UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For The Quarterly Period Ended September 30, 2014

OR

¨

Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 000-51801

 

ROSETTA RESOURCES INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

43-2083519

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

1111 Bagby Street, Suite 1600

Houston, TX

77002

(Address of principal executive offices)

(Zip Code)

(713) 335-4000

(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  x    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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

 

Large accelerated filer

x

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

¨  (Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  ¨    No   x

The number of shares of the registrant’s Common Stock, $0.001 par value per share, outstanding as of October 24, 2014 was 61,489,705 which excludes unvested restricted stock awards.

 

 

 

 

 


Table of Contents

 

Part I –

 

Financial Information

  

 

 

 

Item 1. Financial Statements

  

3

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

20

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

  

28

 

 

Item 4. Controls and Procedures

  

29

Part II –

 

Other Information

  

 

 

 

Item 1. Legal Proceedings

  

30

 

 

Item 1A. Risk Factors

  

30

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  

30

 

 

Item 3. Defaults Upon Senior Securities

  

30

 

 

Item 4. Mine Safety Disclosures

  

30

 

 

Item 5. Other Information

  

30

 

 

Item 6. Exhibits

  

31

Signatures

  

32

 

 

 

2


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Rosetta Resources Inc.

Consolidated Balance Sheet

(In thousands, except par value and share amounts)

 

 

 

September 30,
2014

 

 

December 31,
2013

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,627

 

 

$

193,784

 

Accounts receivable

 

 

154,268

 

 

 

122,677

 

Derivative instruments

 

 

14,249

 

 

 

4,307

 

Prepaid expenses

 

 

9,050

 

 

 

9,860

 

Deferred income taxes

 

 

1,524

 

 

 

27,976

 

Other current assets

 

 

5,032

 

 

 

1,284

 

Total current assets

 

 

207,750

 

 

 

359,888

 

Oil and natural gas properties using the full cost method of accounting:

 

 

 

 

 

 

 

 

Proved properties

 

 

5,172,365

 

 

 

3,951,397

 

Unproved/unevaluated properties, not subject to amortization

 

 

535,041

 

 

 

755,438

 

Gathering systems and compressor stations

 

 

278,045

 

 

 

168,730

 

Other fixed assets

 

 

29,794

 

 

 

26,362

 

 

 

 

6,015,245

 

 

 

4,901,927

 

Accumulated depreciation, depletion and amortization, including impairment

 

 

(2,313,109

)

 

 

(2,020,879

)

Total property and equipment, net

 

 

3,702,136

 

 

 

2,881,048

 

Other assets:

 

 

 

 

 

 

 

 

Debt issuance costs

 

 

26,756

 

 

 

25,602

 

Derivative instruments

 

 

8,347

 

 

 

5,458

 

Other long-term assets

 

 

281

 

 

 

4,622

 

Total other assets

 

 

35,384

 

 

 

35,682

 

Total assets

 

$

3,945,270

 

 

$

3,276,618

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

236,058

 

 

$

190,950

 

Royalties and other payables

 

 

114,164

 

 

 

78,264

 

Derivative instruments

 

 

 

 

 

4,913

 

Total current liabilities

 

 

350,222

 

 

 

274,127

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Derivative instruments

 

 

966

 

 

 

433

 

Long-term debt

 

 

1,910,000

 

 

 

1,500,000

 

Deferred income taxes

 

 

179,833

 

 

 

136,407

 

Other long-term liabilities

 

 

19,705

 

 

 

17,317

 

Total liabilities

 

 

2,460,726

 

 

 

1,928,284

 

Commitments and Contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; authorized 5,000,000 shares; no shares issued in 2014 or 2013

 

 

 

 

 

 

Common stock, $0.001 par value; authorized 150,000,000 shares; issued 62,272,702 shares and 62,032,162 shares at September 30, 2014 and December 31, 2013, respectively

 

 

62

 

 

 

61

 

Additional paid-in capital

 

 

1,193,492

 

 

 

1,182,672

 

Treasury stock, at cost; 785,185 shares and 724,755 shares at September 30, 2014 and December 31, 2013, respectively

 

 

(27,308

)

 

 

(24,592

)

Accumulated other comprehensive loss

 

 

(98

)

 

 

(108

)

Retained earnings

 

 

318,396

 

 

 

190,301

 

Total stockholders' equity

 

 

1,484,544

 

 

 

1,348,334

 

Total liabilities and stockholders' equity

 

$

3,945,270

 

 

$

3,276,618

 

 

See accompanying notes to the consolidated financial statements.

 

 

 

3


Rosetta Resources Inc.

Consolidated Statement of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil sales

$

168,016

 

 

$

140,172

 

 

$

462,396

 

 

$

353,119

 

NGL sales

 

66,003

 

 

 

50,857

 

 

 

176,740

 

 

 

144,236

 

Natural gas sales

 

54,359

 

 

 

34,136

 

 

 

157,878

 

 

 

108,369

 

Derivative instruments

 

77,215

 

 

 

(30,597

)

 

 

4,035

 

 

 

3,484

 

Total revenues

 

365,593

 

 

 

194,568

 

 

 

801,049

 

 

 

609,208

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expense

 

26,952

 

 

 

15,854

 

 

 

71,537

 

 

 

35,982

 

Treating and transportation

 

23,638

 

 

 

18,807

 

 

 

62,933

 

 

 

52,414

 

Taxes, other than income

 

13,191

 

 

 

7,896

 

 

 

35,656

 

 

 

24,286

 

Depreciation, depletion and amortization

 

128,255

 

 

 

60,915

 

 

 

293,670

 

 

 

153,382

 

Reserve for commercial disputes

 

5,800

 

 

 

 

 

 

5,800

 

 

 

 

General and administrative costs

 

23,438

 

 

 

18,790

 

 

 

64,643

 

 

 

52,830

 

Total operating costs and expenses

 

221,274

 

 

 

122,262

 

 

 

534,239

 

 

 

318,894

 

Operating income

 

144,319

 

 

 

72,306

 

 

 

266,810

 

 

 

290,314

 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest capitalized

 

21,011

 

 

 

6,907

 

 

 

53,628

 

 

 

26,009

 

Interest income

 

(1

)

 

 

 

 

 

(14

)

 

 

 

Other expense

 

(116

)

 

 

620

 

 

 

12,531

 

 

 

1,061

 

Total other expense

 

20,894

 

 

 

7,527

 

 

 

66,145

 

 

 

27,070

 

Income before provision for income taxes

 

123,425

 

 

 

64,779

 

 

 

200,665

 

 

 

263,244

 

Income tax expense

 

45,017

 

 

 

23,754

 

 

 

72,570

 

 

 

93,387

 

Net income

$

78,408

 

 

$

41,025

 

 

$

128,095

 

 

$

169,857

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.28

 

 

$

0.67

 

 

$

2.08

 

 

$

2.95

 

Diluted

$

1.27

 

 

$

0.67

 

 

$

2.08

 

 

$

2.93

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

61,484

 

 

 

61,152

 

 

 

61,439

 

 

 

57,656

 

Diluted

 

61,675

 

 

 

61,364

 

 

 

61,636

 

 

 

57,924

 

  

See accompanying notes to the consolidated financial statements.

 

 

 

4


Rosetta Resources Inc.

Consolidated Statement of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net income

 

$

78,408

 

 

$

41,025

 

 

$

128,095

 

 

$

169,857

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of accumulated other comprehensive gain (loss) related to de-designated hedges, net of income taxes of $58 and ($97) for the three and nine months ended September 30, 2013, respectively

 

 

 

 

 

(102

)

 

 

 

 

 

171

 

Postretirement medical benefits prior service benefit (cost), net of income taxes of ($2) and ($3) for the three months ended September 30, 2014 and 2013, respectively, and ($6) and $98 for the nine months ended September 30, 2014 and 2013, respectively

 

 

4

 

 

 

6

 

 

 

10

 

 

 

(173

)

Other comprehensive income (loss)

 

 

4

 

 

 

(96

)

 

 

10

 

 

 

(2

)

Comprehensive income

 

$

78,412

 

 

$

40,929

 

 

$

128,105

 

 

$

169,855

 

  

See accompanying notes to the consolidated financial statements.

 

 

 

5


Rosetta Resources Inc.

Consolidated Statement of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

128,095

 

 

$

169,857

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

293,670

 

 

 

153,382

 

Deferred income taxes

 

 

69,914

 

 

 

89,358

 

Amortization of deferred loan fees recorded as interest expense

 

 

2,866

 

 

 

7,674

 

Loss on debt extinguishment

 

 

3,101

 

 

 

 

Stock-based compensation expense

 

 

9,821

 

 

 

8,293

 

(Gain) loss due to change in fair value of derivative instruments

 

 

(17,211

)

 

 

3,280

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(31,592

)

 

 

(11,230

)

Prepaid expenses

 

 

2,053

 

 

 

(652

)

Other current assets

 

 

(3,749

)

 

 

171

 

Long-term assets

 

 

90

 

 

 

(105

)

Accounts payable and accrued liabilities

 

 

17,848

 

 

 

32,347

 

Royalties and other payables

 

 

35,899

 

 

 

19,201

 

Other long-term liabilities

 

 

(14

)

 

 

4,189

 

Excess tax benefit from share-based awards

 

 

 

 

 

(6,342

)

Net cash provided by operating activities

 

 

510,791

 

 

 

469,423

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisitions of oil and gas assets

 

 

(79,600

)

 

 

(952,703

)

Additions to oil and gas assets

 

 

(1,000,816

)

 

 

(568,140

)

Disposals of oil and gas assets

 

 

8

 

 

 

(1,402

)

Net cash used in investing activities

 

 

(1,080,408

)

 

 

(1,522,245

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings on Credit Facility

 

 

795,000

 

 

 

580,000

 

Payments on Credit Facility

 

 

(685,000

)

 

 

(515,000

)

Issuance of Senior Notes

 

 

500,000

 

 

 

700,000

 

Retirement of Senior Notes

 

 

(200,000

)

 

 

 

Proceeds from issuance of common stock

 

 

 

 

 

329,008

 

Deferred loan fees

 

 

(8,364

)

 

 

(18,102

)

Proceeds from stock options exercised

 

 

375

 

 

 

4,582

 

Purchases of treasury stock

 

 

(2,716

)

 

 

(6,838

)

Excess tax benefit from share-based awards

 

 

165

 

 

 

6,342

 

Net cash provided by financing activities

 

 

399,460

 

 

 

1,079,992

 

Net (decrease) increase in cash

 

 

(170,157

)

 

 

27,170

 

Cash and cash equivalents, beginning of period

 

 

193,784

 

 

 

36,786

 

Cash and cash equivalents, end of period

 

$

23,627

 

 

$

63,956

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Capital expenditures included in Accounts payable and accrued liabilities

 

$

145,956

 

 

$

126,780

 

  

See accompanying notes to the consolidated financial statements.

 

 

 

6


Rosetta Resources Inc.

Consolidated Statement of Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

 

 

Treasury Stock

 

 

Accumulated
Other

 

 

 

 

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Paid-In Capital

 

 

Shares

 

 

Amount

 

 

Comprehensive Loss

 

 

Retained Earnings

 

 

Stockholders'

Equity

 

Balance at December 31,
2013

 

 

62,032,162

 

 

$

61

 

 

$

1,182,672

 

 

 

724,755

 

 

$

(24,592

)

 

$

(108

)

 

$

190,301

 

 

$

1,348,334

 

Excess tax benefit from share-based awards

 

 

 

 

 

 

 

 

165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

165

 

Stock options exercised

 

 

19,000

 

 

 

1

 

 

 

375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

376

 

Treasury stock - employee tax payment

 

 

 

 

 

 

 

 

 

 

 

60,430

 

 

 

(2,716

)

 

 

 

 

 

 

 

 

(2,716

)

Stock-based compensation

 

 

 

 

 

 

 

 

10,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,280

 

Vesting of restricted stock

 

 

221,540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

128,095

 

 

 

128,105

 

Balance at September 30, 2014

 

 

62,272,702

 

 

$

62

 

 

$

1,193,492

 

 

 

785,185

 

 

$

(27,308

)

 

$

(98

)

 

$

318,396

 

 

$

1,484,544

 

  

See accompanying notes to the consolidated financial statements.

 

 

 

7


Rosetta Resources Inc.

Notes to Consolidated Financial Statements (unaudited)

 

(1) Organization and Operations of the Company

Nature of Operations. Rosetta Resources Inc. (together with its consolidated subsidiaries, the “Company”) is an independent exploration and production company engaged in the acquisition and development of onshore energy resources in the United States of America. The Company’s operations are located in the Eagle Ford shale in South Texas and the Permian Basin in West Texas.

These interim financial statements have not been audited. However, in the opinion of management, all adjustments, consisting of normal recurring adjustments necessary to fairly state the financial statements, have been included. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for the entire year. In addition, these financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”). These financial statements and notes should be read in conjunction with the Company’s audited Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Annual Report”).

 

(2) Summary of Significant Accounting Policies

The Company has provided a discussion of significant accounting policies, estimates and judgments in its 2013 Annual Report. There have been no changes to the Company’s significant accounting policies since December 31, 2013.

Recent Accounting Developments

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. The ASU will supersede most of the existing revenue recognition requirements in GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires disclosures sufficient to enable users to understand an entity’s nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The pronouncement is effective for annual and interim reporting periods beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. This guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

 

(3) Property and Equipment

The Company’s Total property and equipment, net consists of the following:

 

 

 

September 30, 2014

 

 

December 31,  2013

 

 

 

(In thousands)

 

Proved properties

 

$

5,172,365

 

 

$

3,951,397

 

Unproved/unevaluated properties

 

 

535,041

 

 

 

755,438

 

Gathering systems and compressor stations

 

 

278,045

 

 

 

168,730

 

Other fixed assets

 

 

29,794

 

 

 

26,362

 

Total

 

 

6,015,245

 

 

 

4,901,927

 

Less: Accumulated depreciation, depletion and amortization

 

 

(2,313,109

)

 

 

(2,020,879

)

Total property and equipment, net

 

$

3,702,136

 

 

$

2,881,048

 

  

Acquisitions

2014 Permian Acquisition. On December 30, 2013, the Company entered into a definitive agreement with several private parties to acquire Delaware Basin assets covering 5,034 net acres located in Reeves County (the “2014 Permian Acquisition”). These assets include 13 gross producing wells, of which 11 are operated by the Company. The Company completed the 2014 Permian Acquisition on February 28, 2014, with an effective date of December 1, 2013, for total cash consideration of $83.8 million.

8


Gates Ranch Acquisition. In the second quarter of 2013, the Company acquired the remaining 10% working interest in certain producing wells along with a third party’s option to participate in future wells in certain leases of its Gates Ranch leasehold located in the Eagle Ford shale (the “Gates Acquisition”) in Webb County for total cash consideration of approximately $128.1 million. The transaction closed on June 5, 2013 (the “Gates Acquisition Date”) and was financed with borrowings under the Company’s senior secured revolving credit facility (the “Credit Facility”), as described in Note 7 – Debt and Credit Agreements. As of the Gates Acquisition Date, the Company owns a 100% working interest in the entire Gates Ranch leasehold.

2013 Permian Acquisition. On March 14, 2013, the Company entered into a purchase and sale agreement with Comstock Oil & Gas, LP to purchase producing and undeveloped oil and natural gas interests in the Permian Basin in Gaines and Reeves Counties, Texas (the “2013 Permian Acquisition”). The Company completed the 2013 Permian Acquisition on May 14, 2013, with an effective date of January 1, 2013, for total cash consideration of $825.2 million. The 2013 Permian Acquisition was financed with the proceeds from the Company’s issuance of the 5.625% Senior Notes, as described in Note 7 – Debt and Credit Agreements, and the common stock offering described in Note 10 – Equity. In connection with the 2013 Permian Acquisition and related financings, the Company incurred total transaction costs of approximately $31.0 million, including (i) $5.6 million of commitment fees and related expenses associated with a bridge credit facility (“Bridge Credit Facility”), which were recorded as Interest expense since the Company did not borrow under the Bridge Credit Facility, (ii) $10.0 million of debt issuance costs paid in connection with the issuance of the 5.625% Senior Notes, which were deferred and are being amortized over the term of these senior notes, (iii) $13.1 million of equity issuance costs and related expenses associated with the common stock offering, which were reflected as a reduction of equity proceeds, and (iv) $2.3 million of consulting, investment, advisory, legal and other acquisition-related fees, which were expensed and are included in General and administrative costs.

The above transactions were accounted for under the acquisition method of accounting, whereby each respective purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values, with any excess of the purchase price over the estimated fair value of the identifiable net assets acquired recorded as goodwill (or shortfall of purchase price versus net fair value recorded as bargain purchase). Based on the final purchase price allocations for these acquisitions, no goodwill or bargain purchase was recognized. The final purchase price allocations for these transactions, representing consideration paid, assets acquired and liabilities assumed as of the respective acquisition dates, are shown in the tables below.

2014 Permian Acquisition

 

 

 

Final Total Purchase Price Allocation

 

 

 

(In thousands)

 

Cash consideration

 

$

83,752

 

Fair value of assets acquired:

 

 

 

 

Oil and natural gas properties

 

 

 

 

Proved properties

 

$

61,520

 

Unproved/unevaluated properties

 

 

22,525

 

Total assets acquired

 

$

84,045

 

Fair value of liabilities assumed:

 

 

 

 

Asset retirement obligations

 

$

293

 

Net assets acquired

 

$

83,752

 

  

2013 Permian Acquisition and Gates Ranch Acquisition

 

 

 

Final Total Purchase Price Allocation

 

 

 

(In thousands)

 

Cash consideration

 

$

953,242

 

Fair value of assets acquired:

 

 

 

 

Other fixed assets

 

$

600

 

Oil and natural gas properties

 

 

 

 

Proved properties

 

 

290,273

 

Unproved/unevaluated properties

 

 

663,300

 

Total assets acquired

 

$

954,173

 

Fair value of liabilities assumed:

 

 

 

 

Asset retirement obligations

 

$

931

 

Net assets acquired

 

$

953,242

 

9


  

The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties included estimates of: (i) future production, including adjustments for risk; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; (v) future cash flows; and (vi) a market-based weighted average cost of capital rate. These inputs required significant judgments and estimates by the Company’s management at the time of the valuation and are the most sensitive and subject to change. See Note 5 – Fair Value Measurements for additional information.

The results of operations attributable to the 2014 Permian Acquisition were included in the Company’s Consolidated Statement of Operations beginning on March 1, 2014 and increased Total revenues by $3.3 million and $9.2 million, respectively, and Operating income by $0.9 million and $3.2 million, respectively, for the three and nine months ended September 30, 2014.

The following unaudited pro forma information assumes the transactions and related financings for the 2013 Permian Acquisition and the Gates Acquisition occurred on January 1, 2012 and the 2014 Permian Acquisition occurred on January 1, 2013. The unaudited pro forma information includes the effects of issuing the 5.625% Senior Notes, the issuance of common stock in the equity offering and the use of proceeds from the debt and equity offerings as discussed above. The pro forma results of operations have been prepared by adjusting the Company’s historical results to include the historical results of the acquired assets based on information provided by the sellers, the Company’s knowledge of the acquired properties and the impact of the Company’s purchase price allocation. The Company believes the assumptions used provide a reasonable basis for reflecting the pro forma significant effects directly attributable to the acquisitions and associated financings. The pro forma results of operations do not include any cost savings or other synergies that may result from the acquisitions, or any estimated costs that have been or will be incurred by the Company to integrate these assets. The pro forma information does not purport to represent what the Company’s results of operations would have been if the 2013 Permian Acquisition and Gates Acquisition had occurred on January 1, 2012, and the 2014 Permian Acquisition had occurred on January 1, 2013.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2014 (1)

 

 

2013 (2)

 

 

2014 (2)

 

 

2013

 

 

 

(In thousands, except per share and share data)

 

 

(In thousands, except per share and share data)

 

Total revenues

 

$

365,593

 

 

$

200,525

 

 

$

804,146

 

 

$

658,037

 

Net income

 

 

78,408

 

 

 

43,284

 

 

 

128,840

 

 

 

185,049

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.28

 

 

$

0.71

 

 

$

2.10

 

 

$

3.03

 

Diluted

 

$

1.27

 

 

$

0.71

 

 

$

2.09

 

 

$

3.02

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

61,484

 

 

 

61,152

 

 

 

61,439

 

 

 

61,011

 

Diluted

 

 

61,675

 

 

 

61,364

 

 

 

61,636

 

 

 

61,279

 

  

(1)

No pro forma adjustments were made for the period as all acquisitions and related financings are included in the Company’s historical results.

(2)

No pro forma adjustments were made related to the 2013 Permian Acquisition and Gates Acquisition for the period as the acquisitions are included in the Company’s historical results.

Additional Disclosures about Property and Equipment

The Company capitalizes internal costs directly identified with acquisition, exploration and development activities. The Company capitalized $1.9 million and $1.6 million of internal costs for the three months ended September 30, 2014 and 2013, respectively, and $5.6 million and $5.5 million for the nine months ended September 30, 2014 and 2013, respectively.

Oil and gas properties include unevaluated property costs of $535.0 million and $755.4 million as of September 30, 2014 and December 31, 2013, respectively, which are not being amortized. These amounts primarily represent acquisition costs of unproved properties and unevaluated exploration projects in which the Company owns a direct interest. Such costs are periodically evaluated for impairment, and upon evaluation or impairment are transferred to the Company’s full cost pool and amortized. During the nine months ended September 30, 2014, the Company transferred $162.9 million of Permian acquisition costs to the full cost pool as a result of development activities in this area.

Pursuant to full cost accounting rules, the Company must perform a ceiling test each quarter on its proved oil and natural gas assets within each separate cost center. All of the Company’s costs are included in one cost center because all of the Company’s operations are located in the United States. The Company’s ceiling test was calculated using trailing twelve-month, unweighted-

10


average first-day-of-the-month prices for oil and natural gas as of September 30, 2014, which were based on a West Texas Intermediate oil price of $95.56 per Bbl and a Henry Hub natural gas price of $4.24 per MMBtu (adjusted for basis and quality differentials), respectively. Utilizing these prices, the calculated ceiling amount exceeded the net capitalized cost of oil and natural gas properties as of September 30, 2014, and as a result, no write-down was recorded. It is possible that a write-down of the Company’s oil and gas properties could occur in future periods in the event that oil and natural gas prices significantly decline or the Company experiences significant downward adjustments to its estimated proved reserves.

 

(4) Commodity Derivative Contracts

The Company is exposed to various market risks, including volatility in oil, natural gas liquids (“NGL”) and natural gas prices, which are managed through derivative instruments. The level of derivative activity utilized depends on market conditions, operating strategies and available derivative prices. The Company utilizes various types of derivative instruments to manage commodity price risk, including fixed price swaps, basis swaps and costless collars. Forward contracts on various commodities are entered into to manage the price risk associated with forecasted sales of the Company’s oil, NGL and natural gas production.

As of September 30, 2014, the following derivative contracts were outstanding with associated notional volumes and average underlying prices that represent hedged prices of commodities at various market locations:

 

 

 

 

 

 

 

Notional

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Daily

 

 

Notional

 

 

Average

 

 

Average

 

 

 

Settlement

 

Derivative

 

Volume

 

 

Volume

 

 

Floor/Fixed Prices

 

 

Ceiling Prices

 

Product

 

Period

 

Instrument

 

(Bbls)

 

 

(Bbls)

 

 

per Bbl

 

 

per Bbl

 

Crude oil

 

2014

 

Costless Collar

 

 

3,000

 

 

 

276,000

 

 

$

83.33

 

 

$

109.63

 

Crude oil

 

2014

 

Swap

 

 

6,000

 

 

 

552,000

 

 

 

93.13

 

 

 

 

 

Crude oil

 

2015

 

Swap

 

 

12,000

 

 

 

4,380,000

 

 

 

89.81

 

 

 

 

 

Crude oil

 

2016

 

Swap

 

 

6,000

 

 

 

2,196,000

 

 

 

90.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,404,000

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

Notional

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Daily

 

 

Notional

 

 

Average

 

 

 

 

 

Settlement

 

Derivative

 

Volume

 

 

Volume

 

 

Fixed Prices

 

 

 

Product

 

Period

 

Instrument

 

(Bbls)

 

 

(Bbls)

 

 

per Bbl

 

 

 

NGL-Ethane

 

2014

 

Swap

 

 

4,500

 

 

 

414,000

 

 

$

13.21

 

 

 

NGL-Propane

 

2014

 

Swap

 

 

2,785

 

 

 

256,220

 

 

 

44.71

 

 

 

NGL-Isobutane

 

2014

 

Swap

 

 

930

 

 

 

85,560

 

 

 

61.26

 

 

 

NGL-Normal Butane

 

2014

 

Swap

 

 

875

 

 

 

80,500

 

 

 

60.29

 

 

 

NGL-Pentanes Plus

 

2014

 

Swap

 

 

910

 

 

 

83,720

 

 

 

84.97

 

 

 

NGL-Ethane

 

2015

 

Swap

 

 

3,476

 

 

 

1,268,810

 

 

 

11.31

 

 

 

NGL-Propane

 

2015

 

Swap

 

 

1,750

 

 

 

638,750

 

 

 

43.35

 

 

 

NGL-Isobutane

 

2015

 

Swap

 

 

617

 

 

 

225,082

 

 

 

53.05

 

 

 

NGL-Normal Butane

 

2015

 

Swap

 

 

579

 

 

 

211,179

 

 

 

52.53

 

 

 

NGL-Pentanes Plus

 

2015

 

Swap

 

 

579

 

 

 

211,179

 

 

 

77.72