16. Consolidating Financial Statements

The 2019 Notes and the 2021 Notes (see Note 8) are guaranteed on a senior unsecured basis by the Guarantors, which are 100% owned by the Company. These guarantees are full and unconditional and joint and several among the Guarantors. Certain of the Company's immaterial wholly owned subsidiaries do not guarantee the Notes ("Non-Guarantor Subsidiaries").

The following financial information reflects consolidating financial information of the Company ("Issuer") and its Guarantors on a combined basis, prepared on the equity basis of accounting. The Non-Guarantor Subsidiaries are minor and, therefore, not presented separately. The information is presented in accordance with the requirements of Rule 3-10 under the SEC's Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the Guarantors operated as independent entities. The Company has not presented separate financial and narrative information for each of the Guarantors because it believes such financial and narrative information would not provide any additional information that would be material in evaluating the sufficiency of the Guarantors. The consolidating balance sheet at December 31, 2010 includes a revision in the Issuer column that reduced Investments in and advances to subsidiaries and stockholders' equity by $54.4 million. The consolidating statement of cash flows for the year ended December 31, 2010 includes a revision in presentation in the Issuer column, which increased cash flows from operating activities by $28.1 million and reduced cash flows from financing activities by the same amount. These revisions are eliminated in consolidation and have no effect on the Guarantors or consolidated financial statements.

Consolidating Balance Sheet

(In thousands, except share data)

		September 30,			September 30,			September 30,			September 30,
	December 31, 2011
	Parent/ Issuer			Combined Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	443,482		$	27,390		$	—		$	470,872
Short-term investments		19,994			—			—			19,994
Accounts receivable – oil and gas revenues		—			52,164			—			52,164
Accounts receivable – joint interest partners		88			68,808			(1,628	)		67,268
Inventory		—			3,543			—			3,543
Prepaid expenses		309			1,831			—			2,140
Advances to joint interest partners		—			3,935			—			3,935
Deferred income taxes		—			3,233			—			3,233
Other current assets		18			473			—			491

Total current assets		463,891			161,377			(1,628	)		623,640

Property, plant and equipment
Oil and gas properties (successful efforts method)		—			1,235,357			—			1,235,357
Other property and equipment		—			20,859			—			20,859
Less: accumulated depreciation, depletion, amortization and impairment		—			(176,261	)		—			(176,261	)

Total property, plant and equipment, net		—			1,079,955			—			1,079,955

Investments in and advances to subsidiaries		958,880			—			(958,880	)		—
Derivative instruments		—			4,362			—			4,362
Deferred costs and other assets		15,742			3,683			—			19,425

Total assets	$	1,438,513		$	1,249,377		$	(960,508	)	$	1,727,382

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	1,563		$	12,272		$	(1,628	)	$	12,207
Advances from joint interest partners		—			9,064			—			9,064
Revenues and production taxes payable		—			19,468			—			19,468
Accrued liabilities		103			119,589			—			119,692
Accrued interest payable		15,767			7			—			15,774
Derivative instruments		—			5,907			—			5,907
Other current liabilities		—			472			—			472

Total current liabilities		17,433			166,779			(1,628	)		182,584

Long-term debt		800,000			—			—			800,000
Asset retirement obligations		—			13,075			—			13,075
Derivative instruments		—			3,505			—			3,505
Deferred income taxes		(13,158	)		106,141			—			92,983
Other liabilities		—			997			—			997

Total liabilities		804,275			290,497			(1,628	)		1,093,144

Stockholders' equity
Capital contributions from affiliates		—			941,575			(941,575	)		—
Common stock, $0.01 par value; 300,000,000 shares authorized; 92,483,393 issued and 92,460,914 outstanding		921			—			—			921
Treasury stock, at cost; 22,479 shares		(602	)		—			—			(602	)
Additional paid-in-capital		647,374			8,743			(8,743	)		647,374
Retained deficit		(13,455	)		8,562			(8,562	)		(13,455	)

Total stockholders' equity		634,238			958,880			(958,880	)		634,238

Total liabilities and stockholders' equity	$	1,438,513		$	1,249,377		$	(960,508	)	$	1,727,382

		September 30,			September 30,			September 30,			September 30,
	December 31, 2010
	Parent/ Issuer			Combined Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	119,940		$	23,580		$	—		$	143,520
Accounts receivable – oil and gas revenues		—			25,909			—			25,909
Accounts receivable – joint interest partners		—			28,902			(306	)		28,596
Inventory		—			1,323			—			1,323
Prepaid expenses		236			254			—			490
Advances to joint interest partners		—			3,595			—			3,595
Deferred income taxes		—			2,470			—			2,470

Total current assets		120,176			86,033			(306	)		205,903

Property, plant and equipment
Oil and gas properties (successful efforts method)		—			580,968			—			580,968
Other property and equipment		—			1,970			—			1,970
Less: accumulated depreciation, depletion, amortization and impairment		—			(99,255	)		—			(99,255	)

Total property, plant and equipment, net		—			483,683			—			483,683
Investments in and advances to subsidiaries		430,970			—			(430,970	)		—
Deferred costs and other assets		—			2,266			—			2,266

Total assets	$	551,146		$	571,982		$	(431,276	)	$	691,852

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	306		$	8,198		$	(306	)	$	8,198
Advances from joint interest partners		—			3,101			—			3,101
Revenues and production taxes payable		—			6,180			—			6,180
Accrued liabilities		—			58,239			—			58,239
Accrued interest payable		—			2			—			2
Derivative instruments		—			6,543			—			6,543

Total current liabilities		306			82,263			(306	)		82,263

Long-term debt		—			—			—			—
Asset retirement obligations		—			7,640			—			7,640
Derivative instruments		—			3,943			—			3,943
Deferred income taxes		(954	)		46,386			—			45,432
Other liabilities		—			780			—			780

Total liabilities		(648	)		141,012			(306	)		140,058

Stockholders' equity
Capital contributions from affiliates		—			513,501			(513,501	)		—
Common stock, $0.01 par value; 300,000,000 shares authorized; 92,240,345 issued and outstanding		920			—			—			920
Additional paid-in-capital		643,719			8,743			(8,743	)		643,719
Retained deficit		(92,845	)		(91,274	)		91,274			(92,845	)

Total stockholders' equity		551,794			430,970			(430,970	)		551,794

Total liabilities and stockholders' equity	$	551,146		$	571,982		$	(431,276	)	$	691,852

Consolidating Statement of Operations

(In thousands)

		September 30,			September 30,			September 30,			September 30,
	Years Ended December 31, 2011
	Parent/ Issuer			Combined Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
Oil and gas revenues	$	—		$	330,422		$	—		$	330,422
Expenses
Lease operating expenses		—			34,072			—			34,072
Production taxes		—			33,865			—			33,865
Depreciation, depletion and amortization		—			74,981			—			74,981
Exploration expenses		—			1,685			—			1,685
Impairment of oil and gas properties		—			3,610			—			3,610
Loss on sale of properties		—			207			—			207
General and administrative expenses		5,505			23,930			—			29,435

Total expenses		5,505			172,350			—			177,855

Operating income (loss)		(5,505	)		158,072			—			152,567

Other income (expense)
Equity in earnings of subsidiaries		99,836			—			(99,836	)		—
Net gain on derivative instruments		—			1,595			—			1,595
Interest expense		(28,310	)		(1,308	)		—			(29,618	)
Other income (expense)		1,165			470			—			1,635

Total other income (expense)		72,691			757			(99,836	)		(26,388	)

Income (loss) before income taxes		67,186			158,829			(99,836	)		126,179
Income tax benefit (expense)		12,204			(58,993	)		—			(46,789	)

Net income (loss)	$	79,390		$	99,836		$	(99,836	)	$	79,390

Consolidating Statement of Operations

(In thousands)

		September 30,			September 30,			September 30,		September 30,
	Year Ended December 31, 2010
	Parent/ Issuer			Combined Guarantor Subsidiaries			Intercompany Eliminations		Consolidated
Oil and gas revenues	$	—		$	128,927		$	—	$	128,927
Expenses
Lease operating expenses		—			14,582			—		14,582
Production taxes		—			13,768			—		13,768
Depreciation, depletion and amortization		—			37,832			—		37,832
Exploration expenses		—			297			—		297
Impairment of oil and gas properties		—			11,967			—		11,967
Stock-based compensation expenses		—			8,743			—		8,743
General and administrative expenses		2,780			16,965			—		19,745

Total expenses		2,780			104,154			—		106,934

Operating income (loss)		(2,780	)		24,773			—		21,993

Other income (expense)
Equity in earnings of subsidiaries		(28,124	)		—			28,124		—
Net loss on derivative instruments		—			(7,653	)		—		(7,653	)
Interest expense		—			(1,357	)		—		(1,357	)
Other income (expense)		255			29			—		284

Total other income (expense)		(27,869	)		(8,981	)		28,124		(8,726	)

Income (loss) before income taxes		(30,649	)		15,792			28,124		13,267
Income tax benefit (expense)		954			(43,916	)		—		(42,962	)

Net income (loss)	$	(29,695	)	$	(28,124	)	$	28,124	$	(29,695	)

Consolidating Statement of Cash Flows

(In thousands)

		September 30,			September 30,			September 30,			September 30,
	Year Ended December 31, 2011
	Parent/ Issuer			Combined Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	79,390		$	99,836		$	(99,836	)	$	79,390
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in earnings of subsidiaries		(99,836	)		—			99,836			—
Depreciation, depletion and amortization		—			74,981			—			74,981
Impairment of oil and gas properties		—			3,610			—			3,610
Loss on sale of properties		—			207			—			207
Deferred income taxes		(12,204	)		58,993			—			46,789
Derivative instruments		—			(1,595	)		—			(1,595	)
Stock-based compensation expenses		3,656			—			—			3,656
Debt discount amortization and other		1,196			365			—			1,561
Working capital and other changes:
Change in accounts receivable		(88	)		(66,134	)		1,322			(64,900	)
Change in inventory		—			(2,550	)		—			(2,550	)
Change in prepaid expenses		(73	)		(1,527	)		—			(1,600	)
Change in other current assets		(18	)		(473	)		—			(491	)
Change in other assets		(100	)		(39	)		—			(139	)
Change in accounts payable and accrued liabilities		17,127			20,511			(1,322	)		36,316
Change in other current liabilities		—			472			—			472
Change in other liabilities		—			317			—			317

Net cash provided by operating activities		(10,950	)		186,974			—			176,024

Cash flows from investing activities:
Capital expenditures		—			(613,223	)		—			(613,223	)
Derivative settlements		—			(3,841	)		—			(3,841	)
Purchases of short-term investments		(184,907	)		—			—			(184,907	)
Redemptions of short-term investments		164,913			—			—			164,913
Advances to joint interest partners		—			(497	)		—			(497	)
Advances from joint interest partners		—			5,963			—			5,963
Proceeds from equipment and property sales		—			2,202			—			2,202

Net cash used in investing activities		(19,994	)		(609,396	)		—			(629,390	)

Cash flows from financing activities:
Proceeds from issuance of senior notes		800,000			—			—			800,000
Purchases of treasury stock		(602	)		—			—			(602	)
Debt issuance costs		(16,838	)		(1,842	)		—			(18,680	)
Investment in / capital contributions from subsidiaries		(428,074	)		428,074			—			—

Net cash provided by financing activities		354,486			426,232			—			780,718

Increase in cash and cash equivalents		323,542			3,810			—			327,352
Cash and cash equivalents at beginning of period		119,940			23,580			—			143,520

Cash and cash equivalents at end of period	$	443,482		$	27,390		$	—		$	470,872

Consolidating Statement of Cash Flows

(In thousands)

		September 30,			September 30,			September 30,			September 30,
	Year Ended December 31, 2010
	Parent/ Issuer			Combined Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
Cash flows from operating activities:
Net loss	$	(29,695	)	$	(28,124	)	$	28,124		$	(29,695	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Equity in earnings of subsidiaries		28,124			—			(28,124	)		—
Depreciation, depletion and amortization		—			37,832			—			37,832
Impairment of oil and gas properties		—			11,967			—			11,967
Deferred income taxes		(954	)		43,916			—			42,962
Derivative instruments		—			7,653			—			7,653
Stock-based compensation expenses		1,227			8,743			—			9,970
Debt discount amortization and other		—			470			—			470
Working capital and other changes:
Change in accounts receivable		—			(44,756	)		306			(44,450	)
Change in inventory		—			(498	)		—			(498	)
Change in prepaid expenses		(236	)		(120	)		—			(356	)
Change in other assets		—			(164	)		—			(164	)
Change in accounts payable and accrued liabilities		306			13,917			(306	)		13,917
Change in other liabilities		—			4			—			4

Net cash provided by (used in) operating activities		(1,228	)		50,840			—			49,612

Cash flows from investing activities:
Capital expenditures		—			(226,544	)		—			(226,544	)
Acquisition of oil and gas properties		—			(86,393	)		—			(86,393	)
Derivative settlements		—			(120	)		—			(120	)
Advances to joint interest partners		—			1,010			—			1,010
Advances from joint interest partners		—			2,512			—			2,512

Net cash used in investing activities		—			(309,535	)		—			(309,535	)

Cash flows from financing activities:
Proceeds from sale of common stock		399,669			—			—			399,669
Proceeds from credit facility		—			72,000			—			72,000
Principal payments on credit facility		—			(107,000	)		—			(107,000	)
Debt issuance costs		—			(1,788	)		—			(1,788	)
Investment in / capital contributions from subsidiaries		(278,501	)		278,501			—			—

Net cash provided by (used in) financing activities		121,168			241,713			—			362,881

Increase (decrease) in cash and cash equivalents		119,940			(16,982	)		—			102,958
Cash and cash equivalents at beginning of period		—			40,562			—			40,562

Cash and cash equivalents at end of period	$	119,940		$	23,580		$	—		$	143,520