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EX-10.2 - EXHIBIT 10.2 - MAGNUM HUNTER RESOURCES CORPmhr-2015930xex102.htm
EX-10.3 - EXHIBIT 10.3 - MAGNUM HUNTER RESOURCES CORPmhr-2015930xex103.htm
EX-31.2 - EXHIBIT 31.2 - MAGNUM HUNTER RESOURCES CORPmhr-2015930xex312.htm
EX-31.1 - EXHIBIT 31.1 - MAGNUM HUNTER RESOURCES CORPmhr-2015930xex311.htm
EX-32 - EXHIBIT 32 - MAGNUM HUNTER RESOURCES CORPmhr-2015930xex32.htm
EX-12.1 - EXHIBIT 12.1 - MAGNUM HUNTER RESOURCES CORPmhr-2015930xex121.htm
 
FORM 10-Q
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
x      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015 
-OR-
o         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to               
 
Commission file number 001-32997
 
MAGNUM HUNTER RESOURCES CORPORATION
(Name of registrant as specified in its charter)
 

Delaware
 
86-0879278
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
909 Lake Carolyn Parkway, Suite 600, Irving, Texas 75039
(Address of principal executive offices) (Zip Code)
 
(832) 369-6986
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding twelve months, 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 (as defined in Rule 12b-2 of the Act):
 

Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 6, 2015, there were 260,743,281 shares of the registrant's common stock ($0.01 par value) outstanding.
 




QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2015
 
TABLE OF CONTENTS
 
 
Page
 
 
PART I. FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements (unaudited):
 
 
 
Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014
 
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015 and 2014
 
 
Consolidated Statement of Shareholders' Equity for the Nine Months Ended September 30, 2015
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per-share data)
(unaudited)
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
CURRENT ASSETS
 

 
 

Cash and cash equivalents
$
6,463

 
$
53,180

Accounts receivable:
 
 
 
Oil and natural gas sales
16,041

 
21,514

Joint interests and other, net of allowance for doubtful accounts of $567 at September 30, 2015 and $308 at December 31, 2014
8,524

 
23,888

Derivative assets
1,054

 
16,586

Inventory
2,554

 
2,268

Investments
968

 
3,864

Prepaid expenses and other assets
4,056

 
4,091

Total current assets
39,660

 
125,391

 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
 

 
 

Oil and natural gas properties, successful efforts method of accounting, net
979,147

 
1,098,235

Gas transportation, gathering and processing equipment and other, net
74,417

 
77,423

Total property, plant and equipment, net
1,053,564

 
1,175,658

 
 
 
 
OTHER ASSETS
 

 
 

Deferred financing costs, net of amortization of $17,568 at September 30, 2015 and $15,099 at December 31, 2014
19,765

 
22,856

Other assets
419

 
3,928

Assets of discontinued operations
343,307

 
347,191

Total assets
$
1,456,715

 
$
1,675,024


The accompanying Notes to the Consolidated Financial Statements are an integral part of these unaudited financial statements.

1



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares and per-share data)
(unaudited)
 
September 30,
2015
 
December 31,
2014
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 

CURRENT LIABILITIES
 

 
 

Current portion of long-term debt
$
939,679

 
$
10,770

Accounts payable
83,603

 
135,697

Accounts payable to related parties
11,234

 
90

Accrued liabilities
35,004

 
20,277

Revenue payable
4,357

 
5,450

Derivative liabilities
569

 

Other liabilities
2,413

 
1,356

Total current liabilities
1,076,859

 
173,640

 
 
 
 
Long-term debt, net of current portion
8,300

 
937,963

Asset retirement obligations, net of current portion
26,451

 
26,229

Other long-term liabilities
5,415

 
5,337

Total liabilities
1,117,025

 
1,143,169

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 15)


 


 
 
 
 
REDEEMABLE PREFERRED STOCK
 

 
 

Series C Cumulative Perpetual Preferred Stock ("Series C Preferred Stock"), cumulative dividend rate 10.25% per annum, 4,000,000 authorized, 4,000,000 issued and outstanding as of September 30, 2015 and December 31, 2014, with a liquidation preference of $25.00 per share
100,000

 
100,000

 
 
 
 
SHAREHOLDERS' EQUITY
 

 
 

Preferred stock, 10,000,000 shares authorized, including authorized shares of Series C Preferred Stock
 
 
 
Series D Cumulative Preferred Stock ("Series D Preferred Stock"), cumulative dividend rate 8.0% per annum, 5,750,000 authorized, 4,424,889 issued and outstanding as of September 30, 2015 and December 31, 2014, with a liquidation preference of $50.00 per share
221,244

 
221,244

Series E Cumulative Convertible Preferred Stock ("Series E Preferred Stock"), cumulative dividend rate 8.0% per annum, 12,000 authorized, 3,803 issued and 3,722 outstanding as of September 30, 2015 and December 31, 2014, with a liquidation preference of $25,000 per share
95,069

 
95,069

Common stock, $0.01 par value per share, 350,000,000 shares authorized, and 261,269,008 and 201,420,701 issued, and 260,354,056 and 200,505,749 outstanding as of September 30, 2015 and December 31, 2014, respectively
2,613

 
2,014

Additional paid in capital
975,534

 
909,783

Accumulated deficit
(1,051,865
)
 
(784,546
)
Accumulated other comprehensive income (loss)
1,039

 
(7,765
)
Treasury stock, at cost:
 
 
 
Series E Preferred Stock, 81 shares as of September 30, 2015 and December 31, 2014
(2,030
)
 
(2,030
)
Common stock, 914,952 shares as of September 30, 2015 and December 31, 2014
(1,914
)
 
(1,914
)
Total shareholders' equity
239,690

 
431,855

Total liabilities and shareholders' equity
$
1,456,715

 
$
1,675,024


The accompanying Notes to the Consolidated Financial Statements are an integral part of these unaudited financial statements.

2



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per-share data)
(unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
REVENUES AND OTHER
 
 
 
 
 
 
 
Oil and natural gas sales
$
27,852

 
$
62,510

 
$
110,661

 
$
222,247

Midstream natural gas gathering, processing, and marketing
161

 
1,180

 
1,091

 
66,937

Oilfield services
5,294

 
5,986

 
15,552

 
17,561

Other revenue
357

 
881

 
1,282

 
1,330

     Total revenue
33,664

 
70,557

 
128,586

 
308,075

OPERATING EXPENSES
 
 
 
 
 
 
 
Production costs
11,130

 
10,994

 
34,286

 
34,236

Severance taxes and marketing
1,588

 
5,396

 
6,170

 
16,100

Transportation, processing, and other related costs
17,536

 
14,255

 
48,498

 
33,123

Exploration
4,358

 
27,284

 
14,327

 
52,394

Impairment of proved oil and gas properties
49,842

 
22,886

 
63,791

 
39,798

Midstream natural gas gathering, processing, and marketing
52

 
941

 
730

 
66,373

Oilfield services
3,264

 
3,856

 
12,153

 
11,892

Depletion, depreciation, amortization and accretion
23,378

 
32,147

 
103,441

 
89,903

Gain on sale of assets, net
(2,892
)
 
(7,988
)
 
(31,288
)
 
(4,600
)
General and administrative
10,060

 
16,851

 
34,089

 
49,621

     Total operating expenses
118,316

 
126,622

 
286,197

 
388,840

OPERATING LOSS
(84,652
)
 
(56,065
)
 
(157,611
)
 
(80,765
)
OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest income
34

 
40

 
132

 
126

Interest expense
(25,031
)
 
(17,936
)
 
(72,598
)
 
(55,827
)
Gain (loss) on derivative contracts, net
568

 
8,262

 
3,345

 
(333
)
Loss from equity method investments
(176
)
 
(79
)
 
(494
)
 
(436
)
Other income (expense)
(1,913
)
 
2,179

 
(9,666
)
 
2,606

     Total other expense, net
(26,518
)
 
(7,534
)
 
(79,281
)
 
(53,864
)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX
(111,170
)
 
(63,599
)
 
(236,892
)
 
(134,629
)
Income tax benefit

 

 

 

LOSS FROM CONTINUING OPERATIONS, NET OF TAX
(111,170
)
 
(63,599
)
 
(236,892
)
 
(134,629
)
Gain on dilution of interest in Eureka Hunter Holdings, LLC, net of tax
2,211

 

 
4,601

 

Loss from discontinued operations, net of tax
(4,222
)
 
(59,590
)
 
(8,485
)
 
(101,963
)
Loss on disposal of discontinued operations, net of tax

 
(258
)
 

 
(13,983
)
NET LOSS
(113,181
)
 
(123,447
)
 
(240,776
)
 
(250,575
)
Net loss attributed to non-controlling interests

 
2,764

 

 
3,653

LOSS ATTRIBUTABLE TO MAGNUM HUNTER RESOURCES CORPORATION
(113,181
)
 
(120,683
)
 
(240,776
)
 
(246,922
)
Dividends on preferred stock
(8,848
)
 
(8,848
)
 
(26,543
)
 
(26,516
)
Dividends on preferred stock of discontinued operations

 
(6,644
)
 

 
(19,202
)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
(122,029
)
 
$
(136,175
)
 
$
(267,319
)
 
$
(292,640
)
Weighted average number of common shares outstanding, basic and diluted
231,742,785

 
199,448,453

 
213,692,427

 
185,440,763

Loss from continuing operations per share, basic and diluted
$
(0.52
)
 
$
(0.35
)
 
$
(1.23
)
 
$
(0.85
)
Income (loss) from discontinued operations per share, basic and diluted
(0.01
)
 
(0.33
)
 
(0.02
)
 
(0.73
)
NET LOSS PER COMMON SHARE, BASIC AND DILUTED
$
(0.53
)
 
$
(0.68
)
 
$
(1.25
)
 
$
(1.58
)
 
 
 
 
 
 
 
 
AMOUNTS ATTRIBUTABLE TO MAGNUM HUNTER RESOURCES CORPORATION
 
 
 
 
 
 
 
Loss from continuing operations, net of tax
$
(111,170
)
 
$
(60,835
)
 
$
(236,892
)
 
$
(130,976
)
Income (loss) from discontinued operations, net of tax
(2,011
)
 
(59,848
)
 
(3,884
)
 
(115,946
)
Net loss
$
(113,181
)
 
$
(120,683
)
 
$
(240,776
)
 
$
(246,922
)

The accompanying Notes to the Consolidated Financial Statements are an integral part of these unaudited financial statements.

3



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
NET LOSS
$
(113,181
)
 
$
(123,447
)
 
$
(240,776
)
 
$
(250,575
)
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
(2
)
 

 
100

 
(1,218
)
Unrealized loss on available for sale securities
(1,304
)
 
(2,583
)
 
(2,403
)
 
(3,188
)
Amounts reclassified for other than temporary impairment of available for sale securities
2,115

 

 
11,107

 

Amounts reclassified from accumulated other comprehensive income upon sale of Williston Hunter Canada, Inc.

 

 

 
20,741

Total other comprehensive income
809

 
(2,583
)
 
8,804

 
16,335

COMPREHENSIVE LOSS
(112,372
)
 
(126,030
)
 
(231,972
)
 
(234,240
)
Comprehensive loss attributable to non-controlling interests

 
2,764

 

 
3,653

COMPREHENSIVE LOSS ATTRIBUTABLE TO MAGNUM HUNTER RESOURCES CORPORATION
$
(112,372
)
 
$
(123,266
)
 
$
(231,972
)
 
$
(230,587
)
 
The accompanying Notes to the Consolidated Financial Statements are an integral part of these unaudited financial statements.

4



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
(in thousands)
 
 
Number of Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series D
Preferred Stock
 
Series E
Preferred Stock
 
Common Stock
 
Series D
Preferred Stock
 
Series E
Preferred Stock
 
Common
Stock
 
Additional
Paid in
Capital
 
Accumulated
Deficit
 
Accumulated Other
Comprehensive
Income (loss)
 
Treasury
Stock
 
Total
Shareholders'
Equity
BALANCE, January 1, 2015
4,425

 
4

 
201,421

 
$
221,244

 
$
95,069

 
$
2,014

 
$
909,783

 
$
(784,546
)
 
$
(7,765
)
 
$
(3,944
)
 
$
431,855

Share-based compensation

 

 
1,360

 

 

 
14

 
6,478

 

 

 

 
6,492

Shares withheld for taxes

 

 
(105
)
 

 

 
(1
)
 
(310
)
 

 

 

 
(311
)
Shares of common stock issued for payment of 401k plan matching contribution

 

 
2,291

 

 

 
23

 
1,855

 

 

 

 
1,878

Sale of common stock

 

 
56,202

 

 

 
562

 
57,678

 

 

 

 
58,240

Dividends on preferred stock

 

 

 

 

 

 

 
(26,543
)
 

 

 
(26,543
)
Shares of common stock issued upon exercise of common stock options

 

 
100

 

 

 
1

 
50

 

 

 

 
51

Net loss

 

 

 

 

 

 

 
(240,776
)
 

 

 
(240,776
)
Foreign currency translation

 

 

 

 

 

 

 

 
100

 

 
100

Unrealized loss on available for sale securities, net

 

 

 

 

 

 

 

 
(2,403
)
 

 
(2,403
)
Amounts reclassified from accumulated other comprehensive income for other than temporary impairment of available for sale securities

 

 

 

 

 

 

 

 
11,107

 

 
11,107

BALANCE, September 30, 2015
4,425

 
4

 
261,269

 
$
221,244

 
$
95,069

 
$
2,613

 
$
975,534

 
$
(1,051,865
)
 
$
1,039

 
$
(3,944
)
 
$
239,690


The accompanying Notes to the Consolidated Financial Statements are an integral part of these unaudited financial statements.

5



MAGNUM HUNTER RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Nine Months Ended September 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(240,776
)
 
$
(250,575
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depletion, depreciation, amortization and accretion
103,441

 
101,733

Exploration
12,579

 
51,306

Impairment of proved oil and gas properties
63,791

 
39,798

Impairment of other assets
11,107

 
666

Share-based compensation
8,059

 
7,267

Cash paid for plugging wells
(136
)
 
(26
)
Loss (gain) on sale of assets
(31,288
)
 
9,371

Loss (gain) on derivative contracts
(3,457
)
 
92,125

Cash proceeds (payment) on settlement of derivative contracts
19,558

 
(4,074
)
Gain on dilution of interest in Eureka Hunter Holdings, LLC
(4,601
)
 

Loss from equity method investments
8,979

 
504

Amortization and write-off of deferred financing costs and discount on Senior Notes included in interest expense
4,587

 
8,809

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
21,305

 
20,742

Inventory
(276
)
 
4,681

Prepaid expenses and other current assets
35

 
(2,766
)
Accounts payable
60,082

 
(50,851
)
Revenue payable
(1,021
)
 
(2,336
)
Accrued liabilities
14,843

 
(12,819
)
Net cash provided by operating activities
46,811

 
13,555

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures and advances
(164,874
)
 
(363,304
)
Change in restricted cash

 
5,000

Change in deposits and other long-term assets
3,389

 
310

Proceeds from sales of assets
38,384

 
110,690

Net cash used in investing activities
(123,101
)
 
(247,304
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net proceeds from sales of common shares
58,239

 
178,432

Proceeds from sale of Eureka Hunter Holdings Series A Preferred Units

 
11,956

Proceeds from sale of Eureka Hunter Holdings Series A Common Units

 
8,180

Repurchase of non-controlling interest

 
(2,875
)
Proceeds from exercise of warrants and options
51

 
9,622

Preferred stock dividends
(26,543
)
 
(36,754
)
Repayments of debt
(8,684
)
 
(208,298
)
Proceeds from borrowings on debt
6,886

 
279,592

Deferred financing costs
(451
)
 
(6,228
)
Change in other long-term liabilities
79

 
1,032

Net cash provided by financing activities
29,577

 
234,659

Effect of changes in exchange rate on cash
(4
)
 
44

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(46,717
)
 
954

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
53,180

 
41,713

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
6,463

 
$
42,667


The accompanying Notes to the Consolidated Financial Statements are an integral part of these unaudited financial statements.

6



MAGNUM HUNTER RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - GENERAL
 
Organization and Nature of Operations

Magnum Hunter Resources Corporation, a Delaware corporation, operating directly and indirectly through its subsidiaries ("Magnum Hunter" or the "Company"), is an Irving, Texas based independent oil and gas company engaged primarily in the exploration for and the exploitation, acquisition, development and production of natural gas and natural gas liquids resources predominantly in shale plays in the United States, along with certain oil field service activities. In addition, the Company has a substantial equity method investment in midstream operations, which is classified as discontinued operations.

Presentation of Consolidated Financial Statements
 
The accompanying unaudited interim consolidated financial statements of Magnum Hunter have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these consolidated financial statements in accordance with 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 revenue and expenses during reporting periods. Actual results could differ materially from those estimates.

In the opinion of management, all adjustments (consisting of normal recurring adjustments unless otherwise indicated) necessary for the fair statement of the financial position and the results of operations for the interim periods presented have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.  The year-end balance sheet data were derived from audited financial statements, but do not include all disclosures required by GAAP. 

Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with GAAP that would substantially duplicate the disclosures contained in the audited consolidated financial statements as reported in the Company's Annual Report on Form 10-K have been condensed or omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as amended.

The consolidated financial statements also reflect the interests of the Company's wholly owned subsidiary, Magnum Hunter Production, Inc. ("MHP"), in various managed drilling partnerships. The Company accounts for the interests in these managed drilling partnerships using the proportionate consolidation method.

Reclassification of Prior-Period Balances

Certain prior period balances have been reclassified to correspond with current-period presentation. 

Effective January 1, 2015, the Company adopted ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, issued by the Financial Accounting Standards Board ("FASB"). ASU 2014-08 updated the requirements for reporting discontinued operations in ASC Subtopic 205-20, Presentation of Financial Statements - Discontinued Operations, by requiring classification as discontinued operations of a component of an entity, a group of components of an entity, or a business (including equity method investments) if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when either 1) the component, group of components of an entity, or a business meet the criteria to be classified as held for sale, 2) are disposed of by sale, or 3) are disposed of other than by sale (e.g. abandonment or a distribution to owners in a spinoff). This ASU was effective prospectively for all disposals (or classification as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. As a result of the Company's decision in June 2015 to pursue the sale of all of its equity ownership interest in Eureka Hunter Holdings, LLC ("Eureka Hunter Holdings") and the adoption of ASU 2014-08, the Company was required to reclassify the operations of Eureka Hunter Holdings to discontinued operations for all periods presented. See "Note 3 - Acquisitions, Divestitures, and Discontinued Operations".


7



The Company has separately classified transportation and processing expenses incurred to deliver gas to processing plants and/or to selling points, which were previously included as components of lease operating expenses and severance taxes and marketing, in the accompanying consolidated statements of operations for all periods presented. The Company has also renamed lease operating expenses as "Production costs" and presented transportation and processing expenses as "Transportation, processing, and other related costs" in order to provide more meaningful information on costs associated with production and development.

The Company has reclassified approximately $5.2 million of oil and gas transportation, processing and production taxes payables from accounts receivable - oil and natural gas sales to accounts payable as of December 31, 2014.

Non-Controlling Interest in Consolidated Subsidiaries

Prior to July 24, 2014, the Company owned 87.5% of the equity interests in PRC Williston, LLC ("PRC Williston"), which sold substantially all of its assets on December 30, 2013. On July 24, 2014, the Company executed a settlement and release agreement with Drawbridge Special Opportunities Fund LP and Fortress Value Recovery Fund I LLC f/k/a D.B. Zwirn Special Opportunities Fund, L.P. As a result of this settlement agreement, the Company owns 100% of the equity interests in PRC Williston and has all rights and claims to its remaining assets and liabilities, which are not significant. The net loss attributable to non-controlling interest for PRC Williston is recorded through July 24, 2014.

Regulated Activities

Sentra Corporation, a wholly owned subsidiary of the Company, owns and operates distribution systems for retail sales of natural gas in south central Kentucky. Sentra Corporation's gas distribution billing rates are regulated by the Kentucky Public Service Commission based on recovery of purchased gas costs. The Company accounts for its operations based on the provisions of the FASB Accounting Standards Codification ("ASC") Subtopic 980-605, Regulated Operations-Revenue Recognition, which requires covered entities to record regulatory assets and liabilities resulting from actions of regulators. During the three and nine months ended September 30, 2015, gas utility sales from Sentra Corporation's regulated operations aggregated $42,845 and $504,075, respectively. During the three and nine months ended September 30, 2014, the Company had revenues of $27,656 and $473,555, respectively, related to Sentra Corporation's regulated operations.

Recently Issued Accounting Standards
 
Accounting standards-setting organizations frequently issue new or revised accounting rules.  The Company regularly reviews all new pronouncements to determine their impact, if any, on its financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the revised standard 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 and services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 requires entities to disclose both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for all entities by one year. As such, this amendment is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. The guidance allows for either a "full retrospective" adoption or a "modified retrospective" adoption, and earlier application is permitted as of annual reporting periods beginning after December 14, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the adoption methods and the impact of this ASU on its consolidated financial statements and financial statement disclosures.

In April 2015, the FASB issued ASU 2015-03, Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this update. This amendment is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. As of September 30, 2015, the Company had $19.8 million of debt issuance costs, which under this standard would be reclassified from an asset to a direct deduction from the related debt liability.


8



In April 2015, the FASB issued ASU 2015-04, Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Fees Paid in a Cloud Computing Agreement. This update provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This update does not change GAAP for a customer's accounting for service contracts. This amendment is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted for all entities, either prospectively to all arrangements entered into or materially modified after the effective date, or retrospectively. The Company has several cloud computing arrangements and is currently evaluating the impact of this ASU on its consolidated financial statements and financial statement disclosures.

NOTE 2 - GOING CONCERN AND LIQUIDITY; FORBEARANCE AGREEMENTS

As of September 30, 2015, the Company had $6.5 million in cash and a working capital deficit of $1,037.2 million, and the Company continues to incur significant losses from continuing operations. Additionally, as of September 30, 2015, the Company was in default under its senior revolving credit facility (as amended, the "Credit Facility") and Second Lien Credit Agreement (as defined below), as further described below. In addition, the Company has an interest payment due on November 15, 2015 on its Senior Notes (as defined below) of approximately $29.3 million, of which $22.1 million was accrued as of September 30, 2015, which the Company does not expect to be able to pay (but which is the subject of forbearance agreements described below and in "Note 9 - Debt"). Although the Company has taken proactive measures to address these issues, including entering into such forbearance agreements, these factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded asset amounts or the amount and classification of liabilities that might be necessary as a result of this uncertainty.

As further described in "Note 9 - Debt", on September 30, 2015, the Company was in default under its Credit Facility and its Second Lien Term Loan Agreement relating to past due accounts payable. Pursuant to covenants contained in the Credit Facility and the Second Lien Term Loan Agreement, the Company is not permitted to have accounts payable outstanding in excess of 180 days from the invoice date (subject to certain permissible amounts). As of September 8, 2015, the Company had approximately $1.4 million in accounts payable outstanding (other than such permissible amounts) in excess of 180 days from the invoice date. Under the terms of the Company's Credit Facility and Second Lien Term Loan Agreement, this default would result in an event of default (as defined in the agreements) if not cured within 30 days. As of October 8, 2015, the Company continued to have accounts payable outstanding (other than such permissible amounts) in excess of 180 days from the invoice date, resulting in an event of default. Due to the event of default, the lenders under the Company's Credit Facility and Second Lien Term Loan Agreement may declare the outstanding loan amounts immediately due and payable. In addition, $3.1 million of certain of the Company's equipment notes payable and certain of the Company's derivatives contracts became callable subsequent to September 30, 2015 as a result of certain cross-default provisions. Accordingly, the Company's debt balances under the Credit Facility, Second Lien Term Loan Agreement, and certain equipment notes payable and derivatives are reflected as current liabilities in the accompanying consolidated balance sheet as of September 30, 2015.

Our unsecured 9.750% Senior Notes due 2020 ("Senior Notes") and certain remaining derivatives contracts also contain cross-default or cross-acceleration provisions that may result in the Senior Notes and the remaining derivatives contracts becoming callable if any material obligation is called by a lender due to an event of the default. Specifically, a cross-default under the indenture governing the Senior Notes (the "Indenture") will occur if the lenders under the Company's Credit Facility or Second Lien Term Loan Agreement choose to accelerate the indebtedness under such agreement as a result of the event of default. The Company has not received any notice of acceleration with respect to any of the obligations described above.

