NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – unaudited
For the Quarterly Period Ended September 30, 2021
(in thousands, except per share amounts or where otherwise indicated)
1. Nature of Operations
Ranger Oil Corporation (together with its consolidated subsidiaries, unless the context otherwise requires, “Ranger,” “Ranger Oil,” the “Company,” “we,” “us” or “our”) is an independent oil and gas company focused on the onshore development and production of oil, natural gas liquids (“NGLs”) and natural gas. Our current operations consist of drilling unconventional horizontal development wells and operating our producing wells in the Eagle Ford Shale (the “Eagle Ford”) in South Texas. We operate in and report our financial results and disclosures as one segment, which is the development and production of crude oil, NGLs and natural gas.
On October 5, 2021, the Company acquired Lonestar Resources US Inc., a Delaware corporation (“Lonestar”), as a result of which Lonestar and its subsidiaries became wholly-owned subsidiaries of the Company (the “Merger”). The Merger was effected pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated July 10, 2021, by and between the Company and Lonestar. Following the completion of the Merger, the Company changed its name from Penn Virginia Corporation (“Penn Virginia”) to Ranger Oil Corporation, and its Class A Common Stock (“Class A Common Stock”), par value of $0.01 per share, began trading on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “ROCC” on October 18, 2021.
2. Basis of Presentation
Our unaudited condensed consolidated financial statements include the accounts of Ranger Oil and all of our subsidiaries as of the relevant dates. Intercompany balances and transactions have been eliminated. A substantial noncontrolling interest in our subsidiaries is provided for in our condensed consolidated statements of operations and comprehensive income (loss) as well as our condensed consolidated balance sheets as of and for the period ended September 30, 2021 (see Note 3 for additional detail including the basis of presentation of the noncontrolling interest). Our condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Preparation of these statements involves the use of estimates and judgments where appropriate. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of our condensed consolidated financial statements, have been included. Our condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2020. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Such reclassifications did not have a material impact on prior period financial statements. As the Merger was completed after the quarterly period ended September 30, 2021, our unaudited condensed consolidated financial statements exclude Lonestar’s financial information and operating results for all periods presented.
3. Juniper Transactions
On January 15, 2021 (the “Juniper Closing Date”), the Company consummated the transactions (collectively, the “Juniper Transactions”) contemplated by: (i) the Contribution Agreement, dated November 2, 2020 (the “Contribution Agreement”), by and among the Company, PV Energy Holdings, L.P. (the “Partnership”) and JSTX Holdings, LLC (“JSTX”), an affiliate of Juniper Capital Advisors, L.P. (“Juniper Capital” and, together with JSTX and Rocky Creek, “Juniper”); and (ii) the Contribution Agreement, dated November 2, 2020 (the “Asset Agreement,” and, together with the Contribution Agreement, the “Juniper Transaction Agreements”), by and among Rocky Creek Resources, LLC, an affiliate of Juniper Capital (“Rocky Creek”), the Company and the Partnership.
In connection with the consummation of the Juniper Transactions, the Company completed a reorganization into an up-C structure which was intended to, among other things, result in the affiliates of Juniper Capital having a voting interest in the Company that is commensurate with such holders’ economic interest in the Partnership, including (i) the conversion of each of the Company’s corporate subsidiaries into limited liability companies which are disregarded for U.S. federal income tax purposes, including the conversion of Penn Virginia Holding Corp. into Penn Virginia Holdings, LLC, a Delaware limited liability company (“Holdings”), and (ii) the Company’s contribution of all of its equity interests in Holdings to the Partnership in exchange for 15,268,686 newly issued common units representing limited partner interests (the “Common Units”).
On the Juniper Closing Date, (i) pursuant to the terms of the Contribution Agreement, JSTX contributed to the Partnership, as a capital contribution, $150 million in cash in exchange for 17,142,857 newly issued Common Units and the Company issued to JSTX 171,428.57 shares of Series A Preferred Stock, par value $0.01 per share, of the Company (“Series A Preferred Stock”) at a price equal to the par value of the shares acquired, and (ii) pursuant to the terms of the Asset Agreement, including certain closing adjustments based on a September 1, 2020 effective date (the “Effective Date”), Rocky Creek contributed to our operating subsidiary certain oil and gas assets in exchange for 5,405,252 newly issued Common Units and the Company issued to Rocky Creek 54,052.52 shares of Series A Preferred Stock (5,406,141 Common Units and 54,061.41 shares of Series A Preferred Stock after post-closing adjustments) at a price equal to the par value of the shares acquired, including 495,900 Common Units and 4,959 shares of Series A Preferred Stock placed in a restricted account to support post-closing indemnification claims, 50% of such amount of which was disbursed 180 days after the Juniper Closing Date and the remainder to be disbursed one year after the Juniper Closing Date. In connection with the contribution of the oil and gas assets under the Asset Agreement, we received $1.2 million of revenues attributable to production from the Rocky Creek assets for the period from December 1, 2020 through the Juniper Closing Date.
We incurred a total of $19.0 million of professional fees, including advisory, legal, consulting fees and other costs in connection with the Juniper Transactions. A total of $5.0 million were attributable to services and costs incurred and recognized in 2020 as general and administrative expenses (“G&A”). The remaining $14.0 million of costs were incurred in January 2021 or otherwise incurred contingent upon the closing of the Juniper Transactions, including $5.5 million of transaction costs incurred by Juniper that were required to be paid by the Company under the Juniper Transaction Agreements as well as $3.8 million of costs incurred by us related to the issuance of the Series A Preferred Stock and Common Units. Collectively, these amounts were classified as a reduction to the capital contribution on our condensed consolidated balance sheet. The remainder of $4.7 million, representing professional fees and other costs, was recognized as a component of G&A in the quarter ended March 31, 2021.
In determining the appropriate accounting for the Partnership and Juniper’s interest, we considered the guidance in Accounting Standards Codification (“ASC”) 810, Consolidation. The Partnership is considered a variable interest entity for which the Company is the primary beneficiary as it has a controlling financial interest in the Partnership and has the power to direct the activities most significant to the Partnership’s economic performance, as well as the obligation to absorb losses and receive benefits that are potentially significant. As such, the Partnership is reflected as a consolidated subsidiary in the condensed consolidated financial statements. The ownership interest in the Partnership held by Juniper (the “Noncontrolling interest”) is included in the condensed consolidated balance sheet as Noncontrolling interest, which is classified within permanent equity. The Noncontrolling interest is classified in permanent equity as it does not meet the definition of a liability under ASC 480, Distinguishing Liabilities from Equity and, among other considerations, the Common Units are optionally redeemable by the holder for a fixed number of shares (on a one-for-one basis) and there is no fixed or determinable date or fixed or determinable price for redemption; further, while the Common Units may be redeemed with Class A Common Stock or cash, the method of settlement is solely at the discretion of the Company, with the Company having the ability to settle the redemption in shares. Additionally, while the holders of the Series A Preferred Stock (now Class B Common Stock as described below), who also own the Common Units, could cause the Noncontrolling interest to be redeemed through an event that is not solely within the control of the Company such as a change-in-control, through their majority voting rights, all holders of equally and more subordinated equity interests in the Company would be entitled to receive the same form of consideration upon such event.
The Noncontrolling interest percentage is based on the proportionate amount of the number of Common Units held by Juniper to the total Common Units outstanding which is also equivalent to the voting power in the Company associated with the Series A Preferred Stock (now Class B Common Stock as described below) held by Juniper. The Noncontrolling interest was initially measured on the Juniper Closing Date as the sum of (i) total Shareholders’ equity immediately prior to the closing of the Juniper Transactions, (ii) the fair value of Juniper’s and Rocky Creek’s contributions provided in exchange for Common Units and Series A Preferred Stock (net of the Juniper transaction costs and securities issuance costs paid by the Company and including the cash received directly by the Company for a portion of the Rocky Creek revenues as discussed above and asset retirement obligations (“AROs”) associated with the contributed properties); and (iii) a deferred income tax adjustment attributable to the Juniper Transactions, the total of which was then multiplied by the Noncontrolling interest percentage. The difference between the calculated Noncontrolling interest and the fair value of the consideration received was recorded as a reduction to paid-in capital.
