Attached files
| file | filename |
|---|---|
| EX-32.2 - SECTION 906 CERTIFICATION OF CFO - CARRIZO OIL & GAS INC | ex3223q16.htm |
| EX-32.1 - SECTION 906 CERTIFICATION OF CEO - CARRIZO OIL & GAS INC | ex3213q16.htm |
| EX-31.2 - SECTION 302 CERTIFICATION OF CFO - CARRIZO OIL & GAS INC | ex3123q16.htm |
| EX-31.1 - SECTION 302 CERTIFICATION OF CEO - CARRIZO OIL & GAS INC | ex3113q16.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________
FORM 10-Q
_________________________________________________
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016
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: 000-29187-87
_________________________________________________
CARRIZO OIL & GAS, INC.
(Exact name of registrant as specified in its charter)
_________________________________________________
Texas | 76-0415919 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
500 Dallas Street, Suite 2300, Houston, Texas | 77002 | |
(Address of principal executive offices) | (Zip Code) | |
(713) 328-1000
(Registrant’s telephone number)
____________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | 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 ¨ NO x
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of October 28, 2016 was 65,129,295.
TABLE OF CONTENTS
PAGE | ||
Part I. Financial Information | ||
Item 1. | Consolidated Financial Statements (Unaudited) | |
Notes to Consolidated Financial Statements | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Part II. Other Information | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
Signatures | ||
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
CARRIZO OIL & GAS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) (Unaudited) | ||||||||
September 30, 2016 | December 31, 2015 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $3,235 | $42,918 | ||||||
Accounts receivable, net | 49,294 | 54,721 | ||||||
Derivative assets | 20,146 | 131,100 | ||||||
Other current assets | 4,838 | 3,443 | ||||||
Total current assets | 77,513 | 232,182 | ||||||
Property and equipment | ||||||||
Oil and gas properties, full cost method | ||||||||
Proved properties, net | 1,127,264 | 1,369,151 | ||||||
Unproved properties, not being amortized | 196,738 | 335,452 | ||||||
Other property and equipment, net | 10,693 | 12,258 | ||||||
Total property and equipment, net | 1,334,695 | 1,716,861 | ||||||
Deferred income taxes | — | 46,758 | ||||||
Derivative assets | — | 1,115 | ||||||
Other assets | 8,299 | 10,330 | ||||||
Total Assets | $1,420,507 | $2,007,246 | ||||||
Liabilities and Shareholders’ Equity (Deficit) | ||||||||
Current liabilities | ||||||||
Accounts payable | $57,302 | $74,065 | ||||||
Revenues and royalties payable | 43,838 | 67,808 | ||||||
Accrued capital expenditures | 68,583 | 39,225 | ||||||
Accrued interest | 20,956 | 21,981 | ||||||
Deferred income taxes | — | 46,758 | ||||||
Other current liabilities | 39,083 | 35,647 | ||||||
Total current liabilities | 229,762 | 285,484 | ||||||
Long-term debt | 1,333,801 | 1,236,017 | ||||||
Asset retirement obligations | 17,534 | 16,183 | ||||||
Derivative liabilities | 29,354 | 12,648 | ||||||
Other liabilities | 15,415 | 12,860 | ||||||
Total liabilities | 1,625,866 | 1,563,192 | ||||||
Commitments and contingencies | ||||||||
Shareholders’ equity (deficit) | ||||||||
Common stock, $0.01 par value, 90,000,000 shares authorized; 59,117,696 issued and outstanding as of September 30, 2016 and 58,332,993 issued and outstanding as of December 31, 2015 | 591 | 583 | ||||||
Additional paid-in capital | 1,436,355 | 1,411,081 | ||||||
Accumulated deficit | (1,642,305 | ) | (967,610 | ) | ||||
Total shareholders’ equity (deficit) | (205,359 | ) | 444,054 | |||||
Total Liabilities and Shareholders’ Equity (Deficit) | $1,420,507 | $2,007,246 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
-2-
CARRIZO OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenues | |||||||||||||||
Crude oil | $95,154 | $95,237 | $254,758 | $289,552 | |||||||||||
Natural gas liquids | 5,616 | 3,330 | 15,119 | 11,602 | |||||||||||
Natural gas | 10,407 | 7,670 | 29,886 | 28,627 | |||||||||||
Total revenues | 111,177 | 106,237 | 299,763 | 329,781 | |||||||||||
Costs and Expenses | |||||||||||||||
Lease operating | 24,282 | 22,213 | 71,071 | 67,304 | |||||||||||
Production taxes | 4,886 | 4,264 | 12,940 | 13,313 | |||||||||||
Ad valorem taxes | 1,426 | 2,256 | 3,950 | 7,012 | |||||||||||
Depreciation, depletion and amortization | 48,949 | 81,256 | 160,492 | 234,458 | |||||||||||
General and administrative, net | 18,119 | 4,207 | 59,046 | 54,879 | |||||||||||
(Gain) loss on derivatives, net | (11,744 | ) | (28,752 | ) | 29,938 | (42,596 | ) | ||||||||
Interest expense, net | 21,190 | 16,208 | 58,913 | 51,403 | |||||||||||
Impairment of proved oil and gas properties | 105,057 | 812,752 | 576,540 | 812,752 | |||||||||||
Loss on extinguishment of debt | — | — | — | 38,137 | |||||||||||
Other expense, net | 499 | 3,516 | 1,568 | 10,789 | |||||||||||
Total costs and expenses | 212,664 | 917,920 | 974,458 | 1,247,451 | |||||||||||
Loss From Continuing Operations Before Income Taxes | (101,487 | ) | (811,683 | ) | (674,695 | ) | (917,670 | ) | |||||||
Income tax benefit | 313 | 102,915 | — | 140,456 | |||||||||||
Loss From Continuing Operations | (101,174 | ) | (708,768 | ) | (674,695 | ) | (777,214 | ) | |||||||
Income From Discontinued Operations, Net of Income Taxes | — | 1,121 | — | 2,225 | |||||||||||
Net Loss | ($101,174 | ) | ($707,647 | ) | ($674,695 | ) | ($774,989 | ) | |||||||
Net Loss Per Common Share - Basic | |||||||||||||||
Loss from continuing operations | ($1.72 | ) | ($13.75 | ) | ($11.49 | ) | ($15.62 | ) | |||||||
Income from discontinued operations, net of income taxes | — | 0.02 | — | 0.04 | |||||||||||
Net loss | ($1.72 | ) | ($13.73 | ) | ($11.49 | ) | ($15.58 | ) | |||||||
Net Loss Per Common Share - Diluted | |||||||||||||||
Loss from continuing operations | ($1.72 | ) | ($13.75 | ) | ($11.49 | ) | ($15.62 | ) | |||||||
Income from discontinued operations, net of income taxes | — | 0.02 | — | 0.04 | |||||||||||
Net loss | ($1.72 | ) | ($13.73 | ) | ($11.49 | ) | ($15.58 | ) | |||||||
Weighted Average Common Shares Outstanding | |||||||||||||||
Basic | 58,945 | 51,543 | 58,705 | 49,742 | |||||||||||
Diluted | 58,945 | 51,543 | 58,705 | 49,742 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CARRIZO OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, | |||||||
2016 | 2015 | ||||||
Cash Flows From Operating Activities | |||||||
Net loss | ($674,695 | ) | ($774,989 | ) | |||
Income from discontinued operations, net of income taxes | — | (2,225 | ) | ||||
Adjustments to reconcile loss from continuing operations to net cash provided by operating activities from continuing operations | |||||||
Depreciation, depletion and amortization | 160,492 | 234,458 | |||||
Impairment of proved oil and gas properties | 576,540 | 812,752 | |||||
(Gain) loss on derivatives, net | 29,938 | (42,596 | ) | ||||
Cash received for derivative settlements, net | 98,820 | 141,909 | |||||
Loss on extinguishment of debt | — | 38,137 | |||||
Stock-based compensation expense, net | 30,834 | 9,203 | |||||
Deferred income taxes | — | (140,538 | ) | ||||
Non-cash interest expense, net | 3,105 | 3,564 | |||||
Other, net | 2,427 | 4,554 | |||||
Changes in components of working capital and other assets and liabilities- | |||||||
Accounts receivable | 1,768 | 27,395 | |||||
Accounts payable | (20,294 | ) | (18,115 | ) | |||
Accrued liabilities | (7,954 | ) | (5,614 | ) | |||
Other assets and liabilities, net | (3,134 | ) | (3,676 | ) | |||
Net cash provided by operating activities from continuing operations | 197,847 | 284,219 | |||||
Net cash used in operating activities from discontinued operations | — | (1,247 | ) | ||||
