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TABLE OF CONTENTS

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q




ý

 

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

For the quarterly period ended June 30, 2017

OR

o

 

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

For the transition period from                             to                            

Commission File Number: 001-35467



Halcón Resources Corporation
(Exact name of registrant as specified in its charter)



Delaware
(State or other jurisdiction of
incorporation or organization)
  1311
(Primary Standard Industrial
Classification Code Number)
  20-0700684
(I.R.S. Employer
Identification Number)

1000 Louisiana Street, Suite 6700, Houston, TX 77002
(Address of principal executive offices)

(832) 538-0300
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)



        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 twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No 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 ý    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 o   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company ý

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 ý

        At July 31, 2017, 150,076,361 shares of the Registrant's Common Stock were outstanding.

   


Table of Contents


TABLE OF CONTENTS

 
   
  Page  

PART I—FINANCIAL INFORMATION

       

ITEM 1.

 

Condensed Consolidated Financial Statements

    5  

 

Condensed Consolidated Statements of Operations

    5  

 

Condensed Consolidated Balance Sheets

    6  

 

Condensed Consolidated Statements of Stockholders' Equity

    7  

 

Condensed Consolidated Statements of Cash Flows

    8  

 

Notes to Unaudited Condensed Consolidated Financial Statements

    9  

ITEM 2.

 

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

    46  

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    66  

ITEM 4.

 

Controls and Procedures

    67  

PART II—OTHER INFORMATION

       

ITEM 1.

 

Legal Proceedings

    68  

ITEM 1A.

 

Risk Factors

    68  

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    68  

ITEM 3.

 

Defaults Upon Senior Securities

    68  

ITEM 4.

 

Mine Safety Disclosures

    69  

ITEM 5.

 

Other Information

    69  

ITEM 6.

 

Exhibits

    69  

Signatures

    71  

2


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Special note regarding forward-looking statements

        This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. All statements, other than statements of historical facts, including, among other things, the purchase price, timing and use of proceeds from the Williston Divestiture and our business strategy and other plans and objectives for future operations, are forward-looking statements. These forward-looking statements are identified by their use of terms and phrases such as "may," "expect," "estimate," "project," "plan," "objective," "believe," "predict," "intend," "achievable," "anticipate," "will," "continue," "potential," "should," "could" and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. Readers should consider carefully the risks described under the "Risk Factors" section of our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as well as the other disclosures contained herein and therein, which describe factors that could cause our actual results to differ from those anticipated in the forward-looking statements, including, but not limited to, the following factors:

    volatility in commodity prices for oil and natural gas, including the current sustained decline in the price for oil;

    our ability to generate sufficient cash flow from operations, borrowings or other sources to enable us to fund our operations, satisfy our obligations and develop our undeveloped acreage positions;

    our ability to replace our oil and natural gas reserves and production;

    the possibility that acquisitions and divestitures may involve unexpected costs or delays, and that acquisitions may not achieve intended benefits and may divert management's time and energy;

    our ability to successfully integrate acquired oil and natural gas businesses and operations;

    we have historically had substantial indebtedness and we may incur more debt in the future;

    higher levels of indebtedness make us more vulnerable to economic downturns and adverse developments in our business;

    the presence or recoverability of estimated oil and natural gas reserves and the actual future production rates and associated costs;

    our ability to successfully develop our large inventory of undeveloped acreage in our resource plays;

    our ability to retain key members of senior management, the board of directors, and key technical employees;

    access to and availability of water and other treatment materials to carry out fracture stimulations in our resource plays;

    access to adequate gathering systems, processing facilities, transportation take-away capacity to move our production to market and marketing outlets to sell our production at market prices;

    contractual limitations that affect our management's discretion in managing our business, including covenants that, among other things, limit our ability to incur debt, make investments and pay cash dividends;

    the potential for production decline rates for our wells to be greater than we expect;

    competition, including competition for acreage in our resource play holdings;

3


Table of Contents

    environmental risks;

    drilling and operating risks;

    exploration and development risks;

    the possibility that the industry may be subject to future regulatory or legislative actions (including additional taxes and changes in environmental regulations);

    general economic conditions, whether internationally, nationally or in the regional and local market areas in which we do business, may be less favorable than expected, including the possibility that economic conditions in the United States will worsen and that capital markets are disrupted, which could adversely affect demand for oil and natural gas and make it difficult to access capital;

    social unrest, political instability or armed conflict in major oil and natural gas producing regions outside the United States, such as the Middle East, and armed conflict or acts of terrorism or sabotage;

    other economic, competitive, governmental, regulatory, legislative, including federal, state and tribal regulations and laws, geopolitical and technological factors that may negatively impact our business, operations or oil and natural gas prices;

    the insurance coverage maintained by us may not adequately cover all losses that we may sustain;

    title to the properties in which we have an interest may be impaired by title defects;

    senior management's ability to execute our plans to meet our goals;

    the cost and availability of goods and services, such as drilling rigs, fracture stimulation services and tubulars; and

    our dependency on the skill, ability and decisions of third party operators of the oil and natural gas properties in which we have a non-operated working interest.

        All forward-looking statements are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this document. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

4


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.    Condensed Consolidated Financial Statements (Unaudited)


HALCÓN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share amounts)

 
  Successor    
  Predecessor   Successor    
  Predecessor  
 
   
   
 
 
  Three Months
Ended
June 30, 2017
   
  Three Months
Ended
June 30, 2016
  Six Months
Ended
June 30, 2017
   
  Six Months
Ended
June 30, 2016
 
 
   
   
 
 
   
   
 

Operating revenues:

                                 

Oil, natural gas and natural gas liquids sales:

                                 

Oil

  $ 108,695       $ 99,095   $ 231,216       $ 174,062  

Natural gas

    5,946         3,159     12,165         6,901  

Natural gas liquids

    5,306         3,504     11,331         5,441  

Total oil, natural gas and natural gas liquids sales            

    119,947         105,758     254,712         186,404  

Other

    190         389     1,023         1,092  

Total operating revenues

    120,137         106,147     255,735         187,496  

Operating expenses:

                                 

Production:

                                 

Lease operating

    20,380         16,981     41,024         37,559  

Workover and other

    7,128         7,915     18,569         15,706  

Taxes other than income

    10,727         9,753     22,303         17,011  

Gathering and other

    11,812         10,519     23,754         21,903  

Restructuring

    50         189     805         5,073  

General and administrative

    26,922         24,708     47,771         66,324  

Depletion, depreciation and accretion

    31,962         39,671     64,848         94,937  

Full cost ceiling impairment

            257,869             754,769  

(Gain) loss on sale of oil and natural gas properties            

    (4,500 )           (235,690 )        

Other operating property and equipment impairment            

                        28,056  

Total operating expenses

    104,481         367,605     (16,616 )       1,041,338  

Income (loss) from operations

    15,656         (261,458 )   272,351         (853,842 )

Other income (expenses):

                                 

Net gain (loss) on derivative contracts

    24,156         (54,523 )   50,554         (35,781 )

Interest expense and other, net

    (19,635 )       (58,322 )   (44,478 )       (106,113 )

Gain (loss) on extinguishment of debt

                (56,898 )       81,434  

Total other income (expenses)

    4,521         (112,845 )   (50,822 )       (60,460 )

Income (loss) before income taxes

    20,177         (374,303 )   221,529         (914,302 )

Income tax benefit (provision)

                (12,000 )        

Net income (loss)

    20,177         (374,303 )   209,529         (914,302 )

Non-cash preferred dividend

    (47,206 )           (48,007 )        

Series A preferred dividends

            (3,198 )           (6,396 )

Preferred dividends and accretion on redeemable noncontrolling interest

            (4,852 )           (28,517 )

Net income (loss) available to common stockholders

  $ (27,029 )     $ (382,353 ) $ 161,522       $ (949,215 )

Net income (loss) per share of common stock:

                                 

Basic

  $ (0.19 )     $ (3.17 ) $ 1.37       $ (7.89 )

Diluted

  $ (0.19 )     $ (3.17 ) $ 1.37       $ (7.89 )

Weighted average common shares outstanding:

                                 

Basic

    143,545         120,708     117,554         120,360  

Diluted

    143,545         120,708     118,209         120,360  

   

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

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HALCÓN RESOURCES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share and per share amounts)

 
  Successor  
 
  June 30,
2017
  December 31,
2016
 

Current assets:

             

Cash

  $ 21   $ 24  

Accounts receivable

    124,250     147,762  

Receivables from derivative contracts

    26,389     5,923  

Prepaids and other

    6,839     6,940  

Total current assets

    157,499     160,649  

Oil and natural gas properties (full cost method):

             

Evaluated

    1,326,160     1,269,034  

Unevaluated

    1,053,408     316,439  

Gross oil and natural gas properties

    2,379,568     1,585,473  

Less—accumulated depletion

    (527,654 )   (465,849 )

Net oil and natural gas properties

    1,851,914     1,119,624  

Other operating property and equipment:

             

Gas gathering and other operating assets

    67,595     38,617  

Less—accumulated depreciation

    (3,041 )   (1,107 )

Net other operating property and equipment

    64,554     37,510  

Other noncurrent assets:

             

Receivables from derivative contracts

    5,477      

Funds in escrow and other

    1,906     1,887  

Total assets

  $ 2,081,350   $ 1,319,670  

Current liabilities:

             

Accounts payable and accrued liabilities

  $ 223,305   $ 186,184  

Liabilities from derivative contracts

    280     16,434  

Other

    4,704     4,935  

Total current liabilities

    228,289     207,553  

Long-term debt, net

    1,093,548     964,653  

Other noncurrent liabilities:

             

Liabilities from derivative contracts

    363     486  

Asset retirement obligations

    26,980     31,985  

Other

    141     2,305  

Commitments and contingencies (Note 10)

             

Stockholders' equity:

             

Common stock: 1,000,000,000 shares of $0.0001 par value authorized; 150,101,781 and 92,991,183 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively

    15     9  

Additional paid-in capital

    1,002,469     592,663  

Retained earnings (accumulated deficit)

    (270,455 )   (479,984 )

Total stockholders' equity

    732,029     112,688  

Total liabilities and stockholders' equity

  $ 2,081,350   $ 1,319,670  

   

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

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HALCÓN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(In thousands)

 
  Preferred Stock   Common Stock    
  Retained
Earnings
(Accumulated
Deficit)
   
 
 
  Additional
Paid-In
Capital
  Stockholders'
Equity
 
 
  Shares   Amount   Shares   Amount  

Balances at December 31, 2015 (Predecessor)

    245   $     122,524   $ 12   $ 3,283,097   $ (3,230,695 ) $ 52,414  

Net income (loss)

                        11,958     11,958  

Conversion of Series A preferred stock

    (23 )       724                  

Preferred dividends on redeemable noncontrolling interest

                        (9,329 )   (9,329 )

Accretion of redeemable noncontrolling interest

                        (26,576 )   (26,576 )

Fair value of equity issued to Predecessor

                                         

common stockholders

                    (22,176 )       (22,176 )

Cash payment to Preferred Holders

                    (11,100 )       (11,100 )

Reverse stock split rounding

            5                    

Offering costs

                    (10 )       (10 )

Long-term incentive plan forfeitures

            (517 )                

Reduction in shares to cover individuals' tax withholding

            (498 )       (176 )       (176 )

Share-based compensation

                    4,995         4,995  

Balances at September 9, 2016 (Predecessor)

    222   $     122,238   $ 12   $ 3,254,630   $ (3,254,642 ) $  

Cancellation of Predecessor equity

    (222 ) $     (122,238 ) $ (12 ) $ (3,254,630 ) $ 3,254,642   $  

Balances at September 9, 2016 (Predecessor)

      $       $   $   $   $  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Successor common stock and warrants

      $     90,000   $ 9   $ 571,114   $   $ 571,123  

Balances at September 9, 2016 (Successor)

   
 
$

   
90,000
 
$

9
 
$

571,114
 
$

 
$

571,123
 

Net income (loss)

                        (479,193 )   (479,193 )

Preferred dividends on redeemable noncontrolling interest

                        (791 )   (791 )

