May 15, 2016 - 10:30 PM EDT
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SABINE OIL & GAS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

We are an independent oil and natural gas company engaged in the acquisition, development, exploitation and exploration of oil and natural gas properties onshore in the United States. Our properties are primarily focused in three core geographic areas: East Texas targeting the Cotton Valley Sand and Haynesville Shale; South Texas, targeting the Eagle Ford Shale formation; and North Texas, targeting the Granite Wash formation.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report and in the Annual Report on Form 10-K. The following discussion contains "forward- looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions, or beliefs about future events may, and often do, vary from actual results and the differences can be material. Some of the key factors which could cause actual results to vary from expectations include changes in oil and natural gas prices, the timing of planned capital expenditures, availability of acquisitions, uncertainties in estimating proved reserves and forecasting production results, operational factors affecting the commencement or maintenance of producing wells, the condition of the capital markets generally, as well as our ability to access them and uncertainties regarding environmental regulations or litigation and other legal or regulatory developments affecting our business, as well as those factors discussed below and elsewhere in this report and in the Annual Report on Form 10-K, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. See "Cautionary Statement Regarding Forward-Looking Statements."

Our MD&A includes the following sections;

· Chapter 11 Filings - a description of our recent events and our Chapter 11

filings

· Capital Program - a summary of planned capital expenditures during 2016

· Results of Operations - an analysis of our consolidated results of operations

for the three month periods presented in our financial statements

· Liquidity, Capital Resources and Financial Position - an analysis of our cash

flows, sources and uses of cash, contractual obligations and commercial

    commitments


Chapter 11 Filings

On July 15, 2015, we and certain of our subsidiaries, including Giant Gas Gathering LLC, Sabine Bear Paw Basin LLC, Sabine East Texas Basin LLC, Sabine Mid-Continent Gathering LLC, Sabine Mid-Continent LLC, Sabine Oil & Gas Finance Corporation, Sabine South Texas Gathering LLC, Sabine South Texas LLC and Sabine Williston Basin LLC (collectively, the "Filing Subsidiaries" and, together with us, the "Debtors"), filed voluntary petitions (the "Bankruptcy Petitions") for reorganization under the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The Debtors Chapter 11 cases (the "Chapter 11 Cases") are being jointly administered under the case styled In re Sabine Oil & Gas Corporation, et al, Case No. 15-11835. The Debtors will continue to operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

By certain "first day" motions filed in the Chapter 11 Cases, we obtained Bankruptcy Court approval (on an interim basis) to, among other things and subject to the terms of the orders entered by the Bankruptcy Court, pay employee wages, health benefits and certain other employee obligations, pay pre-petition certain lienholders and forward funds to third parties, including royalty holders and other partners.

For the duration of our Chapter 11 proceedings, our operations and ability to develop and execute our business plan are subject to the risks and uncertainties associated with the Chapter 11 process. For example, negative events associated with our Chapter 11 proceedings could adversely affect our relationships with our suppliers, service providers, customers, and other third parties and our ability to retain employees, which in turn could adversely affect our operations and financial condition. As a result of these risks and uncertainties, the number of our outstanding shares and shareholders, assets, liabilities, officers and/or directors could be significantly different following the outcome of the


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Chapter 11 proceedings, and the description of our operations, properties and capital plans included in this Quarterly Report on Form 10-Q may not accurately reflect our operations, properties and capital plans following the Chapter 11 process.

In particular, subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. The rejection of an executory contract or unexpired lease is generally treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors of performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Counterparties to such rejected contracts or leases may assert claims against the applicable debtor's estate for such damages. The assumption of an executory contract or unexpired lease generally requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors in this Quarterly Report on Form 10-Q, including where applicable a quantification of our obligations under any such executory contract or unexpired lease with the Debtors, is qualified by any overriding rejection rights we have under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and the Debtors expressly preserve all of their rights with respect thereto.

Our filing of the Bankruptcy Petitions described above constitutes an event of default that accelerated our obligations under the New Revolving Credit Facility, the Term Loan Facility, the 2017 Notes and the Legacy Forest Notes. We have classified all debt as "Liabilities Subject to Compromise" in the Condensed Consolidated Balance Sheet at March 31, 2016. This debt includes unsecured and under-secured obligations with are reported at the amounts expected to be allowed as claims by the Bankruptcy Court, even if they may be settled for lesser amounts. If we cannot continue as a going concern, adjustments to the carrying values and classification of our assets and liabilities and the reported income and expenses could be required and could be material. For additional description of the defaults present under our debt obligations, please see Note 6 to our consolidated financial statements included herein.

We are making adequate protection payments to the lenders under the New Revolving Credit Facility in an amount equal to the non-default rate of interest, fees and costs due and payable on a monthly basis under the New Revolving Credit Facility, in accordance with the cash collateral order filed with the Bankruptcy Court. Additionally, cash generated by the Company deemed to be proceeds of the oil and gas properties that represent prepetition collateral is deposited into a segregated account, which is reflected as Cash in the Condensed Consolidated Balance Sheet as of March 31, 2016, and it is used solely to pay for the operations of the prepetition collateral properties.

On October 21, 2015, the Debtors filed a motion (the "Bar Date Motion") requesting that the Bankruptcy Court establish certain bar dates to assist with the claims reconciliation process. On November 10, 2015, the Bankruptcy Court granted the Bar Date Motion. On January 26, 2016, the Debtors filed the Disclosure Statement for Joint Chapter 11 Plan of Reorganization of Sabine Oil & Gas Corporation and its Debtor Affiliates (as further amended, modified or supplemented from time to time and including all exhibits and supplements thereto, the "Disclosure Statement") filed in support of the Joint Chapter 11 Plan of Reorganization of Sabine Oil & Gas Corporation and its Debtor Affiliates (as further amended, modified or supplemented from time to time and including all exhibits and supplements thereto, the "Plan of Reorganization"). Since the initial filing, the Plan of Reorganization and Disclosure Statement have been subsequently amended on March 31, 2016 and April 27, 2016. If the Plan of Reorganization currently on file is confirmed it would significantly reduce our outstanding long-term debt and annual interest payments. On April 29, 2016, the Bankruptcy Court approved the adequacy of the Disclosure Statement. On May 2, 2016, the Debtors filed the solicitation version of the Plan of Reorganization and the Disclosure Statement. The hearing to consider confirmation of the Plan of Reorganization is expected to commence on June 13, 2016. Although the Debtors currently have the exclusive right to file a plan and solicit the appropriate votes thereon, such rights expire on June 9, 2016 and August 9, 2016, respectively. There can be no assurances regarding our ability to successfully develop, confirm or consummate the Plan of Reorganization, an alternative plan of reorganization or alternative restructuring transaction, including a sale of all or substantially all of our assets.


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Capital Program

Our full year 2016 capital expenditures are forecasted to total approximately $21 million, excluding acquisitions and divestitures. However, we expect production growth from our 2016 capital program will not offset production declines, which will result in material decreases to our production and related cash flows. Consistent with our historical practice, we periodically review our capital expenditures and adjust our budget based on liquidity, commodity prices and drilling results.

Results of Operations

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

The following table sets forth selected operating data for the three months ended March 31, 2016 compared to the three months ended March 31, 2015:




                                        For the Three Months Ended       Amount of
                                                March 31,                Increase      Percent
                                           2016             2015        (Decrease)     Change
                                                     (in thousands)
Revenues
Oil, natural gas liquids and
natural gas                           $       47,852     $    97,628    $  (49,776)       (51) %
Other                                            308             397           (89)       (22) %
Total revenues                                48,160          98,025       (49,865)       (51) %

Operating expenses
Lease operating                               17,379          24,355        (6,976)       (29) %
Marketing, gathering,
transportation and other                       7,142           9,357        (2,215)       (24) %
Production and ad valorem taxes                3,383           2,768            615         22 %
General and administrative                     5,320          15,038        (9,718)       (65) %
Depletion, depreciation and
amortization                                  19,979          54,063       (34,084)       (63) %
Accretion                                        545             474             71         15 %
Impairments                                   86,298         236,485      (150,187)            *
Other operating expenses                       2,247           5,393        (3,146)            *
Total operating expenses                     142,293         347,933      (205,640)       (59) %

Other (expenses) income
Interest, net of capitalized
interest (2)                                (11,575)        (70,247)       (58,672)       (84) %
Gain on derivative instruments                     -          36,124         36,124            *
Total other (expenses) income               (11,575)        (34,123)       (22,548)            *
Reorganization items, net                   (29,374)               -       (29,374)            *
Net loss before income taxes               (135,082)       (284,031)        148,949            *
Income tax expense                                 -               -              -            *
Net loss                              $    (135,082)     $ (284,031)    $   148,949            *
Reconciliation to derive Adjusted
EBITDA (1):
Interest, net of capitalized
interest                                      11,575          70,247
Depletion, depreciation and
amortization                                  19,979          54,063
Impairments                                   86,298         236,485
Other                                          2,041           3,969
Accretion                                        545             474
Loss on derivative instruments                     -          11,004
Option premium amortization                        -         (1,145)
Reorganization items, net                     29,374               -
Adjusted EBITDA (1)                   $       14,730     $    91,066


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* Not meaningful or applicable


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(1) Adjusted EBITDA is a non-GAAP financial measure. Please see "-Non-GAAP Financial Measure."

(2) Interest at contractual interest rates would have been approximately $51.1 million. As of the petition date, interest is no longer being accrued on the Term Loan Facility, 2017 Notes and Legacy Forest Notes.




                                        For the Three Months Ended        Amount of
                                                March 31,                 Increase      Percent
                                          2016              2015         (Decrease)     Change
Oil, NGL and natural gas sales by
product (in thousands):
Oil                                  $       11,304    $       37,928    $  (26,624)       (70) %
NGL                                           5,882            11,397        (5,515)       (48) %
Natural gas                                  30,666            48,303       (17,637)       (37) %
Total                                $       47,852    $       97,628    $  (49,776)       (51) %

Production data:
Oil (MBbl)                                   408.21            906.45       (498.24)       (55) %
NGL (MBbl)                                   564.55            894.69       (330.14)       (37) %
Natural gas (Bcf)                             15.35             16.66         (1.31)        (8) %
Combined (Bcfe) (1)                           21.20             27.47         (6.27)       (23) %

Average prices before effects of
economic hedges (2):
Oil (per Bbl)                        $        27.69    $        41.84    $   (14.15)       (34) %
NGL (per Bbl)                        $        10.42    $        12.74    $    (2.32)       (18) %
Natural gas (per Mcf)                $         2.00    $         2.90    $    (0.90)       (31) %
Combined (per Mcfe) (1)              $         2.26    $         3.55    $    (1.29)       (36) %

Average realized prices after
effects of economic hedges (2):
Oil (per Bbl)                        $        27.69    $        68.78    $   (41.09)       (60) %
NGL (per Bbl)                        $        10.42    $        12.74    $    (2.32)       (18) %
Natural gas (per Mcf)                $         2.00    $         4.19    $    (2.19)       (52) %
Combined (per Mcfe)(1)               $         2.26    $         5.23    $    (2.97)       (57) %

Average costs (per Mcfe) (1):
Lease operating                      $         0.82    $         0.89    $    (0.07)        (8) %
Marketing, gathering,
transportation and other             $         0.34    $         0.34    $         -          - %
Production and ad valorem taxes      $         0.16    $         0.10    $      0.06         60 %
General and administrative           $         0.25    $         0.55    $    (0.30)       (55) %
Depletion, depreciation and
amortization                         $         0.94    $         1.97    $    (1.03)       (52) %


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(1) Oil and NGL production was converted at 6 Mcf per Bbl to calculate combined

production and per Mcfe amounts.

(2) Average prices shown in the table reflect prices both before and after the

      effects of cash settlements on commodity derivative transactions. The
      Company's calculation of such effects includes gains or losses on cash
      settlements for commodity derivative transactions. All of our commodity
      derivatives were terminated as of July 15, 2015.


Oil, natural gas liquids and natural gas sales. Revenues from production of oil and natural gas decreased from $97.6 million in the three months ended March 31, 2015 to $47.9 million in the three months ended March 31, 2016, a decrease of 51%. This decrease of $49.8 million was primarily the result of a decrease in oil, natural gas liquids and natural gas revenues of $26.6 million, $5.5 million and $17.6 million, respectively, due to decreases in prices of $14.15/Bbl, $2.32/Bbl and $0.90/Mcf, respectively, as well as lower South Texas and North Texas production of 58% and 47%, respectively, as a result of decline and reduction in development activities.

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The following table sets forth additional information concerning our production volumes for the three months ended March 31, 2016 compared to the three months ended March 31, 2015:






                For the Three Months Ended
                        March 31,               Percent
                   2016             2015         Change
                         (in Bcfe)
South Texas            2.70             6.44        (58) %
East Texas            17.04            18.25         (7) %
North Texas            1.46             2.78        (47) %
Total                 21.20            27.47        (23) %



Lease operating. Lease operating expenses decreased from $24.4 million in the three months ended March 31, 2015 to $17.4 million in the three months ended March 31, 2016, a decrease of 29%. The decrease in lease operating expense of $7.0 million is primarily due operating efficiencies following the Combination. Lease operating expenses decreased from $0.89 per Mcfe in the three months ended March 31, 2015 to $0.82 per Mcfe in the three months ended March 31, 2016. The decrease of $0.07 per Mcfe in the three months ended March 31, 2016 compared to the three months ended March 31, 2015 is due to cost reduction efforts in East Texas. The following table displays the lease operating expense by area for the three months ended March 31, 2016 and 2015




                              For the Three Months Ended
                March 31,                     March 31,
                   2016         Per Mcfe         2015         Per Mcfe
                         (in thousands, except per Mcfe data)
South Texas    $      3,182    $     1.18    $      4,633    $     0.72
East Texas           13,561          0.80          18,718          1.03
North Texas             636          0.44           1,003          0.36
Other                     -             -               1             -
Total          $     17,379    $     0.82    $     24,355    $     0.89




Marketing, gathering, transportation and other. Marketing, gathering, transportation and other expenses decreased from $9.4 million in the three months ended March 31, 2015 to $7.1 million in the three months ended March 31, 2016, a decrease of 24%. The decrease of $2.2 million in the three months ended March 31, 2016 compared to the three months ended March 31, 2015, is primarily due to decreased production volumes.

Production and ad valorem taxes. Production and ad valorem taxes increased from $2.8 million in the three months ended March 31, 2015 to $3.4 million in the three months ended March 31, 2016, an increase of 22%. Production and ad valorem taxes increased on a per unit basis from $0.10 per Mcfe in the three months ended March 31, 2015 to $0.16 per Mcfe in the three months ended March 31, 2016. The increase of $0.06 per Mcfe in the three months ended March 31, 2016 compared to the three months ended March 31, 2015 is primarily due to a higher realized ad valorem tax rate related to development activities as well as the timing and amount of high cost gas exemptions. Production and ad valorem taxes as a percentage of oil and natural gas revenues were 7% and 3% for the three months ended March 31, 2016 and 2015, respectively.

General and administrative. General and administrative expenses decreased from $15.0 million in the three months ended March 31, 2015 to $5.3 million in the three months ended March 31, 2016, a decrease of $9.7 million, or 65%. General and administrative expenses decreased on a per unit basis from $0.55 per Mcfe in the three months ended March 31, 2015 to $0.25 per Mcfe in the three months ended March 31, 2016. In the three months ended March 31, 2015 general and administrative expenses were higher as a result of the Combination. A transition plan to administratively combine the companies, was executed during the first several months of 2015, after which the Company was able to recognize operating efficiencies through a reduction in employee headcount, as well as the elimination of duplicative administrative costs, and the implementation of other cost saving efforts.


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Depletion, depreciation and amortization. DD&A decreased from $54.1 million in the three months ended March 31, 2015 to $20.0 million in the three months ended March 31, 2016, a decrease of $34.1 million. Depletion, depreciation, and amortization decreased from $1.97 per Mcfe in the three months ended March 31, 2015 to $0.94 per Mcfe in the three months ended March 31, 2016, or a decrease of 52%. The decrease in the DD&A rate per Mcfe is driven by a lower amortization base due to recent ceiling test impairments resulting from declines in the prior twelve month pricing and lower PV-10 compared to net book value, coupled with a decreased drilling program driving reduced rates of production.

Impairments. In the three months ended March 31, 2016, we recorded a non-cash impairment charge of $86.0 million for the carrying value of proved oil and natural gas properties in excess of the ceiling limitation. The average of the historical unweighted first day of the month prices for the prior twelve month period ended March 31, 2016 was $2.39 per MMbtu for natural gas and $46.26 per Bbl for oil compared to $3.88 per MMbtu for natural gas and $82.72 per Bbl for oil for the prior twelve month period ended March 31, 2015. In the three months ended March 31, 2015 we recorded a non-cash impairment charge of $236.5 million for the carrying value of proved oil and natural gas properties in excess of the ceiling limitation.

Other operating expenses. Other operating expenses in the three months ended March 31, 2016 relate primarily to $2.0 million of non-recurring organizational expenditures and $0.3 million of charges related to marketing contract volume commitments. Other operating expenses in the three months ended March 31, 2015 of $5.4 million primarily represent transactions costs related the Combination and prepetition restructure costs.

