Note 1: Nature of operations and summary of significant accounting policies and going concern
Nature of operations
Chaparral Energy, Inc. and its subsidiaries (collectively, “we”, “our”, “us”, or the “Company”) are involved in the exploration, development, production, operation and acquisition of oil and natural gas properties. Our properties are located primarily in Oklahoma and our commodity products include crude oil, natural gas and natural gas liquids.
Interim financial statements
The accompanying unaudited consolidated interim financial statements of the Company have been prepared in accordance with the rules and regulations of the SEC and do not include all of the financial information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These financial statements and the notes thereto should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019.
The financial information as of June 30, 2020, and for the three and six months ended June 30, 2020 and 2019, is unaudited. The financial information as of December 31, 2019 has been derived from the audited financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019. In management’s opinion, such information contains all adjustments considered necessary for a fair presentation of the results of the interim periods. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations that will be realized for the year ended December 31, 2020.
Certain reclassifications have been made to prior period financial statements to conform to current period presentation. The reclassifications had no effect on our previously reported results of operations.
Chapter 11 Cases and going concern
On August 16, 2020 (the “Petition Date”), Chaparral Energy, Inc. and its consolidated subsidiaries, including Chaparral Resources, L.L.C., Chaparral Real Estate, L.L.C., Chaparral CO2, L.L.C., CEI Pipeline, L.L.C., Chaparral Energy, L.L.C., CEI Acquisition, L.L.C., Green Country Supply, Inc., Chaparral Biofuels, L.L.C., Chaparral Exploration, L.L.C., Roadrunner Drilling, L.L.C., Trabajo Energy, L.L.C., Charles Energy, L.L.C. and Chestnut Energy, L.L.C. (collectively, the “Debtors”) filed voluntary petitions commencing the Chapter 11 Cases, seeking relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Company has requested court approval for the joint administration of the Chapter 11 Cases under the caption In re Chaparral Energy, Inc. We are currently operating our business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court, in accordance with the applicable provisions of the Bankruptcy Code.
To maintain and continue uninterrupted ordinary course operations during the bankruptcy proceedings, the Debtors filed a variety of “first day” motions seeking approval from the Bankruptcy Court for various forms of customary relief designed to minimize the effect of bankruptcy on the Debtors’ operations, customers and employees. Upon entry by the Bankruptcy Court of the orders approving all requested “first day” relief, we will be able to conduct normal business activities and pay all associated obligations for the period following our bankruptcy filing and (subject to caps applicable to payments of certain pre-petition obligations) pre-petition employee wages and benefits, pre-petition amounts owed to certain lienholders and vendors, royalty interest and working interest holders, and partners. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of our business require the prior approval of the Bankruptcy Court.
The commencement, through the Chapter 11 Cases, of a voluntary proceeding in bankruptcy constituted an immediate event of default under our Credit Agreement and the indenture governing our Senior Notes (the “Indenture”), resulting in the automatic and immediate acceleration of all outstanding amounts under those financing arrangements. Accordingly, we have classified the outstanding balances under our Credit Agreement and Senior Notes as current liabilities on our condensed consolidated balance sheet as of June 30, 2020.
Please see “Note 11: Subsequent events” for a discussion of the restructuring support agreement and the related proposed plan of reorganization.
Ability to continue as a going concern—The accompanying condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The filing of the Chapter 11 Cases constituted an event of default
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
under the Indenture and the Credit Agreement, resulting in the automatic and immediate acceleration of outstanding balances under those financing arrangements. The Company projects that it will not have sufficient cash on hand or available liquidity to repay all of such debt. These conditions along with the significant risks and uncertainties related to the Company’s liquidity and the Chapter 11 Cases raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. If the Company cannot continue as a going concern, adjustments to the carrying values and classification of its assets and liabilities and the reported amounts of income and expenses could be required and could be material.
Cash and cash equivalents
We maintain cash and cash equivalents in bank deposit accounts and money market funds which may not be federally insured. As of June 30, 2020, cash with a recorded balance totaling approximately $55,445 was held at JP Morgan Chase Bank, N.A. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on such accounts.
Accounts receivable
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016–13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016–13”), which changes the recognition model for the impairment of financial instruments, including accounts receivable, loans and held-to-maturity debt securities, among others. We adopted ASU 2016–13 using the modified retrospective method effective January 1, 2020. In contrast to previous guidance, which considered current information and events, and only recognized losses when they became probable (an “incurred loss” model), ASU 2016–13 mandates an “expected loss” model. The expected loss model: (i) estimates the risk of loss even when risk is remote, (ii) estimates losses over the contractual life, (iii) considers past events, current conditions and reasonable supported forecasts and (iv) has no recognition threshold. ASU 2016–13 is applicable to our accounts receivable portfolio, particularly those receivables attributable to our joint interest partners which have a higher credit risk than those associated with our traditional customer receivables.
Basis of accounting. Our accounts receivable are carried at gross cost, representing amounts due, less an allowance for expected credit losses. We write off accounts receivable when they are determined to be uncollectible. When we recover amounts that were previously written off, those amounts are offset against the allowance and reduce expense in the year of recovery.
The Company has four portfolio segments constituting its total accounts receivables: (i) joint interest receivables; (ii) commodity sales receivables; (iii) derivative settlement receivables and (iv) other receivables. The table below discloses balances related to these four segments and the allowance:
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June 30,
2020
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December 31,
2019
|
|
Joint interests
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$
|
9,992
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|
$
|
16,664
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|
|
Commodity sales
|
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14,416
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|
|
30,819
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|
Derivative settlements
|
|
15,540
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|
717
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|
Other
|
|
3,249
|
|
|
2,544
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|
Allowance for credit losses
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|
(4,215)
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|
(1,097)
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$
|
38,982
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|
|
$
|
49,647
|
|
Commodity sales receivables. The Company sells its commodity products primarily to oil and natural gas midstream entities including crude oil refineries and natural gas processing plants. We also sell a small percentage of our natural gas and natural gas liquids to energy marketing entities. Payment is generally due within 30 days of sales and amounts outstanding longer than 90 days are considered past due. Based on 2019 commodity sales, our 10 largest purchasers account for over 75% of our commodity sales. Based on our history of collections from our purchasers, we believe the probability of credit losses from uncollectible receivables to be low. We perform annual credit evaluations on purchasers representing approximately 80% or more of our commodity revenues. The evaluations include (i) an assessment of external credit ratings; (ii) performing internal risk evaluations when external ratings are not available; (iii) assessing the need for guarantor letters or letters of credit. We estimate the expected losses on uncollectible receivables by applying a uniform allowance rate on the total outstanding balance taking into consideration general industry conditions and more specifically, factors impacting the midstream energy segment. We may make further adjustments to our allowance for credit losses according to any specific news we may receive regarding individual purchasers.
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
Joint interest receivables. Our joint interest receivables represent amounts owed to us by other working interest owners on wells that we operate. We have numerous joint interest counterparties which are the result of combining all or portions of multiple oil and gas leases to form units for the drilling of wells under pooling or a joint interest agreements. The counterparties in this segment are diverse, ranging from large public company upstream operators to individual mineral leaseholders. Amounts billed to our joint interest owners generally consist of drilling and completion costs, in the early stages of a well, and lease operating expenses and costs for workovers and remediation work once a well in online. Payment is generally due within 60 days of billing and amount outstanding longer than 90 days are considered past due. Our historical losses on uncollectible receivables have predominantly been attributable to this portfolio segment, although losses in prior years have not been material. In the event of nonpayment, we may be able to mitigate our losses by netting the outstanding amount against any revenues payable to the joint interest owner and if still insufficient, by assuming the joint interest owner’s working interest in the well. The fair value of the working interest, which represents collateral for the outstanding receivable, will depend on the fair value of the remaining oil and natural gas reserves of the well. We monitor the ongoing collectability of these receivables by focusing on past due accounts with material balances. We estimate the expected losses on uncollectible joint interest receivables by applying varying allowance rates to outstanding balances based on aging of the balances. We also factor in current industry conditions, outstanding revenues payable to the accountholder, the fair value of the accountholder’s working interest in the property and the accountholder’s previous loss history in assessing the appropriate allowance. This method is augmented with a specific identification approach that includes directly communicating with certain joint interest owners that have material outstanding balances and consideration of specific information or circumstances regarding the account, such as bankruptcy, litigation or ongoing negotiations.
Derivative settlement receivables. Our derivative receivables relate to net settlements due from counterparties to our derivative contracts. Since derivative settlements fluctuate depending on commodity price changes, which are volatile, the associated amounts can result in a net payable or a net receivable position in any given month. Our derivative contracts generally require payment within 60 days of the fixing date. We have a limited number of counterparties to our derivative contracts, all of whom are large financial institutions and are also lenders under our credit agreement. These financial institution counterparties bear investment grade credit ratings. We have never incurred credit losses from our derivative receivables and believe the probability of such losses to be highly remote. Furthermore, to the extent that a balance is uncollectible, we believe that we have offset rights against amounts owed to the counterparty under our credit facility. Based on these circumstances, we have not recorded any allowance for credit losses related to these receivables. As discussed in “Note 11: Subsequent events,” we terminated all our outstanding derivatives in July 2020.
Other receivables. These receivables are of a nonrecurring discrete nature and generally immaterial with respect to our total receivables. Outstanding amounts may include receivables from taxing authorities and post-closing adjustments from acquisitions and divestitures.
Response to current industry conditions. We are in the midst of an unprecedented decline in crude oil prices brought about by the COVID-19 pandemic and other macroeconomic factors, which has drastically reduced demand for crude oil. The price decline has been exacerbated by episodic storage constraints. We have incorporated the prevailing industry crisis into our forecast of credit losses by increasing the allowance rates that we apply to our receivables, and for certain accounts where we have applied specific identification measures, recognizing an allowance sooner than would be typical under normal conditions.
Accrued interest, discount and premiums. We do not accrue interest on the outstanding balances of our receivables. There are no discounts or premiums associated with our receivables.
Presentation of credit loss expense. Our credit loss expense is included as a component of “General and administrative expenses” on our consolidated statement of operations and is as follows:
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Three months ended June 30,
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Six months ended June 30,
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|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Credit losses on receivables
|
|
$
|
1,447
|
|
|
$
|
(18)
|
|
|
$
|
2,964
|
|
|
$
|
(276)
|
|
Credit quality disclosures. We are exempted under ASU 2016-13 from disclosing credit quality disclosures on our commodity sales receivables. Since all the financial institution counterparties to our derivative contracts bear investment grade credit ratings, we do not believe further decomposition by credit rating is necessary for this segment of receivables. The table below segregates our joint interest receivables based on the amount of revenues payable which can be utilized to offset the receivable balance. We consider this segregation to be a reasonable indicator of credit quality.
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
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Joint interest receivables, gross
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|
|
June 30,
2020
|
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Accounts which have sufficient related revenue distributions payable to offset entire receivable balance
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$
|
258
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|
|
Accounts which have related revenue distributions payable but not sufficient to offset entire receivable balance
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|
|
|
|
3,711
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|
Accounts without related revenue distributions payable
|
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|
|
|
|
6,023
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|
Total
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|
|
|
$
|
9,992
|
|
Allowance for credit losses. The table below discloses activity on our receivables allowance account:
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Six months ended June 30, 2020
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Commodity sales
|
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Joint interest
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Derivatives
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Other
|
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Total
|
|
Balance at January 1, 2020
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$
|
—
|
|
|
$
|
1,097
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,097
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|
|
Cumulative effect of accounting standard adoption
|
|
154
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|
|
—
|
|
|
—
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|
|
—
|
|
|
154
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|
|
Credit losses
|
|
59
|
|
|
2,905
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|
|
—
|
|
|
—
|
|
|
2,964
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|
|
Write-offs
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—
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—
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|
|
—
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|
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—
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|
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—
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|
Recoveries
|
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—
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—
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—
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|
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—
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|
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—
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|
|
Balance at June 30, 2020
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|
$
|
213
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|
|
$
|
4,002
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|
|
$
|
—
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|
|
$
|
—
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|
|
$
|
4,215
|
|
Inventories
Inventories consisted of the following:
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|
June 30,
2020
|
|
December 31,
2019
|
|
Equipment inventory
|
|
$
|
2,673
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|
|
$
|
3,435
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|
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Commodities
|
|
425
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|
|
474
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|
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Inventory valuation allowance
|
|
(642)
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|
|
(179)
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|
|
|
|
$
|
2,456
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|
|
$
|
3,730
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|
During the three and six months ended June 30, 2020, we recorded an adjustment to net realizable value of $310 and $463 on our equipment inventory, which is reflected as “Impairment of other assets” on our consolidated statements of operations.
Property and equipment, net
Major classes of property and equipment are shown in the following:
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June 30,
2020
|
|
December 31,
2019
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Machinery and equipment
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|
$
|
3,229
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|
|
$
|
3,543
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Office and computer equipment
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3,606
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|
3,363
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Automobiles and trucks
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2,469
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|
|
3,071
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Building and improvements
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|
664
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|
|
693
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Furniture and fixtures
|
|
8
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|
|
8
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|
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|
|
9,976
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|
|
10,678
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|
Less accumulated depreciation, amortization and impairment
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|
3,963
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|
|
3,459
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|
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|
|
6,013
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|
|
7,219
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Land
|
|
1,935
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|
|
1,998
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|
|
|
|
$
|
7,948
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|
|
$
|
9,217
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|
Held for sale. In an effort to further streamline operations, during the fourth quarter of 2019, the Company began transitioning from an internally staffed and resourced oilfield services function to a third party provider solution. As a result, it began to actively market all related company-owned oilfield services machinery and equipment for eventual disposal. Accounting guidance requires us
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
to reflect the disposal group separately on the balance sheet as “Assets held for sale” at carrying value or fair value less cost to sell, whichever is less. The carrying value of assets held for sale is not included in the table above. Our held for sale assets are as follows:
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Carrying value at
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|
|
June 30,
2020
|
|
December 31,
2019
|
|
Equipment
|
|
$
|
—
|
|
|
$
|
1,572
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|
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Vehicles
|
|
111
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|
|
488
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|
|
Real estate
|
|
—
|
|
|
800
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|
Total held for sale
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|
$
|
111
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|
|
$
|
2,860
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Oil and natural gas properties
Capitalized Costs. We use the full cost method of accounting for oil and natural gas properties and activities. Accordingly, we capitalize all costs incurred in connection with the exploration for and development of oil and natural gas reserves. Proceeds from the disposition of oil and natural gas properties are accounted for as a reduction in capitalized costs, with no gain or loss generally recognized unless such dispositions involve a significant alteration in the depletion rate. We capitalize internal costs that can be directly identified with exploration and development activities, but do not include any costs related to production, general corporate overhead or similar activities. Capitalized costs include geological and geophysical work, 3D seismic, delay rentals, and drilling completing and equipping oil and natural gas wells, including salaries, benefits, and other internal costs directly attributable to these activities.
Costs associated with unevaluated oil and natural gas properties are excluded from the amortizable base until a determination has been made as to the existence of proved reserves. Quarterly, unevaluated leasehold costs are transferred to the amortization base with the costs of drilling the related well upon proving up reserves of a successful well or upon determination of a dry or uneconomic well. Furthermore, unevaluated oil and natural gas properties are reviewed for impairment if events and circumstances exist that indicate a possible decline in the recoverability of the carrying amount of such property. The impairment assessment is conducted at least once annually and whenever there are indicators that impairment has occurred. In assessing whether impairment has occurred, we consider factors such as intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; assignment of proved reserves; and economic viability of development if proved reserves are assigned. Upon determination of impairment, all or a portion of the associated leasehold costs are transferred to the full cost pool and become subject to amortization. The processes above are applied to unevaluated oil and natural gas properties on an individual basis or as a group if properties are individually insignificant. Our future depreciation, depletion and amortization rate would increase or we may incur ceiling test write-downs if costs are transferred to the amortization base without any associated reserves.
In the past, the costs associated with unevaluated properties typically related to acquisition costs of unproved acreage. As a result of the application of fresh start accounting on the Prior Effective Date in 2017, a substantial portion of the carrying value of our unevaluated properties are the result of a fair value increase to reflect the value of our acreage in our Focus Areas.
The costs of unevaluated oil and natural gas properties consisted of the following:
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|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
Leasehold acreage
|
|
$
|
135,059
|
|
|
$
|
334,083
|
|
|
Capitalized interest
|
|
6,317
|
|
|
16,785
|
|
|
Wells and facilities in progress of completion
|
|
919
|
|
|
20,361
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|
|
Total unevaluated oil and natural gas properties excluded from amortization
|
|
$
|
142,295
|
|
|
$
|
371,229
|
|
Ceiling Test. In accordance with the full cost method of accounting, the net capitalized costs of oil and natural gas properties are not to exceed their related PV-10 value, net of tax considerations, plus the cost of unproved properties not being amortized.
Our estimates of oil and natural gas reserves as of June 30, 2020, and the related PV-10 value, were prepared using an average price for oil and natural gas on the first day of each month for the prior twelve months as required by the SEC. These losses are reflected in “Impairment of oil and gas assets” in our consolidated statements of operations. The ceiling test impairment we recorded in the current year was driven in part by our impairment of unevaluated leasehold in the amount $216,173 and $218,741 for the three and six month periods ending June 30, 2020, respectively. Impairments of leasehold result in a transfer of amounts from unevaluated oil and natural gas properties to the full cost amortization base subsequently impacting the ceiling test.
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
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|
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|
|
Three months ended June 30,
|
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|
|
Six months ended June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Impairment of oil and gas assets
|
|
384,639
|
|
|
$
|
63,593
|
|
|
$
|
456,010
|
|
|
$
|
113,315
|
|
Producer imbalances. We recognize revenue on all natural gas sold to our customers regardless of our proportionate working interest in a well. Liabilities are recorded for imbalances greater than our proportionate share of remaining estimated natural gas reserves. Our aggregate imbalance positions at June 30, 2020, and December 31, 2019, were immaterial.
Revenue recognition
The following table displays the revenue disaggregated and reconciles the disaggregated revenue to the revenue reported:
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|
|
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|
|
|
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|
|
Three months ended June 30,
|
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|
|
Six months ended June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Oil
|
|
$
|
10,384
|
|
|
$
|
50,990
|
|
|
$
|
47,410
|
|
|
$
|
83,792
|
|
|
Natural gas
|
|
5,679
|
|
|
10,476
|
|
|
14,334
|
|
|
21,682
|
|
|
Natural gas liquids
|
|
3,903
|
|
|
11,025
|
|
|
13,585
|
|
|
20,242
|
|
|
Gross commodity sales
|
|
19,966
|
|
|
72,491
|
|
|
75,329
|
|
|
125,716
|
|
|
Transportation and processing
|
|
(4,086)
|
|
|
(5,784)
|
|
|
(10,598)
|
|
|
(10,390)
|
|
|
Net commodity sales
|
|
$
|
15,880
|
|
|
$
|
66,707
|
|
|
$
|
64,731
|
|
|
$
|
115,326
|
|
Please see “Note 16: Revenue recognition” in “Item 8. Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2019, for a discussion of our revenue recognition policy including a description of products and revenue disaggregation criteria, performance obligations, pricing, measurement and contract assets and liabilities.
Income taxes
On March 27, 2020, the President of the U.S. signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act provides relief to corporate taxpayers by permitting a five-year carryback of 2018-2020 net operating losses (“NOLs”), removing the 80% limitation on the carryback of those NOLs, increasing the Section 163(j) 30% limitation on interest expense deductibility to 50% of adjusted taxable income for 2019 and 2020, and accelerates refunds for minimum tax credit carryforwards, along with a few other provisions. During the three and six months ended June 30, 2020, no material adjustments were made to provision amounts recorded as a result of the enactment of the CARES Act.
The provision for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of permanent differences and discrete items. Management judgment is required in estimating operating income in order to determine our effective income tax rate. The consistent effective tax rate, as disclosed below, is a result of maintaining a valuation allowance against substantially all of our net deferred tax asset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Effective income tax rate
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Despite the Company’s net loss for the six month period ended June 30, 2020, we did not record any net deferred tax benefit due to the Company’s projected taxable loss for the year ending December 31, 2020. Nor did the Company record a net deferred tax benefit, as any deferred tax asset arising from the benefit is reduced by a valuation allowance as utilization of the loss carryforwards and realization of other deferred tax assets cannot be reasonably assured.
A valuation allowance for deferred tax assets, including NOLs, is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which such taxable income is generated, to determine whether a valuation allowance is
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry.
We will continue to evaluate whether the valuation allowance is needed in future reporting periods. The valuation allowance will remain until we can determine that the net deferred tax assets are more likely than not to be realized. Future events or new evidence which may lead us to conclude that it is more likely than not that some or all of our net deferred tax assets will be realized include, but are not limited to, cumulative historical pre-tax earnings, improvements in oil prices, and taxable events that could result from one or more transactions. The valuation allowance does not prevent future utilization of the tax attributes if we recognize taxable income. As long as we conclude that the valuation allowance against our net deferred tax asset is necessary, we likely will not have any additional deferred income tax expense or benefit.
The benefit of an uncertain tax position taken or expected to be taken on an income tax return is recognized in the consolidated financial statements at the largest amount that is more likely than not to be sustained upon examination by the relevant taxing authority. Interest and penalties, if any, related to uncertain tax positions would be recorded in interest expense and other expense, respectively. There were no uncertain tax positions at June 30, 2020, or December 31, 2019.
As a result of the Prior Reorganization Plan and related transactions, the Company experienced an ownership change within the meaning of Internal Revenue Code (“IRC”) Section 382 on the Prior Effective Date. This ownership change subjected certain of the Company’s tax attributes, including $760,067 of federal net operating loss carryforwards, to an IRC Section 382 limitation. This limitation has not resulted in a current tax liability for the six month period ended June 30, 2020, or any intervening period since the Prior Effective Date. Since the Prior Effective Date ownership change, the Company has generated additional NOLs and other tax attributes that are not currently subject to an IRC Section 382 limitation. The Company’s ability to use NOLs and other tax attributes to reduce taxable income and income taxes could be materially impacted by a future IRC 382 ownership change. Future transactions involving the Company’s stock, including those outside of the Company’s control, could cause an IRC 382 ownership change resulting in a limitation on tax attributes currently not limited and a more restrictive limitation on tax attributes currently subject to the previous IRC 382 limitation.
Subleases expense
Subleases expense for the three months ended March 31, 2019, consisted of our expense on operating leases for CO2 compressors that we subleased to another operator in 2019. Please see “Note 1: Nature of operations and summary of significant accounting policies” and “Note 17: Leases” in “Item 8. Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2019, for a discussion of the subleases.
Reorganization items
Reorganization items reflect, where applicable, expenses, gains and losses incurred that are incremental and a direct result of the reorganization of the business resulting from the Prior Chapter 11 Cases and Prior Reorganization Plan. The reorganization items disclosed in our consolidated statement of operations consist of professional fees for continuing legal work to resolve outstanding claims and fees to the U.S. Bankruptcy Trustee, which we will continue to incur until both the Prior Chapter 11 Cases and the Chapter 11 Cases are closed.
Liability management expenses
Liability management expense includes third party legal and professional service fees incurred from our activities to restructure our debt and in preparation for our Chapter 11 Cases.
Litigation loss
The expense consists of our estimate of the settlement costs for the Naylor Farms Case as discussed in “Note 10: Commitments and Contingencies.”
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
Recently issued accounting pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard eliminates certain exceptions in the existing guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. The new guidance also clarifies certain aspects of the existing guidance, among other things. The standard is effective for interim and annual periods beginning after December 15, 2020 and shall be applied on either a prospective basis, a retrospective basis for all periods presented, or a modified retrospective basis through a cumulative-effect adjustment to retained earnings depending on which aspects of the new standard are applicable to an entity. The Company is in the process of evaluating the new standard and is unable to estimate its financial impact, if any, at this time.
Note 2: Earnings per share
A reconciliation of the components of basic and diluted EPS is presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
(in thousands, except share and per share data)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Numerator for basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(438,726)
|
|
|
$
|
(45,229)
|
|
|
$
|
(433,809)
|
|
|
$
|
(148,769)
|
|
|
Denominator for basic loss per share
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
45,949,797
|
|
|
45,641,797
|
|
|
45,890,041
|
|
|
45,549,518
|
|
|
Denominator for diluted loss per share
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
45,949,797
|
|
|
45,641,797
|
|
|
45,890,041
|
|
|
45,549,518
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(9.55)
|
|
|
$
|
(0.99)
|
|
|
$
|
(9.45)
|
|
|
$
|
(3.27)
|
|
|
Diluted
|
|
$
|
(9.55)
|
|
|
$
|
(0.99)
|
|
|
$
|
(9.45)
|
|
|
$
|
(3.27)
|
|
|
Participating securities excluded from loss per share calculations
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock units - stock settled
|
|
604,789
|
|
|
81,119
|
|
|
604,789
|
|
|
81,119
|
|
|
Unvested restricted stock awards
|
|
1,839,381
|
|
|
706,821
|
|
|
1,839,381
|
|
|
706,821
|
|
Note 3: Supplemental disclosures to the consolidated statements of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
Net cash provided by operating activities included:
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
16,942
|
|
|
$
|
16,328
|
|
|
Interest capitalized
|
|
(3,900)
|
|
|
(6,613)
|
|
|
Cash payments for reorganization items
|
|
1,189
|
|
|
857
|
|
|
Non-cash investing activities included:
|
|
|
|
|
|
Asset retirement obligation additions and revisions
|
|
133
|
|
|
386
|
|
|
Financing lease right of use asset additions (see Note 5: Leases)
|
|
—
|
|
|
1,387
|
|
|
Change in accrued oil and gas capital expenditures
|
|
(22,418)
|
|
|
7,024
|
|
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
Note 4: Debt
As of the dates indicated, long-term debt and financing leases consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
8.75% Senior Notes due 2023
|
|
$
|
300,000
|
|
|
$
|
300,000
|
|
|
Credit facility
|
|
225,000
|
|
|
130,000
|
|
|
Installment note payable
|
|
—
|
|
|
371
|
|
|
Financing lease obligations
|
|
1,442
|
|
|
1,653
|
|
|
Unamortized debt issuance costs
|
|
(4,154)
|
|
|
(10,038)
|
|
|
Total debt, net
|
|
522,288
|
|
|
421,986
|
|
|
Less current portion
|
|
521,292
|
|
|
594
|
|
|
Total long-term debt, net
|
|
$
|
996
|
|
|
$
|
421,392
|
|
Chapter 11 Cases and Effect of Automatic Stay. On August 16, 2020, 2020, the Debtors filed for relief under the Bankruptcy Code. The commencement, through the Chapter 11 Cases, of a voluntary proceeding in bankruptcy constituted an immediate event of default under the Credit Agreement and the Indenture, resulting in immediate acceleration of outstanding amounts under these financing arrangements. Any efforts to enforce payment obligations related to the Company’s debt, including the acceleration thereof, have been automatically stayed as a result of the Chapter 11 Cases, and the creditors’ rights of enforcement are subject to the applicable provisions of the Bankruptcy Code. As a result of the acceleration, we have classified the amounts outstanding under the Credit Agreement and Senior Notes as current liabilities on our condensed consolidated balance sheet as of June 30, 2020. For more information on the Chapter 11 Cases and related matters, refer to the “Note 1: Nature of operations and summary of significant accounting policies” and “Note 11: Subsequent events.”
Credit Agreement
Pursuant to our Credit Agreement with Royal Bank of Canada, as administrative agent and issuing bank, and the additional lenders party thereto, we have a $750,000 credit facility that is collateralized by our oil and natural gas properties and is scheduled to mature on December 21, 2022. Availability under our credit facility is subject to the financial covenants discussed below and a borrowing base based on the value of our oil and natural gas properties and set by the banks semi-annually on or around May 1 and November 1 of each year. Our borrowing base under the credit facility as of June 30, 2020, was $175,000 with no availability (see discussion of Borrowing Base Deficiency below).
As of June 30, 2020, our outstanding borrowings were accruing interest at the Adjusted LIBO Rate (as defined in the Credit Agreement, as defined below), plus the Applicable Margin (as defined in the Credit Agreement), which resulted in a weighted average interest rate of 3.19%.
The Credit Agreement contains financial covenants that require, for each fiscal quarter, us to maintain: (1) a Current Ratio (as defined in the Credit Agreement) of no less than 1.0 to 1.0, and (2) a Ratio of Total Debt to EBITDAX (as defined in the Credit Agreement) of no greater than 4.0 to 1.0 calculated on a trailing four-quarter basis.
The Credit Agreement contains covenants and events of default customary for oil and natural gas reserve-based lending facilities. Our Credit Agreement and Senior Notes include cross default provisions wherein a default on one instrument may cause default on the other. Please see “Note 8: Debt” in “Item 8. Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2019, for a discussion of the material provisions of our Credit Agreement.
On April 1, 2020, we borrowed $15,000, and on April 2, 2020, we provided notice to our lenders to borrow an additional $90,000 (the latter herein referred to as the “Borrowing”) which increased the total amount outstanding under the Credit Agreement to $250,000. The Borrowing was made by the Company as a precautionary measure in order to increase its cash position and thereby provide for flexibility in the current challenging business environment and associated uncertainties. Subsequent to the Borrowing, we were notified that our lenders had exercised their right to make an interim redetermination of the Company’s borrowing base. The lenders’ redetermination notice stated that the Company’s borrowing base was decreased from $325,000 to $175,000, effective April 3, 2020. Our lenders subsequently reaffirmed the borrowing base at the same level on May 5, 2020, in conjunction with our scheduled semi-annual redetermination process. As a result of the April 3, 2020 borrowing base redetermination, the Borrowing, once funded, created a borrowing base deficiency in the amount of $75,000 under the Credit Agreement (the “Borrowing Base Deficiency”). In accordance with the Credit Agreement the Company is allowed to eliminate such Borrowing Base Deficiency by repaying the amount of the Borrowing
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
Base Deficiency in six equal monthly installments. During the second quarter, we made two such payments totaling $25,000 plus interest between May 1 to June 1, 2020. A third payment of $12,500 was made in early July 2020. No premium or penalty was charged with respect to those repayments. We did not make the fourth installment payment of $12,500 that was due on August 3, 2020 (the “August Deficiency Payment”), which subsequently resulted in an event of default under the Credit Agreement and under the Indenture, as discussed further below.
On July 15, 2020, the Company entered into a Limited Forbearance Agreement with the lenders under its Credit Agreement (the “Lenders”). The Limited Forbearance Agreement included, among other things, a requirement that the Company terminate all of its outstanding commodity hedges and to apply a certain portion of the proceeds thereof toward partial repayment of the outstanding amount under the Credit Agreement. The Limited Forbearance Agreement was amended effective as of July 24, 2020, by the First Amendment to Limited Forbearance Agreement (the “First Amendment”) and was further amended effective July 29, 2020 by a Second Amendment (the “Second Amendment” and, as amended, such Limited Forbearance Agreement, the “Lender Forbearance Agreement”).
The forbearance period under the Lender Forbearance Agreement began on July 15, 2020 and was scheduled to expire on July 29, 2020, unless terminated earlier in accordance with the terms thereof. The Second Amendment extended the scheduled termination date to August 9, 2020, unless terminated earlier in accordance with the terms of the Forbearance Agreement. However, the Second Amendment permitted an extension of the scheduled termination date by mutual agreement of the Administrative Agent and the Company to any date up to and including August 14, 2020. The Administrative Agent and the Company agreed to extend the termination date to August 14, 2020. Subsequently, on August 14, 2020, the Lender Forbearance Agreement was further amended by a Third Amendment (the “Third Amendment” and, as amended, such Lender Forbearance Agreement, the “Final Lender Forbearance Agreement”), which, among other things, extended the scheduled termination date to August 17, 2020, unless terminated earlier in accordance with the terms of the Final Lender Forbearance Agreement.
Pursuant to the Final Lender Forbearance Agreement, the Lenders agreed, during the forbearance period, to forbear from exercising any remedies under the Credit Agreement for any default or event of default resulting from any failure by the Company or any of its subsidiaries to make all or any part of the required interest payment due on July 15, 2020 with respect to the Company’s Senior Notes (including the failure to make such payment during the 30-day grace period therefor), as discussed further below. Even though the indenture for the Senior Notes provides for a 30-day grace period before an event of default occurs under the indenture, the failure to make the interest payment on the due date constituted an event of default under the cross-default provisions of the Credit Agreement. The Company did not make the required interest payment of $13,125 on the due date or within the 30-day grace period. The Final Lender Forbearance Agreement also includes forbearance for the Company’s failure to timely pay the August Deficiency Payment under the Credit Agreement and the failure to timely deliver the quarterly financial statements for the period ended June 30, 2020 and the required accompanying officer’s certificate.
Pursuant to the Limited Forbearance Agreement with the lenders under our Credit Agreement, we terminated all our outstanding derivatives contracts on July 27, 2020 and applied a certain portion of the proceeds thereof toward partial repayment of the outstanding amount under the Credit Agreement, which we discuss in “Note 11: Subsequent events.”
Senior Notes
On June 29, 2018, we completed the issuance and sale at par of $300,000 in aggregate principal amount of our Senior Notes in a private placement under Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Senior Notes bear interest at a rate of 8.75% per year beginning June 29, 2018 (payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2019) and will mature on July 15, 2023.
The Senior Notes are the Company’s senior unsecured obligations and rank equal in right of payment with all of the Company’s existing and future senior indebtedness, senior to all of the Company’s existing and future subordinated indebtedness and effectively subordinated to all of the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing such indebtedness.
The Indenture contains customary covenants, certain mandatory redemption provisions and events of default. Please see “Note 8: Debt” in “Item 8. Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2019, for a discussion of the material provisions of our Senior Notes.
On July 15, 2020, the Company elected not to make the $13,125 interest payment on the Senior Notes due on that day. Under the Indenture, the Company has a 30-day grace period to make the interest payment before that non-payment constitutes an event of default. The 30-day grace period expires on August 14, 2020. However, as discussed above, the failure to make that interest payment on the Senior Notes constituted an event of default under cross-default provisions of the Credit Agreement.
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
Effective as of July 30, 2020, the Company and the holders of at least 75% of the principal amount of outstanding Senior Notes (the “Initial Consenting Noteholders”) entered into a Forbearance and Waiver Agreement (the “Noteholder Forbearance Agreement”). Pursuant to the Noteholder Forbearance Agreement, the Initial Consenting Noteholders agreed, during the forbearance period, to forbear from exercising certain remedies under the Indenture (including acceleration) for any default or event of default resulting from any failure by the Company to pay the August Deficiency Payment under the Credit Agreement on or before August 3, 2020. In addition, under the Noteholder Forbearance Agreement, subject to the occurrence of such an event of default, the Initial Consenting Noteholders have waived any such event of default and the consequences thereof under the Indenture. The forbearance period under the Noteholder Forbearance Agreement began on July 30, 2020 and was scheduled to expire on August 14, 2020. On August 14, 2020, the Company and the Initial Consenting Noteholders amended and restated the Noteholder Forbearance Agreement (such amendment and restatement, the “Amended and Restated Noteholder Forbearance Agreement”). Pursuant to the Amended and Restated Noteholder Forbearance Agreement, the Initial Consenting Noteholders agreed to extend the forbearance period to August 17, 2020 and to additionally forbear from exercising certain remedies under the Indenture (including acceleration) for any default or event of default resulting from any failure by the Company to make the required interest payment of $13,125 within the 30-day grace period described above.
Please see “Note 11: Subsequent events” for a discussion of the restructuring support agreement and the related proposed plan of reorganization.
As discussed above, our filing of the Chapter 11 Cases triggered an event of default on our Senior Notes. The event of default effectively allows the lender to demand immediate repayment, thus shortening the life of our Senior Notes to the current period. As a result, we wrote off the remaining balance of unamortized issuance costs in the amount of $4,420.
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
Note 5: Leases
We currently have financing leases that consist of fleet trucks and office equipment and an operating lease for the office space housing our headquarters. Please see “Note 17: Leases” in “Item 8. Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2019, for a discussion of these leases. We also have short term leases, which are those with lease terms of 12 months or less, and generally consist of wellhead compressors and drilling rigs with terms ranging from one month to six months. We do not recognize right of use assets or lease liabilities for leases with durations of 12 months or less.
Lease assets and liabilities
Our operating lease and financing lease assets and liabilities are recorded on our balance sheet as of June 30, 2020 as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
|
|
Operating leases
|
|
Financing leases
|
|
Right of use asset:
|
|
|
|
|
|
Right of use assets from operating leases
|
|
$
|
1,744
|
|
|
$
|
—
|
|
|
Plant, property and equipment, net
|
|
—
|
|
|
1,428
|
|
|
Total lease assets
|
|
$
|
1,744
|
|
|
$
|
1,428
|
|
|
Lease liability:
|
|
|
|
|
|
Account payable and accrued liabilities
|
|
$
|
1,331
|
|
|
$
|
—
|
|
|
Long-term debt and financing leases, classified as current
|
|
—
|
|
|
446
|
|
|
Long-term debt and financing leases, less current maturities
|
|
—
|
|
|
996
|
|
|
Noncurrent operating lease obligations
|
|
234
|
|
|
—
|
|
|
Total lease liabilities
|
|
$
|
1,565
|
|
|
$
|
1,442
|
|
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
Our income, expenses and cash flows related to our leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Lease cost
|
|
|
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
114
|
|
|
$
|
749
|
|
|
$
|
231
|
|
|
$
|
1,442
|
|
|
Interest on lease liabilities
|
|
26
|
|
|
117
|
|
|
53
|
|
|
230
|
|
|
Operating lease cost
|
|
389
|
|
|
308
|
|
|
779
|
|
|
616
|
|
|
Short-term lease cost
|
|
92
|
|
|
154
|
|
|
310
|
|
|
283
|
|
|
Variable lease cost
|
|
—
|
|
|
95
|
|
|
—
|
|
|
190
|
|
|
Sublease income
|
|
—
|
|
|
(1,198)
|
|
|
—
|
|
|
(2,396)
|
|
|
Total lease cost
|
|
$
|
621
|
|
|
$
|
225
|
|
|
$
|
1,373
|
|
|
$
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized operating lease cost (1)
|
|
$
|
—
|
|
|
$
|
3,371
|
|
|
$
|
—
|
|
|
$
|
6,706
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
|
|
|
Operating cash flows for finance leases
|
|
$
|
(26)
|
|
|
$
|
(117)
|
|
|
$
|
(53)
|
|
|
$
|
(230)
|
|
|
Operating cash flows for operating leases
|
|
(344)
|
|
|
(308)
|
|
|
(689)
|
|
|
(616)
|
|
|
Investing cash flows for operating leases
|
|
—
|
|
|
(2,965)
|
|
|
—
|
|
|
(3,988)
|
|
|
Financing cash flows for finance leases
|
|
(107)
|
|
|
(746)
|
|
|
(212)
|
|
|
(1,445)
|
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
—
|
|
|
717
|
|
|
—
|
|
|
1,387
|
|
________________________________
(1)The operating lease cost is related to drilling rigs with terms longer than 30 days and is capitalized as part of oil and natural gas properties on our balance sheets.
Note 6: Derivative instruments
Our results of operations, financial condition and capital resources are highly dependent upon the prevailing market prices of, and demand for, oil, natural gas and natural gas liquids. These commodity prices are subject to wide fluctuations and market uncertainties. To mitigate a portion of this exposure, we enter into various types of derivative instruments, including commodity price swaps, collars, and basis protection swaps.
The following table summarizes our crude oil derivatives outstanding as of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fixed price per Bbl
|
|
Period and type of contract
|
|
Volume
MBbls
|
|
Swaps
|
|
2020
|
|
|
|
|
|
Oil swaps
|
|
1,026
|
|
|
$
|
50.56
|
|
|
Oil roll swaps
|
|
180
|
|
|
$
|
0.30
|
|
|
2021
|
|
|
|
|
|
Oil swaps
|
|
689
|
|
|
$
|
46.24
|
|
|
Oil roll swaps
|
|
150
|
|
|
$
|
0.30
|
|
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
The following table summarizes our natural gas derivatives outstanding as of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period and type of contract
|
|
Volume
BBtu
|
|
Weighted average fixed price per MMBtu
|
|
2020
|
|
|
|
|
|
Natural gas swaps
|
|
3,000
|
|
|
$
|
2.75
|
|
|
Natural gas basis swaps
|
|
3,000
|
|
|
$
|
(0.46)
|
|
Effect of derivative instruments on the consolidated balance sheets
All derivative financial instruments are recorded on the balance sheet at fair value. See “Note 7: Fair value measurements” for additional information regarding fair value measurements. The estimated fair values of derivative instruments are provided below. The carrying amounts of these instruments are equal to the estimated fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
|
Net value
|
|
Assets
|
|
Liabilities
|
|
Net value
|
|
Natural gas derivative contracts
|
|
$
|
2,288
|
|
|
$
|
(500)
|
|
|
$
|
1,788
|
|
|
$
|
3,552
|
|
|
$
|
(1)
|
|
|
$
|
3,551
|
|
|
Crude oil derivative contracts
|
|
15,399
|
|
|
—
|
|
|
15,399
|
|
|
391
|
|
|
(22,196)
|
|
|
(21,805)
|
|
|
NGL derivative contracts
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,868
|
|
|
(699)
|
|
|
2,169
|
|
|
Total derivative instruments
|
|
17,687
|
|
|
(500)
|
|
|
17,187
|
|
|
6,811
|
|
|
(22,896)
|
|
|
(16,085)
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting adjustments (1)
|
|
(500)
|
|
|
500
|
|
|
—
|
|
|
(5,864)
|
|
|
5,864
|
|
|
—
|
|
|
Derivative instruments - current
|
|
15,197
|
|
|
—
|
|
|
15,197
|
|
|
947
|
|
|
(11,957)
|
|
|
(11,010)
|
|
|
Derivative instruments - long-term
|
|
$
|
1,990
|
|
|
$
|
—
|
|
|
$
|
1,990
|
|
|
$
|
—
|
|
|
$
|
(5,075)
|
|
|
$
|
(5,075)
|
|
________________________________
(1)Amounts represent the impact of master netting agreements that allow us to net settle positive and negative positions with the same counterparty. Positive and negative positions with counterparties are netted only to the extent that they relate to the same current versus noncurrent classification on the balance sheet.
Effect of derivative instruments on the consolidated statements of operations
We do not apply hedge accounting to any of our derivative instruments. As a result, all gains and losses associated with our derivative contracts are recognized immediately as “Derivative gains (losses)” in the consolidated statements of operations.
“Derivative gains (losses)” in the consolidated statements of operations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Change in fair value of commodity price derivatives
|
|
$
|
(35,934)
|
|
|
$
|
17,596
|
|
|
$
|
33,272
|
|
|
$
|
(33,935)
|
|
|
Net settlements received on commodity price derivatives
|
|
22,915
|
|
|
138
|
|
|
32,089
|
|
|
653
|
|
|
Total derivative gains (losses)
|
|
$
|
(13,019)
|
|
|
$
|
17,734
|
|
|
$
|
65,361
|
|
|
$
|
(33,282)
|
|
Pursuant to the Limited Forbearance Agreement with the lenders under our Credit Agreement, we terminated all our outstanding derivatives contracts on July 27, 2020 and applied a certain portion of the proceeds thereof toward partial repayment of the outstanding amount under the Credit Agreement, which we discuss in “Note 11: Subsequent events.”
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
Note 7: Fair value measurements
Fair value is 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. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.
We categorize fair value measurements based upon the level of judgment associated with the inputs used to measure the fair value of the assets and liabilities as follows:
•Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
•Level 2 inputs include quoted prices for identical or similar instruments in markets that are not active and inputs other than quoted prices that are observable for the asset or liability.
•Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the asset or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and may affect the placement of assets and liabilities within the levels of the fair value hierarchy.
Recurring fair value measurements
As of June 30, 2020, and December 31, 2019, our financial instruments recorded at fair value on a recurring basis consisted of commodity derivative contracts (see “Note 6: Derivative instruments”). We had no Level 1 assets or liabilities. Our derivative contracts classified as Level 2 consisted of commodity price swaps and oil roll swaps, which are valued using an income approach. Future cash flows from the commodity price swaps are estimated based on the difference between the fixed contract price and the underlying published forward market price. Our derivative contracts classified as Level 3 during the current year consisted of natural gas basis swaps and collars. The fair value of these contracts is developed by a third-party pricing service using a proprietary valuation model, which we believe incorporates the assumptions that market participants would have made at the end of each period. Observable inputs include contractual terms, published forward pricing curves, and yield curves. Significant unobservable inputs are implied volatilities and proprietary pricing curves. Significant increases (decreases) in implied volatilities in isolation would result in a significantly higher (lower) fair value measurement. We review these valuations and the changes in the fair value measurements for reasonableness. All derivative instruments are recorded at fair value and include a measure of our own nonperformance risk for derivative liabilities or our counterparty credit risk for derivative assets.
The fair value hierarchy for our financial assets and liabilities is shown by the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
Derivative
assets
|
|
Derivative
liabilities
|
|
Net assets
(liabilities)
|
|
Derivative
assets
|
|
Derivative
liabilities
|
|
Net assets
(liabilities)
|
|
Significant other observable inputs (Level 2)
|
|
$
|
17,687
|
|
|
$
|
—
|
|
|
$
|
17,687
|
|
|
$
|
6,576
|
|
|
$
|
(22,895)
|
|
|
$
|
(16,319)
|
|
|
Significant unobservable inputs (Level 3)
|
|
—
|
|
|
(500)
|
|
|
(500)
|
|
|
235
|
|
|
(1)
|
|
|
234
|
|
|
Netting adjustments (1)
|
|
(500)
|
|
|
500
|
|
|
—
|
|
|
(5,864)
|
|
|
5,864
|
|
|
—
|
|
|
|
|
$
|
17,187
|
|
|
$
|
—
|
|
|
17,187
|
|
|
$
|
947
|
|
|
$
|
(17,032)
|
|
|
$
|
(16,085)
|
|
________________________________
(1)Amounts represent the impact of master netting agreements that allow us to net settle positive and negative positions with the same counterparty. Positive and negative positions with counterparties are netted on the balance sheet only to the extent that they relate to the same current versus noncurrent classification.
Changes in the fair value of our derivative instruments, classified as Level 3 in the fair value hierarchy, were as follows for the periods presented:
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
Net derivative assets (liabilities)
|
|
2020
|
|
2019
|
|
Beginning balance
|
|
$
|
234
|
|
|
$
|
30
|
|
|
Realized and unrealized gains included in derivative losses
|
|
1,033
|
|
|
441
|
|
|
Settlements (received) paid
|
|
(1,767)
|
|
|
116
|
|
|
Ending balance
|
|
$
|
(500)
|
|
|
$
|
587
|
|
|
(Losses) gains relating to instruments still held at the reporting date included in derivative gains (losses) for the period
|
|
$
|
(430)
|
|
|
$
|
742
|
|
Nonrecurring fair value measurements
Asset retirement obligations. Additions to the asset and liability associated with our asset retirement obligations are measured at fair value on a nonrecurring basis. Our asset retirement obligations consist of the estimated present value of future costs to plug and abandon or otherwise dispose of our oil and natural gas properties and related facilities. Significant inputs used in determining such obligations include estimates of plugging and abandonment costs, inflation rates, discount rates, and well life, all of which are Level 3 inputs according to the fair value hierarchy. The table below discloses the inflation and discount rate assumptions for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
Inflation rate
|
|
2.21
|
%
|
|
2.25
|
%
|
|
Credit-adjusted risk-free discount rate (low)
|
|
25.00
|
%
|
|
12.35
|
%
|
|
Credit-adjusted risk-free discount rate (high)
|
|
25.00
|
%
|
|
14.60
|
%
|
These estimates may change based upon future inflation rates and changes in statutory remediation rules. See “Note 8: Asset retirement obligations” for additional information regarding our asset retirement obligations.
Fair value of other financial instruments
Our significant financial instruments, other than derivatives, consist primarily of cash and cash equivalents, accounts receivable, accounts payable, and debt. We believe the carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate fair values due to the short-term maturities of these instruments.
The carrying value and estimated fair value of our debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
Level 2
|
|
Carrying
value (1)
|
|
Estimated
fair value
|
|
Carrying
value (1)
|
|
Estimated
fair value
|
|
8.75% Senior Notes due 2023
|
|
$
|
300,000
|
|
|
$
|
30,000
|
|
|
$
|
300,000
|
|
|
$
|
133,050
|
|
|
Credit facility
|
|
225,000
|
|
|
225,000
|
|
|
130,000
|
|
|
130,000
|
|
|
Other secured debt (2)
|
|
—
|
|
|
—
|
|
|
371
|
|
|
371
|
|
________________________________
(1)The carrying value excludes deductions for debt issuance costs.
(2)The balance December 31, 2019, consisted of only equipment installment notes.
The carrying value of our credit facility and other secured long-term debt approximates fair value because the rates are comparable to those at which we could currently borrow under similar terms, are variable and incorporate a measure of our credit risk. The fair value of our Senior Notes was estimated based on quoted market prices.
Counterparty credit risk
Our derivative contracts are executed with institutions, or affiliates of institutions, that are parties to our credit facilities at the time of execution, and we believe the credit risks associated with all of these institutions are acceptable. We do not require collateral or other security from counterparties to support derivative instruments. Master agreements are in place with each of our derivative counterparties which provide for net settlement in the event of default or termination of the contracts under each respective agreement.
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
As a result of the netting provisions, our maximum amount of loss under derivative transactions due to credit risk is limited to the net amounts due from the counterparties under the derivatives. Our loss is further limited as any amounts due from a defaulting counterparty that is a Lender, or an affiliate of a Lender, under our credit facilities can be offset against amounts owed to such counterparty Lender. As of June 30, 2020, the counterparties to our open derivative contracts consisted of five financial institutions, all of which were lenders under our credit facility.
The following table summarizes our derivative assets and liabilities which are offset in the consolidated balance sheets under our master netting agreements. It also reflects the amounts outstanding under our credit facilities that are available to offset our net derivative assets due from counterparties that are lenders under our credit facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offset in the consolidated balance sheets
|
|
|
|
|
|
Gross amounts not offset in the consolidated balance sheets
|
|
|
|
|
|
|
|
Gross assets
(liabilities)
|
|
Offsetting assets
(liabilities)
|
|
Net assets
(liabilities)
|
|
Derivatives (1)
|
|
Amounts
outstanding
under credit
facilities (2)
|
|
Net amount
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
17,687
|
|
|
$
|
(500)
|
|
|
$
|
17,187
|
|
|
$
|
—
|
|
|
$
|
(17,187)
|
|
|
$
|
—
|
|
|
Derivative liabilities
|
|
(500)
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
$
|
17,187
|
|
|
$
|
—
|
|
|
$
|
17,187
|
|
|
$
|
—
|
|
|
$
|
(17,187)
|
|
|
$
|
—
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
6,811
|
|
|
$
|
(5,864)
|
|
|
$
|
947
|
|
|
$
|
—
|
|
|
$
|
(947)
|
|
|
$
|
—
|
|
|
Derivative liabilities
|
|
(22,896)
|
|
|
5,864
|
|
|
(17,032)
|
|
|
—
|
|
|
947
|
|
|
(16,085)
|
|
|
|
|
$
|
(16,085)
|
|
|
$
|
—
|
|
|
$
|
(16,085)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(16,085)
|
|
________________________________
(1)Since positive and negative positions with a counterparty are netted on the balance sheet only to the extent that they relate to the same current versus noncurrent classification, these represent remaining amounts that could have been offset under our master netting agreements.
(2)The amount outstanding under our credit facility that is available to offset our net derivative assets due from counterparties that are lenders under our credit facility.
We did not post additional collateral under any of these contracts as all of our counterparties are secured by the collateral under our credit facilities. Payment on our derivative contracts could be accelerated in the event of a default under our Credit Agreement. The aggregate fair value of our derivative liabilities subject to acceleration in the event of default was $500 before offsets at June 30, 2020.
Pursuant to the Limited Forbearance Agreement with the lenders under our Credit Agreement, we terminated all our outstanding derivatives contracts on July 27, 2020 and applied a certain portion of the proceeds thereof toward partial repayment of the outstanding amount under the Credit Agreement, which we discuss in “Note 11: Subsequent events.”
Note 8: Asset retirement obligations
The following table provides a summary of our asset retirement obligation activity:
|
|
|
|
|
|
|
|
Balance at January 1, 2020
|
$
|
23,156
|
|
|
Liabilities incurred in current period
|
84
|
|
|
Liabilities settled or disposed in current period
|
(419)
|
|
|
Revisions in estimated cash flows
|
49
|
|
|
Accretion expense
|
649
|
|
|
Balance at June 30, 2020
|
$
|
23,519
|
|
|
Less current portion included in accounts payable and accrued liabilities
|
2,107
|
|
|
Asset retirement obligations, long-term
|
$
|
21,412
|
|
See “Note 7: Fair value measurements” for additional information regarding fair value assumptions associated with our asset retirement obligations.
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
Note 9: Deferred compensation
Our deferred compensation includes cash awards and equity-based awards which are either settled in cash or in stock.
Cash Awards
From time to time, we have granted cash awards with long term vesting requirements. Our cash awards, which are generally service-based, vest either in one year, in annual increments over a three year period or in annual increments over a four-year period. We accrue for the cost of each annual increment over the period that service is required to vest. A summary of compensation expense for our cash awards is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Cash LTIP expense (net of amounts capitalized)
|
|
$
|
187
|
|
|
$
|
67
|
|
|
$
|
354
|
|
|
$
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020, the outstanding liability accrued for our Cash LTIP, based on requisite service provided, was $1,366.
Equity Awards
The Company’s outstanding equity based awards have been granted under the 2017 Chaparral Energy, Inc. Management Incentive Plan (the “MIP”) and the Chaparral Energy, Inc. 2019 Long-Term Incentive Plan (the “LTIP”), which replaced the MIP in June 2019. Our equity grants have been in the form or restricted stock awards (“restricted shares”) and restricted stock units (“RSUs”). In December 2019, we also granted restricted shares to our recently appointed chief executive officer under an inducement equity grant that is exempted from the general requirement of the NYSE rules that require equity-based compensation plans and arrangements to be approved by stockholders. The LTIP provides for the following types of awards: options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other incentive awards. The aggregate number of shares of Class A common stock, par value $0.01 per share, reserved for issuance pursuant to the LTIP is set at 3,500,000. Please see “Note 13: Deferred Compensation” in “Item 8. Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2019, for further details on the MIP, the LTIP as well as the nature and vesting requirements for our restricted shares and RSUs.
A summary of our restricted share activity is presented below:
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Shares
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|
|
|
|
|
Performance Shares
|
|
|
|
|
|
Weighted
average
award date
fair value
|
|
Restricted
shares
|
|
Vest
date
fair
value
|
|
Weighted
average
award date
fair value
|
|
Restricted
shares
|
|
|
|
($ per share)
|
|
|
|
|
|
($ per share)
|
|
|
|
Unvested and outstanding at January 1, 2020
|
|
$
|
5.41
|
|
|
1,069,505
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|
|
|
|
$
|
1.53
|
|
|
1,089,343
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|
|
Granted
|
|
$
|
—
|
|
|
—
|
|
|
|
|
$
|
—
|
|
|
—
|
|
|
Vested
|
|
$
|
15.71
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|
|
(203,888)
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|
|
$
|
130
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|
|
$
|
—
|
|
|
—
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|
|
Forfeited
|
|
$
|
8.87
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|
|
(82,658)
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|
|
|
|
$
|
6.94
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|
|
(20,833)
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|
|
Cancelled
|
|
$
|
20.05
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|
|
(12,088)
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|
|
|
|
$
|
—
|
|
|
—
|
|
|
Unvested and outstanding at June 30, 2020
|
|
$
|
2.09
|
|
|
770,871
|
|
|
|
|
$
|
1.33
|
|
|
1,068,510
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|
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
A summary of our RSU activity is presented below:
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Equity classified RSUs
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|
|
|
|
|
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Service-condition RSUs
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|
|
|
|
Market condition RSUs
|
|
|
|
|
|
Weighted average
award date fair value
|
|
Restricted
units
|
|
Vest date
fair value
|
|
Weighted average
award date
fair value
|
|
Restricted
units
|
|
|
|
($ per share)
|
|
|
|
|
|
($ per share)
|
|
|
|
Unvested and outstanding at January 1, 2020
|
|
$
|
2.41
|
|
|
638,383
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|
|
|
|
$
|
1.36
|
|
|
390,000
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|
|
Granted
|
|
$
|
1.95
|
|
|
4,500
|
|
|
|
|
$
|
—
|
|
|
—
|
|
|
Vested
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
Forfeited
|
|
$
|
1.56
|
|
|
(228,094)
|
|
|
|
|
$
|
1.36
|
|
|
(200,000)
|
|
|
Unvested and outstanding at June 30, 2020
|
|
$
|
2.87
|
|
|
414,789
|
|
|
|
|
$
|
1.36
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability classified RSUs
|
|
|
|
|
|
|
|
Weighted average
award date fair value
|
|
Restricted
units
|
|
Vest date
fair value
|
|
|
|
($ per share)
|
|
|
|
|
|
Unvested and outstanding at January 1, 2020
|
|
$
|
4.57
|
|
|
75,779
|
|
|
|
|
Granted
|
|
$
|
—
|
|
|
—
|
|
|
|
|
Vested
|
|
$
|
1.33
|
|
|
(60,000)
|
|
|
$
|
41
|
|
|
Forfeited
|
|
$
|
17.66
|
|
|
(1,515)
|
|
|
|
|
Unvested and outstanding at June 30, 2020
|
|
$
|
16.83
|
|
|
14,264
|
|
|
|
Stock-based compensation cost
Compensation cost is calculated net of forfeitures. We recognize the impact of forfeitures due to employee terminations in expense as those forfeitures occur instead of incorporating an estimate of such forfeitures. For awards with performance conditions, we will assess the probability that a performance condition will be achieved at each reporting period to determine whether and when to recognize compensation cost. For awards with market conditions, expense is recognized on the entire value of the award regardless of the vesting outcome so long as the participant remains employed.
A portion of stock-based compensation cost associated with employees involved in our acquisition, exploration, and development activities has been capitalized as part of our oil and natural gas properties. The remaining cost is reflected in lease operating and general and administrative expenses in the consolidated statements of operations. Stock-based compensation expense is as follows for the periods indicated:
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|
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|
|
|
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|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Stock-based compensation cost
|
|
$
|
101
|
|
|
$
|
1,260
|
|
|
$
|
771
|
|
|
$
|
2,720
|
|
|
Less: stock-based compensation cost capitalized
|
|
(7)
|
|
|
(399)
|
|
|
(281)
|
|
|
(1,025)
|
|
|
Stock-based compensation expense
|
|
$
|
94
|
|
|
$
|
861
|
|
|
$
|
490
|
|
|
$
|
1,695
|
|
|
Number of vested shares repurchased or settled in cash
|
|
92,649
|
|
|
126,231
|
|
|
96,505
|
|
|
206,653
|
|
|
Payments for stock-based compensation
|
|
53
|
|
|
708
|
|
|
59
|
|
|
1,171
|
|
Based on a quarter end market price of $0.65 per share of our Class A common stock, the aggregate intrinsic value of all restricted shares and RSUs outstanding was $1,593 as of June 30, 2020. Payments for restricted shares and the associated number of shares repurchased are reflected as treasury stock transactions in our consolidated statements of equity. As of June 30, 2020, and December 31, 2019, accrued payroll and benefits payable included for stock-based compensation costs expected to be settled within the next
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
twelve months were $45 and $52, respectively, all of which relates to our cash-settled RSUs. Unrecognized stock-based compensation cost of approximately $1,357 as of June 30, 2020, is expected to be recognized over a weighted-average period of 1.3 years.
Note 10: Commitments and contingencies
Standby letters of credit (“Letters”) available under our credit facility may be used in lieu of surety bonds with various organizations for liabilities relating to the operation of oil and natural gas properties. We had Letters outstanding totaling nil as of June 30, 2020 and nil as of December 31, 2019. When amounts under the Letters are paid by the lenders, interest accrues on the amount paid at the same interest rate applicable to borrowings under the credit facility. No amounts were paid by the lenders under the Letters; therefore, we paid no interest on the Letters during the six months ended June 30, 2020 or 2019.
Surety bonds totaling $2,121 were posted on our behalf as of June 30, 2020. We pay premiums for such bonds and, under normal circumstances, are not required to post collateral of any kind to support their issuance. However, as a result of the current extraordinary macroeconomic situation and the Borrowing Base Deficiency discussed above, we have been required to post cash collateral in respect of the bonds totaling $950.
Litigation and Claims
Prior Chapter 11 Cases. Commencement of the Prior Chapter 11 Cases automatically stayed many of the proceedings and actions against us noted below as well as other claims and actions that were or could have been brought prior to May 9, 2016 (the “Prior Petition Date”), and the claims remain subject to Bankruptcy Court jurisdiction. With respect to the proofs of claim asserted in the Prior Chapter 11 Cases arising from the proceedings or actions below that were initiated prior to the Prior Petition Date, we are unable to estimate the amount of such claims that will be allowed by the Bankruptcy Court due to, among other things, the complexity and number of legal and factual issues which are necessary to determine the amount of such claims and uncertainties related to the nature of defenses asserted in connection with the claims, the potential size of the putative classes, and the types of the properties and scope of agreements related to such claims. As a result, no reserves were established in respect of such proofs of claims or any of the proceedings or actions described below. To the extent that any of the legal proceedings were filed that relate to one or more claims accruing prior to the Prior Petition Date and that result in a claim being allowed against us, pursuant to the terms of the Prior Reorganization Plan, such claims would be satisfied through the issuance of new stock in the Company or, if the amount of such claim is below the convenience class threshold, through cash settlement, in each case subject to their further treatment prescribed by the Plan of Reorganization, assuming its ultimate approval.
Naylor Farms, Inc., individually and as class representative on behalf of all similarly situated persons v. Chaparral Energy, L.L.C. (the “Naylor Farms case”). On June 7, 2011, an alleged class action was filed against us in the United States District Court for the Western District of Oklahoma (“Naylor Trial Court”) alleging that we improperly deducted post-production costs from royalties paid to plaintiffs and other non-governmental Royalty Interest owners from crude oil and natural gas wells we operate in Oklahoma. The plaintiffs have alleged a number of claims, including breach of contract, fraud, breach of fiduciary duty, unjust enrichment, and other claims and seek termination of leases, recovery of compensatory damages, interest, punitive damages and attorney fees on behalf of the alleged class. Plaintiffs indicated they seek damages in excess of $5,000, the majority of which consist of interest and may increase with the passage of time. We responded to the Naylor Farms petition, denied the allegations and raised arguments and defenses. Plaintiffs filed a motion for class certification in October 2015. In addition, the plaintiffs filed a motion for summary judgment asking the Naylor Trial Court to determine as a matter of law that natural gas is not marketable until it is in the condition and location to enter an interstate pipeline. On May 20, 2016, we filed a Notice of Suggestion of Bankruptcy with the Naylor Trial Court. Subsequently the bankruptcy stay was lifted for the limited purpose of determining the class certification issue.
On January 17, 2017, the Naylor Trial Court certified a modified class of plaintiffs with oil and gas leases containing specific language. The modified class constitutes less than 60% of the leases the plaintiffs originally sought to certify. After additional briefing on the subject, on April 18, 2017, the Naylor Trial Court issued an order certifying the class to include only claims relating back to June 1, 2006. On May 3, 2019, our appeal of that class certification was denied by the Tenth Circuit Court of Appeals.
In addition to filing claims on behalf of the named and putative plaintiffs, on August 15, 2016, plaintiffs’ attorneys filed a proof of claim on behalf of the putative class claiming damages in excess of $150,000 in our Prior Chapter 11 Cases. The Company objected to treatment of the claim on a class basis, asserting the claim should be addressed on an individual basis. On April 20, 2017, plaintiffs filed an amended proof of claim reducing the claim to an amount in excess of $90,000 inclusive of actual and punitive damages, statutory interest and attorney fees. On May 24, 2017, the Bankruptcy Court denied the Company’s objection, ruling the plaintiffs
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
may file a claim on behalf of the class. This order did not establish liability or otherwise address the merits of the plaintiffs’ claims. The Bankruptcy Court order was affirmed by the United States District Court for the District of Delaware on September 24, 2019. On October 24, 2019, the Company filed its notice of appeal to the United States Court of Appeals for the Third Circuit.
During the period leading up to the commencement of the Chapter 11 Case, the Company engaged in settlement negotiations with counsel to the plaintiffs in the Naylor Farms case. On July 6, 2020, after multiple rounds of negotiations, the Company and the class representatives reached an agreement in principle on the terms of a settlement and, on August 15, 2020, the Company and the class representatives entered into a settlement agreement (the “Settlement Agreement”) to settle all claims related to the Naylor Farms case, including, for the avoidance of doubt, all alleged claims arising prior to the petition date in the Prior Chapter 11 Cases and all alleged claims arising thereafter.
Pursuant to the Settlement Agreement, the Company has agreed to:
•pay $2,500 to the settlement class;
•pay $850 to counsel to the settlement class for attorney fees, in exchange for a release of all liens or claims asserted by all counsel related to the Naylor Farms case;
•pay $150 to the class representative for services rendered as class representative; and
•allow the class proof of claim filed in the Prior Chapter 11 Case in an aggregate amount of $45,000 (provided that all other individual proofs of claims filed for similar claims are withdrawn).
The effectiveness of the settlement is subject to numerous conditions precedent, including approval by the Bankruptcy Court. Upon the Bankruptcy Court’s final approval of the Settlement Agreement, the members of the class who do not opt out of the settlement will provide the Company with a release of all past and present claims with respect to the allegations in the Naylor Farms case, and the Naylor Farms case and the Third Circuit appeal will be dismissed with prejudice.
Upon the final approval of the Settlement Agreement and the effectiveness of the settlement, the plaintiffs, in full satisfaction, settlement, discharge, and release of their claims asserted in the Prior Chapter 11 Cases, shall be deemed to hold 1,432,300 shares of Class A common stock in Chaparral Energy, Inc. as of the Petition Date on account of the $45,000 allowed class proof of claim and shall be entitled to receive any distribution under the Plan provided to holders of equity interests who do not hold through the Depository Trust Corporation (the “DTC”) or whose interests arise in connection with claims pending in the Prior Chapter 11 Cases, subject to a cap.
W.H. Davis Family Limited Partnership Claims in the Company’s Prior Chapter 11 Cases (the “W. H. Davis case”). The W. H. Davis Family Limited Partnership and affiliates (collectively, “Davis”) filed Proofs of Claim in the Company’s Prior Chapter 11 Cases. Davis claimed that Chaparral owed Davis $17,262 as the result of Chaparral’s alleged diversion of CO2 from the Camrick Unit and the North Perryton Unit to the Farnsworth Unit. All these units were divested by the Company as part of its EOR asset sale in November 2017. While the Company denies all claims asserted by Davis, the Company determined it was prudent to explore settlement of the claims. Accordingly, the Company and Davis agreed at mediation to settle Davis’ claims for an allowed claim of $2,650 in Class 6 under the Prior Reorganization Plan, which agreement was memorialized in a settlement term sheet executed by both parties on the day of the mediation, a settlement agreement executed by both parties thereafter, and a settlement stipulation executed by both parties that was filed with the Bankruptcy Court. Davis subsequently contested the enforcement of the settlement under its terms, claiming that Davis was mistaken in its understanding of the terms of the Prior Reorganization Plan as relate to Class 6 claims. On August 14, 2020, Davis stipulated to the termination of such contest without payment by the Company of any consideration therefor.
We are involved in various other legal proceedings including, but not limited to, commercial disputes, claims from royalty and surface owners (including those alleging damages from induced earthquakes), property damage claims, quiet title actions, personal injury claims, employment claims, and other matters which arise in the ordinary course of business. In addition, other proofs of claim have been filed in our bankruptcy case which we anticipate repudiating. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect any of them individually to have a material effect on our financial condition, results of operations or cash flows.
Contractual obligations
We have numerous contractual commitments in the ordinary course of business including debt service requirements, operating leases, financing leases, well drilling obligations and purchase obligations. Our operating leases currently consist of an office space lease at our headquarters and our financing leases consist of leases on our fleet vehicles and office equipment. We have a well drilling commitment under the terms of leasehold purchase agreements which we entered into in 2017. The drilling commitment requires the
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
Company to drill and complete 10 wells on such leasehold in each of 2019, 2020, and 2021 and 15 wells in 2022. To the extent the Company does not drill and complete the minimum number of wells in a given year, it is required to pay the sellers of the acreage $250 for each deficient well. The Company has paid the deficiency amount related to its 2019 drilling commitment and recorded an accrual of $2,500 in March 2020 for the deficiency on its 2020 drilling commitment and recorded an additional accrual of $6,250 in June 2020 for the remaining obligation as it does not intend to drill any further wells on the subject acreage.
Other than additional borrowings under our credit facility and the Borrowing Base Deficiency described in “Note 4: Debt” and the termination of our derivative contracts discussed below, we did not have material changes to our contractual commitments since December 31, 2019.
Note 11: Subsequent events
As discussed in “Note 4: Debt”, the Lender Forbearance Agreement required us to terminate all our outstanding derivative contracts and to apply a certain portion of the proceeds thereof toward partial repayment of the outstanding amount under the Credit Agreement. Pursuant to this requirement, on July 27, 2020, the Company terminated all its outstanding derivative contracts. Proceeds from the early termination along with amounts owed to the Company from previously settled positions totaled $28,237. Of this amount, $24,000 was applied toward repayment on outstanding credit facility borrowings and the remainder was retained by the Company. The amount applied toward debt repayment versus the amount retained by the Company was determined under the terms of the Lender Forbearance Agreement.
On August 15, 2020, the Debtors entered into a restructuring support agreement (the “RSA”) with (i) certain lenders under our Credit Agreement and (ii) certain holders of our Senior Notes (the “Restructuring Support Parties”). Pursuant to the RSA, the Restructuring Support Parties agreed, subject to the terms and conditions of the RSA, to vote to accept the Debtors’ prepackaged Joint Chapter 11 Plan of Reorganization (as proposed, our “Plan of Reorganization”). Our Plan of Reorganization and the related disclosure statement (the “Disclosure Statement”) were each filed with the Bankruptcy Court on August 16, 2020. Below is a summary of certain material terms of the RSA and the treatment that the stakeholders of the Company would receive under the Plan of Reorganization:
•The RSA includes certain milestones for the progress of the Chapter 11 Cases, which include the dates by which the Company is required to, among other things, obtain certain court orders and consummate the transactions contemplated therein. Failure to meet these milestones allows the RSA to be terminated by the non-Company signatories thereto. In addition, the signatories to the RSA will have the right to terminate the RSA under certain circumstances, including if the board of directors of the Company determines in good faith that performance under the RSA would be inconsistent with its fiduciary duties as set forth therein. The Plan of Reorganization remains subject to approval by the Bankruptcy Court and the satisfaction of certain conditions precedent.
•The Company will emerge from Chapter 11 with a $300,000 exit credit facility (the “Exit Facility”). The Exit Facility will include (A) second out term loans (the “Second Out Term Loans”) in an amount to be determined, which will have a maturity date that is one year and 91 days following the Revolving Maturity Date (defined below) and (B) a revolving facility (the maturity date of which will be the earlier of May 31, 2024 or 40 months after emergence (the “Revolving Maturity Date”)) that has an initial borrowing base equal to (i) the lesser of (a) $175,000 or (b) the Company’s proved developed producing reserves on a PV-15 basis, plus hedges, on 6-month roll-forward basis minus (ii) the aggregate amount of the Second Out Term Loans. There must be a minimum of $20,000 of availability under the Exit Facility at emergence.
•The Company will raise $35,000 through a fully backstopped new money rights offering (the “Rights Offering”) of second-lien senior notes convertible into New Common Stock (as defined below) (the “2L Convertible Notes”) issued at par. The Convertible Notes will be convertible into shares of New Common Stock equal to 50% of the New Common Stock outstanding upon the reorganized Company’s emergence from bankruptcy (subject to certain anti-dilution protection) and will have the following terms:
◦they will have a maturity date of May 31, 2025 or 52 months after emergence, whichever is earlier;
◦they will bear interest at a rate of 9% per annum (if paid in cash), or 13% per annum (if paid in kind with additional principal);
◦interest must be paid in kind with additional principal if the Company’s liquidity is less than $20,000 at the time of such payment.
•On August 15, 2020, the Debtors entered into a Backstop Purchase Agreement (the “Backstop Purchase Agreement”) with the backstop parties named therein (the “Backstop Parties”). The Backstop Parties are obligated to fund, if necessary, the
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
entirety of the initial $35,000 principal amount. In exchange for that commitment, such holders will receive a put option premium (the “Put Option Premium”) equal to 10% of the total issued and outstanding shares of new common stock of the reorganized Company (the “New Common Stock”) prior to dilution by the Management Incentive Plan (as defined below), the Warrants (as defined below) and the conversion of the 2L Convertible Notes. The Convertible Notes will be convertible into shares of New Common Stock equal to 50% of New Common Stock outstanding upon the reorganized Company’s emergence from bankruptcy (subject to certain anti-dilution protection). If the Backstop Purchase Agreement is terminated (subject to certain exceptions, including a termination of the Backstop Purchase Agreement by the Company as a result of a breach by the Backstop Parties), the Debtors will be required to pay the Put Option Premium in a cash amount equal to $2,625 in lieu of New Common Stock. The transactions contemplated by the Backstop Purchase Agreement are conditioned upon the satisfaction or waiver of customary conditions for transactions of this nature, including among other things that (i) the Bankruptcy Court shall have confirmed the Plan and (ii) all Convertible Notes have been, or concurrently with the Closing will be, subscribed for or purchased pursuant to the Backstop Purchase Agreement.
•The reorganized Company will adopt a management incentive plan (the “Management Incentive Plan”), which will provide for the issuance of equity and/or equity based awards for up to 7% of the new common equity issued by the reorganized Company, the terms and conditions of which will be determined by the reorganized Company’s new board members within 30 days after emergence.
•Holders of Credit Agreement Claims
◦Lenders under the Credit Agreement will receive, on account of their prepetition loans, (i) their pro rata share of cash in the amount of the difference between their outstanding loans as of the effective date of the Plan of Reorganization and the initial borrowing base under the Exit Facility and (ii) with respect to lenders who agree to provide revolving commitments under the Exit Facility, their pro rata share of an additional amount of cash in excess of $5,000 (less cash payments scheduled to be made as severance payments to former officers and employees at or around emergence in accordance with the terms of the severance settlement agreements in an amount not to exceed $1,220 and less other cash payments required to be made at or around exit pursuant to the Plan of Reorganization) and new first-lien first-out revolving loans on account of their remaining prepetition loans and, with respect to lenders electing not to provide revolving commitments under the Exit Facility, new first-lien second-out term loans on account of their remaining prepetition loans.
•Holders of Senior Notes
◦At emergence, each holder of Senior Notes will receive its pro rata share of (i) 100% of the New Common Stock, subject to dilution by any New Common Stock issued in connection with the Management Incentive Plan, Warrants (as defined below), conversion of the 2L Convertible Notes and the Put Option Premium, and obligations in respect of the Senior Notes would be extinguished and (ii) rights to participate pro rata in the Rights Offering of the 2L Convertible Notes.
•Holders of Other Claims
◦Except as otherwise provided in the Plan of Reorganization, all other claims, including general unsecured claims, will receive treatment that renders them unimpaired under the Bankruptcy Code.
•Existing Equityholders
◦All of the Company's existing common stock and other equity interests will be cancelled without any distribution to the holders of such common stock and other equity interests on account thereof.
◦However, holders of the Company's existing common stock and certain other equity interests that do not object to the Plan of Reorganization or opt out of the releases contained in the Plan of Reorganization (the “Eligible Common Stockholders”) are entitled to receive their ratable share of $1,200 in cash and the package of cashless exercise warrants described below (or in the case of certain holders of equity interests who do not hold through the DTC, cash in an amount equal to $0.01508 per share in lieu of such warrants). As of the date hereof, the Company has 47,790,146 shares of common stock outstanding.
◦The cashless exercise warrants distributable pro rata to the Eligible Common Stockholders (the “Warrants”) will be exercisable for (i) 5% of the New Common Stock issued by the reorganized Company at emergence, with a $300,000 equity value strike price and 4-year term and (ii) 5% of the New Common Stock issued by the reorganized Company at emergence with a $350,000 equity value strike price and 5-year term. The Warrants will be subject to dilution by New Common Stock issued in connection with the Management Incentive Plan, the Put Option Premium, and any conversion of the 2L Convertible Notes.
Chaparral Energy, Inc. and subsidiaries
Condensed notes to consolidated financial statements (unaudited)
(dollars in thousands, except per share amounts)
•Claimants in the Prior Chapter 11 Cases
◦Holders of claims in the Prior Chapter 11 Cases that are classified in Class 6 or Class 8 in the Prior Reorganization Plan, if and when their claims are allowed, that do not object to the Plan of Reorganization or opt out of the releases contained in the Plan of Reorganization will receive an equivalent amount of cash as such Eligible Common Stockholders who do not hold through the DTC. Distributions to holders of such claims in the Prior Chapter 11 Cases after the effective date of the Plan of Reorganization will be capped at $150.