10-Q 1 a12-20150_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

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 September 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 November 5, 2012, 216,217,427 shares of the Registrant’s Common Stock were outstanding.

 

 

 



Table of Contents

 

Third 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 Nine Months Ended September 30, 2012 and 2011

 

5

 

 

 

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

 

6

 

 

 

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

 

7

 

 

 

Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 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

 

32

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

44

 

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

44

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

45

 

 

 

ITEM 1A. RISK FACTORS

 

45

 

 

 

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

 

52

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

52

 

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

52

 

 

 

ITEM 5. OTHER INFORMATION

 

52

 

 

 

ITEM 6. EXHIBITS

 

53

 

 

 

SIGNATURES

 

56

 

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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 or pending acquisitions, including expectations regarding closings, capital expenditures, potential increases in oil and natural gas production, the number and location of anticipated 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. You should consider carefully the risks discussed under the “Risk Factors” section of our 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, natural gas liquids (or NGLs) 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 assets in East Texas;

 

·                  the possibility that acquisitions may involve unexpected costs or delays, will not achieve intended benefits and will divert management’s time and energy, which could have an adverse effect on our financial position, results of operations or cash flows;

 

·                  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;

 

·                  our ability to generate sufficient cash flow from operations, or access to capital through borrowings or other sources to fully execute our business plans;

 

·                  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;

 

3



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·                  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, NGLs and natural gas and/or make it difficult to access financial markets;

 

·                  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;

 

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

 

·                  hurricanes on the Gulf Coast and severe winter weather in North Dakota and Montana may cause us to be subject to production curtailments in the future due to damage to certain field or, even in the event producing field is not damaged, production could be curtailed due to damage to facilities and equipment owned by oil and gas purchaser, or vendors and suppliers.

 

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.

 

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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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Operating revenues:

 

 

 

 

 

 

 

 

 

Oil, natural gas and natural gas liquids sales

 

 

 

 

 

 

 

 

 

Oil

 

$

65,662

 

$

18,955

 

$

109,042

 

$

62,150

 

Natural gas

 

3,775

 

2,548

 

6,683

 

8,252

 

Natural gas liquids

 

3,214

 

2,644

 

7,006

 

7,582

 

Total oil, natural gas and natural gas liquids sales

 

72,651

 

24,147

 

122,731

 

77,984

 

Other

 

489

 

39

 

560

 

124

 

Total operating revenues

 

73,140

 

24,186

 

123,291

 

78,108

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Production:

 

 

 

 

 

 

 

 

 

Lease operating

 

15,511

 

7,363

 

32,121

 

23,016

 

Workovers

 

1,123

 

136

 

2,384

 

1,032

 

Taxes

 

4,432

 

1,391

 

7,354

 

4,280

 

Restructuring

 

725

 

 

1,732

 

 

General and administrative

 

33,192

 

3,972

 

66,613

 

13,140

 

Depletion, depreciation and accretion

 

22,726

 

5,594

 

34,661

 

16,877

 

Total operating expenses

 

77,709

 

18,456

 

144,865

 

58,345

 

Income (loss) from operations

 

(4,569

)

5,730

 

(21,574

)

19,763

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

 

 

 

 

Interest expense and other, net

 

(5,074

)

(3,455

)

(22,250

)

(14,318

)

Net gain (loss) on derivative contracts

 

(9,575

)

22,617

 

(849

)

16,635

 

Total other income (expenses)

 

(14,649

)

19,162

 

(23,099

)

2,317

 

Income (loss) before income taxes

 

(19,218

)

24,892

 

(44,673

)

22,080

 

Income tax provision

 

963

 

13,116

 

1,171

 

11,279

 

Net income (loss)

 

(20,181

)

11,776

 

(45,844

)

10,801

 

Non-cash preferred dividend

 

 

 

(88,445

)

 

Net income (loss) available to common stockholders

 

$

(20,181

)

$

11,776

 

$

(134,289

)

$

10,801

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.11

)

$

0.45

 

$

(1.01

)

$

0.41

 

Diluted

 

$

(0.11

)

$

0.45

 

$

(1.01

)

$

0.41

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

191,846

 

26,362

 

132,460

 

26,254

 

Diluted

 

191,846

 

26,362

 

132,460

 

26,254

 

 

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)

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

18,126

 

$

49

 

Accounts receivable

 

105,288

 

10,288

 

Receivables from derivative contracts

 

4,324

 

260

 

Income tax receivable

 

9,850

 

 

Deferred income taxes

 

533

 

2,601

 

Inventory

 

8,621

 

4,310

 

Prepaids and other

 

4,061

 

2,729

 

Total current assets

 

150,803

 

20,237

 

Oil and natural gas properties (full cost method):

 

 

 

 

 

Evaluated

 

1,710,797

 

715,666

 

Unevaluated

 

1,197,764

 

 

Gross oil and natural gas properties

 

2,908,561

 

715,666

 

Less: accumulated depletion and impairment

 