Interest expense. Interest expense decreased from $70.2 million in the three months ended March 31, 2015 to $11.6 million in the three months ended March 31, 2016, a decrease of $58.7 million, or 84%, primarily because we discontinued the accrual and payment of interest on the Term Loan Facility, the 2017 Notes and the Legacy Forest Notes upon the filing of the Bankruptcy Petitions. As of the filing of the Bankruptcy Petitions, interest is no longer being accrued on the Term Loan Facility, 2017 Notes and the Legacy Forest Notes as part of Chapter 11 filings. For more information, please see Note 6 within "Part I, Item 1. Financial Statements."

Gain on derivative instruments. Gains and losses from the change in fair value of derivative instruments as well as cash settlements on commodity derivatives are recognized in our results of operations. During the three months ended March 31, 2016 and 2015, we recognized a net gain on derivative instruments of zero and $36.1 million, respectively. The amount of gain or loss recognized on derivative instruments is dependent upon commodity prices, which affects the value of the contracts. The Company had no derivative instruments following settlements on or before July 15, 2015.

Reorganization items, net. Reorganization Items, net of $29.4 million are primarily made up of professional fees incurred for post-petition expenses which would not have otherwise been incurred by the Company.

Income tax expense. For the three months ended March 31, 2015 and March 31, 2016, we recorded no income tax expense or benefit, resulting in an effective tax rate of 0%. The significant difference between our effective tax rate and the federal statutory income tax rate of 35% is due to a full valuation allowance recorded on net deferred tax assets in excess of deferred tax liabilities. A valuation allowance is established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of March 31, 2016, the Company believes it is more likely than not that the overall deferred tax asset will not be realized.

Capital Resources and Liquidity

Our primary sources of liquidity have historically been equity contributions, borrowings under the New Revolving Credit Facility, net cash provided by operating activities, net proceeds from the issuance of the 2017 Notes and proceeds from the Term Loan Facility. Our primary use of capital has been the acquisition and development of oil and natural gas properties. Since the Chapter 11 filings, our principal sources of liquidity have been limited to cash flow from operations and cash on hand. In addition to the cash requirements necessary to fund ongoing operations, we have incurred and continue to incur significant professional fees and other costs in connection with the preparation and administration of the Chapter 11 proceedings. We anticipate that we will continue to incur significant professional fees and costs for the pendency of the Chapter 11 proceedings.




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Although we believe our cash flow from operations and cash on hand will be adequate to meet the operating costs of our existing business, there are no assurances that our cash flow from operations and cash on hand will be sufficient to continue to fund our operations or to allow us to continue as a going concern until a Chapter 11 plan is confirmed by the Bankruptcy Court or another alternative restructuring transaction is approved by the Bankruptcy Court and consummated. Our long-term liquidity requirements, the adequacy of our capital resources and our ability to continue as a going concern are difficult to predict at this time and ultimately cannot be determined until a Chapter 11 plan has been confirmed, if at all, by the Bankruptcy Court. If our future sources of liquidity are insufficient, we could face substantial liquidity constraints and be unable to continue as a going concern and will likely be required to significantly reduce, delay or eliminate capital expenditures, implement further cost reductions, seek other financing alternatives or seek the sale of some or all of our assets. The Company has temporarily deferred additional development activities. If we (i) continue to limit, defer or eliminate future capital expenditure plans, (ii) are unsuccessful in developing reserves and adding production through our capital program or (iii) implement cost-cutting efforts that are too overreaching, the value of our oil and natural gas properties and our financial condition and results of operations could be adversely affected.

In connection with funding our liquidity and the Combination, we have incurred substantial additional debt. As of March 31, 2016, the total outstanding principal amount of our long-term indebtedness was $2.752 billion, consisting of indebtedness under the New Revolving Credit Facility, the 2017 Notes, the Legacy Forest Notes, and the Term Loan Facility, and, as of March 31, 2016, no extensions of credit are available under the New Revolving Credit Facility. In addition, our filing of the Bankruptcy Petitions constituted an event of default that accelerated our obligations under these debt instruments. For a description of our outstanding debt instruments, please see "-Net Cash Provided by Financing Activities."

Our ability to service our debt obligations and fund our capital expenditures has been negatively impacted by significant decreases in the market price for oil, NGLs and natural gas during the fourth quarter of 2014 with continued weakness throughout 2015 and into the first quarter of 2016. The decrease in the market price for our production directly reduces our operating cash flow. While we previously used hedging arrangements to reduce our exposure to fluctuations in the prices of oil, NGLs and natural gas, all of our current and future hedging arrangements have been terminated as a result of the bankruptcy filing and events of default under our debt obligations. In addition, the decrease in the market price for our production indirectly impacts our other sources of potential liquidity.

On February 25, 2015, we borrowed approximately $356 million under our New Revolving Credit Facility which represented the remaining undrawn amount under the New Revolving Credit Facility. Our borrowing base under our New Revolving Credit Facility was subject to its semi-annual redetermination on April 27, 2015 and was decreased to $750 million. The decrease in our borrowing base as a result of the redetermination resulted in a deficiency of approximately $250 million which requires repayment in six monthly installments in an amount of $41.54 million, beginning May 27, 2015. None of such payments has been made or will be made and pursuant to the automatic stay under the Bankruptcy Code, the creditors under the New Revolving Credit Facility are currently stayed from taking any action against us as a result of these non-payments. Our cash balance at May 10, 2016 was approximately $156.4 million.

Ability to Continue as a Going Concern

Our filing of the Bankruptcy Petitions described above accelerated our obligations under the New Revolving Credit Facility, the Term Loan Facility, the 2017 Notes and the Legacy Forest Notes. We have classified all debt as "Liabilities Subject to Compromise" in the Condensed Consolidated Balance Sheet at March 31, 2016. If we cannot continue as a going concern, adjustments to the carrying values and classification of our assets and liabilities and the reported income and expenses could be required and would be material. For additional description of the defaults present under our debt obligations, please see Note 6 within "Part I, Item 1. Financial Statements."

Working Capital

Our working capital balance fluctuates as a result of timing and amount of borrowings or repayments under our credit arrangements, changes in the fair value of our outstanding commodity derivative instruments, the timing of receiving reimbursement of amounts paid by us for the benefit of joint venture partners as well as changes in revenue receivables as a result of price and volume fluctuations.


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For the three months ended March 31, 2016, we had a decrease in working capital of $36.1 million. The decrease in working capital for the three months ended March 31, 2016 is primarily due to cash used in operations. For more information on the classification of debt, please see Note 2 within "Part I, Item 1. Financial Statements."

Net Cash Provided by Operating Activities

Cash flows from operations are our primary source of capital and liquidity and are primarily affected by the sale of oil, NGLs and natural gas, as well as commodity prices, net of effects of derivative contract settlements and changes in working capital. Net cash used in operating activities was $24.8 million for the three months ended March 31, 2016 compared to net cash provided by operating activities of $42.2 million for the three months ended March 31, 2015. The decrease in cash flow from operations for the three months ended March 31, 2016 as compared to the same period in 2015 was primarily the result of a decrease in working capital.

Our operating cash flow is sensitive to many variables, the most significant of which is the volatility of prices for oil and natural gas production. Prices for these commodities are determined primarily by prevailing market conditions. Regional and worldwide economic activity, weather, infrastructure capacity to reach markets and other variable factors influence market conditions for these products. These factors are beyond our control and are difficult to predict.

Net Cash Used in Investing Activities

During the three months ended March 31, 2016 and 2015, cash flows used in investing activities were $13.5 million and $164.8 million, respectively, primarily related to capital expenditures for drilling, development and acquisition costs, including cash payments for accrued expenses as of the prior respective balance sheet date. The decrease in cash flows used in investing activities during the three months ended March 31, 2016 compared to 2015 was primarily the result of lower capital expenditures.

Our capital expenditures for property exploration, development, and leasehold acquisitions for the three months ended March 31, 2016 and 2015 were $7.3 million and $106.0 million, respectively.

Our planned 2016 capital expenditures budget is expected to total approximately $21 million. The amount, timing and allocation of capital expenditures are largely discretionary and within our control. If oil and natural gas prices decline to levels below our acceptable levels or costs increase to levels above our acceptable levels, we could choose to defer a significant portion of budgeted capital expenditures until later periods to achieve the desired balance between sources and uses of liquidity and prioritize capital projects that we believe have the highest expected returns and potential to generate near-term cash flow. We routinely monitor and adjust our capital expenditures in response to changes in prices, availability of financing, drilling and acquisition costs, industry conditions, the timing of regulatory approvals, the availability of rigs, success or lack of success in drilling activities, contractual obligations, internally generated cash flow and other factors both within and outside our control. The temporary reduction in our capital program could result in a decline in our oil and natural gas reserves and production and cash flows and limit our ability to obtain needed capital or financing. Refer to the "Capital Resources and Liquidity" section above for a discussion of our liquidity and planned actions.

Net Cash Provided by Financing Activities

Net cash provided by financing activities of zero during the three months ended March 31, 2016 was primarily the result of no borrowings under the New Revolving Credit Facility. Net cash provided by financing activities of $424.9 million during the three months ended March 31, 2015 was the result of net borrowings under the Former Revolving Credit Facility of $426.0 million and debt issuance costs of $0.9 million.

New Revolving Credit Facility. On December 16, 2014, we amended and restated the Amended and Restated Credit Agreement, dated as of April 28, 2009, matured on April 7, 2016, by and among us, Wells Fargo Bank, National Association, as administrative agent, and the lenders and other parties party thereto with the New Revolving Credit Facility. The New Revolving Credit Facility provided for a $2 billion revolving credit facility, with an initial borrowing base of $1 billion. The New Revolving Credit Facility included a sub-limit permitting up to $100 million of letters of credit. The borrowing base for the New Revolving Credit Facility was subsequently reduced to $750 million on April 27, 2015.


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Our filing of the Bankruptcy Petitions described above under "-Chapter 11 Filings" above constitutes an event of default, not subject to the NRCF Forbearance Agreement, that accelerated our obligations under the New Revolving Credit Facility. Additionally other events of default, including cross-defaults, are present due to the failure to make interest payments, the failure to make the borrowing base deficiency payments, the "going concern" qualification in our 2015 and 2014 audited financial statements and other matters. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Debtors as a result of the default.

We are making adequate protection payments to the lenders under the New Revolving Credit Facility in an amount equal to the non-default rate of interest, fees and costs due and payable on a monthly basis under the New Revolving Credit Facility, in accordance with the cash collateral order filed with the Bankruptcy Court. Additionally, cash generated by the Company deemed to be proceeds of the oil and gas properties that represent prepetition collateral is deposited into a segregated account, which is reflected as Cash in the Condensed Consolidated Balance Sheet as of March 31, 2016, and it is used solely to pay for the operations of the prepetition collateral properties.

Prior to May 29, 2015, loans under the New Revolving Credit Facility bore interest at our option at either:

· the sum of (1) the Alternate Base Rate, which is defined as the highest of (a)

    Wells Fargo Bank, National Association's prime rate; (b) the federal funds
    effective rate plus 0.50%; or (c) the Eurodollar Rate (as defined in the New
    Revolving Credit Facility) for a one-month interest period plus 1% and (2) a
    margin varying from 0.50% to 1.50% depending on our most recent borrowing base
    utilization percentage (the "Revolving Base Rate"); or


· the Eurodollar Rate plus a margin varying from 1.50% to 2.50% depending on our

most recent borrowing base utilization percentage.

Beginning May 29, 2015 and thereafter during the occurrence of an event of default under the New Revolving Credit Facility, the loans under the New Revolving Credit Facility will bear interest at the Revolving Base Rate (as defined in the New Revolving Credit Facility).

