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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
 FORM 10-Q
________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
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: 1-13283
  pvac2019logo.jpg
PENN VIRGINIA CORPORATION
(Exact name of registrant as specified in its charter)
__________________________________________________________
Virginia
 
23-1184320
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
16285 PARK TEN PLACE, SUITE 500
HOUSTON, TX 77084
(Address of principal executive offices) (Zip Code)
(713722-6500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.01 Par Value
 
PVAC
 
The Nasdaq Global Select Market
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 (“Exchange Act”) 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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes    No  
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer

 
Accelerated Filer

Non-accelerated Filer
 
Smaller Reporting Company
 
 
 
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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      No  
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act subsequent to the distribution of securities under a plan confirmed by a court.    Yes   No  
 As of August 2, 2019, 15,107,265 shares of common stock of the registrant were outstanding.
 




PENN VIRGINIA CORPORATION
QUARTERLY REPORT ON FORM 10-Q
 For the Quarterly Period Ended June 30, 2019
 Table of Contents
Part I - Financial Information
Item
 
Page
1.
Financial Statements - unaudited.
 
 
Condensed Consolidated Statements of Operations
 
Condensed Consolidated Statements of Comprehensive Income
 
Condensed Consolidated Balance Sheets
 
Condensed Consolidated Statements of Cash Flows
 
Notes to Condensed Consolidated Financial Statements:
 
 
1. Nature of Operations
 
2. Basis of Presentation
 
3. Acquisitions and Divestitures
 
4. Accounts Receivable and Revenues from Contracts with Customers
 
5. Derivative Instruments
 
6. Property and Equipment
 
7. Long-Term Debt
 
8. Income Taxes
 
9. Leases
 
10. Additional Balance Sheet Detail
 
11. Fair Value Measurements
 
12. Commitments and Contingencies
 
13. Shareholders’ Equity
 
14. Share-Based Compensation and Other Benefit Plans
 
15. Interest Expense
 
16. Earnings per Share
Forward-Looking Statements
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
 
Overview and Executive Summary
 
Key Developments
 
Financial Condition
 
Results of Operations
 
Off Balance Sheet Arrangements
 
Critical Accounting Estimates
3.
Quantitative and Qualitative Disclosures About Market Risk.
4.
Controls and Procedures.
Part II - Other Information
1.
Legal Proceedings.
1A.
Risk Factors.
5.
Other Information
6.
Exhibits.
Signatures




Part I. FINANCIAL INFORMATION
Item 1.
Financial Statements.
PENN VIRGINIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS unaudited
(in thousands, except per share data) 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
Crude oil
$
114,031

 
$
101,716

 
$
208,843

 
$
172,974

Natural gas liquids
3,502

 
5,533

 
9,050

 
8,479

Natural gas
5,290

 
3,912

 
9,567

 
6,702

Gain on sales of assets, net
16

 
4

 
41

 
79

Other revenues, net
(72
)
 
415

 
494

 
557

Total revenues
122,767

 
111,580

 
227,995

 
188,791

Operating expenses
 
 
 
 
 
 
 
Lease operating
10,362

 
8,730

 
21,366

 
16,026

Gathering, processing and transportation
6,408

 
4,574

 
10,337

 
7,933

Production and ad valorem taxes
7,579

 
5,795

 
13,271

 
9,887

General and administrative
6,232

 
5,322

 
13,297

 
11,793

Depreciation, depletion and amortization
44,298

 
31,273

 
83,168

 
53,354

Total operating expenses
74,879

 
55,694

 
141,439

 
98,993

Operating income
47,888

 
55,886

 
86,556

 
89,798

Other income (expense)
 
 
 
 
 
 
 
Interest expense
(9,056
)
 
(6,150
)
 
(18,534
)
 
(10,751
)
Derivatives
13,603

 
(52,241
)
 
(54,414
)
 
(71,036
)
Other, net
8

 
(16
)
 
114

 
(74
)
Income (loss) before income taxes
52,443

 
(2,521
)
 
13,722

 
7,937

Income tax expense
(818
)
 

 
(794
)
 
(163
)
Net income (loss)
$
51,625

 
$
(2,521
)
 
$
12,928

 
$
7,774

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
3.42

 
$
(0.17
)
 
$
0.86

 
$
0.52

Diluted
$
3.40

 
$
(0.17
)
 
$
0.85

 
$
0.51

 
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
15,106

 
15,058

 
15,102

 
15,050

Weighted average shares outstanding – diluted
15,162

 
15,058

 
15,174

 
15,171


See accompanying notes to condensed consolidated financial statements.


3



PENN VIRGINIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME unaudited
(in thousands) 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
51,625

 
$
(2,521
)
 
$
12,928

 
$
7,774

Other comprehensive income:
 
 
 
 
 
 
 
Change in pension and postretirement obligations, net of tax
(1
)
 

 
(2
)
 

 
(1
)
 

 
(2
)
 

Comprehensive income (loss)
$
51,624

 
$
(2,521
)
 
$
12,926

 
$
7,774



See accompanying notes to condensed consolidated financial statements.

4



PENN VIRGINIA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS unaudited
(in thousands, except share data)
 
June 30,
 
December 31,
 
2019
 
2018
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
12,796

 
$
17,864

Accounts receivable, net of allowance for doubtful accounts
52,471

 
66,038

Derivative assets
7,182

 
34,932

Income taxes receivable
3,707

 
2,471

Other current assets
4,733

 
5,125

Total current assets
80,889

 
126,430

Property and equipment, net (full cost method)
1,038,687

 
927,994

Derivative assets
2,756

 
10,100

Deferred income taxes

 
1,949

Other assets
7,412

 
2,481

Total assets
$
1,129,744

 
$
1,068,954

 
 
 
 
Liabilities and Shareholders’ Equity
 

 
 

Current liabilities
 

 
 

Accounts payable and accrued liabilities
$
111,993

 
$
103,700

Derivative liabilities
14,203

 
991

Total current liabilities
126,196

 
104,691

Other liabilities
8,236

 
5,533

Deferred income taxes
81

 

Derivative liabilities
2,201

 

Long-term debt, net
531,476

 
511,375

 
 
 
 
Commitments and contingencies (Note 12)


 


 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock of $0.01 par value – 5,000,000 shares authorized; none issued

 

Common stock of $0.01 par value – 45,000,000 shares authorized; 15,107,265 and 15,080,594 shares issued as of June 30, 2019 and December 31, 2018, respectively
151

 
151

Paid-in capital
198,997

 
197,630

Retained earnings
262,326

 
249,492

Accumulated other comprehensive income
80

 
82

Total shareholders’ equity
461,554

 
447,355

Total liabilities and shareholders’ equity
$
1,129,744

 
$
1,068,954


See accompanying notes to condensed consolidated financial statements.

5



PENN VIRGINIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS unaudited
(in thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities
 

 
 

Net income
$
12,928

 
$
7,774

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 

Depreciation, depletion and amortization
83,168

 
53,354

Derivative contracts:
 
 
 
Net losses
54,414

 
71,036

Cash settlements, net
(3,907
)
 
(19,977
)
Deferred income tax expense
2,030

 
163

Gain on sales of assets, net
(41
)
 
(79
)
Non-cash interest expense
1,748

 
1,644

Share-based compensation (equity-classified)
2,055

 
2,451

Other, net
26

 
26

Changes in operating assets and liabilities, net
1,941

 
4,026

Net cash provided by operating activities
154,362

 
120,418

 
 
 
 
Cash flows from investing activities
 

 
 

Acquisitions, net

 
(86,835
)
Capital expenditures
(175,941
)
 
(201,350
)
Proceeds from sales of assets, net
29

 
2,525

Net cash used in investing activities
(175,912
)
 
(285,660
)
 
 
 
 
Cash flows from financing activities
 

 
 

Proceeds from credit facility borrowings
32,000

 
166,500

Repayment of credit facility borrowings
(13,000
)
 

Debt issuance costs paid
(2,518
)
 
(754
)
Net cash provided by financing activities
16,482

 
165,746

Net increase (decrease) in cash and cash equivalents
(5,068
)
 
504

Cash and cash equivalents – beginning of period
17,864

 
11,017

Cash and cash equivalents – end of period
$
12,796

 
$
11,521

 
 
 
 
Supplemental disclosures:
 

 
 

Cash paid for:
 

 
 

Interest, net of amounts capitalized
$
16,784

 
$
8,953

Reorganization items, net
$
79

 
$
442

Non-cash investing and financing activities:
 
 
 
Changes in accounts receivable related to acquisitions
$

 
$
(26,631
)
Changes in other assets related to acquisitions
$

 
$
(2,469
)
Changes in accrued liabilities related to acquisitions
$

 
$
(15,099
)
Changes in accrued liabilities related to capital expenditures
$
17,397

 
$
12,231

Changes in other liabilities for asset retirement obligations related to acquisitions
$

 
$
382

 

See accompanying notes to condensed consolidated financial statements.

6



PENN VIRGINIA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS unaudited
For the Quarterly Period Ended June 30, 2019
(in thousands, except per share amounts or where otherwise indicated)

1. 
Nature of Operations
Penn Virginia Corporation (together with its consolidated subsidiaries, unless the context otherwise requires, “Penn Virginia,” the “Company,” “we,” “us” or “our”) is an independent oil and gas company engaged in the onshore exploration, development and production of oil, natural gas liquids (“NGLs”) and natural gas. Our current operations consist primarily of drilling unconventional horizontal development wells and operating our producing wells in the Eagle Ford Shale (the “Eagle Ford”) in Gonzales, Lavaca, Fayette and DeWitt Counties in South Texas.
On March 21, 2019, we and Denbury Resources Inc. (“Denbury”) entered into a Termination Agreement (the “Termination Agreement”) under which the parties mutually agreed to terminate our previously announced merger agreement.
Subject to limited customary exceptions, the Termination Agreement also mutually releases the parties from any claims of liability to one another relating to the contemplated merger transaction. We incurred a total of $0.8 million of incremental costs associated with the merger transaction as well as the Termination Agreement during the six months ended June 30, 2019. These costs are included in the “General and administrative” (“G&A”) expenses caption in our Condensed Consolidated Statement of Operations.

2.
Basis of Presentation
Our unaudited Condensed Consolidated Financial Statements include the accounts of Penn Virginia and all of our subsidiaries. Intercompany balances and transactions have been eliminated. Our Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Preparation of these statements involves the use of estimates and judgments where appropriate. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of our Condensed Consolidated Financial Statements, have been included. Our Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. Operating results for the six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
Adoption of Recently Issued Accounting Pronouncements
Effective January 1, 2019, we adopted and began applying the relevant guidance provided in Accounting Standards Update (“ASU”) 2016–02, Leases (“ASU 2016–02”) and related amendments to GAAP which, together with ASU 2016–02, represent ASC Topic 842, Leases (“ASC Topic 842”). We adopted ASC Topic 842 using the optional transition approach with a charge to the beginning balance of retained earnings as of January 1, 2019 (see Note 9 for the impact and disclosures associated with the adoption of ASC Topic 842). Comparative periods and related disclosures have not been restated for the application of ASC Topic 842.
Recently Issued Accounting Pronouncements Pending Adoption
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016–13, Measurement of Credit Losses on Financial Instruments (“ASU 2016–13”), which changes the recognition model for the impairment of financial instruments, including accounts receivable, loans and held-to-maturity debt securities, among others. ASU 2016–13 is required to be adopted using the modified retrospective method by January 1, 2020, with early adoption permitted for fiscal periods beginning after December 15, 2018. In contrast to current guidance, which considers current information and events and utilizes a probable threshold (an “incurred loss” model), ASU 2016–13 mandates an “expected loss” model. The expected loss model: (i) estimates the risk of loss even when risk is remote, (ii) estimates losses over the contractual life, (iii) considers past events, current conditions and reasonable supported forecasts and (iv) has no recognition threshold. ASU 2016–13 will have applicability to our accounts receivable portfolio, particularly those receivables attributable to our joint interest partners which have a higher credit risk than those associated with our traditional customer receivables. At this time, we do not anticipate that the adoption of ASU 2016–13 will have a significant impact on our Consolidated Financial Statements and related disclosures; however, we are continuing to evaluate the requirements as well as monitoring developments regarding ASU 2016–13 that are unique to our industry. We plan to adopt ASU 2016–13 effective January 1, 2020.
Going Concern Presumption
Our unaudited Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business.

