Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐ 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 001-31539

SM ENERGY COMPANY

(Exact name of registrant as specified in its charter)

Delaware 41-0518430

(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

1775 Sherman Street, Suite 1200, Denver, Colorado 80203

(Address of principal executive offices) (Zip Code)

(303) 861-8140

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value	SM	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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



	Large accelerated filer	☑	Accelerated filer	☐

	Non-accelerated filer	☐	Smaller reporting company	☐

			Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 23, 2019, the registrant had 112,857,163 shares of common stock outstanding.

TABLE OF CONTENTS



Item		Page
	Part I	3

Item 1.	Financial Statements (unaudited)	3

	Condensed Consolidated Balance Sheets June 30, 2019, and December 31, 2018	3

	Condensed Consolidated Statements of Operations Three and Six Months Ended June 30, 2019, and 2018	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) Three and Six Months Ended June 30, 2019, and 2018	5

	Condensed Consolidated Statements of Stockholders’ Equity Continuous Quarterly Presentation Ended June 30, 2019, and 2018	6

	Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2019, and 2018	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk (included within the content of Item 2)	40

Item 4.	Controls and Procedures	40

	Part II	42

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 6.	Exhibits	43

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)



	June 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	12		$	77,965
Accounts receivable	165,757			167,536
Derivative assets	114,242			175,130
Prepaid expenses and other	8,723			8,632
Total current assets	288,734			429,263
Property and equipment (successful efforts method):
Proved oil and gas properties	7,974,754			7,278,362
Accumulated depletion, depreciation, and amortization	(3,774,548		)	(3,417,953		)
Unproved oil and gas properties	1,445,985			1,581,401
Wells in progress	257,945			295,529
Properties held for sale, net	—			5,280
Other property and equipment, net of accumulated depreciation of $62,372 and $57,102, respectively	81,193			88,546
Total property and equipment, net	5,985,329			5,831,165
Noncurrent assets:
Derivative assets	30,180			58,499
Other noncurrent assets	87,696			33,935
Total noncurrent assets	117,876			92,434
Total assets	$	6,391,939		$	6,352,862
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	407,883		$	403,199
Derivative liabilities	70,259			62,853
Other current liabilities	25,803			—
Total current liabilities	503,945			466,052
Noncurrent liabilities:
Revolving credit facility	118,000			—
Senior Notes, net of unamortized deferred financing costs	2,450,737			2,448,439
Senior Convertible Notes, net of unamortized discount and deferred financing costs	152,503			147,894
Asset retirement obligations	95,194			91,859
Deferred income taxes	190,146			223,278
Derivative liabilities	12,431			12,496
Other noncurrent liabilities	67,140			42,522
Total noncurrent liabilities	3,086,151			2,966,488

Commitments and contingencies (note 6)

Stockholders’ equity:
Common stock, $0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 112,525,633 and 112,241,966 shares, respectively	1,125			1,122
Additional paid-in capital	1,779,665			1,765,738
Retained earnings	1,033,051			1,165,842
Accumulated other comprehensive loss	(11,998		)	(12,380		)
Total stockholders’ equity	2,801,843			2,920,322
Total liabilities and stockholders’ equity	$	6,391,939		$	6,352,862

The accompanying notes are an integral part of these condensed consolidated financial statements.

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
Operating revenues and other income:
Oil, gas, and NGL production revenue	$	406,854		$	402,558		$	747,330		$	785,444
Net gain on divestiture activity	262			39,501			323			424,870
Other operating revenues	56			1,857			449			3,197
Total operating revenues and other income	407,172			443,916			748,102			1,213,511
Operating expenses:
Oil, gas, and NGL production expense	123,050			117,400			244,355			238,279
Depletion, depreciation, amortization, and asset retirement obligation liability accretion	206,330			151,765			384,076			282,238
Exploration	10,877			14,056			22,225			27,783
Abandonment and impairment of unproved properties	12,417			11,935			18,755			17,560
General and administrative	30,920			28,920			63,006			56,602
Net derivative (gain) loss	(79,655		)	63,749			97,426			71,278
Other operating expenses, net	(934		)	(57		)	(599		)	4,555
Total operating expenses	303,005			387,768			829,244			698,295
Income (loss) from operations	104,167			56,148			(81,142		)	515,216
Interest expense	(39,627		)	(41,654		)	(77,607		)	(84,739		)
Other non-operating income (expense), net	(562		)	1,802			(879		)	2,211
Income (loss) before income taxes	63,978			16,296			(159,628		)	432,688
Income tax (expense) benefit	(13,590		)	901			32,448			(98,090		)
Net income (loss)	$	50,388		$	17,197		$	(127,180	)	$	334,598

