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EX-12.1 - EXHIBIT 12.1 - SM Energy Coexhibit121-ratioofearnings.htm
EX-32.1 - EXHIBIT 32.1 - SM Energy Cosm-321906certifications331.htm
EX-31.2 - EXHIBIT 31.2 - SM Energy Cosm-312certificationwpursel.htm
EX-31.1 - EXHIBIT 31.1 - SM Energy Cosm-311certificationjottoso.htm
EX-2.2 - EXHIBIT 2.2 - SM Energy Coexhibit22secondamendmentto.htm
EX-2.1 - EXHIBIT 2.1 - SM Energy Coexhibit21-membershipintere.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

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

For the transition period from ___________ to ___________

Commission File Number 001-31539
smlogo.jpg
SM ENERGY COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
 
41-0518430
(I.R.S. Employer
Identification No.)
1775 Sherman Street, Suite 1200, Denver, Colorado
(Address of principal executive offices)
 
80203
(Zip Code)
(303) 861-8140
(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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
 
 
 
Non-accelerated filer o  
(Do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
 
 
 
Emerging growth company o 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of April 26, 2017, the registrant had 111,258,225 shares of common stock, $0.01 par value, outstanding.



1


SM ENERGY COMPANY
TABLE OF CONTENTS

PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SM ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
 
March 31,
2017
 
December 31,
2016
 ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
659,147

 
$
9,372

Accounts receivable
108,368

 
151,950

Derivative asset
73,978

 
54,521

Prepaid expenses and other
8,053

 
8,799

Total current assets
849,546

 
224,642

 
 
 
 
Property and equipment (successful efforts method):
 
 
 
Proved oil and gas properties
4,803,068

 
5,700,418

Less - accumulated depletion, depreciation, and amortization
(2,589,204
)
 
(2,836,532
)
Unproved oil and gas properties
2,483,601

 
2,471,947

Wells in progress
186,707

 
235,147

Oil and gas properties held for sale, net
455,943

 
372,621

Other property and equipment, net of accumulated depreciation of $44,662 and $42,882, respectively
110,005

 
137,753

Total property and equipment, net
5,450,120

 
6,081,354

 
 
 
 
Noncurrent assets:
 
 
 
Derivative asset
84,195

 
67,575

Other noncurrent assets
15,847

 
19,940

Total other noncurrent assets
100,042

 
87,515

Total Assets
$
6,399,708

 
$
6,393,511

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
299,676

 
$
299,708

Derivative liability
53,809

 
115,464

Total current liabilities
353,485

 
415,172

 
 
 
 
Noncurrent liabilities:
 
 
 
Revolving credit facility

 

Senior Notes, net of unamortized deferred financing costs
2,765,714

 
2,766,719

Senior Convertible Notes, net of unamortized discount and deferred financing costs
132,889

 
130,856

Asset retirement obligation
83,160

 
96,134

Asset retirement obligation associated with oil and gas properties held for sale
16,056

 
26,241

Deferred income taxes
304,331

 
315,672

Derivative liability
81,306

 
98,340

Other noncurrent liabilities
47,252

 
47,244

Total noncurrent liabilities
3,430,708

 
3,481,206

 
 
 
 
Commitments and contingencies (note 6)


 


 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 111,258,225 and 111,257,500 shares, respectively
1,113

 
1,113

Additional paid-in capital
1,723,010

 
1,716,556

Retained earnings
906,515

 
794,020

Accumulated other comprehensive loss
(15,123
)
 
(14,556
)
Total stockholders’ equity
2,615,515

 
2,497,133

Total Liabilities and Stockholders’ Equity
$
6,399,708

 
$
6,393,511

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

3


SM ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)

 
For the Three Months Ended March 31,
 
2017
 
2016
Operating revenues and other income:
 
 
 
Oil, gas, and NGL production revenue
$
333,198


$
211,823

Net gain (loss) on divestiture activity
37,463

 
(69,021
)
Other operating revenues
2,077

 
274

Total operating revenues and other income
372,738


143,076







Operating expenses:





Oil, gas, and NGL production expense
138,046


144,543

Depletion, depreciation, amortization, and asset retirement obligation liability accretion
137,812


214,207

Exploration
11,978


15,273

Impairment of proved properties

 
269,785

Abandonment and impairment of unproved properties

 
2,311

General and administrative
29,224


32,238

Net derivative gain
(114,774
)

(14,228
)
Other operating expenses
4,859

 
5,672

Total operating expenses
207,145


669,801







Income (loss) from operations
165,593


(526,725
)






Non-operating income (expense):





Interest expense
(46,953
)

(31,088
)
Gain (loss) on extinguishment of debt
(35
)
 
15,722

Other, net
335

 
6







Income (loss) before income taxes
118,940


(542,085
)
Income tax (expense) benefit
(44,506
)

194,875







Net income (loss)
$
74,434


$
(347,210
)






Basic weighted-average common shares outstanding
111,258

 
68,077

Diluted weighted-average common shares outstanding
111,329

 
68,077

Basic net income (loss) per common share
$
0.67


$
(5.10
)
Diluted net income (loss) per common share
$
0.67


$
(5.10
)
Dividends per common share
$
0.05


$
0.05


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

4


SM ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)

 
For the Three Months Ended March 31,
 
 
2017
 
2016
Net income (loss)
$
74,434

 
$
(347,210
)
Other comprehensive loss, net of tax:
 
 
 
Pension liability adjustment
(567
)
 
(236
)
Total other comprehensive loss, net of tax
(567
)
 
(236
)
Total comprehensive income (loss)
$
73,867

 
$
(347,446
)

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

5


SM ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share amounts)




Additional Paid-in Capital



Accumulated Other Comprehensive Loss

 Total Stockholders’ Equity

Common Stock


Retained Earnings



Shares

Amount




Balances, December 31, 2016
111,257,500


$
1,113


$
1,716,556


$
794,020


$
(14,556
)

$
2,497,133

Net income






74,434




74,434

Other comprehensive loss








(567
)

(567
)
Dividends declared, $ 0.05 per share






(5,563
)



(5,563
)
Issuance of common stock upon vesting of restricted stock units, net of shares used for tax withholdings
725




(11
)





(11
)
Stock-based compensation expense




5,455






5,455

Cumulative effect of accounting change (1)




1,108


43,624




44,732

Other

 

 
(98
)
 

 

 
(98
)
Balances, March 31, 2017
111,258,225


$
1,113


$
1,723,010


$
906,515


$
(15,123
)

$
2,615,515

____________________________________________
(1) 
Refer to Note 2 - Basis of Presentation, Significant Accounting Policies, and Recently Issued Accounting Standards.

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


6


SM ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

 
For the Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
74,434

 
$
(347,210
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Net (gain) loss on divestiture activity
(37,463
)
 
69,021

Depletion, depreciation, amortization, and asset retirement obligation liability accretion
137,812

 
214,207

Impairment of proved properties

 
269,785

Abandonment and impairment of unproved properties

 
2,311

Stock-based compensation expense
5,455

 
6,868

Net derivative gain
(114,774
)
 
(14,228
)
Derivative settlement gain
7

 
147,028

Amortization of discount and deferred financing costs
4,946

 
(920
)
Non-cash (gain) loss on extinguishment of debt, net
22

 
(15,722
)
Deferred income taxes
33,225

 
(195,039
)
Plugging and abandonment
(1,191
)
 
(604
)
Other, net
4,567

 
(1,151
)
Changes in current assets and liabilities:
 
 
 
Accounts receivable
30,407

 
26,922

Prepaid expenses and other
178

 
4,984

Accounts payable and accrued expenses
(5,497
)
 
(52,294
)
Accrued derivative settlements
2,838

 
4,318

Net cash provided by operating activities
134,966

 
118,276

 
 
 
 
Cash flows from investing activities:
 
 
 
Net proceeds from the sale of oil and gas properties
744,333

 
1,206

Capital expenditures
(154,401
)
 
(176,370
)
Acquisition of proved and unproved oil and gas properties
(75,105
)
 
(15,044
)
Other, net
2,486

 
885

Net cash provided by (used in) investing activities
517,313

 
(189,323
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from credit facility
397,500

 
317,000

Repayment of credit facility
(397,500
)
 
(226,000
)
Cash paid to repurchase Senior Notes
(2,344
)
 
(19,917
)
Other, net
(160
)
 
(3
)
Net cash provided by (used in) financing activities
(2,504
)
 
71,080

 
 
 
 
Net change in cash and cash equivalents
649,775

 
33

Cash and cash equivalents at beginning of period
9,372

 
18

Cash and cash equivalents at end of period
$
659,147

 
$
51

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

7


SM ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
(in thousands)

Supplemental schedule of additional cash flow information and non-cash activities:
 
For the Three Months Ended March 31,
 
2017
 
2016
Supplemental Cash Flow Information:
 
 
 
Operating Activities:
 
 
 
Cash paid for interest, net of capitalized interest
$
(42,872
)
 
$
(24,453
)
Net cash refunded for income taxes
$
15

 
$
4,689

Investing Activities:
 
 
 
Changes in capital expenditure accruals and other
$
27,214

 
$
20,643

 
 
 
 
Supplemental Non-Cash Investing Activities:
 
 
 
Fair value of properties exchanged
$
24,544

 
$
733

 
 
 
 
Supplemental Non-Cash Financing Activities:
 
 
 
Dividends declared, but not paid
$
5,563

 
$
3,404


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

8


SM ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 - The Company and Business

SM Energy Company, together with its consolidated subsidiaries (“SM Energy” or the “Company”), is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil and condensate, natural gas, and natural gas liquids (also respectively referred to as “oil,” “gas,” and “NGLs” throughout this report) in onshore North America.