7



Subsequent Events
Management has evaluated all of our activities through the issuance date of our Condensed Consolidated Financial Statements and has concluded that no subsequent events have occurred that would require recognition in our Condensed Consolidated Financial Statements or disclosure in the Notes thereto.
3.
Acquisitions and Divestitures
Acquisitions
Hunt Acquisition
In December 2017, we entered into a purchase and sale agreement with Hunt Oil Company (“Hunt”) to acquire certain oil and gas assets in the Eagle Ford Shale, primarily in Gonzales County, Texas for $86.0 million in cash, subject to adjustments (the “Hunt Acquisition”). The Hunt Acquisition had an effective date of October 1, 2017, and closed on March 1, 2018, at which time we paid cash consideration of $84.4 million. In connection with the Hunt Acquisition, we also acquired working interests in certain wells that we previously drilled as operator in which Hunt had rights to participate prior to the transaction closing. Accumulated costs, net of suspended revenues for these wells was $13.8 million, which we have reflected as a component of the total net assets acquired. We funded the Hunt Acquisition with borrowings under our credit agreement (the “Credit Facility”).
The final settlement of the Hunt Acquisition occurred in July 2018, at which time an additional $0.2 million of acquisition costs was allocated from certain working capital components and Hunt transferred $1.4 million to us primarily for suspended revenues attributable to the acquired properties.
We incurred a total of $0.5 million of transaction costs for legal, due diligence and other professional fees associated with the Hunt Acquisition, including $0.1 million in 2017 and $0.4 million in the first quarter of 2018. These costs have been recognized as a component of our G&A expenses.
We accounted for the Hunt Acquisition by applying the acquisition method of accounting as of March 1, 2018. The following table represents the final fair values assigned to the net assets acquired and the total acquisition cost incurred, including consideration transferred to Hunt:
Assets
 
 
Oil and gas properties - proved
 
$
82,443

Oil and gas properties - unproved
 
16,339

Liabilities
 
 
Revenue suspense
 
1,448

Asset retirement obligations
 
356

Net assets acquired
 
$
96,978

 
 
 
Cash consideration paid to Hunt, net
 
$
82,955

Application of working capital adjustments
 
245

Accumulated costs, net of suspended revenues, for wells in which Hunt had rights to participate
 
13,778

Total acquisition costs incurred
 
$
96,978


Valuation of Acquisitions
The fair value of the oil and gas properties acquired in the Hunt Acquisition was measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) reserves, (ii) future operating and development costs, (iii) future commodity prices, (iv) future cash flows, (v) the timing of our development plans and (vi) a market-based weighted-average cost of capital. Because many of these inputs are not observable, we have classified the initial fair value estimates as Level 3 inputs as that term is defined in GAAP.
Impact of Acquisitions on Actual and Pro Forma Results of Operations
The results of operations attributable to the Hunt Acquisition have been included in our Consolidated Financial Statements for the periods after March 1, 2018. The Hunt Acquisition provided revenues and estimated earnings (including revenues less operating expenses and excluding allocations of interest expense and income taxes) of approximately $0.4 million and $0.2 million, respectively, for the period from March 1, 2018 through March 31, 2018. As the properties and working interests acquired in connection with the Hunt Acquisition are included within our existing Eagle Ford acreage, it is not practical or meaningful to disclose revenues and earnings unique to those assets for periods beyond those during which they were acquired, as they were fully integrated into our regional operations soon after their acquisition. The following table presents unaudited summary pro forma financial information for the six months ended June 30, 2018, assuming the Hunt

8



Acquisition occurred as of January 1, 2018. The pro forma financial information does not purport to represent what our actual results of operations would have been if the Hunt Acquisition had occurred as of this date, or the results of operations for any future periods.
 
 
Six Months Ended June 30,
 
 
2018
Total revenues
 
$
194,036

Net income
 
$
9,886

Net income per share - basic
 
$
0.66

Net income per share - diluted
 
$
0.65


Divestitures
Mid-Continent Divestiture
In June 2018, we entered into a purchase and sale agreement with a third party to sell all of our Mid-Continent oil and gas properties, located primarily in Oklahoma in the Granite Wash, for $6.0 million in cash, subject to customary adjustments. The sale had an effective date of March 1, 2018 and closed on July 31, 2018, and we received net proceeds of $6.2 million, of which $0.7 million was received in June 2018 as an earnest deposit. The sale proceeds and de-recognition of certain assets and liabilities were recorded as a reduction of our net oil and gas properties. In November 2018, we paid $0.5 million, including $0.2 million of suspended revenues, to the buyer in connection with the final settlement.
The Mid-Continent properties had asset retirement obligations (“AROs”) of $0.3 million as well as a net working capital deficit attributable to the oil and gas properties of $1.3 million as of July 31, 2018. The net pre-tax operating income attributable to the Mid-Continent assets was $0.6 million and $1.4 million for the three and six months ended June 30, 2018.
Sales of Undeveloped Acreage, Rights and Other Assets
In February 2018, we sold our undeveloped acreage holdings in the Tuscaloosa Marine Shale in Louisiana that were scheduled to expire in 2019. In March 2018, we sold certain undeveloped deep leasehold rights in Oklahoma, and in May 2018, we sold certain pipeline assets in our former Marcellus Shale operating region. We received a combined total of $1.7 million for these leasehold and other assets which were applied as a reduction of our net oil and gas properties.
4.       Accounts Receivable and Revenues from Contracts with Customers
Accounts Receivable and Major Customers
The following table summarizes our accounts receivable by type as of the dates presented:
 
June 30,
 
December 31,
 
2019
 
2018
Customers
$
48,347

 
$
59,030

Joint interest partners
3,546

 
6,404

Other
629

 
640

 
52,522

 
66,074

Less: Allowance for doubtful accounts
(51
)
 
(36
)
 
$
52,471

 
$
66,038



For the six months ended June 30, 2019, three customers accounted for $150.0 million, or approximately 66%, of our consolidated product revenues. The revenues generated from these customers during the six months ended June 30, 2019, were $85.6 million, $37.5 million and $26.9 million, or 38%, 16% and 12% of the consolidated total, respectively. As of June 30, 2019 and December 31, 2018, $32.4 million and $34.8 million, or approximately 67% and 59%, of our consolidated accounts receivable from customers was related to these customers. No significant uncertainties exist related to the collectability of amounts owed to us by any of these customers. For the six months ended June 30, 2018, three customers accounted for $157.8 million, or approximately 84%, of our consolidated product revenues. The allowance for doubtful accounts is entirely attributable to certain receivables from joint interest partners.

9



5.
Derivative Instruments
We utilize derivative instruments to mitigate our financial exposure to commodity price volatility. Our derivative instruments are not formally designated as hedges in the context of GAAP.
We typically utilize collars and swaps, which are placed with financial institutions that we believe to be acceptable credit risks, to hedge against the variability in cash flows associated with anticipated sales of our future production. While the use of derivative instruments limits the risk of adverse price movements, such use may also limit future revenues from favorable price movements.
The counterparty to a collar or swap contract is required to make a payment to us if the settlement price for any settlement period is below the floor or swap price for such contract. We are required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling or swap price for such contract. Neither party is required to make a payment to the other party if the settlement price for any settlement period is equal to or greater than the floor price and equal to or less than the ceiling price for such contract.
We determine the fair values of our commodity derivative instruments based on discounted cash flows derived from third-party quoted forward prices for West Texas Intermediate (“WTI”), Louisiana Light Sweet (“LLS”) and Magellan East Houston (“MEH”) crude oil closing prices as of the end of the reporting period. The discounted cash flows utilize discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset position, and our own credit risk if the derivative is in a liability position. We are currently unhedged with respect to NGL and natural gas production.
The following table sets forth our commodity derivative positions, presented on a net basis by period of maturity, as of June 30, 2019:
 
 
 
Average
 
Weighted
 
 
 
 
 
 
 
Volume Per
 
Average
 
Fair Value
 
Instrument
 
Day
 
Price
 
Asset
 
Liability
Crude Oil:
 
 
(barrels)
 
($/barrel)
 
 
 
 
Third quarter 2019
Swaps-WTI
 
7,397

 
$
55.70

 
$

 
$
1,677

Third quarter 2019
Swaps-LLS
 
5,000

 
$
59.17

 

 
1,589

Third quarter 2019
Swaps-MEH
 
1,000

 
$
64.00

 
15

 

Fourth quarter 2019
Swaps-WTI
 
7,398

 
$
55.70

 

 
1,222

Fourth quarter 2019
Swaps-LLS
 
5,000

 
$
59.17

 

 
1,059

Fourth quarter 2019
Swaps-MEH
 
1,000

 
$
64.00

 
46

 

First quarter 2020
Swaps-WTI
 
7,000

 
$
54.94

 

 
1,048

First quarter 2020
Swaps-MEH
 
2,000

 
$
61.03

 

 
108

Second quarter 2020
Swaps-WTI
 
7,000

 
$
54.94

 

 
375

Second quarter 2020
Swaps-MEH
 
2,000

 
$
61.03

 

 
75

Third quarter 2020
Swaps-WTI
 
7,000

 
$
54.93

 
164

 

Third quarter 2020
Swaps-MEH
 
2,000

 
$
61.03

 

 
52

Fourth quarter 2020
Swaps-WTI
 
7,000

 
$
54.93

 
569

 

Fourth quarter 2020
Swaps-MEH
 
2,000

 
$
61.03

 

 
51

Settlements to be paid in subsequent period
 
 
 
 

 


 
4


Financial Statement Impact of Derivatives
The impact of our derivative activities on income is included in “Derivatives” in our Condensed Consolidated Statements of Operations. The following table summarizes the effects of our derivative activities for the periods presented:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Derivative income (losses)
$
13,603

 
$
(52,241
)
 
$
(54,414
)
 
$
(71,036
)

The effects of derivative gains and (losses) and cash settlements are reported as adjustments to reconcile net income to net cash provided by operating activities. These items are recorded in the “Derivative contracts” section of our Condensed Consolidated Statements of Cash Flows under “Net (gains) losses” and “Cash settlements, net.”

10



The following table summarizes the fair values of our derivative instruments presented on a gross basis, as well as the locations of these instruments on our Condensed Consolidated Balance Sheets as of the dates presented:
 
 
 
 
June 30, 2019
 
December 31, 2018
 
 
 
 
Derivative
 
Derivative
 
Derivative
 
Derivative
Type
 
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
 
Derivative assets/liabilities – current
 
$
7,182

 
$
14,203

 
$
34,932

 
$
991

Commodity contracts
 
Derivative assets/liabilities – noncurrent
 
2,756

 
2,201

 
10,100

 

 
 
 
 
$
9,938

 
$
16,404

 
$
45,032

 
$
991


As of June 30, 2019, we reported net commodity derivative liabilities of $6.5 million. The contracts associated with this position are with eight counterparties, all of which are investment grade financial institutions and are participants in the Credit Facility. This concentration may impact our overall credit risk in that these counterparties may be similarly affected by changes in economic or other conditions. We have neither paid to, nor received from, our counterparties any cash collateral in connection with our derivative positions. Furthermore, our derivative contracts are not subject to margin calls or similar accelerations. No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties.
6.
Property and Equipment
The following table summarizes our property and equipment as of the dates presented: 
 
June 30,
 
December 31,
 
2019
 
2018
Oil and gas properties:
 

 
 

Proved
$
1,224,547

 
$
1,037,993

Unproved
66,419

 
63,484

Total oil and gas properties
1,290,966

 
1,101,477

Other property and equipment
24,588

 
20,383

Total properties and equipment
1,315,554

 
1,121,860

Accumulated depreciation, depletion and amortization
(276,867
)
 
(193,866
)
 
$
1,038,687

 
$
927,994


Unproved property costs of $66.4 million and $63.5 million have been excluded from amortization as of June 30, 2019 and December 31, 2018, respectively. An additional $4.2 million and $0.3 million of costs, associated with wells in-progress for which we had not previously recognized any proved undeveloped reserves, were excluded from amortization as of June 30, 2019 and December 31, 2018. We transferred less than $0.1 million and $5.6 million of undeveloped leasehold costs associated with acreage unlikely to be drilled or associated with proved undeveloped reserves, including capitalized interest, from unproved properties to the full cost pool during the six months ended June 30, 2019 and 2018, respectively. We capitalized internal costs of $2.2 million and $1.6 million and interest of $2.2 million and $4.7 million during the six months ended June 30, 2019 and 2018, respectively, in accordance with our accounting policies. Average depreciation, depletion and amortization per barrel of oil equivalent of proved oil and gas properties was $17.49 and $15.36 for the six months ended June 30, 2019 and 2018, respectively.

11



7.
Long-Term Debt
The following table summarizes our debt obligations as of the dates presented:
 
June 30, 2019
 
December 31, 2018
 
Principal
 
Unamortized Discount and Deferred Issuance Costs 1, 2
 
Principal
 
Unamortized Discount and Deferred Issuance Costs 1, 2
Credit facility
$
340,000

 
 
 
$
321,000

 
 
Second lien term loan
200,000

 
$
8,524

 
200,000

 
$
9,625

Totals
540,000

 
$
8,524

 
521,000

 
$
9,625

Less: Unamortized discount
(2,795
)
 
 
 
(3,159
)
 
 
Less: Unamortized deferred issuance costs
(5,729
)
 
 
 
(6,466
)
 
 
Long-term debt, net
$
531,476

 
 
 
$
511,375

 
 

_______________________
1
Issuance costs of the Credit Facility, which represent costs attributable to the access to credit over its contractual term, have been presented as a component of Other assets (see Note 10) and are being amortized over the term of the Credit Facility using the straight-line method.
2 Discount and issuance costs of the Second Lien Facility are being amortized over the term of the underlying loan using the effective-interest method.
Credit Facility
The Credit Facility provides a $1.0 billion revolving commitment and $500 million borrowing base and a $25 million sublimit for the issuance of letters of credit. In May 2019, the borrowing base was increased to $500 million from $450 million pursuant to the Borrowing Base Increase Agreement and Amendment No. 6 to the Credit Agreement (the “Sixth Amendment”). In the six months ended June 30, 2019, we incurred and capitalized approximately $2.5 million of issue and other costs associated with the Sixth Amendment. Availability under the Credit Facility may not exceed the lesser of the aggregate commitments or the borrowing base. The borrowing base under the Credit Facility is redetermined semi-annually, generally in April and October of each year. Additionally, the Credit Facility lenders may, at their discretion, initiate a redetermination at any time during the six-month period between scheduled redeterminations. The Credit Facility is available to us for general corporate purposes, including working capital. We had $0.4 million in letters of credit outstanding as of June 30, 2019 and December 31, 2018.
In connection with the Sixth Amendment, maturity of the Credit Facility was extended to May 2024 from September 2020; provided that in June 2022, unless we have either extended the maturity date of our $200 million Second Lien Credit Agreement dated as of September 29, 2017 (the “Second Lien Facility”) described below to a date that is at least 91 days after the extended maturity date of May 2024 or have repaid our Second Lien Facility in full, the maturity date of the Credit Facility will mean June 2022. Prior to entry into the Sixth Amendment, we received consent from requisite lenders of our Second Lien Facility to extend the maturity of our Credit Facility to May 2024.
The outstanding borrowings under the Credit Facility bear interest at a rate equal to, at our option, either (a) a customary reference rate plus an applicable margin ranging from 0.50% to 1.50% (2.00% to 3.00% prior to May 2019), determined based on the average availability under the Credit Facility or (b) a customary London interbank offered rate (“LIBOR”) plus an applicable margin ranging from 1.50% to 2.50% (3.00% to 4.00% prior to May 2019), determined based on the average availability under the Credit Facility. Interest on reference rate borrowings is payable quarterly in arrears and is computed on the basis of a year of 365/366 days, and interest on LIBOR borrowings is payable every one, three or six months, at our election, and is computed on the basis of a year of 360 days. As of June 30, 2019, the actual weighted-average interest rate on the outstanding borrowings under the Credit Facility was 4.42%. Unused commitment fees are charged at a rate of 0.375% to 0.50%, depending upon utilization.
The Credit Facility is guaranteed by us and all of our subsidiaries (the “Guarantor Subsidiaries”). The guarantees under the Credit Facility are full and unconditional and joint and several. Substantially all of our consolidated assets are held by the Guarantor Subsidiaries. There are no significant restrictions on our ability or any of the Guarantor Subsidiaries to obtain funds through dividends, advances or loans. The obligations under the Credit Facility are secured by a first priority lien on substantially all of our assets.
In connection with the Sixth Amendment and effective May 2019, the Credit Facility requires us to maintain (1) a minimum current ratio (as defined in the Credit Facility, which considers the unused portion of the total commitment as a current asset), measured as of the last day of each fiscal quarter of 1.00 to 1.00 and (2) a maximum leverage ratio (consolidated indebtedness to adjusted earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses), both as defined in the Credit Facility, measured as of the last day of each fiscal quarter of 4.00 to 1.00.

12



The Credit Facility also contains customary affirmative and negative covenants, including as to compliance with laws (including environmental laws, ERISA and anti-corruption laws), maintenance of required insurance, delivery of quarterly and annual financial statements, oil and gas engineering reports and budgets, maintenance and operation of property (including oil and gas properties), restrictions on the incurrence of liens and indebtedness, merger, consolidation or sale of assets, payment of dividends, and transactions with affiliates and other customary covenants.
The Credit Facility contains customary events of default and remedies for credit facilities of this nature. If we do not comply with the financial and other covenants in the Credit Facility, the lenders may, subject to customary cure rights, require immediate payment of all amounts outstanding under the Credit Facility.
As of June 30, 2019, and through the date upon which the Condensed Consolidated Financial Statements were issued, we were in compliance with all of the covenants under the Credit Facility.
Second Lien Facility
On September 29, 2017, we entered into the Second Lien Facility. We received net proceeds of $187.8 million from the Second Lien Facility net of an original issue discount (“OID”) of $4.0 million and issue costs of $8.2 million. The proceeds from the Second Lien Facility were used to fund a significant acquisition and related fees and expenses. The maturity date under the Second Lien Facility is September 29, 2022.
The outstanding borrowings under the Second Lien Facility bear interest at a rate equal to, at our option, either (a) a customary reference rate based on the prime rate plus an applicable margin of 6.00% or (b) a customary LIBOR rate plus an applicable margin of 7.00%. As of June 30, 2019, the actual interest rate of outstanding borrowings under the Second Lien Facility was 9.41%. Amounts under the Second Lien Facility were borrowed at a price of 98% with an initial interest rate of 8.34%, resulting in an effective interest rate of 9.89%. Interest on reference rate borrowings is payable quarterly in arrears and is computed on the basis of a year of 365/366 days, and interest on eurocurrency borrowings is payable every one or three months (including in three-month intervals if we select a six-month interest period), at our election and is computed on the basis of a 360-day year. We have the right, to the extent permitted under the Credit Facility and an intercreditor agreement between the lenders under the Credit Facility and the lenders under the Second Lien Facility, to prepay loans under the Second Lien Facility at any time, subject to the following prepayment premiums (in addition to customary “breakage” costs with respect to eurocurrency loans): during year one, a customary “make-whole” premium; during year two, 102% of the amount being prepaid; during year three, 101% of the amount being prepaid; and thereafter, no premium. The Second Lien Facility also provides for the following prepayment premiums in the event of a change in control that results in an offer of prepayment that is accepted by the lenders under the Second Lien Facility: during years one and two, 102% of the amount being prepaid; during year three, 101% of the amount being prepaid; and thereafter, no premium.
The Second Lien Facility is collateralized by substantially all of the Company’s and its subsidiaries’ assets with lien priority subordinated to the liens securing the Credit Facility. The obligations under the Second Lien Facility are guaranteed by us and the Guarantor Subsidiaries.
The Second Lien Facility has no financial covenants, but contains customary affirmative and negative covenants, including as to compliance with laws (including environmental laws, ERISA and anti-corruption laws), maintenance of required insurance, delivery of quarterly and annual financial statements, oil and gas engineering reports and budgets, maintenance and operation of property (including oil and gas properties), restrictions on the incurrence of liens and indebtedness, merger, consolidation or sale of assets, payment of dividends and transactions with affiliates and other customary covenants.
As illustrated in the table above, the OID and issue costs of the Second Lien Facility are presented as reductions to the outstanding term loans. These costs are subject to amortization using the interest method over the five-year term of the Second Lien Facility.
As of June 30, 2019, and through the date upon which the Consolidated Financial Statements were issued, we were in compliance with all of the covenants under the Second Lien Facility.

13



8.
Income Taxes
We recognized a federal and state income tax expense for the six months ended June 30, 2019 at the blended rate of 21.6%. The federal and state tax expense was offset by an adjustment to the valuation allowance against our net deferred tax assets resulting in an effective tax rate of 5.8%, which related to Texas deferred tax expense. The effect of the valuation allowance, as well as a reclassification of $1.2 million from deferred tax assets to the current income tax receivable for refundable alternative minimum tax (“AMT”) credit carryforwards, was to adjust our deferred tax asset to a deferred tax liability position $0.1 million as of June 30, 2019. We recognized a federal income tax expense for the six months ended June 30, 2018 at the blended rate of 21.6% which was similarly offset by a valuation allowance against our net deferred tax assets. We recorded an adjustment of $0.2 million to the deferred tax asset related to sequestration of a portion of the aforementioned AMT credit carryforward resulting in an effective tax rate of 2.1%. We considered both the positive and negative evidence in determining that it was more likely than not that some portion or all of our deferred tax assets will not be realized, due primarily to cumulative losses.
We had no liability for unrecognized tax benefits as of June 30, 2019. There were no interest and penalty charges recognized during the periods ended June 30, 2019 and 2018. Tax years from 2014 forward remain open to examination by the major taxing jurisdictions to which the Company is subject; however, net operating losses originating in prior years are subject to examination when utilized.
9.
Leases
Adoption of ASC Topic 842
Effective January 1, 2019, we adopted ASC Topic 842 and have applied the guidance therein to all of our contracts and agreements explicitly identified as leases as well as other contractual arrangements that we have determined to include or otherwise have the characteristics of a lease as defined in ASC Topic 842. As illustrated in the disclosures below, the adoption of ASC Topic 842 resulted in the recognition of certain assets and liabilities on our Condensed Consolidated Balance Sheet and changes in the amounts and timing of lease cost recognition in our Condensed Consolidated Statements of Operations as compared to prior GAAP. We have adopted ASC Topic 842 using the optional transition approach with an adjustment to the beginning balance of retained earnings as of January 1, 2019. Accordingly, our 2019 financial statements are not comparable with respect to leases in effect during all periods prior to January 1, 2019. On January 1, 2019, we recognized operating lease right-of-use (“ROU”) assets of $2.5 million and operating lease obligations of $2.8 million on our Condensed Consolidated Balance Sheet for operating leases in effect on that date. We recorded an immaterial adjustment to the beginning balance of retained earnings as of January 1, 2019 representing the difference between the operating lease ROU assets and operating lease obligations recognized upon adoption net of amounts already included in our liabilities as of December 31, 2018 that were attributable to straight-line lease expense in excess of amounts paid for certain operating leases. We did not identify any finance leases, as defined in ASC Topic 842, upon the date of initial adoption.
Accounting Policies for Leases
We determine if an arrangement is a lease at the inception of the underlying contractual arrangement. Operating leases are included in the captions “Other assets,” “Accounts payable and accrued liabilities” and “Other liabilities” on our Condensed Consolidated Balance Sheets and are identified as ROU assets - operating, Current operating lease obligations and Noncurrent operating lease obligations, respectively, below and in Note 10.
ROU assets represent our right to use an underlying asset for the lease term and lease obligations represent our obligation to make lease payments arising from the underlying contractual arrangement. Operating lease ROU assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term. The operating lease ROU assets include any lease payments made in advance and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
Most of our leasing arrangements do not identify or otherwise provide for an implicit interest rate. Accordingly, we utilize a secured incremental borrowing rate based on information available at the commencement date in the determination of the present value of the lease payments. As most of our lease arrangements have terms ranging from two to five years, our secured incremental borrowing rate is primarily based on the rates applicable to our Credit Facility.
We have lease arrangements that include lease and certain non-lease components, including amounts for related taxes, insurance, common area maintenance and similar terms. We have elected to apply a practical expedient provided in ASC Topic 842 to not separate the lease and non-lease components. Accordingly, the ROU assets and lease obligations for such leases will include the present value of the estimated payments for the non-lease components over the lease term.
Certain of our lease arrangements with contractual terms of 12 months or less are classified as short-term leases. Accordingly, we have elected to not include the underlying ROU assets and lease obligations on our Condensed Consolidated Balance Sheets. The associated costs are aggregated with all of our other lease arrangements and are disclosed in the tables that follow.

14



Certain of our lease arrangements result in variable lease payments which, in accordance with ASC Topic 842, do not give rise to lease obligations. Rather, the basis and terms and conditions upon which such variable lease payments are determined are disclosed in the summary below.
Lease Arrangements and Supplemental Disclosures
We have lease arrangements for office facilities and certain office equipment, certain field equipment including compressors, drilling rigs, land easements and similar arrangements for rights-of-way, and certain gas gathering and gas lift assets. Our short-term leases are primarily comprised of our contractual arrangements with certain vendors for operated drilling rigs and our field compressors. Our primary variable lease includes our field gas gathering and gas lift agreement with a midstream service provider and the lease payments are charged on a volumetric basis at a contractual fixed rate.
The following table summarizes the components of our total lease cost for the periods presented:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2019
Operating lease cost
 
$
194

 
$
357

Short-term lease cost
 
11,484

 
23,055

Variable lease cost
 
5,548

 
10,643

Less: Amounts charged as drilling costs 1
 
(10,790
)
 
(21,641
)
Total lease cost recognized in the Condensed Consolidated Statement of Operations 2
 
$
6,436

 
$
12,414

___________________
1 
Represents the combined gross amounts paid and (i) capitalized as drilling costs for our working interest share and (ii) billed to joint interest partners for their working interest share for short-term leases of operated drilling rigs.
2 
Includes $2.9 million and $5.0 million recognized in Gathering, processing and transportation, $3.3 million and $7.1 million recognized in Lease operating and $0.2 million and $0.4 million recognized in G&A for the three and six months ended June 30, 2019, respectively.
The following table summarizes supplemental cash flow information related to leases for the six months ended June 30, 2019:
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
221

ROU assets obtained in exchange for lease obligations:
 
 
Operating leases 1
 
$
3,325


___________________
1    Includes $2.5 million recognized upon adoption of ASC Topic 842 and $0.8 million obtained during the six months ended June 30, 2019.
The following table summarizes supplemental balance sheet information related to leases as of June 30, 2019:
ROU assets - operating leases
 
$
3,059

 
 
 
Current operating lease obligations
 
$
874

Noncurrent operating lease obligations
 
2,545

Total operating lease obligations
 
$
3,419

 
 
 
Weighted-average remaining lease term
 
 
Operating leases
 
4.6 Years

 
 
 
Weighted-average discount rate
 
 
Operating leases
 
5.97
%
 
 
 
Maturities of operating lease obligations for the years ending December 31,
 
 
2019
 
$
437

2020
 
846

2021
 
830

2022
 
834

2023
 
833

2024 and thereafter
 
139

Total undiscounted lease payments
 
3,919

Less: imputed interest
 
(500
)
Total operating lease obligations
 
$
3,419



15



10.
Additional Balance Sheet Detail
The following table summarizes components of selected balance sheet accounts as of the dates presented:
 
June 30,
 
December 31,
 
2019
 
2018
Other current assets:
 

 
 

Tubular inventory and well materials
$
3,733

 
$
4,061

Prepaid expenses
1,000

 
1,064

 
$
4,733

 
$
5,125

Other assets:
 

 
 

Deferred issuance costs of the Credit Facility
$
4,308

 
$
2,437

Right-of-use assets – operating leases
3,059

 

Other
45

 
44

 
$
7,412

 
$
2,481

Accounts payable and accrued liabilities:
 

 
 

Trade accounts payable
$
15,712

 
$
16,507

Drilling costs
39,831

 
22,434

Royalties and revenue – related
43,903

 
51,212

Production, ad valorem and other taxes
5,236

 
2,418

Compensation – related
3,295

 
4,489

Interest
673

 
670

Current operating lease obligations
874

 

Other
2,469

 
5,970

 
$
111,993

 
$
103,700

Other liabilities:
 

 
 

Asset retirement obligations
$
4,497

 
$
4,314

Noncurrent operating lease obligations
2,545

 

Defined benefit pension obligations
802

 
857

Postretirement health care benefit obligations
392

 
362

 
$
8,236

 
$
5,533



11.
Fair Value Measurements
We apply the authoritative accounting provisions included in GAAP for measuring the fair value of both our financial and nonfinancial assets and liabilities. Fair value is an exit price representing the expected amount we would receive upon the sale of an asset or that we would expect to pay to transfer a liability in an orderly transaction with market participants at the measurement date.
Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives and our Credit Facility and Second Lien Facility borrowings. As of June 30, 2019, the carrying values of all of these financial instruments approximated fair value.

16



Recurring Fair Value Measurements
Certain financial assets and liabilities are measured at fair value on a recurring basis on our Condensed Consolidated Balance Sheets. The following tables summarize the valuation of those assets and (liabilities) as of the dates presented:
 
 
June 30, 2019
 
 
Fair Value
 
Fair Value Measurement Classification
Description
 
Measurement
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Commodity derivative assets – current
 
$
7,182

 
$

 
$
7,182

 
$

Commodity derivative assets – noncurrent
 
$
2,756

 
$

 
$
2,756

 
$

Liabilities:
 
 

 
 

 
 

 
 

Commodity derivative liabilities – current
 
$
(14,203
)
 
$

 
$
(14,203
)
 
$

Commodity derivative liabilities – noncurrent
 
$
(2,201
)
 
$

 
$
(2,201
)
 
$


 
 
December 31, 2018
 
 
Fair Value
 
Fair Value Measurement Classification
Description
 
Measurement
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Commodity derivative assets – current
 
$
34,932

 
$

 
$
34,932

 
$

Commodity derivative assets - noncurrent
 
$
10,100

 
$

 
$
10,100

 
$

Liabilities:
 
 

 
 

 
 

 
 

Commodity derivative liabilities – current
 
$
(991
)
 
$

 
$
(991
)
 
$

Commodity derivative liabilities – noncurrent
 
$

 
$

 
$

 
$


Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one level of the fair value hierarchy to another level. In such instances, the transfer is deemed to have occurred at the beginning of the quarterly period in which the event or change in circumstances that caused the transfer occurred. There were no transfers during the six months ended June 30, 2019 and 2018.
We used the following methods and assumptions to estimate fair values for the financial assets and liabilities described below:
Commodity derivatives: We determine the fair values of our commodity derivative instruments based on discounted cash flows derived from third-party quoted forward prices for WTI, LLS and MEH crude oil closing prices as of the end of the reporting periods. We generally use the income approach, using valuation techniques that convert future cash flows to a single discounted value. Each of these is a Level 2 input.
Non-Recurring Fair Value Measurements
In addition to the fair value measurements applied with respect to the Hunt Acquisition, as described in Note 3, the most significant non-recurring fair value measurements utilized in the preparation of our Condensed Consolidated Financial Statements are those attributable to the initial determination of AROs associated with the ongoing development of new oil and gas properties. The determination of the fair value of AROs is based upon regional market and facility specific information. The amount of an ARO and the costs capitalized represent the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor after discounting the future cost back to the date that the abandonment obligation was incurred using a rate commensurate with the risk, which approximates our cost of funds. Because these significant fair value inputs are typically not observable, we have categorized the initial estimates as Level 3 inputs.
12.
Commitments and Contingencies
Gathering and Intermediate Transportation Commitments
We have long-term agreements with Republic Midstream, LLC (“Republic Midstream”) and Republic Midstream Marketing, LLC (“Republic Marketing” and, together with Republic Midstream, collectively, “Republic”) to provide gathering and intermediate pipeline transportation services for a substantial portion of our crude oil and condensate production in the South Texas region as well as volume capacity support for certain downstream interstate pipeline transportation.
Republic is obligated to gather and transport our crude oil and condensate from within a dedicated area in the Eagle Ford via a gathering system and intermediate takeaway pipeline connecting to a downstream interstate pipeline operated by a third party through 2041. We have a minimum volume commitment (“MVC”) of 8,000 gross barrels of oil per day to Republic through 2031 under the gathering agreement.

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Under the marketing agreement, we have a commitment to sell 8,000 barrels per day of crude oil (gross) to Republic, or to any third party, utilizing Republic Marketing’s capacity on a downstream interstate pipeline through 2026.
Excluding the potential impact of the effects of price escalation from commodity price changes, the minimum fee requirements attributable to the MVC under the gathering and transportation agreement are as follows: $6.3 million for the remainder of 2019, $13.0 million per year for 2020 through 2025, $7.4 million for 2026, $3.8 million per year for 2027 through 2030 and $2.2 million for 2031.
Drilling, Completion and Other Commitments
As of June 30, 2019, we had contractual commitments on a pad-to-pad basis for two drilling rigs. Additionally, we have a one-year agreement, effective January 1, 2019, which can be terminated with 60 days’ notice by either party, to utilize of certain frac services. In the absence of any potential early termination, we have an obligation of $9.9 million associated with the remaining minimum daily utilization commitment.
Legal and Regulatory
We are involved, from time to time, in various legal proceedings arising in the ordinary course of business. While the ultimate results of these proceedings cannot be predicted with certainty, our management believes that these claims will not have a material effect on our financial position, results of operations or cash flows. As of June 30, 2019, we had a reserve in the amount of $0.3 million included in “Accounts payable and accrued liabilities” for the estimated settlement of disputes with partners regarding certain transactions that occurred in prior years. As of June 30, 2019, we had AROs of approximately $4.5 million attributable to the plugging of abandoned wells. 
13.    Shareholders’ Equity
The following tables summarize the components of our shareholders equity and the changes therein as of and for the six months ended June 30, 2019 and 2018.
 
 
Common Stock
 
Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total Shareholders’ Equity
Balance as of December 31, 2018
 
$
151

 
$
197,630

 
$
249,492

 
$
82

 
$
447,355

Net loss
 

 

 
(38,697
)
 

 
(38,697
)
Cumulative effect of change in accounting principle 1
 

 

 
(94
)
 

 
(94
)
All other changes 2
 

 
381

 

 
(1
)
 
380

Balance as of March 31, 2019
 
$
151

 
$
198,011

 
$
210,701

 
$
81

 
$
408,944

Net income
 

 

 
51,625

 

 
51,625

All other changes 2
 

 
986

 

 
(1
)
 
985

Balance as of June 30, 2019
 
$
151

 
$
198,997

 
$
262,326

 
$
80

 
$
461,554

_______________________
1  
Attributable to the adoption of ASC Topic 842 as of January 1, 2019 (see Note 9).
2 Includes equity-classified share-based compensation of $2.1 million during the six months ended June 30, 2019. During the six months ended June 30, 2019, 26,671 shares of common stock were issued in connection with the vesting of certain time-vested restricted stock units (“RSUs”), net of shares withheld for income taxes.
 
 
Common Stock
 
Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total Shareholders’ Equity
Balance as of December 31, 2017
 
$
150

 
$
194,123

 
$
27,366

 
$

 
$
221,639

Net income
 

 

 
10,295

 

 
10,295

Cumulative effect of change in accounting principle 1
 

 

 
(2,659
)
 

 
(2,659
)
All other changes 2
 
1

 
988

 

 

 
989

Balance as of March 31, 2018
 
$
151

 
$
195,111

 
$
35,002

 
$

 
$
230,264

Net loss
 

 

 
(2,521
)
 

 
(2,521
)
All other changes 2
 

 
869

 

 

 
869

Balance as of June 30, 2018
 
$
151