SYNERGY RESOURCES CORPORATION
April 30, 2015
U.S. Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E., Mail Stop 7010
Washington D.C. 20549
Via EDGAR and Federal Express
Attention: Mr. Karl Hiller
Mr. Joseph Klinko
Re: Synergy Resources Corporation
Form 10-K for the Fiscal Year ended August 31, 2014 Filed October
30, 2014 Form 10-Q for the Fiscal Quarter ended November 30, 2014
Filed January 9, 2015 Response Letter dated March 13, 2015 File No.
001-35245
Dear Mr. Hiller and Mr. Klinko:
This letter is in response to your letter dated April 2, 2015, to Synergy
Resources Corporation (the "Company"), transmitting the comments of the staff
(the "Staff") of the U.S. Securities and Exchange Commission (the "Commission")
relating to the above-referenced Annual Report on Form 10-K and Quarterly Report
on Form 10-Q. For your convenience, the response is preceded by the Staff's
comment to which the response relates.
Form 10-K for the Fiscal Year ended August 31, 2014
Management's Discussion and Analysis, page 35
Overview, page 35
1. Original Comment. We note your response to prior comment two and the
disclosure you intend to include in your next periodic filing to address
implications of the recent decline in oil and gas prices for your critical
accounting policies. We also note that while you indicate reasonably
likely effects of the current economic environment may be material and
measurable, you do not address the extent to which your plans may be
impacted.
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Items 303(a)(1), (2)(ii) and (3)(ii) of Regulation S-K require you to
address the reasonably likey effects of trends and uncertainties on
liquidity, capital resources, and results of operations. The guidance in
FRC ss.ss.501.12.b.3, and 501.14 (Sections III.A, III.B.3., and V of SEC
Release Nos 33-8350; 34-48960; FR-72), clarifies how these requirements
may be addressed in an introduction/overview, the content and focus
generally, and assumptions underlying critical accounting estimates.
Given that you expect a "significant negative impact" in your accounting
for oil and gas activities due to recent changes in prices, and in view of
the implications for the underlying reserve computations and your
development plans, it appears your disclosures should be expanded to more
fully portray the reasonably likely effects of trends and uncertainties.
For example, you should clarify the extent to which development plans are
reasonably likely to be curtailed or deferred, specify the reserves
associated with these contingencies, and the reasonably likely accounting
effects. Please also clarify your remarks pertaining to derivatives to
indicate the extent to which you have hedged future production and to
explain how the strike prices compare to those underlying your historical
results.
Response. Our financial results for the period covered by the referenced
Form 10-K were not significantly effected by the decline in commodity
prices. The declines were most significant during our second fiscal
quarter ended February 28, 2015 (a decline of 48% from August 31 to
February 28). Accordingly, we incorporated additional language in the Form
10-Q for the quarter ended February 28, 2015 (the "February Report").
Illustrations of the additional language are presented in the following
paragraphs. Since the significant impact of the price declines occurred
subsequent to August 31, 2014, we respectfully propose that the
disclosures included in the February Report satisfy our disclosure
requirements.
The following specific disclosures were included in the February Report:
We continue to expect that commodity price declines will have a
"significant negative impact" on the calculation of the ceiling test. In
addition to including that statement in CRITICAL ACCOUNTING POLICIES
(commencing on page 47), we address actual and potential ceiling test
impacts in the following areas:
(i) Page 33 - MARKET CONDITIONS. "For the second quarter, the ceiling
test indicated that no impairment had occurred. However, continued
low prices will further lower the calculated ceiling, and future
impairments may occur."
(ii) Page 45 - TRENDS AND OUTLOOK. "A continuing decline in oil and gas
prices...(vi) may cause a ceiling test impairment."
(iii) Page 48 - CRITICAL ACCOUNTING POLICIES. "The ceiling test performed
for the quarter ended February 28, 2015, did not result in
impairment recognition. However, a decline of 7% or more in the
value of the ceiling limitation would have resulted in an
impairment."
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We expanded our discussion of the extent to which development plans are
reasonably likely to be curtailed or deferred in four sections of the
February Report, as follows:
(i) Page 31 - DRILLING AND COMPLETION OPERATONS. "As of the end of our
second fiscal quarter, we have no plans to curtail any activities.
However, should commodity prices weaken further, our operational
flexibility will allow us to adjust the completion schedule of many
of our wells in progress and reduce further drilling activity if
prudent."
(ii) Page 32 - COMPLETION ACTIVITY. The second paragraph of this section
discloses our plans to complete all of the wells in progress, as
follows: "The balance of our drilled but not yet completed wells
consists of eight wells at our Geis pad and eight wells at our
Weideman pad, which includes four Extended Reach Lateral (ERL)
wells. The four ERL Weideman wells will take longer and cost more to
complete than our standard length lateral wells. We continue to
anticipate the Geis wells and the Weideman wells will begin
production during our fourth fiscal quarter. While these pads are
located in the more northern area of the Wattenberg Field, we
anticipate midstream operating conditions will improve with the
startup of DCP Midstream's Lucerne II plant in May."
(iii) Page 42 - CAPITAL REQUIREMENTS. "However, as commodity prices have
dropped, we have negotiated lower costs from our service providers
and revised our completion design and we are now budgeting that the
remaining standard length lateral wells to be drilled this fiscal
year will cost between $3.1 million and $3.5 million each. In order
to maximize the efficient use of our capital we have reduced the
amount of non-operated working interests in wells operated by
others, either by swapping interests when appropriate or by outright
selling of interests."
(iv) Page 45 - TRENDS AND OUTLOOK. "The recent decline in commodity
prices has led to a corresponding decline in service costs, which
directly relate to our drilling and completion costs. On average, we
have been able to reduce drilling and completion costs by
approximately 25% over the first two quarters of fiscal 2015, due to
a combination of optimizing well designs, moving to day-rate
drilling, lower contract rates for drilling rigs, and lower
completion costs. This focus on cost reduction has supported
well-level economics in spite of the severe price drop in crude oil
and natural gas. We believe at current drilling and completion cost
levels and with current prevailing commodity prices, we can achieve
reasonable well-level rates of return going forward."
We included significant discussion regarding the impact of commodity
derivative contracts on our financial position and results of operatons.
In addition to the previously proposed disclosure that was included in
CRITICAL ACCOUNTING POLICIES, we included the following items:
(i) Page 31 - EARLY LIQUIDATION OF IN-THE-MONEY COMMODITY CONTRACTS. We
discussed the realized gains from liquidating certain commodity
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contracts and the creation of new contract positions with $50 per
barrel exercise prices.
(ii) Page 43 - OIL AND GAS COMMODITY CONTRACTS. We provided six
paragraphs of discussion, including the quantities of barrels of oil
and cubic feet of gas covered under open contracts, the percentage
of anticipated production, and the overall duration of the
contracts.
(iii) Page 44 - HEDGE ACTIVITY ACCOUNTING. We provided two paragraphs of
discussion that include the estimated fair value of the open
commodity contracts as of February 28, 2015.
(iv) Page 20 - NOTE 7. COMMODITY DERIVATIVE INSTRUMENTS. In the notes to
the financial statements we disclose details about all of our open
contracts at February 28, 2015.
(v) Page 50 - COMMODITY PRICE RISK. We also believe that the discussion
regarding the sensitivity of our financial results to changes in
commodity prices is useful to the reader.
Form 10-Q for the Fiscal Quarter ended November 30, 2014
Management's Discussion and Analysis, page 29
Overview, page 30
2. Original Comment. Disclosures on pages 30 and 31 suggest that you do not
believe the downward trend in oil and gas prices will be material, as
indicated in the following excerpts.
"We believe that our basic strategy is sound whether oil and gas
prices are high or low"
"...we anticipate we can achieve attractive economic rates of
return even with current low commodity prices"
"...we believe we have a sustainable business model in almost any
commodity price environment."
However, the draft disclosure you provided in response to prior comment
two states you "anticipate that the price declines during the second
quarter will have a significant negative impact on the ceiling test
calculation for future quarters...[and] as prices decline, the economic
performance of certain properties in the reserve estimate may deteriorate
to the point that they are removed from the proved reserve category..."
Review your disclosure under this section and revise as needed to resolve
any inconsistencies between it and the draft disclosure included in your
response, also the disclosures previously referenced on page 34 and 41.
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Response. In response to the Staff's comment, we reviewed the draft
disclosure proposed in our March 13, 2015 Response Letter and revised the
language to resolve any inconsistencies between it and the above
referenced disclosures. The revised language was incorporated in the
February Report. Illustrations of the additional language are presented in
the following paragraphs.
The disclosure on pages 30 and 31 of the Form 10-Q for the quarter ended
November 30, 2014 (the "November Report") focused on our strategy of
reducing costs during periods of commodity price declines. In light of a
further deterioration in prices during the second fiscal quarter, our
strategic discussion was further revised for the February Report. Starting
on page 29, our strategy disclosure summarized the general nature of cost
reductions undertaken by us and further, summarized the use of derivative
contracts to mitigate the short term impact of price declines. Each of
these themes is discussed in greater detail in subsequent pages of the
February Report.
On page 29, under STRATEGY, the first paragraph includes the sentence:
"Drilling in lower risk areas, maintaining high operating interests, and
focusing on cost control enables us to achieve attractive well economics
in most commodity environments." In the second paragraph, we included the
phrase "...and that our cost-focused strategy is prudent irrespective of
the prevailing commodity price environment."
On page 31, under DRILLING AND COMPLETION OPERATIONS, we included a
paragraph on the relationship between costs and prevailing prices, as
follows: "As commodity prices have fallen over the preceding two fiscal
quarters, we have been able to reduce drilling and completion costs by
approximately 25%. We think we can achieve even lower costs in the future,
but believe at current drilling and completion cost levels and with
current prevailing commodity prices, we can achieve reasonable well level
rates of return going forward." On page 42 under CAPITAL REQUIREMENTS, we
included the statement: "However, as commodity prices have dropped we have
negotiated lower costs from our service providers and revised our
completion design and we are now budgeting that the remaining standard
length lateral wells to be drilled this fiscal year will cost between $3.1
million and $3.5 million each." We give further detail on page 32 under
DRILLING ACTIVITY, as follows: "Total drilling and completion costs are
expected to be between $3.1 to $3.3 million per well for the Codell wells
and $3.3 to $3.5 million per well for the Niobrara wells." These
disclosures illustrate our business philosophy of adjusting the cost side
of the financial equation as we work to improve our results of operations.
As the details of our specific discussions related to commodity
derivatives were included in our response to comment one in this letter,
they are not repeated in our response to comment two.
We updated our discussion under TRENDS AND OUTLOOK for the February
Report, which starts on page 45. The corresponding discussion for the
November Report started on page 41. We included specific reference to a
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ceiling test impairment in the first paragraph and added a paragraph to
discuss trends in service costs. The new paragraph says: "The recent
decline in commodity prices has led to a corresponding decline in service
costs, which directly relate to our drilling and completion costs. On
average, we have been able to reduce drilling and completion costs by
approximately 25% over the first two quarters of fiscal 2015, due to a
combination of optimizing well designs, moving to day-rate drilling, lower
contract rates for drilling rigs, and lower completion costs. This focus
on cost reduction has supported well-level economics in spite of the
severe price drop in crude oil and natural gas. We believe at current
drilling and completion cost levels and with current prevailing commodity
prices, we can achieve reasonable well-level rates of return going
forward."
The Company acknowledges that (i) the Company is responsible for the
adequacy and accuracy of the disclosure in the Company's filings; (ii) Staff
comments or changes to disclosure in response to Staff comments do not foreclose
the Comission from taking any action with respect to the Company's filings; and
(iii) the Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws of
the United States.
Please call the undersigned at (970) 737-1073 with any additional comments
or questions you may have.
Very truly yours,
/s/ Frank L. Jennings
Frank L. Jennings
Chief Financial Officer
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