sn_Current folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Form 10‑Q

(Mark One)

ma

 

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

For the quarterly period ended September 30, 2017

OR

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

For the transition period from            to         

Commission file number: 1‑35372

Sanchez Energy Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

45‑3090102
(I.R.S.  Employer
Identification No.)

1000 Main Street, Suite 3000
Houston, Texas
(Address of Principal Executive Offices)

77002
(Zip Code)

(713) 783‑8000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, 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 ☐

Accelerated filer ☒

Non‑accelerated filer ☐
(Do not check if a
smaller reporting company)

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

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

Number of shares of registrant’s common stock, par value $0.01 per share, outstanding as of November 3, 2017: 84,129,196

 

 

 


 

Table of Contents

Sanchez Energy Corporation

Form 10‑Q

For the Quarterly Period Ended September 30, 2017

 

Table of Contents

 

 

 

 

 

PART I

 

Item 1. 

Financial Statements

5

 

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

5

 

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

6

 

Condensed Consolidated Statement of Stockholders’ Equity (Deficit) for the Nine Months Ended September 30, 2017 (Unaudited)

7

 

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

8

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

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

65

Item 4. 

Controls and Procedures

66

 

PART II

 

Item 1. 

Legal Proceedings

67

Item 1A. 

Risk Factors

67

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

67

Item 3. 

Defaults Upon Senior Securities

67

Item 4. 

Mine Safety Disclosures

67

Item 5. 

Other Information

67

Item 6. 

Exhibits

68

SIGNATURES 

70

 

 

2


 

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CAUTIONARY NOTE REGARDING FORWARD‑LOOKING STATEMENTS

 

This Quarterly Report on Form 10‑Q contains “forward‑looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical facts, included in this Quarterly Report on Form 10‑Q that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward‑looking statements.  These statements are based on certain assumptions we made based on management’s experience, perception of historical trends and technical analyses, current conditions, anticipated future developments and other factors believed to be appropriate and reasonable by management.  When used in this Quarterly Report on Form 10‑Q, words such as “will,” “potential,” “believe,” “estimate,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “plan,” “predict,” “project,” “profile,” “model,” “strategy,” “future” or their negatives or the statements that include these words or other words that convey the uncertainty of future events or outcomes, are intended to identify forward‑looking statements, although not all forward‑looking statements contain such identifying words.  In particular, statements, express or implied, concerning our future operating results and returns or our ability to replace or increase reserves, increase production, or generate income or cash flows, operational and commercial benefits of our partnerships, expected benefits from acquisitions, including the Comanche Acquisition (defined below), and our strategic relationship with Sanchez Midstream Partners LP (“SNMP”) (formerly Sanchez Production Partners LP) are forward‑looking statements.  Forward‑looking statements are not guarantees of performance.  Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control.  Although we believe that the expectations reflected in our forward‑looking statements are reasonable and are based on reasonable assumptions, no assurance can be given that these assumptions are accurate or that any of these expectations will be achieved (in full or at all) or will prove to have been correct.  Important factors that could cause our actual results to differ materially from the expectations reflected in the forward‑looking statements include, among others:

 

·

the timing and extent of changes in prices for, and demand for, crude oil and condensate, natural gas liquids (“NGLs”), natural gas and related commodities;

 

·

our ability to successfully execute our business and financial strategies;

 

·

our ability to utilize the services, personnel and other assets of Sanchez Oil & Gas Corporation (“SOG”) pursuant to existing services agreements;

 

·

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

 

·

the realized benefits of the acreage acquired in our various acquisitions, including the Comanche Acquisition, and other assets and liabilities assumed in connection therewith;

 

·

our ability to successfully integrate the various assets acquired, including assets acquired in the Comanche Acquisition, into our operations, fully identify existing and potential problems with respect to such properties and accurately estimate reserves, production and costs with respect to such properties;

 

·

the realized benefits of our partnerships and joint ventures, including our partnership with affiliates of The Blackstone Group, L.P.;

 

·

the realized benefits of our transactions with SNMP;

 

·

the extent to which our drilling plans are successful in economically developing our acreage in, and to produce reserves and achieve anticipated production levels from, our existing and future projects;

 

·

the accuracy of reserve estimates, which by their nature involve the exercise of professional judgment and may, therefore, be imprecise;

 

·

the extent to which we can optimize reserve recovery and economically develop our plays utilizing horizontal and vertical drilling, advanced completion technologies and hydraulic fracturing;

 

·

our ability to successfully execute our hedging strategy and the resulting realized prices therefrom;

 

3


 

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·

the credit worthiness and performance of our counterparts, including financial institutions, operating partners and other parties;

 

·

competition in the oil and natural gas exploration and production industry in the marketing of crude oil, natural gas and NGLs and for the acquisition of leases and properties, employees and other personnel, equipment, materials and services and, related thereto, the availability and cost of employees and other personnel, equipment, materials and services;

 

·

our ability to access the credit and capital markets to obtain financing on terms we deem acceptable, if at all, and to otherwise satisfy our capital expenditure requirements;

 

·

the availability, proximity and capacity of, and costs associated with, gathering, processing, compression and transportation facilities;

 

·

the impact of, and changes in, government policies, laws and regulations, including tax laws and regulations, environmental laws and regulations relating to air emissions, waste disposal, hydraulic fracturing and access to and use of water, laws and regulations imposing conditions and restrictions on drilling and completion operations and laws and regulations with respect to derivatives and hedging activities;

 

·

developments in oil‑producing and natural gas‑producing countries, the actions of the Organization of Petroleum Exporting Countries (“OPEC”) and other factors affecting the supply and pricing of oil and natural gas;

 

·

the extent to which our crude oil and natural gas properties operated by others are operated successfully and economically;

 

·

the use of competing energy sources and the development of alternative energy sources;

 

·

unexpected results of litigation filed against us;

 

·

disruptions due to extreme weather conditions, such as extreme rainfall, hurricanes or tornadoes;

 

·

the extent to which we incur uninsured losses and liabilities or losses and liabilities in excess of our insurance coverage; and

 

·

the other factors described under “Part I, Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part II, Item 1A.  Risk Factors” and elsewhere in this Quarterly Report on Form 10‑Q and in our other public filings with the Securities and Exchange Commission (the “SEC”).

 

In light of these risks, uncertainties and assumptions, the events anticipated by our forward‑looking statements may not occur, and, if any of such events do, we may not have correctly anticipated the timing of their occurrence or the extent of their impact on our actual results.  Accordingly, you should not place any undue reliance on any of our forward‑looking statements.  Any forward‑looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to correct or update any forward‑looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law.

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PART I—FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Sanchez Energy Corporation

 

Condensed Consolidated Balance Sheets (Unaudited)

 

(in thousands, except par value and share amounts)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

174,228

 

$

501,917

 

Oil and natural gas receivables

 

 

80,676

 

 

41,057

 

Joint interest billings receivables

 

 

17,165

 

 

496

 

Accounts receivable - related entities

 

 

7,557

 

 

6,401

 

Fair value of derivative instruments

 

 

11,378

 

 

 —

 

Other current assets

 

 

24,754

 

 

12,934

 

Total current assets

 

 

315,758

 

 

562,805

 

Oil and natural gas properties, at cost, using the full cost method:

 

 

 

 

 

 

 

Proved oil and natural gas properties

 

 

4,266,813

 

 

3,164,115

 

Unproved oil and natural gas properties

 

 

446,167

 

 

231,424

 

Total oil and natural gas properties

 

 

4,712,980

 

 

3,395,539

 

Less: Accumulated depreciation, depletion, amortization and impairment

 

 

(2,869,245)

 

 

(2,736,951)

 

Total oil and natural gas properties, net

 

 

1,843,735

 

 

658,588

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Fair value of derivative instruments

 

 

8,942

 

 

 —

 

Investments (Investment in SNMP measured at fair value of $25.6 million and $26.8 million as of September 30, 2017, and December 31, 2016, respectively)

 

 

30,833

 

 

39,656

 

Other assets

 

 

40,831

 

