NOTE 1—NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Organization and Description of the Business
RSP Permian, Inc. ("RSP Inc." or the "Company") was formed on September 30, 2013, pursuant to the laws of the state of Delaware to be a holding company for RSP Permian, L.L.C., a Delaware limited liability company (“RSP LLC”). RSP LLC was formed on October 18, 2010, by its management team and affiliates of Natural Gas Partners, a family of energy-focused private equity investment funds (“NGP”). The Company is engaged in the acquisition, exploration, development and production of unconventional oil and associated liquids-rich natural gas reserves in the Permian Basin of West Texas. The Company priced its initial public offering ("IPO") and began trading on the New York Stock Exchange under the ticker RSPP in January 2014. Additional background on the Company, its IPO and subsequent public stock offerings, along with details of the ownership of the Company, are available in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 and other documents filed with the Securities and Exchange Commission ("SEC").
Basis of Presentation
These financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC. They reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to such rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. The financial statements in this Quarterly Report on Form 10–Q should be read together with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, which contains a complete summary of the Company's significant accounting policies and disclosures.
Subsequent Events
The Company has evaluated subsequent events in preparing its consolidated financial statements. There were no material subsequent events requiring additional disclosure in the financial statements.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Although management believes these estimates are reasonable, actual results could differ from these estimates. Changes in estimates are recorded prospectively. Significant assumptions are required in the valuation of proved oil and natural gas reserves that may affect the amount at which oil and natural gas properties are recorded. Estimation of asset retirement obligations (“AROs”) and valuations of derivative instruments also require significant assumptions. It is possible that these estimates could be revised at future dates and these revisions could be material. Depletion of oil and natural gas properties are determined using estimates of proved oil and natural gas reserves. There are numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and natural gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves and commodity price estimates.
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
|
|
(In thousands)
|
Sale of oil, natural gas and natural gas liquids
|
|
$
|
22,534
|
|
|
$
|
22,166
|
|
Joint interest owners
|
|
7,618
|
|
|
5,596
|
|
Derivatives - settled, but uncollected
|
|
650
|
|
|
8,561
|
|
Total accounts receivable
|
|
$
|
30,802
|
|
|
$
|
36,323
|
|
Accounts receivable, which are primarily from the sale of oil, natural gas and natural gas liquids (“NGLs”), are accrued based on estimates of the volumetric sales and prices the Company believes it will receive. In addition, settled but uncollected derivative contracts, and receivables related to joint interest billings are included in accounts receivable. The Company routinely reviews outstanding balances, assesses the financial strength of its customers and records a reserve for amounts not expected to be fully recovered. The need for an allowance is determined based upon reviews of individual accounts, historical losses, existing economic conditions and other pertinent factors and management's expectations are that all material receivables at period-end will be collected. Bad debt expense was
zero
for each of the three months ended March 31, 2016 and 2015, respectively.
Oil and Natural Gas Properties
The Company uses the successful efforts method of accounting for its oil and natural gas exploration and production activities. Costs incurred by the Company related to the acquisition of oil and natural gas properties and the cost of drilling development wells and successful exploratory wells are capitalized, while the costs of unsuccessful exploratory wells are expensed when determined to be unsuccessful.
The Company may capitalize interest on expenditures for significant exploration and development projects that last more than
six months
, while activities are in progress to bring the assets to their intended use. The Company has not capitalized any interest as projects generally lasted less than
six months
. Costs incurred to maintain wells and related equipment, lease and well operating costs and other exploration costs are expensed as incurred. Gains and losses arising from the sale of properties are generally included in operating income.
Capitalized acquisition costs attributable to proved oil and natural gas properties and leasehold costs are depleted on a field level, based on proved reserves, using the unit-of-production method. Capitalized exploration well costs and development costs, including AROs, are depleted on a field level, based on proved developed reserves. For the three months ended March 31, 2016 and 2015, depletion expense for oil and natural gas producing property was
$44.2 million
and
$31.2 million
, respectively. Depletion expense is included in depreciation, depletion and amortization in the accompanying consolidated statements of operations.
