Long-Term Incentive Plan (the “Plan”) to increase the number of shares that may be issued under the Plan from 2,466,666 to 3,700,000 shares; and (iii) on an advisory (non-binding) basis, the payments made to the Company’s named executive officers in connection with the transactions contemplated by the Purchase Agreement.

 

The Closing of the transaction resulted in a change in control of the Company. Material events and items resulting from the transaction include the following:

 

·                         completion of transactions contemplated by the Purchase Agreement and shareholder approval as discussed above;

 

·                         the resignation and termination of the Company’s four executive officers and the resignation of certain other officers;

 

·                         change in control payments of $4.6 million to the officers of the Company recorded in general and administrative expense;

 

·                         change in control payment of $0.8 million pursuant to a retainer agreement with the Company’s outside law firm recorded in general and administrative expense;

 

·                         accelerated vesting of all unvested employee restricted stock shares and accelerated vesting and exercise of all unvested stock appreciation rights resulting in $4.3 million of share-based compensation expense recorded in general and administrative expense;

 

·                         payoff and termination of the Company’s revolving credit facility of $133.0 million plus accrued interest, as well as the expensing of the related unamortized debt issue costs of $2.9 million;

 

·                         payoff and termination of the Company’s second lien term facility of $75.0 million plus accrued interest and a prepayment fee of $1.5 million, as well as the expensing of the related unamortized debt issue costs of $2.9 million; and

 

·                         closing costs of $11.2 million related to engagement fees and various professional fees including $2.5 million recorded in general and administrative expense related to a termination fee pursuant to a previous engagement.

 

During January 2012, the Company approved a one-for-three reverse stock split, which was implemented on February 10, 2012. Retroactive application of the reverse stock split is required and all share and per share information included for all periods presented in these financial statements reflects the reverse stock split.

 

During February 2012, the transaction with HALRES LLC resulted in an “ownership change” as defined under Section 382 of the Internal Revenue Code. As a consequence, the Company will have additional limitations on its ability to use the net operating losses it accrued before the change-in-control as a deduction against any taxable income the Company realizes after the change-in-control.

 

11



Table of Contents

 

3. RESTRUCTURING

 

During March 2012, the Company announced its intention to close the Plano, Texas office and begin the process of relocating key administrative functions to Houston, Texas (the “Restructuring”). As part of the Restructuring, the Company offered certain severance and retention benefits (collectively, the “Severance Program”) to the affected employees. The estimated total expense of the Severance Program is approximately $3.2 million and related costs will be recognized as restructuring expense over the requisite service periods through May 2013, as applicable.  The Company recorded a restructuring liability of $0.1 million as of March 31, 2012.  During the three months ended June 30, 2012, the Company increased the restructuring liability by an additional $0.9 million to reflect the accrual of expense over the requisite period and decreased the liability by $0.2 million for actual expenditures, resulting in a liability of $0.8 million at June 30, 2012.

 

4. ACQUISITIONS

 

Unevaluated Properties

 

On June 28, 2012, the Company completed the acquisition of acreage in Eastern Ohio, prospective for the Utica/Point Pleasant formations.  Pursuant to the terms of an Agreement of Sale and Purchase dated May 8, 2012 with NCL Appalachian Partners, L.P. (“NCL”), the Company acquired a working interest in approximately 27,000 net acres for an adjusted purchase price of approximately $164.0 million.  The Company funded the acquisition with cash on hand.  No oil or natural gas production or proved reserves are currently attributable to the acquired assets.

 

In addition to the NCL acquisition, during 2012 the Company incurred approximately $274.5 million in capital expenditures on unevaluated oil and gas leaseholds through numerous leasing and acquisition transactions.  No oil or natural gas production or proved reserves are currently attributable to the leasehold assets which were primarily located in Texas, Louisiana, Ohio and Pennsylvania.

 

Other Acquisitions and Merger

 

See Note 15, “Subsequent Events — Acquisitions” for discussion of the recently closed acquisition of producing and nonproducing acreage in east Texas (the “East Texas Assets”) and the GeoResources, Inc. (“GeoResources”) merger.

 

5. OIL AND NATURAL GAS PROPERTIES

 

The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under this method of accounting, all costs of acquisition, exploration and development of oil and natural gas reserves (including such costs as leasehold acquisition costs, geological expenditures, dry hole costs, tangible and intangible development costs and direct internal costs) are capitalized as the cost of oil and natural gas properties when incurred. To the extent capitalized costs of evaluated oil and natural gas properties, net of accumulated depletion, exceed the discounted future net revenues of proved oil and natural gas reserves, net of deferred taxes, such excess capitalized costs are charged to expense.

 

The Company assesses all items classified as unevaluated property on a quarterly basis for possible impairment or reduction in value. The Company assesses properties on an individual basis or as a group, if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to amortization.

 

Investments in unevaluated oil and gas properties and exploration and development projects for which depletion expense is not currently recognized, and for which exploration or development activities are in progress, qualify for interest capitalization.  The capitalized interest is determined by multiplying the Company’s weighted-average borrowing cost on debt by the average amount of qualifying costs incurred that are excluded from the full cost pool; however, the amount of capitalized interest cannot exceed the amount of gross interest expense incurred in any given period.  The capitalized interest amounts are recorded as additions to unevaluated oil and natural gas properties on our condensed consolidated balance sheet.  As the costs excluded are transferred to the full cost pool, the associated capitalized interest is also transferred to the full cost pool.  For the three and six months ended June 30, 2012, the Company capitalized interest costs of $3.3 million and $3.4 million, respectively.

 

At June 30, 2012 the ceiling test value of the Company’s reserves was calculated based on the first day average of the 12-months ended June 30, 2012 of the West Texas Intermediate (“WTI”) spot price of $95.67 per barrel, adjusted by lease or field for quality, transportation fees, and regional price differentials, and the first day average of the 12-months ended June 30, 2012 of the Henry Hub price of $3.15 per million British thermal units (“Mmbtu”), adjusted by lease or field for energy content, transportation fees, and regional price differentials. Using these prices, the Company’s net book value of oil and natural gas properties at June 30, 2012, did not exceed the ceiling amount. Changes in production rates, levels of reserves, future development costs, and other factors will determine the Company’s actual ceiling test calculation and impairment analyses in future periods.

 

At June 30, 2011 the ceiling test value of the Company’s reserves was calculated based on the first day average of the 12-months ended June 30, 2011 of the WTI posted price of $90.09 per barrel, adjusted by lease or field for quality,

 

12



Table of Contents

 

transportation fees, and regional price differentials, and the first day average of the 12-months ended June 30, 2011 of the Henry Hub price of $4.21 per Mmbtu, adjusted by lease or field for energy content, transportation fees, and regional price differentials. Using these prices, the Company’s net book value of oil and natural gas properties at June 30, 2011, did not exceed the ceiling amount.

 

6. LONG-TERM DEBT

 

Long-term debt as of June 30, 2012 and December 31, 2011 consisted of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

8% senior convertible note (1)

 

$

242,579

 

$

 

Revolving credit facility

 

 

127,000

 

Term loan facility

 

 

75,000

 

 

 

$

242,579

 

$

202,000

 

 


(1)                                  Amount is net of a $41.3 million unamortized discount at June 30, 2012. See “8% Senior Convertible Note” below for more details.

 

8% Senior Convertible Note

 

On February 8, 2012, the Company issued a $275.0 million principal amount 8% Note together with Warrants for an aggregate purchase price of $275.0 million. The 8% Note bears interest at a rate of 8% per annum, payable quarterly on March 31, June 30, September 30 and December 31 of each year. Through the March 31, 2014 interest payment date, the Company may elect to borrow and add to principal of the 8% Note, all or any portion of the interest due on the 8% Note. At June 30, 2012 and March 31, 2012, the Company elected to pay in-kind $5.7 and $3.2 million, respectively, of interest incurred during the first six months of 2012 by increasing the 8% Note. The 8% Note matures on February 8, 2017. At any time after February 8, 2014, the noteholder may elect to convert all or any portion of the principal amount and accrued but unpaid interest into common stock. Each $4.50 of principal and accrued but unpaid interest is convertible into one share of the Company’s common stock. The 8% Note is a senior unsecured obligation of the Company and ranks equally with all of its future senior unsubordinated indebtedness.

 

The Company allocated the proceeds received for the 8% Note and Warrants on a relative fair value basis. Consequently, the Company recorded a discount of $43.6 million to be amortized over the remaining life of the 8% Note utilizing the effective interest rate method. The remaining unamortized discount was $41.3 million at June 30, 2012.

 

Senior Unsecured Notes

 

See Note 15, “Subsequent Events — 9.75% Senior Notes” for discussion on debt issuance subsequent to June 30, 2012.

 

February 2012 Credit Facility

 

On February 8, 2012, the Company entered into a $500.0 million, five-year, senior secured revolving credit agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”) as the administrative agent and lead arranger, which replaces the Company’s March 2011 credit facility. The agreement increased the revolving borrowing base to $225.0 million and matures on February 8, 2017. The borrowing base will be redetermined semi-annually, with the Company and the lenders each having the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations. The borrowing base is subject to a reduction equal to the product of 0.25 multiplied by the stated principal amount (without regard to any initial issue discount) of any future notes or other long-term debt securities that the Company may issue. Funds advanced under the revolving credit agreement may be paid down and re-borrowed during the five-year term of the revolver. The pricing on the agreement is LIBOR plus a margin ranging from 1.5% to 2.5% based on a percentage of usage. Advances under the revolving credit agreement are secured by liens on substantially all properties and assets of the Company and its subsidiaries. The revolving credit agreement contains representations, warranties and covenants customary in transactions of this nature including restrictions on the payment of dividends on the Company’s capital stock and financial covenants relating to current ratio and minimum interest coverage ratio. The Company maintains commodity hedges of not more than 100% of its projected production for the first 24 months, 75% of its projected production for the next 25 to 36 months and 50% of projected production for the next 37 to 48 months. At June 30, 2012, the Company is in compliance with the financial debt covenants under this agreement. At June 30, 2012, the Company had no indebtedness outstanding under the $500.0 million senior revolving credit agreement, $1.3 million of letters of credit outstanding and $223.7 million of borrowing

 

13



Table of Contents

 

capacity available. See Note 15, “Subsequent Events — Credit Facility Amendment” for discussion on the amendment of the February 2012 credit facility subsequent to June 30, 2012.

 

March 2011 Credit Facilities

 

The Company’s March 2011 facilities included a $250.0 million first lien revolving credit facility and a $75.0 million second lien term loan facility, replacing the November 2007 facility. SunTrust Bank was the administrative agent for the revolving facility, and Guggenheim Corporate Funding, LLC was the administrative agent for the term loan facility. The initial borrowing base under the revolving credit facility was $150.0 million. This revolving credit facility allowed for funds advanced to be paid down and re-borrowed during the five-year term of the revolver, and bore interest at LIBOR plus a margin ranging from 2.5% to 3.25% based on a percentage of usage. The term loan credit facility provided for payments of interest only during its 5.5-year term, with the interest rate being LIBOR plus 9.0% with a 2.0% LIBOR floor, or if any period the Company elected to pay a portion of the interest under its term loan “in kind”, then the interest rate would have been LIBOR plus 10.0% with a 2.0% LIBOR floor, and with 7.0% of the interest amount paid in cash and the remaining 3.0% paid in kind by being added to principal. At December 31, 2011, $127.0 million was outstanding under the revolving credit facility and $75.0 million was outstanding under the term loan credit facility. On February 8, 2012, the Company paid in full the outstanding balances under the revolving credit facility and the term loan facility and both facilities were terminated, with a resulting $1.5 million charge to interest expense related to an early termination penalty.

 

Debt Issuance Costs

 

The Company capitalizes certain direct costs associated with the issuance of long-term debt and amortizes such costs over the lives of the respective debt. During the first quarter of 2012, the Company capitalized approximately $3.3 million and $2.0 million in costs associated with the issuance of the 8% Note and February 2012 credit facility, respectively. During February 2012, the Company expensed $5.8 million of debt issuance costs as a result of the pay off and termination of the March 2011 revolving credit and term loan facilities.  The Company expensed the remaining debt issuance cost associated with the November 2007 facility totaling approximately $2.7 million in the first quarter 2011. At June 30, 2012 and December 31, 2011, the Company had approximately $5.5 million and $6.0 million, respectively, of unamortized debt issuance costs.  See Note 15, “Subsequent Events — 9.75% Senior Notes” for discussion of the debt issuance costs related to the issuance of the 9.75% senior unsecured notes.

 

7. INCOME TAXES

 

Under guidance contained in Topic 740 of the Accounting Standard Codification TM (the “ASC”), deferred taxes are determined by applying the provisions of enacted tax laws and rates for the jurisdictions in which the Company operates to the estimated future tax effects of the differences between the tax basis of assets and liabilities and their reported amounts in the Company’s financial statements. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized.

 

The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which the Company operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. During the three and six months ended June 30, 2012 and 2011, the Company analyzed and made no adjustment to the valuation allowance.

 

14



Table of Contents

 

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The significant differences between pre-tax book income and taxable book income relate to non-deductible expenses, state income taxes, change in valuation allowances, Section 382 net operating loss limitations and other adjustments to deferred tax balances. The sources and tax rates of the differences for the six months ended June 30 are as follows:

 

 

 

2012

 

2011

 

Income tax at the federal statutory rate

 

34.0

%

34.0

%

 

 

 

 

 

 

State income tax benefit (expense), net of federal benefit

 

(0.7

)

20.0

 

Non-deductible dues and entertainment

 

(0.3

)

8.5

 

Non-deductible interest and expense on Note

 

(18.7

)

 

Reduction in deferred tax asset

 

(5.2

)

 

Share-based compensation

 

(0.4

)

2.8

 

Non-deductible compensation

 

(4.3

)

 

Non-deductible basis in other operating property and equipment

 

(0.9

)

 

Merger costs

 

(4.3

)

 

 

 

(0.8

)%

65.3

%

 

The Company has calculated an estimated effective annual tax rate for the current annual reporting period, excluding any discrete items, of 4.4% as of June 30, 2012. Additionally, the Company recorded a discrete item of $1.3 million related to the reduction in net operating losses due to additional limitations created by a change in control prior to the recapitalization of the Company in February 2012. The recapitalization created an “ownership change” and as a result the net operating losses of the Company will be subject to additional limitations. The discrete item of $1.3 million decreases the effective tax rate to a negative tax rate of 0.8%.  The estimated annual effective tax rate differs from the statutory rate primarily due to non-deductible interest expense on the 8% Note issued as part of the recapitalization of the Company.  Based on the estimated effective annual tax rate, the Company has recorded a tax provision of $0.2 million on a pre-tax loss of $25.5 million for the six months ended June 30, 2012. For the six months ended June 30, 2011, the Company recorded income tax benefit of $1.8 million on a pre-tax loss of $2.8 million, resulting in an effective tax rate of 65.3%.

