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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 September 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 November 7, 2016 is shown below:

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MIDSTATES PETROLEUM COMPANY, INC.

QUARTERLY REPORT ON

FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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.

NYMEX:  The New York Mercantile Exchange.

Proved reserves:  Those quantities of oil and natural 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 governmental regulations—prior to the time at which contracts providing the right to operate or produce 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 natural 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.

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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 natural 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, natural 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 THROUGH OCTOBER 20, 2016)

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 THROUGH OCTOBER 20, 2016)

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 THROUGH OCTOBER 20, 2016)

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 THROUGH OCTOBER 20, 2016)

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 THROUGH OCTOBER 20, 2016)

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 (“Midstates Sub”), engages in the business of exploring, drilling for, and the production of, oil, natural gas liquids (“NGLs”) and natural gas.  Midstates was incorporated pursuant to the laws of the State of Delaware on October 25, 2011 in connection with its initial public offering to become a holding company for 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 and Midstates Sub, unless the context indicates otherwise.

The Company conducts oil and gas operations and owns and operates oil and natural 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 of 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 Title 11 of Chapter 11 of the United States Code (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”) were jointly administered under the case styled In re Midstates Petroleum Company, Inc., et al, No. 16-32237.  The Bankruptcy Court confirmed the First Amended Joint Chapter 11 Plan of Reorganization of Midstates Petroleum Company, Inc., and its Debtor Affiliate (the “Plan”) on September 28, 2016 and the Debtors subsequently emerged from bankruptcy on October 21, 2016 (the “Effective Date”).  Although the Company is no longer a debtor-in-possession, the Company was a debtor-in-possession for the quarter ended September 30, 2016 and through October 20, 2016, the date immediately prior to the Effective Date.  As such, certain aspects of the Chapter 11 Cases and related matters are described below in order to provide context to the Company’s financial condition and results of operations for the period presented.

For the quarter ended September 30, 2016, the Debtors operated 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. During the Chapter 11 Cases, the Company conducted normal business activities pursuant to certain “first day” motions filed in the Chapter 11 Cases and approved by the Bankruptcy Court 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 of these motions, the Company was able to pay all associated obligations for the period following the Petition Date.  Additionally, the Company was authorized to pay and has paid pre-petition tax obligations, 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.  The Company has accounted for the bankruptcy in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, Reorganizations.

The Debtors’ Plan was supported by the vast majority of its pre-petition secured creditors and was confirmed by the Bankruptcy Court on September 28, 2016.  Pursuant to the confirmed Plan, the significant transactions that occurred upon the Effective Date were as follows:

·                  Substantial Deleveraging of the Balance Sheet:  The permanent pay-down of $81.3 million of the Company’s Credit Facility, with a $170.0 million exit facility (the “Exit Facility”) established upon the Effective Date, (ii) the pay-down of $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 junior to the Credit Facility.

·                  Credit Facility Claims: Holders of allowed claims arising under the Credit Facility (the “Credit Facility Claims”) received their pro rata share of approximately $81.3 million in cash and the Credit Facility was superseded, pursuant to the Plan, by the Exit Facility, as further described below.

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·                  Second Lien Notes Claims: Holders of allowed claims arising under the Second Lien Notes (the “Second Lien Notes Claims”)  received their pro rata share of (a) 96.25% of the equity of the reorganized Company in the form of common stock and (b) a cash payment of $60.0 million.

·                  Third Lien Notes Claims: Holders of allowed claims arising under the Third Lien Notes (the “Third Lien Notes Claims”), pursuant to a settlement with holders of Second Lien Notes Claims on terms more fully set forth in the Plan (the “Second/Third Lien Plan Settlement”), received their pro rata share of 2.5% of the equity in the form of common stock in the reorganized Company and warrants to acquire 4,411,765 shares of common stock in the reorganized Company with a strike price of $24.00 per common share and expiring 42 months after the Effective Date.

·                  Unsecured Claims: Holders (the “Unsecured Noteholders”) of allowed claims arising under the Debtors’ 10.75% Senior Unsecured Notes due 2020 (the “2020 Notes Claims”), the holders of allowed claims arising 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 general unsecured claims received their pro rata share of 1.25% of the equity in the form of common stock in the reorganized Company and warrants to acquire 2,213,789 shares of common stock in the reorganized Company (the “Unencumbered Assets Equity Distribution”) with a strike price of $46.00 per common share and expiring 42 months after the Effective Date.

·                  Existing Equity: All existing equity interests of the Company were extinguished, and existing equity holders did not receive any consideration in respect of their equity interests.

·                  New Equity: On the Effective Date, the Company issued 24,687,500 shares of common stock in the reorganized Company and will issue 312,500 additional common shares pursuant to the Plan in a future distribution.  The total authorized capital stock of the reorganized Company consists of 250,000,000 shares of common stock and 50,000,000 shares of preferred stock.

·                  Exit Facility: The Company’s Credit Facility, which was redetermined with a borrowing base of $170.0 million in April 2016, was superseded, pursuant to the Plan, by the Exit Facility.  The Exit Facility has 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 each year on April 1 and October 1 thereafter.  The Exit Facility matures on September 30, 2020 with interest payable at LIBOR plus 4.50% per annum, subject to a 1.00% LIBOR floor.  The Exit Facility is 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).  Until April 2018, unless the borrowing base is redetermined earlier, the amount available to be drawn under the Exit Facility is reduced by $40.0 million, and thereafter, the Company must maintain liquidity equal to at least 20.0% of the effective borrowing base.  In connection therewith, on the the Effective Date, the Company made an additional payment of $40.0 million to lenders under its Exit Facility. In addition to the aforementioned liquidity covenant, the Exit Facility also contains various other financial covenants, including an EBITDA to interest expense coverage ratio limitation of 3.00:1.00, a ratio limitation of Total Net Indebtedness (as defined in the Exit Facility) to EBITDA of not more than 2.25:1.00 through April 1, 2018 and not more than 3.00:1.00 thereafter, and a capital expenditure limitation of $50.0 million for the 6 months ended December 31, 2016, $81.0 million for the year ended December 31, 2017, $85.0 million for the year ended December 31, 2018 and $78.0 million for the year ended December 31, 2019.  The Exit Facility is also subject to a variety of other terms and conditions including conditions precedent to funding and various other covenants and representations and warranties.

·                  Management Incentive Plan: A management equity incentive plan (the “MIP”) was established under which 10% of the equity in the reorganized Company (on a fully-diluted/fully-distributed basis) was reserved for grants to be made from time to time to the directors, officers, and other members of management of the reorganized Company.

In accordance with the Plan, the reorganized Company’s new board of directors is made up of seven directors consisting of the President and Chief Executive Officer of the reorganized Company (Frederic F. Brace), one member of the Company’s pre-bankruptcy board of directors (Alan J. Carr, who will also serve as non-executive chairman of the Board), and five newly-appointed members selected by the holders of the Second Lien Notes Claims (Patrice Douglas, Neal P. Goldman, Todd R. Snyder, Michael S. Reddin, and Bruce H. Vincent).

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Fresh Start Accounting

Upon emergence from the Chapter 11 Cases on the Effective Date, the Company will be required to apply fresh start accounting to its consolidated financial statements because (i) the holders of voting shares of the Company prior to the Effective Date received less than 50% of the voting shares of the Company following its emergence from the Chapter 11 Cases and (ii) the reorganization value of its assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims.  Under the principles of fresh start accounting, a new reporting entity was considered to be created upon emergence.  The Company will allocate the reorganization value of the Company to its individual assets based on their estimated fair values as of that date.  As a result of the application of fresh start accounting and the effects of the implementation of the Plan, the Company’s consolidated financial statements on and after the Effective Date will not be comparable with the Company’s 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 Petition Date which are 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 Chapter 11 Cases. Such claims remain subject to future adjustments and resolution of certain of these claims has and will extend beyond the Effective Date.  Adjustments may result from negotiations, actions of the Bankruptcy Court, determination as to the value of any collateral securing claims or various other 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.  As of September 30, 2016 liabilities subject to compromise consist of the following:

Interest Expense

The Debtors 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 nine months ended September 30, 2016 was approximately $47.6 million and $79.3 million, respectively, representing interest expense incurred subsequent to the Petition Date.

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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 were also reclassified to reorganization items in order to reflect the expected amounts of allowed claims.  Reorganization items consisted of the following for the three and nine months ended September 30, 2016:

(1) Through September 30, 2016, the Company has incurred significant professional fees associated with various advisors engaged in the restructuring process.  In addition, the Company paid certain advisors success fees upon its emergence from bankruptcy on October 21, 2016.  Success fees of $7.3 million were earned on September 28, 2016, the Company’s bankruptcy confirmation date, and as such were accrued and included in the above table under the heading “professional fees incurred.”

(2)  Other reorganization items recorded in the third quarter of 2016 include $0.2 million related to Houston office fixed assets, which were abandoned, as well as a $1.6 million decrease in the liability previously recorded for the abandonment of the Houston office lease.

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 condensed consolidated financial statements for the quarter ended September 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.

On the Effective Date, the Company emerged from the Chapter 11 Cases after completing all required actions and satisfying the remaining conditions to its Plan, which was confirmed by the Bankruptcy Court by an order entered on September 28, 2016.  The Company cannot currently estimate the financial effect of its emergence from bankruptcy on its financial statements, although it expects to record material adjustments due to the Plan and the application of fresh start accounting guidance at the Effective Date.

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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, after 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 that fiscal year.  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 is currently evaluating the impact this standard will have on its condensed consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows — Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”).  ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing existing diversity of practice.  The eight specific cash flow issues contained within ASU 2016-15 are debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle.  ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  The Company does not believe the adoption of ASU 2016-15 will have a material impact on its 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 September 30, 2016 and December 31, 2015, the Company did not have any open commodity derivative contract positions.

Gains 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 in “Gains on commodity derivative contracts - net” within revenues in the unaudited condensed consolidated statements of operations.

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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:

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 nine months ended September 30, 2016 and 2015, the Company capitalized the following (in thousands):

(1)         Inclusive of $0.1 million and $0.3 million of qualifying share-based compensation expense for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, inclusive of $0.5 million and $1.1 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, amortization and impairment (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 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.

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For the three and nine months ended September 30, 2016, capitalized costs exceeded the ceiling and the Company recorded an impairment of oil and gas properties of $33.9 million and $224.6 million, respectively.  The comparable three and nine month periods ended September 30, 2015 included impairments of oil and gas properties of $486.9 million and $1.2 billion, 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.

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 nine months ended September 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 nine months ended September 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 subsequent to December 31, 2015, consistent with the balance sheet classification of outstanding borrowings under the Credit Facility.

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7. Accrued Liabilities

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

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 for the periods presented:

9. Debt

The Company’s filing of the Bankruptcy Petitions, described in Note 2 herein, constituted an event of default that accelerated the Company’s obligations under the Credit Facility, the Second Lien Notes, the 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, the holders of the Second Lien Notes, the holders of the Third Lien Notes and the holders of the Senior Notes were stayed from taking any actions against the Company as a result of these defaults.  On the Effective Date, the Second Lien Notes were exchanged for a cash payment of $60.0 million and 96.25% of the equity in the reorganized Company, and the Third Lien Notes and Senior Notes were exchanged for a combination of equity in the form of common stock of the reorganized Company and warrants to acquire additional common shares of the reorganized Company.  Additionally, the Company paid down $81.3 million owed under the Credit Facility.  See “—Note 2. Chapter 11 Proceedings” for more discussion regarding the Chapter 11 Cases.

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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, borrowings outstanding under the Company’s Credit Facility are classified as current at September 30, 2016 and December 31, 2015.

(2) Principal amount as of the Petition Date has been reclassified to liabilities subject to compromise.  See “—Note 2. Chapter 11 Proceedings.”

Reclassification of Senior and Secured Notes

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

Reserve-based Credit Facility

At September 30, 2016, the Company maintained a $750.0 million Credit Facility with a borrowing base of $170.0 million.  As a result of the semiannual redetermination on April 1, 2016, the borrowing base 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, including outstanding letters of credit, resulting in a borrowing base deficiency of approximately $82.0 million which had not been cured as of September 30, 2016.

The Company’s filing of the Bankruptcy Petitions described in Note 2 herein constituted 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 auditor’s 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.

As discussed in “—Note 2. Chapter 11 Proceedings” herein, on the Effective Date, the existing Credit Facility was amended and the Company entered into the Exit Facility among the Company, as borrower, and the lenders under the existing Credit Facility as lenders.  The Exit Facility has 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 matures on September 30, 2020 with interest payable at LIBOR plus 4.50% per annum, subject to a 1.00% LIBOR floor.  Additionally, at the Effective Date, the Company made a permanent pay down of $81.3 million to the lenders under the Credit Facility.  Until April 2018, unless the borrowing base is redetermined earlier, the amount available to be drawn under the Exit Facility is reduced by $40.0 million, and thereafter, the Company must maintain liquidity equal to at least 20.0% of the effective borrowing base.  In connection therewith, on the the Effective Date, the Company made an additional payment of $40.0 million to lenders under its Exit Facility.

In addition to the aforementioned liquidity covenant, the Exit Facility also contains various other financial covenants, including an EBITDA to interest expense coverage ratio limitation of 3.00:1.00, a ratio limitation of Total Net Indebtedness (as defined in the Exit Facility) to EBITDA of not more than 2.25:1.00 through April 1, 2018 and not more than 3.00:1.00 thereafter, and a capital expenditure limitation of $50.0 million for the 6 months ended December 31, 2016, $81.0 million for the year ended December 31, 2017, $85.0 million for the year ended December 31, 2018 and $78.0 million for the year ended December 31, 2019.  The Exit Facility is also subject to a variety of other terms and conditions including conditions precedent to funding and various other covenants and representations and warranties.

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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 remained outstanding at September 30, 2016 and are included in liabilities subject to compromise in the condensed consolidated balance sheet as of September 30, 2016.

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 constituted 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 auditor’s 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.

On the Effective Date, the obligations of the Company with respect to the 2020 Senior Notes were cancelled and holders of the 2020 Senior Notes received their agreed upon pro-rata share of the Unencumbered Assets Equity Distribution.  See “—Note 2. Chapter 11 Proceedings” for more 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 September 30, 2016 and are included in liabilities subject to compromise in the condensed consolidated balance sheet as of September 30, 2016.

The Company’s filing of the Bankruptcy Petitions described in Note 2 herein constituted 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 auditor’s 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.

On the Effective Date, the obligations of the Company with respect to the 2021 Senior Notes were cancelled and holders of the 2021 Senior Notes received their agreed-upon pro-rata share of the Unencumbered Assets Equity Distribution.  See “—Note 2. Chapter 11 Proceedings” for more discussion.

Second Lien Notes

On May 21, 2015, the Company issued and sold $625.0 million aggregate principal amount of Second Lien Notes, in a private placement conducted pursuant to Rule 144A under the Securities Act. In November 2015, these notes were exchanged for an equal principal amount of identical registered notes.  The outstanding balance of $625.0 million is included in liabilities subject to compromise in the condensed consolidated balance sheet as of September 30, 2016.

The Company’s filing of the Bankruptcy Petitions described in Note 2 herein constituted an event of default that accelerated the Company’s obligations under the Second Lien 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.

On the Effective Date, the obligations of the Company with respect to the Second Lien Notes were cancelled and holders of the Second Lien Notes received a cash payment of $60.0 million as well as their agreed-upon pro-rata share of equity in the reorganized Company.  See “—Note 2. Chapter 11 Proceedings” for more discussion.

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Third Lien Notes

On May 21, 2015 and June 2, 2015, the Company issued approximately $504.1 million and $20.0 million, respectively, in aggregate principal amount of Third Lien Notes in a private placement and in exchange for an aggregate $306.4 million of the 2020 Senior Notes and $352.3 million of the 2021 Senior Notes. In November 2015, these notes were exchanged for an equal principal amount of identical registered notes.  The outstanding balance of $529.7 million is included in liabilities subject to compromise in the condensed consolidated balance sheet as of September 30, 2016.

The Company’s filing of the Bankruptcy Petitions described in Note 2 herein constituted an event of default that accelerated the Company’s obligations under the Third Lien Notes.  In addition, various other defaults existed prior to the filing of the Bankruptcy Petitions, including the failure to receive an unqualified auditor’s 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.

On the Effective Date, the obligations of the Company with respect to the Third Lien Notes were cancelled and holders of the Third Lien Notes received their agreed upon pro-rata share of equity and warrants in the reorganized Company as set forth in the Second/Third Lien Plan Settlement embodied in the Plan.  See “—Note 2. Chapter 11 Proceedings” for more discussion.

10. Equity and Share-Based Compensation

Impact of Bankruptcy Proceedings

At the Effective Date, the Company’s current common stock was cancelled and new common stock of the reorganized Company was issued.  At the Effective Date, the Company issued 24,687,500 shares of common stock in the reorganized Company, 4,411,765 warrants with a strike price of $24.00 per common share of the reorganized Company and 2,213,789 warrants with a strike price of $46.00 per common share of the reorganized Company.  The total authorized capital stock of the reorganized Company consists of 250,000,000 shares of common stock and 50,000,000 shares of preferred stock.

The Company’s share-based compensation awards that remained unvested at the Effective Date were also cancelled upon the Company’s emergence from the Chapter 11 Cases.  The cancellation of these share-based compensation awards will result in the recognition of expense on the date of cancellation to record any previously unamortized expense related to the awards.  Also at the Effective Date, the Company’s 2012 Long Term Incentive Plan (the “2012 LTIP”) was replaced by the Company’s 2016 Long Term Incentive Plan (the “2016 LTIP”).  The types of awards that may be granted under the 2016 LTIP include stock options, restricted stock units, restricted stock, performance awards and other forms of awards granted or denominated in shares of common stock of the reorganized Company, as well as certain cash-based awards. The terms of each award are as determined by the Compensation Committee of the Board of Directors. A total of 3,513,590 shares of common stock of the reorganized Company are reserved for issuance under the 2016 LTIP as equity-based awards to employees, directors and certain other persons.  At the Effective Date, a total of 1,327,192 awards were made consisting of 628,468 options to employees, 628,468 restricted stock units to employees, 57,856 restricted stock units to non-employee directors and 12,400 unrestricted shares of common stock to employees and non-employee directors.  Options and restricted stock units granted to employees, excluding the 12,400 unrestricted shares of common stock in the reorganized Company granted to employees and non-employee directors, vest in four installments: 1/6 will vest on the six-month anniversary of the Effective Date, an additional 1/6 will vest on the twelve-month anniversary of the Effective Date, an additional 1/3 will vest on the twenty four-month anniversary of the Effective Date and the final 1/3 will vest on the thirty six-month anniversary of the Effective Date. The awards are subject to accelerated vesting in the event a recipient’s employment is terminated prior to the vesting date by the Company without “Cause” or by the participant with “Good Reason” (each, as defined in the 2016 LTIP) or due to the participant’s death or disability.  Restricted stock units granted to non-employee directors vest on December 31, 2017.

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Common Shares

Share Activity

The following table summarizes changes in the number of outstanding shares during the nine months ended September 30, 2016: