12.Commitments and Contingencies

Legal and Regulatory

From time to time, the Company may be a plaintiff or defendant in a pending or threatened legal proceeding arising in the normal course of its business. All known liabilities are accrued when probable and reasonably estimable based on the Company’s best estimate of the potential loss. The Company has recognized $29.0 million of accrued liabilities in relation to legal proceedings, of which $27.0 million is classified within “Other long-term liabilities” and $2 million is classified within “Liabilities Subject to Compromise” in the Condensed Consolidated Balance Sheet as of March 31, 2016. As of December 31, 2015 the Company recognized $28.7 million of accrued liabilities in relation to legal proceedings, of which $26.7 million was classified within “Other long-term liabilities” and $2 million was classified within “Liabilities Subject to Compromise” in the Condensed Consolidated Balance Sheet. Additionally, as of March 31, 2016, the Company had Asset Retirement Obligations (“ARO”) of approximately $50.8 million, of which $9.4 million was reported in “Liabilities Subject to Compromise” in the Condensed Consolidated Balance Sheet. As of December 31, 2015, the Company had AROs of approximately $50.3 million, of which $9.4 million was reported in “Liabilities Subject to Compromise” in the Condensed Consolidated Balance Sheet attributable to the plugging of abandoned wells. There have been no updates to significant legal cases in the three months ended March 31, 2016 other than that all pre-petition litigation (with the exception of Forest Oil Corporation v. El Rucio Land and Cattle Company, Inc., et al., discussed below) has been stayed due to the filing of Sabine’s voluntary petition for relief under Chapter 11 of the Bankruptcy Code.

Forest Oil Corporation v. El Rucio Land and Cattle Company, Inc., et al.

On February 29, 2012, two members of a three-member arbitration panel reached a decision adverse to the Company in the proceeding styled Forest Oil Corp. et al. v. El Rucio Land & Cattle Co. et al. The third member of the arbitration panel dissented. The proceeding was initiated in January 2005 and involves claims asserted by the landowner-claimant based on the diminution in value of its land and related damages allegedly resulting from operational and reclamation practices employed by Forest Oil in the 1970s, 1980s, and early 1990s. The arbitration decision awarded the claimant $23 million in damages and attorneys’ fees and additional injunctive relief regarding future surface-use issues. On October 9, 2012, after vacating a portion of the decision imposing a future bonding requirement on the Company, the trial court for the 55th Judicial District of Harris County, Texas, reduced the arbitration decision to a judgment. The judgment was affirmed by the Court of Appeals for the First District of Texas on July 24, 2014, and a motion for rehearing was denied on August 8, 2014. The Company filed a petition for review with the Texas Supreme Court on January 5, 2015. On May 1, 2015, the Texas Supreme Court requested full briefing on the merits. On July 15, 2015, the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On September 15, 2015, the bankruptcy court granted an unopposed motion to lift the automatic stay thereby allowing the appeal currently pending in the Texas Supreme Court to move forward. All briefing in the matter is now completed.

Stourbridge Investments, LLC v. Forest Oil Corporation, et al., Raul v. Carroll, et al., Rothenberg v. Forest Oil Corporation, et al., Gawlikowski v. Forest Oil Corporation, et al., Edwards v. Carroll, et al., Jabri v. Forest Oil Corporation, et al., Olinatz v. Forest Oil Corporation, et al.

Following the May 6, 2014 announcement of the proposed Combination, six putative class action lawsuits were filed by Forest Oil shareholder in the Supreme Court of the State of New York, County of New York, alleging breaches of fiduciary duty by the directors of Forest Oil and aiding and abetting of those breaches of fiduciary duty by Sabine entities in connection with the proposed Combination. By order dated July 8, 2014, the six New York cases were consolidated for all purposes under the caption In re Forest Oil Corporation Shareholder Litigation, Index No. 651418/2014. On July 17, 2014, plaintiffs in the consolidated New York action filed a Consolidated Class Action Complaint (the “Consolidated Complaint”). The Consolidated Complaint seeks to certify a plaintiff class consisting of all holders of Forest Oil common stock other than the defendants and their affiliates. The defendants named in these actions include the directors of Forest Oil (Patrick R. McDonald, James H. Lee, Dod A. Fraser, James D. Lightner, Loren K. Carroll, Richard J. Carty, and Raymond I. Wilcox), as well as Sabine and certain of its affiliates (specifically, Sabine Oil & Gas LLC, Sabine Investor Holdings LLC, Sabine Oil & Gas Holdings LLC, and Sabine Oil & Gas Holdings II LLC). The Consolidated Complaint also purports to identify FR XI Onshore AIV, L.L.C. as a defendant, but no causes of action are alleged against that entity.

The Consolidated Complaint alleges that the proposed Combination arises out of a series of unlawful actions by the board of directors of Forest Oil seeking to ensure that Sabine and affiliates of First Reserve Corporation (“First Reserve”) acquire the assets of, and take control over, Forest Oil through an alleged “three-step merger transaction” that allegedly does not represent a value-maximizing transaction for the shareholders of Forest Oil. The Consolidated Complaint also complains that the proposed Combination has been improperly restructured to require only a majority vote of current Forest Oil shareholders to approve the Combination with Sabine, rather than a two-thirds majority as would have been required under the original transaction structure. The Consolidated Complaint additionally alleges that members of Forest Oil’s board, as well as Forest Oil’s financial adviser for the proposed Combination, are subject to conflicts of interest that compromise their loyalty to Forest Oil’s shareholders, that the defendants have improperly sought to “lock up” the proposed Combination with certain inappropriate “deal protection devices” that impede Forest Oil from pursuing superior potential transactions with other bidders.

The Consolidated Complaint asserts causes of action against the directors of Forest Oil for breaches of fiduciary duty and violations of the New York Business Corporation Law, as well as a cause of action against the Sabine defendants for aiding and abetting the directors’ breaches of duty and violations of law, and it seeks preliminary and permanent injunctive relief to enjoin consummation of the proposed Combination or, in the alternative, rescission and/or rescissory and other damages in the event that the proposed Combination is consummated before the lawsuit is resolved.

In addition to these New York proceedings, one putative class action lawsuit has been filed by Forest Oil shareholders in the United States District Court for the District of Colorado. That action, captioned Olinatz v. Forest Oil Corp., No. 1:14-cv-01409-MSK-CBS, was commenced on May 19, 2014, and plaintiffs filed an Amended Complaint (the “Olinatz Complaint”) on June 13, 2014. The Olinatz Complaint also alleges breaches of fiduciary duty by the directors of Forest Oil and aiding and abetting of those breaches of fiduciary duty by the Sabine defendants in connection with the proposed Combination, as well as related claims alleging violations of Section 14 (a) and 20 (a) of the Securities Exchange Act of 1934, and Securities and Exchange Commission Rule 14a-9 promulgated thereunder, in connection with alleged misstatements in a Form S-4 Registration Statement filed by Forest Oil on May 29, 2014, which recommends that Forest Oil shareholders approve the proposed Combination. The Olinatz Complaint names as defendants Forest Oil and certain of its affiliates (specifically, Forest Oil Corporation, New Forest Oil Inc., and Forest Oil Merger Sub Inc.), the directors of Forest Oil (Patrick R. McDonald, James H. Lee, Dod A. Fraser, James D. Lightner, Loren K. Carroll, Richard J. Carty, and Raymond I. Wilcox), and Sabine and certain of its affiliates (specifically, Sabine Oil & Gas LLC, Sabine Investor Holdings LLC, Sabine Oil & Gas Holdings LLC, and Sabine Oil & Gas Holdings II LLC), and seeks preliminary and permanent injunctive relief to enjoin consummation of the proposed Combination or, in the alternative, rescission in the event the proposed Combination is consummated before the lawsuit is resolved, as well as imposition of a constructive trust on any alleged benefits improperly received by defendants.

On October 14, 2014, on motion by the Colorado plaintiffs, the Court in the Colorado action entered an order directing the Clerk of the Court to administratively close the action, subject to reopening on good cause shown.

On November 11, 2014, the defendants reached an agreement in principle with plaintiffs in the New York action regarding a settlement of that action, and that agreement is reflected in a memorandum of understanding executed by the parties on that date. The settlement, if consummated, will also resolve the Colorado action. In connection with the settlement contemplated by the memorandum of understanding, Forest Oil agreed to make certain additional disclosures related to the proposed transaction with Sabine, which are contained in Forest Oil’s November 12, 2014 Form 8-K, and Sabine agreed that, within 120 days after the closing of the proposed combination transaction, Sabine Investor Holdings LLC will designate for a period of no less than three (3) years at least one additional independent director, as defined in Section 303A.02 of the New York Stock Exchange Listed Company Manual, as a Sabine Nominee (as defined in Section 1.4 of the Amended and Restated Agreement and Plan of Merger). The total number of Sabine Nominees will remain unchanged, but at least one of the remaining two Sabine Nominees that had not yet been determined was required to be independent. In connection with the closing of the Combination, Thomas Chewning, an independent director as defined in Section 303A.02 of the New York Exchange Listed Company Manual, was appointed as a Sabine Nominee. The memorandum of understanding contemplates that the parties will enter into a stipulation of settlement.

On March 13, 2015, plaintiffs informed Sabine that they believed Sabine had materially violated the terms of the memorandum of understanding by (i) failing to replace or create a mechanism to replace an independent director who resigned from the board of directors in January of 2015, and (ii) making changes to the terms of the merger agreement that were not necessary or required to facilitate the consummation of the proposed transaction without first disclosing and permitting shareholders to vote on the changes. Sabine disagrees with plaintiffs’ position and believes it has fully complied with the memorandum of understanding. In an attempt to facilitate a resolution, however, Sabine offered to: (i) appoint an independent director if an additional director was added to the Board of Directors (bringing the total number of directors eight in the next twelve months, and (ii) remove or waive the “Reincorporation Penalty” provision. Plaintiffs accepted the offer on April 22, 2015, contingent upon the Parties’ reaching agreement on a stipulation of settlement, which they are presently negotiating.

The stipulation of settlement will be subject to customary conditions, including court approval. In the event the parties enter into a stipulation of settlement, a hearing will be scheduled at which the New York Court will consider the fairness, reasonableness, and adequacy of the settlement. If the settlement is finally approved by the Court, it will resolve and release all claims or actions that were or could have been brought challenging any aspect of the proposed combination transaction, the Amended and Restated Agreement and Plan of Merger, the merger agreement originally entered into by Sabine Investor Holdings LLC, Forest Oil, New Forest Oil Inc. and certain of their affiliated entities on May 5, 2014, any disclosure made in connection therewith, including the Definitive Proxy Statement, and all other matters that were the subject of the complaint in the New York action, pursuant to terms that will be disclosed to shareholders prior to final approval of the settlement. In addition, in connection with the settlement, the parties contemplate that the parties will negotiate in good faith regarding the amount of attorney’s fees and expenses that shall be paid to plaintiffs’ counsel in connection with the Actions. There can be no assurances that the parties will ultimately enter into a stipulation of settlement or that the New York Court will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated. The parties are presently negotiating the stipulation of settlement. At this time, the Company is unable to estimate the potential outcome of this litigation or the ultimate exposure.

On July 15, 2015, Sabine filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. As a result of the pending bankruptcy, this matter is currently stayed.

HPIP-Gonzales Holdings, LLC v. Forest Oil Corporation

On November 11, 2014, HPIP-Gonzales Holdings, LLC (“HPIP”) initiated arbitration against the Company alleging that the Company breached various provisions, along with its duty of good faith and fair dealing, of the Gathering, Treating and Processing Agreement with HPIP entered into in May 2013 (the “HPIP Gathering Agreement”) and the Acid Gas Handling Agreement with HPIP entered into in May 2014 (together with the HPIP Gathering Agreement, the “HPIP Agreements”). HPIP also sought to exercise a contractual provision requiring Sabine to purchase the facilities governed by the HPIP Agreements in the event the related drilling program terminates. On December 19, 2014, the Company filed its Answering Statement and Notice of Counterclaim, denying HPIP’s claims and asserting generally that HPIP breached various provisions of the agreements, resulting in damages to the Company. The Company further alleged that its drilling program had not terminated. On July 15, 2015, the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. As a result of the pending bankruptcy, the arbitration is currently stayed. On May 11, 2016 the Bankruptcy Court issued an order authorizing rejection of the Company’s midstream gathering agreements with HPIP Gonzales Holdings, LLC (the “HPIP Gathering Agreement”) effective September 30, 2015.

Wilmington Savings Fund Society, FSB v. Forest Oil Corporation

On February 26, 2015, the Company was served with a complaint concerning the indenture governing its 2019 Notes. The complaint is pending in the Supreme Court of the State of New York and generally alleges that certain events of default occurred with respect to the 2019 Notes due to the business combination between Forest Oil Corporation and Sabine Oil & Gas LLC. The Company also received a notice of default and acceleration from the trustee with respect to the 2019 Notes containing similar allegations. If the Company is not successful in their defense of this complaint, the Company may be required to redeem the holders of the 2019 Notes at 101% of the outstanding principal, plus accrued and outstanding interest of the notes. The Company filed its Answer to the complaint on April 17, 2015. The Company believes the allegations against it are without merit and intend to vigorously defend against such claims and pursue any and all defenses available. However, the Company is unable to predict the outcome of such matter, and the proceedings may have a negative impact on the Company’s liquidity, financial condition and results of operations.

While the Company intends to vigorously defend the claims against it and believe they are without merit, an adverse ruling could cause the Company’s indebtedness to become immediately due and payable.

Additional claims, lawsuits, or proceedings may be filed or commenced arising out of the indentures to which we are a party and with respect to the business combination.

On July 15, 2015, the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. As a result of the pending bankruptcy, this matter is currently stayed.

Sabine Oil & Gas Corporation v. Wilmington Trust, N.A.

On July 15, 2015, the Company filed an adversary proceeding asserting, on its behalf, a constructive fraudulent transfer claim against the Term Loan Facility administrative agent Wilmington Trust, N.A. Specifically, the complaint (the “Complaint”) states that at the time of the Business Combination between Sabine Oil & Gas LLC and Forest Oil Corporation, Forest Oil Corporation was insolvent from a balance-sheet standpoint. The Complaint also alleges that Forest Oil Corporation did not receive reasonably equivalent value in exchange for pledging hundreds of millions of dollars of oil and gas assets to secure the Term Loan Facility debt that Sabine Oil & Gas LLC had previously incurred. Accordingly, pursuant to Bankruptcy Code Section 551, Sabine is seeking to avoid and preserve, for the benefit of the Company’s unsecured creditors, the liens imposed on legacy Forest Oil Corporation assets that secured the $650 million in preexisting Sabine Oil & Gas LLC debt under the Term Loan Facility. In August 2015, the defendant filed a motion to dismiss, which is now fully briefed, and the Court heard oral argument on October 15, 2015, but did not rule.

On December 30, 2015, the official committee for unsecured creditors (the “Creditors Committee”) and counsel for the Forest Notes Trustees filed motions to intervene in the adversary proceeding. On January 5, 2016, the Creditors Committee also filed an objection to Wilmington Trust, N.A.’s motion to dismiss the complaint. The Court held a second hearing on the motion to dismiss on January 12, 2016, but has yet to rule.

Drilling and Completion

On August 10, 2015 the Bankruptcy Court issued orders allowing the Company to reject its rig and servicing contracts with Nabors effective July 15, 2015 and the total estimated allowable claim has been included in “Liabilities Subject to Compromise” in the Condensed Consolidated Balance Sheet. The rejections impacted and eliminated approximately $29 million due over the life of the secured contracts as of the date the contracts were rejected.

On May 11, 2016, the Bankruptcy Court issued an order authorizing the rejection of the Company’s midstream gathering agreements with HPIP Gonzales Holdings, LLC (the “HPIP Gathering Agreement”) effective September 30, 2015. The rejection of the HPIP Gathering Agreement eliminates the Company’s obligation to drill at least one well per year on the relevant acreage and avoids triggering the agreement’s “put” provision, which would require the Company to purchase the gathering and processing facilities at a contractually mandated price if the drilling program terminated prior to May 2, 2017. On May 3, 2016, the Bankruptcy Court also issued an opinion finding that certain covenants contained in the HPIP Gathering Agreement do not “run with the land” as real covenants or as equitable servitudes. Due to the uncertainty of any appeals that may be filed by HPIP and the uncertainties surrounding the claims reconciliation process as well as the pending arbitration between HPIP and the Company (which is currently subject to the automatic stay) and HPIP’s pending claims against the Company in bankruptcy court, the Company is not currently able to estimate an allowable claim in relation to this matter. The Company has not recognized any amounts related to the HPIP Gathering Agreements as of March 31, 2016 or December 31, 2015.

As is customary in the oil and natural gas industry, the Company may at times have commitments in place to reserve or earn certain acreage positions or wells. If the Company does not pay such commitments, the acreage positions or wells may be lost.

Other Commitments

The Company’s filing of the Bankruptcy Petitions described in Note 2 herein constituted an event of default that accelerated the Company’s obligations under the New Revolving Credit Facility, the Term Loan Facility, the 2017 Notes and the Legacy Forest Notes. As a result, the Company has classified all debt as long term as “Liabilities Subject to Compromise” in the Condensed Consolidated Balance Sheet as of March 31, 2016 and December 31, 2015. For additional description of the defaults present under the Company’s debt obligations, please see Note 6 herein.

The Bankruptcy Court also issued orders allowing the Company to reject certain office leases effective September 1, 2015 and the total estimated allowable claim of approximately $3.6 million has been included in “Liabilities Subject to Compromise” in the Condensed Consolidated Balance Sheet as of March 31, 2016 and December 31, 2015.

On May 11, 2016, the Bankruptcy Court entered an order approving the rejection of the Company’s midstream gathering agreements with Nordheim Eagle Ford Gathering, LLC (“Nordheim”) effective December 31, 2015. During 2014, the Company had executed ten-year gas and condensate gathering agreements with Nordheim for the transportation and processing of natural gas and condensate, covering certain properties in South Texas with contractually obligated annual minimum volume commitments to deliver a cumulative 88.5 Bcfe of gas and 5,150 MBbl of condensate by September 22, 2024 (the “Nordheim Gathering Agreements”). Under the terms of the Nordheim Gathering Agreements, the Company was required to make annual deficiency payments for any shortfalls in delivering the minimum annual volumes under these commitments beginning in the third quarter of 2015, which would be partially offset by then-existing credit balances for production in excess of minimum commitments, if any. As of December 31, 2015, the Company had not delivered the minimum volumes required for the prior contract year, resulting in a deficiency of approximately $3.0 million, which was recognized as “Liabilities subject to compromise” in the Condensed Consolidated Balance Sheet as of December 31, 2015. No additional shortfalls have been recognized subsequent to the effective date of the rejection of the Nordheim Gathering Agreements. As of March 31, 2016, the Company has not made the deficiency payment. The Company believes that rejection of the Nordheim Gathering Agreements eliminates any future obligation under the agreements to deliver minimum volumes of gas or condensate, or to make deficiency payments in the event minimum volumes are not delivered. Due to the uncertainty of any appeals that may be filed by Nordheim and the uncertainties surrounding the claims reconciliation process, the Company is not currently able to estimate an allowable claim in relation to this matter. The Company has not recognized any additional amounts related to the rejection of the Nordheim Gathering Agreements as of March 31, 2016.

The Company has executed additional gas gathering agreements for the transportation and processing of natural gas, covering certain properties in our core operating areas and contractually obligated minimum volume commitments to deliver a cumulative 6.8 Bcfe of gas by August 2018. Under the terms of these agreements, the Company is required to make deficiency payments at the end of the contractual term for any shortfalls in delivering the minimum volumes under these commitments. Based on the current development plan for these oil and gas assets, the Company does not anticipate that future production from the applicable assets and dedicated area will satisfy the future volume commitments, resulting in deficiency payments over the life of the agreements. The Company has recognized an estimated deficiency of approximately $1.6 million and $1.3 million as “Liabilities subject to compromise” in the Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015.

There have been no other material changes to commitments and contingencies in the three months ended March 31, 2016.