 

For the six months ended June 30, 2012 the Company has net operating losses of $56.4 million that are not expected to be limited due to the limitations created by the “ownership change” on February 8, 2012.

 

8. FAIR VALUE MEASUREMENTS

 

Pursuant to ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company’s determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company’s unaudited condensed consolidated balance sheets, but also the impact of the Company’s nonperformance risk on its own liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1”) and the lowest priority to unobservable inputs (“Level 3”). Level 2 measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.

 

15



Table of Contents

 

The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of June 30, 2012 and December 31, 2011 (in thousands). As required by ASC 820, a financial instrument’s level within the fair value hierarchy is based on 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 requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between fair value hierarchy levels for the six months ended June 30, 2012 and for the year ended December 31, 2011.

 

 

 

June 30, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Receivables from derivative contracts

 

$

 

$

7,226

 

$

 

$

7,226

 

Liabilities:

 

 

 

 

 

 

 

 

 

Liabilities from derivative contracts

 

$

 

$

 

$

 

$

 

 

 

 

December 31, 2011

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Receivables from derivative contracts

 

$

 

$

260

 

$

 

$

260

 

Liabilities:

 

 

 

 

 

 

 

 

 

Liabilities from derivative contracts

 

$

 

$

1,070

 

$

 

$

1,070

 

 

Derivatives listed above consist of put/call “collars” and sold put options on crude oil and natural gas and interest rate swaps that are carried at fair value. The Company records the net change in the fair value of these positions in “Net gain (loss) on derivative contracts” in the Company’s unaudited condensed consolidated statements of operations. The Company is able to value the assets and liabilities based on observable market data for similar instruments, which resulted in the Company reporting its derivatives as Level 2. This observable data includes the forward curves for commodity prices based on quoted markets prices and implied volatility factors related to changes in the forward curves.

 

As of June 30, 2012 and December 31, 2011, the Company’s derivative contracts were with major financial institutions with investment grade credit ratings which are believed to have a minimal credit risk. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed above; however, the Company does not anticipate such nonperformance. The counterparty to the Company’s current derivative contracts is a lender in the Company’s senior revolving credit agreement. The Company did not post current collateral under any of these contracts as they are secured under the senior revolving credit agreement.

 

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of ASC 825, Financial Instruments. The estimated fair value amounts have been determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of cash, accounts receivable and accounts payable approximates their carrying value due to their short-term nature. The estimated fair value of the Company’s senior revolving credit agreement approximates carrying value because the facility’s interest rate approximates current market rates. The estimated fair value of the Company’s fixed interest rate 8% Note as of June 30, 2012, is $773.1 million and exceeded the carrying value of $242.6 million by $530.5 million. The fair value of the 8% Note at June 30, 2012 was calculated using Level 2 criteria.

 

9. ASSET RETIREMENT OBLIGATIONS

 

For wells drilled, the Company records an asset retirement obligation (“ARO”) when the total depth of a drilled well is reached and the Company can reasonably estimate the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon costs. The Company records the ARO liability on the unaudited condensed consolidated balance sheets and capitalizes the cost in “Oil and natural gas properties” during the period in which the obligation is incurred. The Company records the accretion of its ARO liabilities in “Depletion, depreciation and accretion” expense in the unaudited condensed consolidated statements of operations. The additional capitalized costs are depreciated on a unit-of-production basis.

 

16



Table of Contents

 

The Company recorded the following activity related to its ARO liability for the six months ended June 30, 2012 (in thousands):

 

Liability for asset retirement obligations as of December 31, 2011

 

$

33,713

 

Liabilities settled

 

(68

)

Additions

 

60

 

Accretion expense

 

829

 

Liability for asset retirement obligations as of June 30, 2012

 

34,534

 

Less: current asset retirement obligations

 

1,446

 

Long-term asset retirement obligations

 

$

33,088

 

 

10. COMMITMENTS AND CONTINGENCIES

 

Commitments

 

The Company leases corporate office space in Houston and Plano, Texas and Tulsa, Oklahoma as well as a number of other field office locations. In addition, the Company has lease commitments for certain equipment under long-term operating lease agreements. The office and equipment operating lease agreements expire on various dates through 2020. Rent expense was approximately $1.2 million and $0.7 million for the six months ended June 30, 2012 and 2011, respectively.  Approximate future minimum lease payments for the remainder of 2012 and subsequent annual periods for all non-cancelable operating leases at June 30, 2012 are as follows (in thousands):

 

2012

 

$

2,337

 

2013

 

5,706

 

2014

 

4,766

 

2015

 

4,779

 

2016 and thereafter

 

23,062

 

 

 

$

40,650

 

 

Contingencies

 

From time to time, the Company may be a plaintiff or defendant in a pending or threatened legal proceeding arising in the normal course of its business. While the outcome and impact of currently pending legal proceedings cannot be determined, the Company’s management and legal counsel believe that the resolution of these proceedings through settlement or adverse judgment will not have a material effect on the Company’s unaudited condensed consolidated operating results, financial position or cash flows.

 

11. DERIVATIVES

 

The Company is exposed to certain risks relating to its ongoing business operations, such as commodity price risk and interest rate risk. Derivative contracts are utilized to economically hedge the Company’s exposure to price fluctuations and reduce the variability in the Company’s cash flows associated with anticipated sales of future oil, natural gas and natural gas liquids production. The Company generally hedges a substantial, but varying, portion of anticipated oil and natural gas production for future periods. Currently the Company has hedges in place for periods through June 2014. During 2010, 2011 and 2012, the Company entered into numerous derivative contracts and did not designate these transactions as hedges for accounting purposes. Derivatives are carried at fair value on the unaudited condensed consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the unaudited condensed consolidated statements of operations for the period in which the change occurs. Historically, the Company has also entered into interest rate swaps to mitigate exposure to market rate fluctuations.

 

During February 2012, pursuant to the February 2012 senior secured revolving credit agreement, the Company novated its oil and natural gas derivative instruments to counterparties that are lenders within the new senior secured revolving credit agreement resulting in a realized loss of $0.4 million for novation fees and terminated the interest rate derivatives resulting in a $0.6 million realized loss.

 

It is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The counterparty to the Company’s current

 

17



Table of Contents

 

derivative contracts is a lender in the Company’s senior revolving credit agreement. The Company did not post collateral under any of these contracts as they are secured under the Company’s senior secured revolving credit agreement.

 

The Company’s crude oil and natural gas derivative positions at June 30, 2012 consist of put/call “collars” and sold put options. A collar consists of a sold call, which establishes a maximum price the Company will receive for the volumes under contract and a purchased put that establishes a minimum price. A sold put option limits the exposure of the counterparty’s risk should the price fall below the strike price. Sold put options limit the effectiveness of purchased put options at the low end of the put/call collars to market prices in excess of the strike price of the put option sold.  The following table summarizes the location and fair value amounts of all derivative contracts in the unaudited condensed consolidated balance sheets as of June 30, 2012 and December 31, 2011 (in thousands):

 

 

 

 

 

Asset derivative contracts

 

Liability derivative contracts

 

Netted derivative contracts

 

Derivatives not designated
as hedging contracts

 

Balance sheet location

 

June 30,
2012

 

December 31,
2011

 

June 30,
2012

 

December 31,
2011

 

June 30,
2012

 

December 31,
2011

 

Commodity contracts

 

Current assets - receivables from derivative contracts

 

$

4,915

 

$

1,850

 

$

(408

)

$

(1,590

)

$

4,507

 

$

260

 

Commodity contracts

 