 

25,231

 

Total assets

 

$

2,240,099

 

$

1,286,280

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

4,605

 

$

1,076

 

Other payables

 

 

69,160

 

 

2,251

 

Accrued liabilities:

 

 

 

 

 

 

 

Capital expenditures

 

 

114,591

 

 

35,154

 

Other

 

 

90,153

 

 

82,458

 

Deferred premium liability

 

 

 —

 

 

2,079

 

Fair value of derivative instruments

 

 

3,685

 

 

31,778

 

Other current liabilities

 

 

76,762

 

 

22,201

 

Total current liabilities

 

 

358,956

 

 

176,997

 

Long term debt, net of premium, discount and debt issuance costs

 

 

1,878,010

 

 

1,712,767

 

Asset retirement obligations

 

 

33,578

 

 

25,087

 

Fair value of derivative instruments

 

 

7,620

 

 

3,236

 

Other liabilities

 

 

52,362

 

 

64,333

 

Total liabilities

 

 

2,330,526

 

 

1,982,420

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

Mezzanine equity:

 

 

 

 

 

 

 

Preferred units ($1,000 liquidation preference, 500,000 units authorized; 500,000 and zero units issued and outstanding as of September 30, 2017 and December 31, 2016, respectively)

 

 

414,702

 

 

 —

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock ($0.01 par value, 15,000,000 shares authorized; 1,838,985 shares issued and outstanding as of September 30, 2017 and December 31, 2016 of 4.875% Convertible Perpetual Preferred Stock, Series A; 3,527,830 shares issued and outstanding as of September 30, 2017 and December 31, 2016 of 6.500% Convertible Perpetual Preferred Stock, Series B)

 

 

53

 

 

53

 

Common stock ($0.01 par value, 150,000,000 shares authorized; 83,187,134 and 66,622,624 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively)

 

 

836

 

 

670

 

Additional paid-in capital

 

 

1,352,246

 

 

1,112,397

 

Accumulated deficit

 

 

(1,858,264)

 

 

(1,809,260)

 

Total stockholders' deficit

 

 

(505,129)

 

 

(696,140)

 

Total liabilities and stockholders' deficit

 

$

2,240,099

 

$

1,286,280

 

 

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

5


 

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Sanchez Energy Corporation

 

Condensed Consolidated Statements of Operations (Unaudited)

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2017

    

2016

    

2017

    

2016

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

Oil sales

 

$

91,541

 

$

64,041

 

$

255,913

 

$

172,509

Natural gas liquid sales

 

 

48,949

 

 

19,511

 

 

112,922

 

 

56,535

Natural gas sales

 

 

44,316

 

 

31,255

 

 

125,518

 

 

76,547

Total revenues

 

 

184,806

 

 

114,807

 

 

494,353

 

 

305,591

OPERATING COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas production expenses

 

 

72,056

 

 

38,997

 

 

177,129

 

 

128,609

Production and ad valorem taxes

 

 

11,346

 

 

3,921

 

 

26,669

 

 

14,052

Depreciation, depletion, amortization and accretion

 

 

51,859

 

 

37,651

 

 

135,916

 

 

127,959

Impairment of oil and natural gas properties

 

 

 —

 

 

59,582

 

 

 —

 

 

169,046

General and administrative (1)

 

 

14,665

 

 

26,936

 

 

111,843

 

 

70,399

Total operating costs and expenses

 

 

149,926

 

 

167,087

 

 

451,557

 

 

510,065

Operating income (loss)

 

 

34,880

 

 

(52,280)

 

 

42,796

 

 

(204,474)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

163

 

 

146

 

 

670

 

 

629

Other income (expense)

 

 

(448)

 

 

 7

 

 

3,469

 

 

(196)

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

 

 

(2,074)

 

 

 —

 

 

10,202

 

 

 —

Interest expense

 

 

(35,686)

 

 

(31,797)

 

 

(104,672)

 

 

(95,225)

Earnings from equity investments

 

 

102

 

 

463

 

 

779

 

 

3,154

Net gains (losses) on commodity derivatives

 

 

(41,719)

 

 

18,640

 

 

56,777

 

 

(17,353)

Total other expense

 

 

(79,662)

 

 

(12,541)

 

 

(32,775)

 

 

(108,991)

Income (loss) before income taxes

 

 

(44,782)

 

 

(64,821)

 

 

10,021

 

 

(313,465)

Income tax benefit (expense)

 

 

 —

 

 

(1,441)

 

 

1,208

 

 

(1,441)

Net income (loss)

 

 

(44,782)

 

 

(66,262)

 

 

11,229

 

 

(314,906)

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

(3,988)

 

 

(3,987)

 

 

(11,962)

 

 

(11,961)

Preferred unit dividends and distributions

 

 

(8,347)

 

 

 —

 

 

(35,762)

 

 

 —

Preferred unit amortization

 

 

(5,517)

 

 

 —

 

 

(12,509)

 

 

 —

Net income allocable to participating securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net loss attributable to common stockholders

 

$

(62,634)

 

$

(70,249)

 

$

(49,004)

 

$

(326,867)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

$

(0.81)

 

$

(1.19)

 

$

(0.66)

 

$

(5.56)

Weighted average number of shares used to calculate net loss attributable to common stockholders - basic and diluted

 

 

77,453

 

 

59,190

 

 

74,531

 

 

58,782


(1)

Includes non-cash stock-based compensation expense of $911 and $8,310, respectively, for the three months ended September 30, 2017 and 2016, and $17,337 and $17,905, respectively, for the nine months ended September 30, 2017 and 2016. 

 

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

 

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Sanchez Energy Corporation

 

Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2017 (Unaudited)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

 

Preferred Stock

 

Preferred Stock

 

Common Stock

 

Paid-in

 

Accumulated

 

Stockholders'

 

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Deficit

    

Deficit

 

BALANCE, December 31, 2016

 

1,839

 

$

18

 

3,528

 

$

35

 

66,987

 

$

670

 

$

1,112,397

 

$

(1,809,260)

 

$

(696,140)

 

Issuance of warrants

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

58,958

 

 

 —

 

 

58,958

 

Issuance of common shares to holders of Preferred Units

 

 —

 

 

 —

 

 —

 

 

 —

 

1,500

 

 

15

 

 

17,940

 

 

 —

 

 

17,955

 

Issuance of common stock, net of offering costs of $7.8 million

 

 —

 

 

 —

 

 —

 

 

 —

 

11,500

 

 

115

 

 

134,896

 

 

 —

 

 

135,011

 

Dividends on Series A and Series B Preferred stock

 

 —

 

 

 —

 

 —

 

 

 —

 

1,495

 

 

15

 

 

11,947

 

 

(11,962)

 

 

 —

 

Dividends on SN UnSub preferred units

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(29,167)

 

 

(29,167)

 

Distributions - SN UnSub preferred units

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(6,595)

 

 

(6,595)

 

Accretion of discount on SN UnSub preferred units

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(12,509)

 

 

(12,509)

 

Restricted stock awards, net of forfeitures

 

 —

 

 

 —

 

 —

 

 

 —

 

2,069

 

 

21

 

 

(21)

 

 

 —

 

 

 —

 

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

17,337

 

 

 —

 

 

17,337

 

Deferred tax benefit - current period retained earnings impact

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,208)

 

 

 —

 

 

(1,208)

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

11,229

 

 

11,229

 

BALANCE, September 30, 2017

 

1,839

 

$

18

 

3,528

 

$

35

 

83,551

 

$

836

 

$

1,352,246

 

$

(1,858,264)

 

$

(505,129)

 

 

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

 

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Sanchez Energy Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2017

    

2016

    

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income (loss)

 

$

11,229

 

$

(314,906)

 

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

 

 

 

 

 

 

 

Depreciation, depletion, amortization and accretion

 

 

135,916

 

 

127,959

 

Impairment of oil and natural gas properties

 

 

 —

 

 

169,046

 

Gain on sale of oil and natural gas properties

 

 

(10,202)

 

 

 —

 

Stock-based and phantom unit compensation expense

 

 

31,093

 

 

26,025

 

Net losses (gains) on commodity derivative contracts

 

 

(56,777)

 

 

17,353

 

Net cash settlement received on commodity derivative contracts

 

 

17,538

 

 

105,111

 

Gain on embedded derivatives

 

 

(2,052)

 

 

 —

 

Losses incurred on premiums for derivative contracts

 

 

 —

 

 

18,377

 

Gain on investments

 

 

1,970

 

 

 —

 

Amortization of deferred gain on Western Catarina Midstream Divestiture

 

 

(11,109)

 

 

(11,109)

 

Amortization of debt issuance costs

 

 

9,476

 

 

5,865

 

Accretion of debt discount, net

 

 

476

 

 

475

 

Deferred taxes

 

 

(1,208)

 

 

 —

 

Loss (Gain) on inventory market adjustment

 

 

(9)

 

 

479

 

Earnings from equity investments

 

 

(779)

 

 

(3,154)

 

Distributions from equity investments

 

 

1,191

 

 

428

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(56,638)

 

 

(3,085)

 

Accounts receivable - related entities

 

 

(1,156)

 

 

1,462

 

Other current assets

 

 

(16,636)

 

 

2,608

 

Accounts payable

 

 

3,529

 

 

(2,677)

 

Other payables

 

 

66,909

 

 

221

 

Accrued liabilities

 

 

8,030

 

 

(2,366)

 

Other current liabilities

 

 

39,943

 

 

 —

 

Net cash provided by operating activities

 

 

170,734

 

 

138,112

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Payments for oil and natural gas properties

 

 

(351,225)

 

 

(241,323)

 

Payments for other property and equipment

 

 

(16,255)

 

 

(3,962)

 

Proceeds from sale of oil and natural gas properties

 

 

162,801

 

 

 —

 

Acquisition of oil and natural gas properties

 

 

(1,039,127)

 

 

 —

 

Payments for investments

 

 

(74)

 

 

(28,682)

 

Sale of investments

 

 

12,500

 

 

36,977

 

Net cash used in investing activities

 

 

(1,231,380)

 

 

(236,990)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

323,250

 

 

60,000

 

Repayment of borrowings

 

 

(143,500)

 

 

(60,000)

 

Issuance of common stock (net of underwriting discounts of $7.8 million)

 

 

135,942

 

 

 —

 

Issuance of preferred units

 

 

500,000

 

 

 —

 

Issuance costs related to preferred units

 

 

(20,894)

 

 

 —

 

Financing costs

 

 

(25,237)

 

 

(1,758)

 

Preferred dividends paid

 

 

 —

 

 

(3,987)

 

Cash paid to tax authority for employee stock-based compensation awards

 

 

(842)

 

 

(1,896)

 

Preferred unit distribution

 

 

(35,762)

 

 

 —

 

Net cash provided by (used in) financing activities

 

 

732,957

 

 

(7,641)

 

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

 

(327,689)

 

 

(106,519)

 

Cash and cash equivalents, beginning of period

 

 

501,917

 

 

435,048

 

Cash and cash equivalents, end of period

 

$

174,228

 

$

328,529

 

 

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Change in asset retirement obligations

 

$

6,569

 

$

1,222

 

Change in accrued capital expenditures

 

 

79,916

 

 

(11,322)

 

SUPPLEMENTAL DISCLOSURE:

 

 

 

 

 

 

 

Cash paid for taxes

 

 

 —

 

 

1,996

 

Cash paid for interest

 

$

100,023

 

$

94,869

 

 

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

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Sanchez Energy Corporation

 

Notes to the Condensed Consolidated Financial Statements

 

(Unaudited)

 

Note 1.  Organization

 

Sanchez Energy Corporation (together with our consolidated subsidiaries, “Sanchez Energy,” the “Company,” “we,” “our,” “us” or similar terms), a Delaware corporation formed in August 2011, is an independent exploration and production company focused on the acquisition and development of U.S.  onshore unconventional oil and natural gas resources, with a current focus on the Eagle Ford Shale in South Texas where we have assembled over 286,000 net acres.  We also hold an undeveloped acreage position in the Tuscaloosa Marine Shale (“TMS”) in Mississippi and Louisiana, which offers future upside opportunity. 

 

 

Note 2.  Basis of Presentation and Summary of Significant Accounting Policies

 

The accompanying condensed consolidated financial statements are unaudited and were prepared from the Company’s records.  The condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP” or “U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The Company derived the condensed consolidated balance sheet as of December 31, 2016 from the audited financial statements filed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “2016 Annual Report”).  Because this is an interim period filing presented using a condensed format, it does not include all of the disclosures required by U.S.  GAAP.  These condensed consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the 2016 Annual Report, which contains a summary of the Company’s significant accounting policies and other disclosures.  In the opinion of management, these financial statements include the adjustments and accruals, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods.  These interim results are not necessarily indicative of results to be expected for the entire year.

 

As of September 30, 2017, the Company’s significant accounting policies are consistent with those discussed in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” in the notes to the Company’s consolidated financial statements contained in the 2016 Annual Report.  During the first quarter 2017, as a result of the Comanche Acquisition and related financing, the Company issued preferred equity that is classified as Mezzanine Equity on the Balance Sheet (the “SN UnSub Preferred Units”).  Dividends and amortization of the discount on the SN UnSub Preferred Units have an impact on the Earnings per Share calculation as described below.

 

Earnings per Share

 

Basic net income (loss) per common share is computed using the two-class method.  The two-class method is required for those entities that have participating securities.  The two-class method is an earnings allocation formula that determines net income (loss) per share for participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings.  The Company’s restricted shares of common stock (see Note 14, “Stock‑Based Compensation”) are participating securities under Accounting Standards Codification (“ASC”) 260, “Earnings per Share,” because they may participate in undistributed earnings with common stock.  Participating securities do not have a contractual obligation to share in the Company’s losses.  Therefore, in periods of net loss, no portion of the loss is allocated to participating securities.

 

To determine net income (loss) allocated to each class of ownership (common equity and SN UnSub Preferred Units), we first allocated net income (loss) in accordance with the amount of distributions made for the period by each class, if any.  Distributions declared and paid in the period are treated as distributed earnings in the computation of earnings per common share even though cash distributions are not necessarily derived from current or prior period earnings.  The remaining net income (loss) is allocated to each class in proportion to the class weighted average number of shares outstanding for the period, as compared to the weighted average number of shares for all classes for the period.  Diluted net income (loss) per common share reflects the dilutive effects of the participating securities using the two-class method or the treasury stock method, whichever is more dilutive.  They also reflect the effects of the potential

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conversion of the Company’s Series A and Series B Preferred Stock (as defined below) using the if‑converted method, if the effect is dilutive. 

 

Principles of Consolidation

 

The Company’s condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany balances and transactions have been eliminated.

 

Use of Estimates

 

The condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The most significant estimates pertain to proved oil and natural gas reserves and related cash flow estimates used in the calculation of depletion and impairment of oil and natural gas properties, the evaluation of unproved properties for impairment, the fair value of commodity derivative contracts, embedded derivatives and asset retirement obligations, accrued oil and natural gas revenues and expenses and the allocation of general and administrative expenses.  Actual results could differ materially from those estimates.

 

Recent Accounting Pronouncements

 

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12 “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which changes the recognition and presentation requirements of hedge accounting, including eliminating the requirement to separately measure and report hedge ineffectiveness, and  presenting all items that affect earnings in the same income statement line item as the hedged item.  The ASU also provides new alternatives for applying hedge accounting.  This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2018.  Early adoption is permitted, and the Company is currently in the process of evaluating the impact of adoption of this guidance on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01 “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017.  Early adoption is permitted, and the Company is currently in the process of evaluating the impact of adoption of this guidance on its consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows.  This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017.  Early adoption is permitted, and the Company is currently in the process of evaluating the impact of adoption of this guidance on its consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16 “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which eliminates a current exception in U.S. GAAP to the recognition of the income tax effects of temporary differences that result from intra-entity transfers of non-inventory assets.  The intra-entity exception is being eliminated under the ASU.  The standard is required to be applied on a modified retrospective basis and will be effective beginning with the first quarter 2018.  Early adoption is permitted, and the Company is currently in the process of evaluating the impact of adoption of this guidance on its consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”.  This ASU is intended to clarify the presentation of cash receipts and payments in specific situations.  The amendments in this ASU are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early application is permitted.  The Company does not anticipate that ASU 2016-15 will have a material effect on its consolidated and condensed financial statements and related disclosures.

 

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In March 2016, the FASB issued ASU No. 2016-09 “Compensation – Stock Compensaion (Topic 718): Improvements to Employee Share-Based Payment Accounting,” effective for annual and interim periods for public companies beginning after December 15, 2016.  ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions including accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes.  The Company adopted ASU 2016-09 as of the quarter ended March 31, 2017 on a retrospective basis.  Adoption of this guidance affected the statement of cash flows as of September 30, 2016 as follows (in thousands):

 

Increase in net cash provided by operating activities of approximately $1,896

Increase in net cash used in financing activities of approximately $1,896

 

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842),” effective for annual and interim periods for public companies beginning after December 15, 2018, with a modified retrospective approach to be used for implementation.  The standard updates the previous lease guidance by requiring the recognition of a right-to-use asset and lease liability on the statement of financial position for all leases with lease terms of more than 12 months.  The lease liability represents the discounted obligation to make future minimum lease payments and corresponding right-of-use asset on the balance sheet for most leases.  Recognition, measurement and presentation of expenses and cash flows arising from a lease will depend on classification as a finance or operating lease.  The Company has several operating leases as further discussed in Note 16, “Commitments and Contingencies,” which will be impacted by the new rules under this standard.  The Company will not early adopt this standard, and will apply the revised lease rules for our interim and annual reporting periods starting January 1, 2019.  The Company is currently evaluating the impact of these rules on its financial statements and has started the assessment process by evaluating the population of leases under the revised definition.  The adoption of this standard will result in an increase in the assets and liabilities on the Company’s consolidated balance sheets.  The quantitative impacts of the new standard are dependent on the leases in force at the time of adoption.  As a result, the evaluation of the effect of the new standards will extend over future periods.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” In March, April, and May of 2016, the FASB issued rules clarifying several aspects of the new revenue recognition standard.  The new guidance is effective for fiscal years and interim periods beginning after December 15, 2017.  This guidance outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.  This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized.  The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods and services.  The new standard also requires more detailed disclosures related to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.  The Company will not early adopt the standard although early adoption is permitted.  The Company’s expectation is to apply the modified retrospective approach.  As part of the assessment, the Company has formed an implementation work team, completed trainings on the new revenue recognition model and gathered a representative sample of material revenue contracts covering current revenue streams for which we are currently evaluating the impact under the new standard.  The Company is currently collecting all remaining contracts and evaluating the impacts to its consolidated financial statements under the revised standards.  In addition, the Company is evaluating the impacts of significant historical transactions under the new standard.  As of September 30, 2017, the Company determined that the deferred gains recorded under the Carnero Gathering Disposition and Carnero Processing Disposition (defined below in Note 11, “Related Party Transactions”) could be de-recognized under the new standard. Under the modified retrospective approach, we would adjust the balance of accumulated deficit on January 1, 2018.        

 

 

Note 3.  Acquisitions and Divestitures

 

Our acquisitions are accounted for under the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations”.  A business combination may result in the recognition of a gain or goodwill based on the measurement of the fair value of the assets acquired at the acquisition date as compared to the fair value of consideration transferred, adjusted for purchase price adjustments.  The initial accounting for acquisitions may not be complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that

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existed as of the acquisition dates.  The initial accounting for the Comanche Acquisition, described below, is not yet complete for the oil and gas properties, general property, asset retirement obligations, and potential intangible assets.  The Company is currently in the process of evaluating the final purchase price allocation based on the fair value of all assets and liabilities acquired in the Comanche Acquisition.  The results of operations of the properties acquired in our acquisitions have been included in the condensed consolidated financial statements since the closing dates of the acquisitions.

 

Javelina Disposition

 

On September 19, 2017, the Company, through its wholly owned subsidiary, SN Cotulla Assets, LLC (“SN Cotulla”), sold approximately 68,000 undeveloped net acres located in the Eagle Ford Shale in LaSalle and Webb Counties, Texas to Vitruvian Exploration IV, LLC for approximately $105 million in cash, after preliminary closing adjustments (“the Javelina Disposition”).  Consideration received from the Javelina Disposition was based on an August 1, 2017 effective date and is subject to normal and customary post-closing adjustments.  The Company did not record any gains or losses as a result of the Javelina Disposition. 

 

Marquis Disposition

 

On June 15, 2017, the Company, through its wholly owned subsidiary, SN Marquis LLC, sold approximately 21,000 net acres primarily located in the Eagle Ford Shale in Fayette and Lavaca Counties, Texas to Lonestar Resources US, Inc. (“Lonestar”) for approximately $44 million in cash, after preliminary closing adjustments, and Lonestar Series B Convertible Preferred Stock structured to be converted into 1.5 million shares of Lonestar Class A Common Stock (the “Lonestar Convertible Shares”) upon the satisfaction of certain conditions (the “Marquis Disposition”).  Consideration received from the Marquis Disposition was based on a January 1, 2017 effective date and is subject to other normal and customary post-closing adjustments.  Assets conveyed pursuant to the Marquis Disposition consist of net proved reserves of approximately 2.7 million barrels of oil equivalent (“Boe”) (100% developed) and net production of approximately 1,750 Boe per day from 104 gross (65 net) wells.  The Company did not record any gains or losses as a result of the Marquis Disposition.

 

Comanche Acquisition

 

On March 1, 2017, the Company, through two of its subsidiaries, SN EF UnSub, LP (“SN UnSub”) and SN EF Maverick, LLC (“SN Maverick”), along with Gavilan Resources, LLC (“Gavilan”), an entity controlled by The Blackstone Group, L.P., completed the acquisition of approximately 318,000 gross (155,000 net) acres comprised of 252,000 gross (122,000 net) Eagle Ford Shale acres and 66,000 gross (33,000 net) acres of deep rights only, which includes the Pearsall Shale, representing an approximate 49% average working interest therein (the “Comanche Assets”) from Anadarko E&P Onshore LLC and Kerr-McGee Oil and Gas Onshore LP (together, “Anadarko”) for approximately $2.1 billion in cash, after preliminary closing adjustments (the “Comanche Acquisition”).  Pursuant to the purchase and sale agreement entered into in connection with the Comanche Acquisition, (i) SN UnSub paid approximately 37% of the purchase price (including through a $100 million cash contribution from other Company entities) and (ii) SN Maverick paid approximately 13% of the purchase price.  In the aggregate, SN UnSub and SN Maverick acquired half of the 49% working interest in the Comanche Assets (approximately 50% and 0%, respectively, of the estimated total proved developed producing reserves (PDPs), 20% and 30%, respectively, of the estimated total proved developed non-producing reserves (PDNPs), and 20% and 30%, respectively, of the total proved undeveloped reserves (PUDs)).  Pursuant to the purchase and sale agreement, Gavilan paid 50% of the purchase price and acquired the remaining half of the 49% working interest in and to the Comanche Assets (and approximately 50% of the estimated total PDPs, PDNPs and PUDs).  The Comanche Assets are primarily located in the Western Eagle Ford and significantly expanded the Company’s asset base and production.  The effective date of the Comanche Acquisition is July 1, 2016.  The total purchase price was allocated to the assets purchased and liabilities assumed based upon their fair values on the date of acquisition as follows (in thousands):

 

 

 

 

 

Proved oil and natural gas properties

    

$

781,988

Unproved properties

 

 

262,677

Other assets acquired

 

 

2,751

Fair value of assets acquired

 

 

1,047,416

Asset retirement obligations

 

 

(8,289)

Fair value of net assets acquired

 

$

1,039,127

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In addition, as is common in our industry, we are party to certain gathering agreements that obligate us to deliver a specified volume of production over a defined time horizon.  In particular, with respect to the Comanche Assets, we, as the operator, on behalf of ourselves and the other working interest partners, are party to two gathering agreements that require us to deliver variable monthly quantities through 2034.  Gross volumes under these contracts peak at approximately 63,000 barrels per day (approximately 14,800 barrels per day net) of crude oil and condensate in 2020 and 430,000 Mcf per day (approximately 101,400 Mcf per day net) of natural gas in 2022, and then decrease annually thereafter through the end of the contracts.  We are currently meeting our minimum volume commitments under these contracts and expect to continue to fulfill these obligations based on our anticipated development plan for the Comanche Assets.

 

Cotulla Disposition

 

On December 14, 2016, SN Cotulla, a wholly owned subsidiary of the Company, completed the initial closing of the sale of certain oil and gas interests and associated assets located in Dimmit County, Frio County, LaSalle County, Zavala County and McMullen County, Texas (the “Cotulla Assets”) to Carrizo (Eagle Ford) LLC (“Carrizo Eagle Ford”) pursuant to a purchase and sale agreement dated October 24, 2016 by and among SN Cotulla, the Company for the limited purposes set forth therein, Carrizo Eagle Ford and Carrizo Oil and Gas for the limited purposes set forth therein, for a base purchase price of approximately $181.0 million, subject to normal and customary post-closing adjustments (the “Cotulla Disposition”).  The effective date of the Cotulla Disposition is June 1, 2016.  During 2017, two additional closings occurred and final settlement adjustments were made resulting in total aggregate consideration of approximately $167.4 million.

 

Typically, sales of oil and gas properties are accounted for as adjustments to oil and natural gas properties with no gain or loss recognized.  However, in circumstances where treating a sale like a normal retirement would result in a significant change in the Company’s amortization rate, judgment should be applied.  The Company determined that adjustments to capitalized costs for the Cotulla Disposition would cause a significant change in the Company’s amortization rate.  Upon the initial closing of the Cotulla Disposition, the Company recorded a gain of approximately $112.3 million.  As a result of subsequent closings of the Cotulla Disposition, the Company has recorded additional gains totaling $10.2 million during the nine months ended September 30, 2017.  During the third quarter 2017, the Company recorded a reduction of gain on the Cotulla Disposition of approximately $2.1 million related to the final purchase price adjustment of $2.8 million. 

 

Results of Operations and Pro Forma Operating Results

The following unaudited pro forma combined financial information for the three and nine months ended September 30, 2017 and 2016 is based on the historical consolidated financial statements of the Company adjusted to reflect as if the Comanche Acquisition and related financing had occurred on January 1, 2016.  The unaudited pro forma combined financial information includes adjustments primarily for revenues and expenses for the acquired properties, depreciation, depletion, amortization and accretion, interest expense and debt issuance cost amortization for acquisition debt, and issuance cost amortization of the acquisition preferred financing.  The unaudited pro forma combined financial statements give effect to the events set forth below:

·

The Comanche Acquisition completed March 1, 2017.

·

The issuance of 500,000 SN UnSub Preferred Units for $500 million to finance a portion of the Comanche Acquisition.

·

The borrowing of $173.5 million on a $330 million senior secured reserve based revolving credit facility of SN UnSub (the “SN UnSub Credit Agreement”) to finance a portion of the Comanche Acquisition.

·

Issuance of 1,455,000 shares of the Company’s common stock to certain funds managed or advised by GSO Capital Partners LP (“GSO”), which is an investor in SN UnSub.

·

Issuance of 45,000 shares of the Company’s common stock to Intrepid Private Equity V-A, LLC (“Intrepid”), which is an investor in SN UnSub.

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·

Issuance of warrants to certain funds managed or advised by GSO (the “GSO Funds”) to purchase 1,940,000 shares of the Company’s common stock at an exercise price of $10 per share.

·

Issuance of warrants to Intrepid to purchase 60,000 shares of the Company’s common stock at an exercise price of $10 per share.

·

Issuance of warrants to Gavilan to purchase 6,500,000 shares of the Company’s common stock at an exercise price of $10 per share.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Revenues

 

$

184,806

 

$

180,298

 

$

538,382

 

$

502,065

 

Net loss attributable to common stockholders

 

$

(57,205)

 

$

(113,626)

 

$

(31,170)

 

$

(551,445)

 

Net loss per common share, basic and diluted

 

$

(0.74)

 

$

(1.57)

 

$

(0.61)

 

$

(7.70)

 

 

The unaudited pro forma combined financial information is for informational purposes only and is not intended to represent or to be indicative of the combined results of operations that the Company would have reported had the Comanche Acquisition and related financings been completed as of the dates set forth in this unaudited pro forma combined financial information and should not be taken as indicative of the Company’s future combined results of operations.  The actual results may differ significantly from that reflected in the unaudited pro forma combined financial information for a number of reasons, including, but not limited to, differences in assumptions used to prepare the unaudited pro forma combined financial information and actual results.

 

Post-Acquisition Operating Results

 

The amounts of revenue and excess of revenues over direct operating expenses included in the Company’s condensed consolidated statements of operations for the nine months ended September 30, 2017 for the Comanche Acquisition are shown in the table that follows.  Direct operating expenses include lease operating expenses and production and ad valorem taxes (in thousands):

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

2017

Revenues

 

$

161,553

Excess of revenues over direct operating expenses

 

$

82,243

 

 

 

 

 

 

 

 

Note 4.  Cash and Cash Equivalents

 

As of September 30, 2017 and December 31, 2016, cash and cash equivalents consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

  

Cash at banks

 

$

125,298

 

$

58,269

 

Money market funds

 

 

48,930

 

 

443,648

 

Total cash and cash equivalents

 

$

174,228

 

$

501,917

 

 

 

Note 5.  Oil and Natural Gas Properties

 

The Company’s oil and natural gas properties are accounted for using the full cost method of accounting.  All direct costs and certain indirect costs associated with the acquisition, exploration and development of oil and natural gas properties are capitalized.  Once evaluated, these costs, as well as the estimated costs to retire the assets, are included in the amortization base and amortized to depletion expense using the units‑of‑production method.  Depletion is calculated based on estimated proved oil and natural gas reserves.  Proceeds from the sale or disposition of oil and natural gas

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properties are applied to reduce net capitalized costs unless the sale or disposition causes a significant change in the relationship between costs and the estimated quantity of proved reserves.

 

Full Cost Ceiling Test—Capitalized costs (net of accumulated depreciation, depletion and amortization and deferred income taxes) of proved oil and natural gas properties are subject to a full cost ceiling limitation.  The ceiling limits these costs to an amount equal to the present value, discounted at 10%, of estimated future net cash flows from estimated proved reserves less estimated future operating and development costs, abandonment costs (net of salvage value) and estimated related future income taxes.  In accordance with SEC rules, the oil and natural gas prices used to calculate the full cost ceiling are the 12-month average prices, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, unless prices are defined by contractual arrangements (the “SEC price”).  Prices are adjusted for “basis” or location differentials.  Prices are held constant over the life of the reserves.  If unamortized costs capitalized within the cost pool exceed the ceiling, the excess is charged to expense and separately disclosed during the period in which the excess occurs.  Amounts thus required to be written off are not reinstated for any subsequent increase in the cost center ceiling.  During the three and nine month periods ended September 30, 2017, the Company did not record a full cost ceiling test impairment.  While there is a possibility that the Company will incur impairments to our full cost pool in 2017, factors impacting the full cost ceiling test impairment calculation in future periods have not yet been determined.  Based upon the NYMEX first-day-of-the-month prices for October 2017, along with the NYMEX WTI forward-looking price deck for November and December 2017, the Company estimates the average 12 month trailing first-day-of-the-month prices ending December 31, 2017 to increase from the current quarter ended.

 

Costs associated with unproved properties and properties under development, including costs associated with seismic data, leasehold acreage and the current drilling of wells, are excluded from the full cost amortization base until the properties have been evaluated.  Unproved properties are identified on a project basis, with a project being an area in which significant leasehold interests are acquired within a contiguous area.  Unproved properties are reviewed periodically by management, and when management determines that a project area has been evaluated through drilling operations or a thorough geologic evaluation, the project area is transferred into the full cost pool subject to amortization.  The Company assesses the carrying value of its unproved properties that are not subject to amortization for impairment periodically.  If the results of an assessment indicate that the properties are impaired, the amount of the asset impaired is added to the full cost pool subject to both periodic amortization and the ceiling test.

 

Note 6.  Long‑Term Debt

 

Long-term debt on September 30, 2017 consisted of $1.15 billion principal amount of 6.125% senior notes (consisting of $850 million in Original 6.125% Notes (defined below) and $300 million in Additional 6.125% Notes (defined below), which were issued at a premium to face value of $2.3 million), maturing on January 15, 2023, $600 million principal amount of 7.75% senior notes (consisting of $400 million in Original 7.75% Notes (defined below) and $200 million in Additional 7.75% Notes (defined below), which were issued at a discount to face value of $7.0 million), maturing on June 15, 2021, $175.5 million related to the SN UnSub Credit Agreement, and $4.3 million related to 4.59% non-recourse subsidiary term loan due 2022 (the “Non-Recourse Subsidiary Term Loan”). 

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As of September 30, 2017 and December 31, 2016, the Company’s long‑term debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Outstanding

 

 

 

 

 

 

 

(in thousands) as of

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

Interest Rate

    

Maturity Date

    

2017

    

2016

 

Second Amended and Restated Credit Agreement

 

Variable

 

June 30, 2019

 

$

 —

 

$

 —

 

SN UnSub Credit Agreement

 

Variable

 

March 1, 2022

 

 

175,500

 

 

 —

 

7.75% Senior Notes

 

7.75%

 

June 15, 2021

 

 

600,000

 

 

600,000

 

4.59% Non-Recourse Subsidiary Term Loan

 

4.59%

 

August 31, 2022

 

 

4,250

 

 

 —

 

6.125% Senior Notes

 

6.125%

 

January 15, 2023

 

 

1,150,000

 

 

1,150,000

 

 

 

 

 

 

 

 

1,929,750

 

 

1,750,000

 

Unamortized discount on Additional 7.75% Notes

 

 

 

 

 

 

(3,352)

 

 

(4,030)

 

Unamortized premium on Additional 6.125% Notes

 

 

 

 

 

 

1,427

 

 

1,629

 

Unamortized debt issuance costs

 

 

 

 

 

 

(49,815)

 

 

(34,832)

 

Total long-term debt

 

 

 

 

 

$

1,878,010

 

$

1,712,767

 

 

The components of interest expense are (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

   

September 30, 

 

September 30, 

 

 

2017

   

2016

   

2017

   

2016

Interest on Senior Notes

 

$

(29,234)

 

$

(29,234)

 

$

(87,703)

 

$

(87,704)

Interest on SN UnSub credit agreement

 

 

(2,356)

 

 

 —

 

 

(5,411)

 

 

 —

Interest expense and commitment fees on Second Amended and Restated Credit Agreement

 

 

(667)

 

 

(429)

 

 

(1,606)

 

 

(1,181)

Amortization of debt issuance costs

 

 

(3,270)

 

 

(1,975)

 

 

(9,476)

 

 

(5,865)

Amortization of discount on Additional 7.75% Notes

 

 

(226)

 

 

(226)

 

 

(678)

 

 

(677)

Amortization of premium on Additional 6.125% Notes

 

 

67

 

 

67

 

 

202

 

 

202

Total interest expense

 

$

(35,686)

 

$

(31,797)

 

$

(104,672)

 

$

(95,225)

 

Credit Facility

 

Second Amended and Restated Credit Agreement

 

On June 30, 2014, the Company, as borrower, and certain of its operating subsidiaries, as loan parties, entered into a revolving credit facility represented by a $1.5 billion Second Amended and Restated Credit Agreement with Royal Bank of Canada, as the administrative agent and collateral agent, and the lenders party thereto (together with all subsequent amendments, the “Second Amended and Restated Credit Agreement”).  The Second Amended and Restated Credit Agreement provides for the issuance of letters of credit, limited in the aggregate to the lesser of $80 million and the total availability thereunder. As of September 30, 2017, there were no borrowings and no letters of credit outstanding under the Second Amended and Restated Credit Agreement, which had a borrowing base of $350 million and aggregate elected commitments of $300 million.  Availability under the Second Amended and Restated Credit Agreement is at all times subject to customary conditions and the then applicable borrowing base and aggregate elected commitment amount.  All of the $300 million aggregate elected commitment amount was available for future revolver borrowings as of September 30, 2017. 

 

The Second Amended and Restated Credit Agreement matures on June 30, 2019.  The borrowing base under the Second Amended and Restated Credit Agreement is redetermined semi-annually by the lenders based on, among other things, an evaluation of the Company’s and its restricted subsidiaries’ oil and natural gas reserves.  Semi-annual redeterminations of the borrowing base are generally scheduled to occur on or before April 1 and October 1 of each year.  The next regularly scheduled borrowing base redetermination is expected to occur in the fourth quarter 2017.  The borrowing base is also subject to, among other things, (i) automatic reduction by 25% of the amount of any issuance of high yield debt and second lien debt, subject to certain exceptions, (ii) interim redetermination at the election of the Company once between each scheduled redetermination, (iii) interim redetermination at the election of a majority of the

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lenders once between each scheduled redetermination, and (iv) if the required lenders so direct, in connection with asset sales and swap terminations during the period since the most recent borrowing base determination with a combined borrowing base value of more than 10% of the value of the proved developed oil and gas properties included in the most recent reserve report, a reduction in an amount equal to the borrowing base value, as determined by the administrative agent in its reasonable judgment, of such assets and swaps. 

 

The Company’s obligations under the Second Amended and Restated Credit Agreement are guaranteed by all of the Company’s existing and future subsidiaries and are secured by a first priority lien on substantially all of the Company’s assets and the assets of its existing and future subsidiaries, including a first priority lien on all ownership interests in existing and future subsidiaries, in each case, subject to customary exceptions; provided, however, that the guarantee and first priority lien requirements do not extend to existing and future subsidiaries designated as “unrestricted subsidiaries,” including SN UnSub. 

 

At the Company’s election, interest on borrowings under the Second Amended and Restated Credit Agreement may be calculated based on an alternate base rate (“ABR”) or an adjusted Eurodollar (LIBOR) rate, plus an applicable margin.  The applicable margin varies from 1.00% to 2.00% for ABR borrowings and from 2.00% to 3.00% for Eurodollar (LIBOR) borrowings and letters of credit, if any, depending on the Company’s utilization of the borrowing base.  The Company is also required to pay a commitment fee of 0.50% per annum on any unused aggregate elected commitment amount.  Interest on ABR borrowings and the commitment fee are generally payable quarterly.  Interest on Eurodollar (LIBOR) borrowings are generally payable at the applicable maturity date. 

 

The Second Amended and Restated Credit Agreement contains various affirmative and negative covenants and events of default that limit the Company’s ability to, among other things, incur indebtedness, make restricted payments, grant liens, consolidate or merge, dispose of certain assets, make investments, engage in transactions with affiliates, enter into hedge transactions, and make acquisitions.  The Second Amended and Restated Credit Agreement also provides for cross default between the Second Amended and Restated Credit Agreement and the other debt (including debt under the 6.125% Notes and the 7.75% Notes) and obligations in respect of hedging agreements (on a mark-to-market basis), of the Company and its restricted subsidiaries, in an aggregate principal amount in excess of $10 million.  Furthermore, the Second Amended and Restated Credit Agreement contains financial covenants that require the Company to satisfy the following tests: (i) current assets plus undrawn borrowing capacity on the Second Amended and Restated Credit Agreement to current liabilities of at least 1.0 to 1.0 as of the last day of each fiscal quarter, and (ii) net first lien debt (defined as the excess of first lien debt over cash) to consolidated last twelve months EBITDA of not greater than 2.0 to 1.0 as of the last day of any fiscal quarter. As of September 30, 2017, the Company was in compliance with the covenants of the Second Amended and Restated Credit Agreement.

 

From time to time, the agents, arrangers, book runners and lenders under the Second Amended and Restated Credit Agreement and their affiliates have provided, and may provide in the future, investment banking, commercial lending, hedging and financial advisory services to the Company and its affiliates in the ordinary course of business, for which they have received, or may in the future receive, customary fees and commissions for these transactions. 

 

SN UnSub Credit Agreement

 

On March 1, 2017, SN UnSub, as borrower, entered into a credit agreement for a $500 million revolving credit facility with JP Morgan Chase Bank, N.A. as the administrative agent and the lenders party thereto with a maturity date of March 1, 2022 (the “SN UnSub Credit Agreement”).  The initial borrowing base amount under the SN UnSub Credit Agreement was $330 million.  Additionally, the SN UnSub Credit Agreement provides for the issuance of letters of credit, generally limited in the aggregate to the lesser of $50 million and the total availability under the borrowing base.  Availability under the SN UnSub Credit Agreement is at all times subject to customary conditions and the then applicable borrowing base, which is subject to periodic redetermination. As of September 30, 2017, there were approximately $175.5 million of borrowings and no letters of credit outstanding under the SN UnSub Credit Agreement.

 

Semi-annual redeterminations of the borrowing base are generally scheduled to occur in April and October of each year, with the initial redetermination in May 2017.  On May 8, 2017, the borrowing base of the SN UnSub Credit Agreement was reaffirmed at $330 million in conjunction with the spring redetermination.  The next regularly scheduled borrowing base redetermination is expected in the fourth quarter 2017.  In addition, the borrowing base is subject to interim redetermination at the request of SN UnSub or the lenders based on, among other things, the lenders’ evaluation of SN UnSub’s and its subsidiaries’ oil and natural gas reserves.  The borrowing base is also subject to reduction by 25% 

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of the amount of certain junior debt issuances other than the first $200 million of such debt and by reductions as a result of hedge terminations and asset dispositions that exceed 5% of the then-effective borrowing base, in addition to other customary adjustments. 

 

The obligations under the SN UnSub Credit Agreement are guaranteed by all of SN UnSub’s existing and future subsidiaries and secured by a first priority lien on substantially all of SN UnSub’s assets and the assets of SN UnSub’s existing and future subsidiaries, including a first priority lien on all ownership interests in existing and future subsidiaries as well as a pledge of equity interests in SN UnSub held by SN EF UnSub Holdings, LLC (“SN UnSub Holdings”) and SN EF UnSub GP, LLC, the general partner of SN UnSub (the “SN UnSub General Partner”), in each case, subject to customary exceptions; provided, however, that the guarantee and first priority lien requirements do not extend to existing and future subsidiaries of SN UnSub designated as “unrestricted subsidiaries.”  As of September 30, 2017, SN UnSub had no subsidiaries.

 

At SN UnSub’s election, borrowings under the SN UnSub Credit Agreement may be made on an ABR or a Eurodollar rate basis, plus an applicable margin.  The applicable margin varies from 1.75% to 2.75% for ABR borrowings and from 2.75% to 3.75% for Eurodollar borrowings, depending on the utilization of the borrowing base.  In addition, SN UnSub is also required to pay a commitment fee on the amount of any unused commitments at a rate of 0.50% per annum.  Interest on ABR borrowings and the commitment fee are generally payable quarterly.  Interest on Eurodollar borrowings are generally payable at the applicable maturity date. 

 

The SN UnSub Credit Agreement contains various affirmative and negative covenants and events of default that limit SN UnSub’s ability to, among other things, incur indebtedness, make restricted payments, grant liens, consolidate or merge, dispose of certain assets, make certain investments, engage in transactions with affiliates, enter into and maintain hedge transactions and make certain acquisitions. 

 

The SN UnSub Credit Agreement provides for an event of default upon a change of control and cross default between the SN UnSub Credit Agreement and other indebtedness of SN UnSub in an aggregate principal amount exceeding $25 million.  Additionally, the SN UnSub Credit Agreement contains “separateness” covenants that require SN UnSub to comply with certain corporate formalities and transact with affiliates on an arm’s length basis.  Furthermore, the SN UnSub Credit Agreement contains financial covenants that require SN UnSub to satisfy certain specified financial ratios, including the following tests: (i) a current assets plus undrawn borrowing capacity on the SN UnSub Credit Agreement to current liabilities ratio of at least 1.0 to 1.0 as of the last day of each fiscal quarter and (ii) a net debt to consolidated EBITDA ratio of not greater than 4.0 to 1.0 for each test period, in each case commencing with the fiscal quarter ending June 30, 2017.  As of September 30, 2017, the Company was in compliance with the covenants of the SN UnSub Credit Agreement. 

 

From time to time, the agents, arrangers, book runners and lenders under the SN UnSub Credit Agreement and their affiliates have provided, and may provide in the future, investment banking, commercial lending, hedging and financial advisory services to SN UnSub and its affiliates in the ordinary course of business, for which they have received, or may in the future receive, customary fees and commissions for these transactions.

 

7.75% Senior Notes Due 2021

 

On June 13, 2013, we completed a private offering of $400 million in aggregate principal amount of the Company’s 7.75% senior notes that will mature on June 15, 2021 (the “Original 7.75% Notes”).  Interest on the notes is payable on June 15 and December 15 of each year. We received net proceeds from this offering of approximately $388 million, after deducting initial purchasers’ discounts and offering expenses, which we used to repay outstanding indebtedness at the time.  The Original 7.75% Notes are senior unsecured obligations and are guaranteed on a joint and several senior unsecured basis by, with certain exceptions, substantially all of our existing and future subsidiaries.

 

On September 18, 2013, we issued an additional $200 million in aggregate principal amount of our 7.75% senior notes due 2021 (the “Additional 7.75% Notes” and, together with the Original 7.75% Notes, the “7.75% Notes”) in a private offering at an issue price of 96.5% of the principal amount of the Additional 7.75% Notes.  We received net proceeds of $188.8 million (after deducting the initial purchasers’ discounts and offering expenses of $4.2 million) from the sale of the Additional 7.75% Notes.  The Company also received cash for accrued interest from June 13, 2013 through the date of issuance of $4.1 million, for total net proceeds of $192.9 million from the sale of the Additional 7.75% Notes.  The Additional 7.75% Notes were issued under the same indenture as the Original 7.75% Notes, and are,

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therefore, treated as a single class of securities under the indenture.  We used the net proceeds from the offering to partially fund our acquisition of contiguous acreage in McMullen County, Texas with 13 gross producing wells completed in October 2013, a portion of the 2013 and 2014 capital budgets and for general corporate purposes.

 

The 7.75% Notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future senior unsecured indebtedness.  The 7.75% Notes rank senior in right of payment to our future subordinated indebtedness.  The 7.75% Notes are effectively junior in right of payment to all of our existing and future secured debt (including under our Second Amended and Restated Credit Agreement) to the extent of the value of the assets securing such debt.  The 7.75% Notes are fully and unconditionally guaranteed (except for customary release provisions) on a joint and several senior unsecured basis by the subsidiary guarantors party to the indenture governing the 7.75% Notes.  To the extent set forth in the indenture governing the 7.75% Notes, certain of our subsidiaries will be required to fully and unconditionally guarantee the 7.75% Notes on a joint and several senior unsecured basis in the future.

 

The indenture governing the 7.75% Notes, among other things, restricts our ability and our restricted subsidiaries’ ability to: (i) incur, assume, or guarantee additional indebtedness or issue certain types of equity securities; (ii) pay distributions on, purchase or redeem shares or purchase or redeem subordinated debt; (iii) make certain investments; (iv) enter into certain transactions with affiliates; (v) create or incur liens on their assets; (vi) sell assets; (vii) consolidate, merge or transfer all or substantially all of their assets; (viii) restrict distributions or other payments from the Company’s restricted subsidiaries; and (ix) designate subsidiaries as unrestricted subsidiaries.

 

We have the option to redeem all or a portion of the 7.75% Notes at any time after June 15, 2017 at the applicable redemption prices specified in the indenture plus accrued and unpaid interest.  In addition, we may be required to repurchase the 7.75% Notes upon a change of control or if we sell certain of our assets.

 

On July 18, 2014, we completed an exchange offer of $600 million aggregate principal amount of the 7.75% Notes that had been registered under the Securities Act of 1933, as amended (the “Securities Act”), for an equal amount of the 7.75% Notes that had not been registered under the Securities Act.

 

6.125% Senior Notes Due 2023

 

On June 27, 2014, the Company completed a private offering of $850 million in aggregate principal amount senior unsecured 6.125% notes due 2023 (the “Original 6.125% Notes”).  Interest on the notes is payable on each July 15 and January 15.  The Company received net proceeds from this offering of approximately $829 million, after deducting initial purchasers’ discounts and estimated offering expenses, which the Company used to repay all of the $100 million in borrowings outstanding under its previous credit facility and to finance a portion of the purchase price of the our acquisition of 106,000 net contiguous acres in Dimmit, LaSalle and Webb Counties, Texas (the “Catarina Acquisition”).  We used the remaining proceeds from the offering to fund a portion of the remaining 2014 capital budget and for general corporate purposes.  The Original 6.125% Notes are the senior unsecured obligations of the Company and are guaranteed on a joint and several senior unsecured basis by, with certain exceptions, substantially all of the Company’s existing and future subsidiaries.

 

On September 12, 2014, we issued an additional $300 million in aggregate principal amount of our 6.125% senior notes due 2023 (the “Additional 6.125% Notes” and, together with the Original 6.125% Notes, the “6.125% Notes” and, together with the 7.75% Notes, the “Senior Notes”) in a private offering at an issue price of 100.75% of the principal amount of the Additional 6.125% Notes.  We received net proceeds of $295.9 million, after deducting the initial purchasers’ discounts, adding premiums to face value of $2.3 million and deducting estimated offering expenses of $6.4 million.  The Company also received cash for accrued interest from June 27, 2014 through the date of the issuance of $3.8 million, for total net proceeds of $299.7 million from the sale of the Additional 6.125% Notes.  The Additional 6.125% Notes were issued under the same indenture as the Original 6.125% Notes, and are, therefore, treated as a single class of securities under the indenture.  We used a portion of the net proceeds from the offering to fund a portion of the 2014 capital budget and used the remainder of the net proceeds to fund a portion of the 2015 capital budget, and for general corporate purposes.

 

The 6.125% Notes are senior unsecured obligations and rank equally in right of payment with all of our existing and future senior unsecured indebtedness.  The 6.125% Notes rank senior in right of payment to the Company’s future subordinated indebtedness.  The 6.125% Notes are effectively junior in right of payment to all of the Company’s existing and future secured debt (including under the Second Amended and Restated Credit Agreement) to the extent of the value

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of the assets securing such debt.  The 6.125% Notes are fully and unconditionally guaranteed (except for customary release provisions) on a joint and several senior unsecured basis by the subsidiary guarantors party to the indenture governing the 6.125% Notes.  To the extent set forth in the indenture governing the 6.125% Notes, certain of our subsidiaries will be required to fully and unconditionally guarantee the 6.125% Notes on a joint and several senior unsecured basis in the future.

 

The indenture governing the 6.125% Notes, among other things, restricts our ability and our restricted subsidiaries’ ability to: (i) incur, assume or guarantee additional indebtedness or issue certain types of equity securities; (ii) pay distributions on, purchase or redeem shares or purchase or redeem subordinated debt; (iii) make certain investments; (iv) enter into certain transactions with affiliates; (v) create or incur liens on their assets; (vi) sell assets; (vii) consolidate, merge or transfer all or substantially all of their assets; (viii) restrict distributions or other payments from the Company’s restricted subsidiaries; and (ix) designate subsidiaries as unrestricted subsidiaries.

 

The Company has the option to redeem all or a portion of the 6.125% Notes, at any time on or after July 15, 2018 at the applicable redemption prices specified in the indenture plus accrued and unpaid interest.  The Company may also redeem the 6.125% 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 and additional interest, if any, to the redemption date, at any time prior to July 15, 2018.  The Company may also be required to repurchase the 6.125% Notes upon a change of control or if we sell certain Company assets.

 

On February 27, 2015, we completed an exchange offer of $1.15 billion aggregate principal amount of the 6.125% Notes that had been registered under the Securities Act for an equal amount of the 6.125% Notes that had not been registered under the Securities Act.

 

Pursuant to tripartite agreements by and among the Company, U.S. Bank National Association (“U.S. Bank”) and Delaware Trust Company (“Delaware Trust”), effective May 20, 2016, U.S. Bank resigned as the Trustee, Notes Custodian, Registrar and Paying Agent (“Trustee”) under the indentures of the Senior Notes and Delaware Trust was appointed as successor Trustee.  No other changes to the indentures for the 6.125% Notes or the 7.75% Notes were made at the time of the change in Trustee. 

 

 

Note 7.  Derivative Instruments

 

To reduce the impact of fluctuations in oil, natural gas, and NGL prices on the Company’s business and results of operations, and to protect the economics of property acquisitions at the time of execution, the Company periodically enters into derivative contracts with respect to a portion of its projected oil and natural gas production through various transactions that fix or modify the future prices to be realized.  The derivative contracts may include fixed-for-floating price swaps (whereby, on the settlement date, the Company will receive or pay an amount based on the difference between a pre-determined fixed price and a variable market price for a notional quantity of production), put options (whereby the Company pays a cash premium in order to establish a fixed floor price for a notional quantity of production and, on the settlement date, receives the excess, if any, of the fixed price floor over a variable market price), and costless collars (whereby, on the settlement date, the Company receives the excess, if any, of a variable market price over a fixed floor price up to a fixed ceiling price for a notional quantity of production).  In addition, the Company periodically enters into call swaptions as a way to achieve greater downside price protection than offered under prevailing fixed-for-floating price swaps by agreeing to expand the notional quantity hedged or extend the notional quantity settlement period under a fixed-for floating price swap at the counterparty’s election on a designated date.

 

These hedging activities, which are governed by the terms of our Second Amended and Restated Credit Agreement and the SN UnSub Credit Agreement, as applicable, are intended to support oil and natural gas prices at targeted levels and manage exposure to oil and natural gas price fluctuations.  It is our policy to enter into derivative contracts only with counterparties that are creditworthy and competitive market participants.  Any derivatives that are with lenders, or affiliates of lenders, to our Second Amended and Restated Credit Agreement or SN UnSub Credit Agreement are collateralized by the assets securing our Second Amended and Restated Credit Agreement or SN UnSub Credit Agreement, as applicable, and, therefore, do not currently require the posting of cash collateral.  Our existing derivatives with non-lender counterparties, as designated under the Second Amended and Restated Credit Agreement and SN UnSub Credit Agreement, are unsecured and do not require the posting of cash collateral.  It is never the Company’s intention to enter into derivative contracts for speculative trading purposes.  In connection with the closing

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of the Comanche Acquisition, we hedged a portion of projected future production attributable to the Comanche Assets, using hedge transactions that are consistent with our current hedging strategy. 

 

All of our derivatives are accounted for as mark-to-market activities.  Under ASC 815, “Derivatives and Hedging,” these instruments are recorded on the condensed consolidated balance sheets at fair value as either short term or long term assets or liabilities based on their anticipated settlement date.  The Company nets derivative assets and liabilities by commodity for counterparties where a legal right to such offset exists.  Changes in the derivatives’ fair values are recognized in current earnings since the Company has elected not to designate its current derivative contracts as cash flow hedges for accounting purposes.

 

The following table presents derivative positions for the periods indicated as of September 30, 2017: