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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2020
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: 001-08246
Southwestern Energy Company
(Exact name of registrant as specified in its charter)
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Delaware | | 71-0205415 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
10000 Energy Drive
Spring, Texas 77389
(Address of principal executive offices)(Zip Code)
(832) 796-1000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, Par Value $0.01 | | SWN | | New York Stock Exchange |
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| | | | | | | | |
Class | | Outstanding as of October 27, 2020 |
Common Stock, Par Value $0.01 | | 605,559,524 |
SOUTHWESTERN ENERGY COMPANY
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
All statements, other than historical fact or present financial information, may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements that address activities, outcomes and other matters that should or may occur in the future, including, without limitation, statements regarding the financial position, business strategy, production and reserve growth and other plans and objectives for our future operations, are forward-looking statements. Although we believe the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements
are not guarantees of future performance. We have no obligation and make no undertaking to publicly update or revise any forward-looking statements, except as may be required by law.
Forward-looking statements include the items identified in the preceding paragraph, information concerning possible or assumed future results of operations and other statements in this Quarterly Report on Form 10-Q (this “Quarterly Report”) identified by words such as “anticipate,” “intend,” “plan,” “project,” “estimate,” “continue,” “potential,” “should,” “could,” “may,” “will,” “objective,” “guidance,” “outlook,” “effort,” “expect,” “believe,” “predict,” “budget,” “projection,” “goal,” “forecast,” “model,” “target” or similar words.
You should not place undue reliance on forward-looking statements. They are subject to known and unknown risks, uncertainties and other factors that may affect our operations, markets, products, services and prices and cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with forward-looking statements, risks, uncertainties and factors that could cause our actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:
•the timing and extent of changes in market conditions and prices for natural gas, oil and natural gas liquids (“NGLs”), including regional basis differentials and the impact of reduced demand for our production and products in which our production is a component due to governmental and societal actions taken in response to the COVID-19 pandemic;
•our ability to fund our planned capital investments;
•a change in our credit rating, an increase in interest rates and any adverse impacts from the discontinuation of the London Interbank Offered Rate (“LIBOR”);
•the extent to which lower commodity prices impact our ability to service or refinance our existing debt;
•the impact of volatility in the financial markets or other global economic factors, including the impact of COVID-19;
•difficulties in appropriately allocating capital and resources among our strategic opportunities;
•the timing and extent of our success in discovering, developing, producing and estimating reserves;
•our ability to maintain leases that may expire if production is not established or profitably maintained;
•our ability to realize the expected benefits from acquisitions, including the Merger (as defined below);
•the consummation of or failure to consummate the Merger and the timing thereof;
•costs in connection with the Merger;
•integration of operations and results subsequent to the Merger;
•our ability to refinance the Montage Notes (as defined below) and the borrowings under Montage’s senior secured revolving credit facility;
•our ability to transport our production to the most favorable markets or at all;
•availability and costs of personnel and of products and services provided by third parties;
•the impact of government regulation, including changes in law, the ability to obtain and maintain permits, any increase in severance or similar taxes, and legislation or regulation relating to hydraulic fracturing, climate and over-the-counter derivatives;
•the impact of the adverse outcome of any material litigation against us or judicial decisions that affect us or our industry generally;
•the effects of weather;
•increased competition;
•the financial impact of accounting regulations and critical accounting policies;
•the comparative cost of alternative fuels;
•credit risk relating to the risk of loss as a result of non-performance by our counterparties; and
•any other factors listed in the reports we have filed and may file with the Securities and Exchange Commission (“SEC”).
Should one or more of the risks or uncertainties described above or elsewhere in this Quarterly Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically disclaim all responsibility to update publicly any information contained in a forward-looking statement or any forward-looking statement in its entirety and therefore disclaim any resulting liability for potentially related damages.
All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions, except share/per share amounts) | 2020 | | 2019 | | 2020 | | 2019 |
Operating Revenues: | | | | | | | |
Gas sales | $ | 199 | | | $ | 238 | | | $ | 611 | | | $ | 943 | |
Oil sales | 40 | | | 67 | | | 111 | | | 153 | |
NGL sales | 68 | | | 52 | | | 158 | | | 191 | |
Marketing | 219 | | | 279 | | | 645 | | | 1,004 | |
Other | 1 | | | — | | | 4 | | | 2 | |
| 527 | | | 636 | | | 1,529 | | | 2,293 | |
Operating Costs and Expenses: | | | | | | | |
Marketing purchases | 226 | | | 288 | | | 675 | | | 1,022 | |
Operating expenses | 202 | | | 189 | | | 577 | | | 523 | |
General and administrative expenses | 31 | | | 42 | | | 89 | | | 119 | |
Montage acquisition-related expenses | 3 | | | — | | | 3 | | | — | |
Restructuring charges | — | | | 4 | | | 12 | | | 9 | |
Loss on sale of operating assets | — | | | — | | | — | | | 3 | |
Depreciation, depletion and amortization | 70 | | | 125 | | | 267 | | | 352 | |
Impairments | 361 | | | 2 | | | 2,495 | | | 8 | |
Taxes, other than income taxes | 15 | | | 15 | | | 38 | | | 51 | |
| 908 | | | 665 | | | 4,156 | | | 2,087 | |
Operating Income (Loss) | (381) | | | (29) | | | (2,627) | | | 206 | |
Interest Expense: | | | | | | | |
Interest on debt | 43 | | | 42 | | | 123 | | | 125 | |
Other interest charges | 2 | | | 2 | | | 7 | | | 5 | |
Interest capitalized | (23) | | | (27) | | | (67) | | | (84) | |
| 22 | | | 17 | | | 63 | | | 46 | |
| | | | | | | |
Gain (Loss) on Derivatives | (192) | | | 100 | | | 38 | | | 220 | |
Gain on Early Extinguishment of Debt | — | | | 7 | | | 35 | | | 7 | |
Other Income (Loss), Net | 2 | | | (2) | | | 3 | | | (7) | |
| | | | | | | |
Income (Loss) Before Income Taxes | (593) | | | 59 | | | (2,614) | | | 380 | |
Provision (Benefit) for Income Taxes: | | | | | | | |
Current | — | | | (1) | | | (2) | | | (1) | |
Deferred | — | | | 11 | | | 408 | | | (400) | |
| — | | | 10 | | | 406 | | | (401) | |
Net Income (Loss) | $ | (593) | | | $ | 49 | | | $ | (3,020) | | | $ | 781 | |
| | | | | | | |
| | | | | | | |
Earnings (Loss) Per Common Share: | | | | | | | |
Basic | $ | (1.04) | | | $ | 0.09 | | | $ | (5.48) | | | $ | 1.45 | |
Diluted | $ | (1.04) | | | $ | 0.09 | | | $ | (5.48) | | | $ | 1.44 | |
| | | | | | | |
Weighted Average Common Shares Outstanding: | | | | | | | |
Basic | 571,872,413 | | | 539,221,101 | | | 551,162,559 | | | 539,315,170 | |
Diluted | 571,872,413 | | | 540,038,187 | | | 551,162,559 | | | 540,442,649 | |
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) | $ | (593) | | | $ | 49 | | | $ | (3,020) | | | $ | 781 | |
| | | | | | | |
Change in value of pension and other postretirement liabilities: | | | | | | | |
Amortization of prior service cost and net loss included in net periodic pension cost (1) | 1 | | | 1 | | | 1 | | | 5 | |
| | | | | | | |
Comprehensive income (loss) | $ | (592) | | | $ | 50 | | | $ | (3,019) | | | $ | 786 | |
(1)Tax benefits for the three months ended September 30, 2020 were immaterial. Net of less than $1 million in tax benefits for the nine months ended September 30, 2020 and the three months ended September 30, 2019 and $2 million in tax benefits for the nine months ended September 30, 2019. In 2019, primarily related to settlement of pension assets.
