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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

OR

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to               

Commission File Number: 001-35512

MIDSTATES PETROLEUM COMPANY, INC.

(Exact name of registrant as specified in its charter)

(918) 947-8550

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of our common stock at August 8, 2016 is shown below:

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MIDSTATES PETROLEUM COMPANY, INC.

QUARTERLY REPORT ON

FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016

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GLOSSARY OF OIL AND NATURAL GAS TERMS

Bbl:  One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to oil, condensate or natural gas liquids.

Boe:  Barrels of oil equivalent, with 6,000 cubic feet of natural gas being equivalent to one barrel of oil.

Boe/day:  Barrels of oil equivalent per day.

Completion:  The process of treating a drilled well followed by the installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole, the reporting of abandonment to the appropriate agency.

Dry hole:  A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production do not exceed production expenses and taxes.

Exploratory well:  A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of natural gas or oil in another reservoir.

Mcf: One thousand cubic feet of natural gas.

MMBoe:  One million barrels of oil equivalent.

MMBtu:  One million British thermal units.

Net acres:  The percentage of total acres an owner has out of a particular number of acres, or a specified tract. An owner who has 50% interest in 100 acres owns 50 net acres.

NYMEX:  The New York Mercantile Exchange.

Proved reserves:  Those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. The area of the reservoir considered as proved includes (i) the area identified by drilling and limited by fluid contacts, if any, and (ii) adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data. In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons, as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty. Where direct observation from well penetrations has defined a highest known oil elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty. Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when (i) successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (ii) the project has been approved for development by all necessary parties and entities, including governmental entities. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price is the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.

Reasonable certainty:  A high degree of confidence.

Recompletion:  The process of re-entering an existing wellbore that is either producing or not producing and completing new reservoirs in an attempt to establish or increase existing production.

Reserves:  Estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible as of a given date by application of development projects to known accumulations.

Reservoir:  A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

Spud or Spudding:  The commencement of drilling operations of a new well.

Wellbore:  The hole drilled by the bit that is equipped for oil or gas production on a completed well. Also called well or borehole.

Working interest:  The right granted to the lessee of a property to explore for and to produce and own oil, gas, or other minerals. The working interest owners bear the exploration, development, and operating costs on a cash, penalty, or carried basis.

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PART I - FINANCIAL INFORMATION

MIDSTATES PETROLEUM COMPANY, INC. (DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share amounts)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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MIDSTATES PETROLEUM COMPANY, INC. (DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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MIDSTATES PETROLEUM COMPANY, INC. (DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(In thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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MIDSTATES PETROLEUM COMPANY, INC. (DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

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MIDSTATES PETROLEUM COMPANY, INC. (DEBTOR-IN-POSSESSION)

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization and Business

Midstates Petroleum Company, Inc. (“Midstates”), through its wholly owned subsidiary Midstates Petroleum Company LLC, engages in the business of exploring, drilling for, and the production of, oil, natural gas liquids (“NGLs”) and natural gas.  Midstates Petroleum Company, Inc. was incorporated pursuant to the laws of the State of Delaware on October 25, 2011 to become a holding company for Midstates Petroleum Company LLC (“Midstates Sub”), which was previously a wholly owned subsidiary of Midstates Petroleum Holdings LLC (“Holdings LLC”).  The terms “Company,” “we,” “us,” “our,” and similar terms when used in the present tense, prospectively or for historical periods since April 25, 2012, refer to Midstates Petroleum Company, Inc. and Midstates Sub, unless the context indicates otherwise.

The Company conducts oil and gas operations and owns and operates oil and gas properties in Oklahoma, Texas and Louisiana.  The Company operates a significant portion of its oil and natural gas properties.  The Company’s management evaluates performance based on one reportable segment as all its operations are located in the United States and, therefore, it maintains one cost center.

2. Chapter 11 Proceedings

Voluntary Reorganization Under Chapter 11

On April 30, 2016 (the “Petition Date”), Midstates and Midstates Sub (collectively, the “Debtors”), filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”).  The Debtors’ Chapter 11 cases (the “Chapter 11 Cases”) are being jointly administered under the case styled In re Midstates Petroleum Company, Inc., et al, No. 16-32237.  The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  The Company has accounted for the bankruptcy in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations, beginning in the quarterly period ended June 30, 2016.

By certain “first day” motions filed in the Chapter 11 Cases, the Company obtained Bankruptcy Court approval to, among other things and subject to the terms of the orders entered by the Bankruptcy Court, pay employee wages, health benefits and certain other employee obligations, pay certain lienholders or prospective lienholders and forward funds to third parties, including royalty holders and other working interest owners.  As a result, the Company is not only able to conduct normal business activities and pay all associated obligations for the period following its bankruptcy filing, it is also authorized to pay and has paid pre-petition employee wages and benefits, pre-petition amounts owed to certain lienholders or prospective lienholders and funds belonging to third parties.  During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of business require the prior approval of the Bankruptcy Court.

On April 30, 2016,  and prior to filing the Bankruptcy Petitions, the Debtors entered into a Plan Support Agreement (the “Plan Support Agreement”) with the following parties:

·                  Approximately 80.0% of the lenders (collectively, the “Consenting Credit Facility Lenders”) under the Debtors’ secured revolving first lien credit facility (the “Credit Facility”);

·                  Approximately 74.0% of the holders (collectively, the “Consenting Second Lien Noteholders”) of the Debtors’ 10.0% Second Lien Senior Secured Notes Due 2020 (the “Second Lien Notes”); and

·                  Approximately 77.0% of the holders (collectively, the “Consenting Third Lien Noteholders”, and together with the Consenting Credit Facility Lenders and Consenting Second Lien Noteholders, the “Plan Support Agreement Parties”) of the Debtors’ 12.0% Third Lien Notes due 2020 (the “Third Lien Notes”).

On June 29, 2016, the Debtors entered into a First Amendment to the Plan Support Agreement with certain of the Plan Support Agreement Parties (the “PSA Amendment”).  The PSA Amendment, among other things modified the dates for certain of the milestones related to the occurrence of certain events in the Chapter 11 Cases.

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In order for the Debtors to emerge successfully from the Chapter 11 Cases as reorganized companies, they must obtain approval from the Bankruptcy Court and certain of their respective creditors for a Chapter 11 plan of reorganization.  On May 14, 2016, the Debtors filed with the Bankruptcy Court the Joint Chapter 11 Plan of Reorganization of Midstates Petroleum Company, Inc. and its Debtor Affiliate (as further amended, the “Plan”), as well as the related Disclosure Statement (as further amended, the “Disclosure Statement”).  The Bankruptcy Court approved amended versions of the Plan and Disclosure Statement on July 13, 2016.  On August 3, 2016, the Debtors filed a plan supplement with the Bankruptcy Court, which included, among other things, a schedule of assumed executory contracts and unexpired leases, a list of retained causes of action, a term sheet for the Exit Facility (as defined below), a list of new directors and officers of the reorganized Debtors, a form-of registration rights agreement and a form-of warrant agreement.

The restructuring transactions contemplated by the Plan Support Agreement were memorialized in the Plan and include the following key elements:

·                  Substantial Deleveraging of the Balance Sheet:  The Plan contemplates (i) the permanent pay-down of $82.0 million of the Company’s Credit Facility, with a $170.0 million exit facility (the “Exit Facility”) upon emergence, (ii) the pay-down of up to $60.0 million of the Company’s Second Lien Notes in cash, and (iii) the conversion into equity of all of the Company’s remaining debt that is junior to the Credit Facility.

·                  Intercreditor Settlement: Equity distributions among the noteholder classes will be made in accordance with an intercreditor settlement among the Plan Support Agreement Parties (the “Settlement”), which provides for a valuation allocation with respect to the Company’s assets that are encumbered or unencumbered as of the Petition Date, such that the equity of the reorganized Company will be allocated 98.8% on account of prepetition collateral and 1.2% on account of unencumbered assets.

·                  Credit Facility Claims: Holders of allowed claims under the Credit Facility (the “Credit Facility Claims”) will receive their pro rata share of approximately $82.0 million in cash and the Credit Facility will be amended to reflect the terms of the Exit Facility.

·                  Second Lien Notes Claims: Holders of allowed claims under the Second Lien Notes (the “Second Lien Notes Claims”) will receive their pro rata share of (a) 96.3% of the equity of the reorganized Company (subject to increase to 98.8% if the Third Lien Intercreditor Settlement (as defined below) is not approved as part of the Plan) and (b) cash payments equal to the amount of cash the Company holds at emergence, less cash distributions and reserves to be funded under the Plan (including the cash payment to, and a $40.0 million cash collateral account for the benefit of, the Consenting Credit Facility Lenders) and $70.0 million, subject to a maximum cash distribution to Consenting Second Lien Noteholders of $60.0 million.

·                  Third Lien Notes Claims: Holders of allowed claims under the Third Lien Notes (the “Third Lien Notes Claims”) will receive their pro rata share of 2.5% of the equity in the reorganized Company and warrants to acquire 15% of such equity (the “Third Lien Intercreditor Settlement”).  These warrants will carry a strike price based on an equity valuation for the Company of $600.0 million and will expire 42 months after the Company emerges from the Chapter 11 Cases.

·                  Unsecured Claims: Holders (the “Unsecured Noteholders”) of allowed claims under the Debtors’ 10.75% Senior Unsecured Notes due 2020 (the “2020 Notes Claims”), the holders of allowed claims under the 9.25% Senior Unsecured Notes due 2021 (the “2021 Notes Claims,” and together with the 2020 Notes Claims, the “Unsecured Notes Claims”), and the Holders of other unsecured claims will receive their pro rata share of 1.2% of the equity in the reorganized Company (the “Unencumbered Assets Equity Distribution”).

·                  Existing Equity: All existing equity interests of the Company will be extinguished, and existing equity holders would not receive consideration in respect of their equity interests.

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·                  Exit Facility: The Company’s Credit Facility, which was redetermined with a borrowing base of $170.0 million in April 2016, will be amended, as described, and will continue after emergence as the Exit Facility.  The Exit Facility will have an initial borrowing base of $170.0 million with no borrowing base redeterminations to occur until April 2018 (provided certain conditions are met) and semiannual borrowing base redeterminations thereafter.  The Exit Facility will mature on the earlier of September 30, 2020, or 4 years from the Plan effective date, with interest payable at LIBOR plus 4.50% per annum, subject to a 1.00% LIBOR floor.  The Exit Facility will be secured by first priority mortgages on at least 95.0% of the proved oil and gas reserves and all other oil and gas properties included in the most recently delivered reserve report, pledges of capital stock, a first priority security interest in the cash, cash equivalents, deposit, securities and other similar accounts, and a first-priority perfected security interest in substantially all other tangible and intangible assets (including but not limited to as-extracted collateral, accounts receivable, inventory, equipment, general intangibles, investment property, intellectual property, real property and the proceeds of the foregoing).  The Exit Facility is subject to a variety of other terms and conditions including conditions precedent to funding, financial covenants, and various other covenants and representations and warranties.

·                  Management Incentive Plan: The Plan provides for the establishment of a management equity incentive plan (the “MIP”) under which 10% of the equity in the reorganized Company (on a fully-diluted/fully-distributed basis) will be reserved for grants made from time to time to the directors, officers, and other members of management of the reorganized Company.  The remainder of compensation will be negotiated in connection with approval of the Plan.

·                  Releases: The Plan provides for release, exculpation, and injunction provisions, including customary carve-outs, to the fullest extent permitted by applicable law and consistent with the terms of the Plan Support Agreement.

·                  Corporate Governance: The corporate governance documents of the reorganized Company shall be subject to the consent of the Consenting Second Lien Noteholders.  If the settlement is approved, the initial board of directors of the reorganized Company shall be appointed by the parties to the Plan Support Agreement who hold, in the aggregate, at least 50.1% in principal amount outstanding of the Second Lien Notes held by all parties to the Plan Support Agreement.

Subject to certain exceptions, under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the date of the Bankruptcy Petitions.  Accordingly, although the filing of the Bankruptcy Petitions triggered defaults on the Debtors’ debt obligations, creditors are stayed from taking any actions against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code.  Absent an order of the Bankruptcy Court, substantially all of the Debtors’ prepetition liabilities are subject to discharge under the Bankruptcy Code and are reflected in the June 30, 2016 balance sheet as liabilities subject to compromise.

Under the priority requirements established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities to creditors and post-petition liabilities must be satisfied in full before the holders of the Company’s existing common stock are entitled to receive any distribution or retain any property under a plan of reorganization.  The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation and implementation of the Plan or an alternative transaction.  While the Company is seeking to implement the Plan on the terms summarized above, the outcome of the Chapter 11 Cases remains uncertain at this time and, as a result, the Company cannot accurately estimate the amounts or value of distributions that creditors and stockholders may receive.  The Plan Support Agreement contemplates that stockholders will receive no distribution on account of their interests.

For the duration of the Company’s Chapter 11 proceedings, the Company’s operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the Chapter 11 process.  As a result of these risks and uncertainties, the number of the Company’s outstanding shares and shareholders, assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of the Company’s operations, properties and capital plans included herein may not accurately reflect its operations, properties and capital plans following the Chapter 11 process.

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In particular, subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions.  Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors of performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach.  Counterparties to such rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the applicable Debtors’ estate for such damages.  Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance.  Accordingly, any description of an executory contract or unexpired lease with the Debtors in the interim financial statements, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease with the Debtors is qualified by any overriding rejection rights the Company has under the Bankruptcy Code.  Further, nothing herein is or shall be deemed (i) an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and the Debtors expressly preserve all of their rights with respect thereto, (ii) a waiver of any rights, claims, actions or defenses that the Company may have in respect of any given executory contract or unexpired leases or (iii) an affirmation by the Company to assume any given executory contract or unexpired lease.

There can be no assurances regarding the Company’s ability to successfully develop, confirm and consummate the Plan as contemplated by the Plan Support Agreement or any other plans of reorganization or other alternative restructuring transactions.

Fresh Start Accounting

Based upon the current Plan, the consolidated financial statements of the Company will be required to be prepared with the application of fresh start accounting upon the emergence of the Company from bankruptcy because (i) the holders of existing voting shares of the Company prior to its emergence will receive less than 50% of the voting shares of the Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of its assets immediately prior to confirmation of the plan of reorganization will likely be less than the post-petition liabilities and allowed claims.  Under the principles of fresh start accounting, a new reporting entity is considered to be created, and as a result, the Company will allocate the reorganization value of the Company to its individual assets based on their estimated fair values as of the date of the emerence.  As a result of the anticipated application of fresh start accounting and the effects of the implementation of the Plan Support Agreement, the consolidated financial statements on or after the date of emergence will not be comparable with the consolidated financial statements prior to that date.

Financial Statement Classification of Liabilities Subject to Compromise

Liabilities subject to compromise represent liabilities incurred prior to the commencement of the bankruptcy proceedings which may be affected by the Chapter 11 Cases.  These amounts represent the Company’s allowed claims and its best estimate of claims expected to be allowed which will be resolved as part of the bankruptcy proceedings. Such claims remain subject to future adjustments.  Adjustments may result from negotiations, actions of the Bankruptcy Court, determination as to the value of any collateral securing claims or other various events.  A difference between liability amounts estimated by the Company and claims filed by creditors will be investigated and the Bankruptcy Court will make a final determination of the amount of allowable claims.  The Company’s Credit Facility is fully secured and, as such, is not considered a liability subject to compromise.  Liabilities subject to compromise consist of the following:

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Interest Expense

The Debtors have discontinued recording interest on liabilities subject to compromise upon the Petition Date.  Contractual interest on liabilities subject to compromise not reflected in the condensed consolidated statements of operations for the three and six months ended June 30, 2016 was approximately $31.7 million, representing interest expense from the Petition Date through June 30, 2016.  In addition, the Company has not made required interest payments of $15.8 million and $73.8 million on April 1, 2016 and June 1, 2016, respectively.

Reorganization Items

Reorganization items represent the direct and incremental costs of being in bankruptcy, such as professional fees, pre-petition liability claim adjustments and losses related to terminated contracts that are probable and can be estimated.  Unamortized deferred financing costs as well as unamortized gains on the May 2015 troubled debt restructuring associated with debt classified as liabilities subject to compromise are reclassified to reorganization items in order to reflect the expected amounts of probable allowed claims.  Reorganization items consisted of the following for the three and six months ended June 30, 2016:

(1) Through June 30, 2016, the Company has incurred significant professional fees associated with various advisors engaged in the restructuring process.  The Company anticipates it will continue to incur significant professional fees throughout the duration of the bankruptcy proceedings.  In addition, the Company has agreed to pay certain advisors additional fees contingent upon the completion of a successful restructuring as such term is defined in the related agreements.  The amount of these contingent success fees could be material.

3. Summary of Significant Accounting Policies

Basis of Presentation

These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements.  Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K as filed with the SEC on March 30, 2016.

The consolidated financial statements for the quarter ended June 30, 2016 have been prepared in accordance with FASB ASC Topic 852, Reorganizations.  This guidance requires that transactions and events directly associated with the Chapter 11 reorganization be distinguished from the ongoing operations of the business.  In addition, the guidance provides for changes in the accounting for and presentation of liabilities.  See “—Note 2. Chapter 11 Proceedings”.

All intercompany transactions have been eliminated in consolidation.  In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations for, all periods presented.  In preparing the accompanying condensed consolidated financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed consolidated financial statements and disclosures of contingencies.  Actual results may differ from those estimates.  The results for interim periods are not necessarily indicative of annual results.

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Recently Issued Standards Not Yet Adopted

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”).  ASU 2014-09 provides guidance concerning the recognition and measurement of revenue from contracts with customers.  The objective of ASU 2014-09 is to increase the usefulness of information in the financial statements regarding the nature, timing and uncertainty of revenues.  ASU 2014-09 requires an entity to (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation.  ASU 2014-09 will be effective for the Company beginning on January 1, 2018, including interim periods within that reporting period, considering the one year deferral provided by ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.”  The standard permits the use of either the retrospective or cumulative effect transition method and early adoption is permitted.  The Company has not selected a transition method and is evaluating the impact this standard will have on its condensed consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”).   ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  The new standard is effective for the Company beginning on January 1, 2019, including interim periods within those fiscal years.  A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.  The Company is currently evaluating the impact this standard will have on its condensed consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, “Compensation — Stock Compensation (Topic 718)” (“ASU 2016-09”).  ASU 2016-09 simplifies how certain aspects of share-based payments to employees are recorded.  ASU 2016-09 requires that entities recognize the income tax effects of awards in the income statement when the awards vest or are settled, provides guidance on the classification of certain aspects of share-based payments on the statement of cash flows, changes the threshold for awards to qualify for equity classification, and allows an entity to make an accounting policy election to account for forfeitures when they occur.  The new standard is effective for the Company beginning on January 1, 2017.  The Company does not believe the adoption of ASU 2015-09 will have a material impact on its financial position, results of operations or cash flows.

4. Risk Management and Derivative Instruments

Revenue realized by the Company from the sale of its production is exposed to fluctuations in the prices for crude oil, NGLs and natural gas.  The Company has historically utilized various types of derivative financial instruments, including swaps and collars, to reduce fluctuations in cash flows resulting from changes in commodity prices.  Although the Company has entered into derivative financial instruments in the past,  the Company currently has no derivatives in place.

Commodity Derivative Contracts

As of June 30, 2016 and December 31, 2015, the Company did not have any open commodity derivative contract positions.

Gains (Losses) on Commodity Derivative Contracts

Historically, the Company has not designated its commodity derivative contracts as hedging instruments for financial reporting purposes. Accordingly, commodity derivative contracts are marked-to-market each quarter with the change in fair value during the periodic reporting period recognized currently as a gain or loss in “Gains (losses) on commodity derivative contracts - net” within revenues in the unaudited condensed consolidated statements of operations.

The following table presents net cash received  for commodity derivative  contracts and unrealized net losses  recorded by the Company related to the change in the fair value of the derivative instruments in “Gains on commodity derivative contracts,  net” for the periods presented:

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5. Property and Equipment

Property and equipment consisted of the following as of the dates presented:

Oil and Gas Properties

The Company capitalizes internal costs directly related to exploration and development activities to oil and gas properties. During the three and six months ended June 30, 2016 and 2015, the Company capitalized the following (in thousands):

(1)         Inclusive of $0.1 million and $0.4 million of qualifying share-based compensation expense for the three months ended June 30, 2016 and 2015, respectively. For the six months ended June 30, 2016 and 2015, inclusive of $0.3 million and $0.9 million, respectively.

The Company accounts for its oil and gas properties under the full cost method.  Under the full cost method, proceeds realized from the sale or disposition of oil and gas properties are accounted for as a reduction to capitalized costs unless a significant portion of the Company’s reserve quantities are sold such that it results in a significant alteration of the relationship between capitalized costs and remaining proved reserves, in which case a gain or loss is generally recognized in income.

The Company performs a full-cost ceiling test on a quarterly basis.  The test establishes a limit (ceiling) on the book value of the Company’s oil and gas properties.  The capitalized costs of oil and gas properties, net of accumulated depreciation, depletion and amortization (DD&A) and the related deferred income taxes, may not exceed this “ceiling.”  The ceiling limitation is equal to the sum of: (i) the present value of estimated future net revenues from the projected production of proved oil and gas reserves, excluding future cash outflows associated with settling asset retirement obligations accrued on the balance sheet, calculated using the average oil and natural gas sales price received by the Company as of the first trading day of each month over the preceding twelve months (such prices are held constant throughout the life of the properties) and a discount factor of 10%; (ii) the cost of unproved and unevaluated properties excluded from the costs being amortized; (iii) the lower of cost or estimated fair value of unproved properties included in the costs being amortized; and (iv) related income tax effects.  If capitalized costs exceed this ceiling, the excess is charged to expense in the accompanying consolidated statements of operations.

For the three and six months June 30, 2016, capitalized costs exceeded the ceiling and the Company recorded an impairment of oil and gas properties of $63.0 million and $190.7 million, respectively.  The comparable three and six month periods ended June 30, 2015 included impairments of oil and gas properties of $498.4 million and $673.1 million, respectively.  These impairments were primarily the result of continued low commodity prices, which resulted in a reduction of the discounted present value of the Company’s proved oil and natural gas reserves.

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Depreciation, depletion and amortization is calculated using the Units of Production Method (“UOP”).  The UOP calculation multiplies the percentage of estimated proved reserves produced by the cost of those reserves. The result is to recognize expense at the same pace that the reservoirs are estimated to be depleting. The amortization base in the UOP calculation includes the sum of proved property costs net of accumulated depreciation, depletion, amortization and impairment, estimated future development costs (future costs to access and develop proved reserves) and asset retirement costs that are not already included in oil and gas property, less related salvage value.  The following table presents depletion expense related to oil and gas properties for the three and six months ended June 30, 2016 and 2015, respectively:

Other Property and Equipment

Other property and equipment consists of vehicles, furniture and fixtures, and computer hardware and software and are carried at cost. Depreciation is calculated principally using the straight-line method over the estimated useful lives of the assets, which range from five to seven years. Maintenance and repairs are charged to expense as incurred, while renewals and betterments are capitalized.

6. Other Noncurrent Assets

The following table presents the components of other noncurrent assets as of the dates presented:

During the three months ended June 30, 2016, approximately $1.8 million in deferred financing costs associated with the Credit Facility were impaired.  In addition, deferred financing costs associated with the Credit Facility were reclassified from other noncurrent assets to other current assets at June 30, 2016.

7. Accrued Liabilities

The following table presents the components of accrued and other current liabilities as of the dates presented:

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8. Asset Retirement Obligations

Asset Retirement Obligations (“AROs”) represent the estimated future abandonment costs of tangible assets, such as wells, service assets and other facilities. The estimated fair value of the ARO at inception is capitalized as part of the carrying amount of the related long-lived assets.

The following table reflects the changes in the Company’s AROs as of the dates presented:

9. Debt

The Company’s filing of the Bankruptcy Petitions, described in Note 2 herein, constitutes an event of default that accelerated the Company’s obligations under the Credit Facility, Second Lien Notes, Third Lien Notes and the Senior Notes.  As a result of the filing of the Bankruptcy Petitions, subject to certain limited exceptions, the lenders under the Credit Facility, Second Lien Notes, Third Lien Notes and the holders of the Senior Notes are stayed from taking any actions against the Company as a result of these defaults.

As of the dates presented, the Company’s debt, not including debt instruments classified as liabilities subject to compromise, consisted of the following:

(1) As a result of the Company’s Chapter 11 filing, the Company’s Credit Facility is classified as current at June 30, 2016 and December 31, 2015.

(2) Amount has been reclassified to liabilities subject to compromise at June 30, 2016.  See “—Note 2. Chapter 11 Proceedings”.

Reclassification of Senior and Secured Notes

The Company’s Senior Notes outstanding of $293.6 million due 2020, Senior Notes outstanding of $347.7 million due 2021, Second Lien Notes of $625.0 million due 2020, and Third Lien Notes of $529.7 million due 2020 are included in liabilities subject to compromise in the condensed consolidated balance sheets as of June 30, 2016.  See “—Note 2. Chapter 11 Proceedings” for further information.

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Reserve-based Credit Facility

The Company currently maintains a $750.0 million Credit Facility with a borrowing base of $170.0 million at June 30, 2016, which, as a result of the semiannual redetermination on April 1, 2016, was reduced by $82.0 million from the previous borrowing base of $252.0 million.  As of April 1, 2016, the Company had approximately $252.0 million in aggregate outstanding obligations under the Credit Facility, resulting in a borrowing base deficiency of approximately $82.0 million which has not been cured as of June 30, 2016 or the date of this filing..

The borrowing base under the Credit Facility is subject to semiannual redeterminations in April and October and up to one additional time per six month period following each scheduled borrowing base redetermination, as may be requested by the Company or the administrative agent acting on behalf of lenders under the Credit Facility holding at least two-thirds of the outstanding loans and other obligations.

The Credit Facility matures on May 31, 2018 and borrowings thereunder are secured by substantially all of the Company’s oil and natural gas properties and bear interest at LIBOR plus an applicable margin, depending upon the Company’s borrowing base utilization, between 2.00% and 3.00% per annum.  The effective interest rate was 3.5% and 2.9% for the quarters ended June 30, 2016 and June 30, 2015, respectively.

In addition to interest expense, the Credit Facility requires the payment of a commitment fee each quarter. The commitment fee is computed at the rate of either 0.375% or 0.500% per annum based on the average daily amount by which the borrowing base exceeds the outstanding borrowings during each quarter.

The Company’s filing of the Bankruptcy Petitions described in Note 2 herein constitutes an event of default that accelerated the Company’s obligations under the Credit Facility.  In addition, various other defaults existed prior to the filing of the Bankruptcy Petitions, including the failure to receive an unqualified auditors’ opinion in relation to the 2015 consolidated financial statements, the failure to make required interest payments on the 2020 Senior Notes and the failure to cure the borrowing base deficiency of the Credit Facility.  However, subject to certain limited exceptions, the filing of the Company’s Bankruptcy Petitions automatically enjoined or stayed the Company’s creditors from taking any actions against the Company as a result of such defaults.

The current Plan Support Agreement, if implemented, provides that holders of allowed claims under the Credit Facility will receive their pro rata share of approximately $82.0 million in cash and the Credit Facility will be amended to reflect the terms of the Exit Facility.  See “—Note 2. Chapter 11 Proceedings” for a discussion of the proposed Exit Facility upon emergence from bankruptcy.

2020 Senior Notes

On October 1, 2012, the Company issued $600.0 million in aggregate principal amount of 2020 Senior Notes, conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). In October 2013, these notes were exchanged for an equal principal amount of identical registered notes.  In May 2015 and June 2015, a total of $306.4 million aggregate principal amount of 2020 Senior Notes were exchanged for Third Lien Notes.  As a result, $293.6 million of 2020 Senior Notes remain outstanding at June 30, 2016 and are included in liabilities subject to compromise in the condensed consolidated balance sheet as of June 30, 2016.

The estimated fair value of the 2020 Senior Notes as of June 30, 2016 was $2.9 million (Level 2 in the fair value measurement hierarchy), based on quoted market prices for these same debt securities. The effective interest rate was 3.5% and 10.4%, respectively, for the quarters ended June 30, 2016 and 2015.

On April 1, 2016, the Company elected to forego payment with respect to an approximately $15.8 million interest payment due on the 2020 Notes, which, after the expiration of the 30 day grace period, resulted in an event of default.

The Company’s filing of the Bankruptcy Petitions described in Note 2 herein constitutes an event of default that accelerated the Company’s obligations under the 2020 Senior Notes.  In addition, various other defaults existed prior to the filing of the Bankruptcy Petitions, including the failure to receive an unqualified auditors’ opinion in relation to the 2015 consolidated financial statements, the failure to make required interest payments on the 2020 Senior Notes and the failure to cure the borrowing base deficiency of the Credit Facility.    However, subject to certain limited exceptions, the filing of the Company’s Bankruptcy Petitions automatically enjoined or stayed the Company’s creditors from taking any actions against the Company as a result of such defaults.

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The current Plan Support Agreement, if implemented, provides that holders of allowed claims of the 2020 Senior Notes will receive equity in the reorganized Company; see “—Note 2. Chapter 11 Proceedings” for further discussion.

2021 Senior Notes

On May 31, 2013, the Company issued $700.0 million in aggregate principal amount of 2021 Senior Notes. In October 2013, these notes were exchanged for an equal principal amount of identical registered notes.  In May and June 2015, a total of $352.3 million aggregate principal amount of 2021 Senior Notes were exchanged for Third Lien Notes.  As a result, $347.7 million of 2021 Senior Notes remain outstanding at June 30, 2016 and are included in liabilities subject to compromise in the condensed consolidated balance sheet as of June 30, 2016.

The estimated fair value as of June 30, 2016 of the 2021 Senior Notes was $3.5 million (Level 2 in the fair value measurement hierarchy), based on quoted market prices for these same debt securities. The effective interest rate was 3.0% and 8.9%, respectively, for the quarters ended June 30, 2016 and 2015.

The Company’s filing of the Bankruptcy Petitions described in Note 2 herein constitutes an event of default that accelerated the Company’s obligations under the 2021 Senior Notes.  In addition, various other defaults existed prior to the filing of the Bankruptcy Petitions, including the failure to receive an unqualified auditors’ opinion in relation to the 2015 consolidated financial statements, the failure to make required interest payments on the 2020 Senior Notes and the failure to cure the borrowing base deficiency of the Credit Facility.  However, subject to certain limited exceptions, the filing of the Company’s Bankruptcy Petitions automatically enjoined or stayed the Company’s creditors from taking any actions against the Company as a result of such defaults.

The current Plan Support Agreement, if implemented, provides that holders of allowed claims of the 2021 Senior Notes will receive equity in the reorganized Company; see “—Note 2. Chapter 11 Proceedings” for further discussion.