1700 Broadway, Suite 2300
Denver, Colorado 80290-2300
Tel: 303.837.1661
www.whiting.com
WLL POWER
Annual Report 2017
About the Cover
PL E
O
E
P
CO
M
P
WLL
POWER
A
N
Y
WLL Power is about three things at Whiting Petroleum:
People, Company and Culture.
It takes the right people working on premier assets in a culture
that promotes innovation and integrity, and empowers people to
achieve greatness, to produce the WLL Power necessary to succeed in
today’s oil and gas market.
C
ULT U R E
Our strength as a company comes from our people and our assets. Each are
featured prominently on the cover of our 2017 annual report to highlight what sets
Whiting Petroleum apart. Members of our team such as Darius Frick, Patricia Rodrigues
and Kyle Christianson are all excellent examples of what makes Whiting exceptional. Darius is a District Superintendent for
Whiting Petroleum and a landowner in North Dakota. Patricia oversees Whiting’s petrophysics and rock physics characterization
across the Company. Kyle is the Assistant Operations Supervisor over the Sanish and Cassandra fields.
These are just three examples from the 830 employees that work every day to make Whiting a premier U.S. operator.
While the story for each of our employees is unique, every person working for our Company approaches their
work with the WLL Power required to drive our singular goal of delivering industry leading capital efficiency in
the development of unconventional oil and gas resources.
Corporate Overview
eadquartered in Denver, Colorado, Whiting Petroleum Corporation is an
independent oil and gas company that develops, exploits, acquires and
explores for crude oil, natural gas and natural gas liquids primarily in
H
the Rocky Mountain regions of the United States. We are focused primarily
on organic exploration and development activity, both on grassroots
oil plays and on the development of previously acquired properties.
Our core assets provide the opportunity for repeatable success
and meaningful production growth. We lead the industry with
our competitive asset base, dedication to technology and
record setting results. Whiting is a competitive company,
with a strong plan for the future. The Company’s
shares are traded on the NYSE under the stock
symbol WLL.
FINANCIAL & OPERATIONS SUMMARY
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS, PER UNIT PRICES, RATIOS AND WELL AND ACREAGE STATISTICS)
INCOME STATEMENT & CASH FLOW
2017
2016
2015
Oil, NGL & Natural Gas Sales
$
1,481.4
1,285.0
$ 2,092.5
Net Income (Loss)
$
(1,237.6)
$ (1,339.1)
$
(2,219.3)
Earnings (Loss) per Common Share, Diluted
$
(13.65)
$
(21.27)
$
(45.41)
Weighted Average Shares Outstanding, Diluted
90.683
62.967
48.868
Net Cash Provided by Operating Activities
$
577.1
$
595.0
Net Cash Provided by (Used in) Investing Activities
Net Cash Provided by (Used in) Financing Activities
$
$
73.4
$
(222.6)
155.6
$
(315.3)
$
$
$
1,051.4
(1,982.1)
868.7
2014
3,024.6
64.7
2.12
2013
2,666.5
366.0
12.25
$
$
$
30.630
29.897
1,815.3
$
1,744.7
(2,860.5)
$
(1,902.5)
423.9
$
812.4
$
$
$
$
$
$
BALANCE SHEET
Total Assets
Long-Term Debt
Total Equity
2017
2016
2015
2014
2013
$ 8,403.0
$
9,876.1
$ 11,389.1
$ 13,993.1
$ 2,764.7
$
3,535.3
$ 3,919.1
$
5,149.2
$
$
5,197.7
4,758.6
$
$
5,602.4
5,703.0
$
$
$
8,802.5
2,622.9
3,836.7
41%
Debt-to-Capitalization Ratio
49%
41%
52%
50%
2016
2015
2014
2013
47.2
5.5
41.1
59.6
40.95
12.67
2.20
38.76
$
$
$
$
33.5
3.3
30.2
41.8
27.0
2.8
26.9
34.3
$
$
$
$
81.50
$ 90.39
39.17
$ 40.41
5.53
$ 4.04
73.38
$ 76.76
GROSS
4,775
NET
1,980
802,681
490,009
253,316
156,652
PRODUCTION & AVERAGE COMMODITY PRICES
Oil Production, MMBbl
NGL Production, MMBbl
Natural Gas Production, Bcf
Total Production, MMBOE
2017
29.3
7.0
41.3
43.1
34.0
6.6
41.4
47.5
Oil Price, per Bbl, Excluding Hedging
$ 44.30 $
34.36
Natural Gas Liquids Price, per Bbl
Natural Gas Price, per Mcf
$ 16.00 $
$ 1.78 $
8.88
1.40
Sales Price, per BOE, Net of Hedging
$ 34.55 $
30.22
YEAR-END 2017 WELL COUNT & ACREAGE STATISTICS
Total Productive Wells
Developed Acreage
Undeveloped Acreage
2
2017 Highlights
RESERVES & PRODUCTION PER REGION
8%
Central Rocky
Mountains
1%
Other
91%
Northern Rocky
Mountains
Proved Reserves 617.6 MMBOE
16%
Central Rocky
Mountains
1%
Other
83%
Northern Rocky
Mountains
Q4 2017 - 128.0 MBOE/D Production
128,045BOE/D
Q4 2017 Corporate
Net Production
12%
INCREASE
OVER Q3 2017
1.0+MMBOE
Williston Basin Enhanced
Completion Type Curve
$875 MILLION
Whiting Closed $875MM Asset Sales
$116 MILLION
Q4 2017 Net Cash Provided by
Operating Activitites Exceeded Capex
3
2017 ANNUAL REPORT | WHITING PETROLEUM WLL POWER
WLL POWER
Dear Fellow Shareholders,
Dear Fellow Shareholders,
I am excited and honored to serve you as Whiting’s Chief
I am excited and honored to serve you as Whiting’s Chief
Executive Officer. Whiting’s talented people and quality
Executive Officer. Whiting’s talented people and quality
assets provide a strong platform to achieve our vision
assets provide a strong platform to achieve our vision
of setting the standard of excellence for capital efficient
of setting the standard of excellence for capital efficient
development of unconventional oil and gas assets. This report
development of unconventional oil and gas assets. This report
is organized around the three pillars of our corporate philosophy:
is organized around the three pillars of our corporate philosophy:
People, Company and Culture. As you read through it you will
People, Company and Culture. As you read through it you will
see what attracted me to Whiting and what I believe serves as
see what attracted me to Whiting and what I believe serves as
the foundation for an enduring great company.
the foundation for an enduring great company.
despite
despite
I chose to focus this report primarily on the People at Whiting
I chose to focus this report primarily on the People at Whiting
because their integrity, dedication to excellence and spirit of
because their integrity, dedication to excellence and spirit of
innovation are what drove
innovation are what drove
the performance behind the
the performance behind the
results you see on the following
results you see on the following
pages. A fine example of this
pages. A fine example of this
is our well performance in the
is our well performance in the
Williston Basin. Since 2014,
Williston Basin. Since 2014,
well costs have decreased
well costs have decreased
increasing
22%
22%
increasing
proppant volumes by 153%.
proppant volumes by 153%.
Performance has also been
Performance has also been
excellent, with our average
excellent, with our average
enhanced completion well
enhanced completion well
tracking above a 1.0 MMBOE
tracking above a 1.0 MMBOE
type curve. In addition to a fine
type curve. In addition to a fine
‘homegrown’ employee base
‘homegrown’ employee base
(the majority of our employees
(the majority of our employees
in the Williston Basin are upper
in the Williston Basin are upper
Midwest
natives), Whiting
Midwest
natives), Whiting
has built strong ties to the
has built strong ties to the
communities where it operates
communities where it operates
as profiled in the “People”
as profiled in the “People”
section of this report. These
section of this report. These
connections
that
connections
that
Whiting can operate safely and responsibly as well as efficiently
Whiting can operate safely and responsibly as well as efficiently
and profitably.
and profitably.
ensure
ensure
The Company has a first-class acreage position of over 400,000
The Company has a first-class acreage position of over 400,000
net acres in the Williston Basin. Production has grown from
net acres in the Williston Basin. Production has grown from
14,200 BOE/D when Whiting began full-scale development
14,200 BOE/D when Whiting began full-scale development
in the Williston Basin in 2008 to 106,850 BOE/D in the fourth
in the Williston Basin in 2008 to 106,850 BOE/D in the fourth
quarter of 2017. With oil comprising 68% of production
quarter of 2017. With oil comprising 68% of production
volumes, the Company benefits from robust cash margins
volumes, the Company benefits from robust cash margins
4
4
and strong cash flow. In the fourth quarter of 2017, corporate
and strong cash flow. In the fourth quarter of 2017, corporate
production volumes grew 12% from third quarter levels and
production volumes grew 12% from third quarter levels and
net cash provided by operating activities exceeded capex
net cash provided by operating activities exceeded capex
by $116 million. Whiting’s Williston Basin asset base is truly
by $116 million. Whiting’s Williston Basin asset base is truly
a value machine with the ability to generate growth and free
a value machine with the ability to generate growth and free
cash flow, which we believe differentiates the Company from
cash flow, which we believe differentiates the Company from
the competition.
the competition.
these values so
these values so
Culture is the element of a great organization that allows it
Culture is the element of a great organization that allows it
to adapt to change and thrive in turbulent times. Whiting’s
to adapt to change and thrive in turbulent times. Whiting’s
core values include integrity, innovation and empowering our
core values include integrity, innovation and empowering our
workforce to deliver industry-leading results. We pledge to
workforce to deliver industry-leading results. We pledge to
that
uphold
that
uphold
we can deliver the consistent
we can deliver the consistent
performance and execution that
performance and execution that
increases equity value year after
increases equity value year after
year. As your CEO, I pledge that
year. As your CEO, I pledge that
I will adhere to these values. I will
I will adhere to these values. I will
also communicate our goals to
also communicate our goals to
you in a straightforward manner
you in a straightforward manner
with no excuses if we fall short.
with no excuses if we fall short.
I am a believer that greatness is
I am a believer that greatness is
achieved through ‘grinding out’ a
achieved through ‘grinding out’ a
simple, well executed strategy.
simple, well executed strategy.
like
like
I would
to close by
to close by
I would
acknowledging my predecessor,
acknowledging my predecessor,
Jim Volker. Jim is a true captain
Jim Volker. Jim is a true captain
of our industry. He grew Whiting
of our industry. He grew Whiting
from 17,000 BOE/D at our IPO
from 17,000 BOE/D at our IPO
in 2003 to 128,045 BOE/D in
in 2003 to 128,045 BOE/D in
Q4 2017. Jim had the WLL
Q4 2017. Jim had the WLL
Power to be a key leader in
Power to be a key leader in
the unconventional oil and gas
the unconventional oil and gas
revolution which has transformed
revolution which has transformed
our country into an energy superpower. As you walk through
our country into an energy superpower. As you walk through
the doors of our headquarters in Denver, Colorado, you will see
the doors of our headquarters in Denver, Colorado, you will see
a trophy dedicated to Jim Volker – Wildcatter of the Year 2012.
a trophy dedicated to Jim Volker – Wildcatter of the Year 2012.
This is a rare honor bestowed only upon the true pioneers of
This is a rare honor bestowed only upon the true pioneers of
our industry. Jim, we thank you for your 34 years of service to
our industry. Jim, we thank you for your 34 years of service to
Whiting. The team at Whiting is proud of you and looks to build
Whiting. The team at Whiting is proud of you and looks to build
upon the legacy that Ken Whiting and Jim Volker created.
upon the legacy that Ken Whiting and Jim Volker created.
Sincerely,
Sincerely,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FEBRUARY 22, 2018
Headquarters
Denver, Colorado
Field Location
Headquarters
5
2017 ANNUAL REPORT | WHITING PETROLEUM Asset Overview
Our goal is to generate meaningful growth in shareholder value through the development
of our assets.
Williston Basin
Q4 2017 Net Production
of 106,850 BOE/D
the
is one of
Whiting
largest
producers in the oil-rich Williston
Basin of North Dakota and Montana,
which encompasses
the prolific
Bakken and Three Forks formations.
Since our Sanish field discovery
leader
in 2007, we’ve been a
in the development of new well
designs, midstream
infrastructure
and operating processes. We
control one of the largest acreage
positions in the Williston Basin with
approximately 409,600 net acres
that hold approximately 1,680
potential net drilling locations.
The Williston Basin provides a quality
asset for our team to develop. As our
understanding of the Williston grows,
our teams are able to extract more
out of each well and continue driving
greater efficiencies in the basin.
WILLIAMS
ND
MT
MOUNTRAIL
MCKENZIE
MCLEAN
DUNN
Enhanced Completion
WLL Acreage
WILLISTON BASIN ENHANCED COMPLETIONS ABOVE 1,000 MBOE TYPE CURVE
0 M B O E
0
1 , 5
1 , 0 0 0 M B O E
50
100
150
200
250
300
350
400
DAYS
1,500 MBOE Type Curve
8+MMlb Average Cumulative Production1
7+MMlb Average Cumulative Production2
1,000 MBOE Type Curve
(1) Data set includes 55 wells completed since January
2015 in McKenzie, Mountrail and Williams Counties, North
Dakota with 8+MMLbs of sand.
(2) Data set includes 85 wells completed since January
2016 in McKenzie, Mountrail and Williams Counties, North
Dakota with 7+MMLbs of sand.
350,000
300,000
250,000
200,000
150,000
100,000
50,000
E
O
B
6
Total Net Production in Q4 2017
128,045BOE/D
DJ Basin
Q4 2017 Net Production of
20,625 BOE/D
In the oil-prone sweet spot of the eastern DJ
Basin of Colorado, we have approximately
100,000 net acres. Similar to our Bakken and
Three Forks acreage position, we are utilizing the
latest technology to develop multiple horizons,
which include the Niobrara “A”, “B”, and “C” and
Codell/Fort Hays formations.
WYOMING
CO
Laramie
Kimball
REDTAIL
FIELD AREA
Weld
Larimer
Boulder
Morgan
O M IN ER AL BELT
WATTENBERG
FIELD AREA
O L O R A D
N O F C
E XTE N SIO
WLL Acreage
REDTAIL FIELD NET PRODUCTION GROWTH
25,000
20,000
D
/
E
O
B
15,000
10,000
5,000
0
5
2
0 , 6
2
7 , 6 3 5
0
1
6 , 6
0
5
1 , 7
1
Q1 2017
Q2 2017
Q3 2017
Q4 2017
7
2017 ANNUAL REPORT | WHITING PETROLEUM Productivity / Operational Focus
The People Driving Our Operational Excellence
More oil is being found and produced every day through the hard work and ingenuity of the minds working at Whiting Petroleum.
Our team continues to find ways to drive down costs while improving production rates and overall economics for every drilling
spacing unit (DSU) the Company develops. Multi-disciplinary teams evaluate and optimize operations at each of our assets
through a quarterly technical review (QTR) process. These teams work together to ensure that every DSU drilled by Whiting
across its asset base is better than the last.
The knowledge and collective experience held in the QTRs is a tremendous asset to Whiting. The work done by these teams
leads to greater effectiveness at the asset level, and ultimately, a stronger company.
Williston Basin Drill Times
34% Decline from Beginning of 2014
Our experience and depth of knowledge in the Williston
Basin allows us to constantly improve our operations
in the region. From 2014 through the end of
2017, Whiting has reduced the time it takes
to drill a well by 34%. The use of state-
s
y
a
D
of-the-art drilling rigs, high-torque mud
motors and 3D bit cutter technology
have contributed to the significant
improvement in drill times. Our
vast experience has allowed
20
18
16
14
12
10
8
6
4
2
0
15.5
34% Reduction
13.6
11.2
10.2
2014
2015
2016
2017
us to drill more than 6,500
miles of wellbore since 2006.
Average Number of Stages
28% Increase from 2014
Whiting increased the stages across its 10,000’ lateral wellbores to
stimulate larger rock volumes and increase productivity. In 2017, Whiting
averaged 41 stages per 10,000’ lateral, an increase of 28% from 2014. Our
our
team
core analysis
located
in Denver offers
operations
teams a level of insight
unparalleled in the industry.
Whiting is able to understand
the relationship between pore
density and the ability of liquids
to move through the rock on the
2017
2016
2015
2014
28%
Increase
41
37
33
32
microscopic level thanks to work done by this team.
The information gained from the core analysis team allows the Company to characterize the whole reservoir.
This detailed understanding of the asset gives us an understanding of the rock which has driven the move toward
more stages for each well.
8
Productivity / Operational Focus
Average Proppant
153% Increase from 2014
Along with an increase in the number of stages in each well, the Company is also improving
the economics of each well through the use of more proppant. In the last four years, the average
proppant per well has increased 153% to 9.1 MMLb as our completion engineers worked with our
geotechnical staff to evaluate drilling results and optimize well performance.
Again, it is thanks to the knowledge our teams hold that we continue to lead the industry in adopting superior
completion designs. The analysis done by Whiting’s employees continues to inform our decisions on each new
DSU we develop and improve completion designs with each new well we drill.
3 %
5
1
8.5
9.1
b
L
M
M
10
9
8
7
6
5
4
3
2
1
0
4.5
3.6
2014
2015
2016
2017
Average Total Well Cost
22% Decrease from 2014
While implementing each of these changes that contributed to higher well productivity, our employees streamlined
operations and adopted new cost saving approaches to lower our well costs. The average per well cost reached $7.1 million
in 2017, down 22% from 2014.
This improvement speaks to the culture of efficiency we are building at Whiting. Our team has the WLL Power to continually
improve and to increase our knowledge with each passing day to maximize the productivity of every dollar spent for our
shareholders. Lower well costs are a testament not just to the quality of our assets but also the quality of our people.
$10.00
$9.13
22%
$7.85
$7.16
$7.14
M
M
$
$9.00
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$–
2014
2015
2016
2017
9
2017 ANNUAL REPORT | WHITING PETROLEUM People Are Our Assets
Whiting Petroleum believes our strength comes from the people who make up our team.
We make it a priority to hire people from the communities where we operate. Their
involvement and commitment to our communities is unmatched and immeasurable.
Darius
Frick
Patricia
Rodrigues
D
e
n
v
e
r
O
ffi
Petrophysicist
Patricia
e
c
Rodrigues moved
to Denver, Colorado
from Venezuela 14 years
ago. Today, with her PhD from
the Colorado School of Mines,
Patricia is married with two children
and four step-children. She oversees Whiting’s petrophysics
and rock physics for reservoir characterization and exploration
support across the Company. She has technical publications in
Society of Petroleum Engineers (SPE) and Society of Exploration
Geophysicists (SEG) as well as FUEL and Geophysics magazines.
Patricia was born in Venezuela to Portuguese immigrants.
She studied Chemical Engineering from Universidad Simon
Bolivar in Caracas where she received both her Bachelor’s
and Master’s degrees. She also received a Master’s degree
in Reservoir Engineering. After working for the Venezuelan
state-owned oil and natural gas company for six years,
she moved to the United States. After completing her PhD
in Geophysics with a minor in Petroleum Engineering, she
joined Whiting Petroleum. With over 21 years of experience,
she has pursued the incorporation of seismic technologies
for exploration while managing Whiting’s petrophysical work.
When Patricia is not busy at Whiting or with her family,
she enjoys serving as a bilingual volunteer. She served as a
volunteer firefighter in Venezuela and has also volunteered
with the United Nations Development Program and the
Centura HealthSET (Service, Empowerment, Transformation)
in Denver. She remains active in the Denver Well Logging
Society and the Rocky Mountain Association of Geologists.
W
a
tf
o
r
d
Darius Frick
embodies
C
it
ffi
O
e
y
c
the
Dakota way
North
of
life. As the Northwest
Williston Basin District
Superintendent, he oversees
Whiting’s operations in some of
our most productive fields. Darius, his wife Marna, three sons
and their families, including two granddaughters, all call the
family’s land overlooking Lake Sakakawea home. Just miles
outside Watford City, that land is the same land Marna’s family
homesteaded in 1914. Their current family home stands just
several hundred feet from the original homestead site.
A North Dakota native, Darius embraced the oil and gas industry
by working on a rig during the Bakken’s first boom in 1981.
Over the next 25 years, Darius progressed through companies
and positions. He joined Whiting as a Rig Supervisor in 2006.
Today, as the Northwest Williston Basin Superintendent, he
manages our Hidden Bench and Missouri Breaks fields.
Throughout Watford City and Whiting, Darius is known as a
person you can count on for help. The community relations
framework Whiting is known for was created in large part thanks
to Darius. Serving on local bank and county boards, while
avidly volunteering for Relay for Life, he also leads Whiting’s
community relations efforts in Watford City. In twelve years, he
has raised hundreds of thousands of dollars while supporting
local events and charities in McKenzie County.
The success of the Bakken sent Darius’ three sons to college
and allowed them to return home to promising careers. As
they each build their families, they’re doing it on family land with
each other. Regardless of the season, you can find the family
outside fishing, hunting or saddling up their horses, embracing
the North Dakota lifestyle they never plan to leave.
10
Kyle
Christianson
R
o
b
i
n
s
o
n
L
a
k
e
O
ffi
c
e
The energy Kyle Christianson
puts into his community knows
no limit. Married with three kids, the
Parshall, North Dakota native still calls the
small town home. As the Mayor and Fire Chief, he
spends most of his free time giving back to his community
of 1,200 people. He has also spent the past decade working as
the Assistant Operations Supervisor at Whiting, overseeing our Sanish
and Cassandra fields.
Over his 21 years as a volunteer firefighter for the Parshall Rural Fire Protection District, Kyle has witnessed the
Bakken’s growth from a unique perspective. When he first started volunteering, the fire equipment dated back to
the 1950’s. As North Dakota’s oil and gas production boomed, oil companies, including Whiting, came to the aid of
the fire department. In 2017, a brand new $4 million fire house filled with 9 modern firefighting vehicles was completed.
As Fire Chief, Kyle now leads 19 volunteer firefighters who cover 550 square miles and up to 150 calls a year.
Kyle also serves as Parshall’s Mayor. As he seeks a second term in 2018, he admits the reason is his three children. He wants to
make sure their hometown continues to be a great place to live.
34 Years in the Making
It has been a great honor to serve Whiting as Chairman, President
and CEO. Over my 34 years with Whiting, we transformed it from a
small private enterprise to a top US and NYSE oil producer that led
the way in the discovery and now the continuing major development
of the world class unconventional Bakken oil field. It was my great
fortune to preside over this period of rapid growth. With our top-
of-class team of professionals, we set production records in the
Bakken and pioneered in building the clean gathering and processing
infrastructure to unlock the basin’s potential.
I am extremely grateful and proud to have led the Whiting team that
helped transform and re-energize the United States economy with the
safe and affordable energy provided by the shale revolution. US crude
oil and liquids production is up 6 million barrels per day from its low
and natural gas exports are at the highest level in 50 years. The United
States is once again an energy superpower. Whiting’s contribution to
this achievement has been the highlight of my professional life. I credit
the incredible people at Whiting and in the investment community that
worked alongside me for this achievement.
It is with great confidence and expectations that I hand the reins over
to our new CEO, Brad Holly. Brad has the expertise, energy and
values to take the company to the next level. Brad brings executive
level experience across multiple large scale unconventional oil and gas
projects to Whiting. This will enable Whiting to continue to develop
its world-class assets in a profitable, efficient and environmentally
friendly manner.
You have my profound gratitude and my confidence in “All the Best”
for Whiting Petroleum Corporation.
Sincerely,
James J. Volker
Chairman of the Board
2017 ANNUAL REPORT | WHITING PETROLEUM
11
11
2017 ANNUAL REPORT | WHITING PETROLEUM
Sustainability / Community
At Whiting, we believe we have a responsibility to leave a positive impact on the communities
where we do business. We strive to protect the land, air and water where we operate while
providing a social benefit to those living there.
Prewitt Ranch Wetland Enhancement Project
The Bird Conservancy of the Rockies has been leading the Prewitt Ranch
Wetland Enhancement Project. In 2017, Whiting joined the effort with
the US Fish and Wildlife Service’s Partners for Fish and Wildlife, the
Natural Resources Conservation Service and Ducks Unlimited.
The Prewitt Ranch Wetland Reserve program easement
is in Washington County, Colorado near the Prewitt
Reservoir. This area provides wetland habitat for
many bird species such as waterfowl, shorebirds, birds of prey and perching birds.
Local landowners can voluntarily enter the program and work with the Natural
Resources Conservation Service to manage the land.
The project is focused on water level control within these wetlands. The
ability to manage the water level prevents cattail growth from choking
out plant species that birds and other wildlife use for food and shelter.
Through our partnership with the Bird Conservancy of the Rockies,
we help install new structures to facilitate drying out the wetlands for
cattail management. We also hope to provide consistent shallow, open water
wetlands that will grow food for migratory and wintering bird species. Whiting is
proud to be a part of the project. We look forward to maintaining the vital bird habitat
in the Prewitt Ranch area in the future.
Denver Mountain Parks Foundation
Denver has always been home to Whiting’s
corporate office. Our employees enjoy the
recreational lifestyle Denver offers, largely
through the parks system. In 2017,
Whiting partnered with the Denver
Mountain Parks Foundation to restore
the historical integrity, relevance and quality
to the city’s park system. Our employees raised over $85,000 dollars to
enable the protection and restoration of the parks. In December 2017, Mayor
Michael Hancock met with representatives from Whiting, including our CEO, Brad
Holly, to accept the gift on behalf of the city of Denver.
The Denver Mountain Parks Foundation was formed in 2004 to support the Denver
Department of Parks and Recreation in revitalizing the Mountain Parks system. The Foundation’s
goal is to develop a greater public presence through expanded fundraising, partnerships, educational
programs and events. The money Whiting raised will enable the restoration of the historic shelter, well-
houses and other significant architectural features found in the 14,100 acre Mountain Parks system.
Whiting was proud to show its appreciation for Denver’s Mountain Parks system and to do our part to ensure its
future as a recreational, educational and open space resource for the City of Denver.
12
Grasslands
In May, Whiting Petroleum partnered
with CBS4 Denver, the US Forest
Service and the Bird Conservancy of
the Rockies to create a multilingual
conservation
program promoting
education. The show “Grasslands
LIVE” received one of the highest awards from the United States Forest Service in 2017.
“Grasslands LIVE” was geared toward students and teachers interested in the environment
and wildlife in North America’s grasslands. Filmed on our Redtail acreage in Weld County,
Colorado, the program made connections for students through a variety of innovative methods.
The hour-long program included discussions with experts, including a petroleum engineer from
Whiting, Mike Stahl. The show also focused on historical and current Native American use of grasslands,
fossils and paleontology, bird conservation and research, wildlife, ranching and agriculture, energy
development and multiple use balance.
As a sponsor, Whiting had the opportunity to create a segment for the program. In our segment,
we focused on our relationship with the land where we operate and our landowners. The
goal was to explain how we protect the land while proactively demonstrating the positive
impact oil and gas development has on our lives. We believe it created a positive
impact on the perception of the industry and our relationship with the environment.
In December, “Grasslands LIVE” was awarded the Chief’s Honor Award for
Delivering Benefits to the Public. With over 85 applicants, it was an honor
for Whiting to be recognized. In total, the program reached nearly
170,000 people worldwide. We also distributed the program to
teachers throughout North Dakota through the North Dakota
Petroleum Council’s annual teacher outreach campaign.
Developing this educational resource for students,
educators and others interested in the grassland
ecology curriculum and field-based
demonstrates Whiting’s
collaboration with our environmental
partners. The new relationships with
environmental partners allow Whiting
to further focus on the protection
and conservation of protected
lands.
learning
in
innovation
2017 ANNUAL REPORT | WHITING PETROLEUM
13
13
2017 ANNUAL REPORT | WHITING PETROLEUM Board of Directors
Board of Directors
JAMES J. VOLKER
JAMES J. VOLKER
WILLIAM N. HAHNE
WILLIAM N. HAHNE
THOMAS L. ALLER
THOMAS L. ALLER
JAMES E. CATLIN
JAMES E. CATLIN
James J. Volker serves as Chairman of the
James J. Volker serves as Chairman of the
Board and has been a director of Whiting
Board and has been a director of Whiting
He
Petroleum Corporation since 2003.
He
Petroleum Corporation since 2003.
joined Whiting in 1983 as Vice President of
joined Whiting in 1983 as Vice President of
Corporate Development and served in that
Corporate Development and served in that
position through 1993. In 1993, he became a
position through 1993. In 1993, he became a
contract consultant to Whiting and served in that
contract consultant to Whiting and served in that
capacity until 2000, at which time he became
capacity until 2000, at which time he became
Executive Vice President and Chief Operating
Executive Vice President and Chief Operating
Officer. Mr. Volker was appointed President and
Offi cer. Mr. Volker was appointed President and
Chief Executive Officer of Whiting in 2002 and
Chief Executive Offi cer of Whiting in 2002 and
served in those roles through his retirement
served in those roles through his retirement
on November 1, 2017. He served as Executive
on November 1, 2017. He served as Executive
Chairman of the Board from November 1, 2017
Chairman of the Board from November 1, 2017
through December 31, 2017. Mr. Volker was
through December 31, 2017. Mr. Volker was
co-founder, Vice President and later President
co-founder, Vice President and later President
of Energy Management Corporation from 1971
of Energy Management Corporation from 1971
through 1982. He has 45 years of experience in
through 1982. He has 45 years of experience in
the oil and natural gas industry. Mr. Volker has a
the oil and natural gas industry. Mr. Volker has a
degree in finance from the University of Denver,
degree in fi nance from the University of Denver,
an MBA from the University of Colorado and
an MBA from the University of Colorado and
has completed H. K. VanPoolen and Associates’
has completed H. K. VanPoolen and Associates’
course of study in reservoir engineering.
course of study in reservoir engineering.
William N. Hahne has been a director since
William N. Hahne has been a director since
2007 and currently serves as our Lead Director.
2007 and currently serves as our Lead Director.
Mr. Hahne was Chief Operating Officer of
Mr. Hahne was Chief Operating Offi cer of
Petrohawk Energy Corporation
from 2006
from 2006
Petrohawk Energy Corporation
until 2007. Mr. Hahne served at KCS Energy,
until 2007. Mr. Hahne served at KCS Energy,
Inc. as President, Chief Operating Officer and
Inc. as President, Chief Operating Offi cer and
Director from 2003 to 2006, and as Executive
Director from 2003 to 2006, and as Executive
Vice President and Chief Operating Officer from
Vice President and Chief Operating Offi cer from
1998 to 2003. He is a graduate of Oklahoma
1998 to 2003. He is a graduate of Oklahoma
University with a BS in petroleum engineering
University with a BS in petroleum engineering
and has over 40 years of extensive technical
and has over 40 years of extensive technical
and management experience with independent
and management experience with independent
oil and gas companies
including Unocal,
including Unocal,
oil and gas companies
Union Texas Petroleum Corporation, NERCO,
Union Texas Petroleum Corporation, NERCO,
The Louisiana Land and Exploration Company
The Louisiana Land and Exploration Company
(LL&E) and Burlington Resources, Inc. He is an
(LL&E) and Burlington Resources, Inc. He is an
expert in oil and gas reserve estimating, having
expert in oil and gas reserve estimating, having
served as chairman for the Society of Petroleum
served as chairman for the Society of Petroleum
Engineers Oil and Gas Reserve Committee.
Engineers Oil and Gas Reserve Committee.
Thomas L. Aller has been a director of
Thomas L. Aller has been a director of
Whiting Petroleum Corporation since 2003
Whiting Petroleum Corporation since 2003
and currently serves as Chairman of our
and currently serves as Chairman of our
Compensation Committee. Mr. Aller retired as
Compensation Committee. Mr. Aller retired as
Senior Vice President of Operations Support for
Senior Vice President of Operations Support for
Alliant Energy Corporation in 2014. He served
Alliant Energy Corporation in 2014. He served
as Senior Vice President — Energy Resource
as Senior Vice President — Energy Resource
Development of Alliant Energy Corporation
Development of Alliant Energy Corporation
from 2009 to 2013 and President of Interstate
from 2009 to 2013 and President of Interstate
Power and Light Company since 2004. Prior to
Power and Light Company since 2004. Prior to
that, he served as President of Alliant Energy
that, he served as President of Alliant Energy
Investments, Inc. since 1998 and interim
Investments, Inc. since 1998 and interim
Executive Vice President — Energy Delivery
Executive Vice President — Energy Delivery
of Alliant Energy Corporation since 2003 and
of Alliant Energy Corporation since 2003 and
Senior Vice President — Energy Delivery of
Senior Vice President — Energy Delivery of
Alliant Energy Corporation since 2004. From
Alliant Energy Corporation since 2004. From
1993 to 1998, he served as Vice President of
1993 to 1998, he served as Vice President of
IES Investments. He received his Bachelor’s
IES Investments. He received his Bachelor’s
Degree in political science from Creighton
Degree in political science from Creighton
University and his Master’s Degree in municipal
University and his Master’s Degree in municipal
administration from the University of Iowa.
administration from the University of Iowa.
James E. Catlin has been a director of Whiting
James E. Catlin has been a director of Whiting
Petroleum Corporation since 2014. Mr. Catlin
Petroleum Corporation since 2014. Mr. Catlin
was a co-founder of Kodiak Oil & Gas Corp.
was a co-founder of Kodiak Oil & Gas Corp.
(“Kodiak”) and served at Kodiak as a director
(“Kodiak”) and served at Kodiak as a director
since 2001 and Executive Vice President of
since 2001 and Executive Vice President of
Business Development since 2011 until we
Business Development since 2011 until we
acquired Kodiak in December 2014. Mr. Catlin
acquired Kodiak in December 2014. Mr. Catlin
also previously served as Kodiak’s Chairman of
also previously served as Kodiak’s Chairman of
the Board from 2002 until 2011, Secretary from
the Board from 2002 until 2011, Secretary from
2002 to 2008 and Chief Operating Officer from
2002 to 2008 and Chief Operating Offi cer from
2006 until 2011. Mr. Catlin has over 40 years
2006 until 2011. Mr. Catlin has over 40 years
of geologic experience primarily in the Rocky
of geologic experience primarily in the Rocky
Mountain Region. Mr. Catlin was an owner of CP
Mountain Region. Mr. Catlin was an owner of CP
Resources LLC, an independent oil and natural
Resources LLC, an independent oil and natural
gas company from 1986 to 2001. Mr. Catlin
gas company from 1986 to 2001. Mr. Catlin
was a Founder, Vice President and Director of
was a Founder, Vice President and Director of
Deca Energy from 1980 to 1986 and worked as
Deca Energy from 1980 to 1986 and worked as
a district geologist for Petroleum Inc. and Fuelco
a district geologist for Petroleum Inc. and Fuelco
prior to this time. He received a Bachelor of Arts
prior to this time. He received a Bachelor of Arts
and a Master’s of Science Degree in geology
and a Master’s of Science Degree in geology
from the University of Northern Illinois in 1973.
from the University of Northern Illinois in 1973.
PHILIP E. DOTY
PHILIP E. DOTY
BRAD HOLLY
BRADLEY J. HOLLY
CARIN S. KNICKEL
CARIN S. KNICKEL
MICHAEL B. WALEN
MICHAEL B. WALEN
Philip E. Doty has been a director of Whiting
Philip E. Doty has been a director of Whiting
Petroleum Corporation since 2010 and currently
Petroleum Corporation since 2010 and currently
serves as Chairman of our Audit Committee.
serves as Chairman of our Audit Committee.
Mr. Doty is a certified public accountant. Since
Mr. Doty is a certifi ed public accountant. Since
2007, Mr. Doty has been counsel to EKS&H
2007, Mr. Doty has been counsel to EKS&H
LLP, the largest Colorado-based accounting
LLP, the largest Colorado-based accounting
and consulting firm, where he previously was a
and consulting fi rm, where he previously was a
partner from 2002 to 2007. From 1967 to 2000
partner from 2002 to 2007. From 1967 to 2000
he worked at Arthur Andersen & Co., where he
he worked at Arthur Andersen & Co., where he
was a partner since 1978 and served as the
was a partner since 1978 and served as the
audit partner and head of the Denver office oil
audit partner and head of the Denver offi ce oil
and gas practice until his retirement in 2000.
and gas practice until his retirement in 2000.
He is a graduate of Drake University with a
He is a graduate of Drake University with a
Bachelor’s Degree in accounting.
Bachelor’s Degree in accounting.
Bradley J. Holly joined Whiting Petroleum
Bradley J. Holly joined Whiting Petroleum
Corporation
in November 2017 upon his
in November 2017 upon his
Corporation
appointment as director and election as
appointment as director and election as
President and Chief Executive Officer. Mr.
President and Chief Executive Offi cer. Mr.
Holly has 23 years of experience in the oil and
Holly has 23 years of experience in the oil and
gas industry. Prior to joining Whiting, he held
gas industry. Prior to joining Whiting, he held
various management and technical positions
various management and technical positions
during his 20 years at Anadarko Petroleum
during his 20 years at Anadarko Petroleum
Corporation including Executive Vice President,
Corporation including Executive Vice President,
U.S. Onshore Exploration and Production; Senior
U.S. Onshore Exploration and Production; Senior
Vice President, U.S. Onshore Exploration and
Vice President, U.S. Onshore Exploration and
Production; Senior Vice President, Operations;
Production; Senior Vice President, Operations;
Vice President, Operations for the Southern and
Vice President, Operations for the Southern and
Appalachia Region; among others. He began his
Appalachia Region; among others. He began his
career in 1994 with Amoco Corporation. Mr. Holly
career in 1994 with Amoco Corporation. Mr. Holly
holds a Bachelor of Science degree in petroleum
holds a Bachelor of Science degree in petroleum
engineering from Texas Tech University, and he
engineering from Texas Tech University, and he
is a graduate of the Harvard Business School’s
is a graduate of the Harvard Business School’s
Advanced Management Program.
Advanced Management Program.
Carin S. Knickel has been a director of Whiting
Carin S. Knickel has been a director of Whiting
Petroleum Corporation since 2015. Ms.
Petroleum Corporation since 2015. Ms.
Knickel’s energy industry experience includes
Knickel’s energy industry experience includes
over three decades in operations leadership in
over three decades in operations leadership in
refining, marketing, transportation, exploration,
refi ning, marketing, transportation, exploration,
and production for ConocoPhillips. She also
and production for ConocoPhillips. She also
held roles in business development, strategic
held roles in business development, strategic
planning and commodity trading, and led the
planning and commodity trading, and led the
company’s specialty products business from
company’s specialty products business from
2001 to 2003. She became Vice President of
2001 to 2003. She became Vice President of
Global Human Resources in 2003 and served
Global Human Resources in 2003 and served
on the company’s management committee
on the company’s management committee
from that time until she retired in May 2012.
from that time until she retired in May 2012.
Ms. Knickel also served as Assistant Dean
Ms. Knickel also served as Assistant Dean
for Programs and Talent for the University
for Programs and Talent for the University
of Colorado College of Engineering from
of Colorado College of Engineering from
January 2013 through July 2014. She has
January 2013 through July 2014. She has
a Bachelor’s Degree in marketing from the
a Bachelor’s Degree in marketing from the
University of Colorado and a Master’s Degree in
University of Colorado and a Master’s Degree in
management science from the Massachusetts
management science from the Massachusetts
Institute of Technology.
Institute of Technology.
Michael B. Walen has been a director of
Michael B. Walen has been a director of
Whiting Petroleum Corporation since 2013
Whiting Petroleum Corporation since 2013
and currently serves as Chairman of our
and currently serves as Chairman of our
Nominating and Governance Committee.
Nominating and Governance Committee.
Mr. Walen was the Senior Vice President —
Mr. Walen was the Senior Vice President —
Chief Operating Officer of Cabot Oil and Gas
Chief Operating Offi cer of Cabot Oil and Gas
Corporation from 2001 until 2010 and served
Corporation from 2001 until 2010 and served
in other management and exploration positions
in other management and exploration positions
prior to that time. He has over 40 years of
prior to that time. He has over 40 years of
exploration and management experience with
exploration and management experience with
independent oil and gas companies including
independent oil and gas companies including
PetroCorp Inc., Patrick Petroleum Co., TXO
PetroCorp Inc., Patrick Petroleum Co., TXO
Production Co. and Tenneco Oil Company.
Production Co. and Tenneco Oil Company.
Mr. Walen was also a director of Vitruvian
Mr. Walen was also a director of Vitruvian
Exploration from 2010 to 2013. Mr. Walen
Exploration from 2010 to 2013. Mr. Walen
holds a Bachelor’s Degree in geology from
holds a Bachelor’s Degree in geology from
Central Washington University and a Master’s
Central Washington University and a Master’s
Degree in geology from Western Washington
Degree in geology from Western Washington
University.
University.
14
14
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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: 001-31899
WHITING PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
1700 Broadway, Suite 2300
Denver, Colorado
(Address of principal executive offices)
20-0098515
(I.R.S. Employer
Identification No.)
80290-2300
(Zip code)
(303) 837-1661
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value
(Title of Class)
New York Stock Exchange
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
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
Aggregate market value of the voting common stock held by non-affiliates of the registrant at June 30, 2017: $2,002,000,000.
Number of shares of the registrant’s common stock outstanding at February 15, 2018: 90,927,193 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated by reference into Part III.
TABLE OF CONTENTS
Glossary of Certain Definitions
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Registrant
PART I
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships, Related Transactions and Director Independence
Principal Accounting Fees and Services
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
1
5
18
31
32
38
38
39
41
43
44
63
65
102
102
103
104
104
104
105
105
105
105
GLOSSARY OF CERTAIN DEFINITIONS
Unless the context otherwise requires, the terms “we”, “us”, “our” or “ours” when used in this Annual Report on Form 10-K refer to
Whiting Petroleum Corporation, together with its consolidated subsidiaries. When the context requires, we refer to these entities
separately.
We have included below the definitions for certain terms used in this Annual Report on Form 10-K:
“3-D seismic” Geophysical data that depict the subsurface strata in three dimensions. 3-D seismic typically provides a more detailed
and accurate interpretation of the subsurface strata than 2-D, or two-dimensional, seismic.
“ASC” Accounting Standards Codification.
“Bbl” One stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to oil, NGLs and other liquid hydrocarbons.
“Bcf” One billion cubic feet, used in reference to natural gas.
“BOE” One stock tank barrel of oil equivalent, computed on an approximate energy equivalent basis that one Bbl of crude oil equals
six Mcf of natural gas and one Bbl of crude oil equals one Bbl of natural gas liquids.
“Btu” or “British thermal unit” The quantity of heat required to raise the temperature of one pound of water one degree Fahrenheit.
“CO2” Carbon dioxide.
“completion” The process of preparing an oil and gas wellbore for production through the installation of permanent production
equipment, as well as perforation and fracture stimulation to optimize production.
“costless collar” An option position where the proceeds from the sale of a call option at its inception fund the purchase of a put option
at its inception.
“delay rental” Consideration paid to the lessor by a lessee to extend the terms of an oil and natural gas lease in the absence of drilling
operations and/or production that is contractually required to hold the lease. This consideration is generally required to be paid on or
before the anniversary date of the oil and gas lease during its primary term, and typically extends the lease for an additional year.
“deterministic method” The method of estimating reserves or resources using a single value for each parameter (from the geoscience,
engineering or economic data) in the reserves calculation.
“development well” A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known
to be productive.
“differential” The difference between a benchmark price of oil and natural gas, such as the NYMEX crude oil spot price, and the
wellhead price received.
“dry hole” A well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.
“EOR” Enhanced oil recovery.
“exploratory well” A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or
natural gas in another reservoir.
“extension well” A well drilled to extend the limits of a known reservoir.
“FASB” Financial Accounting Standards Board.
“field” An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural
feature and/or stratigraphic condition. There may be two or more reservoirs in a field that are separated vertically by intervening
impervious strata, or laterally by local geologic barriers, or both. Reservoirs that are associated by being in overlapping or adjacent
fields may be treated as a single or common operational field. The geological terms “structural feature” and “stratigraphic condition”
are intended to identify localized geological features as opposed to the broader terms of basins, trends, provinces, plays, areas of interest,
etc.
1
“GAAP” Generally accepted accounting principles in the United States of America.
“gross acres” or “gross wells” The total acres or wells, as the case may be, in which a working interest is owned.
“ISDA” International Swaps and Derivatives Association, Inc.
“lease operating expense” or “LOE” The expenses of lifting oil or gas from a producing formation to the surface, constituting part of
the current operating expenses of a working interest, and also including labor, superintendence, supplies, repairs, short-lived assets,
maintenance, allocated overhead costs and other expenses incidental to production, but not including lease acquisition or drilling or
completion expenses.
“LIBOR” London interbank offered rate.
“MBbl” One thousand barrels of oil, NGLs or other liquid hydrocarbons.
“MBbl/d” One MBbl per day.
“MBOE” One thousand BOE.
“MBOE/d” One MBOE per day.
“Mcf” One thousand cubic feet, used in reference to natural gas.
“MMBbl” One million barrels of oil, NGLs or other liquid hydrocarbons.
“MMBOE” One million BOE.
“MMBtu” One million British Thermal Units, used in reference to natural gas.
“MMcf” One million cubic feet, used in reference to natural gas.
“MMcf/d” One MMcf per day.
“net acres” or “net wells” The sum of the fractional working interests owned in gross acres or wells, as the case may be.
“net production” The total production attributable to our fractional working interest owned.
“NGL” Natural gas liquid.
“NYMEX” The New York Mercantile Exchange.
“PDNP” Proved developed nonproducing reserves.
“PDP” Proved developed producing reserves.
“plug-and-perf technology” A horizontal well completion technique in which hydraulic fractures are performed in multiple stages, with
each stage utilizing a bridge plug to divert fracture stimulation fluids through the casing perforations into the formation within that stage.
“plugging and abandonment” Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum
will not escape into another or to the surface. Regulations of most states legally require plugging of abandoned wells.
“pre-tax PV10%” The present value of estimated future revenues to be generated from the production of proved reserves calculated in
accordance with the guidelines of the SEC, net of estimated lease operating expense, production taxes and future development costs,
using costs as of the date of estimation without future escalation and using an average of the first-day-of-the month price for each of the
12 months within the fiscal year, without giving effect to non-property related expenses such as general and administrative expenses,
debt service and depreciation, depletion and amortization, or federal income taxes and discounted using an annual discount rate of 10%.
Pre-tax PV10% may be considered a non-GAAP financial measure as defined by the SEC. Refer to the footnote to the Proved Reserves
table in Item 1. “Business” of this Annual Report on Form 10-K for more information.
“prospect” A property on which indications of oil or gas have been identified based on available seismic and geological information.
2
“proved developed reserves” Proved reserves that can be expected to be recovered through existing wells with existing equipment and
operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well.
“proved reserves” Those reserves which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to
be economically producible—from a given date forward, from known reservoirs and under existing economic conditions, operating
methods and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates
that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project
to extract the hydrocarbons must have commenced, or the operator must be reasonably certain that it will commence the project, within
a reasonable time.
The area of the reservoir considered as proved includes all of the following:
a.
b.
The area identified by drilling and limited by fluid contacts, if any, and
Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and
to contain economically producible oil or gas on the basis of available geoscience and engineering data.
Reserves that can be produced economically through application of improved recovery techniques (including, but not limited to, fluid
injection) are included in the proved classification when both of the following occur:
a.
Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir
as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using
reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program
was based, and
b.
The project has been approved for development by all necessary parties and entities, including governmental entities.
Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price
shall be the average price during the 12-month period before the ending date of the period covered by the report, determined as an
unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by
contractual arrangements, excluding escalations based upon future conditions.
“proved undeveloped reserves” or “PUDs” Proved reserves that are expected to be recovered from new wells on undrilled acreage, or
from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to
those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable
technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be
classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled
within five years, unless specific circumstances justify a longer time. Under no circumstances shall estimates of proved undeveloped
reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated,
unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence
using reliable technology establishing reasonable certainty.
“reasonable certainty” If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities
will be recovered. If probabilistic methods are used, there should be at least a 90 percent probability that the quantities actually recovered
will equal or exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and,
as changes due to increased availability of geoscience (geological, geophysical and geochemical) engineering, and economic data are
made to estimated ultimate recovery with time, reasonably certain estimated ultimate recovery is much more likely to increase or remain
constant than to decrease.
“recompletion” An operation whereby a completion in one zone is abandoned in order to attempt a completion in a different zone within
the existing wellbore.
“reserves” Estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given
date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable
expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and
gas or related substances to market, and all permits and financing required to implement the project.
“reservoir” A porous and permeable underground formation containing a natural accumulation of producible crude oil and/or natural
gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
3
“resource play” An expansive contiguous geographical area with known accumulations of crude oil or natural gas reserves that has the
potential to be developed uniformly with repeatable commercial success due to advancements in horizontal drilling and completion
technologies.
“royalty” The amount or fee paid to the owner of mineral rights, expressed as a percentage or fraction of gross income from crude oil
or natural gas produced and sold, unencumbered by expenses relating to the drilling, completing or operating of the affected well.
“royalty interest” An interest in an oil or natural gas property entitling the owner to shares of the crude oil or natural gas production
free of costs of exploration, development and production operations.
“SEC” The United States Securities and Exchange Commission.
“standardized measure of discounted future net cash flows” or “Standardized Measure” The discounted future net cash flows relating
to proved reserves based on the average price during the 12-month period before the ending date of the period covered by the report,
determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period (unless prices
are defined by contractual arrangements, excluding escalations based upon future conditions); current costs and statutory tax rates (to
the extent applicable); and a 10% annual discount rate.
“working interest” The interest in a crude oil and natural gas property (normally a leasehold interest) that gives the owner the right to
drill, produce and conduct operations on the property and to a share of production, subject to all royalties, overriding royalties and other
burdens and to all costs of exploration, development and operations and all risks in connection therewith.
“workover” Operations on a producing well to restore or increase production.
4
Item 1. Business
Overview
PART I
We are an independent oil and gas company engaged in development, production, acquisition and exploration activities primarily in the
Rocky Mountains region of the United States. We were incorporated in the state of Delaware in 2003 in connection with our initial
public offering.
Since our inception, we have built a strong asset base through a combination of property acquisitions, development of proved reserves
and exploration activities. Our current operations and capital programs are focused on organic drilling opportunities and on the
development of previously acquired properties, specifically on projects that we believe provide the greatest potential for repeatable
success and production growth, while selectively pursuing acquisitions that complement our existing core properties. As a result of
lower crude oil prices during 2015 and 2016, we significantly reduced our level of capital spending and focused our drilling activity on
projects that provide the highest rate of return. During 2017, we continued to focus on high-return projects that added production and
reserves through the strategic deployment of capital at our Williston Basin properties and Redtail field, while closely aligning our capital
spending with cash flows generated from operations. In addition, we continually evaluate our property portfolio and sell properties
when we believe that the sales price realized will provide an above average rate of return for the property or when the property no longer
matches the profile of properties we desire to own, such as the asset sales discussed below under “Acquisitions and Divestitures”.
As of December 31, 2017, our estimated proved reserves totaled 617.6 MMBOE and our 2017 average daily production was 118.1
MBOE/d, which results in an average reserve life of approximately 14.3 years.
