NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT EVENTS AND ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
Halcón Resources Corporation (Halcón or the Company) is an independent energy company focused on the acquisition,
production, exploration and development of onshore liquids-rich oil and natural gas assets in the United States. The consolidated financial statements include the accounts of all majority-owned,
controlled subsidiaries. The Company operates in one segment which focuses on oil and natural gas acquisition, production, exploration and development. Allocation of capital is made across the
Company's entire portfolio without regard to operating area. All intercompany accounts and transactions have been eliminated. The Company has evaluated events or transactions through the date of
issuance of this report in conjunction with the preparation of these consolidated financial statements.
Emergence from Voluntary Reorganization under Chapter 11
On July 27, 2016 (the Petition Date), the Company and certain of its subsidiaries (the Halcón Entities) filed voluntary
petitions for relief under chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court in the District of Delaware (the Bankruptcy Court) to pursue a joint prepackaged plan of
reorganization (the Plan). On September 8, 2016, the Bankruptcy Court entered an order confirming the Plan and on September 9, 2016, the Plan became effective (the Effective Date) and
the Halcón Entities emerged from chapter 11 bankruptcy. The Company's subsidiary, HK TMS, LLC which was divested on September 30, 2016, was not part of the
chapter 11 bankruptcy filings. See Note 2,
"Reorganization,"
for further details on the Company's chapter 11 bankruptcy and the
Plan and Note 5,
"Acquisitions and Divestitures,"
for further details on the divestiture of HK TMS, LLC.
Upon
emergence from chapter 11 bankruptcy, the Company adopted fresh-start accounting in accordance with provisions of the Financial Accounting Standards Board's (FASB) Accounting
Standards Codification (ASC) 852,
Reorganizations
(ASC 852) which resulted in the Company becoming a new entity for financial reporting purposes on the
Effective Date. Upon the adoption of fresh-start accounting, the Company's assets and liabilities were recorded at their fair values as of the fresh-start reporting date. As a result of the adoption
of fresh-start accounting, the Company's consolidated financial statements subsequent to September 9, 2016 are not comparable to its consolidated financial statements prior to, and including,
September 9, 2016. See Note 3,
"Fresh-start Accounting,"
for further details on the impact of fresh-start accounting on the Company's
consolidated financial statements.
References
to "Successor" or "Successor Company" relate to the financial position and results of operations of the reorganized Company subsequent to September 9, 2016. References
to "Predecessor" or "Predecessor Company" relate to the financial position and results of operations of the Company prior to, and including, September 9, 2016.
Use of Estimates
The preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United
States requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at
the date of the consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Estimates and assumptions that, in the opinion of
management of the Company, are significant include oil and natural gas revenue accruals, capital and operating expense accruals, oil and natural gas reserves, depletion
92
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT EVENTS AND ACCOUNTING POLICIES (Continued)
relating
to oil and natural gas properties, asset retirement obligations, fair value estimates, including estimates of Reorganization Value, Enterprise Value and the fair value of assets and
liabilities recorded as a result of the adoption of fresh-start accounting, plus the estimated fair values of assets acquired and liabilities assumed in connection with the Pecos County Acquisition
and the fair value of assets sold in connection with the Williston Divestiture and the El Halcón Divestiture (see Note 5,
"Acquisitions and
Divestitures,"
for information on the Pecos County Acquisition, the Williston Divestiture and the El Halcón Divestiture), including the gains on sales recorded,
and income taxes. The Company bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances.
Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as
additional information is obtained and as the Company's operating environment changes. Actual results may differ from the estimates and assumptions used in the preparation of the Company's
consolidated financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with a maturity of three months or less at the time of purchase to be cash
equivalents. These investments are carried at cost, which approximates fair value.
Accounts Receivable and Allowance for Doubtful Accounts
The Company's accounts receivable are primarily receivables from joint interest owners and oil and natural gas purchasers. Accounts receivable
are recorded at the amount due, less an allowance for doubtful accounts, when applicable. The Company establishes provisions for losses on accounts receivable if it determines that collection of all
or part of the outstanding balance is doubtful. The Company regularly reviews collectability and establishes or adjusts the allowance for doubtful accounts as necessary using the specific
identification method. As of December 31, 2017 and 2016, allowances for doubtful accounts were approximately $0.7 million and $1.2 million, respectively.
Oil and Natural Gas Properties
The Company uses the full cost method of accounting for its investment in oil and natural gas properties as prescribed by the United States
Securities and Exchange Commission (SEC). Accordingly, all costs incurred in the acquisition, exploration and development of proved and unproved oil and natural gas properties, including the costs of
abandoned properties, dry holes, geophysical costs, and annual lease rentals are capitalized. All general and administrative corporate costs unrelated to drilling activities are expensed as incurred.
Sales or other dispositions of oil and natural gas properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded unless the ratio of cost to proved reserves would
significantly change. Depletion of evaluated oil and natural gas properties is computed on the units of production method based on proved reserves. The net capitalized costs of evaluated oil and
natural gas properties are subject to a full cost ceiling limitation in which the costs are not allowed to exceed their related estimated future net revenues discounted at 10%, net of tax
considerations.
93
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT EVENTS AND ACCOUNTING POLICIES (Continued)
Costs
associated with unevaluated properties are excluded from the full cost pool until the Company has made a determination as to the existence of proved reserves. The Company reviews
its unevaluated properties at the end of each quarter to determine whether the costs incurred should be transferred to the full cost pool and thereby subject to amortization. Investments in
unevaluated oil and natural gas properties and exploration and development projects for which depletion expense is not currently recognized, and for which exploration or development activities are in
progress, qualify for interest capitalization. The Company determines capitalized interest, when applicable, by multiplying the
Company's weighted-average borrowing cost on debt by the average amount of qualifying costs incurred that were excluded from the full cost pool; however, the amount of capitalized interest cannot
exceed the amount of gross interest expense incurred in any given period. The Successor Company's accounting policy on the capitalization of interest establishes thresholds for the determination of a
development project for the purpose of interest capitalization.
Other Operating Property and Equipment
Other operating property and equipment were recorded at fair value as a result of fresh-start accounting on September 9, 2016 and
additions since that date are recorded at cost. Depreciation is calculated using the straight-line method over the following estimated useful lives: gas gathering systems, thirty years, water disposal
and recycling facilities, twenty years; compressed natural gas facility, ten years; automobiles and computers, three years; computer software, fixtures, furniture and equipment, five years or the
lesser of lease term; trailers, seven years; heavy equipment, eight to ten years; buildings, twenty years and leasehold improvements, lease term. Upon disposition, the cost and accumulated
depreciation are removed and any gains or losses are reflected in current operations. Maintenance and repair costs are charged to operating expense as incurred. Material expenditures which increase
the life or productive capacity of an asset are capitalized and depreciated over the estimated remaining useful life of the asset.
Refer
to Note 3, "
Fresh-start Accounting,"
for a discussion of the valuation approach used to record other operating property and
equipment at fair value as of September 9, 2016. Refer to Note 5,
"Acquisitions and Divestitures,"
for a discussion of other operating
property and equipment acquired and divested during the year.
The
Company reviews its other operating property and equipment for impairment in accordance with ASC 360,
Property, Plant, and Equipment
(ASC 360). ASC 360 requires the Company to evaluate other operating property and equipment for impairment as events occur or circumstances change that would more likely than not reduce the fair value
below the carrying amount. If the carrying amount is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying
amount and the current fair value. Further, the Company evaluates the remaining useful lives of its gas gathering systems and equipment and other operating assets at each reporting period to determine
whether events and circumstances warrant a revision to the remaining depreciation periods. For the period from January 1, 2016 through September 9, 2016, the Company recorded a non-cash
impairment charge of $28.1 million related to $32.8 million gross investments in gas gathering infrastructure that were deemed non-economical due to a shift in exploration, drilling and
developmental plans in a low commodity price environment. This impairment was recorded in
"Other operating property and equipment impairment"
in the
Company's consolidated statements of operations and in
"Other operating property and equipment"
in the Company's consolidated balance sheets.
94
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT EVENTS AND ACCOUNTING POLICIES (Continued)
In
accordance with ASC 820,
Fair Value Measurements and Disclosures
(ASC 820), a financial instrument's level within the fair value
hierarchy is based on the lowest level of input that is significant to the fair value measurement. The estimate of the fair value of the Company's gas gathering systems was based on an income approach
that estimated future cash flows associated with those assets over the remaining asset lives. This estimation includes the use of unobservable inputs, such as estimated future production, gathering
and compression revenues and operating expenses. The use of these unobservable inputs results in the fair value estimate of the Company's gas gathering systems being classified as Level 3.
Revenue Recognition
Revenues from the sale of crude oil, natural gas, and natural gas liquids are recognized when the product is delivered at a fixed or
determinable price, title has transferred, and collectability is reasonably assured and evidenced by a contract. The Company follows the entitlement method of accounting for crude oil and natural gas
sales, recognizing as revenues only its net interest share of all production sold. Any amount attributable to the sale of production in excess of or less than the Company's net interest is recorded as
a balancing asset or liability. At December 31, 2017 and 2016, the Company's imbalances were immaterial.
Concentrations of Credit Risk
The Company operates a substantial portion of its oil and natural gas properties. As the operator of a property, the Company makes full payments
for costs associated with the property and seeks reimbursement from the other working interest owners in the property for their share of those costs. The Company's joint interest partners consist
primarily of independent oil and natural gas producers. If the oil and natural gas exploration and production industry in general was adversely affected, the ability of the Company's joint interest
partners to reimburse the Company could be adversely affected.
The
purchasers of the Company's oil and natural gas production consist primarily of independent marketers, major oil and natural gas companies and gas pipeline companies. Historically,
the Company has not experienced any significant losses from uncollectible accounts. In 2017 and 2016, two individual purchasers of the Company's production, Crestwood Midstream Partners, formerly
Arrow Field Services LLC (Crestwood), and Suncor Energy Marketing Inc. (Suncor), each accounted for more than 10% of total sales, collectively representing 58% of the Company's total
sales for each year. In 2015, three individual purchasers of the Company's production, Crestwood, Sunoco Inc. and Suncor, each accounted for more than 10% of total sales, collectively
representing 57% of the Company's total sales for the year.
Risk Management Activities
The Company follows ASC 815,
Derivatives and Hedging
(ASC 815). From time to time, when
derivative contracts are available at terms (or prices) acceptable to the Company, it may hedge a portion of its forecasted oil, natural gas, and natural gas liquids production. Derivative contracts
entered into by the Company have consisted of transactions in which the Company hedges the variability of cash flow related to a forecasted transaction. The Company recognized all derivative
instruments as either assets or liabilities in the consolidated balance sheets at fair value. The Company has elected to not designate any of its positions for hedge accounting. Accordingly, the
Company
95
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT EVENTS AND ACCOUNTING POLICIES (Continued)
records
the net change in the mark-to-market valuation of these positions, as well as payments and receipts on settled contracts, in "
Net gain (loss) on derivative
contracts
" on the consolidated statements of operations.
Income Taxes
The Company accounts for income taxes using the asset and liability method wherein deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a
valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company classifies all deferred tax assets and liabilities, along with any related
valuation allowance, as noncurrent on the consolidated balance sheets.
The
Company follows ASC 740,
Income Taxes
(ASC 740). ASC 740 creates a single model to address accounting for the uncertainty in income
tax positions and prescribes a minimum recognition threshold a tax position must meet before recognition in the consolidated financial statements.
The
evaluation of a tax position in accordance with ASC 740 is a two-step process. The first step is a recognition process to determine whether it is more likely than not that a tax
position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position
has met the more likely than not recognition threshold, it is presumed that the position will be examined by the appropriate taxing authority with full knowledge of all relevant information. The
second step is a measurement process whereby a tax position that meets the more likely than not recognition threshold is calculated to determine the amount of benefit/expense to recognize in the
consolidated financial statements. The tax position is measured at the largest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement.
The
Company has no liability for unrecognized tax benefits as of December 31, 2017 and 2016. Accordingly, there is no amount of unrecognized tax benefits that, if recognized,
would affect the effective tax rate and there is no amount of interest or penalties currently recognized in the consolidated statements of operations or consolidated balance sheets as of
December 31, 2017, 2016 and 2015. In addition, the Company does not believe that there are any positions for which it is reasonably possible that the total amount of unrecognized tax benefits
will significantly increase or decrease within the next twelve months.
The
Company includes interest and penalties relating to uncertain tax positions within "
Interest expense and other, net
" on the Company's
consolidated statements of operations. Refer to Note 14, "
Income Taxes,
" for more details.
Generally,
the Company's tax years 2014 through 2017 are either currently under audit or remain open and subject to examination by federal tax authorities or the tax authorities in
Louisiana, Mississippi, North Dakota, Oklahoma, Texas, Pennsylvania, Ohio and certain other state taxing jurisdictions where the Company has, or previously had, principal operations. In certain of
these jurisdictions, the Company operates through more than one legal entity, each of which may have
96
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT EVENTS AND ACCOUNTING POLICIES (Continued)
different
open years subject to examination. Additionally, it is important to note that years are open for examination until the statute of limitations in each respective jurisdiction expires.
Tax
audits may be ongoing at any point in time. Tax liabilities are recorded based on estimates of additional taxes which may be due upon the conclusion of these audits. Estimates of
these tax liabilities are made based upon prior experience and are updated for changes in facts and circumstances. However, due to the uncertain and complex application of tax regulations, it is
possible that the ultimate resolution of audits may result in liabilities which could be materially different from these estimates.
Asset Retirement Obligations
ASC 410,
Asset Retirement and Environmental Obligations
(ASC 410) requires that the fair value
of an asset retirement cost, and corresponding liability, should be recorded as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational
method. The Company records asset retirement obligations to reflect the Company's legal obligations related to future plugging and abandonment of its oil and natural gas wells and other operating
property and equipment. The Company estimates the expected cash flows associated with the obligation and discounts the amounts using a credit-adjusted, risk-free interest rate. At least annually, the
Company reassesses the obligation to determine whether a change in the estimated obligation is necessary. The Company evaluates whether there are indicators that suggest the estimated cash flows
underlying the obligation have materially changed. Should these indicators suggest the estimated obligation may have materially changed on an interim basis (quarterly), the Company will accordingly
update its assessment. Additional retirement obligations increase the liability associated with new oil and natural gas wells and other operating property and equipment as these obligations are
incurred.
401(k) Plan
The Company sponsors a 401(k) tax deferred savings plan, whereby the Company matches a portion of employees' contributions in cash.
Participation in the plan is voluntary and all employees of the Company who are 18 years of age are eligible to participate. The Company provided matching contributions of $2.2 million
for the year ended December 31, 2017. The Company provided matching contributions of $0.8 million and $2.0 million for the period September 10, 2016 through
December 31, 2016 and the period January 1, 2016 through September 9, 2016, respectively. The Company provided matching contributions of $3.8 million in 2015. The Company
matches employee contributions dollar-for-dollar on the first 10% of an employee's pre-tax earnings, subject to individual IRS limitations.
Related Party Transaction
On November 16, 2017, a subsidiary of the Company entered into a gas purchase and processing agreement with Salt Creek
Midstream, LLC (Salt Creek) pursuant to which the Company will dedicate for a term of 15 years, all production from its acreage in Ward County, Texas (that is not otherwise previously
dedicated) and certain sections in Winkler County, Texas to a natural gas gathering pipeline and processing facilities to be constructed by Salt Creek. The facilities are expected to be completed and
placed in service in April 2018. The agreement with Salt Creek was the culmination of a lengthy process during which the Company investigated the most efficient method of gathering, processing and
97
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT EVENTS AND ACCOUNTING POLICIES (Continued)
marketing
its future natural gas production in these areas. During the course of its investigation, the Company considered the construction of Company owned gas gathering and processing facilities,
Company owned high pressure pipeline to a third-party processing plant and solicited and received proposals from numerous third parties for long-term gathering and processing options. The Company
received proposals from eight midstream companies, determined that third party options were more attractive from a variety of business perspectives, and that among the proposals it received, Salt
Creek's was superior. The Salt Creek facilities are not yet operational, and no production has been delivered and no payments have been made or received by the Company pursuant to the gas purchase and
processing agreement to date.
Certain
funds under the control of Ares Management LLC (Ares) are the majority owners and controlling parties of Salt Creek. Ares also controls other funds which own in excess of
ten percent (10%) of the stock of the Company. No Ares fund that is a stockholder of the Company has an interest in Salt Creek but one of the Company's directors, who is employed by Ares, and is a
director of the Company, also serves on the board of directors of Salt Creek. Due to these relationships, prior to entering into the gas purchase and processing agreement, the process by which the
Company determined the Salt Creek proposal to be superior to other alternatives, as well as the terms of the agreement, were evaluated and approved in advance by the Audit Committee of the Company and
the disinterested members of the Company's board of directors, in a vote that excluded the Company director who is employed by Ares in accordance with applicable Company policies, including its Code
of Conduct and Corporate Governance Guidelines (copies of which are available through the
Company's website at
www.halconresources.com
), and the Company's procedures for the review and approval of transactions with related parties.
Recently Issued Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-01,
Business Combinations (Topic
805): Clarifying the Definition of a Business
(ASU 2017-01). For public business entities, ASU 2017-01 is effective for fiscal years and interim periods within those fiscal
years, beginning after December 15, 2017. The amendments in this ASU should be applied prospectively on or after the effective date. The ASU was issued to clarify the definition of a business
with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The Company is in the process of
assessing the effects of the application of the new guidance.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230)
(ASU 2016-15). For public business entities,
ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and early adoption is permitted. The areas for simplification in this
ASU involve addressing eight specific classification issues in the statement of cash flows. An entity should apply the amendments in this ASU using a retrospective transition method. The Company is in
the process of assessing the effects of the application of the new guidance.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
(ASU 2016-02). For public business entities, ASU 2016-02 is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. The FASB issued ASU 2016-02 to increase transparency and
comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. An entity
98
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT EVENTS AND ACCOUNTING POLICIES (Continued)
should
apply the amendments in this ASU on a modified retrospective basis. The transition will require application of the new guidance at the beginning of the earliest comparative period presented in
the financial statements. The Company is process of assessing the effects of the application of the new guidance and the financial statement and disclosure impacts. The Company will adopt ASU 2016-02
no later than January 1, 2019.
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09). ASU 2014-09 states that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. The standard provides five steps an entity should apply in determining its revenue recognition. In March 2016, ASU 2014-09 was updated with ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
(ASU 2016-08), which
provides further clarification on the principal versus agent evaluation. ASU 2014-09 is required to be adopted using either the full retrospective approach, with all prior periods presented adjusted,
or the modified retrospective approach, with a cumulative adjustment to retained earnings on the opening balance sheet and is effective for annual reporting periods, and interim periods within that
reporting period, after December 15, 2017. Early adoption is not permitted. The Company has completed an initial review of its contracts and is developing accounting policies and procedures to
address the provisions of ASU 2014-09. Additional disclosures will be required to describe the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. While the
Company does not currently expect net income or cash flows from operations to be materially impacted, the Company expects changes in the recognition of revenues and expenses in certain natural gas
gathering and processing contracts resulting in offsetting changes to
"Oil, natural gas and natural gas liquids sales"
and
"Gathering and other expense"
on
the consolidated statements of operations. The Company will adopt ASU 2014-09 effective January 1, 2018 using
the modified retrospective approach.
2. REORGANIZATION
On June 9, 2016, the Halcón Entities entered into a restructuring support agreement (the Restructuring Support Agreement) with certain holders of the Company's 13%
senior secured third lien notes due 2022 (the Third Lien Noteholders), the Company's 8.875% senior unsecured notes due 2021, 9.25% senior unsecured notes due 2022 and 9.75% senior unsecured notes due
2020 (collectively, the Unsecured Noteholders), the holder of the Company's 8% senior unsecured convertible note due 2020 (the Convertible Noteholder), and certain holders of the Company's 5.75%
Series A Convertible Perpetual Preferred Stock. On July 27, 2016, the Halcón Entities filed voluntary petitions for relief under chapter 11 of the United States
Bankruptcy Code in the U.S. Bankruptcy Court in the District of Delaware to effect an accelerated prepackaged bankruptcy restructuring as contemplated in the Restructuring Support Agreement. On
September 8, 2016, the Bankruptcy Court entered an order confirming the Company's plan of reorganization and on September 9, 2016, the Halcón Entities emerged from
chapter 11 bankruptcy.
Upon
emergence, pursuant to the terms of the Plan, the following significant transactions occurred:
-
-
the Predecessor Company's financing facility was refinanced and replaced with a debtor-in-possession senior-secured, super-priority revolving
credit facility, which was
99
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. REORGANIZATION (Continued)
Each
of the foregoing percentages of equity in the reorganized Company were as of September 9, 2016 and subject to dilution from the exercise of the new warrants described above,
a management incentive plan and other future issuances of equity securities.
See
Note 7,
"Long-term Debt,"
and Note 13, "
Stockholders' Equity
," for
further information regarding the Company's Successor and Predecessor debt and equity instruments.
3. FRESH-START ACCOUNTING
Upon the Company's emergence from chapter 11 bankruptcy, the Company qualified for and adopted fresh-start accounting in accordance with the provisions set forth in ASC 852 as
(i) the Reorganization Value of the Company's assets immediately prior to the date of confirmation was less than the post-petition liabilities and allowed claims, and (ii) the holders of
the existing voting shares of
100
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FRESH-START ACCOUNTING (Continued)
the
Predecessor entity received less than 50% of the voting shares of the emerging entity. Refer to Note 2
, "Reorganization,"
for the terms of
the Plan. Fresh-start accounting requires the Company to present its assets, liabilities, and equity as if it were a new entity upon emergence from bankruptcy. The new entity is referred to as
"Successor" or "Successor Company." However, the Company will continue to present financial information for any periods before adoption of fresh-start accounting for the Predecessor Company. The
Predecessor and Successor Companies may lack comparability, as required in ASC Topic 205,
Presentation of Financial Statements
(ASC 205). ASC 205 states
financial statements are required to be presented comparably from year to year, with any exceptions to comparability clearly disclosed. Therefore, "black-line" financial statements are presented to
distinguish between the Predecessor and Successor Companies.
Adopting
fresh-start accounting results in a new financial reporting entity with no beginning retained earnings or deficit as of the fresh-start reporting date. Upon the application of
fresh-start accounting, the Company allocated the Reorganization Value (the fair value of the Successor Company's total assets) to its individual assets based on their estimated fair values. The
Reorganization Value is intended to represent the approximate amount a willing buyer would value the Company's assets immediately after the reorganization.
Reorganization
Value is derived from an estimate of Enterprise Value, or the fair value of the Company's long-term debt, stockholders' equity and working capital. The estimated
Enterprise Value at the Effective Date is below the midpoint of the Court approved range of $1.6 billion to $1.8 billion, primarily reflecting the decline in forward commodity prices
during the period between the Company's analysis performed in advance of the July 2016 chapter 11 bankruptcy filing and the Effective Date. The Enterprise Value was derived from an independent
valuation using an asset based methodology of proved reserves, undeveloped acreage, and other financial information, considerations and projections, applying a combination of the income, cost and
market approaches as of the fresh-start reporting date of September 9, 2016.
The
Company's principal assets are its oil and natural gas properties. For purposes of estimating the fair value of the Company's proved, probable and possible reserves, an income
approach was used which estimated fair value based on the anticipated cash flows associated with the Company's reserves, risked by reserve category and discounted using a weighted average cost of
capital rate of 10.5% for proved reserves and 12.5% for probable and possible reserves. The proved reserve locations were limited to wells expected to be drilled in the Company's five year development
plan. Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $72.30 per barrel of oil, $3.50 per MMBtu of natural gas and $12.00 per
barrel of oil equivalent of natural gas liquids, after adjustment for transportation fees and regional price differentials. Base pricing was derived from an average of forward strip prices and
analysts' estimated prices.
In
estimating the fair value of the Company's unproved acreage that was not included in the valuation of probable and possible reserves, a market approach was used in which a review of
recent transactions involving properties in the same geographical location indicated the fair value of the Company's unproved acreage from a market participant perspective.
See
further discussion below in the
"Fresh-start accounting adjustments"
for the specific assumptions used in the valuation of the
Company's various other assets.
101
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FRESH-START ACCOUNTING (Continued)
Although
the Company believes the assumptions and estimates used to develop Enterprise Value and Reorganization Value are reasonable and appropriate, different assumptions and estimates
could materially impact the analysis and resulting conclusions. The assumptions used in estimating these values are inherently uncertain and require judgment.
The
following table reconciles the Company's Enterprise Value to the estimated fair value of the Successor's common stock as of September 9, 2016 (in thousands):
|
|
|
|
|
|
|
September 9, 2016
|
|
Enterprise Value
|
|
$
|
1,618,888
|
|
Plus: Cash
|
|
|
13,943
|
|
Less: Fair value of debt
|
|
|
(1,016,160
|
)
|
Less: Fair value of redeemable noncontrolling interest
|
|
|
(41,070
|
)
|
Less: Fair value of other long-term liabilities
|
|
|
(4,478
|
)
|
Less: Fair value of warrants
|
|
|
(16,691
|
)
|
|
|
|
|
|
Fair Value of Successor common stock
|
|
$
|
554,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table reconciles the Company's Enterprise Value to its Reorganization Value as of September 9, 2016 (in thousands):
|
|
|
|
|
|
|
September 9, 2016
|
|
Enterprise Value
|
|
$
|
1,618,888
|
|
Plus: Cash
|
|
|
13,943
|
|
Plus: Current liabilities
|
|
|
178,639
|
|
Plus: Noncurrent asset retirement obligation
|
|
|
32,156
|
|
|
|
|
|
|
Reorganization Value of Successor assets
|
|
$
|
1,843,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheet
The following illustrates the effects on the Company's consolidated balance sheet due to the reorganization and fresh-start accounting
adjustments. The explanatory notes following the table below provide further details on the adjustments, including the Company's assumptions and methods used to
102
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FRESH-START ACCOUNTING (Continued)
determine
fair value for its assets and liabilities. Amounts included in the table below are rounded to thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 9, 2016
|
|
|
|
Predecessor
Company
|
|
Reorganization
Adjustments
|
|
Fresh-Start
Adjustments
|
|
Successor
Company
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
111,464
|
|
$
|
(97,521
|
)
(1)
|
$
|
|
|
$
|
13,943
|
|
Accounts receivable
|
|
|
116,859
|
|
|
|
|
|
|
|
|
116,859
|
|
Receivables from derivative contracts
|
|
|
97,648
|
|
|
|
|
|
|
|
|
97,648
|
|
Restricted cash
|
|
|
17,164
|
|
|
|
|
|
|
|
|
17,164
|
|
Prepaids and other
|
|
|
8,961
|
|
|
|
|
|
(1,332
|
)
(7)
|
|
7,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
352,096
|
|
|
(97,521
|
)
|
|
(1,332
|
)
|
|
253,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties (full cost method):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluated
|
|
|
7,712,003
|
|
|
|
|
|
(6,497,874
|
)
(8)
|
|
1,214,129
|
|
Unevaluated
|
|
|
1,193,259
|
|
|
|
|
|
(861,144
|
)
(8)
|
|
332,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross oil and natural gas properties
|
|
|
8,905,262
|
|
|
|
|
|
(7,359,018
|
)
|
|
1,546,244
|
|
Lessaccumulated depletion
|
|
|
(6,803,231
|
)
|
|
|
|
|
6,803,231
|
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net oil and natural gas properties
|
|
|
2,102,031
|
|
|
|
|
|
(555,787
|
)
|
|
1,546,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating property and equipment
|
|
|
100,079
|
|
|
|
|
|
(62,008
|
)
(9)
|
|
38,071
|
|
Lessaccumulated depreciation
|
|
|
(24,154
|
)
|
|
|
|
|
24,154
|
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other operating property and equipment
|
|
|
75,925
|
|
|
|
|
|
(37,854
|
)
|
|
38,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from derivative contracts
|
|
|
4,431
|
|
|
|
|
|
|
|
|
4,431
|
|
Funds in escrow and other
|
|
|
1,610
|
|
|
|
|
|
27
|
(10)
|
|
1,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,536,093
|
|
$
|
(97,521
|
)
|
$
|
(594,946
|
)
|
$
|
1,843,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
160,000
|
|
$
|
13,688
|
(2)
|
$
|
|
|
$
|
173,688
|
|
Liabilities from derivative contracts
|
|
|
102
|
|
|
|
|
|
|
|
|
102
|
|
Other
|
|
|
414
|
|
|
|
|
|
4,435
|
(11)(12)
|
|
4,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
160,516
|
|
|
13,688
|
|
|
4,435
|
|
|
178,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net
|
|
|
1,031,114
|
|
|
|
|
|
(14,954
|
)
(13)
|
|
1,016,160
|
|
Liabilities subject to compromise
|
|
|
2,007,703
|
|
|
(2,007,703
|
)
(3)
|
|
|
|
|
|
|
Other noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities from derivative contracts
|
|
|
525
|
|
|
|
|
|
|
|
|
525
|
|
Asset retirement obligations
|
|
|
48,955
|
|
|
|
|
|
(16,799
|
)
(12)
|
|
32,156
|
|
Other
|
|
|
528
|
|
|
|
|
|
3,425
|
(11)(14)
|
|
3,953
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest
|
|
|
219,891
|
|
|
|
|
|
(178,821
|
)
(14)
|
|
41,070
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock (Predecessor)
|
|
|
|
|
|
(4)
|
|
|
|
|
|
|
|
Common Stock (Predecessor)
|
|
|
12
|
|
|
(12
|
)
(4)
|
|
|
|
|
|
|
Common Stock (Successor)
|
|
|
|
|
|
9
|
(5)
|
|
|
|
|
9
|
|
Additional paid-in capital (Predecessor)
|
|
|
3,287,906
|
|
|
(3,287,906
|
)
(4)
|
|
|
|
|
|
|
Additional paid-in capital (Successor)
|
|
|
|
|
|
571,114
|
(5)
|
|
|
|
|
571,114
|
|
Retained earnings (accumulated deficit)
|
|
|
(4,221,057
|
)
|
|
4,613,289
|
(6)
|
|
(392,232
|
)
(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
(933,139
|
)
|
|
1,896,494
|
|
|
(392,232
|
)
|
|
571,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
2,536,093
|
|
$
|
(97,521
|
)
|
$
|
(594,946
|
)
|
$
|
1,843,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FRESH-START ACCOUNTING (Continued)
Reorganization adjustments
-
1)
-
The
table below details cash payments as of September 9, 2016, pursuant to the terms of the Plan described in Note 2,
"
Reorganization,
" (in thousands):
|
|
|
|
|
Payment to Third Lien Noteholders
|
|
$
|
33,826
|
|
Payment to Unsecured Noteholders
|
|
|
37,595
|
|
Payment to Convertible Noteholder
|
|
|
15,000
|
|
Payment to Preferred Holders
|
|
|
11,100
|
|
|
|
|
|
|
Total Uses
|
|
$
|
97,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
2)
-
In
connection with the chapter 11 bankruptcy, the Company modified and rejected certain office lease arrangements and paid approximately $3.4 million
for these modifications and rejections subsequent to the emergence from chapter 11 bankruptcy. This amount also reflects $10.3 million paid to the Company's restructuring advisors
subsequent to the emergence from chapter 11 bankruptcy.
-
3)
-
Liabilities
subject to compromise were as follows (in thousands):
|
|
|
|
|
13.0% senior secured third lien notes due 2022
|
|
$
|
1,017,970
|
|
9.25% senior notes due 2022
|
|
|
37,194
|
|
8.875% senior notes due 2021
|
|
|
297,193
|
|
9.75% senior notes due 2020
|
|
|
315,535
|
|
8.0% convertible note due 2020
|
|
|
289,669
|
|
Accrued interest
|
|
|
46,715
|
|
Office lease modification and rejection fees
|
|
|
3,427
|
|
|
|
|
|
|
Liabilities subject to compromise
|
|
|
2,007,703
|
|
Fair value of equity and warrants issued to Third Lien Noteholders, Unsecured Noteholders and Convertible Noteholder
|
|
|
(548,947
|
)
|
Cash payments to Third Lien Noteholders, Unsecured Noteholders and Convertible Noteholder
|
|
|
(86,421
|
)
|
Office lease modification and rejection fees
|
|
|
(3,427
|
)
|
|
|
|
|
|
Gain on settlement of Liabilities subject to compromise
|
|
$
|
1,368,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
4)
-
Reflects
the cancellation of Predecessor equity, as follows (in thousands):
|
|
|
|
|
Predecessor Company stock
|
|
$
|
3,287,918
|
|
Fair value of equity issued to Predecessor common stockholders
|
|
|
(22,176
|
)
|
Cash payment to Preferred Holders
|
|
|
(11,100
|
)
|
|
|
|
|
|
Cancellation of Predecessor Company equity
|
|
$
|
3,254,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
5)
-
Reflects
the issuance of Successor equity. In accordance with the Plan, the Successor Company issued 3.6 million shares of common stock to the Predecessor
Company's existing common stockholders, 68.8 million shares of common stock to the Third Lien Noteholders, 14.0 million shares of common stock to the Unsecured Noteholders, and
3.6 million shares of common stock to
104
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FRESH-START ACCOUNTING (Continued)
the
Convertible Noteholder. This amount is subject to dilution by warrants issued to the Unsecured Noteholders and the Convertible Noteholder totaling 4.7 million shares with an exercise price
of $14.04
per share and a term of four years. The fair value of the warrants was estimated at $3.52 per share using a Black-Scholes-Merton valuation model.
-
6)
-
The
table below reflects the cumulative effect of the reorganization adjustments discussed above (in thousands):
|
|
|
|
|
Gain on settlement of Liabilities subject to compromise
|
|
$
|
1,368,908
|
|
Accrued reorganization items
|
|
|
(10,261
|
)
|
Cancellation of Predecessor Company equity
|
|
|
3,254,642
|
|
|
|
|
|
|
Net impact to retained earnings (accumulated deficit)
|
|
$
|
4,613,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fresh-start accounting adjustments
-
7)
-
Reflects
the reclassification of tubulars and well equipment to "
Oil and natural gas properties
."
-
8)
-
In
estimating the fair value of its oil and natural gas properties, the Company used a combination of the income and market approaches. For purposes of estimating the
fair value of the Company's proved, probable and possible reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Company's reserves,
risked by reserve category and discounted using a weighted average cost of capital rate of 10.5% for proved reserves and 12.5% for probable and possible reserves. The proved reserve locations were
limited to wells expected to be drilled in the Company's five year development plan. Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties
were $72.30 per barrel of oil, $3.50 per MMBtu of natural gas and $12.00 per barrel of natural gas liquids, after adjustment for transportation fees and regional price differentials. Base pricing was
derived from an average of forward strip prices and analysts' estimated prices.
In
estimating the fair value of the Company's unproved acreage that was not included in the valuation of probable and possible reserves, a market approach was used in which a review of recent
transactions involving properties in the same geographical location indicated the fair value of the Company's unproved acreage from a market participant perspective.
-
9)
-
In
estimating the fair value of its other operating property and equipment, the Company used a combination of the income, cost, and market approaches.
For
purposes of estimating the fair value of its gas gathering assets, an income approach was used that estimated future cash flows associated with the assets over the remaining useful lives. The
valuation included such inputs as estimated future production, gathering and compression revenues, and operating expenses that were discounted at a weighted average cost of capital rate of 9.5%.
For
purposes of estimating the fair value of its other operating assets, the Company used a combination of the market and cost approaches. A market approach was relied upon to value land and computer
equipment, and in this valuation approach, recent transactions of similar assets were utilized to determine the value from a market participant perspective. For the remaining other operating assets, a
cost approach was used. The estimation of fair value under the cost approach
105
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FRESH-START ACCOUNTING (Continued)
was
based on current replacement costs of the assets, less depreciation based on the estimated economic useful lives of the assets and age of the assets.
-
10)
-
Reflects
the adjustment of the Company's equity method investment in SBE Partners, L.P. to fair value based on an income approach, which calculated the
discounted cash flows of the Company's share of the partnership's interest in oil and gas proved reserves. The anticipated cash flows of the reserve were risked by reserve category and discounted at
10.5%. Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $72.30 per barrel of oil, $3.50 per MMBtu of natural gas and $12.00 per
barrel of oil equivalent of natural gas liquids, after adjustment for transportation fees and regional price differentials. Base pricing was derived from an average of forward strip prices and
analysts' estimated prices.
-
11)
-
Records
an intangible liability of approximately $8.3 million, $4.5 million of which was recorded as current, to adjust the Company's active rig
contract to fair value at September 9, 2016. The intangible liability will be amortized over the remaining life of the contract.
-
12)
-
Reflects
the adjustment of asset retirement obligations to fair value using estimated plugging and abandonment costs as of September 9, 2016, adjusted for
inflation and then discounted at the appropriate credit-adjusted risk free rate ranging from 5.5% to 6.6% depending on the life of the well. The fair value of asset retirement obligations was
estimated at $32.5 million, approximately $0.3 million of which was recorded as current. Refer to Note 10,
"Asset Retirement
Obligations,"
for further details of the Company's asset retirement obligations.
-
13)
-
Reflects
the adjustment of the 2020 Second Lien Notes and the 2022 Second Lien Notes to fair value. The fair value estimate was based on quoted market prices from
trades of such debt on September 9, 2016. Refer to Note 7,
"Long-term Debt,"
for definitions of and further information regarding the 2020
Second Lien Notes and 2022 Second Lien Notes.
-
14)
-
Reflects
the adjustment of the Company's redeemable noncontrolling interest and related embedded derivative of HK TMS, LLC to fair value. The fair value of
the redeemable noncontrolling interest was estimated at $41.1 million and the embedded derivative was estimated at zero. For purposes of estimating the fair values, an income approach was used
that estimated fair value based on the anticipated cash flows associated with HK TMS, LLC's proved reserves, risked by reserve category and discounted using a weighted average cost of capital
rate of 12.5%. The value of the redeemable noncontrolling interest was further reduced by a probability factor of the potential assignment of the common shares of HK TMS, LLC to Apollo Global
Management, which occurred subsequent to the fresh-start date. Refer to Note 5,
"Acquisitions and Divestitures,"
for further information
regarding the divestiture of HK TMS, LLC on September 30, 2016.
-
15)
-
Reflects
the cumulative effect of the fresh-start accounting adjustments discussed above.
Reorganization Items
Reorganization items represent (i) expenses or income incurred subsequent to the Petition Date as a direct result of the Plan,
(ii) gains or losses from liabilities settled, and (iii) fresh-start accounting
106
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FRESH-START ACCOUNTING (Continued)
adjustments
and are recorded in "
Reorganization items
" in the Company's consolidated statements of operations. The following table summarizes the net
reorganization items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Period from
September 10, 2016
through
December 31, 2016
|
|
|
|
Period from
January 1, 2016
through
September 9, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on settlement of Liabilities subject to compromise
|
|
$
|
|
|
|
|
$
|
1,368,908
|
|
Fresh start adjustments
|
|
|
|
|
|
|
|
(392,232
|
)
|
Reorganization professional fees and other
|
|
|
(2,049
|
)
|
|
|
|
(30,287
|
)
|
Write-off debt discounts/premiums and debt issuance costs
|
|
|
|
|
|
|
|
(32,667
|
)
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on reorganization items
|
|
$
|
(2,049
|
)
|
|
|
$
|
913,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. RESTRUCTURING
In 2017 and 2016, the Company had reductions in its workforce in conjunction with its divestiture activities in 2017 and the decrease in drilling and developmental activities planned for
2016. Consequently, for the year ended December 31, 2017 and the period January 1, 2016 through September 9, 2016, the Company incurred approximately $7.5 million and
$5.2 million, respectively, in severance costs and accelerated stock-based compensation expense related to the termination of certain employees. These costs were recorded in
"
Restructuring
" on the consolidated statements of operations.
5. ACQUISITIONS AND DIVESTITURES
Acquisitions
Recent Acquisition of Additional Properties in Monument Draw (Ward and Winkler Counties, Texas)
On December 13, 2017, the Company acquired undeveloped acreage and related assets in the Delaware Basin, in an area contiguous to the
western and southern areas of the Company's existing Monument Draw properties in Ward County, Texas from a private company, for a total cash purchase price of $101.6 million, subject to
customary post-closing adjustments. The effective date of the acquisition was September 1, 2017.
Hackberry Draw Assets (Pecos and Reeves Counties, Texas)
On January 18, 2017, Halcón Energy Properties, Inc., a wholly owned subsidiary of the Company, entered into a
Purchase and Sale Agreement with Samson Exploration, LLC (Samson), pursuant to which it agreed to acquire acreage and related assets in the Hackberry Draw area of the Delaware Basin, located in
Pecos and Reeves Counties, Texas (collectively, the Pecos County Assets), for a total adjusted purchase price of $699.2 million (the Pecos County Acquisition). The Pecos County Acquisition
closed on February 28, 2017. The transaction had an effective date of November 1, 2016. The Company funded the Pecos County Acquisition with the net proceeds from the private placement
of new 8% automatically convertible preferred stock and borrowings under its Senior Credit Agreement. Refer to Note 13,
"Stockholders' Equity,"
for further discussion of the Company's issuance of the preferred stock.
107
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. ACQUISITIONS AND DIVESTITURES (Continued)
The
Pecos County Acquisition was accounted for as a business combination in accordance with ASC 805,
Business Combinations
(ASC 805)
which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values. The estimated fair value of the
properties acquired approximates the fair value of consideration and as a result no goodwill was recognized.
The
following table summarizes the consideration paid to acquire the Pecos County Assets, as well as the estimated values of assets acquired and liabilities assumed as of the acquisition
date (in thousands):
|
|
|
|
|
Cash consideration paid to Samson at closing
(1)
|
|
$
|
703,865
|
|
Less: Post-effective closing date adjustments
(2)
|
|
|
(4,677
|
)
|
|
|
|
|
|
Final consideration transferred
|
|
$
|
699,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Estimated Fair Value of Liabilities Assumed:
|
|
|
|
|
Current liabilities
|
|
$
|
839
|
|
Asset retirement obligations
|
|
|
2,116
|
|
|
|
|
|
|
Amount attributable to liabilites assumed
|
|
|
2,955
|
|
|
|
|
|
|
Total purchase price plus liabilities assumed
|
|
$
|
702,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value of Assets Acquired:
|
|
|
|
|
Evaluated oil and natural gas properties
(3)(4)
|
|
$
|
188,275
|
|
Unevaluated oil and natural gas properties
(3)(4)
|
|
|
487,489
|
|
Gas gathering and other operating assets
(5)
|
|
|
26,379
|
|
|
|
|
|
|
Amount attributable to assets acquired
|
|
$
|
702,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Represents amount of cash consideration, adjusted for customary closing items, for the purchase of the Pecos County Assets
funded by the issuance of approximately $400.1 million of new 8% automatically convertible preferred stock and borrowings under the Senior Credit
Agreement.
-
(2)
-
In accordance with the purchase agreement, the effective date of the acquisition was November 1, 2016 and therefore
revenues, expenses and related capital expenditures from November 1, 2016 through February 28, 2017, the closing date of the Pecos County Acquisition, have been reflected as adjustments
to the purchase price consideration.
-
(3)
-
In estimating the fair value of the Pecos County Assets' oil and natural gas properties, the Company used an income approach.
For purposes of estimating the fair value of the proved, probable and possible reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the
Pecos County Assets' estimated reserves risked by reserve category and discounted using a weighted average cost of capital rate of 10.0% for proved reserves and 12.0% for probable and possible
reserves. The proved reserve locations were limited to wells expected to be drilled in the Company's five-year development plan. This estimation includes the use of unobservable inputs, such as
estimated future production, oil and natural gas revenues and expenses. The use of these unobservable inputs results in the fair value estimate of the Pecos County Assets being classified as
Level 3.
108
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. ACQUISITIONS AND DIVESTITURES (Continued)
-
(4)
-
Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $76.10
per barrel of oil, $4.14 per Mcf of natural gas and $29.48 per barrel of oil equivalent of natural gas liquids, after adjustment for transportation fees and regional price differentials. Base pricing
was derived from an average of forward strip prices and research analysts' estimated prices.
-
(5)
-
In estimating the fair value of the Pecos County Assets' other operating property and equipment, the Company used a combination
of the cost and market approaches. A market approach was relied upon to value the land, heavy equipment and vehicles, and in this valuation approach, recent transactions of similar assets were
utilized to determine the value from a market participant perspective. For the remaining other operating assets, a cost approach was used. The estimation of fair value under the cost approach was
based on current replacement costs of the assets, less depreciation based on the estimated economic useful lives of the assets and age of the assets.
The
following unaudited pro forma combined results of operations are provided for the year ended December 31, 2017, the period of September 10, 2016 through
December 31, 2016 and the period of January 1, 2016 through September 9, 2016 as though the Pecos County Acquisition had been completed as of the beginning of the comparable prior
annual reporting period, or January 1, 2016. The pro forma combined results of operations for the year ended December 31, 2017, the period of September 10, 2016 through
September 30, 2016 and the period of January 1, 2016 through September 9, 2016 have been prepared by adjusting the historical results of the Company to include the historical
results of the Pecos County Assets. These supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would
have been achieved by the combined Company for the periods presented or that may be achieved by the combined Company in the future. The pro forma results of operations do not include any cost savings
or other synergies that resulted, or may result, from the Pecos County Acquisition or any estimated costs that will be incurred to integrate the Pecos County Assets. Future results may vary
significantly from the results reflected in this unaudited pro forma financial information because of future events and transactions, as well as other factors. Amounts included in the table below are
rounded to thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
September 10, 2016
through
December 31, 2016
|
|
|
|
Period from
January 1, 2016
through
September 9, 2016
|
|
|
|
Year Ended
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
Revenue
|
|
$
|
385,867
|
|
$
|
166,499
|
|
|
|
$
|
288,902
|
|
Net income (loss)
|
|
|
542,724
|
|
|
(475,580
|
)
|
|
|
|
16,513
|
|
Net income (loss) available to common stockholders
|
|
|
494,717
|
|
|
(476,371
|
)
|
|
|
|
(28,239
|
)
|
Pro forma net income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.73
|
|
$
|
(5.22
|
)
|
|
|
$
|
(0.23
|
)
|
Diluted
|
|
$
|
3.70
|
|
$
|
(5.22
|
)
|
|
|
$
|
(0.23
|
)
|
109
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. ACQUISITIONS AND DIVESTITURES (Continued)
The
Company's historical financial information was adjusted to give effect to the pro forma events that are directly attributable to the Pecos County Assets and are factually
supportable. The unaudited pro forma consolidated results include the historical revenues and expenses of assets acquired and liabilities assumed, with the following
adjustments:
-
-
Adjustment to recognize incremental depletion expense under the full cost method of accounting based on the fair value of the oil and natural
gas properties and incremental accretion expense based on the asset retirement costs of the oil and natural gas properties at acquisition;
-
-
Adjustment to recognize incremental depreciation expense of the other operating property and equipment and incremental accretion expense based
on the asset retirement costs of the other operating property and equipment at acquisition; and
-
-
Eliminate transaction costs and non-recurring charges directly related to the transactions that were included in the historical results of
operations for the Company in the amount of approximately $1.0 million. Transaction costs directly related to the transaction that do not have a continuing impact on the combined Company's
operating results have been excluded from the pro forma earnings.
For
the year ended December 31, 2017, the Company recognized $46.2 million of oil, natural gas and natural gas liquids and other revenue related to the Pecos County Assets
and $5.9 million of net field operating income (oil, natural gas and natural gas liquids and other revenues less lease operating expense, workover expense, production taxes, gathering and other
expense, and depletion, depreciation and accretion expense) related to the Pecos County Assets. Additionally, non-recurring transaction costs of approximately $1.0 million related to the Pecos
County Acquisition for the year ended December 31, 2017 are included in the consolidated statements of operations in "
General and administrative"
expenses; these non-recurring transaction costs have been excluded from the pro forma results for all periods presented in the above table.
Monument Draw Assets (Ward and Winkler Counties, Texas)
On December 9, 2016, the Company entered into an agreement with a private company, pursuant to which the Company acquired the rights to
purchase acreage in the Monument Draw area of the Delaware Basin, located in Ward and Winkler Counties, Texas (the Ward County Assets) prospective for the Wolfcamp and Bone Spring formations for an
initial purchase price of $11,000 per acre. The Ward County Assets are divided into two tracts (the Southern Tract and the Northern Tract) with separate options for each tract. The agreement was
subsequently amended on June 14, 2017 to increase the purchase price of the Southern Tract and the Northern Tract acreage, from $11,000 per acre to $13,000 per acre, for rights to additional
depths in the acreage under option.
Pursuant to the terms of the agreement, on June 15, 2017, the Company purchased the Southern Tract acreage for approximately $87.4 million and on January 9, 2018, the Company
purchased the Northern Tract acreage for approximately $108.2 million.
110
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. ACQUISITIONS AND DIVESTITURES (Continued)
Divestitures
Williston Basin Non-Operated Assets
On September 19, 2017, certain wholly owned subsidiaries of the Company entered into an agreement with a privately-owned company pursuant
to which the Company sold its non-operated properties and related assets located in the Williston Basin in North Dakota and Montana (the Non-Operated Williston Assets) for a total adjusted
sales price of approximately $105.2 million, before certain post-closing adjustments as provided for in the sales agreement. The effective date of the transaction was April 1, 2017 and
the transaction closed on November 9, 2017. Proceeds from the sale were recorded as a reduction to the carrying value of the Company's full cost pool with no gain or loss recorded.
Williston Basin Operated Assets
On July 10, 2017, the Company and certain of its subsidiaries entered into an agreement with Bruin Williston Holdings, LLC for the
sale of all of the Company's operated oil and natural gas leases, oil and natural gas wells and related assets located in the Williston Basin in North Dakota, as well as 100% of the membership
interests in two of its subsidiaries (the Williston Assets) for a total adjusted sales price of approximately $1.4 billion, before certain post-closing adjustments as provided for in the sales
agreement (the Williston Divestiture). The effective date of the sale was June 1, 2017 and the transaction closed on September 7, 2017. The Company used the net proceeds from the sale to
repay borrowings outstanding under its Senior Credit Agreement, repurchase approximately $425 million principal amount of the then outstanding $850 million principal amount of its 6.75%
senior notes, redeem all of its outstanding 12% senior secured second lien notes and for general corporate purposes.
The
net proceeds from the sale were allocated between the Company's oil and natural gas properties, other operating property and equipment and liabilities transferred on a fair value
basis. Approximately $1.39 billion was allocated to the Company's oil and natural gas properties and approximately $10.9 million was allocated to other operating property and equipment.
As
discussed further in Note 6,
"Oil and Natural Gas Properties,"
the Company uses the full cost method of accounting for its
investment in oil and natural gas properties. Under this method of accounting, sales of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized,
unless the adjustment significantly alters the relationship between capitalized costs and proved reserves. If the Williston Divestiture was accounted for as an adjustment of capitalized costs with no
gain or loss recognized, the adjustment would have significantly altered the relationship between capitalized costs and proved reserves. Accordingly, the Company recognized a gain on the sale of the
Williston Assets of $485.9 million during the year ended December 31, 2017. The carrying value of the properties sold was determined by allocating total capitalized costs within the full
cost pool between properties sold and properties retained based on their relative fair values. The gain was recorded in
"Gain (loss) on the sale of oil and natural gas
properties,"
on the Company's consolidated statements of operations.
111
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. ACQUISITIONS AND DIVESTITURES (Continued)
East Texas Eagle Ford Assets
On January 24, 2017, certain of the Company's subsidiaries entered into an agreement with a subsidiary of Hawkwood Energy, LLC
(Hawkwood) for the sale of all of the Company's oil and natural gas properties and related assets located in the Eagle Ford formation of East Texas (the El Halcón Assets) for a total
adjusted sales price of $491.1 million (the El Halcón Divestiture). The effective date of the sale was January 1, 2017 and the transaction closed on March 9, 2017.
The Company used the net proceeds from the sale to repay borrowings outstanding under its Senior Credit Agreement and for general corporate purposes.
The
net proceeds from the sale were allocated between the Company's oil and natural gas properties, other operating property and equipment and liabilities transferred on a fair value
basis. Approximately $484.1 million was allocated to the Company's oil and natural gas properties and $10.2 million was allocated to other operating property and equipment.
Under
the full cost method of accounting, sales of oil and gas properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless the adjustment
significantly alters the relationship between capitalized costs and proved reserves. If the El Halcón Divestiture was accounted for as an adjustment of capitalized costs with no gain or
loss recognized, the adjustment would have significantly altered the relationship between capitalized costs and proved reserves. Accordingly, the Company recognized a gain on the sale in connection
with this transaction of $235.7 million during the year ended December 31, 2017. The carrying value of the properties sold was
determined by allocating total capitalized costs within the full cost pool between properties sold and properties retained based on their relative fair values. The gain was recorded in
"Gain (loss) on sale of oil and natural
gas properties,"
on the Company's consolidated statements of operations.
HK TMS, LLC
On September 30, 2016, certain wholly-owned subsidiaries of the Successor Company executed an Assignment and Assumption Agreement with an
affiliate of Apollo Global Management (Apollo) pursuant to which Apollo acquired one hundred percent (100%) of the common shares (the Membership Interests) of HK TMS, LLC (HK TMS), which
transaction is referred to as the HK TMS Divestiture. HK TMS was previously a wholly-owned subsidiary and held all of the Successor Company's oil and natural gas properties in the
Tuscaloosa Marine Shale (TMS). In exchange for the assignment of the Membership Interests, Apollo assumed all obligations relating to the Membership Interests, which were previously classified as
"Mezzanine
Equity"
on the consolidated balance sheets of HK TMS, from and after such date. Refer to Note 12,
"Mezzanine Equity"
for further details of the accounting considerations for HK TMS.
112
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. OIL AND NATURAL GAS PROPERTIES
Oil and natural gas properties as of December 31, 2017 and 2016 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
December 31,
2017
|
|
December 31,
2016
|
|
Subject to depletion
|
|
$
|
877,316
|
|
$
|
1,269,034
|
|
|
|
|
|
|
|
|
|
Not subject to depletion:
|
|
|
|
|
|
|
|
Exploration and extension wells in progress
|
|
|
5,298
|
|
|
5,159
|
|
Other capital costs:
|
|
|
|
|
|
|
|
Incurred in 2017
|
|
|
760,488
|
|
|
|
|
Incurred in 2016
(1)
|
|
|
|
|
|
311,280
|
|
Incurred in 2015
|
|
|
|
|
|
|
|
Incurred in 2014 and prior
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total not subject to depletion
|
|
|
765,786
|
|
|
316,439
|
|
|
|
|
|
|
|
|
|
Gross oil and natural gas properties
|
|
|
1,643,102
|
|
|
1,585,473
|
|
Less accumulated depletion
|
|
|
(570,155
|
)
|
|
(465,849
|
)
|
|
|
|
|
|
|
|
|
Net oil and natural gas properties
|
|
$
|
1,072,947
|
|
$
|
1,119,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
In 2016, with the application of fresh-start accounting, the Company's unevaluated properties were recorded at fair value as of
the fresh-start reporting date.
The
Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under this method of accounting, all costs of acquisition, exploration and
development of oil and natural gas reserves (including such costs as leasehold acquisition costs, geological expenditures, dry hole costs, tangible and intangible development costs and direct internal
costs) are capitalized as the cost of oil and natural gas properties when incurred. To the extent capitalized costs of evaluated oil and natural gas properties, net of accumulated depletion, exceed
the discounted future net revenues of proved oil and natural gas reserves, net of deferred taxes, such excess capitalized costs are charged to expense.
With
the adoption of fresh-start accounting, the Company recorded its oil and natural gas properties at fair value as of September 9, 2016. The Company's evaluated and unevaluated
properties were assigned values of $1.2 billion and $332.1 million, respectively. Refer to Note 3,
"Fresh-start Accounting,"
for a
discussion of the valuation approaches used.
Additionally,
the Company assesses all properties classified as unevaluated property on a quarterly basis for possible impairment or reduction in value. The Company assesses properties
on an individual basis or as a group, if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term;
geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period
in which these factors indicate impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost
pool and are then subject to depletion and the full cost ceiling test limitation. In March 2016, the Predecessor Company transferred the remaining
113
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. OIL AND NATURAL GAS PROPERTIES (Continued)
unevaluated
Utica and TMS properties of approximately $330.4 million and $74.8 million, respectively, to the full cost pool. For the quarter ended March 31, 2016, management
concluded that it was no longer probable that capital would be available or approved to continue exploratory drilling activities in the Predecessor Company's Utica or TMS acreage positions in advance
of the related lease expirations due to the Predecessor Company's evaluation of strategic alternatives to reduce its debt and preserve liquidity in light of continued low commodity prices, together
with a reduction of the Predecessor Company's exploration department and the Predecessor Company's intent to expend capital only on its most economical and proven areas.
Investments
in unevaluated oil and natural gas properties and exploration and development projects for which depletion expense is not currently recognized, and for which exploration or
development activities are in progress, qualify for interest capitalization. The Predecessor Company determined capitalized interest by multiplying the Predecessor Company's weighted-average borrowing
cost on debt by the average amount of qualifying costs incurred that were excluded from the full cost pool; however, the amount of capitalized interest cannot exceed the amount of gross interest
expense incurred in any given period. The capitalized interest amounts were recorded as additions to unevaluated oil and natural gas properties on the consolidated balance sheets. As the costs
excluded were transferred to the full cost pool, the associated capitalized interest was also transferred to the full cost pool. For the period from January 1, 2016 through September 9,
2016, the Predecessor Company capitalized interest costs of $68.2 million. The Successor Company's policy on the capitalization of interest establishes thresholds for the determination of a
development project for the purpose of interest capitalization.
The
ceiling test value of the Company's reserves was calculated based on the following prices:
|
|
|
|
|
|
|
|
|
|
West Texas
Intermediate
(per barrel)
(1)
|
|
Henry Hub
(per MMBtu)
(1)
|
|
December 31, 2017
|
|
$
|
51.34
|
|
$
|
2.976
|
|
December 31, 2016
|
|
|
42.75
|
|
|
2.481
|
|
December 31, 2015
|
|
|
50.28
|
|
|
2.587
|
|
-
(1)
-
Unweighted average of the first day of the 12-months ended spot price, adjusted by lease or field for quality, transportation
fees and market differentials.
The
Company's net book value of oil and natural gas properties at March 31, June 30, September 30, and December 31, 2017 did not exceed the ceiling amount.
The Company's net book value of oil and natural gas properties at March 31, June 30 and September 30, 2016 exceeded the ceiling amount. The Company recorded full cost ceiling test
impairments before income taxes of $420.9 million ($268.1 million after taxes, before valuation allowance) for the period of September 10, 2016 through September 30, 2016
and $754.8 million ($478.2 million after taxes, before valuation allowance) for the six months ended June 30, 2016. The impairment at September 30, 2016 reflects the
differences between the first day of the month average prices for the preceding twelve months required by Regulation S-X, Rule 4-10 and ASC 932 in calculating the ceiling test and the
forward-looking prices required by ASC 852 to estimate the fair value of the Company's oil and natural gas properties on the fresh-start reporting date of September 9, 2016. The ceiling test
impairments at March 31, 2016 and June 30, 2016, were driven by decreases in the first-day-of-the-month 12-month average prices for
114
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. OIL AND NATURAL GAS PROPERTIES (Continued)
crude
oil used in the ceiling test calculations since December 31, 2015. The impairment at March 31, 2016 also reflects the transfer of the remaining unevaluated Utica and TMS
properties, as discussed above.
The
Predecessor Company's net book value of oil and natural gas properties at March 31, June 30, September 30 and December 31, 2015 exceeded the ceiling
amount. The Predecessor Company recorded a full cost ceiling test impairment before income taxes of $2.6 billion ($1.7 billion after taxes, before valuation allowance) for the year ended
December 31, 2015. The impairment for the year ended December 31, 2015 was driven by decreases in the first-day-of-the-month average prices for crude oil used in the ceiling test
calculations from $94.99 per barrel at December 31, 2014 to $50.28 per barrel at December 31, 2015.
The
Company recorded the full cost ceiling test impairments in
"Full cost ceiling impairment"
in the Company's consolidated statements of
operations and in
"Accumulated depletion"
in the Company's consolidated balance sheets.
Changes
in commodity prices, production rates, levels of reserves, future development costs, transfers of unevaluated properties to the full cost pool, capital spending, and other
factors will determine the Company's actual ceiling test calculation and impairment analyses in future periods.
7. LONG-TERM DEBT
Long-term debt as of December 31, 2017 and 2016 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
December 31,
2017
|
|
December 31,
2016
|
|
Senior revolving credit facility
|
|
$
|
|
|
$
|
186,000
|
|
8.625% senior secured second lien notes due 2020
(1)
|
|
|
|
|
|
672,613
|
|
12.0% senior secured second lien notes due 2022
(2)
|
|
|
|
|
|
106,040
|
|
6.75% senior notes due 2025
(3)
|
|
|
409,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
409,168
|
|
$
|
964,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
On February 16, 2017, the Company repurchased approximately 41% of the outstanding aggregate principal amount of its
8.625% senior secured second lien notes due 2020 with proceeds from the issuance of new 6.75% senior notes due 2025. The remaining aggregate principal amount was redeemed on March 20, 2017.
Amount was net of a $27.4 million unamortized discount at December 31, 2016. Refer to "8.625% Senior Secured Second Lien Notes" below for further
details.
-
(2)
-
The Company redeemed the outstanding aggregate principal amount of its 12.0% senior secured second lien notes due 2022 on
October 7, 2017. Amount is net of a $6.8 million unamortized discount at December 31, 2016. Refer to "12.0% Senior Secured Second Lien Notes" below for further
details.
-
(3)
-
On February 16, 2017, the Company issued $850.0 million aggregate principal amount of new 6.75% senior notes due
2025. On October 10, 2017, the Company repurchased approximately $425.0 million principal amount of the 2025 Notes at 103.0% of par plus accrued and unpaid interest. Amount is net
of $8.1 million unamortized discount and $7.7 million unamortized debt issuance costs at December 31, 2017. Refer to "6.75% Senior Notes" below for further
details.
115
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. LONG-TERM DEBT (Continued)
Senior Revolving Credit Facility
On September 7, 2017, the Company entered into an Amended and Restated Senior Secured Revolving Credit Agreement (the Senior Credit
Agreement) by and among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and certain other financial institutions party thereto, as lenders. The Senior Credit Agreement
amends and restates in its entirety the original Senior Secured Revolving Credit Agreement entered into on September 9, 2016. Pursuant to the Senior Credit Agreement, the lenders party thereto
have agreed to provide the Company with a $1.0 billion senior secured reserve-based revolving credit facility with a current borrowing base of $100.0 million. The maturity date of the
Senior Credit Agreement is September 7, 2022. The borrowing base will be redetermined semi-annually, with the lenders and the Company each having the right to one interim unscheduled
redetermination between any two consecutive semi-annual redeterminations. The borrowing base takes into account the estimated value of the Company's oil and natural gas properties, proved reserves,
total indebtedness, and other relevant factors consistent with customary oil and natural gas lending criteria. Amounts outstanding under the Senior Credit Agreement bear interest at specified margins
over the base rate of 1.25% to 2.25% for ABR-based loans or at specified margins over LIBOR of 2.25% to 3.25% for Eurodollar-based loans. These margins fluctuate based on the Company's utilization of
the facility. The Company may elect, at its option, to prepay any borrowings outstanding under the Senior Credit Agreement without premium or penalty (except with respect to any break funding payments
which may be payable pursuant to the terms of the Senior Credit Agreement). Amounts outstanding under the Senior Credit Agreement are guaranteed by certain of the Company's direct and indirect
subsidiaries and secured by a security interest in substantially all of the assets of the Company and its subsidiaries.
The
Senior Credit Agreement also contains certain financial covenants, including the maintenance of (i) a Total Net Indebtedness Leverage Ratio (as defined in the Senior Credit
Agreement) not to exceed 4.00:1.00 and (ii) a Current Ratio (as defined in the Senior Credit Agreement) not to be less than 1.00:1.00. At December 31, 2017, the Company was in compliance
with the financial covenants under the Senior Credit Agreement.
The
Senior Credit Agreement also contains certain events of default, including non-payment; breaches of representations and warranties; non-compliance with covenants or other agreements;
cross-default to material indebtedness; judgments; change of control; and voluntary and involuntary bankruptcy.
At
December 31, 2017, under the effective borrowing base of $100.0 million, the Company had no indebtedness outstanding, approximately $1.6 million letters of credit
outstanding and approximately $98.4 million of borrowing capacity available under the Senior Credit Agreement.
On
February 2, 2018, the Company entered into the Second Amendment (the Second Amendment) to the Senior Credit Agreement by and among the Company, as borrower, JPMorgan Chase
Bank, N.A., as administrative agent, and certain other financial institutions party thereto, as lenders. The Second
Amendment, among other things, provides for (i) the use of annualized financial data in determining EBITDA (as defined in the Senior Credit Agreement) for the fiscal quarters ending
June 30, 2018, September 30, 2018 and December 31, 2018, (ii) an increase in the ratio of Consolidated Total Net Debt (as defined in the Senior Credit Agreement) to EBITDA
of 4.50:1.00 for the fiscal quarter ending June 30, 2018, and a ratio of 4.00:1.00 for any fiscal quarter thereafter, (iii) a waiver of compliance with the covenant relating to the Total
Net Indebtedness Leverage Ratio (as
116
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. LONG-TERM DEBT (Continued)
defined
in the Senior Credit Agreement) for the fiscal quarter ending March 31, 2018, and (iv) a waiver of the automatic reduction to the borrowing base that would otherwise result due
to the issuance of the Additional 2025 Notes (defined below). See Note 17,
"Subsequent Events,"
for further details on the Second
Amendment.
8.625% Senior Secured Second Lien Notes
On May 1, 2015, the Company issued $700.0 million aggregate principal amount of its 8.625% senior secured second lien notes due
2020 (the 2020 Second Lien Notes) in a private offering. The 2020 Second Lien Notes were issued at par. The net proceeds from the sale of the 2020 Second Lien Notes were approximately
$686.2 million (after deducting offering fees and expenses). The 2020 Second Lien Notes bore interest at a rate of 8.625% per annum, payable semi-annually on February 1 and
August 1 of each year. In accordance with the Plan, the 2020 Second Lien Notes were unimpaired and reinstated upon the Company's emergence from chapter 11 bankruptcy.
On
February 16, 2017, the Company paid approximately $303.5 million for approximately $289.2 million principal amount of 2020 Second Lien Notes, a make-whole premium
of $13.2 million plus accrued and unpaid interest of approximately $1.1 million to repurchase such notes pursuant to a tender offer and issued a redemption notice to redeem the remaining
2020 Second Lien Notes. On February 21, 2017, the Company paid approximately $1.2 million for approximately $1.2 million of principal amount of 2020 Second Lien Notes, a
make-whole premium of approximately $54,000 plus accrued and unpaid interest to repurchase such notes pursuant to guaranteed delivery procedures of the tender offer. On March 20, 2017, the
Company paid approximately $432.0 million for $409.6 million aggregate principal amount of 2020 Second Lien Notes, a make-whole premium of $17.7 million and unpaid interest of
approximately $4.8 million to redeem the remaining notes at a price of 104.313% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the redemption date. The
repurchase and redemption of the 2020 Second Lien Notes was funded with proceeds from the issuance of $850.0 million in new 6.75% senior notes due 2025, discussed further below.
The
Company recognized a loss on the extinguishment of debt, representing a $30.9 million loss on the repurchase for the tender premium paid and a $26.0 million loss on the
write-off of the discount on the notes. The loss was recorded in
"Gain (loss) on extinguishment of debt"
on the consolidated statements of operations.
12.0% Senior Secured Second Lien Notes
On December 21, 2015, the Company completed the issuance in a private placement of approximately $112.8 million aggregate
principal amount of new 12.0% senior secured second lien notes due 2022 (the 2022 Second Lien Notes) in exchange for approximately $289.6 million principal amount of its then outstanding senior
unsecured notes, consisting of $116.6 million principal amount of 9.75% senior notes due 2020, $137.7 million principal amount of 8.875% senior notes due 2021 and $35.3 million
principal amount of 9.25% senior notes due 2022. At closing, the Predecessor Company paid all accrued and unpaid interest since the respective interest payment dates of the unsecured notes surrendered
in the exchange. The 2022 Second Lien Notes bore interest at a rate of 12.0% per annum, payable semi-annually on February 15 and August 15 of each year. In accordance with the terms of
the Plan, the 2022 Second Lien Notes were unimpaired and reinstated upon the Company's emergence from chapter 11 bankruptcy.
117
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. LONG-TERM DEBT (Continued)
On
September 7, 2017, the Company issued an irrevocable notice to redeem the outstanding aggregate principal amount of its 2022 Second Lien Notes on October 7, 2017 (the
Redemption Date). In accordance with the terms of the indenture governing the 2022 Second Lien Notes, all of the outstanding 2022 Second Lien Notes were redeemed at a redemption price equal to the
principal amount of $112.8 million plus a make whole premium of approximately $23.0 million and accrued and unpaid interest of approximately $2.0 million. On September 7,
2017, utilizing $137.8 million of the proceeds from the Williston Divestiture, the Company deposited with U.S. Bank National Association an amount of funds sufficient to fund the redemption,
delivered instructions to apply the deposited funds toward the redemption, and received a written acknowledgment from U.S. Bank National Association of the satisfaction and discharge of the indenture
governing the 2022 Second Lien Notes and the obligations of the Company and the subsidiary guarantors under the 2022 Second Lien Notes and related guarantees. The payment of the redemption price and
accrued interest to a holder of 2022 Second Lien Notes became due and payable on the Redemption Date upon presentation and surrender by the holder of such notes.
The
Company recognized a loss on the extinguishment of debt, representing a $23.0 million loss on the redemption for the make whole premium paid and a $6.2 million loss on
the write-off of the discount on the notes. The loss was recorded in
"Gain (loss) on extinguishment of debt"
on the consolidated statements of
operations.
6.75% Senior Notes
On February 16, 2017, the Company issued $850.0 million aggregate principal amount of new 6.75% senior notes due 2025 (the
2025 Notes) in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (Securities Act), Rule 144A and Regulation S,
and applicable state securities laws. The 2025 Notes were issued at par and bear interest at a rate of 6.75% per annum, payable semi-annually on February 15 and August 15 of each
year. The 2025 Notes will mature on February 15, 2025. Proceeds from the private placement were approximately $834.1 million after deducting initial purchasers' discounts and
commissions and offering expenses. The Company used a portion of the net proceeds from the private placement to fund the repurchase and redemption of the outstanding 2020 Second Lien Notes, as
discussed above, and for general corporate purposes.
The
2025 Notes are governed by an Indenture, dated as of February 16, 2017 (as supplemented, the February 2017 Indenture) by and among the Company, the Guarantors and U.S.
Bank National Association, as Trustee, which contains affirmative and negative covenants that, among other things, limit the ability of the Company and the Guarantors to incur indebtedness; purchase
or redeem stock or subordinated indebtedness; make investments; create liens; enter into transactions with affiliates; sell assets; refinance certain indebtedness; merge with or into other companies
or transfer substantially all of their assets; and, in certain circumstances, to pay dividends or make other distributions on stock. The February 2017 Indenture also contains customary events of
default. Upon the occurrence of certain events of default, the Trustee or the holders of the 2025 Notes may declare all outstanding 2025 Notes to be due and payable immediately. The
2025 Notes are jointly and severally, fully and unconditionally guaranteed on a senior unsecured basis by the Company's existing wholly-owned subsidiaries. Halcón, the issuer of
the 2025 Notes, has no material independent assets or operations apart from the assets and operations of its subsidiaries.
118
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. LONG-TERM DEBT (Continued)
In
connection with the sale of the 2025 Notes, on February 16, 2017, the Company, the Guarantors and J.P. Morgan Securities LLC, on behalf of itself and as
representative of the initial purchasers, entered into a Registration Rights Agreement (the 2017 Registration Rights Agreement) pursuant to which the Company agreed to, among other things, use
reasonable best efforts to file a registration statement
under the Securities Act and complete an exchange offer for the 2025 Notes within 365 days after closing. The Company filed the registration statement on November 1, 2017 and it
was declared effective by the SEC on December 21, 2017. In addition, the Company completed the exchange offer for the 2025 Notes on February 1, 2018.
At
any time prior to February 15, 2020, the Company may redeem the 2025 Notes, in whole or in part, at a redemption price equal to 100% of their principal amount plus a
make-whole premium, together with accrued and unpaid interest, if any, to the redemption date. The 2025 Notes will be redeemable, in whole or in part, on or after February 15, 2020 at
redemption prices equal to the principal amount multiplied by the percentage set forth below, plus accrued and unpaid interest (if any) on the 2025 Notes redeemed during the twelve month period
indicated beginning on February 15 of the years indicated below:
|
|
|
|
|
Year
|
|
Percentage
|
|
2020
|
|
|
105.063
|
|
2021
|
|
|
103.375
|
|
2022
|
|
|
101.688
|
|
2023 and thereafter
|
|
|
100.000
|
|
Additionally,
the Company may redeem up to 35% of the 2025 Notes prior to February 15, 2020 for a redemption price of 106.75% of the principal amount thereof, plus accrued
and unpaid interest, utilizing net cash proceeds from certain equity offerings. In addition, upon a change of control of the Company, holders of the 2025 Notes will have the right to require
the Company to repurchase all or any part of their 2025 Notes for cash at a price equal to 101% of the aggregate principal amount of the 2025 Notes repurchased, plus any accrued and
unpaid interest.
On
July 25, 2017, the Company concluded a consent solicitation of the holders of the 2025 Notes (the Consent Solicitation) and obtained consents to amend the February 2017
Indenture from approximately 99% of the holders of the 2025 Notes. As supplemented, the February 2017 Indenture amends provisions in order to exempt, among other things, the Williston
Divestiture from certain provisions therein triggered upon a sale of "all or substantially all of the assets" of the Company. Consenting
holders of the 2025 Notes received a consent fee of 2.0% of principal, or $16.9 million. The Company recorded the $16.9 million consent fees paid as a discount on the
2025 Notes.
On
September 7, 2017, the Company commenced an offer to purchase for cash up to $425.0 million of the $850.0 million outstanding aggregate principal amount of its
2025 Notes at 103.0% of principal plus accrued and unpaid interest. The consummation of the Williston Divestiture constituted a "Williston Sale" under the February 2017 Indenture, and the
Company was required to make an offer to all holders of the 2025 Notes to purchase for cash an aggregate principal amount up to $425.0 million of the 2025 Notes. The offer to
purchase expired on October 6, 2017, with notes representing in excess of $425.0 million of principal amount validly tendered. As a result, on October 10, 2017, the Company
repurchased approximately $425.0 million principal amount of the 2025 Notes on a pro rata basis at 103.0% of par plus accrued and unpaid interest of approximately $4.1 million.
119
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. LONG-TERM DEBT (Continued)
The
Company recognized a loss on the extinguishment of debt of approximately $28.9 million, representing a $12.8 million loss on the repurchase for the tender premium paid,
an $8.3 million loss on the write-off of the discount, and a $7.8 million loss on the write-off of the debt issuance costs on the notes repurchased. The loss was recorded in
"Gain (loss) on extinguishment of
debt"
on the consolidated statements of operations.
The
remaining unamortized discount was $8.1 million at December 31, 2017.
On
February 15, 2018, the Company issued an additional $200.0 million aggregate principal amount of its 2025 Notes at a price to the initial purchasers of 103.0% of
par (the Additional 2025 Notes). The net proceeds from the sale of the Additional 2025 Notes were approximately $203.0 million after deducting initial purchasers' premiums,
commissions and estimated offering expenses and will be used to fund the cash consideration for the acquisition of the West Quito Draw Properties, discussed further in Note 17,
"Subsequent Events,"
and for general corporate purposes, including to fund the Company's 2018 drilling program. These notes were issued under the
February 2017 Indenture. See Note 17,
"Subsequent Events,"
for further details on the issuance of the Additional 2025 Notes.
Debt Maturities
Aggregate maturities required on long-term debt at December 31, 2017 due in future years are as follows (in thousands, excluding
discounts and debt issuance costs):
|
|
|
|
|
2018
|
|
$
|
|
|
2019
|
|
|
|
|
2020
|
|
|
|
|
2021
|
|
|
|
|
2022
|
|
|
|
|
Thereafter
(1)
|
|
|
425,005
|
|
|
|
|
|
|
Total
|
|
$
|
425,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
On February 15, 2018, the Company issued an additional $200.0 million aggregate principal amount of its 6.75%
senior unsecured notes due 2025, which is not included in the table above. See Note 17, "Subsequent Events," for more details.
Debt Issuance Costs
The Company capitalizes certain direct costs associated with the issuance of debt and amortizes such costs over the lives of the respective
debt. During the year ended December 31, 2017, the Company capitalized approximately $17.6 million of debt issuance costs related to the Senior Credit Agreement and the
2025 Notes. For the year ended December 31, 2017, the Company expensed $8.0 million of debt issuance costs in conjunction with debt repurchases and decreases in the borrowing base
under the Senior Credit Agreement. As part of the Company's reorganization, all debt issuance costs related to the Company's Predecessor debt were extinguished. At December 31, 2017, the
Company had $8.3 million of debt issuance costs remaining that are being amortized over the lives of the respective debt. The debt issuance costs for the Company's Senior Credit Agreement are
presented in
"Funds in escrow and other
" and the debt issuance costs for the Company's senior unsecured debt are presented in
"Long-term debt, net"
on the
consolidated balance sheets.
120
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. FAIR VALUE MEASUREMENTS
Pursuant to ASC 820, the Company's determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in
receivables on the Company's consolidated balance sheets, but also the impact of the Company's nonperformance risk on its own liabilities. ASC 820 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 measurements are inputs that are
observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. The Company utilizes market data or assumptions that market participants
would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market
corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.
As
required by ASC 820, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The
Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement
within the fair value hierarchy levels. There were no transfers between fair value hierarchy levels for any period presented. The following tables set forth by level within the fair value hierarchy
the Company's financial assets and liabilities that were accounted for at fair value as of December 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from derivative contracts
|
|
$
|
|
|
$
|
677
|
|
$
|
|
|
$
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities from derivative contracts
|
|
$
|
|
|
$
|
26,999
|
|
$
|
|
|
$
|
26,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from derivative contracts
|
|
$
|
|
|
$
|
5,923
|
|
$
|
|
|
$
|
5,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities from derivative contracts
|
|
$
|
|
|
$
|
16,920
|
|
$
|
|
|
$
|
16,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
contracts listed above as Level 2 include collars and basis swaps that are carried at fair value. The Company records the net change in the fair value of these
positions in
"Net gain (loss) on derivative contracts"
in the Company's consolidated statements of operations. The Company is able to value the assets
and liabilities based on observable market data for similar instruments, which resulted in the Company reporting its derivatives as Level 2. This observable data includes the forward curves
121
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. FAIR VALUE MEASUREMENTS (Continued)
for
commodity prices based on quoted markets prices and implied volatility factors related to changes in the forward curves. See Note 9,
"Derivative and Hedging
Activities,"
for additional discussion of derivatives.
The
Company's derivative contracts are with major financial institutions with investment grade credit ratings which are believed to have minimal credit risk. As such, the Company is
exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts; however, the Company does not anticipate such nonperformance.
The
following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of ASC 825,
Financial
Instruments
. The estimated fair value amounts have been determined at discrete points in time based on relevant market information. These estimates involve uncertainties and
cannot be determined with precision. The estimated fair value of cash, accounts receivable and accounts payable approximates their carrying value due to their short-term nature. The estimated fair
value of the Company's Senior Credit Agreement approximates carrying value because the interest rates approximate current market rates. The following table presents the estimated fair values of the
Company's fixed interest rate, long-term debt instruments as of December 31, 2017 and 2016 (excluding discounts and debt issuance costs) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Debt
|
|
Principal
Amount
|
|
Estimated
Fair Value
|
|
Principal
Amount
|
|
Estimated
Fair Value
|
|
8.625% senior secured second lien notes
|
|
$
|
|
|
$
|
|
|
$
|
700,000
|
|
$
|
733,250
|
|
12.0% senior secured second lien notes
|
|
|
|
|
|
|
|
|
112,826
|
|
|
123,827
|
|
6.75% senior notes
|
|
|
425,005
|
|
|
443,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
425,005
|
|
$
|
443,790
|
|
$
|
812,826
|
|
$
|
857,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
fair value of the Company's fixed interest debt instruments was calculated using Level 2 criteria at December 31, 2017 and 2016. The fair value of the Company's senior
notes is based on quoted market prices from trades of such debt.
On
February 28, 2017, the Company closed the Pecos County Acquisition and recorded the assets acquired and liabilities assumed at their acquisition date fair values. See
Note 5,
"Acquisitions and Divestitures
," for a discussion of the fair value approaches used by the Company and the classification of the
estimates within the fair value hierarchy.
On
September 9, 2016, the Company emerged from chapter 11 bankruptcy and adopted fresh-start accounting, which resulted in the Company becoming a new entity for financial
reporting purposes. Upon the adoption of fresh-start accounting, the Company's assets and liabilities were recorded at their fair values as of the fresh-start reporting date, September 9, 2016.
See Note 3,
"Fresh-start Accounting,"
for a detailed discussion of the fair value approaches used by the Company.
For
the period from January 1, 2016 through September 9, 2016, the Predecessor Company recorded a non-cash impairment charge of $28.1 million related to its gas
gathering infrastructure. See Note 1,
"Financial Statement Presentation,"
for a discussion of the valuation approach used and the classification
of the estimate within the fair value hierarchy.
122
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. FAIR VALUE MEASUREMENTS (Continued)
The
Company follows the provisions of ASC 820, for nonfinancial assets and liabilities measured at fair value on a non-recurring basis. These provisions apply to the Company's initial
recognition of asset retirement obligations for which fair value is used. The asset retirement obligation estimates are derived from historical costs and management's expectation of future cost
environments; and therefore, the Company has designated these liabilities as Level 3. See Note 10,
"Asset Retirement Obligations,"
for a
reconciliation of the beginning and ending balances of the liability for the Company's asset retirement obligations.
9. DERIVATIVE AND HEDGING ACTIVITIES
The Company is exposed to certain risks relating to its ongoing business operations, such as commodity price risk and interest rate risk. Derivative contracts are utilized to hedge the
Company's exposure to
price fluctuations and reduce the variability in the Company's cash flows associated with anticipated sales of future oil and natural gas production. When derivative contracts are available at terms
(or prices) acceptable to the Company, it generally hedges a substantial, but varying, portion of anticipated oil and natural gas production for future periods. Derivatives are carried at fair value
on the consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the consolidated statements of operations for the period in which the change occurs. The
Company's hedge policies and objectives may change significantly as its operational profile changes and/or commodities prices change. The Company does not enter into derivative contracts for
speculative trading purposes.
It
is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive
market makers. The Company did not post collateral under any of its derivative contracts as they are secured under the Company's Senior Credit Agreement or are uncollateralized trades.
The
Company's crude oil and natural gas derivative positions at any point in time may consist of swaps, basis swaps, costless put/call "collars" and deferred put options. Swaps are
designed so that the Company receives or makes payments based on a differential between fixed and variable prices for crude oil and natural gas. Basis swaps effectively lock in a price differential
between regional prices (i.e. Midland) and the relevant price index at which the oil production is sold (i.e. Cushing). A costless collar consists of a sold call, which establishes a
maximum price the Company will receive for the volumes under contract and a purchased put that establishes a minimum price. A sold put option limits the exposure of the counterparty's risk should the
price fall below the strike price. Sold put options limit the effectiveness of purchased put options at the low end of the put/call collars to market prices in excess of the strike price of the put
option sold. The Company has elected to not designate any of its derivative contracts for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of these
derivative contracts, as well as all payments and receipts on settled derivative contracts, in
"Net gain (loss) on derivative contracts"
on the
consolidated statements of operations.
At
December 31, 2017, the Company had 34 open commodity derivative contracts summarized in the following tables: three natural gas collar arrangements, 12 crude oil basis swaps
and 19 crude oil collar arrangements.
At
December 31, 2016, the Company had 22 open commodity derivative contracts summarized in the following tables: two natural gas collar arrangements and 20 crude oil collar
arrangements.
123
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. DERIVATIVE AND HEDGING ACTIVITIES (Continued)
All
derivative contracts are recorded at fair market value in accordance with ASC 815 and ASC 820 and included in the consolidated balance sheets as assets or liabilities. The
following table summarizes the location and fair value amounts of all derivative contracts in the consolidated balance sheets as of December 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivative contracts
|
|
|
|
Liability derivative
contracts
|
|
|
|
|
|
Successor
|
|
|
|
Successor
|
|
Derivatives not
designated as
hedging contracts
under ASC 815
|
|
Balance sheet
location
|
|
December 31,
2017
|
|
December 31,
2016
|
|
Balance sheet
location
|
|
December 31,
2017
|
|
December 31,
2016
|
|
Commodity contracts
|
|
Current assetsreceivables from derivative contracts
|
|
$
|
677
|
|
$
|
5,923
|
|
Current liabilitiesliabilities from derivative contracts
|
|
$
|
(19,248
|
)
|
$
|
(16,434
|
)
|
Commodity contracts
|
|
Other noncurrent assetsreceivables from derivative contracts
|
|
|
|
|
|
|
|
Other noncurrent liabilitiesliabilities from derivative contracts
|
|
|
(7,751
|
)
|
|
(486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging contracts under ASC 815
|
|
$
|
677
|
|
$
|
5,923
|
|
|
|
$
|
(26,999
|
)
|
$
|
(16,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the location and amounts of the Company's realized and unrealized gains and losses on derivative contracts in the Company's consolidated statements of
operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) recognized in income on derivative
contracts for the
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
Period from
September 10,
2016 through
December 31,
2016
|
|
|
|
Period from
January 1,
2016 through
September 9,
2016
|
|
|
|
|
|
|
|
Year
Ended
December 31,
2017
|
|
|
|
Year
Ended
December 31,
2015
|
|
Derivatives not designated
as hedging contracts under
ASC 815
|
|
Location of gain or (loss)
recognized in income on
derivative contracts
|
|
|
|
|
|
|
|
|
|
Commodity contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
commodity contracts
|
|
net gain (loss) on derivative contracts
|
|
$
|
(16,468
|
)
|
$
|
(112,449
|
)
|
|
|
$
|
(263,732
|
)
|
$
|
(129,282
|
)
|
Realized gain (loss) on
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
commodity contracts
|
|
net gain (loss) on derivative contracts
|
|
|
17,759
|
|
|
84,709
|
|
|
|
|
245,734
|
|
|
439,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gain (loss) on derivative contracts
|
|
$
|
1,291
|
|
$
|
(27,740
|
)
|
|
|
$
|
(17,998
|
)
|
$
|
310,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. DERIVATIVE AND HEDGING ACTIVITIES (Continued)
At
December 31, 2017 and 2016, the Company had the following open crude oil and natural gas derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Floors
|
|
Ceilings
|
|
Basis Differential
|
|
Period
|
|
Instrument
|
|
Commodity
|
|
Volume in
Mmbtu's/ Bbl's
|
|
Price /
Price Range
|
|
Weighted
Average
Price
|
|
Price /
Price Range
|
|
Weighted
Average
Price
|
|
Price /
Price Range
|
|
Weighted
Average
Price
|
|
January 2018 - December 2018
|
|
Basis Swap
|
|
Crude Oil
|
|
|
2,555,000
|
|
$
|
|
$
|
|
|
$
|
|
$
|
|
|
$(1.05) - $(1.50)
|
|
$
|
(1.29
|
)
|
January 2018 - December 2018
|
|
Collars
|
|
Crude Oil
|
|
|
2,920,000
|
|
45.00 - 53.00
|
|
|
49.29
|
|
50.00 - 60.00
|
|
|
56.82
|
|
|
|
|
|
|
January 2018 - December 2018
|
|
Collars
|
|
Natural Gas
|
|
|
2,737,500
|
|
3.00 - 3.03
|
|
|
3.01
|
|
3.22 - 3.38
|
|
|
3.30
|
|
|
|
|
|
|
April 2018 - December 2018
|
|
Basis Swap
|
|
Crude Oil
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
|
(1.15)
|
|
|
(1.15
|
)
|
April 2018 - December 2018
|
|
Collars
|
|
Crude Oil
|
|
|
275,000
|
|
46.75
|
|
|
46.75
|
|
51.75
|
|
|
51.75
|
|
|
|
|
|
|
July 2018 - December 2018
|
|
Basis Swap
|
|
Crude Oil
|
|
|
1,012,000
|
|
|
|
|
|
|
|
|
|
|
|
(0.98) - (1.18)
|
|
|
(1.12
|
)
|
July 2018 - December 2018
|
|
Collars
|
|
Crude Oil
|
|
|
184,000
|
|
48.50
|
|
|
48.50
|
|
53.50
|
|
|
53.50
|
|
|
|
|
|
|
October 2018 - December 2018
|
|
Collars
|
|
Crude Oil
|
|
|
92,000
|
|
50.65
|
|
|
50.65
|
|
55.65
|
|
|
55.65
|
|
|
|
|
|
|
January 2019 - March 2019
|
|
Collars
|
|
Crude Oil
|
|
|
90,000
|
|
46.75
|
|
|
46.75
|
|
51.75
|
|
|
51.75
|
|
|
|
|
|
|
January 2019 - December 2019
|
|
Basis Swap
|
|
Crude Oil
|
|
|
4,380,000
|
|
|
|
|
|
|
|
|
|
|
|
(0.50) - (1.33)
|
|
|
(1.02
|
)
|
January 2019 - December 2019
|
|
Collars
|
|
Crude Oil
|
|
|
1,825,000
|
|
50.00 - 51.00
|
|
|
50.24
|
|
55.00 - 57.30
|
|
|
55.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Floors
|
|
Ceilings
|
|
Period
|
|
Instrument
|
|
Commodity
|
|
Volume in
Mmbtu's/ Bbl's
|
|
Price /
Price Range
|
|
Weighted
Average
Price
|
|
Price /
Price Range
|
|
Weighted
Average
Price
|
|
January 2017 - December 2017
|
|
Collars
|
|
Natural Gas
|
|
|
3,650,000
|
|
$3.15 - $3.26
|
|
$
|
3.20
|
|
$3.50 - $3.76
|
|
$
|
3.63
|
|
January 2017 - December 2017
|
|
Collars
|
|
Crude Oil
|
|
|
6,843,750
|
|
47.00 - 60.00
|
|
|
51.39
|
|
52.00 - 76.84
|
|
|
58.75
|
|
January 2018 - December 2018
|
|
Collars
|
|
Crude Oil
|
|
|
730,000
|
|
53.00
|
|
|
53.00
|
|
58.00
|
|
|
58.00
|
|
The
Company presents the fair value of its derivative contracts at the gross amounts in the consolidated balance sheets. The following table shows the potential effects of master netting
arrangements on the fair value of the Company's derivative contracts at December 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
|
|
Successor
|
|
Successor
|
|
Offsetting of Derivative Assets and Liabilities
|
|
December 31,
2017
|
|
December 31,
2016
|
|
December 31,
2017
|
|
December 31,
2016
|
|
Gross amounts presented in the consolidated balance sheet
|
|
$
|
677
|
|
$
|
5,923
|
|
$
|
(26,999
|
)
|
$
|
(16,920
|
)
|
Amounts not offset in the consolidated balance sheet
|
|
|
(231
|
)
|
|
(5,283
|
)
|
|
231
|
|
|
5,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
$
|
446
|
|
$
|
640
|
|
$
|
(26,768
|
)
|
$
|
(11,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. DERIVATIVE AND HEDGING ACTIVITIES (Continued)
The Company enters into an International Swap Dealers Association Master Agreement (ISDA) with each counterparty prior to a derivative contract with such counterparty. The ISDA is a
standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the
Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.
10. ASSET RETIREMENT OBLIGATIONS
The Company records an asset retirement obligation (ARO) on oil and natural gas properties when it can reasonably estimate the fair value of an obligation to perform site reclamation,
dismantle facilities or plug and abandon costs. For other operating property and equipment, the Company records an ARO when the system is placed in service and it can reasonably estimate the fair
value of an obligation to perform site reclamation and other necessary work when it is required. The Company records the ARO liability on the consolidated balance sheets and capitalizes a portion of
the cost in
"Oil and natural gas properties"
or
"Other operating property and equipment"
during the
period in which the obligation is incurred. The Company records the accretion of its ARO liabilities in
"Depletion, depreciation and accretion"
expense
in the consolidated statements of operations. The additional capitalized costs are depreciated on a unit-of-production basis or straight-line basis.
126
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. ASSET RETIREMENT OBLIGATIONS (Continued)
The
Company recorded the following activity related to its ARO liability (inclusive of the current portion) (in thousands):
|
|
|
|
|
Liability for asset retirement obligation as of December 31, 2015 (Predecessor)
|
|
$
|
47,016
|
|
Liabilities settled and divested
|
|
|
(180
|
)
|
Additions
|
|
|
1,044
|
|
Acquisitions
|
|
|
75
|
|
Accretion expense
|
|
|
1,414
|
|
|
|
|
|
|
Liability for asset retirement obligations as of September 9, 2016 (Predecessor)
|
|
$
|
49,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value fresh-start adjustment
|
|
$
|
(16,883
|
)
|
Liability for asset retirement obligations as of September 9, 2016 (Successor)
|
|
$
|
32,486
|
|
Liabilities settled and divested
(1)
|
|
|
(1,211
|
)
|
Additions
|
|
|
513
|
|
Accretion expense
|
|
|
587
|
|
|
|
|
|
|
Liability for asset retirement obligations as of December 31, 2016 (Successor)
|
|
$
|
32,375
|
|
Liabilities settled and divested
(1)
|
|
|
(33,796
|
)
|
Additions
|
|
|
592
|
|
Acquisitions
(1)
|
|
|
3,109
|
|
Accretion expense
|
|
|
1,306
|
|
Revisions in estimated cash flows
|
|
|
782
|
|
|
|
|
|
|
Liability for asset retirement obligations as of December 31, 2017 (Successor)
|
|
$
|
4,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
See Note 5, "Acquisitions and Divestitures," for additional information on the Company's acquisition and divestiture
activities.
11. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases corporate office space in Houston, Texas and Denver, Colorado. In addition, the Company has lease commitments for certain
equipment under long-term operating lease agreements. The office and equipment operating lease agreements expire on various dates through 2024. Rent expense was approximately $3.9 million,
$1.4 million, $5.9 million and $8.6 million for the year ended December 31, 2017, the period of September 10, 2016 through December 31, 2016, the period of
January 1, 2016 through September 9, 2016 and for the year ended December 31, 2015.
127
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. COMMITMENTS AND CONTINGENCIES (Continued)
Approximate
future minimum lease payments for subsequent annual periods for all non-cancelable operating leases as of December 31, 2017 are as follows (in thousands):
|
|
|
|
|
2018
|
|
$
|
3,339
|
|
2019
|
|
|
2,990
|
|
2020
|
|
|
1,811
|
|
2021
|
|
|
1,497
|
|
2022
|
|
|
835
|
|
Thereafter
|
|
|
1,345
|
|
|
|
|
|
|
Total
|
|
$
|
11,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2017, the Company has the following active drilling rig commitments (in thousands):
|
|
|
|
|
2018
|
|
$
|
5,746
|
|
2019
|
|
|
|
|
2020
|
|
|
|
|
2021
|
|
|
|
|
2022
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2017, termination of the Company's active drilling rig commitments would require early termination penalties of $4.5 million, which would be in lieu of
paying the remaining active drilling rig commitments of $5.7 million.
In
past years, with the sustained decline in crude oil prices, the Company stacked certain drilling rigs and amended other previous drilling rig contracts. In the future, the Company
expects to incur stacking charges/early termination fees on certain drilling rig commitments as follows (in thousands):
|
|
|
|
|
2018
|
|
$
|
1,260
|
|
2019
|
|
|
|
|
2020
|
|
|
3,000
|
|
2021
|
|
|
|
|
2022
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
June 20, 2017, the Company entered into an agreement with a private company for the right to purchase acreage located in Ward and Winkler Counties, Texas prospective for the
Wolfcamp and Bone Spring formations. The Company paid $5.0 million and drilled a commitment well to earn the option to acquire the acreage for $76.8 million, if the option is exercised,
by March 31, 2018. This option purchase agreement is not included in the tables above.
The
Company has entered into various long-term gathering, transportation and sales contracts with respect to production from the Delaware Basin in West Texas. As of December 31,
2017, the Company
128
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. COMMITMENTS AND CONTINGENCIES (Continued)
had
in place two long-term crude oil contracts and seven long-term natural gas contracts in this area and the sales prices under these contracts are based on posted market rates. Under the terms of
these contracts, the Company has committed a substantial portion of its production from this area for periods ranging from one to eight years from the date of first production. The sales prices under
these contracts are based on posted market rates.
Contingencies
From time to time, the Company may be a plaintiff or defendant in a pending or threatened legal proceeding arising in the normal course of its
business. While the outcome and impact of currently pending legal proceedings cannot be determined, the Company's management and legal counsel believe that the resolution of these proceedings through
settlement or adverse judgment will not have a material effect on the Company's consolidated operating results, financial position or cash flows.
12. MEZZANINE EQUITY
On June 16, 2014, funds and accounts managed by affiliates of Apollo contributed $150 million in cash
to HK TMS, a Delaware limited liability company, which was then wholly owned by the Company and held all of the Company's acreage in the TMS formation, located in Mississippi and Louisiana, in
exchange for the issuance by HK TMS of 150,000 preferred shares. At the closing, the Predecessor Company also contributed $50 million in cash to HK TMS. Holders of the HK TMS preferred shares
were to receive quarterly cash dividends of 8% cumulative perpetual per annum, subject to HK TMS' option to pay such dividends "in-kind" through the issuance of additional preferred shares. The
preferred shares were expected to be automatically redeemed and cancelled when the holders received cash dividends and distributions on the preferred shares equating to the greater of a 12% annual
rate of return plus principal and 1.25 times their investment plus applicable fees (the Redemption Price), subject to adjustment under certain circumstances. On September 30, 2016, certain
wholly-owned subsidiaries of the Successor Company executed an Assignment and Assumption Agreement with an affiliate of Apollo pursuant to which 100% of the Membership Interests in HK TMS were
assigned to Apollo. In exchange for the assignment, Apollo assumed all obligations relating to such Membership Interests. See Note 5,
"Acquisitions and
Divestitures,"
for further information regarding the HK TMS Divestiture.
The
preferred shares were classified as "
Redeemable noncontrolling interest
" and included in
"Mezzanine
equity"
between total liabilities and stockholders' equity on the consolidated balance sheets pursuant to ASC 480-10-S99-3A. The preferred shares were considered probable of
becoming redeemable and therefore were accreted up to the estimated required redemption value. The accretion was presented as a deemed dividend and recorded in "
Redeemable
noncontrolling interest
" on the consolidated balance sheets and within "
Preferred dividends and accretion on redeemable noncontrolling
interest
" on the consolidated statements of operations. In accordance with ASC 480-10-S99-3A, an adjustment to the carrying amount presented in mezzanine equity was recognized
as charges against retained earnings and reduced income available to common stockholders in the calculation of earnings per share.
In
March 2015, Apollo delivered a withdrawal notice to HK TMS indicating their election not to acquire additional preferred shares, referred to as the Tranche Rights, in HK TMS (the
Withdrawal Notice). Upon issuance of the Withdrawal Notice, HK TMS incurred a fee escalating from $2.50 per share to $20.00 per share for the next eight full fiscal quarters for any preferred shares
then
129
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. MEZZANINE EQUITY (Continued)
outstanding,
which began in the quarter ended June 30, 2015 (the Withdrawal Exit Fee). The Withdrawal Exit Fee would have been payable upon redemption of the preferred shares and was recorded
at fair value within "
Other noncurrent liabilities
" on the consolidated balance sheets at December 31, 2015.
The
following table sets forth a reconciliation of the changes in fair value of embedded derivative (in thousands):
|
|
|
|
|
|
|
Embedded
derivative
|
|
Balances at December 31, 2015 (Predecessor)
|
|
$
|
6,100
|
|
Change in fair value
|
|
|
(5,734
|
)
|
|
|
|
|
|
Balance at September 9, 2016 (Predecessor)
|
|
$
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value fresh-start adjustment
|
|
|
(366
|
)
|
Balance at September 9, 2016 (Successor)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company recorded the following activity related to the preferred shares in
"Mezzanine equity"
on the consolidated balance sheets for
the year ended December 31, 2016 (in thousands, except share amounts):
|
|
|
|
|
|
|
|
|
|
Redeemable
noncontrolling
interest
|
|
|
|
Shares
|
|
Amount
|
|
Balances at December 31, 2015 (Predecessor)
|
|
|
165,639
|
|
$
|
183,986
|
|
Dividends paid in-kind
|
|
|
9,329
|
|
|
9,329
|
|
Accretion of redeemable noncontrolling interest
|
|
|
|
|
|
26,576
|
|
|
|
|
|
|
|
|
|
Balances at September 9, 2016 (Predecessor)
|
|
|
174,968
|
|
$
|
219,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value fresh-start adjustment
|
|
|
|
|
$
|
(178,821
|
)
|
Balances at September 9, 2016 (Successor)
|
|
|
174,968
|
|
$
|
41,070
|
|
Dividends paid in-kind
|
|
|
791
|
|
|
791
|
|
HK TMS Divestiture
(1)
|
|
|
(175,759
|
)
|
|
(41,861
|
)
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016 (Successor)
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
See Note 5, "Acquisitions and Divestitures," for additional information on the HK TMS
Divestiture.
For
the period of September 10, 2016 through September 30, 2016 and January 1, 2016 through September 9, 2016, HK TMS issued 791 and 9,329 additional
preferred shares to Apollo for dividends paid-in-kind, respectively. For the year ended December 31, 2015, HK TMS issued 12,614 additional preferred shares to Apollo for dividends paid in-kind.
These dividends were presented within "
Preferred dividends and accretion on redeemable noncontrolling interest"
on the consolidated statements of
operations. Upon the election of in-kind dividends, HK TMS was required to pay a fee of $5.00 per preferred share then outstanding (PIK exit fee). Such fees would have been due upon redemption of
130
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. MEZZANINE EQUITY (Continued)
the
preferred shares. For the year ended December 31, 2015, HK TMS incurred PIK exit fees totaling $3.1 million, which was recorded at fair value within "
Other
noncurrent liabilities
" on the consolidated balance sheets.
HK
TMS was not included in the chapter 11 bankruptcy filings or the Restructuring Support Agreement discussed in Note 2,
"Reorganization."
13. STOCKHOLDERS' EQUITY
Preferred Stock and Non-Cash Preferred Stock Dividend
On January 24, 2017 (the Commitment Date), the Company entered into a stock purchase agreement with certain accredited investors to sell,
in a private placement exempt from registration requirements of the Securities Act pursuant to Section 4(a)(2), approximately 5,518 shares of 8% Automatically Convertible Preferred Stock, par
value $0.0001 per share (the Preferred Stock), each share of which was convertible into 10,000 shares of common stock. Also on January 24, 2017, the Company received an executed written consent
in lieu of a stockholders' meeting authorizing and approving the conversion of the Preferred Stock into common stock. On February 27, 2017, the Company filed with the Delaware Secretary of
State a Certificate of Designation, Preferences, Rights and Limitations of the Preferred Stock (the Certificate of Designation), which created the series of preferred stock issued by the Company on
that same date. The Company issued the Preferred Stock at $72,500 per share. Gross proceeds were approximately $400.1 million, or $7.25 per share of common stock. The Company incurred
approximately $11.9 million in expenses associated with this offering, including placement agent fees. On March 16, 2017, the Company mailed a definitive information statement to its
stockholders notifying them that a majority of its stockholders had consented to the issuance of common stock, par value $0.0001 per share, upon the conversion of the Preferred Stock. The Preferred
Stock automatically converted into 55.2 million shares of common stock on April 6, 2017 in accordance with the terms of the Certificate of Designation. No cash dividends were paid on the
Preferred Stock since, pursuant to the terms of the Certificate of Designation of the Preferred Stock, conversion occurred prior to June 1, 2017.
The
Company agreed to file a registration statement to register the resale of shares of common stock issuable upon conversion of the Preferred Stock and to pay penalties in the
event such registration was not effective by June 27, 2017. The Company filed such registration statement on March 3, 2017 and it was declared effective by the SEC on April 7,
2017.
In
accordance with ASC Topic 470,
Debt
(ASC 470), the Company determined that the conversion feature in the Preferred Stock represented a
beneficial conversion feature. The fair value of the Company's common stock of $8.12 per share on the Commitment Date was greater than the conversion price of $7.25 per share of common stock,
representing a beneficial conversion feature of $0.87 per share of common stock, or approximately $48.0 million in aggregate. Under ASC 470, $48.0 million (the intrinsic value of the
beneficial conversion feature) of the proceeds received from the issuance of the Preferred Stock was allocated to
"Additional paid-in capital,"
creating
a discount on the Preferred Stock (the Discount). The Discount is required to be amortized on a non-cash basis over the approximate 65-month period between the issuance date and the required
redemption date of July 28, 2022, or fully amortized upon an accelerated date of redemption or conversion, and recorded as a preferred dividend. As a result, approximately $0.8 million
of the Discount was amortized and a non-cash preferred dividend was recorded in the three months ended March 31, 2017 and due to the
131
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. STOCKHOLDERS' EQUITY (Continued)
conversion
date occurring on April 6, 2017, the remaining $47.2 million of the amortization of the Discount was accelerated to the conversion date and fully amortized in the three months
ended June 30, 2017. The Discount amortization is reflected in
"Non-cash preferred dividend"
in the consolidated statements of operations. The
preferred dividend was charged against additional paid-in capital since no retained earnings were available.
Common Stock
On September 9, 2016, upon emergence from chapter 11 bankruptcy, all existing shares of Predecessor common stock were cancelled
and the Successor Company issued approximately 90.0 million shares of common stock in total to the Predecessor Company's existing common stockholders, Third Lien Noteholders, Unsecured
Noteholders, and the Convertible Noteholder. Refer to Note 2, "
Reorganization,
" for further details.
Also
on September 9, 2016, the Successor Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State to provide for (i) the
total number of shares of all classes of capital stock that the Successor Company has the authority to issue is 1,001,000,000 of which 1,000,000,000 shares are common stock, par value $0.0001 per
share and 1,000,000 shares are preferred stock, par value $0.0001 per share, (ii) a classified board structure, (iii) the right of removal of directors with or without cause by
stockholders, and (iv) a restriction on the Successor Company from issuing any non-voting equity securities in violation of Section 1123(a)(6) of chapter 11 of title 11 of the
United States Code.
On
February 9, 2018, the Company sold 9.2 million shares of common stock, par value $0.0001 per share, in a public offering at a price of $6.90 per share. The net proceeds
to the Company from the offering were approximately $60.8 million, after deducting the underwriters' discounts and estimated offering expenses. See Note 17
"Subsequent Events,"
for a further
discussion of the issuance of common stock.
Warrants
On September 9, 2016, upon the emergence from chapter 11 bankruptcy, all existing February 2012 warrants were cancelled and the
Successor Company issued 3.8 million new warrants to the Unsecured Noteholders and 0.9 million new warrants to the Convertible Noteholder. The warrants in aggregate can be exercised to
purchase 4.7 million shares of the Successor Company's common stock at an exercise price of $14.04 per share. The Company allocated approximately $16.7 million of the Enterprise Value to
the warrants which is reflected in "
Additional paid-in capital
" on the consolidated balance sheets. The holders are entitled to exercise the warrants in
whole or in part at any time prior to expiration on September 9, 2020. See Note 2, "
Reorganization,
" for further details.
Incentive Plans
Immediately prior to emergence from chapter 11 bankruptcy, the Predecessor Incentive Plan was cancelled and all stock-based compensation
awards granted thereunder were either vested or cancelled and Predecessor Company's Board adopted the 2016 Long-Term Incentive Plan (the 2016 Incentive Plan). An aggregate of 10.0 million
shares of the Successor Company's common stock were available for grant pursuant to awards under the 2016 Incentive Plan in the form of nonqualified stock options, incentive stock options, restricted
stock awards, restricted stock units, stock appreciation rights, performance units, performance bonuses, stock awards and other incentive awards. On April 6, 2017,
132
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. STOCKHOLDERS' EQUITY (Continued)
Amendment
No. 1 to the 2016 Incentive Plan to increase, by 9.0 million shares, the maximum number of shares of common stock that may be issued thereunder, i.e., a maximum of
19.0 million shares, became effective, which was 20 calendar days following the date the Company mailed a definitive information statement to all stockholders of record notifying them of
approval of the amendment by written
consent of holders of a majority of the Company's outstanding stock. As of December 31, 2017 and 2016, a maximum of 7.7 million and 1.7 million shares, respectively of the
Successor Company's common stock remained reserved for issuance under the 2016 Incentive Plan.
The
Company accounts for stock-based payment accruals under authoritative guidance on stock compensation. The guidance requires all stock-based payments to employees and directors,
including grants of stock options, and restricted stock, to be recognized in the financial statements based on their fair values. For awards granted under the 2016 Incentive Plan subsequent to
emerging from chapter 11 bankruptcy and in conjunction with the early adoption of ASU 2016-09, the Successor Company has elected to not apply a forfeiture estimate and will recognize a credit
in compensation expense to the extent awards are forfeited.
For
the year ended December 31, 2017, the Company recognized $36.8 million of stock-based compensation expense. For the period from September 10, 2016 through
December 31, 2016 and the period from January 1, 2016 through September 9, 2016 the Company recognized $21.5 million and $4.9 million, respectively, of stock-based
compensation expense. For the year ended December 31, 2015, the Company recognized $14.5 million of stock-based compensation expense. Stock-based compensation expense is recorded as a
component of "
General and administrative
" on the consolidated statements of operations.
Stock Options
From time to time, the Company grants stock options under its incentive plans covering shares of common stock to employees of the Company. Stock
options, when exercised, are settled through the payment of the exercise price in exchange for new shares of stock underlying the option. These awards typically vest over a three year period at a rate
of one-third on the annual anniversary date of the grant and expire ten years from the grant date.
Immediately
prior to emergence from chapter 11 bankruptcy, all outstanding stock options under the Predecessor Incentive Plan were cancelled. Refer to Note 2,
"Reorganization,"
for further details.
The
weighted average grant date fair value of options granted during the year ended December 31, 2017 was $7.8 million. At December 31, 2017, the Company had
$13.0 million of unrecognized compensation expense related to non-vested stock options to be recognized over a weighted-average vesting period of 1.2 years.
The
weighted average grant date fair value of options granted during the period from September 10, 2016 through December 31, 2016 was $32.3 million. No options were
granted during the period January 1, 2016 through September 9, 2016. At December 31, 2016, the Company had $26.5 million of unrecognized compensation expense related to
non-vested stock options to be recognized over a weighted-average period of 1.7 years.
The
weighted average grant date fair value of options granted in 2015 was $4.9 million.
133
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. STOCKHOLDERS' EQUITY (Continued)
The
following table sets forth the stock option transactions for the year ended December 31, 2017, the period from September 10, 2016 through December 31, 2016, the
period from January 1, 2016 through September 9, 2016 and the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Weighted Average
Exercise Price
Per Share
|
|
Aggregate
Intrinsic
Value
(1)
(In thousands)
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
Outstanding at December 31, 2014 (Predecessor)
|
|
|
3,784,732
|
|
$
|
25.25
|
|
$
|
724
|
|
|
8.7
|
|
Granted
|
|
|
1,922,467
|
|
|
5.36
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(847,066
|
)
|
|
22.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015 (Predecessor)
|
|
|
4,860,133
|
|
$
|
17.80
|
|
$
|
|
|
|
8.4
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(695,302
|
)
|
|
21.17
|
|
|
|
|
|
|
|
Cancelled
(2)
|
|
|
(4,164,831
|
)
|
|
17.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 9, 2016 (Predecessor)
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 9, 2016 (Successor)
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
Granted
|
|
|
5,319,400
|
|
|
9.22
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016 (Successor)
|
|
|
5,319,400
|
|
$
|
9.22
|
|
$
|
631
|
|
|
9.7
|
|
Granted
|
|
|
1,790,605
|
|
|
7.72
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(374,102
|
)
|
|
8.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017 (Successor)
|
|
|
6,735,903
|
|
$
|
8.84
|
|
$
|
29
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
The intrinsic value of stock options was calculated as the amount by which the closing market price on December 31,
2017, 2016 and 2015 of the underlying stock exceeded the exercise price of the option. No stock options were exercised during the year ended December 31, 2017, 2016 or
2015.
-
(2)
-
Immediately prior to emergence from chapter 11 bankruptcy, all outstanding options under the Predecessor Incentive Plan
were cancelled.
134
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. STOCKHOLDERS' EQUITY (Continued)
Options
outstanding at December 31, 2017 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
(1)
|
|
Range of Grant
Prices Per Share
|
|
Number
|
|
Weighted Average
Exercise Price
per Share
|
|
Weighted Average
Remaining
Contractual Live
(Years)
|
|
Number
|
|
Weighted Average
Exercise Price
per Share
|
|
Aggregate
Intrinsic
Value
|
|
Weighted Average
Remaining
Contractual Live
(Years)
|
|
$6.55 - $7.75
|
|
|
1,722,671
|
|
$
|
7.72
|
|
|
9.3
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
$8.93 - $9.24
|
|
|
5,013,232
|
|
|
9.23
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
At December 31, 2017, none of the Company's options were exercisable due to service performance conditions or option
exercise prices below the current market value of the underlying stock.
The
assumptions used in calculating the Black-Scholes-Merton valuation model fair value of the Company's stock options for the year ended December 31, 2017, the period from
September 10, 2016 through December 31, 2016 and the year ended December 31, 2015 are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
September 10, 2016
through
December 31, 2016
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
|
|
Year Ended
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Weighted average value per option granted during the period
|
|
$
|
4.36
|
|
$
|
6.07
|
|
|
|
$
|
2.56
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price volatility
(1)
|
|
|
60.18
|
%
|
|
56.29
|
%
|
|
|
|
56.45
|
%
|
Risk free rate of return
|
|
|
1.94
|
%
|
|
1.34
|
%
|
|
|
|
1.66
|
%
|
Expected term
|
|
|
6 years
|
|
|
6 years
|
|
|
|
|
5 years
|
|
-
(1)
-
Due to the Company's limited historical data, expected volatility was estimated using volatilities of similar entities whose
share or option prices and assumptions were publicly available.
Restricted Stock
From time to time, the Company grants shares of restricted stock to employees and non-employee directors of the Company. Employee shares
typically vest over a three year period at a rate of one-third on the annual anniversary date of the grant, and the non-employee directors' shares vest six months from the date of grant. Certain
shares granted under the 2016 Incentive Plan, specifically related to the Company's emergence from chapter 11 bankruptcy vested on or before September 30, 2017.
Immediately
prior to emergence from chapter 11 bankruptcy, all outstanding unvested restricted stock awards granted under the Predecessor Incentive Plan were vested. Refer to
Note 2,
"Reorganization,"
for further details.
The
weighted average grant date fair value of shares granted during the year ended December 31, 2017 was $14.3 million. At December 31, 2017, the Company had
$3.2 million of unrecognized compensation expense related to non-vested restricted stock awards to be recognized over a weighted-average vesting period of 1.4 years.
135
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. STOCKHOLDERS' EQUITY (Continued)
The weighted average grant date fair value of shares granted during the period from September 10, 2016 through December 31, 2016 was $27.3 million. No restricted
shares were granted from the period January 1, 2016 through September 9, 2016. At December 31, 2016, the Company had $11.5 million of unrecognized compensation expense
related to non-vested restricted stock awards to be recognized over a weighted-average period of 0.9 years.
The
weighted average grant date fair value of the shares granted in 2015 was $8.5 million.
The
following table sets forth the restricted stock transactions for the year ended December 31, 2017, the period from September 10, 2016 through December 31, 2016,
the period from January 1, 2016 through September 9, 2016 and the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average Grant
Date Fair Value
Per Share
|
|
Aggregate
Intrinsic
Value
(1)
(In thousands)
|
|
Unvested outstanding shares at December 31, 2014 (Predecessor)
|
|
|
2,068,911
|
|
$
|
15.55
|
|
$
|
18,413
|
|
Granted
|
|
|
2,047,785
|
|
|
4.15
|
|
|
|
|
Vested
|
|
|
(858,708
|
)
|
|
16.24
|
|
|
|
|
Forfeited
|
|
|
(387,583
|
)
|
|
12.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested outstanding shares at December 31, 2015 (Predecessor)
|
|
|
2,870,405
|
|
$
|
7.55
|
|
$
|
3,617
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(436,256
|
)
|
|
18.50
|
|
|
|
|
Accelerated vesting
(2)
|
|
|
(1,917,072
|
)
|
|
5.39
|
|
|
|
|
Forfeited
|
|
|
(517,077
|
)
|
|
6.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested outstanding shares at September 9, 2016 (Predecessor)
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested shares outstanding at September 9, 2016 (Successor)
|
|
|
|
|
$
|
|
|
$
|
|
|
Granted
|
|
|
2,991,202
|
|
|
9.14
|
|
|
|
|
Vested
|
|
|
(1,253,125
|
)
|
|
9.24
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested outstanding shares at December 31, 2016 (Successor)
|
|
|
1,738,077
|
|
$
|
9.06
|
|
$
|
16,234
|
|
Granted
|
|
|
2,022,432
|
|
|
7.07
|
|
|
|
|
Vested
|
|
|
(2,516,647
|
)
|
|
8.39
|
|
|
|
|
Forfeited
|
|
|
(498,355
|
)
|
|
7.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested shares outstanding at December 31, 2017 (Successor)
|
|
|
745,507
|
|
$
|
7.05
|
|
$
|
5,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
The intrinsic value of restricted stock was calculated as the closing market price on December 31, 2017, 2016 and 2015
of the underlying stock multiplied by the number of restricted shares. The total fair
136
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. STOCKHOLDERS' EQUITY (Continued)
value of shares vested was $16.1 million, $11.6 million, $0.9 million, and $5.2 million for the year ended December 31, 2017, the period from September 10,
2016 through December 31, 2016, the period from January 1, 2016 through September 9, 2016 and the year ended December 31, 2015,
respectively.
-
(2)
-
Immediately prior to emergence from chapter 11 bankruptcy, all outstanding unvested restricted stock under the
Predecessor Incentive Plan were vested.
14. INCOME TAXES
Income tax benefit (provision) for the indicated periods is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
Period from
September 10, 2016
through
December 31, 2016
|
|
|
|
Period from
January 1, 2016
through
September 9, 2016
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
|
|
Year Ended
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,000
|
|
$
|
(5,000
|
)
|
|
|
$
|
8,666
|
|
$
|
(8,580
|
)
|
State
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
(506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
(4,744
|
)
|
|
|
|
8,666
|
|
|
(9,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
52,223
|
|
|
|
|
(22,491
|
)
|
|
(39,331
|
)
|
State
|
|
|
|
|
|
(52,223
|
)
|
|
|
|
22,491
|
|
|
39,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (provision)
|
|
$
|
5,000
|
|
$
|
(4,744
|
)
|
|
|
$
|
8,666
|
|
$
|
(9,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. INCOME TAXES (Continued)
The
actual income tax benefit (provision) differs from the expected income tax benefit (provision) as computed by applying the United States Federal corporate income tax rate of 35% for
each period as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
Period from
September 10, 2016
through
December 31, 2016
|
|
|
|
Period from
January 1, 2016
through
September 9, 2016
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
|
|
Year Ended
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Expected tax benefit (provision)
|
|
$
|
(185,740
|
)
|
$
|
166,057
|
|
|
|
$
|
(1,152
|
)
|
$
|
669,737
|
|
State income tax expense, net of federal benefit
|
|
|
(2,587
|
)
|
|
6,243
|
|
|
|
|
(43
|
)
|
|
41,003
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(14,803
|
)
|
|
|
|
Net operating loss limitation under IRC Section 382
|
|
|
|
|
|
(161,704
|
)
|
|
|
|
|
|
|
|
|
TMS Divestiture
|
|
|
|
|
|
(157,767
|
)
|
|
|
|
|
|
|
|
|
Adjustments attributable to reorganization
|
|
|
|
|
|
|
|
|
|
|
275,460
|
|
|
|
|
Change in state rate
|
|
|
(10,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Debt related costs
|
|
|
|
|
|
|
|
|
|
|
(4,089
|
)
|
|
(7,102
|
)
|
Cancellation of indebtedness income
|
|
|
|
|
|
|
|
|
|
|
103,268
|
|
|
(89,081
|
)
|
Increase (reduction) in deferred tax asset
|
|
|
95,907
|
|
|
|
|
|
|
|
14,645
|
|
|
(6,369
|
)
|
Change in valuation allowance and related items
|
|
|
392,846
|
|
|
202,592
|
|
|
|
|
(263,211
|
)
|
|
(598,429
|
)
|
IRC section 108 attribute reduction
|
|
|
|
|
|
(56,483
|
)
|
|
|
|
(101,342
|
)
|
|
(13,744
|
)
|
Tax Cuts and Jobs Act of 2017
|
|
|
(280,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(4,431
|
)
|
|
(3,682
|
)
|
|
|
|
(67
|
)
|
|
(5,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (provision)
|
|
$
|
5,000
|
|
$
|
(4,744
|
)
|
|
|
$
|
8,666
|
|
$
|
(9,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. INCOME TAXES (Continued)
The
components of net deferred income tax assets (liabilities) recognized are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
December 31,
2017
|
|
December 31,
2016
|
|
Deferred noncurrent income tax assets:
|
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
205,570
|
|
$
|
155,393
|
|
Built in loss adjustment Section 382
|
|
|
90,897
|
|
|
|
|
Stock-based compensation expense
|
|
|
5,501
|
|
|
3,430
|
|
Asset retirement obligations
|
|
|
963
|
|
|
11,233
|
|
Book-tax differences in property basis
|
|
|
125,309
|
|
|
647,574
|
|
Unrealized hedging transactions
|
|
|
5,901
|
|
|
3,937
|
|
Other
|
|
|
|
|
|
330
|
|
|
|
|
|
|
|
|
|
Gross deferred noncurrent income tax assets
|
|
|
434,141
|
|
|
821,897
|
|
Valuation allowance
|
|
|
(426,765
|
)
|
|
(821,897
|
)
|
|
|
|
|
|
|
|
|
Deferred noncurrent income tax assets
|
|
$
|
7,376
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred noncurrent income tax liabilities:
|
|
|
|
|
|
|
|
Basis difference in debt
|
|
$
|
(6,366
|
)
|
$
|
|
|
Other
|
|
|
(1,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred noncurrent income tax liabilities
|
|
$
|
(7,376
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred income tax assets (liabilities)
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
December 22, 2017, the Tax Cuts and Job Act of 2017 (the Act) was signed into law making significant changes to the Internal Revenue Code of 1986, as amended (the IRC). Changes
include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, imposes significant additional limitations on the
deductibility of interest and net operating losses, allows for the expensing of certain capital expenditures, and limits the deductibility of certain types of executive compensation. The Company has
calculated its best estimate of the impact of the Act in its year-end income statement provision in accordance with its understanding of the Act and guidance available as of the date of this filing
and as a result have recorded a $280.9 million income tax provision primarily related to the decrease in the corporate tax rate offset by a corresponding decrease in the Company's valuation
allowance for no net overall impact to the Company's income tax provision for the year ended December 31, 2017.
On
December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP in situations when a registrant does not
have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with
SAB 118, the Company has determined that the $280.9 million income tax provision and corresponding decrease in the Company's valuation allowance was a provisional amount and a reasonable
estimate at December 31, 2017. Any subsequent adjustments to these amounts will be recorded to current tax benefit (provision) in the quarter of 2018 when the analysis is complete.
139
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. INCOME TAXES (Continued)
At
December 31, 2015, the Company early adopted ASU 2015-07 on a prospective basis and accordingly, presents all deferred tax assets and liabilities as noncurrent on the
consolidated balance sheets.
The
Company emerged from chapter 11 bankruptcy on September 9, 2016. Under the Plan, a substantial portion of the Company's pre-petition debt securities were extinguished.
Absent an exception, a debtor recognizes cancellation of indebtedness income (CODI) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue
price. The IRC provides that a debtor in a bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the
consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid,
(ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued. As a result of the market value of equity upon
emergence from chapter 11 bankruptcy proceedings, U.S. CODI was approximately $844.7 million, which reduced the value of the Company's U.S. net operating
losses (NOLs) and other assets on January 1, 2017. The Company also had various state NOL carryforwards that were subject to reduction as a result of the CODI being excluded from taxable
income.
IRC
Section 382 provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, as well as certain built-in-losses, against future U.S.
taxable income in the event of a change in ownership. The Company's emergence from chapter 11 bankruptcy proceedings is considered a change in ownership for purposes of IRC Section 382.
The limitation under the IRC is based on the value of the corporation as of the emergence date. The ownership changes and resulting annual limitation resulted in the expiration of approximately
$750 million of net operating losses generated prior to the emergence date. The expiration of these tax attributes was fully offset by a corresponding decrease in the Company's U.S. valuation
allowance, which results in no net tax provision.
The
amount of consolidated U.S. NOLs available as of December 31, 2017 after attribute reduction on January 1, 2017 and Section 382 limitation is estimated to be
approximately $976.8 million. These NOLs will expire in the years 2019 through 2036.
The
Company assesses the recoverability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will not
be realized. The Company considers all available evidence (both positive and negative) in determining whether a valuation allowance is required. The Company evaluated possible sources of taxable
income that may be available to realize the benefit of deferred tax assets, including projected future taxable income, the reversal of existing temporary differences, taxable income in carryback years
and available tax planning strategies in making this assessment. A significant item of objective negative evidence considered was the cumulative book loss over the three-year period ended
December 31, 2017 driven primarily by the full cost ceiling impairments over that period which limits the ability to consider other subjective evidence such as the Company's anticipated future
growth. As a result of the Company's analysis, it was concluded that as of December 31, 2017 a valuation allowance should continue to be applied against the Company's net deferred tax asset.
The Company recorded a valuation allowance as of December 31, 2017 of $426.8 million, a decrease of $392.8 million from December 31, 2016. The Company will continue to
monitor facts and circumstances in the reassessment of the likelihood that operating loss carryforwards, credits and other deferred tax assets will be utilized.
140
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. INCOME TAXES (Continued)
ASC 740,
Income Taxes
(ASC 740) prescribes a recognition threshold and a measurement attribute for the financial statement recognition and
measurement of income tax positions taken or expected to be taken in an income tax return. For those benefits to be recognized, an income tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. The Company has no unrecognized tax benefits for the year ended December 31, 2017, the period of September 10, 2016 through December 31, 2016,
the period of January 1, 2016 through September 9, 2016 and the year ended December 31, 2015.
Generally,
the Company's income tax years 2014 through 2017 remain open for federal purposes and are subject to examination by Federal tax authorities. The Company's income tax returns
are also subject to audit by the tax authorities in Louisiana, Mississippi, North Dakota, Oklahoma, Texas, Pennsylvania, Ohio and certain other state taxing jurisdictions where the Company has, or
previously had, operations. In certain jurisdictions the Company operates through more than one legal entity, each of which may have different open years subject to examination. The open years for
state purposes can vary from the normal three year statue expiration period for federal purposes.
The
Company recognizes interest and penalties accrued to unrecognized benefits in
"Interest expense and other, net"
in its consolidated
statements of operations. For the year ended December 31, 2017, the period of September 10, 2016 through December 31, 2016, the period of January 1, 2016 through
September 9, 2016 and the year ended December 31, 2015 the Company recognized no interest and penalties.
During
the first quarter of 2014, the Internal Revenue Service commenced an audit of GeoResources' tax returns for the years ending December 31, 2010 through August 1,
2012. The audit closed during April 2015 resulting in a favorable adjustment to the Company of $0.1 million.
15. EARNINGS PER SHARE
On September 9, 2016, upon emergence from chapter 11 bankruptcy, the Predecessor Company's equity was cancelled and new equity was issued. Refer to Note 2,
"Reorganization,"
for further details.
141
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. EARNINGS PER SHARE (Continued)
The
following represents the calculation of earnings (loss) per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Year Ended
December 31, 2017
|
|
Period from
September 10, 2016
through
December 31, 2016
|
|
|
|
Period from
January 1, 2016
through
September 9, 2016
|
|
Year Ended
December 31, 2015
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
487,679
|
|
$
|
(479,984
|
)
|
|
|
$
|
(32,794
|
)
|
$
|
(2,006,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic number of common shares outstanding
|
|
|
132,763
|
|
|
91,228
|
|
|
|
|
120,513
|
|
|
107,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share
|
|
$
|
3.67
|
|
$
|
(5.26
|
)
|
|
|
$
|
(0.27
|
)
|
$
|
(18.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
487,679
|
|
$
|
(479,984
|
)
|
|
|
$
|
(32,794
|
)
|
$
|
(2,006,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic number of common shares outstanding
|
|
|
132,763
|
|
|
91,228
|
|
|
|
|
120,513
|
|
|
107,531
|
|
Common stock equivalent shares representing shares issuable upon:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
Exercise of February 2012 Warrants
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
Exercise of warrants
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
|
|
|
|
|
|
|
|
Vesting of restricted shares
|
|
|
813
|
|
|
Anti-dilutive
|
|
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
Vesting of performance units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock
|
|
|
Anti-dilutive
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Convertible Note
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
Conversion of Series A Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
|
|
|
Anti-dilutive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted number of common shares outstanding
|
|
|
133,576
|
|
|
91,228
|
|
|
|
|
120,513
|
|
|
107,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share
|
|
$
|
3.65
|
|
$
|
(5.26
|
)
|
|
|
$
|
(0.27
|
)
|
$
|
(18.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock equivalents, including stock options, restricted shares, warrants, and preferred stock totaling 17.1 million shares for the year ended December 31, 2017 were
not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive.
142
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. EARNINGS PER SHARE (Continued)
On
February 9, 2018, the Company sold 9.2 million shares of common stock, par value $0.0001 per share, in a public offering at a price of $6.90 per share. Refer to
Note 17, "
Subsequent Events
," for further details.
Common
stock equivalents, including stock options, restricted shares and warrants totaling 11.2 million shares for the period from September 10, 2016 through
December 31, 2016 were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive. Common stock equivalents, including stock
options, restricted shares, warrants, convertible debt and preferred stock totaling 43.6 million shares for the period from January 1, 2016 through September 9, 2016 were not
included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive.
Common
stock equivalents, including stock options, restricted shares, warrants, convertible debt and preferred stock totaling 47.1 million shares were not included in the
computation of diluted earnings per share of common stock because the effect would have been anti-dilutive for the year ended December 31, 2015 due to the net loss.
143
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. ADDITIONAL FINANCIAL STATEMENT INFORMATION
Certain balance sheet amounts are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
Oil, natural gas and natural gas liquids revenues
|
|
$
|
24,110
|
|
$
|
86,433
|
|
Joint interest accounts
|
|
|
2,249
|
|
|
39,828
|
|
Accrued settlements on derivative contracts
|
|
|
64
|
|
|
18,599
|
|
Affiliated partnership
|
|
|
|
|
|
268
|
|
Other
|
|
|
9,993
|
|
|
2,634
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,416
|
|
$
|
147,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaids and other:
|
|
|
|
|
|
|
|
Prepaids
|
|
$
|
4,324
|
|
$
|
6,704
|
|
Income tax receivable
|
|
|
6,250
|
|
|
|
|
Other
|
|
|
54
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,628
|
|
$
|
6,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds in escrow and other:
|
|
|
|
|
|
|
|
Funds in escrow
|
|
$
|
563
|
|
$
|
561
|
|
Other
|
|
|
1,128
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,691
|
|
$
|
1,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
35,688
|
|
$
|
24,364
|
|
Accrued oil and natural gas capital costs
|
|
|
50,743
|
|
|
32,967
|
|
Revenues and royalties payable
|
|
|
20,256
|
|
|
79,147
|
|
Accrued interest expense
|
|
|
10,985
|
|
|
31,146
|
|
Accrued employee compensation
|
|
|
9,805
|
|
|
3,428
|
|
Accrued lease operating expenses
|
|
|
2,024
|
|
|
14,077
|
|
Deferred premium on derivative contracts
|
|
|
1,142
|
|
|
|
|
Affiliated partnership
|
|
|
|
|
|
323
|
|
Other
|
|
|
444
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
$
|
131,087
|
|
$
|
186,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. SUBSEQUENT EVENTS
Pending Acquisition of West Quito Draw Properties
On February 6, 2018, a wholly owned subsidiary of the Company, entered into a Purchase and Sale Agreement (the Shell PSA) with
SWEPI LP (Shell), an affiliate of Shell Oil Company, pursuant to which the Company agreed to purchase acreage and related assets in the Southern Delaware Basin located in Ward County, Texas
(the West Quito Draw Properties) for a total purchase price of $200.0 million. The effective date of the proposed acquisition is February 1, 2018, and the Company expects to close the
transaction in early April 2018.
144
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. SUBSEQUENT EVENTS (Continued)
The
purchase price is subject to adjustments for (i) operating expenses, capital expenditures and revenues between the effective date and the closing date, (ii) title and
environmental defects, and (iii) other purchase price adjustments customary in oil and gas purchase and sale agreements. Pursuant to the terms of the Shell PSA, the Company paid a deposit into
escrow totaling $20.0 million, which amount will be applied to the purchase price if the transaction closes.
The
completion of the acquisition of the West Quito Draw Properties is subject to customary closing conditions. Either party may terminate the Shell PSA if certain closing conditions
have not been satisfied, or if the transaction has not closed on or before April 20, 2018. If one or more of the closing conditions are not satisfied, or if the transaction is otherwise
terminated, the acquisition may not be completed. The Company's escrow deposit with Shell is refundable only in specified circumstances if the transaction is not consummated.
Shell
and the Company each make customary representations and warranties in the Shell PSA for transactions of this type. The Shell PSA also includes customary covenants relating to the
operation of the West Quito Draw Properties prior to the closing date and other matters. The parties have agreed to indemnify one another for breaches of their respective representations and
warranties, as well as the operation of the West Quito Draw Properties prior to (in the case of the Shell) and after (in the case of the Company) the closing date. Indemnities for breaches of
representations and warranties, and any purchase price adjustments attributable to title or environmental defects, are subject to certain threshold limitations. Specifically, indemnification claims
are subject to an individual claim threshold of $50,000, and Shell is required to indemnify the Company for claims totaling in excess of 2% of the purchase price, or $4.0 million. The Company's
right to indemnification in certain circumstances is subject to a cap equal to 15% of the purchase price, or $30.0 million. The total amount of uncured title defect claims or unremedied
environmental claims must be more than 1.5% of the purchase price, or $3.0 million, respectively, before the Company will be entitled to a downward adjustment to the purchase price
consideration for either type of claim.
The
Company intends to fund the cash consideration for the acquisition of the West Quito Draw Properties with the net proceeds from the issuance of the Additional 2025 Notes and common
stock, both of which are discussed below. There can be no assurance that the Company will acquire the West Quito Draw Properties on the terms or timing described herein or at all. Even
if the Company consummates the acquisition of the West Quito Draw Properties, the Company may not be able to achieve the expected benefits.
Issuance of Additional 2025 Notes
On February 15, 2018, the Company issued an additional $200.0 million aggregate principal amount of its 2025 Notes at a price to
the initial purchasers of 103.0% of par (the Additional 2025 Notes). The net proceeds from the sale of the Additional 2025 Notes were approximately $203.0 million after deducting initial
purchasers' premiums, commissions and estimated offering
expenses and will be used to fund the cash consideration for the acquisition of the West Quito Draw Properties, if consummated, and for general corporate purposes, including to fund the Company's 2018
drilling program. These notes were issued under the February 2017 Indenture.
The
Additional 2025 Notes will be treated as a single class with, and have the same terms as, the 2025 Notes, except that the Additional 2025 Notes will initially be subject to transfer
restrictions and
145
Table of Contents
HALCÓN RESOURCES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. SUBSEQUENT EVENTS (Continued)
have
the benefit of certain registration rights and provisions for the payment of additional interest in the event of a breach with respect to such registration rights.
In
connection with the Additional 2025 Notes issued, on February 15, 2018, the Company and J.P. Morgan Securities, LLC, on behalf of itself and initial purchasers,
entered into a Registration Rights Agreement, pursuant to which the Company agreed to, among other things, use reasonable best efforts to file a registration statement under the Securities Act
and complete an exchange offer for the Additional 2025 Notes within 180 days after closing.
The
Additional 2025 Notes were issued in a private placement exempt from the registration under the Securities Act pursuant to Rule 144A and Regulation S under the
Securities Act and applicable state securities laws.
Issuance of Common Stock
On February 9, 2018, the Company sold 9.2 million shares of common stock, par value $0.0001 per share, in a public offering at a
price of $6.90 per share. The net proceeds to the Company from the offering were approximately $60.8 million, after deducting the underwriters' discounts and estimated offering expenses. The
Company intends to use the net proceeds, together with the net proceeds from the issuance of the Additional 2025 Notes, to fund the cash consideration for the acquisition of the West Quito Draw
Properties, if consummated, and for general corporate purposes, including to fund the Company's 2018 drilling program.
Second Amendment to Senior Credit Agreement
On February 2, 2018, the Company entered into the Second Amendment to the Company's Senior Credit Agreement by and among the Company, as
borrower, JPMorgan Chase Bank, N.A., as administrative agent, and certain other financial institutions party thereto, as lenders. The Second Amendment, among other things, provides for (i) the
use of annualized financial data in determining EBITDA (as defined in the Senior Credit Agreement) for the fiscal quarters ending June 30, 2018, September 30, 2018 and
December 31, 2018, (ii) an increase in the ratio of Consolidated Total Net Debt (as defined in the Senior Credit Agreement) to EBITDA of 4.50:1.00 for the fiscal quarter ending
June 30, 2018, and a ratio of 4.00:1.00 for any fiscal quarter thereafter, (iii) a waiver of compliance with the covenant relating to the Total Net Indebtedness Leverage Ratio (as
defined in the Senior Credit Agreement) for the fiscal quarter ending March 31, 2018, and (iv) a waiver of the automatic reduction to the borrowing base that would otherwise result due
to the issuance of the Additional 2025 Notes.
Northern Tract of Monument Draw Assets (Ward and Winkler Counties, Texas)
On January 9, 2018, the Company exercised its option to purchase the Northern Tract of the Ward County Assets, for a cash purchase price
of approximately $108.2 million. The acreage is located in the Monument Draw area of the Delaware Basin adjacent to the Company's existing Ward County Assets.
146
Table of Contents
SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
Oil and Natural Gas Reserves
Users of this information should be aware that the process of estimating quantities of "proved" and "proved developed" oil and natural gas
reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may
also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving
production history and continual reassessment of the viability of production under varying economic conditions. As a result, revisions to existing reserve estimates may occur from time to time.
Although every reasonable effort is made to ensure reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various
reservoirs make these estimates generally less precise than other estimates included in the financial statement disclosures.
Proved
reserves represent estimated quantities of natural gas, crude oil and condensate and natural gas liquids that geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs under economic and operating conditions in effect when the estimates were made. Proved developed reserves are proved reserves
expected to be recovered through wells and equipment in place and under operating methods used when the estimates were made.
The
proved reserves estimates reported herein for the years ended December 31, 2017, 2016 and 2015 have been independently evaluated by Netherland, Sewell, a worldwide leader of
petroleum property analysis for industry and financial organizations and government agencies. Netherland, Sewell was founded in 1961 and performs consulting petroleum engineering services under Texas
Board of Professional Engineers Registration No. F-2699. Within Netherland, Sewell, the technical persons primarily responsible for preparing the estimates set forth in the Netherland, Sewell
reserves reports incorporated herein are Mr. Neil H. Little, Mr. J. Carter Henson, Jr. and Mr. Mike K. Norton. Mr. Little, a Licensed Professional Engineer in the State of
Texas (No. 117966), has been practicing consulting petroleum engineering at Netherland, Sewell since 2011 and has over nine years of prior industry experience. He graduated from Rice University
in 2002 with a Bachelor of Science Degree in Chemical Engineering and from University of Houston in 2007 with a Master of Business Administration Degree. Mr. Henson, a Licensed Professional
Engineer in the State of Texas (No. 73964), has been practicing consulting petroleum engineering at Netherland, Sewell since 1989 and has over eight years of prior industry experience. He
graduated from Rice University in 1981 with a Bachelor of Science Degree in Mechanical Engineering. Mr. Norton, a Licensed Professional Geoscientist in the State of Texas (No. 441), has
been a practicing petroleum geoscience consultant at Netherland, Sewell since 1989 and has over ten years of prior industry experience. He graduated from Texas A&M University in 1978 with a Bachelor
of Science Degree in Geology. Netherland, Sewell has reported to the Company, that the technical principals meet or exceed the education, training, and experience requirements set forth in the
Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers; they are proficient in judiciously applying industry standard
practices to engineering and geoscience evaluations as well as applying SEC and other industry reserves definitions and guidelines.
The
Company's board of directors has established an independent reserves committee composed of three outside directors, all of whom have experience in energy company reserve evaluations.
The Company's independent engineering firm reports jointly to the reserves committee and to the Senior Vice President of Corporate Reserves. The reserves committee is charged with ensuring the
integrity of the process of selection and engagement of the independent engineering firm and in making a recommendation to the board of directors as to whether to approve the report prepared by the
independent engineering firm. Ms. Tina Obut, the Company's Senior Vice President of Corporate Reserves is primarily responsible for overseeing the preparation of the annual reserve report by
Netherland, Sewell. She graduated from Marietta College with a Bachelor of Science degree in
147
Table of Contents
Petroleum
Engineering, received a Master of Science degree in Petroleum and Natural Gas Engineering from Penn State University and a Master of Business Administration degree from the University of
Houston.
The
reserves information in this Annual Report on Form 10-K represents only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil
and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and
judgment. As a result, estimates of different engineers may vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may lead to revising the original
estimate. Accordingly, initial reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered. The meaningfulness of such estimates depends primarily on
the accuracy of the assumptions upon which they were based. Except to the extent the Company acquires additional properties containing proved reserves or conducts successful exploration and
development activities or both, the Company's proved reserves will decline as reserves are produced.
The
following tables illustrate the Company's estimated net proved reserves, including changes, and proved developed and proved undeveloped reserves for the periods indicated. The oil
and natural gas liquids prices as of December 31, 2017, 2016 and 2015 are based on the respective 12-month unweighted average of the first of the month prices of the West Texas Intermediate
spot price which equates to $51.34 per barrel, $42.75 per barrel and $50.28 per barrel, respectively. The natural gas prices as of December 31, 2017, 2016 and 2015 are based on the respective
12-month unweighted average of the first of the month prices of the Henry Hub spot price which equates to $2.976 per MMBtu, $2.481 per MMBtu and $2.587 per MMBtu, respectively. All prices are adjusted
by lease or field for energy content, transportation fees, and market differentials. All prices are held constant in accordance with SEC guidelines. All proved reserves are located in the United
States.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Proved Reserves
|
|
|
|
Oil (MBbls)
|
|
Natural Gas
(MMcf)
|
|
Natural Gas
Liquids
(MBbls)
|
|
Equivalent
(MBoe)
|
|
Proved reserves, December 31, 2014 (Predecessor)
|
|
|
155,574
|
|
|
103,662
|
|
|
16,286
|
|
|
189,137
|
|
Extensions and discoveries
|
|
|
10,117
|
|
|
6,838
|
|
|
1,215
|
|
|
12,472
|
|
Purchase of minerals in place
|
|
|
36
|
|
|
17
|
|
|
4
|
|
|
43
|
|
Production
|
|
|
(12,019
|
)
|
|
(10,123
|
)
|
|
(1,457
|
)
|
|
(15,163
|
)
|
Sale of minerals in place
|
|
|
(5
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
(6
|
)
|
Revision of previous estimates
|
|
|
(33,010
|
)
|
|
(21,950
|
)
|
|
(3,010
|
)
|
|
(39,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves, December 31, 2015 (Predecessor)
|
|
|
120,693
|
|
|
78,442
|
|
|
13,037
|
|
|
146,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extensions and discoveries
|
|
|
15,279
|
|
|
7,532
|
|
|
1,722
|
|
|
18,256
|
|
Purchase of minerals in place
|
|
|
1,114
|
|
|
654
|
|
|
113
|
|
|
1,336
|
|
Production
|
|
|
(10,368
|
)
|
|
(9,571
|
)
|
|
(1,597
|
)
|
|
(13,560
|
)
|
Sale of minerals in place
|
|
|
(1,319
|
)
|
|
(258
|
)
|
|
(7
|
)
|
|
(1,369
|
)
|
Revision of previous estimates
|
|
|
(5,799
|
)
|
|
3,439
|
|
|
2,373
|
|
|
(2,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves, December 31, 2016 (Successor)
|
|
|
119,600
|
|
|
80,238
|
|
|
15,641
|
|
|
148,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extensions and discoveries
|
|
|
19,105
|
|
|
18,423
|
|
|
3,483
|
|
|
25,659
|
|
Purchase of minerals in place
|
|
|
20,934
|
|
|
15,635
|
|
|
3,220
|
|
|
26,760
|
|
Production
|
|
|
(7,511
|
)
|
|
(7,439
|
)
|
|
(1,249
|
)
|
|
(10,000
|
)
|
Sale of minerals in place
|
|
|
(126,427
|
)
|
|
(92,465
|
)
|
|
(18,490
|
)
|
|
(160,328
|
)
|
Revision of previous estimates
|
|
|
8,432
|
|
|
32,346
|
|
|
6,591
|
|
|
20,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves, December 31, 2017 (Successor)
|
|
|
34,133
|
|
|
46,738
|
|
|
9,196
|
|
|
51,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent (MBoe)
|
|
|
|
Proved
Developed
Reserves
|
|
Proved
Undeveloped
Reserves
|
|
Total
Proved
Reserves
|
|
Proved reserves, December 31, 2014 (Predecessor)
|
|
|
77,427
|
|
|
111,710
|
|
|
189,137
|
|
Extensions and discoveries
|
|
|
6,559
|
|
|
5,913
|
|
|
12,472
|
|
Purchase of minerals in place
|
|
|
43
|
|
|
|
|
|
43
|
|
Production
|
|
|
(15,163
|
)
|
|
|
|
|
(15,163
|
)
|
Sale of minerals in place
|
|
|
(6
|
)
|
|
|
|
|
(6
|
)
|
Transfers
|
|
|
14,594
|
|
|
(14,594
|
)
|
|
|
|
Revision of previous estimates
|
|
|
(1,569
|
)
|
|
(38,110
|
)
|
|
(39,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves, December 31, 2015 (Predecessor)
|
|
|
81,885
|
|
|
64,919
|
|
|
146,804
|
|
|
|
|
|
|
|
|
|
|
|
|
Extensions and discoveries
|
|
|
3,925
|
|
|
14,331
|
|
|
18,256
|
|
Purchase of minerals in place
|
|
|
810
|
|
|
526
|
|
|
1,336
|
|
Production
|
|
|
(13,560
|
)
|
|
|
|
|
(13,560
|
)
|
Sale of minerals in place
|
|
|
(1,123
|
)
|
|
(246
|
)
|
|
(1,369
|
)
|
Transfers
|
|
|
7,510
|
|
|
(7,510
|
)
|
|
|
|
Revision of previous estimates
|
|
|
6,461
|
|
|
(9,314
|
)
|
|
(2,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves, December 31, 2016 (Successor)
|
|
|
85,908
|
|
|
62,706
|
|
|
148,614
|
|
|
|
|
|
|
|
|
|
|
|
|
Extensions and discoveries
|
|
|
8,269
|
|
|
17,390
|
|
|
25,659
|
|
Purchase of minerals in place
|
|
|
9,123
|
|
|
17,637
|
|
|
26,760
|
|
Production
|
|
|
(10,000
|
)
|
|
|
|
|
(10,000
|
)
|
Sale of minerals in place
|
|
|
(100,537
|
)
|
|
(59,791
|
)
|
|
(160,328
|
)
|
Transfers
|
|
|
7,432
|
|
|
(7,432
|
)
|
|
|
|
Revision of previous estimates
|
|
|
15,823
|
|
|
4,591
|
|
|
20,414
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves, December 31, 2017 (Successor)
|
|
|
16,018
|
|
|
35,101
|
|
|
51,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Developed Reserves
|
|
|
|
Oil (MBbls)
|
|
Natural Gas
(MMcf)
|
|
Natural Gas
Liquids
(MBbls)
|
|
Equivalent
(MBoe)
|
|
December 31, 2017 (Successor)
|
|
|
10,150
|
|
|
16,303
|
|
|
3,151
|
|
|
16,018
|
|
December 31, 2016 (Successor)
|
|
|
67,983
|
|
|
51,525
|
|
|
9,337
|
|
|
85,908
|
|
December 31, 2015 (Predecessor)
|
|
|
66,123
|
|
|
49,201
|
|
|
7,561
|
|
|
81,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Undeveloped Reserves
|
|
|
|
Oil (MBbls)
|
|
Natural Gas
(MMcf)
|
|
Natural Gas
Liquids
(MBbls)
|
|
Equivalent
(MBoe)
|
|
December 31, 2017 (Successor)
|
|
|
23,983
|
|
|
30,435
|
|
|
6,045
|
|
|
35,101
|
|
December 31, 2016 (Successor)
|
|
|
51,617
|
|
|
28,713
|
|
|
6,304
|
|
|
62,706
|
|
December 31, 2015 (Predecessor)
|
|
|
54,570
|
|
|
29,241
|
|
|
5,476
|
|
|
64,919
|
|
The
Company's proved reserves have been estimated using deterministic methods. At December 31, 2017, total proved reserves were approximately 51.1 MMBoe, a 97.5 MMBoe net decrease
over the previous year's estimate of 148.6 MMBoe. The net decrease in total proved reserves was the result of divestitures totaling 160.3 MMBoe and production of 10.0 MMBoe, partially offset by
acquisitions totaling 26.8 MMBoe, additions and extensions of 25.7 MMBoe and net positive revisions of 20.4 MMBoe. In 2017, we divested of all of our assets in the Bakken/Three Forks formations in
North Dakota, and the Eagle Ford formation in East Texas, and other non-core assets, which in its entirety comprised all of our proved reserves at December 31, 2016. Substantially all of our
proved reserves at December 31, 2017 are associated with our Delaware Basin properties.
149
Table of Contents
At
December 31, 2017, our estimated proved undeveloped (PUD) reserves were approximately 35.1 MMBoe, a 27.6 MMBoe net decrease over the previous year's estimate of 62.7 MMBoe. The
net decrease in PUD reserves was the result of divestitures of 59.8 MMBoe and development of 7.4 MMBoe, partially offset by acquisitions of 17.6 MMBoe, additions and extensions of 17.4 MMBoe and net
positive revisions of 4.6 MMBoe. Of the 17.4 MMBoe of extensions and discoveries in proved undeveloped reserves, approximately 10.0 MMBoe are associated with drilling infills and 5.9 MMBoe are
associated with drilling extensions in the Delaware Basin. We did not separately track infill drilling activities as a subset of additions to extensions and discoveries for the properties we disposed
of during 2017. Net positive revisions of 4.6 MMBoe in proved undeveloped reserves include net negative revisions of 3.0 MMBoe offset by 7.6 MMBoe of positive revisions due to the effect of higher
prices.
At
December 31, 2017, our proved developed reserves were approximately 16.0 MMBoe, a 69.9 MMBoe net decrease over the previous year's estimate of 85.9 MMBoe. The net decrease in
proved developed reserves was the result of divestitures of 100.5 MMBoe and production of 10.0 MMBoe, partially offset by additions and extensions of 8.3 MMBoe, acquisitions of 9.1 MMBoe, development
of 7.4 MMBoe (transferred from PUD), and net positive revisions of 15.8 MMBoe. Of the 8.3 MMBoe of extensions and discoveries in proved developed reserves, approximately 3.1 MMBoe are
associated with infill drilling activity and 2.5 MMBoe are associated with drilling extensions in the Delaware Basin. We did not separately track infill drilling activities as a subset of additions to
extensions and discoveries for the properties we disposed of during 2017. Net positive revisions of 15.8 MMBoe in proved developed reserves include 12.5 MMBoe in net positive performance revisions and
3.3 MMBoe in positive revisions due to increase in prices.
During
2016, net positive revisions of 6.5 MMBoe in proved developed reserves include 9.7 MMBoe in net positive performance revisions offset by 3.2 MMBoe in negative revisions due to
lower prices. Net negative revisions of 9.3 MMBoe in proved undeveloped reserves include 22.4 MMBoe associated with PUD locations that were removed because they no longer met the SEC five year
development requirement, 2.2 MMBoe of negative revisions due to the effect of lower prices, offset by 15.3 MMBoe in net positive revisions in undeveloped reserves related to improved performance.
During
2015, net negative revisions in proved developed reserves of 1.6 MMBoe include 6.9 MMBoe in net positive performance revisions offset by 8.5 MMBoe in negative revisions due to
lower prices. Net negative revisions in proved undeveloped reserves of 38.1 MMBoe include 36.6 MMBoe associated with PUD locations that were removed because they no longer met the SEC five year
development requirement, 8.3 MMBoe in negative revisions due to lower prices, offset by 6.8 MMBoe in net positive revisions to undeveloped reserves related to improved performance.
As
of December 31, 2017 all of the Company's PUD reserves are planned to be developed within five years from the date they were initially recorded. During 2017, approximately
$143.3 million in capital expenditures went toward the development of proved undeveloped reserves, which includes drilling, completion and other facility costs associated with developing proved
undeveloped wells.
For
wells classified as proved developed producing where sufficient production history existed, reserves were based on individual well performance evaluation and production decline curve
extrapolation techniques. For undeveloped locations and wells that lacked sufficient production history, reserves were based on analogy to producing wells within the same area exhibiting similar
geologic and reservoir characteristics, combined with volumetric methods. The volumetric estimates were based on geologic maps and rock and fluid properties derived from well logs, core data, pressure
measurements, and fluid samples. Well spacing was determined from drainage patterns derived from a combination of performance-based recoveries and volumetric estimates for each area or field. PUD
locations were limited to areas of uniformly high quality reservoir properties, between existing commercial producers.
150
Table of Contents
Reliable technologies were used to determine areas where PUD locations are more than one offset location away from a producing well. These technologies include
seismic data, wire line openhole log data, core data, log cross-sections, performance data, and statistical analysis. In such areas, these data demonstrated consistent, continuous reservoir
characteristics in addition to significant quantities of economic EURs from individual producing wells. The Company's management team has been a leader in data gathering and evaluation in these areas
and was instrumental in developing consortiums that allow various operators to exchange data. The Company relied only on production flow tests and historical production data, along with the reliable
geologic data mentioned above to estimate proved reserves. No other alternative methods or technologies were used to estimate proved reserves. Out of total proved undeveloped reserves of
35.1 MMBoe at December 31, 2017, 7.9 MMBoe were associated with 9 gross PUD locations that were more than one offset location from a producing well.
Capitalized Costs Relating to Oil and Natural Gas Producing Activities
The following table illustrates the total amount of capitalized costs relating to oil and natural gas producing activities and the total amount
of related accumulated depletion, depreciation and accretion (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
December 31,
2017
|
|
December 31,
2016
|
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
Evaluated oil and natural gas properties
(1)
|
|
$
|
877,316
|
|
$
|
1,269,034
|
|
|
|
$
|
7,060,721
|
|
Unevaluated oil and natural gas properties
|
|
|
765,786
|
|
|
316,439
|
|
|
|
|
1,641,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,643,102
|
|
|
1,585,473
|
|
|
|
|
8,702,077
|
|
Accumulated depletion
(1)
|
|
|
(570,155
|
)
|
|
(465,849
|
)
|
|
|
|
(5,933,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,072,947
|
|
$
|
1,119,624
|
|
|
|
$
|
2,768,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Amounts do not include costs for the Company's gas gathering systems and related support
equipment.
Costs Incurred in Oil and Natural Gas Property Acquisition, Exploration and Development Activities
Costs incurred in property acquisition, exploration and development activities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
Period from
September 10, 2016
through
December 31,
2016
|
|
|
|
Period from
January 1, 2016
through
September 9,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
|
|
Year Ended
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Property acquisition costs, proved
(1)
|
|
$
|
219,308
|
|
$
|
|
|
|
|
$
|
(127
|
)
|
$
|
(582
|
)
|
Property acquisition costs, unproved
|
|
|
794,239
|
|
|
5,070
|
|
|
|
|
3
|
|
|
268
|
|
Exploration and extension well costs
|
|
|
183,798
|
|
|
13,865
|
|
|
|
|
67,216
|
|
|
194,683
|
|
Development costs
|
|
|
143,323
|
|
|
45,765
|
|
|
|
|
135,939
|
|
|
285,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
$
|
1,340,668
|
|
$
|
64,700
|
|
|
|
$
|
203,031
|
|
$
|
479,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Proved property acquisition costs in 2016 and 2015 primarily reflect the impact of purchase price
adjustments.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Natural Gas
Reserves
The following Standardized Measure of Discounted Future Net Cash Flows (Standardized Measure) has been developed utilizing ASC 932,
Extractive ActivitiesOil
and Gas
(ASC 932)
151
Table of Contents
procedures
and based on oil and natural gas reserve and production volumes estimated by the Company's engineering staff. It can be used for some comparisons, but should not be the only method used to
evaluate the Company or its performance. Further, the information in the following table may not represent realistic assessments of future cash flows, nor should the Standardized Measure be viewed as
representative of the current value of the Company.
The
Company believes that the following factors should be taken into account when reviewing the following information:
-
-
future costs and selling prices will probably differ from those required to be used in these calculations;
-
-
due to future market conditions and governmental regulations, actual rates of production in future years may vary significantly from the rate
of production assumed in the calculations;
-
-
a 10% discount rate may not be reasonable as a measure of the relative risk inherent in realizing future net oil and natural gas revenues; and
-
-
future net revenues may be subject to different rates of income taxation.
At
December 31, 2017, 2016 and 2015, as specified by the SEC, the prices for oil and natural gas used in this calculation were the unweighted 12-month average of the first day of
the month prices, except for volumes subject to fixed price contracts. Estimates of future income taxes are computed using current statutory income tax rates including consideration for estimated
future statutory depletion and tax credits. The resulting net cash flows are reduced to present value amounts by applying a 10% discount factor.
The
Standardized Measure is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
Future cash inflows
|
|
$
|
2,033,110
|
|
$
|
4,726,490
|
|
$
|
5,406,179
|
|
Future production costs
|
|
|
(769,894
|
)
|
|
(2,290,079
|
)
|
|
(2,414,629
|
)
|
Future development costs
|
|
|
(421,748
|
)
|
|
(771,070
|
)
|
|
(813,814
|
)
|
Future income tax expense
|
|
|
(12,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future net cash flows before 10% discount
|
|
|
829,005
|
|
|
1,665,341
|
|
|
2,177,736
|
|
10% annual discount for estimated timing of cash flows
|
|
|
(492,972
|
)
|
|
(861,824
|
)
|
|
(1,067,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Standardized measure of discounted future net cash flows
|
|
$
|
336,033
|
|
$
|
803,517
|
|
$
|
1,110,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152
Table of Contents
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Natural
Gas Reserves
The following is a summary of the changes in the Standardized Measure for the Company's proved oil and natural gas reserves during each of the
years in the three year period ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
Beginning of year
|
|
$
|
803,517
|
|
$
|
1,110,565
|
|
$
|
3,256,370
|
|
Sale of oil and natural gas produced, net of production costs
|
|
|
(220,815
|
)
|
|
(275,816
|
)
|
|
(375,137
|
)
|
Purchase of minerals in place
|
|
|
222,658
|
|
|
9,626
|
|
|
946
|
|
Sales of minerals in place
|
|
|
(1,368,383
|
)
|
|
(18,816
|
)
|
|
(96
|
)
|
Extensions and discoveries
|
|
|
200,807
|
|
|
67,433
|
|
|
94,679
|
|
Changes in income taxes, net
|
|
|
(952
|
)
|
|
|
|
|
170,546
|
|
Changes in prices and costs
|
|
|
330,130
|
|
|
(302,064
|
)
|
|
(2,452,581
|
)
|
Previously estimated development costs incurred
|
|
|
58,605
|
|
|
66,087
|
|
|
295,258
|
|
Net changes in future development costs
|
|
|
|
|
|
46,981
|
|
|
456,726
|
|
Revisions of previous quantities
|
|
|
206,425
|
|
|
20,192
|
|
|
(718,932
|
)
|
Accretion of discount
|
|
|
62,379
|
|
|
111,056
|
|
|
342,692
|
|
Changes in production rates and other
|
|
|
41,662
|
|
|
(31,727
|
)
|
|
40,094
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
336,033
|
|
$
|
803,517
|
|
$
|
1,110,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153
Table of Contents
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Prior year financial statements are not comparable to our current year financial statements due to the adoption of fresh-start accounting.
References to "Successor" or "Successor Company" relate to the financial position and results of operations of the reorganized company subsequent to September 9, 2016. References to
"Predecessor" or "Predecessor Company" relate to the financial position and results of operations of the reorganized company prior to, and including, September 9, 2016.
The
following table presents selected quarterly financial data derived from the Company's unaudited consolidated interim financial statements. The following data is only a summary and
should be read with the Company's historical consolidated financial statements and related notes contained in this document (in thousands, except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Quarters Ended
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
135,598
|
|
$
|
120,137
|
|
$
|
96,953
|
|
$
|
25,277
|
|
Income (loss) from operations
|
|
|
256,695
|
|
|
15,656
|
|
|
473,199
|
|
|
(30,127
|
)
|
Net income (loss)
|
|
|
189,352
|
|
|
20,177
|
|
|
419,287
|
|
|
(93,130
|
)
|
Net income (loss) available to common stockholders
(1)
|
|
|
188,551
|
|
|
(27,029
|
)
|
|
419,287
|
|
|
(93,130
|
)
|
Net income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.07
|
|
$
|
(0.19
|
)
|
$
|
2.85
|
|
$
|
(0.63
|
)
|
Diluted
|
|
$
|
1.69
|
|
$
|
(0.19
|
)
|
$
|
2.82
|
|
$
|
(0.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
|
|
|
Period from
July 1, 2016
through
September 9, 2016
|
|
|
|
Period from
September 10, 2016
through
September 30, 2016
|
|
|
|
|
|
Quarter Ended
March 31
|
|
Quarter Ended
June 30
|
|
|
|
Quarter Ended
December 31
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
81,349
|
|
$
|
106,147
|
|
$
|
79,347
|
|
|
|
$
|
23,107
|
|
$
|
130,255
|
|
Income (loss) from operations
|
|
|
(592,384
|
)
|
|
(261,458
|
)
|
|
2,225
|
|
|
|
|
(433,725
|
)
|
|
17,926
|
|
Net income (loss)
|
|
|
(539,999
|
)
|
|
(374,303
|
)
|
|
926,260
|
|
|
|
|
(450,692
|
)
|
|
(28,501
|
)
|
Net income (loss) available to common stockholders
(2)
|
|
|
(566,862
|
)
|
|
(382,353
|
)
|
|
916,421
|
|
|
|
|
(451,483
|
)
|
|
(28,501
|
)
|
Net income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(4.72
|
)
|
$
|
(3.17
|
)
|
$
|
7.58
|
|
|
|
$
|
(4.96
|
)
|
$
|
(0.31
|
)
|
Diluted
|
|
$
|
(4.72
|
)
|
$
|
(3.17
|
)
|
$
|
6.06
|
|
|
|
$
|
(4.96
|
)
|
$
|
(0.31
|
)
|
-
(1)
-
The volatility in "Net income (loss) available to common stockholders" is substantially due to a) the gains on the sales
of oil and natural gas properties and b) the losses on extinguishment of debt. See footnotes for additional information.
-
(2)
-
The volatility in "Net income (loss) available to common stockholders" is substantially due to a) the Company's
reorganization and associated fresh-start accounting, b) the Company's full cost ceiling impairments, c) the gains on the extinguishment of debt and d) the Company's realized and
unrealized gains and losses on its derivative contracts. See footnotes for additional information.
154
Table of Contents