Note 2 - Basis of Presentation, Significant Accounting Policies, and Recently Issued Accounting Standards

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of SM Energy and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Quarterly Report on Form 10-Q and Regulation S-X. These financial statements do not include all information and notes required by GAAP for annual financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to consolidated financial statements included in SM Energy’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”). In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of interim financial information, have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year. In connection with the preparation of the Company’s unaudited condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of March 31, 2017, and through the filing of this report. Certain prior period amounts have been reclassified to conform to the current presentation on the accompanying condensed consolidated financial statements.

Significant Accounting Policies

The significant accounting policies followed by the Company are set forth in Note 1 to the Company’s consolidated financial statements in its 2016 Form 10-K, and are supplemented by the notes to the unaudited condensed consolidated financial statements in this report. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the 2016 Form 10-K.

Recently Issued Accounting Standards

Effective January 1, 2017, the Company adopted, using various transition methods, Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 is meant to simplify certain aspects of accounting for share-based payment arrangements, including income tax effects, accounting for forfeitures, and net share settlements. The Company adopted the various applicable amendments as summarized below:

ASU 2016-09 requires all future excess tax benefits and deficiencies related to share-based payment arrangements to be recognized as income tax benefit or expense as discrete events in the period in which they occur. The Company adopted this amendment under a modified retrospective transition method, which resulted in a $44.3 million cumulative-effect adjustment to retained earnings as of January 1, 2017, with a corresponding deferred tax asset recorded for previously unrecognized excess tax benefits. Consequentially, the Company’s diluted share count calculation changed prospectively beginning in the period ended March 31, 2017. Any future excess tax benefits and deficiencies are now being excluded from the assumed proceeds calculated under the treasury stock method for share-based payment arrangements. Lastly, this amendment requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, which the Company applied prospectively beginning in the period ended March 31, 2017. There are no periods presented that would require reclassification of cash flows had the Company elected to apply this amendment retrospectively.

9


ASU 2016-09 allows entities to elect whether to account for forfeitures of share-based payment awards by recognizing forfeitures of awards as they occur or by estimating the number of awards expected to be forfeited. This amendment is to be applied using a modified retrospective transition method. Upon adopting ASU 2016-09, the Company elected to change its policy to account for forfeitures of share-based payment awards as they occur effective January 1, 2017. This change in accounting policy resulted in a net $0.7 million cumulative-effect adjustment to retained earnings as of January 1, 2017, to adjust for actual forfeitures versus the previously estimated forfeiture rate. The corresponding impacts were an increase in additional paid-in capital and a decrease in deferred tax assets.
ASU 2016-09 allows entities to withhold an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction, without triggering liability classification of the award; however, the Company does not plan on changing its current withholding process as outlined in its share-based award agreements. Related to this amendment, ASU 2016-09 requires entities to present cash payments made to tax authorities on the employees’ behalf for withheld tax shares as a financing activity on the statement of cash flows retrospectively. However, this presentation is already consistent with the Company’s historical and current cash flow presentation of net share settlement from issuance of stock awards, and therefore, there was no impact from this amendment.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) for the recognition of revenue from contracts with customers. Several additional related ASUs have been issued. The Company has established a cross-functional implementation team that is currently evaluating the provisions of each of these standards, analyzing their impact on the Company’s contract portfolio, reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements of these standards to the Company’s revenue contracts, and assessing their potential impact on the Company’s financial statements and disclosures. The Company currently plans to apply the modified retrospective method upon adoption and plans to adopt the guidance on the effective date of January 1, 2018.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which changes the accounting for leases. The Company is currently establishing a cross-functional implementation team to analyze the impact of the standard on the Company’s contract portfolio by reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard. In addition, the Company is working to identify appropriate changes to the Company’s business processes, systems, and controls to support recognition and disclosure under the new standard. The Company currently plans to adopt the guidance on the effective date of January 1, 2019.

In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). This ASU is intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost by providing additional guidance on the presentation of net benefit cost on the income statement and on the components eligible for capitalization in assets. As outlined in ASU 2017-07, certain amendments are to be applied using a retrospective method while others are required to be applied using a prospective method. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted as outlined in ASU 2017-07. The Company is currently evaluating the provisions of this guidance and assessing the potential impact on the Company’s financial statements and disclosures and does not intend to early adopt this guidance.

Other than as disclosed above or in the 2016 Form 10-K, there are no other accounting standards applicable to the Company that would have a material effect on the Company’s financial statements and related disclosures that have been issued but not yet adopted by the Company as of March 31, 2017, and through the filing of this report.

Note 3 – Divestitures, Assets Held for Sale, and Acquisitions
Divestitures

On March 10, 2017, the Company divested its outside-operated Eagle Ford shale assets, including ownership interest in related midstream assets, for total cash received at closing, net of commissions (referred to throughout this report as “net divestiture proceeds”), of $747.4 million, subject to post-closing adjustments, and recorded a net estimated gain of $398.1 million for the three months ended March 31, 2017. These assets were classified as held for sale as of December 31, 2016.


10


The following table presents income (loss) before income taxes of the outside-operated Eagle Ford shale assets sold for the three months ended March 31, 2017, and 2016. This divestiture is considered a disposal of a significant asset group.
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Income (loss) before income taxes (1)
$
24,324

 
$
(286,399
)
____________________________________________
(1) 
Income (loss) before income taxes reflects oil, gas, and NGL production revenue, less oil, gas, and NGL production expense and depletion, depreciation, amortization, and asset retirement obligation liability accretion. Additionally, income (loss) before income taxes included impairment of proved properties expense of approximately $269.6 million for the three months ended March 31, 2016.

Assets Held for Sale

Assets are classified as held for sale when the Company commits to a plan to sell the assets and there is reasonable certainty the sale will take place within one year. Upon classification as held for sale, long-lived assets are no longer depreciated or depleted, and a measurement for impairment is performed to identify and expense any excess of carrying value over fair value less estimated costs to sell. Any subsequent changes to the fair value less estimated costs to sell impact the measurement of assets held for sale, with any gain or loss reflected in the net gain (loss) on divestiture activity line item in the accompanying condensed consolidated statements of operations (“accompanying statements of operations”).

As of March 31, 2017, the accompanying condensed consolidated balance sheets (“accompanying balance sheets”) present $455.9 million of assets held for sale, net of accumulated depletion, depreciation, and amortization expense, which consisted primarily of the Company’s remaining Williston Basin assets in Divide County, North Dakota (referred to as “Divide County” throughout this report). A corresponding asset retirement obligation liability of $16.1 million was separately presented. The Company expects to close the divestiture of these assets during the second quarter of 2017. These assets were written down by $359.6 million to reflect fair value less estimated costs to sell upon classification as held for sale during the three months ended March 31, 2017.

The following table presents loss before income taxes of the Company’s Divide County assets held for sale for the three months ended March 31, 2017, and 2016:
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Loss before income taxes (1)
$
(335,561
)
 
$
(16,813
)
____________________________________________
(1)  
Loss before income taxes reflects oil, gas, and NGL production revenue less oil, gas, and NGL production expense and depletion, depreciation, amortization, and asset retirement obligation liability accretion. Additionally, loss before income taxes for the three months ended March 31, 2017, included the $359.6 million write-down on these assets held for sale as discussed above, and loss before income taxes for the three months ended March 31, 2016, included $1.6 million of unproved property impairments.

Acquisitions

During the first quarter of 2017, the Company acquired approximately 2,900 net acres of proved and unproved properties in the Midland Basin for $59.6 million, subject to post-closing adjustments. Under authoritative accounting guidance, this transaction was considered an asset acquisition, and therefore, the properties were recorded based on the fair value of the total consideration transferred on the acquisition date and transaction costs were capitalized as a component of the cost of the assets acquired.

The Company finalized the 2016 acquisition of Midland Basin properties from Rock Oil Holdings, LLC (referred to as the “Rock Oil Acquisition”) during the first quarter of 2017 by paying an additional $7.4 million of cash consideration, resulting in total consideration of $998.4 million paid after final closing adjustments. There were no material changes to the recorded basis of the proved and unproved properties acquired as a result of the final settlement.


11


Also, during the first quarter of 2017, and subsequent to March 31, 2017, the Company completed trades of properties, primarily unproved, in Howard and Martin Counties, Texas resulting in the Company acquiring approximately 3,020 net acres in exchange for 2,310 net acres. There was no cash consideration for the trade that was completed during the three months ended March 31, 2017, and this trade was recorded at the fair value of the assets surrendered with no gain or loss recognized.

Note 4 - Income Taxes

The income tax (expense) benefit recorded for the three months ended March 31, 2017, and 2016, differs from the amounts that would be provided by applying the statutory United States federal income tax rate to income or loss before income taxes primarily due to the effect of state income taxes, changes in valuation allowances, excess tax benefits and deficiencies from share-based payment awards, and accumulated impacts of other smaller permanent differences. The quarterly rate can also be affected by the proportional impacts of forecasted net income or loss as of each period end presented.

The provision for income taxes for the three months ended March 31, 2017, and 2016, consisted of the following:
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Current portion of income tax (expense) benefit:
 
 
 
Federal
$
(7,439
)
 
$

State
(3,842
)
 
(164
)
Deferred portion of income tax (expense) benefit
(33,225
)
 
195,039

Income tax (expense) benefit
$
(44,506
)
 
$
194,875

Effective tax rate
37.4
%
 
35.9
%

On a year-to-date basis, a change in the Company’s effective tax rate between reported periods will generally reflect differences in its estimated highest marginal state tax rate due to changes in the composition of income or loss from Company activities among multiple state tax jurisdictions. Cumulative effects of state tax rate changes are reflected in the period that legislation is enacted. As a result of adopting ASU 2016-09, excess tax benefits and deficiencies from share-based payment awards are expected to impact the Company’s effective tax rate between periods. Please refer to Note 2 - Basis of Presentation, Significant Accounting Policies, and Recently Issued Accounting Standards.

The change in the current portion of income tax expense relates to the effect of anticipated utilization of carryover net operating losses, deferred expenses, and carryover tax credits. The Company is generally no longer subject to United States federal or state income tax examinations by tax authorities for years before 2013, with the exception of its 2003 tax year.

Note 5 - Long-Term Debt

Credit Facility

The Company’s Fifth Amended and Restated Credit Agreement, as amended (the “Credit Agreement”), provides for a maximum loan amount of $2.5 billion and has a maturity date of December 10, 2019.

On March 31, 2017, the Company entered into a Ninth Amendment to the Credit Agreement (the “Ninth Amendment”) with its lenders. Pursuant to the Ninth Amendment, and as part of the regular, semi-annual borrowing base redetermination process, the borrowing base and aggregate lender commitments were reduced to $925 million. This expected reduction was primarily due to the sale of the Company’s outside-operated Eagle Ford shale assets in the first quarter of 2017 and the decrease in the value of the Company’s proved reserves at December 31, 2016. The borrowing base redetermination process considers the value of both the Company’s (a) proved oil and gas properties reflected in the Company’s most recent reserve report and (b) commodity derivative contracts, each as determined by the Company’s lender group. Additionally, the Ninth Amendment modified the Credit Agreement to allow the Company to enter into derivative contracts for an increased percentage of projected production volumes. As a result of the reduction to the Company’s borrowing base and aggregate lender commitments, the Company recorded approximately $1.1 million of expense related to the acceleration of unamortized deferred financing costs for the three months ended March 31, 2017. The next scheduled redetermination date is October 1, 2017.

12


The Company must comply with certain financial and non-financial covenants under the terms of the Credit Agreement, including covenants limiting dividend payments and requiring the Company to maintain certain financial ratios, as defined by the Credit Agreement. Financial covenants under the Credit Agreement require, as of the last day of each of the Company’s fiscal quarters, the Company’s (a) ratio of senior secured debt to 12-month trailing adjusted EBITDAX to be not more than 2.75 to 1.0; (b) adjusted current ratio to be not less than 1.0 to 1.0; and (c) ratio of 12-month trailing adjusted EBITDAX to interest expense to be not less than 2.0 to 1.0. The Company was in compliance with all financial and non-financial covenants under the Credit Agreement as of March 31, 2017, and through the filing of this report.

Interest and commitment fees are accrued based on a borrowing base utilization grid set forth in the Credit Agreement and presented in Note 5 – Long-Term Debt to the Company’s consolidated financial statements in its 2016 Form 10-K.  Eurodollar loans accrue interest at the London Interbank Offered Rate plus the applicable margin from the utilization table, and Alternate Base Rate and swingline loans accrue interest at the prime rate, plus the applicable margin from the utilization table.  Commitment fees are accrued on the unused portion of the aggregate lender commitment amount and are included in interest expense in the accompanying statements of operations.

The following table presents the outstanding balance, total amount of letters of credit outstanding, and available borrowing capacity under the Credit Agreement as of April 26, 2017, March 31, 2017, and December 31, 2016:
 
As of April 26, 2017
 
As of March 31, 2017
 
As of December 31, 2016
 
(in thousands)
Credit facility balance (1)
$

 
$

 
$

Letters of credit (2)
200

 
200

 
200

Available borrowing capacity
924,800

 
924,800

 
1,164,800

Total aggregate lender commitment amount
$
925,000

 
$
925,000

 
$
1,165,000

____________________________________________
(1) 
Unamortized deferred financing costs attributable to the credit facility are presented as a component of other noncurrent assets on the accompanying balance sheets and totaled $4.3 million and $5.9 million as of March 31, 2017, and December 31, 2016, respectively.
(2) 
Letters of credit outstanding reduce the amount available under the credit facility on a dollar-for-dollar basis.
Senior Notes
The Company’s Senior Notes consist of 6.50% Senior Notes due 2021, 6.125% Senior Notes due 2022, 6.50% Senior Notes due 2023, 5.0% Senior Notes due 2024, 5.625% Senior Notes due 2025, and 6.75% Senior Notes due 2026 (collectively referred to as “Senior Notes”). The Senior Notes, net of unamortized deferred financing costs line on the accompanying balance sheets as of March 31, 2017, and December 31, 2016, consisted of the following:
 
As of March 31, 2017
 
As of December 31, 2016
 
Principal Amount
 
Unamortized Deferred Financing Costs
 
Senior Notes, Net of Unamortized Deferred Financing Costs
 
Principal Amount
 
Unamortized Deferred Financing Costs
 
Senior Notes, Net of Unamortized Deferred Financing Costs
 
(in thousands)
6.50% Senior Notes due 2021 (1) (2)
$
344,611

 
$
3,176

 
$
341,435

 
$
346,955

 
$
3,372

 
$
343,583

6.125% Senior Notes due 2022 (2)
561,796

 
6,684

 
555,112

 
561,796

 
6,979

 
554,817

6.50% Senior Notes due 2023 (2)
394,985

 
4,254

 
390,731

 
394,985

 
4,436

 
390,549

5.0% Senior Notes due 2024
500,000

 
6,302

 
493,698

 
500,000

 
6,533

 
493,467

5.625% Senior Notes due 2025
500,000

 
7,393

 
492,607

 
500,000

 
7,619

 
492,381

6.75% Senior Notes due 2026
500,000

 
7,869

 
492,131

 
500,000

 
8,078

 
491,922

Total
$
2,801,392

 
$
35,678

 
$
2,765,714

 
$
2,803,736

 
$
37,017

 
$
2,766,719

____________________________________________
(1) 
During the first quarter of 2017, the Company repurchased a total of $2.3 million in aggregate principal amount of 6.50% Senior Notes due 2021 in open market transactions at a slight premium. The Company canceled all of these repurchased Senior Notes upon cash settlement.

13


(2) 
During the first quarter of 2016, the Company repurchased a total of $46.3 million in aggregate principal amount of certain of its Senior Notes in open market transactions for a settlement amount of $29.9 million, excluding interest, of which $19.9 million was paid during the three months ended March 31, 2016, with the remaining $10.0 million settlement amount being accrued at March 31, 2016, and paid in the second quarter of 2016. The Company recorded a net gain on extinguishment of debt of approximately $15.7 million for the three months ended March 31, 2016. This amount includes a gain of approximately $16.4 million associated with the discount realized upon repurchase, which was partially offset by approximately $0.7 million related to the acceleration of unamortized deferred financing costs. The Company canceled all of these repurchased Senior Notes upon cash settlement.

The Senior Notes are unsecured senior obligations and rank equal in right of payment with all of the Company’s existing and any future unsecured senior debt, and are senior in right of payment to any future subordinated debt. There are no subsidiary guarantors of the Senior Notes.  The Company is subject to certain covenants under the indentures governing the Senior Notes and was in compliance with all covenants as of March 31, 2017, and through the filing of this report. The Company may redeem some or all of its Senior Notes prior to their maturity at redemption prices based on a premium, plus accrued and unpaid interest as described in the indentures governing the Senior Notes.

Senior Convertible Notes

On August 12, 2016, the Company issued $172.5 million in aggregate principal amount of 1.50% Senior Convertible Notes due July 1, 2021 (the “Senior Convertible Notes”). The Senior Convertible Notes are unsecured senior obligations and rank equal in right of payment with all of the Company’s existing and any future unsecured senior debt, and are senior in right of payment to any future subordinated debt.

The Senior Convertible Notes mature on July 1, 2021, unless earlier converted. Holders may convert their Senior Convertible Notes at their option at any time prior to January 1, 2021, only under certain circumstances as outlined in the indenture governing the Senior Convertible Notes and in Note 5 – Long-Term Debt to the Company’s consolidated financial statements in its 2016 Form 10-K. On or after January 1, 2021, until the maturity date, holders may convert their Senior Convertible Notes at any time. The Company may not redeem the Senior Convertible Notes prior to the maturity date. Upon conversion, the Senior Convertible Notes may be settled, at the Company’s election, in shares of the Company’s common stock, cash, or a combination of cash and common stock. Holders may convert their notes based on a conversion rate of 24.6914 shares of the Company’s common stock per $1,000 principal amount of the Senior Convertible Notes, which is equal to an initial conversion price of approximately $40.50 per share, subject to adjustment.
    
The Company has initially elected a net-settlement method to satisfy its conversion obligation. Under the net-settlement method, upon conversion, the Senior Convertible Notes will be settled, at the Company’s election, in shares of the Company’s common stock, cash, or a combination of cash and common stock. The Senior Convertible Notes were not convertible at the option of holders as of March 31, 2017, or through the filing of this report. Notwithstanding the inability to convert, the if-converted value of the Senior Convertible Notes as of March 31, 2017, did not exceed the principal amount.

At issuance, the Company recorded $132.3 million as the initial carrying amount of the debt component, which approximated its fair value at issuance, and was estimated by using an interest rate for nonconvertible debt with terms similar to the Senior Convertible Notes. The effective interest rate used was 7.25 percent. The $40.2 million excess of the principal amount of the Senior Convertible Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount and debt-related issuance costs are amortized to the carrying value of the Senior Convertible Notes as interest expense through the maturity date of July 1, 2021. Interest expense recognized on the Senior Convertible Notes related to the stated interest rate and amortization of the debt discount totaled $2.4 million for the three months ended March 31, 2017.

The net carrying amount of the liability component of the Senior Convertible Notes, as reflected on the accompanying balance sheets as of March 31, 2017, and December 31, 2016, consisted of the following:
 
As of March 31, 2017
 
As of December 31, 2016
 
(in thousands)
Principal amount of Senior Convertible Notes
$
172,500

 
$
172,500

Unamortized debt discount
(35,713
)
 
(37,513
)
Unamortized deferred financing costs
(3,898
)
 
(4,131
)
Net carrying amount
$
132,889

 
$
130,856



14


The Company is subject to certain covenants under the indenture governing the Senior Convertible Notes and was in compliance with all covenants as of March 31, 2017, and through the filing of this report.

Capped Call Transactions

In connection with the issuance of the Senior Convertible Notes, the Company entered into capped call transactions with affiliates of the underwriters of such issuance. The capped call transactions are generally expected to reduce the potential dilution upon conversion of the Senior Convertible Notes and/or partially offset any cash payments the Company is required to make in excess of the principal amount of converted Senior Convertible Notes in the event that the market price per share of the Company’s common stock is greater than the strike price of the capped call transactions, which initially corresponds to the approximate $40.50 per share conversion price of the Senior Convertible Notes. The cap price of the capped call transactions is initially $60.00 per share. If the market price per share exceeds the cap price of the capped call transactions, there could be dilution or there would not be an offset of such potential cash payments.

Note 6 - Commitments and Contingencies

Commitments

During the first quarter of 2017, the Company completed the divestiture of its outside-operated Eagle Ford shale assets. Upon closing of the sale, the Company is no longer subject to gathering, processing, and transportation throughput commitments totaling 514 Bcf of natural gas, 52 MMBbl of oil, and 13 MMBbl of NGLs, or $501.9 million of the potential undiscounted deficiency payments as of December 31, 2016.

As of March 31, 2017, the Company had total gathering, processing, and transportation throughput commitments with various third parties that require delivery of a minimum amount of 915 Bcf of natural gas, 17 MMBbl of crude oil, and 25 MMBbl of water through 2028. If the Company delivers no product, the aggregate undiscounted deficiency payments total approximately $458.8 million. As of the filing of this report, the Company does not expect to incur any material shortfalls with regard to its remaining gathering, processing, and transportation throughput commitments.

Additionally, the Company entered into drilling rig contracts during the first quarter of 2017, and subsequent to March 31, 2017. As of the filing of this report, the Company’s total drilling rig commitment was $30.1 million; however, if the Company terminated these rig contracts early, penalties of $19.0 million would be incurred instead.

There were no other material changes in commitments during the first quarter of 2017. Please refer to Note 6 - Commitments and Contingencies in the Company’s 2016 Form 10-K for additional discussion of the Company’s commitments.

Contingencies

The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the expected results of any pending litigation and claims will not have a material effect on the results of operations, the financial position, or the cash flows of the Company.

Note 7 - Compensation Plans

Performance Share Units Under the Equity Incentive Compensation Plan

The Company grants performance share units (“PSUs”) to eligible employees as part of its long-term equity compensation program. The number of shares of the Company’s common stock issued to settle PSUs ranges from 0% to 200% of the number of PSUs awarded and is determined based on certain performance criteria over a three-year measurement period. The performance criteria for PSUs are based on a combination of the Company’s annualized Total Shareholder Return (“TSR”) for the performance period and the relative performance of the Company’s TSR compared with the annualized TSR of certain peer companies for the performance period. For the three months ended March 31, 2017, and 2016, total compensation expense recorded for PSUs was $2.5 million and $2.9 million, respectively, within general and administrative and exploration expense. As of March 31, 2017, there was $14.2 million of total unrecognized compensation expense related to unvested PSU awards, which is being amortized through 2019. There have been no material changes to the outstanding and non-vested PSUs during the three months ended March 31, 2017.


15


Restricted Stock Units Under the Equity Incentive Compensation Plan

The Company grants restricted stock units (“RSUs”) as part of its long-term equity compensation program. Each RSU represents a right to receive one share of the Company’s common stock upon settlement of the award at the end of the specified vesting period. For the three months ended March 31, 2017, and 2016, total compensation expense recorded for RSUs was $2.5 million and $3.2 million, respectively, within general and administrative expense and exploration expense. As of March 31, 2017, there was $12.9 million of total unrecognized compensation expense related to unvested RSU awards, which is being amortized through 2019. There have been no material changes to the outstanding and non-vested RSUs during the three months ended March 31, 2017.

Note 8 - Pension Benefits

Pension Plans

The Company has a non-contributory defined benefit pension plan covering substantially all of its employees who joined the Company prior to January 1, 2015, and who meet age and service requirements (the “Qualified Pension Plan”). The Company also has a supplemental non-contributory pension plan covering certain management employees (the “Nonqualified Pension Plan” and together with the Qualified Pension Plan, the “Pension Plans”). The Company froze the Pension Plans to new participants, effective as of December 31, 2015. Employees participating in the Pension Plans as of December 31, 2015, continue to earn benefits.

Components of Net Periodic Benefit Cost for the Pension Plans

The following table presents the components of the net periodic benefit cost for the Pension Plans:
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Service cost
$
2,050

 
$
1,987

Interest cost
727

 
624

Expected return on plan assets that reduces periodic pension cost
(559
)
 
(545
)
Amortization of prior service cost
4

 
4

Amortization of net actuarial loss
396

 
372

Net periodic benefit cost
$
2,618

 
$
2,442


Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10 percent of the greater of the benefit obligation or the market-related value of assets are amortized over the average remaining service period of active participants.

Contributions

The Company contributed $3.0 million to the Qualified Pension Plan during the three months ended March 31, 2017.

Note 9 - Earnings Per Share

Basic net income or loss per common share is calculated by dividing net income or loss available to common stockholders by the basic weighted-average number of common shares outstanding for the respective period. Diluted net income or loss per common share is calculated by dividing adjusted net income or loss by the diluted weighted-average number of common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for this calculation consist of unvested RSUs, contingent PSUs, and shares into which the Senior Convertible Notes are convertible, which are measured using the treasury stock method.

PSUs represent the right to receive, upon settlement of the PSUs after the completion of the three-year performance period, a number of shares of the Company’s common stock that may range from zero to two times the number of PSUs granted on the award date. The number of potentially dilutive shares related to PSUs is based on the number of shares, if any, that would be issuable at the end of the respective reporting period, assuming that date was the end of the contingency period applicable to such PSUs.


16


On August 12, 2016, the Company issued $172.5 million in aggregate principal amount of Senior Convertible Notes due 2021. Upon conversion, the Senior Convertible Notes may be settled, at the Company’s election, in shares of the Company’s common stock, cash, or a combination of cash and common stock. The Company has initially elected a net-settlement method to satisfy its conversion obligation, which allows the Company to settle the principal amount of the Senior Convertible Notes in cash and to settle the excess conversion value in shares, as well as cash in lieu of fractional shares. However, the Company has not made this a formal legal irrevocable election and thereby reserves the right to settle the Senior Convertible Notes in any manner allowed under the indenture as business conditions warrant. Shares of the Company’s common stock traded at an average closing price below the $40.50 conversion price for the three months ended March 31, 2017, and therefore, had no dilutive impact. In connection with the offering of the Senior Convertible Notes, the Company entered into capped call transactions with affiliates of the underwriters that would effectively prevent dilution upon settlement up to the $60.00 cap price. The capped call transactions are not reflected in diluted net income per share, nor will they ever be, as they are anti-dilutive. Please refer to Note 5 - Long-Term Debt for additional discussion.

When the Company recognizes a loss from continuing operations, as was the case for three months ended March 31, 2016, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per common share.

The following table details the weighted-average dilutive and anti-dilutive securities for the periods presented:
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Dilutive
71

 

Anti-dilutive

 
49


The following table sets forth the calculations of basic and diluted earnings per share:
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(in thousands, except per share amounts)
Net income (loss)
$
74,434

 
$
(347,210
)
Basic weighted-average common shares outstanding
111,258

 
68,077

Add: dilutive effect of unvested RSUs and contingent PSUs
71

 

Add: dilutive effect of 1.50% Senior Convertible Notes

 

Diluted weighted-average common shares outstanding
111,329

 
68,077

Basic net income (loss) per common share
$
0.67

 
$
(5.10
)
Diluted net income (loss) per common share
$
0.67

 
$
(5.10
)

Note 10 - Derivative Financial Instruments

Summary of Oil, Gas, and NGL Derivative Contracts in Place
    
The Company has entered into various commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows. As of March 31, 2017, all derivative counterparties were members of the Company’s credit facility lender group and all contracts were entered into for other-than-trading purposes. The Company’s derivative contracts consist of swap and collar arrangements for oil, gas, and NGLs. In a typical commodity swap agreement, if the agreed upon published third-party index price (“index price”) is lower than the swap fixed price, the Company receives the difference between the index price and the agreed upon swap fixed price. If the index price is higher than the swap fixed price, the Company pays the difference.  For collar arrangements, the Company receives the difference between an agreed upon index and the floor price if the index price is below the floor price. The Company pays the difference between the agreed upon ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and ceiling prices.
    

17


As of March 31, 2017, the Company had commodity derivative contracts outstanding as summarized in the tables below.

Oil Swaps


Contract Period
 
NYMEX WTI Volumes
 
Weighted-Average
 Contract Price
 
 
(MBbls)
 
(per Bbl)
Second quarter 2017
 
1,444

 
$
46.44

Third quarter 2017
 
1,340

 
$
46.66

Fourth quarter 2017
 
1,254

 
$
46.35

Total
 
4,038

 
 

Oil Collars
Contract Period
 
NYMEX WTI
 Volumes
 
Weighted-
Average Floor
 Price
 
Weighted-
Average Ceiling
 Price
 
 
(MBbls)
 
(per Bbl)
 
(per Bbl)
Second quarter 2017
 
636

 
$
45.00

 
$
54.10

Third quarter 2017
 
583

 
$
45.00

 
$
54.05

Fourth quarter 2017
 
540

 
$
45.00

 
$
54.01

2018
 
3,343

 
$
50.00

 
$
58.55

2019
 
2,660

 
$
50.00

 
$
59.31

Total
 
7,762

 
 
 
 

Oil Basis Swaps


Contract Period
 
Midland-Cushing Volumes
 
Weighted-Average
 Contract Price (1)
 
 
(MBbls)
 
(per Bbl)
2018
 
2,080

 
$
(1.27
)
2019
 
1,588

 
$
(1.45
)
Total
 
3,668

 
 
____________________________________________
(1)  
Represents the price differential between WTI prices at Midland, Texas and WTI prices at Cushing, Oklahoma.

Natural Gas Swaps
Contract Period
 
Sold
Volumes
 
Weighted-Average
 Contract Price
 
Purchased Volumes (1)
 
Weighted- Average Contract Price
 
Net
Volumes
 
 
(BBtu)
 
(per MMBtu)
 
(BBtu)
 
(per MMBtu)
 
(BBtu)
Second quarter 2017
 
26,205

 
$
3.98

 

 
$

 
26,205

Third quarter 2017
 
23,657

 
$
4.01

 

 
$

 
23,657

Fourth quarter 2017
 
22,001

 
$
3.98

 

 
$

 
22,001

2018
 
75,778

 
$
3.54

 
(30,606
)
 
$
4.27

 
45,172

2019
 
32,016

 
$
4.02

 
(24,415
)
 
$
4.34

 
7,601

Total (2)
 
179,657

 
 
 
(55,021
)
 
 
 
124,636

____________________________________________
(1) 
During 2016, the Company restructured certain of its gas derivative contracts by buying fixed price volumes to offset existing 2018 and 2019 fixed price swap contracts totaling 55.0 million MMBtu. The Company then entered into new 2017 fixed price swap contracts totaling 38.6 million MMBtu with a contract price of $4.43 per MMBtu. No other cash or other consideration was included as part of the restructuring.
(2) 
Total net volumes of natural gas swaps are comprised of IF El Paso Permian (2%), IF HSC (95%), and IF NNG Ventura (3%).


18


NGL Swaps
 
 
OPIS Purity Ethane Mont Belvieu
 
OPIS Propane Mont Belvieu Non-TET
 
OPIS Normal Butane Mont Belvieu Non-TET
 
OPIS Isobutane Mont Belvieu Non-TET
 
OPIS Natural Gasoline Mont Belvieu Non-TET
Contract Period
 
Volumes
Weighted-Average
 Contract Price
 
Volumes
Weighted-Average
Contract Price
 
Volumes
Weighted-Average
Contract Price
 
Volumes
Weighted-Average
Contract Price
 
Volumes
Weighted-Average
Contract Price
 
 
(MBbls)
(per Bbl)
 
(MBbls)
(per Bbl)
 
(MBbls)
(per Bbl)
 
(MBbls)
(per Bbl)
 
(MBbls)
(per Bbl)
Second quarter 2017
 
787

$
8.86

 
634

$
21.90

 
182

$
32.53

 
157

$
33.38

 
249

$
48.47

Third quarter 2017
 
736

$
9.14

 
588

$
21.91

 
163

$
32.42

 
140

$
33.28

 
222

$
48.43

Fourth quarter 2017
 
692

$
9.10

 
550

$
21.91

 
149

$
32.34

 
128

$
33.23

 
203

$
48.41

2018
 
2,434

$
10.18

 
1,442

$
22.86

 
138

$
35.41

 
119

$
35.44

 
189

$
49.40

2019
 
2,176

$
11.95

 

$

 

$

 

$

 

$

2020
 
539

$
11.13

 

$

 

$

 

$

 

$

Total
 
7,364

 
 
3,214

 
 
632

 
 
544

 
 
863

 

Summary of Oil, Gas, and NGL Derivative Contracts Entered Into Subsequent to March 31, 2017

Subsequent to March 31, 2017, and through April 26, 2017, the Company entered into various derivative commodity contracts as summarized in the tables below.

Oil Collars
Contract Period
 
NYMEX WTI
 Volumes
 
Weighted-
Average Floor
 Price
 
Weighted-
Average Ceiling
 Price
 
 
(MBbls)
 
(per Bbl)
 
(per Bbl)
Fourth quarter 2017
 
546

 
$
50.00

 
$
58.08

2018
 
1,687

 
$
50.00

 
$
57.12

2019
 
468

 
$
50.00

 
$
56.20

Total
 
2,701

 
 
 
 

Oil Basis Swaps


Contract Period
 
Midland-Cushing Volumes
 
Weighted-Average
 Contract Price (1)
 
 
(MBbls)
 
(per Bbl)
Third quarter 2017
 
566

 
$
(1.62
)
Fourth quarter 2017
 
1,403

 
$
(1.55
)
2018
 
3,584

 
$
(1.50
)
2019
 
2,375

 
$
(1.45
)
Total
 
7,928

 
 
____________________________________________
(1)  
Represents the price differential between WTI prices at Midland, Texas and WTI prices at Cushing, Oklahoma.

Natural Gas Swaps
Contract Period
 
IF HSC
Volumes
 
Weighted-Average
 Contract Price
 
 
(BBtu)
 
(per MMBtu)
2018
 
17,236

 
$
2.87

2019
 
9,378

 
$
2.88

Total
 
26,614

 
 


19


NGL Swaps
 
 
OPIS Purity Ethane Mont Belvieu
 
OPIS Propane Mont Belvieu Non-TET
 
OPIS Normal Butane Mont Belvieu Non-TET
 
OPIS Isobutane Mont Belvieu Non-TET
 
OPIS Natural Gasoline Mont Belvieu Non-TET
Contract Period
 
Volumes
Weighted-Average
 Contract Price
 
Volumes
Weighted-Average
Contract Price
 
Volumes
Weighted-Average
Contract Price
 
Volumes
Weighted-Average
Contract Price
 
Volumes
Weighted-Average
Contract Price
 
 
(MBbls)
(per Bbl)
 
(MBbls)
(per Bbl)
 
(MBbls)
(per Bbl)
 
(MBbls)
(per Bbl)
 
(MBbls)
(per Bbl)
Second quarter 2017
 
105

$
10.97

 

$

 

$

 

$

 

$

Third quarter 2017
 
170

$
10.98

 

$

 

$

 

$

 

$

Fourth quarter 2017
 
274

$
11.04

 

$

 

$

 

$

 

$

2018
 
1,157

$
12.23

 
345

$
26.04

 
87

$
31.71

 
69

$
30.35

 
116

$
47.36

Total
 
1,706

 
 
345

 
 
87

 
 
69

 
 
116

 

Derivative Assets and Liabilities Fair Value

The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities. The fair value of the commodity derivative contracts was a net asset of $23.1 million as of March 31, 2017, and a net liability of $91.7 million as of December 31, 2016.

The following tables detail the fair value of derivatives recorded in the accompanying balance sheets, by category:
 
As of March 31, 2017
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet
 Classification
 
Fair Value
 
Balance Sheet
 Classification
 
Fair Value
 
(in thousands)
Commodity contracts
Current assets
 
$
73,978

 
Current liabilities
 
$
53,809

Commodity contracts
Noncurrent assets
 
84,195

 
Noncurrent liabilities
 
81,306

Derivatives not designated as hedging instruments
 
 
$
158,173

 
 
 
$
135,115


 
As of December 31, 2016
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet
 Classification
 
Fair Value
 
Balance Sheet
 Classification
 
Fair Value
 
(in thousands)
Commodity contracts
Current assets
 
$
54,521

 
Current liabilities
 
$
115,464

Commodity contracts
Noncurrent assets
 
67,575

 
Noncurrent liabilities
 
98,340

Derivatives not designated as hedging instruments
 
 
$
122,096

 
 
 
$
213,804


Offsetting of Derivative Assets and Liabilities

As of March 31, 2017, and December 31, 2016, all derivative instruments held by the Company were subject to master netting arrangements with various financial institutions. In general, the terms of the Company’s agreements provide for offsetting of amounts payable or receivable between it and the counterparty, at the election of both parties, for transactions that settle on the same date and in the same currency. The Company’s agreements also provide that in the event of an early termination, the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. The Company’s accounting policy is to not offset these positions in its accompanying balance sheets.  


20


The following table provides a reconciliation between the gross assets and liabilities reflected on the accompanying balance sheets and the potential effects of master netting arrangements on the fair value of the Company’s derivative contracts:
 
Derivative Assets
 
Derivative Liabilities
 
As of
 
As of
Offsetting of Derivative Assets and Liabilities
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
 
(in thousands)
Gross amounts presented in the accompanying balance sheets
$
158,173

 
$
122,096

 
$
(135,115
)
 
$
(213,804
)
Amounts not offset in the accompanying balance sheets
(88,952
)
 
(118,080
)
 
88,952

 
118,080

Net amounts
$
69,221

 
$
4,016

 
$
(46,163
)
 
$
(95,724
)
    
The following table summarizes the components of the net derivative gain presented in the accompanying statements of operations:
 
For the Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Derivative settlement (gain) loss:
 
 
 
Oil contracts
$
9,084

 
$
(99,992
)
Gas contracts
(17,506
)
 
(41,053
)
NGL contracts
8,415

 
(5,983
)
Total derivative settlement gain
$
(7
)

$
(147,028
)
 
 
 
 
Total net derivative (gain) loss:
 
 
 
Oil contracts
$
(49,590
)
 
$
(10,432
)
Gas contracts
(44,468
)
 
(24,023
)
NGL contracts
(20,716
)
 
20,227

Total net derivative gain
$
(114,774
)

$
(14,228
)

Credit Related Contingent Features

As of March 31, 2017, and through the filing of this report, all of the Company’s derivative counterparties were members of the Company’s credit facility lender group. Under the Credit Agreement and derivative contracts, the Company is required to secure mortgages on assets having a value equal to at least 90 percent of the total PV-9 of the Company’s proved oil and gas properties evaluated in the most recent reserve report.

Note 11 - Fair Value Measurements

The Company follows fair value measurement accounting guidance for all assets and liabilities measured at fair value. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Market or observable inputs are the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The fair value hierarchy for grouping these assets and liabilities is based on the significance level of the following inputs:
Level 1 – quoted prices in active markets for identical assets or liabilities
Level 2 – quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable
Level 3 – significant inputs to the valuation model are unobservable

21


The following table summarizes the Company’s assets and liabilities that are measured at fair value in the accompanying balance sheets and where they are classified within the fair value hierarchy as of March 31, 2017:

Level 1

Level 2

Level 3

(in thousands)
Assets:








Derivatives (1)
$


$
158,173


$

Total property and equipment, net (2)
$

 
$

 
$
443,772

Liabilities:








Derivatives (1)
$


$
135,115


$

____________________________________________
(1) 
This represents a financial asset or liability that is measured at fair value on a recurring basis.
(2) 
This represents a non-financial asset that is measured at fair value on a nonrecurring basis.

The following table summarizes the Company’s assets and liabilities that are measured at fair value in the accompanying balance sheets and where they were classified within the fair value hierarchy as of December 31, 2016:
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Assets:
 
 
 
 
 
Derivatives (1)
$

 
$
122,096

 
$

Total property and equipment, net (2)
$

 
$

 
$
88,205

Liabilities:
 
 
 
 
 
Derivatives (1)
$

 
$
213,804

 
$

____________________________________________
(1) 
This represents a financial asset or liability that is measured at fair value on a recurring basis.
(2) 
This represents a non-financial asset that is measured at fair value on a nonrecurring basis.

Both financial and non-financial assets and liabilities are categorized within the above fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used by the Company as well as the general classification of such instruments pursuant to the above fair value hierarchy.

Derivatives

The Company uses Level 2 inputs to measure the fair value of oil, gas, and NGL commodity derivatives. Fair values are based upon interpolated data. The Company derives internal valuation estimates taking into consideration forward commodity price curves, counterparties’ credit ratings, the Company’s credit rating, and the time value of money. These valuations are then compared to the respective counterparties’ mark-to-market statements. The considered factors result in an estimated exit-price that management believes provides a reasonable and consistent methodology for valuing derivative instruments. The derivative instruments utilized by the Company are not considered by management to be complex, structured, or illiquid. The oil, gas, and NGL commodity derivative markets are highly active.

Generally, market quotes assume that all counterparties have near zero, or low, default rates and have equal credit quality. However, an adjustment may be necessary to reflect the credit quality of a specific counterparty to determine the fair value of the instrument. The Company monitors the credit ratings of its counterparties and may require counterparties to post collateral if their ratings deteriorate. In some instances, the Company will attempt to novate the trade to a more stable counterparty. All of the Company’s derivative counterparties are members of the Company’s credit facility lender group.

Valuation adjustments are necessary to reflect the effect of the Company’s credit quality on the fair value of any derivative liability position. This adjustment takes into account any credit enhancements, such as collateral margin that the Company may have posted with a counterparty, as well as any letters of credit between the parties. The methodology to determine this adjustment is consistent with how the Company evaluates counterparty credit risk, taking into account the Company’s credit rating, current credit facility margins, and any change in such margins since the last measurement date.


22


The methods described above may result in a fair value estimate that may not be indicative of net realizable value or may not be reflective of future fair values and cash flows. While the Company believes that the valuation methods utilized are appropriate and consistent with authoritative accounting guidance and with other marketplace participants, the Company recognizes that third parties may use different methodologies or assumptions to determine the fair value of certain financial instruments that could result in a different estimate of fair value at the reporting date.

Refer to Note 10 - Derivative Financial Instruments for more information regarding the Company’s derivative instruments.

Proved and Unproved Oil and Gas Properties and Other Property and Equipment

Property and equipment, net measured at fair value within the accompanying balance sheets totaled $443.8 million as of March 31, 2017, and related to assets held for sale as further discussed below. Property and equipment, net measured at fair value totaled $88.2 million as of December 31, 2016, and related primarily to downward performance reserve revisions on the Company’s Powder River Basin assets at year-end.
    
Proved oil and gas properties. Proved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication the carrying costs may not be recoverable. The Company uses Level 3 inputs and the income valuation technique, which converts future amounts to a single present value amount, to measure the fair value of proved properties through an application of discount rates and price forecasts representative of the current operating environment, as selected by the Company’s management. The calculation of the discount rates are based on the best information available and the rates used ranged from 10 percent to 15 percent based on the reservoir specific weightings of future estimated proved and unproved cash flows as of March 31, 2017, and December 31, 2016. The Company believes the discount rates are representative of current market conditions and consider estimates of future cash payments, reserve categories, expectations of possible variations in the amount and/or timing of cash flows, the risk premium, and nonperformance risk. The prices for oil and gas are forecast based on NYMEX strip pricing, adjusted for basis differentials, for the first five years, after which a flat terminal price is used for each commodity stream. The prices for NGLs are forecast using OPIS Mont Belvieu pricing, for as long as the market is actively trading, after which a flat terminal price is used. Future operating costs are also adjusted as deemed appropriate for these estimates. There were no impairments on proved properties during the three months ended March 31, 2017. For the three months ended March 31, 2016, the Company recorded $269.8 million of proved property impairments related primarily to the Company’s outside-operated Eagle Ford shale assets and the decline in expected reserve cash flows driven by commodity price declines during the first quarter of 2016.
 
Unproved oil and gas properties. Unproved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs may not be recoverable.  To measure the fair value of unproved properties, the Company uses a market approach, which takes into account the following significant assumptions: remaining lease terms, future development plans, risk weighted potential resource recovery, estimated reserve values, and estimated acreage value based on price(s) received for similar, recent acreage transactions by the Company or other market participants. There were no material abandonments or impairments of unproved properties during the three months ended March 31, 2017, or 2016.

Oil and gas properties held for sale. Proved and unproved properties and other property and equipment classified as held for sale, including the corresponding asset retirement obligation liability, are valued using a market approach based on an estimated net selling price, as evidenced by the most current bid prices received from third parties, if available, or by recent, comparable market transactions. If an estimated selling price is not available, the Company utilizes the various income valuation techniques discussed above. Any initial write-down and subsequent changes to the fair value less estimated cost to sell is included within the net gain (loss) on divestiture activity line item in the accompanying statements of operations. For the three months ended March 31, 2017, write-downs to fair value less estimated costs to sell on the Divide County assets held for sale totaled $359.6 million. For the three months ended March 31, 2016, write-downs to fair value less estimated costs to sell on certain assets held for sale totaled $68.3 million. Certain of these assets were subsequently sold in the third quarter of 2016 for a small net gain due to successful marketing efforts. Please refer to Note 3 – Divestitures, Assets Held for Sale, and Acquisitions for additional discussion.


23


Long-Term Debt

The following table reflects the fair value of the Senior Notes and Senior Convertible Notes measured using Level 1 inputs based on quoted secondary market trading prices. These notes were not presented at fair value on the accompanying balance sheets as of March 31, 2017, or December 31, 2016, as they were recorded at carrying value, net of any unamortized discounts and deferred financing costs. Please refer to Note 5 - Long-Term Debt for additional discussion.
 
As of March 31, 2017
 
As of December 31, 2016
 
Principal Amount
 
Fair Value
 
Principal Amount
 
Fair Value
 
(in thousands)
6.50% Senior Notes due 2021
$
344,611

 
$
353,657

 
$
346,955

 
$
354,546

6.125% Senior Notes due 2022
$
561,796

 
$
572,330

 
$
561,796

 
$
570,925

6.50% Senior Notes due 2023
$
394,985

 
$
403,378

 
$
394,985

 
$
403,134

5.0% Senior Notes due 2024
$
500,000

 
$
472,500

 
$
500,000

 
$
475,975

5.625% Senior Notes due 2025
$
500,000

 
$
479,550

 
$
500,000

 
$
485,000

6.75% Senior Notes due 2026
$
500,000

 
$
503,750

 
$
500,000

 
$
516,565

1.50% Senior Convertible Notes due 2021
$
172,500

 
$
171,355

 
$
172,500

 
$
202,189


The carrying value of the Company’s credit facility approximates its fair value, as the applicable interest rates are floating and based on prevailing market rates.

24



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

This discussion includes forward-looking statements. Please refer to Cautionary Information about Forward-Looking Statements at the end of this item for important information about these types of statements.

Overview of the Company, Highlights, and Outlook

General Overview

We are an independent energy company engaged in the acquisition, exploration, development, and production of oil, gas, and NGLs in onshore North America. We currently have development positions in the Midland Basin, Eagle Ford shale, and Bakken/Three Forks resource plays. Our strategic objective is to become a premier operator of top tier assets. During 2016, and continuing into 2017, we cored up our portfolio through proved and unproved property acquisitions in the Midland Basin. We were able to accomplish this through the divestiture of non-core assets and successful financing transactions. We plan to continue coring up our portfolio so we can concentrate on our highest return programs and provide value through accelerated development activity. Our Midland Basin and Eagle Ford shale assets have high operating margins and significant opportunities for additional economic investment. We seek to maximize the value of our assets by applying industry leading technology and outstanding operational execution. Our portfolio is comprised of unconventional resource prospects with prospective drilling opportunities, which we believe provide for long-term production and reserves growth. We focus on achieving high full-cycle economic returns on our investments and maintaining a simple, strong balance sheet.

Oil, Gas, and NGL Prices

Our financial condition and the results of our operations are significantly affected by the prices we receive for our oil, gas, and NGL production, which can fluctuate dramatically. When we refer to realized oil, gas, and NGL prices below, the disclosed price represents the average price for the respective period, before the effects of derivative settlements, unless otherwise indicated. While quoted NYMEX oil and gas and OPIS NGL prices are generally used as a basis for comparison within our industry, the prices we receive are affected by quality, energy content, location, and transportation differentials for these products.

The following table summarizes commodity price data, as well as the effects of derivative settlements, for the first quarter of 2017, as well as the fourth and first quarters of 2016:
 
For the Three Months Ended
 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
Crude Oil (per Bbl):
 
 
 
 
 
Average NYMEX contract monthly price
$
51.91

 
$
49.29

 
$
33.41

Realized price, before the effect of derivative settlements
$
47.55

 
$
43.58

 
$
25.67

Effect of oil derivative settlements
$
(2.58
)
 
$
5.38

 
$
24.27

 
 
 
 
 
 
Natural Gas:
 
 
 
 
 
Average NYMEX monthly settle price (per MMBtu)
$
3.32

 
$
2.98

 
$
1.96

Realized price, before the effect of derivative settlements (per Mcf)
$
2.98

 
$
2.86

 
$
1.87

Effect of natural gas derivative settlements (per Mcf)
$
0.52

 
$
0.35

 
$
1.15

 
 
 
 
 
 
NGLs (per Bbl): 
 
 
 
 
 
Average OPIS price (1)
$
26.74

 
$
24.11

 
$
15.99

Realized price, before the effect of derivative settlements
$
22.06

 
$
20.02

 
$
11.76

Effect of NGL derivative settlements
$
(2.88
)
 
$
(3.10
)
 
$
1.78

____________________________________________
(1)  
Average OPIS prices per barrel of NGL, historical or strip, are based on a product mix of 37% Ethane, 32% Propane, 6% Isobutane, 11% Normal Butane, and 14% Natural Gasoline for all periods presented. This product mix represents the industry standard composite barrel and does not necessarily represent our product mix for NGL production. Realized prices reflect our actual product mix.


25


We expect future prices for oil, gas, and NGLs to continue to be volatile.  In addition to supply and demand fundamentals, as a global commodity, the price of oil is affected by real or perceived geopolitical risks in all regions of the world as well as the relative strength of the dollar compared to other currencies. Oil markets continue to be unstable due to over-supply, large inventory balances, and uncertainty in global demand. The increase in oil prices at the end of 2016 was primarily attributable to the Organization of Petroleum Exporting Countries (“OPEC”) and non-OPEC exporting countries agreeing to cut production. While participating countries have largely adhered to agreed upon production cuts, uncertainty remains concerning whether these cuts will be sustained. Drilling activity in the United States has increased in recent months, putting continued downward pressure on oil prices in the near term.

There has been improvement in natural gas pricing over the last year, largely as a result of demand growth from gas fired power generation and both LNG exports and exports to Mexico exceeding prior expectations. We expect prices to remain near current levels in the near term as drilling rigs in operation have increased in recent months leading to increased supply, which we expect will be offset by continued demand growth from LNG exports and exports to Mexico. We also expect prices to fluctuate with changes in demand resulting from the weather.

NGL prices have also improved over the last year due to oil and natural gas price recovery. We expect NGL prices to remain near current levels through 2017, as we expect increased demand from export and petrochemical markets to be offset by increased drilling activity.

The following table summarizes 12-month strip prices for NYMEX WTI oil, NYMEX Henry Hub gas, and OPIS NGLs (same product mix as discussed under the table above) as of April 26, 2017, and March 31, 2017:
 
As of April 26, 2017
 
As of March 31, 2017
NYMEX WTI oil (per Bbl)
$
50.58

 
$
51.64

NYMEX Henry Hub gas (per MMBtu)
$
3.39

 
$
3.36

OPIS NGLs (per Bbl)
$
24.69

 
$
24.84

We use financial derivative instruments as part of our financial risk management program. We have a financial risk management policy governing our use of derivatives.  The amount of our production covered by derivatives is driven by the amount of debt on our balance sheet, the level of capital commitments and long-term obligations we have in place, and our ability to enter into favorable derivative commodity contracts.  With our current derivative contracts, we believe we have partially reduced our exposure to volatility in commodity prices in the near term. Our use of costless collars for a portion of our derivatives allows us to participate in some of the upward movements in oil prices while also setting a price floor for a portion of our oil production. Please refer to Note 10 - Derivative Financial Instruments in Part I, Item 1 of this report and the caption titled Commodity Price Risk in Overview of Liquidity and Capital Resources below for additional information regarding our oil, gas, and NGL derivatives.

First Quarter 2017 Highlights and Outlook for the Remainder of 2017

Our priorities for 2017 are to:

demonstrate the value of our 2016 and 2017 acquisitions in the Midland Basin;

generate high margin production growth from our operated acreage positions in the Midland Basin and Eagle Ford shale;

successfully execute the sale of our outside-operated Eagle Ford shale and Divide County assets; and

reduce our outstanding debt.

Our capital program for 2017, excluding acquisitions, is expected to be approximately $875 million. By concentrating our capital on the highest return programs and operating at strong performance levels, we expect to generate higher company-wide margins and cash flow growth while creating value for our stockholders. We successfully closed the sale of our outside-operated Eagle Ford shale assets in the first quarter of 2017 for net divestiture proceeds of $747.4 million. Additionally, we began marketing our Divide County assets, which we expect to sell by mid-year. We plan to use these divestiture proceeds to support the funding of our 2017 and 2018 capital programs. If market conditions are favorable, we may use a portion of the divestiture proceeds to pay down outstanding debt; however, the amount and timing is uncertain. Please refer to Overview of Liquidity and Capital Resources below for additional discussion on how we expect to fund our 2017 capital program.

26


Operational Activities. In our Midland Basin program, we began 2017 operating four drilling rigs and added two drilling rigs during the first quarter of 2017, one of which is drilling vertical test wells. We placed a seventh drilling rig into operation in mid-April 2017. Of these seven drilling rigs, five are focused on delineating and developing the Lower and Middle Spraberry and Wolfcamp A and B shale intervals on our acreage position in Howard and Martin Counties, Texas, and the other two drilling rigs remain focused on developing the Wolfcamp and Spraberry shale intervals on our Sweetie Peck property in Upton County, Texas. We expect approximately 80 percent of our 2017 capital program to be dedicated to our Midland Basin program.
During the first quarter of 2017, we acquired approximately 2,900 net acres in Howard County, Texas for $59.6 million, subject to post-closing adjustments, and completed an acreage trade of approximately 760 net acres in Howard County, Texas. Additionally, subsequent to March 31, 2017, we completed another asset trade, primarily leasehold interests, in Howard and Martin Counties, Texas, whereby we received approximately 2,260 net acres in exchange for transferring approximately 1,550 net acres. These trades provide us the opportunity to drill longer lateral wells and increase our working interest in existing drilling units.
In our Eagle Ford shale program, we began running one drilling rig during the first quarter of 2017. We plan to add another drilling rig in the third quarter of 2017, and are focused on reducing our drilled but not completed well count and meeting lease obligations. We expect 20 percent of our 2017 capital program to be dedicated to our Eagle Ford shale program.
In our Powder River Basin program, we continued running one drilling rig during the first quarter of 2017 under an acquisition and development funding agreement with a third party, pursuant to which the third party is carrying our drilling and completion costs.
Costs Incurred in Oil and Gas Producing Activities. Costs incurred in oil and gas property acquisition, exploration and development activities, whether capitalized or expensed, totaled $281.5 million for the three months ended March 31, 2017, and were incurred primarily in our Midland Basin and operated Eagle Ford shale programs. Of our total costs incurred for the three months ended March 31, 2017, $85.8 million relates to property acquisitions, primarily unproved, in Howard County, Texas. Included in this acquisition amount is the fair value attributed to the properties surrendered in the non-monetary acreage trade completed during the first quarter of 2017, as discussed above.

Drilling and Completion Activity. The table below provides a summary of changes in our drilled but not completed well count and current year drilling and completion activity in our operated programs during the first quarter of 2017:
 
Midland Basin
 
Eagle Ford Shale
 
Bakken/Three Forks (1)
 
Total
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
Wells drilled but not completed at December 31, 2016
17

 
17

 
47

 
47

 
20

 
17

 
84

 
81

Wells drilled
19

 
19

 
5

 
5

 

 

 
24

 
24

Wells completed
(16
)
 
(16
)
 
(17
)
 
(17
)
 

 

 
(33
)
 
(33
)
Wells drilled but not completed at March 31, 2017
20

 
20

 
35

 
35

 
20

 
17

 
75

 
72

_________________________________________
(1)
During the first quarter of 2017, we announced plans to sell our Divide County assets.

Production Results. The table below provides a regional breakdown of our production for the first quarter of 2017:
 
Permian
 
South Texas & Gulf Coast
 
Rocky Mountain
 
Total
Oil (MMBbl)
1.6

 
0.9

 
1.0

 
3.5

Gas (Bcf)
2.9

 
30.0

 
1.0

 
33.9

NGLs (MMBbl)

 
2.9

 

 
2.9

Equivalent (MMBOE)
2.1

 
8.8

 
1.2

 
12.1

Avg. daily equivalents (MBOE/d)
23.4

 
97.6

 
13.4

 
134.4

Relative percentage
17
%
 
73
%
 
10
%
 
100
%
____________________________________________
Note: Amounts may not calculate due to rounding.


27


Production on an equivalent basis decreased 10 percent for the three months ended March 31, 2017, compared with the same period in 2016, primarily as a result of the divestitures of properties across our regions in the last half of 2016 and the first quarter of 2017, specifically our Raven/Bear Den and outside-operated Eagle Ford shale assets. Please refer to A Three-Month Overview of Selected Production and Financial Information, Including Trends and Comparison of Financial Results and Trends Between the Three Months Ended March 31, 2017, and 2016 below for additional discussion on production.

Financial Results. In the first quarter of 2017, we had the following financial results:

We recorded net income of $74.4 million, or $0.67 per diluted share, for the three months ended March 31, 2017, compared with a net loss of $347.2 million, or $5.10 per diluted share, for the three months ended March 31, 2016. Net income for the three months ended March 31, 2017, was driven largely by a net gain of $398.1 million recorded on the sale of our outside-operated Eagle Ford shale assets and a net derivative gain of $114.8 million, mostly offset by a $359.6 million write-down to estimated fair value less costs to sell on our Divide County assets held for sale. Please refer to Comparison of Financial Results and Trends Between the Three Months Ended March 31, 2017, and 2016 below for additional discussion regarding the components of net income (loss) for each period.

We had net cash provided by operating activities of $135.0 million for the three months ended March 31, 2017, compared with $118.3 million for the same period in 2016. Please refer to Analysis of Cash Flow Changes Between the Three Months Ended March 31, 2017, and 2016 below for additional discussion.

Adjusted EBITDAX, a non-GAAP financial measure, for the three months ended March 31, 2017, was $172.2 million, compared with $182.3 million for the same period in 2016. Please refer to Non-GAAP Financial Measures below for additional discussion, including our definition of adjusted EBITDAX and reconciliations of our net income (loss) and net cash provided by operating activities to adjusted EBITDAX.

On March 31, 2017, pursuant to the Ninth Amendment to our Credit Agreement, our borrowing base and aggregate lender commitments were reduced to $925 million during the regularly scheduled semi-annual redetermination and as a result of closing the sale of our outside-operated Eagle Ford shale assets. Please refer to Note 5 - Long-Term Debt in Part I, Item I of this report for additional discussion.

28


Financial Results of Operations and Additional Comparative Data

The tables below provide information regarding selected production and financial information. A detailed discussion follows.

 
For the Three Months Ended
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
2017
 
2016
 
2016
 
2016
 
(in millions, except for production data)
Production (MMBOE)
12.1

 
13.4

 
14.2

 
14.3

Oil, gas, and NGL production revenue
$
333.2

 
$
346.3

 
$
329.2

 
$
291.1

Oil, gas, and NGL production expense
$
138.0

 
$
151.9


$
152.5

 
$
148.6

Depletion, depreciation, amortization, and asset retirement obligation liability accretion
$
137.8

 
$
171.6

 
$
194.0

 
$
211.0

Exploration
$
12.0

 
$
23.7

 
$
13.5

 
$
13.2

General and administrative
$
29.2

 
$
33.3

 
$
32.7

 
$
28.2

Net income (loss)
$
74.4

 
$
(200.9
)
 
$
(40.9
)
 
$
(168.7
)
____________________________________________
Note: Amounts may not calculate due to rounding.

Selected Performance Metrics

 
For the Three Months Ended
 
March 31,
 
December 31,