Exhibit 99.6

GEORESOURCES, INC and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

		June 30, 2012				December 31, 2011
		(unaudited)
ASSETS
Current assets:
Cash		$	40,289			$	39,144
Accounts receivable:
Oil and gas revenues			29,027				26,485
Joint interest billings and other, less allowance for doubtful accounts of $579 and $609, respectively			36,419				21,328
Affiliated partnerships			581				371
Notes receivable			476				545
Derivative financial instruments			8,311				4,037
Income taxes receivable			7,849				7,753
Prepaid expenses and other			4,211				3,681
Total current assets			127,163				103,344
Oil and gas properties, successful efforts method:
Proved properties			577,093				428,871
Unproved properties			58,304				44,613
Office and other equipment			1,961				1,675
Land			146				146
			637,504				475,305
Less accumulated depreciation, depletion and amortization			(117,715	)			(96,753	)
Net property and equipment			519,789				378,552
Equity in oil and gas limited partnerships			1,668				2,240
Derivative financial instruments			2,189				868
Deferred financing costs and other			2,502				2,687
		$	653,311			$	487,691

 

The accompanying notes are an integral part of these statements.

 

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GEORESOURCES, INC and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

		June 30, 2012				December 31, 2011
		(unaudited)
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	32,357			$	25,483
Accounts payable to affiliated partnerships			1,679				3,597
Revenue and royalties payable			25,201				17,043
Drilling advances			18,024				12,965
Accrued expenses			10,159				5,073
Derivative financial instruments			—				2,890
Total current liabilities			87,420				67,051
Long-term debt			80,000				—
Deferred income taxes			67,517				44,389
Asset retirement obligations			9,587				7,940
Stockholders’ equity:
Common stock, par value $0.01 per share; authorized 100,000,000 shares; issued and outstanding: 25,639,622 in 2012 and 25,595,930 in 2011			256				256
Additional paid-in capital			284,673				281,515
Accumulated other comprehensive income			6,263				1,069
Retained earnings			117,595				85,471
Total stockholders’ equity			408,787				368,311
			653,311			$	487,691

The accompanying notes are an integral part of these statements.

 

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GEORESOURCES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

(unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Revenue:
Oil and gas revenues		$	51,797			$	29,292			$	94,361			$	55,906
Partnership management fees			143				131				244				242
Property operating income			748				923				2,553				1,361
Gain on sale of property and equipment			15,108				1				15,110				737
Partnership income			104				505				395				915
Interest and other			409				28				440				358
Total revenue			68,309				30,880				113,103				59,519
Expenses:
Lease operating expense			7,919				5,747				15,171				10,766
Production taxes			3,258				1,898				6,080				3,519
Re-engineering and workovers			1,020				709				1,792				1,103
Exploration expense			2				124				281				356
General and administrative expense			8,394				2,962				13,041				5,562
Depreciation, depletion and amortization			13,616				6,348				23,390				11,928
Hedge ineffectiveness			(164	)			(1,561	)			(98	)			641
Interest			760				452				1,169				1,038
Total expense			34,805				16,679				60,826				34,913
Income before income taxes			33,504				14,201				52,277				24,606
Income tax expense (benefit):
Current			2,124				641				219				798
Deferred			10,676				4,781				19,934				8,716
			12,800				5,422				20,153				9,514
Net income		$	20,704			$	8,779			$	32,124			$	15,092
Less: Net loss attributable to GeoResources, Inc.			—				(87	)			—				(87	)
Net income attributable to GeoResources, Inc.		$	20,704			$	8,866			$	32,124			$	15,179
Net income per share (basic)		$	0.81			$	0.35			$	1.25			$	0.61
Net income per share (diluted)		$	0.79			$	0.34			$	1.23			$	0.60
Weighted average shares outstanding:
Basic			25,633,832				25,460,622				25,622,254				24,778,182
Diluted			26,159,756				25,861,849				26,114,113				25,271,578

The accompanying notes are an integral part of these statements.

 

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GEORESOURCES, INC. and SUBSIDARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

		Three Months Ended June 30,
		2012				2011
Net income		$	20,704			$	8,779
Other comprehensive income, net of tax:
Changes in fair market value of hedged positions, net of taxes of $5,124 and $2,602, respectively			8,332				4,318
Net realized hedging (gain) loss charge to income, net of taxes of $608 and $666, respectively			(989	)			1,106
Total other comprehensive income, net of tax			7,343				5,424
Comprehensive Income			28,047				14,203
Comprehensive loss attributable to noncontrolling interest			—				(87	)
Comprehensive income attributable to GeoResources, Inc.		$	28,047			$	14,290
		Six Months Ended June 30,
		2012				2011
Net income		$	32,124			$	15,092
Other comprehensive income, net of tax:
Changes in fair market value of hedged positions, net of taxes of $3,780 and $484, respectively			6,146				(804	)
Net realized hedging (gain) loss charge to income, net of taxes of $586 and $944, respectively			(952	)			1,566
Total other comprehensive income, net of tax			5,194				762
Comprehensive Income			37,318				15,854
Comprehensive loss attributable to noncontrolling interest			—				(87	)
Comprehensive income attributable to GeoResources, Inc.		$	37,318			$	15,941

The accompanying notes are an integral part of these statements.