Net cash provided by operating activities | 197,847 | 282,972 | |||||
Cash Flows From Investing Activities | |||||||
Capital expenditures - oil and gas properties | (346,245 | ) | (541,616 | ) | |||
Proceeds from sales of oil and gas properties, net | 15,331 | 7,934 | |||||
Other, net | (661 | ) | (5,390 | ) | |||
Net cash used in investing activities from continuing operations | (331,575 | ) | (539,072 | ) | |||
Net cash used in investing activities from discontinued operations | — | (2,125 | ) | ||||
Net cash used in investing activities | (331,575 | ) | (541,197 | ) | |||
Cash Flows From Financing Activities | |||||||
Issuance of senior notes | — | 650,000 | |||||
Tender and redemption of senior notes | — | (626,681 | ) | ||||
Payment of deferred purchase payment | — | (150,000 | ) | ||||
Borrowings under credit agreement | 510,116 | 1,045,521 | |||||
Repayments of borrowings under credit agreement | (414,116 | ) | (889,031 | ) | |||
Payments of debt issuance costs | (1,150 | ) | (11,665 | ) | |||
Sale of common stock, net of offering costs | — | 231,316 | |||||
Proceeds from stock options exercised | — | 46 | |||||
Other, net | (805 | ) | (115 | ) | |||
Net cash provided by financing activities from continuing operations | 94,045 | 249,391 | |||||
Net cash provided by financing activities from discontinued operations | — | — | |||||
Net cash provided by financing activities | 94,045 | 249,391 | |||||
Net Decrease in Cash and Cash Equivalents | (39,683 | ) | (8,834 | ) | |||
Cash and Cash Equivalents, Beginning of Period | 42,918 | 10,838 | |||||
Cash and Cash Equivalents, End of Period | $3,235 | $2,004 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
-4-
CARRIZO OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Nature of Operations
Carrizo Oil & Gas, Inc. is a Houston-based energy company which, together with its subsidiaries (collectively, the “Company”), is actively engaged in the exploration, development, and production of oil and gas primarily from resource plays located in the United States. The Company’s current operations are principally focused in proven, producing oil and gas plays primarily in the Eagle Ford Shale in South Texas, the Delaware Basin in West Texas, the Niobrara Formation in Colorado, the Utica Shale in Ohio, and the Marcellus Shale in Pennsylvania.
Consolidated Financial Statements
The accompanying unaudited interim consolidated financial statements include the accounts of the Company after elimination of intercompany transactions and balances and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and therefore do not include all disclosures required for financial statements prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”). In the opinion of management, these financial statements include all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly, in all material respects, the Company’s interim financial position, results of operations and cash flows. However, the results of operations for the periods presented are not necessarily indicative of the results of operations that may be expected for the full year. These financial statements and related notes included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Annual Report”). Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Such reclassifications had no material impact on prior period amounts.
2. Summary of Significant Accounting Policies
The Company has provided a discussion of significant accounting policies, estimates, and judgments in “Note 2. Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in its 2015 Annual Report. There have been no changes to the Company’s significant accounting policies since December 31, 2015, other than the recently adopted accounting pronouncements described below.
Recently Adopted Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 requires that all deferred tax liabilities and assets, as well as any related valuation allowance, be classified in the balance sheet as noncurrent. Effective January 1, 2016, the Company early adopted ASU 2015-17 which was applied prospectively and therefore the adoption had no impact on the consolidated balance sheet as of December 31, 2015.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 is to simplify the presentation of debt issuance costs in financial statements by presenting such costs in the balance sheet as a direct deduction from the related debt rather than as an asset. In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30) (“ASU 2015-15”), which allows debt issuance costs associated with line-of-credit agreements to be deferred and presented as an asset in the balance sheet, subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings. Effective January 1, 2016, the Company adopted ASU 2015-03 and ASU 2015-15 and reclassified $19.7 million of unamortized debt issuance costs related to the Company’s senior notes from long-term assets to long-term debt in the consolidated balance sheet as of December 31, 2015. Debt issuance costs associated with the Company’s revolving credit facility remain classified as a long-term asset in the consolidated balance sheets.
Recently Issued Accounting Pronouncements
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance addresses eight specific cash flow issues for which current GAAP is either unclear or does not include specific guidance. ASU 2016-15 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted, provided that it is adopted in its entirety in the same period. The Company is evaluating ASU 2016-15 to determine what impact adoption of the new standard will have on its consolidated statements of cash flows.
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In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which amends certain aspects of accounting for share-based payment arrangements. ASU 2016-09 revises or provides alternative accounting for the tax impacts of share-based payment arrangements, forfeitures, minimum statutory tax withholdings, and prescribes certain disclosures to be made in the period of adoption. ASU 2016-09 is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. The Company is evaluating ASU 2016-09 to determine what impact adoption of the new standard will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which significantly changes accounting for leases by requiring that lessees recognize a right-of-use asset and a related lease liability representing the obligation to make lease payments, for virtually all lease transactions. Additional disclosures about an entity’s lease transactions will also be required. ASU 2016-02 defines a lease as “a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration.” ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. The Company is evaluating ASU 2016-02 to determine what impact adoption of the new standard will have on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606) (“ASU 2014-09”), which will require entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will supersede most current guidance related to revenue recognition when it becomes effective. The new standard also will require expanded disclosures regarding the nature, timing, amount and certainty of revenue and cash flows from contracts with customers. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted for interim and annual periods beginning after December 31, 2016. Companies are permitted to adopt ASU 2014-09 through the use of either the full retrospective approach or a modified retrospective approach. The Company does not currently intend to early-adopt ASU 2014-09 and has not determined which transition method it will use. The Company is evaluating ASU 2014-09 to determine what impact adoption of the new standard will have on its consolidated financial statements and related disclosures.
