See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
No
te 1. Bac
kground, Organization and Basis of Presentation
Overview
Memorial Resource Development Corp. (the “Company”) is a publicly traded Delaware corporation, the common shares of which are listed on the NASDAQ Global Market (“NASDAQ”) under the symbol “MRD.” Unless the context requires otherwise, references to “we,” “us,” “our,” “MRD,” or “the Company” are intended to mean the business and operations of Memorial Resource Development Corp. and its consolidated subsidiaries.
References to: (i) “Memorial Production Partners,” “MEMP” and “the Partnership” refer to Memorial Production Partners LP individually and collectively with its subsidiaries, as the context requires; (ii) “MEMP GP” refer to Memorial Production Partners GP LLC, the general partner of the Partnership; (iii) “MRD Holdco” refer to MRD Holdco LLC, a holding company controlled by the Funds (defined below) that, together as part of a group, owns a majority of our common stock; (iv) “the Funds” refer collectively to Natural Gas Partners VIII, L.P., Natural Gas Partners IX, L.P. and NGP IX Offshore Holdings, L.P., which collectively control MRD Holdco; and (v) “NGP” refer to Natural Gas Partners, a family of private equity investment funds organized to make direct equity investments in the energy industry, including the Funds.
Basis of Presentation
Our consolidated financial statements include our accounts and those of our subsidiaries in which we have a controlling interest. Under the amended consolidation guidance that we adopted on January 1, 2016 (see Note 2), a limited partnership is considered a variable interest entity (“VIE”) unless a single limited partner or a simple majority of all partners have substantive kick-out or participating rights. The Company determined that MEMP was a VIE and we were deemed the primary beneficiary. On June 1, 2016, we completed the sale of MEMP GP, Beta Operating Company, LLC (“Beta Operating”) and MEMP Services LLC (“Services”) (collectively, the “Disposition Entities”), to MEMP for $0.75 million in cash. This sale was a reconsideration event under the amended consolidation guidance which resulted in the deconsolidation of the Partnership. Our equity statement reflects a loss of $0.1 million related to the deconsolidation of the Disposition Entities and their subsidiaries. Our financial statements have been retrospectively revised to reflect the Disposition Entities and their subsidiaries as discontinued operations for all periods presented (see Note 3). After the completion of the sale, we have one reportable business segment, which is engaged in the acquisition, exploration and development of oil and natural gas properties.
All material intercompany transactions and balances have been eliminated in preparation of our consolidated financial statements. Our results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of results expected for the full year. In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for fair presentation. Although we believe the disclosures in these financial statements are adequate and make the information presented not misleading, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”).
Our equity statement reflects a $127.1 million equity transfer from stockholders’ equity to noncontrolling interest related to the acquisition by MEMP of certain assets from the Company in East Texas in February 2015 for certain properties in North Louisiana (the “Property Swap”).
Proposed
Merger with Range Resources Corporation
On May 15, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Range Resources Corporation (“Range”), a Delaware corporation, and Medina Merger Sub, Inc., a Delaware corporation and a direct wholly-owned subsidiary of Range (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth, the Merger Sub will be merged with and into the Company, with the Company continuing as the surviving entity and a wholly owned subsidiary of Range (“the Merger”).
If the Merger is completed, each share of our common stock outstanding immediately before that time (including outstanding shares of our restricted common stock, all of which will become fully vested and unrestricted under the terms of the Merger Agreement) will automatically be converted into the right to receive 0.375 of a share of Range common stock, par value of $0.01 per share (“Range Common Stock”). The Merger is subject to customary closing conditions, including the approval by both Memorial and Range stockholders. We expect the closing of the Merger will occur late in the third quarter of 2016.
12
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In connection with the execution of the Merger Agreement, MRD Holdco, Jay Graham (our chief executive officer), Anthony Bahr and WHR Incentive LLC (a limited liability company controlled by Mr. Graham and Mr. Bahr) (collectively, the “Memorial Stockholders
”) entered into a voting and support agreement with Range and have agreed to vote all of the shares held by them in favor of the approval and adoption of the Merger Agreement and the transactions contemplated by the Merger Agreement, including the merger.
As of June 30, 2016, the Memorial Stockholders hold and are entitled to vote in the aggregate approximately 47.7% of the issued and outstanding shares of our common stock entitled to vote at our special meeting. In addition, certain other stockholders of
the Company who are not party to the voting and support agreement are party to an existing voting agreement, as discussed in our 2015 Form 10-K, pursuant to which those stockholders are required to vote all of the shares of our common stock that they own a
s directed by MRD Holdco. As of June 30, 2016, those additional stockholders hold and are entitled to vote in the aggregate approximately 2.7% of the outstanding shares of our common stock entitled to vote at our special meeting.
Upon completion of the Merger, our common stock currently listed on the NASDAQ will cease to be listed for trading on the NASDAQ and will subsequently be deregistered under the Securities Exchange Act of 1934, as amended.
Use of Estimates
The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates include, but are not limited to, oil and natural gas reserves; depreciation, depletion, and amortization of proved oil and natural gas properties; future cash flows from oil and natural gas properties; impairment of long-lived assets; realization of long-term prepaid processing fees; fair value of derivatives; fair value of equity compensation; fair values of assets acquired and liabilities assumed in business combinations, income taxes and asset retirement obligations.
Note 2. Summary of Significant Accounting Policies
A discussion of our critical accounting policies and estimates is included in our 2015 Form 10-K.
Oil and Natural Gas Properties
Oil and natural gas properties consisted of the following at the dates indicated (in thousands):
|
June 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
|
(In thousands)
|
|
Proved oil and natural gas properties
|
$
|
1,984,500
|
|
|
$
|
1,740,530
|
|
Support equipment and facilities
|
|
7,191
|
|
|
|
4,719
|
|
Unproved oil and natural gas properties
|
|
417,920
|
|
|
|
414,759
|
|
Total oil and natural gas properties
|
$
|
2,409,611
|
|
|
$
|
2,160,008
|
|
At June 30, 2016 and December 31, 2015, we had $147.4 million and $174.0 million, respectively, capitalized in proved oil and natural gas properties related to wells in various stages of drilling and completion, which have been excluded from the depletion base.
13
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accrued liabilities
Current accrued liabilities consisted of the following at the dates indicated (in thousands):
|
June 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Accrued capital expenditures
|
$
|
24,084
|
|
|
$
|
40,197
|
|
Accrued interest payable
|
|
17,665
|
|
|
|
17,657
|
|
Accrued lease operating expense
|
|
1,414
|
|
|
|
2,031
|
|
Accrued general and administrative expenses
|
|
5,871
|
|
|
|
4,030
|
|
Accrued ad valorem taxes
|
|
1,619
|
|
|
|
157
|
|
Accrued current income taxes
|
|
20,007
|
|
|
|
1,911
|
|
Other miscellaneous, including operator advances
|
|
1,404
|
|
|
|
2,893
|
|
Total accrued liabilities
|
$
|
72,064
|
|
|
$
|
68,876
|
|
Supplemental Cash Flow Information
Supplemental cash flow from continuing operations for the periods presented (in thousands):
|
For the Six Months Ended
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
Supplemental cash flows:
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest
|
$
|
22,418
|
|
|
$
|
35,650
|
|
Cash paid for taxes
|
|
3,800
|
|
|
|
2,000
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
Increase (decrease) in capital expenditures in payables and accrued liabilities
|
|
(16,113
|
)
|
|
|
25,560
|
|
(Increase) decrease in accounts receivable related to other financial instruments
|
|
2,633
|
|
|
|
—
|
|
Assumptions of asset retirement obligations related to properties acquired or drilled
|
|
530
|
|
|
|
—
|
|
New Accounting Pronouncements
Improvements to Employee Share-Based Payment Accounting
. In March 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update to simplify the guidance on employee share-based payment accounting. The update involves several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. Entities will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, the new guidance eliminates the requirement that excess tax benefits be realized before companies can recognize them and requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, the new guidance will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by: (i) recognizing forfeitures of awards as they occur or (ii) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required.
The new guidance is effective for reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, but all of the guidance must be adopted in the same period. The Company is currently assessing the impact the adoption of this new guidance will have on our consolidated financial statements and related disclosures. For the amendments that change the recognition and measurement of share-based payment awards, the new guidance requires transition under a modified retrospective approach, with a cumulative-effect adjustment made to retained earnings as of the beginning of the fiscal period in which the guidance is adopted. Prospective application is required for the accounting for excess tax benefits and tax deficiencies. Entities should apply the new guidance retrospectively for all periods presented related to the classification of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirements. Entities may apply the presentation changes for excess tax benefits in the statement of cash flows either prospectively or retrospectively.
14
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Leases.
In February 2016, the FASB issued a revision to its lease accounting guidance. The FASB retained a dual model, requiring leases to be classified as either direct
financing or operating leases. The classification will be based on criteria that are similar to the current lease accounting treatment. The revised guidance requires lessees to recognize a right-of-use asset and lease liability for all leasing transactions
regardless of classification. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it sh
ould recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments are effective for financial statements issued for annual periods beginning after December 15, 2018 and interim periods within those fiscal y
ears. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The revised guidance must be adopted using a modified retrospective transition and provides for certain practical expedients. Transition will r
equire application of the new guidance at the beginning of the earliest comparative period presented. The Company is currently evaluating the standard and the impact on the Company’s financial statements and related footnote disclosures.
Amendments to Consolidation Analysis
. In February 2015, the FASB issued an accounting standards update to improve consolidation guidance for certain types of legal entities. The guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and provides a scope exception from consolidation guidance for certain money market funds. We adopted this guidance on January 1, 2016 and determined that MEMP was a VIE for which the Company is the primary beneficiary for accounting purposes. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. On June 1, 2016, we completed the sale of the Disposition Entities to MEMP as discussed in Note 1, which triggered a reconsideration event under the guidance which resulted in the deconsolidation of the Partnership.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.
Note 3. Discontinued Operations
As previously discussed in Note 1, we sold the Disposition Entities and their subsidiaries on June 1, 2016 to MEMP. Below is a reconciliation of carrying amounts of major classes of assets and liabilities included as part of discontinued operations as reflected on the balance sheet associated with this disposal transaction (in thousands):
|
December 31,
|
|
|
2015
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
2,175
|
|
Accounts receivable
|
|
61,404
|
|
Short-term derivative instruments
|
|
272,320
|
|
Prepaid expenses and other current assets
|
|
9,642
|
|
Total current assets
|
|
345,541
|
|
Property and equipment, net
|
|
1,946,937
|
|
Long-term derivative instruments
|
|
461,810
|
|
Restricted investments
|
|
152,631
|
|
Other long-term assets
|
|
5,053
|
|
Total assets
|
$
|
2,911,972
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
8,792
|
|
Accounts payable - affiliates
|
|
193
|
|
Revenues payable
|
|
27,021
|
|
Accrued liabilities
|
|
52,923
|
|
Short-term derivative instruments
|
|
2,850
|
|
Total current liabilities
|
|
91,779
|
|
Long-term debt
|
|
2,000,579
|
|
Asset retirement obligations
|
|
162,989
|
|
Long-term derivative instruments
|
|
1,441
|
|
Deferred tax liabilities
|
|
2,094
|
|
Total liabilities
|
$
|
2,258,882
|
|
15
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Below is a reconciliation of major line items constituting pretax profit (loss) of discontinued operations to the after tax profit (loss) of
discontinued operations that are presented in the statement of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil & natural gas sales
|
$
|
43,806
|
|
|
$
|
97,221
|
|
|
$
|
104,429
|
|
|
$
|
189,170
|
|
Other revenues
|
|
186
|
|
|
|
917
|
|
|
|
429
|
|
|
|
1,786
|
|
Total revenues
|
|
43,992
|
|
|
|
98,138
|
|
|
|
104,858
|
|
|
|
190,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating
|
|
19,347
|
|
|
|
44,888
|
|
|
|
55,043
|
|
|
|
85,366
|
|
Gathering, processing, and transportation
|
|
6,166
|
|
|
|
9,548
|
|
|
|
15,375
|
|
|
|
18,214
|
|
Exploration
|
|
3
|
|
|
|
32
|
|
|
|
125
|
|
|
|
122
|
|
Taxes other than income
|
|
2,534
|
|
|
|
6,058
|
|
|
|
6,542
|
|
|
|
12,713
|
|
Depreciation, depletion, and amortization
|
|
29,954
|
|
|
|
46,286
|
|
|
|
74,383
|
|
|
|
97,552
|
|
Impairment of proved oil and natural gas properties
|
|
—
|
|
|
|
—
|
|
|
|
8,342
|
|
|
|
251,347
|
|
General and administrative (1)
|
|
9,092
|
|
|
|
14,377
|
|
|
|
22,616
|
|
|
|
28,888
|
|
Accretion of asset retirement obligations
|
|
1,828
|
|
|
|
1,686
|
|
|
|
4,535
|
|
|
|
3,320
|
|
(Gain) loss on commodity derivative instruments
|
|
104,365
|
|
|
|
61,403
|
|
|
|
52,620
|
|
|
|
(84,056
|
)
|
(Gain) loss on sale of properties
|
|
—
|
|
|
|
—
|
|
|
|
(96
|
)
|
|
|
—
|
|
Other, net
|
|
—
|
|
|
|
(943
|
)
|
|
|
119
|
|
|
|
(943
|
)
|
Total costs and expenses
|
|
173,289
|
|
|
|
183,335
|
|
|
|
239,604
|
|
|
|
412,523
|
|
Operating income (loss)
|
|
(129,297
|
)
|
|
|
(85,197
|
)
|
|
|
(134,746
|
)
|
|
|
(221,567
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
(19,142
|
)
|
|
|
(27,910
|
)
|
|
|
(51,694
|
)
|
|
|
(56,728
|
)
|
Other, net
|
|
26,014
|
|
|
|
124
|
|
|
|
26,014
|
|
|
|
284
|
|
Total other income (expense)
|
|
6,872
|
|
|
|
(27,786
|
)
|
|
|
(25,680
|
)
|
|
|
(56,444
|
)
|
Pretax profit (loss) of discontinued operations
|
|
(122,425
|
)
|
|
|
(112,983
|
)
|
|
|
(160,426
|
)
|
|
|
(278,011
|
)
|
Income tax benefit (expense)
|
|
—
|
|
|
|
(876
|
)
|
|
|
(96
|
)
|
|
|
1,494
|
|
Net income (loss) from discontinued operations
|
$
|
(122,425
|
)
|
|
$
|
(113,859
|
)
|
|
$
|
(160,522
|
)
|
|
$
|
(276,517
|
)
|
|
(1)
|
Included $4.4 million and $12.2 million, for the three and six months ended June 30, 2016; and $8.5 million and $17.0 million for the three and six months ended June 30, 2015 that was allocated to discontinued operations under an omnibus agreement. This omnibus agreement was terminated on June 1, 2016, and we entered into a transition services agreement (“TSA”) with MEMP to manage post-closing separation costs and activities through February 2017. At June 30, 2016, we owed MEMP approximately $1.9 million under the TSA.
|
In connection with the sale of the Disposition Entities, we received $4.2 million from MEMP for the sale of furniture, fixtures, and other property and equipment. We also received an additional $5.4 million from MEMP related to both the settlement of a receivable that had been previously eliminated in consolidation and prepaid expenses. We paid MEMP approximately $1.9 million, which represented a settlement related to corporate office space.
Note 4. Acquisitions and Divestitures
Transaction-related costs, which include costs associated with our proposed Merger with Range, are included in general and administrative expenses in the accompanying statements of operations for the periods indicated below (in thousands):
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
June 30,
|
|
|
June 30,
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
$
|
6,179
|
|
|
$
|
126
|
|
|
$
|
6,209
|
|
|
$
|
1,407
|
|
2016 Acquisitions and Divestitures
There were no material acquisitions during the three and six months ended June 30, 2016. In addition, there were no material divestitures during the three and six months ended June 30, 2016, except for the Disposition Entities and their subsidiaries as discussed in Note 1.
2015 Acquisition and Divestitures
On April 17, 2015, we sold certain oil and natural gas properties to a third party in Colorado and Wyoming for approximately $13.6 million (the “Rockies Divestiture”) and recorded a gain of less than $0.1 million related to the sale.
16
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On June 1, 2015, we entered into an oil and gas lease option agreement with a third p
arty pursuant to which we have the right to obtain one or more oil and gas leases in North Louisiana. The option is exercisable through February 2017. The purchase price of this option was approximately $4.0 million. The purchase price has been capitalized
as part of unproved properties and will be expensed if the option is not exercised.
Note 5. Fair Value Measurements of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a specified measurement date. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk. A three-tier hierarchy has been established that classifies fair value amounts recognized or disclosed in the financial statements. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). All of the derivative instruments reflected on the accompanying balance sheets were considered Level 2.
The carrying values of accounts receivables, accounts payables (including accrued liabilities), restricted investments and amounts outstanding under long-term debt agreements with variable rates included in the accompanying balance sheets approximated fair value at June 30, 2016 and December 31, 2015. The fair value estimates are based upon observable market data and are classified within Level 2 of the fair value hierarchy. These assets and liabilities are not presented in the following tables. See Note 8 for the estimated fair value of our outstanding fixed-rate debt.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair market values of the derivative financial instruments reflected on the balance sheets as of June 30, 2016 and December 31, 2015 were based on estimated forward commodity prices (including nonperformance risk) and forward interest rate yield curves. Nonperformance risk is the risk that the obligation related to the derivative instrument will not be fulfilled. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement in its entirety. The significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
The following table presents the gross derivative assets and liabilities that are measured at fair value on a recurring basis at June 30, 2016 and December 31, 2015 for each of the fair value hierarchy levels:
|
Fair Value Measurements at June 30, 2016 Using
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Market
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Fair Value
|
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
$
|
—
|
|
|
$
|
135,658
|
|
|
$
|
—
|
|
|
$
|
135,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
$
|
—
|
|
|
$
|
550
|
|
|
$
|
—
|
|
|
$
|
550
|
|
|
Fair Value Measurements at December 31, 2015 Using
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Market
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Fair Value
|
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
$
|
—
|
|
|
$
|
319,762
|
|
|
$
|
—
|
|
|
$
|
319,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
$
|
—
|
|
|
$
|
480
|
|
|
$
|
—
|
|
|
$
|
480
|
|
See Note 6 for additional information regarding our derivative instruments.
17
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are reported at fair value on a nonrecurring basis as reflected on the balance sheets. The following methods and assumptions are used to estimate the fair values:
|
·
|
The fair value of asset retirement obligations (“AROs”) is based on discounted cash flow projections using numerous estimates, assumptions, and judgments regarding factors such as the existence of a legal obligation for an ARO; amounts and timing of settlements; the credit-adjusted risk-free rate; and inflation rates. See Note 7 for a summary of changes in AROs.
|
|
·
|
If sufficient market data is not available, the determination of the fair values of proved and unproved properties acquired in transactions accounted for as business combinations are prepared by utilizing estimates of discounted cash flow projections. The factors to determine fair value include, but are not limited to, estimates of: (i) economic reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital. To compensate for the inherent risk of estimating and valuing unproved properties, the discounted future net revenues of probable and possible reserves are reduced by additional risk-weighting factors. The fair value of supporting equipment, such as plant assets, acquired in transactions accounted for as business combinations are commonly estimated using the depreciated replacement cost approach.
|
|
·
|
Proved oil and natural gas properties are reviewed for impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such properties. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity prices, the timing of future production and capital expenditures and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and natural gas properties.
|
Note 6. Risk Management and Derivative and Other Financial Instruments
Derivative and other financial instruments are utilized to manage exposure to commodity price and interest rate fluctuations and achieve a more predictable cash flow in connection with natural gas and oil sales from production and borrowing related activities. These instruments limit exposure to declines in prices or increases in interest rates, but also limit the benefits that would be realized if prices increase or interest rates decrease.
Certain inherent business risks are associated with commodity and interest derivative contracts and other financial instruments, including market risk and credit risk. Market risk is the risk that the price of natural gas or oil will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by the counterparty to a contract. It is our policy to enter into derivative contracts, including interest rate swaps, and other financial instruments only with creditworthy counterparties, which generally are financial institutions, deemed by management as competent and competitive market makers. Some of the lenders, or certain of their affiliates, under our credit agreements are counterparties to our derivative contracts. While collateral is generally not required to be posted by counterparties, credit risk associated with derivative and other financial instruments is minimized by limiting exposure to any single counterparty and entering into derivative and other financial instruments only with counterparties that are large financial institutions, which management believes present minimal credit risk. Additionally, master netting agreements are used to mitigate risk of loss due to default with counterparties on derivative or other financial instruments. We have also entered into the International Swaps and Derivatives Association Master Agreements (“ISDA Agreements”) with each of our counterparties. The terms of the ISDA Agreements provide us and each of our counterparties with rights of set-off upon the occurrence of defined acts of default by either us or our counterparty to a derivative or other financial instrument, whereby the party not in default may set-off all liabilities owed to the defaulting party against all net derivative asset receivables from the defaulting party.
At June 30, 2016, we had net derivative and other financial assets of $162.4 million. After taking into effect netting arrangements, we had counterparty exposure of $16.6 million related to derivative and other financial instruments of which all was with a single counterparty. Had all counterparties failed completely to perform according to the terms of their existing contracts, we would have the right to offset $145.8 million against amounts outstanding under our revolving credit facility at June 30, 2016. See Note 8 for additional information regarding our revolving credit facility.
Commodity Derivatives and Other Financial Instruments
We may use a combination of commodity derivatives and other financial instruments (e.g., floating-for-fixed swaps, put options, costless collars and basis swaps) to manage exposure to commodity price volatility. We recognize all derivative instruments at fair value; however, certain of our derivative instruments have a deferred premium. The deferred premium is factored into the fair value measurement and the Company agrees to defer the premium paid or received until the time of settlement. Cash settlements received on settled derivative positions during the six months ended June 30, 2016 is net of deferred premiums of $10.5 million.
18
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2015, we restructured our existing 2018 crude oil and natural gas hedges for crude oil and
NGL swaps that will settle in 2016. Cash settlements of approximately $92.3 million from the terminated 2018 positions were received and applied as premiums for the new crude oil and NGL swaps. Certain contracts are classified as other financial instrument
s, which required bifurcation, based on the relationship between the fixed swap price and the market price at the restructure dates. Due to bifurcation, $27.3 million of the restructured contracts represents other financial assets at June 30, 2016.
We enter into natural gas derivative contracts that are indexed to NYMEX-Henry Hub and regional indices such as TGT Z1 in proximity to our areas of production. We also enter into oil derivative contracts indexed primarily to NYMEX-WTI. Our NGL derivative contracts are primarily indexed to OPIS Mont Belvieu.
At June 30, 2016, we had the following open commodity positions (excluding embedded derivatives):
|
Remaining
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
Natural Gas Derivative Contracts:
|
|
|
|
|
|
|
|
Fixed price swap contracts:
|
|
|
|
|
|
|
|
Average Monthly Volume (MMBtu)
|
|
3,120,000
|
|
|
|
1,770,000
|
|
Weighted-average fixed price
|
$
|
4.06
|
|
|
$
|
4.24
|
|
|
|
|
|
|
|
|
|
Collar contracts:
|
|
|
|
|
|
|
|
Average Monthly Volume (MMBtu)
|
|
1,000,000
|
|
|
|
1,050,000
|
|
Weighted-average floor price
|
$
|
4.00
|
|
|
$
|
4.00
|
|
Weighted-average ceiling price
|
$
|
4.71
|
|
|
$
|
5.06
|
|
|
|
|
|
|
|
|
|
Purchased put option contracts:
|
|
|
|
|
|
|
|
Average Monthly Volume (MMBtu)
|
|
6,700,000
|
|
|
|
5,350,000
|
|
Weighted-average strike price
|
$
|
3.54
|
|
|
$
|
3.48
|
|
Weighted-average deferred premium
|
$
|
(0.34
|
)
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
TGT Z1 basis swaps:
|
|
|
|
|
|
|
|
Average Monthly Volume (MMBtu)
|
|
1,120,000
|
|
|
|
200,000
|
|
Spread - Henry Hub
|
$
|
(0.10
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
Crude Oil Derivative Contracts:
|
|
|
|
|
|
|
|
Fixed price swap contracts:
|
|
|
|
|
|
|
|
Average Monthly Volume (Bbls)
|
|
32,833
|
|
|
|
28,000
|
|
Weighted-average fixed price
|
$
|
83.91
|
|
|
$
|
84.70
|
|
|
|
|
|
|
|
|
|
Collar contracts:
|
|
|
|
|
|
|
|
Average Monthly Volume (Bbls)
|
|
26,600
|
|
|
|
—
|
|
Weighted-average floor price
|
$
|
80.00
|
|
|
$
|
—
|
|
Weighted-average ceiling price
|
$
|
99.70
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
NGL Derivative Contracts:
|
|
|
|
|
|
|
|
Fixed price swap contracts:
|
|
|
|
|
|
|
|
Average Monthly Volume (Bbls)
|
|
366,758
|
|
|
|
—
|
|
Weighted-average fixed price
|
$
|
39.93
|
|
|
$
|
—
|
|
19
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2016, we had the following open embedded derivative positions:
|
Remaining
|
|
|
2016
|
|
Oil Hybrid Contracts:
|
|
|
|
Fixed price swap contracts:
|
|
|
|
Average Monthly Volume (Bbls)
|
|
27,211
|
|
Weighted-average fixed price
|
$
|
46.50
|
|
Initial net investment price
|
|
62.29
|
|
Total contract swap price
|
$
|
108.79
|
|
|
|
|
|
NGL Hybrid Contracts:
|
|
|
|
Fixed price swap contracts:
|
|
|
|
Average Monthly Volume (Bbls)
|
|
111,175
|
|
Weighted-average fixed price
|
$
|
15.77
|
|
Initial net investment price
|
|
25.61
|
|
Total contract swap price
|
$
|
41.38
|
|
Balance Sheet Presentation
The following table summarizes both: (i) the gross fair value of derivative instruments by the appropriate balance sheet classification even when the derivative instruments are subject to netting arrangements and qualify for net presentation in the balance sheet and (ii) the net recorded fair value as reflected on the balance sheet at June 30, 2016 and December 31, 2015. There was no cash collateral received or pledged associated with our derivative instruments since most of the counterparties, or certain of their affiliates, to our derivative contracts are lenders under our collective credit agreements.
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
December 31,
|
|
Type
|
|
Balance Sheet Location
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
(In thousands)
|
|
Commodity contracts
|
|
Short-term derivative instruments
|
|
$
|
98,937
|
|
|
$
|
228,349
|
|
|
$
|
343
|
|
|
$
|
358
|
|
Netting arrangements
|
|
Short-term derivative instruments
|
|
|
(343
|
)
|
|
|
(358
|
)
|
|
|
(343
|
)
|
|
|
(358
|
)
|
Net recorded fair value
|
|
Short-term derivative instruments
|
|
$
|
98,594
|
|
|
$
|
227,991
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Long-term derivative instruments
|
|
$
|
36,721
|
|
|
$
|
91,413
|
|
|
$
|
207
|
|
|
$
|
122
|
|
Netting arrangements
|
|
Long-term derivative instruments
|
|
|
(207
|
)
|
|
|
(122
|
)
|
|
|
(207
|
)
|
|
|
(122
|
)
|
Net recorded fair value
|
|
Long-term derivative instruments
|
|
$
|
36,514
|
|
|
$
|
91,291
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(Gains) Losses on Derivatives
All gains and losses, including changes in the derivative instruments’ fair values, have been recorded in the accompanying statements of operations since derivative instruments are not designated as hedging instruments for accounting and financial reporting purposes. The following table details the gains and losses related to derivative instruments for the periods indicated (in thousands):
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
Statements of
|
|
June 30,
|
|
|
June 30,
|
|
|
|
Operations Location
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Commodity derivative contracts
|
|
(Gain) loss on commodity derivatives
|
|
$
|
90,617
|
|
|
$
|
30,463
|
|
|
$
|
54,175
|
|
|
$
|
(77,727
|
)
|
Note 7. Asset Retirement Obligations
Asset retirement obligations primarily relate to our portion of future plugging and abandonment costs for wells and related facilities. The following table presents the changes in the asset retirement obligations for the six months ended June 30, 2016 (in thousands):
Asset retirement obligations at beginning of period
|
$
|
10,079
|
|
Liabilities added from acquisitions or drilling
|
|
530
|
|
Revision of estimates
|
|
(125
|
)
|
Accretion expense
|
|
295
|
|
Asset retirement obligations at end of period
|
$
|
10,779
|
|
20
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
8. Long Term Debt
The following table presents our consolidated debt obligations at the dates indicated:
|
June 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
|
(In thousands)
|
|
$2.0 billion revolving credit facility, variable-rate, due June 2019
|
$
|
514,000
|
|
|
$
|
423,000
|
|
5.875% senior unsecured notes, due July 2022 ("Senior Notes") (1) (2)
|
|
600,000
|
|
|
|
600,000
|
|
Unamortized debt issuance costs
|
|
(10,098
|
)
|
|
|
(10,936
|
)
|
Total long-term debt
|
$
|
1,103,902
|
|
|
$
|
1,012,064
|
|
(1)
|
The estimated fair value of this fixed-rate debt was $598.5 million and $525.0 million at June 30, 2016 and December 31, 2015, respectively.
|
(2)
|
The estimated fair value is based on quoted market prices and is classified as Level 2 within the fair value hierarchy.
|
On May 31, 2016, we entered into a sixth amendment to our revolving credit facility to, among other things, permit the sale of MEMP GP, Beta Operating and Services to MEMP. Effective June 1, 2016, Beta Operating was automatically released as a guarantor and discharged from any and all obligations under or in connection with our revolving credit facility or other related loan documents. The liens on and security interests in the equity interests owned by us in each of MEMP GP, Beta Operating, and Services, and the mortgaged property owned by Beta Operating were automatically released.
Senior Notes
Effective June 1, 2016, the guarantor subsidiaries are 100% owned by the Company; the Company has no material assets or operations independent of the guarantor subsidiaries; and there are no significant restrictions upon the ability of the guarantor subsidiaries to distribute funds to the Company. Additionally, our Senior Notes are jointly and severally, fully and unconditional guaranteed (subject to customary release provisions) by the guarantor subsidiaries.
Borrowing Base
Credit facilities tied to borrowing base are common throughout the oil and gas industry. Our revolving credit facility borrowing base is subject to redetermination, on at least a semi-annual basis, primarily based on estimated proved reserves. The borrowing base for our credit facility was the following at the date indicated (in thousands):
|
June 30,
|
|
|
2016
|
|
$2.0 billion revolving credit facility, variable-rate, due June 2019
|
$
|
1,000,000
|
|
Weighted-Average Interest Rates
The following table presents the weighted-average interest rates paid on our consolidated variable-rate debt obligations for the periods presented:
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
Credit Facility
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revolving credit facility (1)
|
|
2.49
|
%
|
|
|
1.70
|
%
|
|
|
2.38
|
%
|
|
|
1.80
|
%
|
(1)
|
As noted in the 2015 10-K, the Applicable Margin (as defined in our revolving credit facility), or credit spread, varies based on the total commitment usage (which is the ratio of outstanding borrowings and letters of credit to the borrowing base then in effect). The Applicable Margin for the three months and six months ended for June 30, 2016 was 2.00% and 1.90%, respectively. The Applicable Margin for the three months and six months ended June 30, 2015, was 1.50% and 1.57%, respectively.
|
|
Unamortized Deferred Financing Costs
Unamortized deferred financing costs associated with our consolidated debt obligations were as follows at the dates indicated:
|
June 30,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
|
(In thousands)
|
|
Revolving credit facility
|
$
|
4,292
|
|
|
$
|
4,976
|
|
Senior Notes
|
|
10,098
|
|
|
|
10,936
|
|
Total unamortized deferred financing costs
|
|
14,390
|
|
|
|
15,912
|
|
21
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
No
te 9. Stockholders’ Equity and Noncontrolling Interests
Common Stock
The Company's authorized capital stock includes 600,000,000 shares of common stock, $0.01 par value per share. The following is a summary of the changes in our common shares issued for the six months ended June 30, 2016:
Balance December 31, 2015
|
|
205,293,743
|
|
Restricted common shares issued (Note 11)
|
|
1,117,606
|
|
Restricted common shares repurchased (1)
|
|
(363,159
|
)
|
Restricted common shares forfeited
|
|
(9,877
|
)
|
Balance June 30, 2016
|
|
206,038,313
|
|
|
(1)
|
Restricted common shares are generally net-settled by shareholders to cover the required withholding tax upon vesting. Participants surrendered shares with value equivalent to the employee’s minimum statutory obligation for the applicable income and other employment taxes. Total payments remitted for the employees’ tax obligations to the appropriate taxing authorities were approximately $5.7 million. These net-settlements had the effect of shares repurchased by the Company as they reduced the number of shares that would have otherwise been outstanding as a result of the vesting and did not represent an expense to the Company.
|
|
See Note 11 for additional information regarding restricted common shares. Restricted shares of common stock are considered issued and outstanding on the grant date of the restricted stock award.
Share Repurchase Program
The Company repurchased 2,764,887 shares of common stock under the December 2014 repurchase program for an aggregate price of $47.8 million through March 16, 2015, which exhausted the December 2014 repurchase program. We have retired all of the shares of common stock repurchased and the shares of common stock are no longer issued or outstanding
.
In April 2015, the board of directors (“Board”) of the Company authorized the repurchase of up to $50.0 million of the Company’s outstanding common stock from time to time on the open market, through block trades or otherwise. The Company was not obligated to repurchase any dollar amount or specific number of shares of its common stock under the program, which could have been suspended or discontinued at any time. The Company did not repurchase any shares of common stock under the April 2015 repurchase program. The April 2015 repurchase program expired in April 2016.
Noncontrolling Interests
Noncontrolling interests is the portion of equity ownership in the Company’s consolidated subsidiaries not attributable to the Company and primarily consisted of the equity interests held by: (i) the limited partners of MEMP prior to June 1, 2016 (see Note 1) and (ii) a third party investor in the San Pedro Bay Pipeline Company prior to November 3, 2015.
Distributions paid to the limited partners of MEMP primarily represent the quarterly cash distributions paid to MEMP’s unitholders. Contributions received from limited partners of MEMP primarily represent net cash proceeds received from common unit offerings. These distributions and contributions are a component of net cash provided by discontinued operations from financing activities as presented on our cash flow statement.
22
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Not
e 10. Earnings per Share
The following sets forth the calculation of earnings (loss) per share, or EPS, for the periods indicated (in thousands, except per share amounts):
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations available to common stockholders
|
$
|
(195,833
|
)
|
|
$
|
(26,614
|
)
|
|
$
|
(190,116
|
)
|
|
$
|
22,121
|
|
Net income (loss) from discontinued operations available to common stockholders
|
|
128
|
|
|
|
88
|
|
|
|
168
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
203,948
|
|
|
|
189,628
|
|
|
|
203,807
|
|
|
|
190,163
|
|
Incremental treasury stock method shares (1)
|
|
310
|
|
|
|
364
|
|
|
|
39
|
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS from continuing operations
|
$
|
(0.96
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.93
|
)
|
|
$
|
0.12
|
|
Diluted EPS from continuing operations (1)
|
$
|
(0.96
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.93
|
)
|
|
$
|
0.12
|
|
Basic EPS from discontinued operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Diluted EPS from discontinued operations (1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(1)
|
The Company determines the more dilutive of either the two-class method or the treasury stock method for diluted EPS. The two-class method was more dilutive for each period presented. The incremental treasury stock method shares were excluded from the computation of diluted EPS because the inclusion of such shares would have been anti-dilutive.
|
|
Note 11. Long-Term Incentive Plans
The following table summarizes information regarding restricted common share awards granted under the Memorial Resource Development Corp. 2014 Long-Term Incentive Plan (“LTIP”) for the periods presented:
|
Number of Shares
|
|
|
Weighted-Average Grant Date Fair Value per Share (1)
|
|
Restricted common shares outstanding at December 31, 2015
|
|
1,668,845
|
|
|
$
|
18.89
|
|
Granted (2)
|
|
1,117,606
|
|
|
$
|
13.13
|
|
Forfeited
|
|
(9,877
|
)
|
|
$
|
18.84
|
|
Vested
|
|
(1,145,885
|
)
|
|
$
|
18.87
|
|
Restricted common shares outstanding at June 30, 2016 (3)
|
|
1,630,689
|
|
|
$
|
14.96
|
|
|
(1)
|
Determined by dividing the aggregate grant date fair value of awards issued.
|
|
|
(2)
|
The aggregate grant date fair value of restricted common share awards issued in 2016 was $14.7 million based on a grant date market price ranging from $13.08 to $15.58 per share.
|
|
|
(3)
|
Effective immediately prior to the effective time of the Merger, each outstanding share of our unvested restricted common stock will fully vest and any applicable restrictions will lapse and, at the effective time of the Merger, each such share will be treated as a share of our common stock, including with respect to the right to receive 0.375 of a fully vested share of Range Common Stock.
|
|
The following table summarizes the amount of recognized compensation expense associated with these awards that are reflected in the accompanying statements of operations for the periods presented (in thousands):
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
June 30,
|
|
|
June 30,
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
$
|
10,521
|
|
|
$
|
1,957
|
|
|
$
|
13,673
|
|
|
$
|
3,443
|
|
The unrecognized compensation cost associated with restricted common share awards was $23.2 million at June 30, 2016. We expect to recognize the unrecognized compensation cost for these awards over a weighted-average period of 2.44 years.
23
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LTIP Modification.
On March 9, 2016, certain employees were impacted by an involuntary termination which, up
on the Board’s approval, accelerated the vesting schedule of unvested awards under the LTIP that otherwise would have been forfeited upon a voluntary termination. The acceleration of the LTIP vesting schedule represents an improbable-to-probable modificati
on. The grant-date fair value compensation cost of approximately $0.5 million was reversed and the modified-date grant fair value compensation cost of $1.1 million was recognized.
On June 1, 2016, with the completion of the sale of the Disposition Entities and their subsidiaries to MEMP as discussed in Note 1, we accelerated the vesting schedule of unvested awards under the LTIP for the employees that remained with the Disposition Entities and their subsidiaries. The grant-date fair value compensation cost of approximately $2.5 million was reversed and the modified-date grant fair value compensation cost of $9.8 million was recognized.
Note 12. Incentive Units
MRD Holdco
MRD Holdco’s governing documents authorize the issuance of 1,000 incentive units, of which 930 incentive units were granted in exchange for cancelled predecessor awards (the “Exchanged Incentive Units”). Subsequent to our initial public offering, MRD Holdco granted the remaining 70 incentive units to certain key employees (the “Subsequent Incentive Units”).
We recognized compensation expense of $74.3 million and $52.6 million for the three and six months ended June 30, 2016, respectively, offset by a deemed capital contribution to MRD Holdco. The unrecognized compensation expense of approximately $6.2 million as of June 30, 2016 will be recognized over the remaining expected service period of 0.25 years.
The fair value of the Exchanged Incentive Units and Subsequent Incentive Units will be remeasured on a quarterly basis until all payments have been made. The settlement obligation rests with MRD Holdco. Accordingly, no payments will ever be made by us related to these incentive units; however, adjustments to non-cash compensation expense will be allocated to us in future periods offset by deemed capital contributions or distributions. As such, these awards are not dilutive to our stockholders.
The fair value of the incentive units was estimated using a Monte Carlo simulation valuation model with the following assumptions:
|
Exchanged Incentive Units
|
|
|
Subsequent Incentive Units
|
|
Valuation date
|
6/30/2016
|
|
|
6/30/2016
|
|
Dividend yield
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
55.00
|
%
|
|
|
55.00
|
%
|
Risk-free rate
|
|
0.26
|
%
|
|
|
0.26
|
%
|
Expected life (years)
|
|
0.25
|
|
|
|
0.25
|
|
Note 13. Related Party Transactions
Amounts due to MRD Holdco and certain affiliates of NGP at June 30, 2016 and December 31, 2015 are presented as “Accounts payable
–
affiliates” in the accompanying balance sheets.
NGP Affiliated Companies
During the three and six months ended June 30, 2016, we paid approximately $0.5 million and $3.8 million, respectively, to Cretic Energy Services, LLC, a NGP affiliated company, for services related to our drilling and completion activities.
During the three and six months ended June 30, 2016, we paid approximately $1.1 million and $3.5 million, respectively, to Multi-Shot, LLC, a NGP affiliated company, for services related to our drilling and completion activities, of which less than $0.1 million was attributable to discontinued operations.
During the three months ended June 30, 2016, we also paid a NGP affiliate company approximately $1.1 million for mineral interests located in North Louisiana.
Related Party Agreements
We and certain of our affiliates have entered into various documents and agreements. These agreements have been negotiated among affiliated parties and, consequently, are not the result of arm’s-length negotiations.
Registration Rights Agreement and Voting Agreement
A discussion of these agreements is included in our 2015 Form 10-K.
24
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
S
ervices Agreement
A discussion of this agreement is included in our 2015 Form 10-K. The services agreement was terminated effective March 1, 2015. During the six months ended June 30, 2015, we recognized approximately $2.0 million of general and administrative expenses under this agreement.
Midstream Agreements
We have various midstream service agreements with affiliates of PennTex Midstream Partners, LP (“PennTex”), an affiliate of NGP, for the gathering, processing and transportation of natural gas and NGLs. Additionally, we entered into an area of mutual interest and exclusivity agreement (“AMI”) with PennTex pursuant to which PennTex has the exclusive right to provide midstream services to support our current and future production in North Louisiana on our operated acreage within such area (other than production subject to existing third-party commitments). A discussion of these agreements is included in our 2015 Form 10-K.
Pursuant to the gas processing agreement, any deficiency payments made by the Company under this agreement will be treated as prepaid processing fees by PennTex (except for the June 2015 deficiency payment)
because we may utilize these deficiency payments as credit for fees owed if we have delivered the total minimum volume commitment under the processing agreement within the initial term of the agreement
.
We must pay a quarterly deficiency payment based on the firm-commitment fixed fee if the cumulative minimum volume commitment as of the end of such quarter exceeds the sum of (i) the cumulative volumes processed (or credited with respect to plant interruptions) under the processing agreement as of the end of such quarter plus (ii) volumes corresponding to deficiency payments incurred prior to such quarter. During the three and six months ended June 30, 2016, we incurred $3.2 million and
$6.5 million, respectively, of deficiency payments. As of June 30, 2016, we had $6.5 million of prepaid processing fees on our balance sheet in the “Other long-term assets” line.
All net costs associated with these agreements are reflected in the statement of operations in the “Gathering, processing, and transportation – affiliate” line.
Classic Pipeline Gas Gathering Agreement & Water Disposal Agreement
A discussion of these agreements is included in our 2015 Form 10-K. The amended gas gathering agreement was terminated in November 2015 in connection with a third party’s acquisition of Classic Pipeline and Gathering, LLC’s (“Classic Pipeline”) Joaquin gathering system. Additionally, Classic Pipeline assigned its salt water disposal system to MEMP in November 2015. For the three and six months ended June 30, 2015, MEMP incurred gathering and salt water disposal fees of approximately $1.1 million and $2.0 million, respectively, under these agreements. These fees are a component of net income (loss) from discontinued operations as presented on our statement of operations.
Note 14. Commitments and Contingencies
Litigation & Environmental
As part of our normal business activities, we may be named as defendants in litigation and legal proceedings, including those arising from regulatory and environmental matters. Although we are insured against various risks to the extent we believe it is prudent, there is no assurance that the nature and amount of such insurance will be adequate, in every case, to indemnify us against liabilities arising from future legal proceedings. We are not aware of any litigation, pending or threatened, that we believe is reasonably likely to have a significant adverse effect on our financial position, results of operations or cash flows.
25
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Subsequent event.
In July 2016, alleged stockholders (“Plaintiffs”) of the Company, filed two class action lawsuits against us and t
he members of our board of directors relating to the Merger. These lawsuits are styled (i) Roger Mariani v. Memorial Resource Development Corp., et al., Case No. 4:16-cv-2042, in the United States District Court for the Southern District of Texas, Houston
Division; and (ii)
Joel Morris v. Memorial Resource Development Corp., et al.
, Case No. 4:16-cv-02183, in the United States District Court for the Southern District of Texas, Houston Division. The Morris action also names Range and Merger Sub as additional
defendants. Plaintiffs allege that the joint proxy statement/prospectus filed in connection with the Merger omits allegedly material information concerning, in general and among other things, (i) the valuation analyses prepared by Barclays Capital Inc. (“
Barclays”) and Morgan Stanley & Co. LLC (“Morgan Stanley”) in connection with their fairness opinions regarding the Merger, (ii) the financial projections utilized by Barclays and Morgan Stanley and (iii) the background of the Merger. Based on these allega
tions, Plaintiffs allege that (i) the defendants have violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and (ii) members of our board of directors have violated Section 20(a) of the Exchange Act. Plaintiffs also allege, in ge
neral and among other things, that the terms of the Merger are (i) unfair to our stockholders and (ii) the result of an inadequate process. Based on these allegations, Plaintiffs seek to enjoin us from proceeding with or consummating the Merger. To the ext
ent that the Merger is consummated before injunctive relief is granted, Plaintiffs seek to have the Merger rescinded. Plaintiffs also seek attorneys’ fees. Plaintiffs have not yet served the defendants, and our date to answer, move to dismiss, or otherwise
respond to the lawsuit has not yet been set. We cannot predict the outcome of the lawsuits or any others that might be filed, nor can we predict the amount of time and expense that will be required to resolve the lawsuits. We intend to vigorously defend t
he lawsuits.
There were no environmental reserves recorded on our balance sheet at June 30, 2016 and December 31, 2015 associated with continuing operations.
Third Party Midstream Service Agreements (Gathering & Processing)
The Company has an existing amended and restated midstream service agreement with ETC Field Services LLC (formerly known as Regency Field Services LLC) (“ETC”) for the gathering and processing of natural gas in North Louisiana as discussed in our 2015 Form 10-K. ETC is entitled to receive a payback demand fee from us and other third parties equal to 110% of certain infrastructure improvement costs. The payback demand fee is based upon actual volumes gathered, but not less than a specified monthly demand quantity. Until payout is achieved, there is also a monthly demand quantity associated with gathering and processing fees.
We have the right to request that gas gathered by ETC be delivered to alternative delivery points for processing (e.g., PennTex). Under these circumstances, ETC assesses us a $0.25 per MMBtu gathering only fee to take gas off its system.
Firm Gas Transportation Service Agreement
The Company entered into a long-term firm transportation agreement with Regency Intrastate Gas LP (“RIGS”) to assure the delivery of its natural gas to market. This agreement’s primary term terminates on December 31, 2025, subject to one-year extensions at either party’s election. This commitment requires a minimum monthly reservation charge that escalates annually by two percent regardless of whether the contracted capacity is used or not. An overrun charge that also escalates annually by two percent applies to gas received in excess of the contracted capacity. In addition to the demand and overrun fees, RIGS retains 1.25% of gas received for fuel. The following table summarizes the reserved capacity and applicable fees associated with this agreement:
Period
|
Reserved Capacity (MMBtu/d)
|
|
|
Reservation Demand Charge ($/MMBtu)
|
|
|
Overrun Charge ($/MMBtu)
|
|
January 1, 2016 to December 31, 2022
|
|
300,000
|
|
|
|
0.075
|
|
|
|
0.150
|
|
January 1, 2023 to December 31, 2025
|
|
200,000
|
|
|
|
0.075
|
|
|
|
0.150
|
|
In the future, additional receipt points may be developed. The following pricing grid, subject to annual escalation, would apply to gas received at any of these future receipt points.
|
Reservation Demand Charge ($/MMBtu)
|
|
|
Commodity Charge ($/MMBtu)
|
|
|
Overrun Charge ($/MMBtu)
|
|
Total gas receipts
≤
contracted reserved capacity
|
|
0.075
|
|
|
|
0.075
|
|
|
n/a
|
|
Total gas receipts > contracted reserved capacity
|
n/a
|
|
|
n/a
|
|
|
|
0.150
|
|
26
MEMORIAL RESOURCE DEVELOPMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Sales Delivery Commitment
Recently, the Company and a third party entered into a contract whereby the Company agreed to sell and deliver NGLs produced at gas processing plants owned and operated by PennTex. The NGLs are delivered to a pipeline owned by an affiliate of the third party. The initial term of the contract terminates on December 31, 2022, subject to one-year extensions at either party’s election. The price we receive is tied to published indices, net of transportation and fractionation deductions. Commencing April 1, 2016, through the end of the initial term of the agreement, the minimum sales volume commitment is 6,000 BPD. If we fail to deliver the minimum sales volume commitment, we will be required to pay a deficiency payment equal to transportation and fractionation deductions on undelivered volumes. Currently, transportation and fractionation deductions are approximately $4.39 per barrel.
Related Party Agreements
See Note 13 for additional information.
Not
e 15. Income Taxes
The Company is a corporation subject to federal and state income taxes. The compensation expense associated with the incentive units of MRD Holdco (discussed in Note 12) creates a nondeductible permanent difference for income tax purposes.
The Company’s income tax benefit from continuing operations for the three and six months ended June 30, 2016 was $25.3 million and $22.4 million, respectively, compared to $24.6 million of income tax benefit and $22.9 million of income tax expense for the three and six months ended June 30, 2015, respectively. The Company’s effective tax rate from continuing operations for the three and six months ended June 30, 2016 was 11.5% and 10.5%, respectively, compared to 48.1% and 49.0% for the three and six months ended June 30, 2015, respectively. The change in the effective tax rate from 2015 to 2016 was primarily due to a change in non-deductible incentive unit compensation as discussed in Note 12. The effective tax rate for the three and six months ended June 30, 2016 and 2015 differed from the statutory federal income tax rate primarily due to non-deductible incentive unit compensation expense, state income tax, net of federal benefit, and long-term incentive plan compensation expense.
We reported no liability for unrecognized tax benefits as of June 30, 2016 and expect no significant change to the unrecognized tax benefits in the next twelve months.
Consistent with establishing the deferred tax liability through stockholders’ equity in our initial public offering, we reversed a deferred tax liability of approximately $28.0 million through stockholders’ equity in 2015 attributable to the deferred tax effects of the Property Swap in 2015.
27