Long-term incentive plan grants

            2,991                  

Share-based compensation

                    21,549         21,549  

Balances at December 31, 2016 (Successor)

      $     92,991   $ 9   $ 592,663   $ (479,984 ) $ 112,688  

Net income (loss)

                        209,529     209,529  

Sale of convertible preferred stock

    6                 352,048         352,048  

Preferred beneficial conversion feature

                    48,007         48,007  

Conversion of preferred stock

    (6 )       55,180     6     (6 )        

Offering costs

                    (11,919 )       (11,919 )

Long-term incentive plan grants

            2,022                  

Long-term incentive plan forfeitures

            (89 )                

Reduction in shares to cover individuals' tax withholding

            (2 )       (17 )       (17 )

Share-based compensation

                    21,693         21,693  

Balances at June 30, 2017 (Successor)

      $     150,102   $ 15   $ 1,002,469   $ (270,455 ) $ 732,029  

   

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

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HALCÓN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 
  Successor    
  Predecessor  
 
  Six Months
Ended
June 30, 2017
   
  Six Months
Ended
June 30, 2016
 
 
   
 
 
   
 

Cash flows from operating activities:

                 

Net income (loss)

  $ 209,529       $ (914,302 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

                 

Depletion, depreciation and accretion

    64,848         94,937  

Full cost ceiling impairment

            754,769  

(Gain) loss on sale of oil and natural gas properties

    (235,690 )        

Other operating property and equipment impairment

            28,056  

Share-based compensation, net

    21,290         3,652  

Unrealized loss (gain) on derivative contracts

    (42,219 )       224,281  

Amortization and write-off of deferred loan costs

    896         3,024  

Amortization of discount and premium

    1,887         1,269  

Loss (gain) on extinguishment of debt

    56,898         (81,434 )

Accrued settlements on derivative contracts

    (3,520 )       (23,072 )

Other income (expense)

    (1,004 )       3,973  

Change in assets and liabilities:

                 

Accounts receivable

    34,982         72,286  

Prepaids and other

    91         (4,535 )

Accounts payable and accrued liabilities

    14,655         (20,161 )

Net cash provided by (used in) operating activities

    122,643         142,743  

Cash flows from investing activities:

                 

Oil and natural gas capital expenditures

    (121,210 )       (170,416 )

Proceeds received from sale of oil and natural gas properties

    477,306         (407 )

Acquisition of oil and natural gas properties

    (907,487 )       158  

Acquisition of other operating property and equipment

    (25,538 )        

Other operating property and equipment capital expenditures

    (13,735 )       (886 )

Proceeds received from sale of other operating property and equipment

    10,352         115  

Funds held in escrow and other

    285         59  

Net cash provided by (used in) investing activities

    (580,027 )       (171,377 )

Cash flows from financing activities:

                 

Proceeds from borrowings

    1,235,000         425,000  

Repayments of borrowings

    (1,118,000 )       (395,648 )

Premium paid to repurchase the 2020 Second Lien Notes

    (30,917 )        

Debt issuance costs

    (16,823 )       (1,186 )

Preferred stock issued

    400,055          

Offering costs and other

    (11,934 )       (385 )

Net cash provided by (used in) financing activities

    457,381         27,781  

Net increase (decrease) in cash

    (3 )       (853 )

Cash at beginning of period

    24         8,026  

Cash at end of period

  $ 21       $ 7,173  

Disclosure of non-cash investing and financing activities:

                 

Accrued capitalized interest

  $       $ (2,387 )

Asset retirement obligations

    (5,972 )       919  

Accretion of non-cash preferred dividend

    48,007          

Preferred dividends on redeemable noncontrolling interest paid-in-kind

            6,655  

Accretion of redeemable noncontrolling interest

            21,862  

Accrued debt issuance costs

    (45 )       904  

Accrued offering costs

    (3 )        

   

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

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HALCÓN RESOURCES CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. FINANCIAL STATEMENT PRESENTATION

Basis of Presentation and Principles of Consolidation

        Halcón Resources Corporation (Halcón or the Company) is an independent energy company focused on the acquisition, production, exploration and development of onshore liquids-rich oil and natural gas assets in the United States. The unaudited condensed consolidated financial statements include the accounts of all majority-owned, controlled subsidiaries. The Company operates in one segment which focuses on oil and natural gas acquisition, production, exploration and development. The Company's oil and natural gas properties are managed as a whole rather than through discrete operating areas. Operational information is tracked by operating area; however, financial performance is assessed as a whole. Allocation of capital is made across the Company's entire portfolio without regard to operating area. All intercompany accounts and transactions have been eliminated. These unaudited condensed consolidated financial statements reflect, in the opinion of the Company's management, all adjustments, consisting of normal and recurring adjustments, necessary to present fairly the financial position as of, and the results of operations for, the periods presented. During interim periods, Halcón follows the accounting policies disclosed in its Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission (SEC) on March 1, 2017. Please refer to the notes in the 2016 Annual Report on Form 10-K when reviewing interim financial results, though, as described below, such prior financial statements may not be comparable to the interim financial statements due to the adoption of fresh-start accounting on September 9, 2016.

Emergence from Voluntary Reorganization under Chapter 11

        On July 27, 2016 (the Petition Date), the Company and certain of its subsidiaries (the Halcón Entities) filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court in the District of Delaware (the Bankruptcy Court) to pursue a joint prepackaged plan of reorganization (the Plan). On September 8, 2016, the Bankruptcy Court entered an order confirming the Plan and on September 9, 2016, the Plan became effective (the Effective Date) and the Halcón Entities emerged from chapter 11 bankruptcy. The Company's subsidiary, HK TMS, LLC which was divested on September 30, 2016, was not part of the chapter 11 bankruptcy filings. See Note 2, "Reorganization," for further details on the Company's chapter 11 bankruptcy and the Plan and Note 4, "Acquisitions and Divestitures," for further details on the divestiture of HK TMS, LLC.

        Upon emergence from chapter 11 bankruptcy, the Company adopted fresh-start accounting in accordance with provisions of the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) 852, "Reorganizations" (ASC 852) which resulted in the Company becoming a new entity for financial reporting purposes on the Effective Date. Upon the adoption of fresh-start accounting, the Company's assets and liabilities were recorded at their fair values as of the fresh-start reporting date. As a result of the adoption of fresh-start accounting, the Company's unaudited condensed consolidated financial statements subsequent to September 9, 2016 are not comparable to its unaudited condensed consolidated financial statements prior to, and including, September 9, 2016. See Note 3, "Fresh-start Accounting," for further details on the impact of fresh-start accounting on the Company's unaudited condensed consolidated financial statements.

        References to "Successor" or "Successor Company" relate to the financial position and results of operations of the reorganized Company subsequent to September 9, 2016. References to "Predecessor"

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HALCÓN RESOURCES CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. FINANCIAL STATEMENT PRESENTATION (Continued)

or "Predecessor Company" relate to the financial position and results of operations of the Company prior to, and including, September 9, 2016.

Use of Estimates

        The preparation of the Company's unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Estimates and assumptions that, in the opinion of management of the Company, are significant include oil and natural gas revenue accruals, capital and operating expense accruals, oil and natural gas reserves, depletion relating to oil and natural gas properties, asset retirement obligations, fair value estimates, including estimates of Reorganization Value, Enterprise Value and the fair value of assets and liabilities recorded as a result of the adoption of fresh-start accounting, plus the estimated fair values of assets acquired and liabilities assumed in connection with the Pecos County Acquisition and the fair value of assets sold in connection with the El Halcón Divestiture (see to Note 4, "Acquisitions and Divestitures," for information on the Pecos County Acquisition and the El Halcón Divestiture), including the gain on sale recorded, and income taxes. The Company bases its estimates and judgments on historical experience and on various other assumptions and information believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be predicted with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company's operating environment changes. Actual results may differ from the estimates and assumptions used in the preparation of the Company's unaudited condensed consolidated financial statements.

        Interim period results are not necessarily indicative of results of operations or cash flows for the full year and accordingly, certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, has been condensed or omitted. The Company has evaluated events or transactions through the date of issuance of these unaudited condensed consolidated financial statements.

Accounts Receivable and Allowance for Doubtful Accounts

        The Company's accounts receivable are primarily receivables from joint interest owners and oil and natural gas purchasers. Accounts receivable are recorded at the amount due, less an allowance for doubtful accounts, when applicable. The Company establishes provisions for losses on accounts receivable if it determines that collection of all or part of the outstanding balance is doubtful. The Company regularly reviews collectability and establishes or adjusts the allowance for doubtful accounts as necessary using the specific identification method. There were no significant allowances for doubtful accounts as of June 30, 2017 (Successor) or December 31, 2016 (Successor).

Other Operating Property and Equipment

        Gas gathering systems and equipment were recorded at fair value as a result of fresh-start accounting on September 9, 2016 and additions since that date are recorded at cost. Depreciation is

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HALCÓN RESOURCES CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. FINANCIAL STATEMENT PRESENTATION (Continued)

calculated using the straight-line method over a 30-year, 20-year, or 10-year estimated useful life applicable to gas gathering systems, a water recycling facility and a compressed natural gas facility, respectively. Upon disposition, the cost and accumulated depreciation are removed and any gains or losses are reflected in current operations. Maintenance and repair costs are charged to operating expense as incurred. Material expenditures which increase the life or productive capacity of an asset are capitalized and depreciated over the estimated remaining useful life of the asset.

        Other operating assets were recorded at fair value as a result of fresh-start accounting on September 9, 2016 and additions since that date are recorded at cost. Depreciation is calculated using the straight-line method over the following estimated useful lives: automobiles and computers, three years; computer software, fixtures, furniture and equipment, five years or the lesser of the lease term; trailers, seven years; heavy equipment, eight to ten years; buildings, twenty years and leasehold improvements, lease term. Upon disposition, the cost and accumulated depreciation are removed and any gains or losses are reflected in current operations. Maintenance and repair costs are charged to operating expense as incurred. Material expenditures which increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset.

        Refer to Note 4, "Acquisitions and Divestitures," for a discussion of gas gathering systems and equipment and other operating assets acquired and divested during the period.

        The Company reviews its gas gathering systems and equipment and other operating assets for impairment in accordance with ASC 360, Property, Plant, and Equipment (ASC 360). ASC 360 requires the Company to evaluate gas gathering systems and equipment and other operating assets for impairment as events occur or circumstances change that would more likely than not reduce the fair value below the carrying amount. If the carrying amount is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, the Company evaluates the remaining useful lives of its gas gathering systems and other operating assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods. For the six months ended June 30, 2016 (Predecessor), the Company recorded a non-cash impairment charge of $28.1 million in "Other operating property and equipment impairment" in the Company's unaudited condensed consolidated statements of operations and in "Gas gathering and other operating assets" in the Company's unaudited condensed consolidated balance sheets related to $32.8 million gross investments in gas gathering infrastructure that were deemed non-economical due to a shift in exploration, drilling and developmental plans in a low commodity price environment.

        In accordance with ASC 820, Fair Value Measurements and Disclosures (ASC 820), a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The estimate of the fair value of the Company's gas gathering systems was based on an income approach that estimated future cash flows associated with those assets over the remaining asset lives. This estimation includes the use of unobservable inputs, such as estimated future production, gathering and compression revenues and operating expenses. The use of these unobservable inputs results in the fair value estimate of the Company's gas gathering systems being classified as Level 3.

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HALCÓN RESOURCES CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. FINANCIAL STATEMENT PRESENTATION (Continued)

Recently Issued Accounting Pronouncements

        In January 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01). For public business entities, ASU 2017-01 is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2017. The amendments in this ASU should be applied prospectively on or after the effective date. The ASU was issued to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The Company is in the process of assessing the effects of the application of the new guidance.

        In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) (ASU 2016-15). For public business entities, ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and early adoption is permitted. The areas for simplification in this ASU involve addressing eight specific classification issues in the statement of cash flows. An entity should apply the amendments in this ASU using a retrospective transition method. The Company is in the process of assessing the effects of the application of the new guidance.

