UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

 

 

FORM 10-Q

 

 

 

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For The Quarterly Period Ended September 30, 2015

OR

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________ to ____________

Commission File Number 001-14039

 

 

 

 

 

 

 

 

Callon Petroleum Company

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware

(State or Other Jurisdiction of

Incorporation or Organization)

64-0844345

(IRS Employer

Identification No.)

 

 

200 North Canal Street

Natchez, Mississippi

(Address of Principal Executive Offices)

39120

(Zip Code)

 

601-442-1601

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No  

 

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

 

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

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No  

 

The Registrant had 66,287,148 shares of common stock outstanding as of October 30, 2015 .

 

 


 

 

Table of Contents

 

 

 

Part I. Financial Information

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets   

4

 

 

Consolidated Statements of Operations  

5

 

 

Consolidated Statements of Cash Flows  

6

 

 

Notes to Consolidated Financial Statements  

7

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations  

16

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk  

27

 

 

Item 4.  Controls and Procedures  

28

 

 

Part II.  Other Information

 

 

 

Item 1.  Legal Proceedings  

29

 

 

Item 1A.  Risk Factors  

29

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds  

29

 

 

Item 3.  Defaults Upon Senior Securities  

29

 

 

Item 4.  Mine Safety Disclosures  

29

 

 

Item 5.  Other Information  

29

 

 

Item 6.  Exhibits  

30

 

 

 

2


 

 

Table of Contents

 

DEFINITIONS

 

All defined terms under Rule 4-10(a) of R egulation S-X shall have their prescribed meanings when used in this report. As used in this document:

 

·

ARO :   a sset retirement obligation.

·

Bbl or Bbls :  barrel or barrels of oil or natural gas liquids.

·

BOE :  barrel of oil equivalent, determined by using the ratio of one Bbl of oil or NGLs to six Mcf of gas.  The ratio of one barrel of oil or NGL to six Mcf of natural gas is commonly used in the industry and represents the approximate energy equivalence of oil or NGLs to natural gas, and does not represent the economic equivalency of oil and NGLs to natural gas. The sales price of a barrel of oil or NGLs is considerably higher than the sales price of six Mcf of natural gas.

·

BBtu : billion Btu .

·

BOE/d :  BOE per day.

·

Btu :  a British thermal unit, which is a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit.

·

LIBOR :  London Interbank Offered Rate.

·

LOE:  lease operating expense.

·

MBbls :  thousand barrels of oil.

·

MBOE :  thousand BOE.

·

Mcf :  thousand cubic feet of natural gas.

·

MMBtu :  million Btu.

·

MMcf :  million cubic feet of natural gas.

·

NGL or NGLs :  natural gas liquids, such as ethane, propane, butanes and natural gasoline that are extracted from natural gas production streams.

·

NYMEX :  New York Mercantile Exchange.

·

Oil : includes crude oil and condensate.

·

SEC :  United States Securities and Exchange Commission.

·

GAAP: Generally Accepted Accounting Principles in the United States .

 

With respect to information relating to our working interest in wells or acreage, “net” oil and gas wells or acreage is determined by multiplying gross wells or acreage by our working interest therein. Unless otherwise specified, all references to wells and acres are gross.

 

3


 

 

Table of Contents

Part I.  Financial Information

Item I.  Financial Statements

Callon Petroleum Company

Consolidated Balance Sheets

(in thousands, except par and per share values and share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

ASSETS

 

Unaudited

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

1,922 

 

$

968 

Accounts receivable

 

39,385 

 

 

30,198 

Fair value of derivatives

 

16,763 

 

 

27,850 

Other current assets

 

1,410 

 

 

1,441 

Total current assets

 

59,480 

 

 

60,457 

Oil and natural gas properties, full cost accounting method:

 

 

 

 

 

  Evaluated properties

 

2,251,993 

 

 

2,077,985 

  Less accumulated depreciation, depletion and amortization

 

(1,618,027)

 

 

(1,478,355)

  Net oil and natural gas properties

 

633,966 

 

 

599,630 

  Unevaluated properties

 

141,581 

 

 

142,525 

Total oil and natural gas properties

 

775,547 

 

 

742,155 

Other property and equipment, net

 

7,905 

 

 

7,118 

Restricted investments

 

3,305 

 

 

3,810 

Deferred tax asset

 

 

 

44,688 

Deferred financing costs

 

15,858 

 

 

18,200 

Fair value of derivatives

 

2,203 

 

 

Other assets, net

 

426 

 

 

342 

Total assets

$

864,724 

 

$

876,770 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

$

76,162 

 

$

76,753 

Accrued interest

 

6,066 

 

 

5,993 

Cash-settled restricted stock unit awards

 

8,025 

 

 

3,856 

Asset retirement obligations

 

827 

 

 

4,747 

Deferred tax liability

 

 

 

6,214 

Fair value of derivatives

 

 

 

1,249 

Total current liabilities

 

91,080 

 

 

98,812 

Senior secured revolving credit facility

 

99,000 

 

 

35,000 

Secured second lien term loan

 

300,000 

 

 

300,000 

Asset retirement obligations

 

3,856 

 

 

1,927 

Cash-settled restricted stock unit awards

 

3,487 

 

 

7,175 

Other long-term liabilities

 

220 

 

 

121 

Total liabilities

 

497,643 

 

 

443,035 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, series A cumulative, $0.01 par value and $50.00 liquidation preference, 2,500,000 shares authorized: 1,578,948 and 1,578,948 shares outstanding, respectively

 

16 

 

 

16 

Common stock, $0.01 par value, 110,000,000 shares authorized; 66,279,074 and 55,225,288 shares outstanding, respectively

 

663 

 

 

552 

Capital in excess of par value

 

592,287 

 

 

526,162 

Accumulated deficit

 

(225,885)

 

 

(92,995)

Total stockholders’ equity

 

367,081 

 

 

433,735 

Total liabilities and stockholders’ equity

$

864,724 

 

$

876,770 

 

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

 

4


 

 

Table of Contents

Callon Petroleum Company

Consolidated Statements of Operations

(Unaudited; in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

  Oil sales

 

$

30,582 

 

$

36,346 

 

$

94,584 

 

$

104,965 

  Natural gas sales

 

 

3,734 

 

 

3,311 

 

 

9,365 

 

 

8,479 

Total operating revenues

 

 

34,316 

 

 

39,657 

 

 

103,949 

 

 

113,444 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

  Lease operating expenses

 

 

7,194 

 

 

6,270 

 

 

20,728 

 

 

14,863 

  Production taxes

 

 

2,583 

 

 

2,247 

 

 

7,800 

 

 

6,429 

  Depreciation, depletion and amortization

 

 

16,704 

 

 

16,115 

 

 

52,395 

 

 

38,635 

  General and administrative

 

 

4,302 

 

 

3,261 

 

 

22,167 

 

 

23,707 

  Accretion expense

 

 

142 

 

 

202 

 

 

485 

 

 

603 

  Write-down of oil and natural gas properties

 

 

87,301 

 

 

 

 

87,301 

 

 

  Rig termination fee

 

 

 

 

 

 

3,641 

 

 

  Gain on sale of other property and equipment

 

 

 

 

 

 

 

 

(1,080)

Total operating expenses

 

 

118,226 

 

 

28,095 

 

 

194,517 

 

 

83,157 

  Income (loss) from operations

 

 

(83,910)

 

 

11,562 

 

 

(90,568)

 

 

30,287 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

  Interest expense

 

 

5,603 

 

 

2,205 

 

 

15,567 

 

 

5,007 

  Gain on early extinguishment of debt

 

 

 

 

 

 

 

 

(3,205)

  Gain on derivative contracts

 

 

(23,283)

 

 

(9,944)

 

 

(17,463)

 

 

(2,746)

  Other income

 

 

(92)

 

 

(61)

 

 

(177)

 

 

(203)

Total other income

 

 

(17,772)

 

 

(7,800)

 

 

(2,073)

 

 

(1,147)

  Income (loss) before income taxes

 

 

(66,138)

 

 

19,362 

 

 

(88,495)

 

 

31,434 

     Income tax expense

 

 

45,667 

 

 

7,161 

 

 

38,474 

 

 

12,630 

     Net income (loss)

 

 

(111,805)

 

 

12,201 

 

 

(126,969)

 

 

18,804 

     Preferred stock dividends

 

 

(1,974)

 

 

(1,974)

 

 

(5,921)

 

 

(5,921)

 Income (loss) available to common stockholders

 

$

(113,779)

 

$

10,227 

 

$

(132,890)

 

$

12,883 

 Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

$

(1.72)

 

$

0.24 

 

$

(2.10)

 

$

0.31 

  Diluted

 

$

(1.72)

 

$

0.23 

 

$

(2.10)

 

$

0.30 

  Shares used in computing income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

 

66,277 

 

 

43,187 

 

 

63,265 

 

 

41,370 

  Diluted

 

 

66,277 

 

 

44,211 

 

 

63,265 

 

 

42,510 

 

 

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

 

5


 

 

Table of Contents

Callon Petroleum Company

Consolidated Statements of Cash Flows

(Unaudited; in thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

(126,969)

 

$

18,804 

Adjustments to reconcile net income (loss) to cash provided by operating activities:

 

 

 

 

 

 

  Depreciation, depletion and amortization

 

 

52,583 

 

 

39,493 

  Write-down of oil and natural gas properties

 

 

87,301 

 

 

  Accretion expense

 

 

485 

 

 

603 

  Amortization of non-cash debt related items

 

 

2,342 

 

 

494 

  Amortization of deferred credit

 

 

 

 

(433)

  Deferred income tax expense

 

 

38,474 

 

 

12,630 

  Net loss (gain) on derivatives, net of settlements

 

 

7,635 

 

 

(5,728)

  Gain on sale of other property and equipment

 

 

 

 

(1,080)

  Non-cash gain for early debt extinguishment

 

 

 

 

(3,205)

  Non-cash expense (benefit) related to equity share-based awards

 

 

(300)

 

 

432 

  Change in the fair value of liability share-based awards

 

 

4,759 

 

 

6,571 

  Payments to settle asset retirement obligations

 

 

(3,047)

 

 

(3,283)

  Changes in current assets and liabilities:

 

 

 

 

 

 

     Accounts receivable

 

 

(7,278)

 

 

(8,016)

     Other current assets

 

 

31 

 

 

802 

     Current liabilities

 

 

6,455 

 

 

3,449 

  Payments to settle vested liability share-based awards related to early retirements

 

 

(3,538)

 

 

(1,417)

  Payments to settle vested liability share-based awards

 

 

(3,925)

 

 

(2,052)

  Change in other long-term liabilities

 

 

100 

 

 

  Change in other assets, net

 

 

421 

 

 

(367)

     Net cash provided by operating activities

 

 

55,529 

 

 

57,697 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(178,548)

 

 

(188,793)

Deposit on acquisition

 

 

 

 

(10,629)

Proceeds from sales of mineral interests and equipment

 

 

348 

 

 

1,991 

    Net cash used in investing activities

 

 

(178,200)

 

 

(197,431)

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings on credit facility

 

 

130,000 

 

 

200,000 

Payments on credit facility

 

 

(66,000)

 

 

(169,610)

Payment of deferred financing costs

 

 

 

 

(3,068)

Issuance of common stock

 

 

65,546 

 

 

122,514 

Payment of preferred stock dividends

 

 

(5,921)

 

 

(5,921)

     Net cash provided by financing activities

 

 

123,625 

 

 

143,915 

Net change in cash and cash equivalents

 

 

954 

 

 

4,181 

  Balance, beginning of period

 

 

968 

 

 

3,012 

  Balance, end of period

 

$

1,922 

 

$

7,193 

 

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

 

 

 

 

 

6


 

 

Callon Petroleum Company

Notes to the Consolidated Financial Statements

( All dollar amounts in thousands, except per unit data)

 

INDEX TO THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

1.  

Description of Business and Basis of Presentation

7.

Fair Value Measurements

2.  

Oil and Natural Gas Properties

8.

Income Taxes

3.  

Acquisitions

9.

Asset Retirement Obligations

4.  

Earnings Per Share

10.

Equity Transactions

5.  

Borrowings

11.

Other

6.  

Derivative Instruments and Hedging Activities

 

 

 

Note 1 - Description of Business and Basis of Presentation

 

Description of business

 

Callon Petroleum Company is an independent oil and natural gas company established in 1950. The Company was incorporated under the laws of the state of Delaware in 1994 and succeeded to the business of a publicly traded limited partnership, a joint venture with a consortium of European investors and an independent energy company partially owned by a member of current management. As used herein, the “Company,” “Callon,” “we,” “us,” and “our” refer to Callon Petroleum Company and its predecessors and subsidiaries unless the context requires otherwise.

 

Callon is focused on the acquisition, development, exploration and exploitation of unconventional, onshore, oil and natural gas reserves in the Permian Basin in West Texas, and more specifically, the Midland Basin. The Company’s operations to date have been predominantly focused on horizontal drilling of several prospective intervals, including multiple levels of the Wolfcamp formation and, more recently, the Lower Spraberry shale . Callon has assembled a multi-year inventory of potential horizontal well locations and intends to add to this inventory through delineation drilling of emerging zones on our existing acreage and acquisition of additional locations through acreage purchases, joint ventures and asset swaps.  

 

Basis of presentation

 

Unless otherwise indicated, all dollar amounts included within the Footnotes to the Financial Statements are presented in thousands, except for per share and per unit data.

 

The interim consolidated financial statements of the Company have been prepared in accordance with (1) GAAP, (2) the SEC’s instructions to Quarterly Report on Form 10-Q and (3) Rule 10-01 of Regulation S-X, and include the accounts of Callon Petroleum Company, and its subsidiary, Callon Petroleum Operating Company (“CPOC”). CPOC also has subsidiaries, namely Callon Offshore Production, Inc. and Mississippi Marketing, Inc.

 

These interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The balance sheet at December 31, 2014 has been derived from the audited financial statements at that date. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ended December 31, 2015.

 

In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, including normal recurring adjustments and all intercompany account and transaction eliminations, necessary to present fairly the Company’s financial position, the results of its operations and its cash flows for the periods indicated. Certain prior year amounts have been reclassified to conform to current year presentation.

 

7


 

 

 

 

 

Footnotes to the Financial Statements (continued)

(Unless otherwise indicated, dollar amounts included in the footnotes to the financial

statements are presented in thousands, except for per share and per unit data)

 

 

Table of Contents

 

Recently issued accounting policies

 

In April 2015, the Financial Accounting Standards Board issued accounting standards update No. 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The standard requires that the costs for issuing debt should appear on the balance sheet as direct reduction from the debt’s carrying value. The guidance in ASU 2015-03 is effective for public entities for annual reporting periods beginning after December 15, 2015, including interim periods therein. Early adoption is permitted and is to be applied on retrospective basis. The Company is currently evaluating the method of adoption and impact this standard will have on its financial statements and related disclosures.

 

In August 2015, the FASB issued ASU No. 2015-15,   Interest –   Imputation of Interest   (Subtopic 835-30):   Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements   (“ASU 2015-15”). ASU 2015-15 updates the accounting guidance included in ASU 2015-03 a s a result of the June 18, 2015, Emerging Issues Task Force meeting, in which the SEC stated that the SEC staff would not object to an entity deferring and presenting costs related to revolving debt arrangements as an asset. The Company is currently evaluating the method of adoption and impact this standard will have on its financial statements and related disclosures.

 

N ote 2 - Oil and Natural Gas Properties  

 

The Company uses the full cost method of accounting for its exploration and development activities. Under this method of accounting, the cost of both successful and unsuccessful exploration and development activities are capitalized as oil and gas properties. Such amounts include the cost of drilling and equipping productive wells, dry hole costs, lease acquisition costs, delay rentals, interest capitalized on unevaluated leases, other costs related to exploration and development activities, and site restoration, dismantlement and abandonment costs capitalized in accordance with asset retirement obligation accounting guidance. Costs capitalized also include any internal costs that are directly related to exploration and development activities, including salaries and benefits, but do not include any costs related to production, general corporate overhead or similar activities.

 

Under full cost accounting rules, the Company reviews the carrying value of its proved oil and natural gas properties each quarter. Under these rules, capitalized costs of oil and natural gas properties, net of accumulated depreciation, depletion and amortization and deferred income taxes, may not exceed the present value of estimated future net cash flows from proved oil and natural gas reserves, discounted at 10%, plus the lower of cost or fair value of unevaluated properties, net of related tax effects (the full cost ceiling). These rules generally require pricing based on the preceding 12-months’ average oil and natural gas prices based on closing prices on the first day of each month and require a write-down if the net capitalized costs of proved oil and natural gas properties exceeds the full cost ceiling.  At September 30, 2015, the prices used in determining the estimated future net cash flows from proved reserves were $ 54. 48 per barrel of oil and $ 3. 53 per Mcf of natural gas. For the period ended September 30, 2015, the Company recognized a   write-down of oil and natural gas properties of $ 87,301   as a result of the ceiling test limitation.

 

No te 3 - Acquisitions  

 

On October 8, 2014, the Company completed the acquisition of certain undeveloped acreage and producing oil and gas properties located in Midland, Andrews, Ector and Martin Counties, Texas (the “Central Midland Basin Acquisition”) for an aggregate cash purchase price of $210,205. The Company assumed operatorship of the properties on November 1, 2014, and acquired a 62% working interest  ( 46.5% net revenue interest) in the Central Midland Basin Acquisition. The aggregate cash purchase price was funded with a combination of the net proceeds from an equity offering of $122,450 and a portion of the net proceeds from borrowings under a secured second lien term loan.

 

The Central Midland Basin Acquisition was accounted for under the acquisition method of accounting, which involves determining the fair value of the assets acquired and liabilities assumed. The following purchase price allocation is based on management’s estimates of the fair value of the assets acquired and liabilities assumed. The following table summarizes the acquisition date fair values of the net assets acquired:

 

 

 

 

 

Oil and natural gas properties

 

$

91,895 

Unevaluated oil and natural gas properties

 

 

118,450 

Asset retirement obligations

 

 

(140)

  Net assets acquired

 

$

210,205 

8


 

 

 

 

 

Footnotes to the Financial Statements (continued)

(Unless otherwise indicated, dollar amounts included in the footnotes to the financial

statements are presented in thousands, except for per share and per unit data)

 

 

Table of Contents

 

 

The following unaudited summary pro forma financial information for the three and nine   months ended September 30 , 2014 has been presented for illustrative purposes only and does not purport to represent what the Company’s results of operations would have been if the Central Midland Basin Acquisition had occurred as presented, or to project the Company’s results of operations for any future periods. The pro forma financial information was prepared assuming the Central Midland Basin Acquisition occurred as of January 1, 2013. The pro forma adjustments are based on available information and certain assumptions that management believes are reasonable, including revenue, lease operating expenses, production taxes, depreciation, depletion and amortization expense, accretion expense, interest expense and capitalized interest.  

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2014

 

September 30, 2014

Revenues

 

$

48,037 

 

$

142,040 

Income from operations

 

 

15,245 

 

 

45,543 

Income available to common stockholders

 

 

11,143 

 

 

16,686 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

Basic

 

$

0.19 

 

$

0.30 

Diluted

 

$

0.19 

 

$

0.29 

 

 

 

 

 

 

 

 

 

 

 

 

Note 4 - Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(share amounts in thousands)

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

Net income (loss)

 

$

(111,805)

 

$

12,201 

 

$

(126,969)

 

$

18,804 

Preferred stock dividends

 

 

(1,974)

 

 

(1,974)

 

 

(5,921)

 

 

(5,921)

Income (loss) available to common stockholders

 

$

(113,779)

 

$

10,227 

 

$

(132,890)

 

$

12,883 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

66,277 

 

 

43,187 

 

 

63,265 

 

 

41,370 

Dilutive impact of restricted stock

 

 

 

 

1,024 

 

 

 

 

1,140 

Weighted average shares outstanding for diluted loss per share

 

 

66,277 

 

 

44,211 

 

 

63,265 

 

 

42,510 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share

 

$

(1.72)

 

$

0.24 

 

$

(2.10)

 

$

0.31 

Diluted income (loss) per share

 

$

(1.72)

 

$

0.23 

 

$

(2.10)

 

$

0.30 

 

 

 

 

 

 

 

 

 

 

Stock options (a)

 

 

15 

 

 

30 

 

 

15 

 

 

30 

Restricted stock (a)

 

 

159 

 

 

 

 

159 

 

 

 

(a)

Shares excluded from the diluted earnings per share calculation because their effect would be anti-dilutive.

 

 

Note 5 - Borrowings  

 

The Company’s borrowings consisted of the following at:

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

Principal components:

 

 

 

 

 

 

Senior secured revolving credit facility

 

$

99,000 

 

$

35,000 

Secured second lien term loan

 

 

300,000 

 

 

300,000 

  Total carrying value of borrowings

 

$

399,000 

 

$

335,000 

 

Senior secured revolving credit facility (the “Credit Facility”)

 

On March 11, 2014, the Company entered into the Fifth Amended and Restated Credit Agreement to the Credit Facility with a maturity date of March 11, 2019 .   JPMorgan Chase Bank, N.A. is Administrative Agent, and participating lenders include Regions Bank, Citibank, N.A., Capital One, N.A., KeyBank, N.A., Whitney Bank, IberiaBank, N.A., OneWest Bank, N.A., SunTrust Bank and

9


 

 

 

 

 

Footnotes to the Financial Statements (continued)

(Unless otherwise indicated, dollar amounts included in the footnotes to the financial

statements are presented in thousands, except for per share and per unit data)

 

 

Table of Contents

 

Royal Bank of Canada. The total notional amount available under the Credit Facility is   $500,000 . Amounts borrowed under the Credit Facility may not exceed the borrowing base, which is generally reviewed on a semi-annual basis. As of September 30, 2015 ,   the Credit Facility’s borrowing base was $250,000 . The Credit Facility is secured by first preferred mortgages covering the Company’s major producing properties. Subsequent to September 30, 2015 the Credit Facility’s borrowing base was increased to $ 300,000 following the lenders’ regularly scheduled semi-annual redetermination process.

 

As of September 30, 2015 , the balance outstanding on the Credit Facility was $99,000 with a weighted-average interest rate of 2.21% , calculated as the LIBOR plus a tiered rate ranging from 1.75% to 2.75% , which is determined based on utilization of the facility. In addition, the Credit Facility carries a commitment fee of 0.5% per annum, payable quarterly, on the unused portion of the borrowing base.  

 

Secured second lien term loan (the “Term Loan”)

 

On October 8, 2014, the Company entered into the Term Loan with an aggregate amount of up to $300,000 and a maturity date of October 8, 2021 . The Royal Bank of Canada is Administrative Agent, and participants include several institutional lenders. The Term Loan may be prepaid at the Company’s option, subject to a prepayment premium. The prepayment amount (i)   is 102% if the prepayment event occurs prior to October 8, 2016, (ii) is 101% if the prepayment event occurs on or after October 8, 201 6 but before October 8, 201 7 , and (ii i ) is   100% for prepayments made on or after October 8, 201 7 . The Term Loan is secured by junior liens on properties mortgaged under the Credit Facility, subject to an intercreditor agr eement.

 

As of September 30, 2015 , the balance outstanding on the Term Loan was $300,000 with an interest rate of 8.5% , calculated at a rate of LIBOR   (subject to a floor rate of 1.0% ) plus 7.5% per annum. The Company can elect a LIBOR rate based on various tenors , and is currently incurring interest based on an underlying three-month LIBOR rate , which was last elected in October 2015 .

 

Restrictive covenants

 

The Company’s Credit Facility and Term Loan contain various covenants including restrictions on additional indebtedness, payment of cash dividends and maintenance of certain financial ratios. The Company was in compliance with these covenants at September 30, 2015 .

 

Note 6 - Derivative Instruments and Hedging Activities

 

Objectives and strategies for using derivative instruments

 

The Company is exposed to fluctuations in oil and natural gas prices received for its production. Consequently, the Company believes it is prudent to manage the variability in cash flows on a portion of its oil and natural gas production. The Company utilizes a mix of collars, swaps, puts, calls and similar derivative financial instruments to manage fluctuations in cash flows resulting from changes in commodity prices. The Company does not use these instruments for speculative or trading purposes.

 

Counterparty risk and offsetting

 

The use of derivative instruments exposes the Company to the risk that a counterparty will be unable to meet its commitments. While the Company monitors counterparty creditworthiness on an ongoing basis, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, the Company may not realize the benefit of some of its derivative instruments under lower commodity prices while continuing to be obligated under higher commodity price contracts subject to any right of offset under the agreements. Counterparty credit risk is considered when determining the fair value of a derivative instrument; see   Note 7 for additional information regarding fair value.

 

The Company executes commodity derivative contracts under master agreements that have netting provisions that provide for offsetting assets against liabilities. In general, if a party to a derivative transaction incurs an event of default, as defined in the applicable agreement, the other party will have the right to demand the posting of collateral, demand a cash payment transfer or terminate the arrangement.

10


 

 

 

 

 

Footnotes to the Financial Statements (continued)

(Unless otherwise indicated, dollar amounts included in the footnotes to the financial

statements are presented in thousands, except for per share and per unit data)

 

 

Table of Contents

 

 

Financial statement presentation and settlements

 

Settlements of the Company’s derivative instruments are based on the difference between the contract price or prices specified in the derivative instrument and a benchmark price, such as the NYMEX price. To determine the fair value of the Company’s derivative instruments, the Company utilizes present value methods that include assumptions about commodity prices based on those observed in underlying markets. See Note 7 for additional information regarding fair value.

 

Derivatives not designated as hedging instruments

 

The Company records its derivative contracts at fair value in the consolidated balance sheet and records changes in fair value as a gain or loss on derivative contracts in the consolidated statement of operations. Cash settlements are also recorded as gain or loss on derivative contracts in the consolidated statement of operations.

 

The following table reflects the fair value of the Company’s derivative instruments for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Presentation

 

Asset Fair Value

 

Liability Fair Value

 

Net Derivative Fair Value

Commodity

 

Classification

 

Line Description

 

09/30/2015

 

12/31/2014

 

09/30/2015

 

12/31/2014

 

09/30/2015

 

12/31/2014

Natural gas

 

Current

 

Fair value of derivatives

 

$

407 

 

$

1,262 

 

$

 

$

(7)

 

$

407 

 

$

1,255 

Oil

 

Current

 

Fair value of derivatives

 

 

16,356 

 

 

26,588 

 

 

 

 

(1,242)

 

 

16,356 

 

 

25,346 

Oil

 

Non-current

 

Fair value of derivatives

 

 

2,203 

 

 

 

 

 

 

 

 

2,203 

 

 

 

 

Totals

 

 

 

$

18,966 

 

$

27,850 

 

$

 

$

(1,249)

 

$

18,966 

 

$

26,601 

 

As previously discussed, the Company’s derivative contracts are subject to master netting arrangements. The Company’s policy is to present the fair value of derivative contracts on a net basis in the consolidated balance sheet. The following presents the impact of this presentation to the Company’s recognized assets and liabilities for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

Presented without

 

 

 

As Presented with

 

 

Effects of Netting

 

Effects of Netting

 

Effects of Netting

Current assets: Fair value of derivatives

 

$

17,539 

 

$

(776)

 

$

16,763 

Long-term assets: Fair value of derivatives

 

 

2,203 

 

 

 

 

2,203 

Current liabilities: Fair value of derivatives

 

$

(776)

 

$

776 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

Presented without

 

 

 

As Presented with

 

 

Effects of Netting

 

Effects of Netting

 

Effects of Netting

Current assets: Fair value of derivatives

 

$

27,850 

 

$

 

$

27,850 

Current liabilities: Fair value of derivatives

 

$

(1,249)

 

$

 

$

(1,249)

 

For the periods indicated, the Company recorded the following related to its derivatives in the consolidated statement of operations as gain or loss on derivative contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

Oil derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on settlements

 

$

9,399 

 

$

(497)

 

$

23,863 

 

$

(2,838)

Net gain (loss) on fair value adjustments

 

 

13,758 

 

 

10,351 

 

 

(6,787)

 

 

5,805 

  Total gain (loss)

 

$

23,157 

 

$

9,854 

 

$

17,076 

 

$

2,967 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on settlements

 

$

390 

 

$

35 

 

$

1,235 

 

$

(144)

Net gain (loss) on fair value adjustments

 

 

(264)

 

 

55 

 

 

(848)

 

 

(77)

  Total gain (loss)

 

$

126 

 

$

90 

 

$

387 

 

$

(221)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gain on derivative contracts

 

$

23,283 

 

$

9,944 

 

$

17,463 

 

$

2,746 

 

11


 

 

 

 

 

Footnotes to the Financial Statements (continued)

(Unless otherwise indicated, dollar amounts included in the footnotes to the financial

statements are presented in thousands, except for per share and per unit data)

 

 

Table of Contents

 

Derivative positions

 

Listed in the tables below are the outstanding oil and natural gas derivative contracts as of September 30, 2015 :  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

December 31,

Oil contracts

 

2015

 

2016

 

2016

 

2016

 

2016

Swap contracts (NYMEX):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total volume (MBbls)

 

 

442 

 

 

182 

 

 

182 

 

 

184 

 

 

184 

  Weighted average price per Bbl

 

$

64.93 

 

$

58.23 

 

$

58.23 

 

$

58.23 

 

$

58.23 

Swap contracts (Midland basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

differentials):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (MBbls)

 

 

327 

 

 

364 

 

 

364 

 

 

368 

 

 

368 

  Weighted average price per Bbl

 

$

(2.38)

 

$

0.17 

 

$

0.17 

 

$

0.17 

 

$

0.17 

Collar contracts combined with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

short puts (WTI, three-way collar):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (MBbls)

 

 

 

 

182 

 

 

182 

 

 

184 

 

 

184 

   Weighted average price per Bbl

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Ceiling (short call)

 

$

 

$

65.00 

 

$

65.00 

 

$

65.00 

 

$

65.00 

     Floor (long put)

 

$

 

$

55.00 

 

$

55.00 

 

$

55.00 

 

$

55.00 

     Short put

 

$

 

$

40.33 

 

$

40.33 

 

$

40.33 

 

$

40.33 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

December 31,

Natural gas contracts

 

2015

 

2016

 

2016

 

2016

 

2016

Collar contracts combined with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

short puts (three-way collar):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (BBtu)

 

 

161 

 

 

 

 

 

 

 

 

  Weighted average price per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  MMBtu

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Ceiling (short call)

 

$

4.32 

 

$

 

$

 

$

 

$

     Floor (long put)

 

$

3.85 

 

$

 

$

 

$

 

$

     Short put

 

$

3.25 

 

$

 

$

 

$

 

$

Swap contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total volume (BBtu)

 

 

228 

 

 

 

 

 

 

 

 

  Weighted average price per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  MMBtu

 

$

3.96 

 

$

 

$

 

$

 

$

Short call contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Short call volume (BBtu)

 

 

111 

 

 

 

 

 

 

 

 

  Short call price per MMBtu

 

$

5.00 

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 7 - Fair Value Measurements

 

The fair value hierarchy included in GAAP gives the highest priority to Level 1 inputs, which consist of unadjusted quoted prices for identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments. Level 3 valuations are derived from inputs that are significant and unobservable, and these valuations have the lowest priority.

 

Fair Value of Financial Instruments

 

Cash, cash equivalents, and restricted investments. The carrying amounts for these instruments approximate fair value due to the short-term nature or maturity of the instruments.

 

Debt. The Company’s debt is recorded at the carrying amount in the consolidated balance sheet. The carrying amount of floating-rate debt approximated fair value because the interest rates were variable and reflective of market rates.

12


 

 

 

 

 

Footnotes to the Financial Statements (continued)

(Unless otherwise indicated, dollar amounts included in the footnotes to the financial

statements are presented in thousands, except for per share and per unit data)

 

 

Table of Contents

 

 

Assets and liabilities measured at fair value on a recurring basis

 

Certain assets and liabilities are reported at fair value on a recurring basis in the consolidated balance sheet. The following methods and assumptions were used to estimate fair value:

 

Commodity derivative instruments. The fair value of commodity derivative instruments is derived using an income approach valuation model that utilizes market-corroborated inputs that are observable over the term of the derivative contract. The Company’s fair value calculations also incorporate an estimate of the counterparties’ default risk for derivative assets and an estimate of the Company’s default risk for derivative liabilities. The Company believes that the majority of the inputs used to calculate the commodity derivative instruments fall within Level 2 of the fair   value hierarchy based on the wide availability of quoted market prices for similar commodity derivative contracts. See Note 6 for additional information regarding the Company’s derivative instruments.

 

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Presentation as of September 30, 2015

 

Classification

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

Fair value of derivatives

 

Current assets

 

$

 

$

16,763 

 

$

 

$

16,763 

Other assets, net

 

Long-term assets

 

 

 

 

2,203 

 

 

 

 

2,203 

  Total net assets

 

 

 

$

 

$

18,966 

 

$

 

$

18,966 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Presentation as of December 31, 2014

 

Classification

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

Fair value of derivatives

 

Current assets

 

$

 

$

27,850 

 

$

 

$

27,850 

Fair value of derivatives

 

Current liabilities

 

 

 

 

(1,249)

 

 

 

 

(1,249)

  Total net assets

 

 

 

$

 

$

26,601 

 

$

 

$

26,601 

 

 

 

 

 

 

 

 

 

 

 

 

Note 8 - Income Taxes

 

The Company typically provides for income taxes at a statutory rate of   35 %   adjusted for permanent differences expected to be realized, which primarily relate to   non-deductible executive compensation expenses and state income taxes. As a result of the write-down of oil and natural gas properties discussed in Note 2 , the Company has incurred a cumulative   three   year loss. Because of the impact the cumulative loss has on the determination of the recoverability of deferred tax assets through future earnings, the Company assessed the ability to realize its deferred tax assets based on the future reversals of existing deferred tax liabilities. Accordingly, the Company established a valuation allowance for a portion of the deferred tax asset. The valuation allowance was   $ 68,818   as of September 30, 2015 .

 

Note 9 - Asset Retirement Obligations

 

The table below summarizes the Company’s asset retirement obligations activity for the nine months ended September 30, 2015 :  

 

 

 

 

Asset retirement obligations at January 1, 2015

 

$

6,674 

Accretion expense

 

 

485 

Liabilities incurred

 

 

121 

Liabilities settled

 

 

(2,923)

Revisions to estimate

 

 

326 

Asset retirement obligations at end of period

 

 

4,683 

Less: Current asset retirement obligations

 

 

(827)

  Long-term asset retirement obligations at September 30, 2015

 

$

3,856 

 

Certain of the Company’s operating agreements require that assets be restricted for abandonment obligations. Amounts recorded in the consolidated balance sheet at September 30, 2015 as long-term restricted investments were $3,305 . These assets, which primarily include short-term U.S. Government securities, are held in abandonment trusts dedicated to pay future abandonment costs for several of the Company’s oil and natural gas properties.

 

13


 

 

 

 

 

Footnotes to the Financial Statements (continued)

(Unless otherwise indicated, dollar amounts included in the footnotes to the financial

statements are presented in thousands, except for per share and per unit data)

 

 

Table of Contents

 

Note 10 - Equity Transactions

 

10% Series A Cumulative Preferred Stock (“Preferred Stock”)

 

Holders of the Company’s Preferred Stock are entitled to receive, when, as and if declared by our Board of Directors, out of funds legally available for the payment of dividends, cumulative cash dividends at a rate of 10.0% per annum of the $50.00 liquidation preference per share (equivalent to $5.00 per annum per share). Dividends are payable quarterly in arrears on the last day of each March, June, September and December when, as and if declared by our Board of Directors. Preferred Stock dividends were $1,974   and $5,921   for the three and nine months ended September 30, 2015 and 2014 , respectively.

 

The Preferred Stock has no stated maturity and is not subject to any sinking fund or other mandatory redemption. On or after May 30, 2018, the Company may, at its option, redeem the Preferred Stock, in whole or in part, by paying $50.00 per share in cash , plus any accrued and unpaid dividends to the redemption date.

 

Following a change of control, as defined in the prospectus supplement, the Company will have the option to redeem the Preferred Stock, in whole but not in part for $50.00 per share in cash, plus accrued and unpaid dividends (whether or not declared), to the redemption date. If the Company does not exercise its option to redeem the Preferred Stock upon a change of control, the holders of the Preferred Stock have the option to convert the Preferred Stock into a number of shares of the Company’s common stock based on the value of the common stock on the date of the change of control as determined under the certificate of designations for the Preferred Stock. If the change of control occurred on September 30, 2015 , and the Company did not exercise its right to redeem the Preferred Stock, using the closing price of $ 7.29 as the value of a share of common stock, each share of Preferred Stock would be convertible into approximately 6.9 shares of common stock. If the Company exercises its redemption rights relating to shares of Preferred Stock, the holders of Preferred Stock will not have the conversion right described above.

 

Common Stock    

 

On March 13, 2015, the Company completed an underwritten public offering of 9,000,000 shares of its common stock at $6.55 per share, before underwriting discounts, and the exercise in full by the underwriters of their option to purchase 1,350,000 additional shares of common stock at $6.55 per share, before underwriting discounts. The Company received net proceeds of approximately $65,546, after the underwriting discounts and estimated offering costs.

 

Note 11 - Other

 

Operating leases

 

As of September 30, 2015 , the Company had contracts for two horizontal drilling rigs (the “Cactus 1 Rig” and “Cactus 2 Rig”). The Cactus 1 Rig  w as initially contracted for a term of two years in April 2012. The Cactus 2 Rig was initially contracted for a term of two years in April 2014. The Cactus 2 Rig replaced a previously contracted horizontal drilling rig, which was cancelled in March 2014. In March 2015, the Company extended the terms of its Cactus 1 Rig and Cactus 2 Rig to end in July 2018 and August 2018, respectively. The rig lease agreements include early termination provisions that obligate the Company to reduced minimum rentals pursuant to a “standby” dayrate for the term of the agreement. These payments would be reduced assuming the lessor is able to re-charter the rig and staffing personnel to another l essee.

 

In March 2015, the Company decided to terminate its one-year contract for a vertical rig (effective April 2015) and is required to pay approximately $3,641 in reduced rental payments over the remainder of the lease term ending November 2015 , unless the lessor is able to re-charter the rig to another lessee. This amount was recognized as rig termination fee on the c onsolidated s tatements of operations for the three and nine months ended September 30, 2015 .   As of September 30, 2015 ,   the Company ha s paid $2,800 of the estimated   $3,641 in reduced rental payments.

 

14


 

Table of Contents

 

Special Note Regarding Forward Looking Statements

 

All statements, other than statements of historical fact, may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements that address activities, outcomes and other matters that should or may occur in the future, including, without limitation, statements regarding the financial position, business strategy, production and reserve quantities, present value and growth and other plans and objectives for our future operations, are forward-looking statements. Although we believe the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance.

 

Forward-looking statements include the items identified in the preceding paragraph, information concerning possible or assumed future results of operations and other statements in this Form 10-Q identified by words such as “anticipate,” “project,” “intend,” “estimate,” “expect,” “believe,” “predict,” “budget,” “projection,” “goal,” “plan,” “forecast,” “target” or similar expressions.

 

You should not place undue reliance on forward-looking statements. They are subject to known and unknown risks, uncertainties and other factors that may affect our operations, markets, products, services and prices , and cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with forward-looking statements, risks, uncertainties and factors that could cause our actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:  

 

·

the timing and extent of changes in market conditions and prices for oil, natural gas and NGLs (including regional basis differentials),

·

our ability to transport our production to the most favorable markets or at all,

·

the timing and extent of our success in discovering, developing, producing and estimating reserves,

·

our ability to fund our planned capital investments,

·

the impact of government regulation, including regulation of endangered species, any increase in severance or similar taxes, legislation relating to hydraulic fracturing, the climate and over-the-counter derivatives,

·

the costs and availability of oilfield personnel services and drilling supplies, raw materials, and equipment and services,

·

our future property acquisition or divestiture activities,

·

the effects of weather,

·

increased competition,

·

the financial impact of accounting regulations and critical accounting policies,

·

the comparative cost of alternative fuels,

·

conditions in capital markets, changes in interest rates and the ability of our lenders to provide us with funds as agreed,

·

credit risk relating to the risk of loss as a result of non-performance by our counterparties, and

·

any other factors listed in the reports we have filed and may file with the SEC.

 

We caution you that the forward-looking statements contained in this Form 10-Q are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and sale of oil and natural gas. These risks include, but are not limited to, the risks described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014 (the  “ 2014 Annual Report on Form 10-K”), and all quarterly reports on Form 10-Q filed subsequently thereto.

 

Should one or more of the risks or uncertainties described above or in our 2014 Annual Report on Form 10-K occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically disclaim all responsibility to publicly update any information contained in a forward-looking statement or any forward-looking statement in its entirety and therefore disclaim any resulting liability for potentially related damages.

 

All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

 

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General

 

The following management’s discussion and analysis describes the principal factors affecting the Company’s results of operations, liquidity, capital resources and contractual cash obligations. This discussion should be read in conjunction with the accompanying unaudited consolidated financial statements and our 2014 Annual Report on Form 10-K, which include additional information about our business practices, significant accounting policies, risk factors, and the transactions that underlie our financial results. Our website address is www.callon.com . All of our filings with the SEC are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC. Information on our website does not form part of this report on Form 10-Q.

 

We are an independent oil and natural gas company established in 1950. We are focused on the acquisition, development, exploration and exploitation of unconventional, onshore, oil and natural gas reserves in the Permian Basin in West Texas, and more specifically, the Midland Basin. Our operating culture is center ed on responsible development of hydrocarbon resources, safety and the environment, which we believe strengthens our operati onal performance. Our drilling activity to date ha s been predominantly focused on the horizontal d evelopment of several prospective intervals, including multiple levels of the Wolfcamp formation and , more recently, the Lower Spraberry shale . We have assembled a multi-year inventory of potential horizontal well locations and intend to add to this inventory through delineation drilling of em erging zones on our existing acreage and acquisition of additional locations through acreage purchases, joint ventures and asset swaps. Our production was approximately 79% oil and 21% natural gas for the nine months ended   September 30, 2015 . On September 30, 2015 , our acreage position in the Permian Basin was approximately 17,395 net acres .   T he Company   no longer holds an acreage position in the Northern Midland Basin after s elling 40 gross and net acres around a produ cing well and releas ing all remaining undeveloped acreage in the Northern Midland Basin in 2015 .  

 

Commodity Prices

 

T he prices for oil and natural gas remain extremely volatile and sometimes experience large fluctuations as a result of relatively small changes in supply, weather conditions, economic conditions and actions by OPEC and other countries and g overnment actions.  Prices of oil and natural gas will affect the following aspects of our business:

 

·

our revenues, cash flows and earnings;

·

the amount of oil and natural gas that we are economically able to produce;

·

our ability to attract capital to finance our operations and cost of the capital;

·

the amount we are allowed to borrow under our credit facilit y ; and

·

the value of our oil and natural gas properties.

 

For the three months ended September 30, 2015, the average NYMEX price for a barrel of oil was   $ 46.41 per Bbl , compared to $ 97.24 per Bbl   for the same period of 2014. For the nine months ended September 30, 2015, the average NYMEX price for a barrel of oil was $ 51.00 per Bbl   compared to $ 99.66 per Bbl   for the same period of 2014. The NYMEX price for a barrel of oil ranged from a low of $ 38.24 per Bbl   to a high of $ 61.43 per Bbl   for the nine months ended September 30, 2015.  

 

For the three months ended September 30, 2015, the average NYMEX price   for natural gas was  $ 2.73 per MMBtu compared to approximately $ 3.95 per MMBtu for the same period in 2014.  For the nine months ended September 30, 2015, the average NYMEX price for natural gas was $ 2.76 per MMBtu compared to $ 4.41 per MMBtu for the same period in 2014. The NYMEX price for natural gas ranged from a low of $ 2.49 per MMBtu to a high of $ 3.23 per MMBtu for the nine months ended September 30, 2015.

 

The Company uses the full cost method of ac counting for its exploration and development activities. Under full cost accounting rules, the Company reviews the carrying value of its proved oil and natural gas properties each quarter. Under these rules, capitalized costs of oil and natural gas properties, net of accumulated depreciation, depletion and amortization and deferred income taxes, may not exceed the present value of estimated future net cash flows from proved oil and natural gas reserves, discounted at 10%, plus the lower of cost or fair value of unevaluated properties, net of related tax effects (the full cost ceiling). These rules generally require pricing based on the preceding 12-months’ average oil and natural gas prices based on closing prices on the first day of each month and require a write-down if the net capitalized costs of proved oil and natural gas properties exceeds the full cost ceiling. For the period ended September 30, 2015, the Company recorded an $87.3 million write-down of oil and natural gas properties as a result of the ceiling test limitation driven primarily by the significant decrease in oil prices beginning in the fourth quarter of 2014. Based on

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prevailing commodity prices in the current environment, we expect to incur additional ceiling test write-downs in the future. However, we do not expect such prevailing commodity prices to have significant adverse effects on our proved oil and gas reserves. See Note 2 in the Footnotes to the Financial Statements for more information.

 

The table below presents results of the full cost ceiling test as of September 30, 2015, along with various pricing scenarios to demonstrate the sensitivity of our full cost ceiling to change s in 12 - month average oil and natural gas prices. Prices do not include the impact of oil and natural gas derivative instruments. This sensitivity analysis is as of September 30, 2015 and, accordingly, does not consider drilling results, production, changes in oil and natural gas prices, and changes in future development and operating costs subsequent to September 30, 2015 that may require revisions to our proved reserve estimates and resulting estimated future net cash flows used in the full cost ceiling test.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12-Month Average Prices

 

Excess (Deficit) of full cost ceiling over net capitalized costs

 

Change in excess (deficit) of full cost ceiling over net capitalized costs

Pricing Scenarios

 

Oil ($/Bbl)

 

Natural gas ($/Mcf)

 

(In millions)

 

(In millions)

September 30, 2015 Actual

 

$

54.48 

 

$

3.53 

 

$

(87,301)

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Combined price sensitivity

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas +10%

 

$

59.93 

 

$

3.89 

 

$

33,020 

 

$

120,321 

Oil and natural gas -10%

 

$

49.03 

 

$

3.18 

 

$

(207,737)

 

$

(120,436)

Oil price sensitivity

 

 

 

 

 

 

 

 

 

 

 

 

Oil +10%

 

$

59.93 

 

$

3.53 

 

$

20,080 

 

$

107,381 

Oil -10%

 

$

49.03 

 

$

3.53 

 

$

(194,748)

 

$

(107,447)

Natural gas sensitivity

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas +10%

 

$

54.48 

 

$

3.89 

 

$

(74,322)

 

$

12,979 

Natural gas -10%

 

$

54.48 

 

$

3.18 

 

$

(100,292)

 

$

(12,991)

 

 

 

 

 

Operational Highlights

 

Our production grew 73%   and 82%   for the three and nine months ended September 30, 2015 ,   respectively, compared to the same period s of 2014 , increasing to 896 MBOE from 519 MBOE and 2,533 MBOE from 1,392 MBOE for the comparative three and nine months periods, respectively.  

 

 

 

 

 

 

 

 

 

 

 

 

Net Production (MBOE)

 

 

Three Months Ended September 30,

 

 

2015

 

2014

 

Change

 

% Change

Southern Midland Basin

 

613 

 

393 

 

220 

 

56% 

Central Midland Basin

 

283 

 

123 

 

160 

 

130% 

Northern Midland Basin

 

 

 

(3)

 

(100)%

  Total

 

896 

 

519 

 

377 

 

73% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Production (MBOE)

 

 

Nine Months Ended September 30,

 

 

2015

 

2014

 

Change

 

% Change

Southern Midland Basin

 

1,601 

 

1,080 

 

521 

 

48% 

Central Midland Basin

 

931 

 

297 

 

634 

 

213% 

Northern Midland Basin

 

 

15 

 

(14)

 

(93)%

  Total

 

2,533 

 

1,392 

 

1,141 

 

82% 

 

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The following table sets forth productive wells as of September 30, 2015 :

 

 

 

 

 

 

 

 

 

 

 

 

Oil Wells

 

Natural Gas Wells

 

 

Gross

 

Net

 

Gross

 

Net

Working interest

 

348 

 

259.9 

 

 

Royalty interest

 

 

0.1 

 

 

  Total

 

351 

 

260.0 

 

 

 

A well is categorized as an oil well or a natural gas well based upon the ratio of oil to natural gas reserves on a BOE basis. However, most of our wells produce both oil and natural gas.

 

The following table summarizes the Company’s drilling activity in the Permian Basin for periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2015

 

 

Drilled

 

Completed (a)

 

Awaiting Completion

 

 

Gross

 

Net

 

Gross

 

Net

 

Gross

 

Net

Southern Midland Basin horizontal wells

 

 

1.0 

 

 

2.0 

 

 

1.0 

Central Midland Basin horizontal wells

 

 

4.1 

 

 

5.0 

 

 

0.4 

  Total Midland Basin   horizontal wells

 

 

5.1 

 

 

7.0 

 

 

1.4 

 

(a)

Completions include wells drilled prior to the third quarter of 2015 .

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2015

 

 

Drilled

 

Completed (a)

 

Awaiting Completion

 

 

Gross

 

Net

 

Gross

 

Net

 

Gross

 

Net

Southern Midland Basin horizontal wells

 

12 

 

11.8 

 

14 

 

13.8 

 

 

1.0 

Central Midland Basin horizontal wells

 

15 

 

8.7 

 

13 

 

8.3 

 

 

0.4 

Central Midland Basin vertical wells

 

 

 

 

0.4 

 

 

  Total Midland Basin wells

 

27 

 

20.5 

 

28 

 

22.5 

 

 

1.4 

 

(a)

Completions include wells drilled prior to 2015.

 

Liquidity and Capital Resources

 

Historically, our primary sources of capital have been cash flows from operations, borrowings from financial institutions, the sale of debt and equity securities and asset dispositions. Our primary uses of capital have been for the acquisition, development, exploration and exploitation of oil and natural gas properties, in addition to refinancing of debt instr uments. In March 2015, we completed a common stock offering to raise additional capital, and we continue to evaluate other sources of capital to complement our cash flows from operations as we pursue our long-term growth plan in the Permian Basin.

 

Based upon current commodity price expectations for 2015 , we believe that our cash flow from operations, proceeds from our March 2015 equity offering and borrowings under our Credit Facility and Term Loan will be sufficient to fund our operations for 2015, including working capital requirements. However, future cash flows are subject to a number of variables, including forecasted production volumes and commodity prices. We are the operator for 100% of our remaining 2015 capital program and, as a result, the amount and timing of a substantial portion of our planned capital expenditures is largely discretionary. Accordingly, we may determine it prudent to curtail drilling and completion operations due to capital constraints or reduced returns on investment as a result of commodity price weakness.

 

Cash and cash equivalents increased $0.9 million in the nine months ended September 30, 2015 to $1.9 million compared to $1.0 million at December 31, 2014 .  

 

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Liquidity and cash flow

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

(dollars in millions)

 

2015

 

2014

Net cash provided by operating activities

 

$

55.5 

 

$

57.7 

Net cash used in investing activities

 

 

(178.2)

 

 

(197.4)

Net cash provided by financing activities

 

 

123.6 

 

 

143.9 

  Net change in cash

 

$

0.9 

 

$

4.2 

 

Operating activities.  For the nine months ended September 30, 2015 , net cash provided by operating activities was $55.5 million compared to net cash provided by operating activities of   $57.7 million for the same period in 2014 .   The decrease was predominantly attributable to a decline in oil revenues precipitated by depressed commodity prices ,   offset by gains on the settlement of derivative contracts and a 73% increase in oil produ ction .   Also contributing to the decrease were increases in lease operating expenses, production taxes, interest expense, nonrecurring early ret irement expenses, and   payments on cash-settle d   restricted stock unit   (“RSU”) awards .   P roduction, realized prices, and operating expenses are discussed below in Results of Operations. Se e   Notes 6 and 7  i n the Footnotes to the Financial Statements for a reconciliation of the components of the Company’s derivative contracts and disclosures related to derivative instruments including their composition and valuation.  

 

Investing activities.  For the nine months ended September 30, 2015 , net cash used in investing activities was $178.2 million compared to $197.4 million for the same period in 2014 . The $19.2   million decrease in cash used in investing activities was primarily attributable to a $10.6 million decrease in deposits on acquisitions for which there w ere none in the current period and a $10. 3 million decrease in capital expenditures, offset by a $1.6 million decrease in proceeds resulting from the sale of mineral interests and equipment. The $10. 3 million decrease in capital expenditures was driven by a decrease in acreage acquisition costs, a reduction i n drilling and completion costs, and reductions in capitalized general and administrative costs allocated directly to exploration and development projects. Offsetting these costs wa s a n increase in capital expenditures related to capitalized interest. General and administrative expenses and capitalized interest are discussed below in Results of Operations.

 

Capital expenditures , on a cash b a sis,   i nclude the following for the periods indicated (in millions):

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

2015

 

2014

Southern Midland Basin

 

$

104.1 

 

$

127.7 

Central Midland Basin

 

 

55.7 

 

 

40.4 

Northern Midland Basin

 

 

 

 

0.4 

  Total operational expenditures

 

 

159.8 

 

 

168.5 

 

 

 

 

 

 

 

Capitalized general and administrative costs allocated directly to

 

 

 

 

 

 

exploration and development projects

 

 

7.9 

 

 

9.4 

Capitalized interest

 

 

8.0 

 

 

1.7 

  Total capitalized general and administrative and interest costs

 

 

15.9 

 

 

11.1 

 

 

 

 

 

 

 

Total operational expenditures inclusive of capitalized general

 

 

 

 

 

 

and administrative and interest costs

 

 

175.7 

 

 

179.6 

 

 

 

 

 

 

 

Acquisitions

 

 

2.8 

 

 

9.2 

  Total capital expenditures

 

$

178.5 

 

$

188.8 

 

Financing activities .  For the nine months ended September 30, 2015 , net cash provided by financing activities was $123.6 million compared to cash provided by financing activities of $143.9 million during the same period of 2014 . Net cash provided by financing activities during the nine months ended September 30, 2015 included $65.5 million of net proceeds from the issuance of common stock and a net $64.0 million of borrowings on our Credit Facility. In addition, the Company paid approximately $5.9 million in preferred stock dividends. Se e   Note 10  i n the Footnotes to the Financial Statements for additional information about the Company’s equity offering.

 

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Operational Capital Budget and Third Quarter Summary

 

In order to facilitate its tactical shift to the Central Midland area, the Company increased its operational capital budget to $180 million (on an accrual basis), with the increase primarily related to the facilities and infrastructure investment required to accommodate an increased level of activity. Callon also increased its drilling and completion budget to reflect longer completed lateral lengths, enhanced completion designs and non-consenting partner capital, offset in part by continued achieved reductions in well costs throughout the year. A reconciliation of the revised capital budget to the original plan is provided below (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

2015 Operational Capital Budget

 

 

Drilling and Completion

 

Facilities

 

Total

Original operational capital budget

 

$

150.5 

 

$

12.0 

 

$

162.5 

Enhanced completions/Longer laterals/Non-consents

 

 

7.5 

 

 

 

 

7.5 

Central Midland: Accelerated facilities investments

 

 

 

 

6.0 

 

 

6.0 

East Bloxom: Tank battery upgrade and repairs

 

 

 

 

4.0 

 

 

4.0 

  Revised operational capital budget

 

$

158.0 

 

$

22.0 

 

$

180.0 

 

Operational capital expenditures on an accrual basis were $149.5 million for the nine months ended September 30, 2015.

 

For the nine months ended September 30, 2015, our horizontal drilling program was primarily focused on program development of established Upper and Lower Wolfcamp B zones and the Lower Spraberry zones, in both the Southern and Central Midland Basin with lateral lengths ranging from approximately 5,000 feet to 10,000 feet. We expect our remaining 2015 horizontal drilling program to be focused on the development of the Lower Sp r aberry zones in the Central Midland Basin with lateral lengths ranging from approximately 5,000 feet to 10,000 feet.

 

In addition to the operational capital expenditures above, we budgeted a total of $17.2 million for (i) capitalized general and administrative costs and (ii) certain retained plugging and abandonment costs related to divested Gulf of Mexico shelf assets.

 

We currently expect to fund our remaining 2015 capital program from cash flow from operations and borrowing s under our Credit Facility.

 

 

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Results of Operations

 

The following table sets forth certain operating information with respect to the Company’s oil and natural gas operations for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

Change

 

% Change

Net production:

 

 

 

 

 

 

 

 

 

 

 

  Oil (MBbls)

 

 

689 

 

 

425 

 

 

264 

 

62% 

  Natural gas (MMcf)

 

 

1,239 

 

 

565 

 

 

674 

 

119% 

     Total (MBOE)

 

 

896 

 

 

519 

 

 

377 

 

73% 

  Average daily production (BOE/d)

 

 

9,739 

 

 

5,641 

 

 

4,098 

 

73% 

  % oil (BOE basis)

 

 

77% 

 

 

82% 

 

 

 

 

 

Average realized sales price:

 

 

 

 

 

 

 

 

 

 

 

  Oil (Bbl) (excluding impact of cash settled derivatives)

 

$

44.39 

 

$

85.52 

 

$

(41.13)

 

(48)%

  Oil (Bbl) (including impact of cash settled derivatives)

 

 

58.03 

 

 

84.35 

 

 

(26.32)

 

(31)%

  Natural gas (Mcf) (excluding impact of cash settled derivatives)

 

$

3.01 

 

$

5.86 

 

$

(2.85)

 

(49)%

  Natural gas (Mcf) (including impact of cash settled derivatives)

 

 

3.33 

 

 

5.92 

 

 

(2.59)

 

(44)%

  Total (BOE) (excluding impact of cash settled derivatives)

 

$

38.30 

 

$

76.41 

 

$

(38.11)

 

(50)%

  Total (BOE) (including impact of cash settled derivatives)

 

 

49.22 

 

 

75.52 

 

 

(26.30)

 

(35)%

Oil and natural gas revenues (in thousands):

 

 

 

 

 

 

 

 

 

 

 

  Oil revenue

 

$

30,582 

 

$

36,346 

 

$

(5,764)

 

(16)%

  Natural gas revenue

 

 

3,734 

 

 

3,311 

 

 

423 

 

13% 

     Total

 

$

34,316 

 

$

39,657 

 

$

(5,341)

 

(13)%

Additional per BOE data:

 

 

 

 

 

 

 

 

 

 

 

  Sales price (excluding impact of cash settled derivatives)

 

$

38.30 

 

$

76.41 

 

$

(38.11)

 

(50)%

     Lease operating expense

 

 

8.03 

 

 

12.08 

 

 

(4.05)

 

(34)%

     Production taxes

 

 

2.88 

 

 

4.33 

 

 

(1.45)

 

(33)%

  Operating margin

 

$

27.39 

 

$

60.00 

 

$

(32.61)

 

(54)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

Change

 

% Change

Net production:

 

 

 

 

 

 

 

 

 

 

 

  Oil (MBbls)

 

 

2,012 

 

 

1,162 

 

 

850 

 

73% 

  Natural gas (MMcf)

 

 

3,124 

 

 

1,381 

 

 

1,743 

 

126% 

     Total (MBOE)

 

 

2,533 

 

 

1,392 

 

 

1,141 

 

82% 

  Average daily production (BOE/d)

 

 

9,278 

 

 

5,099 

 

 

4,179 

 

82% 

  % oil (BOE basis)

 

 

79% 

 

 

83% 

 

 

 

 

 

Average realized sales price:

 

 

 

 

 

 

 

 

 

 

 

  Oil (Bbl) (excluding impact of cash settled derivatives)

 

$

47.01 

 

$

90.33 

 

$

(43.32)

 

(48)%

  Oil (Bbl) (including impact of cash settled derivatives)

 

 

58.87 

 

 

87.89 

 

 

(29.02)

 

(33)%

  Natural gas (Mcf) (excluding impact of cash settled derivatives)

 

$

3.00 

 

$

6.14 

 

$

(3.14)

 

(51)%

  Natural gas (Mcf) (including impact of cash settled derivatives)

 

 

3.39 

 

 

6.04 

 

 

(2.65)

 

(44)%

  Total (BOE) (excluding impact of cash settled derivatives)

 

$

41.04 

 

$

81.50 

 

$

(40.46)

 

(50)%

  Total (BOE) (including impact of cash settled derivatives)

 

 

50.95 

 

 

79.35 

 

 

(28.40)

 

(36)%

Oil and natural gas revenues (in thousands):

 

 

 

 

 

 

 

 

 

 

 

  Oil revenue

 

$

94,584 

 

$

104,965 

 

$

(10,381)

 

(10)%

  Natural gas revenue

 

 

9,365 

 

 

8,479 

 

 

886 

 

10% 

     Total

 

$

103,949 

 

$

113,444 

 

$

(9,495)

 

(8)%

Additional per BOE data:

 

 

 

 

 

 

 

 

 

 

 

  Sales price (excluding impact of cash settled derivatives)

 

$

41.04 

 

$

81.50 

 

$

(40.46)

 

(50)%

     Lease operating expense

 

 

8.18 

 

 

10.68 

 

 

(2.50)

 

(23)%

     Production taxes

 

 

3.08 

 

 

4.62 

 

 

(1.54)

 

(33)%

  Operating margin

 

$

29.78 

 

$

66.20 

 

$

(36.42)

 

(55)%

 

 

 

 

 

 

 

 

 

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Table of Contents

 

 

 

 

Revenues

 

The following table is intended to reconcile the change in oil, natural gas and total revenue for the respective periods presented by reflecting the effect of changes in volume and in the underlying commodity prices.

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Oil

 

Natural Gas

 

Total

Revenues for the three months ended  September 30, 2014

 

$

36,346 

 

$

3,311 

 

$

39,657 

Volume increase

 

 

22,519 

 

 

3,946 

 

 

26,465 

Price decrease

 

 

(28,283)

 

 

(3,523)

 

 

(31,806)

Net increase (decrease)

 

 

(5,764)

 

 

423 

 

 

(5,341)

Revenues for the three months ended  September 30, 2015

 

$

30,582 

 

$

3,734 

 

$

34,316 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Oil

 

Natural Gas

 

Total

Revenues for the nine months ended  September 30, 2014

 

$

104,965 

 

$

8,479 

 

$

113,444 

Volume increase

 

 

76,759 

 

 

10,705 

 

 

87,464 

Price decrease

 

 

(87,140)

 

 

(9,819)

 

 

(96,959)

Net increase (decrease)

 

 

(10,381)

 

 

886 

 

 

(9,495)

Revenues for the nine months ended  September 30, 2015

 

$

94,584 

 

$

9,365 

 

$

103,949 

 

Oil revenue  

 

For the quarter ended September 30, 2015 , oil revenues of $30.6 million de creased   $5.8 million, or 16% , compared to revenues of $36.3 million for the same period of 2014 .   T he de crease in oil revenue was primarily attributable to a 48% decrease in the average realized sales price offset by a   62% increase in production. The increase in production was primarily attributable to increased production from our Permian properties result ing from an increased number of producing wells from acquisitions and our horizontal drilling program ,   offset by   normal and expected declines from our existing wells.

 

For the nine months ended   September 30, 2015 , oil revenues of $94.6 million decreased $10.4 million, or 10% , compared to revenues of $105.0 million for the same period of 2014 . The decrease in oil revenue was primarily attributable to a 48% decrease in the average realized sales price offset by a 73% increase in production. The increase in production was primarily attributable to increased production from our Permian properties resulting from an increased number of producing wells from acquisitions and our horizontal drilling program , offset by normal and expected declines from our existing wells.

 

Natural gas revenue (including NGLs)

 

Natural gas revenues o f   $3.7 million in creased $0.4 million, or 13% , duri ng the three months ended   September 30, 2015 compared to $3.3 million for the same period of   2014 . The in crease primarily relates to a   119% increase in natural gas volumes and was pr edominant ly offset by a   49% decrease in the average price realized, which fell to $3.01 per Mcf from $5.86 per Mcf ,   reflecti ng decreases in both natural gas and natural gas liquids prices. The in crease in production was primarily attributable to increased production from our Permian properties resulting from an increased number of producing wells as mentioned above.

 

Natural gas revenues o f   $9.4 million increased $0.9 million, or 10% , du ring the nine months ended   September 30, 2015 compared to $8.5 million for the same period of 2014 . The increase primarily relates to a 126% increase in natural gas volumes and was pr edominant ly offset by a 51% decrease in the average price realized, which fell to $3.00 per Mcf from $6.14 per Mcf ,   reflecti ng decreases in both natural gas and natural gas liquids prices. The increase in production was primarily attributable to increased production from our Permian properties resulting from an increased number of producing wells as mentioned above.

 

 

 

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Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per unit amounts)

 

Three Months Ended September 30,

 

 

 

 

 

Per

 

 

 

 

Per

 

Total Change

 

BOE Change

 

 

2015

 

BOE

 

2014

 

BOE

 

$

 

%

 

$

 

%

Lease operating expenses

 

$

7,194 

 

$

8.03 

 

$

6,270 

 

$

12.08 

 

924 

 

15% 

 

(4.05)

 

(34)%

Production taxes

 

 

2,583 

 

 

2.88 

 

 

2,247 

 

 

4.33 

 

336 

 

15% 

 

(1.45)

 

(33)%

Depreciation, depletion and amortization

 

 

16,704 

 

 

18.64 

 

 

16,115 

 

 

31.05 

 

589 

 

4% 

 

(12.41)

 

(40)%

General and administrative

 

 

4,302 

 

 

4.80 

 

 

3,261 

 

 

6.28 

 

1,041 

 

32% 

 

(1.48)

 

(24)%

Accretion expense

 

 

142 

 

 

0.16 

 

 

202 

 

 

0.39 

 

(60)

 

(30)%

 

(0.23)

 

(59)%

Write-down of oil and natural gas properties

 

 

87,301 

 

 

nm

 

 

 

 

 

87,301 

 

nm

 

nm

 

nm

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

Per

 

 

 

 

Per

 

Total Change

 

BOE Change

 

 

2015

 

BOE

 

2014

 

BOE

 

$

 

%

 

$

 

%

Lease operating expenses

 

$

20,728 

 

$

8.18 

 

$

14,863 

 

$

10.68 

 

5,865 

 

39% 

 

(2.50)

 

(23)%

Production taxes

 

 

7,800 

 

 

3.08 

 

 

6,429 

 

 

4.62 

 

1,371 

 

21% 

 

(1.54)

 

(33)%

Depreciation, depletion and amortization

 

 

52,395 

 

 

20.68 

 

 

38,635 

 

 

27.76 

 

13,760 

 

36% 

 

(7.08)

 

(26)%

General and administrative

 

 

22,167 

 

 

8.75 

 

 

23,707 

 

 

17.03 

 

(1,540)

 

(6)%

 

(8.28)

 

(49)%

Accretion expense

 

 

485 

 

 

0.19 

 

 

603 

 

 

0.43 

 

(118)

 

(20)%

 

(0.24)

 

(56)%

Write-down of oil and natural gas properties

 

 

87,301 

 

 

nm

 

 

 

 

 

87,301 

 

nm

 

nm

 

nm

Rig termination fee

 

 

3,641 

 

 

nm

 

 

 

 

 

3,641 

 

nm

 

nm

 

nm

Gain on sale of other property and equipment

 

 

 

 

 

 

(1,080)

 

 

nm

 

1,080 

 

nm

 

nm

 

nm

 

*nm = not meaningful

 

Lease operating expenses (“LOE”) .   These are daily costs incurred to extract oil and natural gas out of the ground, together with the daily costs incurred to maintain our producing properties. Such costs also include maintenance, repairs and workover expenses related to our oil and natural gas properties.

 

LOE for the three months ended   September 30, 2015 incre ased by 15% to $7.2 million compared to $6.3 million for the same period of 2014   primarily due to the growth in Permian production and operations as a result of our acquisition efforts and horizontal drilling program . LOE per BOE for the three months ended September 30, 2015  w as $8.03   per BOE compared to   $12.08 per BOE for the same period of 2014 ,   which was primarily attributable to a decrease in the number of workovers period over period.   Higher production volumes also contributed to the 34% per BOE decrease for the three months ended September 30, 2015 .

 

LOE for the nine months ended   September 30, 2015 increased by 39% to $20.7 million compared to $14.9 million for the same period of 2014 primarily due to the growth in Permian production and operations as a result of our acquisition efforts and horizontal drilling program . LOE per BOE for the nine months ended September 30, 2015   was $8.18   per BOE   compared to   $10.68 per BOE for the same period of 2014 ,   which was primarily attributable to a decrease in the number of workovers period over period. Higher production volumes also contributed to the 23% per BOE decrease for the nine months ended   September 30, 2015 .

 

Production taxes. Production taxes include severance and ad valorem taxes. In general, production taxes are directly related to commodity price changes; however, severance taxes are based upon current year commodity prices, whereas ad valorem taxes are based upon prior year commodity prices. Severance taxes are paid on produced oil and natural gas based on a percentage of revenues from products sold at fixed rates established by federal, state or local taxing authorities. Where available, we benefit from tax credits and exemptions in our various taxing jurisdictions. In the counties where our production is located, w e are also subject to ad valorem taxes , which are generally based on the taxing jurisdictions’ valuation of our oil and gas properties .  

 

Production taxes for the three months ended   September 30, 2015   in creased by 15% to $2.6 million compared to $2.2 million for the same period of 2014 . The in crease was primarily due to a n   in crease in ad valorem taxes attributable to a greater number of producing wells as a result of our acquisition efforts and horizontal drilling program. Offsetting this in crease was a reduction in severance taxes as a result of the decline of oil and natural gas revenue as previously mentioned. On a per BOE basis, production taxes for the three months ended   September 30, 2015 decreased by 33% compared to the same period of 2014 .  

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Production taxes for the nine months ended   September 30, 2015   in creased by 21% to $7.8 million compared to $6.4 million for the same period of 2014 .   The increase was primarily due to an increase in ad valorem taxes attributable to a greater number of producing wells as a result of our acquisition efforts and horizontal drilling program. Offsetting this increase was a reduction in severance taxes as a result of the decline of oil and natural gas revenue as previously mentioned. On a per BOE basis, production taxes for the nine months ended ,   September 30, 2015 decreased by 33% compared to the same period of 2014 .

 

Depreciation, depletion and amortization (“DD&A”). Under the full cost accounting method, we capitalize costs within a cost center and then systematically expense those costs on a units-of-production basis based on proved oil and natural gas reserve quantities. We calculate depletion on the following types of costs: (i) all capitalized costs, other than the cost of investments in unevaluated properties, less accumulated amortization; (ii) the estimated future expenditures to be incurred in developing proved reserves; and (iii) the estimated dismantlement and abandonment costs, net of estimated salvage values. Depreciation of other property and equipment is computed using the straight line method over their estimated useful lives, which range from three to fifteen years.

 

For the three and nine months ended September 30, 2015 ,   D D &A increased 4% to $16.7 million and 36% to $52.4 million, respectively, over the comparative periods of 2014 . These increases are primarily due to production increases of 73% and 82% for the respective periods as previously discussed. For the three months ended   September 30, 2015 ,   DD&A decreased 40% per BOE to $18.64 per BOE compared to $31.05 per BOE for the same period of 2014 .   Similarly, f or the   nine months ended   September 30, 2015 , DD&A decreased 26% per BOE to $20.68 per BOE compared to $27.76 per BOE for the same period of 2014 . The decreases for both periods are attributable to our increased estimated proved reserves relative to our depreciable asset base.

 

General and administrative, net of amounts capitalized (“G&A”). These are costs incurred for overhead, including payroll and benefits for our corporate staff, severance and early retirement expenses, costs of maintaining our headquarters, costs of managing our production and development operations, franchise taxes, depreciation of corporate level assets, public company costs, vesting of equity and liability awards under share-based compensation plans and related mark-to-market valuation adjustments over time, fees for audit and other professional services , and legal compliance.

 

G&A for the three months ended   September 30, 2015   in creased to $ 4.3 million compared to $3.3 million for the same period of 2014 . G&A expenses for the periods indicated include the following (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30,

 

 

2015

 

2014

 

$ Change

 

% Change

Recurring expenses

 

 

 

 

 

 

 

 

 

 

 

  G&A

 

$

3.5 

 

$

4.0 

 

$

(0.5)

 

(13)%

  Share-based compensation

 

 

0.6 

 

 

0.7 

 

 

(0.1)

 

(14)%

  Fair value adjustments of cash-settled RSU awards

 

 

0.1 

 

 

(1.5)

 

 

1.6 

 

107% 

Non-recurring expenses

 

 

 

 

 

 

 

 

 

 

 

  Expense related to a threatened proxy contest

 

 

0.1 

 

 

0.1 

 

 

 

—%

Total G&A expenses

 

$

4.3 

 

$

3.3 

 

$

1.0 

 

30% 

 

G&A for the nine months ended   September 30, 2015   de creased to $22.2  m illion compared to $23.7 million for the same period of 2014 . G&A expenses for the periods indicated include the following (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

2015

 

2014

 

$ Change

 

% Change

Recurring expenses

 

 

 

 

 

 

 

 

 

 

 

  G&A

 

$

11.2 

 

$

12.1 

 

$

(0.9)

 

(8)%

  Share-based compensation

 

 

1.6 

 

 

2.0 

 

 

(0.4)

 

(20)%

  Fair value adjustments of cash-settled RSU awards

 

 

4.3 

 

 

5.7 

 

 

(1.4)

 

(24)%

Non-recurring expenses

 

 

 

 

 

 

 

 

 

 

 

  Early retirement expenses

 

 

3.6 

 

 

1.4 

 

 

2.2 

 

157% 

  Early retirement expenses related to share-based compensation

 

 

1.1 

 

 

1.1 

 

 

 

—%

  Expense related to a threatened proxy contest

 

 

0.4 

 

 

1.4 

 

 

(1.0)

 

(71)%

Total G&A expenses

 

$

22.2 

 

$

23.7 

 

$

(1.5)

 

(6)%

 

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Table of Contents

Accretion expense. The Company is required to record the estimated fair value of liabilities for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Interest is accreted on the present value of the ARO and reported as accretion expense within operating expenses in the consolidated statements of operations.

 

Accretion expense related to our ARO decrease d   30%   and 20%   for the three and nine months ended September 30, 2015 , respectively, c ompared to the same period s of 2014 . Accretion expense generally correlates with the Company’s ARO , which was $4.7  m illion at September 30, 2015   as compared to   $6.4 million at September 30, 2014 . S ee Note 9 in the Footnotes to the Financial Statements for additional information regarding the Company’s ARO.

 

Write-down of oil and natural gas properties. During the third quarter of 2015, the Company reco gnized a write-down of oil and natural gas properties of $87.3 million as a result of the ceiling test limitation. No write-down was reco gnized during the comparable prior year periods. See Note 2 in the Footnotes to the Financial Statements for additional information.   Based on prevailing commodity prices in the current environment, we expect to incur additional ceiling test write-downs in the future.

 

R ig termination f ee .   During the first quarter of 2015 ,   the Company recognized $3.6   million in expense related to the early termination of the contract for its vertical rig. See Note 11   in the Footnotes to the Financial Statements for additional information.

 

Gain on sale of other property and equipment. During 2014, the Company entered into an agreement to sell certain specialized deep water equipment that resulted in a gain on the sale of oth er property and equipment of $1.1 million .

 

Other Income and Expenses and Preferred Stock Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Three Months Ended September 30,

 

 

2015

 

2014

 

 

$ Change

 

% Change

Interest expense

 

$

5,603 

 

$

2,205 

 

$

3,398 

 

154% 

Gain on derivative contracts

 

 

(23,283)

 

 

(9,944)

 

 

(13,339)

 

134% 

Other income

 

 

(92)

 

 

(61)

 

 

(31)

 

51% 

  Total

 

$

(17,772)

 

$

(7,800)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

$

45,667 

 

$

7,161 

 

$

38,506 

 

538% 

Preferred stock dividends

 

 

(1,974)

 

 

(1,974)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2015

 

2014

 

 

$ Change

 

% Change

Interest expense

 

$

15,567 

 

$

5,007 

 

$

10,560 

 

211% 

Gain on early extinguishment of debt

 

 

 

 

(3,205)

 

 

3,205 

 

(100)%

Gain on derivative contracts

 

 

(17,463)

 

 

(2,746)

 

 

(14,717)

 

536% 

Other income, net

 

 

(177)

 

 

(203)

 

 

26 

 

(13)%

  Total

 

$

(2,073)

 

$

(1,147)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

$

38,474 

 

$

12,630 

 

$

25,844 

 

205% 

Preferred stock dividends

 

 

(5,921)

 

 

(5,921)

 

 

 

—%

 

 

Interest expense .   Interest expense incurred during the three months ended   September 30, 2015 increased $3.4 million compared to the same period of 2014 . The increase is primarily attributable to $ 5. 3 million in expense related to a higher outstanding debt balance in 2015 compared to the corresponding period of the prior year. Offsetting the increase is a $ 1.9 million increase in capitalized interest compared to the 2014 period, resulting from a higher average unevaluated property balance for the three months ended ,   September 30, 2015 as compared to the same period of 2014 .

 

Interest expense incurred during the nine months ended   September 30, 2015 increased $10.6 million compared to the same period of 2014 . The increase is primarily attributable to $ 1 8.1 million in expense related to a higher outstanding debt balance in 2015 compared to the corresponding period of the prior year. Offsetting the increase is a $6.2 million increase in capitalized interest compared to the 2014 period, resulting from a higher average unevaluated property balance for the nine months ended ,   September 30, 2015 as

25


 

Table of Contents

compared to the same period of 2014, and a $1. 3 million decrease in interest expense related to the full redemption of our Senior Notes in April 2014 .

 

Gain on early extinguishment of debt. During April 2014, the Company completed a full redemption of the remaining $53.3 million carrying value of its outstanding Senior Notes. The carrying value included $48.5 million of principal value and $4.8 million of unamortized deferred credit. The Company recognized a net $3.2 million gain on early extinguishment of debt, comprised of the recognition of $4.8 million in deferred credit, offset by $1.6 million of redemption expenses.

 

Gain on derivative contracts. For the three and nine months ended September 30, 2015 , t he net gain on derivative contrac ts was $23.3 million and $17.5 million ,   respectively, compared to a $9.9 million and $2.7 million net gain for the same period s of 2014 , respectively. See Notes 6 and 7 in the Footnotes to the Financial Statements for a reconciliation of the components of the Company’s derivative contracts and disclosures related to derivative instruments including their composition and valuation.

 

Income tax expense. The Company had an income tax expense of $45.7 million for the three months ended   September 30, 2015 compared to an income tax expense of $7.2 million for the same period of 2014 .   Similarly, the Company had an income tax expense of $38.5 million for the nine months ended   September 30, 2015 compared to an income tax expense of $12.6 million for the same period of 2014 .   The increase in income tax expense is primarily related to the establishment of a valuation allowance of $68.8 million in the th ird quarter of 2015 and the difference in the amount of income (loss) before income taxes between periods. See Note 8 in the Footnotes to the Financial Statements for additional information.

 

Preferred S tock dividends. Preferred S tock dividends for the three and nine months ended September 30, 2015  w ere consistent with the same period s of 2014 . Dividends reflect a 10% dividend rate and $78.9 million liquidation value. See Note 10   in the Footnotes to the Financial Statements for additional information .

 

 

26


 

Table of Contents

Item 3. Quantitative and Qualitative Disclosur es about Market Risk

 

We are exposed to a variety of market risks including commodity price risk, interest rate risk and counterparty and customer risk. We address these risks through a program of risk management including the use of derivative instruments.

 

Com modity price risk

 

The Company’s revenues are derived from the sale of its oil and natural gas production. The prices for oil and natural gas remain extremely volatile and sometimes experience large fluctuations as a result of relatively small changes in supply, weather conditions, economic conditions and government actions. From time to time, the Company enters into derivative financial instruments to manage oil and natural gas price risk , related both to NYMEX benchmark prices and regional basis differentials . The total volumes which we hedge through the use of our derivative instruments varies from period to period; however, generally our objective is to hedge approximately 50% to 75% of our anticipated internally forecast production for the next 12 to 24 months , subject to the covenants under our Credit Facility . Our hedge policies and objectives may change significantly with movements in commodities prices or futures prices, in addition to modification of our capital spending plans related to operational activities and acquisitions.

 

As of October 30, 2015 , we had commodity hedging contracts linked to NY MEX benchmark pricing, covering approximately 6 0 % and 38 %   of our expected oil and natura l gas production , respectively, for the fourth quarter of 201 5 , based on the midpoint of publicly disclosed guidance as of November 4, 2015 .   In addition, we had commodity hedging contracts linked to Midland WTI basis differentials relative to Cushing covering approximately 44 % o f our expected oil production for the fourth quarter of 2015, based on the midpoint of publicly disclosed oil production guidance as of November 4, 2015 .   Our actual production may vary from the amounts estimated, perhaps materially. See Note 6   in the Footnotes to the Financial Statements for a description of the Company’s outstanding derivative contracts at September 30, 2015 and derivative contracts established subsequent to that date.

 

The Company may utilize fixed price swaps, which reduce the Company’s exposure to decreases in commodity prices and limit the benefit the Company might otherwise have received from any increases in commodity prices. Swap contracts may also be enhanced by the simultaneous sale of call or put options to effectively increase the effective swap price as a result of the receipt of premiums from the option sales. Additionally, the Company may sell put options or call options in conjunction with a swap and use the proceeds to increase the fixed price received.

 

The Company may utilize price collars to reduce the risk of changes in oil and natural gas prices. Under these arrangements, no payments are due by either party as long as the applicable market price is above the floor price (purchased put option) and below the ceiling price (sold call option) set in the collar. If the price falls below the floor, the counter-party to the collar pays the difference to the Company, and if the price rises above the ceiling, the counterparty receives the difference from the Company. Additionally, the Company may sell put options at a price lower than the floor price in conjunction with a collar (three-way collar) and use the proceeds to increase either or both the floor or ceiling prices.

 

The Company may purchase put options, which reduce the Company’s exposure to decreases in oil and natural gas prices while allowing realization of the full benefit from any increases in oil and natural gas prices. If the price falls below the floor, the counterparty pays the difference to the Company.

 

The Company enters into these various agreements from time to time to reduce the effects of volatile oil and natural gas prices and does not enter into derivative transactions for speculative purposes. Presently, none of the Company’s derivative positions are designated as hedges for accounting purposes.

 

Interest rate risk

 

On September 30, 2015 ,   the Company’s debt consisted of $300.0 million related to its Term Loan and $99.0 million related to its Credit Facility. The Company is subject to market risk exposure related to changes in interest rates on our indebtedness under the Term Loan and Credit Facility . As of September 30, 2015 , the weighted average interest rate on our Credit Facility borrowings was 2.21%   and the interest rate on our Term Loan borrowings was 8.50% . An increase or decrease of 1% in the interest rate would have a corresponding increase or decrease in our annual net income of approximately $4.0 million based on the $399.0 million outstanding in the aggregate under the two facilities on September 30, 2015 .   The Company is also subject to market risk exposure related to changes

27


 

Table of Contents

in the underlying LIBOR-based interest rate used for the Term Loan to the extent that available LIBOR election options exceed the 1.0% floor rate.   See Note 5 to the Consolidated Financial Statements for more information on the Company’s interest rates on debt.

 

Counterparty and customer credit r isk

 

The Company’s principal exposures to credit risk are through receivables from the sale of our oil and natural gas production, joint interest receivables and receiv ables resulting from derivative financial contracts .  

 

The Company markets its oil and natural gas production to energy marketing companies. We are subject to credit risk due to the concentration of our oil and natural gas receivables with several significant customers. We do not require any of our customers to post collateral, and the inability of our significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results. At September 30, 2015 our receivables from the sale of our oil and natural gas production were approximately $18.2 million.

 

Joint interest receivables arise from billings to entities that own partial interests in the wells we operate. These entities participate in our wells primarily based on their ownership in leases on which we have or intend to drill. We have little ability to control whether these entities will participate in our wells. At September 30, 2015 our joint interest receivables were approximately $17.6 million.

 

The Company’s oil and natural gas derivative arrangements expose us to credit risk in the event of nonperformance by counterparties. Most of t he counterparties on our derivative instruments currently in place are lenders under our Credit Facility. We are likely to enter into additional derivative instruments with these or other lenders under our Credit Facility, representing institutions with an investment grade ratings. We have existing International Swap Dealers Association Master Agreements (“ISDA Agreements”) with our derivative counterparties. The terms of the ISDA Agreements provide us and the counterparties with rights of set off upon the occurrence of defined acts of default by either us or a counterparty to a derivative, whereby the party not in default may set off all derivative liabilities owed to the defaulting party against all derivative asset receivables from the defaulting party.

 

Item 4. Controls and Procedures

 

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is accumulated and communicated to the issuer’s management, including its principal executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our principal executive and principal financial officers have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2015 .

 

Changes in internal control over financial reporting .   There were no changes to our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

 

 

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Part II.  Other Information

 

Item 1.  Legal Proceedings

 

We are a defendant in various legal proceedings and claims, which arise in the ordinary course of our business. We do not believe the ultimate resolution of any such actions will have a material effect on our financial position or results of operations.

 

Item 1A. Risk Factors

 

There have been no material changes with respect to the risk factors disclosed in our 201 4 Annual Report on Form 10-K.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

None.

 

Item 5.  Other Information

 

None.

 

 

 

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Table of Contents

Item 6.   Exhibits

 

The following exhibits are filed as part of this Form 10-Q.

 

 

 

 

Exhibit

 

 

Number

 

Description

 

3.           Articles of Incorporation and By-Laws

 

 

 

 

3.1 (a)

 

Certificate of Incorporation of the Company, as amended through May 20 , 2015

 

 

 

3.2

 

Certificate of Designation of Rights and Preferences of 10.0% Series A Cumulative Preferred Stock (incorporated by reference to Exhibit 3.5 of the Company’s Form 8-A filed on May 23, 2013)

 

 

 

3.3

 

Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-4 filed August 4, 1994, Reg. No. 33-82408)

 

 

 

 

4.           Instruments defining the rights of security holders, including indentures

 

 

 

 

4.1

 

Specimen Common Stock Certificate (incorporated by reference from Exhibit 4.1 of the Company’s Registration Statement on Form S-4, filed August 4, 1994, Reg. No. 33-82408)

 

 

 

4.2

 

Form of Certificate representing the 10.0% Series A Cumulative Preferred Stock (incorporated herein by reference to Exhibit 4.1 of the Company’s Form 8-A filed on May 23, 2013)

 

 

 

 

 

 

 

10 .            Material Contracts

 

 

 

 

10 .1 (a)

 

First Amendment to the Callon Petroleum Company 2011 Omnibus Incentive Plan

 

31.           Section 13a-14 Certifications

 

 

 

 

31.1 (a)

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2 (a)

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

32.           Section 1350 Certifications

 

 

 

 

32.1 (b)

 

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101. (c)         Interactive Data Files

 

 

(a)

Filed herewith.

(b)

Furnished herewith. Pursuant to SEC Release No. 33-8212, this certification will be treated as “accompanying” this report and not “filed” as part of such report for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of Section 18 of the Exchange Act, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, except to the extent that the registrant specifically incorporates it by reference.

(c)

Pursuant to Rule 406T of Regulation S-T, these interactive data files are being furnished herewith and are not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability.

 

 

 

30


 

Table of Contents

SIGNATURES

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

Callon Petroleum Company

 

 

 

 

Signature

Title

Date

 

 

 

/s/ Fred L. Callon

President and Chief Executive Officer

November 4 , 2015

Fred L. Callon

 

 

 

 

 

/s/ Joseph C. Gatto, Jr.

Senior Vice President,

November 4 , 2015

Joseph C. Gatto, Jr.

Chief Financial Officer and Treasurer

 

 

31


EXHIBIT 3.1

 

STATE OF DELAWARE

SECRETARY OF STATE

DIVISION OF CORPORATIONS

FILED 10:00 AM 03/29/1994

344051804 - 2390003

 

CERTIFICATE OF INCORPORATION

OF

CALLON PETROLEUM HOLDING COMPANY

 

ARTICLE ONE

 

The name of the Corporation is Callon Petroleum Holding Company.

 

ARTICLE TWO

 

The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Wilmington, New Castle County, Delaware, 19801, and the name of its registered agent at such address is The Corporation Trust

Company.

 

ARTICLE THREE

 

The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware ("Act"),

 

ARTICLE FOUR

 

The Corporation shall have authority to issue two classes of stock, and the total number authorized shall be one (1) share of Common Stock of the par value of one cent ($.01) each, and one (1) share of Preferred Stock of the par

value of one cent ($.01) each. A description of the different classes of stock of the Corporation and a statement of the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, in respect of each class of such stock are as follows:

 

1.

ISSUANCE IN CLASS OR SERIES. The Common Stock or Preferred Stock may be issued from time to time in one or more series, or either or both of the Common and Preferred Stock may be divided into additional classes and such classes into one or more series. The terms of a class or series, including all rights and preferences, shall be as specified in the resolution or resolutions adopted by the Board of Directors designating such class or series which resolution or resolutions the Board of Directors is hereby expressly authorized to adopt. Such resolution or resolutions with respect to a class or series shall specify all or such of the rights or preferences of such class or series as the Board of Directors shall determine, including, without limitation, any or all of the following, if applicable: (a) the number of shares to constitute such class or series and the distinctive designation thereof; (b) the dividend or manner for determining the dividend payable with respect to the shares of such class or series and the date or dates from which dividends shall accrue, whether such dividends shall be cumulative, and, if cumulative, the date or dates from which dividends shall accumulate and whether the shares in such class or series shall be entitled to preference or priority over any other class or series of stock of the Corporation with respect to payment of  dividends; (c) the terms and conditions, including price or a manner for determining the price, of redemption, if any, of the shares of such class or series; (d) the terms and conditions of a retirement or sinking fund, if any, for the purchase or redemption of the shares of such class or series; (e) the amount which the shares of such class or series shall be entitled to receive, if any, in the event of any liquidation, dissolution or winding up of the Corporation and whether such shares shall be entitled to a preference or priority over shares of another class or series with respect to amounts received in connection with any liquidation, dissolution or winding up of the Corporation; (f) whether the shares of such class or series shall be convertible into, or exchangeable for, shares of stock of any other class or classes, or any other series of the same or any other class or classes of

1

 


 

stock, of the Corporation and the terms and conditions of any such conversion or exchange; (g) the voting rights, if any, of shares of stock of such class or series in addition to those granted herein, if any; (h) the status as to reissuance or sale of shares of such class or series redeemed, purchased or otherwise reacquired or surrendered to the Corporation on conversion; (i) the conditions and restrictions, if any, on the payment of dividends or on the making of other distributions on, or the purchase,  redemption or other acquisition by the Corporation or any subsidiary, of any other class or series of stock of the Corporation ranking junior to such shares as to dividends or upon liquidation; (j) the conditions, if any, on the creation of indebtedness of the Corporation, or any subsidiary, and (k) such other preferences, rights, restrictions and qualifications as the Board of Directors may determine.

 

All shares of the Common Stock shall rank equally and all shares of the Preferred Stock shall rank equally, and be identical within their classes in all respects regardless of series, except as to terms which may be specified by the Board of Directors pursuant to the above provisions. All shares of any one series of a class of Common Stock or Preferred Stock shall be of equal rank and identical in all respects, except that shares of any one series issued at different times may differ as to the dates which dividends thereon shall accrue and be cumulative.

 

2.

OTHER PROVISIONS. Shares of Common Stock or Preferred Stock of any class or series may be issued with such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, option or special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issuance of such stock adopted by the Board of Directors. Any of the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of any such class or series of stock may be made dependent upon facts ascertainable outside the resolution or resolutions of the Board of Directors providing for the issue of such stock by the Board of Directors, provided the manner in which such facts shall operate upon the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of such class or series is clearly set forth in the resolution or resolutions providing for the issue of such stock adopted by the Board of Directors.

 

3.

COMMON STOCK. Except as otherwise provided in any resolution or resolutions adopted by the Board of Directors providing for the issuance of a class or series of Preferred Stock or Common Stock, the Common Stock shall (a) have the exclusive voting power of the corporation; (b) entitle the holders thereof to one vote per share at all meetings of the stockholders of the Corporation; (c) entitle the holders to share ratably, without preference over any other shares of the Corporation, in all assets of the Corporation in the event of any dissolution, liquidation or winding up of the Corporation; and (d) entitle the record holders thereof on such record dates as are determined, from time to time, by the Board of Directors to receive such dividends, if any, if, as and when declared by the Board of Directors.

 

ARTICLE FIVE

 

The Corporation is to have perpetual existence.

 

 

ARTICLE SIX

 

1.

NUMBER, ELECTION AND TERM OF DIRECTORS. The business and affairs of the Corporation shall be managed by a Board of Directors, which, subject to the rights of holders of shares of any class of series of Preferred Stock of the Corporation then outstanding to elect additional directors under specified circumstances, shall consist of not less than three nor more than twenty-one persons. The exact number of directors within the minimum and  maximum limitations specified in the preceding sentence shall be fixed from time to time by either (i) the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors or (ii) the affirmative vote of the holders of 80% or more of the voting power of all of the shares of the Corporation entitled to vote generally in the election of directors voting together as a single class. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. The directors shall be divided into three classes as nearly equal in number as possible, with the term of office of the first class to expire at the 1995 annual meeting of stockholders, the

2

 


 

term of office of the second class to expire at the 1996 annual meeting of stockholders, and the term of office of the third class to expire at the 1997 annual meeting of stockholders, and with the members of each class to hold office until their successors shall have been elected and qualified At each annual meeting of stockholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election.

 

2.

STOCKHOLDER NOMINATION OF DIRECTOR CANDIDATES. Advance notice of stockholder nominations for the election of directors shall be submitted to the Board of Directors at least 120 days in advance of the scheduled date for the next annual meeting of stockholders.

 

3.

NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Subject to the rights of the holders of any series of any Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors and any vacancies in the Board of Directors resulting from the death, resignation, retirement, disqualification, removal from office or other cause may be filled by a majority vote of the directors then in office even though less than a quorum, or by a sole remaining director.

 

4.

REMOVAL. Subject to the rights of the holders of any series of any Preferred Stock then outstanding, any director or the entire Board of Directors, may be removed from office at any annual or special meeting called for such purpose, and then only for cause and only by the affirmative vote of the holders of 80% or more of the voting power of all of the shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class. As used herein, cause shall mean only the following: conviction of a felony or proof, beyond the existence of a reasonable doubt, that a director has committed grossly negligent or wilful misconduct resulting in a material detriment to the Corporation or committed a material breach of his fiduciary duty to the Corporation resulting in a material detriment to the Corporation.

 

5.

AMENDMENT, REPEAT, ETC. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of 80% or more of the voting power of all of the shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend or adopt any provision inconsistent with or repeal this Article Six, or to alter, amend, adopt any provision inconsistent with or repeal comparable sections of the Bylaws of the Corporation.

 

    

 

ARTICLE SEVEN

 

Subject to the rights of the holders of any series of Preferred Shares then outstanding, Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders unless all of the stockholders entitled to vote thereon consent thereto in writing. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of 80% or more of the voting power of all the shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to call a special meeting of stockholders or to alter, amend or adopt any provision inconsistent with or repeal this Article Seven, or to alter, amend or adopt any provision inconsistent with comparable sections of the Bylaws.

 

ARTICLE EIGHT

 

The Corporation shall have the power to indemnify its present or former directors, officers, employees and agents or any person who served or is serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise to the fun extent permitted by the General Corporation Law of Delaware. Such indemnification shall not be deemed exclusive of any other rights to which such person may be entitled, under any Bylaws, agreements, vote of stockholders or disinterested directors, or otherwise.

 

ARTICLE NINE

3

 


 

 

A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages or breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (if) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Act, or, (iv) for any transaction from which the director derived an improper personal benefit.

 

ARTICLE TEN

 

In furtherance and not in limitation of the powers conferred by statute, the board of directors is expressly authorized to make, alter or repeal the Bylaws of the corporation.

 

ARTICLE ELEVEN

 

The name and address of the incorporator is as follows:

 

George G. Young III

Butler & Binion

1700 First Interstate Bank Plaza

Houston, Texas 77002

 

4

 


 

In Witness Whereof, this certificate of incorporation was executed by the above named individual on this 28th day of March, 1994.

 

/s/ George G. Young III

George G. Young III

 

5

 


 

STATE OF DELAWARE

SECRETARY OF STATE

DIVISION OF CORPORATIONS

FILED 04:30 PM 08/04/1994

944145890 - 2390003

 

CERTIFICATE OF AMENDMENT

 

OF

 

CERTIFICATE OF INCORPORATION

 

Callon Petroleum Holding Company, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"),

 

DOES HEREBY CERTIFY:

 

FIRST: That the Board of Directors of the Corporation, by the unanimous written consent of its members, filed with the minutes of the Board, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of the Corporation:

 

RESOLVED, that the Certificate of Incorporation of the Corporation be amended by chanting Section 1. of the Article thereof numbered "SIX" so that, as amended, Section 1. of said Article shall be and read as follow:

 

"ARTICLE SIX

 

1.

NUMBER, ELECTION AND TERM OF DIRECTORS. The business and affairs of the Corporation shall be managed by a Board of Directors, which, subject to the rights of holders of shares of any class or series of Preferred Stock of the Corporation then outstanding to elect additional directors under specified circumstances, shall consist of no more than twenty-one person. The number of initial directors shall be two. Thereafter, the exact number of director within the maximum limitations as specified above shall be fixed from time to time by either (i) the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors or  (ii) the affirmative vote of the holders of 80% or more of the voting power of all of the shares of the Corporation entitled to vote generally in the election of directors voting together as a single class. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. The directors shall be divided into three classes as nearly equal in number as possible, with the term of office of the first class to expire at the first annual meeting of stockholders following their election, the term of office of the second class to expire at the second annual meeting of stockholders following their election, and the term of office of the third class to expire at the third annual meeting of stockholders following their election, and with the members of each class to hold office until their successors shall have been elected and qualified. At each annual meeting of stockholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Notwithstanding the foregoing, the above provisions regarding classification of directors shall be applicable only in the event that the Board of Directors is composed of three or more directors. Election of directors need not be by written ballot, except as otherwise provided in the Bylaws."

 

SECOND: That in lieu of a meeting and vote of stockholders, the sole stockholder of the Corporation has given its written consent to the amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware.

 

THIRD: That the amendment was duly adopted in accordance with the applicable provisions in Sections 242 and 228 of the General Corporation Law of the State of Delaware.

 

6

 


 

IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by Fred L. Callon, its President, and attested by H. Michael Tatum, Jr., its Secretary, this 2nd day of August, 1994.

 

CALLON PETROLEUM HOLDING COMPANY

 

By /s/ Fred L. Callon

Fred L. Callon, President

 

ATTEST

 

/s/ H. Michael Tatum Jr.

H. Michael Tatum Jr., Secretary

7

 


 

STATE OF DELAWARE

SECRETARY OF STATE

DIVISION OF CORPORATIONS

FILED 04:30 PM 09/16/1994

944174625 - 2390003

 

CERTIFICATE OF MERGER

 

OF

 

CALLON CONSOLIDATED PARTNERS, L.P.

(a Delaware limited partnership)

 

with and into

 

CALLON PETROLEUM HOLDING COMPANY

(a Delaware corporation)

 

Callon Consolidated Partners, L.P., a Delaware limited partnership, for the purpose of merging with Callon Petroleum Holding Company, a Delaware corporation, hereby certifies as follows:

 

1.

The name and jurisdiction of formation or organization of each of the constituent entities are:

 

Name                               Jurisdiction

 

Callon Petroleum Holding Company Delaware

                 Callon Consolidated Partners, L.P.            Delaware

 

2.

An agreement and plan of consolidation has been approved, adopted, certified, executed and acknowledged by each of the constituent entities in accordance with section 263 of the Delaware General Corporation Law.

 

3.

The name of the surviving corporation is Callon Petroleum Holding Company, which shall herewith be changed to Callon Petroleum Company.

 

4.

The amendments or changes in the Certificate of Incorporation of the surviving corporation are as follows:

 

(i)

Article One is amended and replaced in its entirety with the following Article One:

 

"ARTICLE ONE

 

The name of the Corporation is Callon Petroleum Company."

 

(ii)

The first sentence of Article Four is amended and replaced in its entirety with the following sentence:

 

"The Corporation shall have authority to issue two classes of stock, and the total number authorized shall be 20,000,000 shares of Common Stock of the par value of one cent ($.01) each, and 2,500,000 shares of Preferred Stock of the par value of one cent  ($.01) each."

 

5.

The executed agreement and plan of consolidation is on file at the principal place of business of the surviving corporation, the address of which is:

 

                                     Callon Petroleum Holding Company

                                     200 North Canal Street

                                     Natchez, Mississippi 39120

8

 


 

 

6.

A copy of the agreement and plan of consolidation will be furnished by Callon Petroleum Holding Company, on request and without cost, to any partner or stockholder of a constituent entity.

 

9

 


 

IN WITNESS WHEREOF, this Certificate of Merger has been duly executed as of the 16th day of September 1994, and is being filed by Callon Petroleum Holding Company, the surviving corporation.

 

CALLON PETROLEUM HOLDING COMPANY

 

By: /s/ FRED L. CALLON

FRED L. CALLON, President

 

Attest:

 

/s/ H. Michael Tatum, Jr.

H. Michael Tatum, Jr., Secretary

10

 


 

AMENDMENT

TO

CERTIFICATE OF INCORPORATION

OF

CALLON PETROLEUM COMPANY

 

The undersigned, Robert A. Mayfield, Corporate Secretary of Callon Petroleum Company, a corporation organized and existing under the laws of the State of Delaware (the "CORPORATION"), does hereby certify as follows:

 

FIRST:   The name of the Corporation is Callon Petroleum Company

 

SECOND:  This Amendment (the "AMENDMENT") to the Certificate of Incorporation of the Corporation (the "CERTIFICATE") was duly adopted in accordance with the provisions of Section 242 of the Delaware General

Corporation Law. The Board of Directors has duly adopted resolutions setting forth and declaring advisable this Amendment and the holders of a majority of the outstanding stock of the Corporation entitled to vote at the special meeting of the stockholders called for the purpose of voting on the Amendment have voted in favor of this Amendment.

 

THIRD:   The Certificate is hereby amended by amending and restating the first sentence of Article Four to be and read as follows:

 

"The Corporation shall have authority to issue two classes of stock, and the total number authorized shall be 30,000,000 shares of Common Stock, par value $.01 per share, and 2,500,000 shares of Preferred Stock, par value $.01 per share."

 

11

 


 

IN WITNESS WHEREOF, the undersigned has executed this Amendment on behalf of the Corporation and has attested such execution and does verify and affirm, under penalty of perjury, that this Amendment is the act and deed of the Corporation and that the facts stated herein are true as of this 23rd day of January, 2004.

 

CALLON PETROLEUM COMPANY

 

By: /s/ Robert A. Mayfield

Robert A. Mayfield, Corporate Secretary

12

 


 

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

OF

CALLON PETROLEUM COMPANY

 

The undersigned, Robert A. Mayfield, Corporate Secretary of Callon Petroleum Company, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “Corporation” ), does hereby certify as follows:

 

FIRST: The name of the Corporation is Callon Petroleum Company.

 

SECOND:  This Amendment (the “Amendment” ) to the Certificate of Incorporation of the Corporation (the “Certificate” ) was duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law.  The Board of Directors has duly adopted resolutions setting forth and declaring advisable this Amendment and the holders of a majority of the outstanding stock of the Corporation entitled to vote at the special meeting of the stockholders called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware for the purpose of voting on the Amendment have voted in favor of this Amendment.

 

THIRD:  The Certificate is hereby amended by amending and restating the first sentence of Article Four to be and read as follows :

 

“The Corporation shall have authority to issue two classes of stock, and the total number authorized shall be 60,000,000 shares of Common Stock, par value $.01 per share, and 2,500,000 shares of Preferred Stock, par value $.01 per share.”

 

IN WITNESS WHEREOF, the undersigned has executed this Amendment on behalf of the Corporation and has attested such execution and does verify and affirm, under penalty of perjury, that this Amendment is the act and deed of the Corporation and that the facts stated herein are true as of this 31 st day of December, 2009.

 

 

Callon Petroleum Company

 

By:  /s/ Robert A. Mayfield

Robert A. Mayfield, Corporate Secretary

13

 


 

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

OF

CALLON PETROLEUM COMPANY

 

The undersigned, B.F. Weatherly, Corporate Secretary of Callon Petroleum Company, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “Corporation” ), does hereby certify as follows:

 

FIRST: The name of the Corporation is Callon Petroleum Company.

 

SECOND:  This Amendment (the “Amendment” ) to the Certificate of Incorporation of the Corporation (the “Certificate” ) was duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law.  The Board of Directors has duly adopted resolutions setting forth and declaring advisable this Amendment and the holders of a majority of the outstanding stock of the Corporation entitled to vote at the special meeting of the stockholders called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware for the purpose of voting on the Amendment have voted in favor of this Amendment.

 

THIRD:  The Certificate is hereby amended by amending and restating the first sentence of Article Four to be and read as follows :

 

“The Corporation shall have authority to issue two classes of stock, and the total number authorized shall be 110,000,000 shares of Common Stock, par value $.01 per share, and 2,500,000 shares of Preferred Stock, par value $.01 per share.”

 

IN WITNESS WHEREOF, the undersigned has executed this Amendment on behalf of the Corporation and has attested such execution and does verify and affirm, under penalty of perjury, that this Amendment is the act and deed of the Corporation and that the facts stated herein are true as of this 15th day of January, 2014.

 

 

Callon Petroleum Company

 

By: /s/ B.F. Weatherly

B.F. Weatherly, Corporate Secretary

14

 


 

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

OF

CALLON PETROLEUM COMPANY

 

The undersigned, B.F. Weatherly, Corporate Secretary of Callon Petroleum Company, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “ Corporation ”), does hereby certify as follows:

 

FIRST: The name of the Corporation is Callon Petroleum Company.

 

SECOND: This Amendment (the “ Amendmen t”) to the Certificate of Incorporation of the Corporation (the “ Certificate ”) was duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law.  The Board of Directors has duly adopted resolutions setting forth and declaring advisable this Amendment and the holders of a majority of the outstanding stock of the Corporation entitled to vote at the special meeting of the stockholders called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware for the purpose of voting on the Amendment have voted in favor of this Amendment.

 

THIRD: The Certificate is hereby amended by amending and restating the first sentence of Article Four to be and read as follows:

 

“The Corporation shall have authority to issue two classes of stock, and the total number authorized shall be 150,000,000 shares of Common Stock, par value $.01 per share, and 2,500,000 shares of Preferred Stock, par value $.01 per share.”

 

IN WITNESS WHEREOF , the undersigned has executed this Amendment on behalf of the Corporation and has attested such execution and does verify and affirm, under penalty of perjury, that this Amendment is the act and deed of the Corporation and that the facts stated herein are true as of this 20th day of May, 2015.

 

Callon Petroleum Company

 

By: /s/ B.F. Weatherly

B.F. Weatherly, Corporate Secretary

15

 


Exhibit 10.1

 

First Amendment to the Callon Petroleum Company 2011 Omnibus Incentive Plan

 

 

WHEREAS , Callon Petroleum Company (the “Company”) maintains the Callon Petroleum Company 2011 Omnibus Incentive Plan (the “Plan”); and

 

WHEREAS , the Company reserved the right to amend the Plan in Article 21 thereof, and now desires to amend the Plan;

 

NOW, THEREFORE ,   subject to approval of the Company’s stock holders as set out below, the Plan is hereby amended , effective as of May 14, 2015, as follows:

 

1. Section 2.26 is hereby amended, in its entirety, to read as follows:

 

2.26 “Extraordinary Items” means (a) extraordinary, unusual and/or nonrecurring items of gain or loss; (b) gains or losses on the disposition of a business; (c) changes in tax or accounting regulations or laws; or (d) the effect of a merger or acquisition, all of which must be identified in the audited financial statements, including footnotes, or the Management Discussion and Analysis section of the Company's annual report , pursuant to the then-current standards established by the U.S. Financial Accounting Standards Board.

 

2 .   Section 4.1 is hereby amended , in its entirety, to read as follows:

 

4.1 Number of Shares Authorized and Available for Awards .   Subject to adjustment as provided under the Plan, the total number of Shares constituting the Share Pool which is available for Awards under the Plan shall be equal to the sum of (a) Four Million Three Hundred Thousand ( 4, 300 ,000) Shares, (b) any and all Shares that are available for awards under the Prior Plans as of the Effective Date that are not reserved for outstanding awards that were granted under the Prior Plans before the Effective Date, and (c) any and all Shares that may become available for awards under the Prior Plans on or after the Effective Date that were reserved for outstanding awards that were granted under the Prior Plans before the Effective Date, as provided in Section 4.2(b) .

 

Any of the authorized Shares may be used for any type of Award under the Plan, and any or all of the available Shares may be allocated to Incentive Stock Options.

 

3 . Section 4.2 is hereby amended, in its entirety, to read as follows:

 

4.2 Calculation of Share Usage for Share Pool.  The Committee shall determine the number of Shares constituting the Share Pool that is available for grants of Awards under the Plan, subject to the following:

 

(a) Any Shares related to an Award granted under the Plan that (1) terminate by expiration, forfeiture, cancellation or otherwise without the issuance of the Shares, (2) are settled in cash in lieu of Shares, or (3) are exchanged with the Committee’s permission, prior to the issuance of Shares, for Awards not involving Shares, shall again be available immediately for grants under this Plan.  Any Shares tendered or withheld in order to satisfy tax withholding obligations associated with the settlem ent of an Award (except with respect to an O ption or SAR A ward), shall again become available for grants under this Plan.

 

(b) Any Shares related to an Award previously granted under any Prior Plan prior to the Effective Date that, on or after the Effective Date, (1) terminate by expiration, forfeiture, cancellation or otherwise without the issuance of the Shares, are settled in cash in lieu of Shares, or (2) are exchanged with the Committee’s permission, prior to the issuance of Shares, for Awards not involving Shares, shall again be available for grants under this Plan.  Any Shares tendered or withheld in order to satisfy tax withholding obligations associated with the settlement of an

 


 

Award (except with respect to an O ption or SAR A ward), shall again become available for grants under this Plan.

 

4. The third from last paragraph of Section 14.2 is hereby amended, and the prior provisions that were in such paragraph have been deleted, such that Section 14.2 shall read, in its entirety, as follows:

 

The terms of the stated Performance Measures for each applicable Award, whether for a Performance Period of one (1) year or multiple years, must preclude the Committee's discretion to increase the amount payable to any Participant that would otherwise be due upon attainment of the Performance Measures, but may permit the Committee to reduce the amount otherwise payable to the Participant in the Committee's discretion.

 

5 .   Article 17, Effect of a Change in Control , is hereby amended by the addition of the following new Section  17(d), which read s as follows:

 

(d) In the event of a Change in Control, accelerated vesting or accelerated payment of an Award shall occur only in the event of a “double-trigger”, i.e ., there is   separation from service of the Participant within a designated time period following the Change in Control as set out in the Award Agreement for such Participant .

 

Except as amended hereby, the Plan shall continue in full force and effect and the Plan and this First Amendment shall be read, taken and construed as one and the same instrument.

 

Executed effective for all purposes as provided above; provided, however, if this First Amendment is not approved by the stockholders of the Company at the 201 5 Annual Meeting of Stockholders, this First Amendment shall not become effective.

 

 

Callon Petroleum Company

 

 

 

By: /s/ Fred L. Callon

Name: Fred L. Callon

Title: Chairman, President, and Chief Executive Officer

 

2

 


Exhibit 3 1 . 1

 6

 

 

 

 

 

 

 

 

 

 

CERTIFICATIONS

 

I, Fred L. Callon, certify that:

 

 

 

 

 

 

 

 

 

 

 

 

1.

 

I have reviewed this Quarterly Report on Form 10- Q of Callon Petroleum Company;

 

 

 

 

 

 

 

 

 

 

 

 

2.

 

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

 

 

 

 

 

 

 

 

 

 

3.

 

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

 

 

 

 

 

 

 

 

 

 

4.

 

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

a.

 

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b.

 

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

c.

 

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

d.

 

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

 

 

 

 

 

 

 

 

 

 

5.

 

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

a.

 

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b.

 

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

November 4 , 2015

 

/s/ Fred L. Callon

 

 

 

 

 

 

 

 

Fred L. Callon, President and Chief Executive Officer

 

 

 

 

 

 

 

 

(Principal executive officer)

 


Exhibit 3 1 . 2

 

 

 

 

 

 

 

 

 

 

 

CERTIFICATIONS

 

I, Joseph C. Gatto, Jr., certify that:

 

 

 

 

 

 

 

 

 

 

 

 

1.

 

I have reviewed this Quarterly Report on Form 10- Q of Callon Petroleum Company;

 

 

 

 

 

 

 

 

 

 

 

 

2.

 

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

 

 

 

 

 

 

 

 

 

 

3.

 

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

 

 

 

 

 

 

 

 

 

 

4.

 

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

a.

 

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b.

 

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

c.

 

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

d.

 

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

 

 

 

 

 

 

 

 

 

 

5.

 

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

a.

 

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b.

 

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

November 4 , 2015

 

/s/ Joseph C. Gatto, Jr.

 

 

 

 

 

 

 

 

Joseph C. Gatto, Jr., Chief Financial Officer, Senior Vice President and Treasurer

 

 

 

 

 

 

 

 

(Principal Financial Officer)

 


Exhibit 32

 

 

 

 

 

 

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

 

 

 

 

 

In connection with the Quarterly Report on Form 10- Q of Callon Petroleum Company for the quarterly period ended September 30 , 201 5 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, each hereby certify pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with requirements of Section 13(a) of 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

 

November 4 , 2015

 

/s/ Fred L. Callon

 

 

 

 

Fred L. Callon (Principal Executive Officer, Director)

 

 

 

 

 

Date:

 

November 4 , 2015

 

/s/ Joseph C. Gatto, Jr.

 

 

 

 

Joseph C. Gatto, Jr. (Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Report for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.