bcei_Current folio_10Q

Table of Contents

   

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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

EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

 

Commission File Number:  001-35371

 

Bonanza Creek Energy, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

61-1630631

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

410 17th Street, Suite 1400

 

 

Denver, Colorado

 

80202

(Address of principal executive offices)

 

(Zip Code)

 

(720) 440-6100

(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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer

 

Smaller reporting company

(Do not check if a smaller reporting company)

 

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 23, 2015, the registrant had 49,748,846 shares of common stock outstanding.

 

 

 

 

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Table of Contents

BONANZA CREEK ENERGY, INC.

INDEX

 

 

 

 

 

 

    

    

PAGE

Part I. 

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six  Months Ended June 30, 2015 and 2014

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

 

 

Item 2.

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

16 

 

 

 

 

 

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 

 

 

 

 

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PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements.

 

BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

    

December 31, 2014

 

(in thousands, except share data)

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

15,340

 

$

2,584

Accounts receivable:

 

 

 

 

 

Oil and gas sales

 

46,755

 

 

54,574

Joint interest and other

 

26,702

 

 

37,202

Prepaid expenses and other

 

13,870

 

 

12,522

Inventory of oilfield equipment

 

10,340

 

 

15,353

Derivative asset

 

55,419

 

 

86,240

Total current assets

 

168,426

 

 

208,475

Property and equipment  (successful efforts method), at cost:

 

 

 

 

 

Proved properties

 

2,203,152

 

 

1,924,380

Less: accumulated depreciation, depletion and amortization

 

(716,954)

 

 

(592,073)

Total proved properties, net

 

1,486,198

 

 

1,332,307

Unproved properties

 

198,098

 

 

206,721

Wells in progress

 

130,575

 

 

139,208

Natural gas plant, net of accumulated depreciation of $9,640 in 2015 and $8,457 in 2014

 

66,770

 

 

67,840

Other property and equipment, net of accumulated depreciation of $7,804 in 2015 and $6,087 in 2014

 

9,333

 

 

10,401

Total property and equipment, net

 

1,890,974

 

 

1,756,477

Long-term derivative asset

 

11,310

 

 

17,765

Other noncurrent assets

 

22,176

 

 

23,372

Total assets

$

2,092,886

 

$

2,006,089

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses (note 4)

$

120,858

 

$

145,788

Oil and gas revenue distribution payable

 

38,566

 

 

40,659

Contractual obligation for land acquisition

 

12,000

 

 

12,000

Total current liabilities

 

171,424

 

 

198,447

Long-term liabilities:

 

 

 

 

 

Long-term debt (note 5)

 

850,006

 

 

840,619

Contractual obligation for land acquisition

 

11,884

 

 

11,186

Ad valorem taxes

 

19,668

 

 

28,635

Deferred income taxes

 

129,122

 

 

165,667

Asset retirement obligations

 

22,264

 

 

21,464

Total liabilities

 

1,204,368

 

 

1,266,018

Commitments and contingencies (note 6)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $.001 par value, 25,000,000 shares authorized, none outstanding

 

 

 

Common stock, $.001 par value, 225,000,000 shares authorized, 49,750,590 and 41,287,270 issued and outstanding in 2015 and 2014, respectively

 

50

 

 

41

Additional paid-in capital

 

799,534

 

 

591,511

Retained earnings

 

88,934

 

 

148,519

Total stockholders’ equity

 

888,518

 

 

740,071

Total liabilities and stockholders’ equity

$

2,092,886

 

$

2,006,089

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

 

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BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  AND COMPREHENSIVE INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2015

    

2014

 

    

2015

    

2014

 

 

(in thousands, except shares and per share amounts)

Operating net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas sales

 

$

90,422

 

$

151,682

 

 

$

163,498

 

$

279,077

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expense

 

 

20,895

 

 

18,018

 

 

 

40,159

 

 

35,099

Severance and ad valorem taxes

 

 

4,148

 

 

16,263

 

 

 

10,644

 

 

27,013

Exploration

 

 

5,748

 

 

96

 

 

 

6,246

 

 

1,179

Depreciation, depletion and amortization

 

 

69,925

 

 

54,117

 

 

 

128,929

 

 

95,248

Abandonment and impairment of unproved properties

 

 

14,527

 

 

 —

 

 

 

19,996

 

 

 —

General and administrative (including $4,359, $7,353, $7,787, and $14,150, respectively, of stock compensation)

 

 

21,602

 

 

24,547

 

 

 

38,474

 

 

48,261

Total operating expenses

 

 

136,845

 

 

113,041

 

 

 

244,448

 

 

206,800

Income (loss) from operations

 

 

(46,423)

 

 

38,641

 

 

 

(80,950)

 

 

72,277

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative gain (loss)

 

 

(5,478)

 

 

(27,307)

 

 

 

13,378

 

 

(36,085)

Interest expense

 

 

(14,468)

 

 

(9,434)

 

 

 

(28,706)

 

 

(18,769)

Other income

 

 

198

 

 

167

 

 

 

148

 

 

216

Total other expense

 

 

(19,748)

 

 

(36,574)

 

 

 

(15,180)

 

 

(54,638)

Income (loss) from continuing operations before taxes

 

 

(66,171)

 

 

2,067

 

 

 

(96,130)

 

 

17,639

Income tax benefit (expense)

 

 

25,007

 

 

(796)

 

 

 

36,544

 

 

(6,791)

Income (loss) from continuing operations

 

$

(41,164)

 

$

1,271

 

 

 

(59,586)

 

$

10,848

Discontinued operations (note 3):

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations associated with oil and gas properties held for sale

 

 

 —

 

 

 —

 

 

 

 —

 

 

(85)

Gain (loss) on sale of oil and gas properties

 

 

 —

 

 

(184)

 

 

 

 —

 

 

6,330

Income tax benefit (expense)

 

 

 —

 

 

71

 

 

 

 —

 

 

(2,404)

Gain (loss) from discontinued operations

 

 

 —

 

 

(113)

 

 

 

 —

 

 

3,841

Net income (loss)

 

$

(41,164)

 

$

1,158

 

 

$

(59,586)

 

$

14,689

Comprehensive income (loss)

 

$

(41,164)

 

$

1,158

 

 

$

(59,586)

 

$

14,689

Basic and diluted income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.83)

 

$

0.03

 

 

$

(1.25)

 

$

0.27

Income from discontinued operations

 

$

 —

 

$

 

 

$

 —

 

$

0.09

Net income (loss) per common share

 

$

(0.83)

 

$

0.03

 

 

$

(1.25)

 

$

0.36

Basic weighted-average common shares outstanding

 

 

48,923,335

 

 

39,758,489

 

 

 

46,733,682

 

 

39,655,968

Diluted weighted-average common shares outstanding

 

 

48,923,335

 

 

39,857,028

 

 

 

46,733,682

 

 

39,780,195

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

 

 

 

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BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

    

2015

    

2014

 

 

(in thousands)

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

(59,586)

 

$

14,689

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

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

128,929

 

 

95,316

Deferred income taxes

 

 

(36,544)

 

 

9,095

Abandonment and impairment of unproved properties

 

 

19,996

 

 

 —

Dry hole expense

 

 

5,680

 

 

 —

Stock-based compensation

 

 

7,787

 

 

14,150

Amortization of deferred financing costs and debt premium

 

 

1,226

 

 

542

Accretion of contractual obligation for land acquisition

 

 

698

 

 

381

Derivative (gain) loss

 

 

(13,378)

 

 

36,085

Gain on sale of oil and gas properties

 

 

 —

 

 

(6,330)

Other

 

 

(43)

 

 

(14)

Changes in current assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

18,319

 

 

(32,385)

Prepaid expenses and other assets

 

 

(1,348)

 

 

(2,575)

Accounts payable and accrued liabilities

 

 

(23,054)

 

 

29,114

Settlement of asset retirement obligations

 

 

(519)

 

 

(99)

Net cash provided by operating activities

 

 

48,163

 

 

157,969

Cash flows from investing activities:

 

 

 

 

 

 

Acquisition of oil and gas properties

 

 

(11,914)

 

 

(3,091)

Proceeds from sale of oil and gas properties

 

 

 —

 

 

6,000

Exploration and development of oil and gas properties

 

 

(282,993)

 

 

(275,890)

Natural gas plant capital expenditures

 

 

(113)

 

 

(271)

Derivative cash settlements

 

 

50,655

 

 

(8,142)

(Increase) decrease in restricted cash

 

 

 —

 

 

(11,280)

Additions to property and equipment - non oil and gas

 

 

(649)

 

 

(3,989)

Net cash used in investing activities

 

 

(245,014)

 

 

(296,663)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from credit facility

 

 

87,000

 

 

 —

Payments to credit facility

 

 

(77,000)

 

 

 —

Proceeds from sale of common stock

 

 

209,300

 

 

 —

Offering costs related to sale of common stock

 

 

(6,607)

 

 

 —

Offering costs related to sale of Senior Notes

 

 

(93)

 

 

(277)

Payment of employee tax withholdings in exchange for the return of common stock

 

 

(2,448)

 

 

(4,766)

Deferred financing costs

 

 

(545)

 

 

(290)

Net cash provided by (used in) financing activities

 

 

209,607

 

 

(5,333)

Net change in cash and cash equivalents

 

 

12,756

 

 

(144,027)

Cash and cash equivalents:

 

 

 

 

 

 

Beginning of period

 

 

2,584

 

 

180,582

End of period

 

$

15,340

 

$

36,555

Supplemental cash flow disclosure:

 

 

 

 

 

 

Cash paid for interest

 

$

27,396

 

$

17,857

Cash paid for income taxes

 

$

820

 

$

100

Changes in working capital related to drilling expenditures, natural gas plant expenditures, and property acquisition

 

$

(12,935)

 

$

10,920

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

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BONANZA CREEK ENERGY, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1 - ORGANIZATION AND BUSINESS

 

Bonanza Creek Energy, Inc. (“BCEI” or, together with our consolidated subsidiaries, the “Company) is engaged in the acquisition, exploration, development and production of onshore oil and associated liquids-rich natural gas in the United States. Our oil and liquids-weighted assets are concentrated primarily in the Wattenberg Field in Colorado, which the Company has designated the Rocky Mountain region, and the Dorcheat Macedonia Field in southern Arkansas, which the Company has designated the Mid-Continent region.

 

NOTE 2 - BASIS OF PRESENTATION

 

These statements have been prepared in accordance with the Securities and Exchange Commission and accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information with the condensed consolidated balance sheets (“balance sheets”) and the condensed consolidated statements of cash flows as of December 31, 2014, being derived from audited financial statements. The quarterly financial statements included herein do not necessarily include all of the disclosures as may be required under generally accepted accounting principles for complete financial statements. There has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014  (the 2014 Form 10-K”), except as disclosed herein. These consolidated financial statements include all of the adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations. All such adjustments are of a normal recurring nature only. The results of operations for the quarterly periods are not necessarily indicative of the results to be expected for the full fiscal year. The Company evaluated events subsequent to the balance sheet date of June 30, 2015 through the filing date of this report. Certain prior period amounts are reclassified to conform to the current period presentation, when necessary.

 

Principles of Consolidation

 

The balance sheets include the accounts of BCEI and its wholly owned subsidiaries, Bonanza Creek Energy Operating Company, LLC, Bonanza Creek Energy Resources, LLC, Bonanza Creek Energy Upstream LLC, Bonanza Creek Energy Midstream, LLC, Holmes Eastern Company, LLC and Rocky Mountain Infrastructure, LLC. All significant intercompany accounts and transactions have been eliminated.

 

Significant Accounting Policies

 

The significant accounting policies followed by the Company were set forth in Note 1 to the 2014 Form 10-K and are supplemented by the notes throughout this report. These unaudited condensed consolidated financial statements should be read in conjunction with the 2014 Form 10-K.

 

Recently Issued Accounting Standards

 

In March 2015, the Financial Accounting Standards Board issued Update No. 2015-03  Interest – Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This authoritative accounting guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years on a retrospective basis. The Company is currently evaluating the provisions of this guidance and assessing its impact, but does not currently believe it will have a material effect on the Company’s financial statements or disclosures.

Rocky Mountain Infrastructure, LLC

 

During the first quarter of 2015, the Company’s wholly owned subsidiary, Bonanza Creek Energy Operating Company, LLC, formed a wholly owned subsidiary, Rocky Mountain Infrastructure, LLC, to hold gathering systems and related infrastructure that service the Wattenberg Field. In May 2015, Bonanza Creek Energy

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Operating Company, LLC transferred approximately $46.5 million of gathering system assets to Rocky Mountain Infrastructure, LLC.

 

NOTE 3 - DISCONTINUED OPERATIONS

 

During June 2012, the Company began marketing, with intent to sell, all of its oil and gas properties in California classifying them as assets held for sale. Assets are classified as held for sale when the Company commits to a plan to sell the assets and there is reasonable certainty that the sale will take place within one year. The Company determined that its intent to sell all of its assets in a region qualified as discontinued operations. The Company sold its remaining property in this region during the first quarter of 2014 for approximately $6.0 million and recorded a gain on sale of oil and gas properties in the amount of $6.3 million as of June 30, 2014.  

 

The total revenues, expenses, and income associated with the operation of the oil and gas properties held for sale are presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2015

    

2014

    

2015

    

2014

 

 

(in thousands)

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas sales

$

 —

 

$

 —

 

$

 —

 

$

361

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expense

 

 —

 

 

 —

 

 

 —

 

 

366

 

Severance and ad valorem taxes

 

 —

 

 

 —

 

 

 —

 

 

12

 

Depreciation, depletion and amortization

 

 —

 

 

 —

 

 

 —

 

 

68

 

Total operating expenses

 

 —

 

 

 —

 

 

 —

 

 

446

 

Loss from operations associated with oil and gas properties held for sale

$

 —

 

$

 —

 

$

 —

 

$

(85)

 

 

 

NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses contain the following:

 

 

 

 

 

 

 

 

 

    

As of June 30,

    

As of December 31,

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Drilling and completion costs

 

$

69,909

 

$

82,844

 

Accounts payable trade

 

 

5,812

 

 

5,493

 

Accrued general and administrative cost

 

 

10,281

 

 

13,541

 

Lease operating expense

 

 

3,432

 

 

3,569

 

Accrued reclamation cost

 

 

162

 

 

162

 

Accrued interest

 

 

14,225

 

 

14,839

 

Production and ad valorem taxes and other

 

 

17,037

 

 

25,340

 

Total accounts payable and accrued expenses

 

$

120,858

 

$

145,788

 

 

 

 

NOTE 5  - LONG-TERM DEBT

 

Long-term debt consisted of the following as of June 30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

As of June 30,

 

As of December 31,

 

 

2015

    

2014

 

 

 

(in thousands)

 

Revolving credit facility

$

43,000

 

$

33,000

 

6.75% Senior Notes due 2021

 

500,000

 

 

500,000

 

Unamortized premium on 6.75% Senior Notes

 

7,006

 

 

7,619

 

5.75% Senior Notes due 2023

 

300,000

 

 

300,000

 

Total long-term debt

$

850,006

 

$

840,619

 

 

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Credit Facility

 

The Company’s senior secured revolving Credit Agreement, dated March 29, 2011, as amended (the “revolving credit facility”),  was further amended on May 13, 2015 (the “2015 Amendment”) to decrease the borrowing base from $600 million to $550 million with a  total credit facility size of $1 billion remaining unchanged. The Company elected to limit bank commitments at $500 million while reserving the option to access, at the Company’s request, the full $550 million borrowing base. The borrowing base is redetermined semiannually on May 15 and November 15. The revolving credit facility is collateralized by substantially all of the Company’s assets and matures on September 15, 2017. As of June 30, 2015,  the Company had $43 million outstanding under the revolving credit facility with an available borrowing capacity of $483 million, if the Company elected to take advantage of the entire borrowing base, after reduction for the outstanding letter of credit of $24 million. As of December 31, 2014, the Company had $33 million outstanding under the revolving credit facility with an available borrowing capacity of $543 million, if the Company elected to take advantage of the entire $600 million borrowing base available at that date, after reduction for the outstanding letter of credit of $24 million. 

 

The revolving credit facility restricts, among other items, certain dividend payments, additional indebtedness, asset sales, loans,  investments and mergers. The revolving credit facility also contains certain financial covenants, which require the maintenance of certain financial and leverage ratios, as defined by the revolving credit facility. The 2015 Amendment (i) permanently removed the maximum total debt to trailing twelve month debt to earnings before interest, income taxes, depreciation, depletion, and amortization, exploration expense and other non-cash charges (“EBITDAX”) covenant of 4.00 to 1.00 and (ii) introduced both a  maximum senior secured debt (defined as borrowings under the revolving credit facility, balances drawn under letters of credit, and any outstanding second lien debt) to trailing twelve month EBITDAX covenant of 2.50 to 1.00 and a minimum trailing twelve month interest to trailing twelve month EBITDAX coverage covenant of 2.50 to 1.00. The revolving credit facility also contains a minimum current ratio covenant of 1.00 to 1.00. The Company was in compliance with all financial and non-financial covenants as of June 30, 2015, and through the filing date of this report.

 

Senior Unsecured Notes

 

The $500 million aggregate principal amount of 6.75% Senior Notes that mature on April 15, 2021 (“6.75% Senior Notes”) and the $300 million aggregate principal amount of 5.75% Senior Notes that mature on February 1, 2023 (“5.75% Senior Notes” and together with the 6.75% Senior Notes, the “Senior Notes”) are unsecured senior obligations and rank equal in right of payment with all of the Company’s existing and future unsecured senior debt, and are senior in right of payment to any future subordinated debt. The Senior Notes are jointly and severally guaranteed on a senior unsecured basis by our existing and future domestic subsidiaries that guarantee or are borrowers under our revolving credit facility. The Company has no independent assets or operations unrelated to its investments in its consolidated subsidiaries. There are no significant restrictions on the Company’s ability or the ability of any subsidiary guarantor to obtain funds from its subsidiaries by such means as a dividend or loan. The Company is subject to certain covenants under the respective indentures governing the Senior Notes that limit the Company’s ability to incur additional indebtedness, issue preferred stock, and make restricted payments, including certain dividends. The Company was in compliance with all covenants under its Senior Notes as of June 30, 2015, and through the filing date of this report.

 

NOTE 6 - COMMITMENTS AND CONTINGENT LIABILITIES

 

From time to time, the Company is involved in various commercial and regulatory claims, litigation and other legal proceedings that arise in the ordinary course of its business. The Company assesses these claims in an effort to determine the degree of probability and range of possible loss for potential accrual in its condensed consolidated financial statements. In accordance with accounting authoritative guidance, an accrual is recorded for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the most likely anticipated outcome or the minimum amount within a range of possible outcomes. Because legal proceedings are inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about uncertain future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. The Company regularly reviews contingencies to determine the adequacy of its accruals

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and related disclosures. No claims have been made, nor is the Company aware of any material uninsured liability which the Company may have, as it relates to any environmental cleanup, restoration or the violation of any rules or regulations. As of the filing date of this report, there were no material pending or overtly threatened legal actions against the Company of which it is aware.

 

Commitments

 

A  purchase and transportation agreement to deliver 12,580 barrels per day of crude oil over an initial five year term went into effect May 1, 2015. As of the filing date of this report, the Company did not have any shortfalls in delivering the minimum volumes committed.

 

There have been no material changes from the commitments disclosed in the notes to the Company’s consolidated financial statements included in the 2014 Form 10-K.

 

NOTE 7 - STOCK-BASED COMPENSATION

 

Restricted Stock under the Long Term Incentive Plan

 

The Company grants shares of restricted stock to directors, eligible employees and officers under its Long Term Incentive Plan, as amended and restated (“LTIP”). Each share of restricted stock represents one share of the Company’s common stock to be released from restriction upon completion of the vesting period. The awards typically vest in one-third increments over three years. Each share of restricted stock is entitled to a non‑forfeitable dividend, if the Company were to declare one, and has the same voting rights as a share of the Company’s common stock. Shares of restricted stock are valued at the closing price of the Company’s common stock on the grant date and are recognized as general and administrative expense over the vesting period of the award.

 

During the six months ended June 30, 2015, the Company granted 523,000 shares of restricted stock under the Company’s LTIP to certain employees and non-employee directors. The fair value of the issuance was $13.9 million. Total expense recorded for restricted stock for the three month periods ended June 30, 2015 and 2014, was $3.6 million and $7.0 million, respectively, and $6.5 million and $13.6 million for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, unrecognized compensation cost was $24.6 million and will be amortized through 2018.

 

A summary of the status and activity of non-vested restricted stock for the six months ended June 30, 2015 is presented below.

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-

 

 

 

 

 

Average 

 

 

 

Restricted 

 

Grant-Date 

 

 

 

Stock

 

    Fair Value    

 

Non-vested at beginning of year

 

589,529

 

$

37.66

 

Granted

 

523,000

 

$

26.58

 

Vested

 

(249,207)

 

$

25.96

 

Forfeited

 

(26,641)

 

$

34.34

 

Non-vested at end of quarter

 

836,681

 

$

32.53

 

 

Performance Stock Units under the Long Term Incentive Plan

 

The Company grants performance stock units (“PSUs”) to certain officers under its LTIP. The number of shares of the Company’s common stock that may be issued to settle PSUs ranges from zero to two times the number of PSUs awarded. PSUs granted prior to 2014 are determined based on the Company’s performance over a three-year measurement period and vest in their entirety at the end of the measurement period. Satisfaction of the performance conditions for the PSUs granted in 2014 and thereafter are determined at the end of each annual measurement period over the course of the three-year performance cycle in an amount up to two-thirds of the target number of PSUs that are eligible for vesting (such that an amount equal to 200% of the target number of PSUs may be earned during the performance cycle). For all grants, the PSUs will be settled in shares of the Company’s common stock following the end of the three-year performance cycle. Any PSUs that have not vested at the end of

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the applicable measurement period are forfeited. The performance criterion for the PSUs is based on a comparison of the Company’s total shareholder return (“TSR”) for the measurement period compared with the TSRs of a group of peer companies for the same measurement period. Compensation expense associated with PSUs is recognized as general and administrative expense over the measurement period.

 

The fair value of each PSU is estimated at the date of grant using a Monte Carlo simulation, which results in an expected percentage of PSUs to be earned during the performance period. The following table presents the assumptions used to determine the fair value of the PSUs granted during the six month period ended June 30, 2015 and for the year ended December 31, 2014.

 

 

 

 

 

For the Six Months Ended

 

For the Year Ended

 

June 30, 2015

 

December 31, 2014

Expected term of award

3

 

3

Risk-free interest rate

0.15% - 0.99%

 

0.12% - 0.9%

Expected volatility

65%

 

40% - 45%

 

During the six months ended June 30, 2015, the Company granted 144,363 PSUs under the LTIP to certain officers. The fair value of the issuance was $4.8 million. Total expense recorded for PSUs for the three month periods ended June 30, 2015 and 2014 was $852,000 and $392,000, respectively, and $1.3 million and $567,000 for the six month periods ended June 30, 2015 and 2014, respectively. As of June 30, 2015, there was $6.6 million of total unrecognized compensation expense related to unvested PSUs to be amortized through 2017.

 

A summary of the status and activity of PSUs for the six months ended June 30, 2015 is presented below:

 

 

 

 

 

 

 

 

    

 

    

Weighted-Average

 

 

 

 

 

Grant-Date

 

 

 

PSU

 

        Fair Value        

 

Non-vested at beginning of year (1)

 

94,173

 

$

37.55

 

Granted(1)

 

144,363

 

$

33.44

 

Vested(1)

 

 

$

 

Forfeited(1)

 

(1,467)

 

$

34.80

 

Non-vested at end of quarter(1)

 

237,069

 

$

35.28

 


(1)

The number of awards assumes that the associated performance condition is met at the target amount. The final number of shares of the Company’s common stock issued may vary depending on the performance multiplier, which ranges from zero to two, depending on the level of satisfaction of the performance condition.

 

NOTE 8 - FAIR VALUE MEASUREMENTS

 

The Company follows fair value measurement authoritative guidance, which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. The authoritative accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The statement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

 

Level 1:Quoted prices are available in active markets for identical assets or liabilities

 

Level 2:Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable

 

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Level 3:Significant inputs to the valuation model are unobservable

 

Financial and non-financial assets and liabilities are to be classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

 

The following tables present the Company’s financial and non-financial assets and liabilities that were accounted for at fair value as of June 30, 2015 and December 31, 2014 and their classification within the fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2015

 

    

Level 1

    

Level 2

    

Level 3

 

 

(in thousands)

Derivative assets(1)

 

$

 

$

66,729

 

$

—  

Unproved properties(2)

 

$

 

$

 

$

197,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

    

Level 1

    

Level 2

    

Level 3

 

 

(in thousands)

Derivative assets(1)

 

$

 

$

104,005

 

$

Proved properties(2)

 

$

 

$

 

$

407,900

Asset retirement obligations(3)

 

$

 

$

 

$

6,200

(1)

This represents a financial asset or liability that is measured at fair value on a recurring basis.

(2)

This represents non-financial assets that are measured at fair value on a nonrecurring basis due to impairments. This is the fair value of the asset base that was subjected to impairment and does not reflect the entire asset balance as presented on the accompanying balance sheets.  Please refer to the Unproved Oil and Gas Properties and Proved Oil and Gas Properties sections below for additional discussion.

(3)

This represents the revision to estimates of the asset retirement obligation, which is a non-financial liability that is measured at fair value on a nonrecurring basis. Please refer to the Asset Retirement Obligation section below for additional discussion.

 

Derivatives

 

Fair value of all derivative instruments are estimated with industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value of money, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. All valuations were compared against counterparty statements to verify the reasonableness of the estimate. The Company’s commodity swaps and collars are validated by observable transactions for the same or similar commodity options using the NYMEX futures index, and are designated as Level 2 within the valuation hierarchy. Presently, all of our derivative arrangements are concentrated with four counterparties all of which are lenders under the Company’s revolving credit facility.

 

Proved Oil and Gas Properties

 

Proved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs exceed the sum of the undiscounted cash flows. The Company uses Level 3 inputs and the income valuation technique, which converts future amounts to a single present value amount, to measure the fair value of proved properties through an application of risk-adjusted discount rates and price forecasts selected by the Company’s management. The calculation of the risk-adjusted discount rate is a significant management estimate based on the best information available. Management believes that the risk-adjusted discount rate is representative of current market conditions and reflects the following factors: estimates of future cash payments, expectations of possible variations in the amount and/or timing of cash flows, the risk premium, and nonperformance risk. The price forecast is based on the NYMEX strip pricing, adjusted for basis differentials. Future operating costs are also adjusted as deemed appropriate for these estimates. Proved properties classified as held for sale are valued using a

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market approach, based on an estimated selling price, as evidenced by the most current bid prices received from third parties. If an estimated selling price is not available, the Company utilizes the income valuation technique discussed above. There were no proved properties that needed to be measured at fair value at June 30, 2015. The Company impaired the Dorcheat Macedonia Field which had a carrying value of $519.2 million to its fair value of $391.9 million and recognized an impairment of $127.3 million for the year ended December 31, 2014. The Company impaired the McKamie Patton Field which had a carrying value of $41.0 million to its fair value of $16.0 million and recognized an impairment of $25.0 million for the year ended December 31, 2014. The Company impaired the McCallum Field which had a carrying value of $15.3 million to its fair value of zero and recognized an impairment of $15.3 for the year ended December 31, 2014.

 

Unproved Oil and Gas Properties

 

Unproved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs may not be fully recoverable. To measure the fair value of unproved properties, the Company uses Level 3 inputs and the income valuation technique, which takes into account the following significant assumptions: future development plans, risk weighted potential resource recovery, remaining lease life, and estimated reserve values. Unproved properties classified as held for sale are valued using a market approach, based on an estimated selling price, as evidenced by the most current bid prices received from third parties. If an estimated selling price is not available, the Company uses the price received for similar acreage in recent transactions by the Company or other market participants in the principal market. The Company impaired non-core acreage in the Wattenberg Field due to lease expirations, which had a carrying value of $208.6 million to its fair value of $197.7 million and recognized an impairment of unproved properties for the six months ended June 30, 2015 of $10.9 million. The Company fully impaired the North Park Basin in June 2015, due to a strategic shift within the Company’s development plan, recognizing an impairment of unproved properties of $8.7 million. There were no unproved properties measured at fair value as of December 31, 2014.

 

Asset Retirement Obligation

 

The Company utilizes the income valuation technique to determine the fair value of the asset retirement obligation liability at the point of inception 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. Upon completion of wells and natural gas plants, the Company records an asset retirement obligation at fair value using Level 3 assumptions. Given the unobservable nature of the inputs, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. There were no asset retirement obligations measured at fair value as of June 30, 2015.  The Company had $6.2 million of asset retirement obligations recorded at fair value as of December 31, 2014.

 

Long-term Debt

 

As of June 30, 2015, the Company had $500 million of outstanding 6.75% Senior Notes and $300 million of outstanding 5.75% Senior Notes, all of which are unsecured senior obligations. The 6.75% Senior Notes are recorded at cost plus the unamortized premium on the accompanying balance sheets at $507.0 million and $507.6 million as of June 30, 2015 and December 31, 2014, respectively. The fair value of the 6.75%  Senior Notes as of June 30, 2015 and December 31, 2014 was $475.0 million and $440.0 million, respectively. The 5.75% Senior Notes are recorded at cost on the accompanying balance sheets at $300.0 million as of June 30, 2015 and December 31, 2014. The fair value of the 5.75% Senior Notes as of June 30, 2015 and December 31, 2014 was $269.3 million and $243.0 million, respectively. The Senior Notes are measured using Level 1 inputs based on a secondary market trading price. The Company’s revolving credit facility approximates fair value as the applicable interest rates are floating. The outstanding balance under the revolving credit facility as of June 30, 2015 and December 31, 2014 was $43.0 million and $33.0 million, respectively.

 

NOTE 9 - DERIVATIVES

 

The Company enters into commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows. All contracts are entered into

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for other-than-trading purposes. The Company’s derivatives include swaps and collar arrangements for oil and gas and none of the derivative instruments qualify as having hedging relationships.

 

As of June 30, 2015, and as of the filing date of this report, the Company had the following derivative commodity contracts in place:

 

 

    

 

    

Total Volumes

    

Average

    

   Average 

 

Average

 

Average

 

 

Settlement

 

Derivative

 

(Bbls/MMBtu

 

 Fixed

 

Short Floor

 

Floor

 

Ceiling

 

Fair Market

Period

 

Instrument

 

per day)

 

Price

 

Price

 

Price

 

Price

 

Value of Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Oil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3Q 2015

 

Swap

 

6,000

 

$

72.16

 

 

 

 

 

 

 

 

 

 

$

6,754

 

4Q 2015

 

Swap

 

6,000

 

$

72.16

 

 

 

 

 

 

 

 

 

 

 

6,214

 

3Q 2015

 

2-Way Collar

 

6,500

 

 

 

 

 

 

 

$

84.62

 

$

95.49

 

 

14,763

 

4Q 2015

 

2-Way Collar

 

6,500

 

 

 

 

 

 

 

$

84.62

 

$

95.49

 

 

14,254

 

2016

 

3-Way Collar

 

5,500

 

 

 

 

$

70.00

 

$

85.00

 

$

96.83 

 

 

23,483

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

65,468 

 

Gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3Q - 4Q 2015

 

3-Way Collar

 

15,000

 

 

 

 

$

3.50

 

$

4.00

 

$

4.75 

 

$

1,261 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,261 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

66,729 

 

 

Derivative Assets and Liabilities Fair Value

 

The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities.

 

The following table contains a summary of all the Company’s derivative positions reported on the accompanying balance sheets as of June 30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

As of June 30, 2015

 

    

Balance Sheet Location

    

Fair Value

 

 

 

 

(in thousands)

Derivative Assets:

 

 

 

 

 

Commodity contracts

 

Current assets

 

$

55,419

Commodity contracts

 

Noncurrent assets

 

 

11,310

Derivative Liabilities:

 

 

 

 

 

Commodity contracts

 

Current liabilities

 

 

—  

Commodity contracts

 

Long-term liabilities

 

 

—  

Total derivative asset

 

 

 

$

66,729

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

    

Balance Sheet Location

    

Fair Value

 

 

 

 

(in thousands)

Derivative Assets:

 

 

 

 

 

Commodity contracts

 

Current assets

 

$

86,240

Commodity contracts

 

Noncurrent assets

 

 

17,765

Derivative Liabilities:

 

 

 

 

 

Commodity contracts

 

Current liabilities

 

 

—  

Commodity contracts

 

Long-term liabilities

 

 

—  

Total derivative asset

 

 

 

$

104,005

 

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The following table summarizes the components of the derivative gain (loss) presented on the accompanying statements of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  June 30,

 

Six months ended June 30,

 

 

    

2015

    

2014

    

2015

    

2014

 

 

 

(in thousands)

 

Derivative cash settlement gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil contracts(1)

 

$

14,507

 

$

(5,894)

 

$

49,298

 

$

(7,594)

 

Gas contracts

 

 

682

 

 

(21)

 

 

1,357

 

 

(548)

 

Total derivative cash settlement gain (loss)(2)

 

$

15,189

 

$

(5,915)

 

$

50,655

 

$

(8,142)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value loss

 

$

(20,667)

 

$

(21,392)

 

$

(37,277)

 

$

(27,943)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivative gain (loss)(3)

 

$

(5,478)

 

$

(27,307)

 

$

13,378

 

$

(36,085)

 


(1)

During the three months ended June 30, 2015, the Company paid $10.5 million to convert its three-way collars, scheduled to settle during the third and fourth quarters of 2015, to two-way collars.

(2)

Derivative cash settlement gain (loss) for the six months ended June 30, 2015 and 2014 is reported in the derivative cash settlements line item on the accompanying condensed consolidated statements of cash flows within the net cash used in investing activities.

(3)

Total derivative gain (loss) for the six months ended June 30, 2015 and 2014 is reported in the derivative (gain) loss line item on the accompanying condensed consolidated statements of cash flows within the net cash provided by operating activities.

 

NOTE 10  - EARNINGS PER SHARE

 

The Company issues shares of restricted stock entitling the holders to receive non-forfeitable dividends, if and when, the Company was to declare a dividend, before vesting, thus making the awards participating securities. The awards are included in the calculation of earnings per share under the two-class method. The two-class method allocates earnings for the period between common shareholders and unvested participating shareholders.

 

The Company issues PSUs, which represent the right to receive, upon settlement of the PSUs, a number of shares of the Company’s common stock that range from zero to two times the number of PSUs granted on the award date. The number of potentially dilutive shares related to PSUs is based on the number of shares, if any, that would be issuable at the end of the respective reporting period, assuming that date was the end of the measurement period applicable to such PSUs. Please refer to Note 7 - Stock-Based Compensation, for additional discussion.

 

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The following table sets forth the calculation of income (loss) per basic and diluted shares from continuing and discontinued operations and net income (loss) for the three and six month periods ended June 30, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2015

    

2014

    

2015

    

2014

 

 

 

(in thousands, except shares and per share amounts)

 

Income (loss) from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(41,164)

 

$

1,271

 

$

(59,586)

 

$

10,848

 

Less: undistributed income (loss) to unvested restricted stock

 

 

(688)

 

 

23

 

 

(1,007)

 

 

205

 

Undistributed income (loss) to common shareholders

 

 

(40,476)

 

 

1,248

 

 

(58,579)

 

 

10,643

 

Basic income (loss) per common share from continuing operations

 

$

(0.83)

 

$

0.03

 

$

(1.25)

 

$

0.27

 

Diluted income (loss) per common share from continuing operations

 

$

(0.83)

 

$

0.03

 

$

(1.25)

 

$

0.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

$

 —

 

$

(113)

 

$

 —

 

$

3,841

 

Less: undistributed income to unvested restricted stock

 

 

 —

 

 

2

 

 

 —

 

 

73

 

Undistributed income (loss) to common shareholders

 

 

 —

 

 

(111)

 

 

 —

 

 

3,768

 

Basic income per common share from discontinued operations

 

$

 —

 

$

 —

 

$

 —

 

$

0.09

 

Diluted income per common share from discontinued operations

 

$

 —

 

$

 —

 

$

 —

 

$

0.09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(41,164)

 

$

1,158

 

$

(59,586)

 

$

14,689

 

Less: undistributed income (loss) to unvested restricted stock

 

 

(688)

 

 

21

 

 

(1,007)

 

 

277

 

Undistributed income (loss) to common shareholders

 

 

(40,476)

 

 

1,137

 

 

(58,579)

 

 

14,412

 

Basic net income (loss) per common share

 

$

(0.83)

 

$

0.03

 

$

(1.25)

 

$

0.36

 

Diluted net income (loss) per common share

 

$

(0.83)

 

$

0.03

 

$

(1.25)

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding - basic

 

 

48,923,335

 

 

39,758,489

 

 

46,733,682

 

 

39,655,968

 

Add: dilutive effect of contingent PSUs

 

 

 —

 

 

98,539

 

 

 —

 

 

124,227

 

Weighted-average shares outstanding - diluted

 

 

48,923,335

 

 

39,857,028

 

 

46,733,682

 

 

39,780,195

 

The Company was in  a net loss position for the three and six month periods ended June 30, 2015, which made the 80,906 and 106,644 potentially dilutive shares anti-dilutive, respectively.  The Company had no anti-dilutive shares for the three and six month periods ended June 30, 2014.

NOTE 11 - CAPITAL STOCK

 

On February 6, 2015, the Company completed a public offering of 8,050,000 shares of its common stock generating net proceeds of $202.7 million after deducting underwriter discounts, commissions and offering expenses of approximately $6.6 million. The Company used a portion of the net proceeds to repay all of the outstanding borrowings under its revolving credit facility and for general corporate purposes, including its drilling and development program and other capital expenditures.

15


 

Table of Contents

NOTE 12 - INCOME TAXES

 

The Company uses the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the tax rate in effect at that time. During the three and six month periods ended June 30, 2015, the effective tax rate was 37.8% and 38.0%, respectively. During the three and six month periods ended June 30, 2014, the effective tax rate was 38.5%.

 

The deferred income tax liability for an oil and gas exploration company is dependent on many variables such as estimating the economic lives of depleting oil and gas reserves and commodity prices. Accordingly, the liability is subject to continual recalculation, revision of the numerous estimates required, and may change significantly in the event of such things as major acquisitions, divestitures, product price changes, changes in reserve estimates, changes in reserve lives, and changes in tax rates or tax laws. 

As of June 30, 2015, the Company had no unrecognized tax benefits. The Company’s management does not believe that there are any new items or changes in facts or judgments that should impact the Company's tax position during the first half of 2015. Given the substantial net operating loss carry forward at the federal level, neither significant interest expense nor penalties charged for any examining agents’ tax adjustments of income tax returns are anticipated, and any such adjustments would very likely adjust only net operating loss carry forward.

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2014, as well as the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.

 

Executive Summary

 

We are a Denver-based exploration and production company focused on the extraction of oil and associated liquids-rich natural gas in the United States. Our predecessors were founded in 1999 and we went public in December of 2011. Our shares of common stock are listed for trading on the NYSE under the symbol “BCEI.”

 

Our operations are focused in the Wattenberg Field in Colorado, which we have designated the Rocky Mountain region, and the Dorcheat Macedonia Field in southern Arkansas, which we have designated the Mid-Continent region. The Wattenberg Field is one of the premier oil and gas resource plays in the United States benefiting from a low cost structure and strong production efficiencies. Our management team has extensive experience acquiring and operating oil and gas properties and significant expertise in horizontal drilling and fracture stimulation, which we believe will continue to contribute to the development of our sizable inventory of projects, including those targeting the Niobrara and Codell formations in the Rocky Mountain region and oily Cotton Valley sands in the Mid-Continent region. Our corporate strategy is to create stockholder value by increasing sales volumes from our Wattenberg horizontal opportunities and develop additional resource potential in both of our core areas while capitalizing on well cost reduction gained through efficiencies, managing risk exposure through derivative contracts, and engaging in prudent evaluations of potential acquisitions. We operate approximately 98% of our proved reserves with an average working interest of approximately 89% providing us with significant control over the rate of development of our asset base. Despite the