3. Property and Equipment, Net
As of September 30, 2016 and December 31, 2015, total property and equipment, net consisted of the following:
September 30, 2016 | December 31, 2015 | |||||||
(In thousands) | ||||||||
Proved properties | $4,467,760 | $3,976,511 | ||||||
Accumulated depreciation, depletion and amortization and impairments | (3,340,496 | ) | (2,607,360 | ) | ||||
Proved properties, net | 1,127,264 | 1,369,151 | ||||||
Unproved properties, not being amortized | ||||||||
Unevaluated leasehold and seismic costs | 163,915 | 280,263 | ||||||
Exploratory wells in progress | 2,051 | 9,432 | ||||||
Capitalized interest | 30,772 | 45,757 | ||||||
Total unproved properties, not being amortized | 196,738 | 335,452 | ||||||
Other property and equipment | 23,106 | 22,677 | ||||||
Accumulated depreciation | (12,413 | ) | (10,419 | ) | ||||
Other property and equipment, net | 10,693 | 12,258 | ||||||
Total property and equipment, net | $1,334,695 | $1,716,861 | ||||||
Average depreciation, depletion and amortization (“DD&A”) per Boe of proved properties was $12.72 and $24.19 for the three months ended September 30, 2016 and 2015, respectively, and $13.79 and $23.82 for the nine months ended September 30, 2016 and 2015, respectively.
The Company capitalized internal costs of employee compensation and benefits, including stock-based compensation, directly associated with acquisition, exploration and development activities totaling $2.7 million and $3.1 million for the three months ended September 30, 2016 and 2015, respectively, and $8.5 million and $14.0 million for the nine months ended September 30, 2016 and 2015, respectively.
Unproved properties, not being amortized, include unevaluated leasehold and seismic costs associated with specific unevaluated properties, the cost of exploratory wells in progress and related capitalized interest. The Company capitalized interest costs associated with its unevaluated leasehold and seismic costs and exploratory well costs totaling $2.9 million and $7.5 million for
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the three months ended September 30, 2016 and 2015, respectively, and $13.4 million and $26.2 million for the nine months ended September 30, 2016 and 2015, respectively.
Impairment of Proved Oil and Gas Properties
At the end of each quarter, the net book value of oil and gas properties, less related deferred income taxes, are limited to the “cost center ceiling” equal to (i) the sum of (A) the present value of estimated future net revenues from proved oil and gas reserves, less estimated future expenditures to be incurred in developing and producing the proved reserves computed using a discount factor of 10%, (B) the costs of unproved properties not being amortized, and (C) the lower of cost or estimated fair value of unproved properties included in the costs being amortized; less (ii) related income tax effects. Any excess of the net book value of oil and gas properties, less related deferred income taxes, over the cost center ceiling is recognized as an impairment of proved oil and gas properties. An impairment recognized in one period may not be reversed in a subsequent period even if higher commodity prices in the future result in a cost center ceiling in excess of the net book value of oil and gas properties, less related deferred income taxes.
The estimated future net revenues used in the cost center ceiling are calculated using the average realized prices for sales of crude oil, natural gas liquids and natural gas on the first calendar day of each month during the 12-month period prior to the end of the current quarter (“12-Month Average Realized Price”), held flat for the life of the production, except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts. Prices do not include the impact of derivative instruments as the Company elected not to meet the criteria to qualify derivative instruments for hedge accounting treatment.
Primarily due to declines in the 12-Month Average Realized Price of crude oil, the Company recognized impairments of proved oil and gas properties for the three and nine months ended September 30, 2016 and 2015 as summarized in the table below:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
Impairment of proved oil and gas properties (in thousands) | $105,057 | $812,752 | $576,540 | $812,752 | ||||||||
End of period price ($/Bbl) | $38.36 | $56.05 | $38.36 | $56.05 | ||||||||
Beginning of period price ($/Bbl) | $39.84 | $68.92 | $47.24 | $92.24 | ||||||||
Percent decrease in price | (4 | %) | (19 | %) | (19 | %) | (39 | %) | ||||
The Company's estimated range of the fourth quarter cost center ceiling, at the high end, would exceed the net book value of oil and gas properties, less related deferred income taxes, and at the low end, would result in an impairment of proved oil and gas properties of $50.0 million. This estimated range of the fourth quarter cost center ceiling is based on the estimated 12-Month Average Realized Price of crude oil of $39.26 per barrel as of December 31, 2016, which is based on the average realized price for sales of crude oil on the first calendar day of each month for the first 11 months and an estimate for the twelfth month based on a quoted forward price. Declines in the 12-Month Average Realized Price of crude oil in subsequent quarters would result in a lower present value of the estimated future net revenues from proved oil and gas reserves and may result in additional impairments of proved oil and gas properties.
4. Income Taxes
The Company’s estimated annual effective income tax rates are used to allocate expected annual income tax expense or benefit to interim periods. The rates are the ratio of estimated annual income tax expense or benefit to estimated annual income or loss before income taxes by taxing jurisdiction, except for discrete items, which are significant, unusual or infrequent items for which income taxes are computed and recorded in the interim period in which the discrete item occurs. The estimated annual effective income tax rates are applied to the year-to-date income or loss before income taxes by taxing jurisdiction to determine the income tax expense or benefit allocated to the interim period. The Company updates its estimated annual effective income tax rates on a quarterly basis considering the geographic mix of income or loss attributable to the tax jurisdictions in which the Company operates.
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The Company’s income tax benefit from continuing operations differs from the income tax benefit computed by applying the U.S. federal statutory corporate income tax rate of 35% to loss from continuing operations before income taxes as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(In thousands) | ||||||||||||||||
Loss from continuing operations before income taxes | ($101,487 | ) | ($811,683 | ) | ($674,695 | ) | ($917,670 | ) | ||||||||
Income tax benefit at the statutory rate | 35,520 | 284,089 | 236,143 | 321,185 | ||||||||||||
State income tax benefit, net of U.S. federal income taxes | 575 | 6,542 | 3,859 | 6,321 | ||||||||||||
Deferred tax assets valuation allowance | (36,696 | ) | (187,607 | ) | (240,897 | ) | (187,607 | ) | ||||||||
Texas Franchise Tax rate reduction, net of U.S. federal income taxes | — | — | — | 1,671 | ||||||||||||
Other | 914 | (109 | ) | 895 | (1,114 | ) | ||||||||||
Income tax benefit from continuing operations | $313 | $102,915 | $— | $140,456 | ||||||||||||
Deferred Tax Assets Valuation Allowance
Deferred tax assets are recorded for net operating losses and temporary differences between the book and tax basis of assets and
liabilities expected to produce tax deductions in future periods. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those deferred tax assets would be deductible. The Company assesses the realizability of its deferred tax assets on a quarterly basis by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company considers all available evidence (both positive and negative) when determining whether a valuation allowance is required. In making this assessment, the Company evaluated possible sources of taxable income that may be available to realize the deferred tax assets, including projected future taxable income, the reversal of existing temporary differences, taxable income in carryback years and available tax planning strategies.
A significant item of objective negative evidence considered was the cumulative historical three year pre-tax loss and a net deferred tax asset position at September 30, 2016, driven primarily by the impairments of proved oil and gas properties recognized during the second half of 2015 and throughout 2016, which limits the ability to consider other subjective evidence such as the Company’s potential for future growth. Based on evaluation of the evidence available during the three months ended September 30, 2016, the Company’s previous conclusion that it is more likely than not the net deferred tax assets will not be realized remained unchanged and an additional valuation allowance of $36.7 million was recorded for the three months ending September 30, 2016, reducing the net deferred tax assets to zero. This additional valuation allowance increased the total valuation allowance recorded during the nine months ended September 30, 2016 to $240.9 million.