The following table summarizes by core area, our estimated proved reserves as of December 31, 2017, their corresponding pre-tax
PV10% values, and our fourth quarter 2017 average daily production rates, as well as our company’s total standardized measure of
discounted future net cash flows as of December 31, 2017:
Core Area
(MMBbl) (MMBbl)
Oil
NGLs
Gas
(Bcf)
Total
%
(MMBOE) Oil
Proved Reserves (1)
Natural
Pre-Tax
PV10%
Value (2)
(in millions)
Northern Rocky Mountains (3)
298.2
133.0
787.4
562.5
53% $
3,779
Central Rocky Mountains (4)
Other (5)
Total
34.9
4.5
5.7
0.2
55.8
3.3
49.9
70%
5.2
86%
161
29
337.6
138.9
846.5
617.6
55% $
3,969
Discounted Future Income Tax Expense
(101)
4th Quarter 2017
Average Daily
Production
(MBOE/d)
106.8
20.6
0.6
128.0
Standardized Measure of Discounted Future Net Cash Flows
_____________________
(1) Oil and gas reserve quantities and related discounted future net cash flows have been derived from an oil price of $51.34 per Bbl
and a gas price of $2.98 per MMBtu, which were calculated using an average of the first-day-of-the month price for each month
within the 12 months ended December 31, 2017 as required by current SEC and FASB guidelines.
3,868
$
(2) Pre-tax PV10% may be considered a non-GAAP financial measure as defined by the SEC and is derived from the standardized
measure of discounted future net cash flows (the “Standardized Measure”), which is the most directly comparable GAAP financial
measure. Pre-tax PV10% is computed on the same basis as the Standardized Measure but without deducting future income taxes.
We believe pre-tax PV10% is a useful measure for investors when evaluating the relative monetary significance of our oil and
natural gas properties. We further believe investors may utilize our pre-tax PV10% as a basis for comparison of the relative size
and value of our proved reserves to other companies because many factors that are unique to each individual company impact the
amount of future income taxes to be paid. Our management uses this measure when assessing the potential return on investment
related to our oil and gas properties and acquisitions. However, pre-tax PV10% is not a substitute for the Standardized Measure.
Our pre-tax PV10% and Standardized Measure do not purport to present the fair value of our proved oil, NGL and natural gas
reserves.
(3) Includes oil and gas properties located in Montana and North Dakota.
5
(4) Includes oil and gas properties located in Colorado.
(5) Primarily includes non-core oil and gas properties located in Colorado, Mississippi, New Mexico, Texas and Wyoming.
During 2017, we incurred $912 million in exploration and development (“E&D”) expenditures, including $858 million for the drilling
of 238 gross (164.1 net) wells. All of these new wells resulted in productive completions.
Our current 2018 E&D budget is $750 million, which we expect to fund substantially with net cash provided by our operating activities
and cash on hand. To the extent net cash provided by operating activities is higher or lower than currently anticipated, we would adjust
our E&D budget accordingly, enter into agreements with industry partners, divest certain oil and gas property interests, adjust borrowings
outstanding under our credit facility or access the capital markets as necessary.
Acquisitions and Divestitures
During 2016 and 2017, in response to sustained lower crude oil prices, we divested of a large number of oil and gas properties and other
related assets that no longer matched the profile of properties we desire to own. Our significant acquisitions and divestitures during the
last two years are summarized below.
Acquisitions. There were no significant acquisitions during the years ended December 31, 2017 and 2016.
2017 Divestitures. In September 2017, we completed the sale of our interests in certain producing oil and gas properties located in the
Fort Berthold Indian Reservation area in Dunn and McLean counties of North Dakota, as well as other related assets and liabilities, (the
“FBIR Assets”) for aggregate sales proceeds of $500 million (before closing adjustments). The sale was effective September 1, 2017
and resulted in a pre-tax loss on sale of $402 million. The properties spanned approximately 29,600 net developed acres and consisted
of estimated proved reserves of 32 MMBOE as of December 31, 2016, representing 5% of our proved reserves as of that date. The
FBIR Assets generated 7% (or 8.3 MBOE/d) of our August 2017 average daily production.
In January 2017, we completed the sale of our 50% interest in the Robinson Lake gas processing plant located in Mountrail County,
North Dakota and our 50% interest in the Belfield gas processing plant located in Stark County, North Dakota, as well as the associated
natural gas, crude oil and water gathering systems, effective January 1, 2017, for aggregate sales proceeds of $375 million (before
closing adjustments).
2016 Divestitures. In July 2016, we completed the sale of our interest in our enhanced oil recovery project in the North Ward Estes
field in Ward and Winkler counties of Texas, including our interest in certain CO2 properties in the McElmo Dome field in Colorado
and certain other related assets and liabilities (the “North Ward Estes Properties”) for a cash purchase price of $300 million (before
closing adjustments). In addition to the cash purchase price, the buyer of the North Ward Estes Properties agreed to pay us $100,000
for every $0.01 that, as of June 28, 2018, the average NYMEX crude oil futures contract price for each month from August 2018 through
July 2021 is above $50.00/Bbl up to a maximum amount of $100 million (the “Contingent Payment”). In July 2017, the buyer paid us
$35 million to settle this Contingent Payment, resulting in a pre-tax gain of $3 million. The sale was effective July 1, 2016 and resulted
in a pre-tax loss on sale of $187 million. The North Ward Estes Properties consisted of estimated proved reserves of 120.3 MMBOE as
of December 31, 2015, representing 15% of our proved reserves as of that date, and generated 8.6 MBOE/d (or 6%) of our June 2016
average daily net production.
Business Strategy
Our goal is to generate meaningful growth in shareholder value through the development, acquisition and exploration of oil and gas
projects with attractive rates of return on capital. Specifically, we have focused, and plan to continue to focus, on the following:
Developing Existing Properties. The development of our large resource play at our Williston Basin project has become our central
objective. As of December 31, 2017, we have assembled approximately 688,200 gross (409,600 net) developed and undeveloped acres
in the Williston Basin located in North Dakota and Montana. As of December 31, 2017, we had four drilling rigs operating in this area.
At our Redtail field in the Denver Julesburg Basin (the “DJ Basin”) in Weld County, Colorado, we have assembled approximately
120,200 gross (100,000 net) developed and undeveloped acres. In response to low commodity prices, we suspended completion
operations in this area beginning in the second quarter of 2016, however, we resumed completion activity during the first quarter of
2017 and added a second completion crew in April 2017. During 2017, we completed and brought on production a significant portion
of our drilled uncompleted well inventory (“DUCs”) from yearend 2016. During the fourth quarter of 2017, based on the recent and
comparative well performance results of the DJ Basin to the Williston Basin, our management decided to concentrate development
activities during 2018 in the Williston Basin. We plan to complete 22 DUCs in our Redtail field during the first half of 2018, and then
cease additional development activity in this area until commodity prices further recover.
6
Our Redtail gas plant processes the associated gas produced from our wells in this area, and has a current inlet capacity of 50 MMcf/d.
As of December 31, 2017, the plant was processing 26 MMcf/d.
Disciplined Financial Approach. Our goal is to remain financially strong, yet flexible, through the prudent management of our balance
sheet and active management of our exposure to commodity price volatility. We have historically funded our acquisition and growth
activity through a combination of internally generated cash flows, equity and debt issuances, bank borrowings and certain oil and gas
property divestitures, as appropriate, to maintain our financial position. As a result of sustained lower crude oil prices in 2015 and 2016,
we significantly reduced our level of capital spending and focused our drilling activity on projects that provided the highest rate of
return. During 2017, we continued to focus on high-return projects that added production and reserves through the strategic deployment
of capital at our Williston Basin properties and Redtail field, while closely aligning our capital spending with cash flows generated from
operations. From time to time, we monetize non-core properties and use the net proceeds from these asset sales to repay debt under our
credit agreement or fund our E&D expenditures. For example, during 2016 and 2017 we sold a large number of oil and gas properties
and other related assets that no longer matched the profile of properties we desire to own. In addition, to support cash flow generation
on our existing properties and help ensure expected cash flows from newly acquired properties, we periodically enter into derivative
contracts. Typically, we use costless collars and swaps to provide an attractive base commodity price level. As of January 23, 2018,
we had derivative contracts covering the sale of approximately 72% of our forecasted 2018 oil production.
Growing Through Accretive Acquisitions. Since 2003, we have completed 21 separate significant acquisitions of producing properties
for total estimated proved reserves of 445.2 MMBOE, as of the effective dates of the acquisitions. Our experienced team of management,
land, engineering and geoscience professionals has developed and refined an acquisition program designed to increase reserves and
complement our existing properties, including identifying and evaluating acquisition opportunities, closing purchases and effectively
managing the properties we acquire. We intend to selectively pursue the acquisition of properties that are complementary to our core
operating areas.
Competitive Strengths
We believe that our key competitive strengths lie in our focused asset portfolio, our experienced management and technical teams and
our commitment to the effective application of new technologies.
Focused, Long-Lived Asset Base. As of December 31, 2017, we had interests in 4,775 gross (1,980 net) productive wells on
approximately 802,700 gross (490,000 net) developed acres across our geographical areas. We believe the concentration of our operated
assets presents us with multiple opportunities to successfully execute our business strategy by enabling us to leverage our technical
expertise and take advantage of operational efficiencies. Our proved reserve life is approximately 14.3 years based on year-end 2017
proved reserves and 2017 production.
Experienced Management and Technical Teams. Our management team averages 26 years of experience in the oil and gas industry.
Our personnel have extensive experience in each of our core geographical areas and in all of our operational disciplines. In addition,
our team of acquisition professionals has an average of 30 years of experience in the evaluation, acquisition and operational assimilation
of oil and gas properties.
Commitment to Technology. In each of our core operating areas, we have accumulated extensive geologic and geophysical knowledge
and have developed significant technical and operational expertise. In recent years, we have developed considerable expertise in
conventional and 3-D seismic imaging and interpretation. Data provided by our in-house, state-of-the-art rock analysis laboratory is
used to support real-time drilling and completion decisions, and to help us further understand unconventional oil plays. Our technical
team has access to approximately 9,200 square miles of 3-D seismic data, digital well logs and other subsurface information. This data
is analyzed with advanced geophysical and geological computer resources dedicated to the accurate and efficient characterization of the
subsurface oil and gas reservoirs that comprise our asset base. In addition, our information systems enable us to update our production
databases through daily uploads from hand-held computers in the field. This commitment to technology has increased the productivity
and efficiency of our field operations and development activities.
We continue to advance our completion techniques, including significantly increasing proppant volumes, utilizing diverter agents to
better distribute fluid and proppant across individual zones, varying the number of completion stages, and employing new fracture
stimulation fluids, including slickwater. We plan to continue use of these state-of-the-art completion designs on wells we drill
throughout 2018, while also testing new diversion technology and more efficient placement and drillout of down-hole plugs.
7
Proved Reserves
Our estimated proved reserves as of December 31, 2017 are summarized by core area in the table below. Refer to “Reserves” in Item 2
of this Annual Report on Form 10-K for information relating to the uncertainties surrounding these reserve categories.
Oil
(MMBbl)
159.8
0.6
137.8
298.2
NGLs
(MMBbl)
74.2
0.3
58.5
133.0
14.9
20.0
34.9
4.0
0.5
4.5
2.2
3.5
5.7
0.2
-
0.2
Natural Gas
(Bcf)
Estimated
Future Capital
% of Total Expenditures (1)
Total
(MMBOE) Proved
447.4
1.8
338.2
787.4
21.4
34.4
55.8
2.4
0.9
3.3
308.6
1.2
252.7
562.5
20.7
29.2
49.9
4.6
0.6
5.2
55%
-%
45%
100% $
41%
59%
100% $
88%
12%
100% $
(in millions)
2,504.7
508.9
9.2
Northern Rocky Mountains (2)
PDP
PDNP
PUD
Total proved
Central Rocky Mountains (3)
PDP
PUD
Total proved
Other (4)
PDP
PDNP
Total proved
Total Company
PDP
PDNP
PUD
178.7
1.1
157.8
337.6
76.6
0.3
62.0
138.9
471.2
2.7
372.6
846.5
333.9
1.8
281.9
617.6
54%
-%
46%
100% $
Total proved
_____________________
(1) Estimated future capital expenditures incorporate numerous assumptions and are subject to many uncertainties, including oil and
3,022.8
natural gas prices, costs of oil field goods and services, drilling results and several other factors.
(2) Includes oil and gas properties located in Montana and North Dakota.
(3) Includes oil and gas properties located in Colorado.
(4) Primarily includes non-core oil and gas properties located in Colorado, Mississippi, New Mexico, Texas and Wyoming.
Marketing and Major Customers
We principally sell our oil and gas production to end users, marketers and other purchasers that have access to nearby pipeline facilities.
In areas where there is no practical access to pipelines, oil is trucked or transported by rail to terminals, market hubs, refineries or storage
facilities. The tables below present percentages by purchaser that accounted for 10% or more of our total oil, NGL and natural gas sales
for the years ended December 31, 2017 and 2016. For the year ended December 31, 2015, no individual purchaser accounted for 10%
or more of our total oil, NGL and natural gas sales. We believe that the loss of any individual purchaser would not have a long-term
material adverse impact on our financial position or results of operations, as alternative customers and markets for the sale of our
products are readily available in the areas in which we operate.
Year Ended December 31, 2017
Tesoro Crude Oil Co
18%
8
Year Ended December 31, 2016
Tesoro Crude Oil Co
Jamex Marketing LLC
Title to Properties
15%
12%
Our properties are subject to customary royalty interests, liens securing indebtedness, liens incident to operating agreements, liens for
current taxes and other burdens, including other mineral encumbrances and restrictions. Our credit agreement is also collateralized by
a first lien on substantially all of our assets. We do not believe that any of these burdens materially interfere with the use of our properties
or the operation of our business.
We believe that we have satisfactory rights or title to all of our producing properties. As is customary in the oil and gas industry, limited
investigation of title is made at the time of acquisition of undeveloped properties. In most cases, we investigate title and obtain title
opinions from counsel only when we acquire producing properties or before commencement of drilling operations.
Competition
The oil and gas industry is a highly competitive environment for acquiring properties, obtaining investment capital, securing oil field
goods and services, marketing oil and natural gas products and attracting and retaining qualified personnel. Many of our competitors
possess and employ financial, technical and personnel resources substantially greater than ours, which can be particularly important in
the areas in which we operate. Those companies may be able to pay more for productive oil and gas properties and exploratory prospects
and to evaluate, bid for and purchase a greater number of properties and prospects than our resources permit. In addition, the
unavailability or high cost of drilling rigs or other equipment and services could delay or adversely affect our development and
exploration operations. Our ability to acquire additional prospects and to find and develop reserves in the future will depend on our
ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment.
Regulation
Regulation of Production
The production of oil and gas is subject to regulation under a wide range of local, state and federal statutes, rules, orders and regulations.
Federal, state and local statutes and regulations require permits for drilling operations, drilling bonds and periodic report submittals
during operations. All of the states in which we own and operate properties have regulations governing conservation matters, including
provisions for the unitization or pooling of oil and gas properties, the establishment of maximum allowable rates of production from oil
and gas wells, the regulation of well spacing and the plugging and abandonment of wells. The effect of these regulations is to limit the
amount of oil and gas that we can produce from our wells and to limit the number of wells or the locations that we can drill, although
we can apply for exceptions to such regulations or to have reductions in well spacing. Moreover, each state generally imposes a
production or severance tax with respect to the production or sale of oil, NGLs and natural gas within its jurisdiction.
Some of our offshore operations are conducted on federal leases that are administered by the Bureau of Ocean Energy Management (the
“BOEM”), and we are therefore required to comply with the regulations and orders issued by the BOEM under the Outer Continental
Shelf Lands Act. Among other things, we are required to obtain prior BOEM approval for any exploration plans we pursue and for our
lease development and production plans. BOEM regulations also establish construction requirements for production facilities located
on our federal offshore leases and govern the plugging and abandonment of wells and the removal of production facilities from these
leases. The present value of our future abandonment obligations associated with offshore properties was $44 million as of December
31, 2017.
The BOEM also establishes the basis for royalty payments due under federal oil and gas leases through regulations issued under
applicable statutory authority. State regulatory authorities establish similar standards for royalty payments due under state oil and gas
leases. The basis for royalty payments established by the BOEM and the state regulatory authorities is generally applicable to all federal
and state oil and gas lessees. Accordingly, we believe that the impact of royalty regulation on our operations should generally be the
same as the impact on our competitors.
Regulation of Sale and Transportation of Oil
Sales of crude oil, condensate and NGLs are not currently regulated and are made at negotiated prices, however, Congress could reenact
price controls or enact other legislation in the future.
Our crude oil sales are affected by the availability, terms and cost of transportation. The transportation of oil in common carrier pipelines
is also subject to rate regulation. The Federal Energy Regulatory Commission (the “FERC”) regulates interstate oil pipeline
9
transportation rates under the Interstate Commerce Act. In general, interstate oil pipeline rates must be cost-based, although settlement
rates agreed to by all shippers are permitted and market-based rates may be permitted in certain circumstances. Effective January 1,
1995, the FERC implemented regulations establishing an indexing system (based on inflation) for crude oil transportation rates that
allowed for an increase or decrease in the cost of transporting oil to the purchaser. The FERC’s regulations include a methodology for
oil pipelines to change their rates through the use of an index system that establishes ceiling levels for such rates. The most recent
mandatory five-year review period resulted in an order from the FERC for the index to be based on Producer Price Index for Finished
Goods (the “PPI-FG”) plus a 1.23% adjustment for the five-year period from July 1, 2016 through June 30, 2021. This represents a
decrease from the PPI-FG plus 2.65% adjustment from the prior five-year period. The FERC determined that it would now use a
calculation based on what it determined to be a superior data source, reflecting actual cost-of-service data as opposed to the accounting
data historically used as a proxy for such information under the prior index methodology. The regulations provide that each year the
Commission will publish the oil pipeline index after the PPI-FG becomes available. Intrastate oil pipeline transportation rates are subject
to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation and the degree of regulatory oversight and
scrutiny given to intrastate oil pipeline rates varies from state to state. Insofar as effective interstate and intrastate rates are equally
applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any way
that is of material difference from those of our competitors.
Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open
access standard, common carriers must offer service to all shippers requesting service on the same terms and under the same rates.
When oil pipelines operate at full capacity, access is governed by prorationing provisions set forth in the pipelines’ published tariffs. In
addition, the FERC has emergency authority under the Interstate Commerce Act to intervene and direct priority use of oil pipeline
transportation capacity, and the FERC exercised this authority over a specific pipeline in February 2014 in response to significant
disruptions in the supply of propane. Accordingly, we believe that access to oil pipeline transportation services generally will be
available to us to the same extent as to our competitors.
Transportation and safety of oil and hazardous liquid is subject to regulation by the Department of Transportation (the “DOT”) under
the Pipeline Integrity, Protection, Enforcement and Safety Act of 2006 and the Pipeline Safety, Regulatory Certainty and Job Creation
Act of 2012. The Pipeline and Hazardous Material Safety Administration (“PHMSA”), an agency within the DOT, enforces regulations
on all interstate liquids transportation and some intrastate liquids transportation. PHMSA does not enforce the regulations in states that
are capable of enforcing the same regulations themselves. The effect of regulatory changes under the DOT and their effect on interstate
and intrastate oil and hazardous liquid transportation will not affect our operations in any way that is of material difference from those
of our competitors.
A portion of our crude oil production may be shipped to market centers using rail transportation facilities owned and operated by third
parties. The DOT and PHMSA establish safety regulations relating to crude-by-rail transportation. In addition, third-party rail operators
are subject to the regulatory jurisdiction of the Surface Transportation Board of the DOT, the Federal Railroad Administration (the
“FRA”) of the DOT, the Occupational Safety and Health Administration and other federal regulatory agencies. Additionally, various
state and local agencies have jurisdiction over disposal of hazardous waste and seek to regulate movement of hazardous materials in
ways not preempted by federal law.
In response to rail accidents occurring between 2002 and 2008, the U.S. Congress passed the Rail Safety and Improvement Act of 2008,
which implemented regulations governing different areas related to railroad safety. In response to train derailments occurring in the
United States and Canada in 2013 and 2014, U.S. regulators have taken a number of actions to address the safety risks of transporting
crude oil by rail.
In February 2014, the DOT issued an emergency order requiring all persons to ensure crude oil is properly tested and classed prior to
offering such product into transportation, and to assure all shipments by rail of crude oil be handled as a Packing Group I or II hazardous
material. Also in February 2014, the Association of American Railroads entered into a voluntary agreement with the DOT to implement
certain restrictions around the movement of crude oil by rail. In May 2014 (and extended indefinitely in May 2015), the DOT issued an
Emergency Restriction/Prohibition Order requiring each railroad carrier operating trains transporting 1,000,000 gallons or more of
Bakken crude oil to provide notice to state officials regarding the expected movement of the trains through the counties in each state.
The PHMSA and FRA have also issued safety advisories and alerts regarding oil transportation and have issued a report focused on the
increased volatility and flammability of Bakken crude oil as compared with other crudes in the U.S. In May 2015, PHMSA issued new
rules applicable to “high-hazard flammable trains”, defined as a continuous block of 20 or more tank cars loaded with a flammable
liquid or 35 or more tank cars loaded with a flammable liquid dispersed throughout a train. Among other requirements, the new rules
require enhanced braking systems, enhanced standards for newly constructed tank cars and retrofitting of existing tank cars, restricted
operating speeds, a documented testing and sampling program, and routine assessments that evaluate 27 safety and security factors. In
December 2015, the Fixing America's Surface Transportation (“FAST”) Act became law, further extending PHMSA’s authority to
improve the safety of transporting flammable liquids by rail and pursuant to which new regulations phasing out the use of certain older
rail cars were finalized in August 2016. In June 2016, the Protecting our Infrastructure of Pipelines and Enhancing Safety (“PIPES”)
Act of 2016 became law. The PIPES Act strengthens PHMSA’s safety authority, including an expansion of its ability to issue emergency
10
orders, which was adopted by rule in October 2016. PHMSA continues to review further potential new safety regulations under the
PIPES Act and the FAST Act.
We do not currently own or operate rail transportation facilities or rail cars. However, the adoption of any regulations that impact the
testing or rail transportation of crude oil could increase our costs of doing business and limit our ability to transport and sell our crude
oil at favorable prices at market centers throughout the U.S., the consequences of which could have a material adverse effect on our
financial condition, results of operations and cash flows. The effect of any such regulatory changes will not affect our operations in any
way that is of material difference from those of our competitors.
Regulation of Transportation, Storage, Sale and Gathering of Natural Gas
The FERC regulates the transportation, and to a lesser extent, the sale for resale of natural gas in interstate commerce pursuant to the
Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978 and regulations issued under those Acts. In 1989, however, Congress
enacted the Natural Gas Wellhead Decontrol Act, which removed all remaining price and non-price controls affecting wellhead sales of
natural gas, effective January 1, 1993. While sales by producers of natural gas can currently be made at unregulated market prices, in
the future Congress could reenact price controls or enact other legislation with detrimental impact on many aspects of our business.
Our natural gas sales are affected by the availability, terms and cost of transportation. The price and terms of access to pipeline
transportation and underground storage are subject to extensive federal and state regulation. From 1985 to the present, several major
regulatory changes have been implemented by Congress and the FERC that affect the economics of natural gas production, transportation
and sales. In addition, the FERC is continually proposing and implementing new rules and regulations affecting those segments of the
natural gas industry that remain subject to the FERC's jurisdiction, most notably interstate natural gas transmission companies and
certain underground storage facilities. These initiatives may also affect the intrastate transportation of natural gas under certain
circumstances. The stated purpose of many of these regulatory changes is to promote competition among the various sectors of the
natural gas industry by making natural gas transportation more accessible to natural gas buyers and sellers on an open and non-
discriminatory basis.
The FERC implements the Outer Continental Shelf Lands Act pertaining to transportation and pipeline issues, which requires that all
pipelines operating on or across the outer continental shelf provide open access and non-discriminatory transportation service. One of
the FERC’s principal goals in carrying out this Act’s mandate is to increase transparency in the market to provide producers and shippers
on the outer continental shelf with greater assurance of open access services on pipelines located on the outer continental shelf and non-
discriminatory rates and conditions of service on such pipelines.
We cannot accurately predict whether the FERC’s actions will achieve the goal of increasing competition in the markets in which our
natural gas is sold. Regulations implemented by the FERC in recent years could result in an increase in the cost of transportation service
on certain petroleum product pipelines. In addition, the natural gas industry historically has always been heavily regulated. Therefore,
we cannot provide any assurance that the less stringent regulatory approach established by the FERC will continue. However, we do
not believe that any action taken will affect us in a way that materially differs from the way it affects other natural gas producers.
Transportation and safety of natural gas is subject to regulation by the DOT under the Pipeline Inspection, Protection, Enforcement and
Safety Act of 2006 and the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2012. In addition, intrastate natural gas
transportation is subject to enforcement by state regulatory agencies and PHMSA enforces regulations on interstate natural gas
transportation. State regulatory agencies can also create their own transportation and safety regulations as long as they meet PHMSA’s
minimum requirements. The basis for intrastate regulation of natural gas transportation and the degree of regulatory oversight and
scrutiny given to intrastate natural gas pipeline rates and services varies from state to state. Insofar as such regulation within a particular
state will generally affect all intrastate natural gas shippers within the state on a comparable basis, we believe that the regulation of
similarly situated intrastate natural gas transportation in any of the states in which we operate and ship natural gas on an intrastate basis
will not affect our operations in any way that is of material difference from those of our competitors. Likewise, the effect of regulatory
changes by the DOT and their effect on interstate natural gas transportation will not affect our operations in any way that is of material
difference from those of our competitors.
The failure to comply with these rules and regulations can result in substantial penalties. We use the latest tools and technologies to
remain compliant with current pipeline safety regulations.
In October 2015, a failure at an underground natural gas storage facility in Southern California prompted PHMSA to issue an advisory
bulletin reminding owners and operators of underground storage facilities to review operations, identify the potential for facility leaks
and failures, and to review and update emergency plans. The State of California proclaimed the underground natural gas storage facility
an emergency situation in January 2016. A federal task force was also convened to make recommendations to help avoid such failures.
An interim final rule of PHMSA became effective in January 2017 which adopted certain specific industry recommended practices into
Part 192 of the Federal Pipeline Safety Regulations. If an operator fails to take any measures recommended it would need to justify in
its written procedures why the measure is impracticable and unnecessary. PHMSA regulations had previously covered much of the
11
surface piping up to the wellhead at underground natural gas storage facilities served by pipeline and not extend in part to the “downhole”
portion of these facilities. The requirements cover design, construction, material, testing, commissioning, reservoir monitoring and
recordkeeping for existing and newly constructed underground natural gas storage facilities as well as procedures and practices for
newly constructed and existing underground natural gas storage facilities such as operations, maintenance, threat identification,
monitoring, assessment, site security, emergency response and preparedness, training, recordkeeping and reporting. These regulations
and any further increased attention to and requirements for underground storage safety and infrastructure by state and federal regulators
that may result from this incident will not affect us in a way that materially differs from the way it affects other natural gas producers.
Environmental Regulations
General. Our oil and gas exploration, development and production operations are subject to stringent federal, state and local laws and
regulations governing the discharge or release of materials into the environment or otherwise relating to environmental protection.
Numerous governmental agencies, such as the U.S. Environmental Protection Agency (the “EPA”), issue regulations to implement and
enforce such laws, which often require difficult and costly compliance measures that carry substantial administrative, civil and criminal
penalties or that may result in injunctive relief for failure to comply. These laws and regulations may require the acquisition of a permit
before drilling or facility construction commences; restrict the types, quantities and concentrations of various materials that can be
released into the environment in connection with drilling and production activities; limit or prohibit project siting, construction or drilling
activities on certain lands located within wilderness, wetlands, ecologically sensitive and other protected areas; require remedial action
to prevent pollution from former operations, such as plugging abandoned wells or closing pits; and impose substantial liabilities for
unauthorized pollution resulting from our operations. The EPA and analogous state agencies may delay or refuse the issuance of required
permits or otherwise include onerous or limiting permit conditions that may have a significant adverse impact on our ability to conduct
operations. The regulatory burden on the oil and gas industry increases the cost of doing business and consequently affects its
profitability.
Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly material
handling, storage, transport, disposal or cleanup requirements could materially and adversely affect our operations and financial position,
as well as those of the oil and gas industry in general. While we believe that we are in compliance, in all material respects, with current
applicable environmental laws and regulations and have not experienced any material adverse effect from compliance with these
environmental requirements, there is no assurance that this trend will continue in the future.
President Trump has indicated that he would work to ease regulatory burdens on industry and on the oil and gas sector, including
environmental regulations. However, any executive orders the President may issue or any new legislation Congress may pass with the
goal of reducing environmental statutory or regulatory requirements may be challenged in court. In addition, various state laws and
regulations (and permits issued thereunder) will be unaffected by federal changes unless and until the state laws and corresponding
permits are similarly changed, and any judicial review is completed.
The environmental laws and regulations which have the most significant impact on the oil and gas exploration and production industry
are as follows:
Superfund. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA” or
“Superfund”), and comparable state laws impose strict joint and several liability, without regard to fault or the legality of conduct, on
classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons
include the owner or operator of the site where a release occurred and anyone who disposed of or arranged for the disposal of the
hazardous substance released at the site. Under CERCLA, such persons may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs
of certain health studies. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and
property damage allegedly caused by hazardous substances released into the environment. In the course of our ordinary operations, we
may generate material that may be regulated as “hazardous substances”. Consequently, we may be jointly and severally liable under
CERCLA or comparable state statutes for all or part of the costs required to clean up sites where these materials have been disposed or
released.
We currently own or lease, and in the past have owned or leased, properties that for many years have been used for the exploration and
production of oil and gas. Although we and our predecessors have used operating and disposal practices that were standard in the
industry at the time, hazardous substances, wastes or hydrocarbons may have been released on, under or from the properties owned or
leased by us or on, under or from other locations where such substances have been taken for recycling or disposal. In addition, many of
these owned and leased properties have been operated by third parties or by previous owners or operators whose treatment and disposal
of hazardous substances, wastes or hydrocarbons were not under our control. Similarly, the disposal facilities where discarded materials
are sent are also often operated by third parties whose waste treatment and disposal practices may not be adequate. While we only use
what we consider to be reputable disposal facilities, we might not know of a potential problem if the disposal occurred before we
acquired the property or business, and if the problem itself is not discovered until years later. Our properties, adjacent affected properties,
12
offsite disposal facilities and substances disposed or released on them may be subject to CERCLA and analogous state laws. Under
these laws, we could be required:
to remove or remediate previously disposed materials, including materials disposed or released by prior owners or operators or
other third parties;
to clean up contaminated property, including contaminated groundwater;
to perform remedial operations to prevent future contamination, including the plugging and abandonment of wells drilled and left
inactive by prior owners and operators; or
to pay some or all of the costs of any such action.
At this time, we do not believe that we are a potentially responsible party with respect to any Superfund site and we have not been
notified of any claim, liability or damages under CERCLA.
Oil Pollution Act. The Oil Pollution Act of 1990 (“OPA”) and regulations issued under OPA impose strict, joint and several liability
on “responsible parties” for removal costs and damages resulting from oil spills into or upon navigable waters, adjoining shorelines or
in the exclusive economic zone of the United States. A “responsible party” includes the owner or operator of an onshore facility and
the lessee, permittee or holder of a right of use and easement of the area in which an offshore facility is located. OPA establishes a
liability limit for onshore facilities of $350 million per spill, while the liability limit for offshore facilities is the payment of all removal
costs plus $75 million per spill damages. These limits do not apply if the spill is caused by a responsible party’s gross negligence or
willful misconduct; the spill resulted from a responsible party’s violation of a federal safety, construction or operating regulation; a
responsible party fails to report a spill or to cooperate fully in a cleanup; or a responsible party fails to comply with an order issued
under the authority of the Intervention on the High Seas Act. OPA also requires the lessee or permittee of the offshore area in which a
covered offshore facility is located to establish and maintain evidence of financial responsibility in the amount of $35 million to cover
liabilities related to an oil spill for which such responsible party is statutorily responsible. The President may increase the amount of
financial responsibility required under OPA by up to $150 million, depending on the risk represented by the quantity or quality of oil
that is handled by the facility. Any failure to comply with OPA’s requirements or inadequate cooperation during a spill response action
may subject a responsible party to administrative penalties up to $25,000 per day per violation. We believe we are in compliance with
all applicable OPA financial responsibility obligations. Moreover, we are not aware of any action or event that would subject us to
liability under OPA, and we believe that compliance with OPA’s financial responsibility and other operating requirements will not have
a material adverse effect on us.
Resource Conservation and Recovery Act. The Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes
regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the
auspices of the EPA, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own
more stringent requirements. We generate solid and hazardous wastes that are subject to RCRA and comparable state laws. Drilling
fluids, produced water and most of the other wastes associated with the exploration, development and production of crude oil or natural
gas are currently regulated under RCRA’s non-hazardous waste provisions. However, it is possible that certain oil and natural gas
exploration and production wastes now classified as non-hazardous could be classified as hazardous waste in the future. In September
2010, the Natural Resources Defense Council filed a petition with the EPA, requesting them to reconsider the RCRA exemption for
exploration, production and development wastes. In May 2016, several environmental groups sued the EPA for failing to update its
rules for management of oil and gas drilling waste under RCRA. The petitioners requested that the EPA revise its regulations for waste
materials generated as a result of oil and gas exploration and production activities. The petitioners claimed that the EPA has not reviewed
or revised its regulations for management of wastes from oil and gas exploration and production operations since 1988, even though the
statute requires the EPA to review and, if necessary, revise the regulations every three years. In December 2016, the court entered a
Consent Decree resolving the litigation. Under the Consent Decree, the EPA has agreed to propose no later than March 15, 2019 a
rulemaking for revision of the regulations pertaining to oil and gas wastes or sign a determination that revision of the regulations is not
necessary. In the event that the EPA proposes a rulemaking for revised oil and gas waste regulations, the Consent Decree requires that
the EPA take final action following notice and comment rulemaking no later than July 15, 2021. Any such change in the current RCRA
exemption and comparable state laws could result in an increase in the costs to manage and dispose of wastes. Additionally, these
exploration and production wastes may be regulated by state agencies as solid waste. Also, ordinary industrial wastes such as paint
wastes, waste solvents, laboratory wastes and waste compressor oils may be regulated as hazardous waste. Although we do not believe
the current costs of managing our materials constituting wastes (as they are presently classified) to be significant, any repeal or
modification of the oil and gas exploration and production exemption by administrative, legislative or judicial process, or modification
of similar exemptions in analogous state statutes would increase the volume of hazardous waste we are required to manage and dispose
of and would cause us, as well as our competitors, to incur increased operating expenses.
Clean Water Act. The Federal Water Pollution Control Act, or the Clean Water Act, as amended (“CWA”), and analogous state laws
impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances,
into state waters or other waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance
with the terms of a permit issued by the EPA or an analogous state agency. Spill prevention, control and countermeasure requirements
13
under federal law require appropriate containment berms and similar structures to help prevent the contamination of navigable waters
in the event of a petroleum hydrocarbon tank spill, rupture or leak. In addition, CWA and analogous state laws require individual
permits or coverage under general permits for discharges of storm water runoff from certain types of facilities.
The EPA had regulations under the authority of CWA that required certain oil and gas exploration and production projects to obtain
permits for construction projects with storm water discharges. However, the Energy Policy Act of 2005 nullified most of the EPA
regulations that required storm water permitting of oil and gas construction projects. There are still some state and federal rules that
regulate the discharge of storm water from some oil and gas construction projects. Costs may be associated with the treatment of
wastewater and/or developing and implementing storm water pollution prevention plans. Federal and state regulatory agencies can
impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of CWA and
analogous state laws and regulations. In Section 40 CFR 112 of the regulations, the EPA promulgated the Spill Prevention, Control and
Countermeasure regulations, which require certain oil containing facilities to prepare plans and meet construction and operating
standards.
Air Emissions. The Federal Clean Air Act, as amended (the “CAA”), and comparable state laws regulate emissions of various air
pollutants from various industrial sources through air emissions permitting programs and also impose other monitoring and reporting
requirements. We may be required to incur certain capital expenditures in the future for air pollution control equipment in connection
with obtaining and maintaining pre-construction and operating permits and approvals for air emissions. In addition, the EPA has
developed, and continues to develop, stringent regulations governing emissions of toxic air pollutants at specified sources. For example,
in 2012, the EPA finalized rules establishing new air emission controls for oil and natural gas production operations. Specifically, the
EPA’s rule includes New Source Performance Standards to address emissions of sulfur dioxide and volatile organic compounds and a
separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and
processing activities. Among other things, these standards require the application of reduced emission completion techniques associated
with the completion of newly drilled and fractured wells in addition to existing wells that are refractured. The rules also establish
specific requirements regarding emissions from compressors, dehydrators, storage tanks and other production equipment. These rules
could require a number of modifications to operations at certain of our oil and gas properties including the installation of new equipment.
Compliance with such rules could result in significant costs, including increased capital expenditures and operating costs, which may
adversely impact our business. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-
compliance with air permits or other requirements of the CAA and associated state laws and regulations.
The EPA announced in 2015 that it would directly regulate methane emissions from oil and natural gas wells for the first time as part
of President Obama’s Climate Action Plan. As part of this strategy, in May 2016, the EPA issued three final rules. The EPA issued a
final rule that updated the New Source Performance Standards to add requirements that the oil and gas industry reduce emissions of
greenhouse gases and to cover additional equipment and activities in the oil and gas production chain. The final rule sets emissions
limits for methane, which is the principal greenhouse gas emitted by equipment and processes in the oil and gas sector. This rule applies
to new, reconstructed and modified processes and equipment. This rule also expands the volatile organic compound emissions limits to
hydraulically fractured oil wells and equipment used across the industry that was not regulated in the 2012 rules. The rule also requires
owners and operators to find and repair leaks, also known as “fugitive emissions.” The EPA also issued a final rule known as the Source
Determination Rule, which is intended to clarify when multiple pieces of equipment and activities in the oil and gas industry must be
deemed a single source when determining whether major source permitting programs apply under the prevention of significant
deterioration, nonattainment new source review preconstruction and operation permit programs under Title V of the CAA (“Title V”).
The final rule defines the term “adjacent” to clarify that equipment and activities in the oil and gas sector that are under common control
will be considered part of the same source if they are located near each other – specifically, if they are located on the same site, or on
sites that share equipment and are within one quarter of a mile of each other. This rule applies to equipment and activities used for
onshore oil and natural gas production, and for natural gas processing. It does not apply to offshore operations. Finally, the EPA also
issued a final Federal Implementation Plan (“FIP”) for Indian country, which implements the minor new source review program in
Indian country for oil and natural gas production. The FIP will be used instead of site-specific minor new source review preconstruction
permits in Indian country and incorporates emissions limits and other requirements from eight federal air standards, including the final
New Source Performance Standard, subpart OOOOa. Requirements of the FIP apply throughout Indian country, except non-reservation
areas, unless a tribe or the EPA demonstrates jurisdiction for those areas.
Compliance with such rules could result in significant costs, including increased capital expenditures and operating costs, which may
adversely impact our business. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-
compliance with air permits or other requirements of the CAA and associated state laws and regulations.
In 2016, the EPA also issued the first draft of an Information Collection Request, seeking a broad range of information on the oil and
gas industry, including: how equipment and emissions controls are, or can be, configured, what installing those controls entails and the
associated costs. This includes information on natural gas venting that occurs as part of existing processes or maintenance activities,
such as well and pipeline blowdowns, equipment malfunctions and flashing emissions from storage tanks.
14
In June 2017, the EPA proposed staying the final rule implementing certain of the new oil and gas standards for two years while it
reconsiders the rules. In November 2017, the EPA issued a notice of data availability for the proposed stay of the rules, with a comment
period closing on December 8, 2017.
We are currently engaged in discussions with the Colorado Department of Public Health and Environment (the “CDPHE”) concerning
certain equipment used in our Redtail facilities and our compliance with various air permits and applicable federal and state air quality
laws and regulations over the control of air pollutant emissions from those facilities. We and the CDPHE are negotiating the terms of a
settlement agreement to resolve this matter.
Hydraulic Fracturing. Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons
from tight rock formations. The process involves the injection of mainly water and sand plus a de minimis amount of chemicals under
pressure into formations to fracture the surrounding rock and stimulate production. Hydraulic fracturing has been utilized to complete
wells in our most active areas located in the states of Colorado, Montana and North Dakota and we expect it will also be used in the
future. Should our exploration and production activities expand to other states, it is likely that we will utilize hydraulic fracturing to
complete or recomplete wells in those areas. The process is typically regulated by state oil and gas commissions. However, the EPA
also issued guidance in 2014 for permitting authorities and the industry regarding the process for obtaining a permit for hydraulic
fracturing involving diesel.
In December 2016, the EPA released a final report on the potential impacts of oil and gas fracturing activities on the quality and quantity
of drinking water resources in the United States. In addition, in June 2016, the EPA issued a final rule promulgating pretreatment
standards for the oil and gas extraction category which would address discharges of wastewater pollutants from onshore unconventional
oil and gas extraction facilities to publicly-owned treatment works. The EPA is also conducting a study of private wastewater treatment
facilities accepting oil and gas extraction wastewater. The EPA is collecting data and information regarding the extent to which these
facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial
characteristics of the facilities, the environmental impacts of discharges and other information.
Other federal agencies are also examining hydraulic fracturing, including the U.S. Department of Energy, the U.S. Government
Accountability Office and the White House Council for Environmental Quality. In March 2015, the U.S. Department of the Interior
released a final rule addressing (i) hydraulic fracturing on federal and Indian oil and natural gas leases to require validation of well
integrity and strong cement barriers between the wellbore and water zones through which the wellbore passes, (ii) disclosure of
chemicals used in hydraulic fracturing to the Bureau of Land Management, (iii) higher standards for interim storage of recovered waste
fluids from hydraulic fracturing, and (iv) measures to lower the risk of cross-well contamination with chemicals and fluids used in
fracturing operations. In addition, legislation has been introduced in Congress from time to time to provide for federal regulation of
hydraulic fracturing and to require disclosure of the chemicals used in the fracturing process. Also, some states have adopted, and other
states are considering adopting, regulations that could ban, restrict or impose additional requirements on activities relating to hydraulic
fracturing in certain circumstances. For example, in June 2011, Texas enacted a law that requires the disclosure of information regarding
the substances used in the hydraulic fracturing process to the Railroad Commission of Texas (the entity that regulates oil and natural
gas production in Texas) and the public. Such federal or state legislation could require the disclosure of chemical constituents used in
the fracturing process to state or federal regulatory authorities who could then make such information publicly available. Disclosure of
chemicals used in the fracturing process could make it easier for third parties opposing hydraulic fracturing to pursue legal proceedings
against producers and service providers based on allegations that specific chemicals used in the fracturing process could adversely affect
human health or the environment, including groundwater. This rule was challenged in federal court and in June 2016, the Wyoming
District Court hearing the case ruled that the Department of the Interior had exceeded its authority in issuing the rule. In March 2017,
Justice Department lawyers representing the Bureau of Land Management asked the Court of Appeals for the Tenth Circuit to stay the
government’s previously filed appeal as the Trump Administration was planning to rescind the rules; and in July 2017, the Department
of the Interior announced its proposal to rescind the rules, with the public comment period on the proposal closing in September 2017.
On December 29, 2017, the Department of the Interior issued a final rule rescinding the 2015 rule.
In addition, if hydraulic fracturing is regulated at the federal level, our fracturing activities could become subject to additional permitting
requirements or operational restrictions and also to associated permitting delays, litigation risk and potential increases in costs. Further,
local governments may seek to adopt, and some have adopted, ordinances within their jurisdictions restricting the use of or regulating
the time, place and manner of drilling or hydraulic fracturing. No assurance can be given as to whether or not similar measures might
be considered or implemented in the jurisdictions in which our properties are located. If new laws, regulations or ordinances that
significantly restrict or otherwise impact hydraulic fracturing are passed by Congress or adopted in the states or local municipalities
where our properties are located, such legal requirements could prohibit or make it more difficult or costly for us to perform hydraulic
fracturing activities and thereby could affect the determination of whether a well is commercially viable. In addition, restrictions on
hydraulic fracturing could reduce the amount of oil and natural gas that we are ultimately able to produce in commercially paying
quantities and the calculation of our reserves.
In addition, in July 2014, a major university and U.S. Geological Survey researchers published a study purporting to find a causal
connection between the deep well injection of hydraulic fracturing wastewater and a sharp increase in seismic activity in Oklahoma
15
since 2008. This study, as well as subsequent studies and reports, may trigger new legislation or regulations that would limit or ban the
disposal of hydraulic fracturing wastewater in deep injection wells. If such new laws or rules are adopted, our operations may be
curtailed while alternative treatment and disposal methods are developed and approved.
Further, in May 2014, the EPA published an Advance Notice of Proposed Rulemaking under the Toxic Substances Control Act, relating
to the disclosure of chemical substances and mixtures used in oil and gas exploration and production. On July 11, 2014, the EPA
extended the public comment period for the rulemaking to September 18, 2014. The EPA has not yet taken further action with respect
to this rule. Depending on the precise disclosure requirements the EPA elects to impose, if any, we may be obliged to disclose valuable
proprietary information, and failure to do so may subject us to penalties.
Global Warming and Climate Change. In December 2009, the EPA published its findings that emissions of carbon dioxide, methane
and other greenhouse gases (“GHG”) present an endangerment to public health and the environment because emissions of such gases
are, according to the EPA, contributing to the warming of the earth’s atmosphere and other climate changes. Based on these findings,
the EPA has adopted and implemented regulations that restrict emissions of GHG under existing provisions of the CAA, including rules
that limit emissions of GHG from motor vehicles beginning with the 2012 model year. The EPA has asserted that these final motor
vehicle GHG emission standards trigger the CAA construction and operating permit requirements for stationary sources, commencing
when the motor vehicle standards took effect in January 2011. In June 2010, the EPA published its final rule to address the permitting
of GHG emissions from stationary sources under the Prevention of Significant Deterioration (the “PSD”) and Title V permitting
programs. This rule “tailors” these permitting programs to apply to certain stationary sources of GHG emissions in a multi-step process,
with the largest sources first becoming subject to permitting. Further, facilities required to obtain PSD permits for their GHG emissions
are required to reduce those emissions consistent with guidance for determining “best available control technology” standards for GHG,
which guidance was published by the EPA in November 2010. Also in November 2010, the EPA expanded its existing GHG reporting
rule to include onshore oil and natural gas production, processing, transmission, storage and distribution facilities. This rule requires
reporting of GHG emissions from such facilities on an annual basis. We believe that we are in compliance with all substantial applicable
emissions requirements.
In June 2014, the Supreme Court upheld most of the EPA’s GHG permitting requirements, allowing the agency to regulate the emission
of GHG from stationary sources already subject to the PSD and Title V requirements. Certain of our equipment and installations may
currently be subject to PSD and Title V requirements and hence, under the Supreme Court’s ruling, may also be subject to the installation
of controls to capture GHG. For any equipment or installation so subject, we may have to incur increased compliance costs to capture
related GHG emissions.
In October 2016, the EPA proposed revisions to the rule applicable to GHGs for PSD and Title V permitting requirements. On
November 18, 2016, the EPA extended the public comment period for the rulemaking to December 16, 2016. The proposed rule has
not yet been finalized.
In accordance with President Obama’s Climate Action Plan, in August 2015, the EPA issued a rule to reduce carbon emissions from
electric generating units. The rule, commonly called the “Clean Power Plan”, requires states to develop plans to reduce carbon emissions
from fossil fuel-fired generating units commencing in 2022, with the reductions to be fully phased in by 2030. Each state is given a
different carbon reduction target, but the EPA expects that, in the aggregate, the overall proposal will reduce carbon emissions from
electric generating units by 32% from 2005 levels. States are given substantial flexibility in meeting their emission reduction targets
and can generally choose to lower carbon emissions by replacing higher carbon generation, such as coal or natural gas, with lower
carbon generation, such as efficient natural gas units or renewable energy alternatives. Several industry groups and states have
challenged the Clean Power Plan in the Court of Appeals for the D.C. Circuit, and in February 2016, the U.S. Supreme Court stayed the
implementation of the Clean Power Plan while it is being challenged in court. The Court of Appeals for the D.C. Circuit heard oral
arguments on the Clean Power Plan in September 2016, but has not yet issued a decision. On March 28, 2017, the Trump Administration
issued an executive order directing the EPA to review the Clean Power Plan. On the same day, the EPA filed a motion in the U.S. Court
of Appeals for the D.C. Circuit requesting that the court hold the case in abeyance while the EPA conducts its review of the Clean Power
Plan. On October 16, 2017, the EPA published a proposed rule that would repeal the Clean Power Plan. The EPA also stated in the
proposed rule that the agency has not determined the scope of any rule to regulate GHG emissions from existing electric generating
units, but intends to issue an Advance Notice of Proposed Rulemaking “in the near future.” Several states have already announced their
intention to challenge any repeal of the Clean Power Plan. It is not yet clear what changes, if any, will result from the EPA’s proposal,
whether or how the courts will rule on the legality of the Clean Power Plan, the EPA’s repeal of the rules, or any future replacement.
In addition, both houses of Congress have actively considered legislation to reduce emissions of GHG, and many states have already
taken legal measures to reduce emissions of GHG, primarily through the development of GHG inventories, GHG permitting and/or
regional GHG “cap and trade” programs. Most of these “cap and trade” programs work by requiring either major sources of emissions
or major producers of fuels to acquire and surrender emission allowances, with the number of allowances available for purchase reduced
each year until the overall GHG emission reduction goal is achieved. In the absence of new legislation, the EPA is issuing new
regulations that limit emissions of GHG associated with our operations, which will require us to incur costs to inventory and reduce
emissions of GHG associated with our operations and which could adversely affect demand for the oil, NGLs and natural gas that we
16
produce. Finally, it should be noted that many scientists have concluded that increasing concentrations of GHG in the atmosphere may
produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, floods and
other climatic events. If any such effects were to occur, they could have an adverse effect on our assets and operations.
Consideration of Environmental Issues in Connection with Governmental Approvals. Our operations frequently require licenses, permits
and/or other governmental approvals. Several federal statutes, including the Outer Continental Shelf Lands Act (“OCSLA”), the
National Environmental Policy Act (“NEPA”) and the Coastal Zone Management Act (“CZMA”), require federal agencies to evaluate
environmental issues in connection with granting such approvals and/or taking other major agency actions. OCSLA, for instance,
requires the U.S. Department of Interior to evaluate whether certain proposed activities would cause serious harm or damage to the
marine, coastal or human environment. Similarly, NEPA requires the Department of Interior and other federal agencies to evaluate
major agency actions having the potential to significantly impact the environment. In the course of such evaluations, an agency would
have to prepare an environmental assessment and potentially an environmental impact statement. The CZMA, on the other hand, aids
states in developing a coastal management program to protect the coastal environment from growing demands associated with various
uses, including offshore oil and gas development. In obtaining various approvals from the Department of Interior, we must certify that
we will conduct our activities in a manner consistent with all applicable regulations.
Employees
As of January 31, 2018, we had approximately 830 full-time employees, including 22 senior level geoscientists and 59 petroleum
engineers. Our employees are not represented by any labor unions. We consider our relations with our employees to be satisfactory
and have never experienced a work stoppage or strike.
Available Information
We maintain a website at the address www.whiting.com. We are not including the information contained on our website as part of, or
incorporating it by reference into, this report. We make available free of charge (other than an investor’s own Internet access charges)
through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, including
exhibits and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish
such material to, the SEC.
17
Item 1A. Risk Factors
Each of the risks described below should be carefully considered, together with all of the other information contained in this Annual
Report on Form 10-K, before making an investment decision with respect to our securities. In the event of the occurrence, reoccurrence,
continuation or increased severity of any of the risks described below, our business, financial condition or results of operations could be
materially and adversely affected, and you may lose all or part of your investment.
