UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20142017
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 001‑31899
| | |
| WHITING PETROLEUM CORPORATION | |
| (Exact name of Registrantregistrant as specified in its charter) | |
| | |
Delaware | | 20‑0098515 |
(State or other jurisdiction
of incorporation or organization) | | (I.R.S. Employer
Identification No.) |
| | |
1700 Broadway, Suite 2300
Denver, Colorado | | 80290‑2300 |
(Address of principal executive offices) | | (Zip code) |
| | |
| (303) 837‑1661 | |
| (Registrant’s telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act:
| |
Common Stock, $0.001 par value Preferred Share Purchase Rights
| New York Stock Exchange
New York Stock Exchange |
(Title of Class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the Registrantregistrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrantregistrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act. Yes ☐ No ☒
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐☒
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”filer”, “accelerated filer”, “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | |
Large accelerated filer | ☒ | Accelerated filer ☐
| Non-accelerated filer ☐
| Smaller reporting company | ☐ |
Accelerated filer | ☐ | | Emerging growth company | ☐ |
Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Aggregate market value of the voting common stock held by non-affiliates of the Registrantregistrant at June 30, 2014: $9,569,978,297.2017: $2,002,000,000.
Number of shares of the Registrant’sregistrant’s common stock outstanding at February 13, 2015: 167,041,05415, 2018: 90,927,193 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 20152018 Annual Meeting of Stockholders are incorporated by reference into Part III.
TABLE OF CONTENTS
glossary of Certain Definitions
Unless the context otherwise requires, the terms “we,” “us,”“we”, “us”, “our” or “ours” when used in this Annual Report on Form 10-K refer to Whiting Petroleum Corporation, together with its consolidated subsidiaries. When the context requires, we refer to these entities separately.
We have included below the definitions for certain terms used in this Annual Report on Form 10-K:
“3-D seismic” Geophysical data that depict the subsurface strata in three dimensions. 3-D seismic typically provides a more detailed and accurate interpretation of the subsurface strata than 2-D, or two-dimensional, seismic.
“ASC” Accounting Standards Codification.
“Bbl” One stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to oil, NGLs and other liquid hydrocarbons.
“Bcf” One billion cubic feet, used in reference to natural gas or CO2.gas.
“BOE” One stock tank barrel of oil equivalent, computed on an approximate energy equivalent basis that one Bbl of crude oil equals six Mcf of natural gas and one Bbl of crude oil equals one Bbl of natural gas liquids.
“COBtu”2 or ” Carbon dioxide.“British thermal unit” The quantity of heat required to raise the temperature of one pound of water one degree Fahrenheit.
“CO2 flood” A tertiary recovery method in which CO2” is injected into a reservoir to enhance hydrocarbon recovery.Carbon dioxide.
“completion” The process of preparing an oil and gas wellbore for production through the installation of permanent production equipment, for the production of crude oil or natural gas, or in the case of a dry hole, the reporting of abandonmentas well as perforation and fracture stimulation to the appropriate agency.optimize production.
“costless collar” An optionsoption position where the proceeds from the sale of a call option at its inception fund the purchase of a put option at its inception.
“delay rental” Consideration paid to the lessor by a lessee to extend the terms of an oil and natural gas lease in the absence of drilling operations and/or production that is contractually required to hold the lease. This consideration is generally required to be paid on or before the anniversary date of the oil and gas lease during its primary term, and typically extends the lease for an additional year.
“deterministic method” The method of estimating reserves or resources using a single value for each parameter (from the geoscience, engineering or economic data) in the reserves calculation.
“development well” A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
“differential” The difference between a benchmark price of oil and natural gas, such as the NYMEX crude oil spot price, and the wellhead price received.
“dry hole” A well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.
“EOR” Enhanced oil recovery.
“exploratory well” A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir. Generally, an exploratory well is any well that is not a development well, an extension well, a service well or a stratigraphic test well.
“extension well” A well drilled to extend the limits of a known reservoir.
“FASB” Financial Accounting Standards Board.
“FASB ASC” The Financial Accounting Standards Board Accounting Standards Codification.
“field” An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. There may be two or more reservoirs in a field that are separated vertically by intervening impervious strata, or laterally by local geologic barriers, or both. Reservoirs that are associated by being in overlapping or adjacent fields may be treated as a single or common operational field. The geological terms “structural feature” and “stratigraphic
condition” are intended to identify localized geological features as opposed to the broader terms of basins, trends, provinces, plays, areas of interest, etc.
“GAAP” Generally accepted accounting principles in the United States of America.
“gross acresacres” or “gross wells” The total acres or wells, as the case may be, in which a working interest is owned.
“ISDA” International Swaps and Derivatives Association, Inc.
“lease operating expense” or “LOE” The expenses of lifting oil or gas from a producing formation to the surface, constituting part of the current operating expenses of a working interest, and also including labor, superintendence, supplies, repairs, short-lived assets, maintenance, allocated overhead costs and other expenses incidental to production, but not including lease acquisition or drilling or completion expenses.
“LIBOR” London interbank offered rate.
“MBbl” One thousand barrels of oil, NGLs or other liquid hydrocarbons.
“MBbl/d” One MBbl per day.
“MBOE” One thousand BOE.
“MBOE/d” One MBOE per day.
“Mcf” One thousand cubic feet, used in reference to natural gas or CO2.gas.
“MMBbl” One million Bbl.barrels of oil, NGLs or other liquid hydrocarbons.
“MMBOE” One million BOE.
“MMBtu” One million British Thermal Units.Units, used in reference to natural gas.
“MMcf” One million cubic feet, used in reference to natural gas or CO2.gas.
“MMcf/d” One MMcf per day.
“net acres” or “net wells” The sum of the fractional working interests owned in gross acres or wells, as the case may be.
“net production” The total production attributable to our fractional working interest owned.
“NGL” Natural gas liquid.
“NYMEX” The New York Mercantile Exchange.
“PDNP” Proved developed nonproducing reserves.
“PDP” Proved developed producing reserves.
“plug-and-perf technology” A horizontal well completion technique in which hydraulic fractures are performed in multiple stages, with each stage utilizing a bridge plug to divert fracture stimulation fluids through the casing perforations into the formation within that stage.
“plugging and abandonment” Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface. Regulations of most states legally require plugging of abandoned wells.
“possible reserves” Those reserves that are less certain to be recovered than probable reserves.
“pre-tax PV10%” The present value of estimated future revenues to be generated from the production of proved reserves calculated in accordance with the guidelines of the SEC, net of estimated lease operating expense, production taxes and future development costs, using costs as of the date of estimation without future escalation and using an average of the first-day-of-the month price for each of the 12 months within the fiscal year, without giving effect to non-property related expenses such as general and administrative expenses, debt service and depreciation, depletion and amortization, or federal income taxes and discounted using an annual discount
rate of 10%. Pre-tax PV10% may be considered a non-GAAP financial measure as defined by the SEC. SeeRefer to the footnote to the Proved Reserves table in Item 1. “Business” of this Annual Report on Form 10-K for more information.
“probable reserves” Those reserves that are less certain to be recovered than proved reserves but which, together with proved reserves, are as likely as not to be recovered.
“prospect” A property on which indications of oil or gas have been identified based on available seismic and geological information.
“proved developed reserves”Proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well.
“proved reserves” Those reserves which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced, or the operator must be reasonably certain that it will commence the project, within a reasonable time.
The area of the reservoir considered as proved includes all of the following:
| a. | | The area identified by drilling and limited by fluid contacts, if any, and |
| b. | | Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data. |
Reserves that can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when both of the following occur:
| a. | | Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based, and |
| b. | | The project has been approved for development by all necessary parties and entities, including governmental entities. |
Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12-month period before the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
“proved undeveloped reserves” or “PUDs” Proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless specific circumstances justify a longer time. Under no circumstances shall estimates forof proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty.
“PUD” Proved undeveloped reserves.
“reasonable certainty” If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as changes due to increased availability of geoscience (geological, geophysical and geochemical) engineering, and economic data are made to estimated ultimate recovery with time, reasonably certain estimated ultimate recovery is much more likely to increase or remain constant than to decrease.
“recompletion” An operation whereby a completion in one zone is abandoned in order to attempt a completion in a different zone within the existing wellbore.
“reserves” Estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.
“reservoir” A porous and permeable underground formation containing a natural accumulation of producible crude oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
“resource play” Refers to drilling programs targeted at regionally distributedAn expansive contiguous geographical area with known accumulations of crude oil or natural gas accumulations. Successful exploitation of these reservoirs is dependent upon new technologies such asreserves that has the potential to be developed uniformly with repeatable commercial success due to advancements in horizontal drilling and multi-stage fracture stimulation to access large rock volumes in order to produce economic quantities of oil or natural gas.completion technologies.
“royalty” The amount or fee paid to the owner of mineral rights, expressed as a percentage or fraction of gross income from crude oil or natural gas produced and sold, unencumbered by expenses relating to the drilling, completing or operating of the affected well.
“royalty interest” An interest in an oil or natural gas property entitling the owner to shares of the crude oil or natural gas production free of costs of exploration, development and production operations.
“SEC” The United States Securities and Exchange Commission.
“service well” A service well is a well drilled or completed for the purpose of supporting production in an existing field. Wells in this class are drilled for the following specific purposes: gas injection (natural gas, propane, butane, CO2 or flue gas), water injection, steam injection, air injection, salt-water disposal, water supply for injection, observation or injection for in-situ combustion.
“standardized measure of discounted future net cash flows” or “Standardized Measure” The discounted future net cash flows relating to proved reserves based on the average price during the 12-month period before the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period (unless prices are defined by contractual arrangements, excluding escalations based upon future conditions); current costs and statutory tax rates (to the extent applicable); and a 10% annual discount rate.
“working interest” The interest in a crude oil and natural gas property (normally a leasehold interest) that gives the owner the right to drill, produce and conduct operations on the property and to a share of production, subject to all royalties, overriding royalties and other burdens and to all costs of exploration, development and operations and all risks in connection therewith.
“workover” Operations on a producing well to restore or increase production.
PART I
Item 1.Business
Overview
We are an independent oil and gas company engaged in exploration, development, production, acquisition and productionexploration activities primarily in the Rocky Mountains and Permian Basin regionsregion of the United States. We were incorporated in the state of Delaware in 2003 in connection with our initial public offering.
Since our inception, in 1980, we have built a strong asset base and achieved steady growth through a combination of property acquisitions, development of proved reserves and exploration activities. Our current operations and capital programs are focused on organic drilling opportunities and on the development of previously acquired properties, specifically on projects that we believe provide the greatest potential for repeatable success and production growth, while selectively pursuing acquisitions that complement our existing core properties. As a result of lower crude oil prices during 2015 and 2016, we significantly reduced our level of capital spending and focused our drilling activity on projects that provide the highest rate of return. During 2017, we continued to focus on high-return projects that added production and reserves through the strategic deployment of capital at our Williston Basin properties and Redtail field, while closely aligning our capital spending with cash flows generated from operations. In addition, we continually evaluate our property portfolio and sell properties when we believe that the sales price realized will provide an above average rate of return for the property or when the property no longer matches the profile of properties we desire to own, such as the asset sales discussed below under “Acquisitions and Divestitures”.
As of December 31, 2014,2017, our estimated proved reserves totaled 780.3617.6 MMBOE representing a 78% increase inand our proved reserves since December 31, 2013. Our 20142017 average daily production was 114.5118.1 MBOE/d, andwhich results in an average reserve life of approximately 18.714.3 years.
The following table summarizes by core area, our estimated proved reserves as of December 31, 2014,2017, their corresponding pre-tax PV10% values, and our fourth quarter 20142017 average daily production rates, as well as our company’s total standardized measure of discounted future net cash flows as of December 31, 2014:2017:
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | Proved Reserves (1) | | |
| | | | | | | | | | | | Pre-Tax | | 4th Quarter 2014 |
| | | | | | Natural | | | | | | | PV10% | | Average Daily |
| | Oil | | NGLs | | Gas | | Total | | % | | | Value (2) | | Production |
Core Area | | (MMBbl) | | (MMBbl) | | (Bcf) | | (MMBOE) | | Oil | | (in millions) | | (MBOE/d) |
Rocky Mountains (3) | | 528.6 | | 35.0 | | 432.9 | | 635.7 | | 83% | | $ | 12,517.9 | | 116.2 |
Permian Basin | | 110.9 | | 19.0 | | 18.7 | | 133.0 | | 83% | | | 1,460.9 | | 11.5 |
Other (4) | | 4.1 | | 0.7 | | 40.4 | | 11.6 | | 35% | | | 156.6 | | 3.6 |
Total | | 643.6 | | 54.7 | | 492.0 | | 780.3 | | 82% | | $ | 14,135.4 | | 131.3 |
Discounted Future Income Taxes | | | | | | | | | | | | | (3,292.0) | | |
Standardized Measure of Discounted Future Net Cash Flows | | | | | | | | | | | | $ | 10,843.4 | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | Proved Reserves (1) | | |
| | | | | | | | | | | | Pre-Tax | | 4th Quarter 2017 |
| | | | | | Natural | | | | | | PV10% | | Average Daily |
| | Oil | | NGLs | | Gas | | Total | | % | | Value (2) | | Production |
Core Area | | (MMBbl) | | (MMBbl) | | (Bcf) | | (MMBOE) | | Oil | | (in millions) | | (MBOE/d) |
Northern Rocky Mountains (3) | | 298.2 | | 133.0 | | 787.4 | | 562.5 | | 53% | | $ | 3,779 | | 106.8 |
Central Rocky Mountains (4) | | 34.9 | | 5.7 | | 55.8 | | 49.9 | | 70% | | | 161 | | 20.6 |
Other (5) | | 4.5 | | 0.2 | | 3.3 | | 5.2 | | 86% | | | 29 | | 0.6 |
Total | | 337.6 | | 138.9 | | 846.5 | | 617.6 | | 55% | | $ | 3,969 | | 128.0 |
Discounted Future Income Tax Expense | | | (101) | | |
Standardized Measure of Discounted Future Net Cash Flows | | $ | 3,868 | | |
_____________________
| (1) | | Oil and gas reserve quantities and related discounted future net cash flows have been derived from an oil price of $51.34 per Bbl and a gas pricesprice of $2.98 per MMBtu, which were calculated using an average of the first-day-of-the month price for each month within the 12 months ended December 31, 2014, pursuant to2017 as required by current SEC and FASB guidelines. |
| (2) | | Pre-tax PV10% may be considered a non-GAAP financial measure as defined by the SEC and is derived from the standardized measure of discounted future net cash flows (the “Standardized Measure”), which is the most directly comparable GAAP financial measure. Pre-tax PV10% is computed on the same basis as the standardized measure of discounted future net cash flowsStandardized Measure but without deducting future income taxes. We believe pre-tax PV10% is a useful measure for investors forwhen evaluating the relative monetary significance of our oil and natural gas properties. We further believe investors may utilize our pre-tax PV10% as a basis for comparison of the relative size and value of our proved reserves to other companies because many factors that are unique to each individual company impact the amount of future income taxes to be paid. Our management uses this measure when assessing the potential return on investment related to our oil and gas properties and acquisitions. However, pre-tax PV10% is not a substitute for the standardized measure of discounted future net cash flows.Standardized Measure. Our pre-tax PV10% and the standardized measure of discounted future net cash flowsStandardized Measure do not purport to present the fair value of our proved oil, NGL and natural gas reserves. |
| (3) | | Includes oil and gas properties located in Colorado, Montana and North Dakota, Utah and Wyoming.Dakota. |
| (4)
| | Other primarily includes oil and gas properties located in Arkansas, Michigan, Oklahoma and Texas.
|
While historically we have grown through acquisitions, we are increasingly focused on a balance between our exploration and development programs and are continuing to selectively pursue acquisitions that complement our existing core properties, such as the Kodiak Acquisition discussed below under “Acquisitions and Divestitures”. We believe that our significant drilling inventory, combined with our operating experience and cost structure, provides us with meaningful organic growth opportunities.
Our growth plan is centered on the following activities:
| ·(4)
| | pursuing the development of projects that we believe will generate attractive rates of return;Includes oil and gas properties located in Colorado.
|
| ·(5)
| | allocating a portion of our exploration and development (“E&D”) budget to leasing and exploring prospect areas;
|
| ·
| | maintaining a balanced portfolio of lower risk, long-livedPrimarily includes non-core oil and gas properties that provide stable cash flows;located in Colorado, Mississippi, New Mexico, Texas and
|
| ·
| | seeking property acquisitions that complement our core areas, such as the Kodiak Acquisition discussed below under “Acquisitions and Divestitures”. Wyoming.
|
During 2014,2017, we incurred $3.2 billion$912 million in exploration and development and acreage(“E&D”) expenditures, including $3.0 billion$858 million for the drilling of 611238 gross (257.1(164.1 net) wells. OfAll of these new wells 253.0 (net) resulted in productive completions and 4.1 (net) were unsuccessful, yielding a 98% success rate.completions.
Our current 20152018 E&D budget is $2.0 billion, and included in this amount is approximately $59$750 million, in acreage acquisition costs. The 2015 budget of $2.0 billion represents a substantial decrease from the $3.2 billion in E&D (which amount also includes acreage expenditures)which we incurred in 2014. This reduced capital budget is in response to the significantly lower crude oil prices experienced during the fourth quarter of 2014 and continuing into 2015. We expect to fund substantially all ofwith net cash provided by our 2015 E&D budget usingoperating activities and cash on hand. To the extent net cash provided by operating activities cash on hand,is higher or lower than currently anticipated, we would adjust our E&D budget accordingly, enter into agreements with industry partners, divest certain oil and gas property interests, adjust borrowings outstanding under our credit facility or throughaccess the issuance of additional debt or equity securities.capital markets as necessary.
We continually evaluate our current portfolio and sell properties when we believe that the sales price realized will provide an above average rate of return for the property or when the property no longer matches the profile of properties we desire to own.
Acquisitions and Divestitures
During 2016 and 2017, in response to sustained lower crude oil prices, we divested of a large number of oil and gas properties and other related assets that no longer matched the profile of properties we desire to own. Our significant acquisitions and divestitures during the last two years are summarized below. See “Management’s Discussion
Acquisitions. There were no significant acquisitions during the years ended December 31, 2017 and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K for additional information on these acquisitions and divestitures.2016.
2014 Acquisitions. On December 8, 2014, we completed the acquisition of Kodiak Oil & Gas Corp. (now known as Whiting Canadian Holding Company ULC, “Kodiak”) whereby we acquired all of the outstanding common stock of Kodiak (the “Kodiak Acquisition”). Pursuant to the terms of the Kodiak Acquisition agreement, Kodiak shareholders received 0.177 of a share of Whiting common stock in exchange for each share of Kodiak common stock they owned. Total consideration for the Kodiak Acquisition was $1.8 billion, consisting of the 47,546,139 Whiting common shares issued at the market price of $37.25 per share on the date of issuance plus the fair value of Kodiak’s outstanding equity awards assumed by Whiting. The aggregate purchase price of the transaction was $4.3 billion, which includes the assumption of Kodiak’s outstanding debt of $2.5 billion as of December 8, 2014 and the net cash acquired of $19 million.
As a result of the Kodiak Acquisition, Whiting acquired approximately 327,000 gross (178,000 net) acres located primarily in North Dakota, including interests in 778 producing oil and gas wells and undeveloped acreage. Approximately 10,000 of the net acres acquired were located in Wyoming and Colorado. The producing properties had estimated proved reserves of 191.8 MMBOE as of the acquisition date, 86% of which are crude oil and NGLs.
The acquisition significantly expanded our presence in the Williston Basin, adding undeveloped acreage, oil and natural gas reserves and production that were complementary to our existing asset base and operations in this area. As a result of this acquisition, we became the largest Bakken/Three Forks producer in the Williston Basin as of the acquisition date.
20142017 Divestitures. On March 27, 2014,In September 2017, we completed the sale of approximately 49,900 gross (41,000 net) acres in our Big Tex prospect, which consisted mainly of undeveloped acreage as well as our interests in certain producing oil and gas wells,properties located in the Delaware BasinFort Berthold Indian Reservation area in Dunn and McLean counties of North Dakota, as well as other related assets and liabilities, (the “FBIR Assets”) for aggregate sales proceeds of $500 million (before closing adjustments). The sale was effective September 1, 2017 and resulted in a pre-tax loss on sale of $402 million. The properties spanned approximately 29,600 net developed acres and consisted of estimated proved reserves of 32 MMBOE as of December 31, 2016, representing 5% of our proved reserves as of that date. The FBIR Assets generated 7% (or 8.3 MBOE/d) of our August 2017 average daily production.
In January 2017, we completed the sale of our 50% interest in the Robinson Lake gas processing plant located in Mountrail County, North Dakota and our 50% interest in the Belfield gas processing plant located in Stark County, North Dakota, as well as the associated natural gas, crude oil and water gathering systems, effective January 1, 2017, for aggregate sales proceeds of $375 million (before closing adjustments).
2016 Divestitures. In July 2016, we completed the sale of our interest in our enhanced oil recovery project in the North Ward Estes field in Ward and Winkler counties of Texas, including our interest in certain CO2 properties in the McElmo Dome field in Colorado and certain other related assets and liabilities (the “North Ward Estes Properties”) for a cash purchase price of $76$300 million (before closing adjustments). In addition to the cash purchase price, the buyer of the North Ward Estes Properties agreed to pay us $100,000 for every $0.01 that, as of June 28, 2018, the average NYMEX crude oil futures contract price for each month from August 2018 through July 2021 is above $50.00/Bbl up to a maximum amount of $100 million (the “Contingent Payment”). In July 2017, the buyer paid us $35 million to settle this Contingent Payment, resulting in a pre-tax gain of $3 million. The sale was effective July 1, 2016 and resulted in a pre-tax loss on sale of $12$187 million. With this divestiture, we no longer own any interests in the Big Tex prospect.
2013 Acquisitions. On September 20, 2013, we completed the acquisitionThe North Ward Estes Properties consisted of approximately 39,300 gross (17,300 net) acres in the Williston Basin, including interests in 121 producing oil and gas wells and undeveloped acreage, located in Williams and McKenzie counties of North Dakota and Roosevelt and Richland counties of Montana for an initial purchase price of $261 million.
2013 Divestitures. On October 31, 2013, we completed the sale of approximately 45,000 gross (32,200 net) acres in our Big Tex prospect, which consisted mainly of undeveloped acreage as well as our interests in certain producing oil and gas wells, located in the Delaware Basin of Texas for a cash purchase price of $151 million, resulting in a pre-tax gain on sale of $11 million. Of the total net acres sold, approximately 30,800 net acres were located in Pecos County, Texas, and approximately 1,400 net acres were located in Reeves County, Texas. The producing properties had estimated proved reserves of 1.1120.3 MMBOE as of December 31, 2012,
2015, representing 0.3%15% of our proved reserves as of that date, and generated 0.28.6 MBOE/d of our third quarter 2013 average daily net production.
On July 15, 2013, we completed the sale of our interests in certain oil and gas producing properties located in our EOR projects in the Postle and Northeast Hardesty fields in Texas County, Oklahoma, including the related Dry Trail plant gathering and processing facility, oil delivery pipeline, our entire 60% interest in the Transpetco CO2 pipeline, crude oil swap contracts and certain other related assets and liabilities (collectively the “Postle Properties”) for a cash purchase price of $809 million after selling costs and post-closing adjustments. This divestiture resulted in a pre-tax gain on sale of $109 million. We used the net proceeds from this sale to repay a portion of the debt outstanding under our credit agreement. The Postle Properties consisted of estimated proved reserves of 45.1 MMBOE as of December 31, 2012, representing 11.9% of our proved reserves as of that date, and generated 8% (or 7.6 MBOE/d)6%) of our June 20132016 average daily net production.
Business Strategy
Our goal is to generate meaningful growth in our net assetshareholder value per share of proved reserves through the exploration, development, acquisition and acquisitionexploration of oil and gas projects with attractive rates of return on capital employed. To date, we have pursued this goal through both continued field development in our core areas and the acquisition of reserves. Because of our extensive property base, we are pursuing several economically attractive oil and gas opportunities to develop properties as well as to explore our acreage positions for additional production growth and proved reserves.capital. Specifically, we have focused, and plan to continue to focus, on the following:
Pursuing High-Return Organic Reserve AdditionsDeveloping Existing Properties. The development of our large resource plays such asplay at our Williston Basin project has become one of our central objectives.objective. As of December 31, 2014,2017, we have assembled approximately 1,311,800688,200 gross (811,700(409,600 net) developed and undeveloped acres in the Williston Basin located in MontanaNorth Dakota and North Dakota.Montana. As of December 31, 2014,2017, we had 16four drilling rigs operating in the Williston Basin. During 2014, the focus of our development in the Williston Basin continued in the Sanish and Parshall, Lewis & Clark/Pronghorn, Hidden Bench/Tarpon, Missouri Breaks and Cassandra fields. Additionally, Whiting owns a 50% ownership interest in two gas processing plants located in the Williston Basin. The Robinson Lake plant located in our Sanish field has a current processing capacity of approximately 130 MMcf/d. Our Belfield plant located near the Pronghorn field currently has inlet compression in place to process 35 MMcf/d. Both plants have fractionation capability to convert NGLs into propane and butane, which end products can then be sold locally for higher realized prices. We are also currently constructing a 100% owned gas processing plant in our Cassandra field which is expected to come online during the first quarter of 2015 with a processing capacity of 15 MMcf/d.this area.
A new area of focus for us isAt our Redtail field in the Denver JulesbergJulesburg Basin (“DJ(the “DJ Basin”) in Weld County, Colorado, where we have the potentialassembled approximately 120,200 gross (100,000 net) developed and undeveloped acres. In response to drill over 1,400 gross wells targeting several intervals in the Niobrara formation. As of December 31, 2014,low commodity prices, we had approximately 185,700 gross (132,200 net) acres, with four drilling rigs operatingsuspended completion operations in this area. In April 2014, we completed the construction of and brought online a gas processing plant for this area. The plant’s current inlet capacity is 20 MMcf/d, and we plan to further expand the plant’s capacity to 70 MMcf/darea beginning in the second quarter of 2015.2016, however, we resumed completion activity during the first quarter of 2017 and added a second completion crew in April 2017. During 2017, we completed and brought on production a significant portion of our drilled uncompleted well inventory (“DUCs”) from yearend 2016. During the fourth quarter of 2017, based on the recent and comparative well performance results of the DJ Basin to the Williston Basin, our management decided to concentrate development activities during 2018 in the Williston Basin. We expectplan to complete 22 DUCs in our Redtail field will be another growth platform for Whitingduring the first half of 2018, and then cease additional development activity in 2015this area until commodity prices further recover.
Our Redtail gas plant processes the associated gas produced from our wells in this area, and beyond.
Developing Existing Properties. Ourhas a current property base, which includes our acquisitions over the past 11 years, provides us with numerous low-risk opportunities for exploration and development drilling.inlet capacity of 50 MMcf/d. As of December 31, 2014, we have identified a drilling inventory of over 5,600 gross wells that we believe will add substantial production over2017, the next five years.plant was processing 26 MMcf/d.
Disciplined Financial Approach. Our drilling inventory consists ofgoal is to remain financially strong, yet flexible, through the developmentprudent management of our provedbalance sheet and unproved reserves. Additionally, we have opportunities to apply and expand enhanced recovery techniques that we expect will increase proved reserves and extend the productive livesactive management of our mature fields. In 2005, we acquired the North Ward Estes field, located in the Permian Basin of West Texas.exposure to commodity price volatility. We have experienced significanthistorically funded our acquisition and growth activity through a combination of internally generated cash flows, equity and debt issuances, bank borrowings and certain oil and gas property divestitures, as appropriate, to maintain our financial position. As a result of sustained lower crude oil prices in 2015 and 2016, we significantly reduced our level of capital spending and focused our drilling activity on projects that provided the highest rate of return. During 2017, we continued to focus on high-return projects that added production increases in this fieldand reserves through the strategic deployment of capital at our Williston Basin properties and Redtail field, while closely aligning our capital spending with cash flows generated from operations. From time to time, we monetize non-core properties and use of secondarythe net proceeds from these asset sales to repay debt under our credit agreement or fund our E&D expenditures. For example, during 2016 and tertiary recovery techniques, and2017 we anticipate such production increases will continue over the next five to seven years. In this field, we are actively injecting water and CO2 and executing extensive re-development, drilling and completion operations, as well as expanding our gas processing facilities, which will allow us to separate and inject approximately 290 MMcf/d of recycled CO2, thereby maximizing our recoverysold a large number of oil and gas properties and other related assets that no longer matched the profile of properties we desire to own. In addition, to support cash flow generation on our existing properties and help ensure expected cash flows from this reservoir.newly acquired properties, we periodically enter into derivative contracts. Typically, we use costless collars and swaps to provide an attractive base commodity price level. As of January 23, 2018, we had derivative contracts covering the sale of approximately 72% of our forecasted 2018 oil production.
Growing Through Accretive Acquisitions. From 2004 to 2014,Since 2003, we have completed 21 separate significant acquisitions of producing properties for total estimated proved reserves of 445.2 MMBOE, as of the effective dates of the acquisitions. Our experienced team of management, land, engineering and geoscience professionals has developed and refined an acquisition program designed to increase reserves and complement our existing properties, including identifying and evaluating acquisition opportunities, closing purchases and then effectively managing the properties we acquire. We intend to selectively pursue the acquisition of properties that are complementary to our core operating areas, as demonstrated by the Kodiak Acquisition, which closed on December 8, 2014 and expanded our presence in the Williston Basin located in Montana and North Dakota.areas.
Disciplined Financial Approach. Our goal is to remain financially strong, yet flexible, through the prudent management of our balance sheet and active management of our exposure to commodity price volatility. We have historically funded our acquisitions and growth activity through a combination of equity and debt issuances, bank borrowings, internally generated cash flow and certain oil
and gas property divestitures, as appropriate, to maintain our strong financial position. From time to time, we monetize non-core properties and use the net proceeds from these asset sales to repay debt under our credit agreement, as we did with the sale of our Postle Properties, which we completed on July 15, 2013. To support cash flow generation on our existing properties and help ensure expected cash flows from acquired properties, we periodically enter into derivative contracts. Typically, we use costless collars and fixed-price oil and gas contracts to provide an attractive base commodity price level.
Competitive Strengths
We believe that our key competitive strengths lie in our balancedfocused asset portfolio, our experienced management and technical teamteams and our commitment to the effective application of new technologies.
Balanced,Focused, Long-Lived Asset Base. As of December 31, 2014,2017, we had interests in 11,6544,775 gross (4,471(1,980 net) productive wells acrosson approximately 1,610,800802,700 gross (886,700(490,000 net) developed acres across all our geographical areas. We believe this geographic mixthe concentration of properties and organic drilling opportunities, combined with our continuing business strategy of acquiring and developing properties in these areas,operated assets presents us with multiple opportunities to successfully execute our strategy.business strategy by enabling us to leverage our technical expertise and take advantage of operational efficiencies. Our proved reserve life is approximately 18.714.3 years based on year-end 20142017 proved reserves and 20142017 production.
Experienced Management Teamand Technical Teams. Our management team averages 2926 years of experience in the oil and gas industry. Our personnel have extensive experience in each of our core geographical areas and in all of our operational disciplines. In addition, eachour team of our acquisition professionals has at leastan average of 30 years of experience in the evaluation, acquisition and operational assimilation of oil and gas properties.
Commitment to Technology. In each of our core operating areas, we have accumulated extensive geologic and geophysical knowledge and have developed significant technical and operational expertise. In recent years, we have developed considerable expertise in conventional and 3-D seismic imaging and interpretation. Data provided by our in-house, state-of-the-art rock analysis laboratory is used to support real-time drilling and completion decisions, and to help us further understand unconventional oil plays. Our technical team has access to approximately 9,1009,200 square miles of 3-D seismic data, digital well logs and other subsurface information. This data is analyzed with advanced geophysical and geological computer resources dedicated to the accurate and efficient characterization of the subsurface oil and gas reservoirs that comprise our asset base. In addition, our information systems enable us to update our production databases through daily uploads from hand-held computers in the field. We have a team of 10 professionals averaging over 26 years of experience managing CO2floods, which provides us with the ability to pursue other CO2flood targets and employ this technology to add reserves to our portfolio. This commitment to technology has increased the productivity and efficiency of our field operations and development activities.
In 2011, we completed the build-out and installation of an in-house, state-of-the-art rock analysis laboratory. We continue to utilize the data from this rock lab to support real-time drilling and completion decisions, and to help us to further understand unconventional oil plays. This knowledge has given us the confidence to assemble over 600,000 gross acres in four oil resource plays, located in three separate basin areas that were new to us.
As a result of our successful testing of cemented liner and plug-and-perf completion designs across all of our prospect areas, in January 2014 we began using this technique for all of our completions in the Williston Basin, resulting in a significant improvement in initial production rates. We have continued to evaluate modifications toadvance our completion techniques, including significantly increasing proppant volumes, utilizing diverter agents to better distribute fluid and proppant across individual zones, varying the number of completion stages, utilizing differentand employing new fracture stimulation fluids, including slickwater, and increasing the volume of sand and ceramic proppant used in these fluids. In 2015, weslickwater. We plan to continue use of ourthese state-of-the-art completion designdesigns on a majority of the wells we drill in the Williston Basin. We arethroughout 2018, while also utilizing this completion technique in the Niobrara formation in the DJ Basintesting new diversion technology and more efficient placement and drillout of Colorado with encouraging results. We continue to refine our completion techniques to deliver improved results across all of our fields.down-hole plugs.
Proved Probable and Possible Reserves
Our estimated proved probable and possible reserves as of December 31, 20142017 are summarized by core area in the table below. SeeRefer to “Reserves” in Item 2 of this Annual Report on Form 10-K for information relating to the uncertainties surrounding these reserve categories.
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | Estimated |
| | | | | | | | | | | | Future Capital |
| | Oil | | NGLs | | Natural Gas | | Total | | % of Total | | Expenditures |
Rocky Mountains (1): | | (MMBbl) | | (MMBbl) | | (Bcf) | | (MMBOE) | | Proved | | (in millions) |
PDP | | 261.4 | | 18.9 | | 247.8 | | 321.6 | | 51% | | | |
PDNP | | 0.6 | | 0.1 | | 1.1 | | 0.8 | | -% | | | |
PUD | | 266.6 | | 16.0 | | 184.0 | | 313.3 | | 49% | | | |
Total proved | | 528.6 | | 35.0 | | 432.9 | | 635.7 | | 100% | | $ | 6,418.0 |
Total probable | | 308.3 | | 10.0 | | 235.1 | | 357.5 | | | | $ | 8,062.1 |
Total possible | | 107.5 | | 8.8 | | 88.9 | | 131.1 | | | | $ | 3,113.6 |
| | | | | | | | | | | | | |
Permian Basin: | | | | | | | | | | | | | |
PDP | | 53.4 | | 5.8 | | 10.4 | | 60.9 | | 46% | | | |
PDNP | | 14.4 | | 3.6 | | 2.6 | | 18.4 | | 14% | | | |
PUD | | 43.1 | | 9.6 | | 5.7 | | 53.7 | | 40% | | | |
Total proved | | 110.9 | | 19.0 | | 18.7 | | 133.0 | | 100% | | $ | 1,490.2 |
Total probable | | 23.9 | | 8.3 | | 29.3 | | 37.1 | | | | $ | 446.0 |
Total possible | | 71.2 | | 16.9 | | 5.8 | | 89.1 | | | | $ | 692.0 |
| | | | | | | | | | | | | |
Other (2): | | | | | | | | | | | | | |
PDP | | 3.5 | | 0.5 | | 32.9 | | 9.5 | | 82% | | | |
PDNP | | 0.3 | | 0.1 | | 3.4 | | 1.0 | | 9% | | | |
PUD | | 0.3 | | 0.1 | | 4.1 | | 1.1 | | 9% | | | |
Total proved | | 4.1 | | 0.7 | | 40.4 | | 11.6 | | 100% | | $ | 16.4 |
Total probable | | 2.0 | | 0.4 | | 13.7 | | 4.7 | | | | $ | 41.8 |
Total possible | | 1.4 | | 0.1 | | 22.9 | | 5.3 | | | | $ | 97.5 |
| | | | | | | | | | | | | |
Total Company: | | | | | | | | | | | | | |
PDP | | 318.3 | | 25.2 | | 291.1 | | 392.0 | | 50% | | | |
PDNP | | 15.3 | | 3.8 | | 7.1 | | 20.2 | | 3% | | | |
PUD | | 310.0 | | 25.7 | | 193.8 | | 368.1 | | 47% | | | |
Total proved | | 643.6 | | 54.7 | | 492.0 | | 780.3 | | 100% | | $ | 7,924.6 |
Total probable | | 334.2 | | 18.7 | | 278.1 | | 399.3 | | | | $ | 8,549.9 |
Total possible | | 180.1 | | 25.8 | | 117.6 | | 225.5 | | | | $ | 3,903.1 |
| | | | | | | | | | | | Estimated |
| | | | | | | | | | | | Future Capital |
| | Oil | | NGLs | | Natural Gas | | Total | | % of Total | | Expenditures (1) |
Northern Rocky Mountains (2) | | (MMBbl) | | (MMBbl) | | (Bcf) | | (MMBOE) | | Proved | | (in millions) |
PDP | | 159.8 | | 74.2 | | 447.4 | | 308.6 | | 55% | | | |
PDNP | | 0.6 | | 0.3 | | 1.8 | | 1.2 | | -% | | | |
PUD | | 137.8 | | 58.5 | | 338.2 | | 252.7 | | 45% | | | |
Total proved | | 298.2 | | 133.0 | | 787.4 | | 562.5 | | 100% | | $ | 2,504.7 |
| | | | | | | | | | | | | |
Central Rocky Mountains (3) | | | | | | | | | | | | | |
PDP | | 14.9 | | 2.2 | | 21.4 | | 20.7 | | 41% | | | |
PUD | | 20.0 | | 3.5 | | 34.4 | | 29.2 | | 59% | | | |
Total proved | | 34.9 | | 5.7 | | 55.8 | | 49.9 | | 100% | | $ | 508.9 |
| | | | | | | | | | | | | |
Other (4) | | | | | | | | | | | | | |
PDP | | 4.0 | | 0.2 | | 2.4 | | 4.6 | | 88% | | | |
PDNP | | 0.5 | | - | | 0.9 | | 0.6 | | 12% | | | |
Total proved | | 4.5 | | 0.2 | | 3.3 | | 5.2 | | 100% | | $ | 9.2 |
| | | | | | | | | | | | | |
Total Company | | | | | | | | | | | | | |
PDP | | 178.7 | | 76.6 | | 471.2 | | 333.9 | | 54% | | | |
PDNP | | 1.1 | | 0.3 | | 2.7 | | 1.8 | | -% | | | |
PUD | | 157.8 | | 62.0 | | 372.6 | | 281.9 | | 46% | | | |
Total proved | | 337.6 | | 138.9 | | 846.5 | | 617.6 | | 100% | | $ | 3,022.8 |
_____________________
| (1) | | Includes oil and gas properties located in Colorado, Montana, North Dakota, Utah and Wyoming.
|
| (2)
| | Other primarily includes oil and gas properties located in Arkansas, Michigan, Oklahoma and Texas.
|
The estimatedEstimated future capital expenditures in the table above incorporate numerous assumptions and are subject to many uncertainties, including oil and natural gas prices, costs of oil field goods and services, drilling results and several other factors.
| (2) | | Includes oil and gas properties located in Montana and North Dakota. |
| (3) | | Includes oil and gas properties located in Colorado. |
| (4) | | Primarily includes non-core oil and gas properties located in Colorado, Mississippi, New Mexico, Texas and Wyoming. |
Marketing and Major Customers
We principally sell our oil and gas production to end users, marketers and other purchasers that have access to nearby pipeline facilities. In areas where there is no practical access to pipelines, oil is trucked or transported by rail to terminals, market hubs, refineries or storage facilities. The tabletables below presentspresent percentages by purchaser that accounted for 10% or more of our total oil,
NGL and natural gas sales for the years ended December 31, 2014, 20132017 and 2012.2016. For the year ended December 31, 2015, no individual purchaser accounted for 10% or more of our total oil, NGL and natural gas sales. We believe that the loss of any individual purchaser would not have a long-term material adverse impact on our financial position or results of operations.operations, as alternative customers and markets for the sale of our products are readily available in the areas in which we operate.
| | | | | | |
| | 2014 | | 2013 | | 2012 |
Plains Marketing LP | | 17% | | 21% | | 20% |
Shell Trading US | | 10% | | 14% | | 14% |
Bridger Trading LLC | | 10% | | 8% | | 11% |
Eighty Eight Oil Company | | 6% | | 11% | | 11% |
| | | | | | |
Year Ended December 31, 2017 | | | | | | |
Tesoro Crude Oil Co | | | | | | 18% |
| | | | | | |
Year Ended December 31, 2016 | | | | | | |
Tesoro Crude Oil Co | | | | | | 15% |
Jamex Marketing LLC | | | | | | 12% |
Title to Properties
Our properties are subject to customary royalty interests, liens securing indebtedness, liens incident to operating agreements, liens for current taxes and other burdens, including other mineral encumbrances and restrictions. Our credit agreement is also securedcollateralized by a first lien on substantially all of our assets. We do not believe that any of these burdens materially interfere with the use of our properties or the operation of our business.
We believe that we have satisfactory rights or title to all of our producing properties. As is customary in the oil and gas industry, limited investigation of title is made at the time of acquisition of undeveloped properties. In most cases, we investigate title and obtain title opinions from counsel only when we acquire producing properties or before commencement of drilling operations.
Competition
We operate inThe oil and gas industry is a highly competitive environment for acquiring properties, obtaining investment capital, securing oil field goods and services, marketing oil and natural gas products and securing trainedattracting and retaining qualified personnel. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours, which can be particularly important in the areas in which we operate. Those companies may be able to pay more for productive oil and gas properties and exploratory prospects and to evaluate, bid for and purchase a greater number of properties and prospects than our financialresources permit. In addition, the unavailability or personnel resources permit.high cost of drilling rigs or other equipment and services could delay or adversely affect our development and exploration operations. Our ability to acquire additional prospects and to find and develop reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Also, there is substantial competition for available investment capital in the oil and gas industry.
Regulation
Regulation of Transportation, Sale and Gathering of Natural Gas
The Federal Energy Regulatory Commission (the “FERC”) regulates the transportation, and to a lesser extent, the sale for resale of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978 and regulations issued under those Acts. In 1989, however, Congress enacted the Natural Gas Wellhead Decontrol Act, which removed all remaining price and non-price controls affecting wellhead sales of natural gas, effective January 1, 1993. While sales by producers of natural gas and all sales of crude oil, condensate and NGLs can currently be made at unregulated market prices, in the future Congress could reenact price controls or enact other legislation with detrimental impact on many aspects of our business.
Our natural gas sales are affected by the availability, terms and cost of transportation. The price and terms of access to pipeline transportation and underground storage are subject to extensive federal and state regulation. From 1985 to the present, several major regulatory changes have been implemented by Congress and the FERC that affect the economics of natural gas production, transportation and sales. In addition, the FERC is continually proposing and implementing new rules and regulations affecting those segments of the natural gas industry that remain subject to the FERC's jurisdiction, most notably interstate natural gas transmission companies and certain underground storage facilities. These initiatives may also affect the intrastate transportation of natural gas under certain circumstances. The stated purpose of many of these regulatory changes is to promote competition among the various sectors of the natural gas industry by making natural gas transportation more accessible to natural gas buyers and sellers on an open and non-discriminatory basis.
The FERC implements The Outer Continental Shelf Lands Act pertaining to transportation and pipeline issues, which requires that all pipelines operating on or across the outer continental shelf provide open access and non-discriminatory transportation service. One of the FERC’s principal goals in carrying out this Act’s mandate is to increase transparency in the market to provide producers and shippers on the outer continental shelf with greater assurance of open access services on pipelines located on the outer continental shelf and non-discriminatory rates and conditions of service on such pipelines.
We cannot accurately predict whether the FERC’s actions will achieve the goal of increasing competition in the markets in which our natural gas is sold. In addition, many aspects of these regulatory developments have not become final but are still pending judicial and final FERC decisions. Regulations implemented by the FERC in recent years could result in an increase in the cost of transportation
service on certain petroleum product pipelines. In addition, the natural gas industry historically has always been heavily regulated. Therefore, we cannot provide any assurance that the less stringent regulatory approach recently established by the FERC will continue. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other natural gas producers.
Transportation and safety of natural gas is subject to regulation by the Department of Transportation (the “DOT”) under the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006 and the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2012. In addition, intrastate natural gas transportation is subject to enforcement by state regulatory agencies, and the Pipeline and Hazardous Material Safety Administration (“PHMSA”), an agency within the DOT, enforces regulations on interstate natural gas transportation. State regulatory agencies can also create their own transportation and safety regulations as long as they meet PHMSA’s minimum requirements. The basis for intrastate regulation of natural gas transportation and the degree of regulatory oversight and scrutiny given to intrastate natural gas pipeline rates and services varies from state to state. Insofar as such regulation within a particular state will generally affect all intrastate natural gas shippers within the state on a comparable basis, we believe that the regulation of similarly situated intrastate natural gas transportation in any of the states in which we operate and ship natural gas on an intrastate basis will not affect our operations in any way that is of material difference from those of our competitors. Likewise, the effect of regulatory changes by the DOT and their effect on interstate natural gas transportation will not affect our operations in any way that is of material difference from those of our competitors. We use the latest tools and technologies to remain compliant with current pipeline safety regulations.
Regulation of Transportation of Oil
Sales of crude oil, condensate and NGLs are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future.
Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. The FERC regulates interstate oil pipeline transportation rates under the Interstate Commerce Act. In general, interstate oil pipeline rates must be cost-based, although settlement rates agreed to by all shippers are permitted and market-based rates may be permitted in certain circumstances. Effective January 1, 1995, the FERC implemented regulations establishing an indexing system (based on inflation) for crude oil transportation rates that allowed for an increase or decrease in the cost of transporting oil to the purchaser. The FERC’s regulations include a methodology for oil pipelines to change their rates through the use of an index system that establishes ceiling levels for such rates. The most recent mandatory five-year review period resulted in an order from the FERC for the index to be based on Producer Price Index for Finished Goods (the “PPI-FG”) plus a 2.65% adjustment for the five-year period July 1, 2011 through June 30, 2016. This represents an increase for the PPI-FG plus 1.3% adjustment from the prior five-year period. A requested rehearing of the order was denied by the FERC. The regulations provide that each year the Commission will publish the oil pipeline index after the PPI-FG becomes available. Intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any way that is of material difference from those of our competitors.
Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard, common carriers must offer service to all shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines’ published tariffs. In addition, the FERC has emergency authority under the Interstate Commerce Act to intervene and direct priority use of oil pipeline transportation capacity, and the FERC has exercised this authority over a specific pipeline in February 2014 in response to significant disruptions in the supply of propane. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors.
Transportation and safety of oil and hazardous liquid is subject to regulation by the DOT under the Pipeline Integrity, Protection, Enforcement and Safety Act of 2006 and the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2012. PHMSA enforces regulations on all interstate liquids transportation and some intrastate liquids transportation. PHMSA does not enforce the regulations in states that are capable of enforcing the same regulations themselves. The effect of regulatory changes under the DOT and their effect on interstate and intrastate oil and hazardous liquid transportation will not affect our operations in any way that is of material difference from those of our competitors.
A portion of our crude oil production may be shipped to market centers using rail transportation facilities owned and operated by third parties. The DOT and PHMSA establish safety regulations relating to crude-by-rail transportation. In addition, third-party rail operators are subject to the regulatory jurisdiction of the Surface Transportation Board of the DOT, the Federal Railroad Administration (the “FRA”) of the DOT, OSHA and other federal regulatory agencies. Additionally, various state and local agencies have jurisdiction over disposal of hazardous waste and seek to regulate movement of hazardous materials in ways not preempted by federal law.
In response to rail accidents occurring between 2002 and 2008, the U.S. Congress passed the Rail Safety and Improvement Act of 2008, which implemented regulations governing different areas related to railroad safety. In response to train derailments occurring in the United States and Canada in 2013 and 2014, U.S. regulators are implementing or considering new rules to address the safety risks of transporting crude oil by rail.
On February 25, 2014 the DOT issued an emergency order requiring all persons to ensure crude oil is properly tested and classed prior to offering such product into transportation, and to assure all shipments by rail of crude oil be handled as a Packing Group I or II hazardous material. Also in February 2014, the Association of American Railroads entered into a voluntary agreement with the DOT to implement certain restrictions around the movement of crude oil by rail. In May 2014, the DOT issued an Emergency Restriction/Prohibition Order requiring each railroad carrier operating trains transporting 1,000,000 gallons or more of Bakken crude oil to provide notice to state officials regarding the expected movement of the trains through the counties in each state. The PHMSA and FRA have also issued safety advisories and alerts regarding oil transportation, have issued a report focused on the increased volatility and flammability of Bakken crude oil as compared with other crudes in the U.S. and have various rulemaking proceedings underway.
We do not currently own or operate rail transportation facilities or rail cars. However, the adoption of any regulations that impact the testing or rail transportation of crude oil could increase our costs of doing business and limit our ability to transport and sell our crude oil at favorable prices at market centers throughout the U.S., the consequences of which could have a material adverse effect on our financial condition, results of operations and cash flows. The effect of any such regulatory changes will not affect our operations in any way that is of material difference from those of our competitors.
Regulation of Production
The production of oil and gas is subject to regulation under a wide range of local, state and federal statutes, rules, orders and regulations. Federal, state and local statutes and regulations require permits for drilling operations, drilling bonds and periodic report submittals during operations. All of the states in which we own and operate properties have regulations governing conservation matters, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum allowable rates of production from oil and gas wells, the regulation of well spacing and the plugging and abandonment of wells. The effect of these regulations is to limit the amount of oil and gas that we can produce from our wells and to limit the number of wells or the locations that we can drill, although we can apply for exceptions to such regulations or to have reductions in well spacing. Moreover, each state generally imposes a production or severance tax with respect to the production or sale of oil, NGLs and natural gas within its jurisdiction.
Some of our offshore operations are conducted on federal leases that are administered by the Bureau of Ocean Energy Management (the “BOEM”). Currently, none of our total production volumes, and we are produced from offshore leases. However, the present value of our future abandonment obligations associated with offshore properties was $36 million as of December 31, 2014. Whiting is therefore required to comply with the regulations and orders issued by the BOEM under the Outer Continental Shelf Lands Act. Among other things, we are required to obtain prior BOEM approval for any exploration plans we pursue and for our lease development and production plans. BOEM regulations also establish construction requirements for production facilities located on our federal offshore leases and govern the plugging and abandonment of wells and the removal of production facilities from these leases. Under limited circumstances, the BOEM could require us to suspend or terminateThe present value of our operations on a federal lease.future abandonment obligations associated with offshore properties was $44 million as of December 31, 2017.
The BOEM also establishes the basis for royalty payments due under federal oil and gas leases through regulations issued under applicable statutory authority. State regulatory authorities establish similar standards for royalty payments due under state oil and gas leases. The basis for royalty payments established by the BOEM and the state regulatory authorities is generally applicable to all federal and state oil and gas lessees. Accordingly, we believe that the impact of royalty regulation on our operations should generally be the same as the impact on our competitors.
Regulation of Sale and Transportation of Oil
Sales of crude oil, condensate and NGLs are not currently regulated and are made at negotiated prices, however, Congress could reenact price controls or enact other legislation in the future.
Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. The Federal Energy Regulatory Commission (the “FERC”) regulates interstate oil pipeline transportation rates under the Interstate Commerce Act. In general, interstate oil pipeline rates must be cost-based, although settlement rates agreed to by all shippers are permitted and market-based rates may be permitted in certain circumstances. Effective January 1, 1995, the FERC implemented regulations establishing an indexing system (based on inflation) for crude oil transportation rates that allowed for an increase or decrease in the cost of transporting oil to the purchaser. The FERC’s regulations include a methodology for oil pipelines to change their rates through the use of an index system that establishes ceiling levels for such rates. The most recent
mandatory five-year review period resulted in an order from the FERC for the index to be based on Producer Price Index for Finished Goods (the “PPI-FG”) plus a 1.23% adjustment for the five-year period from July 1, 2016 through June 30, 2021. This represents a decrease from the PPI-FG plus 2.65% adjustment from the prior five-year period. The FERC determined that it would now use a calculation based on what it determined to be a superior data source, reflecting actual cost-of-service data as opposed to the accounting data historically used as a proxy for such information under the prior index methodology. The regulations provide that each year the Commission will publish the oil pipeline index after the PPI-FG becomes available. Intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any way that is of material difference from those of our competitors.
Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard, common carriers must offer service to all shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines’ published tariffs. In addition, the FERC has emergency authority under the Interstate Commerce Act to intervene and direct priority use of oil pipeline transportation capacity, and the FERC exercised this authority over a specific pipeline in February 2014 in response to significant disruptions in the supply of propane. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors.
Transportation and safety of oil and hazardous liquid is subject to regulation by the Department of Transportation (the “DOT”) under the Pipeline Integrity, Protection, Enforcement and Safety Act of 2006 and the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2012. The Pipeline and Hazardous Material Safety Administration (“PHMSA”), an agency within the DOT, enforces regulations on all interstate liquids transportation and some intrastate liquids transportation. PHMSA does not enforce the regulations in states that are capable of enforcing the same regulations themselves. The effect of regulatory changes under the DOT and their effect on interstate and intrastate oil and hazardous liquid transportation will not affect our operations in any way that is of material difference from those of our competitors.
A portion of our crude oil production may be shipped to market centers using rail transportation facilities owned and operated by third parties. The DOT and PHMSA establish safety regulations relating to crude-by-rail transportation. In addition, third-party rail operators are subject to the regulatory jurisdiction of the Surface Transportation Board of the DOT, the Federal Railroad Administration (the “FRA”) of the DOT, the Occupational Safety and Health Administration and other federal regulatory agencies. Additionally, various state and local agencies have jurisdiction over disposal of hazardous waste and seek to regulate movement of hazardous materials in ways not preempted by federal law.
In response to rail accidents occurring between 2002 and 2008, the U.S. Congress passed the Rail Safety and Improvement Act of 2008, which implemented regulations governing different areas related to railroad safety. In response to train derailments occurring in the United States and Canada in 2013 and 2014, U.S. regulators have taken a number of actions to address the safety risks of transporting crude oil by rail.
In February 2014, the DOT issued an emergency order requiring all persons to ensure crude oil is properly tested and classed prior to offering such product into transportation, and to assure all shipments by rail of crude oil be handled as a Packing Group I or II hazardous material. Also in February 2014, the Association of American Railroads entered into a voluntary agreement with the DOT to implement certain restrictions around the movement of crude oil by rail. In May 2014 (and extended indefinitely in May 2015), the DOT issued an Emergency Restriction/Prohibition Order requiring each railroad carrier operating trains transporting 1,000,000 gallons or more of Bakken crude oil to provide notice to state officials regarding the expected movement of the trains through the counties in each state. The PHMSA and FRA have also issued safety advisories and alerts regarding oil transportation and have issued a report focused on the increased volatility and flammability of Bakken crude oil as compared with other crudes in the U.S. In May 2015, PHMSA issued new rules applicable to “high-hazard flammable trains”, defined as a continuous block of 20 or more tank cars loaded with a flammable liquid or 35 or more tank cars loaded with a flammable liquid dispersed throughout a train. Among other requirements, the new rules require enhanced braking systems, enhanced standards for newly constructed tank cars and retrofitting of existing tank cars, restricted operating speeds, a documented testing and sampling program, and routine assessments that evaluate 27 safety and security factors. In December 2015, the Fixing America's Surface Transportation (“FAST”) Act became law, further extending PHMSA’s authority to improve the safety of transporting flammable liquids by rail and pursuant to which new regulations phasing out the use of certain older rail cars were finalized in August 2016. In June 2016, the Protecting our Infrastructure of Pipelines and Enhancing Safety (“PIPES”) Act of 2016 became law. The PIPES Act strengthens PHMSA’s safety authority, including an expansion of its ability to issue emergency orders, which was adopted by rule in October 2016. PHMSA continues to review further potential new safety regulations under the PIPES Act and the FAST Act.
We do not currently own or operate rail transportation facilities or rail cars. However, the adoption of any regulations that impact the testing or rail transportation of crude oil could increase our costs of doing business and limit our ability to transport and sell our crude oil at favorable prices at market centers throughout the U.S., the consequences of which could have a material adverse effect on our
financial condition, results of operations and cash flows. The effect of any such regulatory changes will not affect our operations in any way that is of material difference from those of our competitors.
Regulation of Transportation, Storage, Sale and Gathering of Natural Gas
The FERC regulates the transportation, and to a lesser extent, the sale for resale of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978 and regulations issued under those Acts. In 1989, however, Congress enacted the Natural Gas Wellhead Decontrol Act, which removed all remaining price and non-price controls affecting wellhead sales of natural gas, effective January 1, 1993. While sales by producers of natural gas can currently be made at unregulated market prices, in the future Congress could reenact price controls or enact other legislation with detrimental impact on many aspects of our business.
Our natural gas sales are affected by the availability, terms and cost of transportation. The price and terms of access to pipeline transportation and underground storage are subject to extensive federal and state regulation. From 1985 to the present, several major regulatory changes have been implemented by Congress and the FERC that affect the economics of natural gas production, transportation and sales. In addition, the FERC is continually proposing and implementing new rules and regulations affecting those segments of the natural gas industry that remain subject to the FERC's jurisdiction, most notably interstate natural gas transmission companies and certain underground storage facilities. These initiatives may also affect the intrastate transportation of natural gas under certain circumstances. The stated purpose of many of these regulatory changes is to promote competition among the various sectors of the natural gas industry by making natural gas transportation more accessible to natural gas buyers and sellers on an open and non-discriminatory basis.
The FERC implements the Outer Continental Shelf Lands Act pertaining to transportation and pipeline issues, which requires that all pipelines operating on or across the outer continental shelf provide open access and non-discriminatory transportation service. One of the FERC’s principal goals in carrying out this Act’s mandate is to increase transparency in the market to provide producers and shippers on the outer continental shelf with greater assurance of open access services on pipelines located on the outer continental shelf and non-discriminatory rates and conditions of service on such pipelines.
We cannot accurately predict whether the FERC’s actions will achieve the goal of increasing competition in the markets in which our natural gas is sold. Regulations implemented by the FERC in recent years could result in an increase in the cost of transportation service on certain petroleum product pipelines. In addition, the natural gas industry historically has always been heavily regulated. Therefore, we cannot provide any assurance that the less stringent regulatory approach established by the FERC will continue. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other natural gas producers.
Transportation and safety of natural gas is subject to regulation by the DOT under the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006 and the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2012. In addition, intrastate natural gas transportation is subject to enforcement by state regulatory agencies and PHMSA enforces regulations on interstate natural gas transportation. State regulatory agencies can also create their own transportation and safety regulations as long as they meet PHMSA’s minimum requirements. The basis for intrastate regulation of natural gas transportation and the degree of regulatory oversight and scrutiny given to intrastate natural gas pipeline rates and services varies from state to state. Insofar as such regulation within a particular state will generally affect all intrastate natural gas shippers within the state on a comparable basis, we believe that the regulation of similarly situated intrastate natural gas transportation in any of the states in which we operate and ship natural gas on an intrastate basis will not affect our operations in any way that is of material difference from those of our competitors. Likewise, the effect of regulatory changes by the DOT and their effect on interstate natural gas transportation will not affect our operations in any way that is of material difference from those of our competitors.
The failure to comply with these rules and regulations can result in substantial penalties. We use the latest tools and technologies to remain compliant with current pipeline safety regulations.
In October 2015, a failure at an underground natural gas storage facility in Southern California prompted PHMSA to issue an advisory bulletin reminding owners and operators of underground storage facilities to review operations, identify the potential for facility leaks and failures, and to review and update emergency plans. The State of California proclaimed the underground natural gas storage facility an emergency situation in January 2016. A federal task force was also convened to make recommendations to help avoid such failures. An interim final rule of PHMSA became effective in January 2017 which adopted certain specific industry recommended practices into Part 192 of the Federal Pipeline Safety Regulations. If an operator fails to take any measures recommended it would need to justify in its written procedures why the measure is impracticable and unnecessary. PHMSA regulations had previously covered much of the surface piping up to the wellhead at underground natural gas storage facilities served by pipeline and not extend in part to the “downhole” portion of these facilities. The requirements cover design, construction, material, testing, commissioning, reservoir monitoring and recordkeeping for existing and newly constructed underground natural gas storage facilities as well as procedures and practices for newly constructed and existing underground natural gas storage facilities such as operations, maintenance, threat identification, monitoring, assessment, site security, emergency response and preparedness, training, recordkeeping and reporting. These regulations
and any further increased attention to and requirements for underground storage safety and infrastructure by state and federal regulators that may result from this incident will not affect us in a way that materially differs from the way it affects other natural gas producers.
Environmental Regulations
General. Our oil and gas exploration, development and production operations are subject to stringent federal, state and local laws and regulations governing the discharge or release of materials into the environment or otherwise relating to environmental protection. Numerous governmental agencies, such as the U.S. Environmental Protection Agency (the “EPA”), issue regulations to implement and enforce such laws, which often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties or that may result in injunctive relief for failure to comply. These laws and regulations may require the acquisition of a permit before drilling or facility construction commences; restrict the types, quantities and concentrations of various materials that can be released into the environment in connection with drilling and production activities; limit or prohibit project siting, construction or drilling activities on certain lands located within wilderness, wetlands, ecologically sensitive and other protected areas; require remedial action to prevent pollution from former operations, such as plugging abandoned wells or closing pits; and impose substantial
liabilities for unauthorized pollution resulting from our operations. The EPA and analogous state agencies may delay or refuse the issuance of required permits or otherwise include onerous or limiting permit conditions that may have a significant adverse impact on our ability to conduct operations. The regulatory burden on the oil and gas industry increases the cost of doing business and consequently affects its profitability.
Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly material handling, storage, transport, disposal or cleanup requirements could materially and adversely affect our operations and financial position, as well as those of the oil and gas industry in general. While we believe that we are in compliance, in all material respects, with current applicable environmental laws and regulations and have not experienced any material adverse effect from compliance with these environmental requirements, there is no assurance that this trend will continue in the future.
President Trump has indicated that he would work to ease regulatory burdens on industry and on the oil and gas sector, including environmental regulations. However, any executive orders the President may issue or any new legislation Congress may pass with the goal of reducing environmental statutory or regulatory requirements may be challenged in court. In addition, various state laws and regulations (and permits issued thereunder) will be unaffected by federal changes unless and until the state laws and corresponding permits are similarly changed, and any judicial review is completed.
The environmental laws and regulations which have the most significant impact on the oil and gas exploration and production industry are as follows:
Superfund. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA” or “Superfund”), and comparable state laws impose strict joint and several liability, without regard to fault or the legality of conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the owner or operator of the site where a release occurred and anyone who disposed of or arranged for the disposal of the hazardous substance released at the site. Under CERCLA, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances released into the environment. In the course of our ordinary operations, we may generate material that may be regulated as “hazardous substances.”substances”. Consequently, we may be jointly and severally liable under CERCLA or comparable state statutes for all or part of the costs required to clean up sites at whichwhere these materials have been disposed or released.
We currently own or lease, and in the past have owned or leased, properties that for many years have been used for the exploration and production of oil and gas. Although we and our predecessors have used operating and disposal practices that were standard in the industry at the time, hazardous substances, wastes or hydrocarbons may have been released on, under or from the properties owned or leased by us or on, under or from other locations where such substances have been taken for recycling or disposal. In addition, many of these owned and leased properties have been operated by third parties or by previous owners or operators whose treatment and disposal of hazardous substances, wastes or hydrocarbons waswere not under our control. Similarly, the disposal facilities where discarded materials are sent are also often operated by third parties whose waste treatment and disposal practices may not be adequate. While we only use what we consider to be reputable disposal facilities, we might not know of a potential problem if the disposal occurred before we acquired the property or business, and if the problem itself is not discovered until years later. Our properties, adjacent affected properties, the offsite disposal facilities and the substances disposed or released on them may be subject to CERCLA and analogous state laws. Under these laws, we could be required:
| · | | to remove or remediate previously disposed materials, including materials disposed or released by prior owners or operators or other third parties; |
| · | | to clean up contaminated property, including contaminated groundwater; |
| · | | to perform remedial operations to prevent future contamination, including the plugging and abandonment of wells drilled and left inactive by prior owners and operators; or |
| · | | to pay some or all of the costs of any such action. |
At this time, we do not believe that we are a potentially responsible party with respect to any Superfund site and we have not been notified of any claim, liability or damages under CERCLA.
Oil Pollution Act. The Oil Pollution Act of 1990 (“OPA”) and regulations issued under OPA impose strict, joint and several liability on “responsible parties” for removal costs and damages resulting from oil spills into or upon navigable waters, adjoining shorelines or in the exclusive economic zone of the United States. A “responsible party” includes the owner or operator of an onshore facility and the lessee, permittee or holder of a right of use and easement of the area in which an offshore facility is located. OPA establishes a liability limit for onshore facilities of $350 million per spill, while the liability limit for offshore facilities is the payment of all removal costs plus $75 million per spill damages. These limits do not apply if the spill is caused by a responsible party’s gross negligence or willful misconduct; the spill resulted from a responsible party’s violation of a federal safety, construction or operating regulation; a responsible party fails to report a spill or to cooperate fully in a cleanup; or a responsible party fails to comply with an order issued under the authority of the Intervention on the High Seas Act. OPA also requires the lessee or permittee of the offshore area in which a covered offshore facility is located to establish and maintain evidence of financial responsibility in the amount of $35 million to cover liabilities related to an oil spill for which such responsible party is statutorily responsible. The President may increase the amount of financial responsibility required under OPA by up to $150 million, depending on the risk represented by the quantity or quality of oil that is handled by the facility. Any failure to comply with OPA’s requirements or inadequate cooperation during a spill
response action may subject a responsible party to administrative penalties up to $25,000 per day per violation. We believe we are in compliance with all applicable OPA financial responsibility obligations. Moreover, we are not aware of any action or event that would subject us to liability under OPA, and we believe that compliance with OPA’s financial responsibility and other operating requirements will not have a material adverse effect on us.
Resource Conservation and Recovery Act. The Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the auspices of the EPA, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own more stringent requirements. We generate solid and hazardous wastes that are subject to RCRA and comparable state laws. Drilling fluids, produced waterswater and most of the other wastes associated with the exploration, development and production of crude oil or natural gas are currently regulated under RCRA’s non-hazardous waste provisions. However, it is possible that certain oil and natural gas exploration and production wastes now classified as non-hazardous could be classified as hazardous waste in the future. In September 2010, the Natural Resources Defense Council filed a petition with the EPA, requesting them to reconsider the RCRA exemption for exploration, production and development wastes but,wastes. In May 2016, several environmental groups sued the EPA for failing to date,update its rules for management of oil and gas drilling waste under RCRA. The petitioners requested that the agency has not taken any action onEPA revise its regulations for waste materials generated as a result of oil and gas exploration and production activities. The petitioners claimed that the petition. The EPA has not formally respondedreviewed or revised its regulations for management of wastes from oil and gas exploration and production operations since 1988, even though the statute requires the EPA to this petition yet.review and, if necessary, revise the regulations every three years. In December 2016, the court entered a Consent Decree resolving the litigation. Under the Consent Decree, the EPA has agreed to propose no later than March 15, 2019 a rulemaking for revision of the regulations pertaining to oil and gas wastes or sign a determination that revision of the regulations is not necessary. In the event that the EPA proposes a rulemaking for revised oil and gas waste regulations, the Consent Decree requires that the EPA take final action following notice and comment rulemaking no later than July 15, 2021. Any such change in the current RCRA exemption and comparable state laws could result in an increase in the costs to manage and dispose of wastes. Additionally, these exploration and production wastes may be regulated by state agencies as solid waste. Also, ordinary industrial wastes such as paint wastes, waste solvents, laboratory wastes and waste compressor oils may be regulated as hazardous waste. Although we do not believe the current costs of managing our materials constituting wastes (as they are presently classified) to be significant, any repeal or modification of the oil and gas exploration and production exemption by administrative, legislative or judicial process, or modification of similar exemptions in analogous state statutes would increase the volume of hazardous waste we are required to manage and dispose of and would cause us, as well as our competitors, to incur increased operating expenses.
Clean Water Act. The Federal Water Pollution Control Act, or the Clean Water Act, as amended (“CWA”), and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances, into state waters or other waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. Spill prevention, control and countermeasure requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. In addition, CWA and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities.
The EPA had regulations under the authority of CWA that required certain oil and gas exploration and production projects to obtain permits for construction projects with storm water discharges. However, the Energy Policy Act of 2005 nullified most of the EPA regulations that required storm water permitting of oil and gas construction projects. There are still some state and federal rules that regulate the discharge of storm water from some oil and gas construction projects. Costs may be associated with the treatment of wastewater and/or developing and implementing storm water pollution prevention plans. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of CWA and analogous state laws and regulations. In Section 40 CFR 112 of the regulations, the EPA promulgated the Spill Prevention, Control and Countermeasure (“SPCC”) regulations, which require certain oil containing facilities to prepare plans and meet construction and operating standards.
Air Emissions. The Federal Clean Air Act, as amended (the “CAA”), and comparable state laws regulate emissions of various air pollutants from various industrial sources through air emissions permitting programs and also impose other monitoring and reporting requirements. We may be required to incur certain capital expenditures in the future for air pollution control equipment in connection with obtaining and maintaining pre-construction and operating permits and approvals for air emissions. In addition, the EPA has developed, and continues to develop, stringent regulations governing emissions of toxic air pollutants at specified sources. For example, in 2012, the EPA finalized rules establishing new air emission controls for oil and natural gas production operations. Specifically, the EPA’s rule includes New Source Performance Standards to address emissions of sulfur dioxide and volatile organic compounds and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. Among other things, these standards require the application of reduced emission completion techniques associated with the completion of newly drilled and fractured wells in addition to existing wells that are refractured. The rules also establish specific requirements regarding emissions from compressors, dehydrators, storage tanks and other production equipment. These rules could require a number of modifications to operations at certain of our oil and gas properties including the installation of new equipment. Compliance with such rules could result in significant costs, including increased capital expenditures and operating costs, which may adversely impact our business. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the CAA and associated state laws and regulations.
The EPA announced in 2015 that it would directly regulate methane emissions from oil and natural gas wells for the first time as part of President Obama’s Climate Action Plan. As part of this strategy, in May 2016, the EPA issued three final rules. The EPA issued a final rule that updated the New Source Performance Standards to add requirements that the oil and gas industry reduce emissions of greenhouse gases and to cover additional equipment and activities in the oil and gas production chain. The final rule sets emissions limits for methane, which is the principal greenhouse gas emitted by equipment and processes in the oil and gas sector. This rule applies to new, reconstructed and modified processes and equipment. This rule also expands the volatile organic compound emissions limits to hydraulically fractured oil wells and equipment used across the industry that was not regulated in the 2012 rules. The rule also requires owners and operators to find and repair leaks, also known as “fugitive emissions.” The EPA also issued a final rule known as the Source Determination Rule, which is intended to clarify when multiple pieces of equipment and activities in the oil and gas industry must be deemed a single source when determining whether major source permitting programs apply under the prevention of significant deterioration, nonattainment new source review preconstruction and operation permit programs under Title V of the CAA (“Title V”). The final rule defines the term “adjacent” to clarify that equipment and activities in the oil and gas sector that are under common control will be considered part of the same source if they are located near each other – specifically, if they are located on the same site, or on sites that share equipment and are within one quarter of a mile of each other. This rule applies to equipment and activities used for onshore oil and natural gas production, and for natural gas processing. It does not apply to offshore operations. Finally, the EPA also issued a final Federal Implementation Plan (“FIP”) for Indian country, which implements the minor new source review program in Indian country for oil and natural gas production. The FIP will be used instead of site-specific minor new source review preconstruction permits in Indian country and incorporates emissions limits and other requirements from eight federal air standards, including the final New Source Performance Standard, subpart OOOOa. Requirements of the FIP apply throughout Indian country, except non-reservation areas, unless a tribe or the EPA demonstrates jurisdiction for those areas.
Compliance with such rules could result in significant costs, including increased capital expenditures and operating costs, which may adversely impact our business. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the CAA and associated state laws and regulations.
In 2016, the EPA also issued the first draft of an Information Collection Request, seeking a broad range of information on the oil and gas industry, including: how equipment and emissions controls are, or can be, configured, what installing those controls entails and the associated costs. This includes information on natural gas venting that occurs as part of existing processes or maintenance activities, such as well and pipeline blowdowns, equipment malfunctions and flashing emissions from storage tanks.
In June 2017, the EPA proposed staying the final rule implementing certain of the new oil and gas standards for two years while it reconsiders the rules. In November 2017, the EPA issued a notice of data availability for the proposed stay of the rules, with a comment period closing on December 8, 2017.
We are currently engaged in discussions with the Colorado Department of Public Health and Environment (the “CDPHE”) concerning certain equipment used in our Redtail facilities and our compliance with various air permits and applicable federal and state air quality laws and regulations over the control of air pollutant emissions from those facilities. We and the CDPHE are negotiating the terms of a settlement agreement to resolve this matter.
Hydraulic Fracturing. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons from tight rock formations. The process involves the injection of mainly water and sand andplus a de minimis amount of chemicals under pressure into formations to fracture the surrounding rock and stimulate production. Hydraulic fracturing has been utilized to complete wells in our most active areas
located in the states of Colorado, Michigan, Montana and North Dakota Texas and Wyoming, and we expect it will also be used in the future. Should our exploration and production activities expand to other states, it is likely that we will utilize hydraulic fracturing to complete or recomplete wells in those areas. The process is typically regulated by state oil and gas commissions. However, the EPA recentlyalso issued guidance which was published in the Federal Register on February 12, 2014 for permitting authorities and the industry regarding the process for obtaining a permit for hydraulic fracturing involving diesel.
At the same time,In December 2016, the EPA has commencedreleased a study offinal report on the potential environmental impacts of hydraulicoil and gas fracturing activities on the quality and quantity of drinking water resources.resources in the United States. In addition, in June 2016, the EPA is currently studying wastewater and stormwater discharges from hydraulic fracturing facilities. A proposedissued a final rule to amend the Effluent Limitations Guidelines and Standardspromulgating pretreatment standards for the oil and gas extraction category which would address discharges of wastewater pollutants from onshore unconventional oil and gas extraction facilities to publicly-owned treatment works is expected in early 2015.. The EPA announced in 2015 that it would directly regulate methane emissions fromis also conducting a study of private wastewater treatment facilities accepting oil and natural gas wells forextraction wastewater. The EPA is collecting data and information regarding the first time as partextent to which these facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial characteristics of President Obama’s Climate Action Plan. As partthe facilities, the environmental impacts of this strategy, the EPA will propose in the summer of 2015 a rule to set methanedischarges and volatile organic compound emissions standards for new and modified oil and natural gas wells. The final rule is expected in 2016. other information.
Other federal agencies are also examining hydraulic fracturing, including the U.S. Department of Energy, the U.S. Government Accountability Office and the White House Council for Environmental Quality. TheIn March 2015, the U.S. Department of the Interior released a draft proposedfinal rule in May 2012 governingaddressing (i) hydraulic fracturing on federal and Indian oil and natural gas leases to require validation of well integrity and strong cement barriers between the wellbore and water zones through which the wellbore passes, (ii) disclosure of information regarding the chemicals used in hydraulic fracturing advance approval for well-stimulation activities, mechanical integrity testing of casing and monitoring of well-stimulation operations, and on May 24, 2013to the Federal Bureau of Land Management, issued a revised draft(iii) higher standards for interim storage of recovered waste fluids from hydraulic fracturing, and (iv) measures to lower the proposed rule.risk of cross-well contamination with chemicals and fluids used in fracturing operations. In addition, legislation has been introduced in Congress from time to time to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the fracturing process. Also, some states have adopted, and other states are considering adopting, regulations that could ban, restrict or impose additional requirements on activities relating to hydraulic fracturing in certain circumstances. For example, onin June 17, 2011, Texas enacted a law that requires the disclosure of information regarding the substances used in the hydraulic fracturing process to the Railroad Commission of Texas (the entity that regulates oil and natural gas production in Texas) and the public. Such federal or state legislation could require the disclosure of chemical constituents used in the fracturing process to state or federal regulatory authorities who could then make such information publicly available. Disclosure of chemicals used in the fracturing process could make it easier for third parties opposing hydraulic fracturing to pursue legal proceedings against producers and service providers based on allegations that specific chemicals used in the fracturing process could adversely affect human health or the environment, including groundwater. This rule was challenged in federal court and in June 2016, the Wyoming District Court hearing the case ruled that the Department of the Interior had exceeded its authority in issuing the rule. In March 2017, Justice Department lawyers representing the Bureau of Land Management asked the Court of Appeals for the Tenth Circuit to stay the government’s previously filed appeal as the Trump Administration was planning to rescind the rules; and in July 2017, the Department of the Interior announced its proposal to rescind the rules, with the public comment period on the proposal closing in September 2017. On December 29, 2017, the Department of the Interior issued a final rule rescinding the 2015 rule.
In addition, if hydraulic fracturing is regulated at the federal level, our fracturing activities could become subject to additional permitpermitting requirements or operational restrictions and also to associated permitting delays, litigation risk and potential increases in costs. Further, local governments may seek to adopt, and some have adopted, ordinances within their jurisdictions restricting the use of or regulating the time, place and manner of drilling or hydraulic fracturing. No assurance can be given as to whether or not similar measures might be considered or implemented in the jurisdictions in which our properties are located. If new laws, regulations or ordinances that significantly restrict or otherwise impact hydraulic fracturing are passed by Congress or adopted in the states or local municipalities where our properties are located, such legal requirements could prohibit or make it more difficult or costly for us to perform hydraulic fracturing activities and thereby could affect the determination of whether a well is commercially viable. In addition, restrictions on hydraulic fracturing could reduce the amount of oil and natural gas that we are ultimately able to produce in commercially paying quantities and the calculation of our reserves.
In addition, onin July 3, 2014, a major university and U.S. Geological Survey researchers published a study purporting to find a causal connection between the deep well injection of hydraulic fracturing wastewater and a sharp increase in seismic activity in Oklahoma since 2008. SuchThis study, as well as subsequent studies and reports, may trigger new legislation or regulations that would limit or ban the disposal of hydraulic fracturing wastewater in deep injection wells. If such new laws or rules are adopted, our operations may be curtailed while alternative treatment and disposal methods are developed and approved.
Further, onin May 19, 2014, the EPA published an Advance Notice of Proposed Rulemaking (“ANPR”) under the Toxic Substances Control Act, relating to the disclosure of chemical substances and mixtures used in oil and gas exploration and production. On July 11, 2014, the EPA extended the public comment period for the rulemaking to September 18, 2014. The EPA has not yet taken further action with respect to this rule. Depending on the precise disclosure requirements the EPA elects to impose, if any, we may be obliged to disclose valuable proprietary information, and failure to do so may subject us to penalties.
Global Warming and Climate Change. OnIn December 15, 2009, the EPA published its findings that emissions of carbon dioxide, methane and other greenhouse gases (“GHG”) present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to the warming of the earth’s atmosphere and other climate changes. Based on these findings, the EPA has begun adoptingadopted and implementingimplemented regulations that restrict emissions of GHG under existing provisions of the CAA, including one rulerules that limitslimit emissions of GHG from motor vehicles beginning with the 2012 model year. The EPA has asserted that these final motor vehicle GHG emission standards trigger the CAA construction and operating permit requirements for stationary sources, commencing when the motor vehicle standards took effect onin January 2, 2011. OnIn June 3, 2010, the EPA published its final rule to address the permitting of GHG emissions from stationary sources under the Prevention of Significant Deterioration (the “PSD”) and Title V permitting programs. This rule “tailors” these permitting programs to apply to certain stationary sources of GHG emissions in a multi-step process, with the largest sources first becoming subject to permitting. Further, facilities required to obtain PSD permits for their GHG emissions are required to reduce those emissions consistent with guidance for
determining “best available control technology” standards for GHG, which guidance was published by the EPA in November 2010. Also in November 2010, the EPA expanded its existing GHG reporting rule to include onshore oil and natural gas production, processing, transmission, storage and distribution facilities. This rule requires reporting of GHG emissions from such facilities on an annual basis with reporting beginning in 2012 for emissions occurring in 2011.basis. We believe that we are in compliance with all substantial applicable emissions requirements, and we are preparing to comply with future requirements.
In June 2014, the Supreme Court upheld most of the EPA’s GHG permitting requirements, allowing the agency to regulate the emission of GHG from stationary sources already subject to the PSD and Title V requirements. Certain of our equipment and installations may currently be subject to PSD and Title V requirements and hence, under the Supreme Court’s ruling, may also be subject to the installation of controls to capture GHG. For any equipment or installation so subject, we may have to incur increased compliance costs to capture related GHG emissions.
In October 2016, the EPA proposed revisions to the rule applicable to GHGs for PSD and Title V permitting requirements. On November 18, 2016, the EPA extended the public comment period for the rulemaking to December 16, 2016. The EPA took additional action under the CAA in June 2014. proposed rule has not yet been finalized.
In accordance with President Obama’s Climate Action Plan, on June 18, 2014,in August 2015, the EPA proposed rulesissued a rule to reduce carbon emissions from electric generating units. The proposal,rule, commonly called the “Clean Power Plan,”Plan”, requires states to develop plans to reduce carbon emissions from fossil fuel-fired generating units commencing in 2020,2022, with the reductions to be fully phased in by 2030. Each state is given a different carbon reduction target, but the EPA expects that, in the aggregate, the overall proposal will reduce carbon emissions from electric generating units by 30%32% from 2005 levels. As proposed, statesStates are given substantial flexibility in meeting their emission reduction targets and can generally choose to lower carbon emissions by replacing higher carbon generation, such as coal or natural gas, with lower carbon generation, such as efficient natural gas units or renewable energy alternatives. Several industry groups and states have challenged the Clean Power Plan in the Court of Appeals for the D.C. Circuit, and in February 2016, the U.S. Supreme Court stayed the implementation of the Clean Power Plan while it is being challenged in court. The Court of Appeals for the D.C. Circuit heard oral arguments on the Clean Power Plan in September 2016, but has not yet issued a decision. On March 28, 2017, the Trump Administration issued an executive order directing the EPA to review the Clean Power Plan. On the same day, the EPA filed a motion in the U.S. Court of Appeals for the D.C. Circuit requesting that the court hold the case in abeyance while the EPA conducts its review of the Clean Power Plan. On October 16, 2017, the EPA published a proposed rule that would repeal the Clean Power Plan. The EPA also stated in the proposed rule that the agency has not determined the scope of any rule to regulate GHG emissions from existing electric generating units, but intends to issue an Advance Notice of Proposed Rulemaking “in the near future.” Several states have already announced their intention to challenge any repeal of the Clean Power Plan. It is not possible at this time to predictyet clear what requirements might be adopted bychanges, if any, will result from the EPA in the final rule expected in 2015,EPA’s proposal, whether or how the courts will rule on the legality of the Clean Power Plan, the EPA’s repeal of the rules, or any such final rule would impact our business.future replacement.
In addition, both houses of Congress have actively considered legislation to reduce emissions of GHG, and many states have already taken legal measures to reduce emissions of GHG, primarily through the development of GHG inventories, greenhouse gasGHG permitting and/or regional GHG “cap and trade” programs. Most of these “cap and trade” programs work by requiring either major sources of emissions or major producers of fuels to acquire and surrender emission allowances, with the number of allowances available for purchase reduced each year until the overall GHG emission reduction goal is achieved. In the absence of new legislation, the EPA is issuing new regulations that limit emissions of GHG associated with our operations, which will require us to incur costs to inventory and reduce emissions of GHG associated with our operations and which could adversely affect demand for the oil, NGLs and natural gas that we produce. Finally, it should be noted that many scientists have concluded that increasing concentrations of GHG in the atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our assets and operations.
Consideration of Environmental Issues in Connection with Governmental Approvals. Our operations frequently require licenses, permits and/or other governmental approvals. Several federal statutes, including the Outer Continental Shelf Lands Act (“OCSLA”), the National Environmental Policy Act (“NEPA”) and the Coastal Zone Management Act (“CZMA”), require federal agencies to evaluate environmental issues in connection with granting such approvals and/or taking other major agency actions. OCSLA, for instance, requires the U.S. Department of Interior to evaluate whether certain proposed activities would cause serious harm or damage to the marine, coastal or human environment. Similarly, NEPA requires the Department of Interior and other federal agencies to evaluate major agency actions having the potential to significantly impact the environment. In the course of such evaluations, an agency would have to prepare an environmental assessment and potentially an environmental impact statement. The CZMA, on the other hand, aids states in developing a coastal management program to protect the coastal environment from growing demands associated with various uses, including offshore oil and gas development. In obtaining various approvals from the Department of Interior, we must certify that we will conduct our activities in a manner consistent with all applicable regulations.
Employees
As of DecemberJanuary 31, 2014,2018, we had 1,282approximately 830 full-time employees, including 4322 senior level geoscientists and 8459 petroleum engineers. Our employees are not represented by any labor unions. We consider our relations with our employees to be satisfactory and have never experienced a work stoppage or strike.
Available Information
We maintain a website at the address www.whiting.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this report. We make available free of charge (other than an investor’s own Internet access charges) through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, including exhibits and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC.
Item 1A.Risk Factors
Each of the risks described below should be carefully considered, together with all of the other information contained in this Annual Report on Form 10-K, before making an investment decision with respect to our securities. In the event of the occurrence, reoccurrence, continuation or increased severity of any of the risks described below, our business, financial condition or results of operations could be materially and adversely affected, and you may lose all or part of your investment.
Oil and natural gas prices are very volatile. An extended period of low oil and natural gas prices may adversely affect our business, financial condition, results of operations or cash flows.
The oil and gas markets are very volatile, and we cannot predict future oil and natural gas prices. The price we receive for our oil, NGL and natural gas production heavily influences our revenue, profitability, access to capital and future rate of growth. The prices we receive for our production depend on numerous factors beyond our control. These factors include,control, including, but are not limited to, the following:
| · | | changes in regional, domestic and global supply and demand for oil and natural gas; |
| · | | the actionslevel of the Organization of Petroleum Exporting Countries;global oil and natural gas inventories; |
| · | | the levelactions of global oil and natural gas inventories;the Organization of Petroleum Exporting Countries; |
| · | | the price and quantity of imports of foreign oil and natural gas; |
| · | | political and economic conditions, including embargoes, in oil-producing countries or affecting other oil-producing activity, such as the recent conflicts in the Middle East; |
| · | | the level of global oil and natural gas exploration and production activity; |
| · | | the effects of global credit, financial and economic issues; |
| · | | developments of United States energy infrastructure, such as President Obama’s recent veto of legislation that would have allowed the Keystone XL pipeline from Hardesty, Alberta to Cushing, Oklahoma to proceed and the development of liquefied natural gas exporting facilities and the perceived timing thereof;infrastructure; |
| · | | technological advances affecting energy consumption; |
| · | | current and anticipated changes to domestic and foreign governmental regulations;regulations, including those expected as a result of the election of Donald Trump to the U.S. Presidency; |
| · | | proximity and capacity of oil and natural gas pipelines and other transportation facilities; |
| · | | the price and availability of competitors’ supplies of oil and natural gas in captive market areas; |
| · | | the price and availability of alternative fuels; and |
Moreover, government regulations, such as regulation of oil and natural gas gathering and transportation, can adversely affect commodity prices in the long term.
These factors and the volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price movements. Also, prices for crude oil and prices for natural gas do not necessarily move in tandem. Declines in oil or natural gas prices would not only reduce revenue, but could also reduce the amount of oil and natural gas that we can economically produce.produce and therefore potentially lower our oil and gas reserve quantities. If the oil and natural gas industry experiences significant price declines,extended periods of low prices, we may, among other things, be unable to meet all of our financial obligations or make planned expenditures.
Oil prices have fallen significantly since reaching highs of over $105.00 per BblSubstantial and extended declines in June 2014, dropping below $45.00 per Bbl in January 2015. Natural gas prices have also declined from over $4.80 per Mcf in April 2014 to below $2.60 per Mcf in February 2015. In addition, forecasted prices for both oil and gas for 2015 have also declined.
Lower oil, NGL and natural gas prices have resulted and may not only decrease our revenues on a per unit basis but also may ultimately reduce the amount of oil and natural gas that we can produce economically and therefore potentially lower our reserve quantities. A substantial or extended decline in oil, NGL or natural gas prices maycontinue to result in impairments of our proved oil and gas properties or undeveloped acreage and may materially and adversely affect our future business, financial condition, cash flows, results of operations, liquidity or ability to finance planned capital expenditures. To the extent commodity prices received from production are insufficient to fund planned capital expenditures, we will be required to reduce spending, sell assets or borrow to fund any such shortfall. Lower oil, NGLcommodity prices have reduced, and natural gas prices may alsofurther reduce, the amount of our borrowing base under our credit agreement, which is determined at the discretion of theour lenders based on the collateral value of our proved reserves that have been mortgaged to the lenders, and is subject to regular redeterminations on May 1 and November 1 of each year, as well as special redeterminations described in the credit agreement. At the timeUpon a redetermination, if borrowings in excess of the last redetermination,revised borrowing capacity were outstanding, we could be forced to immediately repay a portion of the applicable oildebt outstanding under our credit agreement.
Lower commodity prices may also make it more difficult for us to comply with the covenants and gas prices were $92.68 per Bbl and $3.88 per Mcf, whereasother restrictions in the quoted NYMEX prices for oil and gas on February 13, 2015 were $53.67 per Bbl and $2.81 per Mcf.agreements governing our debt as described under the risk factor entitled “The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business.”
Alternatively, higher oil and natural gas prices may result in significant mark-to-market losses being incurred on our commodity-based derivatives, which may in turn cause us to experience net losses.
Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could adversely affect our business, financial condition or results of operations.
Our future success will depend on the success of our exploration, development and production activities. Our oil and natural gas exploration and productiondevelopment activities are subject to numerous risks beyond our control, including the risk that drilling will not result in commercially viable oil or natural gas production. Our decisions to purchase, explore, develop or otherwise exploit prospects or properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and engineering studies, the results of which are often inconclusive or subject to varying interpretations. Please read “— ReserveRefer to the risk factor entitled “Reserve estimates depend on many assumptions that may turn out to be inaccurate...” later in these Risk Factors for a discussion of the uncertainty involved in these processes. Our cost of drilling, completing and operating wells is often uncertain before drilling commences. Overruns in budgeted expenditures are common risks that can make a particular project uneconomical. Further, many factors may curtail, delay or cancel drilling, including the following:
| · | | substantial or extended declines in oil, NGL and natural gas prices; |
| · | | delays imposed by or resulting from compliance with regulatory requirements; |
| · | | delays in or limits on the issuance of drilling permits on our federal leases, including as a result of government shutdowns; |
| · | | pressure or irregularities in geological formations; |
| · | | shortages of or delays in obtaining qualified personnel or equipment, including drilling rigs and completion services and CO2; services; |
| · | | equipment failures or accidents; |
| · | | adverse weather conditions, such as freezing temperatures, hurricanes and storms; |
| ·
| | reductions in oil, NGL and natural gas prices;
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| · | | pipeline takeaway and refining and processing capacity; and |
Our debt level and the covenants in the agreements governing our debt could negatively impact our financial condition, results of operations, cash flows and business prospects.
As of December 31, 2014,2017, we had $1.4 billion inno borrowings and $3$2 million in letters of credit outstanding under Whiting Oil and Gas Corporation’s (“Whiting Oil and Gas”) credit facility with $3.1 $2.3billion of available borrowing capacity, as well as $3.9$3.2 billion of senior notes outstanding and $350$562 million of convertible senior subordinated notes outstanding. We are allowed to incur additional indebtedness, provided that we meet certain requirements in the indentures governing our senior notes and our senior subordinated notes and Whiting Oil and Gas’ credit agreement.
Our level of indebtedness and the covenants contained in the agreements governing our debt could have important consequences for our operations, including:
| · | | making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt agreements, including financial and other restrictive covenants, could result in an event of default under Whiting Oil and Gas’ credit agreement and the indentures governing our senior notes and convertible senior notes; |
| · | | requiring us to dedicate a substantial portion of our cash flow from operations to required payments on debt, thereby reducing the availability of cash flow for working capital, capital expenditures and other general business activities; |
| · | | limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate and other activities; |
| · | | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
| · | | placing us at a competitive disadvantage relative to other less leveraged competitors; and |
| · | | making us vulnerable to increases in interest rates, because debt under Whiting Oil and Gas’ credit agreement is subject to certain rate variability.variability; |
| · | | making us more vulnerable to economic downturns and adverse developments in our industry or the economy in general, especially declines in oil and natural gas prices; and |
| · | | when oil and natural gas prices decline, our ability to maintain compliance with our financial covenants becomes more difficult and our borrowing base is subject to reductions, which may reduce or eliminate our ability to fund our operations. |
We may be required to repay all or a portion of our debt on an accelerated basis in certain circumstances. If we fail to comply with the covenants and other restrictions in the agreements governing our debt, it could lead to an event of default and the acceleration of our repayment of outstanding debt. In addition, if we are in default under the agreements governing our indebtedness, we would not be able to pay dividends on our capital stock. Our ability to comply with these covenants and other restrictions may be affected by events beyond our control, including prevailing economic and financial conditions. Moreover, the borrowing base limitation on Whiting Oil and Gas’ credit agreement is periodically redetermined on May 1 and November 1 of each year, and may be the subject of special redeterminations described in such credit agreement based on an evaluation of our oil and gas reserves. Because oil and gas prices are principal inputs into the valuation of our reserves, if oil and gas prices remain at their current levels for a prolonged period or go lower, our borrowing base could be reduced at the next redetermination date or during future redeterminations. Upon a redetermination, if borrowings in excess of the revised borrowing capacity were outstanding, we could be forced to immediately repay a portion of our debt outstanding under the credit agreement.
We may not have sufficient funds to make such repayments. If we are unable to repay our debt out ofwith cash on hand, we could attempt to refinance such debt, sell assets or repay such debt with the proceeds from an equity offering. We may not be able to generate sufficient cash flow to pay the interest on our debt or future borrowings, and equity financings or proceeds from the sale of assets may not be available to pay or refinance such debt. The terms of our debt, including Whiting Oil and Gas’ credit agreement, may also prohibit us from taking such actions. Factors that will affect our ability to raise cash through an offering of our capital stock or debt securities, a
refinancing of our debt or a sale of assets include financial market conditions and our market value and operating performance at the time of such offering or other financing. We may not be able to successfully complete any such offering, refinancing or sale of assets.
In conjunctionIf we cannot make scheduled payments on our indebtedness or otherwise fail to comply with the Kodiak Acquisitioncovenants and other restrictions in December 2014,the agreements governing our debt, we assumed Kodiak’swill be in default and the lenders under Whiting Oil and Gas’ credit agreement and the holders of our senior notes and convertible senior notes could declare all outstanding principal amountand interest to be due and payable, and the lenders under Whiting Oil and Gas’ credit agreement could terminate their commitments to loan money and could foreclose against the assets collateralizing their borrowings and we could be forced into bankruptcy or liquidation. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of $800 million of 8.125% Senior Notes due December 2019, $350 million of 5.5% Senior Notes due January 2021operations. Further, failing to comply with the financial and $400 million of 5.5% Senior Notes due February 2022 (the “Kodiak Notes”). On January 7, 2015, as required under the terms ofother restrictive covenants in Whiting Oil and Gas’ credit agreement and the indentures governing our senior notes and convertible senior notes could result in an event of default, which could adversely affect our business, financial condition and results of operations.
The instruments governing our indebtedness contain various covenants limiting the Kodiak Notes (the “Kodiak Indentures”) upondiscretion of our management in operating our business.
The indentures governing our senior notes and convertible senior notes and Whiting Oil and Gas’ credit agreement contain various restrictive covenants that may limit our management’s discretion in certain respects. In particular, these agreements will limit our and our subsidiaries’ ability to, among other things:
| · | | pay dividends or make other distributions or repurchase or redeem our capital stock; |
| · | | prepay, redeem or repurchase certain debt; |
| · | | make loans and investments; |
| · | | incur or guarantee additional indebtedness or issue preferred stock; |
| · | | enter into agreements that restrict dividends or other payments from our restricted subsidiaries to us; |
| · | | consolidate, merge or transfer all or substantially all of our assets and those of our restricted subsidiaries taken as a whole; |
| · | | engage in transactions with affiliates; |
| · | | enter into hedging contracts; and |
| · | | create unrestricted subsidiaries. |
In addition, Whiting Oil and Gas’ credit agreement requires us, as of the last day of any quarter, to maintain the following ratios (as defined in the credit agreement): (i) a changeconsolidated current assets to consolidated current liabilities ratio (which includes an add back of the available borrowing capacity under the credit agreement) of not less than 1.0to1.0, (ii) a total senior secured debt to the last four quarters’ EBITDAX ratio of less than 3.0 to 1.0 during the Interim Covenant Period (defined below), and thereafter a total debt to EBITDAX ratio of less than 4.0to1.0, and (iii) a ratio of the last four quarters’ EBITDAX to consolidated cash interest charges of not less than 2.25 to 1.0 during the Interim Covenant Period. Under the credit agreement, the “Interim Covenant Period” is defined as the
period from June 30, 2015 until the earlier of (i) April 1, 2018 or (ii) the commencement of an investment-grade debt rating period. Also, the indentures under which we issued our senior notes restrict us from incurring additional indebtedness and making certain restricted payments, subject to certain exceptions, unless our fixed charge coverage ratio (as defined in controlthe indentures) is at least 2.0 to 1.0. If we were in violation of Kodiak,these covenants, then we offeredmay not be able to repurchaseincur additional indebtedness, including under Whiting Oil and Gas’ credit agreement. A substantial or extended decline in oil or natural gas prices may adversely affect our ability to comply with these covenants.
If we fail to comply with the restrictions in the indentures governing our senior notes and convertible senior notes, Whiting Oil and Gas’ credit agreement or any other subsequent financing agreements, a default may allow the creditors to accelerate the related indebtedness as well as any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, lenders may be able to terminate any commitments they had made to make further funds available to us. Furthermore, if we were unable to repay the amounts due and payable under Whiting Oil and Gas’ credit agreement, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event that our lenders or noteholders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets or be able to borrow sufficient funds to repay or refinance that indebtedness. Also, if we are in default under the agreements governing our indebtedness, we will not be able to pay dividends on our capital stock.
If oil, NGL and natural gas prices decrease, we may be required to take write-downs of the carrying values of our oil and gas properties.
Accounting rules require that we periodically review the carrying value of our producing oil and gas properties for possible impairment. Based on specific market factors and circumstances at 101%the time of par all $1,550prospective impairment reviews (which may include depressed oil, NGL and natural gas prices and the continuing evaluation of development plans, production data, economics and other factors) we may be required to write down the carrying value of our oil and gas properties. For example, we recorded a $835 million principal amountimpairment charge during 2017 for the partial write-down of Kodiak Notes outstanding. The repurchase offer expiresthe Redtail field in Colorado. A write-down constitutes a non-cash charge to earnings. We may incur additional impairment charges in the future, which could have a material adverse effect on March 3, 2015. We expect to fund any payments due as a resultour results of such repurchase offer with borrowings under our revolving credit facility, which would reduce availability under such facility.operations in the period recognized.
Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.
Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons from tight rock formations. The process involves the injection of mainly water and sand andplus a de minimis amount of chemicals under pressure into formations to fracture the surrounding rock and stimulate production. Hydraulic fracturing has been utilized to complete wells in our most active areas located in the states of Colorado, Michigan, Montana and North Dakota, Texas and Wyoming, and we expect it will also be used in the future. Should our exploration and production activities expand to other states, it is likely that we will utilize hydraulic fracturing to complete or recomplete wells in those areas. The process is typically regulated by state oil and gas commissions. However, the U.S. Environmental Protection Agency (the “EPA”) recentlyalso issued guidance which was published in the Federal Register on February 12, 2014 for permitting authorities and the industry regarding the process for obtaining a permit for hydraulic fracturing involving diesel.
At the same time,In December 2016, the EPA has commencedreleased a study offinal report on the potential environmental impacts of hydraulicoil and gas fracturing activities on the quality and quantity of drinking water resources.resources in the United States. In addition, in June 2016, the EPA is currently studying wastewater and stormwater discharges from hydraulic fracturing facilities. A proposedissued a final rule to amend the Effluent Limitations Guidelines and Standardspromulgating pretreatment standards for the oil and gas extraction category which would address discharges of wastewater pollutants from onshore unconventional oil and gas extraction facilities to publicly-owned treatment works is expected in early 2015.works. The EPA announced in 2015 that it would directly regulate methane emissions fromis also conducting a study of private wastewater treatment facilities accepting oil and natural gas wells forextraction wastewater. The EPA is collecting data and information regarding the first time as partextent to which these facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial characteristics of President Obama’s Climate Action Plan. As partthe facilities, the environmental impacts of this strategy, the EPA will propose in the summer of 2015 a rule to set methanedischarges and volatile organic compound emissions standards for new and modified oil and natural gas wells. The final rule is expected in 2016. other information.
Other federal agencies are also examining hydraulic fracturing, including the U.S. Department of Energy, the U.S. Government Accountability Office and the White House Council for Environmental Quality. TheIn March 2015, the U.S. Department of the Interior released a draft proposedfinal rule in May 2012 governingaddressing (i) hydraulic fracturing on federal and Indian oil and natural gas leases to require validation of well integrity and strong cement barriers between the wellbore and water zones through which the wellbore passes, (ii) disclosure of information regarding the chemicals used in hydraulic fracturing advance approval for well-stimulation activities, mechanical integrity testing of casing and monitoring of well-stimulation operations, and on May 24, 2013to the Federal Bureau of Land Management, (iii) higher standards for interim storage of recovered waste fluids from hydraulic fracturing, and (iv) measures to lower the risk of cross-well contamination with chemicals and fluids used in fracturing operations. This rule was challenged in federal court and in June 2016, the Wyoming District Court hearing the case ruled that the Department of the Interior had exceeded its authority in issuing the rule. In March 2017, Justice Department lawyers representing the Bureau of Land Management asked the Court of Appeals for the Tenth Circuit to stay the government’s previously filed appeal as the Trump Administration was planning to rescind the rules; and in July 2017, the Department of the Interior announced its proposal to rescind the rules, with the public comment period on the proposal closing in September 2017. On December 29, 2017, the Department of the Interior issued a revised draftfinal rule rescinding the 2015 rule.
In addition, legislation has been introduced in Congress from time to time to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the fracturing process. Also, some states have adopted, and other states are considering adopting, regulations that could ban, restrict or impose additional requirements on activities relating to hydraulic fracturing in certain circumstances. For example, onin June 17, 2011, Texas enacted a law that requires the disclosure of information regarding the substances used in the hydraulic fracturing process to the Railroad Commission of Texas (the entity that regulates oil and natural gas production in Texas) and the public. Such federal or state legislation could require the disclosure of chemical constituents used in the fracturing process to state or federal regulatory authorities who could then make such information publicly available. Disclosure of chemicals used in the fracturing process could make it easier for third parties opposing hydraulic fracturing to pursue legal proceedings against producers and service providers based on allegations that specific chemicals used in the fracturing process could adversely affect human health or the environment, including groundwater. In addition, if hydraulic fracturing is regulated at the federal level, our fracturing activities could become subject to additional permitpermitting requirements or operational restrictions and also to associated permitting delays, litigation risk and potential increases in costs. Further, local governments may seek to adopt, and some have adopted, ordinances within their jurisdictions restricting the use of or regulating the time, place and manner of drilling or hydraulic fracturing. No assurance can be given as to whether or not similar measures might be considered or implemented in the jurisdictions in which our properties are located. If new laws, regulations or ordinances that significantly restrict or otherwise impact hydraulic fracturing are passed by Congress or adopted in the states or local municipalities where our properties are located, such legal requirements could prohibit or make it more difficult or costly for us to perform hydraulic fracturing activities and thereby could affect the determination of whether a well is commercially viable. In addition, restrictions on hydraulic fracturing could reduce the amount of oil and natural gas that we are ultimately able to produce in commercially paying quantities and the calculation of our reserves.
In addition, onin July 3, 2014, a major university and U.S. Geological Survey researchers published a study purporting to find a causal connection between the deep well injection of hydraulic fracturing wastewater and a sharp increase in seismic activity in Oklahoma since 2008. SuchThis study, as well as subsequent studies and reports, may trigger new legislation or regulations that would limit or ban the disposal of hydraulic fracturing wastewater in deep injection wells. If such new laws or rules are adopted, our operations may be curtailed while alternative treatment and disposal methods are developed and approved.
Further, onin May 19, 2014, the EPA published an Advance Notice of Proposed Rulemaking (“ANPR”) under the Toxic Substances Control Act, relating to the disclosure of chemical substances and mixtures used in oil and gas exploration and production. Depending on the precise disclosure requirements the EPA elects to impose, if any, we may be obliged to disclose valuable proprietary information, and failure to do so may subject us to penalties.
Refer to “Hydraulic Fracturing” in Item 2 of this Annual Report on Form 10-K for more information on hydraulic fracturing.
IfWe have entered into physical delivery contracts and do not expect to be able to deliver all the oil NGLrequired under such contracts and, natural gas prices decrease,as a result, we mayexpect we will be required to take write-downsmake deficiency payments.
As of the carrying values of our oil and gas properties.
Accounting rules require that we periodically review the carrying value of our producing oil and gas properties for possible impairment. Based on specific market factors and circumstances at the time of prospective impairment reviews (which may include depressed oil, NGL and natural gas prices and the continuing evaluation of development plans, production data, economics and other factors) we may be required to write down the carrying value of our oil and gas properties. For example, we recorded a $587 million impairment write-down during 2014 for the partial impairment of non-core oil and gas producing properties, which are not currently being developed, in Colorado, Louisiana, North Dakota and Utah related to the decrease in oil and gas prices at December 31, 2014. A write-down constitutes a non-cash charge to earnings. Oil and gas prices have continued to decline since December 31, 2014 which may cause us to incur additional impairments that could have a material adverse effect on our results of operations in the period recognized.
Our use of enhanced recovery methods creates uncertainties that could adversely affect our results of operations and financial condition.
One of our business strategies is to commercially develop oil reservoirs using enhanced recovery technologies. For example,2017, we inject water and CO2 into formations on some of our properties to increase the production of oil and natural gas. The additional production and reserves attributable to the use of these enhanced recovery methods are inherently difficult to predict. If our enhanced recovery programs do not allow for the extraction of oil and gas in the manner or to the extent that we anticipate, our future results of operations and financial condition could be materially adversely affected. Additionally, our ability to utilize CO2 injection as an enhanced recovery technique is subject to our ability to obtain sufficient quantities of CO2. Under our CO2had three physical delivery contracts if the supplier suffers an inability to deliver its contractually required quantities of CO2 to us and other parties with whom it has CO2 contracts, then the supplier may reduce the amount of CO2 on a pro rata basis it provides to us and such other parties. If this occurs or if we are otherwise limited in the quantities of CO2 available to us, we may not have sufficient CO2 to produce oil and natural gas in the manner or to the extent that we anticipate, and our future oil and gas production volumes could be negatively impacted. These contracts are also structured as “take-or-pay” arrangements, which require us to continuedeliver fixed volumes of crude oil. One of these contracts is tied to oil production at our Sanish field in Mountrail County, North Dakota, and two are tied to oil production at our Redtail field in Weld County, Colorado. Although, we believe that our production and reserves are sufficient to fulfill the delivery commitment at our Sanish field in North Dakota, if we fail to deliver the committed volumes, we would be required to pay a deficiency payment of $7.00 per undelivered barrel (subject to upward adjustment). At our Redtail field, we have determined that it is not probable that future oil production will be sufficient to meet the minimum volume requirements under our two contracts in this area. On February 1, 2018, we paid $61 million to the counterparty to one of these Redtail delivery contracts to settle all future minimum volume commitments under the agreement. We expect to make periodic deficiency payments even if we decideunder the second Redtail contract that currently total $4.92 per undelivered Bbl (subject to terminate or reduce our use of CO2 as part of our enhanced recovery techniques.
The development of the proved undeveloped reserves in the North Ward Estes field may take longerupward adjustment). During 2017, 2016 and may require higher levels of capital expenditures than we currently anticipate.
As of December 31, 2014, proved undeveloped reserves comprised 40% of the North Ward Estes field’s2015, total estimated proved reserves. To fully developdeficiency payments under these reserves, we expectcontracts amounted to incur future development costs of $762$66 million, at the North Ward Estes field as of December 31, 2014. This field encompasses 11% of our total estimated future development costs related$43 million and $15 million, respectively. Refer to proved undeveloped reserves. Development of“Properties – Delivery Commitments” for more information about these reserves may take longer and require higher levels of capital expenditures than we currently anticipate. In addition, the development of these reserves will require the use of enhanced recovery techniques, including water flood and CO2 injection installations, the success of which is less predictable than traditional development techniques.delivery contracts.
Prospects that we decide to drill may not yield oil or gas in commercially viable quantities.
We describe some of our current prospects and our plans to explore those prospects in this Annual Report on Form 10-K. A prospect is a property on which we have identified what our geoscientists believe, based on available seismic and geological information, to be indications of oil or gas. Our prospects are in various stages of evaluation, ranging from a prospect that is ready to drill to a prospect that will require substantial additional seismic data processing and interpretation. There is no way to predict in advance of drilling and testing whether any particular prospect will yield oil or gas in sufficient quantities to recover drilling or completion costs or to be economically viable. The use of seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or gas will be present or, if present, whether oil or gas will be present in commercially viable quantities. In addition, because of the wide variance that results from different equipment used to test the wells, initial flow rates may not be indicative of sufficient oil or gas quantities in a particular field. The analogies we draw from available data from other wells, from more fully explored prospects, or from producing fields may not be applicable to our drilling prospects. We may terminate our drilling program for a prospect if results do not merit further investment.
Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.
The process of estimating oil and natural gas reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of reserves referred to in this Annual Report on Form 10-K.
In order to prepare our estimates, we must project production rates and timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process also requires economic assumptions about matters such as the following:
| · | | historical production from the area compared with production rates from other producing areas; |
| · | | the assumed effect of governmental regulation; and |
| · | | assumptions about future prices of oil, NGLs and natural gas including differentials, production and development costs, gathering and transportation costs, severance and excise taxes, capital expenditures and availability of funds. |
Therefore, estimates of oil and natural gas reserves are inherently imprecise. Actual future production; oil, NGL and natural gas prices; revenues; taxes; exploration and development expenditures; operating expenses; and quantities of recoverable oil and natural gas reserves will most likely vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of reserves referred to in this Annual Report on Form 10-K. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond our control.
You should not assume that the present value of future net revenues from our proved reserves, as referred to in this report, is the current market value of our estimated proved oil and natural gas reserves. In accordance with SEC requirements, we base the estimated discounted future net cash flows from our proved reserves on 12-month average prices and current costs as of the date of the estimate. The 12-month average prices used for the year ended December 31, 20142017 were $94.99$51.34 per Bbl and $4.35$2.98 per Mcf, whereas the quoted NYMEX prices for oil and gas on February 13, 2015 were $53.67 per Bbl and $2.81 per Mcf.MMBtu. Actual future prices and costs may differ materially from those used in the estimate. If natural gasthe 12-month average oil prices decline by $0.10 per Mcf, then the standardized measure of discounted future net cash flows ofused to calculate our estimated provedoil reserves as of December 31, 2014 would have decreased by $21 million. If oil prices decline by $1.00 per Bbl, then the standardized measure of discounted future net cash flows of our estimated proved reserves as of December 31, 20142017 would have decreased by $179 $181million.
Risks associated with If the production, gathering, transportation and sale of oil, NGLs and natural gas could adversely affect net income and cash flows.
Our net income and cash flows will depend upon, among other things, oil, NGL and natural gas production and the prices and costs incurred to develop and produce oil and natural gas reserves. Drilling, production or transportation accidents that temporarily or permanently halt the production and sale of oil, NGLs and natural gas will decrease revenues and increase expenditures. For example, accidents may occur that result in personal injuries, property damage, damage to productive formations or equipment and environmental damages. Any costs incurred in connection with any such accidents that are not insured against will have the effect of reducing net income. Also, we do not have insurance policies in effect that are intended to provide coverage for losses solely related to hydraulic fracturing operations. Please read “— Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing...” above in these Risk Factors for a discussion of the uncertainty involved in the regulation of hydraulic fracturing. Also, our oil, NGL and natural gas production depends in large part on the proximity and capacity of pipeline systems and transportation facilities which are mostly owned by third parties. The lack of availability or the lack of capacity on these systems and facilities could result in the curtailment of production or the delay or discontinuance of drilling plans. Similarly, curtailments or damage to pipelines and other transportation facilities used to transport oil, NGLs and natural gas production to markets for sale could decrease revenues or increase transportation expenses. Any such curtailments or damage to the gathering systems could also require finding alternative means to transport the oil, NGLs and natural gas production, which alternative means could result in additional costs that will have the effect of increasing transportation expenses.
Also, there have been recent accidents involving rail cars carrying Bakken formation crude oil, which resulted in the U.S. Department of Transportation (the “DOT”) issuing an emergency order on February 25, 2014 that requires rail shippers to test the makeup of such crude oil before transporting it. This move follows the safety alert the DOT issued in January 2014 that Bakken formation crude oil is more flammable than other types of crude oil and has been followed by additional emergency orders and safety advisories and alerts. An accident involving rail cars could result in significant personal injuries and property and environmental damage. Additionally, added regulations currently being considered in response to such accidents could result in additional costs that could increase transportation expenses.
In addition, drilling, production and transportation of hydrocarbons bear the inherent risk of loss of containment. Potential consequences include loss of reserves, loss of production, loss of economic value associated with the affected wellbore, contamination of soil, ground water and surface water, as well as potential fines, penalties or damages associated with any of the foregoing consequences.
The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business.
The indentures governing our senior notes and our senior subordinated notes and Whiting Oil and Gas’ credit agreement contain various restrictive covenants that may limit our management’s discretion in certain respects. In particular, these agreements will limit our and our subsidiaries’ ability to, among other things:
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| | pay dividends on, redeem or repurchase our capital stock or redeem or repurchase our senior or subordinated debt;
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| | enter into agreements that restrict dividends or other payments from our restricted subsidiaries to us;
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| | consolidate, merge or transfer all or substantially all of our assets and those of our restricted subsidiaries taken as a whole;
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| | engage in transactions with affiliates;
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| | enter into hedging contracts;
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| | create unrestricted subsidiaries; and
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| | enter into sale and leaseback transactions.
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In addition, Whiting Oil and Gas’ credit agreement requires us, as of the last day of any quarter, (i) to not exceed a total debt to the last four quarters’ EBITDAX ratio (as defined in the credit agreement) of 4.0 to 1.0 and (ii) to have a consolidated current assets to consolidated current liabilities ratio (as defined in the credit agreement and which includes an add back of the available borrowing capacity under the credit agreement) of not less than 1.0 to 1.0. Also, the indentures under which we issued our senior notes and our senior subordinated notes restrict us from incurring additional indebtedness and making certain restricted payments, subject to certain exceptions, unless our fixed charge coverage ratio (as defined in the indentures) is at least 2.0 to 1. The Kodiak Indentures restrict us from incurring additional indebtedness and making certain restricted payments, subject to certain exceptions, unless our fixed charge coverage ratio (as defined in the indentures) is at least 2.25 to 1. If we were in violation of these covenants, then we may not be able to incur additional indebtedness, including under Whiting Oil and Gas’ credit agreement. A substantial or extended decline in oil or12-month average natural gas prices may adversely affectused to calculate our ability to comply with these covenants.
If we fail to comply withnatural gas reserves decline by $0.10 per MMBtu, then the restrictions in the indentures (including the Kodiak Indentures) governingstandardized measure of discounted future net cash flows of our and Kodiak’s senior notes and our senior subordinated notes or Whiting Oil and Gas’ credit agreement or any other subsequent financing agreements, a default may allow the creditors, if the agreements so provide, to accelerate the related indebtednessestimated proved reserves as well as any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, lenders may be able to terminate any commitments they had made to make further funds available to us. Furthermore, if we are in default under the agreements governing our indebtedness, we will not be able to pay dividends on our capital stock.of December 31, 2017 would have decreased by $21million.
Our exploration and development operations require substantial capital, and we may be unable to obtain needed capital or financing on satisfactory terms, which could lead to a loss of properties and a decline in our oil and natural gas reserves.
The oil and gas industry is capital intensive. We make and expect to continue to make substantial capital expenditures in our business and operations for the exploration, development, production and acquisition of oil and natural gas reserves. To date, we have financed capital expenditures through a combination of internally generated cash flows, equity and debt issuances, bank borrowings, internally generated cash flows, agreements with industry partners and oil and gas property divestments. We intend to finance future capital expenditures with cash flow from operations, proceeds from property divestitures, cash on hand and financing arrangements. Our cash flow from operations and access to capital is subject to a number of variables, including:
| · | | the prices at which oil and natural gas are sold; |
| · | | the level of oil and natural gas we are able to produce from existing wells; |
| · | | the prices at which oil and natural gas are sold; |
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| | the costs of producing oil and natural gas; and
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| · | | our ability to acquire, locate and produce new reserves. |
If our revenues or the borrowing base under our credit agreement decrease as a result of lower oil and natural gas prices, operating difficulties, declines in reserves, or for any other reason, then we may have limited ability to obtain the capital necessary to sustain our operations at current levels.
We may, from time to time, need to seek additional financing. There can be no assurance as to the availability or terms of any additional financing. If additional capital is needed, we may not be able to obtain debt or equity financing on terms favorable to us, or at all. If cash generated by operations or available under our revolving credit facility is not sufficient to meet our capital requirements, the failure to obtain additional financing could result in a curtailment of our operations relating to the exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves.
Part of our business strategy includes selling properties which subjects us to various risks.
Part of our business strategy includes selling properties when we believe that the sales price realized will provide an above average rate of return for the property or when the property no longer matches the profile of properties we desire to own. However, there is no assurance that such sales will occur in the time frames or with the economic terms we expect. Unless we conduct successful exploration, development and production activities or acquire properties containing proved reserves, divestitures of our properties will reduce our proved reserves and potentially our production. We may not be able to develop, find or acquire additional reserves sufficient to replace such reserves and production from any of the properties we sell. Additionally, agreements pursuant to which we sell properties may include terms that survive closing of the sale, including indemnification provisions, which could obligate us to substantial liabilities.
Risks associated with the production, gathering, transportation and sale of oil, NGLs and natural gas could adversely affect net income and cash flows.
Our net income and cash flows will depend upon, among other things, oil, NGL and natural gas production and the prices received and costs incurred to develop and produce oil and natural gas reserves. Drilling, production or transportation accidents that temporarily or permanently halt the production and sale of oil, NGLs and natural gas will decrease revenues and increase expenditures. For example, accidents may occur that result in personal injuries, property damage, damage to productive formations or equipment and environmental damages. Any costs incurred in connection with any such accidents that are not insured against will have the effect of reducing net income. Also, we do not have insurance policies in effect that are intended to provide coverage for losses solely related to hydraulic fracturing operations. Refer to the risk factor entitled “Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing...” for a discussion of the uncertainty involved in the regulation of hydraulic fracturing. Also, our oil, NGL and natural gas production depends in large part on the proximity and capacity of pipeline systems and transportation facilities which are mostly owned by third parties. The lack of availability or the lack of capacity on these systems and facilities could result in the curtailment of production or the delay or discontinuance of drilling plans. Similarly, curtailments or damage to pipelines and other transportation facilities used to transport oil, NGLs and natural gas production to markets for sale could decrease revenues or increase transportation expenses. Any such curtailments or damage to the gathering systems could also require finding alternative means to transport the oil, NGLs and natural gas production, which alternative means could result in additional costs that will have the effect of increasing transportation expenses.
Also, in response to accidents involving rail cars carrying Bakken formation crude oil, the U.S. Department of Transportation (the “DOT”) issued an emergency order in February 2014 that requires rail shippers to test the makeup of such crude oil before transporting it. This move follows the safety alert the DOT issued in January 2014 that Bakken formation crude oil is more flammable than other types of crude oil and has been followed by additional emergency orders and safety advisories and alerts. An accident involving rail cars could result in significant personal injuries and property and environmental damage. In May 2015, the Pipeline and Hazardous Material Safety Administration issued new rules applicable to “high-hazard flammable trains”, discussed in “Item 1 Business – Regulation – Regulation of Sale and Transportation of Oil” above, which could increase transportation expenses. Similarly, regulatory responses to the October 2015 failure at a Southern California underground natural gas storage facility could also lead to increased expenses for underground storage.
In addition, drilling, production and transportation of hydrocarbons bear the inherent risk of loss of containment. Potential consequences include loss of reserves, loss of production, loss of economic value associated with the affected wellbore, contamination of air, soil, ground water and surface water, as well as potential fines, penalties or damages associated with any of the foregoing consequences.
Our acreage must be drilled before lease expiration, generally within three to five years, in order to hold the acreage by production. Failure to drill sufficient wells in order to hold acreage will result in substantial lease renewal costs, or if renewal is not feasible, loss of our lease and prospective drilling opportunities.
Unless production is established on our undeveloped acreage, the underlying leases will expire. As of December 31, 2014,2017, the portion of our net undeveloped acreage that is subject to expiration over the next three years, if not successfully developed or renewed, is approximately 26%37% in 2015, 29%2018, 10% in 20162019 and 13%12% in 2017.2020. The cost to renew such leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. In addition, on certain portions of our acreage, third-party leases become immediately effective if our leases expire. As such, our actual drilling activities may materially differ from our current expectations, which could adversely affect our business.
Our acquisition activities may not be successful.
As part of our growth strategy, we have made and may continue to make acquisitions of businesses and properties. However, suitable acquisition candidates may not continue to be available on terms and conditions we find acceptable, and acquisitions pose substantial risks to our business, financial condition and results of operations. In pursuing acquisitions, we compete with other companies, many of which have greater financial and other resources to acquire attractive companies and properties. The following are some of the risks associated with acquisitions, including any completed or future acquisitions:
| · | | some of the acquired businesses or properties may not produce revenues, reserves, earnings or cash flow at anticipated levels; |
| · | | we may assume liabilities that were not disclosed to us or that exceed our estimates; |
| · | | we may be unable to integrate acquired businesses successfully and to realize anticipated economic, operational and other benefits in a timely manner, which could result in substantial costs and delays or other operational, technical or financial problems; |
| · | | acquisitions could disrupt our ongoing business, distract management, divert resources and make it difficult to maintain our current business standards, controls and procedures; |
| · | | we may issue additional equity or debt securities in order to fund future acquisitions; and |
| · | | we may incur losses as a result of title defects. |
Substantial acquisitions or other transactions could require significant external capital and could change our risk and property profile.
In order to finance acquisitions of additional producing or undeveloped properties, we may need to alter or increase our capitalization substantially through the issuance of debt or equity securities, the sale of production payments or other means. These changes in capitalization may significantly affect our risk profile. Additionally, significant acquisitions or other transactions can change the character of our operations and business. The character of the new properties may be substantially different in operating or geological characteristics or geographic location than our existing properties. Furthermore, we may not be able to obtain external funding for additional future acquisitions or other transactions or to obtain external funding on terms acceptable to us.
The unavailability or high cost of additional drilling rigs, equipment, supplies, personnel and oil field services could adversely affect our ability to execute our exploration and development plans on a timely basis or within our budget.
The demand for qualified and experienced field personnel to conduct field operations, geologists, geophysicists, engineers and other professionals in the oil and natural gas industry can fluctuate significantly, often in correlation with oil and natural gas prices, causing periodic shortages. Historically, there have been shortages of drilling rigs, completion crews and other oilfield equipment as demand for rigs and equipmentthese items has increased along with the number of wells being drilled.drilled and completed. These factors also cause significant increases in costs for equipment, services and personnel. Higher oil and natural gas prices generally stimulate demand and result in increased prices for drilling rigs crews and associated supplies, equipmentother oilfield goods and services. Additionally, our operations in some instances require supply materials for production, such as CO2, which could become subject to shortage and increasing costs. Shortages of field personnel and other professionals, drilling rigs, completion crews, equipment supplies or personnelsupplies or price increases could delay or adversely affect our exploration and development operations, which could restrict such operations or have a material adverse effect on our business, financial condition, results of operations or cash flows, or restrict operations.flows.
Our identified drilling locations are scheduled out over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling.
We have specifically identified and scheduled drilling locations as an estimation of our future multi-year drilling activities on our existing acreage. As of December 31, 2014, we had identified a drilling inventory of over 5,600 gross drilling locations. These scheduled drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including oil and natural gas prices, the availability of capital, costs of oil field goods and services, drilling results, our ability to extend drilling acreage leases beyond expiration, regulatory approvals and other factors. Because of these uncertainties, we do not know if the numerous potential drilling locations we have identified will ever be drilled or if we will be able to produce oil or gas from these or any other potential drilling locations. As such, our actual drilling activities may materially differ from those presently identified, which could in turn adversely affect our business.business or require us to remove certain proved undeveloped reserves from our proved reserve base if we are unable to drill those PUD locations within the SEC’s 5-year window.
We have been an early entrant into new or emerging plays. As a result, our drilling results in these areas are uncertain, the value of our undeveloped acreage may decline and we may incur impairment charges if drilling results are unsuccessful.
While our costs to acquire undeveloped acreage in new or emerging plays have generally been less than those of later entrants into a developing play, our drilling results in these areas are more uncertain than drilling results in areas that are developed and producing. Since new or emerging plays have limited or no production history, we are unable to use past drilling results in those areas to help predict our future drilling results. Therefore, our cost of drilling, completing and operating wells in these areas may be higher than initially expected, and the value of our undeveloped acreage will decline if drilling results are unsuccessful. Furthermore, if drilling results are unsuccessful, we may be required to write down the carrying value of our undeveloped acreage in new or emerging plays. For example, during the fourth quarter of 2014,2017 we recorded a $45$12 million non-cash charge for the impairment of unprovedundeveloped oil and gas properties in Louisiana, Michigan, Montana, North Dakota and Texas, as well as a $21 million non-cash charge for the impairment of unproved CO2 properties in New Mexico.where we have no current or future plans to drill. We may also incur such impairment charges in the future, which could have a material adverse effect on our results of operations in the period taken. Additionally, our rights to develop a portion of our undeveloped acreage may expire if not successfully developed or renewed. SeeRefer to “Acreage” in Item 2 of this Annual Report on Form 10-K for more information relating to the expiration of our rights to develop undeveloped acreage.
Properties that we acquire may not produce as projected, and we may be unable to identify liabilities associated with the properties or obtain indemnities from sellers for liabilities they may have created.
Our business strategy includes a continuing acquisition program. From 2004 through 2014,2017, we completed 21 separate significant acquisitions of producing properties with a combined purchase price of $6.4billion for estimated proved reserves as of the effective dates of the acquisitions of 445.2 MMBOE. The successful acquisition of producing properties requires assessment of many factors, which are inherently inexact and may be inaccurate, including the following:
| · | | the amount of recoverable reserves; |
| · | | future oil and natural gas prices; |
| · | | estimates of operating costs; |
| · | | estimates of future development costs; |
| · | | timing of future development costs; |
| · | | estimates of the costs and timing of plugging and abandonment; and |
| · | | the assumption of unknown potential environmental and other liabilities, losses or costs, including for example, historical spills or releases for which we are not indemnified or for which our indemnity is inadequate. |
Our assessment will not reveal all existing or potential problems, nor will it permit us to become familiar enough with the properties to assess fully their capabilities and deficiencies. In the course of our due diligence, we may not inspect every well, platform, facility or pipeline. Inspections may not reveal structural and environmental problems, such as pipeline corrosion or groundwater contamination, when they are made. We may not be able to obtain contractual indemnities from the seller for liabilities that it created. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations.
We may not be able to replace the reserves on properties we divest, and the agreements pursuant to which assets we divest may contain continuing indemnification obligations.
Part of our business strategy includes selling properties when we believe that the sales price realized will provide an above average rate of return for the property or when the property no longer matches the profile of properties we desire to own. Unless we conduct successful exploration, development and production activities or acquire properties containing proved reserves, divestitures of our properties will reduce our proved reserves and potentially our production. We may not be able to develop, find or acquire additional reserves sufficient to replace such reserves and production from any of the properties we sell. Additionally, agreements pursuant to
which we sell properties may include terms that survive closing of the sale, including indemnification provisions, which could obligate us to substantial liabilities.
Our use of oil and natural gas price hedging contracts involves credit risk andonly a portion of our anticipated production, may limit higher revenues in the future in connection with commodity price increases and may result in significant fluctuations in our net income.
We enter into hedging transactions of our oil and natural gas production revenues to reduce our exposure to fluctuations in the price of oil and natural gas. Our hedging transactions to date have consisted of financially settled crude oil and natural gas options contracts, primarily costless collars and swap contracts,swaps, placed with major financial institutions. As of February 13, 2015,January 23, 2018, we had contracts covering the sale of between 444,700 and 968,3601,850,000 barrels of oil per month for all of 2015.2018, which represents approximately 72% of our forecasted 2018 oil production volumes. All of our oil hedges will expire by December 2017. SeeJune 2019. Refer to “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of this Annual Report on Form 10-K for pricing information and a more detailed discussion of our hedging transactions.
We may in the future enter into these and other types of hedging arrangements to reduce our exposure to fluctuations in the market prices of oil and natural gas, or alternatively, we may decide to unwind or restructure the hedging arrangements we previously entered into. Hedging transactions expose us to risk of financial loss in some circumstances, including if production is less than expected, the other party to the contract defaults on its obligations or there is a change in the expected differential between the underlying price in the hedging agreement and actual prices received. Hedging transactions may limit the benefit we may otherwise receive from increases in the price for oil and natural gas. Our three-way collars only provide partial protection against declines in market prices due to the fact that when the market price falls below the sub-floor, the minimum price we will receive will be NYMEX plus the difference between the floor and the sub-floor. Furthermore, if we do not engage in hedging transactions or unwind hedging transactions we previously entered into, then we may be more adversely affected by declines in oil and natural gas prices than our competitors who engage in hedging transactions. Additionally, hedging transactions may expose us to cash margin requirements.
We recognize all gains and losses from changes in commodity derivative fair values immediately in earnings rather than deferring any such amounts in accumulated other comprehensive income.income (loss). Consequently, we may experience significant net losses, on a non-cash basis, due to changes in the value of our hedges as a result of commodity price volatility.
Seasonal weather conditions and lease stipulations adversely affect our ability to conduct drilling activities in some of the areas where we operate.
Oil and gas operations in the Rocky Mountains are adversely affected by seasonal weather conditions and lease stipulations designed to protect various wildlife. In certain areas, drilling and other oil and gas activities can only be conducted during the spring and summer months. This limits our ability to operate in those areas and can intensify competition during those months for drilling rigs, oil field equipment, services, supplies and qualified personnel, which may lead to periodic shortages. Resulting shortages or high costs could delay our operations, cause temporary declines in our oil and gas production and materially increase our operating and capital costs.
An increase in the differential or decrease in the premium between the NYMEX or other benchmark prices of oil and natural gas and the wellhead price we receive could have a material adverse effect on our results of operations, financial condition and cash flows.
The prices that we receive for our oil and natural gas production generally trade at a discount, but sometimes at a premium, to the relevant benchmark prices such as NYMEX. A negative difference between the benchmark price and the price received is called a differential and a positive difference is called a premium. The differential and premium may vary significantly due to market conditions, the quality and location of production and other risk factors. We cannot accurately predict oil and natural gas differentials and premiums. Increases in the differential and decreases in the premium between the benchmark price for oil and natural gas and the wellhead price we receive could have a material adverse effect on our results of operations, financial condition and cash flows.
We may incur substantial losses and be subject to substantial liability claims as a result of our oil and gas operations.
We are not insured against all risks. Losses and liabilities arising from uninsured and underinsured events could materially and adversely affect our business, financial condition or results of operations. Our oil and natural gas exploration and production activities are subject to all of the operating risks associated with drilling for and producing oil and natural gas, including the possibility of:
| · | | environmental hazards, such as uncontrollable flows of oil, gas, brine, well fluids, toxic gas or other pollution into the environment, including groundwater and shoreline contamination; |
| · | | abnormally pressured formations; |
| · | | mechanical difficulties, such as stuck oil field drilling and service tools and casing collapse; |
| · | | the loss of well control; |
| · | | personal injuries and death; and |
Any of these risks could adversely affect our ability to conduct operations or result in substantial losses to our company. We may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other event occurs and is not fully covered by insurance, then it could adversely affect us.
We have limited control over activities on properties we do not operate, which could reduce our production and revenues and increase capital expenditures.
We operate 70%82% of our net productive oil and natural gas wells, which represents 85%88% of our proved developed producing reserves as of December 31, 2014.2017. If we do not operate the properties in which we own an interest, we do not have control over normal operating procedures, expenditures or future development of our properties. The failure of an operator of our wells to adequately perform operations or an operator’s breach of the applicable agreements could reduce our production and revenues. The success and timing of our drilling and development activities on properties operated by others therefore depends upon a number of factors outside of our control, including the operator’s decisions with respect to the timing and amount of capital expenditures, the period of time over which the operator seeks to generate a return on capital expenditures, inclusion of other participants in drilling wells, and the use of technology, as well as the operator’s expertise and financial resources and the operator’s relative interest in the field. Operators may also opt to decrease operational activities following a significant decline in, or a sustained period of low, oil or natural gas prices. Because we do not have a majority interest in most wells we do not operate, we may not be in a position to remove the operator in the event of poor performance. Accordingly, while we use commercially reasonable efforts to cause the operator to act asin a reasonably prudent operator,manner, we are limited in our ability to do so.
Our use of 3-D seismic data is subject to interpretation and may not accurately identify the presence of oil and gas, which could adversely affect the results of our drilling operations.
Even when properly used and interpreted, 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures. In addition, the use of 3-D seismic and other advanced technologies requires greater predrilling expenditures than traditional drilling strategies do, and we could incur losses as a result of such expenditures. Thus, some of our drilling activities may not be successful or economical, and our overall drilling success rate or our drilling success rate for activities in a particular area could decline. We often gather 3-D seismic data over large areas. Our interpretation of seismic data delineates for us those portions of an area that we believe are desirable for drilling. Therefore, we may choose not to acquire option or lease rights prior to acquiring seismic data, and in many cases, we may identify hydrocarbon indicators before seeking option or lease rights in the location. If we are not able to lease those locations on acceptable terms, it would result in our having made substantial expenditures to acquire and analyze 3-D seismic data without having an opportunity to attempt to benefit from those expenditures.
Market conditions or operational impediments may hinder our access to oil and gas markets or delay our production.
In connection with our continued development of oil and gas properties, we may be disproportionately exposed to the impact of delays or interruptions of production from wells inon these properties, caused by transportation capacity constraints, curtailment of production or the interruption of transporting oil and gas volumes produced. In addition, market conditions or a lack of satisfactory oil and gas transportation arrangements may hinder our access to oil and gas markets or delay our production. The availability of a ready market for our oil, NGL and natural gas production depends on a number of factors, including the demand for and supply of oil, NGLs and natural gas and the proximity of reserves to pipelines and terminal facilities. Our ability to market our production depends substantially on the availability and capacity of gathering systems, pipelines and processing facilities owned and operated by third-parties. Additionally, entering into arrangements for these services exposes us to the risk that third parties will default on their obligations under such arrangements. Our failure to obtain such services on acceptable terms or the default by a third party on their obligation to provide such services could materially harm our business. We may be required to shut in wells for a lack of a market or because access to gas pipelines, gathering systems or processing facilities may be limited or unavailable. If that were to occur, then we would be unable to realize revenue from those wells until production arrangements were made to deliver the production to market.
We are subject to complex laws that can affect the cost, manner or feasibility of doing business.
Exploration, development, production and sale of oil and natural gas are subject to extensive federal, state, local and international regulation. We may be required to make large expenditures to comply with governmental regulations. Matters subject to regulation include:
| · | | discharge permits for drilling operations; |
| · | | reports concerning operations; |
| · | | the spacing of wells;well spacing;
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| · | | unitization and pooling of properties; and |
Under these laws, we could be liable for personal injuries, property damage and other damages. Failure to comply with these laws also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover, these laws could change in ways that could substantially increase our costs. Any such liabilities, penalties, suspensions, terminations or regulatory changes could materially and adversely affect our financial condition and results of operations.
Our operations may incur substantial costs and liabilities to comply with environmental laws and regulations.
Our oil and gas operations are subject to stringent federal, state and local laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit before drilling commences; restrict the types, quantities and concentration of materials that can be released into the environment in connection with drilling and production activities; limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and impose substantial liabilities for pollution resulting from our operations. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, incurrence of investigatory or remedial obligations, or the imposition of injunctive relief.relief, or certain leases could be cancelled in the event that an agency refuses to issue or delays the issuance of a required permit. Under these environmental laws and regulations, we could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible for the release or if our operations were standard in the industry at the time they were performed. Private parties, including the surface owners of properties upon which we drill, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage. We may not be able to recover some or any of these costs from insurance. Moreover, federal law and some state laws allow the government to place a lien on real property for costs incurred by the government to address contamination on the property.
President Trump has indicated that he would work to ease regulatory burdens on industry and on the oil and gas sector, including environmental regulations. However, any executive orders the President may issue or any new legislation Congress may pass with the goal of reducing environmental statutory or regulatory requirements may be challenged in court. In addition, various state laws and regulations (and permits issued thereunder) will be unaffected by federal changes unless and until the state laws and corresponding permits are similarly changed, and any judicial review is completed.
Changes in environmental laws and regulations occur frequently and may have a materially adverse impact on our business. For example, in 2012, the EPA published final rules under the Federal Clean Air Act (the “CAA”) that subject oil and natural gas production, processing, transmission and storage operations to regulation under the New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants. With regards to production activities, these rules require, among other things, the reduction of volatile organic compound emissions from certain fractured and refractured gas wells for which well completion operations are conducted and, in particular, requiring some of these wells to use reduced emission completions, also known as “green completions,”completions”, after January 1, 2015. These regulations also establish specific new requirements regarding emissions from production-related wet seal and reciprocating compressors, pneumatic controllers and storage vessels.
The EPA announced in 2015 that it would directly regulate methane emissions from oil and natural gas wells for the first time as part of President Obama’s Climate Action Plan. As part of this strategy, in May 2016, the EPA issued three final rules. The EPA issued a final rule that updated the New Source Performance Standards to add requirements that the oil and gas industry reduce emissions of greenhouse gases and to cover additional equipment and activities in the oil and gas production chain. The final rule sets emissions limits for methane, which is the principal greenhouse gas emitted by equipment and processes in the oil and gas sector. This rule applies to new, reconstructed and modified processes and equipment. This rule also expands the volatile organic compound emissions limits to hydraulically fractured oil wells and equipment used across the industry that was not regulated in the 2012 rules. The rule also requires owners and operators to find and repair leaks, also known as “fugitive emissions.” The EPA also issued a final rule known as the Source
Determination Rule, which is intended to clarify when multiple pieces of equipment and activities in the oil and gas industry must be deemed a single source when determining whether major source permitting programs apply under the prevention of significant deterioration, nonattainment new source review preconstruction and operation permit programs under Title V of the CAA (“Title V”). The final rule defines the term “adjacent” to clarify that equipment and activities in the oil and gas sector that are under common control will be considered part of the same source if they are located near each other – specifically, if they are located on the same site, or on sites that share equipment and are within one quarter of a mile of each other. This rule applies to equipment and activities used for onshore oil and natural gas production, and for natural gas processing. It does not apply to offshore operations. Finally, the EPA also issued a final Federal Implementation Plan (“FIP”) for Indian country, which implements the minor new source review program in Indian country for oil and natural gas production. The FIP will be used instead of site-specific minor new source review preconstruction permits in Indian country and incorporates emissions limits and other requirements from eight federal air standards, including the final New Source Performance Standard, subpart OOOOa. Requirements of the FIP apply throughout Indian country, except non-reservation areas, unless a tribe or the EPA demonstrates jurisdiction for those areas.
Compliance with such rules could result in significant costs, including increased capital expenditures and operating costs, which may adversely impact our business. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the CAA and associated state laws and regulations.
In 2016, the EPA also issued the first draft of an Information Collection Request, seeking a broad range of information on the oil and gas industry, including: how equipment and emissions controls are, or can be, configured, what installing those controls entails and the associated costs. This includes information on natural gas venting that occurs as part of existing processes or maintenance activities, such as well and pipeline blowdowns, equipment malfunctions and flashing emissions from storage tanks.
In June 2017, the EPA proposed staying the final rule implementing certain of the new oil and gas standards for two years while it reconsiders the rules. In November 2017, the EPA issued a notice of data availability for the proposed stay of the rules, with a comment period closing on December 8, 2017.
We are currently engaged in discussions with the Colorado Department of Public Health and Environment (the “CDPHE”) concerning certain equipment used in our Redtail facilities and our compliance with various air permits and applicable federal and state air quality laws and regulations over the control of air pollutant emissions from those facilities. We and the CDPHE are negotiating the terms of a settlement agreement to resolve this matter.
Any increased governmental regulation or suspension of oil and natural gas exploration or production activities that arises out of these incidents could result in higher operating costs, which could in turn adversely affect our operating results. Also, for instance, any changes in laws or regulations that result in more stringent or costly material handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to maintain compliance and may otherwise have a material adverse effect on our results of operations, competitive position or financial condition as well as those of the oil and gas industry in general.
Climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating costs and reduced demand for oil and gas that we produce.
OnIn December 15, 2009, the EPA published its findings that emissions of carbon dioxide, methane and other greenhouse gases (“GHG”) present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to the warming of the earth’s atmosphere and other climate changes. Based on these findings, the EPA has begun adoptingadopted and implementingimplemented regulations that restrict emissions of GHG under existing provisions of the Federal Clean Air Act (the “CAA”),CAA, including one rulerules that limitslimit emissions of GHG from motor vehicles beginning with the 2012 model year. The EPA has asserted that these final motor vehicle GHG emission standards trigger the CAA construction and operating permit requirements for stationary sources, commencing when the motor vehicle standards took effect onin January 2, 2011. OnIn June 3, 2010, the EPA published its final rule to address the permitting of GHG emissions from stationary sources under the Prevention of Significant Deterioration (the “PSD”) and Title V permitting programs. This rule “tailors” these permitting programs to apply to certain stationary sources of GHG emissions in a multi-step process, with the largest sources first subject to permitting. Further, facilities required to obtain PSD permits for their GHG emissions are required to reduce those emissions consistent with guidance for determining “best available control technology” standards for GHG, which guidance was published by the EPA in November 2010. Also in November 2010, the EPA expanded its existing GHG reporting rule to include onshore oil and natural gas production, processing, transmission, storage and distribution facilities. This rule requires reporting of GHG emissions from such facilities on an annual basis with reporting beginning in 2012 for emissions occurring in 2011.basis.
In June 2014, the Supreme Court upheld most of the EPA’s GHG permitting requirements, allowing the agency to regulate the emission of GHG from stationary sources already subject to the PSD and Title V requirements. Certain of our equipment and
installations may currently be subject to PSD and Title V requirements and hence, under the Supreme Court’s ruling, may also be subject to the installation of controls to capture GHGs. For any equipment or installation so subject, we may have to incur increased compliance costs to capture related GHG emissions.
The EPA took additional action under the CAA in June 2014.
In accordance with President Obama’s Climate Action Plan, on June 18, 2014,in August 2015, the EPA proposed rulesissued a rule to reduce carbon emissions from electric generating units. The proposal,rule, commonly called the “Clean Power Plan,”Plan”, requires states to develop plans to reduce carbon emissions from fossil fuel-fired generating units commencing in 2020,2022, with the reductions to be fully phased in by 2030. Each state is given a different carbon reduction target, but the EPA expects that, in the aggregate, the overall proposal will reduce carbon emissions from electric generating units by 30%32% from 2005 levels. As proposed, statesStates are given substantial flexibility in meeting their emission reduction targets and can generally choose to lower carbon emissions by replacing higher carbon generation, such as coal or natural gas, with lower carbon generation, such as efficient natural gas units or renewable energy alternatives. Several industry groups and states have challenged the Clean Power Plan in the Court of Appeals for the D.C. Circuit, and in February 2016, the U.S. Supreme Court stayed the implementation of the Clean Power Plan while it is being challenged in court. The Court of Appeals for the D.C. Circuit heard oral arguments on the Clean Power Plan in September 2016, but has not yet issued a decision. On March 28, 2017, the Trump Administration issued an executive order directing the EPA to review the Clean Power Plan. On the same day, the EPA filed a motion in the U.S. Court of Appeals for the D.C. Circuit requesting that the court hold the case in abeyance while the EPA conducts its review of the Clean Power Plan. On October 16, 2017, the EPA published a proposed rule that would repeal the Clean Power Plan. The EPA also stated in the proposed rule that the agency has not determined the scope of any rule to regulate GHG emissions from existing electric generating units, but intends to issue an Advance Notice of Proposed Rulemaking “in the near future.” Several states have already announced their intention to challenge any repeal of the Clean Power Plan. It is not possible at this time to predictyet clear what requirements might be adopted bychanges, if any, will result from the EPA in the final rule expected in 2015,EPA’s proposal, whether or how the courts will rule on the legality of the Clean Power Plan, the EPA’s repeal of the rules, or any such final rule would impact our business.future replacement.
In addition, both houses of Congress have actively considered legislation to reduce emissions of GHG, and many states have already taken legal measures to reduce emissions of GHG, primarily through the development of GHG inventories, greenhouse gasGHG permitting and/or regional GHG “cap and trade” programs. Most of these “cap and trade” programs work by requiring either major sources of emissions or major producers of fuels to acquire and surrender emission allowances, with the number of allowances available for purchase reduced each year until the overall GHG emission reduction goal is achieved. In the absence of new legislation, the EPA is issuing new regulations that limit emissions of GHG associated with our operations which will require us to incur costs to inventory and reduce emissions of GHG associated with our operations and which could adversely affect demand for the oil, NGLs and natural gas that we produce. Finally, it should be noted that many scientists have concluded that increasing concentrations of GHG in the atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our assets and operations.
Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our cash flows and results of operations.
Unless we conduct successful exploration, development and production activities or acquire properties containing proved reserves, our proved reserves will decline as those reserves are produced. Producing oil and natural gas reservoirs are generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Our future oil and natural gas reserves and production, and therefore our cash flow and income, are highly dependent on our success in efficiently developing and producing our current reserves and economically finding or acquiring additional recoverable reserves. We may not be able to develop, find or acquire additional reserves to replace our current and future production.
The loss of senior management or technical personnel could adversely affect us.
To a large extent, we depend on the services of our senior management and technical personnel. The loss of the services of our senior management or technical personnel, including JamesBradley J. Volker, Chairman,Holly, President and Chief Executive Officer; Bruce R. DeBoer, Senior Vice President, General Counsel and Corporate Secretary; Peter W. Hagist, Senior Vice President, Planning; Rick A. Ross, Senior Vice President, Operations; Michael J. Stevens, Senior Vice President and Chief Financial Officer; Mark R. Williams, Senior Vice President, Exploration and Development; Steven A. Kranker, Vice President, Reservoir Engineering/Acquisitions; or David M. Seery, Vice President, Land; or Michael J. Stevens, Vice President and Chief Financial Officer,Land, could have a material adverse effect on our operations. We do not maintain, nor do we plan to obtain, any insurance against the loss of any of these individuals.
Substantial acquisitions or other transactions could require significant external capital and could change our risk and property profile.
In order to finance acquisitions of additional producing or undeveloped properties, we may need to alter or increase our capitalization substantially through the issuance of debt or equity securities, the sale of production payments or other means. These changes in capitalization may significantly affect our risk profile. Additionally, significant acquisitions or other transactions can change the character of our operations and business. The character of the new properties may be substantially different in operating or geological characteristics or geographic location than our existing properties. Furthermore, we may not be able to obtain external funding for additional future acquisitions or other transactions or to obtain external funding on terms acceptable to us.
Competition in the oil and gas industry is intense, which may adversely affect our ability to compete.
We operate in a highly competitive environment for acquiring properties, obtaining investment capital, securing oilfield goods and services, marketing oil and natural gas products and securing trainedattracting and retaining qualified personnel. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours, which can be particularly important in the areas in which we operate. Those companies may be able to pay more for productive oil and gas properties and exploratory prospects and to evaluate, bid for and purchase a greater number of properties and prospects than our financial or personnel resources allow for. Our ability to acquire additional prospects and to find and develop reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. Also, there is substantial competition for available capital for investment in the oil and gas industry. We may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital.
Certain federal income tax deductions currently available with respect to oil and gas exploration and development may be eliminated or deferred as a result of future legislation.
In February 2015, President Obama’s Administration released its proposed federal budget for fiscal year 2016 that would, if enacted into law, make significant changes to United States tax laws, including the elimination of certain key U.S. federal income tax preferences currently available to oil and gas exploration and production companies. Such changes include, but are not limited to:
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| | the repeal of the percentage depletion allowance for oil and gas properties;
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| | the elimination of current deductions for intangible drilling and development costs;
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| | the elimination of the deduction for U.S. oil and gas production activities; and
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| | an extension of the amortization period for certain geological and geophysical expenditures.
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It is unclear, however, whether any such changes will be enacted or how soon such changes could be effective. The passage of any legislation containing these or similar changes in U.S. federal income tax law could eliminate or defer certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such changes could negatively affect our financial condition and results of operations.
In connection with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, new regulations forthcoming in this area may result in increased costs and cash collateral requirements for the types of oil and gas derivative instruments we use to manage our risks related to oil and gas commodity price volatility.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted into law. This financial reform legislation includes provisions that require over-the-counter derivative transactions to be executed through an exchange or centrally cleared. In addition, the legislation provides an exemption from mandatory clearing requirements based on regulations to be developed by the Commodity Futures Trading Commission (the “CFTC”) and the SEC for transactions by non-financial institutions to hedge or mitigate commercial risk. At the same time, the legislation includes provisions under which the CFTC may impose collateral requirements for transactions, including those that are used to hedge commercial risk. However, during drafting of the legislation, members of Congress adopted report language and issued a public letter stating that it was not their intention to impose margin and collateral requirements on counterparties that utilize transactions to hedge commercial risk. Final rules on major provisions in the legislation, like new margin requirements, willmay be established through rulemakings and willwould not take effect until 12 months after the date of enactment. Although we cannot predict the ultimate outcome of these rulemakings, new regulations in this area may result in increased costs and cash collateral requirements for the types of oil and gas derivative instruments we use to hedge and to otherwise manage our financial risks related to volatility in oil and gas commodity prices.
We depend on computer and telecommunications systems, and failures in our systems or cyber security attacks could significantly disrupt our business operations.
We have entered into agreements with third parties for hardware, software, telecommunications and other information technology services in connection with our business. In addition, we have developed proprietary software systems, management techniques and other information technologies incorporating software licensed from third parties. It is possible we could incur interruptions from cyber security attacks, computer viruses or malware. We believe that we have positive relations with our related vendors and maintain adequate anti-virus and malware software and controls; however, any interruptions to our arrangements with third parties for our computing and communications infrastructure or any other interruptions to our information systems could lead to data corruption, communication interruption or otherwise significantly disrupt our business operations.
WeOur convertible senior notes may experience difficulties in integrating Kodiak intoadversely affect the market price of our businesses, whichcommon stock.
The market price of our common stock is likely to be influenced by our convertible senior notes. For example, the market price of our common stock could cause the combined company to fail to realize many of the anticipated potential benefits of the Kodiak Acquisition.
We acquired Kodiak with the expectation that the acquisition would result in various benefits, including, among other things, operating efficienciesbecome more volatile and cost savings. Achieving the anticipated benefits of the Kodiak Acquisition will depend in part upon whether our two companies integrate our businesses in an efficient and effective manner. We may notcould be able to accomplish this integration process successfully. The difficulties of combining the two companies’ businesses potentially will include, among other things:depressed by:
| · | | the necessity of addressing possible differences, incorporating cultures and management philosophies and the integration of certain operations following the transaction will require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day businessinvestors’ anticipation of the combined company;potential resale in the market of a substantial number of additional shares of our common stock received upon conversion of our convertible senior notes;
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| · | | possible sales of our common stock by investors who view our convertible senior notes as a more attractive means of equity participation in us than owning shares of our common stock; and |
| · | | any inability ofhedging or arbitrage trading activity that may develop involving our management to cause best practices to be applied to the combined company’s business.convertible senior notes and our common stock.
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An inability to realize the full extent of the anticipated benefits of the transaction, as well as any delays encountered in the transition process, could have an adverse effect upon the revenues, level of expenses and operating results of the combined company, which may affect the value of our common stock.
The market price of our common stock may decline in the future as a result of the Kodiak Acquisition.
The market price of our common stock may decline in the future as a result of the Kodiak Acquisition for a number of reasons, including the unsuccessful integration of Kodiak (including the reasons set forth in the preceding risk factor) or our failure to achieve the perceived benefits of the Kodiak Acquisition, including financial and operating results, as rapidly as or to the extent anticipated by financial or industry analysts. These factors are, to some extent, beyond our control.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Summary of Oil and Gas Properties and Projects
Northern Rocky Mountains Region
Our Northern Rocky Mountains operations include assetsour properties in the statesWilliston Basin of Colorado, Montana, North Dakota Utah and Wyoming. AsMontana targeting the Bakken and Three Forks formations and encompassing approximately 688,200 gross (409,600 net) developed and undeveloped acres as of December 31, 2014, our2017. Our estimated proved reserves in the Northern Rocky Mountains regionas of December 31, 2017 were 635.7562.5 MMBOE (83%(53% oil), which represented 81%91% of our total estimated proved reserves and contributed 116.2106.8 MBOE/d of average daily production in the fourth quarter of 2014.2017.
Sanish and Parshall Fields. Our Sanish and Parshall fields in Mountrail County, North Dakota target the Bakken and Three Forks formations and encompass approximately 169,900 gross (82,600 net) developed and undeveloped acres. Net productionAcross our acreage in the SanishWilliston Basin, we have implemented new completion designs which utilize cemented liners, plug-and-perf technology, significantly higher sand volumes, new diversion technology and Parshall fields averaged 45.0 MBOE/d for the fourth quarter of 2014, representing a 2% decrease from 46.1 MBOE/dboth hybrid and slickwater fracture stimulation methods, which have resulted in the third quarter of 2014.improved initial production rates. As of December 31, 2014,2017, we had three drillingfour rigs active in the Sanish field. Based on the success of our high density pilot programs in the Sanish field, we commenced a development program drilling nine Bakken wells per spacing unit in the area, an increase over our original plan of three to four wells per spacing unit. Additionally, we have implemented a new slickwater fracture stimulation method using cemented liners at the Sanish field and are encouraged by the initial results.
In order to process the produced gas stream from the Sanish wells, we constructed and brought on-line the Robinson Lake gas plant. The plant has a current processing capacity of 130 MMcf/d and fractionation equipment that allows us to convert NGLs into propane and butane, which end products can then be sold locally for higher realized prices.
Lewis & Clark/Pronghorn Fields. Our Lewis & Clark/Pronghorn fields are located primarily in the Stark and Billings counties of North Dakota and run along the Bakken shale pinch-out in the southern Williston Basin. In this area, the Upper Bakken shale is thermally mature and moderately over-pressured,Basin, and we believe that it has charged reservoir zones within the immediately underlying Pronghorn Sand and Three Forks formations (Middle Bakken and Lower Bakken Shale is absent). As of December 31, 2014, the Lewis & Clark/Pronghorn fields encompassed approximately 339,200 gross (227,400 net) developed and undeveloped acres. Net production in the Lewis & Clark/Pronghorn fields averaged 16.4 MBOE/d in the fourth quarter of 2014, representingplan to add a 2% decrease from 16.7 MBOE/d in the third quarter of 2014. As of December 31, 2014, we had one drillingfifth rig operating in the Pronghorn field, which utilizes drilling pads, with two or three wells being drilled from each pad. We have implemented our new completion design in this field utilizing cemented liners and plug-and-perf technology based on our successful testing of this completion technique in 2013. Additionally, we are evaluating our slickwater fracture stimulation method at the Pronghorn field and are encouraged by the results.
At our gas processing plant located south of Belfield, North Dakota, which primarily processes production from the Pronghorn area, there is currently inlet compression in place to process 35 MMcf/d. As of December 31, 2014 the plant was processing over 23 MMcf/d. In May 2012, we sold a 50% ownership interest in the plant, gathering systems and related facilities. We retained a 50% ownership interest and continue to operate the Belfield plant and facilities.
Hidden Bench/Tarpon Fields. Our Hidden Bench and Tarpon fields in McKenzie County, North Dakota target the Bakken and Three Forks formations and encompass approximately 121,300 gross (69,000 net) developed and undeveloped acres and 18,800 gross (13,900 net) developed and undeveloped acres, respectively, as of December 31, 2014. Net production at Hidden Bench/Tarpon averaged 22.6 MBOE/d in the fourth quarter of 2014, which represents a 40% increase from 16.2 MBOE/d in the third quarter of 2014. Contributing to this period over period production increase was net production added as a result of the Kodiak Acquisition totaling 10.7 MBOE/d from December 8, 2014, the closing date of the acquisition, through December 31, 2014. As of December 31, 2014, we had four drilling rigs active in the Hidden Bench field. We have also implemented our new completion design at our Hidden Bench/Tarpon fields, utilizing cemented liners and plug-and-perf technology incorporating three to five perforation clusters per fracture stage. This new design has generated positive results, demonstrated by average increases of 20% in initial production rates, as well as 30, 60 and 90-day production rates, from wells recently drilled in these fields. At our Tarpon field we have also implemented a completion technique using cemented liners and coiled tubing, and at our Hidden Bench field, based on the success of our high density drilling pilot in this area we initiated a development program of drilling eight wells per spacing unit, an increase overmid-year 2018.
Central Rocky Mountains
Our Central Rocky Mountains operations include properties at our original plan of four wells per spacing unit.
Cassandra Field. Our CassandraRedtail field in Williamsthe Denver Julesburg Basin (“DJ Basin”) in Weld County, North Dakota targetsColorado targeting the BakkenNiobrara and Three ForksCodell/Fort Hays formations and encompassesencompassing approximately 29,800120,200 gross (14,000(100,000 net) developed and undeveloped acres as of December 31, 2014. As of December 31, 2014, we had one drilling rig active2017. Our estimated proved reserves in the Cassandra field. In 2014, we improved our completion design in this area utilizing cemented liners and plug-and-perf technology with increased proppant volumes resulting in significant improvements in performance.
Missouri Breaks Field. As of December 31, 2014, we had approximately 130,300 gross (82,600 net) developed and undeveloped acres at our Missouri Breaks field located in Richland County, Montana and McKenzie County, North Dakota. We have drilled successful wells on the western, eastern and southern portions of our acreage in this area. In the fourth quarter of 2014, net production from the Missouri Breaks field averaged 6.6 MBOE/d, representing an 8% increase from 6.1 MBOE/d in the third quarter of 2014. As
of December 31, 2014, we had three drilling rigs active in the Missouri Breaks field. We have implemented a new completion design at this field, utilizing cemented liners, plug-and-perf technology and higher sand volumes, and this new design has significantly improved initial production rates. In addition, we continue to evaluate the slickwater fracture stimulation method used in this area and are encouraged by the initial results.
Other NorthernCentral Rocky Mountains. As of December 31, 2014, we had four drilling rigs operating in new areas of the Williston Basin that were acquired in the Kodiak Acquisition. We plan to release two of these rigs during the first quarter of 2015.
Redtail Field. Our Redtail field in the DJ Basin in Weld County, Colorado targets the Niobrara formation and encompasses approximately 185,700 gross (132,200 net) developed and undeveloped acresMountains as of December 31, 2014. In the fourth quarter of 2014, net production from the Redtail field averaged 10.2 MBOE/d, representing an 18% increase from 8.6 MBOE/d in the third quarter of 2014. Our development plan at Redtail currently includes drilling up to eight Niobrara “B” wells per spacing unit and eight Niobrara “A” wells per spacing unit. We are currently completing wells drilled from the Horsetail 30F pad in this area to test a high-density pattern in the Niobrara “A”, “B” and “C” zones, with 32 wells per spacing unit. As of December 31, 2014, we had four drilling rigs operating in this area. As a result of the recent decline in crude oil prices, we plan to decrease the number of rigs operating in this area to three for most of 2015. We have implemented our updated completion design at this field, utilizing cemented liners, plug-and-perf technology and higher sand volumes, which has been yielding improved production results.
In April 2014, we brought online the Redtail gas plant to process the associated gas produced by our wells in this area. The plant’s current inlet capacity is 20 MMcf/d, and we plan to further expand the plant’s capacity to 70 MMcf/d in the second quarter of 2015.
Permian Basin Region
Our Permian Basin operations include assets in Texas and New Mexico. As of December 31, 2014, the Permian Basin region contributed 133.02017 were 49.9 MMBOE (83%(70% oil) of estimated proved reserves to our portfolio of operations,, which represented 17%8% of our total estimated proved reserves and contributed 11.520.6 MBOE/d of average daily production in the fourth quarter of 2014.2017.
North Ward Estes Field. The North Ward Estes field includes five base leases with 100% working interestsWe have established production in approximately 64,900 gross (62,900 net) developedthe Niobrara “A”, “B” and undeveloped acres“C” zones and the Codell/Fort Hays formations. In response to low commodity prices, we suspended completion operations in Wardthis area beginning in the second quarter of 2016, however, we resumed completion activity during the first quarter of 2017 and Winkler counties, Texas. Currentadded a second completion crew in April 2017. During 2017, we completed and brought on production from our EOR project is from the Yates formation at 2,600 feet, which is the primary producing zone, with additional production from other zones including the Queen at 3,000 feet.
The North Ward Estes field has been responding positively to the water and CO2 floods that we initiated in May 2007. We are currently injecting CO2 into one of the largest phasesa significant portion of our eight-phase project at North Ward Estes, and all phases of the project subject to CO2 flood procedures continue to respond positively. Indrilled uncompleted well inventory (“DUCs”) from yearend 2016. During the fourth quarter of 2014, production from2017, based on the field averaged 9.7 MBOE/d, which represents a 2% increase from 9.5 MBOE/drecent and comparative well performance results of the DJ Basin to the Williston Basin, our management decided to concentrate development activities during 2018 in the third quarterWilliston Basin. We plan to complete 22 DUCs in our Redtail field during the first half of 2014.2018, and then cease additional development activity in this area until commodity prices further recover.
Our Redtail gas plant processes the associated gas produced from our wells in this area, and has a current inlet capacity of 50 MMcf/d. As of December 31, 2014, we were injecting approximately 4102017, the plant was processing 26 MMcf/d of CO2 in this field, over half of which is recycled.
North Ward Estes’ proved reserves at December 31, 2014 were 40% proved undeveloped. In order to fully develop the reserves at this field within our currently planned timeframe, we will need to utilize significant quantities of purchased CO2. As of December 31, 2014, we currently have under contract the future volumes of CO2 that we believe are necessary to develop the field’s PUDs over at least the next seven years. In addition, we are currently planning for future sources of CO2 capable of generating sufficient quantities to carry out the development of all probable and possible reserves at North Ward Estes. However, we cannot provide assurance with respect to the timing or actual quantities of CO2 that will be obtainable for the development of this field’s oil and gas reserves.d.
Other
Our other operations primarily relate to non-core assets in Arkansas, Michigan, OklahomaColorado, Mississippi, New Mexico, Texas and Texas.Wyoming. As of December 31, 2014,2017, these properties contributed 11.65.2 MMBOE (35%(86% oil) of proved reserves to our portfolio of operations, which represented 2%1% of our total estimated proved reserves and contributed 3.60.6 MBOE/d of average daily production in the fourth quarter of 2014.2017.
Reserves
As of December 31, 2014,2017 and 2016, all of our oil and gas reserves arewere attributable to properties within the United States. A summary of our proved oil and gas reserves as of December 31, 20142017 and 2016 based on average fiscal-year prices (calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period ended December 31, 2014)2017 and 2016, respectively) is as follows:
| | | | | | | | |
| | | | | | | | |
| | Oil | | NGLs | | Natural Gas | | Total |
| | (MBbl) | | (MBbl) | | (MMcf) | | (MBOE) |
Proved reserves | | | | | | | | |
Developed | | 333,593 | | 28,935 | | 298,237 | | 412,234 |
Undeveloped | | 310,036 | | 25,749 | | 193,783 | | 368,082 |
Total proved—December 31, 2014 | | 643,629 | | 54,684 | | 492,020 | | 780,316 |
Probable reserves | | | | | | | | |
Developed | | 10,665 | | 3,032 | | 6,463 | | 14,774 |
Undeveloped | | 323,579 | | 15,685 | | 271,610 | | 384,532 |
Total probable—December 31, 2014 | | 334,244 | | 18,717 | | 278,073 | | 399,306 |
Possible reserves | | | | | | | | |
Developed | | 25,363 | | 7,116 | | 2,682 | | 32,926 |
Undeveloped | | 154,741 | | 18,728 | | 114,923 | | 192,623 |
Total possible—December 31, 2014 | | 180,104 | | 25,844 | | 117,605 | | 225,549 |
| | | | | | | | |
| | | | | | | | |
| | Oil | | NGLs | | Natural Gas | | Total |
| | (MBbl) | | (MBbl) | | (MMcf) | | (MBOE) |
2017 | | | | | | | | |
Proved developed reserves | | 179,829 | | 76,957 | | 473,829 | | 335,758 |
Proved undeveloped reserves | | 157,754 | | 61,992 | | 372,648 | | 281,854 |
Total proved reserves | | 337,583 | | 138,949 | | 846,477 | | 617,612 |
2016 | | | | | | | | |
Proved developed reserves | | 183,165 | | 51,888 | | 337,860 | | 291,363 |
Proved undeveloped reserves | | 211,602 | | 49,605 | | 377,799 | | 324,174 |
Total proved reserves | | 394,767 | | 101,493 | | 715,659 | | 615,537 |
Proved reserves. Estimates of proved developed and undeveloped reserves are inherently imprecise and are continually subject to revision based on production history, results of additional exploration and development, price changes and other factors.
In 2014, totalTotal extensions and discoveries of 174.858.3 MMBOE in 2017 were primarily attributable to successful drilling at our Redtail, Sanish, Hidden Bench, Missouri Breaks, Pronghorn, Tarpon and Cassandra fields.in the Williston Basin. Both the new wells drilled in these areasthis area as well as the PUD locations added as a result of drilling increased our proved reserves.
In 2014, total salesSales of minerals in place of 2.1totaled 50.4 MMBOE during 2017 and were primarily attributable to the disposition of properties in the Big Tex prospect, further described in “Acquisitions and Divestitures” within Item 1 of this Annual Report on Form 10-K, as well as other property divestitures in the Lucky Ditch, Whiskey Springs and Bridger Lake fields, which decreased our proved reserves.
In 2014, total purchases of minerals in place of 195.6 MMBOE were primarily attributable to the Kodiak Acquisition, whereby we acquired interests in 778 producing oil and gas wells and undeveloped acreage in the Williston Basin,FBIR Assets as further described in “Acquisitions and Divestitures” within Item 1 of this Annual Report on Form 10-K, which increased our proved reserves.10-K.
In 2014,2017, revisions to previous estimates increased proved developed and undeveloped reserves by a net amount of 15.337.1 MMBOE. Included in these revisions were (i) 15.688.7 MMBOE of net upward adjustments attributable to reservoir analysis and well performance and (ii) 0.3 MMBOE of downward adjustments caused by lowerhigher crude oil, NGL and natural gas prices incorporated into our reserve estimates at December 31, 20142017 as compared to December 31, 2013.
Proved undeveloped reserves. Our PUD reserves increased 98%decreased 13% or 182.042.3 MMBOE on a net basis from December 31, 20132016 to December 31, 2014.2017. The following table provides a reconciliation of our PUDs for the year ended December 31, 2014:2017:
| | |
| | |
| | Total |
| | (MBOE) |
PUD balance—December 31, 20132016 | | 186,096324,174 |
Converted to proved developed through drilling | | (30,064) |
Converted to proved developed at EOR projects
| | (7,940)(43,047) |
Added from extensions and discoveries | | 135,615 |
Removed for five-year rule
| | (2,168) |
Removed due to low commodity prices
| | (218) |
Purchased
| | 94,16641,039 |
Sold | | -
(28,337) |
Revisions | | (7,405)(11,975) |
PUD balance—December 31, 20142017 | | 368,082281,854 |
During 2014,2017, we incurred $767$668 million in capital expenditures, or $25.51$15.52 per BOE, to drill and bring on-line 30.143.0 MMBOE of PUD reserves. Also during 2014, 7.9 MMBOE of PUD volumes became proved developed reserves at our CO2 EOR project in the North Ward Estes field, at a cost of $39.58 per BOE. Combining the PUD drilling conversions with the PUD EOR conversions, we converted PUDs to proved developed reserves at a cost of $28.45 per BOE during 2014.
In addition, we added 135.641.0 MMBOE of PUD volumesPUDs from extensions and discoveries during the year and this increase in proved undeveloped reserves was primarily due to additional PUD locations added based on successful drilling in the NorthernWilliston Basin. We have made an investment decision and Central Rockies areas and additional PUD reserves being assignedadopted a development plan to our North Ward Estes EOR project.
During 2014, we added total PUD volumes of 94.2 MMBOE through acquisitions, of which 90.5 MMBOE were attributable to the Kodiak Acquisition.
Based on our 2014 year end independent engineering reserve report, we will drill all of our individual PUD drilling locations within five years of the date such PUDs were added. However, we do have certain quantities of proved undeveloped reserves in the North Ward Estes fieldIn that will remain in the PUD category for periods extending beyond five years because of certain external factors that preclude the development of the North Ward Estes EOR PUDs all at once. Due to the large areal extent of the field, this CO2 EOR project will progress through the field in a sequential manner as earlier injection areas are completed and new injection areas are initiated. External factors that preclude the execution of the CO2 project throughout the field all at the same time include: (i) the volume of injection water necessary to re-pressure the reservoir in advance of the CO2 injection, (ii) the volume of purchased and recycled CO2 necessary to be injected to process the oil in the reservoir, and (iii) the equipment and manpower necessary to build the infrastructure and prepare the wells for the EOR project. Our stagedregard, under our current 2018 development plan, is designedwe expect to expand the project as quickly and efficiently as possible to fully develop the field.
Probable reserves. Estimatesconvert approximately 53.4 MMBOE of probable developed and undeveloped reserves are inherently imprecise. When producing an estimate of the amount of oil and gas that is recoverable from a particular reservoir, an estimated quantity of probable reserves is an estimate that is as likely as not to be achieved. Estimates of probable reserves are also continually subject to revision based on production history, results of additional exploration and development, price changes and other factors.
We use deterministic methods to estimate probable reserve quantities, and when deterministic methods are used, it is as likely as not that actual remaining quantities recovered will exceed the sum of estimated proved plus probable reserves. Probable reserves may be assigned to areas of a reservoir adjacentPUDs to proved reserves where data control or interpretations of available data are less certain and even if the interpreted reservoir continuity of structure or productivity does not meet the reasonable certainty criterion. Probable reserves may be assigned to areas that are structurally higher than the proved area if these areas are in communication with the proved reservoir. Probable reserve estimates also include potential incremental quantities associated with a greater percentage recovery of the hydrocarbons in place than assumed for proved reserves.
Increases in probabledeveloped reserves during 2014 were primarily attributable to 1,916 new probable well locations that were added in 2014 as a result of the Kodiak Acquisition as well as drilling activity across the Rocky Mountains region. Offsetting these increases were 14.0 MMBOE of probable reserves that were converted to proved reserves during 2014, primarily at our Redtail field and various fields in the Northern Rocky Mountains.
Possible reserves. Estimates of possible developed and undeveloped reserves are also inherently imprecise. When producing an estimate of the amount of oil and gas that is recoverable from a particular reservoir, an estimated quantity of possible reserves is an
estimate that might be achieved, but only under more favorable circumstances than are likely. Estimates of possible reserves are also continually subject to revision based on production history, results of additional exploration and development, price changes and other factors.
We use deterministic methods to estimate possible reserve quantities, and when deterministic methods are used to estimate possible reserve quantities, the total quantities ultimately recovered from a project have a low probability of exceeding proved plus probable plus possible reserves. Possible reserves may be assigned to areas of a reservoir adjacent to probable reserves where data control and interpretations of available data are progressively less certain. Frequently, this will be in areas where geoscience and engineering data are unable to define clearly the area and vertical limits of commercial production from the reservoir. Possible reserves also include incremental quantities associated with a greater percentage recovery of the hydrocarbons in place than the recovery quantities assumed for probable reserves.
Possible reserves may be assigned where geoscience and engineering data identify directly adjacent portions of a reservoir within the same accumulation that may be separated from proved areas by faults with displacement less than formation thickness or other geological discontinuities and that have not been penetrated by a wellbore, and we believe that such adjacent portions are in communication with the known (proved) reservoir. Possible reserves may be assigned to areas that are structurally higher or lower than the proved area if these areas are in communication with the proved reservoir.
Possible reserves increased during 2014 primarily due to successful drilling at our Redtail, Sanish, Parshall, Lewis & Clark/Pronghorn and Hidden Bench fields. Offsetting these increases were 7.0 MMBOE of possible reserves that were converted to probable during 2014 at our North Ward Estes field and various other fields in the Northern Rocky Mountains, and 11.8 MMBOE of possible reserves were converted to proved during 2014 at the same areas.
At December 31, 2014, our probable reserves were estimated to be 399.3 MMBOE and our possible reserves were estimated to be 225.5 MMBOE, for a total of 624.8 MMBOE. The EOR project at our North Ward Estes field represented 110.3 MMBOE, or 18%, of our total 624.8 MMBOE probable and possible reserve quantities. In order to fully develop the EOR probable and possible reserves at North Ward Estes, we will need to utilize significant quantities of purchased CO2. We are currently planning for future sources capable of generating sufficient CO2 quantities to carry out the development of all probable and possible reserves at North Ward Estes. However, the availability of future CO2 supplies is subject to uncertainty and may require significant future capital expenditures by us, and we cannot therefore provide assurance with respect to the timing or actual quantities of CO2 that will be obtainable for the development of such reserves.year.
Preparation of reserves estimates. We maintain adequate and effective internal controls over the reserve estimation process as well as the underlying data upon which reserve estimates are based. The primary inputs to the reserve estimation process are comprised of technical information, financial data, ownership interests and production data. All field and reservoir technical information, which is updated annually, is assessed for validity when the reservoir engineers hold technical meetings with geoscientists, operations and land personnel to discuss field performance and to validate future development plans. Current revenue and expense information is obtained from our accounting records, which are subject to our internal controls over financial reporting. Internal controls over financial reporting are assessed for effectiveness annually using the criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. All current financial data such as commodity prices, lease operating expenses, production taxes and field commodity price differentials are updated in the reserve database and then analyzed to ensure that they have been entered accurately and that all updates are complete. Our current ownership in mineral interests and well production data are also subject to the aforementioned internal controls over financial reporting, and they are incorporated into the reserve database as well and verified to ensure their accuracy and completeness. Once the reserve database has been entirely updated with current information, and all relevant technical support material has been assembled, our independent engineering firm Cawley, Gillespie & Associates, Inc. (“CG&A”) meets with our technical personnel in our Denver and Midland officesoffice to review field performance and future development plans. Following these reviews,this review, the reserve database and supporting data is furnished to CG&A so that they can prepare their independent reserve estimates and final report. Access to our reserve database is restricted to specific members of the reservoir engineering department.
CG&A is a Texas Registered Engineering Firm. Our primary contact at CG&A is Mr. Robert D. Ravnaas,W. Todd Brooker, President. Mr. RavnaasBrooker is a State of Texas Licensed Professional Engineer. SeeRefer to Exhibit 99.2 of this Annual Report on Form 10-K for the Report of Cawley, Gillespie & Associates, Inc. and further information regarding the professional qualifications of Mr. Ravnaas.Brooker.
Our Vice President of Reservoir Engineering and Acquisitions is responsible for overseeing the preparation of the reserves estimates. He has over 3033 years of experience, the majority of which has involved reservoir engineering and reserve estimation, and he holds a Bachelor’s degree in petroleum engineering from the Colorado School of Mines. He is also a member of the Society of Petroleum Engineers.
Acreage
The following table summarizes gross and net developed and undeveloped acreage by statecore area at December 31, 2014.2017. Net acreage isrepresents our percentage ownership of gross acreage. Acreage in which our interest is limited to royalty and overriding royalty interests has been excluded.
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Developed Acreage | | Undeveloped Acreage (2) | | Total Acreage |
| | Gross | | Net | | Gross | | Net | | Gross | | Net |
California | | 25,548 | | 3,606 | | - | | - | | 25,548 | | 3,606 |
Colorado | | 71,493 | | 51,181 | | 195,372 | | 119,981 | | 266,865 | | 171,162 |
Louisiana | | 23,867 | | 9,191 | | 100,697 | | 91,472 | | 124,564 | | 100,663 |
Michigan | | 139,390 | | 61,221 | | 289,465 | | 245,868 | | 428,855 | | 307,089 |
Montana | | 97,406 | | 58,886 | | 107,825 | | 68,172 | | 205,231 | | 127,058 |
New Mexico | | 17,625 | | 6,387 | | 123,412 | | 114,045 | | 141,037 | | 120,432 |
North Dakota | | 813,348 | | 474,804 | | 293,266 | | 209,876 | | 1,106,614 | | 684,680 |
Oklahoma | | 56,610 | | 28,391 | | 406 | | 68 | | 57,016 | | 28,459 |
Texas | | 252,273 | | 136,831 | | 23,772 | | 18,061 | | 276,045 | | 154,892 |
Utah | | 14,301 | | 6,972 | | 431,488 | | 273,295 | | 445,789 | | 280,267 |
Wyoming | | 89,162 | | 44,596 | | 44,729 | | 31,548 | | 133,891 | | 76,144 |
Other (1) | | 9,810 | | 4,588 | | 912 | | 349 | | 10,722 | | 4,937 |
Total | | 1,610,833 | | 886,654 | | 1,611,344 | | 1,172,735 | | 3,222,177 | | 2,059,389 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Developed Acreage | | Undeveloped Acreage (1) | | Total Acreage |
| | Gross | | Net | | Gross | | Net | | Gross | | Net |
Northern Rocky Mountains | | 648,122 | | 385,610 | | 40,078 | | 23,982 | | 688,200 | | 409,592 |
Central Rocky Mountains | | 41,301 | | 35,806 | | 78,896 | | 64,165 | | 120,197 | | 99,971 |
Other (2) | | 113,258 | | 68,593 | | 134,342 | | 68,505 | | 247,600 | | 137,098 |
| | 802,681 | | 490,009 | | 253,316 | | 156,652 | | 1,055,997 | | 646,661 |
_____________________
| (1) | | Other includes Alabama, Arkansas, Kansas, Mississippi and Nebraska.
|
| (2)
| | Out of a total of 1,611,344approximately 253,300 gross (1,172,735(156,700 net) undeveloped acres as of December 31, 2014,2017, the portion of our net undeveloped acresacreage that is subject to expiration over the next three years, if not successfully developed or renewed, is approximately 26%37% in 2015, 29%2018, 10% in 20162019 and 13%12% in 2017.2020. Only a minor amount of our proved undeveloped reserves are located on leases that are subject to expiration during 2018. |
| (2) | | Other includes Arkansas, California, Colorado, Louisiana, Michigan, Mississippi, New Mexico, Oklahoma, Texas, Utah and Wyoming. |
Production History
The following table presents historical information about our produced oil and gas volumes:
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
Oil production (MMBbl) | | | 33.5 | | | 27.0 | | | 23.1 |
NGL production (MMBbl) | | | 3.3 | | | 2.8 | | | 2.8 |
Natural gas production (Bcf) | | | 30.2 | | | 26.9 | | | 25.8 |
Total production (MMBOE) | | | 41.8 | | | 34.3 | | | 30.2 |
Daily production (MBOE/d) | | | 114.5 | | | 94.1 | | | 82.5 |
North Ward Estes field production (1) | | | | | | | | | |
Oil production (MMBbl) | | | 3.1 | | | 2.9 | | | 2.8 |
NGL production (MMBbl) | | | 0.4 | | | 0.4 | | | 0.3 |
Natural gas production (Bcf) | | | 0.3 | | | 0.3 | | | 0.3 |
Total production (MMBOE) | | | 3.6 | | | 3.4 | | | 3.2 |
Sanish field production (1) | | | | | | | | | |
Oil production (MMBbl) | | | 9.9 | | | 9.8 | | | 9.0 |
NGL production (MMBbl) | | | 1.1 | | | 1.1 | | | 1.2 |
Natural gas production (Bcf) | | | 5.9 | | | 4.8 | | | 3.6 |
Total production (MMBOE) | | | 12.0 | | | 11.7 | | | 10.8 |
Average sales prices (before the effects of hedging): | | | | | | | | | |
Oil (per Bbl) | | $ | 81.50 | | $ | 90.39 | | $ | 83.86 |
NGLs (per Bbl) | | $ | 39.17 | | $ | 40.41 | | $ | 39.36 |
Natural gas (per Mcf) | | $ | 5.53 | | $ | 4.04 | | $ | 3.42 |
Average production costs: | | | | | | | | | |
Production costs (per BOE) (2) | | $ | 11.24 | | $ | 11.94 | | $ | 11.92 |
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Total Company production | | | | | | | | | |
Oil (MMBbl) | | | 29.3 | | | 34.0 | | | 47.2 |
NGL (MMBbl) | | | 7.0 | | | 6.6 | | | 5.5 |
Natural gas (Bcf) | | | 41.3 | | | 41.4 | | | 41.1 |
Total (MMBOE) | | | 43.1 | | | 47.5 | | | 59.6 |
Daily average (MBOE/d) | | | 118.1 | | | 129.9 | | | 163.2 |
Sanish field production (1) | | | | | | | | | |
Oil (MMBbl) | | | 5.7 | | | 7.2 | | | 9.4 |
NGL (MMBbl) | | | 1.1 | | | 1.0 | | | 1.2 |
Natural gas (Bcf) | | | 7.1 | | | 7.8 | | | 7.3 |
Total (MMBOE) | | | 8.0 | | | 9.5 | | | 11.8 |
Average sales prices (before the effects of hedging) | | | | | | | | | |
Oil (per Bbl) | | $ | 44.30 | | $ | 34.36 | | $ | 40.95 |
NGLs (per Bbl) | | $ | 16.00 | | $ | 8.88 | | $ | 12.67 |
Natural gas (per Mcf) | | $ | 1.78 | | $ | 1.40 | | $ | 2.20 |
Average production costs | | | | | | | | | |
Production costs (per BOE) (2) | | $ | 8.57 | | $ | 8.25 | | $ | 9.02 |
_____________________
| (1) | | The North Ward Estes and Sanish fields werefield was our only fieldsfield that contained 15% or more of our total proved reserve volumes as of December 31, 2014.during the periods presented. |
| (2) | | Production costs reported above exclude from lease operating expenses ad valorem taxes of $27 million ($0.65 per BOE), $20 million ($0.59 per BOE) and $16 million ($0.54 per BOE) for the years ended December 31, 2014, 2013 and 2012, respectively.taxes. |
Productive Wells
The following table summarizes gross and net productive oil and natural gas wells by regioncore area at December 31, 2014.2017. A net well isrepresents our percentage ownership of a gross well. Wells in which our interest is limited to royalty and overriding royalty interests are excluded.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Oil Wells | | Natural Gas Wells | | Total Wells(1) | | Oil Wells | | Natural Gas Wells | | Total Wells(1) |
| | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net |
Rocky Mountains | | 4,670 | | 1,653 | | 413 | | 215 | | 5,083 | | 1,868 | |
Permian Basin | | 4,098 | | 1,746 | | 374 | | 111 | | 4,472 | | 1,857 | |
Northern Rocky Mountains | | | 2,767 | | 1,218 | | - | | - | | 2,767 | | 1,218 |
Central Rocky Mountains | | | 373 | | 293 | | - | | - | | 373 | | 293 |
Other (2) | | 467 | | 209 | | 1,632 | | 537 | | 2,099 | | 746 | | 1,566 | | 428 | | 69 | | 41 | | 1,635 | | 469 |
Total | | 9,235 | | 3,608 | | 2,419 | | 863 | | 11,654 | | 4,471 | | 4,706 | | 1,939 | | 69 | | 41 | | 4,775 | | 1,980 |
_____________________
| (1) | | 13714 wells have multiple completions. These 137completions, and these 14 wells contain a total of 34134 completions. One or more completions in the same bore hole are counted as one well.
|
| (2) | | Other primarily includes non-core oil and gas properties located in Arkansas, Michigan, OklahomaColorado, New Mexico, North Dakota, Texas and Texas.Wyoming. |
We have an interest in or operate 32 EOR projects, which include either secondary (waterflood) or tertiary (CO2 injection) recovery efforts, and aggregate production from such EOR fields averaged 12.0 MBOE/d during 2014 or 10% of our 2014 daily production. For these areas, we need to use enhanced recovery techniques in order to maintain oil and gas production from these fields.
Oil and Gas Drilling Activity
We are engaged in numerous drilling activities on properties presently owned, and we intend to drill or develop other properties acquired in the future. The following table sets forth our oil and gas drilling activity for the last three years. Wells drilled to develop our CO2 reserves at our Bravo Dome field in New Mexico have not been included in the drilling activity table below. A dry well is an exploratory, development or extension well that proves to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well. A productive well is an exploratory, development or extension well that is not a dry well. The information below
should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled and quantities of reserves found.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Wells | | Net Wells | | Gross Wells | | Net Wells |
| | Productive | | Dry | | Total | | Productive | | Dry | | Total | | Productive | | Dry | | Total | | Productive | | Dry | | Total |
2014: | | | | | | | | | | | | | | |
2017 | | | | | | | | | | | | | |
Development | | 571 | | 1 | | | 572 | | 231.5 | | 0.4 | | 231.9 | | 238 | | - | | 238 | | 164.1 | | - | | 164.1 |
Exploratory | | 34 | | 5 | (1) | | 39 | | 21.5 | | 3.7 | | 25.2 | | - | | - | | - | | - | | - | | - |
Total | | 605 | | 6 | | | 611 | | 253.0 | | 4.1 | | 257.1 | | 238 | | - | | 238 | | 164.1 | | - | | 164.1 |
2013: | | | | | | | | | | | | | | |
2016 | | | | | | | | | | | | | |
Development | | 376 | | 1 | | | 377 | | 185.5 | | 1 | | 186.5 | | 89 | | - | | 89 | | 48.2 | | - | | 48.2 |
Exploratory | | 43 | | 8 | | | 51 | | 35.2 | | 7.5 | | 42.7 | | - | | - | | - | | - | | - | | - |
Total | | 419 | | 9 | | | 428 | | 220.7 | | 8.5 | | 229.2 | | 89 | | - | | 89 | | 48.2 | | - | | 48.2 |
2012: | | | | | | | | | | | | | | |
2015 | | | | | | | | | | | | | |
Development | | 324 | | - | | | 324 | | 140.4 | | - | | 140.4 | | 531 | | 1 | | 532 | | 260.1 | | 1.0 | | 261.1 |
Exploratory | | 68 | | 5 | | | 73 | | 47.8 | | 4.7 | | 52.5 | | 7 | | 1 | | 8 | | 5.7 | | 1.0 | | 6.7 |
Total | | 392 | | 5 | | | 397 | | 188.2 | | 4.7 | | 192.9 | | 538 | | 2 | | 540 | | 265.8 | | 2.0 | | 267.8 |
_____________________
| (1)
| | During 2014, we drilled six CO2 wells at our Bravo Dome field that were exploratory dry holes and that have not been included in the drilling results above.
|
As of December 31, 2014,2017, we had 21four operated drilling rigs active on our properties. The breakdownproperties in our Northern Rocky Mountains area. As of ourDecember 31, 2017, we had 174 gross (86.4 net) operated rigs by geographic area is as follows:and non-operated wells in the process of drilling, completing or waiting on completion.
| | |
| | Drilling Rigs
|
Northern Rocky Mountains
| | 16
|
Central Rocky Mountains
| | 4
|
North Ward Estes
| | 1
|
Total
| | 21
|
Hydraulic Fracturing
Hydraulic fracturing is a common practice in the oil and gas industry that is used to stimulate production of hydrocarbons from tight oil and gas formations. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. This process has typically been regulated by state oil and gas commissions. However, as described in more detail in “Business – Regulation – Environmental Regulations – Hydraulic Fracturing” in Item 1 of this Annual Report on Form 10-K, the EPA has initiated the regulation of hydraulic fracturing;fracturing, other federal agencies are examining hydraulic fracturing;fracturing, and federal legislation is pending with respect to hydraulic fracturing. We have utilized hydraulic fracturing in the completion of our wells in our most active areas located in the states of Colorado, Michigan, Montana and North Dakota Texas and Wyoming and we plan to continue to utilize this completion methodology.
Whiting’sOur proved undeveloped reserve quantities that are associated with hydraulic fracture treatments consist of substantially all of our proved undeveloped reserves, or 368.1281.9 MMBOE.
On February 13, 2014, we had a well control incident during drilling operations involving one well in our Hidden Bench field in North Dakota. The well was quickly brought under control with no liquids leaving the location, and there were no resulting injuries. Appropriate regulatory agencies were notified of the incident. Other than this incident, weWe are not aware of any environmental incidents, or citations or suits that have occurred during the last three years related to hydraulic fracturing operations involving oil and gas properties that we operate or in which we own a non-operated interest.
In order to minimize any potential environmental impact from hydraulic fracture treatments, we have taken the following steps:
| · | | we follow fracturing and flowback procedures that comply with or exceed North Dakota Industrial Commission or other state requirements; |
| · | | we train all company and contract personnel who are responsible for well preparation, fracture stimulation and flowback on our procedures; |
| · | | we have implemented the incremental procedures of running a well casing caliper,��visually inspecting the surface joint of intermediate casing;casing and, if a lighter wall joint of casing or drilling wear is detected, reducing the minimum burst pressure is reduced accordingly; |
| · | | for wells that are within one mile of major bodies of water or locations that lead to bodies of water, we construct sufficient berming around the well location prior to initiating fracturing operations; |
| · | | we run fracturing strings in certain situations when extra precaution is warranted, such as where the anticipated maximum treating pressure for the well is greater than the pressure rating of the intermediate casing or in areas located within one mile of major bodies of water; |
| · | | we conduct annual emergency incident response drills in all of our active areas; and |
| · | | we are a member of the Sakakawea Area Spill Response LLC (“SASR”), which is composed of 13 oil and gas related companies operating in the Missouri River and Lake Sakakawea regionregions of North Dakota. Members agreed to share spill response resources and maintain SASR-owned water response equipment that can be accessed quickly in the early stages of a spill. |
While we do not have insurance policies in effect that are intended to provide coverage for losses solely related to hydraulic fracturing operations, we do have general liability and excess liability insurance policies that we believe would cover third-party claims related to hydraulic fracturing operations and associated legal expenses in accordance with, and subject to, the terms of such policies.
Delivery Commitments
Our production sales agreements contain customary terms and conditions for the oil and natural gas industry, generally provide for sales based on prevailing market prices in the area, and generally have terms of one year or less.
We have also entered intoAs of December 31, 2017, we had three physical delivery contracts which require us to deliver fixed volumes of crude oil. AsOne of December 31, 2014, we had delivery commitments totaling 12.4 MMBblthese contracts is tied to oil production at our Sanish field in Mountrail County, North Dakota and became effective upon completion of crude oil (or 37% of total 2014 oil production), 17.8 MMBbl (53%), 19.6 MMBbl (59%), 21.5 MMBbl (64%), 23.3 MMBbl (70%) and 6.0 MMBbl (18%) for the years ended December 31, 2015 through 2020, respectively. TheseDakota Access Pipeline on June 1, 2017. The remaining two contracts are tied to oil production at our Redtail field in the DJ Basin in Weld County, Colorado. AsOn February 1, 2018, we paid $61 million to the counterparty to one of these Redtail delivery contracts to settle all future minimum volume commitments under the agreement. The following table summarizes our remaining Sanish and Redtail delivery commitments as of December 31, 2014,2017, as adjusted for the February 1, 2018 settlement:
| | | | | | | | |
| | Sanish Contracted | | Redtail 1 Contracted | | Redtail 2 Contracted | | As a Percentage of |
| | Crude Oil Volumes | | Crude Oil Volumes | | Crude Oil Volumes | | Total 2017 |
Period | | (Bbl) | | (Bbl) | | (Bbl) (1) | | Oil Production |
Jan - Dec 2018 | | 5,475,000 | | 14,150,000 | | 620,000 | | 69% |
Jan - Dec 2019 | | 5,475,000 | | 15,975,000 | | - | | 73% |
Jan - Dec 2020 | | 5,490,000 | | 4,140,000 | | - | | 33% |
Jan - Dec 2021 | | 5,475,000 | | - | | - | | 19% |
Jan - Dec 2022 | | 5,475,000 | | - | | - | | 19% |
Jan - Dec 2023 | | 5,475,000 | | - | | - | | 19% |
Jan - Dec 2024 | | 2,280,000 | | - | | - | | 8% |
_____________________
| (1) | | Reflects the reduced volumes under this contract as a result of its settlement on February 1, 2018. |
Under the terms of the Sanish contract, if we fail to deliver the committed volumes we will be required to pay a deficiency payment of $7.00 per undelivered Bbl, subject to upward adjustment, over the duration of the contract. However, we believe that our production and reserves are sufficient to fulfill the delivery commitment at our Sanish field, and we therefore expect to avoid any payments for deficiencies under this contract.
Under the terms of the first Redtail contract, if we fail to deliver the committed volumes we are required to pay a deficiency payment that currently totals $4.92 per undelivered Bbl (subject to upward adjustment) over the duration of the contract. Under the terms of the second Redtail contract, and prior to its termination on February 1, 2018, if we failed to deliver the committed volumes we were required to pay a deficiency payment equal to the terminal and pipeline transportation fees paid by the counterparty on such undelivered barrels, or $3.93 per undelivered Bbl. We have determined that it is no longernot probable that future oil production from our Redtail field will be sufficient to meet the minimum volume requirements specified in thesethe related physical delivery contracts, and as a result, we expect to make periodic deficiency payments for any shortfalls in delivering the minimum committed volumes. We currently anticipate that we will under-deliver by a total of approximately 10.4 MMBbl over the duration of the contracts, which would require undiscounted aggregate deficiency payments of approximately $49 million over the next 5 years. We recognize any monthly deficiency payments in the period in which the underdelivery takes place and the related liability has been incurred. See “QuantitativeDuring 2017, 2016 and Qualitative Disclosures about Market Risk” in Item 7A of this Annual Report on Form 10-K for more information about our delivery commitments2015, total deficiency payments under these agreements.contracts amounted to $66 million, $43 million and $15 million, respectively.
Item 3. Legal Proceedings
Whiting isWe are subject to litigation claims and governmental and regulatory proceedings arising in the ordinary course of business. ItWhile the outcome of these lawsuits and claims cannot be predicted with certainty, it is management’s opinion that allthe loss for any litigation matters and claims and litigation we are involved in that are reasonably possible to occur will not likely to have a material adverse effect, individually or in the aggregate, on our consolidated financial position, cash flows or results of operations.
After the closing of the acquisition of Kodiak Oil & Gas Corp. in December 2014, the U.S. Environmental Protection Agency (the “EPA”) contacted us to discuss Kodiak’s responses to a June 2014 information request from the EPA under Section 114(a) of the Federal Clean Air Act, as amended (the “CAA”). In addition, in July 2015 and March 2016, we received information requests from the EPA under Section 114(a) of the CAA. The information requests relate to tank batteries used in our Williston Basin operations and our compliance with certain regulatory requirements at those locations for the control of air pollutant emissions from those facilities. We have responded to the EPA’s July 2015 and March 2016 information requests, and such responses were also provided to the North Dakota Department of Health (the “NDDoH”), with whom the EPA was coordinating in making the requests.
In connection with the above EPA inquiries, we entered into a settlement with the NDDoH that became effective in November 2016. This settlement addressed approximately 94% of our North Dakota properties owned at the time but did not address our operations on the Fort Berthold Indian Reservation in North Dakota, over which the EPA has sole authority to enforce CAA violations. In September 2017, we completed the sale of our interests in all Fort Berthold Indian Reservation properties that we previously obtained from Kodiak. In November 2017, we entered into a settlement with the EPA concerning the alleged violations of applicable regulations by Kodiak prior to its acquisition, and by us after we acquired the subject properties. Under the terms of the settlement agreement we and the EPA agreed that we would pay a civil penalty of $450,000, which penalty was paid in full in November 2017.
We are currently engaged in discussions with the Colorado Department of Public Health and Environment (the “CDPHE”) concerning certain equipment used in our Redtail facilities and our compliance with various air permits and applicable federal and state air quality laws and regulations over the control of air pollutant emissions from those facilities. We and the CDPHE are negotiating the terms of a settlement agreement to resolve this matter.
Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers of the Registrant
The following table sets forth certain information, as of February 13, 2015,15, 2018, regarding the executive officers of Whiting Petroleum Corporation:
| | |
Name | Age | Position |
JamesBradley J. VolkerHolly
| 6847
| Chairman, President and Chief Executive Officer
|
Bruce R. DeBoer | 65 | Senior Vice President, General Counsel and Corporate Secretary |
Peter W. Hagist | 5457
| Senior Vice President, Planning |
Rick A. Ross | 5659
| Senior Vice President, Operations |
Michael J. Stevens | 52 | Senior Vice President and Chief Financial Officer |
Mark R. Williams | 5861
| Senior Vice President, Exploration and Development |
Bruce R. DeBoer
| 62
| Vice President, General Counsel and Corporate Secretary
|
Heather M. Duncan | 4447
| Vice President, Human Resources |
Steven A. Kranker | 5356
| Vice President, Reservoir Engineering and Acquisitions |
David M. Seery | 6063
| Vice President, Land |
Michael J. StevensSirikka R. Lohoefener
| 49
| Vice President and Chief Financial Officer
|
Brent P. Jensen
| 4539
| Controller and Treasurer |
The following biographies describe the business experience of our executive officers:
JamesBradley J. VolkerHolly joined us in August 1983November 2017 upon his appointment as Vice President of Corporate Developmentdirector and served in that position through April 1993. In March 1993, he became a contract consultant to us and served in that capacity until August 2000, at which time he became Executive Vice President and Chief Operating Officer. Mr. Volker was appointed President and Chief Executive Officer and a director in January 2002 and Chairman of the Board in January 2004. Effective January 1, 2011, Mr. Volker stepped downelection as President, but continued as Chairman and Chief Executive Officer. Effective June 2014, he was again elected President and Chief Executive Officer. Mr. Volker was co-founder, Vice President and later President of Energy Management Corporation from 1971 through 1982. HeHolly has 4323 years of experience in the oil and gas industry. Prior to joining Whiting, he held various management and technical positions during his 20 years at Anadarko Petroleum Corporation including Executive Vice President, U.S. Onshore Exploration and Production; Senior Vice President, U.S. Onshore Exploration and Production; Senior Vice President, Operations; Vice President, Operations for the Southern and Appalachia Region; among others. He began his career in 1994 with Amoco Corporation. Mr. Volker hasHolly holds a Bachelor’sBachelor of Science degree in financepetroleum engineering from Texas Tech University, and he is a graduate of the Harvard Business School’s Advanced Management Program.
Bruce R. DeBoer joined us as Vice President, General Counsel and Corporate Secretary in January 2005 and was elected Senior Vice President, General Counsel and Corporate Secretary effective January 2018. From January 1997 to May 2004, Mr. DeBoer served as Vice President, General Counsel and Corporate Secretary of Tom Brown, Inc., an independent oil and gas exploration and production company. Mr. DeBoer has 38 years of experience in managing the legal departments of several independent oil and gas companies. He holds a Bachelor of Science degree in political science from South Dakota State University and received his J.D. and MBA degrees from the University of Denver, an MBA from the University of Colorado and has completed H. K. VanPoolen and Associates’ course of study in reservoir engineering.South Dakota.
Peter W. Hagist joined us in October 2005 as Vice President, Operations-Midland. In June 2014, he was elected Senior Vice President of Planning. Mr. Hagist has 3336 years of experience in the oil and gas industry and 2527 years of experience managing tertiary recovery operations. Prior to joining Whiting, he held management and professional positions with Kinder Morgan CO2 Company and Pennzoil Exploration and Production Company. Mr. Hagist holds a Bachelor of Science degree in Petroleum Engineeringpetroleum engineering from the Colorado School of Mines. He is a registered Professional Engineer and a member of the Society of Petroleum Engineers.
Rick A. Ross joined us in March 1999 as an Operations Manager. In May 2007, he became Vice President of Operations and in June 2014, he was elected Senior Vice President of Operations. Mr. Ross has 3235 years of oil and gas experience, including 17 years with Amoco Production Company where he served in various technical and managerial positions. Mr. Ross holds a Bachelor of Science degree in mechanical engineering from the South Dakota School of Mines and Technology. He is a registered Professional Engineer, a member of the Society of Petroleum Engineers and was a past Chairman of the North Dakota Petroleum Council.
Michael J. Stevens joined us in May 2001 as Controller, became Treasurer in January 2002 and became Vice President and Chief Financial Officer in March 2005. Mr. Stevens was elected Senior Vice President and Chief Financial Officer effective March 1, 2015. His 31 years of oil and gas experience includes eight years of service in various positions including Chief Financial Officer, Controller, Secretary and Treasurer at Inland Resources Inc., a company engaged in oil and gas exploration and development. He spent seven years in public accounting with Coopers & Lybrand in Minneapolis, Minnesota. He is a graduate of Mankato State University of Minnesota and is a Certified Public Accountant.
Mark R. Williams joined us in December 1983 as Exploration Geologist and has been Vice President of Exploration and Development since December 1999. Mr. Williams was elected Senior Vice President, Exploration and Development effective January 1, 2011. He has 3437 years of domestic and international experience in the oil and gas industry. Mr. Williams holds a Master’s degree in geology from the Colorado School of Mines and a Bachelor’s degree in geology from the University of Utah.
Bruce R. DeBoer joined us as Vice President, General Counsel and Corporate Secretary in January 2005. From January 1997 to May 2004, Mr. DeBoer served as Vice President, General Counsel and Corporate Secretary of Tom Brown, Inc., an independent oil and gas exploration and production company. Mr. DeBoer has 35 years of experience in managing the legal departments of several independent oil and gas companies. He holds a Bachelor of Science degree in political science from South Dakota State University and received his J.D. and MBA degrees from the University of South Dakota.
Heather M. Duncan joined us in February 2002 as Assistant Director of Human Resources and in January 2003 became Director of Human Resources. In January 2008, she was appointed Vice President of Human Resources. Ms. Duncan has 1821 years of human
resources experience in the oil and gas industry. She holds a Bachelor of Arts degree in anthropology and an MBA from the University of Colorado. She is a certified Senior Professional in Human Resources.
Steven A. Kranker joined us in March 2013 as First Director – Acquisitions and Reservoir Engineering and became Vice President of Reservoir Engineering and Acquisitions in July 2013. Prior to joining Whiting, Mr. Kranker held positions at several companies engaged in oil and gas exploration and development, including Manager of Reserves at Bill Barrett Corporation from June 2012 to March 2013, President of Earth Energy Reserves, Inc. from July 2010 to June 2012, and various positions at Forest Oil Corporation,
including Corporate Engineering Manager, from May 2001 to July 2010. Mr. Kranker has 3033 years of acquisition and reservoir engineering experience, including Brunei Shell Petroleum, Arco Alaska Inc., Maxus Exploration, Conoco Inc. and Shell Western E&P Inc. He received his Bachelor of Science degree in petroleum engineering from the Colorado School of Mines. Mr. Kranker is a member of the Society of Petroleum Engineers.
David M. Seery joined us as our Manager of Land in July 2004 as a result of our acquisition of Equity Oil Company, where he was Manager of Land and Manager of Equity’s Exploration Department, positions he had held for more than five years. He became our Vice President of Land in January 2005. Mr. Seery has 3437 years of land experience including staff and managerial positions with Marathon Oil Company. Mr. Seery holds a Bachelor of Science degree in business administration from the University of Montana. He is a registered Land Professional and has held various duties with the Denver Association of Petroleum Landmen.
Michael J. StevensSirikka R. Lohoefener joined us in May 2001June 2006 as a Senior Financial Accountant, became Financial Reporting Manager in January 2011 and Controller becamein March 2015. She was appointed Controller and Treasurer in January 2002March 2017 and became Vice President and Chief Financial Officer in March 2005. His 28is the Company’s designated principal accounting officer. Prior to joining Whiting, Ms. Lohoefener spent five years of oil and gas experience includes eight years of service in various positions including Chief Financial Officer, Controller, Secretary and Treasurer at Inland Resources Inc.,with Wagner, Burke & Barnes, LLP, a company engaged in oil and gas exploration and development. He spent seven years in public accounting with Coopers & Lybrandfirm previously based in Minneapolis, Minnesota. He isGolden, Colorado. She holds a graduateMaster of Mankato StateAccountancy degree from the University of MinnesotaMissouri and is a Certified Public Accountant.
Brent P. Jensen joined us in August 2005 as Controller, and he became Controller and Treasurer in January 2006. He was previously with PricewaterhouseCoopers L.L.P. in Houston, Texas, where he held various positions in their oil and gas audit practice since 1994, which included assignments of four years in Moscow, Russia and three years in Milan, Italy. He has 21 years of oil and gas accounting experience and is a Certified Public Accountant. Mr. Jensen holds a Bachelor of Arts degree from the University of California, Los Angeles.
Executive officers are elected by, and serve at the discretion of, the Board of Directors. There are no family relationships between any of our directors or executive officers.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Whiting Petroleum Corporation’s common stock is traded on the New York Stock Exchange under the symbol “WLL.”“WLL”. The following table shows the high and low sale prices for our common stock (as adjusted for the one-for-four reverse stock split as discussed below) for the periods presented.
| | | | | | |
| | | | | | |
| | High | | Low |
Fiscal Year Ended December 31, 2014 | | | | | | |
Fourth quarter (ended December 31, 2014) | | $ | 78.99 | | $ | 24.13 |
Third quarter (ended September 30, 2014) | | $ | 92.92 | | $ | 76.28 |
Second quarter (ended June 30, 2014) | | $ | 82.35 | | $ | 68.46 |
First quarter (ended March 31, 2014) | | $ | 72.32 | | $ | 54.93 |
Fiscal Year Ended December 31, 2013 | | | | | | |
Fourth quarter (ended December 31, 2013) | | $ | 70.57 | | $ | 56.40 |
Third quarter (ended September 30, 2013) | | $ | 60.65 | | $ | 46.13 |
Second quarter (ended June 30, 2013) | | $ | 50.96 | | $ | 42.44 |
First quarter (ended March 31, 2013) | | $ | 52.02 | | $ | 43.60 |
| | | | | | |
| | | | | | |
| | High | | Low |
Fiscal Year Ended December 31, 2017 | | | | | | |
Fourth quarter (ended December 31, 2017) | | $ | 28.60 | | $ | 18.56 |
Third quarter (ended September 30, 2017) | | $ | 23.52 | | $ | 15.88 |
Second quarter (ended June 30, 2017) | | $ | 41.48 | | $ | 20.44 |
First quarter (ended March 31, 2017) | | $ | 53.48 | | $ | 31.84 |
Fiscal Year Ended December 31, 2016 | | | | | | |
Fourth quarter (ended December 31, 2016) | | $ | 53.56 | | $ | 30.88 |
Third quarter (ended September 30, 2016) | | $ | 39.72 | | $ | 25.52 |
Second quarter (ended June 30, 2016) | | $ | 57.76 | | $ | 29.00 |
First quarter (ended March 31, 2016) | | $ | 39.16 | | $ | 13.40 |
On November 8, 2017, our Board of Directors approved a reverse stock split of our common stock at a ratio of one-for-four and a reduction in the number of authorized shares of our common stock from 600,000,000 shares to 225,000,000. Our common stock began trading on a split-adjusted basis on November 9, 2017 upon opening of the markets. All share and per share amounts in this Annual Report on Form 10-K for periods prior to November 2017 have been retroactively adjusted to reflect the reverse stock split.
On February 13, 2015,15, 2018, there were 809705 holders of record of our common stock.
We have not paid any cash dividends on our common stock since we were incorporated in July 2003, and we do not anticipate paying any such dividends on our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon various factors, including our financial position, cash flows, results of operations, capital requirements and investment opportunities. Except for limited exceptions, our credit agreement restricts our ability to make any cash dividends or distributions on our common stock. Additionally, the indentures governing our senior and senior subordinated notes (including Kodiak’s senior notes) contain restrictive covenants that may limit our ability to pay cash dividends on our common stock.
Information relating to compensation plans under which our equity securities are authorized for issuance is set forth in Part III, Item 12 of this Annual Report on Form 10-K.
The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.
The following graph compares on a cumulative basis changes since December 31, 20092012 in (a) the total stockholder return on our common stock with (b) the total return on the Standard & Poor’s Composite 500 Index and (c) the total return on the Dow Jones U.S. Oil Companies, SecondaryExploration & Production Index. Such changes have been measured by dividing (a) the sum of (i) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (ii) the difference between the price per share at the end of and the beginning of the measurement period, by (b) the price per share at the beginning of the measurement period. The graph assumes $100 was invested on December 31, 20092012 in our common stock, the Standard & Poor’s Composite 500 Index and the Dow Jones U.S. Oil Companies, Secondary Index.
Exploration & Production Index, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 12/31/2009 | | 12/31/2010 | | 12/31/2011 | | 12/31/2012 | | 12/31/2013 | | 12/31/2014 | | 12/31/2012 | | 12/31/2013 | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 |
Whiting Petroleum Corporation | | $ | 100 | | $ | 164 | | $ | 131 | | $ | 121 | | $ | 173 | | $ | 92 | | $ | 100 | | $ | 143 | | $ | 76 | | $ | 22 | | $ | 28 | | $ | 15 |
Standard & Poor’s Composite 500 Index | | 100 | | 113 | | 113 | | 128 | | 166 | | 185 | | 100 | | 130 | | 144 | | 143 | | 157 | | 187 |
Dow Jones U.S. Exploration & Production Index | | 100 | | 116 | | 110 | | 115 | | 150 | | 132 | | 100 | | 130 | | 114 | | 86 | | 105 | | 105 |
Item 6. Selected Financial Data
The consolidated statements of incomeoperations and statements of cash flows information for the years ended December 31, 2014, 20132017, 2016 and 20122015 and the consolidated balance sheet information at December 31, 20142017 and 20132016 are derived from our audited financial statements included elsewhere in this report. The consolidated statements of incomeoperations and statements of cash flows information for the years ended December 31, 20112014 and 20102013 and the consolidated balance sheet information at December 31, 2012, 20112015, 2014 and 20102013 are derived from audited financial statements that are not included in this report. Our historical results include the results from our recent proved property acquisitions beginning on the following closing dates: properties related to the acquisition of Kodiak Acquisition,Oil & Gas Corp., December 8, 2014;2014, and properties in North Dakota and Montana, September 20, 2013; and properties in Colorado, September 9, 2010.2013. In addition, our historical results also include the effects of our recent proved property divestitures beginning on the following closing dates: properties in the Fort Berthold Indian Reservation area, September 1, 2017; gas processing plants and related gathering systems in North Dakota, January 1, 2017; properties in the North Ward Estes field, July 27, 2016; water facilities in Colorado, December 16, 2015; non-core properties in various fields across multiple states, December 15, 2015, November 12, 2015 and June 10, 2015; the underlying properties of Whiting USA Trust I, April 15, 2015; properties in the Postle field, July 15, 2013; and properties in Texas, October 31, 2013. For a discussion of other material factors affecting the comparability of the information presented below, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K.
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| | | | | | | | | | | | | | | |
| | (in millions, except per share data) |
Consolidated Statements of Income Information: | | | | | | | | | | | | | | | |
Revenues and other income: | | | | | | | | | | | | | | | |
Oil, NGL and natural gas sales | | $ | 3,024.6 | | $ | 2,666.5 | | $ | 2,137.7 | | $ | 1,860.1 | | $ | 1,475.3 |
Gain (loss) on hedging activities | | | - | | | (1.9) | | | 2.3 | | | 8.8 | | | 23.2 |
Amortization of deferred gain on sale | | | 30.5 | | | 31.7 | | | 29.5 | | | 13.9 | | | 15.6 |
Gain on sale of properties | | | 27.6 | | | 128.6 | | | 3.4 | | | 16.3 | | | 1.4 |
Interest income and other | | | 2.3 | | | 3.4 | | | 0.5 | | | 0.5 | | | 0.6 |
Total revenues and other income | | | 3,085.0 | | | 2,828.3 | | | 2,173.4 | | | 1,899.6 | | | 1,516.1 |
Costs and expenses: | | | | | | | | | | | | | | | |
Lease operating | | | 496.9 | | | 430.2 | | | 376.4 | | | 305.5 | | | 268.3 |
Production taxes | | | 253.0 | | | 225.4 | | | 171.6 | | | 139.2 | | | 103.9 |
Depreciation, depletion and amortization | | | 1,089.5 | | | 891.5 | | | 684.7 | | | 468.2 | | | 393.9 |
Exploration and impairment (1) | | | 854.4 | | | 453.2 | | | 167.0 | | | 84.6 | | | 59.4 |
General and administrative | | | 177.2 | | | 138.0 | | | 108.6 | | | 85.0 | | | 64.7 |
Interest expense | | | 170.6 | | | 112.9 | | | 75.2 | | | 62.5 | | | 59.1 |
Loss on early extinguishment of debt | | | - | | | 4.4 | | | - | | | - | | | 6.2 |
Change in Production Participation Plan liability | | | - | | | (7.0) | | | 13.8 | | | (0.9) | | | 12.1 |
Commodity derivative (gain) loss, net | | | (100.5) | | | 7.8 | | | (85.9) | | | (24.8) | | | 7.1 |
Total costs and expenses | | | 2,941.1 | | | 2,256.4 | | | 1,511.4 | | | 1,119.3 | | | 974.7 |
Income before income taxes | | | 143.9 | | | 571.9 | | | 662.0 | | | 780.3 | | | 541.4 |
Income tax expense | | | 79.2 | | | 205.9 | | | 247.9 | | | 288.7 | | | 204.8 |
Net income | | | 64.7 | | | 366.0 | | | 414.1 | | | 491.6 | | | 336.7 |
Net loss attributable to noncontrolling interest | | | 0.1 | | | 0.1 | | | 0.1 | | | 0.1 | | | - |
Net income available to shareholders | | | 64.8 | | | 366.1 | | | 414.2 | | | 491.7 | | | 336.7 |
Preferred stock dividends (2) | | | - | | | (0.5) | | | (1.1) | | | (1.1) | | | (64.0) |
Net income available to common shareholders | | $ | 64.8 | | $ | 365.5 | | $ | 413.1 | | $ | 490.6 | | $ | 272.7 |
Earnings per common share, basic (3) | | $ | 0.53 | | $ | 3.09 | | $ | 3.51 | | $ | 4.18 | | $ | 2.57 |
Earnings per common share, diluted (3) | | $ | 0.53 | | $ | 3.06 | | $ | 3.48 | | $ | 4.14 | | $ | 2.55 |
Other Financial Information: | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 1,815.3 | | $ | 1,744.7 | | $ | 1,401.2 | | $ | 1,192.1 | | $ | 997.3 |
Net cash used in investing activities | | $ | (2,860.5) | | $ | (1,902.5) | | $ | (1,780.3) | | $ | (1,760.0) | | $ | (914.6) |
Net cash provided by (used in) financing activities | | $ | 423.9 | | $ | 812.4 | | $ | 408.1 | | $ | 564.8 | | $ | (75.7) |
Capital expenditures | | $ | 2,888.4 | | $ | 2,772.7 | | $ | 2,171.5 | | $ | 1,804.3 | | $ | 923.8 |
Consolidated Balance Sheet Information: | | | | | | | | | | | | | | | |
Total assets | | $ | 14,019.5 | | $ | 8,833.5 | | $ | 7,272.4 | | $ | 6,045.6 | | $ | 4,648.8 |
Long-term debt | | $ | 5,628.8 | | $ | 2,653.8 | | $ | 1,800.0 | | $ | 1,380.0 | | $ | 800.0 |
Total equity (4) | | $ | 5,703.0 | | $ | 3,836.7 | | $ | 3,453.2 | | $ | 3,029.1 | | $ | 2,531.3 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | |
| | (in millions, except per share data) |
Consolidated Statements of Operations Information | | | | | | | | | | | | | | | |
Operating revenues | | $ | 1,481.4 | | $ | 1,285.0 | | $ | 2,092.5 | | $ | 3,024.6 | | $ | 2,664.6 |
Net income (loss) attributable to common shareholders | | $ | (1,237.6) | | $ | (1,339.1) | | $ | (2,219.2) | | $ | 64.8 | | $ | 365.5 |
Earnings (loss) per common share, basic (1) | | $ | (13.65) | | $ | (21.27) | | $ | (45.41) | | $ | 2.12 | | $ | 12.36 |
Earnings (loss) per common share, diluted (1) | | $ | (13.65) | | $ | (21.27) | | $ | (45.41) | | $ | 2.12 | | $ | 12.25 |
Other Financial Information | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 577.1 | | $ | 595.0 | | $ | 1,051.4 | | $ | 1,815.3 | | $ | 1,744.7 |
Net cash provided by (used in) investing activities | | $ | 73.4 | | $ | (222.6) | | $ | (1,982.1) | | $ | (2,860.5) | | $ | (1,902.5) |
Net cash provided by (used in) financing activities | | $ | 155.6 | | $ | (315.3) | | $ | 868.7 | | $ | 423.9 | | $ | 812.4 |
Cash capital expenditures | | $ | 852.0 | | $ | 543.9 | | $ | 2,483.7 | | $ | 2,888.4 | | $ | 2,772.7 |
Consolidated Balance Sheet Information | | | | | | | | | | | | | | | |
Total assets | | $ | 8,403.0 | | $ | 9,876.1 | | $ | 11,389.1 | | $ | 13,993.1 | | $ | 8,802.5 |
Long-term debt | | $ | 2,764.7 | | $ | 3,535.3 | | $ | 5,197.7 | | $ | 5,602.4 | | $ | 2,622.9 |
Total equity (2) | | $ | 3,919.1 | | $ | 5,149.2 | | $ | 4,758.6 | | $ | 5,703.0 | | $ | 3,836.7 |
_____________________
| (1) | | Includes proved oil and gas property impairments of $587 million and CO2 property impairments of $42 million for the year ended December 31, 2014, and proved oil and gas property impairments of $267 million for the year ended December 31, 2013.
|
| (2)
| | The year ended December 31, 2010 includes a cash premium of $47.5 million for the induced conversion of our 6.25% Perpetual Preferred Stock.
|
| (3)
| | On January 26, 2011,November 8, 2017, our Board of Directors approved a two-for-oneone-for-four reverse stock split of the Company's shares ofour common stock to be effected in the form of a stock dividend effective February 22, 2011.stock. Earnings (loss) per common share basic and diluted for periods prior to February 20112017 have been retroactively adjusted to reflect the reverse stock split. |
| (4)(2)
| | No cash dividends were declared or paid on our common stock during the periods presented. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, the terms “Whiting,” “we,” “us,”“Whiting”, “we”, “us”, “our” or “ours” when used in this Item refer to Whiting Petroleum Corporation, together with its consolidated subsidiaries, Whiting Oil and Gas Corporation (“Whiting Oil and Gas”), Whiting US Holding Company, Whiting Canadian Holding Company ULC (formerly Kodiak Oil & Gas Corp., “Kodiak”), Whiting Resources Corporation (formerly Kodiak Oil & Gas (USA) Inc.) and Whiting Programs, Inc. When the context requires, we refer to these entities separately. This document contains forward-looking statements, which give our current expectations or forecasts of future events. Please refer to “Forward-Looking Statements” at the end of this Item for an explanation of these types of statements.
Overview
We are an independent oil and gas company engaged in exploration, development, production, acquisition and productionexploration activities primarily in the Rocky Mountains and Permian Basin regionsregion of the United States. Since 2006, we have increased our focusOur current operations and capital programs are focused on organic drilling activityopportunities and on the development of previously acquired properties, specifically on projects that we believe provide the opportunitygreatest potential for repeatable successessuccess and production growth, while continuing to selectively pursuepursuing acquisitions that complement our existing core properties. As a result of lower crude oil prices during 2015 and 2016, we significantly reduced our level of capital spending and focused our drilling activity on projects that provide the highest rate of return. During 2017, we continued to focus on high-return projects that added production and reserves through the strategic deployment of capital at our Williston Basin properties such as the recent acquisition of Kodiak (the “Kodiak Acquisition”) discussed below under “Acquisitions and Divestiture Highlights”. We believe the combination of acquisitions, subsequent development and organic drilling provides us with a broad set of growth alternatives and allows us to directRedtail field, while closely aligning our capital resources to what we consider to be the most advantageous investments. We also believe that our significant drilling inventory, combinedspending with our operating experience and cost structure, provides us with meaningful organic growth opportunities. Our growth plan is centered on the following activities:
| ·
| | pursuing the development of projects that we believe will generate attractive rates of return;
|
| ·
| | allocating a portion of our exploration and development budget to leasing and exploring prospect areas;
|
| ·
| | maintaining a balanced portfolio of lower risk, long-lived oil and gas properties that provide stable cash flows; and
|
| ·
| | seeking property acquisitions that complement our core areas, such as the recent Kodiak Acquisition discussed below under “Acquisition and Divestiture Highlights”.
|
We have historically acquired operated and non-operated properties that exceed our rate of return criteria. For acquisitions of properties with additional development and exploration potential, our focus has been on acquiring operated properties so that we can better control the timing and implementation of capital spending. In some instances, we have been able to acquire non-operated property interests at attractive rates of return that established a presence in a new area of interest or that have complemented our existingcash flows generated from operations. We intend to continue to acquire both operated and non-operated interests to the extent we believe they meet our return criteria. In addition, our willingness to acquire non-operated properties in new geographic regions provides us with geophysical and geologic data in some cases that leads to further acquisitions in the same region, whether on an operated or non-operated basis.
Wewe continually evaluate our current property portfolio and sell properties when we believe that the sales price realized will provide an above average rate of return for the property or when the property no longer matches the profile of properties we desire to own.own, such as the asset sales discussed below under “Acquisition and Divestiture Highlights” and in the “Acquisitions and Divestitures” footnote in the notes to consolidated financial statements.
Our revenue, profitability and future growth rate depend on many factors which are beyond our control, such as oil and gas prices, economic, political and regulatory developments, and competition from other sources of energy, as well asand the other items discussed inunder the caption “Risk Factors” in Item IA1A of this Annual Report on Form 10-K. Oil and gas prices historically have been volatile and may fluctuate widely in the future. The following table highlights the quarterly average NYMEX price trends for crude oil and natural gas prices since the first quarter of 2013:2016:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2013 | | 2014 | | 2016 | | 2017 |
| | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 | | Q1 | | Q2 | | Q3 | | Q4 |
Crude oil | | $ | 94.34 | | $ | 94.23 | | $ | 105.82 | | $ | 97.50 | | $ | 98.62 | | $ | 102.98 | | $ | 97.21 | | $ | 73.12 | | $ | 33.51 | | $ | 45.60 | | $ | 44.94 | | $ | 49.33 | | $ | 51.86 | | $ | 48.29 | | $ | 48.19 | | $ | 55.39 |
Natural gas | | $ | 3.34 | | $ | 4.10 | | $ | 3.58 | | $ | 3.60 | | $ | 4.93 | | $ | 4.68 | | $ | 4.07 | | $ | 4.04 | | $ | 2.06 | | $ | 1.98 | | $ | 2.93 | | $ | 2.98 | | $ | 3.07 | | $ | 3.09 | | $ | 2.89 | | $ | 2.87 |
Oil prices have fallen significantly since reaching highs of over $105.00 per Bbl in June 2014, dropping below $45.00 per Bbl in January 2015. Natural gas prices have also declined from over $4.80 per Mcf in April 2014 to below $2.60 per Mcf in February 2015. In addition, forecasted prices for both oil and gas for 2015 have also declined. Lower oil, NGL and natural gas prices may not only decrease our revenues on a per unit basis, but may also reduce the amount of oil and natural gas that we can produce economically and therefore potentially lower our oil and gas reserves. A substantial orreserve quantities. Substantial and extended declinedeclines in oil, NGL orand natural gas prices have resulted and may result in impairments of our proved oil and gas properties or undeveloped acreage (such as the impairments discussed below under “Results of Operations”) and may materially and adversely affect our future business, financial condition, cash flows, results of operations, liquidity or ability to finance planned capital expenditures. Lower oil, NGL and natural gasIn addition, lower commodity prices may also reduce the amount of our borrowing base under our credit agreement, which is determined at the discretion of theour lenders and which is based on the collateral value of our proved reserves that have been mortgaged to the lenders. Upon a redetermination, if borrowings in excess of the revised borrowing capacity were outstanding, we could be forced to immediately repay a portion of the debt outstanding under our credit agreement. In addition,Alternatively, higher oil and natural gas prices may result in significant mark-to-market losses being incurred on our commodity-based derivatives, which may in turn cause us to experience net losses.derivatives.
For a discussion of material changes to our proved probable and possible reserves from December 31, 20132016 to December 31, 20142017 and our ability to convert PUDs to proved developed reserves, probable reservesrefer to proved reserves, and possible reserves to probable or proved reserves, see “Reserves” in Item 2 of this Annual Report on Form 10-K. Additionally, for a discussion relating to the minimum remaining terms of our leases, seerefer to “Acreage” in Item 2 of this Annual Report on Form 10-K, and for a discussion on our need to use enhanced recovery techniques, see “Productive Wells” in Item 2 of this Annual Report on Form 10-K.
20142017 Highlights and Future Considerations
Operational Highlights.Highlights
Sanish and Parshall Fields. Northern Rocky Mountains – Williston Basin
Our Sanish and Parshall fieldsproperties in Mountrail County,the Williston Basin of North Dakota and Montana target the Bakken and Three Forks formations. Net production infrom the Sanish and Parshall fieldsWilliston Basin averaged 45.0106.8 MBOE/d for the fourth quarter of 2014,2017, representing a 2% decrease5% increase from 46.1102.0 MBOE/d in the third quarter of 2014.2017. Across our acreage in the Williston Basin, we have implemented new completion designs which utilize cemented liners, plug-and-perf technology, significantly higher sand volumes, new diversion technology and both hybrid and slickwater
fracture stimulation methods, which have resulted in improved initial production rates. As of December 31, 2014,2017, we had three drillingfour rigs active in the Sanish field. Based on the success of our high density pilot programs in the Sanish field, we commenced a development program drilling nine Bakken wells per spacing unit in the area, an increase over our original plan of three to four wells per spacing unit. Additionally, we have implemented a new slickwater fracture stimulation method using cemented liners at the Sanish field and are encouraged by the initial results.
Lewis & Clark/Pronghorn Fields. Our Lewis & Clark/Pronghorn fields are located primarily in the Stark and Billings counties of North Dakota and run along the Bakken shale pinch-out in the southern Williston Basin. In this area, the Upper Bakken shale is thermally mature and moderately over-pressured,Basin, and we believe that it has charged reservoir zones within the immediately underlying Pronghorn Sand and Three Forks formations (Middle Bakken and Lower Bakken Shale is absent). Net production in the Lewis & Clark/Pronghorn fields averaged 16.4 MBOE/d in the fourth quarter of 2014, representingplan to add a 2% decrease from 16.7 MBOE/d in the third quarter of 2014. As of December 31, 2014, we had one drillingfifth rig operating in the Pronghorn field, which utilizes drilling pads, with two or three wells being drilled from each pad. We have implemented our new completion design in this field utilizing cemented liners and plug-and-perf technology based on our successful testing of this completion technique in 2013. Additionally, we are evaluating our slickwater fracture stimulation method at the Pronghorn field and are encouraged by the results.
At our gas processing plant located south of Belfield, North Dakota, which primarily processes production from the Pronghorn area, there is currently inlet compression in place to process 35 MMcf/d. As of December 31, 2014 the plant was processing over 23 MMcf/d. In May 2012, we sold a 50% ownership interest in the plant, gathering systems and related facilities. We retained a 50% ownership interest and continue to operate the Belfield plant and facilities.
Hidden Bench/Tarpon Fields. Our Hidden Bench and Tarpon fields in McKenzie County, North Dakota target the Bakken and Three Forks formations. Net production at Hidden Bench/Tarpon averaged 22.6 MBOE/d in the fourth quarter of 2014, which represents a 40% increase from 16.2 MBOE/d in the third quarter of 2014. Contributing to this period over period production increase was net production added as a result of the Kodiak Acquisition totaling 10.7 MBOE/d from December 8, 2014, the closing date of the acquisition, through December 31, 2014. As of December 31, 2014, we had four drilling rigs active in the Hidden Bench field. We have also implemented our new completion design at our Hidden Bench/Tarpon fields, utilizing cemented liners and plug-and-perf technology incorporating three to five perforation clusters per fracture stage. This new design has generated positive results, demonstrated by average increases of 20% in initial production rates, as well as 30, 60 and 90-day production rates, from wells recently drilled in these fields. At our Tarpon field we have also implemented a completion technique using cemented liners and coiled tubing, and at our Hidden Bench field, based on the success of our high density drilling pilot in this area we initiated a development program of drilling eight wells per spacing unit, an increase over our original plan of four wells per spacing unit.mid-year 2018.
Cassandra Field. Our Cassandra field in Williams County, North Dakota targets the Bakken and Three Forks formations. As of December 31, 2014, we had one drilling rig active in the Cassandra field. In 2014, we improved our completion design in this area utilizing cemented liners and plug-and-perf technology with increased proppant volumes resulting in significant improvements in performance.Central Rocky Mountains – Denver Julesburg Basin
Missouri Breaks Field. Our Missouri Breaks field, which is located in Richland County, Montana and McKenzie County, North Dakota, targets the Middle Bakken formation. We have drilled successful wells on the western, eastern and southern portions of our acreage in this area. In the fourth quarter of 2014, net production from the Missouri Breaks field averaged 6.6 MBOE/d, representing an 8% increase from 6.1 MBOE/d in the third quarter of 2014. As of December 31, 2014, we had three drilling rigs active in the Missouri Breaks field. We have implemented a new completion design at this field, utilizing cemented liners, plug-and-perf technology and higher sand volumes, and this new design has significantly improved initial production rates. In addition, we continue to evaluate the slickwater fracture stimulation method used in this area and are encouraged by the initial results.
Redtail Field. Our Redtail field in the Denver JulesbergJulesburg Basin (“DJ Basin”) in Weld County, Colorado targets the Niobrara formation. In the fourth quarter of 2014, netand Codell/Fort Hays formations. Net production from the Redtail field averaged 10.220.6 MBOE/d in the fourth quarter of 2017, representing an 18%a 75% increase from 8.611.8 MBOE/d in the third quarter of 2014. Our development plan at Redtail currently includes drilling up to eight Niobrara “B” wells per
spacing unit and eight Niobrara “A” wells per spacing unit.2017. We are currently completing wells drilled from the Horsetail 30F pad in this area to test a high-density patternhave established production in the Niobrara “A”, “B” and “C” zones with 32 wells per spacing unit. As of December 31, 2014, we had four drilling rigs operating in this area.and the Codell/Fort Hays formations. We have implemented a new wellbore configuration in this area, which significantly reduces drilling times. In response to low commodity prices, we suspended completion operations in this area beginning in the second quarter of 2016, however, we resumed completion activity during the first quarter of 2017 and added a second completion crew in April. During 2017, we completed and brought on production a significant portion of our updated completion design atdrilled uncompleted well inventory (“DUCs”) from yearend 2016. During the fourth quarter of 2017, based on the recent and comparative well performance results of the DJ Basin to the Williston Basin, our management decided to concentrate development activities during 2018 in the Williston Basin. We plan to complete 22 DUCs in our Redtail field during the first half of 2018, and then cease additional development activity in this field, utilizing cemented liners, plug-and-perf technology and higher sand volumes, which has been yielding improved production results.area until commodity prices further recover.
In April 2014, we brought online theOur Redtail gas plant to processprocesses the associated gas produced from our wells in this area. The plant’sarea, and has a current inlet capacity is 20of 50 MMcf/d, and we plan to further expand the plant’s capacity to 70 MMcf/d in the second quarter of 2015.
North Ward Estes Field. The North Ward Estes field is located in the Ward and Winkler counties in Texas, and we continue to have significant development and related infrastructure activity in this field since we acquired it in 2005. Our activity at North Ward Estes to date has resulted in production increases and substantial reserve additions, and our expansion of the CO2 flood in this area continues to generate positive results.
North Ward Estes has been responding positively to the water and CO2 floods that we initiated in May 2007. We are currently injecting CO2 into one of the largest phases of our eight-phase project at North Ward Estes, and all phases of the project subject to CO2 flood procedures continue to respond positively. Net production from North Ward Estes averaged 9.7 MBOE/d for the fourth quarter of 2014, which represents a 2% increase from 9.5 MBOE/d in the third quarter of 2014.d. As of December 31, 2014,2017, the plant was processing 26 MMcf/d.
Financing Highlights
On February 2, 2017, we were injecting approximately 410 MMcf/dpaid $281 million to redeem all of CO2 into the field, over halfremaining $275 million aggregate principal amount of our 2018 Senior Subordinated Notes, which is recycled.
Whiting USA Trust I. On January 28, 2015,payment consisted of the net profits100% redemption price plus all accrued and unpaid interest that Whiting conveyed to Whiting USA Trust I (“Trust I”) terminated as a result of 9.11 MMBOE (which amount is equivalent to 8.20 MMBOE attributableon the notes. We financed the redemption with borrowings under our credit agreement. Refer to the net profits interest) having been produced and sold from the underlying properties. Upon termination, the net profits interest“Long-Term Debt” footnote in the underlying properties reverted backnotes to Whiting, resulting in an increase in our production volumes of approximately 2.3 MBOE/d as of the termination of the net profits interest.consolidated financial statements for more information on this financing transaction.
Financing Highlights. In August 2014, we entered into a Sixth Amended and Restated Credit Agreement with a syndicate of banks which replaced Whiting Oil and Gas’ existing credit agreement effective December 8, 2014, the closing date of the Kodiak Acquisition. This amended credit agreement increasedOn October 19, 2017, the borrowing base under Whiting Oil and Gas’ credit facility to $4.5 billion, with aggregate commitments of $3.5 billion. Subsequently in December 2014, the lenders under the credit agreement increased their aggregate commitments under this amendedour credit agreement were reduced from $3.5$2.5 billion to $4.5$2.3 billion of which $3.5 billion relates to commitments to extend revolving credit and $1.0 billion relates to a senior secured delayed draw term loan facility (“Delayed Draw Facility”). The Delayed Draw Facility may be used to provide cash consideration for any repurchase or redemption of Kodiak’s outstanding senior notes in connection with the Kodiak Acquisition, to pay transaction costsNovember 1, 2017 regular borrowing base redetermination, and for other corporate purposes. A portionwas primarily the result of the revolving credit facility, in an aggregate amount not to exceed $100 million, may be used to issue letterssale of credit forour Fort Berthold Indian Reservation area assets on September 1, 2017, as discussed below under “Acquisition and Divestiture Highlights”. All other terms of the account of Whiting Oil and Gas and other designated subsidiaries of Whiting Petroleum Corporation. Under the amended credit agreement remained unchanged.
On November 8, 2017 and following approval by our stockholders of an amendment to our certificate of incorporation to effect a reverse stock split, our Board of Directors approved a reverse stock split of our common stock at a ratio of one-for-four and a reduction in the revolving credit facility will maturenumber of authorized shares of our common stock from 600,000,000 shares to 225,000,000. Our common stock began trading on a split-adjusted basis on November 9, 2017 upon opening of the markets. All share and per share amounts (except par value and par value per share amounts) for periods prior to 2017 presented in this Item 7 of this Annual Report on Form 10-K have been retroactively adjusted to reflect the reverse stock split. Refer to the “Shareholders’ Equity and Noncontrolling Interest” footnote in the notes to consolidated financial statements for more information on this equity transaction.
On December 8, 2019, and the Delayed Draw Facility will mature on December 31, 2015.
In conjunction with the Kodiak Acquisition in December 2014,27, 2017, we assumed Kodiak’s outstanding principal amountissued at par $1.0 billion of $800 million of 8.125% Senior Notes due December 2019, $350 million of 5.5%6.625% Senior Notes due January 2021 and $400 million2026 (the “2026 Senior Notes”). We used the net proceeds from this offering to redeem on January 26, 2018 all of 5.5%our outstanding 5.0% Senior Notes due February 2022March 2019 (the “Kodiak“2019 Senior Notes”). On January 7, 2015, as required under at a 102.976% redemption price plus all accrued and unpaid interest on the termsnotes. Refer to the “Subsequent Events” footnote in the notes to consolidated financial statements for more information on the redemption of the indentures governing the Kodiak Notes (the “Kodiak Indentures”) upon a change in control of Kodiak, we offered to repurchase at 101% of par all $1,550 million principal amount of Kodiak Notes outstanding. The repurchase offer expires on March 3, 2015. We expect to fund any payments due as a result of such repurchase offer with borrowings under our revolving credit facility, which would reduce availability under such facility.2019 Senior Notes.
20152018 Exploration and Development Budget.Budget
Our current 20152018 exploration and development (“E&D”) budget is $2.0 billion,$750 million, which we expect to fund substantially with net cash provided by our operating activities and cash on hand, borrowings under our credit facility, or through the issuance of additional debt or equity securities. Thishand. The overall budget represents a substantial decrease from the $3.2 billion$912 million incurred on E&D (which amount also includes acreage expenditures)expenditures during 2014.2017. This reduced capitalspending is primarily attributable to our Redtail field where we incurred $293 million in drilling and development costs during 2017, but where we have allocated only $75 million of our 2018 E&D budget is in responsedue to the significantly lower crude oil prices experienced duringrecent well performance results of this area compared to the fourth quarter of 2014 and continuing into 2015. We expect to allocate $1.8 billion ofWilliston Basin. Planned E&D expenditures at our 2015 budget to exploration and development activity (of which, $82 million is related to CO2 development projects), $59 million for undeveloped acreage and $123 million for facilities.Williston Basin properties have increased slightly between years. To the extent net cash provided by operating activities is higher or lower than currently anticipated, we wouldcould adjust our E&D budget, accordingly orenter into agreements with industry partners, divest certain oil and gas property interests, adjust borrowings outstanding under our credit facility or access the capital markets as necessary. Our 20152018 E&D budget currently is allocated among our major development areas as indicated in the table below. Of our existing potential projects, we believe these present the opportunity for the highest return and most efficient use of our capital expenditures.
| | | |
| | 20152018 Exploration and
|
| | Development Budget |
Development Area | | (in millions) |
Northern RockiesRocky Mountains | | $ | 960.5600 |
Central RockiesRocky Mountains | | | 386.475 |
Non-operated properties | | | 132.950 |
CO2 EOR projectOther (1)
| | | 82.2 |
Well work and other
| | | 194.7 |
Exploration (2)
| | | 61.1 |
Facilities
| | | 123.2 |
Undeveloped acreage
| | | 59.025 |
Total | | $ | 2,000.0750 |
_____________________
| (1) | | 2015 planned capital expenditures at our CO2 EOR project include $80 million for North Ward Estes CO2 purchases.
|
| (2)
| | Comprised primarily of exploration salaries, seismic activities, lease delay rentalsfacilities costs and exploratory drilling.undeveloped acreage purchases. |
Acquisition and Divestiture Highlights.Highlights
Kodiak Acquisition. On December 8, 2014, we completed the Kodiak Acquisition whereby we acquired all of the outstanding common stock of Kodiak. Pursuant to the terms of the Kodiak Acquisition agreement, Kodiak shareholders received 0.177 of a share of Whiting common stock in exchange for each share of Kodiak common stock they owned. Total consideration for the Kodiak Acquisition was $1.8 billion, consisting of the 47,546,139 Whiting common shares issued at the market price of $37.25 per share on the date of issuance plus the fair value of Kodiak’s outstanding equity awards assumed by Whiting. The aggregate purchase price of the transaction was $4.3 billion, which includes the assumption of Kodiak’s outstanding debt of $2.5 billion as of December 8, 2014 and the net cash acquired of $19 million.
As a result of the Kodiak Acquisition, Whiting acquired approximately 327,000 gross (178,000 net) acres located primarily in North Dakota including interests in 778 producing oil and gas wells and undeveloped acreage. Approximately 10,000 of the net acres acquired were located in Wyoming and Colorado. The producing properties had estimated proved reserves of 191.8 MMBOE as of the acquisition date, 86% of which are crude oil and NGLs.
The acquisition significantly expanded our presence in the Williston Basin, adding undeveloped acreage, oil and natural gas reserves and production that were complementary to our existing asset base and operations in this area. As a result of this acquisition, we became the largest Bakken/Three Forks producer in the Williston Basin as of the acquisition date.
Big Tex Divestiture. In March 2014,January 1, 2017, we completed the sale of approximately 49,900 gross (41,000 net) acresour 50% interest in the Robinson Lake gas processing plant located in Mountrail County, North Dakota and our Big Tex prospect, which consisted mainly of undeveloped acreage50% interest in the Belfield gas processing plant located in Stark County, North Dakota, as well as the associated natural gas, crude oil and water gathering systems, effective January 1, 2017, for aggregate sales proceeds of $375 million (before closing adjustments). We used the net proceeds from this transaction to repay a portion of the debt outstanding under our credit agreement.
On July 19, 2017, the buyer of our North Ward Estes properties paid us $35 million to settle a contingent payment associated with the original purchase and sale agreement, which sale closed in July 2016. This settlement resulted in a pre-tax gain of $3 million. Refer to the “Acquisitions and Divestitures” footnote in the notes to consolidated financial statements for more information on this transaction.
On September 1, 2017, we completed the sale of our interests in certain producing oil and gas wells,properties located in the Delaware BasinFort Berthold Indian Reservation area in Dunn and McLean counties of TexasNorth Dakota, as well as other related assets and liabilities, (the “FBIR Assets”) for a cash purchase priceaggregate sales proceeds of $76$500 million resulting(before closing adjustments). The sale was effective September 1, 2017 and resulted in a pre-tax gainloss on sale of $12$402 million. With this divestiture, we no longer own any interests inWe used the Big Tex prospect.net proceeds from the sale to repay a portion of the debt outstanding under our credit agreement. The properties spanned approximately 29,600 net developed acres and consisted of estimated proved reserves of 32 MMBOE as of December 31, 2016, representing 5% of our proved reserves as of that date. The FBIR Assets generated 7% (or 8.3 MBOE/d) of our August 2017 average daily production.
Results of Operations
The following table sets forth selected operating data for the periods indicated:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Year Ended | | Year Ended December 31, |
| | December 31, | | 2017 | | 2016 | | 2015 |
| | 2014 | | 2013 | | 2012 | |
Net production: | | | | | | | | | | |
Net production | | | | | | | | | | |
Oil (MMBbl) | | | 33.5 | | | 27.0 | | | 23.1 | | | 29.3 | | | 34.0 | | | 47.2 |
NGLs (MMBbl) | | | 3.3 | | | 2.8 | | | 2.8 | | | 7.0 | | | 6.6 | | | 5.5 |
Natural gas (Bcf) | | | 30.2 | | | 26.9 | | | 25.8 | | | 41.3 | | | 41.4 | | | 41.1 |
Total production (MMBOE) | | | 41.8 | | | 34.3 | | | 30.2 | | | 43.1 | | | 47.5 | | | 59.6 |
Net sales (in millions): | | | | | | | | | | |
Net sales (in millions) | | | | | | | | | | |
Oil (1) | | $ | 2,729.0 | | $ | 2,443.7 | | $ | 1,940.5 | | $ | 1,296.4 | | $ | 1,167.8 | | $ | 1,931.9 |
NGLs | | | 128.6 | | | 114.0 | | | 108.9 | | | 111.6 | | | 59.0 | | | 70.2 |
Natural gas | | | 167.0 | | | 108.8 | | | 88.3 | | | 73.4 | | | 58.2 | | | 90.4 |
Total oil, NGL and natural gas sales | | $ | 3,024.6 | | $ | 2,666.5 | | $ | 2,137.7 | | $ | 1,481.4 | | $ | 1,285.0 | | $ | 2,092.5 |
Average sales prices: | | | | | | | | | | |
Average sales prices | | | | | | | | | | |
Oil (per Bbl) (1) | | $ | 81.50 | | $ | 90.39 | | $ | 83.86 | | $ | 44.30 | | $ | 34.36 | | $ | 40.95 |
Effect of oil hedges on average price (per Bbl) | | | 1.29 | | | (1.13) | | | (1.25) | | | 0.29 | | | 4.46 | | | 4.59 |
Oil net of hedging (per Bbl) | | $ | 82.79 | | $ | 89.26 | | $ | 82.61 | | $ | 44.59 | | $ | 38.82 | | $ | 45.54 |
Weighted average NYMEX price (per Bbl) (2) | | $ | 91.55 | | $ | 98.02 | | $ | 94.03 | | $ | 51.11 | | $ | 42.71 | | $ | 49.06 |
NGLs (per Bbl) | | $ | 39.17 | | $ | 40.41 | | $ | 39.36 | | $ | 16.00 | | $ | 8.88 | | $ | 12.67 |
Natural gas (per Mcf) (1) | | $ | 5.53 | | $ | 4.04 | | $ | 3.42 | |
Effect of natural gas hedges on average price (per Mcf) | | | - | | | - | | | 0.06 | |
Natural gas net of hedging (per Mcf) | | $ | 5.53 | | $ | 4.04 | | $ | 3.48 | |
Weighted average NYMEX price (per Mcf) (2) | | $ | 4.40 | | $ | 3.66 | | $ | 2.79 | |
Costs and expenses (per BOE): | | | | | | | | | | |
Natural gas (per Mcf) | | | $ | 1.78 | | $ | 1.40 | | $ | 2.20 |
Weighted average NYMEX price (per MMBtu) (2) | | | $ | 2.97 | | $ | 2.47 | | $ | 2.62 |
Costs and expenses (per BOE) | | | | | | | | | | |
Lease operating expenses | | $ | 11.89 | | $ | 12.53 | | $ | 12.46 | | $ | 8.51 | | $ | 8.31 | | $ | 9.32 |
Production taxes | | $ | 6.05 | | $ | 6.56 | | $ | 5.68 | | $ | 2.86 | | $ | 2.29 | | $ | 3.07 |
Depreciation, depletion and amortization | | $ | 26.06 | | $ | 25.96 | | $ | 22.67 | | $ | 22.01 | | $ | 24.64 | | $ | 20.87 |
General and administrative | | $ | 4.24 | | $ | 4.02 | | $ | 3.59 | | $ | 2.88 | | $ | 3.09 | | $ | 2.90 |
_____________________
| (1) | | Before consideration of hedging transactions. |
| (2) | | Average NYMEX pricing weighted for monthly production volumes. |
Year Ended December 31, 20142017 Compared to Year Ended December 31, 20132016
Oil, NGL and Natural Gas Sales. Our oil, NGL and natural gas sales revenue increased $358$196 million to $3,025 million$1.5 billion when comparing 20142017 to 2013.2016. Sales revenue is a function of oil, NGL and gas volumes sold and average commodity prices realized. Our oil sales volumes increased 24%decreased 14%, while our NGL sales volumes increased 16%5% and our natural gas sales volumes increased 12%remained relatively consistent between periods. The oil volume increase resulteddecrease between periods was primarily from drilling success at our Hidden Bench/Tarpon, Sanish and Parshall, Redtail, Missouri Breaks and Lewis & Clark/Pronghorn fields. During 2014, oil production from our Hidden Bench/Tarpon fields increased 2,355 MBbl, Sanish and Parshall fields increased 1,830 MBbl, Redtail field increased 1,450 MBbl, Missouri Breaks field increased 795 MBbl, and our Lewis & Clark/Pronghorn fields increased 450 MBbl over the same period in 2013. In additionattributable to the production increases from drilling were 850 MBbl of oil production added across several of our Northern Rockies areas as a result of the Kodiak Acquisition, which closed on December 8, 2014. These production increases were partially offset by the sale of our Postle field, which had oil production of 1,270 MBbl in 2013 but which was fully divested in July 2013, as well as normal field production decline across severalall of our areas. Our NGLs are generally produced concurrently with our crude oil volumes,areas resulting from reduced drilling and completion activity during 2016 and 2017 in a high correlation between fluctuations in our oil quantities sold and our NGL quantities sold. As a result, our NGL sales volume increases generally relatedresponse to the same areas as ourdepressed commodity price environment. In addition, we completed certain oil volume increases, such as our Hidden Bench/Tarpon fields, our Redtail field, our Lewis & Clark/Pronghorn fields and our Sanishgas property divestitures during 2016 and Parshall fields. The gas volume increase between periods was primarily the result of2017, which negatively impacted oil production in 2017 by 2,330 MBbl. These decreases were partially offset by new wells drilled and completed in the Williston Basin and DJ Basin which added 6,040 MBbl and 1,750 MBbl, respectively, of oil production during 2017 as compared to 2016. The NGL volume increase between periods generally relates to new wells drilled and completed in the pastWilliston Basin and DJ Basin over the last twelve months, which caused increasesas well as additional volumes processed as more wells were connected to gas processing plants in associatedthe Williston Basin in an effort to increase our overall gas production of 1,750 MMcf at our Sanishcapture rate in this area and Parshall fields, 1,530 MMcf at our Hidden Bench/Tarpon fields and 1,455 MMcf at our Redtail field. In addition, 615 MMcf of gas production was added as a resultreduce flared volumes. Many of the Kodiak Acquisition.new Williston Basin wells are in areas with higher gas-to-oil production ratios than previously drilled areas. These gasNGL volume increases were partially offset by normal field production decline across severalall our areas. New wells drilled and completed at our Williston Basin and DJ Basin properties resulted in 8,555 MMcf and 910 MMcf, respectively, of additional gas volumes during 2017 as compared to 2016. This gas volume increase was entirely offset by normal field production decline across all of our areas and the most notable of2016 and 2017 property divestitures, which was our Flat Rock field wherenegatively impacted gas production volumes decreased 740 MMcf when comparing 2014 to 2013.in 2017 by 690 MMcf.
In addition to the above crude oil, NGL and natural gasThese overall production-related increasesdecreases in net revenue was an increasewere offset by increases in the average sales price realized for oil, NGLs and natural gas of 37% in 20142017 compared to 2013. These increases were partially offset by decreases in the average sales prices realized for oil and NGLs.2016. Our average price for oil before(before the effects of hedging decreased 10%hedging), NGLs and ournatural gas increased 29%,
80% and 27%, respectively, between periods. Our average sales price realized for NGLs decreased 3% between periods.
Gain on Saleoil is impacted by deficiency payments we are making under two physical delivery contracts at our Redtail field due to our inability to meet the minimum volume commitments under these contracts. During 2017 and 2016, our total average sales price realized for oil was $2.27 per Bbl lower and $1.27 per Bbl lower, respectively, as a result of Properties. During 2014,these deficiency payments. On February 1, 2018, we sold undeveloped acreage as well aspaid $61 million to the counterparty to one of these Redtail delivery contracts to settle all future minimum volume commitments under the agreement. The remaining agreement will continue to negatively impact the price we receive for oil from our interests in certain producing oilRedtail field through April 2020, when the contract terminates. Refer to the “Commitments and gas wellsContingencies” footnote in the Big Tex prospectnotes to consolidated financial statements for net proceeds of $76 million in cash, which resulted in a pre-tax gainmore information on sale of $12 million. Also during 2014, we sold certain non-core properties inthese physical delivery contracts and the Rocky Mountains region for aggregate sales proceeds of $33 million, resulting in a pre-tax gain on sale of $17 million. In July 2013, we sold our interest in the Postle Properties for net proceeds of $810 million, which resulted in a pre-tax gain on sale of $110 million. Additionally during 2013, we sold our interest in certain producing oil and gas wells and undeveloped acreage in the Big Tex prospect for net proceeds of $152 million, which resulted in a pre-tax gain on sale of $13 million for the year ended December 31, 2013. There were no other property divestitures resulting in a significant gain or loss on sale during 2014 or 2013.related deficiency payments.
Lease Operating Expenses. Our lease operating expenses (“LOE”) during 20142017 were $497$367 million, a $67$28 million increasedecrease over 2013. Higher LOE in 2014 were primarily related to a $92 million increase in the cost of oil field goods and services associated with net wells we added during the last twelve months, partially offset by a2016. This decrease in well workover activity. Workovers decreased from $82 million in 2013 to $57 million in 2014,was primarily due to a lower numberdecline in the costs of oilfield goods and services resulting from cost reduction measures we have implemented and the elimination of $13 million of LOE attributable to properties that we divested during 2016 and 2017, as well workovers being conducted at our CO2 project at North Ward Estes.as the general downturn in the oil and gas industry.
Our lease operating expenses on a BOE basis, however, decreasedincreased when comparing 20142017 to 2013.2016. LOE per BOE amounted to $11.89$8.51 during 2014,2017, which represents a decreasean increase of $0.64$0.20 per BOE (or 2%) from 2013.2016. This decreaseincrease was mainly due to higherlower overall production volumes between periods, combined withpartially offset by the declineoverall decrease in well workover costs, asLOE expense discussed above.
Production Taxes. Our production taxes during 20142017 were $253$123 million, a $28$15 million increase over the same period in 2013,2016, which increase was primarily due to higher oil, NGL and natural gas sales between periods. Our production taxes, however, are generally calculated as a percentage of net sales revenue before the effects of hedging, and this percentage on a company-wide basis was 8.4%remained relatively consistent at 8.3% and 8.5% for 20142017 and 2013,2016, respectively.
Depreciation, Depletion and Amortization. Our depreciation, depletion and amortization (“DD&A”) expense increased $198decreased $223 million in 20142017 as compared to 2013.2016. The components of our DD&A expense were as follows (in thousands):
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| | | | | | | | | | | | |
| | Year Ended | | | | | | |
| | December 31, | | Year Ended December 31, |
| | 2014 | | 2013 | | 2017 | | 2016 |
Depletion | | $ | 1,070,503 | | $ | 876,208 | | $ | 927,594 | | $ | 1,149,302 |
Depreciation | | | 5,494 | | | 4,700 | | | 7,536 | | | 8,479 |
Accretion of asset retirement obligations | | | 13,548 | | | 10,608 | | | 13,809 | | | 13,801 |
Total | | $ | 1,089,545 | | $ | 891,516 | | $ | 948,939 | | $ | 1,171,582 |
DD&A in 2014 increased over 2013decreased between periods primarily due to $194$222 million in higherlower depletion expense, between periods. Of this increase, $191consisting of a $127 million decrease related to an increase in oura lower depletion rate between periods and a $95 million decrease due to lower overall production volumes during 2014 and $3 million related to a higher depletion rate between periods.2017. On a BOE basis, our overall DD&A rate of $26.06$22.01 for 2014 represented a slight2017 was 11% lower than the rate of $24.64 in 2016. The primary factors contributing to this lower DD&A rate were (i) an increase to proved and proved developed reserves over the 2013 ratelast twelve months (excluding the effect of $25.96divestitures) mainly due to $2.8 billionhigher average oil and natural gas prices used to calculate our reserves, as well as upward performance revisions, extensions and discoveries in our Williston Basin area, and (ii) the impact of property divestitures over the past twelve months. These factors that positively impacted our DD&A rate were partially offset by $831 million in drilling and development expenditures during the past twelve months, which were largely offset by additions to proved and proved developed reserves over this same time period.months.
Exploration and Impairment Costs. Our exploration and impairment costs increased $401$815 million in 20142017 as compared to 2013.2016. The components of our exploration and impairment costsexpense were as follows (in thousands):
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| | | | | | | | | | | | |
| | Year Ended | | | | | | |
| | December 31, | | Year Ended December 31, |
| | 2014 | | 2013 | | 2017 | | 2016 |
Exploration | | $ | 86,803 | | $ | 94,755 | | $ | 36,324 | | $ | 45,846 |
Impairment | | | 767,627 | | | 358,455 | | | 899,853 | | | 75,622 |
Total | | $ | 854,430 | | $ | 453,210 | | $ | 936,177 | | $ | 121,468 |
Exploration costs decreased $8$10 million during 20142017 as compared to 20132016 primarily due to decreases in geological and geophysical (“G&G”) activity,$18 million of lower delay lease rentals paid and lower exploratory dry hole costs,rig termination fees incurred between periods, partially offset by rig termination feesthe write-off of $3 million incurred during 2014. G&G costs, such as seismic studies, amounted to $23$12 million during 2014 as compared2017 of pre-drilling expenditures for well locations in our Redtail field where we currently have no future plans to $30 million during 2013. Delay lease rentals decreased $6 million between periods. Exploratory dry hole costs for 2014 totaled $26 million, primarily related to five exploratory dry holes drilled on our oil and gas properties in 2014, including three in Michigan and two in the Rocky Mountains region, as well as six exploratory dry holes at our CO2 development project in New Mexico. During 2013, on the other hand, we drilled eight exploratory dry holes in the Rocky Mountains and Permian Basin regions totaling $29 million.drill.
Impairment expense in 20142017 primarily related to (i) $587$835 million in non-cash impairment charges for the partial write-down of non-core proved oil and gas properties, which are not currently being developed,our Redtail field in Colorado Louisiana, North Dakota and Utah relateddue to the decreasea reduction of reserves driven by recent well performance results in oil and gas prices at December 31, 2014,this area, (ii) $70$47 million of amortization of leasehold costs associated with individually insignificant unproved properties, (iii) $66 million in impairment write-downs of undeveloped leases that had reached their expiration dates but that had no wells drilled on them or in areas where we have no further plans to drill or otherwise develop the acreage, (including $21 million in impairment write-downs of undeveloped CO2 acreage), and (iv) $42 million of impairment write-downs on our CO2 development properties whose net book values exceeded their undiscounted future net cash flows. Impairment expense in 2013 primarily related to (i) $267 million in non-cash impairment charges for the partial write-down of proved properties, primarily attributable to gas reserves in the Rocky Mountains region and in Michigan, whose net book values exceeded their undiscounted future net cash flows, (ii) $71 million of amortization of leasehold costs associated with individually insignificant unproved properties, and (iii) $19$12 million ofin impairment write-downs of undeveloped acreage costs for leases that had reached their expiration dates but where we have no wells had been drilled on such acreage.future plans to drill. Impairment expense in 2016 primarily related to $60 million
of leasehold amortization associated with individually insignificant unproved properties and $13 million in impairment write-downs of undeveloped acreage costs for leases where we have no future plans to drill.
General and Administrative Expenses. We report general and administrative (“G&A”) expenses net of third-party reimbursements and internal allocations. The components of our general and administrativeG&A expenses were as follows (in thousands):
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| | | | | | | | | | | | |
| | Year Ended | | | | | | |
| | December 31, | | Year Ended December 31, |
| | 2014 | | 2013 | | 2017 | | 2016 |
General and administrative expenses | | $ | 300,814 | | $ | 251,593 | | $ | 228,669 | | $ | 264,948 |
Reimbursements and allocations | | | (123,603) | | | (113,599) | | | (104,381) | | | (118,070) |
General and administrative expenses, net | | $ | 177,211 | | $ | 137,994 | | $ | 124,288 | | $ | 146,878 |
General and administrativeG&A expense before reimbursements and allocations increased $49decreased $36 million during 20142017 as compared to 20132016 primarily due to transaction-related costs totaling $53 million incurred in 2014 for the Kodiak Acquisition discussed under “Acquisition and Divestiture Highlights” above, as well as higherlower employee compensation between periods.compensation. Employee compensation increased $31decreased $39 million in 20142017 as compared to 20132016 primarily due to reductions in personnel hired duringover the past twelve months, as well as general pay increases.
These increases were offset by amonths. The decrease in accrued distributions under our Production Participation Plan (the “Plan”) between periods. General and administrative expense for 2014 and 2013 includes $24 million and $66 million, respectively, for accrued Plan compensation. On June 11, 2014, the Plan was terminated effective December 31, 2013. Accordingly, there will be no compensation expense incurred under the Plan going forward. Refer to the Deferred Compensation footnote in the notes to consolidated financial statements for more information. Beginning January 1, 2015, we have implemented a new cash bonus structure for our employees to replace the terminated Plan.
The increase in reimbursements and allocations for 20142017 was primarily caused by higher salary costs and a greater numberthe result of field workers on Whiting-operated properties. property divestitures over the past twelve months.
Our general and administrative expenses ason a percentageBOE basis also decreased when comparing 2017 to 2016. G&A expense per BOE amounted to $2.88 during 2017, which represents a decrease of oil, NGL and natural gas sales increased$0.21 per BOE (or 7%) from 5% in 2013 to 6% for 2014, as a result of the increases in general and administrative costs between periods discussed above.
Interest Expense. The components of our interest expense were as follows (in thousands):
| | | | | | |
| | | | | | |
| | Year Ended |
| | December 31, |
| | 2014 | | 2013 |
Senior Notes and Senior Subordinated Notes | | $ | 153,260 | | $ | 73,983 |
Credit agreement | | | 9,419 | | | 27,978 |
Amortization of debt issue costs and premium | | | 11,984 | | | 12,405 |
Other | | | 63 | | | 85 |
Capitalized interest | | | (4,084) | | | (1,515) |
Total | | $ | 170,642 | | $ | 112,936 |
The increase in interest expense of $58 million between periods2016. This decrease was mainly attributable to $79 million in higher interest costs incurred on our notes during 2014. This increase is due to our September 2013 issuance of $1.1 billion of 5% Senior Notes due 2019 and $1.2 billion of 5.75% Senior Notes due 2021, as well as interest costs incurred on the $1.6 billion of senior notes we assumed on December 8, 2014 as part of the Kodiak Acquisition. This increase waslower employee compensation, partially offset by a $19 million decrease in the amount of interest incurred on our credit agreement during 2014 as compared to 2013 due to lower borrowings outstanding during 2014.
Our weighted average debt outstanding during 2014 was $2.9 billion versus $2.3 billion for 2013. Our weighted average effective cash interest rate was 5.5% during 2014 compared to 4.5% during 2013.overall production volumes between periods.
Commodity Derivative (Gain) Loss, Net. All of ourOur commodity derivative contracts as well as ourand embedded derivatives are marked-to-marketmarked to market each quarter with fair value gains and losses recognized immediately in earnings as commodity derivative (gain) loss, net. Cash flow, however, is only impacted to the extent that settlements under these contracts result in making or receiving a payment to or from the counterparty. Commodity derivativeDerivative (gain) loss, net amounted to a gainloss of $101$123 million for 2014 mainly due to the recognition2017, which consisted of a $54 million asset related to two fixed-differentialfair value loss on our long-term crude oil sales and delivery contract, a $50 million loss on our costless collar commodity derivative contracts that failedresulting from the “normal purchase normal sale” exclusion during the fourth quarter of 2014, as well as the significant downwardupward shift in the futures curve of forecasted commodity prices (“forward price curve”) for crude oil from January 1, 20142017 (or the 20142017 date on which new contracts were entered into) to December 31, 2014. Commodity derivative2017, and a $19 million fair value loss on embedded derivatives. Derivative (gain) loss, net for 2013, however, resulted in2016 amounted to a gain of $1 million, which consisted of a $59 million fair value gain on embedded derivatives, partially offset by a $58 million loss of $8 million due to the lesson commodity derivative contracts resulting from a more significant upward shift in the same forward price curve from January 1, 20132016 (or the 20132016 date on which prior year contracts were entered into) to December 31, 2013.2016.
SeeRefer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,”Risk”, for a list of our outstanding derivativescommodity derivative contracts as of January 23, 2018.
Loss on Sale of Properties. During 2017, we sold our interests in the FBIR Assets for net cash proceeds of $501 million, which resulted in a pre-tax loss on sale of $402 million. During 2016, we sold our interests in the North Ward Estes properties for net cash proceeds of $295 million, which resulted in a pre-tax loss on sale of $187 million. There were no other property divestitures resulting in a significant gain or loss on sale during 2017 or 2016.
Interest Expense. The components of our interest expense were as follows (in thousands):
| | | | | | |
| | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
Notes | | $ | 133,123 | | $ | 187,374 |
Amortization of debt issue costs, discounts and premiums | | | 31,715 | | | 335,569 |
Credit agreement | | | 24,971 | | | 32,885 |
Other | | | 1,381 | | | 1,930 |
Capitalized interest | | | (102) | | | (138) |
Total | | $ | 191,088 | | $ | 557,620 |
The decrease in interest expense of $367 million between periods was mainly attributable to a decrease in amortization of debt issue costs, discounts and premiums and lower interest costs incurred on our notes during 2017 as compared to 2016. The decrease in amortization of debt issue costs, discounts and premiums of $304 million was due to (i) a non-cash charge of $244 million for the acceleration of unamortized debt discounts in connection with the December 2016 conversions of our Mandatory Convertible Notes, (ii) a $40 million decrease in debt discount and debt issue cost amortization related to the exchange and subsequent conversion to common stock of $1.6 billion of notes during 2016, (iii) a non-cash charge of $14 million for the acceleration of unamortized debt discounts in connection with the August 2016 induced exchange of a portion of our Mandatory Convertible Notes, and (iv) a $6 million non-cash charge for the acceleration of unamortized debt issuance costs in connection with a reduction of the aggregate commitments
under our credit agreement in March 2016. The $54 million decrease in note interest was primarily due to (i) the conversions of the New Convertible Notes in May 2016 and the Mandatory Convertible Notes in the second half of 2016, resulting in a $39 million decrease in note interest during 2017, and (ii) the redemption of the 2018 Senior Subordinated Notes in February 13, 2015.2017, resulting in a $16 million decrease between periods. Refer to the “Long-Term Debt” footnote in the notes to consolidated financial statements for more information on these debt transactions.
Our weighted average debt outstanding during 2017 was $3.3 billion versus $5.0 billion for 2016. Our weighted average effective cash interest rate was 4.8% during 2017 compared to 4.4% during 2016.
Loss on Extinguishment of Debt. During 2017, we redeemed all of the remaining $275 million aggregate principal amount of 2018 Senior Subordinated Notes and recognized a $2 million loss on extinguishment of debt. During 2016, we recognized a net loss on extinguishment of debt of $42 million. In March 2016, we completed the exchange of $477 million aggregate principal amount of our senior notes and senior subordinated notes for the same aggregate principal amount of New Convertible Notes, and recognized a $91 million gain on extinguishment of debt. Subsequently, during the second quarter of 2016, the holders of the New Convertible Notes voluntarily converted all $477 million aggregate principal amount of the New Convertible Notes for approximately 10.5 million shares of our common stock, and we recognized a $188 million loss on extinguishment of debt upon conversion. In June and July 2016, we completed the exchange of $1.1 billion aggregate principal amount of our senior notes, convertible senior notes and senior subordinated notes for the same aggregate principal amount of Mandatory Convertible Notes, and recognized a $57 million gain on extinguishment of debt. Subsequently in July 2016, $333 million aggregate principal amount of the Mandatory Convertible Notes were converted into approximately 8.3 million shares of our common stock, and we recognized a $3 million gain on extinguishment of debt upon conversion. In August 2016, we induced the exchange of an additional $38 million aggregate principal amount of the Mandatory Convertible Notes for approximately 1.2 million shares of our common stock, and we recognized a $4 million debt inducement expense. Refer to the “Long-Term Debt” footnote in the notes to consolidated financial statements for more information on these debt transactions.
Income Tax ExpenseBenefit. Income tax expensebenefit for 2017 totaled $79$483 million for 2014 as compared to $206a benefit of $88 million for 2016, an increase of income tax for 2013, a decrease of $127$395 million that was mainly related to $428(i) a $259 million non-cash charge in 2016 resulting from an ownership shift as defined under Section 382 of the Internal Revenue Code (“IRC”) which will limit our usage of certain net operating losses and tax credits in the future, (ii) $174 million of permanent tax differences recognized in 2016 associated with the issuance and subsequent conversion of the New Convertible Notes and the Mandatory Convertible Notes, (iii) $42 million of net income tax benefits resulting from a reduction in the U.S. federal statutory tax rate upon enactment of the Tax Cuts and Jobs Act (the “TCJA”) in December 2017, (iv) $294 million in lowerhigher pre-tax incomeloss between periods.periods, and (v) the partial release of a valuation allowance on net operating losses totaling $41 million in connection with the sale of the FBIR Assets in the third quarter of 2017. These decreases were partially offset by the establishment of a full valuation allowance against our $119 million net deferred tax assets in 2017 as wells as the tax impact of the $835 million impairment charge at our Redtail field, which charge was incurred after the date of enactment of the TCJA and was therefore effected at the new federal tax rate of 21%.
Our effective tax rates for 20142017 and 20132016 differ from the U.S. statutory income tax rate primarily due to the effects of state income taxes and permanent taxable differences. Our overall effective tax rate increased from 36.0%6.1% in 20132016 to 55.0%28.1% for 2014.2017. This increase is mainly the result of expanded activitythe IRC Section 382 limitation on our net operating losses and tax credits recognized in states2016, as well as permanent tax differences recognized during 2016 associated with higher corporatethe issuance and subsequent conversions of the New Convertible Notes and the Mandatory Convertible Notes, income tax rates, merger costs related tobenefits resulting from enactment of the Kodiak Acquisition that are not deductibleTCJA and reduced statethe partial release of a valuation allowance on net operating losses in connection with the sale of the FBIR Assets in the third quarter of 2017. These increases in our effective tax credits.
Year Ended December 31, 20132016 Compared to Year Ended December 31, 20122015
Oil, NGL and Natural Gas Sales. Our oil, NGL and natural gas sales revenue increased $529decreased $808 million to $2,667 million$1.3 billion when comparing 20132016 to 2012.2015. Sales revenue is a function of oil, NGL and gas volumes sold and average commodity prices realized. Our oil sales volumes increased 17%decreased 28%, while our NGL and our natural gas sales volumes increased 4% between periods, while our NGL sales volumes remained consistent20% and 1%, respectively, between periods. The oil volume increase resulteddecrease between periods was primarily attributable to normal field production decline across several of our areas resulting from reduced drilling success at our Hidden Bench/Tarpon, Sanish and Parshall, Missouri Breaks, Lewis & Clark/Pronghorncompletion activity during 2015 and Redtail fields. During 2013,2016 in response to the depressed commodity price environment. In addition, we completed several non-core oil production from our Hidden Bench/Tarpon fields increased 1,770 MBbl, Sanish and Parshall fields increased 1,100 MBbl, Missouri Breaks field increased 765 MBbl, Lewis & Clark/Pronghorn fields increased 765 MBbl,gas property divestitures during 2015 and our Redtail field increased 610 MBbl over the same period in 2012. These production increases were partially offset by the sale of the Postle Properties in July 2013 and the Whiting USA Trust II (“Trust II”) divestiture in March 2012,2016, which divestitures negatively impacted oil production in 20132016 by 1,250 MBbl and 295 MBbl, respectively. The gas volume increase between periods was primarily the result of2,615 MBbl. These decreases were partially offset by new wells drilled and completed in the Williston Basin and DJ Basin which added 4,990 MBbl and 605 MBbl, respectively, of oil production during 2013, which caused2016 as compared to 2015. Our NGL sales volume increases between periods generally related to additional volumes processed as more wells were connected to gas processing plants in associated gasthe Williston Basin, as well as new wells drilled and completed in the Williston Basin and DJ Basin over the twelve months ended December 31, 2016. Many of the new Williston Basin wells were in areas with higher gas-to-oil production of 1,380 MMcf at our Hidden Bench/Tarpon fields, 1,330 MMcf at our Sanish and Parshall fields and 870 MMcf at our Lewis & Clark/Pronghorn fields.ratios than previously drilled areas. These gasNGL volume increases were largelypartially offset by normal field production decline across several of our areas, the most notableareas. The gas volume increase between periods was primarily due to drilling success at our Williston Basin and DJ Basin properties which resulted in 9,570 MMcf and 1,125 MMcf, respectively, of which was our Flat Rock field where productionadditional gas volumes decreased 1,080 MMcf when comparing 2013during 2016 as compared to 2012.2015. In addition, gas volumes
increased between periods as more wells were connected to gas processing plants in the Trust II divestitureWilliston Basin over the twelve months ended December 31, 2016 in March 2012an effort to increase our overall gas capture rate in this area and reduce flared volumes. These gas volume increases were largely offset by the 2015 and 2016 property divestitures, which negatively impacted gas production in 20132016 by 545 MMcf.5,740 MMcf, as well as normal field production decline across several of our areas.
In addition to the above crude oil and natural gas production-related increasesdecreases in net revenue there were increasesalso significant decreases in the average sales pricesprice realized for oil, NGLs and natural gas in 20132016 compared to 2012.2015. Our average price for oil before(before the effects of hedging increased 8%hedging), our average price for NGLs increased 3% between periods, and our average price for natural gas before the effects of hedging increased 18%decreased 16%, 30% and 36%, respectively, between periods.
Gain on Sale of Properties. During 2013, we sold our interest in the Postle Properties for net proceeds of $810 million, which resulted in a pre-tax gain on sale of $110 million. Additionally during 2013, we sold our interest in certain producing oil and gas wells and undeveloped acreage in the Big Tex prospect for net proceeds of $152 million, which resulted in a pre-tax gain on sale of $13 million for the year ended December 31, 2013. There were no other property divestitures resulting in a significant gain or loss on sale during 2013 or 2012.
Lease Operating Expenses. Our LOE during 20132016 were $430$395 million, a $54$160 million increasedecrease over the same period in 2012. Higher2015. This decrease was primarily due to (i) $84 million of lower LOE in 2013 were primarily relatedattributable to properties that we divested during 2015 and 2016, (ii) a $45$51 million increasedecline in the costcosts of oil fieldoilfield goods and services associated with net wellsresulting from cost reduction measures we added duringimplemented as well as the twelve months ended December 31, 2013,general downturn in the oil and gas industry, and (iii) a $9reduction in well workover activity between periods. Workovers decreased from $52 million increase in costs2015 to $27 million in 2016, primarily due to a reduction in well workover activity at theour EOR project at North Ward Estes, CO2 processing facility due to increased production from that field and higher volumes therefore processed through the plant.which we sold in July 2016.
Our lease operating expenses on a BOE basis only increased slightly during 2013.also decreased when comparing 2016 to 2015. LOE per BOE amounted to $12.53$8.31 during 2013,2016, which was up from $12.46represented a decrease of $1.01 per BOE during 2012.(or 11%) from 2015. This increasedecrease was mainly due to the higher costs of oil field goods and services and CO2 processing facility costsoverall decrease in 2013, asLOE expense discussed above, partially offset by higherlower overall production volumes between periods. The properties sold during 2015 and 2016 consisted mainly of mature oil and gas producing properties with LOE per BOE rates that were higher than our overall blended corporate rate.
Production Taxes. Our production taxes during 20132016 were $225$109 million, a $54$74 million increasedecrease over the same period in 2012,2015, which increasedecrease was primarily due to higherlower oil, NGL and natural gas sales between periods. Our production taxes, however, are generally calculated as a percentage of net sales revenue before the effects of hedging, and this percentage on a company-wide basis wasremained relatively consistent at 8.5% and 8.0%8.7% for 20132016 and 2012,2015, respectively.
Depreciation, Depletion and Amortization. Our DD&A expense increased $207decreased $72 million in 20132016 as compared to 2012.2015. The components of our DD&A expense were as follows (in thousands):
| | | | | | | |
| | | | | | | | | | | | |
| | Year Ended | | | | | | |
| | December 31, | | Year Ended December 31, |
| | 2013 | | 2012 | | 2016 | | 2015 |
Depletion | | $ | 876,208 | | $ | 673,789 | | $ | 1,149,302 | | $ | 1,213,355 |
Depreciation | | | 4,700 | | | 3,672 | | | 8,479 | | | 9,664 |
Accretion of asset retirement obligations | | | 10,608 | | | 7,263 | | | 13,801 | | | 20,274 |
Total | | $ | 891,516 | | $ | 684,724 | | $ | 1,171,582 | | $ | 1,243,293 |
DD&A in 2013 increased over 2012decreased between periods primarily due to $202$64 million in higherlower depletion expense, between periods. Of this increase, $105consisting of a $291 million relateddecrease due to an increase in ourlower overall production volumes during 2013 and $972016, which was partially offset by a $227 million increase related to a higher depletion rate between periods. On a BOE basis, our overall DD&A rate of $25.96$24.64 for 20132016 was 15%18% higher than the rate of $22.67 for 2012 due$20.87 in 2015. The primary factors contributing to $2.3 billionthis higher DD&A rate were (i) decreases to proved and proved developed reserves over the twelve months ended December 31, 2016 (excluding the effect of divestitures) primarily attributable to lower average oil and natural gas prices used to calculate our reserves, (ii) $539 million in drilling and development expenditures during the twelve months ended December 31, 2013, which2016, and (iii) the impact of property divestitures. These factors that negatively impacted our DD&A rate were partially offset by additions toimpairment write-downs on proved oil and proved developed reserves over this same time period.
Exploration and Impairment Costs. Our exploration and impairment costs increased $286 milliondecreased $1.8 billion in 20132016 as compared to 2012.2015. The components of our exploration and impairment costsexpense were as follows (in thousands):
| | | | | | | |
| | | | | | | | | | | | |
| | Year Ended | | | | | | |
| | December 31, | | Year Ended December 31, |
| | 2013 | | 2012 | | 2016 | | 2015 |
Exploration | | $ | 94,755 | | $ | 59,117 | | $ | 45,846 | | $ | 143,363 |
Impairment | | | 358,455 | | | 107,855 | | | 75,622 | | | 1,738,308 |
Total | | $ | 453,210 | | $ | 166,972 | | $ | 121,468 | | $ | 1,881,671 |
Exploration costs increased $36decreased $98 million during 20132016 as compared to 20122015 primarily due to an increase in G&G activity, higherlower rig termination fees incurred between periods, lower exploratory dry hole costs higher delay lease rentals paid and an increasea decrease in geology-related general and administrative expenses. G&G costs, such as seismic studies,Rig termination fees amounted to $30$18 million during 20132016 as compared to $17$95 million during 2012. Exploratoryin 2015. During 2015, we drilled one exploratory dry hole costs for 2013 totaled $29in Michigan
totaling $9 million, primarily related to eightwhereas in 2016 we drilled no exploratory dry holes drilled in the Rocky Mountains and Permian Basin regions during 2013. During 2012, on the other hand, we drilled five exploratory dry holes in the Rocky Mountains and Permian Basin regions and in Michigan totaling $18 million. Delay lease rentals increased $7 million between periods, while geology-relatedholes. Geology-related general and administrative expenses increaseddecreased $6 million.million between periods.
Impairment expense in 20132016 primarily related to $60 million of leasehold amortization associated with individually insignificant unproved properties and $13 million in impairment write-downs of undeveloped acreage costs for leases where we have no future plans to drill. Impairment expense in 2015 primarily related to (i) $267 million$1.5 billion in non-cash impairment charges for the partial write-down of our North Ward Estes field in Texas and other non-core proved oil and gas properties primarily attributablein Texas, Wyoming, North Dakota and Colorado that were not being developed due to depressed oil and gas reserves in the Rocky Mountains region and in Michigan,prices, (ii) $86 million of leasehold amortization associated with individually insignificant unproved properties, (iii) $62 million of impairment write-downs on our CO2 development properties whose net book values exceeded their undiscounted future net cash flows, (ii) $71and (iv) $49 million of amortization of leasehold costs associated with individually insignificant unproved properties and (iii) $19 million ofin impairment write-downs of undeveloped acreage costs for leases thatwhere we had reached their expiration dates but where no wells had been drilled on such acreage.future plans to drill.
Goodwill Impairment expense in 2012 primarily related to (i) the amortization. As a result of leasehold costs associated with individually insignificant unproved properties of $54 million, (ii) $47 million of non-cash proved property impairment write-downs, mainlya sustained decrease in the Rocky Mountains regionprice of our common stock during the third quarter of 2015 caused by a significant decline in crude oil and (iii) $6natural gas prices over that same period, we performed a goodwill impairment test as of September 30, 2015. The impairment test indicated that the fair value of our reporting unit was less than its carrying amount, and further that there was no remaining implied fair value attributable to goodwill. Based on these results, we recorded a non-cash impairment charge of $874 million in 2015 to reduce the carrying value of impairment write-downs of undeveloped acreage costs.goodwill to zero.
General and Administrative Expenses. We report general and administrativeG&A expenses net of third-party reimbursements and internal allocations. The components of our general and administrativeG&A expenses were as follows (in thousands):
| | | | | | | |
| | | | | | | | | | | | |
| | Year Ended | | | | | | |
| | December 31, | | Year Ended December 31, |
| | 2013 | | 2012 | | 2016 | | 2015 |
General and administrative expenses | | $ | 251,593 | | $ | 199,943 | | $ | 264,948 | | $ | 309,987 |
Reimbursements and allocations | | | (113,599) | | | (91,370) | | | (118,070) | | | (137,371) |
General and administrative expenses, net | | $ | 137,994 | | $ | 108,573 | | $ | 146,878 | | $ | 172,616 |
General and administrativeG&A expense before reimbursements and allocations increased $52decreased $45 million during 20132016 as compared to 20122015 primarily due to higherlower employee compensation, and an increase in accrued Plan distributions. However, our general and administrative expensessavings realized as a percentageresult of oil, NGLcost reduction measures we implemented and natural gas sales remained consistent for 2013 and 2012 at about 5%.the impact of property divestitures. Employee compensation increased $29decreased $28 million in 20132016 as compared to 2012 due to personnel hired during 2013, general pay increases and higher stock compensation between periods. Accrued distributions under the Plan increased $22 million between periods. This increase was2015 primarily due to a one-time charge underreductions in personnel over the Plan of $22 million for the sale of the Postle Properties in the third quarter of 2013 and $9 million related to a higher level of Plan net revenues (which have been reduced by lease operating expenses and production taxes pursuant to the Plan formula), which increases were partially offset by higher accrued Plan distributions of $9 million during 2012 due to the Trust II net profits interest divestiture in 2012.
twelve months ended December 31, 2016. The increasedecrease in reimbursements and allocations for 20132016 was primarily caused by higher salary costs andthe result of a greaterlower number of field workers on Whiting-operated properties.properties associated with reduced drilling activity as well as property divestitures over the twelve months ended December 31, 2016.
Our general and administrative expenses on a BOE basis, however, increased when comparing 2016 to 2015. G&A expense per BOE amounted to $3.09 during 2016, which represented an increase of $0.19 per BOE (or 7%) from 2015. This increase was mainly due to lower overall production volumes between periods, partially offset by lower employee compensation and savings realized as a result of our cost reduction measures.
Derivative (Gain) Loss, Net. Our commodity derivative contracts and embedded derivatives are marked to market each quarter with fair value gains and losses recognized immediately in earnings as derivative (gain) loss, net. Cash flow, however, is only impacted to the extent that settlements under these contracts result in making or receiving a payment to or from the counterparty. Derivative (gain) loss, net amounted to a gain of $1 million for 2016, which consisted of a $59 million fair value gain on embedded derivatives, partially offset by a $58 million loss on commodity derivative contracts resulting from the upward shift in the forward price curve for crude oil from January 1, 2016 (or the 2016 date on which new contracts were entered into) to December 31, 2016. Derivative (gain) loss, net for 2015 consisted of a $218 million gain on commodity derivative contracts primarily due to the more significant downward shift in the same forward price curve from January 1, 2015 (or the 2015 date on which prior year contracts were entered into) to December 31, 2015.
Loss on Sale of Properties. During 2016, we sold our interest in the North Ward Estes properties for net cash proceeds of $295 million, which resulted in a pre-tax loss on sale of $187 million. There were no other property divestitures resulting in a significant gain or loss on sale during 2016. During 2015, we sold our interests in certain non-core producing oil and gas wells and undeveloped acreage across many of our operating areas, as well as a water system in Colorado for aggregate net proceeds of $515 million, which resulted in a pre-tax loss on sale of $61 million.
Interest Expense. The components of our interest expense were as follows (in thousands):
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended | | Year Ended December 31, |
| | December 31, | | 2016 | | 2015 |
| | 2013 | | 2012 | |
Senior Notes and Senior Subordinated Notes | | $ | 73,983 | | $ | 40,250 | |
Notes | | | $ | 187,374 | | $ | 265,358 |
Amortization of debt issue costs, discounts and premiums | | | | 335,569 | | | 46,525 |
Credit agreement | | | 27,978 | | | 28,043 | | | 32,885 | | | 26,071 |
Amortization of debt issue costs and premium | | | 12,405 | | | 9,518 | |
Other | | | 85 | | | 148 | | | 1,930 | | | 453 |
Capitalized interest | | | (1,515) | | | (2,749) | | | (138) | | | (4,282) |
Total | | $ | 112,936 | | $ | 75,210 | | $ | 557,620 | | $ | 334,125 |
The increase in interest expense of $38$223 million between periods was mainly attributable to a $34 millionan increase in the amountamortization of debt issue costs, discounts and premiums, partially offset by lower interest costs incurred on our notes during 20132016 as compared to 20122015. The increase in amortization of debt issue costs, discounts and premiums of $289 million was primarily due to (i) a non-cash charge of $244 million for the acceleration of unamortized debt discounts in connection with the December 2016 conversions of our September 2013Mandatory Convertible Notes, (ii) $22 million of amortization of debt discounts on the Mandatory Convertible Notes we issued in June and July 2016 prior to their conversions, (iii) a non-cash charge of $14 million for the acceleration of unamortized debt discounts in connection with the August 2016 induced exchange of a portion of our Mandatory Convertible Notes, and (iv) a $6 million non-cash charge for the acceleration of unamortized debt issuance costs in connection with a reduction of the aggregate commitments under our credit agreement in March 2016. The $78 million decrease in note interest was primarily due to (i) $71 million incurred during 2015 on the $1.6 billion of notes we assumed as part of the acquisition of Kodiak Oil & Gas Corp. (the “Kodiak Notes”), all of which were subsequently repurchased in 2015, and (ii) the conversions of the New Convertible Notes in May 2016 and the Mandatory Convertible Notes in the second half of 2016, resulting in a $22 million decrease in note interest between periods. This decrease in note interest expense was partially offset by our March 2015 issuance of $1.1 billion$1,250 million of 5%2020 Convertible Senior Notes due 2019 and $1.2 billion$750 million of 5.75%2023 Senior Notes, due 2021. which resulted in a $15 million increase in interest expense between periods.
Our weighted average debt outstanding during 20132016 was $2.3$5.0 billion versus $1.6$5.7 billion for 2012.2015. Our weighted average effective cash interest rate was 4.5%4.4% during 20132016 compared to 4.3%5.2% during 2012.2015.
Commodity Derivative (Gain) Loss Net.on Extinguishment of Debt. AllDuring 2016, we recognized a net loss on extinguishment of debt of $42 million. In March 2016, we completed the exchange of $477 million aggregate principal amount of our commodity derivative contracts as well assenior notes and senior subordinated notes for the same aggregate principal amount of New Convertible Notes, and recognized a $91 million gain on extinguishment of debt. Subsequently, during the second quarter of 2016, the holders of the New Convertible Notes voluntarily converted all $477 million aggregate principal amount of the New Convertible Notes for approximately 10.5 million shares of our embedded derivatives are marked-to-market each quarter with fair value gainscommon stock, and losseswe recognized immediatelya $188 million loss on extinguishment of debt upon conversion. In June and July 2016, we completed the exchange of $1.1 billion aggregate principal amount of our senior notes, convertible senior notes and senior subordinated notes for the same aggregate principal amount of Mandatory Convertible Notes, and recognized a $57 million gain on extinguishment of debt. Subsequently in earnings, as commodity derivative (gain)July 2016, $333 million aggregate principal amount of the Mandatory Convertible Notes were converted into approximately 8.3 million shares of our common stock, and we recognized a $3 million gain on extinguishment of debt upon conversion. In August 2016, we induced the exchange of an additional $38 million aggregate principal amount of the Mandatory Convertible Notes for approximately 1.2 million shares of our common stock, and we recognized a $4 million debt inducement expense. During 2015, we repurchased all $1.6 billion aggregate principal amount of the Kodiak Notes then outstanding, and recognized an $18 million loss net. Cash flow, however, is only impactedon extinguishment of debt. Refer to the extent that settlements under these contracts result in making or receiving a payment from the counterparty. Commodity derivative (gain) loss, net amounted to a loss of $8 million for 2013 mainly due to the upward shift“Long-Term Debt” footnote in the forward price curvenotes to consolidated financial statements for crude oil from January 1, 2013 (or the 2013 datemore information on which new contracts were entered into) to December 31, 2013. Commodity derivative (gain) loss, net for 2012, however, resulted in a gain of $86 million due to a significant downward shift in the same forward price curve from January 1, 2012 (or the 2012 date on which prior year contracts were entered into) to December 31, 2012.these debt transactions.
Income Tax ExpenseBenefit. Income tax expensebenefit for 2016 totaled $206$88 million for 2013 as compared to $248a benefit of $774 million of income tax for 2012,2015, a decrease of $42$686 million that was mainly related to $90 million(i) $1.6 billion in lower pre-tax incomeloss between periods, (ii) a $259 million non-cash charge in 2016 resulting from an ownership shift as well as $11 million in statedefined under Section 382 of the Internal Revenue Code which will limit our usage of certain net operating losses and tax credits realizedin the future, as discussed in the “Income Taxes” footnote in the notes to consolidated financial statements, and (iii) $174 million of permanent tax differences recognized during 2013.2016 associated with the issuance and subsequent conversion of the New Convertible Notes and the Mandatory Convertible Notes.
Our effective tax rates for 20132016 and 20122015 differ from the U.S. statutory income tax rate primarily due to the effects of state income taxes and permanent taxable differences. Our overall effective tax rate decreased from 37.4%25.9% in 20122015 to 36.0%6.1% for 2013.2016. This decrease in rate iswas mainly attributable to statethe result of the IRC Section 382 limitation on our net operating losses and tax credits recognized in 2016, as well as $174 million of permanent tax differences recognized during 2016 associated with the issuance and a reduction tosubsequent conversions of the North Dakota corporateNew Convertible Notes and the Mandatory Convertible Notes, which differences increased our 2016 effective tax rate to a lesser extent than the increase in our 2015 effective tax rate resulting from $874 million in goodwill impairment expense which created a one-time benefit during 2013.was not tax deductible.
Liquidity and Capital Resources
Overview. At December 31, 2014,2017, we had $78$879 million of cash on hand and $5.7$3.9 billion of equity, while at December 31, 2013,2016, we had $699$56 million of cash on hand and $3.8$5.1 billion of equity.
One of the primary sources of variability in our cash flows from operating activities is commodity price volatility, which we partially mitigate through the use of commodity hedge contracts. Oil accounted for 80%68% and 79%72% of our total production in 20142017 and 2013,2016, respectively. As a result, our operating cash flows are more sensitive to fluctuations in oil prices than they are to fluctuations in NGL or natural gas prices. As of February 13, 2015,January 23, 2018, we had derivative contracts covering the sale of approximately 18%72% of our forecasted 20152018 oil production volumes. For a list of all of our outstanding derivatives as of February 13, 2015, seeJanuary 23, 2018, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.”Risk”.
Cash Flows from 20142017 Compared to 20132016. During 2014,2017, we generated $1.8 billion$577 million of cash provided by operating activities, an increasea decrease of $71$18 million from 2013.2016. Cash provided by operating activities increaseddecreased primarily due to higherlower crude oil NGL and natural gas production volumes, a decrease in cash settlements received on our derivative contracts and higher production taxes during 2017. These negative factors were partially offset by higher realized sales prices for oil, NGLs and natural gas, as well as lower exploration costs during 2014. These positive factors were partially offset by lower realized sales prices for oil and NGLs, as well as increasedcash interest expense, lease operating expenses, production taxes, general and administrative expenses and cash interest expense in 2014exploration costs during 2017 as compared to 2013.2016. Refer to “Results of Operations” for more information on the impact of volumes and prices on revenues and for more information on increases and decreases in certain expenses during 2014.2017.
During 2014,2017, cash flows from operating activities and cash on hand plus $475$930 million in net borrowings under our credit agreement and $108 million of proceeds from the sale of oil and gas properties were used to finance $2.8 billion$831 million of drilling and development expenditures, $80$550 million for purchases of other property and equipment, $46net repayments under our credit agreement, the redemption of $275 million of our 2018 Senior Subordinated Notes, $21 million of oil and gas property acquisitions (net of cash acquired), $26
million for the final payment under our Tax Sharing and Indemnification Agreement with Alliant Energy Corporation and $15$13 million of debt issuance costs.
Cash Flows from 20132016 Compared to 20122015. During 2013,2016, we generated $1.7 billion$595 million of cash provided by operating activities, an increasea decrease of $344$456 million from 2012.2015. Cash provided by operating activities increaseddecreased primarily due to higherlower realized sales prices for oil, NGLs and natural gas, and higherlower crude oil production volumes, and a decrease in cash settlements received on our derivative contracts during 2016. These negative factors were partially offset by higher NGL and natural gas production volumes, during 2013. These positive factors were partially offset by increasedas well as lower lease operating expenses, exploration costs, production taxes, exploration costs,cash interest expense and general and administrative expenses and cash interest expense in 2013during 2016 as compared to 2012. See “Results of Operations” for more information on the impact of prices and volumes on revenues and for more information on increases in certain expenses during 2013. Cash2015.
During 2016, cash flows from operating activities plus $2.3 billion of proceeds from the issuance of our Senior Notes and $969$313 million ofin proceeds from the sale of oil and gas properties were used to finance $2.3 billion$539 million of drilling and development expenditures, $1.2 billion$250 million of net repayments under our credit agreement, $423$42 million of oilearly conversion payments on our New Convertible Notes and gas property acquisitions, $254 million for the redemption of our 7% Senior Subordinated Notes due 2014, $43 million in investing derivative purchases (net of cash receipts for settlements), $45 million for purchases of other property and equipment and $30$22 million of debt issuance costs.
Exploration Development and Undeveloped AcreageDevelopment Expenditures. The following chart details our exploration, development and undeveloped acreageE&D expenditures incurred by regioncore area (in thousands):
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended |
| | December 31, |
| | 2014 | | 2013 | | 2012 |
Rocky Mountains (1) | | $ | 2,756,647 | | $ | 2,172,462 | | $ | 1,581,934 |
Permian Basin (2) | | | 379,702 | | | 346,812 | | | 410,154 |
Other (3) | | | 45,589 | | | 155,918 | | | 119,431 |
Total incurred | | $ | 3,181,938 | | $ | 2,675,192 | | $ | 2,111,519 |
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Northern Rocky Mountains | | $ | 601,737 | | $ | 348,610 | | $ | 1,556,267 |
Central Rocky Mountains | | | 292,826 | | | 170,256 | | | 603,646 |
Permian Basin (1) | | | - | | | 33,266 | | | 94,940 |
Other (2) | | | 17,866 | | | 1,462 | | | 58,749 |
Total incurred | | $ | 912,429 | | $ | 553,594 | | $ | 2,313,602 |
_____________________
| (1) | | For the year ended December 31, 2012, proceeds from the sale of the Belfield gas plant of $66 million have been included as a reduction to expendituresDuring 2016, we sold our interest in the Rocky Mountains region.Bravo Dome field in New Mexico and our enhanced oil recovery project at North Ward Estes.
|
| (2) | | For the year ended December 31, 2014, amount includes $76 million related to the acquisition of undeveloped acreage and the development of CO2 reserves and facilities at our Bravo Dome field in New Mexico. For the year ended December 31, 2013 amount includes $21 million related to the acquisition of undeveloped acreage and related facilities at our Bravo Dome field in New Mexico. For the year ended December 31, 2012, amount includes $11 million related to the acquisition of undeveloped acreage at our Bravo Dome field in New Mexico.
|
| (3)
| | Other primarily includes non-core oil and gas properties located in Louisiana, Michigan, OklahomaColorado, Mississippi, New Mexico, Texas and Texas.Wyoming. |
We continually evaluate our capital needs and compare them to our capital resources. Our current 20152018 E&D budget is $2.0 billion,$750 million, which we expect to fund substantially with net cash provided by our operating activities and cash on hand, borrowings under our credit facility, or through the issuance of additional debt or equity securities. Thishand. The 2018 E&D budget represents a substantial decrease from the $3.2 billion$912 million incurred on exploration, development and acreageE&D expenditures during 2014. This reduced capital budget is in response to the significantly lower crude oil prices experienced during the fourth quarter of 2014 and continuing into 2015. We expect to allocate $1.8 billion of our 2015 budget to exploration and development activity, $59 million for undeveloped acreage and $123 million for facilities. Although we have only budgeted $59 million for undeveloped leasehold purchases in 2015, we will continue to selectively pursue property acquisitions that complement our existing core property base.2017. We believe that should additional attractive acquisition opportunities arise or exploration and developmentE&D expenditures exceed $2.0 billion,$750 million, we will be able to finance additional capital expenditures with cash on hand, cash flows from operating activities, borrowings under our credit agreement, issuances of additional debt or equity securities,through agreements with industry partners, or divestitures of certain oil and gas property interests.interests, borrowings under our credit agreement or by accessing the capital markets. Our level of exploration, development and acreageE&D expenditures is largely discretionary, and the amount of funds devotedwe devote to any particular activity may increase or decrease significantly depending on available opportunities, commodity prices, cash flows, available opportunities and development results, among other factors. We believe that we have sufficient liquidity and capital resources to execute our business plansplan over the next 12 months and for the foreseeable future, including obligations arising as a result of the recent Kodiak Acquisition. On December 8, 2014, under the terms of the Kodiak Acquisition agreement, we acquired all of the outstanding common stock of Kodiak, whereby Kodiak shareholders received 0.177 of a share of Whiting common stock in exchange for each share of Kodiak common stock they owned, and we assumed or repaid all of Kodiak’s outstanding debt as of that date.future. With our expected cash flow streams, commodity price hedging strategies, current liquidity levels
(including availability under our credit agreement), access to debt and equity markets and flexibility to modify future capital expenditure programs, we expect to be able to fund all planned capital programs and debt repayments, comply with our debt covenants, and meet other obligations that may arise from our oil and gas operations.
Credit Agreement. Whiting Oil and Gas, our wholly-ownedwholly owned subsidiary, has a credit agreement with a syndicate of banks that as of December 31, 20142017 had a borrowing base of $4.5 billion, withand aggregate commitments of $4.5 billion, of which $3.5 billion relates to commitments to extend revolving credit and $1.0 billion relates to a Delayed Draw Facility. The Delayed Draw Facility may be used to provide cash consideration for any repurchase or redemption of Kodiak’s outstanding senior notes in connection with the Kodiak Acquisition, to pay transaction costs and for other corporate purposes.$2.3 billion. As of December 31, 2014,2017, we had $3.1$2.3 billion of available borrowing capacity, which was net of $1.4 billion in borrowings (which includes $925 million we borrowed to repay the debt outstanding under Kodiak’s credit facility after the completion of the Kodiak Acquisition) and $3$2 million in letters of credit outstanding, with no borrowings outstanding. The revolving credit facility will mature on December 8, 2019, and the Delayed Draw Facility will mature on December 31, 2015.
The borrowing base under the credit agreement is determined at the discretion of the lenders, based on the collateral value of our proved reserves that have been mortgaged to such lenders, and is subject to regular redeterminations on May 1 and November 1 of each year, as well as special redeterminations described in the credit agreement, in each case which may reduce the amount of the borrowing base. At the time of the last redetermination, the applicable oil and gas prices were $92.68 per Bbl and $3.88 per Mcf, whereas the quoted NYMEX prices for oil and gas on February 13, 2015 were $53.67 per Bbl and $2.81 per Mcf. Because oil and gas prices are principal inputs into the valuation of our reserves, if current or projected oil and gas prices remain atdecline from their current levels, for a prolonged period or go lower, our borrowing base could be reduced at the next redetermination date or during future redeterminations. However, we anticipate an increase in our proved reserves since the time of the last redetermination resulting from the Kodiak Acquisition as well as drilling results, which factors are expected to have a positive impact on our borrowing base and may offset any borrowing base reductions driven by a low price environment. Upon a redetermination of our borrowing base, either on a periodic or special redetermination date, if borrowings in excess of the revised borrowing capacity were outstanding, we could be forced to immediately repay a portion of our debt outstanding under the credit agreement.
A portion of the revolving credit facility in an aggregate amount not to exceed $100$50 million may be used to issue letters of credit for the account of Whiting Oil and Gas or other designated subsidiaries of ours. As of December 31, 2014, $972017, $48 million was available for additional letters of credit under the agreement.
The credit agreement provides for interest only payments until December 2019, when the expiration date of thecredit agreement whenexpires and all outstanding borrowings are due. Interest under the revolving credit facility accrues at our option at either (i) a base rate for a base rate loan plus the margin in the table below, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.5% per annum, or an adjusted LIBOR rate plus 1.0% per annum, or (ii) an adjusted LIBOR rate for a Eurodollar loan plus the margin in the table below. Additionally, we also incur commitment fees as set forth in the table below on the unused portion of the aggregate commitments of the lenders under the revolving credit facility.
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| | Applicable | | Applicable | | | | Applicable | | Applicable | | |
| | Margin for Base | | Margin for | | Commitment | | Margin for Base | | Margin for | | Commitment |
Ratio of Outstanding Borrowings to Borrowing Base | | Rate Loans | | Eurodollar Loans | | Fee | | Rate Loans | | Eurodollar Loans | | Fee |
Less than 0.25 to 1.0 | | 0.50% | | 1.50% | | 0.375% | | 1.00% | | 2.00% | | 0.50% |
Greater than or equal to 0.25 to 1.0 but less than 0.50 to 1.0 | | 0.75% | | 1.75% | | 0.375% | | 1.25% | | 2.25% | | 0.50% |
Greater than or equal to 0.50 to 1.0 but less than 0.75 to 1.0 | | 1.00% | | 2.00% | | 0.50% | | 1.50% | | 2.50% | | 0.50% |
Greater than or equal to 0.75 to 1.0 but less than 0.90 to 1.0 | | 1.25% | | 2.25% | | 0.50% | | 1.75% | | 2.75% | | 0.50% |
Greater than or equal to 0.90 to 1.0 | | 1.50% | | 2.50% | | 0.50% | | 2.00% | | 3.00% | | 0.50% |
Interest under the Delayed Draw Facility accrues at our option at either (i) a base rate for a base rate loan plus (A) 1.00% per annum through March 8, 2015 and (B) 1.50% per annum from March 9, 2015 through the December 31, 2015 maturity date, or (ii) an adjusted LIBOR rate for a Eurodollar loan plus (A) 2.00% per annum through March 8, 2015 and (B) 2.50% per annum from March 9, 2015 through the December 31, 2015 maturity date. We also incur commitment fees of 0.25% on the unused portion of the aggregate commitments of the lenders under the Delayed Draw Facility.
The credit agreement contains restrictive covenants that may limit our ability to, among other things, incur additional indebtedness, sell assets, make loans to others, make investments, enter into mergers, enter into hedging contracts, incur liens and engage in certain other transactions without the prior consent of our lenders. However, the credit agreement permits us and certain of our subsidiaries to issue second lien indebtedness of up to $1.0 billion subject to certain conditions and limitations. Except for limited exceptions, the credit agreement also restricts our ability to make any dividend payments or distributions on our common stock. These restrictions apply to all of our restricted subsidiaries (as defined in the net assets of Whiting Oil and Gas.credit agreement). The credit agreement requires us, as of the last day of any quarter, (i) to not exceed a total debt tomaintain the last four quarters’ EBITDAX ratiofollowing ratios (as defined in the credit agreement) of 4.0 to 1.0 and (ii) to have: (i) a consolidated current assets to consolidated current liabilities ratio (as defined in the credit agreement and which(which includes an add back of the available borrowing capacity under the credit agreement) of not less than 1.0 to 1.0.1.0, (ii) a total senior secured debt to the last four quarters’ EBITDAX ratio of less than 3.0 to 1.0 during the Interim Covenant Period (defined below), and thereafter a total debt to EBITDAX ratio of less than 4.0 to 1.0 and (iii) a ratio of the last four quarters’ EBITDAX to consolidated cash interest charges of not less than 2.25 to 1.0 during the Interim Covenant Period. Under the credit agreement, the “Interim Covenant Period” is defined as the period from June 30, 2015 until the earlier of (i) April 1, 2018 or (ii) the commencement of an investment-grade debt rating period (as defined in the credit agreement). We were in compliance with our covenants under the credit agreement as of December 31, 2014.2017. However, a substantial or extended decline in oil, NGL or natural gas prices may adversely affect our ability to comply with these covenants in the future.
Under the terms of the credit agreement, at any time during which we have an investment-grade debt rating from Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Group and we have elected, at our discretion, to effect an investment-grade rating period, (i) certain security requirements, including the borrowing base requirement, and restrictive covenants will cease to apply, (ii) certain other restrictive covenants will become less restrictive, (iii) an asset coverage covenant will be imposed, and (iv) the interest rate margin applicable to all revolving borrowings as well as the commitment fee with respect to the revolving facility will be based upon our debt rating rather than the ratio of outstanding borrowings to the borrowing base.
For further information on the loan security related to our credit agreement, refer to the Long-Term Debt“Long-Term Debt” footnote in the notes to consolidated financial statements.
Senior Notes and Senior Subordinated Notes. In December 2017, we issued at par $1.0 billion of 6.625% Senior Notes due January 2026. In March 2015, we issued at par $750 million of 6.25% Senior Notes due April 2023 (the “2023 Senior Notes”). In September 2013, we issued at par $1.1 billion of 5%5.0% Senior Notes due March 2019 (the “2019 Senior Notes”) and $800 million of 5.75% Senior Notes due March 2021, and also in September 2013, we issued at 101% of par an additional $400 million of 5.75% Senior Notes due March 2021 (collectively the “2021
“2021 Senior Notes” and together with the 2026 Senior Notes, the 2023 Senior Notes and the 2019 Senior Notes, the “Senior Notes”). In September 2010, we issued at par $350 million of 6.5% Senior Subordinated Notes due October 2018 (the “2018 Senior Subordinated Notes”).
KodiakExchange of Senior Notes. In conjunction with the Kodiak Acquisition, Whiting US Holding Company, our wholly-owned subsidiary, became a co-issuer of the Kodiak Notes. Upon closing of the Kodiak Acquisition, the Kodiak Indentures were amended to (i) modify certain covenants and restrictions, (ii) to provide for unconditional and irrevocable guarantees by Whiting Petroleum Corporation and Whiting Oil and Gas Corporation of the prompt payment, when due, of any amounts owed under the Kodiak Notes and the Kodiak Indentures, and (iii) to allow Whiting US Holding Company to become a co-issuerSenior Subordinated Notes for Convertible Notes. During 2016, we exchanged (i) $75 million aggregate principal amount of the Kodiak Notes. Also in conjunction with the Kodiak Acquisition, in December 2014, eachour 2018 Senior Subordinated Notes, (ii) $139 million aggregate principal amount of the indentures governing our 2019 Senior Notes, (iii) $326 million aggregate principal amount of our 2021 Senior Notes, and (iv) $342 million aggregate principal amount of our 2023 Senior Notes, for the same aggregate principal amount of convertible notes. Subsequently during 2016, all $882 million aggregate principal amount of these convertible notes was converted into approximately 21.6 million shares of our common stock pursuant to the terms of the notes.
Redemption of 2018 Senior Subordinated Notes. On February 2, 2017, we paid $281 million to redeem all of the then outstanding $275 million aggregate principal amount of our 2018 Senior Subordinated Notes, (collectively,which payment consisted of the “Whiting100% redemption price plus all accrued and unpaid interest on the notes. We financed the redemption with borrowings under our credit agreement. As of March 31, 2017, no 2018 Senior Subordinated Notes remained outstanding.
Redemption of 2019 Senior Notes. On January 26, 2018, we paid $1.0 billion to redeem all of the then outstanding $961 million aggregate principal amount of our 2019 Senior Notes, which payment consisted of the 102.976% redemption price plus all accrued and unpaid interest on the notes. We financed the redemption with proceeds from the issuance of our 2026 Senior Notes and borrowings under our credit agreement.
2020 Convertible Senior Notes. In March 2015, we issued at par $1,250 million of 1.25% Convertible Senior Notes due April 2020 (the “2020 Convertible Senior Notes”) were amended. During 2016, we exchanged $688 million aggregate principal amount of our 2020 Convertible Senior Notes for the same aggregate principal amount of new mandatory convertible senior notes. Subsequently during 2016, all $688 million aggregate principal amount of these mandatory convertible senior notes was converted into approximately 17.8 million shares of our common stock pursuant to include Whiting US Holding Company, Kodiakthe terms of the notes.
For the remaining $562 million aggregate principal amount of 2020 Convertible Senior Notes outstanding as of December 31, 2017, we have the option to settle conversions of these notes with cash, shares of common stock or a combination of cash and Whiting Resources Corporation (formerly Kodiak Oil & Gas (USA) Inc.common stock at our election. Our intent is to settle the principal amount of the 2020 Convertible Senior Notes in cash upon conversion. Prior to January 1, 2020, the 2020 Convertible Senior Notes will be convertible at the holder’s option only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the “measurement period”) as guarantors.in which the trading price per $1,000 principal amount of the 2020 Convertible Senior Notes for each trading day of the measurement period is less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after January 1, 2020, the 2020 Convertible Senior Notes will be convertible at any time until the second scheduled trading day immediately preceding the April 1, 2020 maturity date of the notes. The notes will be convertible at a current conversion rate of 6.4102 shares of our common stock per $1,000 principal amount of the notes, which is equivalent to a current conversion price of approximately $156.00. The conversion rate will be subject to adjustment in some events. In addition, following certain corporate events that occur prior to the maturity date, we will increase, in certain circumstances, the conversion rate for a holder who elects to convert its 2020 Convertible Senior Notes in connection with such corporate event. As of December 31, 2017, none of the contingent conditions allowing holders of the 2020 Convertible Senior Notes to convert these notes had been met.
Note Covenants.The indentures governing the WhitingSenior Notes restrict us from incurring additional indebtedness, subject to certain exceptions, unless our fixed charge coverage ratio (as defined in the indentures) is at least 2.0 to 1. The indentures governing the Kodiak Notes restrict us from incurring additional indebtedness, subject to certain exceptions, unless our fixed charge coverage ratio (as defined in the indentures) is at least 2.25 to 1. If we were in violation of these covenants,this covenant, then we may not be able to incur additional indebtedness, including under Whiting Oil and Gas’ credit agreement. Additionally, thethese indentures governing the Whiting Notes and the Kodiak Notes contain restrictive covenants that may limit our ability to, among other things, pay cash dividends, make certain other restricted payments, redeem or repurchase our capital stock, or our subordinated debt, make investments or issue preferred stock, sell assets, consolidate, merge or transfer all or substantially all of the assets of ours and our restricted subsidiaries taken as a whole, and enter into hedging contracts. These covenants may potentially limit the discretion of our management in certain respects. We were in compliance with these covenants as of December 31, 2014.2017. However, a substantial or extended decline in oil, NGL or natural gas prices may adversely affect our ability to comply with these covenants in the future.
On January 7, 2015, as required under the Kodiak Indentures upon a change in control of Kodiak, Whiting offered to repurchase at 101% of par all $1,550 million principal amount of Kodiak Notes outstanding. The repurchase offer expires on March 3, 2015. We expect to fund any payments due as a result of such repurchase offer with borrowings under our revolving credit facility.
Shelf Registration Statement. We have on file with the SEC a universal shelf registration statement to allow us to offer an indeterminate amount of securities in the future. Under the registration statement, we may periodically offer from time to time debt securities, common stock, preferred stock, warrants and other securities or any combination of such securities in amounts, prices and on terms announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement at the time of any such offering.
Contractual Obligations and Commitments
Schedule of Contractual Obligations. The table below does not include any penalties that may be incurred under our physical delivery contracts, since we cannot predict with accuracy the amount and timing of any such penalties if incurred. The following table summarizes our obligations and commitments as of December 31, 20142017 to make future payments under certain contracts, aggregated by category of contractual obligation, for the time periods specified below (in thousands):below. This table does not include amounts payable under contracts where we cannot predict with accuracy the amount and timing of such payments, including any amounts we may be obligated to pay under our derivative contracts, as such payments are dependent upon the price of crude oil in effect at the time of settlement, and any penalties that may be incurred for underdelivery under our physical delivery contracts. For further information on these contracts refer to the “Derivative Financial Instruments” footnote in the notes to consolidated financial statements and “Delivery Commitments” in Item 2 of this Annual Report on Form 10-K.
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| | | | | | | | | | | | | | | | | Payments due by period |
| | Payments due by period | | | (in thousands) |
| | | | | Less than 1 | | | | | | | | More than 5 | | | | | Less than 1 | | | | | | | | More than 5 |
Contractual Obligations | | Total | | year | | 1-3 years | | 3-5 years | | years | | Total | | year | | 1-3 years | | 3-5 years | | years |
Long-term debt (1) | | $ | 5,600,000 | | $ | - | | $ | - | | $ | 3,650,000 | | $ | 1,950,000 | | $ | 3,805,389 | | $ | 961,409 | | $ | 562,075 | | $ | 873,609 | | $ | 1,408,296 |
Cash interest expense on debt (2) | | | 1,468,613 | | | 279,701 | | | 559,402 | | | 480,250 | | | 149,260 | | | 869,284 | | | 164,015 | | | 303,700 | | | 193,863 | | | 207,706 |
Asset retirement obligations (3) | | | 179,931 | | | 12,190 | | | 24,326 | | | 24,615 | | | 118,800 | | | 134,237 | | | 5,031 | | | 26,420 | | | 10,587 | | | 92,199 |
Purchase obligations (4) | | | 148,969 | | | 68,775 | | | 80,194 | | | - | | | - | |
Pipeline transportation agreements (5) | | | 113,784 | | | 18,794 | | | 25,781 | | | 19,118 | | | 50,091 | |
Drilling rig contracts (6) | | | 278,784 | | | 146,141 | | | 132,643 | | | - | | | - | |
Operating leases (7) | | | 34,602 | | | 7,692 | | | 14,157 | | | 12,537 | | | 216 | |
Production Participation Plan liability (8) | | | 113,391 | | | 113,391 | | | - | | | - | | | - | |
Water disposal agreement (4) | | | | 121,659 | | | 18,579 | | | 40,635 | | | 37,328 | | | 25,117 |
Purchase obligations (5) | | | | 22,968 | | | 7,656 | | | 15,312 | | | - | | | - |
Pipeline transportation agreements (6) | | | | 55,044 | | | 9,308 | | | 18,914 | | | 15,341 | | | 11,481 |
Drilling rig contracts (7) | | | | 19,742 | | | 19,442 | | | 300 | | | - | | | - |
Leases (8) | | | | 14,703 | | | 7,502 | | | 7,201 | | | - | | | - |
Total | | $ | 7,938,074 | | $ | 646,684 | | $ | 836,503 | | $ | 4,186,520 | | $ | 2,268,367 | | $ | 5,043,026 | | $ | 1,192,942 | | $ | 974,557 | | $ | 1,130,728 | | $ | 1,744,799 |
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| (1) | | Long-term debt consists of the principal amounts of the 6.5% Senior Subordinated Notes dueand the 2020 Convertible Senior Notes. On January 26, 2018, we used the 5%proceeds from the December 2017 issuance of our 6.625% Senior Notes due 2019, the 8.125% Senior Notes due 2019, the 5.5% Senior Notes due 2021, the 5.75% Senior Notes due 2021, the 5.5% Senior Notes due 2022 and the outstandingJanuary 2026 as well as borrowings under our credit agreement due in 2019. The $800to redeem all of the then outstanding $961 million of 8.125%5.0% Senior Notes due 2019, $350 million of 5.5% Senior Notes due 2021 and $400 million of 5.5% Senior Notes due 2022 are subject to our repurchase offer in connection with the Kodiak Acquisition that expires on March 3, 2015. See “—2014 Highlights and Future Considerations – Financing Highlights” above for more information.2019. |
| (2) | | Cash interest expense on our Senior Subordinated Notes and ourthe Senior Notes is estimated assuming no principal repayment until the due dates of the instruments. Cash interest expense on the credit agreement2020 Convertible Senior Notes is estimated assuming no principal repayment untilrepayments or conversions prior to maturity. Commitment fees on the credit agreement are estimated assuming no principal borrowings or repayments or changes to commitments under the agreement through the December 2019 instrument due date and is estimated at a fixed interest rate of 1.9%.date. |
| (3) | | Asset retirement obligations represent the present value of estimated amounts expected to be incurred in the future to plug and abandon oil and gas wells, remediate oil and gas properties and dismantle their related plants, facilities and facilities.offshore platforms. |
| (4) | | We have threeone water disposal agreement which expires in 2024, whereby we have contracted for the transportation and disposal of the produced water from our Redtail field. Under the terms of the agreement, we are obligated to provide a minimum volume of produced water or else pay for any deficiencies at the price stipulated in the contract. As a result of our reduced development operations at our Redtail field, we have made and expect to continue to make periodic deficiency payments under this contract. Refer to the “Commitments and Contingencies” footnote in the notes to the consolidated financial statements for more information on this contract and related deficiency payments. |
| (5) | | We have one take-or-pay purchase agreements, ofagreement which one agreement expires in 2015 and two agreements expire in 2017. One of these agreements contains commitments to buy certain volumes of CO2 for use in our North Ward Estes EOR project in Texas. Under the remaining two take-or-pay agreements,2020, whereby we have committed to buy certain volumes of water for use in the fracture stimulation process ofon wells we complete in our Redtail field. Under the terms of these agreements,the agreement, we are obligated to purchase a minimum volume of CO2 or water as the case may be, or else pay for any deficiencies at the price stipulated in the contract. The CO2 volumes planned for use in the EOR project inAs a result of our North Ward Estes field and the water volumes planned for usereduced development operations at our Redtail field, currently exceedwe have made and expect to continue to make periodic deficiency payments under this contract. Refer to the minimum volumes specified“Commitments and Contingencies” footnote in allthe notes to the consolidated financial statements for more information on this contract and related deficiency payments. |
| (6) | | We have three pipeline transportation agreements with two different suppliers, expiring in 2022, 2024 and 2025. Under two of these agreements. Therefore,contracts, we expecthave committed to avoidpay fixed monthly reservation fees on dedicated pipelines from our Redtail field for natural gas and NGL transportation capacity, plus a variable charge based on actual transportation volumes. The remaining contract contains a commitment to transport a minimum volume of crude oil via a certain oil gathering system or else pay for any payments for deficiencies under these contracts.at a price stipulated in the contract. The purchasing obligations reported above represent our minimum financial commitments pursuant to the terms of these contracts, however, our actual expenditures under these contracts are expected tomay exceed the minimum commitments presented above. |
| (5)
| | We have two ship-or-pay agreements with different suppliers, one expiring in 2015 and one expiring in 2017, whereby we have committed to transport a minimum daily volume of CO2 or water, as the case may be, via certain pipelines or else pay for any deficiencies at a price stipulated in the contracts. In addition, we have three pipeline transportation agreements with one supplier, one expiring in 2024 and two expiring in 2025, whereby we have committed to pay fixed monthly reservation fees on dedicated pipelines for natural gas and NGL transportation capacity from our Redtail field, plus a variable charge based on actual transportation volumes.
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| (6)(7)
| | As of December 31, 2014,2017, we had 18three drilling rigs under long-term contract, allcontracts, of which were operatingtwo drilling rigs expire in the Rocky Mountains region. Subsequent to2018 and one expires in 2019. As of December 31, 2014, we early terminated five of these long-term contracts incurring2017, early termination penalties of approximately $27 million. These penalties have been included as contractual commitment amounts in the table above. Of the remaining 13 long-term contracts, seven expire in 2016 and six in 2017. Early termination of the remainingthese contracts would require termination penalties of $212$11 million, which would be in lieu of paying the remaining drilling commitments under these contracts. No other drilling rigs working for us are currentlyThe obligations reported above represent our minimum financial commitments pursuant to the terms of these contracts, however, our actual expenditures under long-termthese contracts or contracts thatmay exceed the minimum commitments presented above. |
cannot be terminated at the end of the well that is currently being drilled. Due to the short-term and indeterminate nature of the time remaining on rigs drilling on a well-by-well basis, such obligations have not been included in this table.
| (7)(8)
| | We lease 197,000222,900 square feet of administrative office space in Denver, Colorado under an operating lease arrangement expiring in 2019, 47,90044,500 square feet of office space in Midland, Texas expiring in 2020, an additional 36,300 square feet of administrative office space in Denver, Colorado assumed in the Kodiak Acquisition expiring in 2016, and 20,00036,500 square feet of office space in Dickinson, North Dakota expiring in 2016. In addition, we entered into2020. We have sublet the majority of our office space in Midland, Texas to a third party for the remaining lease for several residential apartments in Watford City and Dickinson, North Dakota under an operating lease agreement expiring in 2015. |
| (8)
| | In June 2014, we terminated our Production Participation Plan effective December 31, 2013. Pursuant to the terms of the Plan, upon termination we are required to distribute to each Plan participant an amount, based upon the valuation method set forthterm. The offsetting rental income has not been included in the Plan, in a lump sum payment twelve months after the date of termination. As of December 31, 2014, a portion of this liability representing a regular distribution under the Plan totaling $41 million had been paid to our third-party payroll administrator. However, these funds were not distributed by the payroll administrator to Plan participants until January 2015. The final Plan distribution payment will be made in June 2015.table above.
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Based on current oil and natural gas prices and anticipated levels of production, we believe that the estimated net cash generated from operations, together with cash on hand and amounts available under our credit agreement, and the Delayed Draw Facility, will be adequate to meet future liquidity needs, including satisfying our financial obligations and any obligations arising as a result of the Kodiak Acquisition and funding our operations,operating, development and exploration and development activities.
New Accounting Pronouncements
For further information on the effects of recently adopted accounting pronouncements and the potential effects of new accounting pronouncements, refer to the Summary“Summary of Significant Accounting PoliciesPolicies” footnote in the notes to consolidated financial statements.
Critical Accounting Policies and Estimates
Our discussion of financial condition and results of operations is based upon the information reported in our consolidated financial statements. The preparation of these statements in accordance with GAAP and SEC rules and regulations requires us to make certain assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities at the date of our financial statements. We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, weather, politics, global economics, mechanical problems, general business conditions and other factors. A summary of our significant accounting policies is detailed in Note 1 to our consolidated financial statements. We have outlined below certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management.
Successful Efforts Accounting. We account for our oil and gas operations using the successful efforts method of accounting. Under this method, the fair value of property acquired and all costs associated with successful exploratory wells and all development wells are capitalized. Items charged to expense generally include geological and geophysical costs, costs of unsuccessful exploratory wells and oil and gas production costs. All of our properties are located within the continental United States.
Oil and Natural Gas Reserve Quantities. Reserve quantities and the related estimates of future net cash flows affect our periodic calculations of depletion, impairment of our oil and natural gas properties and our asset retirement obligations. Proved oil and gas reserves are those quantities of oil and gas which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Reserve quantities and future cash flows included in this report are prepared in accordance with guidelines established by the SEC and the FASB. The accuracy of our reserve estimates is a function of:of (i) the quality and quantity of available data, (ii) the interpretation of that data, (iii) the accuracy of various mandated economic assumptions, and (iv) the judgments of the persons preparing the estimates.
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External petroleum engineers independently estimated all of the proved probable and possible reserve quantities included in this annual report.Annual Report on Form 10‑K. In connection with our external petroleum engineers performing their independent reserve estimations, we furnish them with the following information that they review: (1) technical support data, (2) technical analysis of geologic and engineering support information, (3) economic and production data and (4) our well ownership interests. The independent petroleum engineers, Cawley,
Gillespie & Associates, Inc., evaluated 100% of our estimated proved reserve quantities and their related pre-tax future net cash flows as of December 31, 2014.2017. Estimates prepared by others may be higher or lower than our estimates. Because these estimates depend on many assumptions, all of which may differ substantially from actual results, reserve estimates may be different from the quantities of oil and gas that are ultimately recovered. For example, if the crude oil and natural gas prices used in our year-end reserve estimates increased or decreased by 10%, our proved reserve quantities at December 31, 2017 would have increased by 19 MBOE (3%) or decreased by 24 MBOE (4%), respectively, and the pre-tax PV10% of our proved reserves would have increased by $1.1 billion (28%) or decreased by $1.1 billion (27%), respectively. We continually make revisions to reserve estimates throughout the year as additional information becomes available. We make changes to depletion rates and impairment calculations (when impairment indicators arise) in the same period that changes to reserve estimates are made.
Depreciation, Depletion and Amortization. Our rate of recording DD&A is dependent upon our estimates of total proved and proved developed reserves, which estimates incorporate various assumptions and future projections. If our estimates of total proved or proved developed reserves decline, the rate at which we record DD&A expense increases, which in turn reduces our net income. Such a decline in reserves may result from lower commodity prices or other changes to reserve estimates, as discussed above, and we are unable to predict changes in reserve quantity estimates as such quantities are dependent on the success of our exploration and development program, as well as future economic conditions.
Impairment of Oil and Gas Properties. We review the value of our oil and gas properties whenever management judges that events and circumstances indicate that the recorded carrying value of properties may not be recoverable. Impairments of producing properties are determined by comparing their future net undiscounted cash flows to their net book values at the end of each period. If their net capitalized costs exceed undiscounted future cash flows, the cost of the property is written down to “fair value,”value”, which is determined using net discounted future cash flows from the producing property. Different pricing assumptions or discount rates could result in a different calculated impairment. In addition to proved property impairments, we provide for impairments on significant undeveloped properties when we determine that the property will not be developed or a permanent impairment in value has occurred. Individually insignificant unproved properties are amortized on a composite basis, based on past success, experience and average lease-term lives.
Goodwill Impairment. We test ourtested goodwill for impairment annually in the second quarter or whenwhenever events or changes in circumstances indicateindicated that the fair value of aour reporting unit hasmay have been reduced below its carrying value. When testing goodwill for impairment, if our qualitative analysis indicatesindicated that it iswas more likely than not that the fair value of the reporting unit iswas less than its carrying value, we then performperformed a quantitative impairment test. If the carrying value of the reporting unit exceedsexceeded its fair value, goodwill iswas written down to its implied fair value with an offsetting charge to earnings.
We performed our annual goodwill impairment test as of June 30, 2015, and determined that no impairment had occurred. However, as a result of a sustained decrease in the price of Whiting’s common stock during the third quarter of 2015 caused by a significant decline in crude oil and natural gas prices over that same period, we performed another goodwill impairment test as of September 30, 2015. The impairment test indicated that the fair value of our reporting unit was less than its carrying amount, and further that there was no remaining implied fair value attributable to goodwill. Based on these results, we recorded a non-cash impairment charge to reduce the carrying value of goodwill to zero.
The fair value of our reporting unit was ascribed using an income approach analysis based on net discounted future cash flows and a market approach analysis. The income approach analysis was dependent on a number of factors including estimates of future oil and gas production from our reserve reports, future commodity prices based on sales contract terms or NYMEX forward price curves as of the date of the estimate (adjusted for basis differentials), future operating and development costs, the successful development of proved and unproved reserves, an inflation rate and a discount rate based on our weighted-average cost of capital. The market approach was dependent on our market capitalization as of the date of the estimate, an estimate of the control premium that a market participant would apply to value our reporting unit as a whole and the fair value of our outstanding debt.
There is considerable judgment involved in estimating fair values, particularly in determining the valuation methodologies to utilize and the weighting applied to such methodologies. Although we based the fair value estimate of our reporting unit on assumptions we believed to be reasonable, those assumptions are inherently uncertain, and actual results could differ from our estimates.
Asset Retirement Obligation. Our asset retirement obligations (“ARO”) consist of estimated future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage and land restoration in accordance with applicable local, state and federal laws. The discounted fair value of an ARO liability is required to be recognized in the period in which it is incurred, with the associated asset retirement cost capitalized as part of the carrying cost of the oil and gas asset. The recognition of an ARO requires that management make numerous assumptions regarding such factors as the estimated probabilities, amounts and timing of settlements; the credit-adjusted risk-free discount rate to be used;rate; the inflation rates;rate; and future advances in technology. In periods subsequent to the initial measurement of thean ARO, we must recognize period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. Increases in the ARO liability due to the passage of time impact net income as accretion expense. The related capitalized cost, including revisions thereto, is charged to expense through DD&A over the life of the oil and gas property.
Production Participation PlanDerivative and Embedded Derivative Instruments. On June 11, 2014, the Board of Directors terminated our Production Participation Plan (the “Plan”), in which all employees participated, effective December 31, 2013. Prior to Plan termination, interests in oil and gas properties acquired, developed or sold during the year were allocated to the Plan on an annual basis as determined by the Compensation Committee of the Board of Directors. Once allocated, the interests (not legally conveyed) were fixed. The short-term obligation related to the Plan is reflected in the “Current portion of Production Participation Plan liability” line item in our consolidated balance sheets. This obligation at December 31, 2013 was based on cash flows during 2013 and was paid in cash in January 2014. The calculation of this liability depended in part on our estimates of accrued revenues and costs as of December 31, 2013 as discussed below under “Revenue Recognition.” The vested long-term obligation related to the Plan at December 31, 2013 is reflected in the “Production Participation Plan liability” line itemAll derivative instruments are recorded in the consolidated balance sheets. This liability was derived primarily from reserve report estimates asfinancial statements at fair value, other than derivative instruments that meet the “normal purchase normal sale” exclusion or other derivative scope exceptions. We do not currently apply hedge accounting to any of that date. Pursuant to the terms of the Plan, upon Plan termination all employees became fully vested,our outstanding derivative instruments, and the fully vested amount due to Plan participants has been reflected as a current payableresult, all changes in derivative fair values are recognized currently in earnings.
We determine the recorded amounts of our derivative instruments measured at fair value utilizing third-party valuation specialists. We review these valuations, including the related model inputs and assumptions, and analyze changes in fair value measurements between periods. We corroborate such inputs, calculations and fair value changes using various methodologies, and review unobservable inputs for reasonableness utilizing relevant information from other published sources. When available, we utilize counterparty valuations to
assess the reasonableness of our valuations. The values we report in our financial statements change as of December 31, 2014, as it will be distributedthe assumptions used in these valuations are revised to Plan participants during the first half of 2015. This liability includes the value of proved undevelopedreflect changes in market conditions (particularly those for oil and gas properties awarded upon Plan termination, and is based on reserve report estimates and forecasted commodity prices for crude oil, NGLs and natural gas asfutures) or other factors, many of the December 31, 2013 termination effective date.which are beyond our control.
Derivative Instruments and Hedging Activity. We periodically enter into commodity derivative contracts to manage our exposure to oil and natural gas price volatility. We primarily utilize costless collars and swaps which are generally placed with major financial institutions, as well as crude oil sales and delivery contracts. We use hedging to help ensure that we have adequate cash flow to fundfunding for our capital programs and to manage returns on our acquisitionsdrilling programs and drilling programs.acquisitions. Our decision on the quantity and price at which we choose to hedge our production is based in part on our view of current and future market conditions. While the use of these hedging arrangements limits the downside risk of adverse price movements, it may also limit future revenues from favorable price movements. We primarily
utilize costless collars and swaps contracts, which are generally placed with major financial institutions, as well as fixed-differential crude oil sales contracts.
All derivative instruments are recorded onhedging transactions also involves the consolidated balance sheet at fair value, other thanrisk that the derivative instruments thatcounterparties will be unable to meet the “normal purchase normal sale” exclusion. Changes infinancial terms of such transactions. We evaluate the derivatives’ fair value are recognized currently in earnings unless specific hedge accounting criteria are met. For qualifying cash flow hedges,ability of our counterparties to perform at the fair value gain or lossinception of a hedging relationship and on the derivative is deferred in accumulated other comprehensive income (loss) to the extent the hedge is effective and is reclassified to the gain (loss) on hedging activities line item in our consolidated statements of income in the period that the hedged production is delivered.a periodic basis as appropriate.
We value our costless collars and swaps using industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures. We value our long-term crude oil sales and delivery contracts based on ana probability-weighted income approach which considers various assumptions, including quoted forwardspot prices for commodities, market differentials for crude oil and U.S. Treasury rates. The discount raterates used in the fair values of these instruments includesinclude a measure of nonperformance risk by the counterparty or us, as appropriate.
We utilizeIn addition, we evaluate the counterparties’ valuations to assess the reasonablenessterms of our valuations. The values we reportconvertible debt and other contracts, if any, to determine whether they contain embedded components that are required to be bifurcated and accounted for separately as derivative financial instruments.
We valued the embedded derivatives related to our convertible notes using a binomial lattice model which considered various inputs including (i) our common stock price, (ii) risk-free rates based on U.S. Treasury rates, (iii) recovery rates in our financial statements change as these estimates are revised to reflect changes in market conditions (particularly those for oilthe event of default, (iv) default intensity and natural gas futures) or other factors, many of which are beyond our control.
The use of hedging transactions also involves the risk that the counterparties will be unable to meet the financial terms of such transactions. We evaluate the ability(v) volatility of our counterpartiescommon stock.
We also had an embedded derivative related to perform atour purchase and sale agreement with the inceptionbuyer of the North Ward Estes properties, which included a hedging relationshipcontingent payment linked to NYMEX crude oil prices. Prior to settlement of the contingent payment in July 2017, we valued this embedded derivative using a modified Black-Scholes swaption pricing model which considered various assumptions, including quoted forward prices for commodities, time value and onvolatility factors. The discount rate used in the fair value of this instrument included a periodic basis as appropriate.measure of the counterparty’s nonperformance risk.
Income Taxes and Uncertain Tax Positions. We provide for income taxes in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”). We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in our financial statements and our tax returns. We routinely assess the realizability of our deferred tax assets. If we conclude that it is more likely than not that some portion or all of our deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. We consider future taxable income in making such assessments. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as they relate to prevailing oil and natural gas prices).
On December 22, 2017, Congress passed the Tax Cuts and Jobs Act (the “TCJA”). The new legislation significantly changes the U.S. corporate tax law by, among other things, lowering the U.S. corporate income tax rate from 35% to 21% beginning in January 2018, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used to account for business combinations, however, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed. As a result of the new legislation, we recognized the provisional impacts of the revaluation of our deferred tax assets and liabilities as of the date of enactment. These provisional amounts may be adjusted in future periods if additional information is obtained or further clarification and guidance is issued by regulatory authorities regarding the application of the law.
ASC 740 requires uncertain income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. Under ASC 740, uncertain tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized uncertain tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
We are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these
liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the liability no longer applies. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be.
Revenue Recognition. We predominantly derive our revenue from the sale of produced oil, NGLs and natural gas. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers and the price we will receive. Variances between our estimated revenue and actual payment are recorded in the month the payment is received. However, differences have been and are insignificant.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014 09”), which we adopted effective January 1, 2018 using the modified retrospective approach. Refer to the “Summary of Significant Accounting Policies” footnote in the notes to consolidated financial statements for more information on this new accounting standard.
Accounting for Business Combinations. We account for all of our business combinations using the purchaseacquisition method, which is the only method permitted under FASB ASC Topic 805, Business Combinations, and involves the use of significant judgment.
Under the purchaseacquisition method of accounting, a business combination is accounted for at a purchase price based upon the fair value of the consideration given. The assets and liabilities acquired are measured at their fair values, and the purchase price is allocated to the assets and liabilities based upon these fair values. The excess, if any, of the cost ofconsideration given to acquire an acquired entity over the net amounts assigned to its assets acquired and liabilities assumed is recognized as goodwill. The excess, if any, of the fair value of assets acquired and liabilities assumed over the cost of an acquired entity is recognized immediately to earnings as a gain from bargain purchase.
Determining the fair values of the assets and liabilities acquired involves the use of judgment, since some of the assets and liabilities acquired do not have fair values that are readily determinable. Different techniques may be used to determine fair values, including
market prices (where available), appraisals, comparisons to transactions for similar assets and liabilities, and present values of estimated future cash flows, among others. Since these estimates involve the use of significant judgment, they can change as new information becomes available.
The business combinations completed during the prior three years consisted of oil and gas properties. In general, the consideration we have paid to acquire these properties or companies was entirely allocated to the fair value of the assets acquired and liabilities assumed at the time of acquisition and consequently, there was no goodwill nor any bargain purchase gains recognized on our business combinations. However, the purchase price allocation associated with the Kodiak Acquisition resulted in the recognition of goodwill. For further information on the Kodiak Acquisition, refer to the Acquisitions and Divestitures footnote in the notes to consolidated financial statements.
Effects of Inflation and Pricing
WeAs a result of the sustained depressed commodity price environment during 2015, 2016 and continuing into 2017, we have experienced increasedlower costs during 2013 and 2014 due to increaseda decrease in demand for oil field products and services. The oil and gas industry is very cyclical, and the demand for goods and services of oil field companies, suppliers and others associated with the industry puts extreme pressure on the economic stability and pricing structure within the industry. Typically, as prices for oil and natural gas increase, so do all associated costs. Conversely, in a period of declining prices, associated cost declines are likely to lag and not adjust downward in proportion to prices. Material changes in prices also impact our current revenue stream, estimates of future reserves, borrowing base calculations of bank loans, depletion expense, impairment assessments of oil and gas properties and values of properties in purchase and sale transactions. Material changes in prices can impact the value of oil and gas companies and their ability to raise capital, borrow money and retain personnel. While we do not currently expect business costs to materially increase in the near term, higher prices for oil and natural gasdemand in the industry could result in increases in the costs of materials, services and personnel.
Forward-Looking Statements
This report contains statements that we believe to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than historical facts, including, without limitation, statements regarding our future financial position, business strategy, projected revenues, earnings, costs, capital expenditures and debt levels, and plans and objectives of management for future operations, are forward-looking statements. When used in this report, words such as we “expect,” “intend,” “plan,” “estimate,” “anticipate,”“expect”, “intend”, “plan”, “estimate”, “anticipate”, “believe” or “should” or the negative thereof or variations thereon or similar terminology are generally intended to identify forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements.
These risks and uncertainties include, but are not limited to: declines in, or extended periods of low oil, NGL or natural gas prices; our level of success in exploration, development and production activities; risks related to our level of indebtedness, ability to comply with debt covenants and periodic redeterminations of the borrowing base under our credit agreement; impacts to financial statements as a result of impairment write-downs; our ability to successfully complete asset dispositions and the risks related thereto; revisions to reserve
estimates as a result of changes in commodity prices, regulation and other factors; adverse weather conditions that may negatively impact development or production activities; the timing of our exploration and development expenditures; our ability to obtain sufficient quantities of CO2 necessary to carry out our EOR projects; inaccuracies of our reserve estimates or our assumptions underlying them; revisions to reserve estimates as a result of changes in commodity prices, regulation and other factors; risks relating to any unforeseen liabilities of ours; our ability to generate sufficient cash flows from operations to meet the internally funded portion of our capital expenditures budget; our ability to obtain external capital to finance exploration and development operations and acquisitions;operations; federal and state initiatives relating to the regulation of hydraulic fracturing; the potential impact of federal debt reduction initiativesfracturing and tax reform legislation being considered by the U.S. Federal Government that could have a negative effect on the oil and gas industry; our ability to identify and complete acquisitions and to successfully integrate acquired businesses;air emissions; unforeseen underperformance of or liabilities associated with acquired properties; the impacts of hedging on our results of operations; failure of our properties to yield oil or gas in commercially viable quantities; availability of, and risks associated with, transport of oil and gas; our ability to drill producing wells on undeveloped acreage prior to its lease expiration; shortages of or delays in obtaining qualified personnel or equipment, including drilling rigs and completion services; uninsured or underinsured losses resulting from our oil and gas operations; our inability to access oil and gas markets due to market conditions or operational impediments; the impact and costs of compliance with laws and regulations governing our oil and gas operations; the potential impact of changes in laws, including tax reform, that could have a negative effect on the oil and gas industry; our ability to replace our oil and natural gas reserves; any loss of our senior management or technical personnel; competition in the oil and gas industry; cyber security attacks or failures of our telecommunication systems; our ability to successfully integrate Kodiak after the Kodiak Acquisition and achieve anticipated benefits from the transaction; and other risks described under the caption “Risk Factors” in Item 1A of this Annual Report on Form 10‑K. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk
The price we receive for our oil and gas production heavily influences our revenue, profitability, access to capital and future rate of growth. Crude oil and natural gas are commodities, and therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the markets for oil and gas have been volatile, and these markets will likely continue to be volatile in the future. Based on 20142017 production, our income (loss) before income taxes for 20142017 would have moved up or down $273$130 million for each 10% change in oil prices per Bbl, $13$11 million for each 10% change in NGL prices per Bbl and $17$7 million for each 10% change in natural gas prices per Mcf.
We periodically enter into derivative contracts to achieve a more predictable cash flow by reducing our exposure to oil and natural gas price volatility. Our derivative contracts have traditionally been costless collars and swap contracts,swaps, although we evaluate and have entered into other forms of derivative instruments as well. Currently, we do not apply hedge accounting, and therefore all changes in commodity derivative fair values are recorded immediately to earnings.
Commodity Derivative Contracts
Crude Oil Costless Collars and Swaps. The collared hedges shown in the table below have the effect of providing a protective floor while allowing us to share in upward pricing movements. The three-way collars, however, do not provide complete protection against declines in crude oil prices due to the fact that when the market price falls below the sub-floor, the minimum price we would receive would be NYMEX plus the difference between the floor and the sub-floor. While these hedges are designed to reduce our exposure to price decreases, they also have the effect of limiting the benefit of price increases above the ceiling. For the crude oil collars outstanding asThe fair value of these commodity derivative instruments at December 31, 2014,2017 was a net liability of $69 million. A hypothetical upward or downward shift of 10% per Bbl in the NYMEX forward curve for crude oil as of December 31, 20142017 would cause an increase of $86 million or a decrease or increase,of $64 million, respectively, of $2 million in our commodity derivative (gain) loss.this fair value liability.
The swap contracts shown in the tables below entitle us to receive settlement from the counterparty in amounts, if any, by which the settlement price for the applicable calculation period is less than the fixed price, or to pay the counterparty if the settlement price for the applicable calculation period is more than the fixed price. While the fixed-price swaps are designed to decrease our exposure to downward price movements, they also have the effect of limiting the benefit of upward price movements. For theThere were no swaps outstanding as of December 31, 2014, a hypothetical upward or downward shift of 10% per Bbl in the NYMEX forward curve2017.
Our outstanding commodity derivative contracts as of December 31, 2014 would cause a decrease or increase, respectively, of $17 million in our commodity derivative (gain) loss.
Our outstanding hedges as of February 13, 2015January 23, 2018 are summarized below:
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| | | | | | | | | | | | | | | | |
Derivative | | | | | | Monthly Volume | | Weighted Average | | | | | | Monthly Volume | | Weighted Average |
Instrument | | Commodity | | Period | | (Bbl) | | NYMEX Sub-Floor/Floor/Ceiling | | Commodity | | Period | | (Bbl) | | NYMEX Price |
| | | | | | | | | Sub-Floor/Floor/Ceiling |
Three-way collars (1) | | Crude oil | | 01/2015 to 03/2015 | | 100,000 | | $70.00/$85.00/$107.90 | | Crude oil | | 01/2018 to 03/2018 | | 1,450,000 | | $37.07/$47.07/$57.30 |
| | Crude oil | | 04/2015 to 06/2015 | | 100,000 | | $70.00/$85.00/$107.90 | |
| | Crude oil | | 07/2015 to 09/2015 | | 500,000 | | $47.00/$58.00/$78.99 | |
| | Crude oil | | 10/2015 to 12/2015 | | 500,000 | | $47.00/$58.00/$78.99 | |
| | Crude oil | | 01/2016 to 03/2016 | | 550,000 | | $43.18/$53.18/$76.26 | |
| | Crude oil | | 04/2016 to 06/2016 | | 550,000 | | $43.18/$53.18/$76.26 | |
| | Crude oil | | 07/2016 to 09/2016 | | 550,000 | | $43.18/$53.18/$76.26 | |
| | Crude oil | | 10/2016 to 12/2016 | | 550,000 | | $43.18/$53.18/$76.26 | |
Collars | | Crude oil | | 01/2015 to 03/2015 | | 9,000 | | $85.00/$102.75 | |
| | Crude oil | | 04/2015 to 06/2015 | | 9,100 | | $85.00/$102.75 | |
| | Crude oil | | 07/2015 to 09/2015 | | 209,200 | | $51.06/$57.37 | |
| | Crude oil | | 10/2015 to 12/2015 | | 209,200 | | $51.06/$57.37 | |
| | Crude oil | | 01/2016 to 03/2016 | | 250,000 | | $51.00/$63.48 | |
| | Crude oil | | 04/2016 to 06/2016 | | 250,000 | | $51.00/$63.48 | |
| | Crude oil | | 07/2016 to 09/2016 | | 250,000 | | $51.00/$63.48 | |
| | Crude oil | | 10/2016 to 12/2016 | | 250,000 | | $51.00/$63.48 | |
| | Crude oil | | 01/2017 to 03/2017 | | 250,000 | | $53.00/$70.44 | | Crude oil | | 04/2018 to 06/2018 | | 1,450,000 | | $37.07/$47.07/$57.30 |
| | Crude oil | | 04/2017 to 06/2017 | | 250,000 | | $53.00/$70.44 | | Crude oil | | 07/2018 to 09/2018 | | 1,450,000 | | $37.07/$47.07/$57.30 |
| | Crude oil | | 07/2017 to 09/2017 | | 250,000 | | $53.00/$70.44 | | Crude oil | | 10/2018 to 12/2018 | | 1,450,000 | | $37.07/$47.07/$57.30 |
| | Crude oil | | 10/2017 to 12/2017 | | 250,000 | | $53.00/$70.44 | | | | | | | | Fixed Price |
Swaps | | Crude oil | | 01/2015 to 03/2015 | | 335,700 | | $93.33 | | Crude oil | | 01/2018 to 03/2018 | | 400,000 | | $61.74 |
| | Crude oil | | 04/2015 to 06/2015 | | 339,430 | | $93.33 | | Crude oil | | 04/2018 to 06/2018 | | 400,000 | | $61.74 |
| | Crude oil | | 07/2015 to 09/2015 | | 259,160 | | $76.57 | | Crude oil | | 07/2018 to 09/2018 | | 400,000 | | $61.74 |
| | Crude oil | | 10/2015 to 12/2015 | | 251,230 | | $76.25 | | Crude oil | | 10/2018 to 12/2018 | | 400,000 | | $61.74 |
| | | | | | | | | Floor/Ceiling |
Collars | | | Crude oil | | 01/2019 to 03/2019 | | 150,000 | | $50.00/$65.33 |
| | | Crude oil | | 04/2019 to 06/2019 | | 150,000 | | $50.00/$65.33 |
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| (1) | | A three-way collar is a combination of options: a sold call, a purchased put and a sold put. The sold call establishes a maximum price (ceiling) we will receive for the volumes under contract. The purchased put establishes a minimum price (floor), unless the market price falls below the sold put (sub-floor), at which point the minimum price would be NYMEX plus the difference between the purchased put and the sold put strike price. |
Fixed-differential Crude Oil Contracts. We have entered into two fixed-differential crude oil sales and delivery contracts for oil volumes we plan to produce from the Niobrara in Colorado.
The table below summarizes the future production volumes to be sold under one of these contracts as of January 1, 2015 at a price equal to NYMEX less a fixed differential of $4.75 per Bbl. When we are unable to deliver the production volumes specified in this contract, the fixed differential increases proportionately.
| | | | |
| | | | |
| | | | Daily Volume
|
Commodity
| | Period
| | (Bbl per day)
|
Crude oil
| | 04/2015 to 12/2015
| | 25,000
|
Crude oil
| | 01/2016 to 12/2016
| | 28,750
|
Crude oil
| | 01/2017 to 12/2017
| | 33,750
|
Crude oil
| | 01/2018 to 12/2018
| | 38,750
|
Crude oil
| | 01/2019 to 12/2019
| | 43,750
|
Crude oil
| | 01/2020 to 03/2020
| | 45,000
|
The table below summarizes the future production volumes to be sold under the second contract as of January 1, 2015 at a price equal to NYMEX less certain fixed differentials depending on the delivery methods specified in the contract.
| | | | |
| | | | |
| | | | Daily Volume
|
Commodity
| | Period
| | (Bbl per day)
|
Crude oil
| | 04/2015 to 12/2015
| | 20,000
|
Crude oil
| | 01/2016 to 12/2016
| | 20,000
|
Crude oil
| | 01/2017 to 12/2017
| | 20,000
|
Crude oil
| | 01/2018 to 12/2018
| | 20,000
|
Crude oil
| | 01/2019 to 12/2019
| | 20,000
|
Crude oil
| | 01/2020 to 03/2020
| | 20,000
|
As of December 31, 2014, we determined that it is no longer probable that future oil production from our Redtail field will be sufficient to meet the minimum volume requirements specified in these fixed-differential crude oil contracts, and accordingly, that we will not settle these contracts through physical delivery of crude oil volumes. As a result, we have determined that these contracts no longer qualify for the “normal purchase normal sale” exclusion, and we have therefore reflected these contracts at fair value in the consolidated financial statements. For these commodity derivative contracts, a hypothetical $10.00 per Bbl increase in the market differential for crude oil as of December 31, 2014 would cause an increase in our commodity derivative (gain) loss of $42 million, whereas a hypothetical $10.00 per Bbl decrease in the market differential for crude oil would cause a decrease in our commodity derivative (gain) loss of $43 million.
Interest Rate Risk
Market risk is estimated as the change in fair value resulting from a hypothetical 100 basis point change in the interest rate on the outstanding balance under our credit agreement. Our credit agreement allows us to fix the interest rate for all or a portion of the principal balance for a period up to six months. To the extent that the interest rate is fixed, interest rate changes affect the instrument’s fair market value but do not impact results of operations or cash flows. Conversely, for the portion of the credit agreement that has a floating interest rate, interest rate changes will not affect the fair market value but will impact future results of operations and cash flows. At December 31, 2014, our2017, we had no borrowings outstanding principal balance under our credit agreement was $1.4 billion, and the weighted average interest rate on the outstanding principal balance was 1.9%. At December 31, 2014, the carrying amount approximated fair market value. Assuming a constant debt level of $1.4 billion, the cash flow impact resulting from a 100 basis point change in interest rates during periods when the interest rate is not fixed would be $14 million over a 12-month time period.agreement. Changes in interest rates do not affect the amount of interest we pay on our fixed-rate Senior Notes or Senior Subordinated Notes,senior notes, but changes in interest rates do affect the fair values of ourthese notes.
In March 2015, we issued 1.25% Convertible Senior Notes due April 2020 (the “2020 Convertible Senior Notes”). As the interest rate on these notes is fixed at 1.25%, we are not subject to any direct risk of loss related to fluctuations in interest rates. However, changes in interest rates do affect the fair value of this debt instrument, which could impact the amount of gain or loss that we recognize in earnings upon conversion of the notes. Refer to the “Long-Term Debt” and “Fair Value Measurements” footnotes in the notes to consolidated financial statements for more information on the material terms and fair values of the 2020 Convertible Senior Subordinated Notes.
Item 8. Financial Statements and Supplementary Data
| |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
| |
Report of Independent Registered Public Accounting Firm | 6966 |
Consolidated Balance Sheets as of December 31, 20142017 and 20132016 | 7067 |
Consolidated Statements of IncomeOperations for the Years Ended December 31, 2014, 20132017, 2016 and 20122015 | 7168 |
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012
| 72 |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 20132017, 2016 and 20122015 | 7369 |
Consolidated Statements of Equity for the Years Ended December 31, 2014, 20132017, 2016 and 20122015 | 7571 |
Notes to Consolidated Financial Statements | 7672 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Whiting Petroleum Corporation
Denver, Colorado
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Whiting Petroleum Corporation and subsidiaries (the "Company"“Company”) as of December 31, 20142017 and 2013, and2016, the related consolidated statements of income, comprehensive income,operations, cash flows, and equity for each of the three years in the period ended December 31, 2014. Our audits also included2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statement schedule listedstatements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the Index at Item 15. period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements and financial statement schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Whiting Petroleum Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
February 27, 201522, 2018
We have served as the Company’s auditors since 2003.
WHITING PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2014 | | 2013 | | 2017 | | 2016 |
ASSETS | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 78,100 | | $ | 699,460 | | $ | 879,379 | | $ | 55,975 |
Restricted cash | | | | - | | | 17,250 |
Accounts receivable trade, net | | | 543,172 | | | 341,177 | | | 284,214 | | | 173,919 |
Derivative assets | | | 135,577 | | | 1,274 | |
Prepaid expenses and other | | | 86,150 | | | 27,707 | | | 26,035 | | | 26,312 |
Assets held for sale | | | | - | | | 349,146 |
Total current assets | | | 842,999 | | | 1,069,618 | | | 1,189,628 | | | 622,602 |
Property and equipment: | | | | | | | | | | | | |
Oil and gas properties, successful efforts method | | | 14,949,702 | | | 10,065,150 | | | 11,293,650 | | | 13,230,851 |
Other property and equipment | | | 276,582 | | | 206,385 | | | 134,524 | | | 134,638 |
Total property and equipment | | | 15,226,284 | | | 10,271,535 | | | 11,428,174 | | | 13,365,489 |
Less accumulated depreciation, depletion and amortization | | | (3,083,572) | | | (2,676,490) | | | (4,244,735) | | | (4,222,071) |
Total property and equipment, net | | | 12,142,712 | | | 7,595,045 | | | 7,183,439 | | | 9,143,418 |
Goodwill | | | 875,676 | | | - | |
Debt issuance costs | | | 53,274 | | | 48,530 | |
Other long-term assets | | | 104,843 | | | 120,277 | | | 29,967 | | | 110,122 |
TOTAL ASSETS | | $ | 14,019,504 | | $ | 8,833,470 | | $ | 8,403,034 | | $ | 9,876,142 |
LIABILITIES AND EQUITY | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | |
Current portion of long-term debt | | | $ | 958,713 | | $ | - |
Accounts payable trade | | $ | 62,664 | | $ | 107,692 | | | 32,761 | | | 32,126 |
Revenues and royalties payable | | | | 171,028 | | | 147,226 |
Accrued capital expenditures | | | 429,970 | | | 158,739 | | | 69,744 | | | 56,830 |
Revenues and royalties payable | | | 254,018 | | | 198,558 | |
Current portion of Production Participation Plan liability | | | 113,391 | | | 73,264 | |
Accrued interest | | | | 40,971 | | | 44,749 |
Accrued lease operating expenses | | | | 36,865 | | | 45,015 |
Accrued liabilities and other | | | 169,193 | | | 144,327 | | | 51,590 | | | 63,538 |
Taxes payable | | | 63,822 | | | 50,052 | | | 28,771 | | | 39,547 |
Accrued interest | | | 67,913 | | | 44,405 | |
Deferred income taxes | | | 47,545 | | | 648 | |
Derivative liabilities | | | | 132,525 | | | 17,628 |
Accrued employee compensation and benefits | | | | 30,360 | | | 31,134 |
Liabilities related to assets held for sale | | | | - | | | 538 |
Total current liabilities | | | 1,208,516 | | | 777,685 | | | 1,553,328 | | | 478,331 |
Long-term debt | | | 5,628,782 | | | 2,653,834 | | | 2,764,716 | | | 3,535,303 |
Deferred income taxes | | | 1,230,630 | | | 1,278,030 | | | - | | | 475,689 |
Production Participation Plan liability | | | - | | | 87,503 | |
Asset retirement obligations | | | 167,741 | | | 116,442 | | | 129,206 | | | 168,504 |
Deferred gain on sale | | | 60,305 | | | 79,065 | |
Other long-term liabilities | | | 20,486 | | | 4,212 | | | 36,642 | | | 69,123 |
Total liabilities | | | 8,316,460 | | | 4,996,771 | | | 4,483,892 | | | 4,726,950 |
Commitments and contingencies | | | | | | | | | | | | |
Equity: | | | | | | | | | | | | |
Common stock, $0.001 par value, 300,000,000 shares authorized; 168,346,020 issued and 166,889,152 outstanding as of December 31, 2014 and 120,101,555 issued and 118,657,245 outstanding as of December 31, 2013 | | | 168 | | | 120 | |
Common stock, $0.001 par value, 225,000,000 shares authorized; 92,094,837 issued and 90,698,889 outstanding as of December 31, 2017 and 91,793,472 issued and 90,503,482 outstanding as of December 31, 2016 (1) | | | | 92 | | | 367 |
Additional paid-in capital | | | 3,385,094 | | | 1,583,542 | | | 6,405,490 | | | 6,389,435 |
Retained earnings | | | 2,309,712 | | | 2,244,905 | |
Accumulated deficit | | | | (2,486,440) | | | (1,248,572) |
Total Whiting shareholders' equity | | | 5,694,974 | | | 3,828,567 | | | 3,919,142 | | | 5,141,230 |
Noncontrolling interest | | | 8,070 | | | 8,132 | | | - | | | 7,962 |
Total equity | | | 5,703,044 | | | 3,836,699 | | | 3,919,142 | | | 5,149,192 |
TOTAL LIABILITIES AND EQUITY | | $ | 14,019,504 | | $ | 8,833,470 | | $ | 8,403,034 | | $ | 9,876,142 |
| | | | | | | | | | | | |
See notes to consolidated financial statements. | | | | | | | |
_____________________
| (1) | | All share amounts (except par value amounts) as of December 31, 2016 have been retroactively adjusted to reflect the Company’s one-for-four reverse stock split in November 2017, as described in Note 8 to these consolidated financial statements. |
The accompanying notes are an integral part of these consolidated financial statements.
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(in thousands, except per share data)
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended |
| | December 31, |
| | 2014 | | 2013 | | 2012 |
REVENUES AND OTHER INCOME: | | | | | | | | | |
Oil, NGL and natural gas sales | | $ | 3,024,617 | | $ | 2,666,549 | | $ | 2,137,714 |
Gain (loss) on hedging activities | | | - | | | (1,958) | | | 2,338 |
Amortization of deferred gain on sale | | | 30,494 | | | 31,737 | | | 29,458 |
Gain on sale of properties | | | 27,657 | | | 128,648 | | | 3,423 |
Interest income and other | | | 2,329 | | | 3,409 | | | 519 |
Total revenues and other income | | | 3,085,097 | | | 2,828,385 | | | 2,173,452 |
COSTS AND EXPENSES: | | | | | | | | | |
Lease operating | | | 496,925 | | | 430,221 | | | 376,424 |
Production taxes | | | 253,008 | | | 225,403 | | | 171,625 |
Depreciation, depletion and amortization | | | 1,089,545 | | | 891,516 | | | 684,724 |
Exploration and impairment | | | 854,430 | | | 453,210 | | | 166,972 |
General and administrative | | | 177,211 | | | 137,994 | | | 108,573 |
Interest expense | | | 170,642 | | | 112,936 | | | 75,210 |
Loss on early extinguishment of debt | | | - | | | 4,412 | | | - |
Change in Production Participation Plan liability | | | - | | | (6,980) | | | 13,824 |
Commodity derivative (gain) loss, net | | | (100,579) | | | 7,802 | | | (85,911) |
Total costs and expenses | | | 2,941,182 | | | 2,256,514 | | | 1,511,441 |
INCOME BEFORE INCOME TAXES | | | 143,915 | | | 571,871 | | | 662,011 |
INCOME TAX EXPENSE (BENEFIT): | | | | | | | | | |
Current | | | 2,625 | | | 986 | | | (669) |
Deferred | | | 76,545 | | | 204,882 | | | 248,581 |
Total income tax expense | | | 79,170 | | | 205,868 | | | 247,912 |
NET INCOME | | | 64,745 | | | 366,003 | | | 414,099 |
Net loss attributable to noncontrolling interests | | | 62 | | | 52 | | | 90 |
NET INCOME AVAILABLE TO SHAREHOLDERS | | | 64,807 | | | 366,055 | | | 414,189 |
Preferred stock dividends | | | - | | | (538) | | | (1,077) |
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS | | $ | 64,807 | | $ | 365,517 | | $ | 413,112 |
EARNINGS PER COMMON SHARE: | | | | | | | | | |
Basic | | $ | 0.53 | | $ | 3.09 | | $ | 3.51 |
Diluted | | $ | 0.53 | | $ | 3.06 | | $ | 3.48 |
WEIGHTED AVERAGE SHARES OUTSTANDING: | | | | | | | | | |
Basic | | | 122,138 | | | 118,260 | | | 117,601 |
Diluted | | | 122,519 | | | 119,588 | | | 119,028 |
| | | | | | | | | |
See notes to consolidated financial statements. | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
OPERATING REVENUES | | | | | | | | | |
Oil, NGL and natural gas sales | | $ | 1,481,435 | | $ | 1,284,982 | | $ | 2,092,482 |
OPERATING EXPENSES | | | | | | | | | |
Lease operating expenses | | | 366,880 | | | 395,135 | | | 555,392 |
Production taxes | | | 123,483 | | | 108,715 | | | 183,035 |
Depreciation, depletion and amortization | | | 948,939 | | | 1,171,582 | | | 1,243,293 |
Exploration and impairment | | | 936,177 | | | 121,468 | | | 1,881,671 |
Goodwill impairment | | | - | | | - | | | 873,772 |
General and administrative | | | 124,288 | | | 146,878 | | | 172,616 |
Derivative (gain) loss, net | | | 122,847 | | | (587) | | | (217,972) |
Loss on sale of properties | | | 401,113 | | | 184,567 | | | 60,791 |
Amortization of deferred gain on sale | | | (12,963) | | | (14,570) | | | (16,751) |
Total operating expenses | | | 3,010,764 | | | 2,113,188 | | | 4,735,847 |
LOSS FROM OPERATIONS | | | (1,529,329) | | | (828,206) | | | (2,643,365) |
OTHER INCOME (EXPENSE) | | | | | | | | | |
Interest expense | | | (191,088) | | | (557,620) | | | (334,125) |
Loss on extinguishment of debt | | | (1,540) | | | (42,236) | | | (18,361) |
Interest income and other | | | 1,316 | | | 1,292 | | | 2,356 |
Total other expense | | | (191,312) | | | (598,564) | | | (350,130) |
LOSS BEFORE INCOME TAXES | | | (1,720,641) | | | (1,426,770) | | | (2,993,495) |
INCOME TAX BENEFIT | | | | | | | | | |
Current | | | (7,291) | | | (7,190) | | | (357) |
Deferred | | | (475,688) | | | (80,456) | | | (773,870) |
Total income tax benefit | | | (482,979) | | | (87,646) | | | (774,227) |
NET LOSS | | | (1,237,662) | | | (1,339,124) | | | (2,219,268) |
Net loss attributable to noncontrolling interests | | | 14 | | | 22 | | | 86 |
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS | | $ | (1,237,648) | | $ | (1,339,102) | | $ | (2,219,182) |
LOSS PER COMMON SHARE (1) | | | | | | | | | |
Basic | | $ | (13.65) | | $ | (21.27) | | $ | (45.41) |
Diluted | | $ | (13.65) | | $ | (21.27) | | $ | (45.41) |
WEIGHTED AVERAGE SHARES OUTSTANDING (1) | | | | | | | | | |
Basic | | | 90,683 | | | 62,967 | | | 48,868 |
Diluted | | | 90,683 | | | 62,967 | | | 48,868 |
_____________________
| (1) | | All share and per share amounts have been retroactively adjusted for the 2015 and 2016 periods to reflect the Company’s one-for-four reverse stock split in November 2017, as described in Note 8 to these consolidated financial statements. |
The accompanying notes are an integral part of these consolidated financial statements.
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMEN68TS OF COMPREHENSIVE INCOME
(in thousands)
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended |
| | December 31, |
| | 2014 | | 2013 | | 2012 |
NET INCOME | | $ | 64,745 | | $ | 366,003 | | $ | 414,099 |
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: | | | | | | | | | |
OCI amortization on de-designated hedges (1) (2) | | | - | | | 1,236 | | | (1,476) |
Total other comprehensive income (loss), net of tax | | | - | | | 1,236 | | | (1,476) |
COMPREHENSIVE INCOME | | | 64,745 | | | 367,239 | | | 412,623 |
Comprehensive loss attributable to noncontrolling interest | | | 62 | | | 52 | | | 90 |
COMPREHENSIVE INCOME ATTRIBUTABLE TO WHITING | | $ | 64,807 | | $ | 367,291 | | $ | 412,713 |
_____________________
| (1)
| | Presented net of income tax expense of $722 for the year ended December 31, 2013 and an income tax benefit of $862 for the year ended December 31, 2012.
|
| (2)
| | These OCI amortization amounts on de-designated hedges are reclassified from accumulated other comprehensive income (“AOCI”) to gain (loss) on hedging activities in the consolidated statements of income.
|
See notes to consolidated financial statements.
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended |
| | December 31, |
| | 2014 | | 2013 | | 2012 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Net income | | $ | 64,745 | | $ | 366,003 | | $ | 414,099 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
Depreciation, depletion and amortization | | | 1,089,545 | | | 891,516 | | | 684,724 |
Deferred income tax expense | | | 76,545 | | | 204,882 | | | 248,581 |
Amortization of debt issuance costs and debt premium | | | 11,984 | | | 12,405 | | | 9,518 |
Stock-based compensation | | | 23,258 | | | 22,436 | | | 18,190 |
Amortization of deferred gain on sale | | | (30,494) | | | (31,737) | | | (29,458) |
Gain on sale of properties | | | (27,657) | | | (128,648) | | | (3,423) |
Undeveloped leasehold and oil and gas property impairments | | | 767,627 | | | 358,455 | | | 107,855 |
Exploratory dry hole costs | | | 26,327 | | | 28,725 | | | 18,428 |
Loss on early extinguishment of debt | | | - | | | 4,412 | | | - |
Change in Production Participation Plan liability | | | - | | | (6,980) | | | 13,824 |
Non-cash portion of derivative gains | | | (57,465) | | | (20,830) | | | (115,733) |
Other, net | | | (9,030) | | | (16,118) | | | (18,708) |
Changes in current assets and liabilities: | | | | | | | | | |
Accounts receivable trade, net | | | 17,618 | | | (22,912) | | | (55,750) |
Prepaid expense and other | | | (50,352) | | | (15,981) | | | 2,535 |
Accounts payable trade and accrued liabilities | | | (86,480) | | | 33,360 | | | 58,647 |
Revenues and royalties payable | | | (1,963) | | | 48,988 | | | 45,798 |
Taxes payable | | | 1,094 | | | 16,769 | | | 2,088 |
Net cash provided by operating activities | | | 1,815,302 | | | 1,744,745 | | | 1,401,215 |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
Drilling and development capital expenditures | | | (2,842,837) | | | (2,349,819) | | | (2,050,029) |
Acquisition of oil and gas properties, net of cash acquired | | | (45,573) | | | (422,923) | | | (125,282) |
Other property and equipment | | | (79,955) | | | (45,304) | | | 3,852 |
Proceeds from sale of oil and gas properties | | | 107,848 | | | 968,606 | | | 69,190 |
Net proceeds from sale of 18,400,000 units in Whiting USA Trust II | | | - | | | - | | | 322,257 |
Issuance of note receivable | | | - | | | (10,530) | | | (306) |
Cash paid for investing derivatives | | | - | | | (44,900) | | | - |
Cash settlements received on investing derivatives | | | - | | | 2,371 | | | - |
Net cash used in investing activities | | | (2,860,517) | | | (1,902,499) | | | (1,780,318) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Issuance of 5% Senior Notes due 2019 | | | - | | | 1,100,000 | | | - |
Issuance of 5.75% Senior Notes due 2021 | | | - | | | 1,204,000 | | | - |
Redemption of 7% Senior Subordinated Notes due 2014 | | | - | | | (253,988) | | | - |
Borrowings under credit agreement | | | 2,150,000 | | | 1,860,000 | | | 2,340,000 |
Repayments of borrowings under credit agreement | | | (1,675,000) | | | (3,060,000) | | | (1,920,000) |
Repayment of tax sharing liability | | | (26,373) | | | (1,759) | | | (2,329) |
Debt issuance costs | | | (14,901) | | | (29,690) | | | (2,807) |
Restricted stock used for tax withholdings | | | (11,652) | | | (5,611) | | | (5,695) |
Proceeds from stock options exercised | | | 1,781 | | | - | | | - |
Preferred stock dividends paid | | | - | | | (538) | | | (1,077) |
Net cash provided by financing activities | | $ | 423,855 | | $ | 812,414 | | $ | 408,092 |
| | | | | | | | | |
See notes to consolidated financial statements. | | | | | | | | | (Continued) |
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | |
Net loss | | $ | (1,237,662) | | $ | (1,339,124) | | $ | (2,219,268) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | |
Depreciation, depletion and amortization | | | 948,939 | | | 1,171,582 | | | 1,243,293 |
Deferred income tax benefit | | | (475,688) | | | (80,456) | | | (773,870) |
Amortization of debt issuance costs, debt discount and debt premium | | | 31,715 | | | 335,569 | | | 46,525 |
Stock-based compensation | | | 21,641 | | | 25,647 | | | 28,098 |
Amortization of deferred gain on sale | | | (12,963) | | | (14,570) | | | (16,751) |
Loss on sale of properties | | | 401,113 | | | 184,567 | | | 60,791 |
Undeveloped leasehold and oil and gas property impairments | | | 899,853 | | | 75,622 | | | 1,738,308 |
Goodwill impairment | | | - | | | - | | | 873,772 |
Exploratory dry hole costs | | | - | | | 134 | | | 9,440 |
Loss on extinguishment of debt | | | 1,540 | | | 42,236 | | | 18,361 |
Non-cash derivative (gain) loss | | | 131,129 | | | 151,151 | | | (1,615) |
Other, net | | | (9,255) | | | (10,185) | | | (9,337) |
Changes in current assets and liabilities: | | | | | | | | | |
Accounts receivable trade, net | | | (110,879) | | | 155,416 | | | 207,367 |
Prepaid expenses and other | | | (444) | | | 586 | | | 54,027 |
Accounts payable trade and accrued liabilities | | | (24,953) | | | (62,774) | | | (117,136) |
Revenues and royalties payable | | | 23,799 | | | (32,185) | | | (74,417) |
Taxes payable | | | (10,776) | | | (8,206) | | | (16,196) |
Net cash provided by operating activities | | | 577,109 | | | 595,010 | | | 1,051,392 |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | |
Drilling and development capital expenditures | | | (830,552) | | | (539,208) | | | (2,455,218) |
Acquisition of oil and gas properties | | | (21,429) | | | (4,718) | | | (28,449) |
Other property and equipment | | | (4,596) | | | (9,255) | | | (13,266) |
Proceeds from sale of oil and gas properties | | | 929,974 | | | 313,355 | | | 514,814 |
Deposit received on properties held for sale | | | - | | | 17,250 | | | - |
Net cash provided by (used in) investing activities | | | 73,397 | | | (222,576) | | | (1,982,119) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | |
Borrowings under credit agreement | | | 1,900,000 | | | 1,310,000 | | | 3,550,000 |
Repayments of borrowings under credit agreement | | | (2,450,000) | | | (1,560,000) | | | (4,150,000) |
Issuance of common stock | | | - | | | - | | | 1,111,148 |
Issuance of 1.25% Convertible Senior Notes due 2020 | | | - | | | - | | | 1,250,000 |
Issuance of 6.625% Senior Notes due 2026 | | | 1,000,000 | | | - | | | - |
Issuance of 6.25% Senior Notes due 2023 | | | - | | | - | | | 750,000 |
Redemption of 6.5% Senior Subordinated Notes due 2018 | | | (275,121) | | | - | | | - |
Redemption of 8.125% Senior Notes due 2019 | | | - | | | - | | | (832,429) |
Redemption of 5.5% Senior Notes due 2021 | | | - | | | - | | | (353,500) |
Redemption of 5.5% Senior Notes due 2022 | | | - | | | - | | | (404,000) |
Early conversion payments for New Convertible Notes | | | - | | | (41,919) | | | - |
Debt and equity issuance costs | | | (13,150) | | | (22,499) | | | (54,461) |
Proceeds from stock options exercised | | | - | | | - | | | 3,048 |
Restricted stock used for tax withholdings | | | (6,081) | | | (844) | | | (1,126) |
Net cash provided by (used in) financing activities | | $ | 155,648 | | $ | (315,262) | | $ | 868,680 |
| | | | | | | | | |
| | | | | | | | | (Continued) |
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended |
| | December 31, |
| | 2014 | | 2013 | | 2012 |
NET CHANGE IN CASH AND CASH EQUIVALENTS | | $ | (621,360) | | $ | 654,660 | | $ | 28,989 |
CASH AND CASH EQUIVALENTS: | | | | | | | | | |
Beginning of period | | | 699,460 | | | 44,800 | | | 15,811 |
End of period | | $ | 78,100 | | $ | 699,460 | | $ | 44,800 |
SUPPLEMENTAL CASH FLOW DISCLOSURES: | | | | | | | | | |
Income taxes paid (refunded), net | | $ | 1,380 | | $ | 3,681 | | $ | (268) |
Interest paid, net of amounts capitalized | | $ | 135,150 | | $ | 66,541 | | $ | 68,005 |
NONCASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | | |
Accrued capital expenditures related to property additions | | $ | 429,970 | | $ | 158,739 | | $ | 110,663 |
Fair value of equity issued and debt assumed in the Kodiak Acquisition | | $ | 4,289,088 | | $ | - | | $ | - |
| | | | | | | | | |
See notes to consolidated financial statements. | | | | | | | | | (Concluded) |
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | $ | 806,154 | | $ | 57,172 | | $ | (62,047) |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | | | | | | | |
Beginning of period | | | 73,225 | | | 16,053 | | | 78,100 |
End of period | | $ | 879,379 | | $ | 73,225 | | $ | 16,053 |
SUPPLEMENTAL CASH FLOW DISCLOSURES | | | | | | | | | |
Income taxes paid (refunded), net | | $ | 49 | | $ | (1,044) | | $ | (604) |
Interest paid, net of amounts capitalized | | $ | 163,151 | | $ | 239,963 | | $ | 292,582 |
NONCASH INVESTING ACTIVITIES | | | | | | | | | |
Accrued capital expenditures and accounts payable related to property additions | | $ | 80,762 | | $ | 65,052 | | $ | 94,105 |
NONCASH FINANCING ACTIVITIES (1) | | | | | | | | | |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. | | | | | | (Concluded) |
| (1) | | Refer to the “Long-Term Debt” footnote in the notes to consolidated financial statements for a discussion of (i) the Company’s exchange of senior notes and senior subordinated notes for convertible notes and the subsequent conversions of such notes, and (ii) the Company’s exchange of senior notes, convertible senior notes and senior subordinated notes for mandatory convertible notes and the subsequent conversions of such notes. |
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | | | Total | | | | | | |
| | | | | | | | | | | | Additional | | Other | | | | | Whiting | | | | | | |
| | Preferred Stock | | Common Stock | | Paid-in | | Comprehensive | | Retained | | Shareholders' | | Noncontrolling | | Total |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Income (Loss) | | Earnings | | Equity | | Interest | | Equity |
BALANCES-January 1, 2012 | | 172 | | $ | - | | 118,105 | | $ | 118 | | $ | 1,554,223 | | $ | 240 | | $ | 1,466,276 | | $ | 3,020,857 | | $ | 8,274 | | $ | 3,029,131 |
Net income (loss) | | - | | | - | | - | | | - | | | - | | | - | | | 414,189 | | | 414,189 | | | (90) | | | 414,099 |
Other comprehensive income | | - | | | - | | - | | | - | | | - | | | (1,476) | | | - | | | (1,476) | | | - | | | (1,476) |
Restricted stock issued | | - | | | - | | 592 | | | 1 | | | (1) | | | - | | | - | | | - | | | - | | | - |
Restricted stock forfeited | | - | | | - | | (9) | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Restricted stock used for tax withholdings | | - | | | - | | (106) | | | - | | | (5,695) | | | - | | | - | | | (5,695) | | | - | | | (5,695) |
Stock-based compensation | | - | | | - | | - | | | - | | | 18,190 | | | - | | | - | | | 18,190 | | | - | | | 18,190 |
Preferred dividends paid | | - | | | - | | - | | | - | | | - | | | - | | | (1,077) | | | (1,077) | | | - | | | (1,077) |
BALANCES-December 31, 2012 | | 172 | | | - | | 118,582 | | | 119 | | | 1,566,717 | | | (1,236) | | | 1,879,388 | | | 3,444,988 | | | 8,184 | | | 3,453,172 |
Net income (loss) | | - | | | - | | - | | | - | | | - | | | - | | | 366,055 | | | 366,055 | | | (52) | | | 366,003 |
Other comprehensive income | | - | | | - | | - | | | - | | | - | | | 1,236 | | | - | | | 1,236 | | | - | | | 1,236 |
Conversion of preferred stock to common | | (172) | | | - | | 794 | | | 1 | | | - | | | - | | | - | | | 1 | | | - | | | 1 |
Restricted stock issued | | - | | | - | | 941 | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Restricted stock forfeited | | - | | | - | | (100) | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Restricted stock used for tax withholdings | | - | | | - | | (115) | | | - | | | (5,611) | | | - | | | - | | | (5,611) | | | - | | | (5,611) |
Stock-based compensation | | - | | | - | | - | | | - | | | 22,436 | | | - | | | - | | | 22,436 | | | - | | | 22,436 |
Preferred dividends paid | | - | | | - | | - | | | - | | | - | | | - | | | (538) | | | (538) | | | - | | | (538) |
BALANCES-December 31, 2013 | | - | | | - | | 120,102 | | | 120 | | | 1,583,542 | | | - | | | 2,244,905 | | | 3,828,567 | | | 8,132 | | | 3,836,699 |
Net income (loss) | | - | | | - | | - | | | - | | | - | | | - | | | 64,807 | | | 64,807 | | | (62) | | | 64,745 |
Issuance of common stock for the Kodiak Acquisition | | - | | | - | | 47,546 | | | 48 | | | 1,771,046 | | | - | | | - | | | 1,771,094 | | | - | | | 1,771,094 |
Fair value of restricted stock units assumed in the Kodiak Acquisition | | - | | | - | | 258 | | | - | | | 9,596 | | | - | | | - | | | 9,596 | | | - | | | 9,596 |
Fair value of stock options assumed in the Kodiak Acquisition | | - | | | - | | - | | | - | | | 7,523 | | | - | | | - | | | 7,523 | | | - | | | 7,523 |
Exercise of stock options | | - | | | - | | 117 | | | - | | | 1,781 | | | - | | | - | | | 1,781 | | | - | | | 1,781 |
Restricted stock issued | | - | | | - | | 908 | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Restricted stock forfeited | | - | | | - | | (386) | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Restricted stock used for tax withholdings | | - | | | - | | (199) | | | - | | | (11,652) | | | - | | | - | | | (11,652) | | | - | | | (11,652) |
Stock-based compensation | | - | | | - | | - | | | - | | | 23,258 | | | - | | | - | | | 23,258 | | | - | | | 23,258 |
BALANCES-December 31, 2014 | | - | | $ | - | | 168,346 | | $ | 168 | | $ | 3,385,094 | | $ | - | | $ | 2,309,712 | | $ | 5,694,974 | | $ | 8,070 | | $ | 5,703,044 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Retained | | Total | | | | | | |
| | | | | | | Additional | | Earnings | | Whiting | | | | | | |
| | Common Stock | | Paid-in | | (Accumulated | | Shareholders' | | Noncontrolling | | Total |
| | Shares (1) | | Amount | | Capital | | Deficit) | | Equity | | Interest | | Equity |
BALANCES-January 1, 2015 | | 42,087 | | $ | 168 | | $ | 3,385,094 | | $ | 2,309,712 | | $ | 5,694,974 | | $ | 8,070 | | $ | 5,703,044 |
Net loss | | - | | | - | | | - | | | (2,219,182) | | | (2,219,182) | | | (86) | | | (2,219,268) |
Issuance of common stock | | 9,250 | | | 37 | | | 1,100,000 | | | - | | | 1,100,037 | | | - | | | 1,100,037 |
Equity component of 2020 Convertible Senior Notes, net | | - | | | - | | | 144,755 | | | - | | | 144,755 | | | - | | | 144,755 |
Exercise of stock options | | 37 | | | - | | | 3,048 | | | - | | | 3,048 | | | - | | | 3,048 |
Restricted stock issued | | 304 | | | 1 | | | (1) | | | - | | | - | | | - | | | - |
Restricted stock forfeited | | (58) | | | - | | | - | | | - | | | - | | | - | | | - |
Restricted stock used for tax withholdings | | (10) | | | - | | | (1,126) | | | - | | | (1,126) | | | - | | | (1,126) |
Stock-based compensation | | - | | | - | | | 28,098 | | | - | | | 28,098 | | | - | | | 28,098 |
BALANCES - December 31, 2015 | | 51,610 | | | 206 | | | 4,659,868 | | | 90,530 | | | 4,750,604 | | | 7,984 | | | 4,758,588 |
Net loss | | - | | | - | | | - | | | (1,339,102) | | | (1,339,102) | | | (22) | | | (1,339,124) |
Issuance of common stock upon conversion of convertible notes | | 39,386 | | | 158 | | | 1,535,296 | | | - | | | 1,535,454 | | | - | | | 1,535,454 |
Reduction of equity component of 2020 Convertible Senior Notes upon extinguishment, net | | - | | | - | | | (63,330) | | | - | | | (63,330) | | | - | | | (63,330) |
Recognition of beneficial conversion features on convertible notes | | - | | | - | | | 232,801 | | | - | | | 232,801 | | | - | | | 232,801 |
Restricted stock issued | | 1,005 | | | 4 | | | (4) | | | - | | | - | | | - | | | - |
Restricted stock forfeited | | (182) | | | (1) | | | 1 | | | - | | | - | | | - | | | - |
Restricted stock used for tax withholdings | | (26) | | | - | | | (844) | | | - | | | (844) | | | - | | | (844) |
Stock-based compensation | | - | | | - | | | 25,647 | | | - | | | 25,647 | | | - | | | 25,647 |
BALANCES - December 31, 2016 | | 91,793 | | | 367 | | | 6,389,435 | | | (1,248,572) | | | 5,141,230 | | | 7,962 | | | 5,149,192 |
Net loss | | - | | | - | | | - | | | (1,237,648) | | | (1,237,648) | | | (14) | | | (1,237,662) |
Conveyance of third party ownership interest in Sustainable Water Resources, LLC | | - | | | - | | | - | | | - | | | - | | | (7,948) | | | (7,948) |
Reverse stock split | | - | | | (276) | | | 276 | | | - | | | - | | | - | | | - |
Restricted stock issued | | 707 | | | 2 | | | (2) | | | - | | | - | | | - | | | - |
Restricted stock forfeited | | (261) | | | (1) | | | 1 | | | - | | | - | | | - | | | - |
Restricted stock used for tax withholdings | | (144) | | | - | | | (6,081) | | | - | | | (6,081) | | | - | | | (6,081) |
Stock-based compensation | | - | | | - | | | 21,641 | | | - | | | 21,641 | | | - | | | 21,641 |
Cumulative effect of change in accounting principle | | - | | | - | | | 220 | | | (220) | | | - | | | - | | | - |
BALANCES - December 31, 2017 | | 92,095 | | $ | 92 | | $ | 6,405,490 | | $ | (2,486,440) | | $ | 3,919,142 | | $ | - | | $ | 3,919,142 |
_____________________
| (1) | | All common share amounts have been retroactively adjusted for the 2015 and 2016 periods to reflect the Company’s one-for-four reverse stock split in November 2017, as described in Note 8 to these consolidated financial statements. |
The accompanying notes are an integral part of these consolidated financial statements.
WHITING PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations—Whiting Petroleum Corporation, a Delaware corporation, is an independent oil and gas company that explores for, develops, acquiresengaged in the development, production, acquisition and producesexploration of crude oil, NGLs and natural gas primarily in the Rocky Mountains and Permian Basin regionsregion of the United States. Unless otherwise specified or the context otherwise requires, all references in these notes to “Whiting” or the “Company” are to Whiting Petroleum Corporation and its consolidated subsidiaries.subsidiaries, Whiting Oil and Gas Corporation (“Whiting Oil and Gas”), Whiting US Holding Company, Whiting Canadian Holding Company ULC (formerly Kodiak Oil & Gas Corp., “Kodiak”), Whiting Resources Corporation and Whiting Programs, Inc.
Basis of Presentation of Consolidated Financial Statements—The consolidated financial statements have been prepared in accordance with GAAP and SEC rules and regulations and include the accounts of Whiting Petroleum Corporation, its consolidated subsidiaries and Whiting’s pro rata share of the accounts of Whiting USA Trust I (“Trust I”) pursuant to Whiting’s 15.8% ownership interest in TrustI. On January 28, 2015, the net profits interest that Whiting conveyed to Trust I terminated and such interest in the underlying properties reverted back to Whiting. Investments in entities which give Whiting significant influence, but not control, over the investee are accounted for using the equity method. Under the equity method, investments are stated at cost plus the Company’s equity in undistributed earnings and losses. All intercompany balances and transactions have been eliminated upon consolidation.
Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principlesGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Items subject to such estimates and assumptions include (1)(i) oil and natural gas reserves; (2) cash flow estimates used in(ii) impairment tests of long-lived assets; (3)(iii) depreciation, depletion and amortization; (4)(iv) asset retirement obligations; (5) assigning(v) assignment of fair value and allocatingallocation of purchase price in connection with business combinations, including the determination of any resulting goodwill; (6)(vi) valuations of the Company’s reporting unit used in impairment tests of goodwill; (vii) income taxes; (7)(viii) accrued liabilities; (8)(ix) valuation of derivative instruments; and (9)(x) accrued revenue and related receivables. Although management believes these estimates are reasonable, actual results could differ from these estimates.
Reclassifications—Certain prior period balances in the consolidated balance sheets have been reclassified to conform to the current year presentation. Such reclassifications had no impact on net income, cash flows or shareholders’ equity previously reported.
Cash, and Cash Equivalents and Restricted Cash—Cash equivalents consist of demand deposits and highly liquid investments which have an original maturity of three months or less.
Restricted cash at December 31, 2016 related to a deposit received in connection with the sale of Whiting’s interests in the Robinson Lake and Belfield gas processing plants. The use of these funds was restricted per the terms of the purchase agreement until the sale transaction closed on January1, 2017. Refer to the “Acquisition and Divestitures” footnote for further information on this transaction.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets and the consolidated statements of cash flows:
| | | | | | |
| | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Cash and cash equivalents | | $ | 879,379 | | $ | 55,975 |
Restricted cash | | | - | | | 17,250 |
Total cash, cash equivalents and restricted cash | | $ | 879,379 | | $ | 73,225 |
Accounts Receivable Trade—Whiting’s accounts receivable trade consist mainly of receivables from oil and gas purchasers and joint interest owners on properties the Company operates. For receivables from joint interest owners, Whiting typically has the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings. Generally, the Company’s oil and gas receivables are collected within two months, and to date, the Company has had minimal bad debts.
The Company routinely assesses the recoverability of all material trade and other receivables to determine their collectability. At December 31, 20142017 and 2013,2016, the Company had an allowance for doubtful accounts of $9$17 million and $4$10 million, respectively.
Inventories—Materials and supplies inventories consist primarily of tubular goods and production equipment, carried at weighted-average cost. Materials and supplies are included in other property and equipment.equipment and totaled $24 million and $33 million as of December 31, 2017 and 2016, respectively. Crude oil in tanks inventory is carried at the lower of the estimated cost to produce or market value andnet
realizable value. Oil in tanks is included in prepaid expenses and other.other and totaled $7 million and $8 million as of December 31, 2017 and 2016, respectively.
Oil and Gas Properties
Proved. The Company follows the successful efforts method of accounting for its oil and gas properties. Under this method of accounting, all property acquisition costs and development costs are capitalized when incurred and depleted on a units-of-productionunit-of-production basis over the remaining life of proved reserves and proved developed reserves, respectively. Costs of drilling exploratory wells are initially capitalized but are charged to expense if the well is determined to be unsuccessful.
The Company assesses its proved oil and gas properties for impairment whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. The impairment test compares undiscounted future net cash flows to the assets’ net book value. If the net capitalized costs exceed future net cash flows, then the cost of the property is written down to fair value. Fair value for oil and gas properties is generally determined based on discounted future net cash flows. Impairment expense for proved properties totaled $835 million and $1.6 billion for the years ended December 31, 2017 and 2015, respectively, which is reported in exploration and impairment expense.
Net carrying values of retired, sold or abandoned properties that constitute less than a complete unit of depreciable property are charged or credited, net of proceeds, to accumulated depreciation, depletion and amortization unless doing so significantly affects the unit-of-production amortization rate, in which case a gain or loss is recognized in income. Gains or losses from the disposal of complete units of depreciable property are recognized to earnings.
Interest cost is capitalized as a component of property cost for development projects that require greater than six months to be readied for their intended use. During 2014, 20132017, 2016 and 2012,2015, the Company capitalized interest of $4$0.1 million, $2$0.1 million and $3$4 million, respectively.
Unproved. Unproved properties consist of costs to acquire undeveloped leases as well as purchases of unproved reserves. Undeveloped lease costs and unproved reserve acquisitions are capitalized, and individually insignificant unproved properties are amortized on a composite basis, based on past success, past experience and average lease-term lives.lives and the historical experience of developing acreage in a particular prospect. The Company evaluates significant unproved properties for impairment based on remaining lease term, drilling results, reservoir performance, seismic interpretation or future plans to develop acreage. When successful wells are drilled on undeveloped leaseholds, unproved property costs are reclassified to proved properties and depleted on a unit-of-production basis. Impairment expense for unproved properties totaled $59 million, $73 million and $135 million for the years ended December 31, 2017, 2016 and 2015, respectively, which is reported in exploration and impairment expense.
Exploratory. Geological and geophysical costs, including exploratory seismic studies, and the costs of carrying and retaining unproved acreage are expensed as incurred. Costs of seismic studies that are utilized in development drilling within an area of proved reserves are capitalized as development costs. Amounts of seismic costs capitalized are based on only those blocks of data used in determining development well locations. To the extent that a seismic project covers areas of both developmental and exploratory drilling, those seismic costs are proportionately allocated between development costs and exploration expense.
Costs of drilling exploratory wells are initially capitalized, pending determination of whether the well has found proved reserves. If an exploratory well has not found proved reserves, the costs of drilling the well and other associated costs are charged to expense. CostCosts incurred for exploratory wells that find reserves, which cannot yet be classified as proved, continue to be capitalized if (a)(i) the well has found a sufficient quantity of reserves to justify completion as a producing well, and (b)(ii) the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project. If either condition is not met, or if the Company obtains information that raises substantial doubt about the economic or operational viability of the project, the exploratory well costs, net of any salvage value, are expensed.
Enhanced recovery activities. The Company carries out tertiary recovery methods on certain of its oil and gas properties in order to recover additional hydrocarbons that are not recoverable from primary or secondary recovery methods. Acquisition costs of tertiary injectants, such as purchased CO2, for EOR activities that are used during a project’s pilot phase, or prior to a project’s technical and economic viability (i.e. prior to the recognition of proved tertiary recovery reserves) are expensed as incurred. After a project has been determined to be technically feasible and economically viable, all acquisition costs of tertiary injectants are capitalized as development costs and depleted, as they are incurred solely for obtaining access to reserves not otherwise recoverable and have future economic benefits over the life of the project. As CO2 is recovered together with oil and gas production, it is extracted and re-injected, and all the associated CO2 recycling costs are expensed as incurred. Likewise costs incurred to maintain reservoir pressure are also expensed.
Other Property and Equipment—Other property and equipment consists of (i) materials and supplies inventories, (ii) leasehold costscarried at weighted-average cost, and development costs of our CO2 source properties and (iii) other property and equipment including, furniture and fixtures, buildings, leasehold improvements and automobiles, which are stated at cost and depreciated using the straight-line method over their estimated useful lives ranging from 4 to 30 years.
Goodwill—Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in a business combination.combinations. Goodwill has an indefinite useful life and is not amortized, but rather is tested by the Company for impairment annually in the second quarter or whenwhenever events or changes in circumstances indicate that the fair value of athe reporting unit hasmay have been reduced below its carrying value. If
The Company performed its annual goodwill impairment test as of June 30, 2015, and determined that no impairment had occurred. However, as a result of a sustained decrease in the Company’s qualitative analysis indicatesprice of Whiting’s common stock during the third quarter of 2015 caused by a significant decline in crude oil and natural gas prices over that it is more likely than notsame period, the Company performed another goodwill impairment test
as of September 30, 2015. The impairment test performed by the Company indicated that the fair value of theits reporting unit iswas less than its carrying amount, and further that there was no remaining implied fair value attributable to goodwill. Based on these results, the Company then performsrecorded a quantitativenon-cash impairment test. Ifcharge to reduce the carrying value of the reporting unit exceeds its fair value, goodwill is written down to its implied fair value with an offsetting charge to earnings.zero.
Debt Issuance Costs—Debt issuance costs related to the Company’s Senior Notessenior notes, convertible senior notes and Senior Subordinated Notessenior subordinated notes are included as a deduction from the carrying amount of long-term debt in the consolidated balance sheets and are amortized to interest expense using the effective interest method over the term of the related debt. Debt issuance costs related to the credit facility are included in other long-term assets and are amortized to interest expense on a straight-line basis over the borrowing term.term of the agreement.
Debt Discounts and Premiums—Debt discounts and premiums related to the Company’s senior notes and convertible notes are included as a deduction from or addition to the carrying amount of the long-term debt in the consolidated balance sheets and are amortized to interest expense using the effective interest method over the term of the related notes.
Derivative Instruments—The Company enters into derivative contracts, primarily costless collars and swap contracts,swaps, to manage its exposure to commodity price risk. Whiting follows FASB ASC Topic 815, Derivatives and Hedging, to account for its derivative financial instruments. All derivative instruments, other than those that meet the “normal purchase normal sale” exclusion, are recorded on the balance sheet as either an asset or liability measured at fair value. Gains and losses from changes in the fair value of derivative instruments are recognized immediately in earnings, unless the derivative meets specific hedge accounting criteria and the derivative has been designated as a hedge. Effective April 1, 2009, however, theThe Company elected to discontinue alldoes not currently apply hedge accounting prospectively,to any of its outstanding derivative instruments, and as of December 31, 2013,a result, all amounts related to de-designated cash flow hedges had been reclassified intochanges in derivative fair values are recognized currently in earnings.
Cash flows from derivatives used to manage commodity price risk are classified in operating activities along with the cash flows of the underlying hedged transactions. The Company does not enter into derivative instruments for speculative or trading purposes. Refer to the “Derivative Financial Instruments” footnote for further information.
Asset Retirement Obligations and Environmental Costs—Asset retirement obligations relate to future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage and returning such land to its original condition. The Company follows FASB ASC Topic 410, Asset Retirement and Environmental Obligations, to determine its asset retirement obligation amounts by calculating the present value of the estimated future cash outflows associated with its plug and abandonment obligations. The fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred (typically when a well is completed or acquired or when an asset is installed at the production location), and the cost of such liability increases the carrying amount of the related long-lived asset by the same amount. The liability is accreted each period through charges to depreciation, depletion and amortization expense, and the capitalized cost is depleted on a units-of-productionunit-of-production basis over the proved developed reserves of the related asset. Revisions typically occur due to changes in estimated retirement obligationsabandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells, and such revisions result in adjustments to the related capitalized asset and corresponding liability.
Liabilities for environmental costs are recorded on an undiscounted basis when it is probable that obligations have been incurred and the amounts can be reasonably estimated. These liabilities are not reduced by possible recoveries from third parties.
Deferred Gain on Sale—The deferred gain on sale relates to the sale of 11,677,500 Trust I units and 18,400,000 Whiting USA Trust II (“Trust II”) units, and is amortized to income based on the units-of-productionunit-of-production method.
Revenue Recognition—Oil and gas revenues are recognized when production volumes are sold to a purchaser at a fixed or determinable price, delivery has occurred and title has transferred, persuasive evidence of a sales arrangement exists and collectability of the revenue is probable.reasonably assured. Revenues from the production of gas properties in which the Company has an interest with other producers are recognized on the basis of the Company’s net working interest (entitlement method). Net deliveries in excess of entitled amounts are recorded as liabilities, while net under deliveries are reflected as receivables. The Company’s aggregate imbalance positions as of December 31, 20142017 and 20132016 were not significant.
Taxes collected and remitted to governmental agencies on behalf of customers are not included in revenues or costs and expenses.
General and Administrative Expenses—General and administrative expenses are reported net of reimbursements of overhead costs that are allocated to the working interest owners whichthat participate in oil and gas properties operated by Whiting.
Stock-based Compensation Expense—The Company has share-based employee compensation plans that provide for the issuance of various types of stock-based awards, including shares of restricted stock, restricted stock units and stock options, to employees and non-employee directors. The Company determines compensation expense for restricted stock awards and options granted under these plans based on the grant date fair value, and such expense is recognized on a straight-line basis over the requisite service period of the award. The Company determines compensation expense for cash-settled restricted stock units granted under these plans based on the fair value of such awards at the end of each reporting period, and such awards are recorded as a liability in the consolidated balance sheets. Gains
and losses from changes in the fair value of restricted stock units are recognized immediately in earnings. The Company accounts for forfeitures of share-based awards as they occur. Refer to the “Stock-Based Compensation” footnote for further information.
401(k) Plan—The Company has a defined contribution retirement plan for all employees. The plan is funded by employee contributions and discretionary Company contributions. The Company’s contributions for 2017, 2016 and 2015 were $8 million, $8 million and $12 million, respectively. Employees vest in employer contributions at 20% per year of completed service.
Acquisition Costs—Acquisition related expenses, which consist of external costs directly related to the Company’s acquisitions, such as advisory, legal, accounting, valuation and other professional fees, are expensed as incurred.
Maintenance and Repairs—Maintenance and repair costs whichthat do not extend the useful lives of property and equipment are charged to expense as incurred. Major replacements, renewals and betterments are capitalized.
Income Taxes—Income taxes are recognized based on earnings reported for tax return purposes in addition to a provision for deferred income taxes. Deferred income taxes are accounted for using the liability method. Under this method, deferred tax assets and liabilities are determined by applying the enacted statutory tax rates in effect at the end of a reporting period to the cumulative temporary differences between the tax bases of assets and liabilities and their reported amounts in the Company’s financial statements. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance for deferred tax assets is established when it is more likely than not that some portion of the benefit from deferred tax assets will not be realized. The Company’s uncertain tax positions must meet a more-likely-than-not realization threshold to be recognized, and any potential accrued interest and penalties related to unrecognized tax benefits are recognized within income tax expense.
Earnings Per Share—Basic earnings per common share is calculated by dividing net income availableattributable to common shareholders by the weighted average number of common shares outstanding during each period. Diluted earnings per common share is calculated by dividing adjusted net income availableattributable to common shareholders by the weighted average number of diluted common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for the diluted earnings per share calculations consist of unvested restricted stock awards, and outstanding stock options and contingently issuable shares of convertible debt to be settled in cash, all using the treasury method, as well as convertible perpetual preferred stock using the if-converted method. In addition, the computation of diluted earnings per share excess tax benefits that would be created uponcalculation for the assumed vestingyear ended December 31, 2016 considers the effect of unvested restricted shares orconvertible debt issued and converted during 2016, using the assumed exercise of stock options (i.e. hypothetical excess tax benefits) are included in the assumed proceeds component of the treasury shareif-converted method for periods prior to the extent that such excess tax benefits are more likely than not to be realized.their actual conversions. When a loss from continuing operations exists, all dilutive securities and potentially dilutive securities are anti-dilutive and are therefore excluded from the computation of diluted earnings per share.
Industry Segment and Geographic Information—The Company has evaluated how it is organized and managed and has identified only one operating segment, which is the exploration and production of crude oil, NGLs and natural gas. The Company considers its gathering, processing and marketing functions as ancillary to its oil and gas producing activities. All of the Company’s operations and assets are located in the United States, and substantially all of its revenues are attributable to United States customers.
Concentration of Credit Risk—Whiting is exposed to credit risk in the event of nonpayment by counterparties, a significant portion of which are concentrated in energy related industries. The creditworthiness of customers and other counterparties is subject to continuing review. The following table presentstables present the percentages by purchaser that accounted for 10% or more of the Company’s total oil, NGL and natural gas sales for the years ended December 31, 2014, 20132017 and 2012:2016. For the year ended December 31, 2015, no individual purchaser accounted for 10% or more of the Company’s total oil, NGL and natural gas sales.
| | | | | | |
Year Ended December 31, 2017 | | | | | | |
Tesoro Crude Oil Co | | | | | | 18% |
| | | | | | |
| | 2014 | | 2013 | | 2012 |
Plains Marketing LP | | 17% | | 21% | | 20% |
Shell Trading US | | 10% | | 14% | | 14% |
Bridger Trading LLC | | 10% | | 8% | | 11% |
Eighty Eight Oil Company | | 6% | | 11% | | 11% |
| | | | | | |
Year Ended December 31, 2016 | | | | | | |
Tesoro Crude Oil Co | | | | | | 15% |
Jamex Marketing LLC | | | | | | 12% |
Commodity derivative contracts held by the Company are with sevennine counterparties, all of which are participants in Whiting’s credit facility as well, and all of which have investment-grade ratings from Moody’s and Standard & Poor.Poor’s. As of December 31, 2014,2017, outstanding derivative contracts with JP Morgan Chase Bank, N.A., Wells Fargo Bank, N.A., JP Morgan Chase Bank,Capital One, N.A. and Canadian Imperial Bank of CommerceKeyBank, N.A. represented 34%24%, 28%17%, 14% and 13%10%, respectively, of total crude oil volumes hedged.
Reclassifications—Certain prior period balances in the consolidated balance sheets have been reclassified to conform to the current year presentation. Such reclassifications had no impact on net income, cash flows or shareholders’ equity previously reported.
Adopted and Recently Issued Accounting Pronouncements—In February 2013, the FASB issued Accounting Standards Update No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date (“ASU 2013-04”). The objective of ASU 2013-04 is to provide guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. ASU 2013-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company adopted ASU 2013-04 effective January 1, 2014, which did not have an impact on the Company’s consolidated financial statements.
In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). The objective of ASU 2013-11 is to provide guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company adopted ASU 2013-11 effective January 1, 2014, which did not have an impact on the Company’s consolidated financial statements, other than insignificant balance sheet reclassifications.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014‑09”). The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The FASB subsequently issued various ASUs which deferred the effective date of ASU 2014‑09 is2014-09 and provided additional implementation guidance.
ASU 2014-09 and its amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016.2017. The standards permit retrospective application using either of the following methodologies: (i) restatement of each prior reporting period presented or (ii) recognition of a cumulative-effect adjustment as of the date of initial application. The Company adopted these ASUs effective January 1, 2018 using the modified retrospective approach. The Company has completed the assessment of its contracts with customers and is currently evaluatingin the impactprocess of adopting ASU 2014‑09, butimplementing the standard is not expectedchanges to have a significant effect on its consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern (“ASU 2014-15”). The objective of ASU 2014-15 is to provide guidance on management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continuestatements, accounting policies and internal controls as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for fiscal years ending after December 15, 2016, and annual and interim periods thereafter. This standardresult of the adoption of these standards. The adoption is not expected to have an impact on the Company’s net income or cash flows, however, it will result in changes to the classification of fees incurred under certain pipeline gathering and transportation agreements and gas processing agreements, as well as certain costs attributable to non-operated properties, which will result in an overall decrease in total revenues with a corresponding decrease in lease operating expenses under the new standards. In addition, the Company is continuing to assess the additional disclosures that will be required upon implementation of these ASUs.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”). The objective of this ASU is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and should be applied using a modified retrospective approach. Early adoption is permitted. Although the Company is still in the process of evaluating the effect of adopting ASU 2016‑02, the adoption is expected to result in (i) an increase in the assets and liabilities recorded on its consolidated financial statements.balance sheet, (ii) an increase in depreciation, depletion and amortization expense and interest expense recorded on its consolidated statement of operations, and (iii) additional disclosures. As of December 31, 2017, the Company had approximately $73 million of contractual obligations related to its non-cancelable leases, drilling rig contracts and pipeline transportation agreements, and it will evaluate those contracts as well as other existing arrangements to determine if they qualify for lease accounting under ASU 2016-02.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The objective of this ASU is to simplify several aspects of the accounting for employee share-based payment transactions, including income tax consequences, forfeitures, classification of awards as either equity or liabilities and classification in the statement of cash flows. Portions of this ASU must be applied prospectively while other portions may be applied either prospectively or retrospectively. ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, and the Company adopted this standard on January 1, 2017. Upon adoption of ASU 2016-09, the Company (i) recorded previously unrecognized excess tax benefits on a modified retrospective basis with a full valuation allowance, resulting in a net cumulative-effect adjustment to retained earnings of zero, (ii) prospectively removed excess tax benefits from its calculation of diluted shares, which had no impact on the Company’s diluted earnings per share for year ended December 31, 2017, and (iii) elected to account for forfeitures of share-based awards as they occur, rather than by applying an estimated forfeiture rate to determine compensation expense, the effect of which was recognized using a modified retrospective approach and resulted in an immaterial cumulative-effect adjustment to retained earnings and additional paid-in capital.
2. OIL AND GAS PROPERTIES
Net capitalized costs related to the Company’s oil and gas producing activities at December 31, 20142017 and 20132016 are as follows (in thousands):
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2014 | | 2013 | | 2017 | | 2016 |
Proved leasehold costs | | $ | 3,637,026 | | $ | 1,633,495 | | $ | 2,622,576 | | $ | 3,330,928 |
Unproved leasehold costs | | | 1,232,040 | | | 372,298 | | | 137,694 | | | 392,484 |
Costs of completed wells and facilities | | | 9,319,808 | | | 7,563,350 | | | 8,288,591 | | | 9,016,472 |
Wells and facilities in progress | | | 760,828 | | | 496,007 | | | 244,789 | | | 490,967 |
Total oil and gas properties, successful efforts method | | | 14,949,702 | | | 10,065,150 | | | 11,293,650 | | | 13,230,851 |
Accumulated depletion | | | (3,003,270) | | | (2,645,841) | | | (4,185,301) | | | (4,170,237) |
Oil and gas properties, net | | $ | 11,946,432 | | $ | 7,419,309 | | $ | 7,108,349 | | $ | 9,060,614 |
3. ACQUISITIONS AND DIVESTITURES
20142017 Acquisitions and Divestitures
On December 8, 2014,September 1, 2017, the Company completed the acquisitionsale of Kodiak Oil & Gas Corp. (now known as Whiting Canadian Holding Company ULC, “Kodiak”), whereby Whiting acquired all of the outstanding common stock of Kodiak (the “Kodiak Acquisition”). Pursuant to the terms of the Kodiak Acquisition agreement, Kodiak shareholders received 0.177 of a share of Whiting common stock in exchange for each share of Kodiak common stock they owned. Total consideration for the Kodiak Acquisition was $1.8 billion, consisting of 47,546,139 Whiting common shares issued at the market price of $37.25 per share on the date of issuance plus the fair value of Kodiak’s outstanding equity awards assumed by Whiting. The aggregate purchase price of the transaction was $4.3 billion, which includes the assumption of Kodiak’s outstanding debt of $2.5 billion as of December 8, 2014 and the net cash acquired of $19 million.
Kodiak was an independent energy company focused on exploration and production of crude oil and natural gas reserves, primarily in the Williston Basin region of the United States. As a result of the Kodiak Acquisition, Whiting acquired approximately 327,000 gross (178,000 net) acres located primarily in North Dakota, includingits interests in 778certain producing oil and gas wellsproperties located in the Fort Berthold Indian Reservation area in Dunn and undeveloped acreage. Approximately 10,000McLean counties of North Dakota, as well as other related assets and liabilities, (the “FBIR Assets”) for aggregate sales proceeds of $500 million (before closing adjustments). The sale was effective September 1, 2017 and resulted in a pre-tax loss on sale of $402 million. The Company used the net proceeds from the sale to repay a portion of the net acres acquired were located in Wyoming and Colorado.
The acquisition significantly expanded the Company’s presence in the Williston Basin, adding undeveloped acreage, oil and natural gas reserves and production that were complementary todebt outstanding under its existing asset base and operations in this area. As a result of this acquisition, Whiting became the largest Bakken/Three Forks producer in the Williston Basin as of the acquisition date.
The Kodiak Acquisition was accounted for using the acquisition method of accounting for business combinations. The allocation of the preliminary estimated purchase price is based upon management’s estimates and assumptions related to the fair value of assets acquired and liabilities assumedon the acquisition date using currently available information. Transaction costs relating to the Kodiak Acquisition were expensed as incurred. The initial accounting for the Kodiak Acquisition is preliminary, and adjustments to provisional amounts (such as goodwill, certain accrued liabilities and their related deferred taxes), or recognition of additional assets acquired or liabilities assumed, may occur as additional information is obtained about facts and circumstances that existed as of the acquisition date.credit agreement.
On January 1, 2017, the Company completed the sale of its 50% interest in the Robinson Lake gas processing plant located in Mountrail County, North Dakota and its 50% interest in the Belfield gas processing plant located in Stark County, North Dakota, as well as the associated natural gas, crude oil and water gathering systems, effective January 1, 2017, for aggregate sales proceeds of $375 million (before closing adjustments). The preliminary consideration transferred, fair valueCompany used the net proceeds from this transaction to repay a portion of the debt outstanding under its credit agreement.
The following table shows the components of assets acquired and liabilities assumed, and the resulting goodwillclassified as held for sale as of the acquisition date are as followsDecember 31, 2016 (in thousands):
| | | |
| | | |
Consideration:
| | | |
Fair value of Whiting’s common stock issued (1)
| | $
| 1,771,094 |
Fair value of Kodiak restricted stock units assumed by Whiting (2)
| | | 9,596 |
Fair value of Kodiak options assumed by Whiting
| | | 7,523 |
Total consideration
| | $
| 1,788,213 |
| | | |
Fair value of liabilities assumed:
| | | |
Accounts payable trade
| | $
| 18,390 |
Accrued capital expenditures
| | | 104,509 |
Revenues and royalties payable
| | | 57,423 |
Accrued liabilities and other
| | | 45,695 |
Taxes payable
| | | 12,676 |
Accrued interest
| | | 18,070 |
Current deferred tax liability
| | | 30,279 |
Long-term debt
| | | 2,500,875 |
Asset retirement obligations
| | | 8,646 |
Other long-term liabilities
| | | 15,735 |
Amount attributable to liabilities assumed
| | $
| 2,812,298 |
| | | |
Fair value of assets acquired:
| | | |
Cash and cash equivalents
| | $
| 18,879 |
Accounts receivable trade, net
| | | 219,654 |
Derivative assets
| | | 85,718 |
Prepaid expenses and other
| | | 8,624 |
Oil and gas properties, successful efforts method:
| | | |
Proved properties
| | | 2,266,607 |
Unproved properties
| | | 1,000,396 |
Other property and equipment
| | | 11,347 |
Long-term deferred tax asset
| | | 107,497 |
Other long-term assets
| | | 6,113 |
Amount attributable to assets acquired
| | $
| 3,724,835 |
Goodwill
| | $
| 875,676 |
_____________________
| (1)
| | 47,546,139 shares of Whiting common stock at $37.25 per share (closing priceCarrying Value as of December 5, 2014), based on Kodiak’s 268,622,497 common shares outstanding at closing.
|
| (2)
| | 257,601 shares of Whiting common stock issued at $37.25 per share (closing price as of December 5, 2014), based on Kodiak’s 1,455,409 restricted stock units held by employees as of December 8, 2014.
|
Goodwill recognized as a result of the Kodiak Acquisition totaled $876 million, none of which is deductible for income tax purposes. Goodwill is primarily attributable to the operational and financial synergies expected to be realized from the acquisition, including employing optimized completion techniques on Kodiak's undrilled acreage which will improve hydrocarbon recovery, realized savings in drilling and well completion costs, the accelerated development of Kodiak’s asset base, and the acquisition of experienced oil and gas technical personnel.
The results of operations of Kodiak from the December 8, 2014 closing date through December 31, 2014, representing approximately $46 million of revenue and $17 million of net income, have been included in Whiting’s consolidated statements of income for the year ended December 31, 2014.
2014 Divestitures
On March 27, 2014, the Company completed the sale of approximately 49,900 gross (41,000 net) acres in its Big Tex prospect, which consisted mainly of undeveloped acreage as well as its interests in certain producing oil and gas wells, located in the Delaware Basin of Texas for a cash purchase price of $76 million resulting in a pre-tax gain on sale of $12 million.
2013 Acquisitions
On September 20, 2013, the Company completed the acquisition of approximately 39,300 gross (17,300 net) acres in the Williston Basin, including interests in 121 producing oil and gas wells and undeveloped acreage, located in Williams and McKenzie counties of North Dakota and Roosevelt and Richland counties of Montana for an initial purchase price of $261 million. Revenue and earnings from these properties since the September 20, 2013 acquisition date are not material, and disclosures of pro forma revenues and net income for this acquisition of these wells are also not material and have not been presented accordingly.
The acquisition was recorded using the purchase method of accounting. The initial purchase price has been adjusted for post-closing settlements that have occurred since the acquisition date totaling $6 million. The following table summarizes the allocation of the $256 million adjusted purchase price to the tangible assets acquired and liabilities assumed in this acquisition of oil and gas properties (in thousands):
| | | |
| | | December 31, 2016 |
Purchase price
| | $
| 255,537 |
Allocation of purchase price:Assets
| | | |
Oil and gas properties, successful efforts method:net | | $ | 347,817 |
Other property and equipment, net | | | 475 |
Total property and equipment, net | | | 348,292 |
Other long-term assets | | | 854 |
Total assets held for sale | | $ | 349,146 |
| | | |
Proved properties
| | $
| 229,002 |
Unproved propertiesLiabilities
| | | 27,335 |
Oil in tank inventory
| | | 522 |
Accounts receivable
| | | 578 |
Asset retirement obligations | | $ | (1,900)131 |
Other long-term liabilities | | | 407 |
Total liabilities related to assets held for sale | | $ | 255,537538 |
2013 Divestitures
On October 31, 2013, the Company completed the sale of approximately 45,000 gross (32,200 net) acres in its Big Tex prospect, which consisted mainly of undeveloped acreage as well as its interests in certain producing oil and gas wells, located in the Delaware Basin of Texas for a cash purchase price of $151 million, resulting in a pre-tax gain on sale of $11 million. Of the total net acres sold, approximately 30,800 net acres are located in Pecos County, Texas, and approximately 1,400 net acres are located in Reeves County, Texas.
On July 15, 2013, the Company completed the sale of its interests in certain oil and gas producing properties located in its EOR projects in the Postle and Northeast Hardesty fields in Texas County, Oklahoma, including the related Dry Trail plant gathering and processing facility, oil delivery pipeline, its entire 60% interest in the Transpetco CO2 pipeline, crude oil swap contracts and certain other related assets and liabilities (collectively the “Postle Properties”) for a cash purchase price of $809 million after selling costs and post-closing adjustments. This divestiture resulted in a pre-tax gain on sale of $109 million. The Company used the net proceeds from this sale to repay a portion of the debt outstanding under its credit agreement.
2012 Acquisitions
There were no significant acquisitions during the year ended December 31, 2012.2017.
20122016 Acquisitions and Divestitures
On May 18, 2012,In July 2016, the Company sold a 50% ownershipcompleted the sale of its interest in its Belfield gas processing plant, natural gas gathering system,enhanced oil gathering systemrecovery project in the North Ward Estes field in Ward and Winkler counties of Texas, including Whiting’s interest in certain CO2 properties in the McElmo Dome field in Colorado and certain other related facilities locatedassets and liabilities (the “North Ward Estes Properties”) for a cash purchase price of $300 million (before closing adjustments). The sale was effective July 1, 2016 and resulted in Stark County, North Dakota for total cash proceedsa pre-tax loss on sale of $66$187 million. WhitingThe Company used the net proceeds from the sale to repay a portion of the debt outstanding under its credit agreement.
In addition to the cash purchase price, the buyer agreed to pay Whiting $100,000 for every $0.01 that, as of June 28, 2018, the average NYMEX crude oil futures contract price for each month from August 2018 through July 2021 is above $50.00/Bbl up to a maximum amount of $100 million (the “Contingent Payment”). The Company determined that this Contingent Payment was an embedded derivative and reflected it at fair value in the consolidated financial statements prior to settlement. On March 28, 2012,July 19, 2017, the buyer paid $35 million to Whiting to settle this Contingent Payment, resulting in a pre-tax gain of $3 million. Refer to the “Derivative Financial Instruments” and “Fair Value Measurements” footnotes for more information on this embedded derivative instrument.
There were no significant acquisitions during the year ended December 31, 2016.
2015 Acquisitions and Divestitures
In December 2015, the Company completed an initial public offering of units of beneficial interest in Trust II, selling 18,400,000 Trust II units at $20.00 per unit, which generated net proceeds of $322 million after underwriters’ fees, offering expenses and post-close adjustments. The Company used the net offering proceeds to repay a portion of the debt outstanding under its credit agreement. The net proceeds from the sale of Trust II units toa fresh water delivery system, a produced water gathering system and four saltwater disposal wells located in Weld County, Colorado, effective December 16, 2015, for aggregate sales proceeds of $75 million (before closing adjustments).
In June 2015, the public resultedCompany completed the sale of its interests in certain non-core oil and gas wells, effective June 1, 2015, for aggregate sales proceeds of $150 million (before closing adjustments) resulting in a deferredpre-tax loss on sale of $118 million. The properties included over 2,000 gross wells in 132 fields across 10 states.
In April 2015, the Company completed the sale of its interests in certain non-core oil and gas wells, effective May 1, 2015, for aggregate sales proceeds of $108 million (before closing adjustments) resulting in a pre-tax gain on sale of $128$29 million. Immediately prior toThe properties were located in 187 fields across 14 states, and predominately consisted of assets that were previously included in the closingunderlying properties of Whiting USA Trust I.
Also during the offering, Whiting conveyed a term net profits interestyear ended December 31, 2015, the Company completed several immaterial divestiture transactions for the sale of its interests in certain of itsnon-core oil and gas properties to Trust IIwells and undeveloped acreage, for aggregate sales proceeds of $176 million (before closing adjustments) resulting in exchange for 100% of the trust’s units issued, or 18,400,000 units.
The net profits interest entitles Trust II to receive 90% of the net proceeds from thea pre-tax gain on sale of oil and natural gas production from the underlying properties. The net profits interest will terminate on the later to occur of (1) December 31, 2021, or (2) the time when 11.79 MMBOE have been produced from the underlying properties and sold. This is the equivalent of 10.61 MMBOE in respect of Trust II’s right to receive 90% of the net proceeds from such reserves pursuant to the net profits interest.$28 million.
Unaudited Pro Forma Operating Results
The following unaudited pro forma combined results of operations for the years ended December 31, 2014 and 2013 are derived from the historical consolidated financial statements of Whiting and Kodiak and give effect to the Kodiak Acquisition as if it had occurred on January 1, 2013.
| | | | | | |
| | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| | (in thousands, except per share data) |
Total revenues | | $ | 4,141,046 | | $ | 3,774,137 |
Net income available to common shareholders | | $ | 362,376 | | $ | 576,450 |
| | | | | | |
Earnings per common share: | | | | | | |
Basic | | $ | 2.18 | | $ | 3.48 |
Diluted | | $ | 2.17 | | $ | 3.46 |
The unaudited pro forma combined results of operations reflect pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including (i) Whiting common stock and equity awards issued to convert Kodiak’s outstanding shares of common stock and equity awards as of the closing date of the transaction, (ii) adjustments to conform Kodiak’s historical policy of accounting for its oil and natural gas properties from the full cost method to the successful efforts method of accounting, (iii) depletion of Kodiak’s fair-valued proved oil and gas properties, (iv) adjustments to interest expense to reflect the assumption of Kodiak’s debt by Whiting, and (v) the estimated tax impacts of the pro forma adjustments. Additionally, pro forma earnings forThere were no significant acquisitions during the year ended December 31, 2014 were adjusted to exclude $86 million of acquisition-related costs incurred by Whiting and Kodiak, and the pro forma earnings for the year ended December 31, 2013 were adjusted to include these charges.
The unaudited pro forma financial information has been prepared for informational purposes only and does not purport to represent what Whiting’s results of operations would have been had the transactions actually been consummated on the assumed dates nor are they indicative of future results of operations. The unaudited pro forma combined financial information does not reflect future events that may occur after the transactions including, but not limited to, the anticipated realization of ongoing savings from operating efficiencies from the Kodiak Acquisition.2015.
4. LONG-TERM DEBT
Long-term debt, including the current portion, consisted of the following at December 31, 20142017 and 20132016 (in thousands):
| | | | | | |
| | | | | | |
| | December 31, |
| | 2014 | | 2013 |
Credit agreement | | $ | 1,400,000 | | $ | - |
6.5% Senior Subordinated Notes due 2018 | | | 350,000 | | | 350,000 |
5% Senior Notes due 2019 | | | 1,100,000 | | | 1,100,000 |
8.125% Senior Notes due 2019, including unamortized debt premium of $23,742 | | | 823,742 | | | - |
5.75% Senior Notes due 2021, including unamortized debt premium of $3,180 and $3,834, respectively | | | 1,203,180 | | | 1,203,834 |
5.5% Senior Notes due 2021, including unamortized debt premium of $867 | | | 350,867 | | | - |
5.5% Senior Notes due 2022, including unamortized debt premium of $993 | | | 400,993 | | | - |
Total debt | | $ | 5,628,782 | | $ | 2,653,834 |
| | | | | | |
| | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Credit agreement | | $ | - | | $ | 550,000 |
6.5% Senior Subordinated Notes due 2018 | | | - | | | 275,121 |
5.0% Senior Notes due 2019 | | | 961,409 | | | 961,409 |
1.25% Convertible Senior Notes due 2020 | | | 562,075 | | | 562,075 |
5.75% Senior Notes due 2021 | | | 873,609 | | | 873,609 |
6.25% Senior Notes due 2023 | | | 408,296 | | | 408,296 |
6.625% Senior Notes due 2026 | | | 1,000,000 | | | - |
Total principal | | | 3,805,389 | | | 3,630,510 |
Unamortized debt discounts and premiums | | | (50,945) | | | (71,340) |
Unamortized debt issuance costs on notes | | | (31,015) | | | (23,867) |
Total debt | | | 3,723,429 | | | 3,535,303 |
Less current portion of long-term debt | | | (958,713) | | | - |
Total long-term debt | | $ | 2,764,716 | | $ | 3,535,303 |
The following table shows five succeeding fiscal years of scheduledanticipated maturities for the Company’s long-term debt as of December 31, 20142017 (in thousands):
| | | | | | | | | | | | | | | |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
Long-term debt (1) | | $ | - | | $ | - | | $ | - | | $ | 350,000 | | $ | 3,300,000 |
| | | | | | | | | | | | | | | |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
Long-term debt | | $ | 961,409 | | $ | - | | $ | 562,075 | | $ | 873,609 | | $ | - |
_____________________
| (1)
| | Refer to “Kodiak Senior Notes Repurchase Offer” below for more information.
|
Credit Agreement—In August 2014,
Whiting Oil and Gas, Corporation (“Whiting Oil and Gas”), the Company’s wholly-ownedwholly owned subsidiary, entered intohas a Sixth Amended and Restated Credit Agreementcredit agreement with a syndicate of banks which replaced its existing credit agreement upon closingthat as of the Kodiak Acquisition on December 8, 2014. This amended credit agreement increased the31, 2017 had a borrowing
base under Whiting Oil and Gas’ credit facility to $4.5 billion, with aggregate commitments of $3.5$2.3 billion. Subsequently in December 2014, the lenders under the credit agreement increased their aggregate commitments under this amended agreement from $3.5 billion to $4.5 billion, of which $3.5 billion relates to commitments to extend revolving credit and $1.0 billion relates to a senior secured delayed draw term loan facility (“Delayed Draw Facility”). The Delayed Draw Facility may be used to provide cash consideration for any repurchase or redemption of Kodiak’s outstanding senior notes in connection with the Kodiak Acquisition, to pay transaction costs and for other corporate purposes. Under the amended credit agreement, the revolving credit facility will mature on December 8, 2019, and the Delayed Draw Facility will mature on December 31, 2015. As of December 31, 2014,2017, the Company had $3.1$2.3 billion of available borrowing capacity, which was net of $1.4 billion in borrowings and $3$2 million in letters of credit outstanding, with no borrowings outstanding.
The borrowing base under the credit agreement is determined at the discretion of the lenders, based on the collateral value of the Company’s proved reserves that have been mortgaged to such lenders, and is subject to regular redeterminations on May 1 and November 1 of each year, as well as special redeterminations described in the credit agreement, in each case which may reduce the amount of the borrowing base. Upon a redetermination of ourthe borrowing base, either on a periodic or special redetermination date, if borrowings in excess of the revised borrowing capacity were outstanding, wethe Company could be forced to immediately repay a portion of ourits debt outstanding under the credit agreement. In October 2017, the borrowing base and aggregate commitments under the facility were reduced from $2.5 billion to $2.3 billion in connection with the November 1, 2017 regular borrowing base redetermination, and was primarily a result of the sale of the Company’s FBIR Assets on September 1, 2017.
A portion of the revolving credit facility in an aggregate amount not to exceed $100$50 million may be used to issue letters of credit for the account of Whiting Oil and Gas or other designated subsidiaries of the Company. As of December 31, 2014, $972017, $48 million was available for additional letters of credit under the agreement.
The credit agreement provides for interest only payments until December 2019, when the expiration date of thecredit agreement whenexpires and all outstanding borrowings are due. Interest under the revolving credit facility accrues at the Company’s option at either (i) a base rate for a base rate loan plus the margin in the table below, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.5% per annum, or an adjusted LIBOR rate plus 1.0% per annum, or (ii) an adjusted LIBOR rate for a Eurodollar loan plus the margin in the table below. Additionally, the Company also incurs commitment fees as set forth in the table below on the unused portion of the aggregate commitments of the lenders under the revolving credit facility, which are included as a component of interest expense. At December 31, 2014,2016, the entire $1.4 billionweighted average interest rate on the outstanding principal balance under the credit agreement was under the revolving credit facility with a weighted average interest rate of 1.9%4.0%.
| | | | | | |
| | | | | | |
| | Applicable | | Applicable | | |
| | Margin for Base | | Margin for | | Commitment |
Ratio of Outstanding Borrowings to Borrowing Base | | Rate Loans | | Eurodollar Loans | | Fee |
Less than 0.25 to 1.0 | | 0.50% | | 1.50% | | 0.375% |
Greater than or equal to 0.25 to 1.0 but less than 0.50 to 1.0 | | 0.75% | | 1.75% | | 0.375% |
Greater than or equal to 0.50 to 1.0 but less than 0.75 to 1.0 | | 1.00% | | 2.00% | | 0.50% |
Greater than or equal to 0.75 to 1.0 but less than 0.90 to 1.0 | | 1.25% | | 2.25% | | 0.50% |
Greater than or equal to 0.90 to 1.0 | | 1.50% | | 2.50% | | 0.50% |
78
| | | | | | |
| | | | | | |
| | Applicable | | Applicable | | |
| | Margin for Base | | Margin for | | Commitment |
Ratio of Outstanding Borrowings to Borrowing Base | | Rate Loans | | Eurodollar Loans | | Fee |
Less than 0.25 to 1.0 | | 1.00% | | 2.00% | | 0.50% |
Greater than or equal to 0.25 to 1.0 but less than 0.50 to 1.0 | | 1.25% | | 2.25% | | 0.50% |
Greater than or equal to 0.50 to 1.0 but less than 0.75 to 1.0 | | 1.50% | | 2.50% | | 0.50% |
Greater than or equal to 0.75 to 1.0 but less than 0.90 to 1.0 | | 1.75% | | 2.75% | | 0.50% |
Greater than or equal to 0.90 to 1.0 | | 2.00% | | 3.00% | | 0.50% |
Interest under the Delayed Draw Facility accrues at the Company’s option at either (i) a base rate for a base rate loan plus (A) 1.00% per annum through March 8, 2015 and (B) 1.50% per annum from March 9, 2015 through the December 31, 2015 maturity date, or (ii) an adjusted LIBOR rate for a Eurodollar loan plus (A) 2.00% per annum through March 8, 2015 and (B) 2.50% per annum from March 9, 2015 through the December 31, 2015 maturity date. We also incur commitment fees of 0.25% on the unused portion of the aggregate commitments of the lenders under the Delayed Draw Facility.
The amended credit agreement contains restrictive covenants that may limit the Company’s ability to, among other things, incur additional indebtedness, sell assets, make loans to others, make investments, enter into mergers, enter into hedging contracts, incur liens and engage in certain other transactions without the prior consent of its lenders. However, the credit agreement permits the Company and certain of its subsidiaries to issue second lien indebtedness of up to $1.0 billion subject to certain conditions and limitations. Except for limited exceptions, the credit agreement also restricts the Company’s ability to make any dividend payments or distributions on its common stock. These restrictions apply to all of the net assets ofCompany’s restricted subsidiaries (as defined in the subsidiaries.credit agreement). As of December 31, 2014, total restricted net assets2017, there were $6.9 billion, and the amount ofno retained earnings free from restrictions was $24 million.restrictions. The credit agreement requires the Company, as of the last day of any quarter, (i) to not exceed a total debt tomaintain the last four quarters’ EBITDAX ratiofollowing ratios (as defined in the credit agreement) of 4.0 to 1.0 and (ii) to have: (i) a consolidated current assets to consolidated current liabilities ratio (as defined in the credit agreement and which(which includes an add back of the available borrowing capacity under the credit agreement) of not less than 1.0 to 1.0.1.0, (ii) a total senior secured debt to the last four quarters’ EBITDAX ratio of less than 3.0 to 1.0 during the Interim Covenant Period (defined below), and thereafter a total debt to EBITDAX ratio of less than 4.0 to 1.0, and (iii) a ratio of the last four quarters’ EBITDAX to consolidated cash interest charges of not less than 2.25 to 1.0 during the Interim Covenant Period. Under the credit agreement, the “Interim Covenant Period” is defined as the period from June 30, 2015 until the earlier of (i) April 1, 2018 or (ii) the commencement of an investment-grade debt rating period (as defined in the credit agreement). The Company was in compliance with its covenants under the credit agreement as of December 31, 2014.2017.
Under the terms of the credit agreement, at any time during which Whiting has an investment-grade debt rating from Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Group and Whiting has elected, at its discretion, to effect an investment-grade rating period, (i) certain security requirements, including the borrowing base requirement, and restrictive covenants will cease to apply, (ii) certain other restrictive covenants will become less restrictive, (iii) an additional financial covenant will be imposed, and (iv) the interest rate margin applicable to all revolving borrowings as well as the commitment fee with respect to the revolving facility will be based upon the Company’s debt rating rather than the ratio of outstanding borrowings to the borrowing base.
The obligations of Whiting Oil and Gas under the credit agreement are securedcollateralized by a first lien on substantially all of Whiting Oil and Gas’ and Whiting Resource Corporation’s properties included in the borrowing base for the credit agreement.properties. The Company has guaranteed the obligations of Whiting Oil and Gas under the credit agreement and has pledged the stock of its subsidiaries as security for its guarantee.
Senior Notes, Convertible Senior Notes and Senior Subordinated Notes
The following table summarizes the material terms of the Company’s senior notes and convertible senior notes outstanding at December 31, 2017:
| | | | | | | | | | |
| | | | | | | | | | |
| | | | 2020 | | | | | | |
| | 2019 | | Convertible | | 2021 | | 2023 | | 2026 |
| | Senior Notes (1) | | Senior Notes | | Senior Notes | | Senior Notes | | Senior Notes |
Outstanding principal (in thousands) | | $ 961,409 | | $ 562,075 | | $ 873,609 | | $ 408,296 | | $ 1,000,000 |
Interest rate | | 5.0% | | 1.25% | | 5.75% | | 6.25% | | 6.625% |
Maturity date | | Mar 15, 2019 | | Apr 1, 2020 | | Mar 15, 2021 | | Apr 1, 2023 | | Jan 15, 2026 |
Interest payment dates | | Mar 15, Sep 15 | | Apr 1, Oct 1 | | Mar 15, Sep 15 | | Apr 1, Oct 1 | | Jan 15, Jul 15 |
Make-whole redemption date (2) | | Dec 15, 2018 | | N/A (3) | | Dec 15, 2020 | | Jan 1, 2023 | | Oct 15, 2025 |
_____________________
| (1) | | On January 26, 2018, the Company used the proceeds from the December 2017 issuance of its 6.625% Senior Notes due January 2026 as well as borrowings under its credit agreement to redeem all of the outstanding 5.0% Senior Notes due March 2019. |
| (2) | | On or after these dates, the Company may redeem the applicable series of notes, in whole or in part, at a redemption price equal to 100% of the principal amount redeemed, together with accrued and unpaid interest up to the redemption date. At any time prior to these dates, the Company may redeem the notes at a redemption price that includes an applicable premium as defined in the indentures to such notes. |
| (3) | | The indenture governing the 1.25% Convertible Senior Notes due 2020 does not allow for optional redemption by the Company prior to the maturity date. |
Senior Notes and Senior Subordinated Notes—In September 2010, the Company issued at par $350 million of 6.5% Senior Subordinated Notes due October 2018 (the “2018 Senior Subordinated Notes”). The estimated fair value of these notes was $345 million and $371 million as of December 31, 2014 and 2013, respectively, based on quoted market prices for these debt securities, and such fair value is therefore designated as Level 1 within the valuation hierarchy.
Issuance of Senior Notes. In September 2013, the Company issued at par $1.1 billion of 5%5.0% Senior Notes due March 2019 (the “2019 Senior Notes”) and $800million of 5.75% Senior Notes due March 2021, and issued at 101% of par an additional $400 million of 5.75% Senior Notes due March2021 (collectively, the “2021 Senior Notes”). The debt premium recorded in connection with the issuance of the 2021 Senior
Notes is being amortized to interest expense over the term of the notes using the effective interest method, with an effective interest rate of 5.5% per annum.
In March 2015, the Company issued at par $750 million of 6.25% Senior Notes due April 2023 (the “2023 Senior Notes”).
Issuance of Senior Notes. In December 2017, the Company issued at par $1.0 billion of 6.625% Senior Notes due January 2026 (the “2026 Senior Notes” and together with the 2019 Senior Notes, the “Whiting2021 Senior Notes and the 2023 Senior Notes, the “Senior Notes”). The estimated fair valueCompany used the net proceeds from this offering to redeem on January 26, 2018 all of the outstanding 2019 Senior Notes was $1.0 billion and $1.1 billion as of December 31, 2014 and 2013, respectively. The estimated fair value of the 2021 Senior Notes was $1.1 billion and $1.3 billion as of December 31, 2014 and 2013, respectively. These fair values are based on quoted market prices for these debt securities, and such fair values are therefore designated as Level 1 within the valuation hierarchy.
Redemption of Senior Subordinated Notes. In October 2013, the Company paid $254 million to redeem its entire $250 million aggregate principal amount of the 7% Senior Subordinated Notes due February 2014 (the “2014 Senior Subordinated Notes”) at a 102.976% redemption price of 101.595%. Concurrent with this redemption, the Company paidplus all accrued and unpaid interest on the 2014notes. Refer to the “Subsequent Events” footnote for more information on the redemption of the 2019 Senior Notes.
Exchange of Senior Notes and Senior Subordinated Notes up to but not includingfor Convertible Notes. On March 23, 2016, the redemption date.Company completed the exchange of $477 million aggregate principal amount of Senior Notes and 2018 Senior Subordinated Notes, consisting of (i) $49 million aggregate principal amount of its 2018 Senior Subordinated Notes, (ii) $97 million aggregate principal amount of its 2019 Senior Notes, (iii) $152 million aggregate principal amount of its 2021 Senior Notes, and (iv) $179 million aggregate principal amount of its 2023 Senior Notes, for $477 million aggregate principal amount of convertible senior notes and convertible senior subordinated notes (the “New Convertible Notes”). This exchange transaction was accounted for as an extinguishment of debt for each portion of the Senior Notes and 2018 Senior Subordinated Notes that was exchanged. As a result, Whiting recognized a $91 million gain on extinguishment of debt, which was net of a $4 million non-cash charge for the acceleration of unamortized debt issuance costs and debt premium on the original notes. Each series of New Convertible Notes was recorded at fair value upon issuance, with the difference between the principal amount of the notes and their fair values, totaling $95 million, recorded as a debt discount. The Company financed the redemptionaggregate debt discount of these notes with proceeds from the$185 million recorded upon issuance of the Whiting SeniorNew Convertible Notes also included $90 million related to the fair value of the holders’ conversion options, which were embedded derivatives that met the criteria to be bifurcated from their host contracts and accounted for separately. Refer to the “Derivative Financial Instruments” and “Fair Value Measurements” footnotes for more information on these embedded derivatives.
During the second quarter of 2016, holders of the New Convertible Notes voluntarily converted all $477 million aggregate principal amount of the New Convertible Notes for approximately 10.5 million shares of the Company’s common stock. Upon conversion, the Company paid $46 million in cash consisting of early conversion payments to the holders of the notes, as discussed above.well as all accrued and unpaid interest on such notes. As a result of the redemption,conversions, Whiting recognized a $4$188 million loss on early extinguishment of debt, which primarily consisted of a cashnon-cash charge for the acceleration of $4 million related to the redemption premiumunamortized debt issuance costs and debt discount on the 2014notes. As of June 30, 2016, no New Convertible Notes remained outstanding.
Exchange of Senior Notes and Senior Subordinated Notes for Mandatory Convertible Notes. On July 1, 2016, the Company completed the exchange of $405 million aggregate principal amount of Senior Notes and 2018 Senior Subordinated Notes for the same aggregate principal amount of new mandatory convertible senior notes and mandatory convertible senior subordinated notes. Refer to “Mandatory Convertible Notes” below for more information on these exchange transactions.
Kodiak Senior Notes. In conjunction with the acquisition of Kodiak Acquisition,in December 2014, Whiting US Holding Company, a wholly-ownedwholly owned subsidiary of the Company, became a co-issuer of Kodiak’s outstanding principal amount of $800 million of 8.125% Senior Notes due December 2019 (the “2019 Kodiak Notes”), $350 million of 5.5% Senior Notes due January 2021 (the “2021 Kodiak Notes”), and $400 million of 5.5% Senior Notes due February 2022 (the “Kodiak“2022 Kodiak Notes”). The Kodiak Notes were recorded at their fair values of $824 million, $351 million and $401 million, respectively, on December 8, 2014,together with the closing date of the acquisition. The related premiums of $24 million, $1 million and $1 million, respectively, are being amortized to interest expense over the life of the related notes. As of December 31, 2014, the estimated fair value of the Kodiak Notes was $812 million, $351 million and $401 million, respectively, based on quoted market prices for these debt securities, and such fair value is therefore designated as Level 1 within the valuation hierarchy.
Upon closing of the Kodiak Acquisition, the indentures under which the Kodiak Notes were issued (the “Kodiak Indentures”) were amended to (i) modify certain covenants and restrictions, (ii) to provide for unconditional and irrevocable guarantees by Whiting Petroleum Corporation and Whiting Oil and Gas of the prompt payment, when due, of any amounts owed under the2019 Kodiak Notes and the Kodiak Indentures, and (iii) to allow Whiting US Holding Company to become a co-issuer of the Kodiak Notes. Also in conjunction with the Kodiak Acquisition, in December 2014, each of the indentures governing the Company’s 2019 Senior Notes, 2021 Senior Notes and 2018 Senior Subordinated Notes were amended to include Whiting US Holding Company, Kodiak and Whiting Resources Corporation (formerly Kodiak Oil & Gas (USA) Inc.) as guarantors. Shortly after closing, the Kodiak Notes, were deregistered in accordance with the Securities Exchange Act of 1934, and accordingly, the Company is exempt from the reporting requirements under Rule 3-10 of Regulation S-X of the SEC with respect to the Kodiak Notes.“Kodiak Notes”).
Kodiak Senior Notes Repurchase Offer. OnIn January 7, 2015, as required under the Kodiak Indentures upon a change in control of Kodiak, Whiting offered to repurchase at 101% of par all $1,550 million principal amount of Kodiak Notes then outstanding. TheIn March 2015, Whiting paid $760 million to repurchase offer expires$2 million aggregate principal amount of the 2019 Kodiak Notes, $346 million aggregate principal amount of the 2021 Kodiak Notes and $399 million aggregate principal amount of the 2022 Kodiak Notes, which payment consisted of the 101% redemption price and all accrued and unpaid interest on March 3, 2015. The Company expectssuch notes. In May 2015, Whiting paid an additional $5 million to fund any payments due asrepurchase the remaining $4 million aggregate principal amount of the 2021 Kodiak Notes and $1 million aggregate principal amount of the 2022 Kodiak Notes, which payment consisted of the 101% redemption price and all accrued and unpaid interest on such notes. In December 2015, Whiting paid $834 million to repurchase the remaining $798 million aggregate principal amount of the 2019 Kodiak Notes, which payment consisted of the 104.063% redemption price and all accrued and unpaid interest on such notes. As a result of the repurchases, Whiting recognized an $18 million loss on extinguishment of debt, which consisted of a $40 million cash charge related to the redemption premium on the Kodiak Notes, partially offset by a $22 million non-cash credit related to the acceleration of unamortized debt premiums on such repurchase offernotes. As of December 31, 2015, no Kodiak Notes remained outstanding.
Redemption of 2018 Senior Subordinated Notes. On February 2, 2017, the Company paid $281 million to redeem all of the then outstanding $275 million aggregate principal amount of 2018 Senior Subordinated Notes, which payment consisted of the 100% redemption price plus all accrued and unpaid interest on the notes. The Company financed the redemption with borrowings under its revolving credit facility.agreement. As a result of the redemption, Whiting recognized a $2 million loss on extinguishment of debt, which consisted of a
non-cash charge for the acceleration of unamortized debt issuance costs on the notes. As of March 31, 2017, no 2018 Senior Subordinated Notes remained outstanding.
2020 Convertible Senior Notes—In March 2015, the Company issued at par $1,250 million of 1.25% Convertible Senior Notes due April 2020 (the “2020 Convertible Senior Notes”) for net proceeds of $1.2 billion, net of initial purchasers’ fees of $25 million. On June 29, 2016, the Company exchanged $129 million aggregate principal amount of its 2020 Convertible Senior Notes for the same aggregate principal amount of new mandatory convertible senior notes, and on July 1, 2016, the Company exchanged $559 million aggregate principal amount of its 2020 Convertible Senior Notes for the same aggregate principal amount of new mandatory convertible senior notes. Refer to “Mandatory Convertible Notes” below for more information on these exchange transactions.
For the remaining $562 million aggregate principal amount of 2020 Convertible Senior Notes outstanding as of December 31, 2017, the Company has the option to settle conversions of these notes with cash, shares of common stock or a combination of cash and common stock at its election. The WhitingCompany’s intent is to settle the principal amount of the 2020 Convertible Senior Notes in cash upon conversion. Prior to January 1, 2020, the 2020 Convertible Senior Notes will be convertible at the holder’s option only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the 2020 Convertible Senior Notes for each trading day of the measurement period is less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after January 1, 2020, the 2020 Convertible Senior Notes will be convertible at any time until the second scheduled trading day immediately preceding the April 1, 2020 maturity date of the notes. The notes will be convertible at a current conversion rate of 6.4102 shares of Whiting’s common stock per $1,000 principal amount of the notes, which is equivalent to a current conversion price of approximately $156.00. The conversion rate will be subject to adjustment in some events. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase, in certain circumstances, the conversion rate for a holder who elects to convert its 2020 Convertible Senior Notes in connection with such corporate event. As of December 31, 2017, none of the contingent conditions allowing holders of the 2020 Convertible Senior Notes to convert these notes had been met.
Upon issuance, the Company separately accounted for the liability and equity components of the 2020 Convertible Senior Notes. The liability component was recorded at the estimated fair value of a similar debt instrument without the conversion feature. The difference between the principal amount of the 2020 Convertible Senior Notes and Kodiakthe estimated fair value of the liability component was recorded as a debt discount and is being amortized to interest expense over the term of the notes using the effective interest method, with an effective interest rate of 5.6% per annum. The fair value of the liability component of the 2020 Convertible Senior Notes as of the issuance date was estimated at $1.0 billion, resulting in a debt discount at inception of $238 million. The equity component, representing the value of the conversion option, was computed by deducting the fair value of the liability component from the initial proceeds of the 2020 Convertible Senior Notes issuance. This equity component was recorded, net of deferred taxes and issuance costs, in additional paid-in capital within shareholders’ equity, and will not be remeasured as long as it continues to meet the conditions for equity classification.
Transaction costs related to the 2020 Convertible Senior Notes issuance were allocated to the liability and equity components based on their relative fair values. Issuance costs attributable to the liability component were recorded as a reduction to the carrying value of long-term debt on the consolidated balance sheet and are being amortized to interest expense over the term of the notes using the effective interest method. Issuance costs attributable to the equity component were recorded as a charge to additional paid-in capital within shareholders’ equity.
The 2020 Convertible Senior Notes consisted of the following at December 31, 2017 and 2016 (in thousands):
| | | | | | |
| | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Liability component | | | | | | |
Principal | | $ | 562,075 | | $ | 562,075 |
Less: unamortized note discount | | | (51,666) | | | (72,622) |
Less: unamortized debt issuance costs | | | (4,178) | | | (5,988) |
Net carrying value | | $ | 506,231 | | $ | 483,465 |
Equity component (1) | | $ | 136,522 | | $ | 136,522 |
| (1) | | Recorded in additional paid-in capital, net of $5 million of issuance costs and $50 million of deferred taxes as of December 31, 2017 and 2016. |
Interest expense recognized on the 2020 Convertible Senior Notes related to the stated interest rate and amortization of the debt discount totaled $28 million, $43 million and $44 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Mandatory Convertible Notes—On June 29, 2016, the Company completed the exchange of $129 million aggregate principal amount of its 2020 Convertible Senior Notes for the same aggregate principal amount of new mandatory convertible notes, and on July 1, 2016, the Company completed the exchange of $964 million aggregate principal amount of Senior Notes, 2020 Convertible Senior Notes and 2018 Senior Subordinated Notes, consisting of (i) $26 million aggregate principal amount of 2018 Senior Subordinated Notes, (ii) $42 million aggregate principal amount of 2019 Senior Notes, (iii) $559 million aggregate principal amount of 2020 Convertible Senior Notes, (iv) $174 million aggregate principal amount of 2021 Senior Notes, and (v) $163 million aggregate principal amount of 2023 Senior Notes, for the same aggregate principal amount of new mandatory convertible notes (together the “Mandatory Convertible Notes”).
These transactions were accounted for as extinguishments of debt for the portions of Senior Notes, 2020 Convertible Senior Notes and 2018 Senior Subordinated Notes that were exchanged. As a result, Whiting recognized a $57 million gain on extinguishment of debt, which was net of a $113 million charge for the non-cash write-off of unamortized debt issuance costs, debt discounts and debt premium on the original notes. In addition, Whiting recorded a $63 million reduction to the equity component of the 2020 Convertible Senior Notes, which was net of deferred taxes. The Mandatory Convertible Notes were recorded at fair value upon issuance with the difference between the principal amount of the notes and their fair values, totaling $69 million, recorded as a debt discount. The Mandatory Convertible Notes contained contingent beneficial conversion features, the intrinsic value of which was recognized in additional paid-in capital at the time the contingency was resolved, resulting in an additional debt discount of $233 million. The aggregate debt discount of $302 million was being amortized to interest expense over the term of the notes using the effective interest method.
The July 1, 2016 note exchange transactions triggered an ownership shift as defined under Section 382 of the Internal Revenue Code due to the “deemed share issuance” that resulted from the note exchanges. This triggering event will limit the Company’s usage of certain of its net operating losses and tax credits in the future. Refer to the “Income Taxes” footnote for more information.
During the second half of 2016, the entire $1,093 million aggregate principal amount of the Mandatory Convertible Notes were converted into approximately 28.9 million shares of the Company’s common stock pursuant to the terms of the notes. As a result of these conversions, Whiting recognized (i) a $259 million non-cash charge for the acceleration of unamortized debt discounts on the notes, which is included in interest expense in the consolidated statements of operations, and (ii) a $1 million net loss on extinguishment of debt. As of December 31, 2016, no Mandatory Convertible Notes remained outstanding.
Security and Guarantees
The Senior Notes and the 2020 Convertible Senior Notes are unsecured obligations of Whiting Petroleum Corporation and Whiting US Holding Company, respectively, andthese unsecured obligations are subordinated to all of the Company’s secured indebtedness, which consists of Whiting Oil and Gas’ credit agreement. The 2018 Senior Subordinated Notes are also unsecured obligations of Whiting Petroleum Corporation and are subordinated to all of the Company’s senior debt, which currently consists of the Whiting Senior Notes, the Kodiak Notes and Whiting Oil and Gas’ credit agreement.
The Company’s obligations under the 2018 Senior Subordinated Notes and the Whiting2020 Convertible Senior Notes are fully and unconditionally guaranteed by the Company’s wholly-owned100%‑owned subsidiaries, Whiting Oil and Gas, Whiting US Holding Company, Whiting Canadian Holding Company ULC and Whiting Resources Corporation (the “Guarantors”). These guarantees are full and unconditional and joint and several among the Guarantors. Any subsidiaries other than these Guarantors are minor subsidiaries as defined by Rule 3-10(h)(6) of Regulation S‑X of the SEC. Whiting Petroleum Corporation has no assets or operations independent of this debt and its investments in its consolidated subsidiaries.
5. ASSET RETIREMENT OBLIGATIONS
The Company’s asset retirement obligations represent the present value of estimated future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage, and land restoration (including removal of certain onshore and offshore facilities in California) in accordance with applicable local, state and federal laws. The Company follows FASB ASC Topic 410, Asset Retirement and Environmental Obligations, to determine its asset retirement obligation amounts by calculating the present value of the estimated future cash outflows associated with its plug and abandonment obligations. The current portions at December 31, 20142017 and 20132016 were $12$5 million and $10$8 million, respectively, and have been included in accrued liabilities and other. Revisions toother in the liability typically occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells.consolidated balance sheets. The following table provides a reconciliation of the Company’s asset retirement obligations for the years ended December 31, 20142017 and 20132016 (in thousands):
Table of Contents
| | | | | | |
| | | | | | |
| | December 31, |
| | 2014 | | 2013 |
Asset retirement obligation at January 1 | | $ | 126,148 | | $ | 97,818 |
Additional liability incurred | | | 29,186 | | | 17,535 |
Revisions in estimated cash flows (1) | | | 25,909 | | | 12,225 |
Accretion expense | | | 13,548 | | | 10,608 |
Obligations on sold properties | | | (7,237) | | | (3,630) |
Liabilities settled | | | (7,623) | | | (8,408) |
Asset retirement obligation at December 31 | | $ | 179,931 | | $ | 126,148 |
_____________________
| | | | | | |
| | | | | | |
| | 2017 | | 2016 |
Asset retirement obligation at January 1 | | $ | 177,004 | | $ | 161,908 |
Additional liability incurred | | | 7,727 | | | 3,238 |
Revisions to estimated cash flows (1) (2) | | | (52,947) | | | 11,620 |
Accretion expense | | | 13,809 | | | 13,800 |
Obligations on sold properties | | | (6,988) | | | (4,771) |
Liabilities settled | | | (4,368) | | | (8,791) |
Asset retirement obligation at December 31 | | $ | 134,237 | | $ | 177,004 |
| (1) | | Revisions into estimated cash flows during the year ended December 31, 20142017 are primarily attributable to increasedthe deferral of the estimated timing of abandonment of a large number of Whiting’s producing properties resulting from increases in commodity prices used in the calculation of the Company’s reserves as of December 31, 2017, which lengthened the economic lives of these properties. In addition, during 2017 there were decreases in the estimates of future costs for oilfield goods and services required to plug and abandon wells in certain fields in the Northern Rocky Mountains and Permian Basin regions. Mountains. |
| (2) | | Revisions into estimated cash flows during the year ended December 31, 2013 were2016 are primarily attributable to increasedthe acceleration in the estimated timing of abandonment of a large number of Whiting’s producing properties resulting from decreases in commodity prices used in the calculation of the Company’s reserves as of December 31, 2016, which shortened the economic lives of these properties. For the year ended December 31, 2016, the increase was partially offset by decreases in the estimates of futuresfuture costs for oilfield goods and services required to plug and abandon wells in certain fields in the Central and Northern Rocky Mountains region.Mountains. |
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations, and Whitingit uses derivative instruments to manage its commodity price risk. Whiting follows FASB ASC Topic 815, DerivativesIn addition, the Company periodically enters into contracts that contain embedded features which are required to be bifurcated and Hedging, to accountaccounted for its derivative financial instruments.separately as derivatives.
Commodity Derivative Contracts—Historically, prices received for crude oil and natural gas production have been volatile because of seasonal weather patterns, supply and demand factors, worldwide political factors, and general economic conditions.conditions and seasonal weather patterns. Whiting primarily enters into derivative contracts such as crude oil costless collars and swaps, as well as sales and fixed-differentialdelivery contracts, to achieve a more predictable cash flow by reducing its exposure to commodity price volatility. Commodity derivative contracts arevolatility, thereby used to ensureensuring adequate cash flow to fundfunding for the Company’s capital programs and to managefacilitating the management of returns on acquisitionsdrilling programs and drilling programs.acquisitions. The Company does not enter into derivative contracts for speculative or trading purposes.
Crude Oil Costless Collars and Swaps.Collars. Costless collars are designed to establish floor and ceiling prices on anticipated future oil or gas production, while swaps are designed to establish a fixed price for anticipated future oil or gas production. While the use of these derivative instruments limits the downside risk of adverse price movements, they may also limit future revenues from favorable price movements.
The table below details the Company’s costless collar and swap derivatives entered into to hedge forecasted crude oil production revenues as of February 13, 2015, including certain oil collars and swaps assumed in the Kodiak Acquisition.December 31, 2017.
| | | | | | |
| | | | | | |
| | | | Whiting Petroleum Corporation |
| | | | | | |
Derivative | | | | Contracted Crude | | Weighted Average NYMEX Price |
Instrument | | Period | | Oil Volumes (Bbl) | | Collar Ranges for Crude Oil (per Bbl) |
Three-way collars (1) | | Jan - Dec 2015 | | 3,600,000 | | $50.83 - $62.50 - $83.81 |
| | Jan - Dec 2016 | | 6,600,000 | | $43.18 - $53.18 - $76.26 |
Collars | | Jan - Dec 2015 | | 1,309,500 | | $52.47 - $59.26 |
| | Jan - Dec 2016 | | 3,000,000 | | $51.00 - $63.48 |
| | Jan - Dec 2017 | | 3,000,000 | | $53.00 - $70.44 |
Swaps | | Jan - Dec 2015 | | 3,556,560 | | $86.05 |
| | Total | | 21,066,060 | | |
| | | | | | |
| | | | | | |
| | | | | | |
Derivative | | | | Contracted Crude | | Weighted Average NYMEX Price |
Instrument | | Period | | Oil Volumes (Bbl) | | Collar Ranges for Crude Oil (per Bbl) |
Three-way collars (1) | | Jan - Dec 2018 | | 17,400,000 | | $37.07 - $47.07 - $57.30 |
| | Total | | 17,400,000 | | |
_____________________
| (1) | | A three-way collar is a combination of options: a sold call, a purchased put and a sold put. The sold call establishes a maximum price (ceiling) Whiting will receive for the volumes under contract. The purchased put establishes a minimum price (floor), unless the market price falls below the sold put (sub-floor), at which point the minimum price would be NYMEX plus the difference between the purchased put and the sold put strike price. |
| (2) | | Subsequent to December 31, 2017, the Company entered into additional swap contracts for 4,400,000 Bbl of crude oil volumes for the year ended December 31, 2018, as well as costless collars for 900,000 Bbl of crude oil volumes for the six months ended June30, 2019. |
In March 2013, Whiting entered into certain crude oil swap contracts in order to achieve more predictable cash flowsCrude Oil Sales and manage returns on certain oil and gas properties thatDelivery Contract. As of December 31, 2017, the Company was considering for monetization. Accordingly, the acquisition of these swap contracts and cash receipts from settlements of these swap positions have been reflected as an investing activity in the statement of cash flows. On July 15, 2013, upon closing of the sale of the Postle Properties discussed in the Acquisitions and Divestitures footnote, these crude oil swaps were novated to the buyer. Cash settlements that do not relate to investing derivatives or that do not havehad a significant financing element are reflected as operating activities in the statement of cash flows.
Fixed-differential Crude Oil Contracts. The Company has entered into two long-term crude oil sales and delivery contractscontract for oil volumes produced from its Redtail field in Colorado. Under the terms of these agreements,the agreement, Whiting hashad committed to deliver certain fixed volumes of crude oil from 2015 through 2020 at a price equal to NYMEX less the fixed differentials specified in the agreements. As of December 31, 2014, theApril 2020. The Company determined that it is no longerwas not probable that future oil production from its Redtail field willwould be sufficient to meet the minimum volume requirements specified in these contracts, andthis contract; accordingly, that the Company willwould not
settle these contractsthis contract through physical delivery of crude oil volumes. As a result, Whiting has determined that these contracts no longerthis contract would not qualify for the “normal purchase normal sale” exclusion and has therefore reflected themthe contract at fair value in the consolidated financial statements. As of December 31, 2014,2017 and 2016, the estimated fair value of thesethis derivative contractscontract was an asseta liability of $54 million.$63 million and $9 million, respectively. On February 1, 2018, Whiting paid $61 million to the counterparty to settle all future minimum volume commitments under this agreement. Accordingly, this crude oil sales and delivery contract was fully terminated and the fair value of this corresponding derivative was therefore zero as of that date.
Embedded Commodity Derivative ContractDerivatives—In May 2011, WhitingMarch 2016, the Company issued convertible notes that contained debtholder conversion options which the Company determined were not clearly and closely related to the debt host contracts, and the Company therefore bifurcated these embedded features and reflected them at fair value in the consolidated financial statements. During the second quarter of 2016, the entire aggregate principal amount of these notes was converted into shares of the Company’s common stock, and the fair value of these embedded derivatives as of December 31, 2017 and 2016 was therefore zero.
In July 2016, the Company entered into a long-term contract to purchase CO2 for use in its EOR project that is being carried out atand sale agreement with the buyer of its North Ward Estes field in Texas. This contract contained a price adjustment clauseProperties, whereby the buyer agreed to pay Whiting additional proceeds of $100,000 for every $0.01 that, was linked to changes inas of June 28, 2018, the average NYMEX crude oil prices.futures contract price for each month from August 2018 through July 2021 is above $50.00/Bbl up to a maximum amount of $100 million. The Company had determined that the portion of this contract linked to NYMEX oil pricesNYMEX-linked contingent payment was not clearly and closely related to the host contract, and the Company therefore bifurcated this embedded pricing feature from its host contract and reflected it at its estimated fair value of $51 million in the consolidated financial statements. The Company had terminatedstatements as of December 31, 2016. On July 19, 2017, the buyer paid $35 million to Whiting to settle this contract, however, prior toNYMEX-linked contingent payment, and accordingly, the issuance date of these financial statements, and theembedded derivative’s fair value of this embedded derivative was therefore zero as of December 31, 2014.2017.
Derivative Instrument Reporting—All derivative instruments are recorded in the consolidated financial statements at fair value, other than derivative instruments that meet the “normal purchase normal sale” exclusion.exclusion or other derivative scope exceptions. The following tables summarizetable summarizes the effects of commodity derivative instruments on the consolidated statements of incomeoperations for the years ended December 31, 20142017, 2016 and 20132015 (in thousands):
| | | | | | | | |
| | | | | | | | |
| | | | Loss Reclassified from AOCI into |
| | | | Income (Effective Portion) |
ASC 815 Cash Flow | | | | Year Ended December 31, |
| | | | | | | | |
Hedging Relationships (1) | | Income Statement Classification | | 2014 | | 2013 |
Commodity contracts | | Gain (loss) on hedging activities | | $ | - | | $ | (1,958) |
_____________________
| (1)
| | Effective April 1, 2009, the Company de-designated all of its commodity derivative contracts that had been previously designated as cash flow hedges and elected to discontinue hedge accounting prospectively. As a result, such mark-to-market values at March 31, 2009 were frozen in AOCI as of the de-designation date and were reclassified into earnings as the original hedged transactions affected income. As of December 31, 2013, all amounts previously in AOCI had been reclassified into earnings.
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | (Gain) Loss Recognized in Income | | | | (Gain) Loss Recognized in Income |
Not Designated as | | | | Year Ended December 31, | | Statement of Operations | | Year Ended December 31, |
ASC 815 Hedges | | Income Statement Classification | | 2014 | | 2013 | | Classification | | 2017 | | 2016 | | 2015 |
Commodity contracts | | Commodity derivative (gain) loss, net | | $ | (136,995) | | $ | 20,503 | | Derivative (gain) loss, net | | $ | 104,138 | | $ | 58,771 | | $ | (217,972) |
Embedded commodity contracts | | Commodity derivative (gain) loss, net | | | 36,416 | | | (12,701) | |
Embedded derivatives | | | Derivative (gain) loss, net | | | 18,709 | | | (59,358) | | | - |
Total | | | | $ | (100,579) | | $ | 7,802 | | | | $ | 122,847 | | $ | (587) | | $ | (217,972) |
Offsetting of Derivative Assets and Liabilities. With each individual financial derivative counterparty, the Company typically has numerous hedge positions that span a several-month time period and that typically result in both fair value asset and liability positions held with that counterparty, which positions are all offset to a single fair value asset or liability amount at the end of each reporting period. The Company nets its financial derivative instrument fair value amounts executed with the same counterparty pursuant to ISDA master agreements, which provide for net settlement over the term of the contract and in the event of default or termination of the contract. The following tables summarize the location and fair value amounts of all the Company’s derivative instruments in the consolidated balance sheets, as well as the gross recognized derivative assets, liabilities and amounts offset in the consolidated balance sheets (in thousands):
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | December 31, 2014 (1) |
| | | | | | | | | | Net |
| | | | Gross | | | | | Recognized |
| | | | Recognized | | Gross | | Fair Value |
Not Designated as | | | | Assets/ | | Amounts | | Assets/ |
ASC 815 Hedges | | Balance Sheet Classification | | Liabilities | | Offset | | Liabilities |
Derivative assets: | | | | | | | | | | | |
Commodity contracts | | Derivative assets | | $ | 154,329 | | $ | (18,752) | | $ | 135,577 |
Commodity contracts | | Other long-term assets | | | 45,459 | | | - | | | 45,459 |
Total derivative assets | | | | $ | 199,788 | | $ | (18,752) | | $ | 181,036 |
Derivative liabilities: | | | | | | | | | | | |
Commodity contracts | | | | $ | 18,752 | | $ | (18,752) | | $ | - |
Total derivative liabilities | | | | $ | 18,752 | | $ | (18,752) | | $ | - |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | December 31, 2017 (1) |
| | | | | | | | | | Net |
| | | | Gross | | | | | Recognized |
| | | | Recognized | | Gross | | Fair Value |
Not Designated as | | | | Assets/ | | Amounts | | Assets/ |
ASC 815 Hedges | | Balance Sheet Classification | | Liabilities | | Offset | | Liabilities |
Derivative assets | | | | | | | | | | | |
Commodity contracts - current | | Prepaid expenses and other | | $ | 9,829 | | $ | (9,829) | | $ | - |
Total derivative assets | | | | $ | 9,829 | | $ | (9,829) | | $ | - |
Derivative liabilities | | | | | | | | | | | |
Commodity contracts - current | | Derivative liabilities | | $ | 142,354 | | $ | (9,829) | | $ | 132,525 |
Total derivative liabilities | | | | $ | 142,354 | | $ | (9,829) | | $ | 132,525 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | December 31, 2013 (1) |
| | | | | | | | | | Net |
| | | | Gross | | | | | Recognized |
| | | | Recognized | | Gross | | Fair Value |
Not Designated as | | | | Assets/ | | Amounts | | Assets/ |
ASC 815 Hedges | | Balance Sheet Classification | | Liabilities | | Offset | | Liabilities |
Derivative assets: | | | | | | | | | | | |
Commodity contracts | | Derivative assets | | $ | 23,752 | | $ | (22,478) | | $ | 1,274 |
Embedded commodity contracts | | Other long-term assets | | | 36,416 | | | - | | | 36,416 |
Total derivative assets | | | | $ | 60,168 | | $ | (22,478) | | $ | 37,690 |
Derivative liabilities: | | | | | | | | | | | |
Commodity contracts | | Accrued liabilities and other | | $ | 25,960 | | $ | (22,478) | | $ | 3,482 |
Total derivative liabilities | | | | $ | 25,960 | | $ | (22,478) | | $ | 3,482 |
84
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | December 31, 2016 (1) |
| | | | | | | | | | Net |
| | | | Gross | | | | | Recognized |
| | | | Recognized | | Gross | | Fair Value |
Not Designated as | | | | Assets/ | | Amounts | | Assets/ |
ASC 815 Hedges | | Balance Sheet Classification | | Liabilities | | Offset | | Liabilities |
Derivative assets | | | | | | | | | | | |
Commodity contracts - current | | Prepaid expenses and other | | $ | 21,405 | | $ | (21,405) | | $ | - |
Commodity contracts - non-current | | Other long-term assets | | | 9,495 | | | (9,495) | | | - |
Embedded derivatives - non-current | | Other long-term assets | | | 50,632 | | | - | | | 50,632 |
Total derivative assets | | | | $ | 81,532 | | $ | (30,900) | | $ | 50,632 |
Derivative liabilities | | | | | | | | | | | |
Commodity contracts - current | | Derivative liabilities | | $ | 39,033 | | $ | (21,405) | | $ | 17,628 |
Commodity contracts - non-current | | Other long-term liabilities | | | 19,724 | | | (9,495) | | | 10,229 |
Total derivative liabilities | | | | $ | 58,757 | | $ | (30,900) | | $ | 27,857 |
_____________________
| (1) | | Because counterparties to the Company’s financial derivative contracts subject to master netting arrangements are lenders under Whiting Oil and Gas’ credit agreement, which eliminates its need to post or receive collateral associated with its derivative positions, columns for cash collateral pledged or received have not been presented in the tables above.these tables. |
Contingent Features in Financial Derivative Instruments. None of the Company’s derivative instruments contain credit-risk-related contingent features. Counterparties to the Company’s financial derivative contracts are high credit-quality financial institutions that are lenders under Whiting’s credit agreement. The Company uses only credit agreement participants to hedge with, since these institutions are secured equally with the holders of Whiting’s bank debt, which eliminates the potential need to post collateral when Whiting is in a derivative liability position. As a result, the Company is not required to post letters of credit or corporate guarantees for its financial derivative counterparties in order to secure contract performance obligations.
7. FAIR VALUE MEASUREMENTS
Cash and cash equivalents, accounts receivable and payable are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. The Company’s credit agreement has a recorded value that approximates its fair value since its variable interest rate is tied to current market rates. The Company’s Senior Notes (including the Kodiak Notes) and Senior Subordinated Notes are recorded at cost, and the fair values of these instruments are included in the Long-Term Debt footnote. The Company’s derivative financial instruments are recorded at fair value and include a measure of the Company’s own nonperformance risk or that of its counterparties as appropriate.
The Company follows FASB ASC Topic 820, Fair Value Measurement and Disclosure, which establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
| · | | Level 1: Quoted Prices in Active Markets for Identical Assets – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| · | | Level 2: Significant Other Observable Inputs – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| · | | Level 3: Significant Unobservable Inputs – inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level.
Cash, cash equivalents, restricted cash, accounts receivable and accounts payable are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. The Company’s credit agreement has a recorded value that approximates its fair value since its variable interest rate is tied to current market rates and the applicable margins represent market rates.
The Company’s senior notes and senior subordinated notes are recorded at cost, and the Company’s convertible senior notes are recorded at fair value at the date of issuance. The following table summarizes the fair values and carrying values of these instruments as of December 31, 2017 and 2016 (in thousands):
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Fair | | Carrying | | Fair | | Carrying |
| | Value (1) | | Value (2) | | Value (1) | | Value (2) |
6.5% Senior Subordinated Notes due 2018 | | $ | - | | $ | - | | $ | 275,121 | | $ | 273,506 |
5.0% Senior Notes due 2019 | | | 985,444 | | | 958,713 | | | 961,409 | | | 956,607 |
1.25% Convertible Senior Notes due 2020 | | | 517,109 | | | 506,231 | | | 503,057 | | | 483,465 |
5.75% Senior Notes due 2021 | | | 897,633 | | | 869,284 | | | 868,149 | | | 868,460 |
6.25% Senior Notes due 2023 | | | 418,503 | | | 403,940 | | | 408,296 | | | 403,265 |
6.625% Senior Notes due 2026 | | | 1,025,000 | | | 985,261 | | | - | | | - |
Total | | $ | 3,843,689 | | $ | 3,723,429 | | $ | 3,016,032 | | $ | 2,985,303 |
| (1) | | Fair values are based on quoted market prices for these debt securities, and such fair values are therefore designated as Level 1 within the valuation hierarchy. |
| (2) | | Carrying values are presented net of unamortized debt issuance costs and debt discounts or premiums. |
The Company’s derivative financial instruments are recorded at fair value and include a measure of the Company’s own nonperformance risk or that of its counterparty, as appropriate. The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 20142017 and 2013,2016, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values (in thousands):
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | Total Fair Value |
| | Level 1 | | Level 2 | | Level 3 | | December 31, 2014 |
Financial Assets | | | | | | | | | | | | |
Commodity derivatives – current | | $ | - | | $ | 127,506 | | $ | 8,071 | | $ | 135,577 |
Commodity derivatives – non-current | | | - | | | - | | | 45,459 | | | 45,459 |
Total financial assets | | $ | - | | $ | 127,506 | | $ | 53,530 | | $ | 181,036 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | Total Fair Value |
| | Level 1 | | Level 2 | | Level 3 | | December 31, 2017 |
Financial Liabilities | | | | | | | | | | | | |
Commodity derivatives – current | | $ | - | | $ | 69,247 | | $ | 63,278 | | $ | 132,525 |
Total financial liabilities | | $ | - | | $ | 69,247 | | $ | 63,278 | | $ | 132,525 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Total Fair Value | | | | | | | | | | | Total Fair Value |
| | Level 1 | | Level 2 | | Level 3 | | December 31, 2013 | | Level 1 | | Level 2 | | Level 3 | | December 31, 2016 |
Financial Assets | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity derivatives – current | | $ | - | | $ | 1,274 | | $ | - | | $ | 1,274 | |
Embedded commodity derivatives – non-current | | | - | | | - | | | 36,416 | | | 36,416 | |
Embedded derivatives – non-current | | | $ | - | | $ | 50,632 | | $ | - | | $ | 50,632 |
Total financial assets | | $ | - | | $ | 1,274 | | $ | 36,416 | | $ | 37,690 | | $ | - | | $ | 50,632 | | $ | - | | $ | 50,632 |
Financial Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity derivatives – current | | $ | - | | $ | 3,482 | | $ | - | | $ | 3,482 | | $ | - | | $ | 14,664 | | $ | 2,964 | | $ | 17,628 |
Commodity derivatives – non-current | | | | - | | | 3,979 | | | 6,250 | | | 10,229 |
Total financial liabilities | | $ | - | | $ | 3,482 | | $ | - | | $ | 3,482 | | $ | - | | $ | 18,643 | | $ | 9,214 | | $ | 27,857 |
The following methods and assumptions were used to estimate the fair values of the Company’s financial assets and liabilities in the tables above:that are measured on a recurring basis:
Commodity Derivatives. Commodity derivative instruments consist mainly of costless collars and swap contracts for crude oil. The Company’s costless collars and swaps are valued based on an income approach. Both theThe option and swap models considermodel considers various assumptions, such as quoted forward prices for commodities, time value and volatility factors. These assumptions are observable in the marketplace throughout the full term of the contract, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace, and are therefore designated as Level 2 within the valuation hierarchy. The discount rates used in the fair values of these instruments include a measure of either the Company’s or the counterparty’s
nonperformance risk, as appropriate. The Company utilizes its counterparties’ valuations to assess the reasonableness of its own valuations.
In addition, the Company has twohad a long-term crude oil sales and delivery contracts,contract, whereby it hashad committed to deliver certain fixed volumes of crude oil at a price equal to NYMEX less the fixed differentials specified in the agreement.through April 2020. Whiting has determined that the contracts docontract did not meet the “normal purchase normal sale” exclusion, and has therefore reflected these contractsthis contract at fair value in its consolidated financial statements. TheseThis commodity derivatives arederivative was valued based on ana probability-weighted income approach which considers various assumptions, including quoted forwardspot prices for commodities, market differentials for crude oil, U.S. Treasury rates and either the Company’s or the counterparty’s nonperformance risk, as appropriate.
The assumptions used in the valuation of the fixed-differential contractscrude oil sales and delivery contract include certain market differential metrics that are unobservable during the term of the contracts. Such unobservable inputs are significant to the contract valuation methodology, and thecontracts’ fair values are therefore designated as Level 3 within the valuation hierarchy.
Embedded Commodity Derivatives. The embedded commodity derivative was related to a long-term CO2 purchase contract, which had a price adjustment clause linked to changes in NYMEX crude oil prices. Whiting determined that the portion of this contract linked to NYMEX oil prices was not clearly and closely related to its corresponding host contract, and the Company therefore bifurcated this embedded pricing feature from the host contract and reflected it at fair value in its consolidated financial statements as of December 31, 2013. The assumptions used in the CO2 contract valuation, which was based on the income approach, included certain oil price metrics that were unobservable during the term of the contract. Such unobservable oil price inputs were significant to the CO2 contract valuation methodology, and the contract’s fair value was therefore designated as Level 3 within the valuation hierarchy. BecauseOn February 1, 2018, Whiting paid $61 million to the counterparty to settle all future minimum volume commitments under this agreement. Accordingly, this derivative was settled in its entirety as of that date.
Embedded Derivatives. The Company had embedded derivatives related to its convertible notes that were issued in March 2016. The notes contained debtholder conversion options which the Company subsequently terminated this COdetermined were not clearly and closely related to the debt host contracts and the Company therefore bifurcated these embedded features and reflected them at fair value in the consolidated financial statements. Prior to their settlements, the fair values of these embedded derivatives were determined using a binomial lattice model which considered various inputs including (i) Whiting’s common stock price, (ii) risk-free rates based on U.S. Treasury rates, (iii) recovery rates in the event of default, (iv) default intensity, and (v) volatility of Whiting’s common stock. The expected volatility and default intensity used in the valuation were unobservable in the marketplace and significant to the valuation methodology, and the embedded derivatives’ fair value was therefore designated as Level 3 in the valuation hierarchy. During the second quarter of 2016, the entire aggregate principal amount of these convertible notes was converted into shares of the Company’s common stock. Accordingly, the embedded derivatives were settled in their entirety as of June 30, 2016.2 purchase contract, however, its
The Company had an embedded derivative hadrelated to its purchase and sale agreement with the buyer of the North Ward Estes Properties. The agreement included a Contingent Payment linked to NYMEX crude oil prices which the Company determined was not clearly and closely related to the host contract, and the Company therefore bifurcated this embedded feature and reflected it at fair value in the consolidated financial statements prior to settlement. The fair value of zerothis embedded derivative was determined using a modified Black-Scholes swaption pricing model which considers various assumptions, including quoted forward prices for commodities, time value and volatility factors. These assumptions were observable in the marketplace throughout the full term of the financial instrument, could be derived from observable data or were supported by observable levels at which transactions are executed in the marketplace, and were therefore designated as Level 2 within the valuation hierarchy. The discount rate used in the fair value of this instrument included a measure of the counterparty’s nonperformance risk. On July 19, 2017, the buyer paid $35 million to Whiting in satisfaction of this Contingent Payment. Accordingly, the embedded derivative was settled in its entirety as of December 31, 2014.that date.
Level 3 Fair Value Measurements.Measurements—A third-party valuation specialist is utilized to determinein determining the fair value of the commodityCompany’s derivative instruments designated as Level 3. The Company reviews these valuations, (includingincluding the related model inputs and assumptions)assumptions, and analyzes changes in fair value measurements between periods. The Company corroborates such inputs, calculations and fair value changes using various methodologies, and reviews unobservable inputs for reasonableness utilizing relevant information from other published sources.
The following table presents a reconciliation of changes in the fair value of financial assets (liabilities)or liabilities designated as Level 3 in the valuation hierarchy for the years ended December 31, 20142017 and 20132016 (in thousands):
| | | | | | |
| | | | | | |
| | Year Ended |
| | December 31, |
| | 2014 | | 2013 |
Fair value asset, beginning of period | | $ | 36,416 | | $ | 23,715 |
Unrealized gains (losses) on commodity derivative contracts included in earnings (1) | | | 17,114 | | | 12,701 |
Transfers into (out of) Level 3 | | | - | | | - |
Fair value asset, end of period | | $ | 53,530 | | $ | 36,416 |
| | | | | | |
| | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
Fair value liability, beginning of period | | $ | (9,214) | | $ | (4,027) |
Recognition of embedded derivatives associated with convertible note issuances | | | - | | | (89,884) |
Unrealized gains on embedded derivatives included in earnings (1) | | | - | | | 47,965 |
Settlement of embedded derivatives upon conversion of convertible notes | | | - | | | 41,919 |
Unrealized losses on commodity derivative contracts included in earnings (1) | | | (54,064) | | | (5,187) |
Transfers into (out of) Level 3 | | | - | | | - |
Fair value liability, end of period | | $ | (63,278) | | $ | (9,214) |
_____________________
| (1) | | Included in commodity derivative (gain) loss, net in the consolidated statements of income.operations. |
Quantitative Information Aboutabout Level 3 Fair Value Measurements. The significant unobservable inputs used in the fair value measurement of the Company’s commodity derivative contractsinstrument designated as Level 3 are as follows:
| | | | | | | | |
| | | | | | | | |
| | Fair Value at | | | | | | |
| | December 31, 2014 | | Valuation | | Unobservable | | Amount |
| | (in thousands) | | Technique | | Input | | (per Bbl) |
Commodity derivative contracts | | $53,530 | | Income approach | | Market differential for crude oil | | $5.74 |
| | | | | | |
| | | | | | |
Derivative Instrument | | Valuation Technique | | Unobservable Input | | Amount |
Commodity derivative contract | | Probability-weighted income approach | | Market differential for crude oil | | $4.08 - $4.92 per Bbl |
Sensitivity to Changes in Significant Unobservable Inputs. As presented above, the significant unobservable inputs used in the fair value measurement of Whiting’s commodity derivative contractscontract are the market differentials for crude oil over the term of the contracts.contract. Significant increases (decreases)or decreases in these unobservable inputs in isolation would result in a significantly lower (higher)or higher, respectively, fair value assetliability measurement.
NonrecurringNon-recurring Fair Value Measurements.—The Company applies the provisions of the fair value measurement standard on a non-recurring basis to its nonrecurring, non-financial measurements,assets and liabilities, including proved oil and gas property impairments.property. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. The Company did not recognize any impairment write-downs with respect to its proved property during the year ended December 31, 2016. The following table presents
tables present information about the Company’s non-financial assets and liabilities measured at fair value on a nonrecurringnon-recurring basis as offor the year ended December 31, 2014 and 2013,2017, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair valuesvalue (in thousands):
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Loss (Before |
| | Net Carrying | | | | | | | | | | | Tax) Year |
| | Value as of | | | | | | | | | | | Ended |
| | December 31, | | Fair Value Measurements Using | | December 31, |
| | 2014 | | Level 1 | | Level 2 | | Level 3 | | 2014 |
Proved property impairments (1) | | $ | 179,155 | | $ | - | | $ | - | | $ | 179,155 | | $ | 629,450 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Loss (Before |
| | Net Carrying | | | | | | | | | | | Tax) Year |
| | Value as of | | | | | | | | | | | Ended |
| | December 31, | | Fair Value Measurements Using | | December 31, |
| | 2017 | | Level 1 | | Level 2 | | Level 3 | | 2017 |
Proved property (1) | | $ | 389,390 | | $ | - | | $ | - | | $ | 389,390 | | $ | 834,950 |
_____________________
| (1) | | During the year ended December 31, 2014,fourth quarter of 2017, proved oil and gas properties at the Redtail field in the Denver Julesburg Basin (the “DJ Basin”) in Weld County, Colorado, with a previous carrying amount of $763 million$1.2 billion were written down to their fair value as of $176December31, 2017 of $389 million, resulting in a non-cash impairment charge of $587 million. The$835 million which was recorded within exploration and impairment primarily consisted of non-core oil and gas properties, that are not currently being developed, in Colorado, Louisiana, North Dakota and Utah and related to the decrease in the forward price curve for crude oil and natural gas on December 31, 2014 and the associated decline in oil and gas reserves in those areas. Also during the year ended December 31, 2014, proved COexpense. 2 properties at the Bravo Dome field in New Mexico with a carrying amount of $45 million were written down to their fair value of $3 million, resulting in a non-cash impairment charge of $42 million. |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Loss (Before |
| | Net Carrying | | | | | | | | | | | Tax) Year |
| | Value as of | | | | | | | | | | | Ended |
| | December 31, | | Fair Value Measurements Using | | December 31, |
| | 2013 | | Level 1 | | Level 2 | | Level 3 | | 2013 |
Proved property impairments (1) | | $ | 106,114 | | $ | - | | $ | - | | $ | 106,114 | | $ | 267,109 |
_____________________
| (1)
| | During the year ended December 31, 2013, proved oil and gas properties with a carrying amount of $373 million were written down to their fair value of $106 million, resulting in a non-cash impairment charge of $267 million. The impairment consisted of (i) a $221 million write-down in the Rocky Mountains region and Michigan related to the decrease in the forward price curve for natural gas at December 31, 2013 and the associated decline in gas reserves in those areas and (ii) a $46 million write-down in the Rocky Mountains region related to well performance and associated changes in reserves during the fourth quarter of 2013.
|
The following methods and assumptions were used to estimate the fair values of the non-financial liabilitiesassets in the tablestable above:
Proved Property Impairments. OnceThe Company tests proved property for impairment whenever events or changes in circumstances indicate that the fair value of these assets may be reduced below their carrying value. Based on recent well performance results in the DJ Basin, the Company has determined thatreduced its reserves at its Redtail field during the fourth quarter of 2017, and performed a proved property impairment has occurred, the costtest as of the property is written down to itsDecember 31, 2017. The fair value which is determinedwas ascribed using income approach analyses based on the net discounted future cash flows from the producing property and such discounted cash flows are developed using the income approach.related assets. The discounted cash flows arewere based on management’s expectations for the future. Unobservable inputs includeincluded estimates of future oil and gas or CO2production as the case may be, from the Company’s reserve reports, commodity prices based on sales contract terms or NYMEX forward price curves as of the date of the estimate (adjusted for basis differentials), estimated operating and development costs, and a risk-adjusted discount rate based on the Company’s weighted-average cost of capital (all of which arewere designated as Level 3 inputs within the fair value hierarchy). The impairment test indicated that a proved property impairment had occurred, and the Company therefore recorded a non-cash impairment charge to reduce the carrying value of the impaired property to its fair value at December 31, 2017.
8. DEFERRED COMPENSATIONSHAREHOLDERS’ EQUITY AND NONCONTROLLING INTEREST
Common Stock
Production Participation PlanReverse Stock Split.—The Company had a Production Participation Plan (the “Plan”) in which all employees participated. On June 11, 2014, the Board of Directors of the Company terminated the Plan effective December 31, 2013. Prior to Plan termination, interests in oilNovember 8, 2017 and gas properties acquired, developed or sold during the year were allocated to the Plan on an annual basis as determinedfollowing approval by the Compensation CommitteeCompany’s stockholders of an amendment to its certificate of incorporation to effect a reverse stock split, the Company’s Board of Directors. Once allocated,Directors approved a reverse stock split of Whiting’s common stock at a ratio of one-for-four and a reduction in the interests (not legally conveyed) were fixed. Interest allocationsnumber of authorized shares of the Company’s common stock from 600,000,000 shares to 225,000,000. Whiting’s common stock began trading on a split-adjusted basis on November 9, 2017 upon opening of the markets. All share and per share amounts in these consolidated financial statements and related notes for periods prior to 1995 consistedNovember 2017 have been retroactively adjusted to reflect the reverse stock split.
Common Stock Offering. In March 2015, the Company completed a public offering of 2%‑3% overriding royalty interests. Interest allocationsits common stock, selling 8,750,000 shares of common stock at a price of $120.00 per share and providing net proceeds of approximately $1.0 billion after 1995 were 1.75%‑5%underwriter’s fees. In addition, the Company granted the underwriter a 30-day option to purchase up to an additional 1,312,500 shares of oil and gas sales less lease operating expenses and production taxes.common stock. On April 1, 2015, the underwriter exercised its right to purchase an additional 500,000 shares of common stock, providing additional net proceeds of $61 million.
Employees vestedNoncontrolling Interest—The Company’s noncontrolling interest represented an unrelated third party’s 25% ownership interest in Sustainable Water Resources, LLC (“SWR”). During the Plan ratably at 20% per year over a five-year period. However, pursuantthird quarter of 2017, the third party’s ownership interest in SWR was assigned back to SWR. Thetable below summarizes the activity for the equity attributable to the terms of the Plan, upon Plan termination all employees fully vested, and the Company is required to distribute to each Plan participant an amount, based upon the valuation method set forth in the Plan, in a lump sum payment twelve months after the date of termination. This distribution includes the value of proved undeveloped oil and gas properties (“PUDs”) awarded upon Plan termination and is based on forecasted commodity prices for crude oil, NGLs and natural gas as of December 31, 2013. The fully vested amount due to Plan participants totals $113 million and has been reflected as a current payable, as it will be distributed to Plan participants during the first half of 2015. As of December 31, 2014, a portion of this liability representing a regular distribution under the Plan totaling $41 million hadnoncontrolling interest (in thousands):
| | | | | | |
| | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
Balance at beginning of period | | $ | 7,962 | | $ | 7,984 |
Net loss | | | (14) | | | (22) |
Conveyance of ownership interest | | | (7,948) | | | - |
Balance at end of period | | $ | - | | $ | 7,962 |
been paid to the Company’s third-party payroll administrator. However, these funds were not distributed by the payroll administrator to Plan participants until January 2015. The final Plan distribution payment will be made in June 2015.
Accrued compensation expense under the Plan for the year ended December 31, 2014 primarily relates to the change in liability for employee vestings and PUDs assigned upon Plan termination and amounted to $24 million charged to general and administrative expense and $2 million charged to exploration expense. Accrued compensation expense under the Plan for the years ended December 31, 2013 and 2012 amounted to $66 million and $45 million, respectively, charged to general and administrative expense and $7 million and $4 million, respectively, charged to exploration expense. Of the aggregate $73 million of accrued compensation under the Plan as of December 31, 2013, $24 million relates to the sale of the Postle Properties, which is further described in the Acquisitions and Divestitures footnote.
Prior to Plan termination, the Company recorded non-cash changes in the present value of estimated future payments under the Plan as a separate line item in the consolidated statements of income. As a result of Plan termination, all changes in the Plan liability during 2014 related to cash termination payments to be made in 2015. The following table presents changes in the Plan’s estimated long-term liability (in thousands):
| | | | | | |
| | | | | | |
| | Year Ended December 31, |
| | | 2014 | | | 2013 |
Long-term Production Participation Plan liability at January 1 | | $ | 87,503 | | $ | 94,483 |
Change in liability for accretion, vesting, changes in estimates and new Plan year activity prior to Plan termination | | | - | | | 66,284 |
Change in liability for vesting and PUDs assigned upon Plan termination | | | 25,888 | | | - |
Amount reflected as a current liability | | | (113,391) | | | (73,264) |
Long-term Production Participation Plan liability at December 31 | | $ | - | | $ | 87,503 |
401(k) Plan—The Company has a defined contribution retirement plan for all employees. The plan is funded by employee contributions and discretionary Company contributions. The Company’s contributions for 2014, 2013 and 2012 were $9 million, $8 million and $6 million, respectively. Employees vest in employer contributions at 20% per year of completed service.
9. SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTEREST
6.25% Convertible Perpetual Preferred Stock—In June 2009, the Company completed a public offering of 6.25% convertible perpetual preferred stock (“preferred stock”), selling 3,450,000 shares at a price of $100.00 per share. As a result of voluntary conversions and the Company exercising its right to mandatorily convert shares of preferred stock effective June 27, 2013, all 172,129 remaining shares of preferred stock outstanding on March 31, 2013 were converted into 792,919 shares of common stock. As of December 31, 2014, no shares of preferred stock remained issued or outstanding.
Each holder of the preferred stock was entitled to an annual dividend of $6.25 per share to be paid quarterly in cash, common stock or a combination thereof on March 15, June 15, September 15 and December 15, once such dividend had been declared by Whiting’s board of directors.STOCK-BASED COMPENSATION
Equity Incentive Plan—At the Company’s 2013 Annual Meeting held on May 7, 2013, shareholders approvedThe Company maintains the Whiting Petroleum Corporation 2013 Equity Incentive Plan, as amended and restated (the “2013 Equity Plan”), which replaced the Whiting Petroleum Corporation 2003 Equity Incentive Plan (the “2003 Equity Plan”) and includes the authority to issue 5,300,0001,375,000 shares of the Company’s common stock. Upon shareholder approval of the 2013 Equity Plan, the 2003 Equity Plan was terminated. The 2003 Equity Plan continues to govern awards that were outstanding as of the date of its termination, which remain in effect pursuant to their terms. Any shares netted or forfeited after May 7, 2013 under the 2003 Equity Plan and any shares forfeited under the 2013 Equity Plan will be available for future issuance under the 2013 Equity Plan. However, shares netted for tax withholding under the 2013 Equity Plan will be cancelled and will not be available for future issuance. Under the 2013 Equity Plan, no employee or officer participant may be granted options for more than 600,000225,000 shares of common stock, stock appreciation rights relating to more than 600,000225,000 shares of common stock, or more than 300,000150,000 shares of restricted stock, more than 150,000 restricted stock units, more than 150,000 performance shares, or more than 150,000 performance units during any calendar year. On December 8, 2014, the Company increased the numberIn addition, no non-employee director participant may be granted options for more than 25,000 shares of common stock, stock appreciation rights relating to more than 25,000 shares issuable under the 2013 Equity Plan by 978,161of common stock, more than 25,000 shares to accommodate for the conversion of Kodiak’s outstanding equity awards to Whiting equity awards upon closing of the Kodiak Acquisition. Any shares nettedrestricted stock, or forfeited under this increased availability will be cancelled and will not be available for future issuance under the 2013 Equity Plan.more than 25,000 restricted stock units during any calendar year. As of December 31, 2014, 5,048,4332017, 1,137,723 shares of common stock remained available for grant under the 2013 Equity Plan.
For the years ended December 31, 2014, 2013Restricted Stock, Restricted Stock Units and 2012, total stock compensation expense recognized for restricted share awards and stock options was $23 million, $22 million and $18 million, respectively.
Equity Awards Assumed in Kodiak Acquisition.Performance Shares Upon closing of the Kodiak Acquisition, the—The Company assumed all of Kodiak’s outstanding equity awards, including restricted stock awards, restricted stock units and stock options. Kodiak’s outstanding equity
awards held by employees were converted into Whiting’s equity awards using a conversion ratio of 0.177. The outstandinggrants service-based restricted stock awards and restricted stock units vested upon closing of the transaction, and the $10 million estimated fair value of the 257,601 shares of Whiting common stock issued to convert these awards was recorded as part of the purchase consideration.
The estimated fair value of the 673,235 Whiting options issued in exchange for Kodiak’s outstanding options was approximately $8 million, based on a Black-Scholes option-pricing model. Of this value, approximately $7 million was attributable to service rendered prior to the date of acquisition and was recorded as part of the purchase consideration, and the remaining $1 million will be expensed over the remaining service term of the replacement stock option awards. The unvested stock option awards will vest over a one to three-year service period from the grant date and are exercisable immediately upon vesting through the tenth anniversary of the grant date. The following table summarizes the assumptions used to estimate the fair value of stock options assumed in the Kodiak Acquisition:
| | |
| | 2014
|
Risk-free interest rate
| | 0.08% - 1.90%
|
Expected volatility
| | 40.3% - 49.7%
|
Expected term
| | 2.0 yrs. - 6.1 yrs.
|
Dividend yield
| | -
|
The weighted average fair value of these options, as determined by the Black-Scholes valuation model, was $12.20 per share as of the December 8, 2014 closing date of the Kodiak Acquisition.
Restricted Shares. Restricted stock awards for executive officers and employees, which generally vest ratably over a three-year service period, whileperiod. The Company also grants service-based restricted stock awards to directors, which generally vest ratably over a one-year service period. TheIn addition, the Company uses historical data and projectionsgrants performance share awards to estimate expected employee behaviors related to restricted stock forfeitures. The expected forfeituresexecutive officers that are then included as part of the grant date estimate of compensation cost. For service-based restricted stock awards, the grant date fair value is determined based on the closing bid price of the Company’s common stock on the grant date.
In January 2014, 2013 and 2012, 750,681 shares, 751,872 shares and 444,501 shares, respectively, of restricted stock, subject to certain market-based vesting criteria in addition to the standardas well as a three-year service condition, wereperiod. Upon adoption of ASU 2016-09 on January 1, 2017, the Company elected to account for forfeitures of awards granted to executive officers under the Equity Plan. Vesting each year is subject to the condition that Whiting’s stock price increases by a greater percentage (or decreases by a lesser percentage) than the average percentage increase (or decrease, respectively) of the stock prices of a peer group of companies.these plans as they occur in determining compensation expense. The market-based conditions must be met in order for the stock awards to vest, and it is therefore possible that no shares could vest in one or more of the three-year vesting periods. However, the Company recognizes compensation expense for all awards subject to marketmarket-based vesting conditions regardless of whether it becomes probable that these conditions will be achieved or not, and compensation expense is not reversed if vesting does not actually occur.
During 2017, 2016 and 2015, 538,194, 737,912 and 205,971 shares, respectively, of service-based restricted stock awards were granted to employees, executive officers and directors under the 2013 Equity Plan. The grant date fair value of restricted stock awards is determined based on the closing bid price of the Company’s common stock on the grant date. The weighted average grant date fair value of restricted stock awards was $40.66 per share, $27.82 per share and $123.72 per share for the years ended December 31, 2017, 2016, and 2015, respectively.
During 2017, 2016 and 2015, 168,466, 268,278 and 97,937 performance shares, respectively, subject to certain market-based vesting criteria were granted to executive officers under the 2013 Equity Plan. These market-based awards cliff vest on the third anniversary of the grant date, and the number of shares that will vest at the end of that three-year performance period is determined based on the rank of Whiting’s cumulative stockholder return compared to the stockholder return of a peer group of companies over the same three-year period. The number of shares earned could range from zero up to two times the number of shares initially granted.
For these awards subject to market conditions, the grant date fair value wasis estimated using a Monte Carlo valuation model. The Monte Carlo model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Expected volatility wasis calculated based on the historical volatility of Whiting’s common stock, and the risk-free interest rate is based on U.S. Treasury yield curve rates with maturities consistent with the three-year vesting period. The key assumptions used in valuing thethese market-based restricted sharesawards were as follows:
| | | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
Number of simulations | | 65,000 | | 65,000 | | 65,000 | | 2,500,000 | | 2,500,000 | | 2,500,000 |
Expected volatility | | 42.3% | | 43.1% | | 51.9% | | 82.44% | | 60.8% | | 40.3% |
Risk-free interest rate | | 0.86% | | 0.41% | | 0.35% | | 1.52% | | 1.13% | | 0.99% |
Dividend yield | | - | | - | | - | | - | | - | | - |
The weighted average grant date fair value of the market-based restricted stockawards as determined by the Monte Carlo valuation model was $26.59$63.04 per share, $23.01$25.56 per share and $29.45$133.00 per share in January 2014, 20132017, 2016 and 2012,2015, respectively.
The following table shows a summary of the Company’s nonvested restricted stock as ofaward (“RSA”), restricted stock unit (“RSU”) and performance share activity for the year ended December 31, 2012, 2013 and 2014 as well as activity during the years then ended:2017:
| | | | | | |
| | | | | Weighted Average |
| | Number | | Grant Date |
| | of Shares | | Fair Value |
Restricted stock awards nonvested, January 1, 2012 | | | 724,395 | | $ | 29.88 |
Granted | | | 592,400 | | | 34.45 |
Vested | | | (357,170) | | | 17.91 |
Forfeited | | | (8,599) | | | 51.72 |
Restricted stock awards nonvested, December 31, 2012 | | | 951,026 | | | 37.02 |
Granted | | | 940,792 | | | 27.59 |
Vested | | | (347,824) | | | 35.32 |
Forfeited | | | (99,684) | | | 30.95 |
Restricted stock awards nonvested, December 31, 2013 | | | 1,444,310 | | | 31.71 |
Granted | | | 907,856 | | | 32.41 |
Assumed in Kodiak Acquisition (1) | | | 304,926 | | | 37.25 |
Vested | | | (814,439) | | | 34.05 |
Forfeited | | | (385,785) | | | 34.86 |
Restricted stock awards nonvested, December 31, 2014 | | | 1,456,868 | | $ | 31.16 |
_____________________
| (1)
| | Kodiak’s existing restricted stock units and restricted stock awards held by employees, which automatically converted into 257,601 restricted stock units and 47,325 restricted stock awards of Whiting and vested upon closing of the Kodiak Acquisition.
|
| | | | | | | | | |
| | Number of Awards | | Weighted Average |
| | Service-Based | | Service-Based | | Market-Based | | Grant Date |
| | RSAs | | RSUs | | Performance Awards | | Fair Value |
Nonvested awards, January 1 | | 766,818 | | - | | 523,172 | | $ | 54.19 |
Granted | | 538,194 | | 39,619 | | 168,466 | | | 44.89 |
Vested | | (339,199) | | - | | - | | | 51.23 |
Forfeited | | (67,392) | | - | | (194,111) | | | 81.97 |
Nonvested awards, December 31 | | 898,421 | | 39,619 | | 497,527 | | $ | 44.99 |
As of December 31, 2014,2017, there was $13$18 million of total unrecognized compensation cost related to unvested restricted stockawards granted under the stock incentive plans. That cost is expected to be recognized over a weighted average period of 1.72.0 years. For the years ended December 31, 2014, 20132017, 2016 and 2012,2015, the total fair value of restricted stock vested was $31$15 million, $17$5 million and $19$4 million, respectively.
Stock Options. —Stock options may be granted to certain executive officers of the Company with exercise prices equal to the closing market price of the Company’s common stock on the grant date. There were no stock options granted under either the 2003 Equity Plan or the 2013 Equity Plan during 20142017, 2016 or 2013, other than the 673,235 stock options assumed in connection with the Kodiak Acquisition. In January 2012, 45,359 stock options were granted under the 2003 Equity Plan.2015. The Company’s stock options vest ratably over a three-year service period from the grant date and are exercisable immediately upon vesting through the tenth anniversary of the grant date.
The Company uses a Black-Scholes option-pricing model to estimate the fair value of stock option awards. Because the Company first granted stock options in 2009, it does not have historical exercise data upon which to estimate the expected term of the options. As such, the Company has elected to estimate the expected term of the stock options granted using the “simplified” method for “plain vanilla” options. The expected volatility at the grant date is based on the historical volatility of Whiting’s common stock, and the risk-free interest rate is determined based on the yield on U.S. Treasury strips with maturities similar to those of the expected term of the stock options. The following table summarizes the assumptions used to estimate the grant date fair value of stock options awarded in 2012:
| | |
| | 2012
|
Risk-free interest rate
| | 1.19%
|
Expected volatility
| | 61.4%
|
Expected term
| | 6.0 yrs.
|
Dividend yield
| | -
|
The grant date fair value of the stock options awarded, as determined by the Black-Scholes valuation model, was $28.88 per share in January 2012.
The following table shows a summary of the Company’s stock options outstanding as of December 31, 2012, 2013 and 20142017 as well as activity during the yearsyear then ended:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Weighted | | | | | | | | | | Weighted |
| | | | | | | | | | Average | | | | | | | | | | Average |
| | | | Weighted | | Aggregate | | Remaining | | | | Weighted | | Aggregate | | Remaining |
| | | | Average | | Intrinsic | | Contractual | | | | Average | | Intrinsic | | Contractual |
| | Number of | | Exercise Price | | Value | | Term | | Number of | | Exercise Price | | Value | | Term |
| | Options | | per Share | | (in thousands) | | (in years) | | Options | | per Share | | (in thousands) | | (in years) |
Options outstanding at January 1, 2012 | | 377,336 | | $ | 26.09 | | | | | | |
Options outstanding at January 1 | | | 128,524 | | $ | 158.17 | | | | | |
Granted | | 45,359 | | | 51.22 | | | | | | | - | | | - | | | | | |
Exercised | | - | | | - | | $ | - | | | | - | | | - | | $ | - | | |
Forfeited or expired | | - | | | - | | | | | | | (6,490) | | | 207.86 | | | | | |
Options outstanding at December 31, 2012 | | 422,695 | | | 28.79 | | | | | | |
Granted | | - | | | - | | | | | | |
Exercised | | - | | | - | | $ | - | | | |
Forfeited or expired | | (1,855) | | | 60.28 | | | | | | |
Options outstanding at December 31, 2013 | | 420,840 | | | 28.65 | | | | | | |
Granted | | - | | | - | | | | | | |
Assumed in Kodiak Acquisition | | 673,235 | | | 44.48 | | | | | | |
Exercised | | (117,123) | | | 15.21 | | $ | 6,203,361 | | | |
Forfeited or expired | | (8,559) | | | 50.51 | | | | | | |
Options outstanding at December 31, 2014 | | 968,393 | | $ | 41.09 | | $ | 5,216,952 | | 4.8 | |
Options vested and expected to vest at December 31, 2014 | | 905,107 | | $ | 40.78 | | $ | 4,984,431 | | 4.8 | |
Options exercisable at December 31, 2014 | | 831,220 | | $ | 38.45 | | $ | 5,216,952 | | 4.2 | |
Options outstanding at December 31 | | | 122,034 | | $ | 154.32 | | $ | 28 | | 2.4 |
Options vested at December 31 | | | 122,034 | | $ | 154.32 | | $ | 28 | | 2.4 |
Options exercisable at December 31 | | | 122,034 | | $ | 154.32 | | $ | 28 | | 2.4 |
UnrecognizedThere was no unrecognized compensation cost as of December 31, 2014 related to unvested stock option awards was $1 million, which is expected to be recognized over a period of 1.2 years.
Rights Agreement—In 2006, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock of the Company payable to the stockholders of record as of March 2, 2006. As a resultDecember 31, 2017. There were no stock options exercised during the years ended December 31, 2017 or 2016. For the year ended December 31, 2015, the aggregate intrinsic value of stock options exercised was $2 million.
For the two-for-one split of the Company’s commonyears ended December 31, 2017, 2016 and 2015, total stock effective February 22, 2011, one-half of a Right is now associated with eachcompensation expense recognized for restricted share of common stock. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share (“Preferred Shares”), of the Company at a price of $180.00 per one one-hundredth of a Preferred Share, subject to adjustment. If any person becomes a 15% or more stockholder of the Company, then each Right (subject to certain limitations) will entitle its holder to purchase, at the Right’s then current exercise price, a number of shares of commonawards and stock of the Company or of the acquirer having a market value at the time of twice the Right’s per share exercise price. The Company’s Board of Directors may redeem the Rights for $0.001 per Right at any time prior to the time when the Rights become exercisable. Unless the Rights are redeemed, exchanged or terminated earlier, they will expire on February 23, 2016.
Noncontrolling Interest—The noncontrolling interest represents an unrelated third party’s 25% ownership interest in Sustainable Water Resources, LLC. Thetable below summarizes the activity for the equity attributable to the noncontrolling interest (in thousands):
| | | | | | |
| | | | | | |
| | Year Ended |
| | December 31, |
| | 2014 | | 2013 |
Balance at January 1 | | $ | 8,132 | | $ | 8,184 |
Net loss | | | (62) | | | (52) |
Balance at December 31 | | $ | 8,070 | | $ | 8,132 |
options was $22 million, $26 million and $28 million, respectively.
10. INCOME TAXES
Income tax expensebenefit consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | | | | |
| | 2014 | | 2013 | | 2012 | | Year Ended December 31, |
Current income tax expense (refund): | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
Current income tax expense (benefit) | | | | | | | | | | |
Federal | | $ | (2,758) | | $ | 7,060 | | $ | - | | $ | (7,305) | | $ | (7,340) | | $ | - |
State | | | 5,383 | | | (6,074) | | | (669) | | | 14 | | | 150 | | | (357) |
Total current income tax expense (refund) | | | 2,625 | | | 986 | | | (669) | |
Deferred income tax expense: | | | | | | | | | | |
Total current income tax benefit | | | | (7,291) | | | (7,190) | | | (357) |
Deferred income tax benefit | | | | | | | | | | |
Federal | | | 65,522 | | | 196,787 | | | 233,468 | | | (398,686) | | | (65,130) | | | (736,520) |
State | | | 11,023 | | | 8,095 | | | 15,113 | | | (77,002) | | | (15,326) | | | (37,350) |
Total deferred income tax expense | | | 76,545 | | | 204,882 | | | 248,581 | |
Total deferred income tax benefit | | | | (475,688) | | | (80,456) | | | (773,870) |
Total | | $ | 79,170 | | $ | 205,868 | | $ | 247,912 | | $ | (482,979) | | $ | (87,646) | | $ | (774,227) |
Income tax expensebenefit differed from amounts that would result from applying the U.S. statutory income tax rate (35%) to income before income taxes as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | | | | |
| | 2014 | | 2013 | | 2012 | | Year Ended December 31, |
U.S. statutory income tax expense | | $ | 50,371 | | $ | 200,155 | | $ | 231,704 | |
| | | 2017 | | 2016 | | 2015 |
U.S. statutory income tax benefit | | | $ | (602,219) | | $ | (499,370) | | $ | (1,047,723) |
State income taxes, net of federal benefit | | | 12,705 | | | 13,962 | | | 14,444 | | | (39,557) | | | (33,050) | | | (44,654) |
State income tax credits | | | - | | | (10,525) | | | - | |
Statutory depletion | | | (618) | | | (796) | | | (620) | |
Valuation allowance | | | | 120,880 | | | - | | | - |
Federal tax reform | | | | (42,033) | | | - | | | - |
Impairment charge after enactment of federal tax reform | | | | 114,293 | | | - | | | - |
IRC Section 382 limitation | | | | (45,899) | | | 259,494 | | | - |
Non-deductible convertible debt expenses | | | | - | | | 174,071 | | | - |
Goodwill impairment | | | | - | | | - | | | 305,820 |
Market-based equity awards | | | | 7,003 | | | 8,352 | | | 2,690 |
Enacted changes in state tax laws | | | 3,700 | | | (1,416) | | | - | | | - | | | 5,020 | | | 7,350 |
Market-based equity awards | | | 2,805 | | | - | | | - | |
Permanent items | | | 3,504 | | | 2,122 | | | 1,524 | |
Transaction costs | | | 6,936 | | | - | | | - | |
Other | | | (233) | | | 2,366 | | | 860 | | | 4,553 | | | (2,163) | | | 2,290 |
Total | | $ | 79,170 | | $ | 205,868 | | $ | 247,912 | | $ | (482,979) | | $ | (87,646) | | $ | (774,227) |
The principal components of the Company’s deferred income tax assets and liabilities at December 31, 20142017 and 20132016 were as follows (in thousands):
��
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2014 | | 2013 | | 2017 | | 2016 |
Deferred income tax assets: | | | | | | | |
Deferred income tax assets | | | | | | | |
Net operating loss carryforward | | $ | 588,330 | | $ | 438,922 | | $ | 828,617 | | $ | 1,248,034 |
Production Participation Plan liability | | | 26,942 | | | 32,245 | |
Tax sharing liability | | | - | | | 9,439 | |
Derivative instruments | | | | 31,567 | | | 6,145 |
Asset retirement obligations | | | 13,791 | | | 23,642 | | | 16,138 | | | 21,398 |
Underwriter fees | | | 14,065 | | | 10,974 | |
Restricted stock compensation | | | 15,527 | | | 13,384 | | | 9,704 | | | 12,171 |
Premium on Senior Notes | | | 7,979 | | | - | |
EOR credit carryforwards | | | 7,946 | | | 7,946 | | | 7,946 | | | 7,946 |
Alternative minimum tax credit carryforwards | | | 15,694 | | | 18,452 | | | - | | | 7,847 |
Transaction costs | | | 7,957 | | | - | |
Other | | | 9,493 | | | 3,234 | | | 11,549 | | | 19,356 |
Total deferred income tax assets | | | 707,724 | | | 558,238 | | | 905,521 | | | 1,322,897 |
Less valuation allowance | | | (5,638) | | | (1,230) | | | (271,300) | | | (264,461) |
Net deferred income tax assets | | | 702,086 | | | 557,008 | | | 634,221 | | | 1,058,436 |
Deferred income tax liabilities: | | | | | | | |
Deferred income tax liabilities | | | | | | | |
Oil and gas properties | | | 1,785,926 | | | 1,675,916 | | | 566,747 | | | 1,412,781 |
Trust distributions | | | 129,437 | | | 149,332 | | | 54,980 | | | 94,120 |
Derivative instruments | | | 64,898 | | | 10,438 | |
Discount on convertible senior notes | | | | 12,494 | | | 27,224 |
Total deferred income tax liabilities | | | 1,980,261 | | | 1,835,686 | | | 634,221 | | | 1,534,125 |
Total net deferred income tax liabilities | | $ | 1,278,175 | | $ | 1,278,678 | | $ | - | | $ | 475,689 |
The Company’s July 1, 2016 note exchange transactions triggered an ownership shift within the meaning of Section 382 of the Internal Revenue Code (“IRC”) due to the “deemed share issuance” that resulted from the note exchanges. The ownership shift will limit Whiting’s usage of certain of its net operating losses and tax credits in the future. Accordingly, the Company recognized valuation allowances on its deferred tax assets totaling $259 million. In the third quarter of 2017 there was a partial release of this valuation allowance in the amount of $41 million associated with built-on gains on the sale of the FBIR Assets.
As of December 31, 2014,2017, the Company had federal net operating loss (“NOL”) carryforwards of $1.7 billion. Of this amount, $70 million in NOL carryforwards relate to tax deductions for stock compensation that exceed stock compensation costs recognized for financial statement purposes. The benefit of these excess tax deductions will not be recognized as an NOL in the Company’s financial statements, until the related deductions reduce taxes payable and are thereby realized. In addition, $170 million of NOL carryforwards are a result$2.9 billion, which was net of the Kodiak Acquisition, and the utilization of this amount is limited to $77 million each year for the next three years.IRC Section 382 limitation. The Company also has various state NOL carryforwards. The determination of the state NOL carryforwards is dependent upon apportionment percentages and state laws that can change from year to year and that can thereby impact the amount of such carryforwards. If unutilized, the federal NOL will expire between 20282023 and 2035,2037, and the state NOLs will expire between 20152018 and 2035.2037.
EOR credits are a credit against federal income taxes for certain costs related to extracting high-cost oil, utilizing certain prescribed enhanced tertiary recovery methods. As of December 31, 2014,2017, the Company had recognized aggregate EOR credits of $8 million that are available to offset regular federal income taxesmillion. As a result of the IRC Section 382 limitation in July 2016, the future. These credits can be carried forward and will expire between 2023 and 2025. Federal EOR credits are subject to phase-out according to the level of average domestic crude oil prices. The EOR credit has been phased-out since 2006, but this phase-out affects only the periods for which EOR credits can be captured and not the periods in which such credits can be utilized.Company recorded a full valuation allowance on these credits.
The Company iswas subject to the alternative minimum tax (“AMT”) principally due to its significant intangible drilling cost deductions. For 2017, the Company expects to forego bonus depreciation and claim a refund under the Protecting Americans from Tax Hikes Act for its AMT credits and has recognized a $7 million current benefit. As of December 31, 2014,2017, the Company had no remaining AMT credits totaling $16 million that are available to offset future regular federal income taxes.
On December 22, 2017, Congress passed the Tax Cuts and Jobs Act (the “TCJA”). The new legislation significantly changes the U.S. corporate tax law by, among other things, lowering the U.S. corporate income tax rate from 35% to 21% beginning in January 2018, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. FASB ASC Topic 740, Income Taxes, requires companies to recognize the impact of the changes in tax law in the period of enactment.
The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used to account for business combinations, however, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed. SAB 118 outlines a three-step process to be applied at each reporting period to account for and qualitatively disclose (i) the effects of the change in tax law for which accounting is complete, (ii) provisional amounts (or adjustments to provisional amounts) for the effects of the change in tax law where accounting is not complete, but where a reasonable estimate has been made, and (iii) areas affected by
the change in tax law where a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the TCJA.
Amounts recorded during the year ended December 31, 2017 related to the TCJA principally relate to the reduction in the U.S. corporate income tax rate to 21%, which resulted in (i) income tax expense of $51 million from the revaluation of the Company’s deferred tax assets and liabilities as of the date of enactment and (ii) an income tax benefit totaling $93 million related to a reduction in the Company’s existing valuation allowances. Reasonable estimates were made based on the Company’s analysis of the remeasurement of its deferred tax assets and liabilities and valuation allowances under tax reform. These creditsprovisional amounts may be adjusted in future periods if additional information is obtained or further clarification and guidance is issued by regulatory authorities regarding the application of the law.
Other provisions of the TCJA that do not expireimpact 2017, but may impact income taxes in future years include (i) a limitation on the current deductibility of net interest expense in excess of 30% of adjusted taxable income, (ii) a limitation on the usage of NOLs generated after 2017 to 80% of taxable income, (iii) additional limitations on certain meals and canentertainment expenses, (iv) the inclusion of performance based compensation in determining the excessive compensation limitation, and (v) the unlimited carryforward of NOLs.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion, or all, of the Company’s deferred tax assets will not be carried forward indefinitely.
realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of temporary differences, tax-planning strategies and projected future taxable income and results of operations. If the Company concludes that it is more likely than not that some portion, or all, of its deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. At December 31, 2014,2017, after considering the impact of the federal tax rate reduction resulting from the enactment of the TCJA, the Company had a valuation allowance totaling $6$271 million, comprised of unamortized underwriter fees in Canada$138 million of NOL carryforward limitations under Section 382 of the IRC, $8 million of EOR credits, which will expire between 2023 and foreign tax credit2025, $5 million of Canadian NOL carryforwards, which will expire between 20152034 and 2016.2035, and $1 million of short-term capital loss carryforwards that are not expected to be realized. In addition, the Company has determined that it does not expect the carrying value of its deferred tax assets to be realized, and accordingly, has recorded a full valuation allowance totaling $119 million on its net deferred tax assets as of December 31, 2017. At December 31, 2016, the Company had a valuation allowance totaling $265 million, comprised of $251 million of NOL carryforward limitations under Section 382 of the IRC, $8 million of EOR credits, and $5 million of Canadian NOL carryforwards. These valuation allowances have beenwere recorded because the Company determined it was more likely than not that the benefit from these deferred tax assets willwould not be realized due to the IRC Section 382 limitation on the NOL carryforward and the EOR credit carryforwards, as well as the divestiture of all foreign operations.
In conjunction with the Kodiak Acquisition,2014, the Company acquired Kodiak Oil & Gas Corp. (“Kodiak”), which is a Canadian entity that is to be disregarded for U.S. tax purposes. Kodiak holds an interest in Whiting Resources Corporation, (formerly Kodiak Oil & Gas (USA) Inc.), a U.S. entity which has undistributed earnings at December 31, 2014. These earnings are considered to be indefinitely reinvested, and accordingly, no provision hasentity. Canadian taxes have not been provided for on those earnings. Ifrecognized as the Company were to repatriate those earningstax basis exceeds the book basis in the formassociated assets. U.S. income taxes on Kodiak and its subsidiary, Whiting Resources Corporation, however, have been fully recognized on their cumulative losses to date. The TCJA provides for a one-time “deemed repatriation” of dividends or otherwise, no taxes would result.
Net deferred income tax liabilities were classified in the consolidated balance sheets as follows (in thousands):
| | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 |
Assets: | | | | | | |
Current deferred income taxes | | $ | - | | $ | - |
Liabilities: | | | | | | |
Current deferred income taxes | | | 47,545 | | | 648 |
Non-current deferred income taxes | | | 1,230,630 | | | 1,278,030 |
Net deferred income tax liabilities | | $ | 1,278,175 | | $ | 1,278,678 |
The following table summarizes the activity related to the Company’s liabilityaccumulated foreign earnings for unrecognized tax benefits (in thousands):
| | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
Beginning balance at January 1 | | $ | 170 | | $ | 170 | | $ | 299 |
Decrease related to tax position taken in a prior period | | | - | | | - | | | (129) |
Ending balance at December 31 | | $ | 170 | | $ | 170 | | $ | 170 |
The unrecognized tax benefit balance at December 31, 2014 includes certain tax positions, the allowance of which would positively affect the annual effective income tax rate. For the year ended December 31, 2014,2017. We do not expect to pay U.S. federal cash taxes on the deemed repatriation due to an estimated accumulated deficit in foreign earnings for tax purposes.
As of December 31, 2017 and 2016, the Company did not have any uncertain tax positions. During the year ended December 31, 2016, the Company reversed an unrecognized tax benefit of $170,000 as a result of the IRC Section 382 limitation, which resulted in the Company recording a full valuation allowance on its EOR credits, the underlying asset generating the uncertain tax position. For the years ended December 31, 2017, 2016 and 2015, the Company did not recognize any interest or penalties with respect to unrecognized tax benefits, nor did the Company have any such interest or penalties previously accrued. The Company believes that it is reasonably possible that no increases or decreases to unrecognized tax benefits will occur in the next twelve months.
The Company files income tax returns in the U.S. federal jurisdiction and in various states, each with varying statutes of limitations. The 20112014 through 20142017 tax years generally remain subject to examination by federal and state tax authorities. Additionally, in conjunction with the Kodiak Acquisition, the Company has Canadian income tax filings which remain subject to examination by the related tax authorities for the 20092012 through 20142017 tax years.
11. EARNINGS PER SHARE
The reconciliations between basic and diluted earningsloss per share are as follows (in thousands, except per share data):
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended |
| | December 31, |
| | 2014 | | 2013 | | 2012 |
Basic Earnings Per Share | | | | | | | | | |
Numerator: | | | | | | | | | |
Net income available to shareholders | | $ | 64,807 | | $ | 366,055 | | $ | 414,189 |
Preferred stock dividends (1) | | | - | | | (494) | | | (1,077) |
Net income available to common shareholders, basic | | $ | 64,807 | | $ | 365,561 | | $ | 413,112 |
Denominator: | | | | | | | | | |
Weighted average shares outstanding, basic | | | 122,138 | | | 118,260 | | | 117,601 |
Diluted Earnings Per Share | | | | | | | | | |
Numerator: | | | | | | | | | |
Net income available to common shareholders, basic | | $ | 64,807 | | $ | 365,561 | | $ | 413,112 |
Preferred stock dividends | | | - | | | 538 | | | 1,077 |
Adjusted net income available to common shareholders, diluted | | $ | 64,807 | | $ | 366,099 | | $ | 414,189 |
Denominator: | | | | | | | | | |
Weighted average shares outstanding, basic | | | 122,138 | | | 118,260 | | | 117,601 |
Restricted stock and stock options | | | 381 | | | 957 | | | 633 |
Convertible perpetual preferred stock | | | - | | | 371 | | | 794 |
Weighted average shares outstanding, diluted | | | 122,519 | | | 119,588 | | | 119,028 |
Earnings per common share, basic | | $ | 0.53 | | $ | 3.09 | | $ | 3.51 |
Earnings per common share, diluted | | $ | 0.53 | | $ | 3.06 | | $ | 3.48 |
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Basic Loss Per Share (1) | | | | | | | | | |
Net loss attributable to common shareholders | | $ | (1,237,648) | | $ | (1,339,102) | | $ | (2,219,182) |
Weighted average shares outstanding | | | 90,683 | | | 62,967 | | | 48,868 |
Loss per common share | | $ | (13.65) | | $ | (21.27) | | $ | (45.41) |
| | | | | | | | | |
Diluted Loss Per Share (1) | | | | | | | | | |
Adjusted net loss attributable to common shareholders | | $ | (1,237,648) | | $ | (1,339,102) | | $ | (2,219,182) |
Weighted average shares outstanding | | | 90,683 | | | 62,967 | | | 48,868 |
Loss per common share | | $ | (13.65) | | $ | (21.27) | | $ | (45.41) |
_____________________
| (1) | | For the year ended December 31, 2013, amount includes a decrease of $0.04 million in preferred stock dividends for preferred stock dividends accumulated. There were no accumulated dividend adjustmentsAll share and per share numbers have been retroactively adjusted for the years ended December 31, 2014 or 2012.2015 and 2016 periods to reflect the Company’s one-for-four reverse stock split in November 2017, as described in Note 8 to these consolidated financial statements.
|
For the year ended December 31, 2014,2017, the Company had a net loss and therefore the diluted earnings per share calculation for that period excludes (i) the dilutiveanti-dilutive effect of 803,902509,744 shares of service-based restricted stock, 22,946 shares of market-based restricted stock and 1,083 stock options. In addition, the diluted earnings per share calculation for the year ended December 31, 2017 excludes the effect of 554,580 common shares for stock options that were out-of-the-money and 5,447 shares of restricted stock that did not meet its market-based vesting criteria as of December 31, 2017.
For the year ended December 31, 2016, the Company had a net loss and therefore the diluted earnings per share calculation for that period excludes the anti-dilutive effect of (i) 10,820,758 shares issuable for convertible notes prior to their conversions under the if-converted method, (ii) 444,646 shares of service-based restricted stock, and (iii) 1,158 stock options. In addition, the diluted earnings per share calculation for the year ended December 31, 2016 excludes the effect of 479,452 common shares for stock options that were out-of-the-money and 92,548 shares of restricted stock that did not meet its market-based vesting criteria as of December 31, 2016.
For the year ended December 31, 2015, the Company had a net loss and therefore the diluted earnings per share calculation for that period excludes the anti-dilutive effect of 129,034 shares of service-based restricted stock and 21,391 stock options. In addition, the diluted earnings per share calculation for the year ended December 31, 2015 excludes the effect of 169,069 incremental shares of restricted stock that did not meet its market-based vesting criteria as of December 31, 2014,2015 and (ii) the anti-dilutive effect of 791128,689 common shares for stock options that were out-of-the-money. For
Refer to the year ended“Stock-Based Compensation” footnote for further information on the Company’s restricted stock and stock options.
As discussed in the “Long-Term Debt” footnote, the Company has the option to settle the 2020 Convertible Senior Notes with cash, shares of common stock or any combination thereof upon conversion. Based on the current conversion price, the entire outstanding principal amount of the 2020 Convertible Senior Notes as of December 31, 2013,2017 would be convertible into approximately 3.6 million shares of the Company’s common stock. However, the Company’s intent is to settle the principal amount of the notes in cash upon conversion. As a result, only the amount by which the conversion value exceeds the aggregate principal amount of the notes (the “conversion spread”) is considered in the diluted earnings per share calculation excludescomputation under the dilutive effect of (i) 173,778 incremental shares of restrictedtreasury stock that did not meet its market-based vesting criteria asmethod. As of December 31, 2013,2017, 2016 and (ii) 8,689 common shares for stock options that were out-of-the-money. For2015, the year ended December 31, 2012,conversion value did not exceed the principal amount of the notes. Accordingly, there was no impact to diluted earnings per share calculation excludes (i)or the dilutive effect of 141,807 incremental shares of restricted stock that did not meet its market-based vesting criteria as of December 31, 2012, and (ii) the anti-dilutive effect of 7,720 common sharesrelated disclosures for stock options that were out-of-the-money.those periods.
12. RELATED PARTY TRANSACTIONS
Whiting USA Trust I—As a result of Whiting’s retained ownership of 15.8%, or 2,186,389 units in Whiting USA Trust I, it is a related party of the Company. The following table summarizes the related party receivable and payable balances between the Company and Trust I as of December 31, 2014 and 2013 (in thousands):
| | | | | | |
| | December 31, |
| | 2014 | | 2013 |
Assets | | | | | | |
Unit distributions due from Trust I (1) | | $ | 652 | | $ | 1,093 |
Liabilities | | | | | | |
Unit distributions payable to Trust I (2) | | $ | 4,133 | | $ | 6,932 |
_____________________
| (1)
| | This amount represents Whiting’s 15.8% interest in the net proceeds due from Trust I and is included within accounts receivable trade, net in the Company’s consolidated balance sheets.
|
| (2)
| | This amount represents net proceeds from Trust I’s underlying properties that the Company has received between the last Trust I distribution date and December 31, 2014 and 2013, respectively, but which the Company has not yet distributed to Trust I as of December 31, 2014 and 2013, respectively. Due to ongoing processing of Trust I revenues and expenses after December 31, 2014 and 2013, the amount of Whiting’s next scheduled distribution to Trust I, and the related distribution by Trust I to its unitholders, will differ from this amount. These amounts are included within accounts payable trade in the Company’s consolidated balance sheet.
|
For the year ended December 31, 2014, Whiting paid $30 million, net of state tax withholdings, in unit distributions to Trust I and received $5 million in distributions back from Trust I pursuant to its retained ownership in 2,186,389 Trust I units.
On January 28, 2015, the net profits interest that Whiting conveyed to Trust I terminated as a result of 9.11 MMBOE (which amount is equivalent to 8.20 MMBOE attributable to the net profits interest) having been produced and sold from the underlying properties. Upon termination, the net profits interest in the underlying properties reverted back to Whiting, and Trust I will no longer be a related party.
Tax Sharing Liability—Prior to Whiting’s initial public offering in November 2003, it was a wholly-owned indirect subsidiary of Alliant Energy Corporation (“Alliant Energy”), and when the transactions discussed below were entered into, Alliant Energy was a related party of the Company. As of December 31, 2004 and thereafter, Alliant Energy was no longer a related party.
In 2003, the Company entered into a Tax Separation and Indemnification Agreement with Alliant Energy, whereby the Company and Alliant Energy made certain tax elections with the effect that the tax bases of Whiting’s assets were increased. Such additional tax bases have resulted in increased income tax deductions for Whiting and, accordingly, have reduced income taxes otherwise payable by Whiting. Under this Tax Separation and Indemnification Agreement, the Company agreed to pay to Alliant Energy (each year from 2004 to 2013) 90% of the tax benefits the Company realized annually as a result of this step-up in tax bases. In 2014, Whiting was obligated to pay Alliant the present value of 90% of the remaining tax benefits expected to result from its increased tax bases, which payout assumes all such tax benefits will be realized in future years.
In March 2014, the Company made the final payment due Alliant Energy under this agreement totaling $26 million, including $3 million of interest. During 2013 and 2012, the Company made payments of $2 million each year under this agreement and recognized interest expense of $3 million and $2 million, respectively.
Alliant Energy Guarantee—The Company holds a 6% working interest in three offshore platforms in California and the related onshore plant and equipment. Alliant Energy has guaranteed the Company’s obligation in the abandonment of these assets.
13.12. COMMITMENTS AND CONTINGENCIES
The table below shows the Company’s minimum future payments under non-cancelable operating leases and unconditional purchase obligations as of December 31, 20142017 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due by period | | Payments due by period |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
Non-cancelable leases | | $ | 7,692 | | $ | 7,547 | | $ | 6,610 | | $ | 6,693 | | $ | 5,844 | | $ | 216 | | $ | 34,602 | | $ | 7,502 | | $ | 6,399 | | $ | 802 | | $ | - | | $ | - | | $ | - | | $ | 14,703 |
Drilling rig contracts | | | 146,141 | | | 101,855 | | | 30,788 | | | - | | | - | | | - | | | 278,784 | | | 19,442 | | | 300 | | | - | | | - | | | - | | | - | | | 19,742 |
Pipeline transportation agreements | | | 5,948 | | | 9,722 | | | 9,559 | | | 9,559 | | | 9,559 | | | 50,091 | | | 94,438 | | | 5,369 | | | 5,369 | | | 5,369 | | | 5,369 | | | 5,369 | | | 11,481 | | | 38,326 |
Total | | $ | 159,781 | | $ | 119,124 | | $ | 46,957 | | $ | 16,252 | | $ | 15,403 | | $ | 50,307 | | $ | 407,824 | | $ | 32,313 | | $ | 12,068 | | $ | 6,171 | | $ | 5,369 | | $ | 5,369 | | $ | 11,481 | | $ | 72,771 |
Non-cancelable Leases—The Company leases 197,000222,900 square feet of administrative office space in Denver, Colorado under an operating lease arrangement expiring in 2019, 47,90044,500 square feet of office space in Midland, Texas expiring in 2020, an additional 36,300 square feet of administrative office space in Denver, Colorado assumed in the Kodiak Acquisition expiring in 2016, and 20,00036,500 square feet of office space in Dickinson, North Dakota expiring in 2016. In addition, the Company entered into a lease for several residential apartments in Watford City and Dickinson, North Dakota under an operating lease arrangement expiring in 2015.2020. Rental expense for 2014, 20132017, 2016 and 20122015 amounted to $7$8 million, $5$9 million and $6$9 million, respectively. Minimum lease payments under the terms of non-cancelable operating leases as of December 31, 20142017 are shown in the table above. The Company has sublet the majority of its office space in Midland, Texas to a third party for the remaining lease term. The offsetting rental income has not been included in the table above.
Drilling Rig Contracts—As of December 31, 2014,2017, the Company had 18three drilling rigs under long-term contract, allcontracts, of which were operatingtwo drilling rigs expire in the Rocky Mountains region. Subsequent to December 31, 2014, the Company early terminated five of these long-term contracts incurring early termination penalties totaling approximately $27 million. These penalties2018 and theone expires in 2019. The Company’s minimum drilling commitments under the terms of the 18 long-term drilling rigthese contracts as of December 31, 20142017 are shown in the table above. Of the remaining 13 long-term contracts, seven expire in 2016 and six in 2017. EarlyAs of December 31, 2017, early termination of the remainingthese contracts would
require termination penalties of $212$11 million, which would be in lieu of paying the remaining drilling commitments under these contracts. No other drilling rigs working for the Company are currently under long-term contracts or contracts that cannot be terminated at the end of the well that is currently being drilled. During 2014, 20132017, 2016 and 2012,2015, the Company made payments of $106$29 million, $93$31 million and $101$18 million, respectively, under these long-term contracts, which are initially capitalized as a component of oil and gas properties and either depleted in future periods or written off as exploration expense.
Pipeline Transportation Agreements—The Company has two ship-or-paythree pipeline transportation agreements with two different suppliers, one expiring in 20152022, 2024 and one expiring2025. Under two of these contracts, the Company has committed to pay fixed monthly reservation fees on dedicated pipelines from its Redtail field for natural gas and NGL transportation capacity, plus a variable charge based on actual transportation volumes. These fixed monthly reservation fees totaling approximately $38 million have been included in 2017, whereby it has committedthe table above.
The remaining contract contains a commitment to transport a minimum daily volume of CO2 or water, as the case may be,crude oil via a certain pipelinesoil gathering system or else pay for any deficiencies at a price stipulated in the contracts.contract. Although minimum dailyannual quantities are specified in the agreements,agreement, the actual CO2 or wateroil volumes transported and their corresponding unit prices are variable over the term of the contracts.contract. As a result, the future minimum payments for each of the five succeeding fiscal years are not fixed and determinable and are not therefore included in the table above. As of December 31, 2014,2017, the Company estimated the minimum future commitments under these ship-or-pay agreementsthis transportation agreement to approximate $20$17 million through 2017.2022.
In addition, the Company has three pipelineDuring 2017, 2016 and 2015, transportation agreements, one expiring in 2024 and two expiring in 2025, whereby it has committed to pay monthly reservation fees on dedicated pipelines forof crude oil, natural gas and NGL transportation capacity from the Redtail field, plus a variable charge based on actual transportation volumes. These fixed monthly reservation fees totaling approximately $94 million have been included in the table above.
During 2014, 2013 and 2012, transportation of natural gas, CO2 and waterNGLs under these contracts amounted to $13$7 million, $4$5 million and $3 million, respectively. As of December 31, 2014, the Company estimated future commitments under all of these pipeline transportation agreements to approximate $114 million through 2025.
Purchase Contracts—The Company has threeone take-or-pay purchase agreements, ofagreement which one agreement expires in 2015 and two agreements expire in 2017. One of these agreements contains commitments to buy certain volumes of CO2 for use in its EOR project in the North Ward Estes field in Texas. Under the remaining two take-or-pay agreements,2020, whereby the Company has committed to buy certain volumes of water for use in the fracture stimulation process of wells the Company completes in its Redtail field. Under the terms of these agreements,the agreement, the Company is obligated to purchase a minimum volume of CO2 or water as the case may be, or else pay for any deficiencies at the price stipulated in the contract. The CO2 volumes planned for use in the Company’s EOR project in the North Ward Estes field and the water volumes planned for use at our Redtail field currently exceed the minimum volumes specified in all of these agreements, therefore, the Company expects to avoid any payments for deficiencies under these contracts. During 2014, 2013 and 2012, purchases of CO2 and water amounted to $105 million, $84 million and $83 million, respectively. Although minimum daily quantities are specified in the agreements,agreement, the actual CO2 or water volumes purchased and their corresponding unit prices are variable over the term of the contracts.contract. As a result, the future minimum payments for each of the five succeeding fiscal years are not fixed and determinable and are not therefore included in the table above. As of December 31, 2014,2017, the Company estimated the minimum future commitments under all of thesethis purchase agreementsagreement to approximate $149$23 million through 2020.
As a result of the Company’s reduced development operations at its Redtail field, Whiting expects to make periodic deficiency payments under this contract during the remaining term. During 2017 and 2016, purchases of water amounted to $22 million and $1 million, respectively, which included insignificant deficiency payments for the year ended December 31, 2017.
Water Disposal Agreement—The Company has one water disposal agreement which expires in 2024, whereby it has contracted for the transportation and disposal of the produced water from its Redtail field. Under the terms of the agreement, the Company is obligated to provide a minimum volume of produced water or else pay for any deficiencies at the price stipulated in the contract. Although minimum monthly quantities are specified in the agreement, the actual water volumes disposed of and their corresponding unit prices are variable
over the term of the contract. As a result, the future minimum payments for each of the five succeeding fiscal years are not fixed and determinable and are not therefore included in the table above. As of December 31, 2017, the Company estimated the minimum future commitments under this disposal agreement to approximate $122 million through 2024. As a result of the Company’s reduced development operations at its Redtail field, Whiting has made and expects to make periodic deficiency payments under this contract. During 2017 and 2016, transportation and disposal of produced water amounted to $16 and $8 million, respectively, which includes $4 million and $2 million of deficiency payments, respectively. There were no water disposal costs incurred under this contract during 2015.
Delivery Commitments—The Company has various physical delivery contracts which require the Company to deliver fixed volumes of crude oil. One of these delivery commitments became effective on June 1, 2017 upon completion of the Dakota Access Pipeline, and it is tied to crude oil production from Whiting’s Sanish field in Mountrail County, North Dakota. Under the terms of the agreement, Whiting has committed to deliver 15 MBbl/d for a term of seven years. The Company believes its production and reserves at the Sanish field are sufficient to fulfill this delivery commitment, and therefore expects to avoid any payments for deficiencies under this contract.
The remaining two delivery contracts are tied to crude oil production at Whiting’s Redtail field in Weld County, Colorado. On February 1, 2018, the Company paid $61 million to the counterparty to one of these contracts to settle all future minimum volume commitments under the agreement. As of December 31, 2014, the Company had2017, these contracts contain remaining delivery commitments of 12.414.8 MMBbl, 17.8 MMBbl, 19.6 MMBbl, 21.5 MMBbl, 23.316.0 MMBbl and 6.04.1 MMBbl of crude oil for the years ended December 31, 20152018 through 2020, respectively. These deliveryrespectively, which commitments relatehave been reduced to crude oil production at Whiting’s Redtail field inreflect the DJ Basin in Weld County, Colorado. As of December 31, 2014, thecontract settlement on February 1, 2018. The Company has determined that it is no longernot probable that future oil production from its Redtail field will be sufficient to meet the minimum volume requirements specified in these physical delivery contracts, and as a result, the Company expects to make periodic deficiency payments for any shortfalls in delivering the minimum committed volumes. The Company currently anticipates that it will under-deliver by a
During 2017, 2016 and 2015, total of approximately 10.4 MMBbl over the duration of the contracts, which would require undiscounted aggregate deficiency payments of approximately $49under these contracts amounted to $66 million, over the next 5 years.$43 million and $15 million, respectively. The Company recognizes any monthly deficiency payments in the period in which the underdelivery takes place and the related liability has been incurred. The table above does not include any such deficiency payments that may be incurred under the Company’s physical delivery contracts, since it cannot be predicted with accuracy the amount and timing of any such penalties incurred.
Litigation—The Company is subject to litigation, claims and governmental and regulatory proceedings arising in the ordinary course of business. We accrueThe Company accrues a loss contingency for these lawsuits and claims when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Accordingly, no material amounts for loss contingencies associated with litigation, claims or assessments have been accrued at December 31, 2014 or 2013. While the outcome of these lawsuits and claims cannot be predicted with certainty, it is the opinion of the Company’s management that the loss for any litigation matters and claims that are reasonably possible to occur will not have a material adverse effect, individually or in the aggregate, on its consolidated financial position, cash flows or results of operations. Accordingly, no material amounts for loss contingencies associated with litigation, claims or assessments have been accrued at December 31, 2017 or 2016.
14. SUBSEQUENT EVENT
On January 7, 2015, as required under the Kodiak Indentures upon a change in control, Whiting offered to repurchase at 101% of par all $1,550 million principal amount of Kodiak Notes outstanding. The repurchase offer expires on March 3, 2015. The Company expects to fund any payments due as a result of such repurchase offer with borrowings under its revolving credit facility.
15. OIL AND GAS ACTIVITIES
The Company’s oil and gas activities for 2014, 2013 and 2012 were entirely within the United States. Costs incurred in oil and gas producing activities were as follows (in thousands):
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
Development (1) | | $ | 2,891,893 | | $ | 2,132,824 | | $ | 1,667,182 |
Proved property acquisition (2) | | | 2,278,855 | | | 232,572 | | | 19,785 |
Unproved property acquisition (2) | | | 1,035,439 | | | 174,103 | | | 119,175 |
Exploration | | | 216,587 | | | 363,234 | | | 436,084 |
Total | | $ | 6,422,774 | | $ | 2,902,733 | | $ | 2,242,226 |
_____________________
| (1)
| | During 2014, 2013 and 2012, non-cash additions to oil and gas properties of $45 million, $30 million and $36 million, respectively, which relate to estimated costs of the future plugging and abandonment of the Company’s oil and gas wells, are included in development costs in the table above.
|
| (2)
| | During 2014, amounts include $2.3 billion of non-cash proved property additions and $1.0 billion of non-cash unproved property additions related to the Kodiak Acquisition.
|
Net capitalized costs related to the Company’s oil and gas producing activities were as follows (in thousands):
| | | | | | |
| | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 |
Proved oil and gas properties | | $ | 12,956,834 | | $ | 9,196,845 |
Unproved oil and gas properties | | | 1,992,868 | | | 868,305 |
Accumulated depletion | | | (3,003,270) | | | (2,645,841) |
Oil and gas properties, net | | $ | 11,946,432 | | $ | 7,419,309 |
13. CAPITALIZED EXPLORATORY WELL COSTS
Exploratory well costs that are incurred and expensed in the same annual period have not been included in the table below. The net changes in capitalized exploratory well costs were as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
Beginning balance at January 1 | | $ | 85,378 | | $ | 108,861 | | $ | 90,519 | | $ | - | | $ | - | | $ | 14,293 |
Additions to capitalized exploratory well costs pending the determination of proved reserves | | 145,336 | | 281,951 | | 384,223 | | | 13,894 | | | - | | | 54,707 |
Reclassifications to wells, facilities and equipment based on the determination of proved reserves | | (200,869) | | (291,962) | | (358,625) | | | - | | | - | | | (63,352) |
Capitalized exploratory well costs charged to expense | | | (15,552) | | | (13,472) | | | (7,256) | | | - | | | - | | | (5,648) |
Ending balance at December 31 | | $ | 14,293 | | $ | 85,378 | | $ | 108,861 | | $ | 13,894 | | $ | - | | $ | - |
At December 31, 2014,2017, the Company had no costs capitalized for exploratory wells in progress for a period of greater than one year after the completion of drilling.
14. SUBSEQUENT EVENTS
16. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
For all years presented our independent petroleum engineers independently estimatedRedemption of 2019 Senior Notes—On December 27, 2017, the trustee under the indenture governing the Company’s 2019 Senior Notes provided notice to the holders of such notes that Whiting elected to redeem all of the proved, probableremaining $961 million aggregate principal amount of the 2019 Senior Notes on January 26, 2018, and possible reserve quantities included in this annual report. In connection with our external petroleum engineers performing their independent reserve estimations, we furnish them withon that date, Whiting paid $1.0 billion consisting of the following information that they review: (1) technical support data, (2) technical analysis of geologic and engineering support information, (3) economic and production data and (4) our well ownership interests. The102.976% redemption
price plus all accrued and unpaid interest on the notes. The Company financed the redemption with proceeds from the issuance of the 2026 Senior Notes and borrowings under its credit agreement.
Termination of Redtail Delivery Commitment—On February 1, 2018, the Company paid $61 million to the counterparty to one of its physical delivery contracts for crude oil production at its Redtail field in Weld County, Colorado to settle all future minimum commitments under this agreement. Refer to the “Commitments and Contingencies” footnote for further information on the Company’s delivery commitments.
SUPPLEMENTAL DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
Oil and Gas Producing Activities
Net capitalized costs related to the Company’s oil and gas producing activities were as follows (in thousands):
| | | | | | |
| | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
Proved oil and gas properties | | $ | 10,911,167 | | $ | 12,347,400 |
Unproved oil and gas properties | | | 382,483 | | | 883,451 |
Accumulated depletion | | | (4,185,301) | | | (4,170,237) |
Oil and gas properties, net | | $ | 7,108,349 | | $ | 9,060,614 |
The Company’s oil and gas activities for 2017, 2016 and 2015 were entirely within the United States. Costs incurred in oil and gas producing activities were as follows (in thousands):
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Development (1) | | $ | 799,462 | | $ | 518,585 | | $ | 2,137,755 |
Proved property acquisition | | | 4,075 | | | 797 | | | - |
Unproved property acquisition | | | 17,629 | | | 3,642 | | | 29,050 |
Exploration | | | 50,218 | | | 45,846 | | | 192,422 |
Total | | $ | 871,384 | | $ | 568,870 | | $ | 2,359,227 |
_____________________
| (1) | | Development costs include non-cash downward adjustments to oil and gas properties of $45 million for 2017 and non-cash additions to oil and gas properties of $15 million and $48 million for 2016 and 2015, respectively, which relate to estimated future plugging and abandonment costs of the Company’s oil and gas wells. |
Oil and Gas Reserve Quantities
For all years presented, the Company’s independent petroleum engineers independently estimated all of the proved reserve quantities included in this Annual Report on Form 10-K. In connection with the external petroleum engineers performing their independent reserve estimations, Whiting furnishes them with the following information for their review: (i) technical support data, (ii) technical analysis of geologic and engineering support information, (iii) economic and production data, and (iv) the Company’s well ownership interests. The independent petroleum engineers, Cawley, Gillespie & Associates, Inc., evaluated 100% of ourthe Company’s estimated proved reserve quantities and their related pre-tax future net cash flows as of December 31, 2014.2017. Proved reserve estimates included herein conform to the definitions prescribed by the SEC. Estimates of proved reserves are inherently imprecise and are continually subject to revision based on production history, results of additional exploration and development, price changes and other factors.
As of December 31, 2014,2017, all of the Company’s oil and gas reserves are attributable to properties within the United States. A summary of the Company’s changes in quantities of proved oil and gas reserves for the years ended December 31, 2012, 20132015, 2016 and 20142017 are as follows:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Oil | | NGLs | | Natural Gas | | Total | | Oil | | NGLs | | Natural Gas | | Total |
| | (MBbl) | | (MBbl) | | (MMcf) | | (MBOE) | | (MBbl) | | (MBbl) | | (MMcf) | | (MBOE) |
Balance—January 1, 2012 | | 260,144 | | 37,609 | | 284,975 | | 345,249 | |
Proved reserves | | | | | | | | | |
Balance—January 1, 2015 | | | 643,629 | | 54,684 | | 492,020 | | 780,316 |
Extensions and discoveries | | 68,134 | | 6,526 | | 40,915 | | 81,479 | | 131,134 | | 26,074 | | 192,575 | | 189,304 |
Sales of minerals in place | | (7,960) | | (320) | | (13,987) | | (10,611) | | (33,767) | | (3,240) | | (96,891) | | (53,156) |
Production | | (23,139) | | (2,766) | | (25,827) | | (30,209) | | (47,176) | | (5,539) | | (41,129) | | (59,570) |
Revisions to previous estimates | | 4,106 | | (951) | | (61,812) | | (7,148) | | (97,143) | | 40,968 | | 119,085 | | (36,327) |
Balance—December 31, 2012 | | 301,285 | | 40,098 | | 224,264 | | 378,760 | |
Balance—December 31, 2015 | | | 596,677 | | 112,947 | | 665,660 | | 820,567 |
Extensions and discoveries | | | 48,208 | | 12,980 | | 93,070 | | 76,700 |
Sales of minerals in place | | | (95,294) | | (16,795) | | (13,797) | | (114,388) |
Production | | | (33,992) | | (6,642) | | (41,438) | | (47,540) |
Revisions to previous estimates | | | (120,832) | | (997) | | 12,164 | | (119,802) |
Balance—December 31, 2016 | | | 394,767 | | 101,493 | | 715,659 | | 615,537 |
Extensions and discoveries | | 88,293 | | 9,830 | | 63,893 | | 108,772 | | 30,076 | | 14,512 | | 82,391 | | 58,320 |
Sales of minerals in place | | (36,992) | | (4,777) | | (12,411) | | (43,838) | | (42,137) | | (5,263) | | (18,116) | | (50,419) |
Purchases of minerals in place | | 14,543 | | 1,311 | | 7,751 | | 17,146 | | 157 | | 29 | | 283 | | 233 |
Production | | (27,035) | | (2,821) | | (26,917) | | (34,342) | | (29,261) | | (6,978) | | (41,261) | | (43,115) |
Revisions to previous estimates | | 7,327 | | 1,228 | | 20,934 | | 12,044 | | (16,019) | | 35,156 | | 107,521 | | 37,056 |
Balance—December 31, 2013 | | 347,421 | | 44,869 | | 277,514 | | 438,542 | |
Extensions and discoveries | | 146,122 | | 12,947 | | 94,452 | | 174,811 | |
Sales of minerals in place | | (1,642) | | - | | (2,925) | | (2,130) | |
Purchases of minerals in place | | 169,586 | | - | | 156,140 | | 195,609 | |
Production | | (33,485) | | (3,283) | | (30,218) | | (41,804) | |
Revisions to previous estimates | | 15,627 | | 151 | | (2,943) | | 15,288 | |
Balance—December 31, 2014 | | 643,629 | | 54,684 | | 492,020 | | 780,316 | |
Balance—December 31, 2017 | | | 337,583 | | 138,949 | | 846,477 | | 617,612 |
| | | | | | | | | | | | | | | | |
Proved developed reserves: | | | | | | | | | |
December 31, 2011 | | 180,975 | | 22,109 | | 211,297 | | 238,300 | |
December 31, 2012 | | 190,845 | | 24,204 | | 160,893 | | 241,864 | |
December 31, 2013 | | 198,204 | | 23,721 | | 183,129 | | 252,446 | |
Proved developed reserves | | | | | | | | | |
December 31, 2014 | | 333,593 | | 28,935 | | 298,237 | | 412,234 | | 333,593 | | 28,935 | | 298,237 | | 412,234 |
December 31, 2015 | | | 298,444 | | 55,437 | | 300,631 | | 403,986 |
December 31, 2016 | | | 183,165 | | 51,888 | | 337,860 | | 291,363 |
December 31, 2017 | | | 179,829 | | 76,957 | | 473,829 | | 335,758 |
| | | | | | | | | | | | | | | | |
Proved undeveloped reserves: | | | | | | | | | |
December 31, 2011 | | 79,169 | | 15,500 | | 73,678 | | 106,949 | |
December 31, 2012 | | 110,440 | | 15,894 | | 63,371 | | 136,896 | |
December 31, 2013 | | 149,217 | | 21,148 | | 94,385 | | 186,096 | |
Proved undeveloped reserves | | | | | | | | | |
December 31, 2014 | | 310,036 | | 25,749 | | 193,783 | | 368,082 | | 310,036 | | 25,749 | | 193,783 | | 368,082 |
December 31, 2015 | | | 298,233 | | 57,510 | | 365,029 | | 416,581 |
December 31, 2016 | | | 211,602 | | 49,605 | | 377,799 | | 324,174 |
December 31, 2017 | | | 157,754 | | 61,992 | | 372,648 | | 281,854 |
Notable changes in proved reserves for the year ended December 31, 2014 included:2017 included the following:
| · | | Extensions and discoveries. In 2014,2017, total extensions and discoveries of 174.858.3 MMBOE were primarily attributable to successful drilling in the Williston Basin. Both the new wells drilled in this area as well as the PUD locations added as a result of drilling increased the Company’s proved reserves. |
| · | | Sales of minerals in place. Sales of minerals in place totaled 50.4 MMBOE during 2017 and were primarily attributable to the disposition of the FBIR Assets as further described in the “Acquisitions and Divestitures” footnote in the notes to the consolidated financial statements. |
| · | | Revisions to previous estimates. In 2017, revisions to previous estimates increased proved developed and undeveloped reserves by a net amount of 37.1 MMBOE. Included in these revisions were (i) 88.7 MMBOE of upward adjustments caused by higher crude oil, NGL and natural gas prices incorporated into the Company’s reserve estimates at December 31, 2017 as compared to December 31, 2016 and (ii) 51.6 MMBOE of downward adjustments primarily attributable to reservoir analysis and well performance in the Redtail Sanish, Hidden Bench, Missouri Breaks, Pronghorn, Tarponfield. |
Notable changes in proved reserves for the year ended December 31, 2016 included the following:
| · | | Extensions and Cassandra fields.discoveries. In 2016, total extensions and discoveries of 76.7 MMBOE were primarily attributable to successful drilling in the Williston Basin and DJ Basin. Both the new wells drilled in these areas as well as the PUD locations added as a result of drilling increased the Company’s proved reserves. |
| · | | Sales of minerals in place. Sales of minerals in place totaled 114.4 MMBOE during 2016 and were primarily attributable to the disposition of the North Ward Estes Properties as further described in the “Acquisitions and Divestitures” footnote in the notes to the consolidated financial statements. |
| · | | Revisions to previous estimates. In 2016, revisions to previous estimates decreased proved developed and undeveloped reserves by a net amount of 119.8 MMBOE. Included in these revisions were (i) 121.6 MMBOE of downward adjustments caused by lower crude oil, NGL and natural gas prices incorporated into the Company’s reserve estimates at December 31, 2016 as compared to December 31, 2015 and (ii) 1.8 MMBOE of net upward adjustments attributable to reservoir analysis and well performance. |
Notable changes in proved reserves for the year ended December 31, 2015 included the following:
| · | | Extensions and discoveries. In 2015, total extensions and discoveries of 189.3 MMBOE were primarily attributable to successful drilling in the Williston Basin and DJ Basin. Both the new wells drilled in these areas as well as the PUD locations added as a result of drilling increased the Company’s proved reserves. |
| · | | Sales of minerals in place. In 2014, total salesSales of minerals in place of 2.1totaled 53.2 MMBOE during 2015 and were primarily attributable to the disposition of various non-core properties inacross all of the Big Tex prospect,Company’s operating areas as further described in the Acquisitions“Acquisitions and DivestituresDivestitures” footnote as well as other property divestitures in the Lucky Ditch, Whiskey Springs and Bridger Lake fields, which decreased the Company’s proved reserves. |
| ·
| | Purchases of minerals in place. In 2014, total purchases of minerals in place of 195.6 MMBOE were primarily attributablenotes to the Kodiak Acquisition, whereby we acquired interests in 778 producing oil and gas wells and undeveloped acreage in the Williston Basin, further described in the Acquisitions and Divestitures footnote, which increased the Company’s proved reserves.
|
| ·
| | Revisions to previous estimates. In 2014, revisions to previous estimates increased proved developed and undeveloped reserves by a net amount of 15.3 MMBOE. Included in these revisions were (i) 15.6 MMBOE of net upward adjustments attributable to reservoir analysis and well performance and (ii) 0.3 MMBOE of downward adjustments caused by lower crude oil prices incorporated into the Company’s reserve estimates at December 31, 2014 as compared to December 31, 2013.
|
Notable changes in proved reserves for the year ended December 31, 2013 included:
| ·
| | Extensions and discoveries. In 2013, total extensions and discoveries of 108.8 MMBOE were primarily attributable to successful drilling in the Redtail, Sanish, Missouri Breaks, Hidden Bench and Pronghorn fields. The new producing wells in these areas and their related proved undeveloped locations added during the year increased the Company’s proved reserves.
|
| ·
| | Sales of minerals in place. In 2013, total sales of minerals in place of 43.8 MMBOE were primarily attributable to the disposition of the Postle Properties, further described in the Acquisitions and Divestitures footnote, which decreased the Company’s proved reserves.
|
| ·
| | Purchases of minerals in place. In 2013, total purchases of minerals in place of 17.1 MMBOE were primarily attributable to the acquisition of 121 producing oil and gas wells and undeveloped acreage in the Williston Basin, further described in the Acquisitions and Divestitures footnote, which increased the Company’s proved reserves.consolidated financial statements.
|
| · | | Revisions to previous estimates. In 2013,2015, revisions to previous estimates increaseddecreased proved developed and undeveloped reserves by a net amount of 12.036.3 MMBOE. Included in these revisions were (i) 4.982.3 MMBOE of upwarddownward adjustments caused by higherlower crude oil, NGL and natural gas prices incorporated into the Company’s reserve estimates at December 31, 20132015 as compared to December 31, 20122014 and (ii) 7.146.0 MMBOE of net upward adjustments attributable to reservoir analysis and well performance. |
Notable changes in proved reserves for the year ended December 31, 2012 included:Standardized Measure of Discounted Future Net Cash Flows
| ·
| | Extensions and discoveries. In 2012, total extensions and discoveries of 81.5 MMBOE were primarily attributable to successful drilling in the Sanish, Redtail, Missouri Breaks and Pronghorn fields. The new producing wells in these fields and their related proved undeveloped locations added during the year increased the Company’s proved reserves.
|
| ·
| | Revisions to previous estimates. In 2012, revisions to previous estimates decreased proved developed and undeveloped reserves by a net amount of 7.1 MMBOE. Included in these revisions were (i) 11.8 MMBOE of downward adjustments caused by lower crude oil and natural gas prices incorporated into the Company’s reserve estimates at December 31, 2012 as compared to December 31, 2011, and (ii) 4.7 MMBOE of net upward adjustments attributable to reservoir analysis and well performance.
|
As discussed in Deferred Compensation within these footnotes to the consolidated financial statements, the Company had a Production Participation Plan (the “Plan”) in which all employees participated. On June 11, 2014, the Board of Directors of the Company terminated the Plan effective December 31, 2013. The reserve disclosures above include oil and natural gas reserve volumes that were allocated to the Plan prior to its termination. Once allocated to Plan participants, the interests were fixed. Interest allocations prior to 1995 consisted of 2%–3% overriding royalty interests. Interest allocations after 1995 were 1.75%–5% of oil and gas sales less lease operating expenses and production taxes from the production allocated to the Plan.
The standardized measure of discounted future net cash flowsStandardized Measure relating to proved oil and gas reserves and the changes in standardized measure of discounted future net cash flowsthe Standardized Measure relating to proved oil and natural gas reserves were prepared in accordance with the provisions of FASB ASC Topic 932, Extractive Activities—Oil and Gas. Future cash inflows as of December 31, 2014, 20132017, 2016 and 20122015 were computed by applying average fiscal-year prices (calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively) to estimated future production. Future production and development costs are computed by estimating the expenditures to be incurred in developing and producing the proved oil and natural gas reserves at year end, based on year-end costs and assuming the continuation of existing economic conditions.
Future income tax expenses are calculated by applying appropriate year-end tax rates to future pretax net cash flows relating to proved oil and natural gas reserves, less the tax basis of properties involved. Future income tax expenses give effect to permanent differences, tax credits and loss carryforwards relating to the proved oil and natural gas reserves. Future net cash flows are discounted at a rate of 10% annually to derive the standardized measure of discounted future net cash flows.Standardized Measure. This calculation does not necessarily result in an estimate of the fair value of the Company’s oil and gas properties.
The standardized measure of discounted future net cash flowsStandardized Measure relating to proved oil and natural gas reserves is as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
Future cash flows | | $ | 59,949,707 | | $ | 35,178,399 | | $ | 29,308,752 | | $ | 19,635,532 | | $ | 16,946,961 | | $ | 29,339,528 |
Future production costs | | | (20,772,234) | | | (12,973,292) | | | (11,397,332) | | | (7,874,590) | | | (7,266,435) | | | (12,344,463) |
Future development costs | | | (7,924,573) | | | (5,355,383) | | | (3,181,618) | | | (3,022,841) | | | (3,605,977) | | | (6,166,397) |
Future income tax expense | | | (8,579,237) | | | (3,954,401) | | | (4,278,529) | | | (474,646) | | | - | | | (388,072) |
Future net cash flows | | | 22,673,663 | | | 12,895,323 | | | 10,451,273 | | | 8,263,455 | | | 6,074,549 | | | 10,440,596 |
10% annual discount for estimated timing of cash flows | | | (11,830,243) | | | (6,301,462) | | | (5,044,240) | | | (4,395,897) | | | (3,376,463) | | | (5,866,225) |
Standardized measure of discounted future net cash flows | | $ | 10,843,420 | | $ | 6,593,861 | | $ | 5,407,033 | | $ | 3,867,558 | | $ | 2,698,086 | | $ | 4,574,371 |
_____________________
| (1) | | Based on the 12-month average oil and natural gas prices used in the computation of pre-tax PV10% as of December 31, 2016, Whiting’s future net income generated over the life of its proved reserves is expected to be less than its NOL carryforward deductions and therefore, under the Standardized Measure, there is no deduction for federal or state income taxes. |
Future cash flows as shown above are reported without consideration for the effects of open hedge contracts at each period end. If the effects of hedging transactions were included in the computation, then undiscounted future cash inflows would have decreasedincreased by $7$77million and $71 million in 2014, would not have changed in 20132016 and 2015, respectively, and would have decreased by $20 millionhad no impact on undiscounted future cash inflows in 2012.2017.
The changes in the standardized measure of discounted future net cash flowsStandardized Measure relating to proved oil and natural gas reserves are as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
Beginning of year | | $ | 6,593,861 | | $ | 5,407,033 | | $ | 5,272,492 | | $ | 2,698,086 | | $ | 4,574,371 | | $ | 10,843,420 |
Sale of oil and gas produced, net of production costs | | | (2,274,682) | | | (2,010,925) | | | (1,589,665) | | | (991,069) | | | (781,132) | | | (1,354,054) |
Sales of minerals in place | | | (48,532) | | | (1,064,195) | | | (438,614) | | | (312,346) | | | (1,434,545) | | | (1,414,511) |
Net changes in prices and production costs | | | 81,522 | | | 902,916 | | | (1,061,495) | | | 994,749 | | | (1,594,183) | | | (11,001,949) |
Extensions, discoveries and improved recoveries | | | 3,950,413 | | | 2,827,321 | | | 3,708,780 | | | 437,459 | | | 730,396 | | | 2,078,071 |
Previously estimated development costs incurred during the period | | | 1,149,926 | | | 832,096 | | | 526,982 | | | 542,746 | | | 477,830 | | | 1,625,160 |
Changes in estimated future development costs | | | (3,382,849) | | | (1,264,189) | | | (1,498,592) | | | 50,215 | | | 1,722,897 | | | 102,499 |
Purchases of minerals in place | | | 4,420,417 | | | 445,669 | | | - | | | 1,748 | | | - | | | - |
Revisions of previous quantity estimates | | | 345,775 | | | 313,069 | | | (295,432) | | | 277,967 | | | (1,502,416) | | | (966,713) |
Net change in income taxes | | | (651,817) | | | (335,637) | | | 255,328 | | | (101,806) | | | 47,431 | | | 3,578,106 |
Accretion of discount | | | 659,386 | | | 540,703 | | | 527,249 | | | 269,809 | | | 457,437 | | | 1,084,342 |
End of year | | $ | 10,843,420 | | $ | 6,593,861 | | $ | 5,407,033 | | $ | 3,867,558 | | $ | 2,698,086 | | $ | 4,574,371 |
Future net revenues included in the standardized measure of discounted future net cash flowsStandardized Measure relating to proved oil and natural gas reserves incorporate calculated weighted average sales prices (inclusive of adjustments for quality and location) in effect at December 31, 2014, 20132017, 2016 and 20122015 as follows:
| | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
Oil (per Bbl) | | $ | 84.69 | | $ | 90.80 | | $ | 87.15 | | $ | 47.16 | | $ | 35.60 | | $ | 43.07 |
NGLs (per Bbl) | | $ | 46.59 | | $ | 54.38 | | $ | 58.15 | | $ | 14.74 | | $ | 10.09 | | $ | 15.53 |
Natural Gas (per Mcf) | | $ | 5.88 | | $ | 4.30 | | $ | 3.21 | | $ | 1.97 | | $ | 2.61 | | $ | 2.83 |
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly financial data for the years ended December 31, 20142017 and 20132016 (in thousands, except per share data):
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2014 | | 2014 | | 2014 | | 2014 |
Oil, NGL and natural gas sales | | $ | 721,250 | | $ | 825,760 | | $ | 805,054 | | $ | 672,553 |
Operating profit (1) | | $ | 311,169 | | $ | 370,033 | | $ | 326,215 | | $ | 177,722 |
Net income (loss) | | $ | 109,051 | | $ | 151,426 | | $ | 157,961 | | $ | (353,693) |
Basic earnings (loss) per share | | $ | 0.92 | | $ | 1.27 | | $ | 1.33 | | $ | (2.69) |
Diluted earnings (loss) per share | | $ | 0.91 | | $ | 1.26 | | $ | 1.32 | | $ | (2.68) |
| | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2013 | | 2013 | | 2013 | | 2013 |
Oil, NGL and natural gas sales | | $ | 605,114 | | $ | 651,868 | | $ | 706,543 | | $ | 703,024 |
Operating profit (1) | | $ | 252,806 | | $ | 269,528 | | $ | 316,764 | | $ | 280,311 |
Net income (loss) | | $ | 86,244 | | $ | 134,944 | | $ | 204,091 | | $ | (59,276) |
Basic earnings (loss) per share | | $ | 0.73 | | $ | 1.14 | | $ | 1.72 | | $ | (0.50) |
Diluted earnings (loss) per share | | $ | 0.72 | | $ | 1.14 | | $ | 1.71 | | $ | (0.50) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2017 | | 2017 | | 2017 | | 2017 |
Oil, NGL and natural gas sales | | $ | 371,317 | | $ | 311,515 | | $ | 324,191 | | $ | 474,412 |
Gross profit (loss) (1) | | $ | 8,461 | | $ | (21,855) | | $ | (6,769) | | $ | 62,296 |
Net loss | | $ | (86,971) | | $ | (65,981) | | $ | (286,432) | | $ | (798,278) |
Basic loss per share (2) | | $ | (0.96) | | $ | (0.73) | | $ | (3.16) | | $ | (8.80) |
Diluted loss per share (2) | | $ | (0.96) | | $ | (0.73) | | $ | (3.16) | | $ | (8.80) |
| | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2016 | | 2016 | | 2016 | | 2016 |
Oil, NGL and natural gas sales | | $ | 289,697 | | $ | 337,036 | | $ | 315,554 | | $ | 342,695 |
Gross loss (1) | | $ | (162,898) | | $ | (98,978) | | $ | (83,369) | | $ | (45,205) |
Net loss | | $ | (171,758) | | $ | (301,046) | | $ | (693,055) | | $ | (173,265) |
Basic loss per share (2) | | $ | (3.36) | | $ | (5.33) | | $ | (9.89) | | $ | (2.34) |
Diluted loss per share (2) | | $ | (3.36) | | $ | (5.33) | | $ | (9.89) | | $ | (2.34) |
_____________________
| (1) | | Oil, NGL and natural gas sales less lease operating expense, production taxes and depreciation, depletion and amortization. |
| (2) | | All per share amounts have been retroactively adjusted to reflect the Company's one-for-four reverse stock split in November 2017, as described in Note 8 to these consolidated financial statements. |
******
Item 9. �� Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), our management evaluated, with the participation of our Chairman, President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the year ended December 31, 2014.2017. Based upon their evaluation of these disclosuresdisclosure controls and procedures, the Chairman, President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the year ended December 31, 20142017 to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting. The management of Whiting Petroleum Corporation and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of the inherent limitations of internal control over financial reporting, misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 20142017 using the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management believes that, as of December 31, 2014,2017, our internal control over financial reporting was effective based on those criteria. Our assessment of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls of the entities acquired in the Kodiak Acquisition on December 8, 2014. Kodiak’s consolidated total assets and total revenues represent approximately 32% of our consolidated total assets at December 31, 2014 and 1% of our consolidated revenues for the year ended December 31, 2014. We are in the process of integrating Kodiak’s and our internal control over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. We believe, however, that we will be able to maintain sufficient internal control over financial reporting throughout this integration process.
The effectiveness of our internal control over financial reporting as of December 31, 20142017 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein on the following page.
Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 20142017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Whiting Petroleum Corporation
Denver, Colorado
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Whiting Petroleum Corporation and subsidiaries (the "Company"“Company”) as of December 31, 2014,2017, based on criteria established in Internal Control — Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission. As describedCommission (“COSO”). In our opinion, the Company maintained, in Management’s Annual Report on Internal Control over Financial Reporting, management excluded from its assessment theall material respects, effective internal control over financial reporting of Kodiak Oil & Gas Corp. (“Kodiak”), which was acquired on December 8, 2014, and whose financial statements constitute 32% of total assets as of December 31, 2014 and 1%2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of total revenues ofthe Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statement amountsstatements as of and for the year ended December 31, 2014. Accordingly,2017 of the Company and our audit did not include the internal control overreport dated February 22, 2018 expressed an unqualified opinion on those financial reporting at Kodiak. statements.
Basis for Opinion
The Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2014 of the Company and our report dated February 27, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
February 27, 201522, 2018
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information included under the captions “Corporate Governance – Proposal 1 – Election of Directors,”Directors”, “Corporate Governance – Board Committee Information – Audit Committee” and “Share Ownership – Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for Whiting Petroleum Corporation’s 20152018 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference. Information with respect to our executive officers appears in Part I of this Annual Report on Form 10‑K.
We have adopted the Whiting Petroleum Corporation Code of Business Conduct and Ethics that applies to our directors, our Chairman, President and Chief Executive Officer, our Senior Vice President and Chief Financial Officer, our Controller and Treasurer and other persons performing similar functions. We have posted a copy of the Whiting Petroleum Corporation Code of Business Conduct and Ethics on our website at www.whiting.com. The Whiting Petroleum Corporation Code of Business Conduct and Ethics is also available in print to any stockholder who requests it in writing from the Corporate Secretary of Whiting Petroleum Corporation. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8‑K regarding amendments to, or waivers from, the Whiting Petroleum Corporation Code of Business Conduct and Ethics by posting such information on our website at www.whiting.com.
We are not including the information contained on our website as part of, or incorporating it by reference into, this report.
Item 11. Executive Compensation
The information required by this Item is included under the captions “Corporate Governance – Director Compensation,”Compensation” and “Executive Compensation” (other than “Executive Compensation – Proposal 2 – Advisory Vote on the Compensation of Our Named Executive Officers”) in the Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item with respect to security ownership of certain beneficial owners and management is included under the captions “Share Ownership – Directors and Executive Officers” and “Share Ownership – Certain Beneficial Owners” in the Proxy Statement and is incorporated herein by reference. The following table sets forth information with respect to compensation plans under which equity securities of Whiting Petroleum Corporation are authorized for issuance as of December 31, 2014.2017.
Equity Compensation Plan Information
| | | | | | | | | | | | |
| | | | | | Number of securities remaining | | | | | | Number of securities remaining |
| | Number of securities to | | Weighted-average | | available for future issuance under | | Number of securities to | | Weighted-average | | available for future issuance under |
| | be issued upon exercise | | exercise price of | | equity compensation plans | | be issued upon exercise | | exercise price of | | equity compensation plans |
| | of outstanding options, | | outstanding options, | | (excluding securities reflected in | | of outstanding options, | | outstanding options, | | (excluding securities reflected in |
Plan Category | | warrants and rights | | | warrants and rights | | the first column) | | warrants and rights | | | warrants and rights | | the first column) |
Equity compensation plans approved by security holders (1) | | 968,393 | | $ | 41.09 | | 5,048,433 (2) | | 122,034 | | $ | 154.32 | | 1,137,723 (2) |
Equity compensation plans not approved by security holders | | - | | | N/A | | - | | - | | | N/A | | - |
Total | | 968,393 | | $ | 41.09 | | 5,048,433 (2) | | 122,034 | | $ | 154.32 | | 1,137,723 (2) |
_____________________
| (1) | | Includes the Whiting Petroleum Corporation 2003 Equity Incentive Plan (the “2003 Equity Plan”) and Whiting Petroleum Corporation 2013 Equity Incentive Plan, as amended and restated (the “2013 Equity Plan”). Upon shareholder approval of the 2013 Equity Plan in May 2013, the 2003 Equity Plan was terminated, but continues to govern awards that were outstanding onat the date of its termination. Any shares netted or forfeited under the 2003 Equity Plan and any shares forfeited under the 2013 Equity Plan will be available for future issuance under the 2013 Equity Plan. However, shares netted for tax withholding under the 2013 Equity Plan will be cancelled and will not be available for future issuance. |
| (2) | | Number of securities reduced by 968,393122,034 stock options outstanding and 1,456,8681,435,567 shares of restricted common stock previously issued for which the restrictions have not lapsed. |
Item 13. Certain Relationships, Related Transactions and Director Independence
The information required by this Item is included under the caption “Corporate Governance – Governance Information – Independence of Directors” and “Corporate Governance – Governance Information – Transactions with Related Persons” in the Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this Item is included under the caption “Audit Matters – Audit and Non-Audit Fees and Services” in the Proxy Statement and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
| | |
(a) | 1.Financial statements – Refer to the Index to Consolidated Financial Statements included in Item 8 of this Form 10-K for a list of all financial statements filed as part of this report. |
| 2.Financial statement schedules – The following financial statement schedule is filed as part of this Annual Report on Form 10-K: |
| | a.Schedule I – Condensed Financial Information of Registrant
|
| | All other schedules are omitted since the required information is not present, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. |
| 3.Exhibits – The exhibits listed in the accompanying index to exhibits are filed as part of this Annual Report on Form 10‑K. |
(b) | Exhibits |
| The exhibits listed in the accompanying exhibit index are filed (except where otherwise indicated) as part of this report. |
(c)
| Financial statement schedules
|
Item 16. Form 10-K Summary
None.
******
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WHITING PETROLEUM CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANYEXHIBIT INDEX
CONDENSED BALANCE SHEETS
(in thousands)
| |
| |
Exhibit | |
Number | Exhibit Description |
(2.1) | Purchase and Sale Agreement, dated August 14, 2017, by and between Whiting Resources Corporation, RimRock Oil & Gas Williston, LLC, Whiting Oil and Gas Corporation and RimRock Oil & Gas Williston Resources, Inc., effective as of September 1, 2017 [Incorporated by reference to Exhibit 2.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on September 6, 2017 (File No. 001-31899)]. |
(3.1) | Restated Certificate of Incorporation of Whiting Petroleum Corporation [Incorporated by reference to Exhibit 3.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on November 9, 2017 (File No. 001-31899)]. |
(3.2) | Amended and Restated By-laws of Whiting Petroleum Corporation, effective October 24, 2017 [Incorporated by reference to Exhibit 3.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 26, 2017 (File No. 001-31899)]. |
(4.1) | Sixth Amended and Restated Credit Agreement, dated as of August 27, 2014, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the various other agents party thereto [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on August 28, 2014 (File No. 001-31899)]. |
(4.2) | First Amendment to Sixth Amended and Restated Credit Agreement, dated as of April 27, 2015, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the various other agents party thereto [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2015 (File No. 001-31899)]. |
(4.3) | Second Amendment to Sixth Amended and Restated Credit Agreement, dated as of October 13, 2015, among Whiting Petroleum Corporation, its subsidiary Whiting Oil and Gas Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders party thereto [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 14, 2015 (File No. 001-31899)]. |
(4.4) | Third Amendment to Sixth Amended and Restated Credit Agreement and First Amendment to Amended and Restated Guaranty and Collateral Agreement, dated as of March 25, 2016, among Whiting Petroleum Corporation, its subsidiary Whiting Oil and Gas Corporation, certain other subsidiaries of Whiting Petroleum Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents and lenders party thereto [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on March 28, 2016 (File No. 001-31899)]. |
(4.5) | Fifth Amendment to Sixth Amended and Restated Credit Agreement, dated as of December 12, 2017, among Whiting Petroleum Corporation, its subsidiary Whiting Oil and Gas Corporation, certain other subsidiaries of Whiting Petroleum Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents and lenders party thereto [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 13, 2017 (File No. 001-31899)]. |
(4.6)^ | Amended and Restated Guaranty and Collateral Agreement, dated as of December 8, 2014, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation, Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., Kodiak Williston, LLC and JPMorgan Chase Bank, N.A., as Administrative Agent [Incorporated by reference to Exhibit 4.16 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 8, 2014 (File No. 001-31899)]. |
(4.7) | Maximum Credit Amount Increase Agreement, dated as of December 19, 2014, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 22, 2014 (File No. 001-31899)]. |
(4.8) | Indenture, dated September 12, 2013, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on September 12, 2013 (File No. 001-31899)]. |
(4.9) | Second Supplemental Indenture, dated September 12, 2013, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, creating the 5.75% Senior Notes due 2021 [Incorporated by reference to Exhibit 4.3 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on September 12, 2013 (File No. 001-31899)]. |
(4.10) | Supplemental Indenture and Amendment – Subsidiary Guarantee, dated as of December 11, 2014, among Whiting Petroleum Corporation, Whiting Canadian Holding Company ULC, Whiting Resources Corporation, Whiting US Holding Company and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the 5.75% Senior Notes Due 2021 [Incorporated by reference to Exhibit 4.3 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 12, 2014 (File No. 001-31899)]. |
| | | | | | |
| | | | | | |
| | December 31, |
| | 2014 | | 2013 |
ASSETS | | | | | | |
Current assets | | $ | 3,859 | | $ | 5,120 |
Investment in subsidiaries | | | 5,464,763 | | | 2,707,184 |
Intercompany receivable | | | 2,907,270 | | | 3,796,321 |
Total assets | | $ | 8,375,892 | | $ | 6,508,625 |
| | | | | | |
LIABILITIES AND EQUITY | | | | | | |
Current liabilities | | $ | 27,738 | | $ | 26,054 |
Long-term debt | | | 2,653,180 | | | 2,653,834 |
Other long-term liabilities | | | - | | | 170 |
Shareholders’ equity | | | 5,694,974 | | | 3,828,567 |
Total liabilities and equity | | $ | 8,375,892 | | $ | 6,508,625 |
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Exhibit | |
Number | Exhibit Description |
(4.11) | Fourth Supplemental Indenture, dated March 27, 2015, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation, Whiting US Holding Company, Whiting Canadian Holding Company ULC, Whiting Resources Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, creating the 6.25% Senior Notes due 2023 [Incorporated by reference to Exhibit 4.3 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on March 30, 2015 (File No. 001-31899)]. |
(4.12) | Fifth Supplemental Indenture, dated December 27, 2017, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation, Whiting US Holding Company, Whiting Canadian Holding Company ULC, Whiting Resources Corporation and the Bank of New York Mellon Trust Company, N.A. as Trustee, creating the 6.625% Senior Notes due 2026 [Incorporated by reference to Exhibit 4.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 27, 2017 (File No. 001-31899)]. |
(4.13) | Indenture, dated March 27, 2015, among Whiting Petroleum Corporation, the Guarantors and The Bank of New York Mellon Trust Company, N.A., as Trustee, creating the 1.25% Convertible Senior Notes due 2020 [Incorporated by reference to Exhibit 4.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on March 30, 2015 (File No. 001-31899)]. |
(10.1)* | Whiting Petroleum Corporation 2003 Equity Incentive Plan, as amended through October 23, 2007 [Incorporated by reference to Exhibit 10.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 29, 2007 (File No. 001‑31899)]. |
(10.2)* | Whiting Petroleum Corporation 2013 Equity Incentive Plan, as amended and restated effective as of November 8, 2017 [Incorporated by reference to Exhibit 10.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on November 9, 2017 (File No. 001-31899)]. |
(10.3)* | Summary of Non-Employee Director Compensation for Whiting Petroleum Corporation. |
(10.4)* | Form of Indemnification Agreement for directors and officers of Whiting Petroleum Corporation [Incorporated by reference to Exhibit 10.1 to Whiting Petroleum Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 001-31899)]. |
(10.5)* | Form of Executive Employment and Severance Agreement for executive officers of Whiting Petroleum Corporation [Incorporated by reference to Exhibit 10.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on January 5, 2015 (File No. 001‑31899)]. |
(10.6)* | Form of Stock Option Agreement pursuant to the Whiting Petroleum Corporation 2003 Equity Incentive Plan [Incorporated by reference to Exhibit 10.14 to Whiting Petroleum Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-31899)]. |
(10.7)* | Form of Restricted Stock Agreement pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan for performance vesting awards [Incorporated by reference to Exhibit 10.14 to Whiting Petroleum Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-31899)]. |
(10.8)* | Form of Restricted Stock Agreement pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan for time-based vesting awards [Incorporated by reference to Exhibit 10.10 to Whiting Petroleum Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-31899)]. |
(10.9)* | Form of Stock Option Agreement pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan [Incorporated by reference to Exhibit 10.16 to Whiting Petroleum Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-31899)]. |
(10.10)* | Form of Performance Share Award Agreement pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan granted prior to 2018 [Incorporated by reference to Exhibit 10.12 to Whiting Petroleum Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-31899)]. |
(10.11)* | Form of Performance Share Award Agreement pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan granted in 2018 and after. |
(10.12)* | Executive Employment and Severance Agreement, between Bradley J. Holly and Whiting Petroleum Corporation, effective as of November 1, 2017 [Incorporated by reference to Exhibit 10.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 26, 2017 (File No. 001-31899)]. |
(10.13)* | Amended and Restated Executive Employment and Severance Agreement, between James J. Volker and Whiting Petroleum Corporation, effective as of November 1, 2017 [Incorporated by reference to Exhibit 10.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 26, 2017 (File No. 001-31899)]. |
(10.14)* | Form of Restricted Stock Unit Award Agreement (Cash-Settled) pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan [Incorporated by reference to Exhibit 10.3 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 26, 2017 (File No. 001‑31899)]. |
(10.15)* | Form of Restricted Stock Unit Award Agreement (Stock-Settled) pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan [Incorporated by reference to Exhibit 10.4 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 26, 2017 (File No. 001‑31899)]. |
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
OPERATING EXPENSES: | | | | | | | | | |
General and administrative | | $ | (1,010) | | $ | (1,131) | | $ | (16,506) |
Interest expense | | | (1,864) | | | (2,922) | | | (2,168) |
Equity in earnings of subsidiaries | | | 66,100 | | | 361,732 | | | 425,870 |
INCOME BEFORE INCOME TAXES | | | 63,226 | | | 357,679 | | | 407,196 |
Income tax benefit | | | 1,581 | | | 8,376 | | | 6,993 |
NET INCOME | | $ | 64,807 | | $ | 366,055 | | $ | 414,189 |
COMPREHENSIVE INCOME | | $ | 64,807 | | $ | 366,055 | | $ | 414,189 |
| | | | | | | | | |
See notes to condensed financial statements. |
Table of Contents
Exhibit | |
Number | Exhibit Description |
(10.16) | Registration Rights Agreement, dated as of December 27, 2017, by and among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation, Whiting US Holding Company, Whiting Canadian Holding Company ULC, Whiting Resources Corporation and J.P. Morgan Securities LLC, for itself and as representative of the initial purchasers named therein [Incorporated by reference to Exhibit 10.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 27, 2017 (File No. 001-31899). |
(21) | Significant Subsidiaries of Whiting Petroleum Corporation. |
(23.1) | Consent of Deloitte & Touche LLP. |
(23.2) | Consent of Cawley, Gillespie & Associates, Inc., Independent Petroleum Engineers. |
(31.1) | Certification by the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. |
(31.2) | Certification by the Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. |
(32.1) | Written Statement of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
(32.2) | Written Statement of the Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
(99.1) | Proxy Statement for the 2018 Annual Meeting of Stockholders, to be filed within 120 days of December 31, 2017 [To be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after December 31, 2017; except to the extent specifically incorporated by reference, the Proxy Statement for the 2018 Annual Meeting of Stockholders shall not be deemed to be filed with the Securities and Exchange Commission as part of this Annual Report on Form 10-K]. |
(99.2) | Report of Cawley, Gillespie & Associates, Inc., Independent Petroleum Engineers relating to Total Proved Reserves, dated January 9, 2018. |
(101) | The following materials from Whiting Petroleum Corporation’s Annual Report on Form 10‑K for the year ended December 31, 2017 are filed herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 2017 and 2016, (ii) the Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015, (iii) the Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015, (iv) the Consolidated Statements of Equity for the Years Ended December 31, 2017, 2016 and 2015, and (v) Notes to Consolidated Financial Statements. |
_____________________
*A management contract or compensatory plan or arrangement.
^Kodiak Oil & Gas Corp. is now known as Whiting Canadian Holding Company ULC; Kodiak Oil & Gas (USA) Inc. is now known as Whiting Resources Corporation; Kodiak Williston, LLC has merged with Whiting Resources Corporation; KOG Finance, LLC has been dissolved; and KOG Oil & Gas ULC has been liquidated.
Schedule I
WHITING PETROLEUM CORPORATION
CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | | $ | - | | $ | - | | $ | 16,423 |
| | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
Investment in subsidiaries | | | - | | | - | | | - |
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Intercompany receivable | | | 26,373 | | | (2,048,253) | | | (14,094) |
Issuance of 5% Senior Notes due 2019 | | | - | | | 1,100,000 | | | - |
Issuance of 5.75% Senior Notes due 2021 | | | - | | | 1,204,000 | | | - |
Redemption of 7% Senior Subordinated Notes due 2014 | | | - | | | (253,988) | | | - |
Repayment of tax sharing liability | | | (26,373) | | | (1,759) | | | (2,329) |
Net cash used in financing activities | | | - | | | - | | | (16,423) |
NET CHANGE IN CASH AND CASH EQUIVALENTS | | | - | | | - | | | - |
CASH AND CASH EQUIVALENTS: | | | | | | | | | |
Beginning of period | | | - | | | - | | | - |
End of period | | $ | - | | $ | - | | $ | - |
| | | | | | | | | |
NONCASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | | |
Fair value of equity issued in the Kodiak Acquisition | | $ | 2,696,094 | | $ | - | | $ | - |
Distributions from Whiting USA Trust I | | $ | 4,614 | | $ | 4,749 | | $ | 5,827 |
Preferred stock dividends paid | | $ | - | | $ | (538) | | $ | (1,077) |
| | | | | | | | | |
See notes to condensed financial statements. |
WHITING PETROLEUM CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS OF THE PARENT COMPANY
1. BASIS OF PRESENTATION
Condensed Financial Statements—The condensed financial statements of Whiting Petroleum Corporation (the “Registrant” or “Parent Company”) do not include all of the information and notes normally included with financial statements prepared in accordance with GAAP. These condensed financial statements, therefore, should be read in conjunction with the consolidated financial statements and notes thereto of the Registrant, included elsewhere in this Annual Report on Form 10-K. For purposes of these condensed financial statements, the Parent Company’s investments in wholly-owned subsidiaries are accounted for under the equity method.
Restricted Assets of Registrant—Except for limited exceptions, including the payment of interest on the senior notes and senior subordinated notes, Whiting Oil and Gas Corporation’s (“Whiting Oil and Gas”) credit agreement restricts the ability of Whiting Oil and Gas to make any dividend payments, distributions or other payments to the Parent Company. As of December 31, 2014, total restricted net assets were $6.9 billion. Accordingly, these condensed financial statements have been prepared pursuant to Rule 5-04 of Regulation S-X of the Securities Exchange Act of 1934, as amended.
2. LONG-TERM DEBT AND OTHER LONG-TERM LIABILITIES
The Parent Company’s long-term debt and other long-term liabilities consisted of the following at December 31, 2014 and 2013 (in thousands):
| | | | | | |
| | | | | | |
| | December 31, |
| | 2014 | | 2013 |
Long-term debt: | | | | | | |
6.5% Senior Subordinated Notes due 2018 | | $ | 350,000 | | $ | 350,000 |
5% Senior Notes due 2019 | | | 1,100,000 | | | 1,100,000 |
5.75% Senior Notes due 2021, including unamortized debt premium of $3,180 and $3,834, respectively | | | 1,203,180 | | | 1,203,834 |
Other long-term liabilities | | | - | | | 170 |
Total long-term debt and other long-term liabilities | | $ | 2,653,180 | | $ | 2,654,004 |
Scheduled maturities of the Parent Company’s principal amounts of long-term debt and other long-term liabilities (including the current portions thereof) as of December 31, 2014 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total |
Amounts due | | $ | - | | $ | - | | $ | - | | $ | 350,000 | | $ | 1,100,000 | | $ | 1,200,000 | | $ | 2,650,000 |
For further information on the Senior Subordinated Notes, Senior Notes and tax sharing liability, refer to the Long-Term Debt and Related Party Transactions notes to the consolidated financial statements of the Registrant.
3. SHAREHOLDERS’ EQUITY
6.25% Convertible Perpetual Preferred Stock—In June 2009, the Parent Company completed a public offering of 6.25% convertible perpetual preferred stock (“preferred stock”), selling 3,450,000 shares at a price of $100.00 per share. As a result of voluntary conversions and the Parent Company exercising its right to mandatorily convert shares of preferred stock effective June 27, 2013, all 172,129 remaining shares of preferred stock outstanding on March 31, 2013, were converted into 792,919 shares of common stock. As of December 31, 2014, no shares of preferred stock remained outstanding.
For further information on the convertible perpetual preferred stock, refer to the Shareholders’ Equity note to the consolidated financial statements of the Registrant.
******
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 27th22nd day of February, 2015.2018.
| | |
| | WHITING PETROLEUM CORPORATION |
| | |
| | |
| By | /s/ JamesBradley J. VolkerHolly |
| | JamesBradley J. VolkerHolly
|
| | Chairman, President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantregistrant and in the capacities and on the dates indicated.
| | |
Signature | Title | Date |
/s/ JamesBradley J. VolkerHolly JamesBradley J. VolkerHolly
| Chairman, President and Chief
(Principal Executive Officer)
| February 27, 201522, 2018 |
/s/ Michael J. Stevens Michael J. Stevens | Senior Vice President and
Chief Financial Officer
(Principal Financial Officer) | February 27, 201522, 2018 |
/s/ Brent P. JensenSirikka R. Lohoefener Brent P. JensenSirikka R. Lohoefener
| Controller and Treasurer
(Principal Accounting Officer)
| February 27, 201522, 2018 |
/s/ James J. Volker James J. Volker | Chairman and Director | February 22, 2018 |
/s/ Thomas L. Aller Thomas L. Aller | Director | February 27, 2015
|
/s/ D. Sherwin Artus
D. Sherwin Artus
| Director
| February 27, 201522, 2018 |
/s/ James E. Catlin James E. Catlin | Director | February 27, 201522, 2018 |
/s/ Philip E. Doty Philip E. Doty | Director | February 27, 201522, 2018 |
/s/ William N. Hahne William N. Hahne | Director | February 27, 201522, 2018 |
/s/ Allan R. LarsonCarin S. Knickel Allan R. LarsonCarin S. Knickel
| Director | February 27, 2015
|
/s/ Lynn A. Peterson
Lynn A. Peterson
| Director
| February 27, 201522, 2018 |
/s/ Michael B. Walen Michael B. Walen | Director | February 27, 201522, 2018 |
EXHIBIT INDEX
| |
| |
Exhibit
| |
Number
| Exhibit Description
|
(2.1)^
| Arrangement Agreement, dated as of July 13, 2014, by and among Whiting Petroleum Corporation, 1007695 B.C. Ltd. and Kodiak Oil & Gas Corp. [Incorporated by reference to Exhibit 2.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on July 14, 2014 (File No. 001-31899)].
|
(3.1)
| Restated Certificate of Incorporation of Whiting Petroleum Corporation [Incorporated by reference to Exhibit 3.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on July 1, 2013 (File No. 001-31899)].
|
(3.2)
| Amended and Restated By-laws of Whiting Petroleum Corporation, effective February 20, 2014 [Incorporated by reference to Exhibit 3.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on February 20, 2014 (File No. 001-31899)].
|
(4.1)
| Sixth Amended and Restated Credit Agreement, dated as of August 27, 2014, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the various other agents party thereto [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on August 28, 2014 (File No. 001-31899)].
|
(4.2)^
| Amended and Restated Guaranty and Collateral Agreement, dated as of December 8, 2014, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation, Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., Kodiak Williston, LLC and JPMorgan Chase Bank, N.A., as Administrative Agent [Incorporated by reference to Exhibit 4.16 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 8, 2014 (File No. 001-31899)].
|
(4.3)
| Maximum Credit Amount Increase Agreement, dated as of December 19, 2014, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 22, 2014 (File No. 001-31899)].
|
(4.4)
| Subordinated Indenture, dated as of April 19, 2005, by and among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation, Whiting Programs, Inc., Equity Oil Company (succeeded to Whiting Oil and Gas Corporation) and The Bank of New York Mellon Trust Company, N.A., as successor trustee [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on September 24, 2010 (File No. 001-31899)].
|
(4.5)
| Second Supplemental Indenture, dated September 24, 2010, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, creating the 6.5% Senior Subordinated Notes due 2018 [Incorporated by reference to Exhibit 4.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on September 24, 2010 (File No. 001-31899)].
|
(4.6)
| Supplemental Indenture and Amendment – Subsidiary Guarantee, dated as of December 11, 2014, among Whiting Petroleum Corporation, Whiting Canadian Holding Company ULC, Whiting Resources Corporation, Whiting US Holding Company and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the 6.5% Senior Subordinated Notes Due 2018 [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 12, 2014 (File No. 001-31899)].
|
(4.7)
| Indenture, dated September 12, 2013, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on September 12, 2013 (File No. 001-31899)].
|
(4.8)
| First Supplemental Indenture, dated September 12, 2013, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, creating the 5.0% Senior Notes due 2019 [Incorporated by reference to Exhibit 4.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on September 12, 2013 (File No. 001-31899)].
|
(4.9)
| Supplemental Indenture and Amendment – Subsidiary Guarantee, dated as of December 11, 2014, among Whiting Petroleum Corporation, Whiting Canadian Holding Company ULC, Whiting Resources Corporation, Whiting US Holding Company and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the 5.0% Senior Notes Due 2019 [Incorporated by reference to Exhibit 4.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 12, 2014 (File No. 001-31899)].
|
(4.10)
| Second Supplemental Indenture, dated September 12, 2013, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, creating the 5.75% Senior Notes due 2021 [Incorporated by reference to Exhibit 4.3 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on September 12, 2013 (File No. 001-31899)].
|
(4.11)
| Supplemental Indenture and Amendment – Subsidiary Guarantee, dated as of December 11, 2014, among Whiting Petroleum Corporation, Whiting Canadian Holding Company ULC, Whiting Resources Corporation, Whiting US Holding Company and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the 5.75% Senior Notes Due 2021 [Incorporated by reference to Exhibit 4.3 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 12, 2014 (File No. 001-31899)].
|
Exhibit
| |
Number
| Exhibit Description
|
(4.12)^
| Indenture, dated November 23, 2011, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., U.S. Bank National Association and Computershare Trust Company of Canada, relating to the Kodiak Oil & Gas Corp. 8.125% Senior Notes Due 2019 [Incorporated by reference to Exhibit 4.2 to Kodiak Oil & Gas Corp.’s Current Report on Form 8-K filed on November 23, 2011 (File No. 001-32920)].
|
(4.13)^
| Supplemental Indenture, dated as of July 30, 2013, among Kodiak Oil & Gas Corp., Kodiak Williston, LLC, KOG Finance, LLC, U.S. Bank National Association and Computershare Trust Company of Canada, to the Indenture, dated as of November 23, 2011, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., U.S. Bank National Association and Computershare Trust Company of Canada, relating to the Kodiak Oil & Gas Corp. 8.125% Senior Notes Due 2019 [Incorporated by reference to Exhibit 4.1 to Kodiak Oil & Gas Corp.’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2013 (File No. 001-32920)].
|
(4.14)^
| Supplemental Indenture, dated as of October 3, 2014, among Kodiak Oil & Gas Corp., KOG Oil & Gas ULC, U.S. Bank National Association and Computershare Trust Company of Canada, to the Indenture, dated as of November 23, 2011, as supplemented, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., U.S. Bank National Association and Computershare Trust Company of Canada, relating to the Kodiak Oil & Gas Corp. 8.125% Senior Notes Due 2019 [Incorporated by reference to Exhibit 4.1 to Kodiak Oil & Gas Corp.’s Current Report on Form 8-K filed on October 6, 2014 (File No. 001-32920)].
|
(4.15)^
| First Supplemental Indenture, dated October 17, 2014, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., KOG Finance, LLC, Kodiak Williston, LLC, KOG Oil & Gas ULC, U.S. Bank National Association, as trustee, Computershare Trust Company of Canada, as Canadian trustee, and Whiting Petroleum Corporation, relating to the Kodiak Oil & Gas Corp. 8.125% Senior Notes Due 2019 [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 20, 2014 (File No. 001-31899)].
|
(4.16)^
| Second Supplemental Indenture, dated as of December 4, 2014, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., Kodiak Williston, LLC, Whiting Oil and Gas Corporation, Whiting US Holding Company, U.S. Bank National Association, as trustee, Computershare Trust Company of Canada, as Canadian Trustee, relating to the 8.125% Senior Notes Due 2019 [Incorporated by reference to Exhibit 4.12 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 8, 2014 (File No. 001-31899)].
|
(4.17)^
| Indenture, dated January 15, 2013, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., U.S. Bank, National Association, as trustee, and Computershare Trust Company of Canada, as the Canadian trustee, relating to the Kodiak Oil & Gas Corp. 5.5% Senior Notes Due 2021 [Incorporated by reference to Exhibit 4.2 to Kodiak Oil & Gas Corp.’s Current Report on Form 8-K filed on January 15, 2013 (File No. 001-32920)].
|
(4.18)^
| Supplemental Indenture, dated as of July 30, 2013, among Kodiak Oil & Gas Corp., Kodiak Williston, LLC, KOG Finance, LLC, U.S. Bank National Association and Computershare Trust Company of Canada, to the Indenture, dated as of January 15, 2013, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., U.S. Bank National Association and Computershare Trust Company of Canada, relating to the Kodiak Oil & Gas Corp. 5.5% Senior Notes Due 2021 [Incorporated by reference to Exhibit 4.2 to Kodiak Oil & Gas Corp.’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2013 (File No. 001-32920)].
|
(4.19)^
| Supplemental Indenture, dated as of October 3, 2014, among Kodiak Oil & Gas Corp., KOG Oil & Gas ULC, U.S. Bank National Association and Computershare Trust Company of Canada, to the Indenture, dated as of January 15, 2013, as supplemented, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., U.S. Bank National Association and Computershare Trust Company of Canada, relating to the Kodiak Oil & Gas Corp. 5.5% Senior Notes Due 2021 [Incorporated by reference to Exhibit 4.2 to Kodiak Oil & Gas Corp.’s Current Report on Form 8-K filed on October 6, 2014 (File No. 001-32920)].
|
(4.20)^
| First Supplemental Indenture, dated October 17, 2014, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., KOG Finance, LLC, Kodiak Williston, LLC, KOG Oil & Gas ULC, U.S. Bank National Association, as trustee, Computershare Trust Company of Canada, as Canadian trustee, and Whiting Petroleum Corporation, relating to the Kodiak Oil & Gas Corp. 5.5% Senior Notes Due 2021 [Incorporated by reference to Exhibit 4.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 20, 2014 (File No. 001-31899)].
|
(4.21)^
| Second Supplemental Indenture, dated as of December 4, 2014, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., Kodiak Williston, LLC, Whiting Oil and Gas Corporation, Whiting US Holding Company, U.S. Bank National Association, as trustee, Computershare Trust Company of Canada, as Canadian Trustee, relating to the 5.5% Senior Notes Due 2021 109[Incorporated by reference to Exhibit 4.13 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 8, 2014 (File No. 001-31899)].
|
(4.22)^
| Indenture, dated July 26, 2013, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., KOG Finance, LLC, Kodiak Williston, LLC, U.S. Bank National Association, as trustee, and Computershare Trust Company of Canada, as Canadian trustee, relating to the Kodiak Oil & Gas Corp. 5.5% Senior Notes Due 2022 [Incorporated by reference to Exhibit 4.2 to Kodiak Oil & Gas Corp.’s Current Report on Form 8-K filed on July 26, 2013 (File No. 001-32920)].
|
Exhibit
| |
Number
| Exhibit Description
|
(4.23)^
| Supplemental Indenture, dated as of October 3, 2014, among Kodiak Oil & Gas Corp., KOG Oil & Gas ULC, U.S. Bank National Association and Computershare Trust Company of Canada, to the Indenture, dated as of July 26, 2013, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., U.S. Bank National Association and Computershare Trust Company of Canada, relating to the Kodiak Oil & Gas Corp. 5.5% Senior Notes Due 2022 [Incorporated by reference to Exhibit 4.3 to Kodiak Oil & Gas Corp.’s Current Report on Form 8-K filed on October 6, 2014 (File No. 001-32920)].
|
(4.24)^
| First Supplemental Indenture, dated October 17, 2014, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., KOG Finance, LLC, Kodiak Williston, LLC, KOG Oil & Gas ULC, U.S. Bank National Association, as trustee, Computershare Trust Company of Canada, as Canadian trustee, and Whiting Petroleum Corporation, relating to the Kodiak Oil & Gas Corp. 5.5% Senior Notes Due 2022 [Incorporated by reference to Exhibit 4.3 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 20, 2014 (File No. 001-31899)].
|
(4.25)^
| Second Supplemental Indenture, dated as of December 4, 2014, among Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc., Kodiak Williston, LLC, Whiting Oil and Gas Corporation, Whiting US Holding Company, U.S. Bank National Association, as trustee, Computershare Trust Company of Canada, as Canadian Trustee, relating to the 5.5% Senior Notes Due 2022 [Incorporated by reference to Exhibit 4.14 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 8, 2014 (File No. 001-31899)].
|
(4.26)
| Rights Agreement, dated as of February 23, 2006, between Whiting Petroleum Corporation and Computershare Trust Company, Inc. [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on February 24, 2006 (File No. 001‑31899)].
|
(10.1)*
| Whiting Petroleum Corporation 2003 Equity Incentive Plan, as amended through October 23, 2007 [Incorporated by reference to Exhibit 10.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 29, 2007 (File No. 001‑31899)].
|
(10.2)*
| Whiting Petroleum Corporation 2013 Equity Incentive Plan [Incorporated by reference to Annex A to Whiting Petroleum Corporation’s definitive proxy statement filed with the Securities and Exchange Commission on Schedule 14A on March 25, 2013 (File No. 001-31899)].
|
(10.3)*
| Form of Restricted Stock Agreement pursuant to the Whiting Petroleum Corporation 2003 Equity Incentive Plan for time-based vesting awards on and after October 23, 2007 [Incorporated by reference to Exhibit 10.4 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 29, 2007 (File No. 001-31899)].
|
(10.4)*
| Form of Restricted Stock Agreement pursuant to the Whiting Petroleum Corporation 2003 Equity Incentive Plan for awards to executive officers on and after February 23, 2008 [Incorporated by reference to Exhibit 10.1 to Whiting Petroleum Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 001‑31899)].
|
(10.5)*
| Whiting Petroleum Corporation Production Participation Plan, as amended and restated February 4, 2008 [Incorporated by reference to Exhibit 10.6 to Whiting Petroleum Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-31899)].
|
(10.6)*
| Summary of Non-Employee Director Compensation for Whiting Petroleum Corporation.
|
(10.7)*
| Production Participation Plan Credit Service Agreement, dated February 23, 2007, between Whiting Petroleum Corporation and James J. Volker [Incorporated by reference to Exhibit 10.7 to Whiting Petroleum Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-31899)].
|
(10.8)*
| Form of Indemnification Agreement for directors and officers of Whiting Petroleum Corporation [Incorporated by reference to Exhibit 10.10 to Whiting Petroleum Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 001-31899)].
|
(10.9)*
| Form of Executive Employment and Severance Agreement for executive officers of Whiting Petroleum Corporation [Incorporated by reference to Exhibit 10.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on January 5, 2015 (File No. 001‑31899)].
|
(10.10)*
| Form of Stock Option Agreement pursuant to the Whiting Petroleum Corporation 2003 Equity Incentive Plan [Incorporated by reference to Exhibit 10.14 to Whiting Petroleum Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-31899)].
|
(10.11)*
| Form of Restricted Stock Agreement pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan for performance vesting awards [Incorporated by reference to Exhibit 10.14 to Whiting Petroleum Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-31899)].
|
(10.12)*
| Form of Restricted Stock Agreement pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan for time-based vesting awards [Incorporated by reference to Exhibit 10.15 to Whiting Petroleum Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-31899)].
|
(10.13)*
| Form of Stock Option pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan [Incorporated by reference to Exhibit 10.16 to Whiting Petroleum Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-31899)].
|
Exhibit
| |
Number
| Exhibit Description
|
(10.14)*
| Form of Performance Share Award Agreement pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan [Incorporated by reference to Exhibit 10.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on January 5, 2015 (File No. 001‑31899)].
|
(21)
| Subsidiaries of Whiting Petroleum Corporation.
|
(23.1)
| Consent of Deloitte & Touche LLP.
|
(23.2)
| Consent of Cawley, Gillespie & Associates, Inc., Independent Petroleum Engineers.
|
(31.1)
| Certification by the Chairman, President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
|
(31.2)
| Certification by the Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
|
(32.1)
| Written Statement of the Chairman, President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
|
(32.2)
| Written Statement of the Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
|
(99.1)
| Proxy Statement for the 2015 Annual Meeting of Stockholders, to be filed within 120 days of December 31, 2014 [To be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after December 31, 2014; except to the extent specifically incorporated by reference, the Proxy Statement for the 2015 Annual Meeting of Stockholders shall not be deemed to be filed with the Securities and Exchange Commission as part of this Annual Report on Form 10-K].
|
(99.2)
| Report of Cawley, Gillespie & Associates, Inc., Independent Petroleum Engineers relating to Total Proved Reserves and Report of Cawley, Gillespie & Associates, Inc. relating to Probable and Possible Reserves, each dated January 6, 2015.
|
(101)
| The following materials from Whiting Petroleum Corporation’s Annual Report on Form 10‑K for the year ended December 31, 2014 are filed herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 2014 and 2013, (ii) the Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012, (iii) the Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012, (iv) the Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012, (v) the Consolidated Statements of Equity for the Years Ended December 31, 2014, 2013 and 2012 and (vi) Notes to Consolidated Financial Statements.
|
_____________________
*A management contract or compensatory plan or arrangement.
^Kodiak Oil & Gas Corp. is now known as Whiting Canadian Holding Company ULC; Kodiak Oil & Gas (USA) Inc. is now known as Whiting Resources Corporation; Kodiak Williston, LLC has merged with Whiting Resources Corporation; KOG Finance, LLC has been dissolved; and KOG Oil & Gas ULC has been liquidated.