The Company’s oil and natural gas properties as of March 31, 2016 and December 31, 2015 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
(In thousands)
|
Proved oil and natural gas properties
|
|
$
|
2,294,412
|
|
|
$
|
2,197,056
|
|
|
Unproved oil and natural gas properties
|
|
881,778
|
|
|
878,995
|
|
|
Total oil and natural gas properties
|
|
3,176,190
|
|
|
3,076,051
|
|
|
Less: Accumulated depletion
|
|
(401,666
|
)
|
|
(357,524
|
)
|
|
Total oil and natural gas properties, net
|
|
$
|
2,774,524
|
|
|
$
|
2,718,527
|
|
|
In some circumstances, it may be uncertain whether proved commercial reserves have been found when drilling has been completed. Such exploratory well drilling costs may continue to be capitalized if the anticipated reserve quantity is sufficient to justify its completion as a producing well and sufficient progress in assessing the reserves and the economic and operating viability of the project is being made. As of March 31, 2016 and December 31, 2015, there were
no
costs capitalized in connection with exploratory wells in progress.
Capitalized costs are evaluated for impairment whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. To determine if a field is impaired, the Company compares the carrying value of the field to the undiscounted future net cash flows by applying estimates of future oil and natural gas prices to the estimated future
production of oil and natural gas reserves over the economic life of the property and deducting future costs. Future net cash flows are based upon reservoir engineers’ estimates of proved reserves.
For a property determined to be impaired, an impairment loss equal to the difference between the property’s carrying value and its estimated fair value is recognized. Fair value, on a field basis, is estimated to be the present value of the aforementioned expected future net cash flows. Each part of this calculation is subject to a large degree of judgment, including the determination of the depletable units’ estimated reserves, future net cash flows and fair value.
No
impairment of proved property was recorded for the three months ended March 31, 2016 or 2015. The calculation of expected future net cash flows in impairment evaluations are mainly based on estimates of future oil and natural gas prices, proved reserves and risk-adjusted probable reserves quantities, and estimates of future production and capital costs associated with our proved and risk-adjusted reserves. The Company's estimates for future oil and natural gas prices used in the impairment evaluations are based on observable prices for the next three years, and then held constant for the remaining lives of the properties. It is reasonably possible that oil and natural gas prices used in future impairment evaluations may decline, which would result in the need to further impair the carrying value of the Company's properties.
Unproved property costs and related leasehold expirations are assessed quarterly for potential impairment and when industry conditions dictate an impairment may be possible. For the three months ended March 31, 2016, impairment expense of unproved property was
$0.2 million
which primarily related to an expectation that certain leasehold interests would expire and not be renewed, along with certain leasehold interests that may expire or be sold in the future.
No
impairment of unproved property was recorded for the three months ended March 31, 2015.
Natural gas volumes are converted to Boe at the rate of
six
Mcf of natural gas to one Bbl of oil. This convention is not an equivalent price basis and there may be a large difference in value between an equivalent volume of oil versus an equivalent volume of natural gas. NGL volumes are stated in barrels.
Asset Retirement Obligation
The Company records AROs related to the retirement of long-lived assets at the time a legal obligation is incurred and the liability can be reasonably estimated. AROs are recorded as long-term liabilities with a corresponding increase in the carrying amount of the related long-lived asset. Subsequently, the asset retirement cost included in the carrying amount of the related asset is allocated to expense through depletion of the asset. Changes in the liability due to passage of time are generally recognized as an increase in the carrying amount of the liability and as corresponding accretion expense.
The Company estimates a fair value of the obligation on each well in which it owns an interest by identifying costs associated with the future down-hole plugging, dismantlement and removal of production equipment and facilities, and the restoration and reclamation of the surface acreage to a condition similar to that existing before oil and natural gas extraction began.
In general, the amount of ARO and the costs capitalized will be equal to the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor up to the estimated settlement date which is then discounted back to the date that the abandonment obligation was incurred using an estimated credit adjusted rate. If the estimated ARO changes, an adjustment is recorded to both the ARO and the long-lived asset. Revisions to estimated AROs can result from changes in retirement cost estimates, revisions to estimated inflation rates and changes in the estimated timing of abandonment.
After recording these amounts, the ARO is accreted to its future estimated value using the same assumed credit adjusted rate and the associated capitalized costs are depreciated on a unit-of-production basis.
The ARO consisted of the following for the period indicated:
|
|
|
|
|
|
|
Three Months Ended
March 31, 2016
|
|
(In thousands)
|
Asset retirement obligation at beginning of period
|
$
|
7,063
|
|
|
Liabilities incurred or assumed
|
1,368
|
|
|
Liabilities settled
|
(2
|
)
|
|
Accretion expense
|
113
|
|
|
Asset retirement obligation at end of period
|
$
|
8,542
|
|
|
Income Taxes
The following is an analysis of the Company’s consolidated income tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
(In thousands)
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
1,184
|
|
|
|
Deferred
|
|
(9,298
|
)
|
|
(1,514
|
)
|
|
|
|
|
|
|
|
|
|
Income Tax Benefit
|
|
$
|
(9,298
|
)
|
|
$
|
(330
|
)
|
|
|
Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, given the provisions of enacted tax laws. Tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The Company’s policy is to record interest and penalties relating to uncertain tax positions in income tax expense. At March 31, 2016, the Company did not have any accrued liability for uncertain tax positions and does not anticipate recognition of any significant liabilities for uncertain tax positions during the next 12 months.
The Company’s U.S. federal income tax returns for 2011 and beyond, and its Texas franchise tax returns for 2010 and beyond, remain subject to examination by the taxing authorities. No other jurisdiction’s returns are significant to the Company’s financial position.
New Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update ("ASU") 2016-09, “Compensation - Stock Compensation Topic 718: Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects of the accounting for share-based payment award transactions. These simplifications include the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Public entities are required to apply ASU 2016-09 for annual and interim reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of its pending adoption of this guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)," which requires all lease transactions (with terms in excess of 12 months) to be recognized on the balance sheet as lease assets and lease liabilities. Public entities are required to apply ASU 2016-02 for annual and interim reporting periods beginning after December 15, 2018 with early adoption permitted. The Company is currently evaluating the impact of its pending adoption of this guidance on its consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments," which requires the acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Public entities are required to apply ASU 2015-16 for annual and interim reporting periods beginning after December 15, 2015. The adoption of this guidance in the first quarter of 2016 did not have a material effect on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs." which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the debt obligation, similar to debt discounts. The Company adopted this guidance in the first quarter of 2016. Accordingly, debt issuance costs in the amount of
$12.1 million
which were formerly classified as long-term assets at December 31, 2015 have been reclassified as a deduction from the carrying amount of our senior notes in the consolidated balance sheet.
In January 2015, the FASB issued ASU 2015-01, "Income Statement - Extraordinary and Unusual Items (Subtopic 225-20)," which eliminates the concept of extraordinary items in US GAAP. An entity is required to apply ASU 2015-01 for annual and interim reporting periods beginning after December 15, 2015. An entity may apply ASU 2015-01 prospectively or retrospectively for all periods presented in the financial statements. The adoption of this guidance in the first quarter of 2016 did not have a material effect on the Company's consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern,” which requires a company’s management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable). An entity is required to apply ASU 2014-15 for annual and interim reporting periods beginning after December 15, 2016 with early adoption permitted. The Company is currently evaluating the impact of its pending adoption of this guidance on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which provides a comprehensive revenue recognition standard for contracts with customers that supersedes current revenue recognition guidance including industry specific guidance. An entity is required to apply ASU 2014-09 for annual and interim reporting periods beginning after December 15, 2016. An entity can apply ASU 2014-09 using either a full retrospective method, meaning the standard is applied to all of the periods presented, or a modified retrospective method, meaning the cumulative effect of initially applying the standard is recognized in the most current period presented in the financial statements. The Company is currently evaluating the impact of its pending adoption of this guidance on its consolidated financial statements.
NOTE 3—ACQUISITIONS OF OIL AND NATURAL GAS PROPERTY INTERESTS
Glass Ranch Acquisition
In the third quarter of 2015, in separate transactions with multiple sellers, the Company acquired undeveloped acreage and oil and gas producing properties located in Martin and Glasscock counties for an aggregate purchase price of approximately
$274 million
, subject to certain purchase price adjustments. Subsequent to the initial closing, certain non-operated working interest owners in these properties elected to sell us their interests for an additional
$39 million
. Approximately
$61.3 million
was recorded as proved oil and natural gas properties. The aggregate acquisitions include
6,548
net acres in our core focus area with an average royalty burden of approximately
23%
, with production of approximately
1,680
Boe/d and
191
net horizontal drilling locations as of the effective date. The acquisitions were permanently funded with proceeds from both an underwritten public offering of RSP Inc. common stock in August 2015 and the issuance of senior unsecured notes in August 2015.
WPR Acquisition
In the fourth quarter of 2015, the Company acquired undeveloped acreage and oil and gas producing properties for an aggregate purchase price of approximately
$137 million
, subject to certain purchase price adjustments, from Wolfberry Partners Resources LLC ("WPR"), an entity partly owned by affiliates of the Company. The acquisition included
4,100
largely contiguous net acres, in the core of the Midland Basin with production of approximately
1,900
Boe/d and
86
net horizontal drilling locations as of the effective date. The acquisition was funded with proceeds from an underwritten public offering of RSP Inc. common stock that was completed in October 2015. The majority of WPR is owned both directly, and indirectly, by Ted Collins, Jr. and Michael W. Wallace, who are also members of our board of directors and
two
of our largest shareholders. Due to the related party nature of the WPR acquisition, only the disinterested members of our board of directors, consistent with our related party transaction policy, reviewed and ultimately approved the transaction.
In the first quarter of 2016, the Company closed on acquisitions of approximately
$29.1 million
of additional working interests in the properties noted above from certain other non-operated working interest owners. These acquisitions were funded with cash on hand.
NOTE 4—DERIVATIVE INSTRUMENTS
Commodity Derivative Instruments
The Company uses derivative instruments to manage its exposure to cash-flow variability from commodity-price risk inherent in its crude oil and natural gas production. These include over-the-counter (“OTC”) swaps and collars. The derivative instruments are recorded at fair value on the consolidated balance sheets and any gains and losses are recognized in current period earnings.
Each swap transaction has an established fixed price. When the settlement price is above the fixed price, the Company pays its counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the hedged contract volume. When the settlement price is below the fixed price, the counterparty pays the Company an amount equal to the difference between the settlement price and the fixed price multiplied by the hedged contract volume.
Each collar transaction has an established price floor and ceiling, and certain collar transactions also include a short put as well. When the settlement price is below the price floor established by these collars, the Company receives an amount from its counterparty equal to the difference between the settlement price and the price floor multiplied by the hedged contract volume. When the settlement price is above the price ceiling established by these collars, the Company pays its counterparty an amount equal to the difference between the settlement price and the price ceiling multiplied by the hedged contract volume. When the settlement price is below the short put price, the Company pays its counterparty an amount equal to the difference between the settlement price and the short put price.
The following table summarizes all open positions as of
March 31, 2016
:
|
|
|
|
|
|
|
Contracts Expiring in 2016
|
|
|
|
|
|
|
|
Crude Oil Collars:
|
|
|
|
|
Notional volume (Bbl)
|
|
360,000
|
|
|
Weighted average ceiling price ($/Bbl)(1)
|
|
$
|
74.41
|
|
|
Weighted average floor price ($/Bbl)(1)
|
|
$
|
55.00
|
|
|
Weighted average short put price ($/Bbl)(1)
|
|
$
|
45.00
|
|
|
_______________________________________
(1)
The crude oil derivative contracts are settled based on the month’s average daily NYMEX price of West Texas Intermediate Light Sweet Crude.
Derivative Fair Values and Gains (Losses)
The following table presents the fair value of derivative instruments. The Company’s derivatives are presented as separate line items in its consolidated balance sheets as current and noncurrent derivative instrument assets and liabilities. The fair value amounts are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of the Company’s master netting arrangements. See Note 5 for further discussion related to the fair value of the Company's derivatives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
(In thousands)
|
Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
5,113
|
|
|
$
|
8,452
|
|
|
$
|
(2,209
|
)
|
|
$
|
(3,994
|
)
|
|
|
|
|
|
|
|
|
|
Total derivative instruments
|
|
$
|
5,113
|
|
|
$
|
8,452
|
|
|
$
|
(2,209
|
)
|
|
$
|
(3,994
|
)
|
Gains and losses on derivatives are reported in the consolidated statements of operations.
The following represents the Company’s reported gains on derivative instruments for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Gain on derivative instruments:
|
|
|
|
|
|
|
Commodity derivative instruments
|
|
$
|
396
|
|
|
$
|
12,330
|
|
Total
|
|
$
|
396
|
|
|
$
|
12,330
|
|
Offsetting of Derivative Assets and Liabilities
The following table presents the Company’s gross and net derivative assets and liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount
Presented on
Balance Sheet
|
|
Netting
Adjustments(a)
|
|
Net
Amount
|
|
|
(In thousands)
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
Derivative instrument assets with right of offset or master netting agreements
|
|
$
|
5,113
|
|
|
$
|
(2,209
|
)
|
|
$
|
2,904
|
|
Derivative instrument liabilities with right of offset or master netting agreements
|
|
$
|
(2,209
|
)
|
|
$
|
2,209
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Derivative instrument assets with right of offset or master netting agreements
|
|
$
|
8,452
|
|
|
$
|
(3,994
|
)
|
|
$
|
4,458
|
|
Derivative instrument liabilities with right of offset or master netting agreements
|
|
$
|
(3,994
|
)
|
|
$
|
3,994
|
|
|
$
|
—
|
|
_______________________________________
(a)
With all of the Company’s financial trading counterparties, the Company has agreements in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements.
Credit-Risk Related Contingent Features in Derivatives
None of the Company’s derivative instruments contain credit-risk related contingent features.
No
amounts of collateral were posted by the Company related to net positions as of
March 31, 2016
and December 31, 2015.
NOTE 5—FAIR VALUE MEASUREMENTS
The book values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The book value of the Company’s credit facilities approximate fair value as the interest rates are variable. The book value of the Company's senior notes approximates the fair value as the current trading value of the notes was slightly above par value. If the Company recorded the notes at fair value they would be Level 1 in our fair value hierarchy as they are traded in an active market with quoted prices for identical instruments. The fair value of derivative financial instruments is determined utilizing industry standard models using assumptions and inputs which are substantially observable in active markets throughout the full term of the instruments. These include market price curves, contract terms and prices, credit risk adjustments, implied market volatility and discount factors.
The Company has categorized its assets and liabilities measured at fair value, based on the priority of inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
•
Level 1—Assets and liabilities recorded at fair value for which values are based on unadjusted quoted prices for identical assets or liabilities in an active market that management has the ability to access. Active markets are considered to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
•
Level 2—Assets and liabilities recorded at fair value for which values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Substantially all of these inputs are observable in the marketplace throughout the full term of the price risk management instrument and can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace.
•
Level 3—Assets and liabilities recorded at fair value for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs that are not corroborated by market data. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
Valuation techniques that maximize the use of observable inputs are favored. Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the
significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy.
Fair Value Measurement on a Recurring Basis
The following table presents, by level within the fair value hierarchy, the Company’s assets and liabilities that are measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total fair value
|
|
|
(In thousands)
|
As of March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative instruments
|
|
$
|
—
|
|
|
$
|
2,904
|
|
|
$
|
—
|
|
|
$
|
2,904
|
|
Total
|
|
$
|
—
|
|
|
$
|
2,904
|
|
|
$
|
—
|
|
|
$
|
2,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total fair value
|
|
|
(In thousands)
|
As of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative instruments
|
|
$
|
—
|
|
|
$
|
4,458
|
|
|
$
|
—
|
|
|
$
|
4,458
|
|
Total
|
|
$
|
—
|
|
|
$
|
4,458
|
|
|
$
|
—
|
|
|
$
|
4,458
|
|
Significant Level 2 assumptions used to measure the fair value of the commodity derivative instruments include current market and contractual commodity prices, implied volatility factors, appropriate risk adjusted discount rates, as well as other relevant data.
Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. There were no transfers between Level 1, Level 2 or Level 3 during the three months ended March 31, 2015 and the year ended December 31, 2015.
Nonfinancial Assets and Liabilities
Assets and liabilities acquired in business combinations are recorded at their fair value on the date of acquisition. Significant Level 3 assumptions associated with the calculation of future cash flows used in the analysis of fair value of the oil and natural gas property acquired include the Company’s estimate of future commodity prices, production costs, development expenditures, production, risk-adjusted discount rates and other relevant data. Additionally, fair value is used to determine the inception value of the Company’s AROs. The inputs used to determine such fair value are primarily based upon costs incurred historically for similar work, as well as estimates from independent third parties for costs that would be incurred to restore leased property to the contractually stipulated condition. Additions to the Company’s AROs represent a nonrecurring Level 3 measurement.
The Company reviews its proved oil and natural gas properties for impairment purposes by comparing the expected undiscounted future cash flows at a producing field level to the unamortized capitalized cost of the asset. Significant assumptions associated with the calculation of future cash flows used in the impairment analysis include the estimate of future commodity prices, production costs, development expenditures, production, risk-adjusted discount rates and other relevant data. As such, the fair value of oil and natural gas properties used in estimating impairment represents a nonrecurring Level 3 measurement.
NOTE 6—LONG-TERM DEBT
Long-term debt consists of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
(In millions)
|
|
|
|
|
|
|
6.625% Senior Notes
|
|
$
|
700.0
|
|
|
$
|
700.0
|
|
|
Less: Discount
|
|
$
|
(1.3
|
)
|
|
$
|
(1.4
|
)
|
|
Less: Debt issuance costs
|
|
$
|
(11.8
|
)
|
|
$
|
(12.1
|
)
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
686.9
|
|
|
$
|
686.5
|
|
|
Credit Agreement
On August 24, 2015, the Company amended the revolving credit facility to increase the borrowing base to
$600 million
along with other updates.
The Company's revolving credit facility requires it to maintain the following
three
financial ratios:
•
a working capital ratio, which is the ratio of consolidated current assets (includes unused commitments under its revolving credit facility and excludes restricted cash and derivative assets) to consolidated current liabilities (excluding the current portion of long-term debt under the credit facility and derivative liabilities), of not less than
1.0
to 1.0;
•
a leverage ratio, which is the ratio of the sum of all of the Company’s debt to the consolidated EBITDAX (as defined in the credit agreement) for the four fiscal quarters then ended, of not greater than
4.5
to 1.0,
•
a senior secured leverage ratio, which is the ratio of the sum of all the Company's debt that is (i) secured and (ii) not subordinated to obligations under the revolving credit facility to the consolidated EBITDAX (as defined in the credit agreement) for the four fiscal quarters then ended, of not greater than
3.5
to 1.0.
The Company's revolving credit facility contains restrictive covenants that may limit its ability to, among other things, incur additional indebtedness, make loans to others, make investments, enter into mergers, make or declare dividends, enter into commodity hedges exceeding a specified percentage or its expected production, enter into interest rate hedges exceeding a specified percentage of its outstanding indebtedness, incur liens, sell assets or engage in certain other transactions without the prior consent of the lenders.
The Company was in compliance with such covenants and ratios as of March 31, 2016.
Principal amounts borrowed are payable on the maturity date, and interest is payable quarterly for base rate loans and at the end of the applicable interest period for Eurodollar loans. The Company has a choice of borrowing in Eurodollars or at the alternate base rate. Eurodollar loans bear interest at a rate per annum equal to an adjusted LIBOR rate (equal to the quotient of: (i) the LIBOR Rate divided by (ii) a percentage equal to
100%
minus the maximum rate on such date at which the Administrative Agent is required to maintain reserves on “Eurocurrency Liabilities” as defined in and pursuant to Regulation D of the Board of Governors of the Federal Reserve System) plus an applicable margin ranging from
100
to
200 basis points
, depending on the percentage of its borrowing base utilized. Alternate base rate loans bear interest at a rate per annum equal to the greatest of: (i) the agent bank’s referenced rate; (ii) the federal funds effective rate plus
100 basis points
; and (iii) the adjusted LIBOR rate plus
100 basis points
, plus an applicable margin ranging from
0
to
100 basis points
, depending on the percentage of its borrowing base utilized, plus a facility fee of
0.50%
charged on the borrowing base amount. At March 31, 2016, the prime borrowing rate of interest under the Company’s revolving credit facility was
3.50%
. RSP LLC may repay any amounts borrowed prior to the maturity date without any premium or penalty other than customary LIBOR breakage costs. As of March 31, 2016, the revolving credit facility has a margin of
1.00%
to
2.00%
plus LIBOR, plus a facility fee of
0.50%
charged on the borrowing base amount.
The amount available to be borrowed under the revolving credit facility is subject to a borrowing base that is re-determined semiannually each May and November and depends on the volumes of proved oil and natural gas reserves and estimated cash flows from these reserves and commodity hedge positions. The borrowing base under the Company’s amended and restated credit agreement is
$600 million
as of March 31, 2016, with lender commitments of
$1 billion
. The maturity date of the Company's revolving credit facility is August 29, 2019.
Senior Notes Due 2022
On September 26, 2014, the Company issued
$500.0 million
of
6.625%
senior unsecured notes at par through a private placement. On August 10, 2015, the Company issued an additional
$200.0 million
of these notes at
99.25%
of the principal amount through a private placement. The notes will mature on October 1, 2022. The notes are senior unsecured obligations that rank equally with all of our future senior indebtedness, are effectively subordinated to all our existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness, including borrowings under RSP LLC's revolving credit facility, and will rank senior to any future subordinated indebtedness of the Company. Interest on these notes is payable semi-annually on April 1 and October 1. On or after October 1, 2017, the Company may redeem some or all of the notes, with certain restrictions, at a redemption price, plus accrued and unpaid interest, of
104.969%
of principal, declining in twelve-month intervals to
100%
in 2020 and thereafter. In addition, prior to October 1, 2017, the Company may redeem up to
35%
of the principal amount of the notes with the net proceeds of qualified offerings of our equity at a redemption price of
106.625%
of the principal amount of the notes, plus accrued and unpaid interest.
The Company incurred approximately
$11.3 million
of debt issuance costs related to the 2014 note issuance and
$2.4 million
related to the 2015 note issuance, which are a reduction to “Long-term debt” on the Company's consolidated balance sheets and will be amortized to interest expense, net, over the life of the notes using the effective interest method. In the event of certain changes in control of the Company, each holder of notes will have the right to require us to repurchase all or any part of the notes at a purchase price in cash equal to
101%
of the principal amount, plus accrued and unpaid interest to the date of purchase. RSP LLC, our
100%
owned and only subsidiary, has fully and unconditionally guaranteed the notes. RSP Inc. does not have independent assets or operations. The terms of the notes include, among other restrictions, limitations on our ability to repurchase shares, incur debt, create liens, make investments, transfer or sell assets, enter into transactions with affiliates and consolidate, merge or transfer all or substantially all of our assets. In June 2015, the Company exchanged
$500.0 million
of these notes for registered notes with the same terms. In March 2016, the Company exchanged an additional
$200.0 million
of these notes for registered notes with the same terms. The Company was in compliance with the provisions of the indenture governing the senior unsecured notes as of March 31, 2016.
NOTE 7—COMMITMENTS AND CONTINGENCIES
Legal Matters
In the ordinary course of business, the Company may at times be subject to claims and legal actions. Management believes it is remote that the impact of such matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Environmental Matters
The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. These laws, which are often changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed as incurred. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and to comply with regulatory policies and procedures.
The Company accounts for environmental contingencies in accordance with the accounting guidance related to accounting for contingencies. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments and/or clean-ups are probable and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments is fixed and readily determinable. At both March 31, 2016 and December 31, 2015, the Company had no environmental matters requiring specific disclosure or requiring the recognition of a liability.
Contractual Obligations
The Company had no material changes in its contractual commitments and obligations from amounts listed under "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Requirements and Sources of Liquidity - Contractual Obligations" in our Annual Report on Form 10-K for the year ended December 31, 2015.
NOTE 8—EQUITY-BASED COMPENSATION
Equity-based compensation expense, which was recorded in General and administrative expenses, was
$3.1
million and
$2.1
million for the three months ended March 31, 2016 and 2015, respectively.
Restricted Stock Awards
In connection with the IPO, the Company adopted the RSP Permian, Inc. 2014 Long Term Incentive Plan (the “LTIP”) for the employees, consultants and directors of the Company and its affiliates who perform services for the Company.
Equity-based compensation expense for awards under the LTIP was
$1.9 million
and
$1.6 million
for the three months ended March 31, 2016 and 2015, respectively. The Company views restricted stock awards with graded vesting as single awards with an expected life equal to the average expected life and amortize the awards on a straight-line basis over the life of the awards.
The compensation expense for these awards was determined based on the market price of the Company’s common stock at the date of grant applied to the total number of shares that were anticipated to fully vest. As of March 31, 2016, the Company had unrecognized compensation expense of
$14.4 million
related to restricted stock awards which is expected to be recognized over a weighted average period of
2.3 years
.
The following table represents restricted stock award activity for the three months ended March 31:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
Shares
|
|
Weighted Average Fair Value
|
|
Shares
|
|
Weighted Average Fair Value
|
Restricted shares outstanding, beginning of period
|
|
499,529
|
|
|
$
|
25.99
|
|
|
477,767
|
|
|
$
|
23.71
|
|
Restricted shares granted
|
|
432,708
|
|
|
19.45
|
|
|
269,032
|
|
|
27.15
|
|
Restricted shares vested
|
|
(232,080
|
)
|
|
24.93
|
|
|
(223,864
|
)
|
|
22.44
|
|
Restricted shares outstanding, end of period
|
|
700,157
|
|
|
$
|
22.29
|
|
|
522,935
|
|
|
$
|
26.03
|
|
Performance-Based Restricted Stock Awards
In June 2014, performance-based restricted stock awards were granted containing predetermined market conditions with a cliff vesting period of
2.75 years
. We granted
134,400
of these shares at a
100%
of target payout while the conditions of the grants allow for a payout ranging between
no
payout and
200%
of target. In March 2015, an additional grant of performance-based restricted stock awards were granted containing predetermined market conditions with a cliff vesting period of
2.83 years
. We granted
159,932
of these shares at a
100%
of target payout while the conditions of the grants allow for a payout ranging between
no
payout and
200%
of target. In February 2016, an additional grant of performance-based restricted stock awards were granted containing predetermined market conditions with a cliff vesting period of
2.92 years
. We granted
484,650
of these shares at a
100%
of target payout while the conditions of the grants allow for a payout ranging from
no
payout and
100%
of target payout.
Equity-based compensation for these awards was
$1.2 million
and
$0.5 million
for the three months ended March 31, 2016 and 2015, respectively. The compensation expense for these performance based awards is based on a per share value using a Monte-Carlo simulation. The payout level is calculated based on actual total shareholder return performance achieved during the performance period compared to a defined peer group of comparable public companies. The unrecognized compensation expense related to these shares is approximately $
10.8
million as of March 31, 2016 and is expected to be recognized over the next
2.25 years
.
The following table represents performance-based restricted stock award activity for the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
Shares
|
|
Weighted Average Fair Value
|
|
Shares
|
|
Weighted Average Fair Value
|
Restricted shares outstanding, beginning of period
|
|
294,332
|
|
|
$
|
31.41
|
|
|
134,400
|
|
|
$
|
28.14
|
|
Restricted shares granted
|
|
484,650
|
|
|
13.53
|
|
|
159,932
|
|
|
31.74
|
|
Restricted shares outstanding, end of period
|
|
778,982
|
|
|
$
|
20.28
|
|
|
294,332
|
|
|
$
|
31.41
|
|
NOTE 9—EARNINGS PER SHARE
The Company’s basic earnings per share amounts have been computed using the two-class method based on the weighted-average number of shares of common stock outstanding for the period. Because the Company recognized a net loss for both the three months ended March 31, 2016 and 2015, all unvested restricted share awards were not recognized in dilutive earnings per share calculations as they would be antidilutive. A reconciliation of the components of basic and diluted earnings per common share is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Numerator:
|
|
|
|
|
|
Net loss available to stockholders
|
|
$
|
(17,416
|
)
|
|
$
|
(1,024
|
)
|
Basic net loss allocable to participating securities (1)
|
|
—
|
|
|
—
|
|
Loss available to stockholders
|
|
$
|
(17,416
|
)
|
|
$
|
(1,024
|
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
100,060
|
|
|
78,190
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Restricted stock
|
|
—
|
|
|
—
|
|
Weighted average number of common shares outstanding - diluted
|
|
100,060
|
|
|
78,190
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.17
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.17
|
)
|
|
$
|
(0.01
|
)
|
_______________________________________
(1)
Restricted share awards that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in computing earnings using the two-class method. Participating securities, however, do not participate in undistributed net losses.