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| | | |
ASSETS | (in millions) |
Current assets: | | | |
Cash and cash equivalents | $ | 95 | | | $ | 5 | |
Accounts receivable, net | 239 | | | 345 | |
Derivative assets | 238 | | | 278 | |
Other current assets | 41 | | | 51 | |
Total current assets | 613 | | | 679 | |
Natural gas and oil properties, using the full cost method, including $1,379 million as of September 30, 2020 and $1,506 million as of December 31, 2019 excluded from amortization | 25,969 | | | 25,250 | |
| | | |
Other | 500 | | | 520 | |
Less: Accumulated depreciation, depletion and amortization | (23,247) | | | (20,503) | |
Total property and equipment, net | 3,222 | | | 5,267 | |
Operating lease assets | 145 | | | 159 | |
Deferred tax assets | — | | | 407 | |
Other long-term assets | 177 | | | 205 | |
Total long-term assets | 322 | | | 771 | |
TOTAL ASSETS | $ | 4,157 | | | $ | 6,717 | |
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
| | | |
Accounts payable | $ | 416 | | | $ | 525 | |
Taxes payable | 47 | | | 59 | |
Interest payable | 56 | | | 51 | |
| | | |
Derivative liabilities | 287 | | | 125 | |
Current operating lease liabilities | 33 | | | 34 | |
Other current liabilities | 30 | | | 54 | |
Total current liabilities | 869 | | | 848 | |
Long-term debt | 2,450 | | | 2,242 | |
Long-term operating lease liabilities | 107 | | | 119 | |
Long-term derivative liabilities | 188 | | | 111 | |
Pension and other postretirement liabilities | 35 | | | 43 | |
Other long-term liabilities | 124 | | | 108 | |
Total long-term liabilities | 2,904 | | | 2,623 | |
Commitments and contingencies (Note 12) | | | |
Equity: | | | |
Common stock, $0.01 par value; 1,250,000,000 shares authorized; issued 649,899,653 shares as of September 30, 2020 and 585,555,923 shares as of December 31, 2019 | 7 | | | 6 | |
| | | |
Additional paid-in capital | 4,882 | | | 4,726 | |
Accumulated deficit | (4,271) | | | (1,251) | |
Accumulated other comprehensive loss | (32) | | | (33) | |
Common stock in treasury, 44,353,224 shares as of September 30, 2020 and December 31, 2019 | (202) | | | (202) | |
Total equity | 384 | | | 3,246 | |
TOTAL LIABILITIES AND EQUITY | $ | 4,157 | | | $ | 6,717 | |
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | |
| For the nine months ended September 30, |
(in millions) | 2020 | | 2019 |
Cash Flows From Operating Activities: | | | |
Net income (loss) | $ | (3,020) | | | $ | 781 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation, depletion and amortization | 267 | | | 352 | |
Amortization of debt issuance costs | 6 | | | 5 | |
Impairments | 2,495 | | | 8 | |
Deferred income taxes | 408 | | | (400) | |
(Gain) loss on derivatives, unsettled | 272 | | | (108) | |
Stock-based compensation | 2 | | | 6 | |
Gain on early extinguishment of debt | (35) | | | (7) | |
Loss on sale of assets | — | | | 3 | |
Other | 3 | | | 11 | |
Change in assets and liabilities: | | | |
Accounts receivable | 106 | | | 257 | |
Accounts payable | (129) | | | (124) | |
Taxes payable | (12) | | | (3) | |
Interest payable | 3 | | | 2 | |
Inventories | 3 | | | (2) | |
Other assets and liabilities | 38 | | | (42) | |
Net cash provided by operating activities | 407 | | | 739 | |
| | | |
Cash Flows From Investing Activities: | | | |
Capital investments | (700) | | | (877) | |
Proceeds from sale of property and equipment | 2 | | | 42 | |
| | | |
Net cash used in investing activities | (698) | | | (835) | |
| | | |
Cash Flows From Financing Activities: | | | |
| | | |
Payments on long-term debt | (72) | | | (43) | |
Payments on revolving credit facility | (1,449) | | | — | |
Borrowings under revolving credit facility | 1,415 | | | — | |
Change in bank drafts outstanding | (9) | | | (11) | |
Proceeds from issuance of long-term debt | 350 | | | — | |
Debt issuance costs | (5) | | | — | |
Purchase of treasury stock | — | | | (21) | |
Proceeds from issuance of common stock, net | 152 | | | — | |
Cash paid for tax withholding | (1) | | | (1) | |
| | | |
Net cash provided by (used in) financing activities | 381 | | | (76) | |
| | | |
Increase (decrease) in cash and cash equivalents | 90 | | | (172) | |
Cash and cash equivalents at beginning of year | 5 | | | 201 | |
Cash and cash equivalents at end of period | $ | 95 | | | $ | 29 | |
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Common Stock in Treasury | | Total |
| Shares Issued | | Amount | | | | | | | Shares | | Amount | |
| | | | | | | | | | | | | | | | | |
| (in millions, except share amounts) |
Balance at December 31, 2019 | 585,555,923 | | | $ | 6 | | | | | $ | 4,726 | | | $ | (1,251) | | | $ | (33) | | | 44,353,224 | | | $ | (202) | | | $ | 3,246 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | |
Net loss | — | | | — | | | | | — | | | (1,547) | | | — | | | — | | | — | | | (1,547) | |
Other comprehensive income | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Total comprehensive loss | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | (1,547) | |
Stock-based compensation | — | | | — | | | | | 1 | | | — | | | — | | | — | | | — | | | 1 | |
| | | | | | | | | | | | | | | | | |
Issuance of restricted stock | 12,397 | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Cancellation of restricted stock | (167,130) | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Restricted units granted | 1,005,976 | | | — | | | | | 1 | | | — | | | — | | | — | | | — | | | 1 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Tax withholding – stock compensation | (383,731) | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance at March 31, 2020 | 586,023,435 | | | $ | 6 | | | | | $ | 4,728 | | | $ | (2,798) | | | $ | (33) | | | 44,353,224 | | | $ | (202) | | | $ | 1,701 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | |
Net loss | — | | | — | | | | | — | | | (880) | | | — | | | — | | | — | | | (880) | |
Other comprehensive income | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Total comprehensive loss | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | (880) | |
Stock-based compensation | — | | | — | | | | | 1 | | | — | | | — | | | — | | | — | | | 1 | |
Issuance of restricted stock | 222,489 | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Cancellation of restricted stock | (1,079,515) | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Restricted units granted | 1,649,294 | | | — | | | | | 2 | | | — | | | — | | | — | | | — | | | 2 | |
Tax withholding – stock compensation | (222,163) | | | — | | | | | (1) | | | — | | | — | | | — | | | — | | | (1) |
Balance at June 30, 2020 | 586,593,540 | | | $ | 6 | | | | | $ | 4,730 | | | $ | (3,678) | | | $ | (33) | | | 44,353,224 | | | $ | (202) | | | $ | 823 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | |
Net loss | — | | | — | | | | | — | | | (593) | | | — | | | — | | | — | | | (593) | |
Other comprehensive income | — | | | — | | | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
Total comprehensive loss | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | (592) | |
Stock-based compensation | — | | | — | | | | | 1 | | | — | | | — | | | — | | | — | | | 1 | |
Issuance of common stock | 63,250,000 | | | 1 | | | | | 151 | | | — | | | — | | | — | | | — | | | 152 | |
Issuance of restricted stock | 63,344 | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Cancellation of restricted stock | (5,196) | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Treasury stock | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Tax withholding – stock compensation | (2,035) | | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance at Balance at September 31, 2020 | 649,899,653 | | | $ | 7 | | | | | $ | 4,882 | | | $ | (4,271) | | | $ | (32) | | | 44,353,224 | | | $ | (202) | | | $ | 384 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Common Stock in Treasury | | Total |
| Shares Issued | | Amount | | | | | Shares | | Amount | |
| | | | | | | | | | | | | | | |
| (in millions, except share amounts) |
Balance at December 31, 2018 | 585,407,107 | | | $ | 6 | | | $ | 4,715 | | | $ | (2,142) | | | $ | (36) | | | 39,092,537 | | | $ | (181) | | | $ | 2,362 | |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | 594 | | | — | | | — | | | — | | | 594 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 594 | |
Stock-based compensation | — | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 3 | |
| | | | | | | | | | | | | | | |
Issuance of restricted stock | 8,798 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Cancellation of restricted stock | (128,324) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Treasury stock | — | | | — | | | — | | | — | | | — | | | 5,260,687 | | | (21) | | | (21) | |
Performance units vested | 535,802 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Tax withholding – stock compensation | (274,657) | | | — | | | (1) | | | — | | | — | | | — | | | — | | | (1) | |
Balance at March 31, 2019 | 585,548,726 | | | $ | 6 | | | $ | 4,717 | | | $ | (1,548) | | | $ | (36) | | | 44,353,224 | | | $ | (202) | | | $ | 2,937 | |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | 138 | | | — | | | — | | | — | | | 138 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 4 | | | — | | | — | | | 4 | |
Total comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 142 | |
Stock-based compensation | — | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 3 | |
Issuance of restricted stock | 6,424 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Cancellation of restricted stock | (72,555) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Tax withholding – stock compensation | (4,250) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance at June 30, 2019 | 585,478,345 | | | $ | 6 | | | $ | 4,720 | | | $ | (1,410) | | | $ | (32) | | | 44,353,224 | | | $ | (202) | | | $ | 3,082 | |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | 49 | | | — | | | — | | | — | | | 49 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
Total comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 50 | |
Stock-based compensation | — | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 3 | |
Issuance of restricted stock | 205,883 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Cancellation of restricted stock | (33,851) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Tax withholding – stock compensation | (12,957) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance at Balance at September 30, 2019 | 585,637,420 | | | $ | 6 | | | $ | 4,723 | | | $ | (1,361) | | | $ | (31) | | | 44,353,224 | | | $ | (202) | | | $ | 3,135 | |
The accompanying notes are an integral part of these consolidated financial statements.
SOUTHWESTERN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Southwestern Energy Company (including its subsidiaries, collectively “Southwestern” or the “Company”) is an independent energy company engaged in natural gas, oil and NGL exploration, development and production (“E&P”). The Company is also focused on creating and capturing additional value through its marketing business (“Marketing”), which was previously referred to as “Midstream” when it included the operation of gathering systems. Southwestern conducts most of its business through subsidiaries and operates principally in two segments: E&P and Marketing.
E&P. Southwestern’s primary business is the exploration for and production of natural gas, oil and NGLs, with ongoing operations focused on the development of unconventional natural gas and oil reservoirs located in Pennsylvania and West Virginia. The Company’s operations in northeast Pennsylvania, herein referred to as “Northeast Appalachia,” are primarily focused on the unconventional natural gas reservoir known as the Marcellus Shale. Operations in West Virginia and southwest Pennsylvania, herein referred to as “Southwest Appalachia,” are focused on the Marcellus Shale, the Utica and the Upper Devonian unconventional natural gas and oil reservoirs. Collectively, Southwestern refers to its properties located in Pennsylvania and West Virginia as “Appalachia.” The Company also operates drilling rigs located in Pennsylvania and West Virginia, and provides certain oilfield products and services, principally serving the Company’s E&P activities through vertical integration.
Marketing. Southwestern’s marketing activities capture opportunities that arise through the marketing and transportation of natural gas, oil and NGLs primarily produced in its E&P operations.
The accompanying consolidated financial statements were prepared using accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information relating to the Company’s organization and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been appropriately condensed or omitted in this Quarterly Report. The Company believes the disclosures made are adequate to make the information presented not misleading.
The consolidated financial statements contained in this report include all normal and recurring material adjustments that, in the opinion of management, are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented herein. It is recommended that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Annual Report”).
The Company’s significant accounting policies, which have been reviewed and approved by the Audit Committee of the Company’s Board of Directors, are summarized in Note 1 in the Notes to the Consolidated Financial Statements included in the Company’s 2019 Annual Report.
(2) ACQUISITION
On August 12, 2020, Southwestern and Montage Resources Corporation (“Montage”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Montage will merge with and into Southwestern, with Southwestern continuing as the surviving company (the “Merger”). The Company will acquire at the effective time of the Merger (the “Effective Time”) all of the outstanding shares of common stock of Montage in exchange for 1.8656 shares of common stock of the Company per share of Montage common stock. No fractional Southwestern common shares will be issued in the Merger, and holders of Montage common shares will, instead, receive cash in lieu of fractional Southwestern common shares, if any. This exchange ratio is fixed and will not be adjusted for changes in the Company’s stock price. Following the closing of the Merger, Southwestern’s existing shareholders and Montage’s existing shareholders will own approximately 90% and 10%, respectively, of the outstanding shares of the combined company. The transaction is expected to close in the fourth quarter of 2020, subject to customary closing conditions, including the approval of the Montage shareholders.
The Merger Agreement provides that, upon consummation of the Merger, the directors and officers of Southwestern immediately prior to the Effective Time shall, from and after the Effective Time, be the directors and officers of the combined company. Southwestern will continue to be headquartered in Spring, Texas.
In August 2020, the Company completed an underwritten public offering of 63,250,000 shares of common stock with an offering price to the public of $2.50 per share, with net proceeds from the offering totaling $152 million after deducting underwriting discounts and offering expenses. Also in August 2020, the Company completed an underwritten public offering of
$350 million aggregate principal amount of 8.375% senior notes due 2028 (the “2028 Notes”). The net proceeds from the offering, after deducting the underwriting discount and estimated offering expenses, were approximately $345 million. The Company intends to use the net proceeds from the debt offering, together with the net proceeds received from the common stock offering and borrowings under its revolving credit facility, to fund a redemption of $510 million aggregate principal amount of Montage’s outstanding 8.875% Senior Notes due 2023 (the “Montage Notes”) and related accrued interest in connection with the closing of the Merger. Pending the consummation of the Merger, a portion of these net proceeds has temporarily been used to repay revolving credit facility borrowings until the anticipated redemption of the Montage Notes. The 2028 Notes are subject to special mandatory redemption at par plus accrued and unpaid interest if the Merger does not close on or prior to February 12, 2021 or the Company determines in its sole discretion that the consummation of the Merger cannot or is not reasonably likely to be satisfied by February 12, 2021.
The Company has recorded approximately $3 million in transaction related expenses for the three and nine months ended September 30, 2020.
(3) RESTRUCTURING CHARGES
On February 4, 2020, the Company notified employees of a workforce reduction plan as a result of a strategic realignment of the Company’s organizational structure. This reduction was substantially complete by the end of the first quarter of 2020. Affected employees were offered a severance package, which included a one-time payment depending on length of service and, if applicable, the current value of unvested long-term incentive awards that were forfeited. These costs were recognized as restructuring charges for the nine months ended September 30, 2020, and were substantially complete by the end of the first quarter of 2020.
In December 2018, the Company closed on the sale of the equity in certain of its subsidiaries that owned and operated its Fayetteville Shale E&P and related midstream gathering assets in Arkansas. As part of this transaction, most employees associated with those assets became employees of the buyer although the employment of some was terminated. All affected employees were offered a severance package, which included a one-time cash payment depending on length of service and, if applicable, the current value of a portion of equity awards that were forfeited. As of September 30, 2019, the Company had substantially completed the Fayetteville Shale sale-related employment terminations.
As a result of the Fayetteville Shale sale, the Company relocated certain employees and infrastructure to other locations and began the process of consolidating and reorganizing its office space. These charges related to office consolidation and reorganization have been recognized as restructuring charges.
In July 2019, the Company terminated its existing lease agreement in its headquarters office building and entered into a new 10-year lease agreement for a smaller portion of the building. Approximately $3 million and $5 million of the fees associated with the Company’s headquarters office consolidation and other office consolidation are reflected as restructuring charges for the three and nine months ended September 30, 2019, respectively. The Company also recognized additional severance costs in the third quarter of 2019 related to continued organizational restructuring.
The following table presents a summary of the restructuring charges included in Operating Income (Loss) for the three and nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | 2020 | | 2019 | | 2020 | | 2019 |
Severance (including payroll taxes) | $ | — | | | $ | 1 | | | $ | 12 | | | $ | 4 | |
Office consolidation | — | | | 3 | | | — | | | 5 | |
| | | | | | | |
Total restructuring charges (1) | $ | — | | | $ | 4 | | | $ | 12 | | | $ | 9 | |
(1)Total restructuring charges were $12 million for the Company’s E&P segment for the nine months ended September 30, 2020, and $4 million and $9 million for the three and nine months ended September 30, 2019, respectively.
The following table presents a reconciliation of the liability associated with the Company’s restructuring activities at September 30, 2020, which is reflected in accounts payable on the consolidated balance sheet:
| | | | | |
(in millions) | |
Liability at December 31, 2019 | $ | 2 | |
Additions | 12 | |
Distributions | (14) | |
Liability at September 30, 2020 | $ | — | |
(4) REVENUE RECOGNITION
Revenues from Contracts with Customers
Natural gas and liquids. Natural gas, oil and NGL sales are recognized when control of the product is transferred to the customer at a designated delivery point. The pricing provisions of the Company’s contracts are primarily tied to a market index with certain adjustments based on factors such as delivery, quality of the product and prevailing supply and demand conditions in the geographic areas in which the Company operates. Under the Company’s sales contracts, the delivery of each unit of natural gas, oil and NGLs represents a separate performance obligation, and revenue is recognized at the point in time when the performance obligations are fulfilled. There is no significant financing component to the Company’s revenues as payment terms are typically within 30 to 60 days of control transfer. Furthermore, consideration from a customer corresponds directly with the value to the customer of the Company’s performance completed to date. As a result, the Company recognizes revenue in the amount for which the Company has a right to invoice and has not disclosed information regarding its remaining performance obligations.
The Company records revenue from its natural gas and liquids production in the amount of its net revenue interest in sales from its properties. Accordingly, natural gas and liquid sales are not recognized for deliveries in excess of the Company’s net revenue interest, while natural gas and liquid sales are recognized for any under-delivered volumes. Production imbalances are generally recorded as receivables and payables and not contract assets or contract liabilities as the imbalances are between the Company and other working interest owners, not the end customer.
Marketing. The Company, through its marketing affiliate, markets natural gas, oil and NGLs for its affiliated E&P company as well as other joint interest owners that choose to market with the Company. In addition, the Company markets some products purchased from third parties. Marketing revenues for natural gas, oil and NGL sales are recognized when control of the product is transferred to the customer at a designated delivery point. The pricing provisions of the Company’s contracts are primarily tied to market indices with certain adjustments based on factors such as delivery, quality of the product and prevailing supply and demand conditions. Under the Company’s marketing contracts, the delivery of each unit of natural gas, oil and NGLs represents a separate performance obligation, and revenue is recognized at the point in time when the performance obligations are fulfilled. Customers are invoiced and revenues are recorded each month as natural gas, oil and NGLs are delivered, and payment terms are typically within 30 to 60 days of control transfer. Furthermore, consideration from a customer corresponds directly with the value to the customer of the Company’s performance completed to date. As a result, the Company recognizes revenue in the amount for which the Company has a right to invoice and has not disclosed information regarding its remaining performance obligations.
Disaggregation of Revenues
The Company presents a disaggregation of E&P revenues by product on the consolidated statements of operations net of intersegment revenues. The following table reconciles operating revenues as presented on the consolidated statements of operations to the operating revenues by segment:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | E&P | | Marketing | | Intersegment Revenues | | Total |
Three months ended September 30, 2020 | | | | | | | |
Gas sales | $ | 190 | | | $ | — | | | $ | 9 | | | $ | 199 | |
Oil sales | 39 | | | — | | | 1 | | | 40 | |
NGL sales | 68 | | | — | | | — | | | 68 | |
Marketing | — | | | 495 | | | (276) | | | 219 | |
Other | 1 | | | — | | | — | | | 1 | |
| | | | | | | |
Total | $ | 298 | | | $ | 495 | | | $ | (266) | | | $ | 527 | |
| | | | | | | |
Three months ended September 30, 2019 | | | | | | | |
Gas sales | $ | 230 | | | $ | — | | | $ | 8 | | | $ | 238 | |
Oil sales | 66 | | | — | | | 1 | | | 67 | |
NGL sales | 52 | | | — | | | — | | | 52 | |
Marketing | — | | | 592 | | | (313) | | | 279 | |
| | | | | | | |
Total | $ | 348 | | | $ | 592 | | | $ | (304) | | | $ | 636 | |
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | E&P | | Marketing | | Intersegment Revenues | | Total |
Nine months ended September 30, 2020 | | | | | | | |
Gas sales | $ | 584 | | | $ | — | | | $ | 27 | | | $ | 611 | |
Oil sales | 107 | | | — | | | 4 | | | 111 | |
NGL sales | 158 | | | — | | | — | | | 158 | |
Marketing | — | | | 1,432 | | | (787) | | | 645 | |
Other (1) | 4 | | | — | | | — | | | 4 | |
Total | $ | 853 | | | $ | 1,432 | | | $ | (756) | | | $ | 1,529 | |
| | | | | | | |
Nine months ended September 30, 2019 | | | | | | | |
Gas sales | $ | 918 | | | $ | — | | | $ | 25 | | | $ | 943 | |
Oil sales | 151 | | | — | | | 2 | | | 153 | |
NGL sales | 191 | | | — | | | — | | | 191 | |
Marketing | — | | | 2,158 | | | (1,154) | | | 1,004 | |
Other (2) | 1 | | | 1 | | | — | | | 2 | |
Total | $ | 1,261 | | | $ | 2,159 | | | $ | (1,127) | | | $ | 2,293 | |
(1)For the nine months ended September 30, 2020, other E&P revenues consists primarily of gains on purchaser imbalances associated with certain NGLs.
(2)For the nine months ended September 30, 2019, other E&P revenues consists primarily of water sales to third-party operators, and other Marketing revenues consists primarily of sales of gas from storage.
Associated E&P revenues are also disaggregated for analysis on a geographic basis by the core areas in which the Company operates, which are in Pennsylvania and West Virginia.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | 2020 | | 2019 | | 2020 | | 2019 |
Northeast Appalachia | $ | 131 | | | $ | 175 | | | $ | 443 | | | $ | 740 | |
Southwest Appalachia | 166 | | | 173 | | | 409 | | | 519 | |
Other | 1 | | | — | | | 1 | | | 2 | |
Total | $ | 298 | | | $ | 348 | | | $ | 853 | | | $ | 1,261 | |
Receivables from Contracts with Customers
The following table reconciles the Company’s receivables from contracts with customers to consolidated accounts receivable as presented on the consolidated balance sheet:
| | | | | | | | | | | |
(in millions) | September 30, 2020 | | December 31, 2019 |
Receivables from contracts with customers | $ | 218 | | | $ | 284 | |
Other accounts receivable | 21 | | | 61 | |
Total accounts receivable | $ | 239 | | | $ | 345 | |
Amounts recognized against the Company’s allowance for doubtful accounts related to receivables arising from contracts with customers were immaterial for the three and nine months ended September 30, 2020 and 2019. The Company has no contract assets or contract liabilities associated with its revenues from contracts with customers.
(5) CASH AND CASH EQUIVALENTS
The following table presents a summary of cash and cash equivalents as of September 30, 2020 and December 31, 2019:
| | | | | | | | | | | | |
(in millions) | September 30, 2020 | | December 31, 2019 | |
Cash | $ | 93 | | | $ | 5 | | |
Marketable securities (1) | 2 | | | — | | |
| | | | |
Total | $ | 95 | | | $ | 5 | | |
(1)Consists of government stable value money market funds.
(6) NATURAL GAS AND OIL PROPERTIES
The Company utilizes the full cost method of accounting for costs related to the exploration, development and acquisition of natural gas and oil properties. Under this method, all such costs (productive and nonproductive), including salaries, benefits and other internal costs directly attributable to these activities, are capitalized on a country-by-country basis and amortized over the estimated lives of the properties using the units-of-production method. These capitalized costs are subject to a ceiling test that limits such pooled costs, net of applicable deferred taxes, to the aggregate of the present value of future net revenues attributable to proved natural gas, oil and NGL reserves discounted at 10% (standardized measure). Any costs in excess of the ceiling are written off as a non-cash expense. The expense may not be reversed in future periods, even though higher natural gas, oil and NGL prices may subsequently increase the ceiling. Companies using the full cost method are required to use the average quoted price from the first day of each month from the previous 12 months, including the impact of derivatives designated for hedge accounting, to calculate the ceiling value of their reserves. The Company had no hedge positions that were designated for hedge accounting as of September 30, 2020. Prices used to calculate the ceiling value of reserves were as follows:
| | | | | | | | | | | |
| September 30, 2020 | | September 30, 2019 |
Natural gas (per MMBtu) | $ | 1.97 | | | $ | 2.87 | |
Oil (per Bbl) | $ | 43.40 | | | $ | 57.77 | |
NGLs (per Bbl) | $ | 9.26 | | | $ | 12.59 | |
Using the average quoted prices above, adjusted for market differentials, the Company’s net book value of its United States natural gas and oil properties exceeded the ceiling by $361 million at September 30, 2020, resulting in a non-cash ceiling test impairment. In the first and second quarters of 2020, the Company’s net book value of its United States natural gas and oil properties exceeded the ceiling by approximately $1.48 billion and $650 million, respectively, and resulted in a non-cash ceiling test impairments. Decreases in market prices as well as changes in production rates, levels of reserves, evaluation of costs excluded from amortization, future development costs and production costs could result in future ceiling test impairments. Given the decline in commodity prices in late 2019 and the first three quarters of 2020, an additional non-cash impairment of the Company’s assets may occur in the fourth quarter of 2020.
For the nine months ended September 30, 2020, the Company recognized a $5 million impairment related to other non-core assets not included in natural gas and oil properties.
The Company’s net book value of its United States natural gas and oil properties did not exceed the ceiling amount at September 30, 2019, and the Company had no derivative positions that were designated for hedge accounting as of September 30, 2019. In June 2019, the Company sold non-core acreage for $25 million. There was no production or proved reserves associated with this acreage.
(7) EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the reportable period. The diluted earnings per share calculation adds to the weighted average number of common shares outstanding: the incremental shares that would have been outstanding assuming the exercise of dilutive stock options, the vesting of unvested restricted shares of common stock, restricted stock units and performance units. An antidilutive impact is an increase in earnings per share or a reduction in net loss per share resulting from the conversion, exercise or contingent issuance of certain securities.
In August 2020, the Company completed an underwritten public offering of 63,250,000 shares of its common stock with an offering price to the public of $2.50 per share. Net proceeds after deducting underwriting discounts and offering expenses were approximately $152 million. See Note 2 for additional details regarding the Company’s use of proceeds from the equity offering. In the first quarter of 2019, the Company repurchased 5,260,687 shares of its outstanding common stock as part of a share repurchase program for approximately $21 million at an average price of $3.84 per share.
