0001628280-18-013345.txt : 20181101 0001628280-18-013345.hdr.sgml : 20181101 20181101170618 ACCESSION NUMBER: 0001628280-18-013345 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 89 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181101 DATE AS OF CHANGE: 20181101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GULFPORT ENERGY CORP CENTRAL INDEX KEY: 0000874499 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 731521290 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19514 FILM NUMBER: 181154679 BUSINESS ADDRESS: STREET 1: 14313 NORTH MAY AVENUE STREET 2: SUITE 100 CITY: OKLAHOMA CITY STATE: OK ZIP: 73134 BUSINESS PHONE: 4058488807 MAIL ADDRESS: STREET 1: 14313 NORTH MAY AVENUE STREET 2: SUITE 100 CITY: OKLAHOMA CITY STATE: OK ZIP: 73134 FORMER COMPANY: FORMER CONFORMED NAME: WRT ENERGY CORP DATE OF NAME CHANGE: 19930328 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN RESOURCE TECHNOLOGIES INC DATE OF NAME CHANGE: 19600201 10-Q 1 gpor-09302018x10xq.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018 OR
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
Commission File Number 000-19514
 
Gulfport Energy Corporation
(Exact Name of Registrant As Specified in Its Charter)
 
Delaware
 
73-1521290
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification Number)
3001 Quail Springs Parkway
Oklahoma City, Oklahoma
 
73134
(Address of Principal Executive Offices)
 
(Zip Code)
(405) 252-4600
(Registrant Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer  ý    Accelerated filer   ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of October 29, 2018, 173,302,055 shares of the registrant’s common stock were outstanding.




GULFPORT ENERGY CORPORATION
TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

 



1


GULFPORT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30, 2018
 
December 31, 2017
 
(In thousands, except share data)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
124,571

 
$
99,557

Accounts receivable—oil and natural gas sales
157,391

 
146,773

Accounts receivable—joint interest and other
39,511

 
35,440

Accounts receivable—related parties
79

 

Prepaid expenses and other current assets
9,742

 
4,912

Short-term derivative instruments
19,809

 
78,847

Total current assets
351,103

 
365,529

Property and equipment:
 
 
 
Oil and natural gas properties, full-cost accounting, $2,925,145 and $2,912,974 excluded from amortization in 2018 and 2017, respectively
9,936,714

 
9,169,156

Other property and equipment
92,388

 
86,754

Accumulated depletion, depreciation, amortization and impairment
(4,506,306
)
 
(4,153,733
)
Property and equipment, net
5,522,796

 
5,102,177

Other assets:
 
 
 
Equity investments
232,529

 
302,112

Long-term derivative instruments
3,530

 
8,685

Deferred tax asset

 
1,208

Inventories
8,234

 
8,227

Other assets
17,038

 
19,814

Total other assets
261,331

 
340,046

Total assets
$
6,135,230

 
$
5,807,752

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
582,464

 
$
553,609

Asset retirement obligation—current
120

 
120

Short-term derivative instruments
62,601

 
32,534

Current maturities of long-term debt
647

 
622

Total current liabilities
645,832

 
586,885

Long-term derivative instruments
15,101

 
2,989

Asset retirement obligation—long-term
78,411

 
74,980

Deferred tax liability
3,046

 

Other non-current liabilities

 
2,963

Long-term debt, net of current maturities
2,100,825

 
2,038,321

Total liabilities
2,843,215

 
2,706,138

Commitments and contingencies (Note 9)

 

Preferred stock, $.01 par value; 5,000,000 authorized, 30,000 authorized as redeemable 12% cumulative preferred stock, Series A; 0 issued and outstanding

 

Stockholders’ equity:
 
 
 
Common stock - $.01 par value, 200,000,000 authorized, 173,218,643 issued and outstanding at September 30, 2018 and 183,105,910 at December 31, 2017
1,732

 
1,831

Paid-in capital
4,316,006

 
4,416,250

Accumulated other comprehensive loss
(46,354
)
 
(40,539
)
Retained deficit
(979,369
)
 
(1,275,928
)
Total stockholders’ equity
3,292,015

 
3,101,614

Total liabilities and stockholders’ equity
$
6,135,230

 
$
5,807,752


See accompanying notes to consolidated financial statements.

2


GULFPORT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except share data)
Revenues:
 
 
 
 
 
 
 
Natural gas sales
$
271,167

 
$
223,340

 
$
753,261

 
$
606,544

Oil and condensate sales
45,682

 
31,459

 
140,687

 
85,338

Natural gas liquid sales
53,776

 
33,559

 
141,883

 
88,985

Net (loss) gain on natural gas, oil, and NGL derivatives
(9,663
)
 
(22,860
)
 
(96,737
)
 
141,588

 
360,962

 
265,498

 
939,094

 
922,455

Costs and expenses:

 
 
 
 
 
 
Lease operating expenses
22,325

 
20,020

 
64,143

 
60,044

Production taxes
9,348

 
5,419

 
23,861

 
14,464

Midstream gathering and processing
78,913

 
69,372

 
214,546

 
176,258

Depreciation, depletion and amortization
119,915

 
106,650

 
352,848

 
254,887

General and administrative
15,848

 
13,065

 
42,955

 
37,922

Accretion expense
1,037

 
456

 
3,056

 
1,148

Acquisition expense

 
33

 

 
2,391

 
247,386

 
215,015

 
701,409

 
547,114

INCOME FROM OPERATIONS
113,576

 
50,483

 
237,685

 
375,341

OTHER (INCOME) EXPENSE:

 
 
 
 
 
 
Interest expense
33,253

 
27,130

 
100,922

 
74,797

Interest income
(92
)
 
(37
)
 
(162
)
 
(927
)
Litigation settlement
917

 

 
917

 

Insurance proceeds

 

 
(231
)
 

Gain on sale of equity method investments
(2,733
)
 

 
(124,768
)
 
(12,523
)
(Income) loss from equity method investments, net
(12,858
)
 
2,737

 
(35,282
)
 
33,468

Other income
(61
)
 
(345
)
 
(201
)
 
(863
)
 
18,426

 
29,485

 
(58,805
)
 
93,952

INCOME BEFORE INCOME TAXES
95,150

 
20,998

 
296,490

 
281,389

INCOME TAX EXPENSE (BENEFIT)

 
2,763

 
(69
)
 
2,763

NET INCOME
$
95,150

 
$
18,235

 
$
296,559

 
$
278,626

NET INCOME PER COMMON SHARE:
 
 
 
 
 
 
 
Basic
$
0.55

 
$
0.10

 
$
1.69

 
$
1.56

Diluted
$
0.55

 
$
0.10

 
$
1.68

 
$
1.56

Weighted average common shares outstanding—Basic
173,057,538

 
182,957,416

 
175,776,312

 
178,736,569

Weighted average common shares outstanding—Diluted
173,304,914

 
183,008,436

 
176,440,461

 
179,130,570


See accompanying notes to consolidated financial statements.


3


GULFPORT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income
$
95,150

 
$
18,235

 
$
296,559

 
$
278,626

Foreign currency translation adjustment
3,052

 
6,832

 
(5,815
)
 
12,719

Other comprehensive income (loss)
3,052

 
6,832

 
(5,815
)
 
12,719

Comprehensive income
$
98,202

 
$
25,067

 
$
290,744

 
$
291,345



See accompanying notes to consolidated financial statements.


4


GULFPORT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

 
 
 
 
 

Paid-in
Capital
 
Accumulated
Other
Comprehensive (Loss) Income
 
Retained
Deficit
 
Total
Stockholders’
Equity
 
Common Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
 
 
(In thousands, except share data)
Balance at January 1, 2018
183,105,910

 
$
1,831

 
$
4,416,250

 
$
(40,539
)
 
$
(1,275,928
)
 
$
3,101,614

Net income

 

 

 

 
296,559

 
296,559

Other Comprehensive Loss

 

 

 
(5,815
)
 

 
(5,815
)
Stock-based Compensation

 

 
9,654

 

 

 
9,654

Shares Repurchased
(10,505,469
)
 
(105
)
 
(109,892
)
 

 

 
(109,997
)
Issuance of Restricted Stock
618,202

 
6

 
(6
)
 

 

 

Balance at September 30, 2018
173,218,643

 
$
1,732

 
$
4,316,006

 
$
(46,354
)
 
$
(979,369
)
 
$
3,292,015

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
158,829,816

 
$
1,588

 
$
3,946,442

 
$
(53,058
)
 
$
(1,711,080
)
 
$
2,183,892

Net income

 

 

 

 
278,626

 
278,626

Other Comprehensive Income


 


 


 
12,719

 

 
12,719

Stock-based Compensation

 

 
7,988

 

 

 
7,988

Issuance of Common Stock for the Vitruvian Acquisition, net of related expenses
23,852,117

 
239

 
459,197

 

 

 
459,436

Issuance of Restricted Stock
399,843

 
4

 
(4
)
 

 

 

Balance at September 30, 2017
183,081,776

 
$
1,831

 
$
4,413,623

 
$
(40,339
)
 
$
(1,432,454
)
 
$
2,942,661


See accompanying notes to consolidated financial statements.

