UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

 

 

FORM 10-Q

 

 

 

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2014

OR

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 001-14039

 

 

 

 

 

 

 

 

Callon Petroleum Company

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware

(State or Other Jurisdiction of

Incorporation or Organization)

64-0844345

(IRS Employer

Identification No.)

 

 

200 North Canal Street

Natchez, Mississippi

(Address of Principal Executive Offices)

39120

(Zip Code)

 

601-442-1601

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

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

 

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

 

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

 

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

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if smaller reporting company)

Smaller reporting company

 

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

 

As of October 31, 2014,  55,225,288 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding.

 

 


 

 

Table of Contents

 

 

 

Part I. Financial Information

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets  

4

 

 

Consolidated Statements of Operations  

5

 

 

Consolidated Statements of Cash Flows  

6

 

 

Notes to Consolidated Financial Statements  

7

 

 

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

19

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk 

30

 

 

Item 4.  Controls and Procedures 

31

 

 

Part II.  Other Information

 

 

 

Item 1.  Legal Proceedings 

32

 

 

Item 1A.  Risk Factors 

32

 

 

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

32

 

 

Item 3.  Defaults Upon Senior Securities 

32

 

 

Item 4.  Mine Safety Disclosures 

32

 

 

Item 5.  Other Information 

32

 

 

Item 6.  Exhibits 

33

 

 

 

2


 

 

Table of Contents

 

DEFINITIONS

 

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

 

·

ARO:  asset retirement obligation.

·

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

·

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

·

BBtu: billion Btu.

·

BOE/d:  BOE per day.

·

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

·

LIBOR:  London Interbank Offered Rate.

·

LOE:  lease operating expense.

·

MBbls:  thousand barrels of oil.

·

MBOE:  thousand BOE.

·

Mcf:  thousand cubic feet of natural gas.

·

MMBtu:  million Btu.

·

MMcf:  million cubic feet of natural gas.

·

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

·

NYMEX:  New York Mercantile Exchange.

·

Oil: includes crude oil and condensate.

·

SEC:  United States Securities and Exchange Commission.

·

GAAP: Generally Accepted Accounting Principles in the United States.

 

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

 

3


 

 

Table of Contents

Part I.  Financial Information

Item I.  Financial Statements

Callon Petroleum Company

Consolidated Balance Sheets

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

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

December 31, 2013

ASSETS

 

Unaudited

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

7,193 

 

$

3,012 

Accounts receivable

 

27,923 

 

 

20,586 

Deferred tax asset

 

3,321 

 

 

3,843 

Fair value of derivatives

 

4,842 

 

 

60 

Other current assets

 

1,260 

 

 

2,063 

Total current assets

 

44,539 

 

 

29,564 

Oil and natural gas properties, full cost accounting method:

 

 

 

 

 

  Evaluated properties

 

1,894,803 

 

 

1,701,577 

  Less accumulated depreciation, depletion and amortization

 

(1,460,271)

 

 

(1,420,612)

  Net oil and natural gas properties

 

434,532 

 

 

280,965 

  Unevaluated properties

 

40,445 

 

 

43,222 

Total oil and natural gas properties

 

474,977 

 

 

324,187 

Other property and equipment, net

 

7,033 

 

 

7,255 

Restricted investments

 

3,802 

 

 

3,806 

Deferred tax asset

 

45,952 

 

 

57,765 

Acquisition deposit

 

10,629 

 

 

Other assets, net

 

5,294 

 

 

1,376 

Total assets

$

592,226 

 

$

423,953 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

$

50,491 

 

$

53,464 

Market-based restricted stock unit awards

 

5,668 

 

 

4,173 

Asset retirement obligations

 

5,138 

 

 

4,120 

Fair value of derivatives

 

465 

 

 

1,036 

Total current liabilities

 

61,762 

 

 

62,793 

13% senior notes:

 

 

 

 

 

  Principal outstanding

 

 

 

48,481 

  Deferred credit, net of accumulated amortization of $0 and $26,239, respectively

 

 

 

5,267 

Total 13% senior notes

 

 

 

53,748 

Senior secured revolving credit facility

 

20,000 

 

 

22,000 

Secured second lien term loan

 

82,500 

 

 

Asset retirement obligations

 

1,281 

 

 

2,612 

Market-based restricted stock unit awards

 

9,841 

 

 

3,409 

Other long-term liabilities

 

1,091 

 

 

297 

Total liabilities

 

176,475 

 

 

144,859 

Stockholders’ equity:

 

 

 

 

 

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

 

16 

 

 

16 

Common stock, $0.01 par value, 110,000,000 and 60,000,000 shares authorized; 55,218,827 and 40,345,456 shares outstanding, respectively

 

552 

 

 

404 

Capital in excess of par value

 

525,166 

 

 

401,540 

Accumulated deficit

 

(109,983)

 

 

(122,866)

Total stockholders’ equity

 

415,751 

 

 

279,094 

Total liabilities and stockholders’ equity

$

592,226 

 

$

423,953 

 

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

4


 

 

Table of Contents

Callon Petroleum Company

Consolidated Statements of Operations

(Unaudited; in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

  Oil sales

 

$

36,346 

 

$

27,014 

 

$

104,965 

 

$

65,615 

  Natural gas sales

 

 

3,311 

 

 

3,783 

 

 

8,479 

 

 

10,483 

Total operating revenues

 

 

39,657 

 

 

30,797 

 

 

113,444 

 

 

76,098 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

  Lease operating expenses

 

 

6,270 

 

 

5,270 

 

 

14,863 

 

 

16,412 

  Production taxes

 

 

2,247 

 

 

991 

 

 

6,429 

 

 

2,217 

  Depreciation, depletion and amortization

 

 

16,115 

 

 

11,907 

 

 

38,635 

 

 

33,603 

  General and administrative

 

 

3,261 

 

 

5,826 

 

 

23,707 

 

 

14,110 

  Accretion expense

 

 

202 

 

 

458 

 

 

603 

 

 

1,556 

  Gain on sale of other property and equipment

 

 

 

 

 

 

(1,080)

 

 

Total operating expenses

 

 

28,095 

 

 

24,452 

 

 

83,157 

 

 

67,898 

  Income from operations

 

 

11,562 

 

 

6,345 

 

 

30,287 

 

 

8,200 

Other (income) expenses:

 

 

 

 

 

 

 

 

 

 

 

 

  Interest expense

 

 

2,205 

 

 

1,417 

 

 

5,007 

 

 

4,469 

  Gain on early extinguishment of debt

 

 

 

 

 

 

(3,205)

 

 

  (Gain) loss on derivative contracts

 

 

(9,944)

 

 

3,686 

 

 

(2,746)

 

 

2,123 

  Other (income) expense

 

 

(61)

 

 

(279)

 

 

(203)

 

 

(368)

Total other (income) expenses

 

 

(7,800)

 

 

4,824 

 

 

(1,147)

 

 

6,224 

  Income before income taxes

 

 

19,362 

 

 

1,521 

 

 

31,434 

 

 

1,976 

     Income tax expense

 

 

7,161 

 

 

456 

 

 

12,630 

 

 

950 

     Income before equity in earnings of Medusa Spar  LLC

 

 

12,201 

 

 

1,065 

 

 

18,804 

 

 

1,026 

  Equity from Medusa Spar LLC

 

 

 

 

17 

 

 

 

 

14 

     Net income

 

 

12,201 

 

 

1,082 

 

 

18,804 

 

 

1,040 

     Preferred stock dividends

 

 

(1,974)

 

 

(1,974)

 

 

(5,921)

 

 

(2,654)

 Income (loss) available to common stockholders

 

$

10,227 

 

$

(892)

 

$

12,883 

 

$

(1,614)

 Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

$

0.24 

 

$

(0.02)

 

$

0.31 

 

$

(0.04)

  Diluted

 

$

0.23 

 

$

(0.02)

 

$

0.30 

 

$

(0.04)

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

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

 

43,187 

 

 

40,321 

 

 

41,370 

 

 

40,064 

  Diluted

 

 

44,211 

 

 

40,321 

 

 

42,510 

 

 

40,064 

 

 

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

 

5


 

 

Table of Contents

Callon Petroleum Company

Consolidated Statements of Cash Flows

(Unaudited; in thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

18,804 

 

$

1,040 

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

 

 

 

 

 

 

  Depreciation, depletion and amortization

 

 

39,493 

 

 

34,668 

  Accretion expense

 

 

603 

 

 

1,556 

  Amortization of non-cash debt related items

 

 

494 

 

 

348 

  Amortization of deferred credit

 

 

(433)

 

 

(2,448)

  Equity in earnings of Medusa Spar LLC

 

 

 

 

(14)

  Deferred income tax expense

 

 

12,630 

 

 

950 

  Net loss (gain) on derivatives, net of settlements

 

 

(5,728)

 

 

2,929 

  Gain on sale of other property and equipment

 

 

(1,080)

 

 

  Non-cash gain on early debt extinguishment

 

 

(3,205)

 

 

  Non-cash expense related to equity share-based awards

 

 

432 

 

 

1,335 

  Change in the fair value of liability share-based awards

 

 

6,571 

 

 

1,076 

  Payments to settle asset retirement obligations

 

 

(3,283)

 

 

(701)

  Changes in current assets and liabilities:

 

 

 

 

 

 

     Accounts receivable

 

 

(8,016)

 

 

(3,455)

     Other current assets

 

 

802 

 

 

(236)

     Current liabilities

 

 

3,449 

 

 

1,969 

  Payments to settle vested liability share-based awards

 

 

(3,469)

 

 

(239)

  Change in other long-term liabilities

 

 

 

 

(258)

  Change in other assets, net

 

 

(367)

 

 

(3,306)

     Net cash provided by operating activities

 

 

57,697 

 

 

35,214 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(188,793)

 

 

(101,067)

Acquisition

 

 

 

 

(11,000)

Deposit on acquisition

 

 

(10,629)

 

 

Proceeds from sales of mineral interest and equipment

 

 

1,991 

 

 

1,389 

Distribution from Medusa Spar LLC

 

 

 

 

813 

    Net cash used in investing activities

 

 

(197,431)

 

 

(109,865)

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings on debt

 

 

200,000 

 

 

48,000 

Payment of deferred financing costs

 

 

(3,068)

 

 

Payments on debt

 

 

(169,610)

 

 

(41,000)

Issuance of preferred stock

 

 

 

 

70,035 

Issuance of common stock

 

 

122,514 

 

 

Payment of preferred stock dividends

 

 

(5,921)

 

 

(2,654)

     Net cash provided by financing activities

 

 

143,915 

 

 

74,381 

Net change in cash and cash equivalents

 

 

4,181 

 

 

(270)

  Balance, beginning of period

 

 

3,012 

 

 

1,139 

  Balance, end of period

 

$

7,193 

 

$

869 

 

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

 

 

6


 

Table of Contents

Callon Petroleum Company

Notes to the Consolidated Financial Statements

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

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

 

INDEX TO THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

1. 

Description of Business and Basis of Presentation

6.

Fair Value Measurements

2. 

Oil and Natural Gas Properties

7.

Income Taxes

3. 

Earnings Per Share

8.

Asset Retirement Obligations

4. 

Borrowings

9.

Equity Transactions

5. 

Derivative Instruments and Hedging Activities

10.

Other

 

 

Note 1 - Description of Business and Basis of Presentation

 

Description of business

 

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

 

Callon is focused on the acquisition, development, exploration and exploitation of unconventional oil and natural gas reserves in the Permian Basin in West Texas. In late 2013, with the sale of its remaining offshore assets in the Gulf of Mexico, the Company completed the onshore strategic repositioning it initiated in 2009.

 

Basis of presentation

 

Unless otherwise indicated, all dollar amounts included within the footnotes to the financial statements are presented in thousands, except for per share and per unit data.

 

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

 

These interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The balance sheet at December 31, 2013 has been derived from the audited financial statements at that date. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ended December 31, 2014.

 

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

 

 

7


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

Recently issued accounting policies

 

In May 2014, the Financial Accounting Standards Board issued accounting standards update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. The standard requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 will replace most of the existing revenue recognition requirements in GAAP when it becomes effective. The guidance in ASU No. 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, including interim periods therein. Early adoption is not permitted.  The Company is currently evaluating the method of adoption and impact this standard will have on its financial statements and related disclosures.

 

Note 2 – Oil and Natural Gas Properties

 

Acquisitions

 

In the first quarter of 2014, the Company acquired 1,527 net acres in Upton and Reagan Counties, Texas, which are located in the southern portion of the Midland Basin near its existing core development fields, for an aggregate cash purchase price of $8,200. The properties bear a working interest of 100% and an average net revenue interest of 78%.

 

On October 8, 2014, the Company completed the acquisition of certain undeveloped acreage and producing oil and gas properties located in Midland, Andrews, Ector and Martin Counties, Texas (the “Acquisition”) for an aggregate cash purchase price of $205,011, including estimated purchase price adjustments of $7,561 based on an effective date of May 1, 2014. The Company assumed operatorship of the properties on November 1, 2014, and acquired a 62% working interest (46.5% net revenue interest) in the Acquisition. The aggregate cash purchase price was funded with a combination of the net proceeds from an equity offering of $122,514 and a portion of the proceeds from borrowings under a new $300,000 secured second lien term loan (the “New Second Lien Loan”). For additional information on the debt transactions and equity offering, see Notes 4 and 9, respectively.

 

The Acquisition was accounted for under the purchase method of accounting, which involves determining the fair value of the assets acquired and liabilities assumed. The following purchase price allocation is preliminary and based on management’s estimates of the fair value of the assets acquired and liabilities assumed as of the date of this Form 10-Q. The preliminary purchase price allocation is subject to change based on numerous factors, including the final adjusted purchase price and the final estimated fair value of the assets acquired and liabilities assumed. Any such adjustments to the preliminary estimates of fair value could be material.

 

The following table summarizes the estimated acquisition date fair values of the net assets acquired:

 

 

 

 

 

 

Oil and natural gas properties

 

$

92,847 

Unevaluated oil and natural gas properties

 

 

113,092 

Asset retirement obligations

 

 

(928)

  Net assets to be acquired

 

$

205,011 

 

8


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

The following unaudited summary pro forma financial information for the three and nine month periods ended September 30, 2014 has been presented for illustrative purposes only and does not purport to represent what the Company’s results of operations would have been if the Acquisition had occurred as presented, or to project the Company’s results of operations for any future periods. The pro forma financial information was prepared assuming the Acquisition and the debt transactions and equity offering discussed in Notes 4 and 9, respectively, occurred as of January 1, 2013. The pro forma adjustments are based on available information and certain assumptions that management believes are reasonable, including revenue, lease operating expenses, production taxes, depreciation, depletion and amortization expense, accretion expense, interest expense and capitalized interest.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

Revenues

 

$

48,035 

 

$

43,253 

 

$

142,040 

 

$

114,078 

Income from operations

 

 

15,269 

 

 

13,721 

 

 

45,453 

 

 

28,481 

Income available to common stockholders

 

 

11,102 

 

 

766 

 

 

16,571 

 

 

2,477 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.19 

 

$

0.01 

 

$

0.30 

 

$

0.05 

Diluted

 

$

0.19 

 

$

0.01 

 

$

0.29 

 

$

0.05 

 

 

Note 3 - Earnings Per Share

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(share amounts in thousands)

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

Net income (loss)

 

$

12,201 

 

$

1,082 

 

$

18,804 

 

$

1,040 

Preferred stock dividends

 

 

(1,974)

 

 

(1,974)

 

 

(5,921)

 

 

(2,654)

Income (loss) available to common stockholders

 

$

10,227 

 

$

(892)

 

$

12,883 

 

$

(1,614)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

43,187 

 

 

40,321 

 

 

41,370 

 

 

40,064 

Dilutive impact of restricted stock

 

 

1,024 

 

 

 

 

1,140 

 

 

Weighted average shares outstanding for diluted income (loss) per share

 

 

44,211 

 

 

40,321 

 

 

42,510 

 

 

40,064 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share

 

$

0.24 

 

$

(0.02)

 

$

0.31 

 

$

(0.04)

Diluted income (loss) per share

 

$

0.23 

 

$

(0.02)

 

$

0.30 

 

$

(0.04)

 

 

 

 

 

 

 

 

 

 

The following were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive:

Stock options

 

 

30 

 

 

52 

 

 

30 

 

 

52 

Restricted stock

 

 

 

 

239 

 

 

 

 

239 

 

 

 

Note 4 – Borrowings

 

The Company’s borrowings consisted of the following at:

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

December 31, 2013

Principal components:

 

 

 

 

 

 

Credit Facility

 

$

20,000 

 

$

22,000 

Second Lien Loan

 

 

82,500 

 

 

13% Senior Notes, principal

 

 

 

 

48,481 

Total principal outstanding

 

 

102,500 

 

 

70,481 

13% Senior Notes, unamortized deferred credit

 

 

 

 

5,267 

Total carrying value of borrowings

 

$

102,500 

 

$

75,748 

 

9


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

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

 

On March 11, 2014, the Company entered into the Fifth Amended and Restated Credit Agreement to the Credit Facility with a maturity date of March 11, 2019.  JPMorgan Chase Bank, N.A. is Administrative Agent, and participating lenders include Regions Bank, Citibank, N.A., Capital One, N.A., KeyBank, N.A., Whitney Bank, IberiaBank, N.A., OneWest Bank, N.A., SunTrust Bank and Royal Bank of Canada. The total notional amount available under the Credit Facility is $500,000. Amounts borrowed under the Credit Facility may not exceed the borrowing base, which is generally reviewed on a semi-annual basis. As of September 30, 2014 the Credit Facility’s borrowing base was $155,000. The Credit Facility is secured by first preferred mortgages covering the Company’s major producing properties. In conjunction with the closing of the Acquisition on October 8, 2014, the borrowing base on the Company’s Credit Facility was amended to $250,000.

 

As of September 30, 2014, the balance outstanding on the Credit Facility was $20,000 with a weighted-average interest rate of 2.43%, calculated as the LIBOR plus a tiered rate ranging from 1.75% to 2.75%, which is determined based on utilization of the facility. In addition, the Credit Facility carries a commitment fee of 0.5% per annum, payable quarterly, on the unused portion of the borrowing base.

 

Term loans

 

On March 11, 2014, the Company entered into the Secured Second Lien Term Loan (the “Second Lien Loan”) in an aggregate amount of up to $125,000, including initial commitments of $100,000 and additional availability of $25,000 subject to the consent of two-thirds of the lenders and compliance with financial covenants after giving effect to such increase. The Second Lien Loan matures on September 11, 2019, and is not subject to mandatory prepayments unless new debt or preferred stock is issued. The Second Lien Loan may be prepaid at the Company’s option, subject to a prepayment premium. The prepayment amount is (i) 102% if the prepayment event occurs prior to March 11, 2015, and (ii) 101% if the prepayment event occurs on or after March 15, 2015 but before March 15, 2016, and (iii) 100% for prepayments made on or after March 15, 2016. The Second Lien Loan is secured by junior liens on properties mortgaged under the Credit Facility, subject to an intercreditor agreement. On April 10, 2014, the Company drew an initial amount of $62,500 with an original issue discount of 1.0%. In addition, the Second Lien Loan carries a commitment fee of 0.5% per annum, payable quarterly, on the unused portion of the initial commitment amount until March 11, 2015. As of September 30, 2014, the balance outstanding on the Second Lien Loan was $82,500 with an interest rate of 8.75%, calculated at a rate of LIBOR (subject to a floor rate of 1.0%) plus 7.75% per annum.

 

Subsequent to September 30, 2014, the Second Lien Loan was repaid in full using proceeds from the New Second Lien Loan discussed below, resulting in a loss on early extinguishment of debt of $3,054. In conjunction with the closing of the Acquisition on October 8, 2014, the Company refinanced its Second Lien Loan with the New Second Lien Loan with a maturity date of October 8, 2021. The Royal Bank of Canada is Administrative Agent, and participants include several institutional lenders. On October 8, 2014, the Company drew an initial amount of $300,000 with a discount of 2.0% and an interest rate of 8.5%, calculated at a rate of LIBOR (subject to a floor rate of 1.0%) plus 7.5% per annum. The New Second Lien Loan may be prepaid at the Company’s option, subject to a prepayment premium. The prepayment amount is (i) 102% if the prepayment event occurs prior to October 8, 2015, and (ii) 101% if the prepayment event occurs on or after October 8, 2015 but before October 8, 2016, and (iii) 100% for prepayments made on or after October 8, 2016. The New Second Lien Loan is secured by junior liens on properties mortgaged under the Credit Facility, subject to an intercreditor agreement.

 

13% senior notes due 2016 (“Senior Notes”) and deferred credit

 

On April 11, 2014, the Company completed a full redemption of the remaining $48,481 principal amount of outstanding Senior Notes using proceeds from the Second Lien Loan. The redemption resulted in a net $3,205 gain on the early extinguishment of debt (including $4,780 of accelerated deferred credit amortization). The gain represents the difference between the $50,057 paid for the redemption of the Senior Notes ($1,576 of redemption costs, primarily the call premium) and the carrying value of the remaining Senior Notes of $53,261 (inclusive of $4,780 of deferred credit). The Company also paid $193 in accrued interest through the redemption date. Upon the redemption, the indenture governing the Senior Notes was discharged in accordance with its terms.

 

10


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

Restrictive covenants

 

The Company’s Credit Facility and Second Lien Loan contain various covenants including restrictions on additional indebtedness, payment of cash dividends and maintenance of certain financial ratios. The Company was in compliance with these covenants at September 30, 2014.

 

Note 5 - Derivative Instruments and Hedging Activities

 

Objectives and strategies for using derivative instruments

 

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

 

Counterparty risk and offsetting

 

The use of derivative instruments exposes the Company to the risk that a counterparty will be unable to meet its commitments. While the Company monitors counterparty creditworthiness on an ongoing basis, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, the Company may not realize the benefit of some of its derivative instruments under lower commodity prices while continuing to be obligated under higher commodity price contracts subject to any right of offset under the agreements. Counterparty credit risk is considered when determining the fair value of a derivative instrument; see Note 6 for additional information regarding fair value.

 

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

 

Financial statement presentation and settlements

 

Settlements of the Company’s derivative instruments are based on the difference between the contract price or prices specified in the derivative instrument and a benchmark price, such as the NYMEX price. To determine the fair value of the Company’s derivative instruments, the Company utilizes present value methods that include assumptions about commodity prices based on those observed in underlying markets. See Note 6 for additional information regarding fair value.

 

Derivatives not designated as hedging instruments

 

The Company elected not to designate its derivative contracts as accounting hedges under Accounting Standards Codification 815. Consequently, the Company records its derivative contracts at fair value in the consolidated balance sheet and records changes in fair value as a gain or loss on derivative contracts in the consolidated statement of operations. Cash settlements are also recorded as gain or loss on derivative contracts in the consolidated statement of operations.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Presentation

 

Asset Fair Value

 

Liability Fair Value

 

Net Derivative Fair Value

Commodity

 

Classification

 

Line Description

 

09/30/14

 

12/31/2013

 

09/30/2014

 

12/31/2013

 

09/30/2014

 

12/31/2013

Natural gas

 

Current

 

Fair value of derivatives

 

$

 

$

 

$

(47)

 

$

 

$

(47)

 

$

Natural gas

 

Current

 

Fair value of derivatives

 

 

 

 

60 

 

 

 

 

 

 

 

 

60 

Natural gas

 

Non-current

 

Other long-term liabilities

 

 

 

 

 

 

(41)

 

 

(72)

 

 

(41)

 

 

(72)

Oil

 

Current

 

Fair value of derivatives

 

 

4,842 

 

 

 

 

(418)

 

 

(1,036)

 

 

4,424 

 

 

(1,036)

Oil

 

Non-current

 

Other long-term assets

 

 

1,169 

 

 

 

 

 

 

 

 

1,169 

 

 

Oil

 

Non-current

 

Other long-term liabilities

 

 

 

 

 

 

(824)

 

 

 

 

(824)

 

 

 

 

Totals

 

 

 

$

6,011 

 

$

60 

 

$

(1,330)

 

$

(1,108)

 

$

4,681 

 

$

(1,048)

11


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

 

As previously discussed, the Company’s derivative contracts are subject to master netting arrangements. The Company’s policy is to present the fair value of derivative contracts on a net basis in the consolidated balance sheet. The following presents the impact of this presentation to the Company’s recognized assets and liabilities at September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Presented without

 

 

 

As Presented with

 

 

Effects of Netting

 

Effects of Netting

 

Effects of Netting

Current assets: Fair value of derivatives

 

$

4,968 

 

$

(126)

 

$

4,842 

Long-term assets: Fair value of derivatives

 

 

1,169 

 

 

 

 

1,169 

Current liabilities: Fair value of derivatives

 

$

(591)

 

$

126 

 

$

(465)

Long-term liabilities: Fair value of derivatives

 

 

(865)

 

 

 

 

(865)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

Natural gas derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on settlements

 

$

35 

 

$

(16)

 

$

(144)

 

$

(123)

Net gain (loss) on fair value adjustments

 

 

55 

 

 

81 

 

 

(77)

 

 

178 

Total gain (loss)

 

$

90 

 

$

65 

 

$

(221)

 

$

55 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on settlements

 

$

(497)

 

$

(618)

 

$

(2,838)

 

$

804 

Net gain (loss) on fair value adjustments

 

 

10,351 

 

 

(3,133)

 

 

5,805 

 

 

(2,982)

Total gain (loss)

 

$

9,854 

 

$

(3,751)

 

$

2,967 

 

$

(2,178)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gain (loss) on derivative instruments

 

$

9,944 

 

$

(3,686)

 

$

2,746 

 

$

(2,123)

 

12


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

Derivative positions

 

Listed in the tables below are the outstanding oil and natural gas derivative contracts as of September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

December 31,

Oil contracts

 

2014

 

2015

 

2015

 

2015

 

2015

Collar contracts combined with short

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

puts (three-way collar):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (MBbls)

 

 

 

 

158 

 

 

159 

 

 

 

 

  Price per Bbl

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Ceiling (short call)

 

$

 

$

99.10 

 

$

99.10 

 

$

 

$

     Floor (long put)

 

$

 

$

90.00 

 

$

90.00 

 

$

 

$

     Short put

 

$

 

$

75.00 

 

$

75.00 

 

$

 

$

Swap contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total volume (MBbls)

 

 

267 

 

 

171 

 

 

136 

 

 

129 

 

 

74 

  Weighted average price per Bbl

 

$

93.66 

 

$

92.25 

 

$

92.18 

 

$

92.25 

 

$

92.20 

Put spreads:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (MBbls)

 

 

 

 

 

 

 

 

138 

 

 

138 

  Long put price per Bbl

 

$

 

$

 

$

 

$

90.00 

 

$

90.00 

  Short put price per Bbl

 

$

 

$

 

$

 

$

75.00 

 

$

75.00 

Swap contracts combined with short put:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (MBbls)

 

 

92 

 

 

 

 

 

 

 

 

  Swap price per Bbl

 

$

93.35 

 

$

 

$

 

$

 

$

  Short put price per Bbl

 

$

70.00 

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

December 31,

Natural gas contracts

 

2014

 

2015

 

2015

 

2015

 

2015

Collar contracts combined with short

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

puts (three-way collar):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (BBtu)

 

 

 

 

248 

 

 

227 

 

 

207 

 

 

161 

   Weighted average price per MMBtu

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Ceiling (short call)

 

$

 

$

4.67 

 

$

4.32 

 

$

4.32 

 

$

4.32 

     Floor (long put)

 

$

 

$

4.00 

 

$

3.85 

 

$

3.85 

 

$

3.85 

     Short put

 

$

 

$

3.50 

 

$

3.25 

 

$

3.25 

 

$

3.25 

Swap contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total volume (BBtu)

 

 

414 

 

 

248 

 

 

227 

 

 

207 

 

 

161 

  Weighted average price per MMBtu

 

$

4.04 

 

$

3.98 

 

$

3.98 

 

$

3.98 

 

$

3.98 

Call contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (BBtu)

 

 

115 

 

 

 

 

 

 

 

 

     Short call price per MMBtu (a)

 

$

4.75 

 

$

 

$

 

$

 

$

     Long call price per MMBtu (a)

 

$

4.75 

 

$

 

$

 

$

 

$

Swap contracts combined with short calls:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Swap volume (BBtu)

 

 

184 

 

 

 

 

 

 

 

 

  Swap price per MMBtu

 

$

4.25 

 

$

 

$

 

$

 

$

  Short call volume (BBtu)

 

 

 

 

108 

 

 

109 

 

 

110 

 

 

111 

  Short call price per MMBtu

 

$

 

$

5.00 

 

$

5.00 

 

$

5.00 

 

$

5.00 

 

(a)

Offsetting contracts.

13


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

Subsequent Event

 

The following derivative contracts were executed subsequent to September 30, 2014: