Attached files

file filename
EX-32.1 - EX-32.1 - WildHorse Resource Development Corpwrd-ex321_6.htm
EX-31.2 - EX-31.2 - WildHorse Resource Development Corpwrd-ex312_9.htm
EX-31.1 - EX-31.1 - WildHorse Resource Development Corpwrd-ex311_8.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

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

For the transition period from            to          .

Commission File Number: 001-37964

 

WildHorse Resource Development Corporation

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

81-3470246

( State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

9805 Katy Freeway, Suite 400, Houston, TX

 

77024

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (713) 568-4910

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, par value $0.01 per share

 

New York Stock Exchange

(Title of each class)

 

(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

 

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      No  

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

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.

 

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

 

As of October 31, 2017, the registrant had 101,171,233 shares of common stock, $0.01 par value outstanding.

 

 

 


 

WILDHORSE RESOURCE DEVELOPMENT CORPORATION

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

 

 

Glossary of Oil and Natural Gas Terms

 

2

 

 

Commonly Used Defined Terms

 

6

 

 

Cautionary Note Regarding Forward-Looking Statements

 

8

 

 

 

 

 

 

 

PART I—FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements

 

10

 

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

 

10

 

 

Unaudited Statements of Condensed Consolidated and Combined Operations for the Three Months and Nine Months Ended September 30, 2017 and 2016

 

11

 

 

Unaudited Statements of Condensed Consolidated and Combined Cash Flows for the Nine Months Ended September 30, 2017 and 2016

 

12

 

 

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months

Ended September 30, 2017

 

13

 

 

Note 1 – Organization and Basis of Presentation

 

14

 

 

Note 2 – Summary of Significant Accounting Policies

 

15

 

 

Note 3 – Acquisitions and Divestitures

 

16

 

 

Note 4 – Fair Value Measurements of Financial Instruments

 

18

 

 

Note 5 – Risk Management and Derivative Instruments

 

19

 

 

Note 6 – Accounts Receivable

 

22

 

 

Note 7 – Accrued Liabilities

 

22

 

 

Note 8 – Asset Retirement Obligations

 

22

 

 

Note 9 – Long Term Debt

 

23

 

 

Note 10 – Preferred Stock

 

24

 

 

Note 11 – Equity

 

26

 

 

Note 12 – Earnings Per Share

 

27

 

 

Note 13 – Long Term Incentive Plans

 

27

 

 

Note 14 – Incentive Units

 

27

 

 

Note 15 – Related Party Transactions

 

28

 

 

Note 16 – Segment Disclosures

 

30

 

 

Note 17 – Income Taxes

 

30

 

 

Note 18 – Commitments and Contingencies

 

31

 

 

Note 19 – Subsequent Events

 

32

 

 

 

 

 

Item 2.

 

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

 

33

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

46

Item 4.

 

Controls and Procedures

 

47

 

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

49

Item 1A.

 

Risk Factors

 

49

Item 2.

 

Unregistered Sales Of Equity Securities and Use of Proceeds

 

49

Item 3.

 

Defaults Upon Senior Securities

 

49

Item 4.

 

Mine Safety Disclosures

 

49

Item 5.

 

Other Information

 

49

Item 6.

 

Exhibits

 

50

 

 

 

 

 

 

 

Signatures

 

52

 

 

 

 

 

 

 

i


 

GLOSSARY OF OIL AND NATURAL GAS TERMS

The following are abbreviations and definitions of commonly used in the oil and natural gas industry:

3-D seismic: Geophysical data that depict the subsurface strata in three dimensions. 3-D seismic typically provides a more detailed and accurate interpretation of the subsurface strata than 2-D, or two-dimensional, seismic.

Basin: A large natural depression on the earth’s surface in which sediments generally brought by water accumulate.

Bbl: One stock tank barrel of 42 U.S. gallons liquid volume used herein in reference to crude oil, condensate or NGLs.

Bcf: One billion cubic feet of natural gas.

Boe: One barrel of oil equivalent, calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Bbl of oil. This is an energy content correlation and does not reflect a value or price relationship between the commodities.

Boe/d: One Boe per day.

British thermal unit or Btu: The quantity of heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.

Completion: Installation of permanent equipment for production of oil or natural gas, or, in the case of a dry well, to reporting to the appropriate authority that the well has been abandoned.

Condensate: A mixture of hydrocarbons that exists in the gaseous phase at original reservoir temperature and pressure, but that, when produced, is in the liquid phase at surface pressure and temperature.

Delineation: The process of placing a number of wells in various parts of a reservoir to determine its boundaries and production characteristics.

Developed acreage: The number of acres that are allocated or assignable to productive wells or wells capable of production.

Development costs: Costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing the oil and natural gas. For a complete definition of development costs refer to the SEC’s Regulation S-X, Rule 4-10(a)(7).

Development project: The means by which petroleum resources are brought to the status of economically producible. As examples, the development of a single reservoir or field, an incremental development in a producing field or the integrated development of a group of several fields and associated facilities with a common ownership may constitute a development project.

Development well: A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.

Differential: An adjustment to the price of oil or natural gas from an established spot market price to reflect differences in the quality and/or location of oil or natural gas.

Downspacing: Additional wells drilled between known producing wells to better develop the reservoir.

Dry well: A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.

Economically producible: The term economically producible, as it relates to a resource, means a resource which generates revenue that exceeds, or is reasonably expected to exceed, the costs of the operation. For a complete definition of economically producible, refer to the SEC’s Regulation S-X, Rule 4-10(a)(10).

Estimated ultimate recovery or EUR: The sum of reserves remaining as of a given date and cumulative production as of that date.

Exploratory well: A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir.

2


 

Field: An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations. For a complete definition of field, refer to the SEC’s Regulation S-X, Rule 4-10(a)(15).

