10-Q 1 sogc-20150331x10q.htm 10-Q sogc_current folio_10Q

 

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, 2015

 

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: 01-13515

 


 

SABINE OIL & GAS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

New York

25-0484900

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

 

1415 Louisiana Street, Suite 1600
Houston, Texas 77002

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code: (832) 242-9600

 

Securities registered pursuant to Section 12 (b) of the Act:

Title of class

Name of each exchange on which registered

Common Stock, Par Value $0.10 Per Share

OTCQB Marketplace

 

 

Securities registered pursuant to Section 12 (g) of the Act: None

 


 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

    

 

Large accelerated filer 

Accelerated filer 

 

Non-accelerated filer  (Do not check if a 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 Act). Yes   No 

214,147,720 shares of our $0.10 par value common stock were outstanding on May 8, 2015.

 

 

 


 

EXPLANATORY NOTE

As discussed in “Item 1. Financial Statements and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below, on December 16, 2014, Sabine Oil & Gas LLC, a Delaware limited liability company (“Sabine O&G”), and Forest Oil Corporation, a New York corporation, completed the combination of their respective businesses through a series of transactions whereby certain indirect equity holders of Sabine O&G contributed the equity interests in Sabine O&G to Forest Oil Corporation. In exchange for this contribution, the equity holders of Sabine O&G received shares of Sabine Oil & Gas Corporation (“Sabine”) common stock and Series A senior non-voting equity-equivalent preferred stock collectively representing approximately a 73.5% economic interest in Sabine and 40% of the total voting power in Sabine (the “Combination”).  On December 19, 2014, Forest Oil Corporation changed its name to “Sabine Oil & Gas Corporation.” Because Sabine O&G was considered the accounting acquirer in the Combination under GAAP, Sabine O&G is also considered the accounting predecessor of Sabine Oil & Gas Corporation. Accordingly, the historical financial and operating data of Sabine Oil & Gas Corporation included in this Quarterly Report on Form 10-Q which cover periods prior to the completion of the Combination, reflect the assets, liabilities and operations of Sabine O&G, the predecessor to Sabine Oil & Gas Corporation, and do not reflect the assets, liabilities and operations of Sabine Oil & Gas Corporation (which was then known as “Forest Oil Corporation”) prior to the Combination. References in this Quarterly Report on Form 10-Q to “Sabine,” “the Company,” “we,” “us” and “our” refer (i) with respect to the period from and after December 16, 2014, to the group of entities within the consolidated group of Sabine Oil & Gas Corporation, and (ii) with respect to the period prior to December 16, 2014, to the group of entities within the consolidated group of Sabine O&G, the predecessor, unless, in each case, otherwise indicated or the context otherwise requires. References in this Quarterly Report on Form 10-Q to “Forest” refer to Sabine Oil & Gas Corporation prior to the Combination, when it was known as “Forest Oil Corporation.” For more information regarding Forest’s historical operating data, please see the Company’s prior Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.

 

 

 


 

Table of Contents

 

    

 

Part I-FINANCIAL INFORMATION 

 

 

 

 

Item 1.

Financial Statements

 

Condensed Consolidated Balance Sheets at March 31, 2015 and December 31, 2014

 

Condensed Consolidated Statements of Operations for the Three Months Ended

 

 

March 31, 2015 and 2014

 

Condensed Consolidated Statement of Shareholders’ Equity (Deficit) for the Three

 

 

Months Ended March 31, 2015 and the Year Ended December 31, 2014

 

Condensed Consolidated Statements of Cash Flows for the Three Months

 

 

Ended March 31, 2015 and 2014

 

Notes to Condensed Consolidated Financial Statements

Item 2. 

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

 

 

Operations

29 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

50 

Item 4.

Controls and Procedures

52 

 

Part II-OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

53 

Item 1A. 

Risk Factors

56 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

60 

Item 3. 

Defaults Upon Senior Securities

60 

Item 4. 

Mine Safety Disclosures

60 

Item 5. 

Other Information

60 

Item 6. 

Exhibits

60 

 

Signatures

61 

 

 

 

 

 

3


 

Certain Terms Used in this Quarterly Report on Form 10-Q

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the following terms have the meanings set forth below:

·

“Combination” refers to the consummation of a series of transactions whereby certain indirect equity holders of Sabine O&G contributed the equity interests in Sabine O&G to Sabine Oil & Gas Corporation (which was then known as “Forest Oil Corporation”). In exchange for this contribution, the equity holders of Sabine O&G received shares of Sabine common stock and Series A senior non-voting equity-equivalent preferred stock (“Sabine Series A preferred stock”) collectively representing approximately a 73.5% economic interest in Sabine and 40% of the total voting power in Sabine. The Combination was completed on December 16, 2014.

·

“Forest” refers to Sabine Oil & Gas Corporation, a New York corporation, prior to the Combination, which was then known as “Forest Oil Corporation.” Forest changed its name to “Sabine Oil & Gas Corporation” on December 19, 2014.

·

“New Revolving Credit Facility Maturity Date” refers to April 7, 2016. However, in the event the Company receives the consent of the lenders or agent for the lenders under the Term Loan Facility (as defined below) or the Term Loan Facility is paid-off or satisfied in full prior to April 7, 2016, the “New Revolving Credit Facility Maturity Date” will refer to the earlier of (1) December 16, 2019 and (2) the date that is 91 days prior to the maturity date of the Term Loan Facility, if it is in existence at such time.

·

“Sabine,” “we,” “us” or the “Company” refers (i) with respect to the period from and after December 16, 2014, the date of the Combination, to the group of entities within the consolidated group of Sabine Oil & Gas Corporation, a New York corporation and the entity which survived the Combination and (ii) with respect to the period prior to December 16, 2014, to the group of entities within the consolidated group of Sabine O&G.

·

“Sabine Investor Holdings” refers to Sabine Investor Holdings LLC, a Delaware limited liability company, of which the common equity interests are owned by affiliates of First Reserve, certain members of the Company’s management and board of directors. 

·

“Sabine O&G” refers to Sabine Oil & Gas LLC, a Delaware limited liability company and the accounting predecessor of Sabine.

·

“Sabine O&G Properties” refer to the oil and natural gas properties historically owned by Sabine O&G prior to the Combination.

·

“Sabine Oil & Gas Corporation” refers to Sabine Oil & Gas Corporation, a New York corporation.

 

 

 

 

4


 

Condensed Consolidated Financial Statements

Sabine Oil & Gas Corporation

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Assets

    

 

    

    

 

    

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

305,616 

 

$

3,252 

 

Accounts receivable

 

 

76,544 

 

 

108,110 

 

Prepaid expenses and other current assets

 

 

14,870 

 

 

13,092 

 

Derivative instruments

 

 

138,998 

 

 

160,217 

 

Total current assets

 

 

536,028 

 

 

284,671 

 

Property, plant and equipment:

 

 

 

 

 

 

 

Oil and natural gas properties (full cost method)

 

 

 

 

 

 

 

Proved

 

 

4,332,951 

 

 

4,214,260 

 

Unproved

 

 

303,519 

 

 

319,256 

 

Gas gathering and processing equipment

 

 

14,772 

 

 

14,315 

 

Office furniture and fixtures

 

 

14,774 

 

 

14,030 

 

 

 

 

4,666,016 

 

 

4,561,861 

 

Accumulated depletion, depreciation and amortization

 

 

(2,786,341)

 

 

(2,495,793)

 

Total property, plant and equipment, net

 

 

1,879,675 

 

 

2,066,068 

 

Other assets:

 

 

 

 

 

 

 

Derivative instruments

 

 

8,194 

 

 

 —

 

Deferred financing costs, net

 

 

29,350 

 

 

34,862 

 

Deferred income taxes

 

 

122,864 

 

 

117,662 

 

Other long-term assets

 

 

6,740 

 

 

6,665 

 

Total other assets

 

 

167,148 

 

 

159,189 

 

Total assets

 

$

2,582,851 

 

$

2,509,928 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable – trade

 

$

78,375 

 

$

83,282 

 

Royalties payable

 

 

27,999 

 

 

41,368 

 

Accrued exploration and development

 

 

47,590 

 

 

112,580 

 

Accrued operating expenses and other

 

 

64,156 

 

 

71,244 

 

Accrued interest payable

 

 

29,315 

 

 

30,946 

 

Derivative instruments

 

 

3,500 

 

 

4,645 

 

Deferred income taxes

 

 

122,864 

 

 

117,662 

 

Current maturities of long-term debt, net of discount

 

 

2,436,528 

 

 

1,988,883 

 

Other short-term liabilities

 

 

12,292 

 

 

14,304 

 

Total current liabilities

 

 

2,822,619 

 

 

2,464,914 

 

Long-term liabilities:

 

 

 

 

 

 

 

Asset retirement obligation

 

 

39,977 

 

 

39,382 

 

Derivative instruments

 

 

248 

 

 

2,269 

 

Other long-term liabilities

 

 

67,587 

 

 

67,155 

 

Total long-term liabilities

 

 

107,812 

 

 

108,806 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000,000 authorized shares, 2,508,945 shares issued and outstanding at March 31, 2015 and December 31, 2014

 

 

25 

 

 

25 

 

Common stock, $0.10 par value, 650,000,000 authorized shares; 200,104,279 and 200,975,778 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively

 

 

20,009 

 

 

20,096 

 

Additional paid in capital

 

 

1,565,135 

 

 

1,564,805 

 

Accumulated deficit

 

 

(1,932,749)

 

 

(1,648,718)

 

Total shareholders’ deficit

 

 

(347,580)

 

 

(63,792)

 

Total liabilities and shareholders’ equity

 

$

2,582,851 

 

$

2,509,928 

 

 

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

 

5


 

Condensed Consolidated Financial Statements

Sabine Oil & Gas Corporation

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31, 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Revenues

    

 

    

    

 

    

    

Oil, natural gas liquids and natural gas

 

$

97,628 

 

$

112,306 

 

Other

 

 

397 

 

 

411 

 

Total revenues

 

 

98,025 

 

 

112,717 

 

Operating expenses

 

 

 

 

 

 

 

Lease operating

 

 

24,355 

 

 

11,371 

 

Marketing, gathering, transportation and other

 

 

9,357 

 

 

4,386 

 

Production and ad valorem taxes

 

 

2,768 

 

 

5,592 

 

General and administrative

 

 

15,038 

 

 

6,390 

 

Depletion, depreciation and amortization

 

 

54,063 

 

 

39,925 

 

Accretion

 

 

474 

 

 

217 

 

Impairments

 

 

236,485 

 

 

 —

 

Other operating expenses (income)

 

 

5,393 

 

 

(1,429)

 

Total operating expenses

 

 

347,933 

 

 

66,452 

 

Other income (expenses)

 

 

 

 

 

 

 

Interest expense, net of capitalized interest

 

 

(70,247)

 

 

(25,825)

 

Gain (loss) on derivative instruments

 

 

36,124 

 

 

(22,126)

 

Total other expenses

 

 

(34,123)

 

 

(47,951)

 

Net loss before income taxes

 

 

(284,031)

 

 

(1,686)

 

Income tax expense

 

 

 —

 

 

 —

 

Net loss

 

$

(284,031)

 

$

(1,686)

 

Net loss per share:

 

 

 

 

 

 

 

Basic

 

$

(1.42)

 

$

(0.01)

 

Diluted

 

$

(1.42)

 

$

(0.01)

 

Weighted average shares outstanding – basic

 

 

200,298 

 

 

118,863 

 

Weighted average shares outstanding – diluted

 

 

200,298 

 

 

118,863 

 

 

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

 

 

6


 

Condensed Consolidated Financial Statements

Sabine Oil & Gas Corporation

Condensed Consolidated Statement of Shareholders’ Equity (Deficit) (Unaudited)

 (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

    

 

 

    

 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

 

Preferred Stock

 

Common Stock

 

Paid In

 

Accumulated

 

Shareholders’

 

 

 

Shares

 

Value

 

Shares

 

Value

 

Capital

 

Deficit

 

Equity (Deficit)

 

Balance as of December 31, 2013

 

 —

 

$

 —

 

118,863 

 

$

11,885 

 

$

1,511,123 

 

$

(1,321,998)

 

$

201,010 

 

Consideration transferred

 

 —

 

 

 —

 

79,242 

 

 

7,924 

 

 

32,489 

 

 

 —

 

 

40,413 

 

Issuance of preferred stock

 

2,509 

 

 

25 

 

 —

 

 

 —

 

 

(25)

 

 

 —

 

 

 —

 

Restricted stock

 

 —

 

 

 —

 

2,871 

 

 

287 

 

 

(287)

 

 

 —

 

 

 —

 

Amortization of stock based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,041 

 

 

 —

 

 

1,041 

 

Tax effect of transactions with entities under common control

 

 —

 

 

 —

 

 —

 

 

 —

 

 

20,464 

 

 

 —

 

 

20,464 

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(326,720)

 

 

(326,720)

 

Balance as of December 31, 2014

 

2,509 

 

$

25 

 

200,976 

 

$

20,096 

 

$

1,564,805 

 

$

(1,648,718)

 

$

(63,792)

 

Shares repurchased

 

 —

 

 

 —

 

(871)

 

 

(87)

 

 

(87)

 

 

 —

 

 

(174)

 

Amortization of stock based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

417 

 

 

 —

 

 

417 

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(284,031)

 

 

(284,031)

 

Balance as of March 31, 2015

 

2,509 

 

$

25 

 

200,105 

 

$

20,009 

 

$

1,565,135 

 

$

(1,932,749)

 

(347,580)

 

 

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

 

 

7


 

Condensed Consolidated Financial Statements

Sabine Oil & Gas Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 

 

 

 

2015

 

2014

 

 

 

 

 

Cash flows from operating activities:

    

 

    

    

 

    

 

Net loss

 

$

(284,031)

 

$

(1,686)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Depletion, depreciation and amortization

 

 

54,063 

 

 

39,925 

 

Impairments

 

 

236,485 

 

 

 —

 

Accretion expense

 

 

474 

 

 

217 

 

Non-cash interest expense

 

 

20,249 

 

 

(7,898)

 

Amortization of deferred financing costs

 

 

6,044 

 

 

2,209 

 

Loss on derivative instruments

 

 

11,004 

 

 

20,941 

 

Amortization of option premiums

 

 

(1,145)

 

 

(6,156)

 

Amortization of prepaid expenses

 

 

1,503 

 

 

889 

 

Non-cash stock based compensation

 

 

417 

 

 

 —

 

Other, net

 

 

557 

 

 

(27)

 

Working capital and other changes:

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable

 

 

36,964 

 

 

(6,663)

 

Increase in other assets

 

 

(2,840)

 

 

(1,188)

 

Increase (decrease) in accounts payable, royalties payable and accrued liabilities

 

 

(37,573)

 

 

11,089 

 

Net cash provided by operating activities

 

 

42,171 

 

 

51,652 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Oil and natural gas property additions

 

 

(164,211)

 

 

(155,097)

 

Oil and natural gas property acquisitions

 

 

 —

 

 

(20,000)

 

Gas processing equipment additions

 

 

(457)

 

 

(1,985)

 

Other asset additions

 

 

(742)

 

 

(1,219)

 

Cash received from sale of assets

 

 

660 

 

 

11,930 

 

Net cash used in investing activities

 

 

(164,750)

 

 

(166,371)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowings under senior secured revolving credit facility

 

 

425,987 

 

 

130,000 

 

Debt repayments for the senior secured revolving credit facility

 

 

 —

 

 

(25,000)

 

Debt issuance costs

 

 

(870)

 

 

(1,211)

 

Shares repurchased

 

 

(174)

 

 

 —

 

Net cash provided by financing activities

 

 

424,943 

 

 

103,789 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

302,364 

 

 

(10,930)

 

Cash and cash equivalents, beginning of period

 

 

3,252 

 

 

11,821 

 

Cash and cash equivalents, end of period

 

$

305,616 

 

$

891 

 

 

 

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

 

 

8


 

Sabine Oil & Gas Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1.Organization

Sabine Oil & Gas Corporation (“Sabine” or the “Company”) is an independent oil and natural gas company engaged in the acquisition, development, exploitation and exploration of oil and natural gas properties in North America. Sabine was incorporated in New York in 1924, as the successor to a company formed in 1916, and has been a publicly held company since 1969.

On December 16, 2014, pursuant to a series of transaction agreements (the “Combination”), certain indirect equity holders (such indirect equity holders are referred to as the “Legacy Sabine Investors”) of Sabine Oil & Gas LLC (“Sabine O&G”) contributed the equity interests in Sabine O&G to Sabine (which was then known as “Forest Oil Corporation”). In exchange for this contribution, the Legacy Sabine Investors received shares of Sabine common stock and Sabine Series A preferred stock collectively representing approximately a 73.5% economic interest in Sabine and 40% of the total voting power in Sabine. Holders of Sabine common stock immediately prior to the closing of the Combination continued to hold their Sabine common stock following the closing, which immediately following the closing represented approximately a 26.5% economic interest in Sabine and 60% of the total voting power in Sabine.

On December 19, 2014, the Company filed a certificate of amendment with the New York Secretary of State to change its name from “Forest Oil Corporation” to “Sabine Oil & Gas Corporation.”

2.Immaterial Misstatement

Subsequent to the issuance of the Consolidated Financial Statements for the year ended December 31, 2014, management identified a misstatement in the presentation of deferred taxes associated with its 7¼% senior notes due 2019 (the “2019 Notes”) originally issued by Forest on June 6, 2007 and the 7½% senior notes due 2020 (the “2020 Notes”) originally issued by Forest on September 17, 2012 and the effects of adjusting the allocation of the stepped up basis in certain assets relating to the effects of the Combination. Such amounts should have been presented as current deferred tax liabilities as of December 31, 2014. The Company also corrected the classification of certain assets related to post-retirement benefit obligations that had previously been presented as Other short-term assets. Such amounts should have been presented as other long term-assets. Management concluded that these misstatements are immaterial, individually and in the aggregate. The effects of these misstatements on previously reported balances are presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet

 

 

 

as of December 31, 2014

 

 

 

As Previously Reported

 

Adjustments

 

As Adjusted

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Other short-term assets

 

$

8,120 

 

$

(6,565)

 

$

1,555 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

46,084 

 

 

71,578 

 

 

117,662 

 

Other long-term assets

 

 

100 

 

 

6,565 

 

 

6,665 

 

Total assets

 

$

2,438,350 

 

$

71,578 

 

$

2,509,928 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

$

46,084 

 

$

71,578 

 

$

117,662 

 

Total liabilities and shareholders’ equity

 

$

2,438,350 

 

$

71,578 

 

$

2,509,928 

 

 

 

9


 

 

 

3.Liquidity and Ability to Continue as a Going Concern

On February 25, 2015, the Company borrowed approximately $356 million under its New Revolving Credit Facility which represented the remaining undrawn amount under the New Revolving Credit Facility. As of March 31, 2015, the Company did not have credit extensions available under the New Revolving Credit Facility due to the going concern default described below. As of March 31, 2015, the total outstanding principal amount of the Company’s debt obligations was $2.821 billion, consisting of approximately $971 million of borrowings under the New Revolving Credit Facility, $350 million of the 2017 Notes, $800 million of the Legacy Forest Notes, and a $700 million Term Loan Facility. In addition, as of March 31, 2015, the Company had approximately $29 million of outstanding letters of credit under the New Revolving Credit Facility. Additionally, the Company’s cash balance at March 31, 2015 was approximately $305.6 million. The Company has substantial interest payment obligations related to this debt over the next twelve months. For additional detail on each of the debt obligations, including definitions of the terms “New Revolving Credit Facility,” “2017 Notes,” “Legacy Forest Notes” and “Term Loan Facility,” please see Note 8 herein.

The Company also has significant pending maturities on its debt obligations.  If the Company is unable to refinance its 2017 Notes to mature at least 91 days after December 31, 2018, its Term Loan Facility in an outstanding amount of $700 million will mature on November 16, 2016. The Company’s New Revolving Credit Facility, which currently has approximately $971 million of debt outstanding, will mature on the New Revolving Credit Facility Maturity Date. The Company’s ability to repay the principal amount of its debt upon the pending maturities has been negatively impacted by significant decreases in the market price for oil, natural gas, and NGLs during the fourth quarter of 2014 with continued weakness into the first and second quarters of 2015. Additionally, the Company’s borrowing base under its New Revolving Credit Facility was subject to its semi-annual redetermination on April 27, 2015 and was decreased to $750 million. The decrease in the Company’s borrowing base as a result of the redetermination resulted in a deficiency of approximately $250 million which must be repaid in six monthly installments of $41.54 million. The uncertainty associated with the Company’s ability to repay its outstanding debt obligations as they become due raises substantial doubt about its ability to continue as a going concern.

The Company’s New Revolving Credit Facility and Term Loan Facility require that the Company’s annual financial statements include a report from its independent registered public accounting firm with an unqualified opinion without an explanatory paragraph as to going concern. In consideration of the uncertainty mentioned above, the report of the Company’s independent registered public accounting firm that accompanied its audited consolidated financial statements for the year ended December 31, 2014 contained an explanatory paragraph regarding the substantial doubt about its ability to continue as a going concern. As a result, the Company is in default under its New Revolving Credit Facility and Term Loan Facility. On May 4, 2015, the Company entered into a Forbearance Agreement and First Amendment to the New Revolving Credit Facility (the “Forbearance Agreement”) with respect to certain anticipated events of default, including the default under the New Revolving Credit Facility as a result of the “going concern” qualification in the Company’s 2014 audited financial statements. Pursuant to the Forbearance Agreement, the administrative agent under the New Revolving Credit Facility has agreed to forbear from exercising remedies until the earlier of (i) certain events of default under the Forbearance Agreement or New Revolving Credit Facility, (ii) the acceleration or exercise of remedies by any other lender or creditor, and (iii) June 30, 2015 (the “Forbearance Period”), with respect to the following anticipated events of default: (i) the “going concern” qualification in the Company’s 2014 audited financial statements, (ii) the failure of the Company to make the April 2015 interest payment due under the Term Loan Facility, as discussed below, and (iii) any failure of the Company to make the May 27, 2015 and June 27, 2015 borrowing base deficiency payments under the New Revolving Credit Facility. In exchange for the administrative agent under the New Revolving Credit Facility agreeing to forbear from exercising remedies as described above, the Company has agreed during the Forbearance Period to, among other things, tighten certain non-financial covenants under the New Revolving Credit Facility and provide mortgages on certain currently unencumbered properties.

Similarly, if the Company does not obtain a waiver or forbearance under the Term Loan Facility with respect to the “going concern” qualification in the Company’s 2014 audited financial statements within 180 days of notice, there will exist an event of default under the Term Loan Facility that will allow the lenders under the Term Loan Facility to be able to accelerate the debt.  Any acceleration of the debt obligations under the New Revolving Credit Facility or Term Loan Facility would result in a cross-default and potential acceleration of the maturity of the Company’s other outstanding

10


 

debt obligations. Therefore, all of the Company’s outstanding debt obligations in the amount of approximately $2,437 million (net of discount) and approximately $1,989 million (net of discount) are presented in current liabilities as of March 31, 2015 and December 31, 2014, respectively. Additionally, the lenders under the Term Loan Facility are subject to a 180-day standstill before they are able to exercise remedies as a result of the uncured event of default.  Following the expiration of the 180-day standstill, the lenders are permitted to foreclose on the collateral securing the Term Loan Facility. These defaults create additional uncertainty associated with the Company’s ability to repay its outstanding debt obligations as they become due and raise substantial doubt about its ability to continue as a going concern.

Additionally, the Company has elected to exercise its right to a grace period with respect to a $15.3 million interest payment under its Term Loan Facility. The interest payment was due April 21, 2015; however, such grace period permits the Company 30 days to make such interest payment before an event of default occurs. The Company believes it is in the best interests of its stakeholders to actively address the Company’s debt and capital structure and intends to continue discussions with its creditors and their respective professionals during the 30-day grace period. If the Company fails to pay the interest payment during the 30-day grace period and does not obtain a waiver for the interest payment, an event of default would exist under the Term Loan Facility and the lenders under the Term Loan Facility would be able to accelerate the debt. However, the lenders would not be able to foreclose on the collateral securing the Term Loan Facility until after the expiration of the 180-day standstill. If the Company continues to fail to pay the interest payment, such failure could constitute a cross default under certain of the Company’s other indebtedness. If the indebtedness under the Term Loan Facility or any of the Company’s other indebtedness is accelerated, the Company may have to file for bankruptcy.

The Company is currently engaged in discussions with the lenders under its Term Loan Facility regarding a waiver or forbearance with respect to the event of default that may occur upon the expiration of the 30-day grace period with respect to the April 21, 2015 interest payment.

In order to increase the Company’s liquidity to levels sufficient to meet the Company’s commitments, the Company is currently pursuing or considering a number of actions including: (i) actively managing the Company’s debt capital structure through a number of alternatives, including debt repurchases, debt-for-debt exchanges, debt-for-equity exchanges and secured financing, (ii) in- and out-of-court restructuring, (iii) minimizing the Company’s capital expenditures, (iv) obtaining waivers or amendments from the Company’s lenders, (v) effectively managing the Company’s working capital and (vi) improving the Company’s cash flows from operations. There can be no assurance that sufficient liquidity can be raised from one or more of these transactions or that these transactions can be consummated within the period needed to meet certain obligations.

The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q 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 condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of the uncertainties as discussed above.

4.Significant Accounting Policies

Basis of Presentation

The Company presents its condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). The accompanying condensed consolidated financial statements include Sabine and its wholly owned subsidiaries. All intercompany transactions have been eliminated. In the opinion of management, all adjustments, which are of a normal recurring nature, have been made that are necessary for a fair presentation of the financial position of the Company at March 31, 2015, and the results of its operations and its cash flows for the periods presented. Interim results are not necessarily indicative of expected future results because of various factors including the impact of fluctuations in the prices of oil, natural gas, and NGLs and the impact the prices have on the Company’s revenues and the fair values of its derivative instruments.

Certain amounts in the prior year financial statements have been reclassified to conform to the 2015 financial statement presentation.

11


 

Sabine O&G is considered the accounting predecessor of Sabine Oil & Gas Corporation. Accordingly, the historical financial information of Sabine Oil & Gas Corporation included in this Quarterly Report on Form 10-Q which cover periods prior to the completion of the Combination, reflect the assets, liabilities and operations of Sabine O&G, the accounting predecessor to Sabine Oil & Gas Corporation, and do not reflect the assets, liabilities and operations of Sabine Oil & Gas Corporation. The assets acquired and liabilities assumed in the Combination were recognized in the condensed consolidated balance sheet at their preliminary fair value as of December 16, 2014 and the operating results of the acquired properties are included in the condensed consolidated financial statements for the period beginning thereafter. See Note 7 for details of the Combination.

For a more complete understanding of the Company’s operations, financial position, and accounting policies, reference is made to the consolidated financial statements of the Company, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, previously filed with the Securities and Exchange Commission (“SEC”) on March 31, 2015.

Oil and Natural Gas Properties and Equipment

For the three months ended March 31, 2015, the Company recognized an impairment of $236.5 million for the carrying value of proved oil and natural gas properties in excess of the ceiling limitation. For the three months ended March 31, 2014, the Company did not recognize an impairment for the carrying value of proved oil and natural gas properties in excess of the ceiling limitation. The average of the historical unweighted first day of the month prices for the prior twelve month periods ended March 31, 2015 and 2014 were $3.88 and $3.99, respectively, for natural gas. The average of the historical unweighted first day of the month prices for the prior twelve month periods ended March 31, 2015 and 2014 were $82.72 and $98.30, respectively, for oil.

The Company’s depletion expense on oil and natural gas properties is calculated each quarter utilizing period end proved reserve quantities. The Company recorded $53.2 million and $39.3 million of depletion on oil and natural gas properties for the three months ended March 31, 2015 and 2014, respectively. As a rate of production, depletion was $1.94 per Mcfe and $2.37 per Mcfe for the three months ended March 31, 2015 and 2014, respectively.

Financial Instruments

The Company’s financial instruments including cash and cash equivalents, accounts receivable, and accounts payable are carried at cost, which approximates fair value due to the short-term maturity of these instruments. Since considerable judgment is required to develop estimates of fair value, the estimates provided are not necessarily indicative of the amounts the Company could realize upon the purchase or refinancing of such instruments. The Company’s derivative instruments are reported at fair value based on Level 2 fair value methodologies. The New Revolving Credit Facility, Term Loan Facility, 2017 Notes, 2019 Notes and 2020 Notes are carried at nominal value, net of unamortized discount. See Note 13 for fair value measurements related to these instruments.

Use of Estimates

The preparation of the condensed consolidated financial statements for the Company in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The Company’s condensed consolidated financial statements are based on a number of significant estimates, including acquisition purchase price allocations, fair value of derivative instruments, oil, natural gas liquids and natural gas reserve quantities that are the basis for the calculation of DD&A and impairment of oil, natural gas liquids and natural gas properties, and timing and costs associated with its asset retirement obligations.

Earnings (Loss) per Share

No potential common shares are included in the computation of any diluted per share amount when a net loss exists because they would be deemed antidilutive, as was the case for the three months ended March 31, 2015.

12


 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014‑09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under existing generally accepted accounting principles. This new standard is based upon the principal that revenue is recognized to depict the transfer of 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. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016. Entities have the option of using either a retrospective or modified approach to adopt ASU 2014-09. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements or decided upon the method of adoption. On April 1, 2015, the FASB approved proposing a one year deferral for implementation and giving companies the option to early adopt based on the original effective dates.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and sets rules for how this information should be disclosed in the financial statements. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. The Company plans to adopt ASU 2014-15 prospectively for the annual period ending December 31, 2016. Pursuant to ASU 2014-15, the Company is required to consider whether there are adverse conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued and the probability that management’s plans will mitigate the adverse conditions or events (if any). Adverse conditions or events would include, but not be limited to, negative financial trends (such as recurring operating losses, working capital deficiencies, or insufficient liquidity), a need to restructure outstanding debt to avoid default, and industry developments (for example commodity price declines and regulatory changes).

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 is effective retrospectively for annual and interim periods beginning after December 15, 2015. The Company intends to adopt ASU 2015-03 in the annual period ended December 31, 2015.

5.Significant Customers

During the three months ended March 31, 2015, purchases by three companies exceeded 10% of the total oil, natural gas liquids and natural gas sales of the Company. Purchases by Enbridge Pipeline (East Texas) LP, NGL Crude Logistics LLC and Laclede Energy accounted for approximately 22%,  15% and 12% of oil, natural gas liquids and natural gas sales, respectively. During the three months ended March 31, 2014, purchases by three companies exceeded 10% of the total oil, natural gas liquids and natural gas sales of the Company. Purchases by Enbridge Pipeline (East Texas) LP, Eastex Crude Company and Laclede Energy accounted for approximately 15%,  14% and 10% of oil, natural gas liquids and natural gas sales, respectively.

6.Income Taxes

Effective Tax Rate

For the three months ended March 31, 2015, we recorded no income tax expense, resulting in an effective tax rate of 0%.  The significant difference between our effective tax rate and federal statutory income tax rate of 35% is due to a full valuation allowance recorded on net deferred tax asset in excess of deferred tax liabilities.  For year ended December 31, 2014, the effective tax rate of (11.99)% differs from the federal statutory rate of 35% due to earnings prior to the corporate merger that are not subject to corporate income tax, recording the initial book and tax basis differences associated with the change in tax status, state income taxes and impairment of non-deductible goodwill.

13


 

Immaterial Misstatement of Deferred Tax Assets and Liabilities

As discussed in Note 2, the Company has adjusted the Consolidated Balance Sheet as of December 31, 2014 to adjust for an error in the classification of the current deferred tax liabilities and non-current deferred tax assets resulting from the deferred tax liabilities associated with the 2019 Notes and 2020 Notes which were presented as current as of December 31, 2014, and the effects of adjusting the allocation of the stepped-up basis in certain assets relating to the effects of the Combination. The deferred taxes related to the net operating loss carry forwards and valuation allowance was also adjusted to $180 million and $345 million, respectively.  The effects of this misstatement on previously issued disclosures are corrected below. There is no effect to the income statement as a result of this misstatement.

Net Deferred Tax Assets and Liabilities

The components of net deferred tax assets and liabilities at December 31, 2014 are as follows:

 

 

 

 

 

 

 

    

Year Ended

 

 

 

December 31, 2014

 

 

    

(In Thousands)

 

Deferred tax assets:

 

 

 

 

Property and equipment

 

$

279,955 

 

Goodwill

 

 

9,302 

 

Net operating loss carryforwards

 

 

180,134 

 

Other

 

 

48,372 

 

Total gross deferred tax assets

 

$

517,763 

 

Less valuation allowance

 

 

(344,740)

 

Net deferred tax assets

 

$

173,023 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

Unrealized gains on derivative instruments, net

 

$

(27,766)

 

Long-term liabilities

 

 

(143,259)

 

Other

 

 

(1,998)

 

Total gross deferred tax liabilities

 

$

(173,023)

 

 

 

 

 

 

Net deferred tax assets

 

$

 —

 

 

 

 

 

 

Current deferred tax assets (liabilities)

 

$

(117,662)

 

Non-current deferred tax assets (liabilities)

 

 

117,662 

 

Net deferred tax assets (liabilities)

 

$

 —

 

 

Net Operating Loss

U.S. federal net operating loss carryforwards (“NOLs”) at December 31, 2014 were adjusted to be approximately $515 million, of which $483 million is subject to limitation under Section 382 of the Internal Revenue Code. The Company increased the NOL by $402 million because there is more likelihood the NOL can be utilized. The NOL balance excludes those NOLs that the Company believes the likelihood of utilization to be remote as a result of limitations imposed under Section 382 of the Internal Revenue Code. The NOLs are scheduled to expire in 2019 and 2020 and the remaining will expire after 2034. Additional analysis of the IRC 382 limitations will be done upon filing of the corporate income tax return and could result in a change to the value of the NOLs.

Valuation Allowance

A valuation allowance is established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company believes it is more likely than not that the overall deferred tax asset will not be realized. At December 31, 2014, the Company recorded  a valuation allowance of $345 

14


 

million, which is the amount of deferred tax assets that exceed deferred tax liabilities, and are more likely than not that will not be realized.

 

 

 

7.Property Acquisitions and Divestitures

The results of the Combination and the acquisitions described below are included in the accompanying Condensed Consolidated Statements of Operations since each acquisition’s respective close date.

On December 16, 2014, the Legacy Sabine Investors contributed the equity interests in Sabine O&G to Sabine Oil & Gas Corporation, which was then known as “Forest Oil Corporation.” In exchange for this contribution, the Legacy Sabine Investors received shares of Sabine common stock and Sabine Series A preferred stock, collectively representing approximately a 73.5% economic interest in Sabine and 40% of the total voting power in Sabine. Immediately following the contribution, Sabine O&G and related holding companies merged into Forest Oil Corporation (“Forest”), with Forest Oil Corporation surviving the mergers. Holders of Forest common stock immediately prior to the closing of the Combination continued to hold their common stock following the closing, which immediately following the closing represented approximately a 26.5% economic interest in Sabine and 60% of the total voting power in Sabine. On December 19, 2014, Forest Oil Corporation changed its name to “Sabine Oil & Gas Corporation.” Sabine O&G was the accounting acquirer in the Combination. The business purpose for the Combination was to combine Forest and Sabine O&G’s complementary asset portfolios to create a larger company that would benefit from drilling optimization and economies of scale.

All assets and liabilities including oil and gas properties were recorded at their fair value. In determining the fair value of the oil and gas properties, the Company prepared estimates of oil and natural gas reserves. The Company used estimated future prices to apply to the estimated reserve quantities acquired and the estimated future operating and development costs to arrive at the estimates of future net revenues. The valuations to derive the purchase price included the use of both proved and unproved categories of reserves, expectation for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk adjusted discount rates. Other significant estimates were used by management to calculate fair value of assets acquired and liabilities assumed. The Company may record purchase price adjustments as a result of changes in such estimates. No material adjustments have been recorded as of March 31, 2015.

Total pro forma impact of the Combination was an increase to “Total revenues” on the Condensed Consolidated Statement of Operations of $55.9 million for the three months ended March 31, 2014, and an increase to “Net loss” on the Condensed Consolidated Statement of Operations of $6.7 million for the three months ended March 31, 2014. 

 

8.Debt

Senior Notes

2017 Notes

The Company and the Company’s subsidiary Sabine Oil & Gas Finance Corporation, formerly NFR Energy Finance Corporation, have $350 million in 9.75% senior unsecured notes due 2017 (the “2017 Notes”) currently outstanding. The 2017 Notes are unsecured obligations that bear interest at a rate of 9.75% per annum, payable semi-annually on February 15 and August 15 each year. In conjunction with the issuance of the 2017 Notes, the Company recorded a discount to be amortized over the remaining life of the 2017 Notes utilizing the simple interest method. The remaining unamortized discount was $1.2 million and $1.4 million at March 31, 2015 and December 31, 2014, respectively. The 2017 Notes were issued under and are governed by an indenture dated February 12, 2010 by and among Sabine Oil & Gas Corporation, Sabine Oil & Gas Finance Corporation, the Bank of New York Mellon Trust Company, N.A. as trustee, and guarantors party thereto. Due to the amortization of the discount, the effective interest rate on the 2017 Notes as of March 31, 2015 was 10.33%. 

15


 

2019 Notes

In connection with the consummation of the Combination, on December 16, 2014, the Company assumed $577.9 million in 7¼% senior notes due 2019. Interest on the 2019 Notes is payable semiannually on June 15 and December 15. In conjunction with the consummation of the Combination, the Company recorded a discount of $287.5 million to be amortized over the remaining life of the 2019 Notes utilizing the simple interest method. The remaining unamortized discount was $268.9 million and $284.9 million at March 31, 2015 and December 31, 2014, respectively. Due to the amortization of the discount, the effective interest rate on the 2019 Notes for the three months ended March 31, 2015 was 18.31%. 

On February 25, 2015, the Company received notice that Wilmington Savings Fund Society, FSB has been appointed as successor trustee under the indenture governing the 2019 Notes.

2020 Notes

In connection with the consummation of the Combination, on December 16, 2014, the Company assumed $222.1 million in 7½% senior notes due 2020. Interest on the 2020 Notes is payable semiannually on March 15 and September 15. In conjunction with the consummation of the Combination, the Company recorded a discount of $117.7 million to be amortized over the remaining life of the 2020 Notes utilizing the simple interest method. The remaining unamortized discount was $111.7 million and $116.9 million at March 31, 2015 and December 31, 2014, respectively. Due to the amortization of the discount, the effective interest rate on the 2020 Notes for the three months ended March 31, 2015 was 16.72%. 

On April 30, 2015, the Company received notice that Wilmington Savings Fund Society, FSB has been appointed as successor trustee under the indenture governing the 2020 Notes.

The New Revolving Credit Facility

On December 16, 2014, in connection with the consummation of the Combination, the Company amended and restated the Amended and Restated Credit Agreement, dated as of April 28, 2009, maturing on April 7, 2016, by and among Sabine O&G, Wells Fargo Bank, National Association, as administrative agent, and the lenders and other parties party thereto (the “Former Revolving Credit Facility”) with the Second Amended and Restated Credit Agreement (the “New Revolving Credit Facility”). The New Revolving Credit Facility provides for a $2 billion revolving credit facility, with an initial borrowing base of $1 billion. The New Revolving Credit Facility includes a sub-limit permitting up to $100 million of letters of credit.

The New Revolving Credit Facility matures on the New Revolving Credit Facility Maturity Date.

The borrowing base is subject to redeterminations by the lenders semi-annually, each April 1 and October 1, beginning April 1, 2015 or such later time as the Company may agree upon request of the administrative agent, or as the majority lenders may agree upon the request of the Company. The Company and the lenders comprising two-thirds of the lenders as measured by exposure may each request two unscheduled borrowing base redeterminations during any 12-month period. The borrowing base under the New Revolving Credit Facility could increase or decrease in connection with a redetermination with increases being subject to the approval of all lenders and decreases (and redeterminations maintaining the borrowing base) being subject to the approval of two-thirds of the lenders as measured by exposure. The borrowing base is also subject to reduction as a result of certain issuances of additional debt, certain asset sales, cancellation of certain hedging positions or lack of sufficient title information. In the event of a reduction of the borrowing base, the Company would be required to repay outstanding exposure under the New Revolving Credit Facility in excess of the new borrowing base in one payment or six equal monthly installments and/or provide additional mortgages over oil and gas properties to support a larger borrowing base, at the Company’s option.

On December 16, 2014, the Company borrowed $750.8 million under the New Revolving Credit Facility, which included the refinancing of Sabine’s former revolving credit facility of $619 million and Forest’s revolving credit agreement of $105 million. During the three months ended March 31, 2015, the Company borrowed approximately $426 million under the New Revolving Credit Facility.

16


 

The Company’s borrowing base under its New Revolving Credit Facility was subject to its semi-annual redetermination on April 27, 2015 and was decreased to $750 million. The decrease in the Company’s borrowing base as a result of the redetermination resulted in a deficiency of approximately $250 million which must be repaid in six monthly installments of $41.54 million, commencing May 27, 2015.

Loans under the New Revolving Credit Facility bear interest at the Company’s option at either:

·

the sum of (1) the Alternate Base Rate, which is defined as the highest of (a) Wells Fargo Bank, National Association’s prime rate; (b) the federal funds effective rate plus 0.50%; or (c) the Eurodollar Rate (as defined in the New Revolving Credit Facility) for a one-month interest period plus 1% and (2) a margin varying from 0.50% to 1.50% depending on the Company’s most recent borrowing base utilization percentage (the “Revolving Base Rate”); or

·

the Eurodollar Rate plus a margin varying from 1.50% to 2.50% depending on the Company’s most recent borrowing base utilization percentage. Beginning May 29, 2015 and thereafter during the occurrence of an event of default under the New Revolving Credit Facility, the loans under the New Revolving Credit Facility will bear interest at the Revolving Base Rate.

As of March 31, 2015 and December 31, 2014, borrowings outstanding under the New Revolving Credit Facility totaled approximately $971 million and $545 million, respectively. Additionally, borrowings outstanding under the New Revolving Credit Facility and the Former Revolving Credit Facility had a weighted average interest rate of 2.6% and 2.3% for the three months ended March 31, 2015 and 2014, respectively.

The unused portion of the New Revolving Credit Facility is subject to a commitment fee ranging from 0.375% to 0.50% per annum depending on the Company’s most recent borrowing base utilization percentage. 

The New Revolving Credit Facility also provides for certain representations and warranties, events of default, affirmative covenants and negative covenants customary for transactions of this type, including a financial maintenance covenant in the form of a first lien secured leverage ratio not to exceed 3.0 to 1.0, of which the covenant is effective March 31, 2015. The Company was in compliance with such covenant as of March 31, 2015.  The New Revolving Credit Facility also contains certain other covenants, including restrictions on additional indebtedness and dividends. See footnote 3 above for a description of current defaults and anticipated events of default under the New Revolving Credit Facility and the Forbearance Agreement recently entered into with respect to the New Revolving Credit Facility. 

The New Revolving Credit Facility provides that all such obligations and the guarantees will be secured by a lien on at least 80% of the PV-9 of the borrowing base properties evaluated in the most recent reserve report delivered to the administrative agent and a pledge of all of the capital stock of the Company’s restricted subsidiaries, subject to certain customary grace periods and exceptions.

As of March 31, 2015, the total outstanding principal amount of the Company’s long-term indebtedness was $2.821 billion, consisting of indebtedness under the New Revolving Credit Facility, the 2017 Notes, the Legacy Forest Notes, and the Term Loan Facility, and as of March 31, 2015, no extensions of credit are available under the New Revolving Credit Facility, reflecting that approximately $29 million of outstanding letters of credit had been made under the New Revolving Credit Facility.

Term Loan Facility

The Company has a $700 million second lien term loan agreement (“Term Loan Facility”) with a maturity date of December 31, 2018 (provided that if the 2017 Senior Notes are not refinanced to mature at least 91 days thereafter, the maturity date shall be 91 days prior to the February 15, 2017 maturity date of the 2017 Senior Notes).

Loans under the Term Loan Facility bear interest at the Adjusted Eurodollar Rate (as defined in the Term Loan Facility) plus 7.50%, with an interest rate floor of 1.25%, and, in the case of alternate base rate borrowings, they bear interest at the Alternate Base Rate (as defined in the Term Loan Facility) plus 6.50%, with an interest rate floor of 2.25% (the “Term Base Rate”).  Any time an interest period for loans expires during an event of default under the Term Loan

17


 

Facility, such loans will bear interest at the Term Base Rate. The weighted average interest rate incurred on this indebtedness for the three months ended March 31, 2015 and 2014 was 8.8%.

All of the Company’s restricted subsidiaries that guarantee its New Revolving Credit Facility have guaranteed the Term Loan Facility.  The obligations under the Term Loan Facility are secured by the same collateral that secures the New Revolving Credit Facility, but the liens securing such obligations are second priority liens to the liens securing the New Revolving Credit Facility.

The Term Loan Facility provides for certain representations and warranties, events of default, affirmative covenants and negative covenants customary for transactions of this type, including restrictions on additional indebtedness and dividends. The Term Loan Facility provides that all obligations thereunder, subject to certain terms and exceptions, be jointly and severally guaranteed by the guarantors described therein. See footnote 3 above for a description of current defaults and anticipated events of default under the Term Loan Facility. 

9.Shareholders’ (Deficit) Equity

Common Stock

Prior to the Combination, Sabine O&G was authorized to issue one class of units to be designated as “Common Units”. The units were not represented by certificates. All Common Units were issued at a price equal to $1,000 per unit.

On December 16, 2014, in connection with the Combination, certain indirect equity holders of Sabine O&G contributed the equity interests in Sabine O&G to Sabine. In exchange for this contribution, the equity holders of Sabine O&G received approximately 79.2 million shares of Sabine common stock (the “Common Shares”) and approximately 2.5 million Series A senior non-voting preferred stock (“Series A Preferred Shares”; see “—Preferred Stock” below) collectively representing approximately a 73.5% economic interest in Sabine and 40% of the total voting power in Sabine.

Holders of Forest common stock immediately prior to the closing of the Combination continued to hold their common stock following the closing of the Combination representing approximately a 26.5% economic interest in Sabine and 60% of the total voting power in Sabine. Common Shares of Sabine held by the holders of Forest common stock is 118.9 million shares.

Additionally, approximately 16.9 million shares and approximately 0.7 million shares of service-based restricted stock were awarded subsequent to the consummation of the Combination in 2014 and in the three months ended March 31, 2015, respectively. Refer to Note 10.

At March 31, 2015, the Company had 650.0 million Common Shares, par value $0.10 per share, authorized and 201.0 million shares issued and outstanding.

Earnings per share and share information presented in the condensed consolidated financial statements for periods prior to December 16, 2014 are based on the Company’s common shares calculated by multiplying the number of Sabine O&G’s units outstanding at the end of each period using an exchange ratio as derived from the agreement governing the Combination. The Company retroactively adjusted its Statement of Shareholders’ (Deficit) Equity at the end of each period using an exchange ratio as derived from the agreement governing the Combination to reflect the legal capital of the accounting acquiree. Beginning on December 16, 2014 common shares are presented for the combined company.

Preferred Stock

On December 16, 2014, in connection with the Combination, certain indirect equity holders of Sabine O&G received 2.5 million Series A Preferred Shares.

The Series A Preferred Shares are convertible into Sabine Common Shares at the option of Legacy Sabine Investors if (1) the Legacy Sabine Investors are able to convert a portion of the Series A Preferred Shares into Common Shares and, as a result of such conversion, would not, together with affiliates, hold more than 50% of the Company’s voting power and (2) Sabine’s board of directors (the “Board”) approves such conversion (such approval not to be unreasonably

18


 

withheld). In addition, Series A Preferred Shares will convert automatically if the Legacy Sabine Investors transfer such shares to a third party and such third party would not, together with its affiliates, hold more than 50% of the Company’s voting power upon receipt of such shares as voting securities.

The Series A Preferred Shares are non-voting. Initially, in connection with a conversion of Series A Preferred Shares into Common Shares as described in the preceding paragraph, each Series A Preferred Share will be convertible into 100 Common Shares.

At March 31, 2015, the Company had 10.0 million Series A Preferred Shares, par value $0.01, authorized and 2.5 million shares issued and outstanding.

Incentive Units

The Incentive Units were issued pursuant to the Combination in exchange for Incentive Units that were outstanding prior to the Combination, and were amended in connection with the closing of the Combination. The Incentive Units that were outstanding prior to the Combination were not a substantive class of equity and participated only upon liquidation events meeting certain requisite financial thresholds which were not considered probable, and, as such, were considered to be liability-based awards with no fair value recognized as of December 31, 2013. As amended, the Incentive Units represent the equivalent of stock appreciation rights redeemable for an applicable number of common shares of the Company (based on the value of the common shares).  As such, the Incentive Units as amended in connection with the Combination were considered to be equity-based awards with a grant date fair value of approximately $2.1 million, of which compensation expense will be recognized on a straight line basis over the requisite derived service period. The compensation expense recognized during the three months ended March 31, 2015 was approximately $0.1 million.

 

10.Stock-Based Compensation

Description of plan

In November 2014, the Company adopted the 2014 LTIP under which nonstatutory options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock, dividend equivalents, and other stock-based awards may be granted to employees, directors and consultants of the Company. The aggregate number of shares of common stock that the Company may issue under the 2014 LTIP may not exceed 20 million shares. On December 16, 2014, in connection with the closing of the Combination, subject to the approval of the Sabine shareholders, the board of directors of Sabine voted to amend the 2014 LTIP to increase the total number of Common Shares reserved for issuance in connection with awards under the 2014 LTIP from 20 million to 40 million, effective as of the date of such shareholder approval. As of March 31, 2015, the Company had 2.5 million shares available for issuance under the 2014 LTIP.

Restricted stock

The following table summarizes the restricted stock activity in the 2014 LTIP for the three months ended March 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock Awards

 

 

 

Weighted

 

 

 

 

 

 

 

Number of Shares

 

 

 

 

 

Weighted Average

 

Remaining Available

 

 

 

Number of

 

Grant Date Fair

 

for Future Issuance

 

 

 

Shares

 

 Value

 

under 2014 LTIP

 

Unvested at December 31, 2014

    

13,923,230 

    

$

0.34 

    

 

3,205,597 

 

Awarded

 

719,132 

 

 

0.10 

 

 

(719,132)

 

Vested

 

 —

 

 

 —

 

 

 —

 

Forfeited

 

(36,604)

 

 

0.34 

 

 

36,604 

 

Unvested at March 31, 2015

 

14,605,758 

 

 

0.33 

 

 

2,523,069 

 

 

19


 

The grant date fair value of restricted stock is determined by averaging the high and low stock price of a share of Sabine common stock as published by the OTC Bulletin Board on the date of grant. Of the unvested restricted stock as of March 31, 2015,  12,656,732 shares vest as follows: (i) two-thirds will vest in one-fourth increments on each of the first four anniversaries of the date of grant and (ii) one-third will vest in full on the fourth anniversary of the date of grant; 1,149,026 shares vest ratably over three years; and 800,000 shares vest ratably over four years. Restricted stock may vest earlier upon a qualifying disability, death, certain involuntary terminations, or a change in control of the Company in accordance with the terms of the underlying agreement.

Compensation costs

Stock compensation expense associated with restricted stock awards for the three months ended March 31, 2015 was $0.3 million, and is included in “General and administrative expenses on the Company’s Condensed Consolidated Statement of Operations.

 

 

11.Statement of Cash Flows

During the three months ended March 31, 2015, Sabine’s noncash investing and financing activities consisted primarily of the following transactions:

·

Accrued and payable capital expenditures as of March 31, 2015 were $76.4 million.

During the three months ended March 31, 2014, Sabine’s noncash investing and financing activities consisted primarily of the following transactions:

·

Accrued and payable capital expenditures as of March 31, 2014 were $111.6 million.

The Company paid $42.8 million and $31.8 million for interest during the three months ended March 31, 2015 and 2014, respectively, net of capitalized interest. 

12.Derivative Financial Instruments

Throughout the three months ended March 31, 2015, the Company has executed derivative contracts as market conditions allowed in order to economically hedge anticipated future cash flows from oil and natural gas producing activities. These include both oil and natural gas fixed-price swap agreements covering certain portions of anticipated 2016 and 2017 production volumes. The Company executed option contracts including written oil call agreements, as well as purchased oil put agreements, covering certain portions of anticipated 2016 oil production. No material premiums were recognized as a result of these option agreements. None of the fixed-price swap or option contracts were designated for hedge accounting, with all mark-to-market changes in fair value recognized currently in earnings. See the table below for specific volume, timing, and pricing details regarding Sabine’s outstanding trade positions.

Additionally, prior to the three months ended March 31, 2015, the Company purchased natural gas puts, wrote oil and natural gas calls, and wrote oil and natural gas puts for periods from 2015 through 2016. No material premiums were recognized as a result of these option agreements. Sabine has sold a swaption agreement allowing the counterparty the option to execute a fixed price swap agreement at a contracted price on contracted volumes before an expiration date. Sabine’s sold swaption contract expires at December 31, 2015. The net unamortized premium included in short-term derivative liabilities is $3.5 million at March 31, 2015.  No unamortized premium remained in long-term derivative liabilities at March 31, 2015. See the table below for specific volume, timing, and pricing details regarding Sabine’s derivative positions. 

Throughout the three months ended March 31, 2014,  the Company purchased natural gas puts, wrote oil and natural gas calls, and wrote oil and natural gas puts for periods from 2014 through 2016, for which a net premium was recognized.  In March 2014, Sabine restructured certain sold call contracts for which the Company had previously recognized a premium liability related to 2015 volumes. As a result of this restructuring, the Company released $4.4 million of premium liability into earnings, recognized in “Gain (loss) on derivative instruments” on the Condensed Consolidated Statement of Operations for the three months ended March 31, 2014.

20


 

The following swaps and options were outstanding with associated notional volumes and contracted swap, floor, and ceiling prices that represent hedge weighted average prices for the index specified as of March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural Gas

 

 

 

 

 

 

 

Weighted Average Prices

 

Settlement Period

    

Derivative Instrument

    

Notional Amount

    

Swap

    

Sub Floor

    

Floor

    

Ceiling

 

 

 

 

 

(MMbtu)

 

($/MMbtu)

 

($/MMbtu)

 

($/MMbtu)

 

($/MMbtu)

 

2015

  

Collar

  

2,750,000 

  

$

  

$

 —

  

$

4.10 

  

$

4.30 

 

2015

 

Swap

 

28,875,000 

 

$

4.15 

 

$

 

$

 

$

 

2015

 

Swap with sub floor

 

28,325,000 

 

$

4.15 

 

$

3.51 

 

$

 

$

 

2016

 

Swap

 

24,522,000 

 

$

3.26 

 

$

 —

 

$

 —

 

$

 —

 

2016

 

Sold call

 

21,960,000 

 

$

 —

 

$

 —

 

$

 —

 

$

5.00 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

 

 

 

 

 

 

Weighted Average Prices

 

Settlement Period

    

Derivative Instrument

    

Notional Amount

    

Swap

    

Sub Floor

    

Floor

    

Ceiling

 

 

 

 

 

(Bbl)

 

($/Bbl)

 

2015

  

Swap

  

1,660,050 

  

$

89.90 

  

$

  

$

  

$

 

2015

 

Swap with sub floor

 

255,750 

 

$

89.50 

 

$

73.47 

 

$

 

$

 

2016

 

Swap

 

640,500 

 

$

63.62 

 

$

 —

 

$

 —

 

$

 —

 

2016

 

Collar

 

366,000 

 

$

 —

 

$

 —

 

$

60.00 

 

$

68.05 

 

2016

 

Swaption

 

366,000 

 

$

98.00 

 

$

 

$

 

$

 

2017

 

Swap

 

547,500 

 

$

64.80 

 

$

 

$

 

$

 

 

Subsequent to March 31, 2015 through May 11, 2015, Sabine has not entered into additional derivative contracts.

The table below presents the Company’s “Gain (loss) on derivative instruments” located in Other income (expenses) in the Condensed Consolidated Statements of Operations:

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31, 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Gain (loss) on derivative instruments

    

$

36,124 

    

$

(22,126)

    

 

Sabine received $46.0 million and paid $7.3 million on settlements of derivatives in three months ended March 31, 2015 and 2014, respectively.

Sabine’s derivative contracts are executed with counterparties under certain master netting agreements that allow the Company to offset assets due from, and liabilities due to, the counterparties. The table below presents the carrying value

21


 

of Sabine’s derivative assets and liabilities both before and after the impact of such netting agreements in the Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets

 

 

 

 

 

March 31, 

 

December 31,

 

 

 

 

 

2015

 

2014

 

 

 

 

 

(in thousands)

 

 

 

 

 

Fair Value

 

Current assets

    

Derivative Instruments

    

$

168,289 

    

$

191,765 

 

Current liabilities (1)

 

Derivative Instruments

 

 

 

 

 

Total current asset fair value

 

 

 

$

168,289 

 

 

191,765 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

Derivative Instruments

 

 

9,612 

 

 

 

Long-term liabilities (1)

 

Derivative Instruments

 

 

 

 

 

Total long-term asset fair value

 

 

 

 

9,612 

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

Less:  Counterparty set-off

 

 

 

 

(30,709)

 

 

(31,548)

 

Total derivative asset net fair value

 

 

 

$

147,192 

 

$

160,217 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liabilities

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

(in thousands)

 

 

 

 

 

Fair Value

 

Current liabilities

    

Derivative Instruments

    

$

(3,500)

    

$

(4,645)

 

Current assets (1)

 

Derivative Instruments

 

 

(29,291)

 

 

(31,548)

 

Total current liability fair value

 

 

 

 

(32,791)

 

 

(36,193)

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

Derivative Instruments

 

 

(248)

 

 

(2,269)

 

Other assets (1)

 

Derivative Instruments

 

 

(1,418)

 

 

 

Total long-term liability fair value

 

 

 

 

(1,666)

 

 

(2,269)

 

 

 

 

 

 

 

 

 

 

 

Less:  Counterparty set-off

 

 

 

 

30,709 

 

 

31,548 

 

Total derivative liability net fair value

 

 

 

$

(3,748)

 

$

(6,914)

 


(1)

Impact of counterparty right of set-off for derivative instruments subject to certain master netting agreements.

At March 31, 2015, and December 31, 2014,  none of the Company’s outstanding derivatives contained credit-risk related contingent features that would result in a material adverse impact to Sabine upon any change in the Company’s credit ratings.

13.Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.

22


 

The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

The three levels of the fair value hierarchy are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, basis swaps, options, and collars.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The following table sets forth, by level, within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value as of March 31, 2015 and December 31, 2014. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring Fair Value Measurements

 

 

 

 

 

 

(in millions)

 

 

 

 

 

    

Level 1

    

Level 2