Annual Reports

 
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  • 10-Q (Nov 8, 2017)
  • 10-Q (Aug 3, 2017)
  • 10-Q (May 10, 2017)
  • 10-Q (Nov 3, 2016)
  • 10-Q (Aug 4, 2016)
  • 10-Q (May 5, 2016)

 
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Other

Gastar Exploration 10-Q 2016

Documents found in this filing:

  1. 10-Q
  2. Ex-3.2
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1
gst-10q_20160630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

FOR THE QUARTERLY PERIOD ENDED June 30, 2016

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM           TO             

Commission File Number: 001-35211

 

GASTAR EXPLORATION INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

38-3531640

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1331 Lamar Street, Suite 650

 

 

Houston, Texas

 

77010

(Address of principal executive offices)

 

(Zip Code)

(713) 739-1800

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

o

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

The total number of outstanding common shares, $0.001 par value per share, as of August 1, 2016 was 131,726,085.

 

 


GASTAR EXPLORATION INC.

QUARTERLY REPORT ON FORM 10-Q

For the three and six months ended June 30, 2016

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

 

Financial Statements

 

 

6

 

 

Gastar Exploration Inc. Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015

 

 

6

 

 

Gastar Exploration Inc. Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)

 

 

8

 

 

Gastar Exploration Inc. Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)

 

 

9

 

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

 

 

10

Item 2.

 

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

 

 

31

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

42

Item 4.

 

Controls and Procedures

 

 

42

PART II – OTHER INFORMATION

 

 

 

Item 1.

 

Legal Proceedings

 

 

43

Item 1A.

 

Risk Factors

 

 

43

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

45

Item 3.

 

Defaults Upon Senior Securities

 

 

45

Item 4.

 

Mine Safety Disclosure

 

 

45

Item 5.

 

Other Information

 

 

45

Item 6.

 

Exhibits

 

 

45

SIGNATURES

 

 

46

 

 

2


On November 14, 2013, Gastar Exploration Ltd., an Alberta, Canada corporation, changed its jurisdiction of incorporation to the State of Delaware and changed its name to “Gastar Exploration, Inc.”  On January 31, 2014, Gastar Exploration, Inc. merged with and into Gastar Exploration USA, Inc., its direct subsidiary, as part of a reorganization to eliminate Gastar Exploration, Inc.’s holding company corporate structure.  Pursuant to the merger agreement, shares of Gastar Exploration, Inc.’s common stock were converted into an equal number of shares of common stock of Gastar Exploration USA, Inc., and Gastar Exploration USA, Inc. changed its name to “Gastar Exploration Inc.” Gastar Exploration Inc. owns and continues to conduct Gastar Exploration, Inc.’s business in substantially the same manner as was being conducted prior to the merger.

Unless otherwise indicated or required by the context, (i) for any date or period prior to the January 31, 2014 merger described above, “Gastar,” the “Company,” “we,” “us,” “our” and similar terms refer collectively to Gastar Exploration, Inc.(formerly known as Gastar Exploration Ltd.) and its subsidiaries, including Gastar Exploration Inc. (formerly known as Gastar Exploration USA, Inc.), and for any date or period after January 31, 2014, such terms refer collectively to Gastar Exploration Inc. and its subsidiaries and (ii) all dollar amounts appearing in this Form 10-Q are stated in United States dollars (“U.S. dollars”) unless otherwise noted and (iii) all financial data included in this Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).

General information about us can be found on our website at www.gastar.com. The information available on or through our website, or about us on any other website, is neither incorporated into, nor part of, this report.  Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings that we make with the U.S. Securities and Exchange Commission (“SEC”), as well as any amendments and exhibits to those reports, will be available free of charge through our website as soon as reasonably practicable after we file or furnish them to the SEC.  Information is also available on the SEC website at www.sec.gov for our U.S. filings.