Basic weighted-average common shares outstanding	112,262			111,701			112,257			111,698
Diluted weighted-average common shares outstanding	112,932			113,630			112,257			113,267
Basic net income (loss) per common share	$	0.45		$	0.15		$	(1.13	)	$	3.00
Diluted net income (loss) per common share	$	0.45		$	0.15		$	(1.13	)	$	2.95
Dividends per common share	$	—		$	—		$	0.05		$	0.05

The accompanying notes are an integral part of these condensed consolidated financial statements.

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2019		2018		2019			2018
Net income (loss)	$	50,388	$	17,197	$	(127,180	)	$	334,598
Other comprehensive income, net of tax:
Pension liability adjustment	119		198		382			458
Total other comprehensive income, net of tax	119		198		382			458
Total comprehensive income (loss)	$	50,507	$	17,395	$	(126,798	)	$	335,056

The accompanying notes are an integral part of these condensed consolidated financial statements.

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share data and dividends per share)



				Additional Paid-in Capital						Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Common Stock						Retained Earnings
	Shares	Amount					Retained Earnings
Balances, December 31, 2018	112,241,966	$	1,122	$	1,765,738		$	1,165,842		$	(12,380	)	$	2,920,322
Net loss	—	—		—			(177,568		)	—			(177,568		)
Other comprehensive income	—	—		—			—			263			263
Cash dividends declared, $0.05 per share	—	—		—			(5,612		)	—			(5,612		)
Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings	2,579	—		(18		)	—			—			(18		)
Stock-based compensation expense	—	—		5,838			—			—			5,838
Balances, March 31, 2019	112,244,545	$	1,122	$	1,771,558		$	982,662		$	(12,117	)	$	2,743,225
Net income	—	—		—			50,388			—			50,388
Other comprehensive income	—	—		—			—			119			119
Issuance of common stock under Employee Stock Purchase Plan	184,079	2		1,957			—			—			1,959
Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings	290	—		(2		)	—			—			(2		)
Stock-based compensation expense	96,719	1		6,153			—			—			6,154
Other	—	—		(1		)	1			—			—
Balances, June 30, 2019	112,525,633	$	1,125	$	1,779,665		$	1,033,051		$	(11,998	)	$	2,801,843

				Additional Paid-in Capital						Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Common Stock						Retained Earnings
	Shares	Amount					Retained Earnings
Balances, December 31, 2017	111,687,016	$	1,117	$	1,741,623		$	665,657		$	(13,789	)	$	2,394,608
Net income	—	—		—			317,401			—			317,401
Other comprehensive income	—	—		—			—			260			260
Cash dividends declared, $0.05 per share	—	—		—			(5,584		)	—			(5,584		)
Stock-based compensation expense		—		5,412			—			—			5,412
Cumulative effect of accounting change	—	—		—			2,969			(2,969		)	—
Other	—	—		—			1			(1		)	—
Balances, March 31, 2018	111,687,016	$	1,117	$	1,747,035		$	980,444		$	(16,499	)	$	2,712,097
Net income	—	—		—			17,197			—			17,197
Other comprehensive income	—	—		—			—			198			198
Issuance of common stock under Employee Stock Purchase Plan	100,249	1		1,880			—			—			1,881
Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings	1,161	—		(10		)	—			—			(10		)
Stock-based compensation expense	58,572	—		5,264			—			—			5,264
Balances, June 30, 2018	111,846,998	$	1,118	$	1,754,169		$	997,641		$	(16,301	)	$	2,736,627

The accompanying notes are an integral part of these condensed consolidated financial statements.

