10-Q 1 rexx-10q_20180331.htm 10-Q rexx-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2018

OR

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

For the transition period from              to             .

Commission file number: 001-33610

 

REX ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-8814402

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification number)

366 Walker Drive

State College, Pennsylvania 16801

(Address of principal executive offices) (Zip Code)

(814) 278-7267

(Registrant’s telephone number, including area code) 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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, 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-2of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

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  

10,708,287 shares of common stock were outstanding on May 10, 2018.

 


REX ENERGY CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018

INDEX

 

 

 

 

PAGE

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

3

PART I. FINANCIAL INFORMATION

 

 

Item 1.

  

Financial Statements

5

 

 

  

Consolidated Balance Sheets as of March 31. 2018 (Unaudited) and December 31, 2017

 5

 

 

  

Consolidated Statements of Operations (Unaudited) for the three-month periods ended March 31, 2018 and March 31, 2017

 6

 

 

  

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the three-month period ended March 31, 2018

 7

 

 

  

Consolidated Statements of Cash Flows (Unaudited) for the three-month periods ended March 31, 2018 and March 31, 2017

 8

 

 

  

Notes to Consolidated Financial Statements (Unaudited)

 9

 

Item 2.

  

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

 40

 

Item 3.

  

Quantitative and Qualitative Disclosure About Market Risk

52

 

Item 4.

  

Controls and Procedures

54

PART II. OTHER INFORMATION

 55

 

Item 1.

  

Legal Proceedings

 55

 

Item 1A.

  

Risk Factors

 55

 

Item 6.

  

Exhibits

 56

SIGNATURES

 57

 

 

 

 

 

2


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Some of the information, including all of the estimates and assumptions, in this report contains forward-looking statements within the meaning of sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this report, including, but not limited to, statements regarding our future financial position, business strategy, budgets, projected costs, savings and plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “continue” or the negative thereof or variations thereon or similar terminology.

These forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Factors that may cause our actual results, performance, or achievements to be materially different from those anticipated in forward-looking statements include, among others, the following:

 

our ability to restructure our balance sheet in a manner that allows us to continue as a going concern over the long term;

 

our ability to service our outstanding indebtedness;

 

the adequacy and availability of capital resources, credit and liquidity, including, but not limited to, access to additional borrowing capacity and our inability to generate sufficient cash flow from operations to fund our capital expenditures and meeting working capital needs;

 

our ability to comply with restrictions imposed by our senior credit facility and other existing and future financing arrangements;

 

domestic and global supply and demand for natural gas, natural gas liquids (“NGLs”) and oil;

 

realized prices for natural gas, NGLs and oil, and the volatility of those prices;

 

impairments of our natural gas and oil asset values due to declines in commodity prices;

 

economic conditions in the United States and globally;

 

conditions in the domestic and global capital and credit markets and their effect on us;

 

new or changing government regulations, including those relating to environmental matters, permitting or other aspects of our operations;

 

the willingness and ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain oil price and production controls;

 

the geologic quality of our properties with regard to, among other things, the existence of hydrocarbons in economic quantities;

 

uncertainties inherent in the estimates of our natural gas, NGL and oil reserves;

 

our ability to increase natural gas, NGL and oil production and income through exploration and development;

 

drilling and operating risks;

 

counterparty credit risks;

 

the success of our drilling techniques in both conventional and unconventional reservoirs;

 

the success of the secondary and tertiary recovery methods we utilize or plan to employ in the future;

 

the number of potential well locations to be drilled, the cost to drill, and the time frame within which they will be drilled;

 

the ability of contractors to timely and adequately perform their drilling, construction, well stimulation, completion and production services;

 

the availability of equipment, such as drilling rigs, and infrastructure, such as transportation, pipelines, processing and midstream services;

 

the effects of adverse weather or other natural disasters on our operations;

 

competition in the gas and oil industry in general, and specifically in our areas of operations;

 

changes in our drilling plans and related budgets;

 

the success of prospect development and property acquisitions;

3


 

the success of our business and financial strategies, and hedging strategies;

 

uncertainties related to the legal and regulatory environment for our industry and our own legal proceedings and their outcome;

 

the eligibility of our common stock for quotation of the OTC Bulletin Board or OTC Markets Group’s Pink marketplace following the delisting of the Company’s common stock from the Nasdaq Stock Market LLC (“Nasdaq”).

Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. Other unknown or unpredictable factors may cause actual results to differ materially from those projected by the forward-looking statements. Most of these factors are difficult to anticipate and may be beyond our control. Unless otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements.

4


Item 1.

Financial Statements.

REX ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

($ in Thousands, Except Share and per Share Data)

 

 

 

March 31, 2018 (unaudited)

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

25,090

 

 

$

15,247

 

Accounts Receivable

 

 

27,147

 

 

 

25,974

 

Taxes Receivable

 

 

48

 

 

 

2,049

 

Short-Term Derivative Instruments

 

 

7,732

 

 

 

8,008

 

Inventory, Prepaid Expenses and Other

 

 

9,997

 

 

 

4,614

 

Total Current Assets

 

 

70,014

 

 

 

55,892

 

Property and Equipment (Successful Efforts Method)

 

 

 

 

 

 

 

 

Evaluated Oil and Gas Properties

 

 

991,617

 

 

 

1,086,625

 

Unevaluated Oil and Gas Properties

 

 

179,297

 

 

 

186,523

 

Other Property and Equipment

 

 

19,792

 

 

 

19,640

 

Wells and Facilities in Progress

 

 

52,271

 

 

 

38,660

 

Pipelines

 

 

16,803

 

 

 

16,803

 

Total Property and Equipment

 

 

1,259,780

 

 

 

1,348,251

 

Less: Accumulated Depreciation, Depletion and Amortization

 

 

(367,900

)

 

 

(463,899

)

Net Property and Equipment

 

 

891,880

 

 

 

884,352

 

Other Assets

 

 

35

 

 

 

44

 

Long-Term Derivative Instruments

 

 

2,880

 

 

 

1,719

 

Deferred Tax Assets - Long Term

 

 

130

 

 

 

130

 

Total Assets

 

$

964,939

 

 

$

942,137

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts Payable

 

$

70,394

 

 

$

62,354

 

Current Maturities of Long-Term Debt

 

 

869,197

 

 

 

834,325

 

Accrued Liabilities

 

 

49,243

 

 

 

45,218

 

Short-Term Derivative Instruments

 

 

64,671

 

 

 

14,892

 

Total Current Liabilities

 

 

1,053,505

 

 

 

956,789

 

Long-Term Derivative Instruments

 

 

10,576

 

 

 

14,249

 

Other Long-Term Debt

 

 

7,972

 

 

 

8,156

 

Other Deposits and Liabilities

 

 

6,866

 

 

 

7,153

 

Future Abandonment Cost

 

 

8,355

 

 

 

9,352

 

Total Liabilities

 

$

1,087,274

 

 

$

995,699

 

Commitments and Contingencies (See Note 12)

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Preferred Stock, $.001 par value per share, 100,000 shares authorized and 3,987

   issued and outstanding on March 31, 2018 and December 31, 2017

 

$

1

 

 

$

1

 

Common Stock, $.001 par value per share, 100,000,000 shares authorized and

   10,708,287 shares issued and outstanding on March 31, 2018 and 10,244,394

   shares issued and outstanding on December 31, 2017.

 

 

11

 

 

 

10

 

Additional Paid-In Capital

 

 

654,534

 

 

 

652,917

 

Accumulated Deficit

 

 

(776,881

)

 

 

(706,490

)

Total Stockholders’ Equity

 

 

(122,335

)

 

 

(53,562

)

Total Liabilities and Stockholders’ Equity

 

$

964,939

 

 

$

942,137

 

See accompanying notes to the unaudited consolidated financial statements

 

 

 

5


REX ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, $ in Thousands, Except per Share Data)

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

OPERATING REVENUE

 

 

 

 

 

 

 

 

Natural Gas, NGL and Condensate Sales

 

$

65,025

 

 

$

52,065

 

Other Operating Revenue

 

 

4

 

 

 

6

 

TOTAL OPERATING REVENUE

 

 

65,029

 

 

 

52,071

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

Production and Lease Operating Expense

 

 

33,846

 

 

 

28,934

 

General and Administrative Expense

 

 

6,525

 

 

 

4,534

 

Loss (Gain) on Disposal of Assets

 

 

647

 

 

 

(1,834

)

Impairment Expense

 

 

8,168

 

 

 

1,546

 

Exploration Expense

 

 

228

 

 

 

220

 

Depreciation, Depletion, Amortization and Accretion

 

 

15,128

 

 

 

15,468

 

Other Operating (Income) Expense

 

 

203

 

 

 

(21

)

TOTAL OPERATING EXPENSES

 

 

64,745

 

 

 

48,847

 

INCOME FROM OPERATIONS

 

 

284

 

 

 

3,224

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Interest Expense

 

 

(22,647

)

 

 

(9,143

)

(Loss) Gain on Derivatives, Net

 

 

(46,426

)

 

 

8,381

 

Other Expense

 

 

(1,004

)

 

 

(28

)

Gain on Extinguishments of Debt

 

 

 

 

 

249

 

TOTAL OTHER EXPENSE

 

 

(70,077

)

 

 

(541

)

INCOME (LOSS) BEFORE INCOME TAX

 

 

(69,793

)

 

 

2,683

 

Income Tax Benefit

 

 

 

 

 

 

NET (LOSS) INCOME

 

 

(69,793

)

 

 

2,683

 

Preferred Stock Dividends

 

 

(598

)

 

 

(598

)

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS

 

$

(70,391

)

 

$

2,085

 

Earnings per common share:

 

 

 

 

 

 

 

 

Basic - Net (Loss) Income Attributable to Rex Energy Common Shareholders

 

$

(6.73

)

 

$

0.21

 

Basic - Weighted Average Shares of Common Stock Outstanding

 

 

10,464

 

 

 

9,769

 

Diluted - Net Income (Loss) Attributable to Rex Energy Common Shareholders

 

$

(6.73

)

 

$

0.21

 

Diluted - Weighted Average Shares of Common Stock Outstanding

 

 

10,464

 

 

 

9,769

 

See accompanying notes to the unaudited consolidated financial statements

 

 

 

6


REX ENERGY CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE-MONTHS ENDED MARCH 31, 2018

(Unaudited, in Thousands)

 

 

 

Common Stock

 

 

Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

Shares

 

 

Par Value

 

 

Additional Paid-

In Capital

 

 

Accumulated

Deficit

 

 

Total

Stockholders’

Equity

 

BALANCE December 31, 2017

 

 

10,244

 

 

$

10

 

 

 

4

 

 

$

1

 

 

$

652,917

 

 

$

(706,490

)

 

$

(53,562

)

Equity Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,019

 

 

 

 

 

 

1,019

 

Issuance of Restricted Stock, Net

   of Forfeitures

 

 

(27

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Dividends in Arrears Paid in

   Common Shares

 

 

491

 

 

 

1

 

 

 

 

 

 

 

 

 

598

 

 

 

(598

)

 

 

1

 

Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(69,793

)

 

 

(69,793

)

BALANCE March 31, 2018

 

 

10,708

 

 

$

11

 

 

 

4

 

 

$

1

 

 

$

654,534

 

 

$

(776,881

)

 

$

(122,335

)

See accompanying notes to the unaudited consolidated financial statements

 

 

 

7


REX ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, $ in Thousands)

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

(69,793

)

 

$

2,683

 

Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities

 

 

 

 

 

 

 

 

Depreciation, Depletion, Amortization and Accretion

 

 

15,128

 

 

 

15,468

 

Loss (Gain) on Derivatives

 

 

46,426

 

 

 

(8,381

)

Cash Settlements of Derivatives

 

 

(2,009

)

 

 

(3,443

)

Equity-based Compensation Expense

 

 

1,018

 

 

 

71

 

Non-cash Exploration Expenses

 

 

 

 

 

11

 

Impairment Expense

 

 

8,168

 

 

 

1,546

 

Non-cash Interest Expense

 

 

4,161

 

 

 

6,081

 

Gain on Extinguishments of Debt

 

 

 

 

 

(249

)

(Gain) Loss on Sale of Assets

 

 

647

 

 

 

(1,834

)

Other Non-cash (Income) Expense

 

 

380

 

 

 

(66

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts Receivable

 

 

96

 

 

 

5,341

 

Taxes Receivable

 

 

2,001

 

 

 

 

Inventory, Prepaid Expenses and Other Assets

 

 

(5,853

)

 

 

422

 

Accounts Payable and Accrued Liabilities

 

 

25,637

 

 

 

(6,989

)

Other Assets and Liabilities

 

 

(89

)

 

 

(139

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

25,918

 

 

 

10,522

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from the Sale of Oil and Gas Properties, Prospects and Other Assets

 

 

16,188

 

 

 

24,329

 

Acquisitions of Undeveloped Acreage

 

 

(620

)

 

 

(299

)

Capital Expenditures for Development of Oil & Gas Properties and Equipment

 

 

(61,738

)

 

 

(25,476

)

NET CASH USED IN INVESTING ACTIVITIES

 

 

(46,170

)

 

 

(1,446

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from Long-Term Debt and Line of Credit, net of Discounts

 

 

30,555

 

 

 

21,500

 

Repayments of Long-Term Debt and Line of Credit

 

 

 

 

 

(28,500

)

Repayments of Loans and Other Notes Payable

 

 

(460

)

 

 

(131

)

Debt Issuance Costs

 

 

 

 

 

(567

)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

30,095

 

 

 

(7,698

)

NET INCREASE IN CASH

 

 

9,843

 

 

 

1,378

 

CASH – BEGINNING

 

 

15,247

 

 

 

3,697

 

CASH – ENDING

 

$

25,090

 

 

$

5,075

 

SUPPLEMENTAL DISCLOSURES

 

 

 

 

 

 

 

 

Interest Paid, net of capitalized interest

 

$

5,594

 

 

$

1,541

 

Cash (Received) Paid for Income Taxes

 

 

(2,001

)

 

 

(163

)

NON-CASH ACTIVITIES

 

 

 

 

 

 

 

 

Change in fair value of contingent consideration receivable - sale of Illinois Basin

 

$

 

 

$

(1,417

)

Proceeds held in Escrow - non-cash component of Gain on Sale of Assets

 

 

150

 

 

 

5,000

 

Increase (Decrease) in Accounts Payable and Accrued Liabilities for Capital Expenditures

 

 

(13,730

)

 

 

(3,040

)

Increase Long Term Debt - Equipment Financing

 

 

345

 

 

 

607

 

Increase in Senior Notes carrying value net of Issuance Costs, Deferred Gain on

   Exchanges, and Net Discount due to Debt to Equity Conversions

 

 

 

 

 

5,208

 

Decrease in  Bond Interest Payable due to Debt to Equity Conversions

 

 

 

 

 

(11

)

Increase in Common Stock outstanding due to Debt to Equity Conversions

 

 

 

 

 

281

 

See accompanying notes to the unaudited consolidated financial statements

 

 

 

8


REX ENERGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

Rex Energy Corporation, together with our subsidiaries (the “Company”), is an independent natural gas, NGL and condensate company with operations currently focused in the Appalachian Basin. We are focused on Marcellus Shale, Utica Shale and Upper Devonian Shale drilling and exploration activities. We pursue a balanced growth strategy of exploiting our sizable inventory of high potential exploration drilling prospects while actively seeking to acquire complementary oil and natural gas properties.

