10-Q 1 rrc-10q_20160930.htm 10-Q rrc-10q_20160930.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 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: 001-12209

 

RANGE RESOURCES CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

34-1312571

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

100 Throckmorton Street, Suite 1200

Fort Worth, Texas

 

76102

(Address of Principal Executive Offices)

 

(Zip Code)

Registrant’s telephone number, including area code

(817) 870-2601

 

Former Name, Former Address and Former Fiscal Year, if changed since last report: Not applicable

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 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

 

  (Do not check if smaller reporting company)

  

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  

247,145,294 Common Shares were outstanding on October 24, 2016

 

 

 

 

 


RANGE RESOURCES CORPORATION

FORM 10-Q

Quarter Ended September 30, 2016

Unless the context otherwise indicates, all references in this report to “Range Resources,” “Range,” “we,” “us,” or “our” are to Range Resources Corporation and its directly and indirectly owned subsidiaries and its ownership interests in equity method investments.

TABLE OF CONTENTS

 

 

 

 

2


PART I – FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements

 

RANGE RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

542

 

 

$

471

 

      Accounts receivable, less allowance for doubtful accounts of $5,555 and $4,994

 

183,883

 

 

 

123,842

 

Derivative assets

 

158,340

 

 

 

281,544

 

Inventory and other

 

36,445

 

 

 

33,217

 

Total current assets

 

379,210

 

 

 

439,074

 

Derivative assets

 

21,480

 

 

 

7,218

 

Goodwill

 

1,630,981

 

 

 

 

Natural gas and oil properties, successful efforts method

 

12,200,382

 

 

 

8,996,336

 

Accumulated depletion and depreciation

 

(2,994,282

)

 

 

(2,635,031

)

 

 

9,206,100

 

 

 

6,361,305

 

Other property and equipment

 

114,911

 

 

 

110,013

 

Accumulated depreciation and amortization

 

(96,603

)

 

 

(90,558

)

 

 

18,308

 

 

 

19,455

 

Other assets

 

71,180

 

 

 

72,979

 

Total assets

$

11,327,259

 

 

$

6,900,031

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

124,348

 

 

$

117,346

 

Asset retirement obligations

 

15,071

 

 

 

15,071

 

Accrued liabilities

 

294,253

 

 

 

188,028

 

Accrued interest

 

21,185

 

 

 

30,139

 

Derivative liabilities

 

7,277

 

 

 

1,136

 

Total current liabilities

 

462,134

 

 

 

351,720

 

Bank debt

 

930,669

 

 

 

86,427

 

Senior notes

 

2,847,564

 

 

 

738,101

 

Senior subordinated notes

 

48,476

 

 

 

1,826,775

 

Deferred tax liabilities

 

1,176,353

 

 

 

777,947

 

Derivative liabilities

 

3,934

 

 

 

21

 

Deferred compensation liabilities

 

119,645

 

 

 

104,792

 

Asset retirement obligations and other liabilities

 

277,671

 

 

 

254,590

 

Total liabilities

 

5,866,446

 

 

 

4,140,373

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

Preferred stock, $1 par, 10,000,000 shares authorized, none issued and outstanding

 

 

 

 

 

Common stock, $0.01 par, 475,000,000 shares authorized, 247,145,228 issued at

     September 30, 2016 and 169,375,743 issued at December 31, 2015

 

2,471

 

 

 

1,693

 

Common stock held in treasury, 44,772 shares at September 30, 2016 and 59,283

     shares at December 31, 2015

 

(1,701

)

 

 

(2,245

)

Additional paid-in capital

 

5,512,727

 

 

 

2,442,623

 

Retained earnings (deficit)

 

(52,684

)

 

 

317,587

 

Total stockholders’ equity

 

5,460,813

 

 

 

2,759,658

 

Total liabilities and stockholders’ equity

$

11,327,259

 

 

$

6,900,031

 

See accompanying notes.

3


RANGE RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas, NGLs and oil sales

$

304,477

 

 

$

252,065

 

 

$

738,570

 

 

$

835,601

 

Derivative fair value income (loss)

 

64,556

 

 

 

202,004

 

 

 

(11,334

)

 

 

290,052

 

Brokered natural gas, marketing and other

 

44,174

 

 

 

25,864

 

 

 

119,181

 

 

 

61,688

 

Total revenues and other income

 

413,207

 

 

 

479,933

 

 

 

846,417

 

 

 

1,187,341

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct operating

 

22,387

 

 

 

35,058

 

 

 

67,112

 

 

 

106,975

 

Transportation, gathering, processing and compression

 

138,764

 

 

 

99,634

 

 

 

400,871

 

 

 

284,258

 

Production and ad valorem taxes

 

6,717

 

 

 

7,336

 

 

 

18,653

 

 

 

26,506

 

Brokered natural gas and marketing

 

44,622

 

 

 

32,331

 

 

 

122,105

 

 

 

80,924

 

Exploration

 

6,943

 

 

 

4,235

 

 

 

18,641

 

 

 

17,146

 

Abandonment and impairment of unproved properties

 

6,082

 

 

 

12,366

 

 

 

23,769

 

 

 

36,187

 

General and administrative

 

41,024

 

 

 

46,178

 

 

 

127,745

 

 

 

150,471

 

Memorial merger expenses

 

33,791

 

 

 

 

 

 

36,412

 

 

 

 

Termination costs

 

136

 

 

 

(77

)

 

 

303

 

 

 

6,290

 

Deferred compensation plan

 

(11,636

)

 

 

(43,705

)

 

 

30,166

 

 

 

(56,611

)

Interest

 

45,967

 

 

 

42,904

 

 

 

121,464

 

 

 

125,590

 

Loss on early extinguishment of debt

 

 

 

 

22,495

 

 

 

 

 

 

22,495

 

Depletion, depreciation and amortization

 

131,489

 

 

 

153,993

 

 

 

374,440

 

 

 

453,178

 

Impairment of proved properties

 

 

 

 

502,233

 

 

 

43,040

 

 

 

502,233

 

Loss (gain) on the sale of assets

 

2,597

 

 

 

681

 

 

 

7,544

 

 

 

(2,053

)

Total costs and expenses

 

468,883

 

 

 

915,662

 

 

 

1,392,265

 

 

 

1,753,589

 

Loss before income taxes

 

(55,676

)

 

 

(435,729

)

 

 

(545,848

)

 

 

(566,248

)

Income tax benefit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

Deferred

 

(13,705

)

 

 

(134,781

)

 

 

(187,231

)

 

 

(174,390

)

 

 

(13,705

)

 

 

(134,781

)

 

 

(187,231

)

 

 

(174,390

)

Net loss

$

(41,971

)

 

$

(300,948

)

 

$

(358,617

)

 

$

(391,858

)

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.23

)

 

$

(1.81

)

 

$

(2.09

)

 

$

(2.36

)

Diluted

$

(0.23

)

 

$

(1.81

)

 

$

(2.09

)

 

$

(2.36

)

Dividends paid per common share

$

0.02

 

 

$

0.04

 

 

$

0.06

 

 

$

0.12

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

180,683

 

 

 

166,517

 

 

 

171,571

 

 

 

166,327

 

Diluted

 

180,683

 

 

 

166,517

 

 

 

171,571

 

 

 

166,327

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

4


RANGE RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 

Nine Months Ended September 30,

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

Net loss

$

(358,617

)

 

$

(391,858

)

Adjustments to reconcile net loss to net cash provided from operating activities:

 

 

 

 

 

 

 

Deferred income tax benefit

 

(187,231

)

 

 

(174,390

)

Depletion, depreciation and amortization and impairment

 

417,480

 

 

 

955,411

 

Exploration dry hole costs

 

2

 

 

 

87

 

Abandonment and impairment of unproved properties

 

23,769

 

 

 

36,187

 

Derivative fair value loss (income)

 

11,334

 

 

 

(290,052

)

Cash settlements on derivative financial instruments

 

260,657

 

 

 

360,645

 

Allowance for bad debt

 

800

 

 

 

600

 

Amortization of deferred financing costs, loss on extinguishment of debt and other

 

5,383

 

 

 

27,572

 

Deferred and stock-based compensation

 

72,689

 

 

 

(10,679

)

Loss (gain) on the sale of assets

 

7,544

 

 

 

(2,053

)

Changes in working capital:

 

 

 

 

 

 

 

Accounts receivable

 

31,985

 

 

 

79,448

 

Inventory and other

 

(776

)

 

 

(7,073

)

Accounts payable

 

(41,268

)

 

 

(13,158

)

Accrued liabilities and other

 

(41,714

)

 

 

(55,127

)

Net cash provided from operating activities

 

202,037

 

 

 

515,560

 

Investing activities:

 

 

 

 

 

 

 

Additions to natural gas and oil properties

 

(339,446

)

 

 

(901,227

)

Additions to field service assets

 

(1,542

)

 

 

(2,878

)

Acreage purchases

 

(29,203

)

 

 

(61,213

)

Memorial Merger, net of cash acquired

 

7,180

 

 

 

 

Other

 

 

 

 

(75

)

Proceeds from disposal of assets

 

191,834

 

 

 

14,825

 

Purchases of marketable securities held by the deferred compensation plan

 

(33,460

)

 

 

(23,594

)

Proceeds from the sales of marketable securities held by the deferred compensation plan

 

37,900

 

 

 

28,168

 

Net cash used in investing activities

 

(166,737

)

 

 

(945,994

)

Financing activities:

 

 

 

 

 

 

 

Borrowings on credit facilities

 

1,887,000

 

 

 

1,940,000

 

Repayments on credit facilities

 

(1,045,000

)

 

 

(1,676,000

)

Repayment of Memorial credit facility

 

(597,000

)

 

 

 

Issuance of senior notes

 

 

 

 

750,000

 

Repayment of senior notes

 

(273,011

)

 

 

 

Repayment of subordinated notes

 

 

 

 

(516,875

)

Debt issuance costs and other

 

(6,381

)

 

 

(14,156

)

Dividends paid

 

(11,654

)

 

 

(20,308

)

Change in cash overdrafts

 

432

 

 

 

(40,123

)

Proceeds from the sales of common stock held by the deferred compensation plan

 

10,385

 

 

 

7,938

 

Net cash (used in) provided from financing activities

 

(35,229

)

 

 

430,476

 

Increase in cash and cash equivalents

 

71

 

 

 

42

 

Cash and cash equivalents at beginning of period

 

471

 

 

 

448

 

Cash and cash equivalents at end of period

$

542

 

 

$

490

 

 

See accompanying notes.

 

5


RANGE RESOURCES CORPORATION

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) SUMMARY OF ORGANIZATION AND NATURE OF BUSINESS

Range Resources Corporation is a Fort Worth, Texas-based independent natural gas, natural gas liquids (“NGLs”) and oil company primarily engaged in the exploration, development and acquisition of natural gas and oil properties in the Appalachian and the North Louisiana regions of the United States. Our objective is to build stockholder value through consistent growth in reserves and production on a cost-efficient basis. Range is a Delaware corporation with our common stock listed and traded on the New York Stock Exchange under the symbol “RRC.”

(2) BASIS OF PRESENTATION

These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Range Resources Corporation 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2016. The results of operations for the third quarter and the nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year. These consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for fair presentation of the results for the periods presented. All adjustments are of a normal recurring nature unless otherwise disclosed. These consolidated financial statements, including selected notes, have been prepared in accordance with the applicable rules of the SEC and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements.

On September 16, 2016, we issued approximately 77.0 million shares of common stock in exchange for all outstanding shares of common stock of Memorial Resources Development Corp. (“Memorial”) using an exchange ratio of 0.375 of a share of Range common stock for each share of Memorial common stock. For additional information, see Note 4. In connection with the allocation of purchase price for this merger, approximately $1.6 billion has been recorded as goodwill. Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the acquisition of a business. Goodwill is not amortized, but rather is tested for impairment annually or when events and changes in circumstances indicate that the fair value of a reporting unit with goodwill has been reduced below carrying value. We assess goodwill for impairment annually on November 1, or more frequently as circumstances require. The impairment test requires allocating goodwill and other assets and liabilities to a reporting unit level, which is represented by our oil and natural gas operations in the United States. The fair value of a reporting unit is determined and compared to the book value of the reporting unit. If the fair value of the reporting unit is less than the book value, including goodwill, then the recorded goodwill is impaired to its implied fair value with a charge to impairment expense.

Inventory.  As of September 30, 2016, we had $13.6 million of material and supplies inventory compared to $20.8 million at December 31, 2015. Material and supplies inventory consist of primarily tubular goods and equipment used in our operations and is stated at lower of specific cost of each inventory item or market. At September 30, 2016, we also had commodity inventory of $13.6 million compared to $4.8 million at December 31, 2015. Commodity inventory as of September 30, 2016 consists of natural gas and NGLs held in storage or as line fill in pipelines.

(3) NEW ACCOUNTING STANDARDS

Not Yet Adopted

In May 2014, an accounting standards update was issued that supersedes the existing revenue recognition requirements. This standard includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Among other things, the standard also eliminates industry-specific revenue guidance, requires enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. This standard is effective for us in first quarter 2018 and will be applied retrospectively to each prior reporting period presented or with the cumulative effect of initially applying the update recognized at the date of initial application. Early adoption is permitted with an effective date no earlier than first quarter 2017. We are evaluating the provisions of this accounting standards update and assessing the impact, if any, it may have on our consolidated results of operations, financial position, cash flows or financial disclosures.