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)



	For the Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	(127,180	)	$	334,598
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net gain on divestiture activity	(323		)	(424,870		)
Depletion, depreciation, amortization, and asset retirement obligation liability accretion	384,076			282,238
Abandonment and impairment of unproved properties	18,755			17,560
Stock-based compensation expense	11,992			10,676
Net derivative loss	97,426			71,278
Derivative settlement loss	(879		)	(61,193		)
Amortization of debt discount and deferred financing costs	7,633			7,750
Deferred income taxes	(33,237		)	97,505
Other, net	(1,287		)	(2,302		)
Net change in working capital	21,454			(21,722		)
Net cash provided by operating activities	378,430			311,518

Cash flows from investing activities:
Net proceeds from the sale of oil and gas properties ⁽¹⁾	12,520			742,215
Capital expenditures	(576,127		)	(723,319		)
Acquisition of proved and unproved oil and gas properties	319			(24,615		)
Net cash used in investing activities	(563,288		)	(5,719		)

Cash flows from financing activities:
Proceeds from credit facility	696,500			—
Repayment of credit facility	(578,500		)	—
Net proceeds from sale of common stock	1,959			1,881
Dividends paid	(5,612		)	(5,584		)
Other, net	(1,044		)	(133		)
Net cash provided by (used in) financing activities	113,303			(3,836		)

Net change in cash, cash equivalents, and restricted cash	(71,555		)	301,963
Cash, cash equivalents, and restricted cash at beginning of period	77,965			313,943
Cash, cash equivalents, and restricted cash at end of period	$	6,410		$	615,906

Supplemental schedule of additional cash flow information and non-cash activities:

Operating activities:
Cash paid for interest, net of capitalized interest	$	(67,646	)	$	(77,803	)

Investing activities:
Changes in capital expenditure accruals and other	$	(10,097	)	$	62,167

Supplemental non-cash investing activities:
Carrying value of properties exchanged	$	66,588		$	—

Reconciliation of cash, cash equivalents, and restricted cash:

Cash and cash equivalents	$	12		$	615,906
Restricted cash ⁽¹⁾	6,398			—
Cash, cash equivalents, and restricted cash at end of period	$	6,410		$	615,906

____________________________________________


⁽¹⁾	As of June 30, 2019, a portion of net proceeds from the sale of oil and gas properties was restricted for future property acquisitions. Restricted cash is included in the other noncurrent assets line item on the accompanying unaudited condensed consolidated balance sheets (“accompanying balance sheets”).

The accompanying notes are an integral part of these condensed consolidated financial statements.

SM ENERGY COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 - Summary of Significant Accounting Policies

Description of Operations

SM Energy Company, together with its consolidated subsidiaries (“SM Energy” or the “Company”), is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil and condensate, natural gas, and natural gas liquids (also respectively referred to as “oil,” “gas,” and “NGLs” throughout this report) in onshore North America.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Quarterly Report on Form 10-Q, and Regulation S-X. These financial statements do not include all information and notes required by GAAP for annual financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”). In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of interim financial information, have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year. In connection with the preparation of the Company’s unaudited condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of June 30, 2019, and through the filing of this report.

Significant Accounting Policies

The significant accounting policies followed by the Company are set forth in Note 1 - Summary of Significant Accounting Policies in the 2018 Form 10-K and are supplemented by the notes to the unaudited condensed consolidated financial statements included in this report. These unaudited condensed consolidated financial statements should be read in conjunction with the 2018 Form 10-K.

