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EX-32.1 - EXHIBIT 32.1 - Oasis Petroleum Inc.oas-ex321x9302015xq3.htm
EX-32.2 - EXHIBIT 32.2 - Oasis Petroleum Inc.oas-ex322x9302015xq3.htm
EX-31.2 - EXHIBIT 31.2 - Oasis Petroleum Inc.oas-ex312x9302015xq3.htm
EX-31.1 - EXHIBIT 31.1 - Oasis Petroleum Inc.oas-ex311x9302015xq3.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
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: 1-34776

Oasis Petroleum Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
80-0554627
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1001 Fannin Street, Suite 1500
Houston, Texas
 
77002
(Address of principal executive offices)
 
(Zip Code)

(281) 404-9500
(Registrant’s telephone number, including area code)
 
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   ý    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  ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨     No   ý
Number of shares of the registrant’s common stock outstanding at October 30, 2015: 139,117,892 shares.
 
 
 
 
 




OASIS PETROLEUM INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015
TABLE OF CONTENTS
 
 
Page



PART I — FINANCIAL INFORMATION
Item 1. — Financial Statements (Unaudited)
Oasis Petroleum Inc.
Condensed Consolidated Balance Sheet
(Unaudited)
 
September 30, 2015
 
December 31, 2014
 
(In thousands, except share data)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
12,265

 
$
45,811

Accounts receivable — oil and gas revenues
101,977

 
130,934

Accounts receivable — joint interest partners
96,205

 
175,537

Inventory
12,929

 
21,354

Prepaid expenses
8,517

 
14,273

Derivative instruments
130,747

 
302,159

Other current assets
1,010

 
6,539

Total current assets
363,650

 
696,607

Property, plant and equipment
 
 
 
Oil and gas properties (successful efforts method)
6,337,945

 
5,966,140

Other property and equipment
436,052

 
313,439

Less: accumulated depreciation, depletion, amortization and impairment
(1,466,422
)
 
(1,092,793
)
Total property, plant and equipment, net
5,307,575

 
5,186,786

Derivative instruments
4,699

 
13,348

Deferred financing costs and other assets
49,184

 
41,671

Total assets
$
5,725,108

 
$
5,938,412

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
19,505

 
$
20,958

Revenues and production taxes payable
152,585

 
209,890

Accrued liabilities
177,134

 
410,379

Accrued interest payable
24,650

 
49,786

Deferred income taxes
35,027

 
97,499

Advances from joint interest partners
5,377

 
6,616

Other current liabilities
1,655

 

Total current liabilities
415,933

 
795,128

Long-term debt
2,380,000

 
2,700,000

Deferred income taxes
571,412

 
526,770

Asset retirement obligations
44,975

 
42,097

Derivative instruments
90

 

Other liabilities
3,216

 
2,116

Total liabilities
3,415,626

 
4,066,111

Commitments and contingencies (Note 14)

 

Stockholders’ equity
 
 
 
Common stock, $0.01 par value: 300,000,000 shares authorized; 139,603,486 shares issued and 139,111,585 shares outstanding at September 30, 2015 and 101,627,296 shares issued and 101,341,619 shares outstanding at December 31, 2014
1,376

 
1,001

Treasury stock, at cost: 491,901 and 285,677 shares at September 30, 2015 and December 31, 2014, respectively
(13,442
)
 
(10,671
)
Additional paid-in capital
1,490,995

 
1,007,202

Retained earnings
830,553

 
874,769

Total stockholders’ equity
2,309,482

 
1,872,301

Total liabilities and stockholders’ equity
$
5,725,108

 
$
5,938,412

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

1


Oasis Petroleum Inc.
Condensed Consolidated Statement of Operations
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share data)
Revenues
 
 
 
 
 
 
 
Oil and gas revenues
$
175,270

 
$
344,706

 
$
563,239

 
$
1,030,735

Well services and midstream revenues
21,965

 
23,953

 
44,429

 
59,821

Total revenues
197,235

 
368,659

 
607,668

 
1,090,556

Operating expenses
 
 
 
 
 
 
 
Lease operating expenses
35,670

 
44,361

 
112,556

 
124,903

Well services and midstream operating expenses
10,023

 
14,922

 
19,370

 
34,611

Marketing, transportation and gathering expenses
8,465

 
7,306

 
23,313

 
19,606

Production taxes
16,676

 
34,584

 
53,915

 
100,880

Depreciation, depletion and amortization
123,734

 
106,972

 
361,430

 
295,520

Exploration expenses
327

 
1,100

 
2,252

 
1,955

Rig termination

 

 
3,895

 

Impairment of oil and gas properties
80

 
1,439

 
24,917

 
2,243

General and administrative expenses
22,358

 
23,915

 
67,190

 
68,186

Total operating expenses
217,333

 
234,599

 
668,838

 
647,904

Gain on sale of properties
172

 
43

 
172

 
187,076

Operating income (loss)
(19,926
)
 
134,103

 
(60,998
)
 
629,728

Other income (expense)
 
 
 
 
 
 
 
Net gain on derivative instruments
103,637

 
103,426

 
111,285

 
20,253

Interest expense, net of capitalized interest
(36,513
)
 
(39,420
)
 
(112,702
)
 
(118,568
)
Other income (expense)
249

 
(38
)
 
370

 
250

Total other income (expense)
67,373

 
63,968

 
(1,047
)
 
(98,065
)
Income (loss) before income taxes
47,447

 
198,071

 
(62,045
)
 
531,663

Income tax benefit (expense)
(20,392
)
 
(76,484
)
 
17,829

 
(201,290
)
Net income (loss)
$
27,055

 
$
121,587

 
$
(44,216
)
 
$
330,373

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic (Note 12)
$
0.20

 
$
1.22

 
$
(0.35
)
 
$
3.32

Diluted (Note 12)
0.20

 
1.21

 
(0.35
)
 
3.29

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic (Note 12)
137,014

 
99,715

 
127,827

 
99,647

Diluted (Note 12)
137,014

 
100,306

 
127,827

 
100,356

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


2


Oasis Petroleum Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited)
 
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Retained Earnings
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Shares
 
Amount
 
 
(In thousands)
Balance as of December 31, 2014
101,342

 
$
1,001

 
286

 
$
(10,671
)
 
$
1,007,202

 
$
874,769

 
$
1,872,301

Issuance of common stock
36,800

 
368

 

 

 
462,465

 

 
462,833

Stock-based compensation
1,176

 

 

 

 
21,335

 

 
21,335

Vesting of restricted shares

 
7

 

 

 
(7
)
 

 

Treasury stock – tax withholdings
(206
)
 

 
206

 
(2,771
)
 

 

 
(2,771
)
Net loss

 

 

 

 

 
(44,216
)
 
(44,216
)
Balance as of September 30, 2015
139,112

 
$
1,376

 
492

 
$
(13,442
)
 
$
1,490,995

 
$
830,553

 
$
2,309,482

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


3


Oasis Petroleum Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
 
Nine Months Ended September 30,
 
2015
 
2014
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(44,216
)
 
$
330,373

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
361,430

 
295,520

Gain on sale of properties
(172
)
 
(187,076
)
Impairment of oil and gas properties
24,917

 
2,243

Deferred income taxes
(17,829
)
 
197,548

Derivative instruments
(111,285
)
 
(20,253
)
Stock-based compensation expenses
19,629

 
15,755

Deferred financing costs amortization and other
7,468

 
5,209

Working capital and other changes:
 
 
 
Change in accounts receivable
108,309

 
(62,581
)
Change in inventory
8,425

 
(4,089
)
Change in prepaid expenses
638

 
(3,179
)
Change in other current assets
5,529

 
(1,581
)
Change in other assets

 
(3,069
)
Change in accounts payable and accrued liabilities
(84,133
)
 
108,788

Change in other current liabilities
1,655

 

Change in other liabilities
(28
)
 
(116
)
Net cash provided by operating activities
280,337

 
673,492

Cash flows from investing activities:
 
