| FRESH START ACCOUNTING | 3. FRESH START ACCOUNTING Fresh Start In accordance with ASC 852, with the application of fresh start accounting, the Company allocated its reorganization value to its individual assets based on their estimated fair values in conformity with FASB ASC Topic 820 – Fair Value Measurement Business Combinations Reorganization Value The Company’s principal assets are its oil and natural gas properties. The fair value of proved reserves was estimated using an income approach, which was based on the anticipated future cash flows associated with those proved reserves, risked by reserve category and discounted using a weighted average cost of capital rate of 14%. The proved reserve locations included in this analysis were limited to wells included in the Company's five-year development plan. Future prices for the income approach were based on forward strip price curves (adjusted for basis differentials). The fair value of the Company’s unproved reserves was estimated using a combination of income and market approaches. See further discussion below in “Fresh Start Accounting Adjustments.” The following table reconciles the Company’s enterprise value to the implied value of the Successor’s common stock as of September 1, 2020 (in thousands, except per share data): Enterprise value $ 1,591,887 Plus: Cash and cash equivalents 22,657 Less: Fair value of debt (425,328) Implied value of Successor common stock $ 1,189,216 The following table reconciles the Company’s enterprise value to its reorganization value as of September 1, 2020 (in thousands): Enterprise value $ 1,591,887 Plus: Cash and cash equivalents 22,657 Accounts payable trade 56,432 Revenues and royalties payable 145,506 Other current liabilities 143,790 Asset retirement obligations 121,343 Operating lease obligations 17,839 Deferred income taxes 14,501 Other long-term liabilities 28,773 Reorganization value $ 2,142,728 Although the Company believes the assumptions and estimates used to develop enterprise value and reorganization value are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions. The assumptions used in estimating these values are inherently uncertain and require judgment. See below under the caption “Fresh Start Adjustments” for additional information regarding assumptions used in the valuation of the Company’s significant assets and liabilities. Condensed Consolidated Balance Sheet at Emergence (in thousands) As of September 1, 2020 Reorganization Fresh Start Predecessor Adjustments Adjustments Successor ASSETS Current assets: Cash and cash equivalents $ 547,354 $ (524,697) (a) $ - $ 22,657 Restricted cash 28,955 (2,205) (b) - 26,750 Accounts receivable trade, net 136,881 - 81 (o) 136,962 Prepaid expenses and other 18,722 231 (c) 2,260 (p) 21,213 Total current assets 731,912 (526,671) 2,341 207,582 Property and equipment: Oil and gas properties, successful efforts method 4,885,013 - (3,058,899) (q) 1,826,114 Other property and equipment 159,866 (909) (d) (87,642) (o)(r) 71,315 Total property and equipment 5,044,879 (909) (3,146,541) 1,897,429 Less accumulated depreciation, depletion and amortization (2,085,266) - 2,085,266 (o)(q)(r) - Total property and equipment, net 2,959,613 (909) (1,061,275) 1,897,429 Debt issuance costs 1,834 10,950 (e) - 12,784 Other long-term assets 37,010 (8,760) (d) (3,317) (o)(s) 24,933 TOTAL ASSETS $ 3,730,369 $ (525,390) $ (1,062,251) $ 2,142,728 LIABILITIES AND EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt $ 912,259 $ (912,259) (f) $ - $ - Accounts payable trade 47,168 9,264 (g)(h) - 56,432 Revenues and royalties payable 145,506 - - 145,506 Accrued capital expenditures 14,037 1,305 (g) - 15,342 Accrued liabilities and other 46,327 21,942 (g)(i) (6,529) (o)(t) 61,740 Accrued lease operating expenses 25,344 1,394 (g) - 26,738 Accrued interest 3,459 (3,332) (g)(j) (127) (o) - Taxes payable 13,972 - - 13,972 Derivative liabilities 25,998 - - 25,998 Total current liabilities 1,234,070 (881,686) (6,656) 345,728 Long-term debt - 425,328 (k) - 425,328 Asset retirement obligations 150,925 - (29,582) (u) 121,343 Operating lease obligations - 17,652 (d)(g) 187 (o) 17,839 Deferred income taxes 69,847 - (55,346) (v) 14,501 Other long-term liabilities 18,160 11,071 (g) (458) (o)(t) 28,773 Total liabilities not subject to compromise 1,473,002 (427,635) (91,855) 953,512 Liabilities subject to compromise 2,526,925 (2,526,925) (g) - - Total liabilities 3,999,927 (2,954,560) (91,855) 953,512 Commitments and contingencies Equity (deficit): Predecessor common stock 92 (92) (l) - - Successor common stock - 38 (m) - 38 Predecessor additional paid-in capital 6,410,410 (6,410,410) (l) - - Successor additional paid-in capital - 1,189,178 (m) - 1,189,178 Accumulated earnings (deficit) (6,680,060) 7,650,456 (n) (970,396) (w) - Total equity (deficit) (269,558) 2,429,170 (970,396) 1,189,216 TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 3,730,369 $ (525,390) $ (1,062,251) $ 2,142,728 Reorganization Adjustments (a) The table below reflects the sources and uses of cash on the Emergence Date pursuant to the terms of the Plan (in thousands): Sources: Release of restricted cash upon bankruptcy emergence $ 28,205 Borrowings under the Exit Credit Agreement 425,328 Total sources of cash 453,533 Uses: Payment of outstanding borrowings under the Predecessor Credit Agreement (912,259) Payment of accrued interest on the Predecessor Credit Agreement (3,437) Payment of debt issuance costs related to Exit Credit Agreement (10,950) Funding of the Professional Fee Escrow Account (26,000) Payment of professional fees upon emergence (14,470) Payment of contract cure amounts (11,114) Total uses of cash (978,230) Net uses of cash $ (524,697) (b) The table below reflects the net reclassification of cash balances to and from restricted cash on the Emergence Date pursuant to terms of the Plan (in thousands): Funding of the Professional Fee Escrow Account $ 26,000 Release of restricted cash upon bankruptcy emergence (1) (28,205) Net reclassifications from restricted cash $ (2,205) (1) Includes $23 million of funds related to derivative termination settlements that were directed by the counterparty to be held in a segregated account until the Company emerged from bankruptcy, as well as $5 million of amounts set aside as adequate assurance for utility providers that were restricted until emergence. (c) Reflects the payment of professional fee retainers upon emergence. (d) The Company amended a corporate office lease agreement and terminated the lease of certain floors within that agreement, which amendment was effective upon emergence from the Chapter 11 Cases. As a result of the lease modification and terminations, the Company reduced the associated right-of-use assets and operating lease obligations by $10 million and $15 million, respectively, resulting in a $5 million gain on settlement of liabilities subject to compromise, which was recorded to reorganization items, net in the condensed consolidated statements of operations. The corporate office lease was classified as an operating lease and the modification did not result in a change to the lease’s classification. Additionally, $18 million of long-term operating lease obligations in liabilities subject to compromise were reinstated to be satisfied in the ordinary course of business. (e) Represents $11 million of financing costs related to the Exit Credit Agreement which were capitalized as debt issuance costs and will be amortized to interest expense through the maturity date of April 1, 2024. (f) Reflects the payment in full of the borrowings outstanding under the Predecessor Credit Agreement on the Emergence Date. (g) As part of the Plan, the Bankruptcy Court approved the settlement of certain claims reported within liabilities subject to compromise in the Company's condensed consolidated balance sheet at their respective allowed claim amounts. The table below indicates the reinstatement or disposition of liabilities subject to compromise (in thousands): Liabilities subject to compromise pre-emergence $ 2,526,925 Amounts reinstated on the Emergence Date: Accounts payable trade (10,866) Accrued capital expenditures (1,305) Accrued lease operating expenses (1,394) Accrued liabilities and other (13,961) Accrued interest (105) Operating lease obligations (17,652) Other long-term liabilities (11,071) Total liabilities reinstated (56,354) Less: Amounts settled per the Plan Issuance of common stock to general unsecured claim holders (1,125,062) Payment of contract cure amounts (10,836) Operating lease modification and terminations (9,669) Issuance of Successor common stock to holders of unvested cash-settled equity awards (1) (64) Total amounts settled (1,145,631) Gain on settlement of liabilities subject to compromise $ 1,324,940 (1) Holders of unvested cash-settled restricted stock awards were included as existing equity interests in the Plan and thus received Successor common stock on a pro rata basis based on the amount of unvested awards held. This amount represents the gain on the liability related to those awards, which was included in liabilities subject to compromise prior to emergence. (h) Reflects the reinstatement of $11 million of accounts payable included in liabilities subject to compromise to be satisfied in the ordinary course of business, partially offset by $2 million of professional fees paid on the Emergence Date. (i) Represents the accrual of success fees payable upon emergence as well as certain other expenses, the payment of certain professional fees that were accrued for prior to emergence and the reinstatement of certain accrued liabilities included in liabilities subject to compromise to be satisfied in the ordinary course of business, as detailed in the following table (in thousands): Reinstatement of accrued expenses from liabilities subject to compromise $ 13,961 Recognition of success fee payable upon emergence 11,500 Other expenses accrued at emergence 3,315 Payment of certain professional fees accrued prior to emergence (6,834) Net impact to accrued liabilities and other $ 21,942 (j) Represents a $3 million payment of accrued interest on the Predecessor Credit Agreement and reinstated accrued interest that was included within liabilities subject to compromise to be satisfied in the ordinary course of business. (k) Reflects borrowings drawn under the Exit Credit Agreement upon emergence. Refer to the "Long-Term Debt" footnote for more information on the Exit Credit Agreement. (l) Pursuant to the terms of the Plan, on the Emergence Date, all Predecessor common stock interests were cancelled. As a result of the cancellation, the Company accelerated the recognition of $4 million in compensation expense related to the unrecognized portion of share-based compensation as of the Emergence Date, which was recorded to reorganization items, net in the condensed consolidated statements of operations. (m) Reflects the issuance of Successor equity, including the issuance of 38,051,210 shares of common stock at a par value of $0.001 per share and warrants to purchase 7,256,227 shares of common stock in exchange for claims against or interests in the Debtors pursuant to the Plan. Equity issued to each class of claims is detailed in the table below (in thousands): Issuance of common stock to general unsecured claim holders $ 1,125,062 Issuance of common stock to Predecessor common stockholders and holders of unvested cash-settled equity awards 34,794 Issuance of warrants to Predecessor common stockholders and holders of unvested cash-settled equity awards 29,360 Fair value of Successor equity $ 1,189,216 (n) The table below reflects the cumulative impact of the reorganization adjustments discussed above (in thousands): Gain on settlement of liabilities subject to compromise $ 1,324,940 Cancellation of Predecessor equity (1) 6,414,541 Fair value of equity issued to Predecessor common stockholders and holders of unvested cash-settled equity awards (34,794) Fair value of warrants issued to Predecessor common stockholders and holders of unvested cash-settled equity awards (29,360) Success fees incurred upon emergence (17,303) Acceleration of unvested stock-based compensation awards (4,161) Other expenses incurred upon emergence (3,407) Net impact on accumulated earnings (deficit) $ 7,650,456 (1) This value is reflective of Predecessor common stock, Predecessor additional paid in capital and the recognition of $4 million in compensation expense related to the unrecognized portion of share-based compensation. Fresh Start Adjustments (o) Reflects the adjustments to fair value made to operating and finance lease assets and liabilities. Upon adoption of fresh start accounting, the Company's remaining lease obligations were recalculated using the incremental borrowing rate applicable to the Company upon emergence and commensurate with the Successor's capital structure. The fair value adjustments related to leases are summarized in the table below (in thousands): Lease Asset/Liability Balance Sheet Classification Fair Value Adjustment Accounts receivable, net Accounts receivable, net $ 81 Operating lease assets, net Other long-term assets (1,480) Finance lease assets Other property and equipment (10,765) Accumulated depreciation - finance leases Less accumulated depreciation, depletion and amortization 15,099 Accrued interest - finance leases Accrued interest 127 Short-term finance lease obligation Accrued liabilities and other (576) Short-term operating lease obligation Accrued liabilities and other 319 Long-term finance lease obligation Other long-term liabilities (1,174) Long-term operating lease obligation Operating lease obligations (187) $ 1,444 (p) Reflects the adjustment to fair value of the Company's oil in tank inventory based on market prices as of the Emergence Date. (q) Reflects the adjustments to fair value of the Company's oil and natural gas properties and undeveloped properties, as well as the elimination of accumulated depletion, depreciation and amortization. For purposes of estimating the fair value of the Company's proved oil and gas properties, an income approach was used which estimated the fair value based on the anticipated future cash flows associated with the Company's proved reserves, risked by reserve category and discounted using a weighted average cost of capital rate of 14%. The proved reserve locations included in this analysis were limited to wells included in the Company's five-year development plan. Future prices for the income approach were based on forward strip price curves (adjusted for basis differentials) as of the Emergence Date. In estimating the fair value of the Company's unproved properties, a combination of income and market approaches were utilized. The income approach consistent with that utilized for proved properties was utilized for properties which had positive future cash flows associated with reserve locations that did not qualify as proved reserves. A market approach was used to value the remainder of the Company’s unproved properties. (r) Reflects the fair value adjustment to recognize the Company’s land, buildings and other property, plant and equipment as of the Emergence Date based on the fair values of such land, buildings and other property, plant and equipment as well as the elimination of related historical depletion, depreciation and amortization balances. Land and buildings were valued using a market approach. Other property, plant and equipment were valued using a cost approach based on the current replacement costs of the assets, less depreciation based on the estimated economic useful lives of the assets and the age of the assets. The fair value adjustments consisted of a decrease of $16 million in land and buildings, a decrease of $61 million in other property, plant and equipment and a corresponding write-off of $66 million in accumulated depletion, depreciation and amortization. (s) Reflects the adjustment to fair value of the Company's other long-term assets, including line fill and pipeline imbalances, based on the commodity market prices as of the Emergence Date, which resulted in a $2 million decrease to other long-term assets. (t) Represents the write-off of a deferred gain balance associated with the Predecessor. The deferred gain does not relate to the Successor and therefore the unamortized balance was written off in full in the Predecessor's condensed consolidated statements of operations. $7 million of the write-off related to the short-term portion of the deferred gain (included in accrued liabilities and other in the condensed consolidated balance sheets at emergence) and the remaining $2 million related to the long-term portion of the deferred gain (included in other long-term liabilities in the condensed consolidated balance sheets at emergence). (u) Reflects the adjustment to fair value of the Company's asset retirement obligations including using a credit-adjusted risk-free rate as of the Emergence Date. (v) Reflects the adjustment to fair value of the Company's deferred tax liability related to Whiting Canadian Holding Company ULC's outside basis difference in its ownership of a portion of Whiting's U.S. assets obtained through the acquisition of Kodiak Oil and Gas Corporation in 2014. (w) Reflects the cumulative impact of the fresh start adjustments discussed above. Reorganization Items, Net Successor Predecessor One Month Ended September 30, 2020 Two Months Ended August 31, 2020 Eight Months Ended August 31, 2020 Legal and professional advisory fees (1) $ - $ 30,502 $ 57,170 Net gain on liabilities subject to compromise - (1,324,940) (1,324,940) Fresh start adjustments, net - 1,025,742 1,025,742 Write-off of unamortized debt issuance costs and premium (2) - - 15,145 Other items, net - 9,464 9,464 Total reorganization items, net $ - $ (259,232) $ (217,419) (1) As of September 30, 2020, $10 million of these fees are accrued and unpaid and are presented in accounts payable and accrued liabilities and other in the condensed consolidated balance sheets. These amounts will be paid in the ordinary course of business. (2) As a result of the Chapter 11 Cases and the adoption of ASC 852, the Company wrote off all unamortized premium and issuance cost balances related to its senior notes on the Petition Date. |