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), followed by other related ASUs that provided targeted improvements and additional practical expedient options (collectively “ASU 2016-02” or “Topic 842”). The Company adopted ASU 2016-02 on January 1, 2019, using the modified retrospective method. The Company elected as part of its adoption to also use the optional transition methodology whereby lease accounting for previously reported periods continues to be reported in accordance with historical accounting guidance for leases in effect for those prior periods. Policy elections and practical expedients the Company has implemented in connection with the adoption of ASU 2016-02 include (a) excluding from the balance sheet leases with terms that are less than one year, (b) for agreements that contain both lease and non-lease components, combining these components together and accounting for them as a single lease, (c) the package of practical expedients, which among other requirements, allows the Company to avoid reassessing contracts that commenced prior to adoption that were properly evaluated under legacy GAAP, and (d) excluding land easements that existed or expired before adoption of ASU 2016-02. The scope of ASU 2016-02 does not apply to leases used in the exploration or use of minerals, oil, natural gas, or other similar non-regenerative resources.

Upon adoption on January 1, 2019, the Company recognized approximately $50.0 million in right-of-use (“ROU”) assets and related lease liabilities for its operating leases. There was no cumulative effect to retained earnings upon the adoption of this guidance. Please refer to Note 12 - Leases for additional discussion.

Other than as disclosed in the 2018 Form 10-K, there are no ASUs that would have a material effect on the Company’s consolidated financial statements and related disclosures that have been issued but not yet adopted by the Company as of June 30, 2019, and through the filing of this report.

Note 2 - Revenue from Contracts with Customers

The Company recognizes its share of revenue from the sale of produced oil, gas, and NGLs in its Permian and South Texas & Gulf Coast regions. As a result of divestiture activity in the first half of 2018, there has been no production revenue from the Rocky Mountain region after the second quarter of 2018. Oil, gas, and NGL production revenue presented within the accompanying unaudited condensed consolidated statements of operations (“accompanying statements of operations”) is reflective of the revenue generated from contracts with customers.

The tables below present oil, gas, and NGL production revenue by product type for each of the Company’s operating regions for the three and six months ended June 30, 2019, and 2018:



	Permian						South Texas & Gulf Coast						Rocky Mountain						Total
	Three Months Ended June 30,						Three Months Ended June 30,						Three Months Ended June 30,						Three Months Ended June 30,
	2019			2018			2019			2018			2019			2018			2019			2018
	(in thousands)
Oil production revenue	$	288,447		$	227,636		$	15,697		$	19,346		$	—		$	19,168		$	304,144		$	266,150
Gas production revenue	16,449			31,734			48,775			52,235			—			95			65,224			84,064
NGL production revenue	(43		)	129			37,529			52,248			—			(33		)	37,486			52,344
Total	$	304,853		$	259,499		$	102,001		$	123,829		$	—		$	19,230		$	406,854		$	402,558
Relative percentage	75		%	64		%	25		%	31		%	—		%	5		%	100		%	100		%

____________________________________________

Note: Amounts may not calculate due to rounding.



	Permian						South Texas & Gulf Coast						Rocky Mountain						Total
	Six Months Ended June 30,						Six Months Ended June 30,						Six Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2019			2018			2019			2018
	(in thousands)
Oil production revenue	$	513,694		$	433,430		$	29,511		$	38,929		$	—		$	54,851		$	543,205		$	527,210
Gas production revenue	32,041			56,611			98,296			104,968			—			1,594			130,337			163,173
NGL production revenue	(22		)	253			73,810			94,018			—			790			73,788			95,061
Total	$	545,713		$	490,294		$	201,617		$	237,915		$	—		$	57,235		$	747,330		$	785,444
Relative percentage	73		%	63		%	27		%	30		%	—		%	7		%	100		%	100		%

____________________________________________

Note: Amounts may not calculate due to rounding.

The Company recognizes oil, gas, and NGL production revenue at the point in time when custody and title (“control”) of the product transfers to the customer, which differs depending on the contractual terms of each of the Company’s arrangements. Transfer of control drives the presentation of transportation, gathering, processing, and other post-production expenses (“fees and other deductions”) within the accompanying statements of operations. Fees and other deductions incurred prior to control transfer are recorded within the oil, gas, and NGL production expense line item on the accompanying statements of operations, while fees and other deductions incurred subsequent to control transfer are embedded in the price and effectively recorded as a reduction of oil, gas, and NGL production revenue. Please refer to Note 2 - Revenue from Contracts with Customers in the 2018 Form 10-K for more information regarding the types of contracts under which oil, gas, and NGL production revenue is generated.

Significant judgments made in applying the guidance in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers relate to the point in time when control transfers to customers in gas processing arrangements with midstream processors. The Company does not believe that significant judgments are required with respect to the determination of the transaction price, including amounts that represent variable consideration, as volume and price carry a low level of estimation uncertainty given the precision of volumetric measurements and the use of index pricing with generally predictable differentials. Accordingly, the Company does not consider estimates of variable consideration to be constrained.

The Company’s contractual performance obligations arise upon the production of hydrocarbons from wells in which the Company has an ownership interest. The performance obligations are considered satisfied upon control transferring to a customer at the wellhead, inlet, or tailgate of the midstream processor’s processing facility, or other contractually specified delivery point. The time period between production and satisfaction of performance obligations is generally less than one day; thus, there are no material unsatisfied or partially unsatisfied performance obligations at the end of the reporting period.

Revenue is recorded in the month when contractual performance obligations are satisfied. However, settlement statements from the purchasers of hydrocarbons and the related cash consideration are received 30 to 90 days after production has occurred. As a result, the Company must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for sale of the product. Estimated revenue due to the Company is recorded within the accounts receivable line item on the accompanying balance sheets until payment is received. The accounts receivable balances from contracts with customers within the accompanying balance sheets as of June 30, 2019, and December 31, 2018, were $100.1 million and $107.2 million, respectively. To estimate accounts receivable from contracts with customers, the Company uses knowledge of its properties, historical performance,

contractual arrangements, index pricing, quality and transportation differentials, and other factors as the basis for these estimates. Differences between estimates and actual amounts received for product sales are recorded in the month that payment is received from the purchaser. Revenue recognized that related to performance obligations satisfied in prior reporting periods was immaterial for the three and six months ended June 30, 2019, and 2018.

Note 3 - Divestitures, Assets Held for Sale, and Acquisitions

Divestitures

No material divestitures occurred during the first six months of 2019, and there were no assets classified as held for sale as of June 30, 2019.

On March 26, 2018, the Company divested approximately 112,000 net acres of its Powder River Basin assets (the “PRB Divestiture”) for total cash received at closing, net of costs (referred to throughout this report as “net divestiture proceeds”), of $490.8 million, subject to final purchase price adjustments, and recorded an estimated net gain of $410.1 million for the six months ended June 30, 2018. After final purchase price adjustments, the Company received net divestiture proceeds of $492.2 million, and recorded a final net gain of $410.6 million related to these divested assets for the year ended December 31, 2018.

During the second quarter of 2018, the Company completed the divestitures of its remaining assets in the Williston Basin located in Divide County, North Dakota (the “Divide County Divestiture”) and its Halff East assets in the Midland Basin (the “Halff East Divestiture”), for combined net divestiture proceeds of $250.8 million, subject to final purchase price adjustments, and recorded a combined estimated net gain of $15.7 million for the six months ended June 30, 2018. After final purchase price adjustments, the Company received net divestiture proceeds of $252.2 million, and recorded a final net gain of $15.4 million related to these divested assets for the year ended December 31, 2018.

Acquisitions

During the first half of 2019, the Company completed several non-monetary acreage trades of undeveloped properties located in Howard, Martin, and Midland Counties, Texas, resulting in the exchange of approximately 2,000 net acres, with $66.6 million of carrying value attributed to the properties transferred by the Company. These trades were recorded at carryover basis with no gain or loss recognized. No such trades occurred during the first half of 2018.

During the second quarter of 2018, the Company acquired approximately 720 net acres of unproved properties in Martin County, Texas, for $24.6 million. Under authoritative accounting guidance, this transaction was considered an asset acquisition. Therefore, the properties were recorded based on the fair value of the total consideration transferred on the acquisition date and the transaction costs were capitalized as a component of the cost of the assets acquired.

Note 4 - Income Taxes

Recorded income tax (expense) or benefit differs from the amounts that would be provided by applying the statutory United States federal income tax rate to income or loss before income taxes. These differences primarily relate to the effect of state income taxes, excess tax benefits and deficiencies from share-based compensation awards, tax limitations on the compensation of certain covered individuals, changes in valuation allowances, and the cumulative impact of other smaller permanent differences. The quarterly rate can also be affected by the proportional impacts of forecast net income or loss for each period end presented, as reflected in the table below.

The provision for income taxes for the three and six months ended June 30, 2019, and 2018, consisted of the following:



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Current portion of income tax (expense) benefit:
Federal	$	—		$	—		$	—		$	—
State	176			40			(789		)	(585		)
Deferred portion of income tax (expense) benefit	(13,766		)	861			33,237			(97,505		)
Income tax (expense) benefit	$	(13,590	)	$	901		$	32,448		$	(98,090	)
Effective tax rate	21.2		%	(5.5		)%	20.3		%	22.7		%

The change in the Company’s effective tax rate for the periods presented above generally reflects differences in the estimated highest marginal state tax rate due to changes in the composition of income or loss from Company activities, including divestitures, among multiple state tax jurisdictions. Future periods are not expected to reflect these differences as the Company’s current activities are occurring predominately in Texas. For all years before 2015, the Company is generally no longer subject to United States federal or state income tax examinations by tax authorities.

Note 5 - Long-Term Debt

Credit Agreement

The Company’s Sixth Amended and Restated Credit Agreement, as amended (the “Credit Agreement”), provides for a senior secured revolving credit facility with a maximum loan amount of $2.5 billion. On April 18, 2019, the Company entered into the First Amendment to the Credit Agreement (the “First Amendment”) with its lenders. Pursuant to the First Amendment, and as part of the regular, semi-annual borrowing base redetermination process, the borrowing base and aggregate lender commitments were increased from $1.5 billion and $1.0 billion, respectively, to $1.6 billion and $1.2 billion, respectively. The borrowing base increase was primarily driven by the increased value of the Company’s estimated proved reserves at December 31, 2018. The next scheduled borrowing base redetermination date is October 1, 2019.

The Credit Agreement is scheduled to mature on September 28, 2023. The maturity date could, however, occur earlier on August 16, 2022, if the Company has not completed certain repurchase, redemption, or refinancing activities associated with its 6.125% Senior Notes due 2022 (“2022 Senior Notes”), as outlined in the Credit Agreement. The Company must comply with certain financial and non-financial covenants under the terms of the Credit Agreement and was in compliance with all such covenants as of June 30, 2019, and through the filing of this report. Please refer to Note 5 - Long-Term Debt in the 2018 Form 10-K for additional detail on the terms of the Company’s Credit Agreement.

Interest and commitment fees associated with the credit facility are accrued based on a borrowing base utilization grid set forth in the Credit Agreement as presented in Note 5 - Long-Term Debt in the Company’s 2018 Form 10-K. At the Company’s election, borrowings under the Credit Agreement may be in the form of Eurodollar, Alternate Base Rate (“ABR”), or Swingline loans. Eurodollar loans accrue interest at the London Interbank Offered Rate, plus the applicable margin from the utilization grid, and ABR and Swingline loans accrue interest at a market-based floating rate, plus the applicable margin from the utilization grid. Commitment fees are accrued on the unused portion of the aggregate lender commitment amount at rates from the utilization grid and are included in the interest expense line item on the accompanying statements of operations.

The following table presents the outstanding balance, total amount of letters of credit outstanding, and available borrowing capacity under the Credit Agreement as of July 23, 2019, June 30, 2019, and December 31, 2018:



	As of July 23, 2019		As of June 30, 2019		As of December 31, 2018
	(in thousands)
Credit facility balance ⁽¹⁾	$	126,000	$	118,000	$	—
Letters of credit ⁽²⁾	—		—		200
Available borrowing capacity	1,074,000		1,082,000		999,800
Total aggregate lender commitment amount	$	1,200,000	$	1,200,000	$	1,000,000

____________________________________________


⁽¹⁾	Unamortized deferred financing costs attributable to the credit facility are presented as a component of other noncurrent assets on the accompanying balance sheets and totaled $6.7 million and $6.4 million as of June 30, 2019, and December 31, 2018, respectively. These costs are being amortized over the term of the credit facility on a straight-line basis.


⁽²⁾	Letters of credit outstanding reduce the amount available under the credit facility on a dollar-for-dollar basis. The letter of credit outstanding as of December 31, 2018, was released during the three months ended March 31, 2019.

Senior Notes

As of June 30, 2019, the Company’s senior notes consisted of 6.125% Senior Notes due 2022, 5.0% Senior Notes due 2024, 5.625% Senior Notes due 2025, 6.75% Senior Notes due 2026, and 6.625% Senior Notes due 2027 (collectively referred to as “Senior Notes”). The Senior Notes, net of unamortized deferred financing costs line item on the accompanying balance sheets as of June 30, 2019, and December 31, 2018, consisted of the following:



	As of June 30, 2019						As of December 31, 2018
	Principal Amount		Unamortized Deferred Financing Costs		Principal Amount, Net of Unamortized Deferred Financing Costs		Principal Amount		Unamortized Deferred Financing Costs		Principal Amount, Net of Unamortized Deferred Financing Costs
	(in thousands)
6.125% Senior Notes due 2022	$	476,796	$	3,420	$	473,376	$	476,796	$	3,921	$	472,875
5.0% Senior Notes due 2024	500,000		4,227		495,773		500,000		4,688		495,312
5.625% Senior Notes due 2025	500,000		5,356		494,644		500,000		5,808		494,192
6.75% Senior Notes due 2026	500,000		5,989		494,011		500,000		6,407		493,593
6.625% Senior Notes due 2027	500,000		7,067		492,933		500,000		7,533		492,467
Total	$	2,476,796	$	26,059	$	2,450,737	$	2,476,796	$	28,357	$	2,448,439

The Senior Notes are unsecured senior obligations and rank equal in right of payment with all of the Company’s existing and any future unsecured senior debt and are senior in right of payment to any future subordinated debt. There are no subsidiary guarantors of the Senior Notes. The Company is subject to certain covenants under the indentures governing the Senior Notes and was in compliance with all such covenants as of June 30, 2019, and through the filing of this report. The Company may redeem some or all of its Senior Notes prior to their maturity at redemption prices based on a premium, plus accrued and unpaid interest as described in the indentures governing the Senior Notes.

Senior Convertible Notes

The Company’s senior convertible notes consist of $172.5 million in aggregate principal amount of 1.50% Senior Convertible Notes due July 1, 2021 (the “Senior Convertible Notes”). The Senior Convertible Notes are unsecured senior obligations and rank equal in right of payment with all of the Company’s existing and any future unsecured senior debt and are senior in right of payment to any future subordinated debt. Please refer to Note 5 - Long-Term Debt in the 2018 Form 10-K for additional detail on the Company’s Senior Convertible Notes and associated capped call transactions.

The Senior Convertible Notes were not convertible at the option of holders as of June 30, 2019, or through the filing of this report. Notwithstanding the inability to convert, the if-converted value of the Senior Convertible Notes as of June 30, 2019, did not exceed the principal amount. The debt discount and debt-related issuance costs are amortized to the principal value of the Senior Convertible Notes as interest expense through the maturity date of July 1, 2021. Interest expense recognized on the Senior Convertible Notes related to the stated interest rate and amortization of the debt discount totaled $2.7 million and $2.6 million for the three months ended June 30, 2019, and 2018, respectively, and totaled $5.4 million and $5.2 million for the six months ended June 30, 2019, and 2018, respectively.

There have been no changes to the initial net carrying amount of the equity component of the Senior Convertible Notes recorded in additional paid-in capital on the accompanying balance sheets since issuance. The Senior Convertible Notes, net of unamortized discount and deferred financing costs line on the accompanying balance sheets as of June 30, 2019, and December 31, 2018, consisted of the following:



	As of June 30, 2019			As of December 31, 2018
	(in thousands)
Principal amount of Senior Convertible Notes	$	172,500		$	172,500
Unamortized debt discount	(18,162		)	(22,313		)
Unamortized deferred financing costs	(1,835		)	(2,293		)
Senior Convertible Notes, net of unamortized discount and deferred financing costs	$	152,503		$	147,894

The Company is subject to certain covenants under the indenture governing the Senior Convertible Notes and was in compliance with all such covenants as of June 30, 2019, and through the filing of this report.

