| LONG-TERM DEBT | 4 . LONG-TERM DEBT
Long-term debt consisted of the following at March 31, 2016 and December 31, 2015 (in thousands):
March 31,
December 31,
2016
2015
Credit agreement
$ 1,000,000
$ 800,000
6.5% Senior Subordinated Notes due 2018
301,288
350,000
6.5% Convertible Senior Subordinated Notes due 2018
48,712
-
5% Senior Notes due 2019
1,003,188
1,100,000
5% Convertible Senior Notes due 2019
96,812
-
1.25% Convertible Senior Notes due 2020
1,250,000
1,250,000
5.75% Senior Notes due 2021
1,047,523
1,200,000
5.75% Convertible Senior Notes due 2021
152,477
-
6.25% Senior Notes due 2023
571,258
750,000
6.25% Convertible Senior Notes due 2023
178,742
-
Total principal
5,650,000
5,450,000
Unamortized debt discounts and premiums
(377,168)
(203,082)
Unamortized debt issuance costs on notes
(49,627)
(49,214)
Fair value of embedded derivatives associated with convertible notes
111,390
-
Total long-term debt
$ 5,334,595
$ 5,197,704
Credit Agreement —Whiting Oil and Gas, the Company’s wholly-owned subsidiary, has a credit agreement with a syndicate of banks that as of March 31, 2016 had a borrowing base of $4.0 billion, with aggregate commitments of $2.5 billion. On March 25, 2016, the Company entered into an amendment to its existing credit agreement and related guaranty and collateral agreement in connection with the May 1, 2016 regular borrowing base redetermination that, among other things, (i) decreased the borrowing base under the facility from $4.0 billion to $2.75 billion, effective May 1, 2016, (ii) reduced the aggregate commitments under the credit agreement from $3.5 billion to $2.5 billion, (iii) reduced the maximum letter of credit commitment amount from $100 million to $50 million, (iv) increased the applicable margin based on the borrowing base utilization percentage by 50 basis points per annum, (v) increased the commitment fee to 50 basis points per annum, (vi) permits the Company and certain of its subsidiaries to issue second lien indebtedness up to $1.0 billion subject to various conditions and limitations, (vii) increased the permitted ratio of total senior secured debt to the last four quarters’ EBITDAX (as defined in the credit agreement) from less than 2.5 to 1.0 to less than 3.0 to 1.0 during the Interim Covenant Period, as defined below, and (viii) permits the Company and certain of its subsidiaries to dispose of their respective ownership interests in certain gas gathering and processing plants located in North Dakota without reducing the borrowing base. As of March 31, 2016 , the Company had $1.5 billion of available borrowing capacity, which was net of $1.0 billion in borrowings and $2 million in letters of credit 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 the borrowing base, either on a periodic or special redetermination date, if borrowings in excess of the revised borrowing capacity were outstanding, the Company could be forced to immediately repay a portion of its debt outstanding under the credit agreement.
A portion of the revolving credit facility in an aggregate amount not to exceed $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 March 31, 2016 , $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 credit agreement expires 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 March 31, 201 6 , the weighted average interest rate on the outstanding principal balance under the credit agreement was 2.7% .
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%
The 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. 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 Company’s restricted subsidiaries (as defined in the credit agreement) . As of March 31, 2016 , there were no retained earnings free from restrictions. The amended credit agreement requires the Company, as of the last day of any quarter, to maintain the following ratios (as defined in the credit agreement): (i) a consolidated 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 1.0 to 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 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 (a) April 1, 2018 or (b) 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 March 31, 2016 .
The obligations of Whiting Oil and Gas under the credit agreement are secured by a first lien on substantially all of Whiting Oil and Gas’ and Whiting Resource Corporation’s 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 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”).
