NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Financial Statement Presentation
During interim periods, Cabot Oil & Gas Corporation (the Company) follows the same accounting policies disclosed in its Annual Report on Form 10-K for the year ended
December 31, 2016
(Form 10-K) filed with the Securities and Exchange Commission (SEC). The interim financial statements should be read in conjunction with the notes to the consolidated financial statements and information presented in the Form 10-K. In management’s opinion, the accompanying interim condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary for a fair statement. The results for any interim period are not necessarily indicative of the expected results for the entire year.
Certain reclassifications have been made to prior year statements to conform with the current year presentation. These reclassifications had no impact on previously reported stockholders' equity, net income (loss) or cash flows, except as discussed in "
Recently Adopted Accounting Pronouncements
" below.
Recently Adopted Accounting Pronouncements
Stock-Based Compensation.
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, as an amendment to Accounting Standards Codification (ASC) Topic 718. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2016. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. The Company elected to apply this guidance on a prospective basis.
The Company adopted this guidance effective January 1, 2017. The recognition of previously unrecognized windfall tax benefits resulted in a cumulative-effect adjustment of
$42.2 million
, which increased retained earnings and decreased net deferred tax liabilities by the same amount as of the beginning of 2017. Effective January 1, 2017, cash paid by the Company when directly withholding shares from employee awards for tax-withholding purposes will be classified as a financing activity. This change has been recognized retrospectively beginning January 1, 2015. Prior periods have been adjusted as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
Net Cash Provided by Financing Activities
|
(In thousands)
|
|
As Reported
|
|
As Adjusted
|
|
As Reported
|
|
As Adjusted
|
Year ended December 31, 2015
|
|
$
|
740,737
|
|
|
$
|
749,598
|
|
|
$
|
232,157
|
|
|
$
|
223,296
|
|
Three months ended March 31, 2016
|
|
62,090
|
|
|
67,112
|
|
|
570,773
|
|
|
565,751
|
|
Six months ended June 30, 2016
|
|
147,244
|
|
|
152,290
|
|
|
497,474
|
|
|
492,428
|
|
Nine months ended September 30, 2016
|
|
252,649
|
|
|
257,705
|
|
|
468,171
|
|
|
463,115
|
|
Year ended December 31, 2016
|
|
392,377
|
|
|
397,441
|
|
|
458,869
|
|
|
453,805
|
|
The remaining provisions of this amendment did not have a material effect on the Company's financial position, results of operations or cash flows.
Accounting Changes and Error Corrections.
In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Venture (Topic 323), which states that registrants should consider additional qualitative disclosures if the impact of an issued but not yet adopted ASU is unknown or cannot be reasonably estimated and to include a description of the effect of the accounting policies that the registrant expects to apply, if determined. Transition guidance in certain issued but not yet adopted ASUs, including Leases and Revenue Recognition, was also updated to reflect this amendment. This guidance is effective immediately. The Company adopted this guidance during the first quarter of 2017. The adoption of this guidance impacted the Company's disclosures but had no effect on its financial position, results of operations or cash flows.
Retirement Benefits
.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715). The amendments in this update require that an employer report the service cost component of postretirement benefits in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable. The amendments in this update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic benefit cost in assets.
The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. The Company elected to early adopt this guidance effective January 1, 2017. The reclassification of interest and amortization of prior service cost resulted in an increase in operating income and an increase in other expense (non-operating expense) of
$1.6 million
and
$1.4 million
for the years ended December 31, 2016 and 2015, respectively, and
$0.8 million
for the
six
months ended
June 30,
2016
.
Recently Issued Accounting Pronouncements
Financial Instruments.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall, as an amendment to ASC Subtopic 825-10. The amendments in this update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Among other items, this update will simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. This impairment assessment reduces the complexity of the other-than-temporary impairment guidance that entities follow currently. The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption of this amendment is not permitted. The Company is currently evaluating the effect that adopting this guidance will have on its financial position, results of operation or cash flows.
Leases.
In February 2016, the FASB issued ASU No. 2016-02, Leases, as a new Topic, ASC Topic 842. The new lease guidance supersedes Topic 840. The core principle of the guidance is that a company should recognize the assets and liabilities that arise from leases. This ASU does not apply to leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. The guidance is effective for interim and annual periods beginning after December 15, 2018. This ASU is to be adopted using a modified retrospective approach. The Company plans to adopt this guidance effective January 1, 2019 and is currently evaluating the effect that adopting this guidance will have on its financial position, results of operations or cash flows.
Revenue Recognition.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, as a new Topic, ASC Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), which deferred the effective date of ASU No. 2014-09 by one year, making the new standard effective for interim and annual periods beginning after December 15, 2017. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
Additionally, in March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus agent considerations (reporting revenue gross versus net), which clarifies the implementation guidance on principal versus agent considerations on such matters. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying performance obligations and licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-scope improvements and practical expedients, which addresses narrow-scope improvements to the guidance on collectibility, non-cash consideration, and completed contracts at transition. Additionally, the amendments in this update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which clarifies the guidance or corrects unintended application of guidance.
The Company plans to adopt this guidance effective January 1, 2018 using the modified retrospective method applied to contracts that are not completed as of that date. The Company has not identified changes to its revenue recognition policies that would result in a material adjustment to the opening balance of retained earnings on January 1, 2018; however, it is continuing to evaluate the effect, if any, that adopting this guidance will have on its financial position, results of operations or cash flows. Adopting this guidance will result in increased disclosures related to revenue recognition policies and disaggregation of revenue. The Company plans to make use of the practical expedient that will allow it to not disclose the value of unsatisfied performance obligations for contracts with an original term of one year or less.
Statement of Cash Flows.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance addresses eight specific cash flow issues for which current GAAP is either unclear or does not include specific guidance. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted, provided that all of the amendments are adopted in the same period. This ASU must be adopted using a retrospective transition method.
Upon adopting this guidance, the Company will be required to make an accounting policy election to classify distributions it receives from its equity method investees under either (1) the cumulative earnings approach in which distributions received are considered returns on investment and classified as cash inflows from operating activities unless the cumulative distributions received exceed cumulative equity in earnings recognized by the Company, or (2) the nature of distributions approach in which distributions received are classified on the basis of the nature of the activity that generated the distribution as either a return on investment (cash inflows from operating activities) or a return of investment (cash inflows from investing activities). The Company has not yet determined which policy election it will make. Currently, the Company is not receiving any distributions from its equity method investees; therefore, the selection between the policy elections would not have a material effect on its presentation of cash flows. If material distributions are received in the future, the impact of the policy election could be material. The Company expects to adopt this guidance effective January 1, 2018 and is currently evaluating the effect that adopting the remaining areas of this guidance will have on its presentation of cash flows. Adoption of this guidance is expected to have no material effect on the Company's financial position or results of operations.
2. Properties and Equipment, Net
Properties and equipment, net are comprised of the following:
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|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30,
2017
|
|
December 31,
2016
|
Proved oil and gas properties
|
|
$
|
6,801,380
|
|
|
$
|
7,437,604
|
|
Unproved oil and gas properties
|
|
291,250
|
|
|
260,543
|
|
Gathering and pipeline systems
|
|
1,569
|
|
|
187,846
|
|
Land, building and other equipment
|
|
84,680
|
|
|
84,462
|
|
|
|
7,178,879
|
|
|
7,970,455
|
|
Accumulated depreciation, depletion and amortization
|
|
(2,975,894
|
)
|
|
(3,720,330
|
)
|
|
|
$
|
4,202,985
|
|
|
$
|
4,250,125
|
|
At
June 30, 2017
, the Company did not have any projects that had exploratory well costs capitalized for a period of greater than
one year
after drilling.
Divestitures
In February 2016, the Company completed the divestiture of certain proved and unproved oil and gas properties in east Texas for approximately
$56.4 million
resulting in a
$0.5 million
gain on sale of assets.
Assets Held for Sale
In June 2017, the Company agreed to sell certain proved and unproved oil and gas properties and related pipeline assets located in West Virginia, Virginia and Ohio for
$41.3 million
, subject to customary purchase price adjustments, and recorded an impairment of
$68.6 million
associated with the proposed sale of these properties. Accordingly, these assets were classified as held for sale as of
June 30, 2017
. The Company expects to close this transaction in the third quarter of 2017.
Balance sheet data related to the assets held for sale is as follows:
|
|
|
|
|
|
(In thousands)
|
|
June 30, 2017
|
ASSETS
|
|
|
Inventories
|
|
$
|
2,228
|
|
Properties and equipment, net
|
|
104,518
|
|
Deferred income taxes
|
|
6,803
|
|
|
|
113,549
|
|
LIABILITIES
|
|
|
Asset retirement obligations
|
|
75,693
|
|
|
|
75,693
|
|
Net assets
|
|
$
|
37,856
|
|
The fair value of the impaired properties was determined using a market approach that took into consideration the expected sales price included in the purchase and sale agreement the Company executed on June 29, 2017. Accordingly, the inputs associated with the fair value of the assets held for sale were considered Level 3 in the fair value hierarchy. Refer to
Note 1
of the Notes to the Consolidated Financial Statements in the Form 10-K for a description of the fair value hierarchy.
3. Equity Method Investments
The Company holds a
25%
equity interest in Constitution Pipeline Company, LLC (Constitution) and a
20%
equity interest in Meade Pipeline Co LLC (Meade). Activity related to
these equity method investments is as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constitution
|
|
Meade
|
|
Total
|
|
|
Six Months Ended June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Balance at beginning of period
|
|
$
|
96,850
|
|
|
$
|
90,345
|
|
|
$
|
32,674
|
|
|
$
|
13,172
|
|
|
$
|
129,524
|
|
|
$
|
103,517
|
|
Contributions
|
|
3,125
|
|
|
6,800
|
|
|
10,501
|
|
|
11,371
|
|
|
13,626
|
|
|
18,171
|
|
Earnings (loss) on equity method investments
|
|
(2,555
|
)
|
|
1,937
|
|
|
(14
|
)
|
|
(2
|
)
|
|
(2,569
|
)
|
|
1,935
|
|
Balance at end of period
|
|
$
|
97,420
|
|
|
$
|
99,082
|
|
|
$
|
43,161
|
|
|
$
|
24,541
|
|
|
$
|
140,581
|
|
|
$
|
123,623
|
|
During
2017
, the Company expects to contribute approximately
$70.0 million
to its equity method investments. For further information regarding the Company’s equity method investments, refer to
Note 4
of the Notes to the Consolidated Financial Statements in the Form 10-K.
Constitution
On April 22, 2016, Constitution announced that the New York State Department of Environmental Conservation (NYSDEC) denied Constitution's application for a Section 401 Water Quality Certification (Certification) for the New York State portion of its proposed 126-mile route. During the second quarter of 2016, Constitution filed legal actions in the U.S. Court of Appeals for the Second Circuit and the U.S. District Court for the Northern District of New York challenging the legality and appropriateness of the NYSDEC’s decision. Both courts granted Constitution's motions to expedite the schedules for the legal actions. On March 16, 2017, the U.S. District Court for the Northern District of New York issued an order ruling, without prejudice, that it lacked subject matter jurisdiction to hear Constitution’s complaint. The U.S. Court of Appeals has heard oral arguments but has not yet ruled on Constitution's appeal.
Constitution stated that it remains committed to pursuing the project and that it intends to pursue all available options to challenge the NYSDEC’s decision. In light of the delays and uncertainties related to the ongoing litigation and the regulatory environment, Constitution has revised its target in-service date to as early as the first half of 2019. This assumes that the U.S. Court of Appeals challenge process is satisfactorily and promptly concluded.
In light of the NYSDEC’s denial and resulting litigation, the Company evaluated its investment in Constitution for other-than-temporary impairment (OTTI) as of
June 30, 2017
and does not believe there is an indication of an OTTI. The Company’s evaluation considered various factors, including but not limited to prior Federal Energy Regulatory Commission (FERC) approval and the related economic viability of the project, the pending appeal filed by Constitution and the other members’ commitment to the project. To the extent that the legal and regulatory proceedings have unfavorable outcomes, or if
Constitution concludes that the project is no longer viable or elects to not go forward as legal and regulatory actions progress, the Company will reevaluate the facts and circumstances relative to its conclusions with respect to OTTI. In the event that facts and circumstances change, the Company may be required to recognize an impairment charge up to its investment value at such time, net of any cash and working capital held by Constitution. The Company will continue to monitor the carrying value of its investment as required.
At this time, the Company remains committed to funding the project in an amount proportionate to its ownership interest for the development and construction of the new pipeline. As of
June 30, 2017
, the Company has made contributions of
$91.7 million
since inception of the project.
4. Debt and Credit Agreements
The Company’s debt and credit agreements consisted of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30,
2017
|
|
December 31,
2016
|
6.51% weighted-average senior notes
|
|
$
|
361,000
|
|
|
$
|
361,000
|
|
9.78% senior notes
|
|
67,000
|
|
|
67,000
|
|
5.58% weighted-average senior notes
|
|
175,000
|
|
|
175,000
|
|
3.65% weighted-average senior notes
|
|
925,000
|
|
|
925,000
|
|
|
|
1,528,000
|
|
|
1,528,000
|
|
Unamortized debt issuance costs
|
|
(6,789
|
)
|
|
(7,470
|
)
|
|
|
$
|
1,521,211
|
|
|
$
|
1,520,530
|
|
The borrowing base under the terms of the Company's revolving credit facility is redetermined annually in April. In addition, either the Company or the banks may request an interim redetermination twice a year or in connection with certain acquisitions or divestitures of oil and gas properties. Effective
April 11, 2017
, the borrowing base and available commitments were reaffirmed at
$3.2 billion
and
$1.7 billion
, respectively.
At
June 30, 2017
, the Company was in compliance with all restrictive financial covenants for both its revolving credit facility and senior notes. As of
June 30, 2017
, based on the Company's asset coverage and leverage ratios, there were no interest rate adjustments required for the Company's senior notes.
At
June 30, 2017
, the Company had
no
borrowings outstanding under its revolving credit facility and had unused commitments of
$1.7 billion
. The Company’s weighted-average effective interest rate for the revolving credit facility for the
six
months ended
June 30, 2016
was approximately
2.3%
.
5. Derivative Instruments and Hedging Activities
As of
June 30, 2017
, the Company had the following outstanding commodity derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collars
|
|
|
|
Basis Swaps
|
|
|
|
|
|
|
|
Floor
|
|
Ceiling
|
|
Swaps
|
|
Type of Contract
|
|
Volume
|
|
Contract Period
|
|
Range
|
|
Weighted-Average
|
|
Range
|
|
Weighted-Average
|
|
Weighted-Average
|
|
Weighted-Average
|
Natural gas
|
|
17.9
|
|
Bcf
|
|
Jul. 2017 - Dec. 2017
|
|
|
|
|
|
|
|
|
|
$
|
3.12
|
|
|
|
Natural gas
|
|
8.9
|
|
Bcf
|
|
Jul. 2017 - Dec. 2017
|
|
|
|
|
|
|
|
|
|
$
|
3.46
|
|
|
|
Natural gas
|
|
17.9
|
|
Bcf
|
|
Jul. 2017 - Dec. 2017
|
|
$
|
—
|
|
|
$
|
3.09
|
|
|
$3.42-$3.45
|
|
$
|
3.43
|
|
|
|
|
|
Natural gas
|
|
21.3
|
|
Bcf
|
|
Jan. 2018 - Dec. 2019
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.42
|
|
Crude oil
|
|
0.9
|
|
Mmbbl
|
|
Jul. 2017 - Dec. 2017
|
|
$
|
—
|
|
|
$
|
50.00
|
|
|
$56.25-$56.50
|
|
$
|
56.39
|
|
|
|
|
|
In the table above, natural gas prices are stated per Mcf and crude oil prices are stated per barrel.
Effect of Derivative Instruments on the Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
(In thousands)
|
|
Balance Sheet Location
|
|
June 30,
2017
|
|
December 31,
2016
|
|
June 30,
2017
|
|
December 31,
2016
|
Commodity contracts
|
|
Other current assets
|
|
$
|
7,708
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity contracts
|
|
Other assets (non-current)
|
|
5,222
|
|
|
2,991
|
|
|
—
|
|
|
—
|
|
Commodity contracts
|
|
Derivative instruments (current)
|
|
—
|
|
|
—
|
|
|
2,688
|
|
|
40,259
|
|
|
|
|
|
$
|
12,930
|
|
|
$
|
2,991
|
|
|
$
|
2,688
|
|
|
$
|
40,259
|
|
Offsetting of Derivative Assets and Liabilities in the Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30,
2017
|
|
December 31,
2016
|
Derivative assets
|
|
|
|
|
|
|
Gross amounts of recognized assets
|
|
$
|
13,880
|
|
|
$
|
2,991
|
|
Gross amounts offset in the statement of financial position
|
|
(950
|
)
|
|
—
|
|
Net amounts of assets presented in the statement of financial position
|
|
12,930
|
|
|
2,991
|
|
Gross amounts of financial instruments not offset in the statement of financial position
|
|
721
|
|
|
—
|
|
Net amount
|
|
$
|
13,651
|
|
|
$
|
2,991
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
|
|
|
|
Gross amounts of recognized liabilities
|
|
$
|
3,638
|
|
|
$
|
40,259
|
|
Gross amounts offset in the statement of financial position
|
|
(950
|
)
|
|
—
|
|
Net amounts of liabilities presented in the statement of financial position
|
|
2,688
|
|
|
40,259
|
|
Gross amounts of financial instruments not offset in the statement of financial position
|
|
—
|
|
|
757
|
|
Net amount
|
|
$
|
2,688
|
|
|
$
|
41,016
|
|
Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cash received (paid) on settlement of derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivative instruments
|
|
$
|
1,204
|
|
|
$
|
11,305
|
|
|
$
|
(319
|
)
|
|
$
|
11,305
|
|
Non-cash gain (loss) on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivative instruments
|
|
12,601
|
|
|
(38,489
|
)
|
|
47,509
|
|
|
(19,495
|
)
|
|
|
$
|
13,805
|
|
|
$
|
(27,184
|
)
|
|
$
|
47,190
|
|
|
$
|
(8,190
|
)
|
6. Fair Value Measurements
The Company follows the authoritative guidance for measuring fair value of assets and liabilities in its financial statements. For further information regarding the fair value hierarchy, refer to
Note 1
of the Notes to the Consolidated Financial Statements in the Form 10-K.
Financial Assets and Liabilities
The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Balance at
June 30, 2017
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
13,765
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,765
|
|
Derivative instruments
|
|
—
|
|
|
—
|
|
|
13,880
|
|
|
13,880
|
|
Total assets
|
|
$
|
13,765
|
|
|
$
|
—
|
|
|
$
|
13,880
|
|
|
$
|
27,645
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
26,199
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26,199
|
|
Derivative instruments
|
|
—
|
|
|
1,111
|
|
|
2,527
|
|
|
3,638
|
|
Total liabilities
|
|
$
|
26,199
|
|
|
$
|
1,111
|
|
|
$
|
2,527
|
|
|
$
|
29,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Balance at
December 31, 2016
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
12,587
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,587
|
|
Derivative instruments
|
|
—
|
|
|
—
|
|
|
2,991
|
|
|
2,991
|
|
Total assets
|
|
$
|
12,587
|
|
|
$
|
—
|
|
|
$
|
2,991
|
|
|
$
|
15,578
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
24,169
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,169
|
|
Derivative instruments
|
|
—
|
|
|
21,400
|
|
|
18,859
|
|
|
40,259
|
|
Total liabilities
|
|
$
|
24,169
|
|
|
$
|
21,400
|
|
|
$
|
18,859
|
|
|
$
|
64,428
|
|
The Company’s investments associated with its deferred compensation plan consist of mutual funds and deferred shares of the Company’s common stock that are publicly traded and for which market prices are readily available.
The derivative instruments were measured based on quotes from the Company’s counterparties. Such quotes have been derived using an income approach that considers various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, basis differentials, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. Estimates are verified using relevant NYMEX futures contracts and/or are compared to multiple quotes obtained from counterparties for reasonableness. The determination of the fair values presented above also incorporates a credit adjustment for non-performance risk. The Company measured the non-performance risk of its counterparties by reviewing credit default swap spreads for the various financial institutions with which it has derivative transactions, while non-performance risk of the Company is evaluated using a market credit spread provided by the Company’s bank. The Company has not incurred any losses related to non-performance risk of its counterparties and does not anticipate any material impact on its financial results due to non-performance by third parties.
The most significant unobservable inputs relative to the Company’s Level 3 derivative contracts are basis differentials and volatility factors. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties’ valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided.
The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Balance at beginning of period
|
|
$
|
(15,868
|
)
|
|
$
|
—
|
|
Total gain (loss) included in earnings
|
|
30,758
|
|
|
(6,499
|
)
|
Settlement (gain) loss
|
|
(3,537
|
)
|
|
(1,807
|
)
|
Transfers in and/or out of level 3
|
|
—
|
|
|
—
|
|
Balance at end of period
|
|
$
|
11,353
|
|
|
$
|
(8,306
|
)
|
|
|
|
|
|
Change in unrealized gains (losses) relating to assets and liabilities still held at the end of the period
|
|
$
|
17,915
|
|
|
$
|
(8,306
|
)
|
There were no transfers between Level 1 and Level 2 fair value measurements for the
six
months ended
June 30, 2017
and
2016
.
Non-Financial Assets and Liabilities
The Company discloses or recognizes its non-financial assets and liabilities, such as impairments, at fair value on a nonrecurring basis. The Company recorded an impairment charge related to certain oil and gas properties during the quarter ended
June 30, 2017
. Refer to
Note 2
of the Notes to the Condensed Consolidated Financial Statements for additional disclosures related to fair value associated with the impaired assets. As
none
of the Company’s other non-financial assets and liabilities were measured at fair value as of
June 30, 2017
, additional disclosures were not required.
The estimated fair value of the Company’s asset retirement obligations at inception is determined by utilizing the income approach by applying a credit-adjusted risk-free rate, which takes into account the Company’s credit risk, the time value of money, and the current economic state to the undiscounted expected abandonment cash flows. Given the unobservable nature of the inputs, the measurement of the asset retirement obligations was classified as Level 3 in the fair value hierarchy.
Fair Value of Other Financial Instruments
The estimated fair value of other financial instruments is the amount at which the instrument could be exchanged currently between willing parties. The carrying amount reported in the Condensed Consolidated Balance Sheet for cash and cash equivalents approximates fair value due to the short-term maturities of these instruments. Cash and cash equivalents are classified as Level 1 in the fair value hierarchy and the remaining financial instruments are classified as Level 2.
The Company uses available market data and valuation methodologies to estimate the fair value of debt. The fair value of debt is the estimated amount the Company would have to pay a third party to assume the debt, including a credit spread for the difference between the issue rate and the period end market rate. The credit spread is the Company’s default or repayment risk. The credit spread (premium or discount) is determined by comparing the Company’s senior notes and revolving credit facility to new issuances (secured and unsecured) and secondary trades of similar size and credit statistics for both public and private debt. The fair value of all senior notes and the revolving credit facility is based on interest rates currently available to the Company. The Company’s debt is valued using an income approach and classified as Level 3 in the fair value hierarchy.
The carrying amount and fair value of debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
(In thousands)
|
|
Carrying
Amount
|
|
Estimated Fair
Value
|
|
Carrying
Amount
|
|
Estimated Fair
Value
|
Debt, net
|
|
$
|
1,521,211
|
|
|
$
|
1,511,291
|
|
|
$
|
1,520,530
|
|
|
$
|
1,463,643
|
|
7. Asset Retirement Obligations
Activity related to the Company’s asset retirement obligations is as follows:
|
|
|
|
|
|
(In thousands)
|
|
Six Months Ended
June 30, 2017
|
Balance at beginning of period
|
|
$
|
133,733
|
|
Liabilities reclassified to held-for-sale
|
|
(75,693
|
)
|
Liabilities incurred
|
|
796
|
|
Liabilities settled
|
|
(1,140
|
)
|
Liabilities divested
|
|
(1,788
|
)
|
Accretion expense
|
|
3,594
|
|
Balance at end of period
|
|
$
|
59,502
|
|
8. Commitments and Contingencies
Contractual Obligations
The Company has various contractual obligations in the normal course of its operations. There have been no material changes to the Company’s contractual obligations described under “Transportation and Gathering Agreements,” “Drilling Rig Commitments,” “Lease Commitments” and “Hydraulic Fracturing Services Commitments” as disclosed in
Note 9
in the Notes to Consolidated Financial Statements included in the Form 10-K.
Legal Matters
The Company is a defendant in various legal proceedings arising in the normal course of business. All known liabilities are accrued when management determines they are probable based on its best estimate of the potential loss. While the outcome and impact of these legal proceedings on the Company cannot be predicted with certainty, management believes that the resolution of these proceedings will not have a material effect on the Company’s financial position, results of operations or cash flows.
Contingency Reserves
When deemed necessary, the Company establishes reserves for certain legal proceedings. The establishment of a reserve is based on an estimation process that includes the advice of legal counsel and subjective judgment of management. While management believes these reserves to be adequate, it is reasonably possible that the Company could incur additional losses with respect to those matters in which reserves have been established. The Company believes that any such amount above the amounts accrued would not be material to the Condensed Consolidated Financial Statements. Future changes in facts and circumstances not currently foreseeable could result in the actual liability exceeding the estimated ranges of loss and amounts accrued.
9. Capital Stock
Treasury Stock
In August 1998, the Board of Directors authorized a share repurchase program under which the Company may purchase shares of common stock in the open market or in negotiated transactions. The timing and amount of any stock purchases are determined at the discretion of management. The Company may use the repurchased shares to fund stock compensation programs currently in existence, or for other corporate purposes. All purchases executed to date have been through open market transactions. There is no expiration date associated with the authorization to repurchase common stock of the Company.
During the first
six
months of
2017
, the Company repurchased
3.0 million
shares for a total cost of
$68.3 million
. Since the authorization date, the Company has repurchased
32.9 million
shares of the
40.0 million
total shares authorized for a total cost of approximately
$456.6 million
, of which
20.0 million
shares have been retired. No treasury shares have been delivered or sold by the Company subsequent to the repurchase. As of
June 30, 2017
,
12.9 million
shares were held as treasury stock.
10. Stock-based Compensation
General
From time to time the Company grants certain stock-based compensation awards, including restricted stock awards, restricted stock units and performance share awards. Stock-based compensation expense associated with these awards was
$10.1 million
and
$7.3 million
in the
second
quarter of
2017
and
2016
, respectively, and
$18.3 million
and
$17.9 million
during the first
six
months of
2017
and
2016
, respectively. Stock-based compensation expense is included in general and administrative expense in the Condensed Consolidated Statement of Operations.
As described in Note 1 to the Condensed Consolidated Financial Statements, effective January 1, 2017, the Company adopted ASU No. 2016-09, which requires that excess tax benefits and tax deficiencies on stock-based compensation be recorded in the income statement. During the first
six
months of
2017
, the Company recorded an increase to tax expense of
$2.6 million
in the Condensed Consolidated Statement of Operations as a result of book compensation cost for employee stock-based compensation exceeding the federal and state tax deductions for awards that vested during the period.
Prior to the adoption of ASU No. 2016-09, windfall tax benefits were recorded in additional paid in capital in the Condensed Consolidated Balance Sheet and tax shortfalls reduced additional paid in capital to the extent they offset previously recorded windfall tax benefits. During the first
six
months of
2016
, the Company recorded a tax shortfall of
$2.1 million
, resulting in a reduction of the Company's windfall tax benefit that was recorded in additional paid in capital in the Condensed Consolidated Balance Sheet. The tax shortfall was a result of book compensation cost for employee stock-based compensation exceeding the federal and state tax deductions for certain awards that vested during the period.
Refer to
Note 13
of the Notes to the Consolidated Financial Statements in the Form 10-K for further description of the various types of stock-based compensation awards and the applicable award terms.
Restricted Stock Units
During the first
six
months of
2017
,
48,781
restricted stock units were granted to non-employee directors of the Company with a weighted-average grant date value of
$22.63
per unit. The fair value of these units is measured based on the closing stock price on grant date and compensation expense is recorded immediately. These units immediately vest and are issued when the director ceases to be a director of the Company.
Performance Share Awards
The performance period for the awards granted during the first
six
months of
2017
commenced on
January 1, 2017
and ends on
December 31, 2019
. The Company used an annual forfeiture rate assumption ranging from
0%
to
6%
for purposes of recognizing stock-based compensation expense for its performance share awards.
Performance Share Awards Based on Internal Performance Metrics
The fair value of performance share award grants based on internal performance metrics is based on the closing stock price on the grant date. Each performance share award represents the right to receive up to
100%
of the award in shares of common stock. Based on the Company’s probability assessment at
June 30, 2017
, it is considered probable that the criteria for all performance awards based on internal metrics awards will be met.
Employee Performance Share Awards.
During the first
six
months of
2017
,
406,460
Employee Performance Share Awards were granted at a grant date value of
$22.60
per share. The performance metrics are set by the Company’s compensation committee and are based on the Company’s average production, average finding costs and average reserve replacement over a
three
-year performance period.
Hybrid Performance Share Awards.
During the first
six
months of
2017
,
272,920
Hybrid Performance Share Awards were granted at a grant date value of
$22.60
per share.
The 2017 awards vest 25% on each of the first and second anniversary dates and 50% on the third anniversary
, provided that the Company has
$100 million
or more of operating cash flow for the year preceding the vesting date, as set by the Company’s compensation committee. If the Company does not meet the performance metric for the applicable period, then the portion of the performance shares that would have been issued on that anniversary date will be forfeited.
Performance Share Awards Based on Market Conditions
These awards have both an equity and liability component, with the right to receive up to the first
100%
of the award in shares of common stock and the right to receive up to an additional
100%
of the value of the award in excess of the equity
component in cash. The equity portion of these awards is valued on the grant date and is not marked to market, while the liability portion of the awards is valued as of the end of each reporting period on a mark-to-market basis. The Company calculates the fair value of the equity and liability portions of the awards using a Monte Carlo simulation model.
TSR Performance Share Awards.
During the first
six
months of
2017
,
409,380
TSR Performance Share Awards were granted and are earned, or not earned, based on the comparative performance of the Company’s common stock measured against a predetermined group of companies in the Company’s peer group over a
three
-year performance period.
The following assumptions were used to determine the grant date fair value of the equity component (February 22,
2017
) and the period-end fair value of the liability component of the TSR Performance Share Awards:
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
June 30, 2017
|
Fair value per performance share award
|
|
$
|
19.85
|
|
|
$14.03 - $18.61
|
Assumptions:
|
|
|
|
|
|
Stock price volatility
|
|
37.8
|
%
|
|
33.5% - 40.0%
|
Risk free rate of return
|
|
1.4
|
%
|
|
1.1% - 1.5%
|
11. Earnings per Common Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is similarly calculated except that the common shares outstanding for the period is increased using the treasury stock method to reflect the potential dilution that could occur if outstanding stock appreciation rights were exercised and stock awards were vested at the end of the applicable period. Anti-dilutive shares represent potentially dilutive securities that are excluded from the computation of diluted income or loss per share as their impact would be anti-dilutive.
The following is a calculation of basic and diluted weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Weighted-average shares - basic
|
|
464,768
|
|
|
465,068
|
|
|
465,057
|
|
|
448,455
|
|
Dilution effect of stock appreciation rights and stock awards at end of period
|
|
1,977
|
|
|
—
|
|
|
1,695
|
|
|
—
|
|
Weighted-average shares - diluted
|
|
466,745
|
|
|
465,068
|
|
|
466,752
|
|
|
448,455
|
|
The following is a calculation of weighted-average shares excluded from diluted EPS due to the anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Weighted-average stock appreciation rights and stock awards excluded from diluted EPS due to the anti-dilutive effect due to net loss
|
|
—
|
|
|
1,569
|
|
|
—
|
|
|
1,168
|
|
Weighted-average stock appreciation rights and stock awards excluded from diluted EPS due to the anti-dilutive effect calculated using the treasury stock method
|
|
—
|
|
|
—
|
|
|
774
|
|
|
827
|
|
Weighted-average stock appreciation rights and stock awards excluded from diluted EPS due to the anti-dilutive effect
|
|
—
|
|
|
1,569
|
|
|
774
|
|
|
1,995
|
|
12. Additional Balance Sheet Information
Certain balance sheet amounts are comprised of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30,
2017
|
|
December 31,
2016
|
Accounts receivable, net
|
|
|
|
|
|
|
Trade accounts
|
|
$
|
176,840
|
|
|
$
|
185,594
|
|
Joint interest accounts
|
|
1,192
|
|
|
1,359
|
|
Other accounts
|
|
1,322
|
|
|
5,335
|
|
|
|
179,354
|
|
|
192,288
|
|
Allowance for doubtful accounts
|
|
(2,012
|
)
|
|
(1,243
|
)
|
|
|
$
|
177,342
|
|
|
$
|
191,045
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
Tubular goods and well equipment
|
|
$
|
10,761
|
|
|
$
|
11,005
|
|
Natural gas in storage
|
|
319
|
|
|
2,299
|
|
|
|
$
|
11,080
|
|
|
$
|
13,304
|
|
|
|
|
|
|
Other current assets
|
|
|
|
|
|
|
Prepaid balances and other
|
|
$
|
4,468
|
|
|
$
|
2,692
|
|
Derivative instruments
|
|
7,708
|
|
|
—
|
|
|
|
$
|
12,176
|
|
|
$
|
2,692
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
13,765
|
|
|
$
|
12,587
|
|
Debt issuance costs
|
|
9,699
|
|
|
11,403
|
|
Derivative instruments
|
|
5,222
|
|
|
2,991
|
|
Other accounts
|
|
62
|
|
|
58
|
|
|
|
$
|
28,748
|
|
|
$
|
27,039
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
Trade accounts
|
|
$
|
32,574
|
|
|
$
|
27,355
|
|
Natural gas purchases
|
|
3,629
|
|
|
2,231
|
|
Royalty and other owners
|
|
83,750
|
|
|
85,449
|
|
Accrued capital costs
|
|
51,445
|
|
|
34,647
|
|
Taxes other than income
|
|
8,686
|
|
|
13,827
|
|
Other accounts
|
|
3,470
|
|
|
4,902
|
|
|
|
$
|
183,554
|
|
|
$
|
168,411
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
12,164
|
|
|
$
|
14,153
|
|
Taxes other than income
|
|
5,858
|
|
|
3,829
|
|
Asset retirement obligations
|
|
2,000
|
|
|
2,000
|
|
Other accounts
|
|
819
|
|
|
1,510
|
|
|
|
$
|
20,841
|
|
|
$
|
21,492
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
26,199
|
|
|
$
|
24,169
|
|
Other accounts
|
|
7,861
|
|
|
4,952
|
|
|
|
$
|
34,060
|
|
|
$
|
29,121
|
|