Capitalized Interest

Capitalized interest costs for the three months ended June 30, 2019, and 2018, were $5.0 million and $6.0 million, respectively, and for the the six months ended June 30, 2019, and 2018, were $9.9 million and $10.5 million, respectively. The amount of interest the Company capitalizes generally fluctuates based on its capital program and the timing and amount of costs associated with capital projects that are considered in progress.

Note 6 - Commitments and Contingencies

Commitments

Other than those items discussed below, there have been no changes in commitments through the filing of this report that differ materially from those disclosed in the 2018 Form 10-K. Please refer to Note 6 - Commitments and Contingencies in the 2018 Form 10-K for additional discussion of the Company’s commitments.

Delivery and Purchase Commitments. During the second quarter of 2019, the Company executed an amendment to its existing sand sourcing agreement that created certain commitments and potential penalties which vary based on the amount of sand the Company uses in well completions occurring in a particular area. This amended sand sourcing agreement expires on December 31, 2023. As of June 30, 2019, potential penalties under this sand sourcing agreement range from zero to a maximum of $10.0 million. The Company does not expect to incur penalties with regard to this agreement.

Drilling Rig and Completion Service Contracts. The Company entered into new and amended drilling rig and well completion service contracts during the first six months of 2019. As of June 30, 2019, the Company’s drilling rig and completion service contract commitments totaled $77.8 million. If all of these contracts were terminated as of June 30, 2019, the Company would avoid a portion of the contractual service commitments; however, the Company would be required to pay $43.5 million in early termination fees. Excluded from these amounts are variable commitments and potential penalties determined by the number of completion crews the Company has in operation in a particular area under a completion service arrangement. As of June 30, 2019, potential penalties under this completion service arrangement, which expires on December 31, 2023, range from zero to a maximum of $15.1 million. The Company does not expect to incur penalties with regard to its drilling rig and completion service contracts.

Electrical Power Purchase Contracts. During the second quarter of 2019, the Company entered into a fixed price contract for the purchase of electrical power that increased the purchase commitment under an existing agreement. As of June 30, 2019, the Company had a commitment to purchase electrical power through 2027 with a total remaining obligation of $57.1 million. As of the filing of this report, the Company expects to meet this commitment.

Contingencies

The Company is subject to litigation and claims arising in the ordinary course of business. The Company accrues for such items when a liability is both probable and the amount can be reasonably estimated. In the opinion of management, the anticipated results of any pending litigation and claims are not expected to have a material effect on the results of operations, the financial position, or the cash flows of the Company.

Note 7 - Compensation Plans

Equity Incentive Compensation Plan

As of June 30, 2019, 5.8 million shares of common stock were available for grant under the Company’s Equity Incentive Compensation Plan (“Equity Plan”).

Performance Share Units

The Company grants performance share units (“PSUs”) to eligible employees as part of its long-term equity incentive compensation program. The number of shares of the Company’s common stock issued to settle PSUs ranges from zero to two times the number of PSUs awarded and is determined based on certain settlement criteria over a three-year performance period. PSUs generally vest on the third anniversary of the date of the grant or upon other triggering events as set forth in the Equity Plan.

For PSUs that were granted in 2016 and 2017, the settlement criteria included a combination of the Company’s Total Shareholder Return (“TSR”) on an absolute basis, and the Company’s TSR relative to the TSR of certain peer companies over the associated three-year performance period. The fair value of the PSUs granted in 2016 and 2017 was measured on the applicable grant dates using a stochastic Monte Carlo simulation using geometric Brownian motion (“GBM Model”). As these awards depend entirely on market-based settlement criteria, the associated compensation expense is recognized on a straight-line basis within general and administrative expense and exploration expense over the vesting periods of the respective awards.