The Company will continue to evaluate whether the valuation allowance is needed in future reporting periods. The valuation allowance will remain until the Company can conclude that the net deferred tax assets are more likely than not to be realized. Future events or new evidence which may lead the Company to conclude that it is more likely than not its net deferred tax assets will be realized include, but are not limited to, cumulative historical pre-tax earnings, improvements in crude oil prices, and taxable events that could result from one or more transactions. The valuation allowance does not preclude the Company from utilizing the tax attributes if the Company recognizes taxable income. As long as the Company continues to conclude that the valuation allowance against its net deferred tax assets is necessary, the Company will have no significant deferred income tax expense or benefit.
5. Long-Term Debt
Long-term debt consisted of the following as of September 30, 2016 and December 31, 2015:
September 30, 2016 | December 31, 2015 | |||||||
(In thousands) | ||||||||
Senior Secured Revolving Credit Facility due 2018 | $96,000 | $— | ||||||
7.50% Senior Notes due 2020 | 600,000 | 600,000 | ||||||
Unamortized premium for 7.50% Senior Notes | 1,080 | 1,251 | ||||||
Unamortized debt issuance costs for 7.50% Senior Notes | (7,950 | ) | (9,048 | ) | ||||
6.25% Senior Notes due 2023 | 650,000 | 650,000 | ||||||
Unamortized debt issuance costs for 6.25% Senior Notes | (9,754 | ) | (10,611 | ) | ||||
Other long-term debt due 2028 | 4,425 | 4,425 | ||||||
Long-term debt | $1,333,801 | $1,236,017 | ||||||
-8-
Senior Secured Revolving Credit Facility
The Company has a senior secured revolving credit facility with a syndicate of banks that, as of September 30, 2016, had a borrowing base of $600.0 million, with $96.0 million of borrowings outstanding at a weighted average interest rate of 2.46%. As of September 30, 2016, the Company also had $0.4 million in letters of credit outstanding, which reduce the amounts available under the revolving credit facility. The credit agreement governing the revolving credit facility provides for interest-only payments until July 2, 2018, when the credit agreement matures and any outstanding borrowings are due. The borrowing base under the credit agreement is subject to regular redeterminations in the Spring and Fall of each year, as well as special redeterminations described in the credit agreement, in each case which may reduce the amount of the borrowing base. The amount the Company is able to borrow with respect to the borrowing base is subject to compliance with the financial covenants and other provisions of the credit agreement. Each of the capitalized terms which are not defined in this note shall have the meaning given to such terms in the credit agreement.
On May 3, 2016, the Company entered into an amendment to the credit agreement (the “Eighth Amendment”) to, among other things (i) replace the Total Debt to EBITDA ratio covenant with a Total Secured Debt to EBITDA ratio covenant that requires such ratio not to exceed 2.00 to 1.00, (ii) add a covenant requiring a minimum EBITDA to Interest Expense ratio of at least 2.50 to 1.00, (iii) reduce the Borrowing Base under the credit facility from $685.0 million to $600.0 million until the next redetermination thereof, (iv) increase the required mortgage coverage on the total value of the oil and gas properties included in the Company’s most recent reserve report from 80% to 90%, (v) require that the Company’s deposit accounts and securities accounts (subject to certain exclusions) become subject to control agreements, (vi) limit the amount of additional senior notes that can be issued by the Company to $400.0 million, (vii) restrict the Company from making borrowings under the credit facility if the Company has or, after giving effect to the borrowing, will have a Consolidated Cash Balance in excess of $50.0 million, (viii) require mandatory prepayment of borrowings to the extent the Consolidated Cash Balance exceeds $50.0 million if either (a) the Company’s ratio of Total Debt to EBITDA exceeds 3.50 to 1.00 or (b) the availability under the credit facility is equal to or less than 20% of the then effective Borrowing Base, (ix) increase the margin on all loans by 0.50%, and (x) increase the commitment fee from 0.375% to 0.50% when utilization of lender commitments is less than 50%.
The obligations of the Company under the credit agreement are guaranteed by the Company’s material domestic subsidiaries and are secured by liens on substantially all of the Company’s assets, including a mortgage lien on oil and gas properties having at least 90% of the total value of the oil and gas properties included in the Company’s most recent reserve report.
Borrowings outstanding under the credit agreement bear interest at the Company’s option at either (i) a base rate for a base rate loan plus the margin set forth in the table below, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.50% and the adjusted LIBO rate plus 1.00%, or (ii) an adjusted LIBO rate for a Eurodollar loan plus the margin set forth in the table below. The Company also incurs commitment fees as set forth in the table below based on the unused portion of lender commitments, which are included in interest expense, net.
Ratio of Outstanding Borrowings and Letters of Credit to Lender Commitments | Applicable Margin for Base Rate Loans | Applicable Margin for Eurodollar Loans | Commitment Fee | |||
Less than 25% | 1.00% | 2.00% | 0.500% | |||
Greater than or equal to 25% but less than 50% | 1.25% | 2.25% | 0.500% | |||
Greater than or equal to 50% but less than 75% | 1.50% | 2.50% | 0.500% | |||
Greater than or equal to 75% but less than 90% | 1.75% | 2.75% | 0.500% | |||
Greater than or equal to 90% | 2.00% | 3.00% | 0.500% | |||
As discussed above, the Company is subject to certain covenants under the terms of the credit agreement, which include the maintenance of the following financial covenants determined as of the last day of each quarter: (1) a ratio of Total Secured Debt to EBITDA of not more than 2.00 to 1.00; (2) a Current Ratio of not less than 1.00 to 1.00; and (3) a ratio of EBITDA to Interest Expense of not less than 2.50 to 1.00. As defined in the credit agreement, EBITDA includes the last four quarters after giving pro forma effect to EBITDA for material acquisitions and dispositions of oil and gas properties, Interest Expense is comprised of the aggregate interest expense paid in cash for the last four quarters, and the Current Ratio includes an add back of the unused portion of lender commitments. As of September 30, 2016, the ratio of Total Secured Debt to EBITDA was 0.24 to 1.00, the Current Ratio was 2.63 to 1.00 and the ratio of EBITDA to Interest Expense was 4.35 to 1.00. Because the financial covenants are determined as of the last day of each quarter, the ratios can fluctuate significantly period to period as the level of borrowings outstanding under the credit agreement are impacted by the timing of cash flows from operations, capital expenditures, acquisitions and dispositions of oil and gas properties and securities offerings.
The credit agreement also places restrictions on the Company and certain of its subsidiaries with respect to additional indebtedness, liens, dividends and other payments to shareholders, repurchases or redemptions of the Company’s common stock, redemptions of senior notes, investments, acquisitions, mergers, asset dispositions, transactions with affiliates, hedging transactions and other matters.
-9-
The credit agreement is subject to customary events of default, including in connection with a change in control. If an event of default occurs and is continuing, the lenders may elect to accelerate amounts due under the credit agreement (except in the case of a bankruptcy event of default, in which case such amounts will automatically become due and payable).
6. Commitments and Contingencies
From time to time, the Company is party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not currently expect these matters to have a materially adverse effect on the financial position or results of operations of the Company.
The results of operations and financial position of the Company continue to be affected from time to time in varying degrees by domestic and foreign political developments as well as legislation and regulations pertaining to restrictions on crude oil and natural gas production, imports and exports, natural gas regulation, tax increases, environmental regulations and cancellation of contract rights. Both the likelihood and overall effect of such occurrences on the Company vary greatly and are not predictable.
7. Stock-Based Compensation
Stock-Based Compensation Expense (Benefit), Net
The Company recognized the following stock-based compensation expense (benefit), net for the periods indicated which is reflected as “General and administrative, net” in the consolidated statements of operations:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(In thousands) | ||||||||||||||||
Restricted stock awards and units | $5,487 | $6,013 | $23,079 | $17,242 | ||||||||||||
Stock appreciation rights | 3,361 | (11,557 | ) | 9,581 | (5,666 | ) | ||||||||||
Performance share awards | 722 | 598 | 2,052 | 1,363 | ||||||||||||
9,570 | (4,946 | ) | 34,712 | 12,939 | ||||||||||||
Less: amounts capitalized to oil and gas properties | (1,150 | ) | (647 | ) | (3,878 | ) | (3,736 | ) | ||||||||
Total stock-based compensation expense (benefit), net | $8,420 | ($5,593 | ) | $30,834 | $9,203 | |||||||||||
Income tax benefit (expense) at the U.S. federal statutory rate | $2,947 | ($1,958 | ) | $10,792 | $3,221 | |||||||||||
8. Loss From Continuing Operations Per Common Share
Supplemental loss from continuing operations per common share information is provided below:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Loss from Continuing Operations | ($101,174 | ) | ($708,768 | ) | ($674,695 | ) | ($777,214 | ) | ||||||||
Basic weighted average common shares outstanding | 58,945 | 51,543 | 58,705 | 49,742 | ||||||||||||
Effect of dilutive instruments | — | — | — | — | ||||||||||||
Diluted weighted average common shares outstanding | 58,945 | 51,543 | 58,705 | 49,742 | ||||||||||||
Loss from Continuing Operations Per Common Share | ||||||||||||||||
Basic | ($1.72 | ) | ($13.75 | ) | ($11.49 | ) | ($15.62 | ) | ||||||||
Diluted | ($1.72 | ) | ($13.75 | ) | ($11.49 | ) | ($15.62 | ) | ||||||||
For the three and nine months ended September 30, 2016 and 2015, the Company reported a loss from continuing operations. As a result, the calculation of diluted weighted average common shares outstanding excluded the anti-dilutive effect of 0.7 million and 0.4 million potentially dilutive common shares outstanding for the three months ended September 30, 2016 and 2015, respectively, and 0.7 million potentially dilutive common shares outstanding for the nine months ended September 30, 2016 and 2015.
9. Derivative Instruments
The Company uses commodity derivative instruments to reduce its exposure to commodity price volatility for a portion of its forecasted crude oil and natural gas production and thereby achieve a more predictable level of cash flows to support the Company’s drilling and completion capital expenditure program. The Company does not enter into derivative instruments for speculative or
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trading purposes. As of September 30, 2016, the Company’s commodity derivative instruments consisted of fixed price swaps, costless collars, and purchased and sold call options, which are described below.
Fixed Price Swaps: The Company receives a fixed price and pays a variable market price to the counterparties over specified periods for contracted volumes.
Costless Collars: A collar is a combination of options including a purchased put option (fixed floor price) and a sold call option (fixed ceiling price) and allows the Company to benefit from increases in commodity prices up to the fixed ceiling price and protect the Company from decreases in commodity prices below the fixed floor price. At settlement, if the market price is below the fixed floor price or is above the fixed ceiling price, the Company receives the fixed price or pays the market price, respectively. If the market price is between the fixed floor price and fixed ceiling price, no payments are due from either party. These contracts were executed contemporaneously with the same counterparties and were premium neutral such that no payments were paid to or received from the counterparties.
Sold Call Options: These contracts give the counterparties the right, but not the obligation, to buy contracted volumes from the Company over specified periods and prices in the future. At settlement, if the market price exceeds the fixed price of the call option, the Company pays the counterparty the excess. If the market price settles below the fixed price of the call option, no payment is due from either party.
Purchased Call Options: These contracts give the Company the right, but not the obligation, to buy contracted volumes from the counterparties over specified periods and prices in the future. At settlement, if the market price exceeds the fixed price of the call option, the counterparties pay the Company the excess. If the market price settles below the fixed price of the call option, no payment is due from either party. The Company purchases call options contemporaneously with sales of call options to increase the fixed price of existing sold call options and therefore are presented on a net basis in the summary of open crude oil derivative positions below.
The following sets forth a summary of the Company’s open crude oil derivative positions at average NYMEX prices as of September 30, 2016:
Period | Type of Contract | Crude Oil Volumes (in Bbls/d) | Weighted Average Floor Price ($/Bbl) | Weighted Average Ceiling Price ($/Bbl) | |||||||||
Q4 2016 | Fixed Price Swaps | 9,750 | $60.03 | ||||||||||
Q4 2016 | Costless Collars | 4,000 | $50.00 | $76.50 | |||||||||
Q1 2017 | Fixed Price Swaps | 12,000 | $50.13 | ||||||||||
Q2 2017 | Fixed Price Swaps | 12,000 | $50.13 | ||||||||||
FY 2018 | Sold Call Options | 2,488 | $60.00 | ||||||||||
FY 2018 | Net Sold Call Options | 900 | $75.00 | ||||||||||
FY 2019 | Sold Call Options | 2,975 | $62.50 | ||||||||||
FY 2019 | Net Sold Call Options | 900 | $77.50 | ||||||||||
FY 2020 | Sold Call Options | 3,675 | $65.00 | ||||||||||
FY 2020 | Net Sold Call Options | 900 | $80.00 | ||||||||||
The following sets forth a summary of the Company’s open natural gas derivative positions at average NYMEX prices as of September 30, 2016:
Period | Type of Contract | Natural Gas Volumes (in MMBtu/d) | Weighted Average Ceiling Price ($/MMBtu) | ||||||
FY 2017 | Sold Call Options | 33,000 | $3.00 | ||||||
FY 2018 | Sold Call Options | 33,000 | $3.25 | ||||||
FY 2019 | Sold Call Options | 33,000 | $3.25 | ||||||
FY 2020 | Sold Call Options | 33,000 | $3.50 | ||||||
See “Note 13. Subsequent Events” for details of derivative positions entered into subsequent to September 30, 2016.
In February 2015, the Company entered into derivative transactions offsetting its then existing crude oil derivative positions covering the periods from March 2015 through December 2016. As a result of the offsetting derivative transactions, the Company locked in $166.4 million of cash flows, of which $9.3 million and $40.0 million were received due to contract settlements during the three months ended September 30, 2016 and 2015, respectively, and $36.9 million and $79.9 million during the nine months
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ended September 30, 2016 and 2015, respectively, and are included in the “Cash received for derivative settlements, net” in the consolidated statements of cash flows. As of September 30, 2016, the remaining locked in cash flows are $10.6 million, of which approximately $7.9 million will be received during the fourth quarter of 2016 and approximately $2.7 million will be received in the first quarter of 2017, as the applicable contracts settle. All of the remaining locked in cash flows are current assets and are classified as “Derivative assets” in the consolidated balance sheets. The derivative assets associated with the offsetting derivative transactions are not subject to price risk. The offsetting derivative transactions are not included in the table above.
In February 2016, the Company sold out-of-the-money natural gas call options for the years 2017 through 2020 and used the associated premium value to obtain in-the-money crude oil fixed price swaps with a weighted average price of $50.27 per Bbl on 6,000 Bbls/d for the first half of 2017. These out-of-the-money natural gas call options and in-the-money crude oil fixed price swaps were executed contemporaneously with the same counterparty, therefore, no cash premiums were paid to or received from the counterparty as the premium value associated with the natural gas call options was immediately applied to the crude oil fixed price swaps.
In March 2016, the Company sold 6,000 Bbls/d of in-the-money crude oil fixed price swaps for the first half of the year 2017 at a weighted average fixed price of $50.00 per Bbl. The associated net premiums totaled approximately $5.6 million, of which approximately $2.8 million was paid during the second quarter of 2016 and the remaining $2.8 million was paid during the third quarter of 2016 and are included in the “Cash received for derivative settlements, net” in the consolidated statements of cash flows.
The Company typically has numerous hedge positions that span several time periods and often result in both fair value asset and liability positions held with that counterparty, which positions are all offset to a single fair value asset or liability at the end of each reporting period, including the deferred premiums associated with its hedge positions. The Company nets its derivative instrument fair values executed with the same counterparty pursuant to ISDA master agreements, which provide for net settlement over the term of the contract and in the event of default or termination of the contract. The fair value of derivative instruments where the Company is in a net asset position with its counterparties as of September 30, 2016 and December 31, 2015 totaled $6.8 million and $119.6 million, respectively, and is summarized by counterparty in the table below:
Counterparty | September 30, 2016 | December 31, 2015 | ||||
Regions | 40 | % | 9 | % | ||
Wells Fargo | 34 | % | 35 | % | ||
Union Bank | 26 | % | 5 | % | ||
Capital One | — | % | 1 | % | ||
Societe Generale | — | % | 37 | % | ||
Citibank | — | % | 13 | % | ||
Total | 100 | % | 100 | % | ||
The counterparties to the Company’s derivative instruments are also lenders under the Company’s credit agreement which allows the Company to satisfy any need for margin obligations associated with derivative instruments where the Company is in a net liability position with its counterparties with the collateral securing the credit agreement, thus eliminating the need for independent collateral posting.
Because each of the counterparties have investment grade credit ratings, the Company believes it does not have significant credit risk and accordingly does not currently require its counterparties to post collateral to support the net asset positions of its derivative instruments. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties to its derivative instruments. Although the Company does not currently anticipate such nonperformance, it continues to monitor the credit ratings of its counterparties.
10. Fair Value Measurements
Accounting guidelines for measuring fair value establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
Level 1 – Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.
Level 2 – Other inputs that are observable directly or indirectly such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 – Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis as presented in the consolidated balance sheets as of September 30, 2016 and December 31, 2015. All items included in the tables below are Level 2 inputs within the fair value hierarchy:
September 30, 2016 | ||||||||||||
Gross Amounts Recognized | Gross Amounts Offset in the Consolidated Balance Sheets | Net Amounts Presented in the Consolidated Balance Sheets | ||||||||||
(In thousands) | ||||||||||||
Derivative assets | ||||||||||||
Derivative assets-current | $31,742 | ($11,596 | ) | $20,146 | ||||||||
Derivative assets-non current | 1,992 | (1,992 | ) | — | ||||||||
Derivative liabilities | ||||||||||||
Other current liabilities | (11,596 | ) | 11,596 | — | ||||||||
Derivative liabilities-non current | (31,346 | ) | 1,992 | (29,354 | ) | |||||||
Total | ($9,208 | ) | $— | ($9,208 | ) | |||||||
December 31, 2015 | ||||||||||||
Gross Amounts Recognized | Gross Amounts Offset in the Consolidated Balance Sheets | Net Amounts Presented in the Consolidated Balance Sheets | ||||||||||
(In thousands) | ||||||||||||
Derivative assets | ||||||||||||
Derivative assets-current | $159,447 | ($28,347 | ) | $131,100 | ||||||||
Derivative assets-non current | 10,780 | (9,665 | ) | 1,115 | ||||||||
Derivative liabilities | ||||||||||||
Other current liabilities | (28,364 | ) | 28,347 | (17 | ) | |||||||
Derivative liabilities-non current | (22,313 | ) | 9,665 | (12,648 | ) | |||||||
Total | $119,550 | $— | $119,550 | |||||||||
The fair values of the Company’s derivative assets and liabilities are based on a third-party industry-standard pricing model that uses market data obtained from third-party sources, including quoted forward prices for crude oil and natural gas, discount rates and volatility factors. The fair values are also compared to the values provided by the counterparties for reasonableness and are adjusted for the counterparties’ credit quality for derivative assets and the Company’s credit quality for derivative liabilities.
The derivative asset and liability fair values reported in the consolidated balance sheets that pertain to the Company’s derivative instruments are as of the balance sheet date and subsequently change to reflect actual results, changes in market conditions and other factors. However, the fair value of the net derivative asset attributable to the offsetting crude oil derivative transactions are not subject to price risk as changes in the fair value of the original positions are offset by changes in the fair value of the offsetting positions. The Company typically has numerous hedge positions that span several time periods and often result in both derivative assets and liabilities with the same counterparty, which positions are all offset to a single derivative asset or liability in the consolidated balance sheets, including the deferred premiums associated with its hedge positions. The Company nets the fair values of its derivative assets and liabilities associated with derivative instruments executed with the same counterparty pursuant to ISDA master agreements, which provide for net settlement over the term of the contract and in the event of default or termination of the contract. The Company had no transfers into Level 1 and no transfers into or out of Level 2 for the nine months ended September 30, 2016 and 2015.
-13-
Fair Value of Other Financial Instruments
The Company’s other financial instruments consist of cash and cash equivalents, receivables, payables and long-term debt, which are classified as Level 1 under the fair value hierarchy. The carrying amounts of cash and cash equivalents, receivables, and payables approximate fair value due to the highly liquid or short-term nature of these instruments. The carrying amount of long-term debt associated with borrowings outstanding under the Company’s revolving credit facility approximates fair value as borrowings bear interest at variable rates. The following table presents the carrying amounts of the Company’s senior notes and other long-term debt, net of debt premiums and debt issuance costs, with the fair values of each based on quoted market prices.
September 30, 2016 | December 31, 2015 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
7.50% Senior Notes due 2020 | $593,130 | $615,000 | $592,203 | $528,000 | ||||||||||||
6.25% Senior Notes due 2023 | 640,246 | 643,500 | 639,389 | 533,000 | ||||||||||||
Other long-term debt due 2028 | 4,425 | 4,337 | 4,425 | 4,182 | ||||||||||||
11. Condensed Consolidating Financial Information
The rules of the SEC require that condensed consolidating financial information be provided for a subsidiary that has guaranteed the debt of a registrant issued in a public offering, where the guarantee is full, unconditional and joint and several and where the voting interest of the subsidiary is 100% owned by the registrant. The Company is, therefore, presenting condensed consolidating financial information on a parent company, combined guarantor subsidiaries, combined non-guarantor subsidiaries and consolidated basis and should be read in conjunction with the consolidated financial statements. The financial information may not necessarily be indicative of results of operations, cash flows, or financial position had such guarantor subsidiaries operated as independent entities.
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CARRIZO OIL & GAS, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, 2016 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Assets | ||||||||||||||||||||
Total current assets | $2,551,367 | $50,479 | $— | ($2,524,333 | ) | $77,513 | ||||||||||||||
Total property and equipment, net | 42,759 | 1,291,991 | 3,800 | (3,855 | ) | 1,334,695 | ||||||||||||||
Investment in subsidiaries | (1,338,051 | ) | — | — | 1,338,051 | — | ||||||||||||||
Other assets | 8,143 | 156 | — | — | 8,299 | |||||||||||||||
Total Assets | $1,264,218 | $1,342,626 | $3,800 | ($1,190,137 | ) | $1,420,507 | ||||||||||||||
Liabilities and Shareholders’ Deficit | ||||||||||||||||||||
Current liabilities | $94,952 | $2,658,363 | $3,800 | ($2,527,353 | ) | $229,762 | ||||||||||||||
Long-term liabilities | 1,357,911 | 22,314 | — | 15,879 | 1,396,104 | |||||||||||||||
Total shareholders’ deficit | (188,645 | ) | (1,338,051 | ) | — | 1,321,337 | (205,359 | ) | ||||||||||||
Total Liabilities and Shareholders’ Deficit | $1,264,218 | $1,342,626 | $3,800 | ($1,190,137 | ) | $1,420,507 | ||||||||||||||
December 31, 2015 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Assets | ||||||||||||||||||||
Total current assets | $2,578,034 | $52,067 | $— | ($2,397,919 | ) | $232,182 | ||||||||||||||
Total property and equipment, net | 44,499 | 1,671,774 | 3,059 | (2,471 | ) | 1,716,861 | ||||||||||||||
Investment in subsidiaries | (815,836 | ) | — | — | 815,836 | — | ||||||||||||||
Other assets | 74,679 | 156 | — | (16,632 | ) | 58,203 | ||||||||||||||
Total Assets | $1,881,376 | $1,723,997 | $3,059 | ($1,601,186 | ) | $2,007,246 | ||||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||
Current liabilities | $161,792 | $2,521,572 | $3,059 | ($2,400,939 | ) | $285,484 | ||||||||||||||
Long-term liabilities | 1,260,200 | 18,261 | — | (753 | ) | 1,277,708 | ||||||||||||||
Total shareholders’ equity | 459,384 | (815,836 | ) | — | 800,506 | 444,054 | ||||||||||||||
Total Liabilities and Shareholders’ Equity | $1,881,376 | $1,723,997 | $3,059 | ($1,601,186 | ) | $2,007,246 | ||||||||||||||
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CARRIZO OIL & GAS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Ended September 30, 2016 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Total revenues | $105 | $111,072 | $— | $— | $111,177 | |||||||||||||||
Total costs and expenses | 28,551 | 184,047 | — | 66 | 212,664 | |||||||||||||||
Loss from continuing operations before income taxes | (28,446 | ) | (72,975 | ) | — | (66 | ) | (101,487 | ) | |||||||||||
Income tax benefit | — | — | — | 313 | 313 | |||||||||||||||
Equity in loss of subsidiaries | (72,975 | ) | — | — | 72,975 | — | ||||||||||||||
Loss from continuing operations | (101,421 | ) | (72,975 | ) | — | 73,222 | (101,174 | ) | ||||||||||||
Income from discontinued operations, net of income taxes | — | — | — | — | — | |||||||||||||||
Net loss | ($101,421 | ) | ($72,975 | ) | $— | $73,222 | ($101,174 | ) | ||||||||||||
Three Months Ended September 30, 2015 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Total revenues | $235 | $106,002 | $— | $— | $106,237 | |||||||||||||||
Total costs and expenses | (6,718 | ) | 890,350 | — | 34,288 | 917,920 | ||||||||||||||
Income (loss) from continuing operations before income taxes | 6,953 | (784,348 | ) | — | (34,288 | ) | (811,683 | ) | ||||||||||||
Income tax (expense) benefit | (25,496 | ) | 119,847 | — | 8,564 | 102,915 | ||||||||||||||
Equity in loss of subsidiaries | (664,501 | ) | — | — | 664,501 | — | ||||||||||||||
Loss from continuing operations | (683,044 | ) | (664,501 | ) | — | 638,777 | (708,768 | ) | ||||||||||||
Income from discontinued operations, net of income taxes | 1,121 | — | — | — | 1,121 | |||||||||||||||
Net loss | ($681,923 | ) | ($664,501 | ) | $— | $638,777 | ($707,647 | ) | ||||||||||||
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CARRIZO OIL & GAS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2016 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Total revenues | $349 | $299,414 | $— | $— | $299,763 | |||||||||||||||
Total costs and expenses | 151,445 | 822,582 | — | 431 | 974,458 | |||||||||||||||
Loss from continuing operations before income taxes | (151,096 | ) | (523,168 | ) | — | (431 | ) | (674,695 | ) | |||||||||||
Income tax benefit | — | — | — | — | — | |||||||||||||||
Equity in loss of subsidiaries | (523,168 | ) | — | — | 523,168 | — | ||||||||||||||
Loss from continuing operations | (674,264 | ) | (523,168 | ) | — | 522,737 | (674,695 | ) | ||||||||||||
Income from discontinued operations, net of income taxes | — | — | — | — | — | |||||||||||||||
Net loss | ($674,264 | ) | ($523,168 | ) | $— | $522,737 | ($674,695 | ) | ||||||||||||
Nine Months Ended September 30, 2015 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Total revenues | $1,485 | $328,296 | $— | $— | $329,781 | |||||||||||||||
Total costs and expenses | 116,793 | 1,101,671 | — | 28,987 | 1,247,451 | |||||||||||||||
Loss from continuing operations before income taxes | (115,308 | ) | (773,375 | ) | — | (28,987 | ) | (917,670 | ) | |||||||||||
Income tax benefit | 17,296 | 116,006 | — | 7,154 | 140,456 | |||||||||||||||
Equity in loss of subsidiaries | (657,369 | ) | — | — | 657,369 | — | ||||||||||||||
Loss from continuing operations | (755,381 | ) | (657,369 | ) | — | 635,536 | (777,214 | ) | ||||||||||||
Income from discontinued operations, net of income taxes | 2,225 | — | — | — | 2,225 | |||||||||||||||
Net loss | ($753,156 | ) | ($657,369 | ) | $— | $635,536 | ($774,989 | ) | ||||||||||||
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CARRIZO OIL & GAS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2016 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net cash provided by (used in) operating activities from continuing operations | ($10,882 | ) | $208,729 | $— | $— | $197,847 | ||||||||||||||
Net cash used in investing activities from continuing operations | (122,846 | ) | (331,351 | ) | (740 | ) | 123,362 | (331,575 | ) | |||||||||||
Net cash provided by financing activities from continuing operations | 94,045 | 122,622 | 740 | (123,362 | ) | 94,045 | ||||||||||||||
Net cash used in discontinued operations | — | — | — | — | — | |||||||||||||||
Net decrease in cash and cash equivalents | (39,683 | ) | — | — | — | (39,683 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | 42,918 | — | — | — | 42,918 | |||||||||||||||
Cash and cash equivalents, end of period | $3,235 | $— | $— | $— | $3,235 | |||||||||||||||
Nine Months Ended September 30, 2015 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net cash provided by (used in) operating activities from continuing operations | ($8,817 | ) | $293,036 | $— | $— | $284,219 | ||||||||||||||
Net cash used in investing activities from continuing operations | (396,036 | ) | (529,046 | ) | — | 386,010 | (539,072 | ) | ||||||||||||
Net cash provided by financing activities from continuing operations | 399,391 | 236,010 | — | (386,010 | ) | 249,391 | ||||||||||||||
Net cash used in discontinued operations | (3,372 | ) | — | — | — | (3,372 | ) | |||||||||||||
Net decrease in cash and cash equivalents | (8,834 | ) | — | — | — | (8,834 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | 10,838 | — | — | — | 10,838 | |||||||||||||||
Cash and cash equivalents, end of period | $2,004 | $— | $— | $— | $2,004 | |||||||||||||||
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12. Supplemental Cash Flow Information
Supplemental disclosures to the consolidated statements of cash flows are presented below:
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
(In thousands) | ||||||||
Non-cash investing activities: | ||||||||
Increase (decrease) in capital expenditure payables and accruals | $7,316 | ($71,967 | ) | |||||
Other non-cash investing activities (1) | 12,468 | 23,737 | ||||||
(1) | Other non-cash investing activities includes items such as property exchanges, capitalized asset retirement obligations, capital lease transactions and other non-cash activity. |
13. Subsequent Events
Sanchez Acquisition
On October 24, 2016, the Company entered into a purchase and sale agreement with Sanchez Energy Corporation and SN Cotulla Assets, LLC, a subsidiary of Sanchez Energy Corporation, to acquire oil and gas properties in the Eagle Ford Shale primarily in LaSalle, Frio and McMullen Texas counties (the “Sanchez Acquisition”) for a purchase price of approximately $181.0 million in cash, subject to customary purchase price adjustments. The transaction has an effective date of June 1, 2016, and is currently expected to close on or about December 14, 2016. On October 24, 2016, the Company paid $10.0 million as a deposit, which was funded from borrowings under the revolving credit facility that were repaid with net proceeds from the common stock offering discussed below. The remaining purchase price is due on the closing date. The Company intends to fund the remaining purchase price at closing with cash remaining from the common stock offering described below and borrowings under its revolving credit facility. Upon consummation of the Sanchez Acquisition, the Company will become the operator of all the acquired properties.