Oil and natural gas prices are very volatile. An extended period of low oil and natural gas prices may adversely affect our business,
financial condition, results of operations or cash flows.
The oil and gas markets are very volatile, and we cannot predict future oil and natural gas prices. The price we receive for our oil, NGL
and natural gas production heavily influences our revenue, profitability, access to capital and future rate of growth. The prices we
receive for our production depend on numerous factors beyond our control, including, but not limited to, the following:
changes in regional, domestic and global supply and demand for oil and natural gas;
the level of global oil and natural gas inventories;
the actions of the Organization of Petroleum Exporting Countries;
the price and quantity of imports of foreign oil and natural gas;
political and economic conditions, including embargoes, in oil-producing countries or affecting other oil-producing activity, such
as the recent conflicts in the Middle East;
the level of global oil and natural gas exploration and production activity;
the effects of global credit, financial and economic issues;
developments of United States energy infrastructure;
weather conditions;
technological advances affecting energy consumption;
current and anticipated changes to domestic and foreign governmental regulations, including those expected as a result of the
election of Donald Trump to the U.S. Presidency;
proximity and capacity of oil and natural gas pipelines and other transportation facilities;
the price and availability of competitors’ supplies of oil and natural gas in captive market areas;
the price and availability of alternative fuels; and
acts of force majeure.
Moreover, government regulations, such as regulation of oil and natural gas gathering and transportation, can adversely affect
commodity prices in the long term.
These factors and the volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price
movements. Also, prices for crude oil and prices for natural gas do not necessarily move in tandem. Declines in oil or natural gas prices
would not only reduce revenue, but could also reduce the amount of oil and natural gas that we can economically produce and therefore
potentially lower our oil and gas reserve quantities. If the oil and natural gas industry experiences extended periods of low prices, we
may, among other things, be unable to meet all of our financial obligations or make planned expenditures.
Substantial and extended declines in oil, NGL and natural gas prices have resulted and may continue to result in impairments of our
proved oil and gas properties or undeveloped acreage and may materially and adversely affect our future business, financial condition,
cash flows, results of operations, liquidity or ability to finance planned capital expenditures. To the extent commodity prices received
from production are insufficient to fund planned capital expenditures, we will be required to reduce spending, sell assets or borrow to
fund any such shortfall. Lower commodity prices have reduced, and may further reduce, the amount of our borrowing base under our
credit agreement, which is determined at the discretion of our lenders based on the collateral value of our proved reserves that have been
mortgaged to the lenders, and is subject to regular redeterminations on May 1 and November 1 of each year, as well as special
redeterminations described in the credit agreement. Upon a redetermination, if borrowings in excess of the revised borrowing capacity
were outstanding, we could be forced to immediately repay a portion of the debt outstanding under our credit agreement.
Lower commodity prices may also make it more difficult for us to comply with the covenants and other restrictions in the agreements
governing our debt as described under the risk factor entitled “The instruments governing our indebtedness contain various covenants
limiting the discretion of our management in operating our business.”
18
Alternatively, higher oil prices may result in significant mark-to-market losses being incurred on our commodity-based derivatives,
which may in turn cause us to experience net losses.
Drilling for and producing oil and natural gas are high risk activities with many uncertainties that could adversely affect our
business, financial condition or results of operations.
Our future success will depend on the success of our exploration, development and production activities. Our oil and natural gas
exploration and development activities are subject to numerous risks beyond our control, including the risk that drilling will not result
in commercially viable oil or natural gas production. Our decisions to purchase, explore, develop or otherwise exploit prospects or
properties will depend in part on the evaluation of data obtained through geophysical and geological analyses, production data and
engineering studies, the results of which are often inconclusive or subject to varying interpretations. Refer to the risk factor entitled
“Reserve estimates depend on many assumptions that may turn out to be inaccurate...” for a discussion of the uncertainty involved in
these processes. Our cost of drilling, completing and operating wells is often uncertain before drilling commences. Overruns in budgeted
expenditures are common risks that can make a particular project uneconomical. Further, many factors may curtail, delay or cancel
drilling, including the following:
substantial or extended declines in oil, NGL and natural gas prices;
delays imposed by or resulting from compliance with regulatory requirements;
delays in or limits on the issuance of drilling permits on our federal leases, including as a result of government shutdowns;
pressure or irregularities in geological formations;
shortages of or delays in obtaining qualified personnel or equipment, including drilling rigs and completion services;
equipment failures or accidents;
adverse weather conditions, such as freezing temperatures, hurricanes and storms;
pipeline takeaway and refining and processing capacity; and
title problems.
Our debt level and the covenants in the agreements governing our debt could negatively impact our financial condition, results of
operations, cash flows and business prospects.
As of December 31, 2017, we had no borrowings and $2 million in letters of credit outstanding under Whiting Oil and Gas Corporation’s
(“Whiting Oil and Gas”) credit facility with $2.3 billion of available borrowing capacity, as well as $3.2 billion of senior notes and
$562 million of convertible senior notes outstanding. We are allowed to incur additional indebtedness, provided that we meet certain
requirements in the indentures governing our senior notes and Whiting Oil and Gas’ credit agreement.
Our level of indebtedness and the covenants contained in the agreements governing our debt could have important consequences for our
operations, including:
making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the
obligations of any of our debt agreements, including financial and other restrictive covenants, could result in an event of default
under Whiting Oil and Gas’ credit agreement and the indentures governing our senior notes and convertible senior notes;
requiring us to dedicate a substantial portion of our cash flow from operations to required payments on debt, thereby reducing the
availability of cash flow for working capital, capital expenditures and other general business activities;
limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general
corporate and other activities;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
placing us at a competitive disadvantage relative to other less leveraged competitors;
making us vulnerable to increases in interest rates, because debt under Whiting Oil and Gas’ credit agreement is subject to certain
rate variability;
making us more vulnerable to economic downturns and adverse developments in our industry or the economy in general,
especially declines in oil and natural gas prices; and
when oil and natural gas prices decline, our ability to maintain compliance with our financial covenants becomes more difficult
and our borrowing base is subject to reductions, which may reduce or eliminate our ability to fund our operations.
19
We may be required to repay all or a portion of our debt on an accelerated basis in certain circumstances. If we fail to comply with the
covenants and other restrictions in the agreements governing our debt, it could lead to an event of default and the acceleration of our
repayment of outstanding debt. In addition, if we are in default under the agreements governing our indebtedness, we would not be able
to pay dividends on our capital stock. Our ability to comply with these covenants and other restrictions may be affected by events
beyond our control, including prevailing economic and financial conditions. Moreover, the borrowing base limitation on Whiting Oil
and Gas’ credit agreement is redetermined on May 1 and November 1 of each year, and may be the subject of special redeterminations
described in such credit agreement based on an evaluation of our oil and gas reserves. Because oil and gas prices are principal inputs
into the valuation of our reserves, if oil and gas prices remain at their current levels for a prolonged period or go lower, our borrowing
base could be reduced at the next redetermination date or during future redeterminations. Upon a redetermination, if borrowings in
excess of the revised borrowing capacity were outstanding, we could be forced to immediately repay a portion of our debt outstanding
under the credit agreement.
We may not have sufficient funds to make such repayments. If we are unable to repay our debt with cash on hand, we could attempt to
refinance such debt, sell assets or repay such debt with the proceeds from an equity offering. We may not be able to generate sufficient
cash flow to pay the interest on our debt or future borrowings, and equity financings or proceeds from the sale of assets may not be
available to pay or refinance such debt. The terms of our debt, including Whiting Oil and Gas’ credit agreement, may also prohibit us
from taking such actions. Factors that will affect our ability to raise cash through an offering of our capital stock or debt securities, a
refinancing of our debt or a sale of assets include financial market conditions and our market value and operating performance at the
time of such offering or other financing. We may not be able to successfully complete any such offering, refinancing or sale of assets.
If we cannot make scheduled payments on our indebtedness or otherwise fail to comply with the covenants and other restrictions in the
agreements governing our debt, we will be in default and the lenders under Whiting Oil and Gas’ credit agreement and the holders of
our senior notes and convertible senior notes could declare all outstanding principal and interest to be due and payable, and the lenders
under Whiting Oil and Gas’ credit agreement could terminate their commitments to loan money and could foreclose against the assets
collateralizing their borrowings and we could be forced into bankruptcy or liquidation. Our inability to generate sufficient cash flows
to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and
adversely affect our financial position and results of operations. Further, failing to comply with the financial and other restrictive
covenants in Whiting Oil and Gas’ credit agreement and the indentures governing our senior notes and convertible senior notes could
result in an event of default, which could adversely affect our business, financial condition and results of operations.
The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our
business.
The indentures governing our senior notes and convertible senior notes and Whiting Oil and Gas’ credit agreement contain various
restrictive covenants that may limit our management’s discretion in certain respects. In particular, these agreements will limit our and
our subsidiaries’ ability to, among other things:
pay dividends or make other distributions or repurchase or redeem our capital stock;
prepay, redeem or repurchase certain debt;
make loans and investments;
incur or guarantee additional indebtedness or issue preferred stock;
create certain liens;
enter into agreements that restrict dividends or other payments from our restricted subsidiaries to us;
sell assets;
consolidate, merge or transfer all or substantially all of our assets and those of our restricted subsidiaries taken as a whole;
engage in transactions with affiliates;
enter into hedging contracts; and
create unrestricted subsidiaries.
In addition, Whiting Oil and Gas’ credit agreement requires us, as of the last day of any quarter, to maintain the following ratios (as
defined in the credit agreement): (i) a consolidated current assets to consolidated current liabilities ratio (which includes an add back of
the available borrowing capacity under the credit agreement) of not less than 1.0 to 1.0, (ii) a total senior secured debt to the last four
quarters’ EBITDAX ratio of less than 3.0 to 1.0 during the Interim Covenant Period (defined below), and thereafter a total debt to
EBITDAX ratio of less than 4.0 to 1.0, and (iii) a ratio of the last four quarters’ EBITDAX to consolidated cash interest charges of not
less than 2.25 to 1.0 during the Interim Covenant Period. Under the credit agreement, the “Interim Covenant Period” is defined as the
period from June 30, 2015 until the earlier of (i) April 1, 2018 or (ii) the commencement of an investment-grade debt rating period.
20
Also, the indentures under which we issued our senior notes restrict us from incurring additional indebtedness and making certain
restricted payments, subject to certain exceptions, unless our fixed charge coverage ratio (as defined in the indentures) is at least
2.0 to 1.0. If we were in violation of these covenants, then we may not be able to incur additional indebtedness, including under Whiting
Oil and Gas’ credit agreement. A substantial or extended decline in oil or natural gas prices may adversely affect our ability to comply
with these covenants.
If we fail to comply with the restrictions in the indentures governing our senior notes and convertible senior notes, Whiting Oil and Gas’
credit agreement or any other subsequent financing agreements, a default may allow the creditors to accelerate the related indebtedness
as well as any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, lenders may be able to
terminate any commitments they had made to make further funds available to us. Furthermore, if we were unable to repay the amounts
due and payable under Whiting Oil and Gas’ credit agreement, those lenders could proceed against the collateral granted to them to
secure that indebtedness. In the event that our lenders or noteholders accelerate the repayment of our borrowings, we and our subsidiaries
may not have sufficient assets or be able to borrow sufficient funds to repay or refinance that indebtedness. Also, if we are in default
under the agreements governing our indebtedness, we will not be able to pay dividends on our capital stock.
If oil, NGL and natural gas prices decrease, we may be required to take write-downs of the carrying values of our oil and gas
properties.
Accounting rules require that we periodically review the carrying value of our producing oil and gas properties for possible impairment.
Based on specific market factors and circumstances at the time of prospective impairment reviews (which may include depressed oil,
NGL and natural gas prices and the continuing evaluation of development plans, production data, economics and other factors) we may
be required to write down the carrying value of our oil and gas properties. For example, we recorded a $835 million impairment charge
during 2017 for the partial write-down of the Redtail field in Colorado. A write-down constitutes a non-cash charge to earnings. We
may incur additional impairment charges in the future, which could have a material adverse effect on our results of operations in the
period recognized.
Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and
additional operating restrictions or delays.
Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons from tight rock
formations. The process involves the injection of mainly water and sand plus a de minimis amount of chemicals under pressure into
formations to fracture the surrounding rock and stimulate production. Hydraulic fracturing has been utilized to complete wells in our
most active areas located in the states of Colorado, Montana and North Dakota, and we expect it will also be used in the future. Should
our exploration and production activities expand to other states, it is likely that we will utilize hydraulic fracturing to complete or
recomplete wells in those areas. The process is typically regulated by state oil and gas commissions. However, the U.S. Environmental
Protection Agency (the “EPA”) also issued guidance in 2014 for permitting authorities and the industry regarding the process for
obtaining a permit for hydraulic fracturing involving diesel.
In December 2016, the EPA released a final report on the potential impacts of oil and gas fracturing activities on the quality and quantity
of drinking water resources in the United States. In addition, in June 2016, the EPA issued a final rule promulgating pretreatment
standards for the oil and gas extraction category which would address discharges of wastewater pollutants from onshore unconventional
oil and gas extraction facilities to publicly-owned treatment works. The EPA is also conducting a study of private wastewater treatment
facilities accepting oil and gas extraction wastewater. The EPA is collecting data and information regarding the extent to which these
facilities accept such wastewater, available treatment technologies (and their associated costs), discharge characteristics, financial
characteristics of the facilities, the environmental impacts of discharges and other information.
Other federal agencies are also examining hydraulic fracturing, including the U.S. Department of Energy, the U.S. Government
Accountability Office and the White House Council for Environmental Quality. In March 2015, the U.S. Department of the Interior
released a final rule addressing (i) hydraulic fracturing on federal and Indian oil and natural gas leases to require validation of well
integrity and strong cement barriers between the wellbore and water zones through which the wellbore passes, (ii) disclosure of
chemicals used in hydraulic fracturing to the Bureau of Land Management, (iii) higher standards for interim storage of recovered waste
fluids from hydraulic fracturing, and (iv) measures to lower the risk of cross-well contamination with chemicals and fluids used in
fracturing operations. This rule was challenged in federal court and in June 2016, the Wyoming District Court hearing the case ruled
that the Department of the Interior had exceeded its authority in issuing the rule. In March 2017, Justice Department lawyers representing
the Bureau of Land Management asked the Court of Appeals for the Tenth Circuit to stay the government’s previously filed appeal as
the Trump Administration was planning to rescind the rules; and in July 2017, the Department of the Interior announced its proposal to
rescind the rules, with the public comment period on the proposal closing in September 2017. On December 29, 2017, the Department
of the Interior issued a final rule rescinding the 2015 rule.
In addition, legislation has been introduced in Congress from time to time to provide for federal regulation of hydraulic fracturing and
to require disclosure of the chemicals used in the fracturing process. Also, some states have adopted, and other states are considering
21
adopting, regulations that could ban, restrict or impose additional requirements on activities relating to hydraulic fracturing in certain
circumstances. For example, in June 2011, Texas enacted a law that requires the disclosure of information regarding the substances
used in the hydraulic fracturing process to the Railroad Commission of Texas (the entity that regulates oil and natural gas production in
Texas) and the public. Such federal or state legislation could require the disclosure of chemical constituents used in the fracturing
process to state or federal regulatory authorities who could then make such information publicly available. Disclosure of chemicals
used in the fracturing process could make it easier for third parties opposing hydraulic fracturing to pursue legal proceedings against
producers and service providers based on allegations that specific chemicals used in the fracturing process could adversely affect human
health or the environment, including groundwater. In addition, if hydraulic fracturing is regulated at the federal level, our fracturing
activities could become subject to additional permitting requirements or operational restrictions and also to associated permitting delays,
litigation risk and potential increases in costs. Further, local governments may seek to adopt, and some have adopted, ordinances within
their jurisdictions restricting the use of or regulating the time, place and manner of drilling or hydraulic fracturing. No assurance can
be given as to whether or not similar measures might be considered or implemented in the jurisdictions in which our properties are
located. If new laws, regulations or ordinances that significantly restrict or otherwise impact hydraulic fracturing are passed by Congress
or adopted in the states or local municipalities where our properties are located, such legal requirements could prohibit or make it more
difficult or costly for us to perform hydraulic fracturing activities and thereby could affect the determination of whether a well is
commercially viable. In addition, restrictions on hydraulic fracturing could reduce the amount of oil and natural gas that we are
ultimately able to produce in commercially paying quantities and the calculation of our reserves.
In addition, in July 2014, a major university and U.S. Geological Survey researchers published a study purporting to find a causal
connection between the deep well injection of hydraulic fracturing wastewater and a sharp increase in seismic activity in Oklahoma
since 2008. This study, as well as subsequent studies and reports, may trigger new legislation or regulations that would limit or ban the
disposal of hydraulic fracturing wastewater in deep injection wells. If such new laws or rules are adopted, our operations may be
curtailed while alternative treatment and disposal methods are developed and approved.
Further, in May 2014, the EPA published an Advance Notice of Proposed Rulemaking under the Toxic Substances Control Act, relating
to the disclosure of chemical substances and mixtures used in oil and gas exploration and production. Depending on the precise
disclosure requirements the EPA elects to impose, if any, we may be obliged to disclose valuable proprietary information, and failure to
do so may subject us to penalties.
Refer to “Hydraulic Fracturing” in Item 2 of this Annual Report on Form 10-K for more information on hydraulic fracturing.
We have entered into physical delivery contracts and do not expect to be able to deliver all the oil required under such contracts and,
as a result, we expect we will be required to make deficiency payments.
As of December 31, 2017, we had three physical delivery contracts which require us to deliver fixed volumes of crude oil. One of these
contracts is tied to oil production at our Sanish field in Mountrail County, North Dakota, and two are tied to oil production at our Redtail
field in Weld County, Colorado. Although, we believe that our production and reserves are sufficient to fulfill the delivery commitment
at our Sanish field in North Dakota, if we fail to deliver the committed volumes, we would be required to pay a deficiency payment of
$7.00 per undelivered barrel (subject to upward adjustment). At our Redtail field, we have determined that it is not probable that future
oil production will be sufficient to meet the minimum volume requirements under our two contracts in this area. On February 1, 2018,
we paid $61 million to the counterparty to one of these Redtail delivery contracts to settle all future minimum volume commitments
under the agreement. We expect to make periodic deficiency payments under the second Redtail contract that currently total $4.92 per
undelivered Bbl (subject to upward adjustment). During 2017, 2016 and 2015, total deficiency payments under these contracts amounted
to $66 million, $43 million and $15 million, respectively. Refer to “Properties – Delivery Commitments” for more information about
these delivery contracts.
Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve
estimates or underlying assumptions will materially affect the quantities and present value of our reserves.
The process of estimating oil and natural gas reserves is complex. It requires interpretations of available technical data and many
assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions
could materially affect the estimated quantities and present value of reserves referred to in this Annual Report on Form 10-K.
In order to prepare our estimates, we must project production rates and timing of development expenditures. We must also analyze
available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. The process
also requires economic assumptions about matters such as the following:
historical production from the area compared with production rates from other producing areas;
the assumed effect of governmental regulation; and
22
assumptions about future prices of oil, NGLs and natural gas including differentials, production and development costs, gathering
and transportation costs, severance and excise taxes, capital expenditures and availability of funds.
Therefore, estimates of oil and natural gas reserves are inherently imprecise. Actual future production; oil, NGL and natural gas prices;
revenues; taxes; exploration and development expenditures; operating expenses; and quantities of recoverable oil and natural gas
reserves will most likely vary from our estimates. Any significant variance could materially affect the estimated quantities and present
value of reserves referred to in this Annual Report on Form 10-K. In addition, we may adjust estimates of proved reserves to reflect
production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are
beyond our control.
You should not assume that the present value of future net revenues from our proved reserves, as referred to in this report, is the current
market value of our estimated proved oil and natural gas reserves. In accordance with SEC requirements, we base the estimated
discounted future net cash flows from our proved reserves on 12-month average prices and current costs as of the date of the estimate.
The 12-month average prices used for the year ended December 31, 2017 were $51.34 per Bbl and $2.98 per MMBtu. Actual future
prices and costs may differ materially from those used in the estimate. If the 12-month average oil prices used to calculate our oil
reserves decline by $1.00 per Bbl, then the standardized measure of discounted future net cash flows of our estimated proved reserves
as of December 31, 2017 would have decreased by $181 million. If the 12-month average natural gas prices used to calculate our natural
gas reserves decline by $0.10 per MMBtu, then the standardized measure of discounted future net cash flows of our estimated proved
reserves as of December 31, 2017 would have decreased by $21 million.
Our exploration and development operations require substantial capital, and we may be unable to obtain needed capital or financing
on satisfactory terms, which could lead to a loss of properties and a decline in our oil and natural gas reserves.
The oil and gas industry is capital intensive. We make and expect to continue to make substantial capital expenditures in our business
and operations for the exploration, development, production and acquisition of oil and natural gas reserves. To date, we have financed
capital expenditures through a combination of internally generated cash flows, equity and debt issuances, bank borrowings, agreements
with industry partners and oil and gas property divestments. We intend to finance future capital expenditures with cash flow from
operations, proceeds from property divestitures, cash on hand and financing arrangements. Our cash flow from operations and access
to capital is subject to a number of variables, including:
the prices at which oil and natural gas are sold;
our proved reserves;
the level of oil and natural gas we are able to produce from existing wells;
the costs of producing oil and natural gas; and
our ability to acquire, locate and produce new reserves.
If our revenues or the borrowing base under our credit agreement decrease as a result of lower oil and natural gas prices, operating
difficulties, declines in reserves, or for any other reason, then we may have limited ability to obtain the capital necessary to sustain our
operations at current levels.
We may, from time to time, need to seek additional financing. There can be no assurance as to the availability or terms of any additional
financing. If additional capital is needed, we may not be able to obtain debt or equity financing on terms favorable to us, or at all. If
cash generated by operations or available under our revolving credit facility is not sufficient to meet our capital requirements, the failure
to obtain additional financing could result in a curtailment of our operations relating to the exploration and development of our prospects,
which in turn could lead to a possible loss of properties and a decline in our oil and natural gas reserves.
Part of our business strategy includes selling properties which subjects us to various risks.
Part of our business strategy includes selling properties when we believe that the sales price realized will provide an above average rate
of return for the property or when the property no longer matches the profile of properties we desire to own. However, there is no
assurance that such sales will occur in the time frames or with the economic terms we expect. Unless we conduct successful exploration,
development and production activities or acquire properties containing proved reserves, divestitures of our properties will reduce our
proved reserves and potentially our production. We may not be able to develop, find or acquire additional reserves sufficient to replace
such reserves and production from any of the properties we sell. Additionally, agreements pursuant to which we sell properties may
include terms that survive closing of the sale, including indemnification provisions, which could obligate us to substantial liabilities.
23
Risks associated with the production, gathering, transportation and sale of oil, NGLs and natural gas could adversely affect net
income and cash flows.
Our net income and cash flows will depend upon, among other things, oil, NGL and natural gas production and the prices received and
costs incurred to develop and produce oil and natural gas reserves. Drilling, production or transportation accidents that temporarily or
permanently halt the production and sale of oil, NGLs and natural gas will decrease revenues and increase expenditures. For example,
accidents may occur that result in personal injuries, property damage, damage to productive formations or equipment and environmental
damages. Any costs incurred in connection with any such accidents that are not insured against will have the effect of reducing net
income. Also, we do not have insurance policies in effect that are intended to provide coverage for losses solely related to hydraulic
fracturing operations. Refer to the risk factor entitled “Federal, state and local legislative and regulatory initiatives relating to hydraulic
fracturing...” for a discussion of the uncertainty involved in the regulation of hydraulic fracturing. Also, our oil, NGL and natural gas
production depends in large part on the proximity and capacity of pipeline systems and transportation facilities which are mostly owned
by third parties. The lack of availability or the lack of capacity on these systems and facilities could result in the curtailment of
production or the delay or discontinuance of drilling plans. Similarly, curtailments or damage to pipelines and other transportation
facilities used to transport oil, NGLs and natural gas production to markets for sale could decrease revenues or increase transportation
expenses. Any such curtailments or damage to the gathering systems could also require finding alternative means to transport the oil,
NGLs and natural gas production, which alternative means could result in additional costs that will have the effect of increasing
transportation expenses.
Also, in response to accidents involving rail cars carrying Bakken formation crude oil, the U.S. Department of Transportation (the
“DOT”) issued an emergency order in February 2014 that requires rail shippers to test the makeup of such crude oil before transporting
it. This move follows the safety alert the DOT issued in January 2014 that Bakken formation crude oil is more flammable than other
types of crude oil and has been followed by additional emergency orders and safety advisories and alerts. An accident involving rail
cars could result in significant personal injuries and property and environmental damage. In May 2015, the Pipeline and Hazardous
Material Safety Administration issued new rules applicable to “high-hazard flammable trains”, discussed in “Item 1 Business –
Regulation – Regulation of Sale and Transportation of Oil” above, which could increase transportation expenses. Similarly, regulatory
responses to the October 2015 failure at a Southern California underground natural gas storage facility could also lead to increased
expenses for underground storage.
In addition, drilling, production and transportation of hydrocarbons bear the inherent risk of loss of containment. Potential consequences
include loss of reserves, loss of production, loss of economic value associated with the affected wellbore, contamination of air, soil,
ground water and surface water, as well as potential fines, penalties or damages associated with any of the foregoing consequences.
Our acreage must be drilled before lease expiration, generally within three to five years, in order to hold the acreage by production.
Failure to drill sufficient wells in order to hold acreage will result in substantial lease renewal costs, or if renewal is not feasible,
loss of our lease and prospective drilling opportunities.
Unless production is established on our undeveloped acreage, the underlying leases will expire. As of December 31, 2017, the portion
of our net undeveloped acreage that is subject to expiration over the next three years, if not successfully developed or renewed, is
approximately 37% in 2018, 10% in 2019 and 12% in 2020. The cost to renew such leases may increase significantly, and we may not
be able to renew such leases on commercially reasonable terms or at all. In addition, on certain portions of our acreage, third-party
leases become immediately effective if our leases expire. As such, our actual drilling activities may materially differ from our current
expectations, which could adversely affect our business.
Our acquisition activities may not be successful.
As part of our growth strategy, we have made and may continue to make acquisitions of businesses and properties. However, suitable
acquisition candidates may not continue to be available on terms and conditions we find acceptable, and acquisitions pose substantial
risks to our business, financial condition and results of operations. In pursuing acquisitions, we compete with other companies, many
of which have greater financial and other resources to acquire attractive companies and properties. The following are some of the risks
associated with acquisitions, including any completed or future acquisitions:
some of the acquired businesses or properties may not produce revenues, reserves, earnings or cash flow at anticipated levels;
we may assume liabilities that were not disclosed to us or that exceed our estimates;
we may be unable to integrate acquired businesses successfully and to realize anticipated economic, operational and other benefits
in a timely manner, which could result in substantial costs and delays or other operational, technical or financial problems;
acquisitions could disrupt our ongoing business, distract management, divert resources and make it difficult to maintain our current
business standards, controls and procedures;
we may issue additional equity or debt securities in order to fund future acquisitions; and
24
we may incur losses as a result of title defects.
The unavailability or high cost of additional drilling rigs, equipment, supplies, personnel and oil field services could adversely affect
our ability to execute our exploration and development plans on a timely basis or within our budget.
The demand for qualified and experienced field personnel to conduct field operations, geologists, geophysicists, engineers and other
professionals in the oil and natural gas industry can fluctuate significantly, often in correlation with oil and natural gas prices, causing
periodic shortages. Historically, there have been shortages of drilling rigs, completion crews and other oilfield equipment as demand
for these items has increased along with the number of wells being drilled and completed. These factors also cause significant increases
in costs for equipment, services and personnel. Higher oil and natural gas prices generally stimulate demand and result in increased
prices for drilling rigs and other oilfield goods and services. Shortages of field personnel and other professionals, drilling rigs,
completion crews, equipment or supplies or price increases could delay or adversely affect our exploration and development operations,
which could restrict such operations or have a material adverse effect on our business, financial condition, results of operations or cash
flows.
Our identified drilling locations are scheduled out over several years, making them susceptible to uncertainties that could materially
alter the occurrence or timing of their drilling.
We have specifically identified and scheduled drilling locations as an estimation of our future multi-year drilling activities on our existing
acreage. These scheduled drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these
locations depends on a number of uncertainties, including oil and natural gas prices, the availability of capital, costs of oil field goods
and services, drilling results, our ability to extend drilling acreage leases beyond expiration, regulatory approvals and other factors.
Because of these uncertainties, we do not know if the numerous potential drilling locations we have identified will ever be drilled or if
we will be able to produce oil or gas from these or any other potential drilling locations. As such, our actual drilling activities may
materially differ from those presently identified, which could in turn adversely affect our business or require us to remove certain proved
undeveloped reserves from our proved reserve base if we are unable to drill those PUD locations within the SEC’s 5-year window.
We have been an early entrant into new or emerging plays. As a result, our drilling results in these areas are uncertain, the value
of our undeveloped acreage may decline and we may incur impairment charges if drilling results are unsuccessful.
While our costs to acquire undeveloped acreage in new or emerging plays have generally been less than those of later entrants into a
developing play, our drilling results in these areas are more uncertain than drilling results in areas that are developed and producing.
Since new or emerging plays have limited or no production history, we are unable to use past drilling results in those areas to help
predict our future drilling results. Therefore, our cost of drilling, completing and operating wells in these areas may be higher than
initially expected, and the value of our undeveloped acreage will decline if drilling results are unsuccessful. Furthermore, if drilling
results are unsuccessful, we may be required to write down the carrying value of our undeveloped acreage in new or emerging plays.
For example, during 2017 we recorded a $12 million non-cash charge for the impairment of undeveloped oil and gas properties where
we have no current or future plans to drill. We may also incur such impairment charges in the future, which could have a material
adverse effect on our results of operations in the period taken. Additionally, our rights to develop a portion of our undeveloped acreage
may expire if not successfully developed or renewed. Refer to “Acreage” in Item 2 of this Annual Report on Form 10-K for more
information relating to the expiration of our rights to develop undeveloped acreage.
Properties that we acquire may not produce as projected, and we may be unable to identify liabilities associated with the properties
or obtain indemnities from sellers for liabilities they may have created.
Our business strategy includes a continuing acquisition program. From 2004 through 2017, we completed 21 separate significant
acquisitions of producing properties with a combined purchase price of $6.4 billion for estimated proved reserves as of the effective
dates of the acquisitions of 445.2 MMBOE. The successful acquisition of producing properties requires assessment of many factors,
which are inherently inexact and may be inaccurate, including the following:
the amount of recoverable reserves;
future oil and natural gas prices;
estimates of operating costs;
estimates of future development costs;
timing of future development costs;
estimates of the costs and timing of plugging and abandonment; and
the assumption of unknown potential environmental and other liabilities, losses or costs, including for example, historical spills
or releases for which we are not indemnified or for which our indemnity is inadequate.
25
Our assessment will not reveal all existing or potential problems, nor will it permit us to become familiar enough with the properties to
assess fully their capabilities and deficiencies. In the course of our due diligence, we may not inspect every well, platform, facility or
pipeline. Inspections may not reveal structural and environmental problems, such as pipeline corrosion or groundwater contamination,
when they are made. We may not be able to obtain contractual indemnities from the seller for liabilities that it created. We may be
required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in
accordance with our expectations.
Our use of oil and natural gas price hedging contracts involves only a portion of our anticipated production, may limit higher
revenues in the future in connection with commodity price increases and may result in significant fluctuations in our net income.
We enter into hedging transactions of our oil and natural gas production revenues to reduce our exposure to fluctuations in the price of
oil and natural gas. Our hedging transactions to date have consisted of financially settled crude oil and natural gas options contracts,
primarily costless collars and swaps, placed with major financial institutions. As of January 23, 2018, we had contracts covering the
sale of 1,850,000 barrels of oil per month for all of 2018, which represents approximately 72% of our forecasted 2018 oil production
volumes. All of our oil hedges will expire by June 2019. Refer to “Quantitative and Qualitative Disclosures about Market Risk” in
Item 7A of this Annual Report on Form 10-K for pricing information and a more detailed discussion of our hedging transactions.
We may in the future enter into these and other types of hedging arrangements to reduce our exposure to fluctuations in the market
prices of oil and natural gas, or alternatively, we may decide to unwind or restructure the hedging arrangements we previously entered
into. Hedging transactions expose us to risk of financial loss in some circumstances, including if production is less than expected, the
other party to the contract defaults on its obligations or there is a change in the expected differential between the underlying price in the
hedging agreement and actual prices received. Hedging transactions may limit the benefit we may otherwise receive from increases in
the price for oil and natural gas. Our three-way collars only provide partial protection against declines in market prices due to the fact
that when the market price falls below the sub-floor, the minimum price we will receive will be NYMEX plus the difference between
the floor and the sub-floor. Furthermore, if we do not engage in hedging transactions or unwind hedging transactions we previously
entered into, then we may be more adversely affected by declines in oil and natural gas prices than our competitors who engage in
hedging transactions. Additionally, hedging transactions may expose us to cash margin requirements.
We recognize all gains and losses from changes in commodity derivative fair values immediately in earnings rather than deferring any
such amounts in accumulated other comprehensive income (loss). Consequently, we may experience significant net losses, on a non-
cash basis, due to changes in the value of our hedges as a result of commodity price volatility.
Seasonal weather conditions and lease stipulations adversely affect our ability to conduct drilling activities in some of the areas
where we operate.
Oil and gas operations in the Rocky Mountains are adversely affected by seasonal weather conditions and lease stipulations designed to
protect various wildlife. In certain areas, drilling and other oil and gas activities can only be conducted during the spring and summer
months. This limits our ability to operate in those areas and can intensify competition during those months for drilling rigs, oil field
equipment, services, supplies and qualified personnel, which may lead to periodic shortages. Resulting shortages or high costs could
delay our operations, cause temporary declines in our oil and gas production and materially increase our operating and capital costs.
An increase in the differential or decrease in the premium between the NYMEX or other benchmark prices of oil and natural gas
and the wellhead price we receive could have a material adverse effect on our results of operations, financial condition and cash
flows.
The prices that we receive for our oil and natural gas production generally trade at a discount, but sometimes at a premium, to the
relevant benchmark prices such as NYMEX. A negative difference between the benchmark price and the price received is called a
differential and a positive difference is called a premium. The differential and premium may vary significantly due to market conditions,
the quality and location of production and other risk factors. We cannot accurately predict oil and natural gas differentials and premiums.
Increases in the differential and decreases in the premium between the benchmark price for oil and natural gas and the wellhead price
we receive could have a material adverse effect on our results of operations, financial condition and cash flows.
We may incur substantial losses and be subject to substantial liability claims as a result of our oil and gas operations.
We are not insured against all risks. Losses and liabilities arising from uninsured and underinsured events could materially and adversely
affect our business, financial condition or results of operations. Our oil and natural gas exploration and production activities are subject
to all of the operating risks associated with drilling for and producing oil and natural gas, including the possibility of:
environmental hazards, such as uncontrollable flows of oil, gas, brine, well fluids, toxic gas or other pollution into the environment,
including groundwater and shoreline contamination;
abnormally pressured formations;
26
mechanical difficulties, such as stuck oil field drilling and service tools and casing collapse;
the loss of well control;
fires and explosions;
personal injuries and death; and
natural disasters.
Any of these risks could adversely affect our ability to conduct operations or result in substantial losses to our company. We may elect
not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollution
and environmental risks generally are not fully insurable. If a significant accident or other event occurs and is not fully covered by
insurance, then it could adversely affect us.
We have limited control over activities on properties we do not operate, which could reduce our production and revenues and increase
capital expenditures.
We operate 82% of our net productive oil and natural gas wells, which represents 88% of our proved developed producing reserves as
of December 31, 2017. If we do not operate the properties in which we own an interest, we do not have control over normal operating
procedures, expenditures or future development of our properties. The failure of an operator of our wells to adequately perform
operations or an operator’s breach of the applicable agreements could reduce our production and revenues. The success and timing of
our drilling and development activities on properties operated by others therefore depends upon a number of factors outside of our
control, including the operator’s decisions with respect to the timing and amount of capital expenditures, the period of time over which
the operator seeks to generate a return on capital expenditures, inclusion of other participants in drilling wells, and the use of technology,
as well as the operator’s expertise and financial resources and the operator’s relative interest in the field. Operators may also opt to
decrease operational activities following a significant decline in, or a sustained period of low, oil or natural gas prices. Because we do
not have a majority interest in most wells we do not operate, we may not be in a position to remove the operator in the event of poor
performance. Accordingly, while we use reasonable efforts to cause the operator to act in a prudent manner, we are limited in our ability
to do so.
Our use of 3-D seismic data is subject to interpretation and may not accurately identify the presence of oil and gas, which could
adversely affect the results of our drilling operations.
Even when properly used and interpreted, 3-D seismic data and visualization techniques are only tools used to assist geoscientists in
identifying subsurface structures and hydrocarbon indicators and do not enable the interpreter to know whether hydrocarbons are, in
fact, present in those structures. In addition, the use of 3-D seismic and other advanced technologies requires greater predrilling
expenditures than traditional drilling strategies do, and we could incur losses as a result of such expenditures. Thus, some of our drilling
activities may not be successful or economical, and our overall drilling success rate or our drilling success rate for activities in a particular
area could decline. We often gather 3-D seismic data over large areas. Our interpretation of seismic data delineates for us those portions
of an area that we believe are desirable for drilling. Therefore, we may choose not to acquire option or lease rights prior to acquiring
seismic data, and in many cases, we may identify hydrocarbon indicators before seeking option or lease rights in the location. If we are
not able to lease those locations on acceptable terms, it would result in our having made substantial expenditures to acquire and analyze
3-D seismic data without having an opportunity to attempt to benefit from those expenditures.
Market conditions or operational impediments may hinder our access to oil and gas markets or delay our production.
In connection with our continued development of oil and gas properties, we may be disproportionately exposed to the impact of delays
or interruptions of production from wells on these properties, caused by transportation capacity constraints, curtailment of production
or the interruption of transporting oil and gas volumes produced. In addition, market conditions or a lack of satisfactory oil and gas
transportation arrangements may hinder our access to oil and gas markets or delay our production. The availability of a ready market
for our oil, NGL and natural gas production depends on a number of factors, including the demand for and supply of oil, NGLs and
natural gas and the proximity of reserves to pipelines and terminal facilities. Our ability to market our production depends substantially
on the availability and capacity of gathering systems, pipelines and processing facilities owned and operated by third-parties.
Additionally, entering into arrangements for these services exposes us to the risk that third parties will default on their obligations under
such arrangements. Our failure to obtain such services on acceptable terms or the default by a third party on their obligation to provide
such services could materially harm our business. We may be required to shut in wells for a lack of a market or because access to gas
pipelines, gathering systems or processing facilities may be limited or unavailable. If that were to occur, then we would be unable to
realize revenue from those wells until production arrangements were made to deliver the production to market.
27
We are subject to complex laws that can affect the cost, manner or feasibility of doing business.
Exploration, development, production and sale of oil and natural gas are subject to extensive federal, state, local and international
regulation. We may be required to make large expenditures to comply with governmental regulations. Matters subject to regulation
include:
discharge permits for drilling operations;
drilling bonds;
reports concerning operations;
well spacing;
unitization and pooling of properties; and
taxation.
Under these laws, we could be liable for personal injuries, property damage and other damages. Failure to comply with these laws also
may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover,
these laws could change in ways that could substantially increase our costs. Any such liabilities, penalties, suspensions, terminations or
regulatory changes could materially and adversely affect our financial condition and results of operations.
Our operations may incur substantial costs and liabilities to comply with environmental laws and regulations.
Our oil and gas operations are subject to stringent federal, state and local laws and regulations relating to the release or disposal of
materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition
of a permit before drilling commences; restrict the types, quantities and concentration of materials that can be released into the
environment in connection with drilling and production activities; limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas; and impose substantial liabilities for pollution resulting from our operations. Failure to
comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, incurrence of
investigatory or remedial obligations, the imposition of injunctive relief, or certain leases could be cancelled in the event that an agency
refuses to issue or delays the issuance of a required permit. Under these environmental laws and regulations, we could be held strictly
liable for the removal or remediation of previously released materials or property contamination regardless of whether we were
responsible for the release or if our operations were standard in the industry at the time they were performed. Private parties, including
the surface owners of properties upon which we drill, may also have the right to pursue legal actions to enforce compliance as well as
to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage. We may not
be able to recover some or any of these costs from insurance. Moreover, federal law and some state laws allow the government to place
a lien on real property for costs incurred by the government to address contamination on the property.
President Trump has indicated that he would work to ease regulatory burdens on industry and on the oil and gas sector, including
environmental regulations. However, any executive orders the President may issue or any new legislation Congress may pass with the
goal of reducing environmental statutory or regulatory requirements may be challenged in court. In addition, various state laws and
regulations (and permits issued thereunder) will be unaffected by federal changes unless and until the state laws and corresponding
permits are similarly changed, and any judicial review is completed.
Changes in environmental laws and regulations occur frequently and may have a materially adverse impact on our business. For
example, in 2012, the EPA published final rules under the Federal Clean Air Act (the “CAA”) that subject oil and natural gas production,
processing, transmission and storage operations to regulation under the New Source Performance Standards and National Emission
Standards for Hazardous Air Pollutants. With regards to production activities, these rules require, among other things, the reduction of
volatile organic compound emissions from certain fractured and refractured gas wells for which well completion operations are
conducted and, in particular, requiring some of these wells to use reduced emission completions, also known as “green completions”,
after January 1, 2015. These regulations also establish specific new requirements regarding emissions from production-related wet seal
and reciprocating compressors, pneumatic controllers and storage vessels.
The EPA announced in 2015 that it would directly regulate methane emissions from oil and natural gas wells for the first time as part
of President Obama’s Climate Action Plan. As part of this strategy, in May 2016, the EPA issued three final rules. The EPA issued a
final rule that updated the New Source Performance Standards to add requirements that the oil and gas industry reduce emissions of
greenhouse gases and to cover additional equipment and activities in the oil and gas production chain. The final rule sets emissions
limits for methane, which is the principal greenhouse gas emitted by equipment and processes in the oil and gas sector. This rule applies
to new, reconstructed and modified processes and equipment. This rule also expands the volatile organic compound emissions limits to
hydraulically fractured oil wells and equipment used across the industry that was not regulated in the 2012 rules. The rule also requires
owners and operators to find and repair leaks, also known as “fugitive emissions.” The EPA also issued a final rule known as the Source
Determination Rule, which is intended to clarify when multiple pieces of equipment and activities in the oil and gas industry must be
28
deemed a single source when determining whether major source permitting programs apply under the prevention of significant
deterioration, nonattainment new source review preconstruction and operation permit programs under Title V of the CAA (“Title V”).
The final rule defines the term “adjacent” to clarify that equipment and activities in the oil and gas sector that are under common control
will be considered part of the same source if they are located near each other – specifically, if they are located on the same site, or on
sites that share equipment and are within one quarter of a mile of each other. This rule applies to equipment and activities used for
onshore oil and natural gas production, and for natural gas processing. It does not apply to offshore operations. Finally, the EPA also
issued a final Federal Implementation Plan (“FIP”) for Indian country, which implements the minor new source review program in
Indian country for oil and natural gas production. The FIP will be used instead of site-specific minor new source review preconstruction
permits in Indian country and incorporates emissions limits and other requirements from eight federal air standards, including the final
New Source Performance Standard, subpart OOOOa. Requirements of the FIP apply throughout Indian country, except non-reservation
areas, unless a tribe or the EPA demonstrates jurisdiction for those areas.
Compliance with such rules could result in significant costs, including increased capital expenditures and operating costs, which may
adversely impact our business. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-
compliance with air permits or other requirements of the CAA and associated state laws and regulations.
In 2016, the EPA also issued the first draft of an Information Collection Request, seeking a broad range of information on the oil and
gas industry, including: how equipment and emissions controls are, or can be, configured, what installing those controls entails and the
associated costs. This includes information on natural gas venting that occurs as part of existing processes or maintenance activities,
such as well and pipeline blowdowns, equipment malfunctions and flashing emissions from storage tanks.
In June 2017, the EPA proposed staying the final rule implementing certain of the new oil and gas standards for two years while it
reconsiders the rules. In November 2017, the EPA issued a notice of data availability for the proposed stay of the rules, with a comment
period closing on December 8, 2017.
We are currently engaged in discussions with the Colorado Department of Public Health and Environment (the “CDPHE”) concerning
certain equipment used in our Redtail facilities and our compliance with various air permits and applicable federal and state air quality
laws and regulations over the control of air pollutant emissions from those facilities. We and the CDPHE are negotiating the terms of a
settlement agreement to resolve this matter.
Any increased governmental regulation or suspension of oil and natural gas exploration or production activities that arises out of these
incidents could result in higher operating costs, which could in turn adversely affect our operating results. Also, for instance, any
changes in laws or regulations that result in more stringent or costly material handling, storage, transport, disposal or cleanup
requirements could require us to make significant expenditures to maintain compliance and may otherwise have a material adverse effect
on our results of operations, competitive position or financial condition as well as those of the oil and gas industry in general.
Climate change legislation or regulations restricting emissions of greenhouse gases could result in increased operating costs and
reduced demand for oil and gas that we produce.
In December 2009, the EPA published its findings that emissions of carbon dioxide, methane and other greenhouse gases (“GHG”)
present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing
to the warming of the earth’s atmosphere and other climate changes. Based on these findings, the EPA has adopted and implemented
regulations that restrict emissions of GHG under existing provisions of the CAA, including rules that limit emissions of GHG from
motor vehicles beginning with the 2012 model year. The EPA has asserted that these final motor vehicle GHG emission standards
trigger the CAA construction and operating permit requirements for stationary sources, commencing when the motor vehicle standards
took effect in January 2011. In June 2010, the EPA published its final rule to address the permitting of GHG emissions from stationary
sources under the Prevention of Significant Deterioration (the “PSD”) and Title V permitting programs. This rule “tailors” these
permitting programs to apply to certain stationary sources of GHG emissions in a multi-step process, with the largest sources first subject
to permitting. Further, facilities required to obtain PSD permits for their GHG emissions are required to reduce those emissions
consistent with guidance for determining “best available control technology” standards for GHG, which guidance was published by the
EPA in November 2010. Also in November 2010, the EPA expanded its existing GHG reporting rule to include onshore oil and natural
gas production, processing, transmission, storage and distribution facilities. This rule requires reporting of GHG emissions from such
facilities on an annual basis.
In June 2014, the Supreme Court upheld most of the EPA’s GHG permitting requirements, allowing the agency to regulate the emission
of GHG from stationary sources already subject to the PSD and Title V requirements. Certain of our equipment and installations may
currently be subject to PSD and Title V requirements and hence, under the Supreme Court’s ruling, may also be subject to the installation
of controls to capture GHGs. For any equipment or installation so subject, we may have to incur increased compliance costs to capture
related GHG emissions.
29
In accordance with President Obama’s Climate Action Plan, in August 2015, the EPA issued a rule to reduce carbon emissions from
electric generating units. The rule, commonly called the “Clean Power Plan”, requires states to develop plans to reduce carbon emissions
from fossil fuel-fired generating units commencing in 2022, with the reductions to be fully phased in by 2030. Each state is given a
different carbon reduction target, but the EPA expects that, in the aggregate, the overall proposal will reduce carbon emissions from
electric generating units by 32% from 2005 levels. States are given substantial flexibility in meeting their emission reduction targets
and can generally choose to lower carbon emissions by replacing higher carbon generation, such as coal or natural gas, with lower
carbon generation, such as efficient natural gas units or renewable energy alternatives. Several industry groups and states have
challenged the Clean Power Plan in the Court of Appeals for the D.C. Circuit, and in February 2016, the U.S. Supreme Court stayed the
implementation of the Clean Power Plan while it is being challenged in court. The Court of Appeals for the D.C. Circuit heard oral
arguments on the Clean Power Plan in September 2016, but has not yet issued a decision. On March 28, 2017, the Trump Administration
issued an executive order directing the EPA to review the Clean Power Plan. On the same day, the EPA filed a motion in the U.S. Court
of Appeals for the D.C. Circuit requesting that the court hold the case in abeyance while the EPA conducts its review of the Clean Power
Plan. On October 16, 2017, the EPA published a proposed rule that would repeal the Clean Power Plan. The EPA also stated in the
proposed rule that the agency has not determined the scope of any rule to regulate GHG emissions from existing electric generating
units, but intends to issue an Advance Notice of Proposed Rulemaking “in the near future.” Several states have already announced their
intention to challenge any repeal of the Clean Power Plan. It is not yet clear what changes, if any, will result from the EPA’s proposal,
whether or how the courts will rule on the legality of the Clean Power Plan, the EPA’s repeal of the rules, or any future replacement.
In addition, both houses of Congress have actively considered legislation to reduce emissions of GHG, and many states have already
taken legal measures to reduce emissions of GHG, primarily through the development of GHG inventories, GHG permitting and/or
regional GHG “cap and trade” programs. Most of these “cap and trade” programs work by requiring either major sources of emissions
or major producers of fuels to acquire and surrender emission allowances, with the number of allowances available for purchase reduced
each year until the overall GHG emission reduction goal is achieved. In the absence of new legislation, the EPA is issuing new
regulations that limit emissions of GHG associated with our operations which will require us to incur costs to inventory and reduce
emissions of GHG associated with our operations and which could adversely affect demand for the oil, NGLs and natural gas that we
produce. Finally, it should be noted that many scientists have concluded that increasing concentrations of GHG in the atmosphere may
produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, floods and
other climatic events. If any such effects were to occur, they could have an adverse effect on our assets and operations.
Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our cash
flows and results of operations.
Unless we conduct successful exploration, development and production activities or acquire properties containing proved reserves, our
proved reserves will decline as those reserves are produced. Producing oil and natural gas reservoirs are generally characterized by
declining production rates that vary depending upon reservoir characteristics and other factors. Our future oil and natural gas reserves
and production, and therefore our cash flow and income, are highly dependent on our success in efficiently developing and producing
our current reserves and economically finding or acquiring additional recoverable reserves. We may not be able to develop, find or
acquire additional reserves to replace our current and future production.
The loss of senior management or technical personnel could adversely affect us.
To a large extent, we depend on the services of our senior management and technical personnel. The loss of the services of our senior
management or technical personnel, including Bradley J. Holly, President and Chief Executive Officer; Bruce R. DeBoer, Senior Vice
President, General Counsel and Corporate Secretary; Peter W. Hagist, Senior Vice President, Planning; Rick A. Ross, Senior Vice
President, Operations; Michael J. Stevens, Senior Vice President and Chief Financial Officer; Mark R. Williams, Senior Vice President,
Exploration and Development; Steven A. Kranker, Vice President, Reservoir Engineering/Acquisitions; or David M. Seery, Vice
President, Land, could have a material adverse effect on our operations. We do not maintain, nor do we plan to obtain, any insurance
against the loss of any of these individuals.
Substantial acquisitions or other transactions could require significant external capital and could change our risk and property
profile.
In order to finance acquisitions of additional producing or undeveloped properties, we may need to alter or increase our capitalization
substantially through the issuance of debt or equity securities, the sale of production payments or other means. These changes in
capitalization may significantly affect our risk profile. Additionally, significant acquisitions or other transactions can change the
character of our operations and business. The character of the new properties may be substantially different in operating or geological
characteristics or geographic location than our existing properties. Furthermore, we may not be able to obtain external funding for
additional future acquisitions or other transactions or to obtain external funding on terms acceptable to us.
30
Competition in the oil and gas industry is intense, which may adversely affect our ability to compete.
We operate in a highly competitive environment for acquiring properties, obtaining investment capital, securing oilfield goods and
services, marketing oil and natural gas products and attracting and retaining qualified personnel. Many of our competitors possess and
employ financial, technical and personnel resources substantially greater than ours, which can be particularly important in the areas in
which we operate. Those companies may be able to pay more for productive oil and gas properties and exploratory prospects and to
evaluate, bid for and purchase a greater number of properties and prospects than our resources allow for. Our ability to acquire additional
prospects and to find and develop reserves in the future will depend on our ability to evaluate and select suitable properties and to
consummate transactions in a highly competitive environment. We may not be able to compete successfully in the future in acquiring
prospective reserves, developing reserves, marketing hydrocarbons, attracting and retaining quality personnel and raising additional
capital.
In connection with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, new regulations in this area
may result in increased costs and cash collateral requirements for the types of oil and gas derivative instruments we use to manage
our risks related to oil and gas commodity price volatility.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted into law. This financial reform
legislation includes provisions that require over-the-counter derivative transactions to be executed through an exchange or centrally
cleared. In addition, the legislation provides an exemption from mandatory clearing requirements based on regulations to be developed
by the Commodity Futures Trading Commission (the “CFTC”) and the SEC for transactions by non-financial institutions to hedge or
mitigate commercial risk. At the same time, the legislation includes provisions under which the CFTC may impose collateral
requirements for transactions, including those that are used to hedge commercial risk. However, during drafting of the legislation,
members of Congress adopted report language and issued a public letter stating that it was not their intention to impose margin and
collateral requirements on counterparties that utilize transactions to hedge commercial risk. Final rules on major provisions in the
legislation, like new margin requirements, may be established through rulemakings and would not take effect until 12 months after the
date of enactment. Although we cannot predict the ultimate outcome of these rulemakings, new regulations in this area may result in
increased costs and cash collateral requirements for the types of oil and gas derivative instruments we use to hedge and to otherwise
manage our financial risks related to volatility in oil and gas commodity prices.
We depend on computer and telecommunications systems, and failures in our systems or cyber security attacks could significantly
disrupt our business operations.
We have entered into agreements with third parties for hardware, software, telecommunications and other information technology
services in connection with our business. In addition, we have developed proprietary software systems, management techniques and
other information technologies incorporating software licensed from third parties. It is possible we could incur interruptions from cyber
security attacks, computer viruses or malware. We believe that we have positive relations with our related vendors and maintain
adequate anti-virus and malware software and controls; however, any interruptions to our arrangements with third parties for our
computing and communications infrastructure or any other interruptions to our information systems could lead to data corruption,
communication interruption or otherwise significantly disrupt our business operations.
Our convertible senior notes may adversely affect the market price of our common stock.
The market price of our common stock is likely to be influenced by our convertible senior notes. For example, the market price of our
common stock could become more volatile and could be depressed by:
investors’ anticipation of the potential resale in the market of a substantial number of additional shares of our common stock
received upon conversion of our convertible senior notes;
possible sales of our common stock by investors who view our convertible senior notes as a more attractive means of equity
participation in us than owning shares of our common stock; and
hedging or arbitrage trading activity that may develop involving our convertible senior notes and our common stock.
Item 1B. Unresolved Staff Comments
None.
31
Item 2. Properties
Summary of Oil and Gas Properties and Projects
Northern Rocky Mountains
Our Northern Rocky Mountains operations include our properties in the Williston Basin of North Dakota and Montana targeting the
Bakken and Three Forks formations and encompassing approximately 688,200 gross (409,600 net) developed and undeveloped acres as
of December 31, 2017. Our estimated proved reserves in the Northern Rocky Mountains as of December 31, 2017 were 562.5 MMBOE
(53% oil), which represented 91% of our total estimated proved reserves and contributed 106.8 MBOE/d of average daily production in
the fourth quarter of 2017.
Across our acreage in the Williston Basin, we have implemented new completion designs which utilize cemented liners, plug-and-perf
technology, significantly higher sand volumes, new diversion technology and both hybrid and slickwater fracture stimulation methods,
which have resulted in improved initial production rates. As of December 31, 2017, we had four rigs active in the Williston Basin, and
we plan to add a fifth rig in this area mid-year 2018.
Central Rocky Mountains
Our Central Rocky Mountains operations include properties at our Redtail field in the Denver Julesburg Basin (“DJ Basin”) in Weld
County, Colorado targeting the Niobrara and Codell/Fort Hays formations and encompassing approximately 120,200 gross (100,000
net) developed and undeveloped acres as of December 31, 2017. Our estimated proved reserves in the Central Rocky Mountains as of
December 31, 2017 were 49.9 MMBOE (70% oil), which represented 8% of our total estimated proved reserves and contributed 20.6
MBOE/d of average daily production in the fourth quarter of 2017.
We have established production in the Niobrara “A”, “B” and “C” zones and the Codell/Fort Hays formations. In response to low
commodity prices, we suspended completion operations in this area beginning in the second quarter of 2016, however, we resumed
completion activity during the first quarter of 2017 and added a second completion crew in April 2017. During 2017, we completed
and brought on production a significant portion of our drilled uncompleted well inventory (“DUCs”) from yearend 2016. During the
fourth quarter of 2017, based on the recent and comparative well performance results of the DJ Basin to the Williston Basin, our
management decided to concentrate development activities during 2018 in the Williston Basin. We plan to complete 22 DUCs in our
Redtail field during the first half of 2018, and then cease additional development activity in this area until commodity prices further
recover.
Our Redtail gas plant processes the associated gas produced from our wells in this area, and has a current inlet capacity of 50 MMcf/d.
As of December 31, 2017, the plant was processing 26 MMcf/d.
Other
Our other operations primarily relate to non-core assets in Colorado, Mississippi, New Mexico, Texas and Wyoming. As of
December 31, 2017, these properties contributed 5.2 MMBOE (86% oil) of proved reserves to our portfolio of operations, which
represented 1% of our total estimated proved reserves and contributed 0.6 MBOE/d of average daily production in the fourth quarter of
2017.
32
Reserves
As of December 31, 2017 and 2016, all of our oil and gas reserves were attributable to properties within the United States. A summary
of our proved oil and gas reserves as of December 31, 2017 and 2016 based on average fiscal-year prices (calculated as the unweighted
arithmetic average of the first-day-of-the-month price for each month within the 12-month period ended December 31, 2017 and 2016,
respectively) is as follows:
2017
Proved developed reserves
Proved undeveloped reserves
Total proved reserves
2016
Proved developed reserves
Proved undeveloped reserves
Total proved reserves
Oil
(MBbl)
NGLs
(MBbl)
Natural Gas
(MMcf)
Total
(MBOE)
179,829
157,754
337,583
183,165
211,602
394,767
76,957
61,992
138,949
51,888
49,605
101,493
473,829
372,648
846,477
337,860
377,799
715,659
335,758
281,854
617,612
291,363
324,174
615,537
Proved reserves. Estimates of proved developed and undeveloped reserves are inherently imprecise and are continually subject to
revision based on production history, results of additional exploration and development, price changes and other factors.
Total extensions and discoveries of 58.3 MMBOE in 2017 were primarily attributable to successful drilling in the Williston Basin. Both
the new wells drilled in this area as well as the PUD locations added as a result of drilling increased our proved reserves.
Sales of minerals in place totaled 50.4 MMBOE during 2017 and were primarily attributable to the disposition of the FBIR Assets as
further described in “Acquisitions and Divestitures” within Item 1 of this Annual Report on Form 10-K.
In 2017, revisions to previous estimates increased proved developed and undeveloped reserves by a net amount of 37.1 MMBOE.
Included in these revisions were (i) 88.7 MMBOE of upward adjustments caused by higher crude oil, NGL and natural gas prices
incorporated into our reserve estimates at December 31, 2017 as compared to December 31, 2016 and (ii) 51.6 MMBOE of downward
adjustments primarily attributable to reservoir analysis and well performance at our Redtail field in Colorado.
Proved undeveloped reserves. Our PUD reserves decreased 13% or 42.3 MMBOE on a net basis from December 31, 2016 to
December 31, 2017. The following table provides a reconciliation of our PUDs for the year ended December 31, 2017:
PUD balance—December 31, 2016
Converted to proved developed through drilling
Added from extensions and discoveries
Sold
Revisions
PUD balance—December 31, 2017
Total
(MBOE)
324,174
(43,047)
41,039
(28,337)
(11,975)
281,854
During 2017, we incurred $668 million in capital expenditures, or $15.52 per BOE, to drill and bring on-line 43.0 MMBOE of PUD
reserves. In addition, we added 41.0 MMBOE of PUDs from extensions and discoveries during the year primarily due to successful
drilling in the Williston Basin. We have made an investment decision and adopted a development plan to drill all of our individual PUD
locations within five years of the date such PUDs were added. In that regard, under our current 2018 development plan, we expect to
convert approximately 53.4 MMBOE of PUDs to proved developed reserves during the year.
Preparation of reserves estimates. We maintain adequate and effective internal controls over the reserve estimation process as well as the
underlying data upon which reserve estimates are based. The primary inputs to the reserve estimation process are comprised of technical
information, financial data, ownership interests and production data. All field and reservoir technical information, which is updated
annually, is assessed for validity when the reservoir engineers hold technical meetings with geoscientists, operations and land personnel to
discuss field performance and to validate future development plans. Current revenue and expense information is obtained from our
accounting records, which are subject to our internal controls over financial reporting. Internal controls over financial reporting are assessed
for effectiveness annually using the criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. All current financial data such as commodity prices, lease operating expenses,
33
production taxes and field commodity price differentials are updated in the reserve database and then analyzed to ensure that they have been
entered accurately and that all updates are complete. Our current ownership in mineral interests and well production data are also subject
to the aforementioned internal controls over financial reporting, and they are incorporated into the reserve database as well and verified to
ensure their accuracy and completeness. Once the reserve database has been entirely updated with current information, and all relevant
technical support material has been assembled, our independent engineering firm Cawley, Gillespie & Associates, Inc. (“CG&A”) meets
with our technical personnel in our Denver office to review field performance and future development plans. Following this review, the
reserve database and supporting data is furnished to CG&A so that they can prepare their independent reserve estimates and final report.
Access to our reserve database is restricted to specific members of the reservoir engineering department.
CG&A is a Texas Registered Engineering Firm. Our primary contact at CG&A is Mr. W. Todd Brooker, President. Mr. Brooker is a State
of Texas Licensed Professional Engineer. Refer to Exhibit 99.2 of this Annual Report on Form 10-K for the Report of Cawley, Gillespie
& Associates, Inc. and further information regarding the professional qualifications of Mr. Brooker.
Our Vice President of Reservoir Engineering and Acquisitions is responsible for overseeing the preparation of the reserves estimates. He
has over 33 years of experience, the majority of which has involved reservoir engineering and reserve estimation, and he holds a Bachelor’s
degree in petroleum engineering from the Colorado School of Mines. He is also a member of the Society of Petroleum Engineers.
Acreage
The following table summarizes gross and net developed and undeveloped acreage by core area at December 31, 2017. Net acreage
represents our percentage ownership of gross acreage. Acreage in which our interest is limited to royalty and overriding royalty interests
has been excluded.
Northern Rocky Mountains
Central Rocky Mountains
Other (2)
Gross
Developed Acreage
Net
385,610
35,806
68,593
490,009
648,122
41,301
113,258
802,681
Undeveloped Acreage (1)
Gross
Net
40,078
78,896
134,342
253,316
23,982
64,165
68,505
156,652
Total Acreage
Gross
688,200
120,197
247,600
1,055,997
Net
409,592
99,971
137,098
646,661
_____________________
(1) Out of a total of approximately 253,300 gross (156,700 net) undeveloped acres as of December 31, 2017, the portion of our net
undeveloped acreage that is subject to expiration over the next three years, if not successfully developed or renewed, is
approximately 37% in 2018, 10% in 2019 and 12% in 2020. Only a minor amount of our proved undeveloped reserves are located
on leases that are subject to expiration during 2018.
(2) Other includes Arkansas, California, Colorado, Louisiana, Michigan, Mississippi, New Mexico, Oklahoma, Texas, Utah and
Wyoming.
34
Production History
The following table presents historical information about our produced oil and gas volumes:
Total Company production
Oil (MMBbl)
NGL (MMBbl)
Natural gas (Bcf)
Total (MMBOE)
Daily average (MBOE/d)
Sanish field production (1)
Oil (MMBbl)
NGL (MMBbl)
Natural gas (Bcf)
Total (MMBOE)
Average sales prices (before the effects of hedging)
Oil (per Bbl)
NGLs (per Bbl)
Natural gas (per Mcf)
Average production costs
Production costs (per BOE) (2)
$
$
$
$
Year Ended December 31,
2016
2017
2015
29.3
7.0
41.3
43.1
118.1
5.7
1.1
7.1
8.0
34.0
6.6
41.4
47.5
129.9
7.2
1.0
7.8
9.5
44.30
16.00
1.78
$
$
$
34.36
8.88
1.40
$
$
$
47.2
5.5
41.1
59.6
163.2
9.4
1.2
7.3
11.8
40.95
12.67
2.20
8.57
$
8.25
$
9.02
_____________________
(1) The Sanish field was our only field that contained 15% or more of our total proved reserve volumes during the periods presented.
(2) Production costs reported above exclude ad valorem taxes.
Productive Wells
The following table summarizes gross and net productive oil and natural gas wells by core area at December 31, 2017. A net well
represents our percentage ownership of a gross well. Wells in which our interest is limited to royalty and overriding royalty interests
are excluded.
Northern Rocky Mountains
Central Rocky Mountains
Other (2)
Total
Oil Wells
Gross
Net
Natural Gas Wells
Net
Gross
Total Wells(1)
Gross
Net
2,767
373
1,566
4,706
1,218
293
428
1,939
-
-
69
69
-
-
41
41
2,767
373
1,635
4,775
1,218
293
469
1,980
_____________________
(1) 14 wells have multiple completions, and these 14 wells contain a total of 34 completions. One or more completions in the same
bore hole are counted as one well.
(2) Other primarily includes non-core oil and gas properties located in Colorado, New Mexico, North Dakota, Texas and Wyoming.
Oil and Gas Drilling Activity
We are engaged in numerous drilling activities on properties presently owned, and we intend to drill or develop other properties acquired
in the future. The following table sets forth our oil and gas drilling activity for the last three years. A dry well is an exploratory,
development or extension well that proves to be incapable of producing either oil or gas in sufficient quantities to justify completion as
an oil or gas well. A productive well is an exploratory, development or extension well that is not a dry well. The information below
35
should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between
the number of productive wells drilled and quantities of reserves found.
2017
Development
Exploratory
Total
2016
Development
Exploratory
Total
2015
Development
Exploratory
Total
Productive
Gross Wells
Dry
Total
Productive
Net Wells
Dry
Total
238
-
238
89
-
89
531
7
538
-
-
-
-
-
-
1
1
2
238
-
238
89
-
89
532
8
540
164.1
-
164.1
48.2
-
48.2
260.1
5.7
265.8
-
-
-
-
-
-
1.0
1.0
2.0
164.1
-
164.1
48.2
-
48.2
261.1
6.7
267.8
As of December 31, 2017, we had four operated drilling rigs active on our properties in our Northern Rocky Mountains area. As of
December 31, 2017, we had 174 gross (86.4 net) operated and non-operated wells in the process of drilling, completing or waiting on
completion.
Hydraulic Fracturing
Hydraulic fracturing is a common practice in the oil and gas industry that is used to stimulate production of hydrocarbons from tight oil
and gas formations. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the
surrounding rock and stimulate production. This process has typically been regulated by state oil and gas commissions. However, as
described in more detail in “Business – Regulation – Environmental Regulations – Hydraulic Fracturing” in Item 1 of this Annual Report
on Form 10-K, the EPA has initiated the regulation of hydraulic fracturing, other federal agencies are examining hydraulic fracturing,
and federal legislation is pending with respect to hydraulic fracturing. We have utilized hydraulic fracturing in the completion of our
wells in our most active areas located in the states of Colorado, Montana and North Dakota and we plan to continue to utilize this
completion methodology.
Our proved undeveloped reserve quantities that are associated with hydraulic fracture treatments consist of substantially all of our proved
undeveloped reserves, or 281.9 MMBOE.
We are not aware of any environmental incidents, citations or suits that have occurred during the last three years related to hydraulic
fracturing operations involving oil and gas properties that we operate or in which we own a non-operated interest.
In order to minimize any potential environmental impact from hydraulic fracture treatments, we have taken the following steps:
we follow fracturing and flowback procedures that comply with or exceed North Dakota Industrial Commission or other state
requirements;
we train all company and contract personnel who are responsible for well preparation, fracture stimulation and flowback on our
procedures;
we have implemented the incremental procedures of running a well casing caliper, visually inspecting the surface joint of
intermediate casing and, if a lighter wall joint of casing or drilling wear is detected, reducing the minimum burst pressure
accordingly;
for wells that are within one mile of major bodies of water or locations that lead to bodies of water, we construct sufficient berming
around the well location prior to initiating fracturing operations;
we run fracturing strings in certain situations when extra precaution is warranted, such as where the anticipated maximum treating
pressure for the well is greater than the pressure rating of the intermediate casing or in areas located within one mile of major
bodies of water;
we conduct annual emergency incident response drills in all of our active areas; and
36
we are a member of the Sakakawea Area Spill Response LLC (“SASR”), which is composed of 13 oil and gas related companies
operating in the Missouri River and Lake Sakakawea regions of North Dakota. Members agreed to share spill response resources
and maintain SASR-owned water response equipment that can be accessed quickly in the early stages of a spill.
While we do not have insurance policies in effect that are intended to provide coverage for losses solely related to hydraulic fracturing
operations, we do have general liability and excess liability insurance policies that we believe would cover third-party claims related to
hydraulic fracturing operations and associated legal expenses in accordance with, and subject to, the terms of such policies.
Delivery Commitments
Our production sales agreements contain customary terms and conditions for the oil and natural gas industry, generally provide for sales
based on prevailing market prices in the area, and generally have terms of one year or less.
As of December 31, 2017, we had three physical delivery contracts which require us to deliver fixed volumes of crude oil. One of these
contracts is tied to oil production at our Sanish field in Mountrail County, North Dakota and became effective upon completion of the
Dakota Access Pipeline on June 1, 2017. The remaining two contracts are tied to oil production at our Redtail field in Weld County,
Colorado. On February 1, 2018, we paid $61 million to the counterparty to one of these Redtail delivery contracts to settle all future
minimum volume commitments under the agreement. The following table summarizes our remaining Sanish and Redtail delivery
commitments as of December 31, 2017, as adjusted for the February 1, 2018 settlement:
Redtail 1 Contracted
Crude Oil Volumes
Redtail 2 Contracted
Crude Oil Volumes
Sanish Contracted
Crude Oil Volumes
(Bbl)
5,475,000
5,475,000
5,490,000
5,475,000
5,475,000
5,475,000
2,280,000
Period
Jan - Dec 2018
Jan - Dec 2019
Jan - Dec 2020
Jan - Dec 2021
Jan - Dec 2022
Jan - Dec 2023
Jan - Dec 2024
_____________________
(1) Reflects the reduced volumes under this contract as a result of its settlement on February 1, 2018.
(Bbl)
14,150,000
15,975,000
4,140,000
-
-
-
-
(Bbl) (1)
620,000
-
-
-
-
-
-
As a Percentage of
Total 2017
Oil Production
69%
73%
33%
19%
19%
19%
8%
Under the terms of the Sanish contract, if we fail to deliver the committed volumes we will be required to pay a deficiency payment of
$7.00 per undelivered Bbl, subject to upward adjustment, over the duration of the contract. However, we believe that our production
and reserves are sufficient to fulfill the delivery commitment at our Sanish field, and we therefore expect to avoid any payments for
deficiencies under this contract.
Under the terms of the first Redtail contract, if we fail to deliver the committed volumes we are required to pay a deficiency payment
that currently totals $4.92 per undelivered Bbl (subject to upward adjustment) over the duration of the contract. Under the terms of the
second Redtail contract, and prior to its termination on February 1, 2018, if we failed to deliver the committed volumes we were required
to pay a deficiency payment equal to the terminal and pipeline transportation fees paid by the counterparty on such undelivered barrels,
or $3.93 per undelivered Bbl. We have determined that it is not probable that future oil production from our Redtail field will be
sufficient to meet the minimum volume requirements specified in the related physical delivery contracts, and as a result, we expect to
make periodic deficiency payments for any shortfalls in delivering the minimum committed volumes. We recognize any monthly
deficiency payments in the period in which the underdelivery takes place and the related liability has been incurred. During 2017, 2016
and 2015, total deficiency payments under these contracts amounted to $66 million, $43 million and $15 million, respectively.
37
Item 3. Legal Proceedings
We are subject to litigation claims and governmental and regulatory proceedings arising in the ordinary course of business. While the
outcome of these lawsuits and claims cannot be predicted with certainty, it is management’s opinion that the loss for any litigation
matters and claims we are involved in that are reasonably possible to occur will not have a material adverse effect, individually or in the
aggregate, on our consolidated financial position, cash flows or results of operations.
After the closing of the acquisition of Kodiak Oil & Gas Corp. in December 2014, the U.S. Environmental Protection Agency (the
“EPA”) contacted us to discuss Kodiak’s responses to a June 2014 information request from the EPA under Section 114(a) of the Federal
Clean Air Act, as amended (the “CAA”). In addition, in July 2015 and March 2016, we received information requests from the EPA
under Section 114(a) of the CAA. The information requests relate to tank batteries used in our Williston Basin operations and our
compliance with certain regulatory requirements at those locations for the control of air pollutant emissions from those facilities. We
have responded to the EPA’s July 2015 and March 2016 information requests, and such responses were also provided to the North
Dakota Department of Health (the “NDDoH”), with whom the EPA was coordinating in making the requests.
In connection with the above EPA inquiries, we entered into a settlement with the NDDoH that became effective in November 2016.
This settlement addressed approximately 94% of our North Dakota properties owned at the time but did not address our operations on
the Fort Berthold Indian Reservation in North Dakota, over which the EPA has sole authority to enforce CAA violations. In September
2017, we completed the sale of our interests in all Fort Berthold Indian Reservation properties that we previously obtained from Kodiak.
In November 2017, we entered into a settlement with the EPA concerning the alleged violations of applicable regulations by Kodiak
prior to its acquisition, and by us after we acquired the subject properties. Under the terms of the settlement agreement we and the EPA
agreed that we would pay a civil penalty of $450,000, which penalty was paid in full in November 2017.
We are currently engaged in discussions with the Colorado Department of Public Health and Environment (the “CDPHE”) concerning
certain equipment used in our Redtail facilities and our compliance with various air permits and applicable federal and state air quality
laws and regulations over the control of air pollutant emissions from those facilities. We and the CDPHE are negotiating the terms of a
settlement agreement to resolve this matter.
Item 4. Mine Safety Disclosures
Not applicable.
38
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information, as of February 15, 2018, regarding the executive officers of Whiting Petroleum
Corporation:
Name
Bradley J. Holly
Bruce R. DeBoer
Peter W. Hagist
Rick A. Ross
Michael J. Stevens
Mark R. Williams
Heather M. Duncan
Steven A. Kranker
David M. Seery
Sirikka R. Lohoefener
Age Position
47 President and Chief Executive Officer
65 Senior Vice President, General Counsel and Corporate Secretary
57 Senior Vice President, Planning
59 Senior Vice President, Operations
52 Senior Vice President and Chief Financial Officer
61 Senior Vice President, Exploration and Development
47 Vice President, Human Resources
56 Vice President, Reservoir Engineering and Acquisitions
63 Vice President, Land
39 Controller and Treasurer
The following biographies describe the business experience of our executive officers:
Bradley J. Holly joined us in November 2017 upon his appointment as director and election as President and Chief Executive Officer.
Mr. Holly has 23 years of experience in the oil and gas industry. Prior to joining Whiting, he held various management and technical
positions during his 20 years at Anadarko Petroleum Corporation including Executive Vice President, U.S. Onshore Exploration and
Production; Senior Vice President, U.S. Onshore Exploration and Production; Senior Vice President, Operations; Vice President,
Operations for the Southern and Appalachia Region; among others. He began his career in 1994 with Amoco Corporation. Mr. Holly
holds a Bachelor of Science degree in petroleum engineering from Texas Tech University, and he is a graduate of the Harvard Business
School’s Advanced Management Program.
Bruce R. DeBoer joined us as Vice President, General Counsel and Corporate Secretary in January 2005 and was elected Senior Vice
President, General Counsel and Corporate Secretary effective January 2018. From January 1997 to May 2004, Mr. DeBoer served as
Vice President, General Counsel and Corporate Secretary of Tom Brown, Inc., an independent oil and gas exploration and production
company. Mr. DeBoer has 38 years of experience in managing the legal departments of several independent oil and gas companies. He
holds a Bachelor of Science degree in political science from South Dakota State University and received his J.D. and MBA degrees
from the University of South Dakota.
Peter W. Hagist joined us in October 2005 as Vice President, Operations-Midland. In June 2014, he was elected Senior Vice President
of Planning. Mr. Hagist has 36 years of experience in the oil and gas industry and 27 years of experience managing tertiary recovery
operations. Prior to joining Whiting, he held management and professional positions with Kinder Morgan CO2 Company and Pennzoil
Exploration and Production Company. Mr. Hagist holds a Bachelor of Science degree in petroleum engineering from the Colorado
School of Mines. He is a registered Professional Engineer and a member of the Society of Petroleum Engineers.
Rick A. Ross joined us in March 1999 as an Operations Manager. In May 2007, he became Vice President of Operations and in June
2014, he was elected Senior Vice President of Operations. Mr. Ross has 35 years of oil and gas experience, including 17 years with
Amoco Production Company where he served in various technical and managerial positions. Mr. Ross holds a Bachelor of Science
degree in mechanical engineering from the South Dakota School of Mines and Technology. He is a registered Professional Engineer, a
member of the Society of Petroleum Engineers and was a past Chairman of the North Dakota Petroleum Council.
Michael J. Stevens joined us in May 2001 as Controller, became Treasurer in January 2002 and became Vice President and Chief
Financial Officer in March 2005. Mr. Stevens was elected Senior Vice President and Chief Financial Officer effective March 1, 2015.
His 31 years of oil and gas experience includes eight years of service in various positions including Chief Financial Officer, Controller,
Secretary and Treasurer at Inland Resources Inc., a company engaged in oil and gas exploration and development. He spent seven years
in public accounting with Coopers & Lybrand in Minneapolis, Minnesota. He is a graduate of Mankato State University of Minnesota
and is a Certified Public Accountant.
Mark R. Williams joined us in December 1983 as Exploration Geologist and has been Vice President of Exploration and Development
since December 1999. Mr. Williams was elected Senior Vice President, Exploration and Development effective January 1, 2011. He
has 37 years of domestic and international experience in the oil and gas industry. Mr. Williams holds a Master’s degree in geology from
the Colorado School of Mines and a Bachelor’s degree in geology from the University of Utah.
Heather M. Duncan joined us in February 2002 as Assistant Director of Human Resources and in January 2003 became Director of
Human Resources. In January 2008, she was appointed Vice President of Human Resources. Ms. Duncan has 21 years of human
39
resources experience in the oil and gas industry. She holds a Bachelor of Arts degree in anthropology and an MBA from the University
of Colorado. She is a certified Senior Professional in Human Resources.
Steven A. Kranker joined us in March 2013 as First Director – Acquisitions and Reservoir Engineering and became Vice President of
Reservoir Engineering and Acquisitions in July 2013. Prior to joining Whiting, Mr. Kranker held positions at several companies engaged
in oil and gas exploration and development, including Manager of Reserves at Bill Barrett Corporation from June 2012 to March 2013,
President of Earth Energy Reserves, Inc. from July 2010 to June 2012, and various positions at Forest Oil Corporation, including
Corporate Engineering Manager, from May 2001 to July 2010. Mr. Kranker has 33 years of acquisition and reservoir engineering
experience, including Brunei Shell Petroleum, Arco Alaska Inc., Maxus Exploration, Conoco Inc. and Shell Western E&P Inc. He
received his Bachelor of Science degree in petroleum engineering from the Colorado School of Mines. Mr. Kranker is a member of the
Society of Petroleum Engineers.
David M. Seery joined us as our Manager of Land in July 2004 as a result of our acquisition of Equity Oil Company, where he was Manager
of Land and Manager of Equity’s Exploration Department, positions he had held for more than five years. He became our Vice President
of Land in January 2005. Mr. Seery has 37 years of land experience including staff and managerial positions with Marathon Oil Company.
Mr. Seery holds a Bachelor of Science degree in business administration from the University of Montana. He is a registered Land
Professional and has held various duties with the Denver Association of Petroleum Landmen.
Sirikka R. Lohoefener joined us in June 2006 as a Senior Financial Accountant, became Financial Reporting Manager in January 2011 and
Controller in March 2015. She was appointed Controller and Treasurer in March 2017 and is the Company’s designated principal
accounting officer. Prior to joining Whiting, Ms. Lohoefener spent five years with Wagner, Burke & Barnes, LLP, a public accounting
firm previously based in Golden, Colorado. She holds a Master of Accountancy degree from the University of Missouri and is a Certified
Public Accountant.
Executive officers are elected by, and serve at the discretion of, the Board of Directors. There are no family relationships between any
of our directors or executive officers.
40
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Whiting Petroleum Corporation’s common stock is traded on the New York Stock Exchange under the symbol “WLL”. The following
table shows the high and low sale prices for our common stock (as adjusted for the one-for-four reverse stock split as discussed below)
for the periods presented.
Fiscal Year Ended December 31, 2017
Fourth quarter (ended December 31, 2017)
Third quarter (ended September 30, 2017)
Second quarter (ended June 30, 2017)
First quarter (ended March 31, 2017)
Fiscal Year Ended December 31, 2016
Fourth quarter (ended December 31, 2016)
Third quarter (ended September 30, 2016)
Second quarter (ended June 30, 2016)
First quarter (ended March 31, 2016)
High
Low
28.60 $
23.52 $
41.48 $
53.48 $
53.56 $
39.72 $
57.76 $
39.16 $
18.56
15.88
20.44
31.84
30.88
25.52
29.00
13.40
$
$
$
$
$
$
$
$
On November 8, 2017, our Board of Directors approved a reverse stock split of our common stock at a ratio of one-for-four and a
reduction in the number of authorized shares of our common stock from 600,000,000 shares to 225,000,000. Our common stock began
trading on a split-adjusted basis on November 9, 2017 upon opening of the markets. All share and per share amounts in this Annual
Report on Form 10-K for periods prior to November 2017 have been retroactively adjusted to reflect the reverse stock split.
On February 15, 2018, there were 705 holders of record of our common stock.
We have not paid any cash dividends on our common stock since we were incorporated in July 2003, and we do not anticipate paying
any such dividends on our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the
expansion of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon various
factors, including our financial position, cash flows, results of operations, capital requirements and investment opportunities. Except
for limited exceptions, our credit agreement restricts our ability to make any cash dividends or distributions on our common stock.
Additionally, the indentures governing our senior notes contain restrictive covenants that may limit our ability to pay cash dividends on
our common stock.
Information relating to compensation plans under which our equity securities are authorized for issuance is set forth in Part III, Item 12
of this Annual Report on Form 10-K.
The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed”
with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the
Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of
1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.
The following graph compares on a cumulative basis changes since December 31, 2012 in (a) the total stockholder return on our common
stock with (b) the total return on the Standard & Poor’s Composite 500 Index and (c) the total return on the Dow Jones U.S. Exploration
& Production Index. Such changes have been measured by dividing (a) the sum of (i) the cumulative amount of dividends for the
measurement period, assuming dividend reinvestment, and (ii) the difference between the price per share at the end of and the beginning
of the measurement period, by (b) the price per share at the beginning of the measurement period. The graph assumes $100 was invested
on December 31, 2012 in our common stock, the Standard & Poor’s Composite 500 Index and the Dow Jones U.S. Exploration &
Production Index, respectively.
41
Whiting Petroleum Corporation
Standard & Poor’s Composite 500 Index
Dow Jones U.S. Exploration & Production Index
$
12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017
15
76 $
187
105
22 $
143
86
100 $
100
100
143 $
130
130
144
114
157
105
28 $
42
Item 6. Selected Financial Data
The consolidated statements of operations and statements of cash flows information for the years ended December 31, 2017, 2016 and
2015 and the consolidated balance sheet information at December 31, 2017 and 2016 are derived from our audited financial statements
included elsewhere in this report. The consolidated statements of operations and statements of cash flows information for the years
ended December 31, 2014 and 2013 and the consolidated balance sheet information at December 31, 2015, 2014 and 2013 are derived
from audited financial statements that are not included in this report. Our historical results include the results from our recent proved
property acquisitions beginning on the following closing dates: properties related to the acquisition of Kodiak Oil & Gas Corp.,
December 8, 2014, and properties in North Dakota and Montana, September 20, 2013. In addition, our historical results also include
the effects of our recent property divestitures beginning on the following closing dates: properties in the Fort Berthold Indian Reservation
area, September 1, 2017; gas processing plants and related gathering systems in North Dakota, January 1, 2017; properties in the North
Ward Estes field, July 27, 2016; water facilities in Colorado, December 16, 2015; non-core properties in various fields across multiple
states, December 15, 2015, November 12, 2015 and June 10, 2015; the underlying properties of Whiting USA Trust I, April 15, 2015;
properties in the Postle field, July 15, 2013; and properties in Texas, October 31, 2013. For a discussion of other material factors
affecting the comparability of the information presented below, refer to “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in Item 7 of this Annual Report on Form 10-K.
2017
Year Ended December 31,
2015
2016
2014
2013
(in millions, except per share data)
Consolidated Statements of Operations Information
Operating revenues
$
Net income (loss) attributable to common shareholders $
Earnings (loss) per common share, basic (1)
$
Earnings (loss) per common share, diluted (1)
$
1,481.4 $
(1,237.6) $
(13.65) $
(13.65) $
1,285.0 $
(1,339.1) $
(21.27) $
(21.27) $
2,092.5 $
(2,219.2) $
(45.41) $
(45.41) $
3,024.6 $
64.8 $
2.12 $
2.12 $
2,664.6
365.5
12.36
12.25
Other Financial Information
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Cash capital expenditures
Consolidated Balance Sheet Information
Total assets
Long-term debt
Total equity (2)
$
$
$
$
$
$
$
577.1 $
73.4 $
155.6 $
852.0 $
595.0 $
(222.6) $
(315.3) $
543.9 $
1,051.4 $
(1,982.1) $
868.7 $
2,483.7 $
1,815.3 $
(2,860.5) $
423.9 $
2,888.4 $
1,744.7
(1,902.5)
812.4
2,772.7
8,403.0 $
2,764.7 $
3,919.1 $
9,876.1 $
3,535.3 $
5,149.2 $
11,389.1 $
5,197.7 $
4,758.6 $
13,993.1 $
5,602.4 $
5,703.0 $
8,802.5
2,622.9
3,836.7
_____________________
(1) On November 8, 2017, our Board of Directors approved a one-for-four reverse stock split of our common stock. Earnings (loss)
per common share for periods prior to 2017 have been retroactively adjusted to reflect the reverse stock split.
(2) No cash dividends were declared or paid on our common stock during the periods presented.
43
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires, the terms “Whiting”, “we”, “us”, “our” or “ours” when used in this Item refer to Whiting
Petroleum Corporation, together with its consolidated subsidiaries, Whiting Oil and Gas Corporation (“Whiting Oil and Gas”), Whiting
US Holding Company, Whiting Canadian Holding Company ULC (formerly Kodiak Oil & Gas Corp., “Kodiak”), Whiting Resources
Corporation and Whiting Programs, Inc. When the context requires, we refer to these entities separately. This document contains
forward-looking statements, which give our current expectations or forecasts of future events. Please refer to “Forward-Looking
Statements” at the end of this Item for an explanation of these types of statements.
Overview
We are an independent oil and gas company engaged in development, production, acquisition and exploration activities primarily in the
Rocky Mountains region of the United States. Our current operations and capital programs are focused on organic drilling opportunities
and on the development of previously acquired properties, specifically on projects that we believe provide the greatest potential for
repeatable success and production growth, while selectively pursuing acquisitions that complement our existing core properties. As a
result of lower crude oil prices during 2015 and 2016, we significantly reduced our level of capital spending and focused our drilling
activity on projects that provide the highest rate of return. During 2017, we continued to focus on high-return projects that added
production and reserves through the strategic deployment of capital at our Williston Basin properties and Redtail field, while closely
aligning our capital spending with cash flows generated from operations. In addition, we continually evaluate our property portfolio
and sell properties when we believe that the sales price realized will provide an above average rate of return for the property or when
the property no longer matches the profile of properties we desire to own, such as the asset sales discussed below under “Acquisition
and Divestiture Highlights” and in the “Acquisitions and Divestitures” footnote in the notes to consolidated financial statements.
Our revenue, profitability and future growth rate depend on many factors which are beyond our control, such as oil and gas prices,
economic, political and regulatory developments, competition from other sources of energy, and the other items discussed under the
caption “Risk Factors” in Item 1A of this Annual Report on Form 10-K. Oil and gas prices historically have been volatile and may
fluctuate widely in the future. The following table highlights the quarterly average NYMEX price trends for crude oil and natural gas
prices since the first quarter of 2016:
Crude oil
Natural gas
$
$
Q1
33.51 $
2.06 $
2016
Q2
45.60 $
1.98 $
Q3
44.94 $
2.93 $
Q4
49.33 $
2.98 $
Q1
51.86 $
3.07 $
Q2
48.29 $
3.09 $
Q3
48.19 $
2.89 $
Q4
55.39
2.87
2017
Lower oil, NGL and natural gas prices may not only decrease our revenues on a per unit basis, but may also reduce the amount of oil
and natural gas that we can produce economically and therefore potentially lower our oil and gas reserve quantities. Substantial and
extended declines in oil, NGL and natural gas prices have resulted and may result in impairments of our proved oil and gas properties
or undeveloped acreage (such as the impairments discussed below under “Results of Operations”) and may materially and adversely
affect our future business, financial condition, cash flows, results of operations, liquidity or ability to finance planned capital
expenditures. In addition, lower commodity prices may reduce the amount of our borrowing base under our credit agreement, which is
determined at the discretion of our lenders and is based on the collateral value of our proved reserves that have been mortgaged to the
lenders. Upon a redetermination, if borrowings in excess of the revised borrowing capacity were outstanding, we could be forced to
immediately repay a portion of the debt outstanding under our credit agreement. Alternatively, higher oil prices may result in significant
mark-to-market losses being incurred on our commodity-based derivatives.
For a discussion of material changes to our proved reserves from December 31, 2016 to December 31, 2017 and our ability to convert
PUDs to proved developed reserves, refer to “Reserves” in Item 2 of this Annual Report on Form 10-K. Additionally, for a discussion
relating to the minimum remaining terms of our leases, refer to “Acreage” in Item 2 of this Annual Report on Form 10-K.
2017 Highlights and Future Considerations
Operational Highlights
Northern Rocky Mountains – Williston Basin
Our properties in the Williston Basin of North Dakota and Montana target the Bakken and Three Forks formations. Net production
from the Williston Basin averaged 106.8 MBOE/d for the fourth quarter of 2017, representing a 5% increase from 102.0 MBOE/d in
the third quarter of 2017. Across our acreage in the Williston Basin, we have implemented new completion designs which utilize
cemented liners, plug-and-perf technology, significantly higher sand volumes, new diversion technology and both hybrid and slickwater
fracture stimulation methods, which have resulted in improved initial production rates. As of December 31, 2017, we had four rigs
active in the Williston Basin, and we plan to add a fifth rig in this area mid-year 2018.
44
Central Rocky Mountains – Denver Julesburg Basin
Our Redtail field in the Denver Julesburg Basin (“DJ Basin”) in Weld County, Colorado targets the Niobrara and Codell/Fort Hays
formations. Net production from the Redtail field averaged 20.6 MBOE/d in the fourth quarter of 2017, representing a 75% increase
from 11.8 MBOE/d in the third quarter of 2017. We have established production in the Niobrara “A”, “B” and “C” zones and the
Codell/Fort Hays formations. We have implemented a new wellbore configuration in this area, which significantly reduces drilling
times. In response to low commodity prices, we suspended completion operations in this area beginning in the second quarter of 2016,
however, we resumed completion activity during the first quarter of 2017 and added a second completion crew in April. During 2017,
we completed and brought on production a significant portion of our drilled uncompleted well inventory (“DUCs”) from yearend 2016.
During the fourth quarter of 2017, based on the recent and comparative well performance results of the DJ Basin to the Williston Basin,
our management decided to concentrate development activities during 2018 in the Williston Basin. We plan to complete 22 DUCs in
our Redtail field during the first half of 2018, and then cease additional development activity in this area until commodity prices further
recover.
Our Redtail gas plant processes the associated gas produced from our wells in this area, and has a current inlet capacity of 50 MMcf/d.
As of December 31, 2017, the plant was processing 26 MMcf/d.
Financing Highlights
On February 2, 2017, we paid $281 million to redeem all of the remaining $275 million aggregate principal amount of our 2018 Senior
Subordinated Notes, which payment consisted of the 100% redemption price plus all accrued and unpaid interest on the notes. We
financed the redemption with borrowings under our credit agreement. Refer to the “Long-Term Debt” footnote in the notes to
consolidated financial statements for more information on this financing transaction.
On October 19, 2017, the borrowing base and aggregate commitments under our credit agreement were reduced from $2.5 billion to
$2.3 billion in connection with the November 1, 2017 regular borrowing base redetermination, and was primarily the result of the sale
of our Fort Berthold Indian Reservation area assets on September 1, 2017, as discussed below under “Acquisition and Divestiture
Highlights”. All other terms of the credit agreement remained unchanged.
On November 8, 2017 and following approval by our stockholders of an amendment to our certificate of incorporation to effect a reverse
stock split, our Board of Directors approved a reverse stock split of our common stock at a ratio of one-for-four and a reduction in the
number of authorized shares of our common stock from 600,000,000 shares to 225,000,000. Our common stock began trading on a
split-adjusted basis on November 9, 2017 upon opening of the markets. All share and per share amounts (except par value and par value
per share amounts) for periods prior to 2017 presented in this Item 7 of this Annual Report on Form 10-K have been retroactively
adjusted to reflect the reverse stock split. Refer to the “Shareholders’ Equity and Noncontrolling Interest” footnote in the notes to
consolidated financial statements for more information on this equity transaction.
On December 27, 2017, we issued at par $1.0 billion of 6.625% Senior Notes due January 2026 (the “2026 Senior Notes”). We used
the net proceeds from this offering to redeem on January 26, 2018 all of our outstanding 5.0% Senior Notes due March 2019 (the “2019
Senior Notes”) at a 102.976% redemption price plus all accrued and unpaid interest on the notes. Refer to the “Subsequent Events”
footnote in the notes to consolidated financial statements for more information on the redemption of the 2019 Senior Notes.
2018 Exploration and Development Budget
Our 2018 exploration and development (“E&D”) budget is $750 million, which we expect to fund substantially with net cash provided
by our operating activities and cash on hand. The overall budget represents a decrease from the $912 million incurred on E&D
expenditures during 2017. This reduced spending is primarily attributable to our Redtail field where we incurred $293 million in drilling
and development costs during 2017, but where we have allocated only $75 million of our 2018 E&D budget due to the recent well
performance results of this area compared to the Williston Basin. Planned E&D expenditures at our Williston Basin properties have
increased slightly between years. To the extent net cash provided by operating activities is higher or lower than currently anticipated,
we could adjust our E&D budget, enter into agreements with industry partners, divest certain oil and gas property interests, adjust
borrowings outstanding under our credit facility or access the capital markets as necessary. Our 2018 E&D budget currently is allocated
among our major development areas as indicated in the table below. Of our existing potential projects, we believe these present the
opportunity for the highest return and most efficient use of our capital expenditures.
45
Development Area
Northern Rocky Mountains
Central Rocky Mountains
Non-operated properties
Other (1)
Total
_____________________
(1) Comprised of facilities costs and undeveloped acreage purchases.
Acquisition and Divestiture Highlights
2018 Exploration and
Development Budget
(in millions)
$
$
600
75
50
25
750
On January 1, 2017, we completed the sale of our 50% interest in the Robinson Lake gas processing plant located in Mountrail County,
North Dakota and our 50% interest in the Belfield gas processing plant located in Stark County, North Dakota, as well as the associated
natural gas, crude oil and water gathering systems, effective January 1, 2017, for aggregate sales proceeds of $375 million (before
closing adjustments). We used the net proceeds from this transaction to repay a portion of the debt outstanding under our credit
agreement.
On July 19, 2017, the buyer of our North Ward Estes properties paid us $35 million to settle a contingent payment associated with the
original purchase and sale agreement, which sale closed in July 2016. This settlement resulted in a pre-tax gain of $3 million. Refer to
the “Acquisitions and Divestitures” footnote in the notes to consolidated financial statements for more information on this transaction.
On September 1, 2017, we completed the sale of our interests in certain producing oil and gas properties located in the Fort Berthold
Indian Reservation area in Dunn and McLean counties of North Dakota, as well as other related assets and liabilities, (the “FBIR Assets”)
for aggregate sales proceeds of $500 million (before closing adjustments). The sale was effective September 1, 2017 and resulted in a
pre-tax loss on sale of $402 million. We used the net proceeds from the sale to repay a portion of the debt outstanding under our credit
agreement. The properties spanned approximately 29,600 net developed acres and consisted of estimated proved reserves of 32
MMBOE as of December 31, 2016, representing 5% of our proved reserves as of that date. The FBIR Assets generated 7% (or 8.3
MBOE/d) of our August 2017 average daily production.
46
Results of Operations
The following table sets forth selected operating data for the periods indicated:
Net production
Oil (MMBbl)
NGLs (MMBbl)
Natural gas (Bcf)
Total production (MMBOE)
Net sales (in millions)
Oil (1)
NGLs
Natural gas
Total oil, NGL and natural gas sales
Average sales prices
Oil (per Bbl) (1)
Effect of oil hedges on average price (per Bbl)
Oil net of hedging (per Bbl)
Weighted average NYMEX price (per Bbl) (2)
NGLs (per Bbl)
Natural gas (per Mcf)
Weighted average NYMEX price (per MMBtu) (2)
Costs and expenses (per BOE)
Lease operating expenses
Production taxes
Depreciation, depletion and amortization
General and administrative
_____________________
(1) Before consideration of hedging transactions.
Year Ended December 31,
2016
2017
2015
29.3
7.0
41.3
43.1
1,296.4 $
111.6
73.4
1,481.4 $
44.30 $
0.29
44.59 $
51.11 $
34.0
6.6
41.4
47.5
1,167.8 $
59.0
58.2
1,285.0 $
34.36 $
4.46
38.82 $
42.71 $
47.2
5.5
41.1
59.6
1,931.9
70.2
90.4
2,092.5
40.95
4.59
45.54
49.06
16.00 $
8.88 $
12.67
1.78 $
2.97 $
1.40 $
2.47 $
2.20
2.62
8.51 $
2.86 $
22.01 $
2.88 $
8.31 $
2.29 $
24.64 $
3.09 $
9.32
3.07
20.87
2.90
$
$
$
$
$
$
$
$
$
$
$
$
(2) Average NYMEX pricing weighted for monthly production volumes.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Oil, NGL and Natural Gas Sales. Our oil, NGL and natural gas sales revenue increased $196 million to $1.5 billion when comparing
2017 to 2016. Sales revenue is a function of oil, NGL and gas volumes sold and average commodity prices realized. Our oil sales
volumes decreased 14%, while our NGL volumes increased 5% and our natural gas sales volumes remained relatively consistent between
periods. The oil volume decrease between periods was primarily attributable to normal field production decline across all of our areas
resulting from reduced drilling and completion activity during 2016 and 2017 in response to the depressed commodity price
environment. In addition, we completed certain oil and gas property divestitures during 2016 and 2017, which negatively impacted oil
production in 2017 by 2,330 MBbl. These decreases were partially offset by new wells drilled and completed in the Williston Basin
and DJ Basin which added 6,040 MBbl and 1,750 MBbl, respectively, of oil production during 2017 as compared to 2016. The NGL
volume increase between periods generally relates to new wells drilled and completed in the Williston Basin and DJ Basin over the last
twelve months, as well as additional volumes processed as more wells were connected to gas processing plants in the Williston Basin
in an effort to increase our overall gas capture rate in this area and reduce flared volumes. Many of the new Williston Basin wells are
in areas with higher gas-to-oil production ratios than previously drilled areas. These NGL volume increases were partially offset by
normal field production decline across all our areas. New wells drilled and completed at our Williston Basin and DJ Basin properties
resulted in 8,555 MMcf and 910 MMcf, respectively, of additional gas volumes during 2017 as compared to 2016. This gas volume
increase was entirely offset by normal field production decline across all of our areas and the 2016 and 2017 property divestitures, which
negatively impacted gas production in 2017 by 690 MMcf.
These overall production-related decreases in net revenue were offset by increases in the average sales price realized for oil, NGLs and
natural gas in 2017 compared to 2016. Our average price for oil (before the effects of hedging), NGLs and natural gas increased 29%,
47
80% and 27%, respectively, between periods. Our average sales price realized for oil is impacted by deficiency payments we are making
under two physical delivery contracts at our Redtail field due to our inability to meet the minimum volume commitments under these
contracts. During 2017 and 2016, our total average sales price realized for oil was $2.27 per Bbl lower and $1.27 per Bbl lower,
respectively, as a result of these deficiency payments. On February 1, 2018, we paid $61 million to the counterparty to one of these
Redtail delivery contracts to settle all future minimum volume commitments under the agreement. The remaining agreement will
continue to negatively impact the price we receive for oil from our Redtail field through April 2020, when the contract terminates. Refer
to the “Commitments and Contingencies” footnote in the notes to consolidated financial statements for more information on these
physical delivery contracts and the related deficiency payments.
Lease Operating Expenses. Our lease operating expenses (“LOE”) during 2017 were $367 million, a $28 million decrease over 2016.
This decrease was primarily due to a decline in the costs of oilfield goods and services resulting from cost reduction measures we have
implemented and the elimination of $13 million of LOE attributable to properties that we divested during 2016 and 2017, as well as the
general downturn in the oil and gas industry.
Our lease operating expenses on a BOE basis, however, increased when comparing 2017 to 2016. LOE per BOE amounted to $8.51
during 2017, which represents an increase of $0.20 per BOE (or 2%) from 2016. This increase was mainly due to lower overall
production volumes between periods, partially offset by the overall decrease in LOE expense discussed above.
Production Taxes. Our production taxes during 2017 were $123 million, a $15 million increase over the same period in 2016, which
increase was primarily due to higher oil, NGL and natural gas sales between periods. Our production taxes, however, are generally
calculated as a percentage of net sales revenue before the effects of hedging, and this percentage on a company-wide basis remained
relatively consistent at 8.3% and 8.5% for 2017 and 2016, respectively.
