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FRESH-START ACCOUNTING | 12 Months Ended
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Dec. 31, 2020
FRESH-START ACCOUNTING |
FRESH-START ACCOUNTING | 3. FRESH-START ACCOUNTING Upon the Company’s emergence from chapter 11 bankruptcy, the Company qualified for and adopted fresh-start accounting in accordance with the provisions set forth in ASC 852 as (i) the Reorganization Value of the Company’s assets immediately prior to the date of confirmation was less than the total of the post-petition liabilities and allowed claims, and (ii) the holders of the existing voting shares of the Predecessor entity received less than 50% of the voting shares of the emerging entity. Refer to Note 2, “Reorganization,” for the terms of the Plan. Fresh-start accounting requires the Company to present its assets, liabilities, and equity as if it were a new entity upon emergence from bankruptcy. The new entity is referred to as “Successor” or “Successor Company.” However, the Company will continue to present financial information for any periods before adoption of fresh-start accounting for the Predecessor Company. The Predecessor and Successor Companies lack comparability, as required in ASC Topic 205, Presentation of Financial Statements (ASC 205). ASC 205 states financial statements are required to be presented comparably from year to year, with any exceptions to comparability clearly disclosed. Therefore, “black-line” financial statements are presented to distinguish between the Predecessor and Successor Companies. Adopting fresh-start accounting results in a new financial reporting entity with no beginning retained earnings or deficit as of the fresh-start reporting date. Upon the adoption of fresh-start accounting, the Company allocated the Reorganization Value (the fair value of the Successor Company’s total assets) to its individual assets based on their estimated fair values. The Reorganization Value is intended to represent the approximate amount a willing buyer would pay for the Company’s assets immediately after the reorganization. Reorganization Value is derived from an estimate of Enterprise Value, or the fair value of the Company’s long-term debt, stockholders’ equity and working capital. The estimated Enterprise Value of $441.6 million at the Effective Date was in the Bankruptcy Court approved range of $425.0 million and $475.0 million. The Enterprise Value was derived from an independent valuation using an asset based methodology of estimated proved reserves, undeveloped acreage, and other financial information, considerations and projections, applying a combination of the income, cost and market approaches as of the fresh-start reporting date of October 1, 2019. The Company elected to adopt fresh-start accounting effective October 1, 2019, to coincide with the timing of its normal fourth quarter reporting period, which resulted in the Company becoming a new entity for financial reporting purposes. The Company evaluated and concluded that events between October 1, 2019 and October 8, 2019 were immaterial and use of an accounting convenience date of October 1, 2019 was appropriate. As such, fresh-start accounting is reflected in the accompanying consolidated balance sheet as of December 31, 2019 (Successor) and related reorganization adjustments and fresh-start adjustments are included in the accompanying consolidated statement of operations in “Reorganization items, net” for the period from January 1, 2019 through October 1, 2019 (Predecessor). The Company’s principal assets are its oil and natural gas properties. For purposes of estimating the fair value of the Company’s proved reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Company’s reserves, risked by reserve category and discounted using a weighted average cost of capital rate of 10.0%. The proved reserve locations were limited to wells expected to be drilled in the Company’s five year development plan. Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $71.51 per barrel of oil, $3.37 per MMBtu of natural gas and $29.50 per barrel of oil equivalent of natural gas liquids. Base pricing was derived from an average of forward strip prices and analysts’ estimated prices. In estimating the fair value of the Company’s unproved acreage, a market approach was used in which a review of recent transactions involving properties in the same geographical location indicated the fair value of the Company’s unproved acreage from a market participant perspective. See further discussion below in the “Fresh-start accounting adjustments” for the specific assumptions used in the valuation of the Company’s various other assets. Although the Company believes the assumptions and estimates used to develop Enterprise Value and Reorganization Value are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions. The assumptions used in estimating these values are inherently uncertain and require judgment. The following table reconciles the Company’s Enterprise Value to the estimated fair value of the Successor’s common stock as of October 1, 2019 (in thousands):
|  | October 1, 2019
Enterprise Value |  | $ | 441,583
Plus: Cash |  |  | 15,546
Less: Fair value of debt |  |  | (130,000)
Less: Fair value of warrants |  |  | (7,336)
Fair Value of Successor common stock |  | $ | 319,793
The following table reconciles the Company’s Enterprise Value to its Reorganization Value as of October 1, 2019 (in thousands):
|  | October 1, 2019
Enterprise Value |  | $ | 441,583
Plus: Cash |  |  | 15,546
Plus: Current liabilities |  |  | 122,134
Plus: Lease liabilities |  |  | 3,395
Plus: Noncurrent asset retirement obligation |  |  | 10,153
Plus: Other noncurrent liabilities |  |  | 1,625
Reorganization Value of Successor assets |  | $ | 594,436
Condensed Consolidated Balance Sheet The following illustrates the effects on the Company’s consolidated balance sheet due to the reorganization and fresh-start accounting adjustments. The explanatory notes following the table below provide further details on the adjustments, including the Company’s assumptions and methods used to determine fair value for its assets, liabilities, and warrants. Amounts included in the table below are rounded to thousands.
|  | As of October 1, 2019
|  | Predecessor Company |  | Reorganization Adjustments |  | Fresh-Start Adjustments |  | Successor Company
Current assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 17,009 |  | $ | (1,463) | (1) | $ | — |  | $ | 15,546
Accounts receivable, net |  |  | 37,826 |  |  | — |  |  | — |  |  | 37,826
Assets from derivative contracts |  |  | 15,310 |  |  | — |  |  | — |  |  | 15,310
Restricted cash |  |  | — |  |  | 13,839 | (2) |  | — |  |  | 13,839
Prepaids and other |  |  | 14,642 |  |  | 7,110 | (3) |  | (11,462) | (11) |  | 10,290
Total current assets |  |  | 84,787 |  |  | 19,486 |  |  | (11,462) |  |  | 92,811
Oil and natural gas properties (full cost method): |  |  |  |  |  |  |  |  |  |  |  |
Evaluated |  |  | 2,155,288 |  |  | — |  |  | (1,774,924) | (12)(13) |  | 380,364
Unevaluated |  |  | 438,365 |  |  | — |  |  | (329,411) | (13) |  | 108,954
Gross oil and natural gas properties |  |  | 2,593,653 |  |  | — |  |  | (2,104,335) |  |  | 489,318
Less - accumulated depletion |  |  | (1,709,719) |  |  | — |  |  | 1,709,719 | (13) |  | —
Net oil and natural gas properties |  |  | 883,934 |  |  | — |  |  | (394,616) |  |  | 489,318
Other operating property and equipment: |  |  |  |  |  |  |  |  |  |  |  |
Other operating property and equipment |  |  | 203,373 |  |  | — |  |  | (199,718) | (12)(14) |  | 3,655
Less - accumulated depreciation |  |  | (14,416) |  |  | — |  |  | 14,416 | (14) |  | —
Net other operating property and equipment |  |  | 188,957 |  |  | — |  |  | (185,302) |  |  | 3,655
Other noncurrent assets: |  |  |  |  |  |  |  |  |  |  |  |
Assets from derivative contracts |  |  | 4,120 |  |  | — |  |  | — |  |  | 4,120
Operating lease right of use assets |  |  | 3,694 |  |  | — |  |  | (300) | (15) |  | 3,394
Funds in escrow and other |  |  | 1,138 |  |  | — |  |  | — |  |  | 1,138
Total assets |  | $ | 1,166,630 |  | $ | 19,486 |  | $ | (591,680) |  | $ | 594,436
Current liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities |  | $ | 112,578 |  | $ | 2,727 | (4) | $ | — |  | $ | 115,305
Liabilities from derivative contracts |  |  | 6,829 |  |  | — |  |  | — |  |  | 6,829
Current portion of long-term debt, net |  |  | 258,234 |  |  | (258,234) | (5) |  | — |  |  | —
Operating lease liabilities |  |  | 1,337 |  |  | — |  |  | (424) | (15) |  | 913
Total current liabilities |  |  | 378,978 |  |  | (255,507) |  |  | (424) |  |  | 123,047
Long-term debt |  |  | — |  |  | 130,000 | (6) |  | — |  |  | 130,000
Liabilities subject to compromise |  |  | 625,005 |  |  | (625,005) | (7) |  | — |  |  | —
Other noncurrent liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Liabilities from derivative contracts |  |  | 1,625 |  |  | — |  |  | — |  |  | 1,625
Asset retirement obligations |  |  | 10,153 |  |  | — |  |  | — |  |  | 10,153
Operating lease liabilities |  |  | 2,438 |  |  | — |  |  | 44 | (15) |  | 2,482
Commitments and contingencies |  |  |  |  |  |  |  |  |  |  |  |
Stockholders' equity: |  |  |  |  |  |  |  |  |  |  |  |
Common Stock (Predecessor) |  |  | 16 |  |  | (16) | (8) |  | — |  |  | —
Common Stock (Successor) |  |  | — |  |  | 2 | (9) |  | — |  |  | 2
Additional paid-in capital (Predecessor) |  |  | 1,087,441 |  |  | (1,087,441) | (8) |  | — |  |  | —
Additional paid-in capital (Successor) |  |  | — |  |  | 327,127 | (9) |  | — |  |  | 327,127
Retained earnings (accumulated deficit) |  |  | (939,026) |  |  | 1,530,326 | (10) |  | (591,300) | (16) |  | —
Total stockholders' equity |  |  | 148,431 |  |  | 769,998 |  |  | (591,300) |  |  | 327,129
Total liabilities and stockholders' equity |  | $ | 1,166,630 |  | $ | 19,486 |  | $ | (591,680) |  | $ | 594,436
Reorganization adjustments
| 1) |  | The table below details cash payments as of October 1, 2019, pursuant to the terms of the Plan described in Note 2, “Reorganization,” (in thousands):
Sources: |  |  |
Proceeds from Senior Noteholder Rights Offering |  | $ | 150,150
Proceeds from Senior Credit Agreement |  |  | 130,000
Proceeds from Existing Equity Interests Rights Offering |  |  | 5,779
Total Sources |  | $ | 285,929
Uses: |  |  |
Payment of Predecessor Credit Agreement principal, accrued interest, and fees |  | $ | (226,580)
Payment of DIP Facility principal and accrued interest |  |  | (35,174)
Funding of professional fee escrow and cash collateral account |  |  | (13,839)
Payment of debt issuance costs on Senior Credit Agreement |  |  | (8,764)
Payment of professional fees and other |  |  | (3,035)
Total Uses |  | $ | (287,392)
Total Sources and Uses |  | $ | (1,463)
| 2) |  | Reflects the funding of an escrow account for professional fees associated with the chapter 11 bankruptcy and an account to cash collateralize the Predecessor Company’s outstanding letters of credit.
| 3) |  | Represents $10.2 million in debt issuance costs related to the Senior Credit Agreement, partially offset by the release of $3.1 million in fees paid to the Company’s restructuring advisors prior to the emergence from chapter 11 bankruptcy.
| 4) |  | Represents $7.7 million in fees to be paid to the Company’s restructuring advisors subsequent to the Company’s emergence from chapter 11 bankruptcy, partially offset by payments of i) accrued interest and fees on the Predecessor Credit Agreement and the DIP Facility of $3.5 million and ii) professional fees associated with the chapter 11 bankruptcy of $1.5 million.
| 5) |  | On the Emergence Date, in accordance with the Plan, the Company repaid the principal outstanding on the Predecessor Credit Agreement of $223.2 million and the DIP Facility of $35.0 million using proceeds from the Equity Rights Offerings and borrowings under the Senior Credit Agreement.
| 6) |  | Reflects the initial borrowing on the Senior Credit Agreement.
| 7) |  | Liabilities subject to compromise were as follows (in thousands):
6.75% senior notes due 2025 |  | $ | 625,005
Liabilities subject to compromise |  |  | 625,005
Discount on shares issued per the Senior Noteholder Subscription Rights Offering |  |  | (67,840)
Issuance of common stock to Class 4 claimholders |  |  | (75,388)
Gain on settlement of liabilities subject to compromise |  | $ | 481,777
| 8) |  | Reflects the cancellation of Predecessor common stock and additional paid-in capital.
| 9) |  | The following table reconciles reorganization adjustments made to Successor common stock and additional paid-in capital (in thousands):
Par value of 16,203,940 shares of new common stock issued to holders of senior note claims and existing equity interest claims (valued at $19.74 per share) |  | $ | 2
Fair Value of warrants issued to holder of the Existing Equity Interests (1) |  |  | 7,336
Additional paid-in-capital (Successor) |  |  | 322,294
Equity issuance costs associated with Equity Rights Offering |  |  | (2,503)
Total change in Successor common stock and additional paid-in capital |  | $ | 327,129
| (1) |  | The fair value of the warrants was estimated using a Binomial Lattice model with the following assumptions: implied stock price of the Successor Company of $19.74; initial strike price per share of $40.17, $48.28, and $60.45, for Series A, B, and C warrants, respectively, increased each month at an annualized rate of 6.75%; expected volatility of 45%; and risk free interest rate using the USD Yield Curve at each time-step in the lattice.
| 10) |  | The table below reflects the cumulative effect of the adjustments discussed above (in thousands):
Gain on settlement of liabilities subject to compromise |  | $ | 481,777
Success fees incurred upon emergence |  |  | (8,376)
Fair value of equity issued to Predecessor common stockholders |  |  | (7,449)
Fair value of warrants issued to Predecessor common stockholders |  |  | (7,336)
Issuance of common stock to backstop commitment parties |  |  | (13,079)
Other |  |  | (2,668)
Cancellation of Predecessor Company equity |  |  | 1,087,457
Net impact to retained earnings (accumulated deficit) |  | $ | 1,530,326
Fresh-start accounting adjustments
| 11) |  | Adjustment reflects the write-off of debt issuance costs associated with the Senior Credit Agreement of $10.2 million and the write-off of prepaid expenses related to $1.2 million of premiums for the Predecessor Company’s directors and officers’ insurance policy.
| 12) |  | Includes the reclassification of treating equipment and gathering support facilities from “Other operating property and equipment” to “Oil and natural gas properties, evaluated.” The Successor Company’s policy of accounting for its treating equipment and gathering support facilities identifies these assets as part of the Company’s full cost pool due to their supporting nature to the Company’s oil and natural gas operations.
| 13) |  | Reflects the adjustment to fair value of the Company’s oil and natural gas properties and unproved acreage, as well as the elimination of accumulated depletion.
In estimating the fair value of its oil and natural gas properties, the Company used a combination of the income and market approaches. For purposes of estimating the fair value of the Company’s proved reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Company’s reserves, risked by reserve category and discounted using a weighted average cost of capital rate of 10.0%. The proved reserve locations were limited to wells expected to be drilled in the Company’s five year development plan. Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $71.51 per barrel of oil, $3.37 per MMBtu of natural gas and $29.50 per barrel of natural gas liquids. Base pricing was derived from an average of forward strip prices and analysts’ estimated prices. In estimating the fair value of the Company’s unproved acreage, a market approach was used in which a review of recent transactions involving properties in the same geographical location indicated the fair value of the Company’s unproved acreage from a market participant perspective.
| 14) |  | Reflects the adjustment to fair value of the Company’s other operating property and equipment, as well as the elimination of accumulated depreciation.
For purposes of estimating the fair value of its other operating property and equipment, the Company used a combination of the market and cost approaches. A market approach was relied upon to value land and vehicles, and in this valuation approach, recent transactions of similar assets were utilized to determine the value from a market participant perspective. For the remaining other operating assets, a cost approach was used. The estimation of fair value under the cost approach was based on current replacement costs of the assets, less depreciation based on the estimated economic useful lives of the assets and age of the assets.
| 15) |  | Upon adoption of fresh start accounting, the Company’s lease obligations were recalculated using the incremental borrowing rate applicable to the Company upon emergence from chapter 11 bankruptcy and commensurate with its new capital structure. The incremental borrowing rate used decreased from 4.83% in the Predecessor period to 3.70% in the Successor period. Additionally represents the removal of right-of-use assets and lease liabilities associated with the Company’s compressors, as the remaining contract term of the compressor leases were less than one year as of the Effective Date. See Note 4, “Leases,” for details associated with the Company’s short-term lease costs.
| 16) |  | Reflects the cumulative effect of the fresh-start accounting adjustments discussed above.
Reorganization Items Reorganization items represent (i) expenses or income incurred subsequent to the Petition Date as a direct result of the Plan, (ii) gains or losses from liabilities settled, and (iii) fresh‑start accounting adjustments and are recorded in “Reorganization items, net” in the Company’s consolidated statements of operations. The following table summarizes the net reorganization items (in thousands):
|  | Successor |  |  | Predecessor
|  | Period from |  |  | Period from
|  | October 2, 2019 |  |  | January 1, 2019
|  | through |  |  | through
|  | December 31, 2019 |  |  | October 1, 2019
Gain on settlement of liabilities subject to compromise |  | $ | — |  |  | $ | 481,777
Fresh start adjustments |  |  | — |  |  |  | (591,300)
Gain on adjustment of prepetition liabilities subject to compromise to the allowed claims amount |  |  | — |  |  |  | 20,274
Write-off debt discount/premium and debt issuance costs |  |  | — |  |  |  | (10,953)
Reorganization professional fees and other |  |  | (3,298) |  |  |  | (16,922)
Gain (loss) on reorganization items |  | $ | (3,298) |  |  | $ | (117,124)

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