 

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GEORESOURCES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2012

(In thousands, except share data)

(unaudited)

 

		Common Stock								Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Total
		Shares				Par value
Balance, December 31, 2011			25,595,930			$	256			$	281,515			$	85,471			$	1,069			$	368,311
Exercise of employee stock options			39,062				—				431												431
Vesting of restricted stock			4,630				—				—												—
Excess tax benefit from share-based compensation											299												299
Net income															32,124								32,124
Other comprehensive income, net of taxes, $3,194																			5,194				5,194
Equity based compensation expense											2,428												2,428
Balance, June 30, 2012			25,639,622			$	256			$	284,673			$	117,595			$	6,263			$	408,787

The accompanying notes are an integral part of this statement.

 

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GEORESOURCES, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

		Six Months Ended June 30,
		2012				2011
Cash flows from operating activities:
Net income		$	32,124			$	15,092
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization			23,390				11,928
Gain on sale of property and equipment			(15,110	)			(737	)
Accretion of asset retirement obligations			226				224
Hedge ineffectiveness (gain) loss			(98	)			641
Partnership income			(395	)			(915	)
Partnership distributions			967				465
Deferred income taxes			19,934				8,716
Settlement of asset retirement liability			(41	)			—
Non-cash compensation			2,428				810
Excess tax benefit from share-based compensation			(299	)			(2,125	)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable			(17,419	)			(21,705	)
(Increase) decrease in prepaid expense and other			(432	)			(789	)
(Decrease) increase in accounts payable and accrued expense			23,258				26,777
Net cash provided by operating activities			68,533				38,382
Cash flows from investing activities:
Proceeds from sale of property and equipment			20,399				345
Additions to property and equipment			(168,517	)			(42,440	)
Net cash used in investing activities			(148,118	)			(42,095	)
Cash flows from financing activities:
Proceeds from stock options exercised			431				5,022
Issuance of common stock			—				122,486
Excess tax benefit from share-based compensation			299				2,125
Issuance of long-term debt			80,000				—
Reduction of long-term debt			—				(87,000	)
Net cash provided by financing activities			80,730				42,633
Net increase in cash and cash equivalents			1,145				38,920
Cash and cash equivalents at beginning of period			39,144				9,370
Cash and cash equivalents at end of period		$	40,289			$	48,290
Supplementary information:
Interest paid		$	753			$	485
Income taxes paid		$	16			$	627

The accompanying notes are an integral part of these statements.

 

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GEORESOURCES, INC. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE A: Organization and Basis of Presentation

Description of Operations

GeoResources, Inc. (“GeoResources” or the “Company”) operates a single business segment involved in the acquisition, development and production of, and exploration for, crude oil, natural gas and related products primarily in Texas, North Dakota, Louisiana, Oklahoma, Montana and Colorado. On July 31, 2012, the stockholders of GeoResources and Halcón Resources Corporation (“Halcón”) approved the merger of GeoResources into a subsidiary of Halcón. On August 1, 2012 Halcón acquired all of the issued and outstanding shares of common stock of the Company. See Note M “Subsequent Events” for discussion of the merger.

Consolidated Financial Statements

The unaudited consolidated financial statements include the accounts of GeoResources and its majority-owned subsidiaries. We consolidated our non-controlling interest in Trigon Energy Partners, LLC, a Delaware limited liability company (“Trigon”) until September 2011, at which time we deconsolidated the non-controlling interest due to a distribution of all of Trigon’s assets to Trigon’s owners. The financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying financial statements include all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly, in all material respects, the Company’s interim results. Our 2011 Annual Report on Form 10-K and 10-K/A includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated financial statements included in GeoResources’ 2011 Annual Report on Forms 10-K and 10-K/A. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year.

Earnings Per Share

Basic earnings per share is computed by dividing net income attributable to common shares by the basic weighted-average shares of common stock outstanding during the period. The calculation of diluted earnings per share is similar to basic, except the denominator includes the effect of dilutive common stock equivalents. Dilutive common stock equivalents consist of unvested restricted stock unit awards, warrants to purchase common stock, and outstanding stock options. The number of potential common shares outstanding relating to stock options, warrants to purchase common stock, and restricted stock units is computed using the treasury stock method. Net income per share computations reconciling basic and diluted net income for the three and six months ended June 30, 2012 and 2011 consist of the following (in thousands, except per share data):

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Numerator:
Net income attributable to GeoResources, Inc. common shares		$	20,704			$	8,866			$	32,124			$	15,179
Denominator:
Basic weighted average shares			25,634				25,461				25,622				24,778
Effect of dilutive securities - share-based compensation			478				401				471				494
Effect of dilutive securities - warrants to purchase common stock			48				—				21				—
Diluted weighted average shares			26,160				25,862				26,114				25,272
Earnings per share
Basic		$	0.81			$	0.35			$	1.25			$	0.61
Diluted		$	0.79			$	0.34			$	1.23			$	0.60

 

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For the three month period ended June 30, 2012, no options were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. For the three month period ended June 30, 2011, options to purchase approximately 21,000 shares of common stock were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. For the six month periods ended June 30, 2012 and 2011, options to purchase approximately 300 and 20,000 shares of common stock, respectively, were excluded from the dilutive earnings per share calculation because the effect would be anti-dilutive.

For the three month periods ended June 30, 2012 and 2011, approximately 400 and 13,000 restricted stock units, respectively, were excluded from the dilutive earnings per share calculation because their effect would be anti-dilutive. For the six month periods ended June 30, 2012 and 2011, approximately 575 and 13,000 restricted stock units, respectively, were excluded from the dilutive earnings per share calculation because their effect would be anti-dilutive.

For the three and six month periods ended June 30, 2012, no warrants to purchase shares of common stock were excluded from the dilutive earnings per share calculation because the warrants’ exercise price exceeded the average market price of the Company’s common shares during these periods. For the three and six month periods ended June 30, 2011, warrants to purchase 613,336 shares of common stock were excluded from the dilutive earnings per share calculation because the warrants’ exercise price exceeded the average market price of the Company’s common shares during these periods.

NOTE B: Acquisitions and Dispositions

In August 2011, the Company closed an acquisition of producing oil and gas properties located in the Austin Chalk trend of east Texas. The purchase price was $11 million plus closing adjustments for normal operating activities. The acquisition included approximately 3,700 net acres. For the three months ended June 30, 2012 these properties contributed $877,000 of revenue and $296,000 of net loss to the Company. For the six months ended June 30, 2012 these properties contributed $1.6 million of revenue and $178,000 of net income to the Company.

In December 2011, the Company sold approximately 1,800 net acres in Atacosa County, Texas for $4.6 million. For accounting purposes, the Company used the cost recovery method; under this method proceeds have been recorded in the balance sheet as a reduction to the carrying value of the unproved properties.

In January 2012, the Company closed an acquisition of unproved leasehold interest in McKenzie County, North Dakota. The Company’s net acquisition cost was $12.7 million and was funded with working capital and borrowings on its credit facility.

In February 2012, the Company closed an acquisition of producing wells and acreage in the Austin Chalk trend of east Texas in the Brookeland field area, Newton and Jasper Counties. The Company acquired varying working interests in 96 producing and productive wells across approximately 170,000 net acres. The Company’s net acquisition cost was $40.4 million, subject to closing adjustments for normal operating activity and other customary purchase price adjustments for the effective date of January 1, 2012,

 

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until closing. The acquisition was funded with borrowings on the Company’s credit facility. For the three months ended June 30, 2012 this acquisition contributed $3.9 million of revenue and $876,000 of net income to the Company. For the six months ended June 30, 2012 this acquisition contributed $4.4 million of revenue and $1.0 million of net income to the Company.

In June 2012, the Company sold a producing property located in Duval, Texas to an unaffiliated third party for $20.4 million. The Company recognized a gain of $15.1 million in conjunction with this sale.

NOTE C: Recently Issued Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities. The new standard requires an entity to disclose information about offsetting arrangements to enable financial statement users to understand the effect of netting arrangements on an entity’s financial position. The disclosures are required for recognized financial instruments and derivative instruments that are subject to offsetting under current accounting literature or are subject to master netting agreements irrespective of whether they are offset. The objective of the new disclosures is to facilitate comparison between entities that prepare financial statements on the basis of U.S. GAAP and entities that prepare financial statements under International Financial Reporting Standards (“IFRS”). The disclosure requirements will be effective for the periods beginning on or after January 1, 2013 and must be applied retrospectively to all periods presented on a balance sheet. The Company will adopt the requirements of ASU No. 2011-11 on January 1, 2013, which may require additional note disclosures for derivative instruments and is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income: Presentation of Comprehensive Income (“ASU 2011-05”), which provides amendments to FASB Topic 220, Comprehensive Income. The objective of ASU 2011-05 is to require an entity to present the total comprehensive income, the components of net income and the components of other comprehensive either in a single continuous statement of comprehensive income or in two separate statements but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. ASU 2011-05 was effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively. In December 2011, the FASB issued Accounting Standards Update No. 2011-12, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”), which defers the effective date of changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments in this update become effective at the same time as the amendments in ASU 2011-05. The Company adopted the provisions of ASU 2011-05 and 2011-12 effective January 1, 2012, which did not have an impact on its consolidated financial statements other than requiring the Company to present its statements of comprehensive income separately from its statements of equity, as these statements were previously presented on a combined basis.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which provides amendments to FASB ASC Topic 820, Fair Value Measurement. The objective of ASU 2011-04 is to create common fair value measurement and disclosure requirement between U.S. GAAP and IFRS. The amendments clarify existing fair value measurement and disclosure requirements and make changes to particular principles or requirements for measuring or disclosing information about fair value measurements. ASU 2011-04 was effective for interim and annual periods beginning after December 15, 2011. The Company adopted this standard effective January 1, 2012, which did not have an impact on the Company’s consolidated financial statements other than additional disclosures.

 

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NOTE D: Long-term Debt

On November 9, 2011, the Company entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”). The credit agreement provides for a credit facility for financing of up to $450 million for the Company. The borrowing base at June 30, 2012 was $210 million. The credit agreement provides for annual interest rates at (a) LIBOR plus 1.75% to 2.75% or (b) the prime rate plus 0.75% to 1.75%, depending on the amount borrowed. The credit agreement also requires the payment of commitment fees to the ledger on the unutilized commitment. The commitment rate is 0.375% per annum if less than 50% of the borrowing base is outstanding and 0.50% per annum if more than 50% of the borrowing base is outstanding. The Company is also required to pay customary letter of credit fees. All of the obligations under the credit facility, and guarantees of those obligations, are secured by substantially all of the Company’s assets.

The credit facility requires the maintenance of certain financial ratios, contains customary affirmative covenants, and provides for customary events of default. The Company was in compliance with all covenants at June 30, 2012.

The principal outstanding under the Company’s credit agreement was $80 million at June 30, 2012. The Company did not have any principal outstanding at December 31, 2011. The annual interest rate in effect at June 30, 2012 was 2.35% on the entire outstanding principal. Upon the closing of the merger discussed in Note M “Subsequent Event”, Halcón paid the outstanding balance under the credit facility in full. Once the balance was paid, the credit facility was terminated.

Interest expense for the three months ended June 30, 2012 and 2011 includes amortization of deferred financing costs of $128,000 and $269,000, respectively. Interest expense for the six months ended June 30, 2012 and 2011 includes amortization of deferred financing costs of $256,000 and $533,000, respectively.

NOTE E: Stock Options, Performance Awards and Stock Warrants

In June 2011, the shareholders of the Company approved amendments to the GeoResources, Inc., Amended and Restated 2004 Employees’ Stock Incentive Plan (the “Plan”), which authorizes the issuance of options and other stock-based incentives to officers, employees, directors and consultants of the Company to acquire up to 3,250,000 shares of the Company’s common stock at prices which may not be less than the stock’s fair market value on the date of grant. The options can be designated as either incentive options or nonqualified options. The plan also allows the issuance of performance units, including restricted stock units.

 

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A summary of the Company’s stock option activity for the six months ended June 30, 2012 is as follows:

 

		Number of Shares				Weighted Average Exercise Price				Weighted Average Fair Value				Weighted Average Remaining Contractual Life (year)				Aggregate Intrinsic Value
Outstanding, December 31, 2011			781,486			$	10.88			$	4.42				6.93			$	14,402,787
Granted			—
Exercised			(39,062	)		$	11.03			$	4.05
Canceled/forfeited			—
Outstanding, June 30, 2012			742,424			$	10.87			$	4.44				6.43			$	19,107,332
Vested and exercisable			521,174			$	9.96			$	3.71				6.11			$	13,891,432
Vested and expected to vest			740,428			$	10.86			$	4.44				6.43			$	19,066,272

During the six months ended June 30, 2012, 172,500 options vested with a weighted average exercise price of $11.08. The weighted average grant date fair value of these options was $5.22 per option. At June 30, 2012, there were 221,250 unvested options, in respect of 221,250 shares of the Company’s common stock, with a weighted average remaining amortization period of 1.51 years.

The Company recognizes compensation expense by first calculating the fair value of the options at the date of grant determined by the Black-Scholes option pricing model. The Company then amortizes the value of these options as compensation expense on a straight line basis over the vesting period of the options. For the three month periods ended June 30, 2012 and 2011 the Company recognized compensation expense of $233,000 and $273,000, respectively, related to these options. For the six month periods ended June 30, 2012 and 2011, the Company recognized compensation expense of $450,000 and $562,000, respectively, related to these options. As of June 30, 2012, the future un-amortized pre-tax compensation expense associated with non-vested stock options totaled $1.0 million to be recognized through the second quarter of 2015.

In addition to the stock options discussed above the Company has granted certain officers, employees and directors restricted stock unit awards. Each restricted stock unit represent a contingent right to receive one share of the Company’s common stock upon vesting. Compensation expense, determined by multiplying the number of restricted stock units granted by the closing market price of the Company’s common stock on the grant date, is recognized over the respective vesting periods on a straight-line basis. For the three months ended June 30, 2012 and 2011, compensation expense related to restricted stock units was $1.0 million and $248,000, respectively. For the six month periods ended June 30, 2012 and 2011, compensation expense related to restricted stock units was $2.0 million and $248,000, respectively. The Company has an assumed forfeiture rate of 1% on restricted stock issued. As of June 30, 2012, the future unamortized pre-tax compensation expense associated with unvested restricted stock units totaled approximately $10.4 million to be recognized through June 2015. The weighted average vesting period related to unvested restricted stock units at June 30, 2012 was approximately 2.34 years. A summary of the Company’s restricted stock unit activity for the six months ended June 30, 2012 is as follows:

 

		Units				Fair  Value(1)
Outstanding, December 31, 2011			197,050			$	27.72
Granted			257,970			$	31.58
Vested(2)			(66,930	)		$	28.62
Forfeited			—				—
Outstanding, June 30, 2012			388,090			$	30.13

 

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(1)	Represents the weighted average grant date market value.

(2)

During the three month period ended March 31, 2012, 4,630 restricted stock units vested. On March 31, 2012, one share of common stock was issued for each restricted stock unit that vested during the first quarter. During the second quarter of 2012, 62,300 restricted stock units vested and on July 2, 2012, 48,964 shares of common stock were issued as a result of this vesting. Employees relinquished their rights to the remaining 13,336 restricted stock units in exchange for the Company satisfying the employees’ tax liability related to the issuance of the 48,964 shares of common stock.

The Company has outstanding warrants to purchase 613,336 shares of common stock at June 30, 2012. The warrants, which were acquired by non-affiliated accredited investors pursuant to exemptions from registration under the federal and state securities laws on June 5, 2008 have an exercise price of $32.43 and have a remaining life of 11 months at June 30, 2012.

The merger with Halcón, which is discussed in Note M “Subsequent Event”, constituted a change in control as defined in the Plan. The change in control triggered the vesting of all unvested options and restricted stock units as of August 1, 2012. In addition, Halcón assumed the outstanding warrants of the Company.

NOTE F: Income Taxes

Deferred income taxes are recorded to account for the tax effects associated with temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax purposes, as required by current accounting standards. The deferred tax amounts are measured using the enacted tax rates applicable to periods when these differences are expected to reverse.

Uncertain Tax Positions

The Company will consider a tax position settled if the taxing authority has completed its examinations, the Company does not plan to appeal the tax authority ruling, and the Company deems the possibility that the taxing authority will reexamine the tax position in the future as remote. For uncertain tax issues, the Company uses the benefit recognition model which contains a two-step approach, a more-likely-than-not recognition criteria and a measurement attribute that measures the position as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. If it is not more likely than not that the benefit will be sustained on its technical merits, no benefit will be recorded. The amount of interest expense recognized by the Company related to uncertain tax positions is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously taken or expected to be taken in a tax return.

At June 30, 2012, the Company did not have any uncertain tax positions that would require recognition. The Company’s uncertain tax positions may change in the next twelve months; however, the Company does not expect any possible change to have a significant impact on its results of operations or financial position as of June 30, 2012.

The Company files a consolidated federal income tax return and various combined and separate filings in several state and local jurisdictions. The Company’s 2010 income tax return is currently under examination by the Internal Revenue Service (“IRS”). We do not expect the outcome of the examination to have a material adverse effect on Company’s financial position, results of operations or cash flows.

It is also the Company’s practice to recognize estimated interest and penalties, if any, related to potential underpayment of income taxes as a component of income tax expense in its Consolidated Statements of Income. As of June 30, 2012, the Company did not have any accrued interest or penalties associated with any unrecognized tax liabilities. The Company does not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits and the expiration of statutes of limitations prior to June 30, 2013.

NOTE G: Derivative Financial Instruments

The Company enters into various crude oil and natural gas hedging contracts, primarily costless collars and swaps, in an effort to manage its exposure to product price volatility. Historically, prices received for oil and gas production have been volatile because of seasonal weather patterns, supply and demand factors, worldwide political factors and general economic conditions. Costless collars are designed to establish floor and ceiling prices on anticipated future oil and gas production. Swaps are designed so

 

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that the Company receives or makes payments based on a differential between fixed and variable prices for crude oil and natural gas. The Company has designated its commodity derivative contracts as cash flow hedges designed to achieve more predictable cash flows, as well as to reduce its exposure to price volatility. While the use of derivative instruments limits the downside risk of adverse price movements, they may also limit future revenues from favorable price movements.

At June 30, 2012, accumulated other comprehensive income consisted of unrecognized gains of $6.3 million, net of taxes of $3.8 million, representing the inception to date change in mark-to-market value of the effective portion of the Company’s open commodity contracts, designated as cash flow hedges. At December 31, 2011, accumulated other comprehensive income consisted of unrecognized gains of $1.1 million, net of taxes of $658,000. Based on the estimated fair market value of the Company’s derivative contracts designated as hedges at June 30, 2012, the Company expects to reclassify net gains of $8.3 million into earnings from accumulated other comprehensive income during the next twelve months; however, actual cash settlement gains and losses recognized may differ materially.

 

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At June 30, 2012, the Company had hedged its exposure to the variability in future cash flows from forecasted oil and gas production volumes as follows:

 

		Total Remaining Volume				Floor Price				Ceiling / Swap Price
Crude Oil Contracts (Bbls):
Swap contracts:
2012			60,000							$	86.85
2012			60,000							$	87.22
2012			30,000							$	99.55
2012			60,000							$	103.95
2012			30,000							$	105.00
2012			30,000							$	107.30
2012			60,000							$	108.45
2013			60,000							$	97.60
2013			60,000							$	100.70
2013			120,000							$	101.85
2013			120,000							$	105.55
Costless collar contracts
2012			60,000			$	85.00			$	110.00
Natural Gas Contracts (Mmbtu)
Swap contracts
2012			120,000							$	2.925
2012			450,000							$	4.850
2012			300,000							$	6.415
2013			240,000							$	3.560
2013			225,000							$	4.850

All derivative instruments are recorded on the consolidated balance sheet at fair value. The following table summarizes the location and fair value amounts of all derivative instruments in the consolidated balance sheets (in thousands):

 

Derivatives designated as ASC 815 hedges:		Asset Derivatives										Liability Derivatives
		Balance Sheet Location		Fair Value								Balance Sheet Location		Fair Value
				Jun. 30, 2012				Dec. 31, 2011						Jun. 30, 2012				Dec. 31, 2011
Commodity contracts		Current derivative financial instruments asset		$	8,311			$	4,037			Current derivative financial instruments liability		$	—			$	(2,890	)
Commodity contracts		Long-term derivative financial instruments asset			2,189				868			Long-term derivative financial instruments liability			—				—
				$	10,500			$	4,905					$	—			$	(2,890	)

 

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Commodity derivative contracts – The following table summarizes the effects of commodity derivative instruments on the consolidated statements of income for the three months ended June 30, 2012 and 2011 (in thousands):

 

Derivatives designated as ASC 815 hedges:		Amount of Gain or (Loss) Recognized in OCI on Derivative  (Effective Portion)								Location of Gain or (Loss) Reclassified from OCI into Income (Effective Portion)		Amount of Gain or (Loss) Reclassified from OCI into Income  (Effective Portion)
		Jun. 30, 2012				Jun. 30, 2011						Jun. 30, 2012				Jun. 30, 2011
Commodity contracts		$	13,456			$	6,920			Oil and gas revenues		$	1,597			$	(1,772	)
		$	13,456			$	6,920					$	1,597			$	(1,772	)

 

		Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)		Amount of Gain Recognized in Income on Derivative (Ineffective Portion)
				Jun. 30, 2012				Jun. 30, 2011
Derivatives in ASC 815 Cash Flow Hedging Relationships:
Commodity contracts		Hedge ineffectiveness		$	164			$	1,561

The following table summarizes the effects of commodity derivative instruments on the consolidated statements of income for the six months ended June 30, 2012 and 2011 (in thousands):

 

Derivatives designated as ASC 815 hedges:		Amount of Gain or (Loss) Recognized in OCI on Derivative  (Effective Portion)								Location of Gain or (Loss) Reclassified from OCI into Income (Effective Portion)		Amount of Gain or (Loss) Reclassified from OCI into Income  (Effective Portion)
		Jun. 30, 2012				Jun. 30, 2011						Jun. 30, 2012				Jun. 30, 2011
Commodity contracts		$	9,926			$	(1,288	)		Oil and gas revenues		$	1,538			$	(2,510	)
		$	9,926			$	(1,288	)				$	1,538			$	(2,510	)

 

Derivatives in ASC 815 Cash Flow Hedging Relationships:		Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)		Amount of Gain or (Loss) Recognized in Income  on Derivative (Ineffective Portion)
				Jun. 30, 2012				Jun. 30, 2011
Commodity contracts		Hedge ineffectiveness		$	98			$	(641	)

Contingent features in derivative instruments – None of the Company’s derivative instruments contain credit-risk-related contingent features. Counterparties to the Company’s derivative contracts are high credit quality financial institutions that are lenders under the Company’s credit facility. The Company uses its credit facility participants to hedge with, since these institutions are secured equally with the holders of the Company’s debt, which eliminates the potential need to post collateral when the Company is in a large derivative liability position. As a result, the Company is not required to post letters of credit or corporate guarantees for its derivative counterparties in order to secure contract performance obligations.

 

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NOTE H: Fair Value Disclosures

ASC Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.

ASC Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:

 

•

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

•

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

•

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of the 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 in its entirety requires judgment and considers factors specific to the asset or liability.

Cash, Cash Equivalents, Accounts Receivable and Payable and Royalties Payable – The carrying amount of cash and cash equivalents, accounts receivable and payable and royalties payable are estimated to approximate their fair values due to the short maturities of these instruments.

Long-term Debt – The Company’s long-term debt obligation under its current credit facility at June 30, 2012 bears interest at floating market rates, so carrying amounts and fair values are approximately equal.

Derivative Financial Instruments – Derivative financial instruments are carried at fair value. Commodity derivative instruments consist of costless collars and swaps for crude oil and natural gas. The Company’s costless collar is valued based on the counterparty’s marked-to-market statements, which are validated by observable transactions for the same or similar commodity options using the NYMEX futures index, and is designated as Level 2 within the valuation hierarchy. The Company’s swaps are valued based on a discounted future cash flow model. The primary input for the model is the NYMEX futures index. The Company’s model is validated by the counterparty’s marked-to-market statements. The swaps are also designated as Level 2 within the valuation hierarchy. The discount rate used in determining the fair values of these instruments includes a measure of nonperformance risk.

The table below presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

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Fair Value of Financial Assets and Liabilities - June 30, 2012

(in thousands)

 

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Balances as of June 30, 2012
Current portion of derivative financial instrument asset (1)			—			$	8,311			$	—			$	8,311
Long-term portion of derivative financial instrument asset (1)			—				2,189				—				2,189

 

(1)	Commodity derivative instruments accounted for as cash flow hedges.

Fair Value of Financial Assets and Liabilities - December 31, 2011

(in thousands)

 

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Balances as of December 31, 2011
Current portion of derivative financial instrument asset (1)			—			$	4,037				—			$	4,037
Long-term portion of derivative financial instrument asset (1)			—				868				—				868
Current portion of derivative financial instrument liability (1)			—				(2,890	)			—				(2,890	)

 

(1)	Commodity derivative instruments accounted for as cash flow hedges.

At June 30, 2012, and December 31, 2011, the Company did not have any assets or liabilities measured at fair value on a recurring basis that meet the definition of Level 1 or Level 3. Also, there were no transfers between Level 1, Level 2 or Level 3 as of June 30, 2012 and December 31, 2011.

Asset Impairments – The Company reviews proved oil and gas properties for impairment quarterly and when events and circumstances indicate a significant decline in the recoverability of the carrying value of such properties. When events and circumstances indicate a significant decline in the recoverability of a property, the Company estimates the future cash flows expected in connection with the property and compares such future cash flows to the carrying value of the property to determine if the carrying amount is recoverable. If the carrying amount of the property exceeds its estimated undiscounted

 

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future cash flows, the carrying amount of the property is reduced to its estimated fair value. Fair value may be estimated using comparable market data, a discounted cash flow method, or a combination of the two. In the discounted cash flow method, estimated future cash flows are based on management’s expectations for the future and include significant Level 3 assumptions associated with estimates of future oil and gas production, commodity prices based on commodity futures price curves as of the date of the estimate, operating and development costs, and a risk-adjusted discount rate. The Company did not record any asset impairment during the three or six month periods ended June 30, 2012 or 2011.

Asset Retirement Obligations – The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. Significant Level 3 inputs used in the calculation of asset retirement obligations include estimates of plugging costs and estimates of reserve lives. The estimated plugging costs per well and reserve lives vary significantly depending on the nature and location of the well. Significant increases or decreases in the plugging costs and/or reserve lives would result in a significant change to the fair value measurement. A reconciliation of the Company’s asset retirement obligation is presented in Note J.

Property Acquisitions and Business Combinations – The Company records the identifiable assets acquired, liabilities assumed and any non-controlling interests at fair value at the date of acquisition. Fair value may be estimated using comparable market data, a discounted cash flow method, or a combination of the two. In the discounted cash flow method, estimated future cash flows are based on management’s expectations for the future and include estimates of future oil and gas production, commodity prices based on commodity futures price curves as of the date of the estimate, operating and development costs, and a risk-adjusted discount rate. Significant Level 3 assumptions associated with the calculation of discounted cash flows used in the determination of fair value of the acquisition include the Company’s estimate of future natural gas and crude oil prices, operating and development costs, anticipated production of proved reserves, appropriate risk-adjusted discount rates and other relevant data. The Company’s acquisitions are discussed in Note B.

NOTE I: Public Offering of Common Stock

On January 19, 2011, the Company closed a public offering of 5,175,000 shares of common stock issued by the Company (including 675,000 shares of over allotment granted to underwriters) and 989,000 shares sold by certain selling shareholders in a public offering, at a price of $25.00 per share. The net proceeds for the shares sold by the Company were approximately $122.5 million after deducting the underwriters’ discount and other offering expenses of $6.9 million.

NOTE J: Asset Retirement Obligations

The Company’s asset retirement obligations represent the estimated future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage and land restoration, in accordance with applicable local, state and federal laws. The Company determines its obligation by calculating the present value of estimated cash flows related to plugging and abandonment obligations. The changes to the Asset Retirement Obligations (“ARO”) for oil and gas properties and related equipment during the six months ended June 30, 2012, are as follows (in thousands):

 

Asset retirement obligation, January 1, 2012		$	7,940
Accretion expense			226
Additional liabilities incurred			1,611
Settlement of liabilities			(41	)
Disposals of property			(149	)
Asset retirement obligation, June 30, 2012		$	9,587

 

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NOTE K: Related Party Transactions

Accounts receivable at June 30, 2012, and December 31, 2011, includes $446,000 and $258,000, respectively, due from SBE Partners LP (“SBE Partners”). Accounts receivable at June 30, 2012 and December 31, 2011, also includes $135,000 and $113,000, respectively, due from OKLA Energy Partners LP (“OKLA Energy”). Both of these partnerships are oil and gas limited partnerships for which a subsidiary of the Company serves as general partner. These amounts represent the limited partnerships’ share of property operating expenditures incurred by operating subsidiaries of the Company on their behalf, as well as accrued management fees. Accounts payable at June 30, 2012, and December 31, 2011, includes $1.5 million and $2.8 million, respectively, due to the SBE Partners for oil and gas revenues collected on its behalf. Accounts payable at June 30, 2012, and December 31, 2011, also includes $189,000 and $817,000, respectively, due to OKLA Energy for oil and gas revenues collected on its behalf.

Subsidiaries of the Company operate the majority of the oil and gas properties in which the two limited partnerships have an interest. Under this arrangement, the Company collects revenues from purchasers and incurs property operating and development expenditures on behalf of the limited partnerships. These revenues are paid monthly to each limited partnership, which in turn reimburse the Company for the limited partnership’s share of expenditures. The Company earned management fees during the three months ended June 30, 2012 and 2011 of $143,000, and $131,000 respectively. The Company earned management fees during the six months ended June 30, 2012 and 2011, of $244,000 and $242,000, respectively.

NOTE L: Equity Investments

The Company holds investments, in the form of general partnership interests, in two affiliated partnerships, SBE Partners and OKLA Energy. The Company accounts for these investments using the equity method of accounting. Under this accounting method the Company records its net share of income and expenses in the Partnership Income line item of its Consolidated Statement of Income. Contributions to the investment increase the Company’s investment while distributions from the investment decrease the Company’s carrying value of the investment.

OKLA Energy, formed during 2008, holds direct working interests in producing oil and gas properties located throughout Oklahoma. The Company’s 2% general partner interest reverts to 35.66% when the limited partner realizes a contractually specified rate of return. The Company recorded losses in partnership income related to this investment of $2,100 and gains of $10,000, respectively for the three month periods ended June 30, 2012 and 2011. For the six month periods ended June 30, 2012 and 2011 the Company recorded gain in partnership income of $900 and $9,000, respectively.

SBE Partners, formed during 2007, holds direct working interests in producing oil and gas properties located in Giddings field, Texas. The Company holds a general partnership interest of approximately 30%. The Company recorded gains in partnership income related to this investment of $106,000 and $495,000, respectively for the three month periods ended June 30, 2012 and 2011. For the six month periods ended June 30, 2012 and 2011 the Company recorded gain in partnership income of $394,000 and $906,000, respectively.

The Company’s carrying value for its equity investment in OKLA Energy at June 30, 2012 and December 31, 2011, was $629,000 and $646,000, respectively. The Company’s carrying value for its equity investment in SBE Partners at June 30, 2012 and December 31, 2011 was $1.0 million and $1.6 million, respectively.

 

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NOTE M: Subsequent Events

On July 31, 2012, the stockholders of the GeoResources and Halcón Resources Corporation (“Halcón”) approved the merger of GeoResources into a subsidiary of Halcón. The closing of the transaction occurred on August 1, 2012 and the Company’s stockholders received $20 in cash and 1.932 shares of Halcón’s common stock for each share of the Company’s common stock. The cash consideration aggregated approximately $531.5 million, and Halcón issued approximately 51.3 million shares of common stock to the stockholders of the Company. In addition, Halcón assumed outstanding warrants of the Company providing for the issuance of 1,184,966 shares of Halcón’s common stock upon exercise. Upon the closing of the merger, Halcón paid the outstanding balance under our credit facility with Wells Fargo Bank, N.A. in full. Once the balance was paid, the credit facility was terminated.

On July 16, 2012, a settlement agreement was entered into, subject to the court’s approval, regarding the settlement of the action styled Yost v. GeoResources, Inc. et al., Case No. 1:12-CV-01307-MSK-KMT, pending in the United States District Court for the District of Colorado (the “Federal Action”), which was filed on behalf of a putative class of GeoResources stockholders against GeoResources, the GeoResources board of directors and, in certain instances, Halcón and certain subsidiaries of Halcón as aiders and abettors. Pursuant to such settlement, Halcón and GeoResources agreed to make certain supplemental disclosures regarding the merger and to provide additional disclosures to their stockholders, which disclosures were included in a Form 8-K filed with the U.S. Securities and Exchange Commission on July 18, 2012. Objections to the settlement agreement are scheduled to be submitted on August 15, 2012 to the federal court in Colorado and a hearing on the settlement agreement is expected to be scheduled at a later date.

 

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