Attached files
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EX-32.2 - WRITTEN STATEMENT OF THE CHIEF FINANCIAL OFFICER - WHITING PETROLEUM CORP | wll-20160930xex32_2.htm |
EX-32.1 - WRITTEN STATEMENT OF THE CHIEF EXECUTIVE OFFICER - WHITING PETROLEUM CORP | wll-20160930xex32_1.htm |
EX-31.2 - CERTIFICATION OF THE SENIOR VICE PRESIDENT AND CFO - WHITING PETROLEUM CORP | wll-20160930xex31_2.htm |
EX-31.1 - CERTIFICATION OF THE CHAIRMAN, PRESIDENT AND CEO - WHITING PETROLEUM CORP | wll-20160930xex31_1.htm |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
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: 001‑31899
WHITING PETROLEUM CORPORATION |
|
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(Exact name of Registrant as specified in its charter) |
|
Delaware |
|
20‑0098515 |
(State or other jurisdiction |
|
(I.R.S. Employer |
|
||
1700 Broadway, Suite 2300 |
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80290‑2300 |
(Address of principal executive offices) |
|
(Zip code) |
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(303) 837‑1661 |
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|
(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 ☒ 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, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☒ |
Accelerated filer ☐ |
Non-accelerated filer ☐ |
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 ☒
Number of shares of the Registrant’s common stock outstanding at October 14, 2016: 284,343,983 shares.
Glossary of Certain Definitions
Unless the context otherwise requires, the terms “we”, “us”, “our” or “ours” when used in this Quarterly Report on Form 10-Q refer to Whiting Petroleum Corporation, together with its consolidated subsidiaries. When the context requires, we refer to these entities separately.
We have included below the definitions for certain terms used in this report:
“Bbl” One stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to oil, NGLs and other liquid hydrocarbons.
“Bcf” One billion cubic feet, used in reference to natural gas or CO2.
“BOE” One stock tank barrel of oil equivalent, computed on an approximate energy equivalent basis that one Bbl of crude oil equals six Mcf of natural gas and one Bbl of crude oil equals one Bbl of natural gas liquids.
“CO2” Carbon dioxide.
“completion” The process of preparing an oil and gas wellbore for production through the installation of permanent production equipment, as well as perforation or fracture stimulation as required to optimize production.
“costless collar” An option position where the proceeds from the sale of a call option at its inception fund the purchase of a put option at its inception.
“deterministic method” The method of estimating reserves or resources using a single value for each parameter (from the geoscience, engineering or economic data) in the reserves calculation.
“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” The difference between a benchmark price of oil and natural gas, such as the NYMEX crude oil spot price, and the wellhead price received.
“dry hole” A well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.
“EOR” Enhanced oil recovery.
“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.
“FASB” Financial Accounting Standards Board.
“FASB ASC” The Financial Accounting Standards Board Accounting Standards Codification.
“field” An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. There may be two or more reservoirs in a field that are separated vertically by intervening impervious strata, or laterally by local geologic barriers, or both. Reservoirs that are associated by being in overlapping or adjacent fields may be treated as a single or common operational field. The geological terms “structural feature” and “stratigraphic condition” are intended to identify localized geological features as opposed to the broader terms of basins, trends, provinces, plays, areas of interest, etc.
“GAAP” Generally accepted accounting principles in the United States of America.
“gross acres” or “gross wells” The total acres or wells, as the case may be, in which a working interest is owned.
“ISDA” International Swaps and Derivatives Association, Inc.
“lease operating expense” or “LOE” The expenses of lifting oil or gas from a producing formation to the surface, constituting part of the current operating expenses of a working interest, and also including labor, superintendence, supplies, repairs, short-lived assets, maintenance, allocated overhead costs and other expenses incidental to production, but not including lease acquisition or drilling or completion expenses.
1
“LIBOR” London interbank offered rate.
“MBbl” One thousand barrels of oil, NGLs or other liquid hydrocarbons.
“MBOE” One thousand BOE.
“MBOE/d” One MBOE per day.
“Mcf” One thousand cubic feet, used in reference to natural gas or CO2.
“MMBbl” One million Bbl.
“MMBOE” One million BOE.
“MMcf” One million cubic feet, used in reference to natural gas or CO2.
“MMcf/d” One MMcf per day.
“net acres” or “net wells” The sum of the fractional working interests owned in gross acres or wells, as the case may be.
“net production” The total production attributable to our fractional working interest owned.
“NGL” Natural gas liquid.
“NYMEX” The New York Mercantile Exchange.
“plug-and-perf technology” A horizontal well completion technique in which hydraulic fractures are performed in multiple stages, with each stage utilizing a bridge plug to divert fracture stimulation fluids through the casing perforations into the formation within that stage.
“plugging and abandonment” Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface. Regulations of most states legally require plugging of abandoned wells.
“prospect” A property on which indications of oil or gas have been identified based on available seismic and geological information.
“proved developed reserves” Proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well.
“proved reserves” Those reserves 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.
The area of the reservoir considered as proved includes all of the following:
a. |
The area identified by drilling and limited by fluid contacts, if any, and |
b. |
Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data. |
Reserves that can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when both of the following occur:
a. |
Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based, and |
b. |
The project has been approved for development by all necessary parties and entities, including governmental entities. |
2
Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12-month period before the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
“reasonable certainty” If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as changes due to increased availability of geoscience (geological, geophysical and geochemical) engineering, and economic data are made to estimated ultimate recovery with time, reasonably certain estimated ultimate recovery is much more likely to increase or remain constant than to decrease.
“reserves” Estimated remaining quantities of oil and 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 gas or related substances to market, and all permits and financing required to implement the project.
“reservoir” A porous and permeable underground formation containing a natural accumulation of producible crude oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
“royalty” The amount or fee paid to the owner of mineral rights, expressed as a percentage or fraction of gross income from crude oil or natural gas produced and sold, unencumbered by expenses relating to the drilling, completing or operating of the affected well.
“SEC” The United States Securities and Exchange Commission.
“working interest” The interest in a crude oil and natural gas property (normally a leasehold interest) that gives the owner the right to drill, produce and conduct operations on the property and to a share of production, subject to all royalties, overriding royalties and other burdens and to all costs of exploration, development and operations and all risks in connection therewith.
“workover” Operations on a producing well to restore or increase production.
