10-Q 1 cpr-10q_20160930.htm CPR-10Q-20160930 cpr-10q_20160930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended September 30, 2016

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: 333-134748

 

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)

 

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  

(Explanatory Note: The registrant is a voluntary filer and is not subject to the filing requirements of the Securities Exchange Act of 1934.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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

Accelerated Filer

 

 

 

 

Non-Accelerated Filer

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      No  

Number of shares outstanding of each of the issuer’s classes of common stock as of November 7, 2016:

 

Class

 

Number of

shares

Class A Common Stock, $0.01 par value

 

333,686

 

Class B Common Stock, $0.01 par value

 

344,859

 

Class C Common Stock, $0.01 par value

 

209,882

 

Class E Common Stock, $0.01 par value

 

504,276

 

Class F Common Stock, $0.01 par value

 

1

 

Class G Common Stock, $0.01 par value

 

2

 

 

 

 

 

 


 

CHAPARRAL ENERGY, INC.

Index to Form 10-Q

 

 

 

Page

Part I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

6

Consolidated balance sheets as of September 30, 2016 (unaudited) and December 31, 2015

 

6

Consolidated statements of operations for the three and nine months ended September 30, 2016, and 2015 (unaudited)

 

8

Consolidated statements of cash flows for the nine months ended September 30, 2016, and 2015 (unaudited)

 

9

Condensed notes to consolidated financial statements (unaudited)

 

10

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

 

29

Overview

 

29

Results of operations

 

33

Liquidity and capital resources

 

40

Non-GAAP financial measure and reconciliation

 

44

Critical accounting policies

 

45

Recent accounting pronouncements

 

45

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

45

Item 4. Controls and Procedures

 

46

Part II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

46

Item 1A. Risk Factors

 

46

Item 3. Defaults Upon Senior Securities

 

49

Item 5. Other Information

 

49

Item 6. Exhibits

 

50

Signatures

 

51

 

2


 

CAUTIONARY STATEMENT

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, our bankruptcy proceedings, 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:

 

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;

 

competition and 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 anticipated expenses;

 

estimates of proved reserves;

 

exploitation of property acquisitions; 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. These risks and uncertainties include those factors described in Item 1A of this report and under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015. Specifically, some factors that could cause actual results to differ include:

 

risks and uncertainties associated with our Chapter 11 Cases (as defined herein), including our ability to develop, confirm and consummate a plan under Chapter 11;

 

the significant amount of our debt;

 

worldwide supply of and demand for oil and natural gas;

 

volatility and declines in oil and natural gas prices;

 

drilling plans (including scheduled and budgeted wells);

 

the number, timing or results of any wells;

 

changes in wells operated and in reserve estimates;

 

supply of CO2 ;

 

future growth and expansion;

 

future exploration;

 

integration of existing and new technologies into operations;

3


 

 

future capital expenditures (or funding thereof) and working capital;

 

borrowings and capital resources and liquidity;

 

changes in strategy and business discipline;

 

future tax matters;

 

any loss of key personnel;

 

future seismic data (including timing and results);

 

the plans for timing, interpretation and results of new or existing seismic surveys or seismic data;

 

geopolitical events affecting oil and natural gas prices;

 

outcome, effects or timing of legal proceedings;

 

the effect of litigation and contingencies;

 

the ability to generate additional prospects; 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.

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 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.

GLOSSARY OF CERTAIN DEFINED TERMS

The terms defined in this section are used throughout this Form 10-Q:

 

Basin. A low region or natural depression in the earth’s crust where sedimentary deposits accumulate.

 

Bankruptcy Court. United State Bankruptcy Court for the District of Delaware

 

Bbl. One stock tank barrel of 42 U.S. gallons liquid volume used herein in reference to crude oil, condensate, or natural gas liquids.

 

BBtu. One billion British thermal units.

 

Boe. Barrels of oil equivalent using the ratio of six thousand cubic feet of natural gas to one barrel of oil.

 

Boe/d. Barrels of oil equivalent per day.

 

Btu. British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.

 

Completion. The 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.

 

Credit Facility. Eighth Restated Credit Agreement, dated April 12, 2010, by and among us, Chaparral Energy, L.L.C., in its capacity as Borrower Representative for the Borrowers, JPMorgan Chase Bank, N.A., as Administrative Agent and each of the Lenders named therein, as amended.

 

E&P Areas. Areas where we engage in exploration and production activities including the following plays: the STACK, Mississippi Lime, Panhandle Marmaton and Legacy Production Areas.

 

Enhanced oil recovery (EOR). The use of any improved recovery method, including injection of CO 2 or polymer, to remove additional oil after secondary recovery.

4


 

 

EOR Project Areas. Areas where we are currently injecting, plan to inject or have potential for injection of CO2 as a means of additional oil recovery. These Areas include our active EOR Project Areas and potential EOR Project Areas.

 

Exclusive Filing Period. The exclusive period to file a Chapter 11 plan of reorganization.

 

Field. An 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.

 

Legacy Production Areas. Includes mature producing properties with low production decline curves and reserves, which include most of our vertical production and horizontal production outside the STACK, Mississippi Lime and Panhandle Marmaton, including the Cleveland Sand and Granite Wash. For prior year comparative purposes the areas also include Ark-La-Tex, Permian Basin and North Texas properties that we have sold.

 

MBbls. One thousand barrels of crude oil, condensate, or natural gas liquids.

 

MBoe. One thousand barrels of crude oil equivalent.

 

Mcf. One thousand cubic feet of natural gas.

 

MMBtu. One million British thermal units.

 

MMcf. One million cubic feet of natural gas.

 

Natural gas liquids (NGLs). Those hydrocarbons in natural gas that are separated from the gas as liquids through the process of absorption, condensation, adsorption or other methods in gas processing or cycling plants. Natural gas liquids primarily include propane, butane, isobutane, pentane, hexane and natural gasoline.

 

NYMEX. The New York Mercantile Exchange.

 

Play. A term describing an area of land following the identification by geologists and geophysicists of reservoirs with potential oil and natural gas reserves.

 

Proved reserves. The 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.

 

Proved undeveloped reserves. Reserves 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 value. When 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%.

 

SEC. The Securities and Exchange Commission.

 

Secondary recovery. The recovery of oil and natural gas through the injection of liquids or gases into the reservoir, supplementing its natural energy. Secondary recovery methods are often applied when production slows due to depletion of the natural pressure.

 

STACK. An acronym standing for Sooner Trend Anadarko Canadian Kingfisher. A play in the Anadarko Basin of Oklahoma in which we operate.

 

Senior Notes. Collectively, our 9.875% senior notes due 2020, 8.25% senior notes due 2021 and 7.625% senior notes due 2022.

 

Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of economic quantities of oil or natural gas regardless of whether such acreage contains proved reserves.

 

 

5


 

PART I — FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Consolidated balance sheets

 

 

 

September 30,

 

 

 

 

 

 

 

2016

 

 

December 31,

 

(dollars in thousands, except share data)

 

(unaudited)

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

189,361

 

 

$

17,065

 

Accounts receivable, net

 

 

41,273

 

 

 

79,000

 

Inventories, net

 

 

8,121

 

 

 

12,329

 

Prepaid expenses

 

 

2,945

 

 

 

3,700

 

Derivative instruments

 

 

 

 

 

143,737

 

Total current assets

 

 

241,700

 

 

 

255,831

 

Property and equipment—at cost, net

 

 

43,179

 

 

 

48,962

 

Oil and natural gas properties, using the full cost method:

 

 

 

 

 

 

 

 

Proved

 

 

4,279,179

 

 

 

4,128,193

 

Unevaluated (excluded from the amortization base)

 

 

17,115

 

 

 

66,905

 

Accumulated depreciation, depletion, amortization and impairment

 

 

(3,763,423

)

 

 

(3,396,261

)

Total oil and natural gas properties

 

 

532,871

 

 

 

798,837

 

Derivative instruments

 

 

 

 

 

19,501

 

Deferred income taxes

 

 

 

 

 

53,914

 

Other assets

 

 

8,253

 

 

 

27,694

 

Total assets

 

$

826,003

 

 

$

1,204,739

 

 

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

 

 

6


 

Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Consolidated balance sheets—continued

 

 

 

September 30,

 

 

 

 

 

 

 

2016

 

 

December 31,

 

(dollars in thousands, except share data)

 

(unaudited)

 

 

2015

 

Liabilities and stockholders’ deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

32,003

 

 

$

66,222

 

Accrued payroll and benefits payable

 

 

2,553

 

 

 

15,305

 

Accrued interest payable

 

 

107

 

 

 

23,303

 

Revenue distribution payable

 

 

8,874

 

 

 

12,391

 

Long-term debt and capital leases, classified as current

 

 

472,435

 

 

 

1,607,127

 

Deferred income taxes

 

 

 

 

 

53,914

 

Total current liabilities

 

 

515,972

 

 

 

1,778,262

 

Stock-based compensation

 

 

 

 

 

400

 

Asset retirement obligations

 

 

50,211

 

 

 

46,434

 

Liabilities subject to compromise

 

 

1,286,828

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Preferred stock, 600,000 shares authorized, none issued and outstanding

 

 

 

 

 

 

Class A Common stock, $0.01 par value, 10,000,000 shares authorized and 334,545

   and 345,289 shares issued and outstanding as of September 30, 2016, and

   December 31, 2015, respectively

 

 

4

 

 

 

4

 

Class B Common stock, $0.01 par value, 10,000,000 shares authorized and 344,859

   shares issued and outstanding

 

 

3

 

 

 

3

 

Class C Common stock, $0.01 par value, 10,000,000 shares authorized and 209,882

   shares issued and outstanding

 

 

2

 

 

 

2

 

Class E Common stock, $0.01 par value, 10,000,000 shares authorized and 504,276

   shares issued and outstanding

 

 

5

 

 

 

5

 

Class F Common stock, $0.01 par value, 1 share authorized, issued, and outstanding

 

 

 

 

 

 

Class G Common stock, $0.01 par value, 3 shares authorized and 2 shares issued

   and outstanding

 

 

 

 

 

 

Additional paid in capital

 

 

425,207

 

 

 

431,307

 

Accumulated deficit

 

 

(1,452,229

)

 

 

(1,051,678

)

Total stockholders' deficit

 

 

(1,027,008

)

 

 

(620,357

)

Total liabilities and stockholders' deficit

 

$

826,003

 

 

$

1,204,739

 

 

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

 

 

7


 

Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Consolidated statements of operations

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(unaudited)

 

Revenues - commodity sales

 

$

65,847

 

 

$

74,512

 

 

$

180,076

 

 

$

261,801

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating

 

 

22,291

 

 

 

24,881

 

 

 

68,462

 

 

 

83,921

 

Transportation and processing

 

 

2,429

 

 

 

1,902

 

 

 

6,493

 

 

 

6,246

 

Production taxes

 

 

2,174

 

 

 

2,795

 

 

 

6,812

 

 

 

11,123

 

Depreciation, depletion and amortization

 

 

29,624

 

 

 

52,027

 

 

 

94,396

 

 

 

173,694

 

Loss on impairment of oil and gas assets

 

 

 

 

 

737,758

 

 

 

281,079

 

 

 

955,320

 

Loss on impairment of other assets

 

 

202

 

 

 

 

 

 

1,461

 

 

 

13,311

 

General and administrative

 

 

1,519

 

 

 

7,389

 

 

 

14,812

 

 

 

25,843

 

Liability management

 

 

 

 

 

 

 

 

9,396

 

 

 

 

Cost reduction initiatives

 

 

89

 

 

 

603

 

 

 

3,228

 

 

 

9,739

 

Total costs and expenses

 

 

58,328

 

 

 

827,355

 

 

 

486,139

 

 

 

1,279,197

 

Operating income (loss)

 

 

7,519

 

 

 

(752,843

)

 

 

(306,063

)

 

 

(1,017,396

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(7,436

)

 

 

(28,598

)

 

 

(57,243

)

 

 

(83,202

)

Non-hedge derivative gains (losses)

 

 

 

 

 

85,415

 

 

 

(9,468

)

 

 

105,266

 

Write-off of Senior Note issuance costs, discount and premium

 

 

 

 

 

 

 

 

(16,970

)

 

 

 

Other (expense) income, net

 

 

(129

)

 

 

108

 

 

 

217

 

 

 

2,088

 

Net non-operating (expense) income

 

 

(7,565

)

 

 

56,925

 

 

 

(83,464

)

 

 

24,152

 

Reorganization items, net

 

 

(5,504

)

 

 

 

 

 

(10,859

)

 

 

 

Loss before income taxes

 

 

(5,550

)

 

 

(695,918

)

 

 

(400,386

)

 

 

(993,244

)

Income tax (benefit) expense

 

 

(59

)

 

 

(48,776

)

 

 

165

 

 

 

(161,314

)

Net loss

 

$

(5,491

)

 

$

(647,142

)

 

$

(400,551

)

 

$

(831,930

)

 

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

 

 

8


 

Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Consolidated statements of cash flows

 

 

 

Nine months ended

 

 

 

September 30,

 

(in thousands)

 

2016

 

 

2015

 

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(400,551

)

 

$

(831,930

)

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

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

94,396

 

 

 

173,694

 

Loss on impairment of assets

 

 

282,540

 

 

 

968,631

 

Write-off of Senior Note issuance costs, discount and premium

 

 

16,970

 

 

 

 

Deferred income taxes

 

 

 

 

 

(161,480

)

Non-hedge derivative losses (gains)

 

 

9,468

 

 

 

(105,266

)

Loss (gain) on sale of assets

 

 

128

 

 

 

(1,448

)

Other

 

 

2,832

 

 

 

4,013

 

Change in assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,866

)

 

 

16,625

 

Inventories

 

 

2,758

 

 

 

(3,642

)

Prepaid expenses and other assets

 

 

(370

)

 

 

2,258

 

Accounts payable and accrued liabilities

 

 

24,026

 

 

 

(15,012

)

Revenue distribution payable

 

 

1,173

 

 

 

(12,444

)

Stock-based compensation

 

 

(5,384

)

 

 

(4,355

)

Net cash provided by operating activities

 

 

23,120

 

 

 

29,644

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Expenditures for property, plant, and equipment and oil and natural gas properties

 

 

(119,994

)

 

 

(267,203

)

Proceeds from asset dispositions

 

 

954

 

 

 

29,251

 

Proceeds from non-hedge derivative instruments

 

 

90,590

 

 

 

173,149

 

Cash in escrow

 

 

49

 

 

 

 

Net cash used in investing activities

 

 

(28,401

)

 

 

(64,803

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

181,000

 

 

 

120,000

 

Repayment of long-term debt

 

 

(1,563

)

 

 

(75,354

)

Principal payments under capital lease obligations

 

 

(1,860

)

 

 

(1,792

)

Payment of other financing fees

 

 

 

 

 

(1,404

)

Net cash provided by financing activities

 

 

177,577

 

 

 

41,450

 

Net increase in cash and cash equivalents

 

 

172,296

 

 

 

6,291

 

Cash and cash equivalents at beginning of period

 

 

17,065

 

 

 

31,492

 

Cash and cash equivalents at end of period

 

$

189,361

 

 

$

37,783

 

 

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

 

 

 

9


 

Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Condensed notes to consolidated financial statements (unaudited)

(dollars in thousands, unless otherwise noted)

 

 

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

Nature of operations

Chaparral Energy, Inc. and its subsidiaries, (collectively, “we”, “our”, “us”, or the “Company”) are involved in the acquisition, exploration, development, production and operation of oil and natural gas properties. Our properties are located primarily in Oklahoma and Texas. As discussed in “Note 2—Chapter 11 filing,” we are currently operating our business as debtor in possession in accordance with the applicable provisions of the Bankruptcy Code.

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, 2015.

The financial information as of September 30, 2016, and for the three and nine months ended September 30, 2016, and 2015, respectively, is unaudited. The financial information as of December 31, 2015, has been derived from the audited financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2015. 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 nine months ended September 30, 2016, are not necessarily indicative of the results of operations that will be realized for the year ended December 31, 2016.

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 September 30, 2016, cash with a recorded balance totaling $37,535 and $49,852 was held at JP Morgan Chase Bank, N.A and Arvest Bank, respectively. In addition, we also held cash equivalents in the form of treasury securities with a recorded balance of $101,095 at Arvest Wealth Management. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on such accounts. We are not party to any valid blocked account agreements with respect to any material amount of cash.

Accounts receivable

We have receivables from joint interest owners and oil and natural gas purchasers which are generally uncollateralized. Accounts receivable consisted of the following at September 30, 2016, and December 31, 2015:

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Joint interests

 

$

10,471

 

 

$

14,149

 

Accrued commodity sales

 

 

26,628

 

 

 

21,645

 

Derivative settlements

 

 

 

 

 

40,380

 

Other

 

 

4,669

 

 

 

3,329

 

Allowance for doubtful accounts

 

 

(495

)

 

 

(503

)

 

 

$

41,273

 

 

$

79,000

 

10


Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Condensed notes to consolidated financial statements (unaudited) – continued

(dollars in thousands, unless otherwise noted)

 

 

Inventories

Inventories consisted of the following at September 30, 2016, and December 31, 2015:

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Equipment inventory

 

$

9,066

 

 

$

11,470

 

Commodities

 

 

1,355

 

 

 

1,698

 

Inventory valuation allowance

 

 

(2,300

)

 

 

(839

)

 

 

$

8,121

 

 

$

12,329

 

We recorded lower of cost or market adjustments for the periods disclosed below due to depressed industry conditions which resulted in lower demand for such equipment and hence lower market prices. These adjustments are reflected in “Loss on impairment of other assets” in our consolidated statements of operations.

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Inventory - lower of cost or market adjustment

 

$

202

 

 

$

 

 

$

1,461

 

 

$

7,296

 

Oil and natural gas properties

The costs of unevaluated oil and natural gas properties, which are excluded from amortization until the properties are evaluated, consisted of the following at September 30, 2016, and December 31, 2015:

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Undeveloped acreage

 

$

13,864

 

 

$

60,031

 

Wells and facilities in progress pending determination

 

 

3,251

 

 

 

6,874

 

Total unevaluated oil and natural gas properties excluded from amortization

 

$

17,115

 

 

$

66,905

 

Ceiling Test. In accordance with the full cost method of accounting, the net capitalized costs of oil and natural gas properties are not to exceed their related PV-10 value, net of tax considerations, plus the cost of unproved properties not being amortized.

Our estimates of oil and natural gas reserves as of September 30, 2016, were prepared using an average price for oil and natural gas on the first day of each month for the prior twelve months as required by the SEC.

Due to the substantial decline of commodity prices that began in mid-2014 and which continue to remain low, the cost center ceiling exceeded the net capitalized cost of our oil and natural gas properties at the end of each quarter beginning with the second quarter of 2015 through the second quarter of 2016, resulting in ceiling test write-downs in those periods. The amount of any future impairment is generally difficult to predict, and will depend on the average oil and natural gas prices during each period, the incremental proved reserves added during each period, and additional capital spent

Impairment of long-lived assets

We recorded impairment losses of $6,015 related to four drilling rigs not currently in use for the nine months ended September 30, 2015. One of the rigs was last deployed in January 2015 while the remaining three have been stacked for three to four years. The loss was recorded as a result of the deterioration in commodity prices and drilling activity whereby the value of such equipment had declined while utilizing third party equipment had become more cost effective, resulting in us impairing the value of the rigs to their estimated fair value. These losses are reflected in “Loss on impairment of other assets” in our consolidated statements of operations.

11


Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Condensed notes to consolidated financial statements (unaudited) – continued

(dollars in thousands, unless otherwise noted)

 

Our bankruptcy filing on May 9, 2016, (see “Note 2—Chapter 11 filing) was an event that required an assessment whether the carrying amounts of our long-lived assets would be recoverable. Our evaluation indicated that no additional impairment was necessary as a direct result of the bankruptcy.

In October 2016, the Company entered into an agreement for the sale of our four drilling rigs for a price of $2,000. We anticipate the sale to close in January, 2017.

Income taxes

Although we recorded a net loss for the nine months ended September 30, 2016, we did not record any corresponding tax benefit as any deferred tax asset arising from the loss is currently not believed to be realizable and is therefore reduced by a valuation allowance. At September 30, 2016, our valuation allowance is $580,280 which reduces our net deferred tax assets to zero value as we continue to believe that it is more likely than not that we will not realize the deferred tax assets primarily related to our cumulative net operating losses. Income tax recognized for the nine months ended September 30, 2016, is a result of current Texas margin tax on gross revenues less certain deductions. See “Note 10—Income Taxes” in Item 8. Financial Statement and Supplementary Data of our Annual Report on Form 10-K for the year ended December 31, 2015, for additional information about our income taxes.

As described in “Note 2—Chapter 11 filing”, in conjunction with our efforts to restructure our indebtedness, on May 9, 2016, we filed voluntary petitions seeking relief under Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware commencing cases for relief under Chapter 11 of the Bankruptcy Code. Our negotiations to restructure our debt include a proposal for the holders of our Senior Notes to convert those notes into equity of the reorganized Company, effectuated through a plan of reorganization in bankruptcy. Absent an exception, a debtor recognizes cancellation of indebtedness income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The Internal Revenue Code of 1986, as amended (“IRC”), provides that a debtor in a Chapter 11 bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is determined based on the fair market value of the consideration received by the creditors in settlement of outstanding indebtedness. Upon emergence from Chapter 11 bankruptcy proceedings, the CODI may reduce some or the entire amount of prior tax attributes, which can include net operating losses, capital losses, alternative minimum tax credits and tax basis in assets. The actual reduction in tax attributes does not occur until the first day of the Company’s tax year ending subsequent to the date of emergence.

The IRC provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, as well as certain built-in-losses, against future taxable income in the event of a change in ownership. Emergence from Chapter 11 bankruptcy proceedings may result in a change in ownership for purposes of the IRC. However, the IRC provides alternatives for taxpayers in Chapter 11 bankruptcy proceedings that may or may not result in an annual limitation. We are in the process of determining which alternatives are most beneficial to us in conjunction with our ongoing negotiations with our debtholders.

Liability management

Liability management expense includes third party legal and professional service fees incurred from our activities to restructure our debt and in preparation for our bankruptcy petition. As a result of our Chapter 11 petition, such expenses, to the extent that they are incremental and directly related to our bankruptcy reorganization, are reflected in “Reorganization items” in our consolidated statements of operations.

12


Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Condensed notes to consolidated financial statements (unaudited) – continued

(dollars in thousands, unless otherwise noted)

 

Cost reduction initiatives

Cost reduction initiatives include expenses related to our efforts to reduce our capital, operating and administrative costs in response to the depressed commodity pricing environment. The expense consists of costs for one-time severance and termination benefits in connection with our reductions in force and third party legal and professional services we have engaged to assist in our cost savings initiatives as follows:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

One-time severance and termination benefits

 

$

89

 

 

$

596

 

 

$

3,125

 

 

$

7,467

 

Professional fees

 

 

 

 

 

7

 

 

 

103

 

 

 

2,272

 

Total cost reduction initiatives expense

 

$

89

 

 

$

603

 

 

$

3,228

 

 

$

9,739

 

 

Recently adopted accounting pronouncements

In November 2015, the FASB issued authoritative guidance aimed at simplifying the accounting for deferred taxes. To simplify presentation, the new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. Importantly, the guidance does not change the existing requirement that only permits offsetting within a jurisdiction – that is, companies are still prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. This guidance was early adopted on a prospective basis during the second quarter of 2016 and allowed us to offset our noncurrent deferred income tax asset with our current deferred income tax liability. Other than the preceding balance sheet change, the adoption did not have a material impact on our financial statements and results of operations.

Recently issued accounting pronouncements

In May 2014, the FASB issued authoritative guidance that supersedes previous revenue recognition requirements and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB recently approved a delay which will make the updated guidance effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only for fiscal years beginning after December 31, 2016, and interim periods thereafter. We are currently evaluating the effect the new standard will have on our financial statements and results of operations.

In January 2016, the FASB issued authoritative guidance that amends existing requirements on the classification and measurement of financial instruments. The standard principally affects accounting for equity investments and financial liabilities where the fair value option has been elected. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods thereafter. Early adoption of certain provisions is permitted. We do not expect this guidance to materially impact our financial statements or results of operations.

In February 2016, the FASB issued authoritative guidance significantly amending the current accounting for leases. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. Furthermore, all leases will fall into one of two categories: (i) a financing lease or (ii) an operating lease. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, a sale will only be recognized if the criteria in the new revenue recognition standard are met. For public business entities, this guidance is effective for fiscal periods beginning after December 15, 2018 and interim periods thereafter. Early adoption is permitted. We are currently evaluating the effect the new guidance will have on our financial statements and results of operations.

In March 2016, the FASB issued authoritative guidance with the objective to simplify several aspects of the accounting for share-based payments, including accounting for income taxes when awards vest or are settled, statutory withholdings and accounting for forfeitures. Classification of these aspects on the statement of cash flows is also addressed. For public business entities, this guidance is effective for fiscal periods beginning after December 15, 2016, and interim periods thereafter. Early adoption is permitted.

13


Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Condensed notes to consolidated financial statements (unaudited) – continued

(dollars in thousands, unless otherwise noted)

 

We do not expect this guidance to materially impact our financial statements or results of operations in connection with our outstanding awards.

In March 2016, the FASB issued authoritative guidance that clarifies that the assessment of whether an embedded contingent put or call option in a financial instrument is clearly and closely related to the debt host requires only an analysis of the four-step decision sequence described in ASC 815. The guidance is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted in any interim period for which financial statements have not been issued, but would be retroactively applied to the beginning of the year that includes the interim period. We do not expect this guidance to materially impact our financial statements or results of operations.

In June 2016, the FASB issued authoritative guidance which modifies the measurement of expected credit losses of certain financial instruments. The guidance is effective for fiscal years beginning after December 15, 2020, however early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the effect the new guidance will have on our financial statements and results of operations.

 

Note 2: Chapter 11 filing

Background. The severe and sustained decline in oil and natural gas prices since mid-2014 has negatively impacted revenues, earnings and cash flows, and our liquidity. As a result of our deteriorating liquidity, there was uncertainty regarding our ability to repay our outstanding debt obligations as they became due, especially in the event of any acceleration of indebtedness, and hence substantial doubt about our ability to continue as a going concern. This doubt was expressed in the audit opinion of our annual consolidated financial statements for the year ended December 31, 2015, and constituted an event of default under our Credit Facility since the covenants under the facility require us to deliver our annual financial statements without a going concern explanatory paragraph.

On March 1 and April 1, 2016, we elected not to make interest payments on our 8.25% Senior Notes and 9.875% Senior Notes, respectively. Under the indenture governing these Senior Notes, the failure to make the interest payments was subject to a 30-day grace period before constituting an event of default. We did not make either interest payment on the Senior Notes within their respective 30-day grace periods and as a result, are currently in default under the indentures governing these Senior Notes. While in default, the outstanding principal and any accrued interest may be called upon which would cause it to be immediately due and payable. Our failure to make such interest payments within the 30-day grace period also resulted in a cross default under our Credit Facility, capital leases and mortgage note.

The defaults discussed above result in cross defaults on our remaining indebtedness and therefore subjected all our debt to potential acceleration in the event that the outstanding amounts are called by our lenders.

Faced with these defaults, we entered into agreements (the “Forbearance Agreements”) with the lenders under our Credit Facility (the “Lenders”) and an ad hoc committee (the “Ad Hoc Committee”) of noteholders collectively holding more than 50% of the Senior Notes outstanding to forbear from exercising remedies on account of the missed interest payments and certain other alleged defaults specified in the Forbearance Agreements through and including May 1, 2016. While the Forbearance Agreements were in effect, we continued to engage in good-faith arm’s-length negotiations regarding a potential restructuring of the Credit Facility and the Senior Notes that would materially delever the Company’s balance sheet and allow us to retain sufficient liquidity to continue to operate our business going forward. In the course of these negotiations, the Company, the Lenders, and the Ad Hoc Committee exchanged and considered, with the assistance of their respective advisors, numerous restructuring proposals.

On May 9, 2016 (the “Petition Date”), 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. (collectively, the “Chapter 11 Subsidiaries” and, together with Chaparral Energy, Inc., the “Debtors”) filed voluntary petitions seeking relief under Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) commencing cases for relief under chapter 11 of the Bankruptcy Code (the “Chapter 11 Cases”). Our filing of the Chapter 11 Cases constitutes an additional event of default under our Credit Facility, Senior Notes, capital leases and mortgage note.

14


Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Condensed notes to consolidated financial statements (unaudited) – continued

(dollars in thousands, unless otherwise noted)

 

Debtor-In-Possession. We are currently operating our business as debtors in possession in accordance with the applicable provisions of the Bankruptcy Code. We have filed a variety of first day motions with the Bankruptcy Court that will allow us to continue to operate our business without interruption. These motions are designed primarily to minimize the impact of our bankruptcy filing on our operations, creditors and employees. The Bankruptcy Court has granted all first day motions filed by us and our Chapter 11 Subsidiaries. As a result, we are able to conduct normal business activities and pay the associated obligations for the period following our bankruptcy filing and are also authorized to pay (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 critical vendors and funds belonging to third parties, including royalty 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. Final orders on the motions to satisfy our obligations to certain third parties and to forward funds held by us that belong to third parties were granted on June 7, 2016.

Automatic Stay. Subject to certain exceptions, under the Bankruptcy Code, the filing of the bankruptcy petitions automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or the filing of other actions against us or our property to recover, collect or secure a claim arising prior to the Petition Date. Creditors are stayed from taking any actions against us as a result of debt defaults, subject to certain limited exceptions permitted by the Bankruptcy Code.

Risks Associated with Chapter 11 Proceedings. For the duration of our Chapter 11 Cases, our operations and ability to develop and execute our business plan are subject to the risks and uncertainties associated with the Chapter 11 process. As a result of these risks and uncertainties, the number of our outstanding shares of common stock and stockholders, assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of our operations, properties and capital plans included in this quarterly report may not accurately reflect our operations, properties and capital plans following our emergence from bankruptcy.

Executory Contracts. In particular, subject to certain exceptions, under the Bankruptcy Code, we may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves us of performing future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Counterparties to such rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the applicable Debtors’ estate for such damages. Generally, the assumption of an executory contract or unexpired lease requires us to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease involving us in these financial statements, including where applicable, a quantification of our obligations under any such executory contract or unexpired lease with us is qualified by our rights to reject such executory contract or unexpired lease under the Bankruptcy Code.

Magnitude of Potential Claims. On June 29, 2016, we filed with the Bankruptcy Court schedules and statements setting forth, among other things, our assets and liabilities, subject to the assumptions filed in connection therewith (as amended on August 9 and August 18, 2016, the “Schedules and Statements”). We may subsequently decide to further amend or modify our Schedules and Statements.

On June 13, 2016, we filed a motion to set a bar date to assist with the claims reconciliation process.  The Bankruptcy Court approved such motion on July 1, 2016, setting the bar date on August 19, 2016, for all potential claimants other than governmental authorities whose bar date is on November 7, 2016. Through the claims resolution process, differences in amounts scheduled by the Debtors and claims filed by creditors will be investigated and resolved, including through the filing of objections with the Bankruptcy Court where appropriate. In light of the potential number and amount of claims filed, the claims resolution process may take considerable time to complete, and we expect that it will continue after our emergence from bankruptcy. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently ascertained.

Effect of Filing on Creditors and Shareholders. Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities and post-petition liabilities must be satisfied in full or consensual agreement reached between parties before the holders of our existing common stock are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or shareholders, if any, will not be determined until confirmation and implementation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed in the

15


Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Condensed notes to consolidated financial statements (unaudited) – continued

(dollars in thousands, unless otherwise noted)

 

Chapter 11 proceedings to each of these constituencies or what types or amounts of distributions, if any, they would receive. A plan of reorganization could result in holders of our liabilities and/or securities, including our common stock, receiving no distribution on account of their interests and cancellation of their holdings. As discussed below, if certain requirements of the Bankruptcy Code are met, a plan of reorganization can be confirmed notwithstanding its rejection by the holders of our common stock and notwithstanding the fact that such holders do not receive or retain any property on account of their equity interests under the plan. Because of such possibilities, the value of our securities is highly speculative.

 

Process for Plan of Reorganization. In order to successfully exit bankruptcy, we will need to propose, and obtain confirmation by the Bankruptcy Court of, a plan (or plans) of reorganization that satisfies the requirements of the Bankruptcy Code. A plan of reorganization would, among other things, resolve our pre-petition obligations, set forth the revised capital structure of the newly reorganized entity and provide for corporate governance subsequent to exit from bankruptcy.

 

We have the exclusive right for 120 days after the Petition Date to file a plan of reorganization subject to extension for cause. If the Exclusive Filing Period lapses, any party in interest may file a plan of reorganization for any of the Debtors.  On October 13, 2016, the Bankruptcy Court approved our motion to extend the Exclusive Filing Period to November 9, 2016, and we expect to request a further extension.      

 

In addition to being voted on by holders of impaired claims and equity interests, a plan of reorganization must satisfy certain requirements of the Bankruptcy Code and must be confirmed, by the Bankruptcy Court in order to become effective. A plan of reorganization would be accepted by holders of claims against and equity interests in us if (i) more than one-half in number and at least two-thirds in dollar amount of allowed claims actually voting in each class of claims impaired by the plan have voted to accept the plan and (ii) at least two-thirds in amount of allowed equity interests actually voting in each class of equity interests impaired by the plan has voted to accept the plan. A class of claims or equity interests that does not receive or retain any property under the plan on account of such claims or interests is deemed to have voted to reject the plan.

 

Under certain circumstances set forth in Section 1129(b) of the Bankruptcy Code, the Bankruptcy Court may confirm a plan even if such plan has not been accepted by all impaired classes of claims and equity interests. The precise requirements and evidentiary showing for confirming a plan notwithstanding its rejection by one or more impaired classes of claims or equity interests depends upon a number of factors, including the status and seniority of the claims or equity interests in the rejecting class (i.e., secured claims or unsecured claims, subordinated or senior claims, preferred or common stock). Generally, with respect to common stock interests, a plan may be “crammed down” even if the shareholders receive no recovery if the proponent of the plan demonstrates that (1) no class junior to the common stock is receiving or retaining property under the plan and (2) no class of claims or interests senior to the common stock is being paid more than in full.

 

Our timing of filing a plan of reorganization will depend on the timing and outcome of numerous other ongoing matters in the Chapter 11 Cases. Although we expect to file a plan of reorganization that provides for emergence from bankruptcy as a going concern, there can be no assurance at this time that we will be able to successfully develop, confirm and consummate one or more plans of reorganization or other alternative restructuring transactions, that satisfies the conditions of the Bankruptcy Code and is confirmed by the Bankruptcy Court, or that any such plan will be implemented successfully.

 

Basis of Accounting. As noted above, the uncertainty regarding our ability to meet our debt obligations and the resultant filing of the Chapter 11 Cases raises substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of our Chapter 11 Cases, other than as set forth under “Liabilities subject to compromise” and “Reorganization items” on the accompanying consolidated financial statements. In particular, the financial statements do not purport to show (i) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (ii) as to pre-petition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (iii) as to stockholders’ equity accounts, the effect of any changes that may be made in our capitalization; or (iv) as to operations, the effect of any changes that may be made to our business. We have accounted for the bankruptcy in accordance with Accounting Standards Codification 852, Reorganizations.

Liabilities Subject to Compromise. Our financial statements include amounts classified as liabilities subject to compromise which represent estimates of pre-petition obligations that we anticipate will be allowed as claims in our bankruptcy case. These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.

16


Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Condensed notes to consolidated financial statements (unaudited) – continued

(dollars in thousands, unless otherwise noted)

 

The amounts currently classified as liabilities subject to compromise may be subject to future adjustments depending on the Bankruptcy Court actions, further development with respect to disputed claims, and other events. Additional amounts may be included in liabilities subject to compromise in future periods if executory contracts and unexpired leases are rejected. Conversely, to the extent that such executory contracts or unexpired leases are not rejected and are instead assumed, certain liabilities characterized as subject to compromise may be converted to post-petition liabilities. Because of the uncertain nature of many of the potential claims, the magnitude of such claims is not reasonably estimable at this time. We will continue to evaluate these liabilities during the pendency of the Chapter 11 Cases and adjust amounts as necessary. The magnitude of claims and or the adjustments to such claims may be material. Nothing herein constitutes an admission or waiver of any rights.

The following table summarizes the components of “Liabilities subject to compromise” included on our Consolidated Balance Sheet as of September 30, 2016:

 

 

 

September 30, 2016

 

Accounts payable and accrued liabilities

 

$

9,740

 

Accrued payroll and benefits payable

 

 

5,133

 

Revenue distribution payable

 

 

4,690

 

Senior Notes and associated accrued interest

 

 

1,267,265

 

Liabilities subject to compromise

 

$

1,286,828

 

Reorganization Items. We use this category to reflect, where applicable, post-petition revenues, expenses, gains and losses that are direct and incremental as a result of the reorganization of the business. We have incurred and will continue to incur significant costs associated with the reorganization. The amount of these costs, which are being expensed as incurred, are expected to significantly affect our results of operations. Reorganization items for the three and nine months ended September 30, 2016, are as follows:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30, 2016

 

Professional fees

 

$

4,268

 

 

$

9,623

 

Claims for non-performance of executory contract

 

 

1,236

 

 

 

1,236

 

Total reorganization items

 

$

5,504

 

 

$

10,859

 

 

 

Note 3: Supplemental disclosures to the consolidated statements of cash flows

Supplemental disclosures to the consolidated statements of cash flows are presented below:

 

 

 

Nine months ended September 30,

 

 

 

2016

 

 

2015

 

Net cash provided by operating activities included:

 

 

 

 

 

 

 

 

Cash payments for interest

 

$

19,899

 

 

$

77,437

 

Interest capitalized

 

 

(1,741

)

 

 

(8,115

)

Cash payments for interest, net of amounts capitalized

 

$

18,158

 

 

$

69,322

 

Cash payments for income taxes

 

$

250

 

 

$

639

 

Cash payments for reorganization items

 

$

4,255

 

 

$

 

Non-cash financing activities included:

 

 

 

 

 

 

 

 

Repayment of Credit Facility with proceeds from early termination of derivative contracts (See Note 4)

 

$

103,560

 

 

$

 

Non-cash investing activities included:

 

 

 

 

 

 

 

 

Asset retirement obligation additions and revisions

 

$

4,015

 

 

$

3,637

 

Change in accrued oil and gas capital expenditures

 

$

(22,543

)

 

$

(116,237

)

 

17


Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Condensed notes to consolidated financial statements (unaudited) – continued

(dollars in thousands, unless otherwise noted)

 

Note 4: Debt

As of the dates indicated, debt consisted of the following:

 

 

September 30, 2016

 

 

December 31, 2015

 

9.875% Senior Notes due 2020, net of discount of $0 and $4,185, respectively (1)

 

$

 

 

$

293,815

 

8.25% Senior Notes due 2021 (1)

 

 

 

 

 

384,045

 

7.625% Senior Notes due 2022, including premium of $0 and $4,939, respectively (1)

 

 

 

 

 

530,849

 

Credit Facility (2)

 

 

444,440

 

 

 

367,000

 

Real estate mortgage notes, principal and interest payable

   monthly, bearing interest at rates ranging from 3.16%

   to 5.46%, due August 2021 through December 2028;

   collateralized by real property (2)

 

 

9,735

 

 

 

10,182

 

Installment notes payable, principal and interest payable

   monthly, bearing interest at rates ranging from 2.85%

   to 5.00%, due October 2016 through February 2018;

   collateralized by automobiles, machinery and equipment (2)

 

 

683

 

 

 

1,799

 

Capital lease obligations (2)

 

 

17,577

 

 

 

19,437

 

Total debt, net

 

 

472,435

 

 

 

1,607,127

 

Less current portion

 

 

472,435

 

 

 

1,607,127

 

Total long-term debt, net

 

$

 

 

$

 

 

(1)

These unsecured obligations have been classified as “Liabilities subject to compromise” as of September 30, 2016.

(2)

These secured obligations have not been classified as “Liabilities subject to compromise” as we believe the values of the underlying assets provide sufficient collateral to satisfy such obligations.

We are currently in default on all our indebtedness. The defaults stem from, among others, our commencement of the Chapter 11 Cases, direct defaults as a result of nonpayment of interest, violations of financial covenants and the inclusion of a going concern explanatory paragraph in the audit opinion of our annual financial statements. Moreover, due to our commencement of the Chapter 11 Cases, all of our indebtedness has been accelerated by operation of law.

Senior Notes

The Senior Notes are our senior unsecured obligations and rank equally in right of payment with all our existing and future senior debt, and rank senior to all of our existing and future subordinated debt. Pursuant to accounting guidance while in bankruptcy, our Senior Notes and the associated accrued interest have been classified as “Liabilities subject to compromise” on our consolidated balance sheets as of September 30, 2016. We will not accrue interest expense on our Senior Notes during the pendency of the Chapter 11 Cases as we do not expect to pay such interest. As a result, reported interest expense is $25,303 and $39,641 lower than contractual interest for the three and nine month periods ending September 30, 2016.

In March 2016 we wrote off the remaining unamortized issuance costs, premium and discount related to our Senior Notes for a net charge of $16,970. These deferred items are typically amortized over the life of the corresponding bond. However, as a result of not paying the interest due on our 2021 Senior Notes by the end of our 30-day grace period on March 31, 2016, as discussed in “Note 2—Chapter 11 filing,” we triggered an Event of Default on our Senior Notes. While uncured, the Event of Default effectively allows the lender to demand immediate repayment, thus shortening the life of our Senior Notes to the current period. As a result, we wrote off the remaining balance of unamortized issuance costs, premium and discount on March 31, 2016, as follows:

 

Non-cash expense for write-off of debt issuance costs on Senior Notes

 

$

17,756

 

Non-cash expense for write-off of debt discount costs on Senior Notes

 

 

4,014

 

Non-cash gain for write-off of debt premium on Senior Notes

 

 

(4,800

)

Total

 

$

16,970

 

18


Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Condensed notes to consolidated financial statements (unaudited) – continued

(dollars in thousands, unless otherwise noted)

 

Credit Facility

In April 2010, we entered into an Eighth Restated Credit Agreement (our “Credit Facility”), which is collateralized by our oil and natural gas properties and, as amended, matures on November 1, 2017. During the nine months ended September 30, 2016, we had additional borrowings of $181,000 and repayments of $103,560 on our Credit Facility. As discussed in “Note 5—Derivative instruments,” our repayment of $103,560 was effectuated by directly offsetting proceeds payable to us from the termination of our derivative contracts against outstanding borrowings under the Credit Facility during the third quarter of 2016. The ability to offset was possible as the previous counterparties to our derivative contracts are also Lenders. As of September 30, 2016, the weighted average interest rate was 5.0% on outstanding borrowings under Credit Facility. This rate represents the Alternate Base Rate (as defined under the Credit Facility) plus the applicable margin. The Company has not recorded the additional 2.0% default margin interest as the Lenders have agreed to waive that amount upon our exit from bankruptcy pursuant to a non-binding agreement between the Lenders and the Ad Hoc Committee.

Availability under our Credit Facility was subject to a borrowing base which is set by the banks semiannually on May 1 and November 1 of each year. In addition, the lenders may request a borrowing base redetermination once between each scheduled redetermination and in the event of early termination of our derivative contracts. We are currently in negotiations, as part of our reorganization, regarding the structure of our exit financing upon emergence from bankruptcy where we believe such financing will include a revolving credit facility subject to a borrowing base.

Subject to certain exceptions, under the Bankruptcy Code, the commencement of the Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or the filing of other actions against us or our property to recover, collect or secure a claim arising prior to the Petition Date. Creditors are stayed from taking any actions against us as a result of debt defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. There can be no assurances that the agent and lenders will consensually agree to a restructuring of the Credit Facility. Any proposed non-consensual restructuring of the Credit Facility could result in substantial delay in emergence from bankruptcy and there can be no assurances that the Bankruptcy Court would approve such proposed non-consensual restructuring. During the Chapter 11 Cases, we expect to remain current on our interest payments under the Credit Facility to the extent required by order of the Bankruptcy Court.

Capital Leases

During 2013, we entered into lease financing agreements with U.S. Bank National Association for $24,500 through the sale and subsequent leaseback of existing compressors owned by us. The carrying value of these compressors is included in our oil and natural gas full cost pool. The lease financing obligations are for 84 -month terms and include the option to purchase the equipment for a specified price at 72 months as well as an option to purchase the equipment at the end of the lease term for its then-current fair market value. Lease payments related to the equipment are recognized as principal and interest expense based on a weighted average implicit interest rate of 3.8%. Minimum lease payments are approximately $3,181 annually. As discussed previously, our debt defaults and the commencement of the Chapter 11 Cases are events of default under our capital leases.

Note 5: Derivative instruments

Overview

Our results of operations, financial condition and capital resources are highly dependent upon the prevailing market prices of, and demand for, oil, natural gas and natural gas liquids. These commodity prices are subject to wide fluctuations and market uncertainties. To mitigate a portion of this exposure, we previously entered into various types of derivative instruments, including commodity price swaps, enhanced price swaps, collars, put options, and basis protection swaps. We also previously entered into crude oil derivative contracts to hedge a portion of our natural gas liquids production.

Due to defaults under the master agreements governing our derivative contracts, our outstanding derivative positions were terminated in May 2016 and we have no outstanding derivative contracts as of September 30, 2016. As discussed in “Note 6—Fair value measurements” all the counterparties to our derivative transactions are also financial institutions within the lender group under our Credit Facility. The derivative master agreements with these counterparties generally specify that a default under any of our indebtedness, as well as any bankruptcy filing, is an event of default which may result in early termination of the derivative contracts. Proceeds from the early terminations, inclusive of amounts receivable at the time of termination for previous settlements, totaled $119,303. Of this amount, in the third quarter of 2016, $103,560 was utilized to offset outstanding borrowings under our Credit Facility and the remainder was remitted to the Company.

19


Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Condensed notes to consolidated financial statements (unaudited) – continued

(dollars in thousands, unless otherwise noted)

 

While we are in default on our indebtedness and have a bankruptcy filing, we will no longer be able to represent that we can comply with the credit default or bankruptcy covenants under any prospective derivative master agreements and thus may not be able to enter into new hedging transactions. We are currently negotiating with the Lenders, most of which were previously counterparties to our derivative contracts, regarding the resumption of hedging activity prior to our potential emergence from bankruptcy. However, there can be no assurance that we will be able to enter into new derivative transactions on terms that are acceptable to us.

Effect of derivative instruments on the consolidated balance sheets

All derivative financial instruments are recorded on the balance sheet at fair value. See “Note 6—Fair value measurements” for additional information regarding fair value measurements. The estimated fair values of derivative instruments are provided below. The carrying amounts of these instruments are equal to the estimated fair values.

 

 

 

As of December 31, 2015

 

 

 

Assets

 

 

Liabilities

 

 

Net value

 

Natural gas derivative contracts

 

$

41,328

 

 

$

(1,158

)

 

$

40,170

 

Crude oil derivative contracts

 

 

123,068

 

 

 

 

 

 

123,068

 

Total derivative instruments

 

 

164,396

 

 

 

(1,158

)

 

 

163,238

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Netting adjustments (1)

 

 

1,158

 

 

 

(1,158

)

 

 

 

Derivative instruments - current

 

 

143,737

 

 

 

 

 

 

143,737

 

Derivative instruments - long-term

 

$

19,501

 

 

$

 

 

$

19,501

 

 

(1)

Amounts represent the impact of master netting agreements that allow us to net settle positive and negative positions with the same counterparty. Positive and negative positions with counterparties are netted only to the extent that they relate to the same current versus noncurrent classification on the balance sheet.

Effect of derivative instruments on the consolidated statements of operations

We do not apply hedge accounting to any of our derivative instruments. As a result, all gains and losses associated with our derivative contracts are recognized immediately as non-hedge derivative gains in the consolidated statements of operations.

Non-hedge derivative gains in the consolidated statements of operations are comprised of the following:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Change in fair value of commodity price derivatives

 

$

 

 

$

30,941

 

 

$

(163,238

)

 

$

(67,883

)

Settlement gains on commodity price derivatives

 

 

 

 

 

54,474

 

 

 

62,626

 

 

 

157,754

 

Settlement gains on early terminations of commodity price derivatives

 

 

 

 

 

 

 

 

91,144

 

 

 

15,395

 

Total non-hedge derivative gains (losses)

 

$

 

 

$

85,415

 

 

$

(9,468

)

 

$

105,266

 

 

Note 6: Fair value measurements

Fair value is defined by the FASB 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. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

20


Chaparral Energy, Inc. and subsidiaries

(Debtor in possession)

Condensed notes to consolidated financial statements (unaudited) – continued

(dollars in thousands, unless otherwise noted)

 

Fair value measurements are categorized according to the fair value hierarchy defined by the FASB. The hierarchical levels are based upon the level of judgment associated with the inputs used to measure the fair value of the assets and liabilities as follows:

 

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2 inputs include quoted prices for identical or similar instruments in markets that are not active and inputs other than quoted prices that are observable for the asset or liability.

 

Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the asset or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and may affect the placement of assets and liabilities within the levels of the fair value hierarchy.

Recurring fair value measurements

Our financial instruments recorded at fair value on a recurring basis consist of commodity derivative contracts (see “Note 5—Derivative instruments”). Our derivative contracts classified as Level 2 consisted of commodity price swaps and basis protection swaps, which are valued using an income approach. Future cash flows from the derivatives are estimated based on the difference between the fixed contract price and the underlying published forward market price, and are discounted at the LIBOR swap rate. Our derivative contracts classified as Level 3 consisted of three-way collars, enhanced swaps, and purchased puts. The fair value of these contracts is developed by a third-party pricing service using a proprietary valuation model, which we believe incorporates the assumptions that market participants would have made at the end of each period. Observable inputs include contractual terms, published forward pricing curves, and yield curves. Significant unobservable inputs are implied volatilities. Significant increases (decreases) in implied volatilities in isolation would result in a significantly higher (lower) fair value measurement. We review these valuations and the changes in the fair value measurements for reasonableness. All derivative instruments are recorded at fair value and include a measure of our own nonperformance risk for derivative liabilities or that of our counterparties for derivative assets. As discussed in “Note 5—Derivative instruments,” due to defaults under the master agreements governing our derivative contracts, all our outstanding derivative positions were terminated in May 2016 and we have no outstanding derivative contracts as of September 30, 2016.

The fair value hierarchy for our financial assets and liabilities is shown by the following table:

 

 

 

As of December 31, 2015

 

 

 

Derivative

assets

 

 

Derivative

liabilities

 

 

Net assets

(liabilities)

 

Significant other observable inputs (Level 2)

 

$

41,328

 

 

$

(1,158

)

 

$

40,170

 

Significant unobservable inputs (Level 3)

 

 

123,068

 

 

 

 

 

 

123,068

 

Netting adjustments (1)

 

 

(1,158

)

 

 

1,158

 

 

 

 

 

 

$

163,238