The following table presents the computation of earnings per share for the three and nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions, except share/per share amounts) | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) | $ | (593) | | | $ | 49 | | | $ | (3,020) | | | $ | 781 | |
| | | | | | | |
Number of common shares: | | | | | | | |
Weighted average outstanding | 571,872,413 | | | 539,221,101 | | | 551,162,559 | | | 539,315,170 | |
Issued upon assumed exercise of outstanding stock options | — | | | — | | | — | | | — | |
Effect of issuance of non-vested restricted common stock | — | | | 187,706 | | | — | | | 400,120 | |
Effect of issuance of non-vested restricted units | — | | | — | | | — | | | — | |
Effect of issuance of non-vested performance units | — | | | 629,380 | | | — | | | 727,359 | |
Weighted average and potential dilutive outstanding | 571,872,413 | | | 540,038,187 | | | 551,162,559 | | | 540,442,649 | |
| | | | | | | |
Earnings per common share | | | | | | | |
Basic | $ | (1.04) | | | $ | 0.09 | | | $ | (5.48) | | | $ | 1.45 | |
Diluted | $ | (1.04) | | | $ | 0.09 | | | $ | (5.48) | | | $ | 1.44 | |
The following table presents the common stock shares equivalent excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2020 and 2019, as they would have had an antidilutive effect:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Unexercised stock options | 4,425,886 | | | 5,102,882 | | | 4,519,385 | | | 5,115,334 | |
Unvested share-based payment | 939,941 | | | 2,136,453 | | | 946,547 | | | 1,797,963 | |
Restricted stock units | 1,935,781 | | | — | | | 2,001,621 | | | — | |
Performance units | 2,282,211 | | | 240,450 | | | 2,027,985 | | | 247,443 | |
Total | 9,583,819 | | | 7,479,785 | | | 9,495,538 | | | 7,160,740 | |
(8) DERIVATIVES AND RISK MANAGEMENT
The Company is exposed to volatility in market prices and basis differentials for natural gas, oil and NGLs which impacts the predictability of its cash flows related to the sale of those commodities. These risks are managed by the Company’s use of certain derivative financial instruments. As of September 30, 2020, the Company’s derivative financial instruments consisted of fixed price swaps, two-way costless collars, three-way costless collars, basis swaps and call options. The Company’s interest rate swaps expired in June 2020. A description of the Company’s derivative financial instruments is provided below:
| | | | | |
Fixed price swaps | If the Company sells a fixed price swap, the Company receives a fixed price for the contract and pays a floating market price to the counterparty. If the Company purchases a fixed price swap, the Company receives a floating market price for the contract and pays a fixed price to the counterparty. |
| |
Two-way costless collars | Arrangements that contain a fixed floor price (purchased put option) and a fixed ceiling price (sold call option) based on an index price which, in aggregate, have no net cost. At the contract settlement date, (1) if the index price is higher than the ceiling price, the Company pays the counterparty the difference between the index price and ceiling price, (2) if the index price is between the floor and ceiling prices, no payments are due from either party, and (3) if the index price is below the floor price, the Company will receive the difference between the floor price and the index price. |
| |
| | | | | |
Three-way costless collars | Arrangements that contain a purchased put option, a sold call option and a sold put option based on an index price that, in aggregate, have no net cost. At the contract settlement date, (1) if the index price is higher than the sold call strike price, the Company pays the counterparty the difference between the index price and sold call strike price, (2) if the index price is between the purchased put strike price and the sold call strike price, no payments are due from either party, (3) if the index price is between the sold put strike price and the purchased put strike price, the Company will receive the difference between the purchased put strike price and the index price, and (4) if the index price is below the sold put strike price, the Company will receive the difference between the purchased put strike price and the sold put strike price. |
| |
Basis swaps | Arrangements that guarantee a price differential for natural gas from a specified delivery point. If the Company sells a basis swap, the Company receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract. If the Company purchases a basis swap, the Company pays the counterparty if the price differential is greater than the stated terms of the contract and receives a payment from the counterparty if the price differential is less than the stated terms of the contract. |
| |
Call options | The Company purchases and sells call options in exchange for a premium. If the Company purchases a call option, the Company receives from the counterparty the excess (if any) of the market price over the strike price of the call option at the time of settlement, but if the market price is below the call’s strike price, no payment is due from either party. If the Company sells a call option, the Company pays the counterparty the excess (if any) of the market price over the strike price of the call option at the time of settlement, but if the market price is below the call’s strike price, no payment is due from either party. |
| |
Interest rate swaps | Interest rate swaps were used to fix or float interest rates on existing or anticipated indebtedness. The purpose of these instruments was to manage the Company’s existing or anticipated exposure to unfavorable interest rate changes. The Company’s interest rate swaps expired in June 2020. |
The Company contracts with counterparties for its derivative instruments that it believes are creditworthy at the time the transactions are entered into, and the Company actively monitors the credit ratings and credit default swap rates of these counterparties where applicable. However, there can be no assurance that a counterparty will be able to meet its obligations to the Company. The fair value of the Company’s derivative assets and liabilities includes a non-performance risk factor. See Note 10 for additional details regarding the Company’s fair value measurements of its derivative positions. The Company presents its derivative positions on a gross basis and does not net the asset and liability positions.
The following tables provide information about the Company’s financial instruments that are sensitive to changes in commodity prices and that are used to protect the Company’s exposure. None of the financial instruments below are designated for hedge accounting treatment. The tables present the notional amount, the weighted average contract prices and the fair value by expected maturity dates as of September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial Protection on Production | |
| | | Weighted Average Price per MMBtu | | | |
| Volume (Bcf) | | Swaps | | Sold Puts | | Purchased Puts | | Sold Calls | | Basis Differential | | Fair Value at September 30, 2020 (in millions) | |
Natural Gas | | | | | | | | | | | | | | |
2020 | | | | | | | | | | | | | | |
Fixed price swaps | 91 | | | $ | 2.46 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 16 | | (1) |
Two-way costless collars | 57 | | | — | | | — | | | 2.45 | | | 2.75 | | | — | | | (7) | | |
Three-way costless collars | 25 | | | — | | | 2.19 | | | 2.58 | | | 2.96 | | | — | | | (11) | | (2) |
Total | 173 | | | | | | | | | | | | | $ | (2) | | |
2021 | | | | | | | | | | | | | | |
Fixed price swaps | 93 | | | $ | 2.67 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (13) | | |
Two-way costless collars | 166 | | | — | | | — | | | 2.51 | | | 2.89 | | | — | | | (27) | | |
Three-way costless collars | 291 | | | — | | | 2.16 | | | 2.49 | | | 2.84 | | | — | | | (113) | | (3) |
Total | 550 | | | | | | | | | | | | | $ | (153) | | |
2022 | | | | | | | | | | | | | | |
Fixed price swaps | 37 | | | $ | 2.75 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (2) | | |
Two-way costless collars | 32 | | | — | | | — | | | 2.17 | | | 2.88 | | | — | | | (5) | | |
Three-way costless collars | 116 | | | — | | | 2.07 | | | 2.44 | | | 2.87 | | | — | | | (24) | | |
Total | 185 | | | | | | | | | | | | | $ | (31) | | |
2023 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Three-way costless collars | 25 | | | $ | — | | | $ | 2.07 | | | $ | 2.48 | | | $ | 3.18 | | | $ | — | | | $ | (2) | | |
| | | | | | | | | | | | | | |
Basis Swaps | | | | | | | | | | | | | | |
2020 | 66 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (0.37) | | | $ | 21 | | |
2021 | 155 | | | — | | | — | | | — | | | — | | | (0.12) | | | 21 | | |
2022 | 127 | | | — | | | — | | | — | | | — | | | (0.38) | | | 4 | | |
Total | 348 | | | | | | | | | | | | | $ | 46 | | |
(1)Includes $1 million in premiums paid related to certain natural gas fixed price swaps recognized as a component of derivative assets within current assets on the consolidated balance sheet at September 30, 2020. As certain natural gas fixed price swaps settle, the premium will be amortized and recognized as a component of gain (loss) on derivatives on the consolidated statements of operations.
(2)Includes $2 million in deferred premiums related to certain natural gas three-way costless collars recognized as a component of derivative liabilities within current liabilities on the consolidated balance sheet at September 30, 2020. As certain three-way costless collars settle, the premium will be paid and recognized as a component of gain (loss) on derivatives on the consolidated statement of operations.