Depreciation, Depletion and Amortization. Our depreciation, depletion and amortization (“DD&A”) expense decreased $223 million
in 2017 as compared to 2016. The components of our DD&A expense were as follows (in thousands):
Depletion
Depreciation
Accretion of asset retirement obligations
Total
Year Ended December 31,
2016
2017
1,149,302
8,479
13,801
1,171,582
927,594 $
7,536
13,809
948,939 $
$
$
DD&A decreased between periods primarily due to $222 million in lower depletion expense, consisting of a $127 million decrease
related to a lower depletion rate between periods and a $95 million decrease due to lower overall production volumes during 2017. On
a BOE basis, our overall DD&A rate of $22.01 for 2017 was 11% lower than the rate of $24.64 in 2016. The primary factors contributing
to this lower DD&A rate were (i) an increase to proved and proved developed reserves over the last twelve months (excluding the effect
of divestitures) mainly due to higher average oil and natural gas prices used to calculate our reserves, as well as upward performance
revisions, extensions and discoveries in our Williston Basin area, and (ii) the impact of property divestitures over the past twelve months.
These factors that positively impacted our DD&A rate were partially offset by $831 million in drilling and development expenditures
during the past twelve months.
Exploration and Impairment Costs. Our exploration and impairment costs increased $815 million in 2017 as compared to 2016. The
components of our exploration and impairment expense were as follows (in thousands):
Exploration
Impairment
Total
Year Ended December 31,
2016
2017
36,324 $
899,853
936,177 $
45,846
75,622
121,468
$
$
Exploration costs decreased $10 million during 2017 as compared to 2016 primarily due to $18 million of lower rig termination fees
incurred between periods, partially offset by the write-off of $12 million during 2017 of pre-drilling expenditures for well locations in
our Redtail field where we currently have no future plans to drill.
Impairment expense in 2017 primarily related to (i) $835 million in non-cash impairment charges for the partial write-down of our
Redtail field in Colorado due to a reduction of reserves driven by recent well performance results in this area, (ii) $47 million of leasehold
amortization associated with individually insignificant unproved properties, and (iii) $12 million in impairment write-downs of
undeveloped acreage costs for leases where we have no future plans to drill. Impairment expense in 2016 primarily related to $60 million
48
of leasehold amortization associated with individually insignificant unproved properties and $13 million in impairment write-downs of
undeveloped acreage costs for leases where we have no future plans to drill.
General and Administrative Expenses. We report general and administrative (“G&A”) expenses net of third-party reimbursements and
internal allocations. The components of our G&A expenses were as follows (in thousands):
General and administrative expenses
Reimbursements and allocations
General and administrative expenses, net
Year Ended December 31,
2016
2017
$
$
228,669 $
(104,381)
124,288 $
264,948
(118,070)
146,878
G&A expense before reimbursements and allocations decreased $36 million during 2017 as compared to 2016 primarily due to lower
employee compensation. Employee compensation decreased $39 million in 2017 as compared to 2016 primarily due to reductions in
personnel over the past twelve months. The decrease in reimbursements and allocations for 2017 was primarily the result of property
divestitures over the past twelve months.
Our general and administrative expenses on a BOE basis also decreased when comparing 2017 to 2016. G&A expense per BOE
amounted to $2.88 during 2017, which represents a decrease of $0.21 per BOE (or 7%) from 2016. This decrease was mainly due to
lower employee compensation, partially offset by lower overall production volumes between periods.
Derivative (Gain) Loss, Net. Our commodity derivative contracts and embedded derivatives are marked to market each quarter with
fair value gains and losses recognized immediately in earnings as derivative (gain) loss, net. Cash flow, however, is only impacted to
the extent that settlements under these contracts result in making or receiving a payment to or from the counterparty. Derivative (gain)
loss, net amounted to a loss of $123 million for 2017, which consisted of a $54 million fair value loss on our long-term crude oil sales
and delivery contract, a $50 million loss on our costless collar commodity derivative contracts resulting from the upward shift in the
futures curve of forecasted commodity prices (“forward price curve”) for crude oil from January 1, 2017 (or the 2017 date on which
new contracts were entered into) to December 31, 2017, and a $19 million fair value loss on embedded derivatives. Derivative (gain)
loss, net for 2016 amounted to a gain of $1 million, which consisted of a $59 million fair value gain on embedded derivatives, partially
offset by a $58 million loss on commodity derivative contracts resulting from a more significant upward shift in the same forward price
curve from January 1, 2016 (or the 2016 date on which prior year contracts were entered into) to December 31, 2016.
Refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, for a list of our outstanding commodity derivative
contracts as of January 23, 2018.
Loss on Sale of Properties. During 2017, we sold our interests in the FBIR Assets for net cash proceeds of $501 million, which resulted
in a pre-tax loss on sale of $402 million. During 2016, we sold our interests in the North Ward Estes properties for net cash proceeds
of $295 million, which resulted in a pre-tax loss on sale of $187 million. There were no other property divestitures resulting in a
significant gain or loss on sale during 2017 or 2016.
Interest Expense. The components of our interest expense were as follows (in thousands):
Notes
Amortization of debt issue costs, discounts and premiums
Credit agreement
Other
Capitalized interest
Total
Year Ended December 31,
2016
2017
$
$
133,123 $
31,715
24,971
1,381
(102)
191,088 $
187,374
335,569
32,885
1,930
(138)
557,620
The decrease in interest expense of $367 million between periods was mainly attributable to a decrease in amortization of debt issue
costs, discounts and premiums and lower interest costs incurred on our notes during 2017 as compared to 2016. The decrease in
amortization of debt issue costs, discounts and premiums of $304 million was due to (i) a non-cash charge of $244 million for the
acceleration of unamortized debt discounts in connection with the December 2016 conversions of our Mandatory Convertible Notes,
(ii) a $40 million decrease in debt discount and debt issue cost amortization related to the exchange and subsequent conversion to
common stock of $1.6 billion of notes during 2016, (iii) a non-cash charge of $14 million for the acceleration of unamortized debt
discounts in connection with the August 2016 induced exchange of a portion of our Mandatory Convertible Notes, and (iv) a $6 million
non-cash charge for the acceleration of unamortized debt issuance costs in connection with a reduction of the aggregate commitments
49
under our credit agreement in March 2016. The $54 million decrease in note interest was primarily due to (i) the conversions of the
New Convertible Notes in May 2016 and the Mandatory Convertible Notes in the second half of 2016, resulting in a $39 million decrease
in note interest during 2017, and (ii) the redemption of the 2018 Senior Subordinated Notes in February 2017, resulting in a $16 million
decrease between periods. Refer to the “Long-Term Debt” footnote in the notes to consolidated financial statements for more
information on these debt transactions.
Our weighted average debt outstanding during 2017 was $3.3 billion versus $5.0 billion for 2016. Our weighted average effective cash
interest rate was 4.8% during 2017 compared to 4.4% during 2016.
Loss on Extinguishment of Debt. During 2017, we redeemed all of the remaining $275 million aggregate principal amount of 2018
Senior Subordinated Notes and recognized a $2 million loss on extinguishment of debt. During 2016, we recognized a net loss on
extinguishment of debt of $42 million. In March 2016, we completed the exchange of $477 million aggregate principal amount of our
senior notes and senior subordinated notes for the same aggregate principal amount of New Convertible Notes, and recognized a
$91 million gain on extinguishment of debt. Subsequently, during the second quarter of 2016, the holders of the New Convertible Notes
voluntarily converted all $477 million aggregate principal amount of the New Convertible Notes for approximately 10.5 million shares
of our common stock, and we recognized a $188 million loss on extinguishment of debt upon conversion. In June and July 2016, we
completed the exchange of $1.1 billion aggregate principal amount of our senior notes, convertible senior notes and senior subordinated
notes for the same aggregate principal amount of Mandatory Convertible Notes, and recognized a $57 million gain on extinguishment
of debt. Subsequently in July 2016, $333 million aggregate principal amount of the Mandatory Convertible Notes were converted into
approximately 8.3 million shares of our common stock, and we recognized a $3 million gain on extinguishment of debt upon conversion.
In August 2016, we induced the exchange of an additional $38 million aggregate principal amount of the Mandatory Convertible Notes
for approximately 1.2 million shares of our common stock, and we recognized a $4 million debt inducement expense. Refer to the
“Long-Term Debt” footnote in the notes to consolidated financial statements for more information on these debt transactions.
Income Tax Benefit. Income tax benefit for 2017 totaled $483 million as compared to a benefit of $88 million for 2016, an increase of
$395 million that was mainly related to (i) a $259 million non-cash charge in 2016 resulting from an ownership shift as defined under
Section 382 of the Internal Revenue Code (“IRC”) which will limit our usage of certain net operating losses and tax credits in the future,
(ii) $174 million of permanent tax differences recognized in 2016 associated with the issuance and subsequent conversion of the New
Convertible Notes and the Mandatory Convertible Notes, (iii) $42 million of net income tax benefits resulting from a reduction in the
U.S. federal statutory tax rate upon enactment of the Tax Cuts and Jobs Act (the “TCJA”) in December 2017, (iv) $294 million in higher
pre-tax loss between periods, and (v) the partial release of a valuation allowance on net operating losses totaling $41 million in
connection with the sale of the FBIR Assets in the third quarter of 2017. These decreases were partially offset by the establishment of
a full valuation allowance against our $119 million net deferred tax assets in 2017 as wells as the tax impact of the $835 million
impairment charge at our Redtail field, which charge was incurred after the date of enactment of the TCJA and was therefore effected
at the new federal tax rate of 21%.
Our effective tax rates for 2017 and 2016 differ from the U.S. statutory income tax rate primarily due to the effects of state income taxes
and permanent taxable differences. Our overall effective tax rate increased from 6.1% in 2016 to 28.1% for 2017. This increase is
mainly the result of the IRC Section 382 limitation on our net operating losses and tax credits recognized in 2016, as well as permanent
tax differences recognized during 2016 associated with the issuance and subsequent conversions of the New Convertible Notes and the
Mandatory Convertible Notes, income tax benefits resulting from enactment of the TCJA and the partial release of a valuation allowance
on net operating losses in connection with the sale of the FBIR Assets in the third quarter of 2017. These increases in our effective tax
rate were partially offset by the recognition of a full valuation allowance on our net deferred tax assets in 2017 and the tax impact of the
impairment charge at our Redtail field after the date of enactment of the TCJA.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Oil, NGL and Natural Gas Sales. Our oil, NGL and natural gas sales revenue decreased $808 million to $1.3 billion when comparing
2016 to 2015. Sales revenue is a function of oil, NGL and gas volumes sold and average commodity prices realized. Our oil sales
volumes decreased 28%, while our NGL and natural gas sales volumes increased 20% and 1%, respectively, between periods. The oil
volume decrease between periods was primarily attributable to normal field production decline across several of our areas resulting from
reduced drilling and completion activity during 2015 and 2016 in response to the depressed commodity price environment. In addition,
we completed several non-core oil and gas property divestitures during 2015 and 2016, which negatively impacted oil production in
2016 by 2,615 MBbl. These decreases were partially offset by new wells drilled and completed in the Williston Basin and DJ Basin
which added 4,990 MBbl and 605 MBbl, respectively, of oil production during 2016 as compared to 2015. Our NGL sales volume
increases between periods generally related to additional volumes processed as more wells were connected to gas processing plants in
the Williston Basin, as well as new wells drilled and completed in the Williston Basin and DJ Basin over the twelve months ended
December 31, 2016. Many of the new Williston Basin wells were in areas with higher gas-to-oil production ratios than previously
drilled areas. These NGL volume increases were partially offset by normal field production decline across several of our areas. The
gas volume increase between periods was primarily due to drilling success at our Williston Basin and DJ Basin properties which resulted
in 9,570 MMcf and 1,125 MMcf, respectively, of additional gas volumes during 2016 as compared to 2015. In addition, gas volumes
50
increased between periods as more wells were connected to gas processing plants in the Williston Basin over the twelve months ended
December 31, 2016 in an effort to increase our overall gas capture rate in this area and reduce flared volumes. These gas volume
increases were largely offset by the 2015 and 2016 property divestitures, which negatively impacted gas production in 2016 by 5,740
MMcf, as well as normal field production decline across several of our areas.
In addition to production-related decreases in net revenue there were also significant decreases in the average sales price realized for
oil, NGLs and natural gas in 2016 compared to 2015. Our average price for oil (before the effects of hedging), NGLs and natural gas
decreased 16%, 30% and 36%, respectively, between periods.
Lease Operating Expenses. Our LOE during 2016 were $395 million, a $160 million decrease over 2015. This decrease was primarily
due to (i) $84 million of lower LOE attributable to properties that we divested during 2015 and 2016, (ii) a $51 million decline in the
costs of oilfield goods and services resulting from cost reduction measures we implemented as well as the general downturn in the oil
and gas industry, and (iii) a reduction in well workover activity between periods. Workovers decreased from $52 million in 2015 to
$27 million in 2016, primarily due to a reduction in well workover activity at our EOR project at North Ward Estes, which we sold in
July 2016.
Our lease operating expenses on a BOE basis also decreased when comparing 2016 to 2015. LOE per BOE amounted to $8.31 during
2016, which represented a decrease of $1.01 per BOE (or 11%) from 2015. This decrease was mainly due to the overall decrease in
LOE expense discussed above, partially offset by lower overall production volumes between periods. The properties sold during 2015
and 2016 consisted mainly of mature oil and gas producing properties with LOE per BOE rates that were higher than our overall blended
corporate rate.
Production Taxes. Our production taxes during 2016 were $109 million, a $74 million decrease over the same period in 2015, which
decrease was primarily due to lower oil, NGL and natural gas sales between periods. Our production taxes, however, are generally
calculated as a percentage of net sales revenue before the effects of hedging, and this percentage on a company-wide basis remained
relatively consistent at 8.5% and 8.7% for 2016 and 2015, respectively.
Depreciation, Depletion and Amortization. Our DD&A expense decreased $72 million in 2016 as compared to 2015. The components
of our DD&A expense were as follows (in thousands):
Depletion
Depreciation
Accretion of asset retirement obligations
Total
Year Ended December 31,
2015
2016
1,213,355
1,149,302 $
9,664
8,479
20,274
13,801
1,243,293
1,171,582 $
$
$
DD&A decreased between periods primarily due to $64 million in lower depletion expense, consisting of a $291 million decrease due
to lower overall production volumes during 2016, which was partially offset by a $227 million increase related to a higher depletion rate
between periods. On a BOE basis, our overall DD&A rate of $24.64 for 2016 was 18% higher than the rate of $20.87 in 2015. The
primary factors contributing to this higher DD&A rate were (i) decreases to proved and proved developed reserves over the twelve
months ended December 31, 2016 (excluding the effect of divestitures) primarily attributable to lower average oil and natural gas prices
used to calculate our reserves, (ii) $539 million in drilling and development expenditures during the twelve months ended December 31,
2016, and (iii) the impact of property divestitures. These factors that negatively impacted our DD&A rate were partially offset by
impairment write-downs on proved oil and gas properties recognized in the third quarter of 2015.
Exploration and Impairment Costs. Our exploration and impairment costs decreased $1.8 billion in 2016 as compared to 2015. The
components of our exploration and impairment expense were as follows (in thousands):
Exploration
Impairment
Total
Year Ended December 31,
2015
2016
45,846 $
75,622
121,468 $
143,363
1,738,308
1,881,671
$
$
Exploration costs decreased $98 million during 2016 as compared to 2015 primarily due to lower rig termination fees incurred between
periods, lower exploratory dry hole costs and a decrease in geology-related general and administrative expenses. Rig termination fees
amounted to $18 million during 2016 as compared to $95 million in 2015. During 2015, we drilled one exploratory dry hole in Michigan
51
totaling $9 million, whereas in 2016 we drilled no exploratory dry holes. Geology-related general and administrative expenses decreased
$6 million between periods.
Impairment expense in 2016 primarily related to $60 million of leasehold amortization associated with individually insignificant
unproved properties and $13 million in impairment write-downs of undeveloped acreage costs for leases where we have no future plans
to drill. Impairment expense in 2015 primarily related to (i) $1.5 billion in non-cash impairment charges for the partial write-down of
our North Ward Estes field in Texas and other non-core proved oil and gas properties primarily in Texas, Wyoming, North Dakota and
Colorado that were not being developed due to depressed oil and gas prices, (ii) $86 million of leasehold amortization associated with
individually insignificant unproved properties, (iii) $62 million of impairment write-downs on our CO2 development properties whose
net book values exceeded their undiscounted future net cash flows, and (iv) $49 million in impairment write-downs of undeveloped
acreage costs for leases where we had no future plans to drill.
Goodwill Impairment. As a result of a sustained decrease in the price of our common stock during the third quarter of 2015 caused by
a significant decline in crude oil and natural gas prices over that same period, we performed a goodwill impairment test as of September
30, 2015. The impairment test indicated that the fair value of our reporting unit was less than its carrying amount, and further that there
was no remaining implied fair value attributable to goodwill. Based on these results, we recorded a non-cash impairment charge of
$874 million in 2015 to reduce the carrying value of goodwill to zero.
General and Administrative Expenses. We report G&A expenses net of third-party reimbursements and internal allocations. The
components of our G&A expenses were as follows (in thousands):
General and administrative expenses
Reimbursements and allocations
General and administrative expenses, net
Year Ended December 31,
2015
2016
$
$
264,948 $
(118,070)
146,878 $
309,987
(137,371)
172,616
G&A expense before reimbursements and allocations decreased $45 million during 2016 as compared to 2015 primarily due to lower
employee compensation, savings realized as a result of cost reduction measures we implemented and the impact of property divestitures.
Employee compensation decreased $28 million in 2016 as compared to 2015 primarily due to reductions in personnel over the twelve
months ended December 31, 2016. The decrease in reimbursements and allocations for 2016 was the result of a lower number of field
workers on Whiting-operated properties associated with reduced drilling activity as well as property divestitures over the twelve months
ended December 31, 2016.
Our general and administrative expenses on a BOE basis, however, increased when comparing 2016 to 2015. G&A expense per BOE
amounted to $3.09 during 2016, which represented an increase of $0.19 per BOE (or 7%) from 2015. This increase was mainly due to
lower overall production volumes between periods, partially offset by lower employee compensation and savings realized as a result of
our cost reduction measures.
Derivative (Gain) Loss, Net. Our commodity derivative contracts and embedded derivatives are marked to market each quarter with
fair value gains and losses recognized immediately in earnings as derivative (gain) loss, net. Cash flow, however, is only impacted to
the extent that settlements under these contracts result in making or receiving a payment to or from the counterparty. Derivative (gain)
loss, net amounted to a gain of $1 million for 2016, which consisted of a $59 million fair value gain on embedded derivatives, partially
offset by a $58 million loss on commodity derivative contracts resulting from the upward shift in the forward price curve for crude oil
from January 1, 2016 (or the 2016 date on which new contracts were entered into) to December 31, 2016. Derivative (gain) loss, net
for 2015 consisted of a $218 million gain on commodity derivative contracts primarily due to the more significant downward shift in
the same forward price curve from January 1, 2015 (or the 2015 date on which prior year contracts were entered into) to December 31,
2015.
Loss on Sale of Properties. During 2016, we sold our interest in the North Ward Estes properties for net cash proceeds of $295 million,
which resulted in a pre-tax loss on sale of $187 million. There were no other property divestitures resulting in a significant gain or loss
on sale during 2016. During 2015, we sold our interests in certain non-core producing oil and gas wells and undeveloped acreage across
many of our operating areas, as well as a water system in Colorado for aggregate net proceeds of $515 million, which resulted in a pre-
tax loss on sale of $61 million.
52
Interest Expense. The components of our interest expense were as follows (in thousands):
Notes
Amortization of debt issue costs, discounts and premiums
Credit agreement
Other
Capitalized interest
Total
Year Ended December 31,
2015
2016
$
$
187,374 $
335,569
32,885
1,930
(138)
557,620 $
265,358
46,525
26,071
453
(4,282)
334,125
The increase in interest expense of $223 million between periods was mainly attributable to an increase in amortization of debt issue
costs, discounts and premiums, partially offset by lower interest costs incurred on our notes during 2016 as compared to 2015. The
increase in amortization of debt issue costs, discounts and premiums of $289 million was primarily due to (i) a non-cash charge of $244
million for the acceleration of unamortized debt discounts in connection with the December 2016 conversions of our Mandatory
Convertible Notes, (ii) $22 million of amortization of debt discounts on the Mandatory Convertible Notes we issued in June and July
2016 prior to their conversions, (iii) a non-cash charge of $14 million for the acceleration of unamortized debt discounts in connection
with the August 2016 induced exchange of a portion of our Mandatory Convertible Notes, and (iv) a $6 million non-cash charge for the
acceleration of unamortized debt issuance costs in connection with a reduction of the aggregate commitments under our credit agreement
in March 2016. The $78 million decrease in note interest was primarily due to (i) $71 million incurred during 2015 on the $1.6 billion
of notes we assumed as part of the acquisition of Kodiak Oil & Gas Corp. (the “Kodiak Notes”), all of which were subsequently
repurchased in 2015, and (ii) the conversions of the New Convertible Notes in May 2016 and the Mandatory Convertible Notes in the
second half of 2016, resulting in a $22 million decrease in note interest between periods. This decrease in note interest expense was
partially offset by our March 2015 issuance of $1,250 million of 2020 Convertible Senior Notes and $750 million of 2023 Senior Notes,
which resulted in a $15 million increase in interest expense between periods.
Our weighted average debt outstanding during 2016 was $5.0 billion versus $5.7 billion for 2015. Our weighted average effective cash
interest rate was 4.4% during 2016 compared to 5.2% during 2015.
Loss on Extinguishment of Debt. During 2016, we recognized a net loss on extinguishment of debt of $42 million. In March 2016, we
completed the exchange of $477 million aggregate principal amount of our senior notes and senior subordinated notes for the same
aggregate principal amount of New Convertible Notes, and recognized a $91 million gain on extinguishment of debt. Subsequently,
during the second quarter of 2016, the holders of the New Convertible Notes voluntarily converted all $477 million aggregate principal
amount of the New Convertible Notes for approximately 10.5 million shares of our common stock, and we recognized a $188 million
loss on extinguishment of debt upon conversion. In June and July 2016, we completed the exchange of $1.1 billion aggregate principal
amount of our senior notes, convertible senior notes and senior subordinated notes for the same aggregate principal amount of Mandatory
Convertible Notes, and recognized a $57 million gain on extinguishment of debt. Subsequently in July 2016, $333 million aggregate
principal amount of the Mandatory Convertible Notes were converted into approximately 8.3 million shares of our common stock, and
we recognized a $3 million gain on extinguishment of debt upon conversion. In August 2016, we induced the exchange of an additional
$38 million aggregate principal amount of the Mandatory Convertible Notes for approximately 1.2 million shares of our common stock,
and we recognized a $4 million debt inducement expense. During 2015, we repurchased all $1.6 billion aggregate principal amount of
the Kodiak Notes then outstanding, and recognized an $18 million loss on extinguishment of debt. Refer to the “Long-Term Debt”
footnote in the notes to consolidated financial statements for more information on these debt transactions.
Income Tax Benefit. Income tax benefit for 2016 totaled $88 million as compared to a benefit of $774 million for 2015, a decrease of
$686 million that was mainly related to (i) $1.6 billion in lower pre-tax loss between periods, (ii) a $259 million non-cash charge in
2016 resulting from an ownership shift as defined under Section 382 of the Internal Revenue Code which will limit our usage of certain
net operating losses and tax credits in the future, as discussed in the “Income Taxes” footnote in the notes to consolidated financial
statements, and (iii) $174 million of permanent tax differences recognized during 2016 associated with the issuance and subsequent
conversion of the New Convertible Notes and the Mandatory Convertible Notes.
Our effective tax rates for 2016 and 2015 differ from the U.S. statutory income tax rate primarily due to the effects of state income taxes
and permanent taxable differences. Our overall effective tax rate decreased from 25.9% in 2015 to 6.1% for 2016. This decrease was
mainly the result of the IRC Section 382 limitation on our net operating losses and tax credits recognized in 2016, as well as $174 million
of permanent tax differences recognized during 2016 associated with the issuance and subsequent conversions of the New Convertible
Notes and the Mandatory Convertible Notes, which differences increased our 2016 effective tax rate to a lesser extent than the increase
in our 2015 effective tax rate resulting from $874 million in goodwill impairment expense which was not tax deductible.
53
Liquidity and Capital Resources
Overview. At December 31, 2017, we had $879 million of cash on hand and $3.9 billion of equity, while at December 31, 2016, we had
$56 million of cash on hand and $5.1 billion of equity.
One of the primary sources of variability in our cash flows from operating activities is commodity price volatility, which we partially
mitigate through the use of commodity hedge contracts. Oil accounted for 68% and 72% of our total production in 2017 and 2016,
respectively. As a result, our operating cash flows are more sensitive to fluctuations in oil prices than they are to fluctuations in NGL
or natural gas prices. As of January 23, 2018, we had derivative contracts covering the sale of approximately 72% of our forecasted
2018 oil production volumes. For a list of all of our outstanding derivatives as of January 23, 2018, refer to Item 7A, “Quantitative and
Qualitative Disclosures about Market Risk”.
Cash Flows from 2017 Compared to 2016. During 2017, we generated $577 million of cash provided by operating activities, a decrease
of $18 million from 2016. Cash provided by operating activities decreased primarily due to lower crude oil production volumes, a
decrease in cash settlements received on our derivative contracts and higher production taxes during 2017. These negative factors were
partially offset by higher realized sales prices for oil, NGLs and natural gas, as well as lower cash interest expense, lease operating
expenses, general and administrative expenses and exploration costs during 2017 as compared to 2016. Refer to “Results of Operations”
for more information on the impact of volumes and prices on revenues and for more information on increases and decreases in certain
expenses during 2017.
During 2017, cash flows from operating activities plus $930 million in proceeds from the sale of oil and gas properties were used to
finance $831 million of drilling and development expenditures, $550 million of net repayments under our credit agreement, the
redemption of $275 million of our 2018 Senior Subordinated Notes, $21 million of oil and gas property acquisitions and $13 million of
debt issuance costs.
Cash Flows from 2016 Compared to 2015. During 2016, we generated $595 million of cash provided by operating activities, a decrease
of $456 million from 2015. Cash provided by operating activities decreased primarily due to lower realized sales prices for oil, NGLs
and natural gas, lower crude oil production volumes, and a decrease in cash settlements received on our derivative contracts during
2016. These negative factors were partially offset by higher NGL and natural gas production volumes, as well as lower lease operating
expenses, exploration costs, production taxes, cash interest expense and general and administrative expenses during 2016 as compared
to 2015.
During 2016, cash flows from operating activities plus $313 million in proceeds from the sale of oil and gas properties were used to
finance $539 million of drilling and development expenditures, $250 million of net repayments under our credit agreement, $42 million
of early conversion payments on our New Convertible Notes and $22 million of debt issuance costs.
Exploration and Development Expenditures. The following chart details our E&D expenditures incurred by core area (in thousands):
Northern Rocky Mountains
Central Rocky Mountains
Permian Basin (1)
Other (2)
Total incurred
Year Ended December 31,
2016
2017
$
$
601,737 $
292,826
-
17,866
912,429 $
348,610 $
170,256
33,266
1,462
553,594 $
2015
1,556,267
603,646
94,940
58,749
2,313,602
_____________________
(1) During 2016, we sold our interest in the Bravo Dome field in New Mexico and our enhanced oil recovery project at North Ward
Estes.
(2) Other primarily includes non-core oil and gas properties located in Colorado, Mississippi, New Mexico, Texas and Wyoming.
We continually evaluate our capital needs and compare them to our capital resources. Our 2018 E&D budget is $750 million, which we
expect to fund substantially with net cash provided by operating activities and cash on hand. The 2018 E&D budget represents a decrease
from the $912 million incurred on E&D expenditures during 2017. We believe that should additional attractive acquisition opportunities
arise or E&D expenditures exceed $750 million, we will be able to finance additional capital expenditures through agreements with
industry partners, divestitures of certain oil and gas property interests, borrowings under our credit agreement or by accessing the capital
markets. Our level of E&D expenditures is largely discretionary, and the amount of funds we devote to any particular activity may
increase or decrease significantly depending on commodity prices, cash flows, available opportunities and development results, among
other factors. We believe that we have sufficient liquidity and capital resources to execute our business plan over the next 12 months
and for the foreseeable future. With our expected cash flow streams, commodity price hedging strategies, current liquidity levels
54
(including availability under our credit agreement), access to debt and equity markets and flexibility to modify future capital expenditure
programs, we expect to be able to fund all planned capital programs and debt repayments, comply with our debt covenants, and meet
other obligations that may arise from our oil and gas operations.
Credit Agreement. Whiting Oil and Gas, our wholly owned subsidiary, has a credit agreement with a syndicate of banks that as of
December 31, 2017 had a borrowing base and aggregate commitments of $2.3 billion. As of December 31, 2017, we had $2.3 billion
of available borrowing capacity, which was net of $2 million in letters of credit outstanding, with no borrowings outstanding.
The borrowing base under the credit agreement is determined at the discretion of the lenders, based on the collateral value of our proved
reserves that have been mortgaged to such lenders, and is subject to regular redeterminations on May 1 and November 1 of each year,
as well as special redeterminations described in the credit agreement, in each case which may reduce the amount of the borrowing base.
Because oil and gas prices are principal inputs into the valuation of our reserves, if current or projected oil and gas prices decline from
their current levels, our borrowing base could be reduced at the next redetermination date or during future redeterminations. Upon a
redetermination of our borrowing base, either on a periodic or special redetermination date, if borrowings in excess of the revised
borrowing capacity were outstanding, we could be forced to immediately repay a portion of our debt outstanding under the credit
agreement.
A portion of the revolving credit facility in an aggregate amount not to exceed $50 million may be used to issue letters of credit for the
account of Whiting Oil and Gas or other designated subsidiaries of ours. As of December 31, 2017, $48 million was available for
additional letters of credit under the agreement.
The credit agreement provides for interest only payments until December 2019, when the credit agreement expires and all outstanding
borrowings are due. Interest under the revolving credit facility accrues at our option at either (i) a base rate for a base rate loan plus the
margin in the table below, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.5% per annum,
or an adjusted LIBOR rate plus 1.0% per annum, or (ii) an adjusted LIBOR rate for a Eurodollar loan plus the margin in the table below.
Additionally, we also incur commitment fees as set forth in the table below on the unused portion of the aggregate commitments of the
lenders under the revolving credit facility.
Ratio of Outstanding Borrowings to Borrowing Base
Less than 0.25 to 1.0
Greater than or equal to 0.25 to 1.0 but less than 0.50 to 1.0
Greater than or equal to 0.50 to 1.0 but less than 0.75 to 1.0
Greater than or equal to 0.75 to 1.0 but less than 0.90 to 1.0
Greater than or equal to 0.90 to 1.0
Applicable
Margin for Base
Rate Loans
1.00%
1.25%
1.50%
1.75%
2.00%
Applicable
Margin for
Eurodollar Loans
2.00%
2.25%
2.50%
2.75%
3.00%
Commitment
Fee
0.50%
0.50%
0.50%
0.50%
0.50%
The credit agreement contains restrictive covenants that may limit our ability to, among other things, incur additional indebtedness, sell
assets, make loans to others, make investments, enter into mergers, enter into hedging contracts, incur liens and engage in certain other
transactions without the prior consent of our lenders. However, the credit agreement permits us and certain of our subsidiaries to issue
second lien indebtedness of up to $1.0 billion subject to certain conditions and limitations. Except for limited exceptions, the credit
agreement also restricts our ability to make any dividend payments or distributions on our common stock. These restrictions apply to
all of our restricted subsidiaries (as defined in the credit agreement). The credit agreement requires us, as of the last day of any quarter,
to maintain the following ratios (as defined in the credit agreement): (i) a consolidated current assets to consolidated current liabilities
ratio (which includes an add back of the available borrowing capacity under the credit agreement) of not less than 1.0 to 1.0, (ii) a total
senior secured debt to the last four quarters’ EBITDAX ratio of less than 3.0 to 1.0 during the Interim Covenant Period (defined below),
and thereafter a total debt to EBITDAX ratio of less than 4.0 to 1.0 and (iii) a ratio of the last four quarters’ EBITDAX to consolidated
cash interest charges of not less than 2.25 to 1.0 during the Interim Covenant Period. Under the credit agreement, the “Interim Covenant
Period” is defined as the period from June 30, 2015 until the earlier of (i) April 1, 2018 or (ii) the commencement of an investment-
grade debt rating period (as defined in the credit agreement). We were in compliance with our covenants under the credit agreement as
of December 31, 2017. However, a substantial or extended decline in oil, NGL or natural gas prices may adversely affect our ability to
comply with these covenants in the future.
For further information on the loan security related to our credit agreement, refer to the “Long-Term Debt” footnote in the notes to
consolidated financial statements.
Senior Notes and Senior Subordinated Notes. In December 2017, we issued at par $1.0 billion of 6.625% Senior Notes due January
2026. In March 2015, we issued at par $750 million of 6.25% Senior Notes due April 2023 (the “2023 Senior Notes”). In September
2013, we issued at par $1.1 billion of 5.0% Senior Notes due March 2019 (the “2019 Senior Notes”) and $800 million of 5.75% Senior
Notes due March 2021, and issued at 101% of par an additional $400 million of 5.75% Senior Notes due March 2021 (collectively the
55
“2021 Senior Notes” and together with the 2026 Senior Notes, the 2023 Senior Notes and the 2019 Senior Notes, the “Senior Notes”).
In September 2010, we issued at par $350 million of 6.5% Senior Subordinated Notes due October 2018 (the “2018 Senior Subordinated
Notes”).
Exchange of Senior Notes and Senior Subordinated Notes for Convertible Notes. During 2016, we exchanged (i) $75 million aggregate
principal amount of our 2018 Senior Subordinated Notes, (ii) $139 million aggregate principal amount of our 2019 Senior Notes, (iii)
$326 million aggregate principal amount of our 2021 Senior Notes, and (iv) $342 million aggregate principal amount of our 2023 Senior
Notes, for the same aggregate principal amount of convertible notes. Subsequently during 2016, all $882 million aggregate principal
amount of these convertible notes was converted into approximately 21.6 million shares of our common stock pursuant to the terms of
the notes.
Redemption of 2018 Senior Subordinated Notes. On February 2, 2017, we paid $281 million to redeem all of the then outstanding
$275 million aggregate principal amount of our 2018 Senior Subordinated Notes, which payment consisted of the 100% redemption
price plus all accrued and unpaid interest on the notes. We financed the redemption with borrowings under our credit agreement. As
of March 31, 2017, no 2018 Senior Subordinated Notes remained outstanding.
Redemption of 2019 Senior Notes. On January 26, 2018, we paid $1.0 billion to redeem all of the then outstanding $961 million
aggregate principal amount of our 2019 Senior Notes, which payment consisted of the 102.976% redemption price plus all accrued and
unpaid interest on the notes. We financed the redemption with proceeds from the issuance of our 2026 Senior Notes and borrowings
under our credit agreement.
2020 Convertible Senior Notes. In March 2015, we issued at par $1,250 million of 1.25% Convertible Senior Notes due April 2020 (the
“2020 Convertible Senior Notes”). During 2016, we exchanged $688 million aggregate principal amount of our 2020 Convertible Senior
Notes for the same aggregate principal amount of new mandatory convertible senior notes. Subsequently during 2016, all $688 million
aggregate principal amount of these mandatory convertible senior notes was converted into approximately 17.8 million shares of our
common stock pursuant to the terms of the notes.
For the remaining $562 million aggregate principal amount of 2020 Convertible Senior Notes outstanding as of December 31, 2017, we
have the option to settle conversions of these notes with cash, shares of common stock or a combination of cash and common stock at
our election. Our intent is to settle the principal amount of the 2020 Convertible Senior Notes in cash upon conversion. Prior to
January 1, 2020, the 2020 Convertible Senior Notes will be convertible at the holder’s option only under the following circumstances:
(i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter),
if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130%
of the conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day
period (the “measurement period”) in which the trading price per $1,000 principal amount of the 2020 Convertible Senior Notes for
each trading day of the measurement period is less than 98% of the product of the last reported sale price of our common stock and the
conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after January 1, 2020, the
2020 Convertible Senior Notes will be convertible at any time until the second scheduled trading day immediately preceding the April 1,
2020 maturity date of the notes. The notes will be convertible at a current conversion rate of 6.4102 shares of our common stock per
$1,000 principal amount of the notes, which is equivalent to a current conversion price of approximately $156.00. The conversion rate
will be subject to adjustment in some events. In addition, following certain corporate events that occur prior to the maturity date, we
will increase, in certain circumstances, the conversion rate for a holder who elects to convert its 2020 Convertible Senior Notes in
connection with such corporate event. As of December 31, 2017, none of the contingent conditions allowing holders of the 2020
Convertible Senior Notes to convert these notes had been met.
Note Covenants. The indentures governing the Senior Notes restrict us from incurring additional indebtedness, subject to certain
exceptions, unless our fixed charge coverage ratio (as defined in the indentures) is at least 2.0 to 1. If we were in violation of this
covenant, then we may not be able to incur additional indebtedness, including under Whiting Oil and Gas’ credit agreement.
Additionally, these indentures contain restrictive covenants that may limit our ability to, among other things, pay cash dividends, make
certain other restricted payments, redeem or repurchase our capital stock, make investments or issue preferred stock, sell assets,
consolidate, merge or transfer all or substantially all of the assets of ours and our restricted subsidiaries taken as a whole, and enter into
hedging contracts. These covenants may potentially limit the discretion of our management in certain respects. We were in compliance
with these covenants as of December 31, 2017. However, a substantial or extended decline in oil, NGL or natural gas prices may
adversely affect our ability to comply with these covenants in the future.
Shelf Registration Statement. We have on file with the SEC a universal shelf registration statement to allow us to offer an indeterminate
amount of securities in the future. Under the registration statement, we may periodically offer from time to time debt securities, common
stock, preferred stock, warrants and other securities or any combination of such securities in amounts, prices and on terms announced
when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered,
will be described in detail in a prospectus supplement at the time of any such offering.
56
Contractual Obligations and Commitments
Schedule of Contractual Obligations. The following table summarizes our obligations and commitments as of December 31, 2017 to
make future payments under certain contracts, aggregated by category of contractual obligation, for the time periods specified below.
This table does not include amounts payable under contracts where we cannot predict with accuracy the amount and timing of such
payments, including any amounts we may be obligated to pay under our derivative contracts, as such payments are dependent upon the
price of crude oil in effect at the time of settlement, and any penalties that may be incurred for underdelivery under our physical delivery
contracts. For further information on these contracts refer to the “Derivative Financial Instruments” footnote in the notes to consolidated
financial statements and “Delivery Commitments” in Item 2 of this Annual Report on Form 10-K.
Contractual Obligations
Long-term debt (1)
Cash interest expense on debt (2)
Asset retirement obligations (3)
Water disposal agreement (4)
Purchase obligations (5)
Pipeline transportation agreements (6)
Drilling rig contracts (7)
Leases (8)
Total
Payments due by period
(in thousands)
Total
$ 3,805,389 $
Less than 1
year
961,409 $
1-3 years
3-5 years
More than 5
years
562,075 $
873,609 $ 1,408,296
869,284
164,015
303,700
193,863
207,706
134,237
5,031
26,420
10,587
121,659
18,579
40,635
37,328
22,968
55,044
7,656
15,312
-
9,308
18,914
15,341
11,481
19,742
19,442
300
-
-
14,703
7,502
$ 5,043,026 $ 1,192,942 $
7,201
-
974,557 $ 1,130,728 $ 1,744,799
-
92,199
25,117
-
_____________________
(1) Long-term debt consists of the principal amounts of the Senior Notes and the 2020 Convertible Senior Notes. On January 26, 2018,
we used the proceeds from the December 2017 issuance of our 6.625% Senior Notes due January 2026 as well as borrowings under
our credit agreement to redeem all of the then outstanding $961 million 5.0% Senior Notes due March 2019.
(2) Cash interest expense on the Senior Notes is estimated assuming no principal repayment until the due dates of the instruments.
Cash interest expense on the 2020 Convertible Senior Notes is estimated assuming no principal repayments or conversions prior to
maturity. Commitment fees on the credit agreement are estimated assuming no principal borrowings or repayments or changes to
commitments under the agreement through the December 2019 instrument due date.
(3) Asset retirement obligations represent the present value of estimated amounts expected to be incurred in the future to plug and
abandon oil and gas wells, remediate oil and gas properties and dismantle their related plants, facilities and offshore platforms.
(4) We have one water disposal agreement which expires in 2024, whereby we have contracted for the transportation and disposal of
the produced water from our Redtail field. Under the terms of the agreement, we are obligated to provide a minimum volume of
produced water or else pay for any deficiencies at the price stipulated in the contract. As a result of our reduced development
operations at our Redtail field, we have made and expect to continue to make periodic deficiency payments under this contract.
Refer to the “Commitments and Contingencies” footnote in the notes to the consolidated financial statements for more information
on this contract and related deficiency payments.
(5) We have one take-or-pay purchase agreement which expires in 2020, whereby we have committed to buy certain volumes of water
for use in the fracture stimulation process on wells we complete in our Redtail field. Under the terms of the agreement, we are
obligated to purchase a minimum volume of water or else pay for any deficiencies at the price stipulated in the contract. As a result
of our reduced development operations at our Redtail field, we have made and expect to continue to make periodic deficiency
payments under this contract. Refer to the “Commitments and Contingencies” footnote in the notes to the consolidated financial
statements for more information on this contract and related deficiency payments.
(6) We have three pipeline transportation agreements with two different suppliers, expiring in 2022, 2024 and 2025. Under two of
these contracts, we have committed to pay fixed monthly reservation fees on dedicated pipelines from our Redtail field for natural
gas and NGL transportation capacity, plus a variable charge based on actual transportation volumes. The remaining contract
contains a commitment to transport a minimum volume of crude oil via a certain oil gathering system or else pay for any deficiencies
at a price stipulated in the contract. The obligations reported above represent our minimum financial commitments pursuant to the
terms of these contracts, however, our actual expenditures under these contracts may exceed the minimum commitments presented
above.
57
(7) As of December 31, 2017, we had three drilling rigs under long-term contracts, of which two drilling rigs expire in 2018 and one
expires in 2019. As of December 31, 2017, early termination of these contracts would require termination penalties of $11 million,
which would be in lieu of paying the remaining drilling commitments under these contracts. The obligations reported above
represent our minimum financial commitments pursuant to the terms of these contracts, however, our actual expenditures under
these contracts may exceed the minimum commitments presented above.
(8) We lease 222,900 square feet of administrative office space in Denver, Colorado under an operating lease arrangement expiring in
2019, 44,500 square feet of office space in Midland, Texas expiring in 2020, and 36,500 square feet of office space in Dickinson,
North Dakota expiring in 2020. We have sublet the majority of our office space in Midland, Texas to a third party for the remaining
lease term. The offsetting rental income has not been included in the table above.
Based on current oil and natural gas prices and anticipated levels of production, we believe that the estimated net cash generated from
operations, together with cash on hand and amounts available under our credit agreement, will be adequate to meet future liquidity
needs, including satisfying our financial obligations and funding our operating, development and exploration activities.
New Accounting Pronouncements
For further information on the effects of recently adopted accounting pronouncements and the potential effects of new accounting
pronouncements, refer to the “Summary of Significant Accounting Policies” footnote in the notes to consolidated financial statements.
Critical Accounting Policies and Estimates
Our discussion of financial condition and results of operations is based upon the information reported in our consolidated financial
statements. The preparation of these statements in accordance with GAAP and SEC rules and regulations requires us to make certain
assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of
contingent assets and liabilities at the date of our financial statements. We base our assumptions and estimates on historical experience
and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in
circumstances, weather, politics, global economics, mechanical problems, general business conditions and other factors. A summary of
our significant accounting policies is detailed in Note 1 to our consolidated financial statements. We have outlined below certain of
these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the
application of significant judgment by our management.
Successful Efforts Accounting. We account for our oil and gas operations using the successful efforts method of accounting. Under this
method, the fair value of property acquired and all costs associated with successful exploratory wells and all development wells are
capitalized. Items charged to expense generally include geological and geophysical costs, costs of unsuccessful exploratory wells and
oil and gas production costs. All of our properties are located within the continental United States.
Oil and Natural Gas Reserve Quantities. Reserve quantities and the related estimates of future net cash flows affect our periodic
calculations of depletion, impairment of our oil and natural gas properties and our asset retirement obligations. Proved oil and gas
reserves are those quantities of oil and gas which, by analysis of geoscience and engineering data, can be estimated with reasonable
certainty to be economically producible—from a given date forward, from known reservoirs and under existing economic conditions,
operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless
evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the
estimation. Reserve quantities and future cash flows included in this report are prepared in accordance with guidelines established by
the SEC and the FASB. The accuracy of our reserve estimates is a function of (i) the quality and quantity of available data, (ii) the
interpretation of that data, (iii) the accuracy of various mandated economic assumptions, and (iv) the judgments of the persons preparing
the estimates.
External petroleum engineers independently estimated all of the proved reserve quantities included in this Annual Report on Form 10-K.
In connection with our external petroleum engineers performing their independent reserve estimations, we furnish them with the
following information that they review: (1) technical support data, (2) technical analysis of geologic and engineering support
information, (3) economic and production data and (4) our well ownership interests. The independent petroleum engineers, Cawley,
Gillespie & Associates, Inc., evaluated 100% of our estimated proved reserve quantities and their related pre-tax future net cash flows
as of December 31, 2017. Estimates prepared by others may be higher or lower than our estimates. Because these estimates depend on
many assumptions, all of which may differ substantially from actual results, reserve estimates may be different from the quantities of
oil and gas that are ultimately recovered. For example, if the crude oil and natural gas prices used in our year-end reserve estimates
increased or decreased by 10%, our proved reserve quantities at December 31, 2017 would have increased by 19 MBOE (3%) or
decreased by 24 MBOE (4%), respectively, and the pre-tax PV10% of our proved reserves would have increased by $1.1 billion (28%)
or decreased by $1.1 billion (27%), respectively. We continually make revisions to reserve estimates throughout the year as additional
information becomes available. We make changes to depletion rates and impairment calculations (when impairment indicators arise)
in the same period that changes to reserve estimates are made.
58
Depreciation, Depletion and Amortization. Our rate of recording DD&A is dependent upon our estimates of total proved and proved
developed reserves, which estimates incorporate various assumptions and future projections. If our estimates of total proved or proved
developed reserves decline, the rate at which we record DD&A expense increases, which in turn reduces our net income. Such a decline
in reserves may result from lower commodity prices or other changes to reserve estimates, as discussed above, and we are unable to
predict changes in reserve quantity estimates as such quantities are dependent on the success of our exploration and development
program, as well as future economic conditions.
Impairment of Oil and Gas Properties. We review the value of our oil and gas properties whenever management judges that events and
circumstances indicate that the recorded carrying value of properties may not be recoverable. Impairments of producing properties are
determined by comparing their future net undiscounted cash flows to their net book values at the end of each period. If their net
capitalized costs exceed undiscounted future cash flows, the cost of the property is written down to “fair value”, which is determined
using net discounted future cash flows from the producing property. Different pricing assumptions or discount rates could result in a
different calculated impairment. In addition to proved property impairments, we provide for impairments on significant undeveloped
properties when we determine that the property will not be developed or a permanent impairment in value has occurred. Individually
insignificant unproved properties are amortized on a composite basis, based on past success, experience and average lease-term lives.
Goodwill Impairment. We tested goodwill for impairment annually in the second quarter or whenever events or changes in
circumstances indicated that the fair value of our reporting unit may have been reduced below its carrying value. When testing goodwill
for impairment, if our qualitative analysis indicated that it was more likely than not that the fair value of the reporting unit was less than
its carrying value, we then performed a quantitative impairment test. If the carrying value of the reporting unit exceeded its fair value,
goodwill was written down to its implied fair value with an offsetting charge to earnings.
We performed our annual goodwill impairment test as of June 30, 2015, and determined that no impairment had occurred. However, as
a result of a sustained decrease in the price of Whiting’s common stock during the third quarter of 2015 caused by a significant decline
in crude oil and natural gas prices over that same period, we performed another goodwill impairment test as of September 30, 2015.
The impairment test indicated that the fair value of our reporting unit was less than its carrying amount, and further that there was no
remaining implied fair value attributable to goodwill. Based on these results, we recorded a non-cash impairment charge to reduce the
carrying value of goodwill to zero.
The fair value of our reporting unit was ascribed using an income approach analysis based on net discounted future cash flows and a
market approach analysis. The income approach analysis was dependent on a number of factors including estimates of future oil and
gas production from our reserve reports, future commodity prices based on sales contract terms or NYMEX forward price curves as of
the date of the estimate (adjusted for basis differentials), future operating and development costs, the successful development of proved
and unproved reserves, an inflation rate and a discount rate based on our weighted-average cost of capital. The market approach was
dependent on our market capitalization as of the date of the estimate, an estimate of the control premium that a market participant would
apply to value our reporting unit as a whole and the fair value of our outstanding debt.
There is considerable judgment involved in estimating fair values, particularly in determining the valuation methodologies to utilize and
the weighting applied to such methodologies. Although we based the fair value estimate of our reporting unit on assumptions we
believed to be reasonable, those assumptions are inherently uncertain, and actual results could differ from our estimates.
Asset Retirement Obligation. Our asset retirement obligations (“ARO”) consist of estimated future costs associated with the plugging
and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage and land restoration in accordance with
applicable local, state and federal laws. The discounted fair value of an ARO liability is required to be recognized in the period in which
it is incurred, with the associated asset retirement cost capitalized as part of the carrying cost of the oil and gas asset. The recognition
of an ARO requires that management make numerous assumptions regarding such factors as the estimated probabilities, amounts and
timing of settlements; the credit-adjusted risk-free discount rate; the inflation rate; and future advances in technology. In periods
subsequent to the initial measurement of an ARO, we must recognize period-to-period changes in the liability resulting from the passage
of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. Increases in the ARO
liability due to the passage of time impact net income as accretion expense. The related capitalized cost, including revisions thereto, is
charged to expense through DD&A over the life of the oil and gas property.
Derivative and Embedded Derivative Instruments. All derivative instruments are recorded in the consolidated financial statements at
fair value, other than derivative instruments that meet the “normal purchase normal sale” exclusion or other derivative scope exceptions.
We do not currently apply hedge accounting to any of our outstanding derivative instruments, and as a result, all changes in derivative
fair values are recognized currently in earnings.
We determine the recorded amounts of our derivative instruments measured at fair value utilizing third-party valuation specialists. We
review these valuations, including the related model inputs and assumptions, and analyze changes in fair value measurements between
periods. We corroborate such inputs, calculations and fair value changes using various methodologies, and review unobservable inputs
for reasonableness utilizing relevant information from other published sources. When available, we utilize counterparty valuations to
59
assess the reasonableness of our valuations. The values we report in our financial statements change as the assumptions used in these
valuations are revised to reflect changes in market conditions (particularly those for oil and natural gas futures) or other factors, many
of which are beyond our control.
We periodically enter into commodity derivative contracts to manage our exposure to oil and natural gas price volatility. We primarily
utilize costless collars and swaps which are generally placed with major financial institutions, as well as crude oil sales and delivery
contracts. We use hedging to help ensure that we have adequate funding for our capital programs and to manage returns on our drilling
programs and acquisitions. Our decision on the quantity and price at which we choose to hedge our production is based in part on our
view of current and future market conditions. While the use of these hedging arrangements limits the downside risk of adverse price
movements, it may also limit future revenues from favorable price movements. The use of hedging transactions also involves the risk
that the counterparties will be unable to meet the financial terms of such transactions. We evaluate the ability of our counterparties to
perform at the inception of a hedging relationship and on a periodic basis as appropriate.
We value our costless collars and swaps using industry-standard models that consider various assumptions, including quoted forward
prices for commodities, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant
economic measures. We value our long-term crude oil sales and delivery contracts based on a probability-weighted income approach
which considers various assumptions, including quoted spot prices for commodities, market differentials for crude oil and U.S. Treasury
rates. The discount rates used in the fair values of these instruments include a measure of nonperformance risk by the counterparty or
us, as appropriate.
In addition, we evaluate the terms of our convertible debt and other contracts, if any, to determine whether they contain embedded
components that are required to be bifurcated and accounted for separately as derivative financial instruments.
We valued the embedded derivatives related to our convertible notes using a binomial lattice model which considered various inputs
including (i) our common stock price, (ii) risk-free rates based on U.S. Treasury rates, (iii) recovery rates in the event of default, (iv)
default intensity and (v) volatility of our common stock.
We also had an embedded derivative related to our purchase and sale agreement with the buyer of the North Ward Estes properties,
which included a contingent payment linked to NYMEX crude oil prices. Prior to settlement of the contingent payment in July 2017,
we valued this embedded derivative using a modified Black-Scholes swaption pricing model which considered various assumptions,
including quoted forward prices for commodities, time value and volatility factors. The discount rate used in the fair value of this
instrument included a measure of the counterparty’s nonperformance risk.
Income Taxes and Uncertain Tax Positions. We provide for income taxes in accordance with FASB ASC Topic 740, Income Taxes
(“ASC 740”). We record deferred tax assets and liabilities to account for the expected future tax consequences of events that have been
recognized in our financial statements and our tax returns. We routinely assess the realizability of our deferred tax assets. If we conclude
that it is more likely than not that some portion or all of our deferred tax assets will not be realized, the tax asset is reduced by a valuation
allowance. We consider future taxable income in making such assessments. Numerous judgments and assumptions are inherent in the
determination of future taxable income, including factors such as future operating conditions (particularly as they relate to prevailing
oil and natural gas prices).
On December 22, 2017, Congress passed the Tax Cuts and Jobs Act (the “TCJA”). The new legislation significantly changes the U.S.
corporate tax law by, among other things, lowering the U.S. corporate income tax rate from 35% to 21% beginning in January 2018,
implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The SEC
issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allows registrants to record provisional amounts during a one year
“measurement period” similar to that used to account for business combinations, however, the measurement period is deemed to have
ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the
measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects
can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed. As a
result of the new legislation, we recognized the provisional impacts of the revaluation of our deferred tax assets and liabilities as of the
date of enactment. These provisional amounts may be adjusted in future periods if additional information is obtained or further
clarification and guidance is issued by regulatory authorities regarding the application of the law.
ASC 740 requires uncertain income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial
statements. Under ASC 740, uncertain tax positions that previously failed to meet the more-likely-than-not threshold should be
recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized uncertain tax positions
that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which
that threshold is no longer met.
We are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the
application of complex tax laws and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these
60
liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the liability
no longer applies. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less
than we expect the ultimate assessment to be.
Revenue Recognition. We predominantly derive our revenue from the sale of produced oil, NGLs and natural gas. Revenue is recorded
in the month the product is delivered to the purchaser. We receive payment from one to three months after delivery. At the end of each
month, we estimate the amount of production delivered to purchasers and the price we will receive. Variances between our estimated
revenue and actual payment are recorded in the month the payment is received. However, differences have been and are insignificant.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014 09”),
which we adopted effective January 1, 2018 using the modified retrospective approach. Refer to the “Summary of Significant
Accounting Policies” footnote in the notes to consolidated financial statements for more information on this new accounting standard.
Accounting for Business Combinations. We account for business combinations using the acquisition method, which is the only method
permitted under FASB ASC Topic 805, Business Combinations, and involves the use of significant judgment.
Under the acquisition method of accounting, a business combination is accounted for at a purchase price based upon the fair value of
the consideration given. The assets and liabilities acquired are measured at their fair values, and the purchase price is allocated to the
assets and liabilities based upon these fair values. The excess, if any, of the consideration given to acquire an entity over the net amounts
assigned to its assets acquired and liabilities assumed is recognized as goodwill. The excess, if any, of the fair value of assets acquired
and liabilities assumed over the cost of an acquired entity is recognized immediately to earnings as a gain from bargain purchase.
Determining the fair values of the assets and liabilities acquired involves the use of judgment, since some of the assets and liabilities
acquired do not have fair values that are readily determinable. Different techniques may be used to determine fair values, including
market prices (where available), appraisals, comparisons to transactions for similar assets and liabilities, and present values of estimated
future cash flows, among others. Since these estimates involve the use of significant judgment, they can change as new information
becomes available.
The business combinations completed during the prior three years consisted of oil and gas properties. In general, the consideration we
have paid to acquire these properties or companies was entirely allocated to the fair value of the assets acquired and liabilities assumed
at the time of acquisition and consequently, there was no goodwill nor any bargain purchase gains recognized on our business
combinations.
Effects of Inflation and Pricing
As a result of the sustained depressed commodity price environment during 2015, 2016 and continuing into 2017, we have experienced
lower costs due to a decrease in demand for oil field products and services. The oil and gas industry is very cyclical, and the demand
for goods and services of oil field companies, suppliers and others associated with the industry puts extreme pressure on the economic
stability and pricing structure within the industry. Typically, as prices for oil and natural gas increase, so do all associated costs.
Conversely, in a period of declining prices, associated cost declines are likely to lag and not adjust downward in proportion to prices.
Material changes in prices also impact our current revenue stream, estimates of future reserves, borrowing base calculations of bank
loans, depletion expense, impairment assessments of oil and gas properties and values of properties in purchase and sale transactions.
Material changes in prices can impact the value of oil and gas companies and their ability to raise capital, borrow money and retain
personnel. While we do not currently expect business costs to materially increase in the near term, higher demand in the industry could
result in increases in the costs of materials, services and personnel.
Forward-Looking Statements
This report contains statements that we believe to be “forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than historical facts, including, without
limitation, statements regarding our future financial position, business strategy, projected revenues, earnings, costs, capital expenditures
and debt levels, and plans and objectives of management for future operations, are forward-looking statements. When used in this
report, words such as we “expect”, “intend”, “plan”, “estimate”, “anticipate”, “believe” or “should” or the negative thereof or variations
thereon or similar terminology are generally intended to identify forward-looking statements. Such forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such
statements.
These risks and uncertainties include, but are not limited to: declines in, or extended periods of low oil, NGL or natural gas prices; our
level of success in exploration, development and production activities; risks related to our level of indebtedness, ability to comply with
debt covenants and periodic redeterminations of the borrowing base under our credit agreement; impacts to financial statements as a
result of impairment write-downs; our ability to successfully complete asset dispositions and the risks related thereto; revisions to reserve
61
estimates as a result of changes in commodity prices, regulation and other factors; adverse weather conditions that may negatively
impact development or production activities; the timing of our exploration and development expenditures; inaccuracies of our reserve
estimates or our assumptions underlying them; risks relating to any unforeseen liabilities of ours; our ability to generate sufficient cash
flows from operations to meet the internally funded portion of our capital expenditures budget; our ability to obtain external capital to
finance exploration and development operations; federal and state initiatives relating to the regulation of hydraulic fracturing and air
emissions; unforeseen underperformance of or liabilities associated with acquired properties; the impacts of hedging on our results of
operations; failure of our properties to yield oil or gas in commercially viable quantities; availability of, and risks associated with,
transport of oil and gas; our ability to drill producing wells on undeveloped acreage prior to its lease expiration; shortages of or delays
in obtaining qualified personnel or equipment, including drilling rigs and completion services; uninsured or underinsured losses resulting
from our oil and gas operations; our inability to access oil and gas markets due to market conditions or operational impediments; the
impact and costs of compliance with laws and regulations governing our oil and gas operations; the potential impact of changes in laws,
including tax reform, that could have a negative effect on the oil and gas industry; our ability to replace our oil and natural gas reserves;
any loss of our senior management or technical personnel; competition in the oil and gas industry; cyber security attacks or failures of
our telecommunication systems; and other risks described under the caption “Risk Factors” in Item 1A of this Annual Report on Form
10-K. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this Annual Report on Form 10-K.
62
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk
The price we receive for our oil and gas production heavily influences our revenue, profitability, access to capital and future rate of
growth. Crude oil and natural gas are commodities, and therefore, their prices are subject to wide fluctuations in response to relatively
minor changes in supply and demand. Historically, the markets for oil and gas have been volatile, and these markets will likely continue
to be volatile in the future. Based on 2017 production, our income (loss) before income taxes for 2017 would have moved up or down
$130 million for each 10% change in oil prices per Bbl, $11 million for each 10% change in NGL prices per Bbl and $7 million for each
10% change in natural gas prices per Mcf.
We periodically enter into derivative contracts to achieve a more predictable cash flow by reducing our exposure to oil and natural gas
price volatility. Our derivative contracts have traditionally been costless collars and swaps, although we evaluate and have entered into
other forms of derivative instruments as well. Currently, we do not apply hedge accounting, and therefore all changes in commodity
derivative fair values are recorded immediately to earnings.
Crude Oil Costless Collars and Swaps. The collared hedges shown in the table below have the effect of providing a protective floor
while allowing us to share in upward pricing movements. The three-way collars, however, do not provide complete protection against
declines in crude oil prices due to the fact that when the market price falls below the sub-floor, the minimum price we would receive
would be NYMEX plus the difference between the floor and the sub-floor. While these hedges are designed to reduce our exposure to
price decreases, they also have the effect of limiting the benefit of price increases above the ceiling. The fair value of these commodity
derivative instruments at December 31, 2017 was a net liability of $69 million. A hypothetical upward or downward shift of 10% per
Bbl in the NYMEX forward curve for crude oil as of December 31, 2017 would cause an increase of $86 million or a decrease of
$64 million, respectively, in this fair value liability.
The swap contracts shown in the tables below entitle us to receive settlement from the counterparty in amounts, if any, by which the
settlement price for the applicable calculation period is less than the fixed price, or to pay the counterparty if the settlement price for the
applicable calculation period is more than the fixed price. While the fixed-price swaps are designed to decrease our exposure to
downward price movements, they also have the effect of limiting the benefit of upward price movements. There were no swaps
outstanding as of December 31, 2017.
Our outstanding commodity derivative contracts as of January 23, 2018 are summarized below:
Derivative
Instrument
Commodity
Period
(Bbl)
Monthly Volume
Three-way collars (1)
Swaps
Collars
Crude oil
Crude oil
Crude oil
Crude oil
Crude oil
Crude oil
Crude oil
Crude oil
01/2018 to 03/2018
04/2018 to 06/2018
07/2018 to 09/2018
10/2018 to 12/2018
1,450,000
1,450,000
1,450,000
1,450,000
01/2018 to 03/2018
04/2018 to 06/2018
07/2018 to 09/2018
10/2018 to 12/2018
Crude oil
Crude oil
01/2019 to 03/2019
04/2019 to 06/2019
400,000
400,000
400,000
400,000
150,000
150,000
Weighted Average
NYMEX Price
Sub-Floor/Floor/Ceiling
$37.07/$47.07/$57.30
$37.07/$47.07/$57.30
$37.07/$47.07/$57.30
$37.07/$47.07/$57.30
Fixed Price
$61.74
$61.74
$61.74
$61.74
Floor/Ceiling
$50.00/$65.33
$50.00/$65.33
_____________________
(1) A three-way collar is a combination of options: a sold call, a purchased put and a sold put. The sold call establishes a maximum
price (ceiling) we will receive for the volumes under contract. The purchased put establishes a minimum price (floor), unless the
market price falls below the sold put (sub-floor), at which point the minimum price would be NYMEX plus the difference between
the purchased put and the sold put strike price.
Interest Rate Risk
Market risk is estimated as the change in fair value resulting from a hypothetical 100 basis point change in the interest rate on the
outstanding balance under our credit agreement. Our credit agreement allows us to fix the interest rate for all or a portion of the principal
63
balance for a period up to six months. To the extent that the interest rate is fixed, interest rate changes affect the instrument’s fair market
value but do not impact results of operations or cash flows. Conversely, for the portion of the credit agreement that has a floating interest
rate, interest rate changes will not affect the fair market value but will impact future results of operations and cash flows. At
December 31, 2017, we had no borrowings outstanding under our credit agreement. Changes in interest rates do not affect the amount
of interest we pay on our fixed-rate senior notes, but changes in interest rates do affect the fair values of these notes.
In March 2015, we issued 1.25% Convertible Senior Notes due April 2020 (the “2020 Convertible Senior Notes”). As the interest rate
on these notes is fixed at 1.25%, we are not subject to any direct risk of loss related to fluctuations in interest rates. However, changes
in interest rates do affect the fair value of this debt instrument, which could impact the amount of gain or loss that we recognize in
earnings upon conversion of the notes. Refer to the “Long-Term Debt” and “Fair Value Measurements” footnotes in the notes to
consolidated financial statements for more information on the material terms and fair values of the 2020 Convertible Senior Notes.
64
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Equity for the Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
66
67
68
69
71
72
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Whiting Petroleum Corporation
Denver, Colorado
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Whiting Petroleum Corporation and subsidiaries (the “Company”)
as of December 31, 2017 and 2016, the related consolidated statements of operations, cash flows, and equity for each of the three years
in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control —
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 22, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
February 22, 2018
We have served as the Company’s auditors since 2003.
66
WHITING PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable trade, net
Prepaid expenses and other
Assets held for sale
Total current assets
Property and equipment:
Oil and gas properties, successful efforts method
Other property and equipment
Total property and equipment
Less accumulated depreciation, depletion and amortization
Total property and equipment, net
Other long-term assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt
Accounts payable trade
Revenues and royalties payable
Accrued capital expenditures
Accrued interest
Accrued lease operating expenses
Accrued liabilities and other
Taxes payable
Derivative liabilities
Accrued employee compensation and benefits
Liabilities related to assets held for sale
Total current liabilities
Long-term debt
Deferred income taxes
Asset retirement obligations
Other long-term liabilities
Total liabilities
Commitments and contingencies
Equity:
Common stock, $0.001 par value, 225,000,000 shares authorized; 92,094,837 issued and
90,698,889 outstanding as of December 31, 2017 and 91,793,472 issued and 90,503,482
outstanding as of December 31, 2016 (1)
Additional paid-in capital
Accumulated deficit
Total Whiting shareholders' equity
Noncontrolling interest
Total equity
TOTAL LIABILITIES AND EQUITY
December 31,
2017
2016
$
$
$
879,379
-
284,214
26,035
-
1,189,628
11,293,650
134,524
11,428,174
(4,244,735)
7,183,439
29,967
8,403,034
958,713
32,761
171,028
69,744
40,971
36,865
51,590
28,771
132,525
30,360
-
1,553,328
2,764,716
-
129,206
36,642
4,483,892
55,975
17,250
173,919
26,312
349,146
622,602
13,230,851
134,638
13,365,489
(4,222,071)
9,143,418
110,122
9,876,142
-
32,126
147,226
56,830
44,749
45,015
63,538
39,547
17,628
31,134
538
478,331
3,535,303
475,689
168,504
69,123
4,726,950
92
6,405,490
(2,486,440)
3,919,142
-
3,919,142
8,403,034
$
367
6,389,435
(1,248,572)
5,141,230
7,962
5,149,192
9,876,142
$
$
$
$
_____________________
(1) All share amounts (except par value amounts) as of December 31, 2016 have been retroactively adjusted to reflect the Company’s
one-for-four reverse stock split in November 2017, as described in Note 8 to these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
67
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
OPERATING REVENUES
Oil, NGL and natural gas sales
OPERATING EXPENSES
Lease operating expenses
Production taxes
Depreciation, depletion and amortization
Exploration and impairment
Goodwill impairment
General and administrative
Derivative (gain) loss, net
Loss on sale of properties
Amortization of deferred gain on sale
Total operating expenses
Year Ended December 31,
2016
2017
2015
$
1,481,435 $
1,284,982 $
2,092,482
366,880
123,483
948,939
936,177
-
124,288
122,847
401,113
(12,963)
3,010,764
395,135
108,715
1,171,582
121,468
-
146,878
(587)
184,567
(14,570)
2,113,188
555,392
183,035
1,243,293
1,881,671
873,772
172,616
(217,972)
60,791
(16,751)
4,735,847
LOSS FROM OPERATIONS
(1,529,329)
(828,206)
(2,643,365)
OTHER INCOME (EXPENSE)
Interest expense
Loss on extinguishment of debt
Interest income and other
Total other expense
(191,088)
(1,540)
1,316
(191,312)
(557,620)
(42,236)
1,292
(598,564)
(334,125)
(18,361)
2,356
(350,130)
LOSS BEFORE INCOME TAXES
(1,720,641)
(1,426,770)
(2,993,495)
INCOME TAX BENEFIT
Current
Deferred
Total income tax benefit
(7,291)
(475,688)
(482,979)
(7,190)
(80,456)
(87,646)
(357)
(773,870)
(774,227)
NET LOSS
Net loss attributable to noncontrolling interests
(1,237,662)
14
(1,339,124)
22
(2,219,268)
86
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
(1,237,648) $
(1,339,102) $
(2,219,182)
LOSS PER COMMON SHARE (1)
Basic
Diluted
$
$
(13.65) $
(13.65) $
(21.27) $
(21.27) $
(45.41)
(45.41)
WEIGHTED AVERAGE SHARES OUTSTANDING (1)
Basic
Diluted
90,683
90,683
62,967
62,967
48,868
48,868
_____________________
(1) All share and per share amounts have been retroactively adjusted for the 2015 and 2016 periods to reflect the Company’s one-for-
four reverse stock split in November 2017, as described in Note 8 to these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
68
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash provided by operating
Year Ended December 31,
2016
2015
2017
$
(1,237,662) $
(1,339,124) $
(2,219,268)
activities:
Depreciation, depletion and amortization
Deferred income tax benefit
Amortization of debt issuance costs, debt discount and debt premium
Stock-based compensation
Amortization of deferred gain on sale
Loss on sale of properties
Undeveloped leasehold and oil and gas property impairments
Goodwill impairment
Exploratory dry hole costs
Loss on extinguishment of debt
Non-cash derivative (gain) loss
Other, net
Changes in current assets and liabilities:
Accounts receivable trade, net
Prepaid expenses and other
Accounts payable trade and accrued liabilities
Revenues and royalties payable
Taxes payable
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Drilling and development capital expenditures
Acquisition of oil and gas properties
Other property and equipment
Proceeds from sale of oil and gas properties
Deposit received on properties held for sale
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under credit agreement
Repayments of borrowings under credit agreement
Issuance of common stock
Issuance of 1.25% Convertible Senior Notes due 2020
Issuance of 6.625% Senior Notes due 2026
Issuance of 6.25% Senior Notes due 2023
Redemption of 6.5% Senior Subordinated Notes due 2018
Redemption of 8.125% Senior Notes due 2019
Redemption of 5.5% Senior Notes due 2021
Redemption of 5.5% Senior Notes due 2022
Early conversion payments for New Convertible Notes
Debt and equity issuance costs
Proceeds from stock options exercised
Restricted stock used for tax withholdings
Net cash provided by (used in) financing activities
$
69
948,939
(475,688)
31,715
21,641
(12,963)
401,113
899,853
-
-
1,540
131,129
(9,255)
(110,879)
(444)
(24,953)
23,799
(10,776)
577,109
(830,552)
(21,429)
(4,596)
929,974
-
73,397
1,171,582
(80,456)
335,569
25,647
(14,570)
184,567
75,622
-
134
42,236
151,151
(10,185)
155,416
586
(62,774)
(32,185)
(8,206)
595,010
(539,208)
(4,718)
(9,255)
313,355
17,250
(222,576)
1,900,000
(2,450,000)
-
-
1,000,000
-
(275,121)
-
-
-
-
(13,150)
-
(6,081)
155,648 $
1,310,000
(1,560,000)
-
-
-
-
-
-
-
-
(41,919)
(22,499)
-
(844)
(315,262) $
1,243,293
(773,870)
46,525
28,098
(16,751)
60,791
1,738,308
873,772
9,440
18,361
(1,615)
(9,337)
207,367
54,027
(117,136)
(74,417)
(16,196)
1,051,392
(2,455,218)
(28,449)
(13,266)
514,814
-
(1,982,119)
3,550,000
(4,150,000)
1,111,148
1,250,000
-
750,000
-
(832,429)
(353,500)
(404,000)
-
(54,461)
3,048
(1,126)
868,680
(Continued)
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NET CHANGE IN CASH, CASH EQUIVALENTS AND
RESTRICTED CASH
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Beginning of period
End of period
SUPPLEMENTAL CASH FLOW DISCLOSURES
Income taxes paid (refunded), net
Interest paid, net of amounts capitalized
Year Ended December 31,
2016
2017
2015
$
806,154
$
57,172
$
(62,047)
73,225
879,379
49
163,151
$
$
$
$
$
$
16,053
73,225
$
78,100
16,053
(1,044) $
$
239,963
(604)
292,582
NONCASH INVESTING ACTIVITIES
Accrued capital expenditures and accounts payable related to property
additions
$
80,762
$
65,052
$
94,105
NONCASH FINANCING ACTIVITIES (1)
The accompanying notes are an integral part of these consolidated financial statements.
(Concluded)
(1) Refer to the “Long-Term Debt” footnote in the notes to consolidated financial statements for a discussion of (i) the Company’s
exchange of senior notes and senior subordinated notes for convertible notes and the subsequent conversions of such notes, and (ii)
the Company’s exchange of senior notes, convertible senior notes and senior subordinated notes for mandatory convertible notes
and the subsequent conversions of such notes.
70
l
a
t
o
T
y
t
i
u
q
E
g
n
i
l
l
o
r
t
n
o
c
n
o
N
'
s
r
e
d
l
o
h
e
r
a
h
S
d
e
t
a
l
u
m
u
c
c
A
(
t
s
e
r
e
t
n
I
y
t
i
u
q
E
)
t
i
c
i
f
e
D
l
a
t
o
T
g
n
i
t
i
h
W
d
e
n
i
a
t
e
R
s
g
n
i
n
r
a
E
-
-
8
4
0
,
3
4
4
0
,
3
0
7
,
5
)
8
6
2
,
9
1
2
,
2
(
5
5
7
,
4
4
1
7
3
0
,
0
0
1
,
1
)
6
2
1
,
1
(
8
9
0
,
8
2
8
8
5
,
8
5
7
,
4
)
4
2
1
,
9
3
3
,
1
(
4
5
4
,
5
3
5
,
1
-
-
)
0
3
3
,
3
6
(
1
0
8
,
2
3
2
)
4
4
8
(
7
4
6
,
5
2
2
9
1
,
9
4
1
,
5
)
2
6
6
,
7
3
2
,
1
(
)
8
4
9
,
7
(
-
-
-
-
)
1
8
0
,
6
(
1
4
6
,
1
2
$
0
7
0
,
8
)
6
8
(
-
-
-
-
-
-
-
)
2
2
(
4
8
9
,
7
-
-
-
-
-
-
-
-
-
-
-
-
-
-
)
4
1
(
2
6
9
,
7
)
8
4
9
,
7
(
$
4
7
9
,
4
9
6
,
5
8
4
0
,
3
)
2
8
1
,
9
1
2
,
2
(
5
5
7
,
4
4
1
7
3
0
,
0
0
1
,
1
-
-
)
6
2
1
,
1
(
8
9
0
,
8
2
4
0
6
,
0
5
7
,
4
)
2
0
1
,
9
3
3
,
1
(
4
5
4
,
5
3
5
,
1
-
-
)
0
3
3
,
3
6
(
1
0
8
,
2
3
2
)
4
4
8
(
7
4
6
,
5
2
0
3
2
,
1
4
1
,
5
)
8
4
6
,
7
3
2
,
1
(
-
-
-
-
-
)
1
8
0
,
6
(
1
4
6
,
1
2
$
2
1
7
9
0
3
,
,
2
)
2
8
1
9
1
2
,
,
2
(
-
-
-
-
-
-
-
0
3
5
,
0
9
)
2
0
1
9
3
3
,
,
1
(
-
-
-
-
-
-
-
-
-
-
-
-
-
)
0
2
2
(
)
2
7
5
8
4
2
,
,
1
(
)
8
4
6
7
3
2
,
,
1
(
$
4
9
0
5
8
3
,
,
3
$
8
6
1
$
7
8
0
,
2
4
l
a
n
o
i
t
i
d
d
A
n
i
-
d
i
a
P
l
a
t
i
p
a
C
k
c
o
t
S
n
o
m
m
o
C
t
n
u
o
m
A
)
1
(
s
e
r
a
h
S
-
8
4
0
,
3
5
5
7
,
4
4
1
0
0
0
0
0
1
,
,
1
-
)
1
(
-
)
6
2
1
,
1
(
8
9
0
,
8
2
8
6
8
9
5
6
,
,
4
6
9
2
5
3
5
,
,
1
)
0
3
3
,
3
6
(
)
4
(
1
)
4
4
8
(
7
4
6
,
5
2
1
0
8
,
2
3
2
-
7
3
-
-
1
-
-
-
-
6
0
2
8
5
1
-
-
4
)
1
(
-
-
5
3
4
9
8
3
,
,
6
7
6
3
-
-
)
2
(
1
6
7
2
0
2
2
)
1
8
0
,
6
(
1
4
6
,
1
2
-
-
-
-
-
2
)
1
(
)
6
7
2
(
-
0
5
2
,
9
-
7
3
4
0
3
)
8
5
(
)
0
1
(
-
-
0
1
6
,
1
5
6
8
3
,
9
3
-
-
-
)
6
2
(
)
2
8
1
(
5
0
0
,
1
3
9
7
,
1
9
-
-
-
-
-
7
0
7
)
1
6
2
(
)
4
4
1
(
N
O
I
T
A
R
O
P
R
O
C
M
U
E
L
O
R
T
E
P
G
N
I
T
I
H
W
Y
T
I
U
Q
E
F
O
S
T
N
E
M
E
T
A
T
S
D
E
T
A
D
I
L
O
S
N
O
C
)
s
d
n
a
s
u
o
h
t
n
i
(
t
e
n
,
s
e
t
o
N
r
o
i
n
e
S
e
l
b
i
t
r
e
v
n
o
C
0
2
0
2
f
o
t
n
e
n
o
p
m
o
c
y
t
i
u
q
E
k
c
o
t
s
n
o
m
m
o
c
f
o
e
c
n
a
u
s
s
I
s
s
o
l
t
e
N
5
1
0
2
,
1
y
r
a
u
n
a
J
-
S
E
C
N
A
L
A
B
s
g
n
i
d
l
o
h
h
t
i
w
x
a
t
r
o
f
d
e
s
u
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
5
1
0
2
,
1
3
r
e
b
m
e
c
e
D
-
S
E
C
N
A
L
A
B
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
k
c
o
t
S
s
s
o
l
t
e
N
s
n
o
i
t
p
o
k
c
o
t
s
f
o
e
s
i
c
r
e
x
E
d
e
t
i
e
f
r
o
f
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
d
e
u
s
s
i
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
r
o
i
n
e
S
e
l
b
i
t
r
e
v
n
o
C
0
2
0
2
f
o
t
n
e
n
o
p
m
o
c
y
t
i
u
q
e
f
o
n
o
i
t
c
u
d
e
R
t
e
n
,
t
n
e
m
h
s
i
u
g
n
i
t
x
e
n
o
p
u
s
e
t
o
N
e
l
b
i
t
r
e
v
n
o
c
n
o
s
e
r
u
t
a
e
f
n
o
i
s
r
e
v
n
o
c
l
a
i
c
i
f
e
n
e
b
f
o
n
o
i
t
i
n
g
o
c
e
R
e
l
b
i
t
r
e
v
n
o
c
f
o
n
o
i
s
r
e
v
n
o
c
n
o
p
u
k
c
o
t
s
n
o
m
m
o
c
f
o
e
c
n
a
u
s
s
I
s
e
t
o
n
s
g
n
i
d
l
o
h
h
t
i
w
x
a
t
r
o
f
d
e
s
u
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
-
S
E
C
N
A
L
A
B
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
k
c
o
t
S
s
s
o
l
t
e
N
d
e
t
i
e
f
r
o
f
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
d
e
u
s
s
i
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
s
e
t
o
n
e
l
b
a
n
i
a
t
s
u
S
n
i
t
s
e
r
e
t
n
i
p
i
h
s
r
e
n
w
o
y
t
r
a
p
d
r
i
h
t
f
o
e
c
n
a
y
e
v
n
o
C
e
l
p
i
c
n
i
r
p
g
n
i
t
n
u
o
c
c
a
n
i
e
g
n
a
h
c
f
o
t
c
e
f
f
e
e
v
i
t
a
l
u
m
u
C
s
g
n
i
d
l
o
h
h
t
i
w
x
a
t
r
o
f
d
e
s
u
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
k
c
o
t
S
7
1
0
2
,
1
3
r
e
b
m
e
c
e
D
-
S
E
C
N
A
L
A
B
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
C
L
L
,
s
e
c
r
u
o
s
e
R
r
e
t
a
W
d
e
t
i
e
f
r
o
f
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
d
e
u
s
s
i
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
t
i
l
p
s
k
c
o
t
s
e
s
r
e
v
e
R
71
2
4
1
,
9
1
9
,
3
$
$
2
4
1
,
9
1
9
,
3
$
)
0
4
4
6
8
4
,
,
2
(
$
0
9
4
5
0
4
,
,
6
$
2
9
$
5
9
0
,
2
9
s
a
,
7
1
0
2
r
e
b
m
e
v
o
N
n
i
t
i
l
p
s
k
c
o
t
s
e
s
r
e
v
e
r
r
u
o
f
-
r
o
f
-
e
n
o
s
’
y
n
a
p
m
o
C
e
h
t
t
c
e
l
f
e
r
o
t
s
d
o
i
r
e
p
6
1
0
2
d
n
a
5
1
0
2
e
h
t
r
o
f
d
e
t
s
u
j
d
a
y
l
e
v
i
t
c
a
o
r
t
e
r
n
e
e
b
e
v
a
h
s
t
n
u
o
m
a
e
r
a
h
s
n
o
m
m
o
c
l
l
A
)
1
(
.
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
i
f
d
e
t
a
d
i
l
o
s
n
o
c
e
s
e
h
t
f
o
t
r
a
p
l
a
r
g
e
t
n
i
n
a
e
r
a
s
e
t
o
n
g
n
i
y
n
a
p
m
o
c
c
a
e
h
T
.
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
i
f
d
e
t
a
d
i
l
o
s
n
o
c
e
s
e
h
t
o
t
8
e
t
o
N
n
i
d
e
b
i
r
c
s
e
d
WHITING PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations—Whiting Petroleum Corporation, a Delaware corporation, is an independent oil and gas company engaged
in the development, production, acquisition and exploration of crude oil, NGLs and natural gas primarily in the Rocky Mountains region
of the United States. Unless otherwise specified or the context otherwise requires, all references in these notes to “Whiting” or the
“Company” are to Whiting Petroleum Corporation and its consolidated subsidiaries, Whiting Oil and Gas Corporation (“Whiting Oil
and Gas”), Whiting US Holding Company, Whiting Canadian Holding Company ULC (formerly Kodiak Oil & Gas Corp., “Kodiak”),
Whiting Resources Corporation and Whiting Programs, Inc.
Basis of Presentation of Consolidated Financial Statements—The consolidated financial statements have been prepared in accordance
with GAAP and SEC rules and regulations and include the accounts of Whiting Petroleum Corporation, its consolidated subsidiaries
and Whiting’s pro rata share of the accounts of Whiting USA Trust I (“Trust I”) pursuant to Whiting’s 15.8% ownership interest in
Trust I. On January 28, 2015, the net profits interest that Whiting conveyed to Trust I terminated and such interest in the underlying
properties reverted back to Whiting. Investments in entities which give Whiting significant influence, but not control, over the investee
are accounted for using the equity method. Under the equity method, investments are stated at cost plus the Company’s equity in
undistributed earnings and losses. All intercompany balances and transactions have been eliminated upon consolidation.
Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting period. Items subject to such estimates
and assumptions include (i) oil and natural gas reserves; (ii) impairment tests of long-lived assets; (iii) depreciation, depletion and
amortization; (iv) asset retirement obligations; (v) assignment of fair value and allocation of purchase price in connection with business
combinations, including the determination of any resulting goodwill; (vi) valuations of the Company’s reporting unit used in impairment
tests of goodwill; (vii) income taxes; (viii) accrued liabilities; (ix) valuation of derivative instruments; and (x) accrued revenue and
related receivables. Although management believes these estimates are reasonable, actual results could differ from these estimates.
Reclassifications—Certain prior period balances in the consolidated balance sheets have been reclassified to conform to the current year
presentation. Such reclassifications had no impact on net income, cash flows or shareholders’ equity previously reported.
Cash, Cash Equivalents and Restricted Cash—Cash equivalents consist of demand deposits and highly liquid investments which have
an original maturity of three months or less.
Restricted cash at December 31, 2016 related to a deposit received in connection with the sale of Whiting’s interests in the Robinson
Lake and Belfield gas processing plants. The use of these funds was restricted per the terms of the purchase agreement until the sale
transaction closed on January 1, 2017. Refer to the “Acquisition and Divestitures” footnote for further information on this transaction.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance
sheets and the consolidated statements of cash flows:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
December 31,
2017
2016
$
$
879,379
-
879,379
$
$
55,975
17,250
73,225
Accounts Receivable Trade—Whiting’s accounts receivable trade consist mainly of receivables from oil and gas purchasers and joint
interest owners on properties the Company operates. For receivables from joint interest owners, Whiting typically has the ability to
withhold future revenue disbursements to recover any non-payment of joint interest billings. Generally, the Company’s oil and gas
receivables are collected within two months, and to date, the Company has had minimal bad debts.
The Company routinely assesses the recoverability of all material trade and other receivables to determine their collectability. At
December 31, 2017 and 2016, the Company had an allowance for doubtful accounts of $17 million and $10 million, respectively.
Inventories—Materials and supplies inventories consist primarily of tubular goods and production equipment, carried at weighted-
average cost. Materials and supplies are included in other property and equipment and totaled $24 million and $33 million as of
December 31, 2017 and 2016, respectively. Crude oil in tanks inventory is carried at the lower of the estimated cost to produce or net
72
realizable value. Oil in tanks is included in prepaid expenses and other and totaled $7 million and $8 million as of December 31, 2017
and 2016, respectively.
Oil and Gas Properties
Proved. The Company follows the successful efforts method of accounting for its oil and gas properties. Under this method of
accounting, all property acquisition costs and development costs are capitalized when incurred and depleted on a unit-of-production
basis over the remaining life of proved reserves and proved developed reserves, respectively. Costs of drilling exploratory wells are
initially capitalized but are charged to expense if the well is determined to be unsuccessful.
The Company assesses its proved oil and gas properties for impairment whenever events or circumstances indicate that the carrying
value of the assets may not be recoverable. The impairment test compares undiscounted future net cash flows to the assets’ net book
value. If the net capitalized costs exceed future net cash flows, then the cost of the property is written down to fair value. Fair value for
oil and gas properties is generally determined based on discounted future net cash flows. Impairment expense for proved properties
totaled $835 million and $1.6 billion for the years ended December 31, 2017 and 2015, respectively, which is reported in exploration
and impairment expense.
Net carrying values of retired, sold or abandoned properties that constitute less than a complete unit of depreciable property are charged
or credited, net of proceeds, to accumulated depreciation, depletion and amortization unless doing so significantly affects the unit-of-
production amortization rate, in which case a gain or loss is recognized in income. Gains or losses from the disposal of complete units
of depreciable property are recognized to earnings.
Interest cost is capitalized as a component of property cost for development projects that require greater than six months to be readied
for their intended use. During 2017, 2016 and 2015, the Company capitalized interest of $0.1 million, $0.1 million and $4 million,
respectively.
Unproved. Unproved properties consist of costs to acquire undeveloped leases as well as purchases of unproved reserves. Undeveloped
lease costs and unproved reserve acquisitions are capitalized, and individually insignificant unproved properties are amortized on a
composite basis, based on average lease-term lives and the historical experience of developing acreage in a particular prospect. The
Company evaluates significant unproved properties for impairment based on remaining lease term, drilling results, reservoir
performance, seismic interpretation or future plans to develop acreage. When successful wells are drilled on undeveloped leaseholds,
unproved property costs are reclassified to proved properties and depleted on a unit-of-production basis. Impairment expense for
unproved properties totaled $59 million, $73 million and $135 million for the years ended December 31, 2017, 2016 and 2015,
respectively, which is reported in exploration and impairment expense.
Exploratory. Geological and geophysical costs, including exploratory seismic studies, and the costs of carrying and retaining unproved
acreage are expensed as incurred. Costs of seismic studies that are utilized in development drilling within an area of proved reserves
are capitalized as development costs. Amounts of seismic costs capitalized are based on only those blocks of data used in determining
development well locations. To the extent that a seismic project covers areas of both developmental and exploratory drilling, those
seismic costs are proportionately allocated between development costs and exploration expense.
Costs of drilling exploratory wells are initially capitalized, pending determination of whether the well has found proved reserves. If an
exploratory well has not found proved reserves, the costs of drilling the well and other associated costs are charged to expense. Costs
incurred for exploratory wells that find reserves, which cannot yet be classified as proved, continue to be capitalized if (i) the well has
found a sufficient quantity of reserves to justify completion as a producing well, and (ii) the Company is making sufficient progress
assessing the reserves and the economic and operating viability of the project. If either condition is not met, or if the Company obtains
information that raises substantial doubt about the economic or operational viability of the project, the exploratory well costs, net of any
salvage value, are expensed.
Other Property and Equipment—Other property and equipment consists of materials and supplies inventories, carried at weighted-
average cost, and furniture and fixtures, buildings, leasehold improvements and automobiles, which are stated at cost and depreciated
using the straight-line method over their estimated useful lives ranging from 4 to 30 years.
Goodwill—Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in business
combinations. Goodwill has an indefinite useful life and is not amortized, but rather is tested by the Company for impairment annually
in the second quarter or whenever events or changes in circumstances indicate that the fair value of the reporting unit may have been
reduced below its carrying value.
The Company performed its annual goodwill impairment test as of June 30, 2015, and determined that no impairment had occurred.
However, as a result of a sustained decrease in the price of Whiting’s common stock during the third quarter of 2015 caused by a
significant decline in crude oil and natural gas prices over that same period, the Company performed another goodwill impairment test
73
as of September 30, 2015. The impairment test performed by the Company indicated that the fair value of its reporting unit was less
than its carrying amount, and further that there was no remaining implied fair value attributable to goodwill. Based on these results, the
Company recorded a non-cash impairment charge to reduce the carrying value of goodwill to zero.
Debt Issuance Costs—Debt issuance costs related to the Company’s senior notes, convertible senior notes and senior subordinated notes
are included as a deduction from the carrying amount of long-term debt in the consolidated balance sheets and are amortized to interest
expense using the effective interest method over the term of the related debt. Debt issuance costs related to the credit facility are included
in other long-term assets and are amortized to interest expense on a straight-line basis over the term of the agreement.
Debt Discounts and Premiums—Debt discounts and premiums related to the Company’s senior notes and convertible notes are included
as a deduction from or addition to the carrying amount of the long-term debt in the consolidated balance sheets and are amortized to
interest expense using the effective interest method over the term of the related notes.
Derivative Instruments—The Company enters into derivative contracts, primarily costless collars and swaps, to manage its exposure to
commodity price risk. Whiting follows FASB ASC Topic 815, Derivatives and Hedging, to account for its derivative financial
instruments. All derivative instruments, other than those that meet the “normal purchase normal sale” exclusion, are recorded on the
balance sheet as either an asset or liability measured at fair value. Gains and losses from changes in the fair value of derivative
instruments are recognized immediately in earnings, unless the derivative meets specific hedge accounting criteria and the derivative
has been designated as a hedge. The Company does not currently apply hedge accounting to any of its outstanding derivative
instruments, and as a result, all changes in derivative fair values are recognized currently in earnings.
Cash flows from derivatives used to manage commodity price risk are classified in operating activities along with the cash flows of the
underlying hedged transactions. The Company does not enter into derivative instruments for speculative or trading purposes. Refer to
the “Derivative Financial Instruments” footnote for further information.
Asset Retirement Obligations and Environmental Costs—Asset retirement obligations relate to future costs associated with the
plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage and returning such land to its
original condition. The Company follows FASB ASC Topic 410, Asset Retirement and Environmental Obligations, to determine its
asset retirement obligation amounts by calculating the present value of the estimated future cash outflows associated with its plug and
abandonment obligations. The fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred
(typically when a well is completed or acquired or when an asset is installed at the production location), and the cost of such liability
increases the carrying amount of the related long-lived asset by the same amount. The liability is accreted each period through charges
to depreciation, depletion and amortization expense, and the capitalized cost is depleted on a unit-of-production basis over the proved
developed reserves of the related asset. Revisions typically occur due to changes in estimated abandonment costs or well economic
lives, or if federal or state regulators enact new requirements regarding the abandonment of wells, and such revisions result in
adjustments to the related capitalized asset and corresponding liability.
Liabilities for environmental costs are recorded on an undiscounted basis when it is probable that obligations have been incurred and
the amounts can be reasonably estimated. These liabilities are not reduced by possible recoveries from third parties.
Deferred Gain on Sale—The deferred gain on sale relates to the sale of 18,400,000 Whiting USA Trust II (“Trust II”) units, and is
amortized to income based on the unit-of-production method.
Revenue Recognition—Oil and gas revenues are recognized when production volumes are sold to a purchaser at a fixed or determinable
price, delivery has occurred and title has transferred, persuasive evidence of a sales arrangement exists and collectability of the revenue
is reasonably assured. Revenues from the production of gas properties in which the Company has an interest with other producers are
recognized on the basis of the Company’s net working interest (entitlement method). Net deliveries in excess of entitled amounts are
recorded as liabilities, while net under deliveries are reflected as receivables. The Company’s aggregate imbalance positions as of
December 31, 2017 and 2016 were not significant.
Taxes collected and remitted to governmental agencies on behalf of customers are not included in revenues or costs and expenses.
General and Administrative Expenses—General and administrative expenses are reported net of reimbursements of overhead costs that
are allocated to the working interest owners that participate in oil and gas properties operated by Whiting.
Stock-based Compensation Expense—The Company has share-based employee compensation plans that provide for the issuance of
various types of stock-based awards, including shares of restricted stock, restricted stock units and stock options, to employees and non-
employee directors. The Company determines compensation expense for restricted stock awards and options granted under these plans
based on the grant date fair value, and such expense is recognized on a straight-line basis over the requisite service period of the award.
The Company determines compensation expense for cash-settled restricted stock units granted under these plans based on the fair value
of such awards at the end of each reporting period, and such awards are recorded as a liability in the consolidated balance sheets. Gains
74
and losses from changes in the fair value of restricted stock units are recognized immediately in earnings. The Company accounts for
forfeitures of share-based awards as they occur. Refer to the “Stock-Based Compensation” footnote for further information.
401(k) Plan—The Company has a defined contribution retirement plan for all employees. The plan is funded by employee contributions
and discretionary Company contributions. The Company’s contributions for 2017, 2016 and 2015 were $8 million, $8 million and
$12 million, respectively. Employees vest in employer contributions at 20% per year of completed service.
Acquisition Costs—Acquisition related expenses, which consist of external costs directly related to the Company’s acquisitions, such
as advisory, legal, accounting, valuation and other professional fees, are expensed as incurred.
Maintenance and Repairs—Maintenance and repair costs that do not extend the useful lives of property and equipment are charged to
expense as incurred. Major replacements, renewals and betterments are capitalized.
Income Taxes—Income taxes are recognized based on earnings reported for tax return purposes in addition to a provision for deferred
income taxes. Deferred income taxes are accounted for using the liability method. Under this method, deferred tax assets and liabilities
are determined by applying the enacted statutory tax rates in effect at the end of a reporting period to the cumulative temporary
differences between the tax bases of assets and liabilities and their reported amounts in the Company’s financial statements. The effect
on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance
for deferred tax assets is established when it is more likely than not that some portion of the benefit from deferred tax assets will not be
realized. The Company’s uncertain tax positions must meet a more-likely-than-not realization threshold to be recognized, and any
potential accrued interest and penalties related to unrecognized tax benefits are recognized within income tax expense.
Earnings Per Share—Basic earnings per common share is calculated by dividing net income attributable to common shareholders by
the weighted average number of common shares outstanding during each period. Diluted earnings per common share is calculated by
dividing adjusted net income attributable to common shareholders by the weighted average number of diluted common shares
outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for the diluted earnings per share
calculations consist of unvested restricted stock awards, outstanding stock options and contingently issuable shares of convertible debt
to be settled in cash, all using the treasury stock method. In addition, the diluted earnings per share calculation for the year ended
December 31, 2016 considers the effect of convertible debt issued and converted during 2016, using the if-converted method for periods
prior to their actual conversions. When a loss from continuing operations exists, all dilutive securities and potentially dilutive securities
are anti-dilutive and are therefore excluded from the computation of diluted earnings per share.
Industry Segment and Geographic Information—The Company has evaluated how it is organized and managed and has identified only
one operating segment, which is the exploration and production of crude oil, NGLs and natural gas. The Company considers its
gathering, processing and marketing functions as ancillary to its oil and gas producing activities. All of the Company’s operations and
assets are located in the United States, and substantially all of its revenues are attributable to United States customers.
Concentration of Credit Risk—Whiting is exposed to credit risk in the event of nonpayment by counterparties, a significant portion of
which are concentrated in energy related industries. The creditworthiness of customers and other counterparties is subject to continuing
review. The following tables present the percentages by purchaser that accounted for 10% or more of the Company’s total oil, NGL
and natural gas sales for the years ended December 31, 2017 and 2016. For the year ended December 31, 2015, no individual purchaser
accounted for 10% or more of the Company’s total oil, NGL and natural gas sales.
Year Ended December 31, 2017
Tesoro Crude Oil Co
Year Ended December 31, 2016
Tesoro Crude Oil Co
Jamex Marketing LLC
18%
15%
12%
Commodity derivative contracts held by the Company are with nine counterparties, all of which are participants in Whiting’s credit
facility as well, and all of which have investment-grade ratings from Moody’s and Standard & Poor’s. As of December 31, 2017,
outstanding derivative contracts with JP Morgan Chase Bank, N.A., Wells Fargo Bank, N.A., Capital One, N.A. and KeyBank, N.A.
represented 24%, 17%, 14% and 10%, respectively, of total crude oil volumes hedged.
Adopted and Recently Issued Accounting Pronouncements—In May 2014, the FASB issued Accounting Standards Update No. 2014-
09, Revenue from Contracts with Customers (“ASU 2014-09”). The objective of ASU 2014-09 is to clarify the principles for recognizing
revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The FASB
subsequently issued various ASUs which deferred the effective date of ASU 2014-09 and provided additional implementation guidance.
ASU 2014-09 and its amendments are effective for fiscal years, and interim periods within those years, beginning after December 15,
75
2017. The standards permit retrospective application using either of the following methodologies: (i) restatement of each prior reporting
period presented or (ii) recognition of a cumulative-effect adjustment as of the date of initial application. The Company adopted these
ASUs effective January 1, 2018 using the modified retrospective approach. The Company has completed the assessment of its contracts
with customers and is in the process of implementing the changes to its financial statements, accounting policies and internal controls
as a result of the adoption of these standards. The adoption is not expected to have an impact on the Company’s net income or cash
flows, however, it will result in changes to the classification of fees incurred under certain pipeline gathering and transportation
agreements and gas processing agreements, as well as certain costs attributable to non-operated properties, which will result in an overall
decrease in total revenues with a corresponding decrease in lease operating expenses under the new standards. In addition, the Company
is continuing to assess the additional disclosures that will be required upon implementation of these ASUs.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”). The objective of this ASU
is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and
disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018 and should be applied using a modified retrospective approach. Early adoption is
permitted. Although the Company is still in the process of evaluating the effect of adopting ASU 2016-02, the adoption is expected to
result in (i) an increase in the assets and liabilities recorded on its consolidated balance sheet, (ii) an increase in depreciation, depletion
and amortization expense and interest expense recorded on its consolidated statement of operations, and (iii) additional disclosures. As
of December 31, 2017, the Company had approximately $73 million of contractual obligations related to its non-cancelable leases,
drilling rig contracts and pipeline transportation agreements, and it will evaluate those contracts as well as other existing arrangements
to determine if they qualify for lease accounting under ASU 2016-02.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment
Accounting (“ASU 2016-09”). The objective of this ASU is to simplify several aspects of the accounting for employee share-based
payment transactions, including income tax consequences, forfeitures, classification of awards as either equity or liabilities and
classification in the statement of cash flows. Portions of this ASU must be applied prospectively while other portions may be applied
either prospectively or retrospectively. ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2016, and the Company adopted this standard on January 1, 2017. Upon adoption of ASU 2016-09, the Company
(i) recorded previously unrecognized excess tax benefits on a modified retrospective basis with a full valuation allowance, resulting in
a net cumulative-effect adjustment to retained earnings of zero, (ii) prospectively removed excess tax benefits from its calculation of
diluted shares, which had no impact on the Company’s diluted earnings per share for year ended December 31, 2017, and (iii) elected
to account for forfeitures of share-based awards as they occur, rather than by applying an estimated forfeiture rate to determine
compensation expense, the effect of which was recognized using a modified retrospective approach and resulted in an immaterial
cumulative-effect adjustment to retained earnings and additional paid-in capital.
2. OIL AND GAS PROPERTIES
Net capitalized costs related to the Company’s oil and gas producing activities at December 31, 2017 and 2016 are as follows (in
thousands):
Proved leasehold costs
Unproved leasehold costs
Costs of completed wells and facilities
Wells and facilities in progress
Total oil and gas properties, successful efforts method
Accumulated depletion
Oil and gas properties, net
3. ACQUISITIONS AND DIVESTITURES
2017 Acquisitions and Divestitures
December 31,
2017
2,622,576 $
137,694
8,288,591
244,789
11,293,650
(4,185,301)
7,108,349 $
2016
3,330,928
392,484
9,016,472
490,967
13,230,851
(4,170,237)
9,060,614
$
$
On September 1, 2017, the Company completed the sale of its interests in certain producing oil and gas properties located in the Fort
Berthold Indian Reservation area in Dunn and McLean counties of North Dakota, as well as other related assets and liabilities, (the
“FBIR Assets”) for aggregate sales proceeds of $500 million (before closing adjustments). The sale was effective September 1, 2017
and resulted in a pre-tax loss on sale of $402 million. The Company used the net proceeds from the sale to repay a portion of the debt
outstanding under its credit agreement.
76
On January 1, 2017, the Company completed the sale of its 50% interest in the Robinson Lake gas processing plant located in Mountrail
County, North Dakota and its 50% interest in the Belfield gas processing plant located in Stark County, North Dakota, as well as the
associated natural gas, crude oil and water gathering systems, effective January 1, 2017, for aggregate sales proceeds of $375 million
(before closing adjustments). The Company used the net proceeds from this transaction to repay a portion of the debt outstanding under
its credit agreement.
The following table shows the components of assets and liabilities classified as held for sale as of December 31, 2016 (in thousands):
Assets
Oil and gas properties, net
Other property and equipment, net
Total property and equipment, net
Other long-term assets
Total assets held for sale
Liabilities
Asset retirement obligations
Other long-term liabilities
Total liabilities related to assets held for sale
Carrying Value as of
December 31, 2016
$
$
$
$
347,817
475
348,292
854
349,146
131
407
538
There were no significant acquisitions during the year ended December 31, 2017.
2016 Acquisitions and Divestitures
In July 2016, the Company completed the sale of its interest in its enhanced oil recovery project in the North Ward Estes field in Ward
and Winkler counties of Texas, including Whiting’s interest in certain CO2 properties in the McElmo Dome field in Colorado and certain
other related assets and liabilities (the “North Ward Estes Properties”) for a cash purchase price of $300 million (before closing
adjustments). The sale was effective July 1, 2016 and resulted in a pre-tax loss on sale of $187 million. The Company used the net
proceeds from the sale to repay a portion of the debt outstanding under its credit agreement.
In addition to the cash purchase price, the buyer agreed to pay Whiting $100,000 for every $0.01 that, as of June 28, 2018, the average
NYMEX crude oil futures contract price for each month from August 2018 through July 2021 is above $50.00/Bbl up to a maximum
amount of $100 million (the “Contingent Payment”). The Company determined that this Contingent Payment was an embedded
derivative and reflected it at fair value in the consolidated financial statements prior to settlement. On July 19, 2017, the buyer paid
$35 million to Whiting to settle this Contingent Payment, resulting in a pre-tax gain of $3 million. Refer to the “Derivative Financial
Instruments” and “Fair Value Measurements” footnotes for more information on this embedded derivative instrument.
There were no significant acquisitions during the year ended December 31, 2016.
2015 Acquisitions and Divestitures
In December 2015, the Company completed the sale of a fresh water delivery system, a produced water gathering system and four
saltwater disposal wells located in Weld County, Colorado, effective December 16, 2015, for aggregate sales proceeds of $75 million
(before closing adjustments).
In June 2015, the Company completed the sale of its interests in certain non-core oil and gas wells, effective June 1, 2015, for aggregate
sales proceeds of $150 million (before closing adjustments) resulting in a pre-tax loss on sale of $118 million. The properties included
over 2,000 gross wells in 132 fields across 10 states.
In April 2015, the Company completed the sale of its interests in certain non-core oil and gas wells, effective May 1, 2015, for aggregate
sales proceeds of $108 million (before closing adjustments) resulting in a pre-tax gain on sale of $29 million. The properties were
located in 187 fields across 14 states, and predominately consisted of assets that were previously included in the underlying properties
of Whiting USA Trust I.
Also during the year ended December 31, 2015, the Company completed several immaterial divestiture transactions for the sale of its
interests in certain non-core oil and gas wells and undeveloped acreage, for aggregate sales proceeds of $176 million (before closing
adjustments) resulting in a pre-tax gain on sale of $28 million.
77
There were no significant acquisitions during the year ended December 31, 2015.
4. LONG-TERM DEBT
Long-term debt, including the current portion, consisted of the following at December 31, 2017 and 2016 (in thousands):
Credit agreement
6.5% Senior Subordinated Notes due 2018
5.0% Senior Notes due 2019
1.25% Convertible Senior Notes due 2020
5.75% Senior Notes due 2021
6.25% Senior Notes due 2023
6.625% Senior Notes due 2026
Total principal
Unamortized debt discounts and premiums
Unamortized debt issuance costs on notes
Total debt
Less current portion of long-term debt
Total long-term debt
December 31,
2017
2016
$
$
- $
-
961,409
562,075
873,609
408,296
1,000,000
3,805,389
(50,945)
(31,015)
3,723,429
(958,713)
2,764,716 $
550,000
275,121
961,409
562,075
873,609
408,296
-
3,630,510
(71,340)
(23,867)
3,535,303
-
3,535,303
The following table shows five succeeding fiscal years of anticipated maturities for the Company’s long-term debt as of December 31,
2017 (in thousands):
Long-term debt
$
961,409
$
-
$
562,075
$
873,609
$
-
2018
2019
2020
2021
2022
Credit Agreement
Whiting Oil and Gas, the Company’s wholly owned subsidiary, has a credit agreement with a syndicate of banks that as of December 31,
2017 had a borrowing base and aggregate commitments of $2.3 billion. As of December 31, 2017, the Company had $2.3 billion of
available borrowing capacity, which was net of $2 million in letters of credit outstanding, with no borrowings outstanding.
The borrowing base under the credit agreement is determined at the discretion of the lenders, based on the collateral value of the
Company’s proved reserves that have been mortgaged to such lenders, and is subject to regular redeterminations on May 1 and
November 1 of each year, as well as special redeterminations described in the credit agreement, in each case which may reduce the
amount of the borrowing base. Upon a redetermination of the borrowing base, either on a periodic or special redetermination date, if
borrowings in excess of the revised borrowing capacity were outstanding, the Company could be forced to immediately repay a portion
of its debt outstanding under the credit agreement. In October 2017, the borrowing base and aggregate commitments under the facility
were reduced from $2.5 billion to $2.3 billion in connection with the November 1, 2017 regular borrowing base redetermination, and
was primarily a result of the sale of the Company’s FBIR Assets on September 1, 2017.
A portion of the revolving credit facility in an aggregate amount not to exceed $50 million may be used to issue letters of credit for the
account of Whiting Oil and Gas or other designated subsidiaries of the Company. As of December 31, 2017, $48 million was available
for additional letters of credit under the agreement.
The credit agreement provides for interest only payments until December 2019, when the credit agreement expires and all outstanding
borrowings are due. Interest under the revolving credit facility accrues at the Company’s option at either (i) a base rate for a base rate
loan plus the margin in the table below, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.5%
per annum, or an adjusted LIBOR rate plus 1.0% per annum, or (ii) an adjusted LIBOR rate for a Eurodollar loan plus the margin in the
table below. Additionally, the Company also incurs commitment fees as set forth in the table below on the unused portion of the
aggregate commitments of the lenders under the revolving credit facility, which are included as a component of interest expense. At
December 31, 2016, the weighted average interest rate on the outstanding principal balance under the credit agreement was 4.0%.
78
Ratio of Outstanding Borrowings to Borrowing Base
Less than 0.25 to 1.0
Greater than or equal to 0.25 to 1.0 but less than 0.50 to 1.0
Greater than or equal to 0.50 to 1.0 but less than 0.75 to 1.0
Greater than or equal to 0.75 to 1.0 but less than 0.90 to 1.0
Greater than or equal to 0.90 to 1.0
Applicable
Margin for Base
Applicable
Margin for
Commitment
Rate Loans
1.00%
1.25%
1.50%
1.75%
2.00%
Eurodollar Loans
2.00%
2.25%
2.50%
2.75%
3.00%
Fee
0.50%
0.50%
0.50%
0.50%
0.50%
The credit agreement contains restrictive covenants that may limit the Company’s ability to, among other things, incur additional
indebtedness, sell assets, make loans to others, make investments, enter into mergers, enter into hedging contracts, incur liens and engage
in certain other transactions without the prior consent of its lenders. However, the credit agreement permits the Company and certain
of its subsidiaries to issue second lien indebtedness of up to $1.0 billion subject to certain conditions and limitations. Except for limited
exceptions, the credit agreement also restricts the Company’s ability to make any dividend payments or distributions on its common
stock. These restrictions apply to all of the Company’s restricted subsidiaries (as defined in the credit agreement). As of December 31,
2017, there were no retained earnings free from restrictions. The credit agreement requires the Company, as of the last day of any
quarter, to maintain the following ratios (as defined in the credit agreement): (i) a consolidated current assets to consolidated current
liabilities ratio (which includes an add back of the available borrowing capacity under the credit agreement) of not less than 1.0 to 1.0,
(ii) a total senior secured debt to the last four quarters’ EBITDAX ratio of less than 3.0 to 1.0 during the Interim Covenant Period
(defined below), and thereafter a total debt to EBITDAX ratio of less than 4.0 to 1.0, and (iii) a ratio of the last four quarters’ EBITDAX
to consolidated cash interest charges of not less than 2.25 to 1.0 during the Interim Covenant Period. Under the credit agreement, the
“Interim Covenant Period” is defined as the period from June 30, 2015 until the earlier of (i) April 1, 2018 or (ii) the commencement of
an investment-grade debt rating period (as defined in the credit agreement). The Company was in compliance with its covenants under
the credit agreement as of December 31, 2017.
The obligations of Whiting Oil and Gas under the credit agreement are collateralized by a first lien on substantially all of Whiting Oil
and Gas’ and Whiting Resource Corporation’s properties. The Company has guaranteed the obligations of Whiting Oil and Gas under
the credit agreement and has pledged the stock of its subsidiaries as security for its guarantee.
Senior Notes, Convertible Senior Notes and Senior Subordinated Notes
The following table summarizes the material terms of the Company’s senior notes and convertible senior notes outstanding at
December 31, 2017:
2020
Outstanding principal (in thousands)
Interest rate
Maturity date
Interest payment dates
Make-whole redemption date (2)
_____________________
(1) On January 26, 2018, the Company used the proceeds from the December 2017 issuance of its 6.625% Senior Notes due January
Mar 15, 2021
Apr 1, 2023
Mar 15, Sep 15 Apr 1, Oct 1
Jan 1, 2023
Dec 15, 2020
N/A (3)
Convertible
2019
Senior Notes (1)
Senior Notes
$ 562,075
$ 961,409
1.25%
5.0%
Mar 15, 2019
Apr 1, 2020
Mar 15, Sep 15 Apr 1, Oct 1
Dec 15, 2018
2021
Senior Notes
$ 873,609
5.75%
2023
Senior Notes
$ 408,296
6.25%
2026
Senior Notes
$ 1,000,000
6.625%
Jan 15, 2026
Jan 15, Jul 15
Oct 15, 2025
2026 as well as borrowings under its credit agreement to redeem all of the outstanding 5.0% Senior Notes due March 2019.
(2) On or after these dates, the Company may redeem the applicable series of notes, in whole or in part, at a redemption price equal to
100% of the principal amount redeemed, together with accrued and unpaid interest up to the redemption date. At any time prior to
these dates, the Company may redeem the notes at a redemption price that includes an applicable premium as defined in the
indentures to such notes.
(3) The indenture governing the 1.25% Convertible Senior Notes due 2020 does not allow for optional redemption by the Company
prior to the maturity date.
Senior Notes and Senior Subordinated Notes—In September 2010, the Company issued at par $350 million of 6.5% Senior
Subordinated Notes due October 2018 (the “2018 Senior Subordinated Notes”).
In September 2013, the Company issued at par $1.1 billion of 5.0% Senior Notes due March 2019 (the “2019 Senior Notes”) and
$800 million of 5.75% Senior Notes due March 2021, and issued at 101% of par an additional $400 million of 5.75% Senior Notes due
March 2021 (collectively, the “2021 Senior Notes”). The debt premium recorded in connection with the issuance of the 2021 Senior
79
Notes is being amortized to interest expense over the term of the notes using the effective interest method, with an effective interest rate
of 5.5% per annum.
In March 2015, the Company issued at par $750 million of 6.25% Senior Notes due April 2023 (the “2023 Senior Notes”).
Issuance of Senior Notes. In December 2017, the Company issued at par $1.0 billion of 6.625% Senior Notes due January 2026 (the
“2026 Senior Notes” and together with the 2019 Senior Notes, the 2021 Senior Notes and the 2023 Senior Notes, the “Senior Notes”).
The Company used the net proceeds from this offering to redeem on January 26, 2018 all of the outstanding 2019 Senior Notes at a
102.976% redemption price plus all accrued and unpaid interest on the notes. Refer to the “Subsequent Events” footnote for more
information on the redemption of the 2019 Senior Notes.
Exchange of Senior Notes and Senior Subordinated Notes for Convertible Notes. On March 23, 2016, the Company completed the
exchange of $477 million aggregate principal amount of Senior Notes and 2018 Senior Subordinated Notes, consisting of (i) $49 million
aggregate principal amount of its 2018 Senior Subordinated Notes, (ii) $97 million aggregate principal amount of its 2019 Senior Notes,
(iii) $152 million aggregate principal amount of its 2021 Senior Notes, and (iv) $179 million aggregate principal amount of its 2023
Senior Notes, for $477 million aggregate principal amount of convertible senior notes and convertible senior subordinated notes (the
“New Convertible Notes”). This exchange transaction was accounted for as an extinguishment of debt for each portion of the Senior
Notes and 2018 Senior Subordinated Notes that was exchanged. As a result, Whiting recognized a $91 million gain on extinguishment
of debt, which was net of a $4 million non-cash charge for the acceleration of unamortized debt issuance costs and debt premium on the
original notes. Each series of New Convertible Notes was recorded at fair value upon issuance, with the difference between the principal
amount of the notes and their fair values, totaling $95 million, recorded as a debt discount. The aggregate debt discount of $185 million
recorded upon issuance of the New Convertible Notes also included $90 million related to the fair value of the holders’ conversion
options, which were embedded derivatives that met the criteria to be bifurcated from their host contracts and accounted for separately.
Refer to the “Derivative Financial Instruments” and “Fair Value Measurements” footnotes for more information on these embedded
derivatives.
During the second quarter of 2016, holders of the New Convertible Notes voluntarily converted all $477 million aggregate principal
amount of the New Convertible Notes for approximately 10.5 million shares of the Company’s common stock. Upon conversion, the
Company paid $46 million in cash consisting of early conversion payments to the holders of the notes, as well as all accrued and unpaid
interest on such notes. As a result of the conversions, Whiting recognized a $188 million loss on extinguishment of debt, which consisted
of a non-cash charge for the acceleration of unamortized debt issuance costs and debt discount on the notes. As of June 30, 2016, no
New Convertible Notes remained outstanding.
Exchange of Senior Notes and Senior Subordinated Notes for Mandatory Convertible Notes. On July 1, 2016, the Company completed
the exchange of $405 million aggregate principal amount of Senior Notes and 2018 Senior Subordinated Notes for the same aggregate
principal amount of new mandatory convertible senior notes and mandatory convertible senior subordinated notes. Refer to “Mandatory
Convertible Notes” below for more information on these exchange transactions.
Kodiak Senior Notes. In conjunction with the acquisition of Kodiak in December 2014, Whiting US Holding Company, a wholly owned
subsidiary of the Company, became a co-issuer of Kodiak’s $800 million of 8.125% Senior Notes due December 2019 (the “2019
Kodiak Notes”), $350 million of 5.5% Senior Notes due January 2021 (the “2021 Kodiak Notes”), and $400 million of 5.5% Senior
Notes due February 2022 (the “2022 Kodiak Notes” and together with the 2019 Kodiak Notes and the 2021 Kodiak Notes, the “Kodiak
Notes”).
In January 2015, Whiting offered to repurchase at 101% of par all $1,550 million principal amount of Kodiak Notes then outstanding.
In March 2015, Whiting paid $760 million to repurchase $2 million aggregate principal amount of the 2019 Kodiak Notes, $346 million
aggregate principal amount of the 2021 Kodiak Notes and $399 million aggregate principal amount of the 2022 Kodiak Notes, which
payment consisted of the 101% redemption price and all accrued and unpaid interest on such notes. In May 2015, Whiting paid an
additional $5 million to repurchase the remaining $4 million aggregate principal amount of the 2021 Kodiak Notes and $1 million
aggregate principal amount of the 2022 Kodiak Notes, which payment consisted of the 101% redemption price and all accrued and
unpaid interest on such notes. In December 2015, Whiting paid $834 million to repurchase the remaining $798 million aggregate
principal amount of the 2019 Kodiak Notes, which payment consisted of the 104.063% redemption price and all accrued and unpaid
interest on such notes. As a result of the repurchases, Whiting recognized an $18 million loss on extinguishment of debt, which consisted
of a $40 million cash charge related to the redemption premium on the Kodiak Notes, partially offset by a $22 million non-cash credit
related to the acceleration of unamortized debt premiums on such notes. As of December 31, 2015, no Kodiak Notes remained
outstanding.
Redemption of 2018 Senior Subordinated Notes. On February 2, 2017, the Company paid $281 million to redeem all of the then
outstanding $275 million aggregate principal amount of 2018 Senior Subordinated Notes, which payment consisted of the 100%
redemption price plus all accrued and unpaid interest on the notes. The Company financed the redemption with borrowings under its
credit agreement. As a result of the redemption, Whiting recognized a $2 million loss on extinguishment of debt, which consisted of a
80
non-cash charge for the acceleration of unamortized debt issuance costs on the notes. As of March 31, 2017, no 2018 Senior
Subordinated Notes remained outstanding.
2020 Convertible Senior Notes—In March 2015, the Company issued at par $1,250 million of 1.25% Convertible Senior Notes due
April 2020 (the “2020 Convertible Senior Notes”) for net proceeds of $1.2 billion, net of initial purchasers’ fees of $25 million. On
June 29, 2016, the Company exchanged $129 million aggregate principal amount of its 2020 Convertible Senior Notes for the same
aggregate principal amount of new mandatory convertible senior notes, and on July 1, 2016, the Company exchanged $559 million
aggregate principal amount of its 2020 Convertible Senior Notes for the same aggregate principal amount of new mandatory convertible
senior notes. Refer to “Mandatory Convertible Notes” below for more information on these exchange transactions.
For the remaining $562 million aggregate principal amount of 2020 Convertible Senior Notes outstanding as of December 31, 2017, the
Company has the option to settle conversions of these notes with cash, shares of common stock or a combination of cash and common
stock at its election. The Company’s intent is to settle the principal amount of the 2020 Convertible Senior Notes in cash upon
conversion. Prior to January 1, 2020, the 2020 Convertible Senior Notes will be convertible at the holder’s option only under the
following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only
during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not
consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar
quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business day period
after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the
2020 Convertible Senior Notes for each trading day of the measurement period is less than 98% of the product of the last reported sale
price of the Company’s common stock and the conversion rate on each such trading day; or (iii) upon the occurrence of specified
corporate events. On or after January 1, 2020, the 2020 Convertible Senior Notes will be convertible at any time until the second
scheduled trading day immediately preceding the April 1, 2020 maturity date of the notes. The notes will be convertible at a current
conversion rate of 6.4102 shares of Whiting’s common stock per $1,000 principal amount of the notes, which is equivalent to a current
conversion price of approximately $156.00. The conversion rate will be subject to adjustment in some events. In addition, following
certain corporate events that occur prior to the maturity date, the Company will increase, in certain circumstances, the conversion rate
for a holder who elects to convert its 2020 Convertible Senior Notes in connection with such corporate event. As of December 31, 2017,
none of the contingent conditions allowing holders of the 2020 Convertible Senior Notes to convert these notes had been met.
Upon issuance, the Company separately accounted for the liability and equity components of the 2020 Convertible Senior Notes. The
liability component was recorded at the estimated fair value of a similar debt instrument without the conversion feature. The difference
between the principal amount of the 2020 Convertible Senior Notes and the estimated fair value of the liability component was recorded
as a debt discount and is being amortized to interest expense over the term of the notes using the effective interest method, with an
effective interest rate of 5.6% per annum. The fair value of the liability component of the 2020 Convertible Senior Notes as of the
issuance date was estimated at $1.0 billion, resulting in a debt discount at inception of $238 million. The equity component, representing
the value of the conversion option, was computed by deducting the fair value of the liability component from the initial proceeds of the
2020 Convertible Senior Notes issuance. This equity component was recorded, net of deferred taxes and issuance costs, in additional
paid-in capital within shareholders’ equity, and will not be remeasured as long as it continues to meet the conditions for equity
classification.
Transaction costs related to the 2020 Convertible Senior Notes issuance were allocated to the liability and equity components based on
their relative fair values. Issuance costs attributable to the liability component were recorded as a reduction to the carrying value of
long-term debt on the consolidated balance sheet and are being amortized to interest expense over the term of the notes using the effective
interest method. Issuance costs attributable to the equity component were recorded as a charge to additional paid-in capital within
shareholders’ equity.
The 2020 Convertible Senior Notes consisted of the following at December 31, 2017 and 2016 (in thousands):
Liability component
Principal
Less: unamortized note discount
Less: unamortized debt issuance costs
Net carrying value
Equity component (1)
December 31,
2017
2016
$
$
$
562,075 $
(51,666)
(4,178)
506,231 $
136,522 $
562,075
(72,622)
(5,988)
483,465
136,522
(1) Recorded in additional paid-in capital, net of $5 million of issuance costs and $50 million of deferred taxes as of December 31,
2017 and 2016.
81
Interest expense recognized on the 2020 Convertible Senior Notes related to the stated interest rate and amortization of the debt discount
totaled $28 million, $43 million and $44 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Mandatory Convertible Notes—On June 29, 2016, the Company completed the exchange of $129 million aggregate principal amount
of its 2020 Convertible Senior Notes for the same aggregate principal amount of new mandatory convertible notes, and on July 1, 2016,
the Company completed the exchange of $964 million aggregate principal amount of Senior Notes, 2020 Convertible Senior Notes and
2018 Senior Subordinated Notes, consisting of (i) $26 million aggregate principal amount of 2018 Senior Subordinated Notes, (ii)
$42 million aggregate principal amount of 2019 Senior Notes, (iii) $559 million aggregate principal amount of 2020 Convertible Senior
Notes, (iv) $174 million aggregate principal amount of 2021 Senior Notes, and (v) $163 million aggregate principal amount of 2023
Senior Notes, for the same aggregate principal amount of new mandatory convertible notes (together the “Mandatory Convertible
Notes”).
These transactions were accounted for as extinguishments of debt for the portions of Senior Notes, 2020 Convertible Senior Notes and
2018 Senior Subordinated Notes that were exchanged. As a result, Whiting recognized a $57 million gain on extinguishment of debt,
which was net of a $113 million charge for the non-cash write-off of unamortized debt issuance costs, debt discounts and debt premium
on the original notes. In addition, Whiting recorded a $63 million reduction to the equity component of the 2020 Convertible Senior
Notes, which was net of deferred taxes. The Mandatory Convertible Notes were recorded at fair value upon issuance with the difference
between the principal amount of the notes and their fair values, totaling $69 million, recorded as a debt discount. The Mandatory
Convertible Notes contained contingent beneficial conversion features, the intrinsic value of which was recognized in additional paid-
in capital at the time the contingency was resolved, resulting in an additional debt discount of $233 million. The aggregate debt discount
of $302 million was being amortized to interest expense over the term of the notes using the effective interest method.
The July 1, 2016 note exchange transactions triggered an ownership shift as defined under Section 382 of the Internal Revenue Code
due to the “deemed share issuance” that resulted from the note exchanges. This triggering event will limit the Company’s usage of
certain of its net operating losses and tax credits in the future. Refer to the “Income Taxes” footnote for more information.
During the second half of 2016, the entire $1,093 million aggregate principal amount of the Mandatory Convertible Notes were converted
into approximately 28.9 million shares of the Company’s common stock pursuant to the terms of the notes. As a result of these
conversions, Whiting recognized (i) a $259 million non-cash charge for the acceleration of unamortized debt discounts on the notes,
which is included in interest expense in the consolidated statements of operations, and (ii) a $1 million net loss on extinguishment of
debt. As of December 31, 2016, no Mandatory Convertible Notes remained outstanding.
Security and Guarantees
The Senior Notes and the 2020 Convertible Senior Notes are unsecured obligations of Whiting Petroleum Corporation and these
unsecured obligations are subordinated to all of the Company’s secured indebtedness, which consists of Whiting Oil and Gas’ credit
agreement.
The Company’s obligations under the Senior Notes and the 2020 Convertible Senior Notes are guaranteed by the Company’s
100%-owned subsidiaries, Whiting Oil and Gas, Whiting US Holding Company, Whiting Canadian Holding Company ULC and
Whiting Resources Corporation (the “Guarantors”). These guarantees are full and unconditional and joint and several among the
Guarantors. Any subsidiaries other than these Guarantors are minor subsidiaries as defined by Rule 3-10(h)(6) of Regulation S-X of
the SEC. Whiting Petroleum Corporation has no assets or operations independent of this debt and its investments in its consolidated
subsidiaries.
5. ASSET RETIREMENT OBLIGATIONS
The Company’s asset retirement obligations represent the present value of estimated future costs associated with the plugging and
abandonment of oil and gas wells, removal of equipment and facilities from leased acreage, and land restoration (including removal of
certain onshore and offshore facilities in California) in accordance with applicable local, state and federal laws. The current portions at
December 31, 2017 and 2016 were $5 million and $8 million, respectively, and have been included in accrued liabilities and other in
the consolidated balance sheets. The following table provides a reconciliation of the Company’s asset retirement obligations for the
years ended December 31, 2017 and 2016 (in thousands):
82
Asset retirement obligation at January 1
Additional liability incurred
Revisions to estimated cash flows (1) (2)
Accretion expense
Obligations on sold properties
Liabilities settled
Asset retirement obligation at December 31
2017
2016
177,004 $
7,727
(52,947)
13,809
(6,988)
(4,368)
134,237 $
161,908
3,238
11,620
13,800
(4,771)
(8,791)
177,004
$
$
(1) Revisions to estimated cash flows during the year ended December 31, 2017 are primarily attributable to the deferral of the estimated
timing of abandonment of a large number of Whiting’s producing properties resulting from increases in commodity prices used in
the calculation of the Company’s reserves as of December 31, 2017, which lengthened the economic lives of these properties. In
addition, during 2017 there were decreases in the estimates of future costs required to plug and abandon wells in certain fields in
the Northern Rocky Mountains.
(2) Revisions to estimated cash flows during the year ended December 31, 2016 are primarily attributable to the acceleration in the
estimated timing of abandonment of a large number of Whiting’s producing properties resulting from decreases in commodity
prices used in the calculation of the Company’s reserves as of December 31, 2016, which shortened the economic lives of these
properties. For the year ended December 31, 2016, the increase was partially offset by decreases in the estimates of future costs
required to plug and abandon wells in certain fields in the Central and Northern Rocky Mountains.
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations, and it uses derivative instruments to manage its
commodity price risk. In addition, the Company periodically enters into contracts that contain embedded features which are required to
be bifurcated and accounted for separately as derivatives.
Commodity Derivative Contracts—Historically, prices received for crude oil and natural gas production have been volatile because of
supply and demand factors, worldwide political factors, general economic conditions and seasonal weather patterns. Whiting primarily
enters into derivative contracts such as crude oil costless collars and swaps, as well as sales and delivery contracts, to achieve a more
predictable cash flow by reducing its exposure to commodity price volatility, thereby ensuring adequate funding for the Company’s
capital programs and facilitating the management of returns on drilling programs and acquisitions. The Company does not enter into
derivative contracts for speculative or trading purposes.
Crude Oil Costless Collars. Costless collars are designed to establish floor and ceiling prices on anticipated future oil or gas production.
While the use of these derivative instruments limits the downside risk of adverse price movements, they may also limit future revenues
from favorable price movements.
The table below details the Company’s costless collar derivatives entered into to hedge forecasted crude oil production revenues as of
December 31, 2017.
Derivative
Instrument
Three-way collars (1)
Period
Jan - Dec 2018
Total
Contracted Crude
Oil Volumes (Bbl)
17,400,000
17,400,000
Weighted Average NYMEX Price
Collar Ranges for Crude Oil (per Bbl)
$37.07 - $47.07 - $57.30
_____________________
(1) A three-way collar is a combination of options: a sold call, a purchased put and a sold put. The sold call establishes a maximum
price (ceiling) Whiting will receive for the volumes under contract. The purchased put establishes a minimum price (floor), unless
the market price falls below the sold put (sub-floor), at which point the minimum price would be NYMEX plus the difference
between the purchased put and the sold put strike price.
(2) Subsequent to December 31, 2017, the Company entered into additional swap contracts for 4,400,000 Bbl of crude oil volumes for
the year ended December 31, 2018, as well as costless collars for 900,000 Bbl of crude oil volumes for the six months ended
June 30, 2019.
Crude Oil Sales and Delivery Contract. As of December 31, 2017, the Company had a long-term crude oil sales and delivery contract
for oil volumes produced from its Redtail field in Colorado. Under the terms of the agreement, Whiting had committed to deliver certain
fixed volumes of crude oil through April 2020. The Company determined it was not probable that future oil production from its Redtail
field would be sufficient to meet the minimum volume requirements specified in this contract; accordingly, the Company would not
83
settle this contract through physical delivery of crude oil volumes. As a result, Whiting determined that this contract would not qualify
for the “normal purchase normal sale” exclusion and has therefore reflected the contract at fair value in the consolidated financial
statements. As of December 31, 2017 and 2016, the estimated fair value of this derivative contract was a liability of $63 million and
$9 million, respectively. On February 1, 2018, Whiting paid $61 million to the counterparty to settle all future minimum volume
commitments under this agreement. Accordingly, this crude oil sales and delivery contract was fully terminated and the fair value of
this corresponding derivative was therefore zero as of that date.
Embedded Derivatives—In March 2016, the Company issued convertible notes that contained debtholder conversion options which the
Company determined were not clearly and closely related to the debt host contracts, and the Company therefore bifurcated these
embedded features and reflected them at fair value in the consolidated financial statements. During the second quarter of 2016, the
entire aggregate principal amount of these notes was converted into shares of the Company’s common stock, and the fair value of these
embedded derivatives as of December 31, 2017 and 2016 was therefore zero.
In July 2016, the Company entered into a purchase and sale agreement with the buyer of its North Ward Estes Properties, whereby the
buyer agreed to pay Whiting additional proceeds of $100,000 for every $0.01 that, as of June 28, 2018, the average NYMEX crude oil
futures contract price for each month from August 2018 through July 2021 is above $50.00/Bbl up to a maximum amount of
$100 million. The Company determined that this NYMEX-linked contingent payment was not clearly and closely related to the host
contract, and the Company therefore bifurcated this embedded feature and reflected it at its estimated fair value of $51 million in the
consolidated financial statements as of December 31, 2016. On July 19, 2017, the buyer paid $35 million to Whiting to settle this
NYMEX-linked contingent payment, and accordingly, the embedded derivative’s fair value was zero as of December 31, 2017.
Derivative Instrument Reporting—All derivative instruments are recorded in the consolidated financial statements at fair value, other
than derivative instruments that meet the “normal purchase normal sale” exclusion or other derivative scope exceptions. The following
table summarizes the effects of derivative instruments on the consolidated statements of operations for the years ended December 31,
2017, 2016 and 2015 (in thousands):
Not Designated as
ASC 815 Hedges
Commodity contracts
Embedded derivatives
Total
Statement of Operations
Classification
Derivative (gain) loss, net
Derivative (gain) loss, net
(Gain) Loss Recognized in Income
Year Ended December 31,
2016
2017
$
$
104,138 $
18,709
122,847 $
58,771 $
(59,358)
(587) $
2015
(217,972)
-
(217,972)
Offsetting of Derivative Assets and Liabilities. The Company nets its financial derivative instrument fair value amounts executed with
the same counterparty pursuant to ISDA master agreements, which provide for net settlement over the term of the contract and in the
event of default or termination of the contract. The following tables summarize the location and fair value amounts of all the Company’s
derivative instruments in the consolidated balance sheets, as well as the gross recognized derivative assets, liabilities and amounts offset
in the consolidated balance sheets (in thousands):
Not Designated as
ASC 815 Hedges
Derivative assets
Commodity contracts - current
Total derivative assets
Derivative liabilities
Commodity contracts - current
Total derivative liabilities
Balance Sheet Classification
Prepaid expenses and other
Derivative liabilities
December 31, 2017 (1)
Gross
Recognized
Assets/
Liabilities
Gross
Amounts
Offset
Net
Recognized
Fair Value
Assets/
Liabilities
$
$
$
$
9,829 $
9,829 $
(9,829) $
(9,829) $
-
-
142,354 $
142,354 $
(9,829) $
(9,829) $
132,525
132,525
84
Not Designated as
ASC 815 Hedges
Derivative assets
Balance Sheet Classification
December 31, 2016 (1)
Gross
Recognized
Assets/
Liabilities
Gross
Amounts
Offset
Net
Recognized
Fair Value
Assets/
Liabilities
Prepaid expenses and other
Commodity contracts - current
Commodity contracts - non-current
Other long-term assets
Embedded derivatives - non-current Other long-term assets
Total derivative assets
Derivative liabilities
Commodity contracts - current
Commodity contracts - non-current
Total derivative liabilities
Derivative liabilities
Other long-term liabilities
$
$
$
$
21,405 $
9,495
50,632
81,532 $
39,033 $
19,724
58,757 $
(21,405) $
(9,495)
-
(30,900) $
(21,405) $
(9,495)
(30,900) $
-
-
50,632
50,632
17,628
10,229
27,857
_____________________
(1) Because counterparties to the Company’s financial derivative contracts subject to master netting arrangements are lenders under
Whiting Oil and Gas’ credit agreement, which eliminates its need to post or receive collateral associated with its derivative positions,
columns for cash collateral pledged or received have not been presented in these tables.
Contingent Features in Financial Derivative Instruments. None of the Company’s derivative instruments contain credit-risk-related
contingent features. Counterparties to the Company’s financial derivative contracts are high credit-quality financial institutions that are
lenders under Whiting’s credit agreement. The Company uses only credit agreement participants to hedge with, since these institutions
are secured equally with the holders of Whiting’s bank debt, which eliminates the potential need to post collateral when Whiting is in a
derivative liability position. As a result, the Company is not required to post letters of credit or corporate guarantees for its derivative
counterparties in order to secure contract performance obligations.
7. FAIR VALUE MEASUREMENTS
The Company follows FASB ASC Topic 820, Fair Value Measurement and Disclosure, which establishes a three-level valuation
hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value
into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined
as follows:
Level 1: Quoted Prices in Active Markets for Identical Assets – inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
Level 2: Significant Other Observable Inputs – inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the financial instrument.
Level 3: Significant Unobservable Inputs – inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the
fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment and considers factors specific to the asset or liability. The Company reflects transfers between the three levels at the
beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level.
Cash, cash equivalents, restricted cash, accounts receivable and accounts payable are carried at cost, which approximates their fair value
because of the short-term maturity of these instruments. The Company’s credit agreement has a recorded value that approximates its
fair value since its variable interest rate is tied to current market rates and the applicable margins represent market rates.
The Company’s senior notes and senior subordinated notes are recorded at cost, and the Company’s convertible senior notes are recorded
at fair value at the date of issuance. The following table summarizes the fair values and carrying values of these instruments as of
December 31, 2017 and 2016 (in thousands):
85
6.5% Senior Subordinated Notes due 2018
5.0% Senior Notes due 2019
1.25% Convertible Senior Notes due 2020
5.75% Senior Notes due 2021
6.25% Senior Notes due 2023
6.625% Senior Notes due 2026
Total
December 31, 2017
Fair
Value (1)
Carrying
Value (2)
$
- $
- $
985,444
517,109
897,633
418,503
1,025,000
3,843,689 $
958,713
506,231
869,284
403,940
985,261
3,723,429 $
$
December 31, 2016
Fair
Value (1)
Carrying
Value (2)
275,121 $
961,409
503,057
868,149
408,296
-
3,016,032 $
273,506
956,607
483,465
868,460
403,265
-
2,985,303
(1) Fair values are based on quoted market prices for these debt securities, and such fair values are therefore designated as Level 1
within the valuation hierarchy.
(2) Carrying values are presented net of unamortized debt issuance costs and debt discounts or premiums.
The Company’s derivative financial instruments are recorded at fair value and include a measure of the Company’s own nonperformance
risk or that of its counterparty, as appropriate. The following tables present information about the Company’s financial assets and
liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016, and indicate the fair value hierarchy of the
valuation techniques utilized by the Company to determine such fair values (in thousands):
Financial Liabilities
Commodity derivatives – current
Total financial liabilities
Financial Assets
Embedded derivatives – non-current
Total financial assets
Financial Liabilities
Commodity derivatives – current
Commodity derivatives – non-current
Total financial liabilities
Level 1
Level 2
Level 3
Total Fair Value
December 31, 2017
$
$
- $
- $
69,247 $
69,247 $
63,278 $
63,278 $
132,525
132,525
Level 1
Level 2
Level 3
Total Fair Value
December 31, 2016
$
$
$
$
- $
- $
50,632 $
50,632 $
- $
- $
- $
-
- $
14,664 $
3,979
18,643 $
2,964 $
6,250
9,214 $
50,632
50,632
17,628
10,229
27,857
The following methods and assumptions were used to estimate the fair values of the Company’s financial assets and liabilities that are
measured on a recurring basis:
Commodity Derivatives. Commodity derivative instruments consist mainly of costless collars for crude oil. The Company’s costless
collars are valued based on an income approach. The option model considers various assumptions, such as quoted forward prices for
commodities, time value and volatility factors. These assumptions are observable in the marketplace throughout the full term of the
contract, can be derived from observable data or are supported by observable levels at which transactions are executed in the
marketplace, and are therefore designated as Level 2 within the valuation hierarchy. The discount rates used in the fair values of these
instruments include a measure of either the Company’s or the counterparty’s nonperformance risk, as appropriate. The Company utilizes
its counterparties’ valuations to assess the reasonableness of its own valuations.
In addition, the Company had a long-term crude oil sales and delivery contract, whereby it had committed to deliver certain fixed
volumes of crude oil through April 2020. Whiting determined that the contract did not meet the “normal purchase normal sale”
exclusion, and has therefore reflected this contract at fair value in its consolidated financial statements. This commodity derivative was
valued based on a probability-weighted income approach which considers various assumptions, including quoted spot prices for
commodities, market differentials for crude oil, U.S. Treasury rates and either the Company’s or the counterparty’s nonperformance
risk, as appropriate. The assumptions used in the valuation of the crude oil sales and delivery contract include certain market differential
metrics that were unobservable during the term of the contract. Such unobservable inputs were significant to the contract valuation
methodology, and the contract’s fair value was therefore designated as Level 3 within the valuation hierarchy. On February 1, 2018,
Whiting paid $61 million to the counterparty to settle all future minimum volume commitments under this agreement. Accordingly,
this derivative was settled in its entirety as of that date.
86
Embedded Derivatives. The Company had embedded derivatives related to its convertible notes that were issued in March 2016. The
notes contained debtholder conversion options which the Company determined were not clearly and closely related to the debt host
contracts and the Company therefore bifurcated these embedded features and reflected them at fair value in the consolidated financial
statements. Prior to their settlements, the fair values of these embedded derivatives were determined using a binomial lattice model
which considered various inputs including (i) Whiting’s common stock price, (ii) risk-free rates based on U.S. Treasury rates, (iii)
recovery rates in the event of default, (iv) default intensity, and (v) volatility of Whiting’s common stock. The expected volatility and
default intensity used in the valuation were unobservable in the marketplace and significant to the valuation methodology, and the
embedded derivatives’ fair value was therefore designated as Level 3 in the valuation hierarchy. During the second quarter of 2016, the
entire aggregate principal amount of these convertible notes was converted into shares of the Company’s common stock. Accordingly,
the embedded derivatives were settled in their entirety as of June 30, 2016.
The Company had an embedded derivative related to its purchase and sale agreement with the buyer of the North Ward Estes Properties.
The agreement included a Contingent Payment linked to NYMEX crude oil prices which the Company determined was not clearly and
closely related to the host contract, and the Company therefore bifurcated this embedded feature and reflected it at fair value in the
consolidated financial statements prior to settlement. The fair value of this embedded derivative was determined using a modified
Black-Scholes swaption pricing model which considers various assumptions, including quoted forward prices for commodities, time
value and volatility factors. These assumptions were observable in the marketplace throughout the full term of the financial instrument,
could be derived from observable data or were supported by observable levels at which transactions are executed in the marketplace,
and were therefore designated as Level 2 within the valuation hierarchy. The discount rate used in the fair value of this instrument
included a measure of the counterparty’s nonperformance risk. On July 19, 2017, the buyer paid $35 million to Whiting in satisfaction
of this Contingent Payment. Accordingly, the embedded derivative was settled in its entirety as of that date.
Level 3 Fair Value Measurements—A third-party valuation specialist is utilized in determining the fair value of the Company’s
derivative instruments designated as Level 3. The Company reviews these valuations, including the related model inputs and
assumptions, and analyzes changes in fair value measurements between periods. The Company corroborates such inputs, calculations
and fair value changes using various methodologies, and reviews unobservable inputs for reasonableness utilizing relevant information
from other published sources.
The following table presents a reconciliation of changes in the fair value of financial assets or liabilities designated as Level 3 in the
valuation hierarchy for the years ended December 31, 2017 and 2016 (in thousands):
Fair value liability, beginning of period
Recognition of embedded derivatives associated with convertible note issuances
Unrealized gains on embedded derivatives included in earnings (1)
Settlement of embedded derivatives upon conversion of convertible notes
Unrealized losses on commodity derivative contracts included in earnings (1)
Transfers into (out of) Level 3
Fair value liability, end of period
_____________________
(1) Included in derivative (gain) loss, net in the consolidated statements of operations.
$
$
Year Ended December 31,
2016
2017
(9,214) $
-
-
-
(54,064)
-
(63,278) $
(4,027)
(89,884)
47,965
41,919
(5,187)
-
(9,214)
Quantitative Information about Level 3 Fair Value Measurements. The significant unobservable inputs used in the fair value
measurement of the Company’s commodity derivative instrument designated as Level 3 are as follows:
Derivative Instrument
Valuation Technique
Commodity derivative contract Probability-weighted income approach Market differential for crude oil
Unobservable Input
Amount
$4.08 - $4.92 per Bbl
Sensitivity to Changes in Significant Unobservable Inputs. As presented above, the significant unobservable inputs used in the fair value
measurement of Whiting’s commodity derivative contract are the market differentials for crude oil over the term of the contract.
Significant increases or decreases in these unobservable inputs in isolation would result in a significantly lower or higher, respectively,
fair value liability measurement.
Non-recurring Fair Value Measurements—The Company applies the provisions of the fair value measurement standard on a non-
recurring basis to its non-financial assets and liabilities, including proved property. These assets and liabilities are not measured at fair
value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. The Company did not recognize any
impairment write-downs with respect to its proved property during the year ended December 31, 2016. The following table presents
information about the Company’s non-financial assets measured at fair value on a non-recurring basis for the year ended December 31,
87
2017, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in
thousands):
Net Carrying
Value as of
December 31,
2017
Fair Value Measurements Using
Level 2
Level 1
Level 3
Loss (Before
Tax) Year
Ended
December 31,
2017
$
Proved property (1)
_____________________
(1) During the fourth quarter of 2017, proved oil and gas properties at the Redtail field in the Denver Julesburg Basin (the “DJ Basin”)
in Weld County, Colorado, with a previous carrying amount of $1.2 billion were written down to their fair value as of December 31,
2017 of $389 million, resulting in a non-cash impairment charge of $835 million which was recorded within exploration and
impairment expense.
389,390 $
389,390 $
834,950
- $
- $
The following methods and assumptions were used to estimate the fair values of the non-financial assets in the table above:
Proved Property Impairments. The Company tests proved property for impairment whenever events or changes in circumstances
indicate that the fair value of these assets may be reduced below their carrying value. Based on recent well performance results in the
DJ Basin, the Company reduced its reserves at its Redtail field during the fourth quarter of 2017, and performed a proved property
impairment test as of December 31, 2017. The fair value was ascribed using income approach analyses based on the net discounted
future cash flows from the producing property and related assets. The discounted cash flows were based on management’s expectations
for the future. Unobservable inputs included estimates of future oil and gas production from the Company’s reserve reports, commodity
prices based on sales contract terms or forward price curves (adjusted for basis differentials), operating and development costs, and a
discount rate based on the Company’s weighted-average cost of capital (all of which were designated as Level 3 inputs within the fair
value hierarchy). The impairment test indicated that a proved property impairment had occurred, and the Company therefore recorded
a non-cash impairment charge to reduce the carrying value of the impaired property to its fair value at December 31, 2017.
8. SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTEREST
Common Stock
Reverse Stock Split. On November 8, 2017 and following approval by the Company’s stockholders of an amendment to its certificate
of incorporation to effect a reverse stock split, the Company’s Board of Directors approved a reverse stock split of Whiting’s common
stock at a ratio of one-for-four and a reduction in the number of authorized shares of the Company’s common stock from 600,000,000
shares to 225,000,000. Whiting’s common stock began trading on a split-adjusted basis on November 9, 2017 upon opening of the
markets. All share and per share amounts in these consolidated financial statements and related notes for periods prior to November
2017 have been retroactively adjusted to reflect the reverse stock split.
Common Stock Offering. In March 2015, the Company completed a public offering of its common stock, selling 8,750,000 shares of
common stock at a price of $120.00 per share and providing net proceeds of approximately $1.0 billion after underwriter’s fees. In
addition, the Company granted the underwriter a 30-day option to purchase up to an additional 1,312,500 shares of common stock. On
April 1, 2015, the underwriter exercised its right to purchase an additional 500,000 shares of common stock, providing additional net
proceeds of $61 million.
Noncontrolling Interest—The Company’s noncontrolling interest represented an unrelated third party’s 25% ownership interest in
Sustainable Water Resources, LLC (“SWR”). During the third quarter of 2017, the third party’s ownership interest in SWR was assigned
back to SWR. The table below summarizes the activity for the equity attributable to the noncontrolling interest (in thousands):
Balance at beginning of period
Net loss
Conveyance of ownership interest
Balance at end of period
Year Ended December 31,
2016
2017
$
$
7,962 $
(14)
(7,948)
- $
7,984
(22)
-
7,962
88
9. STOCK-BASED COMPENSATION
Equity Incentive Plan—The Company maintains the Whiting Petroleum Corporation 2013 Equity Incentive Plan, as amended and
restated (the “2013 Equity Plan”), which replaced the Whiting Petroleum Corporation 2003 Equity Incentive Plan (the “2003 Equity
Plan”) and includes the authority to issue 1,375,000 shares of the Company’s common stock. Upon shareholder approval of the 2013
Equity Plan, the 2003 Equity Plan was terminated. The 2003 Equity Plan continues to govern awards that were outstanding as of the
date of its termination, which remain in effect pursuant to their terms. Any shares netted or forfeited under the 2003 Equity Plan and
any shares forfeited under the 2013 Equity Plan will be available for future issuance under the 2013 Equity Plan. However, shares
netted for tax withholding under the 2013 Equity Plan will be cancelled and will not be available for future issuance. Under the 2013
Equity Plan, no employee or officer participant may be granted options for more than 225,000 shares of common stock, stock
appreciation rights relating to more than 225,000 shares of common stock, more than 150,000 shares of restricted stock, more than
150,000 restricted stock units, more than 150,000 performance shares, or more than 150,000 performance units during any calendar
year. In addition, no non-employee director participant may be granted options for more than 25,000 shares of common stock, stock
appreciation rights relating to more than 25,000 shares of common stock, more than 25,000 shares of restricted stock, or more than
25,000 restricted stock units during any calendar year. As of December 31, 2017, 1,137,723 shares of common stock remained available
for grant under the 2013 Equity Plan.
Restricted Stock, Restricted Stock Units and Performance Shares—The Company grants service-based restricted stock awards and
restricted stock units to executive officers and employees, which generally vest ratably over a three-year service period. The Company
also grants service-based restricted stock awards to directors, which generally vest over a one-year service period. In addition, the
Company grants performance share awards to executive officers that are subject to market-based vesting criteria as well as a three-year
service period. Upon adoption of ASU 2016-09 on January 1, 2017, the Company elected to account for forfeitures of awards granted
under these plans as they occur in determining compensation expense. The Company recognizes compensation expense for all awards
subject to market-based vesting conditions regardless of whether it becomes probable that these conditions will be achieved or not, and
compensation expense is not reversed if vesting does not actually occur.
During 2017, 2016 and 2015, 538,194, 737,912 and 205,971 shares, respectively, of service-based restricted stock awards were granted
to employees, executive officers and directors under the 2013 Equity Plan. The grant date fair value of restricted stock awards is
determined based on the closing bid price of the Company’s common stock on the grant date. The weighted average grant date fair
value of restricted stock awards was $40.66 per share, $27.82 per share and $123.72 per share for the years ended December 31, 2017,
2016, and 2015, respectively.
During 2017, 2016 and 2015, 168,466, 268,278 and 97,937 performance shares, respectively, subject to certain market-based vesting
criteria were granted to executive officers under the 2013 Equity Plan. These market-based awards cliff vest on the third anniversary of
the grant date, and the number of shares that will vest at the end of that three-year performance period is determined based on the rank
of Whiting’s cumulative stockholder return compared to the stockholder return of a peer group of companies over the same three-year
period. The number of shares earned could range from zero up to two times the number of shares initially granted.
For awards subject to market conditions, the grant date fair value is estimated using a Monte Carlo valuation model. The Monte Carlo
model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment.
Expected volatility is calculated based on the historical volatility of Whiting’s common stock, and the risk-free interest rate is based on
U.S. Treasury yield curve rates with maturities consistent with the three-year vesting period. The key assumptions used in valuing these
market-based awards were as follows:
Number of simulations
Expected volatility
Risk-free interest rate
Dividend yield
2017
2,500,000
82.44%
1.52%
-
2016
2,500,000
60.8%
1.13%
-
2015
2,500,000
40.3%
0.99%
-
The weighted average grant date fair value of the market-based awards as determined by the Monte Carlo valuation model was $63.04
per share, $25.56 per share and $133.00 per share in 2017, 2016 and 2015, respectively.
89
The following table shows a summary of the Company’s restricted stock award (“RSA”), restricted stock unit (“RSU”) and performance
share activity for the year ended December 31, 2017:
Service-Based
RSAs
Number of Awards
Service-Based
RSUs
Market-Based
Performance Awards
Weighted Average
Grant Date
Fair Value
Nonvested awards, January 1
Granted
Vested
Forfeited
Nonvested awards, December 31
766,818
538,194
(339,199)
(67,392)
898,421
-
39,619
-
-
39,619
523,172 $
168,466
-
(194,111)
497,527 $
54.19
44.89
51.23
81.97
44.99
As of December 31, 2017, there was $18 million of total unrecognized compensation cost related to unvested awards granted under the
stock incentive plans. That cost is expected to be recognized over a weighted average period of 2.0 years. For the years ended
December 31, 2017, 2016 and 2015, the total fair value of restricted stock vested was $15 million, $5 million and $4 million,
respectively.
Stock Options—Stock options may be granted to certain executive officers of the Company with exercise prices equal to the closing
market price of the Company’s common stock on the grant date. There were no stock options granted under the 2013 Equity Plan during
2017, 2016 or 2015. The Company’s stock options vest ratably over a three-year service period from the grant date and are exercisable
immediately upon vesting through the tenth anniversary of the grant date.
The following table shows a summary of the Company’s stock options outstanding as of December 31, 2017 as well as activity during
the year then ended:
Weighted
Average
Exercise Price
per Share
Aggregate
Intrinsic
Value
(in thousands)
Weighted
Average
Remaining
Contractual
Term
(in years)
Number of
Options
Options outstanding at January 1
Granted
Exercised
Forfeited or expired
Options outstanding at December 31
Options vested at December 31
Options exercisable at December 31
128,524 $
-
-
(6,490)
122,034 $
122,034 $
122,034 $
158.17
-
-
207.86
154.32
154.32
154.32
$
$
$
$
-
28
28
28
2.4
2.4
2.4
There was no unrecognized compensation cost related to unvested stock option awards as of December 31, 2017. There were no stock
options exercised during the years ended December 31, 2017 or 2016. For the year ended December 31, 2015, the aggregate intrinsic
value of stock options exercised was $2 million.
For the years ended December 31, 2017, 2016 and 2015, total stock compensation expense recognized for restricted share awards and
stock options was $22 million, $26 million and $28 million, respectively.
90
10. INCOME TAXES
Income tax benefit consists of the following (in thousands):
Current income tax expense (benefit)
Federal
State
Total current income tax benefit
Deferred income tax benefit
Federal
State
Total deferred income tax benefit
Total
Year Ended December 31,
2016
2017
2015
$
$
(7,305) $
14
(7,291)
(7,340) $
150
(7,190)
-
(357)
(357)
(398,686)
(77,002)
(475,688)
(482,979) $
(65,130)
(15,326)
(80,456)
(87,646) $
(736,520)
(37,350)
(773,870)
(774,227)
Income tax benefit differed from amounts that would result from applying the U.S. statutory income tax rate (35%) to income before
income taxes as follows (in thousands):
U.S. statutory income tax benefit
State income taxes, net of federal benefit
Valuation allowance
Federal tax reform
Impairment charge after enactment of federal tax reform
IRC Section 382 limitation
Non-deductible convertible debt expenses
Goodwill impairment
Market-based equity awards
Enacted changes in state tax laws
Other
Total
Year Ended December 31,
2016
(499,370) $
(33,050)
-
-
-
259,494
174,071
-
8,352
5,020
(2,163)
(87,646) $
2017
(602,219) $
(39,557)
120,880
(42,033)
114,293
(45,899)
-
-
7,003
-
4,553
(482,979) $
2015
(1,047,723)
(44,654)
-
-
-
-
-
305,820
2,690
7,350
2,290
(774,227)
$
$
91
The principal components of the Company’s deferred income tax assets and liabilities at December 31, 2017 and 2016 were as follows
(in thousands):
Deferred income tax assets
Net operating loss carryforward
Derivative instruments
Asset retirement obligations
Restricted stock compensation
EOR credit carryforwards
Alternative minimum tax credit carryforwards
Other
Total deferred income tax assets
Less valuation allowance
Net deferred income tax assets
Deferred income tax liabilities
Oil and gas properties
Trust distributions
Discount on convertible senior notes
Total deferred income tax liabilities
Total net deferred income tax liabilities
Year Ended December 31,
2016
2017
$
828,617 $
31,567
16,138
9,704
7,946
-
11,549
905,521
(271,300)
634,221
566,747
54,980
12,494
634,221
$
- $
1,248,034
6,145
21,398
12,171
7,946
7,847
19,356
1,322,897
(264,461)
1,058,436
1,412,781
94,120
27,224
1,534,125
475,689
The Company’s July 1, 2016 note exchange transactions triggered an ownership shift within the meaning of Section 382 of the Internal
Revenue Code (“IRC”) due to the “deemed share issuance” that resulted from the note exchanges. The ownership shift will limit
Whiting’s usage of certain of its net operating losses and tax credits in the future. Accordingly, the Company recognized valuation
allowances on its deferred tax assets totaling $259 million. In the third quarter of 2017 there was a partial release of this valuation
allowance in the amount of $41 million associated with built-on gains on the sale of the FBIR Assets.
As of December 31, 2017, the Company had federal net operating loss (“NOL”) carryforwards of $2.9 billion, which was net of the IRC
Section 382 limitation. The Company also has various state NOL carryforwards. The determination of the state NOL carryforwards is
dependent upon apportionment percentages and state laws that can change from year to year and that can thereby impact the amount of
such carryforwards. If unutilized, the federal NOL will expire between 2023 and 2037, and the state NOLs will expire between 2018
and 2037.
EOR credits are a credit against federal income taxes for certain costs related to extracting high-cost oil, utilizing certain prescribed
enhanced tertiary recovery methods. As of December 31, 2017, the Company had recognized aggregate EOR credits of $8 million. As
a result of the IRC Section 382 limitation in July 2016, the Company recorded a full valuation allowance on these credits.
The Company was subject to the alternative minimum tax (“AMT”) principally due to its significant intangible drilling cost deductions.
For 2017, the Company expects to forego bonus depreciation and claim a refund under the Protecting Americans from Tax Hikes Act
for its AMT credits and has recognized a $7 million current benefit. As of December 31, 2017, the Company had no remaining AMT
credits available to offset future regular federal income taxes.
On December 22, 2017, Congress passed the Tax Cuts and Jobs Act (the “TCJA”). The new legislation significantly changes the U.S.
corporate tax law by, among other things, lowering the U.S. corporate income tax rate from 35% to 21% beginning in January 2018,
implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. FASB
ASC Topic 740, Income Taxes, requires companies to recognize the impact of the changes in tax law in the period of enactment.
The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allows registrants to record provisional amounts during a one
year “measurement period” similar to that used to account for business combinations, however, the measurement period is deemed to
have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During
the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the
effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
SAB 118 outlines a three-step process to be applied at each reporting period to account for and qualitatively disclose (i) the effects of
the change in tax law for which accounting is complete, (ii) provisional amounts (or adjustments to provisional amounts) for the effects
of the change in tax law where accounting is not complete, but where a reasonable estimate has been made, and (iii) areas affected by
92
the change in tax law where a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to
the enactment of the TCJA.
Amounts recorded during the year ended December 31, 2017 related to the TCJA principally relate to the reduction in the U.S. corporate
income tax rate to 21%, which resulted in (i) income tax expense of $51 million from the revaluation of the Company’s deferred tax
assets and liabilities as of the date of enactment and (ii) an income tax benefit totaling $93 million related to a reduction in the Company’s
existing valuation allowances. Reasonable estimates were made based on the Company’s analysis of the remeasurement of its deferred
tax assets and liabilities and valuation allowances under tax reform. These provisional amounts may be adjusted in future periods if
additional information is obtained or further clarification and guidance is issued by regulatory authorities regarding the application of
the law.
Other provisions of the TCJA that do not impact 2017, but may impact income taxes in future years include (i) a limitation on the current
deductibility of net interest expense in excess of 30% of adjusted taxable income, (ii) a limitation on the usage of NOLs generated after
2017 to 80% of taxable income, (iii) additional limitations on certain meals and entertainment expenses, (iv) the inclusion of performance
based compensation in determining the excessive compensation limitation, and (v) the unlimited carryforward of NOLs.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion, or all, of
the Company’s deferred tax assets will not be realized. In making such determination, the Company considers all available positive and
negative evidence, including future reversals of temporary differences, tax-planning strategies and projected future taxable income and
results of operations. If the Company concludes that it is more likely than not that some portion, or all, of its deferred tax assets will not
be realized, the tax asset is reduced by a valuation allowance. At December 31, 2017, after considering the impact of the federal tax
rate reduction resulting from the enactment of the TCJA, the Company had a valuation allowance totaling $271 million, comprised of
$138 million of NOL carryforward limitations under Section 382 of the IRC, $8 million of EOR credits, which will expire between 2023
and 2025, $5 million of Canadian NOL carryforwards, which will expire between 2034 and 2035, and $1 million of short-term capital
loss carryforwards that are not expected to be realized. In addition, the Company has determined that it does not expect the carrying
value of its deferred tax assets to be realized, and accordingly, has recorded a full valuation allowance totaling $119 million on its net
deferred tax assets as of December 31, 2017. At December 31, 2016, the Company had a valuation allowance totaling $265 million,
comprised of $251 million of NOL carryforward limitations under Section 382 of the IRC, $8 million of EOR credits, and $5 million of
Canadian NOL carryforwards. These valuation allowances were recorded because the Company determined it was more likely than not
that the benefit from these deferred tax assets would not be realized due to the IRC Section 382 limitation on the NOL carryforward and
the EOR credit carryforwards, as well as the divestiture of all foreign operations.
In 2014, the Company acquired Kodiak Oil & Gas Corp. (“Kodiak”), which is a Canadian entity that is disregarded for U.S. tax purposes.
Kodiak holds an interest in Whiting Resources Corporation, a U.S. entity. Canadian taxes have not been recognized as the tax basis
exceeds the book basis in the associated assets. U.S. income taxes on Kodiak and its subsidiary, Whiting Resources Corporation,
however, have been fully recognized on their cumulative losses to date. The TCJA provides for a one-time “deemed repatriation” of
accumulated foreign earnings for the year ended December 31, 2017. We do not expect to pay U.S. federal cash taxes on the deemed
repatriation due to an estimated accumulated deficit in foreign earnings for tax purposes.
As of December 31, 2017 and 2016, the Company did not have any uncertain tax positions. During the year ended December 31, 2016,
the Company reversed an unrecognized tax benefit of $170,000 as a result of the IRC Section 382 limitation, which resulted in the
Company recording a full valuation allowance on its EOR credits, the underlying asset generating the uncertain tax position. For the
years ended December 31, 2017, 2016 and 2015, the Company did not recognize any interest or penalties with respect to unrecognized
tax benefits, nor did the Company have any such interest or penalties previously accrued. The Company believes that it is reasonably
possible that no increases to unrecognized tax benefits will occur in the next twelve months.
The Company files income tax returns in the U.S. federal jurisdiction and in various states, each with varying statutes of limitations.
The 2014 through 2017 tax years generally remain subject to examination by federal and state tax authorities. Additionally, the Company
has Canadian income tax filings which remain subject to examination by the related tax authorities for the 2012 through 2017 tax years.
93
11. EARNINGS PER SHARE
The reconciliations between basic and diluted loss per share are as follows (in thousands, except per share data):
Basic Loss Per Share (1)
Net loss attributable to common shareholders
Weighted average shares outstanding
Loss per common share
Diluted Loss Per Share (1)
Year Ended December 31,
2016
2015
2017
$
$
(1,237,648) $
90,683
(13.65) $
(1,339,102) $
62,967
(21.27) $
(2,219,182)
48,868
(45.41)
Adjusted net loss attributable to common shareholders
Weighted average shares outstanding
Loss per common share
_____________________
(1) All share and per share numbers have been retroactively adjusted for the 2015 and 2016 periods to reflect the Company’s one-for-
(1,237,648) $
90,683
(13.65) $
(1,339,102) $
62,967
(21.27) $
(2,219,182)
48,868
(45.41)
$
$
four reverse stock split in November 2017, as described in Note 8 to these consolidated financial statements.
For the year ended December 31, 2017, the Company had a net loss and therefore the diluted earnings per share calculation for that
period excludes the anti-dilutive effect of 509,744 shares of service-based restricted stock, 22,946 shares of market-based restricted
stock and 1,083 stock options. In addition, the diluted earnings per share calculation for the year ended December 31, 2017 excludes
the effect of 554,580 common shares for stock options that were out-of-the-money and 5,447 shares of restricted stock that did not meet
its market-based vesting criteria as of December 31, 2017.
For the year ended December 31, 2016, the Company had a net loss and therefore the diluted earnings per share calculation for that
period excludes the anti-dilutive effect of (i) 10,820,758 shares issuable for convertible notes prior to their conversions under the if-
converted method, (ii) 444,646 shares of service-based restricted stock, and (iii) 1,158 stock options. In addition, the diluted earnings
per share calculation for the year ended December 31, 2016 excludes the effect of 479,452 common shares for stock options that were
out-of-the-money and 92,548 shares of restricted stock that did not meet its market-based vesting criteria as of December 31, 2016.
For the year ended December 31, 2015, the Company had a net loss and therefore the diluted earnings per share calculation for that
period excludes the anti-dilutive effect of 129,034 shares of service-based restricted stock and 21,391 stock options. In addition, the
diluted earnings per share calculation for the year ended December 31, 2015 excludes the effect of 169,069 incremental shares of
restricted stock that did not meet its market-based vesting criteria as of December 31, 2015 and 128,689 common shares for stock options
that were out-of-the-money.
Refer to the “Stock-Based Compensation” footnote for further information on the Company’s restricted stock and stock options.
As discussed in the “Long-Term Debt” footnote, the Company has the option to settle the 2020 Convertible Senior Notes with cash,
shares of common stock or any combination thereof upon conversion. Based on the current conversion price, the entire outstanding
principal amount of the 2020 Convertible Senior Notes as of December 31, 2017 would be convertible into approximately 3.6 million
shares of the Company’s common stock. However, the Company’s intent is to settle the principal amount of the notes in cash upon
conversion. As a result, only the amount by which the conversion value exceeds the aggregate principal amount of the notes (the
“conversion spread”) is considered in the diluted earnings per share computation under the treasury stock method. As of December 31,
2017, 2016 and 2015, the conversion value did not exceed the principal amount of the notes. Accordingly, there was no impact to
diluted earnings per share or the related disclosures for those periods.
94
12. COMMITMENTS AND CONTINGENCIES
The table below shows the Company’s minimum future payments under non-cancelable operating leases and unconditional purchase
obligations as of December 31, 2017 (in thousands):
Non-cancelable leases
Drilling rig contracts
Pipeline transportation
agreements
Total
2018
2019
Payments due by period
2021
2020
2022
Thereafter
$
7,502 $
19,442
6,399 $
300
802 $
-
- $
-
- $
-
- $
-
Total
14,703
19,742
5,369
32,313 $
5,369
12,068 $
$
5,369
6,171 $
5,369
5,369 $
5,369
5,369 $
11,481
11,481 $
38,326
72,771
Non-cancelable Leases—The Company leases 222,900 square feet of administrative office space in Denver, Colorado under an
operating lease arrangement expiring in 2019, 44,500 square feet of office space in Midland, Texas expiring in 2020, and 36,500 square
feet of office space in Dickinson, North Dakota expiring in 2020. Rental expense for 2017, 2016 and 2015 amounted to $8 million,
$9 million and $9 million, respectively. Minimum lease payments under the terms of non-cancelable operating leases as of December
31, 2017 are shown in the table above. The Company has sublet the majority of its office space in Midland, Texas to a third party for
the remaining lease term. The offsetting rental income has not been included in the table above.
Drilling Rig Contracts—As of December 31, 2017, the Company had three drilling rigs under long-term contracts, of which two drilling
rigs expire in 2018 and one expires in 2019. The Company’s minimum drilling commitments under the terms of these contracts as of
December 31, 2017 are shown in the table above. As of December 31, 2017, early termination of these contracts would require
termination penalties of $11 million, which would be in lieu of paying the remaining drilling commitments under these contracts. During
2017, 2016 and 2015, the Company made payments of $29 million, $31 million and $18 million, respectively, under these long-term
contracts, which are initially capitalized as a component of oil and gas properties and either depleted in future periods or written off as
exploration expense.
Pipeline Transportation Agreements—The Company has three pipeline transportation agreements with two different suppliers, expiring
in 2022, 2024 and 2025. Under two of these contracts, the Company has committed to pay fixed monthly reservation fees on dedicated
pipelines from its Redtail field for natural gas and NGL transportation capacity, plus a variable charge based on actual transportation
volumes. These fixed monthly reservation fees totaling approximately $38 million have been included in the table above.
The remaining contract contains a commitment to transport a minimum volume of crude oil via a certain oil gathering system or else
pay for any deficiencies at a price stipulated in the contract. Although minimum annual quantities are specified in the agreement, the
actual oil volumes transported and their corresponding unit prices are variable over the term of the contract. As a result, the future
minimum payments for each of the five succeeding fiscal years are not fixed and determinable and are not therefore included in the table
above. As of December 31, 2017, the Company estimated the minimum future commitments under this transportation agreement to
approximate $17 million through 2022.
During 2017, 2016 and 2015, transportation of crude oil, natural gas and NGLs under these contracts amounted to $7 million, $5 million
and $3 million, respectively.
Purchase Contracts—The Company has one take-or-pay purchase agreement which expires in 2020, whereby the Company has
committed to buy certain volumes of water for use in the fracture stimulation process of wells the Company completes in its Redtail
field. Under the terms of the agreement, the Company is obligated to purchase a minimum volume of water or else pay for any
deficiencies at the price stipulated in the contract. Although minimum daily quantities are specified in the agreement, the actual water
volumes purchased and their corresponding unit prices are variable over the term of the contract. As a result, the future minimum
payments for each of the five succeeding fiscal years are not fixed and determinable and are not therefore included in the table above.
As of December 31, 2017, the Company estimated the minimum future commitments under this purchase agreement to approximate
$23 million through 2020.
As a result of the Company’s reduced development operations at its Redtail field, Whiting expects to make periodic deficiency payments
under this contract during the remaining term. During 2017 and 2016, purchases of water amounted to $22 million and $1 million,
respectively, which included insignificant deficiency payments for the year ended December 31, 2017.
Water Disposal Agreement—The Company has one water disposal agreement which expires in 2024, whereby it has contracted for the
transportation and disposal of the produced water from its Redtail field. Under the terms of the agreement, the Company is obligated to
provide a minimum volume of produced water or else pay for any deficiencies at the price stipulated in the contract. Although minimum
monthly quantities are specified in the agreement, the actual water volumes disposed of and their corresponding unit prices are variable
95
over the term of the contract. As a result, the future minimum payments for each of the five succeeding fiscal years are not fixed and
determinable and are not therefore included in the table above. As of December 31, 2017, the Company estimated the minimum future
commitments under this disposal agreement to approximate $122 million through 2024. As a result of the Company’s reduced
development operations at its Redtail field, Whiting has made and expects to make periodic deficiency payments under this contract.
During 2017 and 2016, transportation and disposal of produced water amounted to $16 and $8 million, respectively, which includes
$4 million and $2 million of deficiency payments, respectively. There were no water disposal costs incurred under this contract during
2015.
Delivery Commitments—The Company has various physical delivery contracts which require the Company to deliver fixed volumes of
crude oil. One of these delivery commitments became effective on June 1, 2017 upon completion of the Dakota Access Pipeline, and it
is tied to crude oil production from Whiting’s Sanish field in Mountrail County, North Dakota. Under the terms of the agreement,
Whiting has committed to deliver 15 MBbl/d for a term of seven years. The Company believes its production and reserves at the Sanish
field are sufficient to fulfill this delivery commitment, and therefore expects to avoid any payments for deficiencies under this contract.
The remaining two delivery contracts are tied to crude oil production at Whiting’s Redtail field in Weld County, Colorado. On
February 1, 2018, the Company paid $61 million to the counterparty to one of these contracts to settle all future minimum volume
commitments under the agreement. As of December 31, 2017, these contracts contain remaining delivery commitments of 14.8 MMBbl,
16.0 MMBbl and 4.1 MMBbl of crude oil for the years ended December 31, 2018 through 2020, respectively, which commitments have
been reduced to reflect the contract settlement on February 1, 2018. The Company has determined that it is not probable that future oil
production from its Redtail field will be sufficient to meet the minimum volume requirements specified in these physical delivery
contracts, and as a result, the Company expects to make periodic deficiency payments for any shortfalls in delivering the minimum
committed volumes.
During 2017, 2016 and 2015, total deficiency payments under these contracts amounted to $66 million, $43 million and $15 million,
respectively. The Company recognizes any monthly deficiency payments in the period in which the underdelivery takes place and the
related liability has been incurred. The table above does not include any such deficiency payments that may be incurred under the
Company’s physical delivery contracts, since it cannot be predicted with accuracy the amount and timing of any such penalties incurred.
Litigation—The Company is subject to litigation, claims and governmental and regulatory proceedings arising in the ordinary course
of business. The Company accrues a loss contingency for these lawsuits and claims when it is probable that a loss has been incurred
and the amount of the loss can be reasonably estimated. While the outcome of these lawsuits and claims cannot be predicted with
certainty, it is the opinion of the Company’s management that the loss for any litigation matters and claims that are reasonably possible
to occur will not have a material adverse effect, individually or in the aggregate, on its consolidated financial position, cash flows or
results of operations. Accordingly, no material amounts for loss contingencies associated with litigation, claims or assessments have
been accrued at December 31, 2017 or 2016.
13. CAPITALIZED EXPLORATORY WELL COSTS
Exploratory well costs that are incurred and expensed in the same annual period have not been included in the table below. The net
changes in capitalized exploratory well costs were as follows (in thousands):
Beginning balance at January 1
Additions to capitalized exploratory well costs pending the determination
$
of proved reserves
Reclassifications to wells, facilities and equipment based on the
determination of proved reserves
Capitalized exploratory well costs charged to expense
Ending balance at December 31
Year Ended December 31,
2016
2017
2015
- $
- $
14,293
13,894
-
54,707
-
-
13,894 $
$
-
-
- $
(63,352)
(5,648)
-
At December 31, 2017, the Company had no costs capitalized for exploratory wells in progress for a period of greater than one year
after the completion of drilling.
14. SUBSEQUENT EVENTS
Redemption of 2019 Senior Notes—On December 27, 2017, the trustee under the indenture governing the Company’s 2019 Senior
Notes provided notice to the holders of such notes that Whiting elected to redeem all of the remaining $961 million aggregate principal
amount of the 2019 Senior Notes on January 26, 2018, and on that date, Whiting paid $1.0 billion consisting of the 102.976% redemption
96
price plus all accrued and unpaid interest on the notes. The Company financed the redemption with proceeds from the issuance of the
2026 Senior Notes and borrowings under its credit agreement.
Termination of Redtail Delivery Commitment—On February 1, 2018, the Company paid $61 million to the counterparty to one of its
physical delivery contracts for crude oil production at its Redtail field in Weld County, Colorado to settle all future minimum
commitments under this agreement. Refer to the “Commitments and Contingencies” footnote for further information on the Company’s
delivery commitments.
97
SUPPLEMENTAL DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
Oil and Gas Producing Activities
Net capitalized costs related to the Company’s oil and gas producing activities were as follows (in thousands):
Proved oil and gas properties
Unproved oil and gas properties
Accumulated depletion
Oil and gas properties, net
Year Ended December 31,
2016
2017
12,347,400
10,911,167 $
883,451
382,483
(4,170,237)
(4,185,301)
9,060,614
7,108,349 $
$
$
The Company’s oil and gas activities for 2017, 2016 and 2015 were entirely within the United States. Costs incurred in oil and gas
producing activities were as follows (in thousands):
Development (1)
Proved property acquisition
Unproved property acquisition
Exploration
Total
Year Ended December 31,
2016
2017
$
$
799,462 $
4,075
17,629
50,218
871,384 $
518,585 $
797
3,642
45,846
568,870 $
2015
2,137,755
-
29,050
192,422
2,359,227
_____________________
(1) Development costs include non-cash downward adjustments to oil and gas properties of $45 million for 2017 and non-cash additions
to oil and gas properties of $15 million and $48 million for 2016 and 2015, respectively, which relate to estimated future plugging
and abandonment costs of the Company’s oil and gas wells.
Oil and Gas Reserve Quantities
For all years presented, the Company’s independent petroleum engineers independently estimated all of the proved reserve quantities
included in this Annual Report on Form 10-K. In connection with the external petroleum engineers performing their independent reserve
estimations, Whiting furnishes them with the following information for their review: (i) technical support data, (ii) technical analysis of
geologic and engineering support information, (iii) economic and production data, and (iv) the Company’s well ownership interests.
The independent petroleum engineers, Cawley, Gillespie & Associates, Inc., evaluated 100% of the Company’s estimated proved reserve
quantities and their related pre-tax future net cash flows as of December 31, 2017. Proved reserve estimates included herein conform
to the definitions prescribed by the SEC. Estimates of proved reserves are inherently imprecise and are continually subject to revision
based on production history, results of additional exploration and development, price changes and other factors.
98
As of December 31, 2017, all of the Company’s oil and gas reserves are attributable to properties within the United States. A summary
of the Company’s changes in quantities of proved oil and gas reserves for the years ended December 31, 2015, 2016 and 2017 are as
follows:
Proved reserves
Balance—January 1, 2015
Extensions and discoveries
Sales of minerals in place
Production
Revisions to previous estimates
Balance—December 31, 2015
Extensions and discoveries
Sales of minerals in place
Production
Revisions to previous estimates
Balance—December 31, 2016
Extensions and discoveries
Sales of minerals in place
Purchases of minerals in place
Production
Revisions to previous estimates
Balance—December 31, 2017
Proved developed reserves
December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017
Proved undeveloped reserves
December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017
Oil
(MBbl)
NGLs
(MBbl)
Natural Gas
(MMcf)
Total
(MBOE)
643,629
131,134
(33,767)
(47,176)
(97,143)
596,677
48,208
(95,294)
(33,992)
(120,832)
394,767
30,076
(42,137)
157
(29,261)
(16,019)
337,583
333,593
298,444
183,165
179,829
310,036
298,233
211,602
157,754
54,684
26,074
(3,240)
(5,539)
40,968
112,947
12,980
(16,795)
(6,642)
(997)
101,493
14,512
(5,263)
29
(6,978)
35,156
138,949
28,935
55,437
51,888
76,957
25,749
57,510
49,605
61,992
492,020
192,575
(96,891)
(41,129)
119,085
665,660
93,070
(13,797)
(41,438)
12,164
715,659
82,391
(18,116)
283
(41,261)
107,521
846,477
298,237
300,631
337,860
473,829
193,783
365,029
377,799
372,648
780,316
189,304
(53,156)
(59,570)
(36,327)
820,567
76,700
(114,388)
(47,540)
(119,802)
615,537
58,320
(50,419)
233
(43,115)
37,056
617,612
412,234
403,986
291,363
335,758
368,082
416,581
324,174
281,854
Notable changes in proved reserves for the year ended December 31, 2017 included the following:
Extensions and discoveries. In 2017, total extensions and discoveries of 58.3 MMBOE were primarily attributable to successful
drilling in the Williston Basin. Both the new wells drilled in this area as well as the PUD locations added as a result of drilling
increased the Company’s proved reserves.
Sales of minerals in place. Sales of minerals in place totaled 50.4 MMBOE during 2017 and were primarily attributable to the
disposition of the FBIR Assets as further described in the “Acquisitions and Divestitures” footnote in the notes to the consolidated
financial statements.
Revisions to previous estimates. In 2017, revisions to previous estimates increased proved developed and undeveloped reserves
by a net amount of 37.1 MMBOE. Included in these revisions were (i) 88.7 MMBOE of upward adjustments caused by higher
crude oil, NGL and natural gas prices incorporated into the Company’s reserve estimates at December 31, 2017 as compared to
December 31, 2016 and (ii) 51.6 MMBOE of downward adjustments primarily attributable to reservoir analysis and well
performance in the Redtail field.
Notable changes in proved reserves for the year ended December 31, 2016 included the following:
Extensions and discoveries. In 2016, total extensions and discoveries of 76.7 MMBOE were primarily attributable to successful
drilling in the Williston Basin and DJ Basin. Both the new wells drilled in these areas as well as the PUD locations added as a
result of drilling increased the Company’s proved reserves.
99
Sales of minerals in place. Sales of minerals in place totaled 114.4 MMBOE during 2016 and were primarily attributable to the
disposition of the North Ward Estes Properties as further described in the “Acquisitions and Divestitures” footnote in the notes to
the consolidated financial statements.
Revisions to previous estimates. In 2016, revisions to previous estimates decreased proved developed and undeveloped reserves
by a net amount of 119.8 MMBOE. Included in these revisions were (i) 121.6 MMBOE of downward adjustments caused by
lower crude oil, NGL and natural gas prices incorporated into the Company’s reserve estimates at December 31, 2016 as compared
to December 31, 2015 and (ii) 1.8 MMBOE of net upward adjustments attributable to reservoir analysis and well performance.
Notable changes in proved reserves for the year ended December 31, 2015 included the following:
Extensions and discoveries. In 2015, total extensions and discoveries of 189.3 MMBOE were primarily attributable to successful
drilling in the Williston Basin and DJ Basin. Both the new wells drilled in these areas as well as the PUD locations added as a
result of drilling increased the Company’s proved reserves.
Sales of minerals in place. Sales of minerals in place totaled 53.2 MMBOE during 2015 and were primarily attributable to the
disposition of various non-core properties across all of the Company’s operating areas as further described in the “Acquisitions
and Divestitures” footnote in the notes to the consolidated financial statements.
Revisions to previous estimates. In 2015, revisions to previous estimates decreased proved developed and undeveloped reserves
by a net amount of 36.3 MMBOE. Included in these revisions were (i) 82.3 MMBOE of downward adjustments caused by lower
crude oil, NGL and natural gas prices incorporated into the Company’s reserve estimates at December 31, 2015 as compared to
December 31, 2014 and (ii) 46.0 MMBOE of net upward adjustments attributable to reservoir analysis and well performance.
Standardized Measure of Discounted Future Net Cash Flows
The Standardized Measure relating to proved oil and gas reserves and changes in the Standardized Measure relating to proved oil and
natural gas reserves were prepared in accordance with the provisions of FASB ASC Topic 932, Extractive Activities—Oil and Gas.
Future cash inflows as of December 31, 2017, 2016 and 2015 were computed by applying average fiscal-year prices (calculated as the
unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period ended December 31,
2017, 2016 and 2015, respectively) to estimated future production. Future production and development costs are computed by estimating
the expenditures to be incurred in developing and producing the proved oil and natural gas reserves at year end, based on year-end costs
and assuming the continuation of existing economic conditions.
Future income tax expenses are calculated by applying appropriate year-end tax rates to future pretax net cash flows relating to proved
oil and natural gas reserves, less the tax basis of properties involved. Future income tax expenses give effect to permanent differences,
tax credits and loss carryforwards relating to the proved oil and natural gas reserves. Future net cash flows are discounted at a rate of
10% annually to derive the Standardized Measure. This calculation does not necessarily result in an estimate of the fair value of the
Company’s oil and gas properties.
The Standardized Measure relating to proved oil and natural gas reserves is as follows (in thousands):
2017
December 31,
2016
2015
$
Future cash flows
Future production costs
Future development costs
Future income tax expense (1)
Future net cash flows
10% annual discount for estimated timing of cash flows
Standardized measure of discounted future net cash flows
_____________________
(1) Based on the 12-month average oil and natural gas prices used in the computation of pre-tax PV10% as of December 31, 2016,
Whiting’s future net income generated over the life of its proved reserves is expected to be less than its NOL carryforward
deductions and therefore, under the Standardized Measure, there is no deduction for federal or state income taxes.
19,635,532 $
(7,874,590)
(3,022,841)
(474,646)
8,263,455
(4,395,897)
3,867,558 $
16,946,961 $
(7,266,435)
(3,605,977)
-
6,074,549
(3,376,463)
2,698,086 $
29,339,528
(12,344,463)
(6,166,397)
(388,072)
10,440,596
(5,866,225)
4,574,371
$
Future cash flows as shown above are reported without consideration for the effects of open hedge contracts at each period end. If the
effects of hedging transactions were included in the computation, then undiscounted future cash inflows would have increased by
$77 million and $71 million in 2016 and 2015, respectively, and would have had no impact on undiscounted future cash inflows in 2017.
100
The changes in the Standardized Measure relating to proved oil and natural gas reserves are as follows (in thousands):
Beginning of year
Sale of oil and gas produced, net of production costs
Sales of minerals in place
Net changes in prices and production costs
Extensions, discoveries and improved recoveries
Previously estimated development costs incurred during the period
Changes in estimated future development costs
Purchases of minerals in place
Revisions of previous quantity estimates
Net change in income taxes
Accretion of discount
End of year
2017
2,698,086 $
(991,069)
(312,346)
994,749
437,459
542,746
50,215
1,748
277,967
(101,806)
269,809
3,867,558 $
December 31,
2016
4,574,371 $
(781,132)
(1,434,545)
(1,594,183)
730,396
477,830
1,722,897
-
(1,502,416)
47,431
457,437
2,698,086 $
2015
10,843,420
(1,354,054)
(1,414,511)
(11,001,949)
2,078,071
1,625,160
102,499
-
(966,713)
3,578,106
1,084,342
4,574,371
$
$
Future net revenues included in the Standardized Measure relating to proved oil and natural gas reserves incorporate calculated weighted
average sales prices (inclusive of adjustments for quality and location) in effect at December 31, 2017, 2016 and 2015 as follows:
Oil (per Bbl)
NGLs (per Bbl)
Natural Gas (per Mcf)
QUARTERLY FINANCIAL DATA (UNAUDITED)
2017
47.16
14.74
1.97
$
$
$
2016
35.60
10.09
2.61
$
$
$
2015
43.07
15.53
2.83
$
$
$
The following is a summary of the unaudited quarterly financial data for the years ended December 31, 2017 and 2016 (in thousands,
except per share data):
Oil, NGL and natural gas sales
Gross profit (loss) (1)
Net loss
Basic loss per share (2)
Diluted loss per share (2)
Three Months Ended
March 31,
2017
June 30,
2017
September 30,
December 31,
2017
2017
$
$
$
$
$
371,317 $
8,461 $
(86,971) $
(0.96) $
(0.96) $
311,515 $
(21,855) $
(65,981) $
(0.73) $
(0.73) $
324,191 $
(6,769) $
(286,432) $
(3.16) $
(3.16) $
474,412
62,296
(798,278)
(8.80)
(8.80)
Three Months Ended
March 31,
2016
June 30,
2016
September 30,
December 31,
2016
2016
Oil, NGL and natural gas sales
Gross loss (1)
Net loss
Basic loss per share (2)
Diluted loss per share (2)
_____________________
(1) Oil, NGL and natural gas sales less lease operating expense, production taxes and depreciation, depletion and amortization.
(2) All per share amounts have been retroactively adjusted to reflect the Company's one-for-four reverse stock split in November 2017,
289,697 $
(162,898) $
(171,758) $
(3.36) $
(3.36) $
315,554 $
(83,369) $
(693,055) $
(9.89) $
(9.89) $
337,036 $
(98,978) $
(301,046) $
(5.33) $
(5.33) $
342,695
(45,205)
(173,265)
(2.34)
(2.34)
$
$
$
$
$
as described in Note 8 to these consolidated financial statements.
******
101
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”), our management evaluated, with the participation of our President and Chief Executive Officer and our Senior Vice
President and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Exchange Act) as of the end of the year ended December 31, 2017. Based upon their evaluation of these
disclosure controls and procedures, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer
concluded that the disclosure controls and procedures were effective as of December 31, 2017 to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange Commission, and to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including
our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting. The management of Whiting Petroleum Corporation
and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Because of the inherent limitations of internal control over financial reporting, misstatements may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017 using the criteria
set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, our management believes that, as of December 31, 2017, our internal control over financial
reporting was effective based on those criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Deloitte & Touche LLP,
an independent registered public accounting firm, as stated in their report which is included herein on the following page.
Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred
during the quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
102
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Whiting Petroleum Corporation
Denver, Colorado
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Whiting Petroleum Corporation and subsidiaries (the “Company”) as of
December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated
Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the consolidated financial statements as of and for the year ended December 31, 2017 of the Company and our report dated February 22,
2018 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
February 22, 2018
Item 9B. Other Information
None.
103
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information included under the captions “Corporate Governance – Proposal 1 – Election of Directors”, “Corporate Governance –
Board Committee Information – Audit Committee” and “Share Ownership – Section 16(a) Beneficial Ownership Reporting
Compliance” in our definitive Proxy Statement for Whiting Petroleum Corporation’s 2018 Annual Meeting of Stockholders (the “Proxy
Statement”) is incorporated herein by reference. Information with respect to our executive officers appears in Part I of this Annual
Report on Form 10-K.
We have adopted the Whiting Petroleum Corporation Code of Business Conduct and Ethics that applies to our directors, our President
and Chief Executive Officer, our Senior Vice President and Chief Financial Officer, our Controller and Treasurer and other persons
performing similar functions. We have posted a copy of the Whiting Petroleum Corporation Code of Business Conduct and Ethics on
our website at www.whiting.com. The Whiting Petroleum Corporation Code of Business Conduct and Ethics is also available in print
to any stockholder who requests it in writing from the Corporate Secretary of Whiting Petroleum Corporation. We intend to satisfy the
disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from, the Whiting Petroleum Corporation
Code of Business Conduct and Ethics by posting such information on our website at www.whiting.com.
We are not including the information contained on our website as part of, or incorporating it by reference into, this report.
Item 11. Executive Compensation
The information required by this Item is included under the captions “Corporate Governance – Director Compensation” and “Executive
Compensation” (other than “Executive Compensation – Proposal 2 – Advisory Vote on the Compensation of Our Named Executive
Officers”) in the Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item with respect to security ownership of certain beneficial owners and management is included under
the captions “Share Ownership – Directors and Executive Officers” and “Share Ownership – Certain Beneficial Owners” in the Proxy
Statement and is incorporated herein by reference. The following table sets forth information with respect to compensation plans under
which equity securities of Whiting Petroleum Corporation are authorized for issuance as of December 31, 2017.
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by security
holders (1)
Equity compensation plans not approved by
security holders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
the first column)
122,034
$
-
122,034
$
154.32
N/A
154.32
1,137,723 (2)
-
1,137,723 (2)
_____________________
(1) Includes the Whiting Petroleum Corporation 2003 Equity Incentive Plan (the “2003 Equity Plan”) and Whiting Petroleum
Corporation 2013 Equity Incentive Plan, as amended and restated (the “2013 Equity Plan”). Upon shareholder approval of the 2013
Equity Plan in May 2013, the 2003 Equity Plan was terminated, but continues to govern awards that were outstanding at the date
of its termination. Any shares netted or forfeited under the 2003 Equity Plan and any shares forfeited under the 2013 Equity Plan
will be available for future issuance under the 2013 Equity Plan. However, shares netted for tax withholding under the 2013 Equity
Plan will be cancelled and will not be available for future issuance.
(2) Number of securities reduced by 122,034 stock options outstanding and 1,435,567 shares of restricted common stock previously
issued for which the restrictions have not lapsed.
104
Item 13. Certain Relationships, Related Transactions and Director Independence
The information required by this Item is included under the caption “Corporate Governance – Governance Information – Independence
of Directors” and “Corporate Governance – Governance Information – Transactions with Related Persons” in the Proxy Statement and
is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this Item is included under the caption “Audit Matters – Audit and Non-Audit Fees and Services” in the
Proxy Statement and is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a)
1. Financial statements – Refer to the Index to Consolidated Financial Statements included in Item 8 of this Form 10-K for a
list of all financial statements filed as part of this report.
2. Financial statement schedules – All schedules are omitted since the required information is not present, or is not present in
amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated
financial statements or the notes thereto.
3. Exhibits – The exhibits listed in the accompanying index to exhibits are filed as part of this Annual Report on Form 10-K.
(b)
Exhibits
The exhibits listed in the accompanying exhibit index are filed (except where otherwise indicated) as part of this report.
Item 16. Form 10-K Summary
None.
******
105
Exhibit
Number
(2.1)
(3.1)
(3.2)
(4.1)
(4.2)
(4.3)
(4.4)
(4.5)
(4.6)^
(4.7)
(4.8)
(4.9)
(4.10)
EXHIBIT INDEX
Exhibit Description
Purchase and Sale Agreement, dated August 14, 2017, by and between Whiting Resources Corporation, RimRock
Oil & Gas Williston, LLC, Whiting Oil and Gas Corporation and RimRock Oil & Gas Williston Resources, Inc.,
effective as of September 1, 2017 [Incorporated by reference to Exhibit 2.1 to Whiting Petroleum Corporation’s
Current Report on Form 8-K filed on September 6, 2017 (File No. 001-31899)].
Restated Certificate of Incorporation of Whiting Petroleum Corporation [Incorporated by reference to Exhibit 3.2 to
Whiting Petroleum Corporation’s Current Report on Form 8-K filed on November 9, 2017 (File No. 001-31899)].
Amended and Restated By-laws of Whiting Petroleum Corporation, effective October 24, 2017 [Incorporated by
reference to Exhibit 3.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 26, 2017
(File No. 001-31899)].
Sixth Amended and Restated Credit Agreement, dated as of August 27, 2014, among Whiting Petroleum Corporation,
Whiting Oil and Gas Corporation, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent,
and the various other agents party thereto [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum
Corporation’s Current Report on Form 8-K filed on August 28, 2014 (File No. 001-31899)].
First Amendment to Sixth Amended and Restated Credit Agreement, dated as of April 27, 2015, among Whiting
Petroleum Corporation, Whiting Oil and Gas Corporation, the lenders party thereto, JPMorgan Chase Bank, N.A., as
Administrative Agent, and the various other agents party thereto [Incorporated by reference to Exhibit 4.1 to Whiting
Petroleum Corporation’s Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2015 (File No. 001-
31899)].
Second Amendment to Sixth Amended and Restated Credit Agreement, dated as of October 13, 2015, among Whiting
Petroleum Corporation, its subsidiary Whiting Oil and Gas Corporation, JPMorgan Chase Bank, N.A., as
Administrative Agent, and the lenders party thereto [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum
Corporation’s Current Report on Form 8-K filed on October 14, 2015 (File No. 001-31899)].
Third Amendment to Sixth Amended and Restated Credit Agreement and First Amendment to Amended and Restated
Guaranty and Collateral Agreement, dated as of March 25, 2016, among Whiting Petroleum Corporation, its
subsidiary Whiting Oil and Gas Corporation, certain other subsidiaries of Whiting Petroleum Corporation, JPMorgan
Chase Bank, N.A., as Administrative Agent, and the other agents and lenders party thereto [Incorporated by reference
to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on March 28, 2016 (File No.
001-31899)].
Fifth Amendment to Sixth Amended and Restated Credit Agreement, dated as of December 12, 2017, among Whiting
Petroleum Corporation, its subsidiary Whiting Oil and Gas Corporation, certain other subsidiaries of Whiting
Petroleum Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents and lenders
party thereto [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report on Form
8-K filed on December 13, 2017 (File No. 001-31899)].
Amended and Restated Guaranty and Collateral Agreement, dated as of December 8, 2014, among Whiting
Petroleum Corporation, Whiting Oil and Gas Corporation, Kodiak Oil & Gas Corp., Kodiak Oil & Gas (USA) Inc.,
Kodiak Williston, LLC and JPMorgan Chase Bank, N.A., as Administrative Agent [Incorporated by reference to
Exhibit 4.16 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on December 8, 2014 (File No.
001-31899)].
Maximum Credit Amount Increase Agreement, dated as of December 19, 2014, among Whiting Petroleum
Corporation, Whiting Oil and Gas Corporation, the lenders party thereto, and JPMorgan Chase Bank, N.A., as
Administrative Agent [Incorporated by reference to Exhibit 4.1 to Whiting Petroleum Corporation’s Current Report
on Form 8-K filed on December 22, 2014 (File No. 001-31899)].
Indenture, dated September 12, 2013, among Whiting Petroleum Corporation, Whiting Oil and Gas Corporation and
The Bank of New York Mellon Trust Company, N.A., as Trustee [Incorporated by reference to Exhibit 4.1 to Whiting
Petroleum Corporation’s Current Report on Form 8-K filed on September 12, 2013 (File No. 001-31899)].
Second Supplemental Indenture, dated September 12, 2013, among Whiting Petroleum Corporation, Whiting Oil and
Gas Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, creating the 5.75% Senior
Notes due 2021 [Incorporated by reference to Exhibit 4.3 to Whiting Petroleum Corporation’s Current Report on
Form 8-K filed on September 12, 2013 (File No. 001-31899)].
Supplemental Indenture and Amendment – Subsidiary Guarantee, dated as of December 11, 2014, among Whiting
Petroleum Corporation, Whiting Canadian Holding Company ULC, Whiting Resources Corporation, Whiting US
Holding Company and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the 5.75% Senior
Notes Due 2021 [Incorporated by reference to Exhibit 4.3 to Whiting Petroleum Corporation’s Current Report on
Form 8-K filed on December 12, 2014 (File No. 001-31899)].
106
Exhibit
Number
(4.11)
(4.12)
(4.13)
(10.1)*
(10.2)*
(10.3)*
(10.4)*
(10.5)*
(10.6)*
(10.7)*
(10.8)*
(10.9)*
(10.10)*
(10.11)*
(10.12)*
(10.13)*
(10.14)*
(10.15)*
Exhibit Description
Fourth Supplemental Indenture, dated March 27, 2015, among Whiting Petroleum Corporation, Whiting Oil and Gas
Corporation, Whiting US Holding Company, Whiting Canadian Holding Company ULC, Whiting Resources
Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, creating the 6.25% Senior Notes
due 2023 [Incorporated by reference to Exhibit 4.3 to Whiting Petroleum Corporation’s Current Report on Form 8-K
filed on March 30, 2015 (File No. 001-31899)].
Fifth Supplemental Indenture, dated December 27, 2017, among Whiting Petroleum Corporation, Whiting Oil and
Gas Corporation, Whiting US Holding Company, Whiting Canadian Holding Company ULC, Whiting Resources
Corporation and the Bank of New York Mellon Trust Company, N.A. as Trustee, creating the 6.625% Senior Notes
due 2026 [Incorporated by reference to Exhibit 4.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K
filed on December 27, 2017 (File No. 001-31899)].
Indenture, dated March 27, 2015, among Whiting Petroleum Corporation, the Guarantors and The Bank of New York
Mellon Trust Company, N.A., as Trustee, creating the 1.25% Convertible Senior Notes due 2020 [Incorporated by
reference to Exhibit 4.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on March 30, 2015
(File No. 001-31899)].
Whiting Petroleum Corporation 2003 Equity Incentive Plan, as amended through October 23, 2007 [Incorporated by
reference to Exhibit 10.2 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on October 29, 2007
(File No. 001-31899)].
Whiting Petroleum Corporation 2013 Equity Incentive Plan, as amended and restated effective as of November 8,
2017 [Incorporated by reference to Exhibit 10.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K
filed on November 9, 2017 (File No. 001-31899)].
Summary of Non-Employee Director Compensation for Whiting Petroleum Corporation.
Form of Indemnification Agreement for directors and officers of Whiting Petroleum Corporation [Incorporated by
reference to Exhibit 10.1 to Whiting Petroleum Corporation’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008 (File No. 001-31899)].
Form of Executive Employment and Severance Agreement for executive officers of Whiting Petroleum Corporation
[Incorporated by reference to Exhibit 10.1 to Whiting Petroleum Corporation’s Current Report on Form 8-K filed on
January 5, 2015 (File No. 001-31899)].
Form of Stock Option Agreement pursuant to the Whiting Petroleum Corporation 2003 Equity Incentive Plan
[Incorporated by reference to Exhibit 10.14 to Whiting Petroleum Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2008 (File No. 001-31899)].
Form of Restricted Stock Agreement pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan for
performance vesting awards [Incorporated by reference to Exhibit 10.14 to Whiting Petroleum Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2013 (File No. 001-31899)].
Form of Restricted Stock Agreement pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan for
time-based vesting awards [Incorporated by reference to Exhibit 10.10 to Whiting Petroleum Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2016 (File No. 001-31899)].
Form of Stock Option Agreement pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive Plan
[Incorporated by reference to Exhibit 10.16 to Whiting Petroleum Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2013 (File No. 001-31899)].
Form of Performance Share Award Agreement pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive
Plan granted prior to 2018 [Incorporated by reference to Exhibit 10.12 to Whiting Petroleum Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2016 (File No. 001-31899)].
Form of Performance Share Award Agreement pursuant to the Whiting Petroleum Corporation 2013 Equity Incentive
Plan granted in 2018 and after.
Executive Employment and Severance Agreement, between Bradley J. Holly and Whiting Petroleum Corporation,
effective as of November 1, 2017 [Incorporated by reference to Exhibit 10.1 to Whiting Petroleum Corporation’s
Current Report on Form 8-K filed on October 26, 2017 (File No. 001-31899)].
Amended and Restated Executive Employment and Severance Agreement, between James J. Volker and Whiting
Petroleum Corporation, effective as of November 1, 2017 [Incorporated by reference to Exhibit 10.2 to Whiting
Petroleum Corporation’s Current Report on Form 8-K filed on October 26, 2017 (File No. 001-31899)].
Form of Restricted Stock Unit Award Agreement (Cash-Settled) pursuant to the Whiting Petroleum Corporation 2013
Equity Incentive Plan [Incorporated by reference to Exhibit 10.3 to Whiting Petroleum Corporation’s Current Report
on Form 8-K filed on October 26, 2017 (File No. 001-31899)].
Form of Restricted Stock Unit Award Agreement (Stock-Settled) pursuant to the Whiting Petroleum Corporation
2013 Equity Incentive Plan [Incorporated by reference to Exhibit 10.4 to Whiting Petroleum Corporation’s Current
Report on Form 8-K filed on October 26, 2017 (File No. 001-31899)].
107
Exhibit
Number
(10.16)
(21)
(23.1)
(23.2)
(31.1)
(31.2)
(32.1)
(32.2)
(99.1)
(99.2)
(101)
Exhibit Description
Registration Rights Agreement, dated as of December 27, 2017, by and among Whiting Petroleum Corporation,
Whiting Oil and Gas Corporation, Whiting US Holding Company, Whiting Canadian Holding Company ULC,
Whiting Resources Corporation and J.P. Morgan Securities LLC, for itself and as representative of the initial
purchasers named therein [Incorporated by reference to Exhibit 10.1 to Whiting Petroleum Corporation’s Current
Report on Form 8-K filed on December 27, 2017 (File No. 001-31899).
Significant Subsidiaries of Whiting Petroleum Corporation.
Consent of Deloitte & Touche LLP.
Consent of Cawley, Gillespie & Associates, Inc., Independent Petroleum Engineers.
Certification by the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
Certification by the Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act.
Written Statement of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
Written Statement of the Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
Proxy Statement for the 2018 Annual Meeting of Stockholders, to be filed within 120 days of December 31, 2017
[To be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after December 31,
2017; except to the extent specifically incorporated by reference, the Proxy Statement for the 2018 Annual Meeting
of Stockholders shall not be deemed to be filed with the Securities and Exchange Commission as part of this Annual
Report on Form 10-K].
Report of Cawley, Gillespie & Associates, Inc., Independent Petroleum Engineers relating to Total Proved Reserves,
dated January 9, 2018.
The following materials from Whiting Petroleum Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2017 are filed herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the
Consolidated Balance Sheets as of December 31, 2017 and 2016, (ii) the Consolidated Statements of Operations for
the Years Ended December 31, 2017, 2016 and 2015, (iii) the Consolidated Statements of Cash Flows for the Years
Ended December 31, 2017, 2016 and 2015, (iv) the Consolidated Statements of Equity for the Years Ended December
31, 2017, 2016 and 2015, and (v) Notes to Consolidated Financial Statements.
_____________________
*
^
A management contract or compensatory plan or arrangement.
Kodiak Oil & Gas Corp. is now known as Whiting Canadian Holding Company ULC; Kodiak Oil & Gas (USA) Inc. is now
known as Whiting Resources Corporation; Kodiak Williston, LLC has merged with Whiting Resources Corporation; KOG
Finance, LLC has been dissolved; and KOG Oil & Gas ULC has been liquidated.
108
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, on this 22nd day of February, 2018.
SIGNATURES
WHITING PETROLEUM CORPORATION
By
/s/ Bradley J. Holly
Bradley J. Holly
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Bradley J. Holly
Bradley J. Holly
/s/ Michael J. Stevens
Michael J. Stevens
/s/ Sirikka R. Lohoefener
Sirikka R. Lohoefener
/s/ James J. Volker
James J. Volker
/s/ Thomas L. Aller
Thomas L. Aller
/s/ James E. Catlin
James E. Catlin
/s/ Philip E. Doty
Philip E. Doty
/s/ William N. Hahne
William N. Hahne
/s/ Carin S. Knickel
Carin S. Knickel
/s/ Michael B. Walen
Michael B. Walen
Title
President and Chief Executive Officer and
Director
(Principal Executive Officer)
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Controller and Treasurer
(Principal Accounting Officer)
Date
February 22, 2018
February 22, 2018
February 22, 2018
Chairman and Director
February 22, 2018
February 22, 2018
February 22, 2018
February 22, 2018
February 22, 2018
February 22, 2018
February 22, 2018
Director
Director
Director
Director
Director
Director
109
1700 Broadway, Suite 2300
Denver, Colorado 80290-2300
Tel: 303.837.1661
www.whiting.com
NYSE: WLL