In September 2013, the Company issued at par $1.1 billion of 5% Senior Notes due March 2019 (the “2019 Senior Notes”) and $800 million of 5.75% Senior Notes due March 2021, and issued at 101% of par an additional $400 million of 5.75% Senior Notes due March 2021 (collectively, the “2021 Senior Notes”). The debt premium recorded in connection with the issuance of the 2021 Senior Notes is 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” and together with the 2019 Senior Notes and 2021 Senior Notes, the “Whiting Senior Notes”).
Kodiak Senior Notes. In conjunction with the acquisition of Kodiak Oil & Gas Corp. (the “Kodiak Acquisition”) in December 2014 , Whiting US Holding Company, a wholly-owned subsidiary of the Company, became a co-issuer of Kodiak’s $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 “2022 Kodiak Notes” and together with the 2019 Kodiak Notes and the 2021 Kodiak Notes, the “Kodiak Notes”).
I n January 2015, Whiting offered to repurchase at 101% of par all $1,550 million principal amount of Kodiak Notes then outstanding. I n March 2015, Whiting paid $760 million to repurchase $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 such notes. I n May 2015, Whiting paid an additional $5 million to repurchase 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. The Company financed the repurchases with borrowings under its revolving credit facility , which borrowings were subsequently repaid with proceeds from the equity offerings discussed within the “Shareholders’ Equity and Noncontrolling Interest” footnote and the debt offerings discussed within this footnote, and with cash on hand. I n 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. The Company financed the December 2015 note repurchase with borrowings under its credit agreement. As a result of the repurchases, Whiting recognized a n $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 notes. As of December 31, 2015, no Kodiak Notes remained outstanding.
Exchange of Senior Notes and Senior Subordinat ed Notes for Convertible Notes – O n March 23, 2016, the Company exchanged $477 million aggregate principal amount of its senior notes and 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 (i) $49 million aggregate principal amount of new 6.5% Convertible Senior Subordinated Notes due 2018 (the “2018 Convertible Senior Subordinated Notes”), (ii) $97 million aggregate principal amount of new 5% Convertible Senior Notes due 2019 (the “2019 Convertible Senior Note s”), (iii) $152 million aggregate p rincipal amount of new 5.75% Convertible Senior Notes due 2021 (the “202 1 Convertible Senior Notes”), and (iv) $179 million aggregate principal amount of new 6.25% Convertible Senior Notes due 2023 (the “2023 Convertible Senior Notes” and, together with the 2018 Convertible Senior Subordinated Notes, the 2019 Convertible Senior Notes and the 2021 Convertible Senior Notes, the “New Convertible Notes”). The redemption provisions, covenants, interest payments and maturity terms applicable to each series of New Convertible Notes are substantially identical to those applicable to the corresponding series of the Whiting Senior Notes and the 2018 Senior Subordinated Notes.
The New Convertible Notes are convertible, at the option of the holders, into shares of common stock at any time from the date of issuance up until the close of business on the earlier of (i) the fifth business day following the date of a mandatory conversion notice from the Company (see below for a discussion of the mandatory conversion terms), (ii) the business day immediately preceding the date of redemption, if Whiting were to elect to redeem all or a portion of the New Convertible Notes prior to maturity, or (iii) the business day immediately preceding the maturity date. In addition, (i) if a holder exercises its right to convert on or prior to September 23, 2016, such holder will receive an early conversion cash payment in an amount equal to 18 months of interest payable on the applicable series of notes, (ii) if a holder exercises its right to convert after September 23, 2016 but on or prior to March 23, 2017, such holder will receive an early conversion cash payment in an amount equal to 12 months of interest payable on the applicable series of notes, or (iii) if a holder exercises its right to convert after March 23, 2017 but on or prior to September 23, 2017, such holder will receive an early conversion cash payment in an amount equal to six months of interest payable on the applicable series of notes. Upon exercise of this option, the holder will also be entitled to cash payment of all accrued and unpaid interest through the conversion date.
The initial conversion rate for the 2018 Convertible Senior Subordinated Notes, the 2021 Convertible Senior Notes and the 2023 Convertible Senior Notes is 86.9565 common shares per $1,000 principal amount of the notes (representing an initial conversion price of $11.50 per share), and the initial conversion rate for the 2019 Convertible Senior Notes is 90.9091 common shares per $1,000 principal amount of the notes (representing an initial conversion price of $11.00 per share). Each initial conversion rate is subject to customary adjustments if certain share transactions were to be initiated by Whiting.
The Company has the right to mandatorily convert the New Convertible Notes, in whole or in part, if the volume weighted average price (as defined in the applicable indentures governing the New Convertible Notes) of the Company’s common stock exceeds 89.13% of the applicable conversion price of the 2018 Convertible Senior Subordinated Notes, the 2021 Convertible Senior Notes and the 2023 Convertible Senior Notes and 93.18% of the applicable conversion price of the 2019 Convertible Senior Notes (each representing an initial mandatory conversion trigger price of $10.25 per share) for at least 20 trading days during a 30 consecutive trading day period. No early conversion or accrued and unpaid interest payments will be made upon a mandatory conversion. As of March 31, 2016 , no mandatory conversion triggers of the New Convertible Notes had been met and no holders of the notes had exercised their conversion options.
This transaction was accounted for as an extinguishment of debt for each portion of the Whiting Senior Notes and 2018 Senior Subordinated Notes that were exchanged. As a result, Whiting recognized a $91 million gain on extinguishment of debt, which included 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 debt discount also includes $90 million related to the fair value of the holders’ conversion options, which are embedded derivatives that meet the criteria to be bifurcated from their host contracts and accounted for separately. These embedded derivatives will be marked to market each quarter with the changes in fair value recorded as derivative (gain) loss, net in the consolidated statements of operations. Refer to the “Derivative Financial Instruments” and “Fair Value Measurements” footnotes for more information.
The $185 million total debt discount will be amortized to interest expense over the respective terms of the notes using the effective interest method. Accrued transaction costs of $8 million attributable to the New Convertible Notes issuance 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 respective term s of the notes using the effective interest method.
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” and together with the 2019 Convertible Senior Notes, the 2021 Convertible Senior Notes and the 2023 Convertible Senior Notes, the “Convertible Senior Notes” ) for net proceeds of $1.2 billion, net of initial purchasers’ fees of $25 million. The notes will mature on April 1, 2020 unless earlier converted in accordance with their terms.
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 Company’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 an initial conversion rate of 25.6410 shares of Whiting’s common stock per $1,000 principal amount of the notes, which is equivalent to an initial conversion price of approximately $39.00 . 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 March 31, 2016 , 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 the 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 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 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 consist of the following at March 31, 2016 and December 31, 2015 (in thousands):
March 31,
December 31,
2016
2015
Liability component:
Principal
$ 1,250,000
$ 1,250,000
Less: unamortized note discount
(194,786)
(205,572)
Less: unamortized debt issuance costs
(16,293)
(17,277)
Net carrying value
$ 1,038,921
$ 1,027,151
Equity component (1)
$ 237,500
$ 237,500
(1)
Recorded in additional paid-in capital, net of $ 5 million of issuance costs and $88 million of deferred taxes.
Interest expense recognized on the 2020 Convertible Senior Notes related to the stated interest rate and amortization of the debt discount totaled $15 million and $1 million for the three months ended March 31, 2016 and 2015, respectively.
The Whiting Senior Notes and the Convertible Senior Notes are unsecured obligations of Whiting Petroleum Corporation and these 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 and the 2018 Convertible 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 Convertible Senior Notes and borrowings under Whiting Oil and Gas’ credit agreement.
The Company’s obligations under the Whiting Senior Notes, the Convertible Senior Notes , the 2018 Senior Subordinated Note s and the 2018 Convertible Senior Subordinated Notes are guaranteed by the Company’s wholly-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. |