Common Stock Offering
On October 28, 2016, the Company completed a public offering of 6.0 million shares of its common stock at a price of $37.32 per share, for proceeds of $223.9 million, net of underwriting discounts. The Company used the net proceeds from the common stock offering to repay borrowings under the revolving credit facility and intends to use any remaining proceeds to fund a portion of the purchase price of the Sanchez Acquisition due on the closing date.
Fall 2016 Borrowing Base Redetermination
On October 24, 2016, as a result of the Fall 2016 borrowing base redetermination, the borrowing base was reaffirmed at $600.0 million until the next redetermination thereof. The borrowing base under the credit agreement is subject to regular redeterminations in the Spring and Fall of each year, as well as special redeterminations described in the credit agreement, in each case which may reduce the amount of the borrowing base.
Hedging Update
In October 2016, the Company entered into the following crude oil and natural gas derivative positions:
Period | Type of Contract | Volumes (in Bbls/d) | Weighted Average Floor Price ($/Bbl) | ||||||
Q3 2017 | Fixed Price Swaps | 6,000 | $54.15 | ||||||
Q4 2017 | Fixed Price Swaps | 3,000 | $55.01 | ||||||
Period | Type of Contract | Volumes (in MMBtu/d) | Weighted Average Floor Price ($/MMBtu) | ||||||
FY 2017 | Fixed Price Swaps | 20,000 | $3.30 | ||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of the significant factors that affected the financial position and results of operations of Carrizo Oil & Gas, Inc. and its subsidiaries (collectively, the “Company”) during the periods included in the accompanying unaudited consolidated financial statements. You should read this in conjunction with the unaudited interim consolidated financial statements included in this Quarterly Report on Form 10-Q and the discussion under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Annual Report”).
General Overview
Production, Commodity Prices and Revenue. Total production for the three months ended September 30, 2016 increased 13% to 40,762 Boe/d from the total production for the three months ended September 30, 2015 of 35,948 Boe/d, due primarily to increased production from new wells in the Eagle Ford and Delaware Basin as well as increased production in the Marcellus due to a lower level of voluntary curtailments compared to the third quarter of 2015. Production from the Eagle Ford comprised 71% of our total production for the third quarter of 2016. Crude oil production for the three months ended September 30, 2016 was 24,488 Bbls/d, an increase of 4% from the three months ended September 30, 2015, primarily driven by increased production from new wells in the Eagle Ford, which averaged 21,649 Bbls/d. Revenues for the third quarter of 2016 of $111.2 million increased as compared to revenues from third quarter of 2015 of $106.2 million driven primarily by the increased production described above and an increase in average realized NGL prices, partially offset by a decrease in average realized crude oil prices. For further discussion of production, commodity prices and revenue, see “—Results of Operations” below.
Operational Highlights. See the table below for details of our operated drilling and completion activity by region:
Three Months Ended September 30, 2016 | September 30, 2016 | ||||||||||||||||||||||||||
Drilled | Wells Brought on Production | Waiting on Completion | Producing | Rig count | |||||||||||||||||||||||
Region | Gross | Net | Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||
Eagle Ford | 17 | 14.9 | 24 | 23.2 | 26 | 23.8 | 315 | 279.2 | 2 | ||||||||||||||||||
Niobrara | — | — | 9 | 5.2 | — | — | 132 | 59.0 | — | ||||||||||||||||||
Marcellus | — | — | — | — | 11 | 4.3 | 81 | 26.0 | — | ||||||||||||||||||
Utica | — | — | — | — | — | — | 4 | 3.1 | — | ||||||||||||||||||
Delaware Basin | — | — | 2 | 1.9 | — | — | 6 | 5.6 | — | ||||||||||||||||||
Total | 17 | 14.9 | 35 | 30.3 | 37 | 28.1 | 538 | 372.9 | 2 | ||||||||||||||||||
Recent Developments
Sanchez Acquisition. On October 24, 2016, we entered into a purchase and sale agreement with Sanchez Energy Corporation and SN Cotulla Assets, LLC, a subsidiary of Sanchez Energy Corporation, to acquire oil and gas properties in the Eagle Ford Shale primarily in LaSalle, Frio and McMullen Texas counties (the “Sanchez Acquisition”) for an agreed upon purchase price of approximately $181.0 million in cash, subject to customary purchase price adjustments. The properties to be acquired include approximately 15,000 net acres and 112 gross (93.0 net) wells. Based on information provided by the seller, we estimate that net production from the properties to be acquired was approximately 3,100 Boe/d for the month ended September 30, 2016.
The transaction had an effective date of June 1, 2016, and is currently expected to close on or about December 14, 2016. On October 24, 2016, we paid $10.0 million as a deposit, which was funded from borrowings under the revolving credit facility that were repaid with net proceeds from the common stock offering discussed below. The remaining purchase price is due on the closing date. We intend to fund the remaining purchase price at closing with cash remaining from the common stock offering described below and borrowings under its revolving credit facility. Upon consummation of the Sanchez Acquisition, we will become the operator of all the acquired properties.
Financing Activities. On October 28, 2016, we completed a public offering of 6.0 million shares of our common stock at a price of $37.32 per share, which generated proceeds of $223.9 million, net of underwriting discounts. We used the net proceeds from the common stock offering to repay borrowings under the revolving credit facility and intend to use any remaining proceeds to fund a portion of the purchase price of the Sanchez Acquisition due on the closing date.
On October 24, 2016, as a result of the Fall 2016 borrowing base redetermination, the borrowing base was reaffirmed at $600.0 million until the next redetermination thereof. The borrowing base under the credit agreement is subject to regular redeterminations in the Spring and Fall of each year, as well as special redeterminations described in the credit agreement, in each case which may change the amount of the borrowing base.
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Results of Operations
Three Months Ended September 30, 2016, Compared to the Three Months Ended September 30, 2015
The following table summarizes total production volumes, daily production volumes, average realized prices and revenues for the three months ended September 30, 2016 and 2015: