| |
(3) | Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 245 gross (41.44 net) wells drilled by other operators on our acreage.Corporate Governance Highlights |
(4) Includes NRI/WI from wells that have been drilled or in which we have elected to participate. Includes 392 gross (30.02 net) wells drilled by other operators on our acreage.
| |
(5) | We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). |
| |
(6) | NRI shown is for producing wells. |
Utica Shale (primarily in Eastern Ohio)
Location and Land
As of December 31, 2018, we held leasehold interests in approximately 241,000 gross (210,000 net) acres in the Utica Shale.
Area History
As of December 31, 2018, the Ohio Department of Natural Resources reported that there were 2,138 producing horizontal wells, 246 horizontal wells that had been drilled but were not yet completed or connected to a pipeline, 116 horizontal wells that were being drilled and an additional 449 horizontal wells that had been permitted.
Geology
The Utica Shale is located in the Appalachian Basin of the United States and Canada. The Utica Shale is a rock unit comprised of organic-rich calcareous black shale that was deposited about 440 million to 460 million years ago during the Late Ordovician period. It overlies the Trenton Limestone and is located a few thousand feet below the Marcellus Shale.
The source rock portion of the Utica Shale underlies portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia in the United States and is also present beneath parts of Lake Ontario, Lake Erie and Ontario, Canada. Throughout this area, the Utica Shale ranges in thickness from less than 100 feet to over 800 feet. There is a general thinning from east to west. Across our position, the Utica Shale ranges in thickness from over 600 to over 750 feet.
The application of horizontal drilling, combined with multi-staged hydraulic fracturing to create permeable flow paths from shale units into wellbores, were the key technologies that unlocked development of the Devonian-age Marcellus Shale and the Ordovician-age Utica Shale in the Appalachian Basin states of Pennsylvania, West Virginia, Southern New York and Eastern Ohio. This proven technology has potential for application in other shale units which extend across much of the Appalachian Basin region.
Facilities
There are standard land oil and natural gas processing facilities in the Utica Shale. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering.
Recent and Future Activities
We spud our first well, the Wagner 1-28H, on our Utica Shale acreage in February 2012 and, as of December 31, 2018, had spud
385 gross wells, 290 of which were completed and were producing. In 2018, we spud 23 gross (19.5 net) wells, of which three were completed as producing wells and, as of December 31, 2018, 20 were in various stages of completion. We commenced sales from 35 gross and net wells in the Utica Shale during 2018. During 2019 (through February 15, 2019), we spud five gross (3.7 net) wells. As of February 15, 2019, three of these wells were in various stages of completion and the other two were still drilling. In addition, other operators drilled 28 gross (4.4 net) wells and commenced sales from 32 gross (9.4 net) wells on our Utica Shale acreage in 2018.
We currently intend to drill 13 to 15 gross (10 to 11 net) horizontal wells, and commence sales from 47 to 51 gross (40 to 45 net) horizontal wells, on our Utica Shale acreage in 2019. We currently anticipate two to three net horizontal wells will be drilled, and sales commenced from two to three net horizontal wells, by other operators on our Utica Shale acreage during 2019. As of February 15, 2019, we had two operated horizontal rig drilling in the play. We plan to run, on average, approximately one operated horizontal rig in the Utica Shale in 2019.
Production Status
Aggregate net production from our Utica Shale acreage during the three months ended December 31, 2018 was approximately 102,665 MMcfe, or 1,115.9 MMcfe per day, of which 97% was from natural gas and 3% was from oil and NGLs.
SCOOP (Oklahoma)
Location and Land
As of December 31, 2018, we held leasehold interests in approximately 66,000 gross (50,000 net) surface acres in the SCOOP and approximately 92,000 net reservoir acres, which includes 50,000 net Woodford acres and 42,000 net Springer acres.
Area History
The SCOOP, or South Central Oklahoma Oil Province, is a loosely defined province that encompasses many of the top hydrocarbon producing counties in Oklahoma. The area extends mainly across Grady, Caddo, McClain, Garvin, Stevens, Carter and Love Counties. The region was historically developed by vertical wells drilled through multiple stacked reservoirs ranging from the Cambrian to Permian Periods in age. The play represents the transition to mainly horizontal development targeting predominantly oil and condensate-rich hydrocarbons. The most prolific of these reservoirs include the, Springer (Goddard) Shale, Caney Shale, Woodford Shale and Sycamore Formation.
Geology
The SCOOP play of Oklahoma is located in the southeast portion of the prolific Anadarko Basin. The SCOOP play mainly targets the Devonian to Mississippian aged Woodford Shale. The Woodford Shale is a silica and highly organic rich black shale that was deposited about 320 million to 370 million years ago. Across our position, the Woodford Shale ranges in thickness from 200 to over 400 feet and directly overlies the Hunton Limestone and underlies the Sycamore formation, both of which are also locally productive reservoirs. The Sycamore formation is age equivalent to the Meramec and Osage being developed in the STACK, or Sooner Trend Anadarko Basin Canadian and Kingfisher Counties, play and is located between the organic-rich Woodford and Caney Shales. The Sycamore formation is approximately 250 feet thick across our acreage position, presenting a significant development target.
Facilities
There are standard land oil and natural gas processing facilities in the SCOOP. Our facilities located at well site pads include storage tank batteries, oil/gas/water separation equipment, vapor recovery units, line heaters, compression emission control devices and applicable metering.
Recent and Future Activities
On February 17, 2017, we, through our wholly-owned subsidiary Gulfport MidCon, LLC, or Gulfport MidCon (formerly known as SCOOP Acquisition Company, LLC), completed our acquisition, which we refer to as our SCOOP acquisition, of certain assets from Vitruvian II Woodford, LLC, an unrelated third-party seller, for a total purchase price of approximately $1.85 billion, consisting of $1.35 billion in cash, subject to certain adjustments, and approximately 23.9 million shares of the Company’s common stock (of which approximately 5.2 million shares were placed in an indemnity escrow). Our SCOOP acquisition included approximately 46,000 net surface acres with multiple producing zones, including the Woodford and Springer formations in the SCOOP resource play, in Grady, Stephens and Garvin Counties, Oklahoma.
Upon our acquisition of these assets, we focused on the high-grading of equipment for our rig fleet to drive efficiencies and lower drill days in the play. Improved well performance has also been realized with enhanced completion designs compared to
historical practices for the area. Our 2018 drilling program concentrated on SCOOP Woodford wells, however, during 2018, we also spud and commenced sales from one upper Sycamore well.
In 2018, we spud 13 gross (12.1 net) wells, of which four were completed as producing wells and, as of December 31, 2018, nine were in various stages of completion. We commenced sales from 15 gross (12.8 net) wells in the SCOOP during 2018. During 2019 (through February 15, 2019), we spud two gross (1.6 net) wells. As of February 15, 2019, both of these wells were still drilling. In addition, other operators drilled 40 gross (3.1 net) wells and commenced sales from 47 gross (3.6 net) wells on our SCOOP acreage in 2018.
We currently intend to drill nine to ten gross (seven to eight net) horizontal wells, and commence sales from 15 to 17 gross (14 to 15 net) horizontal wells, on our SCOOP acreage in 2019. We currently anticipate one to two net horizontal wells will be drilled, and sales commenced from one to two net horizontal wells, by other operators on our SCOOP acreage during 2019. As of February 15, 2019, we had two operated horizontal rigs drilling in the play. We intend to run, on average, approximately 1.5 operated horizontal rigs in the SCOOP during 2019.
Production Status
Aggregate net production from our SCOOP acreage during the three months ended December 31, 2018 was approximately 24,406 net MMcfe, or 265.3 MMcfe per day, of which 70% was from natural gas and 30% was from oil and natural gas liquids.
West Cote Blanche Bay Field
Location and Land
The WCBB field is located approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. We own a 100% working interest (80.108% net revenue interest, or NRI), and are the operator, in depths above the base of the 13900 Sand which is located at 11,320 feet. In addition, we own a 40.40% non-operated working interest (29.95% NRI) in depths below the base of the 13900 Sand, which is operated by Chevron Corporation. Our leasehold interests at WCBB contain 5,668 gross acres.
Area History and Production
Texaco, now part of Chevron Corporation, drilled the discovery well in this field in 1940 based on a seismic and gravitational anomaly. WCBB was subsequently developed on an even 160-acre pattern for much of the remainder of the decade. Developmental drilling continued and reached its peak in the 1970s when over 300 wells were drilled in the field. Of the 1,093 wells drilled as of December 31, 2018, 980 were completed as producing wells. From the date of our acquisition of WCBB in 1997 through December 31, 2018, we drilled 273 new wells, 240 of which were productive, for an 88% success rate. As of December 31, 2018, estimated field cumulative gross production was 200 MMBO and 238 Bcf of gas. Of the 1,093 wells drilled in WCBB as of December 31, 2018, 69 were producing, 146 were shut-in, and six were being used as salt water disposal wells. The other 872 wells have been plugged and abandoned.
Geology
WCBB overlies one of the largest salt dome structures on the Gulf Coast. The field is characterized by a piercement salt dome, which created traps from the Pleistocene through the Miocene formations. The relative movements affected deposition and created a complex system of fault traps. The compensating fault sets generally trend northwest to southeast and are intersected by sets having a major radial component. Later-stage movement caused extension over the dome and a large graben system (a downthrown area bounded by normal faults) was formed.
There are over 100 distinct sandstone reservoirs recognized throughout most of the field, and nearly 200 major and minor discrete intervals have been tested. Within the 1,093 wells that had been drilled in the field as of December 31, 2018, over 4,000 potential zones have been penetrated. These sands are highly porous and permeable reservoirs primarily with a strong water drive.
WCBB is a structurally and stratigraphically complex field. All of the proved undeveloped, or PUD, locations at WCBB are adjacent to faults and abut at least one fault. Our drilling programs are designed to penetrate each PUD trap with a new wellbore in a structurally optimum position, usually very close to the fault seal. The majority of these wells have been, and new wells drilled in connectionbelieve effective corporate governance requires regular constructive discussions with our drilling programs will be, directionally drilled using steering tools and downhole motors.
The tolerance for error in getting near the fault is low, so the complex faulting does introduce the risk of crossing the fault before encountering the zone of interest, which could result in part or all of the zone being absent in the borehole. This, in turn, can result in lower than expected or no reserves for that zone. The new wellbores eliminate the mechanical risk associated with trying to produce the zone from an old existing wellbore, while the wellbore locations are selected in an effort to more efficiently drain each reservoir. The vast majority of the PUD targets are up-dip offsets to wells that produced from a sub-optimal position within a particular zone.
Facilities
We own and operate a production facility at WCBB that includes four production tank batteries, seven natural gas compressors, a storage barge facility, a dock, a dehydration unit and a salt water disposal system.
Recent Activity
In 2018, at our WCBB field, we recompleted 32 existing wells and spud no new wells. As of February 15, 2019, no existing wells had been recompleted during 2019 in our WCBB field.
Production Status
In the fourth quarter of 2018, our net production at WCBB was approximately 837 MMcfe, or an average of 9.1 MMcfe per day, all of which was from oil.
East Hackberry Field
Location and Land
The East Hackberry field in Louisiana is located along the western shore and the land surrounding Lake Calcasieu, 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 82.33% average NRI) in certain producing oil and natural gas properties situated in the East Hackberry field. As of December 31, 2018, we held beneficial interests in approximately 4,116 acres, including the Erwin Heirs Block, which is located on land, and the adjacent State Lease 50 Block, which is located primarily in the shallow waters of Lake Calcasieu.
Area History and Production
The East Hackberry field was discovered in 1926 by Gulf Oil Company, now Chevron Corporation, by a gravitational anomaly survey. The massive shallow salt stock presented an easily recognizable gravity anomaly indicating a productive field. Initial production began in 1927 and has continued to the present. The estimated cumulative oil and condensate production through 2018 was over 4,758 MBO and 332 Bcf of casinghead gas production. A total of 272 wells have been drilled on our portion of the field. As of December 31, 2018, 14 wells had daily production, 130 were shut-in and three had been converted to salt water disposal wells. The remaining 125 wells had been plugged and abandoned.
Geology
The Hackberry field is a major salt intrusive feature, elliptical in shape as opposed to a classic “dome,” divided into east and west field entities by a saddle. Structurally, our East Hackberry acreage is located on the eastern end of the Hackberry salt ridge. There are over 30 pay zones at this field. The salt intrusion formed a series of structurally complex and steeply dipping fault blocks in the Lower Miocene and Oligocene age rocks. These fault blocks serve as traps for hydrocarbon accumulation. Our wells currently produce from perforations found between 5,100 and 12,200 feet.
Facilities
stockholders. We have a field officeproactive engagement process that serves both the East and West Hackberry fields. In addition, we own and operate two production facilities at East Hackberry that include one land based tank batteries, a production barge, two natural gas compressors, dehydration units and salt water disposal systems.
Recent Activity
During 2018 at East Hackberry, we recompleted 15 existing wells and spud no new wells. As of February 15, 2019, no existing wells had been recompleted during 2019 in our East Hackberry field.
Production Status
In the fourth quarter of 2018, our net production at East Hackberry was approximately 115 MMcfe, or an average of1.2 MMcfe per day, all of which was from oil.
West Hackberry Field
Location and Land
The West Hackberry field is located on land and is five miles west of Lake Calcasieu in Cameron Parish, Louisiana, approximately 85 miles west of Lafayette and 15 miles inland from the Gulf of Mexico. We own a 100% working interest (approximately 87.50% NRI) in 1,032 acres within the West Hackberry field. Our leases at West Hackberry are located within two miles of one of the United States Department of Energy's Strategic Petroleum Reserves.
Area History
The first discovery well at West Hackberry was drilled in 1938 and the field was developed by Superior Oil Company, now ExxonMobil Corporation, between 1938 and 1988. The estimated cumulative oil and condensate production through 2018 was 493 MBO and 140 Bcf of natural gas. As of December 31, 2018,42 wells had been drilled on our portion of West Hackberry. As of December 31, 2018, two of such wells were producing, seven were shut-in and one was being used as a salt water disposal well. The remaining 32 wells have been plugged and abandoned.
Geology
Structurally, our West Hackberry acreage is located on the western end of the Hackberry salt ridge. There are over 30 pay zones at this field. West Hackberry consists of a series of fault-bounded traps in the Oligocene-age Vincent and Keough sands associated with the Hackberry Salt Ridge. Recoveries from these thick, porous, water-drive reservoirs have resulted in per well cumulative production of almost 700 MBOE.
Recent Activity
During 2018 at West Hackberry, we did not spud any new wells. As of February 15, 2019, no existing wells had been recompleted during 2019 in our West Hackberry field.
Production Status
In the fourth quarter of 2018, our net production at West Hackberry was approximately 17 MMcfe, or an average of 186.2 Mcfe per day, all of which was from oil.
Facilities
We own and operate a production facility at West Hackberry that includes a land based tank battery and salt water disposal system.
We do not anticipate any material activities in our Southern Louisiana fields during 2019.
Niobrara Formation (Northwestern Colorado)
Location and Land
Effective as of April 1, 2010, we acquired leasehold interests in the Niobrara Formation in Northwestern Colorado and, as of December 31, 2018, we held leases for approximately 2,900 net acres. In 2018, no wells were spud on our Niobrara Formation acreage.
Area History
The Niobrara Formation is a shale oil rock formation located in Colorado, Northwest Kansas, Southwest Nebraska, and Southeast Wyoming. Oil and natural gas can be found at depths of 3,000 to 14,000 feet and is drilled both vertically and horizontally. The Upper Cretaceous Niobrara Formation has emerged as another potential crude oil resource play in various basins throughout the northern Rocky Mountain region. As with most resource plays, the Niobrara Formation has a history of producing through conventional technology with some of the earliest production dating back to the early 1900s. Natural fracturing has played a key role in producing the Niobrara Formation historically due to the low porosity and low permeability of the formation. Because of this, conventional production has been very localized and limited in area extent. We believe the Niobrara Formation can be produced on a more widespread basis using today's horizontal multi-stage fracture stimulation technology where the Niobrara Formation is thermally mature.
Geology
The Niobrara Formation oil play in Northwestern Colorado is located between the Piceance Basin to the south and the Sand Wash Basin to the north. Rocks mainly consist of interbedded organic-rich shales, calcareous shales and marlstones. It is the fractured marlstone intervals locally known as the Buck Peak, Tow Creek and Wolf Mountain benches that account for the majority of the area's production. These fractured carbonate reservoirs are associated with anticlinal, synclinal and monoclinal folds, and fault zones. This proven oil accumulation is considered to be continuous in nature and lightly explored. Source rocks are predominantly oil prone and thermally mature with respect to oil generation. The producing intervals are geologically equivalent to the Niobrara Formation reservoirs of the DJ and Powder River Basins, which are currently emerging as a major crude resource play.
Production Status
In the fourth quarter of 2018, net productionencourages feedback from our Niobrara Formation acreage was approximately 23 MMcfe, or an averagestockholders. This feedback helps shape our corporate governance practices, and has specifically resulted in:• Adoption of stock ownership guidelines for our non-employee directors and executive officers to further align the long-term financial interests of our directors and executive officers with those of our stockholders; • Adoption of Corporate Governance Guidelines to ensure best practices and reflect the Board’s commitment to monitor the effectiveness of policy and decision making at the Board and management levels; • All directors are independent, except for our Chief Executive Officer; • Independent chair of the Board; • Advancement of Board diversity, with three current female directors, emphasis on diversity in the Nominating and Corporate Governance Committee’s charter and the adoption of a Board Diversity Policy; | • Majority vote requirement for stockholders to amend the Bylaws; • Majority voting to elect directors in uncontested elections and plurality voting to elect directors in contested elections; • Sustainability Committee to further develop our commitment to HSE and corporate responsibility and sustainability matters and their impact on our business and operations; • Active board oversight of risk and risk management; • Periodic Board and Committee self-assessments conducted; • Independent director meetings in executive sessions at all regularly scheduled Board meetings; and • 99% attendance at 2020 Board and Committee meetings. |
12 2020 ANNUAL REPORT | | 
|
| | CORPORATE GOVERNANCE MATTERS AND COMMUNICATIONS WITH THE BOARD |
Annual Board Self-Assessment Process |
Board and Committee Evaluations
Director Performance Evaluations
How often did the Board of Directors meet in 2020? |
The Board of 251.0 Mcfe per day, all of which was from oil.
Facilities
There are typical land oil and natural gas processing facilitiesDirectors met 29 times in the Niobrara Formation. Our facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units.
Recent Activity
There were no new wells drilled on our Niobrara Formation acreage in 2018. We do not anticipate drilling any wells in the Niobrara Formation during 2019.
Bakken Formation
Location and Land
The Bakken Formation is located in the Williston Basin areas of Western North Dakota and Eastern Montana. As of December 31, 2018, we held approximately 780 net acres, interests in 18 wells and overriding royalty interests in certain existing and future wells.
Production Status
In the fourth quarter of 2018, our net production from this acreage was approximately 76 MMcfe, or an average of827.1 Mcfe per day, of which 86% was from oil and 14% was from natural gas and natural gas liquids.
Facilities
There are typical land, oil and natural gas processing facilities in the Williston Basin. The facilities located at well locations include storage tank batteries, oil/gas/water separation equipment and pumping units.
Recent Activities
There were no new wells drilled on our Bakken Formation acreage in 2018. We do not anticipate drilling any wells in the Bakken Formation during 2019.
Additional Properties
2020. In addition to
these meetings, the Board of Directors adopted resolutions by unanimous written consent. Each director attended at least 99% of the aggregate meetings of the Board of Directors and the meetings of the Committees on which he or she served.Do our non-management directors meet separately without management? |
Our non-management directors routinely meet in an executive session following each regularly scheduled meeting of the Board of Directors.
| | 2020 ANNUAL REPORT 13 |
CORPORATE GOVERNANCE MATTERS AND COMMUNICATIONS WITH THE BOARD | | |
How can I communicate with the Board of Directors? |
Individuals may communicate with our core properties discussed above, we also own working interestsBoard of Directors or individual directors by writing to our General Counsel and overriding royalty interest in various fields in Louisiana, TexasCorporate Secretary, Patrick K. Craine, at Gulfport Energy Corporation, 3001 Quail Springs Parkway, Oklahoma City, Oklahoma 73134. Our General Counsel and Oklahoma as describedCorporate Secretary will review all correspondence and forward our Board of Directors correspondence that, in the following table asopinion of December 31, 2018:
|
| | | | | | | | | | | | | | | | |
| Field | | State | | Parish/County | | Average Working Interest | | Overriding Royalty Interests | | Producing Wells | | Non-Producing Wells |
| Deer Island | | Louisiana | | Terrebonne | | 3.13 | % | | — |
| | — |
| | 1 |
|
| Napoleonville | | Louisiana | | Assumption | | — |
| | 2.5 | % | | 3 |
| | — |
|
| Crest | | Texas | | Ochiltree | | 2.00 | % | | — |
| | 1 |
| | — |
|
| Eagle City South | | Oklahoma | | Dewey | | 1.04 | % | | — |
| | 1 |
| | — |
|
| Fay South | | Oklahoma | | Blaine | | 0.30 | % | | — |
| | 1 |
| | — |
|
| Fay East | | Oklahoma | | Blaine | | 0.15 | % | | — |
| | 1 |
| | — |
|
| Squaw Cheek | | Oklahoma | | Blaine | | 0.13 | % | | — |
| | 1 |
| | — |
|
| Watonga Chickasha Trend | | Oklahoma | | Canadian | | 0.05 | % | | — |
| | 1 |
| | — |
|
| Green River Basin | | Colorado | | Moffat | | 0.07 | % | | — |
| | 2 |
| | — |
|
Our Equity Investments
Grizzly Oil Sands. We, through our wholly-owned subsidiary Grizzly Holdings Inc., ownGeneral Counsel and Corporate Secretary, relates to the function of our Board of Directors or a 24.9% interest in Grizzly. AsBoard Committee or otherwise requires their attention. Directors may review a log of December 31, 2018, Grizzly had approximately 830,000 net acres under lease inall correspondence received by us and request copies. Concerns relating to accounting, internal control over financial reporting or auditing matters will be immediately brought to the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 steam-assisted gravity drainage, or SAGD, oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. Algar Lake production peaked at 2,200 barrels per day during the ramp-up phaseattention of the SAGD facility, however, in April 2015, Grizzly made the decision to suspend operations at its Algar Lake facility due to the commodity price drop and its effect on project economics. Grizzly continues to monitor market conditions as it assesses startup plans for the facility. Grizzly also owns the May River property comprising approximately 47,000 acres. An initial 12,000 barrel per day development application covering the eastern portionchairman of the May River lease has been deemed complete from the Alberta Energy RegulatorAudit Committee and is awaiting final approval. A 2-D seismic program covering approximately 83 kilometers has been completed to more fully define the resource over the remaining lease beyond the development application area. In 2017, Grizzly advanced plans for cold heavy oil sands production, or CHOPS, at its Cadotte propertyhandled in Peace River. However, plans for development are dependent on stabilized commodity prices. Grizzly continues to advance rail marketing strategies to ensure consistent and flexible access to premium markets for its future production. Grizzly is also advancing a project to utilize its Windell truck to rail terminal located near Conklin, Alberta, for movement of liquefied petroleum gas, or LPG, into the oil sands area for use in Thermal applications by SAGD producers.
Thailand. We own a 23.5% ownership interest in Tatex II. Tatex II, a privately held entity, holds an 8.5% interest in APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering approximately 108,000 acres which includes the Phu Horm Field. Our investment is accounted for on the equity method. Tatex II accounts for its investment in APICO using the cost method. In December 2006, first gas sales were achieved at the Phu Horm field located in northeast Thailand. Phu Horm's initial gross production was approximately 60 MMcf per day. For 2018, net gas production was approximately 78 MMcf per day and condensate production was 245 barrels per day. PTT Exploration and Production Public Company Limited operates the field with a 55% interest. Other interest owners include APICO (35% interest) and ExxonMobil (10% interest). Our gross working interest (through Tatex II as a member of APICO) in the Phu Horm field is 0.7%. Since our ownership in the Phu Horm field is indirect and Tatex II's investment in APICO is accounted for by the cost method, these reserves are not included in our year-end reserve information.
Other Investments. In connection with Mammoth Energy's initial public offering, or IPO, in October 2016, we received 9,150,000 shares of Mammoth Energy common stock in return for our contribution to Mammoth Energy of our 30.5% interest
in Mammoth Energy Partners LLC. In June 2017, we received an additional 2,000,000 shares of Mammoth Energy common stock in connectionaccordance with our
contributionAudit Committee’s procedures.Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics designed to help directors and employees resolve ethical issues. Our Code of Business Conduct and Ethics applies to all directors and employees. Our Code of our equity interests in three other entities to Mammoth Energy. We sold 76,250 shares of our Mammoth Energy common stock in the IPOBusiness Conduct and an additional 1,354,574 shares in a subsequent underwritten public offering in 2018. As a result, as of December 31, 2018, we owned 9,829,548 shares, or approximately 21.9%, of Mammoth Energy’s outstanding common stock.
In February 2016, we, through our wholly owned subsidiary Gulfport Midstream Holdings, LLC, or Midstream Holdings, entered into an agreement with Rice Midstream Holdings LLC, or Rice, a subsidiary of Rice Energy Inc., to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas, through a new entity, Strike Force Midstream LLC, or Strike Force. In 2017, Rice was acquired by EQT Corporation, or EQT. Prior to the sale of the Company's interest in Strike Force (discussed below), the Company owned a 25% interest in Strike Force, and EQT acted as operator and owned the remaining 75% interest. Strike Force's gathering assets provide gathering services for wells operated by Gulfport and other operators and connectivity of existing dry gas gathering systems. First flow for Strike Force commenced on February 1, 2016. In May 2018, the Company sold its 25% interest in Strike Force to EQT Midstream Partners, LP for proceeds of $175.0 million in cash.
See Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these and our other equity investments.
Competition
The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation. In addition, oil and natural gas compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include electricity, coal and fuel oils. Changes in the availability or price of oil and natural gas or other forms of energy, as well as business conditions, conservation, legislation, regulations and the ability to convert to alternate fuels and other forms of energy may affect the demand for oil and natural gas.
Marketing and Customers
The availability of a ready market for any oil and/or natural gas we produce depends on numerous factors beyond the control of our management,Ethics covers various topics including, but not limited to, conflicts of interest, fair dealing, discrimination and harassment, confidentiality, compliance procedures and employee complaint procedures. Our Code of Business Conduct and Ethics, together with any amendments or waivers, is posted on our website at www.gulfportenergy.com under the demand for oil and natural gas and the level of domestic production and imports of oil, the proximity and capacity of gas pipelines, the availability of skilled labor, materials and equipment, the effect of state and federal regulation of oil and natural gas production and federal regulation of gas sold in interstate commerce. Both our Utica Shale and SCOOP natural gas production is sold to various counterparties through established NAESBs at the plant tailgates and various central delivery points owned and operated by third party midstream companies. Our natural gas production is sold under monthly, seasonal and long-term contracts and, as needed, through daily transactions. When sold in basin, pricing is typically based on Platts Gas Daily - Texas Eastern M2 Zone for our Utica Shale acreage and Platts Gas Daily - Panhandle Tx-Ok and NGPL Midcontinent for our SCOOP acreage. To maintain flow assurance and price stability, and as discussed under "–Transportation and Takeaway Capacity," we have entered into agreements in both the Utica and SCOOP basins to transport a portion of our natural gas production to various delivery points. These agreements allow us to price the molecules at those various downstream markets less transportation charges. The majority of our Utica oil is sold to purchasers at the tailgate of a condensate stabilizer located near Cadiz, Ohio, owned and operated by MPLX Energy Logistics, or MPLX. Our SCOOP oil is sold at the lease to various purchasers at respective area postings. In Southern Louisiana, our oil is sold to parties taking custody at the lease or at the outlet from a Gulfport oil storage barge. Our NGLs“Investors – Corporate Governance” captions.Political Contribution Policy
Engagement in the Utica Shale are primarily fractionated at MPLX's Hopedale facility. The majoritypolitical, legislative and regulatory process is important to the success of the product is marketedCompany. The Company has delegated compliance and oversight over this function to the Sustainability Committee and has adopted a political contributions and activity policy that sets forth the ways by which the operator with Gulfport receivingCompany and its employees may participate in the benefit from the MPLX's aggregationpolitical, legislative and established logistic network. Our SCOOP NGLs are primarily sent to Mont Belvieu on our commitment to DCP Southern Hillsregulatory process. All political contributions and purchased at the fractionation facility. For the year ended December 31, 2018, sales to BP Energy Company, or BP, and ECO-Energy accounted for approximately 17% and 10%, respectively, of our total oil, natural gas and NGL revenues, before the effects of hedging.
As of December 31, 2018, we had an average of approximately 663,000 MMBtu per day of firm sales contracted with third parties for 2019. We had an average of approximately 526,000 MMBtu per day, 372,000 MMBtu per day, 272,000 MMBtu per day, 255,000 MMBtu per day and 212,000 MMBtu per day contracted with third parties for 2020, 2021, 2022, 2023 and thereafter, respectively.
Transportation and Takeaway Capacity
In Ohio and Oklahoma, as of December 31, 2018, we had entered into firm transportation contracts to deliver approximately 1,205,000 MMBtu to 1,405,000 MMBtu per day for 2019 and 2020. We continuously monitor the need to secure additional firm transportation contracts for incremental volumes from our Utica Shale and SCOOP acreage but expect additional long term contracts to be limited in 2019. Our primary long-haul firm transportation commitments include the following:
520,000 MMBtu per day of firm capacity on Dominion East Ohio, which began in 2014 and allows us to reach additional connectivity to Gulf Coast and Midwest natural gas markets;
250,000 MMBtu per day of firm capacity on Dominion Transmission, which began in 2015 and allows us to reach additional connectivity to Midwest natural gas markets;
194,000 MMBtu per day of firm capacity on ANR Pipeline Company facilities, which began in 2014 and allows us to reach the Michigan, Chicago and Wisconsin natural gas markets;
200,000 MMBtu per day of firm capacity on Tennessee Gas Pipeline facilities, which began in 2015 and allows us to reach Gulf Coast delivery points;
275,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which began in 2015 and allows us to reach additional connectivity to Gulf Coast and Midwest markets;
50,000 MMBtu per day of firm capacity on Rockies Express Pipeline facilities, which went into partial service in December 2016 and full service in January 2017, allowing additional connectivity to Gulf Coast and Midwest markets;
20,000 MMBtu per day of firm capacity on Natural Gas Pipeline facilities which began in 2015 and allows us to reach Midwest markets;
50,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities which began in 2016 allowing additional access to Gulf Coast delivery points;
54,000 MMBtu per day of firm capacity on Texas Gas Transmission facilities which began in 2017 allowing additional access to Gulf Coast delivery points;
100,000 MMBtu per day of firm capacity on Texas Eastern Transmission facilities which began in 2017 allowing additional access to Midwest delivery points;
150,000 MMBtu per day of firm capacity on Energy Transfer’s Rover Pipeline facilities, 50,000 of which began in 2017 allowing additional access to Midwest delivery points, and 100,000 of which began in 2018 allowing additional access to Canadian, Midwest and Gulf Coast delivery points; and
100,000 MMBtu per day of firm capacity on Columbia Gulf Transmission facilities which began in late 2017 allowing additional access to Gulf Coast delivery points; and
50,000 MMBtu per day of firm capacity on Enable Oklahoma Intrastate which was acquired in early 2017 through our SCOOP acquisition allowing additional connectivity to East Texas and Gulf Coast markets; and
30,000 MMBtu per day of firm capacity on Enable Gas Transmission facilities which was acquired in early 2017 through our SCOOP acquisition allowing additional access to East Texas delivery points; and
20,000 MMBtu per day of firm capacity on Midcontinent Express Pipeline facilities which began mid 2017 allowing additional access to Gulf Coast delivery points; and
50,000 MMBtu per day of firm capacity on Gulf Crossing Pipeline facilities which began mid 2017 allowing additional access to Gulf Coast delivery points; and
200,000 MMBtu per day of firm capacity on Cheniere Midship Pipeline facilities which will begin in 2019 allowing additional access to East Texas delivery points.
Under firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. We continue to actively identify and evaluate additional takeaway capacity to facilitate production growth in our Utica Basin and Oklahoma positions.
Regulation
Regulation of Oil and Natural Gas Production
Oil and natural gas operations such as oursactivities are subject to
various typescompliance with applicable laws.Aircraft Use Policy
We restrict personal use of legislation, regulationCompany-owned or chartered aircraft by our executive officers and other legal requirements enactedemployees, as well as by governmental authorities. This legislationmembers of our Board of Directors. Our aircraft use policy requires that any personal use of Company-owned or chartered aircraft by any NEO be reported as a perquisite, based on the aggregate incremental value of such personal use. There was no personal use of Company-owned or chartered aircraft in 2020.
14 2020 ANNUAL REPORT | |
|
NOMINATING PROCESS FOR DIRECTORS, DIRECTOR QUALIFICATIONS AND REVIEW OF DIRECTOR NOMINEES |
Director Qualifications
As provided by the Nominating and regulation affectingCorporate Governance Committee’s charter, our Nominating and Corporate Governance Committee identifies, investigates and recommends to our Board of Directors candidates with the goal of creating a balance of knowledge, experience and diversity. The Committee identifies candidates through the use of third-party search firms, as well as through the extensive networks of our directors and management team in the oil and natural gas industryindustry.
It is our policy that potential directors should possess the highest personal and professional ethics, integrity and values and be committed to representing the interests of our stockholders. In addition to reviewing a candidate’s background and accomplishments, candidates are reviewed in the context of the current composition of our Board of Directors, the skills necessary to provide effective oversight in critical areas and the evolving needs of our business. It is the policy of our Board of Directors that, at all times, at least a majority of its members meets the standards of independence promulgated by the Nasdaq and the SEC and that all members reflect a range of talents, skills and expertise, particularly in the areas of accounting and finance, management, leadership and oil and gas-related industries to provide sound and prudent guidance with respect to our operations and the interests of our stockholders.
Board Diversity Policy
Our Nominating and Corporate Governance Committee is dedicated to diversity and adopted a Board Diversity Policy in November 2019. The policy requires that the Nominating and Corporate Governance Committee consider diversity in its evaluation of candidates for Board membership. Our Nominating and Corporate Governance Committee, in accordance with its charter, seeks to include diverse candidates in all director searches, taking into account diversity of gender, race, ethnicity, background, age, thought and tenure on our Board (in connection with the consideration of the renomination of an existing director), including by affirmatively instructing any search firm retained to assist the Nominating and Corporate Governance Committee in identifying director candidates to seek to include diverse candidates from traditional and nontraditional candidate groups. In accordance with its charter, our Nominating and Corporate Governance Committee periodically reviews and makes recommendations regarding the composition of the Board and the size of the Board.
We also require that the members of our Board of Directors be able to dedicate the time and resources sufficient to ensure the diligent performance of their duties on our behalf, including attending meetings of the Board of Directors and applicable Committee meetings. In accordance with its charter, our Nominating and Corporate Governance Committee periodically reviews the criteria for the selection of directors to serve on our Board and recommends any proposed changes to our Board of Directors for approval.
| | 2020 ANNUAL REPORT 15 |
DIRECTOR LEADERSHIP STRUCTURE |
Role of Chairman and Chief Executive Officer
The positions of Chairman of the Board and Chief Executive Officer are held by two different individuals, and the Chairman of the Board is a non-executive position elected from among the directors by the Board. Separating the positions of Chairman of the Board and Chief Executive Officer allows our Chief Executive Officer to focus on business development strategies as well as our day-to-day business and operations, while allowing our Chairman of the Board to lead the Board in its fundamental role of providing advice to and oversight of management. The Chairman of the Board provides leadership to our Board of Directors and works with the Board of Directors to define its structure and activities in the fulfillment of its responsibilities.
The duties of the non-executive Chairman of the Board include:
• Presiding at meetings of our Board of Directors and stockholders;
• Setting board agendas with the input from other members of the Board and our management;
• Facilitating communication among and information flow to directors;
• Calling special meetings of our Board of Directors and stockholders; and
• Advising and counseling our Chief Executive Officer and other officers.
Our Board of Directors does not have a lead director.
Directors
We believe that our directors bring a broad range of leadership experience to the boardroom and regularly contribute to the thoughtful discussion involved in effectively overseeing the business and affairs of the Company. We believe that the atmosphere of our Board is collegial, that all Board members are well engaged in their responsibilities and that all Board members express their views and consider the opinions expressed by other directors. Seven out of eight directors are independent under the Nasdaq listing standards and SEC rules. We believe that all our independent directors have demonstrated leadership in business enterprises and are familiar with Board processes. Our independent directors are involved in the leadership structure of our Board by serving on our Audit, Nominating and Corporate Governance, Sustainability and Compensation Committees, comprised entirely of independent directors and each having an independent chairperson.
Committee Chairs
Specifically, our Audit Committee Chair oversees the accounting and financial reporting processes and compliance with legal and regulatory requirements. Our Compensation Committee Chair oversees our compensation policies and practices and their impact on risk and risk management. The Chair of our Sustainability Committee oversees our practices relating to health, safety and environmental protections, as well as social and governance matters. Our Nominating and Corporate Governance Committee Chair monitors matters related to Board and Committee composition, Board performance and best practices in corporate governance. As such, each Committee Chair provides independent leadership for purposes of many important functions delegated by our Board of Directors to each Committee.
16 2020 ANNUAL REPORT | |
|
BOARD OF DIRECTORS’ ROLE IN RISK OVERSIGHT |
While our management team is responsible for the day-to-day management of risks, the Board of Directors has primary responsibility for risk oversight. Boards typically exercise this oversight during regular Board meetings, but our Board of Directors also maintains constant reviewand open dialogue with management and reviews and monitors key processes. As a result, they are better able to respond to emerging risks and to influence our strategy to address those risks.
While our Board of Directors is ultimately responsible for amendment or expansion. Somerisk oversight at the Company, our four Committees assist the Board in fulfilling its oversight responsibilities in the areas of these requirements carry substantial penaltiesrisk below:
Committee | Risk Areas of Focus |
Audit | • Financial Reporting • Internal Controls • Legal Compliance • Regulatory Compliance • Reserves Reporting • Risk Management • Marketing and Hedging |
Compensation | • Compensation Policies • Executive Performance |
Sustainability | • Environment • Public Health • Government Relations • Political Contributions |
Nominating and Corporate Governance | • Board Organization • Membership • Structure • Succession Planning • Corporate Governance |
Board Composition
Key Competencies | Independent Oversight |
üOil & Gas Industry Knowledge üSignificant Operating Experience üAccounting & Financial Expertise üExecutive Leadership Experience üPublic Company Board and Corporate Governance Experience | üAll directors are independent other than the CEO, including an independent Chairman üRecently adopted Board Diversity Policy and Corporate Governance Guidelines to enhance our director recruitment and corporate governance practices ü Over 40% of our independent directors are female, including the Chair of our Sustainability Committee |
| | 2020 ANNUAL REPORT 17 |
Corporate Responsibility and
Sustainability Highlights |
Gulfport is proud to play its part in the responsible and efficient development of domestic natural gas which is critical to our country’s economic success as it provides the primary fuel for failure to comply. The regulatory burdenefficient power generation in the United States. We are aware of the positive influence and potential impact we may have on the oilcommunities where we operate and naturallive. Gulfport prioritizes safety, environmental protection, operational excellence and giving back to the communities in which we operate.
We have identified several key areas where our business could have an impact on the communities where we operate, including: greenhouse gas industry increasesemissions, waste and spills, water usage, health, safety and environmental (HSE) protection, employee training and education, and community involvement. Our Sustainability Committee oversees environmental, safety, social, sustainability and governance (ESG) matters. Continuously improving our costHSE performance remains a top priority. Our HSE performance also directly impacts the compensation of doing businessall our employees as it is one of the performance goals included in our cash incentive compensation plan. We believe having measurable HSE metrics as part of our incentive compensation program leads to improved accountability and consequently, affectsreinforces our profitability.
We own interests in producing oilcultural focus on operating safely and
natural gas properties located inprotecting employees, the
Utica Shale primarily in Eastern Ohio, the SCOOP Woodford and SCOOP Springer plays in Oklahoma, along the Louisiana Gulf Coast and in the Niobrara Formation in Northwestern Coloradoenvironment and the
Bakken Formation in Western North Dakota and Eastern Montana. The statescommunities in which
we operate.Environmental Stewardship. Gulfport strives to minimize the environmental impact of our fieldsoperations by consistently focusing on finding ways to reduce our environmental footprint. Gulfport minimizes our environmental impact by, among other things:
• Selecting and designing our well sites to minimize impacts to sensitive habitats and surrounding areas;
• Reducing water disposal volumes and freshwater consumption through water re-use or water sharing agreements with other operators where possible;
• Investing in and implementing technology to reduce emissions, waste and our physical footprint on our drilling locations;
• Specifically targeting methane emission reductions with the formation of a multi-functional team which reviews and assesses potential emission points such as liquids unloading events, pneumatic control devices and thief hatches;
• Implementing spill prevention and response activities to confirm equipment is maintained and operating practices are located regulatecontinually improved to prevent spills and minimize the productionimpact of our operations to the soil, air and salewater; and
• Employing air quality programs, monitoring and operating practices to ensure that we comply with or exceed applicable regulations.
We are a member of The Environmental Partnership which is committed to continuous improvements in environmental performance, including the reduction of methane and volatile organic compound emissions. Limiting waste water and oil spills are included as part of our incentive compensation programs to ensure we hold ourselves accountable for being good environmental stewards.
Gulfport instituted a corporate environmental policy that supports our commitment to operational excellence and natural gas, including requirements for obtaining drilling permits,our compliance obligations. The policy fosters environmental awareness and guides employee behavior consistent with Gulfport’s expectations. All Gulfport employees are expected to act and make decisions within the method of developing fields and the spacing and operation of wells. In addition, regulations governing conservation matters aimed at preventing the waste of oil and natural gas resources could affect the rate of production and may include maximum daily production allowables for wells on a market demand or conservation basis.
Environmental Regulation
Our oil and natural gas exploration, development and production operations are subject to stringent laws and regulations governing the discharge of materials into the environment or otherwise relating to protectionguidelines of the
environment or occupational healthpolicy to ensure our business complies with all local, state and
safety. Numerous governmental agencies, such as the U.S. Environmental Protection Agency, or the EPA, issue regulations that often require difficult and costly compliance measures that carry substantial administrative, civil and criminal penalties and may result in injunctive obligations for non-compliance. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands, ecologically or seismically sensitive areas, and other protected areas, require action to prevent or remediate pollution from current or former operations, such as plugging abandoned wells or closing earthen pits, result in the suspension or revocation of necessary permits, licenses and authorizations, require that additional pollution controls be installed and impose substantial liabilities for pollution resulting from our operations or related to our owned or operated facilities. Liability under such laws and regulations is often strict (i.e., no showing of “fault” is required) and can be joint and several. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Changes infederal environmental laws and regulations
occur frequently,applicable to our operations. Each employee and
any changes that resultcontractor is expected to protect the environment, minimize and manage waste responsibly, reduce and eliminate emissions and limit spills and discharges.In 2021 we finalized a Supplier Code of Conduct which clearly establishes Gulfport’s expectations regarding environmental, health and safety obligations, in more stringentaddition to conduct and costly pollution control or waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as the oil and natural gas industry in general. Our management believes that we are in substantial compliance with applicable environmental laws and regulations and we have not experienced any material adverse effect from compliance with these environmental requirements. This trend, however, may not continue in the future.
Waste Handling. The Resource Conservation and Recovery Act, as amended, or RCRA, and comparable state statutes and regulations promulgated thereunder, affect oil and natural gas exploration, development and production activities by imposing requirements regarding the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. With federal approval, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Although most wastes associated with the exploration, development and production of crude oil and natural gas are exempt from regulation as hazardous wastes under RCRA, such wastes may constitute “solid wastes” that are subject to the less stringent non-hazardous waste requirements. Moreover, the EPA or state or local governments may adopt more stringent requirements for the handling of non-hazardous wastes or categorize some non-hazardous wastes as hazardous for future regulation. Indeed, legislation has been proposed from time to time in Congress to re-categorize certain oil and natural gas exploration, development and production wastes as “hazardous wastes.” Also, in
December 2016, the EPA agreed in a consent decree to review its regulation of oil and gas waste. It has until March 2019 to determine whether any revisions are necessary. Any such changes in the laws and regulations could have a material adverse effect on our capital expenditures and operating expenses.
Administrative, civil and criminal penalties can be imposed for failure to comply with waste handling requirements. We believe that we are in substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under such laws and regulations. Although we do not believe the current costs of managing our wastes, as presently classified, to be significant, any legislative or regulatory reclassification of oil and natural gas exploration and production wastes could increase our costs to manage and dispose of such wastes.
Remediation of Hazardous Substances. The Comprehensive Environmental Response, Compensation and Liability Act, as amended, also known as CERCLA or the “Superfund” law, and analogous state laws, generally impose liability, without regard to fault or legality of the original conduct, on classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current owner or operator of a contaminated facility, a former owner or operator of the facility at the time of contamination, and those persons that disposed or arranged for the disposal of the hazardous substance at the facility. Under CERCLA and comparable state statutes, persons deemed “responsible parties” are subject to strict liability that, in some circumstances, may be joint and several, for the costs of removing or remediating previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination), for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. In the course of our operations, we use materials that, if released, would be subject to CERCLA and comparable state statutes. Therefore, governmental agencies or third parties may seek to hold us responsible under CERCLA and comparable state statutes for all or part of the costs to clean up sites at which such “hazardous substances” have been released.
Water Discharges. The Federal Water Pollution Control Act of 1972, as amended, also known as the “Clean Water Act,” the Safe Drinking Water Act, the Oil Pollution Act, or OPA, and analogous state laws and regulations promulgated thereunder impose restrictions and strict controls regarding the unauthorized discharge of pollutants, including produced waters and other gas and oil wastes, into navigable waters of the United States, as well as state waters. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the state. Spill prevention, control and countermeasure plan requirements under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including jurisdictional wetlands, unless authorized by a permit issued by the U.S. Army Corps of Engineers, or the Corps. On June 29, 2015, the EPA and the Corps jointly promulgated final rules redefining the scope of waters protected under the Clean Water Act. The rules are subject to ongoing litigation and have been stayed in more than half the States. Also, on December 11, 2018, the EPA and the Corps released a proposed rule that would replace the 2015 rule, and significantly reduce the waters subject to federal regulation under the Clean Water Act. Such proposal is currently subject to public review and comment, after which additional legal challenges are anticipated. As a result of such recent developments, substantial uncertainty exists regarding the scope of waters protected under the Clean Water Act. To the extent the rule expands the range of properties subject to the Clean Water Act’s jurisdiction, we could face increased costs and delays with respect to obtaining permits for dredge and fill activities in wetland areas.
The EPA has also adopted regulations requiring certain oil and natural gas exploration and production facilities to obtain individual permits or coverage under general permits for storm water discharges. In addition, on June 28, 2016, the EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants, which regulations are discussed in more detail below under the caption “-Regulation of Hydraulic Fracturing.” Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans, as well as for monitoring and sampling the storm water runoff from certain of our facilities. Some states also maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions.
The OPAethics standards.Safety. Safety is the primary federal lawpriority for oil spill liability. The OPA contains numerous requirements relatingall Gulfport employees and contractors supporting our activities. Gulfport provides comprehensive safety training to all employees and is fully committed to a safe working environment. We utilize and apply performance metrics to drive and improve a leading position in safe operations. Gulfport has designed and instituted emergency response and business continuity plans to address incidents involving operational disruptions, pandemics and natural disasters. These measures include prompt notification procedures enabling Gulfport personnel to quickly evaluate and mitigate risks. Limiting safety incidents is included as part of our 2020 incentive compensation program to ensure we train and hold our employees accountable for operating safely.
18 2020 ANNUAL REPORT | |
|
| | Corporate Responsibility and Sustainability Highlights |
Gulfport established the Work Safe Program which focuses on a combination of twelve rules derived from Company policies (critical tasks) and cultural conditions that have been linked to serious safety incidents in our industry. Critical Task Rules are those requiring specific operating procedures to mitigate hazardous work site conditions to complete work safely. Cultural Condition Rules are defined as work site conditions or human behaviors that have been linked to the preventionroot cause of most incidents.
Employees and responsecontractors are expected to petroleum releases into waterslive by, apply and follow the requirements that coincide with the twelve rules. Our goal is to not only improve our safety performance but to proactively prevent incidents before they happen.
Stop Work is one of the United States, including the requirement that operators of offshore facilitiesWork Safe Program’s critical tasks. Our Chief Executive Officer, David Wood, and certain onshore facilities near or crossing waterways must developChief Operating Officer, Donnie Moore, signed and maintain facility response contingency planscommunicated a Stop Work Authority and maintain certain significant levels of financial assurance to cover potential environmental cleanup and restoration costs. The OPA subjects owners of facilities to strict liability that, in some circumstances, may be joint and
several for all containment and cleanup costs and certain other damages arising from a release, including, but not limitedObligation letter to the costs of respondingCompany’s employees and our contractors. This letter outlines Gulfport’s commitment to a release of oil to surface waters.
Noncompliance with the Clean Water Act or the OPA may result in substantial administrative, civil and criminal penalties, as well as injunctive obligations. We believe we are in material compliance with the requirements of each of these laws.
Air Emissions. The federal Clean Air Act, as amended, and comparable state laws and regulations, regulate emissions of various air pollutants through the issuance of permits and the imposition of other requirements. The EPA has developed, and continues to develop, stringent regulations governing emissions of air pollutants at specified sources. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to obtain additional permits and incur capital costs in order to remain in compliance. For example, on August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new emission controls for oil and natural gas production and processing operations, which regulations are discussed in more detail below under the caption “-Regulation of Hydraulic Fracturing.” Also, on May 12, 2016, the EPA issued a final rule regarding the criteria for aggregating multiple small surface sites into a single source for air-quality permitting purposes applicable to the oil and gas industry. This rule could cause small facilities, on an aggregate basis, to be deemed a major source, thereby triggering more stringent air permitting processes and requirements. These laws and regulations may increase the costs of compliance for some facilities we own or operate, and federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal Clean Air Act and associated state laws and regulations. We believe that we are in substantial compliance with all applicable air emissions regulations and that we hold all necessary and valid construction and operating permits for our operations. Obtaining or renewing permits has the potential to delay the development of oil and natural gas projects.
Climate Change. In recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases. The EPA has finalized a series of greenhouse gas monitoring, reporting and emission control rules for the oil and natural gas industry and the U.S. Congress has from time to time considered adopting legislation to reduce emissions of greenhouse gases and almost one-half of the states have already taken legal measures to reduce emissions of greenhouse gases primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. Although the U.S. Congress has not adopted such legislation at this time, it may do so in the future and many states continue to pursue regulations to reduce greenhouse gas emissions.
In December 2015, the United States participated in the 21st Conference of the Parties, or COP-21, of the United Nations Framework Convention on Climate Change in Paris, France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature, and to conserve and enhance sinks and reservoirs of GHGs. The Agreement went into effect on November 4, 2016. The Agreement establishes a framework for the parties to cooperate and report actions to reduce GHG emissions. However, on June 1, 2017, President Trump announced that the United States would withdraw from the Paris Agreement, and begin negotiations to either re-enter or negotiate an entirely new agreement with more favorable terms for the United States. The Paris Agreement sets forth a specific exit process, whereby a party may not provide notice of its withdrawal until three years from the effective date, with such withdrawal taking effect one year from such notice. It is not clear what steps the Trump Administration plans to take to withdraw from the Paris Agreement, whether a new agreement can be negotiated, or what terms would be included in such an agreement. Furthermore, in response to the announcement, many state and local leaders have stated their intent to intensify efforts to uphold the commitments set forth in the international accord.
Restrictions on emissions of methane or carbon dioxide that may be imposed could adversely impact the demand for, price of and value of our products and reserves. As our operations also emit greenhouse gases directly, current and future laws or regulations limiting such emissions could increase our own costs. Currently, while we are subject to certain federal GHG monitoring and reporting requirements, our operations are not adversely impacted by existing federal, state and local climate change initiatives and, at this time, it is not possible to accurately estimate how potential future laws or regulations addressing greenhouse gas emissions would impact our business.
There have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital. Furthermore, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals or public entities may seek to enforce environmental laws and regulations against us and could allege personal injury, property damages or other liabilities. While we are not a party to any such litigation, we could be named in actions making similar
allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition.
Moreover, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially hotter or colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations.
Endangered Species Act
Environmental laws such as the Endangered Species Act, or the ESA and analogous state statutes, may impact exploration, development and production activities on public or private lands. The ESA provides broad protection for species of fish, wildlife and plants that are listed as threatened or endangered in the U.S., and restricts activities that may adversely affect listed species or their habitat. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act, though, in December 2017, the U.S. Fish and Wildlife Service provided guidance limiting the reach of the Act. Federal agencies are required to insure that any action authorized, funded or carried out by them is not likely to jeopardize the continued existence of listed species or modify their critical habitat. While some of our facilities may be located in areas that are designated as habitat for endangered or threatened species, we believe that we are in substantial compliance with the ESA. The U.S. Fish and Wildlife Service may identify, however, previously unidentified endangered or threatened species or may designate critical habitat and suitable habitat areas that it believes are necessary for survival of a threatened or endangered species, which could cause us to incur additional costs or become subject to operating restrictions or bans in the affected areas.
Occupational Safety and Health Act
We are also subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state laws that regulate the protection of the health, and safety of employees. In addition, OSHA’s hazard communication standard requires that information be maintained about hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and citizens. We believe that our operations are in substantial compliance with the OSHA requirements.
Regulation of Hydraulic Fracturing
Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. We use hydraulic fracturing extensively in the development of our Utica Shale and SCOOP acreage. The federal Safe Drinking Water Act, or SDWA, regulates the underground injection of substances through the Underground Injection Control, or UIC, program. Hydraulic fracturing is generally exempt from regulation under the UIC program, and the hydraulic fracturing process is typically regulated by state oil and gas commissions. However, legislation has been proposed in recent sessions of Congress to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection,” to require federal permitting and regulatory control of hydraulic fracturing, and to require disclosure of the chemical constituents of the fluids used in the fracturing process. Furthermore, several federal agencies have asserted regulatory authority over certain aspects of the process. For example, the EPA has taken the position that hydraulic fracturing with fluids containing diesel fuel is subject to regulation under the UIC program, specifically as “Class II” UIC wells.
Additionally, on June 28, 2016, EPA published a final rule prohibiting the discharge of wastewater from onshore unconventional oil and gas extraction facilities to publicly owned wastewater treatment plants. The EPA is also conducting a study of private wastewater treatment facilities (also known as centralized waste treatment, or CWT, facilities) accepting oil and gas extraction wastewater. The EPA is collecting data and information related to the extent to which CWT facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial characteristics of CWT facilities, and the environmental impacts of discharges from CWT facilities.
On August 16, 2012, the EPA published final regulations under the federal Clean Air Act that establish new air emission controls for oil and natural gas production and natural gas processing operations. Specifically, the EPA’s rule package includes NSP standards to address emissions of sulfur dioxide and volatile organic compounds, or VOCs, and a separate set of emission
standards to address hazardous air pollutants frequently associated with oil and natural gas production and processing activities. The final rule seeks to achieve a 95% reduction in VOCs emitted by requiring the use of reduced emission completions or “green completions” on all hydraulically-fractured wells constructed or refractured after January 1, 2015. The rules also establish specific new requirements regarding emissions from compressors, controllers, dehydrators, storage tanks and other production equipment. The EPA received numerous requests for reconsideration of these rules from both industry and the environmental community, and court challenges to the rules were also filed. In response, the EPA has issued, and will likely continue to issue, revised rules responsive to some of the requests for reconsideration. In particular, on May 12, 2016, the EPA amended its regulations to impose new standards for methane and VOC emissions for certain new, modified and reconstructed equipment, processes and activities across the oil and natural gas sector. However, in a March 28, 2017 executive order, President Trump directed the EPA to review the 2016 regulations and, if appropriate, to initiate a rule making to rescind or revise them consistent with the stated policy of promoting clean and safe development of the nation’s energy resources, while at the same time avoiding regulatory burdens that unnecessarily encumber energy production. On June 16, 2017, the EPA published a proposed rule to stay for two years certain requirements of the 2016 regulations, including fugitive emission requirements. Also, on October 15, 2018, the EPA published a proposed rule to significantly reduce regulatory burdens imposed by the 2016 regulations, including, for example, reducing the monitoring frequency for fugitive emissions and revising the requirements for pneumatic pumps at well sites. The above standards, to the extent implemented, as well as any future laws and their implementing regulations, may require us to obtain pre-approval for the expansion or modification of existing facilities or the construction of new facilities expected to produce air emissions, impose stringent air permit requirements, or mandate the use of specific equipment or technologies to control emissions.
In addition, on March 26, 2015, the Bureau of Land Management, or BLM, published a final rule governing hydraulic fracturing on federal and Indian lands. The rule requires public disclosure of chemicals used in hydraulic fracturing, implementation of a casing and cementing program, management of recovered fluids, and submission to the BLM of detailed information about the proposed operation, including wellbore geology, the location of faults and fractures, and the depths of all usable water. Also, on November 15, 2016, the BLM finalized a waste prevention rule to reduce the flaring, venting and leaking of methane from oil and gas operations on federal and Indian lands. The rule requires operators to use currently available technologies and equipment to reduce flaring, periodically inspect their operations for leaks, and replace outdated equipment that vents large quantities of gas into the air. The rule also clarifies when operators owe the government royalties for flared gas. On March 28, 2017, President Trump signed an executive order directing the BLM to review the above rules and, if appropriate, to initiate a rulemaking to rescind or revise them. Accordingly, on December 29, 2017, the BLM published a final rule to rescind the 2015 hydraulic fracturing rule; however, a coalition of environmentalists, tribal advocates and the state of California filed lawsuits challenging the rule rescission. Also, on February 22, 2018, the LM published proposed amendments to the waste prevention rule that would eliminate certain air quality provisions and, on April 4, 2018, a federal district court stayed certain provisions of the 2016 rule. At this time, it is uncertain when, or if, the rules will be implemented, and what impact they would have on our operations.
Furthermore, there are certain governmental reviews either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. On December 13, 2016, the EPA released a study examining the potential for hydraulic fracturing activities to impact drinking water resources, finding that, under some circumstances, the use of water in hydraulic fracturing activities can impact drinking water resources. Also, on February 6, 2015, the EPA released a report with findings and recommendations related to public concern about induced seismic activity from disposal wells. The report recommends strategies for managing and minimizing the potential for significant injection-induced seismic events. Other governmental agencies, including the U.S. Department of Energy, the U.S. Geological Survey, and the U.S. Government Accountability Office, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies could spur initiatives to further regulate hydraulic fracturing, and could ultimately make it more difficult or costly for us to perform fracturing and increase our costs of compliance and doing business.
Some states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. If new or more stringent state or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where we operate, we could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development or production activities, and perhaps even be precluded from drilling wells.
There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, induced seismic activity, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment
generally. Aand provides the expectation and support to all Gulfport employees and contract partners to stop work when conditions warrant. Every person on a Gulfport work site has the authority to stop any work that is believed to cause an unsafe condition, or places personnel or the environment atrisk.Health, Safety & Environment Highlights for 2020:
• Reduced reportable spills by 70% year-over-year
• Reduced number of lawsuitstotal OSHA recordable injuries by 50% year-over-year
• Recorded an increase in Hazard Observations/Stop Works year-over-year
• Developed and enforcement actions have been initiated acrossdelivered multiple Work Safe Program trainings for employees and contractors
Community Engagement. Gulfport consistently strives to positively impact and improve the country implicating hydraulic fracturing practices. If new laws or regulations that significantly restrict hydraulic fracturing are
adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations asensure the safety and well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could cause us to incur substantial compliance costs, and compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations. At this time, it is not possible to estimate the impact on our business of newly enacted or potential federal, state or local laws governing hydraulic fracturing.
Other Regulation-being of the Oil and Natural Gas Industry
The oil and natural gas industry is extensively regulated by numerous federal, state and local authorities. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations that are binding on the oil and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply. Although the regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, affects our profitability, these burdens generally do not affect us any differently or to any greater or lesser extent than they affect other companies in the industry with similar types, quantities and locations of production.
The availability, terms and cost of transportation significantly affect sales of oil and natural gas. The interstate transportation of oil and natural gas is subject to federal regulation, including regulation of the terms, conditions and rates for interstate transportation, natural gas storage and various other matters, primarily by the Federal Energy Regulatory Commission, or FERC. Federal and state regulations govern the price and terms for access to oil and natural gas pipeline transportation. FERC's regulations for interstate oil and natural gas transmission in some circumstances may also affect the intrastate transportation of oil and natural gas.
Although oil and natural gas prices are currently unregulated, Congress historically has been active in the area of oil and natural gas regulation. We cannot predict whether new legislation to regulate oil and natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, the proposals might have on our operations. Sales of condensate and natural gas liquids are not currently regulated and are made at market prices.
Drilling and Production. Our operations are subject to various types of regulation at the federal, state and local level. These types of regulation include requiring permits for the drilling of wells, drilling bonds and reports concerning operations. The states and some counties and municipalities in which we operate also regulate one or more of the following:
the location of wells;
the method of drilling and casing wells;
the timing of construction or drilling activities, including seasonal wildlife closures;
the rates of production or “allowables”;
the surface use and restoration of properties upon which wells are drilled;
the plugging and abandoning of wells; and
notice to, and consultation with, surface owners and other third parties.
State laws regulate the size and shape of drilling and spacing units or proration units governing the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and natural gas we can produce
from our wells or limit the number of wells or the locations at which we can drill. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction. States do not regulate wellhead prices or engage in other similar direct regulation, but we cannot assure you that they will not do so in the future. The effect of such future regulations may be to limit the amounts of oil and natural gas that may be produced from our wells, negatively affect the economics of production from these wells or to limit the number of locations we can drill.
Federal, state and local regulations provide detailed requirements for the plugging and abandonment of wells, closure or decommissioning of production facilities and pipelines and for site restoration in areaspopulations where we operate. AlthoughGulfport has also formed a strong partnership with the U.S. Army Corps of Engineers does not require bonds or other financial assurances, some state agencies and municipalities do have such requirements.
Natural Gas Sales and Transportation. Historically, federal legislation and regulatory controls have affected the price of the natural gas we produceFoundation for Appalachian Ohio and the mannerCommunities Foundation of Oklahoma and created the Gulfport Energy Fund in which we marketboth Ohio and Oklahoma. Through these funds, Gulfport makes direct monetary contributions to local organizations to improve education, youth development, health, human services and environmental stewardship.
| | 2020 ANNUAL REPORT 19 |
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS |
This Compensation Discussion and Analysis, or CD&A, explains the Compensation Committee’s compensation philosophy, summarizes our production. FERC has jurisdiction over the transportationexecutive compensation programs and saledescribes compensation decisions for resale of natural gas in interstate commerce by natural gas companies under the Natural Gas Act of 1938Gulfport’s Chief Executive Officer, or CEO, Chief Financial Officer, or CFO, and the Natural Gas Policy Actnext three highest paid executives for 2020. These officers, known as our NEOs, are:
David M. Wood | Chief Executive Officer and President |
Quentin R. Hicks | Executive Vice President, Chief Financial Officer |
Donnie Moore | Executive Vice President, Chief Operating Officer |
Patrick K. Craine | Executive Vice President, General Counsel and Corporate Secretary |
Michael Sluiter | Senior Vice President of Reservoir Engineering |
20 2020 ANNUAL REPORT | |
|
Gulfport 2020 Business Performance Highlights |
In the current depressed commodity price environment and period of 1978. Since 1978, various federal lawseconomic uncertainty, we took the following operational and financial measures in 2020 to improve our balance sheet and preserve liquidity:
• Reduced 2020 capital spending by more than 50% as compared to 2019;
• Divested our SCOOP water infrastructure assets to a third-party water service provider for $50million;
• Reduced certain corporate general and administrative costs through pay reductions, furloughs and reductions in force;
• Continued to significantly improve operational efficiencies and reduce drilling and completion costs in both our SCOOP and Utica operating areas. In the Utica, our average spud to rig release time was 18.7 days in 2020, which was a 5% improvement from 2019 levels. In the SCOOP, our average spud to rig release time was 35.5 days, representing a 35% improvement compared to 2019 levels.
Although management’s actions listed above have been enacted which have resulted inhelped to improve the complete removalcompany’s liquidity and cost-structure, continued macro headwinds including the depressed state of all price and non-price controls for sales of domestic natural gas sold in “first sales,” which include all of our sales of our own production. Under the Energy Policy Act of 2005, FERC has substantial enforcement authority to prohibit the manipulation of natural gasenergy capital markets and enforce its rules and orders, includingextraordinarily low commodity price environment presented significant risks to the Company’s ability to assess substantial civil penalties.
FERC also regulates interstate natural gas transportation rates and service conditions and establishes the terms under which we may use interstate natural gas pipeline capacity, which affects the marketing of natural gas that we produce, as well as the revenues we receive for sales of our natural gas and release of our natural gas pipeline capacity. Commencing in 1985, FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC's initiatives have led to the development of a competitive, open access market for natural gas purchases and sales that permits all purchasers of natural gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically has been very heavily regulated; therefore, we cannot guarantee that the less stringent regulatory approach currently pursued by FERC and Congress will continue indefinitely into the future nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities.
Under FERC’s current regulatory regime, transmission services are provided on an open-access, non-discriminatory basis at cost-based rates or at negotiated rates. Gathering service, which occurs upstream of jurisdictional transmission services, is regulated by the states onshore and in state waters. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC as a natural gas company under the NGA. Althoughfund its policy is still in flux, FERC has in the past reclassified certain jurisdictional transmission facilities as non-jurisdictional gathering facilities, which has the tendency to increase our costs of transporting gas to point-of-sale locations.
Oil Sales and Transportation. Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. Nevertheless, Congress could reenact price controls in the future.
Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate Commerce Act and intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any materially different way than such regulation will affect the operations of our competitors.
Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this standard, common carriers must offer service to all similarly situated shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines' published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors.
State Regulation. The states in which we operate regulate the drilling for, and the production and gathering of, oil and natural gas, including through requirements relating to the method of developing new fields, the spacing and operation of wells
and the prevention of waste of oil and natural gas resources. States may also regulate rates of production and may establish maximum daily production allowables from oil and natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead prices or engage in other similar direct economic regulation, but we cannot assure you that they will not do so in the future. The effect of these regulations may be to limit the amount of oil and natural gas that may be produced from our wells and to limit the number of wells or locations we can drill.
In July 2015, the Ohio Department of Natural Resources, or the ODNR, enacted a comprehensive set of rules to regulate the construction of horizontal well pads. Under these new rules, operators must submit detailed horizontal well pad design packages prepared by a professional engineer for review and certification by the ODNR Division of Oil and Gas Resources Management prior to the commencement of any oil and natural gas activity. These rules resulted in increased construction costs for operators. Furthermore, pursuant to new rules approved in August 2016, operators must immediately notify ODNR regarding certain oil and natural gas releases. Also, on November 20, 2018, Ohio EPA announced that it intends to develop new rules that would cover air pollution emissions associated with non-conventional oil and gas facilities.
The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to resource conservation and equal employment opportunity. We do not believe that compliance with these laws will have a material adverse effect on us.
Operational Hazards and Insurance
The oil and natural gas business involves a variety of operating risks, including the risk of fire, explosions, blow outs, pipe failures and, in some cases, abnormally high pressure formations which could lead to environmental hazards such as oil spills, natural gas leaks and the discharge of toxic gases. If any of these should occur, we could incur legal defense costs and could be required to pay amounts due to injury, loss of life, damage or destruction to property, natural resources and equipment, pollution or environmental damage, regulatory investigation and penalties and suspension of operations.
In accordance with what we believe to be industry practice, we maintain insurance against some, but not all, of the operating risks to which our business is exposed. We insure some, but not all, of our properties for operational and hurricane related events. We currently have insurance policies that include coverage for general liability, physical damage to our oil and natural gas properties, operational control of certain wells, oil pollution, third party liability, workers compensation, cyber and employers' liability and other coverage. Our insurance coverage includes deductibles that must be met prior to recovery. Additionally, our insurance is subject to exclusions and limitations, and there is no assurance that such coverage will fully or adequately protect us against liability from all potential consequences, damages and losses. Any of these events could cause a significant disruption to our business. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows.
Currently, we have general liability insurance coverage with an annual aggregate limit of up to $101.0 million which includes sudden and accidental pollution for the effects of onshore and offshore pollution on third parties arising from our operations as well as $10.0 million of gradual pollution insurance coverage. For our offshore WCBB properties, we also have a $52.0 million property physical damage policy which insures against most operational perils, such as explosions, fire, vandalism, theft, hail and windstorms, provided, however, that this policy is limited to $16.0 million for damages arising as a result of a named windstorm. All of our insurance coverage includes deductibles of up to $250,000 per occurrence ($1.75 million in the case of a named windstorm) that must be met prior to recovery. Additionally, our insurance is subject to customary exclusions and limitations. We reevaluate the purchase of insurance, policy terms and limits annually. Future insurance coverage for our industry could increase in cost and may include higher deductibles or retentions. In addition, some forms of insurance may become unavailable in the future or unavailable on terms that we believe are economically acceptable. No assurance can be given that we will be able to maintain insurance in the future at rates that we consider reasonable and we may elect to maintain minimal or no insurance coverage. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. The occurrence of a significant event, not fully insured against, could have a material adverse effect on our financial condition and results of operations.
We carry control of well insurance for all of our Utica Shale and SCOOP wells and several Southern Louisiana wells. We also require all of our third party vendors to sign master service agreements in which they agree to indemnify us for injuries and deaths of the service provider's employees as well as contractors and subcontractors hired by the service provider.
We have prepared and have in place spill prevention control and countermeasure plans for each of our principal facilities in response to federal and state requirements. The plans are reviewed annually and updated as necessary. As required by
applicable regulations, our facilities are built with secondary containment systems to capture potential releases. We also own additional spill kits with oil booms and absorbent pads that are readily available, if needed. In addition, we have emergency response companies on retainer. These companies specialize in the clean up of hydrocarbons as a result of spills, blow-outs and natural disasters, and are on call to us 24 hours a day, seven days a week when their services are needed. We pay these companies a retainer plus additional amounts when they provide us with clean up services. Our aggregate payments for the retainer and clean up services during 2018 and 2017 were approximately $0.6 million and $0.2 million. While these companies have been able to meet our service needs when required from time to time in the past, it is possible that the ability of one or more of them to provide services to us in the future, if and when needed, could be hindered or delayed in the event of a widespread disaster. However, in light of the areas in which we operate and the nature of our production, we believe other companies would be available to us in the event our primary remediation companies are unable to perform. To supplement our planning and operation activities in Ohio, Oklahoma and Louisiana, we also actively manage an incident response planning program and coordinate with applicable state agency personnel on spills and releases through the Ohio, Oklahoma and Louisiana Incident Notification Hotlines. We also participate in the Ohio, Oklahoma and Louisiana Emergency Planning and Community Right to Know Act (EPCRA) programs, which includes reporting of various materials used or stored on-site as well as notification to state and local emergency response centers, such as local fire departments, for emergency planning purposes.
Headquarters and Other Facilities
We own an office building with approximately 120,000 square feet of office space in Oklahoma City, Oklahoma that serves as our corporate headquarters. We also own an approximately 28,500 square foot office building in Oklahoma City, Oklahoma where some of our employees office.
We own an approximately 12,300 square foot building located in St. Clairsville, Ohio that serves as our headquarters for our Ohio operations. We also own an approximately 12,500 square foot building in Lafayette, Louisiana. This building contains approximately 6,200 square feet of finished office area and 6,300 square feet of clear span warehouse area. We lease approximately 3,700 square feet in a building in Lafayette that we use as our Louisiana headquarters. We also lease an office in Lindsay, Oklahoma that serves as our Oklahoma production field office. Each of these properties is suitable and adequate for its use.
Employees
At December 31, 2018, we had 350 employees.
Availability of Company Reports
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Investor Relations page of our website at www.gulfportenergy.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information contained on our website, or on other websites that may be linked to our website, is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC.
Risks Related to our Business and Industry
Market conditions for oil and natural gas, and volatility in prices for oil and natural gas, have in the past adversely affected, and may continue in the future to adversely affect, our revenue, cash flows, profitability, growth, production and the present value of our estimated reserves.
Our revenues, cash flows, profitability, future rate of growth, production and the carrying value of our oil and natural gas properties depend significantly upon the prevailing prices for natural gas and, to a lesser extent, oil. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control, including:
worldwide and domestic supplies of oil and natural gas;
the level of prices, and expectations about future prices, of oil and natural gas;
the cost of exploring for, developing, producing and delivering oil and natural gas;
the expected rates of declining current production;
the level of consumer demand;
the price and availability of alternative fuels;
technical advances affecting energy consumption;
risks associated with operating drilling rigs;
the availability of pipeline capacity and other transportation facilities;
the price and level of foreign imports;
domestic and foreign governmental regulations and taxes;
the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;
speculative trading in crude oil and natural gas derivative contracts;
political or economic instability or armed conflict in oil and natural gas producing regions, including the Middle East, Africa, South America and Russia;
the overall domestic and global economic environment; and
weather conditions, including hurricanes, and other natural disasters that can affect oil and natural gas operations over a wide area.
These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2017, West Texas intermediate light sweet crude oil, which we refer to as West Texas Intermediate or WTI, prices ranged from $42.48 to $60.46 per barrel and the Henry Hub spot market price of natural gas ranged from $2.44 to $3.71 per MMBtu. During 2018, WTI prices ranged from $44.48 to $77.41 per barrel and the Henry Hub spot market price of natural gas ranged from $2.49 to $6.24 per MMBtu. If the prices of oil and natural gas decline, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impactgoing forward. On October8, 2020, the borrowing base under our revolving credit facility
was reduced for the second time in 2020 from $700million to $580million, thereby significantly reducing available liquidity. Considering the facts above, we elected not to make interest payments of $17.4million due October15, 2020 and $10.8million due November2, 2020 on our 2024 Notes and 2023 Notes, respectively. On November13, 2020, we filed voluntary petitions for relief under Chapter 11.The Compensation Committee will continue to consider the feedback from our stockholders when making compensation decisions for our NEOs. It is important to note that many of the practices utilized under a normal business environment do not apply to a distressed environment.
Practices We Follow |
ü | Incentives Aligned with Stakeholders.All incentive compensation granted in 2020 was either tied to key performance indicators that create value for the enterprise or were time-based retention-related payments with clawback features in order to retain key executives to successfully navigate the Chapter 11 bankruptcy process. |
ü | Robust disclosure of our performance metrics and targets.We provide detailed disclosure of our performance metrics in our CD&A. |
ü | Ownership guidelines.We adopted robust stock-ownership guidelines for directors and executive officers in 2019. |
ü | Risk Management.We perform annual enterprise risk assessments to ensure our use of incentive metrics doesn’t add undue risk to the business. |
ü | Clawback and recoupment processes.We have a Clawback Policy that allows us to recover incentive compensation. |
ü | Executive Compensation best practices.The Compensation Committee uses an independent compensation consulting firm to provide input into the executive compensation programs. |
| | 2020 ANNUAL REPORT 21 |
Practices We Prohibit |
û | Single-trigger vesting of equity awards.The Company does not allow for single-trigger vesting of equity awards in connection with a change of control for any awards granted in 2020 and beyond. |
û | Providing tax gross-ups.No tax gross-ups are provided to NEOs. |
û | Hedging or pledging Gulfport Energy stock.The Company does not allow hedging or pledging of Gulfport securities by our NEOs or directors. |
û | Liberal share recycling.We do not allow liberal share recycling in our stock incentive plan. |
û | Holding Gulfport Energy stock in a margin account.The Company does not allow securities to be held in a margin account by our NEOs or directors. |
û | Excessive perquisites or executive benefits plans. No pension, supplemental executive retirement plan or other excessive perquisite plans are made available to our executive officers (except for our 401(k) plan and medical and insurance plans available to other non-NEOs). |
û | Repricing of Stock Options.The Company has not granted stock options in 2020, currently has no plans to grant stock options in the future and would not reprice any outstanding stock options that might be outstanding. |
STOCKHOLDER ENGAGEMENT AND ANNUAL SAY-ON-PAY ADVISORY VOTE |
The Compensation Committee is committed to engaging with our stockholders and learning their expectations for executive compensation, corporate governance, safety, environmental and other social responsibility issues at Gulfport Energy. The 2020 Say-on-Pay vote results showed that 74% of the shareholders that voted agreed that executive compensation practices at Gulfport Energy were working as expected. While it is clear that the majority shareholder vote was favorable, the Compensation Committee, Board of Directors and Company believe there is opportunity for improvement. Based on the results of the Company’s last advisory vote on the frequency of future Say-on-Pay votes at the Company, also known as a say on frequency vote, the Company will continue to hold annual Say-On-Pay votes until the Company’s next say on frequency vote in 2023.
The Compensation Committee will continue to consider the feedback from our stockholders when making compensation decisions for our NEOs.
22 2020 ANNUAL REPORT | |
|
EXECUTIVE COMPENSATION PHILOSOPHY AND COMPONENTS |
Our executive compensation programs play an important role in helping us achieve our business objectives and effectively reward executive officers for our Company’s annual and long-term performance and individual contributions to performance.
Overview of NEO Total Direct Compensation Components for Fiscal Year 2020
The Company generally believes that incentive pay should comprise the majority of executive compensation. We further believe that long-term compensation should be comprised of equity compensation, and the performance of the company’s stock price should play a role in determining the compensation level of our executives. Long-term incentives should measure multiple years and be tied to strategic results over that time frame. Gulfport Energy also believes that long-term incentives should address retaining our key executives and take a holistic view of the retentive power of all shares granted and still unvested. Gulfport Energy also believes that our short-term incentives should be a direct reflection of our current operating plans and support the longer-term strategic plan by delivering expected rewards for expected results for our annual operating plans. Short-term plans should be competitive in our industry and primarily based on established goals that are measurable and transparent. We also believe base salary levels should be competitive with the market for executives in the oil and gas markets and our benefit packages should be substantively similar for all employees and not include excessive perquisites for executives.
On November13, 2020, Gulfport Energy Corporation commenced a process to restructure our balance sheet comprehensively and improve our cost structure by filing petitions for voluntary relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. While the Board of Directors and our new leadership team have taken decisive actions since mid-2019 to strengthen our financial position, the Company’s large legacy debt burden in addition to significant legacy firm transportation commitments have made this the best path forward for the Company.
In connection with a comprehensive review of the Company’s compensation programs in July and August of 2020, and in consultation with its independent compensation consultant and legal advisors, the Compensation Committee determined that significant changes were appropriate to retain and motivate the Company’s employees as a result of the ongoing uncertainty and unprecedented disruption in the oil and gas industry, in addition to the possibility of a near-term Chapter 11 filing by the Company.
Determining our Executive Compensation |
Benchmarking Against Our Compensation Peer Group
Gulfport utilizes a peer group of companies, or the Compensation Peer Group, as a reference point when establishing both compensation levels for executives and program structures to achieve competitiveness in the market.
2020 Compensation Peer Group
The Compensation Committee directed its independent compensation consultant to conduct a thorough review of the Compensation Peer Group for 2020 and no changes were made from the peer group selected for 2019. The companies reflected in the 2020 Compensation Peer Group reflected a peer group of North American, onshore exploration and production companies that compete with Gulfport Energy for people, resources and investments and are appropriate comparators given factors such as market capitalization, revenue, production and oil and gas product mix.
2020 Compensation Peer Group(1) |
Antero Resources Corporation Carrizo Oil & Gas, Inc. CNX Resources Corporation EQT Corporation Magnolia Oil and Gas Corporation QEP Resources, Inc. SM Energy Company | Berry Petroleum Corporation Chaparral Energy, Inc. Comstock Resources, Inc. Extraction Oil and Gas, Inc. Matador Resources Company Range Resources Corporation Southwestern Energy Company | Cabot Oil & Gas, Inc. Chesapeake Energy Corporation Eclipse Resources Corporation Laredo Petroleum, Inc. PDC Energy, Inc. Roan Resources, Inc. SRC Energy Inc. |
| | 2020 ANNUAL REPORT 23 |
PROCESS FOR DETERMINING EXECUTIVE COMPENSATION |
The Compensation Committee of our Board of Directors oversees our compensation programs for executive officers and all employees. During 2020, the Compensation Committee was comprised of Ben Morris, Deborah Adams, and Alvin Bledsoe. John Somerhalder replaced Mr.Bledsoe on the committee upon his appointment to the Board. All members of the committee are independent directors.
The Role of Our Compensation Committee
The Compensation Committee generally reviews and typically makes its decisions regarding the annual compensation of our NEOs at its regular meetings in the first quarter of each year. These decisions include:
• Certifying annual performance-based incentive awards;
• Establishing target incentive opportunities and applicable performance objectives for the current year’s annual incentive awards;
• Approving adjustments to base salary, annual incentive levels and long-term incentive levels; and
• Granting long-term incentive awards and determining the types of awards for the current year.
The Compensation Committee may also adjust compensation as necessary at other times during the year, such as in the case of promotions, other changes in employment status and significant corporate events, as well as to reflect changing market conditions or for other competitive purposes.
In making its decisions, the Compensation Committee assesses each NEO’s impact during the year and overall value to Gulfport, specifically considering the NEO’s contribution to the growth of Gulfport’s value, operational and financial performance. The committee reviews the performance of the groups over which could limitthe NEO has primary responsibility, their impact on strategic initiatives, recommendations of our independent compensation consultant, the NEO’s role and trajectory in succession planning and development, recommendations from our CEO with respect to our other NEOs and other intangible qualities that contribute to corporate and individual success.
The Role of our CEO
The Compensation Committee evaluates our CEO based on the Company’s performance metrics, leadership role as a member of the Board, our lead representative to the investment community and other criteria. The total compensation package is ultimately determined by the Compensation Committee, based upon its evaluation and input from our independent compensation consultant. Our CEO’s compensation ultimately reflects Gulfport’s performance, personal performance, competitive industry practices and the terms of our employment arrangement.
Each year, our CEO evaluates each of the other NEOs and makes compensation recommendations to the Compensation Committee. In developing recommendations, the CEO considers the recommendations of the Compensation Committee’s independent compensation consultant, as well as each NEO’s contributions to the Company’s performance. The independent compensation consultant reviews and provides comments to the Compensation Committee based on our CEO’s recommendation with respect to NEOs, other than our CEO. Our CEO does not participate in deliberations or decisions concerning his own compensation.
The Role of the Compensation Consultants
The Compensation Committee retained Pearl Meyer as its independent compensation consultant. Pearl Meyer assisted the Compensation Committee in developing a competitive total compensation program that is consistent with our philosophy of goal-oriented pay for performance. This allows us to attract, retain and motivate talented executives. Pearl Meyer’s services included providing an annual analysis of the compensation of our top executive officers and their counterparts at peer companies, as well as the peer group review described above. The analysis compares each element of compensation and total direct compensation awarded by Gulfport and our peers. In addition, Pearl Meyer helped the Compensation Committee consider the allocation between annual incentive and long-term compensation and between the types of long-term incentive awards. Pearl Meyer also provided support with regulatory and other considerations that affect compensation programs generally, as requested by the Compensation Committee.
24 2020 ANNUAL REPORT | |
|
Pearl Meyer reported exclusively to the Compensation Committee. The Compensation Committee reviewed the independence of Pearl Meyer and determined that there were no conflicts of interest as a result of the Compensation Committee’s engagement. The Compensation Committee evaluates the independence of its compensation consultants on an ongoing basis.
2020 COMPENSATION PROGRAM DESCRIPTION |
At the beginning of 2020, the Gulfport Energy board and management team were focused on executing on a business plan and strategy focused on generating cash flow, maximizing liquidity and abilityimproving the Company’s cost structure in an effort to conduct additional exploration and development activities.
Strategic determinations, includingreduce leverage. Accordingly, the allocation of capital and other resources to strategic opportunities, are challenging, and our failure to appropriately allocate capital and resources among our strategic opportunities may adversely affect our financial condition and reduce our future growth rate.
Our future growth prospects are dependent upon our ability to identify optimal strategies for our business. In developing our 2019 business plan, we considered allocating capital and other resources to various aspects of our businesses, including well development, reserve acquisitions, midstream infrastructure and other activities. We also considered our likely sources of capital. Notwithstanding the determinations made in the development of our 2019 plan, business opportunities not previously identified periodically come to our attention, including possible acquisitions and dispositions. If we fail to identify optimal business strategies, including the appropriate rate of reserve development, or fail to optimize our capital investment and capital raising opportunities and the use of our other resources in furtherance of our business strategies, our financial condition and
growth rate may be adversely affected. Moreover, economic or other circumstances may change from those contemplated by our 2019 plan, and our failure to recognize or respond to those changes may limit our ability to achieve our objectives.
We periodically engage in acquisitions, dispositions2020 Incentive Plan (described below) was implemented with a focus on cost control, cash flow generation and other strategic
transactions,and ESG goals.When the 2020 Incentive Plan was implemented, the Company was optimistic that natural gas prices would increase to a level that would allow the Company to be successful without a comprehensive restructuring. However, commodity prices remained depressed through the summer of 2020, primarily as a result of a dramatic decrease in global demand for oil and gas caused by the COVID-19 pandemic and related stay-at-home orders. By July 2020 the board and management team became increasingly focused on a comprehensive restructuring including equity investmentsthe potential for a Chapter 11 filing. The Compensation Committee of the Board revised the incentive compensation program in July and joint venturesAugust of 2020, as described below, given the Company’s circumstances.
Base Salary
The Compensation Committee engaged Pearl Meyer to review the overall competitiveness of our executive compensation programs for 2020, with continued focus on ensuring the alignment of management compensation with performance and the achievement of Gulfport’s long-term strategic goals. The Compensation Committee reviews executive officer base salaries on an annual basis, with a goal of providing market competitive, fixed cash compensation. The Compensation Committee assesses comparable salary information provided by its independent compensation consultant as one factor when determining the base pay for NEOs.
After reviewing data provided by the independent compensation consultant to the Compensation Committee, and in light of economic uncertainties of the US and Global Energy markets and the challenging financial position the Company was experiencing, the decision was made to keep base at the same levels for 2019 for all executives, and no salary increases were provided to any NEO.
On June1, 2020, the Company’s NEOs voluntarily chose to take a 10% salary reduction, and the CEO voluntarily chose to take a 20% salary reduction for the remainder of 2020.
2020 Annual Incentive Awards
On March16, 2020, the Compensation Committee recommended the approval of, and the Board approved, the Company’s 2020 Incentive Plan (the “2020 Incentive Plan”). The Compensation Committee established a performance-based annual incentive program for 2020 that tied our executives’ compensation directly to pre-established performance metrics. Targeted annual incentive award levels were based on market information supplied by the independent compensation consultant. Individual awards may be decreased at the discretion of the Compensation Committee based on overall corporate performance for the year and other considerations.
The 2020 Incentive Plan was designed to provide selected employees incentive compensation opportunities tied to the achievement of specific performance goals (“Incentive Awards”), and service-based compensation opportunities, “Standard Awards” and, together with the Incentive Awards, “Cash Awards”). The 2020 Incentive Plan was administered by the Board or a committee thereof to which the Board has delegated authority to administer the 2020 Incentive Plan (the “Administrator”). The 2020 Incentive Plan focused on (i) continued employment or performance of services for the Company until relevant vesting, forfeiture or clawback dates, as the case may be with respect to Standard Awards and (ii) achievement of objectives and goals (“Performance Targets”) relating to certain financial, operational, safety and environmental metrics in addition to strategic goals (“Performance Factors”) over a period of one year (the “Performance Period”) with respect to Incentive Awards. The above vesting dates, Performance Targets, Performance Factors and Performance Period were determined by the Administrator. Incentive Awards were also subject to time-based vesting conditions such as the participant’s continued employment or performance of services for the Company through the relevant Performance Period or such other dates as determined by the Administrator. Under the 2020 Incentive Plan, the earning of an Incentive Award and payout opportunity was contingent upon meeting the Incentive Award’s applicable threshold performance levels. If threshold performance levels were satisfied, the payout amount varied for performance above or below the pre-established target performance levels. Each Standard Award was
| | 2020 ANNUAL REPORT 25 |
subject to clawback in the event of the participant’s termination of employment with the Company prior to the earlier of the first anniversary of the Grant Date or the occurrence of a change in control, in each case, for reasons other than due to (i) the Company’s or related company’s termination of the participant without cause, (ii) the participant’s voluntary termination of employment with the Company or related company for good reason, or (iii) the participant’s death.
Grant of Cash Awards
Each Incentive Award was subject to a Performance Period of January1, 2020 through December31, 2020. Different vesting periods were applied to separate one-third portions of each Incentive Award (each one-third portion, an “Incentive Tranche Amount”). The applicable Incentive Tranche Amount was scheduled to vest over the period commencing on the Grant Date and ending on each of December31, 2020, December31, 2021 and December31, 2022 (each period, a “Subject Restricted Period”), subject to the participant’s continuous employment and attainment of certain financial, operational, safety and environmental metrics in addition to strategic goals and total shareholder return Performance Targets (“Qualified Performance”). Payment of a vested Incentive Tranche Amount (as such payment may be adjusted by the Administrator pursuant to the Plan) would have been made within 30 days following the vesting date, subject to that Incentive Tranche Amount being earned as a result of the attainment of Qualified Performance. If the participant incurred a Qualified Termination during a Subject Restricted Period, then the participant would have remained eligible to receive any unpaid Incentive Tranche Amounts, again subject to those Incentive Tranche Amounts being earned as a result of the attainment of Qualified Performance. In general, earned Incentive Tranche Amounts would have been prorated if the Qualifying Termination occurred prior to a change in control, and no proration would have occurred if the Qualifying Termination occurred during the 24-month period following a change in control. In either event, the applicable earned and unpaid Incentive Tranche Amounts would have been paid (as payments may have been adjusted by the Administrator pursuant to the 2020 Incentive Plan) within 30 days after Qualified Termination, and if Qualified Termination occurred during the Performance Period, the applicable Qualified Performance determination would have been made at the time of Qualified Termination. If the participant incurred a termination other than a Qualified Termination during a Subject Restricted Period, the participant would have forfeited all rights to receive any payment of the Incentive Tranche Amount that related to a Subject Restricted Period, regardless of whether Qualified Performance was attained.
2020 Annual Incentive Bonus Metrics
In 2020, the Compensation Committee continued incentivizing our recent midstream agreementexecutives to increase Gulfport’s value through our pay for performance Annual Incentive Plan. This Annual Incentive Plan aligns our executives’ interests with EQT. These transactions involve various inherent risks, suchthose of our stockholders by making the executive compensation heavily dependent on increasing Gulfport’s operational and financial performance, as well as rewarding our executives for executing the Company’s long-term strategic goals, including in the areas of health, safety and environmental responsibility.
To achieve these objectives, the Compensation Committee identified critical performance metrics based on objective criteria, established balanced metrics and assigned appropriate weighting to each metric. Throughout this process, the Compensation Committee considered these metrics’ impact on our business, profitability, production and stockholder return.
The 2020 annual incentive thresholds, targets and maximums set by the Compensation Committee were based on financial and key performance measures determined in the first quarter of 2020. The Compensation Committee reviewed financial results and key performance indicators and approved payout results based on those achievements. The metrics used for the 2020 Incentive Plan included: Operated LOE (15%), Cash G&A Excluding Bonuses (15%), Free Cash Flow (15%), Gathering and Processing and Differential (15%), Safety (10%), Environmental Reportables (10%) and Strategic Initiatives (20%). In connection with the implementation of the Revised 2020 Incentive Program described below, the Compensation Committee reviewed results through July31, 2020 and determined a prorated payout was warranted due to the achievement levels detailed below (see 2020 Prorated Actual column).
26 2020 ANNUAL REPORT | |
|
| Weighting | Threshold | Target | Maximum | 2020
Prorated Actual | 2020
Actual
Payout |
Operated LOE per Mcfe ($/Mcfe) | 15% | $0.16 | $0.15 | $0.13 | $0.16 | 7.5% |
Recurring Cash G&A(1) per Mcfe ($/Mcfe) | 15% | $0.15 | $0.14 | $0.12 | $0.15 | 7.5% |
Free Cash Flow(2) ($ MM) | 15% | >$0 | $2 | $15 | $4 | 15% |
Gathering and Processing Differential ($/Mcfe) | 15% | $1.39 | $1.31 | $1.24 | $1.22 | 30% |
Environmental, Social, Corporate Governance (ESG) | | | | | | |
Total Incidents | 5% | 12 | 11 | 9 | 6 | 5% |
Reportable Spills | 5% | 20 | 18 | 16 | 5 | 5% |
Succession Planning | 5% | | | | Target | 5% |
Greenhouse Gas Emissions | 5% | 0.17 | 0.16 | 0.14 | Target | 5% |
Strategic Goals | | | | | | |
Renewal of Credit Facility | 20% | <1 Yr | 1 Yr | >2 Yr | Target | 20% |
Total Achievement Payout | 100% | | | | | 100% |
Relative TSR modifier: Amounts earned under the 2020 Incentive Award Plan would be subject to modification based on relative shareholder return over the period earned. Performance relative to peers between the 25th and 75th percentiles received no modification, performance below the 25th percentile received a negative 25% adjustment of the award and performance above the 75th percentile received a positive 25% adjustment of the award.
2020 Target Annual Incentive Opportunities and Actual Annual Incentive Payments
The Compensation Committee established the target annual incentive opportunity for each NEO, taking into consideration the terms of any applicable employment agreement, and approved the following payments based on the Company’s 2020 performance through July31, 2020 as described above.
Name | Target Annual Incentive
(as % of Base Salary) | Target Annual
Incentive | Actual Annual Incentive
(as % of Target Annual Incentive) | 2020 Payment |
David M. Wood | 125% | $1,042,500 | 100% (prorated for 7 months) | $608,363 |
Quentin R. Hicks | 90% | $ 382,500 | 100% (prorated for 7 months) | $223,212 |
Donnie Moore | 100% | $ 505,000 | 100% (prorated for 7 months) | $294,699 |
Patrick K. Craine | 90% | $ 391,500 | 100% (prorated for 7 months) | $228,464 |
Michael Sluiter | 60% | $ 216,000 | 100% (prorated for 7 months) | $126,049 |
| | 2020 ANNUAL REPORT 27 |
Revised 2020 Incentive Compensation Program
Considering the increased likelihood of a comprehensive restructuring of the Company, including a potential Chapter 11 filing, in July and August 2020 the Compensation Committee conducted a comprehensive review of the Company’s compensation programs and in consultation with its independent compensation consultant and legal advisors, the Compensation Committee determined that significant changes were necessary to retain and motivate the Company’s employees. Accordingly, as of August4, 2020, the Compensation Committee authorized a redesign of the incentive compensation program for the Company’s workforce, including NEOs. Participation by the NEOs in the new compensation program was contingent upon forfeiture of (i) all unpaid amounts previously awarded pursuant to the 2020 Incentive Plan, (ii) all restricted stock units granted in 2020 (described below under “Equity Awards – Time-vesting Restricted Stock Units”) and (iii) any award pursuant to the 2014 Executive Annual Incentive Compensation Program for 2020, other than payment of pro-rata bonuses earned for the period from January1, 2020 through July31, 2020 at the target level as described above. Under the new compensation program, each NEO’s target total variable compensation amount for 2020 (target annual bonus and long-term incentive, after adjusting the long-term incentive targets for each of Messrs. Hicks and Craine to 350% in recognition of increased workload), less the pro-rata incentive payments earned for the period from January1, 2020 through July31, 2020 at the target level as described above, were paid immediately. Each NEO was paid the amount described in the table titled “Revised 2020 Incentive Compensation Program.” Of this amount, 50% (the “Retention Component”) is subject to repayment on an after-tax basis in the event of the NEO’s resignation without good reason or termination by the Company for cause prior to the earlier of July31, 2021, a change in control or completion of a restructuring, and the remaining 50% (the “Performance Component”) is subject to repayment on an after-tax basis if the performance metrics described below are not met over performance periods from August1, 2020 through July31, 2021 as described below.
The Compensation Committee determined that the performance metrics for the Performance Component would consist of (i) Lease Operating Expense (20%), (ii) Recurring Cash G&A (defined above) (20%), (iii) Total Safety Incidents (10%), (iv) Reportable Spills (10%), (v) Obtaining DIP Financing (20%) and (vi) Obtaining Committed Exit Financing (20%). The performance goals for each of the performance metrics are set forth in the table below. The Performance Component consists of 5 performance periods beginning on August1, 2020, and a target completion date for the last performance period of July31, 2021, as outlined in the table below.
KPIs | Performance Period 1
Aug-Sept 2020 | Performance Period 2
Oct-Dec 2020 | Performance Period 3
Jan-Mar 2021 | Performance Period 4
Apr-Jun 2021 | Performance Period 5
July 2021 | Cumulative Target |
Achievement Level | Min | Target | Max | Min | Target | Max | Min | Target | Max | Min | Target | Max | Min | Target | Max | Min | Target | Max |
G&A Costs ($MM) | $9.6 | $9.0 | $8.3 | $14.8 | $13.8 | $12.7 | $14.1 | $13.1 | $12.1 | $14.1 | $13.1 | $12.1 | $4.7 | $4.4 | $4.0 | $57.3 | $53.3 | $49.3 |
Operational LOE ($/Mcfe) | $0.19 | $0.17 | $0.15 | $0.15 | $0.14 | $0.13 | $0.17 | $0.15 | $0.14 | $0.18 | $0.16 | $0.14 | $0.18 | $0.16 | $0.14 | $0.17 | $0.15 | $0.14 |
Safety Incidents/Spills | 3/4 | 2/3 | 1/2 | 4/6 | 3/5 | 2/4 | 4/6 | 3/5 | 2/4 | 4/6 | 3/5 | 2/4 | 2/3 | 1/2 | 0/1 | 17/25 | 12/20 | 7/15 |
Strategic
Goal 1 | Obtain required DIP financing to provide funds for operation during reorganization. Pass 100% / Fail 0% |
Strategic
Goal 2 | Obtain necessary exit financing to provide funds for operation upon emergence. Pass 100% / Fail 0% |
Long-Term Incentive Awards
Each year we grant our ability to obtainNEOs long-term incentive awards, that have historically consisted of equity-based awards. The Compensation Committee determines the necessary regulatory approvals,amount of these awards, as well as the timingmix of and conditions that may be imposed on us by regulatorsequity vehicles. The objectives of our long-term incentive plan are to: (i) create significant alignment between the interests of our NEOs and our abilitystockholders; (ii) attract and retain the services of critical talent; and (iii) focus our executives on our sustained growth and financial success.
28 2020 ANNUAL REPORT | |
|
DETERMINING AWARD STRUCTURE AND SETTING THE TARGET AWARD OPPORTUNITY |
2020 Grants of Cash and Equity Awards
Below is a summary of all grants made to achieve benefits anticipatedNEOs during 2020. The 2020 Incentive Plan awards, other than the Standard Award, were forfeited in connection with the adoption of the Revised 2020 Incentive Compensation Program.
| 2020 Incentive Plan and Equity Award(1) | Revised 2020 Incentive
Compensation Program(2) |
Named Executive Officer | Standard
Award | Incentive
Award | TSR-Based
Performance
Cash | Equity Award
(RSUs) | Cash
Retention | Quarterly
Performance
Award |
David M. Wood | $834,000 | $1,563,750 | $2,371,688 | $315,356 | $2,606,250 | $2,606,250 |
Quentin R. Hicks | $425,000 | $ 573,750 | $ 128,988 | $ 74,566 | $ 935,000 | $ 935,000 |
Donnie Moore | $505,000 | $ 757,500 | $ 816,838 | $137,486 | $1,136,250 | $1,136,250 |
Patrick K. Craine | $435,000 | $ 587,250 | $ 132,023 | $ 76,321 | $ 957,000 | $ 957,000 |
Michael Sluiter | $360,000 | $ 388,800 | $ 107,640 | $ 56,628 | $ 468,000 | $ 468,000 |
Equity Awards – Time-vesting Restricted Stock Units
On March11, 2020 and pursuant to resultour 2019 Amended and Restated Stock Incentive Plan, we granted our named executive officers the number of restricted stock units reflected in the table below, which were set to vest ratably over a period of three years from the transactions. Further, our equity investments and joint venture arrangements may restrict our operational and corporate flexibility and subject us todate of the grants. All 2020 awards listed below were forfeited in connection with the adoption of the Revised 2020 Incentive Compensation Program.
Named Executive Officer | 2020 LTI Award (RSUs) |
David M. Wood | 809,644 |
Quentin Hicks | 191,441 |
Donnie Moore | 352,981 |
Patrick K. Craine | 195,945 |
Michael Sluiter | 145,386 |
COMPENSATION POLICIES AND PRACTICES |
Compensation Risk Management
The Compensation Committee reviews the risks and uncertainties, such as committing us to fund operating and/or capital expenditures,rewards associated with our compensation policies and programs. We believe that our policies and programs encourage and reward prudent business judgment, encourage short-term stockholder value creation, and prioritize long-term growth by discouraging excessive risk taking.
The Compensation Committee believes that the timingCompany utilizes compensation policies and amount of which we may not be able to control. Further, the counterparties to these transactions may not satisfy their obligations to the joint venture. Our inability to complete a transaction or to achieve our strategic or financial goals in any transaction could have significant adverse effects on our earnings, cash flows and financial position.
Concerns over general economic, business or industry conditionsprograms that minimize risks that may have a material adverse effect on our results of operations, liquidity and financial condition.
Concerns over global economic conditions, energy costs, geopolitical issues, inflation, the availability and cost of credit and the European, Asian and the United States financial markets have contributed to economic volatility and diminished expectations for the global economy. In addition, continued hostilities in the Middle East and the occurrence or threat of terrorist attacks in the United States or other countries could adversely affect the global economy. These factors, combined with volatility in commodity prices, business and consumer confidence and unemployment rates, have in the past precipitated, and may in the future precipitate, an economic slowdown. Concerns about global economic growth could have a significant adverse impact on
global financial marketsthe Company.Clawback Provisions
Under the Sarbanes-Oxley Act of 2002, incentive compensation received by our Chief Executive Officer and commodity prices. If the economic climate in the United States or abroad deteriorates, worldwide demand for petroleum products could diminish, which could impact the price at which we can sell our production, affect the ability of our vendors, suppliers and customers to continue operations and ultimately adversely impact our results of operations, liquidity and financial condition.
Our development, acquisition and exploration operations require substantial capital and we may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a loss of properties and a decline in our oil and natural gas reserves.
Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. To increase reserves and production, we undertake development, exploration and other replacement activities or use third parties to accomplish these activities. We have made and expect to make in the future substantial capital expenditures in our business and operations for the development, production, exploration and acquisition of oil and natural gas reserves. For example, we currently estimate our exploration and production capital expenditures for 2019 to be in the range of $525.0 million to $550.0 million and an additional $40.0 million to $50.0 million for leasehold expenditures, primarily lease extensions and infill leasing within our Utica Shale and Scoop development plans.
Historically, we have financed capital expenditures primarily with cash flow from operations, the issuance of equity and debt securities and borrowings under our bank and other credit facilities. Our cash flow from operations and access to capital are subject to a number of variables, including:
our proved reserves;
the volume of oil and natural gas we are able to produce from existing wells;
the prices at which oil and natural gas are sold;
our ability to acquire, locate and produce economically new reserves; and
our ability to borrow under our credit facility.
We cannot assure you that our operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Further, our actual capital expenditures in 2019 could exceed our capital expenditure budget. In the event our capital expenditure requirements at any time are greater than the amount of capital we
have available, we could be required to seek additional sources of capital, which may include traditional reserve base borrowings, debt financing, joint venture partnerships, production payment financings, sales of assets, offerings of debt or equity securities or other means. We cannot assure you that we will be able to obtain debt or equity financing on terms favorable to us, or at all.
If we are unable to fund our capital requirements, we may be required to curtail our operations relating to the exploration and development of our prospects, which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves, or we may be otherwise unable to implement our development plan, complete acquisitions or take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our production, revenues and results of operations. In addition, a delay in or the failure to complete proposed or future infrastructure projects could delay or eliminate potential efficiencies.
Our failure to successfully identify, complete and integrate future acquisitions of properties or businesses could reduce our earnings and slow our growth.
There is intense competition for acquisition opportunities in our industry. The successful acquisition of producing properties requires an assessment of several factors, including:
recoverable reserves;
future oil and natural gas prices and their applicable differentials;
operating costs; and
potential environmental and other liabilities.
The accuracy of these assessments is inherently uncertain and we may not be able to identify attractive acquisition opportunities. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems. Even if we do identify attractive acquisition opportunities, we may not be able to complete the acquisition or do so on commercially acceptable terms.
Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions. Our ability to complete acquisitions is dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals. Further, these acquisitions may be in geographic regions in which we do not currently operate, which could result in unforeseen operating difficulties and difficulties in coordinating geographically dispersed operations, personnel and facilities. In addition, if we enter into new geographic markets, weOfficer may be subject to additionalclawback in the event of a restatement of our financial statements. Under the Stock Incentive Plan, each award pursuant to the Stock Incentive Plan is conditioned on repayment or forfeiture in accordance with applicable laws,
| | 2020 ANNUAL REPORT 29 |
our Company policies and unfamiliar legalany relevant provisions in the related award agreements. Further, under the terms of our employment agreements with Messrs. Wood, Moore, and regulatory requirements. ComplianceCraine, dated August1, 2019, Mr.Hicks dated August9, 2019, and Mr.Sluiter dated November13, 2020 (the “Employment Agreements”), any equity awards granted, any proceeds of any equity awards that previously have been sold, transferred or otherwise disposed of, and any annual incentive award will be subject to clawback by us, now or in the future, under the Dodd-Frank Act and the Sarbanes-Oxley Act, each as amended, and their rules, regulations and binding, published guidance.
Stock Ownership Guidelines for Executive Officers
We believe it is important for our executive officers to align their financial interests with regulatory requirements may impose substantial additional obligationsthose of our stockholders. Accordingly, effective January1, 2019, our Board of Directors adopted a formal stock ownership policy that requires our CEO to achieve a stock ownership level equal to the value of common stock that is five times the value of his annual base salary within five years of the effective date of the stock ownership policy. The Compensation Committee also designated that NEOs are subject to the stock ownership policy. The stock ownership level for our NEOs is three times the value of their respective annual base salaries to be achieved within five years of the effective date of our stock ownership policy. None of our executive officers have been in their position long enough to be required to meet the minimum stock ownership guidelines.
Our non-employee directors are also subject to the stock ownership policy discussed above under “Stock Ownership Guidelines for Directors.”
Anti-Hedging and Pledging Policies
We have a policy prohibiting directors, executive officers and certain other designated employees from speculative trading in our securities, including hedging transactions, short selling, and trading in put options, call options, swaps or collars or holding our securities in margin accounts. We also have a policy prohibiting directors, executive officers and certain other designated employees from pledging Gulfport securities. To our knowledge, all individuals are in compliance with these policies.
Termination and Change of Control Benefits
As noted above, all of our NEOs are parties to Employment Agreements with the Company providing certain payments and benefits in the event of a termination under specific circumstances. The agreements are designed to avoid distraction potentially detrimental to stockholder value upon a change in control and to enhance protection for the executives in connection with such events. These agreements are described in more detail under “Employment Agreements and Termination and Change of Control Benefits.”
Perquisites and Other Personal Benefits
We provide our NEOs with a limited number of perquisites or other personal benefits, primarily consisting of life insurance premiums and Company-sponsored sporting events tickets. We believe these limited benefits help provide a competitive compensation package. The value of these benefits is disclosed in the “Summary Compensation Table.”
Accounting Implications of Executive Compensation Policy
We are required to recognize compensation expense of all stock-based awards pursuant to the provisions of FASB ASC Topic 718, “Compensation-Stock Compensation.” Under U.S. generally accepted accounting principles, or GAAP, only vested shares are included in basic shares outstanding. Also, under GAAP, non-vested shares are included in diluted shares outstanding when the effect is dilutive.
The Compensation Committee believes that linking a large portion of our executive officers’ compensation to both performance-based long-term equity incentive awards and performance-based bonus arrangements, with meaningful performance metrics, appropriately aligns our executives’ interests with those of our stockholders and are consistent with market practices. The Compensation Committee also believes that our current compensation policies and practices enhance retention of executive talent through multi-year vesting of stock awards and discourage unnecessary and excessive risk taking. The Compensation Committee further believes that our other compensation policies and practices, such as our policy prohibiting pledging and hedging of our stock by our executive officers and directors, as well as the lack of significant perquisites and absence of pension or supplemental retirement benefits (aside from those afforded under our broad-based 401(k) plan) for our
30 2020 ANNUAL REPORT | |
|
executive officers are consistent with prudent compensation philosophy and the interests of our stockholders. The Compensation Committee will continue to consider the outcome of our stockholders’ future “say-on-pay” votes when making compensation decisions for our NEOs.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on usits review and discussion with management, the Compensation Committee recommended that the Compensation Discussion and Analysis be included in this filing.
Respectfully submitted by the Compensation Committee:
Ben Morris, Chairman
Deborah Adams
John Somerhalder
Dated: April30, 2021
Compensation Committee Interlocks and Insider Participation
No member of our Compensation Committee during the past fiscal year is or has ever been an officer or employee of ours or has engaged in any related party transaction in which our Company was a participant. None of our executive officers during the past fiscal year serves, or has served during the past fiscal year, as a member of the Board of Directors or Compensation Committee of any other company that has one or more executive officers serving, or that has served during the past fiscal year, as a member of our Board of Directors or Compensation Committee.
| | 2020 ANNUAL REPORT 31 |
SUMMARY COMPENSATION TABLE |
The following table provides information concerning compensation for the fiscal years ended December31, 2020, December31, 2019 and December31, 2018 of our principal executive officer, our current and former principal financial officers and our management, cause usnext three most highly paid executive officers.
Name and Principal Position | Year | Salary
($) | Bonus
($)(1) | Stock
Awards
($)(2) | Non-Equity
Incentive Plan
Compensation
($)(3) | All Other
Compensation
($)(4) | Total
($) |
David M. Wood | 2020 | $744,193 | — | $ 315,761 | $1,694,301 | $ 19,398 | $2,773,653 |
Chief Executive Officer and President | 2019 | $782,840 | — | $5,083,848(5) | $ 521,250 | $ 36,080 | $6,424,018 |
| 2018 | $ 11,538 | — | — | — | $ 347 | $ 11,885 |
Quentin R. Hicks | 2020 | $402,124 | — | $ 74,662 | $ 612,796 | $ 15,420 | $1,105,002 |
Executive Vice President, | 2019 | $138,944 | $ 150,000 | — | $ 66,406 | $ 80,825 | $ 436,175 |
Chief Financial Officer | 2018 | — | — | — | — | — | — |
Donnie Moore | 2020 | $477,810 | — | $ 137,663 | $ 768,136 | $ 18,461 | $1,402,070 |
Executive Vice President, | 2019 | $459,398 | — | $1,233,129(6) | $ 252,500 | $ 29,870 | $1,974,897 |
Chief Operating Officer | 2018 | $413,581 | $ 400,000 | $1,200,001(7) | $ 292,485 | $ 10,772 | $2,316,835 |
Patrick K. Craine | 2020 | $411,590 | — | $ 76,419 | $ 627,214 | $ 15,420 | $1,130,643 |
Executive Vice President, | 2019 | $259,333 | $ 50,000 | $1,099,169(8) | $ 120,169 | $ 9,052 | $1,537,723 |
General Counsel and Corporate Secretary | 2018 | — | — | — | — | — | — |
Michael Sluiter(9) | 2020 | $340,619 | — | $ 56,701 | $ 321,049 | $ 15,508 | $ 733,877 |
Senior Vice President of Reservoir | 2019 | $360,004 | $ 150,000 | $1,573,878(10) | $ 108,000 | $ 72,099 | $2,263,981 |
| 2018 | — | — | — | — | — | — |
No assurance can be given that we will be able to identify additional suitable acquisition opportunities, negotiate acceptable terms, obtain financing for acquisitions on acceptable terms or successfully acquire identified targets. Our failure to achieve consolidation savings, to integrate the acquired businesses and assets into our existing operations successfully or to minimize any unforeseen operational difficulties could have a material adverse effect on our financial condition and results of operations. The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our earnings and growth. Our financial position and results of operations may fluctuate significantly from period to period,Form 10-K. Restricted stock unit values are based on whether or not significant acquisitions are completedthe closing price of the Company’s common stock on the grant date. In valuing the performance share unit awards, the Company used a Monte Carlo simulation. Performance share units vest based on performance and continued service over a three-year period common and the maximum award opportunity for each NEO for the 2019 PSU awards as of the grant date is as follows: Mr. Wood 457,318, Mr. Moore 485,484, Mr. Craine 280,646 and Mr. Sluiter 232,258. The shares granted in particular periods.
Properties we acquire may not produce as projected, and we may be unable to determine reserve potential, identify liabilities associated with the properties that we acquire or obtain protection from sellers against such liabilities.
Acquiring oil and natural gas properties requires us to assess reservoir and infrastructure characteristics, including recoverable reserves, development and operating costs and potential environmental and other liabilities. Such assessments are inexact and inherently uncertain. In2020 were forfeited in connection with the
assessments, we perform a reviewadoption of the
subject properties, but such a review will not necessarily reveal all existing or potential problems. InRevised 2020 Incentive Compensation Program.32 2020 ANNUAL REPORT | |
|
| | 2020 ANNUAL REPORT 33 |
2020 GRANTS OF PLAN-BASED AWARDS |
The following table provides information concerning each grant of an award made to our expectations.NEOs in the fiscal year ended December31, 2020 under any Company plan.
| |
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards(1)
| Estimated Future Payouts under
Equity Incentive Plan Awards | All Other
Stock Awards: Number of
Shares of Stock
or Units
(#)(2) | Grant Date
Fair Value of
Stock
Awards
($)(3) |
Name | Grant
Date | Threshold
($) | Target
($) | Maximum
($) | Threshold
(#) | Target
(#) | Maximum
(#) |
David M. Wood | 3/11/20 | — | — | — | — | — | — | 809,644 | $315,761 |
Chief Executive | 3/11/20 | $ 781,875 | $1,563,750 | $3,127,500 | — | — | — | — | — |
Officer and | 3/11/20 | $ 889,383 | $2,371,688 | $5,929,220 | — | — | — | — | — |
President | 8/3/20 | $ 586,407 | $2,606,250 | $2,606,250 | — | — | — | — | — |
Quentin R. Hicks | 3/11/20 | — | — | — | — | — | — | 191,441 | $ 74,662 |
Chief Financial | 3/11/20 | $ 286,875 | $ 573,750 | $1,147,500 | | | | — | — |
Officer | 3/11/20 | $ 48,371 | $ 128,988 | $ 322,470 | | | | | |
| 8/3/20 | $ 210,375 | $ 935,000 | $ 935,000 | | | | | |
Donnie Moore | 3/11/20 | — | — | — | — | — | — | 352,981 | $137,663 |
Chief Operating | 3/11/20 | $ 378,750 | $ 757,500 | $1,515,000 | — | — | — | — | — |
Officer | 3/11/20 | $ 306,314 | $ 816,838 | $2,042,095 | — | — | — | — | — |
| 8/3/20 | $ 255,657 | $ 1,136,250 | $1,136,250 | | | | | |
Patrick K. Craine | 3/11/20 | — | — | — | — | — | — | 195,945 | $ 76,419 |
Executive Vice | 3/11/20 | $ 293,625 | $ 587,250 | $1,174,500 | — | — | — | — | — |
President, | 3/11/20 | $ 49,509 | $ 132,023 | $ 330,058 | — | — | — | — | — |
General Counsel and Corporate Secretary | 8/3/20 | $ 215,325 | $ 957,000 | $ 957,000 | — | — | — | — | — |
Michael Sluiter | 3/11/20 | — | — | — | — | — | — | 145,386 | $ 56,701 |
Senior Vice | 3/11/20 | $ 194,400 | $ 388,800 | $ 777,600 | — | — | — | — | — |
President of | 3/11/20 | $ 40,365 | $ 107,640 | $ 269,100 | — | — | — | — | — |
Reservoir | 8/3/20 | $ 105,300 | $ 468,000 | $ 468,000 | — | — | — | — | — |
34 2020 ANNUAL REPORT | |
|
OUTSTANDING EQUITY AWARDS AT 2020 FISCAL YEAR-END |
The following table provides information concerning equity awards outstanding for our NEOs and our next three most highly paid executive officers at December31, 2020. All grants received in 2020 were forfeited on August4, 2020 in connection with the adoption of the Revised 2020 Incentive Compensation Program.
| Stock Awards |
Name | Number of
Shares or
Units of Stock
That Have
Not Vested(1)
(#) | Market Value of
Shares or
Units of Stock
That Have
Not Vested(1)
($) | Equity Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other Rights
That Have
Not Vested
(#)(2) | Equity Incentive
Plan Awards:
Market of
Payout Value of
Unearned Shares,
Units or Other
Rights That Have
Not Vested
($)(2) |
David M. Wood(3) | 233,740 | $9,350 | 114,330 | $4,573 |
Quentin R. Hicks(4) | — | — | — | — |
Donnie Moore(5) | 207,543 | $8,302 | 121,371 | $4,855 |
Patrick K. Craine(6) | 141,510 | $5,660 | 70,162 | $2,806 |
Michael Sluiter(7) | 157,414 | $6,297 | 58,065 | $2,323 |
| | 2020 ANNUAL REPORT 35 |
The following table provides the number of shares acquired upon vesting of restricted stock awards for our named executive officers.
| Stock Awards |
Name | Number
of Shares
Acquired on
Vesting
(#) | Value
Realized on
Vesting(1)
($) |
David M. Wood(2) | 116,870 | $116,870 |
Quentin R. Hicks(3) | — | — |
Donnie Moore | 126,628 | $122,057 |
Patrick K. Craine(4) | 70,755 | $ 87,302 |
Michael Sluiter(5) | 78,708 | $ 78,708 |
36 2020 ANNUAL REPORT | |
|
We maintain a retirement savings plan, or a 401(k) Plan, for the benefit of our eligible employees who have attained the age of 18. Currently, employees may incur losseselect to defer their compensation up to the statutorily prescribed limit. During the year, we make a safe harbor contribution based on a formula that provides a company match of 100% of the first 4% of eligible compensation and a 50% match of deferrals that exceed 4% of compensation but do not exceed 6% of compensation with each pay period. We also have the ability to make an additional, discretionary contribution based on each eligible employee’s eligible annual compensation for the prior calendar year. All contributions made by us on behalf of an employee are 100% vested when contributed. The 401(k) Plan is intended to qualify under Sections 401(a) and 501(a) of the Code. Contributions to the 401(k) Plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) Plan, and all contributions are deductible by us when made.
2019 AMENDED AND Restated Stock Incentive Plan |
The Stock Incentive Plan, which amended and restated our 2013 Restated Stock Incentive Plan, was adopted and approved by our stockholders during the 2019 Annual Meeting. The Stock Incentive Plan authorizes the grant of various forms of stock-based compensation, referred to as equity awards. The Board believes that stock-based compensation is a very important factor in attracting and retaining experienced and talented employees who can contribute significantly to the management, growth and profitability of our business. This authorization enabled us to attract and retain the services of employees, consultants and directors who will contribute to our long-term success and to provide incentives that are linked directly to increases in share value that will benefit our stockholders. The Board believes that stock-based compensation is critical for alignment of the interests of our management with the interests of our stockholders. The availability of equity awards not only increases employees’ focus on the creation of stockholder value, but also enhances employee retention and generally provides increased motivation for our employees to contribute to the future success of the Company.
The Stock Incentive Plan provides eligible recipients an opportunity to receive awards and benefit from increases in value of our common stock through the granting of incentive stock options, nonstatutory stock options, restricted awards (restricted stock and restricted stock units), performance awards and stock appreciation rights. The Compensation Committee serves as the plan administrator and as of December31, 2020, an aggregate of 8,471,149shares of restricted common stock, restricted stock units and incentive stock options had been granted under this plan and there remained 4,028,851shares available for future grants under this plan. The amendment and restatement of the Stock Incentive Plan added 5,000,000shares to the Stock Incentive Plan’s share reserve, by increasing the maximum number of shares available for issuance from 7,500,000shares to 12,500,000shares.
On March16, 2020, the Compensation Committee (the “Compensation Committee”) of the Board of Directors (the “Board”) of Gulfport Energy Corporation (the “Company”) recommended the approval of, and the Board approved, the Company’s 2020 Incentive Plan (the “2020 Incentive Plan”).
The 2020 Incentive Plan was designed to provide to select employees of the Company incentive compensation opportunities, which were tied to the achievement of one or more performance goals (“Incentive Awards”), and service-based compensation opportunities (“Standard Awards” and, together with the Incentive Awards, “Cash Awards”). The 2020 Incentive Plan was administered by the Board or a committee thereof to which the Board delegated authority to administer the 2020 Incentive Plan (the “Administrator”). In general, the 2020 Incentive Plan focused on (i) continued employment or performance of services for the Company until relevant vesting, forfeiture or clawback dates, as the case may be with respect to Standard Awards and (ii) achievement of objectives and goals (“Performance Targets”) relating to certain financial and operational metrics (“Performance Factors”) over a period of time (the “Performance Period”) with respect to Incentive Awards. The above vesting dates, Performance Targets, Performance Factors and Performance Period were to be determined by the Administrator. For avoidance of doubt, Incentive Awards were also subject to time-based vesting conditions such as the participant’s continued employment or performance of services for the Company through the relevant Performance Period or such other date(s) as may be determined by the Administrator. Under the 2020 Incentive Plan, the earning of an Incentive Award and payout opportunity was contingent upon meeting the Incentive Award’s applicable threshold performance levels. If such threshold performance levels were satisfied, the payout amount varies for performance above or below the pre-established target performance levels.
| | 2020 ANNUAL REPORT 37 |
The preceding summary of the 2020 Incentive Plan is qualified in its entirety by reference to the full text of such plan, a copy of which is attached as Exhibit 10.7 hereto and incorporated herein by reference.
2020 GRANTS OF CASH AWARDS |
On March11, 2020, the Compensation Committee approved Cash Awards to selected employees, including the Company’s named executive officers, which was granted effective as of March16, 2020 (the “Grant Date”) under the 2020 Incentive Plan. David M. Wood, President and Chief Executive Officer, was granted a Standard Award equal to $834,000 and an Incentive Award with a target amount equal to $2,371,688. Donnie Moore, Chief Operating Officer, was granted a Standard Award equal to $505,000 and an Incentive Award with a target amount equal to $816,838. Quentin R. Hicks, Chief Financial Officer, was granted a Standard Award equal to $425,000 and an Incentive Award with a target amount equal to $128,988. Patrick K. Craine, General Counsel and Corporate Secretary, was granted a Standard Award equal to $435,000 and an Incentive Award with a target amount equal to $132,023. Michael Sluiter, Senior Vice President, Reservoir Engineering, was granted a Standard Award equal to $360,000 and an Incentive Award with a target amount equal to $107,640.
Each Standard Award was paid immediately, but is subject to a repayment obligation of the Standard Award in the event of the participant’s termination of employment with the Company or related company, prior to the earlier of the first anniversary of the Grant Date or the occurrence of a change in control (“Clawback Period”) for reasons other than due to (i) the Company’s or related company’s termination of the participant without cause, (ii) the participant’s voluntary termination of employment with the Company or related company for good reason, or (iii) the participant’s death (each, a “Qualified Termination”).
Each Incentive Award was subject to a Performance Period of January1, 2020 through December31, 2020. Different vesting periods applied to separate one-third portions of each Incentive Award (each one-third portion, an “Incentive Tranche Amount”). In general, the applicable Incentive Tranche Amount was scheduled to vest over the period commencing on the Grant Date and ending, as the case may be, on each of December31, 2020, December31, 2021 and December31, 2022 (each period, a “Subject Restricted Period”), subject to the participant’s continuous employment and attainment of certain financial, operational and total shareholder return Performance Targets (“Qualified Performance”). Payment of a vested Incentive Tranche Amount (payment may be adjusted by the Administrator pursuant to the Plan) would have been made within 30 days following the vesting date, subject to that Incentive Tranche Amount being earned as a result of title defects in the properties in which we invest.
It is our practice in acquiring oil and natural gas leases or interests notattainment of Qualified Performance. If the participant incurred a Qualified Termination during a Subject Restricted Period, then the participant would have remained eligible to incur the expense of retaining lawyersreceive any unpaid Incentive Tranche Amounts, subject to examine the title to the mineral interest. Rather, we rely upon the judgment of oil and gas lease brokers or landmen who perform the fieldwork in examining records in the appropriate governmental office before attempting to acquire a lease in a specific mineral interest. The existence of a material title deficiency can render a lease worthless and can adversely affect our results of operations and financial condition.
Prior to the drilling of an oil or natural gas well, however, it is the normal practice in our industry for the person or company acting as the operator of the well to obtain a preliminary title review to ensure there are no obvious defects in title to the well. Frequently,those Incentive Tranche Amounts being earned as a result of
such examinations,the attainment of Qualified Performance. In general, earned Incentive Tranche Amounts would have been prorated if the Qualifying Termination occurs prior to a change in control, and no proration will occur if the Qualifying Termination occurs during the 24-month period following a change in control. In either event, the applicable earned and unpaid Incentive Tranche Amounts would have been paid (payments may be adjusted by the Administrator pursuant to the 2020 Incentive Plan) within 30 days after Qualified Termination, and if Qualified Termination occurred during the Performance Period, the applicable Qualified Performance determination would have been made at the time of Qualified Termination. If the participant incurred a termination other than a Qualified Termination during a Subject Restricted Period, the participant would have forfeited all rights to receive any payment of the Incentive Tranche Amount that related to Subject Restricted Period, regardless of whether Qualified Performance was attained. As described above, all unpaid amounts with respect to awards granted under the 2020 Incentive Plan were forfeited as of August4, 2020 in connection with the adoption of the Revised 2020 Incentive Compensation Program.The preceding summary of the Standard Awards and Incentive Awards is qualified in its entirety by reference to the full text of the award agreement evidencing the grant of Standard Awards and Incentive Awards, a copy of which is attached as Exhibit 10.8 hereto and incorporated herein by reference.
38 2020 ANNUAL REPORT | |
|
EQUITY COMPENSATION PLAN INFORMATION |
The following table sets forth, as of December31, 2020, certain curative work must be doneinformation with respect to correct defectsall compensation plans under which equity securities are authorized for issuance.
Plan Category | Number of
securities to
be issued upon
exercise of
outstanding
options,
warrants and
rights
(a)(1)(2)(3) | Weighted
average
exercise price
of outstanding
options,
warrants and
rights
(b)(3) | Number of
securities
remaining
available for
future issuance
under equity
compensation
plans excluding
securities
reflected in
column
(a) |
Equity compensation plans approved by security holders(1) | 2,543,108 | $ — | 4,028,851 |
Employment Agreements and Termination and Change of Control Benefits
As indicated above, our NEOs are parties to an Employment Agreement with the Company. Pursuant to the Employment Agreements (“Employment Agreements”) with Messrs. Wood, Moore, Hicks, Craine and Sluiter (“Covered NEOs”), each Employment Agreement provides for an initial term that extends through December31, 2023; provided that the agreement will automatically renew for successive one-year terms unless the Company or the Covered NEOs provide written notice not to renew at least 90 days before the end of the initial term or any renewal term. If a change of control (as described in the marketabilityEmployment Agreement) occurs during the term, the term will be extended to the later of the title, and such curative work entails expense. Our failure to cure any title defects may delay or prevent us from utilizing the associated mineral interest, which may adversely impact our ability in the future to increase production and reserves. Additionally, undeveloped acreage has greater risk of title defects than developed acreage. If there are any title defects or defects in the assignment of leasehold rights in properties in which we hold an interest, we will suffer a financial loss.
Recent decisions by the Ohio Supreme Court interpreting the Ohio Dormant Mineral Act relating to preservation of mineral rights by surface owners could require certain curative efforts to vest title in a portion of our leasehold acreage, increase our leasehold expenses, subject us to payment of additional royalties and/or result in the loss of some of our leasehold acreage in Ohio.
On September 15, 2016, the Ohio Supreme Court issued a series of decisions relating to the Ohio Dormant Mineral Act, which we refer to as the ODMA. In the lead case, Corban v. Chesapeake Exploration L.L.C., the court concluded that the 1989 versionoriginal expiration date of the
ODMA did not transfer ownership of dormant mineral rights automatically, by operation of law. Instead, prior to 2006, surface owners were required to bring a quiet title action in order to establish abandonment of mineral rights. After June 30, 2006, (theterm or the date that is 24months after the effective date of the
2006 versionchange of control. The Employment Agreements provide each NEO with, among other things: (i) an annual base salary of $834,000, $505,000, $425,000, $435,000 and $360,000, for Messrs. Wood, Moore, Hicks, Craine and Sluiter, respectively, (ii) eligibility to earn a target annual bonus under the Company’s annual incentive plan equal to 125%, 100%, 90%, 90% and 60% of base salary for Messrs. Wood, Moore, Hicks ,Craine and Sluiter, respectively, (iii) eligibility for annual grants of equity awards as determined in the sole discretion of the
ODMA)Compensation Committee pursuant to the Company’s equity compensation plans; provided that, with respect to the calendar year ending December31, 2020, each of Messrs. Wood, Moore, Hicks and Craine were entitled to receive awards with a target aggregate fair value of 500%,
surface owners350%, 200% and 200% of base pay, respectively, and (iv) benefits that are
requiredcustomarily provided to
followsimilarly situated executives of the
statutory noticeCompany. In addition, our NEOs will be entitled to receive specified payments and
recording procedures enactedbenefits upon certain termination events pursuant to the Employment Agreements, including termination following a change of control. The Compensation Committee believes that these provisions will encourage our NEOs to remain in
2006. We have assessedour employment in the
impactevent of
a change of control of the Company and during circumstances which indicate that a change of control might occur. The Compensation Committee believes termination and change of control benefits are important in maintaining strong leadership and in encouraging retention in these
recent Ohio Supreme Court decisionssituations and encourages our NEOs to act in the best interests of stockholders without distraction based on
our operationsuncertainty regarding their employment status. Under the Employment Agreements, if a NEO’s employment is terminated without “cause” by the Company or by the NEO for “good reason” during such time that is not within the 24month period following a “change of control” (as such terms are defined or described in
Ohio where the
majorityEmployment Agreements), such NEO will be entitled to severance compensation equal to:• 100% of annual base salary and target annual bonus;
• pro-rata target annual bonus;
• pro-rata vesting of the NEO’s unvested equity awards (with performance award vesting based on performance through the termination date);
| | 2020 ANNUAL REPORT 39 |
• immediate vesting of any Company matching or other contributions to the Company’s non-qualified deferred compensation plans, if any (“Company Non-Qualified Contributions”);
• a lump sum payment of any PTO pay accrued but unused through the termination date; and
• a lump sum payment equal to the NEO’s monthly COBRA premium for a 12-month period.
If, however, a NEO’s employment is terminated without cause by the Company or by the NEO for good reason, in each case, within 24months following a change of control, a NEO will be entitled to severance compensation equal to:
• 200% of annual base salary and target annual bonus for Messrs. Wood, Moore, Hicks and Craine and 100% of annual base salary and target annual bonus for Mr.Sluiter;
• pro-rata target annual bonus;
• immediate vesting of the NEO’s unvested equity awards (with performance award vesting based on performance through the termination date);
• immediate vesting of any Company Non-Qualified Contributions; and
• a lump sum payment equal to the NEO’s monthly COBRA premium for an 18-month period.
Notwithstanding the terms described above, the agreement each NEO entered into in connection with the Revised 2020 Incentive Compensation Program provides that the NEO will not be entitled to any severance amount with respect to a pro-rated annual bonus for a termination that occurs in 2020 or 2021. In addition, upon a termination without cause or a resignation for good reason (i) the Retention Component of the Revised 2020 Incentive Compensation Program will be fully vested and no longer subject to clawback and (ii) the Performance Component of the Revised 2020 Incentive Compensation Program will remain outstanding and eligible to vest based on actual performance through the end of the performance period as if the NEO’s employment had not terminated, and any vested portion of the performance component will no longer be subject to clawback.
Under the Current Employment Agreements:
“Good reason” is generally defined as (i) the elimination of the NEO’s position, a material reduction in the duties and/or reassignment of the NEO to a new position of materially less authority; or (ii) a material reduction in the NEO’s base salary, in either case, subject to a cure period of 30 days.
“Cause” is generally defined as (i) the NEO’s willful and continued failure to perform substantially such NEO’s duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) or (ii) the NEO’s willful engaging in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.
Severance benefits payable under the Employment Agreements are generally conditioned on timely execution of a waiver and release of claims. Each Employment Agreement also contains a one-year post-employment non-solicitation clause and standard confidentiality, trade secrets and cooperation provisions.
40 2020 ANNUAL REPORT | |
|
Termination, Resignation or Change of Control |
The following tables provide information regarding potential payments as of December31, 2020 to each of our acreagenamed executive officers as of December31, 2020 in connection with certain termination events, including a termination related to a change of control of the Company.
Benefits and Payments Upon Termination(1) | Termination
Upon
Death or
Disability(2) | Termination
by Company
Other than
for Cause | Termination
for Cause | Involuntary
Termination
Within
24 Months
Following
Change of
Control |
David M. Wood | | | | |
Severance Payments | — | $1,876,500(3) | — | $3,753,000(4) |
Long-Term Incentives: | | | | |
Unvested Restricted Stock Units(5) | $ 9,350 | $ 2,630 | — | $ 9,350 |
Unvested Performance Stock Units(5) | $ 9,146 | $ 5,621 | — | $ 9,146 |
Benefits Continuation(6)(7) | — | $ 17,293 | — | $ 25,940 |
Total | $ 18,496 | $1,902,044 | — | $3,797,436 |
Quentin R. Hicks | | | | |
Severance Payments | — | $ 807,500(3) | — | $1,615,000(4) |
Long-Term Incentives: | | | | |
Unvested Restricted Stock Units(5) | — | — | — | — |
Unvested Performance Stock Units(5) | — | — | — | — |
Benefits Continuation(6)(7) | — | $ 21,383 | — | $ 32,074 |
Total | — | $ 828,883 | — | $1,647,074 |
Donnie Moore | | | | |
Severance Payments | | $1,010,000(3) | — | $2,020,000(4) |
Long-Term Incentives: | | | | |
Unvested Restricted Stock Units(5) | $ 8,302 | $ 1,382 | — | $ 8,302 |
Unvested Performance Stock Units(5) | $ 9,710 | $ 4,540 | — | $ 9,710 |
Benefits Continuation(6)(7) | — | $ 21,239 | — | $ 31,859 |
Total | $ 18,012 | $1,037,161 | — | $2,069,871 |
Patrick K. Craine | | | | |
Severance Payments | — | $ 826,000(3) | — | $1,653,000(4) |
Long-Term Incentives: | | | | |
Unvested Restricted Stock Units(5) | $ 5,660 | $ 867 | — | $ 5,660 |
Unvested Performance Stock Units(5) | $ 5,613 | $ 2,624 | — | $ 5,613 |
Benefits Continuation(6)(7) | — | $ 21,239 | — | $ 31,859 |
Total | $ 11,273 | $ 850,730 | — | $1,696,132 |
Michael Sluiter | | | | |
Severance Payments | — | $ 576,000(3) | — | $ 576,000(4) |
Long-Term Incentives: | | | | |
Unvested Restricted Stock Units(5) | $ 6,297 | $ 1,316 | — | $ 6,297 |
Unvested Performance Stock Units(5) | $ 4,645 | $ 2,172 | — | $ 4,645 |
Benefits Continuation(6)(7) | — | $ 21,239 | — | $ 31,859 |
Total | $ 10,942 | $ 600,727 | — | $ 618,801 |
| | 2020 ANNUAL REPORT 41 |
If we are unable to complete capital projects in a timely manner, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Delays related to capital spending programs involving engineering, procurement and construction of facilities (including improvements and repairs to our existing facilities) could adversely affect our ability to achieve forecasted internal rates of return and operating results. Delays in making required changes or upgrades to our facilities could subject us to fines or penaltiesrepresenting their earned but unpaid compensation, as well as affect our ability to supply certain products we produce. Such delays may arise as a resultan amount of unpredictable factors, many of which are beyond our control, including:
denial of or delay in receiving requisite regulatory approvals and/or permits;
unplanned increases in the cost of construction materials or labor;
disruptions in transportation of components or construction materials;
adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of vendors or suppliers;
shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages;
market-related increases in a project's debt or equity financing costs; and
nonperformance by, or disputes with, vendors, suppliers, contractors or subcontractors.
Any one or more of these factors could have a significant impact on our ongoing capital projects.
Our Canadian oil sands projects are complex undertakings and may not be completed at our estimated cost or at all.
We, through our wholly-owned subsidiary Grizzly Holdings Inc., own a 24.9% interest in Grizzly. As of December 31, 2018, Grizzly had approximately 830,000 net acres under lease in the Athabasca, Peace River and Cold Lake oil sands regions of Alberta, Canada. Grizzly has high-graded three oil sands projects to various stages of development. Grizzly commenced commercial production from its Algar Lake Phase 1 SAGD oil sand project during the second quarter of 2014 and has regulatory approval for up to 11,300 barrels per day of bitumen production. Algar Lake production peaked at 2,200 barrels per day during the ramp-up phase of the SAGD facility, however, in April 2015, Grizzly made the decision to suspend operations at its Algar Lake facility dueseverance equal to the commodity price dropannual base salary and itstarget bonus in effect on project economics. Grizzly continues to monitor market conditions as it assesses startup plans for the facility. We reviewed our investment in Grizzly for impairment, resulting in an aggregate other than temporary impairment write down of $23.1 million for the year ended December 31, 2016. As of and during the years ended December 31, 2018 and 2017, commodity prices had increased as compared to 2016. We engaged an independent third party to perform a sensitivity analysis based on updated pricing as of December 31, 2018,2020 (the “severance payment”), payable in accordance with the terms of the agreement.
42 2020 ANNUAL REPORT | |
|
Pursuant to Item 402(u) of Regulation S-K, we are disclosing the pay ratio and supporting information comparing the median of the annual total compensation of our investment in Grizzly may result in the future. The Algar Lakeemployees (including full-time, part-time, seasonal and temporary employees) other pending and proposed projects are complex, subject to extensive governmental regulation and will require significant additional financing. There can be no assurance that the necessary governmental approvals will be granted or that such financing could be obtained on commercially reasonable terms or at all, or that if one or more of these projects are completed that they will be successful or that we realize a return on our investment.
The unavailability, high cost or shortages of rigs, equipment, raw materials, supplies, oilfield services or personnel may restrict our operations.
The oil and natural gas industry is cyclical, which can result in shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies and personnel. When shortages occur, the costs and delivery times of rigs, equipment and supplies increase and demand for and wage rates of qualified drilling rig crews also rise with increases in demand. In accordance with customary industry practice, we rely on independent third party service providers to provide most of the services necessary to drill new wells. If we are unable to secure a sufficient number of drilling rigs at reasonable costs, our financial condition and results of operations could suffer, and we may not be able to drill all of our acreage before our leases expire. Shortages of drilling rigs, equipment, raw materials (particularly sand and other proppants), supplies, personnel, trucking services, tubulars, fracking and completion services and production equipment could delay or restrict our exploration and development operations, which in turn could impair our financial condition and results of operations.
Oil and natural gas production operations, especially those using hydraulic fracturing, are substantially dependent on the availability of water. Restrictions on the ability to obtain water may impact our operations.
Water is an essential component of oil and natural gas production during the drilling, and in particular, hydraulic fracturing, process. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our exploration and production operations, could adversely impact our operations.
We rely on a few key employees whose absence or loss could disrupt our operations resulting in a loss of revenues.
Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services, particularly the loss of David M. than Mr.Wood, our Chief Executive Officer and President,
orand the annual total compensation of Mr.Wood, our
Chief Executive Officer and President. The pay ratio is calculated in a manner consistent with Item 402(u) of Regulation S-K.For the year ended December31, 2020, our last completed fiscal year:
• The median of the annual total compensation of all our employees, other senior managementthan Mr.Wood was $114,103.
• The annual total compensation of Mr.Wood was $2,773,653.
Based on this information, for 2020 the ratio of the annual total compensation of Mr.Wood, our Chief Executive Officer and technical personnel, could disrupt our operations and have a material adverse effectPresident, to the median of the annual total compensation of all other employees was approximately 24:1.
We selected December31, 2020 as the date upon which we identified the “median employee.” To identify the median employee, we examined the Medicare Taxable Earnings as reported on our financial condition and results of
operations.Our executives are not restricted from competing with us if they cease to beIRS Form W-2 (Box 5) for 2020 for all individuals employed by us except under certain limited circumstances prohibiting competition while making useon December31, 2020 (other than Mr.Wood).Once we identified our median employee, we calculated that employee’s annual total compensation for 2020 in the same manner that we determined the total compensation of our trade secrets. We are party to an employment agreement with certain of ournamed executive officers. As a practical matter, however, employment agreements may not assure the retention of our employees. Further, we do not maintain “key person” life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees.
Estimates of oil and natural gas reserves are uncertain and may vary substantially from actual production.
There are numerous uncertainties associated with estimating quantities of proved reserves and in projecting future rates of production and timing of expenditures. The reserve information herein represents estimates prepared by (i) Netherland, Sewell & Associates, Inc., or NSAI, with respect to our Utica Shale acreage and our WCBB and Hackberry fields at December 31, 2018, 2017 and 2016, our SCOOP acreage at December 31, 2018 and 2017 and our Niobrara field and our overriding royalty and non-operated interests at December 31, 2018 and (ii) our personnel with respect to our Niobrara field and our overriding royalty and non-operated interests at December 31, 2017, and 2016. Petroleum engineering is not an exact science. Information relating to our proved oil and natural gas reserves is based upon engineering estimates. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, future site restoration and abandonment costs, the assumed effects of regulations by governmental agencies and assumptions concerning future oil and natural gas prices, future operating costs, severance and excise taxes, capital expenditures and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimatesofficers for purposes of the economically recoverable quantitiesSummary Compensation Table set forth above. This resulted in an annual total compensation of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material.
Estimates of reserves as of year-end 2018, 2017 and 2016 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2018, 2017 and 2016, respectively, in accordance with the revised guidelines of the SEC applicable to reserves estimates for such years. Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties.
The present value of future net revenues from our proved reserves is not necessarily the same as the current market value of our estimated oil and natural gas reserves. We base the estimated discounted future net revenue from our proved reserves for 2018, 2017 and 2016 on an average price equal to the unweighted arithmetic average of prices received on a field-by-field basis on the first day of each month within the 12-month period ended December 31, 2018, 2017 and 2016, respectively, in accordance with the revised guidelines of the SEC applicable to reserves estimates for such years.
Actual future net revenues from our oil and natural gas properties will also be affected by factors such as:
actual prices we receive for oil and natural gas;
the amount and timing of actual production;
supply of and demand for oil and natural gas; and
changes in governmental regulations or taxation.
The timing of both our production and our incurrence of costs in connection with the development and production of oil and natural gas properties will affect the timing of actual future net revenues from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flows may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general.
SEC rules could limit our ability to book additional proved undeveloped reserves in the future.
SEC rules require that, subject to limited exceptions, proved undeveloped reserves may only be booked if they relate to wells scheduled to be drilled within five years after the date of booking. This requirement has limited and may continue to limit
our ability to book additional proved undeveloped reserves as we pursue our drilling program. Moreover, we may be required to write down our proved undeveloped reserves if we do not drill those wells within the required five-year timeframe, because they have become uneconomic or otherwise.
The development of our proved undeveloped reserves may take longer and may require higher levels of capital expenditures than we currently anticipate.
Approximately 55.4% of our total estimated proved reserves at December 31, 2018, were proved undeveloped reserves and may not be ultimately developed or produced. Recovery of proved undeveloped reserves requires significant capital expenditures and successful drilling operations. The reserve data included in the reserve reports of our independent petroleum engineers assume that substantial capital expenditures are required to develop such reserves. We cannot be certain that the estimated costs of the development of these reserves are accurate, that development will occur as scheduled or that the results of such development will be as estimated. Delays in the development of our reserves, further decreases in commodity prices or increases in costs to drill and develop such reserves will reduce the future net revenues of our estimated proved undeveloped reserves and may result in some projects becoming uneconomical. In addition, delays in the development of reserves could force us to reclassify certain of our proved reserves as unproved reserves.
There are numerous uncertainties in estimating quantities of bitumen reserves and resources in connection with our equity investment in Grizzly and the indicated level of reserves or recovery of bitumen may not be realized.
There are numerous uncertainties in estimating quantities of bitumen reserves and resources, and the indicated level of reserves or recovery of bitumen may not be realized. In general, estimates of economically recoverable bitumen reserves and the future net cash flow from such reserves are based upon a number of factors and assumptions made as of the date on which the reserve and resource estimates were determined, such as geological and engineering estimates which have uncertainties, the assumed effects of regulation by governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from actual results. All such estimates are, to some degree, uncertain and classifications of reserves are only attempts to define the degree of uncertainty involved. For these reasons, estimates of the economically recoverable bitumen, the classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially.
Estimates with respect to reserves and resources that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves, rather than upon actual production history. Estimates based on these methods generally are less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history may result in variations in the estimated reserves. Reserve and resource estimates may require revision based on actual production experience. Reserve and resources estimates are determined with reference to assumed oil prices and operating costs. Market price fluctuations of oil prices may render uneconomic the recovery of certain grades of bitumen. The actual gravity or quality of bitumen to be produced from Grizzly's lands cannot be determined at this time.
The marketability of our production is dependent upon compressors, gathering lines, transportation barges and other facilities, certain of which we do not control. When these facilities are unavailable, our operations can be interrupted and our revenues reduced.
The marketability of our oil and natural gas production depends in part upon the availability, proximity and capacity of natural gas lines and transportation barges owned by third parties. In general, we do not control these transportation facilities and our access to them may be limited or denied. A significant disruption in the availability of these transportation facilities or our compression and other production facilities could adversely impact our ability to deliver to market or produce our oil and natural gas and thereby cause a significant interruption in our operations. With respect to our Utica Shale acreage where we are focusing a portion of our exploration and development activity, historically there has been no or only limited infrastructure in this area and the commencement of production from our initial and subsequent wells on our Utica Shale acreage has been delayed due to challenges in obtaining rights-of-way and acquiring necessary state and federal permitting and the completion of facilities by our midstream service provider.
If production from our Utica Shale or SCOOP acreage decreases due to decreased developmental activities, production related difficulties or otherwise, we may fail to meet our firm commitment delivery obligations under our firm transportation contracts, which will result in fees and may have a material adverse effect on our operations.
As of December 31, 2018, we had entered into firm transportation contracts to deliver approximately 1,205,000 MMBtu to 1,405,000 MMBtu per day for 2019 and 2020. See Item 1. “Business-Transportation and Takeaway Capacity.” Under these firm transportation contracts, we are obligated to deliver minimum daily volumes or pay fees for any deficiencies in deliveries. If production from our Utica Shale or SCOOP acreage decreases due to decreased developmental activities, taking into consideration the current low commodity price environment, production related difficulties or otherwise, we may be unable to meet our obligations under the existing firm transportation contracts, resulting in fees, which may be significant and may have a material adverse effect on our operations.
Substantially all of our producing properties are located in Eastern Ohio, Oklahoma and Louisiana, making us vulnerable to risks associated with operating in these regions.
Our largest fields by production are located in Eastern Ohio, Oklahoma and approximately five miles off the coast of Louisiana in a shallow bay with water depths averaging eight to ten feet. As a result, we may be disproportionately exposed to the impact of delays or interruptions of production in these geographic regions caused by weather conditions such as snow, ice, fog, rain, hurricanes or other natural disasters or lack of field infrastructure. Losses could occur for uninsured risks or in amounts in excess of any existing insurance coverage. We may not be able to obtain and maintain adequate insurance at rates we consider reasonable and it is possible that certain types of coverage may not be available.
Our identified drilling locations, which are part of our anticipated future drilling plans, are susceptible to uncertainties that could materially alter the occurrence or timing of their drilling.
We have identified over 1,000 drilling locations on our Ohio and Oklahoma properties assuming full development of all of our acreage. These drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including the availability of capital, oil and natural gas prices, inclement weather, costs, drilling results and regulatory changes. Because of these uncertainties, we do not know if the numerous potential drilling locations we have identified will ever be drilled or if we will be able to produce oil or natural gas from these or any other potential drilling locations. As such, our actual drilling activities may materially differ from those presently identified, which could adversely affect our business.
Drilling for and producing oil and natural gas are high-risk activities with many uncertainties that may result in a total loss of investment and adversely affect our business, financial condition or results of operations.
Our drilling activities are subject to many risks. For example, we cannot assure you that new wells drilled by us will be productive or that we will recover all or any portion of our investment in such wells. Drilling for oil and natural gas often involves unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient oil or natural gas to return a profit at then realized prices after deducting drilling, operating and other costs. The seismic data and other technologies we use do not allow us to know conclusively prior to drilling a well that oil or natural gas is present or that it can be produced economically. The costs of exploration, exploitation and development activities are subject to numerous uncertainties beyond our control, and increases in those costs can adversely affect the economics of a project. Further, our drilling and producing operations may be curtailed, delayed, canceled or otherwise negatively impacted as a result of other factors, including:
unusual or unexpected geological formations;
loss of drilling fluid circulation;
title problems;
facility or equipment malfunctions;
unexpected operational events;
shortages or delivery delays of equipment and services;
compliance with environmental and other governmental requirements; and
adverse weather conditions.
Any of these risks can cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution, environmental contamination or loss of wells and other regulatory penalties.
Operating hazards and uninsured risks may result in substantial losses and could prevent us from realizing profits.
Our operations are subject to all of the hazards and operating risks associated with drilling for and production of oil and natural gas, including the risk of fire, explosions, blowouts, surface cratering, uncontrollable flows of natural gas, oil and formation water, pipe or pipeline failures, abnormally pressured formations, casing collapses and environmental hazards such as oil spills, gas leaks, ruptures or discharges of toxic gases. In addition, our operations are subject to risks associated with hydraulic fracturing, including any mishandling, surface spillage or potential underground migration of fracturing fluids, including chemical additives. We may face liability for environmental damage caused by previous owners of properties purchased by us, which liabilities may or may not be covered by insurance. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigations and penalties, suspension of operations and repairs required to resume operations.
In accordance with what we believe to be customary industry practice, we historically have maintained insurance against some, but not all, of our business risks. Our insurance may not be adequate to cover any losses or liabilities we may suffer. Also, insurance may no longer be available to us or, if it is, its availability may be at premium levels that do not justify its purchase. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our financial condition, results of operations or cash flow. We may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows.
Our operations may be exposed to significant delays, costs and liabilities as a result of environmental, health and safety requirements applicable to our business activities.
We may incur significant delays, costs and liabilities as a result of federal, state and local environmental, health and safety requirements applicable to our exploration, development and production activities. These laws and regulations may, among other things: (i) require us to obtain a variety of permits or other authorizations governing our air emissions, water discharges, waste disposal or other environmental impacts associated with drilling, producing and other operations; (ii) regulate the sourcing and disposal of water used in the drilling, fracturing and completion processes; (iii) limit or prohibit drilling activities in certain areas and on certain lands lying within wilderness, wetlands, frontier, seismically active areas and other protected areas; (iv) require remedial action to prevent or mitigate pollution from former operations such as plugging abandoned wells or closing earthen pits; and/or (v) impose substantial liabilities and restrictions on our activities as a result of spills, pollution or failure to comply with regulatory filings. In addition, these laws and regulations may restrict the rate of oil or natural gas production. These laws and regulations are complex, change frequently and have tended to become increasingly stringent over time. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens, the suspension or revocation of necessary permits, licenses and authorizations (which could cause us to cease operations), the requirement that additional pollution controls be installed and, in some instances, issuance of orders or injunctions limiting or requiring discontinuation of certain operations. Under certain environmental laws that impose strict as well as joint and several liability, we may be required to remediate contaminated properties currently or formerly operated by us or facilities of third parties that received waste generated by our operations regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. In addition, the risk of accidental and/or unpermitted spills or releases from our operations could expose us to significant liabilities, penalties and other sanctions under applicable laws.
Moreover, public interest in the protection of the environment has tended to increase over time. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes more stringent and costly operating, waste handling, disposal and cleanup requirements, our business, prospects, financial condition or results of operations could be materially adversely affected.
Our development and exploratory drilling efforts and our well operations may not be profitable or achieve our targeted returns.
We acquire significant amounts of unproved property in order to further our development efforts and expect to continue to undertake acquisitions in the future. Development and exploratory drilling and production activities are subject to many risks, including the risk that no commercially productive reservoirs will be discovered. We acquire unproved properties and lease undeveloped acreage that we believe will enhance our growth potential and increase our earnings over time. However, we cannot assure you that all prospects will be economically viable or that we will not abandon our investments. Additionally, we cannot assure you that unproved property acquired by us or undeveloped acreage leased by us will be profitably developed, that new wells drilled by us in prospects that we pursue will be productive or that we will recover all or any portion of our investment in such unproved property or wells.
Drilling for oil and natural gas may involve unprofitable efforts, not only from dry wells but also from wells that are productive but do not produce sufficient commercial quantities to cover the drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and many factors can adversely affect the economics of a well or property. Drilling operations may be curtailed, delayed or canceled as a result of unexpected drilling conditions, equipment failures or accidents, shortages of equipment or personnel, environmental issues and for other reasons. In addition, wells that are profitable may not meet our internal return targets, which are dependent upon the current and expected future market prices for oil and natural gas, expected costs associated with producing oil and natural gas and our ability to add reserves at an acceptable cost. Drilling results in our newer oil and liquids-rich shale plays may be more uncertain than in shale plays that are more developed and have longer established production histories, and we can provide no assurance that drilling and completion techniques that have proven to be successful in other shale formations to maximize recoveries will be ultimately successful when used in newly developed shale formations.
Part of our strategy involves drilling in existing or emerging shale plays using the latest available horizontal drilling and completion techniques; therefore, the results of our planned exploratory drilling in these plays are subject to risks associated with drilling and completion techniques and drilling results may not meet our expectations for reserves or production.
Our operations involve utilizing the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, landing our well bore in the desired drilling zone, staying in the desired drilling zone while drilling horizontally through the formation, running our casing the entire length of the well bore and being able to run tools and other equipment consistently through the horizontal well bore. Risks that we face while completing our wells include, but are not limited to, being able to fracture stimulate the planned number of stages, being able to run tools the entire length of the well bore during completion operations and successfully cleaning out the well bore after completion of the final fracture stimulation stage. In addition, to the extent we engage in horizontal drilling, those activities may adversely affect our ability to successfully drill in one or more of our identified vertical drilling locations. Furthermore, certain of the new techniques we are adopting, such as infill drilling and multi-well pad drilling, may cause irregularities or interruptions in production due to, in the case of infill drilling, offset wells being shut in and, in the case of multi-well pad drilling, the time required to drill and complete multiple wells before any such wells begin producing. The results of our drilling in new or emerging formations are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas often have limited or no production history and consequently we are less able to predict future drilling results in these areas.
Ultimately, the success of these drilling and completion techniques can only be evaluated over time as more wells are drilled and production profiles are established over a sufficiently long time period. If our drilling results are less than anticipated or we are unable to execute our drilling program because of capital constraints, lease expirations, access to gathering systems, and/or declines in natural gas and oil prices, the return on our investment in these areas may not be as attractive as we anticipate. Further, as a result of any of these developments we could incur material write-downs of our oil and natural gas properties and the value of our undeveloped acreage could decline in the future.
We have been an early entrant into the SCOOP play in Oklahoma. As a result, our drilling results in this area may vary, and the value of our undeveloped acreage will decline if drilling results are unsuccessful.
We have been an early entrant into the SCOOP play in Oklahoma. On February 17, 2017, we completed our SCOOP acquisition, which included approximately 46,000 net surface acres with multiple producing zones, including the Woodford and Springer formations in the SCOOP resource play, in Grady, Stephens and Garvin Counties, Oklahoma. The area was historically developed by vertical wells drilled through multiple stacked reservoirs; however, the current play represents the transition to mainly horizontal development. As a developing play, our drilling results in this area are more uncertain than
drilling results in areas that are more developed and have been producing for a longer period of time. Since limited production history from horizontal wells in the SCOOP exists and since we have limited experience drilling in this play, it is difficult to predict our future drilling results. Our cost of drilling, completing and operating wells in this area may be higher than initially expected, and the value of our undeveloped acreage in the SCOOP may decline if drilling results are unsuccessful. We cannot assure you that unproved property acquired, or undeveloped acreage leased, by us in the SCOOP or other emerging plays will be profitably developed, that wells drilled by us in prospects that we pursue will be productive or that we will recover all or any portion of our investment in such unproved property or wells.
A key part of our strategy involves using some of the latest available horizontal drilling and completion techniques, which involve risks and uncertainties in their application.
Our operations involve utilizing some of the latest drilling and completion techniques as developed by us and our service providers. Risks that we face while drilling include, but are not limited to, the following:
•effectively controlling the level of pressure flowing from particular wells;
•landing our wellbore in the desired drilling zone;
•staying in the desired drilling zone while drilling horizontally through the formation;
•running our casing the entire length of the wellbore; and
•being able to run tools and other equipment consistently through the horizontal wellbore.
Risks that we face while completing our wells include, but are not limited to, the following:
•the ability to fracture stimulate the planned number of stages;
•the ability to run tools the entire length of the wellbore during completion operations; and
•the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage
The results of our drilling in new or emerging formations (including the SCOOP) are more uncertain initially than drilling results in areas that are more developed and have a longer history of established production. Newer or emerging formations and areas have limited or no production history and, consequently, we are more limited in assessing future drilling results in these areas. If our drilling results are less than anticipated, the return on our investment for a particular project may not be as attractive as we anticipated and we could incur material write-downs of unevaluated properties and the value of our undeveloped acreage could decline in the future.
We are not the operator of all of our oil and natural gas properties and therefore are not in a position to control the timing of development efforts, the associated costs or the rate of production of the reserves on such properties.
We are not the operator of all of the properties in which we have an interest, and have limited ability to exercise influence over the operations of such non-operated properties or their associated costs. Dependence on the operator and other working interest owners for these projects, and limited ability to influence operations and associated costs, could prevent the realization of targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploration activities on properties operated by others will depend upon a number of factors that will be largely outside of our control, including:
the timing and amount of capital expenditures;
the availability of suitable drilling equipment, production and transportation infrastructure and qualified operating personnel;
the operator's expertise and financial resources;
approval of other participants in drilling wells;
selection of technology; and
the rate of production of the reserves.
In addition, when we are not the majority owner or operator of a particular oil or natural gas project, if we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited.
A significant portion of our net leasehold acreage is undeveloped, and that acreage may not ultimately be developed or become commercially productive, which could cause us to lose rights under our leases as well as have a material adverse effect on our oil and natural gas reserves and future production and, therefore, our future cash flow and income.
A significant portion of our net leasehold acreage is undeveloped, or acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves. In addition, many of our oil and natural gas leases require us to drill wells that are commercially productive, and if we are unsuccessful in drilling such wells, we could lose our rights under such leases. Our future oil and natural gas reserves and production and, therefore, our future cash flow and income are highly dependent on successfully developing our undeveloped leasehold acreage.
Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities.
Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire. Approximately 18% of our Utica Shale undeveloped acreage that is subject to expiration will be subject to expiration in 2019, with 16% of such acreage expiring in 2020, 15% in 2021 and 51% thereafter, although our Utica Shale leases generally grant us the right to extend these leases for an additional five-year period. As of December 31, 2018, leases representing 88%, 8% and 4% of our SCOOP undeveloped acreage that is subject to expiration are scheduled to expire in 2019, 2020 and 2021, respectively. As of December 31, 2018, leases representing 66% of our total Niobrara Formation undeveloped acreage are scheduled to expire in 2019. The cost to renew expiring leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. If we are unable to fund renewals of expiring leases, we could lose portions of our acreage and our actual drilling activities may differ materially from our current expectations, which could adversely affect our business.
Conservation measures and technological advances could reduce demand for oil and natural gas.
Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas. The impact of the changing demand for oil and natural gas services and products may have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our operations are subject to various governmental laws and regulations which require compliance that can be burdensome and expensive and could expose us to significant liabilities.
Our oil and natural gas operations are subject to various federal, state and local governmental regulations that may be changed from time to time in response to economic and political conditions. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity to conserve supplies of oil and gas. In addition, the production, handling, storage, transportation, remediation, emission and disposal of oil and natural gas, by-products thereof and other substances and materials produced or used in connection with oil and natural gas operations are subject to regulation under federal, state and local laws and regulations, including those relating to protection of human health and the environment. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil or criminal penalties, permit revocations, requirements for additional pollution controls and injunctions limiting or prohibiting some or all of our operations. Moreover, these laws and regulations impose increasingly strict requirements for water and air pollution control and solid waste management, which trend may continue. Significant expenditures may be required to comply with governmental laws and regulations applicable to us. See Item 1. “Business-
Regulation-Environmental Matters and Regulation” and Item 1. “Business-Regulation-Other Regulation of the Oil and Natural Gas Industry” for a description of certain laws and regulations that affect us.
Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.
Hydraulic fracturing is an important common practice that is used to stimulate production of hydrocarbons, particularly natural gas, from tight formations, including shales. We use hydraulic fracturing extensively in connection with the development and production of certain of our oil and natural gas properties. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. There has been increasing public controversy regarding hydraulic fracturing with regard to the use of fracturing fluids, impacts on drinking water supplies, use of water and the potential for impacts to surface water, groundwater and the environment generally. A number of lawsuits and enforcement actions have been initiated across the country implicating hydraulic fracturing practices. The hydraulic fracturing process is typically regulated by state oil and natural gas commissions. However, legislation has been proposed in recent sessions of Congress to amend the SDWA to repeal the exemption for hydraulic fracturing from the definition of “underground injection,” to require federal permitting and regulatory control of hydraulic fracturing, and to require disclosure of the chemical constituents of the fluids used in the fracturing process. Furthermore, several federal agencies have asserted regulatory authority over certain aspects of the process.
In addition, several states and local jurisdictions in which we operate or hold oil and natural gas interests have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids. For a more detailed discussion of federal, state and local laws and initiatives concerning hydraulic fracturing, see Item 1. “Business-Regulation-Regulation of Hydraulic Fracturing” above.
If new laws or regulations are adopted that significantly restrict hydraulic fracturing, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations as well as make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, if hydraulic fracturing is further regulated at the federal, state or local level, our fracturing activities could become subject to additional permitting and financial assurance requirements, more stringent construction specifications, increased monitoring, reporting and recordkeeping obligations, plugging and abandonment requirements and also to attendant permitting delays and potential increases in costs. Such legislative changes could reduce the volumes of oil and natural gas that we can recover economically and cause us to incur substantial compliance costs. Reduced production and/or compliance or the consequences of any failure to comply by us could have a material adverse effect on our financial condition and results of operations.
Legislation or regulatory initiatives intended to address seismic activity could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could have a material adverse effect on our business.
State and federal regulatory agencies have recently focused on a possible connection between hydraulic fracturing related activities, particularly the underground injection of wastewater into disposal wells, and the increased occurrence of seismic activity, and regulatory agencies at all levels are continuing to study the possible linkage between oil and gas activity and induced seismicity. In addition, a number of lawsuits have been filed in some states, including in Oklahoma, alleging that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. In response to these concerns, regulators in some states are seeking to impose additional requirements, including requirements regarding the permitting of produced water disposal wells or otherwise to assess the relationship between seismicity and the use of such wells.
We dispose of large volumes of produced water gathered from our drilling and production operations in our Louisiana fields by injecting it into wells pursuant to permits issued to us by governmental authorities overseeing such disposal activities. While these permits are issued pursuant to existing laws and regulations, these legal requirements are subject to change, which could result in the imposition of more stringent operating constraints or new monitoring and reporting requirements, owing to, among other things, concerns of the public or governmental authorities regarding such gathering or disposal activities.
In our Utica operations, we attempt to reuse/recycle all produced water from production and completion activities through our fracture stimulation operations when active. While our objective is to recycle 100% of all produced water, we do inject water into third party commercially operated disposal wells in line with all state and federal mandated practices and cease
produced water recycle whenever fracture stimulation operations are idle. In the state of Ohio, all water used during drilling operations is disposed of through injection into third party salt water disposal wells regulated by applicable state agencies.
In our SCOOP operations, state regulations allow$114,103 for the storage of produced water in permitted, above ground, lined and monitored impoundments. These storage impoundments allow the recycle of approximately two-thirds of our produced water from all production and completion operations and approximately 80% of water used in the drilling phase of our operations. The limited water disposed of during drilling operations is injected into state regulated commercial disposal wells.
The adoption and implementation of any new laws or regulations that restrict our ability to use hydraulic fracturing or dispose of produced water gathered from our drilling and production activities by own disposal wells, could have a material adverse effect on our business, financial condition and results of operations.
Restrictions on drilling activities intended to protect certain species of wildlife may adversely affect our ability to conduct drilling activities in some of the areas where we operate.
Oil and natural gas operations in our operating areas can be adversely affected by seasonal or permanent restrictions on drilling activities designed to protect various wildlife species or their habitat. Seasonal restrictions may limit our ability to operate in protected areas and can intensify competition for drilling rigs, oilfield equipment, services, supplies and qualified personnel, which may lead to periodic shortages when drilling is allowed. These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs. Permanent restrictions imposed to protect threatened or endangered species could prohibit drilling in certain areas or require the implementation of expensive mitigation measures. The designation of previously unprotected species in areas where we operate as threatened or endangered could cause us to incur increased costs arising from species protection measures or could result in limitations on our exploration and production activities that could have an adverse impact on our ability to develop and produce our reserves.
The adoption of derivatives legislation by the U.S. Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business.
The adoption of derivatives legislation by the U.S. Congress could have an adverse effect on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business. The U.S. Congress adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act (HR 4173), or Dodd-Frank Act, which, among other provisions, establishes federal oversight and regulation of the over-the-counter derivatives market and entities that participate in that market. The legislation was signed into law by the President on July 21, 2010. In its rulemaking under the legislation, the Commodities Futures Trading Commission, or CFTC, has issued a final rule on position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents (with exemptions for certain bona fide hedging transactions). The CFTC's final rule was set aside by the U.S. District Court for the District of Columbia on September 28, 2012 and remanded to the CFTC to resolve ambiguity as to whether statutory requirements for such limits to be determined necessary and appropriate were satisfied. As a result, the rule has not yet taken effect, although the CFTC has indicated that it intends to appeal the court's decision and that it believes the Dodd-Frank Act requires it to impose position limits. The impact of such regulations upon our business is not yet clear. Certain of our hedging and trading activities and those of our counterparties may be subject to the position limits, which may reduce our ability to enter into hedging transactions.
In addition, the Dodd-Frank Act does not explicitly exempt end users (such as us) from the requirement to use cleared exchanges, rather than hedging over-the-counter, and the requirements to post margin in connection with hedging activities. While it is not possible at this time to predict when the CFTC will finalize certain other related rules and regulations, the Dodd-Frank Act and related regulations may require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our derivative activities, although whether these requirements will apply to our business is uncertain at this time. If the regulations ultimately adopted require that we post margin for our hedging activities or require our counterparties to hold margin or maintain capital levels, the cost of which could be passed through to us, or impose other requirements that are more burdensome than current regulations, our hedging would become more expensive and we may decide to alter our hedging strategy.
The financial reform legislation may also require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our existing or future derivative activities, although the application of those provisions to us is uncertain at this time. The financial reform legislation may also require the counterparties to our derivative instruments to spin off some of their derivatives activities to separate entities, which may not be as creditworthy as the current counterparties. The new legislation and any new regulations could significantly increase the cost of derivative contracts
(including through requirements to post collateral which could adversely affect our available liquidity), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our derivative contracts in existence at that time, and increase our exposure to less creditworthy counterparties. If we reduce or change the way we use derivative instruments as a result of the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Finally, the legislation was intended, in part, to reduce the volatility of oil and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas. Our revenues could therefore be adversely affected if a consequence of the legislation and regulations is to lower commodity prices. Any of these consequences could have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Regulation of greenhouse emissions could result in increased operating costs and reduced demand for the oil and natural gas we produce.
In recent years, federal, state and local governments have taken steps to reduce emissions of greenhouse gases, or GHGs. The EPA has finalized a series of GHG monitoring, reporting and emissions control rules for oil and natural gas industry, and the U.S. Congress has, from time to time, considered adopting legislation to reduce emissions. Almost one-half of the states have already taken measures to reduce emissions of GHGs primarily through the development of GHG emission inventories and/or regional GHG cap-and-trade programs. While we are subject to certain federal GHG monitoring and reporting requirements, our operations currently are not adversely impacted by existing federal, state and local climate change initiatives. For a description of GHG existing and proposed rules and regulations, see Item 1. “Business-Regulation-Environmental Regulation-Climate Change.”
Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations. In addition, substantial limitations on GHG emissions could adversely affect demand for the oil and natural gas we produce.
In addition, there have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital. Furthermore, claims have been made against certain energy companies alleging that GHG emissions from oil and natural gas operations constitute a public nuisance under federal and/or state common law. As a result, private individuals or public entities may seek to enforce environmental laws and regulations against us and could allege personal injury, property damages or other liabilities. While our business is not a party to any such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could significantly impact our operations and could have an adverse impact on our financial condition.
Moreover, there has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially hotter or colder than their historical averages. Extreme weather conditions can interfere with our production and increase our costs and damage resulting from extreme weather may not be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations.
A change in the jurisdictional characterization of some of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of our assets, which may cause our revenues to decline and operating expenses to increase.
Section 1(b) of the Natural Gas Act of 1938, or the NGA, exempts natural gas gathering facilities from regulation by FERC. We believe that the natural gas pipelines in our gathering systems meet the traditional tests FERC has used to establish whether a pipeline performs a gathering function and therefore is exempt from FERC's jurisdiction under the NGA. However, the distinction between FERC-regulated transmission services and federally unregulated gathering services is a fact-based determination. The classification of facilities as unregulated gathering is the subject of ongoing litigation, so the classification and regulation of our gathering facilities are subject to change based on future determinations by FERC, the courts or Congress,
which could cause our revenues to decline and operating expenses to increase and may materially adversely affect our business, financial condition or results of operations. Additional rules and legislation pertaining to those and other matters may be considered or adopted by FERC from time to time. Failure to comply with those regulations in the future could subject us to civil penalty liability, which could have a material adverse effect on our business, financial condition or results of operations.
We face extensive competition in our industry.
The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources. Many of these companies not only explore for and produce oil and natural gas, but also carry on midstream and refining operations and market petroleum and other products on a regional, national or worldwide basis. These competitors may be better positioned to take advantage of industry opportunities and to withstand changes affecting the industry, such as fluctuations in oil and natural gas prices and production, the availability of alternative energy sources and the application of government regulation.
The loss of one or more of the purchasers of our production could adversely affect our business, results of operations, financial condition and cash flows.
The two largest purchasers of our oil and natural gas during the year ended December 31, 2018 accounted for approximately 17% and 10%, respectively, of our total oil, natural gas and NGL revenues. If these purchasers or one or more other significant purchasers, are unable to satisfy its contractual obligations, we may be unable to sell such production to other customers on terms we consider acceptable. Further, the inability of one or more of our customers to pay amounts owed to us could adversely affect our business, financial condition, results of operations and cash flows.
Our method of accounting for oil and natural gas properties may result in impairment of asset value.
We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including nonproductive costs and certain general and administrative costs associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Net capitalized costs are limited to the estimated future net revenues, after income taxes, discounted at 10% per year, from proven oil and natural gas reserves and the cost of the properties not subject to amortization. Such capitalized costs, including the estimated future development costs and site remediation costs, if any, are depleted by an equivalent units-of-production method, converting natural gas to barrels at the ratio of six Mcf of natural gas to one barrel of oil.
Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted arithmetic average of the first-day-of-the-month prices for 2018, 2017 and 2016 adjusted for any contract provisions or financial derivatives, if any, that hedge oil and natural gas revenue, excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, less income tax effects related to differences between the book and tax basis of the oil and natural gas properties. If the net book value reduced by the related net deferred income tax liability exceeds the ceiling, an impairment or noncash writedown is required. A ceiling test impairment can result in a significant loss for a particular period. Once incurred, a write down of oil and natural gas properties is not reversible at a later date, even if oil or gas prices increase. As a result of the decline in commodity prices, we recorded a ceiling test impairment of $715.5 millionidentified employee for the year ended December31, 2016. If prices of oil, natural gas and natural gas liquids continue to decrease, we may be required to further write down the value of our oil and natural gas properties. Future non-cash asset impairments could negatively affect our results of operations.
Recently enacted U.S. tax legislation as well as future U.S. and state tax legislations may adversely affect our business, results of operations, financial condition and cash flow.
On December 22, 2017, the President signed into law Public Law No. 115-97, a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act, that significantly reforms the Internal Revenue Code of 1986, as amended, or the Code. Among other changes, the Tax Act (i) permanently reduces the U.S. corporate income tax rate, (ii) repeals the corporate alternative minimum tax, (iii) eliminates the deduction for certain domestic production activities, (iv) imposes new limitations on the utilization of net operating losses, and (v) provides for more general changes to the taxation of corporations, including changes to cost recovery rules and to the deductibility of interest expense.2020. The Tax Act is complex and
far-reaching, and we cannot predict with certainty the resulting impact its enactment will have on us. The ultimate impactcalculation of the Tax Act may differ from our estimates due to changes in interpretations and assumptions made by us as well as additional regulatory guidance that may be issued, and any such changes in our interpretations and assumptions could have an adverse effect on our business, results of operations, financial condition and cash flow.
In addition, from time to time, legislation has been proposed that, if enacted into law, would make significant changes to U.S. federal and state income tax laws affecting the oil and gas industry. For example, legislations have been introduced in the past to (i) eliminate the immediate deductiontotal compensation for intangible drilling and development costs, (ii) repeal of the percentage depletion allowance for oil and natural gas properties; and (iii) extend the amortization period for certain geological and geophysical expenditures. While these specific changes are notMr.Wood is included in the Tax Act,Summary Compensation Table set forth above. We made no accurate prediction can be made asmaterial assumptions, adjustments, or estimates to whether any such legislative changes will be proposed or enacted in the future or, if enacted, what the specific provisions or the effective date of any such legislation would be. These proposed changes in the U.S. tax law, if adopted, or other similar changes that would impose additional tax on our activities or reduce or eliminate deductions currently available with respect to natural gas and oil exploration, development or similar activities, could adversely affect our business, results of operations, financial condition and cash flows.
Additional state taxes on natural gas extraction may be imposed as a result of future legislation.
In February 2013, the Governor of the State of Ohio proposed a plan in the Ohio House to enact new severance taxes on the oil and gas industry. The proposal was part of the state budget bill. Due to pressure from the State Senate, the proposal was removed from the bill. The bill then passed without the severance tax on June 7, 2013, with an effective date of July 1, 2013. Later in 2013, the Ohio House introduced a stand-alone bill to address the severance tax. HB 375 was introduced on December 4, 2013 and after many hearings and amendments, contained a 2.5% severance tax on horizontal drillers with a percentage of the proceeds earmarked for affected communities in Southeastern Ohio. This bill passed the Ohio House on May 14, 2014. The Ohio State Senate held a hearing on the bill, but there was no further movement before the recess of that General Assembly.
In February 2015, the Governor of Ohio proposed another plan to the new General Assembly to enact new severance taxes on the oil and gas industry. This proposal was part of a state budget proposal to finance a reduction in personal income taxes and other initiatives. The proposal would have imposed a 6.5% tax on oil and gas sold at the wellhead. This severance tax increase was removed from the Bill that was ultimately passed by the Ohio House.
A new General Assembly took office in January 2017, and the Governor of Ohio proposed a new severance tax initiative. The proposal would impose a fixed rate of 6.5% for crude oil and natural gas when sold at the wellhead and a lower rate of 4.5% at later stages of distribution for natural gas and natural gas liquids. The proposal was again met with opposition and was not included in the final budget that was passed and signed by the Governor on June 30, 2017 and effective for the period of July 1, 2017 through June 30, 2019.
These proposed changes in the U.S. and applicable state tax law, if adopted, or other similar changes that tax our production or reduce or eliminate deductions currently available with respect to natural gas and oil exploration and development, could adversely affect our business, financial condition, results of operations and cash flows.
Our use of 2-D and 3-D seismic data is subject to interpretation and may not accurately identify the
presencemedian employee or to determine total compensation, and we did not annualize the compensation for any employees that were not employed by us the entire year.We believe that the above pay ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of oil and natural gas, which could adversely affect the results of our drilling operations.
Even when properly used and interpreted, 2-D and 3-D seismic data and visualization techniques are only tools used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in fact, present in those structures.Regulation S-K. In addition,
because the
useSecurities and Exchange Commission rules for identifying the median employee allow companies to adopt a variety of
3-D seismicmethodologies, to apply certain exclusions, and
to make reasonable estimates and assumptions that reflect their compensation practices, the pay ratio reported by other
advanced technologies requires greater predrilling expenditures than traditional drilling strategies, and we could incur losses as a result of such expenditures. As a result, our drilling activitiescompanies may not be
successfulcomparable to the pay ratio reported above, as other companies may have different employment and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios.2020 DIRECTOR COMPENSATION |
Our policy is that members of our Board of Directors who are also our officers or economical.
We are exposed to fluctuationsemployees do not receive compensation for their services as directors. The compensation of our non-employee directors for 2020 is described below.Cash Compensation
Effective January1, 2019, based on the recommendation of Pearl Meyer, our Board of Directors eliminated attendance fees for Board and Committee meetings and established an annual retainer for each non-employee director of $85,000. The Chairman of the Board receives an additional $85,000 annual retainer and the chairperson of each of our Board Committees receives an additional annual retainer as set forth in the pricetable below. On June1, 2020, the Company’s Board of natural gas and oil. Although we have hedgedDirectors’ voluntarily chose to take a portion10% reduction in board retainer fees for the remainder of 2020.
Equity Compensation
Effective January1, 2019, our estimated 2018 production, we may still be adversely affected by continuing and prolonged declines inBoard of Directors, based on the price of natural gas and oil.
We use derivative instruments to reduce price volatility associated with certain of our oil and natural gas sales, but these hedges may be inadequate to protect us from continuing and prolonged declines in the price of oil and natural gas. For information regarding these derivative instruments, see Item 7A. "Quantitative and Qualitative Disclosures about Market Risk." Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less
than expected or oil and natural gas prices increase. Further, to the extent that the price of oil and natural gas remains at current levels or declines further, we will not be able to hedge future production at the same level as our current hedges, and our results of operations and financial condition would be negatively impacted.
Our hedging transactions expose us to counterparty credit risk.
Our hedging transactions expose us to risk of financial loss if a counterparty fails to perform under a derivative contract. Disruptions in the financial markets could lead to sudden decreases in a counterparty's liquidity, which could make them unable to perform under the termsrecommendation of the derivative contractindependent compensation consultant and we may not be able to realize the benefitCompensation Committee, approved an annual grant of the derivative contract.
A terrorist attack or armed conflict could harm our business.
Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or other countries may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demandrestricted stock units for our services and causing a reduction in our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers' operations is destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all.
Loss of our information and computer systems could adversely affect our business.
We are dependent on our information systems and computer based programs, including our well operations information, seismic data, electronic data processing and accounting data. If any of such programs or systems were to fail or create erroneous information in our hardware or software network infrastructure, whether due to cyber attack or otherwise, possible consequences include our loss of communication links, inability to find, produce, process and sell oil and natural gas and inability to automatically process commercial transactions or engage in similar automated or computerized business activities. Any such consequence could have a material adverse effect on our business.
We are subject to cyber security risks. A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss.
The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain exploration, development, production, and processing activities. For example, we depend on digital technologies to interpret seismic data, manage drilling rigs, production equipment and gathering systems, conduct reservoir modeling and reserves estimation, and process and record financial and operating data. At the same time, cyber incidents, including deliberate attacks or unintentional events, have increased. The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats. Our technologies, systems, networks, and those of its vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, or other disruption of its business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected fornon-employee directors from an extended period. Our systems and insurance coverage for protecting against cyber security risks may not be sufficient. As cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents.
Risks Relating to Our Indebtedness
Our substantial level of indebtedness could adversely affect our business, financial condition, results of operations and prospects.
As of December 31, 2018, we had total indebtedness (net of unamortized debt issuance costs)aggregate value of approximately $2.1 billion, primarily attributable to our senior notes. We had $45.0 million in borrowings outstanding under our secured revolving credit facility and our borrowing base availability was $638.4 million after giving effect to an aggregate of $316.6 million of letters of credit.
Our outstanding indebtedness could have important consequences to you, including the following:
our high level of indebtedness could make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in a default under our secured revolving credit facility or the senior note indentures;
the restrictions imposed$175,000 based on the operation of our business by the terms of our debt agreements may hinder our ability to take advantage of strategic opportunities to grow our business;
our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, restructuring, acquisitions or general corporate purposes may be impaired, which could be exacerbated by further volatility in the credit markets;
we must use a substantial portion of our cash flow from operations to pay interest on our senior notes and our other indebtedness, which will reduce the funds available to us for operations and other purposes;
our level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt;
our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited;
our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business; and
we may be vulnerable to interest rate increases, as our borrowings under our secured revolving credit facility are at variable interest rates.
Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, if we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, or interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest. More specifically, the lenders under our secured revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or litigation.
Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial indebtedness.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including our senior notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying capital expenditures, selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. However, we cannot assure you that undertaking alternative financing plans, if necessary, would allow us to meet our debt obligations. In the absence of such cash flows, we could have substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. Our revolving credit facility and the indentures governing our senior notes restrict our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at the time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations and have an adverse effect on our financial condition.
Restrictive covenants in our secured revolving credit facility, the indentures governing our senior notes and in future debt instruments may restrict our ability to pursue our business strategies.
Our secured revolving credit facility and the indentures governing our senior notes limit, and the terms of any future indebtedness may limit, our ability, among other things, to:
incur or guarantee additional indebtedness;
make certain investments;
declare or pay dividends or make distributions on our capital stock;
prepay subordinated indebtedness;
sell assets including capital stock of restricted subsidiaries;
agree to payment restrictions affecting our restricted subsidiaries;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
enter into transactions with our affiliates;
incur liens;
engage in business other than the oil and gas business; and
designate certain of our subsidiaries as unrestricted subsidiaries.
We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants contained in our revolving credit facility and the indentures governing our senior notes. In addition, our revolving credit facility requires us to maintain certain financial ratios and tests. The requirement that we comply with these provisions may materially adversely affect our ability to react to changes in market conditions, take advantage of business opportunities we believe to be desirable, obtain future financing, fund needed capital expenditures or withstand a continuing or future downturn in our business.
A breach of any of these restrictive covenants could result in default under our revolving credit facility. If default occurs, the lenders under our revolving credit facility may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable, which would result in an event of default under the indentures governing our senior notes. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under our revolving credit facility will also have the right to proceed against the collateral granted to them to secure the indebtedness. If the indebtedness under our revolving credit facility and our senior notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full that indebtedness.
Any significant reduction in our borrowing base under our revolving credit facility as a result of the periodic borrowing base redeterminations or otherwise may negatively impact our ability to fund our operations, and we may not have sufficient funds to repay borrowings under our revolving credit facility if required as a result of a borrowing base redetermination.
Availability under our revolving credit facility is currently subject to a borrowing base of $1.4 billion, with an elected commitment of $1.0 billion. The borrowing base is subject to scheduled semiannual and other elective collateral borrowing base redeterminations based on our oil and natural gas reserves and other factors. As of December 31, 2018, we had $45.0 million in borrowings and $316.6 million of letters of credit outstanding under our revolving credit facility. Any significant reduction in our borrowing base as a result of such borrowing base redeterminations or otherwise may negatively impact our liquidity and our ability to fund our operations and, as a result, may have a material adverse effect on our financial position, results of operation and cash flow. Further, if the outstanding borrowings under our revolving credit facility were to exceed the borrowing base as a result of any such redetermination, we would be required to repay the excess. We may not have sufficient funds to make such repayments. If we do not have sufficient funds and we are otherwise unable to negotiate renewals of our
borrowings or arrange new financing, we may have to sell significant assets. Any such sale could have a material adverse effect on our business and financial results.
We may still be able to incur substantial additional indebtedness in the future, which could further exacerbate the risks that we and our subsidiaries face.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of our revolving credit facility and the indentures governing our senior notes restrict, but in each case do not completely prohibit, us from doing so. As of December 31, 2018, our borrowing base under our revolving credit facility was set at $1.4 billion, with an elected commitment of $1.0 billion, and we had $45.0 million in borrowings under this facility. Total funds available for borrowing under our revolving credit facility as of December 31, 2018, after giving effect to $316.6 million of outstanding letters of credit, were $638.4 million. In addition, the indentures governing our senior notes allow us to issue additional notes under certain circumstances which will also be guaranteed by the guarantors. The indentures governing our senior notes also allow us to incur certain other additional secured debt and allow us to have subsidiaries that do not guarantee the senior notes and which may incur additional debt, which would be structurally senior to our senior notes. In addition, the indentures governing our senior notes do not prevent us from incurring other liabilities that do not constitute indebtedness. If we or a guarantor incur any additional indebtedness that ranks equally with our senior notes (or with the guarantees thereof), including additional unsecured indebtedness or trade payables, the holders of that indebtedness will be entitled to share ratably with holders of our senior notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us or a guarantor. If new debt or other liabilities are added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.
Our borrowings under our revolving credit facility expose us to interest rate risk.
Our earnings are exposed to interest rate risk associated with borrowings under our revolving credit facility. Our revolving credit facility is structured under floating rate terms, as advances under this facility may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the U.S. or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2018, amounts borrowed under our revolving credit facility bore interest at the weighted average rate of 4.23%. A 1% increase in the average interest rate would have increased our interest expense by approximately $0.8 million based on outstanding borrowings under our revolving credit facility throughout the year ended December 31, 2018. An increase in our interest rate at the time we have variable interest rate borrowings outstanding under our revolving credit facility will increase our costs, which may have a material adverse effect on our results of operations and financial condition. As of December 31, 2018, we did not hedge our interest rate risk.
If we experience liquidity concerns, we could face a downgrade in our debt ratings which could restrict our access to, and negatively impact the terms of, current or future financings or trade credit.
Our ability to obtain financings and trade credit and the terms of any financings or trade credit are, in part, dependent on the credit ratings assigned to our debt by independent credit rating agencies. We cannot provide assurance that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances so warrant. Factors that may impact our credit ratings include debt levels, planned asset purchases or sales and near-term and long-term production growth opportunities, liquidity, asset quality, cost structure, product mix and commodity pricing levels. A ratings downgrade could adversely impact our ability to access financings or trade credit and increase our borrowing costs.
Risks Related to Our Common Stock
If our quarterly revenues and operating results fluctuate significantly, theclosing price of our common stock may be volatile.on the date of grant, which represents approximately two-thirds of our non-employee director’s annual compensation. Each grant of restricted stock will vest on the earlier of (a) the date of our next annual meeting of stockholders and (b) the one-year anniversary of the date of the grant, so long as the non-employee director is in continuous service on that date.
Our revenues
| | 2020 ANNUAL REPORT 43 |
Program Component(1) | 2020 Program | 2020 Revised
Program(2) |
Annual base cash retainer for Board service | $ 85,000 | $ 251,500 |
Additional cash retainer to non-executive Chairman | $ 85,000 | $ 85,000 |
Audit Committee Chair cash retainer | $ 20,000 | $ 20,000 |
Compensation Committee Chair cash retainer | $ 15,000 | $ 15,000 |
Nominating and Corporate Governance Committee Chair cash retainer | $ 10,000 | $ 10,000 |
Sustainability Committee Chair cash retainer | $ 10,000 | $ 10,000 |
Restructuring and Finance Chair cash retainer | $ 0 | $ 150,000(3) |
Restructuring and Finance Committee member cash retainer | $ 0 | $ 90,000(3) |
Special Committee Chair cash retainer | $ 0 | $ 100,000(4) |
Special Committee member cash retainer | $ 0 | $ 60,000(4) |
Annual equity grant | $ 175,000 | $ 0 |
Stock ownership guideline | 5.0x annual
base retainer |
Stock Ownership Guidelines for Directors
We believe that a number of factors could cause these fluctuations, including:
changes in oil and natural gas prices;
changes in production levels;
changes in governmental regulations and taxes;
geopolitical developments;
the level of foreign imports of oil and natural gas; and
conditions in the oil and natural gas industry and the overall economic environment.
Because of the factors listed above, among others, we believe that our quarterly revenues, expenses and operating results may vary significantly in the future and that period-to-period comparisonsit is important for members of our operating results are not necessarily meaningful. You should not rely on the resultsBoard of one quarter as an indicationDirectors to align their financial interests with those of our future performance. It is also possiblestockholders. Accordingly, effective January1, 2019, our Board of Directors adopted a formal stock ownership policy that in some future quarters,requires our operating results will fall below our expectations or the expectations of market analysts and investors. If we do not meet these expectations, the price of our common stock may decline significantly.
We do not currently pay dividends on our common stock and do not anticipate doing so in the future.
We have paid no cash dividends on our common stock, and we may not pay cash dividends on our common stock in the future. We intendnon-employee directors to retain any earnings to fund our operations. Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our credit agreement prohibit the payment of any dividends to the holders of our common stock.
There is no guarantee that we will repurchase shares of our common stock under our recently announced stock repurchase program at a level anticipated by our stockholders, which could reduce returns to our stockholders. Decisions to repurchase our common stock will be at the discretion of our board of directors based upon a review of relevant considerations.
In January 2018, our board of directors approvedachieve a stock repurchase program to acquire up to $100.0 million of our outstanding common stock, and in May 2018 expanded this program to acquire up to an additional $100.0 million of our common stock during 2018 for a total of up to $200.0 million. This repurchase program was authorized to extend through December 31, 2018 and was fully executed 2018. In January 2019, our board of directors approved a new stock repurchase program to acquire up to $400.0 million of our outstanding common stock within the next 24 months. The repurchase program does not require us to acquire any specific number of shares. From January 1, 2019 through February 28, 2019, we did not repurchase any shares of our common stock under our new stock repurchase program. An aggregate of $400.0 million remains available for future stock repurchases under our new stock repurchase program. Our board of director’s determination to repurchase shares of our common stock under our new stock repurchase program will depend upon market conditions, applicable legal requirements, contractual obligations and other factors that the board of directors deems relevant. Based on an evaluation of these factors, our board of directors may determine not to repurchase shares or to repurchase shares at reduced levels from those anticipated by our stockholders, any or all of which could reduce returns to our stockholders.
A change of control could limit our use of net operating losses.
As of December 31, 2018, we had a net operating loss, or NOL, carry forward of approximately $782.7 million for federal income tax purposes. If we were to experience an “ownership change,” as determined under Section 382 of the Code, our ability to offset taxable income arising after the ownership change with NOLs generated prior to the ownership change would be limited, possibly substantially. In general, an ownership change would establish an annual limitation on the amount of our pre-change NOLs we could utilize to offset our taxable income in any future taxable year to an amount generallylevel equal to the value of common stock that is five times the value of their annual retainer within five years of the effective date of our stock immediately priorownership policy.
44 2020 ANNUAL REPORT | |
|
2020 Director Compensation Table
The following table contains 2020 compensation information for our non-employee directors who served during 2020. The CEO does not receive compensation for serving as a director of the Company.
Name | Fees Earned or
Paid in Cash
($)(1) | Stock
Awards
($)(2) | Total
($) |
Alvin Bledsoe(3) | $ 423,250(4) | $ 371,596 | $ 794,846 |
Deborah Adams | $ 178,250(4) | $ 182,743 | $ 360,993 |
Samantha Holroyd | $ 125,750(4) | $ 182,743 | $ 308,493 |
David Houston | $ 85,000 | — | $ 85,000 |
Valerie Jochen(3) | $ 161,167(4) | $ 356,465 | $ 517,632 |
C. Doug Johnson | $ 188,250(4) | $ 182,743 | $ 370,993 |
Ben Morris | $ 275,750(4) | $ 182,743 | $ 458,493 |
John Somerhalder | $ 301,625(4) | — | $ 301,625 |
Paul Westerman | $ 42,500 | — | $ 42,500 |
| | 2020 ANNUAL REPORT 45 |
HOLDINGS OF DIRECTORS AND OFFICERS |
The following table sets forth certain information regarding the beneficial ownership change multiplied by the long-term tax-exempt rate. In general, an ownership change will occur if there is a cumulative increase in our ownershipas of more than 50 percentage points by one or more “5% shareholders” (as defined in the Internal Revenue Code) at any time during a rolling three-year period.
Future sales of our common stock may depress our stock price.
We have registered a substantial numberMarch31, 2021 of shares of our common stock under a registration statement filed with the SEC for resale by certaineach of our stockholders. Sales of these or other shares of our common stock in the public market or the perception that these sales may occur, could cause the market price of our common stock to decline. In addition, sales by certain of our stockholders of their shares could impair our ability to raise capital through the sale of common or preferred stock. As of February 18, 2019, there were 162,986,045 shares of our common stock issued and outstanding, excluding 1,534,688 shares of unvested restricted stock awarded under our Amended and Restated 2005 Stock Incentive Plan.
We could issue preferred stock which could be entitled to dividend, liquidation and other special rights and preferences not shared by holders of our common stock or which could have anti-takeover effects.
We are authorized to issue up to 5,000,000 shares of preferred stock, par value $0.01 per share. Shares of preferred stock may be issued from time to time in one or more series as our board of directors, by resolution or resolutions, may from time to time determine each such series to be distinctively designated. The voting powers, preferencesnamed executive officer and relative, participating, optionalby all directors and other special rights, and the qualifications, limitations or restrictions, if any, of each such series of preferred stock may differ from those of any and all other series of preferred stock at any time outstanding, and, subject to certain limitations of our certificate of incorporation and the Delaware General Corporation Law, or DGCL, our board of directors may fix or alter, by resolution or resolutions, the designation, number, voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof, of each such series preferred stock. The issuance of any such preferred stock could materially adversely affect the rights of holders of our common stock and, therefore, could reduce the value of our common stock.
In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell our assets to,executive officers as a third party. The ability of our board of directors to issue preferred stock could discourage, delay or prevent a takeover of us, thereby preserving control of the company by the current stockholders.
The existence of some provisions in our organizational documents could delay or prevent a change in control of our company, even if that change would be beneficial to our stockholders. Our certificate of incorporation and bylaws contain provisions that may make acquiring control of our company difficult.
group:Name of Beneficial Owner(1) | Amount and Nature of
Beneficial Ownership | Percent of Class |
| |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
Additional information regarding our properties is included in Item 1. "Business" above and in Note 3 of the notes to our consolidated financial statements included in this report, which information is incorporated herein by reference.
Proved Oil and Natural Gas Reserves
Evaluation and Review of Reserves.
Reserve estimates at December 31, 2018 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio (71% of our proved reserves at December 31, 2018), the SCOOP Woodford and SCOOP Springer plays in Oklahoma (29% of our proved reserves at December 31, 2018), our WCBB, Hackberry and Niobrara fields, as well as our overriding royalty and non-operated interests (less than 1% of our proved reserves at December 31, 2018). Reserve estimates at December 31, 2017 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio, the SCOOP Woodford and SCOOP Springer plays in Oklahoma and our WCBB and Hackberry fields. Reserve estimates at December 31, 2016 were prepared by NSAI with respect to our assets in the Utica Shale in Eastern Ohio and our WCBB and Hackberry fields. Our personnel prepared reserve estimates with respect to our Niobrara field as well as our overriding royalty and non-operated interests at December 31, 2017 and 2016.
NSAI is an independent petroleum engineering firm. A copy of the summary reserve reports is included as Exhibit 99.1 to this Annual Report on Form 10-K. The technical persons responsible for preparing our proved reserve estimates meet the requirements with regards to qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Our independent third-party engineers do not own an interest in any of our properties and are not employed by us on a contingent basis.
We maintain an internal staff of petroleum engineers and geoscience professionals who work closely with NSAI, our independent reserve engineers, to ensure the integrity, accuracy and timeliness of the data used to calculate our proved reserves relating to our assets in the Utica Shale, SCOOP, WCBB and Hackberry fields. Our internal technical team members meet with NSAI periodically throughout the year to discuss the assumptions and methods used in the proved reserve estimation process. We provide historical information to NSAI for our properties such as ownership interest, oil and gas production, well test data, commodity prices, operating and development costs and other considerations, including availability and costs of infrastructure
and status of permits. Our proved reserves attributable to our other minority interests are prepared internally by our internal staff of petroleum engineers and geoscience professionals. Our Senior Vice President of Reservoir Engineering is primarily responsible for overseeing the preparation of all of our reserve estimates. He is a petroleum engineer with over 20 years of reservoir and operations experience. In addition, our geophysical staff has over 100 years combined industry experience and our reservoir staff has approximately 50 years combined experience.
Our proved reserve estimates are prepared in accordance with our internal control procedures. These procedures, which are intended to ensure reliability of reserve estimations, include the following:
review and verification of historical production data, which data is based on actual production as reported by us;
verification of property ownership by our land department;
preparation of reserve estimates by NSAI in coordination with our experienced reservoir engineers;
direct reporting responsibilities by our reservoir engineering department to our Chief Operating Officer;
review by our reservoir engineering department of all of our reported proved reserves at the close of each quarter, including the review of all significant reserve changes and all new proved undeveloped reserves additions;
provision of quarterly updates to our board of directors regarding operational data, including production, drilling and completion activity levels and any significant changes in our reserves;
annual review by our board of directors of our year-end reserve report and year-over-year changes in our proved reserves, as well as any changes to our previously adopted development plans;
annual review and approval by our senior management and our board of directors of a multi-year development plan;
annual review by our senior management of adjustments to our previously adopted development plan and considerations involved in making such adjustments; and
annual review by our board of directors of changes in our previously approved development plan made by senior management and technical staff during the year, including the substitution, removal or deferral of PUD locations.
The following table sets forth our estimated proved reserves at December 31, 2018, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | Oil (MBbls) | | Natural Gas (MMcf) | | Natural Gas Liquids (MBbls) | | Oil (MBbls) | | Natural Gas (MMcf) | | Natural Gas Liquids (MBbls) | | Oil (MBbls) | | Natural Gas (MMcf) | | Natural Gas Liquids (MBbls) |
| Proved developed | 9,570 |
| | 1,813,184 |
| | 40,810 |
| | 10,245 |
| | 1,616,930 |
| | 36,247 |
| | 4,882 |
| | 744,797 |
| | 14,299 |
|
| Proved undeveloped | 11,480 |
| | 2,320,705 |
| | 39,710 |
| | 8,912 |
| | 3,208,380 |
| | 39,519 |
| | 664 |
| | 1,422,271 |
| | 5,828 |
|
| Total (1) | 21,050 |
| | 4,133,889 |
| | 80,520 |
| | 19,157 |
| | 4,825,310 |
| | 75,766 |
| | 5,546 |
| | 2,167,068 |
| | 20,127 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Total net proved oil and natural gas reserves (MMcfe) (1) | 4,743,311 |
| | 5,394,851 |
| | 2,321,108 |
|
| PV-10 value (in millions) (2) | $ | 3,407.3 |
| | $ | 2,883.0 |
| | $ | 696.0 |
|
| Standardized measure (in millions) (3) | $ | 2,982.7 |
| | $ | 2,643.6 |
| | $ | 688.0 |
|
_____________________
| |
(1) | Estimates of reserves as of year-end 2018, 2017 and 2016 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbon prices received on a field-by-field basis on the first day of each month within the 12- |
month period ended December 31, 2018, 2017 and 2016, respectively, in accordance with revised guidelines of the SEC applicable to reserves estimates as of year-end 2018, 2017 and 2016. Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties. Although we believe these estimates are reasonable, actual future production, cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from these estimates.
| |
(2) | Represents present value, discounted at 10% per annum, of estimated future net revenue before income tax of our estimated proven reserves. The estimated future net revenues set forth above were determined by using reserve quantities of proved reserves and the periods in which they are expected to be developed and produced based on certain prevailing economic conditions. The estimated future production in our reserve reports for the years ended December 31, 2018, 2017 and 2016 is priced based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December of the applicable year, using $65.56 per barrel and $3.10 per MMBtu for 2018, $51.34 per barrel and $2.98 per MMBtu for 2017 and $42.75 per barrel and $2.48 per MMBtu for 2016, and in each case adjusted by lease for transportation fees and regional price differentials. |
PV-10 is a non-GAAP measure because it excludes income tax effects. Management believes that the presentation of the non-GAAP financial measure of PV-10 provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and gas companies. PV-10 is not a measure of financial or operating performance under GAAP. PV-10 should not be considered as an alternative to the standardized measure as defined under GAAP. We have included a reconciliation of PV-10 to the most directly comparable GAAP measure-standardized measure of discounted future net cash flows.
The following table reconciles the standardized measure of future net cash flows to the PV-10 value: |
| | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 |
| | (In thousands) |
| Standardized measure of discounted future net cash flows | $ | 2,982,725 |
| | $ | 2,643,564 |
| | $ | 688,040 |
|
| Add: Present value of future income tax discounted at 10% | 424,596 |
| | 239,468 |
| | 7,927 |
|
| PV-10 value | $ | 3,407,321 |
| | $ | 2,883,032 |
| | $ | 695,967 |
|
| |
(3) | The standardized measure represents the present value of estimated future cash inflows from proved oil and natural gas reserves, less future development, abandonment, production, and income tax expenses, discounted at 10% per annum to reflect timing of future cash flows and using the same pricing assumptions as were used to calculate PV-10. Standardized measure differs from PV-10 because standardized measure includes the effect of future income taxes. |
The above table does not include proved reserves net to our interest in Tatex II, Tatex III or Grizzly. For further discussion of our interest in Tatex II, Tatex III and Grizzly, see Item 1. “Business–Our Equity Investments.”
As noted above, our December 31, 2018 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2018 of $65.56 per barrel and $3.10 per MMBtu. Holding production and development costs constant, if our 2018 reserves were calculated using the December 31, 2018 price of $45.41 per barrel and $2.94 per MMBtu, our discounted future net cash flows before income taxes would have been approximately $2.5 billion, or $0.9 billion less than our actual PV-10 value of $3.4 billion at December 31, 2018.
The table below provides the 2018 SEC pricing of benchmark prices as well as the unweighted average of the months ended December 31, 2018 and January 31, 2019:
|
| | | | | | | |
| | SEC Pricing 2018 | | 2-month Average 2019 |
| Henry Hub Natural Gas (per MMBtu) | $ | 3.10 |
| | $ | 3.90 |
|
| WTI Crude Oil (per Bbl) | $ | 65.56 |
| | $ | 48.17 |
|
The foregoing reserves are all located within the continental United States. Reserve engineering is a subjective process of estimating volumes of economically recoverable oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. As a
result, the estimates of different engineers often vary. In addition, the results of drilling, testing and production may justify revisions of such estimates. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. Estimates of economically recoverable oil and natural gas and of future net revenues are based on a number of variables and assumptions, all of which may vary from actual results, including geologic interpretation, prices and future production rates and costs. See Item 1A. “Risk Factors” contained elsewhere in this Form 10-K. We have not filed any estimates of total, proved net oil or gas reserves with any federal authority or agency other than the SEC since the beginning of our last fiscal year.
Changes in Proved Reserves during 2018.
The following table summarizes the changes in our estimated proved reserves during 2018 (in Bcfe):
|
| | |
Proved Reserves, December 31, 2017 | 5,395 |
|
Sales of oil and gas reserves in place | (45 | ) |
Extensions and discoveries | 711 |
|
Revisions of prior reserve estimates | (821 | ) |
Current production | (497 | ) |
Proved Reserves, December 31, 2018 | 4,743 |
|
Sales of oil and natural gas reserves in place. These are revisions to proved reserves resulting from the divestiture of minerals in place during a period. During 2018, we sold approximately 44.9 Bcfe of proved oil and natural gas reserves through various sales of non-operated interests in both our Utica and SCOOP fields.
Extensions and discoveries. These are additions to our proved reserves that result from (i) extension of the proved acreage of previously discovered reservoirs through additional drilling in periods subsequent to discovery and (ii) discovery of new fields with proved reserves or of new reservoirs of proved reserves in existing fields. Extensions and discoveries of approximately 711.2 Bcfe of proved reserves were primarily attributable to the continued development of our Utica Shale and SCOOP acreage. We added 76 locations in our Utica field, 59 locations in our SCOOP field and 13 new locations in our Southern Louisiana fields. Total extensions and discoveries of approximately 569.8 Bcfe were attributed to our Utica field, which was primarily a result of our current development plan which refocuses development within our existing fields. This change reflects our ongoing efforts to optimize the development program with well selection based on economic returns, commodity mix and surface considerations.
Revisions of prior reserve estimates. Revisions represent changes in previous reserve estimates, either upward or downward, resulting from development plan changes, new information normally obtained from development drilling and production history or a change in economic factors, such as commodity prices, operating costs or development costs.
We experienced downward revisions of approximately 1.0 Tcfe in estimated proved reserves with the exclusion of 127 PUD locations in our Utica field and 12 PUD locations in our SCOOP field, which was primarily a result of changes in our schedule which moved development of these PUD locations beyond five years of initial booking. The development plan change, as approved by our senior management and board of directors, is a result of continued focus on free cash flow generation, thereby reducing the number of wells included in our development plan. This downward revision was partially offset by upward revisions of approximately 82.4 Bcfe in estimated proved reserves in 2018 due to changes in wellbore lateral length, 67.6 Bcfe due to changes in ownership interest, 27.9 Bcfe due to an increase in pricing and 8.3 Bcfe due to changes in our well performance.
While commodity prices experienced volatility throughout 2018, the 12-month average price for natural gas increased from $2.98 per MMBtu for 2017 to $3.10 per MMBtu for 2018, the 12-month average price for NGLs increased from $18.40 per barrel for 2017 to $32.02 per barrel for 2018, and the 12-month average price for crude oil increased from $51.34 per barrel for 2017 to $65.56 per barrel for 2018.
Additional information regarding estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2018, 2017 and 2016 and changes in proved reserves during the last three years are contained in the Supplemental Information on Oil and Gas Exploration and Production Activities, or Supplemental Information, in Note 19 to our consolidated financial statements included in this report.
Proved Undeveloped Reserves (PUDs)
As of December 31, 2018, our proved undeveloped reserves totaled 11,480 MBbls of oil, 2,320,705 MMcf of natural gas and 39,710 MBbls of NGLs, for a total of 2,627,845 MMcfe. Approximately 68% and 32% of our PUDs at year-end 2018 were located in our Utica field and our SCOOP field, respectively. PUDs will be converted from undeveloped to developed as the applicable wells commence production or there are no material incremental completion capital expenditures associated with such proved developed reserves.
We record PUD reserves only after a development plan has been approved by our senior management and board of directors to complete the associated development drilling within five years from the time of initial booking. The PUD locations identified in our development plan are determined based on an analysis of the information that we have available at that time. After a development plan has been adopted, we may periodically make adjustments to the approved development plan due to events and circumstances that have occurred subsequent to the time the plan was approved. These circumstances may include changes in commodity price outlook and costs, delays in the availability of infrastructure, well permitting delays and new data from recently completed wells.
The current development plan approved by our senior management and board of directors represents a decrease in drilling activity from our previous plans with a focus on free cash flow generation. As a result, drilling of certain previously booked PUD locations in both our Utica and SCOOP development plans has been extended beyond five years of initial booking. This change was not a result of well performance or economics.
The following table summarizes the changes in our estimated proved undeveloped reserves during 2018 (in Bcfe):
|
| | |
Proved Undeveloped Reserves, December 31, 2017 | 3,499 |
|
Sales of oil and natural gas reserves in place | (45 | ) |
Extensions and discoveries | 649 |
|
Conversion to proved developed reserves | (576 | ) |
Revisions of prior reserve estimates | (899 | ) |
Proved Undeveloped Reserves, December 31, 2018 | 2,628 |
|
Sales of oil and natural gas reserves in place. During 2018, we sold approximately 44.9 Bcfe of proved undeveloped oil and natural gas reserves associated with various non-operated interests, the majority of which were in our Utica field.
Extensions and discoveries. Our extensions and discoveries of approximately 649.4 Bcfe were primarily attributed to the addition of 75 PUD locations in the Utica field and 11 PUD locations in the SCOOP field as a result of our current development plan that refocused some activity within our existing fields. This change reflects our ongoing efforts to optimize the development program with well selection based on economic returns, commodity mix and surface considerations.
Conversion to proved developed reserves. We converted approximately 575.9 Bcfe attributable to 62 PUD locations into proved developed reserves and 16 PUD locations into proved developed not producing. These 78 PUDs represent a conversion rate of 18% for 2018.
Revision of prior reserve estimates. We experienced negative revisions of approximately 1.0 Tcfe from the exclusion of 127 PUD locations in our Utica field and 12 PUD locations in our SCOOP field, which were primarily a result of changes in our development plan which moved development of these PUD locations beyond five years of initial booking. The development plan change, as approved by our senior management and board of directors, is a result of a focus on free cash flow generation. This negative revision was partially offset by positive revisions of 82.4 Bcfe in estimated proved reserves in 2018 due to changes in wellbore lateral length and 26.3 Bcfe due to change in our ownership interest.
Costs incurred relating to the development of PUDs were approximately $370.3 million in 2018.
All PUD drilling locations included in our 2018 reserve report are scheduled to be drilled within five years of initial booking.
As of December 31, 2018, 1% of our total proved reserves were classified as proved developed non-producing.
As noted above, our December 31, 2018 proved reserves were calculated using prices based on the 12-month unweighted arithmetic average of the first-day-of-the month price for the period January through December 2018 of $65.56 per barrel and $3.10 per MMBtu. Holding production and development costs constant, if SEC pricing were $50.00 per barrel and $2.50 per MMBtu, this would have resulted in a loss of 1.3 Tcfe of our PUD volumes at December 31, 2018. Holding production and development costs constant, if SEC pricing were $40.00 per barrel and $2.00 per MMBtu, this would have resulted in a loss of 2.3 Tcfe of our PUD volumes at December 31, 2018.
Production, Prices and Production Costs
The following table presents our production volumes, average prices received and average production costs during the periods indicated:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | ($ In thousands) |
| Natural gas sales | | | | | |
| Natural gas production volumes (MMcf) | 443,742 |
| | 350,061 |
| | 227,594 |
|
| | | | | | |
| Total natural gas sales | $ | 1,121,815 |
| | $ | 845,999 |
| | $ | 420,128 |
|
| | | | | | |
| Natural gas sales without the impact of derivatives ($/Mcf) | $ | 2.53 |
| | $ | 2.42 |
| | $ | 1.85 |
|
| Impact from settled derivatives ($/Mcf) | $ | (0.04 | ) | | $ | 0.07 |
| | $ | 0.60 |
|
Average natural gas sales price, including settled derivatives ($/Mcf) | $ | 2.49 |
| | $ | 2.49 |
| | $ | 2.45 |
|
| | | | | | |
| Oil and condensate sales | | | | | |
| Oil and condensate production volumes (MBbls) | 2,801 |
| | 2,579 |
| | 2,126 |
|
| | | | | | |
| Total oil and condensate sales | $ | 177,793 |
| | $ | 124,568 |
| | $ | 81,173 |
|
| | | | | | |
| Oil and condensate sales without the impact of derivatives ($/Bbl) | $ | 63.48 |
| | $ | 48.29 |
| | $ | 38.18 |
|
| Impact from settled derivatives ($/Bbl) | $ | (9.51 | ) | | $ | 1.59 |
| | $ | 5.11 |
|
| Average oil and condensate sales price, including settled derivatives ($/Bbl) | $ | 53.97 |
| | $ | 49.88 |
| | $ | 43.29 |
|
| | | | | | |
| Natural gas liquids sales | | | | | |
| Natural gas liquids production volumes (MGal) | 251,720 |
| | 224,038 |
| | 161,562 |
|
| | | | | | |
| Total natural gas liquids sales | $ | 178,915 |
| | $ | 136,057 |
| | $ | 59,115 |
|
| | | | | | |
| Natural gas liquids sales without the impact of derivatives ($/Gal) | $ | 0.71 |
| | $ | 0.61 |
| | $ | 0.37 |
|
| Impact from settled derivatives ($/Gal) | $ | (0.05 | ) | | $ | (0.03 | ) | | $ | (0.01 | ) |
| Average natural gas liquids sales price, including settled derivatives ($/Gal) | $ | 0.66 |
| | $ | 0.58 |
| | $ | 0.36 |
|
| | | | | | |
| Natural gas, oil and condensate and natural gas liquids sales | | | | | |
| Natural gas equivalents (MMcfe) | 496,505 |
| | 397,543 |
| | 263,430 |
|
| | | | | | |
| Total natural gas, oil and condensate and natural gas liquids sales | $ | 1,478,523 |
| | $ | 1,106,624 |
| | $ | 560,416 |
|
| | | | | | |
| Natural gas, oil and condensate and natural gas liquids sales without the impact of derivatives ($/Mcfe) | $ | 2.98 |
| | $ | 2.78 |
| | $ | 2.13 |
|
| Impact from settled derivatives ($/Mcfe) | $ | (0.12 | ) | | $ | 0.07 |
| | $ | 0.56 |
|
| Average natural gas, oil and condensate and natural gas liquids sales price, including settled derivatives ($/Mcfe) | $ | 2.86 |
| | $ | 2.85 |
| | $ | 2.69 |
|
| | | | | | |
| Production Costs: | | | | | |
| Average production costs ($/Mcfe) | $ | 0.18 |
| | $ | 0.20 |
| | $ | 0.26 |
|
| Average production taxes ($/Mcfe) | $ | 0.07 |
| | $ | 0.05 |
| | $ | 0.05 |
|
| Average midstream gathering and processing ($/Mcfe) | $ | 0.58 |
| | $ | 0.63 |
| | $ | 0.63 |
|
| Total production costs, midstream costs and production taxes ($/Mcfe) | $ | 0.83 |
| | $ | 0.88 |
| | $ | 0.94 |
|
The following table provides a summary of our production, average sales prices and average production costs for oil and gas fields containing 15% or more of our total proved reserves as of December 31, 2018:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Utica Shale | | | | | |
| Net Production | | | | | |
| Oil (MBbls) | 299 |
| | 473 |
| | 870 |
|
| Natural gas (MMcf) | 379,417 |
| | 309,450 |
| | 227,447 |
|
| NGL (Mgal) | 113,379 |
| | 139,634 |
| | 161,494 |
|
| Total (MMcfe) | 397,406 |
| | 332,238 |
| | 255,740 |
|
| Average Sales Price Without the Impact of Derivatives: | | | | | |
| Oil ($/Bbl) | $ | 60.22 |
| | $ | 44.26 |
| | $ | 34.59 |
|
| Natural gas ($/Mcf) | $ | 2.50 |
| | $ | 2.38 |
| | $ | 1.85 |
|
| NGL ($/Gal) | $ | 0.67 |
| | $ | 0.60 |
| | $ | 0.37 |
|
| Average Production Costs ($/Mcfe) | $ | 0.14 |
| | $ | 0.15 |
| | $ | 0.18 |
|
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 (1) |
| SCOOP | | | |
| Net Production | | | |
| Oil (MBbls) | 1,710 |
| | 1,083 |
|
| Natural gas (MMcf) | 64,258 |
| | 40,501 |
|
| NGL (Mgal) | 138,261 |
| | 84,283 |
|
| Total (MMcfe) | 94,268 |
| | 59,038 |
|
| Average Sales Price Without the Impact of Derivatives: | | | |
| Oil ($/Bbl) | $ | 62.36 |
| | $ | 48.70 |
|
| Natural gas ($/Mcf) | $ | 2.67 |
| | $ | 2.68 |
|
| NGL ($/Gal) | $ | 0.75 |
| | $ | 0.62 |
|
| Average Production Costs ($/Mcfe) | $ | 0.20 |
| | $ | 0.19 |
|
(1) We acquired our SCOOP assets in our SCOOP acquisition completed on February 17, 2017.
Productive Wells and Acreage
The following table presents our total gross and net productive and non-productive wells, expressed separately for oil and gas, and the total gross and net developed and undeveloped acres as of December 31, 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Average NRI/WI (1) | | Productive Oil Wells | | Productive Gas Wells | | Non-Productive Oil Wells | | Non-Productive Gas Wells | | Developed Acreage (2) | | Undeveloped Acreage |
| Field | Percentages | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net |
| Utica Shale (3) | 44.26/54.44 | | 74 |
| | 36.14 |
| | 493 |
| | 271.86 |
| | 3 |
| | 2.66 |
| | 2 |
| | 1.57 |
| | 92,594 |
| | 72,693 |
| | 148,417 |
| | 136,839 |
|
| SCOOP (4) | 24.34/30.20 | | 110 |
| | 18.58 |
| | 466 |
| | 154.69 |
| | 3 |
| | 2.59 |
| | 30 |
| | 25.24 |
| | 48,658 |
| | 34,532 |
| | 17,625 |
| | 15,517 |
|
| West Cote Blanche Bay Field (5) | 80.108/100 | | 69 |
| | 69 |
| | — |
| | — |
| | 146 |
| | 146 |
| | — |
| | — |
| | 5,668 |
| | 5,668 |
| | — |
| | — |
|
| E. Hackberry Field (6) | 82.33/100 | | 14 |
| | 14 |
| | — |
| | — |
| | 130 |
| | 130 |
| | — |
| | — |
| | 2,910 |
| | 2,910 |
| | 1,206 |
| | 1,206 |
|
| W. Hackberry Field | 87.50/100 | | 2 |
| | 2 |
| | — |
| | — |
| | 7 |
| | 7 |
| | — |
| | — |
| | 727 |
| | 727 |
| | 306 |
| | 306 |
|
| Niobrara Formation (7) | 34.52/48.61 | | 3 |
| | 1.46 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,998 |
| | 999 |
| | 3,816 |
| | 1,908 |
|
| Bakken Formation (8) | 1.51/1.83 | | 18 |
| | 0.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 386 |
| | 77 |
| | 3,505 |
| | 701 |
|
| Overrides/Royalty Non-operated | Various | | 673 |
| | 0.9 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | | 963 |
| | 142.38 |
| | 959 |
| | 426.55 |
| | 289 |
| | 288.25 |
| | 32 |
| | 26.81 |
| | 152,941 |
| | 117,606 |
| | 174,875 |
| | 156,477 |
|
| |
(1) | Net Revenue Interest (NRI)/Working Interest (WI). |
| |
(2) | Developed acres are acres spaced or assigned to productive wells. Approximately 43% of our acreage is developed acreage and has been perpetuated by production. |
| |
(3) | With respect to our total undeveloped Utica Shale acreage as of December 31, 2018, leases representing 11%, 10%, 9% and 32% are currently scheduled to expire in 2019, 2020, 2021 and thereafter, respectively. Our Utica Shale leases generally grant us the right to extend these leases for an additional five-year period. NRI/WI is from wells that have been drilled or in which we have elected to participate. Includes 216 gross (38.12 net) gas wells and 29 gross (3.32 net) oil wells drilled by other operators on our acreage. |
(4) With respect to our total undeveloped SCOOP acreage as of December 31, 2018, leases representing 53%, 5% and 1% are currently scheduled to expire in 2019, 2020 and 2021, respectively. NRI/WI is from wells that have been drilled or in which we have elected to participate. Includes 296 gross (22.20 net) gas well and 96 gross (7.82 net) oil wells drilled by other operators on our acreage.
| |
(5) | We have a 100% working interest (80.108% average NRI) from the surface to the base of the 13900 Sand which is located at 11,320 feet. Below the base of the 13900 Sand, we have a 40.40% non-operated working interest (29.95% NRI). |
| |
(6) | NRI shown is for producing wells. |
| |
(7) | The leases relating to our Niobrara Formation acreage will expire at the end of their respective primary terms unless the applicable leases are renewed or extended, we have commenced the necessary operations required by the terms of the applicable leases or we have obtained actual production from acreage subject to the applicable leases, in which event they will remain in effect until the cessation of production. Leases representing 66% of our total Niobrara undeveloped acreage are currently scheduled to expire in 2019 . |
| |
(8) | NRI/WI is from wells that have been drilled or in which we have elected to participate. |
Completed and Present Drilling and Recompletion Activities
The following table sets forth information with respect to operated wells completed during the periods indicated. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value. Productive wells are those that produce commercial quantities of hydrocarbons, whether or not they produce a reasonable rate of return.
|
| | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | Gross | | Net | | Gross | | Net | | Gross | | Net |
| Recompletions: | | | | | | | | | | | |
| Productive | 47 |
| | 47 |
| | 81 |
| | 81 |
| | 77 |
| | 77 |
|
| Dry | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | 47 |
| | 47 |
| | 81 |
| | 81 |
| | 77 |
| | 77 |
|
| Development: | | | | | | | | | | | |
| Productive | 34 |
| | 30 |
| | 124 |
| | 115.4 |
| | 49 |
| | 42.5 |
|
| Dry | — |
| | — |
| | 2 |
| | 2 |
| | 1 |
| | 1.0 |
|
| Total | 34 |
| | 30 |
| | 126 |
| | 117.4 |
| | 50 |
| | 43.5 |
|
| Exploratory: | | | | | | | | | | | |
| Productive | 2 |
| | 1.5 |
| | — |
| | — |
| | — |
| | — |
|
| Dry | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | 2 |
| | 1.5 |
| | — |
| | — |
| | — |
| | — |
|
Title to Oil and Natural Gas Properties
It is customary in the oil and natural gas industry to make only a cursory review of title to undeveloped oil and natural gas leases at the time they are acquired and to obtain more extensive title examinations when acquiring producing properties. In future acquisitions, we will conduct title examinations on material portions of such properties in a manner generally consistent with industry practice. Certain of our oil and natural gas properties may be subject to title defects, encumbrances, easements, servitudes or other restrictions, none of which, in management's opinion, will in the aggregate materially restrict our operations.
In two separate complaints, one filed by the State of Louisiana and the Parish of Cameron in the 38th Judicial District Court for the Parish of Cameron on February 9, 2016 and the other filed by the State of Louisiana and the District Attorney for the 15th Judicial District of the State of Louisiana in the 15th Judicial District Court for the Parish of Vermilion on July 29, 2016, we were named as a defendant, among 26 oil and gas companies, in the Cameron Parish complaint and among more than 40 oil and gas companies in the Vermilion Parish complaint, or the Complaints. The Complaints were filed under the State and Local Coastal Resources Management Act of 1978, as amended, and the rules, regulations, orders and ordinances adopted thereunder, which we referred to collectively as the CZM Laws, and allege that certain of the defendants’ oil and gas exploration, production and transportation operations associated with the development of the East Hackberry and West Hackberry oil and gas fields, in the case of the Cameron Parish complaint, and the Tigre Lagoon oil and gas field, in the case of the Vermilion Parish complaint, were conducted in violation of the CZM Laws. The Complaints allege that such activities caused substantial damage to land and waterbodies located in the coastal zone of the relevant Parish, including due to defendants’ design, construction and use of waste pits and the alleged failure to properly close the waste pits and to clear, re-vegetate, detoxify and return the property affected to its original condition, as well as the defendants’ alleged discharge of waste into the coastal zone. The Complaints also allege that the defendants’ oil and gas activities have resulted in the dredging of numerous canals, which had a direct and significant impact on the state coastal waters within the relevant Parish and that the defendants, among other things, failed to design, construct and maintain these canals using the best practical techniques to prevent bank slumping, erosion and saltwater intrusion and to minimize the potential for inland movement of storm-generated surges, which activities allegedly have resulted in the erosion of marshes and the degradation of terrestrial and aquatic life therein. The Complaints also allege that the defendants failed to re-vegetate, refill, clean, detoxify and otherwise restore these canals to their original condition. In these two petitions, the plaintiffs seek damages and other appropriate relief under the CZM Laws, including the payment of costs necessary to clear, re-vegetate, detoxify and otherwise restore the affected coastal zone of the relevant Parish to its original condition, actual restoration of such coastal zone to its original condition, and the payment of reasonable attorney fees and legal expenses and pre-judgment and post judgment interest.
We were served with the Cameron complaint in early May 2016 and with the Vermilion complaint in early September 2016. The Louisiana Attorney General and the Louisiana Department of Natural Resources intervened in both the Cameron Parish suit and the Vermilion Parish suit. Shortly after the Complaints were filed, certain defendants removed the cases to the United States District Court for the Western District of Louisiana. In both cases, the plaintiffs filed motions to remand the
lawsuits to state court, which were ultimately granted by the district courts. However, on May 23, 2018, a group of defendants again removed the Cameron Parish and Vermilion Parish lawsuits to federal court. In response, the plaintiffs again filed motions to remand the cases to state court. The removing defendants have opposed plaintiffs' motions to remand. On January 16, 2019, the federal district court held a hearing on plaintiff's motion to remand. The court took the matter under advisement and has not yet issued a ruling. Further action in the cases will be stayed until the courts rule on the motions to remand. Also, shortly after the May 23, 2018 removal, the removing defendants filed motions with the United States Judicial Panel on Multidistrict Litigation, or the MDL Panel, requesting that the Cameron Parish and Vermilion Parish lawsuits be consolidated with 40 similar lawsuits so that pre-trial proceedings in the cases could be coordinated. The MDL Panel denied the motion to consolidate the lawsuits. Due to the procedural posture of the lawsuits, the cases are still in their early stages and the parties have conducted very little discovery. As a result, we have not had the opportunity to evaluate the applicability of the allegations made in plaintiffs' complaints to our operations and management cannot determine the amount of loss, if any, that may result.
In addition, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities. While the outcome of the pending litigation, disputes or claims cannot be predicted with certainty, in the opinion of our management, none of these matters, if decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations.
|
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
|
| |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Price Range of Common Stock
Our common stock is quoted on the Nasdaq Global Select Market under the symbol “GPOR.” The following table sets forth the high and low sale prices of our common stock for the periods presented:
|
| | | | | | | |
| | Price Range of Common Stock |
| | High | | Low |
| 2017 | | | |
| First Quarter | $ | 22.35 |
| | $ | 15.66 |
|
| Second Quarter | 17.82 |
| | 12.47 |
|
| Third Quarter | 15.09 |
| | 10.90 |
|
| Fourth Quarter | 15.08 |
| | 11.73 |
|
| 2018 | | | |
| First Quarter | $ | 13.74 |
| | $ | 8.11 |
|
| Second Quarter | 12.70 |
| | 8.60 |
|
| Third Quarter | 13.41 |
| | 10.07 |
|
| Fourth Quarter | 11.67 |
| | 6.18 |
|
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Issuer Repurchases of Equity Securities
Our common stock repurchase activity for the three months ended December 31, 2018 was as follows:
|
| | | | | | | | | | | | | | |
| Period | | Total number of shares purchased(2) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs (2) | | Approximate maximum dollar value of shares that may yet be purchased under the plans or programs (1) |
| October 2018 | | — |
| | $ | — |
| | — |
| | $ | 90,003,000 |
|
| November 2018 | | 28,584 |
| | $ | 8.81 |
| | — |
| | $ | 90,003,000 |
|
| December 2018 | | 10,212,483 |
| | $ | 8.81 |
| | 10,212,483 |
| | $ | — |
|
| Total | | 10,241,067 |
| | $ | 8.81 |
| | 10,212,483 |
| | |
|
| | | | | | | | | |
(1) | In January 2018, our board of directors approved a stock repurchase program to acquire up to $100.0 million of our outstanding common stock, and in May 2018 expanded this program authorizing us to acquire up to an additional $100.0 million of our outstanding common stock during 2018 for a total of up to $200.0 million. This repurchase program was authorized to extend through December 31, 2018 and was fully executed in December 2018.
|
(2) | In November 2018, we repurchased and canceled 28,584 shares at a weighted average price of $8.81 to satisfy tax withholding requirements incurred upon the vesting of restricted stock. Additionally, in December 2018, we repurchased and canceled approximately 10,212,483 shares under the repurchase program at a weighted average price of $8.81 per share.
|
In January 2019, our board of directors approved a new stock repurchase program to acquire up to $400.0 million of our outstanding common stock within the next 24 months. Our board of director’s determination to repurchase shares of our common stock under our new stock repurchase program will depend upon market conditions, applicable legal requirements, contractual obligations and other factors that the board of directors deems relevant. Based on an evaluation of these factors, our board of directors may determine not to repurchase shares or to repurchase shares at reduced levels from those anticipated by our stockholders, any or all of which could reduce returns to our stockholders.
Holders of Record
At the close of business on February 18, 2019, there were 319 stockholders of record holding 162,986,045 shares of our outstanding common stock. There were approximately 20,540 beneficial owners of our common stock as of February 18, 2019.
Dividend Policy
We have never paid dividends on our common stock. We currently intend to retain all earnings to fund our operations. Therefore, we do not intend to pay any cash dividends on the common stock in the foreseeable future. In addition, the terms of our credit facility restrict the payment of any dividends to the holders of our common stock.
|
| |
ITEM 6. | SELECTED FINANCIAL DATA |
You should read the following selected consolidated financial data in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes appearing elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2018, December 31, 2017 and December 31, 2016 and the selected consolidated balance sheet data at December 31, 2018 and December 31, 2017 are derived from our audited consolidated financial statements appearing elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2015 and December 31, 2014 and the selected consolidated balance sheet data at December 31, 2016, December 31, 2015 and December 31, 2014 are derived from our audited consolidated financial statements that are not included in this report. The historical data presented below is not indicative of future results. We did not pay any cash dividends on our common stock during any of the periods set forth in the following table.
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (In thousands, except share data) |
| Selected Consolidated Statements of Operations Data: | | | | | | | | | |
| Revenues | $ | 1,355,044 |
| | $ | 1,320,303 |
| | $ | 385,910 |
| | $ | 708,990 |
| | $ | 670,762 |
|
| Costs and expenses: | | | | | | | | | |
| Lease operating expenses | 91,640 |
| | 80,246 |
| | 68,877 |
| | 69,475 |
| | 52,191 |
|
| Production taxes | 33,480 |
| | 21,126 |
| | 13,276 |
| | 14,740 |
| | 24,006 |
|
| Midstream gathering and processing | 290,188 |
| | 248,995 |
| | 165,972 |
| | 138,590 |
| | 64,467 |
|
| Depreciation, depletion and amortization | 486,664 |
| | 364,629 |
| | 245,974 |
| | 337,694 |
| | 265,431 |
|
Impairment of oil and natural gas properties
| — |
| | — |
| | 715,495 |
| | 1,440,418 |
| | — |
|
| General and administrative | 56,633 |
| | 52,938 |
| | 43,409 |
| | 41,967 |
| | 38,290 |
|
| Accretion expense | 4,119 |
| | 1,611 |
| | 1,057 |
| | 820 |
| | 761 |
|
| Acquisition expense | — |
| | 2,392 |
| | — |
| | — |
| | — |
|
| Gain on sale of assets | — |
| | — |
| | — |
| | — |
| | (11 | ) |
| | 962,724 |
| | 771,937 |
| | 1,254,060 |
| | 2,043,704 |
| | 445,135 |
|
| Income (Loss) from Operations | 392,320 |
| | 548,366 |
| | (868,150 | ) | | (1,334,714 | ) | | 225,627 |
|
| Other (Income) Expense: | | | | | | | | | |
| Interest expense | 135,273 |
| | 108,198 |
| | 63,530 |
| | 51,221 |
| | 23,986 |
|
| Interest income | (314 | ) | | (1,009 | ) | | (1,230 | ) | | (643 | ) | | (195 | ) |
| Litigation settlement | 1,075 |
| | — |
| | — |
| | — |
| | 25,500 |
|
| Insurance proceeds | (231 | ) | | — |
| | (5,718 | ) | | (10,015 | ) | | — |
|
| Loss on debt extinguishment | — |
| | — |
| | 23,776 |
| | — |
| | — |
|
| Gain on contribution of investments | — |
| | — |
| | — |
| | — |
| | (84,470 | ) |
| Gain on sale of equity method investments | (124,768 | ) | | (12,523 | ) | | (3,391 | ) | | — |
| | — |
|
| (Income) loss from equity method investments | (49,904 | ) | | 17,780 |
| | 37,376 |
| | 106,093 |
| | (139,434 | ) |
| Other expense (income) | 698 |
| | (1,041 | ) | | 129 |
| | (485 | ) | | (504 | ) |
| | (38,171 | ) | | 111,405 |
| | 114,472 |
| | 146,171 |
| | (175,117 | ) |
| Income (Loss) from Continuing Operations before Income Taxes | 430,491 |
| | 436,961 |
| | (982,622 | ) | | (1,480,885 | ) | | 400,744 |
|
| Income Tax (Benefit) Expense | (69 | ) | | 1,809 |
| | (2,913 | ) | | (256,001 | ) | | 153,341 |
|
| Income (Loss) from Continuing Operations | 430,560 |
| | 435,152 |
| | (979,709 | ) | | (1,224,884 | ) | | 247,403 |
|
| Net Income (Loss) Available to Common Stockholders | $ | 430,560 |
| | $ | 435,152 |
| | $ | (979,709 | ) | | $ | (1,224,884 | ) | | $ | 247,403 |
|
| Net Income (Loss) Per Common Share—Basic: | $ | 2.46 |
| | $ | 2.42 |
| | $ | (7.97 | ) | | $ | (12.27 | ) | | $ | 2.90 |
|
| Net Income (Loss) Per Common Share—Diluted: | $ | 2.45 |
| | $ | 2.41 |
| | $ | (7.97 | ) | | $ | (12.27 | ) | | $ | 2.88 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | At December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (In thousands) |
| Selected Consolidated Balance Sheet Data: | | | | | | | | | |
| Total assets | $ | 6,051,036 |
| | $ | 5,807,752 |
| | $ | 4,223,145 |
| | $ | 3,334,734 |
| | $ | 3,619,473 |
|
| Total debt, including current maturities | $ | 2,087,416 |
| | $ | 2,038,943 |
| | $ | 1,593,875 |
| | $ | 946,263 |
| | $ | 703,564 |
|
| Total liabilities | $ | 2,723,268 |
| | $ | 2,706,138 |
| | $ | 2,039,253 |
| | $ | 1,295,897 |
| | $ | 1,323,177 |
|
| Stockholders’ equity | $ | 3,327,768 |
| | $ | 3,101,614 |
| | $ | 2,183,892 |
| | $ | 2,038,837 |
| | $ | 2,296,296 |
|
|
| |
ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Item 1A. "Risk Factors” and the section entitled “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this Annual Report on Form 10-K.
Overview
We are an independent oil and natural gas exploration and production company focused on the exploration, exploitation, acquisition and production of natural gas, natural gas liquids and crude oil in the United States. Our principal properties are located in the Utica Shale primarily in Eastern Ohio and the SCOOP Woodford and SCOOP Springer plans in Oklahoma. In addition, among other interests, we hold an acreage position along the Louisiana Gulf Coast in the West Cote Blanche Bay, or WCBB, and Hackberry fields, an acreage position in the Alberta oil sands in Canada through our interest in Grizzly Oil Sands ULC, or Grizzly, and an approximate 21.9% equity interest in Mammoth Energy Services, Inc., or Mammoth Energy, an oil field services company listed on the Nasdaq Global Select Market (TUSK).
Prices for oil and natural gas have historically been volatile and subject to significant fluctuation in response to changes in supply and demand, market uncertainty and a variety of other factors beyond our control. During the last four years, particularly in light of the continued downturn in commodity prices, we focused on operational efficiencies in an effort to reduce our overall well costs and deliver better results in a more economical manner, all while growing our production base each year. In response to current declining forward natural gas prices, we are shifting to building an organization that is focused on disciplined capital allocation, cash flow generation and a commitment to executing a thoughtful, clearly communicated business plan that enhances value for all of our shareholders. We plan to maximize results with the core assets in our portfolio today and focus on returns that will allow us to operate within our cash flow in 2019.
2018 and 2019 Year to Date Highlights
Production increased 25% to approximately 496,505 MMcfe for the year ended December 31, 2018 from approximately 397,543 MMcfe for the year ended December 31, 2017.
During 2018, we spud 36 gross (31.6 net) wells, turned to sales 50 gross (47.8 net) operated wells, participated in an additional 68gross (7.5 net) wells that were drilled by other operators on our Utica Shale and SCOOP acreage and recompleted 47 existing wells in our Southern Louisiana fields. Of our 36 new wells spud during 2018, seven were completed as producing wells and, at year end, 29 were in various stages of completion.
Oil and natural gas revenues, before the impact of derivatives, increased 36% to $1.5 billion for the year ended December 31, 2018 from $1.1 billion for the year ended December 31, 2017.
During the year ended December 31, 2018, we reduced our unit lease operating expense by 10% to $0.18 per Mcfe from $0.20 per Mcfe during the year ended December 31, 2017.
During the year ended December 31, 2018, we reduced our unit general and administrative expense by 15% to $0.11 per Mcfe from $0.13 per Mcfe during the year ended December 31, 2017.
During the year ended December 31, 2018, we reduced our unit midstream gathering and processing expense by 8% to $0.58 per Mcfe from $0.63 per Mcfe during the year ended December 31, 2017.
In January 2018, our board of directors approved a stock repurchase program to acquire up to $100.0 million of our outstanding common stock, and in May 2018 expanded this program to acquire up to an additional $100.0 million of our common stock during 2018 for a total of up to $200.0 million, which we believe underscores the confidence we have in our business model, financial performance and asset base. During 2018, we purchased 20.7 million shares of our outstanding common stock for a total of approximately $200.0 million.
On May 1, 2018, we sold our 25% equity interest in Strike Force Midstream LLC, or Strike Force, to EQT Midstream Partners, LP for $175.0 million in cash.
On June 29, 2018, we sold 1,235,600 shares, and on July 30, 2018, we sold an additional 118,974 shares, of our Mammoth Energy common stock in an underwritten public offering and related partial exercise of the underwriters' option to purchase additional shares for an aggregate net proceeds to us of approximately $51.5 million. Following the sale of these shares, we owned 9,829,548 shares, or 21.9% at December 31, 2018, of Mammoth Energy’s outstanding common stock.
During 2019 (through February 15, 2019), we spud seven gross (5.3 net) wells. As of February 15, 2019, three wells were waiting on completion and four were still being drilled.
In January 2019, our board of directors approved a stock repurchase program to acquire up to $400.0 million of our outstanding common stock within the next 24 months, which we believe underscores the confidence we have in our business model, financial performance and asset base.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We have identified certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management. We analyze our estimates including those related to oil and natural gas properties, revenue recognition, income taxes and commitments and contingencies, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Oil and Natural Gas Properties. We use the full cost method of accounting for oil and natural gas operations. Accordingly, all costs, including non-productive costs and certain general and administrative costs directly associated with acquisition, exploration and development of oil and natural gas properties, are capitalized. Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, based on the 12-month unweighted average of the first-day-of-the-month price for the prior twelve months, adjusted for any contract provisions or financial derivatives, if any, that hedge our oil and natural gas revenue, and excluding the estimated abandonment costs for properties with asset retirement obligations recorded on the balance sheet, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized, including related deferred taxes for differences between the book and tax basis of the oil and natural gas properties. If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Such capitalized costs, including the estimated future development costs and site remediation costs of proved undeveloped properties are depleted by an equivalent units-of-production method, converting gas to barrels at the ratio of six Mcf of gas to one barrel of oil. No gain or loss is recognized upon the disposal of oil and natural gas properties, unless such dispositions significantly alter the relationship between capitalized costs and proven oil and natural gas reserves. Oil and natural gas properties not subject to amortization consist of the cost of undeveloped leaseholds and
totaled $2.9 billion at both December 31, 2018 and December 31, 2017. These costs are reviewed quarterly by management for impairment, with the impairment provision included in the cost of oil and natural gas properties subject to amortization. Factors considered by management in its impairment assessment include our drilling results and those of other operators, the terms of oil and natural gas leases not held by production and available funds for exploration and development.
Ceiling Test. Companies that use the full cost method of accounting for oil and gas properties are required to perform a ceiling test each quarter. The test determines a limit, or ceiling, on the book value of the oil and gas properties. Net capitalized costs are limited to the lower of unamortized cost net of deferred income taxes or the cost center ceiling (as defined in the preceding paragraph). If the net book value, including related deferred taxes, exceeds the ceiling, an impairment or noncash writedown is required. Ceiling test impairment can give us a significant loss for a particular period; however, future depletion expense would be reduced. A decline in oil and gas prices may result in an impairment of oil and gas properties. As a result of the decline in commodity prices, we recognized a ceiling test impairment of $715.5 million for the year ended December 31, 2016. No ceiling test impairment was recognized by us for the years ended December 31, 2018 and 2017. If prices of oil, natural gas and natural gas liquids decline in the future, we may be required to further write down the value of our oil and natural gas properties, which could negatively affect our results of operations.
Asset Retirement Obligations. We have obligations to remove equipment and restore land at the end of oil and gas production operations. Our removal and restoration obligations are primarily associated with plugging and abandoning wells and associated production facilities.
We record a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed into service. When the liability is initially recorded, we increase the carrying amount of the related long-lived asset by an amount equal to the original liability. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related long-lived asset. Upon settlement of the liability or the sale of the well, the liability is reversed. These liability amounts may change because of changes in asset lives, estimated costs of abandonment or legal or statutory remediation requirements.
The fair value of the liability associated with these retirement obligations is determined using significant assumptions, including current estimates of the plugging and abandonment or retirement, annual inflation of these costs, the productive life of the asset and our risk adjusted cost to settle such obligations discounted using our credit adjusted risk free interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. Revisions to the asset retirement obligation are recorded with an offsetting change to the carrying amount of the related long-lived asset, resulting in prospective changes to depreciation, depletion and amortization expense and accretion of discount. Because of the subjectivity of assumptions and the relatively long life of most of our oil and natural gas assets, the costs to ultimately retire these assets may vary significantly from previous estimates.
Oil and Gas Reserve Quantities. Our estimate of proved reserves is based on the quantities of oil and natural gas that engineering and geological analysis demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. Netherland, Sewell & Associates, Inc. has prepared reserve reports of our reserve estimates at December 31, 2018 on a well-by-well basis for our properties.
Reserves and their relation to estimated future net cash flows impact our depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. Our reserve estimates and the projected cash flows derived from these reserve estimates have been prepared in accordance with the guidelines of the Securities and Exchange Commission, or SEC. The accuracy of our reserve estimates is a function of many factors including the following:
the quality and quantity of available data;
the interpretation of that data;
the accuracy of various mandated economic assumptions; and
the judgments of the individuals preparing the estimates.
Our proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. Therefore, reserve estimates may materially vary from the ultimate quantities of oil and natural gas eventually recovered.
Income Taxes. We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (1) temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and (2) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period the rate change is enacted. Deferred tax assets are recognized in the year in which realization becomes determinable. Quarterly, management performs a forecast of its taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established, if in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2018, a valuation allowance of $212.0 million had been established for the net deferred tax asset. On December 22, 2018, we finalized the provisional accounting for the Tax Cuts and Jobs Act, which was enacted in 2017. Further information on the tax impacts of the Tax Cut and Jobs Act is included in Note 11 of our consolidated financial statements.
Revenue Recognition. We derive almost all of our revenue from the sale of crude oil, natural gas and natural gas liquids produced from our oil and natural gas properties. Revenue is recorded in the month the product is delivered to the purchaser. We receive payment on substantially all of these sales from one to three months after delivery. At the end of each month, we estimate the amount of production delivered to purchasers that month and the price we will receive. Variances between our estimated revenue and actual payment received for all prior months are recorded at the end of the quarter after payment is received. Historically, our actual payments have not significantly deviated from our accruals.
Investments—Equity Method. Investments in entities greater than 20% and less than 50% and/or investments in which we have significant influence are accounted for under the equity method. Under the equity method, our share of investees’ earnings or loss is recognized in the statement of operations.
We review our investments to determine if a loss in value which is other than a temporary decline has occurred. If such loss has occurred, we recognize an impairment provision. For the year ended December 31, 2016, we recognized an impairment loss related to our investment in Grizzly of approximately $23.1 million.
Commitments and Contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. We are involved in certain litigation for which the outcome is uncertain. Changes in the certainty and the ability to reasonably estimate a loss amount, if any, may result in the recognition and subsequent payment of legal liabilities.
Derivative Instruments. We seek to reduce our exposure to unfavorable changes in oil, natural gas and natural gas liquids prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. All derivative instruments are recognized as assets or liabilities in the balance sheet, measured at fair value. We estimate the fair value of all derivative instruments using industry-standard models that considered various assumptions including current market and contractual prices for the underlying instruments, implied volatility, time value, nonperformance risk, as well as other relevant economic measures.
The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Our current commodity derivative instruments are not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities.
See Item 7. "Commodity Price Risk" for a summary of our derivative instruments in place as of December 31, 2018.
RESULTS OF OPERATIONS
Results of Operations
The markets for oil and natural gas have historically been, and will continue to be, volatile. Prices for oil and natural gas may fluctuate in response to relatively minor changes in supply and demand, market uncertainty and a variety of factors beyond our control.
The following table presents our production volumes, average prices received and average production costs during the periods indicated: |
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | ($ In thousands) |
| Natural gas sales | | | | | |
| Natural gas production volumes (MMcf) | 443,742 |
| | 350,061 |
| | 227,594 |
|
| | | | | | |
| Total natural gas sales | $ | 1,121,815 |
| | $ | 845,999 |
| | $ | 420,128 |
|
| | | | | | |
| Natural gas sales without the impact of derivatives ($/Mcf) | $ | 2.53 |
| | $ | 2.42 |
| | $ | 1.85 |
|
| Impact from settled derivatives ($/Mcf) | $ | (0.04 | ) | | $ | 0.07 |
| | $ | 0.60 |
|
| Average natural gas sales price, including settled derivatives ($/Mcf) | $ | 2.49 |
| | $ | 2.49 |
| | $ | 2.45 |
|
| | | | | | |
| Oil and condensate sales | | | | | |
| Oil and condensate production volumes (MBbls) | 2,801 |
| | 2,579 |
| | 2,126 |
|
| | | | | | |
| Total oil and condensate sales | $ | 177,793 |
| | $ | 124,568 |
| | $ | 81,173 |
|
| | | | | | |
| Oil and condensate sales without the impact of derivatives ($/Bbl) | $ | 63.48 |
| | $ | 48.29 |
| | $ | 38.18 |
|
| Impact from settled derivatives ($/Bbl) | $ | (9.51 | ) | | $ | 1.59 |
| | $ | 5.11 |
|
| Average oil and condensate sales price, including settled derivatives ($/Bbl) | $ | 53.97 |
| | $ | 49.88 |
| | $ | 43.29 |
|
| | | | | | |
| Natural gas liquids sales | | | | | |
| Natural gas liquids production volumes (MGal) | 251,720 |
| | 224,038 |
| | 161,562 |
|
| | | | | | |
| Total natural gas liquids sales | $ | 178,915 |
| | $ | 136,057 |
| | $ | 59,115 |
|
| | | | | | |
| Natural gas liquids sales without the impact of derivatives ($/Gal) | $ | 0.71 |
| | $ | 0.61 |
| | $ | 0.37 |
|
| Impact from settled derivatives ($/Gal) | $ | (0.05 | ) | | $ | (0.03 | ) | | $ | (0.01 | ) |
| Average natural gas liquids sales price, including settled derivatives ($/Gal) | $ | 0.66 |
| | $ | 0.58 |
| | $ | 0.36 |
|
| | | | | | |
| Natural gas, oil and condensate and natural gas liquids sales | | | | | |
| Natural gas equivalents (MMcfe) | 496,505 |
| | 397,543 |
| | 263,430 |
|
| | | | | | |
| Total natural gas, oil and condensate and natural gas liquids sales | $ | 1,478,523 |
| | $ | 1,106,624 |
| | $ | 560,416 |
|
| | | | | | |
| Natural gas, oil and condensate and natural gas liquids sales without the impact of derivatives ($/Mcfe) | $ | 2.98 |
| | $ | 2.78 |
| | $ | 2.13 |
|
| Impact from settled derivatives ($/Mcfe) | $ | (0.12 | ) | | $ | 0.07 |
| | $ | 0.56 |
|
| Average natural gas, oil and condensate and natural gas liquids sales price, including settled derivatives ($/Mcfe) | $ | 2.86 |
| | $ | 2.85 |
| | $ | 2.69 |
|
| | | | | | |
| Production Costs: | | | | | |
| Average production costs ($/Mcfe) | $ | 0.18 |
| | $ | 0.20 |
| | $ | 0.26 |
|
| Average production taxes ($/Mcfe) | $ | 0.07 |
| | $ | 0.05 |
| | $ | 0.05 |
|
| Average midstream gathering and processing ($/Mcfe) | $ | 0.58 |
| | $ | 0.63 |
| | $ | 0.63 |
|
| Total production costs, midstream costs and production taxes ($/Mcfe) | $ | 0.83 |
| | $ | 0.88 |
| | $ | 0.94 |
|
The total volume hedged for 2018, 2017 and 2016 represented approximately 78%, 68% and 77%, respectively, of our total sales volumes for the applicable year.
From 2017 to 2018, our net equivalent gas production increased 25% from 397,543 MMcfe to 496,505 MMcfe primarily as a result of the continued development of our Utica Shale and SCOOP acreage. From 2016 to 2017, our net equivalent gas production increased 51% from 263,430 MMcfe to 397,543 MMcfe primarily as a result of the continued development of our Utica Shale acreage and the acquisition of our SCOOP acreage. We currently estimate that our 2019 production will be between 496,400 and 511,000 MMcfe. However, our actual production may be different due to changes in our currently anticipated drilling and recompletion activities, changing economic climate, adverse weather conditions or other unforeseen events. See Item 1A. "Risk Factors."
Comparison of the Years Ended December 31, 2018 and December 31, 2017
We reported net income of $430.6 million for the year ended December 31, 2018 as compared to net income of $435.2 million for the year ended December 31, 2017. This decrease in period-to-period net income was due primarily to a $41.2 million increase in midstream gathering and processing expenses, a $122.0 million increase in depreciation, depletion and amortization expense and a $27.1 million increase in interest expense, partially offset by a $34.7 million increase in oil and natural gas revenues, a $112.2 million increase in gain on sale of equity method investments and a $67.7 million increase in income from equity method investments for the year ended December 31, 2018, as compared to the year ended December 31, 2017.
Oil and Natural Gas Revenues. For the year ended December 31, 2018, we reported oil and natural gas revenues of $1.4 billion as compared to oil and natural gas revenues of $1.3 billion during 2017. This $34.7 million, or 3%, increase in revenues was primarily attributable to the following:
A $275.8 million increase in natural gas sales without the impact of derivatives due to a 27% increase in natural gas sales volumes and a 5% increase in natural gas market prices.
A $53.2 million increase in oil and condensate sales without the impact of derivatives due to a 9% increase in oil and condensate sales volumes and a 32% increase in oil and condensate market prices.
A $42.9 million increase in natural gas liquids sales without the impact of derivatives due to a 12% increase in natural gas liquids sales volumes and a 17% increase in natural gas liquids market prices.
A $337.2 million decrease in natural gas and oil sales due to an unfavorable change in gains and losses from derivative instruments. Of the total change, $253.9 million was due to unfavorable changes in the fair value of our open derivative positions in each period and $83.3 million was due to an unfavorable change in settlements related to our derivative positions.
Lease Operating Expenses. Lease operating expenses, or LOE, not including production taxes increased to $91.6 million for the year ended December 31, 2018 from $80.2 million for the year ended December 31, 2017. This increase was mainly the result of an increase in expenses related to overhead, water hauling and disposal and ad valorem taxes, partially offset by decreases in road, location and equipment repairs, surface rentals and compression. However, due to increased efficiencies and a 25% increase in our production volumes for the year ended December 31, 2018 as compared to the year ended December 31, 2017, our per unit LOE decreased by 10% from $0.20 per Mcfe to $0.18 per Mcfe.
Production Taxes. Production taxes increased to $33.5 million for the year ended December 31, 2018 from $21.1 million for 2017. This increase was primarily related to an increase in realized prices and production volumes.
Midstream Gathering and Processing Expenses. Midstream gathering and processing expenses increased by $41.2 million to $290.2 million for the year ended December 31, 2018 from $249.0 million for 2017. This increase was primarily the result of midstream expenses related to our increased production volumes in the Utica Shale and SCOOP resulting from our 2018 and 2017 drilling activities.
Depreciation, Depletion and Amortization. Depreciation, depletion and amortization, or DD&A, expense increased to $486.7 million for the year ended December 31, 2018, and consisted of $476.4 million in depletion of oil and natural gas properties and $10.3 million in depreciation of other property and equipment, as compared to total DD&A expense of $364.6
million for 2017. This increase was due to an increase in our production and our full cost pool and a decrease in our total proved reserves volume used to calculate our total DD&A expense.
General and Administrative Expenses. Net general and administrative expenses increased to $56.6 million for the year ended December 31, 2018 from $52.9 million for the year ended December 31, 2017. This $3.7 million increase was due to an increase in salaries, benefits and employee stock compensation expense resulting from an increased number of employees, legal fees and computer support, partially offset by a decrease in consulting fees. However, during the year ended December 31, 2018, we decreased our per unit general and administrative expense by 15% to $0.11 per Mcfe from $0.13 per Mcfe during the year ended December 31, 2017 as a result of increases in production.
Accretion Expense. Accretion expense increased to $4.1 million for the years ended December 31, 2018 from $1.6 million for the year ended December 31, 2017, primarily as a result of changes in our asset retirement obligation assumptions during 2017.
Interest Expense. Interest expense increased to $135.3 million for the year ended December 31, 2018 from $108.2 million for the year ended December 31, 2017 due primarily to the issuance of $450.0 million of the 2026 Notes in October 2017. In addition, total weighted debt outstanding under our revolving credit facility was $83.6 million for the year ended December 31, 2018 as compared to $119.2 million outstanding under such facility for 2017. Additionally, we capitalized approximately $4.5 million and $9.5 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2018 and December 31, 2017, respectively. This decrease in capitalized interest in the 2018 period was primarily the result of changes to our development plan for our oil and natural gas properties.
Income Taxes. As of December 31, 2018, we had a net operating loss carry forward of approximately $782.7 million, in addition to numerous temporary differences, which gave rise to a net deferred tax asset. Quarterly, management performs a forecast of our taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established if, in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2018, a valuation allowance of $212.0 million had been provided against the net deferred tax asset, with the exception of certain state net operating losses that we expect to be able to utilize with NOL carrybacks. We recognized an income tax benefit from continuing operations of $0.1 million for the year ended December 31, 2018.
Comparison of the Years Ended December 31, 2017 and December 31, 2016
We reported net income of $435.2 million for the year ended December 31, 2017 as compared to a net loss of $979.7 million for the year ended December 31, 2016. This increase in period-to-period net income was due primarily to no impairment charge for the year ended December 31, 2017 as compared to a $715.5 million impairment of oil and natural gas properties for the year ended December 31, 2016 and a $934.4 million increase in oil and natural gas revenues, partially offset by an $83.0 million increase in midstream gathering and processing expenses, a $118.7 million increase in depreciation, depletion and amortization expense and a $44.7 million increase in interest expense for the year ended December 31, 2017, as compared to the year ended December 31, 2016.
Oil and Gas Revenues. For the year ended December 31, 2017, we reported oil and natural gas revenues of $1.3 billion as compared to oil and natural gas revenues of $385.9 million during 2016. This $934.4 million, or 242%, increase in revenues was primarily attributable to the following:
A $388.2 million increase in natural gas and oil sales due to a favorable change in gains and losses from derivative instruments. Of the total change, $512.1 million was due to favorable changes in the fair value of our open derivative positions in each period and $123.9 million was due to an unfavorable change in settlements related to our derivative positions.
A $425.9 million increase in natural gas sales without the impact of derivatives due to a 54% increase in natural gas sales volumes and a 31% increase in natural gas market prices.
a $43.4 million increase in oil and condensate sales without the impact of derivatives due to a 21% increase in oil and condensate sales volumes and a 26% increase in oil and condensate market prices.
A $76.9 million increase in natural gas liquids sales without the impact of derivatives due to a 39% increase in natural gas liquids sales volumes and a 66% increase in natural gas liquids market prices.
Lease Operating Expenses. Lease operating expenses, or LOE, not including production taxes increased to $80.2 million for the year ended December 31, 2017 from $68.9 million for the year ended December 31, 2016. This increase was mainly the result of an increase in expenses related to supervision and labor, overhead, surface rentals, water hauling and treatment, chemicals, ad valorem taxes and road, location and equipment repairs, partially offset by decreases in compression and water disposal. However, due to increased efficiencies and a 51% increase in our production volumes for the year ended December 31, 2017 as compared to the year ended December 31, 2016, our per unit LOE decreased by 23% from $0.26 per Mcfe to $0.20 per Mcfe.
Production Taxes. Production taxes increased to $21.1 million for the year ended December 31, 2017 from $13.3 million for 2016. This increase was primarily related to an increase in realized prices and production volumes.
Midstream Gathering and Processing Expenses. Midstream gathering and processing expenses increased by $83.0 million to $249.0 million for the year ended December 31, 2017 from $166.0 million for 2016. This increase was primarily the result of midstream expenses related to our increased production volumes in the Utica Shale resulting from our 2017 and 2016 drilling activities, as well as production volumes resulting from our SCOOP acquisition in February 2017.
Depreciation, Depletion and Amortization. Depreciation, depletion and amortization, or DD&A, expense increased to $364.6 million for the year ended December 31, 2017, and consisted of $358.8 million in depletion of oil and natural gas properties and $5.8 million in depreciation of other property and equipment, as compared to total DD&A expense of $246.0 million for 2016. This increase was due to an increase in our full cost pool as a result of our SCOOP acquisition and an increase in our production, partially offset by an increase in our total proved reserves volume used to calculate our total DD&A expense.
General and Administrative Expenses. Net general and administrative expenses increased to $52.9 million for the year ended December 31, 2017 from $43.4 million for the year ended December 31, 2016. This $9.5 million increase was due to an increase in salaries and benefits resulting from an increased number of employees, consulting fees, bank service charges, computer support and franchise taxes, partially offset by a decrease in employee stock compensation expense and legal fees. However, during the year ended December 31, 2017, we decreased our per unit general and administrative expense by 19% to $0.13 per Mcfe from $0.16 per Mcfe during the year ended December 31, 2016.
Accretion Expense. Accretion expense increased to $1.6 million for the year ended December 31, 2017 from $1.1 million for the year ended December 31, 2016, primarily as a result of our SCOOP acquisition.
Interest Expense. Interest expense increased to $108.2 million for the year ended December 31, 2017 from $63.5 million for the year ended December 31, 2016 due primarily to the issuance of $450.0 million of the 2026 Notes in October 2017 and the issuance of $600.0 million of the 2025 Notes in December 2016, partially offset by our repurchase or redemption of our 7.75% Senior Notes due 2020, which we refer to as the 2020 Notes, of which $600.0 million in aggregate principal amount was then outstanding, in October 2016 with the net proceeds from our issuance of $650.0 million of the 2024 Notes. In addition, total weighted debt outstanding under our revolving credit facility was $119.2 million for the year ended December 31, 2017 as compared to $0.2 million outstanding under such facility for 2016. Additionally, we capitalized approximately $9.5 million and $8.7 million in interest expense to undeveloped oil and natural gas properties during the years ended December 31, 2017 and December 31, 2016, respectively. This increase in capitalized interest in the 2017 period was primarily the result of our SCOOP acquisition and the development of this acreage.
Income Taxes. As of December 31, 2017, we had a net operating loss carry forward of approximately $574.4 million, in addition to numerous temporary differences, which gave rise to a net deferred tax asset. Periodically, management performs a forecast of our taxable income to determine whether it is more likely than not that a valuation allowance is needed, looking at both positive and negative factors. A valuation allowance for our deferred tax assets is established if, in management's opinion, it is more likely than not that some portion will not be realized. At December 31, 2017, a valuation allowance of $298.8 million had been provided against the net deferred tax asset, with the exception of certain state net operating losses that we expect to be able to utilize with NOL carrybacks. We recognized an income tax expense from continuing operations of $1.8 million for the year ended December 31, 2017.
Liquidity and Capital Resources
Overview. Historically, our primary sources of funds have been cash flow from our producing oil and natural gas properties, borrowings under our credit facility and issuances of equity and debt securities. Our ability to access any of these sources of funds can be significantly impacted by decreases in oil and natural gas prices or oil and natural gas production.
Our primary uses of cash are for ongoing business operations, repayments of our debt, capital expenditures, investments and acquisitions. During 2018, we initiated a stock repurchase program to purchase shares of our common stock. During 2019, we intend to purchase additional shares of our common stock under our recently announced stock repurchase program opportunistically with available funds or non-core asset sales while maintaining sufficient liquidity to fund our 2019 capital development program.
Net cash flow provided by operating activities was $752.5 million for the year ended December 31, 2018 as compared to net cash flow provided by operating activities of $679.9 million for 2017. This increase was primarily the result of an increase in cash receipts from our oil and natural gas purchasers due to a 26% increase in net revenues after giving effect to settled derivative instruments, partially offset by an increase in our operating expenses.
Net cash flow provided by operating activities was $679.9 million for the year ended December 31, 2017 as compared to net cash flow provided by operating activities of $337.8 million for 2016. This increase was primarily the result of an increase in cash receipts from our oil and natural gas purchasers due to a 60% increase in net revenues after giving effect to settled derivative instruments, partially offset by an increase in our operating expenses.
Net cash used in investing activities for the year ended December 31, 2018 was $643.1 million as compared to $2.5 billion for 2017. During the year ended December 31, 2018, we spent $865.3 million in additions to oil and natural gas properties, of which $461.8 million was spent on our 2018 drilling and recompletion programs, $193.9 million was spent on expenses attributable to the wells spud, completed and recompleted during 2017, $125.6 million was spent on lease related costs, primarily the acquisition of leases in the Utica Shale, $2.6 million was spent on facility enhancements and $2.1 million was spent on plugging costs, with the remainder attributable mainly to future location development and capitalized general and administrative expenses. During the year ended December 31, 2018, we received $175.0 million from the sale of our equity investment in Strike Force and $51.5 million from the sale of Mammoth Energy's common stock. In addition, we invested $2.3 million in Grizzly, and we received $0.4 million in distributions from our investment in Timber Wolf during the year ended December 31, 2018.We did not make any material investments in our other equity investments during the year ended December 31, 2018. During the year ended December 31, 2018, we used cash from operations and proceeds from sales of our investments to fund our investing activities.
Net cash used in investing activities for the year ended December 31, 2017 was $2.5 billion as compared to $720.6 million for 2016. During the year ended December 31, 2017, we spent $1.1 billion in additions to oil and natural gas properties, of which $750.6 million was spent on our 2017 drilling and recompletion programs, $119.8 million was spent on lease related costs, primarily the acquisition of leases in the Utica Shale and the SCOOP, $97.4 million was spent on expenses attributable to the wells spud, completed and recompleted during 2016, $7.2 million was spent on seismic, $4.3 million was spent on plugging costs and $1.5 million was spent on facility enhancements, with the remainder attributable mainly to future location development and capitalized general and administrative expenses. We also spent $1.3 billion to fund the cash portion of the purchase price for our SCOOP acquisition. In addition, $2.3 million was invested in Grizzly and $46.1 million was invested in Strike Force (prior to our sale of our equity interest in Strike Force in May 2018), net of distributions. We did not make any material investments in our other equity investments during the year ended December 31, 2017. During the year ended December 31, 2017, we used cash from operations and proceeds from our 2016 equity and debt offerings and our 2017 debt offering for our investing activities.
Net cash used in financing activities for the year ended December 31, 2018 was $156.7 million as compared to net cash provided by financing activities of $433.0 million for 2017. The 2018 amount used by financing activities is primarily attributable to repurchases under our stock repurchase program of approximately $200.0 million, partially offset by net borrowings under our credit facility.
Net cash provided by financing activities for the year ended December 31, 2017 was $433.0 million as compared to net cash provided by financing activities of $1.7 billion for 2016. The 2017 amount provided by financing activities is primarily attributable to the net proceeds of $444.3 million from our 2017 debt offering.
Credit Facility. We have entered into a senior secured revolving credit facility, as amended, with The Bank of Nova Scotia, as the lead arranger and administrative agent and certain lenders from time to time party thereto. The credit agreement provides for a maximum facility amount of $1.5 billion and matures on December 13, 2021. As of December 31, 2018, we had a borrowing base of $1.4 billion, with an elected commitment of $1.0 billion, and $45.0 million in borrowings outstanding under our revolving credit facility. Total funds available for borrowing, after giving effect to an aggregate of $316.6 million of letters of credit, were $638.4 million. This facility is secured by substantially all of our assets. Our wholly-owned subsidiaries guarantee our obligations under our revolving credit facility.
Advances under our revolving credit facility may be in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans is equal to (1) the applicable rate, which ranges from 0.25% to 1.25%, plus (2) the highest of: (a) the federal funds rate plus 0.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by agent as its “prime rate,” and (c) the eurodollar rate for an interest period of one month plus 1.00%. The interest rate for eurodollar loans is equal to (1) the applicable rate, which ranges from 1.25% to 2.25%, plus (2) the London interbank offered rate that appears on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate for deposits in U.S. dollars, or, if such rate is not available, the rate as administered by ICE Benchmark Administration (or any other person that takes over administration of such rate) per annum equal to the offered rate on such other page or other service that displays an average London interbank offered rate as administered by ICE Benchmark Administration (or any other person that takes over the administration of such rate) for deposits in U.S. dollars, or, if such rate is not available, the average quotations for three major New York money center banks of whom the agent shall inquire as the “London Interbank Offered Rate” for deposits in U.S. dollars. As of December 31, 2018, amounts borrowed under our revolving credit facility bore interest at the weighted average rate of 4.23%.
Our revolving credit facility contains customary negative covenants including, but not limited to, restrictions on our and our subsidiaries' ability to: incur indebtedness; grant liens; pay dividends and make other restricted payments; make investments; make fundamental changes; enter into swap contracts; dispose of assets; change the nature of their business; and enter into transactions with their affiliates. The negative covenants are subject to certain exceptions as specified in our revolving credit facility. Our revolving credit facility also contains certain affirmative covenants, including, but not limited to the following financial covenants: (1) the ratio of net funded debt to EBITDAX (net income, excluding (i) any non-cash revenue or expense associated with swap contracts resulting from ASC 815 and (ii) any cash or non-cash revenue or expense attributable to minority investment plus without duplication and, in the case of expenses, to the extent deducted from revenues in determining net income, the sum of (a) the aggregate amount of consolidated interest expense for such period, (b) the aggregate amount of income, franchise, capital or similar tax expense (other than ad valorem taxes) for such period, (c) all amounts attributable to depletion, depreciation, amortization and asset or goodwill impairment or writedown for such period, (d) all other non-cash charges, (e) exploration costs deducted in determining net income under successful efforts accounting, (f) actual cash distributions received from minority investments, (g) to the extent actually reimbursed by insurance, expenses with respect to liability on casualty events or business interruption, and (h) all reasonable transaction expenses related to dispositions and acquisitions of assets, investments and debt and equity offerings (provided that expenses related to any unsuccessful dispositions will be limited to $3.0 million in the aggregate) for a twelve-month period may not be greater than 4.00 to 1.00; and (2) the ratio of EBITDAX to interest expense for a twelve-month period may not be less than 3.00 to 1.00. We were in compliance with these financial covenants at December 31, 2018.
Senior Notes. In April 2015, we issued an aggregate of $350.0 million in principal amount of our Senior Notes due 2023, or the 2023 Notes. Interest on the 2023 Notes accrues at a rate of 6.625% per annum on the outstanding principal amount thereof, from April 21, 2015, payable semi-annually on May 1 and November 1 of each year, commencing on November 1, 2015. The 2023 Notes will mature on May 1, 2023.
On October 14, 2016, we issued an aggregate of $650.0 million in principal amount of our Senior Notes due 2024, or the 2024 Notes. Interest on the 2024 Notes accrues at a rate of 6.000% per annum on the outstanding principal amount thereof, payable semi-annually on April 15 and October 15 of each year, commencing on April 15, 2017. The 2024 Notes will mature on October 15, 2024.
On December 21, 2016, we issued an aggregate of $600.0 million in principal amount of our Senior Notes due 2025, or the 2025 Notes. Interest on the 2025 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof, payable semi-annually on May 15 and November 15 of each year, commencing on May 15, 2017. The 2025 Notes will mature on May 15, 2025.
On October 11, 2017, we issued $450.0 million in aggregate principal amount of our 2026 Notes. Interest on the 2026 Notes accrues at a rate of 6.375% per annum on the outstanding principal amount thereof, payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2018. The 2026 Notes will mature on January 15, 2026. We received approximately $444.1 million in net proceeds from the offering of the 2026 Notes, a portion of which was used to repay all of our outstanding borrowings under our secured revolving credit facility on October 11, 2017 and the balance was used to fund the remaining outspend related to our 2017 capital development plans.
All of our existing and future restricted subsidiaries that guarantee our secured revolving credit facility or certain other debt guarantee the 2023 Notes, 2024 Notes, 2025 Notes and the 2026 Notes, provided, however, that the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes are not guaranteed by Grizzly Holdings, Inc. and will not be guaranteed by any of our future
unrestricted subsidiaries. The guarantees rank equally in the right of payment with all of the senior indebtedness of the subsidiary guarantors and senior in the right of payment to any future subordinated indebtedness of the subsidiary guarantors. The 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness (including all borrowings and other obligations under our amended and restated credit agreement) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries that do not guarantee the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes.
If we experience a change of control (as defined in the senior note indentures relating to the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes), we will be required to make an offer to repurchase the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes and at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. If we sell certain assets and fail to use the proceeds in a manner specified in our senior note indentures, we will be required to use the remaining proceeds to make an offer to repurchase the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The senior note indentures relating to the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes contain certain covenants that, subject to certain exceptions and qualifications, among other things, limit our ability and the ability of our restricted subsidiaries to incur or guarantee additional indebtedness, make certain investments, declare or pay dividends or make distributions on capital stock, prepay subordinated indebtedness, sell assets including capital stock of restricted subsidiaries, agree to payment restrictions affecting our restricted subsidiaries, consolidate, merge, sell or otherwise dispose of all or substantially all of our assets, enter into transactions with affiliates, incur liens, engage in business other than the oil and gas business and designate certain of our subsidiaries as unrestricted subsidiaries. Under the indenture relating to the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes, certain of these covenants are subject to termination upon the occurrence of certain events, including in the event the 2023 Notes, 2024 Notes, 2025 Notes and 2026 Notes are ranked as "investment grade" by Standard & Poor's and Moody's.
Construction Loan. On June 4, 2015, we entered into a construction loan agreement, or the construction loan, with InterBank for the construction of our new corporate headquarters in Oklahoma City, which was substantially completed in December 2016. The construction loan allows for maximum principal borrowings of $24.5 million and required us to fund 30% of the cost of the construction before any funds could be drawn, which occurred in January 2016. Interest accrues daily on the outstanding principal balance at a fixed rate of 4.50% per annum and was payable on the last day of the month through May 31, 2017, after which date we began making monthly payments of interest and principal. The final payment is due June 4, 2025. As of December 31, 2018, the total borrowings under the construction loan were approximately $23.1 million.
Capital Expenditures. Our recent capital commitments have been primarily for the execution of our drilling programs, acquisitions in the Utica Shale, our SCOOP acquisition in 2017 and for investments in entities that may provide services to facilitate the development of our acreage. Our strategy is to continue to (1) increase cash flow generated from our operations by undertaking new drilling, workover, sidetrack and recompletion projects to exploit our existing properties, subject to economic and industry conditions, (2) pursue acquisition and disposition opportunities and (3) pursue business integration opportunities.
Of our net reserves at December 31, 2018, 55.4% were categorized as proved undeveloped. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved developed reserves, or both. To realize reserves and increase production, we must continue our exploratory drilling, undertake other replacement activities or use third parties to accomplish those activities.
During 2018, we spud 23 gross (19.5 net) and commenced sales from 35 gross and net wells in the Utica Shale for a total cost of approximately $305.8 million. In addition, 28 gross (4.4 net) wells were drilled and 32 gross (9.4 net) wells were turned to sales by other operators on our Utica Shale acreage during 2018 for a total cost to us of approximately $90.1 million. We currently expect to drill 13 to 15 gross (10 to 11 net) horizontal wells and commence sales from 47 to 51 gross (40 to 45 net) horizontal wells on our Utica Shale acreage. As of February 15, 2019, we had two operated horizontal rig drilling in the play. We plan to run on average one operated horizontal rig in the Utica Shale during 2019. We also anticipate an additional two to three net horizontal wells will be drilled, and sales commenced from two to three net horizontal wells, on our Utica Shale acreage by other operators.
During 2018, we spud 13 gross (12.1 net) and commenced sales from 15 gross (12.8 net) wells in the SCOOP for a total cost of approximately $141.3 million. In addition, 40 gross (3.1 net) wells were drilled and 47 gross (3.6 net) wells were turned to sales by other operators on our SCOOP acreage during 2018 for a total cost to us of approximately $39.0 million. During 2019, we currently expect to drill nine to 10 gross (seven to eight net) horizontal wells and commence sales from 15 to
17 gross (14 to 15 net) wells on our SCOOP acreage. We also anticipate one to two net wells will be drilled, and sales commenced from one to two net wells on our SCOOP acreage by other operators. As of February 15, 2019, we had two operated horizontal drilling rigs in the play. We plan to run on average approximately 1.5 operated horizontal rigs in the SCOOP in 2019.
During 2018, we recompleted 32 existing wells and spud no new wells at our WCBB field and recompleted 15 existing wells and spud no new wells in our Hackberry fields for a total aggregate cost of approximately $7.9 million. During 2019, we do not anticipate any activities in our Southern Louisiana fields.
During 2018, no new wells were spud on our Niobrara Formation acreage. We do not currently anticipate any capital expenditures in the Niobrara Formation in 2019.
During the third quarter of 2006, we purchased a 24.9% interest in Grizzly. As of December 31, 2018, our net investment in Grizzly was approximately $44.3 million. Our capital requirements in 2018 for Grizzly were approximately $2.3 million. We do not currently anticipate any material capital expenditures in 2019 related to Grizzly's activities.
We had no material capital expenditures during the during the year ended December 31, 2018 related to our interests in Thailand. We do not currently anticipate any capital expenditures in Thailand in 2019.
In an effort to facilitate the development of our Utica Shale and other domestic acreage, we have invested in entities that can provide services that are required to support our operations. See Item 1. "Business–Our Equity Investments" and Note 4 to our consolidated financial statements included elsewhere in this report for additional information regarding these other investments. During the years ended December 31, 2018 and 2017, we did not make any additional investments in these entities, and we do not currently anticipate any capital expenditures related to these entities in 2019. In the fourth quarter of 2014, we contributed our investments in Stingray Pressure, Stingray Logistics, Bison and Muskie to Mammoth, in exchange for a 30.5% limited partner interest in this newly formed limited partnership. On October 19, 2016, Mammoth Energy completed its IPO of 7,750,000 shares of its common stock at a public offering price of $15.00 per share, of which 7,500,000 shares were sold by Mammoth Energy and 250,000 shares were sold by certain selling stockholders, including 76,250 shares sold by us for which we received net proceeds of $1.1 million. Prior to the completion of the IPO, we were issued 9,150,000 shares of Mammoth Energy common stock in return for the contribution of our 30.5% interest in Mammoth. Following the IPO, we owned an approximate 24.2% interest in Mammoth Energy. On June 5, 2017, we acquired approximately 2.0 million shares of Mammoth Energy common stock in connection with our contribution of all of our membership interests in Sturgeon, Stingray Energy and Stingray Cementing, bringing our equity interest in Mammoth Energy to approximately 25.1%. On June 29, 2018, we sold 1,235,600 shares, and on July 30, 2018, we sold an additional 118,974 shares, of our Mammoth Energy common stock in an underwritten public offering and related partial exercise of the underwriters' option to purchase additional shares for net proceeds to us of approximately $47.0 million and $4.5 million, respectively. Following the sale of these shares, we owned 9,829,548 shares, or 21.9% at December 31, 2018, of Mammoth Energy’s outstanding common stock.
In February 2016, we, through our wholly-owned subsidiary Midstream Holdings, entered into an agreement with Rice to develop natural gas gathering assets in eastern Belmont County and Monroe County, Ohio, which we refer to as the dedicated areas, through an entity called Strike Force. In 2017, Rice was acquired by EQT Corporation, or EQT. Prior to the sale of the Company's interest in Strike Force (discussed below), the Company owned a 25% interest in Strike Force, and EQT acted as operator and owned the remaining 75% interest in Strike Force. Strike Force's gathering assets provide gathering services for wells operated by Gulfport and other operators and connectivity of existing dry gas gathering systems. During the year ended December 31, 2017, we paid $46.1 million in net cash calls related to Strike Force. On May 1, 2018, we sold our 25% equity interest in Strike Force to EQT Midstream Partners, LP for $175.0 million in cash.
In response to current declining forward natural gas prices, we are shifting to building an organization that is focused on disciplined capital allocation, cash flow generation and a commitment to executing a thoughtful, clearly communicated business plan that enhances value for all of our shareholders. We plan to maximize results with the core assets in our portfolio today and focus on returns that will allow us to operate within our cash flow in 2019. As a result, we currently expect to reduce our planned capital expenditures by approximately 29% as compared to 2018.
Our total capital expenditures for 2019 are currently estimated to be in the range of $525.0 million to $550.0 million for drilling and completion expenditures. In addition, we currently expect to spend $40.0 million to $50.0 million in 2019 for non-drilling and completion expenditures, which includes acreage expenses, primarily lease extensions in the Utica Shale. The 2019 range of capital expenditures is lower than the $814.7 million spent in 2018, primarily due to the decrease in current commodity
prices, specifically natural gas prices, and our desire to fund our capital development program within cash flow, as well as to generate free cash flow.
In January 2019, our board of directors approved a stock repurchase program to acquire up to $400.0 million of our outstanding common stock within the next 24 months. We intend to purchase shares under the repurchase program opportunistically with available funds primarily from cash flow from operations and sale of non-core assets while maintaining sufficient liquidity to fund our capital development programs.
We continually monitor market conditions and are prepared to adjust our drilling program if commodity prices dictate. Currently, we believe that our cash flow from operations, cash on hand and borrowings under our loan agreements will be sufficient to meet our normal recurring operating needs and capital requirements for the next twelve months. We believe that our strong liquidity position, hedge portfolio and conservative balance sheet position us well to react quickly to changing commodity prices and accelerate or decelerate our activity within the Utica Basin and the SCOOP as the market conditions warrant. Notwithstanding the foregoing, in the event commodity prices decline from current levels, our capital or other costs increase, our equity investments require additional contributions and/or we pursue additional equity method investments or acquisitions, we may be required to obtain additional funds which we would seek to do through traditional borrowings, offerings of debt or equity securities or other means, including the sale of assets. We regularly evaluate new acquisition opportunities. Needed capital may not be available to us on acceptable terms or at all. Further, if we are unable to obtain funds when needed or on acceptable terms, we may be required to delay or curtail implementation of our business plan or not be able to complete acquisitions that may be favorable to us. If the current low commodity price environment worsens, our revenues, cash flows, results of operations, liquidity and reserves may be materially and adversely affected.
Commodity Price Risk
The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2017, WTI prices ranged from $42.48 to $60.46 per barrel and the Henry Hub spot market price of natural gas ranged from $2.44 to $3.71 per MMBtu. During 2018, WTI prices ranged from $44.48 to $77.41 per barrel and the Henry Hub spot market price of natural gas ranged from $2.49 to $6.24 per MMBtu. If the prices of oil and natural gas decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities.
See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" for information regarding our open fixed price swaps at December 31, 2018.
Commitments
In connection with our acquisition in 1997 of the remaining 50% interest in the WCBB properties, we assumed the seller's (Chevron) obligation to contribute approximately $18,000 per month through March 2004, to a plugging and abandonment trust and the obligation to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997. Chevron retained a security interest in production from these properties until abandonment obligations to Chevron have been fulfilled. Beginning in 2009, we can access the trust for use in plugging and abandonment charges associated with the property. As of December 31, 2018, the plugging and abandonment trust totaled approximately $3.1 million. At December 31, 2018, we have plugged 555 wells at WCBB since we began our plugging program in 1997, which management believes fulfills our current minimum plugging obligation.
In January 2018, our board of directors approved a stock repurchase program to acquire up to $100.0 million of our outstanding common stock during 2018, and in May 2018 expanded this program authorizing us to acquire up to an additional $100.0 million of our outstanding common stock during 2018 for a total of up to $200.0 million. The Company fully executed the program during the year ended December 31, 2018, and repurchased 20.7 million shares for a cost of approximately $200.0 million. In January 2019, our board of directors approved a stock repurchase program to acquire up to $400.0 million of our outstanding common stock within the next 24 months. Purchases under the repurchase program may be made from time to time in open market or privately negotiated transactions, and will be subject to market conditions, applicable legal requirements, contractual obligations and other factors. The repurchase program does not require the Company to acquire any specific
number of shares. The Company intends to purchase shares under the repurchase program opportunistically with available funds while maintaining sufficient liquidity to fund its 2019 capital development program. This repurchase program is authorized to extend through December 31, 2020 and may be suspended from time to time, modified, extended or discontinued by the board of directors of the Company at any time. We did not make any purchases of our common stock during the year ended December 31, 2017 under any stock repurchase program or otherwise.
Contractual and Commercial Obligations
The following table sets forth our contractual and commercial obligations at December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | |
| | Payment due by period |
| Contractual Obligations | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| | (In thousands) |
| Revolving credit agreement (1) | $ | 45,000 |
| | $ | — |
| | $ | 45,000 |
| | $ | — |
| | $ | — |
|
| 6.625% senior unsecured notes due 2023 (2) | 454,344 |
| | 23,188 |
| | 46,375 |
| | 384,781 |
| | — |
|
| 6.000% senior unsecured notes due 2024 (3) | 884,101 |
| | 39,000 |
| | 78,000 |
| | 78,000 |
| | 689,101 |
|
| 6.375% senior unsecured notes due 2025 (4) | 848,748 |
| | 38,250 |
| | 76,500 |
| | 76,500 |
| | 657,498 |
|
| 6.375% senior unsecured notes due 2026 (5) | 665,156 |
| | 28,687 |
| | 57,375 |
| | 57,375 |
| | 521,719 |
|
| Asset retirement obligations (6) | 79,952 |
| | — |
| | — |
| | — |
| | 79,952 |
|
| Building loan (7) | 23,149 |
| | 651 |
| | 1,290 |
| | 1,416 |
| | 19,792 |
|
| Firm transportation contracts | 3,504,318 |
| | 251,644 |
| | 494,201 |
| | 490,972 |
| | 2,267,501 |
|
| Drilling and purchase obligations (8) | 204,969 |
| | 89,022 |
| | 115,947 |
| | — |
| | — |
|
| Operating leases | 271 |
| | 144 |
| | 127 |
| | — |
| | — |
|
| Total | $ | 6,710,008 |
| | $ | 470,586 |
| | $ | 914,815 |
| | $ | 1,089,044 |
| | $ | 4,235,563 |
|
_____________________
(1) Does not include future loan advances, repayments, commitment fees or other fees on our revolving credit facility as we cannot determine with accuracy the timing of such items. Additionally, this table does not include interest expense as it is a floating rate instrument and we cannot determine with accuracy the future interest rates to be charge.
(2) Includes estimated interest of $23.2 million due in less than one year; $46.4 million due in 1-3 years and $34.8 million due in 3-5 years.
(3) Includes estimated interest of $39.0 million due in less than one year; $78.0 million due in 1-3 years; $78.0 million due in 3-5 years and $39.1 million due thereafter.
(4) Includes estimated interest of $38.3 million due in less than one year; $76.5 million due in 1-3 years; $76.5 million due in 3-5 years and $57.5 million due thereafter.
(5) Includes estimated interest of $28.7 million due in less than one year; $57.4 million due in 1-3 years; $57.4 million due in 3-5 years and $71.7 million due thereafter.
| |
(6) | Amount represents the estimated discounted cost for future abandonment of oil and natural gas properties. Due to the uncertainty in timing of the obligation and no current contractual obligation, the liability is included in the "More than 5 years" category. |
| |
(7) | Does not include estimated interest of $1.0 million due in less than one year; $2.0 million due in 1-3 years: $1.9 million due in 3-5 years and $1.3 million due thereafter. |
| |
(8) | Drilling and purchasing obligations reported above represent our minimum financial commitment pursuant to the terms of these contracts. A portion of these future costs will be borne by other interest owners. |
Off-balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2018.
New Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-
specific guidance with Topic 606. Subsequent to ASU 2014-09, the FASB issued several related ASU's to clarify the application of the revenue recognition standard. The core principle of the new standard is for the recognition of revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which the company expects to be entitled in exchange for those goods or services. We adopted ASC 606 as of January 1, 2018 using the modified retrospective transition method applied to contracts that were not completed as of that date. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard. Under the modified retrospective method, we recognize the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings; however, no adjustment was required as a result of adopting the new revenue standard. The comparative information has not been restated and continues to be reported under the historic accounting standards in effect for those periods. The impact of the adoption of the new revenue standard is not expected to be material to our net income on an ongoing basis. See Note 10 to our consolidated financial statements for further discussion of the revenue standard.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard supersedes the previous lease guidance by requiring lessees to recognize a right-to-use asset and lease liability on the balance sheet for all leases with lease terms of greater than one year while maintaining substantially similar classifications for financing and operating leases. The guidance is effective for periods after December 15, 2018, and we will adopt beginning January 1, 2018 using the transition method permitted by ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, issued in August 2018, which permits an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption with no adjustment made to the comparative periods presented in the consolidated financial statements. We will also utilize the practical expedient provided by ASU 2018-11 to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components would be accounted for under ASC 606 and other conditions are met.
We have identified our portfolio of leased assets under the new standard and has evaluated the impact of this guidance on our consolidated financial statements and related disclosures. Offsetting right-of-use assets and corresponding lease liabilities recognized by us on the adoption date totaled approximately $110 million, representing minimum payment obligations associated with identified leases with contractual durations longer than one year. Adoption of the new standard will not result in a material impact to the consolidated statement of operations. We have implemented processes and controls needed to comply with the requirements of the new standard, which includes the implementation of a lease accounting software solution to support lease portfolio management and accounting and disclosures.
Additionally, in January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. The amendments in this update provide an optional expedient to not evaluate existing or expired land easements that were not previously accounted for under current leases guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements beginning at the date of adoption. We do not currently account for any land easements under Topic 840 and plan to utilize this practical expedient in conjunction with the adoption of ASU 2016-02.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, this ASU eliminates the probable initial recognition threshold in current GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposure, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. The guidance is effective for periods after December 15, 2019, with early adoption permitted. We are currently evaluating the impact this standard will have on our financial statements and related disclosures and do not anticipate it to have a material effect.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This ASU clarifies how certain cash receipts and cash payments should be classified and presented in the statement of cash flows. We adopted this standard in the first quarter of 2018 and have made an accounting policy election to classify distributions received from equity method investees using the nature of the distribution approach, which classifies distributions received from investees as either cash inflows from operating activities or cash inflows from investing activities in the statement of cash flows based on the nature of the activities of the investee that generated the distribution. The impact of adopting this ASU was not material to prior periods presented.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows and to provide a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet when the cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance sheet. We adopted this standard in the first quarter of 2018 using the retrospective transition method. The adoption of this standard had no impact on the statement of cash flows for the year ended December 31, 2018. As a result of the adoption, $185.0 million in restricted cash was removed from net cash used in investing resulting in an increase to the ending cash balance for the year ended December 31, 2016. The adoption also resulted in an addition of $185.0 million in restricted cash to the net cash used in investing activities for the year ended December 31, 2017. This addition and the resulting decrease to ending cash was offset by the increase to beginning cash balance of $185.0 million due to the changes at December 31, 2016. Therefore, there was no net impact on the statement of cash flows as of December 31, 2017.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. Under the current business combination guidance, there are three elements of a business: inputs, processes and outputs. The revised guidance adds an initial screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set of assets is not a business. The new framework also specifies the minimum required inputs and processes necessary to be a business. We adopted this standard in the first quarter of 2018 with no significant effect on our financial statements or related disclosures.
In February 2018, the FASB issued ASU No. 2018-02, Income statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for standard tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendment will be effective for reporting periods beginning after December 15, 2018, and early adoption is permitted. We assessed the impact of the ASU on our consolidated financial statements and related disclosures, and determined there was no material impact.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies, and adds certain disclosure requirements on fair value measurements. The amendment will be effective for reporting periods beginning after December 15, 2019, and early adoption is permitted. We are currently assessing the impact of the ASU on our consolidated financial statements and related disclosures
In August 2018, the FASB also issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the accounting for costs associated with implementing a cloud computing arrangement in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software. The amendment will be effective for reporting periods beginning after December 15, 2019, and early adoption is permitted. We are currently assessing the impact of the ASU on our consolidated financial statements and related disclosures.
In August 2018, the Securities and Exchange Commission ("SEC") issued Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends certain disclosure requirements that were redundant, duplicative, overlapping or superseded. Under these amendments, the annual disclosure requirements on the analysis of stockholders' equity is extended to interim financial statements. We will present an analysis of changes in stockholders' equity for the current and comparative year-to-date interim periods. The final rule is effective November 5, 2018, and we will begin presenting this analysis beginning with the quarter ended March 31, 2019.
In November 2018, the FASB also issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, which provides guidance on how to assess whether certain transactions between participants in a collaborative arrangement should be accounted for within the ASU No. 2014-09 revenue recognition standard discussed above. The amendment will be effective for reporting periods beginning after December 15, 2019, and early adoption is permitted. We are currently assessing the impact of the ASU on its consolidated financial statements and related disclosures.
|
| |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our revenues, operating results, profitability, future rate of growth and the carrying value of our oil and natural gas properties depend primarily upon the prevailing prices for oil and natural gas. Historically, oil and natural gas prices have been
volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors, including: worldwide and domestic supplies of oil and natural gas; the level of prices, and expectations about future prices, of oil and natural gas; the cost of exploring for, developing, producing and delivering oil and natural gas; the expected rates of declining current production; weather conditions, including hurricanes, that can affect oil and natural gas operations over a wide area; the level of consumer demand; the price and availability of alternative fuels; technical advances affecting energy consumption; risks associated with operating drilling rigs; the availability of pipeline capacity; the price and level of foreign imports; domestic and foreign governmental regulations and taxes; the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; political instability or armed conflict in oil and natural gas producing regions; and the overall economic environment.
These factors and the volatility of the energy markets make it extremely difficult to predict future oil and natural gas price movements with any certainty. During 2017, WTI prices ranged from $42.48 to $60.46 per barrel and the Henry Hub spot market price of natural gas ranged from $2.44 to $3.71 per MMBtu. During 2018, WTI prices ranged from $44.48 to $77.41 per barrel and the Henry Hub spot market price of natural gas ranged from $2.49 to $6.24 per MMBtu. If the prices of oil and natural gas decline further, our operations, financial condition and level of expenditures for the development of our oil and natural gas reserves may be materially and adversely affected. In addition, lower oil and natural gas prices may reduce the amount of oil and natural gas that we can produce economically. This may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs or if our production estimates change or our exploration or development activities are curtailed, full cost accounting rules may require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties. Reductions in our reserves could also negatively impact the borrowing base under our revolving credit facility, which could further limit our liquidity and ability to conduct additional exploration and development activities.
To mitigate the effects of commodity price fluctuations on our oil and natural gas production, we had the following open fixed price swap positions as of December 31, 2018.
|
| | | | | | | |
| | Location | Daily Volume (MMBtu/day) | | Weighted Average Price |
| 2019 | NYMEX Henry Hub | 1,254,000 |
| | $ | 2.83 |
|
| 2020 | NYMEX Henry Hub | 204,000 |
| | $ | 2.77 |
|
|
| | | | | | | |
| | Location | Daily Volume (Bbls/day) | | Weighted Average Price |
| 2019 | Mont Belvieu C2 | 1,000 |
|
| $ | 18.48 |
|
| 2019 | Mont Belvieu C3 | 4,000 |
| | $ | 28.87 |
|
| 2019 | Mont Belvieu C5 | 500 |
| | $ | 54.08 |
|
During the fourth quarter of 2018, we early terminated all of our fixed price swaps for oil based on both Argus Louisiana Light Sweet Crude and NYMEX West Texas Intermediate scheduled to settle during 2019 covering 5,000 Bbls/day. These early terminations resulted in approximately $0.4 million of settlement losses which is included in net (loss) gain on natural gas, oil, and NGL derivatives in the accompanying consolidated statement of operations.
We sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, we pay our counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes.
|
| | | | | | | |
| | Location | Daily Volume (MMBtu/day) | | Weighted Average Price |
| January 2019 - March 2019 | NYMEX Henry Hub | 50,000 |
| | $ | 3.13 |
|
| April 2019 - December 2019 | NYMEX Henry Hub | 30,000 |
| | $ | 3.10 |
|
For a portion of the natural gas fixed price swaps listed above, the counterparties had the option to extend the original terms an additional twelve months for the period January 2019 through December 2019. In December 2018, the counterparties chose to exercise all natural gas fixed price swaps, resulting in an additional 100,000 MMBtu per day at a weighted average price of $3.05 per MMBtu, which is included in the natural gas fixed price swaps listed above.
In addition, we have entered into natural gas basis swap positions, which settle on the pricing index to basis differential of Transco Zone 4 to the NYMEX Henry Hub natural gas price. As of December 31, 2018, we had the following natural gas basis swap positions for Transco Zone 4.
|
| | | | | | | |
| | Location | Daily Volume (MMBtu/day) | | Hedged Differential |
| 2019 | Transco Zone 4 | 60,000 |
| | $ | (0.05 | ) |
| 2020 | Transco Zone 4 | 60,000 |
| | $ | (0.05 | ) |
In February 2019, we entered into a natural gas basis swap position for 2020, which settles on the pricing index to basis differential of Inside FERC to the NYMEX Henry Hub natural gas price, for approximately 10,000 MMBtu of natural gas per day at a differential of $0.54 per MMBtu. Our fixed price swap contracts are tied to the commodity prices on NYMEX Henry Hub for natural gas and Mont Belvieu for propane, pentane and ethane. We will receive the fixed priced amount stated in the contract and pay to its counterparty the current market price as listed on NYMEX Henry Hub for natural gas or Mont Belvieu for propane, pentane and ethane.
Under our 2019 contracts, we have hedged approximately 94% to 97% of our expected 2019 production. Such arrangements may expose us to risk of financial loss in certain circumstances, including instances where production is less than expected or oil prices increase. At December 31, 2018, we had a net liability derivative position of $13.0 million as compared to a net asset derivative position of $52.0 million as of December 31, 2017, related to our fixed price swaps. Utilizing actual derivative contractual volumes, a 10% increase in underlying commodity prices would have reduced the fair value of these instruments by approximately $155.1 million, while a 10% decrease in underlying commodity prices would have increased the fair value of these instruments by approximately $154.6 million. However, any realized derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production covered by the derivative instrument.
Our revolving credit facility is structured under floating rate terms, as advances under this facility may be in the form of either base rate loans or eurodollar loans. As such, our interest expense is sensitive to fluctuations in the prime rates in the U.S. or, if the eurodollar rates are elected, the eurodollar rates. At December 31, 2018, we had $45.0 million in borrowings outstanding under our credit facility which bore interest at the weighted average rate of 4.23%. A 1% increase in the average interest rate would have increased interest expense by approximately $0.8 million based on outstanding borrowings under our revolving credit facility throughout the year ended December 31, 2018. As of December 31, 2018, we did not have any interest rate swaps to hedge our interest risks.
|
| |
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information required by this item appears beginning on page F-1 following the signature pages of this Report.
|
| |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
| |
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Control and Procedures. Under the direction of our Chief Executive Officer and President and our Chief Financial Officer, we have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and President and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
As of December 31, 2018, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and President and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and President and our Chief Financial Officer have concluded that, as of December 31, 2018, our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for the fair presentation of the consolidated financial statements of Gulfport Energy Corporation. Management is also responsible for establishing and maintaining a system of adequate internal controls over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in the 2013 Internal Control-Integrated Framework, management did not identify any material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2018.
Grant Thornton LLP, the independent registered public accounting firm that audited our financial statements for the year ended December 31, 2018 included with this Annual Report on Form 10-K, has also audited our internal control over financial reporting as of December 31, 2018, as stated in their accompanying report.
|
| | | | | | |
/s/ David M. Wood(2) | 357,053 | /s/ Keri Crowell* |
Name:Alvin Bledsoe | | David M. Wood | | Name: | | Keri Crowell |
Title: | | Chief Executive Officer and President | | Title: | | Chief Financial Officer |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Gulfport Energy Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Gulfport Energy Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our report dated February 28, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 28, 2019
|
| |
ITEM 9B. | OTHER INFORMATION |
None.
PART III
|
| |
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
For information concerning Item 10-Directors, Executive Officers and Corporate Governance, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference).
|
| |
ITEM 11. | EXECUTIVE COMPENSATION |
For information concerning Item 11-Executive Compensation, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference).
|
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
For information concerning Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference).
|
| |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
For information concerning Item 13-Certain Relationships and Related Transactions, and Director Independence, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference).
|
| |
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
For information concerning Item 14-Principal Accounting Fees and Services, see our definitive proxy statement, which will be filed with the Securities and Exchange Commission with 120 days after the close of our previous fiscal year and is incorporated herein by this reference (with the exception of portions noted therein that are not incorporated by reference).
PART IV
|
| |
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The following documents are filed as part of this report or incorporated by reference herein:
Reference is made to the Index to Financial Statements appearing on Page F-1.
| |
(2) | Financial Statement Schedules |
All financial statement schedules have been omitted because they are not applicable or the required disclosure is presented in the financial statements or notes thereto.
|
| | |
Exhibit
Number
| | Description |
— | |
Deborah G. Adams | 46,687 | |
Samantha Holroyd | 20,500 | * |
Valerie Jochen | — | * |
C. Doug Johnson(3) | 63,672 | * |
Ben T. Morris | 64,981 | * |
John W. Somerhalder II Woodford, LLC (incorporated by reference to Exhibit 2.1 to the Form 8-K, File No. 000-19514, filed by the Company with the SEC on December 15, 2016). | — | * |
Quentin R. Hicks | 15,000 | * |
Donnie Moore(4) | 314,999 | * |
Patrick K. Craine(5) | 200,838 | * |
Michael Sluiter(6) | 204,603 | * |
| | | |
Directors and Executive Officers as a Group (12 persons) | 1,288,333 | * |
