bcei_Current folio_10Q

Table of Contents

 

 

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, 2014

 

 

Commission File Number:  001-35371

 

Bonanza Creek Energy, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

61-1630631

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

410 17th Street, Suite 1400

 

 

Denver, Colorado

 

80202

(Address of principal executive offices)

 

(Zip Code)

 

(720) 440-6100

(Registrants telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   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.

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer

 

Smaller reporting company

(Do not check if a 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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 3, 2014, the registrant had 41,237,932 shares of common stock outstanding.

 

 

 


 

Table of Contents

BONANZA CREEK ENERGY, INC.

INDEX

 

 

 

 

 

 

    

    

PAGE

Part I. 

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets September 30, 2014, and December 31, 2013

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income Three and Nine Months Ended September 30, 2014, and 2013

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2014, and 2013

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26 

 

 

 

 

 

Item 4.

Controls and Procedures

27 

 

 

 

 

Part II. 

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

27 

 

 

 

 

 

Item 1A.

Risk Factors

27 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

28 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

28 

 

 

 

 

 

Item 5.

Other Information

28 

 

 

 

 

 

Item 6.

Exhibits

28 

 

 

 

 

 

 

 

2


 

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1.        Financial Statements.

 

BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

 

 

 

 

 

 

    

September 30, 2014

    

December 31, 2013

 

 

(in thousands, except share data)

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

92,618 

 

$

180,582 

Accounts receivable:

 

 

 

 

 

 

Oil and gas sales

 

 

72,292 

 

 

57,485 

Joint interest and other

 

 

21,945 

 

 

12,915 

Prepaid expenses and other

 

 

3,924 

 

 

1,638 

Inventory of oilfield equipment

 

 

9,996 

 

 

10,696 

Derivative asset

 

 

13,300 

 

 

858 

Total current assets

 

 

214,075 

 

 

264,174 

Property and equipment  (successful efforts method), at cost:

 

 

 

 

 

 

Proved properties

 

 

1,753,604 

 

 

1,257,288 

Less: accumulated depreciation, depletion and amortization

 

 

(377,733)

 

 

(224,848)

Total proved properties, net

 

 

1,375,871 

 

 

1,032,440 

Unproved properties

 

 

213,251 

 

 

45,081 

Wells in progress

 

 

155,096 

 

 

110,848 

Natural gas plant, net of accumulated depreciation of $7,819 in 2014 and $5,903 in 2013

 

 

68,479 

 

 

71,474 

Other property and equipment, net of accumulated depreciation of $5,168 in 2014 and $2,822 in 2013

 

 

10,511 

 

 

7,406 

Oil and gas properties held for sale, net of accumulated depreciation, depletion, and amortization of $ - in 2014 and $1,463 in 2013 (Note 4)

 

 

 

 

360 

Total property and equipment, net

 

 

1,823,208 

 

 

1,267,609 

Long-term derivative asset

 

 

5,224 

 

 

293 

Other noncurrent assets

 

 

23,724 

 

 

13,859 

Total assets

 

$

2,066,231 

 

$

1,545,935 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses (Note 5)

 

$

172,568 

 

$

121,665 

Oil and gas revenue distribution payable

 

 

45,951 

 

 

36,241 

Contractual obligation for land acquisition

 

 

12,000 

 

 

12,000 

Derivative liability

 

 

 

 

5,320 

Total current liabilities

 

 

230,519 

 

 

175,226 

Long-term liabilities:

 

 

 

 

 

 

Revolving credit facility (Note 6)

 

 

 

 

6.75% Senior Notes due 2021, net of unamortized premium of $7,926 in 2014 and $8,847 in 2013

 

 

507,926 

 

 

508,847 

5.75% Senior Notes due 2023

 

 

300,000 

 

 

Contractual obligation for land acquisition

 

 

10,604 

 

 

22,033 

Ad valorem taxes

 

 

29,208 

 

 

18,867 

Derivative liability

 

 

 

 

1,203 

Deferred income taxes, net

 

 

192,050 

 

 

152,681 

Asset retirement obligations

 

 

15,382 

 

 

11,050 

Total liabilities

 

 

1,285,689 

 

 

889,907 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $.001 par value, 25,000,000 shares authorized, none outstanding

 

 

 

 

Common stock, $.001 par value, 225,000,000 shares authorized, 41,242,936 and 40,285,919 issued and outstanding in 2014 and 2013, respectively

 

 

41 

 

 

40 

Additional paid-in capital

 

 

588,794 

 

 

527,752 

Retained earnings

 

 

191,707 

 

 

128,236 

Total stockholders’ equity

 

 

780,542 

 

 

656,028 

Total liabilities and stockholders’ equity

 

$

2,066,231 

 

$

1,545,935 

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

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BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  AND COMPREHENSIVE INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

 

 

(in thousands, except per share amounts)

 

Operating net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas sales

 

$

156,371 

 

$

125,973 

 

$

435,448 

 

$

288,798 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating

 

 

18,217 

 

 

12,958 

 

 

53,316 

 

 

36,986 

 

Severance and ad valorem taxes

 

 

15,334 

 

 

8,086 

 

 

42,347 

 

 

18,251 

 

Exploration

 

 

3,291 

 

 

2,099 

 

 

4,470 

 

 

3,524 

 

Depreciation, depletion and amortization

 

 

63,241 

 

 

36,750 

 

 

158,489 

 

 

89,630 

 

General and administrative (including $3,162,  $2,652,  $17,312, and $9,716, respectively, of stock-based compensation)

 

 

14,814 

 

 

13,811 

 

 

63,075 

 

 

40,260 

 

Total operating expenses

 

 

114,897 

 

 

73,704 

 

 

321,697 

 

 

188,651 

 

Income from operations

 

 

41,474 

 

 

52,269 

 

 

113,751 

 

 

100,147 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative gain (loss)

 

 

50,846 

 

 

(16,890)

 

 

14,761 

 

 

(14,443)

 

Interest expense

 

 

(13,228)

 

 

(6,180)

 

 

(31,997)

 

 

(14,013)

 

Other income (loss)

 

 

181 

 

 

(53)

 

 

397 

 

 

(3)

 

Total other income (expense)

 

 

37,799 

 

 

(23,123)

 

 

(16,839)

 

 

(28,459)

 

Income from continuing operations before taxes

 

 

79,273 

 

 

29,146 

 

 

96,912 

 

 

71,688 

 

Income tax expense

 

 

(30,419)

 

 

(11,221)

 

 

(37,216)

 

 

(27,607)

 

Income from continuing operations

 

$

48,854 

 

$

17,925 

 

$

59,696 

 

$

44,081 

 

Discontinued operations (Note 4):

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations associated with oil and gas properties held for sale

 

 

 

 

(234)

 

 

(85)

 

 

(535)

 

Gain (loss) on sale of oil and gas properties

 

 

(117)

 

 

 

 

6,213 

 

 

 

Income tax (expense) benefit

 

 

45 

 

 

90 

 

 

(2,353)

 

 

206 

 

Gain (loss) from discontinued operations

 

 

(72)

 

 

(144)

 

 

3,775 

 

 

(329)

 

Net income

 

$

48,782 

 

$

17,781 

 

$

63,471 

 

$

43,752 

 

Comprehensive income

 

$

48,782 

 

$

17,781 

 

$

63,471 

 

$

43,752 

 

Basic income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.18 

 

$

0.44 

 

$

1.47 

 

$

1.09 

 

Income from discontinued operations

 

$

 

$

 

$

0.09 

 

$

 

Net income per common share

 

$

1.18 

 

$

0.44 

 

$

1.56 

 

$

1.09 

 

Diluted income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.18 

 

$

0.44 

 

$

1.46 

 

$

1.09 

 

Income from discontinued operations

 

$

 

$

 

$

0.09 

 

$

 

Net income per common share

 

$

1.18 

 

$

0.44 

 

$

1.55 

 

$

1.09 

 

Basic weighted-average common shares outstanding

 

 

40,556 

 

 

39,356 

 

 

39,958 

 

 

39,315 

 

Diluted weighted-average common shares outstanding

 

 

40,708 

 

 

39,375 

 

 

40,105 

 

 

39,349 

 

 

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

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BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

    

2014

    

2013

 

 

(in thousands)

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

63,471 

 

$

43,752 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

158,557 

 

 

89,897 

Deferred income taxes

 

 

39,369 

 

 

27,402 

Stock-based compensation

 

 

17,312 

 

 

9,716 

Amortization of deferred financing costs

 

 

1,953 

 

 

1,120 

Amortization of premium on Senior Notes

 

 

(921)

 

 

Accretion of contractual obligation for land acquisition

 

 

571 

 

 

571 

Derivative (gain) loss

 

 

(14,761)

 

 

14,443 

Abandoned lease

 

 

 

 

1,688 

Gain on sale of oil and gas properties

 

 

(6,213)

 

 

Other

 

 

(12)

 

 

Changes in current assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(23,837)

 

 

(32,081)

Prepaid expenses and other assets

 

 

(2,286)

 

 

726 

Accounts payable and accrued liabilities

 

 

43,133 

 

 

33,961 

Settlement of asset retirement obligations

 

 

(374)

 

 

(73)

Net cash provided by operating activities

 

 

275,962 

 

 

191,122 

Cash flows from investing activities:

 

 

 

 

 

 

Acquisition of oil and gas properties

 

 

(178,883)

 

 

(10,969)

Proceeds from sale of oil and gas properties

 

 

6,000 

 

 

Payments of contractual obligations

 

 

(12,000)

 

 

(12,000)

Exploration and development of oil and gas properties

 

 

(448,586)

 

 

(306,685)

Natural gas plant capital expenditures

 

 

(281)

 

 

(4,459)

Derivative cash settlements

 

 

(9,136)

 

 

(9,867)

(Increase) decrease in restricted cash

 

 

(3,062)

 

 

79 

Additions to property and equipment - non oil and gas

 

 

(5,451)

 

 

(3,695)

Net cash used in investing activities

 

 

(651,399)

 

 

(347,596)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from credit facility

 

 

230,000 

 

 

72,000 

Payments to credit facility

 

 

(230,000)

 

 

(191,500)

Proceeds from sale of Senior Notes

 

 

300,000 

 

 

300,000 

Offering costs related to sale of Senior Notes

 

 

(6,867)

 

 

(7,343)

Payment of employee tax withholdings in exchange for the return of common stock

 

 

(5,319)

 

 

(3,503)

Deferred financing costs

 

 

(341)

 

 

(79)

Net cash provided by financing activities

 

 

287,473 

 

 

169,575 

Net change in cash and cash equivalents

 

 

(87,964)

 

 

13,101 

Cash and cash equivalents:

 

 

 

 

 

 

Beginning of period

 

 

180,582 

 

 

4,268 

End of period

 

$

92,618 

 

$

17,369 

Supplemental cash flow disclosure:

 

 

 

 

 

 

Cash paid for interest

 

$

18,519 

 

$

2,855 

Stock issued for the acquisition of oil and gas properties

 

$

49,050 

 

$

Cash paid for income taxes

 

$

200 

 

$

100 

Changes in working capital related to drilling expenditures, natural gas plant expenditures, and property acquisition

 

$

26,776 

 

$

12,066 

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

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BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1 - ORGANIZATION AND BUSINESS

 

Bonanza Creek Energy, Inc. (“BCEI” or, together with our consolidated subsidiaries, the “Company) is engaged in the acquisition, exploration, development and production of onshore oil and associated liquids-rich natural gas in the United States. Our oil and liquids weighted assets are concentrated primarily in the Wattenberg Field in Colorado (Rocky Mountain region) and the Dorcheat Macedonia Field in Southern Arkansas (Mid-Continent region).

 

NOTE 2 - BASIS OF PRESENTATION

 

These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. The quarterly financial statements included herein do not necessarily include all of the disclosures as may be required under generally accepted accounting principles for complete financial statements. There has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”), except as disclosed herein. These consolidated financial statements include all of the adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations. All such adjustments are of a normal recurring nature only. The results of operations for the quarterly periods are not necessarily indicative of the results to be expected for the full fiscal year. The Company evaluated events subsequent to the balance sheet date of September 30, 2014, through the filing date of this report. Certain prior period amounts are reclassified to conform to the current period presentation, when necessary.

 

Principles of Consolidation

 

The condensed consolidated balance sheets (“balance sheets”) include the accounts of BCEI and its wholly owned subsidiaries, Bonanza Creek Energy Operating Company, LLC, Bonanza Creek Energy Resources, LLC, Holmes Eastern Company, LLC, Bonanza Creek Energy Upstream LLC, and Bonanza Creek Energy Midstream, LLC. All significant intercompany accounts and transactions have been eliminated.

 

Significant Accounting Policies

 

The significant accounting policies followed by the Company were set forth in Note 1 to the 2013 Form 10-K and are supplemented by the notes throughout this report. These unaudited condensed consolidated financial statements should be read in conjunction with the 2013 Form 10-K.

 

Recently Issued Accounting Standards

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Update No. 2014-08  - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The update is aimed at reducing the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have or will have a major effect on an entity’s operations and financial results. This authoritative accounting guidance is effective for interim and annual periods beginning after December 15, 2014 and is to be applied prospectively. The Company is currently evaluating the provisions of this guidance and assessing its impact, but does not currently believe it will have a material effect on the Company’s financial statements or disclosures.

 

In May 2014, the FASB issued Update No. 2014-09  - Revenue From Contracts With Customers. The update prescribes two acceptable methods and is effective for the annual period beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.

 

In June 2014, the FASB issued Update No. 2014-12 - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period. The guidance relates to the recognition of share-based compensation when an award provides that a performance target can be achieved after the requisite service period. This authoritative accounting guidance may be applied either prospectively or retrospectively and is effective for annual periods and interim periods beginning after December 15, 2015. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.

 

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In August 2014, the FASB issued Update No. 2014-15 - Presentation of Financial Statements – Going Concern that requires management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the entity’s financial statements are issued, or within one year after the date that the entity’s financial statements are available to be issued, and to provide disclosures when certain criteria are met. This guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.

 

NOTE 3 - ACQUISITIONS

 

The Company acquired approximately 86,000 gross (34,000 net) acres of oil and gas properties, leasehold mineral interests and related assets located in the Wattenberg Field (“Wattenberg Field Acquisition”) from a private operator. The Company paid approximately $174.6 million (inclusive of customary acquisition costs) in cash and issued 853,492 shares of the Company’s common stock valued at $57.47 per share, the market price at the time of closing, for the acquired assets. The Wattenberg Field Acquisition had an effective date of June 1, 2014 and closed on July 8, 2014. The results of operations for the Wattenberg Field Acquisition have been included in the Company’s condensed consolidated financial statements from the date of closing. Pro forma information is not presented as the pro forma results would not have been materially different from the information presented in the accompanying condensed consolidated statements of operations and comprehensive income (the “accompanying statements of operations”).

 

The Wattenberg Field Acquisition was recorded using the purchase method of accounting. The initial purchase price will be adjusted for post-closing settlements. The following table summarizes the allocation of consideration paid (inclusive of customary acquisition costs) to the tangible assets acquired and liabilities assumed in the Wattenberg Field Acquisition.

 

 

 

 

 

 

 

 

Asset Valuation Amount

 

 

 

(in thousands)

Purchase price

 

$

223,650 

 

 

 

 

Allocation of purchase price:

 

 

 

  Proved properties

 

$

25,014 

  Unproved properties

 

 

198,729 

  Asset retirement obligation

 

 

(93)

           Total

 

$

223,650 

 

 

NOTE 4 - DISCONTINUED OPERATIONS

 

During June 2012, the Company began marketing, with intent to sell, all of its oil and gas properties in California classifying them as assets held for sale. Assets are classified as held for sale when the Company commits to a plan to sell the assets and there is reasonable certainty that the sale will take place within one year. The Company determined that its intent to sell all of its assets in a region qualified as discontinued operations. The Company sold its remaining property in this region during the first quarter of 2014 for approximately $6.0 million and recorded a gain on the sale of oil and gas properties in the amount of $6.2 million. The carrying amounts of the remaining properties included within assets held for sale classified as discontinued operations are presented below.

 

 

 

 

 

 

 

 

 

 

    

As of September 30,

    

As of December 31,

 

 

2014

 

2013

 

 

(in thousands)

 

 

 

 

 

 

 

Oil and gas properties, successful efforts method:

 

 

 

 

 

 

Proved properties

 

$

 

$

1,721 

Unproved properties

 

 

 

 

Wells in progress

 

 

 

 

101 

Total property and equipment

 

 

 

 

1,823 

Less accumulated depreciation, depletion and amortization

 

 

 

 

(1,463)

Property and equipment, net

 

$

 

$

360 

 

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The total revenues, expenses, and income associated with the operation of the oil and gas properties held for sale are presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

 

 

(in thousands)

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas sales

 

$

 —

 

$

403 

 

$

361 

 

$

1,278 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating

 

 

 —

 

 

574 

 

 

366 

 

 

1,479 

 

Severance and ad valorem taxes

 

 

 —

 

 

 —

 

 

12 

 

 

 

Exploration

 

 

 —

 

 

 

 

 —

 

 

66 

 

Depreciation, depletion and amortization

 

 

 —

 

 

62 

 

 

68 

 

 

267 

 

Total operating expenses

 

 

 

 

 

637 

 

 

446 

 

 

1,813 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations associated with oil and gas properties held for sale

 

$

 —

 

$

(234)

 

$

(85)

 

$

(535)

 

 

 

 

 

NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses contain the following:

 

 

 

 

 

 

 

 

 

 

    

As of September 30,

    

As of December 31,

 

 

2014

 

2013

 

 

(in thousands)

Drilling and completion costs

 

$

107,747 

 

$

80,971 

Accounts payable trade

 

 

7,269 

 

 

3,288 

Accrued general and administrative cost

 

 

12,875 

 

 

12,720 

Lease operating expenses

 

 

6,339 

 

 

5,440 

Accrued reclamation cost

 

 

162 

 

 

168 

Accrued interest

 

 

18,940 

 

 

7,065 

Accrued oil and gas derivatives

 

 

 

 

446 

Production and ad valorem taxes and other

 

 

19,236 

 

 

11,567 

Total accounts payable and accrued expenses

 

$

172,568 

 

$

121,665 

 

 

NOTE 6 - LONG-TERM DEBT

 

Credit Facility

 

The Company’s senior secured revolving Credit Agreement (the “Revolver” or “credit facility”), dated March 29, 2011, as amended, was further amended on September 30, 2014, to increase the borrowing base from $450 million (decreased from $525 million following the July 2014 issuance of the Company’s 5.75% Senior Notes) to $600 million. The credit facility has an aggregate potential borrowing amount of $1 billion. The Company elected to limit bank commitments to $500 million while reserving the option to access, at the Company’s request, the full $600 million borrowing base prior to the next semi-annual redetermination on May 15, 2015. The Revolver is collateralized by substantially all of the Company’s assets and matures on September 15, 2018. As of September 30, 2014 and December 31, 2013, the Company had no outstanding balance under the Revolver with an available borrowing capacity of $576 million and $414 million, respectively, after the reduction of the outstanding letter of credit of $24 million and $36 million, respectively.

 

The Revolver restricts, among other items, the payment of dividends, certain additional indebtedness, sales of assets, loans and certain investments and mergers. The Revolver also contains certain financial covenants, which require the maintenance of minimum current and debt coverage ratios. The Company was in compliance with all financial and non-financial covenants as of September 30, 2014 and through the filing date of this report.

 

5.75% Senior Notes

 

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On July 15, 2014, the Company issued $300 million aggregate principal amount of 5.75% Senior Notes (the “5.75% Senior Notes”) that mature on February 1, 2023. Interest on the 5.75% Senior Notes began accruing on July 15, 2014, and interest is payable on February 1 and August 1 of each year, beginning on February 1, 2015. The 5.75% Senior Notes are guaranteed on a senior unsecured basis by the Company’s existing and future subsidiaries that incur or guarantee certain indebtedness, including indebtedness under the Revolver. The net proceeds from the sale of the 5.75% Senior Notes were $293.4 million after deductions of $6.6 million of expenses and underwriting discounts and commissions. The net proceeds were used to pay off the Company’s outstanding credit facility balance and the remainder will be used for general corporate purposes, which may include funding the drilling and development program and other capital expenditures.

 

At any time prior to August 1, 2017, subject to certain limitations, the Company may redeem up to 35% of the aggregate principal amount of the 5.75% Senior Notes at a redemption price of 105.75% of the principal amount, plus accrued and unpaid interest, with an amount of cash not greater than the net cash proceeds of an equity offering. The Company may redeem all or a part of the 5.75% Senior Notes at any time prior to August 1, 2018 subject to a “make-whole” premium and accrued and unpaid interest. On or after August 1, 2018, the Company may redeem all or a part of the 5.75% Senior Notes at the redemption price of 102.875% for 2018, 101.438% for 2019, and 100.0% for 2020 and thereafter, during the twelve month period beginning on August 1 of each applicable year, in each case, plus accrued and unpaid interest.

 

As of September 30, 2014, and through the filing date of this report, all of the existing subsidiaries of the Company are guarantors of the 5.75% Senior Notes, and all such subsidiaries are 100% owned by the Company. The guarantees by the subsidiaries are full and unconditional (except for customary release provisions) and constitute joint and several obligations of the subsidiaries. The Company has no independent assets or operations unrelated to its investments in its consolidated subsidiaries. There are no significant restrictions on the Company’s ability or the ability of any subsidiary guarantor to obtain funds from its subsidiaries by such means as a dividend or loan.

 

NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES

 

From time to time, the Company is involved in various commercial and regulatory claims, litigation and other legal proceedings that arise in the ordinary course of its business. The Company assesses these claims in an effort to determine the degree of probability and range of possible loss for potential accrual in its consolidated financial statements. In accordance with accounting authoritative guidance, an accrual is recorded for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the most likely anticipated outcome or the minimum amount within a range of possible outcomes. Because legal proceedings are inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about uncertain future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures. No claims have been made, nor is the Company aware of any material uninsured liability which the Company may have, as it relates to any environmental cleanup, restoration or the violation of any rules or regulations. As of the date of this filing, there were no material pending or overtly threatened legal actions against the Company of which it is aware.

 

Commitments

 

On October 1, 2014, the Company entered into a purchase and transportation agreement to deliver a fixed determinable quantity of crude oil currently anticipated to take effect during the third quarter of 2016. The minimum quantity commitment of crude oil is 15,000 barrels per day over an initial seven year term which equates to an aggregate financial commitment of approximately $322 million over the initial term. While the volume commitment may be met with Company volumes or third party volumes delegated by the Company, the Company will be required to make periodic deficiency payments for any shortfalls in delivering the minimum volume commitments.  

 

On October 8, 2014, the Company entered into a purchase and transportation agreement to deliver a fixed determinable quantity of crude oil currently anticipated to take effect during the first quarter of 2015. The minimum quantity commitment of crude oil is 12,580 barrels per day over an initial five year term which equates to an aggregate financial commitment of approximately $218 million over the initial term. While the volume commitment may be met with Company volumes or third party volumes delegated by the Company, the Company will be required to make periodic deficiency payments for any shortfalls in delivering the minimum volume commitments.

 

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Table of Contents

NOTE 8 - STOCK-BASED COMPENSATION

 

Restricted Stock under the Long Term Incentive Plan

 

The Company grants shares of restricted stock, each of which represents one share of the Company’s common stock typically vesting in one-third increments over approximately three years. Shares of restricted stock are valued at the closing price of the Company’s common stock on the grant date and are recognized as general and administrative expense over the vesting period of the award.

 

During the nine months ended September 30, 2014, the Company granted 228,818 shares of restricted stock under the Company’s Long Term Incentive Program (“LTIP”) to certain employees. The fair value of the issuance was $11.6 million. Total expense recorded for restricted stock for the three month periods ended September 30, 2014 and 2013, was $2.6 million and $2.5 million, respectively, and $15.8 million and $9.2 million for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, unrecognized compensation cost was $1 million and will be amortized through 2017.

 

During the nine months ended September 30, 2014, the Company issued 9,416 shares of restricted common stock under the LTIP to its non-employee directors. Total expense recorded for non-employee directors for the three month periods ended September 30, 2014 and 2013, was $140,000 and $86,000, respectively and $545,000 and $258,000 for the nine months ended September 30, 2014 and 2013, respectively. These awards vest approximately one year after issuance.

 

A summary of the status and activity of non-vested restricted stock for the nine months ended September 30, 2014 is presented below:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-

 

 

 

 

 

Average 

 

 

 

Restricted 

 

Grant-Date 

 

 

 

Stock

 

    Fair Value    

 

Non-vested at beginning of year

 

836,002 

 

$

25.11 

 

Granted

 

238,234 

 

$

48.81 

 

Vested

 

(455,878)

 

$

25.84 

 

Forfeited

 

(25,229)

 

$

29.11 

 

Non-vested at end of quarter

 

593,129 

 

$

34.81 

 

 

Performance Stock Units under the Long Term Incentive Plan

 

The Company grants performance stock units (“PSUs”) under the LTIP to certain officers of the Company. The number of shares of the Company’s common stock that may be issued to settle PSUs range from zero to two times the number of PSUs awarded. PSUs granted prior to 2014 are determined based on the Company’s performance over a three-year measurement period and vest in their entirety at the end of the measurement period. Satisfaction of the performance conditions for the PSUs granted during 2014 are determined at the end of each annual measurement period over the course of the three-year performance cycle in an amount up to two-thirds of the target number of PSUs that are eligible for vesting (such that an amount equal to 200% of the target number of PSUs may be earned during the performance cycle). For all grants, the PSUs will be settled in shares following the end of the three-year performance cycle. Any PSUs that have not vested at the end of the applicable measurement period are forfeited.

 

During the nine months ended September 30, 2014, the Company granted 63,766 PSUs under the LTIP to certain officers. The fair value of the issuance was $2.7 million. Total expense recorded for PSUs for the three month periods ended September 30, 2014 and 2013 was $392,000 and $102,000, respectively and $1.0 million and $209,000 for the nine month periods ended September 30, 2014 and 2013, respectively. As of September 30, 2014, there was $3.0 million of total unrecognized compensation expense related to unvested PSUs to be amortized through 2016.

 

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Table of Contents

A summary of the status and activity of PSUs for the nine months ended September 30, 2014 is presented below:

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-Average

 

 

 

 

 

Grant-Date

 

 

 

PSU

 

        Fair Value        

 

Non-vested at beginning of year (1)

 

40,191 

 

$

32.05 

 

Granted(1)

 

63,766 

 

$

42.50 

 

Vested(1)

 

 

$

 

Forfeited(1)

 

 

$

 

Non-vested at end of quarter(1)

 

103,957 

 

$

38.46 

 


(1)

The number of awards assumes that the associated performance condition is met at the target amount. The final number of shares of common stock issued may vary depending on the performance multiplier, which ranges from zero to two, depending on the level of satisfaction of the performance condition.

 

NOTE 9 - FAIR VALUE MEASUREMENTS

 

The Company follows fair value measurement authoritative guidance for all assets and liabilities measured at fair value, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

 

Level 1:Quoted prices are available in active markets for identical assets or liabilities

 

Level 2:Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable

 

Level 3:Significant inputs to the valuation model are unobservable

 

Financial assets and liabilities are to be classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

 

The following tables present the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 and their classification within the fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2014

 

    

Level 1

    

Level 2

    

Level 3

 

 

(in thousands)

Derivative assets

 

$

 

$

18,524 

 

$

—  

Derivative liabilities

 

$

 

$

—  

 

$

—  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013

 

    

Level 1

    

Level 2

    

Level 3

 

 

(in thousands)

Derivative assets

 

$

 

$

1,151 

 

$

Derivative liabilities

 

$

 

$

6,523 

 

$

 

Derivatives

 

Fair value of all derivative instruments are estimated with industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value of money, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. All valuations were compared against counterparty statements to verify the reasonableness of the estimate. The Company’s commodity swaps and collars are validated by observable transactions for the same or similar commodity options using the NYMEX futures index, and are designated as Level 2 within the

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valuation hierarchy. Presently, all of our derivative arrangements are concentrated with five counterparties all of which are lenders under the Company’s Revolver.

 

Proved Oil and Gas Properties

 

Proved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs exceed the sum of the undiscounted cash flows. The Company uses Level 3 inputs and the income valuation technique, which converts future amounts to a single present value amount, to measure the fair value of proved properties through an application of discount rates and price forecasts selected by the Company’s management. The calculation of the discount rate is a significant management estimate based on the best information available. Management believes that the discount rate is representative of current market conditions and reflects the following factors: estimate of future cash payments, expectations of possible variations in the amount and/or timing of cash flows, the risk premium, and nonperformance risk. The price forecast is based on the NYMEX strip pricing, adjusted for basis differentials. Future operating costs are also adjusted as deemed appropriate for these estimates. Proved properties classified as held for sale are valued using a market approach, based on an estimated selling price, as evidenced by the most current bid prices received from third parties. If an estimated selling price is not available, the Company utilizes the income valuation technique discussed above. There were no proved properties measured at fair value at September 30, 2014 or December 31, 2013.

 

Unproved Oil and Gas Properties

 

Unproved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs may not be recoverable. To measure the fair value of unproved properties, the Company uses Level 3 inputs and the income valuation technique, which takes into account the following significant assumptions: future development plans, risk weighted potential resource recovery, and estimated reserve values. Unproved properties classified as held for sale are valued using a market approach, based on an estimated selling price, as evidenced by the most current bid prices received from third parties. If an estimated selling price is not available, the Company uses the price received for similar acreage in recent transactions by the Company or other market participants in the principal market. There were no unproved properties measured at fair value as of September 30, 2014 or December 31, 2013.

 

Asset Retirement Obligation

 

The Company utilizes the income valuation technique to determine the fair value of the asset retirement obligation liability at the point of inception by applying a credit-adjusted risk-free rate, which takes into account the Company’s credit risk, the time value of money, and the current economic state, to the undiscounted expected abandonment cash flows. Upon completion of wells and natural gas plants, the Company records an asset retirement obligation at fair value using Level 3 assumptions. Given the unobservable nature of the inputs, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs.  There were no asset retirement obligations measured at fair value at September 30, 2014 or December 31, 2013.

 

Long-term Debt

 

As of September 30, 2014, the Company had $500 million of outstanding 6.75% Senior Notes (the “6.75% Senior Notes”) and $300 million of outstanding 5.75% Senior Notes. The 6.75% Senior Notes are recorded at cost net of the unamortized premium on the accompanying balance sheets at $507.9 million and $508.8 million as of September 30, 2014 and December 31, 2013, respectively. The fair value of the 6.75%  Senior Notes as of September 30, 2014 and December 31, 2013 was $515.0 million and $527.5 million, respectively. The fair value of the 5.75% Senior Notes as of September 30, 2014 was $294.0 million. The Senior Notes are measured using Level 1 inputs based on a secondary market trading price. The Company’s Revolver, when drawn upon, approximates fair value as the applicable interest rates are floating.

 

NOTE 10 - DERIVATIVES

 

The Company enters into commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows. All contracts are entered into for other-than-trading purposes. The Company’s derivatives include swaps and collar arrangements for oil and gas and none of the derivative instruments qualify as having hedging relationships.

 

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Table of Contents

As of September 30, 2014, and as of the filing date of this report, the Company had the following derivative commodity contracts in place:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Total Volumes

    

 

 

    

Average

    

Average

    

Average

    

Fair Market

Settlement

 

Derivative

 

(Bbls/MMBtu

 

Average Fixed

 

Short Floor

 

Floor

 

Ceiling

 

Value of Asset

Period

 

Instrument

 

per day)

 

Price

 

Price

 

Price

 

Price

 

(Liability)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Oil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4Q 2014

 

Swap

 

6,370 

 

$

95.62 

 

 

 

 

 

 

 

 

 

 

 

3,166 

1Q 2015

 

Swap

 

6,000 

 

$

95.39 

 

 

 

 

 

 

 

 

 

 

 

3,481 

2Q 2015

 

Swap

 

5,000 

 

$

94.21 

 

 

 

 

 

 

 

 

 

 

 

2,940 

3Q 2015

 

Swap

 

2,000 

 

$

93.43 

 

 

 

 

 

 

 

 

 

 

 

1,131 

4Q 2015

 

Swap

 

2,000 

 

$

93.43 

 

 

 

 

 

 

 

 

 

 

 

1,177 

4Q 2014

 

Collar

 

4,326 

 

 

 

 

 

 

 

$

86.16 

 

$

96.57 

 

 

280 

4Q 2014

 

3-Way Collar

 

2,000 

 

 

 

 

$

65.00 

 

$

87.68 

 

$

99.75 

 

 

249 

1Q 2015

 

3-Way Collar

 

6,500 

 

 

 

 

$

68.08 

 

$

84.32 

 

$

95.90 

 

 

302 

2Q 2015

 

3-Way Collar

 

5,500 

 

 

 

 

$

67.73 

 

$

84.09 

 

$

95.16 

 

 

321 

3Q 2015

 

3-Way Collar

 

6,500 

 

 

 

 

$

68.46 

 

$

84.62 

 

$

95.49 

 

 

655 

4Q 2015

 

3-Way Collar

 

6,500 

 

 

 

 

$

68.46 

 

$

84.62 

 

$

95.49 

 

 

660 

1Q 2016

 

3-Way Collar

 

5,500 

 

 

 

 

$

70.00 

 

$

85.00 

 

$

96.83 

 

 

853 

2Q 2016

 

3-Way Collar

 

5,500 

 

 

 

 

$

70.00 

 

$

85.00 

 

$

96.83 

 

 

856 

3Q 2016

 

3-Way Collar

 

5,500 

 

 

 

 

$

70.00 

 

$

85.00 

 

$

96.83 

 

 

875 

4Q 2016

 

3-Way Collar

 

5,500 

 

 

 

 

$

70.00 

 

$

85.00 

 

$

96.83 

 

 

789 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

17,735 

Gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4Q 2014

 

3-Way Collar

 

30,000 

 

 

 

 

$

3.63 

 

$

4.21 

 

$

4.81 

 

$

496 

1Q 2015

 

3-Way Collar

 

15,000 

 

 

 

 

$

3.50 

 

$

4.00 

 

$

4.75 

 

$

(48)

2Q 2015

 

3-Way Collar

 

15,000 

 

 

 

 

$

3.50 

 

$

4.00 

 

$

4.75 

 

$

190 

3Q 2015

 

3-Way Collar

 

15,000 

 

 

 

 

$

3.50 

 

$

4.00 

 

$

4.75 

 

$

137 

4Q 2015

 

3-Way Collar

 

15,000 

 

 

 

 

$

3.50 

 

$

4.00 

 

$

4.75 

 

$

14 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

789 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

18,524 

 

Derivative Assets and Liabilities Fair Value

 

The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities.

 

The following table contains a summary of all the Company’s derivative positions reported on the accompanying balance sheets as of September 30, 2014 and December 31, 2013:

 

 

 

 

 

 

 

 

 

 

As of September 30, 2014

 

    

Balance Sheet Location

    

Fair Value

 

 

 

 

(in thousands)

Derivative Assets:

 

 

 

 

 

Commodity contracts

 

Current assets

 

$

13,300 

Commodity contracts

 

Noncurrent assets

 

 

5,224 

Derivative Liabilities:

 

 

 

 

 

Commodity contracts

 

Current liabilities

 

 

—  

Commodity contracts

 

Long-term liabilities

 

 

—  

Total net derivative asset

 

 

 

$

18,524 

 

 

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Table of Contents

 

 

 

 

 

 

 

 

As of December 31, 2013

 

    

Balance Sheet Location

    

Fair Value

 

 

 

 

(in thousands)

Derivative Assets:

 

 

 

 

 

Commodity contracts

 

Current assets

 

$

858 

Commodity contracts

 

Noncurrent assets

 

 

293 

Derivative Liabilities:

 

 

 

 

 

Commodity contracts

 

Current liabilities

 

 

(5,320)

Commodity contracts

 

Long-term liabilities

 

 

(1,203)

Total net derivative liability

 

 

 

$

(5,372)

 

The following table summarizes the components of the derivative gain (loss) presented on the accompanying statements of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30,

 

Nine months ended September 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

 

 

(in thousands)

 

(in thousands)

 

Derivative cash settlement gain (loss):