        In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). For public business entities, ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. The FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. An entity should apply the amendments in this ASU on a modified retrospective basis. The transition will require application of the new guidance at the beginning of the earliest comparative period presented in the financial statements. The Company is in the early stages of assessing the effects of the application of the new guidance and the financial statement and disclosure impacts. The Company will adopt ASU 2016-02 no later than January 1, 2019.

        In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard provides five steps an entity should apply in determining its revenue recognition. In March 2016, ASU 2014-09 was updated with ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08), which provides further clarification on the principal versus agent evaluation. ASU 2014-09 is required to be adopted using either the full retrospective approach, with all prior periods presented adjusted, or the modified retrospective approach, with a cumulative adjustment to retained earnings on the opening balance sheet and is effective for annual reporting periods, and interim periods within that reporting period, beginning after December 15, 2016, or after December 2017, if companies choose to elect the deferred adoption date approved by the FASB. Early adoption is not permitted. The Company is in the early stages of assessing the effects of the application of the new guidance and the financial statement and disclosure impacts. The Company will adopt ASU 2014-09 effective January 1, 2018.

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HALCÓN RESOURCES CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. REORGANIZATION

        On June 9, 2016, the Halcón Entities entered into a restructuring support agreement (the Restructuring Support Agreement) with certain holders of the Company's 13% senior secured third lien notes due 2022 (the Third Lien Noteholders), the Company's 8.875% senior unsecured notes due 2021, 9.25% senior unsecured notes due 2022 and 9.75% senior unsecured notes due 2020 (collectively, the Unsecured Noteholders), the holder of the Company's 8% senior unsecured convertible note due 2020 (the Convertible Noteholder), and certain holders of the Company's 5.75% Series A Convertible Perpetual Preferred Stock. On July 27, 2016, the Halcón Entities filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court in the District of Delaware to effect an accelerated prepackaged bankruptcy restructuring as contemplated in the Restructuring Support Agreement. On September 8, 2016, the Bankruptcy Court entered an order confirming the Plan and on September 9, 2016, the Halcón Entities emerged from chapter 11 bankruptcy.

        Upon emergence, pursuant to the terms of the Plan, the following significant transactions occurred:

    the Predecessor Company's financing facility under the Predecessor Credit Agreement was refinanced and replaced with a debtor-in-possession senior secured, super-priority revolving credit facility, which was subsequently converted into the Senior Credit Agreement (refer to Note 6, "Debt," for credit agreement definitions and further details regarding the credit agreements);

    the Predecessor Company's Second Lien Notes (consisting of $700.0 million in aggregate principal amount outstanding of 8.625% senior secured notes due 2020 and $112.8 million in aggregate principal amount outstanding of 12% senior secured notes due 2022) were unimpaired and reinstated;

    the Predecessor Company's Third Lien Notes were cancelled and the Third Lien Noteholders received their pro rata share of 76.5% of the common stock of reorganized Halcón, together with a cash payment of $33.8 million, and accrued and unpaid interest on their notes through May 15, 2016, which interest was paid prior to the chapter 11 bankruptcy filing, in full and final satisfaction of their claims;

    the Predecessor Company's Unsecured Notes were cancelled and the Unsecured Noteholders received their pro rata share of 15.5% of the common stock of reorganized Halcón, together with a cash payment of $37.6 million and warrants to purchase 4% of the common stock of reorganized Halcón (with a four year term and an exercise price of $14.04 per share), and accrued and unpaid interest on their notes through May 15, 2016, which interest was paid prior to the chapter 11 bankruptcy filing, in full and final satisfaction of their claims;

    the Predecessor Company's Convertible Note was cancelled and the Convertible Noteholder received 4% of the common stock of reorganized Halcón, together with a cash payment of $15.0 million and warrants to purchase 1% of the common stock of reorganized Halcón (with a four year term and an exercise price of $14.04 per share), in full and final satisfaction of their claims;

    the general unsecured claims were unimpaired and paid in full in the ordinary course;

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. REORGANIZATION (Continued)

    all outstanding shares of the Predecessor Company's Series A Preferred Stock were cancelled and the Preferred Holders received their pro rata share of $11.1 million in cash, in full and final satisfaction of their interests; and

    all of the Predecessor Company's outstanding shares of common stock were cancelled and the common stockholders received their pro rata share of 4% of the common stock of reorganized Halcón, in full and final satisfaction of their interests.

        Each of the foregoing percentages of equity in the reorganized Company were as of September 9, 2016 and are subject to dilution from the exercise of the new warrants described above, a management incentive plan discussed further in Note 11, "Stockholders' Equity," and other future issuances of equity securities.

        See Note 6, "Debt," and Note 11, "Stockholders' Equity," for further information regarding the Company's Successor and Predecessor debt and equity instruments.

3. FRESH-START ACCOUNTING

        Upon the Company's emergence from chapter 11 bankruptcy, the Company qualified for and adopted fresh-start accounting in accordance with the provisions set forth in ASC 852 as (i) the Reorganization Value of the Company's assets immediately prior to the date of confirmation was less than the post-petition liabilities and allowed claims, and (ii) the holders of the existing voting shares of the Predecessor entity received less than 50% of the voting shares of the emerging entity. Refer to Note 2, "Reorganization," for the terms of the Plan. Fresh-start accounting requires the Company to present its assets, liabilities, and equity as if it were a new entity upon emergence from bankruptcy. The new entity is referred to as "Successor" or "Successor Company." However, the Company will continue to present financial information for any periods before adoption of fresh-start accounting for the Predecessor Company. The Predecessor and Successor companies may lack comparability, as required in ASC Topic 205, Presentation of Financial Statements (ASC 205). ASC 205 states financial statements are required to be presented comparably from year to year, with any exceptions to comparability clearly disclosed. Therefore, "black-line" financial statements are presented to distinguish between the Predecessor and Successor companies.

        Adopting fresh-start accounting results in a new financial reporting entity with no beginning retained earnings or deficit as of the fresh-start reporting date. Upon the application of fresh-start accounting, the Company allocated the Reorganization Value (the fair value of the Successor Company's total assets) to its individual assets based on their estimated fair values. The Reorganization Value is intended to represent the approximate amount a willing buyer would value the Company's assets immediately after the reorganization.

        Reorganization Value is derived from an estimate of Enterprise Value, or the fair value of the Company's long-term debt, stockholders' equity and working capital. The estimated Enterprise Value at the Effective Date was below the midpoint of the Court approved range of $1.6 billion to $1.8 billion, primarily reflecting the decline in forward commodity prices during the period between the Company's analysis performed in advance of the July 2016 chapter 11 bankruptcy filing and the Effective Date. The Enterprise Value was derived from an independent valuation using an asset based methodology of proved reserves, undeveloped acreage, and other financial information, considerations and projections,

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HALCÓN RESOURCES CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. FRESH-START ACCOUNTING (Continued)

applying a combination of the income, cost and market approaches as of the fresh-start reporting date of September 9, 2016.

        The Company's principal assets are its oil and natural gas properties. For purposes of estimating the fair value of the Company's proved, probable and possible reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Company's reserves, risked by reserve category and discounted using a weighted average cost of capital rate of 10.5% for proved reserves and 12.5% for probable and possible reserves. The proved reserve locations were limited to wells expected to be drilled in the Company's five year development plan. Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $72.30 per barrel of oil, $3.50 per million British thermal units (MMBtu) of natural gas and $12.00 per barrel of oil equivalent of natural gas liquids, after adjustment for transportation fees and regional price differentials. Base pricing was derived from an average of forward strip prices and analysts' estimated prices.

        In estimating the fair value of the Company's unproved acreage that was not included in the valuation of probable and possible reserves, a market approach was used in which a review of recent transactions involving properties in the same geographical location indicated the fair value of the Company's unproved acreage from a market participant perspective.

        See further discussion below in the "Fresh-start accounting adjustments" for the specific assumptions used in the valuation of the Company's various other assets.

        Although the Company believes the assumptions and estimates used to develop Enterprise Value and Reorganization Value were reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions. The assumptions used in estimating these values are inherently uncertain and require judgment.

        The following table reconciles the Company's Enterprise Value to the estimated fair value of the Successor's common stock as of September 9, 2016 (in thousands):

 
  September 9,
2016
 

Enterprise Value

  $ 1,618,888  

Plus: Cash

    13,943  

Less: Fair value of debt

    (1,016,160 )

Less: Fair value of redeemable noncontrolling interest

    (41,070 )

Less: Fair value of other long-term liabilities

    (4,478 )

Less: Fair value of warrants

    (16,691 )

Fair Value of Successor common stock

  $ 554,432  

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. FRESH-START ACCOUNTING (Continued)

        The following table reconciles the Company's Enterprise Value to its Reorganization Value as of September 9, 2016 (in thousands):

 
  September 9,
2016
 

Enterprise Value

  $ 1,618,888  

Plus: Cash

    13,943  

Plus: Current liabilities

    178,639  

Plus: Noncurrent asset retirement obligation

    32,156  

Reorganization Value of Successor assets

  $ 1,843,626  

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HALCÓN RESOURCES CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. FRESH-START ACCOUNTING (Continued)

Condensed Consolidated Balance Sheet

        The following illustrates the effects on the Company's unaudited condensed consolidated balance sheet due to the reorganization and fresh-start accounting adjustments. The explanatory notes following the table below provide further details on the adjustments, including the Company's assumptions and methods used to determine fair value for its assets and liabilities. Amounts included in the table below are rounded to thousands.

 
  As of September 9, 2016  
 
  Predecessor
Company
  Reorganization
Adjustments
   
  Fresh-Start
Adjustments
   
  Successor
Company
 

Current assets:

                                 

Cash

  $ 111,464   $ (97,521 ) (1)   $       $ 13,943  

Accounts receivable

    116,859                     116,859  

Receivables from derivative contracts

    97,648                     97,648  

Restricted cash

    17,164                     17,164  

Prepaids and other

    8,961             (1,332 ) (7)     7,629  

Total current assets

    352,096     (97,521 )       (1,332 )       253,243  

Oil and natural gas properties (full cost method):

                                 

Evaluated

    7,712,003             (6,497,874 ) (8)     1,214,129  

Unevaluated

    1,193,259             (861,144 ) (8)     332,115  

Gross oil and natural gas properties

    8,905,262             (7,359,018 )       1,546,244  

Less—accumulated depletion

    (6,803,231 )           6,803,231   (8)      

Net oil and natural gas properties

    2,102,031             (555,787 )       1,546,244  

Other operating property and equipment:

                                 

Gas gathering and other operating assets

    100,079             (62,008 ) (9)     38,071  

Less—accumulated depreciation

    (24,154 )           24,154   (9)      

Net other operating property and equipment

    75,925             (37,854 )       38,071  

Other noncurrent assets:

                                 

Receivables from derivative contracts

    4,431                     4,431  

Funds in escrow and other

    1,610             27   (10)     1,637  

Total assets

  $ 2,536,093   $ (97,521 )     $ (594,946 )     $ 1,843,626  

Current liabilities:

                                 

Accounts payable and accrued liabilities

  $ 160,000   $ 13,688   (2)   $       $ 173,688  

Liabilities from derivative contracts

    102                     102  

Other

    414             4,435   (11)(12)     4,849  

Total current liabilities

    160,516     13,688         4,435         178,639  

Long-term debt, net

    1,031,114             (14,954 ) (13)     1,016,160  

Liabilities subject to compromise

    2,007,703     (2,007,703 ) (3)              

Other noncurrent liabilities:

                                 

Liabilities from derivative contracts

    525                     525  

Asset retirement obligations

    48,955             (16,799 ) (12)     32,156  

Other

    528             3,425   (11)(14)     3,953  

Commitments and contingencies

                                 

Mezzanine equity:

                                 

Redeemable noncontrolling interest

    219,891             (178,821 ) (14)     41,070  

Stockholders' equity:

                                 

Preferred stock (Predecessor)

          (4)              

Common Stock (Predecessor)

    12     (12 ) (4)              

Common Stock (Successor)

        9   (5)             9  

Additional paid-in capital (Predecessor)

    3,287,906     (3,287,906 ) (4)              

Additional paid-in capital (Successor)

        571,114   (5)             571,114  

Retained earnings (accumulated deficit)

    (4,221,057 )   4,613,289   (6)     (392,232 ) (15)      

Total stockholders' equity

    (933,139 )   1,896,494         (392,232 )       571,123  

Total liabilities and stockholders' equity

  $ 2,536,093   $ (97,521 )     $ (594,946 )     $ 1,843,626  

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HALCÓN RESOURCES CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. FRESH-START ACCOUNTING (Continued)

Reorganization adjustments

(1)
The table below details cash payments as of September 9, 2016, pursuant to the terms of the Plan described in Note 2, "Reorganization," (in thousands):

Payment to Third Lien Noteholders

  $ 33,826  

Payment to Unsecured Noteholders

    37,595  

Payment to Convertible Noteholder

    15,000  

Payment to Preferred Holders

    11,100  

Total Uses

  $ 97,521  
(2)
In connection with the chapter 11 bankruptcy, the Company modified and rejected certain office lease arrangements and paid approximately $3.4 million for these modifications and rejections subsequent to the emergence from chapter 11 bankruptcy. This amount also reflects $10.3 million paid to the Company's restructuring advisors subsequent to the emergence from chapter 11 bankruptcy.