Borrowings outstanding under the New Revolving Credit Facility and the Former Revolving Credit Facility totaled approximately $902 million at both, March 31, 2016 and December 31, 2015. Additionally, borrowings outstanding under the New Revolving Credit Facility had a weighted average interest rate of 5.1% and 2.6% for the three months ending March 31, 2016 and 2015, respectively.

At March 31, 2016 and December 31, 2015 the New Revolving Credit Facility is presented as "Liabilities Subject to Compromise," whereas the carrying value equals the face value. Interest expense continues to be recognized on the New Revolving Credit Facility subsequent to the petition date.

The unused portion of the New Revolving Credit Facility is subject to a commitment fee ranging from 0.375% to 0.5% per annum depending on the Company's most recent borrowing base utilization.

The New Revolving Credit Facility provides that all such obligations and the guarantees will be secured by a lien on at least 80% of the PV-9 of the borrowing base properties evaluated in the most recent reserve report delivered to the administrative agent and a pledge of all of the capital stock of our restricted subsidiaries, subject to certain customary grace periods and exceptions. The New Revolving Credit Facility matured on April 7, 2016; however, the obligations under the New Revolving Credit Facility have already been accelerated and are subject to the bankruptcy stay as a result of the filing of the Bankruptcy Petitions.

Term Loan Facility. Sabine O&G entered into a $700 million second lien term loan agreement with a maturity date of December 31, 2018 (provided that if the 2017 Notes are not refinanced to mature at least 91 days thereafter, the maturity date shall be 91 days prior to the February 15, 2017 maturity date of the 2017 Notes).

The Term Loan Facility, including with respect to interest and, in the case of eurodollar borrowings, bears interest at the Adjusted Eurodollar Rate plus 7.50%, with an interest rate floor of 1.25%, and, in the case of alternate base rate borrowings, bears interest at the Alternate Base Rate plus 6.50%, with an interest rate floor of 2.25%. Any time an interest period for Loans expires during an event of default under the Term Loan Facility, such Loans will bear interest at


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the Term Base Rate. The weighted average interest rate incurred on this indebtedness for the three months ended March 31, 2016 and 2015 was zero and 8.8%, respectively.

Our filing of the Bankruptcy Petitions described in Note 2 within "Part I, Item 1. Financial Statements" herein constitutes an event of default that accelerated our obligations under the Term Loan Facility. Additionally other events of default are present due to the failure to make interest payments, the "going concern" qualification in our 2014 audited financial statements and other matters. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Debtors as a result of the default.

The Term Loan Facility was presented as "Liabilities Subject to Compromise," whereas the carrying value equals the face value. As of the petition date the Company had accrued $30.2 million of interest related to the Term Loan Facility, reflected in "Liabilities Subject to Compromise" in the Consolidated Balance Sheets. No interest expense has been recognized subsequent to the petition date.

All of our restricted subsidiaries that guarantee our New Revolving Credit Facility have guaranteed the Term Loan Facility. The obligations under the Term Loan Facility are secured by the same collateral that secures the New Revolving Credit Facility, but the liens securing such obligations are second priority liens to the liens securing the New Revolving Credit Facility. However, the validity of the liens securing the Term Loan Facility are currently in dispute pursuant to the lawsuit filed by us against the Term Loan Facility administrative agent, Wilmington Trust, N.A.

2017 Notes. On February 12, 2010, Sabine Oil & Gas Corporation, formerly NFR Energy LLC, and our subsidiary Sabine Oil & Gas Finance Corporation, formerly NFR Energy Finance Corporation, co-issued $200 million in 9.75% senior unsecured notes due 2017 in a private placement to qualified institutional buyers in accordance with Rule 144A of the Securities Act and to persons outside the United States in compliance with Regulation S of the Securities Act. The 2017 Notes bear interest at a rate of 9.75% per annum, payable semi-annually on February 15 and August 15 each year commencing August 15, 2010. The 2017 Notes were issued at 98.73% of par.

On April 14, 2010, Sabine Oil & Gas Corporation and Sabine Oil & Gas Finance Corporation issued an additional $150 million in senior notes at 9.75% due 2017. The additional notes were issued at 98.75% of par and bear interest at a rate of 9.75% per annum, payable semi-annually on February 15 and August 15 of each year commencing August 15, 2010. The additional notes were issued under the same indenture as the 2017 Notes issued on February 12, 2010. No interest expense has been recognized subsequent to the petition date.

As of March 31, 2016 and December 31, 2015 the 2017 Notes are presented as "Liabilities Subject to Compromise," whereas the carrying value equals the face value. As of the petition date the Company had accrued $14.1 million of interest related to the 2017 Notes, reflected in "Liabilities Subject to Compromise".

The 2017 Notes were issued under and are governed by an indenture dated February 12, 2010 by and among the Sabine Oil & Gas Corporation, Sabine Oil & Gas Finance Corporation, the Bank of New York Mellon Trust Company, N.A. as trustee, and guarantors party thereto.

Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Debtors as a result of the default.

2019 Notes. The Company has $577.9 million in 7¼% senior notes due 2019 (the "2019 Notes"). Interest on the 2019 Notes is payable semiannually on June 15 and December 15. No interest expense has been recognized subsequent to the petition date.

As of March 31, 2016 and December 31, 2015 the 2019 Notes are presented as "Liabilities Subject to Compromise," whereas the carrying value equals the face value. As of the petition date the Company had accrued $24.3 million of interest related to the 2019 notes, reflected in "Liabilities Subject to Compromise".

On February 25, 2015, we received notice that Wilmington Savings Fund Society, FSB has been appointed as successor trustee under the indenture governing the 2019 Notes.

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On February 25, 2015, we received a notice of default and acceleration from the trustee with respect to our 2019 Notes and on February 26, 2015 were served a complaint alleging the same. For more information, please see "Part II, Item 1. Legal Proceedings."

The Company's filing of the Bankruptcy Petitions described in Note 2 herein constitutes an event of default that accelerated the Company's obligations under the 2019 Notes. However, under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Debtors as a result of the default.

2020 Notes. The Company has $222.1 million in 7½% senior notes due 2020 (the "2020 Notes") originally issued by Forest on September 17, 2012. Interest on the 2020 Notes is payable semiannually on March 15 and September 15. No interest expense has been recognized subsequent to the petition date.

As of March 31, 2016 and December 31, 2015 the 2020 Notes are presented as "Liabilities Subject to Compromise," whereas the carrying value equals the face value. As of the petition date the Company had accrued $5.5 million of interest related to the 2020 notes, reflected in "Liabilities Subject to Compromise".

On May 14, 2015, we received notice that Delaware Trust Company has been appointed as successor trustee under the indenture governing the 2020 Notes. The Company's filing of the Bankruptcy Petitions constitutes an event of default that accelerated the Company's obligations under the 2020 Notes.

Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Debtors as a result of the default.

Commodity Hedging Activities

Our primary market risk exposure is in the prices we receive for oil and natural gas production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot regional market prices applicable to our U.S. natural gas production. Pricing for oil and natural gas production has been volatile and unpredictable for several years, and we expect this volatility to continue in the future. The prices we receive for production depends on many factors outside of our control, including volatility in the differences between product prices at sales points and the applicable index price.

In the past, we entered into financial commodity derivative contracts to mitigate the potential negative impact on cash flow caused by changes in oil and natural gas prices. However, as a result of certain events of default under our derivative contracts, all our derivative contracts have been terminated. Subsequent to the termination of these derivative contracts, we have not entered into additional derivative contracts. As a result, we no longer have any commodity derivative contracts in place.

For the three months ended March 31, 2015, we economically hedged approximately 92% of our combined oil and natural gas volumes, which resulted in operating cash flows from commodity derivative instruments of approximately $46.0 million. However, we currently have no commodity derivative instruments in place.

Our ability to service our debt obligations and fund our capital expenditures has been negatively impacted by significant decreases in the market price for oil, NGLs and natural gas during the fourth quarter of 2014 with continued weakness into the first quarter of 2016. The decrease in the market price for our production directly reduces our operating cash flow. We previously used hedging arrangements to reduce our exposure to fluctuations in the prices of oil, NGLs and natural gas. In addition, the decrease in the market price for our production indirectly impacts our other sources of potential liquidity. Lower market prices for our production may result in lower borrowing capacity under our New Revolving Credit Facility and any replacement thereof or higher borrowing costs from other potential sources of debt financing as our borrowing capacity and borrowing costs are generally related to the value of our estimated proved reserves.


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The table below summarizes the gains related to oil and natural gas derivative instruments for three months ended March 31, 2016 and 2015:




                                                             Recognized in Other Income (Expenses)
                                                                  For the Three Months Ended
                                                                          March 31,
                                                                2016                   2015
                                                                        (in thousands)
Cash received on settlements of derivative instruments       $         -        $           45,983
Change in fair value of derivative instruments                         -                   (9,859)
Total gain on derivative instruments                         $         -        $           36,124






Contractual obligations.

On August 10, 2015 the Bankruptcy Court issued orders allowing the Company to reject its rig and servicing contracts with Nabors effective July 15, 2015 and the total estimated allowable claim has been included in "Liabilities Subject to Compromise" in the Condensed Consolidated Balance Sheet. The rejections impacted and eliminated approximately $29 million due over the life of the contracts as of the date the contracts were rejected.

On May 11, 2016, the Bankruptcy Court issued an order authorizing the rejection of the Company's midstream gathering agreements with HPIP Gonzales Holdings, LLC (the "HPIP Gathering Agreement") effective September 30, 2015. The rejection of the HPIP Gathering Agreement eliminates the Company's obligation to drill at least one well per year on the relevant acreage and avoids triggering the agreement's "put" provision, which would require the Company to purchase the gathering and processing facilities at a contractually mandated price if the drilling program terminated prior to May 2, 2017. On May 3, 2016, the Bankruptcy Court also issued an opinion finding that certain covenants contained in the HPIP Gathering Agreement do not "run with the land" as real covenants or as equitable servitudes. Due to the uncertainty of any appeals that may be filed by HPIP and uncertainties surrounding the claims process as well as the pending arbitration between HPIP and the Company (which is currently subject to the automatic stay) and HPIP's pending claims against the Company in bankruptcy court, the Company is not currently able to estimate an allowable claim in relation to this matter. The Company has not recognized amounts related to the HPIP Gathering Agreement as of March 31, 2016 or December 31, 2015.

On May 11, 2016, the Bankruptcy Court issued an order authorizing the rejection of the Company's midstream gathering agreements with Nordheim Eagle Ford Gathering, LLC ("Nordheim") effective December 31, 2015. During 2014, the Company had executed ten-year gas and condensate gathering agreements with Nordheim for the transportation and processing of natural gas and condensate, covering certain properties in South Texas with contractually obligated annual minimum volume commitments to deliver a cumulative 88.5 Bcfe of gas and 5,150 MBbl of condensate by September 22, 2024 (the "Nordheim Gathering Agreements"). Under the terms of the Nordheim Gathering Agreements, the Company is required to make annual deficiency payments for any shortfalls in delivering the minimum annual volumes under these commitments beginning in the third quarter of 2015, which would be partially offset by then-existing credit balances for production in excess of minimum commitments, if any. As of December 31, 2015, the Company had not delivered the minimum volumes required for the prior contract year, resulting in a deficiency of approximately $3.0 million which was recognized as "Other operating expenses" in the Consolidated Statement of Operations and as "Liabilities subject to compromise" in the Condensed Consolidated Balance Sheets. No additional shortfalls have been recognized subsequent to the effective date of the rejection of the Nordheim Gathering Agreements. As of March 31, 2016, the Company has not made the deficiency payment. The Company believes that rejection of the Nordheim Gathering Agreements eliminates any future obligation under the agreements to deliver minimum volumes of gas or condensate, or to make deficiency payments in the event minimum volumes are not delivered. On May 3, 2016, the Bankruptcy Court issued an opinion finding that certain covenants contained in the Nordheim Gathering Agreement do not "run with the land" as real covenants or as equitable servitudes. Due to the uncertainty of any appeals that may be filed by Nordheim and the uncertainties surrounding the claims reconciliation process, the Company is not currently able to estimate an allowable claim in relation to this matter. The Company has not recognized any additional amounts related to the rejection of the Nordheim Gathering Agreements as of March 31, 2016.