The Company has an interest payment due on November 15, 2015 on its Senior Notes. Interest on the Senior Notes accrues at an annual rate of 9.75% and is payable semi-annually on May 15 and November 15. The total interest payment due on November 15, 2015 is expected to be approximately $29.3 million, of which $22.1 million was accrued as of September 30, 2015. The failure by the Company to make an interest payment on the Senior Notes within 30 days following the due date would constitute an event of default under the Senior Notes, and the Senior Notes could be declared immediately due and payable. The Company does not expect to make the interest payment by December 15, 2015; however, payments under the Senior Notes are the subject of forbearance agreements described below and in "Note 9 - Debt". Therefore, the Company's outstanding obligations on its Senior Notes are reflected as current liabilities in the accompanying consolidated balance sheet as of September 30, 2015.

On October 9, 2015, the Company announced that it had suspended monthly cash dividends on all of its outstanding series of preferred stock. The suspension commenced with the monthly cash dividend that would otherwise have been declared and paid for the month ending October 31, 2015 and will continue indefinitely. The outstanding shares of Series E Preferred Stock are represented by depositary shares, each representing a 1/1,000th interest of a share of Series E Preferred Stock. Under the terms of the Company's Series C, Series D and Series E Preferred Stock, any unpaid dividends, including the unpaid dividends for the

9



month ending October 31, 2015 and any future unpaid dividends, will continue to accumulate. Additionally, if the Company does not pay dividends on its Series C, Series D and Series E Preferred Stock for any month within a quarter for a total of four quarterly periods (whether consecutive or non-consecutive), (i) the holders of each series of preferred stock will have the right to elect two directors to serve on the Company's Board of Directors (the "Board") until all accumulated and unpaid dividends have been paid in full, (ii) the annual dividend rates on the Series C, Series D and Series E Preferred Stock will be increased to 12.5%, 10.0% and 10.0%, respectively (the "Penalty Rates"), until all accumulated and unpaid dividends have been paid in full and the Company has paid cash dividends at the respective Penalty Rates in full for an additional two consecutive quarters, and (iii) if not paid in cash, dividends must be paid in shares of common stock or (if the common stock is not publicly traded) in shares of the series of preferred stock (until the dividend default has been cured). The Company had previously suspended dividends on its Series C, Series D and Series E Preferred Stock affecting two quarterly periods during 2013.

As a result of the suspension of monthly cash dividends on its preferred stock, the Company became ineligible to issue securities, including issuances of common stock in At-the-Market ("ATM") offerings, under its universal shelf Registration Statement on Form S-3, which was declared effective on April 22, 2015.

On October 9, 2015, the Company also announced that it has engaged a financial advisor and a special legal advisor to advise management and the Board regarding potential strategic alternatives to enhance liquidity and address the Company's current capital structure, which may include liquidity-enhancing transactions that the Company has commenced previously, as well as restructuring some or all of the Company's debt and preferred equity to preserve cash flow, which may include seeking private restructuring or reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code").

On November 3, 2015, the Company entered into the Sixth Amendment (the "Sixth Amendment") to the Credit Facility by and among the Company, as borrower, the guarantors party thereto, certain holders of the Company's Senior Notes (the "New Senior Notes Lenders"), certain holders of the loans outstanding pursuant to the Company's Second Lien Term Loan Agreement (the "New Second Lien Lenders" and collectively with the New Senior Notes Lenders, the "New First Lien Lenders"), as lenders, Bank of Montreal, as administrative agent and Cantor Fitzgerald Securities, as loan administrator. (as so amended, the "Refinancing Facility") in order to, among other things:

i.
assign amounts outstanding of approximately $5.0 million under the Credit Facility in the form of a single tranche of term loans to the New First Lien Lenders;
ii.
cash collateralize certain outstanding letters of credit issued under the Credit Facility in an aggregate amount of approximately $39.0 million; and
iii.
provide the Company with an additional new term loan in the aggregate principal amount of approximately $16.0 million, which was funded in full by the New First Lien Lenders on the closing date of the Sixth Amendment.

As a result of the Sixth Amendment, the New First Lien Lenders became the lenders under the Refinancing Facility, the Credit Facility was restructured from a senior secured revolving credit facility to a senior secured term loan facility represented by the Refinancing Facility and the aggregate amounts outstanding under the Refinancing Facility as of the closing date of the Sixth Amendment totaled approximately $60.0 million. In addition, the Refinancing Facility includes an uncommitted incremental credit facility for up to an additional $10.0 million aggregate principal amount of term loans to be provided to the Company, if and to the extent requested by the Company and agreed to by a specified percentage of the New First Lien Lenders.

The Refinancing Facility contains the same covenants as the Credit Facility prior to execution of the Sixth Amendment, subject to customary adjustments consistent with financings of this type and duration and subject to the following additional changes:

i.
removal of all financial covenants in effect prior to the Sixth Amendment (including the current ratio, total secured net debt to EBITDAX, proved reserves coverage ratio and proved developed producing reserves coverage ratio covenants).

ii.
removal of restrictions against trade payables being outstanding for more than 180 days from the date of invoice, and

iii. inclusion of budgetary and reporting requirements consistent with financings of this type and duration, including a cumulative budget variance covenant tested every other week, in accordance with the terms of the Refinancing Facility.

The Company believes that the Refinancing Facility will provide the Company with liquidity for approximately 30 to 45 days, during which time the Company and the New First Lien Lenders will continue to discuss various options and alternatives regarding the Company's balance sheet. See "Note 9 - Debt".

On November 3, 2015, the Company and the New Senior Notes Lenders entered into a Forbearance Agreement (the "Forbearance Agreement") whereby the New Senior Notes Lenders agreed to forbear during a certain period from exercising any remedies as

10



a result of any default, Default or Event of Default under (as such terms are defined in) the Indenture that is present as a result of (i) the failure of the Company to make any interest payment otherwise due under the Senior Notes, (ii) a breach of the debt incurrence covenant under the Indenture, or (iii) the failure of the Company to make any interest payment otherwise due pursuant to the Second Lien Term Loan Agreement. Additionally, the New Senior Notes Lenders consented to an amendment to the Indenture, pursuant to a supplemental indenture, which such amendment amends the incurrence of indebtedness covenant in the Indenture to permit the incurrence of the $70.0 million aggregate principal amount of borrowings under the Refinancing Facility. See "Note 9 - Debt".

On November 3, 2015, the Company entered into a Forbearance Agreement and Second Amendment (the "Second Amendment") to the Second Lien Credit Agreement, by and among the Company, as borrower, Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, the lenders party thereto and the agents party thereto (the "Second Lien Term Loan Agreement"). The Second Amendment provides for a forbearance by the lenders under the Second Lien Term Loan Agreement that entered into the Refinancing Facility with respect to exercising remedies regarding any default or event of default that results from the failure of the Company to make any interest payment under the Second Lien Term Loan Agreement, the failure to meet certain financial covenants, and certain other matters (including the default that arose on account of  trade payables being outstanding for more than 180 days). The Second Amendment also amends certain other terms of the Second Lien Term Loan Agreement as necessary to permit the Refinancing Facility and to make certain covenants in the Second Lien Term Loan Agreement consistent with the revised covenants in the Refinancing Facility. See "Note 9 - Debt".

Triad Hunter, LLC ("Triad Hunter"), a wholly owned subsidiary of the Company, and Eureka Hunter Pipeline, LLC ("Eureka Hunter Pipeline") are parties to an Amended and Restated Gas Gathering Services Agreement (the "Gas Gathering Services Agreement"). Under the terms of the Gas Gathering Services Agreement, Triad Hunter reserved throughput capacity in the gas gathering pipeline system of Eureka Hunter Pipeline for which Triad Hunter has committed to minimum reservation fees of approximately $0.75 per MMBtu. As of October 31, 2015, Triad Hunter owed Eureka Hunter Pipeline approximately $10.7 million in past due gathering fees under the Gas Gathering Services Agreement. On November 5, 2015, the Company received a demand notice from MSI (as defined under "Discontinued Operations - Eureka Hunter Holdings" in Note 3 below), on behalf of Eureka Hunter Pipeline, demanding, in connection with past due amounts, adequate assurance of performance of security in the amount of approximately $20.8 million on or before November 10, 2015. Additionally, Eureka Hunter Pipeline can also demand adequate assurance of performance for any payments if it determines that Triad Hunter’s credit is unsatisfactory. MSI advised the Company that its failure to provide such adequate assurance of performance by the specified deadline will result in a suspension of services under the Gas Gathering Services Agreement until such time as the Company provides such adequate assurance of performance. MSI further advised the Company that if the Company has not provided the adequate assurance of performance and/or paid in full all amounts past due by November 20, 2015, then Eureka Hunter Pipeline will terminate the Gas Gathering Services Agreement. The Company does not expect that it will be able to provide such adequate assurance of performance by the specified deadline. The Company has initiated discussions with MSI regarding a forbearance by Eureka Hunter Pipeline and MSI of their rights and remedies with respect to past due amounts under the Gas Gathering Services Agreement, including the provision of adequate assurance of performance. The Company can provide no assurance regarding whether a forbearance will be obtained. If such forbearance is not obtained, and Eureka Hunter Pipeline suspends performance under or terminates the Gas Gathering Services Agreement, such suspension in service or termination would force a temporary shut-in of certain of our wells (until the suspension is lifted or new gas gathering services are arranged) and could materially impact our business, financial condition and results of operations. We cannot predict at this time whether we would be able to secure any alternate gas gathering services or the timing thereof, especially in view of the limited amount of gas gathering service capacity in these areas of operation. Even if such services became available to us, such services may not be on terms we find suitable or attractive. See "Item 1A. Risk Factors - We are and may continue to become subject to claims by vendor creditors.”


11



NOTE 3 - ACQUISITIONS, DIVESTITURES, AND DISCONTINUED OPERATIONS
 
Acquisitions

Agreement to Purchase Utica Shale Acreage

On August 12, 2013, Triad Hunter entered into an asset purchase agreement ("the MNW Purchase Agreement") with MNW Energy, LLC ("MNW"). MNW is an Ohio limited liability company that represents an informal association of various land owners, lessees and sub-lessees of mineral acreage who own or have rights in mineral acreage located in Monroe, Noble and/or Washington Counties, Ohio. Pursuant to the purchase agreement, Triad Hunter agreed to acquire from MNW up to 32,000 net mineral acres, including currently leased and subleased acreage, located in such counties, over a period of time, in staggered closings, subject to certain conditions. The maximum purchase price, if MNW delivers 32,000 acres with acceptable title, would be $142.1 million, excluding title costs. During the nine months ended September 30, 2015 and 2014, Triad Hunter purchased 2,665 and 11,296 net leasehold acres, respectively, from MNW for an aggregate purchase price of $12.0 million and $46.7 million, respectively. As of September 30, 2015, Triad Hunter had purchased a total of 25,044 net leasehold acres from MNW for an aggregate purchase price of $103.9 million.

The Company believes that MNW will not be able to provide Triad Hunter with satisfactory title to any of the remaining net leasehold acres subject to purchase under the MNW Purchase Agreement, and therefore the Company anticipates that none of the remaining net leasehold acres will be acquired by Triad Hunter.

Divestitures

Sale of Certain West Virginia Assets

On May 22, 2015, Triad Hunter entered into a Purchase and Sale Agreement with Antero Resources Corporation ("Antero") pursuant to which Triad Hunter agreed to sell to Antero all of Triad Hunter's right, title and interest in certain undeveloped and unproven leasehold acreage located in Tyler County, West Virginia. The sale transaction closed on June 18, 2015 and Triad Hunter received cash consideration of $33.6 million, subject to post-closing adjustments for any title defects and for remediation of asserted title defects. During the third quarter of 2015, the Company received $4.2 million of additional consideration for title defects cured or removed. The properties sold consisted of ownership interests in approximately 5,210 net leasehold acres.

The Company recognized a gain on the sale of $5.5 million and $31.7 million during the three and nine month periods ended September 30, 2015.

Discontinued Operations

Williston Hunter Canada, Inc.

In September 2013, the Company adopted a plan to divest all of its interests in the Canadian operations of Williston Hunter Canada, Inc. ("WHI Canada"), which was a wholly owned subsidiary of the Company. The Company closed on the sale of its interests in WHI Canada on May 12, 2014. The loss from operations and loss on disposal attributable to WHI Canada are included in discontinued operations.

Eureka Hunter Holdings

In June 2015, the Company announced its decision to pursue the sale of all of its equity ownership interest in Eureka Hunter Holdings in order to improve the Company's liquidity position. The Company has reclassified its equity method investment in Eureka Hunter Holdings to assets of discontinued operations as of September 30, 2015 and December 31, 2014. All operations related to periods prior to December 18, 2014, and all subsequent equity method losses through September 30, 2015, are reflected as discontinued operations.