(3)Includes $1 million in deferred premiums related to certain natural gas three-way costless collars recognized as a component of derivative liabilities within current liabilities on the consolidated balance sheet at September 30, 2020. As certain three-way costless collars settle, the premium will be paid and recognized as a component of gain (loss) on derivatives on the consolidated statement of operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Volume (MBbls) | | Weighted Average Strike Price per Bbl | | Fair Value at September 30, 2020 (in millions) |
| | Swaps | | Sold Puts | | Purchased Puts | | Sold Calls | |
Oil | | | | | | | | | | | |
2020 | | | | | | | | | | | |
Fixed price swaps (1) | 584 | | | $ | 75.44 | | | $ | — | | | $ | — | | | $ | — | | | $ | 20 | |
Two-way costless collars | 261 | | | — | | | — | | | 56.76 | | | 59.75 | | | 4 | |
Three-way costless collars | 404 | | | — | | | 43.71 | | | 52.85 | | | 57.78 | | | 3 | |
Total | 1,249 | | | | | | | | | | | $ | 27 | |
2021 | | | | | | | | | | | |
Fixed price swaps | 2,574 | | | $ | 52.84 | | | $ | — | | | $ | — | | | $ | — | | | $ | 27 | |
Three-way costless collars | 1,445 | | | — | | | 43.52 | | | 53.25 | | | 58.14 | | | 8 | |
Total | 4,019 | | | | | | | | | | | $ | 35 | |
2022 | | | | | | | | | | | |
Fixed price swaps | 762 | | | $ | 48.85 | | | $ | — | | | $ | — | | | $ | — | | | $ | 4 | |
Three-way costless collars | 666 | | | — | | | 42.50 | | | 53.20 | | | 58.00 | | | 2 | |
Total | 1,428 | | | | | | | | | | | $ | 6 | |
2023 | | | | | | | | | | | |
Three-way costless collars | 111 | | | $ | — | | | $ | 30.00 | | | $ | 40.00 | | | $ | 57.85 | | | $ | — | |
| | | | | | | | | | | |
Ethane | | | | | | | | | | | |
2020 | | | | | | | | | | | |
Fixed price swaps | 2,629 | | | $ | 8.62 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
2021 | | | | | | | | | | | |
Fixed price swaps | 5,889 | | | $ | 7.12 | | | $ | — | | | $ | — | | | $ | — | | | $ | (12) | |
Two-way costless collar | 584 | | | — | | | — | | | 7.14 | | | 10.40 | | | — | |
Total | 6,473 | | | | | | | | | | | $ | (12) | |
2022 | | | | | | | | | | | |
Fixed price swaps | 190 | | | $ | 7.41 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Two-way costless collar | 135 | | | — | | | — | | | 7.56 | | | 9.66 | | | — | |
Total | 325 | | | | | | | | | | | $ | — | |
| | | | | | | | | | | |
Propane | | | | | | | | | | | |
2020 | | | | | | | | | | | |
Fixed price swaps | 1,435 | | | $ | 23.11 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2 | |
Two-way costless collars | 92 | | | — | | | — | | | 25.20 | | | 29.40 | | | — | |
Total | 1,527 | | | | | | | | | | | $ | 2 | |
2021 | | | | | | | | | | | |
Fixed price swaps | 4,298 | | | $ | 19.99 | | | $ | — | | | $ | — | | | $ | — | | | $ | (3) | |
2022 | | | | | | | | | | | |
Fixed price swaps | 156 | | | $ | 19.25 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
Normal Butane | | | | | | | | | | | |
2020 | | | | | | | | | | | |
Fixed price swaps | 195 | | | $ | 22.44 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
Natural Gasoline | | | | | | | | | | | |
2020 | | | | | | | | | | | |
Fixed price swaps | 184 | | | $ | 34.59 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
(1)Includes 448 MBbls of purchased fixed price oil swaps at $33.94 per barrel with a fair value of $3 million and 1,032 MBbls of sold fixed price oil swaps at $57.44 per barrel with a fair value of $17 million.
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Other Derivative Contracts |
| Volume (Bcf) | | Weighted Average Strike Price per MMBtu | | Fair Value at September 30, 2020 (in millions) |
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Call Options – Natural Gas (Net) | | | | | |
2020 | 6 | | | $ | 3.15 | | | $ | (2) | |
2021 | 57 | | | 3.15 | | | (17) | |
2022 | 58 | | | 3.00 | | | (15) | |
2023 | 17 | | | 2.84 | | | (4) | |
2024 | 9 | | | 3.00 | | | (2) | |
Total | 147 | | | | | $ | (40) | |
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| Volume (MBbls) | | Weighted Average Strike Price per Bbl | | Fair Value at September 30, 2020 (in millions) |
Call Options – Oil | | | | | |
2021 | 226 | | | $ | 60.00 | | | $ | — | |
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| Volume (Bcf) | | Weighted Average Strike Price per MMBtu | | Fair Value at September 30, 2020 (in millions) |
| | Swaps | | Basis Differential | |
Storage (1) | | | | | | | |
2020 | | | | | | | |
Purchased fixed price swaps | 1 | | | $ | 1.94 | | | $ | — | | | $ | — | |
Purchased basis swaps | — | | | — | | | (0.63) | | | — | |
Fixed price swaps | — | | | 2.09 | | | — | | | — | |
Basis swaps | — | | | — | | | (0.70) | | | — | |
Total | 1 | | | | | | | $ | — | |
2021 | | | | | | | |
Purchased fixed price swaps | 1 | | | $ | 2.04 | | | $ | — | | | $ | — | |
Fixed price swaps | 2 | | | 2.49 | | | — | | | (1) | |
Basis swaps | 1 | | | — | | | (0.38) | | | — | |
Total | 4 | | | | | | | $ | (1) | |
(1)The Company has entered into certain derivatives to protect the value of volumes of natural gas injected into a storage facility that will be withdrawn and sold at a later date.
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Purchased Fixed Price Swaps – Marketing (Natural Gas) (1) | Volume (Bcf) | | Weighted Average Strike Price per MMBtu | | Fair Value at September 30, 2020 (in millions) |
2020 | 2 | | | $ | 2.44 | | | $ | — | |
2021 | 6 | | | 2.44 | | | 3 | |
Total | 8 | | | | | $ | 3 | |
(1)The Company has entered into a limited number of derivatives to protect the value of certain long-term sales contracts.
At September 30, 2020, the net fair value of the Company’s financial instruments related to commodities was a $125 million liability and included a net reduction of the liability of $1 million related to non-performance risk. See Note 10 for additional details regarding the Company’s fair value measurements of its derivative positions. As of September 30, 2020, the Company had no positions designated for hedge accounting treatment. Gains and losses on derivatives that are not designated for hedge accounting treatment, or do not meet hedge accounting requirements, are recorded as a component of gain (loss) on derivatives on the consolidated statements of operations. Accordingly, the gain (loss) on derivatives component of the statement of operations reflects the gain and losses on both settled and unsettled derivatives. Only the settled gains and losses are included in the Company’s realized commodity price calculations.
The Company was a party to interest rate swaps that were entered into to mitigate the Company’s exposure to volatility in interest rates. The interest rate swaps had a notional amount of $170 million and expired in June 2020. Changes in the fair value of the interest rate swaps were included in gain (loss) on derivatives on the consolidated statements of operations.
The balance sheet classification of the assets and liabilities related to derivative financial instruments (none of which are designated for hedge accounting treatment) is summarized below as of September 30, 2020 and December 31, 2019:
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Derivative Assets | | | | | | |
| | | Fair Value | |
(in millions) | Balance Sheet Classification | | September 30, 2020 | | December 31, 2019 | |
Derivatives not designated as hedging instruments: | | | | | | |
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Purchased fixed price swaps – natural gas | Derivative assets | | $ | 3 | | | $ | — | | |
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Fixed price swaps – natural gas | Derivative assets | | 21 | | (1) | 77 | | (1) |
Fixed price swaps – oil | Derivative assets | | 42 | | | 4 | | |
Fixed price swaps – ethane | Derivative assets | | 2 | | | 11 | | |
Fixed price swaps – propane | Derivative assets | | 5 | | | 21 | | |
Two-way costless collars – natural gas | Derivative assets | | 27 | | | 10 | | |
Two-way costless collars – oil | Derivative assets | | 6 | | | 5 | | |
Two-way costless collars – propane | Derivative assets | | — | | | 2 | | |
Three-way costless collars – natural gas | Derivative assets | | 64 | | (2) | 126 | | |
Three-way costless collars – oil | Derivative assets | | 19 | | | 3 | | |
Basis swaps – natural gas | Derivative assets | | 40 | | | 17 | | |
Call options – natural gas | Derivative assets | | 9 | | | 1 | | |
Fixed price swaps – natural gas storage | Derivative assets | | — | | | 1 | | |
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Fixed price swaps – natural gas | Other long-term assets | | 1 | | | 7 | | |
Fixed price swaps – oil | Other long-term assets | | 10 | | | 1 | | |
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Fixed price swaps – propane | Other long-term assets | | 1 | | | 3 | | |
Two-way costless collars – natural gas | Other long-term assets | | 13 | | | 4 | | |
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Three-way costless collars – natural gas | Other long-term assets | | 56 | | | 74 | | |
Three-way costless collars – oil | Other long-term assets | | 14 | | | 7 | | |
Basis swaps – natural gas | Other long-term assets | | 13 | | | 15 | | |
Call options – natural gas | Other long-term assets | | 4 | | | 2 | | |
Total derivative assets | | | $ | 350 | | | $ | 391 | | |
(1) Includes $1 million and $9 million at September 30, 2020 and December 31, 2019, respectively, in premiums paid related to certain natural gas fixed price swaps recognized as a component of derivative assets within current assets on the consolidated balance sheet. As certain natural gas fixed price swaps settle, the premium will be amortized and recognized as a component of gain (loss) on derivatives on the consolidated statements of operations.
(2)Includes $3 million as of September 30, 2020 in deferred premiums related to certain natural gas three-way costless collars recognized as a component of derivative liabilities within current liabilities on the consolidated balance sheet. As certain natural gas three-way costless collars settle, the premium will be paid and recognized as a component of gain (loss) on derivatives on the consolidated statements of operations.
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Derivative Liabilities | | | | | | |
| | | Fair Value | |
(in millions) | Balance Sheet Classification | | September 30, 2020 | | December 31, 2019 | |
Derivatives not designated as hedging instruments: | | | | | | |
Purchased fixed price swaps – natural gas | Derivative liabilities | | $ | — | | | $ | 1 | | |
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Fixed price swaps – natural gas | Derivative liabilities | | 15 | | | 1 | | |
Fixed price swaps – oil | Derivative liabilities | | 1 | | | 6 | | |
Fixed price swaps – ethane | Derivative liabilities | | 10 | | | — | | |
Fixed price swaps – propane | Derivative liabilities | | 5 | | | — | | |
Two-way costless collars – natural gas | Derivative liabilities | | 52 | | | 4 | | |
Two-way costless collars – oil | Derivative liabilities | | 2 | | | 5 | | |
Three-way costless collars – natural gas | Derivative liabilities | | 164 | | | 84 | | |
Three-way costless collars – oil | Derivative liabilities | | 10 | | | 4 | | |
Basis swaps – natural gas | Derivative liabilities | | 3 | | | 17 | | |
Call options – natural gas | Derivative liabilities | | 24 | | | 3 | | |
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Fixed price swaps – natural gas storage | Derivative liabilities | | 1 | | | — | | |
Fixed price swaps – natural gas | Long-term derivative liabilities | | 6 | | | — | | |
Fixed price swaps – oil | Long-term derivative liabilities | | — | | | 2 | | |
Fixed price swaps – ethane | Long-term derivative liabilities | | 4 | | | — | | |
Fixed price swaps – propane | Long-term derivative liabilities | | 2 | | | — | | |
Two-way costless collars – natural gas | Long-term derivative liabilities | | 27 | | | 4 | | |
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Three-way costless collars – natural gas | Long-term derivative liabilities | | 106 | | | 72 | | |
Three-way costless collars – oil | Long-term derivative liabilities | | 10 | | | 8 | | |
Basis swap – natural gas | Long-term derivative liabilities | | 4 | | | 9 | | |
Call options – natural gas | Long-term derivative liabilities | | 29 | | | 15 | | |
Call options – oil | Long-term derivative liabilities | | — | | | 1 | | |
Total derivative liabilities | | | $ | 475 | | | $ | 236 | | |
The following tables summarize the before-tax effect of the Company’s derivative instruments on the consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019:
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Unsettled Gain (Loss) on Derivatives Recognized in Earnings | |
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| | Consolidated statement of Operations Classification of Gain (Loss) on Derivatives, Unsettled | | For the three months ended September 30, | | For the nine months ended September 30, | |
Derivative Instrument | | | 2020 | | 2019 | | 2020 | | 2019 | |
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Purchased fixed price swaps – natural gas | | Gain (Loss) on Derivatives | | $ | 4 | | | $ | — | | | $ | 4 | | | $ | — | | |
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Fixed price swaps – natural gas | | Gain (Loss) on Derivatives | | (138) | | | (19) | | | (74) | | | 36 | | |
Fixed price swaps – oil | | Gain (Loss) on Derivatives | | (20) | | | 8 | | | 54 | | | 5 | | |
Fixed price swaps – ethane | | Gain (Loss) on Derivatives | | (13) | | | 1 | | | (23) | | | 8 | | |
Fixed price swaps – propane | | Gain (Loss) on Derivatives | | (17) | | | 10 | | | (25) | | | 19 | | |
Two-way costless collars – natural gas | | Gain (Loss) on Derivatives | | (34) | | | (11) | | | (45) | | | (2) | | |
Two-way costless collars – oil | | Gain (Loss) on Derivatives | | (5) | | | — | | | 4 | | | (3) | | |
Two-way costless collars – propane | | Gain (Loss) on Derivatives | | (1) | | | 1 | | | (2) | | | 3 | | |
Three-way costless collars – natural gas | | Gain (Loss) on Derivatives | | (98) | | (1) | 3 | | | (194) | | (1) | 27 | | |
Three-way costless collars – oil | | Gain (Loss) on Derivatives | | (4) | | | 3 | | | 15 | | | 4 | | |
Basis swaps – natural gas | | Gain (Loss) on Derivatives | | 54 | | | 12 | | | 40 | | | 6 | | |
Call options – natural gas | | Gain (Loss) on Derivatives | | (16) | | | 1 | | | (25) | | | 5 | | |
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Call options – oil | | Gain (Loss) on Derivatives | | — | | | — | | | 1 | | | — | | |
Purchased fixed price swap – natural gas storage | | Gain (Loss) on Derivatives | | 1 | | | — | | | — | | | |