The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of all of our wholly owned subsidiaries. We report our interests in natural gas, NGL and condensate properties using the proportional consolidation method of accounting. All intercompany balances and transactions have been eliminated. Unless otherwise indicated, all references to “Rex Energy Corporation,” “our,” “we,” “us” and similar terms refer to Rex Energy Corporation and its subsidiaries together. In preparing the accompanying Consolidated Financial Statements, management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures of contingencies.

The interim Consolidated Financial Statements of the Company are unaudited and contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. Actual results may differ from those estimates and results for interim periods are not necessarily indicative of results to be expected for a full year or for previously reported periods due in part, but not limited to, the volatility in prices for natural gas, NGLs and crude oil, future impact of financial derivative instruments, interest rates, estimates of reserves, drilling risks, geological risks, transportation restrictions, the timing of acquisitions, product demand, market consumption, interruption in production, our ability to obtain additional capital, and the success of natural gas, NGL and oil recovery techniques.

Certain amounts and disclosures have been condensed or omitted from these Consolidated Financial Statements pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these interim financial statements should be read in conjunction with the audited Consolidated Financial Statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Ability to Continue as a Going Concern, Covenant Violations and Planned Chapter 11 Reorganization

As of May 15, 2018, the date we filed our Consolidated Financial Statements with the Securities and Exchange Commission on Form 10-Q for the quarterly period ended March 31, 2018, we have not yet made the semi-annual interest payment to the holders of our second lien notes that was due April 2, 2018. The second lien notes provide for a 30-day grace period in which to pay the interest coupon due to the noteholders, which expired on May 2, 2018. Nonpayment of the interest due has resulted in an event of default under our term loan agreement and the second lien indentures. We received a notice of acceleration on April 27, 2018, from the lenders under our term loan agreement demanding immediate payment of all outstanding notes and loans, together with all accrued interest, fees, yield maintenance and call protection amounts. As of March 31, 2018, we recorded at fair value a liability for the yield maintenance and call protection amounts of approximately $53.0 million, recorded as Short-Term Derivative Instruments on our Consolidated Balance Sheet (see Note8, Derivative Instruments and Fair Value Measurements and Note 7, Long-Term Debt, to our Consolidated Financial Statements for additional information).  For the three months ended March 31, 2018, we recorded a loss of approximately $53.0 million as Gain (Loss) on Derivatives, Net in the Consolidated Statement of Operations in connection with various events occurring during the first quarter, which have led to the Company deciding to file Chapter 11 Bankruptcy which have caused these amounts to become due and payable.  The outstanding balance of the term loan inclusive of the yield maintenance, call protection, accrued interest and fees was approximately $274.0 million as of March 31, 2018. In addition to the non-payment of second lien interest, we also encountered additional events of default related to certain non-financial covenants associated with our term loan agreement. These additional events of default are a result of our failure to timely deliver to the term loan lenders our unaudited quarterly financial statements for the quarter ended December 31, 2017 and our annual audited financial statements for the year ended December 31, 2017, as well as related inadvertent failures to provide accurate related written notices to the lenders, and written notices of the events of default in a subsequent draw request under the term loan agreement.

We have entered into forbearance agreements with each of the requisite lenders under our senior term loan facility and the second lien notes. The forbearance agreements do not constitute a waiver of the events of default related to the nonpayment of interest and other non-financial covenants defaults described above. The forbearance agreements specify that the lenders will forbear from taking any enforcement actions during the forbearance period, which extends through May 17, 2018, unless earlier terminated, but does not prevent acceleration of amounts owed. We do not have sufficient liquidity to repay these amounts. The Company has been unsuccessful in negotiating an alternative restructuring with its various stakeholders outside of a voluntary pre-arranged Chapter 11 bankruptcy filing. As such, the ability to conclude a successful negotiation with our lenders and note holders out of court is not expected to occur. An acceleration notice from the lenders of our senior term loan has been received and we lack the liquidity to pay these obligations. Given these circumstances, the Company is currently in the process of preparing to file for protection under Chapter

9


11 of the U.S. Bankruptcy Code which is expected to occur imminently following the filing of this Form 10-Q. There can be no assurances that the Company will be able to reorganize its capital structure on terms acceptable to the Company, its creditors, or at all.

The events of default and significant risks and uncertainties described above raise a substantial doubt about our ability to continue as a going concern. The 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 consolidated financial statements do not include any adjustments that might result from the outcome of our discussions with the lenders under the term loan agreement and the holders of our second lien notes, or the outcome of the going concern uncertainty.

Reverse Stock Split

On May 12, 2017, we effected a one-for-ten reverse stock split. As a result of the reverse stock split, each ten shares of our common stock automatically combined into and became one share of our common stock. Any fractional shares which would have otherwise been due as a result of the reverse split were rounded up to the nearest whole share. As a result of the reverse stock split, we reduced the issued number of common shares from 99.0 million to 9.9 million. The reverse stock split automatically and proportionately adjusted, based on the one-for-ten split ratio, all issued and outstanding shares of our common stock, as well as common stock underlying stock options, warrants and other derivative securities outstanding at the time of the effectiveness of the reverse stock split. The exercise price on outstanding equity based-grants proportionately increased, while the number of shares available under our equity-based plans also was proportionately reduced. Share and per share data for the periods presented reflect the effects of this reverse stock split. References to numbers of shares of common stock and per share data in the accompanying financial statements and notes thereto have been adjusted to reflect the reverse stock split on a retroactive basis.

 

2. FUTURE ABANDONMENT COST

Future abandonment costs are recognized as obligations associated with the retirement of tangible long-lived assets that result from the acquisition and development of the asset. We recognize the fair value of a liability for a retirement obligation in the period in which the liability is incurred. For natural gas and oil properties, this is the period in which the natural gas or oil well is acquired or drilled. The future abandonment cost is capitalized as part of the carrying amount of our natural gas and oil properties at its discounted fair value. The liability is then accreted each period until the liability is settled or the natural gas or oil well is sold, at which time the liability is reversed. If the fair value of a recorded future abandonment cost changes, a revision is recorded to both the asset retirement obligation and the asset retirement cost.

Accretion expense totaled $0.3 million and $0.6 million for the three months ended March 31, 2018 and 2017, respectively.  These amounts are recorded as depreciation, depletion, amortization and accretion (“DD&A”) expense on our Consolidated Statements of Operations. We account for future abandonment costs that relate to wells that are drilled jointly based on our working interest in those wells.

 

($ in Thousands)

March 31, 2018

 

Beginning Balance at January 1, 2018

$

9,939

 

Future Abandonment Obligation Incurred

$

1

 

Future Abandonment Obligation Settled

$

(100

)

Future Abandonment Obligation Cancelled or Sold

$

(878

)

Future Abandonment Obligation Revision of Estimated Obligation

$

99

 

Future Abandonment Obligation Accretion Expense

$

257

 

Total Future Abandonment Cost1

$

9,318

 

 

1 Includes approximately $1.0 million of short-term future abandonment costs, which are classified as Accrued Liabilities on our Consolidated Balance Sheet.

