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EX-32 - ENERGEN CORPORATION 18 U.S.C. SECTION 1350 CERTIFICATION - ENERGEN CORPegn93017ex32.htm
EX-31.B - ENERGEN CORPORATION CERTIFICATION OF CFO - ENERGEN CORPegn93017ex31b.htm
EX-31.A - ENERGEN CORPORATION CERTIFICATION OF CEO - ENERGEN CORPegn93017ex31a.htm
EX-10.B - ENERGEN CORPORATION STOCK INCENTIVE PLAN AS AMENDED - ENERGEN CORPegn93017exhibit10b.htm
EX-10.A - ENERGEN CORPORATION FORM OF EXECUTIVE SEVERANCE AGREEMENT - ENERGEN CORPegn93017exhibit10a.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, 2017
OR
o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _______________

Commission file number 1-7810
Energen Corporation
(Exact name of registrant as specified in its charter)

Alabama
 
63-0757759
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
605 Richard Arrington Jr. Boulevard North, Birmingham, Alabama
 
35203-2707
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code
(205) 326-2700

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
      
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
 
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Number of shares outstanding of each of the registrant’s classes of common stock as of October 31, 2017.
Energen Corporation
 
 $0.01 par value
 
97,201,944

 
 
 
 
 




ENERGEN CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
Risk Factors
 
 
 
 
Item 2.
 
 
 
 
 
Item 5.
 
Other Information
 
 
 
 
Item 6.
 
 
 
 
 









2



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

ENERGEN CORPORATION
 
 
CONSOLIDATED BALANCE SHEETS
 
 
(Unaudited)
 
 
 
 
 
(in thousands)
September 30, 2017
December 31, 2016

 
 
 
ASSETS
 
 
Current Assets
 
 
Cash and cash equivalents
$
252

$
386,093

Accounts receivable, net
129,219

73,322

Inventories, net
14,538

14,222

Derivative instruments
3,895

50

Income tax receivable
9,598

27,153

Prepayments and other
5,838

5,071

Total current assets
163,340

505,911

Property, Plant and Equipment
 
 
Oil and natural gas properties, successful efforts method
 
 
Proved properties
8,256,046

7,543,464

Unproved properties
448,974

196,888

Less accumulated depreciation, depletion and amortization
(4,071,508
)
(3,723,669
)
Oil and natural gas properties, net
4,633,512

4,016,683

Other property and equipment, net
45,198

44,869

Total property, plant and equipment, net
4,678,710

4,061,552

Other postretirement assets
3,583

3,619

Noncurrent derivative instruments
1,064


Other assets
6,879

8,741

TOTAL ASSETS
$
4,853,576

$
4,579,823


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











3



ENERGEN CORPORATION
 
 
CONSOLIDATED BALANCE SHEETS
 
 
(Unaudited)
 
 
 
 
 
(in thousands, except share and per share data)
September 30, 2017
December 31, 2016

 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
Current Liabilities
 
 
Long-term debt due within one year
$

$
24,000

Accounts payable
101,819

65,031

Accrued taxes
14,585

7,252

Accrued wages and benefits
21,268

25,089

Accrued capital costs
67,176

79,988

Revenue and royalty payable
48,429

51,217

Derivative instruments
18,089

65,467

Other
11,402

20,160

Total current liabilities
282,768

338,204

Long-term debt
765,759

527,443

Asset retirement obligations
86,643

81,544

Deferred income taxes
535,002

495,888

Noncurrent derivative instruments
2,962

3,006

Other long-term liabilities
7,162

13,136

Total liabilities
1,680,296

1,459,221

Commitments and Contingencies



Shareholders’ Equity
 
 
Preferred stock, cumulative, $0.01 par value, 5,000,000 shares authorized


Common shareholders’ equity
 
 
Common stock, $0.01 par value; 150,000,000 shares authorized; 100,326,196 shares and 100,138,797 shares issued at September 30, 2017 and December 31, 2016, respectively
1,003

1,001

Premium on capital stock
1,384,518

1,372,569

Retained earnings
1,922,731

1,878,503

Accumulated other comprehensive income, net of tax
 
 
Postretirement plans
1,197

1,405

Deferred compensation plan
2,790

2,261

Treasury stock, at cost; 3,195,499 shares and 3,125,715 shares at September 30, 2017 and December 31, 2016, respectively
(138,959
)
(135,137
)
Total shareholders’ equity
3,173,280

3,120,602

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
4,853,576

$
4,579,823


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

4



ENERGEN CORPORATION
 
 
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
(Unaudited)
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
(in thousands, except per share data)
2017
2016
 
2017
2016
 
 
 
 
 
 
Revenues
 
 
 
 
 
Oil, natural gas liquids and natural gas sales
$
249,114

$
163,973

 
$
644,212

$
458,374

Gain (loss) on derivative instruments, net
(57,610
)
20,412

 
45,037

(40,005
)
Total revenues
191,504

184,385

 
689,249

418,369

Operating Costs and Expenses
 
 
 
 
 
Oil, natural gas liquids and natural gas production
44,549

42,280

 
129,746

132,847

Production and ad valorem taxes
15,326

10,987

 
41,364

33,422

Depreciation, depletion and amortization
131,756

108,167

 
352,957

344,564

Asset impairment
100

587

 
1,589

220,612

Exploration
625

18

 
6,259

1,780

General and administrative (including stock-based compensation of $4,713 and $6,518 for the three months ended September 30, 2017 and 2016, respectively, and $11,101 and $14,493 for the nine months ended September 30, 2017 and 2016, respectively)
21,474

21,710

 
61,665

74,783

Accretion of discount on asset retirement obligations
1,473

1,556

 
4,330

5,092

Gain on sale of assets and other
(5,977
)
(91,222
)
 
(6,980
)
(252,097
)
Total operating costs and expenses
209,326

94,083

 
590,930

561,003

Operating Income (Loss)
(17,822
)
90,302

 
98,319

(142,634
)
Other Income (Expense)
 
 
 
 
 
Interest expense
(9,928
)
(8,987
)
 
(28,039
)
(27,858
)
Other income
58

421

 
486

580

Total other expense
(9,870
)
(8,566
)
 
(27,553
)
(27,278
)
Income (Loss) Before Income Taxes
(27,692
)
81,736

 
70,766

(169,912
)
Income tax expense (benefit)
(9,206
)
28,422

 
26,368

(56,869
)
Net Income (Loss)
$
(18,486
)
$
53,314

 
$
44,398

$
(113,043
)
 
 
 
 
 
 
Diluted Earnings Per Average Common Share
$
(0.19
)
$
0.55

 
$
0.45

$
(1.21
)
Basic Earnings Per Average Common Share
$
(0.19
)
$
0.55

 
$
0.46

$
(1.21
)
Diluted Average Common Shares Outstanding
97,198

97,511

 
97,678

93,602

Basic Average Common Shares Outstanding
97,198

97,068

 
97,176

93,602


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

5



ENERGEN CORPORATION
 
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
(Unaudited)
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
(in thousands)
2017
2016
 
2017
2016
 
 
 
 
 
 
Net Income (Loss)
$
(18,486
)
$
53,314

 
$
44,398

$
(113,043
)
Other comprehensive income (loss):
 
 
 
 
 
Pension and postretirement plans:
 
 
 
 
 
Amortization of prior service cost, net of tax of ($42), ($43), (129) and ($133), respectively
(71
)
(71
)
 
(212
)
(219
)
Amortization of net loss, including settlement charges, net of tax of $0, $0, $3 and $1,168, respectively
2


 
4

1,890

Current period change in fair value of pension and postretirement plans, net of tax of ($6) in 2016


 

(9
)
Total pension and postretirement plans
(69
)
(71
)
 
(208
)
1,662

Comprehensive Income (Loss)
$
(18,555
)
$
53,243

 
$
44,190

$
(111,381
)

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


6



ENERGEN CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
(Unaudited)
 
 
 
 
 
Nine months ended September 30, (in thousands)
2017
2016
 
 
 
Operating Activities
 
 
Net income (loss)
$
44,398

$
(113,043
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
Depreciation, depletion and amortization
352,957

344,564

Asset impairment
1,589

220,612

Accretion of discount on asset retirement obligations
4,330

5,092

Deferred income taxes
39,240

(78,159
)
Change in derivative fair value
(47,030
)
35,366

Gain on sale of assets
(3,972
)
(252,510
)
Stock-based compensation expense
11,101

14,493

Exploration, including dry holes

16

Other, net
(3,491
)
3,082

Net change in:
 
 
Accounts receivable
(55,897
)
38,947

Inventories
(316
)
(2,439
)
Accounts payable
31,614

(11,042
)
Accrued taxes/income tax receivable
24,888

37,646

Pension contributions
(89
)
(14,576
)
Other current assets and liabilities
(16,545
)
(23,580
)
Net cash provided by operating activities
382,777

204,469

Investing Activities
 
 
Additions to oil and natural gas properties
(720,243
)
(314,581
)
Acquisitions
(263,364
)
(135,775
)
Proceeds on the sale of assets, net
4,009

537,202

Net cash provided by (used in) investing activities
(979,598
)
86,846

Financing Activities
 
 
Issuance of common stock, net
273

381,219

Taxes paid for shares withheld
(3,293
)
(2,550
)
Reduction of long-term debt
(24,000
)

Net change in credit facility
238,000

(222,500
)
Tax benefit on stock compensation

(831
)
Net cash provided by financing activities
210,980

155,338

Net change in cash and cash equivalents
(385,841
)
446,653

Cash and cash equivalents at beginning of period
386,093

1,272

Cash and cash equivalents at end of period
$
252

$
447,925


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

7



ENERGEN CORPORATION
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 

1. ORGANIZATION AND BASIS OF PRESENTATION

Energen Corporation (Energen or the Company) is an oil and natural gas exploration and production company engaged in the exploration, development and production of oil, natural gas liquids and natural gas. Our operations are conducted through our subsidiary, Energen Resources Corporation (Energen Resources) and primarily occur within the Midland Basin, the Delaware Basin and the Central Basin Platform areas of the Permian Basin in west Texas and New Mexico. Our corporate headquarters are located in Birmingham, Alabama. The unaudited consolidated financial statements and notes should be read in conjunction with the financial statements and notes thereto included in the 2016 Annual Report of Energen on Form 10-K.

Our accompanying unaudited consolidated financial statements include Energen and its subsidiaries, principally Energen Resources, and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required for complete financial statements. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year. In the opinion of management, the accompanying financial statements reflect all adjustments necessary to present a fair statement of our financial position, results of operations, and cash flows for the periods and as of the dates shown. Such adjustments consist of normal recurring items. Certain reclassifications were made to conform prior periods’ financial statements to the current-quarter presentation.

Workforce Reduction
On January 22, 2016 and March 18, 2016, we reduced our workforce as part of an overall plan to reduce costs and better align our workforce with the needs of our business. In connection with the reductions, we incurred charges of approximately $5.0 million during 2016 for one-time termination benefits which are included in general and administrative expense on the consolidated statements of operations.
































8



2. DERIVATIVE COMMODITY INSTRUMENTS

We periodically enter into derivative commodity instruments to hedge our exposure to price fluctuations on oil, natural gas liquids and natural gas production. These derivative commodity instruments are accounted for as mark-to-market transactions with gains or losses recognized in the period of change in gain (loss) on derivative instruments, net. Such instruments may include over-the-counter (OTC) swaps, options and basis swaps typically executed with investment and commercial banks and energy-trading firms. Derivative transactions are pursuant to standing authorizations by the Board of Directors, which do not authorize speculative positions.

The following tables detail the offsetting of derivative assets and liabilities as well as the fair values of derivatives on the balance sheets:

(in thousands)
September 30, 2017

 
Gross Amounts Not Offset in the Balance Sheets
 
 
Gross Amounts Recognized at Fair Value
Gross Amounts Offset in the Balance Sheets
Net Amounts Presented in the Balance Sheets
Financial Instruments
Cash Collateral Received
Net Fair Value Presented in the Balance Sheets
Derivatives not designated as hedging instruments
 
 
 
 
Assets
 
 
 
 
 
 
Derivative instruments
$
15,652

$
(11,757
)
$
3,895

$

$

$
3,895

Noncurrent derivative instruments
3,680

(2,616
)
1,064



1,064

Total derivative assets
19,332

(14,373
)
4,959



4,959

Liabilities
 
 
 
 
 
 
Derivative instruments
29,846

(11,757
)
18,089



18,089

Noncurrent derivative instruments
5,578

(2,616
)
2,962



2,962

Total derivative liabilities
35,424

(14,373
)
21,051



21,051

Total derivatives
$
(16,092
)
$

$
(16,092
)
$

$

$
(16,092
)

(in thousands)
December 31, 2016
 
 
Gross Amounts Not Offset in the Balance Sheets
 

Gross Amounts Recognized at Fair Value
Gross Amounts Offset in the Balance Sheets
Net Amounts Presented in the Balance Sheets
Financial Instruments
Cash Collateral Received
Net Fair Value Presented in the Balance Sheets
Derivatives not designated as hedging instruments
 
 
 
 
Assets
 
 
 
 
 
 
Derivative instruments
$
1,756

$
(1,706
)
$
50

$

$

$
50

Liabilities
 
 
 
 
 
 
Derivative instruments
67,173

(1,706
)
65,467



65,467

Noncurrent derivative instruments
3,006


3,006



3,006

Total derivative liabilities
70,179

(1,706
)
68,473



68,473

Total derivatives
$
(68,423
)
$

$
(68,423
)
$

$

$
(68,423
)

Due to the volatility of commodity prices, the estimated fair value of our derivative instruments is subject to fluctuation from period to period, which could result in significant differences between the current estimated fair value and the ultimate settlement price. Additionally, Energen is at risk of economic loss based upon the creditworthiness of our counterparties. We were in a net loss position

9



with nine of our active counterparties and in a net gain position with the remaining five at September 30, 2017. The three largest counterparty net gain positions at September 30, 2017, PNC Bank, National Association, Regions Bank and NextEra Energy Power Marketing, LLC, constituted approximately $1.9 million, $1.1 million and $1.0 million, respectively, of Energen’s total net loss on fair value of derivatives.

The following table details the effect of open and closed derivative commodity instruments not designated as hedging instruments on the statements of operations:

(in thousands)
Location on Statements of Operations
Three months
ended
September 30, 2017
Three months
ended
September 30, 2016
Gain (loss) recognized in income on derivatives
Gain (loss) on derivative instruments, net
$
(57,610
)
$
20,412


(in thousands)
Location on Statements of Operations
Nine months
ended
September 30, 2017
Nine months
ended
September 30, 2016
Gain (loss) recognized in income on derivatives
Gain (loss)on derivative instruments, net
$
45,037

$
(40,005
)

As of September 30, 2017, Energen had entered into the following derivative transactions for the remainder of 2017 and subsequent years:

Production Period

Description
Total Hedged Volumes
Weighted Average Contract Price
Oil
 
 
 
2017
NYMEX Swaps
2,010
 MBbl
$50.68 Bbl
 
NYMEX Three-Way Collars
1,200
 MBbl
 
 
Ceiling sold price (call)
 
$62.18 Bbl
 
Floor purchased price (put)
 
$45.00 Bbl
 
Floor sold price (put)
 
$35.00 Bbl
2018
NYMEX Three-Way Collars
13,500
 MBbl
 
 
Ceiling sold price (call)
 
$60.04 Bbl
 
Floor purchased price (put)
 
$45.47 Bbl
 
Floor sold price (put)
 
$35.47 Bbl
Oil Basis Differential
 
 
 
2017
WTI/WTI Basis Swaps
2,970
 MBbl
$(0.68) Bbl
2018
WTI/WTI Basis Swaps
10,800
 MBbl
$(1.01) Bbl
Natural Gas Liquids
 
 
 
2017
Liquids Swaps
20.8
 MMGal
$0.57 Gal
2018
Liquids Swaps
105.8
 MMGal
$0.59 Gal
Natural Gas
 
 
 
2017
Basin Specific Swaps - Permian
3.9
 Bcf
$2.85 Mcf
2017
NYMEX Swaps
0.5
 Bcf
$3.29 Mcf
2018
Basin Specific Swaps - Permian
3.6
 Bcf
$2.56 Mcf
Natural Gas Basis Differential
 
 
 
2017
Permian Swaps
0.5
 Bcf
$(0.29) Mcf
WTI - West Texas Intermediate/Midland, WTI - West Texas Intermediate/Cushing


10



As of September 30, 2017, the maximum term over which Energen has hedged exposures to the variability of cash flows is through December 31, 2018. Subsequent to September 30, 2017, Energen executed various hedges through December 31, 2019.

3. FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, we use various valuation approaches and classify all assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect our own considerations about the assumptions other market participants would use in pricing the asset or liability based on the best information available in the circumstances. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability, and may affect the valuation of the asset or liability and its placement within the fair value hierarchy. The hierarchy is broken down into three levels based on the observability of inputs as follows:
  
Level 1 -
Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 -
Pricing inputs other than quoted prices in active markets included within Level 1, which are either directly or indirectly observable through correlation with market data as of the reporting date and
Level 3 -
Pricing that requires inputs that are both significant and unobservable to the calculation of the fair value measure. The fair value measure represents estimates of the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints.

No transfers between fair value hierarchy levels occurred during the three months and nine months ended September 30, 2017.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
Energen classifies the fair value of multiple derivative instruments executed under master netting arrangements as net derivative assets and liabilities. The following fair value hierarchy tables present information about Energen’s assets and liabilities measured at fair value on a recurring basis:

 
September 30, 2017
(in thousands)
Level 2
Level 3
Total
Assets:
 
 
 
Derivative instruments
$
3,895

$

$
3,895

Noncurrent derivative instruments
1,126

(62
)
1,064

Total assets
5,021

(62
)
4,959

Liabilities:
 
 
 
Derivative instruments
2,552

15,537

18,089

Noncurrent derivative instruments
944

2,018

2,962

Total liabilities
3,496

17,555

21,051

Net derivative asset (liability)
$
1,525

$
(17,617
)
$
(16,092
)

 
December 31, 2016
(in thousands)
Level 2
Level 3
Total
Assets:
 
 
 
Derivative instruments
$
50

$

$
50

Liabilities:
 
 
 
Derivative instruments
57,927

7,540

65,467

Noncurrent derivative instruments
1,694

1,312

3,006

Total liabilities
59,621

8,852

68,473

Net derivative liability
$
(59,571
)
$
(8,852
)
$
(68,423
)


11



Derivative Instruments: The fair value of Energen’s derivative commodity instruments is determined using market transactions and other market evidence whenever possible, including market-based inputs to models and broker or dealer quotations. Our OTC derivative contracts trade in less liquid markets with limited pricing information as compared to markets with actively traded, unadjusted quoted prices; accordingly, the determination of fair value is inherently more difficult. OTC derivatives for which we are able to substantiate fair value through direct or indirect observable market prices are classified within Level 2 of the fair value hierarchy. These Level 2 fair values consist of swaps and options priced in reference to NYMEX oil and natural gas prices. OTC derivatives valued using unobservable market prices have been classified within Level 3 of the fair value hierarchy. These Level 3 fair values include oil basis and natural gas liquids swaps. We consider the frequency of pricing and variability in pricing between sources in determining whether a market is considered active. While Energen does not have access to the specific assumptions used in its counterparties’ valuation models, Energen maintains communications with its counterparties and discusses pricing practices. Further, we corroborate the fair value of our transactions by comparison of market-based price sources.

Level 3 Fair Value Instruments: Energen prepared a sensitivity analysis to evaluate the hypothetical effect that changes in the prices used to estimate fair value would have on the fair value of its Level 3 instruments. We estimate that a 10 percent increase or decrease in commodity prices would result in an approximate $7.7 million change in the fair value of open Level 3 derivative contracts and to our results of operations.

The table below sets forth a summary of changes in the fair value of Energen’s Level 3 derivative commodity instruments as follows:

 
Three months ended
 
September 30,
(in thousands)
2017
2016
Balance at beginning of period
$
7,645

$
(10,650
)
Realized losses
(1,548
)
(4,610
)
Unrealized gains (losses) relating to instruments held at the reporting date*
(24,112
)
6,353

Settlements during period
398

4,610

Balance at end of period
$
(17,617
)
$
(4,297
)

 
Nine months ended
 
September 30,
(in thousands)
2017
2016
Balance at beginning of period
$
(8,852
)
$
(16,059
)
Realized losses
(4,588
)
(11,526
)
Unrealized gains (losses) relating to instruments held at the reporting date*
(7,616
)
11,762

Settlements during period
3,439

11,526

Balance at end of period
$
(17,617
)
$
(4,297
)
*Includes $23.0 million and $14.2 million in losses related to open contracts held at the reporting date for the three months and nine months ended September 30, 2017, respectively. Includes $1.5 million in gains and $1.6 million in losses for the three months and nine months ended September 30, 2016, respectively.















12



The table below sets forth quantitative information about Energen’s Level 3 fair value measurements of derivative commodity instruments as follows:

(in thousands, except price data)
Fair Value as of September 30, 2017
Valuation Technique*
Unobservable Input*
Range
Oil Basis - WTI/WTI
 
 
 
 
2017
$
(285
)
Discounted Cash Flow
Forward Basis
($0.55 - $0.62) Bbl
2018
$
(5,166
)
Discounted Cash Flow
Forward Basis
($0.50 - $0.58) Bbl
Natural Gas Liquids
 
 
 
 
2017
$
(4,952
)
Discounted Cash Flow
Forward Basis
$0.75 Gal
2018
$
(7,214
)
Discounted Cash Flow
Forward Basis
$0.66 Gal
*Discounted cash flow represents an income approach in calculating fair value including the referenced unobservable input and a discount reflecting credit quality of the counterparty.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are reported at fair value on a nonrecurring basis in Energen’s consolidated balance sheets. The following methods and assumptions were used to estimate the fair values of these assets and liabilities.

Asset retirement obligations: Energen’s asset retirement obligations (ARO) primarily relate to the future plugging, abandonment and reclamation of wells and facilities. We recognize a liability for the fair value of the ARO in the periods incurred. See Note 11, Asset Retirement Obligations, for further discussion related to these ARO’s. These assumptions are classified as Level 3 fair value measurements.

Asset Impairments: We monitor our oil and natural gas properties as well as the market and business environments in which we operate and make assessments about events that could result in potential impairment. Such potential events may include, but are not limited to, commodity price declines, unanticipated increased operating costs, and lower than expected field production performance. If a material event occurs, Energen makes an estimate of undiscounted future cash flows to determine whether the asset is impaired. If the asset is impaired, we will record an impairment loss for the difference between the net book value of the properties and the fair value of the properties. The fair value of the properties typically is estimated using discounted cash flows and values derived from purchase and sale agreements and similar support as applicable. Cash flow and fair value estimates require Energen to make projections and assumptions for pricing, demand, competition, operating costs, legal and regulatory issues, discount rates and other factors for many years into the future.

These assumptions are classified as Level 3 fair value measurements. See Note 13, Asset Impairment, for impairments recognized by Energen during the three months and nine months ended September 30, 2017 and 2016.
Financial Instruments not Carried at Fair Value
The stated value of cash and cash equivalents, short-term investments, accounts receivable (net of allowance for doubtful accounts), and short-term debt approximates fair value due to the short maturity of the instruments. The Company invested in certain short-term investments that qualify and were classified as cash and cash equivalents. Energen had an allowance for doubtful accounts of $0.7 million at both September 30, 2017 and December 31, 2016, respectively. The fair value of Energen’s long-term debt, including the current portion, was approximately $779.6 million and $559.9 million and had a carrying value of $768.0 million and $554.0 million at September 30, 2017 and December 31, 2016, respectively. The fair values are based on market prices of similar debt issues having the same remaining maturities, redemption terms and credit rating. Short-term debt is classified as a Level 1 fair value measurement and long-term debt is classified as a Level 2 fair value measurement.













13



4. LONG-TERM DEBT

Long-term debt consisted of the following:

(in thousands)
September 30, 2017
December 31, 2016
Credit facility, due August 30, 2019
$
238,000

$

7.40% Medium-term Notes, Series A, due July 24, 2017

2,000

7.36% Medium-term Notes, Series A, due July 24, 2017

15,000

7.23% Medium-term Notes, Series A, due July 28, 2017

2,000

7.32% Medium-term Notes, Series A, due July 28, 2022
20,000

20,000

7.60% Medium-term Notes, Series A, due July 26, 2027

5,000

7.35% Medium-term Notes, Series A, due July 28, 2027
10,000

10,000

7.125% Medium-term Notes, Series B, due February 15, 2028
100,000

100,000

4.625% Notes, due September 1, 2021
400,000

400,000

Total
768,000

554,000

Less amounts due within one year

24,000

Less unamortized debt discount
367

387

Less unamortized debt issuance costs
1,874

2,170

Total
$
765,759

$
527,443


The aggregate maturities of Energen’s long-term debt outstanding at September 30, 2017 are as follows:

(in thousands)
Remaining 2017
2018
2019
2020
2021
2022 and thereafter
$—
$—
$238,000
$—
$400,000
$130,000

On January 23, 2017, Energen redeemed the $2.0 million of 7.40% Medium-term Notes, Series A, due July 24, 2017 and $5.0 million of 7.60% Medium-term Notes, Series A, due July 26, 2027. The Company also had $17.0 million of scheduled reductions in long-term debt in July 2017.

The debt agreements of Energen contain financial and nonfinancial covenants including routine matters such as timely payment of principal and interest, maintenance of corporate existence and restrictions on liens. Although none of the debt agreements have events of default based on credit ratings, the interest rates applicable to the syndicated credit facility discussed below may adjust based on credit rating changes during certain periods.

Under Energen’s Indenture dated September 1, 1996 with The Bank of New York as Trustee, a cross default provision provides that any debt default of more than $10 million by Energen or Energen Resources will constitute an event of default by Energen. The Indenture does not include a restriction on the payment of dividends.

Credit Facility: On September 2, 2014, Energen entered into a five-year syndicated secured credit facility with domestic and foreign lenders. On October 25, 2016, the borrowing base and aggregate commitments were reaffirmed at $1.05 billion each with no changes in association with the semi-annual redetermination required under the agreement. On April 21, 2017, the borrowing base was increased to $1.4 billion. The aggregate commitments under the credit facility did not change and remained at $1.05 billion. A semi-annual redetermination is in process and expected to be completed in November 2017. Energen’s obligations under the syndicated credit facility are unconditionally guaranteed by Energen Resources. Subject to release of collateral in certain periods upon the achievement of certain investment grade ratings from designated ratings agencies, the credit facility is collateralized by certain assets of Energen and Energen Resources, including a pledge of equity interests in subsidiaries of Energen other than Energen Resources, by mortgages on substantially all of Energen Resources’ oil and natural gas properties and by the pledge of Energen’s and Energen Resources’ deposit accounts, securities accounts and commodity accounts (other than de minimus accounts and excluded accounts). The current credit facility qualifies for classification as long-term debt on the consolidated balance sheets. The financial covenants of the credit facility require Energen to maintain a ratio of total debt to consolidated income before interest expense,

14



income taxes, depreciation, depletion, amortization, exploration expense and other non-cash income and expenses (EBITDAX) less than or equal to 4.0 to 1.0; to maintain a ratio of consolidated current assets (adjusted to include amounts available for borrowings and exclude non-cash derivative instruments) to consolidated current liabilities (adjusted to exclude maturities under the credit facility and non-cash derivative instruments) greater than or equal to 1.0 to 1.0; and, during certain periods, to maintain a ratio of the net present value of proved reserves of our oil and natural gas properties to consolidated total debt greater than or equal to 1.50 to 1.0. We are also bound by covenants which limit our ability to incur additional indebtedness, make certain distributions or alter our corporate structure. Energen may not pay dividends if an event of default exists if the payment would result in an event of default, or if availability is less than 10 percent of the loan limit under the credit facility. Our credit facility also limits our ability to enter into commodity hedges based on projected production volumes. In addition, the terms of our credit facility limit the amount we can borrow to a borrowing base amount which is determined by our lenders in their sole discretion based on their valuation of our proved reserves and their internal criteria including commodity price outlook. The borrowing base amount is subject to redetermination semi-annually and for event-driven unscheduled redeterminations. Our next scheduled redetermination is April 1, 2018.

Under the credit facility, a cross default provision provides that any debt default of more than $75 million by Energen or Energen Resources will constitute an event of default by Energen.

Upon an uncured event of default under the credit facility, all amounts owing under the credit facility, if any, depending on the nature of the event of default will automatically, or may upon notice by the administrative agent or the requisite lenders thereunder, become immediately due and payable and the lenders may terminate their commitments under the defaulted facility. Energen was in compliance with the terms of its credit facility as of September 30, 2017.

The following is a summary of information relating to Energen’s credit facility:

(in thousands)
September 30, 2017
December 31, 2016
Credit facility outstanding
$
238,000

$

Available for borrowings
812,000

1,050,000

Total borrowing commitments
$
1,050,000

$
1,050,000


 
Three months ended
September 30,
Nine months ended
September 30,
 
2017
2016
2017
2016
Maximum amount outstanding at any month-end
$
238,000

$

$
238,000

$
214,500

Average daily amount outstanding
$
191,810

$
374

$
80,476

$
44,938

Weighted average interest rates based on:
 
 
 
 
Average daily amount outstanding
2.51
%
1.72
%
2.49
%
1.72
%
Amount outstanding at period-end
2.49
%
%
2.49
%
%

The following is a summary of information relating to Energen’s interest expense:

 
Three months ended
September 30,
Nine months ended
September 30,
 
2017
2016
2017
2016
Interest expense
$
9,928

$
8,987

$
28,039

$
27,858

Amortization of debt issuance costs related to long-term debt, including our credit facility*
$
830

$
828

$
2,503

$
2,480

Capitalized interest*
$

$
54

$

$
101

Commitment fees*
$
674

$
805

$
2,236

$
2,605

*Included in Energen’s total interest expense. At September 30, 2017, Energen paid commitment fees on the unused portion of the available credit facility at a current annual rate of 30 basis points.


15



5. RECONCILIATION OF EARNINGS PER SHARE (EPS)

 
Three months ended
Three months ended
(in thousands, except per share amounts)
September 30, 2017
September 30, 2016
 
Net
 
Per Share
Net
 
Per Share
 
Loss
Shares
Amount
Income
Shares
Amount
Basic EPS
$
(18,486
)
97,198

$
(0.19
)
$
53,314

97,068

$
0.55

Effect of dilutive securities
 
 
 
 
 
 
Stock options
 

 
 
54

 
Non-vested restricted stock
 

 
 
217

 
Performance share awards
 

 
 
172

 
Diluted EPS
$
(18,486
)
97,198

$
(0.19
)
$
53,314

97,511

$
0.55


 
Nine months ended
Nine months ended
(in thousands, except per share amounts)
September 30, 2017
September 30, 2016
 
Net
 
Per Share
Net
 
Per Share
 
Income
Shares
Amount
Loss
Shares
Amount
Basic EPS
$
44,398

97,176

$
0.46

$
(113,043
)
93,602

$
(1.21
)
Effect of dilutive securities
 
 
 
 
 
 
Stock options
 
25

 
 

 
Non-vested restricted stock
 
284

 
 

 
Performance share awards
 
193

 
 

 
Diluted EPS
$
44,398

97,678

$
0.45

$
(113,043
)
93,602

$
(1.21
)

In periods of loss, shares that otherwise would have been included in diluted average common shares outstanding are excluded. The Company had 547,793 of excluded shares for the three months ended September 30, 2017 and 275,005 of excluded shares for the nine months ended September 30, 2016.

Energen had the following shares that were excluded from the computation of diluted EPS, as inclusion would be anti-dilutive:



Three months ended
September 30,
Nine months ended
September 30,
(in thousands)
2017
2016
2017
2016
Stock options
512

163

512

691

Performance share awards
139


139



6. EQUITY OFFERING

During the first quarter of 2016, Energen issued 18,170,000 additional shares of common stock through a public equity offering. We received net proceeds of approximately $381.1 million, after deducting offering expenses. Net proceeds from this offering were used to repay borrowings under our credit facility and for general corporate purposes.










16



7. STOCK COMPENSATION

Stock Incentive Plan
Restricted Stock: The Stock Incentive Plan provides for the grant of restricted stock and restricted stock units (restricted stock awards) which have been valued based on the quoted market price of Energen’s common stock at the date of grant. Restricted stock awards vest within three years from grant date. A summary of restricted stock award activity during the nine months ended September 30, 2017 is presented below:

 
Shares
Weighted Average Price
Nonvested at December 31, 2016
325,643

$
44.44

Restricted stock units granted
127,661

52.42

Vested
(45,576
)
65.68

Forfeited
(2,803
)
44.68

Nonvested at September 30, 2017
404,925

$
44.56


Performance Share Awards: In addition, the Stock Incentive Plan provides for the grant of performance share awards to eligible employees based on predetermined Energen performance criteria at the end of an award period. The Stock Incentive Plan provides that payment of earned performance share awards be made in the form of Energen common stock. Performance share awards are valued using the Monte Carlo model which uses historical volatility and other assumptions to estimate the probability of satisfying the market condition of the award and have a three-year vesting period. A summary of performance share award activity during the nine months ended September 30, 2017 is presented below:



Shares
Weighted
Average Price
Nonvested at December 31, 2016
336,442

$
57.03

Granted (two-year vesting period)
3,116

$
96.54

Granted (three-year vesting period)
137,084

66.89

Vested and paid
(59,530
)
93.52

Forfeited
(3,225
)
46.16

Nonvested at September 30, 2017
413,887

$
55.43


Stock Repurchase Program
During the three months and nine months ended September 30, 2017, Energen had non-cash purchases of approximately $0.1 million and $3.3 million, respectively, of Energen common stock in conjunction with tax withholdings on other stock compensation and our non-qualified deferred compensation plan. Energen had non-cash purchases of Energen common stock of $0.1 million and $2.6 million during the three months and nine months September 30, 2016. Energen utilized internally generated cash flows in payment of the related tax withholdings.

8. EMPLOYEE BENEFIT PLANS

Pension Plans
In October 2014, Energen’s Board of Directors elected to freeze and terminate its qualified defined benefit pension plan. A plan amendment adopted in October 2014 closed the plan to new entrants, effective November 1, 2014, and froze benefit accruals effective December 31, 2014. Energen terminated the plan on January 31, 2015 and distributed benefits in December 2015. The Pension Benefit Guaranty Corporation (PBGC) is conducting an audit of the termination of the pension plan to ensure that Energen properly calculated and distributed benefits in accordance with plan provisions and in compliance with the appropriate laws and regulations administered by the PBGC.

Energen’s non-qualified supplemental retirement plans were terminated effective December 31, 2014. Distributions under the plans were partially made in the first quarter of 2015 with the remainder of approximately $14.5 million paid in the first quarter of 2016. The Company expects to make no additional benefit payments with respect to the termination of the non-qualified supplemental retirement plans. Certain annuities associated with our non-qualified supplemental retirement plans remain of approximately $1.0

17



million and $1.1 million and are included in other current liabilities and other long-term liabilities on the consolidated balance sheets at September 30, 2017 and December 31, 2016, respectively. In the first quarter of 2016, Energen incurred a settlement charge of $3.3 million for the payment of lump sums from the non-qualified supplemental retirement plans.

Postretirement Benefit Plans
Energen provides certain postretirement health care and life insurance benefits for all employees hired prior to January 1, 2010. These postretirement healthcare and life insurance benefits are available upon reaching normal retirement age while working for Energen. The components of net periodic postretirement benefit income for Energen’s postretirement benefit plan were as follows:



Three months ended
September 30,
Nine months ended
September 30,
(in thousands)
2017
2016
2017
2016
Components of net periodic benefit cost:
 
 
 
 
Service cost
$
18

$
24

$
53

$
71

Interest cost
57

52

170

170

Expected long-term return on assets
(62
)
(68
)
(187
)
(248
)
Prior service cost amortization
(114
)
(113
)
(340
)
(351
)
Actuarial loss amortization
2


7


Settlement charge



45

Curtailment gain



(816
)
Net periodic income
$
(99
)
$
(105
)
$
(297
)
$
(1,129
)

There are no required contributions to the postretirement benefit plan during 2017. In the first quarter of 2016, Energen incurred a curtailment gain of $0.8 million in connection with the reduction in workforce.

2017 Change in Control Severance Pay Plan
In November 2017, Energen adopted the Change in Control Severance Pay Plan which provides for certain severance payments to non-officer employees of Energen Corporation in the event of an involuntary termination of employment other than for cause or a voluntary termination for good reason within one year following any Change in Control. Change in Control, as used in the Plan, has the same definition included in Energen’s Severance Compensation Agreements with named executive officers. The Plan has an initial term of three years, with an automatic one-year extension each anniversary absent Company notification that it will not be extended. The Plan may not be terminated (nor may any amendment which adversely affects rights of participants under the Plan become effective) during the one-year period following a Change in Control.

9. COMMITMENTS AND CONTINGENCIES    

Commitments and Agreements: Under various agreements for third-party gathering, treatment, transportation or other services, Energen is committed to deliver minimum production volumes or to pay certain costs in the event the minimum quantities are not delivered. These delivery commitments are approximately 3.1 million barrels of oil equivalent (MMBOE) through October 2020.

Legal Matters: Energen and its affiliates are, from time to time, parties to various pending or threatened legal proceedings and we have accrued a provision for our estimated liability. Certain of these lawsuits include claims for punitive damages in addition to other specified relief. We recognize a liability for contingencies, including an estimate of legal costs to be incurred, when information available indicates both a loss is probable and the amount of the loss can be reasonably estimated. Based upon information presently available, and in light of available legal and other defenses, contingent liabilities arising from threatened and pending litigation are not considered material in relation to the respective financial positions of Energen and its affiliates. It should be noted, however, that there is uncertainty in the valuation of pending claims and prediction of litigation results.

On November 4, 2015, Energen Resources filed a quiet title action against Endeavor Energy Resources, L.P. (Endeavor) in the District Court of Howard County, Texas, to remove a cloud on the title to approximately 10,000 acres leased by Energen Resources in that county. Energen Resources believes the cloud on title arises from a prior, unreleased but partially terminated oil and gas lease covering the leased lands. The trial judge ruled with respect to the acreage not held by production that Endeavor’s lease terminated prior to the date Energen Resources entered into its lease. In November 2016, the trial judge entered a final judgment to that effect and that judgment has been appealed by Endeavor.


18



In September 2017, Energen Resources received an Order from the Bureau of Safety and Environmental Enforcement of the United States Department of the Interior relating to the decommissioning of the wells, drilling platforms and other infrastructure relating to an expired shallow water federal offshore lease.  Energen Resources was one of multiple parties that received this Order and is in the preliminary stages of evaluating the Order and any potential exposure related thereto. No amount has been accrued as of September 30, 2017.

Environmental Matters: Various environmental laws and regulations apply to the operations of Energen and Energen Resources. Historically, the cost of environmental compliance has not materially affected our financial position, results of operations or cash flows. New regulations, enforcement policies, claims for damages or other events could result in significant unanticipated costs.

During January 2014, Energen Resources responded to a General Notice and Information Request from the Environmental Protection Agency regarding the Reef Environmental Site (the Site) in Sylacauga, Talladega County, Alabama. The letter identifies Energen Resources as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 for the cleanup of the Site. In 2008, Energen hired a third party to transport approximately 3,000 gallons of non-hazardous wastewater to Reef Environmental for wastewater treatment. Reef Environmental ceased operating its wastewater treatment system in 2010. Because it used Reef Environmental only one time for a small volume of non-hazardous wastewater, Energen Resources has not accrued a liability for cleanup of the Site.

New Mexico Audits: In 2011, Energen Resources received an Order to Perform Restructured Accounting and Pay Additional Royalties (the Order), following an audit performed by the Taxation and Revenue Department (the Department) of the State of New Mexico on behalf of the Office of Natural Resources Revenue (ONRR), of federal oil and gas leases in New Mexico. The audit covered periods from January 2004 through December 2008 and included a review of the computation and payment of royalties due on minerals removed from specified U.S. federal leases. The Order addressed ONRR’s efforts to change accounting and reporting practices, and to unbundle fees charged by third parties that gather, compress and transport natural gas production. ONRR now maintains that all or some of such fees are not deductible.

Energen Resources appealed the Order in 2011 and in July 2012, on a motion from ONRR, the Order was remanded. In August 2014, ONRR issued its Revised Order and Energen Resources appealed the Revised Order. In the Revised Order, ONRR ordered that Energen pay additional royalties on production from certain federal leases in the amount of $129,700. At ONRR’s request, the Revised Order was also remanded in August 2015. On April 15, 2016, ONRR issued its Second Revised Order. The Second Revised Order directs Energen Resources to pay additional royalties of $189,000, replacing the previous demand of $129,700. Energen estimates that application of the ONRR position to all of the Company’s federal leases would result in ONRR claims up to approximately $24 million, plus interest and penalties from 2004 forward. ONRR began implementing its unbundling initiative in 2010, but seeks to implement its revisions retroactively, despite the fact that they conflict with previous audits, allowances and industry practice. Energen is contesting the Second Revised Order, the predecessor orders and the findings. Management is unable, at this time, to determine a range of reasonably possible losses, and no amount has been accrued as of September 30, 2017.

Income Taxes: In October 2017, the Company received notification from the Internal Revenue Service of a forthcoming examination of its federal consolidated income tax returns for 2014 and 2016.

10. EXPLORATORY COSTS

Energen capitalizes exploratory drilling costs until a determination is made that the well or project has either found proved reserves or is impaired. After an exploratory well has been drilled and found oil and natural gas reserves, a determination may be pending as to whether the oil and natural gas quantities can be classified as proved. In those circumstances, Energen continues to capitalize the drilling costs pending the determination of proved status if (i) the well has found a sufficient quantity of reserves to justify its completion as a producing well and (ii) Energen is making sufficient progress assessing the reserves and the economic and operating viability of the project. Capitalized exploratory drilling costs are presented in proved properties in the balance sheets. If the exploratory well is determined to be a dry hole, the costs are charged to exploration expense. Other exploration costs, including geological and geophysical costs, are expensed as incurred.










19



The following table sets forth capitalized exploratory well costs and includes additions pending determination of proved reserves, reclassifications to proved reserves and costs charged to expense:

 
Three months ended
September 30,
(in thousands)
2017
2016
Capitalized exploratory well costs at beginning of period
$
141,401

$
37,438

Additions pending determination of proved reserves
168,965

88,879

Reclassifications due to determination of proved reserves
(174,270
)
(44,564
)
Capitalized exploratory well costs at end of period
$
136,096

$
81,753


 
Nine months ended
September 30,
(in thousands)
2017
2016
Capitalized exploratory well costs at beginning of period
$
164,996

$
103,588

Additions pending determination of proved reserves
504,668

250,782

Reclassifications due to determination of proved reserves
(533,568
)
(272,617
)
Capitalized exploratory well costs at end of period
$
136,096

$
81,753

The following table sets forth capitalized exploratory well costs:

(in thousands)
September 30, 2017
December 31, 2016
Exploratory wells in progress (drilling rig not released)
$
15,309

$
14,531

Capitalized exploratory well costs capitalized for a period of one year or less
120,787

143,602

Capitalized exploratory well costs for a period greater than one year

6,863

Total capitalized exploratory well costs
$
136,096

$
164,996


At September 30, 2017, Energen had 55 gross exploratory wells either drilling or waiting on results from completion and testing, all of which were located in the Permian Basin. As of September 30, 2017, the Company had no wells capitalized greater than a year. As of December 31, 2016, the Company had two gross wells capitalized greater than a year, which were completed during 2017.

11. ASSET RETIREMENT OBLIGATIONS

Energen’s asset retirement obligations (ARO) primarily relate to the future plugging, abandonment and reclamation of wells and facilities. We recognize a liability for the fair value of the ARO in the periods incurred. The ARO fair value liability is determined by calculating the present value of the estimated future cash outflows, adjusted for inflation, we expect to incur to plug, abandon and reclaim our producing properties at the end of their productive lives, and is recognized on a discounted basis incorporating an estimate of performance risk specific to Energen. Subsequent to initial measurement, liabilities are accreted to their present value and capitalized costs are depreciated over the estimated useful lives of the related assets. Upon settlement of the liability, Energen may recognize a gain or loss for differences between estimated and actual settlement costs.

The following table reflects the components of the change in Energen’s ARO balance:

(in thousands)
 
Balance as of December 31, 2016
$
81,544

Liabilities incurred
1,072

Liabilities settled
(303
)
Accretion expense
4,330

Balance as of September 30, 2017
$
86,643




20



12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table provides changes in the components of accumulated other comprehensive income (loss), net of the related income tax effects.

(in thousands)
 
 
Balance as of December 31, 2016
 
$
1,405

Amounts reclassified from accumulated other comprehensive income (loss)
 
(208
)
Balance as of September 30, 2017

$
1,197


The following table provides details of the reclassifications out of accumulated other comprehensive income (loss).

 
Three months ended
 
 
September 30,
 
 
2017
2016
 
(in thousands)
Amounts Reclassified
Line Item Where Presented
Postretirement plans:
 
 
 
Prior service cost
$
113

$
114

General and administrative
Actuarial losses
(2
)

General and administrative
Total postretirement plans
111

114

 
Income tax benefit
(42
)
(43
)
 
Total reclassifications for the period, net of tax
$
69

$
71

 

 
Nine months ended
 
 
September 30,
 
 
2017
2016
 
(in thousands)
Amounts Reclassified
Line Item Where Presented
Pension and postretirement plans:
 
 
 
Prior service cost
$
341

$
352

General and administrative
Actuarial losses
(7
)
(3,058
)
General and administrative
Total pension and postretirement plans
334

(2,706
)
 
Income tax expense (benefit)
(126
)
1,035

 
Total reclassifications for the period, net of tax
$
208

$
(1,671
)
 


















21



13. ASSET IMPAIRMENT

Impairments recognized by Energen are presented below:



Three months ended
September 30,
Nine months ended
September 30,
(in thousands)
2017
2016
2017
2016
Permian Basin oil properties
 
 
 
 
Central Basin Platform
$

$

$
1,096

$
187,043

Delaware Basin



21,288

San Juan Basin properties



7,519

Permian Basin unproved leasehold properties
100

587

493

4,722

San Juan Basin unproved leasehold properties



40

Total asset impairments
$
100

$
587

$
1,589

$
220,612


Non-cash impairment writedowns are reflected in asset impairment on the consolidated statements of operations.

Permian Basin: During the first quarter of 2017, Energen recognized non-cash impairment writedowns in the Permian Basin of $1.1 million to adjust the carrying amount of these properties to their fair value. During the first quarter of 2016, Energen recognized non-cash impairment writedowns in the Permian Basin of $208.3 million to adjust the carrying amount of these properties to their fair value. We estimate future discounted cash flows in determining fair value using commodity assumptions, which are based on the commodity price curve for five years and then escalated at 3 percent through our assumed price cap. Our commodity price assumptions declined in the first quarter of 2016 by approximately 5 percent for oil and 4 percent for natural gas in comparable periods.

In the year-to-date 2017, Energen recognized unproved leasehold writedowns primarily on Permian Basin oil properties of $0.5 million. Energen recognized unproved leasehold writedowns primarily on Permian Basin oil properties in the Delaware Basin and the Central Basin Platform of $4.7 million in the year-to-date 2016.

San Juan Basin: During the first quarter of 2016, Energen recognized non-cash impairment writedowns on held for sale properties in the San Juan Basin of $7.5 million to adjust the carrying amount of these properties to their fair value.

14. ACQUISITION AND DISPOSITION OF PROPERTIES

During the nine months ended September 30, 2017, Energen completed an estimated total of $259.3 million in various purchases and renewals of unproved acquisitions, which are accounted for as asset acquisitions, including approximately $208.1 million in the Delaware Basin and approximately $32.4 million in the Midland Basin for unproved leasehold and $18.8 million for mineral purchases in the Delaware Basin. During the nine months ended September 30, 2016, Energen completed an estimated $134.9 million in various purchases and renewals of unproved leasehold largely in the Permian Basin, including approximately $77 million of acreage purchased in Lea County, New Mexico.

During June, July and August of 2016, Energen completed a series of asset sales of certain non-core Permian Basin assets in the Delaware Basin in Texas and in the San Juan Basin in New Mexico for an aggregate purchase price of $552 million. These transactions had closing dates of June 3, June 7, June 30, July 15 and August 9 of 2016 with various effective dates ranging from March 1, 2016 to June 30, 2016. Minor portions of the assets were transferred to other parties upon the exercise of preferential purchase rights under pre-existing joint operating agreements in the ordinary course of business. Pre-tax proceeds to Energen were approximately $532.4 million after purchase price adjustments of approximately $19 million related to the operations of the properties subsequent to the effective dates and other one-time adjustments including transfer payments and certain amounts due to the buyer, but before consideration of transaction costs of approximately $5 million. Energen recognized total net pre-tax gains of approximately $246 million on the sales. For the nine months ended September 30, 2017, included in the gain on sale of assets and other, Energen recognized post-closing adjustment losses of $0.4 million on these sales. For the three and nine months ended September 30, 2016, Energen recognized pre-tax gains of $91.4 million and $252.4 million, respectively, on the sales. Energen used proceeds from the sale to fund ongoing operations.



22


15. RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2017-09, Stock Compensation - Scope of Modification Accounting. The amendments in this update provide guidance about which changes to the
terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendment is effective for annual periods beginning after December 15, 2017, and interim periods within those annual years. This amendment is not expected to have a material impact to the Company’s financial position or results of operations.

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this update require that the service cost component of net periodic postretirement benefit expense be presented in the same statement of operations line item as other employee compensation costs, while the remaining components of net periodic postretirement benefit expense are to be presented outside operating income. The amendment is effective for annual periods beginning after December 15, 2017, and interim periods within those annual years. This amendment is not expected to have a material impact to the Company’s financial position or results of operations.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. This update apples to all entities that are required to present a statement of cash flows. This update provides guidance on eight specific cash flow issues: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. This update will be effective for financial statements issued for fiscal years beginning after December 31, 2017, including interim periods within those fiscal years with early adoption permitted. This update will be applied using the retrospective transition method. Adoption of this standard will only affect the presentation of the Company’s cash flows and is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which makes a number of changes meant to simplify and improve accounting for share-based payments. The amendment was effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this ASU effective January 1, 2017 did not have a material impact on our consolidated financial statements. Upon adoption of this new guidance, all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in our consolidated statements of operations as a discrete item in the reporting period in which they occur. The presentation requirements for cash flows related to employee taxes paid for withheld shares were adjusted retrospectively. These cash outflows, which were historically presented as an operating activity, were classified as a financing activity under taxes paid for shares withheld on the consolidated statements of cash flows. The Company also had an approximate $169,000 decrease to retained earnings associated with our election to recognize forfeitures as they occur.

In February 2016, the FASB issued ASU No. 2016-02, Leases. This update increases transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendment is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The primary effect of adopting the new standard will be to record assets and obligations on the balance sheet for contracts currently recognized as operating leases. We have identified certain applicable leases under the standard and are currently developing an inventory of all applicable leases. The Company is still evaluating the impact of this standard on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This update is based on the principle that revenue is recognized to depict the transfer of 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. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. Companies may apply this update retrospectively or using a modified retrospective approach to adjust retained earnings. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, which deferred the effective date of ASU No. 2014-09 to annual periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company expects to adopt this standard using the modified retrospective method of adoption on January 1, 2018. We continue to evaluate the impact of this standard on our individual customer contracts; however, due to the short length of our revenue cycle, we do not expect and have not identified any significant impacts to our consolidated financial statements.


23



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 

OVERVIEW OF BUSINESS

Energen Corporation (Energen or the Company) is an oil and natural gas exploration and production company engaged in the exploration, development and production of oil, natural gas liquids and natural gas. Our operations are conducted through our subsidiary, Energen Resources Corporation (Energen Resources) and primarily occur within the Midland Basin, the Delaware Basin and the Central Basin Platform areas of the Permian Basin in west Texas and New Mexico.

Energen is focused on increasing its oil, natural gas liquids and natural gas production and proved reserves largely through active development and/or exploratory programs in the Permian Basin. The Company seeks to expand its footprint primarily through acquisitions of proved properties and unproved leasehold within areas of existing operations. All oil, natural gas liquids and natural gas production is sold to third parties. Energen operates properties for its own interest and that of its joint interest owners. This role includes overall project management and day-to-day decision-making relative to project operations.

Overview of Third Quarter 2017 Results and Activities
Key results were as follows during the third quarter of 2017:
realized higher commodity prices including an 8 percent increase in oil prices to $45.07 per barrel;
generated 41 percent higher production to 7,483 thousand barrels of oil equivalent (MBOE), including a 38 percent increase in oil and natural gas liquids production to 5,954 MBOE;
recognized per unit declines of 30 percent and 25 percent in general and administrative (G&A) expense and oil, natural gas liquids and natural gas production expense, respectively;
hedged NYMEX three-way oil collars of 1,440 thousand barrels (MBbl) at $58.76/$40.00/$30.00 per barrel for 2018;
repaid $17.0 million in long-term debt in July 2017; and
completed an estimated $23.7 million in various purchases and renewals of unproved acquisitions in the Permian Basin including approximately $22.1 million in the Delaware Basin and approximately $1.5 million in the Midland Basin for unproved leasehold.

Key results were as follows during the nine months ended September 30, 2017:
realized higher commodity prices including a 22 percent increase in oil prices to $45.89 per barrel and a 29 percent increase in natural gas prices to $2.30 per thousand cubic feet (Mcf);
produced 18,833 MBOE in the current year-to-date as compared to 16,719 MBOE in the prior year-to-date, which included production in the prior year-to-date associated with sold properties of 1,656 MBOE;
recognized per unit declines of 27 percent and 13 percent in G&A expense and oil, natural gas liquids and natural gas production expense, respectively;
hedged natural gas liquids of 34.65 million gallons (MMgal) at $0.64 per gallon and 75.6 MMgal at $0.59 per gallon for 2017 and 2018, respectively, NYMEX three-way oil collars of 10,260 MBbl at $58.46/$44.04/$34.04 per barrel for 2018 and natural gas basin specific - Permian swaps of 3.6 Bcf at $2.56 per Mcf for 2018;
redeemed $2.0 million of 7.40% Medium-term Notes, Series A, due July 24, 2017 and $5.0 million of 7.60% Medium-term Notes, Series A, due July 26, 2027 and had a scheduled reduction of $17.0 million in long-term debt in July 2017; and
completed an estimated $259.3 million in various purchases and renewals of unproved acquisitions in the Permian Basin including approximately $208.1 million in the Delaware Basin and approximately $32.4 million in the Midland Basin for unproved leasehold and $18.8 million for mineral purchases in the Delaware Basin.













24



FINANCIAL AND OPERATING PERFORMANCE

Quarter ended September 30, 2017 vs. quarter ended September 30, 2016
Energen had a net loss of $18.5 million ($0.19 per diluted share) for the three months ended September 30, 2017 as compared with net income of $53.3 million ($0.55 per diluted share) for the same period in the prior year. This change in net income was primarily the result of:

gain in the third quarter of 2016 on a series of asset sales of certain non-core Permian Basin assets in the Delaware Basin in Texas and in the San Juan Basin in New Mexico (approximately $59.3 million after-tax);
increased year-over-year after-tax losses of $56.3 million on open derivatives (resulting from an after-tax $40.2 million non-cash loss on open derivatives for the third quarter of 2017 and an after-tax $16.1 million non-cash gain on open derivatives for the third quarter of 2016);
increased depreciation, depletion and amortization (DD&A) expense (approximately $15.2 million after-tax);
higher production and ad valorem taxes (approximately $2.8 million after-tax); and
increased oil, natural gas liquids and natural gas production expense (approximately $1.5 million after-tax);

partially offset by:

increased oil, natural gas liquids and natural gas production volumes (approximately $40.2 million after-tax);
increased oil and natural gas liquids commodity prices (approximately $15 million after-tax);
period-over-period gain on closed derivatives (approximately $6 million after-tax); and
gain in August 2017 from the sale of certain unproved leasehold properties in Wyoming (approximately $2.5 million).

Nine months ended September 30, 2017 vs. nine months ended September 30, 2016
Energen had net income of $44.4 million ($0.45 per diluted share) for the nine months ended September 30, 2017 as compared with net loss of $113.0 million ($1.21 per diluted share) for the same period in the prior year. This change in net income was primarily the result of:

non-cash impairments in 2016 on certain Permian Basin oil properties primarily in the Central Basin Platform (approximately $120.4 million after-tax) and the Delaware Basin (approximately $13.6 million after-tax);
increased commodity prices (approximately $81.7 million after-tax);
increased year-over-year after-tax gains of $53.7 million on open derivatives (resulting from an after-tax $30.6 million non-cash gain on open derivatives for the first nine months of 2017 and an after-tax $23.1 million non-cash loss on open derivatives for the first nine months of 2016);
increased production volumes (approximately $38.1 million after-tax);
decreased G&A expense (approximately $8.5 million after-tax);
non-cash impairments in 2016 on certain properties in the San Juan Basin (approximately $4.8 million after-tax);
unproved leasehold writedowns in 2016 primarily on Permian Basin properties in the Delaware Basin and Central Basin Platform (approximately $2.9 million after-tax);
gain in August 2017 from the sale of certain unproved leasehold properties in Wyoming (approximately $2.5 million);
decreased oil, natural gas liquids and natural gas production expense (approximately $2 million after-tax); and
period-over-period gain on closed derivatives (approximately $1.1 million after-tax);

partially offset by:

gain in the year-to-date of 2016 on a series of asset sales of certain non-core Permian Basin assets in the Delaware Basin in Texas and in the San Juan Basin in New Mexico (approximately $162.3 million after-tax);
increased DD&A expense (approximately $5.4 million after-tax);
higher production and ad valorem taxes (approximately $5.1 million after-tax);
increased exploration expense (approximately $2.9 million after-tax); and
non-cash impairments on certain Permian Basin oil properties primarily in the Central Basin Platform (approximately $0.7 million after-tax).







25



Outlook
Capital Estimate: Energen plans to continue investing in oil and natural gas production operations. In the 2017 year-to-date, Energen has invested approximately $972 million, including $263 million associated with acquisitions, on its oil and natural gas capital program. The total drilling and development capital for 2017 is estimated to range from $850 million to $900 million, substantially all of which is for existing properties and exploration. Included in total acquisitions/unproved leasehold are unproved leasehold acquisitions in the Delaware Basin of approximately $208.1 million and in the Midland Basin of approximately $32.4 million and $18.8 million for mineral purchases in the Delaware Basin.

Capital expenditures in the Permian Basin by area during 2017 are planned as follows:

(in millions)
2017
Midland Basin
$ 470-490

Delaware Basin
375-405

Central Basin, ARO, other
5

Drilling and development capital
850-900

Acquisitions/Unproved leasehold
265

Total
$ 1,115-1,165


To finance our capital spending, we expect to use cash flow from operations supplemented by our existing syndicated credit facility. Capital spending is required to offset declines in production and proved oil and natural gas reserves. Future success in maintaining and growing reserves and production is highly dependent on the results of our drilling program and our ability to add reserves economically during a volatile market for crude oil and natural gas.

Energen also may allocate additional capital for other oil and natural gas activities such as property acquisitions and additional development of existing properties. Energen may evaluate acquisition opportunities which arise in the marketplace. Energen’s ability to invest in property acquisitions is subject to market conditions and industry trends. Property acquisitions, except as disclosed above, are not included in the aforementioned estimate of oil and natural gas investments and could result in capital expenditures different from those outlined above.





























26



Results of Operations
The following table summarizes information regarding our production and operating data.


Three months ended
Nine months ended

September 30,
September 30,
(in thousands, except sales price and per unit data)
2017
2016
2017
2016
Operating and production data






Oil, natural gas liquids and natural gas sales








Oil
$
203,281

$
138,388

$
532,652

$
386,905

Natural gas liquids
25,508

12,067

59,776

34,584

Natural gas
20,325

13,518

51,784

36,885

Total
$
249,114

$
163,973

$
644,212

$
458,374

Open non-cash mark-to-market gains (losses) on derivative instruments


Oil
$
(46,395
)
$
22,984

$
42,730

$
(33,444
)
Natural gas liquids
(15,765
)
(954
)
(4,148
)
(954
)
Natural gas
(105
)
2,992

8,856

(1,462
)
Total
$
(62,265
)
$
25,022

$
47,438

$
(35,860
)
Closed gains (losses) on derivative instruments


Oil
$
5,388

$
(4,118
)
$
(470
)
$
(5,321
)
Natural gas liquids
(1,923
)

(3,468
)

Natural gas
1,190

(492
)
1,537

1,176

Total
$
4,655

$
(4,610
)
$
(2,401
)
$
(4,145
)
Total revenues
$
191,504

$
184,385

$
689,249

$
418,369

Production volumes
 
 
 
 
Oil (MBbl)
4,510

3,325

11,608

10,269

Natural gas liquids (MMgal)
60.6

41.2

146.0

126.0

Natural gas (MMcf)
9,174

5,958

22,500

20,700

Total production volumes (MBOE)
7,483

5,298

18,833

16,719

Average daily production volumes
 
 
 
 
Oil (MBbl/d)
49.0

36.1

42.5

37.5

Natural gas liquids (MMgal/d)
0.7

0.4

0.5

0.5

Natural gas (MMcf/d)
99.7

64.8

82.4

75.5

Total average daily production volumes (MBOE/d)
81.3

57.6

69.0

61.0

Average realized prices excluding effects of open non-cash mark-to-market derivative instruments
Oil (per barrel)
$
46.27

$
40.38

$
45.85

$
37.16

Natural gas liquids (per gallon)
$
0.39

$
0.29

$
0.39

$
0.27

Natural gas (per Mcf)
$
2.35

$
2.19

$
2.37

$
1.84

Average realized prices excluding effects of all derivative instruments
Oil (per barrel)
$
45.07

$
41.62

$
45.89

$
37.68

Natural gas liquids (per gallon)
$
0.42

$
0.29

$
0.41

$
0.27

Natural gas (per Mcf)
$
2.22

$
2.27

$
2.30

$
1.78

Costs per BOE
 
 
 
 
Oil, natural gas liquids and natural gas production expenses
$
5.95

$
7.98

$
6.89

$
7.94

Production and ad valorem taxes
$
2.05

$
2.07

$
2.20

$
2.00

Depreciation, depletion and amortization
$
17.61

$
20.42

$
18.74

$
20.61

Exploration expense
$
0.08

$

$
0.33

$
0.11

General and administrative
$
2.87

$
4.10

$
3.27

$
4.47

Capital expenditures (including acquisitions)
$
251,621

$
211,393

$
971,867

$
428,443



27



Revenues: Our revenues fluctuate primarily as a result of realized commodity prices, production volumes and the value of our derivative contracts. Our revenues are predominantly derived from the sale of oil, natural gas liquids and natural gas.
In the third quarter of 2017, commodity sales rose $85.1 million or 51.9 percent from the same period of 2016. In the year-to-date 2017, commodity sales increased $185.8 million or 40.5 percent from the same period of 2016. Particular factors impacting commodity sales include the following:

Oil volumes in the third quarter increased 35.6 percent to 4,510 MBbl due to new well performance from the Delaware Basin and Midland Basin horizontal well programs. The increases were partially offset by reduced production associated with normal declines in the Central Basin Platform and the vertical Wolfberry in the Midland Basin. For the year-to-date, oil volumes rose 13 percent to 11,608 MBbl due to new well performance from the Delaware Basin and Midland Basin horizontal well programs. The increases were partially offset by reduced production associated with a series of asset sales of certain non-core Permian Basin assets in the Delaware Basin in Texas and in the San Juan Basin in New Mexico and normal declines in the Delaware Basin 3rd Bone Spring, the Central Basin Platform and the vertical Wolfberry in the Midland Basin.
Average realized oil prices rose 8.3 percent to $45.07 per barrel during the three months ended September 30, 2017. Average realized oil prices increased 21.8 percent to $45.89 per barrel during the nine months ended September 30, 2017.
Natural gas liquids production for the current quarter rose 47.1 percent to 60.6 MMgal. Increased production related to new well performance from the Delaware Basin and Midland Basin horizontal well programs was partially offset by reduced production related to declines in the Midland Basin vertical Wolfberry. For the year-to-date, natural gas liquids production rose 15.9 percent to 146 MMgal primarily due to new well performance partially offset by asset sales of certain non-core Permian Basin assets in the Delaware Basin in Texas and in the San Juan Basin in New Mexico and normal declines.
Average realized natural gas liquids prices rose 44.8 percent to an average price of $0.42 per gallon during the third quarter of 2017. Average realized natural gas liquids prices increased 51.9 percent to an average price of $0.41 per gallon during the nine months ended September 30, 2017.
Natural gas production increased 54 percent to 9.2 Bcf in the third quarter. This increase was primarily due to production increases in the Delaware Basin and Midland Basin horizontal well programs partially offset by lower natural gas production from the 3rd Bone Spring in the Delaware Basin and the vertical Wolfberry in the Midland Basin. For the nine months ended September 30, 2017, natural gas production rose 8.7 percent to 22.5 Bcf largely due to production increases in the Delaware Basin and Midland Basin horizontal well programs partially offset by the sale of natural gas assets in the San Juan Basin and lower natural gas production from the 3rd Bone Spring in the Delaware Basin and the vertical Wolfberry in the Midland Basin.
Average realized natural gas prices fell 2.2 percent to $2.22 per Mcf during the three months ended September 30, 2017. For the current year-to-date, average realized natural gas prices rose 29.2 percent to $2.30 per Mcf.

Realized prices exclude the effects of derivative instruments.

Losses on derivative instruments were $57.6 million in the third quarter of 2017 compared to gains of $20.4 million in the same period of 2016. Gains on derivative instruments were $45.0 million for the nine months ended September 30, 2017 compared to losses of $40.0 million in the same period of 2016. Our earnings are significantly affected by the changes of our derivative instruments. Increases or decreases in the expected commodity price outlook generally result in the opposite effect on the fair value of our derivatives. However, these gains and losses are generally expected to be offset by the unhedged price on the related commodities.

















28



Oil, natural gas liquids and natural gas production expense: The following table provides the components of our oil, natural gas liquids and natural gas production expenses:

 
Three months ended
Nine months ended
 
September 30,
September 30,
(in thousands, except per unit data)
2017
2016
2017
2016
Lease operating expenses
$
31,720

$
26,992

$
88,997

$
88,178

Workover and repair costs
10,430

12,329

35,424

35,440

Marketing and transportation
2,399

2,959

5,325

9,229

Total oil, natural gas liquids and natural gas production expense
$
44,549

$
42,280

$
129,746

$
132,847

Oil, natural gas liquids and natural gas production expense per BOE
$
5.95

$
7.98

$
6.89

$
7.94


Energen had oil, natural gas liquids and natural gas production expense of $44.5 million and $129.7 million during the three months and nine months ended September 30, 2017, respectively, as compared to $42.3 million and $132.8 million during the same periods in 2016. Lease operating expense may be positively or negatively impacted by property acquisitions and dispositions and also generally reflects year-over-year increases in the number of active wells resulting from Energen’s ongoing development and exploratory activities. Overall lease operating expense was positively impacted in the year-to-date by the prior year sale of certain non-core Permian Basin assets and the San Juan Basin.

Lease operating expense rose $4.7 million for the quarter largely due to increased water disposal costs (approximately $2.5 million), higher equipment rental costs (approximately $1.1 million), increased electrical costs (approximately $0.8 million), and increased non-operated costs (approximately $0.7 million) partially offset by decreased producing overhead costs (approximately $0.5 million) and lower gathering costs (approximately $0.5 million). On a per unit basis, the average lease operating expense for the current quarter was $4.24 per barrel of oil equivalent (BOE) as compared to $5.09 per BOE in the same period a year ago.

In the year-to-date, lease operating expense increased $0.8 million largely due to increased water disposal costs (approximately $3.6 million), additional gathering costs (approximately $1.8 million), increased electrical costs (approximately $0.7 million) and increased environmental costs (approximately $0.4 million) partially offset by reduced producing overhead costs (approximately $1.8 million), lower chemical and treatment costs (approximately $1.6 million), decreased labor costs (approximately $0.8 million), lower equipment rental costs (approximately $0.8 million) and decreased non-operated costs (approximately $0.7 million). On a per unit basis, the average lease operating expense for the nine months ended September 30, 2017 was $4.73 per BOE as compared to $5.27 per BOE in the same period a year ago.

Workover and repair costs decreased approximately $1.9 million for the three months ended September 30, 2017. For the nine months ended September 30, 2017, workover and repair costs remained relatively stable.

In the three months ended September 30, 2017, marketing and transportation costs decreased $0.6 million and $3.9 million in the year-to-date primarily due to lower natural gas volumes as a result of the prior year sale of certain San Juan Basin natural gas assets.

Production and ad valorem taxes: The following table provides a detail of our production and ad valorem taxes:

 
Three months ended
Nine months ended
 
September 30,
September 30,
(in thousands, except per unit data)
2017
2016
2017
2016
Production taxes
$
12,663

$
8,256

$
32,098

$
23,666

Ad valorem taxes
2,663

2,731

9,266

9,756

Total production and ad valorem tax expense
$
15,326

$
10,987

$
41,364

$
33,422

Total production and ad valorem tax expense per BOE
$
2.05

$
2.07

$
2.20

$
2.00



29



Production and ad valorem taxes were $15.3 million and $41.4 million during the three months and nine months ended September 30, 2017, respectively, as compared to $11.0 million and $33.4 million during the same periods in 2016. In the current quarter, production-related taxes were $4.4 million higher with approximately $3.4 million attributed to higher production volumes and approximately $1 million associated with increased overall commodity market prices. In the year-to-date, production-related taxes were $8.4 million higher with approximately $5.4 million associated with increased commodity market prices and approximately $3 million associated with higher production volumes. Commodity market prices exclude the effects of derivative instruments for purposes of determining production taxes. Ad valorem taxes decreased $0.1 million in the current quarter and $0.5 million year-to-date.

Depreciation, depletion and amortization: Energen’s DD&A expense for the quarter rose $23.6 million and $8.4 million year-to-date. The average depletion rate for the current quarter was $17.61 per BOE as compared to $20.42 per BOE in the same period a year ago. Higher production volumes in the quarter increased DD&A expense by approximately $44.1 million which was partially offset by lower per unit depletion rates of approximately $20.4 million. For the nine months ended September 30, 2017, the average depletion rate was $18.74 per BOE as compared to $20.61 per BOE in the same period a year ago. Higher production volumes in the year-to-date contributed approximately $43.1 million to the increase in DD&A expense partially offset by lower per unit depletion rates of approximately $34.3 million.

Asset impairment: Non-cash impairment writedowns are reflected in asset impairment on the consolidated statements of operations.

Permian Basin: During the first quarter of 2017, Energen recognized non-cash impairment writedowns in the Permian Basin of $1.1 million to adjust the carrying amount of these properties to their fair value. During the first quarter of 2016, Energen recognized non-cash impairment writedowns in the Permian Basin of $208.3 million to adjust the carrying amount of these properties to their fair value. We estimate future discounted cash flows in determining fair value using commodity assumptions, which are based on the commodity price curve for five years and then escalated at 3 percent through our assumed price cap. Our commodity price assumptions declined in the first quarter of 2016 by approximately 5 percent for oil and 4 percent for natural gas in comparable periods.

In the year-to-date 2017, Energen recognized unproved leasehold writedowns primarily on Permian Basin oil properties of $0.5 million. Energen recognized unproved leasehold writedowns primarily on Permian Basin oil properties in the Delaware Basin and the Central Basin Platform of $4.7 million in the year-to-date 2016.

San Juan Basin: During the first quarter of 2016, Energen recognized non-cash impairment writedowns on held for sale properties in the San Juan Basin of $7.5 million to adjust the carrying amount of these properties to their fair value.

Exploration: The following table provides a detail of our exploration expense:

 
Three months ended
Nine months ended
 
September 30,
September 30,
(in thousands, except per unit data)
2017
2016
2017
2016
Geological and geophysical
$
617

$
6

$
6,058

$
1,482

Dry hole costs



16

Delay rentals and other
8

12

201

282

Total exploration expense
$
625

$
18

$
6,259

$
1,780

Total exploration expense per BOE
$
0.08

$

$
0.33

$
0.11


Exploration expense increased $0.6 million in the third quarter of 2017 and $4.5 million year-to-date primarily due to higher seismic costs.









30



General and administrative: The following table provides details of our G&A expense:

 
Three months ended
Nine months ended
 
September 30,
September 30,
(in thousands, except per unit data)
2017
2016
2017
2016
General and administrative
$
4,097

$
3,504

$
13,587

$
11,764

Benefit and performance-based compensation costs
8,561

9,691

20,064

25,977

Labor costs
8,816

8,515

28,014

37,042

Total general and administrative expense
$
21,474

$
21,710

$
61,665

$
74,783

Total general and administrative expense per BOE
$
2.87

$
4.10

$
3.27

$
4.47


Total G&A expense decreased $0.2 million for the three months ended September 30, 2017 largely due to lower costs from Energen’s benefit and performance-based compensation plans partially offset by increased professional services. G&A expense declined $13.1 million for the year-to-date primarily due to decreased labor, lower costs from Energen’s benefit and performance-based compensation plans partially offset by increased professional services. Charges associated with the workforce reduction of $5.0 million were included in labor costs for the nine months ended September 30, 2016. There were no pension costs included in benefit and performance-based compensation plans costs for the three months ended September 30, 2017 and 2016. There were no pension costs included in benefit and performance-based compensation plans costs for the nine months ended September 30, 2017 as compared to $3.3 million (all of which was settlement expense) during the same period in 2016.

Gain on sale of assets and other: Energen had gains on the sale of assets and other of $6.0 million and $7.0 million for the three months and nine months ended September 30, 2017, respectively. Gains on the sale of assets and other in the current quarter and year-to-date include a $4.5 million gain from the August 2017 sale of certain unproved leasehold properties in Wyoming. For the three months and nine months ended September 30, 2016, Energen had gains on the sale of assets and other of $91.2 million and $252.1 million, respectively.

During June, July and August of 2016, Energen completed a series of asset sales of certain non-core Permian Basin assets in the Delaware Basin in Texas and in the San Juan Basin in New Mexico for an aggregate purchase price of $552 million. These transactions had closing dates of June 3, June 7, June 30, July 15 and August 9 of 2016 with various effective dates ranging from March 1, 2016 to June 30, 2016. Minor portions of the assets were transferred to other parties upon the exercise of preferential purchase rights under pre-existing joint operating agreements in the ordinary course of business. Pre-tax proceeds to Energen were approximately $532.4 million after purchase price adjustments of approximately $19 million related to the operations of the properties subsequent to the effective dates and other one-time adjustments including transfer payments and certain amounts due to the buyer, but before consideration of transaction costs of approximately $5 million. Energen recognized total net pre-tax gains of approximately $246 million on the sales. For the nine months ended September 30, 2017, included in the gain on sale of assets and other, Energen recognized post-closing adjustment losses of $0.4 million on these sales. For the three and nine months ended September 30, 2016, Energen recognized pre-tax gains of $91.4 million and $252.4 million, respectively, on the sales. Energen used proceeds from the sale to fund ongoing operations.

Interest expense: Interest expense increased $0.9 million in the third quarter of 2017 and $0.2 million year-to-date. Higher interest in the current quarter and year-to-date was primarily due to increased borrowings under our syndicated credit facility largely offset by reduced interest related to the January 2017 redemption of the $2.0 million of 7.40% Medium-term Notes, Series A, due July 24, 2017 and $5.0 million of 7.60% Medium-term Notes, Series A, due July 26, 2027 along with the scheduled reduction of $17.0 million of long-term debt in July 2017.

Income tax expense (benefit): Income tax expense decreased $37.6 million for the three months ended September 30, 2017 largely due to lower pre-tax income. In the year-to-date, income tax expense increased $83.2 million primarily due to higher pre-tax income. In October 2017, the Company received notification from the Internal Revenue Service of a forthcoming examination of its federal consolidated income tax returns for 2014 and 2016.







31



FINANCIAL POSITION AND LIQUIDITY
 

Cash Flow
The key drivers impacting our cash flow from operations are our oil, natural gas liquids and natural gas production volumes and realized commodity market prices, net of the effects of settlements on our derivative commodity instruments. We rely on our cash flows from operations to fund our capital spending plans and working capital requirements. Cash flows will be supplemented, as needed, by borrowings under our syndicated credit facility.

Net cash provided by operating activities: Net cash provided by operating activities for the nine months ended September 30, 2017 was $382.8 million as compared to $204.5 million for the same period of 2016. Net income in 2017 was impacted positively overall by the increased price environment along with higher oil production volumes (including the impact of prior year asset sales). Also affecting net income were certain non-cash charges, including deferred income taxes and the change in derivative fair value. Energen’s working capital was influenced by commodity prices and the timing of payments and recoveries.

Net cash provided by (used in) investing activities: Net cash used in investing activities for the nine months ended September 30, 2017 was $979.6 million as compared to net cash provided by investing activities of $86.8 million for the same period of 2016. Energen incurred on a cash basis $984 million in capital expenditures including $720 million largely related to the development of oil and natural gas properties and $264 million primarily related to unproved leasehold acquisitions.

Net cash provided by financing activities: Net cash provided by financing activities for the nine months ended September 30, 2017 was $211.0 million as compared to $155.3 million for the same period of 2016. Net cash provided by financing activities in the year-to-date 2017 was primarily due to the increase in net credit facility borrowings partially offset by the redemption of $2.0 million of 7.40% Medium-term Notes, Series A, due July 24, 2017 and $5.0 million of 7.60% Medium-term Notes, Series A, due July 26, 2027 along with the scheduled reductions of $17.0 million of long-term debt in July 2017.

Changes in Commodity Prices
Realized commodity prices and production levels by commodity type are the two primary drivers of our liquidity. Historically, prices received for oil, natural gas liquids and natural gas production have been volatile because of supply and demand factors, general economic conditions and seasonal weather patterns. Crude oil prices also are affected by quality differentials, worldwide political developments and actions of the Organization of the Petroleum Exporting Countries. Basis differentials, like the underlying commodity prices, can be volatile because of regional supply and demand factors, including seasonal variations and the availability and price of transportation to consuming areas.

We engage in derivative risk management activities, as discussed below, in order to reduce the risk associated with commodity price fluctuations. Commodity hedges in place for 2017 and 2018 will help mitigate some of the commodity price volatility. See Item 3. Quantitative and Qualitative Disclosures about Market Risk, for a full detail of our hedged volumes.

Derivative Commodity Instruments
We periodically enter into derivative commodity instruments to hedge our exposure to price fluctuations on oil, natural gas liquids and natural gas production. Such instruments may include over-the-counter swaps, options and basis swaps typically executed with investment and commercial banks and energy-trading firms. Derivative transactions are pursuant to standing authorizations by the Board of Directors, which do not authorize speculative positions.

Due to the volatility of commodity prices, the estimated fair value of our derivative instruments is subject to fluctuation from period to period, which could result in significant differences between the current estimated fair value and the ultimate settlement price. Additionally, Energen is at risk of economic loss based upon the creditworthiness of our counterparties. We were in a net loss position with nine of our active counterparties and in a net gain position with the remaining five at September 30, 2017. Energen has policies in place to limit hedging to not more than 80 percent of our estimated annual production; however, Energen’s credit facility contains a covenant which operates to limit hedging at a lower threshold in certain circumstances.

See Note 3, Fair Value Measurements, in the Condensed Notes to Unaudited Consolidated Financial Statements for information regarding our policies on fair value measurement.

Credit Facility and Working Capital
At September 30, 2017, we had $812 million of committed financing available under our syndicated credit facility. On September 2, 2014, Energen entered into a five-year syndicated secured credit facility with domestic and foreign lenders. On October 25, 2016, the borrowing base and aggregate commitments were reaffirmed at $1.05 billion each with no changes in association with the semi-

32



annual redetermination required under the agreement. On April 21, 2017, the borrowing base was increased to $1.4 billion. The aggregate commitments under the credit facility did not change and remained at $1.05 billion. A semi-annual redetermination is currently in process and expected to be completed in November 2017. The Company anticipates increasing the borrowing base to $1.7 billion. The aggregate commitments under the credit facility are expected to remain at $1.05 billion. Energen’s obligations under the syndicated credit facility are unconditionally guaranteed by Energen Resources. To finance our operations, working capital and capital spending, we expect to use internally generated cash flow from operations supplemented by our existing syndicated credit facility.

Access to capital is an integral part of Energen’s business plan. Energen may issue long-term debt and equity periodically to replace short-term obligations, enhance liquidity and provide for permanent financing. As of September 30, 2017, the Company had $238 million outstanding under its revolving credit facility. While we expect to have ongoing access to our credit facility and capital markets, continued access could be adversely affected by current and future economic and business conditions and possible credit rating downgrades.

Our debt facilities are subject to certain financial and non-financial covenants as discussed in Note 4, Long-Term Debt, in the Condensed Notes to Unaudited Consolidated Financial Statements. The financial covenants of the credit facility require Energen to maintain a ratio of total debt to consolidated income before interest expense, income taxes, depreciation, depletion, amortization, exploration expense and other noncash income and expenses (EBITDAX) less than or equal to 4.0 to 1.0; to maintain a ratio of consolidated current assets (adjusted to include amounts available for borrowings and exclude non-cash derivative instruments) to consolidated current liabilities (adjusted to exclude maturities under the credit facility and non-cash derivative instruments) greater than or equal to 1.0 to 1.0; and, during certain periods, to maintain a ratio of the net present value of proved reserves of our oil and natural gas properties to consolidated total debt greater than or equal to 1.50 to 1.0. We are also bound by covenants which limit our ability to incur additional indebtedness, make certain distributions or alter our corporate structure. Energen may not pay dividends if an event of default exists, if the payment would result in an event of default, or if availability is less than 10 percent of the loan limit under the credit facility. Our credit facility also limits our ability to enter into commodity hedges based on projected production volumes. In addition, the terms of our credit facility limit the amount we can borrow to a borrowing base amount which is determined by our lenders in their sole discretion based on their valuation of our proved reserves and their internal criteria including commodity price outlook. The borrowing base amount is subject to redetermination semi-annually and for event-driven unscheduled redeterminations. Our next scheduled redetermination is April 1, 2018.

As of September 30, 2017, we were in compliance with our covenants and expect to maintain compliance during the remainder of 2017. However, in future periods, factors including those outside of our control may prevent us from maintaining compliance with the financial and non-financial covenants, including our total debt to EBITDAX covenant. Such factors may include commodity price declines, lack of liquidity in property and capital markets and our continuing ability to execute on our business plan. In the event that we are unable to remain in compliance with our financial and non-financial covenants, we would seek covenant relief at a scheduled redetermination date or at an interim date, as appropriate. However, no assurances can be given with respect to such relief. If any such covenant violations are not waived by the lenders such violation would result in an event of default that could trigger acceleration of payment of the amounts outstanding under credit facilities and long-term note agreements. Additionally, the lenders could refuse to make additional loans under the credit facility, take possession of any collateral, and exercise other remedies or rights that may be available to them, all of which could have a material adverse effect on the business and financial condition of the Company.

At September 30, 2017, Energen reported negative working capital of $119.4 million arising from current liabilities of $282.8 million exceeding current assets of $163.3 million. Working capital at Energen was influenced by accounts payable and accrued capital costs. Energen has $3.9 million in current assets and $18.1 million in current liabilities associated with its derivative financial instruments at September 30, 2017. Energen relies upon cash flows from operations supplemented by our credit facility to fund working capital needs.

Workforce Reduction
On January 22, 2016 and March 18, 2016, we reduced our workforce as part of an overall plan to reduce costs and better align our workforce with the needs of our business in light of current oil and natural gas commodity prices. In connection with the reductions, we incurred charges of approximately $5.0 million during 2016 for one-time termination benefits which are included in general and administrative expense on the consolidated statements of operations.

Equity Offering and Shares Issued
During the first quarter of 2016, Energen issued 18,170,000 additional shares of common stock through a public equity offering. We received net proceeds of approximately $381.1 million, after deducting offering expenses. Net proceeds from this offering were used to repay borrowings under our credit facility and for general corporate purposes.

33



The following table provides a detail of shares issued by Energen:

(in thousands)
September 30, 2017
December 31, 2016
Shares outstanding
97,201

97,075

Treasury stock*
3,125

3,064

Shares issued
100,326

100,139

*Excludes 70.9 shares and 61.8 shares held in the 1997 Deferred Compensation Plan at September 30, 2017 and December 31, 2016, respectively.

Employee Benefit Plans
In October 2014, Energen’s Board of Directors elected to freeze and terminate its qualified defined benefit pension plan. A plan amendment adopted in October 2014 closed the plan to new entrants, effective November 1, 2014, and froze benefit accruals effective December 31, 2014. Energen terminated the plan on January 31, 2015 and distributed benefits in December 2015. The Pension Benefit Guaranty Corporation (PBGC) is conducting an audit of the termination of the pension plan to ensure that Energen properly calculated and distributed benefits in accordance with plan provisions and in compliance with the appropriate laws and regulations administered by the PBGC.

Energen’s non-qualified supplemental retirement plans were terminated effective December 31, 2014. Distributions under the plans were made in the first quarters of 2016 and 2015.

Stock Repurchase Authorization
From time to time, the Company may repurchase shares of its common stock through open market or negotiated purchases. Such repurchases would be pursuant to a 3.6 million share repurchase authorization, of which approximately 3.4 million shares remain, approved by the Board of Directors on October 22, 2014. The timing and amounts of any repurchases are subject to changes in market conditions and other business considerations. We would expect to finance any share repurchases from available cash or under our existing credit facility.

Contractual Cash Obligations
In the course of ordinary business activities, Energen enters into a variety of contractual cash obligations and other commitments. There have been no material changes to the contractual cash obligations of the Company since December 31, 2016.

Other Commitments
New Mexico Audits: In 2011, Energen Resources received an Order to Perform Restructured Accounting and Pay Additional Royalties (the Order), following an audit performed by the Taxation and Revenue Department (the Department) of the State of New Mexico on behalf of the Office of Natural Resources Revenue (ONRR), of federal oil and gas leases in New Mexico. The audit covered periods from January 2004 through December 2008 and included a review of the computation and payment of royalties due on minerals removed from specified U.S. federal leases. The Order addressed ONRR’s efforts to change accounting and reporting practices, and to unbundle fees charged by third parties that gather, compress and transport natural gas production. ONRR now maintains that all or some of such fees are not deductible.

Energen Resources appealed the Order in 2011 and in July 2012, on a motion from ONRR, the Order was remanded. In August 2014, ONRR issued its Revised Order and Energen Resources appealed the Revised Order. In the Revised Order, ONRR ordered that Energen pay additional royalties on production from certain federal leases in the amount of $129,700. At ONRR’s request, the Revised Order was also remanded in August 2015. On April 15, 2016, ONRR issued its Second Revised Order. The Second Revised Order directs Energen Resources to pay additional royalties of $189,000, replacing the previous demand of $129,700. Energen estimates that application of the ONRR position to all of the Company’s federal leases would result in ONRR claims up to approximately $24 million, plus interest and penalties from 2004 forward. ONRR began implementing its unbundling initiative in 2010, but seeks to implement its revisions retroactively, despite the fact that they conflict with previous audits, allowances and industry practice. Energen is contesting the Second Revised Order, the predecessor orders and the findings. Management is unable, at this time, to determine a range of reasonably possible losses, and no amount has been accrued as of September 30, 2017.

Critical Accounting Policies and Estimates
We consider accounting policies related to our accounting for oil and natural gas producing activities and related proved reserves, asset impairments, derivatives and asset retirement obligations as critical accounting policies. These policies are summarized in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2016. The policies include significant estimates made by management using information available

34



at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used.

Asset Impairments: We monitor the business environment and our oil and natural gas properties for triggering events that could result in a potential impairment. Further, we make assumptions about future expectations in our evaluation of potential impairment. Such assumptions include, but are not necessarily limited to, commodity prices and related basis differentials, transportation costs, inflation assumptions, well and reservoir performance, severance and ad valorem taxes, other operating and future development costs, and general business plans.

Our commodity price assumptions are a significant and volatile uncertainty in our estimate, and we are unable to reliably forecast future commodity prices. Our assumption is therefore based on the commodity price curve for the next five years and then escalated at 3 percent through our assumed price caps. Our other assumptions generally have less volatility than the price assumption with variances tending to be field specific and more localized in effect. However, these assumptions can also be impacted by a higher or lower inflationary environment, limitations on takeaway capacity, well and reservoir performance over time, changes to governmental taxation, or changes to cost assumptions, operational and development plans, or the general economic or business environment.

Certain impairments were recognized during the year-to-date 2017 as discussed under Asset Impairments in our Results of Operations. We estimate a further decline in our price assumptions by 10 percent from September 30, 2017 prices (assuming all other assumptions are held constant) would result in no additional expense. Other assumptions such as operating costs, transportation costs, well and reservoir performance, severance tax rates and ad valorem taxes, operating and development plans may change given an assumed 10 percent commodity price decline. However, we are unable to estimate their correlation to the price change and these other assumptions may worsen or partially mitigate some of the estimated impairment.

Recent Accounting Standards Updates
See Note 15, Recently Issued Accounting Standards, in the Condensed Notes to Unaudited Consolidated Financial Statements for information regarding recently issued accounting standards.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
 
 
 
 
 

All statements, other than statements of historical fact, appearing in this report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are included in Energen’s disclosure and analysis as permitted by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements about our expectations, beliefs, intentions or business strategies for the future, statements concerning our outlook with regard to the timing and amount of future production of oil, natural gas liquids and natural gas, price realizations, the nature and timing of capital expenditures for exploration and development, plans for funding operations and drilling program capital expenditures, the timing and success of specific projects, operating costs and other expenses, proved oil and natural gas reserves, liquidity and capital resources, outcomes and effects of litigation, claims and disputes and derivative activities. In particular, forward-looking statements may include words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “forecast”, “foresee”, “intend”, “may”, “plan”, “potential”, “predict”, “project”, “seek”, “will” or other words or expressions concerning matters that are not historical facts. These statements involve certain risks and uncertainties that may cause actual results to differ materially from expectations as of the date of this filing.

The future success and continued viability of our business, like any venture, is subject to many recognized and unrecognized risks and uncertainties. Such risks and uncertainties could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management. The list below identifies certain factors that could cause actual results to differ materially from expectations. The list should not be viewed as complete or comprehensive, as the factors below are not the only risks facing Energen. Energen could also be affected by other risks and uncertainties in addition to those described herein. If any of our assumptions related to the factors identified below were to be proven incorrect, our business, financial condition or results of operations could be materially adversely affected; and such events could impair our ability to implement business plans or complete development activities as scheduled. Further, the trading price of our shares could decline; and shareholders could lose part or all of their investment. In addition, such risks may prevent us from complying with our financial and non-financial covenants and may result in a default under our credit facility or other long-term debt.

the market prices of oil, natural gas liquids and natural gas;
our derivative risk management/hedging arrangements;
production and reserve levels;
valuation of our proved reserves;

35



drilling risks;
our market concentration in the Permian Basin of west Texas and New Mexico;
economic and competitive conditions;
the availability of capital resources;
supply and demand for oil, natural gas liquids and natural gas;
occurrence of property acquisitions or divestitures;
changes to federal, state and local laws and regulations;
regulatory initiatives related to hydraulic fracturing and water usage;
impairment of our proved and unproved oil and natural gas properties;
counterparty credit-worthiness;
inflation rates;
the availability of goods and services;
security threats, including cybersecurity issues;
the securities or capital markets and related risks such as general credit, liquidity, market and interest-rate risks; and
the other factors, risks and uncertainties that are disclosed (i) under Part 1, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016; (ii) in our news releases; (iii) under Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Result of Operations, and Item 3. Quantitative and Qualitative Disclosures about Market Risk in this Quarterly Report on Form 10-Q; (iv) under Part 2, Item 1A. Risk Factors in our Quarterly Reports on Form 10-Q; and (v) in other filings we make with the Securities and Exchange Commission.

Except as otherwise disclosed, the forward-looking statements do not reflect the impact of possible or pending acquisitions, investments, divestitures or restructurings. The absence of errors in input data, calculations and formulas used in estimates, assumptions and forecasts cannot be guaranteed. We base our forward-looking statements on information currently available to us, and we undertake no obligation to correct or update these statements whether as a result of new information, future events or otherwise.



36



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
 
 

The following quantitative and qualitative disclosures about market risk are supplementary to the quantitative and qualitative disclosures provided in our Annual Report on Form 10-K for the year ended December 31, 2016, and the information contained herein should be read in conjunction with the related disclosures in our Annual Report on Form 10-K for the year ended December 31, 2016.

We are exposed to various market risks including commodity price risk, counterparty credit risk and interest rate risk. We seek to manage these risks through our risk management program which often includes the use of derivative instruments. We do not enter into derivative or other financial instruments for speculative or trading purposes.

