16. Consolidating Financial Statements

The Notes (see Note 7) 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 immaterial 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.

Consolidating Balance Sheet

(In thousands, except share data)


	December 31, 2012
	Parent/ Issuer			Combined Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents	$	133,797		$	79,650		$	—		$	213,447
Short-term investments		25,891			—			—			25,891
Accounts receivable – oil and gas revenues		—			110,341			—			110,341
Accounts receivable – joint interest partners		—			99,194			—			99,194
Accounts receivable – affiliates		310			5,845			(6,155	)
Inventory		—			20,707			—			20,707
Prepaid expenses		313			1,457			—			1,770
Advances to joint interest partners		—			1,985			—			1,985
Derivative instruments		—			19,016			—			19,016
Other current assets		235			100			—			335

Total current assets		160,546			338,295			(6,155	)		492,686

Property, plant and equipment
Oil and gas properties (successful efforts method)		—			2,348,128			—			2,348,128
Other property and equipment		—			49,732			—			49,732
Less: accumulated depreciation, depletion, amortization and impairment		—			(391,260	)		—			(391,260	)

Total property, plant and equipment, net		—			2,006,600			—			2,006,600

Investments in and advances to subsidiaries		1,807,010			—			(1,807,010	)		—
Derivative instruments		—			4,981			—			4,981
Deferred income taxes		42,746			—			(42,746	)		—
Deferred costs and other assets		20,748			3,779			—			24,527

Total assets	$	2,031,050		$	2,353,655		$	(1,855,911	)	$	2,528,794


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	9		$	12,482		$	—		$	12,491
Accounts payable – affiliates		5,845			310			(6,155	)
Advances from joint interest partners		—			21,176			—			21,176
Revenues and production taxes payable		—			71,553			—			71,553
Accrued liabilities		100			189,763			—			189,863
Accrued interest payable		30,091			5			—			30,096
Derivative instruments		—			1,048			—			1,048
Deferred income taxes		—			4,558			—			4,558

Total current liabilities		36,045			300,895			(6,155	)		330,785

Long-term debt		1,200,000			—			—			1,200,000
Asset retirement obligations		—			22,956			—			22,956
Derivative instruments		—			380			—			380
Deferred income taxes		—			220,417			(42,746	)		177,671
Other liabilities		—			1,997			—			1,997

Total liabilities		1,236,045			546,645			(48,901	)		1,733,789

Stockholders’ equity
Capital contributions from affiliates		—			1,586,780			(1,586,780	)		—
Common stock, $0.01 par value; 300,000,000 shares authorized; 93,432,712 issued and 93,303,298 outstanding		925			—			—			925
Treasury stock, at cost; 129,414 shares		(3,796	)		—			—			(3,796	)
Additional paid-in-capital		657,943			8,743			(8,743	)		657,943
Retained earnings		139,933			211,487			(211,487	)		139,933

Total stockholders’ equity		795,005			1,807,010			(1,807,010	)		795,005

Total liabilities and stockholders’ equity	$	2,031,050		$	2,353,655		$	(1,855,911	)	$	2,528,794

Consolidating Balance Sheet

(In thousands, except share data)


	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		—			67,268			—			67,268
Accounts receivable – affiliates		88			1,540			(1,628	)		—
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 income taxes		13,158			—			(13,158	)		—
Deferred costs and other assets		15,742			3,683			—			19,425

Total assets	$	1,451,671		$	1,249,377		$	(973,666	)	$	1,727,382


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	23		$	12,184		$	—		$	12,207
Accounts payable - affiliates		1,540			88			(1,628	)		—
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		—			106,141			(13,158	)		92,983
Other liabilities		—			997			—			997

Total liabilities		817,433			290,497			(14,786	)		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 earnings (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	$	1,451,671		$	1,249,377		$	(973,666	)	$	1,727,382

Consolidating Statement of Operations

(In thousands)


	Years Ended December 31, 2012
	Parent/ Issuer			Combined Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
Revenues
Oil and gas revenues	$	—		$	670,491		$	—		$	670,491
Well services revenues		—			16,177			—			16,177

Total revenues		—			686,668			—			686,668

Expenses
Lease operating expenses		—			54,924			—			54,924
Well services operating expense		—			11,774			—			11,774
Marketing, transportation and gathering expenses		—			9,257			—			9,257
Production taxes		—			62,965			—			62,965
Depreciation, depletion and amortization		—			206,734			—			206,734
Exploration expenses		—			3,250			—			3,250
Impairment of oil and gas properties		—			3,581			—			3,581
Loss on sale of properties		—			—			—			—
General and administrative expenses		12,591			44,599			—			57,190

Total expenses		12,591			397,084			—			409,675

Operating income (loss)		(12,591	)		289,584			—			276,993

Other income (expense)
Equity in earnings of subsidiaries		202,924			—			(202,924	)		—
Net gain on derivative instruments		—			34,164			—			34,164
Interest expense		(67,651	)		(2,492	)		—			(70,143	)
Other income (expense)		1,118			3,742			—			4,860

Total other income (expense)		136,391			35,414			(202,924	)		(31,119	)

Income before income taxes		123,800			324,998			(202,924	)		245,874
Income tax benefit (expense)		29,588			(122,074	)		—			(92,486	)

Net income	$	153,388		$	202,924		$	(202,924	)	$	153,388

Consolidating Statement of Operations

(In thousands)


	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		—			32,707			—			32,707
Marketing, transportation and gathering expenses		—			1,365			—			1,365
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 before income taxes		67,186			158,829			(99,836	)		126,179
Income tax benefit (expense)		12,204			(58,993	)		—			(46,789	)

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

Consolidating Statement of Operations

(In thousands)


	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		—			14,118			—		14,118
Marketing, transportation and gathering expenses		—			464			—		464
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 loss	$	(29,695	)	$	(28,124	)	$	28,124	$	(29,695	)

Consolidating Statement of Cash Flows

(In thousands)


	Year Ended December 31, 2012
	Parent/ Issuer			Combined Guarantor Subsidiaries			Intercompany Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	153,388		$	202,924		$	(202,924	)	$	153,388
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in earnings of subsidiaries		(202,924	)		—			202,924			—
Depreciation, depletion and amortization		—			206,734			—			206,734
Impairment of oil and gas properties		—			3,581			—			3,581
Deferred income taxes		(29,588	)		122,067			—			92,479
Derivative instruments		—			(34,164	)		—			(34,164	)
Stock-based compensation expenses		10,219			114			—			10,333
Debt discount amortization and other		2,277			533			—			2,810
Working capital and other changes:
Change in accounts receivable		(222	)		(94,106	)		4,225			(90,103	)
Change in inventory		—			(29,313	)		—			(29,313	)
Change in prepaid expenses		(4	)		350			—			346
Change in other current assets		(217	)		373			—			156
Change in other assets		25			(120	)		—			(95	)
Change in accounts payable and accrued liabilities		18,612			62,319			(4,225	)		76,706
Change in other current liabilities		—			(472	)		—			(472	)

Net cash provided by (used in) operating activities		(48,434	)		440,820			—			392,386

Cash flows from investing activities:
Capital expenditures		—			(1,053,315	)		—			(1,053,315	)
Derivative settlements		—			6,545			—			6,545
Purchases of short-term investments		(126,213	)		—			—			(126,213	)
Redemptions of short-term investments		120,316			—			—			120,316
Advances to joint interest partners		—			1,950			—			1,950
Advances from joint interest partners		—			12,112			—			12,112

Net cash used in investing activities		(5,897	)		(1,032,708	)		—			(1,038,605	)

Cash flows from financing activities:
Proceeds from issuance of senior notes		400,000			—			—			400,000
Purchases of treasury stock		(3,194	)		—			—			(3,194	)
Debt issuance costs		(7,307	)		(705	)		—			(8,012	)
Investment in / capital contributions from subsidiaries		(644,853	)		644,853			—			—

Net cash provided by (used in) financing activities		(255,354	)		644,148			—			388,794

Increase (decrease) in cash and cash equivalents		(309,685	)		52,260			—			(257,425	)
Cash and cash equivalents at beginning of period		443,482			27,390			—			470,872

Cash and cash equivalents at end of period	$	133,797		$	79,650		$	—		$	213,447

Consolidating Statement of Cash Flows

(In thousands)


	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 (used in) 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 (used in) 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)


	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 (used in) 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 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