 

 

3. REVENUE RECOGNITION

 

Effective January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Under the modified retrospective method, the Company recognizes the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings; however, no material adjustment was required as a result of adopting ASC 606. Results for reporting periods beginning on January 1, 2018 are presented under the new revenue standard. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company performed an analysis of the impact of adopting ASC 606 across all revenue streams and did not identify any changes to its revenue recognition policies that would result in a material impact to its consolidated financial statements. The Company also

10


implemented processes and controls to ensure new contracts are reviewed for the appropriate accounting treatment and to generate the required disclosures under the standards.

Revenues Sources and Sales Cycle

Revenue from operations is derived from sales of natural gas, NGL and condensate products produced by our well properties for which we are the operator. A de minimis percentage of revenue is also earned from either working interests, royalty interests, or small override interests we hold in various non-operated well properties. Our sales revenue is generated from on-going daily or monthly sales of volumes of gas and oil commodities, the sales volumes determined by metering or other measurement methods at the delivery point when control of the commodities transfers to the customer.

 

Revenue Recognition – Contracts with Customers

We recognize sales of our natural gas, NGL and condensate products when control of the product is transferred to the customer at delivery points specified in each commodity purchase contract. Under our commodity sales contracts, the delivery of each unit of natural gas, NGLs or condensate represents a separate performance obligation, and revenue is recognized at the point in time when the performance obligations are fulfilled. There are no significant financing components associated with our revenues from sales to customers as payment terms are typically within 30 to 60 days of control transfer. Sales revenue recognized corresponds directly with the value to the customer of the Company’s performance completed to date. We record revenue from sales of our natural gas, NGL and condensate production in the amount equal to our net revenue interest in sales from the producing properties. Under ASC 606, the Company recognizes revenues based on a determination of when control of its commodities is transferred and whether it is acting as a principal or agent in certain transactions.  All facts and circumstances of an arrangement are considered and judgment is often required in making this determination.   The Company considers risk of loss an important indicator of when control transfers, which is comprised of risks associated with loss of product during processing. The Company concluded that title, custody, and acceptance are not by themselves determinative indicators of control, as such factors may be present in the case of a sale or the performance of a service.

As a result of this analysis, the Company concluded that the Company represents the principal and the ultimate third party is its customer, which implies that the Company maintains control of the product through the tailgate of gas processing plants in certain natural gas processing in accordance with the control model in ASC 606. As a result, there were no changes to the Company’s presentation of revenues and expenses for these agreements.

Pricing of Commodity Sales

 

Our natural gas production is primarily sold under contracts that are typically priced at a differential to published commodity index prices for the producing area due to the natural gas quality and the proximity to major consuming markets. NGL and condensate production is sold under contract pricing referenced to various liquids commodity index prices. All revenue from production is generated from our operations in the Appalachian Basin.

Production Imbalances

 

The Company uses the sales method to account for natural gas production imbalances.  If the Company’s sales volume for a well exceeds the Company’s proportionate share of production from the well, a liability is recognized to the extent that the Company’s share of estimated remaining recoverable reserves from the well is insufficient to satisfy this imbalance.  No receivables are recorded for those wells on which the Company has taken less than its proportionate share of production.

Contract Balances

 

Under the Company’s product sales contracts, its customers are invoiced once the Company’s performance obligations have been satisfied, at which point payment is unconditional.  Accordingly, the Company’s product sales contracts do not give rise to material contract assets or contract liabilities.

Performance Obligations

Our contracts with customers represent a series of performance obligations satisfied over time when a performance obligation is satisfied by the transfer of control over a product to the customer.  The transfer of control is generally considered to occur when the Company has transferred custody, title, risk of loss and relinquished any repurchase rights or other similar rights. Our commodity

11


sales contracts are established to facilitate on-going sales of our products with our customers over the term of the contract, with pricing and delivery terms identified in each contract. We do not have contracts with customers that describe the performance obligation in terms of a defined gross total delivery volume over time. We utilized the practical expedient in ASC 606-10-50-14(A) which states that disclosure of the portion of a transaction price allocated to remaining performance obligations is not required if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under our sales contracts, each unit of product generally represents a separate performance obligation; therefore future sales volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

As of March 31, 2018 and December 31, 2017, we had trade receivable balances related to revenue from contracts with customers of approximately $19.6 million and $21.7 million, respectively.  

The following table summarizes our disaggregated revenues recognized from contracts with customers in our Consolidated Statements of Operations for the three month periods ended March 31, 2018 and 2017.

 

 

 

Three Months Ended March 31,

 

($ in Thousands)

 

2018

 

 

2017

 

Revenues from Contracts with Customers by Product

 

 

 

 

 

 

 

 

Natural Gas

 

$

28,576

 

 

$

29,633

 

NGLs

 

 

28,704

 

 

 

17,761

 

Condensate

 

 

6,612

 

 

 

3,409

 

    Total

 

$

63,892

 

 

$

50,803

 

 

 

4. BUSINESS AND OIL AND GAS PROPERTY DISPOSITIONS

Benefit Street Partners, LLC

On March 1, 2016, we entered into a joint exploration and development agreement with an affiliate of Benefit Street Partners, LLC (“BSP”) to jointly develop 58 specifically designated wells in our Moraine East and Warrior North operated areas. BSP agreed to participate in and fund 15.0% of the estimated well costs for 16 designated wells in Butler County, Pennsylvania, all of which have already been drilled, completed, placed in sales and paid for by BSP. BSP also agreed to participate in and fund 65.0% of the estimated well costs for six designated wells in Warrior North, Ohio, all of which have been drilled, completed, placed in sales and paid for by BSP. BSP also has the option to participate in the development of 36 additional wells and would fund 65.0% of the estimated well costs for the designated wells in return for a 65.0% working interest. To date, BSP has exercised its option to participate in 23 of these additional wells. Total consideration for this transaction could be up to $175.0 million with approximately $134.0 million committed as of March 31, 2018. BSP has paid for its interest in the elected wells as of December 31, 2017, and no additional elections have occurred during the quarter ended March 31, 2018. The remainder of the proceeds may be received if BSP makes additional elections as additional wells are drilled to total depth or placed in sales.  BSP earns an assignment of 15%-20% working interest in acreage located within each of the units in which it participates. As of March 31, 2018, all 45 committed wells were in line and producing.

The BSP transaction constitutes a pooling of assets in a joint undertaking to develop these specific properties for which there is substantial uncertainty about the ability to recover the costs applicable to our interest in the properties. Under the terms of the agreement, we hold a substantial obligation for future performance, which may not be proportionally reimbursed by BSP. Due to the uncertainty that exists on the recoverability of costs associated with our retained interest, proceeds received from BSP are considered a recovery of costs and no gain or loss is recognized.

Sale of Warrior South Assets

On January 11, 2017, we, together with MFC Drilling, Inc., and ABARTA Oil & Gas Co., Inc. sold substantially all of our jointly owned oil and gas interests in Noble, Guernsey, and Belmont Counties, Ohio, to Antero Resources Corporation. These interests comprised our Warrior South development area. The effective date for the transaction is October 1, 2016. The sales agreement includes representations, warranties, covenants and agreements as well as various provisions for purchase price and post-closing adjustments customary for transactions of this type. Total consideration for the transaction was approximately $50.0 million, with approximately $29.1 million net to us, subject to customary closing and post-closing adjustments. We received approximately $24.1 million of proceeds on January 11, 2017.  Approximately $5.0 million of the total proceeds due to us was held in escrow and released to us in December 2017 . The sale of assets resulted in a gain on disposal of assets of approximately $1.8 million in January 2017. This gain includes the additional proceeds held in escrow. The sale of assets included 14 gross wells with associated production of 15 Mmcfe/d, with 9 Mmcfe/d net to us, and approximately 6,200 gross acres, with 4,100 acres net to us. This acreage was considered non-core to us. We used the proceeds from the transaction to pay down amounts outstanding under our prior revolving line of credit and for general corporate purposes.

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Sale of Westmoreland Assets

On March 13, 2018, the Company, entered into a Purchase and Sale Agreement with XPR Resources, LLC (“XPR”), pursuant to which the Company agreed to sell to XPR certain of its non-operated oil and gas interests in 61 wells located in Westmoreland, Centre and Clearfield Counties, Pennsylvania, along with associated production and other ancillary assets.  The acreage sold was considered non-core to the Company.  In a related transaction, the Company entered into a Membership Interest Purchase Agreement on the same date with COG2, LLC (“COG2”), an affiliate of XPR, pursuant to which the Company agreed to sell to COG2 its 40% membership interest in RW Gathering, LLC.  Closing occurred on March 21, 2018, with an effective date for the transactions of January 1, 2018. Total consideration for the transactions was approximately $17.2 million, subject to customary closing and post-closing adjustments.  We received approximately $16.4 million of proceeds on March 23, 2018, prior to closing adjustments.  Approximately $0.2 million of the total proceeds due to us is being held in escrow. The sale of assets resulted in a loss on the disposal of assets of approximately $0.6 million in the first quarter of 2018.

5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09, Revenue from Contracts with Customers. The amendments in this ASU affect any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the guidance in ASU 2014-09 is that an entity should recognize revenue to depict 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 guidance provides a five step process to be applied in evaluating contracts under the new standard:

 

1)

Identify the contract(s) with a customer.

 

2)

Identify the performance obligations in the contract.

 

3)

Determine the transaction price.

 

4)

Allocate the transaction price to the performance obligations in the contract.

 

5)

Recognize revenue when (or as) the entity satisfies a performance obligation.

Subsequent to the issuance of ASU 2014-09, the FASB issued several additional Accounting Standards Updates to clarify implementation guidance, provide guidance regarding principal vs. agent considerations and identifying performance obligations, provide narrow-scope improvements, and provide additional disclosure guidance. ASU 2014-09 is required to be adopted using either the full retrospective approach, with all prior periods presented adjusted, or the modified retrospective approach, with the cumulative effect of applying the new standard recognized as an adjustment to retained earnings in the most current period presented in the financial statements. The standard is effective for annual reporting periods, and interim periods within that reporting period, beginning after December 15, 2017. We adopted the new standard effective January 1, 2018 using a modified retrospective approach. We did not require a cumulative adjustment to retained earnings as a result of adopting the standard. 

In February 2016, the FASB issued ASU 2016-02, Leases. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

 

A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and

 

A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

Public business entities are required to apply the amendment of this update for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. We are currently evaluating the potential impact of this standard on our results of operations and internal control environment.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in the update provide guidance regarding the presentation in the statement of cash flows of eight specific cash flow disclosure issues:

 

debt prepayment or debt extinguishment costs;

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settlement of zero-coupon debt instruments or other instruments with coupon rates that are insignificant in relation to the effective interest rate of borrowing;

 

contingent consideration payments made after a business combination;

 

proceeds from the settlement of insurance claims;

 

proceeds from the settlement of corporate-owned life insurance policies;

 

distributions received from equity method investees;

 

beneficial interest in securitization transactions; and

 

separately identifiable cash flows and application of the Predominance Principle.

Public business entities are required to apply the amendments of this update for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted this standard effective January 1, 2018 on a retrospective basis. Adoption of the standard did not have an impact on the presentation of our consolidated statements of cash flows

In May 2017, the FASB issued ASU 2017-09, Stock Compensation - Scope of Modification Accounting, which provides guidance about the types of changes to terms or conditions of a share-based payment award that would require an entity to apply modification accounting. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this update should be applied prospectively to awards modified on or after the adoption date. We adopted this standard effective January 1, 2018. Adoption of the standard did not have a material impact on our consolidated financial statements.

6. CONCENTRATIONS OF CREDIT RISK

By using derivative instruments to hedge exposure to changes in commodity prices, we are exposed to credit risk and market risk. Credit risk is the failure of the counterparties to perform under the terms of the derivative contract. When the fair value of the derivative is positive, the counterparty owes us, which creates repayment risk. We minimize the credit or repayment risk in derivative instruments by entering into transactions with high-quality counterparties. Our counterparties are investment grade financial institutions (see Note 7, Long-Term Debt, to our Consolidated Financial Statements). We have a master netting agreement in place with our counterparties that provides for the offsetting of payables against receivables from separate derivative contracts. None of our derivative contracts have a collateral provision that would require funding prior to the scheduled cash settlement date. For additional information, see Note 8, Derivative Instruments and Fair Value Measurements, to our Consolidated Financial Statements.

We depend on a relatively small number of purchasers for a substantial portion of our revenue. For the three months ended March 31, 2018, approximately 97.8% of our commodity sales came from five purchasers, with the largest single purchaser accounting for 60.1% of commodity sales. We believe the growth in our Appalachian estimated proved reserves, as well as the quantity of purchasers, will help us to minimize our future risks by diversifying our ratio of condensate and gas sales.   

7. LONG-TERM DEBT

Term Loan

On April 28, 2017 (the “Effective Date”), we entered into a term loan agreement (“Term Loan”) with Angelo, Gordon Energy Servicer, LLC (“AGES”), as administrative agent, AGES, as collateral agent (in such capacity, the “Collateral Agent”), Macquarie Bank Limited, as issuing bank (in such capacity, the “Issuing Bank”), and the lenders from time to time party thereto. The Term Loan replaced our prior amended and restated senior secured revolving credit agreement with Royal Bank of Canada, as Administrative Agent, and the lenders from time to time party thereto (the “Prior Credit Agreement”).  The Term Loan provides for a $143,500,000 secured term loan facility (the “Term Facility”) and a $156,500,000 secured delayed draw term loan facility (the “Delayed Draw Term Facility”), which includes a letter of credit sub-facility (the “Letter of Credit Sub-facility”).  The proceeds of the initial loans under the Term Loan were used to refinance the loans then outstanding under the Prior Credit Agreement and payment of fees and expenses related thereto; the proceeds of future loans under the Delayed Draw Term Facility may be used for cash collateralizing letters of credit under the Letter of Credit Sub-facility and general corporate purposes.  The maximum commitments of the lenders under the Term Loan were initially limited to $300,000,000.  Amounts borrowed and repaid may not be re-borrowed. Unless accelerated pursuant to the terms of the Term Loan, the maturity date for the loans under the Term Facility and the loans drawn under the Delayed Draw Term Facility is the earlier of (a) April 28, 2021 and (b) the date that is six months prior to the maturity of our 1.00/8.00% Senior Secured Second Lien Notes due 2020 (the “Second Lien Notes”) unless less than $25,000,000 in aggregate principal amount of Second Lien Notes are then outstanding and no Event of Default (as defined in the Term Loan) exists on such date.  Except as otherwise provided under the terms of the Term Loan in the case of an occurrence of an event of default, the commitments under the Delayed Draw Term Facility expire if not drawn prior to the earlier of (a) April 28, 2018 (which date may be extended for one year

14


with lender consent) and (b) the date upon which we terminate such commitments. As of March 31, 2018, we had $221.0 million in borrowings outstanding and approximately $32.0 million in outstanding undrawn letters of credit. We incurred approximately $3.5 million in debt issuance costs and $4.3 million in original issue discount (“OID”) related to the initial Term Loan borrowing.  We incurred an additional $2.3 million in OID related to the Delayed Draw Term Facility.   During the three months ended March 31, 2018, we amortized $0.3 million of debt issuance costs and $0.5 million of OID. The amortization of debt issuance costs and OID are reported as Interest Expense in our Consolidated Statement of Operations.

At March 31, 2018, approximately $7.7 million in deferred financing fees and OID were written off related to our Term Loan due to (i) the uncertainty regarding the Company’s ability to cure the default as discussed in Note 1, (ii) our inability to comply with certain financial covenants contained in our Term Loan and (iii) the acceleration notice received from the from the lenders the Term Loan. The amount written off is included in interest expense on the consolidated statements of operations for the period ended March 31, 2018.

Borrowings under the Term Loan bear interest at a rate per annum equal to the “Adjusted LIBO Rate” (subject to a 1.00% floor) plus an 8.75% per annum margin. The “Adjusted LIBO Rate” is equal to the product of the three month LIBOR rate multiplied by the statutory reserve rate.  Upon the occurrence and continuance of an Event of Default all outstanding loans bear interest at a rate equal to 4.00% per annum plus the then-effective rate of interest. Interest is payable on the last business day of each March, June, September and December.  Under the Term Loan, we will pay a 3.5% commitment fee on any unused portion of the Delayed Draw Term Facility.

The Term Loan requires us to prepay the loans with 100% of the net cash proceeds received from certain asset sales, swap terminations, incurrences of borrowed money indebtedness, casualty events and equity issuances, subject to certain exceptions and specified reinvestment rights.  Prepayments based on 75% of excess cash flow (“excess cash flow” as defined in the Term Loan agreement represents EBITDAX less capital expenditures, cash payments for interest, cash payments for income taxes, and adjustments for certain non-cash expenses) are required until no more than $287,950,000 in aggregate principal amount of Second Lien Notes remain outstanding, at which time, prepayments based on 50% of excess cash flow will be required.  Prepayments (including mandatory prepayments), terminations, refinancing, reductions and accelerations under the Term Loan are subject to a yield maintenance amount equal to the interest which would have accrued on such prepaid, terminated, refinanced, reduced or accelerated amount during the period beginning on the date of such prepayment, termination, refinancing, reduction or acceleration and ending on the date that is 30 months after the Effective Date and a call protection amount (a) during the period commencing on the Effective Date and ending on the date that is 30 months thereafter, in an amount equal to 3.0% of such prepaid, terminated, refinanced, reduced or accelerated amount and (b) during the period commencing on the date that is 30 months and one day after the Effective Date and ending on the date that is 36 months after the Effective Date, an amount equal to 1.0% of such prepaid, terminated, refinanced, reduced or accelerated amount.  Some of the provisions are required to be bifurcated from the Term Loan and valued separately as derivatives. Due to the short-term nature of these amounts at March 31, 2018 they have been recorded at their fair value using Level 2 inputs. For the three months ended March 31, 2018, we recorded a fair value liability of approximately $53.0 million as Short-Term Derivative Instruments on our Consolidated Balance Sheet. For the three months ended March 31, 2018, we recorded a loss of approximately $53.0 million as Gain (Loss) on Derivatives, Net in the Consolidated Statement of Operations in connection with various events occurring during the first quarter, which have led to the Company deciding to file Chapter 11 Bankruptcy which have caused these amounts to become due and payable.  As of December 31, 2017, the fair value of these embedded derivatives was not material.

The Term Loan contains covenants that restrict our ability to, among other things, materially change the nature of our business, make dividend payments, enter into transactions with affiliates, create or acquire additional subsidiaries, incur indebtedness, sell assets, make loans to others, make investments, enter into mergers, incur liens, and enter into agreements regarding swap and other derivative transactions.

The Term Loan also requires that we comply with the following financial covenants: (1) as of the last day of any fiscal quarter ending on or after December 31, 2017, the PDP Coverage Ratio (as defined in the Term Loan) will not be less than 1.65 to 1.00; (2) as of the last day of any fiscal quarter ending on or after March 31, 2017, the ratio of Net Senior Secured Debt (as defined in the Term Loan) as of such date to EBITDAX  (as defined in the Term Loan) for the period of four fiscal quarters then ending on such day will not be greater than 3.25 to 1.00; and (3) as of the last day of any fiscal quarter ending on or after September 30, 2017 the ratio of EBITDAX for the four fiscal quarters then ending to cash interest expense will not be less than (i) 1.00 to 1.00 for any fiscal quarter ending on or before December 31, 2017 and (ii) 1.30 to 1.00 for each fiscal quarter thereafter. As of March 31, 2018, our PDP Coverage Ratio was 2.34 to 1.00, Net Senior Secured Debt to EBITDAX Ratio was 2.92 to 1.00 and EBITDAX to Cash Interest Expense was 2.51 to 1.00.

Our obligations under the Credit Agreement have been accelerated upon the occurrence of an Event of Default (as such term is defined in the Term Loan). See Note 1, Basis of Presentation and Principles of Consolidation and Note 18 Subsequent Events, for additional information on certain financial and non-financial covenant defaults that have occurred.  

15


Obligations under the Term Loan are secured by mortgages on our oil and gas properties. In connection with the Term Loan, we, including our wholly owned subsidiaries, Rex Energy I, LLC, Rex Energy Operating Corp., PennTex Resources Illinois, Inc., Rex Energy IV, LLC, and R.E. Gas Development, LLC (collectively, the Guarantors and together with us, the Grantors), entered into an amended and restated guaranty and collateral agreement, dated as of April 28, 2017, in favor of the Collateral Agent for the lenders from time to time party to the Term Loan, the secured swap parties and the Issuing Bank (the Guaranty and Collateral Agreement).  Pursuant to the Guaranty and Collateral Agreement, each of the Guarantors, jointly and severally, guaranteed the prompt and complete payment of our obligations under the Term Loan. In addition, each Grantor granted, as security for the prompt and complete payment and performance when due of such Grantors obligations, a security interest in substantially all of its assets, including equity interests in other Guarantors, as applicable.

Senior Notes

On March 31, 2016, we completed an exchange offer and consent solicitation related to our 8.875% Senior Notes due 2020 (the “2020 Notes”) and 6.25% Senior Notes due 2022 (the “2022 Notes” and, together with the 2020 Notes, the “Existing Notes”). We offered to exchange (the “Exchange”) any and all of the Existing Notes held by eligible holders for up to (i) $675.0 million aggregate principal amount of our new Second Lien Notes and (ii) 10.1 million shares of our common stock (the “Shares”). We accounted for these transactions as troubled debt restructurings. As a result of the troubled debt exchanges, the future undiscounted cash flows of the Second Lien Notes are greater than the net carrying value of the Existing Notes. As such, no gain has been recognized within our GAAP basis financial statements and a new effective interest rate has been established.  See Note 9, Income Taxes, to our Consolidated Financial Statements, for information regarding the tax treatment and impact of the Exchange for federal and state income tax purposes.

In exchange for $324.0 million in aggregate principal amount of the 2020 Notes, representing approximately 92.6% of the outstanding aggregate principal amount of the 2020 Notes, and $309.1 million in aggregate principal amount of the 2022 Notes, representing approximately 95.1% of the outstanding aggregate principal amount of the 2022 Notes, we issued (i) $633.2 million aggregate principal amount of Second Lien Notes and (ii) 8.4 million Shares, which had a fair value of $6.5 million upon issuance. An additional $0.5 million aggregate principal amount of Second Lien Notes were issued to holders who were ineligible to accept Shares. In addition, upon closing, we paid in cash accrued and unpaid interest on the Existing Notes accepted in the Exchange from the applicable last interest payment date totaling approximately $12.8 million. The remaining Existing Notes will continue to accrue interest at their historical rates. The Second Lien Notes bore interest at a rate of 1.0% per annum for the first three semi-annual interest payments after issuance and have borne interest at a rate of 8.0% per annum thereafter, payable in cash. Interest payments are due on April 1 and October 1 of each year, beginning October 1, 2016 and ending October 1, 2020. In connection with the Exchange, we incurred approximately $9.1 million in third-party debt issuance costs during the year ended December 31, 2016. These costs were recorded as Debt Exchange Expense in our Consolidated Statement of Operations.

The Company has not made the semi-annual interest payment to the holders of our Second Lien Notes that was due on April 2, 2018, and did not make the interest payment prior to the expiration of the 30 day grace period.  Therefore, the maturity date of the Second Lien Notes is, upon requisite notice, subject to acceleration.  This nonpayment of the semi-annual interest payment on the Second Lien Notes is an event of default under the Company’s Term Loan and under the indentures governing the Existing Notes, which upon requisite notice, would result in an acceleration of the maturity dates of the Term Loan and Existing Notes.  See Note 1, Basis of Presentation and Principles of Consolidation and Note 18 Subsequent Events, for additional information on the non-payment of the semi-annual interest payment due.

Following the completion of the Exchange, we entered into debt-for equity exchanges during the remainder of 2016, with certain holders of our Existing Notes, as well as holders of our Second Lien Notes, in which such Existing Notes and Second Lien Notes were exchanged for unrestricted shares of our common stock.  These exchanges resulted in the retirement of $27.7 million in aggregate principal amount of our remaining Existing Notes and $45.7 million in aggregate principal amount of our outstanding Second Lien Notes, in exchange for the issuance of a total of approximately 2.4 million shares of unrestricted common stock during the year ended December 31, 2016. During the year ended December 31, 2017  , we completed debt-for equity exchanges with certain holders of our Existing Notes.  These exchanges resulted in the retirement of approximately $0.9 million in aggregate principal amount of our remaining Existing Notes, in exchange for approximately 0.1 million shares of unrestricted common stock. The exchanged notes were subsequently cancelled, resulting in a gain  for the three months ended March 31, 2017 of approximately $0.4 million, presented as Gain on Extinguishments of Debt in our Consolidated Statements of Operations.

We may redeem, at specified redemption prices, some or all of the Second Lien Notes at any time on or after April 1, 2018. We may also redeem up to 35% of the Second Lien Notes using the proceeds of certain equity offerings completed before April 1, 2018. If we sell certain of our assets or experience specific kinds of changes in control, we may be required to offer to purchase the Existing Notes and the Second Lien Notes from the holders.

16


The Senior Notes are governed by indentures (the “Indentures”), which contain affirmative and negative covenants that are customary for instruments of this nature, including restrictions or limitations on our ability to incur additional debt, pay dividends, purchase or redeem stock or subordinated indebtedness, make investments, create liens, sell assets, merge with or into other companies or transfer substantially all of our assets, unless those actions satisfy the terms and conditions of the Indentures or are otherwise excepted or permitted.    The Indentures also contain customary events of default. In certain circumstances, the individual trustees under the Indentures or the holders of the Senior Notes may declare all outstanding Senior Notes to be due and payable immediately.  

As of March 31, 2018 and December 31, 2017, we had recorded on our Consolidated Balance Sheets approximately $12.8 million and $14.0 million, respectively, of net premium/discounts related to the Senior Notes. The amortization of our net premium/discounts , which follows the effective interest method, increased interest expense by approximately $1.2 million for the three months ended March 31, 2018.  The amortization of our net premium/discounts decreased interest expense by approximately $3.8 million for the three months ended March 31, 2017. Interest is payable semi-annually on our Existing Notes. Interest on the 2020 Notes is paid at a rate of 8.875% per annum on June 1 and December 1 of each year, while interest on the 2022 Notes is paid at a rate of 6.25% per annum on February 1 and August 1 of each year. Total interest expense for the three months ended March 31, 2018 is composed of non-cash amortization of $4.4 million, cash interest payments of $6.8 million, capitalized interest of $(1.2) million and an increase in accrued interest of $12.6 million.  Total interest expense for the three months ended March 31, 2017 is composed of non-cash amortization of $6.3 million, cash interest payments of $1.3 million and an increase in accrued interest of $1.5 million.

 

 

 

 

March 31, 2018

 

 

 

 

Principal

 

Deferred Gain on Debt Restructurings, Net

 

Net Carrying Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Term Loans, Net

 

 

 

 

 

 

 

 

 

 

Term Loan Draw - due April 2020

$

221,000

 

$

 

$

221,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Notes, Net

 

 

 

 

 

 

 

 

 

 

8.875% Senior Notes due 2020

$

7,333

 

$

 

$

7,333

 

 

6.25% Senior Notes due 2022

 

5,363

 

 

 

$

5,363

 

 

1% / 8%  Second Lien Senior Notes due 2020

 

587,606

 

 

45,813

 

$

633,419

 

 

 

 

$

600,302

 

$

45,813

 

$

646,115

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Long-Term Debt

 

 

 

 

 

 

 

 

 

 

Long-Term Capital Leases - Equipment Financing

 

 

 

 

 

 

 

 

 

Due March, 2021

$

596

 

 

 

 

 

 

 

 

 

Due June, 2021

 

1,337

 

 

 

 

 

 

 

 

 

Due September, 2021

 

1,505

 

 

 

 

 

 

 

 

 

Due May, 2022

 

6,616

 

 

 

 

 

 

 

 

 

Total Capital Lease Obligations

$

10,054

 

 

 

 

 

 

 

 

 

Less: Current Portion of Capital Leases

 

(2,082

)

 

 

 

 

 

 

 

 

 

$

7,972

 

 

 

 

 

 

 

The weighted average interest rate on borrowed balances under the Term Loan for the three months ended March 31, 2018 was approximately 10.5%.  The weighted average interest rate on the Senior Credit Facility for the three months ended March 31, 2017 was approximately 3.7%. The average interest rate on our capital leases for the three months ended March 31, 2018 and 2017 was approximately 16.8% and 11.0%, respectively.  As of March 31, 2018, the Deferred Gain on Debt Restructurings, Net includes Unamortized Premiums/Discounts of $12.8 million, Unamortized Debt Issuance Costs of $30.8 million and Unamortized Deferred Gain on Debt Restructurings of $27.7 million.  

17


 

 

 

 

December 31, 2017

 

 

 

 

 

 

Principal

 

Unamortized net Premium / Discount

 

Unamortized Debt Issuance Costs

 

Deferred Gain on Debt Restructurings, Net

 

Net Carrying Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term Loans, Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term Loan Draw - due April 2020

$

189,500

 

$

(4,711

)

$

(2,761

)

$

 

$

182,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Notes, Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.875% Senior Notes due 2020

$

7,333

 

$

 

$

 

$

(60

)

$

7,273

 

 

 

 

6.25% Senior Notes due 2022

 

5,363

 

 

 

 

 

 

(67

)

 

5,296

 

 

 

 

1% / 8%  Second Lien Senior Notes due 2020

 

587,606

 

 

 

 

 

 

50,196

 

 

637,802

 

 

 

 

 

 

$

600,302

 

$

 

$

 

$

50,069

 

$

650,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Long-Term Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Capital Leases and Other Notes Payable- Equipment Financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due March, 2021

 

$

632

 

 

 

 

 

Due June, 2021

 

 

1,418

 

 

 

 

 

Due September, 2021

 

 

1,578

 

 

 

 

 

Due May 2022

 

 

6,454

 

 

 

 

 

Total Capital Lease Obligations

 

$

10,082

 

 

 

 

 

Less: Current Portion of Capital Leases and Other Notes Payable

 

 

(1,926

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

8,156

 

 

 

 

As of December 31, 2017, the Deferred Gain on Debt Restructurings, Net includes Unamortized Premiums/Discounts of $14.0 million, Unamortized Debt Issuance Costs of $33.6 million and Unamortized Deferred Gain on Debt Restructurings of $30.4 million.

 

The following is the principal maturity schedule for debt outstanding as of March 31, 2018:

 

2018(a)

$

822,833

 

2019

 

2,341

 

2020

 

2,739

 

2021

 

2,582

 

2022

 

861

 

Thereafter

 

 

Total (b)

$

831,356

 

 

(a)

Due to existing and anticipated covenant violations, the Company’s Term Loan and Senior Notes were classified as current as December 31, 2017.

 

(b)

Excludes $45.8 million of Deferred Gain on Debt Restructurings, Net.

 

 

8. DERIVATIVE INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Our results of operations and operating cash flows are impacted by changes in market prices for oil, natural gas and NGLs. To mitigate a portion of the exposure to adverse market changes, we enter into oil, natural gas and NGL commodity derivative instruments to establish price floor protection. As such, when commodity prices decline to levels that are less than our average price floor, we receive payments that supplement our cash flows. Conversely, when commodity prices increase to levels that are above our average price ceiling, we make payments to our counterparties. We do not enter into these arrangements for speculative trading purposes. As of March 31, 2018 and December 31, 2017, our commodity derivative instruments consisted of fixed rate swap contracts,  puts, collars, basis swaps and three-way collars. We did not designate these instruments as cash flow hedges for accounting purposes. Accordingly, associated unrealized gains and losses are recorded directly as Gain (Loss) on Derivatives, Net in the Consolidated Statement of Operations.

We enter into the majority of our derivative arrangements with two counterparties and have a netting agreement in place with these counterparties. We do not obtain collateral to support the agreements, but we believe our credit risk is currently minimal on these transactions. For additional information on the credit risk regarding our counterparties, see Note 6, Concentrations of Credit Risk, to our Consolidated Financial Statements.

None of our commodity derivatives are designated for hedge accounting but are, to a degree, an economic offset to our commodity price exposure. We utilize the mark-to-market accounting method to account for these contracts. We recognize all gains and losses related to these contracts in the Consolidated Statements of Operations as Gain (Loss) on Derivatives, Net under Other Expense. We paid net cash settlements of $2.0 million and $3.4 million in relation to our commodity derivatives during the three months ended March 31, 2018 and 2017, respectively.

18


Embedded Derivatives – Yield Maintenance and Call Protection

We entered into the Term Loan in April 2017, which included certain call protection and yield maintenance provisions that require accelerated payments upon certain events. Prepayments (including mandatory prepayments), terminations, certain events of default, refinancing, reductions and accelerations under the Term Loan are subject to a yield maintenance amount equal to the interest which would have accrued on such prepaid, terminated, refinanced, reduced or accelerated amount during the period beginning on the date of such prepayment, termination, refinancing, reduction or acceleration and ending on the date that is 30 months after the Effective Date and a call protection amount (a) during the period commencing on the Effective Date and ending on the date that is 30 months thereafter, in an amount equal to 3.0% of such prepaid, terminated, refinanced, reduced or accelerated amount and (b) during the period commencing on the date that is 30 months and one day after the Effective Date and ending on the date that is 36 months after the Effective Date, an amount equal to 1.0% of such prepaid, terminated, refinanced, reduced or accelerated amount.

Some of the provisions are required to be bifurcated from the Term Loan and valued separately as derivatives. Due to the short-term nature of these amounts at March 31, 2018 they have been recorded at their fair value using Level 2 inputs. For the three months ended March 31, 2018, we recorded a fair value liability of approximately $53.0 million as Short-Term Derivative Instruments on our Consolidated Balance Sheet. For the three months ended March 31, 2018, we recorded a loss of approximately $53.0 million as Gain (Loss) on Derivatives, Net in the Consolidated Statement of Operations in connection with various events occurring during the first quarter, which have led to the Company deciding to file Chapter 11 Bankruptcy which have caused these amounts to become due and payable. As of December 31, 2017, the fair value of these embedded derivatives was not material.  As of December 31, 2017, the fair value of these embedded derivatives was not material.

 

 Contingent Consideration – Sale of Illinois Basin Operations

 

In conjunction with the sale of our Illinois Basin operations, we executed a contract with the buyer that would allow us to receive future cash payments from the buyer if index pricing targets as defined in the contract are achieved at specified future dates.  We have evaluated the contract and concluded that it meets the definition and requirements for accounting treatment as a derivative instrument, as prescribed in ASC 815-10-15-83. We recorded the contract at its initial fair value of approximately $1.2 million as additional consideration in the calculation of the gain on the sale of the assets. Fair value was determined through application of mathematical models designed to provide fair value estimates utilizing probability measures and the market index measures underlying the contract. The fair value will be adjusted at each future reporting period for the duration of the contract, which concludes June 30, 2019. As of March 31, 2018 and December 31, 2017, the contingent consideration contract was valued at $2.1 million and $1.7 million, respectively. For the three month period ended March 31, 2018, the average index price for oil as specified in the contract was in excess of the required threshold price for the quarter, and we recognized income of approximately $0.8 million, representing the discounted fair value of the additional consideration earned during the quarter. The contract stipulates that the buyer will remit to us $0.9 million not later than April 15, 2019, for the consideration earned during the three months ended March 31, 2018. The discounted fair value of approximately $0.8 million is included in Accounts Receivable on our Consolidated Balance Sheets as of March 31, 2018.  

Derivative Instruments

The following table summarizes the location and amounts of gains and losses on our derivative instruments, none of which are designated as hedges for accounting purposes, in our accompanying Consolidated Statements of Operations for the three months ended March 31, 2018:  

 

 

 

For the Three Months Ended March 31,

 

 

($ in Thousands)

 

2018

 

 

2017

 

 

Oil

 

$

(1,735

)

 

$

1,137

 

 

Natural Gas

 

 

3,392

 

 

 

(59

)

 

NGLs

 

 

3,669

 

 

 

8,720

 

 

Contingent Consideration

 

 

1,214

 

 

 

(1,417

)

 

Embedded Derivatives

 

 

(52,965

)

 

 

 

 

(Loss) Gain on Derivatives, Net

 

$

(46,426

)

 

$

8,381

 

 

 

Our derivative instruments are recorded on the balance sheet as either an asset or a liability, in either case measured at fair value. The fair value associated with our derivative instruments was a net liability of approximately $64.6 million and approximately $19.4 million at March 31, 2018 and December 31, 2017, respectively.

19


Our open asset/(liability) financial commodity derivative instrument positions at March 31, 2018 consisted of:

 

Period

 

Volume

 

Put Option

 

 

Floor

 

 

Ceiling

 

 

Swap

 

 

Fair Market Value ($ in Thousands)

 

Oil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018 - Swaps

 

 

139,250

 

Bbls

 

$

 

 

$

 

 

$

 

 

$

57.55

 

 

$

(811

)

2018 - Collars

 

 

9,000

 

Bbls

 

 

 

 

 

53.00

 

 

 

60.00

 

 

 

 

 

 

(47

)

2018 - Three-Way Collars

 

 

57,000

 

Bbls

 

 

42.11

 

 

 

51.32

 

 

 

61.14

 

 

 

 

 

 

(222

)