CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Energen Corporation (Energen or the Company) is an oil and natural gas exploration and production company engaged in the exploration, development and production of oil, natural gas liquids and natural gas. Our operations are conducted through our subsidiary, Energen Resources Corporation (Energen Resources) and primarily occur within the Midland Basin, the Delaware Basin and the Central Basin Platform areas of the Permian Basin in west Texas and New Mexico. Our corporate headquarters is located in Birmingham, Alabama. The unaudited consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the
2017
Annual Report of Energen on Form 10-K.
Our accompanying unaudited consolidated financial statements include Energen and its subsidiaries, principally Energen Resources, and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required for complete financial statements. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments necessary to present a fair statement of our financial position, results of operations, and cash flows for the periods and as of the dates shown. Such adjustments consist of normal recurring items. Certain reclassifications were made to conform prior periods’ financial statements to the current-quarter presentation.
Proposed Merger of Energen with Diamondback Energy, Inc. (Diamondback)
On August 14, 2018, Energen entered into an Agreement and Plan of Merger (the Merger Agreement) with Diamondback and Sidewinder Merger Sub Inc., a wholly owned subsidiary of Diamondback (Merger Sub). The closing of the Merger (as defined below) is expected to occur in the fourth quarter of 2018.
The Merger Agreement provides that, among other things and subject to the terms and conditions of the Merger Agreement, (1) Merger Sub will be merged with and into Energen (the Merger), with Energen surviving and continuing as the surviving corporation in the Merger, and, (2) at the effective time of the Merger (the Effective Time), each outstanding share of common stock of Energen (other than shares held in treasury by Energen, shares owned by Diamondback or Merger Sub or shares with respect to which dissenters’ rights have been validly exercised in accordance with Alabama law) will be converted into the right to receive
0.6442
of a share of common stock of Diamondback, plus cash in lieu of any fractional shares that otherwise would have been issued (the Merger Consideration). Diamondback’s common stock is listed and traded on NASDAQ under the ticker symbol FANG.
The completion of the Merger is subject to satisfaction or waiver of certain customary mutual closing conditions, including (1) the receipt of the required approvals from Energen shareholders and Diamondback stockholders, (2) the expiration or termination of the waiting period under the Hart-Scott-Rodino Act, as amended (which termination was received on September 10, 2018), (3) the absence of any governmental order or law that makes consummation of the Merger illegal or otherwise prohibited, (4) the effectiveness of the registration statement on Form S-4 to be filed by Diamondback pursuant to which the shares of Diamondback common stock to be issued in connection with the merger are registered with the Securities and Exchange Commission (the SEC), (5) the authorization for listing of Diamondback common stock to be issued in connection with the merger on the NASDAQ and (6) the receipt by each party of a customary opinion that the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the U.S. tax code. The obligation of each party to consummate the Merger is also conditioned upon the other party’s representations and warranties being true and correct (subject to certain materiality exceptions) and the other party having performed in all material respects its obligations under the Merger Agreement.
The Merger Agreement contains termination rights for each of Diamondback and Energen, including, among others, (1) if the consummation of the Merger does not occur on or before March 31, 2019, subject to extension to June 30, 2019 for the sole purpose of obtaining regulatory clearances and (2) subject to certain conditions, if such party wishes to terminate the Merger Agreement to enter into a definitive agreement with respect to a Parent Superior Proposal or a Company Superior Proposal (in each case, as such term is defined in the Merger Agreement), as applicable. Upon termination of the Merger Agreement under specified circumstances, including the termination by Energen in the event of a change of recommendation by the Diamondback board of directors or by Diamondback to enter into an agreement providing for a Parent Superior Proposal (as such term is defined in the Merger Agreement), Diamondback would be required to pay Energen a termination fee of
$400 million
. In addition, upon termination of the Merger Agreement under specified circumstances, including the termination by Diamondback in the event of a change of recommendation by the Energen board of directors or by Energen to enter into an agreement providing for a Company Superior Proposal (as such term is defined in the Merger Agreement), Energen would be required to pay Diamondback a termination fee of
$250 million
. In
addition, if the Merger Agreement is terminated because of a failure of Energen’s shareholders or Diamondback’s stockholders to approve the proposals required to complete the Merger, Energen and Diamondback, as applicable, may be required to reimburse the other party for its actual transaction expenses in an amount not to exceed
$40 million
, in the case of Energen’s expenses, and
$25 million
, in the case of Diamondback’s expenses. In no event will either party be entitled to receive more than one termination fee, net of any expense reimbursement.
In connection with the Merger, Diamondback filed with the SEC, on October 18, 2018, an amendment to the registration statement on Form S-4 that was originally filed on September 13, 2018, that includes a joint proxy statement of Energen and Diamondback. The joint proxy statement also constitutes a prospectus for Diamondback with respect to the shares of Diamondback common stock to be issued as Merger Consideration. The registration statement was declared effective by the SEC on October 24, 2018, and Energen and Diamondback commenced mailing the definitive joint proxy statement/prospectus to Energen shareholders and Diamondback stockholders on or about October 26, 2018.
Additional information on the proposed Merger is included in the registration statement on Form S-4/A filed by Diamondback with the SEC on October 18, 2018.
2. DERIVATIVE COMMODITY INSTRUMENTS
We periodically enter into derivative commodity instruments to hedge our exposure to price fluctuations on oil, natural gas liquids and natural gas production. These derivative commodity instruments are accounted for as mark-to-market transactions with gains or losses recognized in the period of change in gain (loss) on derivative instruments, net. Such instruments may include over-the-counter (OTC) swaps, options and basis swaps typically executed with investment and commercial banks and energy-trading firms. Derivative transactions are pursuant to standing authorizations by the Board of Directors, which do not authorize speculative positions.
The following tables detail the offsetting of derivative assets and liabilities as well as the fair values of derivatives on the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2018
|
|
|
Gross Amounts Not Offset in the Balance Sheets
|
|
|
Gross Amounts Recognized at Fair Value
|
Gross Amounts Offset in the Balance Sheets
|
Net Amounts Presented in the Balance Sheets
|
Financial Instruments
|
Cash Collateral Received
|
Net Fair Value Presented in the Balance Sheets
|
Derivatives not designated as hedging instruments
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Derivative instruments
|
$
|
55,455
|
|
$
|
(51,229
|
)
|
$
|
4,226
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,226
|
|
Noncurrent derivative instruments
|
3,592
|
|
(3,592
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
Total derivative assets
|
59,047
|
|
(54,821
|
)
|
4,226
|
|
—
|
|
—
|
|
4,226
|
|
Liabilities
|
|
|
|
|
|
|
Derivative instruments
|
224,001
|
|
(51,229
|
)
|
172,772
|
|
—
|
|
—
|
|
172,772
|
|
Noncurrent derivative instruments
|
61,049
|
|
(3,592
|
)
|
57,457
|
|
—
|
|
—
|
|
57,457
|
|
Total derivative liabilities
|
285,050
|
|
(54,821
|
)
|
230,229
|
|
—
|
|
—
|
|
230,229
|
|
Total derivatives
|
$
|
(226,003
|
)
|
$
|
—
|
|
$
|
(226,003
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(226,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2017
|
|
|
Gross Amounts Not Offset in the Balance Sheets
|
|
|
Gross Amounts Recognized at Fair Value
|
Gross Amounts Offset in the Balance Sheets
|
Net Amounts Presented in the Balance Sheets
|
Financial Instruments
|
Cash Collateral Received
|
Net Fair Value Presented in the Balance Sheets
|
Derivatives not designated as hedging instruments
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Derivative instruments
|
$
|
1,758
|
|
$
|
(1,758
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Noncurrent derivative instruments
|
42
|
|
(42
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
Total derivative assets
|
1,800
|
|
(1,800
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
Liabilities
|
|
|
|
|
|
|
Derivative instruments
|
73,137
|
|
(1,758
|
)
|
71,379
|
|
—
|
|
—
|
|
71,379
|
|
Noncurrent derivative instruments
|
8,928
|
|
(42
|
)
|
8,886
|
|
—
|
|
—
|
|
8,886
|
|
Total derivative liabilities
|
82,065
|
|
(1,800
|
)
|
80,265
|
|
—
|
|
—
|
|
80,265
|
|
Total derivatives
|
$
|
(80,265
|
)
|
$
|
—
|
|
$
|
(80,265
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(80,265
|
)
|
Due to the volatility of commodity prices, the estimated fair value of our derivative instruments is subject to fluctuation from period to period, which could result in significant differences between the current estimated fair value and the ultimate settlement price. Additionally, Energen is at risk of economic loss based upon the creditworthiness of our counterparties. We were in a net loss position with all
thirteen
our active counterparties at
September 30, 2018
.
The following table details the effect of open and closed derivative commodity instruments not designated as hedging instruments on the consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
Location on Statement of Operations
|
Three months ended
|
|
September 30,
|
(in thousands)
|
2018
|
2017
|
Gain (loss) recognized in income on derivatives
|
Gain (loss) on derivative instruments, net
|
$
|
(154,628
|
)
|
$
|
(57,610
|
)
|
|
|
|
|
|
|
|
|
|
Location on Statement of Operations
|
Nine months ended
|
|
September 30,
|
(in thousands)
|
2018
|
2017
|
Gain (loss) recognized in income on derivatives
|
Gain (loss) on derivative instruments, net
|
$
|
(188,242
|
)
|
45,037
|
|
As of September 30, 2018, Energen had entered into the following derivative transactions for the remainder of
2018
and subsequent years:
|
|
|
|
|
|
Production Period
|
Description
|
Total Hedged Volumes
|
Weighted Average Contract Price
|
Oil
|
|
|
|
2018
|
NYMEX Swaps
|
540
|
MBbl
|
$60.25 Bbl
|
|
NYMEX Three-Way Collars
|
3,375
|
MBbl
|
|
|
Ceiling sold price (call)
|
|
$60.04 Bbl
|
|
Floor purchased price (put)
|
|
$45.47 Bbl
|
|
Floor sold price (put)
|
|
$35.47 Bbl
|
2019
|
NYMEX Swaps
|
8,280
|
MBbl
|
$61.66 Bbl
|
|
NYMEX Three-Way Collars
|
5,760
|
MBbl
|
|
|
Ceiling sold price (call)
|
|
$61.65 Bbl
|
|
Floor purchased price (put)
|
|
$45.94 Bbl
|
|
Floor sold price (put)
|
|
$35.94 Bbl
|
Oil Basis Differential
|
|
|
|
2018
|
WTI/WTI Basis Swaps
|
3,150
|
MBbl
|
$(1.46) Bbl
|
2019
|
WTI/WTI Basis Swaps
|
16,560
|
MBbl
|
$(5.52) Bbl
|
2020
|
WTI/WTI Basis Swaps
|
15,120
|
MBbl
|
$(1.20) Bbl
|
Natural Gas Liquids
|
|
|
|
2018
|
Liquids Swaps
|
34.0
|
MMGal
|
$0.61 Gal
|
2019
|
Liquids Swaps
|
115.9
|
MMGal
|
$0.65 Gal
|
Natural Gas
|
|
|
|
2018
|
Basin Specific Swaps - West Texas/Waha
|
1.8
|
Bcf
|
$1.70 Mcf
|
2018
|
Basin Specific Swaps - Permian
|
0.9
|
Bcf
|
$2.56 Mcf
|
WTI - West Texas Intermediate/Midland, WTI - West Texas Intermediate/Cushing
|
As of
September 30, 2018
, the maximum term over which Energen has hedged exposures to the variability of cash flows is through December 31, 2020.
3. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, we use various valuation approaches and classify all assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect our own considerations about the assumptions other market participants would use in pricing the asset or liability based on the best information available in the circumstances. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability, and may affect the valuation of the asset or liability and its placement within the fair value hierarchy. The hierarchy is broken down into three levels based on the observability of inputs as follows:
|
|
Level 1 -
|
Unadjusted quoted prices in active markets for identical assets or liabilities;
|
|
|
Level 2 -
|
Pricing inputs other than quoted prices in active markets included within Level 1, which are either directly or indirectly observable through correlation with market data as of the reporting date; and
|
|
|
Level 3 -
|
Pricing that requires inputs that are both significant and unobservable to the calculation of the fair value measure. The fair value measure represents estimates of the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints.
|
No transfers between fair value hierarchy levels occurred during the
three
months and nine months ended
September 30, 2018
.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Energen classifies the fair value of multiple derivative instruments executed under master netting arrangements as net derivative assets and liabilities. The following fair value hierarchy tables present information about Energen’s assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
(in thousands)
|
Level 2
|
Level 3
|
Total
|
Assets:
|
|
|
|
Derivative instruments
|
$
|
(4,645
|
)
|
$
|
8,871
|
|
$
|
4,226
|
|
Total assets
|
(4,645
|
)
|
8,871
|
|
4,226
|
|
Liabilities:
|
|
|
|
Derivative instruments
|
167,065
|
|
5,707
|
|
172,772
|
|
Noncurrent derivative instruments
|
30,787
|
|
26,670
|
|
57,457
|
|
Total liabilities
|
197,852
|
|
32,377
|
|
230,229
|
|
Net derivative liability
|
$
|
(202,497
|
)
|
$
|
(23,506
|
)
|
$
|
(226,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
(in thousands)
|
Level 2
|
Level 3
|
Total
|
Liabilities:
|
|
|
|
Derivative instruments
|
$
|
43,241
|
|
$
|
28,138
|
|
$
|
71,379
|
|
Noncurrent derivative instruments
|
7,736
|
|
1,150
|
|
8,886
|
|
Total liabilities
|
50,977
|
|
29,288
|
|
80,265
|
|
Net derivative liability
|
$
|
(50,977
|
)
|
$
|
(29,288
|
)
|
$
|
(80,265
|
)
|
Derivative Instruments:
The fair value of Energen’s derivative commodity instruments is determined using market transactions and other market evidence whenever possible, including market-based inputs to models and broker or dealer quotations. Our OTC derivative contracts trade in less liquid markets with limited pricing information as compared to markets with actively traded, unadjusted quoted prices; accordingly, the determination of fair value is inherently more difficult. OTC derivatives for which we are able to substantiate fair value through direct or indirect observable market prices are classified within Level 2 of the fair value hierarchy. These Level 2 fair values consist of swaps and options priced in reference to NYMEX oil and natural gas prices. OTC derivatives valued using unobservable market prices have been classified within Level 3 of the fair value hierarchy. These Level 3 fair values include oil basis and natural gas liquids swaps. We consider the frequency of pricing and variability in pricing between sources in determining whether a market is considered active. While Energen does not have access to the specific assumptions used in its counterparties’ valuation models, Energen maintains communications with its counterparties and discusses pricing practices. Further, we corroborate the fair value of our transactions by comparison of market-based price sources.
Level 3 Fair Value Instruments:
Energen prepared a sensitivity analysis to evaluate the hypothetical effect that changes in the prices used to estimate fair value would have on the fair value of its Level 3 instruments. We estimate that a 10 percent increase or decrease in commodity prices would result in an approximate
$0.3 million
change in the fair value of open Level 3 derivative contracts and to our results of operations.
The table below sets forth a summary of changes in the fair value of Energen’s Level 3 derivative commodity instruments as follows:
|
|
|
|
|
|
|
|
|
Three months ended
|
|
September 30,
|
(in thousands)
|
2018
|
2017
|
Balance at beginning of period
|
$
|
90,303
|
|
$
|
7,645
|
|
Realized gains (losses)
|
22,603
|
|
(1,548
|
)
|
Unrealized losses relating to instruments held at the reporting date*
|
(109,528
|
)
|
(24,112
|
)
|
Settlements during period
|
(26,884
|
)
|
398
|
|
Balance at end of period
|
$
|
(23,506
|
)
|
$
|
(17,617
|
)
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
September 30,
|
(in thousands)
|
2018
|
2017
|
Balance at beginning of period
|
$
|
(29,288
|
)
|
$
|
(8,852
|
)
|
Realized gains (losses)
|
21,618
|
|
(4,588
|
)
|
Unrealized gains (losses) relating to instruments held at the reporting date*
|
10,064
|
|
(7,616
|
)
|
Settlements during period
|
(25,900
|
)
|
3,439
|
|
Balance at end of period
|
$
|
(23,506
|
)
|
$
|
(17,617
|
)
|
*Includes
$88.8 million
and
$13.0 million
in losses related to open contracts held at the reporting date for the three months and nine months ended September 30, 2018, respectively. Includes
$23.0 million
and
$14.2 million
in losses related to open contracts held at the reporting date for the three months and nine months ended September 30, 2017, respectively.
The table below sets forth quantitative information about Energen’s Level 3 fair value measurements of derivative commodity instruments as follows:
|
|
|
|
|
|
|
|
(in thousands, except price data)
|
Fair Value as of September 30, 2018
|
Valuation Technique*
|
Unobservable Input*
|
Range
|
Oil Basis - WTI/WTI
|
|
|
|
|
2018
|
$
|
24,790
|
|
Discounted Cash Flow
|
Forward Basis
|
($9.50) - ($9.23) Bbl
|
2019
|
$
|
7,417
|
|
Discounted Cash Flow
|
Forward Basis
|
($6.76) - ($5.83) Bbl
|
2020
|
$
|
(11,350
|
)
|
Discounted Cash Flow
|
Forward Basis
|
($0.53) - ($0.26) Bbl
|
Natural Gas Liquids
|
|
|
|
|
2018
|
$
|
(17,870
|
)
|
Discounted Cash Flow
|
Forward Basis
|
$1.00 - $1.01 Gal
|
2019
|
$
|
(26,493
|
)
|
Discounted Cash Flow
|
Forward Basis
|
$0.89 Gal
|
*Discounted cash flow represents an income approach in calculating fair value including the referenced unobservable input and a discount reflecting credit quality of the counterparty.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are reported at fair value on a nonrecurring basis in Energen’s consolidated balance sheets. The following methods and assumptions were used to estimate the fair values of these assets and liabilities.
Asset retirement obligations:
Energen’s asset retirement obligations (ARO) primarily relate to the future plugging, abandonment and reclamation of wells and facilities. We recognize a liability for the fair value of the ARO in the periods incurred. See Note 10, Asset Retirement Obligations, for further discussion related to these AROs. These assumptions are classified as Level 3 fair value measurements.
Asset Impairments:
We monitor our oil and natural gas properties as well as the market and business environments in which we operate and make assessments about events that could result in potential impairment. Such potential events may include, but are not limited to, commodity price declines, unanticipated increased operating costs, and lower than expected field production performance. If a material event occurs, Energen makes an estimate of undiscounted future cash flows to determine whether the asset is impaired. If the asset is impaired, we will record an impairment loss for the difference between the net book value of the properties and the
fair value of the properties. The fair value of the properties typically is estimated using discounted cash flows and values derived from purchase and sale agreements and similar support as applicable. Cash flow and fair value estimates require Energen to make projections and assumptions for pricing, demand, competition, operating costs, legal and regulatory issues, discount rates and other factors for many years into the future.
These assumptions are classified as Level 3 fair value measurements. Impairments recognized by Energen during the three months and nine months ended September 30, 2018 and 2017 were immaterial.
Financial Instruments not Carried at Fair Value
The stated value of cash and cash equivalents, short-term investments, accounts receivable (net of allowance for doubtful accounts), and short-term debt approximates fair value due to the short maturity of the instruments. The Company invested in certain short-term investments that qualify and were classified as cash and cash equivalents. Energen had an allowance for doubtful accounts of
$0.6 million
at both September 30, 2018 and December 31, 2017, respectively. The fair value of Energen’s long-term debt, including the current portion, was approximately
$972.8 million
and
$798.9 million
and had a carrying value of
$955.0 million
and
$785.0 million
at
September 30, 2018
and
December 31, 2017
, respectively. The fair values are based on market prices of similar debt issues having the same remaining maturities, redemption terms and credit rating. Short-term debt is classified as a Level 1 fair value measurement and long-term debt is classified as a Level 2 fair value measurement.
4. LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2018
|
December 31, 2017
|
Credit facility, due April 30, 2023
|
$
|
425,000
|
|
$
|
255,000
|
|
4.625% Notes, due September 1, 2021
|
400,000
|
|
400,000
|
|
7.32% Medium-term Notes, Series A, due July 28, 2022
|
20,000
|
|
20,000
|
|
7.35% Medium-term Notes, Series A, due July 28, 2027
|
10,000
|
|
10,000
|
|
7.125% Medium-term Notes, Series B, due February 15, 2028
|
100,000
|
|
100,000
|
|
Total
|
955,000
|
|
785,000
|
|
Less unamortized debt discount
|
339
|
|
360
|
|
Less unamortized debt issuance costs
|
1,488
|
|
1,779
|
|
Total
|
$
|
953,173
|
|
$
|
782,861
|
|
The aggregate maturities of Energen’s long-term debt outstanding at September 30, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Remaining 2018
|
2019
|
2020
|
2021
|
2022
|
2023 and thereafter
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
400,000
|
|
$
|
20,000
|
|
$
|
535,000
|
|
The debt agreements of Energen contain financial and nonfinancial covenants including routine matters such as timely payment of principal and interest, maintenance of corporate existence and restrictions on liens. None of the debt agreements have events of default based on credit ratings. As of September 30, 2018, we were in compliance with our covenants.
Under Energen’s Indenture dated September 1, 1996 with The Bank of New York as Trustee, a cross default provision provides that any debt default of more than
$10 million
by Energen or Energen Resources will constitute an event of default by Energen. The Indenture does not include a restriction on the payment of dividends.
Our
4.625%
Notes due September 1, 2021 include change in control provisions that may be triggered in a variety of change in control events including, but not limited to, the election to our Board of a majority of directors who are not Continuing Directors. As defined in the notes, a Continuing Director is a director who (1) was a member of the Board on the date of the initial issuance of the notes; or (ii) was nominated for election or elected to the Board with the approval of a majority of the Continuing Directors who were members of the Board at the time of such nomination or election.
Credit Facility:
On September 2, 2014, Energen entered into a
five
-year syndicated secured credit facility with domestic and foreign lenders. On November 9, 2017, the borrowing base was increased to
$1.7 billion
. The aggregate commitments under the credit facility did not change and remained at
$1.05 billion
. On April 30, 2018, we entered into an amendment to our credit facility which extended the maturity to April 30, 2023, increased the borrowing base to
$2.15 billion
and increased the aggregate commitments to
$1.25 billion
. Energen’s obligations under the syndicated credit facility are unconditionally guaranteed by Energen Resources. The credit facility is collateralized by certain assets of Energen and Energen Resources, including a pledge of equity interests in subsidiaries of Energen other than Energen Resources, by mortgages on substantially all of Energen Resources’ oil and natural gas properties and by the pledge of Energen’s and Energen Resources’ deposit accounts, securities accounts and commodity accounts (other than de minimus accounts and excluded accounts). The current credit facility qualifies for classification as long-term debt on the consolidated balance sheets. The financial covenants of the credit facility require Energen to maintain a ratio of total debt to consolidated income before interest expense, income taxes, depreciation, depletion, amortization, exploration expense and other non-cash income and expenses (EBITDAX) less than or equal to
4.0
to 1.0; and to maintain a ratio of consolidated current assets (adjusted to include amounts available for borrowings and exclude non-cash derivative instruments) to consolidated current liabilities (adjusted to exclude maturities under the credit facility and non-cash derivative instruments) greater than or equal to
1.0
to 1.0. We are also bound by covenants which limit our ability to incur additional indebtedness, make certain distributions or alter our corporate structure. Energen may not pay dividends if an event of default exists, if the payment would result in an event of default, or if availability is less than
10 percent
of the loan limit under the credit facility. Under the credit facility, a cross default provision provides that any debt default of more than
$75 million
by Energen or Energen Resources will constitute an event of default by Energen. Our credit facility also limits our ability to enter into commodity hedges based on projected production volumes. In addition, the terms of our credit facility limit the amount we can borrow to a borrowing base amount which is determined by our lenders in their sole discretion based on their valuation of our proved reserves and their internal criteria including commodity price outlook. The borrowing base amount is subject to redetermination semi-annually and for event-driven unscheduled redeterminations. Due to the pending Merger of Energen with Diamondback, our scheduled redetermination on October 1, 2018 was postponed to occur on or about January 15, 2019. Completion of the Merger would give rise to an event of default under the terms of the Energen credit facility. To avoid an event of default, Diamondback will need to either obtain waivers or consents from the lenders under the Energen credit facility or the Energen credit facility will need to be repaid in full and terminated in connection with the Merger.
Upon an uncured event of default under the credit facility, all amounts owing under the credit facility depending on the nature of the event of default, will automatically or may, upon notice by the administrative agent or the requisite lenders thereunder, become immediately due and payable and the lenders may terminate their commitments under the defaulted facility.
The following is a summary of information relating to Energen’s credit facility:
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2018
|
December 31, 2017
|
Credit facility outstanding
|
$
|
425,000
|
|
$
|
255,000
|
|
Available for borrowings
|
825,000
|
|
795,000
|
|
Total borrowing commitments
|
$
|
1,250,000
|
|
$
|
1,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
(in thousands)
|
2018
|
2017
|
2018
|
2017
|
Maximum amount outstanding at any month-end
|
$
|
425,000
|
|
$
|
238,000
|
|
$
|
425,000
|
|
$
|
238,000
|
|
Average daily amount outstanding
|
$
|
386,978
|
|
$
|
191,810
|
|
$
|
309,514
|
|
$
|
80,476
|
|
Weighted average interest rates based on:
|
|
|
|
|
Average daily amount outstanding
|
3.39
|
%
|
2.51
|
%
|
3.21
|
%
|
2.49
|
%
|
Amount outstanding at period-end
|
3.42
|
%
|
2.49
|
%
|
3.42
|
%
|
2.49
|
%
|
The following is a summary of information relating to Energen’s interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
(in thousands)
|
2018
|
2017
|
2018
|
2017
|
Interest expense
|
$
|
11,550
|
|
$
|
9,985
|
|
$
|
32,601
|
|
$
|
28,210
|
|
Amortization of debt issuance costs related to long-term debt, including our credit facility*
|
$
|
541
|
|
$
|
830
|
|
$
|
2,106
|
|
$
|
2,503
|
|
Commitment fees*
|
$
|
681
|
|
$
|
674
|
|
$
|
2,005
|
|
$
|
2,236
|
|
*Included in Energen’s total interest expense. Energen had
no
capitalized interest for the three months and nine months ended September 30, 2018 and 2017. For the nine months ended September 30, 2018, Energen paid commitment fees on the unused portion of the available credit facility at a current annual rate of 30 basis points.
5. RECONCILIATION OF EARNINGS PER SHARE (EPS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
Three months ended
|
(in thousands, except per share amounts)
|
September 30, 2018
|
September 30, 2017
|
|
Net
|
|
Per Share
|
Net
|
|
Per Share
|
|
Loss
|
Shares
|
Amount
|
Loss
|
Shares
|
Amount
|
Basic EPS
|
$
|
(26,572
|
)
|
97,485
|
|
$
|
(0.27
|
)
|
$
|
(18,486
|
)
|
97,198
|
|
$
|
(0.19
|
)
|
Effect of dilutive securities
|
|
|
|
|
|
|
Stock options
|
|
—
|
|
|
|
—
|
|
|
Non-vested restricted stock
|
|
—
|
|
|
|
—
|
|
|
Performance share awards
|
|
—
|
|
|
|
—
|
|
|
Diluted EPS
|
$
|
(26,572
|
)
|
97,485
|
|
$
|
(0.27
|
)
|
$
|
(18,486
|
)
|
97,198
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
Nine months ended
|
(in thousands, except per share amounts)
|
September 30, 2018
|
September 30, 2017
|
|
Net
|
|
Per Share
|
Net
|
|
Per Share
|
|
Income
|
Shares
|
Amount
|
Income
|
Shares
|
Amount
|
Basic EPS
|
$
|
160,617
|
|
97,413
|
|
$
|
1.65
|
|
$
|
44,398
|
|
97,176
|
|
$
|
0.46
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
Stock options
|
|
92
|
|
|
|
25
|
|
|
Non-vested restricted stock
|
|
293
|
|
|
|
284
|
|
|
Performance share awards
|
|
215
|
|
|
|
193
|
|
|
Diluted EPS
|
$
|
160,617
|
|
98,013
|
|
$
|
1.64
|
|
$
|
44,398
|
|
97,678
|
|
$
|
0.45
|
|
In periods of loss, shares that otherwise would have been included in diluted average common shares outstanding are excluded. The Company had
742,290
and
547,793
of excluded shares for the three months ended September 30, 2018 and 2017, respectively.
Energen had the following shares that were excluded from the computation of diluted EPS, as inclusion would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
(in thousands)
|
2018
|
2017
|
2018
|
2017
|
Stock options
|
6
|
|
512
|
|
94
|
|
512
|
|
Non-vested restricted stock
|
—
|
|
—
|
|
3
|
|
—
|
|
Performance share awards
|
—
|
|
139
|
|
—
|
|
139
|
|
6. STOCK COMPENSATION
Stock Incentive Plan
Restricted Stock:
The Stock Incentive Plan provides for the grant of restricted stock and restricted stock units (restricted stock awards) which have been valued based on the quoted market price of Energen’s common stock at the date of grant. Restricted stock awards vest within three years from the grant date. A summary of restricted stock award activity during the nine months ended September 30, 2018 is presented below:
|
|
|
|
|
|
|
|
Shares
|
Weighted Average Price
|
Nonvested at December 31, 2017
|
405,536
|
|
$
|
44.58
|
|
Restricted stock units granted
|
133,920
|
|
52.21
|
|
Vested
|
(148,041
|
)
|
56.83
|
|
Forfeited
|
(2,716
|
)
|
49.15
|
|
Nonvested at September 30, 2018
|
388,699
|
|
$
|
42.51
|
|
Performance Share Awards:
In addition,
the Stock Incentive Plan provides for the grant of performance share awards to eligible employees based on predetermined Energen performance criteria at the end of an award period. The Stock Incentive Plan provides that payment of earned performance share awards be made in the form of Energen common stock. Performance share awards are valued using the Monte Carlo model which uses historical volatility and other assumptions to estimate the probability of satisfying the market condition of the award and have a
two
to
three
-year vesting period. A summary of performance share award activity during the nine months ended September 30, 2018 is presented below:
|
|
|
|
|
|
|
|
Shares
|
Weighted
Average Price
|
Nonvested at December 31, 2017
|
400,037
|
|
$
|
55.65
|
|
Granted (three-year vesting period)
|
158,262
|
|
68.08
|
|
Vested and paid
|
(112,710
|
)
|
83.94
|
|
Forfeited
|
(3,129
|
)
|
60.98
|
|
Nonvested at September 30, 2018
|
442,460
|
|
$
|
52.85
|
|
Stock Repurchase Program
During the
three
months and nine months ended
September 30, 2018
, Energen had non-cash purchases of approximately
$1.3 million
and
$8.2 million
, respectively, of Energen common stock in conjunction with tax withholdings on other stock compensation and our non-qualified deferred compensation plan. Energen had non-cash purchases of Energen common stock of
$0.1 million
and
$3.3 million
during the three months and nine months September 30, 2017. Energen utilized internally generated cash flows in payment of the related tax withholdings.
7. EMPLOYEE BENEFIT PLANS
Postretirement Benefit Plans
Energen provides certain postretirement benefits for all eligible employees hired prior to January 1, 2010. These postretirement benefits are available upon retirement as defined by the plan. The components of net periodic postretirement benefit income for Energen’s postretirement benefit plan were as follows:
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
(in thousands)
|
2018
|
2017
|
Line item where presented
|
Components of net periodic benefit cost:
|
|
|
|
Service cost
|
$
|
16
|
|
$
|
18
|
|
General and administrative
|
Interest cost
|
53
|
|
57
|
|
Interest expense
|
Expected long-term return on assets
|
(51
|
)
|
(62
|
)
|
Other income
|
Prior service cost amortization
|
(113
|
)
|
(114
|
)
|
Other income
|
Actuarial loss amortization
|
31
|
|
2
|
|
Other income
|
Net periodic income
|
$
|
(64
|
)
|
$
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
(in thousands)
|
2018
|
2017
|
Line item where presented
|
Components of net periodic benefit cost:
|
|
|
|
Service cost
|
$
|
48
|
|
$
|
53
|
|
General and administrative
|
Interest cost
|
160
|
|
170
|
|
Interest expense
|
Expected long-term return on assets
|
(152
|
)
|
(187
|
)
|
Other income
|
Prior service cost amortization
|
(340
|
)
|
(340
|
)
|
Other income
|
Actuarial loss amortization
|
93
|
|
7
|
|
Other income
|
Net periodic income
|
$
|
(191
|
)
|
$
|
(297
|
)
|
|
There are no required contributions to the postretirement benefit plan during 2018.
8. COMMITMENTS AND CONTINGENCIES
Legal Matters:
Energen and its subsidiaries are, from time to time, parties to various pending or threatened legal proceedings and we have accrued a provision for our estimated liability. Certain of these lawsuits include claims for punitive damages in addition to other specified relief. We recognize a liability for contingencies, including an estimate of legal costs to be incurred, when information available indicates both a loss is probable and the amount of the loss can be reasonably estimated. Based upon information presently available, and in light of available legal and other defenses, contingent liabilities arising from threatened and pending litigation are not considered material in relation to the respective financial positions of Energen and its subsidiaries. It should be noted, however, that there is uncertainty in the valuation of pending claims and prediction of litigation results.
On November 4, 2015, Energen Resources filed a quiet title action against Endeavor Energy Resources, L.P. (Endeavor) in the District Court of Howard County, Texas, to remove a cloud on the title to approximately
10,000
acres leased by Energen Resources in that county. Energen Resources believes the cloud on title arises from a prior, unreleased but partially terminated oil and gas lease covering the leased lands. The trial judge ruled with respect to the acreage not held by production that Endeavor’s lease terminated prior to the date Energen Resources entered into its lease. In November 2016, the trial judge entered a final judgment to that effect and that judgment was appealed by Endeavor in April 2017. On October 25, 2018, the Texas Eleventh Circuit Court of Appeals entered a judgment affirming the trial court’s final judgment in favor of Energen Resources. The judgment is subject to rehearing before the Eleventh Circuit Court of Appeals and may be appealed to the Supreme Court of Texas.
In connection with the Merger Agreement and the transactions contemplated thereby, two purported class action lawsuits and an individual lawsuit have been filed. Two of the complaints, captioned Melvin Gross v. Energen Corporation, et al., Case No. 2:18-cv-01711-RDP (filed October 17, 2018) and Shiva Stein v. Energen Corporation, et al., Case 2:18-cv-01746-JHE (filed October 22,
2018), were filed in the United States District Court for the Northern District of Alabama. One complaint, captioned Jordan Rosenblatt v. Energen Corporation, et al., Case No. 01-CV-2018-9043232100 (filed October 26, 2018), was filed in the Circuit Court of Jefferson County, Alabama. The complaints assert claims against Energen and its directors. In general, the complaints allege that the defendants violated Sections 14(a) and 20(a) of the Exchange Act because the joint proxy statement/prospectus with respect to the Merger filed with the SEC allegedly misrepresents or omits material information or assert state law breaches of fiduciary duty based on such alleged misrepresentations or omissions. The complaints generally seek, among other things, injunctive relief preventing the consummation of the Merger, rescission in the event the Merger is consummated, and damages. The defendants believe that the actions are without merit.
Environmental Matters:
Various environmental laws and regulations apply to the operations of Energen and Energen Resources. Historically, the cost of environmental compliance has not materially affected our financial position, results of operations or cash flows. New regulations, enforcement policies, claims for damages or other events could result in significant unanticipated costs.
During January 2014, Energen Resources responded to a General Notice and Information Request from the Environmental Protection Agency regarding the Reef Environmental Site (the Site) in Sylacauga, Talladega County, Alabama. The letter identifies Energen Resources as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 for the cleanup of the Site. In 2008, Energen hired a third party to transport approximately
3,000
gallons of non-hazardous wastewater to Reef Environmental for wastewater treatment. Reef Environmental ceased operating its wastewater treatment system in 2010. Because it used Reef Environmental only one time for a small volume of non-hazardous wastewater, Energen Resources has not accrued a liability for cleanup of the Site.
New Mexico Audits:
In 2011, Energen Resources received an Order to Perform Restructured Accounting and Pay Additional Royalties (the Order), following an audit performed by the Taxation and Revenue Department (the Department) of the State of New Mexico on behalf of the Office of Natural Resources Revenue (ONRR), of federal oil and gas leases in New Mexico. The audit covered periods from January 2004 through December 2008 and included a review of the computation and payment of royalties due on minerals removed from specified U.S. federal leases. The Order addressed ONRR’s efforts to change accounting and reporting practices, and to unbundle fees charged by third parties that gather, compress and transport natural gas production. ONRR now maintains that all or some of such fees are not deductible.
Energen Resources appealed the Order in 2011, and in July 2012, on a motion from ONRR, the Order was remanded. In August 2014, ONRR issued its Revised Order and Energen Resources appealed the Revised Order. In the Revised Order, ONRR ordered that Energen pay additional royalties on production from certain federal leases in the amount of
$129,700
. At ONRR’s request, the Revised Order was also remanded in August 2015. On April 15, 2016, ONRR issued its Second Revised Order. The Second Revised Order directs Energen Resources to pay additional royalties of
$189,000
, replacing the previous demand of
$129,700
. Energen estimates that application of the ONRR position to all of the Company’s federal leases would result in ONRR claims up to approximately
$24 million
, plus interest and penalties from 2004 forward. ONRR began implementing its unbundling initiative in 2010, but seeks to implement its revisions retroactively, despite the fact that they conflict with previous audits, allowances and industry practice. Energen is contesting the Second Revised Order, the predecessor orders and the findings. Management is unable, at this time, to determine a range of reasonably possible losses, and no amount has been accrued as of
September 30, 2018
.
Income Taxes:
In March 2018, the Company executed a statute of limitation extension for its 2014 federal consolidated income tax return until September 10, 2019. This extension was granted as part of the Company’s ongoing IRS examination of its 2014 and 2016 federal consolidated income tax returns. In June 2018, the Company received notice that the state of Alabama initiated an income tax audit for the 2014 tax year for all subsidiaries.
Under SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), provisional amounts must be recorded for certain income tax effects of the 2017 Tax Cuts and Jobs Act for which the accounting under ASC 740 is incomplete, but a reasonable estimate can be determined. Energen recorded a provisional estimate of
$0.4 million
deferred income tax expense at December 31, 2017 with respect to the IRC Section 162(m) limitation and associated compensation-related deferred tax assets. As of September 30, 2018, the accounting for this income tax effect has been completed and no changes have been made to the provisional estimate recorded at December 31, 2017.
9. EXPLORATORY COSTS
Energen capitalizes exploratory drilling costs until a determination is made that the well or project has either found proved reserves or is impaired. After an exploratory well has been drilled and found oil and natural gas reserves, a determination may be pending as to whether the oil and natural gas quantities can be classified as proved. In those circumstances, Energen continues to capitalize the drilling costs pending the determination of proved status if (i) the well has found a sufficient quantity of reserves to justify its completion as a producing well and (ii) Energen is making sufficient progress assessing the reserves and the economic and operating viability of the project. Capitalized exploratory drilling costs are presented in proved properties in the consolidated balance sheets. If the exploratory well is determined to be a dry hole, the costs are charged to exploration expense. Other exploration costs, including geological and geophysical costs, are expensed as incurred.
The following table sets forth capitalized exploratory well costs and includes additions pending determination of proved reserves, reclassifications to proved reserves and costs charged to expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
(in thousands)
|
2018
|
2017
|
2018
|
2017
|
Capitalized exploratory well costs at beginning of period
|
$
|
128,234
|
|
$
|
141,401
|
|
$
|
132,200
|
|
$
|
164,996
|
|
Additions pending determination of proved reserves
|
202,743
|
|
168,965
|
|
578,784
|
|
504,668
|
|
Reclassifications due to determination of proved reserves
|
(206,031
|
)
|
(174,270
|
)
|
(586,038
|
)
|
(533,568
|
)
|
Capitalized exploratory well costs at end of period
|
$
|
124,946
|
|
$
|
136,096
|
|
$
|
124,946
|
|
$
|
136,096
|
|
The following table sets forth capitalized exploratory well costs:
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2018
|
December 31, 2017
|
Exploratory wells in progress (drilling rig not released)
|
$
|
17,578
|
|
$
|
10,879
|
|
Capitalized exploratory well costs capitalized for a period of one year or less
|
107,368
|
|
121,321
|
|
Total capitalized exploratory well costs
|
$
|
124,946
|
|
$
|
132,200
|
|
At
September 30, 2018
, Energen had
49
gross exploratory wells either drilling or waiting on results from completion and testing. Substantially all these wells are located in the Permian Basin. As of September 30, 2018 and December 31, 2017, the Company had
no
wells capitalized greater than a year.
10. ASSET RETIREMENT OBLIGATIONS
Energen’s asset retirement obligations (ARO) primarily relate to the future plugging, abandonment and reclamation of wells and facilities. We recognize a liability for the fair value of the ARO in the periods incurred. The ARO fair value liability is determined by calculating the present value of the estimated future cash outflows, adjusted for inflation, we expect to incur to plug, abandon and reclaim our producing properties at the end of their productive lives, and is recognized on a discounted basis incorporating an estimate of performance risk specific to Energen. Subsequent to initial measurement, liabilities are accreted to their present value and capitalized costs are depreciated over the estimated useful lives of the related assets. Upon settlement of the liability, Energen may recognize a gain or loss for differences between estimated and actual settlement costs.
The following table reflects the components of the change in Energen’s ARO balance:
|
|
|
|
|
(in thousands)
|
|
Balance as of December 31, 2017
|
$
|
88,378
|
|
Liabilities incurred
|
1,743
|
|
Liabilities settled
|
(103
|
)
|
Accretion expense
|
4,704
|
|
Balance as of September 30, 2018
|
$
|
94,722
|
|
11. REVENUE RECOGNITION
On January 1, 2018, the Company adopted Accounting Standard Codification (ASC) 606, Revenue from Contracts with Customers, using the modified retrospective method. The adoption of ASC 606 superseded the revenue recognition requirements in ASC 605, Revenue Recognition, and had the following impact on the Company’s results of operations for the three months and nine months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2018
|
(in thousands)
|
As reported under ASC 606
|
As computed under ASC 605
|
Increase (Decrease)
|
Revenues
|
|
|
|
Oil, natural gas liquids and natural gas sales
|
$
|
380,884
|
|
$
|
382,611
|
|
$
|
(1,727
|
)
|
Operating Costs and Expenses
|
|
|
|
Oil, natural gas liquids and natural gas production
|
$
|
55,078
|
|
$
|
56,805
|
|
$
|
(1,727
|
)
|
Net Loss
|
$
|
(26,572
|
)
|
$
|
(26,572
|
)
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
(in thousands)
|
As reported under ASC 606
|
As computed under ASC 605
|
Increase (Decrease)
|
Revenues
|
|
|
|
Oil, natural gas liquids and natural gas sales
|
$
|
1,110,317
|
|
$
|
1,114,892
|
|
$
|
(4,575
|
)
|
Operating Costs and Expenses
|
|
|
|
Oil, natural gas liquids and natural gas production
|
$
|
165,671
|
|
$
|
170,246
|
|
$
|
(4,575
|
)
|
Net Income
|
$
|
160,617
|
|
$
|
160,617
|
|
$
|
—
|
|
The changes in revenues and operating costs and expenses are due to certain marketing and transportation costs determined to have occurred after transfer of control to the purchaser. Accordingly, under ASC 606 these marketing and transportation costs are reported as a deduction to revenues.
The Company does not disclose the value of unsatisfied performance obligations under its contracts with customers, as it applies the practical exemption in accordance with ASC 606. The exemption applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to our remaining performance obligations is not required.
Performance obligations for the sale of oil, natural gas liquids and natural gas are satisfied at a point in time because the customer obtains control and title of the asset when the oil, natural gas liquids and natural gas is delivered to the designated sales point. Because the Company's performance obligations have been satisfied and an unconditional right to consideration exists as of the balance sheet date, the Company has recognized amounts due from contracts with customers of
$150.1 million
and
$131.9 million
at September 30, 2018 and December 31, 2017, respectively, as accounts receivable within the consolidated balance sheets.
Revenues are predominantly derived from the sale of oil, natural gas liquids and natural gas. Revenues are recognized when obligations under the terms of a contract with our customers are satisfied; generally, this occurs with the transfer of control of the promised goods or services in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenue on these contracts is recognized in accordance with the five-step revenue recognition model prescribed under ASC 606. Payment is generally made on these oil, natural gas liquids and natural gas sales contracts within
30
days of the end of the calendar month in which product is delivered. The sale of oil, natural gas liquids and natural gas as presented on the consolidated statements of operations represents the Company's share of revenues net of royalties and excludes revenue interests owned by others. When selling oil, natural gas liquids and natural gas on behalf of royalty owners or working interest owners, the Company is acting as an agent and thus reports the revenue on a net basis. Taxes are not included in the transaction costs.
In accordance with ASC 606, the Company disaggregates revenues from contracts with customers by product type. The following table summarizes our revenue by major product:
|
|
|
|
|
|
|
|
|
Three months ended
|
Nine months ended
|
(in thousands)
|
September 30, 2018
|
September 30, 2018
|
Oil
|
$
|
316,059
|
|
$
|
936,136
|
|
Natural gas liquids
|
49,407
|
|
125,591
|
|
Natural gas
|
15,418
|
|
48,590
|
|
Total
|
$
|
380,884
|
|
$
|
1,110,317
|
|
12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table provides changes in the components of accumulated other comprehensive income (loss), net of the related income tax effects.
|
|
|
|
|
|
(in thousands)
|
|
|
Balance as of December 31, 2017
|
|
$
|
380
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
(184
|
)
|
Amounts reclassified to accumulated other comprehensive income (loss) from retained earnings due to the stranded tax effects of the 2017 Tax Cuts and Jobs Act
|
|
286
|
|
Change in accumulated other comprehensive income (loss)
|
|
102
|
|
Balance as of September 30, 2018
|
|
$
|
482
|
|
The following table provides details of the reclassifications out of accumulated other comprehensive income (loss).
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
September 30,
|
|
|
2018
|
2017
|
|
(in thousands)
|
Amounts Reclassified
|
Line Item Where Presented
|
Postretirement plans:
|
|
|
|
Prior service cost
|
$
|
113
|
|
$
|
113
|
|
Other income
|
Actuarial losses
|
(31
|
)
|
(2
|
)
|
Other income
|
Total postretirement plans
|
82
|
|
111
|
|
|
Income tax expense
|
(20
|
)
|
(42
|
)
|
|
Total reclassifications for the period, net of tax
|
$
|
62
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
September 30,
|
|
|
2018
|
2017
|
|
(in thousands)
|
Amounts Reclassified
|
Line Item Where Presented
|
Postretirement plans:
|
|
|
|
Prior service cost
|
$
|
340
|
|
$
|
341
|
|
Other income
|
Actuarial losses
|
(94
|
)
|
(7
|
)
|
Other income
|
Total postretirement plans
|
246
|
|
334
|
|
|
Income tax expense
|
(62
|
)
|
(126
|
)
|
|
Total reclassifications for the period, net of tax
|
$
|
184
|
|
$
|
208
|
|
|
13. ACQUISITION AND DISPOSITION OF PROPERTIES
In the first quarter of 2018, Energen completed acreage swaps which delivered
1,922.4
net acres in the Midland Basin to a third party, while it received
1,230.7
net acres in the Delaware Basin along with
$0.7 million
cash. Energen recognized a pre-tax gain of
$33.4 million
based on the fair value of the asset surrendered in the acreage trade. In the second quarter of 2018, Energen completed an acreage swap which delivered
240
net acres in the Central Basin platform to a third party, while it received
129.23
net acres in the Midland Basin. Energen recognized a pre-tax gain of
$0.7 million
based on the fair value of the asset surrendered in the acreage trade. During the third quarter of 2018, Energen completed acreage swaps which delivered
612
net acres in the Midland Basin to a third party, while it received
608
net acres in the Midland Basin. Energen recognized a pre-tax gain of
$0.1 million
based on the fair value of the assets surrendered in the acreage trades.
During the nine months ended September 30, 2018, Energen completed an estimated total of
$75.3 million
in various purchases and renewals of unproved acquisitions, which are accounted for as asset acquisitions, including approximately
$67.7 million
in the Delaware Basin and approximately
$7.7 million
in the Midland Basin for unproved leasehold. During the nine months ended September 30, 2017, Energen completed an estimated
$259.3 million
in various purchases and renewals of unproved acquisitions, including approximately
$208.1 million
in the Delaware Basin and approximately
$32.4 million
in the Midland Basin for unproved leasehold and
$18.8 million
for mineral purchases in the Delaware Basin. In addition, during the year-to-date September 30, 2018, Energen completed
$5.8 million
in various proved property acquisitions.
14. RECENTLY ISSUED ACCOUNTING STANDARDS
Recently Adopted Accounting Standards
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2018-02, Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendment is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted. The Company adopted this amendment for its postretirement plans with respect to the disproportionate effect of the Tax Cuts and Jobs Act to clear the effect as of January 1, 2018 that otherwise would not be cleared under current guidance until the postretirement plans have terminated. The Company had an associated
$286,000
decrease to retained earnings for the adoption of this amendment.
In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation - Scope of Modification Accounting. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendment is effective for annual periods beginning after December 15, 2017, and interim periods within those annual years. The adoption of this amendment did not impact the Company’s financial position or results of operations.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this update require that the service cost component of net periodic postretirement benefit expense be presented in the same statement of operations line item as other employee compensation costs, while the remaining components of net periodic postretirement benefit expense are to be presented outside operating income. The amendment is effective for annual periods beginning after December 15, 2017, and interim periods within those annual years. The adoption of this amendment did not have a material impact to the Company’s financial position or results of operations.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. This update apples to all entities that are required to present a statement of cash flows. This update provides guidance on eight specific cash flow issues: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. This update was effective for financial statements issued for fiscal years beginning after December 31, 2017, including interim periods within those fiscal years with early adoption permitted. This update was applied using the retrospective transition method. The adoption of this standard did not impact the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which makes a number of changes meant to simplify and improve accounting for share-based payments. The amendment was effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this ASU effective January 1, 2017 did not have a material impact on our consolidated financial statements. Upon adoption of this new guidance, all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in our consolidated statements of operations as a discrete item in the reporting period in which they occur. The presentation requirements for cash flows related to employee taxes paid for withheld shares were adjusted retrospectively. These cash outflows, which were historically presented as an operating activity, were classified as a financing activity under taxes paid for shares withheld on the consolidated statements of cash flows. The Company also had an approximate
$170,000
decrease to retained earnings associated with our election to recognize forfeitures as they occur.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, ASC 606, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This update is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The Company adopted this standard as of January 1, 2018 using the modified retrospective approach, which only applies to contracts that were not complete as of the date of initial application. Adoption of this standard did not require an adjustment to beginning retained earnings. See Note 11, Revenue Recognition, for further discussion of the impact of the adoption of ASC 606 on the Company’s consolidated financial statements and the Company’s revenue recognition policies.
Recently Issued But Not Yet Adopted Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update requires lessees to recognize a lease liability and a right-of-use (ROU) asset for all leases with a term greater than 12 months on the balance sheet. This standard is not applicable to oil and natural gas leases. This ASU modifies the definition of a lease and outlines the recognition, measurement, presentation and disclosure of leasing arrangement by both lessees and lessors. The Company plans to make certain elections allowing the Company not to reassess contracts that commenced prior to adoption, to continue applying its current accounting policy for land easements until adoption and not to recognize ROU assets or lease liabilities for short-term leases. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which would allow entities to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in the consolidated financial statements. The ASU will allow entities to continue to apply the legacy guidance in Topic 840, including its disclosure requirements, in the comparative periods presented in the year the new leases standard is adopted. Entities that elect this option would still adopt the new leases standard using a modified retrospective transition method, but would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The Company will adopt ASU No. 2016-02 on January 1, 2019 using the modified retrospective transition method.
In preparation for adoption, we have substantially completed a process to identify a complete population of our leases, including the review of various contracts to identify whether such arrangements convey the right to control the use of an identified asset. Based on our portfolio of leases as of September 30, 2018, we estimate the impact of the adoption to be an increase in lease-related assets and liabilities of approximately
$5 million
on Energen’s consolidated balance sheet with no material impact on the results of operations, equity or cash flows. The impact to our consolidated financial statements will depend on the population of leases in effect at the date of adoption. We have additionally begun implementing new business processes and developing new controls and the expanded disclosures of our leasing arrangements.