(534,134

)

(501,993

)

Net oil and natural gas properties

 

2,374,427

 

213,673

 

Other operating property and equipment:

 

 

 

 

 

Other operating assets and equipment

 

32,502

 

9,979

 

Less: accumulated depreciation

 

(7,463

)

(7,133

)

Net other operating property and equipment

 

25,039

 

2,846

 

Other non-current assets:

 

 

 

 

 

Receivables from derivative contracts

 

1,023

 

 

Debt issuance costs, net of amortization

 

23,531

 

5,966

 

Deferred income taxes

 

 

24,102

 

Equity in oil and gas partnerships

 

11,207

 

 

Funds in escrow

 

3,550

 

560

 

Goodwill

 

160,918

 

 

Other

 

939

 

418

 

Total assets

 

$

2,751,437

 

$

267,802

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

202,344

 

$

25,061

 

Liabilities from derivative contracts

 

1,654

 

265

 

Asset retirement obligations

 

1,968

 

1,010

 

Total current liabilities

 

205,966

 

26,336

 

Long-term debt

 

1,175,000

 

202,000

 

Other non-current liabilities:

 

 

 

 

 

Liabilities from derivative contracts

 

254

 

805

 

Asset retirement obligations

 

42,651

 

32,703

 

Deferred income taxes

 

213,742

 

 

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; 217,867,336 and 27,694,583 shares issued; 216,217,427 and 26,244,452 outstanding at September 30, 2012 and December 31, 2011, respectively

 

22

 

3

 

Additional paid-in capital

 

1,385,244

 

229,414

 

Treasury stock: 1,649,909 and 1,450,131 shares at September 30, 2012 and December 31, 2011, respectively, at cost

 

(9,298

)

(7,159

)

Accumulated deficit

 

(262,154

)

(216,310

)

Total stockholders’ equity

 

1,113,814

 

5,948

 

Total liabilities and stockholders’ equity

 

$

2,751,437

 

$

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

 

 

 

Nine Months Ended September 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 forfeitures

 

 

 

(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

)

 

 

(4,994

)

 

 

 

(19,519

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issuance

 

 

 

72,114

 

7

 

452,032

 

 

 

 

452,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

(45,844

)

(45,844

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred beneficial conversion feature

 

 

 

 

 

88,445

 

 

 

 

88,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash preferred dividend

 

 

88,445

 

 

 

(88,445

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term incentive plan grants

 

 

 

276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of stock

 

 

 

 

 

 

200

 

(2,139

)

 

(2,139

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

4,738

 

 

 

 

4,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, September 30, 2012

 

 

$

 

217,867

 

$

22

 

$

1,385,244

 

1,650

 

$

(9,298

)

$

(262,154

)

$

1,113,814

 

 

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

 

7



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HALCÓN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(45,844

)

$

10,801

 

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

 

 

 

 

 

Depletion, depreciation and accretion

 

34,661

 

16,877

 

Deferred income tax provision

 

1,030

 

11,129

 

Share-based compensation

 

3,866

 

2,227

 

Unrealized (gain) loss on derivative contracts

 

3,197

 

(16,391

)

Amortization and write-off of deferred loan costs

 

6,247

 

3,325

 

Non-cash interest and amortization of discount

 

8,620

 

362

 

Other expense (income)

 

470

 

(22

)

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable

 

(25,609

)

1,293

 

Inventory

 

(1,565

)

(500

)

Derivative premium

 

 

4,889

 

Prepaids and other

 

(1,653

)

549

 

Accounts payable and accrued liabilities

 

30,674

 

(10,448

)

Other

 

(526

)

(278

)

Net cash provided by operating activities

 

13,568

 

23,813

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Evaluated oil and natural gas capital expenditures

 

(93,073

)

(19,600

)

Unevaluated oil and natural gas capital expenditures

 

(634,622

)

 

Acquisition of GeoResources, Inc., net of cash acquired

 

(579,497

)

 

Acquisition of East Texas Assets

 

(296,139

)

 

Other operating property and equipment capital expenditures

 

(18,240

)

(503

)

Proceeds received from sales of property and equipment

 

554

 

473

 

Funds held in escrow

 

(2,989

)

 

Net cash used in investing activities

 

(1,624,006

)

(19,630

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from borrowings

 

1,282,255

 

238,166

 

Repayments of borrowings

 

(328,000

)

(235,222

)

Debt issuance costs

 

(23,657

)

(7,003

)

Offering costs

 

(18,535

)

 

Common stock repurchased

 

(2,139

)

(117

)

Preferred stock issued

 

311,556

 

 

Preferred beneficial conversion feature

 

88,445

 

 

Common stock issued

 

275,000

 

 

Warrants issued

 

43,590

 

 

Net cash provided by (used in) financing activities

 

1,628,515

 

(4,176

)

 

 

 

 

 

 

Net increase in cash

 

18,077

 

7

 

Cash at beginning of period

 

49

 

37

 

Cash at end of period

 

$

18,126

 

$

44

 

 

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

 

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HALCÓN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Continued

(In thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2012

 

2011

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for income taxes

 

$

361

 

$

531

 

Cash paid for interest, net of capitalized interest

 

3,931

 

12,036

 

 

 

 

 

 

 

Disclosure of non-cash investing and financing activities:

 

 

 

 

 

Asset retirement obligations

 

$

689

 

$

(23

)

Preferred dividend

 

88,445

 

 

Payment-in-kind interest

 

14,669

 

362

 

Common stock issued for GeoResources, Inc.

 

321,416

 

 

Common stock issued for the East Texas Assets

 

130,623

 

 

 

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

 

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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.

 

Consolidated Financial Statements

 

The unaudited condensed consolidated financial statements include the accounts of Halcón and its majority-owned subsidiaries. The equity method is used to account for investments in affiliates in which the Company does not have majority ownership, but has the ability to exert significant influence.  The Company’s investments in oil and gas limited partnerships for which it serves as general partner and exerts significant influence are accounted for under the equity method. Intercompany accounts and transactions have been eliminated.

 

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 revenue accruals, oil and natural gas reserves, capital accruals, 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.

 

Goodwill

 

During the third quarter of 2012, the Company recorded $160.9 million of goodwill as a result of the GeoResources, Inc. merger. Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the acquisition of a business. Goodwill is not amortized; rather, it is tested for impairment annually and when events or changes in circumstances indicate that fair value of a reporting unit with goodwill has been reduced below carrying value. The impairment test requires allocating goodwill and other assets and liabilities to reporting units. However, the Company has only one reporting unit. To assess impairment, the Company has the option to qualitatively assess if it is more likely than not that the fair value of the reporting unit is less than the book value. Absent a qualitative assessment, or, through the qualitative assessment, if the Company determines it is more likely than not that the fair value of the reporting unit is less than the book value; a quantitative assessment is prepared to calculate the fair market value of the reporting unit. If it is determined that the fair value of the reporting unit is less than the book value, the recorded goodwill is impaired to its implied fair value with a charge to operating expense.

 

The assumptions the Company will use in calculating our reporting unit fair value at the time of the test include our market capitalization and discounted future cash flows based on estimated reserves and production, future costs and future oil and natural gas

 

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prices. Material adverse changes to any of these factors could lead to an impairment of all or a portion of our goodwill in future periods.

 

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 became 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 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 “February 2012 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 February 2012 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;

 

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·                         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.

 

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 subsequent six month period ended September 30, 2012, the Company increased the restructuring liability by an additional $1.7 million to reflect the accrual of expense over the requisite period and decreased the liability by $0.3 million for actual expenditures, resulting in a liability of $1.5 million at September 30, 2012.

 

4. ACQUISITIONS

 

GeoResources, Inc.

 

On August 1, 2012, the Company completed an acquisition of GeoResources, Inc. (“GeoResources” or “GEOI”) by means of the merger of a wholly-owned subsidiary of the Company with and into GeoResources (the “Merger”). In connection with the Merger, each share of GeoResources common stock issued and outstanding immediately prior to the effective time of the Merger was converted into the right to receive $20.00 in cash and 1.932 shares of the Company’s common stock. All outstanding options to purchase GeoResources common stock were exercised immediately prior to the effective time of the Merger on a net cashless basis. All outstanding GeoResources restricted stock units vested and were settled in shares of GeoResources common stock immediately prior to the effective time of the Merger. All outstanding warrants to purchase GeoResources common stock were assumed by the Company and converted into warrants (the “August 2012 Warrants”) to acquire equivalent Merger consideration.

 

In connection with the consummation of the Merger, the Company issued a total of approximately 51.3 million shares of its common stock and paid approximately $531.5 million in cash to former GeoResources stockholders in exchange for their shares of GeoResources common stock. The acquisition expanded the Company’s presence in the Bakken/Three Forks trends of North Dakota and Eastern Montana as well as adding properties in Texas, Oklahoma, and Louisiana, adding oil and natural gas reserves and production to its existing asset base in these areas.

 

The acquisition was accounted for as a business combination in accordance with Accounting Standards Codification (“ASC”) No. 805 “Business Combinations” (“ASC 805”) which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values.

 

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The purchase price allocation presented below is preliminary and includes the use of estimates. This preliminary allocation is based on information that was available to management at the time these unaudited condensed consolidated financial statements were prepared. The Company believes the estimates used are reasonable and the significant effects of the Merger are properly reflected. However, the estimates are subject to change as additional information becomes available and is assessed by the Company. Changes to the purchase price allocation may result in a corresponding change to the goodwill in the period of change. The following table summarizes the consideration paid to acquire GeoResources and the estimated values of assets acquired and liabilities assumed in the accompanying unaudited condensed consolidated balance sheets as of August 1, 2012 (in thousands, except stock price):

 

Purchase price (i)

 

 

 

Shares of Halcón common stock issued to GeoResources’ stockholders

 

50,378

 

Shares of Halcón common stock issued to GeoResources’ stock option holders

 

966

 

Total Halcón common stock issued

 

51,344

 

Halcón common stock price

 

$

6.26

 

Fair value of common stock issued

 

$

321,416

 

Cash consideration paid to GeoResources’ stockholders (ii)

 

521,526

 

Cash consideration paid to GeoResources’ stock option holders (ii)

 

9,996

 

Fair value of warrants assumed by Halcón (v)

 

1,474

 

Total purchase price

 

$

854,412

 

 

 

 

 

Estimated fair value of liabilities assumed:

 

 

 

Current liabilities

 

$

112,641

 

Deferred tax liability (iii)

 

238,882

 

Asset retirement obligations

 

9,320

 

Other non-current liabilities

 

80,024

 

Amount attributable to liabilities assumed

 

$

440,867

 

 

 

 

 

Total purchase price plus liabilities assumed

 

$

1,295,279

 

 

 

 

 

Estimated fair value of assets acquired:

 

 

 

Current assets

 

$

122,528

 

Evaluated oil and natural gas properties (iv)(vi)

 

542,820

 

Unevaluated oil and natural gas properties (vi)

 

455,000

 

Net other operating property and equipment

 

1,179

 

Equity in oil and gas partnerships

 

11,189

 

Other non-current assets

 

1,645

 

Amount attributable to assets acquired

 

$

1,134,361

 

 

 

 

 

Goodwill

 

$

160,918

 

 


(i)                                    Under the terms of the merger agreement, consideration paid by Halcón consisted of $20.00 in cash plus 1.932 shares of Halcón common stock for each share of GeoResources common stock. The total purchase price was based upon the price of Halcón common stock on the closing date of the transaction, August 1, 2012, and approximately 26.6 million shares of GeoResources common stock outstanding at the effective time of the Merger. The Company issued a total of 51.3 million shares of its common stock and paid $531.5 million in cash to former GeoResources stockholders in exchange for their shares of GEOI common stock.

 

(ii)                                Components of cash flow for GeoResources Merger (in thousands):

 

Total cash consideration for Merger and stock options (1)

 

$

531,522

 

Retirement of GeoResources’ long-term debt (2)

 

80,328

 

Cash acquired on date of Merger

 

(32,353

)

Total cash outflows, net

 

$

579,497

 

 

(1)         The majority of the cash consideration was funded by the net proceeds from the 9.75% senior notes.

(2)         Includes accrued interest and fees.

 

(iii)                            Halcón received carryover tax basis in GeoResources’ assets and liabilities because the Merger was not a taxable transaction under

 

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the United States Internal Revenue Code of 1986, as amended (“the Code”). Based upon the purchase price allocation, a step-up in financial reporting carrying value related to the property acquired from GeoResources resulted in a Halcón deferred tax liability of approximately $238.9 million, an increase of approximately $177.5 million to GeoResources’ existing $61.4 million deferred tax liability.

 

(iv)                              Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties was $5.40 per Mcf of natural gas, $55.11 per barrel of oil equivalent for NGLs and $95.22 per barrel of oil, after adjustment for transportation fees and regional price differentials.

 

(v)                                  The $1.5 million fair value of the assumed warrants was calculated using a Black-Scholes valuation model with assumptions for the following variables: price of Halcón stock on the closing date of the merger; risk-free interest rates; and expected volatility. The assumed warrants have been classified as liabilities as the warrant holders can receive cash. The assumed warrants are classified as current liabilities under the assumption that all assumed warrants will be held to maturity date that is within 12 months from September 30, 2012.

 

(vi)                              The market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount for future development and operating costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates used by the Company to estimate the fair value of the oil and natural gas properties represent Level 3 inputs. For additional information on Level 3 inputs, see Note 8 “Fair Value Measurements”.

 

East Texas Assets

 

Between August 1, 2012 and August 3, 2012, the Company completed the acquisition of a total of 20,628 net acres of oil and gas leaseholds in East Texas (the “East Texas Assets”) from CH4 Energy II, LLC, PetroMax Leon, LLC, Petro Texas LLC, King King LLC and several other selling parties for total consideration of $432.2 million comprised of $301.6 million in cash and 20.8 million shares of the Company’s common stock (“East Texas Acquisition”).  The East Texas Acquisition expanded the Company’s presence in East Texas, adding oil and natural gas reserves and production to its existing asset base in this area.  On August 27, 2012 the Company filed a registration statement with the SEC that registers under the Securities Act the resale of the shares of common stock issued as consideration in the East Texas Acquisition. In accordance with the purchase agreement, the effective date of the acquisition was April 1, 2012 and therefore revenues, expenses and related capital expenditures from April 1, 2012 through the closing of the East Texas Acquisition have been reflected as part of the purchase accounting and subsequent to closing of the transaction have resulted in an additional reduction of $5.4 million to the purchase price.

 

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The East Texas Acquisition was accounted for as a business combination in accordance with ASC 805 which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values. No goodwill was recorded in connection with the acquisition. The purchase price allocation is preliminary and subject to adjustment as additional information becomes available and is assessed by the Company. The following table summarizes the consideration paid to acquire the properties and the amounts of the assets acquired and liabilities assumed as of the acquisition date (in thousands, except stock prices):

 

Purchase price (i):

 

 

 

Shares of Halcón common stock issued on 08/01/12

 

16,460

 

Shares of Halcón common stock issued on 08/02/12

 

4,310

 

Total Halcón common stock issued

 

20,770

 

Halcón common stock price on 08/01/12

 

$

6.26

 

Halcón common stock price on 08/02/12

 

$

6.40

 

Fair value of Halcón common stock issued

 

$

130,623

 

Cash consideration paid to sellers of East Texas Assets (iii)

 

301,569

 

Total purchase price (iii)

 

$

432,192

 

 

 

 

 

Estimated fair value of liabilities assumed:

 

 

 

Asset retirement obligations

 

$

337

 

Amount attributable to liabilities assumed

 

$

337

 

 

 

 

 

Total purchase price plus liabilities assumed

 

$

432,529

 

 

 

 

 

Estimated fair value of assets acquired (iv):

 

 

 

Evaluated oil and natural gas properties (ii)

 

$

334,080

 

Unevaluated oil and natural gas properties

 

98,449

 

Amount attributable to assets acquired

 

$

432,529

 

 

 

 

 

Goodwill

 

$

 

 


(i)                                    Based on the terms of the purchase and sale agreements relating to the East Texas Assets, consideration paid by Halcón at closing consisted of $301.6 million in cash plus 20.8 million shares of Halcón common stock. The total purchase price is based upon the price on August 1, 2012 of $6.26 per share of Halcón’s common stock for CH4 Energy, Petro Texas and Petromax Leon (Initial Sellers) and price on August 2, 2012 of $6.40 per share of Halcón’s common stock for King King USA.

 

(ii)                                Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $5.10 per Mcf of natural gas, $49.72 per barrel of oil equivalent for NGLs and $96.56 per barrel of oil, after adjustment for transportation fees and regional price differentials.

 

(iii)                            Subsequent to the acquisition date the Company recorded $5.4 million in post-closing adjustments reducing the total purchase price and cash consideration paid to $426,762 and $296,139, respectively at September 30, 2012.

 

(iv)                              The market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount for future development and operating costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates used by the Company to estimate the fair value of the oil and natural gas properties represent Level 3 inputs. For additional information on Level 3 inputs, see Note 8 “Fair Value Measurements”.

 

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The following unaudited pro forma combined results of operations are provided for the nine-month periods ended September 30, 2012 and September 30, 2011 as though the GeoResources and East Texas Assets acquisitions had been completed as of the beginning of the earliest period presented, or January 1, 2011. The pro forma combined results of operations for the nine-month periods ended September 30, 2012 and 2011 have been prepared by adjusting the historical results of the Company to include the historical results of GeoResources and East Texas Assets.  These supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future.  The pro forma results of operations do not include any cost savings or other synergies that resulted, or may result, from the GeoResources and East Texas Assets acquisitions or any estimated costs that will be incurred to integrate GeoResources and the East Texas Assets.  Future results may vary significantly from the results reflected in this pro forma financial information because of future events and transactions, as well as other factors.

 

 

 

Nine months ended
September 30,
(in thousands, except per
share amounts)

 

 

 

2012

 

2011

 

Revenue

 

$

291,272

 

$

184,511

 

Net loss

 

$

(13,375

)

$

(3,873

)

Loss available to Halcón common stockholders

 

$

(101,820

)

$

(3,786

)

Pro forma net loss per common share

 

 

 

 

 

Basic

 

$

(0.54

)

$

(0.03

)

Diluted

 

$

(0.54

)

$

(0.03

)

 

For the three and nine month periods ended September 30, 2012, the Company recognized $33.9 million of oil, natural gas and natural gas liquids sales and $25.9 million of net field operating income (oil, natural gas and natural gas liquids sales less lease operating expenses, workover expenses and production taxes) related to properties acquired in the GeoResources Merger. Additionally, non-recurring transaction costs of $16.1 million and $19.4 million related to the GeoResources Merger for the three and nine month periods ended September 30, 2012, respectively, are included in the consolidated statement of operations as general and administrative expenses; these non-recurring transaction costs have been excluded from the pro forma results in the above table.

 

For the three and nine month periods September 30, 2012, the Company recognized $15.1 million of oil, natural gas and natural gas liquids sales related to properties acquired in the East Texas Acquisition and $13.0 million of net field operating income (oil, natural gas and natural gas liquids sales less lease operating expenses, workover expenses and production taxes expenses) related to properties acquired in the East Texas Acquisition. Additionally, non-recurring transaction costs of $0.7 million and $1.1 million related to the East Texas Acquisition for the three and nine month periods ended September 30, 2012, respectively, are included in the consolidated statement of operations as general and administrative expenses; these non-recurring transaction costs have been excluded from the pro forma results in the above table.

 

The acquisitions of GeoResources and the East Texas Assets were partially financed with the net proceeds from the issuance of $750.0 million of 9.75% senior unsecured notes and cash on hand.

 

Unevaluated Properties

 

On June 28, 2012, the Company completed the acquisition of acreage in Eastern Ohio, believed to be 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, GeoResources, and East Texas Asset acquisitions, during 2012 the Company incurred approximately $403.2 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 were attributable to the acquired unevaluated leasehold assets which were primarily located in Texas, Louisiana, Ohio and Pennsylvania.

 

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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 properties 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 nine months ended September 30, 2012, the Company capitalized interest costs of $19.4 million and $22.8 million, respectively. During the three and nine month periods ended September 30, 2011 the Company did not capitalize any interest costs.

 

At September 30, 2012 the ceiling test value of the Company’s reserves was calculated based on the first day average of the 12-months ended September 30, 2012 of the West Texas Intermediate (“WTI”) spot price of $94.97 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 September 30, 2012 of the Henry Hub price of $2.83 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 September 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 September 30, 2011 the ceiling test value of the Company’s reserves was calculated based on the first day average of the 12-months ended September 30, 2011 of the WTI posted price of $94.50 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 September 30, 2011 of the Henry Hub price of $4.16 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 September 30, 2011, did not exceed the ceiling amount.

 

6. LONG-TERM DEBT

 

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

 

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

8% Note (1)

 

$

249,979

 

$

 

9.75% Senior Notes (2)

 

740,021

 

 

Revolving credit facility

 

185,000

 

127,000

 

Term loan facility

 

 

75,000

 

 

 

$

1,175,000

 

$

202,000

 

 


(1)         Amount is net of a $39.7 million unamortized discount at September 30, 2012. See “8% Note” below for more details.

(2)         Amount is net of a $10.0 million unamortized discount at September 30, 2012. See “9.75% Senior Notes” below for more details.

 

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8% Note

 

On February 8, 2012, the Company issued the 8% Note in the principal amount of $275.0 million together with the February 2012 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 pay-in-kind, by adding to the principal of the 8% Note, all or any portion of the interest due on the 8% Note. At September 30, 2012, June 30, 2012 and March 31, 2012, the Company elected to pay in-kind $5.8 million, $5.7 and $3.2 million, respectively, of interest incurred during the first nine months of 2012. 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.

 

The Company allocated the proceeds received for the 8% Note and February 2012 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 $39.7 million at September 30, 2012.

 

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 were approximately $723.1 million after deducting the initial purchasers’ discounts, commissions and offering expenses and were used to fund a portion of the cash consideration paid in the GeoResources Merger and the East Texas Assets acquisition.

 

In connection with the issuance of the 9.75% Notes, the Company recorded a discount of approximately $10.2 million to be amortized over the remaining life of the 9.75% Notes using the effective interest method.  The remaining unamortized discount was $10.0 million at September 30, 2012.

 

Credit Facility

 

February 2012 Credit Facility Amendment — The Company’s borrowing base under the February 2012 credit facility was redetermined upon the completion of the GeoResources Merger and East Texas Assets acquisition. On August 1, 2012, 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 limitations on the Company’s commodity hedging program to allow the Company to hedge up to 85% of its projected proved production forecast for 66 months following the date a commodity hedging agreement is executed. See Note 16 “Subsequent Events” for additional discussion regarding enhancements to the Credit Facility related to the pending acquisition of the Williston Basin Assets.

 

February 2012 Credit Facility — On February 8, 2012, the Company entered into the February 2012 Credit Facility 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 replaced 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 85% of its projected proved production forecast. At September 30, 2012, the Company is in compliance with the financial debt covenants under this agreement. At September 30, 2012, the Company had $185.0 million indebtedness outstanding, $1.3 million of letters of credit outstanding and $338.7 million of borrowing capacity available under the revolving credit agreement.

 

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

 

18



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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 2012, the Company capitalized approximately $3.3 million, $4.4 million, and $16.8 million in costs associated with the issuance of the 8% Note, February 2012 credit facility and 9.75% Notes, 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 September 30, 2012 and December 31, 2011, the Company had approximately $23.5 million and $6.0 million, respectively, of unamortized debt issuance costs.

 

7. INCOME TAXES

 

Under guidance contained in Topic 740 of 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 nine months ended September 30, 2012 and 2011, the Company analyzed and made no adjustment to the valuation allowance.

 

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 nine months ended September 30 are as follow:

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Income tax at the federal statutory rate

 

34.0

%

34.0

%

 

 

 

 

 

 

State income tax, net of federal tax

 

1.4

 

6.7

 

Non-deductible dues and entertainment

 

(0.5

)

0.5

 

Non-deductible interest and expense on 8% Note

 

(12.5

)

 

(Reduction) increase in deferred tax asset

 

(2.0

)

9.8

 

Share-based compensation

 

(1.3

)

 

Non-deductible compensation

 

 

0.1

 

Non-deductible basis in other operating property and equipment

 

(0.7

)

 

Non-deductible stock warrants

 

(0.9

)

 

Non-deductible Merger costs

 

(20.1

)

 

 

 

(2.6

)%

51.1

%

 

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The Company has calculated an estimated effective annual tax rate for the current annual reporting period, excluding any discrete items, of a negative 0.6% as of September 30, 2012. Additionally, the Company recorded a discrete item of $0.9 million relating to a $1.0 million benefit for return to provision and a $1.9 million expense for a 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” of the Company in February 2012 and as a result the net operating losses of the Company may be subject to additional limitations. The discrete items decrease the effective tax rate to a negative tax rate of 2.6%.  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 and non-deductible Merger costs associated with the acquisition of GeoResources. Based on the estimated effective annual tax rate, the Company has recorded a tax provision of $0.3 million plus $0.9 million of discrete items for a total income tax expense of $1.2 million on a pre-tax loss of $44.7 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2011, the Company recorded income tax expense of $11.3 million on a pre-tax income of $22.1 million, resulting in an effective tax rate of 51.1%.

 

For the nine months ended September 30, 2012 the Company has net operating losses of $58.1 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, 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.

 

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 September 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 nine months ended September 30, 2012 and for the year ended December 31, 2011.

 

 

 

September 30, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Receivables from derivative contracts

 

$

 

$

5,347

 

$

 

$

5,347

 

Liabilities:

 

 

 

 

 

 

 

 

 

Liabilities from derivative contracts

 

$

 

$

1,908

 

$

 

$

1,908

 

Liabilities from warrants

 

 

2,002

 

 

2,002

 

Total Liabilities

 

$

 

$

3,910

 

$

 

$

3,910

 

 

 

 

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.

 

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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. See Note 11 for addition discussion of derivatives.

 

As of September 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 counterparties to the Company’s current derivative contracts are lenders 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 senior revolving credit agreement.

 

Warrants listed above are carried at fair value. The Company records the net change in fair value on the August 2012 Warrants in Other Expense which is included in “Interest Expense and other, net” in the Company’s unaudited condensed consolidated statements of operations. During the three and nine months ended September 30, 2012 an unrealized loss of $0.5 million was recorded to reflect the change in fair value.  The Company valued the August 2012 Warrants based on observable market data, including treasury rates, historical volatility and data for similar instruments which resulted in the Company reporting its warrants as Level 2.  See Note 12 “August 2012 Warrants” for additional discussion on the terms of the warrants.

 

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 September 30, 2012, is $639.6 million and exceeded the carrying value of $250.0 million by $389.6 million. The estimated fair value of the Company’s fixed interest rate 9.75% Notes as of September 30, 2012, is $760.4 million and exceeded the carrying value of $740.0 million by $20.4 million.  The fair value of the 8% Note and the 9.75% Notes at September 30, 2012 was calculated using Level 2 and Level 3 criteria, respectively. The fair value of the 9.75% Notes was calculated using a Black-Derman-Toy model consistent with the issuance price of the 9.75% Notes.  The significant unobservable input used in the Company’s Level 3 fair value measurement at September 30, 2012 is included in the table below:

 

 

 

 

 

Basis Point

 

Fair Value

 

Liability

 

Unobservable Input

 

Spread

 

(in millions)

 

9.75% Notes

 

Estimated implied option adjusted spread over risk-free rate curve

 

834

 

$

760.4

(1)

 


(1)         A 10% increase in the basis point spread to 917 would decrease the fair value of the 9.75% Notes to $729.2 million and a 10% decrease in the basis point spread to 750 would increase the fair value of the 9.75% Notes to $792.4 million.

 

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Table of Contents

 

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.

 

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

 

Liability for asset retirement obligations as of December 31, 2011

 

$

33,713

 

Liabilities settled

 

(534

)

Additions (1)

 

10,016

 

Accretion expense

 

1,424

 

Liability for asset retirement obligations as of September 30, 2012

 

44,619

 

Less: current asset retirement obligations

 

1,968

 

Long-term asset retirement obligations

 

$

42,651

 

 


(1)         Includes additions of $9.3 million and $0.3 million related to the GeoResources and the East Texas Assets acquisitions, respectively. Please see Note 4, “Acquisitions” for additional information.

 

10. COMMITMENTS AND CONTINGENCIES

 

Commitments

 

The Company leases corporate office space in Houston and Plano, Texas; Tulsa, Oklahoma; Denver, Colorado; and Williston, North Dakota 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 $2.2 million and $1.0 million for the nine months ended September 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 September 30, 2012 are as follows (in thousands):

 

2012

 

$

1,567

 

2013

 

6,226

 

2014

 

5,306

 

2015

 

5,160

 

2016 and thereafter

 

23,196

 

 

 

$

41,455

 

 

The Company is also obligated under contracts for drilling rigs and related equipment for its drilling operations as followings (in thousands):

 

2012

 

$

22,061

 

2013

 

20,858

 

2014

 

10,038

 

2015

 

4,978

 

2016 and thereafter

 

 

 

 

$

57,935

 

 

As of September 30, 2012, early termination of the drilling rigs and related equipment contracts would require termination penalties of $38.5 million, which would be in lieu of paying the remaining drilling commitments of $57.9 million.

 

22


 


Table of Contents

 

The Company also has non-cancelable purchase commitments for pipe, storage tanks and production equipment in the amount of $5.9 million.

 

The Company has committed to one long-term natural gas sales contract in its Williams County North Dakota project area in the Bakken trend. Under the terms of this contract the Company has committed substantially all of the natural gas production for the life of its leases to one purchaser. In return for the life of lease commitment, the purchaser has committed to building a gas gathering system across the Company’s project area. The sales price under this contract is based on a posted market rate.

 

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 counterparties to the Company’s current derivative contracts are lenders 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.

 

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Table of Contents

 

The Company’s crude oil and natural gas derivative positions at September 30, 2012 consist of swaps, put/call “collars” and sold put options. Swaps are designed so that the Company receives or makes payments based on a differential between fixed and variable prices for crude oil and natural gas. 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 September 30, 2012 and December 31, 2011 (in thousands):

 

Derivatives
not
designated

 

 

 

Asset derivative contracts

 

Liability derivative contracts

 

Netted derivative contracts

 

as hedging
contracts

 

Balance sheet
location

 

Sept. 30,
2012

 

Dec. 31,
 2011

 

Sept. 30,
2012

 

Dec. 31,
 2011

 

Sept. 30,
2012

 

Dec. 31,
 2011

 

Commodity contracts

 

Current assets - receivables from derivative contracts

 

$

5,050

 

$

1,850

 

$

(726

)

$

(1,590

)

$

4,324

 

$

260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Other noncurrent assets - receivables from derivative contracts

 

1,047

 

 

(24

)

 

1,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Current liabilities - liabilities from derivative contracts

 

1,960

 

 

(3,614

)

 

(1,654

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Other noncurrent liabilities - liabilities from derivative contracts

 

863

 

2,050

 

(1,117

)

(2,602

)

(254

)

(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

 

$

8,920

 

$

3,900

 

$

(5,481

)

$

(4,710

)

$

3,439

 

$

(810

)

 

24



Table of Contents

 

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
September 30,

 

Nine months ended
September 30,

 

Derivatives not designated as hedging contracts

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on commodity contracts

 

$

(11,817

)

$

22,744

 

$

(4,641

)

$

18,519

 

Realized gain (loss) on commodity contracts

 

2,242

 

76

 

3,850

 

(1,186

)

Unrealized gain (loss) on interest rate swaps

 

 

(138

)

518

 

(556

)

Realized loss on interest rate swaps

 

 

(65

)

(576

)

(142

)

Total net gain (loss) on derivative contracts

 

$

(9,575

)

$

22,617

 

$

(849

)

$

16,635

 

 

At September 30, 2012, the Company had the following open derivatives contracts:

 

 

 

 

 

 

 

September 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

 

October 2012 - December 2012

 

3 Way-collars

 

Crude oil

 

103,500

 

$90.00 - $95.00

 

$

92.78

 

$101.70 - $107.00

 

$

104.13

 

$

70.00

 

$

70.00

 

October 2012 - December 2012

 

Collars

 

Crude oil

 

409,500

 

85.00 - 95.00

 

89.49

 

98.00 - 110.00

 

100.91

 

 

 

 

 

October 2012 - December 2012

 

Fixed Swap

 

Crude oil

 

165,000

 

 

 

 

 

86.85 - 108.45

 

98.62

 

 

 

 

 

October 2012 - December 2012

 

Fixed Swap

 

Natural gas

 

435,000

 

 

 

 

 

2.925 - 6.415

 

5.12

 

 

 

 

 

October 2012 - December 2012

 

Basis Swap

 

Natural gas

 

375,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

2,267,125

 

80.00 - 95.00

 

87.35

 

92.70 - 101.50

 

96.59

 

 

 

 

 

January 2013 - December 2013

 

Fixed Swap

 

Crude oil

 

360,000

 

 

 

 

 

97.60 - 105.55

 

102.18

 

 

 

 

 

January 2013 - December 2013

 

Fixed Swap

 

Natural gas

 

465,000

 

 

 

 

 

3.56 - 4.85

 

4.18

 

 

 

 

 

January 2013 - March 2013

 

Basis Swap

 

Natural gas

 

225,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

25



Table of Contents

 

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

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

Floors

 

Ceilings

 

Put Options Sold

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted