Note 3 – Divestitures, Assets Held for Sale, and Acquisitions

2017 Divestiture Activity

Eagle Ford Divestiture. During the first quarter of 2017, the Company divested its outside-operated Eagle Ford shale assets, including its ownership interest in related midstream assets, for total cash received, net of costs (referred to throughout this report as “net divestiture proceeds”), of $744.1 million. The Company recorded a final net gain of $396.8 million related to these divested assets for the year ended December 31, 2017. These assets were classified as held for sale as of December 31, 2016.

The following table presents income (loss) before income taxes from the outside-operated Eagle Ford shale assets sold for the years ended December 31, 2017, 2016, and 2015. This divestiture was considered a disposal of a significant asset group.



	For the Years Ended December 31,
	2017		2016			2015
	(in thousands)
Income (loss) before income taxes ⁽¹⁾	$	24,324	$	(218,506	)	$	71,556

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⁽¹⁾	Income (loss) before income taxes reflects oil, gas, and NGL production revenue, less oil, gas, and NGL production expense, and depletion, depreciation, amortization, and asset retirement obligation liability accretion. Additionally, income (loss) before income taxes includes approximately $269.6 million of impairment of proved properties expense for the year ended December 31, 2016.

Rocky Mountain and Permian Divestitures. During 2017, the Company divested certain non-core properties in its Rocky Mountain and Permian regions for net divestiture proceeds of $36.2 million and a small net gain. Please refer to the Assets Held for Sale section below for an explanation of divestiture losses the Company recorded during 2017 for its Divide County, North Dakota assets, which were held for sale in the first quarter and a portion of the second quarter of 2017.

2016 Divestiture Activity

Rocky Mountain Divestitures. During the third quarter of 2016, the Company divested certain non-core properties in the Williston Basin and Powder River Basin in two separate packages for net divestiture proceeds of $110.3 million and a final net gain of $16.4 million.

During the fourth quarter of 2016, the Company divested certain Williston Basin assets located outside of Divide County, North Dakota (referred to as “Raven/Bear Den” throughout this report) for net divestiture proceeds of $755.7 million and a final net gain of $29.5 million. In conjunction with this divestiture, the Company closed its Billings, Montana office.

Permian Divestiture. During the third quarter of 2016, the Company divested its non-core properties in southeast New Mexico for net divestiture proceeds of $54.7 million and recorded a final net loss of $10.0 million.

The Company finalized these divestitures in 2017.

2015 Divestiture Activity

Mid-Continent Divestiture. During the second quarter of 2015, the Company divested its Mid-Continent assets in multiple transactions for total net divestiture proceeds of $310.3 million and a final net gain of $108.4 million. In conjunction with the divestiture of its Mid-Continent assets, the Company closed its Tulsa, Oklahoma office.

Permian Divestiture. During the fourth quarter of 2015, the Company divested certain non-core assets in its Permian region. Net divestiture proceeds were $25.1 million and the final net gain on this divestiture was $2.3 million.

Write-downs on certain other assets held for sale and subsequently sold during the year ended December 31, 2015, totaled $68.6 million, which partially offset the net gain on the Mid-Continent and Permian divestitures discussed above.

Assets Held for Sale

Assets are classified as held for sale when the Company commits to a plan to sell the assets and it is probable the sale will take place within one year. Upon classification as held for sale, long-lived assets are no longer depreciated or depleted, and a measurement for impairment is performed to identify and expense any excess of carrying value over fair value less estimated costs to sell. When assets no longer meet the criteria of assets held for sale, they are measured at the lower of the carrying value of the assets before being classified as held for sale, adjusted for any depletion, depreciation, and amortization expense that would have been recognized, or the fair value at the date they are reclassified to assets held for use. Any gain or loss recognized on assets held for sale or on assets held for sale that are subsequently reclassified to assets held for use is reflected in the net gain (loss) on divestiture activity line item in the accompanying statements of operations.

During the year ended December 31, 2017, the Company recorded a $526.5 million write-down on its retained Divide County, North Dakota assets held for sale in early 2017, of which $359.6 million was recorded in the first quarter of 2017 based on estimated fair value less selling costs. An additional $166.9 million write-down was recorded in the second quarter of 2017 based on market conditions that existed on the date the Company decided to retain the assets.

As of December 31, 2017, the accompanying balance sheets present $111.7 million of assets held for sale, net of accumulated depletion, depreciation, and amortization expense, which consists primarily of approximately 112,000 net acres in the Powder River Basin. A corresponding aggregate asset retirement obligation liability of $11.4 million is separately presented. Subsequent to December 31, 2017, the Company entered into a definitive agreement for the sale of these assets for a gross purchase price of $500.0 million, subject to customary closing price adjustments. The Company expects to close this divestiture in the first quarter of 2018. The closing of this divestiture is subject to the satisfaction of customary closing conditions and there can be no assurance that the transaction will close on time or at all.

The Company determined that neither planned nor executed asset sales qualify for discontinued operations accounting under financial statement presentation authoritative guidance.

2017 Acquisition Activity

During the year ended December 31, 2017, the Company acquired approximately 3,600 net acres of primarily unproved properties in Howard and Martin Counties, Texas, in multiple transactions for a total of $76.5 million of cash consideration. Under authoritative accounting guidance, these transactions were considered asset acquisitions and the properties were recorded based on the fair value of the total consideration transferred on the acquisition date and transaction costs were capitalized as a component of the cost of the assets acquired.

Also, during the year ended December 31, 2017, the Company completed several non-monetary acreage trades of primarily unproved properties in Howard and Martin Counties, Texas, resulting in the Company acquiring approximately 8,125 net acres in exchange for approximately 7,580 net acres with $294.0 million of carrying value attributed to the properties surrendered by the Company in such trades. These trades were recorded at carryover basis with no gain or loss recognized.

2016 Acquisition Activity

Rock Oil Acquisition. During the fourth quarter of 2016, the Company acquired all membership interests of JPM EOC Opal, LLC, which owned proved and unproved properties in the Midland Basin, from Rock Oil Holdings, LLC (referred to as the “Rock Oil Acquisition”). The Company finalized the Rock Oil Acquisition during 2017 by paying $7.7 million of cash consideration in addition to the initial adjusted purchase price of $991.0 million, resulting in total consideration of $998.7 million paid after final closing adjustments. The Company funded the acquisition with proceeds from divestitures in 2016 and the Senior Convertible Notes and equity offerings in August 2016, as discussed in Note 5 – Long-Term Debt and Note 13 – Equity, respectively.

The Company determined that the Rock Oil Acquisition met the criteria of a business combination under ASC Topic 805, Business Combinations. The Company allocated the final adjusted purchase price to the acquired assets and liabilities based on fair value as of the acquisition date, as summarized in the table below. This measurement resulted in no goodwill or bargain purchase gain being recognized. Refer to Note 11 – Fair Value Measurements for additional discussion on the valuation techniques used in determining the fair value of the acquired properties. The acquisition costs were insignificant and were expensed as incurred.



	As of October 4, 2016
	(in thousands)
Cash consideration	$	998,691

Fair value of assets and liabilities acquired:
Wells in progress	$	5,672
Proved oil and gas properties	82,584
Unproved oil and gas properties	913,819
Other assets	5,338
Total fair value of oil and gas properties acquired	1,007,413
Working capital	(1,127		)
Asset retirement obligations	(7,595		)
Total fair value of net assets acquired	$	998,691

QStar Acquisition. During the fourth quarter of 2016, the Company acquired additional proved and unproved properties in the Midland Basin from QStar LLC and RRP-QStar, LLC (referred to as the “QStar Acquisition”). The Company finalized the QStar Acquisition during the third quarter of 2017 by paying $7.3 million of cash consideration in addition to the initial consideration of $1.2 billion in cash consideration and the issuance of approximately 13.4 million shares of the Company’s common stock, resulting in total consideration of approximately $1.6 billion paid after final closing adjustments. The Company funded the acquisition with proceeds from the 2016 divestitures and the December 2016 equity offering. Please refer to Note 13 – Equity for additional discussion.

Under authoritative accounting guidance, the transaction was considered an asset acquisition, and therefore, the properties were recorded based on the fair value of the total consideration transferred on the acquisition date and transaction costs were capitalized as a component of the cost of the assets acquired. The Company allocated the final adjusted purchase price to the acquired assets and liabilities, as summarized in the table below.



	As of December 21, 2016
	(in thousands)
Cash consideration, including acquisition costs paid	$	1,174,628
Fair value of equity consideration⁽¹⁾	437,194
Total consideration	$	1,611,822

Assets and liabilities acquired:
Wells in progress	$	21,812
Proved oil and gas properties	61,239
Unproved oil and gas properties	1,538,264
Total oil and gas properties acquired	1,621,315
Working capital	(1,852		)
Asset retirement obligations	(7,641		)
Total net assets acquired	$	1,611,822

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⁽¹⁾

The Company issued approximately 13.4 million shares of common stock, par value $0.01 per share, in a private placement to the sellers in the QStar Acquisition on December 21, 2016. The equity consideration was valued on this date using Level 1 and Level 2 inputs with a discount applied due to the lack of marketability in the near term in accordance with the Lock-Up and Registration Rights Agreement that prohibited the sale of such stock until no earlier than the 90th day after issuance.

2015 Acquisition Activity

There was no significant acquisition activity during the year ended December 31, 2015.