Other noncurrent assets - receivables from derivative contracts

 

 3,207

 

 

(488

)

 

2,719

 

 

Commodity contracts

 

Other noncurrent liabilities - liabilities from derivative contracts

 

 

2,050

 

 

(2,602

)

 

(552

)

Interest rate swaps

 

Current liabilities - liabilities from derivative contracts

 

 

 

 

(265

)

 

(265

)

Interest rate swaps

 

Other noncurrent liabilities - liabilities from derivative contracts

 

 

 

 

(253

)

 

(253

)

Total derivatives not designated as hedging contracts

 

$

8,122

 

$

3,900

 

$

(896

)

$

(4,710

)

$

7,226

 

$

(810

)

 

The types of derivative contracts and related realized and unrealized gains and losses illustrated in the following table are located in “Other income (expenses) — Net gain (loss) on derivative contracts” in the Company’s unaudited condensed consolidated statements of operations (in thousands):

 

 

 

Amount of gain (loss) recognized on derivative contracts for the:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

Derivatives not designated as hedging contracts

 

2012

 

2011

 

2012

 

2011

 

Unrealized gain (loss) on commodity contracts

 

$

12,638

 

$

10,728

 

$

7,176

 

$

(4,225

)

Realized gain (loss) on commodity contracts

 

1,033

 

(2,098

)

1,608

 

(1,262

)

Unrealized gain (loss) on interest rate swaps

 

 

(296

)

518

 

(418

)

Realized gain (loss) on interest rate swaps

 

 

(66

)

(576

)

(77

)

Total net gain (loss) on derivative contracts

 

$

13,671

 

$

8,268

 

$

8,726

 

$

(5,982

)

 

18



Table of Contents

 

At June 30, 2012, the Company had the following open derivative contracts:

 

 

 

 

 

 

 

June 30, 2012

 

 

 

 

 

 

 

 

 

Floors

 

Ceilings

 

Put Options Sold

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

 

 

Volume in

 

Price/Price

 

Average

 

Price/Price

 

Average

 

Price/Price

 

Average

 

Period

 

Instrument

 

Commodity

 

Mmbtu’s/Bbl’s

 

Range

 

Price

 

Range

 

Price

 

Range

 

Price

 

July 2012 - December 2012

 

3 Way-collars

 

Crude oil

 

218,500

 

$90.00 - $100.00

 

$

93.11

 

$101.70 - $113.25

 

$

104.81

 

$

70.00

 

$

70.00

 

July 2012 - December 2012

 

Collars

 

Crude oil

 

117,300

 

90.00 - 95.00

 

91.08

 

102.40 - 107.00

 

106.11

 

 

 

 

 

July 2012 - September 2012

 

Collars

 

Natural gas

 

460,000

 

4.00

 

4.00

 

6.00

 

6.00

 

 

 

 

 

January 2013 - June 2013

 

3 Way-collars

 

Crude oil

 

251,075

 

95.00 - 100.00

 

95.18

 

99.50 - 109.50

 

100.60

 

70.00

 

70.00

 

January 2013 - December 2013

 

Collars

 

Crude oil

 

1,080,875

 

80.00 - 95.00

 

84.87

 

92.70 - 101.50

 

95.08

 

 

 

 

 

January 2014 - June 2014

 

3 Way-collars

 

Crude oil

 

280,500

 

95.00

 

95.00

 

98.20 - 109.50

 

99.59

 

70.00

 

70.00

 

 

At December 31, 2011, the Company had the following open derivative contracts (including interest rate swaps):

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

Floors

 

Ceilings

 

Put Options Sold

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

 

 

Volume in

 

Price/Price

 

Average

 

Price/Price

 

Average

 

Price/Price

 

Average

 

Period

 

Instrument

 

Commodity

 

Mmbtu’s/Bbl’s

 

Range

 

Price

 

Range

 

Price

 

Range

 

Price

 

January 2012 - December 2012

 

3 Way-collars

 

Crude oil

 

400,500

 

$80.00 - $100.00

 

$

87.15

 

$101.70 - $113.25

 

$

104.89

 

$

70.00

 

$

70.00

 

January 2012 - December 2012

 

Collars

 

Crude oil

 

299,300

 

80.00 - 95.00

 

84.34

 

102.40 - 107.00

 

105.43

 

 

 

 

 

January 2012 - March 2012

 

Put options

 

Natural gas

 

609,700

 

4.00 - 4.50

 

4.35

 

 

 

 

 

 

 

 

 

April 2012 - September 2012

 

Collars

 

Natural gas

 

915,000

 

4.00

 

4.00

 

6.00

 

6.00

 

 

 

 

 

January 2013 - June 2013

 

3 Way-collars

 

Crude oil

 

251,075

 

95.00 - 100.00

 

95.18

 

99.50 - 109.50

 

100.60

 

70.00

 

70.00

 

January 2013 - December 2013

 

Collars

 

Crude oil

 

350,875

 

95.00

 

95.00

 

99.00 - 101.50

 

100.04

 

 

 

 

 

January 2014 - June 2014

 

3 Way-collars

 

Crude oil

 

280,500

 

95.00

 

95.00

 

98.20 - 109.50

 

99.59

 

70.00

 

70.00

 

 

Interest Rate Swaps (1) (3)

 

Year

 

Notional
Amount
(in thousands)

 

Fixed Rate

 

Counterparty
Floating Rate (2)

 

Months Covered

 

2013

 

$

50,000

 

2.51

%

3—Month LIBOR

 

January — December

 

2014

 

$

50,000

 

2.51

%

3—Month LIBOR

 

January — March

 

 


(1)                    Settlement is paid to the Company if the counterparty floating rate exceeds the fixed rate and settlement is paid by the Company if the counterparty floating rate is below the fixed rate. Settlement is calculated as the difference in the fixed rate and the counterparty rate.

(2)                    Subject to a minimum rate of 2%.

(3)                    All outstanding interest rate swaps were terminated in connection with the recapitalization during February 2012.

 

12. STOCKHOLDERS’ EQUITY

 

The Company accounts for share-based payment accruals under authoritative guidance on stock compensation, as set forth in ASC Topic 718. The guidance requires all share-based payments to employees and directors, including grants of stock options and restricted stock, to be recognized in the financial statements based on their fair values.

 

On May 8, 2006, the Company’s stockholders first approved its 2006 Long-Term Incentive Plan (as amended, the “Plan”). The Company reserved a maximum of 800,000 shares of its common stock for issuances under the Plan. On May 8, 2008, the Plan was amended to increase the maximum authorized number of shares to be issued under the Plan from 800,000 to 2,000,000. On May 3, 2010, the Plan was amended to increase the maximum authorized number of shares to be issued under the Plan from 2,000,000 to 2,466,666. On February 8, 2012, as part of the recapitalization described in Note 2, the Plan was amended to increase the maximum authorized number of shares to be issued under the Plan from 2,466,666 to 3,700,000. On May 17, 2012, shareholders approved an amendment and restatement of the Plan to (i) increase the maximum number of shares to be issued under the Plan from 3,700,000 to 11,500,000; (ii) extend the effectiveness of the Plan for ten years from the date of approval; and (iii) amend various other provisions of the Plan.  As of June 30, 2012 and December 31, 2011, a maximum of 8,046,719 and 491,450 shares of common stock, respectively remained reserved for issuance under the Plan.