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The Company has executed additional gas gathering agreements for the transportation and processing of natural gas, covering certain properties in our core operating areas and contractually obligated minimum volume commitments to deliver a cumulative 6.8 Bcfe of gas by August 2018. Under the terms of these agreements, the Company is required to make deficiency payments at the end of the contractual term for any shortfalls in delivering the minimum volumes under these commitments. Based on the current development plan for these oil and gas assets, the Company does not anticipate that future production from the applicable assets and dedicated area will satisfy the future volume commitments, resulting in deficiency payments over the life of the agreements. As of March 31, 2016, the Company has recognized an estimated deficiency of approximately $1.6 million which was recognized as "Other operating expenses" in the Consolidated Statements of Operations and as Liabilities subject to compromise in the Consolidated Balance Sheets.

As is customary in the oil and natural gas industry, the Company may at times have commitments in place to reserve or earn certain acreage positions or wells. If the Company does not pay such commitments, the acreage positions or wells may be lost.

We have no off balance sheet arrangements within the meaning of Item 303(a)(4) of SEC Regulation S-K.

Critical Accounting Policies, Estimates, Judgments, and Assumptions

During the three months ended March 31, 2016, we did not have any material changes in critical accounting policies, estimates, judgments and assumptions.

Non-GAAP Financial Measure

Adjusted EBITDA is a non-GAAP financial measure. We believe the presentation of Adjusted EBITDA provides useful information to investors to evaluate the operations of our business excluding certain items and for the reasons set forth below. Adjusted EBITDA should not be considered an alternative to net income, operating income, cash flow operating activities or any other measure of financial performance presented in accordance with US GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of another company because all companies may not calculate Adjusted EBITDA in the same manner.

We use Adjusted EBITDA for the following purposes:

•to assess the financial performance of our assets, without regard to financing methods, capital structure or historical cost basis;

•to assess our operating performance and return on capital as compared to those of other companies in the oil and gas industry, without regard to financing or capital structure;

•to assess the viability of acquisition and capital expenditure projects and the overall rates of return on alternative investment opportunities;

•to assess the ability of our assets to generate cash sufficient to pay interest costs and support indebtedness;

•for various purposes, including strategic planning and forecasting;

Cautionary Statement Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q and the documents referred to in this Quarterly Report on Form 10-Q contain "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 (as amended, the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are statements that are not statements of historical fact, including statements about beliefs, opinions and expectations. Forward-looking statements are based on, and include statements about, our plans, prospects, expected future financial condition, results of operations, cash flows, dividends and dividend plans, objectives, beliefs, financing plans, business strategies, budgets, goals, future events, future revenues or performance, financing needs, outcomes of litigation, projected costs, operating metrics, capital expenditures, competitive positions, acquisitions, investment opportunities, integration, cost savings, synergies, growth opportunities, dispositions, plans and objectives of management for future operations and any other

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information that is not historical information. These statements, which may include statements regarding the period following completion of the reincorporation merger and the related transactions, include, without limitation, words such as "may," "will," "could," "should," "would," "expect," "plan," "project," "forecast," "intend," "anticipate," "believe," "estimate," "predict," "suggest," "view," "potential," "pursue," "target," "continue" and similar expressions and variations as well as the negative of these terms. These statements involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to differ materially from those expressed in them or indicated by them.

These risks and uncertainties are not exhaustive. Other sections of this Quarterly Report on Form 10-Q describe additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform our prior statements to actual results or revised expectations and we do not intend to do so.

These forward-looking statements appear in a number of places and include statements with respect to, among other things:

•risks and uncertainties associated with the Chapter 11 process, including our inability to develop, confirm and consummate a plan under Chapter 11 of the Bankruptcy Code or an alternative restructuring transaction, including a sale of all or substantially all of our assets, which may be necessary to continue as a going concern;

•inability to maintain our relationship with suppliers, customers, employees and other third parties as a result of our Chapter 11 filing;

•failure to satisfy our short- or long-term liquidity needs, including our inability to generate sufficient cash flow from operations or to obtain adequate financing to fund our capital expenditures and meet working capital needs and our ability to continue as a going concern;

•estimates of our oil and natural gas reserves;

•our future financial condition, results of operations, revenues, cash flows, and expenses;

•our future levels of indebtedness, liquidity, and compliance with debt covenants;

•our ability to access the capital markets and the terms on which capital may be available to us;

•our ability to fund our operations and capital expenditures;

•our future business strategy and other plans and objectives for future operations;

•our ability to integrate the historical Forest and Sabine O&G businesses and achieve synergies related to the Combination;

•our business' competitive position;

•our outlook on oil and natural gas prices;

•the amount, nature, and timing of our future capital expenditures, including future development costs;

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•our potential future asset dispositions and other transactions, the timing of closing of such transactions and the use of proceeds, if any, from such transactions;

•the risks associated with potential acquisitions or alliances by us;

•the recruitment and retention of our officers and employees;

•our expected levels of compensation;

•the likelihood of success of and impact of litigation on us;

•our assessment of our counterparty risk and the ability of our counterparties to perform their future obligations; and

•the impact of federal, state, and local political, regulatory, and environmental developments in the United States where we conduct business operations.

We expressly qualify in its entirety each forward-looking statement attributable to us or any person acting on our behalf by the cautionary statements contained or referred to in this section. Except to the extent required by applicable law or regulation, we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Source: Equities.com News (May 15, 2016 - 10:30 PM EDT)

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