NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Summary of Significant Accounting Policies
Description of Operations
SM Energy Company, together with its consolidated subsidiaries (“SM Energy” or the “Company”), is an independent energy company engaged in the acquisition, exploration, development, and production of oil, gas, and NGLs in the State of Texas.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Quarterly Report on Form 10-Q, and Regulation S-X. These financial statements do not include all information and notes required by GAAP for annual financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the 2019 Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of interim financial information, have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year. In connection with the preparation of the Company’s unaudited condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of September 30, 2020, and through the filing of this report. Additionally, certain prior period amounts have been reclassified to conform to current period presentation in the accompanying unaudited condensed consolidated financial statements.
Significant Accounting Policies
The significant accounting policies followed by the Company are set forth in Note 1 - Summary of Significant Accounting Policies in the 2019 Form 10-K and are supplemented by the notes to the unaudited condensed consolidated financial statements included in this report. These unaudited condensed consolidated financial statements should be read in conjunction with the 2019 Form 10-K.
Recently Issued Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 was issued to reduce the complexity of accounting for income taxes for those entities that fall within the scope of the accounting standard. The guidance is to be applied using a prospective method, excluding amendments related to franchise taxes, which should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company early adopted ASU 2019-12 on January 1, 2020, and there was no material impact on the Company’s unaudited condensed consolidated financial statements or disclosures upon adoption.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Generally, the guidance is to be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is evaluating the options provided by ASU 2020-04. Please refer to Note 5 - Long-Term Debt for discussion of the use of the London Interbank Offered Rate (“LIBOR”) in connection with borrowings under the Credit Agreement.
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 was issued to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. The guidance is to be applied using either a modified retrospective or a fully retrospective method. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is evaluating the impact of ASU 2020-06 on its consolidated financial statements and related disclosures.
As disclosed in the 2019 Form 10-K, on January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. As expected, there was no material impact on the Company’s unaudited condensed consolidated financial statements or disclosures upon adoption of these ASUs.
There are no ASUs that would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures that have been issued but not yet adopted by the Company as of September 30, 2020, or through the filing of this report.
Note 2 - Revenue from Contracts with Customers
The Company recognizes its share of revenue from the sale of produced oil, gas, and NGLs from its Midland Basin and South Texas assets. Oil, gas, and NGL production revenue presented within the accompanying unaudited condensed consolidated statements of operations (“accompanying statements of operations”) is reflective of the revenue generated from contracts with customers.
The tables below present oil, gas, and NGL production revenue by product type for each of the Company’s operating regions for the three and nine months ended September 30, 2020, and 2019:
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Midland Basin
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South Texas
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|
Total
|
|
Three Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(in thousands)
|
Oil production revenue
|
$
|
194,547
|
|
|
$
|
277,361
|
|
|
$
|
13,100
|
|
|
$
|
15,496
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|
|
$
|
207,647
|
|
|
$
|
292,857
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|
Gas production revenue
|
23,304
|
|
|
17,780
|
|
|
26,251
|
|
|
46,267
|
|
|
49,555
|
|
|
64,047
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|
NGL production revenue
|
115
|
|
|
124
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|
|
24,695
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|
|
32,391
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|
|
24,810
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|
|
32,515
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|
Total
|
$
|
217,966
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|
|
$
|
295,265
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|
|
$
|
64,046
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|
|
$
|
94,154
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|
|
$
|
282,012
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|
|
$
|
389,419
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Relative percentage
|
77
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%
|
|
76
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%
|
|
23
|
%
|
|
24
|
%
|
|
100
|
%
|
|
100
|
%
|
____________________________________________
Note: Amounts may not calculate due to rounding.
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|
Midland Basin
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South Texas
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Total
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|
Nine Months Ended
September 30,
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|
Nine Months Ended
September 30,
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|
Nine Months Ended
September 30,
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|
2020
|
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2019
|
|
2020
|
|
2019
|
|
2020
|
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2019
|
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(in thousands)
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Oil production revenue
|
$
|
585,041
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|
|
$
|
791,055
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|
|
$
|
33,815
|
|
|
$
|
45,007
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|
|
$
|
618,856
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|
|
$
|
836,062
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|
Gas production revenue
|
46,559
|
|
|
49,821
|
|
|
78,569
|
|
|
144,563
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|
|
125,128
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|
|
194,384
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|
NGL production revenue
|
218
|
|
|
102
|
|
|
61,833
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|
|
106,201
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|
|
62,051
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|
|
106,303
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Total
|
$
|
631,818
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|
|
$
|
840,978
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|
|
$
|
174,217
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|
|
$
|
295,771
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|
|
$
|
806,035
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|
|
$
|
1,136,749
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Relative percentage
|
78
|
%
|
|
74
|
%
|
|
22
|
%
|
|
26
|
%
|
|
100
|
%
|
|
100
|
%
|
____________________________________________
Note: Amounts may not calculate due to rounding.
The Company recognizes oil, gas, and NGL production revenue at the point in time when custody and title (“control”) of the product transfers to the purchaser, which differs depending on the applicable contractual terms. Transfer of control drives the presentation of transportation, gathering, processing, and other post-production expenses (“fees and other deductions”) within the accompanying statements of operations. Fees and other deductions incurred by the Company prior to control transfer are recorded within the oil, gas, and NGL production expense line item on the accompanying statements of operations. When control is transferred at or near the wellhead, sales are based on a wellhead market price that is impacted by fees and other deductions incurred by the purchaser subsequent to the transfer of control. Please refer to Note 2 - Revenue from Contracts with Customers in the 2019 Form 10-K for more information regarding the types of contracts under which oil, gas, and NGL production revenue is generated.
Significant judgments made in applying the guidance in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, relate to the point in time when control transfers to purchasers in gas processing arrangements with midstream processors. The Company does not believe that significant judgments are required with respect to the determination of the transaction price, including amounts that represent variable consideration, as volume and price carry a low level of estimation uncertainty given the precision of volumetric measurements and the use of index pricing with generally predictable differentials. Accordingly, the Company does not consider estimates of variable consideration to be constrained.
The Company’s performance obligations arise upon the production of hydrocarbons from wells in which the Company has an ownership interest. The performance obligations are considered satisfied upon control transferring to a purchaser at the wellhead, inlet, or tailgate of the midstream processor’s processing facility, or other contractually specified delivery point. The time period between
production and satisfaction of performance obligations is generally less than one day; thus, there are no material unsatisfied or partially unsatisfied performance obligations at the end of the reporting period.
Revenue is recorded in the month when performance obligations are satisfied. However, settlement statements from the purchasers of hydrocarbons and the related cash consideration are received 30 to 90 days after production has occurred. As a result, the Company must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for sale of the product. Estimated revenue due to the Company is recorded within the accounts receivable line item on the accompanying unaudited condensed consolidated balance sheets (“accompanying balance sheets”) until payment is received. The accounts receivable balances from contracts with customers within the accompanying balance sheets as of September 30, 2020, and December 31, 2019, were $79.3 million and $146.3 million, respectively. To estimate accounts receivable from contracts with customers, the Company uses knowledge of its properties, historical performance, contractual arrangements, index pricing, quality and transportation differentials, and other factors as the basis for these estimates. Differences between estimates and actual amounts received for product sales are recorded in the month that payment is received from the purchaser.
Note 3 - Divestitures, Assets Held for Sale, and Acquisitions
Divestitures
No material divestitures occurred during the first nine months of 2020 and 2019, and there were no assets classified as held for sale as of September 30, 2020, or December 31, 2019.
Acquisitions
During the third quarter of 2020, the Company completed a non-monetary acreage trade of primarily undeveloped properties located in Upton County, Texas, resulting in the exchange of approximately 535 net acres, with $6.5 million of carrying value attributed to the properties transferred by the Company. This trade was recorded at carryover basis with no gain or loss recognized. Also during the third quarter of 2020, the Company acquired approximately 380 net acres of proved and unproved properties in Martin County, Texas, for $7.1 million.
During the first nine months of 2019, the Company completed several non-monetary acreage trades of primarily undeveloped properties located in Howard, Martin, and Midland Counties, Texas, resulting in the exchange of approximately 2,100 net acres, with $70.8 million of carrying value attributed to the properties transferred by the Company. These trades were recorded at carryover basis with no gain or loss recognized.
Note 4 - Income Taxes
The provision for income taxes for the three and nine months ended September 30, 2020, and 2019, consisted of the following:
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For the Three Months Ended
September 30,
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For the Nine Months Ended
September 30,
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2020
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2019
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2020
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2019
|
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(in thousands)
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Current portion of income tax (expense) benefit:
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|
|
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Federal
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$
|
—
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|
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$
|
3,826
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|
|
$
|
—
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|
|
$
|
3,826
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State
|
173
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|
|
(320)
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|
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(402)
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|
|
(1,109)
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Deferred portion of income tax (expense) benefit
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22,796
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|
|
(19,617)
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|
|
159,064
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|
|
13,620
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Income tax (expense) benefit
|
$
|
22,969
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|
$
|
(16,111)
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|
|
$
|
158,662
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|
|
$
|
16,337
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|
Effective tax rate
|
18.9
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%
|
|
27.6
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%
|
|
20.9
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%
|
|
16.1
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%
|
Recorded income tax expense or benefit differs from the amounts that would be provided by applying the statutory United States federal income tax rate to income or loss before income taxes. These differences primarily relate to the effect of state income taxes, excess tax benefits and deficiencies from stock-based compensation awards, tax limitations on the compensation of covered individuals, changes in valuation allowances, and the cumulative impact of other smaller permanent differences. The quarterly rate can also be affected by the proportional impacts of forecasted net income or loss for each period presented, as reflected in the table above.
During the third quarter of 2020, the proportional effect of recording discrete excess tax deficiencies from share-based compensation awards and other permanent items decreased the Company’s effective tax rate for the three months ended September 30, 2020, compared with the same period in 2019.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. The primary feature of the CARES Act that the Company benefited from was the acceleration of its refundable Alternative Minimum Tax (“AMT”) credits. On April 1, 2020, the Company filed an election to accelerate its remaining refundable AMT credits of $7.6 million. The Company received the refund in July 2020.
For all years before 2016, the Company is generally no longer subject to United States federal or state income tax examinations by tax authorities.
Note 5 - Long-Term Debt
The following table summarizes the Company’s total outstanding balance on its revolving credit facility, Senior Secured Notes net of unamortized discount and deferred financing costs, and Senior Unsecured Notes, net of unamortized deferred financing costs, as of September 30, 2020, and December 31, 2019:
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|
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|
|
|
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|
|
As of September 30, 2020
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|
As of December 31, 2019
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(in thousands)
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Revolving credit facility
|
$
|
178,000
|
|
|
$
|
122,500
|
|
Senior Secured Notes (1)
|
457,391
|
|
|
—
|
|
Senior Unsecured Notes (1)
|
1,717,647
|
|
|
2,610,298
|
|
Total
|
$
|
2,353,038
|
|
|
$
|
2,732,798
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|
____________________________________________
(1) Senior Secured Notes and Senior Unsecured Notes have been defined below.
During the nine months ended September 30, 2020, the Company executed multiple transactions to reduce outstanding debt. During the second quarter of 2020, the Company initiated an offer to exchange its outstanding senior unsecured notes, as presented in the Senior Unsecured Notes section below (“Senior Unsecured Notes”), other than the 1.50% Senior Convertible Notes due 2021 (“2021 Senior Convertible Notes,” and together with the Senior Unsecured Notes, “Old Notes”), and a private exchange of its outstanding 2021 Senior Convertible Notes and portions of its outstanding Senior Unsecured Notes (“Private Exchange”), in each case for newly issued 10.0% Senior Secured Second Lien Notes due January 15, 2025 (“2025 Senior Secured Notes”), referred to together as “Exchange Offers.” In connection with the Exchange Offers, the Company and its lenders amended the Credit Agreement to increase the amount of permitted second lien indebtedness to an aggregate amount of $1.0 billion, inclusive of the 2021 Senior Convertible Notes (“Permitted Second Lien Debt”). Additionally, the Company amended the indenture governing its 2021 Senior Convertible Notes, by entering into the Third Supplemental Indenture, dated as of April 29, 2020 (“Third Supplemental Indenture”), to the original Indenture, dated as of May 21, 2015, as supplemented and amended by the Second Supplemental Indenture, dated as of August 12, 2016, collectively referred to as the “2021 Notes Indenture.” The Third Supplemental Indenture provides that the Company will satisfy any conversion obligation solely in cash.
On June 17, 2020 (“Settlement Date”), the Company exchanged $611.9 million in aggregate principal amount of Senior Unsecured Notes and $107.0 million in aggregate principal amount of 2021 Senior Convertible Notes for $446.7 million in aggregate principal amount of 2025 Senior Secured Notes, as well as, in connection with the Private Exchange, (a) $53.5 million in cash to certain holders of the 2021 Senior Convertible Notes and (b) warrants to acquire up to an aggregate of approximately 5.9 million shares, or approximately five percent of its outstanding common stock, exercisable upon the occurrence of certain future triggering events, to certain holders who exchanged Old Notes in the Private Exchange. Please refer to Note 11 - Fair Value Measurements for more information regarding the warrants issued by the Company. Pursuant to the 2021 Notes Indenture, upon the issuance of Permitted Second Lien Debt, the remaining outstanding 2021 Senior Convertible Notes became secured and are subsequently referred to as the “2021 Senior Secured Convertible Notes,” and together with the 2025 Senior Secured Notes, the “Senior Secured Notes.”
The following table summarizes the principal amounts of the Old Notes tendered as of the Settlement Date:
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Title of Old Notes Tendered
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|
Principal Amount of Old Notes Tendered
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|
|
(in thousands)
|
1.50% Senior Convertible Notes due 2021
|
|
$
|
107,015
|
|
6.125% Senior Notes due 2022
|
|
141,701
|
5.0% Senior Notes due 2024
|
|
155,339
|
5.625% Senior Notes due 2025
|
|
150,882
|
6.75% Senior Notes due 2026
|
|
80,765
|
6.625% Senior Notes due 2027
|
|
83,209
|
Total
|
|
$
|
718,911
|
|
The Company retired $611.9 million and $107.0 million in aggregate principal amount of its Senior Unsecured Notes and 2021 Senior Convertible Notes, respectively, upon the closing of the Exchange Offers. Upon closing, the Company paid $8.9 million of accrued and unpaid interest and accelerated $5.6 million of previously unamortized deferred financing costs associated with the retired Senior Unsecured Notes and 2021 Senior Convertible Notes and accelerated $6.1 million of previously unamortized debt discount associated with the retired 2021 Senior Convertible Notes. The Exchange Offers resulted in a net gain on extinguishment of debt of $227.3 million. The Company cancelled all retired Senior Unsecured Notes and 2021 Senior Convertible Notes upon the closing of the Exchange Offers.
Additionally, during the first and third quarters of 2020, the Company repurchased certain of its Senior Unsecured Notes in open market transactions. During the three months ended September 30, 2020, the Company repurchased a total of $62.5 million in aggregate principal amount of its 6.125% Senior Notes due 2022 (“2022 Senior Notes”) and $29.0 million in aggregate principal amount of its 5.0% Senior Notes due 2024 (“2024 Senior Notes”) in open market transactions for a total settlement amount, excluding accrued interest, of $65.9 million. In connection with the repurchases, the Company recorded a gain on extinguishment of debt of $25.1 million for the three months ended September 30, 2020. This amount included discounts realized upon repurchase of $25.5 million partially offset by approximately $480,000 of accelerated unamortized deferred financing costs. During the three months ended March 31, 2020, the Company repurchased a total of $40.7 million in aggregate principal amount of its 2022 Senior Notes in open market transactions for a total settlement amount, excluding accrued interest, of $28.3 million. In connection with the repurchase, the Company recorded a gain on extinguishment of debt of $12.2 million for the three months ended March 31, 2020. This amount included discounts realized upon repurchase of $12.4 million partially offset by approximately $235,000 of accelerated unamortized deferred financing costs. The Company canceled all repurchased 2022 Senior Notes and 2024 Senior Notes upon settlement.
Please refer to the Credit Agreement and Senior Secured Notes sections below for additional information.
Credit Agreement
The Company’s Credit Agreement provides for a senior secured revolving credit facility with a maximum loan amount of $2.5 billion. During the second quarter of 2020, as a result of lower commodity prices and a corresponding decrease in the value of the Company’s proved reserves, the borrowing base and aggregate lender commitments under the Credit Agreement were both reduced to $1.1 billion. Also during the second quarter of 2020, the Company entered into the Third Amendment and the Fourth Amendment to the Credit Agreement (collectively, the “Amendments”), which permitted the Company to incur new second lien debt of up to $827.5 million prior to the fall semi-annual borrowing base redetermination, provided that all principal amounts of such debt are used to redeem unsecured senior debt of the Company for less than or equal to 80% of par value. The Amendments also permitted the Company to grant a second-priority security interest to the holders of the Company’s outstanding 2021 Senior Convertible Notes to secure the Company’s obligations under the 2021 Senior Convertible Notes. Additionally, the Amendments reduced the amount of dividends that the Company may declare and pay on an annual basis from $50.0 million to $12.0 million. As of the filing of this report, the fall semi-annual borrowing base redetermination was in process. The next scheduled borrowing base redetermination date is April 1, 2021.
The Credit Agreement is scheduled to mature on September 28, 2023, except that, pursuant to the Amendments, newly issued Permitted Second Lien Debt used to redeem any portion of the remaining 2022 Senior Notes must have maturities on or after 180 days after September 28, 2023; otherwise, the maturity date of the Credit Agreement will be July 2, 2023. Without regard to which maturity date is in effect, the maturity date could occur earlier on August 16, 2022, if the Company has not completed certain repurchase, redemption, or refinancing activities associated with its 2022 Senior Notes, and does not have certain unused availability for borrowing under the Credit Agreement, as outlined in the Credit Agreement.
Interest and commitment fees associated with the revolving credit facility are accrued based on a borrowing base utilization grid set forth in the Credit Agreement. The Third Amendment to the Credit Agreement amended the borrowing base utilization grid as presented in the table below. At the Company’s election, borrowings under the Credit Agreement may be in the form of Eurodollar, Alternate Base Rate (“ABR”), or Swingline loans. Eurodollar loans accrue interest at LIBOR, plus the applicable margin from the utilization grid, and ABR and Swingline loans accrue interest at a market-based floating rate, plus the applicable margin from the utilization grid. Commitment fees are accrued on the unused portion of the aggregate lender commitment amount at rates from the utilization grid and are included in the interest expense line item on the accompanying statements of operations.
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|
Borrowing Base Utilization Percentage
|
<25%
|
|
≥25% <50%
|
|
≥50% <75%
|
|
≥75% <90%
|
|
≥90%
|
Eurodollar Loans (1)
|
1.750
|
%
|
|
2.000
|
%
|
|
2.500
|
%
|
|
2.750
|
%
|
|
3.000
|
%
|
ABR Loans or Swingline Loans
|
0.750
|
%
|
|
1.000
|
%
|
|
1.500
|
%
|
|
1.750
|
%
|
|
2.000
|
%
|
Commitment Fee Rate
|
0.375
|
%
|
|
0.375
|
%
|
|
0.500
|
%
|
|
0.500
|
%
|
|
0.500
|
%
|
____________________________________________
(1) The Credit Agreement specifies that if LIBOR is no longer a widely used benchmark rate, or if it is no longer used for determining interest rates for loans in the United States, a replacement interest rate that fairly reflects the cost to the lenders of funding loans shall be established by the Administrative Agent, as defined in the Credit Agreement, in consultation with the Company. Please refer to Note 1 - Summary of Significant Accounting Policies for discussion of FASB ASU 2020-04, which provides guidance related to reference rate reform.
The following table presents the outstanding balance, total amount of letters of credit outstanding, and available borrowing capacity under the Credit Agreement as of October 21, 2020, September 30, 2020, and December 31, 2019:
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|
|
|
|
|
|
|
|
|
|
As of October 21, 2020
|
|
As of September 30, 2020
|
|
As of December 31, 2019
|
|
(in thousands)
|
Revolving credit facility (1)
|
$
|
129,000
|
|
|
$
|
178,000
|
|
|
$
|
122,500
|
|
Letters of credit (2)
|
42,000
|
|
|
42,000
|
|
|
—
|
|
Available borrowing capacity
|
929,000
|
|
|
880,000
|
|
|
1,077,500
|
|
Total aggregate lender commitment amount
|
$
|
1,100,000
|
|
|
$
|
1,100,000
|
|
|
$
|
1,200,000
|
|
____________________________________________
(1) Unamortized deferred financing costs attributable to the revolving credit facility are presented as a component of the other noncurrent assets line item on the accompanying balance sheets and totaled $4.7 million and $5.9 million as of September 30, 2020, and December 31, 2019, respectively. These costs are being amortized over the term of the revolving credit facility on a straight-line basis.
(2) Letters of credit outstanding reduce the amount available under the credit facility on a dollar-for-dollar basis.
Senior Notes
Senior Secured Notes. Senior Secured Notes, net of unamortized discount and deferred financing costs, included within the Senior Notes, net line item on the accompanying balance sheets as of September 30, 2020, consisted of the following:
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|
|
|
|
|
|
|
As of September 30, 2020
|
|
Principal Amount
|
|
Unamortized Debt Discount
|
|
Unamortized Deferred Financing Costs
|
|
Principal Amount, Net
|
|
(in thousands)
|
10.0% Senior Secured Notes due 2025
|
$
|
446,675
|
|
|
$
|
(39,706)
|
|
|
$
|
(12,091)
|
|
|
$
|
394,878
|
|
1.50% Senior Secured Convertible Notes due 2021 (1)
|
65,485
|
|
|
(2,710)
|
|
|
(262)
|
|
|
62,513
|
|
Total
|
$
|
512,160
|
|
|
$
|
(42,416)
|
|
|
$
|
(12,353)
|
|
|
$
|
457,391
|
|
____________________________________________
(1) As discussed above, as required by the 2021 Notes Indenture and as permitted by the Credit Agreement, as the Company issued Permitted Second Lien Debt upon the closing of the Exchange Offers, its remaining 2021 Senior Convertible Notes contemporaneously became secured.
2025 Senior Secured Notes. On June 17, 2020, the Company issued $446.7 million in aggregate principal amount of 2025 Senior Secured Notes due January 15, 2025. The Company incurred fees of $12.9 million, which are being amortized as deferred financing costs over the life of the 2025 Senior Secured Notes. Upon the issuance of the 2025 Senior Secured Notes, the Company recorded $405.0 million as the initial carrying amount, which approximated their fair value at issuance. The excess of the principal amount of the 2025 Senior Secured Notes over its fair value was recorded as a debt discount. The debt discount and deferred financing costs are being amortized to interest expense through the maturity date.
In connection with the issuance of the 2025 Senior Secured Notes, the Company entered into an indenture dated as of June 17, 2020, with UMB Bank, N.A., as trustee, governing the 2025 Senior Secured Notes (“2025 Notes Indenture”). The Company may redeem some or all of its 2025 Senior Secured Notes prior to their maturity at redemption prices based on a premium, plus accrued and unpaid interest as described in the 2025 Notes Indenture.
The 2025 Senior Secured Notes are senior obligations of the Company, secured on a second-priority basis, ranking junior to the Company’s obligations under the Credit Agreement and equal in priority with the 2021 Senior Secured Convertible Notes. The 2025 Senior Secured Notes rank senior in right of payment with all of the Company’s existing and any future unsecured senior or subordinated debt.
2021 Senior Secured Convertible Notes. Upon issuance of the 2025 Senior Secured Notes, which was Permitted Second Lien Debt, as required by the 2021 Notes Indenture, and as permitted by the Credit Agreement, the 2021 Senior Convertible Notes became secured senior obligations of the Company on a second-priority basis, ranking junior to the Company’s obligations under the Credit Agreement and equal in priority with the 2025 Senior Secured Notes. The 2021 Senior Secured Convertible Notes rank senior in right of payment to all of the Company’s existing and any future unsecured senior or subordinated debt. During the second quarter of 2020, pursuant to the Third Supplemental Indenture, the Company agreed to satisfy any conversion obligation solely in cash, resulting in reclassification of the fair value of the equity components out of additional paid-in capital. Please refer to Note 5 - Long-Term Debt in the 2019 Form 10-K for additional detail on the Company’s 2021 Senior Convertible Notes and associated capped call transactions.
The 2021 Senior Secured Convertible Notes were not convertible at the option of holders as of September 30, 2020, or through the filing of this report. Notwithstanding the inability to convert, the if-converted value of the 2021 Senior Secured Convertible Notes did not exceed the principal amount. The Company has the ability to settle its 2021 Senior Secured Convertible Notes obligation, due July 1, 2021, with borrowings under its revolving credit facility. The remaining debt discount and debt-related issuance costs are being amortized to the principal value of the 2021 Senior Secured Convertible Notes as interest expense through the maturity date. Interest expense recognized on the 2021 Senior Secured Convertible Notes related to the stated interest rate and amortization of the debt discount totaled $1.1 million and $2.8 million for the three months ended September 30, 2020, and 2019, respectively, and totaled $6.6 million and $8.2 million for the nine months ended September 30, 2020, and 2019, respectively.
Senior Unsecured Notes. Senior Unsecured Notes, net of unamortized deferred financing costs, included within the Senior Notes, net line item on the accompanying balance sheets as of September 30, 2020, and December 31, 2019, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
As of December 31, 2019
|
|
Principal Amount
|
|
Unamortized Deferred Financing Costs
|
|
Principal Amount, Net
|
|
Principal Amount
|
|
Unamortized Deferred Financing Costs
|
|
Principal Amount, Net
|
|
(in thousands)
|
6.125% Senior Notes due 2022
|
$
|
231,881
|
|
|
$
|
1,055
|
|
|
$
|
230,826
|
|
|
$
|
476,796
|
|
|
$
|
2,920
|
|
|
$
|
473,876
|
|
5.0% Senior Notes due 2024
|
315,633
|
|
|
1,941
|
|
|
313,692
|
|
|
500,000
|
|
|
3,766
|
|
496,234
|
5.625% Senior Notes due 2025
|
349,118
|
|
|
2,950
|
|
|
346,168
|
|
|
500,000
|
|
|
4,903
|
|
495,097
|
6.75% Senior Notes due 2026
|
419,235
|
|
|
4,145
|
|
|
415,090
|
|
|
500,000
|
|
|
5,571
|
|
494,429
|
6.625% Senior Notes due 2027
|
416,791
|
|
|
4,920
|
|
|
411,871
|
|
|
500,000
|
|
|
6,601
|
|
493,399
|
1.50% Senior Convertible Notes due 2021 (1)(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
172,500
|
|
|
15,237
|
|
|
157,263
|
Total
|
$
|
1,732,658
|
|
|
$
|
15,011
|
|
|
$
|
1,717,647
|
|
|
$
|
2,649,296
|
|
|
$
|
38,998
|
|
|
$
|
2,610,298
|
|
____________________________________________
(1) Unamortized deferred financing costs attributable to the 2021 Senior Convertible Notes include $13.9 million related to the unamortized debt discount as of December 31, 2019.
(2) As discussed above, as required by the 2021 Notes Indenture and as permitted by the Credit Agreement, as the Company issued Permitted Second Lien Debt upon the closing of the Exchange Offers, its remaining 2021 Senior Convertible Notes contemporaneously became secured.
The senior unsecured notes listed above (collectively referred to as “Senior Unsecured Notes,” and together with the Senior Secured Notes, “Senior Notes”) are unsecured senior obligations and rank equal in right of payment with all of the Company’s existing and any future unsecured senior debt and are senior in right of payment to any future subordinated debt. The Company may redeem some or all of its Senior Unsecured Notes prior to their maturity at redemption prices based on a premium, plus accrued and unpaid interest as described in the indentures governing the Senior Unsecured Notes. Please refer to Note 5 - Long-Term Debt in the 2019 Form 10-K for additional detail on the Company’s Senior Unsecured Notes.
Covenants
The Company is subject to certain covenants under the Credit Agreement and the indentures governing the Senior Notes that, among other terms, limit the Company’s ability to incur additional indebtedness, make restricted payments including dividends, sell assets, with respect to the Company’s restricted subsidiaries, permit the consensual restriction on the ability of such restricted subsidiaries to pay dividends or indebtedness owing to the Company or to any other restricted subsidiaries, create liens that secure debt, enter into transactions with affiliates, and merge or consolidate with another company. The Company was in compliance with all
covenants under the Credit Agreement and the indentures governing the Senior Notes as of September 30, 2020, and through the filing of this report.
Capitalized Interest
Capitalized interest costs for the three months ended September 30, 2020, and 2019, totaled $4.8 million and $4.2 million, respectively, and totaled $11.6 million and $14.1 million for the nine months ended September 30, 2020, and 2019, respectively. The amount of interest the Company capitalizes generally fluctuates based on the amount borrowed, the Company’s capital program, and the timing and amount of costs associated with capital projects that are considered in progress. Capitalized interest costs are included in total costs incurred.
Note 6 - Commitments and Contingencies
Commitments
Other than those items discussed below, there have been no changes in commitments through the filing of this report that differ materially from those disclosed in the 2019 Form 10-K. Please refer to Note 6 - Commitments and Contingencies in the 2019 Form 10-K for additional discussion of the Company’s commitments.
Drilling Rig Service Contracts. During the nine months ended September 30, 2020, the Company amended certain of its drilling rig contracts resulting in the reduction of day rates and potential early termination fees and the extension of contract terms. As of September 30, 2020, the Company’s drilling rig commitments totaled $12.2 million under contract terms extending through the second quarter of 2021. If all of these contracts were terminated as of the filing of this report, the Company would avoid a portion of the contractual service commitments; however, the Company would be required to pay $5.7 million in early termination fees. No material expenses related to early termination or standby fees were incurred by the Company during the nine months ended September 30, 2020, and the Company does not expect to incur material penalties with regard to its drilling rig contracts during the remainder of 2020.
Drilling and Completion Commitments. During the second quarter of 2020, the Company entered into an agreement that included minimum drilling and completion footage requirements on certain existing leases. If these minimum requirements are not satisfied by March 31, 2021, the Company will be required to pay liquidated damages based on the difference between the actual footage drilled and completed and the minimum requirements. As of September 30, 2020, the liquidated damages could range from zero to a maximum of $35.7 million, with the maximum exposure assuming no additional development activity occurred prior to March 31, 2021. The Company also entered into an agreement that included a minimum number of wells drilled and completed on certain existing leases. If these minimum requirements are not satisfied by December 31, 2021, the Company will be required to pay liquidated damages based on the difference between the actual number of wells drilled and completed and the minimum requirements. As of September 30, 2020, the liquidated damages could range from zero to a maximum of $11.5 million, with the maximum exposure assuming no additional development activity occurred prior to December 31, 2021. As of the filing of this report, the Company expects to meet its obligations under both agreements.
Contingencies
The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the anticipated results of any pending litigation and claims are not expected to have a material effect on the results of operations, the financial position, or the cash flows of the Company.
Note 7 - Compensation Plans
Equity Incentive Compensation Plan
As of September 30, 2020, 4.4 million shares of common stock were available for grant under the Company’s Equity Incentive Compensation Plan (“Equity Plan”).
Performance Share Units
The Company grants performance share units (“PSUs”) to eligible employees as part of its Equity Plan. The number of shares of the Company’s common stock issued to settle PSUs ranges from zero to two times the number of PSUs awarded and is determined based on certain criteria over a three-year performance period. PSUs generally vest on the third anniversary of the date of the grant or upon other triggering events as set forth in the Equity Plan.
For PSUs granted in 2017, which the Company determined to be equity awards, the settlement criteria included a combination of the Company’s Total Shareholder Return (“TSR”) on an absolute basis, and the Company’s TSR relative to the TSR of certain peer companies over the associated three-year performance period. The fair value of the PSUs granted in 2017 was measured on the grant
date using a stochastic Monte Carlo simulation using geometric Brownian motion (“GBM Model”). As these awards depend entirely on market-based settlement criteria, the associated compensation expense is recognized on a straight-line basis within general and administrative expense and exploration expense over the vesting periods of the respective awards.
For PSUs granted in 2018 and 2019, the settlement criteria include a combination of the Company’s TSR relative to the TSR of certain peer companies and the Company’s cash return on total capital invested (“CRTCI”) relative to the CRTCI of certain peer companies over the associated three-year performance period. In addition to these performance criteria, the award agreements for these grants also stipulate that if the Company’s absolute TSR is negative over the three-year performance period, the maximum number of shares of common stock that can be issued to settle outstanding PSUs is capped at one times the number of PSUs granted on the award date, regardless of the Company’s TSR and CRTCI performance relative to its peer group. The fair value of the PSUs granted in 2018 and 2019 was measured on the applicable grant dates using the GBM Model, with the assumption that the associated CRTCI performance condition will be met at the target amount at the end of the respective performance periods. Compensation expense for PSUs is recognized within general and administrative expense and exploration expense over the vesting periods of the respective awards. As these awards depend on a combination of performance-based settlement criteria and market-based settlement criteria, compensation expense may be adjusted in future periods as the number of units expected to vest increases or decreases based on the Company’s expected CRTCI performance relative to the applicable peer companies.
The Company records compensation expense associated with the issuance of PSUs based on the fair value of the awards as of the date of grant. Total compensation expense recorded for PSUs was $1.6 million and $2.9 million for the three months ended September 30, 2020, and 2019, respectively, and $7.0 million and $8.6 million for the nine months ended September 30, 2020, and 2019, respectively. As of September 30, 2020, there was $8.1 million of total unrecognized compensation expense related to non-vested PSU awards, which is being amortized through 2022.
A summary of the status and activity of non-vested PSUs for the nine months ended September 30, 2020, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
PSUs (1)
|
|
Weighted-Average Grant-Date Fair Value
|
Non-vested at beginning of year
|
2,022,585
|
|
$
|
16.87
|
|
Granted
|
—
|
|
$
|
—
|
|
Vested
|
(791,962)
|
|
$
|
15.85
|
|
Forfeited
|
(45,731)
|
|
$
|
16.69
|
|
Non-vested at end of quarter
|
1,184,892
|
|
$
|
17.56
|
|
____________________________________________
(1) The number of shares of common stock assumes a multiplier of one. The actual final number of shares of common stock to be issued will range from zero to two times the number of PSUs awarded depending on the three-year performance multiplier.
During the nine months ended September 30, 2020, the Company settled 791,962 PSUs that were granted in 2017, which earned a 0.9 times multiplier. The Company and the majority of grant participants mutually agreed to net share settle a portion of the awards to cover income and payroll tax withholdings, as provided for in the Equity Plan and applicable award agreements. After withholding 215,451 shares to satisfy income and payroll tax withholding obligations that occurred upon delivery of the shares underlying those PSUs, 485,060 shares of the Company’s common stock were issued in accordance with the terms of the applicable PSU awards.
Employee Restricted Stock Units
The Company grants restricted stock units (“RSUs”) to eligible persons as part of its Equity Plan. Each RSU represents a right to receive one share of the Company’s common stock upon settlement of the award at the end of the specified vesting period. RSUs generally vest one-third of the total grant on each anniversary date of the grant over a three-year vesting period or upon other triggering events as set forth in the Equity Plan.
The Company records compensation expense associated with the issuance of RSUs based on the fair value of the awards as of the date of grant. The fair value of an RSU is equal to the closing price of the Company’s common stock on the day of the grant. Compensation expense for RSUs is recognized within general and administrative expense and exploration expense over the vesting periods of the respective awards. Total compensation expense recorded for employee RSUs was $1.8 million and $2.9 million for the three months ended September 30, 2020, and 2019, respectively and $7.1 million and $8.4 million for the nine months ended September 30, 2020, and 2019, respectively. As of September 30, 2020, there was $8.6 million of total unrecognized compensation expense related to non-vested RSU awards, which is being amortized through 2022.
A summary of the status and activity of non-vested RSUs granted to employees for the nine months ended September 30, 2020, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
Weighted-Average Grant-Date Fair Value
|
Non-vested at beginning of year
|
1,532,131
|
|
$
|
16.01
|
|
Granted
|
—
|
|
$
|
—
|
|
Vested
|
(744,325)
|
|
$
|
16.74
|
|
Forfeited
|
(77,814)
|
|
$
|
15.67
|
|
Non-vested at end of quarter
|
709,992
|
|
$
|
15.29
|
|
During the nine months ended September 30, 2020, the Company settled 744,325 RSUs that related to awards granted in previous years. The Company and the majority of grant participants mutually agreed to net share settle a portion of the awards to cover income and payroll tax withholdings, as provided for in the Equity Plan and applicable award agreements. As a result, 209,126 shares were withheld to satisfy income and payroll tax withholding obligations that occurred upon delivery of the shares underlying those RSUs.
Director Shares
During the second quarters of 2020, and 2019, the Company issued 267,576 and 96,719 shares, respectively, of its common stock to its non-employee directors under the Equity Plan. Shares issued during the second quarter of 2020 will fully vest on December 31, 2020. Shares issued during the second quarter of 2019 fully vested on December 31, 2019. The Company did not issue any director shares during the third quarters of 2020 or 2019.
Employee Stock Purchase Plan
Under the Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15 percent of eligible compensation, without accruing in excess of $25,000 in value from purchases for each calendar year. The purchase price of the stock is 85 percent of the lower of the fair market value of the stock on either the first or last day of the purchase period. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code. There were 297,013 and 184,079 shares issued under the ESPP during the nine months ended September 30, 2020, and 2019, respectively. Total proceeds to the Company for the issuance of these shares was $947,000 and $2.0 million for the nine months ended September 30, 2020, and 2019, respectively. The fair value of ESPP grants is measured at the date of grant using the Black-Scholes option-pricing model.
Note 8 - Pension Benefits
Pension Plans
The Company has a non-contributory defined benefit pension plan covering employees who meet age and service requirements and who began employment with the Company prior to January 1, 2016 (“Qualified Pension Plan”). The Company also has a supplemental non-contributory pension plan covering certain management employees (“Nonqualified Pension Plan” and together with the Qualified Pension Plan, “Pension Plans”). The Company froze the Pension Plans to new participants, effective as of January 1, 2016. Employees participating in the Pension Plans prior to the plans being frozen will continue to earn benefits.
Components of Net Periodic Benefit Cost for the Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(in thousands)
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
Service cost
|
$
|
1,129
|
|
|
$
|
1,395
|
|
|
$
|
3,387
|
|
|
$
|
4,186
|
|
Interest cost
|
590
|
|
|
699
|
|
|
1,768
|
|
|
2,094
|
|
Expected return on plan assets that reduces periodic pension benefit cost
|
(434)
|
|
|
(393)
|
|
|
(1,301)
|
|
|
(1,180)
|
|
Amortization of prior service cost
|
4
|
|
|
4
|
|
|
13
|
|
|
13
|
|
Amortization of net actuarial loss
|
238
|
|
|
239
|
|
|
713
|
|
|
718
|
|
Settlements
|
1,282
|
|
|
—
|
|
|
1,282
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
2,809
|
|
|
$
|
1,944
|
|
|
$
|
5,862
|
|
|
$
|
5,831
|
|
Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10 percent of the greater of the benefit obligation or the market-related value of assets are amortized over the average remaining service period of active participants. The service cost component of net periodic benefit cost for the Pension Plans is presented as an operating expense within the general and administrative and exploration expense line items on the accompanying statements of operations while the other components of net periodic benefit cost for the Pension Plans are presented as non-operating expenses within the other non-operating expense, net line item on the accompanying statements of operations.
Contributions
As of the filing of this report, the Company has contributed $5.9 million to the Qualified Pension Plan in 2020.
Note 9 - Earnings Per Share
Basic net income or loss per common share is calculated by dividing net income or loss available to common stockholders by the basic weighted-average number of common shares outstanding for the respective period. Diluted net income or loss per common share is calculated by dividing net income or loss available to common stockholders by the diluted weighted-average number of common shares outstanding, which includes the effect of potentially dilutive securities. As of September 30, 2019, potentially dilutive securities for this calculation consisted primarily of non-vested RSUs, contingent PSUs, and shares into which the 2021 Senior Convertible Notes were convertible, which were measured using the treasury stock method. Shares of the Company’s common stock traded at an average closing price below the $40.50 conversion price applicable to the 2021 Senior Convertible Notes for the three and nine months ended September 30, 2019, therefore, the 2021 Senior Convertible Notes had no dilutive impact. On April 29, 2020, pursuant to the Third Supplemental Indenture, the Company agreed that it will satisfy any conversion obligation with respect to the 2021 Senior Convertible Notes solely in cash. As a result, the Company’s 2021 Senior Secured Convertible Notes are no longer convertible into shares of the Company’s common stock and thus, were not considered to be a potentially dilutive instrument as of September 30, 2020.
On June 17, 2020, the Company issued warrants to purchase up to an aggregate of approximately 5.9 million shares, or approximately five percent of its outstanding common stock, at an exercise price of $0.01 per share, as discussed in Note 5 - Long-Term Debt. The Warrant Agreement dated as of June 17, 2020 (“Warrant Agreement”), states that the warrants are only exercisable upon the Triggering Date, as defined in Note 11 - Fair Value Measurements. The warrants were not exercisable during the three and nine months ended September 30, 2020, and therefore had no dilutive impact. Please refer to Note 11 - Fair Value Measurements for additional detail regarding the terms of the warrants.
As of September 30, 2020, potentially dilutive securities for this calculation consist primarily of non-vested RSUs, contingent PSUs, and warrants, which were measured using the treasury stock method. Please refer to Note 7 - Compensation Plans and Note 11 - Fair Value Measurements in this report, and Note 9 - Earnings Per Share in the 2019 Form 10-K for additional detail on these potentially dilutive securities.
When the Company recognizes a net loss from continuing operations, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per common share. The following table details the weighted-average anti-dilutive securities for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(in thousands)
|
Anti-dilutive
|
158
|
|
—
|
|
450
|
|
707
|
The following table sets forth the calculations of basic and diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(in thousands, except per share data)
|
Net income (loss)
|
$
|
(98,292)
|
|
|
$
|
42,234
|
|
|
$
|
(599,439)
|
|
|
$
|
(84,946)
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
114,371
|
|
112,804
|
|
113,462
|
|
112,441
|
Dilutive effect of non-vested RSUs and contingent PSUs
|
—
|
|
530
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
Diluted weighted-average common shares outstanding
|
114,371
|
|
113,334
|
|
113,462
|
|
112,441
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
$
|
(0.86)
|
|
|
$
|
0.37
|
|
|
$
|
(5.28)
|
|
|
$
|
(0.76)
|
|
Diluted net income (loss) per common share
|
$
|
(0.86)
|
|
|
$
|
0.37
|
|
|
$
|
(5.28)
|
|
|
$
|
(0.76)
|
|
Note 10 - Derivative Financial Instruments
Summary of Oil, Gas, and NGL Derivative Contracts in Place
The Company has entered into various commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows. As of September 30, 2020, all derivative counterparties were members of the Company’s Credit Agreement lender group and all contracts were entered into for other-than-trading purposes. The Company’s commodity derivative contracts consist of swap and collar arrangements for oil production, and swap arrangements for gas and NGL production. In a typical commodity swap agreement, if the agreed upon published third-party index price (“index price”) is lower than the swap fixed price, the Company receives the difference between the index price and the agreed upon swap fixed price. If the index price is higher than the swap fixed price, the Company pays the difference. For collar arrangements, the Company receives the difference between an agreed upon index price and the floor price if the index price is below the floor price. The Company pays the difference between the agreed upon ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and ceiling prices.
The Company has entered into fixed price oil basis swaps in order to mitigate exposure to adverse pricing differentials between certain industry benchmark prices and the actual physical pricing points where the Company’s production volumes are sold. Currently, the Company has basis swap contracts with fixed price differentials between New York Mercantile Exchange (“NYMEX”) WTI and WTI Midland for a portion of its Midland Basin production with sales contracts that settle at WTI Midland prices, and basis swap contracts with fixed price differentials between NYMEX WTI and Intercontinental Exchange Brent Crude (“ICE Brent”) for a portion of its Midland Basin oil production with sales contracts that settle at ICE Brent prices. The Company has also entered into crude oil swap contracts to fix the differential in pricing between the NYMEX calendar month average and the physical crude oil delivery month (“Roll Differential”) in which the Company pays the periodic variable Roll Differential and receives a weighted-average fixed price differential. The weighted-average fixed price differential represents the amount of net addition (reduction) to delivery month prices for the notional volumes covered by the swap contracts.
As of September 30, 2020, the Company had commodity derivative contracts outstanding through the fourth quarter of 2022 as summarized in the tables below.
Oil Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Period
|
|
NYMEX WTI Volumes
|
|
Weighted-Average
Contract Price
|
|
|
(MBbl)
|
|
(per Bbl)
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter 2020
|
|
4,397
|
|
|
$
|
57.03
|
|
2021
|
|
17,115
|
|
|
$
|
40.38
|
|
2022
|
|
3,885
|
|
|
$
|
43.58
|
|
Total
|
|
25,397
|
|
|
|
Oil Collars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Period
|
|
NYMEX WTI Volumes
|
|
Weighted-Average Floor Price
|
|
Weighted-Average Ceiling Price
|
|
|
(MBbl)
|
|
(per Bbl)
|
|
(per Bbl)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter 2020
|
|
610
|
|
|
$
|
55.00
|
|
|
$
|
61.90
|
|
2021
|
|
551
|
|
|
$
|
48.97
|
|
|
$
|
51.96
|
|
|
|
|
|
|
|
|
Total
|
|
1,161
|
|
|
|
|
|
Oil Basis Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Period
|
|
WTI Midland-NYMEX WTI Volumes
|
|
Weighted-Average
Contract Price (1)
|
|
NYMEX WTI-ICE Brent Volumes
|
|
Weighted-Average Contract Price (2)
|
|
|
(MBbl)
|
|
(per Bbl)
|
|
(MBbl)
|
|
(per Bbl)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter 2020
|
|
4,087
|
|
|
$
|
(0.38)
|
|
|
920
|
|
|
$
|
(8.01)
|
|
2021
|
|
13,975
|
|
|
$
|
0.75
|
|
|
3,650
|
|
|
$
|
(7.86)
|
|
2022
|
|
9,500
|
|
|
$
|
1.15
|
|
|
3,650
|
|
|
$
|
(7.78)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
27,562
|
|
|
|
|
8,220
|
|
|
|
____________________________________________
(1) Represents the price differential between WTI Midland (Midland, Texas) and NYMEX WTI (Cushing, Oklahoma).
(2) Represents the price differential between NYMEX WTI (Cushing, Oklahoma) and ICE Brent (North Sea).
Oil Roll Differential Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Period
|
|
NYMEX WTI Volumes
|
|
Weighted-Average
Contract Price
|
|
|
(MBbl)
|
|
(per Bbl)
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter 2020
|
|
2,503
|
|
|
$
|
(1.18)
|
|
2021
|
|
6,058
|
|
|
$
|
(0.40)
|
|
Total
|
|
8,561
|
|
|
|
Gas Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Period
|
|
IF HSC Volumes
|
|
Weighted-Average
Contract Price
|
|
WAHA Volumes
|
|
Weighted-Average Contract Price
|
|
|
(BBtu)
|
|
(per MMBtu)
|
|
(BBtu)
|
|
(per MMBtu)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter 2020
|
|
9,327
|
|
|
$
|
2.39
|
|
|
4,872
|
|
|
$
|
1.21
|
|
2021
|
|
47,800
|
|
|
$
|
2.42
|
|
|
25,155
|
|
|
$
|
1.67
|
|
2022
|
|
6,104
|
|
|
$
|
2.23
|
|
|
5,904
|
|
|
$
|
2.10
|
|
Total (1)
|
|
63,231
|
|
|
|
|
35,931
|
|
|
|
____________________________________________
(1) The Company has natural gas swaps in place that settle against Inside FERC Houston Ship Channel (“IF HSC”), Inside FERC West Texas (“IF WAHA”), and Platt’s Gas Daily West Texas (“GD WAHA”). As of September 30, 2020, WAHA volumes were comprised of 64 percent IF WAHA and 36 percent GD WAHA.
NGL Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPIS Propane Mont Belvieu Non-TET
|
|
|
|
|
|
|
Contract Period
|
|
|
|
|
|
Volumes
|
|
Weighted-Average Contract Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(MBbl)
|
|
(per Bbl)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter 2020
|
|
|
|
|
|
466
|
|
|
$
|
22.29
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
|
|
|
392
|
|
|
$
|
19.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Derivative Contracts Entered Into Subsequent to September 30, 2020
Subsequent to September 30, 2020, the Company entered into the following commodity derivative contracts:
•fixed price NYMEX WTI oil swap contracts for the second quarter of 2021 for a total of 0.3 MMBbl of oil production at a weighted-average contract price of $42.53 per Bbl;
•fixed price GD WAHA gas swap contracts for the second and third quarters of 2021 for a total of 924 BBtu of gas production at a weighted-average contract price of $2.47 per MMBtu and for 2022 for a total of 2,911 BBtu of gas production at a weighted-average contract price of $2.46 per MMBtu;
•fixed price IF HSC gas swap contracts for the second quarter of 2021 for a total of 1,290 BBtu of gas production at a weighted-average contract price of $2.62 per MMBtu and for 2022 for a total of 15,015 BBtu of gas production at a weighted-average contract price of $2.58 per MMBtu; and
•fixed price OPIS Propane Mont Belvieu Non-TET swap contracts for 2021 for a total of 0.9 MMBbl of propane production at a weighted-average contract price of $20.93 per Bbl.
Derivative Assets and Liabilities Fair Value
The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities, with the exception of derivative instruments that meet the “normal purchase normal sale” exclusion. The Company does not designate its commodity derivative contracts as hedging instruments. The fair value of the commodity derivative contracts was a net asset of $49.5 million and $21.5 million as of September 30, 2020, and December 31, 2019, respectively.
The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets, by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
As of December 31, 2019
|
|
(in thousands)
|
Derivative assets:
|
|
|
|
Current assets
|
$
|
128,046
|
|
|
$
|
55,184
|
|
Noncurrent assets
|
31,509
|
|
|
20,624
|
|
Total derivative assets
|
$
|
159,555
|
|
|
$
|
75,808
|
|
Derivative liabilities:
|
|
|
|
Current liabilities
|
$
|
76,969
|
|
|
$
|
50,846
|
|
Noncurrent liabilities
|
33,068
|
|
|
3,444
|
|
Total derivative liabilities
|
$
|
110,037
|
|
|
$
|
54,290
|
|
Offsetting of Derivative Assets and Liabilities
As of September 30, 2020, and December 31, 2019, all derivative instruments held by the Company were subject to master netting arrangements with various financial institutions. In general, the terms of the Company’s agreements provide for offsetting of amounts payable or receivable between it and the counterparty, at the election of both parties, for transactions that settle on the same date and in the same currency. The Company’s agreements also provide that in the event of an early termination, the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. The Company’s accounting policy is to not offset these positions in its accompanying balance sheets.
The following table provides a reconciliation between the gross assets and liabilities reflected on the accompanying balance sheets and the potential effects of master netting arrangements on the fair value of the Company’s commodity derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets as of
|
|
Derivative Liabilities as of
|
|
September 30, 2020
|
|
December 31, 2019
|
|
September 30, 2020
|
|
December 31, 2019
|
|
(in thousands)
|
Gross amounts presented in the accompanying balance sheets
|
$
|
159,555
|
|
|
$
|
75,808
|
|
|
$
|
(110,037)
|
|
|
$
|
(54,290)
|
|
Amounts not offset in the accompanying balance sheets
|
(104,037)
|
|
|
(35,075)
|
|
|
104,037
|
|
|
35,075
|
|
Net amounts
|
$
|
55,518
|
|
|
$
|
40,733
|
|
|
$
|
(6,000)
|
|
|
$
|
(19,215)
|
|
The following table summarizes the commodity components of the derivative settlement (gain) loss, as well as the components of the net derivative (gain) loss line item presented in the accompanying statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(in thousands)
|
Derivative settlement (gain) loss:
|
|
|
|
|
|
|
|
Oil contracts
|
$
|
(68,907)
|
|
|
$
|
2,246
|
|
|
$
|
(261,095)
|
|
|
$
|
14,304
|
|
Gas contracts
|
(896)
|
|
|
(12,210)
|
|
|
(16,575)
|
|
|
(13,744)
|
|
NGL contracts
|
(502)
|
|
|
(14,758)
|
|
|
(8,600)
|
|
|
(24,403)
|
|
Total net derivative settlement gain
|
$
|
(70,305)
|
|
|
$
|
(24,722)
|
|
|
$
|
(286,270)
|
|
|
$
|
(23,843)
|
|
|
|
|
|
|
|
|
|
Net derivative (gain) loss:
|
|
|
|
|
|
|
|
Oil contracts
|
$
|
30,641
|
|
|
$
|
(83,984)
|
|
|
$
|
(360,649)
|
|
|
$
|
67,261
|
|
Gas contracts
|
31,548
|
|
|
(4,228)
|
|
|
46,537
|
|
|
(36,337)
|
|
NGL contracts
|
1,682
|
|
|
(12,677)
|
|
|
(157)
|
|
|
(34,387)
|
|
Total net derivative (gain) loss
|
$
|
63,871
|
|
|
$
|
(100,889)
|
|
|
$
|
(314,269)
|
|
|
$
|
(3,463)
|
|
Credit Related Contingent Features
As of September 30, 2020, and through the filing of this report, all of the Company’s derivative counterparties were members of the Company’s Credit Agreement lender group. Under the Credit Agreement, the Company is required to provide mortgage liens on assets having a value equal to at least 85 percent of the total PV-9, as defined in the Credit Agreement, of the Company’s proved oil and gas properties evaluated in the most recent reserve report. Collateral securing indebtedness under the Credit Agreement also secures the Company’s derivative agreement obligations.
Note 11 - Fair Value Measurements
The Company follows fair value measurement accounting guidance for all assets and liabilities measured at fair value. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The fair value hierarchy for grouping these assets and liabilities is based on the significance level of the following inputs:
•Level 1 – quoted prices in active markets for identical assets or liabilities
•Level 2 – quoted prices in active markets for similar assets or 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.
The following table is a listing of the Company’s assets and liabilities that are measured at fair value in the accompanying balance sheets and where they are classified within the fair value hierarchy as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
Derivatives (1)
|
$
|
—
|
|
|
$
|
159,555
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivatives (1)
|
$
|
—
|
|
|
$
|
110,037
|
|
|
$
|
—
|
|
__________________________________________
(1) This represents a financial asset or liability that is measured at fair value on a recurring basis.
The following table is a listing of the Company’s assets and liabilities that are measured at fair value in the accompanying balance sheets and where they are classified within the fair value hierarchy as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
Derivatives (1)
|
$
|
—
|
|
|
$
|
75,808
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
Derivatives (1)
|
$
|
—
|
|
|
$
|
54,290
|
|
|
$
|
—
|
|
____________________________________________
(1) This represents a financial asset or liability that is measured at fair value on a recurring basis.
Both financial and non-financial assets and liabilities are categorized within the above fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used by the Company as well as the general classification of such instruments pursuant to the above fair value hierarchy.
Derivatives
The Company uses Level 2 inputs to measure the fair value of oil, gas, and NGL commodity derivatives. Fair values are based upon interpolated data. The Company derives internal valuation estimates taking into consideration forward commodity price curves, counterparties’ credit ratings, the Company’s credit rating, and the time value of money. These valuations are then compared to the respective counterparties’ mark-to-market statements. The considered factors result in an estimated exit price that management believes provides a reasonable and consistent methodology for valuing derivative instruments. The commodity derivative instruments utilized by the Company are not considered by management to be complex, structured, or illiquid. The oil, gas, and NGL commodity derivative markets are highly active.
Please refer to Note 10 - Derivative Financial Instruments and to Note 11 - Fair Value Measurements in the 2019 Form 10-K for more information regarding the Company’s derivative instruments.
Oil and Gas Properties and Other Property and Equipment
The Company had no assets included in total property and equipment, net, measured at fair value as of September 30, 2020, or December 31, 2019.
Proved oil and gas properties. Proved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that associated carrying costs may not be recoverable. The Company uses an income valuation technique, which converts future cash flows to a single present value amount, to measure the fair value of proved properties using a discount rate, price and cost forecasts, and certain reserve risk-adjustment factors, as selected by the Company’s management. The Company uses a discount rate that represents a current market-based weighted average cost of capital. The prices for oil and gas are forecast based on NYMEX strip pricing, adjusted for basis differentials, for the first five years, after which a flat terminal price is used for each commodity stream. The prices for NGLs are forecasted using Oil Price Information Service (“OPIS”) Mont Belvieu pricing, for as long as the market is actively trading, after which a flat terminal price is used. Future operating costs are also adjusted as deemed appropriate for these estimates. Certain undeveloped reserve estimates are also risk-adjusted given the risk to related projected cash flows due to performance and exploitation uncertainties.
Other Property and Equipment. Other property and equipment costs are evaluated for impairment and reduced to fair value when there is an indication the carrying costs may not be recoverable. To measure the fair value of other property and equipment, the Company uses an income valuation technique or market approach depending on the quality of information available to support management’s assumptions and the circumstances. The valuation includes consideration of the proved and unproved assets supported by the property and equipment, future cash flows associated with the assets, and fixed costs necessary to operate and maintain the assets.
No proved property impairment expense was recorded during the three months ended September 30, 2020. For the nine months ended September 30, 2020, the Company recorded impairment expense of $956.7 million related to its South Texas proved oil and gas properties and related support facilities due to the decrease in commodity price forecasts at the end of the first quarter of 2020, specifically decreases in oil and NGL prices. The Company used a discount rate of 11 percent in its calculation of the present value of expected future cash flows based on the prevailing market-based weighted average cost of capital as of March 31, 2020. No proved property impairment expense was recorded during the three or nine months ended September 30, 2019.
The following table presents impairment of oil and gas properties expense and abandonment and impairment of unproved properties expense recorded during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(in millions)
|
Impairment of proved oil and gas properties and related support equipment
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
956.7
|
|
|
$
|
—
|
|
Abandonment and impairment of unproved properties (1)
|
8.8
|
|
|
6.3
|
|
|
50.6
|
|
|
25.1
|
|
Impairment
|
$
|
8.8
|
|
|
$
|
6.3
|
|
|
$
|
1,007.3
|
|
|
$
|
25.1
|
|
____________________________________________
(1) These impairments related to actual and anticipated lease expirations, as well as actual and anticipated losses on acreage due to title defects, changes in development plans, and other inherent acreage risks. The balances in the unproved oil and gas properties line item on the accompanying balance sheets as of September 30, 2020, and December 31, 2019, are recorded at carrying value.
Please refer to Note 1 - Summary of Significant Accounting Policies and Note 11 - Fair Value Measurements in the 2019 Form 10-K for more information regarding the Company’s approach in determining the fair value of its properties.
Long-Term Debt
The following table reflects the fair value of the Company’s Senior Note obligations measured using Level 1 inputs based on quoted secondary market trading prices. These notes were not presented at fair value on the accompanying balance sheets as of September 30, 2020, or December 31, 2019, as they were recorded at carrying value, net of any unamortized discounts and deferred financing costs. Please refer to Note 5 - Long-Term Debt for additional discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
As of December 31, 2019
|
|
Principal Amount
|
|
Fair Value
|
|
Principal Amount
|
|
Fair Value
|
|
(in thousands)
|
6.125% Senior Unsecured Notes due 2022
|
$
|
231,881
|
|
|
$
|
182,027
|
|
|
$
|
476,796
|
|
|
$
|
481,564
|
|
5.0% Senior Unsecured Notes due 2024
|
$
|
315,633
|
|
|
$
|
173,655
|
|
|
$
|
500,000
|
|
|
$
|
479,815
|
|
5.625% Senior Unsecured Notes due 2025
|
$
|
349,118
|
|
|
$
|
162,228
|
|
|
$
|
500,000
|
|
|
$
|
475,835
|
|
6.75% Senior Unsecured Notes due 2026
|
$
|
419,235
|
|
|
$
|
192,659
|
|
|
$
|
500,000
|
|
|
$
|
494,860
|
|
6.625% Senior Unsecured Notes due 2027
|
$
|
416,791
|
|
|
$
|
185,964
|
|
|
$
|
500,000
|
|
|
$
|
493,750
|
|
10.0% Senior Secured Notes due 2025
|
$
|
446,675
|
|
|
$
|
426,820
|
|
|
$
|
—
|
|
|
$
|
—
|
|
1.50% Senior Convertible Notes due 2021 (1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
172,500
|
|
|
$
|
164,430
|
|
1.50% Senior Secured Convertible Notes due 2021 (1)
|
$
|
65,485
|
|
|
$
|
61,195
|
|
|
$
|
—
|
|
|
$
|
—
|
|
____________________________________________
(1) The Company’s 2021 Senior Convertible Notes became secured in the second quarter of 2020 upon the closing of the Exchange Offers. Please refer to Note 5 - Long-Term Debt for additional information.
The carrying value of the Company’s revolving credit facility approximates its fair value, as the applicable interest rates are floating, based on prevailing market rates.
Warrants
As discussed in Note 5 - Long-Term Debt, on June 17, 2020, the Company issued warrants to purchase up to an aggregate of approximately 5.9 million shares, or approximately five percent of its outstanding common stock, at an exercise price of $0.01 per share. The warrants are exercisable any time from and after the Triggering Date, as subsequently defined, until June 30, 2023. The Triggering Date is defined by the Warrant Agreement as the first trading day following five consecutive trading days on which the product of the number of shares of common stock issued and outstanding on four of the five trading days multiplied by the closing price per share of common stock for each such trading day exceeds $1.0 billion (“Triggering Date”). The warrants issued are indexed to the Company’s common stock and are required to be settled through physical settlement or net share settlement if exercised. The warrants were not exercisable during the nine months ended September 30, 2020, and through the filing of this report.
The fair value of the warrants on the issuance date was determined using a stochastic Monte Carlo simulation using the GBM Model. The Company evaluated the warrants under authoritative accounting guidance and determined that they should be classified as
equity instruments. Upon issuance, the warrants were recorded in additional paid-in capital on the accompanying balance sheets at a fair value of $21.5 million, with no recurring fair value measurement required. There have been no changes to the initial carrying amount of the warrants since issuance.
Note 12 - Leases
ASC Topic 842 - Leases (“Topic 842”), requires lessees to recognize operating and finance leases with terms greater than 12 months on the balance sheet. As of September 30, 2020, the Company did not have any agreements in place that were classified as finance leases under Topic 842. Arrangements classified as operating leases are included on the accompanying balance sheets within the other noncurrent assets, other current liabilities, and other noncurrent liabilities line items.
As outlined in Topic 842, a right-of-use (“ROU”) asset represents a lessee’s right to use an underlying asset for the lease term, while the associated lease liability represents the lessee’s obligations to make lease payments. At the commencement date, which is the date on which a lessor makes an underlying asset available for use by a lessee, a lease ROU asset and corresponding lease liability is recognized based on the present value of the future lease payments. Excluded from the initial measurement are certain variable lease payments, which for the Company’s drilling rigs, completion crews, and midstream agreements, may be a significant component of the total lease costs. Subsequent to initial measurement, costs associated with the Company’s operating leases are either expensed on the accompanying statements of operations or capitalized on the accompanying balance sheets depending on the nature and use of the underlying ROU asset and in accordance with GAAP requirements.
Please refer to Note 12 - Leases in the 2019 Form 10-K for more information regarding the Company's policy on leases, and assumptions and judgments made in the initial and subsequent measurement of lease ROU assets and corresponding liabilities.
Currently, the Company has operating leases for asset classes that include office space, office equipment, drilling rigs, midstream agreements, vehicles, and equipment rentals used in field operations. For those operating leases included on the accompanying balance sheets, which only includes leases with terms greater than 12 months at commencement, remaining lease terms range from less than one year to approximately six years. The weighted-average lease term remaining for these leases is approximately three years. Certain leases also contain optional extension periods that allow for terms to be extended for up to an additional 10 years. An early termination option also exists for certain leases, some of which allow for the Company to terminate a lease within one year. Exercising an early termination option may also result in an early termination penalty depending on the terms of the underlying agreement. Based on expectations for those agreements with early termination options, there are no leases in which material early termination options are reasonably certain to be exercised by the Company.
For the three months ended September 30, 2020, and 2019, total costs related to operating leases, including short-term leases, and variable lease payments made for leases with initial lease terms greater than 12 months, were $49.9 million and $107.3 million, respectively. For the nine months ended September 30, 2020, and 2019, total lease costs were $184.9 million and $422.4 million, respectively. These totals do not reflect amounts that may be reimbursed by other third parties in the normal course of business, such as non-operating working interest owners. Components of the Company’s total lease cost, whether capitalized or expensed, for the three and nine months ended September 30, 2020, and 2019, consisted of the following:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(in thousands)
|
Operating lease cost
|
$
|
3,364
|
|
|
$
|
8,344
|
|
|
$
|
14,651
|
|
|
$
|
28,802
|
|
Short-term lease cost (1)
|
27,787
|
|
|
72,874
|
|
|
107,989
|
|
|
309,876
|
|
Variable lease cost (2)
|
18,787
|
|
|
26,090
|
|
|
62,257
|
|
|
83,696
|
|
Total lease cost
|
$
|
49,938
|
|
|
$
|
107,308
|
|
|
$
|
184,897
|
|
|
$
|
422,374
|
|
____________________________________________
(1) Costs associated with short-term lease agreements relate primarily to operational activities where underlying lease terms are less than one year. This amount includes drilling and completion activities and field equipment rentals, most of which are contracted for 12 months or less. It is expected that this amount will fluctuate primarily with the number of drilling rigs and completion crews the Company is operating under short-term agreements.
(2) Variable lease payments include additional payments made that were not included in the initial measurement of the ROU asset and corresponding liability for lease agreements with terms longer than 12 months. Variable lease payments relate to the actual volumes transported under certain midstream agreements, actual usage associated with drilling rigs, completion crews, and vehicles, and variable utility costs associated with the Company’s leased office space. Fluctuations in variable lease payments are driven by actual volumes delivered and the number of drilling rigs and completion crews operating under long-term agreements.
Right-of-use assets obtained in exchange for new operating lease liabilities totaled zero and $745,000 for the three and nine months ended September 30, 2020, respectively, and $1.3 million and $24.0 million for the three and nine months ended September 30, 2019, respectively.
Cash paid for amounts included in the measurement of lease liabilities for the nine months ended September 30, 2020, and 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
(in thousands)
|
Operating cash flows from operating leases
|
$
|
9,074
|
|
|
$
|
9,029
|
|
Investing cash flows from operating leases
|
$
|
6,751
|
|
|
$
|
20,256
|
|
Maturities for the Company’s operating lease liabilities included on the accompanying balance sheets as of September 30, 2020, were as follows:
|
|
|
|
|
|
|
As of September 30, 2020
|
|
(in thousands)
|
2020 (remaining after September 30, 2020)
|
$
|
3,546
|
|
2021
|
12,855
|
|
2022
|
5,920
|
|
2023
|
3,596
|
|
2024
|
2,081
|
|
Thereafter
|
1,640
|
|
Total Lease payments
|
$
|
29,638
|
|
Less: Imputed interest (1)
|
(2,856)
|
|
Total
|
$
|
26,782
|
|
____________________________________________
(1) The weighted-average discount rate used to determine the operating lease liability as of September 30, 2020, was 6.9 percent.
Amounts recorded on the accompanying balance sheets for operating leases as of September 30, 2020, and December 31, 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
As of December 31, 2019
|
|
(in thousands)
|
Other noncurrent assets
|
$
|
24,728
|
|
|
$
|
39,717
|
|
|
|
|
|
Other current liabilities
|
$
|
12,311
|
|
|
$
|
19,189
|
|
Other noncurrent liabilities
|
$
|
14,471
|
|
|
$
|
23,137
|
|
As of September 30, 2020, and through the filing of this report, the Company has no material lease arrangements which are scheduled to commence in the future.