 

19



Table of Contents

 

Stock Options

 

During the six months ended June 30, 2012, the Company granted stock options under the Plan covering 1,272,833 shares of common stock to employees of the Company. The stock options have exercise prices ranging from $8.73 to $11.55 with a weighted average exercise price of $10.11. These awards typically vest over a three year period at a rate of one-third on the annual anniversary date of the grant and expire ten years from the grant date. During the three and six months ended June 30, 2012, $0.4 million and $0.5 million, respectively, was recognized as compensation expense as a component of general and administrative expense. At June 30, 2012, the unrecognized compensation expense related to stock options totaled $4.8 million and will be recognized on the graded-vesting method over the requisite service periods.

 

Stock Appreciation Rights

 

During February 2012, the Company accelerated vesting and exercise of all unvested stock appreciation rights under the Plan (“SARs”) that were granted in May 2011, due to the change in control of the Company resulting from the recapitalization described in Note 2. The Company settled the SARs in cash, resulting in $2.2 million of share-based compensation expense recognized for the six months ended June 30, 2012. The realized compensation expense was partially offset by the reversal of $0.8 million of unrealized losses recorded at December 31, 2011.

 

Restricted Stock

 

During the six months ended June 30, 2012, the Company granted 204,000 shares of restricted stock under the Plan to directors and employees of the Company.  During the three and six months ended June 30, 2012, the Company realized compensation expense of $0.1 million related to the restricted stock issued in 2012. At June 30, 2012, the Company had $2.0 million of unrecognized compensation expense related to non-vested restricted stock awards to be recognized over a weighted-average period of two years. Additionally, during the six months ended June 30, 2012, the Company realized compensation expense of $2.6 million primarily from the accelerated vesting of all unvested employee restricted stock shares due to the change in control in the Company resulting from the recapitalization as described in Note 2.

 

At June 30, 2011, the Company had $4.8 million of unrecognized compensation expense related to non-vested restricted stock awards to be recognized over a weighted-average period of two years. The related compensation expense recognized during the three and six months ended June 30, 2011 was $0.8 million and $1.6 million, respectively. During the three and six months ended June 30, 2011, the Company recorded $0.7 million and $1.4 million, respectively, as compensation expense and $0.1 million and $0.2 million, respectively, as capitalized internal costs.

 

Warrants

 

During February 2012, the Company issued for proceeds of $43.6 million, five year Warrants to purchase 36,666,666 shares of the Company’s common stock at an exercise price of $4.50 per share pursuant to the recapitalization described in Note 2. Proceeds are reflected in additional paid-in capital in stockholders’ equity, net of $0.6 million in issuance costs. The Warrants entitle the holders to exercise the Warrants in whole or in part at any time prior to the expiration date of February 8, 2017.

 

Common Stock

 

On February 8, 2012 pursuant to the closing of the recapitalization described in Note 2, the Company issued 73,333,333 shares of the Company’s common stock for a purchase price of $275.0 million. Costs incurred of $4.0 million were netted against the proceeds of the common stock and recorded accordingly. In addition, the Company amended its certificate of incorporation to increase the Company’s authorized shares of common stock from 33,333,333 shares to 336,666,666 shares.

 

During January 2012, the Company approved a one-for-three reverse stock split, which was implemented on February 10, 2012. Retroactive application of the reverse stock split is required and all share and per share information included for all periods presented in these financial statements reflects the reverse stock split.

 

Preferred Stock and Non-Cash Preferred Stock Dividend

 

On February 29, 2012 (the “Commitment Date”), the Company entered into definitive agreements with a group of certain institutional and selected other accredited investors (collectively, the “investors”) to sell, in a private offering, 4,444.4511 shares of 8% Automatically Convertible Preferred Stock, par value $0.0001 per share (the “Preferred Stock”), each share of which was convertible into 10,000 shares of common stock. Also on February, 29, 2012, the Company received an executed written consent (the “Consent”) in lieu of stockholders’ meeting authorizing and approving the conversion of the Preferred Stock into common stock. On March 2, 2012, the Company filed a Certificate of Designation, Preferences, Rights and Limitations of the Preferred Stock (the “Certificate of Designation”) with the Delaware Secretary of State which stated the

 

20



Table of Contents

 

conversion was to occur on the twentieth day after the mailing of a definitive information statement to stockholders. On March 5, 2012, the Company issued the Preferred Stock to the investors at $90,000 per share. Gross proceeds from the offering were approximately $400.0 million, or $9.00 per share of common stock, before offering expenses. The Company incurred placement agent fees of $14.0 million and associated expenses of approximately $0.5 million in connection with this offering. On March 28, 2012, the Company mailed a definitive information statement to its common stockholders notifying them that Halcón’s majority stockholder had consented to the issuance of common stock, par value $0.0001, upon the conversion of the Preferred Stock. The Preferred Stock automatically converted into 44,444,511 shares of common stock on April 17, 2012 in accordance with the terms of the Certificate of Designation. No cash dividends were paid on the Preferred Stock since pursuant to the terms of the Certificate of Designation of the Preferred Stock, conversion occurred prior to May 31, 2012.

 

The Preferred Stock conversion feature was not considered a derivative instrument under ASC Topic 815— Derivatives and Hedging as it met the scope exception because the conversion feature is both indexed to the Company’s own stock and classified in stockholders’ equity in the Company’s balance sheet. However, in accordance with ASC 470 - Debt (“ASC 470”), the Company determined that the conversion feature in the Preferred Stock did represent a beneficial conversion feature. The fair value of the common stock of $10.99 on the Commitment Date was greater than the conversion price of $9.00 per common share, representing a beneficial conversion feature of $1.99 per common share, or $88.4 million in aggregate. Under ASC 470, $88.4 million (the intrinsic value of the beneficial conversion feature) of the proceeds received from the issuance of the Preferred Stock was allocated to additional paid-in capital, creating a discount on the Preferred Stock (the “Discount”). The Discount resulting from the allocation of value to the beneficial conversion feature was required to be amortized on a non-cash basis over the approximate 71 month period between the issuance date and the required redemption date of February 9, 2018, or fully amortized upon an accelerated date of redemption or conversion, and recorded as a preferred dividend. As a result, approximately $1.1 million of the Discount was amortized in the first quarter of 2012 and due to the conversion date occurring on April 17, 2012, the remaining $87.3 million of Discount amortization was accelerated to the conversion date and was fully amortized in the second quarter of 2012 as per the guidance of ASC 470. The Discount amortization is reflected as a non-cash preferred dividend in the Condensed Consolidated Statement of Operations. In accordance with the guidance in ASC 480, the preferred dividend was charged against additional paid-in capital since no retained earnings were available.

 

13. EARNINGS PER COMMON SHARE

 

The following represents the calculation of earnings per share (in thousands, except per share amounts):

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Basic

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders

 

$

(79,684

)

$

8,936

 

$

(114,108

)

$

(975

)

Weighted average basic number of common shares outstanding

 

136,066

 

26,278

 

102,441

 

26,199

 

Basic net income (loss) per common share

 

$

(0.59

)

$

0.34

 

$

(1.11

)

$

(0.04

)

Diluted

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders

 

$

(79,684

)

$

8,936

 

$

(114,108

)

$

(975

)

Weighted average basic number of common shares outstanding

 

136,066

 

26,278

 

102,441

 

26,199

 

Common stock equivalent shares representing shares issued upon exercise or conversion

 

Anti-dilutive

 

 

Anti-dilutive

 

 

Weighted average diluted number of common shares outstanding

 

136,066

 

26,278

 

102,441

 

26,199

 

Diluted income (loss) per common share

 

$

(0.59

)

$

0.34

 

$

(1.11

)

$

(0.04

)

 

Common stock equivalents of stock options, Preferred Stock, Warrants and the 8% Note totaling 89.4 million and 75.4 million shares were not included in the computations of diluted earnings per share of common stock for the three and six months ended June 30, 2012, respectively, as the effect would have been anti-dilutive due to the net loss.

 

21



Table of Contents

 

14. ADDITIONAL FINANCIAL STATEMENT INFORMATION

 

Certain balance sheet and statement of operations amounts are comprised of the following (in thousands): 

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Accounts receivable:

 

 

 

 

 

Oil and natural gas revenues

 

$

7,281

 

$

9,519

 

Joint interest accounts

 

1,700

 

597

 

Other

 

359

 

172

 

 

 

$

9,340

 

$

10,288

 

Prepaids and other:

 

 

 

 

 

Prepaid expenses

 

$

2,502

 

$

936

 

Other

 

11

 

1,793

 

 

 

$

2,513

 

$

2,729

 

Accounts payable and accrued liabilities:

 

 

 

 

 

Trade payables

 

$

19,004

 

$

12,890

 

Revenues and royalties payable

 

8,053

 

8,564

 

Accrued interest expense

 

216

 

464

 

Accrued income taxes payable

 

279

 

406

 

Accrued employee compensation

 

6,712

 

1,600

 

Other

 

2,510

 

1,137

 

 

 

$

36,774

 

$

25,061

 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

General and administrative:

 

 

 

 

 

 

 

 

 

Share-based compensation

 

$

529

 

$

686

 

$

4,632

 

$

1,355

 

General and administrative, overhead and other

 

12,558

 

3,935

 

28,789

 

7,813

 

 

 

$

13,087

 

$

4,621

 

$

33,421

 

$

9,168

 

Depletion, depreciation and accretion:

 

 

 

 

 

 

 

 

 

Depletion and amortization

 

$

5,528

 

$

5,196

 

$

11,106

 

$

10,469

 

Accretion

 

428

 

412

 

829

 

814

 

 

 

$

5,956

 

$

5,608

 

$

11,935

 

$

11,283

 

Interest expense and other, net:

 

 

 

 

 

 

 

 

 

Interest expense

 

$

4,192

 

$

3,563

 

$

17,230

 

$

10,113

 

Other expense (income)

 

(13

)

798

 

(54

)

750

 

 

 

$

4,179

 

$

4,361

 

$

17,176

 

$

10,863

 

 

15. SUBSEQUENT EVENTS

 

Acquisitions

 

On July 31, 2012, the stockholders of the Company and GeoResources, a Colorado corporation approved the merger of GeoResources into a subsidiary of the Company. The closing of the transaction occurred on August 1, 2012 and GeoResources’ stockholders received a combination of $20 in cash and 1.932 shares of the Company’s common stock for each share of GeoResources’ common stock. The cash consideration aggregated approximately $525.0 million and the Company issued approximately 51.0 million shares of the Company’s common stock to the stockholders of GeoResources.  In addition, the Company assumed outstanding warrants of GeoResources providing for the issuance of 1,184,966 shares of common stock of the Company upon exercise.

 

On July 16, 2012, a settlement agreement was entered into, subject to the court’s approval, regarding the settlement of the action styled Yost v. GeoResources, Inc. et al., Case No. 1:12-CV-01307-MSK-KMT, pending in the United States District Court for the District of Colorado (the “Federal Action”), which was filed on behalf of a putative class of GeoResources stockholders against GeoResources, the GeoResources board of directors and, in certain instances, Halcón and certain subsidiaries of Halcón as aiders and abettors. Pursuant to such settlement, Halcón and GeoResources agreed to make certain

 

22



Table of Contents

 

supplemental disclosures regarding the merger and to provide additional disclosures to their stockholders, which disclosures were included in a Form 8-K filed with the U.S. Securities and Exchange Commission on July 18, 2012.  Objections to the settlement agreement are scheduled to be submitted on August 15, 2012 to the federal court in Colorado and a hearing on the settlement agreement is expected to be scheduled at a later date.

 

In early August 2012, the Company completed the acquisition of an operated interest in approximately 20,000 net acres of oil and gas leasehold in east Texas from several private oil and gas companies.  The properties, which the Company refers to as the East Texas Assets, consist of producing and nonproducing acreage.  The purchase consideration consisted of approximately 20.7 million shares of the Company’s common stock and approximately $300.0 million in cash.

 

The purchase of both GeoResources and the East Texas Assets will be accounted for using the acquisition method of accounting.  Under the acquisition method of accounting, the Company is required to allocate the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values at the respective Closing Dates. The excess of the purchase price over those fair values is recorded as goodwill.  The Company is in the process of valuing the assets acquired and liabilities assumed.  Disclosures required by ASC 805, Business Combinations, will be provided once the initial accounting for the merger is complete.

 

9.75% Senior Notes

 

On July 16, 2012, the Company completed a private offering of $750.0 million aggregate principal amount of 9.75% senior unsecured notes due 2020 (the “9.75% Notes”), issued at 98.646% of par.  The net proceeds from the offering approximated $724.8 million after deducting the initial purchasers’ discounts, commissions and offering expenses and were used to fund the cash consideration portion of the GeoResources merger and a portion of the cash component of the East Texas Assets acquisition.

 

In connection with the issuance of the 9.75% Notes, approximately $15.5 million will be recorded as debt issuance costs and $10.2 million as a discount.  The debt amortization costs and the discount will be amortized over the life of the 9.75% Notes using the effective interest method.

 

Credit Facility Amendment

 

The Company requested, and was granted, a redetermination of the aggregate amount and borrowing base of the February 2012 credit facility in anticipation of, and contingent upon, the successful completion of the GeoResources and East Texas Assets acquisitions. On August 1, 2012, in connection with the closing of the GeoResources and East Texas Assets transactions, the Company entered into the First Amendment to the senior revolving credit agreement (the “First Amendment”).  The First Amendment increased the commitments under the revolving credit facility to an aggregate amount up to $1.5 billion and the borrowing base from $225.0 million to $525.0 million.  The First Amendment also modified the requirements for commodity hedging to not more than 85% of production for 66 months from the date of the commodity hedging agreement.

 

23



Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion is intended to assist in understanding our results of operations for the three and six months ended              June 30, 2012 and 2011 and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and with the consolidated financial statements, notes and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, including those discussed below, which could cause actual results to differ from those expressed.

 

Overview

 

We are an independent energy company engaged in the acquisition, production, exploration and development of onshore oil and natural gas properties in the United States. Our producing properties are located in basins with long histories of oil and natural gas operations.

 

Our oil and natural gas assets consist of a combination of developing and mature liquids-weighted reserves and properties. We have mature oil and natural gas reserves located primarily in Wichita, Wilbarger and Starr Counties, Texas, Pontotoc County, Oklahoma, and in several parishes in Louisiana. We have acquired acreage and may acquire more acreage in the Utica Shale/Point Pleasant formations in Ohio and Pennsylvania, the Woodbine/Eagle Ford formations in Texas, the Tuscaloosa Marine Shale formation in Louisiana, the Wilcox formation in Texas and Louisiana and the Mississippi Lime formation in Oklahoma, as well as several other undisclosed locations.

 

Our average daily oil and natural gas production decreased 6% in the first six months of 2012 compared to the same period in the prior year. During the first six months of 2012, we averaged 3,984 barrels of oil equivalent (“Boe”) per day compared to average daily production of 4,238 Boe per day during the first six months of 2011. The decrease in production compared to the prior year period was driven primarily by natural production declines and pipeline operational issues in South Texas. During the first six months of 2012, we drilled or participated in the drilling of 15 gross (14.2 net) wells of which 14 gross (13.3 net) wells were completed as wells capable of production and one gross (0.9 net) well was a dry hole, resulting in a success rate of 93%.

 

Recent Acquisitions

 

Merger with GeoResources, Inc.

 

On August 1, 2012, we acquired GeoResources, Inc., by merger.  As consideration, we paid a combination of $20 in cash and issued 1.932 shares of the Company’s common stock for each share of GeoResources’ common stock that was issued and outstanding on the closing date and also assumed GeoResources’ outstanding warrants.  GeoResources’ oil and natural gas properties include acreage in the Bakken shale and Three Forks formations in North Dakota and Montana, and the Austin Chalk trend and Eagle Ford shale in Texas.  As of January 1, 2012, GeoResources reported estimated proved reserves of approximately 29.2 million barrels of oil equivalent (“MMBoe”), of which approximately 67% was oil and 70% was developed.  GeoResources’ production for the year ended December 31, 2011 was 1.9 MMBoe.  Prior to the merger, we and GeoResources operated as separate companies. Accordingly, the discussion and analysis of results of operations and financial condition set forth below relate solely to us.  GeoResources’ results of operations will be reflected in the Company’s results from and after August 1, 2012.  Additional details regarding the merger are discussed in Note 15 to the Condensed Consolidated Financial Statements, “Subsequent Events - Acquisitions.”

 

East Texas Assets Acquisition

 

In early August 2012, the Company acquired an operated interest in approximately 20,000 net acres of oil and gas leasehold in east Texas from several private oil and gas companies for cash of approximately $300.0 million and 20.7 million shares of the Company’s common stock.  The properties, which the Company refers to as the East Texas Assets, consist of producing and nonproducing acreage prospective for the Woodbine, Eagle Ford and other formations. Net daily production from the acreage was approximately 2,800 Boe per day as of June 1, 2012.

 

24



Table of Contents

 

Acquisition of Unevaluated Acreage

 

On June 28, 2012, we completed the acquisition of acreage in Eastern Ohio that we believe is prospective for the Utica Shale/Point Pleasant formations.  Pursuant to the terms of an Agreement of Sale and Purchase dated May 8, 2012 with NCL Appalachian Partners, L.P. (“NCL”), we acquired a working interest in approximately 27,000 net acres for an adjusted purchase price of approximately $164.0 million.  We funded the acquisition with cash on hand.  No oil or natural gas production or proved reserves are currently attributable to the acquired assets.  The effective date of the transaction is June 1, 2012.

 

In addition to the NCL acquisition, during the first six months of 2012 we incurred approximately $274.5 million in capital expenditures on unevaluated oil and gas leaseholds through numerous leasing and acquisition transactions.  No oil or natural gas production or proved reserves are currently attributable to the leasehold assets which were primarily located in Texas, Louisiana, Ohio and Pennsylvania.

 

Our financial results depend upon many factors, but are largely driven by the volume of our oil and natural gas production and the price that we receive for that production. Our production volumes will decline as reserves are depleted unless we expend capital in successful development and exploration activities or acquire properties with existing production. The amount we realize for our production depends predominately upon commodity prices and our related commodity price hedging activities, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors. Accordingly, finding and developing oil and natural gas reserves in an economical manner is critical to our long-term success.

 

Other Recent Developments

 

Recapitalization

 

On February 8, 2012, HALRES LLC (formerly, Halcón Resources, LLC), a newly-formed limited liability company led by Floyd C. Wilson, former Chairman and Chief Executive Officer of Petrohawk Energy Corporation, recapitalized us with a $550.0 million investment structured as the purchase of $275.0 million in new common stock, a $275.0 million five-year 8% convertible note and warrants for the purchase of an additional 36,666,666 million shares of our common stock at an exercise price of $4.50 per share. Information as to our recapitalization is set forth under Note 2 to the Condensed Consolidated Financial Statements.

 

February 2012 Credit Facility

 

In connection with the closing of the recapitalization, we entered into a senior revolving credit agreement (the “February 2012 Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, and other lenders on February 8, 2012. Initially, the February 2012 Credit Agreement provided for a $500.0 million facility with an initial borrowing base of $225.0 million. Amounts borrowed under the February 2012 Credit Agreement will mature on February 8, 2017. The borrowing base will be redetermined semi-annually, with the lenders and us each having the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations. The borrowing base takes into account our oil and natural gas properties, proved reserves, total indebtedness, and other relevant factors consistent with customary oil and gas lending criteria. The borrowing base is subject to a reduction equal to the product of 0.25 multiplied by the stated principal amount (without regard to any initial issue discount) of any future notes or other long-term debt securities that we may issue. Funds advanced under the February 2012 Credit Agreement may be paid down and re-borrowed during the five-year term of the revolver. The initial pricing on the February 2012 Credit Agreement was LIBOR plus a margin ranging from 1.5% to 2.5% based on a percentage of usage. Advances under the February 2012 Credit Agreement are secured by liens on substantially all of our properties and assets. The February 2012 Credit Agreement contains representations, warranties and covenants customary in transactions of this nature including restrictions on the payment of dividends on the capital stock and financial covenants relating to current ratio and minimum interest coverage ratio. Initially, we were required to maintain commodity hedges on a monthly basis of not more than 100% of our projected production for the first 24 months, 75% of our projected production for the next 25 to 36 months and 50% of our projected production for the next 37 to 48 months. At June 30, 2012 and as of the date of this filing, we are in compliance with the financial debt covenants under the February 2012 Credit Agreement. At June 30, 2012, we had no indebtedness outstanding under the $500.0 million credit agreement, $1.3 million of letters of credit outstanding and $223.7 million of borrowing capacity available.

 

We requested, and were granted, a redetermination of the aggregate amount and borrowing base of the February 2012 Credit Agreement in anticipation of, and contingent upon, the successful completion of the GeoResources and East Texas Assets acquisitions, which in the aggregate are expected to increase our current Boe per day production volumes from approximately 4,000 Boe per day to 14,000 Boe per day. On August 1, 2012, in connection with the closing of the GeoResources, Inc. merger and East Texas Assets acquisition, we entered into the First Amendment to the February 2012 Credit Agreement (the “First Amendment”).  The First Amendment increased the commitments under the revolving credit facility to an aggregate amount up to $1.5 billion and the borrowing base from $225.0 million to $525.0 million. The First

 

25



Table of Contents

 

Amendment also modified the requirements for commodity hedging to not more than 85% of our current and anticipated production for 66 months from the date such hedge agreement is created.

 

Preferred Stock Offering

 

On March 5, 2012, we sold in a private placement to certain institutional accredited investors 4,444.4511 shares of 8% automatically convertible preferred stock (“Preferred Stock”), par value $0.0001 per share, each share of which automatically converted into 10,000 shares of our common stock on April 17, 2012. We received gross proceeds of approximately $400.0 million, or $9.00 per share of common stock, before offering expenses. No cash dividends were paid on the convertible Preferred Stock as it converted into common stock on or before May 31, 2012. The Preferred Stock was considered to have a beneficial conversion feature because the proceeds per share, approximately $9.00 per share of common stock, were less than the fair value of our common stock of $10.99 per common share on the commitment date. The estimated fair value allocated to the beneficial conversion feature was $88.4 million and was recorded to additional paid-in capital, creating a discount on the Preferred Stock (the “Discount”). The Discount resulting from the allocation of value to the beneficial conversion feature was required to be amortized over the 71 month contractual period from issuance to required redemption, or fully amortized upon an accelerated date of redemption or conversion, by increasing Preferred Stock and recording the offsetting amount as a deemed non-cash Preferred Stock dividend. During the three months ended March 31, 2012, we recorded a non-cash preferred dividend of $1.1 million.  Due to the conversion date occurring on April 17, 2012, the remaining $87.3 million of Discount amortization was accelerated to the conversion date and reflected as a non-cash preferred dividend for the three month period ended June 30, 2012.

 

9.75 % Senior Notes

 

On July 16, 2012, we completed a private offering of $750.0 million aggregate principal amount of 9.75% senior unsecured notes due 2020 (the “9.75% Notes”), issued at 98.646% of par.  The net proceeds from the offering approximated $724.8 million after deducting the initial purchasers’ discounts, commissions and offering expenses and were used to fund the cash consideration portion of the GeoResources merger and a portion of the cash component of the East Texas Assets acquisition.

 

Capital Resources and Liquidity

 

The proceeds provided by our recent financing activities has enabled us to increase our focus on expanding our leasehold position in liquids-rich resource areas. In addition to the assets acquired through the merger with GeoResources, we have acquired and/or identified several target resource plays for additional leasing, including the Utica Shale/Point Pleasant formations in Ohio and Pennsylvania, the Mississippi Lime formation in Northern Oklahoma and Southern Kansas, the Wilcox formation in Southwest Louisiana, the Woodbine/Eagle Ford formations in East Texas and the Tuscaloosa Marine Shale formation in Louisiana. In addition to our ongoing lease acquisition efforts in our targeted resource plays, we have identified several new exploratory areas we believe are prospective for oil and liquids-rich hydrocarbons. We have made significant progress in all of our target resources style plays.  For the six months ended June 30, 2012, we invested $453.2 million on unevaluated properties for oil and natural gas leaseholds, exploration activities and seismic.  The majority of these expenditures were for acreage in the Utica Shale/Point Pleasant and, to a lesser extent, Woodbine/Eagle Ford formations.

 

Our near-term capital spending requirements are expected to be funded with cash flows from operations, proceeds from potential asset dispositions and borrowings under our February 2012 Credit Agreement, for which the borrowing base has been increased from $225.0 million to $525.0 million due to the completed GeoResources merger and the acquisition of the East Texas Assets.  As of August 1, approximately $220.0 million was drawn on the borrowing base. We strive to maintain financial flexibility while continuing our aggressive drilling plans and evaluating potential acquisitions, and will therefore likely continue to access capital markets (if on acceptable terms) as necessary to, among other things, maintain substantial borrowing capacity under our February 2012 Credit Agreement, facilitate drilling on our large undeveloped acreage position and permit us to selectively expand our acreage position and infrastructure projects while sustaining sufficient operating cash levels. Our ability to complete future debt and equity offerings and maintain or increase our borrowing base is subject to a number of variables, including our level of oil and natural gas production, reserves and commodity prices, as well as various economic and market conditions that have historically affected the oil and natural gas industry. If oil and natural gas prices decline for a sustained period of time, our ability to fund our capital expenditures, complete acquisitions, reduce debt, meet our financial obligations and become profitable may be materially impacted.

 

Our future capital resources and liquidity depend, in part, on our success in developing our leasehold interests, growing reserves and production and finding additional reserves. Cash is required to fund capital expenditures necessary to offset inherent declines in our production and proven reserves, which is typical in the capital-intensive oil and natural gas industry. We therefore continuously monitor our liquidity and the capital markets and evaluate our development plans in light of a variety of factors, including, but not limited to, our cash flows, capital resources, acquisition opportunities and drilling success.

 

26



Table of Contents

 

Cash Flow

 

Our primary source of cash for the six months ended June 30, 2012 was from financing activities. Our primary source of cash for the six months ended June 30, 2011 was from operating activities. Proceeds from our recent convertible Preferred Stock offering and recapitalization, as well as borrowings under our 8% convertible note, were partially offset by repayments of our previous credit facilities and cash used in investing activities to fund our unevaluated leasehold activities and our drilling program. Operating cash flow fluctuations were substantially driven by the increase in general and administrative expenses in the six months ended June 30, 2012 as a result of the recapitalization and related change in control matters. Prices for oil and natural gas have historically been subject to seasonal influences typically characterized by peak demand and higher prices in the winter heating season; however, the impact of other risks and uncertainties have influenced prices throughout recent years. See “Results of Operations” below for a review of the impact of prices and volumes on revenues.

 

Net increase in cash is summarized as follows (in thousands):

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

Cash flows provided by (used in) operating activities

 

$

(2,708

)

$

13,043

 

Cash flows used in investing activities

 

(500,809

)

(13,496

)

Cash flows provided by financing activities

 

722,676

 

870

 

Net increase in cash

 

$

219,159

 

$

417

 

 

Operating Activities. Net cash used in operating activities for the six months ended June 30, 2012 was $2.7 million as compared to cash provided by operating activities for the six months ended June 30, 2011 of $13.0 million.

 

Net loss for the six months ended June 30, 2012 was a $25.7 million.  Non-cash items including depreciation, depletion and accretion of $11.9 million, $7.7 million of non-cash interest and amortization as well as $6.3 million of amortization and write-off of deferred loan costs offset this net loss.  The recapitalization, change in control and related activities which occurred during February 2012, coupled with the impact of additional personnel and facilities in support of the rapidly expanding business base, drove a significant increase in general and administrative, which adversely affected operating cash flows.

 

Investing Activities. The primary driver of cash used in investing activities is capital spending, specifically the acquisition of unevaluated leaseholds in our targeted areas. Cash used in investing activities was $500.8 million and $13.5 million for the six months ended June 30, 2012 and 2011, respectively.

 

During the first six months of 2012, we spent $468.2 million on oil and natural gas capital expenditures, primarily on the acquisition of unevaluated leasehold. We participated in the drilling of 15 gross (14.2 net) wells of which 14 gross (13.3 net) wells were completed as wells capable of production and one gross (0.9 net) well was a dry hole, and spent an additional $3.5 million on other operating property and equipment capital expenditures, primarily on leasehold improvements, computers and software in our new corporate office in Houston, Texas. Proceeds from sales of oil and gas properties were $0.3 million.  We also had funds held in escrow of approximately $29.4 million related to pending acquisitions.

 

During the first six months of 2011, we spent $13.5 million on oil and natural gas capital expenditures. During the six months ended June 30, 2011, we participated in the drilling of 30 gross (26.5 net) wells, of which 21 gross (19.2 net) wells were capable of production. Nine gross (7.3 net) wells were drilling, testing or waiting on completion as of June 30, 2011. We spent an additional $0.5 million on other operating property and equipment capital expenditures. Proceeds from sales of oil and gas properties were $0.5 million for the six months ended June 30, 2011.

 

Financing Activities. Net cash flows provided by financing activities were $722.7 million and $0.9 million for the six months ended June 30, 2012 and 2011, respectively.

 

On February 8, 2012, HALRES LLC recapitalized us with a $550.0 million investment structured as the purchase of $275.0 million in new common stock, a $275.0 million five-year 8% convertible note and warrants for the purchase of an additional 36,666,666 million shares of our common stock at an exercise price of $4.50 per share. The convertible note provided $231.4 million cash flow from borrowings and $43.6 million cash flow from warrants issued.

 

In connection with the closing of the recapitalization, we entered into the February 2012 Credit Agreement. The February 2012 Credit Agreement provided for a $500.0 million facility with an initial borrowing base of $225.0 million until it was amended in connection with the closing of the GeoResources and East Texas Assets transactions to increase the facility up to

 

27