5


GULFPORT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine months ended September 30,
 
2018
 
2017
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
296,559

 
$
278,626

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Accretion expense
3,056

 
1,148

Depletion, depreciation and amortization
352,848

 
254,887

Stock-based compensation expense
5,792

 
4,793

(Income) loss from equity investments
(35,040
)
 
34,018

Change in fair value of derivative instruments
106,373

 
(129,692
)
Deferred income tax benefit
(69
)
 

Amortization of loan commitment fees
4,554

 
3,548

Gain on sale of equity method investments
(124,768
)
 
(12,523
)
Distributions from equity method investments
1,978

 

Changes in operating assets and liabilities:
 
 
 
Increase in accounts receivable—oil and natural gas sales
(10,618
)
 
(20,056
)
Increase in accounts receivable—joint interest and other
(2,277
)
 
(23,289
)
Increase in accounts receivable—related parties
(79
)
 
(346
)
Increase in prepaid expenses and other current assets
(4,830
)
 
(2,531
)
Decrease (increase) in other assets
1,228

 
(5,665
)
Increase in accounts payable, accrued liabilities and other
14,968

 
111,335

Settlement of asset retirement obligation
(719
)
 
(2,520
)
Net cash provided by operating activities
608,956

 
491,733

Cash flows from investing activities:
 
 
 
Additions to other property and equipment
(7,134
)
 
(16,288
)
Acquisition of oil and natural gas properties

 
(1,339,456
)
Additions to oil and natural gas properties
(755,263
)
 
(789,743
)
Proceeds from sale of oil and natural gas properties
4,820

 
4,079

Proceeds from sale of other property and equipment
217

 
658

Proceeds from sale of equity method investments
226,487

 

Contributions to equity method investments
(2,318
)
 
(44,844
)
Distributions from equity method investments
446

 
4,114

Net cash used in investing activities
(532,745
)
 
(2,181,480
)
Cash flows from financing activities:
 
 
 
Principal payments on borrowings
(165,428
)
 
(183
)
Borrowings on line of credit
225,000

 
365,000

Borrowings on term loan

 
2,951

Debt issuance costs and loan commitment fees
(772
)
 
(8,261
)
Payments on repurchase of stock
(109,997
)
 

Proceeds from issuance of common stock, net of offering costs

 
(5,364
)
Net cash (used in) provided by financing activities
(51,197
)
 
354,143

Net increase (decrease) in cash, cash equivalents and restricted cash
25,014

 
(1,335,604
)
Cash, cash equivalents and restricted cash at beginning of period
99,557

 
1,460,875

Cash, cash equivalents and restricted cash at end of period
$
124,571

 
$
125,271

Supplemental disclosure of cash flow information:
 
 
 
Interest payments
$
75,045

 
$
50,826

Income tax payments
$

 
$

Supplemental disclosure of non-cash transactions:
 
 
 
Capitalized stock-based compensation
$
3,862

 
$
3,195

Asset retirement obligation capitalized
$
1,094

 
$
11,557

Interest capitalized
$
3,956

 
$
8,753

Foreign currency translation (loss) gain on equity method investments
$
(5,815
)
 
$
12,719

 See accompanying notes to consolidated financial statements.

6


GULFPORT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These consolidated financial statements have been prepared by Gulfport Energy Corporation (the “Company” or “Gulfport”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods, on a basis consistent with the annual audited consolidated financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the summary of significant accounting policies and notes thereto included in the Company’s most recent annual report on Form 10-K. Results for the three and nine month periods ended September 30, 2018 are not necessarily indicative of the results expected for the full year.
1.
ACQUISITIONS
Vitruvian Acquisition
In December 2016, the Company, through its wholly-owned subsidiary Gulfport MidCon LLC (“Gulfport MidCon”) (formerly known as SCOOP Acquisition Company, LLC), entered into an agreement to acquire certain assets of Vitruvian II Woodford, LLC (“Vitruvian”), an unrelated third-party seller (the “Vitruvian Acquisition”). The assets included in the Vitruvian Acquisition include 46,400 net surface acres located in Grady, Stephens and Garvin Counties, Oklahoma. On February 17, 2017, the Company completed the Vitruvian Acquisition for a total initial purchase price of approximately $1.85 billion, consisting of $1.35 billion in cash, subject to certain adjustments, and approximately 23.9 million shares of the Company’s common stock (of which approximately 5.2 million shares were placed in an indemnity escrow). The cash portion of the purchase price was funded with the net proceeds from the Company's December 2016 common stock and senior note offerings and cash on hand. Acquisition costs of $0.03 million and $2.4 million were incurred during the three and nine months ended September 30, 2017, respectively, related to the Vitruvian Acquisition. No acquisition costs were incurred during the three and nine months ended September 30, 2018.
Allocation of Purchase Price    
The Vitruvian Acquisition qualified as a business combination for accounting purposes and, as such, the Company estimated the fair value of the acquired properties as of the February 17, 2017 acquisition date. The fair value of the assets acquired and liabilities assumed was estimated using assumptions that represent Level 3 inputs. See Note 11 for additional discussion of the measurement inputs.
The Company estimated that the consideration paid in the Vitruvian Acquisition for these properties approximated the fair value that would be paid by a typical market participant. As a result, no goodwill or bargain purchase gain was recognized in conjunction with the purchase.
The following table summarizes the consideration paid by the Company in the Vitruvian Acquisition to acquire the properties and the fair value amount of the assets acquired as of February 17, 2017.

7


 
 
(In thousands)
Consideration:
 
 
     Cash, net of purchase price adjustments
 
$
1,354,093

     Fair value of Gulfport’s common stock issued
 
464,639

Total consideration
 
$
1,818,732

 
 
 
Estimated fair value of identifiable assets acquired and liabilities assumed:
 
 
     Oil and natural gas properties
 
 
       Proved properties
 
$
362,264

       Unproved properties
 
1,462,957

     Asset retirement obligations
 
(6,489
)
Total fair value of net identifiable assets acquired
 
$
1,818,732


The equity consideration included in the initial purchase price was based on an equity offering price of $20.96 on December 15, 2016. The decrease in the price of Gulfport’s common stock from $20.96 on December 15, 2016 to $19.48 on February 17, 2017 resulted in a decrease to the fair value of the total consideration paid as compared to the initial purchase price of approximately $35.3 million, which resulted in a closing date fair value lower than the initial purchase price.
Post-Acquisition Operating Results
    
For the three months ended September 30, 2017 and the period from the acquisition date of February 17, 2017 to September 30, 2017, the assets acquired in the Vitruvian Acquisition contributed the following amounts of revenue to the Company's consolidated statements of operations. The amount of net income contributed by the assets is not presented below as it is impracticable to calculate due to the Company integrating the acquired assets into its overall operations using the full cost method of accounting.
 
 
 
 
Period from
 
 
 
 
February 17, 2017
 
 
Three months ended
 
to
 
 
September 30, 2017
 
September 30, 2017
 
 
(In thousands)
Revenue
 
$
60,940

 
$
137,706

Pro Forma Information (Unaudited)

The following unaudited pro forma combined financial information presents the Company’s results as though the Vitruvian Acquisition had been completed at January 1, 2017. The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Vitruvian Acquisition taken place on January 1, 2017; furthermore, the financial information is not intended to be a projection of future results.
 
 
Three months ended
 
Nine months ended
 
 
September 30, 2017
 
September 30, 2017
 
 
(In thousands, except share data)
Pro forma revenue
 
$
265,498

 
$
958,354

Pro forma net income
 
$
18,235

 
$
300,052

Pro forma earnings per share (basic)
 
$
0.10

 
$
1.68

Pro forma earnings per share (diluted)
 
$
0.10

 
$
1.68


8


2.
PROPERTY AND EQUIPMENT
The major categories of property and equipment and related accumulated depletion, depreciation, amortization and impairment as of September 30, 2018 and December 31, 2017 are as follows:
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Oil and natural gas properties
$
9,936,714

 
$
9,169,156

Office furniture and fixtures
42,302

 
37,369

Building
44,565

 
44,565

Land
5,521

 
4,820

Total property and equipment
10,029,102

 
9,255,910

Accumulated depletion, depreciation, amortization and impairment
(4,506,306
)
 
(4,153,733
)
Property and equipment, net
$
5,522,796

 
$
5,102,177


Under the full cost method of accounting, the Company is required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and natural gas properties. At September 30, 2018, the calculated ceiling was greater than the net book value of the Company’s oil and natural gas properties, thus no ceiling test impairment was required for the nine months ended September 30, 2018. No impairment was required for oil and natural gas properties for the nine months ended September 30, 2017.
Included in oil and natural gas properties at September 30, 2018 is the cumulative capitalization of $194.4 million in general and administrative costs incurred and capitalized to the full cost pool. General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $10.6 million and $28.8 million for the three and nine months ended September 30, 2018, respectively, and $8.9 million and $25.6 million for the three and nine months ended September 30, 2017, respectively.
The average depletion rate per Mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $0.94 and $0.89 per Mcfe for the nine months ended September 30, 2018 and 2017, respectively.
The following table summarizes the Company’s non-producing properties excluded from amortization by area at September 30, 2018:
 
September 30, 2018
 
(In thousands)
Utica
$
1,522,633

MidContinent
1,401,392

Niobrara
449

Southern Louisiana
571

Bakken
100

 
$
2,925,145

At December 31, 2017, approximately $2.9 billion of non-producing leasehold costs was not subject to amortization.
The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation typically occurs within three to five years. However, the majority of the Company’s non-producing leases in the Utica Shale have five-year extension terms which could extend this time frame beyond five years.