Formation: A layer of rock which has distinct characteristics that differs from nearby rock.

Generation 1:  With respect to our Eagle Ford Acreage, a hybrid fracking technique using approximately 1,500 pounds per foot of sand and 33 Bbls per foot of fluid, with 200 foot stages and five clusters per stage at 80 barrels per minute. With respect to our North Louisiana Acreage, a slickwater fracking technique using approximately 1,450 pounds per foot of sand, with 200 foot stages and one cluster per stage at 57 barrels per minute.

Generation 3: With respect to our Eagle Ford Acreage, a slickwater fracking technique using approximately 3,700 pounds per foot of sand and 75 Bbls per foot of fluid, with 150 foot stages and nine clusters per stage at 90 barrels per minute.

Gross acres or gross wells: The total acres or wells, as the case may be, in which a working interest is owned.

Held by production: Acreage covered by a mineral lease that perpetuates a company’s right to operate a property as long as the property produces a minimum paying quantity of oil or natural gas.

Horizontal drilling:  A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled at a right angle within a specified interval.

MBbls: One thousand barrels of crude oil, condensate or NGLs.

MBoe:  One thousand Boe.

Mcf: One thousand cubic feet of natural gas.

MMBbls: One million barrels of crude oil, condensate or NGLs.

MMBoe: One million Boe.

MMBtu: One million British thermal units.

Net acres or net wells: Gross acres or wells, as the case may be, multiplied by our working interest ownership percentage.

Net production: Production that is owned less royalties and production due to others.

NGLs: Natural gas liquids. Hydrocarbons found in natural gas which may be extracted as liquefied petroleum gas and natural gasoline.

NYMEX: The New York Mercantile Exchange.

Offset operator: Any entity that has an active lease on an adjoining property for oil, natural gas or NGLs purposes.

Operator: The individual or company responsible for the development and/or production of an oil or natural gas well or lease.

Play: A geographic area with hydrocarbon potential.

Possible reserves: Reserves that are less certain to be recovered than probable reserves.

Present value of future net revenues or PV-10: The estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development and abandonment costs, using prices and costs in effect at the determination date, before income taxes, and without giving effect to non-property-related expenses, discounted to a present value using an annual discount rate of 10% in accordance with the guidelines of the SEC.

Probable reserves: Reserves that are less certain to be recovered than proved reserves but that, together with proved reserves, are as likely as not to be recovered.

3


 

Production costs: Costs incurred to operate and maintain wells and related equipment and facilities, including depreciation and applicable operating costs of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities. For a complete definition of production costs, refer to the SEC’s Regulation S-X, Rule 4-10(a)(20).

Productive well: A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes.

Prospect: A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.

Proved area: Part of a property to which proved reserves have been specifically attributed.

Proved developed reserves: Reserves that can be expected to be recovered through (i) existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared with the cost of a new well or (ii) through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

Proved properties: Properties with proved reserves.

Proved reserves: Those quantities of oil, natural gas and NGLs, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. For a complete definition of proved oil and natural gas reserves, refer to the SEC’s Regulation S-X, Rule 4-10(a)(22).

Proved undeveloped reserves or PUDs: Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations are classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. Under no circumstances are estimates for proved undeveloped reserves attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty.

Realized price: The cash market price less all expected quality, transportation and demand adjustments.

Reasonable certainty: A high degree of confidence. For a complete definition of reasonable certainty, refer to the SEC’s Regulation S-X, Rule 4-10(a)(24).

Recompletion: The completion for production of an existing wellbore in another formation from that which the well has been previously completed.

Reliable technology: Reliable technology is a grouping of one or more technologies (including computational methods) that has been field tested and has been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.

4


 

Reserves: Estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and natural gas or related substances to market and all permits and financing required to implement the project. Reserves should not be assigned to adjacent reservoirs isolated by major, potentially sealing, faults until those reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that are clearly separated from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low reservoir or negative test results). Such areas may contain prospective resources (i.e., potentially recoverable resources from undiscovered accumulations).

Reservoir: A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

Resources: Quantities of oil and natural gas estimated to exist in naturally occurring accumulations. A portion of the resources may be estimated to be recoverable and another portion may be considered to be unrecoverable. Resources include both discovered and undiscovered accumulations.

Royalty: An interest in an oil and natural gas lease that gives the owner the right to receive a portion of the production from the leased acreage (or of the proceeds from the sale thereof), but does not require the owner to pay any portion of the production or development costs on the leased acreage. Royalties may be either landowner’s royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.

Service well: A well drilled or completed for the purpose of supporting production in an existing field.

Spacing: The distance between wells producing from the same reservoir. Spacing is often expressed in terms of acres, e.g., 40-acre spacing, and is often established by regulatory agencies.

Spot market price: The cash market price without reduction for expected quality, transportation and demand adjustments.

Standardized measure: Discounted future net cash flows estimated by applying year-end prices to the estimated future production of year-end proved reserves. Future cash inflows are reduced by estimated future production and development costs based on period-end costs to determine pre-tax cash inflows. Future income taxes, if applicable, are computed by applying the statutory tax rate to the excess of pre-tax cash inflows over our tax basis in the oil and natural gas properties. Future net cash inflows after income taxes are discounted using a 10% annual discount rate.

Stratigraphic test well: A drilling effort, geologically directed, to obtain information pertaining to a specific geologic condition. Such wells customarily are drilled without the intent of being completed for hydrocarbon production. The classification also includes tests identified as core tests and all types of expendable holes related to hydrocarbon exploration. Stratigraphic tests are classified as “exploratory type” if not drilled in a known area or “development type” if drilled in a known area.

Undeveloped acreage: Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves.

Unit: The joining of all or substantially all interests in a reservoir or field, rather than a single tract, to provide for development and operation without regard to separate property interests. Also, the area covered by a unitization agreement.

Unproved properties: Properties with no proved reserves.

Wellbore: The hole drilled by the bit that is equipped for natural gas production on a completed well. Also called well or borehole.

Working interest: The right granted to the lessee of a property to develop and produce and own natural gas or other minerals. The working interest owners bear the exploration, development and operating costs on either a cash, penalty or carried basis.

Workover: Operations on a producing well to restore or increase production.

WTI: West Texas Intermediate.

5


 

COMMONLY USED DEFINED TERMS

As used in this Quarterly Report unless the context indicates or otherwise requires, the terms listed below have the following meanings:

 

the “Company,” “WildHorse Development,” “WRD,” “we,” “our,” “us” or like terms refer collectively to WHR II and Esquisto, together with their consolidated subsidiaries before the completion of our Corporate Reorganization and to WildHorse Resource Development Corporation and its consolidated subsidiaries, including WHR II, Esquisto and Acquisition Co., as of and following the completion of our Corporate Reorganization;

 

“WHR II” or our “predecessor” refers to WildHorse Resources II, LLC, together with its consolidated subsidiaries, which owns all of our North Louisiana Acreage;

 

“Esquisto” refers (i) for the period beginning January 1, 2014 through June 19, 2014, to the Initial Esquisto Assets, (ii) for the period beginning June 20, 2014 through February 16, 2015, to Esquisto I (iii) for the period beginning February 17, 2015 (date of common control) through January 11, 2016, to Esquisto I and Esquisto II on a combined basis and (iv) for the period beginning January 12, 2016 through the completion of our initial public offering on December 19, 2016, to Esquisto II;

 

“Initial Esquisto Assets” refers to the oil and natural gas properties contributed to Esquisto I in connection with the formation of Esquisto I on June 20, 2014;

 

“Esquisto I” refers to Esquisto Resources, LLC;

 

“Esquisto II” refers to Esquisto Resources II, LLC;

 

“Esquisto Merger” refers to the merger of Esquisto I with and into Esquisto II on January 12, 2016;

 

“Acquisition Co.” refers to WHE AcqCo., LLC, an entity formed to acquire the Burleson North Assets;

 

“Previous owner” refers to both Esquisto and Acquisition Co.;

 

“Management Members” refers (i) in the case of WHR II, collectively to the individual founders and employees and other individuals who, together with NGP, initially formed WHR II and (ii) in the case of Esquisto, collectively to the individual founders and employees and other individuals who initially formed Esquisto;

 

the “Corporate Reorganization” refers to (prior to and in connection with our initial public offering) (i) the former owners of WHR II exchanging all of their interests in WHR II for equivalent interests in WildHorse Investment Holdings and the former owners of Esquisto exchanging all of their interests in Esquisto for equivalent interests in Esquisto Investment Holdings, (ii) the contribution by WildHorse Investment Holdings to WildHorse Holdings of all of the interests in WHR II, the contribution by Esquisto Investment Holdings to Esquisto Holdings of all of the interests in Esquisto and the contribution by the former owner of Acquisition Co. of all its interests in Acquisition Co. to Acquisition Co. Holdings, (iii) the issuance of management incentive units by WildHorse Holdings, Esquisto Holdings and Acquisition Co. Holdings to certain of our officers and employees and (iv) the contribution by WildHorse Holdings, Esquisto Holdings and Acquisition Co. Holdings to us of all of the interests in WHR II, Esquisto and Acquisition Co., respectively, in exchange for shares of our common stock;

 

“WildHorse Holdings” refers to WHR Holdings, LLC, a limited liability company formed to own a portion of our common stock following the Corporate Reorganization;

 

“WildHorse Investment Holdings” refers to WildHorse Investment Holdings, LLC, a limited liability company formed to own all of the outstanding equity interests in WildHorse Holdings other than certain management incentive units issued by WildHorse Holdings in connection with our initial public offering;

 

“Esquisto Holdings” refers to Esquisto Holdings, LLC, a limited liability company formed to own a portion of our common stock following the Corporate Reorganization;

 

“Esquisto Investment Holdings” refers to Esquisto Investment Holdings, LLC, a limited liability company formed to own all of the outstanding equity interests in Esquisto Holdings other than certain management incentive units issued by Esquisto Holdings in connection with our initial public offering;

 

“Acquisition Co. Holdings” refers to WHE AcqCo Holdings, LLC, a limited liability company formed to own a portion of our common stock following the Corporate Reorganization;

6


 

 

“North Louisiana Acreage” refers to our acreage in North Louisiana in and around the highly prolific Terryville Complex, which has been historically owned and operated by WHR II, and where we primarily target the overpressured Cotton Valley play;

 

“Terryville Complex” refers to the play located primarily in Lincoln Parish, Louisiana, and northern Jackson Parish, Louisiana;

 

“RCT Area” refers to our Ruston-Choudrant-Tremont acreage within the Terryville Complex located primarily in Lincoln Parish, Louisiana;

 

“Weyerhaeuser Area” refers to the acreage that we have the right to lease within the Terryville Complex located in northern Jackson Parish, Louisiana, which acreage is included in our North Louisiana Acreage;

 

“Eagle Ford Acreage” refers to our acreage in the northern area of the Eagle Ford Shale in Southeast Texas, which has historically been owned and operated by Esquisto;

 

“Burleson North Assets” refers to certain producing properties and undeveloped acreage that Acquisition Co. acquired from Clayton Williams Energy, Inc. prior to or contemporaneously with the closing of our initial public offering, which acquisition is referred to as the “Burleson North Acquisition;”

 

“Acquisition” refers to certain oil and gas working interests and the associated production in the Eagle Ford Shale acquired from Anadarko E&P Onshore LLC (“APC”), Admiral A Holding L.P., TE Admiral A Holding L.P. and Aurora C-I Holding L.P. (collectively, “KKR”) located in Burleson, Brazos, Lee, Milam, Robertson and Washington Counties, Texas;

 

“NGP” refers to Natural Gas Partners, a family of private equity investment funds organized to make direct equity investments in the energy industry, including the funds invested in WHR II, Esquisto and Acquisition Co.; and

 

“Carlyle” refers to The Carlyle Group, L.P. and certain of its affiliates, which indirectly own an interest in certain gross revenues of NGP Energy Capital management, L.L.C., (“NGP ECM”), own a limited partner entitled to a percentage of carried interest from NGP XI US Holdings, L.P. (“NGP XI”), own a carried interest from NGP X US Holdings, L.P. (“NGP X US Holdings”) and purchased all 435,000 shares of our preferred stock, par value $0.01 per share, designated as “Series A Perpetual Convertible Preferred Stock” (the “Preferred Stock”).

7


 

FORWARD–LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on management’s current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under “Part I—Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”) and “Part II—Item 1A. Risk Factors” appearing within this Quarterly Report and elsewhere in this Quarterly Report.

Forward-looking statements may include statements about:

 

our business strategy;

 

our estimated proved, probable and possible reserves;

 

our drilling prospects, inventories, projects and programs;

 

our ability to replace the reserves we produce through drilling and property acquisitions;

 

our financial strategy, liquidity and capital required for our development program;

 

our realized oil, natural gas and NGL prices;

 

the timing and amount of our future production of oil, natural gas and NGLs;

 

our hedging strategy and results;

 

our future drilling plans;

 

competition and government regulations;

 

our ability to obtain permits and governmental approvals;

 

pending legal or environmental matters;

 

our marketing of oil, natural gas and NGLs;

 

our leasehold or business acquisitions;

 

costs of developing our properties;

 

general economic conditions;

 

credit markets;

 

uncertainty regarding our future operating results; and

 

plans, objectives, expectations and intentions contained in this Quarterly Report that are not historical.

We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the development, production, gathering and sale of oil and natural gas. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of drilling and production equipment and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures and the other risks described under “Part I—Item 1A. Risk Factors” of our 2016 Form 10-K.

Reserve engineering is a process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development program. Accordingly, reserve estimates may differ significantly from the quantities of oil and natural gas that are ultimately recovered.

8


 

Should one or more of the risks or uncertainties described in this Quarterly Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report.

9


 

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

WILDHORSE RESOURCE DEVELOPMENT CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except outstanding shares)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,409

 

 

$

3,115

 

Accounts receivable, net

 

 

60,658

 

 

 

26,428

 

Short-term derivative instruments

 

 

2,537

 

 

 

 

Prepaid expenses and other current assets

 

 

3,156

 

 

 

1,633

 

Total current assets

 

 

71,760

 

 

 

31,176

 

Property and equipment:

 

 

 

 

 

 

 

 

Oil and gas properties

 

 

2,716,000

 

 

 

1,573,848

 

Other property and equipment

 

 

47,105

 

 

 

34,344

 

Accumulated depreciation, depletion and amortization

 

 

(311,279

)

 

 

(200,293

)

Total property and equipment, net

 

 

2,451,826

 

 

 

1,407,899

 

Other noncurrent assets:

 

 

 

 

 

 

 

 

Restricted cash

 

 

502

 

 

 

886

 

Long-term derivative instruments

 

 

9,667

 

 

 

 

Debt issuance costs

 

 

2,777

 

 

 

2,320

 

Total assets

 

$

2,536,532

 

 

$

1,442,281

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

31,608

 

 

$

21,014

 

Accrued liabilities

 

 

135,895

 

 

 

23,371

 

Short-term derivative instruments

 

 

3,302

 

 

 

14,087

 

Asset retirement obligations

 

 

90

 

 

 

90

 

Total current liabilities

 

 

170,895

 

 

 

58,562

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Long-term debt

 

 

642,567

 

 

 

242,750

 

Asset retirement obligations

 

 

14,043

 

 

 

10,943

 

Deferred tax liabilities

 

 

132,815

 

 

 

112,552

 

Long-term derivative instruments

 

 

1,426

 

 

 

8,091

 

Other noncurrent liabilities

 

 

1,190

 

 

 

1,495

 

Total noncurrent liabilities

 

 

792,041

 

 

 

375,831

 

Total liabilities

 

 

962,936

 

 

 

434,393

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 18)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A perpetual convertible preferred stock, $0.01 par value: 50,000,000 shares authorized; 435,000 shares issued and outstanding at September 30, 2017

 

 

438,861

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value 500,000,000 shares authorized; 101,171,233 shares and 91,680,441 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

1,012

 

 

 

917

 

Additional paid-in capital

 

 

1,114,829

 

 

 

1,017,368

 

Accumulated earnings (deficit)

 

 

18,894

 

 

 

(10,397

)

Total stockholders’ equity

 

 

1,134,735

 

 

 

1,007,888

 

Total liabilities and equity

 

$

2,536,532

 

 

$

1,442,281

 

See Accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements

10


 

WILDHORSE RESOURCE DEVELOPMENT CORPORATION

UNAUDITED STATEMENTS OF CONDENSED CONSOLIDATED AND COMBINED OPERATIONS

(In thousands, except per share amounts)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil sales

 

$

100,391

 

 

$

19,208

 

 

$

192,431

 

 

$

51,144

 

Natural gas sales

 

 

14,906

 

 

 

12,135

 

 

 

40,328

 

 

 

31,574

 

NGL sales

 

 

6,881

 

 

 

1,466

 

 

 

12,948

 

 

 

3,636

 

Other income

 

 

308

 

 

 

430

 

 

 

1,244

 

 

 

1,727

 

Total operating revenues

 

 

122,486

 

 

 

33,239

 

 

 

246,951

 

 

 

88,081

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

12,435

 

 

 

2,625

 

 

 

26,200

 

 

 

7,687

 

Gathering, processing and transportation

 

 

3,761

 

 

 

1,580

 

 

 

7,403

 

 

 

5,054

 

Gathering system operating expense

 

 

9

 

 

 

(19

)

 

 

53

 

 

 

99

 

Taxes other than income tax

 

 

6,047

 

 

 

1,797

 

 

 

14,455

 

 

 

5,054

 

Depreciation, depletion and amortization

 

 

51,843

 

 

 

19,418

 

 

 

111,515

 

 

 

61,404

 

General and administrative

 

 

11,043

 

 

 

4,927

 

 

 

28,574

 

 

 

14,059

 

Exploration expense

 

 

4,749

 

 

 

1,453

 

 

 

17,868

 

 

 

8,976

 

Total operating expense

 

 

89,887

 

 

 

31,781

 

 

 

206,068

 

 

 

102,333

 

Income (loss) from operations

 

 

32,599

 

 

 

1,458

 

 

 

40,883

 

 

 

(14,252

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(8,749

)

 

 

(1,856

)

 

 

(20,953

)

 

 

(5,609

)

Debt extinguishment costs

 

 

 

 

 

 

 

 

11

 

 

 

(358

)

Gain (loss) on derivative instruments

 

 

(40,288

)

 

 

3,670

 

 

 

37,119

 

 

 

(8,694

)

Other income (expense)

 

 

(12

)

 

 

(15

)

 

 

1

 

 

 

(77

)

Total other income (expense)

 

 

(49,049

)

 

 

1,799

 

 

 

16,178

 

 

 

(14,738

)

Income (loss) before income taxes

 

 

(16,450

)

 

 

3,257

 

 

 

57,061

 

 

 

(28,990

)

Income tax benefit (expense)

 

 

5,646

 

 

 

(200

)

 

 

(21,247

)

 

 

(450

)

Net income (loss)

 

 

(10,804

)

 

 

3,057

 

 

 

35,814

 

 

 

(29,440

)

Net income (loss) attributable to previous owners

 

 

 

 

 

5,161

 

 

 

 

 

 

(2,621

)

Net income (loss) attributable to predecessor

 

 

 

 

 

(2,104

)

 

 

 

 

 

(26,819

)

Net income (loss) available to WRD

 

 

(10,804

)

 

 

 

 

 

35,814

 

 

 

 

Preferred stock dividends

 

 

6,450

 

 

 

 

 

 

6,523

 

 

 

 

Undistributed earnings allocated to participating securities

 

 

 

 

 

 

 

 

3,234

 

 

 

 

Net income (loss) available to common stockholders

 

$

(17,254

)

 

$

 

 

$

26,057

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.17

)

 

n/a

 

 

$

0.27

 

 

n/a

 

Diluted

 

$

(0.17

)

 

n/a

 

 

$

0.27

 

 

n/a

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

99,142

 

 

n/a

 

 

 

95,369

 

 

n/a

 

Diluted

 

 

99,142

 

 

n/a

 

 

 

95,369

 

 

n/a

 

See Accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements

11


 

WILDHORSE RESOURCE DEVELOPMENT CORPORATION

UNAUDITED STATEMENTS OF CONDENSED CONSOLIDATED AND COMBINED CASH FLOWS

(In thousands)

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

$

35,814

 

 

$

(29,440

)

Adjustments to reconcile net income (loss) to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

 

111,009

 

 

 

61,105

 

Accretion of asset retirement obligations

 

 

 

506

 

 

 

299

 

Dry hole expense and impairments of unproved properties

 

 

 

13,910

 

 

 

62

 

Amortization of debt issuance cost

 

 

 

1,962

 

 

 

342

 

(Gain) loss on derivative instruments

 

 

 

(37,119

)

 

 

8,694

 

Cash settlements on derivative instruments

 

 

 

6,895

 

 

 

6,068

 

Accretion of senior note discount

 

 

 

197

 

 

 

 

Deferred income tax expense

 

 

 

20,263

 

 

 

435

 

Debt extinguishment expense (benefit)

 

 

 

(11

)

 

 

358

 

Amortization of equity awards

 

 

 

4,217

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Decrease (increase) in accounts receivable

 

 

 

(42,081

)

 

 

(9,316

)

Decrease (increase) in prepaid expenses and other current assets

 

 

 

(1,245

)

 

 

(353

)

(Decrease) increase in accounts payable and accrued liabilities

 

 

 

28,875

 

 

 

(13,980

)

Net cash flow provided by operating activities

 

 

 

143,192

 

 

 

24,274

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Acquisitions of oil and gas properties

 

 

 

(549,033

)

 

 

(10,939

)

Additions to oil and gas properties

 

 

 

(443,211

)

 

 

(84,841

)

Additions to and acquisitions of other property and equipment

 

 

 

(10,070

)

 

 

(2,970

)

Change in restricted cash

 

 

 

385

 

 

 

(86

)

Net cash used in investing activities

 

 

 

(1,001,929

)

 

 

(98,836

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Advances on revolving credit facilities

 

 

 

363,500

 

 

 

101,000

 

Payments on revolving credit facilities

 

 

 

(447,765

)

 

 

(105,500

)

Debt issuance cost

 

 

 

(13,545

)

 

 

(668

)

Termination of second lien

 

 

 

 

 

 

(225

)

Proceeds from senior notes offering

 

 

 

494,744

 

 

 

 

Proceeds from the issuance of preferred stock

 

 

 

435,000

 

 

 

 

Costs incurred in conjunction with the issuance of preferred stock

 

 

 

(2,662

)

 

 

 

Proceeds from the issuance of common stock

 

 

 

34,457

 

 

 

 

Cost incurred in conjunction with the issuance of common stock

 

 

 

(2,698

)

 

 

 

Previous owner contributions

 

 

 

 

 

 

25,000

 

Predecessor contributions

 

 

 

 

 

 

13,280

 

Net cash provided by financing activities

 

 

 

861,031

 

 

 

32,887

 

Net change in cash and cash equivalents

 

 

 

2,294

 

 

 

(41,675

)

Cash and cash equivalents, beginning of period

 

 

 

3,115

 

 

 

43,126

 

Cash and cash equivalents, end of period

 

 

$

5,409

 

 

$

1,451

 

See Accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements

12


 

WILDHORSE RESOURCE DEVELOPMENT CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF

CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

Common

Stock

 

 

Additional

Paid in

Capital

 

 

Accumulated

Earnings

(Deficit)

 

 

Total

Stockholders' Equity

 

December 31, 2016

 

$

917

 

 

$

1,017,368

 

 

$

(10,397

)

 

$

1,007,888

 

Net income (loss)

 

 

 

 

 

 

 

 

35,814

 

 

 

35,814

 

Issuance of common stock

 

 

23

 

 

 

34,434

 

 

 

 

 

 

34,457

 

Costs incurred in connection with the issuance of common stock

 

 

 

 

 

(1,872

)

 

 

 

 

 

(1,872

)

Issuance of common stock in connection with the Acquisition

 

 

55

 

 

 

60,699

 

 

 

 

 

 

60,754

 

Accrual of preferred stock paid-in-kind dividend

 

 

 

 

 

 

 

 

(6,523

)

 

 

(6,523

)

Amortization of equity awards

 

 

17

 

 

 

4,200

 

 

 

 

 

 

4,217

 

September 30, 2017

 

$

1,012

 

 

$

1,114,829

 

 

$

18,894

 

 

$

1,134,735

 

See Accompanying Notes to Unaudited Condensed Consolidated and Combined Financial Statements

 

 

13


WILDHORSE RESOURCE DEVELOPMENT CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

Note 1. Organization and Basis of Presentation

WildHorse Resource Development Corporation is a publicly traded Delaware corporation, the common stock of which are listed on the New York Stock Exchange (“NYSE”) under the symbol “WRD.”  Unless the context requires otherwise, references to “we,” “us,” “our,” “WRD,” or “the Company” are intended to mean the business and operations of WildHorse Resource Development Corporation and its consolidated subsidiaries. We are an independent oil and natural gas company focused on the acquisition, exploitation, development and production of oil, natural gas and NGL resources in the United States of America.

Reference to “WHR II” or our “predecessor” refers to WildHorse Resources II, LLC, together with its consolidated subsidiaries. Reference to “Esquisto I” refers to Esquisto Resources, LLC.  Reference to “Esquisto II” refers to Esquisto Resources II, LLC.  Reference to “Esquisto Merger” refers to the merger of Esquisto I with and into Esquisto II on January 12, 2016.  Reference to “Esquisto” refers (i) for the period beginning February 17, 2015 (date of common control) through January 11, 2016, to Esquisto I and Esquisto II on a combined basis and (ii) for the period beginning January 12, 2016 through the completion of our initial public offering on December 19, 2016, to Esquisto II.  Reference to “Acquisition Co.” refers to WHE AcqCo., LLC, an entity that was formed to acquire the Burleson North assets (see Note 3—Acquisitions and Divestitures). Reference to “WildHorse Investment Holdings” refers to WildHorse Investment Holdings, LLC.  Reference to “Previous owner” refers to both Esquisto and Acquisition Co. Reference to “Esquisto Investment Holdings” refers to Esquisto Investment Holdings, LLC.  Reference to “WildHorse Holdings” refers to WHR Holdings, LLC.  Reference to “Esquisto Holdings” refers to Esquisto Holdings, LLC. Reference to “Acquisition Co. Holdings” refers to WHE AcqCo Holdings, LLC. Reference to “NGP” refers to Natural Gas Partners, a family of private equity investment funds organized to make direct equity investments in the energy industry, including the funds invested in WHR II, Esquisto and Acquisition Co.

Contemporaneously with our initial public offering, (i) the owners of WHR II exchanged all of their interests in WHR II for equivalent interests in WildHorse Investment Holdings and the owners of Esquisto exchanged all of their interests in Esquisto for equivalent interests in Esquisto Investment Holdings, (ii) WildHorse Investment Holdings contributed all of the interests in WHR II to WildHorse Holdings, Esquisto Investment Holdings contributed all of the interests in Esquisto to Esquisto Holdings and the owner of Acquisition Co. contributed all of its interests in Acquisition Co. to Acquisition Co. Holdings and (iii) WildHorse Holdings, Esquisto Holdings and Acquisition Co. Holdings contributed all of the interests in WHR II, Esquisto and Acquisition Co., respectively, to us in exchange for shares of our common stock. We refer to these reorganization transactions as the “Corporate Reorganization.” As a result of the Corporate Reorganization, WHR II, Esquisto and Acquisition Co. became direct, wholly owned subsidiaries of WildHorse Resource Development Corporation.  In May 2017, in connection with the Acquisition, WRD formed WHR Eagle Ford LLC (“WHR EF”) as a wholly owned subsidiary.  WHR II has two wholly owned subsidiaries – WildHorse Resources Management Company, LLC (“WHRM”) and Oakfield Energy LLC (“Oakfield”).  Esquisto has two wholly owned subsidiaries – Petromax E&P Burleson, LLC and Burleson Water Resources, LLC (“Burleson Water”).  WHRM is the named operator for all oil and natural gas properties owned by us.  

Basis of Presentation

Our predecessor’s financial statements were retrospectively recast due to common control considerations. Because WHR II, Esquisto and Acquisition Co. were under the common control of NGP, the sale and contribution of the respective ownership interests were accounted for as a combination of entities under common control, whereby the assets and liabilities sold and contributed were recorded based on historical cost. As such, the financial statements included herein for the three and nine months ended September 30, 2016 have been derived from the combined financial position and results attributable to our predecessor and Esquisto. For periods after the completion of our initial public offering, our consolidated financial statements include our accounts and those of our subsidiaries.

Certain amounts in the prior year financial statements have been reclassified to conform to current presentation. Gathering, processing, and transportation costs were previously accounted for as revenue deductions and are now being presented as costs and expenses on our statements of operations on a separate line item. Oakfield drip condensate was reclassified from oil sales to other income.

All material intercompany transactions and balances have been eliminated in preparation of our condensed consolidated and combined financial statements.  The accompanying condensed consolidated and combined interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

14


WILDHORSE RESOURCE DEVELOPMENT CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

Use of Estimates in the Preparation of Financial Statements

Preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate the estimates and assumptions on a regular basis; however, actual results may differ from these estimates and assumptions used in the preparation of the financial statements. Significant estimates with regard to these financial statements include (1) the estimate of proved oil, natural gas and NGL reserves and related present value estimates of future net cash flows therefrom; (2) depreciation, depletion and amortization expense; (3) valuation of accounts receivable; (4) accrued capital expenditures and liabilities; (5) asset retirement obligations (“ARO”); (6) environmental remediation costs; (7) valuation of derivative instruments; (8) incentive unit compensation cost; (9) contingent liabilities and (10) impairment expense. Although management believes these estimates are reasonable, changes in facts and circumstances or discovery of new information may result in revised estimates, and such revisions could be material.

Note 2. Summary of Significant Accounting Policies

A discussion of our significant accounting policies and estimates is included in our 2016 Form 10-K.

Supplemental Cash Flow Information

Supplement cash flow for the periods presented (in thousands):

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2017

 

 

2016

 

Supplemental cash flows:

 

 

 

 

 

 

 

 

Cash paid for interest, net of capitalized interest

 

$

13,465

 

 

$

5,388

 

Noncash investing activities:

 

 

 

 

 

 

 

 

Increase (decrease) in capital expenditures in accounts payables and accrued liabilities

 

 

95,292

 

 

 

11,995

 

(Increase) decrease in accounts receivable related to capital expenditures and acquisitions

 

 

7,990

 

 

 

 

 

On June 30, 2017, we issued approximately 5.5 million shares of our common stock valued at approximately $60.8 million to KKR in connection with the consummation of the Acquisition.  See Note 3 for additional information regarding this issuance.

New Accounting Standards

Improvements to Employee Share-Based Payment Accounting. In March 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update to simplify the guidance on employee share-based payment accounting.  The update involved several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. This new standard became effective for annual periods beginning after December 15, 2016.  The Company adopted this guidance as of January 1, 2017 and it did not have a material impact on our consolidated financial statements.  We elected to account for forfeitures on share-based payments by recognizing forfeitures of awards as they occur.

Leases. In February 2016, the FASB issued a revision to its lease accounting guidance. The FASB retained a dual model, requiring leases to be classified as either direct financing or operating leases. The classification will be based on criteria that are similar to the current lease accounting treatment. The revised guidance requires lessees to recognize a right-of-use asset and lease liability for all leasing transactions regardless of classification. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments are effective for financial statements issued for annual periods beginning after December 15, 2018 and interim periods within those fiscal years. Although early adoption is permitted for all entities as of the beginning of an interim or annual reporting period, the Company will apply the revised lease rules for our interim and annual reporting periods starting January 1, 2019 using the required modified retrospective approach, including applicable practical expedients related to leases commenced before the effective date.  As the Company is the lessee under various agreements for office space, compressors and equipment currently accounted for as operating leases, the new rules will increase reported assets and liabilities.  The full quantitative impacts of the new standard are dependent on the leases in force at the time of adoption and, as a result, the evaluation of the effect of the new standards will extend over future periods.

15


WILDHORSE RESOURCE DEVELOPMENT CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

Revenue from Contracts with Customers. In May 2014, the FASB issued a comprehensive new revenue recognition standard for contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The core principle of this standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the standard provides a five-step analysis of transactions to determine when and how revenue is recognized. In August 2015, the FASB issued an accounting standards update that formally delayed the effective date of its new revenue recognition standard. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Although early adoption was permitted, the Company decided not to early adopt.  The new guidance will be applicable to us beginning on January 1, 2018.  The standard permits the use of either the retrospective or cumulative effect transition method. The Company selected the cumulative effect transition method.  We do not currently expect that adoption of the new revenue recognition standard will materially impact revenue recognition for many types of our arrangements.  Though we have not quantified the impact, we believe that the new standard will require that fees incurred under some of our natural gas processing contracts be reported as a deduction to revenue earned under those contracts, instead of being presented as gathering, processing and transportation costs on our statement of operations. Documentation of our revenue streams and related contract reviews is substantially complete.  During the fourth quarter, we plan to finalize our contract review and update our existing business process and internal control documentation for any new or revised processes and controls.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on our consolidated financial statements and footnote disclosures.

Note 3. Acquisitions and Divestitures

Acquisition-related costs

Acquisition-related costs for both related party and third party transactions are included in general and administrative expenses in the accompanying statements of operations for the periods indicated below (in thousands): 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

2017

 

 

2016

 

 

2017

 

 

2016

 

$

998

 

 

$

51

 

 

$

3,796

 

 

$

123

 

2017 Acquisitions

The Acquisition. On May 10, 2017, we, through our wholly owned subsidiary, WHR EF, entered into a Purchase and Sale Agreement (the “First Acquisition Agreement”) by and among WHR EF, as purchaser, and APC and KKR (together with APC, the “First Sellers”), as sellers, to acquire certain acreage and associated production in Burleson, Brazos, Lee, Milam, Robertson, and Washington Counties, Texas (the “Purchase”). Also on May 10, 2017, WHR EF entered into a Purchase and Sale Agreement (together, with the First Acquisition Agreement, the “Acquisition Agreements”), by and among WHR EF, as purchaser, and APC and Anadarko Energy Services Company (together, with APC, the “APC Subs” and together, with the First Sellers, the “Sellers”), as sellers, to acquire certain acreage and associated production in Burleson, Brazos, Lee, Milam, Robertson, and Washington Counties, Texas (together, with the Purchase, the “Acquisition”).

On June 30, 2017, we completed the Acquisition. The aggregate purchase price for the Acquisition, which is subject to customary adjustments as provided in the Acquisition Agreements, consisted of approximately $533.6 million of cash to the APC Subs and approximately 5.5 million shares of our common stock valued at approximately $60.8 million to KKR (collectively, the “Adjusted Purchase Price”). The common stock consideration price payable to KKR was issued pursuant to a Stock Issuance Agreement that was executed on May 10, 2017 (the “Stock Issuance Agreement”), by and among us and KKR.  Post-acquisition, our earnings included $19.6 million of revenues and generated $5.0 million of income related to properties obtained in the Acquisition.

 


16


WILDHORSE RESOURCE DEVELOPMENT CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

The following table summarizes the fair value assessment of the assets acquired and liabilities assumed as of the closing of the Acquisition (in thousands):

 

Consideration:

 

 

 

 

Cash

 

$

533,609

 

Common stock

 

 

60,754

 

Total consideration

 

$

594,363

 

 

 

 

 

 

Preliminary Purchase Price Allocation:

 

 

 

 

Proved oil and gas properties

 

$

264,144

 

Unproved oil and gas properties

 

 

333,778

 

Accounts receivable

 

 

967

 

Asset retirement obligations

 

 

(2,500

)

Accrued liabilities

 

 

(2,026

)

Total identifiable net assets

 

$

594,363

 

Supplemental Pro forma Information.  The following unaudited pro forma combined results of operations are provided for the three months and nine months ended September 30, 2017 and 2016 as though the Acquisition had been completed on January 1, 2016 (in thousands, except per share amounts). The unaudited pro forma financial information was derived from the historical combined statements of operations of the predecessor and previous owners and adjusted to include: (i) the revenues and direct operating expenses associated with oil and natural gas properties acquired, (ii) depletion expense applied to the adjusted basis of the properties acquired and (iii) interest expense on additional borrowings necessary to finance the Acquisition. The unaudited pro forma financial information does not purport to be indicative of results of operations that would have occurred had the Acquisition occurred on the basis assumed above, nor is such information indicative of expected future results of operations.

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

2016

 

 

2017

 

 

2016

 

Revenues

 

n/a

 

$

60,412

 

 

$

295,160

 

 

$

161,280

 

Net Income

 

n/a

 

 

14,390

 

 

 

57,221

 

 

 

(4,540

)

Earnings per share (basic and diluted)

 

n/a

 

n/a

 

 

$

0.47

 

 

n/a

 

 

Burleson 2017 Acquisitions. During the nine months ended September 30, 2017, we closed on multiple transactions to acquire oil and natural gas producing and non-producing properties from third parties in Burleson County, Texas for approximately $19.3 million, of which $11.6 million was allocated to unproved oil and natural gas properties.  

2016 Acquisitions

Burleson North Acquisition.  As discussed in our 2016 Form 10-K, we completed an acquisition of approximately 158,000 net acres of oil and natural gas properties adjacent to our existing Eagle Ford acreage on December 19, 2016 in connection with our initial public offering (the “Burleson North Acquisition”). Funds wired on December 19, 2016 were $389.8 million.  During the three months ending March 31, 2017, we received a post-closing receipt of $3.9 million.  The following table summarizes the fair value assessment of the assets acquired and liabilities assumed as of the acquisition date after customary post-closing adjustments (in thousands).  We allocated $162.9 million of the purchase price to unproved oil and natural gas properties.   

 

 

 

Purchase Price

 

Oil and natural gas properties

 

$

395,591

 

Other property and equipment

 

 

478

 

Accounts receivable

 

 

1,257

 

Accounts payable

 

 

(1,816

)

Asset retirement obligations

 

 

(3,101

)

Accrued liabilities

 

 

(6,503

)

Total identifiable net assets

 

$

385,906

 

17


WILDHORSE RESOURCE DEVELOPMENT CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

Supplemental Pro forma Information.  The following unaudited pro forma combined results of operations are provided for the three months and nine months ended September 30, 2016 as though the Burleson North Acquisition had been completed on January 1, 2015 (in thousands, except per share amounts). The unaudited pro forma financial information was derived from the historical combined statements of operations of the predecessor and previous owners and adjusted to include: (i) the revenues and direct operating expenses associated with oil and natural gas properties acquired and (ii) depletion expense applied to the adjusted basis of the properties acquired. The unaudited pro forma financial information does not purport to be indicative of results of operations that would have occurred had the Burleson North acquisition occurred on the basis assumed above, nor is such information indicative of expected future results of operations.

 

 

 

For the Three Months

Ended September 30, 2016

 

For the Nine Months

Ended September 30, 2016

 

Revenues

 

$

46,337

 

$

125,064

 

Net income (loss)

 

 

7,105

 

 

(20,946

)

Basic and diluted earnings per share

 

n/a

 

n/a

 

 

Note 4. Fair Value Measurements of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a specified measurement date. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk. A three-tier hierarchy has been established that classifies fair value amounts recognized or disclosed in the financial statements. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). All of