3
PART I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
WHITING PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share and per share data)
|
||||||
|
September 30, |
December 31, |
||||
|
2016 |
2015 |
||||
ASSETS |
||||||
Current assets: |
||||||
Cash and cash equivalents |
$ |
18,329 |
$ |
16,053 | ||
Accounts receivable trade, net |
216,378 | 332,428 | ||||
Derivative assets |
34,054 | 158,729 | ||||
Prepaid expenses and other |
17,877 | 27,980 | ||||
Total current assets |
286,638 | 535,190 | ||||
Property and equipment: |
||||||
Oil and gas properties, successful efforts method |
13,721,164 | 13,904,525 | ||||
Other property and equipment |
135,788 | 168,277 | ||||
Total property and equipment |
13,856,952 | 14,072,802 | ||||
Less accumulated depreciation, depletion and amortization |
(4,188,500) | (3,323,102) | ||||
Total property and equipment, net |
9,668,452 | 10,749,700 | ||||
Other long-term assets |
110,654 | 104,195 | ||||
TOTAL ASSETS |
$ |
10,065,744 |
$ |
11,389,085 | ||
LIABILITIES AND EQUITY |
||||||
Current liabilities: |
||||||
Accounts payable trade |
$ |
41,382 |
$ |
77,276 | ||
Revenues and royalties payable |
138,075 | 179,601 | ||||
Accrued capital expenditures |
45,702 | 94,105 | ||||
Accrued interest |
9,052 | 62,661 | ||||
Accrued lease operating expenses |
34,260 | 55,291 | ||||
Accrued liabilities and other |
60,598 | 50,261 | ||||
Taxes payable |
45,868 | 47,789 | ||||
Accrued employee compensation and benefits |
23,007 | 32,829 | ||||
Total current liabilities |
397,944 | 599,813 | ||||
Long-term debt |
4,085,629 | 5,197,704 | ||||
Deferred income taxes |
738,432 | 593,792 | ||||
Asset retirement obligations |
164,289 | 155,550 | ||||
Deferred gain on sale |
38,471 | 48,974 | ||||
Other long-term liabilities |
36,960 | 34,664 | ||||
Total liabilities |
5,461,725 | 6,630,497 | ||||
Commitments and contingencies |
||||||
Equity: |
||||||
Common stock, $0.001 par value, 600,000,000 shares authorized; 289,676,901 issued and 284,343,983 outstanding as of September 30, 2016 and 206,441,303 issued and 204,147,647 outstanding as of December 31, 2015 |
|
|
290 |
|
|
206 |
Additional paid-in capital |
5,671,074 | 4,659,868 | ||||
Retained earnings (accumulated deficit) |
(1,075,311) | 90,530 | ||||
Total Whiting shareholders' equity |
4,596,053 | 4,750,604 | ||||
Noncontrolling interest |
7,966 | 7,984 | ||||
Total equity |
4,604,019 | 4,758,588 | ||||
TOTAL LIABILITIES AND EQUITY |
$ |
10,065,744 |
$ |
11,389,085 | ||
|
The accompanying notes are an integral part of these consolidated financial statements.
4
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share data)
|
||||||||||||
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Three Months Ended |
Nine Months Ended |
||||||||||
|
September 30, |
September 30, |
||||||||||
|
2016 |
2015 |
2016 |
2015 |
||||||||
REVENUES AND OTHER INCOME: |
||||||||||||
Oil, NGL and natural gas sales |
$ |
315,554 |
$ |
504,155 |
$ |
942,287 |
$ |
1,674,530 | ||||
Loss on sale of properties |
(189,934) | (359) | (193,729) | (61,937) | ||||||||
Amortization of deferred gain on sale |
3,490 | 3,666 | 11,111 | 13,240 | ||||||||
Interest income and other |
115 | 579 | 1,146 | 1,449 | ||||||||
Total revenues and other income |
129,225 | 508,041 | 760,815 | 1,627,282 | ||||||||
COSTS AND EXPENSES: |
||||||||||||
Lease operating expenses |
87,982 | 125,575 | 307,530 | 435,315 | ||||||||
Production taxes |
26,372 | 44,303 | 79,125 | 145,410 | ||||||||
Depreciation, depletion and amortization |
284,569 | 316,147 | 900,877 | 922,077 | ||||||||
Exploration and impairment |
24,293 | 1,690,679 | 85,565 | 1,829,160 | ||||||||
Goodwill impairment |
- |
869,713 |
- |
869,713 | ||||||||
General and administrative |
33,908 | 44,821 | 112,227 | 133,788 | ||||||||
Interest expense |
84,578 | 84,551 | 245,145 | 247,984 | ||||||||
(Gain) loss on extinguishment of debt |
(46,541) |
- |
42,236 | 5,634 | ||||||||
Derivative gain, net |
(30,432) | (207,783) | (28,432) | (115,215) | ||||||||
Total costs and expenses |
464,729 | 2,968,006 | 1,744,273 | 4,473,866 | ||||||||
LOSS BEFORE INCOME TAXES |
(335,504) | (2,459,965) | (983,458) | (2,846,584) | ||||||||
INCOME TAX EXPENSE (BENEFIT): |
||||||||||||
Current |
113 | (422) | 115 | (357) | ||||||||
Deferred |
357,438 | (594,425) | 182,286 | (725,686) | ||||||||
Total income tax expense (benefit) |
357,551 | (594,847) | 182,401 | (726,043) | ||||||||
NET LOSS |
(693,055) | (1,865,118) | (1,165,859) | (2,120,541) | ||||||||
Net loss attributable to noncontrolling interests |
3 | 10 | 18 | 48 | ||||||||
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS |
|
$ |
(693,052) |
|
$ |
(1,865,108) |
|
$ |
(1,165,841) |
|
$ |
(2,120,493) |
LOSS PER COMMON SHARE: |
||||||||||||
Basic |
$ |
(2.47) |
$ |
(9.14) |
$ |
(4.92) |
$ |
(11.01) | ||||
Diluted |
$ |
(2.47) |
$ |
(9.14) |
$ |
(4.92) |
$ |
(11.01) | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING: |
||||||||||||
Basic |
280,418 | 204,143 | 237,100 | 192,549 | ||||||||
Diluted |
280,418 | 204,143 | 237,100 | 192,549 | ||||||||
|
||||||||||||
The accompanying notes are an integral part of these consolidated financial statements. |
5
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
|
||||||
|
Nine Months Ended |
|||||
|
September 30, |
|||||
|
2016 |
2015 |
||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||
Net loss |
$ |
(1,165,859) |
$ |
(2,120,541) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation, depletion and amortization |
900,877 | 922,077 | ||||
Deferred income tax expense (benefit) |
182,286 | (725,686) | ||||
Amortization of debt issuance costs, debt discount and debt premium |
72,389 | 33,058 | ||||
Stock-based compensation |
19,512 | 20,786 | ||||
Amortization of deferred gain on sale |
(11,111) | (13,240) | ||||
Loss on sale of properties |
193,729 | 61,937 | ||||
Undeveloped leasehold and oil and gas property impairments |
45,906 | 1,721,160 | ||||
Goodwill impairment |
- |
869,713 | ||||
Exploratory dry hole costs |
37 | 867 | ||||
Loss on extinguishment of debt |
42,236 | 5,634 | ||||
Non-cash derivative loss |
102,100 | 31,831 | ||||
Other, net |
(4,732) | (4,914) | ||||
Changes in current assets and liabilities: |
||||||
Accounts receivable trade, net |
119,622 | 188,341 | ||||
Prepaid expenses and other |
9,063 | 45,787 | ||||
Accounts payable trade and accrued liabilities |
(104,579) | (59,181) | ||||
Revenues and royalties payable |
(41,336) | (75,810) | ||||
Taxes payable |
(1,885) | (563) | ||||
Net cash provided by operating activities |
358,255 | 901,256 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||
Drilling and development capital expenditures |
(434,794) | (2,146,681) | ||||
Acquisition of oil and gas properties |
(3,605) | (25,018) | ||||
Other property and equipment |
(6,744) | (7,123) | ||||
Proceeds from sale of oil and gas properties |
304,291 | 338,507 | ||||
Net cash used in investing activities |
(140,852) | (1,840,315) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||
Borrowings under credit agreement |
1,050,000 | 2,450,000 | ||||
Repayments of borrowings under credit agreement |
(1,200,000) | (3,850,000) | ||||
Issuance of common stock |
- |
1,111,148 | ||||
Issuance of 1.25% Convertible Senior Notes due 2020 |
- |
1,250,000 | ||||
Issuance of 6.25% Senior Notes due 2023 |
- |
750,000 | ||||
Partial redemption of 8.125% Senior Notes due 2019 |
- |
(2,475) | ||||
Redemption of 5.5% Senior Notes due 2021 |
- |
(353,500) | ||||
Redemption of 5.5% Senior Notes due 2022 |
- |
(404,000) | ||||
Early conversion payments for New Convertible Notes |
(41,919) |
- |
||||
Debt and equity issuance costs |
(22,499) | (54,420) | ||||
Proceeds from stock options exercised |
- |
3,048 | ||||
Restricted stock used for tax withholdings |
(709) | (1,111) | ||||
Net cash provided by (used in) financing activities |
$ |
(215,127) |
$ |
898,690 | ||
|
||||||
The accompanying notes are an integral part of these consolidated financial statements. |
(Continued) |
6
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
|
||||||
|
Nine Months Ended |
|||||
|
September 30, |
|||||
|
2016 |
2015 |
||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
$ |
2,276 |
$ |
(40,369) | ||
CASH AND CASH EQUIVALENTS: |
||||||
Beginning of period |
16,053 | 78,100 | ||||
End of period |
$ |
18,329 |
$ |
37,731 | ||
NONCASH INVESTING ACTIVITIES: |
||||||
Accrued capital expenditures related to property additions |
$ |
62,416 |
$ |
125,893 | ||
NONCASH FINANCING ACTIVITIES (1) |
||||||
|
||||||
The accompanying notes are an integral part of these consolidated financial statements. |
(Concluded) |
(1) |
Refer to the “Long-Term Debt” footnote in the notes to consolidated financial statements for a discussion of (i) the Company’s exchange of senior notes and senior subordinated notes for convertible notes and the subsequent conversions of such notes, and (ii) the Company’s exchange of senior notes, convertible senior notes and senior subordinated notes for mandatory convertible notes and the subsequent conversions of such notes. |
7
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (unaudited)
(in thousands)
|
||||||||||||||||||||
|
Retained |
Total |
||||||||||||||||||
|
Additional |
Earnings |
Whiting |
|||||||||||||||||
|
Common Stock |
Paid-in |
(Accumulated |
Shareholders' |
Noncontrolling |
Total |
||||||||||||||
|
Shares |
Amount |
Capital |
Deficit) |
Equity |
Interest |
Equity |
|||||||||||||
BALANCES-January 1, 2015 |
168,346 |
$ |
168 |
$ |
3,385,094 |
$ |
2,309,712 |
$ |
5,694,974 |
$ |
8,070 |
$ |
5,703,044 | |||||||
Net loss |
- |
- |
- |
(2,120,493) | (2,120,493) | (48) | (2,120,541) | |||||||||||||
Issuance of common stock |
37,000 | 37 | 1,100,000 |
- |
1,100,037 |
- |
1,100,037 | |||||||||||||
Equity component of 2020 Convertible Senior Notes, net |
|
- |
|
|
- |
|
|
144,755 |
|
|
- |
|
|
144,755 |
|
|
- |
|
|
144,755 |
Exercise of stock options |
149 |
- |
3,048 |
- |
3,048 |
- |
3,048 | |||||||||||||
Restricted stock issued |
1,216 | 1 | (1) |
- |
- |
- |
- |
|||||||||||||
Restricted stock forfeited |
(217) |
- |
- |
- |
- |
- |
- |
|||||||||||||
Restricted stock used for tax withholdings |
(38) |
- |
(1,111) |
- |
(1,111) |
- |
(1,111) | |||||||||||||
Stock-based compensation |
- |
- |
20,786 |
- |
20,786 |
- |
20,786 | |||||||||||||
BALANCES-September 30, 2015 |
206,456 |
$ |
206 |
$ |
4,652,571 |
$ |
189,219 |
$ |
4,841,996 |
$ |
8,022 |
$ |
4,850,018 | |||||||
|
||||||||||||||||||||
BALANCES-January 1, 2016 |
206,441 |
$ |
206 |
$ |
4,659,868 |
$ |
90,530 |
$ |
4,750,604 |
$ |
7,984 |
$ |
4,758,588 | |||||||
Net loss |
- |
- |
- |
(1,165,841) | (1,165,841) | (18) | (1,165,859) | |||||||||||||
Issuance of common stock upon conversion of convertible notes |
|
79,920 |
|
|
80 |
|
|
822,936 |
|
|
- |
|
|
823,016 |
|
|
- |
|
|
823,016 |
Reduction of equity component of 2020 Convertible Senior Notes upon extinguishment, net |
|
- |
|
|
- |
|
|
(63,330) |
|
|
- |
|
|
(63,330) |
|
|
- |
|
|
(63,330) |
Recognition of beneficial conversion features on convertible notes |
|
- |
|
|
- |
|
|
232,801 |
|
|
- |
|
|
232,801 |
|
|
- |
|
|
232,801 |
Restricted stock issued |
4,021 | 4 | (4) |
- |
- |
- |
- |
|||||||||||||
Restricted stock forfeited |
(615) |
- |
- |
- |
- |
- |
- |
|||||||||||||
Restricted stock used for tax withholdings |
(90) |
- |
(709) |
- |
(709) |
- |
(709) | |||||||||||||
Stock-based compensation |
- |
- |
19,512 |
- |
19,512 |
- |
19,512 | |||||||||||||
BALANCES-September 30, 2016 |
289,677 |
$ |
290 |
$ |
5,671,074 |
$ |
(1,075,311) |
$ |
4,596,053 |
$ |
7,966 |
$ |
4,604,019 | |||||||
|
||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements. |
8
WHITING PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
Description of Operations—Whiting Petroleum Corporation, a Delaware corporation, is an independent oil and gas company engaged in the development, acquisition, exploration and production of crude oil, NGLs and natural gas primarily in the Rocky Mountains region of the United States. Unless otherwise specified or the context otherwise requires, all references in these notes to “Whiting” or the “Company” are to Whiting Petroleum Corporation and its consolidated subsidiaries, Whiting Oil and Gas Corporation (“Whiting Oil and Gas”), Whiting US Holding Company, Whiting Canadian Holding Company ULC (formerly Kodiak Oil & Gas Corp., “Kodiak”), Whiting Resources Corporation (formerly Kodiak Oil & Gas (USA) Inc.) and Whiting Programs, Inc.
Consolidated Financial Statements—The unaudited consolidated financial statements include the accounts of Whiting Petroleum Corporation and its consolidated subsidiaries. Investments in entities which give Whiting significant influence, but not control, over the investee are accounted for using the equity method. Under the equity method, investments are stated at cost plus the Company’s equity in undistributed earnings and losses. All intercompany balances and transactions have been eliminated upon consolidation. These financial statements have been prepared in accordance with GAAP and the SEC rules and regulations for interim financial reporting. In the opinion of management, the accompanying financial statements include all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly, in all material respects, the Company’s interim results. However, operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. The consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q should be read in conjunction with Whiting’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2015. Except as disclosed herein, there have been no material changes to the information disclosed in the notes to consolidated financial statements included in the Company’s 2015 Annual Report on Form 10‑K.
Earnings Per Share—Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each period. Diluted earnings per common share is calculated by dividing adjusted net income available to common shareholders by the weighted average number of diluted common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for the diluted earnings per share calculations consist of (i) convertible debt to be settled in shares, using the if-converted method and (ii) unvested restricted stock awards, outstanding stock options and contingently issuable shares of convertible debt to be settled in cash, all using the treasury stock method. When a loss from continuing operations exists, all dilutive securities and potentially dilutive securities are anti-dilutive and are therefore excluded from the computation of diluted earnings per share.
Adopted and Recently Issued Accounting Pronouncements—In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements To Employee Share-Based Payment Accounting (“ASU 2016-09”). The objective of this ASU is to simplify several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Portions of this ASU must be applied prospectively while other portions may be applied either prospectively or retrospectively. Early adoption is permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting ASU 2016‑09.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”). The objective of this ASU is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and should be applied using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting ASU 2016‑02.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014‑09”). The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The FASB subsequently issued ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, which deferred the effective date of ASU 2014-09 and provided additional implementation guidance. These ASUs are effective for fiscal years, and interim periods within those years, beginning after December 31, 2017. The standards permit retrospective application using either of the following methodologies: (i) restatement of each prior reporting period presented or (ii) recognition of a cumulative-effect adjustment as of the date of initial application. The Company is currently evaluating the impact of adopting these standards on its consolidated financial statements, as well as the transition method to be applied.
9
2. OIL AND GAS PROPERTIES
Net capitalized costs related to the Company’s oil and gas producing activities at September 30, 2016 and December 31, 2015 are as follows (in thousands):
|
||||||
|
September 30, |
December 31, |
||||
|
2016 |
2015 |
||||
Proved leasehold costs |
$ |
3,276,456 |
$ |
3,206,237 | ||
Unproved leasehold costs |
482,042 | 689,754 | ||||
Costs of completed wells and facilities |
9,436,415 | 9,503,020 | ||||
Wells and facilities in progress |
526,251 | 505,514 | ||||
Total oil and gas properties, successful efforts method |
13,721,164 | 13,904,525 | ||||
Accumulated depletion |
(4,138,786) | (3,279,156) | ||||
Oil and gas properties, net |
$ |
9,582,378 |
$ |
10,625,369 |
3. ACQUISITIONS AND DIVESTITURES
2016 Acquisitions and Divestitures
In July 2016, the Company completed the sale of its interest in its enhanced oil recovery project in the North Ward Estes field in Ward and Winkler counties of Texas, including Whiting’s interest in certain CO2 properties in the McElmo Dome field in Colorado, two contracts for the supply and delivery of CO2, and certain other related assets and liabilities (the “North Ward Estes Properties”) for a cash purchase price of $300 million (before closing adjustments). The sale was effective July 1, 2016 and resulted in a pre-tax loss on sale of $188 million. The Company used the net proceeds from the sale to repay a portion of the debt outstanding under its credit agreement.
In addition to the cash purchase price, the buyer has agreed to pay Whiting $100,000 for every $0.01 that, as of June 28, 2018, the average NYMEX crude oil futures contract price for each month from August 2018 through July 2021 is above $50.00/Bbl up to a maximum amount of $100 million (the “Contingent Payment”). The Contingent Payment will be made at the option of the buyer either in cash on July 31, 2018 or in the form of a secured promissory note, accruing interest at 8% per annum with a maturity date of July 29, 2022. The Company has determined that this Contingent Payment is an embedded derivative and has reflected it at fair value in the consolidated financial statements. The fair value of the Contingent Payment as of the closing date of this sale transaction was $39 million. Refer to the “Derivative Financial Instruments” and “Fair Value Measurements” footnotes for more information on this embedded derivative instrument.
There were no significant acquisitions during the nine months ended September 30, 2016.
2015 Acquisitions and Divestitures
In December 2015, the Company completed the sale of a fresh water delivery system, a produced water gathering system and four saltwater disposal wells located in Weld County, Colorado, effective December 16, 2015, for aggregate sales proceeds of $75 million (before closing adjustments).
In June 2015, the Company completed the sale of its interests in certain non-core oil and gas wells, effective June 1, 2015, for aggregate sales proceeds of $150 million (before closing adjustments) resulting in a pre-tax loss on sale of $118 million. The properties included over 2,000 gross wells in 132 fields across 10 states.
In April 2015, the Company completed the sale of its interests in certain non-core oil and gas wells, effective May 1, 2015, for aggregate sales proceeds of $108 million (before closing adjustments) resulting in a pre-tax gain on sale of $29 million. The properties are located in 187 fields across 14 states, and predominately consist of assets that were previously included in the underlying properties of Whiting USA Trust I.
Also during the year ended December 31, 2015, the Company completed several immaterial divestiture transactions for the sale of its interests in certain non-core oil and gas wells and undeveloped acreage, for aggregate sales proceeds of $176 million (before closing adjustments) resulting in a pre-tax gain on sale of $28 million.
There were no significant acquisitions during the year ended December 31, 2015.
10
4. LONG-TERM DEBT
Long-term debt consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):
|
||||||
|
September 30, |
December 31, |
||||
|
2016 |
2015 |
||||
Credit agreement |
$ |
650,000 |
$ |
800,000 | ||
6.5% Senior Subordinated Notes due 2018 |
275,121 | 350,000 | ||||
6.5% Mandatory Convertible Senior Subordinated Notes due 2018 |
5,975 |
- |
||||
5% Senior Notes due 2019 |
961,409 | 1,100,000 | ||||
5% Mandatory Convertible Senior Notes due 2019 |
4,651 |
- |
||||
1.25% Convertible Senior Notes due 2020 |
562,075 | 1,250,000 | ||||
1.25% Mandatory Convertible Senior Notes due 2020, Series 1 |
380,385 |
- |
||||
1.25% Mandatory Convertible Senior Notes due 2020, Series 2 |
87,404 |
- |
||||
5.75% Senior Notes due 2021 |
873,609 | 1,200,000 | ||||
5.75% Mandatory Convertible Senior Notes due 2021 |
125,218 |
- |
||||
6.25% Senior Notes due 2023 |
408,296 | 750,000 | ||||
6.25% Mandatory Convertible Senior Notes due 2023 |
117,333 |
- |
||||
Total principal |
4,451,476 | 5,450,000 | ||||
Unamortized debt discounts and premiums |
(331,338) | (203,082) | ||||
Unamortized debt issuance costs on notes |
(34,509) | (49,214) | ||||
Total long-term debt |
$ |
4,085,629 |
$ |
5,197,704 |
Credit Agreement—Whiting Oil and Gas, the Company’s wholly-owned subsidiary, has a credit agreement with a syndicate of banks that as of September 30, 2016 had a borrowing base of $2.6 billion, with aggregate commitments of $2.5 billion. Upon closing of the sale of the North Ward Estes Properties on July 27, 2016, the borrowing base was reduced from $2.75 billion to $2.6 billion. In October 2016, the borrowing base under the facility was reduced to $2.5 billion in connection with the November 1, 2016 regular borrowing base redetermination, with no change to the aggregate commitments of $2.5 billion. As of September 30, 2016, the Company had $1.8 billion of available borrowing capacity, which was net of $650 million in borrowings and $11 million in letters of credit outstanding.
The borrowing base under the credit agreement is determined at the discretion of the lenders, based on the collateral value of the Company’s proved reserves that have been mortgaged to such lenders, and is subject to regular redeterminations on May 1 and November 1 of each year, as well as special redeterminations described in the credit agreement, in each case which may reduce the amount of the borrowing base. Upon a redetermination of the borrowing base, either on a periodic or special redetermination date, if borrowings in excess of the revised borrowing capacity were outstanding, the Company could be forced to immediately repay a portion of its debt outstanding under the credit agreement. The credit agreement permits the Company to dispose of its ownership interests in certain gas gathering and processing plants located in North Dakota without reducing the borrowing base.
A portion of the revolving credit facility in an aggregate amount not to exceed $50 million may be used to issue letters of credit for the account of Whiting Oil and Gas or other designated subsidiaries of the Company. As of September 30, 2016, $39 million was available for additional letters of credit under the agreement.
The credit agreement provides for interest only payments until December 2019, when the credit agreement expires and all outstanding borrowings are due. Interest under the revolving credit facility accrues at the Company’s option at either (i) a base rate for a base rate loan plus the margin in the table below, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.5% per annum, or an adjusted LIBOR rate plus 1.0% per annum, or (ii) an adjusted LIBOR rate for a Eurodollar loan plus the margin in the table below. Additionally, the Company also incurs commitment fees as set forth in the table below on the unused portion of the aggregate commitments of the lenders under the revolving credit facility, which are included as a component of interest expense. At September 30, 2016 and December 31, 2015, the weighted average interest rate on the outstanding principal balance under the credit agreement was 2.9% and 1.9%, respectively.
11
|
||||||
|
Applicable |
Applicable |
||||
|
Margin for Base |
Margin for |
Commitment |
|||
Ratio of Outstanding Borrowings to Borrowing Base |
Rate Loans |
Eurodollar Loans |
Fee |
|||
Less than 0.25 to 1.0 |
1.00% |
2.00% |
0.50% |
|||
Greater than or equal to 0.25 to 1.0 but less than 0.50 to 1.0 |
1.25% |
2.25% |
0.50% |
|||
Greater than or equal to 0.50 to 1.0 but less than 0.75 to 1.0 |
1.50% |
2.50% |
0.50% |
|||
Greater than or equal to 0.75 to 1.0 but less than 0.90 to 1.0 |
1.75% |
2.75% |
0.50% |
|||
Greater than or equal to 0.90 to 1.0 |
2.00% |
3.00% |
0.50% |
The credit agreement contains restrictive covenants that may limit the Company’s ability to, among other things, incur additional indebtedness, sell assets, make loans to others, make investments, enter into mergers, enter into hedging contracts, incur liens and engage in certain other transactions without the prior consent of its lenders. However, the credit agreement permits the Company and certain of its subsidiaries to issue second lien indebtedness of up to $1.0 billion subject to certain conditions and limitations. Except for limited exceptions, the credit agreement also restricts the Company’s ability to make any dividend payments or distributions on its common stock. These restrictions apply to all of the Company’s restricted subsidiaries (as defined in the credit agreement). As of September 30, 2016, there were no retained earnings free from restrictions. The credit agreement requires the Company, as of the last day of any quarter, to maintain the following ratios (as defined in the credit agreement): (i) a consolidated current assets to consolidated current liabilities ratio (which includes an add back of the available borrowing capacity under the credit agreement) of not less than 1.0 to 1.0, (ii) a total senior secured debt to the last four quarters’ EBITDAX ratio of less than 3.0 to 1.0 during the Interim Covenant Period (defined below), and thereafter a total debt to EBITDAX ratio of less than 4.0 to 1.0, and (iii) a ratio of the last four quarters’ EBITDAX to consolidated cash interest charges of not less than 2.25 to 1.0 during the Interim Covenant Period. Under the credit agreement, the “Interim Covenant Period” is defined as the period from June 30, 2015 until the earlier of (a) April 1, 2018 or (b) the commencement of an investment-grade debt rating period (as defined in the credit agreement). The Company was in compliance with its covenants under the credit agreement as of September 30, 2016.
The obligations of Whiting Oil and Gas under the credit agreement are collateralized by a first lien on substantially all of Whiting Oil and Gas’ and Whiting Resource Corporation’s properties. The Company has guaranteed the obligations of Whiting Oil and Gas under the credit agreement and has pledged the stock of its subsidiaries as security for its guarantee.
Senior Notes and Senior Subordinated Notes—In September 2010, the Company issued at par $350 million of 6.5% Senior Subordinated Notes due October 2018 (the “2018 Senior Subordinated Notes”).
In September 2013, the Company issued at par $1.1 billion of 5% Senior Notes due March 2019 (the “2019 Senior Notes”) and $800 million of 5.75% Senior Notes due March 2021, and issued at 101% of par an additional $400 million of 5.75% Senior Notes due March 2021 (collectively, the “2021 Senior Notes”). The debt premium recorded in connection with the issuance of the 2021 Senior Notes is being amortized to interest expense over the term of the notes using the effective interest method, with an effective interest rate of 5.5% per annum.
In March 2015, the Company issued at par $750 million of 6.25% Senior Notes due April 2023 (the “2023 Senior Notes” and together with the 2019 Senior Notes and 2021 Senior Notes, the “Senior Notes”).
Exchange of Senior Notes and Senior Subordinated Notes for Convertible Notes. On March 23, 2016, the Company completed the exchange of $477 million aggregate principal amount of Senior Notes and 2018 Senior Subordinated Notes, consisting of (i) $49 million aggregate principal amount of its 2018 Senior Subordinated Notes, (ii) $97 million aggregate principal amount of its 2019 Senior Notes, (iii) $152 million aggregate principal amount of its 2021 Senior Notes, and (iv) $179 million aggregate principal amount of its 2023 Senior Notes, for (i) $49 million aggregate principal amount of new 6.5% Convertible Senior Subordinated Notes due 2018 (the “2018 Convertible Senior Subordinated Notes”), (ii) $97 million aggregate principal amount of new 5% Convertible Senior Notes due 2019 (the “2019 Convertible Senior Notes”), (iii) $152 million aggregate principal amount of new 5.75% Convertible Senior Notes due 2021 (the “2021 Convertible Senior Notes”), and (iv) $179 million aggregate principal amount of new 6.25% Convertible Senior Notes due 2023 (the “2023 Convertible Senior Notes” and together with the 2018 Convertible Senior Subordinated Notes, the 2019 Convertible Senior Notes and the 2021 Convertible Senior Notes, the “New Convertible Notes”).
The redemption provisions, covenants, interest payments and maturity terms applicable to each series of New Convertible Notes were substantially identical to those applicable to the corresponding series of Senior Notes and 2018 Senior Subordinated Notes.