On October 6, 2021, the Company, JSTX and Rocky Creek entered into a Contribution and Exchange Agreement, whereby all outstanding shares of the Series A Preferred Stock were exchanged for newly issued shares of Class B Common Stock (“Class B Common Stock”), at a ratio of one share of Class B Common Stock for each 1/100th of a share of Series A Preferred Stock and the designation of the Series A Preferred Stock was cancelled. See Note 14 for additional information.
The following table reconciles the initial investment by Juniper and the carrying value of their Noncontrolling interest as of the Juniper Closing Date (after post-closing adjustments):
|
|
|
|
|
|
|
|
|
|
|
Cash contribution
|
|
$
|
150,000
|
|
|
Issue costs paid for Noncontrolling interest securities
|
|
(3,758)
|
|
|
Transaction costs paid on behalf of Noncontrolling interest
|
|
(5,543)
|
|
|
Fair value of Rocky Creek oil and gas properties contributed
|
|
38,561
|
|
|
Revenues received attributable to contributed properties
|
|
1,160
|
|
|
Suspense revenues attributable to the contributed properties
|
|
(146)
|
|
|
Asset retirement obligations of the contributed properties
|
|
(14)
|
|
|
Fair value of capital contributions
|
|
180,260
|
|
|
Income tax adjustment attributable to the Juniper Transactions
|
|
(708)
|
|
|
Total shareholders’ equity prior to the Juniper Closing Date
|
|
205,558
|
|
|
|
|
$
|
385,110
|
|
|
Juniper voting power through Series A Preferred Stock
|
|
59.6
|
%
|
|
Noncontrolling interest as of the Juniper Closing Date
|
|
$
|
229,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Revenue Recognition
Revenue from Contracts with Customers
Crude oil. We sell our crude oil production to our customers at either the wellhead or a contractually agreed-upon delivery point, including certain regional central delivery point terminals or pipeline inter-connections. We recognize revenue when control transfers to the customer, considering factors associated with custody, title, risk of loss and other contractual provisions as appropriate. Pricing is based on a market index with adjustments for product quality, location differentials and, if applicable, deductions for intermediate transportation. Costs incurred by us for gathering and transporting the products to an agreed-upon delivery point are recognized as a component of Gathering, processing and transportation (“GPT”) in our condensed consolidated statements of operations.
NGLs. We have natural gas processing contracts in place with certain midstream processing vendors. We deliver “wet” natural gas to our midstream processing vendors at the inlet of their processing facilities through gathering lines, certain of which we own and others which are owned by gathering service providers. Subsequent to processing, NGLs are delivered or otherwise transported to a third-party customer. Currently, for these contracts, we have determined that we are the agent and the midstream processing vendor is our customer. Accordingly, we recognize these revenues on a net basis with processing costs presented as a reduction of revenue.
Natural gas. Subsequent to the processing of “wet” natural gas and the separation of NGL products, the “dry” or residue gas is delivered to us at the tailgate of the midstream processing vendors’ facilities and we market the product to our customers, most of whom are interstate pipelines. We recognize revenue when control transfers to the customer, considering factors associated with custody, title, risk of loss and other contractual provisions as appropriate. Pricing is based on a market index with adjustments for product quality and location differentials, as applicable. Costs incurred by us for gathering and transportation from the wellhead through the processing facilities are recognized as a component of GPT in our condensed consolidated statements of operations.
Performance obligations
We record revenue in the month that our oil and gas production is delivered to our customers. However, the collection of revenues from oil and gas production may take up to 60 days following the month of production. Therefore, we make accruals for revenues and accounts receivable based on estimates of our share of production. We record any differences, which historically have not been significant, between the actual amounts ultimately received and the original estimates in the period they become finalized.
We apply a practical expedient which provides for an exemption from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. Under our commodity product sales contracts, we bill our customers and recognize revenue when our performance obligations have been satisfied. At that time, we have determined that payment is unconditional. Accordingly, our commodity sales contracts do not create contract assets or liabilities.
Our accounts receivable consists mainly of trade receivables from commodity sales and joint interest billings due from partners on properties we operate. Our allowance for credit losses is entirely attributable to receivables from joint interest partners. The following table summarizes our accounts receivable by type as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2021
|
|
2020
|
|
Customers
|
$
|
76,909
|
|
|
$
|
39,672
|
|
|
Joint interest partners
|
10,102
|
|
|
3,079
|
|
|
Derivative settlements from counterparties
|
1,000
|
|
|
3,287
|
|
|
Other
|
8
|
|
|
8
|
|
|
Total
|
88,019
|
|
|
46,046
|
|
|
Less: Allowance for credit losses
|
(246)
|
|
|
(197)
|
|
|
Accounts receivable, net of allowance for credit losses
|
$
|
87,773
|
|
|
$
|
45,849
|
|
Major Customers
For the nine months ended September 30, 2021, three customers accounted for $185.5 million, or approximately 53%, of our consolidated product revenues. The revenues generated from these customers during the nine months ended September 30, 2021, were $69.3 million, $71.0 million and $45.2 million, or 20%, 20% and 13% of the consolidated total, respectively. For the nine months ended September 30, 2020, three customers accounted for $113.4 million, or approximately 56%, of our consolidated product revenues. As of September 30, 2021 and December 31, 2020, $27.0 million and $24.1 million, or approximately 35% and 61%, respectively, of our consolidated accounts receivable from customers was related to the three customers referenced above. No significant uncertainties exist related to the collectability of amounts owed to us by any of these customers.
5. Derivative Instruments
We utilize derivative instruments, typically swaps, put options and call options which are placed with financial institutions that we believe are acceptable credit risks, to mitigate our financial exposure to commodity price volatility associated with anticipated sales of our future production and volatility in interest rates attributable to our variable rate debt instruments. For our commodity derivatives, we typically combine swaps, purchased put options, purchased call options, sold put options and sold call options in order to achieve various hedging objectives. Certain of these objectives result in combinations that operate as collars which include purchased put options and sold call options, three-way collars, which include purchased put options, sold put options and sold call options, and enhanced swaps, which include either sold put options or sold call options with the associated premiums rolled into an enhanced fixed price swap, among others.
Our derivative instruments are not formally designated as hedges for accounting purposes. While the use of derivative instruments limits the risk of adverse commodity price and interest rate movements, such use may also limit the beneficial impact of future product revenues and interest expense from favorable commodity price and interest rate movements. From time to time, we may enter into incremental derivative contracts in order to increase the notional volume of production we are hedging, restructure existing derivative contracts or enter into other derivative contracts resulting in modification to the terms of existing contracts. In accordance with our internal policies, we do not utilize derivative instruments for speculative purposes.
Commodity Derivatives 1
The following table sets forth our commodity derivative positions, presented on a net basis by period of maturity, as of September 30, 2021:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4Q2021
|
|
1Q2022
|
|
2Q2022
|
|
3Q2022
|
|
4Q2022
|
|
1Q2023
|
|
2Q2023
|
|
3Q2023
|
|
4Q2023
|
|
1Q2024
|
|
2Q2024
|
|
NYMEX WTI Crude Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Volume Per Day (bbl)
|
|
815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
457
|
|
|
457
|
|
462
|
|
308
|
|
Weighted Average Swap Price ($/bbl)
|
|
$
|
45.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58.75
|
|
|
$58.75
|
|
$58.75
|
|
$58.75
|
|
NYMEX WTI Crude Collars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Volume Per Day (bbl)
|
|
16,304
|
|
|
13,750
|
|
|
7,830
|
|
|
6,114
|
|
|
4,484
|
|
|
2,917
|
|
|
2,885
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Purchased Put Price ($/bbl)
|
|
$
|
51.40
|
|
|
$
|
53.94
|
|
|
$
|
47.37
|
|
|
$
|
44.00
|
|
|
$
|
40.00
|
|
|
$
|
40.00
|
|
|
$
|
40.00
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Sold Call Price ($/bbl)
|
|
$
|
62.23
|
|
|
$
|
66.25
|
|
|
$
|
60.87
|
|
|
$
|
58.36
|
|
|
$
|
52.47
|
|
|
$
|
50.00
|
|
|
$
|
50.00
|
|
|
|
|
|
|
|
|
|
|
NYMEX WTI Purchased Puts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Volume Per Day (bbl)
|
|
3,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Purchased Put Price ($/bbl)
|
|
$
|
55.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMEX WTI Crude CMA Roll Basis Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Volume Per Day (bbl)
|
|
17,935
|
|
|
6,667
|
|
|
6,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Swap Price ($/bbl)
|
|
$
|
0.168
|
|
|
$
|
0.625
|
|
|
$
|
0.625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMEX HH Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Volume Per Day (MMBtu)
|
|
6,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Swap Price ($/MMbtu)
|
|
$
|
3.540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMEX HH Collars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Volume Per Day (MMBtu)
|
|
9,783
|
|
|
3,333
|
|
|
13,187
|
|
|
13,043
|
|
|
13,043
|
|
|
|
|
11,538
|
|
|
11,413
|
|
|
11,413
|
|
|
11,538
|
|
|
11,538
|
|
|
Weighted Average Purchased Put Price ($/MMBtu)
|
|
$
|
2.607
|
|
|
$
|
4.150
|
|
|
$
|
2.500
|
|
|
$
|
2.500
|
|
|
$
|
2.500
|
|
|
|
|
$
|
2.500
|
|
|
$
|
2.500
|
|
|
$
|
2.500
|
|
|
$
|
2.500
|
|
|
$
|
2.328
|
|
|
Weighted Average Sold Call Price($/MMBtu)
|
|
$
|
3.117
|
|
|
$
|
5.750
|
|
|
$
|
3.220
|
|
|
$
|
3.220
|
|
|
$
|
3.220
|
|
|
|
|
$
|
2.682
|
|
|
$
|
2.682
|
|
|
$
|
2.682
|
|
|
$
|
3.650
|
|
|
$
|
3.000
|
|
|
NYMEX HH Sold Puts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Volume Per Day (MMBtu)
|
|
6,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Sold Put Price ($/MMBtu)
|
|
$
|
2.000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPIS Mt Belv Ethane Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Volume per Day (gal)
|
|
|
|
|
|
28,022
|
|
|
27,717
|
|
|
27,717
|
|
|
|
|
98,901
|
|
|
34,239
|
|
|
34,239
|
|
|
34,615
|
|
|
|
|
Weighted Average Fixed Price ($/gal)
|
|
|
|
|
|
$
|
0.2500
|
|
|
$
|
0.2500
|
|
|
$
|
0.2500
|
|
|
|
|
$
|
0.2288
|
|
|
$
|
0.2275
|
|
|
$
|
0.2275
|
|
|
$
|
0.2275
|
|
|
|
__________________________________________________________________________________
1 NYMEX WTI refers to New York Mercantile Exchange West Texas Intermediate that serves as the benchmark for crude oil. NYMEX HH refers to NYMEX Henry Hub that serves as the benchmark for natural gas. OPIS Mt Belv refers to Oil Price Information Service Mt. Belvieu that serves as the benchmark for ethane which represents a commodity proxy for NGLs.
Interest Rate Derivatives
As of September 30, 2021, we had a series of interest rate swap contracts (the “Interest Rate Swaps”) establishing fixed interest rates on a portion of our variable interest rate indebtedness. The notional amount of the Interest Rate Swaps totals $300 million, with us paying a weighted average fixed rate of 1.36% on the notional amount, and the counterparties paying a variable rate equal to LIBOR through May 2022.
Financial Statement Impact of Derivatives
The impact of our derivative activities on income is included within Derivatives on our condensed consolidated statements of operations. Derivative contracts that have expired at the end of a period, but for which cash had not been received or paid as of the balance sheet date, have been recognized as components of Accounts receivable (see Note 4) and Accounts payable and accrued liabilities (see Note 9) on the condensed consolidated balance sheets. The effects of derivative gains and (losses) and cash settlements are reported as adjustments to reconcile net income (loss) to net cash provided by operating activities. These items are recorded within the Derivative contracts section of our condensed consolidated statements of cash flows under Net (gains) losses and Cash settlements and premiums received (paid), net.
The following table summarizes the effects of our derivative activities for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Interest Rate Swap gains (losses) recognized in the condensed consolidated statements of operations
|
$
|
(84)
|
|
|
$
|
32
|
|
|
$
|
(48)
|
|
|
$
|
(7,527)
|
|
|
Commodity gains (losses) recognized in the condensed consolidated statements of operations
|
(21,000)
|
|
|
(6,923)
|
|
|
(119,631)
|
|
|
117,406
|
|
|
|
$
|
(21,084)
|
|
|
$
|
(6,891)
|
|
|
$
|
(119,679)
|
|
|
$
|
109,879
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cash settlements recognized in the condensed consolidated statements of cash flows
|
$
|
(973)
|
|
|
$
|
(919)
|
|
|
$
|
(2,851)
|
|
|
$
|
(1,287)
|
|
|
Commodity cash settlements and premiums received (paid) recognized in the condensed consolidated statements of cash flows
|
(21,265)
|
|
|
7,337
|
|
|
(43,190)
|
|
|
66,582
|
|
|
|
$
|
(22,238)
|
|
|
$
|
6,418
|
|
|
$
|
(46,041)
|
|
|
$
|
65,295
|
|
The following table summarizes the fair values of our derivative instruments, which we elect to present on a gross basis, as well as the locations of these instruments on our condensed consolidated balance sheets as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
|
|
|
|
Derivative
|
|
Derivative
|
|
Derivative
|
|
Derivative
|
|
Type
|
|
Balance Sheet Location
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
Interest rate contracts
|
|
Derivative assets/liabilities – current
|
|
$
|
—
|
|
|
$
|
2,496
|
|
|
$
|
—
|
|
|
$
|
3,655
|
|
|
Commodity contracts
|
|
Derivative assets/liabilities – current
|
|
4,909
|
|
|
60,593
|
|
|
75,506
|
|
|
81,451
|
|
|
Interest rate contracts
|
|
Derivative assets/liabilities – non-current
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,645
|
|
|
Commodity contracts
|
|
Derivative assets/liabilities – non-current
|
|
2,152
|
|
|
21,416
|
|
|
25,449
|
|
|
26,789
|
|
|
|
|
|
|
$
|
7,061
|
|
|
$
|
84,505
|
|
|
$
|
100,955
|
|
|
$
|
113,540
|
|
As of September 30, 2021, we reported net commodity derivative liabilities of $74.9 million and net Interest Rate Swap liabilities of $2.5 million. The contracts associated with these positions are with nine counterparties for commodity derivatives and four counterparties for Interest Rate Swaps, all of which are investment grade financial institutions and are participants in our revolving credit facility (the “Credit Facility”). This concentration may impact our overall credit risk in that these counterparties may be similarly affected by changes in economic or other conditions. Non-performance risk is incorporated by utilizing discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset position, and our own credit risk if the derivative is in a liability position.
The agreements underlying our derivative instruments include provisions for the netting of settlements with the counterparties for contracts of similar type. We have neither paid to, nor received from, our counterparties any cash collateral in connection with our derivative positions. Furthermore, our derivative contracts are not subject to margin calls or similar accelerations. No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties.
See Note 10 for information regarding the fair value of our derivative instruments.
6. Property and Equipment
The following table summarizes our property and equipment as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2021
|
|
2020
|
|
Oil and gas properties:
|
|
|
|
|
Proved
|
$
|
1,762,268
|
|
|
$
|
1,545,910
|
|
|
Unproved
|
59,560
|
|
|
49,935
|
|
|
Total oil and gas properties
|
1,821,828
|
|
|
1,595,845
|
|
|
Other property and equipment
|
28,265
|
|
|
27,746
|
|
|
Total properties and equipment
|
1,850,093
|
|
|
1,623,591
|
|
|
Accumulated depreciation, depletion, amortization and impairments
|
(985,215)
|
|
|
(900,042)
|
|
|
Total property and equipment, net
|
$
|
864,878
|
|
|
$
|
723,549
|
|
Unproved property costs of $59.6 million and $49.9 million have been excluded from amortization as of September 30, 2021 and December 31, 2020, respectively. An additional $1.2 million of costs, associated with wells in-progress for which we had not previously recognized any proved undeveloped reserves, were excluded from amortization as of December 31, 2020. We transferred $13.8 million and $4.5 million of undeveloped leasehold costs associated with acreage unlikely to be drilled or associated with proved undeveloped reserves, including capitalized interest, from unproved properties to the full cost pool during the nine months ended September 30, 2021 and 2020, respectively. We capitalized internal costs of $2.8 million and $1.3 million and interest of $2.6 million and $2.1 million during the nine months ended September 30, 2021 and 2020, respectively, in accordance with our accounting policies. Average depreciation, depletion and amortization per barrel of oil equivalent of proved oil and gas properties was $12.96 and $16.63 for the nine months ended September 30, 2021 and 2020, respectively.
At the end of each quarterly reporting period, the unamortized cost of our oil and gas properties, net of deferred income taxes, is limited to the sum of the estimated after-tax discounted future net revenues from proved properties adjusted for costs excluded from amortization (the “Ceiling Test”). During the three and nine months ended September 30, 2021, the Company recorded zero and a $1.8 million impairment of its oil and gas properties, respectively. During the three and nine months ended September 30, 2020, the Company recorded impairments of its oil and gas properties of $236.0 million and $271.5 million, respectively.
7. Long-Term Debt
The following table summarizes our debt obligations as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Credit Facility
|
$
|
212,900
|
|
|
$
|
314,400
|
|
|
Second Lien Facility
|
143,110
|
|
|
200,000
|
|
|
9.25% Senior Notes due 2026
|
400,000
|
|
|
—
|
|
|
Total
|
756,010
|
|
|
514,400
|
|
|
Less: Unamortized discount 1
|
(4,855)
|
|
|
(1,604)
|
|
|
Less: Unamortized deferred issuance costs 1, 2
|
(4,327)
|
|
|
(3,299)
|
|
|
Total, net
|
$
|
746,828
|
|
|
$
|
509,497
|
|
|
Less: Current portion
|
(7,500)
|
|
|
—
|
|
|
Long-term debt
|
$
|
739,328
|
|
|
$
|
509,497
|
|
_______________________
1 Discount and issuance costs of the Second Lien Facility are being amortized over the term of the underlying loan using the effective-interest method. The discount and issuance costs of the 9.25% Senior Notes due 2026 will be amortized over its respective term beginning in the fourth quarter of 2021 concurrent with the related proceeds being released from escrow and closing of the Lonestar acquisition.
2 Excludes issuance costs of the Credit Facility, which represent costs attributable to the access to credit over its contractual term, that have been presented as a component of Other assets (see Note 9) and are being amortized over the term of the Credit Facility using the straight-line method.
Credit Facility
As of September 30, 2021, the Credit Facility had a $1.0 billion revolving commitment and a $375 million borrowing base, including a $25 million sublimit for the issuance of letters of credit. Availability under the Credit Facility may not exceed the lesser of the aggregate commitments or the borrowing base; however, outstanding borrowings under the Credit Facility were limited to a maximum of $350 million as of September 30, 2021. The borrowing base under the Credit Facility is redetermined semi-annually, generally in the Spring and Fall of each year. Additionally, we and the Credit Facility lenders generally may, upon request, initiate a redetermination at any time during the six-month period between scheduled redeterminations. The Credit Facility is available to us for general corporate purposes, including working capital. Prior to the Eleventh Amendment (as defined below), the Credit Facility was scheduled to mature in May 2024. We had $0.4 million in letters of credit outstanding as of September 30, 2021 and December 31, 2020. During the nine months ended September 30, 2021, we incurred and capitalized approximately $0.7 million of issue costs associated with amendments to the Credit Facility. During the nine months ended September 30, 2020, we incurred and capitalized approximately $0.1 million of issue costs and wrote-off $0.9 million of previously capitalized issue costs due to a reduction of the borrowing base during the first half of 2020.
The Credit Facility is guaranteed by all of the subsidiaries of the borrower (the “Guarantor Subsidiaries”), except for Boland Building, LLC, effective upon the Eleventh Amendment, which holds real estate assets that are associated with Lonestar’s legacy mortgage obligations. The guarantees under the Credit Facility are full and unconditional and joint and several. Substantially all of our consolidated assets are held by the Guarantor Subsidiaries. The obligations under the Credit Facility are secured by a first priority lien on substantially all of our subsidiaries’ assets.
The outstanding borrowings under the Credit Facility bear interest at a rate equal to, at our option, either (a) a customary reference rate plus an applicable margin ranging from 1.50% to 2.50%, determined based on the utilization level under the Credit Facility or (b) a Eurodollar rate, including LIBOR through 2021, plus an applicable margin ranging from 2.50% to 3.50%, determined based on the utilization level under the Credit Facility. Interest on reference rate borrowings is payable quarterly in arrears and is computed on the basis of a year of 365/366 days, and interest on Eurodollar borrowings is payable every one, three or six months, at the election of the borrower, and is computed on the basis of a year of 360 days. As of September 30, 2021, the actual weighted-average interest rate on the outstanding borrowings under the Credit Facility was 3.09%. Unused commitment fees are charged at a rate of 0.50%.
As of September 30, 2021, the Credit Facility required us to maintain (1) a minimum current ratio (as defined in the Credit Facility, which considers the unused portion of the total commitment as a current asset), measured as of the last day of each fiscal quarter of 1.00 to 1.00, (2) a maximum leverage ratio (consolidated indebtedness to adjusted earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses, both as defined in the Credit Facility), measured as of the last day of each fiscal quarter of 3.50 to 1.00 and (3) a maximum first lien leverage ratio (consolidated secured indebtedness to adjusted earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses, both as defined in the Credit Facility), measured as of the last day of each fiscal quarter, of 2.50 to 1.00.
The Credit Facility also contains customary affirmative and negative covenants, including as to compliance with laws (including environmental laws, ERISA and anti-corruption laws), maintenance of required insurance, delivery of quarterly and annual financial statements, oil and gas engineering reports and budgets, maintenance and operation of property (including oil and gas properties), restrictions on the incurrence of liens and indebtedness, merger, consolidation or sale of assets, payment of dividends, and transactions with affiliates and other customary covenants. In addition, as of September 30, 2021, the Credit Facility contained certain anti-cash hoarding provisions.
The Credit Facility contains events of default and remedies. If we do not comply with the financial and other covenants in the Credit Facility, the lenders may, subject to customary cure rights, require immediate payment of all amounts outstanding under the Credit Facility.
As of September 30, 2021, we were in compliance with all of the covenants under the Credit Facility in effect at such time.
In August 2021, we entered into the Master Assignment, Agreement and Amendment No. 11 to Credit Agreement (the “Eleventh Amendment”). The Eleventh Amendment, in addition to other changes described therein, amended the Credit Facility to, effective on the closing of the Merger and satisfaction of other conditions set forth therein, (1) increase the borrowing base to $600 million, with aggregate elected commitments of $400 million, (2) remove certain availability restrictions, (3) remove minimum hedging requirements, (4) remove the first lien leverage ratio covenant, (5) remove the Partnership and PV Energy Holdings GP, LLC as guarantors, and (6) extend the maturity date to the date that is the four year anniversary of the date such amendment became effective, or October 6, 2025.
Second Lien Facility
We entered into the $200 million Second Lien Facility in September 2017 to fund a significant acquisition as well as related fees and expenses. In January 2021, the amendment dated November 2, 2020 (the “Second Lien Amendment”) became effective at which time we made a $50.0 million prepayment as well as a $1.3 million principal payment to a single participant
lender to liquidate their interest in the Second Lien Facility. The Second Lien Amendment provided for (i) the extension of the maturity date of the Second Lien Facility to September 29, 2024, (ii) an increase to the margin applicable to advances under the Second Lien Facility, (iii) the imposition of certain limitations on capital expenditures, acquisitions and investments if the Asset Coverage Ratio (as defined therein) at the end of any fiscal quarter is less than 1.25 to 1.00, (iv) the requirement for maximum and, in certain circumstances as described therein, minimum hedging arrangements, (v) beginning in 2021, a requirement to make quarterly amortization payments equal to $1.875 million and (vi) a provision for the replacement of the LIBOR interest rate upon its expiration. During the nine months ended September 30, 2021, we incurred and capitalized $1.4 million of issue costs in connection with the Second Lien Amendment and wrote off $1.2 million of previously capitalized issue costs and original issue discount allocable to the aforementioned prepayments as a loss on the extinguishment of debt.
The outstanding borrowings under the Second Lien Facility bore interest at a rate equal to, at our option, either (a) a customary reference rate plus an applicable margin of 7.25% or (b) a Eurodollar rate, including LIBOR through 2021, with a floor of 1.00%, plus an applicable margin of 8.25%; provided that the applicable margin would increase to 8.25% and 9.25%, respectively, during any quarter in which the quarterly amortization payment was not made. As of September 30, 2021, the actual interest rate of outstanding borrowings under the Second Lien Facility was 9.25%. Interest on reference rate borrowings was payable quarterly in arrears and computed on the basis of a year of 365/366 days, and interest on Eurodollar borrowings was payable every one or three months (including in three month intervals if we select a six-month interest period), at our election and computed on the basis of a 360-day year.
The Second Lien Facility was collateralized by substantially all of our operating subsidiaries’ assets with lien priority subordinated to the liens securing the Credit Facility. The obligations under the Second Lien Facility were guaranteed by all of Holdings’ subsidiaries.
The Second Lien Facility had no financial covenants, but contained affirmative and negative covenants, including as to compliance with laws (including environmental laws, ERISA and anti-corruption laws), maintenance of required insurance, delivery of quarterly and annual financial statements, oil and gas engineering reports and budgets, maintenance and operation of property (including oil and gas properties), limitations on capital expenditures, investments, the incurrence of liens and indebtedness, merger, consolidation or sale of assets, payment of dividends and transactions with affiliates and other customary covenants.
As of September 30, 2021, we were in compliance with all of the covenants under the Second Lien Facility.
On October 5, 2021, Holdings repaid all of its outstanding obligations under the Second Lien Facility, and terminated the Second Lien Facility. In accordance with the Second Lien Facility, we incurred a prepayment premium of 102% as a result of repayment.
9.25% Senior Notes due 2026
On August 10, 2021, our indirect, wholly-owned subsidiary Penn Virginia Escrow LLC (the “Escrow Issuer”) completed an offering of $400 million aggregate principal amount of senior unsecured notes due 2026 (the “9.25% Senior Notes due 2026”) that bear interest at 9.25% and were sold at 99.018% of par. The proceeds of the offering, net of discount, and other funds were initially deposited in an escrow account pending satisfaction of certain conditions, including the consummation of the Merger on or prior to November 26, 2021. As of September 30, 2021, these funds remained in escrow.
Of the $446.8 million total cash, cash equivalents and restricted cash presented on the condensed consolidated statement of cash flows as of September 30, 2021, $396.1 million is classified as Restricted cash - non-current within long-term assets based on the long-term nature of the 9.25% Senior Notes due 2026. The remaining $15.4 million is classified as Restricted cash - current as this portion represents accrued interest and an amount equivalent to the original issue discount. The net proceeds from the offering, along with cash on hand, were used to repay all outstanding amounts under the Second Lien Facility plus certain long-term debt of Lonestar upon consummation of the Merger. See Note 14 for additional information.
8. Income Taxes
The income tax provision resulted in an expense of $0.5 million and $0.4 million for the three and nine months ended September 30, 2021, respectively. The federal portion was fully offset by an adjustment to the valuation allowance against our net deferred tax assets resulting in an effective tax rate of 1.3%, which is fully attributable to the State of Texas. In connection with the Juniper Transactions, we recorded an adjustment of $0.7 million to Paid-in capital (see Note 3) attributable to certain state deferred income tax effects associated with the change in legal entity structure. Our net deferred income tax liability balance of $0.8 million as of September 30, 2021 is also fully attributable to the State of Texas and primarily related to property.
We recognized a federal and state income tax benefit of $1.6 million and $1.1 million for the three and nine months ended September 30, 2020, respectively. The federal and state tax expense was offset by an adjustment to the valuation allowance
against our net deferred tax assets resulting in an effective tax rate of 0.6% which was fully attributable to the State of Texas. The provision also reflected a reclassification of $1.2 million from deferred tax assets to current income taxes receivable for certain refundable alternative minimum tax credit carryforwards that were later received in June 2020.
We had no liability for unrecognized tax benefits as of September 30, 2021 and December 31, 2020. There were no interest and penalty charges recognized during the three and nine months ended September 30, 2021 and 2020. Tax years from 2015 forward remain open to examination by the major taxing jurisdictions to which the Company is subject; however, net operating losses originating in prior years are subject to examination when utilized.
9. Supplemental Balance Sheet Detail
The following table summarizes components of selected balance sheet accounts as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2021
|
|
2020
|
|
Prepaid and other current assets:
|
|
|
|
|
Inventories 1
|
$
|
6,015
|
|
|
$
|
4,274
|
|
|
Prepaid expenses 2
|
2,517
|
|
|
14,771
|
|
|
|
$
|
8,532
|
|
|
$
|
19,045
|
|
|
Other assets:
|
|
|
|
|
Deferred issuance costs of the Credit Facility, net of amortization
|
$
|
2,422
|
|
|
$
|
2,349
|
|
|
Right-of-use assets – operating leases
|
1,882
|
|
|
2,432
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
127
|
|
|
|
$
|
4,304
|
|
|
$
|
4,908
|
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
Trade accounts payable
|
$
|
34,323
|
|
|
$
|
7,055
|
|
|
Drilling and other lease operating costs
|
32,726
|
|
|
16,088
|
|
|
Royalties
|
55,398
|
|
|
26,615
|
|
|
Production, ad valorem and other taxes
|
8,682
|
|
|
3,094
|
|
|
Derivative settlements to counterparties
|
6,813
|
|
|
321
|
|
|
Compensation
|
5,714
|
|
|
4,222
|
|
|
Interest
|
5,745
|
|
|
504
|
|
|
Current operating lease obligations
|
937
|
|
|
936
|
|
|
Other 3
|
1,992
|
|
|
4,254
|
|
|
|
$
|
152,330
|
|
|
$
|
63,089
|
|
|
Other non-current liabilities:
|
|
|
|
|
Asset retirement obligations
|
$
|
5,972
|
|
|
$
|
5,461
|
|
|
Non-current operating lease obligations
|
1,161
|
|
|
1,752
|
|
|
Postretirement benefit plan obligations
|
1,094
|
|
|
1,149
|
|
|
|
|
|
|
|
|
$
|
8,227
|
|
|
$
|
8,362
|
|
_______________________
1 Includes tubular inventory and well materials of $5.7 million and $3.9 million and crude oil volumes in storage of $0.3 million and $0.4 million as of September 30, 2021 and December 31, 2020, respectively.
2 The balances as of September 30, 2021 and December 31, 2020 include $1.0 million and $13.6 million, respectively, for the prepayment of drilling and completion materials and services.
3 The balance as of December 31, 2020 includes $3.5 million of accrued costs attributable to Juniper Transaction expenses.
10. Fair Value Measurements
We apply the authoritative accounting provisions included in GAAP for measuring the fair value of both our financial and nonfinancial assets and liabilities. Fair value is an exit price representing the expected amount we would receive upon the sale of an asset or that we would expect to pay to transfer a liability in an orderly transaction with market participants at the measurement date.
Our financial instruments, including cash, cash equivalents and restricted cash, accounts receivable, and accounts payable approximate fair value due to their short-term maturities. As of September 30, 2021 and December 31, 2020, the carrying values of the borrowings outstanding under our credit facilities approximate fair value as the borrowings bear interest at variables rates tied to current market rates and the applicable margins represent market rates. The fair value of our fixed rate 9.25% Senior Notes due 2026 is estimated based on the published market prices for issuances of similar risk and tenor and is categorized as Level 2 within the fair value hierarchy. As of September 30, 2021, the carrying amount and estimated fair value of total debt (before amortization of issuance costs) was $756.0 million and $762.0 million, respectively. As of December 31, 2020, the estimated fair value of total debt (before amortization of issuance costs) approximated the carrying value of $514.4 million.
Recurring Fair Value Measurements
The fair values of our derivative instruments are measured at fair value on a recurring basis on our condensed consolidated balance sheets. The following tables summarize the valuation of those assets and (liabilities) as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2021
|
|
|
|
Fair Value
|
|
Fair Value Measurement Classification
|
|
Description
|
|
Measurement
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative assets – current
|
|
$
|
4,909
|
|
|
$
|
—
|
|
|
$
|
4,909
|
|
|
$
|
—
|
|
|
Commodity derivative assets – non-current
|
|
$
|
2,152
|
|
|
$
|
—
|
|
|
$
|
2,152
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swap liabilities – current
|
|
$
|
(2,496)
|
|
|
$
|
—
|
|
|
$
|
(2,496)
|
|
|
$
|
—
|
|
|
Interest rate swap liabilities – non-current
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Commodity derivative liabilities – current
|
|
$
|
(60,593)
|
|
|
$
|
—
|
|
|
$
|
(60,593)
|
|
|
$
|
—
|
|
|
Commodity derivative liabilities – non-current
|
|
$
|
(21,416)
|
|
|
$
|
—
|
|
|
$
|
(21,416)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
Fair Value
|
|
Fair Value Measurement Classification
|
|
Description
|
|
Measurement
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative assets – current
|
|
$
|
75,506
|
|
|
$
|
—
|
|
|
$
|
75,506
|
|
|
$
|
—
|
|
|
Commodity derivative assets – non-current
|
|
$
|
25,449
|
|
|
$
|
—
|
|
|
$
|
25,449
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swap liabilities – current
|
|
$
|
(3,655)
|
|
|
$
|
—
|
|
|
$
|
(3,655)
|
|
|
$
|
—
|
|
|
Interest rate swap liabilities – non-current
|
|
$
|
(1,645)
|
|
|
$
|
—
|
|
|
$
|
(1,645)
|
|
|
$
|
—
|
|
|
Commodity derivative liabilities – current
|
|
$
|
(81,451)
|
|
|
$
|
—
|
|
|
$
|
(81,451)
|
|
|
$
|
—
|
|
|
Commodity derivative liabilities – non-current
|
|
$
|
(26,789)
|
|
|
$
|
—
|
|
|
$
|
(26,789)
|
|
|
$
|
—
|
|
We used the following methods and assumptions to estimate fair values for the financial assets and liabilities described below:
•Commodity derivatives: We determine the fair values of our commodity derivative instruments using industry-standard models that consider various assumptions including current market and contractual prices for the underlying instruments, implied volatilities, time value and non-performance risk. For the current market prices, we use third-party quoted forward prices, as applicable, for NYMEX WTI, MEH crude oil, NYMEX HH natural gas and OPIS Mt Belv Ethane natural gas liquids closing prices as of the end of the reporting periods. Each of these is a Level 2 input.
•Interest rate swaps: We determine the fair values of our interest rate swaps using an income approach valuation technique which discounts future cash flows back to a single present value. We estimate the fair value of the swaps based on published interest rate yield curves as of the date of the estimate. Each of these is a Level 2 input.
Non-performance risk is incorporated by utilizing discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset position, and our own credit risk if the derivative is in a liability position. See Note 5 for additional details on our derivative instruments.
Non-Recurring Fair Value Measurements
In addition to the fair value measurements applied with respect to assets contributed in the Juniper Transactions, the most significant non-recurring fair value measurements utilized in the preparation of our condensed consolidated financial statements are those attributable to the initial determination of AROs associated with the ongoing development of new oil and gas properties and certain share-based compensation awards. The determination of the fair value of AROs is based upon regional market and facility specific information. The amount of an ARO and the costs capitalized represent the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor after discounting the future cost back to the date that the abandonment obligation was incurred using a rate commensurate with the risk, which approximates our cost of funds. Because these significant fair value inputs are typically not observable, we have categorized the initial estimates as Level 3 inputs.
11. Commitments and Contingencies
Drilling and Completion Commitments
As of September 30, 2021, we had contractual commitments on a pad-to-pad basis for two drilling rigs.
Gathering and Intermediate Transportation Commitments
We have long-term agreements with Nuevo G&T and Nuevo Dos Marketing, LLC (“Nuevo Marketing” and together with Nuevo G&T, collectively “Nuevo”) to provide gathering and intermediate pipeline transportation services for a substantial portion of our crude oil and condensate production in as well as volume capacity support for certain downstream interstate pipeline transportation.
Nuevo is obligated to gather and transport our crude oil and condensate from within a dedicated area in the Eagle Ford via a gathering system and intermediate takeaway pipeline connecting to a downstream interstate pipeline operated by a third party through 2041. We have a minimum volume commitment (“MVC”) of 8,000 gross barrels of oil per day to Nuevo through 2031 under the gathering agreement. We are obligated to deliver the first 20,000 gross barrels of oil per day produced from Gonzales, Lavaca, Fayette and DeWitt Counties, Texas.
Under a marketing agreement, we have a commitment to sell 8,000 barrels per day of crude oil (gross) to Nuevo, or to any third party, utilizing Nuevo Marketing’s capacity on a downstream interstate pipeline through 2026.
Under each of the agreements with Nuevo, credits for deliveries of volumes in excess of the volume commitment may be applied to any deficiency arising in the succeeding 12-month period.
Excluding the application of existing credits that we have earned during the preceding 12-month period ended September 30, 2021 for deliveries of volumes in excess of the volume commitment, and the potential impact of the effects of price escalation from commodity price changes, if any, the minimum fee requirements attributable to the MVC under the gathering, transportation and marketing agreements are as follows: $3.5 million for the remainder of 2021, approximately $13.9 million per year for 2022 through 2025, $7.8 million for 2026, $3.8 million per year for 2027 through 2030 and $0.6 million for 2031.
Crude Oil Storage
As a component of the crude oil gathering agreement referenced above, we have access to up to approximately 180,000 barrels of dedicated tank capacity for no additional charge at the service provider’s central delivery point facility (“CDP”), in Lavaca County, Texas through February 2041. We have also contracted for access to up to an additional 70,000 barrels of tank capacity at the CDP on a month-to-month basis which can be terminated by either party with 45-days’ notice to the counterparty. We have also contracted for crude oil storage capacity for up to 90,000 barrels with a downstream interstate pipeline at a facility in DeWitt County, Texas, on a month-to-month basis which can be terminated by either party with 45-days’ notice to the counterparty. Finally, we have an agreement with a marketing affiliate of the aforementioned downstream interstate pipeline to utilize up to 62,000 barrels of capacity within their system on a firm basis and an additional 120,000 barrels, if available, on a flexible basis. Costs associated with these agreements are in the form of monthly fixed rate short-term leases and are charged as incurred on a monthly basis to GPT in our condensed consolidated statements of operations.
Legal, Environmental Compliance and Other Claims
We are involved, from time to time, in various legal proceedings arising in the ordinary course of business. While the ultimate results of these proceedings cannot be predicted with certainty, our management believes that these claims will not have a material effect on our financial position, results of operations or cash flows. We had AROs of approximately $6.0 million and $5.5 million attributable to the plugging of abandoned wells as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, we had an estimated reserve of approximately $0.1 million for certain claims made against us regarding previously divested operations included in Accounts payable and accrued liabilities on our condensed consolidated balance sheets.
12. Share-Based Compensation and Other Benefit Plans
Share-Based Compensation
We reserved a total of 4,424,600 shares of Class A Common Stock for issuance under the Penn Virginia Corporation Management Incentive Plan (the “Plan”) for share-based compensation awards. A total of 760,220 RSUs and 484,197 PRSUs have been granted to employees and directors through September 30, 2021. As of September 30, 2021, a total of 239,524 RSUs and 345,069 PRSUs are unvested and outstanding.
We recognized $4.2 million, including approximately $1.9 million as a result of the change-in-control event associated with the Juniper Transactions, and $0.8 million of expense attributable to the RSUs and PRSUs for the nine months ended September 30, 2021 and 2020, respectively.
The table below presents the number of RSUs granted, the average grant-date fair value and the number of shares vested for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
2020
|
|
RSUs granted
|
|
118,223
|
|
|
281,382
|
|
|
Average grant-date fair value
|
|
$13.84
|
|
$4.49
|
|
Issued upon vesting, net of shares withheld for income taxes
|
|
122,911
|
|
|
45,435
|
|
Compensation expense for RSUs is being charged to expense on a straight-line basis over a range of less than one to three years.
The table below presents the number of PRSUs granted and the number of shares vested for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
2020
|
|
PRSUs granted 1
|
|
225,206
|
|
|
145,399
|
|
|
Monte Carlo grant-date fair value 2
|
|
$17.74 to $33.31
|
|
$2.40 to $16.02
|
|
Average grant-date fair value 3
|
|
$13.63
|
|
not applicable
|
|
Issued upon vesting, net of shares withheld for income taxes
|
|
7,252
|
|
|
19,402
|
|
___________________
1 The 2021 PRSU grants exclude one executive officers’ inducement award originally granted in August 2020 that was amended in April 2021 to conform vesting conditions to other PRSU awards granted in 2021.
2 Represents the Monte Carlo grant-date fair value of 2021 and 2020 PRSU grants based on the Company’s TSR performance (as defined below).
3 Represents the average grant-date fair value of 2021 PRSU grants (none granted prior to 2021) based on the Company’s ROCE performance (as defined below).
Compensation expense for PRSUs with a market condition is being charged to expense on a straight-line basis for the 2021 grants and graded-vesting for the 2020 and 2019 grants, over a range of less than one to three years. Compensation expense for PRSUs with a performance condition is recognized on a straight-line basis over three years, when it is considered probable that the performance condition will be achieved and such grants are expected to vest.
The 2021 PRSU grants are based 50% on the Company’s return on average capital employed (“ROCE”) relative to a defined peer group and 50% based on the Company’s absolute total shareholder return and total shareholder return (“TSR”) relative to a defined peer group. The 2021 PRSUs cliff vest from zero to 200 percent of the original grant at the end of a three-year performance period based on satisfaction of the respective underlying conditions.
Vesting of PRSUs granted in 2020 and 2019 range from zero to 200 percent of the original grant based on the performance of our common stock (TSR-based) relative to a defined peer group. Due to the market condition for the 2019, 2020 and a portion of the 2021 PRSU grants, the grant-date fair value is derived by using a Monte Carlo model. The ranges for the assumptions used in the Monte Carlo model for these PRSUs granted during 2021, 2020 and 2019 are presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 1
|
|
2020 1
|
|
2019
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
131.74% to 134.74%
|
|
101.32% to 117.71%
|
|
49.9
|
%
|
|
Dividend yield
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
Risk-free interest rate
|
|
0.22% to 0.29%
|
|
0.18% to 0.51%
|
|
1.66
|
%
|
|
Performance period
|
|
2021-2023
|
|
2020-2022
|
|
2020-2022
|
___________________
1 One executive officer’s inducement award originally granted in August 2020 was amended in April 2021 to conform vesting conditions to other PRSU awards granted in 2021. The Monte Carlo assumptions for both years are included above.
PRSUs with a market condition do not allow for the reversal of previously recognized expense, even if the market condition is not achieved and no shares ultimately vest.
We recognize share-based compensation expense as a component of G&A expenses in our condensed consolidated statements of operations.
Other Benefit Plans
We maintain the Penn Virginia Corporation and Affiliated Companies Employees 401(k) Plan (the “401(k) Plan”), a defined contribution plan, which covers substantially all of our employees. We recognized $0.2 million and $0.5 million of expense attributable to the 401(k) Plan for the three and nine months ended September 30, 2021, respectively. We recognized $0.1 million and $0.5 million of expense attributable to the 401(k) Plan for the three and nine months ended September 30, 2020, respectively. The charges for the 401(k) Plan are recorded as a component of G&A expenses in our condensed consolidated statements of operations.
We maintain unqualified legacy defined benefit pension and defined benefit postretirement plans that cover a limited number of former employees, all of whom retired prior to January 1, 2000. The combined expense recognized with respect to these plans was less than $0.1 million for each of the three and nine months ended September 30, 2021 and 2020. The charges for these plans are recorded as a component of Other income (expense) in our condensed consolidated statements of operations.
13. Earnings per Share
Basic net earnings (loss) per share is calculated by dividing the net income (loss) available to common shareholders, excluding net income or loss attributable to Noncontrolling interest, as applicable to the nine months ended September 30, 2021 (see Note 3), by the weighted average common shares outstanding for the period.
In computing diluted earnings (loss) per share, basic net earnings (loss) per share is adjusted based on the assumption that dilutive RSUs and PRSUs have vested and outstanding Common Units and shares of Series A Preferred Stock held by Juniper as a Noncontrolling interest in the Partnership are exchanged for common shares, as applicable to the nine months ended September 30, 2021 (see Note 3). Accordingly, our reported net income (loss) attributable to common shareholders is adjusted to reflect the reallocation of the net income (loss) attributable to the Noncontrolling interest assuming exchange of the Common Units and Series A Preferred Stock held by Noncontrolling interest. See Note 14 for additional information related to our recapitalization of common stock and Series A Preferred Stock.
The following table provides a reconciliation of the components used in the calculation of basic and diluted earnings (loss) per share for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Net income (loss)
|
$
|
43,063
|
|
|
$
|
(243,413)
|
|
|
$
|
30,638
|
|
|
$
|
(175,034)
|
|
|
Net income attributable to Noncontrolling interest
|
(25,676)
|
|
|
—
|
|
|
(23,778)
|
|
|
—
|
|
|
Net income (loss) attributable to common shareholders (basic)
|
17,387
|
|
|
(243,413)
|
|
|
6,860
|
|
|
(175,034)
|
|
|
Reallocation of Noncontrolling interest net income
|
25,676
|
|
|
—
|
|
|
23,778
|
|
|
—
|
|
|
Net income (loss) attributable to common shareholders (diluted)
|
$
|
43,063
|
|
|
$
|
(243,413)
|
|
|
$
|
30,638
|
|
|
$
|
(175,034)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares – basic
|
15,319
|
|
|
15,183
|
|
|
15,298
|
|
|
15,168
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Common Units and Series A Preferred Stock that are exchangeable for common shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
RSUs and PRSUs
|
394
|
|
|
—
|
|
|
371
|
|
|
—
|
|
|
Weighted-average shares – diluted 1
|
15,713
|
|
|
15,183
|
|
|
15,669
|
|
|
15,168
|
|
___________________
1 For the three and nine months ended September 30, 2021, approximately 22.5 million potentially dilutive securities represented by approximately 22.5 million Common Units (and the associated approximately 0.2 million shares of Series A Preferred Stock), had the effect of being anti-dilutive and were excluded from the calculation of diluted earnings per share. For the three and nine months ended September 30, 2020, approximately 0.2 million and 0.1 million potentially dilutive securities, represented by RSUs and PRSUs, had the effect of being anti-dilutive and were excluded from the calculation of diluted earnings per share.
14. Subsequent Events
Acquisition of Lonestar Resources
On July 10, 2021, we entered into the Merger Agreement with Lonestar under which we would acquire Lonestar in the Merger. On October 5, 2021, our shareholders voted to approve the Merger and it was consummated the same day. In accordance with the terms of the Merger Agreement, Lonestar shareholders received 0.51 shares of Penn Virginia common stock for each share of Lonestar common stock held immediately prior to the effective time of the Merger. Based on the closing price of Penn Virginia common stock on October 5, 2021 of $30.19, and in connection with the Merger, the total value of Penn Virginia common stock issued to holders of Lonestar common stock, warrants and restricted stock units as applicable, was approximately $173.6 million.
The transaction will be accounted for using the acquisition method of accounting, with Ranger Oil being treated as the accounting acquirer. Under the acquisition method of accounting, the assets and liabilities of Lonestar and its subsidiaries will be recorded at their respective fair values as of the date of completion of the Merger and added to Ranger Oil’s. The preliminary purchase price assessment remains an ongoing process and is subject to change for up to one year subsequent to the closing date of the Merger. Determining the fair value of the assets and liabilities of Lonestar requires judgment and certain assumptions to be made, the most significant of these being related to the valuation of Lonestar’s oil and gas properties.
Penn Virginia shareholders as of immediately prior to the consummation of the Merger own approximately 87% of the combined company, with affiliates of Juniper Capital owning 52% of the combined company, and former Lonestar shareholders own approximately 13% of the combined company.
Release of Escrowed Funds and Debt Repayments
In connection with the consummation of the Merger, the net proceeds from the offering of the 9.25% Senior Notes due 2026 and certain additional funds totaling $411.5 million were released from escrow on October 5, 2021. Obligations under the 9.25% Senior Notes due 2026 were assumed by Holdings, as borrower, and are guaranteed by the subsidiaries of Holdings that guarantee the Credit Facility.
The net proceeds from the 9.25% Senior Notes due 2026 were used to repay and discharge $249.8 million of Lonestar’s long-term debt including accrued interest and related expenses, and the remainder, along with cash on hand, of $146.2 million was used to repay the Second Lien Facility including a prepayment premium and accrued interest and related expenses.
Increased Borrowing Base of Credit Facility
Upon closing of the Merger and subject to the terms of Amendment No. 11 entered into in August 2021, our borrowing base under the Credit Facility increased to $600 million with aggregate elected commitments of $400 million.
See Note 7 for additional information on our debt.
Derivatives
Immediately following the Merger, we paid approximately $50 million to restructure certain of Lonestar’s derivatives, which was funded by borrowings under our Credit Facility. We have reset the majority of the swaps to reflect current market pricing.
Recapitalization of the Company’s Common Stock
On October 6, 2021, the Company effected a recapitalization (the “Recapitalization”), pursuant to which (i) the Company’s common stock was renamed and reclassified as Class A Common Stock, (ii) the authorized number of shares of capital stock of the Company was increased to 145,000,000 shares, (iii) 30,000,000 shares of Class B common stock, par value of $0.01 per share, a new class of capital stock of the Company, was authorized, (iv) all outstanding shares of the Series A Preferred Stock were exchanged for newly issued shares of Class B Common Stock, and (v) the designation of the Series A Preferred Stock was cancelled.
Forward-Looking Statements
Certain statements contained herein that are not descriptions of historical facts are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We use words such as “anticipate,” “guidance,” “assumptions,” “projects,” “estimates,” “expects,” “continues,” “intends,” “plans,” “believes,” “forecasts,” “future,” “potential,” “may,” “possible,” “could” and variations of such words or similar expressions to identify forward-looking statements. Because such statements include risks, uncertainties and contingencies, actual results may differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties and contingencies include, but are not limited to, the following:
•risks related to the acquisition of Lonestar, including the risk that the benefits of the acquisition may not be fully realized or may take longer to realize than expected, and that management attention will be diverted to transaction and integration-related issues;
•risks related to the recently completed transactions with Juniper and its affiliates, including the risk that the benefits of the transactions may not be fully realized or may take longer to realize than expected, and that management attention will be diverted to transaction-related issues;
•risks related to other completed acquisitions, including our ability to realize their expected benefits;
•the decline in, sustained market uncertainty of, and volatility of commodity prices for crude oil, natural gas liquids, or NGLs, and natural gas;
•the continued impact of the COVID-19 pandemic, including reduced demand for oil and natural gas, economic slowdown, governmental actions, stay-at-home orders, interruptions to our operations or our customer’s operations;
•risks related to and the impact of actual or anticipated other world health events;
•risks related to acquisitions and dispositions, including our ability to realize their expected benefits;
• our ability to satisfy our short-term and long-term liquidity needs, including our ability to generate sufficient cash
flows from operations or to obtain adequate financing, including access to the capital markets, to fund our capital expenditures and meet working capital needs;
•our ability to access capital, including through lending arrangements and the capital markets, as and when desired;
• negative events or publicity adversely affecting our ability to maintain our relationships with our suppliers, service providers, customers, employees, and other third parties;
• plans, objectives, expectations and intentions contained in this report that are not historical;
• our ability to execute our business plan in volatile and depressed commodity price environments;
• our ability to develop, explore for, acquire and replace oil and gas reserves and sustain production;
• changes to our drilling and development program;
• our ability to generate profits or achieve targeted reserves in our development and exploratory drilling and well operations;
• our ability to meet guidance, market expectations and internal projections, including type curves;
• any impairments, write-downs or write-offs of our reserves or assets;
• the projected demand for and supply of oil, NGLs and natural gas;
• our ability to contract for drilling rigs, frac crews, materials, supplies and services at reasonable costs;
• our ability to renew or replace expiring contracts on acceptable terms;
• our ability to obtain adequate pipeline transportation capacity or other transportation for our oil and gas production at reasonable cost and to sell our production at, or at reasonable discounts to, market prices;
• the uncertainties inherent in projecting future rates of production for our wells and the extent to which actual production differs from that estimated in our proved oil and gas reserves;
• use of new techniques in our development, including choke management and longer laterals;
• drilling, completion and operating risks, including adverse impacts associated with well spacing and a high concentration of activity;
• our ability to compete effectively against other oil and gas companies;
• leasehold terms expiring before production can be established and our ability to replace expired leases;
• environmental obligations, costs and liabilities that are not covered by an effective indemnity or insurance;
• the timing of receipt of necessary regulatory permits;
• the effect of commodity and financial derivative arrangements with other parties and counterparty risk related to the ability of these parties to meet their future obligations;
• the occurrence of unusual weather or operating conditions, including force majeure events;
• our ability to retain or attract senior management and key employees;
•our reliance on a limited number of customers and a particular region for substantially all of our revenues and production;
• compliance with and changes in governmental regulations or enforcement practices, especially with respect to environmental, health and safety matters;
• physical, electronic and cybersecurity breaches;
• uncertainties relating to general domestic and international economic and political conditions;
• the impact and costs associated with litigation or other legal matters;
• sustainability initiatives; and
• other factors set forth in our periodic filings with the Securities and Exchange Commission, or SEC, including the risks set forth in the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021, and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.
The effects of the COVID-19 pandemic may give rise to risks that are currently unknown or amplify the risks associated with many of these factors.
Additional information concerning these and other factors can be found in our press releases and public filings with the SEC. Many of the factors that will determine our future results are beyond the ability of management to control or predict. Readers should not place undue reliance on forward-looking statements, which reflect management’s views only as of the date hereof. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law.