In August 2014, an accounting standards update was issued that requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in United States auditing standards. This standard is effective for us in fourth quarter 2016 and early adoption is permitted. We do not expect the adoption of this standard to have a significant impact on our consolidated results of operations, financial position, cash flows or financial disclosures.

In February 2016, an accounting standards update was issued that requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Classification of leases as either a finance or operating lease will determine the recognition, measurement and presentation of expenses. This accounting standard update also requires certain quantitative and qualitative disclosures about leasing arrangements. This standard is effective for us in first quarter 2019 and should be applied using a

6


modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements and early adoption is permitted. We are evaluating the provisions of this accounting standards update and assessing the impact it may have, if any, on our consolidated results of operations, financial position or cash flows.

In March 2016, an accounting standards update was issued that simplifies several aspects of the accounting for share-based payment award transactions. Among other things, this new guidance will require all income tax effects of share-based awards to be recognized in the statement of operations when the awards vest or are settled, will allow an employer to repurchase more of an employee’s shares for tax withholding purposes than it can today without triggering liability accounting and will allow a policy election to account for forfeitures as they occur. This standard is effective for us in first quarter 2017 with prospective application and early adoption is permitted. We are evaluating the provisions of this accounting standards update and assessing the impact it may have, if any, on our consolidated results of operations, financial position or cash flows.

In August 2016, an accounting standards update was issued that clarifies how entities classify certain cash receipts and cash payments on the statement of cash flows. The guidance is effective for us in first quarter 2018 and will be applied retrospectively with early adoption permitted. We are evaluating the provisions of this accounting standards update and assessing the impact, if any, it may have on our consolidated cash flow statement presentation.

Recently Adopted

In April 2015, an accounting standards update was issued that requires debt issuance costs to be presented in the balance sheet as a direct reduction from the associated debt liability. This standard was effective for the reporting period beginning on January 1, 2016 with early adoption permitted. As of December 31, 2015, we adopted this standard retrospectively and have accounted for the debt issuance costs as a reduction of the associated debt liability. This adoption only affected our consolidated balance sheets and did not have an impact on our consolidated results of operations or cash flows.

In November 2015, an accounting standards update was issued which requires entities to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This standard is effective for the reporting period beginning January 1, 2017 with early adoption permitted. As of December 31, 2015, we adopted this standard retrospectively and reclassified our current deferred tax assets and liabilities into non-current deferred tax assets and liabilities. This adoption only affected our consolidated balance sheets and did not have an impact on our consolidated results of operations or cash flows.

(4) ACQUISITIONS AND DISPOSITIONS

Memorial Merger

On September 16, 2016, Range Resources Corporation completed its merger with Memorial (the “Memorial Merger,”) which was accomplished through the merger of Medina Merger Sub, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Range, with and into Memorial, with Memorial surviving as a wholly-owned subsidiary of Range. The results of Memorial’s operations since the effective time of the merger are included in our consolidated statement of operations. The merger was effected through the issuance of approximately 77.0 million shares of Range common stock in exchange for all outstanding shares of Memorial using an exchange ratio of 0.375 of a share of Range common stock for each share of Memorial common stock. At the effective time of the merger, Memorial’s liabilities, which are reflected in Range’s consolidated financial statements, included approximately $1.2 billion fair value of outstanding debt. In connection with the Memorial Merger, we have incurred merger-related costs of approximately $36.4 million to date including consulting, investment banking, advisory, legal and other merger-related fees.

Allocation of Purchase Price.  The Memorial Merger has been accounted for as a business combination, using the acquisition method. The following table represents the preliminary allocation of the total purchase price of the Memorial Merger to the assets acquired and the liabilities assumed based on the fair value at the effective time of the merger, with any excess of the purchase price over the estimated fair value of the identifiable net assets acquired recorded as goodwill. Certain data necessary to complete the purchase price allocation is not yet available, and includes, but is not limited to, valuation of pre-merger contingencies, final tax returns that provide the underlying tax basis of Memorial’s assets and liabilities and final appraisals of assets acquired and liabilities assumed. We expect to complete the purchase price allocation during the 12-month period following the merger date, in line with the acquisition method of accounting, during which time the value of the assets and liabilities, including goodwill, may be revised as appropriate.

7


The following table sets forth our preliminary purchase price allocation (in thousands, except shares and stock price):

Purchase price:

 

 

 

Shares of Range common stock issued to Memorial stockholders

 

77,042,749

 

Range common stock price per share on September 15, 2016 (close)

$

39.37

 

Total purchase price

$

3,033,173

 

 

 

 

 

Plus fair value of liabilities assumed by Range:

 

 

 

Accounts payable

 

54,905

 

Other current liabilities

 

96,734

 

Long-term debt

 

1,204,449

 

Deferred taxes

 

583,575

 

Other long-term liabilities

 

19,169

 

Total purchase price plus liabilities assumed

$

4,992,005

 

 

 

 

 

Fair value of Memorial assets:

 

 

 

Cash and equivalents

$

7,180

 

Other current assets

 

93,911

 

Derivative instruments

 

152,994

 

Oil and gas properties:

 

 

 

Proved property

 

1,096,035

 

Unproved property

 

2,007,200

 

Other property and equipment

 

3,579

 

Goodwill (a)

 

1,630,981

 

Other

 

125

 

Total asset value

$

4,992,005

 

(a) Goodwill will not be deductible for income tax purposes.

The fair value measurements of derivative instruments assumed were determined based on published forward commodity price curves as of the date of the Memorial Merger and represent Level 2 inputs. Derivative instruments in an asset position include a measure of counterparty nonperformance risk and the fair values of commodity derivative instruments in a liability position include a measure of our own nonperformance risk, each based on the current published credit default swap rates. The fair value measurements of long-term debt were estimated based on published market prices and represent Level 1 inputs.

The fair value measurements of oil and natural gas properties and asset retirement obligations are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair value of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties include estimates of:  (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average costs of capital rate. These inputs require significant judgments and estimates by management at the time of the valuation and may be subject to change.  Management utilized the assistance of a third party valuation expert to estimate the value of the oil and natural gas properties acquired. In some cases, certain amounts allocated to unproved properties are based on a market approach using third party published data which provides lease pricing information based on certain geographic areas and represent Level 2 inputs.

Goodwill is attributed to net deferred tax liabilities arising from the differences between the purchase price allocated to Memorial’s assets and liabilities based on fair value and the tax basis of these assets and liabilities. In addition, the total consideration for the merger included a control premium, which resulted in a higher value compared to the fair value of net assets acquired. There are also other qualitative assumptions of long-term factors that the merger creates for Range stockholders including additional potential for exploration and development opportunities, additional scale and efficiencies in other basins in which we operate and substantial operating and administrative synergies.

The results of operations attributable to Memorial are included in our consolidated statement of operations beginning on September 16, 2016. Revenues of $21.1 million and field net operating income of $12.3 million from Memorial were generated from September 16, 2016 to September 30, 2016.

Pro forma Financial Information. The following pro forma condensed combined financial information was derived from the historical financial statements of Range and Memorial and gives effect to the merger as if it had occurred on January 1, 2015. The below information reflects pro forma adjustments for the issuance of Range common stock in exchange for Memorial’s outstanding shares of common stock, as well as pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including (i) the depletion of Memorial’s fair-valued proved oil and gas properties and (ii) the estimated tax impacts of the pro forma adjustments. Additionally, pro forma earnings for the three and nine months ended September 30, 2016 were adjusted to

8


exclude $33.8 million for third quarter 2016 and $36.4 million for first nine months 2016 of merger-related costs incurred by Range and $9.3 million incurred by Memorial. The pro forma results of operations do not include any cost savings or other synergies that may result from the Memorial Merger or any estimated costs that have been or will be incurred by us to integrate the Memorial assets. The pro forma condensed combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Memorial Merger taken place on January 1, 2015.  In addition, the pro forma financial information below is not intended to be a projection of future results (in thousands, except per share amounts).

 

 

 

Three Months Ended

September 30,

 

 

 

Nine Months Ended

September 30,

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

Revenues

$

521,668

 

 

$

716,753

 

 

$

1,080,767

 

 

$

1,667,516

 

Net loss

$

(17,882

)

 

$

(223,154

)

 

$

(427,946

)

 

$

(268,433

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.07

)

 

$

(0.92

)

 

$

(1.75

)

 

$

(1.10

)

Diluted

$

(0.07

)

 

$

(0.92

)

 

$

(1.75

)

 

$

(1.10

)

2016 Dispositions

We recognized a pretax net loss on the sale of assets of $2.6 million in third quarter 2016 compared to a pretax net loss of $681,000 in the same period of the prior year and a pretax net loss on the sale of assets of $7.5 million in the nine months ended September 30, 2016 compared to a pretax net gain of $2.1 million in the same period of the prior year.

Western Oklahoma. In first six months 2016, we sold certain properties in Western Oklahoma for proceeds of $77.7 million and we recorded a loss of $6.2 million related to this sale, after closing adjustments and transaction fees. In third quarter 2016, we sold additional properties in Western Oklahoma for proceeds of $900,000 and we recorded a loss of $2.6 million.

Pennsylvania. In first quarter 2016, we sold our non-operated interest in certain wells and gathering facilities in northeast Pennsylvania for proceeds of $111.5 million. After closing adjustments, we recorded a loss of $2.1 million related to this sale.

Other. In third quarter 2016, we sold miscellaneous inventory and surface property for proceeds of $131,000 resulting in a gain of $30,000. In first six months 2016, we sold miscellaneous proved and unproved properties, inventory, other assets and surface acreage for proceeds of $1.7 million resulting in a loss of $198,000. Included in the $1.7 million of proceeds is $1.2 million received from the sale of proved properties in Mississippi and South Texas.

2015 Dispositions

In third quarter 2015, we sold miscellaneous unproved properties and inventory for proceeds of $524,000 resulting in a loss of $681,000. In first six months 2015, we sold miscellaneous unproved property, proved property and inventory for proceeds of $14.3 million resulting in a gain of $2.7 million. Included in the $14.3 million of proceeds is $10.5 million received from the sale of certain West Texas properties which closed in February 2015.

(5) INCOME TAXES

Income tax benefit was as follows (in thousands):

 

 

Three Months Ended
September 30,

 

 

 

Nine Months Ended

September 30,

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

Income tax benefit

$

(13,705

)

 

$

(134,781

)

 

$

(187,231

)

 

$

(174,390

)

Effective tax rate

 

24.6

%

 

 

30.9

%

 

 

34.3

%

 

 

30.8

%

 

We compute our quarterly taxes under the effective tax rate method based on applying an anticipated annual effective rate to our year-to-date income, except for discrete items. Income taxes for discrete items are computed and recorded in the period that the specific transaction occurs. For third quarter and the nine months ended September 30, 2016 and 2015, our overall effective tax rate was different than the federal statutory rate of 35% due primarily to state income taxes, valuation allowances and other permanent differences. The three months ended September 30, 2016 includes $5.3 million income tax expense related to Memorial Merger transaction costs that are not deductible for tax purposes. The three months ended September 30, 2016 also includes $2.8 million and the nine months ended September 30, 2016 includes $10.5 million of tax expense related to an increase in our valuation allowance for state net operating loss carryforwards that we do not believe are realizable. The three months ended September 30, 2016 includes an income tax benefit of $682,000 and the nine months ended September 30, 2016 includes an

9


income tax expense of $1.8 million to adjust the valuation allowance on our deferred tax asset related to future deferred compensation plan distributions of our senior executives. In addition, for the nine months ended September 30, 2016, we recorded income tax expense of $3.7 million related to equity compensation because our compensation expense recorded for financial reporting exceeded our corresponding income tax deduction.

The three months ended September 30, 2015 includes income tax expense of $8.5 million and the nine months ended September 30, 2015 includes income tax expense of $19.8 million related to increases in our valuation allowances for state net operating loss carryforwards and credit carryforwards. The three months ended September 30, 2015 also includes income tax benefit of $2.6 million and the nine months ended September 30, 2015 includes income tax benefit of $3.5 million adjusting our valuation allowance for our deferred tax asset related to future deferred compensation plan distributions of our senior executives.

(6) LOSS PER COMMON SHARE

Basic income or loss per share attributable to common shareholders is computed as (1) income or loss attributable to common shareholders (2) less income allocable to participating securities (3) divided by weighted average basic shares outstanding. Diluted income or loss per share attributable to common shareholders is computed as (1) basic income or loss attributable to common shareholders (2) plus diluted adjustments to income allocable to participating securities (3) divided by weighted average diluted shares outstanding. The following tables set forth a reconciliation of income or loss attributable to common shareholders to basic income or loss attributable to common shareholders to diluted income or loss attributable to common shareholders (in thousands except per share amounts):

 

 

Three Months Ended

September 30,

 

 

 

Nine Months Ended

September 30,

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

Net loss, as reported

$

(41,971

)

 

$

(300,948

)

 

$

(358,617

)

 

$

(391,858

)

Participating earnings (a)

 

(56

)

 

 

(114

)

 

 

(167

)

 

 

(338

)

Basic net loss attributed to common shareholders

 

(42,027

)

 

 

(301,062

)

 

 

(358,784

)

 

 

(392,196

)

Reallocation of participating earnings (a)

 

¾

 

 

 

¾

 

 

 

¾

 

 

 

¾

 

Diluted net loss attributed to common shareholders

$

(42,027

)

 

$

(301,062

)

 

$

(358,784

)

 

$

(392,196

)

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.23

)

 

$

(1.81

)

 

$

(2.09

)

 

$

(2.36

)

Diluted

$

(0.23

)

 

$

(1.81

)

 

$

(2.09

)

 

$

(2.36

)

(a)

Restricted Stock Awards represent participating securities because they participate in nonforfeitable dividends or distributions with common equity owners. Income allocable to participating securities represents the distributed and undistributed earnings attributable to the participating securities. Participating securities, however, do not participate in undistributed net losses.

The following table provides a reconciliation of basic weighted average common shares outstanding to diluted weighted average common shares outstanding (in thousands):

 

 

Three Months Ended
September 30,

 

 

 

Nine Months Ended
September 30,

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

Weighted average common shares outstanding – basic (1)

 

180,683

 

 

 

166,517

 

 

 

171,571

 

 

 

166,327

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Director and employee SARs

 

¾

 

 

 

¾

 

 

 

¾

 

 

 

¾

 

Weighted average common shares outstanding – diluted

 

180,683

 

 

 

166,517

 

 

 

171,571

 

 

 

166,327

 

(1) Includes common stock issued in connection with the exchange of 77.0 million shares for all outstanding Memorial common stock on September 16, 2016.

Weighted average common shares outstanding-basic for both the three months ended September 30, 2016 and the three months ended September 30, 2015 excludes 2.8 million shares of restricted stock held in our deferred compensation plan (although all awards are issued and outstanding upon grant). Weighted average common shares outstanding-basic for both the nine months ended September 30, 2016 and the nine months ended September 30, 2015 also exclude 2.8 million shares of restricted stock held in our deferred compensation plan. Due to our net loss from operations for the three months and nine months ended September 30, 2016 and 2015, we excluded all outstanding stock appreciation rights (“SARs”) and restricted stock from the computation of diluted net loss per share because the effect would have been anti-dilutive.  

(7) SUSPENDED EXPLORATORY WELL COSTS

We capitalize exploratory well costs until a determination is made that the well has either found proved reserves or that it is impaired. Capitalized exploratory well costs are included in natural gas and oil properties in the accompanying consolidated balance sheets. If an exploratory well is determined to be impaired, the well costs are charged to exploration expense in the accompanying consolidated statements of operations. We did not have any exploratory well costs that have been capitalized for a period greater than

10


one year as of September 30, 2016. The following table reflects the change in capitalized exploratory well costs for the nine months ended September 30, 2016 and the year ended December 31, 2015 (in thousands):

 

 

 

September 30,

2016

 

 

 

December 31,

2015

 

Balance at beginning of period

$

4,161

 

 

$

2,996

 

Additions to capitalized exploratory well costs pending the determination of proved reserves

 

1,684

 

 

 

1,165

 

Reclassifications to wells, facilities and equipment based on determination of proved reserves

 

(5,845

)

 

 

¾

 

Divested wells

 

¾

 

 

 

¾

 

Balance at end of period

 

¾

 

 

 

4,161

 

Less exploratory well costs that have been capitalized for a period of one year or less

 

¾

 

 

 

(1,165

)

Capitalized exploratory well costs that have been capitalized for a period greater than one year

$

¾

 

 

$

2,996

 

Number of projects that have exploration well costs that have been capitalized greater than one year

 

¾

 

 

 

1

 

 

(8) INDEBTEDNESS

We had the following debt outstanding as of the dates shown below (bank debt interest rate at September 30, 2016 is shown parenthetically) (in thousands). No interest was capitalized during the three or nine months ended September 30, 2016 or the year ended December 31, 2015.

 

 

September 30,

2016

 

 

 

December 31,

2015

 

Bank debt (2.0%) (a)

$

937,000

 

 

$

95,000

 

Senior notes:

 

 

 

 

 

 

 

4.875% senior notes due 2025

 

750,000

 

 

 

750,000

 

5.00% senior notes due 2023

 

741,514

 

 

 

 

5.00% senior notes due 2022

 

580,032

 

 

 

 

5.875% senior notes due 2022 (b)

 

329,244

 

 

 

 

5.75% senior notes due 2021

 

475,952

 

 

 

 

Other senior notes due 2022 (c)

 

1,090

 

 

 

 

Total senior notes

 

2,877,832

 

 

 

750,000

 

Senior subordinated notes:

 

 

 

 

 

 

 

5.00% senior subordinated notes due 2023

 

7,712

 

 

 

750,000

 

5.00% senior subordinated notes due 2022

 

19,054

 

 

 

600,000

 

5.75% senior subordinated notes due 2021

 

22,214

 

 

 

500,000

 

Total senior subordinated notes

 

48,980

 

 

 

1,850,000

 

Total debt

 

3,863,812

 

 

 

2,695,000

 

Unamortized premium

 

7,552

 

 

 

 

Unamortized debt issuance costs

 

(44,655

)

 

 

(43,697

)

Total debt net of debt issuance costs

$

3,826,709

 

 

$

2,651,303

 

(a) As of September 16, 2016, we repaid the $597.0 million balance outstanding on the Memorial credit facility with funds borrowed under the Range credit facility and terminated the Memorial credit facility.

(b) Represents senior notes assumed in the Memorial Merger that were not purchased for cash and were exchanged for Range 5.875% senior notes due 2022. See Senior Note Exchange below.

(c) Represents the remaining Memorial 5.875% senior notes assumed in the Memorial Merger that were not purchased for cash or exchanged for Range 5.875% senior notes due 2022. See Senior Note Exchange below.

Bank Debt

In October 2014, we entered into an amended and restated revolving bank facility, which we refer to as our bank debt or our bank credit facility, which is secured by substantially all of our assets and has a maturity date of October 16, 2019. The bank credit facility provides for a maximum facility amount of $4.0 billion.  The bank credit facility provides for a borrowing base subject to

11


redeterminations annually by May and for event-driven unscheduled redeterminations. As part of our annual redetermination completed on March 17, 2016, our borrowing base was reaffirmed at $3.0 billion and our bank commitment was also reaffirmed at $2.0 billion. As of September 30, 2016, our bank group was composed of twenty-nine financial institutions with no one bank holding more than 5.8% of the total facility. The borrowing base may be increased or decreased based on our request and sufficient proved reserves, as determined by the bank group. The commitment amount may be increased to the borrowing base, subject to payment of a mutually acceptable commitment fee to those banks agreeing to participate in the facility increase. As of September 30, 2016, the outstanding balance under our bank credit facility was $937.0 million, before deducting debt issuance costs. Additionally, we had $253.9 million of undrawn letters of credit leaving $809.1 million of committed borrowing capacity available under the facility. During a non-investment grade period, borrowings under the bank credit facility can either be at the alternate base rate (“ABR,” as defined in the bank credit facility agreement) plus a spread ranging from 0.25% to 1.25% or LIBOR borrowings at the LIBOR Rate (as defined in the bank credit facility agreement) plus a spread ranging from 1.25% to 2.25%. The applicable spread is dependent upon borrowings relative to the borrowing base. We may elect, from time to time, to convert all or any part of our LIBOR loans to base rate loans or to convert all or any of the base rate loans to LIBOR loans. The weighted average interest rate was 2.3% for the three months ended September 30, 2016 compared to 1.7% for the three months ended September 30, 2015. The weighted average interest rate was 2.3% for the nine months ended September 30, 2016 compared to 1.7% for the nine months ended September 30, 2015. A commitment fee is paid on the undrawn balance based on an annual rate of 0.30% to 0.375%. At September 30, 2016, the commitment fee was 0.30% and the interest rate margin was 1.5% on our LIBOR loans and 0.5% on our base rate loans.

At any time during which we have an investment grade debt rating from Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Services and we have elected, at our discretion, to effect the investment grade rating period, certain collateral security requirements, including the borrowing base requirement and restrictive covenants, will cease to apply and an additional financial covenant (as defined in the bank credit facility) will be imposed. During the investment grade period, borrowings under the credit facility can either be at the ABR plus a spread ranging from 0.125% to 0.75% or at the LIBOR Rate plus a spread ranging from 1.125% to 1.75% depending on our debt rating. The commitment fee paid on the undrawn balance would range from 0.15% to 0.30%. We currently do not have an investment grade debt rating.

Senior Notes

In May 2015, we issued $750.0 million aggregate principal amount of 4.875% senior notes due 2025 (the “Outstanding Notes”) for net proceeds of $737.4 million after underwriting discounts and commissions of $12.6 million. The notes were issued at par and were offered to qualified institutional buyers and non-U.S. persons outside the United States in compliance with Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). On April 8, 2016, all of the Outstanding Notes were exchanged for an equal principal amount of registered 4.875% senior notes due 2025 pursuant to an effective registration statement on Form S-4 filed with the SEC on February 29, 2016 under the Securities Act (the “Exchange Notes”). The Exchange Notes are identical to the Outstanding Notes except the Exchange Notes are registered under the Securities Act and do not have restrictions on transfer, registration rights or provisions for additional interest. Under certain circumstances, if we experience a change of control, noteholders may require us to repurchase all of our senior notes at 101% of the aggregate principal amount plus accrued and unpaid interest, if any.

Senior Note Exchange and Cash Tender Offer

On September 16, 2016, we completed a debt exchange offer to exchange all validly tendered and accepted Memorial senior notes assumed in the Memorial Merger. We exchanged 54.9% of the outstanding Memorial senior notes, whereby we issued $329.2 million senior unsecured 5.875% notes due 2022 (the “5.875% Notes”). The 5.875% Notes were offered to qualified institutional buyers and to non-U.S. persons outside the United States in compliance with Rule 144A and Regulations S under the Securities Act. Interest on the 5.875% Notes is payable in January and July and will mature on July 1, 2022 and is unconditionally guaranteed on a senior unsecured basis by all of our subsidiary guarantors. On or after April 1, 2022, we may redeem the 5.875% Notes in whole or in part and from time to time, at 100% of the principal amount, plus accrued and unpaid interest. The 5.875% Notes are unsecured and are subordinated to all of our existing and future secured debt, rank equally with all of our existing and future senior unsecured debt and rank senior to all of our existing and future subordinated debt. The deferred financing cost for this exchange was $6.3 million. The early cash tender premium paid was $4.1 million, which was paid to note holders who tendered their notes within the ten business day early offer period.

12


Also on September 16, 2016, we completed our concurrent offer to purchase for cash the Memorial senior notes assumed in the Memorial Merger. We were able to purchase 44.9% of the outstanding Memorial senior notes, or $269.7 million principal amount of the senior notes assumed in the Memorial Merger, which we purchased for cash. The early cash tender premium paid was $3.3 million which was paid to note holders who tendered their notes within the ten business days early offer period. The cash tender offer and early cash tender premium were financed with borrowings under our bank credit facility. Both the offer to exchange and the cash tender offer for the 5.875% senior notes assumed in the Memorial Merger were subject to the consummation of the merger. Concurrently with the Memorial senior note exchange offer and cash tender offer, we also solicited consents from the eligible holders to amend the indenture that governed the existing Memorial senior notes. The amendments included eliminating certain of the covenants, restrictive provisions, reporting requirements and events of default. Once a majority of consents were received, the amendments were accepted for all existing Memorial senior note holders, even if the senior notes were not tendered in either the exchange offer or cash tender offer.

Senior Subordinated Note Exchange

On September 16, 2016, we also completed our debt exchange offer to exchange all validly tendered and accepted Range senior subordinated notes as detailed below (in thousands):

Existing Note

 

New Note

 

Principal Amount

of Existing Notes

Validly Tendered

 

Approximate

Percentage

Validly Tendered

5.00% senior subordinated notes due 2023

 

5.00% senior notes due 2023

 

$742,291

 

99.0%

 

 

 

 

 

 

 

5.00% senior subordinated notes due 2022

 

5.00% senior notes due 2022

 

$580,946

 

96.8%

 

 

 

 

 

 

 

5.75% senior subordinated notes due 2021

 

5.75% senior notes due 2021

 

$477,786

 

95.6%

We recorded $6.6 million of third party costs in interest expense in third quarter 2016 related to this exchange. The new senior notes were issued at par and were offered to qualified institutional buyers and non-U.S. persons outside the United States in compliance with Rule 144A and Regulation S under the Securities Act. A $3.5 million premium was recorded in connection with the exchange for certain holders that participated in the exchange after the early tender period and received 95% of face amount tendered in exchange consideration. Interest on the new 5.00% senior notes due 2023 is payable in March and September with a maturity date of March 15, 2023. Interest on the new 5.00% senior notes due 2022 is payable in February and August with a maturity of August 15, 2022. Interest on the new 5.75% senior notes due 2021 is payable in June and December with a maturity date of June 1, 2021. All of the new senior notes are unconditionally guaranteed on a senior unsecured basis by all of our subsidiary guarantors. The new senior notes are unsecured and are subordinated to all of our existing and future senior secured debt and rank senior to all of our existing and future subordinated debt. Under certain circumstances, if we experience a change of control, noteholders may require us to repurchase all of our senior notes at 101% of the aggregate principal amount plus accrued and unpaid interest, if any. Concurrently with the senior subordinated notes exchange offer, we also solicited consents from the eligible holders to amend the indentures that governed each of the existing senior subordinated notes. The amendments included eliminating certain of the covenants, restrictive provisions, reporting requirements and events of default. Once a majority of consents were received, the amendments were accepted for all senior subordinated notes holders, even if the remaining senior subordinated notes were not exchanged. The offer to exchange the senior subordinated notes was subject to the consummation of the Memorial Merger.

Senior Subordinated Notes

If we experience a change of control, noteholders may require us to repurchase all or a portion of our senior subordinated notes at 101% of the aggregate principal amount plus accrued and unpaid interest, if any. All of the senior subordinated notes and the guarantees by our subsidiary guarantors are general, unsecured obligations and are subordinated to our bank debt and are subordinated to existing and future senior debt that we or our subsidiary guarantors are permitted to incur.

Guarantees

Range is a holding company which owns no operating assets and has no significant operations independent of its subsidiaries. The guarantees by our subsidiaries (including the guarantees by our new Memorial Merger subsidiaries), which are directly or indirectly owned by Range, of our senior notes, senior subordinated notes and our bank credit facility are full and unconditional and joint and several, subject to certain customary release provisions. A subsidiary guarantor may be released from its obligations under the guarantee:

 

in the event of a sale or other disposition of all or substantially all of the assets of the subsidiary guarantor or a sale or other disposition of all the capital stock of the subsidiary guarantor, to any corporation or other person (including an unrestricted subsidiary of Range) by way of merger, consolidation, or otherwise; or

 

 

if Range designates any restricted subsidiary that is a guarantor to be an unrestricted subsidiary in accordance with the terms of the indenture.

 

13


Debt Covenants

Our bank credit facility contains negative covenants that limit our ability, among other things, to pay cash dividends, incur additional indebtedness, sell assets, enter into certain hedging contracts, change the nature of our business or operations, merge, consolidate, or make certain investments. In addition, we are required to maintain a ratio of EBITDAX (as defined in the bank credit facility agreement) to cash interest expense of equal to or greater than 2.5 and a current ratio (as defined in the bank credit facility agreement) of no less than 1.0. In addition, the ratio of the present value of proved reserves (as defined in the credit agreement) to total debt must be equal to or greater than 1.5 until Range has two investment grade ratings. We were in compliance with applicable covenants under the bank credit facility at September 30, 2016.

(9) ASSET RETIREMENT OBLIGATIONS

Our asset retirement obligations primarily represent the estimated present value of the amounts we will incur to plug, abandon and remediate our producing properties at the end of their productive lives. Significant inputs used in determining such obligations include estimates of plugging and abandonment costs, estimated future inflation rates and well lives. The inputs are calculated based on historical data as well as current estimated costs. A reconciliation of our liability for plugging and abandonment costs for the nine months ended September 30, 2016 is as follows (in thousands):

 

 

  

Nine Months
Ended
September 30,

 2016

 

Beginning of period

  

$

264,137

 

Acquisition of wells

 

 

16,600

 

Liabilities incurred

  

 

1,516

 

Liabilities settled

 

 

(8,153

)

Disposition of wells

 

 

(4,731

)

Accretion expense

  

 

12,231

 

Change in estimate

  

 

3,139

 

End of period

  

 

284,739

 

Less current portion

  

 

(15,071

)

Long-term asset retirement obligations

  

$

269,668

 

Accretion expense is recognized as a component of depreciation, depletion and amortization expense in the accompanying consolidated statements of operations.

(10) CAPITAL STOCK

We have authorized capital stock of 485.0 million shares which includes 475.0 million shares of common stock and 10.0 million shares of preferred stock. We currently have no preferred stock issued or outstanding. The following is a schedule of changes in the number of common shares outstanding since the beginning of 2015:

 

 

 

Nine Months
Ended
September 30,
2016

 

 

Year
Ended
December 31,
2015

 

Beginning balance

 

 

169,316,460

 

 

 

168,628,177

 

Memorial Merger

 

 

77,042,749

 

 

 

 

SARs exercised

 

 

 

 

 

77,002

 

Restricted stock grants

 

 

464,428

 

 

 

335,103

 

Restricted stock units vested

 

 

263,047

 

 

 

252,507

 

Shares retired

 

 

(739

)

 

 

 

Treasury shares issued

 

 

14,511

 

 

 

23,671

 

Ending balance

 

 

247,100,456

 

 

 

169,316,460

 

 

14


(11) DERIVATIVE ACTIVITIES

We use commodity-based derivative contracts to manage exposure to commodity price fluctuations. We do not enter into these arrangements for speculative or trading purposes. We do not utilize complex derivatives, as we typically utilize commodity swaps or options to (1) reduce the effect of price volatility of the commodities we produce and sell and (2) support our annual capital budget and expenditure plans. The fair value of our derivative contracts, represented by the estimated amount that would be realized upon termination, based on a comparison of the contract price and a reference price, generally the New York Mercantile Exchange (“NYMEX”) for natural gas and crude oil or Mont Belvieu for NGLs, approximated a net asset of $150.9 million at September 30, 2016. These contracts expire monthly through December 2018. The following table sets forth our commodity-based derivative volumes by year as of September 30, 2016, excluding our basis and freight swaps which are discussed separately below:

 

Period

  

Contract Type

  

Volume Hedged

  

Weighted
Average Hedge Price

Natural Gas

  

 

  

 

  

 

2016

  

Swaps (1)

  

901,739 Mmbtu/day

  

$ 3.32

2017

 

Swaps (1)

 

478,192 Mmbtu/day

 

$ 3.14

2018

 

Swaps

 

  70,000 Mmbtu/day

 

$ 2.92

2016

 

Collar (1)

 

  32,609 Mmbtu/day

 

$ 4.00-$ 4.71

2017

 

Collar (1)

 

  34,521 Mmbtu/day

 

$ 4.00-$ 5.06

2016

 

Purchased Put (1)

 

218,478 Mmbtu/day

 

$ 3.54 (2)

2017

 

Purchased Put (1)

 

175,890 Mmbtu/day

 

$ 3.48 (3)

 

 

 

 

 

 

 

Crude Oil

  

 

  

 

  

 

2016

 

Swaps (1)

 

8,640 bbls/day

 

$ 69.49

2017

 

Swaps (1)

 

5,416 bbls/day

 

$ 57.18

2018

 

Swaps

 

   500 bbls/day

 

$ 54.25

2016

 

Collar (1)

 

848 bbls/day

 

$ 80.00-$ 99.70

 

 

 

 

 

 

 

NGLs (C2-Ethane)

 

 

 

 

 

 

2016

 

Swaps (1)

 

5,839 bbls/day

 

$ 0.46/gallon

2017

 

Swaps

 

3,000 bbls/day

 

$ 0.27/gallon

 

 

 

 

 

 

 

NGLs (C3-Propane)

  

 

  

 

  

 

2016

 

   Swaps (1)

 

11,142 bbls/day

 

$ 0.75/gallon

2017

 

Swaps

 

  6,966 bbls/day

 

$ 0.52/gallon

 

 

 

 

 

 

 

NGLs (iC4-isobutane)

 

 

 

 

 

 

2016

 

Swaps (1)

 

1,969 bbls/day

 

$ 1.21/gallon

 

 

 

 

 

 

 

NGLs (NC4-Normal Butane)

  

 

  

 

  

 

2016

 

Swaps (1)

 

6,071 bbls/day

 

$ 0.72/gallon

2017

 

Swaps

 

1,500 bbls/day

 

$ 0.65/gallon

 

 

 

 

 

 

 

NGLs (C5-Natural Gasoline)

  

 

  

 

  

 

2016

 

Swaps (1)

 

8,142 bbls/day

 

$ 1.36/gallon

2017

 

Swaps

 

2,000 bbls/day

 

$ 0.98/gallon

(1) Includes derivative instruments assumed in connection with the Memorial Merger.

(2) Weighted average deferred premium is ($0.34).

(3) Weighted average deferred premium is ($0.32).

Every derivative instrument is required to be recorded on the balance sheet as either an asset or a liability measured at its fair value. If the derivative does not qualify as a hedge or is not designated as a hedge, changes in fair value of these non-hedge derivatives are recognized in earnings as derivative fair value income or loss.

Basis Swap Contracts

In addition to the swaps above, at September 30, 2016, we had natural gas basis swap contracts which lock in the differential between NYMEX and certain of our physical pricing indices primarily in Appalachia. These contracts settle monthly through December 2017 and include a total volume of 59,385,000 Mmbtu. The fair value of these contracts was a gain of $13.8 million on September 30, 2016.

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At September 30, 2016, we also had propane spread swap contracts which lock in the differential between Mont Belvieu and international propane indices. The contracts settle monthly through December 2017 and include a total volume of 525,000 barrels in 2016 and 1,837,500 barrels in 2017. The fair value of these contracts was a gain of $4.1 million on September 30, 2016.

Freight Swap Contracts

In connection with our international propane spread swaps, at September 30, 2016, we had freight swap contracts which lock in the freight rate for a specific trade route on the Baltic Exchange. These contracts settle monthly in fourth quarter 2016 and fourth quarter 2017 and cover 5,000 metric tons per month with a fair value loss of $155,000 on September 30, 2016. These contracts use observable third-party pricing inputs that we consider to be a Level 2 fair value classification.

Derivative Assets and Liabilities

The combined fair value of derivatives included in the accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015 is summarized below. The assets and liabilities are netted where derivatives with both gain and loss positions are held by a single counterparty and we have master netting arrangements. The tables below provide additional information relating to our master netting arrangements with our derivative counterparties (in thousands):

 

 

  

September 30, 2016

 

 

 

  

Gross

Amounts of

Recognized

Assets

 

  

Gross Amounts

Offset in the Balance Sheet

 

  

Net Amounts of

Assets Presented in the

Balance Sheet

 

Derivative assets:

 

  

 

 

 

  

 

 

 

  

 

 

 

Natural gas

–swaps

  

$

68,069

 

  

$

(24,934

)

  

$

43,135

 

 

–basis swaps

 

 

15,066

 

 

 

(1,191

)

 

 

13,875

 

 

–collars

 

 

15,086

 

 

 

¾

 

 

 

15,086

 

 

–puts

 

 

50,792

 

 

 

(145

)

 

 

50,647

 

Crude oil

–swaps

 

 

29,696

 

 

 

(1,292

)

 

 

28,404

 

 

–collars

 

 

2,416

 

 

 

¾

 

 

 

2,416

 

NGLs

–C2 ethane swaps

 

 

6,332

 

 

 

(185

)

 

 

6,147

 

 

–C3 propane swaps

 

 

8,535

 

 

 

(3,719

)

  

 

4,816

 

 

–C3 propane spread swaps

 

 

12,585

 

 

 

(8,506

)

 

 

4,079

 

 

–NC4 butane swaps

  

 

1,282

 

 

 

(371

)

  

 

911

 

 

–iC4 isobutane swaps

 

 

3,557

 

 

 

¾

 

 

 

3,557

 

 

–C5 natural gasoline swaps

 

 

9,722

 

 

 

(2,820

)

 

 

6,902

 

Freight

–swaps

 

 

2

 

 

 

(157

)

 

 

(155

)

 

 

  

$

223,140

 

  

$

(43,320

)

  

$

179,820

 

 

 

 

  

September 30, 2016

 

 

 

  

Gross

Amounts of 

Recognized (Liabilities)

 

  

Gross Amounts
Offset in the
Balance Sheet

 

 

Net Amounts of

(Liabilities) Presented in the

Balance Sheet

 

Derivative (liabilities):

 

  

 

 

 

  

 

 

 

 

 

 

 

Natural gas

–swaps

 

$

(31,557

)

 

$

24,934

 

 

$

(6,623

)

 

–basis swaps

 

 

(1,278

)

 

 

1,191

 

 

 

(87

)

 

–puts

 

 

¾

 

 

 

145

 

 

 

145

 

Crude oil

–swaps

 

 

(2,456

)

 

 

1,292

 

 

 

(1,164

)

NGLs

–C2 ethane swaps

 

 

(185

)

 

 

185

 

 

 

¾

 

 

–C3 propane swaps

 

 

(3,538

)

 

 

3,719

 

 

 

181

 

 

–C3 propane spread swaps

 

 

(8,506

)

 

 

8,506

 

 

 

¾

 

 

–NC4 butane swaps

 

 

(2,407

)

 

 

371

 

 

 

(2,036

)

 

–C5 natural gasoline swaps

 

 

(4,447

)

 

 

2,820

 

 

 

(1,627

)

Freight

–swaps

 

 

(157

)

 

 

157

 

 

 

¾

 

 

 

 

$

(54,531

)

 

$

43,320

 

 

$

(11,211

)

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December 31, 2015

 

 

Gross

Amounts of
Recognized 

Assets

 

 

Gross Amounts
Offset in the
Balance Sheet

 

 

Net Amounts of
Assets Presented in the
Balance Sheet

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

Natural gas

–swaps

$

219,357

 

 

$

(10,245

)

 

$

209,112

 

–basis swaps

 

8,251

 

 

 

(2,765

)

 

 

5,486

Crude oil

–swaps

 

38,699

 

 

 

¾

 

 

 

38,699

NGLs

–C3 propane swaps

 

15,884

 

 

 

¾

 

 

 

15,884

 

–C3 propane spread swaps

 

2,497

 

 

 

(2,497

)

 

 

¾

 

–NC4 butane swaps

 

6,968

 

 

 

¾

 

 

 

6,968

 

–C5 natural gasoline swaps

 

12,694

 

 

 

(81

)

 

 

12,613

 

 

$

304,350

 

 

$

(15,588

)

 

$

288,762

 

 

 

December 31, 2015

 

 

 

Gross

Amounts of
Recognized

 (Liabilities)

 

 

Gross Amounts
Offset in the
Balance Sheet

 

 

Net Amounts of
(Liabilities) Presented in the
Balance Sheet

 

Derivative (liabilities):