UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

 

 

FORM 10-Q

 

 

 

 

 

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

For The Quarterly Period Ended September 30, 2015

OR

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

For the transition period from ____________ to ____________

Commission File Number 001-14039

 

 

 

 

 

 

 

 

Callon Petroleum Company

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware

(State or Other Jurisdiction of

Incorporation or Organization)

64-0844345

(IRS Employer

Identification No.)

 

 

200 North Canal Street

Natchez, Mississippi

(Address of Principal Executive Offices)

39120

(Zip Code)

 

601-442-1601

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

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

 

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

 

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

 

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

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if smaller reporting company)

Smaller reporting company

 

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

 

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

 

 


 

 

Table of Contents

 

 

 

Part I. Financial Information

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets  

4

 

 

Consolidated Statements of Operations  

5

 

 

Consolidated Statements of Cash Flows  

6

 

 

Notes to Consolidated Financial Statements  

7

 

 

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

16

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk 

27

 

 

Item 4.  Controls and Procedures 

28

 

 

Part II.  Other Information

 

 

 

Item 1.  Legal Proceedings 

29

 

 

Item 1A.  Risk Factors 

29

 

 

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

29

 

 

Item 3.  Defaults Upon Senior Securities 

29

 

 

Item 4.  Mine Safety Disclosures 

29

 

 

Item 5.  Other Information 

29

 

 

Item 6.  Exhibits 

30

 

 

 

2


 

 

Table of Contents

 

DEFINITIONS

 

All defined terms under Rule 4-10(a) of Regulation S-X shall have their 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, 2015

 

December 31, 2014

ASSETS

 

Unaudited

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

1,922 

 

$

968 

Accounts receivable

 

39,385 

 

 

30,198 

Fair value of derivatives

 

16,763 

 

 

27,850 

Other current assets

 

1,410 

 

 

1,441 

Total current assets

 

59,480 

 

 

60,457 

Oil and natural gas properties, full cost accounting method:

 

 

 

 

 

  Evaluated properties

 

2,251,993 

 

 

2,077,985 

  Less accumulated depreciation, depletion and amortization

 

(1,618,027)

 

 

(1,478,355)

  Net oil and natural gas properties

 

633,966 

 

 

599,630 

  Unevaluated properties

 

141,581 

 

 

142,525 

Total oil and natural gas properties

 

775,547 

 

 

742,155 

Other property and equipment, net

 

7,905 

 

 

7,118 

Restricted investments

 

3,305 

 

 

3,810 

Deferred tax asset

 

 

 

44,688 

Deferred financing costs

 

15,858 

 

 

18,200 

Fair value of derivatives

 

2,203 

 

 

Other assets, net

 

426 

 

 

342 

Total assets

$

864,724 

 

$

876,770 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

$

76,162 

 

$

76,753 

Accrued interest

 

6,066 

 

 

5,993 

Cash-settled restricted stock unit awards

 

8,025 

 

 

3,856 

Asset retirement obligations

 

827 

 

 

4,747 

Deferred tax liability

 

 

 

6,214 

Fair value of derivatives

 

 

 

1,249 

Total current liabilities

 

91,080 

 

 

98,812 

Senior secured revolving credit facility

 

99,000 

 

 

35,000 

Secured second lien term loan

 

300,000 

 

 

300,000 

Asset retirement obligations

 

3,856 

 

 

1,927 

Cash-settled restricted stock unit awards

 

3,487 

 

 

7,175 

Other long-term liabilities

 

220 

 

 

121 

Total liabilities

 

497,643 

 

 

443,035 

Stockholders’ equity:

 

 

 

 

 

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

 

16 

 

 

16 

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

 

663 

 

 

552 

Capital in excess of par value

 

592,287 

 

 

526,162 

Accumulated deficit

 

(225,885)

 

 

(92,995)

Total stockholders’ equity

 

367,081 

 

 

433,735 

Total liabilities and stockholders’ equity

$

864,724 

 

$

876,770 

 

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

 

4


 

 

Table of Contents

Callon Petroleum Company

Consolidated Statements of Operations

(Unaudited; in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

  Oil sales

 

$

30,582 

 

$

36,346 

 

$

94,584 

 

$

104,965 

  Natural gas sales

 

 

3,734 

 

 

3,311 

 

 

9,365 

 

 

8,479 

Total operating revenues

 

 

34,316 

 

 

39,657 

 

 

103,949 

 

 

113,444 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

  Lease operating expenses

 

 

7,194 

 

 

6,270 

 

 

20,728 

 

 

14,863 

  Production taxes

 

 

2,583 

 

 

2,247 

 

 

7,800 

 

 

6,429 

  Depreciation, depletion and amortization

 

 

16,704 

 

 

16,115 

 

 

52,395 

 

 

38,635 

  General and administrative

 

 

4,302 

 

 

3,261 

 

 

22,167 

 

 

23,707 

  Accretion expense

 

 

142 

 

 

202 

 

 

485 

 

 

603 

  Write-down of oil and natural gas properties

 

 

87,301 

 

 

 

 

87,301 

 

 

  Rig termination fee

 

 

 

 

 

 

3,641 

 

 

  Gain on sale of other property and equipment

 

 

 

 

 

 

 

 

(1,080)

Total operating expenses

 

 

118,226 

 

 

28,095 

 

 

194,517 

 

 

83,157 

  Income (loss) from operations

 

 

(83,910)

 

 

11,562 

 

 

(90,568)

 

 

30,287 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

  Interest expense

 

 

5,603 

 

 

2,205 

 

 

15,567 

 

 

5,007 

  Gain on early extinguishment of debt

 

 

 

 

 

 

 

 

(3,205)

  Gain on derivative contracts

 

 

(23,283)

 

 

(9,944)

 

 

(17,463)

 

 

(2,746)

  Other income

 

 

(92)

 

 

(61)

 

 

(177)

 

 

(203)

Total other income

 

 

(17,772)

 

 

(7,800)

 

 

(2,073)

 

 

(1,147)

  Income (loss) before income taxes

 

 

(66,138)

 

 

19,362 

 

 

(88,495)

 

 

31,434 

     Income tax expense

 

 

45,667 

 

 

7,161 

 

 

38,474 

 

 

12,630 

     Net income (loss)

 

 

(111,805)

 

 

12,201 

 

 

(126,969)

 

 

18,804 

     Preferred stock dividends

 

 

(1,974)

 

 

(1,974)

 

 

(5,921)

 

 

(5,921)

 Income (loss) available to common stockholders

 

$

(113,779)

 

$

10,227 

 

$

(132,890)

 

$

12,883 

 Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

$

(1.72)

 

$

0.24 

 

$

(2.10)

 

$

0.31 

  Diluted

 

$

(1.72)

 

$

0.23 

 

$

(2.10)

 

$

0.30 

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

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

 

66,277 

 

 

43,187 

 

 

63,265 

 

 

41,370 

  Diluted

 

 

66,277 

 

 

44,211 

 

 

63,265 

 

 

42,510 

 

 

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

 

5


 

 

Table of Contents

Callon Petroleum Company

Consolidated Statements of Cash Flows

(Unaudited; in thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

(126,969)

 

$

18,804 

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

 

 

 

 

 

 

  Depreciation, depletion and amortization

 

 

52,583 

 

 

39,493 

  Write-down of oil and natural gas properties

 

 

87,301 

 

 

  Accretion expense

 

 

485 

 

 

603 

  Amortization of non-cash debt related items

 

 

2,342 

 

 

494 

  Amortization of deferred credit

 

 

 

 

(433)

  Deferred income tax expense

 

 

38,474 

 

 

12,630 

  Net loss (gain) on derivatives, net of settlements

 

 

7,635 

 

 

(5,728)

  Gain on sale of other property and equipment

 

 

 

 

(1,080)

  Non-cash gain for early debt extinguishment

 

 

 

 

(3,205)

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

 

 

(300)

 

 

432 

  Change in the fair value of liability share-based awards

 

 

4,759 

 

 

6,571 

  Payments to settle asset retirement obligations

 

 

(3,047)

 

 

(3,283)

  Changes in current assets and liabilities:

 

 

 

 

 

 

     Accounts receivable

 

 

(7,278)

 

 

(8,016)

     Other current assets

 

 

31 

 

 

802 

     Current liabilities

 

 

6,455 

 

 

3,449 

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

 

 

(3,538)

 

 

(1,417)

  Payments to settle vested liability share-based awards

 

 

(3,925)

 

 

(2,052)

  Change in other long-term liabilities

 

 

100 

 

 

  Change in other assets, net

 

 

421 

 

 

(367)

     Net cash provided by operating activities

 

 

55,529 

 

 

57,697 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(178,548)

 

 

(188,793)

Deposit on acquisition

 

 

 

 

(10,629)

Proceeds from sales of mineral interests and equipment

 

 

348 

 

 

1,991 

    Net cash used in investing activities

 

 

(178,200)

 

 

(197,431)

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings on credit facility

 

 

130,000 

 

 

200,000 

Payments on credit facility

 

 

(66,000)

 

 

(169,610)

Payment of deferred financing costs

 

 

 

 

(3,068)

Issuance of common stock

 

 

65,546 

 

 

122,514 

Payment of preferred stock dividends

 

 

(5,921)

 

 

(5,921)

     Net cash provided by financing activities

 

 

123,625 

 

 

143,915 

Net change in cash and cash equivalents

 

 

954 

 

 

4,181 

  Balance, beginning of period

 

 

968 

 

 

3,012 

  Balance, end of period

 

$

1,922 

 

$

7,193 

 

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

 

 

 

 

 

6


 

 

Callon Petroleum Company

Notes to the Consolidated Financial Statements

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

 

INDEX TO THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

1. 

Description of Business and Basis of Presentation

7.

Fair Value Measurements

2. 

Oil and Natural Gas Properties

8.

Income Taxes

3. 

Acquisitions

9.

Asset Retirement Obligations

4. 

Earnings Per Share

10.

Equity Transactions

5. 

Borrowings

11.

Other

6. 

Derivative Instruments and Hedging Activities

 

 

 

Note 1 - Description of Business and Basis of Presentation

 

Description of business

 

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

 

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

 

Basis of presentation

 

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

 

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

 

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

 

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

 

7


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

Recently issued accounting policies

 

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

 

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

 

Note 2 - Oil and Natural Gas Properties 

 

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

 

Under full cost accounting rules, the Company reviews the carrying value of its proved oil and natural gas properties each quarter. Under these rules, capitalized costs of oil and natural gas properties, net of accumulated depreciation, depletion and amortization and deferred income taxes, may not exceed the present value of estimated future net cash flows from proved oil and natural gas reserves, discounted at 10%, plus the lower of cost or fair value of unevaluated properties, net of related tax effects (the full cost ceiling). These rules generally require pricing based on the preceding 12-months’ average oil and natural gas prices based on closing prices on the first day of each month and require a write-down if the net capitalized costs of proved oil and natural gas properties exceeds the full cost ceiling. At September 30, 2015, the prices used in determining the estimated future net cash flows from proved reserves were $54.48 per barrel of oil and $3.53 per Mcf of natural gas. For the period ended September 30, 2015, the Company recognized a write-down of oil and natural gas properties of $87,301 as a result of the ceiling test limitation.

 

Note 3 - Acquisitions 

 

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

 

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

 

 

 

 

 

Oil and natural gas properties

 

$

91,895 

Unevaluated oil and natural gas properties

 

 

118,450 

Asset retirement obligations

 

 

(140)

  Net assets acquired

 

$

210,205 

8


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

 

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

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2014

 

September 30, 2014

Revenues

 

$

48,037 

 

$

142,040 

Income from operations

 

 

15,245 

 

 

45,543 

Income available to common stockholders

 

 

11,143 

 

 

16,686 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

Basic

 

$

0.19 

 

$

0.30 

Diluted

 

$

0.19 

 

$

0.29 

 

 

 

 

 

 

 

 

 

 

 

 

Note 4 - Earnings Per Share

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(share amounts in thousands)

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

Net income (loss)

 

$

(111,805)

 

$

12,201 

 

$

(126,969)

 

$

18,804 

Preferred stock dividends

 

 

(1,974)

 

 

(1,974)

 

 

(5,921)

 

 

(5,921)

Income (loss) available to common stockholders

 

$

(113,779)

 

$

10,227 

 

$

(132,890)

 

$

12,883 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

66,277 

 

 

43,187 

 

 

63,265 

 

 

41,370 

Dilutive impact of restricted stock

 

 

 

 

1,024 

 

 

 

 

1,140 

Weighted average shares outstanding for diluted loss per share

 

 

66,277 

 

 

44,211 

 

 

63,265 

 

 

42,510 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share

 

$

(1.72)

 

$

0.24 

 

$

(2.10)

 

$

0.31 

Diluted income (loss) per share

 

$

(1.72)

 

$

0.23 

 

$

(2.10)

 

$

0.30 

 

 

 

 

 

 

 

 

 

 

Stock options (a)

 

 

15 

 

 

30 

 

 

15 

 

 

30 

Restricted stock (a)

 

 

159 

 

 

 

 

159 

 

 

 

(a)

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

 

 

Note 5 - Borrowings 

 

The Company’s borrowings consisted of the following at:

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

Principal components:

 

 

 

 

 

 

Senior secured revolving credit facility

 

$

99,000 

 

$

35,000 

Secured second lien term loan

 

 

300,000 

 

 

300,000 

  Total carrying value of borrowings

 

$

399,000 

 

$

335,000 

 

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

 

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

9


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

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

 

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

 

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

 

On October 8, 2014, the Company entered into the Term Loan with an aggregate amount of up to $300,000 and a maturity date of October 8, 2021. The Royal Bank of Canada is Administrative Agent, and participants include several institutional lenders. The Term Loan may be prepaid at the Company’s option, subject to a prepayment premium. The prepayment amount (i) is 102% if the prepayment event occurs prior to October 8, 2016, (ii) is 101% if the prepayment event occurs on or after October 8, 2016 but before October 8, 2017, and (iii) is 100% for prepayments made on or after October 8, 2017. The Term Loan is secured by junior liens on properties mortgaged under the Credit Facility, subject to an intercreditor agreement.

 

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

 

Restrictive covenants

 

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

 

Note 6 - Derivative Instruments and Hedging Activities

 

Objectives and strategies for using derivative instruments

 

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

 

Counterparty risk and offsetting

 

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

 

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

10


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

 

Financial statement presentation and settlements

 

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

 

Derivatives not designated as hedging instruments

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Presentation

 

Asset Fair Value

 

Liability Fair Value

 

Net Derivative Fair Value

Commodity

 

Classification

 

Line Description

 

09/30/2015

 

12/31/2014

 

09/30/2015

 

12/31/2014

 

09/30/2015

 

12/31/2014

Natural gas

 

Current

 

Fair value of derivatives

 

$

407 

 

$

1,262 

 

$

 

$

(7)

 

$

407 

 

$

1,255 

Oil

 

Current

 

Fair value of derivatives

 

 

16,356 

 

 

26,588 

 

 

 

 

(1,242)

 

 

16,356 

 

 

25,346 

Oil

 

Non-current

 

Fair value of derivatives

 

 

2,203 

 

 

 

 

 

 

 

 

2,203 

 

 

 

 

Totals

 

 

 

$

18,966 

 

$

27,850 

 

$

 

$

(1,249)

 

$

18,966 

 

$

26,601 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

Presented without

 

 

 

As Presented with

 

 

Effects of Netting

 

Effects of Netting

 

Effects of Netting

Current assets: Fair value of derivatives

 

$

17,539 

 

$

(776)

 

$

16,763 

Long-term assets: Fair value of derivatives

 

 

2,203 

 

 

 

 

2,203 

Current liabilities: Fair value of derivatives

 

$

(776)

 

$

776 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

Presented without

 

 

 

As Presented with

 

 

Effects of Netting

 

Effects of Netting

 

Effects of Netting

Current assets: Fair value of derivatives

 

$

27,850 

 

$

 

$

27,850 

Current liabilities: Fair value of derivatives

 

$

(1,249)

 

$

 

$

(1,249)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

Oil derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on settlements

 

$

9,399 

 

$

(497)

 

$

23,863 

 

$

(2,838)

Net gain (loss) on fair value adjustments

 

 

13,758 

 

 

10,351 

 

 

(6,787)

 

 

5,805 

  Total gain (loss)

 

$

23,157 

 

$

9,854 

 

$

17,076 

 

$

2,967 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on settlements

 

$

390 

 

$

35 

 

$

1,235 

 

$

(144)

Net gain (loss) on fair value adjustments

 

 

(264)

 

 

55 

 

 

(848)

 

 

(77)

  Total gain (loss)

 

$

126 

 

$

90 

 

$

387 

 

$

(221)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gain on derivative contracts

 

$

23,283 

 

$

9,944 

 

$

17,463 

 

$

2,746 

 

11


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

Derivative positions

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

December 31,

Oil contracts

 

2015

 

2016

 

2016

 

2016

 

2016

Swap contracts (NYMEX):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total volume (MBbls)

 

 

442 

 

 

182 

 

 

182 

 

 

184 

 

 

184 

  Weighted average price per Bbl

 

$

64.93 

 

$

58.23 

 

$

58.23 

 

$

58.23 

 

$

58.23 

Swap contracts (Midland basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

differentials):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (MBbls)

 

 

327 

 

 

364 

 

 

364 

 

 

368 

 

 

368 

  Weighted average price per Bbl

 

$

(2.38)

 

$

0.17 

 

$

0.17 

 

$

0.17 

 

$

0.17 

Collar contracts combined with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

short puts (WTI, three-way collar):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (MBbls)

 

 

 

 

182 

 

 

182 

 

 

184 

 

 

184 

   Weighted average price per Bbl

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Ceiling (short call)

 

$

 

$

65.00 

 

$

65.00 

 

$

65.00 

 

$

65.00 

     Floor (long put)

 

$

 

$

55.00 

 

$

55.00 

 

$

55.00 

 

$

55.00 

     Short put

 

$

 

$

40.33 

 

$

40.33 

 

$

40.33 

 

$

40.33 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

December 31,

Natural gas contracts

 

2015

 

2016

 

2016

 

2016

 

2016

Collar contracts combined with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

short puts (three-way collar):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (BBtu)

 

 

161 

 

 

 

 

 

 

 

 

  Weighted average price per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  MMBtu

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Ceiling (short call)

 

$

4.32 

 

$

 

$

 

$

 

$

     Floor (long put)

 

$

3.85 

 

$

 

$

 

$

 

$

     Short put

 

$

3.25 

 

$

 

$

 

$

 

$

Swap contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total volume (BBtu)

 

 

228 

 

 

 

 

 

 

 

 

  Weighted average price per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  MMBtu

 

$

3.96 

 

$

 

$

 

$

 

$

Short call contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Short call volume (BBtu)

 

 

111 

 

 

 

 

 

 

 

 

  Short call price per MMBtu

 

$

5.00 

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 7 - Fair Value Measurements

 

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

 

Fair Value of Financial Instruments

 

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

 

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

12


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

 

Assets and liabilities measured at fair value on a recurring basis

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Presentation as of September 30, 2015

 

Classification

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

Fair value of derivatives

 

Current assets

 

$

 

$

16,763 

 

$

 

$

16,763 

Other assets, net

 

Long-term assets

 

 

 

 

2,203 

 

 

 

 

2,203 

  Total net assets

 

 

 

$

 

$

18,966 

 

$

 

$

18,966 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Presentation as of December 31, 2014

 

Classification

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

Fair value of derivatives

 

Current assets

 

$

 

$

27,850 

 

$

 

$

27,850 

Fair value of derivatives

 

Current liabilities

 

 

 

 

(1,249)

 

 

 

 

(1,249)

  Total net assets

 

 

 

$

 

$

26,601 

 

$

 

$

26,601 

 

 

 

 

 

 

 

 

 

 

 

 

Note 8 - Income Taxes

 

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

 

Note 9 - Asset Retirement Obligations

 

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

 

 

 

 

Asset retirement obligations at January 1, 2015

 

$

6,674 

Accretion expense

 

 

485 

Liabilities incurred

 

 

121 

Liabilities settled

 

 

(2,923)

Revisions to estimate

 

 

326 

Asset retirement obligations at end of period

 

 

4,683 

Less: Current asset retirement obligations

 

 

(827)

  Long-term asset retirement obligations at September 30, 2015

 

$

3,856 

 

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

 

13


 

 

 

 

 

Footnotes to the Financial Statements (continued)

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

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

 

 

Table of Contents

 

Note 10 - Equity Transactions

 

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

 

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

 

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

 

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

 

Common Stock  

 

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

 

Note 11 - Other

 

Operating leases

 

As of September 30, 2015, the Company had contracts for two horizontal drilling rigs (the “Cactus 1 Rig” and “Cactus 2 Rig”). The Cactus 1 Rig  was initially contracted for a term of two years in April 2012. The Cactus 2 Rig was initially contracted for a term of two years in April 2014. The Cactus 2 Rig replaced a previously contracted horizontal drilling rig, which was cancelled in March 2014. In March 2015, the Company extended the terms of its Cactus 1 Rig and Cactus 2 Rig to end in July 2018 and August 2018, respectively. The rig lease agreements include early termination provisions that obliga