 

 

 

3


Glossary of Terms

 

AMI

 

Area of mutual interest, an agreed designated geographic area where co-participants or other industry participants have a right of participation in acquisitions and operations

 

 

 

Bbl

 

Barrel of oil, condensate or NGLs

 

 

 

Bbl/d

 

Barrels of oil, condensate or NGLs per day

 

 

 

Bcf

 

One billion cubic feet of natural gas

 

 

 

Bcfe

 

One billion cubic feet of natural gas equivalent, calculated by converting liquids volumes on the basis of 1/6th of a barrel of oil, condensate or NGLs per Mcf

 

 

 

Boe

 

One barrel of oil equivalent determined using the ratio of six thousand cubic feet of natural gas to one barrel of oil, condensate or NGLs

 

 

 

Boe/d

 

Barrels of oil equivalent per day

 

 

 

Btu

 

British thermal unit, typically used in measuring natural gas energy content

 

 

 

CRP

 

Central receipt point

 

 

 

FASB

 

Financial Accounting Standards Board

 

 

 

GAAP

 

Accounting principles generally accepted in the United States of America

 

 

 

Gross acres

 

Refers to acres in which we own a working interest

 

 

 

Gross wells

 

Refers to wells in which we have a working interest

 

 

 

MBbl

 

One thousand barrels of oil, condensate or NGLs

 

 

 

MBbl/d

 

One thousand barrels of oil, condensate or NGLs per day

 

 

 

MBoe

 

One thousand barrels of oil equivalent, calculated by converting natural gas volumes on the basis of 6 Mcf of natural gas per barrel

 

 

 

MBoe/d

 

One thousand barrels of oil equivalent per day

 

 

 

Mcf

 

One thousand cubic feet of natural gas

 

 

 

Mcf/d

 

One thousand cubic feet of natural gas per day

 

 

 

Mcfe

 

One thousand cubic feet of natural gas equivalent, calculated by converting liquids volumes on the basis of 1/6th of a barrel of oil, condensate or NGLs per Mcf

 

 

 

MMBtu/d

 

One million British thermal units per day

 

 

 

MMcf

 

One million cubic feet of natural gas

 

 

 

MMcf/d

 

One million cubic feet of natural gas per day

 

 

 

MMcfe

 

One million cubic feet of natural gas equivalent, calculated by converting liquids volumes on the basis of 1/6th of a barrel of oil, condensate or NGLs per Mcf

 

 

 

MMcfe/d

 

One million cubic feet of natural gas equivalent per day

 

 

 

Net acres

 

Refers to our proportionate interest in acreage resulting from our ownership in gross acreage

 

 

 

Net wells

 

Refers to gross wells multiplied by our working interest in such wells

 

 

 

NGLs

 

Natural gas liquids

 

 

 

NYMEX

 

New York Mercantile Exchange

 

 

 

PBU

 

Performance based unit comprising one of our compensation plan awards

 

 

 

psi

 

Pounds per square inch

 

 

 

PUD

 

Proved undeveloped reserves

 

 

 

 

4


STACK Play

 

An acronymic name for a predominantly oil producing play referring to the exploration and development of the Sooner

Trend of the Anadarko Basin in Canadian and Kingfisher Counties, Oklahoma

 

 

 

U.S.

 

United States of America

 

 

 

WTI

 

West Texas Intermediate

 

 

5


PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

GASTAR EXPLORATION INC.

CONDENSED CONSOLIDATED BALANCE SHEETS 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

 

 

 

 

 

 

(in thousands, except share data)

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

50,761

 

 

$

50,074

 

Accounts receivable, net of allowance for doubtful accounts of $1,953 and $0, respectively

 

 

7,324

 

 

 

14,302

 

Commodity derivative contracts

 

 

7,729

 

 

 

15,534

 

Prepaid expenses

 

 

4,881

 

 

 

5,056

 

Total current assets

 

 

70,695

 

 

 

84,966

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

 

 

 

 

 

Oil and natural gas properties, full cost method of accounting:

 

 

 

 

 

 

 

 

Unproved properties, excluded from amortization

 

 

87,727

 

 

 

92,609

 

Proved properties

 

 

1,239,324

 

 

 

1,286,373

 

Total oil and natural gas properties

 

 

1,327,051

 

 

 

1,378,982

 

Furniture and equipment

 

 

2,613

 

 

 

3,068

 

Total property, plant and equipment

 

 

1,329,664

 

 

 

1,382,050

 

Accumulated depreciation, depletion and amortization

 

 

(1,120,659

)

 

 

(1,053,116

)

Total property, plant and equipment, net

 

 

209,005

 

 

 

328,934

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

 

5,223

 

 

 

9,335

 

Deferred charges, net

 

 

743

 

 

 

985

 

Advances to operators and other assets

 

 

561

 

 

 

331

 

Other

 

 

1,121

 

 

 

4,944

 

Total other assets

 

 

7,648

 

 

 

15,595

 

TOTAL ASSETS

 

$

287,348

 

 

$

429,495

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,887

 

 

$

2,029

 

Revenue payable

 

 

5,975

 

 

 

5,985

 

Accrued interest

 

 

3,512

 

 

 

3,730

 

Accrued drilling and operating costs

 

 

2,766

 

 

 

2,010

 

Advances from non-operators

 

 

5

 

 

 

167

 

Commodity derivative contracts

 

 

170

 

 

 

 

Commodity derivative premium payable

 

 

1,660

 

 

 

3,194

 

Asset retirement obligation

 

 

89

 

 

 

89

 

Other accrued liabilities

 

 

6,748

 

 

 

6,764

 

Total current liabilities

 

 

23,812

 

 

 

23,968

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

 

 

Long-term debt

 

 

417,765

 

 

 

516,476

 

Commodity derivative contracts

 

 

 

 

 

451

 

Commodity derivative premium payable

 

 

1,886

 

 

 

2,788

 

Asset retirement obligation

 

 

5,586

 

 

 

5,997

 

Total long-term liabilities

 

 

425,237

 

 

 

525,712

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Preferred stock, 40,000,000 shares authorized

 

 

 

 

 

 

 

 

Series A Preferred stock, par value $0.01 per share; 10,000,000 shares designated;

   4,045,000 shares issued and outstanding at June 30, 2016 and December 31, 2015,

   respectively, with liquidation preference of $25.00 per share

 

 

41

 

 

 

41

 

Series B Preferred stock, par value $0.01 per share; 10,000,000 shares designated;

   2,140,000 shares issued and outstanding at June 30, 2016 and December 31, 2015,

   respectively, with liquidation preference of $25.00 per share

 

 

21

 

 

 

21

 

Common stock, par value $0.001 per share; 550,000,000 and 275,000,000 shares authorized at June 30, 2016 and December 31, 2015, respectively; 131,728,879 and 80,024,218 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively

 

 

132

 

 

 

80

 

Additional paid-in capital

 

 

621,954

 

 

 

571,947

 

Accumulated deficit

 

 

(783,849

)

 

 

(692,274

)

Total stockholders’ equity

 

 

(161,701

)

 

 

(120,185

)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

287,348

 

 

$

429,495

 

 

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

 

6


 

 

7


GASTAR EXPLORATION INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

For the Three Months Ended  June 30,

 

 

For the Six Months Ended    June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(in thousands, except share and per share data)

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and condensate

 

$

11,345

 

 

$

17,584

 

 

$

20,158

 

 

$

32,937

 

Natural gas

 

 

1,876

 

 

 

3,950

 

 

 

5,894

 

 

 

10,650

 

NGLs

 

 

1,710

 

 

 

2,184

 

 

 

3,405

 

 

 

4,280

 

Total oil, condensate, natural gas and NGLs revenues

 

 

14,931

 

 

 

23,718

 

 

 

29,457

 

 

 

47,867

 

(Loss) gain on commodity derivatives contracts

 

 

(2,778

)

 

 

(1,790

)

 

 

(2,493

)

 

 

8,433

 

Total revenues

 

 

12,153

 

 

 

21,928

 

 

 

26,964

 

 

 

56,300

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production taxes

 

 

364

 

 

 

822

 

 

 

1,069

 

 

 

1,662

 

Lease operating expenses

 

 

4,584

 

 

 

7,242

 

 

 

10,663

 

 

 

13,261

 

Transportation, treating and gathering

 

 

395

 

 

 

542

 

 

 

1,008

 

 

 

1,039

 

Depreciation, depletion and amortization

 

 

5,591

 

 

 

16,080

 

 

 

19,320

 

 

 

30,551

 

Impairment of oil and natural gas properties

 

 

 

 

 

100,152

 

 

 

48,497

 

 

 

100,152

 

Accretion of asset retirement obligation

 

 

89

 

 

 

131

 

 

 

194

 

 

 

256

 

General and administrative expense

 

 

6,272

 

 

 

4,421

 

 

 

11,947

 

 

 

8,669

 

Total expenses

 

 

17,295

 

 

 

129,390

 

 

 

92,698

 

 

 

155,590

 

LOSS FROM OPERATIONS

 

 

(5,142

)

 

 

(107,462

)

 

 

(65,734

)

 

 

(99,290

)

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(9,263

)

 

 

(6,936

)

 

 

(18,561

)

 

 

(14,497

)

Investment income and other

 

 

(76

)

 

 

3

 

 

 

(43

)

 

 

6

 

LOSS BEFORE PROVISION FOR INCOME TAXES

 

 

(14,481

)

 

 

(114,395

)

 

 

(84,338

)

 

 

(113,781

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

 

(14,481

)

 

 

(114,395

)

 

 

(84,338

)

 

 

(113,781

)

Dividends on preferred stock

 

 

(3,619

)

 

 

(3,619

)

 

 

(7,237

)

 

 

(7,237

)

NET LOSS ATTRIBUTABLE TO COMMON

   STOCKHOLDERS

 

$

(18,100

)

 

$

(118,014

)

 

$

(91,575

)

 

$

(121,018

)

NET LOSS PER SHARE OF COMMON STOCK ATTRIBUTABLE TO COMMON STOCKHOLDERS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.17

)

 

$

(1.52

)

 

$

(1.00

)

 

$

(1.56

)

Diluted

 

$

(0.17

)

 

$

(1.52

)

 

$

(1.00

)

 

$

(1.56

)

WEIGHTED AVERAGE SHARES OF COMMON STOCK

   OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

104,009,337

 

 

 

77,611,167

 

 

 

91,398,735

 

 

 

77,364,368

 

Diluted

 

 

104,009,337

 

 

 

77,611,167

 

 

 

91,398,735

 

 

 

77,364,368

 

 

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

 

 

 

8


GASTAR EXPLORATION INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(84,338

)

 

$

(113,781

)

Adjustments to reconcile net loss to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

19,320

 

 

 

30,551

 

Impairment of oil and natural gas properties

 

 

48,497

 

 

 

100,152

 

Stock-based compensation

 

 

2,335

 

 

 

2,773

 

Mark to market of commodity derivatives contracts:

 

 

 

 

 

 

 

 

Total loss (gain) on commodity derivatives contracts

 

 

2,493

 

 

 

(8,433

)

Cash settlements of matured commodity derivatives contracts, net

 

 

9,581

 

 

 

11,408

 

Cash premiums paid for commodity derivatives contracts

 

 

(565

)

 

 

(45

)

Amortization of deferred financing costs

 

 

2,825

 

 

 

1,736

 

Accretion of asset retirement obligation

 

 

194

 

 

 

256

 

Settlement of asset retirement obligation

 

 

 

 

 

(80

)

Loss on sale of furniture and equipment

 

 

97

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,260

 

 

 

15,887

 

Prepaid expenses

 

 

175

 

 

 

1,397

 

Accounts payable and accrued liabilities

 

 

570

 

 

 

(4,806

)

Net cash provided by operating activities

 

 

5,444

 

 

 

37,015

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Development and purchase of oil and natural gas properties

 

 

(23,370

)

 

 

(84,724

)

Advances to operators

 

 

(69

)

 

 

(1,225

)

Acquisition of oil and natural gas properties - refund

 

 

1,664

 

 

 

 

Proceeds from sale of oil and natural gas properties

 

 

77,621

 

 

 

2,008

 

Deposit for sale of oil and natural gas properties

 

 

 

 

 

6,620

 

Payments to non-operators

 

 

(162

)

 

 

(1,820

)

Sale (purchase) of furniture and equipment

 

 

82

 

 

 

(45

)

Net cash provided by (used in) investing activities

 

 

55,766

 

 

 

(79,186

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from revolving credit facility

 

 

 

 

 

55,000

 

Repayment of revolving credit facility

 

 

(100,370

)

 

 

(5,000

)

Proceeds from issuance of common stock, net of issuance costs

 

 

45,069

 

 

 

 

Dividends on preferred stock

 

 

(3,618

)

 

 

(7,237

)

Deferred financing charges

 

 

(893

)

 

 

(797

)

Tax withholding related to restricted stock and performance based unit award vestings

 

 

(711

)

 

 

(1,425

)

Net cash (used in) provided by financing activities

 

 

(60,523

)

 

 

40,541

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

687

 

 

 

(1,630

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

50,074

 

 

 

11,008

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

50,761

 

 

$

9,378

 

 

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

 

 

 

9


GASTAR EXPLORATION INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Description of Business

Gastar Exploration Inc. (the “Company” or “Gastar”) is a pure play Mid-Continent independent energy company engaged in the exploration, development and production of oil, condensate, natural gas and NGLs. Gastar’s principal business activities include the identification, acquisition, and subsequent exploration and development of oil and natural gas properties with an emphasis on unconventional reserves, such as shale resource plays. Gastar holds a concentrated acreage position in what is believed to be the core of the STACK Play, an area of central Oklahoma which is home to multiple oil and natural gas-rich reservoirs including the Meramec, Oswego, Osage, Woodford and Hunton formations.   On April 8, 2016, Gastar sold substantially all of its producing assets and proved reserves and a significant portion of its undeveloped acreage in the Appalachian Basin for an adjusted sales price of $76.6 million, subject to certain additional adjustments, with an effective date of January 1, 2016 (the “Appalachian Basin Sale”).  

For any date or period prior to January 31, 2014, “Gastar,” the “Company,” “we,” “us,” “our” and similar terms refer collectively to Gastar Exploration, Inc. (formerly known as Gastar Exploration Ltd.) and its subsidiaries, including Gastar Exploration Inc. (formerly known as Gastar Exploration USA, Inc.), and for any date or period after January 31, 2014, such terms refer collectively to Gastar Exploration Inc. and its subsidiaries.

 

 

2.

Summary of Significant Accounting Policies

The accounting policies followed by the Company are set forth in the notes to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”) filed with the SEC. Please refer to the notes to the consolidated financial statements included in the 2015 Form 10-K for additional details of the Company’s financial condition, results of operations and cash flows. No material item included in those notes has changed except as a result of normal transactions in the interim or as disclosed within this report.

The unaudited interim condensed consolidated financial statements of the Company included herein are stated in U.S. dollars and were prepared from the records of the Company by management in accordance with U.S. GAAP applicable to interim financial statements and reflect all normal and recurring adjustments, which are, in the opinion of management, necessary to provide a fair presentation of the results of operations and financial position for the interim periods. Such financial statements conform to the presentation reflected in the 2015 Form 10-K. The current interim period reported herein should be read in conjunction with the financial statements and accompanying notes, including Item 8. “Financial Statements and Supplementary Data, Note 2 – Summary of Significant Accounting Policies,” included in the 2015 Form 10-K.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and natural gas reserve quantities and the related present value of estimated future net cash flows.

The unaudited interim condensed consolidated financial statements of the Company include the consolidated accounts of all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Certain reclassifications of prior year balances have been made to conform to the current year presentation; these reclassifications have no impact on net income (loss).

The results of operations for the three and six months ended June 30, 2016  are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued and has disclosed certain subsequent events in these condensed consolidated financial statements, as appropriate.

 

 

 

 

 

10


Accounts Receivable

Accounts receivable are reported net of the allowance for doubtful accounts.  The allowance for doubtful accounts is determined based on a review of the Company’s receivables.  Receivable accounts are charged off when collection efforts have failed or the account is deemed uncollectible.  At June 30, 2016, the Company determined that a receivable account from a third-party natural gas and NGLs purchaser would no longer be collectible as a result of the third-party purchaser filing for bankruptcy.  A summary of the activity related to the allowance for doubtful accounts is as follows:

 

 

 

June 30, 2016

 

 

December 31, 2015

 

 

 

(in thousands)

 

Allowance for doubtful accounts, beginning of period

 

$

 

 

$

 

Expense

 

 

 

 

 

 

Reductions/write-offs

 

 

1,953

 

 

 

 

Allowance for doubtful accounts, end of period

 

$

1,953

 

 

$

 

Recent Accounting Developments

The following recently issued accounting pronouncements may impact the Company in future periods:

Compensation – Stock Compensation.  In March 2016, the FASB issued updated guidance as part of its simplification initiative which is intended to simplify several aspects of the accounting for stock-based compensation transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.  For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period.  Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted.  Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively.  Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively.  An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. The Company has not yet determined what the effects of adopting this updated guidance will be on its consolidated financial statements.

Leases.  In February 2016, the FASB issued updated guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and enhance disclosures regarding key information about leasing arrangements.  Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this update are effective beginning on January 1, 2019 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  Early adoption is permitted.  The Company has not yet determined what the effects of adopting this updated guidance will be on its consolidated financial statements.

Income Taxes.  In November 2015, the FASB issued updated guidance as part of its simplification initiative for the presentation of deferred taxes.  Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position where such classification generally does not align with the time period in which the recognized deferred tax amounts are expected to be recovered or settled.  To simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position and apply to all entities that present a classified statement of financial position, resulting in the alignment of the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards (IFRS). IAS 1, Presentation of Financial Statements. This guidance is effective for public business entities for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Earlier application is permitted as of the beginning of an interim or annual reporting period and can be applied either prospectively or retrospectively to all periods presented.  The Company does not expect the adoption of this guidance to materially impact its consolidated financial statements.

 

11


Debt Issuance Costs. In April 2015, the FASB issued updated guidance regarding simplification of the presentation of debt issuance costs.  The updated guidance requires debt issuance costs related to a recognized debt liability, other than those costs related to line of credit arrangements, be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, similar to the presentation for debt discounts and premiums, instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate.  This guidance was effective for the Company on January 1, 2016.  The Company’s adoption of this guidance was applied retrospectively and did not have a material impact on the Company’s consolidated financial statements.

Going Concern.  In August 2014, the FASB issued updated guidance related to determining whether substantial doubt exists about an entity's ability to continue as a going concern.  The amendment provides guidance for determining whether conditions or events give rise to substantial doubt that an entity has the ability to continue as a going concern within one year following the date of issuance of annual and interim financial statements, and requires specific disclosures regarding the conditions or events leading to substantial doubt.  The updated guidance is effective for annual reporting periods ending after December 15, 2016 and for annual periods and interim periods thereafter.  Earlier adoption is permitted, but the Company has not elected to adopt the updated guidance early.  The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

Revenue Recognition.  In May 2014, the FASB issued an amendment to previously issued guidance regarding the recognition of revenue, which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition,” and most industry-specific guidance.  The FASB and the International Accounting Standards Board initiated a joint project to clarify the principles for recognizing revenue and to develop a common standard that would (i) remove inconsistencies and weaknesses in revenue requirements, (ii) provide a more robust framework for addressing revenue issues, (iii) improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, (iv) provide more useful information to users of financial statements through improved disclosure requirements and (v) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.  The core principle of the guidance is 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.  To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.  This guidance supersedes prior revenue recognition requirements and most industry-specific guidance throughout the FASB Accounting Standards Codification.  This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  In April 2015, the FASB proposed to delay the effective date one year, beginning in fiscal year 2018 and such proposal was subsequently adopted by the FASB in August 2015.  The Company is evaluating the new guidance and has not yet determined the impact this new standard may have on its consolidated financial statements or decided upon its method of adoption.

 

 

3.

Property, Plant and Equipment

The amount capitalized as oil and natural gas properties was incurred for the purchase and development of various properties in the U.S., located in the states of Oklahoma, Pennsylvania and West Virginia.  On April 8, 2016, the Company sold substantially all of its producing assets and proved reserves and a significant portion of its undeveloped acreage in Pennsylvania and West Virginia comprising the Company’s Appalachian Basin assets.

The following table summarizes the components of unproved properties excluded from amortization at the dates indicated:

 

 

 

June 30, 2016

 

 

December 31, 2015

 

 

 

(in thousands)

 

Unproved properties, excluded from amortization:

 

 

 

 

 

 

 

 

Drilling in progress costs

 

$

2,197

 

 

$

1,533

 

Acreage acquisition costs

 

 

79,874

 

 

 

82,560

 

Capitalized interest

 

 

5,656

 

 

 

8,516

 

Total unproved properties excluded from amortization

 

$

87,727

 

 

$

92,609

 

 

The full cost method of accounting for oil and natural gas properties requires a quarterly calculation of a limitation on capitalized costs, often referred to as a full cost ceiling calculation. The ceiling is the present value (discounted at 10% per annum) of estimated future cash flow from proved oil, condensate, natural gas and NGLs reserves reduced by future operating expenses, development expenditures, abandonment costs (net of salvage) to the extent not included in oil and natural gas properties pursuant to authoritative guidance and estimated future income taxes thereon. To the extent that the Company's capitalized costs (net of accumulated depletion and deferred taxes) exceed the ceiling at the end of the reported period, the excess must be written off to

 

12


expense for such period. Once incurred, this impairment of oil and natural gas properties is not reversible at a later date even if oil and natural gas prices increase. The ceiling calculation is determined using a mandatory trailing 12-month unweighted arithmetic average of the first-day-of-the-month commodities pricing and costs in effect at the end of the period, each of which are held constant indefinitely (absent specific contracts with respect to future prices and costs) with respect to valuing future net cash flows from proved reserves for this purpose.  The 12-month unweighted arithmetic average of the first-day-of-the-month commodities prices are adjusted for basis and quality differentials in determining the present value of the proved reserves.  The table below sets forth relevant pricing assumptions utilized in the quarterly ceiling test computations for the respective periods noted before adjustment for basis and quality differentials:

 

 

 

2016

 

 

 

Total

Impairment

 

 

June 30

 

 

March 31

 

Henry Hub natural gas price (per MMBtu)(1)

 

 

 

 

 

$

2.24

 

 

$

2.40

 

West Texas Intermediate oil price (per Bbl)(1)

 

 

 

 

 

$

43.12

 

 

$

46.26

 

Impairment recorded (pre-tax) (in thousands)

 

$

48,497

 

 

$

 

 

$

48,497

 

 

 

 

2015

 

 

 

Total Year to Date

Impairment

 

 

June 30

 

 

March 31

 

Henry Hub natural gas price (per MMBtu)(1)

 

 

 

 

 

$

3.39

 

 

$

3.88

 

West Texas Intermediate oil price (per Bbl)(1)

 

 

 

 

 

$

71.68

 

 

$

82.72

 

Impairment recorded (pre-tax) (in thousands)

 

$

100,152

 

 

$

100,152

 

 

$

 

 

(1)

For the respective periods, oil and natural gas prices are calculated using the trailing 12-month unweighted arithmetic average of the first-day-of-the-month prices based on Henry Hub spot natural gas prices and West Texas Intermediate spot oil prices.

 

The Company could potentially incur further ceiling test impairments in 2016 should commodities prices decline. However, it is difficult to project future impairment charges in light of numerous variables involved.

The Company’s proved reserves estimates and their estimated discounted value and standardized measure will also be impacted by changes in lease operating costs, future development costs, production, exploration and development activities.  The ceiling limitation calculation is not intended to be indicative of the fair market value of the Company’s proved reserves or future results.

 

13


Appalachian Basin Sale

          On February 19, 2016, the Company entered into an agreement to sell substantially all of its producing assets and proved reserves and a significant portion of its undeveloped acreage in the Appalachian Basin for $80.0 million, subject to customary closing adjustments.  Pursuant to the agreement, on April 8, 2016, the Company completed the Appalachian Basin Sale for an adjusted sales price of $76.6 million, subject to certain additional adjustments.  The Appalachian Basin Sale is reflected as a reduction to the full cost pool and the Company did not record a gain or loss related to the divestiture as it was not determined to be significant to the full cost pool and did not result in a significant change to the depletion rate.  

Appalachian Basin Sale Pro Forma Operating Results

The following unaudited pro forma results for the three months ended June 30, 2015 and the six months ended June 30, 2016 and 2015 show the effect on the Company's consolidated results of operations as if the Appalachian Basin Sale had occurred at the beginning of the periods presented. The pro forma results are the result of excluding from the statement of operations of the Company the revenues and direct operating expenses for the properties divested adjusted for (1) the reduction in ARO liabilities and accretion expense for the properties divested,  (2) the reduction in depreciation, depletion and amortization expense as a result of the divestiture and (3) the reduction in interest expense as a result of the pay down of debt under the Revolving Credit Facility in conjunction with the closing of the Appalachian Basin Sale. As a result, certain estimates and judgments were made in preparing the pro forma adjustments.

 

For the Three Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

 

(in thousands, except  per share data)

 

 

 

(Unaudited)

 

 

Revenues

$

12,268

 

 

$

18,516

 

 

Net Loss

$

(17,892

)

 

$

(114,495

)

 

Loss per share:

 

 

 

 

 

 

 

 

Basic

$

(0.17

)

 

$

(1.48

)

 

Diluted

$

(0.17

)

 

$

(1.48

)

 

 

 

For the Six Months Ended June 30,

 

 

2016

 

 

2015

 

 

(in thousands, except  per share data)

 

 

(Unaudited)

 

Revenues

$

23,889

 

 

$

46,668

 

Net Loss

$

(86,540

)

 

$

(121,463

)

Loss per share:

 

 

 

 

 

 

 

Basic

$

(0.95

)

 

$

(1.57

)

Diluted

$

(0.95

)

 

$

(1.57

)

 

14


 

The pro forma information above includes numerous assumptions, is presented for illustrative purposes only and may not be indicative of the future results or results of operations that would have actually occurred had the Appalachian Basin Sale occurred as presented. In addition, future results may vary significantly from the results reflected in such pro forma information.

 

Husky Acquisition

On December 16, 2015, the Company completed the acquisition of additional working and net revenue interests in 103 gross (10.2 net) producing wells and certain undeveloped acreage in the STACK and Hunton Limestone formations in its existing AMI from its AMI co-participant Husky Ventures, Inc. (“Husky”), Silverstar of Nevada, Inc., Maximus Exploration, LLC and Atwood Acquisitions, LLC for an adjusted purchase price of approximately $42.2 million, reflecting adjustment for an acquisition effective date of July 1, 2015 and which includes a $715,000 deposit into escrow pending the resolution of title defects by the seller recorded to other assets at June 30, 2016, and the conveyance of approximately 11,000 net non-core, non-producing acres in Blaine, Major and Kingfisher Counties, Oklahoma to the sellers, subject to certain adjustments and customary closing conditions (the “Husky Acquisition”).  In connection with the acquisition, the AMI participation agreements with the Company’s AMI co-participant were dissolved.

The Company accounted for the acquisition as a business combination and therefore, recorded the assets acquired at their estimated acquisition date fair values.  The Company incurred a total of $1.5 million of transaction and integration costs associated with the acquisition since closing and expensed these costs as incurred as general and administrative expenses.  The Company utilized relevant market assumptions to determine fair value and allocate the purchase price, such as future commodity prices, projections of estimated natural gas and oil reserves, expectations for future development and operating costs, projections of future rates of production, expected recovery rates and market multiples for similar transactions. Many of the assumptions used are unobservable and as such, represent Level 3 inputs under the fair value hierarchy as described in Note 5, “Fair Value Measurements.” The Company's preliminary assessment of the fair value of the Husky Acquisition assets resulted in a fair market valuation of $44.6 million.  As the fair market valuation varied less than 6% from the purchase price allocation recorded, no adjustment was made to the purchase price allocation.

 

Husky Acquisition Pro Forma Operating Results

The following unaudited pro forma results for the three and six months ended June 30, 2015 show the effect on the Company's consolidated results of operations as if the Husky Acquisition had occurred at the beginning of the period presented. The pro forma results are the result of combining the statement of operations of the Company with the statements of revenues and direct operating expenses for the properties acquired from Husky adjusted for (1) assumption of ARO liabilities and accretion expense for the properties acquired and (2) additional depreciation, depletion and amortization expense as a result of the Company's increased ownership in the acquired properties. The statements of revenues and direct operating expenses for the Husky Acquisition assets exclude all other historical expenses of Husky. As a result, certain estimates and judgments were made in preparing the pro forma adjustments.

 

 

For the Three Months Ended June 30, 2015

 

 

For the Six Months Ended June 30, 2015

 

 

(in thousands, except  per share data)