 
 
Capital expenditures
(740,633
)
 
(998,889
)
Proceeds from sale of properties
78

 
324,938

Costs related to sale of properties

 
(2,337
)
Derivative settlements
291,436

 
(24,773
)
Advances from joint interest partners
(1,239
)
 
(6,053
)
Net cash used in investing activities
(450,358
)
 
(707,114
)
Cash flows from financing activities:
 
 
 
Proceeds from sale of common stock
462,833

 

Proceeds from revolving credit facility
618,000

 
370,000

Principal payments on revolving credit facility
(938,000
)
 
(355,570
)
Deferred financing costs
(3,587
)
 
(99
)
Purchases of treasury stock
(2,771
)
 
(5,240
)
Other

 
(176
)
Net cash provided by financing activities
136,475

 
8,915

Decrease in cash and cash equivalents
(33,546
)
 
(24,707
)
Cash and cash equivalents:
 
 
 
Beginning of period
45,811

 
91,901

End of period
$
12,265

 
$
67,194

Supplemental non-cash transactions:
 
 
 
Change in accrued capital expenditures
$
(233,913
)
 
$
99,103

Change in asset retirement obligations
3,405

 
5,134

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

4


OASIS PETROLEUM INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Organization and Operations of the Company
Organization
Oasis Petroleum Inc. (together with its subsidiaries, “Oasis” or the “Company”) was formed on February 25, 2010, pursuant to the laws of the State of Delaware, to become a holding company for Oasis Petroleum LLC (“OP LLC”), the Company’s predecessor, which was formed as a Delaware limited liability company on February 26, 2007. In connection with its initial public offering in June 2010 and related corporate reorganization, the Company acquired all of the outstanding membership interests in OP LLC in exchange for shares of the Company’s common stock. Oasis Petroleum North America LLC (“OPNA”), a Delaware limited liability company formed in 2007, conducts the Company’s domestic oil and natural gas exploration and production activities. In 2011, the Company formed Oasis Well Services LLC (“OWS”), a Delaware limited liability company, to provide well services to OPNA, and Oasis Petroleum Marketing LLC (“OPM”), a Delaware limited liability company, to provide marketing services to OPNA. In 2013, the Company formed Oasis Midstream Services LLC (“OMS”), a Delaware limited liability company, to provide midstream services to OPNA.
Nature of Business
The Company is an independent exploration and production company focused on the acquisition and development of unconventional oil and natural gas resources in the Williston Basin. The Company’s proved and unproved oil and natural gas properties are located in the North Dakota and Montana areas of the Williston Basin and are owned by OPNA. The Company also operates an oil and gas marketing business (OPM), a well services business (OWS) and a midstream services business (OMS), all of which are complementary to its primary development and production activities. Both OWS and OMS are separate reportable business segments, while OPM is included in the Company’s exploration and production segment.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company include the accounts of Oasis and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements of the Company have not been audited by the Company’s independent registered public accounting firm, except that the Condensed Consolidated Balance Sheet at December 31, 2014 is derived from audited financial statements. Certain reclassifications of prior year balances have been made to conform such amounts to current year classifications. These reclassifications have no impact on net income. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for the fair presentation, have been included. Management has made certain estimates and assumptions that affect reported amounts in the condensed consolidated financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results.
These interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Annual Report”).
As an oil and natural gas producer, the Company’s revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which are dependent upon numerous factors beyond its control such as economic, political and regulatory developments and competition from other energy sources. The energy markets have historically been very volatile, and there can be no assurance that oil and natural gas prices will not be subject to wide fluctuations in the future. Crude oil prices declined significantly in the latter part of 2014 and have remained low while experiencing high volatility in 2015. As a result of lower oil prices, the Company significantly decreased its 2015 capital expenditures as compared to 2014 and is currently concentrating its drilling activities in certain areas that are the most economic in the Williston Basin. An extended period of low prices for oil could have a material adverse effect on the Company’s financial position, results of operations, cash flows and quantities of oil and natural gas reserves that may be economically produced.
Significant Accounting Policies
There have been no material changes to the Company’s critical accounting policies and estimates from those disclosed in the 2014 Annual Report.

5


Recent Accounting Pronouncements
Revenue recognition. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The objective of ASU 2014-09 is greater consistency and comparability across industries by using a five-step model to recognize revenue from customer contracts. ASU 2014-09 also contains some new disclosure requirements under GAAP. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 defers the effective date of the new revenue standard by one year, making it effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the effect that adopting this guidance will have on its financial position, cash flows and results of operations.
Going concern. In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 codifies in GAAP management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the annual reporting period ending after December 15, 2016 and for annual periods and interim periods thereafter. The adoption of this guidance will not impact the Company’s financial position, cash flows or results of operations, but could result in additional disclosures.
Extraordinary items. In January 2015, the FASB issued Accounting Standards Update No. 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”). ASU 2015-01 removes the concept of extraordinary items from GAAP. Under existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is of an unusual nature and occurs infrequently. This separate, net-of-tax presentation will no longer be allowed. ASU 2015-01 is effective for fiscal years beginning after December 15, 2015, including interim periods within those years. The Company does not expect the adoption of this guidance to have a material impact on its financial position, cash flows or results of operations.
Debt issuance costs. In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of debt discount, but it does not affect the recognition or measurement of debt issuance costs. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, including interim periods within those years, and should be applied on a retrospective basis for all prior periods presented. The Company expects that the adoption of this guidance will only impact the presentation of its balance sheet. As of September 30, 2015 and December 31, 2014, the Company had capitalized, unamortized debt issuance costs associated with debt liabilities other than line-of-credit arrangements of $25.9 million and $29.3 million, respectively, included in deferred financing costs and other assets on its Condensed Consolidated Balance Sheet. In August 2015, the FASB issued Accounting Standards Update No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”), which confirms that line-of-credit arrangements are not in the scope of ASU 2015-03. ASU 2015-15 states that, for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are outstanding borrrowings under the line-of-credit arrangement.
Inventory. In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 changes the inventory measurement principle from lower of cost or market to lower of cost and net realizable value for entities using the first-in, first out (FIFO) or average cost methods. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those years. The Company is currently evaluating the effect that adopting this guidance will have on its financial position, cash flows and results of operations.
Business combinations. In September 2015, the FASB issued Accounting Standards Update No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”), which eliminates the requirement for an acquirer in a business combination to restate prior period financial statements for measurement period adjustments. ASU 2015-16 requires that the cumulative impact of measurement period adjustments on current and prior periods be recognized in the reporting period in which the adjustment amount is determined. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those years. The Company is currently evaluating the effect that adopting this guidance will have on its financial position, cash flows and results of operations.
3. Inventory
Equipment and materials consist primarily of proppant, chemicals, tubular goods, well equipment to be used in future drilling or repair operations and well fracturing equipment. Crude oil inventory includes oil in tank and linefill. Inventory is stated at the lower of cost or market value with cost determined on an average cost method. Inventory consists of the following:

6


 
September 30, 2015
 
December 31, 2014
 
(In thousands)
Equipment and materials
$
5,569

 
$
14,225

Crude oil inventory
7,360

 
7,129

Total inventory
$
12,929

 
$
21,354

4. Property, Plant and Equipment
The following table sets forth the Company’s property, plant and equipment:
 
September 30, 2015
 
December 31, 2014
 
(In thousands)
Proved oil and gas properties(1)
$
5,669,125

 
$
5,156,875

Less: Accumulated depreciation, depletion, amortization and impairment
(1,393,283
)
 
(1,043,121
)
Proved oil and gas properties, net
4,275,842

 
4,113,754

Unproved oil and gas properties
668,820

 
809,265

Total oil and gas properties, net
4,944,662

 
4,923,019

Other property and equipment
436,052

 
313,439

Less: Accumulated depreciation
(73,139
)
 
(49,672
)
Other property and equipment, net
362,913

 
263,767

Total property, plant and equipment, net
$
5,307,575

 
$
5,186,786

 __________________
(1)
Included in the Company’s proved oil and gas properties are estimates of future asset retirement costs of $38.4 million and $36.9 million at September 30, 2015 and December 31, 2014, respectively.
Impairment. As a result of expiring leases and periodic assessments of unproved properties, the Company recorded non-cash impairment charges on its unproved oil and natural gas properties of $0.1 million and $24.9 million for the three and nine months ended September 30, 2015, respectively, and $1.4 million and $2.2 million for the three and nine months ended September 30, 2014, respectively. The impairment charges for the nine months ended September 30, 2015 included $16.4 million related to acreage expiring in future periods because there were no current plans to drill or extend the leases prior to their expiration. For the three months ended September 30, 2015 and the three and nine months ended September 30, 2014, the Company did not record similar impairment charges based on its ability to actively manage and prioritize its capital expenditures to drill leases and to make payments to extend leases that would have otherwise expired. No impairment charges on proved oil and gas properties were recorded for the three and nine months ended September 30, 2015 or 2014.
Divestiture. On March 5, 2014, the Company completed the sale of certain non-operated properties in and around its Sanish position for cash proceeds of $324.9 million, which included customary post close adjustments. The Company recognized a $187.0 million gain on sale of properties in its Consolidated Statement of Operations for the year ended December 31, 2014.
5. Fair Value Measurements
In accordance with the FASB’s authoritative guidance on fair value measurements, the Company’s financial assets and liabilities are measured at fair value on a recurring basis. The Company recognizes its non-financial assets and liabilities, such as asset retirement obligations (“ARO”) and proved oil and natural gas properties upon impairment, at fair value on a non-recurring basis.
As defined in the authoritative guidance, 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). To estimate fair value, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable.
The authoritative guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1” measurements) and the lowest priority to unobservable inputs (“Level 3” measurements). The three levels of the fair value hierarchy are as follows:

7


Level 1 — Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 — Pricing inputs, other than unadjusted quoted prices in active markets included in Level 1, are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
Level 3 — Pricing inputs are generally less observable from objective sources, requiring internally developed valuation methodologies that result in management’s best estimate of fair value.
Financial Assets and Liabilities
As required, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis: 
 
At fair value as of September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Money market funds
$
742

 
$

 
$

 
$
742

Commodity derivative instruments (see Note 6)

 
135,446

 

 
135,446

Total assets
$
742

 
$
135,446

 
$

 
$
136,188

Liabilities:
 
 
 
 
 
 
 
Commodity derivative instruments (see Note 6)
$

 
$
90

 
$

 
$
90

Total liabilities
$

 
$
90

 
$

 
$
90

 
 
 
 
 
 
 
 
 
At fair value as of December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Money market funds
$
742

 
$

 
$

 
$
742

Commodity derivative instruments (see Note 6)

 
315,507

 

 
315,507

Total assets
$
742

 
$
315,507

 
$

 
$
316,249

The Level 1 instruments presented in the tables above consist of money market funds included in cash and cash equivalents on the Company’s Condensed Consolidated Balance Sheet at September 30, 2015 and December 31, 2014. The Company’s money market funds represent cash equivalents backed by the assets of high-quality major banks and financial institutions. The Company identifies the money market funds as Level 1 instruments because the money market funds have daily liquidity, quoted prices for the underlying investments can be obtained, and there are active markets for the underlying investments.
The Level 2 instruments presented in the tables above consist of commodity derivative instruments, which include oil collars and swaps. The fair values of the Company’s commodity derivative instruments are based upon a third-party preparer’s calculation using mark-to-market valuation reports provided by the Company’s counterparties for monthly settlement purposes to determine the valuation of its derivative instruments. The Company has the third-party preparer evaluate other readily available market prices for its derivative contracts, as there is an active market for these contracts. The third-party preparer performs its independent valuation using a moment matching method similar to Turnbull-Wakeman for Asian options. The significant inputs used are crude oil prices, volatility, skew, discount rate and the contract terms of the derivative instruments. However, the Company does not have access to the specific proprietary valuation models or inputs used by its counterparties or third-party preparer. The Company compares the third-party preparer’s valuation to counterparty valuation statements,

8


investigating any significant differences, and analyzes monthly valuation changes in relation to movements in crude oil forward price curves. The determination of the fair value for derivative instruments also incorporates a credit adjustment for non-performance risk, as required by GAAP. The Company calculates the credit adjustment for derivatives in a net asset position using current credit default swap values for each counterparty. The credit adjustment for derivatives in a net liability position is based on the Company’s market credit spread. Based on these calculations, the Company recorded an adjustment to reduce the fair value of its net derivative asset by $0.2 million and $0.6 million at September 30, 2015 and December 31, 2014, respectively.

Fair Value of Other Financial Instruments
The Company’s financial instruments, including certain cash and cash equivalents, accounts receivable and accounts payable, are carried at cost, which approximates fair value due to the short-term maturity of these instruments. At September 30, 2015, the Company’s cash equivalents were all Level 1 assets.
The carrying amount of the Company’s long-term debt reported in the Condensed Consolidated Balance Sheet at September 30, 2015 was $2,380.0 million, which includes $2,200.0 million of senior unsecured notes and $180.0 million of borrowings under the revolving credit facility (see Note 7 – Long-Term Debt). The fair value of the Company’s senior unsecured notes, which are publicly traded and therefore categorized as Level 1 liabilities, was $1,771.3 million at September 30, 2015.
Non-Financial Assets and Liabilities
Asset retirement obligations. The carrying amount of ARO in the Company’s Condensed Consolidated Balance Sheet at September 30, 2015 was $45.6 million (see Note 8 – Asset Retirement Obligations). The Company determines its ARO by calculating the present value of estimated cash flows related to the liability. Estimating the future ARO requires management to make estimates and judgments regarding the timing and existence of a liability, as well as what constitutes adequate restoration when considering current regulatory requirements. Inherent in the fair value calculation are numerous assumptions and judgments, including the ultimate costs, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. These assumptions represent Level 3 inputs. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the related asset.
Impairment. The Company reviews its proved oil and natural gas properties for impairment whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred. The Company estimates the expected undiscounted future cash flows of its proved oil and natural gas properties then compares such undiscounted future cash flows to the carrying amount of the proved oil and natural gas properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, the Company will adjust the carrying amount of the oil and natural gas properties to fair value. The factors used to determine fair value are subject to management’s judgment and expertise and include, but are not limited to, recent sales prices of comparable properties, the present value of future cash flows, net of estimated operating and development costs using estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures and various discount rates commensurate with the risk and current market conditions associated with realizing the expected cash flows projected. These assumptions represent Level 3 inputs. No impairment charges on proved oil and natural gas properties were recorded for the three and nine months ended September 30, 2015 or 2014.
6. Derivative Instruments
The Company utilizes derivative financial instruments to manage risks related to changes in oil prices. As of September 30, 2015, the Company utilized two-way costless collar options and swaps to reduce the volatility of oil prices on a significant portion of its future expected oil production. A two-way collar is a combination of options: a sold call and a purchased put. The purchased put establishes a minimum price (floor) and the sold call establishes a maximum price (ceiling) the Company will receive for the volumes under contract. A swap is a sold call and a purchased put established at the same price (both ceiling and floor).
All derivative instruments are recorded on the Company’s Condensed Consolidated Balance Sheet as either assets or liabilities measured at fair value (see Note 5 – Fair Value Measurements). The Company has not designated any derivative instruments as hedges for accounting purposes and does not enter into such instruments for speculative trading purposes. If a derivative does not qualify as a hedge or is not designated as a hedge, the changes in fair value are recognized in the other income (expense) section of the Company’s Condensed Consolidated Statement of Operations as a net gain or loss on derivative instruments. The Company’s cash flow is only impacted when the actual settlements under the derivative contracts result in making a payment to or receiving a payment from the counterparty. These cash settlements represent the cumulative

9


gains and losses on the Company’s derivative instruments and do not include a recovery of costs that were paid to acquire or modify the derivative instruments that were settled. Cash settlements are reflected as investing activities in the Company’s Condensed Consolidated Statement of Cash Flows.
As of September 30, 2015, the Company had the following outstanding commodity derivative instruments, all of which settle monthly based on the average WTI:
 
 
 
 
 
 
 
 
 
 
 
 
 
Settlement
Period
 
Derivative
Instrument
 
Total Notional
Amount of Oil
 
Weighted Average Prices
 
Fair Value
 
 
 
Swap
 
Floor
 
Ceiling
 
 
 
 
 
(Barrels)
 
($/Barrel)
 
(In thousands)
2015
 
Two-way collars
 
455,000

 
 
 
$
86.00

 
$
103.42

 
$
18,790

2015
 
Swaps
 
2,093,000

 
$
73.35

 
 
 
 
 
57,933

2016
 
Two-way collars
 
155,000

 
 
 
$
86.00

 
$
103.42

 
6,133

2016
 
Swaps
 
5,643,000

 
$
57.75

 
 
 
 
 
51,499

2017
 
Swaps
 
372,000

 
$
53.84

 
 
 
 
 
1,001

 
 
 
 
 
 
 
 
 
 
 
 
$
135,356

The following table summarizes the location and fair value of all outstanding commodity derivative instruments recorded in the Company’s Condensed Consolidated Balance Sheet for the periods presented: 
 
 
 
 
Fair Value Asset (Liability)
Commodity
 
Balance Sheet Location
 
September 30, 2015
 
December 31, 2014
 
 
 
 
(In thousands)
Crude oil
 
Derivative instruments — current assets
 
$
130,747

 
$
302,159

Crude oil
 
Derivative instruments — non-current assets
 
4,699

 
13,348

Crude oil
 
Derivative instruments — non-current liabilities
 
(90
)
 

Total derivative instruments
 
$
135,356

 
$
315,507

The following table summarizes the location and amounts of gains and losses from the Company’s commodity derivative instruments recorded in the Company’s Condensed Consolidated Statement of Operations for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Statement of Operations Location
 
2015
 
2014
 
2015
 
2014
 
 
(In thousands)
Net gain on derivative instruments
 
$
103,637

 
$
103,426

 
$
111,285

 
$
20,253

In accordance with the FASB’s authoritative guidance on disclosures about offsetting assets and liabilities, the Company is required to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting agreement. The Company’s derivative instruments are presented as assets and liabilities on a net basis by counterparty, as all counterparty contracts provide for net settlement. No margin or collateral balances are deposited with counterparties, and as such, gross amounts are offset to determine the net amounts presented in the Company’s Condensed Consolidated Balance Sheet.
The following tables summarize gross and net information about the Company’s commodity derivative instruments for the periods presented:
Offsetting of Derivative Assets
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset
in the Balance Sheet
 
Net Amounts of Assets Presented
in the Balance Sheet
 
 
(In thousands)
As of September 30, 2015
 
$
153,394

 
$
(17,948
)
 
$
135,446

As of December 31, 2014
 
331,121

 
(15,614
)
 
315,507


10


Offsetting of Derivative Liabilities
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset
in the Balance Sheet
 
Net Amounts of Liabilities Presented
in the Balance Sheet
 
 
(In thousands)
As of September 30, 2015
 
$
18,038

 
$
(17,948
)
 
$
90

As of December 31, 2014
 
15,614

 
(15,614
)
 


7. Long-Term Debt
Senior unsecured notes. During 2013, the Company issued $1,000.0 million of 6.875% senior unsecured notes due March 15, 2022 (the “2022 Notes”), which resulted in aggregate net proceeds to the Company of $983.6 million. The Company used the proceeds from the 2022 Notes to fund the acquisition of oil and gas properties. During 2011 and 2012, the Company issued $400.0 million of 7.25% senior unsecured notes due February 1, 2019 (the “2019 Notes”), $400.0 million of 6.5% senior unsecured notes due November 1, 2021 (the “2021 Notes”) and $400.0 million of 6.875% senior unsecured notes due January 15, 2023 (the “2023 Notes”), which resulted in aggregate net proceeds to the Company of $1,175.8 million. The Company used the proceeds from these notes to fund its exploration, development and acquisition program and for general corporate purposes. Interest on the 2019 Notes, the 2021 Notes, the 2022 Notes and the 2023 Notes (collectively, the “Notes”) is payable semi-annually in arrears.
The Notes were issued under indentures containing provisions that are substantially the same, as amended and supplemented by supplemental indentures (collectively, the “Indentures”), among the Company, along with its material subsidiaries (the “Guarantors”), and U.S. Bank National Association, as trustee. The Notes are guaranteed on a senior unsecured basis by the Company’s Guarantors, which are 100% owned by the Company. These guarantees are full and unconditional and joint and several among the Guarantors, subject to certain customary release provisions, as follows:
in connection with any sale or other disposition of all or substantially all of the assets of that Guarantor (including by way of merger or consolidation) to a person that is not (either before or after giving effect to such transaction) the Company or a Restricted Subsidiary (as defined in the Indentures) of the Company;
in connection with any sale or other disposition of the capital stock of that Guarantor (including by way of merger or consolidation) to a person that is not (either before or after giving effect to such transaction) the Company or a Restricted Subsidiary of the Company, such that, immediately after giving effect to such transaction, such Guarantor would no longer constitute a subsidiary of the Company;
if the Company designates any Restricted Subsidiary that is a Guarantor to be an unrestricted subsidiary in accordance with the Indenture;
upon legal defeasance or satisfaction and discharge of the Indenture; or
upon the liquidation or dissolution of a Guarantor, provided no event of default occurs under the Indentures as a result thereof.
Prior to certain dates, the Company has certain options to redeem up to 35% of the Notes at a certain redemption price based on a percentage of the principal amount, plus accrued and unpaid interest to the redemption date, with the proceeds of certain equity offerings so long as the redemption occurs within 180 days of completing such equity offering and at least 65% of the aggregate principal amount of the Notes remains outstanding after such redemption. Prior to certain dates, the Company has the option to redeem some or all of the Notes for cash at certain redemption prices equal to a certain percentage of their principal amount plus an applicable make-whole premium and accrued and unpaid interest to the redemption date. The Company estimates that the fair value of these redemption options is immaterial at September 30, 2015 and December 31, 2014.
The Indentures restrict the Company’s ability and the ability of certain of its subsidiaries to: (i) incur additional debt or enter into sale and leaseback transactions; (ii) pay distributions on, redeem or repurchase equity interests; (iii) make certain investments; (iv) incur liens; (v) enter into transactions with affiliates; (vi) merge or consolidate with another company; and (vii) transfer and sell assets. These covenants are subject to certain exceptions and qualifications. If at any time when the Notes are rated investment grade by both Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services and no Default (as defined in the Indentures) has occurred and is continuing, many of such covenants will terminate and the Company and its subsidiaries will cease to be subject to such covenants.
The Indentures contain customary events of default, including:
default in any payment of interest on any Note when due, continued for 30 days;

11


default in the payment of principal or premium, if any, on any Note when due;
failure by the Company to comply with its other obligations under the Indentures, in certain cases subject to notice and grace periods;
payment defaults and accelerations with respect to other indebtedness of the Company and its Restricted Subsidiaries in the aggregate principal amount of $10.0 million or more;
certain events of bankruptcy, insolvency or reorganization of the Company or a Significant Subsidiary (as defined in the Indentures) or group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary;
failure by the Company or any Significant Subsidiary or group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary to pay certain final judgments aggregating in excess of $10.0 million within 60 days; and
any guarantee of the Notes by a Guarantor ceases to be in full force and effect, is declared null and void in a judicial proceeding or is denied or disaffirmed by its maker.

Senior secured revolving line of credit. On April 5, 2013, the Company, as parent, and OPNA, as borrower, entered into a second amended and restated credit agreement (the “Second Amended Credit Facility”), which had a maturity date of April 5, 2018. The Second Amended Credit Facility is restricted to the borrowing base, which is reserve-based and subject to semi-annual redeterminations on April 1 and October 1 of each year. On April 13, 2015, the Company entered into its third amendment to the Second Amended Credit Facility (the “Third Amendment”), which extended the maturity date of the Second Amended Credit Facility to April 13, 2020, provided that the 2019 Notes are retired or refinanced 90 days prior to their maturity. In connection with the Third Amendment, the lenders under the Second Amended Credit Facility (the “Lenders”) completed their regular semi-annual redetermination of the borrowing base scheduled for April 1, 2015, resulting in a borrowing base decrease from $2,000.0 million to $1,700.0 million. The Company increased the Lenders’ aggregate elected commitment from $1,500.0 million to $1,525.0 million. The Lenders’ aggregate commitment can be increased to the full $1,700.0 million borrowing base by increasing the commitment of one or more Lenders. The Third Amendment also increased the Lenders in the bank group to 18 financial institutions supporting the Company’s borrowing base facility. The overall senior secured line of credit under the Second Amended Credit Facility is $2,500.0 million as of September 30, 2015.
Borrowings under the Second Amended Credit Facility are collateralized by perfected first priority liens and security interests on substantially all of the Company’s assets, including mortgage liens on oil and natural gas properties having at least 80% of the reserve value as determined by reserve reports.
Borrowings under the Second Amended Credit Facility are subject to varying rates of interest based on (1) the total outstanding borrowings (including the value of all outstanding letters of credit) in relation to the borrowing base and (2) whether the loan is a London interbank offered rate (“LIBOR”) loan or a domestic bank prime interest rate loan (defined in the Second Amended Credit Facility as an Alternate Based Rate or “ABR” loan). As of September 30, 2015, any outstanding LIBOR and ABR loans bore their respective interest rates plus the applicable margin indicated in the following table:
Ratio of Total Outstanding Borrowings to Borrowing Base
 
Applicable Margin
for LIBOR Loans
 
Applicable Margin
for ABR Loans
Less than .25 to 1
 
1.50
%
 
0.00
%
Greater than or equal to .25 to 1 but less than .50 to 1
 
1.75
%
 
0.25
%
Greater than or equal to .50 to 1 but less than .75 to 1
 
2.00
%
 
0.50
%
Greater than or equal to .75 to 1 but less than .90 to 1
 
2.25
%
 
0.75
%
Greater than or equal to .90 to 1
 
2.50
%
 
1.00
%
An ABR loan may be repaid at any time before the scheduled maturity of the Second Amended Credit Facility upon the Company providing advance notification to the Lenders. Interest is paid quarterly on ABR loans based on the number of days an ABR loan is outstanding as of the last business day in March, June, September and December. The Company has the option to convert an ABR loan to a LIBOR-based loan upon providing advance notification to the Lenders. The minimum available loan term is one month and the maximum loan term is six months for LIBOR-based loans. Interest for LIBOR loans is paid upon maturity of the loan term. Interim interest is paid every three months for LIBOR loans that have loan terms greater than three months in duration. At the end of a LIBOR loan term, the Second Amended Credit Facility allows the Company to elect to repay the borrowing, continue a LIBOR loan with the same or a differing loan term or convert the borrowing to an ABR loan.

12


On a quarterly basis, the Company pays a 0.375% (as of September 30, 2015) annualized commitment fee on the average amount of borrowing base capacity not utilized during the quarter and fees calculated on the average amount of letter of credit balances outstanding during the quarter.
As of September 30, 2015, the Second Amended Credit Facility contained covenants that included, among others:
a prohibition against incurring debt, subject to permitted exceptions;
a prohibition against making dividends, distributions and redemptions, subject to permitted exceptions;
a prohibition against making investments, loans and advances, subject to permitted exceptions;
restrictions on creating liens and leases on the assets of the Company and its subsidiaries, subject to permitted exceptions;
restrictions on merging and selling assets outside the ordinary course of business;
restrictions on use of proceeds, investments, transactions with affiliates or change of principal business;
a provision limiting oil and natural gas derivative financial instruments;
a requirement that the Company maintain a ratio of consolidated EBITDAX (as defined in the Second Amended Credit Facility) to consolidated Interest Expense (as defined in the Second Amended Credit Facility) of no less than 2.5 to 1.0 for the four quarters ended on the last day of each quarter; and
a requirement that the Company maintain a Current Ratio (as defined in the Second Amended Credit Facility) of consolidated current assets (including unused borrowing base capacity and with exclusions as described in the Second Amended Credit Facility) to consolidated current liabilities (with exclusions as described in the Second Amended Credit Facility) of no less than 1.0 to 1.0 as of the last day of any fiscal quarter.
The Second Amended Credit Facility contains customary events of default. If an event of default occurs and is continuing, the Lenders may declare all amounts outstanding under the Second Amended Credit Facility to be immediately due and payable.
As of September 30, 2015, the Company had $180.0 million of LIBOR loans and $5.2 million of outstanding letters of credit issued under the Second Amended Credit Facility, resulting in an unused borrowing base committed capacity of $1,339.8 million. As of September 30, 2015 and December 31, 2014, the weighted average interest rate on borrowings outstanding under the Second Amended Credit Facility was 1.7% and 1.9%, respectively. The Company was in compliance with the financial covenants of the Second Amended Credit Facility as of September 30, 2015.
Deferred financing costs. As of September 30, 2015, the Company had $33.6 million of deferred financing costs related to the Notes and the Second Amended Credit Facility. The deferred financing costs are included in deferred financing costs and other assets on the Company’s Condensed Consolidated Balance Sheet at September 30, 2015 and are being amortized over the respective terms of the Notes and the Second Amended Credit Facility. Amortization of deferred financing costs recorded for the three and nine months ended September 30, 2015 was $1.6 million and $5.5 million, respectively, and $1.6 million and $4.8 million for the three and nine months ended September 30, 2014, respectively. These costs are included in interest expense on the Company’s Condensed Consolidated Statement of Operations.
8. Asset Retirement Obligations
The following table reflects the changes in the Company’s ARO during the nine months ended September 30, 2015:
 
(In thousands)
Balance at December 31, 2014
$
42,549

Liabilities incurred during period
1,233

Liabilities settled during period
(112
)
Accretion expense during period(1)
1,654

Revisions to estimates
241

Balance at September 30, 2015
$
45,565

___________________
(1)
Included in depreciation, depletion and amortization on the Company’s Condensed Consolidated Statement of Operations.

13


At September 30, 2015, the current portion of the total ARO balance was approximately $0.6 million and is included in accrued liabilities on the Company’s Condensed Consolidated Balance Sheet.
9. Income Taxes
The Company’s effective tax rate for the three and nine months ended September 30, 2015 was 43.0% and 28.7%, respectively. The Company’s effective tax rate for the three and nine months ended September 30, 2014 was 38.6% and 37.9%, respectively. While the 2014 rates were consistent with the statutory tax rate applicable to the U.S. and the blended state rate for the states in which the Company conducts business, the effective tax rate was higher for the three months ended September 30, 2015 due to lower pre-tax income and the impact of permanent differences, while the effective tax rate was lower for the nine months ended September 30, 2015 due to the Company’s pre-tax loss and the impact of permanent differences. The permanent differences were primarily between compensation amounts expensed for book purposes versus the amounts deductible for income tax purposes related to stock-based compensation vestings during the three and nine months ended September 30, 2015 at stock prices lower than the grant date values. The impact of these permanent differences was partially offset by a reduction in the North Dakota statutory tax rate in the second quarter of 2015.
The Company had deferred tax assets for its federal and state tax loss carryforwards at September 30, 2015 recorded in deferred income taxes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of September 30, 2015, management determined that a valuation allowance was not required for the tax loss carryforwards as they are expected to be fully utilized before expiration. As of September 30, 2015, the Company did not have any uncertain tax positions requiring adjustments to its tax liability.
10. Stock-Based Compensation
Restricted stock awards. The Company has granted restricted stock awards to employees and directors under its Amended and Restated 2010 Long Term Incentive Plan, the majority of which vest over a three-year period. The fair value of restricted stock grants is based on the closing sales price of the Company’s common stock on the date of grant. Compensation expense is recognized ratably over the requisite service period. For the nine months ended September 30, 2015, the Company assumed annual forfeiture rates by employee group ranging from 0% to 16.9% based on the Company’s forfeiture history for this type of award.
During the nine months ended September 30, 2015, employees and non-employee directors of the Company were granted restricted stock awards equal to 1,234,320 shares of common stock with a $13.08 weighted average grant date per share value. Stock-based compensation expense recorded for restricted stock awards for the three and nine months ended September 30, 2015 was $5.0 million and $16.8 million, respectively, and $5.2 million and $13.4 million for the three and nine months ended September 30, 2014, respectively. Stock-based compensation expense is included in general and administrative expenses on the Company’s Condensed Consolidated Statement of Operations.
Performance share units. The Company has granted performance share units (“PSUs”) to officers of the Company under its Amended and Restated 2010 Long Term Incentive Plan. The PSUs are awards of restricted stock units, and each PSU that is earned represents the right to receive one share of the Company’s common stock. For the nine months ended September 30, 2015, the Company assumed annual forfeiture rates by employee group ranging from 2.4% to 4.9% based on the Company’s forfeiture history for the officer employee groups receiving PSUs.
During the nine months ended September 30, 2015, officers of the Company were granted 425,590 PSUs with an $11.20 weighted average grant date per share value. Stock-based compensation expense recorded for PSUs for the three and nine months ended September 30, 2015 was $1.0 million and $2.9 million, respectively, and $0.8 million and $2.3 million for the three and nine months ended September 30, 2014, respectively, and is included in general and administrative expenses on the Company’s Condensed Consolidated Statement of Operations.
Each grant of PSUs is subject to a designated three-year initial performance period. The number of PSUs to be earned is subject to a market condition, which is based on a comparison of the total shareholder return (“TSR”) achieved with respect to shares of the Company’s common stock against the TSR achieved by a defined peer group at the end of the performance period. Depending on the Company’s TSR performance relative to the defined peer group, award recipients will earn between 0% and 200% of the initial PSUs granted. If less than 200% of the initial PSUs granted are earned at the end of the initial three-year performance period, then the performance period will be extended an additional year to give the award recipients the opportunity to earn up to an aggregate of 200% of the initial PSUs granted.
The Company accounted for these PSUs as equity awards pursuant to the FASB’s authoritative guidance for share-based payments. The aggregate grant date fair value of the market-based awards was determined using a Monte Carlo simulation

14


model, which results in an expected percentage of PSUs earned. The fair value of these PSUs is recognized on a straight-line basis over the performance period. As it is probable that a portion of the awards will be earned during the extended performance period, the grant date fair value will be amortized over four years. However, if 200% of the initial PSUs granted are earned at the end of the initial performance period, then the remaining compensation expense will be accelerated in order to be fully recognized over three years. All compensation expense related to the PSUs will be recognized if the requisite performance period is fulfilled, even if the market condition is not achieved.
The Monte Carlo simulation model uses assumptions regarding random projections and must be repeated numerous times to achieve a probabilistic assessment. The key valuation assumptions for the Monte Carlo model are the forecast period, initial value, risk-free interest rate, volatility and correlation coefficients. The risk-free interest rate is the U.S. Treasury bond rate on the date of grant that corresponds to the extended performance period. The initial value is the average of the volume weighted average prices for the 30 trading days prior to the start of the performance cycle for the Company and each of its peers. Volatility is the standard deviation of the average percentage change in stock price over a historical period for the Company and each of its peers. The correlation coefficients are measures of the strength of the linear relationship between and amongst the Company and its peers estimated based on historical stock price data.
The following assumptions were used for the Monte Carlo model to determine the grant date fair value and associated stock-based compensation expense of the PSUs granted during the nine months ended September 30, 2015:
Forecast period (years)
4.00

Risk-free interest rate
0.99
%
Oasis stock price volatility
50.11
%
For the PSUs granted during the nine months ended September 30, 2015, the Monte Carlo simulation model resulted in 86% of PSUs expected to be earned over the extended performance period.
11. Common Stock
On March 9, 2015, the Company completed a public offering of 36,800,000 shares of its common stock (including 4,800,000 shares issued pursuant to the underwriters’ option to purchase additional common stock) at an offering price of $12.80 per share. Net proceeds from the offering were $463.1 million, after deducting underwriting discounts and commissions and estimated offering expenses, of which $0.4 million is included in common stock and $462.7 million is included in additional paid-in capital on the Company’s Condensed Consolidated Balance Sheet. The Company used the net proceeds to repay outstanding indebtedness under its Second Amended Credit Facility and for general corporate purposes. The offering was made pursuant to an effective shelf registration statement on Form S-3 filed with the SEC on July 15, 2014.
12. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the periods presented. The calculation of diluted earnings (loss) per share includes the impact of potentially dilutive non-vested restricted shares and PSUs outstanding during the periods presented, unless their effect is anti-dilutive. There are no adjustments made to income (loss) available to common stockholders in the calculation of diluted earnings (loss) per share.
The following is a calculation of the basic and diluted weighted-average shares outstanding for the three and nine months ended September 30, 2015 and 2014: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Basic weighted average common shares outstanding
137,014

 
99,715

 
127,827

 
99,647

Dilution effect of stock awards at end of period(1)

 
591

 

 
709

Diluted weighted average common shares outstanding
137,014

 
100,306

 
127,827

 
100,356

Anti-dilutive stock-based compensation awards
2,787

 
1,067

 
2,939

 
927

___________________
(1)
No unvested stock awards were included in computing earnings (loss) per share for the three and nine months ended September 30, 2015 because the effect was anti-dilutive.


15


13. Business Segment Information

The Company’s exploration and production segment is engaged in the acquisition and development of oil and natural gas properties and includes the complementary marketing services provided by OPM. Revenues for the exploration and production segment are derived from the sale of oil and natural gas production. In the first quarter of 2012, the Company began its well services business segment (OWS) to perform completion services for the Company’s oil and natural gas wells operated by OPNA. Revenues for the well services segment are derived from providing well completion services, well completion product sales and tool rentals. In the first quarter of 2013, the Company formed its midstream services business segment (OMS) to perform salt water gathering and disposal and other midstream services for the Company’s oil and natural gas wells operated by OPNA. Revenues for the midstream segment are primarily derived from salt water transport, salt water disposal and fresh water sales. The revenues and expenses related to work performed by OWS and OMS for OPNA’s working interests are eliminated in consolidation, and only the revenues and expenses related to non-affiliated working interest owners are included in the Company’s Condensed Consolidated Statement of Operations. These segments represent the Company’s three current operating units, each offering different products and services. The Company’s corporate activities have been allocated to the supported business segments accordingly.
Management evaluates the performance of the Company’s business segments based on operating income, which is defined as segment operating revenues less operating expenses, including depreciation, depletion and amortization. The following table summarizes financial information for the Company’s business segments for the periods presented: 
 
Exploration and
Production
 
Well Services
 
Midstream Services
 
Eliminations
 
Consolidated
 
(In thousands)
Three months ended September 30, 2015:
 
Revenues from non-affiliates
$
175,270

 
$
15,381

 
$
6,584

 
$

 
$
197,235

Inter-segment revenues

 
33,554

 
23,228

 
(56,782
)
 

Total revenues
175,270

 
48,935

 
29,812

 
(56,782
)
 
197,235

Operating income (loss)
(38,289
)
 
10,936

 
18,828

 
(11,401
)
 
(19,926
)
Other income (expense)
67,359

 
14

 

 

 
67,373

Income before income taxes
$
29,070

 
$
10,950

 
$
18,828

 
$
(11,401
)
 
$
47,447

 
 
Three months ended September 30, 2014:
 
 
 
 
 
 
 
 
 
Revenues from non-affiliates
$
344,706

 
$
20,925

 
$
3,028

 
$

 
$
368,659

Inter-segment revenues

 
66,298

 
10,596

 
(76,894
)
 

Total revenues
344,706

 
87,223

 
13,624

 
(76,894
)
 
368,659

Operating income
126,184

 
23,388

 
5,126

 
(20,595
)
 
134,103

Other income (expense)
63,968

 

 

 

 
63,968

Income before income taxes
$
190,152

 
$
23,388

 
$
5,126

 
$
(20,595
)
 
$
198,071

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015:
 
 
 
 
 
 
 
 
 
Revenues from non-affiliates
$
563,239

 
$
27,308

 
$
17,121

 
$

 
$
607,668

Inter-segment revenues

 
131,220

 
58,994

 
(190,214
)
 

Total revenues
563,239

 
158,528

 
76,115

 
(190,214
)
 
607,668

Operating income (loss)
(103,065
)
 
29,554

 
44,083

 
(31,570
)
 
(60,998
)
Other income (expense)
(1,037
)
 
34

 
(44
)
 

 
(1,047
)
Income (loss) before income taxes
$
(104,102
)
 
$
29,588

 
$
44,039

 
$
(31,570
)
 
$
(62,045
)
 
 
Nine months ended September 30, 2014:
 
 
 
 
 
 
 
 
 
Revenues from non-affiliates
$
1,030,735

 
$
51,630

 
$
8,191

 
$

 
$
1,090,556

Inter-segment revenues

 
146,447

 
28,264

 
(174,711
)
 

Total revenues
1,030,735

 
198,077

 
36,455

 
(174,711
)
 
1,090,556

Operating income
602,797

 
53,137

 
15,854

 
(42,060
)
 
629,728

Other income (expense)
(98,140
)
 
75

 

 

 
(98,065
)

16


Income before income taxes
$
504,657

 
$
53,212

 
$
15,854

 
$
(42,060
)
 
$
531,663

 
 
As of September 30, 2015:
 
Property, plant and equipment, net
$
5,130,061

 
$
66,058

 
$
261,989

 
$
(150,533
)
 
$
5,307,575

Total assets
5,541,674

 
421,642

 
378,284

 
(616,492
)
 
5,725,108

As of December 31, 2014:
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
$
5,074,588

 
$
58,767

 
$
172,394

 
$
(118,963
)
 
$
5,186,786

Total assets
5,802,295

 
281,844

 
212,685

 
(358,412
)
 
5,938,412

14. Commitments and Contingencies
Included below is a discussion of various future commitments of the Company as of September 30, 2015. The commitments under these arrangements are not recorded in the accompanying Condensed Consolidated Balance Sheet. The amounts disclosed represent undiscounted cash flows on a gross basis, and no inflation elements have been applied.
Lease obligations. The Company’s total rental commitments under leases for office space and other property and equipment at September 30, 2015 were $28.7 million.
Drilling contracts. As a result of its lowered 2015 capital expenditure program, the Company elected to early terminate certain drilling rig contracts and recorded a rig termination expense of $3.9 million in its Condensed Consolidated Statement of Operations for the nine months ended September 30, 2015. The Company did not elect to early terminate any drilling rig contracts during the nine months ended September 30, 2014.
As of September 30, 2015, the Company had certain drilling rig contracts with initial terms greater than one year. In the event of early termination under these contracts, the Company would be obligated to pay approximately $5.3 million as of September 30, 2015 for the days remaining through the end of the primary terms of the contracts.
Volume commitment agreements. As of September 30, 2015, the Company had certain agreements with an aggregate requirement to deliver a minimum quantity of approximately 29.2 MMBbl and 4.1 Bcf, prior to any applicable volume credits, within specified timeframes, all of which are less than ten years. Future commitments under these agreements were approximately $193.8 million as of September 30, 2015.
Purchase agreements. As of September 30, 2015, the Company had certain agreements for the purchase of fresh water with an aggregate future commitment of approximately $38.6 million.
Cost sharing agreements. As of September 30, 2015, the Company had certain agreements to share the cost to construct and install electrical facilities. The Company’s estimated future commitment under these agreements was $2.3 million as of September 30, 2015.
Litigation. The Company is party to various legal and/or regulatory proceedings from time to time arising in the ordinary course of business. While the ultimate outcome and impact to the Company cannot be predicted with certainty, the Company believes that all such matters are without merit and involve amounts which, if resolved unfavorably, either individually or in the aggregate, will not have a material adverse effect on its financial condition, results of operations or cash flows. When the Company determines that a loss is probable of occurring and is reasonably estimable, the Company accrues an undiscounted liability for such contingencies based on its best estimate using information available at the time. The Company discloses contingencies where an adverse outcome may be material, or in the judgment of management, the matter should otherwise be disclosed.
On July 6, 2013, a freight train operated by Montreal, Maine and Atlantic Railway (“MMA”) carrying crude oil (the “Train”) derailed in Lac-Mégantic, Quebec. In March 2014, Oasis Petroleum Inc. and OP LLC were added to a group of over fifty named defendants, including other crude oil producers as well as the Canadian Pacific Railway, MMA and certain of its affiliates, owners and transloaders of the crude oil carried by the Train, several lessors of tank cars, and the Attorney General of Canada, in a motion filed in the Quebec Superior Court to authorize a class-action lawsuit seeking economic, compensatory and punitive damages, as well as costs for claims arising out of the derailment of the Train (Yannick Gagne, etc., et al. v. Rail World, Inc., etc., et al., Case No. 48006000001132) (the “Class-Action”). The motion generally alleges wrongful death and negligence in the failure to provide for the proper and safe transportation of crude oil. The Company believes that all claims against Oasis Petroleum Inc. and OP LLC in connection with the derailment of the Train in Lac-Mégantic, Quebec are without merit.
On August 7, 2013, MMA filed for bankruptcy protection in the Quebec Superior Court and the United States Bankruptcy Court in Bangor, Maine (together, the “Bankruptcy Actions”). The trustees appointed in the Bankruptcy Actions have

17


negotiated settlement agreements with the majority of the named defendants in the Class-Action, including Oasis Petroleum Inc. and OP LLC. The Quebec Superior Court and the United States Bankruptcy Court have issued orders approving the settlement agreements which were pending before them, but such orders have not yet become final and are subject to appeal. If the orders become final, pursuant to the settlement agreements, Oasis Petroleum Inc. and OP LLC have agreed to contribute to the compensation fund established for those suffering losses as a result of the Lac-Megantic derailment. The Company has determined that such contributions are fully covered by the Company’s insurance policies. Furthermore, the settlement agreements would bar future litigation against Oasis Petroleum Inc. and OP LLC in Canada and the United States arising out of the Lac-Megantic derailment.

18



15. Condensed Consolidating Financial Information
The Notes (see Note 7) are guaranteed on a senior unsecured basis by the Guarantors, which are 100% owned by the Company. These guarantees are full and unconditional and joint and several among the Guarantors. Certain of the Company’s immaterial wholly-owned subsidiaries do not guarantee the Notes (“Non-Guarantor Subsidiaries”).
The following financial information reflects consolidating financial information of the parent company, Oasis Petroleum Inc. (“Issuer”), and its Guarantors on a combined basis, prepared on the equity basis of accounting. The Non-Guarantor Subsidiaries are immaterial and, therefore, not presented separately. The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the Guarantors operated as independent entities. The Company has not presented separate financial and narrative information for each of the Guarantors because it believes such financial and narrative information would not provide any additional information that would be material in evaluating the sufficiency of the Guarantors.

Condensed Consolidating Balance Sheet
 
September 30, 2015
 
Parent/
Issuer
 
Combined
Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
757

 
$
11,508

 
$

 
$
12,265

Accounts receivable
16

 
198,166

 

 
198,182

Accounts receivable – affiliates
1,258

 
221,784

 
(223,042
)
 

Inventory

 
12,929

 

 
12,929

Prepaid expenses
417

 
8,100

 


 
8,517

Other current assets

 
131,757

 

 
131,757

Oil and gas properties (successful efforts method)

 
6,337,945

 

 
6,337,945

Other property and equipment

 
436,052

 

 
436,052

Accumulated depreciation, depletion, amortization and impairment

 
(1,466,422
)
 

 
(1,466,422
)
Investments in and advances to subsidiaries
4,526,226

 

 
(4,526,226
)
 

Other long-term assets
227,143

 
27,849

 
(201,109
)
 
53,883

Total assets
$
4,755,817

 
$
5,919,668

 
$
(4,950,377
)
 
$
5,725,108

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Accounts payable – affiliates
221,784

 
1,258

 
(223,042
)
 

Other current liabilities
24,551

 
391,382

 

 
415,933

Long-term debt
2,200,000

 
180,000

 

 
2,380,000

Other long-term liabilities

 
820,802

 
(201,109
)
 
619,693

Common stock
1,376

 

 

 
1,376

Other stockholders’ equity
2,308,106

 
4,526,226

 
(4,526,226
)
 
2,308,106

Total liabilities and stockholders’ equity
$
4,755,817

 
$
5,919,668

 
$
(4,950,377
)
 
$
5,725,108


Condensed Consolidating Balance Sheet
 
December 31, 2014
 
Parent/
Issuer
 
Combined
Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
$
776

 
$
45,035

 
$

 
$
45,811

Accounts receivable

 
306,471

 

 
306,471

Accounts receivable – affiliates
781

 
91,459

 
(92,240
)
 

Prepaid expenses
297

 
13,976

 

 
14,273

Other current assets

 
330,052

 

 
330,052

Oil and gas properties (successful efforts method)

 
5,966,140

 

 
5,966,140

Other property and equipment

 
313,439

 

 
313,439

Accumulated depreciation, depletion, amortization and impairment

 
(1,092,793
)
 

 
(1,092,793
)
Investments in and advances to subsidiaries
4,032,494

 

 
(4,032,494
)
 

Other long-term assets
178,752

 
25,584

 
(149,317
)
 
55,019

Total assets
$
4,213,100

 
$
5,999,363

 
$
(4,274,051
)
 
$
5,938,412

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Accounts payable
$

 
$
20,958

 
$

 
$
20,958

Accounts payable – affiliates
91,459

 
781

 
(92,240
)
 

Other current liabilities
49,340

 
724,830

 

 
774,170

Long-term debt
2,200,000

 
500,000

 

 
2,700,000

Other long-term liabilities

 
720,300

 
(149,317
)
 
570,983

Total stockholders’ equity
1,872,301

 
4,032,494

 
(4,032,494
)
 
1,872,301

Total liabilities and stockholders’ equity
$
4,213,100

 
$
5,999,363

 
$
(4,274,051
)
 
$
5,938,412


Condensed Consolidating Statement of Operations
 
Three Months Ended September 30, 2015
 
Parent/
Issuer
 
Combined
Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
 
(In thousands)
Total revenues
$

 
$
197,235

 
$

 
$
197,235

Total operating expenses
(5,903
)
 
(211,430
)
 

 
(217,333
)
Gain on sale of properties

 
172

 

 
172

Operating loss
(5,903
)
 
(14,023
)
 

 
(19,926
)
Equity in earnings of subsidiaries
49,899

 

 
(49,899
)
 

Interest expense, net of capitalized interest
(34,020
)
 
(2,493
)
 

 
(36,513
)
Other income (expense)
1

 
103,885

 

 
103,886

Income before income taxes
9,977

 
87,369

 
(49,899
)
 
47,447

Income tax benefit (expense)
17,078

 
(37,470
)
 

 
(20,392
)
Net income
$
27,055

 
$
49,899

 
$
(49,899
)
 
$
27,055


Condensed Consolidating Statement of Operations
 
Three Months Ended September 30, 2014
 
Parent/
Issuer
 
Combined
Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
 
(In thousands)
Total revenues
$

 
$
368,659

 
$

 
$
368,659

General and administrative expenses
(6,373
)
 
(17,542
)
 

 
(23,915
)
Other operating expenses

 
(210,684
)
 

 
(210,684
)
Gain on sale of properties

 
43

 

 
43

Operating income (loss)
(6,373
)
 
140,476

 

 
134,103

Equity in earnings of subsidiaries
148,357

 

 
(148,357
)
 

Interest expense, net of capitalized interest
(36,724
)
 
(2,696
)
 

 
(39,420
)
Other income (expense)

 
103,388

 

 
103,388

Income before income taxes
105,260

 
241,168

 
(148,357
)
 
198,071

Income tax benefit (expense)
16,327

 
(92,811
)
 

 
(76,484
)
Net income
$
121,587

 
$
148,357

 
$
(148,357
)
 
$
121,587


Condensed Consolidating Statement of Operations
 
Nine Months Ended September 30, 2015
 
Parent/
Issuer
 
Combined
Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
 
(In thousands)
Total revenues
$

 
$
607,668

 
$

 
$
607,668

General and administrative expenses
(20,847
)
 
(46,343
)
 

 
(67,190
)
Other operating expenses

 
(601,648
)
 

 
(601,648
)
Gain on sale of properties

 
172

 

 
172

Operating loss
(20,847
)
 
(40,151
)
 

 
(60,998
)
Equity in earnings of subsidiaries
28,269

 

 
(28,269
)
 

Interest expense, net of capitalized interest
(103,435
)
 
(9,267
)
 

 
(112,702
)
Other income (expense)
5

 
111,650

 

 
111,655

Income (loss) before income taxes
(96,008
)
 
62,232

 
(28,269
)
 
(62,045
)
Income tax benefit (expense)
51,792

 
(33,963
)
 

 
17,829

Net income (loss)
$
(44,216
)
 
$
28,269

 
$
(28,269
)
 
$
(44,216
)

Condensed Consolidating Statement of Operations
 
Nine Months Ended September 30, 2014
 
Parent/
Issuer
 
Combined
Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
 
(In thousands)
Total revenues
$

 
$
1,090,556

 
$

 
$
1,090,556

General and administrative expenses
(17,790
)
 
(50,396
)
 

 
(68,186
)
Other operating expenses

 
(579,718
)
 

 
(579,718
)
Gain on sale of properties

 
187,076

 

 
187,076

Operating income (loss)
(17,790
)
 
647,518

 

 
629,728

Equity in earnings of subsidiaries
410,775

 

 
(410,775
)
 

Interest expense, net of capitalized interest
(110,853
)
 
(7,715
)
 

 
(118,568
)
Other income (expense)
3

 
20,500

 

 
20,503

Income before income taxes
282,135

 
660,303

 
(410,775
)
 
531,663

Income tax benefit (expense)
48,238

 
(249,528
)
 

 
(201,290
)
Net income
$
330,373

 
$
410,775

 
$
(410,775
)
 
$
330,373


Condensed Consolidating Statement of Cash Flows
 
Nine Months Ended September 30, 2015
 
Parent/
Issuer
 
Combined
Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
 
(In thousands)
Net cash provided by operating activities
$
3,323

 
$
277,014

 
$

 
$
280,337

Cash flows from investing activities:
 
 
 
 
 
 
 
Capital expenditures

 
(740,633
)
 

 
(740,633
)
Derivative settlements

 
291,436

 

 
291,436

Other investing activities

 
(1,161
)
 

 
(1,161
)
Net cash used in investing activities

 
(450,358
)
 

 
(450,358
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from sale of common stock
462,833

 

 

 
462,833

Proceeds from revolving credit facility

 
618,000

 

 
618,000

Principal payments on revolving credit facility

 
(938,000
)
 

 
(938,000
)
Other financing activities
(466,175
)
 
459,817

 

 
(6,358
)
Net cash provided by (used in) financing activities
(3,342
)
 
139,817

 

 
136,475

Decrease in cash and cash equivalents
(19
)
 
(33,527
)