(3)
Liabilities subject to compromise were as follows (in thousands):

13.0% senior secured third lien notes due 2022

  $ 1,017,970  

9.25% senior notes due 2022

    37,194  

8.875% senior notes due 2021

    297,193  

9.75% senior notes due 2020

    315,535  

8.0% convertible note due 2020

    289,669  

Accrued interest

    46,715  

Office lease modification and rejection fees

    3,427  

Liabilities subject to compromise

    2,007,703  

Fair value of equity and warrants issued to Third Lien Noteholders, Unsecured Noteholders and Convertible Noteholder

    (548,947 )

Cash payments to Third Lien Noteholders, Unsecured Noteholders and Convertible Noteholder

    (86,421 )

Office lease modification and rejection fees

    (3,427 )

Gain on settlement of Liabilities subject to compromise

  $ 1,368,908  
(4)
Reflects the cancellation of Predecessor equity, as follows (in thousands):

Predecessor Company stock

  $ 3,287,918  

Fair value of equity issued to Predecessor common stockholders

    (22,176 )

Cash payment to Preferred Holders

    (11,100 )

Cancellation of Predecessor Company equity

  $ 3,254,642  
(5)
Reflects the issuance of Successor equity. In accordance with the Plan, the Successor Company issued 3.6 million shares of common stock to the Predecessor Company's existing common stockholders, 68.8 million shares of common stock to the Third Lien Noteholders, 14.0 million shares of common stock to the Unsecured Noteholders, and 3.6 million shares of common stock to

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. FRESH-START ACCOUNTING (Continued)

    the Convertible Noteholder. This amount is subject to dilution by warrants issued to the Unsecured Noteholders and the Convertible Noteholder totaling 4.7 million shares with an exercise price of $14.04 per share and a term of four years. The fair value of the warrants was estimated at $3.52 per share using a Black-Scholes-Merton valuation model.

(6)
The table below reflects the cumulative effect of the reorganization adjustments discussed above (in thousands):

Gain on settlement of Liabilities subject to compromise

  $ 1,368,908  

Accrued reorganization items

    (10,261 )

Cancellation of Predecessor Company equity

    3,254,642  

Net impact to retained earnings (accumulated deficit)

  $ 4,613,289  

Fresh-start accounting adjustments

(7)
Reflects the reclassification of tubulars and well equipment to "Oil and natural gas properties."

(8)
In estimating the fair value of its oil and natural gas properties, the Company used a combination of the income and market approaches. For purposes of estimating the fair value of the Company's proved, probable and possible reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Company's reserves, risked by reserve category and discounted using a weighted average cost of capital rate of 10.5% for proved reserves and 12.5% for probable and possible reserves. The proved reserve locations were limited to wells expected to be drilled in the Company's five year development plan. Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $72.30 per barrel of oil, $3.50 per MMBtu of natural gas and $12.00 per barrel of natural gas liquids, after adjustment for transportation fees and regional price differentials. Base pricing was derived from an average of forward strip prices and analysts' estimated prices.

    In estimating the fair value of the Company's unproved acreage that was not included in the valuation of probable and possible reserves, a market approach was used in which a review of recent transactions involving properties in the same geographical location indicated the fair value of the Company's unproved acreage from a market participant perspective.

(9)
In estimating the fair value of its gas gathering and other operating assets, the Company used a combination of the income, cost, and market approaches.

    For purposes of estimating the fair value of its gas gathering assets, an income approach was used that estimated future cash flows associated with the assets over the remaining useful lives. The valuation included such inputs as estimated future production, gathering and compression revenues, and operating expenses that were discounted at a weighted average cost of capital rate of 9.5%.

    For purposes of estimating the fair value of its other operating assets, the Company used a combination of the market and cost approaches. A market approach was relied upon to value land and computer equipment, and in this valuation approach, recent transactions of similar assets were utilized to determine the value from a market participant perspective. For the remaining other operating assets, a cost approach was used. The estimation of fair value under the cost approach

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. FRESH-START ACCOUNTING (Continued)

    was based on current replacement costs of the assets, less depreciation based on the estimated economic useful lives of the assets and age of the assets.

(10)
Reflects the adjustment of the Company's equity method investment in SBE Partners, L.P. to fair value based on an income approach, which calculated the discounted cash flows of the Company's share of the partnership's interest in oil and gas proved reserves. The anticipated cash flows of the reserves were risked by reserve category and discounted at 10.5%. Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $72.30 per barrel of oil, $3.50 per MMBtu of natural gas and $12.00 per barrel of oil equivalent of natural gas liquids, after adjustment for transportation fees and regional price differentials. Base pricing was derived from an average of forward strip prices and analysts' estimated prices.

(11)
Records an intangible liability of approximately $8.3 million, $4.5 million of which was recorded as current, to adjust the Company's active rig contract to fair value at September 9, 2016. The intangible liability will be amortized over the remaining life of the contract through July 2018.

(12)
Reflects the adjustment of asset retirement obligations to fair value using estimated plugging and abandonment costs as of September 9, 2016, adjusted for inflation and then discounted at the appropriate credit-adjusted risk free rate ranging from 5.5% to 6.6% depending on the life of the well. The fair value of asset retirement obligations was estimated at $32.5 million, approximately $0.3 million of which was recorded as current. Refer to Note 9, "Asset Retirement Obligations" for further details of the Company's asset retirement obligations.

(13)
Reflects the adjustment of the 2020 Second Lien Notes and the 2022 Second Lien Notes to fair value. The fair value estimate was based on quoted market prices from trades of such debt on September 9, 2016. Refer to Note 6, "Debt" for definitions of and further information regarding the 2020 Second Lien Notes and 2022 Second Lien Notes.

(14)
Reflects the adjustment of the Company's redeemable noncontrolling interest and related embedded derivative of HK TMS, LLC to fair value. The fair value of the redeemable noncontrolling interest was estimated at $41.1 million and the embedded derivative was estimated at zero. For purposes of estimating the fair values, an income approach was used that estimated fair value based on the anticipated cash flows associated with HK TMS, LLC's proved reserves, risked by reserve category and discounted using a weighted average cost of capital rate of 12.5%. The value of the redeemable noncontrolling interest was further reduced by a probability factor of the potential assignment of the common shares of HK TMS, LLC to Apollo Global Management, which occurred subsequent to the fresh-start date. Refer to Note 4, "Acquisitions and Divestitures," for further information regarding the divestiture of HK TMS, LLC on September 30, 2016.

(15)
Reflects the cumulative effect of the fresh-start accounting adjustments discussed above.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. ACQUISITIONS AND DIVESTITURES

Acquisitions

Southern Delaware Basin Assets (Pecos and Reeves Counties, Texas)

        On January 18, 2017 (Successor), Halcón Energy Properties, Inc., a wholly owned subsidiary of the Company, entered into a Purchase and Sale Agreement with Samson Exploration, LLC (Samson), pursuant to which it agreed to acquire acreage and related assets in the Southern Delaware Basin located in Pecos and Reeves Counties, Texas (collectively, the Pecos County Assets), for a total purchase price of $703.9 million, subject to customary post-closing adjustments (the Pecos County Acquisition). The Pecos County Acquisition closed on February 28, 2017. The Company funded the Pecos County Acquisition with the net proceeds from the private placement of its preferred stock and borrowings under its Senior Credit Agreement. Refer to Note 11, "Stockholders' Equity," for further discussion of the Company's issuance of 8% Automatically Convertible Preferred Stock.

        The transaction had an effective date of November 1, 2016, and was subject to customary closing conditions, as well as the execution and delivery of certain other agreements.

        The Pecos County Acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations (ASC 805) which, among other things, requires assets acquired and liabilities assumed to be measured at their acquisition date fair values. The estimated fair value of the properties acquired approximates the fair value of consideration and as a result no goodwill was recognized.

        The following table summarizes the consideration paid to acquire the Pecos County Assets, as well as the preliminary estimated values of assets acquired and liabilities assumed as of the acquisition date (in thousands):

Cash consideration paid to Samson at closing(1)

  $ 703,865  

Less: Estimated post-effective closing date adjustments(2)

    (4,816 )

Final estimated consideration transferred

  $ 699,049  

Plus: Estimated Fair Value of Liabilities Assumed:

       

Current liabilities

  $ 839  

Asset retirement obligations

    2,116  

Amount attributable to liabilites assumed

    2,955  

Total purchase price plus liabilities assumed

  $ 702,004  

Estimated Fair Value of Assets Acquired:

       

Evaluated oil and natural gas properties(3)(4)

  $ 150,275  

Unevaluated oil and natural gas properties(3)(4)

    525,350  

Gas gathering and other operating assets(5)

    26,379  

Amount attributable to assets acquired

  $ 702,004  

(1)
Represents amount of cash consideration, adjusted for customary closing items, for the purchase of the Pecos County Assets funded by the issuance of approximately $400.1 million of new 8% automatically convertible preferred stock and borrowings under the Senior Credit Agreement.

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4. ACQUISITIONS AND DIVESTITURES (Continued)

(2)
In accordance with the purchase agreement, the effective date of the acquisition was November 1, 2016 and therefore revenues, expenses and related capital expenditures from November 1, 2016 through the closing of the Pecos County Acquisition have been reflected as adjustments to the purchase price consideration. At closing, a net $1.1 million was identified as reductions to the purchase price consideration for post effective date activities from November 1, 2016 through December 31, 2016. Estimates have been made to reflect expected purchase price consideration adjustments for the post effective date period from January 1, 2017 through February 28, 2017 (the closing date).

(3)
In estimating the fair value of the Pecos County Assets' oil and natural gas properties, the Company used an income approach. For purposes of estimating the fair value of the proved, probable and possible reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Pecos County Assets' estimated reserves risked by reserve category and discounted using a weighted average cost of capital rate of 10.0% for proved reserves and 12.0% for probable and possible reserves. The proved reserve locations were limited to wells expected to be drilled in the Company's five-year development plan. This estimation includes the use of unobservable inputs, such as estimated future production, oil and natural gas revenues and expenses. The use of these unobservable inputs results in the fair value estimate of the Pecos County Assets being classified as Level 3.

(4)
Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $76.10 per barrel of oil, $4.14 per Mcf of natural gas and $29.48 per barrel of oil equivalent of natural gas liquids, after adjustment for transportation fees and regional price differentials. Base pricing was derived from an average of forward strip prices and research analysts' estimated prices.

(5)
In estimating the fair value of the Pecos County Assets' gas gathering and other operating assets, the Company used a combination of the cost and market approaches. A market approach was relied upon to value the land, heavy equipment and vehicles, and in this valuation approach, recent transactions of similar assets were utilized to determine the value from a market participant perspective. For the remaining other operating assets, a cost approach was used. The estimation of fair value under the cost approach was based on current replacement costs of the assets, less depreciation based on the estimated economic useful lives of the assets and age of the assets.

        The following unaudited pro forma combined results of operations are provided for the six months ended June 30, 2017 and 2016 as though the Pecos County Acquisition had been completed as of the beginning of the comparable prior annual reporting period, or January 1, 2016. The pro forma combined results of operations for the six months ended June 30, 2017 and 2016 have been prepared by adjusting the historical results of the Company to include the historical results of the Pecos County Assets. These supplemental pro forma results of operations are provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future. The pro forma results of operations do not include any cost savings or other synergies that resulted, or may result, from the Pecos County Acquisition or any estimated costs that will be incurred to integrate the Pecos County Assets. Future results may vary significantly from the results reflected in

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. ACQUISITIONS AND DIVESTITURES (Continued)

this unaudited pro forma financial information because of future events and transactions, as well as other factors. Amounts included in the table below are rounded to thousands.

 
  Successor    
  Predecessor  
 
  Six Months
Ended
June 30, 2017
(Unaudited)
   
  Six Months
Ended
June 30, 2016
(Unaudited)
 
 
   
 
 
   
 
 
   
 

Revenue

  $ 263,637       $ 201,411  

Net income (loss)

    216,553         (911,990 )

Net income (loss) available to common stockholders

    168,546         (946,903 )

Pro forma net income (loss) per share of common stock:

                 

Basic

  $ 1.43       $ (7.87 )

Diluted

  $ 1.43       $ (7.87 )

        The Company's historical financial information was adjusted to give effect to the pro forma events that are directly attributable to Pecos County Assets and are factually supportable. The unaudited pro forma consolidated results include the historical revenues and expenses of assets acquired and liabilities assumed, with the following adjustments:

    Adjustment to recognize incremental depletion expense under the full cost method of accounting based on the fair value of the oil and natural gas properties and incremental accretion expense based on the asset retirement costs of the oil and natural gas properties at acquisition;

    Adjustment to recognize incremental depreciation expense of the gas gathering and other operating assets and incremental accretion expense based on the asset retirement costs of the gas gathering and other operating assets at acquisition; and

    Eliminate transaction costs and non-recurring charges directly related to the transactions that were included in the historical results of operations for the Company in the amount of $0.9 million. Transaction costs directly related to the transaction that do not have a continuing impact on the combined Company's operating results have been excluded from the pro forma earnings.

        For the six months ended June 30, 2017 (Successor), the Company recognized $14.1 million of oil, natural gas and natural gas liquids and other revenue related to the Pecos County Assets and $4.2 million of net field operating income (oil, natural gas and natural gas liquids and other revenues less lease operating expense, workover expense, production taxes, gathering and other expense, and depletion, depreciation and accretion expense) related to the Pecos County Assets. Additionally, non-recurring transaction costs of $0.9 million related to the Pecos County Acquisition for the six months ended June 30, 2017 (Successor) are included in the unaudited condensed consolidated statements of operations in "General and administrative" expenses; these non-recurring transaction costs have been excluded from the pro forma results for all periods presented in the above table.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. ACQUISITIONS AND DIVESTITURES (Continued)

Divestitures

East Texas Eagle Ford Assets

        On January 24, 2017 (Successor), certain of the Company's subsidiaries entered into an Agreement of Sale and Purchase with a subsidiary of Hawkwood Energy, LLC (Hawkwood) for the sale of all of its oil and natural gas properties and related assets located in the Eagle Ford formation of East Texas (the El Halcón Assets) for a total adjusted sales price of $483.5 million, subject to post-closing adjustments (the El Halcón Divestiture). The effective date of the sale was January 1, 2017 and the transaction closed on March 9, 2017. The sale properties included acreage prospective for the Eagle Ford formation in East Texas and related gas gathering and other operating assets. The Company used the net proceeds from the sale to repay borrowings outstanding under its Senior Credit Agreement and for general corporate purposes.

        The net proceeds from the sale were allocated between the Company's oil and natural gas properties, gas gathering and other operating assets and liabilities transferred on a fair value basis. Approximately $10.2 million was allocated to gas gathering and other operating assets and approximately $477.3 million was allocated to the Company's oil and natural gas properties.

        As discussed further in Note 5, "Oil and Natural Gas Properties," the Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under this method of accounting, sales of oil and gas properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless the adjustment significantly alters the relationship between capitalized costs and proved reserves. If the El Halcón Divestiture was accounted for as an adjustment of capitalized costs with no gain or loss recognized, the adjustment would have significantly altered the relationship between capitalized costs and proved reserves. Accordingly, the Company initially recognized a gain on the sale of $231.2 million during the three months ended March 31, 2017 (Successor). This gain increased by $4.5 million during the three months ended June 30, 2017 (Successor) as the result of customary post-closing adjustments. The carrying value of the properties sold was determined by allocating total capitalized costs within the full cost pool between properties sold and properties retained based on their relative fair values. The gain was recorded in "Gain (loss) on sale of oil and natural gas properties," on the Company's unaudited condensed consolidated statements of operations.

HK TMS, LLC

        On September 30, 2016, certain wholly-owned subsidiaries of the Successor Company executed an Assignment and Assumption Agreement with an affiliate of Apollo Global Management (Apollo) pursuant to which Apollo acquired one hundred percent (100%) of the common shares (the Membership Interests) of HK TMS, LLC (HK TMS), which transaction is referred to as the HK TMS Divestiture. HK TMS was previously a wholly-owned subsidiary and held all of the Successor Company's oil and natural gas properties in the Tuscaloosa Marine Shale (TMS). In exchange for the assignment of the Membership Interests, Apollo assumed all obligations relating to the Membership Interests, which were previously classified as "Mezzanine Equity" on the unaudited condensed consolidated balance sheets of HK TMS, from and after such date. Prior to the HK TMS Divestiture, the preferred shares were considered probable of becoming redeemable and therefore were accreted up to the estimated required redemption value. The accretion was presented as a deemed dividend and recorded in "Preferred dividends and accretion on redeemable noncontrolling interest" on the unaudited

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. ACQUISITIONS AND DIVESTITURES (Continued)

condensed consolidated statements of operations. For the six months ended June 30, 2016 (Predecessor), HK TMS issued 6,655 additional preferred shares to Apollo for dividends paid-in-kind. These dividends were presented within "Preferred dividends and accretion on redeemable noncontrolling interest" on the unaudited condensed consolidated statements of operations.

        HK TMS was not included in the chapter 11 bankruptcy filings or the Restructuring Support Agreement discussed in Note 2, "Reorganization."

5. OIL AND NATURAL GAS PROPERTIES

        The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under this method of accounting, all costs of acquisition, exploration and development of oil and natural gas reserves (including such costs as leasehold acquisition costs, geological expenditures, dry hole costs, tangible and intangible development costs and direct internal costs) are capitalized as the cost of oil and natural gas properties when incurred. To the extent capitalized costs of evaluated oil and natural gas properties, net of accumulated depletion, exceed the discounted future net revenues of proved oil and natural gas reserves, net of deferred taxes, such excess capitalized costs are charged to expense.

        Additionally, the Company assesses all properties classified as unevaluated property on a quarterly basis for possible impairment or reduction in value. The Company assesses properties on an individual basis or as a group, if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion and the full cost ceiling test limitation.

        Investments in unevaluated oil and natural gas properties and exploration and development projects for which depletion expense is not currently recognized, and for which exploration or development activities are in progress, qualify for interest capitalization. The Predecessor Company determined capitalized interest by multiplying the Predecessor Company's weighted-average borrowing cost on debt by the average amount of qualifying costs incurred that were excluded from the full cost pool. The capitalized interest amounts were recorded as additions to unevaluated oil and natural gas properties on the unaudited condensed consolidated balance sheets. For the six months ended June 30, 2016 (Predecessor), the Company capitalized interest costs of $52.9 million. The Successor Company's policy on the capitalization of interest establishes thresholds for the determination of a development project for the purpose of interest capitalization.

        At June 30, 2017 (Successor), the ceiling test value of the Company's reserves was calculated based on the first-day-of-the-month average for the 12-months ended June 30, 2017 of the West Texas Intermediate (WTI) crude oil spot price of $48.95 per barrel, adjusted by lease or field for quality, transportation fees, and regional price differentials, and the first-day-of-the-month average for the 12-months ended June 30, 2017 of the Henry Hub natural gas price of $3.01 per MMBtu, adjusted by lease or field for energy content, transportation fees, and regional price differentials. Using these prices, the Company's net book value of oil and natural gas properties at June 30, 2017 (Successor) did not exceed the ceiling amount.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. OIL AND NATURAL GAS PROPERTIES (Continued)

        At June 30, 2016 (Predecessor), the ceiling test value of the Company's reserves was calculated based on the first-day-of-the-month average for the 12-months ended June 30, 2016 of the WTI crude oil spot price of $43.12 per barrel, adjusted by lease or field for quality, transportation fees, and regional price differentials, and the first-day-of-the-month average for the 12-months ended June 30, 2016 of the Henry Hub natural gas price of $2.24 per MMBtu, adjusted by lease or field for energy content, transportation fees, and regional price differentials. Using these prices, the Company's net book value of oil and natural gas properties at June 30, 2016 exceeded the ceiling amount by $257.9 million ($163.1 million after taxes, before valuation allowance) which resulted in a ceiling test impairment of that amount for the quarter. The impairment at June 30, 2016 (Predecessor) primarily reflects a 7% decrease in the first-day-of-the-month average price for crude oil used in the ceiling test calculation, which was $46.26 per barrel at March 31, 2016. At March 31, 2016 (Predecessor), the Company recorded a full cost ceiling impairment before income taxes of $496.9 million ($315.1 million after taxes, before valuation allowance). The impairment at March 31, 2016 (Predecessor) reflects additional transfers of the remaining unevaluated Utica/Point Pleasant (Utica) and TMS properties of approximately $330.4 million and $74.8 million, respectively, to the full cost pool and, to a lesser extent, an 8% decrease in the first-day-of-the-month average price for crude oil used in the ceiling test calculation, which was $50.28 per barrel at December 31, 2015. As discussed above, the Company considers the facts and circumstances around its unevaluated properties that may indicate impairment on a quarterly basis. Management concluded that it was no longer probable that capital would be available or approved to continue exploratory drilling activities in the Company's Utica or TMS acreage positions in advance of the related lease expirations due to the Company's evaluation of strategic alternatives to reduce its long-term debt while preserving liquidity in light of low commodity prices, together with a reduction of the Company's exploration department and the Company's intent to expend capital only on its most economical and proven areas. The Company recorded the full cost ceiling test impairment in "Full cost ceiling impairment" in the Company's unaudited condensed consolidated statements of operations and in "Accumulated depletion" in the Company's unaudited condensed consolidated balance sheets.

        Changes in commodity prices, production rates, levels of reserves, future development costs, transfers of unevaluated properties, capital spending, and other factors will determine the Company's ceiling test calculations and impairment analyses in future periods.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DEBT

        Long-term debt as of June 30, 2017 (Successor) and December 31, 2016 (Successor), consisted of the following (in thousands):

 
  Successor  
 
  June 30,
2017
  December 31,
2016
 

Senior revolving credit facility

  $ 153,000   $ 186,000  

8.625% senior secured second lien notes due 2020(1)

        672,613  

12.0% senior secured second lien notes due 2022(2)

    106,521     106,040  

6.75% senior notes due 2025(3)

    834,027      

  $ 1,093,548   $ 964,653  

(1)
On February 16, 2017, the Company repurchased approximately 41% of the outstanding aggregate principal amount of its 2020 Second Lien Notes with proceeds from the issuance of new 6.75% senior unsecured notes due 2025. The remaining aggregate principal amount was redeemed on March 20, 2017. Amount was net of a $27.4 million unamortized discount at December 31, 2016 (Successor). Refer to "8.625% Senior Secured Second Lien Notes" below for further details.

(2)
Amounts are net of a $6.3 million and $6.8 million unamortized discount at June 30, 2017 (Successor) and December 31, 2016 (Successor), respectively.

(3)
On February 16, 2017, the Company issued $850.0 million aggregate principal amount of new 6.75% senior unsecured notes due 2025. Amount is net of $16.0 million unamortized debt issuance costs at June 30, 2017 (Successor). Refer to "6.75% Senior Notes" below for further details.

