| Emergence from Chapter 11 Reorganization | Emergence from Chapter 11 Reorganization On November 6, 2018 (the “Petition Date”), the Company, PQE and their direct and indirect wholly owned subsidiaries (collectively, the “Debtors”) filed voluntary petitions (collectively, the “Petition,” and the cases commenced thereby, the “Chapter 11 Cases”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). On January 31, 2019, the Court entered an order (the “Confirmation Order”) confirming the Debtors’ First Amended Chapter 11 Plan of Reorganization, as Immaterially Modified as of January 28, 2019 (as amended, modified or supplemented from time to time, the “Plan”) under Chapter 11 of the Bankruptcy Code. On February 8, 2019 (the “Effective Date”), the Plan became effective in accordance with its terms and the Debtors emerged from the Chapter 11 Cases. On the Effective Date, TDC Energy, LLC, Pittrans, Inc. and Sea Harvester Energy Development, L.L.C. were dissolved. The remaining Debtors (collectively, the "Reorganized Debtors") continue in existence. On the Effective Date and pursuant to the terms of the Plan and the Confirmation Order, the Company: • Adopted an amended and restated certificate of incorporation and bylaws; • Appointed four new members to the Successor’s Board to replace all of the directors of the Predecessor, other than the director also serving as Chief Executive Officer, who was re-appointed pursuant to the Plan; • Canceled all of the Predecessor’s common stock and 6.875% Series B Cumulative Convertible Perpetual Preferred Stock with the former holders thereof not receiving any consideration in respect of such stock; • Authorized 64,999,998 shares of the Successor's Class A Common Stock; one share of the Successor's Class B Common Stock, par value $0.01 per share (the "Class B Common Stock"); one share of the Successor's Class C Common Stock, par value $0.01 per share (the "Class C Common Stock") and 10,000,000 shares of the Successor's preferred stock; • Issued to the former holders of the Predecessor’s 2021 Notes and 2021 PIK Notes, (collectively, the “Old Notes”), in exchange for the cancellation and discharge of the Old Notes: ◦ 8,900,000 shares of the Successor’s Class A Common Stock; and ◦ $80 million of the Successor’s 10% Senior Secured PIK Notes due 2024 (the “2024 PIK Notes”); • Issued 300,000 shares of the Successor’s Class A Common Stock to certain former holders of the Old Notes for their commitment to backstop the Exit Facility (as defined below); • Issued to the Class B Holder (as defined in the Successor’s amended and restated certificate of incorporation) one share of the Class B Common Stock, par value $0.01 per share, which confers certain rights to elect directors and certain drag-along rights; • Issued to the Class C Holder (as defined in the Successor’s amended and restated certificate of incorporation) one share of the Class C Common Stock, par value $0.01 per share, which confers certain rights to elect directors and certain drag-along rights; • Entered into a new $50 million senior secured term loan agreement (the “Exit Facility”) upon the repayment and termination of the Predecessor’s Multidraw Term Loan Agreement; • Entered into a registration rights agreement (the “Registration Rights Agreement”) with certain holders of the Successor’s Class A Common Stock and 2024 PIK Notes; • Adopted a new management incentive plan (the “2019 Long Term Incentive Plan”) for officers, directors and employees of the Successor and its subsidiary, pursuant to which 1,344,000 shares of the Successor’s Class A Common Stock were reserved for issuance. Upon emergence, 827,638 restricted stock units and 263,599 options were granted to officers and directors; and • the General Unsecured Creditor's (the "GUC") pool was funded in the amount of $1.2 million . The foregoing is a summary of the substantive provisions of the Plan and related transactions and is not intended to be a complete description of, or a substitute for a full and complete reading of, the Plan and the other documents referred to above. Effect of Filing on Creditors Subject to certain exceptions, under the Bankruptcy Code, the filing of the Petition automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the Petition Date. Absent an order of the Bankruptcy Court, substantially all of the Debtors’ prepetition liabilities were subject to settlement under the Bankruptcy Code. Although the filing of the Petition triggered defaults on the Debtors’ debt obligations, creditors were stayed from taking any actions against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. Rejection of Executory Contracts Subject to certain exceptions, under the Bankruptcy Code, the Debtors were entitled to assume, assign or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and satisfaction of certain other conditions. Generally, the rejection of an executory contract or unexpired lease was treated as a prepetition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieved the Debtors of performing their future obligations under such executory contract or unexpired lease but entitled the contract counterparty or lessor to a prepetition general unsecured claim for damages caused by such deemed breach. Counterparties to such rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the applicable Debtors’ estate for damages. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with any of the Debtors in this Quarterly Report on Form 10-Q, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease with the applicable Debtor, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and the Debtors expressly preserve all of their rights with respect thereto. During the bankruptcy process the Company's rejection damages were approximately $0.1 million . Reorganization Items, net Reorganization Items, net incurred as a result of the Chapter 11 Cases are presented separately in the accompanying unaudited consolidated statement of operations for the Predecessor period January 1, 2019 through February 8, 2019 as follows (in thousands): Gain on settlement of liabilities subject to compromise $ 168,952 Fresh start adjustments 102,830 Reorganization professional fees and other expenses (5,398 ) Write-off of deferred financing costs (370 ) Other reorganization items, net (3,213 ) Total reorganization items, net $ 262,801 Fresh Start Accounting Upon emergence from bankruptcy, the Company qualified for and adopted fresh start accounting in accordance with the provisions of ASC 852 as (i) the holders of existing voting shares of the Predecessor received less than 50% of the voting shares of the Successor and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims. See "Note 2- Emergence from Chapter 11 Reorganization" for the terms of the Plan. The Company applied fresh start accounting as of February 8, 2019 . Fresh start accounting required the Company to present its assets, liabilities and equity as if it were a new entity upon emergence from bankruptcy, with no beginning retained earnings or deficit as of the fresh start reporting date. As described in "Note 1-Basis of Presentation", the new entity is referred to as Successor, and includes the financial position and results of operations of the reorganized Company subsequent to February 8, 2019 . References to Predecessor relate to the financial position and results of operations of the Company prior to, and including, February 8, 2019 . Reorganization Value Under fresh start accounting, reorganization value represents the fair value of the Successor's total assets and is intended to approximate the amount a willing buyer would pay for the assets immediately after restructuring. Upon application of fresh start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values in conformity with ASC 805, "Business Combinations" ("ASC 805"). The Company’s reorganization value is derived from an estimate of enterprise value. Enterprise value represents the estimated fair value of an entity’s long-term debt and stockholders’ equity. The Bankruptcy Court approved the Plan, which included as support the Company's estimate that the enterprise value of the core assets (as defined in the Plan) of the Successor was in the range of $104 million to $187 million without cash at emergence. The sum of the estimated range of enterprise value plus the amount of estimated cash at emergence was in the range of $117 million to $200 million . This valuation analysis was prepared using reserve information, development schedules, other financial information and financial projections and applying standard valuation techniques, including net asset value analysis, precedent transactions analyses and public comparable company analyses. Based on the estimates and assumptions used in determining the enterprise value, the Company ultimately estimated the enterprise value of the Successor's core assets to be approximately $155.2 million . Valuation of Assets The Company’s principal assets are its oil and gas properties, which the Company accounts for under the full cost accounting method. With the assistance of valuation experts, the Company determined the fair value of its oil and gas properties based on the discounted cash flows expected to be generated from these assets. The computations were based on market conditions and reserves in place as of the bankruptcy emergence date. The fair value analysis performed by independent third party valuation experts was based on the Company’s estimates of reserves as developed internally by the Company’s reserve en gineers. For purposes of estimating the fair value of the Company's proved and probable reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Company's reserves, risked by reserve category and discounted using a weighted average cost of capital of 13.0% . The discount factor was derived from a weighted average cost of capital computation which utilized a blended expected cost of debt and expected returns on equity for similar market participants. Future revenues were based upon forward strip oil and natural gas prices as of the emergence date, adjusted for differentials realized by the Company, and held flat after 2023. Development and operating costs were based on the Company's recent cost trends. The discounted cash flow models also included estimates not typically included in proved reserves such as depletion, depreciation and income tax expenses. The proved reserve locations were limited to wells expected to be drilled in the Company's five year development plan. As a result of this analysis, the Company concluded the fair value of its proved reserves was $52.1 million and the fair value of its unproven reserves was $99 million as of the Effective Date. The Company also reviewed its undeveloped leasehold acreage. An analysis of comparable market transactions indicated a fair value of undeveloped acreage totaling approximately $19.7 million . These amounts are reflected in item 2 in "Fresh Start Adjustments" below. The fair value of the Company's asset retirement obligations was estimated at $2.5 million and was based on estimated plugging and abandonment costs as of the Effective Date, adjusted for inflation and discounted at the Successor's credit-adjusted risk free rate of 10% . See further discussion in "Fresh Start Adjustments" below for details on the specific assumptions used in the valuation of the Company’s various other assets. The following table reconciles the enterprise value per the Plan to the estimated fair value (for fresh start accounting purposes) of the Successor's common stock as of the Effective Date (in thousands): February 8, 2019 Enterprise value $ 155,246 Plus: Cash 23,073 Plus: Restricted cash 5,675 Less: Fair value of 10% PIK Notes due 2024 (65,025 ) Less: Fair value of Term Loan Exit Facility (45,269 ) Fair value of Successor common stock $ 73,700 Shares issued upon emergence 9,371 Per share value $ 7.86 The following table reconciles the enterprise value to the reorganization value as of the Effective Date (in thousands): February 8, 2019 Enterprise value $ 155,246 Plus: Cash 23,073 Plus: Restricted cash 5,675 Plus: Current liabilities 39,758 Plus: Asset retirement obligations (long-term) 2,303 Plus: Other long-term liabilities 2,845 Reorganization value of Successor assets $ 228,900 Reorganization value and enterprise value were estimated using numerous projections and assumptions that are inherently subject to significant uncertainties and resolution of contingencies that are beyond our control. Accordingly, the estimates set forth herein are not necessarily indicative of actual outcomes, and there can be no assurance that the estimates, projections or assumptions will be realized. Consolidated Balance Sheet The adjustments set forth in the following consolidated balance sheet reflect the effects of the transactions contemplated by the Plan and carried out by the Company (reflected in the column "Reorganization Adjustments") as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column "Fresh Start Adjustments"). The explanatory notes highlight methods used to determine fair values or other amounts of the assets and liabilities as well as significant assumptions or inputs. The following table reflects the reorganization and application of ASC 852 on our consolidated balance sheet as of February 8, 2019 (in thousands): Predecessor Reorganization Adjustments Fresh Start Adjustments Successor Assets Current assets: Cash and cash equivalents $ 31,881 $ (8,808 ) (1) $ — $ 23,073 Restricted cash 389 5,286 (2) — 5,675 Revenue receivable 13,704 — — 13,704 Joint interest billing receivable 6,908 — — 6,908 Deposit for surety bonds 3,550 — — 3,550 Other current assets 924 — — 924 Total current assets 57,356 (3,522 ) — 53,834 Property and equipment: Oil and gas properties: Oil and gas properties, full cost method 1,366,884 — (1,314,814 ) (12) 52,070 Unevaluated oil and gas properties 24,033 — 94,660 (12) 118,693 Accumulated depreciation, depletion, and amortization (1,303,376 ) — 1,303,376 (12) — Oil and gas properties, net 87,541 — 83,222 170,763 Other property and equipment 9,318 — (9,068 ) (13) 250 Accumulated depreciation of other property and equipment (9,068 ) — 9,068 (13) — Total property and equipment 87,791 — 83,222 171,013 Other assets 4,151 — (98 ) (14) 4,053 Total Assets $ 149,298 $ (3,522 ) $ 83,124 $ 228,900 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable to vendors $ 14,813 $ 2,575 (4) $ — $ 17,388 Advances from co-owners 3,363 — — 3,363 Oil and gas revenue payable 16,059 — — 16,059 Accrued interest 1,181 (1,181 ) (5) — — Asset retirement obligation 183 — — 183 Right of use liability-short-term 1,080 — — 1,080 Other accrued liabilities 1,224 461 (6) — 1,685 Total current liabilities 37,903 1,855 — 39,758 Multi-draw Term Loan 49,754 246 (3) (4,731 ) (15) 45,269 10% Senior Secured PIK Notes due 2024 — 80,000 (7) (14,975 ) (16) 65,025 Asset retirement obligation 2,303 — — 2,303 Right of use liability-long-term 2,604 — — 2,604 Deferred tax liability — — 241 (17) 241 Total liabilities not subject to compromise 92,564 82,101 (19,465 ) 155,200 Liabilities subject to compromise 321,495 (321,495 ) (8) — — Stockholder's equity: Preferred stock (Predecessor) 1 (1 ) (9) — — Common stock (Predecessor) 26 (26 ) (9) — — Paid-in capital (Predecessor) 314,312 (314,312 ) (9) — — Common stock (Successor) — 94 (10) — 94 Paid-in capital (Successor) — 73,606 (10) — 73,606 Accumulated deficit (579,100 ) 476,511 (11) 102,589 (18) — Total stockholder's equity (264,761 ) 235,872 102,589 73,700 $ 149,298 $ (3,522 ) $ 83,124 $ 228,900 Reorganization Adjustments (in thousands, except per share values) 1. Reflects the cash payments made as of the Effective Date from implementation of the Plan: Uses: Payment of accrued interest on the Multidraw Term Loan $ (1,181 ) Payment of financing costs related to the Term Loan Exit Facility (124 ) Funding of the general unsecured claims administrative escrow account (1,200 ) Cash transferred to restricted cash for professional fee escrow (5,157 ) Cash transferred to restricted cash for consenting creditors fees (129 ) Payment of professional fees at emergence (1,017 ) Total: $ (8,808 ) 2. Reflects the cash reclassified to Restricted Cash as of the Effective Date from implementation of the Plan: Reclassifications to Restricted Cash: Funding of the professional fee escrow account $ 5,157 Funding of the consenting creditors escrow account 129 Total: $ 5,286 3. Reflects the payment of financing costs related to the Term Loan Exit Facility and the write off of deferred financing costs related to the MultiDraw Term Loan Agreement and the Term Loan Exit Facility. 4. Represents the $3.6 million of accrued expenses related to the success fee recognized at emergence and the payment of $1.0 million of professional fees at emergence. 5. Represents the $1.2 million of accrued interest paid at emergence related to the Multidraw Term Loan Agreement. 6. Represents the accrual of the tax liability associated with the forfeiture of RSUs issued at emergence. 7. Represents the issuance of the $80 million PIK Notes due 2024 at face value. 8. Liabilities subject to compromise were settled as follows in accordance with the Plan: 10% Senior Secured Notes due 2021 $ 9,427 10% Senior Secured PIK Notes due 2021 275,046 Accrued interest on Senior Secured Notes due 2021 and PIK Notes due 2021 20,624 General Unsecured Claims & Convenience Claims 1,749 Preferred stock accrued dividends 14,649 Total liabilities subject to compromise $ 321,495 Issuance of the equity to the holders of the Senior Secured Notes due 2021 and PIK Notes due 2021 (71,343 ) Issuance of Successor 10% PIK Notes (80,000 ) GUC Administration Funding (1,200 ) Gain on settlement of liabilities subject to compromise $ 168,952 9. Reflects the cancellation of the Predecessor's preferred stock, common stock and additional paid-in capital to retained earnings. 10. Reflects the issuance of equity of the Successor. In accordance with the Plan, the Successor issued 8.9 million shares of new Class A Common Stock to the holder of Second Lien 10% Senior Secured Notes due 2021 and Second Lien 10% Senior Secured PIK Notes due 2021 as part of the settlement of certain liabilities subject to compromise. In addition, 300,000 shares of new Class A Common Stock were issued to consenting creditors, as well as 263,599 shares of new Class A Common Stock issued to holders of stock awards which vested at emergence. For those shares issued to the holders of stock awards, 92,479 were surrendered for tax purposes; therefore, a net 171,120 shares were considered outstanding at emergence. Each share of Class A Common Stock has a par value of $0.01 . Additionally, the Successor issued one share of Class B Common Stock and one share of Class C Common Stock on the Effective Date in accordance with the Plan. Common stock, par value $0.01 $ 94 Issuance of the equity to the holders of the Senior Secured Notes due 2021 and PIK Notes due 2021 71,249 Issuance of the equity related to the emergence vesting of RSUs 1,318 Issuance of the equity to the consenting creditors 1,500 Total equity issued at emergence 74,161 Value of shares relinquished to satisfy taxes on the RSUs vested at emergence (461 ) Net equity issued at emergence $ 73,700 11. Reflects the cumulative net impact of the effects on Accumulated deficit as follows: Gain on settlement of liabilities subject to compromise $ 168,952 Issuance of the equity to the consenting creditors (1,500 ) Issuance of the equity related to the emergence vesting of RSUs (1,318 ) Success fees recognized at emergence (3,592 ) Accelerated vesting of Predecessor stock compensation (396 ) Write-off deferred financing costs (370 ) Net impact to Reorganization items, net 161,776 Cancellation of Predecessor equity, including vesting 314,735 Net Impact to Accumulated deficit $ 476,511 Fresh Start Adjustments 12. Fair value adjustments to proved oil and a gas properties, associated inventory, unproved acreage, as well as the respective reset of depletion, depreciation, and amortization balances. See above for a detailed discussion of the fair value methodology. 13. Adjustments to record the fair value of the well equipment, leasehold improvements, computer software, computers, as well as the reset of accumulated depreciation. The Company concluded that the net book value of the assets represented the fair value at emergence. 14. Represents the write-down of the Indianola investment to fair value based on a five year cash flow analysis. 15. Upon emergence, the Multidraw Term Loan Agreement was extinguished in the amount of $50 million and the Company entered into the Exit Facility in the amount of $50 million . This adjustment represents the fair value adjustment associated with the Exit Facility. Fair value was estimated via a discounted cash flow analysis by discounting scheduled debt service payments at a credit spread of 10.1% . The credit spread was determined by performing a synthetic credit rating analysis, considering yields on similarly-rated, energy corporate issues, and adjusting based on recovery rates for first lien debt. 16. Represents the fair value adjustments to the 2024 PIK Notes. Fair value was estimated via a discounted cash flow analysis by discounting scheduled debt service payments at a credit spread of 11.9% . The credit spread was determined by performing a synthetic credit rating analysis, considering yields on similarly-rated, energy corporate issues, and adjusting based on recovery rates for second lien debt. 17. Represents the net decrease in tax assets and tax liabilities associated with adjustments for fresh start accounting. 18. Reflects the cumulative impact of the fresh start adjustments discussed above: Proved oil and gas properties fair value adjustment $ (11,438 ) Unproved oil and gas properties fair value adjustment 94,660 Other asset fair value adjustment (98 ) Exit Facility fair value adjustment 4,731 2024 PIK Notes fair value adjustment 14,975 Net gain on fresh start adjustments 102,830 Tax impact on fresh start accounting adjustments (241 ) Net impact to Accumulated deficit $ 102,589 The net gain on fresh start adjustments has been included in Reorganization items, net in the Consolidated Statement of Operations. See "Note 2-Emergence from Chapter 11 Reorganization" for additional details of reorganization items, net. |