9


A reconciliation of the Company’s asset retirement obligation for the nine months ended September 30, 2018 and 2017 is as follows:
 
September 30, 2018
 
September 30, 2017
 
(In thousands)
Asset retirement obligation, beginning of period
$
75,100

 
$
34,276

Liabilities incurred
1,468

 
11,557

Liabilities settled
(719
)
 
(2,520
)
Accretion expense
3,056

 
1,148

Revisions in estimated cash flows
(374
)
 

Asset retirement obligation as of end of period
78,531

 
44,461

Less current portion
120

 
195

Asset retirement obligation, long-term
$
78,411

 
$
44,266

3.
EQUITY INVESTMENTS
Investments accounted for by the equity method consist of the following as of September 30, 2018 and December 31, 2017:
 
 
 
Carrying value
 
(Income) loss from equity method investments

 
Approximate ownership %
 
September 30, 2018
 
December 31, 2017
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
 
 
 
(In thousands)
Investment in Tatex Thailand II, LLC
23.5
%
 
$

 
$

 
$
(137
)
 
$
(95
)
 
$
(241
)
 
$
(549
)
Investment in Grizzly Oil Sands ULC
24.9999
%
 
53,381

 
57,641

 
275

 
296

 
833

 
869

Investment in Timber Wolf Terminals LLC
50.0
%
 

 
983

 

 
4

 
536

 
8

Investment in Windsor Midstream LLC
22.5
%
 
39

 
30

 

 
(2
)
 
(9
)
 
25,232

Investment in Stingray Cementing LLC(1)
%
 

 

 

 

 

 
205

Investment in Stingray Energy Services LLC(1)
%
 

 

 

 

 

 
282

Investment in Sturgeon Acquisitions LLC(1)
%
 

 

 

 

 

 
(71
)
Investment in Mammoth Energy Services, Inc.(1)
22.0
%
 
179,109

 
165,715

 
(12,996
)
 
2,407

 
(35,708
)
 
4,907

Investment in Strike Force Midstream LLC(2)
%
 

 
77,743

 

 
127

 
(693
)
 
2,585

 
 
 
$
232,529


$
302,112


$
(12,858
)
 
$
2,737

 
$
(35,282
)
 
$
33,468

 
 
 
 
(1)
On June 5, 2017, Mammoth Energy Services, Inc. ("Mammoth Energy") acquired Stingray Cementing LLC, Stingray Energy Services LLC and Sturgeon Acquisitions LLC. See below under Mammoth Energy Partners LP/Mammoth Energy Services, Inc. for information regarding these transactions.
 
 
 
 
(2)
On May 1, 2018, the Company sold its 25% interest in Strike Force Midstream to EQT Midstream Partners, LP. See below under under Strike Force Midstream LLC for information regarding this transaction.
 
 
 
 
The tables below summarize financial information for the Company’s equity investments as of September 30, 2018 and December 31, 2017.

10


Summarized balance sheet information:
 
September 30, 2018
 
December 31, 2017
 
 
 
(In thousands)
Current assets
$
481,394

 
$
415,032

Noncurrent assets
$
1,336,604

 
$
1,542,090

Current liabilities
$
358,177

 
$
261,086

Noncurrent liabilities
$
48,328

 
$
148,839

Summarized results of operations:    
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Gross revenue
$
384,043

 
$
160,950

 
$
1,451,580

 
$
357,901

Net income (loss)
$
68,414

 
$
2,101

 
$
181,884

 
$
(109,651
)
Tatex Thailand II, LLC
The Company has an indirect ownership interest in Tatex Thailand II, LLC (“Tatex II”). Tatex II holds an 8.5% interest in APICO, LLC (“APICO”), an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 180,000 acres which includes the Phu Horm Field. The Company received $0.2 million and $0.5 million in distributions from Tatex II during the nine months ended September 30, 2018 and 2017, respectively.
Tatex Thailand III, LLC
The Company has an ownership interest in Tatex Thailand III, LLC (“Tatex III”). Tatex III previously owned a concession covering approximately 245,000 acres in Southeast Asia. As of December 31, 2014, the Company reviewed its investment in Tatex III and, together with Tatex III, made the decision to allow the concession to expire in January 2015. As such, the Company fully impaired the asset as of December 31, 2014. In December 2017, Tatex III was dissolved and the Company received a final distribution of $0.2 million.
Grizzly Oil Sands ULC
The Company, through its wholly owned subsidiary Grizzly Holdings Inc. (“Grizzly Holdings”), owns an interest in Grizzly Oil Sands ULC (“Grizzly”), a Canadian unlimited liability company. The remaining interest in Grizzly is owned by Grizzly Oil Sands Inc. (“Oil Sands”). As of September 30, 2018, Grizzly had approximately 830,000 acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase I steam-assisted gravity drainage ("SAGD") oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. Algar Lake production peaked at 2,200 barrels per day during the ramp-up phase of the SAGD facility, however, in April 2015, Grizzly made the decision to suspend operations at its Algar Lake facility due to the commodity price drop and its effect on project economics. Grizzly continues to monitor market conditions as it assesses start up plans for the facility. The Company reviewed its investment in Grizzly for impairment at September 30, 2018 and 2017 and determined no impairment was required. If commodity prices decline in the future however, impairment of the investment in Grizzly may be necessary. During the nine months ended September 30, 2018, Gulfport paid $2.3 million in cash calls. Grizzly’s functional currency is the Canadian dollar. The Company’s investment in Grizzly was increased by a $2.9 million foreign currency translation gain and decreased by a $5.7 million foreign currency translation loss for the three and nine months ended September 30, 2018, respectively. The Company’s investment in Grizzly was increased by $6.7 million and $12.5 million as a result of a foreign currency translation gain for the three and nine months ended September 30, 2017, respectively.



11


Timber Wolf Terminals LLC
During 2012, the Company invested in Timber Wolf Terminals LLC (“Timber Wolf”). Timber Wolf was formed to operate a crude/condensate terminal and a sand transloading facility in Ohio. During the nine months ended September 30, 2018 and 2017, the Company paid no cash calls to Timber Wolf. The Company received $0.4 million in distributions from Timber Wolf during the nine months ended September 30, 2018 resulting from the sale of assets held by Timber Wolf.
Windsor Midstream LLC
At September 30, 2018, the Company held a 22.5% interest in Windsor Midstream LLC (“Midstream”), an entity controlled and managed by an unrelated third party. The Company received no distributions from Midstream during the nine months ended September 30, 2018 and $0.5 million in distributions during the same period in 2017.
Stingray Cementing LLC
During 2012, the Company invested in Stingray Cementing LLC (“Stingray Cementing”). Stingray Cementing provides well cementing services. The (income) loss from equity method investments presented in the table above reflects any intercompany profit eliminations. On June 5, 2017, the Company contributed all of its membership interests in Stingray Cementing to Mammoth Energy. See below under Mammoth Energy Partners LP/Mammoth Energy Services, Inc. for information regarding this transaction.
Stingray Energy Services LLC
During 2013, the Company invested in Stingray Energy Services LLC (“Stingray Energy”). Stingray Energy provides rental tools for land-based oil and natural gas drilling, completion and workover activities as well as the transfer of fresh water to wellsites. The (income) loss from equity method investments presented in the table above reflects any intercompany profit eliminations. On June 5, 2017, the Company contributed all of its membership interests in Stingray Energy to Mammoth Energy. See below under Mammoth Energy Partners LP/Mammoth Energy Services, Inc. for information regarding this transaction.
Sturgeon Acquisitions LLC
During 2014, the Company invested in Sturgeon Acquisitions LLC (“Sturgeon”) and received an ownership interest of 25% in Sturgeon. Sturgeon owns and operates sand mines that produce hydraulic fracturing grade sand. On June 5, 2017, the Company contributed all of its membership interests in Sturgeon to Mammoth Energy. See below under Mammoth Energy Partners LP/Mammoth Energy Services, Inc. for information regarding this transaction.
Mammoth Energy Partners LP/Mammoth Energy Services, Inc.
In the fourth quarter of 2014, the Company contributed its investments in four entities to Mammoth Energy Partners LP (“Mammoth”) for a 30.5% interest in this entity. In October 2016, Mammoth converted from a limited partnership into a limited liability company named Mammoth Energy Partners LLC (“Mammoth LLC”) and the Company and the other members of Mammoth LLC contributed their interests in Mammoth LLC to Mammoth Energy. Following the contribution, Mammoth Energy completed its initial public offering of shares of its common stock.
On June 5, 2017, the Company contributed all of its membership interests in Sturgeon (which owned Taylor Frac, LLC, Taylor Real Estate Investments, LLC and South River Road, LLC), Stingray Energy and Stingray Cementing to Mammoth Energy in exchange for approximately 2.0 million shares of Mammoth Energy common stock (the "June 2017 Transactions"). The Company accounted for the transactions as a sale of financial assets under ASC 860, Transfers and Servicing. The Company valued the shares of Mammoth Energy common stock it received in the June 2017 Transactions at $18.50 per share, which was the closing price of Mammoth Energy common stock on June 5, 2017. During the second quarter of 2017, the Company recognized a gain of $12.5 million from the June 2017 Transactions, which is included in gain on sale of equity method investments in the accompanying consolidated statement of operations.
On June 29, 2018, the Company sold 1,235,600 shares of its Mammoth Energy common stock in an underwritten public offering for net proceeds of approximately $47.0 million. In connection with the Company's public offering of a portion of its shares of Mammoth Energy common stock, the Company granted the underwriters an option to purchase additional shares of its Mammoth Energy common stock. On July 26, 2018, the underwriters exercised this option, in part, and on July 30, 2018, the

12


Company sold an additional 118,974 shares for net proceeds of approximately $4.5 million. Following the sales of these shares, the Company owned 9,829,548 shares, or approximately 22.0%, of Mammoth Energy's outstanding common stock. As a result of the sales, the Company recorded a gain of $2.7 million and $28.3 million for the three and nine months ended September 30, 2018, which is included in gain on sale of equity method investments in the accompanying consolidated statements of operations.
The Company’s investment in Mammoth Energy was increased by a $0.1 million foreign currency gain and decreased by a $0.2 million foreign currency loss resulting from Mammoth Energy’s foreign subsidiary for the three and nine months ended September 30, 2018, respectively. The Company’s investment in Mammoth Energy was increased by a $0.16 million and $0.2 million foreign currency gain resulting from Mammoth Energy’s foreign subsidiary for the three and nine months ended September 30, 2017, respectively. During the nine months ended September 30, 2018, Gulfport received distributions of $1.2 million from Mammoth Energy as a result of a $0.125 per share dividend in August 2018. The (income) loss from equity method investments presented in the table above reflects any intercompany profit eliminations.
Strike Force Midstream LLC
In February 2016, the Company, through its wholly-owned subsidiary Gulfport Midstream Holdings, LLC (“Midstream Holdings”), entered into an agreement with Rice Midstream Holdings LLC (“Rice”), then a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio through Strike Force Midstream LLC ("Strike Force"). In 2017, Rice was acquired by EQT Corporation ("EQT"). Prior to the sale of the Company's interest in Strike Force (discussed below), the Company owned a 25% interest in Strike Force, and EQT acted as operator and owned the remaining 75% interest. Strike Force's gathering assets provide gathering services for wells operated by Gulfport and other operators and connectivity of existing dry gas gathering systems. Prior to the sale of its interest in Strike Force, the Company elected to report its proportionate share of Strike Force’s earnings on a one-quarter lag as permitted under ASC 323, Investments - Equity Method and Joint Ventures. The (income) loss from equity method investments presented in the table above reflects any intercompany profit eliminations.
During the nine months ended September 30, 2018, Gulfport received distributions of $0.8 million from Strike Force. During the nine months ended September 30, 2017, Gulfport paid $43.0 million in cash calls to Strike Force and received distributions of $3.6 million from Strike Force.
On May 1, 2018, the Company sold its 25% interest in Strike Force to EQT Midstream Partners, LP for proceeds of $175.0 million in cash. As a result of the sale, the Company recognized a gain of $96.4 million net of transaction fees, which is included in gain on sale of equity method investments in the accompanying consolidated statement of operations.
4.
VARIABLE INTEREST ENTITIES
As of September 30, 2018, the Company held variable interests in the following variable interest entities (“VIEs”), but was not the primary beneficiary: Midstream and Timber Wolf. These entities have governing provisions that are the functional equivalent of a limited partnership and are considered VIEs because the limited partners or non-managing members lack substantive kick-out or participating rights which causes the equity owners, as a group, to lack a controlling financial interest. The Company is a limited partner or non-managing member in each of these VIEs and is not the primary beneficiary because it does not have a controlling financial interest. The general partner or managing member has power to direct the activities that most significantly impact the VIEs’ economic performance. The Company also held a variable interest in Strike Force prior to the sale of that interest due to the fact that it did not have sufficient equity capital at risk. The Company was not the primary beneficiary of this entity. Prior to Mammoth Energy’s initial public offering, or "IPO", Mammoth LLC was considered a VIE. As a result of the Company’s contribution of its interest in Mammoth LLC to Mammoth Energy in exchange for Mammoth Energy common stock and the completion of Mammoth Energy’s IPO, the Company determined that it no longer held an interest in a VIE. Prior to the contribution of Stingray Energy, Stingray Cementing and Sturgeon to Mammoth Energy, these entities were considered VIEs. As a result of the Company’s contribution of its membership interests in Stingray Energy, Stingray Cementing and Sturgeon to Mammoth Energy in exchange for Mammoth Energy common stock, the Company determined that it no longer held an interest in a VIE.
The Company accounts for its investment in these VIEs following the equity method of accounting. The carrying amounts of the Company’s equity investments are classified as other non-current assets on the accompanying consolidated balance sheets. The Company’s maximum exposure to loss as a result of its involvement with these VIEs is based on the Company’s capital contributions and the economic performance of the VIEs, and is equal to the carrying value of the Company’s investments which is the maximum loss the Company could be required to record in the consolidated statements of operations. See Note 3 for further discussion of these entities, including the carrying amounts of each investment.

13


5.
LONG-TERM DEBT
Long-term debt consisted of the following items as of September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Revolving credit agreement (1)
$
60,000

 
$

6.625% senior unsecured notes due 2023 (2)
350,000

 
350,000

6.000% senior unsecured notes due 2024 (3)
650,000

 
650,000

6.375% senior unsecured notes due 2025 (4)
600,000

 
600,000

6.375% senior unsecured notes due 2026 (5)
450,000

 
450,000

Net unamortized debt issuance costs (6)
(31,824
)
 
(34,781
)
Construction loan (7)
23,296

 
23,724

Less: current maturities of long term debt
(647
)
 
(622
)
Debt reflected as long term
$
2,100,825

 
$
2,038,321

The Company capitalized approximately $1.6 million and $4.0 million in interest expense to undeveloped oil and natural gas properties during the three and nine months ended September 30, 2018, respectively. The Company capitalized approximately $2.1 million and $8.8 million in interest expense to undeveloped oil and natural gas properties during the three and nine months ended September 30, 2017, respectively.
(1) The Company has entered into a senior secured revolving credit facility, as amended, with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The credit agreement provides for a maximum facility amount of $1.5 billion and matures on December 31, 2021. On March 29, 2017, the Company further amended its revolving credit facility to, among other things, amend the definition of the term EBITDAX to permit pro forma treatment of acquisitions that involve the payment of consideration by Gulfport and its subsidiaries in excess of $50.0 million and of dispositions of property or series of related dispositions of properties that yields gross proceeds to Gulfport or any of its subsidiaries in excess of $50.0 million. On May 4, 2017, the revolving credit facility was further amended to increase the borrowing base from $700.0 million to $1.0 billion, adjust certain of the Company’s investment baskets and add five additional banks to the syndicate. On November 21, 2017, the Company further amended its revolving credit facility to, among other things, (a) decrease the applicable rate for all loans by 0.5% and (b) add a provision that allows Gulfport to elect a commitment amount (the “Elected Commitment Amount”) that is less than the borrowing base. In connection with this amendment, the borrowing base was set at $1.2 billion, with an elected commitment of $1.0 billion. On May 21, 2018, the Company further amended its revolving credit facility to, among other things, (a) decrease the applicable rate for all loans by 0.25%, (b) permit Gulfport and each of its subsidiaries to use the proceeds from dispositions of certain investments to acquire the common stock or other equity interests of Gulfport, subject to certain limitations and (c) increase the borrowing base to $1.4 billion, with an elected commitment of $1.0 billion.
As of September 30, 2018, $60.0 million was outstanding under the revolving credit facility and the total availability for future borrowings under this facility, after giving effect to an aggregate of $316.2 million of letters of credit, was $623.8 million. The Company’s wholly-owned subsidiaries have guaranteed the obligations of the Company under the revolving credit facility.
Advances under the revolving credit facility may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.25% to 1.25%, plus (2) the highest of: (a) the federal funds rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00%. The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.25% to 2.25%, plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or service that displays on average London interbank offered rate as determined by ICE Benchmark Administration (or any other person that takes over administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. At

14


September 30, 2018, amounts borrowed under the credit facility bore interest at the eurodollar rate with a weighted average of 3.72%.
The revolving credit facility contains customary negative covenants including, but not limited to, restrictions on the Company’s and its subsidiaries’ ability to:
incur indebtedness;
grant liens;
pay dividends and make other restricted payments;
make investments;
make fundamental changes;
enter into swap contracts;
dispose of assets;
change the nature of their business; and
enter into transactions with affiliates.
The negative covenants are subject to certain exceptions as specified in the revolving credit facility. The revolving credit facility also contains certain affirmative covenants, including, but not limited to the following financial covenants:
(i) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or non-cash revenue or expense attributable to minority investments plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum of (a) the aggregate amount of consolidated interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges, (e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful disposition will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 4.00 to 1.00; and
(ii) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00.
The Company was in compliance with its financial covenants at September 30, 2018.
(2) On April 21, 2015, the Company issued $350.0 million in aggregate principal amount of 6.625% Senior Notes due 2023 (the “2023 Notes”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act (the “2023 Notes Offering”). The Company received net proceeds of approximately $343.6 million after initial purchaser discounts and commissions and estimated offering expenses.
The 2023 Notes were issued under an indenture, dated as of April 21, 2015, among the Company, the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee. In October 2015, the 2023 Notes were exchanged for a new issue of substantially identical debt securities registered under the Securities Act. Pursuant to the indenture relating to the 2023 Notes, interest on the 2023 Notes accrues at a rate of 6.625% per annum on the outstanding principal amount thereof, payable semi-annually on May 1 and November 1 of each year. The 2023 Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of the Company’s future unrestricted subsidiaries.
(3) On October 14, 2016, the Company issued $650.0 million in aggregate principal amount of 6.000% Senior Notes due 2014 (the "2024 Notes"). The 2024 Notes were issued under an indenture, dated as of October 14, 2016, among the Company, the subsidiary guarantors party thereto and the senior note indenture trustee (the “2024 Indenture”), to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act (the “2024 Notes Offering”). Under the 2024 Indenture, interest on the 2024 Notes accrues at a rate of 6.000% per annum on the outstanding principal amount thereof from October 14, 2016, payable semi-annually on April 15 and October 15 of each year, commencing on April 15, 2017. The 2024 Notes will mature on October 15, 2024. The Company

15


received approximately $638.9 million in net proceeds from the offering of the 2024 Notes, which was used, together with cash on hand, to purchase the then outstanding 2020 Notes in a concurrent cash tender offer, to pay fees and expenses thereof, and to redeem any of the 2020 Notes that remained outstanding after the completion of the tender offer.
(4) On December 21, 2016, the Company issued $600.0 million in aggregate principal amount of 6.375% Senior Notes due 2025 (the “2025 Notes”). The 2025 Notes were issued under an indenture, dated as of December 21, 2016, among the Company, the subsidiary guarantors party thereto and the senior note indenture trustee (the “2025 Indenture”), to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. Under the 2025 Indenture, interest on the 2025 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof from December 21, 2016, payable semi-annually on May 15 and November 15 of each year, commencing on May 15, 2017. The 2025 Notes will mature on May 15, 2025. The Company received approximately $584.7 million in net proceeds from the offering of the 2025 Notes, which was used, together with the net proceeds from the Company’s December 2016 common stock offering and cash on hand, to fund the cash portion of the purchase price for the Vitruvian Acquisition. See “Note 1 – Acquisitions” for additional discussion of the Vitruvian Acquisition.
(5) On October 11, 2017, the Company issued $450.0 million in aggregate principal amount of its 6.375% Senior Notes due 2026 (the “2026 Notes”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. Interest on the 2026 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof from October 11, 2017, payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2018. The 2026 Notes will mature on January 15, 2026. The Company received approximately $444.1 million in net proceeds from the offering of the 2026 Notes, a portion of which was used to repay all of the Company's outstanding borrowings under its secured revolving credit facility on October 11, 2017 and the balance was used to fund the remaining outspend related to the Company's 2017 capital development plans.
In connection with the 2026 Notes offering, the Company and its subsidiary guarantors entered into a registration rights agreement pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2026 Notes for a new issue of substantially identical debt securities registered under the Securities Act. On January 18, 2018, the Company filed a registration statement on Form S-4 with respect to an offer to exchange the 2026 Notes for substantially identical debt securities registered under the Securities Act, which registration statement was declared effective by the SEC on February 12, 2018. The exchange offer relating to the 2026 notes closed on March 22, 2018.
(6) Loan issuance costs related to the 2023 Notes, the 2024 Notes, the 2025 Notes and the 2026 Notes (collectively the “Notes”) have been presented as a reduction to the Notes. At September 30, 2018, total unamortized debt issuance costs were $4.6 million for the 2023 Notes, $9.0 million for the 2024 Notes, $12.9 million for the 2025 Notes and $5.2 million for the 2026 Notes. In addition, loan commitment fee costs for the construction loan agreement described immediately below were $0.1 million at September 30, 2018.
(7) On June 4, 2015, the Company entered into a construction loan agreement (the “Construction Loan”) with InterBank for the construction of a new corporate headquarters in Oklahoma City, which was substantially completed in December 2016. The Construction Loan allows for maximum principal borrowings of $24.5 million and required the Company to fund 30% of the cost of the construction before any funds could be drawn, which occurred in January 2016. Interest accrues daily on the outstanding principal balance at a fixed rate of 4.50% per annum and was payable on the last day of the month through May 31, 2017. Starting June 30, 2017, the Company began making monthly payments of principal and interest, with the final payment due June 4, 2025. At September 30, 2018, the total borrowings under the Construction Loan were approximately $23.3 million.
6.
COMMON STOCK AND CHANGES IN CAPITALIZATION
Issuance of Common Stock
On February 17, 2017, the Company completed the Vitruvian Acquisition for a total initial purchase price of approximately $1.85 billion, consisting of $1.35 billion in cash, subject to certain adjustments, and approximately 23.9 million shares of the Company’s common stock (of which approximately 5.2 million shares are subject to the indemnity escrow). See “Note 1 - Acquisitions” for additional discussion of the Vitruvian Acquisition.
Stock Repurchase Program
In January 2018, the board of directors of the Company approved a stock repurchase program to acquire up to $100 million of the Company's outstanding stock during 2018. In May 2018, the Company's board of directors authorized the expansion of

16


its stock repurchase program, authorizing the Company to acquire up to an additional $100 million of its outstanding common stock during 2018 for a total of up to $200 million. Purchases under the repurchase program may be made from time to time in open market or privately negotiated transactions, and are subject to market conditions, applicable legal requirements, contractual obligations and other factors. The repurchase program does not require the Company to acquire any specific number of shares. This repurchase program is authorized to extend through December 31, 2018 and may be suspended from time to time, modified, extended or discontinued by the board of directors at any time. The Company repurchased 0.4 million and 10.5 million shares for a cost of approximately $5.0 million and $110.0 million during the three and nine months ended September 30, 2018, respectively. All repurchased shares have been retired.
7.
STOCK-BASED COMPENSATION
During the three and nine months ended September 30, 2018, the Company’s stock-based compensation cost was $3.6 million and $9.7 million, respectively, of which the Company capitalized $1.4 million and $3.9 million, respectively, relating to its exploration and development efforts. During the three and nine months ended September 30, 2017, the Company’s stock-based compensation cost was $2.8 million and $8.0 million, respectively, of which the Company capitalized $1.1 million and $3.2 million, respectively, relating to its exploration and development efforts.
The following table summarizes restricted stock activity for the nine months ended September 30, 2018:
 
 
Number of
Unvested
Restricted Shares
 
Weighted
Average
Grant Date
Fair Value
Unvested shares as of January 1, 2018
976,027

 
$
18.71

Granted
1,197,628

 
9.45

Vested
(618,202
)
 
17.77

Forfeited
(32,633
)
 
17.31

Unvested shares as of September 30, 2018
1,522,820

 
$
11.84

Unrecognized compensation expense as of September 30, 2018 related to restricted shares was $15.5 million. The expense is expected to be recognized over a weighted average period of 1.63 years.

17


8.
EARNINGS PER SHARE
Reconciliations of the components of basic and diluted net income per common share are presented in the tables below:
 
Three months ended September 30,
 
2018
 
2017
 
Income
 
Shares
 
Per
Share
 
Income
 
Shares
 
Per
Share
 
(In thousands, except share data)
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net income
$
95,150

 
173,057,538

 
$
0.55

 
$
18,235

 
182,957,416

 
$
0.10

Effect of dilutive securities:

 

 

 

 

 

Stock options and awards

 
247,376

 

 

 
51,020

 

Diluted:

 

 

 

 

 

Net income
$
95,150

 
173,304,914

 
$
0.55

 
$
18,235

 
183,008,436

 
$
0.10

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
2018
 
2017
 
Income
 
Shares
 
Per
Share
 
Income
 
Shares
 
Per
Share
 
(In thousands, except share data)
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net income
$
296,559

 
175,776,312

 
$
1.69

 
$
278,626

 
178,736,569

 
$
1.56

Effect of dilutive securities:

 

 

 

 

 

Stock options and awards

 
664,149

 

 

 
394,001

 

Diluted:

 

 

 

 

 

Net income
$
296,559

 
176,440,461

 
$
1.68

 
$
278,626

 
179,130,570

 
$
1.56




18


9.
COMMITMENTS AND CONTINGENCIES
Plugging and Abandonment Funds
In connection with the Company’s acquisition in 1997 of the remaining 50% interest in its WCBB properties, the Company assumed the seller’s (Chevron) obligation to contribute approximately $18,000 per month through March 2004 to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997. Beginning in 2009, the Company could access the trust for use in plugging and abandonment charges associated with the property, although it has not yet done so. As of September 30, 2018, the plugging and abandonment trust totaled approximately $3.1 million. At September 30, 2018, the Company had plugged 555 wells at WCBB since it began its plugging program in 1997, which management believes fulfills its minimum plugging obligation.
Operating Leases
The Company leases office facilities under non-cancellable operating leases exceeding one year. Future minimum lease commitments under these leases at September 30, 2018 were as follows:
 
 
(In thousands)
Remaining 2018
 
$
39

2019
 
144

2020
 
90

2021
 
38

Total
 
$
311

Firm Transportation and Sales Commitments
The Company had approximately 2,659,000 MMBtu per day of firm sales contracted with third parties. The table below presents these commitments at September 30, 2018 as follows:
 
 
(MMBtu per day)
Remaining 2018
 
590,000

2019
 
659,000

2020
 
526,000

2021
 
372,000

2022
 
272,000

Thereafter
 
240,000

Total
 
2,659,000

The Company also had approximately $3.6 billion of firm transportation contracted with third parties. The table below presents these commitments at September 30, 2018 as follows:
 
 
(In thousands)
Remaining 2018
 
$
62,012

2019
 
251,644

2020
 
247,581

2021
 
246,620

2022
 
246,620

Thereafter
 
2,511,853

Total
 
$
3,566,330


19


Other Commitments
Effective October 1, 2014, the Company entered into a Sand Supply Agreement with Muskie Proppant LLC (“Muskie”), a subsidiary of Mammoth Energy. Effective August 3, 2018, the Company extended the agreement through December 31, 2021. Pursuant to this agreement, as amended, the Company has agreed to purchase annual and monthly amounts of proppant sand subject to exceptions specified in the agreement at agreed pricing plus agreed costs and expenses. Failure by either Muskie or the Company to deliver or accept the minimum monthly amount results in damages calculated per ton based on the difference between the monthly obligation amount and the amount actually delivered or accepted, as applicable. The Company incurred $1.3 million and $1.5 million in non-utilization fees under this agreement during the three and nine months ended September 30, 2018, respectively. The Company did not incur any non-utilization fees during the nine months ended September 30, 2017.
Effective October 1, 2014, the Company entered into an Amended and Restated Master Services Agreement for pressure pumping services with Stingray Pressure Pumping LLC (“Stingray Pressure”), a subsidiary of Mammoth Energy. Pursuant to this agreement, as amended effective July 1, 2018, Stingray Pressure has agreed to provide hydraulic fracturing, stimulation and related completion and rework services to the Company and the Company has agreed to pay Stingray Pressure a monthly service fee plus the associated costs of the services provided. The Company has the right to suspend services of one crew and only one crew at any point in time without payment, fee or other obligation associated with the suspended crew, given appropriate notification of suspension.
Future minimum commitments under these agreements at September 30, 2018 are $154.2 million.
Litigation
In two separate complaints, one filed by the State of Louisiana and the Parish of Cameron in the 38th Judicial District Court for the Parish of Cameron on February 9, 2016 and the other filed by the State of Louisiana and the District Attorney for the 15th Judicial District of the State of Louisiana in the 15th Judicial District Court for the Parish of Vermilion on July 29, 2016, the Company was named as a defendant, among 26 oil and gas companies, in the Cameron Parish complaint and among more than 40 oil and gas companies in the Vermilion Parish complaint, or the Complaints. The Complaints were filed under the State and Local Coastal Resources Management Act of 1978, as amended, and the rules, regulations, orders and ordinances adopted thereunder, which the Company referred to collectively as the CZM Laws, and allege that certain of the defendants’ oil and gas exploration, production and transportation operations associated with the development of the East Hackberry and West Hackberry oil and gas fields, in the case of the Cameron Parish complaint, and the Tigre Lagoon and Lac Blanc oil and gas fields, in the case of the Vermilion Parish complaint, were conducted in violation of the CZM Laws. The Complaints allege that such activities caused substantial damage to land and waterbodies located in the coastal zone of the relevant Parish, including due to defendants’ design, construction and use of waste pits and the alleged failure to properly close the waste pits and to clear, re-vegetate, detoxify and return the property affected to its original condition, as well as the defendants’ alleged discharge of waste into the coastal zone. The Complaints also allege that the defendants’ oil and gas activities have resulted in the dredging of numerous canals, which had a direct and significant impact on the state coastal waters within the relevant Parish and that the defendants, among other things, failed to design, construct and maintain these canals using the best practical techniques to prevent bank slumping, erosion and saltwater intrusion and to minimize the potential for inland movement of storm-generated surges, which activities allegedly have resulted in the erosion of marshes and the degradation of terrestrial and aquatic life therein. The Complaints also allege that the defendants failed to re-vegetate, refill, clean, detoxify and otherwise restore these canals to their original condition. In these two petitions, the plaintiffs seek damages and other appropriate relief under the CZM Laws, including the payment of costs necessary to clear, re-vegetate, detoxify and otherwise restore the affected coastal zone of the relevant Parish to its original condition, actual restoration of such coastal zone to its original condition, and the payment of reasonable attorney fees and legal expenses and pre-judgment and post judgment interest.
The Company was served with the Cameron complaint in early May 2016 and with the Vermilion complaint in early September 2016.  The Louisiana Attorney General and the Louisiana Department of Natural Resources intervened in both the Cameron Parish suit and the Vermilion Parish suit.  Shortly after the Complaints were filed, certain defendants removed the cases to the United States District Court for the Western District of Louisiana.  In both cases, the plaintiffs filed motions to remand the lawsuits to state court, which were ultimately granted by the district courts.  However, on May 23, 2018, a group of defendants again removed the Cameron Parish and Vermilion Parish lawsuits to federal court.  In response, the plaintiffs again filed motions to remand the cases to state court. The removing defendants have opposed plaintiffs’ motions to remand. The motions to remand remain pending, and further action in the cases will be stayed until the courts rule on the motions to remand.  Also, shortly after the May 23, 2018 removal, the removing defendants filed motions with the United States Judicial Panel on Multidistrict Litigation (the “MDL Panel”) requesting that the Cameron Parish and Vermilion Parish lawsuits be consolidated with 40 similar lawsuits so that pre-trial proceedings in the cases could be coordinated.  The MDL Panel denied the motion to

20


consolidate the lawsuits. Due to the procedural posture of lawsuits, the cases are still in their early stages and the parties have conducted very little discovery. As a result, the Company has not had the opportunity to evaluate the applicability of the allegations made in plaintiffs' complaints to the Company's operations and management cannot determine the amount of loss, if any, that may result.
In addition, due to the nature of the Company’s business, it is, from time to time, involved in routine litigation or subject to disputes or claims related to its business activities, including workers’ compensation claims and employment related disputes. In the opinion of the Company’s management, none of the pending litigation, disputes or claims against the Company, if decided adversely, will have a material adverse effect on its financial condition, cash flows or results of operations.
10.
DERIVATIVE INSTRUMENTS
Natural Gas, Oil and Natural Gas Liquids Derivative Instruments
The Company seeks to reduce its exposure to unfavorable changes in natural gas, oil and natural gas liquids ("NGLs") prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. These contracts allow the Company to predict with greater certainty the effective natural gas, oil and NGLs prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production.
Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on the NYMEX Henry Hub for natural gas, Argus Louisiana Light Sweet Crude for oil, the NYMEX West Texas Intermediate for oil, and Mont Belvieu for propane, pentane and ethane. Below is a summary of the Company’s open fixed price swap positions as of September 30, 2018. 
 
Location
Daily Volume (MMBtu/day)
 
Weighted
Average Price
Remaining 2018
NYMEX Henry Hub
1,010,000

 
$
3.01

2019
NYMEX Henry Hub
1,154,000

 
$
2.81

2020
NYMEX Henry Hub
204,000

 
$
2.77

 
Location
Daily Volume
(Bbls/day)
 
Weighted
Average Price
Remaining 2018
ARGUS LLS
2,000

 
$
56.22

2019
ARGUS LLS
1,000

 
$
59.55

Remaining 2018
NYMEX WTI
4,500

 
$
53.72

2019
NYMEX WTI
4,000

 
$
58.28

 
Location
Daily Volume
(Bbls/day)
 
Weighted
Average Price
2019
Mont Belvieu C2
1,000

 
$
18.48

Remaining 2018
Mont Belvieu C3
4,000

 
$
29.34

2019
Mont Belvieu C3
4,000

 
$
28.87

Remaining 2018
Mont Belvieu C5
500

 
$
46.62

2019
Mont Belvieu C5
500

 
$
54.08

The Company sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes.

21


 
Location
Daily Volume (MMBtu/day)
 
Weighted Average Price
October 2018 - March 2019
NYMEX Henry Hub
50,000

 
$
3.13

April 2019 - December 2019
NYMEX Henry Hub
30,000

 
$
3.10

For a portion of the natural gas fixed price swaps listed above, the counterparty has an option to extend the original terms an additional twelve months for the period January 2019 through December 2019. The option to extend the terms expires in December 2018. If executed, the Company would have additional fixed price swaps for 100,000 MMBtu per day at a weighted average price of $3.05 per MMBtu.
In addition, the Company entered into natural gas basis swap positions, which settle on the pricing index to basis differential of Transco Zone 4 to NYMEX Henry Hub natural gas price. As of September 30, 2018, the Company had the following natural gas basis swap positions for Transco Zone 4.
 
Location
Daily Volume (MMBtu/day)
 
Weighted Average Price
Remaining 2018
Transco Zone 4
40,000

 
$
(0.05
)
2019
Transco Zone 4
60,000

 
$
(0.05
)
2020
Transco Zone 4
60,000

 
$
(0.05
)
Balance Sheet Presentation
The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company’s derivative instruments on a gross basis at September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Short-term derivative instruments - asset
$
19,809

 
$
78,847

Long-term derivative instruments - asset
$
3,530

 
$
8,685

Short-term derivative instruments - liability
$
62,601

 
$
32,534

Long-term derivative instruments - liability
$
15,101

 
$
2,989

Gains and Losses
The following table presents the gain and loss recognized in net (loss) gain on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017.
 
Net (loss) gain on derivative instruments
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Natural gas derivatives
$
14,101

 
$
(7,077
)
 
$
(26,789
)
 
$
135,868

Oil derivatives
(11,610
)
 
(6,571
)
 
(45,176
)
 
12,477

Natural gas liquids derivatives
(12,154
)
 
(9,212
)
 
(24,772
)
 
(6,757
)
Total
$
(9,663
)
 
$
(22,860
)
 
$
(96,737
)
 
$
141,588


22


Offsetting of derivative assets and liabilities
As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value.
 
As of September 30, 2018
 
Gross Assets (Liabilities)
 
Gross Amounts
 
 
 
Presented in the
 
Subject to Master
 
Net
 
Consolidated Balance Sheets
 
Netting Agreements
 
Amount
 
(In thousands)
Derivative assets
$
23,339

 
$
(17,053
)
 
$
6,286

Derivative liabilities
$
(77,702
)
 
$
17,053

 
$
(60,649
)
 
As of December 31, 2017
 
Gross Assets (Liabilities)
 
Gross Amounts
 
 
 
Presented in the
 
Subject to Master
 
Net
 
Consolidated Balance Sheets
 
Netting Agreements
 
Amount
 
(In thousands)
Derivative assets
$
87,532

 
$
(22,199
)
 
$
65,333

Derivative liabilities
$
(35,523
)
 
$
22,199

 
$
(13,324
)
Concentration of Credit Risk
By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company’s derivative contracts are with multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company’s counterparties is subject to periodic review. None of the Company’s derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company’s revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company.
11.
FAIR VALUE MEASUREMENTS
The Company records certain financial and non-financial assets and liabilities on the balance sheet at fair value in accordance with ASC 820, Fair Value Measurement and Disclosures (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The statement establishes market or observable inputs as the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The statement requires fair value measurements be classified and disclosed in one of the following categories:
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Significant inputs to the valuation model are unobservable.
Valuation techniques that maximize the use of observable inputs are favored. 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 assessment of the

23


significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter.
The following tables summarize the Company’s financial and non-financial assets and liabilities by ASC 820 valuation level as of September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets:
 
 
 
 
 
Derivative Instruments
$

 
$
23,339

 
$

Liabilities:
 
 
 
 
 
Derivative Instruments
$

 
$
77,702

 
$


 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets:
 
 
 
 
 
Derivative Instruments
$

 
$
87,532

 
$

Liabilities:
 
 
 
 
 
Derivative Instruments
$

 
$
35,523

 
$


The Company estimates the fair value of all derivative instruments using industry-standard models that consider various assumptions, including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the instrument and can be supported by observable data.
The estimated fair values of proved oil and natural gas properties assumed in business combinations are based on a discounted cash flow model and market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates and risk-adjusted discount rates. The estimated fair values of unevaluated oil and natural gas properties was based on geological studies, historical well performance, location and applicable mineral lease terms. Based on the unobservable nature of certain of the inputs, the estimated fair value of the oil and gas properties assumed is deemed to use Level 3 inputs. The asset retirement obligations assumed as part of the business combination were estimated using the same assumptions and methodology as described below. See Note 1 for further discussion of the Vitruvian Acquisition.
The Company estimates asset retirement obligations pursuant to the provisions of ASC Topic 410, Asset Retirement and Environmental Obligations (“ASC 410”). The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 2 for further discussion of the Company’s asset retirement obligations. Asset retirement obligations incurred during the nine months ended September 30, 2018 were approximately $1.5 million.
The fair value of the common stock received from Mammoth Energy in connection with the Company’s contribution of all of its membership interests in Sturgeon, Stingray Energy and Stingray Cementing was estimated using Level 1 inputs, as the price per share was a quoted price in an active market for identical Mammoth Energy common shares.
12.
FAIR VALUE OF FINANCIAL INSTRUMENTS

24


The carrying amounts on the accompanying consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and current debt are carried at cost, which approximates market value due to their short-term nature. Long-term debt related to the Construction Loan is carried at cost, which approximates market value based on the borrowing rates currently available to the Company with similar terms and maturities.
At September 30, 2018, the carrying value of the outstanding debt represented by the Notes was approximately $2.0 billion, including the unamortized debt issuance cost of approximately $4.6 million related to the 2023 Notes, approximately $9.0 million related to the 2024 Notes, approximately $12.9 million related to the 2025 Notes and approximately $5.2 million related to the 2026 Notes. Based on the quoted market price, the fair value of the Notes was determined to be approximately $2.0 billion at September 30, 2018.
13.
REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition

On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASC 606") using the modified retrospective transition applied to contracts that were not completed as of that date. The adoption did not result in a material change in the Company’s accounting or have a material effect on the Company’s financial position, including measurement of revenue, the timing of revenue recognition and the recognition of contract assets, liabilities and related costs. For periods through December 31, 2017, the Company accounted for its revenue using ASC 605, Revenue Recognition.
The Company’s revenues are primarily derived from the sale of natural gas, oil and condensate and NGLs. Sales of natural gas, oil and condensate and NGLs are recognized in the period that the performance obligations are satisfied. The Company generally considers the delivery of each unit (MMBtu or Bbl) to be separately identifiable and represents a distinct performance obligation that is satisfied at a point-in-time once control of the product has been transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to (i) whether the purchaser can direct the use of the product, (ii) the transfer of significant risks, (iii) the Company’s right to payment and (iv) transfer of legal title.
Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. These contracts typically include variable consideration that is based on pricing tied to market indices and volumes delivered in the current month. As such, this market pricing may be constrained (i.e., not estimable) at the inception of the contract but will be recognized based on the applicable market pricing, which will be known upon transfer of the goods to the customer. The payment date is usually within 30 days of the end of the calendar month in which the commodity is delivered.
The recognition of gains or losses on derivative instruments is outside the scope of ASC 606 and is not considered revenue from contracts with customers subject to ASC 606. The Company may use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales.
The Company has elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer, such as sales tax, use tax, value-added tax and similar taxes.
Transaction Price Allocated to Remaining Performance Obligations

A significant number of the Company's product sales are short-term in nature generally through evergreen contracts with contract terms of one year or less. These contracts typically automatically renew under the same provisions. For those contracts, the Company has utilized the practical expedient allowed in the new revenue accounting standard that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
For product sales that have a contract term greater than one year, the Company has utilized the practical expedient that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, the Company's product sales

25


that have a contractual term greater than one year have no long-term fixed consideration.
Contract Balances
Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $157.4 million and $146.8 million as of September 30, 2018 and December 31, 2017, respectively, and are reported in accounts receivable - oil and natural gas sales on the consolidated balance sheet. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront or rights to deficiency payments.
Contract Modifications
For contracts modified prior to the beginning of the earliest reporting period presented under ASC 606, the Company has elected to reflect the aggregate of the effect of all modifications that occurred before the beginning of the earliest period presented under the new standard when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to the satisfied and unsatisfied performance obligations for the modified contracts at transition.
Prior-Period Performance Obligations
The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain gas and NGLs sales may be received for 30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production that was delivered to the purchaser and the price that will be received for the sale of the product. The differences between the estimates and the actual amounts for product sales is recorded in the month that payment is received from the purchaser. The Company has internal controls in place for the estimation process and any identified differences between revenue estimates and actual revenue received historically have not been significant. For the nine months ended September 30, 2018, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material.
14.    INCOME TAXES
The Company records its quarterly tax provision based on an estimate of the annual effective tax rate expected to apply to continuing operations for the various jurisdictions in which it operates. The tax effects of certain items, such as tax rate changes, significant unusual or infrequent items, and certain changes in the assessment of the realizability of deferred taxes, are recognized as discrete items in the period in which they occur and are excluded from the estimated annual effective tax rate.

For the three and nine months ended September 30, 2018, the Company's estimated annual effective tax rate remained nominal as a result of the full valuation allowance on deferred tax assets. Based on the Company's estimated results for the year ending December 31, 2018, the Company anticipates remaining in a net deferred tax asset position. Based on the available positive and negative evidence, the Company expects to maintain a full valuation allowance as it cannot objectively assert that the deferred tax assets are more likely than not to be realized. A significant piece of negative evidence is the cumulative loss incurred over the three year period ending September 30, 2018. However, given the Company's current earnings and anticipated future earnings, it believes that there is a reasonable possibility that within the next 12 months sufficient positive evidence regarding recent cumulative income may become available, which may allow it to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain net deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of any potential valuation allowance release is subject to change based on the levels of profitability that the Company is able to actually achieve.

On December 22, 2017, the President of the United States signed into law Public Law No. 115-97, a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act ("Tax Act") that significantly reformed the Internal Revenue Code of 1986, as amended.  The Tax Act substantially revised numerous areas of U.S. federal income tax law, including reducing the maximum corporate income tax rate from 35% to 21%, allowing for full expensing of certain capital expenditures, modifying the limitations on the utilization of net operating losses, and repealing the corporate alternative minimum tax.  The various estimates included in determining the Company's tax provision as of December 31, 2017 remain provisional through the nine months ended September 30, 2018 and may be adjusted through subsequent events such as the filing of its 2017 consolidated federal income tax return and the issuance of additional guidance from the Internal Revenue Service or from state tax authorities.  There were no material changes to the provisional estimates during the quarter ended September 30, 2018.


26


15.     CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On April 21, 2015, the Company issued $350.0 million in aggregate principal amount of the 2023 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. In connection with the 2023 Notes Offering, the Company and its subsidiary guarantors entered into a registration rights agreement, dated as of April 21, 2015, pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2023 Notes for a new issue of substantially identical debt securities registered under the Securities Act. The exchange offer for the 2023 Notes was completed on October 13, 2015.
On October 14, 2016, the Company issued $650.0 million in aggregate principal amount of the 2024 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The net proceeds from the issuance of the 2024 Notes, together with cash on hand, were used to repurchase or redeem all of the then-outstanding 2020 Notes in October 2016.
On December 21, 2016, the Company issued $600.0 million in aggregate principal amount of the 2025 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. The Company used the net proceeds from the issuance of the 2025 Notes, together with the net proceeds from the December 2016 underwritten offering of the Company’s common stock and cash on hand, to fund the cash portion of the purchase price for the Vitruvian Acquisition.
In connection with the 2024 Notes and the 2025 Notes Offerings, the Company and its subsidiary guarantors entered into two registration rights agreements, pursuant to which the Company agreed to file a registration statement with respect to offers to exchange the 2024 Notes and the 2025 Notes for new issues of substantially identical debt securities registered under the Securities Act. The exchange offers for the 2024 Notes and the 2025 Notes were completed on September 13, 2017.
On October 11, 2017, the Company issued $450.0 million in aggregate principal amount of the 2026 Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in accordance with Regulation S under the Securities Act. A portion of the net proceeds from the issuance of the 2026 Notes was used to repay all of the Company's outstanding borrowings under its secured revolving credit facility on October 11, 2017 and the balance was used to fund the remaining outspend related to the Company's 2017 capital development plans.
In connection with the 2026 Notes offering, the Company and its subsidiary guarantors entered into a registration rights agreement pursuant to which the Company agreed to file a registration statement with respect to an offer to exchange the 2026 Notes for a new issue of substantially identical debt securities registered under the Securities Act. On January 18, 2018, the Company filed a registration statement on Form S-4 with respect to an offer to exchange the 2026 Notes for substantially identical debt securities registered under the Securities Act, which registration statement was declared effective by the SEC on February 12, 2018. The exchange offer relating to the 2026 notes closed on March 22, 2018.
The 2023 Notes, the 2024 Notes, the 2025 Notes and the 2026 Notes are guaranteed on a senior unsecured basis by all existing consolidated subsidiaries that guarantee the Company’s secured revolving credit facility or certain other debt (the “Guarantors”). The 2023 Notes, the 2024 Notes, the 2025 Notes and the 2026 Notes are not guaranteed by Grizzly Holdings, Inc. (the “Non-Guarantor”). The Guarantors are 100% owned by Gulfport (the “Parent”), and the guarantees are full, unconditional, joint and several. There are no significant restrictions on the ability of the Parent or the Guarantors to obtain funds from each other in the form of a dividend or loan.
The following condensed consolidating balance sheets, statements of operations, statements of comprehensive income and statements of cash flows are provided for the Parent, the Guarantors and the Non-Guarantor and include the consolidating adjustments and eliminations necessary to arrive at the information for the Company on a condensed consolidated basis. The information has been presented using the equity method of accounting for the Parent’s ownership of the Guarantors and the Non-Guarantor.


27


CONDENSED CONSOLIDATING BALANCE SHEETS
(Amounts in thousands)
 
September 30, 2018
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
89,214

 
$
35,357

 
$

 
$

 
$
124,571

Accounts receivable - oil and natural gas sales
111,463

 
45,928

 

 

 
157,391

Accounts receivable - joint interest and other
19,066

 
20,445

 

 

 
39,511

Accounts receivable - related parties
79

 

 

 

 
79

Accounts receivable - intercompany
662,319

 
240,373

 

 
(902,692
)
 

Prepaid expenses and other current assets
7,521

 
2,221

 

 

 
9,742

Short-term derivative instruments
19,809

 

 

 

 
19,809

Total current assets
909,471

 
344,324

 

 
(902,692
)
 
351,103

 
 
 
 
 
 
 
 
 
 
Property and equipment:
 
 
 
 
 
 
 
 
 
Oil and natural gas properties, full-cost accounting
7,003,396

 
2,934,047

 

 
(729
)
 
9,936,714

Other property and equipment
91,637

 
751

 

 

 
92,388

Accumulated depletion, depreciation, amortization and impairment
(4,506,267
)
 
(39
)
 

 

 
(4,506,306
)
Property and equipment, net
2,588,766

 
2,934,759

 

 
(729
)
 
5,522,796

Other assets:
 
 
 
 
 
 
 
 
 
Equity investments and investments in subsidiaries
2,723,140

 

 
53,380

 
(2,543,991
)
 
232,529

Long-term derivative instruments
3,530

 

 

 

 
3,530

Inventories
6,800

 
1,434

 

 

 
8,234

Other assets
13,018

 
4,020

 

 

 
17,038

Total other assets
2,746,488

 
5,454

 
53,380

 
(2,543,991
)
 
261,331

  Total assets
$
6,244,725

 
$
3,284,537

 
$
53,380

 
$
(3,447,412
)
 
$
6,135,230

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
464,426

 
$
118,038

 
$

 
$

 
$
582,464

Accounts payable - intercompany
240,310

 
662,254

 
128

 
(902,692
)
 

Asset retirement obligation - current
120

 

 

 

 
120

Short-term derivative instruments
62,601

 

 

 

 
62,601

Current maturities of long-term debt
647

 

 

 

 
647

Total current liabilities
768,104

 
780,292

 
128

 
(902,692
)
 
645,832

Long-term derivative instruments
15,101

 

 

 

 
15,101

Asset retirement obligation - long-term
65,634

 
12,777

 

 

 
78,411

Deferred tax liability
3,046

 

 

 

 
3,046

Long-term debt, net of current maturities
2,100,825

 

 

 

 
2,100,825

Total liabilities
2,952,710

 
793,069

 
128

 
(902,692
)
 
2,843,215

 
 
 
 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
 
 
 
Common stock
1,732

 

 

 

 
1,732

Paid-in capital
4,316,006

 
1,915,598

 
261,626

 
(2,177,224
)
 
4,316,006

Accumulated other comprehensive (loss) income
(46,354
)
 

 
(44,338
)
 
44,338

 
(46,354
)
Retained (deficit) earnings
(979,369
)
 
575,870

 
(164,036
)
 
(411,834
)
 
(979,369
)
Total stockholders’ equity
3,292,015

 
2,491,468

 
53,252

 
(2,544,720
)
 
3,292,015

  Total liabilities and stockholders equity
$
6,244,725

 
$
3,284,537

 
$
53,380

 
$
(3,447,412
)
 
$
6,135,230



28


CONDENSED CONSOLIDATING BALANCE SHEETS
(Amounts in thousands)