Prior to December 18, 2014, Eureka Hunter Holdings was a consolidated subsidiary of the Company and its operations were included in the Midstream and Marketing operating segment. Following a series of transactions and capital contributions that occurred up to and including December 18, 2014, the Company determined it no longer held a controlling financial interest in Eureka Hunter Holdings. However, the Company exercises significant influence through its retained equity interest and through representation on Eureka Hunter Holdings' board of managers and owned 44.53% of the outstanding membership interest of Eureka Hunter Holdings as of September 30, 2015. As a result, the Company uses the equity method to account for its retained interest in Eureka Hunter Holdings.


12



On November 18, 2014, the Company entered into a letter agreement (the "November 2014 Letter Agreement") with Eureka Hunter Holdings and MSIP II Buffalo Holdings, LLC ("MSI"), an affiliate of Morgan Stanley Infrastructure II Inc. Pursuant to the November 2014 Letter Agreement, the parties agreed that, among other things, the Company would make a $13.3 million capital contribution (the "MHR 2015 Contribution") in cash to Eureka Hunter Holdings on or before March 31, 2015, in exchange for additional Series A-1 Units in Eureka Hunter Holdings.

On March 30, 2015, the Company, Eureka Hunter Holdings and MSI entered into an additional letter agreement (the "March 2015 Letter Agreement"), pursuant to which the parties agreed that, among other things, (i) the Company is no longer required to make the MHR 2015 Contribution and (ii) MSI would make certain additional capital contributions to Eureka Hunter Holdings in exchange for additional Series A-2 Units. Pursuant to the March 2015 Letter Agreement, MSI purchased additional Series A-2 Units of Eureka Hunter Holdings as follows:

i.
On March 31, 2015, MSI made a capital contribution in cash to Eureka Hunter Holdings of approximately $27.2 million (the "2015 Growth CapEx Projects Contribution") in exchange for additional Series A-2 Units in Eureka Hunter Holdings with the proceeds of such capital contribution to be used to fund certain of Eureka Hunter Pipeline's 2015 capital expenditures. The 2015 Growth CapEx Projects Contribution is subject to the Company's right to make an MHR Catch-Up Contribution (as defined in the Second Amended and Restated Limited Liability Company Agreement of Eureka Hunter Holdings (the "LLC Agreement")).

ii.
On March 31, 2015, MSI made an additional capital contribution in cash to Eureka Hunter Holdings of approximately $37.8 million (the "Additional Contribution") in exchange for additional Series A-2 Units in Eureka Hunter Holdings with the proceeds of such Additional Contribution to be used to fund certain of Eureka Hunter Pipeline's additional capital expenditures and for certain other uses.
 
Immediately after giving effect to these transactions, the Company and MSI owned 45.53% and 53.00%, respectively, of the equity interests of Eureka Hunter Holdings, with the Company's equity ownership consisting of Series A-1 Units and MSI's equity ownership consisting of Series A-2 Units.

Pursuant to the March 2015 Letter Agreement, the parties further agreed that the Company had the right, in its discretion, to fund as a capital contribution to Eureka Hunter Holdings, all or a portion (in specified minimum amounts) of its pro-rata share of the Additional Contribution, which pro-rata share equaled approximately $18.7 million (the "MHR Additional Contribution Component"), before June 30, 2015 (as extended, the "MHR Contribution Deadline"), in exchange for additional Series A-1 Units in Eureka Hunter Holdings (the "MHR 2015 Make-up Contribution").  On July 27, 2015, the Company entered into an additional letter agreement (the "July 2015 Letter Agreement") with Eureka Hunter Holdings and MSI pursuant to which the parties memorialized an agreement in principle which had been reached prior to June 30, 2015, to extend the MHR Contribution Deadline to the earlier of (i) September 30, 2015 or (ii) the day immediately preceding the date on which the Company disposes, in a sale transaction or otherwise, its equity ownership interest in Eureka Hunter Holdings. As of September 30, 2015, the Company had not funded the MHR Additional Contribution Component, and as such, the Company's Series A-1 Units in Eureka Hunter Holdings were adjusted downward by 529,190 units, which was an amount equivalent to the unfunded portion of the MHR Additional Contribution Component divided by the purchase price per unit paid by MSI in connection with the 2015 Growth CapEx Projects Contribution and the Additional Contribution. As a result of the downward adjustment to its Series A-1 Units, the Company recognized a loss of $7.7 million reported net of tax in "Loss from discontinued operations, net of tax" on the consolidated statements of operations during the three and nine months ended September 30, 2015. The loss included the Company's proportionate decrease in its equity method basis difference which was reduced by $4.0 million during the three and nine months ended September 30, 2015, based on the change in the Company's ownership in the net assets of Eureka Hunter Holdings related to the downward adjustment in its Series A-1 Units.

The Company continues to have the right to make MHR Catch-Up Contributions (as defined in the LLC Agreement) in accordance with the LLC Agreement (as modified by the November 2014 Letter Agreement as to the applicable time and amount limitations) in respect of any MHR Shortfall Amounts (as defined in the LLC Agreement) that are eligible to be funded by the Company under the LLC Agreement.


13



The Company accounted for the March 31, 2015 MSI capital contributions, the issuance of additional Series A-2 Units by Eureka Hunter Holdings, and the September 30, 2015 expiration of the MHR Contribution Deadline in accordance with the subsequent measurement provision of ASC Topic 323, Investments - Equity Method and Joint Ventures, which requires the Company to recognize a gain or loss on the dilution of its equity interest as if the Company had sold a proportionate interest in Eureka Hunter Holdings. During the three and nine months ended September 30, 2015, the Company recognized a gain of $2.2 million and $4.6 million, respectively, reported net of tax in "Gain on dilution of interest in Eureka Hunter Holdings, LLC, net of tax" in the consolidated statements of operations based on the difference between the carrying value of the Company's Series A-1 Units and the proceeds received by Eureka Hunter Holdings for the issuance of additional Series A-2 Units to MSI which resulted in permanent dilution of the Company's equity interest in Eureka Hunter Holdings. The gain included the Company's proportionate decrease in its equity method basis difference which was reduced by $3.6 million and $7.5 million, during the three and nine months ended September 30, 2015, respectively, based on the change in the Company's ownership in the net assets of Eureka Hunter Holdings after giving effect to the dilution of the Company's interest as a result of the unit issuance.

As of September 30, 2015, the Company and MSI owned 44.53% and 53.98%, respectively, of the Class A Common Units of Eureka Hunter Holdings. As of December 31, 2014, the Company and MSI owned 48.60% and 49.84%, respectively of the equity interests of Eureka Hunter Holdings. The Company recorded its retained interest in Eureka Hunter Holdings initially at a fair value of $347.3 million as of December 18, 2014. The carrying value of the Company's equity interest in Eureka Hunter Holdings was $343.3 million and $347.2 million at September 30, 2015 and December 31, 2014, respectively.

The recognition of the Company's retained interest in Eureka Hunter Holdings at fair value upon deconsolidation resulted in a basis difference between the carrying value of the Company's investment in Eureka Hunter Holdings and its proportionate share in net assets of Eureka Hunter Holdings. The basis difference was accounted for using the acquisition method of accounting, which requires that the basis difference be allocated to the identifiable assets of Eureka Hunter Holdings at fair value and based upon the Company's proportionate ownership.  Determining the fair value of assets and liabilities is judgmental in nature and involves the use of significant estimates and assumptions. The Company recognized a basis difference of $201.9 million upon deconsolidation related to its investment in Eureka Hunter Holdings which has been allocated to the following identifiable assets of Eureka Hunter Holdings:
 
Identifiable Assets
 
Ending Basis December 31, 2014
Basis Amortization
Basis Reduction
Ending Basis September 30, 2015
 
(in thousands)
Fixed assets
$
5,088

$
(187
)
$
(289
)
$
4,612

Intangible assets
155,189

(5,471
)
(8,727
)
140,991

Goodwill
41,597


(2,518
)
39,079

Total basis difference
$
201,874

$
(5,658
)
$
(11,534
)
$
184,682


The components of the Company's basis difference, excluding goodwill, are being amortized over their estimated useful lives ranging from 3 to 39 years.

During the second quarter of 2015, the Company completed its valuation of the identifiable assets to which the basis difference is attributable and has recorded amortization based on this valuation for the period ended September 30, 2015.  

14




Summarized income information for Eureka Hunter Holdings for the three and nine months ended September 30, 2015 is as follows:

 
Three Months Ended 
 September 30, 2015
 
Nine Months Ended 
 September 30, 2015
 
(in thousands)
Operating revenues
$
22,457

 
$
53,581

Operating income
$
12,231

 
$
13,549

Net income
$
11,469

 
$
10,623

 
 
 
 
Magnum Hunter's interest in Eureka Hunter Holdings net income (loss)
$
5,222

 
$
4,837

Basis difference amortization
$
(1,780
)
 
$
(5,658
)
Loss on downward adjustment of units
$
(7,664
)
 
$
(7,664
)
Magnum Hunter's equity in earnings (loss), net
$
(4,222
)
 
$
(8,485
)

As of September 30, 2015 and December 31, 2014, the Company had assets of discontinued operations of $343.3 million and $347.2 million, respectively, consisting of its equity method investment in Eureka Hunter Holdings.

The Company included the results of operations related to Eureka Hunter Holdings for all periods presented, and the results of operations of WHI Canada through May 12, 2014, the date of sale, in discontinued operations. The following presents the results of the Company's discontinued operations for the three and nine months ended September 30, 2015 and 2014.
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
Revenues
 
$

 
$
9,113

 
$

 
$
32,073

Depreciation, depletion, amortization and accretion
 

 
(4,224
)
 

 
(11,831
)
Other operating expenses
 

 
(6,401
)
 

 
(23,703
)
Interest expense
 

 
(159
)
 

 
(6,646
)
Loss on derivative contracts, net
 

 
(57,898
)
 

 
(91,792
)
Loss from equity method investments
 
(4,222
)
 

 
(8,485
)
 

Other expense
 

 
(21
)
 

 
(64
)
Loss from discontinued operations, net of tax
 
(4,222
)
 
(59,590
)
 
(8,485
)
 
(101,963
)
Gain on dilution of interest in Eureka Hunter Holdings, net of tax
 
2,211

 

 
4,601

 

Loss on disposal of discontinued operations, net of taxes of $0
 

 
(258
)
 

 
(13,983
)
Loss from discontinued operations, net of taxes
 
$
(2,011
)
 
$
(59,848
)
 
$
(3,884
)
 
$
(115,946
)

Total operating cash inflows related to Eureka Hunter Holdings for the three and nine month periods ended September 30, 2014 were $28.9 million and $67.3 million, respectively, and total investing cash outflows related to Eureka Hunter Holdings for the three and nine month periods ended September 30, 2014 were $46.7 million and $111.1 million, respectively.


15



NOTE 4 - OIL & NATURAL GAS SALES

During the three and nine months ended September 30, 2015 and 2014, the Company recognized sales from oil, natural gas, and natural gas liquids ("NGLs") as follows:

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Oil
$
9,962

 
$
34,495

 
$
34,593

 
$
111,354

Natural gas
14,532

 
18,247

 
59,415

 
74,031

NGLs
3,358

 
9,768

 
16,653

 
36,862

Total oil and natural gas sales
$
27,852

 
$
62,510

 
$
110,661

 
$
222,247


NOTE 5 - PROPERTY, PLANT, & EQUIPMENT

Oil and Natural Gas Properties

The following sets forth the net capitalized costs under the successful efforts method for oil and natural gas properties as of:
 
September 30,
2015
 
December 31,
2014
 
(in thousands)
Mineral interests in properties
 
 
 
Unproved leasehold costs
$
442,799

 
$
481,643

Proved leasehold costs
276,818

 
257,185

Wells and related equipment and facilities
602,258

 
606,406

Advances to operators for wells in progress
1,278

 
1,411

Total costs
1,323,153

 
1,346,645

Less accumulated depletion, depreciation, and amortization
(344,006
)
 
(248,410
)
Net capitalized costs
$
979,147

 
$
1,098,235


Proved oil and natural gas properties are reviewed for impairment on a field-by-field basis bi-annually or when events and circumstances indicate a possible decline in the recoverability of the carrying amount of such property. Impairments of proved properties of $49.8 million and $63.8 million were recorded during the three and nine months ended September 30, 2015, respectively, primarily related to Appalachian Basin and Williston Basin properties. Impairments of proved properties of $22.9 million and $39.8 million were recorded for the three and nine months ended September 30, 2014, respectively, which were comprised primarily of impairments recorded on MHP's proved oil and natural gas properties.

Depletion, depreciation, and amortization expense for proved oil and natural gas properties was $20.8 million and $95.7 million for the three and nine months ended September 30, 2015, respectively, and $28.0 million and $81.9 million for the three and nine months ended September 30, 2014, respectively.

Exploration

Exploration expense consists primarily of abandonment charges, exploratory dry holes, geological and geophysical costs, and impairment expense for capitalized leasehold costs associated with unproved properties for which the Company has no further exploration or development plans.


16



During the three and nine months ended September 30, 2015 and 2014, the Company recognized exploration expense as follows:

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Leasehold impairments
 
 
 
 
 
 
 
   Williston Basin
$
1,898

 
$
17,846

 
$
9,504

 
$
37,765

   Appalachian Basin
1,789

 
7,150

 
2,952

 
9,720

Western Kentucky

 
1,925

 

 
3,820

South Texas
124

 

 
124

 

Total leasehold impairments
3,811

 
26,921

 
12,580

 
51,305

Geological and geophysical
547

 
363

 
1,747

 
1,089

     Total exploration expense
$
4,358

 
$
27,284

 
$
14,327

 
$
52,394


Impairments of leases in the Williston and Appalachian Basins for all periods presented are related to leases that expired and had no exploration activities during the period or are expected to expire and that the Company does not plan to develop or extend. The Company also recognized $1.9 million and $3.8 million in leasehold impairment expense related to fair value write-downs of MHP for the three and nine months ended September 30, 2014, respectively.

Gas Transportation, Gathering, and Processing Equipment and Other

The historical cost of gas transportation, gathering, and processing equipment and other property, presented on a gross basis with accumulated depreciation, as of September 30, 2015 and December 31, 2014 is summarized as follows:

 
September 30,
2015
 
December 31,
2014
 
(in thousands)
Gas transportation, gathering and processing equipment and other
$
102,959

 
$
100,436

Less accumulated depreciation
(28,542
)
 
(23,013
)
Net capitalized costs
$
74,417

 
$
77,423


Depreciation expense for gas transportation, gathering, and processing equipment and other property was $1.9 million and $5.8 million for the three and nine months ended September 30, 2015, respectively, and $2.7 million and $5.8 million for the three and nine months ended September 30, 2014, respectively.


17



NOTE 6 - ASSET RETIREMENT OBLIGATIONS
 
The following table summarizes the Company's asset retirement obligation ("ARO") activities during the nine-month period ended September 30, 2015 and for the year ended December 31, 2014:
 
September 30, 2015
December 31, 2014
 
(in thousands)
Asset retirement obligations at beginning of period
$
26,524

$
16,216

Liabilities incurred
40

218

Liabilities settled
(136
)
(107
)
Liabilities sold
(74
)
(2,598
)
Accretion expense
1,928

1,478

Revisions in estimated liabilities (1)
(596
)
3,208

Reclassified from liabilities associated with assets of MHP

8,109

Asset retirement obligation at end of period
27,686

26,524

Less: current portion (included in other liabilities)
(1,235
)
(295
)
Asset retirement obligations, net of current portion
$
26,451

$
26,229

________________________________
 (1) Revisions in estimated liabilities during 2014 relate to a change in assumptions used with respect to certain wells in the Appalachian Basin in Ohio and West Virginia.
 
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
 
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  GAAP also establishes a framework for measuring fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability.  Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The valuation hierarchy contains three levels:

Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable
Level 3 — Significant inputs to the valuation model are unobservable
 
Transfers between levels of the fair value hierarchy occur at the end of the reporting period in which it is determined that the observability of significant inputs has increased or decreased. There were no transfers between levels of the fair value hierarchy during the nine month periods ended September 30, 2015 and 2014.

The Company used the following fair value measurements for certain of the Company's assets and liabilities at September 30, 2015 and December 31, 2014:
 
Level 1 Classification:
 
Available for Sale Securities
 
At September 30, 2015 and December 31, 2014, the Company held common and preferred stock of publicly traded companies with quoted prices in an active market.  Accordingly, the fair market value measurements of these securities have been classified as Level 1.
 

18



Level 2 Classification:
 
Commodity Derivative Instruments
 
At September 30, 2015 and December 31, 2014, the Company had commodity derivative financial instruments in place. The Company does not designate its derivative instruments as hedges and therefore does not apply hedge accounting.  Changes in fair value of derivative instruments subsequent to the initial measurement are recorded as gain (loss) on derivative contracts, in other income (expense). The estimated fair value amounts of the Company's commodity derivative instruments have been determined at discrete points in time based on relevant market information which resulted in the Company classifying such derivatives as Level 2.  Although the Company's commodity derivative instruments are valued using public indices, the instruments themselves are traded with unrelated counterparties and are not openly traded on an exchange.

As of September 30, 2015 and December 31, 2014, the Company's derivative contracts were with financial institutions, many of which were either senior lenders to the Company or affiliates of such senior lenders, and some of which had investment grade credit ratings. Certain counterparties to the Company's commodity derivatives positions are no longer participants in the Company's credit facilities following the execution of new credit agreements on October 22, 2014 and an amendment on July 10, 2015. See "Note 9 - Debt". All of the counterparties are believed to have minimal credit risk. Although the Company is exposed to credit risk to the extent of nonperformance by the counterparties to these derivative contracts, the Company does not anticipate such nonperformance and monitors the credit worthiness of its counterparties on an ongoing basis.
 
Level 3 Classification:
 
Convertible Security Embedded Derivative
 
The Company recognized an embedded derivative asset resulting from the fair value of the bifurcated conversion feature associated with the convertible note it received in February 2012 as partial consideration upon the sale of Hunter Disposal, LLC ("Hunter Disposal") to GreenHunter Resources, Inc. ("GreenHunter"), a related party. The embedded derivative was valued using a Black-Scholes model valuation of the conversion option.
 
The key inputs used in the Black-Scholes option pricing model were as follows:
 
September 30, 2015
Life (in years)
1.4
Risk-free interest rate
0.60%
Estimated volatility
92%
Dividend
GreenHunter stock price at end of period
$0.30
 
The sensitivity of the estimate of volatility used in determining the fair value of the convertible security embedded derivative would not have a significant impact to the Company's financial statements based on the value of its assets as compared to the financial statements as a whole.

19




The following tables present the fair value hierarchy levels of the Company's financial assets and liabilities which are measured and carried at fair value on a recurring basis:
 
Fair Value Measurements on a Recurring Basis
 
September 30, 2015
 
 (in thousands)
Assets
Level 1
 
Level 2
 
Level 3
Available for sale securities
$
968

 
$

 
$

Commodity derivative assets

 
1,051

 

Convertible security derivative assets

 

 
3

Total assets at fair value
$
968

 
$
1,051

 
$
3

Liabilities
 
 
 
 
 
Commodity derivative liabilities
$

 
$
569

 
$

Total liabilities at fair value
$

 
$
569

 
$

 
Fair Value Measurements on a Recurring Basis
 
December 31, 2014
 
(in thousands)
Assets
Level 1
 
Level 2
 
Level 3
Available for sale securities
$
3,864

 
$

 
$

Commodity derivative assets

 
16,511

 

Convertible security derivative assets

 

 
75

Total assets at fair value
$
3,864

 
$
16,511

 
$
75

 
The following table presents the changes in fair value of the derivative assets and liabilities measured at fair value using significant unobservable inputs (Level 3 inputs) for the nine-month period ended September 30, 2015:
 
Convertible Security Embedded
Derivative Asset
 
(in thousands)
Fair value as of December 31, 2014
$
75

Decrease in fair value recognized in gain (loss) on derivative contracts, net
(72
)
Fair value as of September 30, 2015
$
3


Other Fair Value Measurements
 
The following table presents the carrying amounts and fair values categorized by fair value hierarchy level of the Company's financial instruments not carried at fair value: 
 
 
 
 
September 30, 2015
 
December 31, 2014
 
 
Fair Value Hierarchy
 
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
 
 
 
 
(in thousands)
Senior Notes
 
Level 2
 
$
597,521

 
$
275,700

 
$
597,355

 
$
498,000

MHR Senior Revolving Credit Facility
 
Level 3
 
$
5,000

 
$
5,000

 
$

 
$

MHR Second Lien Term Loan
 
Level 3
 
$
327,469

 
$
319,873

 
$
329,140

 
$
329,140

Equipment Notes Payable
 
Level 3
 
$
17,990

 
$
17,990

 
$
22,238

 
$
22,150


The fair value of the Company's Senior Notes is based on quoted market prices available for Magnum Hunter's Senior Notes.  The fair value hierarchy for the Company's Senior Notes is Level 2 (quoted prices for identical or similar assets in markets that are not active).

20



 
The carrying value of the Company's Credit Facility approximates fair value as the facility is subject to short-term floating interest rates that approximate the rates available to the Company at these dates.  The fair value hierarchy for the Credit Facility is Level 3.
 
The fair value of all fixed-rate notes and the credit facility is based on interest rates currently available to the Company.

Fair Value on a Non-Recurring Basis

The Company follows the provisions of ASC Topic 820, Fair Value Measurement, for non-financial assets and liabilities measured at fair value on a non-recurring basis. As it relates to the Company, ASC Topic 820 applies to certain non-financial assets and liabilities as may be acquired in a business combination and thereby measured at fair value, measurements of impairments, and the initial recognition of asset retirement obligations, for which fair value is used. ARO estimates are derived from historical costs as well as management's expectation of future cost environments. As there is no corroborating market activity to support the assumptions used, the Company has designated these measurements as Level 3. A reconciliation of the beginning and ending balances of the Company's ARO is presented in "Note 6 - Asset Retirement Obligations".

The Company recorded impairment charges of $63.8 million during the nine months ended September 30, 2015 as a result of writing down the carrying value of certain proved properties to estimated fair value. The fair value of the properties impaired was $511.2 million as of September 30, 2015. In order to determine the amounts of the impairment charges, Magnum Hunter compares net capitalized costs of proved oil and natural gas properties to estimated undiscounted future net cash flows using management's expectations of economically recoverable proved, probable, and possible reserves. If the net capitalized cost exceeds the undiscounted future net cash flows, Magnum Hunter impairs the net cost basis down to the discounted future net cash flows, which is management's estimate of fair value. Significant inputs used to determine the fair value include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a discounted cash flow model utilizing a 10% discount rate. The underlying commodity prices embedded in the Company's estimated cash flows are the product of a process that begins with forward curve pricing, adjusted for estimated location and quality differentials, as well as other factors that Magnum Hunter's management believes will impact realizable prices. The inputs used by management for the fair value measurements utilized in this review include significant unobservable inputs, and therefore, the fair value measurements employed are classified as Level 3 for these types of assets.

The Company recorded impairment charges of $16.8 million during the first quarter of 2014 in order to record MHP at the estimated selling price less costs to sell, based on additional information on estimated selling prices obtained through active marketing of the assets. The fair value of these net assets was $60.0 million as of March 31, 2014. The Company had designated this valuation as Level 3. Effective September 2014, the Company withdrew its plan to divest MHP. As of September 2014, the Company remeasured the carrying value of certain long-lived assets of MHP previously classified as held for sale at their fair value in connection with their reclassification to asset held and used and recorded impairment charges of $1.9 million in exploration expense and $17.0 million in impairment of proved oil and gas properties. The fair value of these assets was $52.6 million as of September 30, 2014, and was derived using a variety of assumptions including market precedent transactions for similar assets, analyst pricing, and risk-adjusted discount rates for similar transactions. The Company has designated these valuations as Level 3. Effective September 2014, the assets and liabilities of MHP are presented as held for use and the results of MHP's operations are presented in continuing operations for all periods presented in these interim consolidated financial statements.
 
NOTE 8 - INVESTMENTS AND DERIVATIVES
 
Investment Holdings - Available for Sale Securities

The Company's investment holdings in available for sale securities are concentrated in three issuers whose business activities are related to the oil and natural gas or minerals mining industries. These investments are ancillary to the Company's overall operating strategy and such concentrations of risk related to investment holdings do not pose a substantial risk to the Company's operational performance. The Company evaluates factors that it believes could influence the fair value of the issuers' securities such as management, assets, earnings, cash generation, and capital needs.

The fair values of equity securities fluctuate based upon changes in market prices. Gross unrealized losses on investments are considered for other-than-temporary impairment when such losses have continued for more than a 12-month period. However, security-specific circumstances may arise where an investment is considered impaired when gross unrealized losses have been observed for less than twelve months. At December 31, 2014, the Company did not hold any equity securities which were in a gross unrealized loss position for greater than a year, and no impairments were recognized for the period then ended.


21



As of March 31, 2015, the Company's investment in New Standard Energy Limited ("NSE"), an Australian Securities Exchange-listed Australian company, had been in a gross unrealized loss position for greater than a year. The Company reviewed its investment for impairment and considered such factors as NSE's future business outlook, the prevailing economic environment and the overall market condition for the Company's investment. As a result of its review, the Company recorded an other-than-temporary impairment of $9.0 million which was reclassified from accumulated other comprehensive income into "Other expense" on the consolidated statements of operations during the first quarter of 2015, related to the decline in value of its investment in NSE. Effective October 20, 2015, the Company sold its entire investment in NSE for cash consideration of approximately AUD $0.7 million (approximately $0.5 million USD). The Company recognized a gain on the sale of approximately $0.1 million.

At September 30, 2015, the Company's investments in common shares of Redstar Gold Corp. and Series C Preferred shares of GreenHunter were in gross unrealized loss positions for greater than a year. The Company reviewed the business outlook and market conditions for these investments and recorded other-than-temporary impairment of $0.4 million and $1.8 million related to the decline in value of its investments in common shares of Redstar Gold Corp. and its Series C Preferred shares of GreenHunter, respectively, which were reclassified from accumulated other comprehensive income into "Other expense" on the consolidated statements of operations during the third quarter of 2015.

Investment Holdings - GreenHunter

The Company holds an equity method investment in common shares of GreenHunter received as partial consideration for the sale by Triad Hunter of its equity ownership interest in Hunter Disposal to GreenHunter in 2012. The GreenHunter common stock investment had no carrying value at September 30, 2015 or December 31, 2014. The GreenHunter common shares are publicly traded and had a fair value of $0.5 million and $1.3 million at September 30, 2015 and December 31, 2014, respectively, which is not reflected in the carrying value since the Company's investment is accounted for using the equity method.

Below is a summary of changes in investments for the nine months ended September 30, 2015:

 
Available for Sale Securities
 
(in thousands)
Carrying value as of December 31, 2014
$
3,864

Loss from equity method investment(1)
(494
)
Change in fair value recognized in other comprehensive loss
(2,402
)
Carrying value as of September 30, 2015
$
968


(1) As a result of the carrying value of the Company's investment in common stock of GreenHunter being reduced to zero from equity method losses, the Company is required to allocate any additional losses to its investment in the Series C preferred stock of GreenHunter. The Company recorded additional equity method loss against the carrying value of its investment in the Series C preferred stock of GreenHunter before recording any mark-to-market adjustments.

The Company's investments in available for sale securities have been presented in current assets as "Investments" in the consolidated balance sheet as of September 30, 2015 and December 31, 2014.
 
The cost for equity securities and their respective fair values as of September 30, 2015 and December 31, 2014 are as follows:

 
 
September 30, 2015
 
 
(in thousands)
 
 
Cost
 
Gross Unrealized Losses
 
Fair Value
Securities available for sale, carried at fair value:
 
 
 
 
 
 
Equity securities
 
$
532

 
$

 
$
532

Equity securities - related party (see "Note 14 - Related Party Transactions")
 
436

 

 
436

Total Securities available for sale
 
$
968

 
$

 
$
968



22



 
 
December 31, 2014
 
 
(in thousands)
 
 
Cost
 
Gross Unrealized Losses
 
Fair Value
Securities available for sale, carried at fair value:
 
 
 
 
 
 
Equity securities
 
$
9,876

 
$
(7,323
)
 
$
2,553

Equity securities - related party (see "Note 14 - Related Party Transactions")
 
2,200

 
(889
)
 
1,311

Total Securities available for sale
 
$
12,076

 
$
(8,212
)
 
$
3,864


The methods of determining the fair values of Magnum Hunter's investments in equity securities are described in "Note 7 - Fair Value of Financial Instruments".

Commodity and Financial Derivative Instruments

The Company periodically enters into certain commodity derivative instruments such as futures contracts, swaps, collars, and basis swap contracts. As a producer of oil and natural gas, the Company holds these commodity derivatives to protect the operating revenues and cash flows related to a portion of its future natural gas and crude oil sales from the risk of significant declines in commodity prices, which is intended to help reduce exposure to price risk and improve the likelihood of funding its capital budget. The Company has not designated any commodity derivative instruments as hedges.

As of September 30, 2015, the Company had the following commodity derivative instruments:
 
 
 
 
Weighted Average
Natural Gas
Period
MMBtu/day
Price per MMBtu
Collars
Aug 2015 - Dec 2015
80,000

$2.66 - $3.15
 
 
 
Weighted Average
Crude Oil
Period
Bbl/day
Price per Bbl
Collars
Aug 2015 - Dec 2015
1,500

$45.00 - $48.00
Ceilings sold (call)
Jan 2015 - Dec 2015
1,570

$120.00
Floors sold (put)
Jan 2015 - Dec 2015
259

$70.00


On May 7, 2015, the Company obtained consent under the Credit Facility to terminate the Company's open commodity derivative positions, so long as all such terminations occur prior to the November 1, 2015 borrowing base redetermination. See "Note 9 - Debt". The Company received approximately $11.8 million in cash proceeds from the termination of the majority of its open commodity derivative positions that were terminated on May 7, 2015.

As of September 30, 2015, Citibank, N.A. and Bank of Montreal are the counterparties to the Company's commodity derivatives positions. Collateral securing the Credit Facility is used as collateral for the Company's commodity derivatives with those counterparties participating, currently or at the time the commodity derivative position was entered into, in the Credit Facility, under which the Company had outstanding borrowings of $5.0 million as of September 30, 2015. Effective as of July 10, 2015, Citibank, N.A. is no longer a participant in the Company's credit facilities. The Company is exposed to credit losses in the event of nonperformance by the counterparties where the Company's open commodity derivative contracts are in a gain position. The Company does not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions.

As further discussed in "Note 9 - Debt", as of October 8, 2015, the Company had an event of default under its Credit Facility and Second Lien Term Loan Agreement which resulted in a cross-default under the Company's derivative contracts with Bank of Montreal, and which may result in a cross-default under the Company's derivative contracts with Citibank, N.A. if the outstanding loan obligations under the related credit agreements are accelerated. Under the Company's derivative contracts, upon a cross-default the non-defaulting party may designate an early termination date for all outstanding transactions. The counterparties to the Company's derivative contracts have not designated early termination dates for any of the Company's outstanding commodities derivatives as of the date of this report.


23



On November 2, 2015, the Company terminated its open commodity derivative positions with Bank of Montreal and received approximately $0.9 million in cash proceeds.

At September 30, 2015, the Company also had a convertible security embedded derivative asset primarily due to the conversion feature of the promissory note received as partial consideration for the sale of Hunter Disposal. See "Note 7 - Fair Value of Financial Instruments" and "Note 14 - Related Party Transactions".
 
The following table summarizes the fair value of the Company's commodity and financial derivative contracts as of the dates indicated:
 
 
 
Derivatives not designated as hedging instruments
 
 
Derivative Assets
 
Derivative Liabilities
 
 
September 30,
2015
 
December 31,
2014
 
September 30,
2015
 
December 31,
2014
 
 
(in thousands)
Commodity
 
 
 
 
 
 
 
 
Derivative assets
 
$
1,051

 
$
16,511

 
$

 
$

Derivative liabilities
 

 

 
569

 

Total commodity
 
$
1,051

 
$
16,511

 
$
569

 
$

 
 
 
 
 
 
 
 
 
Financial
 
 
 
 
 
 
 
 
Derivative assets
 
$
3

 
$
75

 
$

 
$

Total financial
 
$
3

 
$
75

 
$

 
$

Total derivatives
 
$
1,054

 
$
16,586

 
$
569

 
$


Certain of the Company's derivative instruments are subject to enforceable master netting arrangements that provide for the net settlement of all derivative contracts between the Company and a counterparty in the event of default or upon the occurrence of certain termination events.  The tables below summarize the Company's commodity derivatives and the effect of master netting arrangements on the presentation of those derivatives in the Company's consolidated balance sheets as of:
 
September 30, 2015
 
Gross Amounts of Recognized Assets and Liabilities
Gross Amounts Offset on the Consolidated Balance Sheet
Net Amount
 
(in thousands)
Current assets:  Fair value of derivative contracts        
$
1,051

$

$
1,051

Current liabilities:  Fair value of derivative contracts        
(569
)

(569
)
 
$
482

$

$
482


 
December 31, 2014
 
Gross Amounts of Assets and Liabilities
Gross Amounts Offset on the Consolidated Balance Sheet
Net Amount
 
(in thousands)
Current assets:  Fair value of derivative contracts        
$
18,146

$
(1,635
)
$
16,511

Current liabilities:  Fair value of derivative contracts        
(1,635
)
1,635


 
$
16,511

$

$
16,511



24



The following table summarizes the net gain (loss) on all derivative contracts included in gain (loss) on derivative contracts, net on the consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Gain (loss) on settled transactions
$
(380
)
 
$
477

 
$
2,814

 
$
(4,074
)
Gain (loss) on open contracts
948

 
7,785

 
531

 
3,741

Total gain (loss), net
$
568

 
$
8,262

 
$
3,345

 
$
(333
)
 
NOTE 9 - DEBT
 
Long-term debt at September 30, 2015 and December 31, 2014 consisted of the following: 
 
September 30,
2015
 
December 31,
2014
 
(in thousands)
Senior Notes payable due May 15, 2020, interest rate of 9.75%, net of unamortized net discount of $2.5 million and $2.6 million at September 30, 2015 and December 31, 2014, respectively
$
597,521

 
$
597,355

Various equipment and real estate notes payable with maturity dates February 2015 - November 2017, interest rates of 4.25% - 7.94%
17,990

 
22,238

MHR Senior Revolving Credit Facility due on demand as of October 8, 2015, original maturity of October 22, 2018, interest rate of 4.21% at September 30, 2015 and 2.92% at December 31, 2014
5,000

 

MHR second lien term loan due on demand as of October 8, 2015, original maturity of October 22, 2019, interest rate of 8.5%, net of unamortized discount of $9.1 million and $10.0 million at September 30, 2015 and December 31, 2014, respectively
327,469

 
329,140

 
947,980

 
948,733

Less: current portion
(939,680
)
 
(10,770
)
Total long-term debt obligations, net of current portion
$
8,300

 
$
937,963



The following table presents the scheduled or expected approximate annual maturities of debt, gross of unamortized discount of $11.6 million as of September 30, 2015
 
(in thousands)
2015
$
946,533

2016
8,226

2017
1,240

2018
558

2019
207

Thereafter
2,826

Total
$
959,590


MHR Senior Revolving Credit Facility and Second Lien Term Loan

Senior Revolving Credit Facility

On October 22, 2014, the Company entered into the Fourth Amended and Restated Credit Agreement by and among the Company, as borrower, Bank of Montreal, as administrative agent, the lenders party thereto and the agents party thereto (as amended, the "Credit Agreement").


25



First Amendment to Credit Agreement and Limited Waiver

On February 24, 2015, the Company entered into a First Amendment to Credit Agreement and Limited Waiver (the "First Amendment") that, among other things, (i) waived the then existing current ratio covenant requirement for the December 31, 2014 compliance period and (ii) lowered the current ratio requirement to 0.75 from 1.0 for the fiscal quarter ending March 31, 2015. Pursuant to the First Amendment, the current ratio requirement would have increased to 1.0 to 1.0 for the fiscal quarter ending June 30, 2015 and each fiscal quarter ending thereafter. The First Amendment also modified the leverage ratio requirement to remain at not more than 2.5x beginning with the December 31, 2014 compliance period through the December 31, 2015 compliance period.

In addition, the First Amendment provided that, until such time as the Company can demonstrate a (i) current ratio of 1.0 to 1.0 as of the last day of a fiscal quarter or, if there is a proposed Liquidity Event (described below) or other arms-length liquidity event with a non-affiliate or unrestricted subsidiary, demonstrate a current ratio of 1.0 to 1.0 on a pro forma basis as of the last day of a calendar month assuming that the Liquidity Event (or other liquidity event) had occurred during such calendar month and (ii) in the case of a decrease of the Rates for ABR Loans and Eurodollar Loans, pro forma compliance with the other applicable financial covenants as of the last day of the fiscal quarter most recently ended, (such period, the "Adjusted Period"), then:

i.
neither the Company nor any of its restricted subsidiaries were permitted to make additional investments in excess of $2 million in the aggregate in oil and gas properties (other than acreage swaps and associated assets) and other applicable assets;
ii.
neither the Company nor any of its restricted subsidiaries were permitted to make additional capital contributions to or other investments in unrestricted subsidiaries in amounts in excess of $2 million in the aggregate; and
iii.
the Company could not make any additional capital contributions to or other investments in Eureka Hunter Holdings.

For purposes of the First Amendment, a "Liquidity Event" meant any event or events resulting in (i) an increase in Liquidity (as defined in the Credit Agreement, as amended by the First Amendment) of at least $36.0 million as a result of an arm's length transaction with a person or entity that is not an affiliate of the Company or (ii) the receipt by the Company or any restricted subsidiary of aggregate net cash proceeds of at least $73.0 million as a result of one or more arm's length transactions with either (a) persons or entities who are not affiliates of the Company or (b) the Company's unrestricted subsidiaries.

The First Amendment also provided that effective March 31, 2015, if a Liquidity Event (described in clause (i) of the preceding paragraph) had not occurred prior to such date, or April 30, 2015 if a proposed Liquidity Event described in clause (ii) of the preceding paragraph for which a pro forma current ratio calculation was used had not occurred prior to such date, the rates for ABR Loans and Eurodollar Loans would automatically increase by 1.00% and the commitment fee would automatically increase by 0.25% and such elevated rates would continue until the day immediately preceding the date on which the Adjusted Period ended. No Liquidity Event or proposed Liquidity Event for which a pro forma current ratio calculation was used had occurred as of April 30, 2015. Accordingly the rates for ABR Loans and Eurodollar Loans and the commitment fee were increased as described in the second preceding sentence.

Second Amendment to Credit Agreement and Limited Waiver

The Company entered into the Second Amendment to Credit Agreement and Limited Waiver (the "Second Amendment") on and effective as of April 17, 2015 by and among the Company, as borrower, Bank of Montreal, as administrative agent, and the several lenders and guarantors party thereto. The waiver required that certain events and conditions be satisfied by May 29, 2015 as further described below. The Second Amendment amended the Credit Agreement to:

i.
Extend the amount of time the Company and its Restricted Subsidiaries (as defined in the Credit Agreement) may have accounts payable outstanding after the invoice date from 90 days to 180 days for any day on or prior to May 29, 2015, after which the date the restriction would have reverted back to 90 days.
ii.
Condition the Company's ability to pay cash dividends on its three outstanding series of preferred stock as follows:
1.
Payment of the preferred stock dividends for the month of April 2015 was permitted provided the Company's previously filed shelf registration statement (the "Shelf Registration Statement"), providing for, among other things, ATM offerings of equity securities of the Company, had been declared effective by the Securities and Exchange Commission (the "SEC") and the Company had executed an agreement (a "Sales Agreement") with an underwriter or sales agent to proceed with any such ATM offerings. The Shelf Registration Statement was declared effective on April 22, 2015 and the Company entered into a Sales Agreement on April 23, 2015.

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2.
Payment of the preferred stock dividends for the month of May 2015 was permitted provided the Company had received, by May 29, 2015, at least $65.0 million of aggregate net cash proceeds from the issuance by the Company of equity securities, permitted asset sales by the Company or any Restricted Subsidiary or the entry into a joint venture by the Company or any Restricted Subsidiary (including the receipt of any contemplated upfront payments therefrom).
iii.
Increase the applicable interest rate margins under the First Lien Credit Agreement by a nominal amount of 25 basis points. The applicable interest rate margins will automatically revert back to the lower levels in effect immediately prior to the effective date of the First Amendment when the Company demonstrates full compliance with its financial covenants under the Credit Agreement or compliance with such covenants on a pro forma basis giving effect to one or more Liquidity
Events.

In addition, pursuant to the Second Amendment, the lenders agreed to waive (i) effective as of March 31, 2015, compliance with the current ratio and leverage ratio covenants under the Credit Agreement for the fiscal quarter ended March 31, 2015 (which covenants, prior to the waiver, required a current ratio of not less than 0.75 to 1.0, and leverage ratio of not more than 2.5 to 1.0, for such fiscal quarter) and (ii) any default or event of default that may have occurred as a result of non-compliance with the accounts payable aging limitation in effect prior to the effective date of the Second Amendment, as described above. These waivers were subject to the Company having received, by May 29, 2015, at least $65.0 million of aggregate net cash proceeds from one or more of the issuance by the Company of equity securities, permitted asset sales by the Company or any Restricted Subsidiary or the entry into a joint venture by the Company or any Restricted Subsidiary (including the receipt of upfront payments therefrom) (the "Waiver Condition").

On May 7, 2015, the Company obtained consent under the Credit Facility to terminate the Company's open commodity derivative positions, so long as all such terminations occurred prior to the November 1, 2015 borrowing base redetermination. Such terminations had been contemplated and were reflected in the May 1, 2015 borrowing base redetermination. Following the May 1, 2015 borrowing base redetermination, the Company's borrowing base under the Credit Facility was maintained at $50 million. The Company terminated the majority of its open commodity derivative positions on May 7, 2015. See "Note 8 - Investments and Derivatives".

Third Amendment to Credit Agreement and Limited Consent

On and effective as of May 28, 2015, the Company entered into the Third Amendment to Credit Agreement and Limited Consent (the "Third Amendment") by and among the Company, as borrower, Bank of Montreal, as administrative agent, and the several lenders and guarantors party thereto. The Third Amendment amended the Credit Agreement to:

i.
Extend the amount of time the Company and its Restricted Subsidiaries may have accounts payable outstanding after the invoice date from 90 days to 180 days for any day on or prior to June 19, 2015 (rather than May 29, 2015, as provided in the Second Amendment), after which June 19, 2015 date the restriction would have reverted back to 90 days; and
ii.
Remove the condition, previously added by the Second Amendment, on the Company's ability to pay cash dividends on its three outstanding series of preferred stock for the month of May 2015, so that the Company may pay such dividends as scheduled on June 1, 2015 without regard to such condition.

In addition, pursuant to the Third Amendment, the lenders agreed to extend the deadline for the Company to satisfy the Waiver Condition from May 29, 2015 to June 19, 2015.

Fourth Amendment to Credit Agreement and Limited Consent

On and effective as of June 19, 2015, the Company entered into the Fourth Amendment to Credit Agreement and Limited Consent (the "Fourth Amendment") by and among the Company, as borrower, Bank of Montreal, as administrative agent, and the several lenders and guarantors party thereto. The Fourth Amendment amended the Credit Agreement to extend the amount of time the Company and its Restricted Subsidiaries may have accounts payable outstanding after the invoice date from 90 days to 180 days for any day on or prior to July 10, 2015, after such date the restriction would have reverted back to 90 days. In addition, pursuant to the Fourth Amendment, the lenders agreed to extend the deadline for Magnum Hunter to satisfy the Waiver Condition from June 19, 2015 to July 10, 2015.


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Fifth Amendment to Credit Agreement and Limited Waiver

On and effective as of July 10, 2015, the Company entered into the Fifth Amendment to Credit Agreement and Limited Waiver (the "Fifth Amendment") by and among the Company, as borrower, Bank of Montreal, as administrative agent, and the several lenders and guarantors party thereto. The Fifth Amendment amended the Credit Agreement to, among other things:

i.
Permanently eliminate the Company's obligation to raise $65.0 million in net cash proceeds from one or more of the issuance by the Company of equity securities, permitted asset sales by the Company or any Restricted Subsidiary or the entry into a joint venture by the Company or any Restricted Subsidiary (including the receipt of upfront payments therefrom);

ii.
Extend the amount of time the Company and its Restricted Subsidiaries may have accounts payable outstanding after the invoice date from 90 days to 180 days for any day on or prior to the earlier of (a) December 31, 2015 or (b) the date that is ten business days following the date on which the Company consummates the sale of all or substantially all of the Company's equity ownership interest in Eureka Hunter Holdings (the date of such sale, the "Trigger Date"), after which earlier date the restriction will revert back to 90 days; and

iii.
Permit certain lenders to sell and assign their rights and obligations under the Credit Agreement to the Bank of Montreal.

In addition, the Fifth Amendment includes a waiver of compliance by the Company with the current ratio and leverage ratio covenants for the fiscal quarter ended June 30, 2015 (which covenants, prior to the waiver, required a current ratio of not less than 1.0 to 1.0 and a leverage ratio of not more than 2.5 to 1.0) and for each fiscal quarter ending thereafter until the earlier of (i) the fiscal quarter ending December 31, 2015 or (ii) the fiscal quarter in which the Trigger Date occurs, at which time the waiver of these financial covenants will no longer be in effect commencing with the earlier of the fiscal quarters referred to in clauses (i) and (ii) of this sentence. Upon expiration of the waiver of these financial covenants, the Company will be required to maintain (i) a current ratio of not less than 1.0 to 1.0 for the fiscal quarter during which the waiver expired and each quarter ending thereafter and (ii) a leverage ratio of not more than (a) 2.5 to 1.0 for the fiscal quarters ending September 30, 2015 (if the Trigger Date occurs during such fiscal quarter) and December 31, 2015 and (b) 2.0 to 1.0 for the fiscal quarter ending March 31, 2016 and for each fiscal quarter ending thereafter.

Sixth Amendment to the Credit Agreement

On and effective as of November 3, 2015, the Company entered into the Sixth Amendment, which amended the Credit Agreement to, among other things:

i.
assign amounts outstanding of approximately $5.0 million under the Credit Facility in the form of a single tranche of term loans to the New First Lien Lenders;
ii.
cash collateralize certain outstanding letters of credit issued under the Credit Facility in an aggregate amount of approximately $39.0 million; and
iii.
provide the Company with an additional new term loan in the aggregate principal amount of $16.0 million, which was funded in full by the New First Lien Lenders on the closing date of the Sixth Amendment.

As a result of the Sixth Amendment, the New First Lien Lenders became the lenders under the Refinancing Facility, the Credit Facility was restructured from a senior secured revolving credit facility to a senior secured term loan facility represented by the Refinancing Facility and the aggregate amounts outstanding under the Refinancing Facility as of the closing date of the Sixth Amendment totaled approximately $60 million. In addition, the Refinancing Facility includes an uncommitted incremental credit facility for up to an additional $10.0 million aggregate principal amount of term loans to be provided to the Company, if and to the extent requested by the Company and agreed to by a specified percentage of the New First Lien Lenders.

The Refinancing Facility is due and payable on the earlier of: (a) December 30, 2015, (b) in the case of an event of default under the Refinancing Facility, the acceleration of the payment of the term loans under the Refinancing Facility, as determined by the requisite percentage of the New First Lien Lenders, or (c) the filing of a Chapter 11 case (or cases) by the Company or any of its subsidiaries. The term loans under the Refinancing Facility bear interest at the Company's option at either the London Interbank Offered Rate, plus an applicable margin of 4.0%, or a specified prime rate of interest, plus an applicable margin of 3.0%.




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The Refinancing Facility contains the same covenants as the Credit Agreement prior to execution of the Sixth Amendment, subject to customary adjustments consistent with financings of this type and duration and subject to the following additional changes:

i.
removal of all financial covenants in effect prior to the Sixth Amendment (including the current ratio, total secured net debt to EBITDAX, proved reserves coverage ratio and proved developed producing reserves coverage ratio covenants).

ii.
removal of restrictions against trade payables being outstanding for more than 180 days from the date of invoice, and

iii. inclusion of budgetary and reporting requirements consistent with financings of this type and duration, including a cumulative budget variance covenant tested every other week, in accordance with the terms of the Refinancing Facility.

The Refinancing Facility also contains restrictions on the sale of assets by the Company and its restricted subsidiaries, which restrictions, among other things, prohibit (i) the Company from selling its equity ownership interests in Eureka Hunter Holdings, LLC (the "EHH Interests") and (ii) the Company and its restricted subsidiaries from engaging in certain farm-outs of undeveloped acreage, without, in each case, first obtaining the requisite consent of the New First Lien Lenders. Additionally, the Refinancing Facility contains a standstill on any marketing by the Company of the sale of the EHH Interests, other than with bidders that contact the Company without prior solicitation and other than any bidders that have already been engaged in such marketing efforts with the Company as of the closing date of the Refinancing Facility.

Defaults under the Credit Agreement

On July 27, 2015, the Company became aware of a default under the Credit Agreement relating to accounts payable. In accordance with the terms of the Credit Agreement, the Company may not have accounts payable outstanding (subject to certain permissible amounts) in excess of 180 days from the invoice date for any day on or prior to the earlier of (a) December 31, 2015 or (b) the Trigger Date, after which earlier date the restriction will revert back to 90 days. The Company cured the default in accordance with the Credit Agreement on August 26, 2015.

On September 8, 2015, the Company became aware of an additional default under the Credit Agreement because the Company had approximately $1.4 million in accounts payable outstanding (other than such permissible amounts) in excess of 180 days from the invoice date. Under the Credit Agreement, the Company had 30 days to cure this default. As of October 8, 2015, the Company continued to have accounts payable outstanding (other than such permissible amounts) in excess of 180 days from the invoice date, resulting in an event of default. Due to the event of default, the lenders under the Credit Agreement may declare the outstanding loan amounts immediately due and payable. As such, the Company's outstanding balance under the Credit Agreement is reflected as a current liability in the accompanying consolidated balance sheet as of September 30, 2015. However, defaults and events of default under the Company's credit facilities are currently subject to certain forbearance agreements.

Our unsecured Senior Notes and certain remaining derivatives contracts also contain cross-default or cross-acceleration provisions that may result in the Senior Notes and the remaining derivatives contracts becoming callable if any material obligation is called by a lender due to an event of the default. Specifically, a cross-default under the indenture governing the Senior Notes will occur if the lenders under the Company's Credit Agreement or Second Lien Term Loan Agreement choose to accelerate the indebtedness under such agreement as a result of the event of default. The Company has not received any notice of acceleration with respect to any of the obligations described above.

The event of default described above under the Credit Agreement resulted in an event of default under the Second Lien Term Loan Agreement and the Note Payable (as defined below). Furthermore, the event of default regarding accounts payable under the Second Lien Term Loan Agreement, as described below, resulted in a cross-default under the Credit Agreement. For additional information regarding cross-defaults, potential cross-defaults, and forbearances, please see the remaining discussion below regarding each debt instrument.

The event of default under the Credit Agreement also resulted in a cross-default under the Company's derivatives contracts with Bank of Montreal, and may result in a cross-default under the Company's derivatives contracts with Citibank, N.A. As of September 30, 2015, the Company had outstanding commodities derivatives contracts representing $1.1 million of current assets and $0.6 million of current liabilities.


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Under the Company's derivative contracts with Bank of Montreal, an event of default under the Credit Agreement which results in the obligations under the Credit Facility becoming, or becoming capable at such time of being declared, due and payable before such obligations would otherwise have been due or payable creates a cross-default. As such, a cross-default arose under the Company's derivative contracts with Bank of Montreal on October 8, 2015 when the obligations under the Credit Agreement became callable. However, the Company did not receive any notice of cross-default from Bank of Montreal with respect to such derivatives contracts. In addition, on November 2, 2015, the Company chose to terminate all of its open commodity derivative positions with Bank of Montreal and received approximately $0.9 million in cash proceeds. See "Note 8 - Investments and Derivatives - Commodity and Financial Derivative Instruments".

Under the Company's derivatives contracts with Citibank, N.A., an event of default under the Credit Agreement which results in the obligations under the Credit Agreement becoming due and payable before such obligations would otherwise have been due and payable creates a cross-default. Therefore, if the obligations under the Credit Agreement are accelerated, a cross-default under the Company's derivatives contracts with Citibank, N.A. would be created. Under each Citibank, N.A. derivatives contract, upon a cross-default the non-defaulting party may then designate an early termination date for all outstanding transactions. Citibank, N.A. has not designated early termination dates for any of the Company's outstanding commodities derivatives as of the date of this report. See "Note 8 - Investments and Derivatives".

As of September 30, 2015, the borrowing base under the Credit Agreement was $50.0 million and outstanding borrowings were $5.0 million. The Company also posted letters of credit for $39.0 million using availability under the Credit Agreement. As of September 30, 2015, the borrowing capacity under the Credit Agreement was $6.0 million.

As described above, on November 3, 2015, the Company entered into the Sixth Amendment, which (i) assigned amounts outstanding of approximately $5.0 million under the Credit Agreement, with such refinancing being in the form of a single tranche of term loans to the New First Lien Lenders, (ii) cash collateralized certain outstanding letters of credit issued under the Credit Agreement in an aggregate amount of approximately $39.0 million and (iii) provided the Company with an additional new term loan in the aggregate principal amount of approximately $16.0 million, which was funded in full by the New First Lien Lenders on the closing date of the Sixth Amendment.

Second Lien Term Loan

On October 22, 2014, the Company entered into the Second Lien Term Loan Agreement by and among the Company, as borrower, Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, the lenders party thereto and the agents party thereto.

The Second Lien Term Loan Agreement requires the Company to satisfy certain financial covenants, including maintaining:

i.
a ratio of the present value of proved reserves using five year strip pricing to secured debt of not less than 1.5 to 1.0 and a ratio of the present value of proved developed and producing reserves using five year strip pricing to secured debt of not less than 1.0 to 1.0, each as of the last day of any fiscal quarter commencing with the fiscal quarter ending December 31, 2014; and
ii.
commencing with the fiscal quarter ending March 31, 2016, a leverage ratio (secured net debt to EBITDAX (as defined in the Second Lien Term Loan Agreement) with a limitation on netting of up to $100.0 million of unencumbered cash) of not more than 2.5 to 1.0 as of the last day of any fiscal quarter for the trailing four-quarter period then ended.

In accordance with the terms of the Second Lien Term Loan Agreement, the Company may not have accounts payable outstanding in excess of 90 days from the invoice date, in excess of permissible amounts provided for in the Second Lien Term Loan Agreement.

On and effective as of April 17, 2015, the Company entered into a First Amendment to Credit Agreement and Limited Waiver (the "Second Lien Amendment"), by and among the Company, as borrower, Credit Suisse AG Cayman Islands Branch, as administrative agent and collateral agent, and the several lenders and guarantors party thereto. The Second Lien Amendment amended the Second Lien Term Loan Agreement by permanently extending the amount of time the Company and its Restricted Subsidiaries (as defined in the Second Lien Term Loan Agreement) may have accounts payable outstanding after the invoice date from 90 days to 180 days. In addition, pursuant to the Second Lien Amendment, the lenders waived any default or event of default that may have occurred in connection with any non-compliance with the accounts payable aging limitation in effect prior to the effective date of the Second Lien Amendment.

On November 3, 2015, the Company entered into the Second Amendment. The Second Amendment provides for a forbearance by the lenders under the Second Lien Term Loan Agreement that entered into the Refinancing Facility with respect to exercising

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remedies regarding any default or event of default that results from the failure of the Company to make any interest payment under the Second Lien Term Loan Agreement, the failure to meet certain financial covenants thereunder, and certain other matters (including the default that arose on account of  trade payables being outstanding for more than 180 days). The Second Amendment also amends certain other terms of the Second Lien Term Loan Agreement as necessary to permit the Refinancing Facility and to make certain covenants in the Second Lien Term Loan Agreement consistent with the revised covenants in the Refinancing Facility. The covenants under the Second Lien Term Loan Agreement otherwise remain substantially the same, subject to customary adjustments for such financings described herein.

Under the Second Amendment, the lenders under the Second Lien Term Loan Agreement that entered into the Refinancing Facility agreed to forbear from exercising remedies under the Second Lien Term Loan Agreement with respect to any failure by the Company to make the October 30, 2015 interest payment under the Second Lien Term Loan Agreement and certain other defaults and events of default (including the default that arose on account of  trade payables being outstanding for more than 180 days) until the earlier of (a) December 30, 2015, (b) the occurrence of an event of default under the Refinancing Facility, which such event of default is not cured or waived in accordance with the terms of the Refinancing Facility within 10 business days, (c) the occurrence of any event of default under the Second Lien Term Loan Agreement, and (d) the filing of a Chapter 11 case (or cases) by the Company or any of its subsidiaries.

Defaults under the Second Lien Term Loan Agreement

On July 27, 2015, the Company became aware of a default under the Second Lien Term Loan Agreement relating to accounts payable. In accordance with the terms of the Second Lien Term Loan Agreement the Company may not have accounts payable outstanding (subject to certain permissible amounts) in excess of 180 days from the invoice date. The Company cured the default in accordance with the Second Lien Term Loan Agreement on August 26, 2015.

On September 8, 2015, the Company became aware of an additional default under the Second Lien Term Loan Agreement because the Company had approximately $1.4 million in accounts payable outstanding (other than such permissible amounts) in excess of 180 days from the invoice date. Under the Second Lien Term Loan Agreement, the Company had 30 days to cure this default. As of October 8, 2015, the Company continued to have accounts payable outstanding (other than such permissible amounts) in excess of 180 days from the invoice date, resulting in an event of default. Due to the event of default, the lenders under the Second Lien Term Loan Agreement may declare the outstanding loan amounts immediately due and payable. As such, the Company's outstanding balance under the Second Lien Term Loan Agreement is reflected as a current liability in the accompanying consolidated balance sheet as of September 30, 2015. However, defaults and events of default under the Company's credit facilities are currently subject to certain forbearance agreements.

As described above, under the Second Amendment, the lenders under the Second Lien Term Loan Agreement that entered into the Refinancing Facility agreed to forbear from exercising remedies under the Second Lien Term Loan Agreement with respect to any failure by the Company to make the October 30, 2015 interest payment under the Second Lien Term Loan Agreement and certain other defaults (including the default that arose on account of  trade payables being outstanding for more than 180 days)and events of default until the earlier of (a) December 30, 2015, (b) the occurrence of an event of default under the Refinancing Facility, which such event of default is not cured or waived in accordance with the terms of the Refinancing Facility within 10 business days, (c) the occurrence of any event of default under the Second Lien Term Loan Agreement, and (d) the filing of a Chapter 11 case (or cases) by the Company or any of its subsidiaries.

Senior Notes

On May 16, 2012, the Company issued $450 million in aggregate principal amount of its Senior Notes. The Senior Notes were issued pursuant to an indenture entered into on May 16, 2012 as supplemented, among the Company, the subsidiary guarantors party thereto, Wilmington Trust, National Association, as the trustee, and Citibank, N.A., as the paying agent, registrar and authenticating agent (the "Indenture"). On December 18, 2012, the Company issued an additional $150 million in aggregate principal amount of Senior Notes pursuant to a supplement to the Indenture. The Senior Notes issued in May 2012 and the Senior Notes issued in December 2012 have identical terms and are treated as a single class of securities under the Indenture. Interest on the Senior Notes is payable semi-annually in arrears on May 15 and November 15.


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The event of default under the Credit Agreement and Second Lien Term Loan Agreement may result in a cross-default under the Company's Senior Notes if the obligations under the Credit Agreement or the Second Lien Term Loan Agreement are accelerated. However, if, prior to any acceleration of the Senior Notes, the acceleration of the indebtedness under the Credit Agreement or Second Lien Term Loan Agreement is rescinded, or the obligations are repaid during the 10 business day period commencing upon the end of any applicable grace period for the occurrence of such acceleration, any event of default caused by such acceleration shall automatically be rescinded, so long as the rescission does not conflict with any judgment, decree or applicable law. If an event of default under the Indenture occurs and is continuing, the trustee or the holders of at least 25% in aggregate principal amount of the then outstanding Senior Notes may declare all the Senior Notes to be due and payable immediately.

The Company has an interest payment due on November 15, 2015 on its Senior Notes. Interest on the Senior Notes accrues at an annual rate of 9.75% and is payable semi-annually on May 15 and November 15. The total interest payment due on November 15, 2015 is expected to be approximately $29.3 million, of which $22.1 million was accrued as of September 30, 2015. The failure by the Company to make an interest payment on the Senior Notes within 30 days following the due date would constitute an event of default under the Senior Notes, and the Senior Notes could be declared immediately due and payable. The Company does not expect to make the interest payment by December 15, 2015; however, payments under the Senior Notes are the subject of forbearance agreements described below and in “- Second Lien Term Loan”. Therefore, the Company's outstanding Senior Notes of $597.5 million, net of unamortized discount, are reflected as current liabilities in the accompanying consolid