Senior Revolving Credit Facility

        On the Effective Date, the Company entered into a senior secured revolving credit agreement (the Senior Credit Agreement) with JPMorgan Chase Bank, N.A., as administrative agent, and certain other financial institutions party thereto, as lenders. The Senior Credit Agreement provides for a $1.5 billion senior secured reserve-based revolving credit facility with a current borrowing base of $650.0 million. The maturity date of the Senior Credit Agreement is July 28, 2021. The borrowing base will be redetermined semi-annually, with the lenders and the Company each having the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations. The borrowing base takes into account the estimated value of the Company's oil and natural gas properties, proved reserves, total indebtedness, and other relevant factors consistent with customary oil and natural gas lending criteria. Amounts outstanding under the Senior Credit Agreement bear interest at specified margins over the base rate of 1.75% to 2.75% for ABR-based loans or at specified margins over LIBOR of 2.75% to 3.75% for Eurodollar-based loans. These margins fluctuate based on the Company's utilization of the facility. The Company may elect, at its option, to prepay any borrowings outstanding under the Senior Credit Agreement without premium or penalty (except with respect to any break funding payments which may be payable pursuant to the terms of the Senior Credit Agreement). Additionally, if the Company has outstanding borrowings or letters of credit or reimbursement obligations in respect of letters of credit and the Consolidated Cash Balance (as defined in the Senior Credit Agreement) exceeds $100.0 million as of the close of business on the most recently ended business day, the Company may also be required to make mandatory prepayments.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DEBT (Continued)

        Amounts outstanding under the Senior Credit Agreement are guaranteed by certain of the Company's direct and indirect subsidiaries and secured by a security interest in substantially all of the assets of the Company and its subsidiaries.

        The Senior Credit Agreement also contains certain financial covenants, including the maintenance of (i) a Total Net Indebtedness Leverage Ratio (as defined in the Senior Credit Agreement) not to exceed 4.75:1.00 initially, determined as of each four fiscal quarter periods and commencing with the fiscal quarter ending September 30, 2016, stepping down to 4.50:1.00 and 4.00:1.00 on September 30, 2017 and March 31, 2019, respectively, and (ii) a Current Ratio (as defined in the Senior Credit Agreement) not to be less than 1.00:1.00. At June 30, 2017 (Successor), the Company was in compliance with the financial covenants under the Senior Credit Agreement.

        The Senior Credit Agreement also contains certain events of default, including non-payment; breaches of representations and warranties; non-compliance with covenants or other agreements; cross-default to material indebtedness; judgments; change of control; and voluntary and involuntary bankruptcy.

        At June 30, 2017 (Successor), under the effective borrowing base of $650.0 million, the Company had $153.0 million of indebtedness outstanding, approximately $6.4 million letters of credit outstanding and approximately $490.6 million of borrowing capacity available under the Senior Credit Agreement.

8.625% Senior Secured Second Lien Notes

        On May 1, 2015 (Predecessor), the Company issued $700.0 million aggregate principal amount of its 8.625% senior secured second lien notes due 2020 (the 2020 Second Lien Notes) in a private offering. The 2020 Second Lien Notes were issued at par. The net proceeds from the sale of the 2020 Second Lien Notes were approximately $686.2 million (after deducting offering fees and expenses). The 2020 Second Lien Notes bore interest at a rate of 8.625% per annum, payable semi-annually on February 1 and August 1 of each year. In accordance with the Plan, the 2020 Second Lien Notes were unimpaired and reinstated upon the Company's emergence from chapter 11 bankruptcy.

        On February 16, 2017 (Successor), the Company paid approximately $303.5 million for approximately $289.2 million principal amount of 2020 Second Lien Notes, a make-whole premium of $13.2 million plus accrued and unpaid interest of approximately $1.1 million to repurchase such notes pursuant to a tender offer and issued a redemption notice to redeem the remaining 2020 Second Lien Notes. On February 21, 2017 (Successor), the Company paid approximately $1.2 million for approximately $1.2 million of principal amount of 2020 Second Lien Notes, a make-whole premium of approximately $54,000 plus accrued and unpaid interest to repurchase such notes pursuant to guaranteed delivery procedures of the tender offer. On March 20, 2017 (Successor), the Company paid approximately $432.0 million for $409.6 million aggregate principal amount of 2020 Second Lien Notes, a make-whole premium of $17.7 million and unpaid interest of approximately $4.8 million to redeem the remaining notes at a price of 104.313% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the redemption date. The repurchase and redemption of the 2020 Second Lien Notes was funded with proceeds from the issuance of $850.0 million in new 6.75% senior unsecured notes due 2025.

        The Company recognized a loss on the extinguishment of debt, representing a $30.9 million loss on the repurchase for the tender premium paid and a $26.0 million loss on the write-off of the discount on the notes. The loss was recorded in "Gain (loss) on extinguishment of debt" on the unaudited condensed consolidated statements of operations.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DEBT (Continued)

12.0% Senior Secured Second Lien Notes

        On December 21, 2015 (Predecessor), the Company completed the issuance in a private placement of approximately $112.8 million aggregate principal amount of new 12.0% senior secured second lien notes due 2022 (the 2022 Second Lien Notes) in exchange for approximately $289.6 million principal amount of its then outstanding senior unsecured notes, consisting of $116.6 million principal amount of 9.75% senior notes due 2020, $137.7 million principal amount of 8.875% senior notes due 2021 and $35.3 million principal amount of 9.25% senior notes due 2022. At closing, the Predecessor Company paid all accrued and unpaid interest since the respective interest payment dates of the unsecured notes surrendered in the exchange. The Predecessor Company recorded the issuance of the 2022 Second Lien Notes at par.

        Interest on the 2022 Second Lien Notes accrues at a rate of 12.0% per annum, payable semi-annually on February 15 and August 15 of each year. The 2022 Second Lien Notes will mature on February 15, 2022. The 2022 Second Lien Notes are secured by second-priority liens on substantially all of the Company's, and certain subsidiaries of the Company (the Guarantors') assets to the extent such assets secure the Company's Senior Credit Agreement (the Collateral). Pursuant to the terms of the Intercreditor Agreement, dated December 21, 2015, the security interest in the Collateral securing the 2022 Second Lien Notes and the guarantees are contractually subordinated to liens that secure the Company's Senior Credit Agreement and certain other permitted indebtedness. Consequently, the 2022 Second Lien Notes and the guarantees are effectively subordinated to the Senior Credit Agreement and such other indebtedness to the extent of the value of the Collateral. In accordance with the terms of the Plan, the 2022 Second Lien Notes were unimpaired and reinstated upon the Company's emergence from chapter 11 bankruptcy.

        As discussed in Note 3, "Fresh-start Accounting," on September 9, 2016, the Company adjusted the 2022 Second Lien Notes to fair value of $107.2 million by recording a discount of $5.7 million to be amortized over the remaining life of the 2022 Second Lien Notes, using the effective interest method.

        In addition, on September 28, 2016, the Company, each of its guarantors and U.S. Bank National Association, as trustee, entered into a supplemental indenture (the 2022 Second Lien Note Supplemental Indenture) to the Indenture dated as of December 21, 2015 with respect to the Company's 2022 Second Lien Notes (the 2022 Second Lien Note Indenture). The 2022 Second Lien Note Supplemental Indenture amended the 2022 Second Lien Note Indenture to modify the incurrence of indebtedness, lien and restricted payments covenants. The 2022 Second Lien Note Supplemental Indenture became operative upon the consummation of the consent solicitation on September 30, 2016. The Company paid an aggregate consent fee of approximately $1.4 million to holders of the 2022 Second Lien Notes and recorded an additional discount of approximately $1.4 million.

        The remaining unamortized discount was $6.3 million at June 30, 2017 (Successor).

6.75% Senior Notes

        On February 16, 2017 (Successor), the Company issued $850.0 million aggregate principal amount of new 6.75% senior unsecured notes due 2025 (the 2025 Notes) in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (Securities Act), Rule 144A and Regulation S, and applicable state securities laws. The 2025 Notes were issued at par and bear interest at a rate of 6.75% per annum, payable semi-annually on February 15 and August 15 of each year, beginning on August 15, 2017. The 2025 Notes will mature on February 15, 2025. Proceeds from the private placement were approximately $833.4 million after deducting initial

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HALCÓN RESOURCES CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DEBT (Continued)

purchasers' discounts and commissions and offering expenses. The Company used a portion of the net proceeds from the private placement to fund the repurchase and redemption of the outstanding 2020 Second Lien Notes, as discussed above, and for general corporate purposes.

        The 2025 Notes are governed by an Indenture, dated as of February 16, 2017 (the February 2017 Indenture) by and among the Company, the Guarantors and U.S. Bank National Association, as Trustee, which contains affirmative and negative covenants that, among other things, limit the ability of the Company and the Guarantors to incur indebtedness; purchase or redeem stock or subordinated indebtedness; make investments; create liens; enter into transactions with affiliates; sell assets; refinance certain indebtedness; merge with or into other companies or transfer substantially all of their assets; and, in certain circumstances, to pay dividends or make other distributions on stock. The February 2017 Indenture also contains customary events of default. Upon the occurrence of certain events of default, the Trustee or the holders of the 2025 Notes may declare all outstanding 2025 Notes to be due and payable immediately. The 2025 Notes are jointly and severally, fully and unconditionally guaranteed on a senior unsecured basis by the Company's existing wholly-owned subsidiaries. Halcón, the issuer of the 2025 Notes, has no material independent assets or operations apart from the assets and operations of its subsidiaries.

        In connection with the sale of the 2025 Notes, on February 16, 2017, the Company, the Guarantors and J.P. Morgan Securities LLC, on behalf of itself and as representative of the initial purchasers, entered into a Registration Rights Agreement (the 2017 Registration Rights Agreement) pursuant to which the Company agreed to, among other things, use reasonable best efforts to file a registration statement under the Securities Act and complete an exchange offer for the 2025 Notes within 365 days after closing. In the event the Company fails to comply with its obligations under the 2017 Registration Rights Agreement, it will be subject to penalties in the form of additional interest payable on the 2025 Notes.

        At any time prior to February 15, 2020, the Company may redeem the 2025 Notes, in whole or in part, at a redemption price equal to 100% of their principal amount plus a make-whole premium, together with accrued and unpaid interest, if any, to the redemption date. The 2025 Notes will be redeemable, in whole or in part, on or after February 15, 2020 at redemption prices equal to the principal amount multiplied by the percentage set forth below, plus accrued and unpaid interest (if any) on the 2025 Notes redeemed during the twelve month period indicated beginning on February 15 of the years indicated below:

Year
  Percentage  

2020

    105.063  

2021

    103.375  

2022

    101.688  

2023 and thereafter

    100.000  

        Additionally, the Company may redeem up to 35% of the 2025 Notes prior to February 15, 2020 for a redemption price of 106.75% of the principal amount thereof, plus accrued and unpaid interest, utilizing net cash proceeds from certain equity offerings. In addition, upon a change of control of the Company, holders of the 2025 Notes will have the right to require the Company to repurchase all or any part of their 2025 Notes for cash at a price equal to 101% of the aggregate principal amount of the 2025 Notes repurchased, plus any accrued and unpaid interest.

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HALCÓN RESOURCES CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DEBT (Continued)

Debt Issuance Costs

        The Company capitalizes certain direct costs associated with the issuance of debt and amortizes such costs over the lives of the respective debt. During the six months ended June 30, 2017 (Successor), the Company capitalized approximately $16.6 million of debt issuance costs related to the 2025 Notes. As part of the Company's reorganization, all debt issuance costs related to the Company's Predecessor debt were extinguished. The debt issuance costs for the Successor Company's senior unsecured debt are presented in "Long-term debt, net" within total liabilities on the unaudited condensed consolidated balance sheet at June 30, 2017 (Successor).

7. FAIR VALUE MEASUREMENTS

        Pursuant to ASC 820, Fair Value Measurements (ASC 820), the Company's determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company's unaudited condensed consolidated balance sheets, but also the impact of the Company's nonperformance risk on its own liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.

        As required by ASC 820, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between fair value hierarchy levels for any period presented. The following tables set forth by level within the fair value hierarchy the Company's financial assets and liabilities that were accounted for at fair value as of June 30, 2017 (Successor) and December 31, 2016 (Successor) (in thousands):

 
  Successor  
 
  June 30, 2017  
 
  Level 1   Level 2   Level 3   Total  

Assets

                         

Receivables from derivative contracts

  $   $ 31,866   $   $ 31,866  

Liabilities

                         

Liabilities from derivative contracts

  $   $ 643   $   $ 643  

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. FAIR VALUE MEASUREMENTS (Continued)


 
  December 31, 2016  
 
  Level 1   Level 2   Level 3   Total  

Assets

                         

Receivables from derivative contracts

  $   $ 5,923   $   $ 5,923  

Liabilities

                         

Liabilities from derivative contracts

  $   $ 16,920   $   $ 16,920  

        Derivative contracts listed above as Level 2 include collars and swaps that are carried at fair value. The Company records the net change in the fair value of these positions in "Net gain (loss) on derivative contracts" on the unaudited condensed consolidated statements of operations. The Company is able to value the assets and liabilities based on observable market data for similar instruments, which resulted in the Company reporting its derivatives as Level 2. This observable data includes the forward curves for commodity prices based on quoted market prices and implied volatility factors related to changes in the forward curves. See Note 8, "Derivative and Hedging Activities," for additional discussion of derivatives.

        The Company's derivative contracts are with major financial institutions with investment grade credit ratings which are believed to have minimal credit risk. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts; however, the Company does not anticipate such nonperformance.

        The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of ASC 825, Financial Instruments. The estimated fair value amounts have been determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of cash, accounts receivables and accounts payables approximate their carrying value due to their short-term nature. The estimated fair value of the Company's Senior Credit Agreement approximates carrying value because the interest rates approximate current market rates. The following table presents the estimated fair values of the Company's fixed interest rate debt instruments as of June 30, 2017 (Successor) and December 31, 2016 (Successor) (excluding discounts and debt issuance costs) (in thousands):

 
  Successor  
 
  June 30, 2017   December 31, 2016  
Debt
  Principal
Amount
  Estimated
Fair Value
  Principal
Amount
  Estimated
Fair Value
 

8.625% senior secured second lien notes

  $   $   $ 700,000   $ 733,250  

12.0% senior secured second lien notes

    112,826     131,672     112,826     123,827  

6.75% senior notes

    850,000     765,408          

  $ 962,826   $ 897,080   $ 812,826   $ 857,077  

        The fair value of the Company's fixed interest rate debt instruments was calculated using Level 2 criteria. The fair value of the Company's senior notes is based on quoted market prices from trades of such debt.

        On February 28, 2017 (Successor), the Company closed the Pecos County Acquisition and recorded the assets acquired and liabilities assumed at their acquisition date fair values. See Note 4, "Acquisitions and Divestitures," for a discussion of the fair value approaches used by the Company and the classification of the estimates within the fair value hierarchy.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. FAIR VALUE MEASUREMENTS (Continued)

        On September 9, 2016, the Company emerged from chapter 11 bankruptcy and adopted fresh-start accounting, which resulted in the Company becoming a new entity for financial reporting purposes. Upon the adoption of fresh-start accounting, the Company's assets and liabilities were recorded at their fair values as of the fresh-start reporting date, September 9, 2016. See Note 3, "Fresh-start Accounting," for a detailed discussion of the fair value approaches used by the Company.

        During the six months ended June 30, 2016 (Predecessor), the Company recorded a non-cash impairment charge of $28.1 million related to its gas gathering systems. See Note 1, "Financial Statement Presentation," for a discussion of the valuation approach used and the classification of the estimate within the fair value hierarchy.

        The Company follows the provisions of ASC 820 for nonfinancial assets and liabilities measured at fair value on a non-recurring basis. These provisions apply to the Company's initial recognition of asset retirement obligations for which fair value is used. The asset retirement obligation estimates are derived from historical costs and management's expectation of future cost environments; consequently, the Company has designated these liabilities as Level 3. See Note 9, "Asset Retirement Obligations," for a reconciliation of the beginning and ending balances of the liability for the Company's asset retirement obligations.

8. DERIVATIVE AND HEDGING ACTIVITIES

        The Company is exposed to certain risks relating to its ongoing business operations, including commodity price risk and interest rate risk. Derivative contracts are utilized to hedge the Company's exposure to price fluctuations and reduce the variability in the Company's cash flows associated with anticipated sales of future oil and natural gas production. When derivative contracts are available at terms (or prices) acceptable to the Company, it generally hedges a substantial, but varying, portion of anticipated oil and natural gas production for future periods. Derivatives are carried at fair value on the unaudited condensed consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the unaudited condensed consolidated statements of operations for the period in which the change occurs. The Company's hedge policies and objectives may change significantly as its operational profile changes and/or commodities prices change. The Company does not enter into derivative contracts for speculative trading purposes.

        It is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions determined by management as competent and competitive market makers. The Company did not post collateral under any of its derivative contracts as they are secured under the Company's Senior Credit Agreement or are uncollateralized trades.

        At June 30, 2017 (Successor), the Company's crude oil and natural gas derivative positions consisted of basis swaps and costless put/call "collars." At December 31, 2016 (Successor), the Company's derivative positions consisted of collars only. Swaps are designed so that the Company receives or makes payments based on a differential between fixed and variable prices for crude oil and natural gas. Basis swaps effectively lock in a price differential between regional prices (i.e. Midland) and the relevant price index at which the oil production is sold (i.e. Cushing). A costless collar consists of a sold call, which establishes a maximum price the Company will receive for the volumes under contract and a purchased put that establishes a minimum price. The Company has elected not to designate any of its derivative contracts for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of these derivative contracts, as well as payments and

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. DERIVATIVE AND HEDGING ACTIVITIES (Continued)

receipts on settled derivative contracts, in "Net gain (loss) on derivative contracts" on the unaudited condensed consolidated statements of operations.

        At June 30, 2017 (Successor), the Company had 44 open commodity derivative contracts summarized in the following tables: eight natural gas collar arrangements, two natural gas basis swaps, eight crude oil basis swaps and 26 crude oil collar arrangements.

        At December 31, 2016 (Successor), the Company had 22 open commodity derivative contracts summarized in the following tables: two natural gas collar arrangements and 20 crude oil collar arrangements.

        All derivative contracts are recorded at fair market value in accordance with ASC 815 and ASC 820 and included in the unaudited condensed consolidated balance sheets as assets or liabilities. The following table summarizes the location and fair value amounts of all derivative contracts in the unaudited condensed consolidated balance sheets (in thousands):

 
   
  Asset derivative
contracts
   
  Liability derivative
contracts
 
 
   
  Successor    
  Successor  
Derivatives not designated as
hedging contracts under
ASC 815
  Balance sheet   June 30,
2017
  December 31,
2016
  Balance sheet   June 30,
2017
  December 31,
2016
 

Commodity contracts

  Current assets—receivables from derivative contracts   $ 26,389   $ 5,923   Current liabilities—liabilities from derivative contracts   $ (280 ) $ (16,434 )

Commodity contracts

  Other noncurrent assets—receivables from derivative contracts     5,477       Other noncurrent liabilities—liabilities from derivative contracts     (363 )   (486 )

Total derivatives not designated as hedging contracts under ASC 815

      $ 31,866   $ 5,923       $ (643 ) $ (16,920 )

        The following table summarizes the location and amounts of the Company's realized and unrealized gains and losses on derivative contracts in the Company's unaudited condensed consolidated statements of operations (in thousands):

 
   
  Amount of gain or (loss)
recognized in income
on derivative contracts for the
  Amount of gain or (loss)
recognized in income
on derivative contracts for the
 
 
   
  Successor    
  Predecessor   Successor    
  Predecessor  
Derivatives not designated as hedging contracts under ASC 815
  Location of gain or (loss) recognized in
income on derivative contracts
  Three Months
Ended
June 30, 2017
   
  Three Months
Ended
June 30, 2016
  Six Months
Ended
June 30, 2017
   
  Six Months
Ended
June 30, 2016
 
   
   
 
   
   
 

Commodity contracts:

                                     

Unrealized gain (loss) on commodity contracts

  Other income (expenses)—net gain (loss) on derivative contracts   $ 18,005       $ (135,303 ) $ 42,219       $ (224,281 )

Realized gain (loss) on commodity contracts

  Other income (expenses)—net gain (loss) on derivative contracts     6,151         80,780     8,335         188,500  

Total net gain (loss) on derivative contracts

      $ 24,156       $ (54,523 ) $ 50,554       $ (35,781 )

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. DERIVATIVE AND HEDGING ACTIVITIES (Continued)

        At June 30, 2017 (Successor) and December 31, 2016 (Successor), the Company had the following open crude oil and natural gas derivative contracts:

 
   
   
  Successor  
 
   
   
  June 30, 2017  
 
   
   
   
  Floors   Ceilings   Basis Differential  
Period
  Instrument   Commodity   Volume in
Mmbtu's/
Bbl's
  Price /
Price
Range
  Weighted
Average
Price
  Price /
Price
Range
  Weighted
Average
Price
  Price /
Price
Range
  Weighted
Average
Price
 

July 2017 - December 2017

  Basis Swap   Natural Gas     920,000   $—   $   $—   $   $(0.40) - $(0.41)   $ (0.40 )

July 2017 - December 2017

  Collars   Natural Gas     3,680,000   3.00 - 3.26     3.13   3.38 - 3.76     3.53            

July 2017 - December 2017

  Collars   Crude Oil     3,910,000   47.00 - 60.00     51.30   52.00 - 76.84     58.40            

January 2018 - December 2018

  Basis Swap   Crude Oil     2,555,000               (1.05) - (1.50)     (1.29 )

January 2018 - December 2018

  Basis Swap   Natural Gas     1,825,000               (0.40) - (0.41)     (0.40 )

January 2018 - December 2018

  Collars   Natural Gas     3,650,000   3.00 - 3.03     3.01   3.22 - 3.39     3.32            

January 2018 - December 2018

  Collars   Crude Oil     2,190,000   45.00 - 53.00     50.17   55.25 - 60.00     58.54            

July 2018 - December 2018

  Basis Swap   Crude Oil     828,000               (1.12) - (1.18)     (1.15 )

January 2019 - December 2019

  Basis Swap   Crude Oil     2,372,500               (1.12) - (1.33)     (1.20 )

 

 
   
   
  Successor  
 
   
   
  December 31, 2016  
 
   
   
   
  Floors   Ceilings  
Period
  Instrument   Commodity   Volume in
Mmbtu's/
Bbl's
  Price /
Price
Range
  Weighted
Average
Price
  Price /
Price
Range
  Weighted
Average
Price
 

January 2017 - December 2017

  Collars   Natural Gas     3,650,000   $3.15 - $3.26   $ 3.20   $3.50 - $3.76   $ 3.63  

January 2017 - December 2017

  Collars   Crude Oil     6,843,750   47.00 - 60.00     51.39   52.00 - 76.84     58.75  

January 2018 - December 2018

  Collars   Crude Oil     730,000   53.00     53.00   58.00     58.00  

        The Company presents the fair value of its derivative contracts at the gross amounts in the unaudited condensed consolidated balance sheets. The following table shows the potential effects of master netting arrangements on the fair value of the Company's derivative contracts (in thousands):

 
  Derivative Assets   Derivative Liabilities  
 
  Successor   Successor  
Offsetting of Derivative Assets and Liabilities
  June 30,
2017
  December 31,
2016
  June 30,
2017
  December 31,
2016
 

Gross Amounts Presented in the Consolidated Balance Sheet

  $ 31,866   $ 5,923   $ (643 ) $ (16,920 )

Amounts Not Offset in the Consolidated Balance Sheet

    (669 )   (5,283 )   642     5,075  

Net Amount

  $ 31,197   $ 640   $ (1 ) $ (11,845 )

        The Company enters into an International Swap Dealers Association Master Agreement (ISDA) with each counterparty prior to a derivative contract with such counterparty. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. ASSET RETIREMENT OBLIGATIONS

        The Company records an asset retirement obligation (ARO) on oil and natural gas properties when it can reasonably estimate the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon costs. For gas gathering systems and equipment, the Company records an ARO when the system is placed in service and it can reasonably estimate the fair value of an obligation to perform site reclamation and other necessary work when it is required. The Company records the ARO liability on the unaudited condensed consolidated balance sheets and capitalizes a portion of the cost in "Oil and natural gas properties" or "Other operating property and equipment" during the period in which the obligation is incurred. The Company records the accretion of its ARO liabilities in "Depletion, depreciation and accretion" expense in the unaudited condensed consolidated statements of operations. The additional capitalized costs are depreciated on a unit-of-production basis or straight-line basis.

        The Company recorded the following activity related to its ARO liability (in thousands, inclusive of the current portion):

Liability for asset retirement obligations as of December 31, 2016 (Successor)

  $ 32,375  

Liabilities settled and divested(1)

    (8,342 )

Additions

    176  

Acquisitions(1)

    2,194  

Accretion expense

    856  

Liability for asset retirement obligations as of June 30, 2017 (Successor)

  $ 27,259  

(1)
See Note 4, "Acquisitions and Divestitures," for further information.

10. COMMITMENTS AND CONTINGENCIES

Commitments

        The Company leases corporate office space in Houston, Texas; and Denver, Colorado as well as other field office locations. Rent expense was approximately $2.0 million and $4.3 million for the six months ended June 30, 2017 (Successor) and 2016 (Predecessor), respectively. Future obligations associated with the Company's operating leases are presented in the table below (in thousands):

Remaining period in 2017

  $ 1,695  

2018

    3,430  

2019

    2,997  

2020

    1,811  

2021

    1,497  

Thereafter

    2,180  

Total

  $ 13,610  

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. COMMITMENTS AND CONTINGENCIES (Continued)

        As of June 30, 2017 (Successor), the Company has the following active drilling rig and hydraulic fracturing commitments (in thousands):

Remaining period in 2017

  $ 18,344  

2018

    16,244  

2019

     

2020

     

2021

     

Thereafter

     

Total

  $ 34,588  

        As of June 30, 2017 (Successor), termination of the Company's active drilling rig and hydraulic fracturing commitments would require early termination penalties of $9.7 million, which would be in lieu of paying the remaining active commitments of $34.6 million.

        In past years, with the sustained decline in crude oil prices, the Company stacked certain drilling rigs and amended other previous drilling rig contracts. In the future, the Company expects to incur stacking charges/early termination fees on certain drilling rig commitments as follows (in thousands):

Remaining period in 2017

  $ 2,222  

2018

    1,260  

2019

     

2020

    3,000  

2021

     

Thereafter

     

Total

  $ 6,482  

        Stacking fees and early termination fees are expensed as incurred within "Gathering and other" on the unaudited condensed consolidated statements of operations.

        In December 2016 (Successor), the Company entered into an agreement with a private company for the right to purchase up to 15,040 net acres located in Ward and Winkler Counties, Texas (the Ward County Assets) prospective for the Wolfcamp and Bone Spring formations for an initial purchase price of $11,000 per acre. The Ward County Assets are divided into two tracts: the Southern Tract, comprising 6,720 net acres, and the Northern Tract, comprising 8,320 net acres, with separate options for each tract. The agreement was subsequently amended on June 14, 2017 (Successor) to increase the purchase price of the Southern and Northern Tract acreage, from $11,000 per acre to $13,000 per acre, for increases in depths in the acreage to be purchased by the Company. Pursuant to the terms of the agreement, the Company initially paid $5.0 million and drilled a commitment well on the Southern Tract and on June 15, 2017 (Successor) purchased the Southern Tract acreage for approximately $13,000 per acre. On June 15, 2017 (Successor), the Company also paid $5.0 million and plans to drill a commitment well on the Northern Tract by September 1, 2017, to earn the option to acquire the Northern Tract acreage for $13,000 per acre by December 31, 2017. On June 20, 2017 (Successor), the Company entered into an additional option agreement with the private company for the right to purchase up to 7,680 additional net acres located in Ward and Winkler Counties, Texas. The Company also paid $5.0 million and plans to drill a commitment well by December 1, 2017, to earn the option to

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. COMMITMENTS AND CONTINGENCIES (Continued)

acquire the additional acreage for $10,000 per acre by March 31, 2018. These option purchase agreements are not included in the tables above.

        The Company has entered into various long-term gathering, transportation and sales contracts with respect to production from the Bakken/Three Forks formations in North Dakota and the Southern Delaware Basin in West Texas. As of June 30, 2017 (Successor), the Company had in place ten long-term crude oil contracts and nine long-term natural gas contracts in these areas. Under the terms of these contracts, the Company has committed a substantial portion of its production from these areas for periods ranging from one to ten years from the date of first production. The sales prices under these contracts are based on posted market rates. Historically, the Company has been able to meet its delivery commitments.

Contingencies

        From time to time, the Company may be a plaintiff or defendant in a pending or threatened legal proceeding arising in the normal course of its business. While the outcome and impact of currently pending legal proceedings cannot be determined, the Company's management and legal counsel believe that the resolution of these proceedings through settlement or adverse judgment will not have a material effect on the Company's unaudited condensed consolidated operating results, financial position or cash flows.

11. STOCKHOLDERS' EQUITY

Preferred Stock and Non-Cash Preferred Stock Dividend

        On January 24, 2017 (Successor) (the Commitment Date), the Company entered into a stock purchase agreement with certain accredited investors to sell, in a private placement exempt from registration requirements of the Securities Act pursuant to Section 4(a)(2), approximately 5,518 shares of 8% Automatically Convertible Preferred Stock, par value $0.0001 per share (the Preferred Stock), each share of which was convertible into 10,000 shares of common stock. Also on January 24, 2017, the Company received an executed written consent in lieu of a stockholders' meeting authorizing and approving the conversion of the Preferred Stock into common stock. On February 27, 2017, the Company filed with the Delaware Secretary of State a Certificate of Designation, Preferences, Rights and Limitations of the Preferred Stock (the Certificate of Designation), which created the series of preferred stock issued by the Company on that same date. The Company issued the Preferred Stock at $72,500 per share. Gross proceeds were approximately $400.1 million, or $7.25 per share of common stock. The Company incurred approximately $11.9 million in expenses associated with this offering, including placement agent fees. On March 16, 2017, the Company mailed a definitive information statement to its common stockholders notifying them that a majority of its stockholders had consented to the issuance of common stock, par value $0.0001 per share, upon the conversion of the Preferred Stock. The Preferred Stock automatically converted into 55.2 million shares of common stock on April 6, 2017 in accordance with the terms of the Certificate of Designation. No cash dividends were paid on the Preferred Stock since, pursuant to the terms of the Certificate of Designation of the Preferred Stock, conversion occurred prior to June 1, 2017.

        The Company agreed to file a registration statement to register the resale of shares of common stock issuable upon conversion of the preferred stock and to pay penalties in the event such registration was not effective by June 27, 2017. The Company filed such registration statement on

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11. STOCKHOLDERS' EQUITY (Continued)

March 3, 2017 and it was declared effective by the Securities and Exchange Commission (SEC) on April 7, 2017.

        In accordance with ASC Topic 470, Debt (ASC 470), the Company determined that the conversion feature in the Preferred Stock represented a beneficial conversion feature. The fair value of the Company's common stock of $8.12 per share on the Commitment Date was greater than the conversion price of $7.25 per share of common stock, representing a beneficial conversion feature of $0.87 per share of common stock, or approximately $48.0 million in aggregate. Under ASC 470, $48.0 million (the intrinsic value of the beneficial conversion feature) of the proceeds received from the issuance of the Preferred Stock was allocated to "Additional paid-in capital," creating a discount on the Preferred Stock (the Discount). The Discount is required to be amortized on a non-cash basis over the approximate 65-month period between the issuance date and the required redemption date of July 28, 2022, or fully amortized upon an accelerated date of redemption or conversion, and recorded as a preferred dividend. As a result, approximately $0.8 million of the Discount was amortized and a non-cash preferred dividend was recorded in the three months ended March 31, 2017 (Successor) and due to the conversion date occurring on April 6, 2017, the remaining $47.2 million of the amortization of the Discount was accelerated to the conversion date and fully amortized in the three months ended June 30, 2017 (Successor). The Discount amortization is reflected in "Non-cash preferred dividend" in the unaudited condensed consolidated statements of operations. The preferred dividend was charged against additional paid-in capital since no retained earnings were available.

Common Stock

        On September 9, 2016, upon emergence from chapter 11 bankruptcy, all existing shares of Predecessor common stock were cancelled and the Successor Company issued approximately 90.0 million shares of common stock in total to the Predecessor Company's existing common stockholders, Third Lien Noteholders, Unsecured Noteholders, and the Convertible Noteholder. Refer to Note 2, "Reorganization" for further details.

        On September 9, 2016, upon emergence from chapter 11 bankruptcy, the Successor Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State to provide for (i) the total number of shares of all classes of capital stock that the Successor Company has the authority to issue is 1,001,000,000 of which 1,000,000,000 shares are common stock, par value $0.0001 per share and 1,000,000 shares are preferred stock, par value $0.0001 per share, (ii) a classified board structure, (iii) the right of removal of directors with or without cause by stockholders, and (iv) a restriction on the Successor Company from issuing any non-voting equity securities in violation of Section 1123(a)(6) of chapter 11 of title 11 of the United States Code. Additionally, the Company's 5.75% Series A Convertible Perpetual Preferred Stock (the Series A Preferred), was cancelled pursuant to the Plan, and no shares of Series A Preferred are outstanding.

Warrants

        On September 9, 2016, upon the emergence from chapter 11 bankruptcy, all existing February 2012 warrants were cancelled and the Successor Company issued 3.8 million new warrants to the Unsecured Noteholders and 0.9 million new warrants to the Convertible Noteholder. The warrants in aggregate can be exercised to purchase 4.7 million shares of the Successor Company's common stock at an exercise price of $14.04 per share. The Company allocated approximately $16.7 million of the

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11. STOCKHOLDERS' EQUITY (Continued)

Enterprise Value to the warrants which is reflected in "Additional paid-in capital" on the unaudited condensed consolidated balance sheets. The holders are entitled to exercise the warrants in whole or in part at any time prior to expiration on September 9, 2020. See Note 2, "Reorganization" for further details.

Incentive Plans

        Immediately prior to emergence from chapter 11 bankruptcy, the Predecessor incentive plan was cancelled and all share-based compensation awards granted thereunder were either vested or cancelled and the Predecessor Company's Board adopted the 2016 Long-Term Incentive Plan (the 2016 Incentive Plan). An aggregate of 10.0 million shares of the Successor Company's common stock were available for grant pursuant to awards under the 2016 Incentive Plan in the form of nonqualified stock options, incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance units, performance bonuses, stock awards and other incentive awards. On April 6, 2017 (Successor), an amendment to the 2016 Incentive Plan to increase by 9.0 million shares the maximum number of shares of common stock that may be issued thereunder, i.e., a maximum of 19.0 million shares, became effective, which was 20 calendar days following the date the Company mailed an information statement to all stockholders of record notifying them of approval of the amendment by written consent. As of June 30, 2017 (Successor) and December 31, 2016 (Successor), a maximum of 7.1 million and 1.7 million shares of common stock, respectively, remained reserved for issuance under the 2016 Incentive Plan.

        The Company accounts for share-based payment accruals under authoritative guidance on stock compensation. The guidance requires all share-based payments to employees and directors, including grants of stock options and restricted stock, to be recognized in the financial statements based on their fair values. For awards granted under the 2016 Incentive Plan subsequent to emerging from chapter 11 bankruptcy and in conjunction with the early adoption of ASU 2016-09, the Company has elected to not apply a forfeiture estimate and will recognize a credit in compensation expense to the extent awards are forfeited.

        For the three and six months ended June 30, 2017 (Successor) the Company recognized $12.9 million and $21.3 million, respectively, of share-based compensation expense. For the three and six months ended June 30, 2016 (Predecessor), the Company recognized $1.5 million and $3.7 million, respectively, of share-based compensation expense. These were recorded as a component of "General and administrative" on the unaudited condensed consolidated statements of operations.