Commodity price risk: Energen’s major market risk exposure is in the pricing applicable to its oil, natural gas liquids and natural gas production. Historically, prices received for oil, natural gas liquids and natural gas production have been volatile due to world and national supply-and-demand factors, seasonal weather patterns and general economic conditions. Crude oil prices also are affected by quality differentials, by worldwide political developments and by actions of the Organization of the Petroleum Exporting Countries. Basis differentials, like the underlying commodity prices, can be volatile because of regional supply-and-demand factors, including seasonal factors and the availability and price of transportation to consuming areas. As impacted by such commodity price volatility during the third quarter of 2017, our average realized oil prices rose 8.3 percent to $45.07 per barrel and average realized natural gas liquids prices increased 44.8 percent to an average price of $0.42 per gallon while average realized natural gas prices decreased 2.2 percent to $2.22 per Mcf. During the year-to-date, our average realized oil prices increased 21.8 percent to $45.89 per barrel, average realized natural gas liquids prices rose 51.9 percent to an average price of $0.41 per gallon and average realized natural gas prices increased 29.2 percent to $2.30 per Mcf.

We periodically enter into derivative commodity instruments to hedge our exposure to price fluctuations on oil, natural gas liquids and natural gas production. Such instruments may include over-the-counter swaps and basis swaps typically executed with investment and commercial banks and energy-trading firms.

As of September 30, 2017 (except as noted), Energen had entered into the following transactions for the remainder of 2017 and subsequent years:

Production Period

Description
Total Hedged Volumes
Average Contract
Price
Fair Value (in thousands)
Oil
 
 
 
 
2017
NYMEX Swaps
2,010
 MBbl
$50.68 Bbl
$
(2,589
)
 
NYMEX Three-Way Collars
1,200
 MBbl
 
177

 
Ceiling sold price (call)
 
$62.18 Bbl
 
 
Floor purchased price (put)
 
$45.00 Bbl
 
 
Floor sold price (put)
 
$35.00 Bbl
 
2018
NYMEX Three-Way Collars
13,500
 MBbl
 
1,512

 
Ceiling sold price (call)
 
$60.04 Bbl
 
 
Floor purchased price (put)
 
$45.47 Bbl
 
 
Floor sold price (put)
 
$35.47 Bbl
 
2019
NYMEX Three-Way Collars
1,440
 MBbl
 
*

 
Ceiling sold price (call)
 
$58.61 Bbl
 
 
Floor purchased price (put)
 
$45.00 Bbl
 
 
Floor sold price (put)
 
$35.00 Bbl
 
Oil Basis Differential
 
 
 
 
2017
WTI/WTI Basis Swaps
2,970
 MBbl
$(0.68) Bbl
(285
)
2018
WTI/WTI Basis Swaps
10,800
 MBbl
$(1.01) Bbl
(5,166
)
2019
WTI/WTI Basis Swaps
1,440
 MBbl
$(0.53) Bbl
*

Natural Gas Liquids
 
 
 
 
2017
Liquids Swaps
20.8
 MMGal
$0.57 Gal
(3,802
)
2018
Liquids Swaps
105.8
 MMGal
$0.59 Gal
(7,214
)

37



Natural Gas
 
 
 
 
2017
Basin Specific Swaps - Permian
3.9
 Bcf
$2.85 Mcf
1,217

2017
NYMEX Swaps
0.5
 Bcf
$3.29 Mcf
107

2018
Basin Specific Swaps - Permian
3.6
 Bcf
$2.56 Mcf
255

Natural Gas Basis Differential
 
 
 
2017
Permian Swaps
0.5
 Bcf
$(0.29) Mcf
103

Derivative contracts (closed but not cash settled)
(407
)
Total net derivative asset
$
(16,092
)
WTI - West Texas Intermediate/Midland, WTI - West Texas Intermediate/Cushing
 
*Contracts entered into subsequent to September 30, 2017

Realized prices are anticipated to be lower than New York Mercantile Exchange prices primarily due to basis differences and other factors. See Note 3, Fair Value Measurements, in the Condensed Notes to Unaudited Consolidated Financial Statements for a summary of changes in the fair value of Energen’s Level 3 derivative commodity instruments.

Counterparty credit risk: Our principal exposure to credit risk is through the sale of our oil, natural gas liquids and natural gas production, which we market to energy marketing companies. Such sales are typically made on an unsecured credit basis with payment due the month following delivery. This concentration of sales to the energy marketing industry has the potential to affect our overall exposure to credit risk. We consider the credit quality of our purchasers and, in certain instances, may require credit assurances such as a deposit, letter of credit or parent guarantee.

We are also at risk for economic loss based upon the credit worthiness of our derivative instrument counterparties. The counterparties to the commodity instruments are investment banks and energy-trading firms and are believed to be creditworthy by Energen. All hedge transactions are subject to Energen’s risk management policy, approved by the Board of Directors, which does not permit speculative positions. Energen formally documents all relationships between hedging instruments and hedged items at the inception of the hedge, as well as its risk management objective and strategy for undertaking the hedge.

Interest rate risk: Our interest rate exposure as of September 30, 2017 primarily relates to our syndicated credit facility with variable interest rates. As of September 30, 2017, the Company had $238 million outstanding under its revolving credit facility. The weighted average interest rate for amounts outstanding at September 30, 2017 was 2.5 percent. All long-term debt obligations, other than our credit facility, were at fixed rates at September 30, 2017.

38



ITEM 4. CONTROLS AND PROCEDURES
 
 
 
 
 

(a)
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are designed to provide reasonable assurance of achieving their objectives and, as of the end of the period covered by this report, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level.

(b)
Our chief executive officer and chief financial officer have concluded that during the most recent fiscal quarter covered by this report there were no changes in our internal control over financial reporting that materially affected or are reasonably likely to materially affect our internal control over financial reporting.




39



PART II: OTHER INFORMATION
 

ITEM 1. LEGAL PROCEEDINGS

Energen and its affiliates are, from time to time, parties to various pending or threatened legal proceedings. Certain of these lawsuits include claims for punitive damages in addition to other specified relief. Various pending or threatened legal proceedings are in progress currently.

On September 12, 2017, Energen filed a complaint for declaratory and injunctive relief against Corvex Management LP (Corvex), a more than five percent shareholder of Energen. The complaint was filed in the Circuit Court of Jefferson County, Alabama. Corvex had made clear that it believed it was entitled to call a special meeting of Energen shareholders for the purposes of expanding the Company’s Board of Directors and electing directors to fill the vacancies created by such expansion. On October 31, 2017, the Court issued a declaratory judgment order affirming Energen’s position that Energen’s certificate of incorporation and related provisions of the laws of Alabama grant to the Energen Board the exclusive right to determine the number of directors within a range of 9 to 15 and to fill any vacancies resulting from an increase in the number of directors. Corvex filed an amendment to its Schedule 13D on November 3, 2017 indicating its intent to appeal the Court’s order to the Alabama Supreme Court.
See Note 9, Commitments and Contingencies, in the Condensed Notes to Unaudited Consolidated Financial Statements for further discussion with respect to legal proceedings.

ITEM 1A. RISK FACTORS

In addition to the information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes in our risk factors from those described in our Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




Period
Total Number of Shares Purchased
 
 Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans
Maximum Number of Shares that May Yet Be Purchased Under the Plans**
July 1, 2017 - July 31, 2017
2,106

*
$
50.10


3,373,161

August 1, 2017 - August 31, 2017
52

*
47.65


3,373,161

September 1, 2017 - September 30, 2017
100

*
51.64


3,373,161

Total
2,258

 
$
50.11


3,373,161

*Acquired in connection with tax withholdings and payment of exercise price on stock compensation plans.
**By resolution adopted October 22, 2014, the Board of Directors authorized Energen to repurchase up to 3.6 million shares of Energen common stock. The resolution does not have an expiration date and does not limit Energen’s authorization to acquire shares in connection with tax withholdings and payment of exercise price on stock compensation plans.

ITEM 5. OTHER INFORMATION

Executive Severance Agreements: Effective November 7, 2017, Energen entered into Executive Severance Agreements (the Severance Agreements) with certain officers, including each of Messrs. McManus, Porter, Richardson and Godsey, providing for severance compensation in the event of termination prior to the occurrence of a change in control event. Following the occurrence of a change in control event, Energen’s existing Severance Compensation Agreements (the CIC Agreements) will be the operative documents. The Severance Agreements have a term ending December 31, 2020. In the event the Company terminates a named executive officer’s employment other than for Cause, death or Disability, or such officer terminates his or her employment for Good Reason (as each term is defined in the Severance Agreements), then, following execution of a release by such officer, Energen shall pay such officer the following: (i) a multiple of the officer’s salary and target bonus; (ii) prorated target bonus for the year of termination; and (iii) a minimum of 12 months of medical premiums. In addition, the officer remains entitled to indemnification by Energen to the fullest extent permitted under applicable law, and, for at least six years following the date of termination, Energen shall continue to provide D&O insurance coverage to the officer at a level no less favorable than in effect as of the effective date of the Severance Agreement. Any such termination shall be treated as a Qualified Termination as defined in the Energen Corporation Stock Incentive Plan (the Stock Incentive Plan). Mr. McManus’ payment is subject to a multiple of 2.0 with 24 months of medical

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premiums, Messrs. Porter and Richardson have a multiple of 1.5 with 18 months of medical premiums, and Mr. Godsey has a multiple of 1.0 with 12 months of medical premiums. Finally, in the event a “Change in Control” (as defined in the CIC Agreements) occurs within one (1) year of an officer’s termination without Cause or for Good Reason, the officer will receive, without duplication, the compensation and benefits the officer would have received had the officer been terminated following such Change in Control under the terms of the CIC Agreements.
For purposes of the Severance Agreements, “Cause” is defined as: (i) the willful and continued failure of the officer to substantially perform the officer’s duties with Energen and its affiliates (other than any such failure resulting from the officer’s incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the officer specifically identifying the manner in which the officer has not substantially performed the officer’s duties; (ii) the officer engaging in willful misconduct that it demonstrably injurious to Energen and its affiliates monetarily or otherwise; or (iii) the conviction of the officer of a felony. The Severance Agreements state that “no act or failure to act, on the part of the Executive, shall be considered “willful” unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive’s action or omission was in the best interests of” Energen. If curable, an officer may only be terminated if such action or omission has not been cured by the officer within thirty (30) days following written notice from Energen. Further, terminations for Cause must be approved by the affirmative vote of not less than two-thirds of the entire membership of the board of directors (excluding the officer, if he is then a member of the board), which determination by the board shall be subject to de novo review by a court of law. “Good Reason” has the same definition as is contained in Energen’s CIC Agreements.
Stock Incentive Plan Amendments: Also effective November 7, 2017, the Board of Directors of Energen approved certain technical and administrative amendments to Sections 1, 2, and 8.4 of the Stock Incentive Plan. The changes to the Stock Incentive Plan include (i) revising the definition of “Cause” to clarify that “no act or failure to act” shall be determined “willful” unless the Participant’s action or failure to take action was in “bad faith or without reasonable belief” that such action or omission was in the best interest of Energen, and (ii) adding language that confirms the Committee may provide for different or supplemental terms and conditions with respect to termination of employment to any Performance Share Award at the time of grant. The form of Severance Agreement and the Energen Corporation Stock Incentive Plan, as amended, are filed as Item 6 Exhibits to this Quarterly Report on Form 10-Q. The summary of the Severance Agreements and amendments to the Stock Incentive Plan are qualified in their entirety by reference to the full text of such agreements.
Compensation Recoupment Policy: Also effective November 7, 2017, the Board of Directors of Energen adopted an officer compensation recoupment policy. The Policy provides that if the Board determines that fraud, illegal conduct, intentional misconduct or gross neglect by a current or former officer of Energen was a significant contributing factor to a restatement of Energen’s financial statements, the Board may recoup from the officer an amount that the Board deems appropriate. The policy is applicable to incentive compensation payable with respect to periods commencing, or having award or grant dates, on or after January 1, 2018. Recoupment shall be made from applicable compensation through one or more of the following actions: (a) requiring repayment by such officer to Energen of all or a portion of cash incentive payments made to, or on behalf of, the officer with respect to the most recent fiscal year for which such payments have been made as of the date of the Board’s recoupment decision; or (b) canceling all or a portion of such officer’s short-term and long-term incentive awards under Energen’s compensation plans, agreements, arrangements or policies that remain unpaid or unvested as of the date of the Board’s recoupment decision.

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ITEM 6. EXHIBITS

10(a)
 
Form of Executive Severance Agreement between Energen Corporation and its named executive officers except Mr. Woodruff.  The agreements provide for (i) a salary and bonus multiple of 2.0 for Mr. McManus, 1.5 for Messrs. Porter and Richardson, and 1.0 for Mr. Godsey, and (ii) 24 months of medical premiums for Mr. McManus, 18 months for Messrs. Porter and Richardson, and 12 months for Mr. Godsey.
10(b)
 
31(a)
-
31(b)
-
32
-
101.INS
-
XBRL Instance Document
101.SCH
-
XBRL Taxonomy Extension Schema Document
101.CAL
-
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
-
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
-
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
-
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
ENERGEN CORPORATION
 
 
 
 
November 8, 2017
 
By
/s/ J. T. McManus, II       
 
 
 
J. T. McManus, II Chairman, Chief Executive Officer and President of Energen Corporation
 
 
 
 
 
 
 
 
November 8, 2017
 
By
/s/ Charles W. Porter, Jr.             
 
 
 
Charles W. Porter, Jr. Vice President, Chief Financial Officer and Treasurer of Energen Corporation
 
 
 
 
 
 
 
 
November 8, 2017
 
By
/s/ Russell E. Lynch, Jr.                    
 
 
 
Russell E. Lynch, Jr. Vice President and Controller of Energen Corporation
 
 
 
 
 
 
 
 


















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