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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-38602
Chaparral Energy, Inc.
(Exact name of registrant as specified in its charter)
Delaware 73-1590941
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
   
701 Cedar Lake Boulevard
Oklahoma City, Oklahoma
 73114
(Address of principal executive offices) (Zip Code)
(405) 478-8770
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of classTrading Symbol(s)Name of each exchange on which registered
Class A common stock, par value, $0.01 per shareCHAPThe New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  Yes      No  
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
                   Yes      No  ☐
Number of shares outstanding of each of the issuer’s classes of common stock as of August 17, 2020: 47,790,146 shares of Class A Common Stock, par value $0.01 per share.





CHAPARRAL ENERGY, INC.
Index to Form 10-Q
 
 Page
 





CAUTIONARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This report includes statements that constitute forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties. These statements may relate to, but are not limited to, information or assumptions about us, our capital and other expenditures, dividends, financing plans, capital structure, cash flow, pending legal and regulatory proceedings and claims, including environmental matters, future economic performance, operating income, cost savings, and management’s plans, strategies, goals and objectives for future operations and growth. These forward-looking statements generally are accompanied by words such as “intend,” “anticipate,” “believe,” “estimate,” “expect,” “should,” “seek,” “project,” “plan” or similar expressions. Any statement that is not a historical fact is a forward-looking statement. It should be understood that these forward-looking statements are necessarily estimates reflecting the best judgment of senior management, not guarantees of future performance. They are subject to a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements in this report may include, for example, statements about:
the Chapter 11 Cases;
the effects of the Chapter 11 Cases on our liquidity or results of operations or business prospects;
the expected terms of a proposed plan of reorganization;
our ability to confirm and consummate a Chapter 11 plan of reorganization;
our ability to continue to operate in the ordinary course while the Chapter 11 Cases are pending;
the treatment of our creditors and other stakeholders (including, without limitation, holders of our common stock) under a plan of reorganization;
the potential impact of any epidemics or pandemics, including COVID-19;
fluctuations in demand or the prices received for oil and natural gas;
the amount, nature and timing of capital expenditures;
drilling, completion and performance of wells;
inventory of drillable locations;
competition;
government regulations;
timing and amount of future production of oil and natural gas;
costs of exploiting and developing properties and conducting other operations, in the aggregate and on a per-unit equivalent basis;
changes in proved reserves;
operating costs and other expenses;
our future financial condition, results of operations, revenue, cash flows and expenses;
estimates of proved reserves;
exploitation of property acquisitions;
takeaway constraints and storage capacity for oil and natural gas; and
marketing of oil and natural gas.
These forward-looking statements represent intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In addition to the risk factors described in Part II, Item 1A. Risk Factors, of this report and Part I, Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2019, the risks and uncertainties include or relate to:
risks and uncertainties regarding the Company’s ability to complete a reorganization process under Chapter 11 of the Bankruptcy Code, including consummation of the restructuring in accordance with the terms of our restructuring support agreement;
the Company’s ability to obtain timely approval by the Bankruptcy Court regarding the motions filed in the Chapter 11 Cases;
the time that the Company will operate under Chapter 11 protection and the continued availability of operating capital during the pendency of the Chapter 11 Cases;
the effects of the Chapter 11 Cases on our liquidity or results of operations or business prospects;
the effects of the Chapter 11 Cases on our business and the interests of various constituents, including our stockholders;
employee attrition and the Company’s ability to retain senior management and other key personnel due to the distractions and uncertainties, including the Company’s ability to provide adequate compensation and benefits during the Chapter 11 Cases;
3



the Company’s ability to maintain relationships with suppliers, customers, employees and other third parties and regulatory authorities because of the Chapter 11 filing;
the effects of the Chapter 11 Cases on the market price of the Company’s common stock and on the Company’s ability to access the capital markets;
risks associated with third party motions in the Chapter 11 Cases, which may interfere with the Company’s ability to consummate the restructuring or an alternative restructuring;
increased administrative and legal costs related to the Chapter 11 process;
potential delays in the Chapter 11 process due to the effects of COVID-19;
other litigation and inherent risks involved in a bankruptcy process;
future capital expenditures (or funding thereof) and working capital;
worldwide supply of and demand for oil and natural gas, including to the extent affected by the COVID-19 pandemic and the recovery therefrom;
volatility and declines in oil and natural gas prices, including to the extent affected by the COVID-19 pandemic and the recovery therefrom;
geopolitical events affecting oil and natural gas prices;
the impact of COVID-19 on the health of our key personnel;
risks related to the geographic concentration of our assets;
our ability to develop, explore for, acquire and replace oil and natural gas reserves and sustain production;
drilling plans (including scheduled and budgeted wells);
the extent to which we are able to continue to reduce lease operating expense and G&A costs;
geologic and reservoir complexity and variability;
uncertainties in estimating our oil and gas reserves and the present values of those reserves;
the number, timing or results of any wells;
changes in wells operated and in reserve estimates;
activities on properties we do not operate;
availability and cost of drilling and production equipment, facilities, field service providers, gathering, processing and transportation;
takeaway constraints and storage capacity for oil and natural gas;
competition in the oil and natural gas industry;
outcome, effects or timing of legal proceedings (including environmental litigation);
weather, including its impact on oil and natural gas demand and weather-related delays on operations;
the impact of natural disasters on our present and future operations;
the operating hazards attendant to the oil and natural gas business;
effectiveness and extent of our risk management activities;
effectiveness of orders from the Oklahoma Corporation Commission and other regulatory bodies in mitigating the risk of lease cancellation actions associated with the voluntary shut-in of production;
current borrowings, capital resources and liquidity;
covenant compliance under instruments governing any of our existing or future indebtedness, including our ability to comply with financial covenants under our Credit Agreement;
the effects of government regulation and permitting and other legal requirements;
the impact of legislative, tax and regulatory initiatives, including in response to the COVID-19 pandemic;
volatility in the price of our common stock;
integration of existing and new technologies into operations;
future exploration;
changes in strategy and business discipline; and
the ability to successfully complete merger, acquisition or divestiture plans, regulatory or other limitations imposed as a result of a merger, acquisition or divestiture, and the success of the business following a merger, acquisition or divestiture.
Reserve engineering is a process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions may change the schedule of any future production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil and natural gas that are ultimately recovered.
Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements contained herein. We undertake no obligation to
4



update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. All forward-looking statements included herein are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

5



GLOSSARY OF CERTAIN DEFINED TERMS
The terms defined in this section are used throughout this Form 10-Q:
Bankruptcy CodeTitle 11 of the United States Code.
Bankruptcy CourtUnited States Bankruptcy Court for the District of Delaware.
BblOne stock tank barrel of 42 U.S. gallons liquid volume used herein in reference to crude oil, condensate, or natural gas liquids.
  
BBtuOne billion British thermal units.
  
BoeOne barrel of crude oil equivalent, determined using the ratio of six thousand cubic feet of natural gas to one barrel of oil.
  
Boe/dBarrels of oil equivalent per day.
  
BtuBritish thermal unit, which is the heat required to raise the temperature of one-pound of water from 58.5 to 59.5 degrees Fahrenheit.
Chapter 11 Cases
Voluntary petitions seeking relief under the Bankruptcy Code in the Bankruptcy Court for relief under Chapter 11 of the Bankruptcy Code filed on August 16, 2020, 2020, by Chaparral Energy, Inc. and its subsidiaries, including Chaparral Resources, L.L.C., Chaparral Real Estate, L.L.C., Chaparral CO2, L.L.C., CEI Pipeline, L.L.C., Chaparral Energy, L.L.C., CEI Acquisition, L.L.C., Green Country Supply, Inc., Chaparral Biofuels, L.L.C., Chaparral Exploration, L.L.C., Roadrunner Drilling, L.L.C., Trabajo Energy, L.L.C., Charles Energy, L.L.C. and Chestnut Energy, L.L.C.
CompletionThe process of treating a drilled well followed by the installation of permanent equipment for the production of oil or natural gas, or in the case of a dry well, the reporting to the appropriate authority that the well has been abandoned.
CO2
Carbon dioxide.
COVID-19An infectious disease caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). It was first identified in late 2019 and has since spread globally, resulting in a sustained pandemic.
Credit AgreementTenth Restated Credit Agreement, as amended, by and among Chaparral Energy, Inc., Royal Bank of Canada as Administrative Agent and the Lenders thereto.
  
Dry well or dry holeAn exploratory, development or extension well that proves to be incapable of producing either oil or natural gas in sufficient quantities to justify completion as an oil or natural gas well.
  
  
Enhanced oil recovery (EOR)
The use of any improved recovery method, including injection of CO2 or polymer, to remove additional oil after Secondary Recovery.
  
FieldAn area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.
Limited Forbearance Agreement
Forbearance Agreement dated as of July 15, 2020, by and among Chaparral Energy, Inc., the subsidiary guarantors party thereto, certain Lenders identified therein, and Royal Bank of Canada, as Administrative Agent and Issuing Bank.
MBblsOne thousand barrels of crude oil, condensate, or natural gas liquids.
  
MBoeOne thousand barrels of crude oil equivalent.
  
McfOne thousand cubic feet of natural gas.
  
MMBtuOne million British thermal units.
  
MMcfOne million cubic feet of natural gas.
  
6




Natural gas liquids (NGLs)Those hydrocarbons in natural gas that are separated from the gas as liquids through the process of absorption, condensation, or other methods in gas processing or cycling plants. Natural gas liquids primarily include propane, butane, isobutane, pentane, hexane and natural gasoline.
NYSEThe New York Stock Exchange.
Plan of ReorganizationPlan of Reorganization contemplated by the RSA.
PlayA term describing an area of land following the identification by geologists and geophysicists of reservoirs with potential oil and natural gas reserves.
  
Prior Chapter 11 Cases
Voluntary petitions seeking relief under the Bankruptcy Code in the Bankruptcy Court for relief under Chapter 11 of the Bankruptcy Code filed on May 9, 2016, by Chaparral Energy, Inc. and its subsidiaries including Chaparral Energy, L.L.C., Chaparral Resources, L.L.C., Chaparral Real Estate, L.L.C., Chaparral CO2 , L.L.C., CEI Pipeline, L.L.C., CEI Acquisition, L.L.C., Green Country Supply, Inc., Chaparral Biofuels, L.L.C., Chaparral Exploration, L.L.C., Roadrunner Drilling, L.L.C.
Prior Effective DateMarch 21, 2017, the date of the Company’s emergence from the Prior Chapter 11 Cases.
Prior Reorganization PlanFirst Amended Joint Plan of Reorganization under the Prior Chapter 11 Cases, dated as of January 25, 2017.
Proved developed reservesReserves that can be expected to be recovered (i) through existing wells with existing equipment and operating methods, or in which the cost of the required equipment is relatively minor compared to the cost of a new well and (ii) through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.
  
Proved reservesThe quantities of oil and natural gas which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. For additional information, see the SEC’s definition in Rule 1-10(a)(22) of Regulation S-X, a link for which is available at the SEC’s website.
  
Proved undeveloped reservesReserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.
  
PV-10 valueWhen used with respect to oil and natural gas reserves, PV-10 value means the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, excluding escalations of prices and costs based upon future conditions, before income taxes, and without giving effect to non-property-related expenses, discounted to a present value using an annual discount rate of 10%.
  
RSA
Restructuring Support Agreement, dated as of August 15, 2020, by and among Chaparral Energy, Inc., certain of its subsidiaries and the Consenting Creditors (as defined therein).
  
SECThe Securities and Exchange Commission.
  
Senior NotesOur 8.75% senior notes due 2023.
  
UnitThe joining of all or substantially all interests in a reservoir or field, rather than a single tract, to provide for development and operation without regard to separate property interests. Also, the area covered by a unitization agreement.

7

Chaparral Energy, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited) 

PART I — FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
(dollars in thousands, except share data)June 30, 2020December 31, 2019
Assets  
Current assets:  
Cash and cash equivalents$56,137  $22,595  
Accounts receivable:
Accounts receivable, gross43,197  50,744  
Allowance for credit losses(4,215) (1,097) 
Accounts receivable, net38,982  49,647  
Inventories, net2,456  3,730  
Prepaid expenses4,034  3,471  
Derivative instruments15,197  947  
Total current assets116,806  80,390  
Property and equipment, net7,948  9,217  
Right of use assets from operating leases1,744  2,444  
Oil and natural gas properties, using the full cost method:  
Proved1,569,627  1,276,036  
Unevaluated (excluded from the amortization base)142,295  371,229  
Accumulated depreciation, depletion, amortization and impairment(1,246,703) (754,379) 
Total oil and natural gas properties465,219  892,886  
Held for sale assets111  2,860  
Derivative instruments1,990    
Other assets1,349  635  
Total assets$595,167  $988,432  
Liabilities and stockholders’ equity  
Current liabilities:  
Accounts payable and accrued liabilities$39,272  $64,558  
Accrued payroll and benefits payable5,970  10,963  
Accrued interest payable12,309  12,227  
Revenue distribution payable9,322  22,370  
Long-term debt and financing leases, classified as current521,292  594  
Derivative instruments  11,957  
Total current liabilities588,165  122,669  
Long-term debt and financing leases, less current maturities996  421,392  
Derivative instruments  5,075  
Noncurrent operating lease obligations234  917  
Deferred compensation419  165  
Asset retirement obligations21,412  21,073  
Commitments and contingencies (Note 10)
Stockholders’ equity:  
Preferred stock, 5,000,000 shares authorized, none issued and outstanding
    
Common stock, $0.01 par value, 192,130,071 shares authorized; 48,297,606 issued and 47,790,146 outstanding at June 30, 2020 and 48,413,185 issued and 47,942,230 outstanding at December 31, 2019
483  485  
Additional paid in capital977,957  977,174  
Treasury stock, at cost, 507,460 and 470,955 shares as of June 30, 2020, and December 31, 2019
(6,128) (6,110) 
Accumulated deficit(988,371) (554,408) 
Total stockholders’ equity(16,059) 417,141  
Total liabilities and stockholders’ equity$595,167  $988,432  
 
The accompanying notes are an integral part of these consolidated financial statements.
8



Chaparral Energy, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
Three months endedSix months ended
(in thousands, except share and per share data)June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Revenues:  
Net commodity sales$15,880  $66,707  $64,731  $115,326  
Sublease revenue  1,198    2,396  
Total revenues15,880  67,905  64,731  117,722  
Costs and expenses:  
Lease operating5,971  13,371  16,059  25,665  
Production taxes823  3,802  3,573  6,682  
Depreciation, depletion and amortization14,821  30,282  37,833  53,997  
Impairment of oil and gas assets384,639  63,593  456,010  113,315  
Impairment of other assets310  6,407  463  6,407  
General and administrative9,488  7,315  17,556  15,628  
Liability management 8,047    8,047    
Litigation loss4,359    4,359    
Subleases  403    806  
Total costs and expenses428,458  125,173  543,900  222,500  
Operating loss (412,578) (57,268) (479,169) (104,778) 
Non-operating income (expense):
Interest expense(8,047) (5,571) (14,683) (10,135) 
Write-off of Senior Note issuance costs(4,420)   (4,420)   
Derivative (losses) gains(13,019) 17,734  65,361  (33,282) 
(Loss) gain on sale of assets(261) 491  (159) 490  
Other income (expense), net35  (302) 281  (288) 
Net non-operating income (expense)(25,712) 12,352  46,380  (43,215) 
Reorganization items, net(436) (313) (1,020) (776) 
Loss before income taxes(438,726) (45,229) (433,809) (148,769) 
Income tax expense        
Net loss$(438,726) $(45,229) $(433,809) $(148,769) 
Loss per share:  
Basic $(9.55) $(0.99) $(9.45) $(3.27) 
Diluted $(9.55) $(0.99) $(9.45) $(3.27) 
Weighted average shares used to compute earnings per share:  
Basic 45,949,797  45,641,797  45,890,041  45,549,518  
Diluted 45,949,797  45,641,797  45,890,041  45,549,518  




The accompanying notes are an integral part of these consolidated financial statements.
9



Chaparral Energy, Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)
 
 Common stock    
(dollars in thousands)Shares
outstanding
AmountAdditional
paid in capital
Treasury
stock
Accumulated
deficit
Total
As of December 31, 201846,390,513  $467  $974,616  $(4,936) $(85,460) $884,687  
Stock-based compensation94,078  1  1,423  —  —  1,424  
Restricted stock forfeited(97,113) (1) —  —  —  (1) 
Repurchase of common stock(80,422) —  —  (463) —  (463) 
Net loss—  —  —  —  (103,540) (103,540) 
Balance at March 31, 201946,307,056  $467  $976,039  $(5,399) $(189,000) $782,107  
Stock-based compensation160,400  1  1,249  —  —  1,250  
Repurchase of common stock(126,231) —  —  (708) —  (708) 
Issuance of common stock - litigation settlement76,217  1  323  —  —  324  
Net loss—  —  —  —  (45,229) (45,229) 
Balance at June 30, 201946,417,442  $469  $977,611  $(6,107) $(234,229) $737,744  

 Common stock    
(dollars in thousands)Shares
outstanding
AmountAdditional
paid in capital
Treasury
stock
Accumulated
deficit
Total
As of December 31, 201947,942,230  $485  $977,174  $(6,110) $(554,408) $417,141  
Cumulative effect of accounting standard adoption—  —  —  —  (154) (154) 
Stock-based compensation—  —  705  —  —  705  
Restricted stock forfeited or canceled(22,494) (1) —  —  —  (1) 
Repurchase of common stock(3,856) —  —  (6) —  (6) 
Net income—  —  —  —  4,917  4,917  
Balance at March 31, 202047,915,880  $484  $977,879  $(6,116) $(549,645) $422,602  
Stock-based compensation—  —  78  —  —  78  
Restricted stock forfeited(93,085) (1) —  —  —  (1) 
Repurchase of common stock(32,649) —  —  (12) —  (12) 
Net loss—  —  —  —  (438,726) (438,726) 
Balance at June 30, 202047,790,146  $483  $977,957  $(6,128) $(988,371) $(16,059) 
 

The accompanying notes are an integral part of these consolidated financial statements.
10



Chaparral Energy, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
Six months ended
(in thousands)June 30, 2020June 30, 2019
Cash flows from operating activities  
Net loss$(433,809) $(148,769) 
Adjustments to reconcile net loss to net cash (used in) provided by operating activities 
Depreciation, depletion and amortization37,833  53,997  
Derivative (gains) losses(65,361) 33,282  
Impairment of oil and gas assets456,010  113,315  
Impairment of other assets463  6,407  
Write-off of Senior Note issuance costs4,420    
Loss (gain) on sale of assets159  (490) 
Other4,612  1,621  
Change in assets and liabilities  
Accounts receivable6,206  13,584  
Inventories747  40  
Prepaid expenses and other assets(1,277) 1,055  
Accounts payable and accrued liabilities(7,217) (18,389) 
Revenue distribution payable(13,049) 600  
Deferred compensation844  1,852  
Net cash (used in) provided by operating activities(9,419) 58,105  
Cash flows from investing activities  
Expenditures for property, plant, and equipment and oil and natural gas properties(86,862) (146,434) 
Proceeds from asset dispositions3,370  857  
Proceeds from derivative instruments, net32,089  653  
Net cash used in investing activities(51,403) (144,924) 
Cash flows from financing activities  
Proceeds from long-term debt120,000  85,000  
Repayment of long-term debt(25,313) (343) 
Principal payments under financing lease obligations(212) (1,445) 
Payment of debt issuance costs and other financing fees(93) (20) 
Treasury stock purchased(18) (1,171) 
Net cash provided by financing activities94,364  82,021  
Net increase (decrease) in cash and cash equivalents33,542  (4,798) 
Cash and cash equivalents, at beginning of period22,595  37,446  
Cash and cash equivalents, at end of period$56,137  $32,648  



The accompanying notes are an integral part of these consolidated financial statements.
11

Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)


Note 1: Nature of operations and summary of significant accounting policies and going concern

Nature of operations

Chaparral Energy, Inc. and its subsidiaries (collectively, “we”, “our”, “us”, or the “Company”) are involved in the exploration, development, production, operation and acquisition of oil and natural gas properties. Our properties are located primarily in Oklahoma and our commodity products include crude oil, natural gas and natural gas liquids.

Interim financial statements

The accompanying unaudited consolidated interim financial statements of the Company have been prepared in accordance with the rules and regulations of the SEC and do not include all of the financial information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These financial statements and the notes thereto should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019.

The financial information as of June 30, 2020, and for the three and six months ended June 30, 2020 and 2019, is unaudited. The financial information as of December 31, 2019 has been derived from the audited financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019. In management’s opinion, such information contains all adjustments considered necessary for a fair presentation of the results of the interim periods. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations that will be realized for the year ended December 31, 2020.

Certain reclassifications have been made to prior period financial statements to conform to current period presentation. The reclassifications had no effect on our previously reported results of operations.

Chapter 11 Cases and going concern

On August 16, 2020 (the “Petition Date”), Chaparral Energy, Inc. and its consolidated subsidiaries, including Chaparral Resources, L.L.C., Chaparral Real Estate, L.L.C., Chaparral CO2, L.L.C., CEI Pipeline, L.L.C., Chaparral Energy, L.L.C., CEI Acquisition, L.L.C., Green Country Supply, Inc., Chaparral Biofuels, L.L.C., Chaparral Exploration, L.L.C., Roadrunner Drilling, L.L.C., Trabajo Energy, L.L.C., Charles Energy, L.L.C. and Chestnut Energy, L.L.C. (collectively, the “Debtors”) filed voluntary petitions commencing the Chapter 11 Cases, seeking relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Company has requested court approval for the joint administration of the Chapter 11 Cases under the caption In re Chaparral Energy, Inc. We are currently operating our business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court, in accordance with the applicable provisions of the Bankruptcy Code.

To maintain and continue uninterrupted ordinary course operations during the bankruptcy proceedings, the Debtors filed a variety of “first day” motions seeking approval from the Bankruptcy Court for various forms of customary relief designed to minimize the effect of bankruptcy on the Debtors’ operations, customers and employees. Upon entry by the Bankruptcy Court of the orders approving all requested “first day” relief, we will be able to conduct normal business activities and pay all associated obligations for the period following our bankruptcy filing and (subject to caps applicable to payments of certain pre-petition obligations) pre-petition employee wages and benefits, pre-petition amounts owed to certain lienholders and vendors, royalty interest and working interest holders, and partners. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of our business require the prior approval of the Bankruptcy Court.

The commencement, through the Chapter 11 Cases, of a voluntary proceeding in bankruptcy constituted an immediate event of default under our Credit Agreement and the indenture governing our Senior Notes (the “Indenture”), resulting in the automatic and immediate acceleration of all outstanding amounts under those financing arrangements. Accordingly, we have classified the outstanding balances under our Credit Agreement and Senior Notes as current liabilities on our condensed consolidated balance sheet as of June 30, 2020.

Please see “Note 11: Subsequent events” for a discussion of the restructuring support agreement and the related proposed plan of reorganization.

Ability to continue as a going concern—The accompanying condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The filing of the Chapter 11 Cases constituted an event of default
12

Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)

under the Indenture and the Credit Agreement, resulting in the automatic and immediate acceleration of outstanding balances under those financing arrangements. The Company projects that it will not have sufficient cash on hand or available liquidity to repay all of such debt. These conditions along with the significant risks and uncertainties related to the Company’s liquidity and the Chapter 11 Cases raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. If the Company cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material.

Cash and cash equivalents

We maintain cash and cash equivalents in bank deposit accounts and money market funds which may not be federally insured. As of June 30, 2020, cash with a recorded balance totaling approximately $55,445 was held at JP Morgan Chase Bank, N.A. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on such accounts.

Accounts receivable

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016–13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016–13”), which changes the recognition model for the impairment of financial instruments, including accounts receivable, loans and held-to-maturity debt securities, among others. We adopted ASU 2016–13 using the modified retrospective method effective January 1, 2020. In contrast to previous guidance, which considered current information and events, and only recognized losses when they became probable (an “incurred loss” model), ASU 2016–13 mandates an “expected loss” model. The expected loss model: (i) estimates the risk of loss even when risk is remote, (ii) estimates losses over the contractual life, (iii) considers past events, current conditions and reasonable supported forecasts and (iv) has no recognition threshold. ASU 2016–13 is applicable to our accounts receivable portfolio, particularly those receivables attributable to our joint interest partners which have a higher credit risk than those associated with our traditional customer receivables.

Basis of accounting. Our accounts receivable are carried at gross cost, representing amounts due, less an allowance for expected credit losses. We write off accounts receivable when they are determined to be uncollectible. When we recover amounts that were previously written off, those amounts are offset against the allowance and reduce expense in the year of recovery.

The Company has four portfolio segments constituting its total accounts receivables: (i) joint interest receivables; (ii) commodity sales receivables; (iii) derivative settlement receivables and (iv) other receivables. The table below discloses balances related to these four segments and the allowance:
June 30,
2020
December 31,
2019
Joint interests$9,992  $16,664  
Commodity sales14,416  30,819  
Derivative settlements15,540  717  
Other3,249  2,544  
Allowance for credit losses(4,215) (1,097) 
 $38,982  $49,647  
 
Commodity sales receivables. The Company sells its commodity products primarily to oil and natural gas midstream entities including crude oil refineries and natural gas processing plants. We also sell a small percentage of our natural gas and natural gas liquids to energy marketing entities. Payment is generally due within 30 days of sales and amounts outstanding longer than 90 days are considered past due. Based on 2019 commodity sales, our 10 largest purchasers account for over 75% of our commodity sales. Based on our history of collections from our purchasers, we believe the probability of credit losses from uncollectible receivables to be low. We perform annual credit evaluations on purchasers representing approximately 80% or more of our commodity revenues. The evaluations include (i) an assessment of external credit ratings; (ii) performing internal risk evaluations when external ratings are not available; (iii) assessing the need for guarantor letters or letters of credit. We estimate the expected losses on uncollectible receivables by applying a uniform allowance rate on the total outstanding balance taking into consideration general industry conditions and more specifically, factors impacting the midstream energy segment. We may make further adjustments to our allowance for credit losses according to any specific news we may receive regarding individual purchasers.
13

Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)


Joint interest receivables. Our joint interest receivables represent amounts owed to us by other working interest owners on wells that we operate. We have numerous joint interest counterparties which are the result of combining all or portions of multiple oil and gas leases to form units for the drilling of wells under pooling or a joint interest agreements. The counterparties in this segment are diverse, ranging from large public company upstream operators to individual mineral leaseholders. Amounts billed to our joint interest owners generally consist of drilling and completion costs, in the early stages of a well, and lease operating expenses and costs for workovers and remediation work once a well in online. Payment is generally due within 60 days of billing and amount outstanding longer than 90 days are considered past due. Our historical losses on uncollectible receivables have predominantly been attributable to this portfolio segment, although losses in prior years have not been material. In the event of nonpayment, we may be able to mitigate our losses by netting the outstanding amount against any revenues payable to the joint interest owner and if still insufficient, by assuming the joint interest owner’s working interest in the well. The fair value of the working interest, which represents collateral for the outstanding receivable, will depend on the fair value of the remaining oil and natural gas reserves of the well. We monitor the ongoing collectability of these receivables by focusing on past due accounts with material balances. We estimate the expected losses on uncollectible joint interest receivables by applying varying allowance rates to outstanding balances based on aging of the balances. We also factor in current industry conditions, outstanding revenues payable to the accountholder, the fair value of the accountholder’s working interest in the property and the accountholder’s previous loss history in assessing the appropriate allowance. This method is augmented with a specific identification approach that includes directly communicating with certain joint interest owners that have material outstanding balances and consideration of specific information or circumstances regarding the account, such as bankruptcy, litigation or ongoing negotiations.

Derivative settlement receivables. Our derivative receivables relate to net settlements due from counterparties to our derivative contracts. Since derivative settlements fluctuate depending on commodity price changes, which are volatile, the associated amounts can result in a net payable or a net receivable position in any given month. Our derivative contracts generally require payment within 60 days of the fixing date. We have a limited number of counterparties to our derivative contracts, all of whom are large financial institutions and are also lenders under our credit agreement. These financial institution counterparties bear investment grade credit ratings. We have never incurred credit losses from our derivative receivables and believe the probability of such losses to be highly remote. Furthermore, to the extent that a balance is uncollectible, we believe that we have offset rights against amounts owed to the counterparty under our credit facility. Based on these circumstances, we have not recorded any allowance for credit losses related to these receivables. As discussed in “Note 11: Subsequent events,” we terminated all our outstanding derivatives in July 2020.

Other receivables. These receivables are of a nonrecurring discrete nature and generally immaterial with respect to our total receivables. Outstanding amounts may include receivables from taxing authorities and post-closing adjustments from acquisitions and divestitures.

Response to current industry conditions. We are in the midst of an unprecedented decline in crude oil prices brought about by the COVID-19 pandemic and other macroeconomic factors, which has drastically reduced demand for crude oil. The price decline has been exacerbated by episodic storage constraints. We have incorporated the prevailing industry crisis into our forecast of credit losses by increasing the allowance rates that we apply to our receivables, and for certain accounts where we have applied specific identification measures, recognizing an allowance sooner than would be typical under normal conditions.

Accrued interest, discount and premiums. We do not accrue interest on the outstanding balances of our receivables. There are no discounts or premiums associated with our receivables.

Presentation of credit loss expense. Our credit loss expense is included as a component of “General and administrative expenses” on our consolidated statement of operations and is as follows:
Three months ended June 30,Six months ended June 30,
2020201920202019
Credit losses on receivables$1,447  $(18) $2,964  $(276) 

Credit quality disclosures. We are exempted under ASU 2016-13 from disclosing credit quality disclosures on our commodity sales receivables. Since all the financial institution counterparties to our derivative contracts bear investment grade credit ratings, we do not believe further decomposition by credit rating is necessary for this segment of receivables. The table below segregates our joint interest receivables based on the amount of revenues payable which can be utilized to offset the receivable balance. We consider this segregation to be a reasonable indicator of credit quality.
14

Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)

Joint interest receivables, grossJune 30,
2020
Accounts which have sufficient related revenue distributions payable to offset entire receivable balance$258  
Accounts which have related revenue distributions payable but not sufficient to offset entire receivable balance3,711  
Accounts without related revenue distributions payable 6,023  
Total$9,992  

Allowance for credit losses. The table below discloses activity on our receivables allowance account:
Six months ended June 30, 2020
Commodity salesJoint interestDerivativesOtherTotal
Balance at January 1, 2020$  $1,097  $  $  $1,097  
Cumulative effect of accounting standard adoption154        154  
Credit losses59  2,905      2,964  
Write-offs          
Recoveries          
Balance at June 30, 2020$213  $4,002  $  $  $4,215  

Inventories

Inventories consisted of the following:
June 30,
2020
December 31,
2019
Equipment inventory$2,673  $3,435  
Commodities425  474  
Inventory valuation allowance(642) (179) 
 $2,456  $3,730  

During the three and six months ended June 30, 2020, we recorded an adjustment to net realizable value of $310 and $463 on our equipment inventory, which is reflected as “Impairment of other assets” on our consolidated statements of operations.

Property and equipment, net

Major classes of property and equipment are shown in the following:
June 30,
2020
December 31,
2019
Machinery and equipment$3,229  $3,543  
Office and computer equipment3,606  3,363  
Automobiles and trucks2,469  3,071  
Building and improvements664  693  
Furniture and fixtures8