This exchange transaction was accounted for as an extinguishment of debt for each portion of the Senior Notes and 2018 Senior Subordinated Notes that was exchanged. As a result, Whiting recognized a $91 million gain on extinguishment of debt, which is net of a $4 million non-cash charge for the acceleration of unamortized debt issuance costs and debt premium on the original notes. Each series of New Convertible Notes was recorded at fair value upon issuance, with the difference between the principal amount of the
12
notes and their fair values, totaling $95 million, recorded as a debt discount. The aggregate debt discount of $185 million recorded upon issuance of the New Convertible Notes also included $90 million related to the fair value of the holders’ conversion options, which were embedded derivatives that met the criteria to be bifurcated from their host contracts and accounted for separately. Refer to the “Derivative Financial Instruments” and “Fair Value Measurements” footnotes for more information on these embedded derivatives. The debt discount and transaction costs of $8 million attributable to the New Convertible Notes issuance were being amortized to interest expense over the respective terms of the notes using the effective interest method.
The New Convertible Notes were convertible, at the option of the holders, into shares of the Company’s common stock at an initial conversion rate of 86.9565 common shares per $1,000 principal amount of the notes (representing an initial conversion price of $11.50 per share) for the 2018 Convertible Senior Subordinated Notes, the 2021 Convertible Senior Notes and the 2023 Convertible Senior Notes and an initial conversion rate of 90.9091 common shares per $1,000 principal amount of the notes (representing an initial conversion price of $11.00 per share) for the 2019 Convertible Senior Notes. Upon exercise of this option, the holder was entitled to receive an early conversion cash payment as well as a cash payment of all accrued and unpaid interest through the conversion date.
During the second quarter of 2016, holders of the New Convertible Notes voluntarily converted all $477 million aggregate principal amount of the New Convertible Notes for approximately 41.8 million shares of the Company’s common stock. Upon conversion, the Company paid $46 million in cash consisting of early conversion payments to the holders of the notes, as well as all accrued and unpaid interest on such notes. As a result of the conversions, Whiting recognized a $188 million loss on extinguishment of debt, which consisted of a non-cash charge for the acceleration of unamortized debt issuance costs and debt discount on the notes. As of June 30, 2016, no New Convertible Notes remained outstanding.
Exchange of Senior Notes and Senior Subordinated Notes for Mandatory Convertible Notes. On July 1, 2016, the Company completed the exchange of $405 million aggregate principal amount of Senior Notes and 2018 Senior Subordinated Notes for the same aggregate principal amount of new mandatory convertible senior notes and mandatory convertible senior subordinated notes. Refer to “Exchange of Senior Notes, Convertible Senior Notes and Senior Subordinated Notes for Mandatory Convertible Notes” below for more information on these exchange transactions and the terms of the new mandatory convertible notes.
Kodiak Senior Notes. In conjunction with the acquisition of Kodiak Oil & Gas Corp. (the “Kodiak Acquisition”) in December 2014, Whiting US Holding Company, a wholly-owned subsidiary of the Company, became a co-issuer of Kodiak’s $800 million of 8.125% Senior Notes due December 2019 (the “2019 Kodiak Notes”), $350 million of 5.5% Senior Notes due January 2021 (the “2021 Kodiak Notes”), and $400 million of 5.5% Senior Notes due February 2022 (the “2022 Kodiak Notes” and together with the 2019 Kodiak Notes and the 2021 Kodiak Notes, the “Kodiak Notes”).
In January 2015, Whiting offered to repurchase at 101% of par all $1,550 million principal amount of Kodiak Notes then outstanding. In March 2015, Whiting paid $760 million to repurchase $2 million aggregate principal amount of the 2019 Kodiak Notes, $346 million aggregate principal amount of the 2021 Kodiak Notes and $399 million aggregate principal amount of the 2022 Kodiak Notes, which payment consisted of the 101% redemption price and all accrued and unpaid interest on such notes. In May 2015, Whiting paid an additional $5 million to repurchase the remaining $4 million aggregate principal amount of the 2021 Kodiak Notes and $1 million aggregate principal amount of the 2022 Kodiak Notes, which payment consisted of the 101% redemption price and all accrued and unpaid interest on such notes. In December 2015, Whiting paid $834 million to repurchase the remaining $798 million aggregate principal amount of the 2019 Kodiak Notes, which payment consisted of the 104.063% redemption price and all accrued and unpaid interest on such notes. As a result of the repurchases, Whiting recognized an $18 million loss on extinguishment of debt, which consisted of a $40 million cash charge related to the redemption premium on the Kodiak Notes, partially offset by a $22 million non-cash credit related to the acceleration of unamortized debt premiums on such notes. As of December 31, 2015, no Kodiak Notes remained outstanding.
2020 Convertible Senior Notes—In March 2015, the Company issued at par $1,250 million of 1.25% Convertible Senior Notes due April 2020 (the “2020 Convertible Senior Notes”) for net proceeds of $1.2 billion, net of initial purchasers’ fees of $25 million. On June 29, 2016, the Company exchanged $129 million aggregate principal amount of its 2020 Convertible Senior Notes for the same aggregate principal amount of new mandatory convertible senior notes, and on July 1, 2016, the Company exchanged $559 million aggregate principal amount of its 2020 Convertible Senior Notes for the same aggregate principal amount of new mandatory convertible senior notes. Refer to “Exchange of Senior Notes, Convertible Senior Notes and Senior Subordinated Notes for Mandatory Convertible Notes” below for more information on these exchange transactions and the terms of the new mandatory convertible notes.
For the remaining $562 million aggregate principal amount of 2020 Convertible Senior Notes, the Company has the option to settle conversions of these notes with cash, shares of common stock or a combination of cash and common stock at its election. The Company’s intent is to settle the principal amount of the 2020 Convertible Senior Notes in cash upon conversion. Prior to January 1, 2020, the 2020 Convertible Senior Notes will be convertible at the holder’s option only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the
13
last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the 2020 Convertible Senior Notes for each trading day of the measurement period is less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after January 1, 2020, the 2020 Convertible Senior Notes will be convertible at any time until the second scheduled trading day immediately preceding the April 1, 2020 maturity date of the notes. The notes will be convertible at an initial conversion rate of 25.6410 shares of Whiting’s common stock per $1,000 principal amount of the notes, which is equivalent to an initial conversion price of approximately $39.00. The conversion rate will be subject to adjustment in some events. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase, in certain circumstances, the conversion rate for a holder who elects to convert its 2020 Convertible Senior Notes in connection with such corporate event. As of September 30, 2016, none of the contingent conditions allowing holders of the 2020 Convertible Senior Notes to convert these notes had been met.
Upon issuance, the Company separately accounted for the liability and equity components of the 2020 Convertible Senior Notes. The liability component was recorded at the estimated fair value of a similar debt instrument without the conversion feature. The difference between the principal amount of the 2020 Convertible Senior Notes and the estimated fair value of the liability component was recorded as a debt discount and is being amortized to interest expense over the term of the notes using the effective interest method, with an effective interest rate of 5.6% per annum. The fair value of the 2020 Convertible Senior Notes as of the issuance date was estimated at $1.0 billion, resulting in a debt discount at inception of $238 million. The equity component, representing the value of the conversion option, was computed by deducting the fair value of the liability component from the initial proceeds of the 2020 Convertible Senior Notes issuance. This equity component was recorded, net of deferred taxes and issuance costs, in additional paid-in capital within shareholders’ equity, and will not be remeasured as long as it continues to meet the conditions for equity classification.
Transaction costs related to the 2020 Convertible Senior Notes issuance were allocated to the liability and equity components based on their relative fair values. Issuance costs attributable to the liability component were recorded as a reduction to the carrying value of long-term debt on the consolidated balance sheet and are being amortized to expense over the term of the notes using the effective interest method. Issuance costs attributable to the equity component were recorded as a charge to additional paid-in capital within shareholders’ equity.
The 2020 Convertible Senior Notes consist of the following at September 30, 2016 and December 31, 2015 (in thousands):
|
||||||
|
September 30, |
December 31, |
||||
|
2016 |
2015 |
||||
Liability component: |
||||||
Principal |
$ |
562,075 |
$ |
1,250,000 | ||
Less: unamortized note discount |
(77,680) | (205,572) | ||||
Less: unamortized debt issuance costs |
(6,436) | (17,277) | ||||
Net carrying value |
$ |
477,959 |
$ |
1,027,151 | ||
Equity component (1) |
$ |
136,522 |
$ |
237,500 |
(1) |
Recorded in additional paid-in capital, net of $5 million of issuance costs and $50 million of deferred taxes as of September 30, 2016 and $5 million of issuance costs and $88 million of deferred taxes as of December 31, 2015. |
The following table presents the interest expense recognized on the 2020 Convertible Senior Notes related to the stated interest rate and amortization of the debt discount for the three and nine months ended September 30, 2016 and 2015 (in thousands):
|
||||||||||||
|
Three Months Ended |
Nine Months Ended |
||||||||||
|
September 30, |
September 30, |
||||||||||
|
2016 |
2015 |
2016 |
2015 |
||||||||
Interest expense on 2020 Convertible Senior Notes |
$ |
6,745 |
$ |
14,395 |
$ |
36,068 |
$ |
29,276 |
Mandatory Convertible Notes
Exchange of Senior Notes, Convertible Senior Notes and Senior Subordinated Notes for Mandatory Convertible Notes. On June 29, 2016, the Company completed the exchange of $129 million aggregate principal amount of its 2020 Convertible Senior Notes for the same aggregate principal amount of new 1.25% Mandatory Convertible Senior Notes due 2020, Series 2 (the “2020 Mandatory
14
Convertible Notes, Series 2”). On July 1, 2016, the Company completed the exchange of $964 million aggregate principal amount of Senior Notes, 2020 Convertible Senior Notes and 2018 Senior Subordinated Notes, consisting of (i) $26 million aggregate principal amount of its 2018 Senior Subordinated Notes, (ii) $42 million aggregate principal amount of its 2019 Senior Notes, (iii) $559 million aggregate principal amount of its 2020 Convertible Senior Notes, (iv) $174 million aggregate principal amount of its 2021 Senior Notes, and (v) $163 million aggregate principal amount of its 2023 Senior Notes, for (i) $26 million aggregate principal amount of new 6.5% Mandatory Convertible Senior Subordinated Notes due 2018 (the “2018 Mandatory Convertible Notes”), (ii) $42 million aggregate principal amount of new 5% Mandatory Convertible Senior Notes due 2019 (the “2019 Mandatory Convertible Notes”), (iii) $559 million aggregate principal amount of new 1.25% Mandatory Convertible Senior Notes due 2020, Series 1 (the “2020 Mandatory Convertible Notes, Series 1”, and together with the 2020 Mandatory Convertible Notes, Series 2, the “2020 Mandatory Convertible Notes”), (iv) $174 million aggregate principal amount of new 5.75% Mandatory Convertible Senior Notes due 2021 (the “2021 Mandatory Convertible Notes”), and (v) $163 million aggregate principal amount of new 6.25% Mandatory Convertible Senior Notes due 2023 (the “2023 Mandatory Convertible Notes” and, together with the 2018 Mandatory Convertible Notes, the 2019 Mandatory Convertible Notes, the 2020 Mandatory Convertible Notes and the 2021 Mandatory Convertible Notes, the “Mandatory Convertible Notes”).
The redemption provisions, covenants, interest payments and maturity terms applicable to each series of Mandatory Convertible Notes are substantially identical to those applicable to the corresponding series of Senior Notes, 2020 Convertible Senior Notes and 2018 Senior Subordinated Notes except that the 2020 Mandatory Convertible Notes will mature on June 5, 2020 unless earlier converted in accordance with their terms.
These transactions were accounted for as extinguishments of debt for the portions of Senior Notes, 2020 Convertible Senior Notes and 2018 Senior Subordinated Notes that were exchanged. As a result, Whiting recognized a $57 million gain on extinguishment of debt, which was net of a $113 million charge for the non-cash write-off of unamortized debt issuance costs, debt discounts and debt premium on the original notes. In addition, Whiting recorded a $63 million reduction to the equity component of the 2020 Convertible Senior Notes, which is net of deferred taxes. The Mandatory Convertible Notes were recorded at fair value upon issuance with the difference between the principal amount of the notes and their fair values, totaling $69 million, recorded as a debt discount. The Mandatory Convertible Notes contain contingent beneficial conversion features, the intrinsic value of which was recognized in additional paid-in capital at the time the contingency was resolved, resulting in an additional debt discount of $233 million. The aggregate debt discount of $302 million is being amortized to interest expense over the respective terms of the notes using the effective interest method.
Transaction costs of $14 million attributable to these note issuances were recorded as a reduction to the carrying value of long-term debt on the consolidated balance sheet and are being amortized to interest expense over the respective terms of the notes using the effective interest method.
The July 1, 2016 note exchange transactions triggered an ownership shift as defined under Section 382 of the Internal Revenue Code due to the “deemed share issuance” that resulted from the note exchanges. This triggering event will limit the Company’s usage of certain of its net operating losses and tax credits in the future. Refer to the “Income Taxes” footnote for more information.
The Mandatory Convertible Notes contain mandatory conversion features whereby four percent of the aggregate principal amount of the Mandatory Convertible Notes were converted into shares of the Company’s common stock for each day of the 25 trading day period that commenced on June 23, 2016 (the “Observation Period”) if the daily volume weighted average price (the “Daily VWAP”) (as defined in the indentures governing the Mandatory Convertible Notes) of the Company’s common stock on such day, rounded to four decimal places for the 2020 Mandatory Convertible Notes and rounded to two decimal places for the 2018 Mandatory Convertible Notes, the 2019 Mandatory Convertible Notes, the 2021 Mandatory Convertible Notes and the 2023 Mandatory Convertible Notes, was above $8.75 (the “Threshold Price”). Upon conversion, the common stock issue price per share is equal to the higher of (i) the Daily VWAP for the Company’s common stock for such trading day multiplied by one plus zero for the 2018 Mandatory Convertible Notes, one plus 0.5% for the 2019 Mandatory Convertible Notes, one plus 8.0% for the 2020 Mandatory Convertible Notes, one plus 2.5% for the 2021 Mandatory Convertible Notes and one plus 3.5% for the 2023 Mandatory Convertible Notes or (ii) $8.75 for the 2018 Mandatory Convertible Notes (equivalent to 114.29 common shares per $1,000 principal amount of the notes), $8.79 for the 2019 Mandatory Convertible Notes (equivalent to 113.72 common shares per $1,000 principal amount of the notes), $9.45 for the 2020 Mandatory Convertible Notes (equivalent to 105.82 common shares per $1,000 principal amount of the notes), $8.97 for the 2021 Mandatory Convertible Notes (equivalent to 111.50 common shares per $1,000 principal amount of the notes) and $9.06 for the 2023 Mandatory Convertible Notes (equivalent to 110.42 common shares per $1,000 principal amount of the notes) (the “Minimum Conversion Prices”).
After the Observation Period, the Company has the right to mandatorily convert any remaining Mandatory Convertible Notes if the Daily VWAP of the Company’s common stock exceeds $8.75 for at least 20 trading days during a 30 consecutive trading day period and holders have the right to convert the Mandatory Convertible Notes at any time. The conversion price after the Observation Period will be the Minimum Conversion Price for each applicable series of Mandatory Convertible Notes. As of September 30, 2016, none
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of the conditions allowing the Company to convert the remaining Mandatory Convertible Notes had been met, and no holders of the Mandatory Convertible Notes had voluntarily converted any such notes.
Conversion of Mandatory Convertible Notes to Common Stock. During the Observation Period, the Daily VWAP of the Company’s common stock was above the Threshold Price (i) for 7 of the 25 trading days for the 2018 Mandatory Convertible Notes, the 2019 Mandatory Convertible Notes, the 2021 Mandatory Convertible Notes and the 2023 Mandatory Convertible Notes and (ii) for 8 of the 25 trading days for the 2020 Mandatory Convertible Notes. As a result, $333 million aggregate principal amount of the Mandatory Convertible Notes were converted into approximately 33.2 million shares of the Company’s common stock, and the Company paid $3 million in cash consisting of all accrued and unpaid interest on such notes. As a result of the conversions, Whiting recognized a $3 million gain on extinguishment of debt, which was net of a non-cash charge for the acceleration of unamortized debt issuance costs and debt discount on the notes.
Induced Exchange of Mandatory Convertible Notes. On August 12, 2016, the Company completed the exchange of (i) $13 million aggregate principal amount of the 2018 Mandatory Convertible Notes which had a conversion price of $8.75 per share (equivalent to 114.29 common shares per $1,000 principal amount of the notes) for shares of the Company’s common stock at an issuance price of $7.77 per share (equivalent to 128.69 common shares per $1,000 principal amount of the notes) and (ii) $25 million aggregate principal amount of the 2019 Mandatory Convertible Notes which had a conversion price of $8.79 per share (equivalent to 113.72 common shares per $1,000 principal amount of the notes) for shares of the Company’s common stock at an issuance price of $7.80 per share (equivalent to 128.17 shares per $1,000 principal amount of the notes). Upon acceptance of this inducement offer by the holders of the notes, such notes were immediately cancelled in exchange for approximately 4.9 million shares of the Company’s common stock and the Company paid $1 million in cash consisting of all accrued and unpaid interest on such notes. As a result of the exchanges, Whiting recognized (i) $4 million of debt inducement expense related to the fair value of the incremental shares issued in the inducement offer over the original conversion terms of the notes, which expense is included in (gain) loss on extinguishment of debt in the consolidated statements of operations, and (ii) a $14 million non-cash charge for the acceleration of unamortized debt discount on the notes, which is included in interest expense in the consolidated statements of operations.
Security and Guarantees
The Senior Notes, the 2020 Convertible Senior Notes, the 2019 Mandatory Convertible Notes, the 2020 Mandatory Convertible Notes, the 2021 Mandatory Convertible Notes and the 2023 Mandatory Convertible Notes (collectively, the “Whiting Senior Notes”) are unsecured obligations of Whiting Petroleum Corporation and these unsecured obligations are subordinated to all of the Company’s secured indebtedness, which consists of Whiting Oil and Gas’ credit agreement. The 2018 Senior Subordinated Notes and the 2018 Mandatory Convertible Notes are also unsecured obligations of Whiting Petroleum Corporation and are subordinated to all of the Company’s senior debt, which currently consists of the Whiting Senior Notes and borrowings under Whiting Oil and Gas’ credit agreement.
The Company’s obligations under the Whiting Senior Notes, the 2018 Senior Subordinated Notes and the 2018 Mandatory Convertible Notes are guaranteed by the Company’s 100%-owned subsidiaries, Whiting Oil and Gas, Whiting US Holding Company, Whiting Canadian Holding Company ULC and Whiting Resources Corporation (the “Guarantors”). These guarantees are full and unconditional and joint and several among the Guarantors. Any subsidiaries other than these Guarantors are minor subsidiaries as defined by Rule 3-10(h)(6) of Regulation S‑X of the SEC. Whiting Petroleum Corporation has no assets or operations independent of this debt and its investments in its consolidated subsidiaries.
5. ASSET RETIREMENT OBLIGATIONS
The Company’s asset retirement obligations represent the present value of estimated future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage, and land restoration (including removal of certain onshore and offshore facilities in California) in accordance with applicable local, state and federal laws. The Company follows FASB ASC Topic 410, Asset Retirement and Environmental Obligations, to determine its asset retirement obligation amounts by calculating the present value of the estimated future cash outflows associated with its plug and abandonment obligations. The current portions at September 30, 2016 and December 31, 2015 were $7 million and $6 million, respectively, and have been included in accrued liabilities and other. Revisions to the liability typically occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells. The following table provides a reconciliation of the Company’s asset retirement obligations for the nine months ended September 30, 2016 (in thousands):
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Asset retirement obligation at January 1, 2016 |
$ |
161,908 | |
Additional liability incurred |
1,768 | ||
Revisions to estimated cash flows |
5,412 | ||
Accretion expense |
10,512 | ||
Obligations on sold properties |
(2,102) | ||
Liabilities settled |
(5,841) | ||
Asset retirement obligation at September 30, 2016 |
$ |
171,657 |
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations, and it uses derivative instruments to manage its commodity price risk. In addition, the Company periodically enters into contracts that contain embedded features which are required to be bifurcated and accounted for separately as derivatives. Whiting follows FASB ASC Topic 815, Derivatives and Hedging, to account for its derivative financial instruments.
Commodity Derivative Contracts—Historically, prices received for crude oil and natural gas production have been volatile because of supply and demand factors, worldwide political factors, general economic conditions and seasonal weather patterns. Whiting enters into derivative contracts such as costless collars, swaps and crude oil sales and delivery contracts to achieve a more predictable cash flow by reducing its exposure to commodity price volatility. Commodity derivative contracts are thereby used to ensure adequate cash flow to fund the Company’s capital programs and to manage returns on drilling programs and acquisitions. The Company does not enter into derivative contracts for speculative or trading purposes.
Crude Oil Costless Collars. Costless collars are designed to establish floor and ceiling prices on anticipated future oil or gas production. While the use of these derivative instruments limits the downside risk of adverse price movements, they may also limit future revenues from favorable price movements.
The table below details the Company’s costless collar derivatives entered into to hedge forecasted crude oil production revenues as of October 1, 2016.
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Whiting Petroleum Corporation |
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Derivative |
Contracted Crude |
Weighted Average NYMEX Price |
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Instrument |
Period |
Oil Volumes (Bbl) |
Collar Ranges for Crude Oil (per Bbl) |
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Three-way collars (1) |
Oct - Dec 2016 |