Exhibit 99.1

INDEX TO FINANCIAL STATEMENTS

 

Stone Energy Corporation
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheet as December  31, 2017 (Successor) and 2016 (Predecessor)			F-3
Consolidated Statement of Operations for the Period March  1, 2017 through December 31, 2017 (Successor), the Period January 1, 2017 through February 28, 2017 (Predecessor) and the Years Ended December 31, 2016 and 2015 (Predecessor)			F-4
Consolidated Statement of Comprehensive Income (Loss) for the Period March 1, 2017 through December 31, 2017 (Successor), the Period January 1, 2017 through February 28, 2017 (Predecessor) and the Years Ended December 31, 2016 and 2015 (Predecessor)			F-5
Consolidated Statement of Changes in Stockholders’ Equity for the Period March 1, 2017 through December 31, 2017 (Successor), the Period January 1, 2017 through February 28, 2017 (Predecessor) and the Years ended December 31, 2016 and 2015 (Predecessor)			F-6
Consolidated Statement of Cash Flows for the Period March  1, 2017 through December 31, 2017 (Successor), the Period January 1, 2017 through February 28, 2017 (Predecessor) and the Years Ended December 31, 2016 and 2015 (Predecessor)			F-7
Notes to Consolidated Financial Statements			F-8
Condensed Consolidated Balance Sheet as of March  31, 2018 (Successor) and December 31, 2017 (Successor)			F-56
Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2018 (Successor), the Period March 1, 2017 through March 31, 2017 (Successor) and the Period January 1, 2017 through February 28, 2017 (Predecessor)			F-57
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2018 (Successor), the Period March 1, 2017 through December 31, 2017 (Successor) and the Period January 1, 2017 through February 28, 2017 (Predecessor)			F-58
Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2018 (Successor), the Period March 1, 2017 through March 31, 2017 (Successor) and the Period January 1, 2017 through February 28, 2017 (Predecessor)			F-59
Notes to Condensed Consolidated Financial Statements			F-60

 

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Stockholders and Board of Directors

Stone Energy Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Stone Energy Corporation (the Company) as of December 31, 2017 (Successor) and 2016 (Predecessor), the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for the period March 1, 2017 through December 31, 2017 (Successor), the period January 1, 2017 through February 28, 2017 (Predecessor), and the years ended December 31, 2016 and 2015 (Predecessor), and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 (Successor) and 2016 (Predecessor), and the results of its operations and its cash flows for the period March 1, 2017 through December 31, 2017 (Successor), the period January 1, 2017 through February 28, 2017 (Predecessor), and the years ended December 31, 2016 and 2015 (Predecessor), in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 9, 2018 expressed an unqualified opinion thereon.

Company Reorganization

As discussed in Note 1 to the consolidated financial statements, on February 15, 2017, the Bankruptcy Court entered an order confirming the plan of reorganization, which became effective on February 28, 2017. Accordingly, the accompanying consolidated financial statements have been prepared in conformity with Accounting Standards Codification 852-10, Reorganizations, for the Successor as a new entity with assets, liabilities and a capital structure having carrying amounts not comparable with prior periods as described in Note 1.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2002.

New Orleans, Louisiana

March 9, 2018

 

F-2

STONE ENERGY CORPORATION

CONSOLIDATED BALANCE SHEET

(In thousands of dollars)

 

		Successor				Predecessor
		December 31, 2017				December 31, 2016
Assets
Current assets:
Cash and cash equivalents		$	263,495			$	190,581
Restricted cash			18,742				—
Accounts receivable			39,258				48,464
Fair value of derivative contracts			879				—
Current income tax receivable			36,260				26,086
Other current assets			7,138				10,151
Total current assets			365,772				275,282
Oil and gas properties, full cost method of accounting:
Proved			713,157				9,616,236
Less: accumulated depreciation, depletion and amortization			(353,462	)			(9,178,442	)
Net proved oil and gas properties			359,695				437,794
Unevaluated			102,187				373,720
Other property and equipment, net of accumulated depreciation of $2,561 and $27,418, respectively			17,275				26,213
Other assets, net of accumulated depreciation and amortization of $5,360 at December 31, 2016			13,844				26,474
Total assets		$	858,773			$	1,139,483
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors		$	54,226			$	19,981
Undistributed oil and gas proceeds			5,142				15,073
Accrued interest			1,685				809
Fair value of derivative contracts			8,969				—
Asset retirement obligations			79,300				88,000
Current portion of long-term debt			425				408
Other current liabilities			22,579				18,602
Total current liabilities			172,326				142,873
Long-term debt			235,502				352,376
Asset retirement obligations			133,801				154,019
Fair value of derivative contracts			3,085				—
Other long-term liabilities			5,891				17,315
Total liabilities not subject to compromise			550,605				666,583
Liabilities subject to compromise			—				1,110,182
Total liabilities			550,605				1,776,765
Commitments and contingencies
Stockholders’ equity:
Predecessor common stock ($.01 par value; authorized 30,000,000 shares; issued 5,610,020 shares)			—				56
Predecessor treasury stock (1,658 shares, at cost)			—				(860	)
Predecessor additional paid-in capital			—				1,659,731
Successor common stock ($.01 par value; authorized 60,000,000 shares; issued 19,998,019 shares)			200				—
Successor additional paid-in capital			555,607				—
Accumulated deficit			(247,639	)			(2,296,209	)
Total stockholders’ equity			308,168				(637,282	)
Total liabilities and stockholders’ equity		$	858,773			$	1,139,483

The accompanying notes are an integral part of this balance sheet.

 

F-3

STONE ENERGY CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share amounts)

 

		Successor				Predecessor
		Period from March 1, 2017 through December 31, 2017				Period from January 1, 2017 through February 28, 2017				Year Ended December 31,
										2016				2015
Operating revenue:
Oil production		$	211,792			$	45,837			$	281,246			$	416,497
Natural gas production			18,874				13,476				64,601				83,509
Natural gas liquids production			9,610				8,706				28,888				32,322
Other operational income			10,008				903				2,657				4,369
Derivative income, net			—				—				—				7,952
Total operating revenue			250,284				68,922				377,392				544,649
Operating expenses:
Lease operating expenses			49,800				8,820				79,650				100,139
Transportation, processing and gathering expenses			4,084				6,933				27,760				58,847
Production taxes			629				682				3,148				6,877
Depreciation, depletion and amortization			99,890				37,429				220,079				281,688
Write-down of oil and gas properties			256,435				—				357,431				1,362,447
Accretion expense			21,151				5,447				40,229				25,988
Salaries, general and administrative expenses			47,817				9,629				58,928				69,384
Incentive compensation expense			8,045				2,008				13,475				2,242
Restructuring fees			739				—				29,597				—
Other operational expenses			3,359				530				55,453				2,360
Derivative expense, net			13,388				1,778				810				—
Total operating expenses			505,337				73,256				886,560				1,909,972
Gain (loss) on Appalachia Properties divestiture			(105	)			213,453				—				—
Income (loss) from operations			(255,158	)			209,119				(509,168	)			(1,365,323	)
Other (income) expense:
Interest expense			11,744				—				64,458				43,928
Interest income			(998	)			(45	)			(550	)			(580	)
Other income			(1,156	)			(315	)			(1,439	)			(1,783	)
Other expense			1,230				13,336				596				434
Reorganization items, net			—				(437,744	)			10,947				—
Total other (income) expense			10,820				(424,768	)			74,012				41,999
Income (loss) before income taxes			(265,978	)			633,887				(583,180	)			(1,407,322	)
Provision (benefit) for income taxes:
Current			(18,339	)			3,570				(5,674	)			(44,096	)
Deferred			—				—				13,080				(272,311	)
Total income taxes			(18,339	)			3,570				7,406				(316,407	)
Net income (loss)		$	(247,639	)		$	630,317			$	(590,586	)		$	(1,090,915	)
Basic income (loss) per share		$	(12.38	)		$	110.99			$	(105.63	)		$	(197.45	)
Diluted income (loss) per share		$	(12.38	)		$	110.99			$	(105.63	)		$	(197.45	)
Average shares outstanding			19,997				5,634				5,591				5,525
Average shares outstanding assuming dilution			19,997				5,634				5,591				5,525

The accompanying notes are an integral part of this statement.

 

F-4

STONE ENERGY CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

		Successor				Predecessor
		Period from March 1, 2017 through December 31, 2017				Period from January 1, 2017 through February 28, 2017				Year Ended December 31,
										2016				2015
Net income (loss)		$	(247,639	)		$	630,317			$	(590,586	)		$	(1,090,915	)
Other comprehensive income (loss), net of tax effect:
Derivatives			—				—				(24,025	)			(62,758	)
Foreign currency translation			—				—				6,073				(2,605	)
Comprehensive income (loss)		$	(247,639	)		$	630,317			$	(608,538	)		$	(1,156,278	)

 

 

The accompanying notes are an integral part of this statement.

 

F-5

STONE ENERGY CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

 

		Common Stock				Treasury Stock				Additional Paid-In Capital				Accumulated Deficit				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
Balance, December 31, 2014 (Predecessor)		$	55			$	(860	)		$	1,633,801			$	(614,708	)		$	83,315			$	1,101,603
Net loss			—				—				—				(1,090,915	)			—				(1,090,915	)
Adjustment for fair value accounting of derivatives, net of tax			—				—				—				—				(62,758	)			(62,758	)
Adjustment for foreign currency translation, net of tax			—				—				—				—				(2,605	)			(2,605	)
Lapsing of forfeiture restrictions of restricted stock			—				—				(2,638	)			—				—				(2,638	)
Amortization of stock compensation expense			—				—				17,524				—				—				17,524
Balance, December 31, 2015 (Predecessor)			55				(860	)			1,648,687				(1,705,623	)			17,952				(39,789	)
Net loss			—				—				—				(590,586	)			—				(590,586	)
Adjustment for fair value accounting of derivatives, net of tax			—				—				—				—				(24,025	)			(24,025	)
Adjustment for foreign currency translation, net of tax			—				—				—				—				6,073				6,073
Lapsing of forfeiture restrictions of restricted stock and granting of stock awards			1				—				(732	)			—				—				(731	)
Amortization of stock compensation expense			—				—				11,776				—				—				11,776
Balance, December 31, 2016 (Predecessor)			56				(860	)			1,659,731				(2,296,209	)			—				(637,282	)
Net income			—				—				—				630,317				—				630,317
Lapsing of forfeiture restrictions of restricted stock and granting of stock awards			—				—				(172	)			—				—				(172	)
Amortization of stock compensation expense			—				—				3,527				—				—				3,527
Balance, February 28, 2017 (Predecessor)			56				(860	)			1,663,086				(1,665,892	)			—				(3,610	)
Cancellation of Predecessor equity			(56	)			860				(1,663,086	)			1,665,892				—				3,610
Balance, February 28, 2017 (Predecessor)			—				—				—				—				—				—
Issuance of Successor common stock and warrants			200				—				554,537				—				—				554,737
Balance, February 28, 2017 (Successor)			200				—				554,537				—				—				554,737
Net loss			—				—				—				(247,639	)			—				(247,639	)
Lapsing of forfeiture restrictions of restricted stock			—				—				(19	)			—				—				(19	)
Amortization of stock compensation expense			—				—				1,272				—				—				1,272
Stock issuance costs - Talos combination			—				—				(183	)							—				(183	)
Balance, December 31, 2017 (Successor)		$	200			$	—			$	555,607			$	(247,639	)		$	—			$	308,168

The accompanying notes are an integral part of this statement.

 

F-6

STONE ENERGY CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

 

		Successor				Predecessor
		Period from March 1, 2017 through December 31, 2017				Period from Jan. 1, 2017 through Feb. 28, 2017				Year Ended December 31,
										2016				2015
Cash flows from operating activities:
Net income (loss)		$	(247,639	)		$	630,317			$	(590,586	)		$	(1,090,915	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion and amortization			99,890				37,429				220,079				281,688
Write-down of oil and gas properties			256,435				—				357,431				1,362,447
Accretion expense			21,151				5,447				40,229				25,988
Deferred income tax provision (benefit)			—				—				13,080				(272,311	)
(Gain) loss on sale of oil and gas properties			105				(213,453	)			—				—
Settlement of asset retirement obligations			(80,671	)			(3,641	)			(20,514	)			(72,382	)
Non-cash stock compensation expense			1,252				2,645				8,443				12,324
Excess tax benefits			—				—				—				(1,586	)
Non-cash derivative expense			15,548				1,778				1,471				16,440
Non-cash interest expense			4				—				18,404				17,788
Non-cash reorganization items			—				(458,677	)			8,332				—
Other non-cash expense			1,245				172				6,248				—
Change in current income taxes			(13,744	)			3,570				20,088				(37,377	)
(Increase) decrease in accounts receivable			2,455				6,354				(1,412	)			43,724
(Increase) decrease in other current assets			4,648				(2,274	)			(3,493	)			1,767
Decrease in inventory			—				—				—				1,304
Increase (decrease) in accounts payable			17,113				(4,652	)			1,026				(14,582	)
Increase (decrease) in other current liabilities			10,677				(9,653	)			9,897				(25,936	)
Investment in derivative contracts			(2,416	)			(3,736	)			—				—
Other			3,023				2,490				(10,135	)			(907	)
Net cash provided by (used in) operating activities			89,076				(5,884	)			78,588				247,474
Cash flows from investing activities:
Investment in oil and gas properties			(65,282	)			(8,754	)			(237,952	)			(522,047	)
Proceeds from sale of oil and gas properties, net of expenses			20,633				505,383				—				22,839
Investment in fixed and other assets			(163	)			(61	)			(1,266	)			(1,549	)
Change in restricted funds			56,805				(75,547	)			1,046				179,467
Net cash provided by (used in) investing activities			11,993				421,021				(238,172	)			(321,290	)
Cash flows from financing activities:
Proceeds from bank borrowings			—				—				477,000				5,000
Repayments of bank borrowings			—				(341,500	)			(135,500	)			(5,000	)
Proceeds from building loan			—				—				—				11,770
Repayments of building loan			(337	)			(24	)			(423	)			—
Cash payment to noteholders			—				(100,000	)			—				—
Stock issuance costs - Talos combination			(184	)			—				—				—
Debt issuance costs			—				(1,055	)			(900	)			(68	)
Excess tax benefits			—				—				—				1,586
Net payments for share-based compensation			(19	)			(173	)			(762	)			(3,127	)
Net cash provided by (used in) financing activities			(540	)			(442,752	)			339,415				10,161
Effect of exchange rate changes on cash			—				—				(9	)			(74	)
Net change in cash and cash equivalents			100,529				(27,615	)			179,822				(63,729	)
Cash and cash equivalents, beginning of period			162,966				190,581				10,759				74,488
Cash and cash equivalents, end of period		$	263,495			$	162,966			$	190,581			$	10,759
Supplemental cash flow information:
Cash paid for interest, net of amount capitalized		$	(10,256	)			—			$	(32,130	)		$	(34,394	)
Cash refunded for income taxes, net of amounts paid			5,420				—				25,762				7,212

The accompanying notes are an integral part of this statement.

 

F-7

STONE ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Stone Energy Corporation (“Stone” or the “Company”) is an independent oil and natural gas company engaged in the acquisition, exploration, exploitation, development and operation of oil and gas properties. We have been operating in the Gulf of Mexico (the “GOM”) Basin since our incorporation in 1993 and have established technical and operational expertise in this area. We leveraged our experience in the GOM conventional shelf and expanded our reserve base into the more prolific plays of the GOM deep water, Gulf Coast deep gas and the Marcellus and Utica shales in Appalachia. At December 31, 2016, we had producing properties and acreage in the Marcellus and Utica Shales in Appalachia. In connection with our restructuring efforts, we completed the sale of the Appalachia Properties (as defined in Note 2 – Reorganization ) to EQT Corporation, through its wholly owned subsidiary EQT Production Company (“EQT”), on February 27, 2017 for net cash consideration of approximately $522.5 million. See Note 2 – Reorganization and Note 4 – Divestiture for additional information on the sale of the Appalachia Properties. We were incorporated in 1993 as a Delaware corporation. Our corporate headquarters are located at 625 E. Kaliste Saloom Road, Lafayette, Louisiana 70508. We have an additional office in New Orleans, Louisiana.

Pending Combination with Talos

On November 21, 2017, Stone and certain of its subsidiaries entered into a series of related agreements pertaining to a business combination with Talos Energy LLC (“Talos Energy”) and its indirect wholly owned subsidiary Talos Production LLC (“Talos Production” and, together with Talos Energy, “Talos”). Talos Energy is controlled indirectly by entities controlled by Apollo Management VII, L.P. (“Apollo VII”), Apollo Commodities Management, L.P., with respect to Series I (together with Apollo VII, “Apollo Management”) and Riverstone Energy Partners V, L.P. (“Riverstone”).

Stone, Sailfish Energy Holdings Corporation (“New Talos”), a direct wholly owned subsidiary of Stone, and Sailfish Merger Sub Corporation, a direct wholly owned subsidiary of New Talos, entered into a Transaction Agreement (the “Transaction Agreement”) with Talos on November 21, 2017, which contemplates a series of transactions (the “Transactions”) occurring on the date of closing of the Transaction Agreement (the “Closing”) that will result in such business combination. Stone and Talos will become wholly owned subsidiaries of New Talos. At the time of the Closing, the parties intend that New Talos will become a publicly traded entity named Talos Energy, Inc. The Transactions include (i) the contribution of 100% of the equity interests in Talos Production to New Talos in exchange for shares of New Talos common stock, (ii) the contribution by entities controlled by or affiliated with Apollo Management (the “Apollo Funds”) and Riverstone (the “Riverstone Funds”) of $102 million in aggregate principal amount of 9.75% Senior Notes due 2022 issued by Talos Production and Talos Production Finance Inc. (together, the “the Talos Issuers”) to New Talos in exchange for shares of New Talos common stock, (iii) the exchange of the second lien bridge loans due 2022 issued by the Talos Issuers for newly issued 11% second lien notes issued by the Talos Issuers, and (iv) the exchange of the 7.50% Senior Second Lien Notes due 2022 (the “2022 Second Lien Notes”) issued by Stone for newly issued 11% second lien notes issued by the Talos Issuers.

Under the terms of the Transaction Agreement, each outstanding share of Stone common stock will be exchanged for one share of New Talos common stock and the current Talos stakeholders (including the Apollo Funds and the Riverstone Funds) will be issued an aggregate of approximately 34.1 million common shares of New Talos. After the completion of the Transactions contemplated by the Transaction Agreement, holders of Stone common stock immediately prior to the combination will collectively hold 37% of the outstanding New Talos common stock and Talos Energy stakeholders will hold 63% of the outstanding New Talos common stock. Outstanding warrants to acquire Stone common stock will become warrants to acquire New Talos common stock with terms and conditions substantially identical to their existing terms and conditions.

 

F-8

The combination was unanimously approved by the boards of directors of Stone and Talos Energy. Completion of the combination is subject to the approval of Stone shareholders, the consummation of a tender offer and consent solicitation for Stone’s 2022 Second Lien Notes, certain regulatory approvals and other customary conditions. Franklin Advisers, Inc. and MacKay Shields LLC, as investment managers for approximately 53% of the outstanding common shares of Stone as of September 30, 2017, entered into voting agreements to vote in favor of the combination, subject to certain conditions. The Transaction Agreement contains certain termination rights for Stone and Talos Energy. Stone may be required to pay a termination fee and to reimburse transaction expenses to Talos Energy if the Transaction Agreement is terminated under certain circumstances. The combination is expected to close in the second quarter of 2018. We cannot provide any assurance that the combination will be completed on the terms or timeline currently contemplated, or at all.

Reorganization and Emergence from Voluntary Chapter 11 Proceedings

On December 14, 2016 (the “Petition Date”), the Company and its subsidiaries Stone Energy Offshore, L.L.C. (“Stone Offshore”) and Stone Energy Holding, L.L.C. (together with the Company, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions”) in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”) seeking relief under the provisions of Chapter 11 of Title 11 (“Chapter 11”) of the United States Bankruptcy Code (the “Bankruptcy Code”). On February 15, 2017, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Second Amended Joint Prepackaged Plan of Reorganization of Stone Energy Corporation and its Debtor Affiliates, dated December 28, 2016 (the “Plan”), as modified by the Confirmation Order, and on February 28, 2017, the Plan became effective (the “Effective Date”) and the Debtors emerged from bankruptcy, with the bankruptcy cases then being closed by Final Decree Closing Chapter 11 Cases and Terminating Claims Agent Services entered by the Bankruptcy Court on April 20, 2017. See Note 2 – Reorganization for additional details.

Upon emergence from bankruptcy, the Company adopted fresh start accounting in accordance with the provisions of Accounting Standards Codification (“ASC”) 852, “ Reorganizations ”, which resulted in the Company becoming a new entity for financial reporting purposes on the Effective Date. As a result of the adoption of fresh start accounting, the Company’s consolidated financial statements subsequent to February 28, 2017 will not be comparable to its financial statements prior to that date. See Note 3 – Fresh Start Accounting for further details on the impact of fresh start accounting on the Company’s consolidated financial statements.

References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to February 28, 2017. References to “Predecessor” or “Predecessor Company” relate to the financial position and results of operations of the Company prior to, and including, February 28, 2017.

Summary of Significant Accounting Policies

A summary of significant accounting policies followed in the preparation of the accompanying consolidated financial statements is set forth below.

Basis of Presentation:

The financial statements include our accounts and the accounts of our wholly owned subsidiaries, Stone Offshore, Stone Energy Holding, L.L.C. and Stone Energy Canada, ULC. On August 29, 2016, our subsidiaries SEO A LLC and SEO B LLC were merged into Stone Offshore. On December 2, 2016, Stone Energy Canada, ULC was dissolved. All intercompany balances have been eliminated. Certain prior year amounts have been reclassified to conform to current year presentation.

Reorganization and Fresh Start Accounting:

For periods subsequent to the Chapter 11 filing, but prior to emergence, ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the

 

F-9

ongoing operations of the business. Accordingly, professional fees and other expenses incurred in the Chapter 11 cases, and unamortized debt issuance costs, premiums and discounts associated with debt classified as liabilities subject to compromise, have been recorded as reorganization items on the consolidated statement of operations for the applicable periods. In addition, pre-petition obligations that were to be impacted by the Chapter 11 process were classified on the consolidated balance sheet at December 31, 2016 as liabilities subject to compromise. See Note 2 – Reorganization and Note 3 – Fresh Start Accounting for more information regarding reorganization items and liabilities subject to compromise.

Upon emergence from bankruptcy, the Company qualified for and adopted fresh start accounting in accordance with the provisions of ASC 852, as (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims. The Company applied fresh start accounting as of February 28, 2017. Fresh start accounting required the Company to present its assets, liabilities and equity as if it were a new entity upon emergence from bankruptcy, with no beginning retained earnings or deficit as of the fresh start reporting date. The new entity is referred to as Successor or Successor Company, and includes the financial position and results of operations of the reorganized Company subsequent to February 28, 2017. References to Predecessor or Predecessor Company relate to the financial position and results of operations of the Company prior to, and including, February 28, 2017.

The Chapter 11 proceedings did not include our former foreign subsidiary Stone Energy Canada, ULC. This subsidiary had no significant activity during 2016, except for the reclassification of approximately $6.1 million of losses related to cumulative foreign currency translation adjustments from accumulated other comprehensive income into other operational expenses upon the substantial liquidation of Stone Energy Canada, ULC. Stone Energy Canada, ULC was dissolved on December 2, 2016.

Use of Estimates:

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various assumptions and information believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects are uncertain and, accordingly, these estimates may change as new events occur, as additional information is obtained and as the Company’s operating environment changes. Actual results could differ from those estimates. Estimates are used primarily when accounting for depreciation, depletion and amortization (“DD&A”) expense, unevaluated property costs, estimated future net cash flows from proved reserves, costs to abandon oil and gas properties, income taxes, accruals of capitalized costs, operating costs and production revenue, capitalized general and administrative costs and interest, insurance recoveries, estimated fair value of derivative contracts, contingencies and fair value estimates, including estimates of reorganization value, enterprise value and the fair value of assets and liabilities recorded as a result of the adoption of fresh start accounting.

Fair Value Measurements:

U.S. GAAP establishes a framework for measuring fair value and requires certain disclosures about fair value measurements. As of December 31, 2017 and 2016, we held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis, including our commodity derivative instruments and our investments in marketable securities.

On February 28, 2017, the Company emerged from bankruptcy and adopted fresh start accounting, which resulted in the Company becoming a new entity for financial reporting purposes. Upon the adoption of fresh start

 

F-10

accounting, the Company’s assets and liabilities were recorded at their fair values as of the fresh start reporting date, February 28, 2017. See Note 3 – Fresh Start Accounting for a detailed discussion of the fair value approaches used by the Company.

Cash and Cash Equivalents:

We consider all money market funds and highly liquid investments in overnight securities through our commercial bank accounts, which result in available funds on the next business day, to be cash and cash equivalents. On December 31, 2017, we had $18.7 million of cash held in a restricted account to satisfy near-term plugging and abandonment liabilities, pursuant to the terms of the Amended Credit Agreement (as defined in Note 13 – Debt ).

Oil and Gas Properties:

We follow the full cost method of accounting for oil and gas properties. Under this method, all acquisition, exploration, development and estimated abandonment costs, including certain related employee and general and administrative costs (less any reimbursements for such costs) and interest incurred for the purpose of finding oil and gas are capitalized. Such amounts include the cost of drilling and equipping productive wells, dry hole costs, lease acquisition costs, delay rentals and other costs related to such activities. Employee, general and administrative costs that are capitalized include salaries and all related fringe benefits paid to employees directly engaged in the acquisition, exploration and development of oil and gas properties, as well as all other directly identifiable general and administrative costs associated with such activities, such as rentals, utilities and insurance. We capitalize a portion of the interest costs incurred on our debt based upon the balance of our unevaluated property costs and our weighted-average borrowing rate. Employee, general and administrative costs associated with production operations and general corporate activities are expensed in the period incurred. Additionally, workover and maintenance costs incurred solely to maintain or increase levels of production from an existing completion interval are charged to lease operating expense in the period incurred.

U.S. GAAP allows the option of two acceptable methods for accounting for oil and gas properties. The successful efforts method is the allowable alternative to the full cost method. The primary differences between the two methods are in the treatment of exploration costs, the computation of DD&A expense and the assessment of impairment of oil and gas properties. Under the full cost method, all exploratory costs are capitalized, while under the successful efforts method, exploratory costs associated with unsuccessful exploratory wells and all geological and geophysical costs are expensed. Under the full cost method, DD&A expense is computed on cost centers represented by entire countries, while under the successful efforts method, cost centers are represented by properties, or some reasonable aggregation of properties with common geological structural features or stratigraphic condition, such as fields or reservoirs. Under the full cost method, oil and gas properties are subject to the ceiling test as discussed below while under the successful efforts method oil and gas properties are assessed for impairment in accordance with ASC 360.

We amortize our investment in oil and gas properties through DD&A expense using the units of production (the “UOP”) method. Under the UOP method, the quarterly provision for DD&A expense is computed by dividing production volumes for the period by the total proved reserves as of the beginning of the period (beginning of period reserves being determined by adding production to the end of period reserves), and applying the respective rate to the net cost of proved oil and gas properties, including future development costs.

Under the full cost method, we compare, at the end of each financial reporting period, the present value of estimated future net cash flows from proved reserves (adjusted for hedges and excluding cash flows related to estimated abandonment costs) to the net capitalized costs of proved oil and gas properties, net of related deferred taxes. We refer to this comparison as a ceiling test. If the net capitalized costs of proved oil and gas properties exceed the estimated discounted future net cash flows from proved reserves, we are required to write down the value of our oil and gas properties to the value of the discounted cash flows.

 

F-11

Sales of oil and gas properties are accounted for as adjustments to net oil and gas properties with no gain or loss recognized, unless the adjustment would significantly alter the relationship between capitalized costs and proved reserves.

Asset Retirement Obligations:

U.S. GAAP requires us to record our estimate of the fair value of liabilities related to future asset retirement obligations in the period the obligation is incurred. Asset retirement obligations relate to the removal of facilities and tangible equipment at the end of an oil and gas property’s useful life. The application of this rule requires the use of management’s estimates with respect to future abandonment costs, inflation, timing of abandonment and cost of capital. U.S. GAAP requires that our estimate of our asset retirement obligations does not give consideration to the value the related assets could have to other parties.

Other Property and Equipment:

Our office buildings in Lafayette, Louisiana are being depreciated on the straight-line method over their estimated useful lives of 39 years.

Derivative Instruments and Hedging Activities:

Through December 31, 2016, we designated our commodity derivatives as cash flow hedges for accounting purposes upon entering into the contracts. Accordingly, the contracts were recorded as either an asset or liability measured at fair value and subsequent changes in the derivative’s fair value were recognized in stockholders’ equity through other comprehensive income (loss), net of related taxes, to the extent the hedge was considered effective. Monthly settlements of effective hedges were reflected in revenue from oil and natural gas production. With respect to our 2017, 2018 and 2019 commodity derivative contracts, we have elected to not designate these contracts as cash flow hedges for accounting purposes. Accordingly, the net changes in the mark-to-market valuations and the monthly settlements of these derivative contracts are recorded in earnings through derivative income (expense).

Earnings Per Common Share:

Under U.S. GAAP, certain instruments granted in share-based payment transactions are considered participating securities prior to vesting and are therefore required to be included in the earnings allocation in calculating earnings per share under the two-class method. Companies are required to treat unvested share-based payment awards with a right to receive non-forfeitable dividends as a separate class of securities in calculating earnings per share.

Production Revenue:

We recognize production revenue under the entitlements method of accounting. Under this method, revenue is deferred for deliveries in excess of our net revenue interest, while revenue is accrued for undelivered or underdelivered volumes. Production imbalances are generally recorded at the estimated sales price in effect at the time of production. See Recently Issued Accounting Standards below.

Income Taxes:

Provisions for income taxes include deferred taxes resulting primarily from temporary differences due to different reporting methods for oil and gas properties for financial reporting and income tax purposes. For financial reporting purposes, all exploratory and development expenditures related to evaluated projects, including future abandonment costs, are capitalized and amortized using the UOP method. For income tax purposes, only the leasehold, geological and geophysical and equipment costs relative to successful wells are

 

F-12

capitalized and recovered through DD&A, although for 2015, 2016 and 2017, special provisions allowed for current deductions for the cost of certain equipment. Generally, most other exploratory and development costs are charged to expense as incurred; however, we follow certain provisions of the Internal Revenue Code (the “IRC”) that allow capitalization of intangible drilling costs where management deems appropriate. Other financial and income tax reporting differences occur as a result of statutory depletion, different reporting methods for sales of oil and gas reserves in place, different reporting methods used in the capitalization of employee, general and administrative and interest expense, and different reporting methods for employee compensation. See Note 12 – Income Taxes for a discussion of the effects of the December 22, 2017 enactment of the Tax Cuts and Jobs Act.

Share-Based Compensation:

We record share-based compensation using the grant date fair value of issued stock options, stock awards, restricted stock and restricted stock units over the vesting period of the instrument. We utilize the Black-Scholes option pricing model to measure the fair value of stock options. The fair value of stock awards, restricted stock and restricted stock units is typically determined based on the average of our high and low stock prices on the grant date.

Combination Transaction Costs:

In general, acquisition-related costs are expensed in the periods in which the costs are incurred and the services are rendered. However, some direct costs of an acquisition, such as the cost of registering and issuing equity securities to effect a business combination, are recorded as a reduction of additional paid-in-capital when incurred.

Recently Issued Accounting Standards:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “ Revenue from Contracts with Customers (Topic 606) ” to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. Additional disclosures will be required to describe the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers including the disaggregation of revenue and remaining performance obligations. The standard may be applied retrospectively or using a modified retrospective approach, with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application, and is effective for interim and annual periods beginning on or after December 15, 2017.

We adopted this new standard on January 1, 2018 using the modified retrospective approach. The adoption of the standard did not have a material effect on our financial position, results of operations or cash flows, but will result in increased disclosures related to revenue recognition policies and disaggregation of revenues.

In February 2016, the FASB issued ASU 2016-02, “ Leases (Topic 842) ” to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard is effective for public companies for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years, with earlier application permitted. Upon adoption the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. We are currently evaluating the effect that this new standard may have on our financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, “ Compensation – Stock Compensation (Topic 718) ” to simplify several aspects of the accounting for share-based payment transactions, including the income tax

 

F-13

consequences, classification of awards as either equity or liabilities, and forfeitures, as well as classification in the statement of cash flows. ASU 2016-09 became effective for us on January 1, 2017. Under ASU 2016-09, we elected to not apply a forfeiture estimate and will recognize a credit in compensation expense to the extent awards are forfeited. The implementation of this new standard did not have a material effect on our financial statements or related disclosures.

In August 2017, the FASB issued ASU 2017-12, “ Derivatives and Hedging (Topic 815) ” to improve the financial reporting of hedging relationships to better reflect an entity’s hedging strategies. The standard expands an entity’s ability to apply hedge accounting for both non-financial and financial risk components and amends the presentation and disclosure requirements. Additionally, ASU 2017-12 eliminates the need to separately measure and report hedge ineffectiveness and generally requires the entire change in fair value of a hedging instrument to be recorded in the same income statement line as the earnings effect of the hedged item. The standard is effective for public companies for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The standard must be adopted by applying a modified retrospective approach to existing designated hedging relationships as of the adoption date, with a cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. We are currently evaluating the effect that this new standard may have on our financial statements and related disclosures.

NOTE 2 — REORGANIZATION

On December 14, 2016, the Debtors filed the Bankruptcy Petitions seeking relief under the provisions of Chapter 11 of the Bankruptcy Code to pursue a prepackaged plan of reorganization. On February 15, 2017, the Bankruptcy Court entered an order confirming the Plan, and on February 28, 2017, the Plan became effective and the Debtors emerged from bankruptcy.

Prior to filing the Bankruptcy Petitions, on October 20, 2016, the Debtors and certain holders of the Company’s 1 ³ ⁄ ₄ % Senior Convertible Notes due 2017 (the “2017 Convertible Notes”) and the Company’s 7 ¹ ⁄ ₂ % Senior Notes due 2022 (the “2022 Notes”) (collectively, the “Notes” and the holders thereof, the “Noteholders”) and the lenders (the “Banks”) under the Fourth Amended and Restated Credit Agreement, dated as of June 24, 2014, as amended, modified, or otherwise supplemented from time to time (the “Pre-Emergence Credit Agreement”), entered into an Amended and Restated Restructuring Support Agreement (the “A&R RSA”). The A&R RSA contained certain covenants on the part of the Company and the Noteholders and Banks who are signatories to the A&R RSA, including that such Noteholders and Banks would support the Company’s sale of Stone’s producing properties and acreage, including approximately 86,000 net acres, in the Appalachia regions of Pennsylvania and West Virginia (the “Appalachia Properties”) to TH Exploration III, LLC, an affiliate of Tug Hill, Inc. (“Tug Hill”), pursuant to the terms of a Purchase and Sale Agreement dated October 20, 2016, as amended on December 9, 2016 (the “Tug Hill PSA”) for a purchase price of at least $350 million and approval of the Bankruptcy Court. Pursuant to the terms of the Tug Hill PSA, Stone agreed to sell the Appalachia Properties to Tug Hill for $360 million in cash, subject to customary purchase price adjustments.

Pursuant to Bankruptcy Court orders dated January 11, 2017 and January 31, 2017, two additional bidders were allowed to participate in competitive bidding on the Appalachia Properties. On January 18, 2017, the Bankruptcy Court approved certain bidding procedures (the “Bidding Procedures”) in connection with the sale of the Appalachia Properties. In accordance with the Bidding Procedures, Stone conducted an auction for the sale of the Appalachia Properties on February 8, 2017 and upon conclusion, selected the final bid submitted by EQT, with a final purchase price of $527 million in cash, subject to customary purchase price adjustments and approval by the Bankruptcy Court, with an upward adjustment to the purchase price of up to $16 million in an amount equal to certain downward adjustments, as the prevailing bid. On February 9, 2017, the Company entered into a purchase and sale agreement with EQT (the “EQT PSA”), reflecting the terms of the prevailing bid and on February 10, 2017, the Bankruptcy Court entered a sale order approving the sale of the Appalachia Properties to EQT. We completed the sale of the Appalachia Properties to EQT on February 27, 2017 for net cash consideration of approximately $522.5 million. At the close of the sale of the Appalachia Properties, the Tug Hill

 

F-14

PSA was terminated, and the Company used a portion of the cash consideration received to pay Tug Hill a break-up fee and expense reimbursements totaling approximately $11.5 million, which is recognized as other expense in the statement of operations for the period of January 1, 2017 through February 28, 2017 (Predecessor). See Note 4 – Divestiture for additional information on the sale of the Appalachia Properties.

Upon emergence from bankruptcy, pursuant to the terms of the Plan, the following significant transactions occurred:

 

•

Shares of the Predecessor Company’s issued and outstanding common stock immediately prior to the Effective Date were cancelled, and on the Effective Date, reorganized Stone issued an aggregate of 20.0 million shares of new common stock (the “New Common Stock”).

 

•

The Predecessor Company’s 2022 Notes and 2017 Convertible Notes were cancelled and the holders of such notes received their pro rata share of (a) $100 million of cash, (b) 19.0 million shares of New Common Stock, representing 95% of the New Common Stock and (c) $225 million of the 2022 Second Lien Notes.

 

•

The Predecessor Company’s common stockholders received their pro rata share of 1.0 million shares of the New Common Stock, representing 5% of the New Common Stock, and warrants to purchase approximately 3.5 million shares of New Common Stock. The warrants have an exercise price of $42.04 per share and a term of four years, unless terminated earlier by their terms upon the consummation of certain business combinations or sale transactions involving the Company.

 

•

The Predecessor Company’s Pre-Emergence Credit Agreement was amended and restated as the Amended Credit Agreement (as defined in Note 13 – Debt ). The obligations owed to the lenders under the Pre-Emergence Credit Agreement were converted to obligations under the Amended Credit Agreement.

 

•

All claims of creditors with unsecured claims, other than claims by the holders of the 2022 Notes and 2017 Convertible Notes, including vendors, were unaltered and paid in full in the ordinary course of business to the extent such claims were undisputed.

For further information regarding the equity and debt instruments of the Predecessor Company and the Successor Company, see Note 5 – Stockholders’ Equity and Note 13 – Debt .

NOTE 3 — FRESH START ACCOUNTING

Upon emergence from bankruptcy, the Company qualified for and adopted fresh start accounting in accordance with the provisions of ASC 852, “ Reorganizations ” as (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims. See Note 2 – Reorganization for the terms of the Plan. The Company applied fresh start accounting as of February 28, 2017. Fresh start accounting required the Company to present its assets, liabilities and equity as if it were a new entity upon emergence from bankruptcy, with no beginning retained earnings or deficit as of the fresh start reporting date. As described in Note 1 – Organization and Summary of Significant Accounting Policies , the new entity is referred to as Successor or Successor Company, and includes the financial position and results of operations of the reorganized Company subsequent to February 28, 2017. References to Predecessor or Predecessor Company relate to the financial position and results of operations of the Company prior to, and including, February 28, 2017.

Reorganization Value

Under fresh start accounting, reorganization value represents the fair value of the Successor Company’s total assets and is intended to approximate the amount a willing buyer would pay for the assets immediately after

 

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restructuring. Upon application of fresh start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values.

The Company’s reorganization value is derived from an estimate of enterprise value. Enterprise value represents the estimated fair value of an entity’s long-term debt and stockholders’ equity. In support of the Plan, the Company estimated the enterprise value of the core assets (as defined in the Plan) of the Successor Company to be in the range of $300 million to $450 million, which was subsequently approved by the Bankruptcy Court. This valuation analysis was prepared using reserve information, development schedules, other financial information and financial projections and applying standard valuation techniques, including net asset value analysis, precedent transactions analyses and public comparable company analyses. Based on the estimates and assumptions used in determining the enterprise value, the Company ultimately estimated the enterprise value of the Successor Company’s core assets to be approximately $420 million.

Valuation of Assets

The Company’s principal assets are its oil and gas properties, which the Company accounts for under the full cost accounting method. With the assistance of valuation experts, the Company determined the fair value of its oil and gas properties based on the discounted cash flows expected to be generated from these assets. The computations were based on market conditions and reserves in place as of the bankruptcy emergence date.

The fair value analysis performed by valuation experts was based on the Company’s estimates of reserves as developed internally by the Company’s reserve engineers. For purposes of estimating the fair value of the Company’s proved, probable and possible reserves, an income approach was used, which estimated fair value based on the anticipated cash flows associated with the Company’s reserves, risked by reserve category and discounted using a weighted average cost of capital of 12.5%. The discount factor was derived from a weighted average cost of capital computation which utilized a blended expected cost of debt and expected returns on equity for similar market participants.

Future revenues were based upon forward strip oil and natural gas prices as of the emergence date, adjusted for differentials realized by the Company, and adjusted for a 2% annual escalation after 2021. Development and operating costs were based on the Company’s recent cost trends adjusted for inflation. The discounted cash flow models also included estimates not typically included in proved reserves such as depreciation and income tax expenses. The proved reserve locations were limited to wells expected to be drilled in the Company’s five year development plan.

As a result of this analysis, the Company concluded the fair value of its proved reserves was $380.8 million and the fair value of its probable and possible reserves was $16.8 million as of the Effective Date. The Company also reviewed its undeveloped leasehold acreage and inventory. An analysis of comparable market transactions indicated a fair value of undeveloped acreage and inventory totaling $80.2 million. These amounts are reflected in the Fresh Start Adjustments item number 12 below. The fair value of the Company’s asset retirement obligations was estimated at $290.1 million and was based on estimated plugging and abandonment costs as of the Effective Date, adjusted for inflation and discounted at the Successor Company’s credit-adjusted risk free rate of 12%.

See further discussion in Fresh Start Adjustments below for details on the specific assumptions used in the valuation of the Company’s various other assets.

 

F-16

The following table reconciles the enterprise value per the Plan to the estimated fair value (for fresh start accounting purposes) of the Successor Company’s common stock as of February 28, 2017 (in thousands, except per share value):

 

		February 28, 2017
Enterprise value		$	419,720
Plus: Cash and other assets			371,278
Less: Fair value of debt			(236,261	)
Less: Fair value of warrants			(15,648	)
Fair value of Successor common stock		$	539,089
Shares issued upon emergence			20,000
Per share value		$	26.95

The following table reconciles the enterprise value per the Plan to the estimated reorganization value as of the Effective Date (in thousands):

 

		February 28, 2017
Enterprise value		$	419,720
Plus: Cash and other assets			371,278
Plus: Asset retirement obligations (current and long-term)			290,067
Plus: Working capital and other liabilities			58,055
Reorganization value of Successor assets		$	1,139,120

Reorganization value and enterprise value were estimated using numerous projections and assumptions that are inherently subject to significant uncertainties and resolution of contingencies that are beyond our control. Accordingly, the estimates set forth herein are not necessarily indicative of actual outcomes, and there can be no assurance that the estimates, projections or assumptions will be realized.

Condensed Consolidated Balance Sheet

The adjustments set forth in the following condensed consolidated balance sheet reflect the effects of the transactions contemplated by the Plan and carried out by the Company (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”). The explanatory notes highlight methods used to determine fair values or

 

F-17

other amounts of the assets and liabilities as well as significant assumptions or inputs. The following table reflects the reorganization and application of ASC 852 on our consolidated balance sheet as of February 28, 2017 (in thousands):

 

		Predecessor Company				Reorganization Adjustments								Fresh Start Adjustments								Successor Company
Assets
Current assets:
Cash and cash equivalents		$	198,571			$	(35,605	)			(1	)		$	—							$	162,966
Restricted cash			—				75,547				(1	)			—								75,547
Accounts receivable			42,808				9,301				(2	)			—								52,109
Fair value of derivative contracts			1,267				—								—								1,267
Current income tax receivable			22,516				—								—								22,516
Other current assets			11,033				875				(3	)			(124	)			(12	)			11,784
Total current assets			276,195				50,118								(124	)							326,189
Oil and gas properties, full cost method of accounting:
Proved			9,633,907				(188,933	)			(1	)			(8,774,122	)			(12	)			670,852
Less: accumulated DD&A			(9,215,679	)			—								9,215,679				(12	)			—
Net proved oil and gas properties			418,228				(188,933	)							441,557								670,852
Unevaluated			371,140				(127,838	)			(1	)			(146,292	)			(12	)			97,010
Other property and equipment, net			25,586				(101	)			(4	)			(4,423	)			(13	)			21,062
Fair value of derivative contracts			1,819				—								—								1,819
Other assets, net			26,516				(4,328	)			(5	)			—								22,188
Total assets		$	1,119,484			$	(271,082	)						$	290,718							$	1,139,120
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable to vendors		$	20,512			$	—							$	—							$	20,512
Undistributed oil and gas proceeds			5,917				(4,139	)			(1	)			—								1,778
Accrued interest			266				—								—								266
Asset retirement obligations			92,597				—								—								92,597
Fair value of derivative contracts			476				—								—								476
Current portion of long-term debt			411				—								—								411
Other current liabilities			17,032				(195	)			(6	)			—								16,837
Total current liabilities			137,211				(4,334	)							—								132,877
Long-term debt			352,350				(116,500	)			(7	)			—								235,850
Asset retirement obligations			151,228				(8,672	)			(1	)			54,914				(14	)			197,470
Fair value of derivative contracts			653				—								—								653
Other long-term liabilities			17,533				—								—								17,533
Total liabilities not subject to compromise			658,975				(129,506	)							54,914								584,383
Liabilities subject to compromise			1,110,182				(1,110,182	)			(8	)			—								—
Total liabilities			1,769,157				(1,239,688	)							54,914								584,383
Commitments and contingencies Stockholders’ equity:
Common stock (Predecessor)			56				(56	)			(9	)			—								—
Treasury stock (Predecessor)			(860	)			860				(9	)			—								—
Additional paid-in capital (Predecessor)			1,660,810				(1,660,810	)			(9	)			—								—
Common stock (Successor)			—				200				(10	)			—								200
Additional paid-in capital (Successor)			—				554,537				(10	)			—								554,537
Accumulated deficit			(2,309,679	)			2,073,875				(11	)			235,804				(15	)			—
Total stockholders’ equity			(649,673	)			968,606								235,804								554,737
Total liabilities and stockholders’ equity		$	1,119,484			$	(271,082	)						$	290,718							$	1,139,120

 

F-18

Reorganization Adjustments

 

1.

Reflects the net cash proceeds received from the sale of the Appalachia Properties in connection with the Plan and net cash payments made as of the Effective Date from implementation of the Plan (in thousands):

 

Sources:
Net cash proceeds from sale of Appalachia Properties(a)		$	512,472
Total sources			512,472
Uses:
Cash transferred to restricted account(b)			75,547
Break-up fee to Tug Hill			10,800
Repayment of outstanding borrowings under Pre-Emergence Credit Agreement			341,500
Repayment of 2017 Convertible Notes and 2022 Notes			100,000
Other fees and expenses(c)			20,230
Total uses			548,077
Net uses		$	(35,605	)

 

(a)

The closing of the sale of the Appalachia Properties occurred on February 27, 2017, but as emergence was contingent on such closing, the effects of the transaction are reflected as reorganization adjustments. See Note 4 – Divestiture for additional details on the sale. Total consideration received for the sale of the Appalachia Properties of $522.5 million included cash consideration of $512.5 million received at closing and a $10.0 million indemnity escrow which was released subsequent to emergence from bankruptcy (see Reorganization Adjustments item number 2 below).

(b)

Reflects the movement of $75.0 million of cash held in a restricted account to satisfy near-term plugging and abandonment liabilities, pursuant to the provisions of the Amended Credit Agreement (as defined in Note 13 – Debt ), and $0.5 million held in a restricted cash account for certain cure amounts in connection with the Chapter 11 proceedings.

(c)

Other fees and expenses include approximately $15.2 million of emergence and success fees, $2.7 million of professional fees and $2.4 million of payments made to seismic providers in settlement of their bankruptcy claims.

 

2.

Reflects a receivable for a $10.0 million indemnity escrow with release delayed until emergence from bankruptcy, net of a $0.7 million reimbursement to Tug Hill in connection with the sale of the Appalachia Properties (see Note 4 – Divestiture ).

3.

Reflects the payment of a claim to a seismic provider as a prepayment/deposit.

4.

Reflects the sale of vehicles in connection with the sale of the Appalachia Properties.

5.

Reflects the write-off of $2.6 million of unamortized debt issuance costs related to the Pre-Emergence Credit Agreement and the reversal of a $1.8 million prepayment made to Tug Hill in October 2016.

6.

Reflects the accrual of $2.0 million in expected bonus payments under the KEIP (as defined in Note 15 – Employee Benefit Plans ) and a $0.4 million termination fee in connection with the early termination of an office lease, less the settlement of a property tax accrual of $2.6 million in connection with the sale of the Appalachia Properties.

7.

Reflects the repayment of $341.5 million of outstanding borrowings under the Pre-Emergence Credit Agreement and the issuance of $225 million of 2022 Second Lien Notes as part of the settlement of the Predecessor Company 2017 Convertible Notes and 2022 Notes.

 

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8.

Liabilities subject to compromise were settled as follows in accordance with the Plan (in thousands):

 

1 3 ⁄ 4 % Senior Convertible Notes due 2017		$	300,000
7 1 ⁄ 2 % Senior Notes due 2022			775,000
Accrued interest			35,182
Liabilities subject to compromise of the Predecessor Company			1,110,182
Cash payment to senior noteholders			(100,000	)
Issuance of 2022 Second Lien Notes to former holders of the senior notes			(225,000	)
Fair value of equity issued to unsecured creditors			(539,089	)
Fair value of warrants issued to unsecured creditors			(15,648	)
Gain on settlement of liabilities subject to compromise		$	230,445

 

9.

Reflects the cancellation of the Predecessor Company’s common stock, treasury stock and additional paid-in capital.

10.

Reflects the issuance of Successor Company equity. In accordance with the Plan, the Successor Company issued 19.0 million shares of New Common Stock to the former holders of the 2017 Convertible Notes and the 2022 Notes and 1.0 million shares of New Common Stock to the Predecessor Company’s common stockholders. These amounts are subject to dilution by warrants issued to the Predecessor Company common stockholders, totaling approximately 3.5 million shares, with an exercise price of $42.04 per share and a term of four years. The fair value of the warrants was estimated at $4.43 per share using a Black-Scholes-Merton valuation model.

11.

Reflects the cumulative impact of the reorganization adjustments discussed above (in thousands):

 

Gain on settlement of liabilities subject to compromise		$	230,445
Professional and other fees paid at emergence			(10,648	)
Write-off of unamortized debt issuance costs			(2,577	)
Other reorganization adjustments			(1,915	)
Net impact to reorganization items			215,305
Gain on sale of Appalachia Properties			213,453
Cancellation of Predecessor Company equity			1,662,282
Other adjustments to accumulated deficit			(17,165	)
Net impact to accumulated deficit		$	2,073,875

Fresh Start Adjustments

 

12.

Fair value adjustments to oil and gas properties, associated inventory and unproved acreage. See above for a detailed discussion of the fair value methodology.

13.

Fair value adjustment for an office building owned by the Company. The income and sales comparison approaches were used in determining the fair value, using anticipated future earnings and an appropriate expected rate of return, as well as relying upon recent sales or offerings of similar assets.

14.

Fair value adjustments to the Company’s asset retirement obligations using estimated plugging and abandonment costs as of the Effective Date, adjusted for inflation and discounted at the Successor Company’s credit-adjusted risk free rate.

15.

Reflects the cumulative effect of the fresh start accounting adjustments discussed above.

 

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Reorganization Items

Reorganization items represent liabilities settled, net of amounts incurred subsequent to the Chapter 11 filing as a direct result of the Plan and are classified as “Reorganization items, net” in the Company’s consolidated statement of operations. The following table summarizes reorganization items, net (in thousands):

 

		Predecessor
		Period from January 1, 2017 through February 28, 2017
Gain on settlement of liabilities subject to compromise		$	230,445
Fresh start valuation adjustments			235,804
Reorganization professional fees and other expenses			(20,403	)
Write-off of unamortized debt issuance costs			(2,577	)
Other reorganization items			(5,525	)
Gain on reorganization items, net		$	437,744

The cash payments for reorganization items for the period from January 1, 2017 through February 28, 2017 include approximately $10.6 million of emergence and success fees and approximately $8.9 million of other reorganization professional fees and expenses paid on the Effective Date.

NOTE 4 — DIVESTITURE

On February 27, 2017, we completed the sale of the Appalachia Properties to EQT for net cash consideration of approximately $522.5 million, representing gross proceeds of $527.0 million adjusted downward by approximately $4.5 million for purchase price adjustments for operations related to the Appalachia Properties after June 1, 2016, the effective date of the transaction. A portion of the consideration received from the sale of the Appalachia Properties was used to fund the Company’s cash payment obligations under the Plan. See Note 2 – Reorganization .

At December 31, 2016, the estimated proved oil and natural gas reserves associated with these assets totaled 18 MMBoe (million barrels of oil equivalent), which represented approximately 34% of the Predecessor Company’s total estimated proved oil and natural gas reserves, on a volume equivalent basis. We no longer have assets or operations in Appalachia. Since accounting for the sale of these oil and gas properties as a reduction of the capitalized costs of oil and gas properties would have significantly altered the relationship between capitalized costs and proved reserves, we recognized a gain on the sale of $213.5 million during the period from January 1, 2017 through February 28, 2017 (Predecessor). The gain on the sale of the Appalachia Properties is computed as follows (in thousands):

 

Net consideration received for sale of Appalachia Properties		$	522,472
Add: Release of funds held in suspense			4,139
Transfer of asset retirement obligations			8,672
Other adjustments, net			2,597
Less: Transaction costs			(7,087	)
Carrying value of properties sold			(317,340	)
Gain on sale		$	213,453

The carrying value of the properties sold was determined by allocating total capitalized costs within the U.S. full cost pool between properties sold and properties retained based on their relative fair values.

 

F-21

NOTE 5 — STOCKHOLDERS’ EQUITY

Common Stock

As discussed in Note 2 – Reorganization , upon emergence from bankruptcy, all existing shares of Predecessor common stock were cancelled, and the Successor Company issued an aggregate of 20.0 million shares of New Common Stock, par value $0.01 per share, to the Predecessor Company’s existing common stockholders and holders of the 2017 Convertible Notes and the 2022 Notes pursuant to the Plan.

Warrants

As discussed in Note 2 – Reorganization , the Predecessor Company’s existing common stockholders received warrants to purchase approximately 3.5 million shares of New Common Stock. The warrants have an exercise price of $42.04 per share and a term of four years, unless terminated earlier by their terms upon the consummation of certain business combinations or sale transactions involving the Company. The Company allocated $15.6 million of the enterprise value to the warrants which is reflected in “Successor additional paid-in capital” on the audited consolidated balance sheet at December 31, 2017 (Successor).

NOTE 6 — EARNINGS PER SHARE

On February 28, 2017, upon emergence from Chapter 11 bankruptcy, the Company’s Predecessor equity was cancelled and new equity was issued. Additionally, the Predecessor Company’s 2017 Convertible Notes were cancelled. See Note 2 – Reorganization and Note 5 – Stockholders’ Equity for further details.

The following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings per share for the indicated periods (in thousands, except per share amounts):

 

		Successor				Predecessor
		Period from March 1, 2017 through December 31, 2017				Period from January 1, 2017 through February 28, 2017				Year Ended December 31,
										2016				2015
Income (numerator):
Basic:
Net income (loss)		$	(247,639	)		$	630,317			$	(590,586	)		$	(1,090,915	)
Net income attributable to participating securities			—				(4,995	)			—				—
Net income (loss) attributable to common stock - basic		$	(247,639	)		$	625,322			$	(590,586	)		$	(1,090,915	)
Diluted:
Net income (loss)		$	(247,639	)		$	630,317			$	(590,586	)		$	(1,090,915	)
Net income attributable to participating securities			—				(4,995	)			—				—
Net income (loss) attributable to common stock - diluted		$	(247,639	)		$	625,322			$	(590,586	)		$	(1,090,915	)
Weighted average shares (denominator):
Weighted average shares - basic			19,997				5,634				5,591				5,525
Dilutive effect of stock options			—				—				—				—
Dilutive effect of warrants			—				—				—				—
Dilutive effect of convertible notes			—				—				—				—
Weighted average shares - diluted			19,997				5,634				5,591				5,525
Basic income (loss) per share		$	(12.38	)		$	110.99			$	(105.63	)		$	(197.45	)
Diluted income (loss) per share		$	(12.38	)		$	110.99			$	(105.63	)		$	(197.45	)

 

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