Document

1775 Sherman Street, Suite 1200,

(Address of principal executive offices)

(Zip Code)

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 September 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.)

(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 October 24, 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 September 30, 2019, and December 31, 2018	3

	Condensed Consolidated Statements of Operations Three and Nine Months Ended September 30, 2019, and 2018	4

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

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

	Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2019, and 2018	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk (included within the content of Item 2)	43

Item 4.	Controls and Procedures	43

	Part II	45

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 6.	Exhibits	46

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)



	September 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	10		$	77,965
Accounts receivable	146,211			167,536
Derivative assets	143,142			175,130
Prepaid expenses and other	21,751			8,632
Total current assets	311,114			429,263
Property and equipment (successful efforts method):
Proved oil and gas properties	8,143,381			7,278,362
Accumulated depletion, depreciation, and amortization	(3,953,181		)	(3,417,953		)
Unproved oil and gas properties	1,434,435			1,581,401
Wells in progress	325,230			295,529
Properties held for sale, net	—			5,280
Other property and equipment, net of accumulated depreciation of $64,971 and $57,102, respectively	79,278			88,546
Total property and equipment, net	6,029,143			5,831,165
Noncurrent assets:
Derivative assets	38,571			58,499
Other noncurrent assets	74,255			33,935
Total noncurrent assets	112,826			92,434
Total assets	$	6,453,083		$	6,352,862
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	431,440		$	403,199
Derivative liabilities	37,798			62,853
Other current liabilities	21,804			—
Total current liabilities	491,042			466,052
Noncurrent liabilities:
Revolving credit facility	129,000			—
Senior Notes, net of unamortized deferred financing costs	2,451,886			2,448,439
Senior Convertible Notes, net of unamortized discount and deferred financing costs	154,883			147,894
Asset retirement obligations	95,806			91,859
Deferred income taxes	217,469			223,278
Derivative liabilities	6,014			12,496
Other noncurrent liabilities	63,233			42,522
Total noncurrent liabilities	3,118,291			2,966,488

Commitments and contingencies (note 6)

Stockholders’ equity:
Common stock, $0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 112,857,163 and 112,241,966 shares, respectively	1,129			1,122
Additional paid-in capital	1,784,787			1,765,738
Retained earnings	1,069,642			1,165,842
Accumulated other comprehensive loss	(11,808		)	(12,380		)
Total stockholders’ equity	2,843,750			2,920,322
Total liabilities and stockholders’ equity	$	6,453,083		$	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 September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Operating revenues and other income:
Oil, gas, and NGL production revenue	$	389,419		$	458,382		$	1,136,749		$	1,243,826
Net gain on divestiture activity	—			786			323			425,656
Other operating revenues	898			201			1,347			3,398
Total operating revenues and other income	390,317			459,369			1,138,419			1,672,880
Operating expenses:
Oil, gas, and NGL production expense	129,042			127,638			373,397			365,917
Depletion, depreciation, amortization, and asset retirement obligation liability accretion	211,125			201,105			595,201			483,343
Exploration	11,626			13,061			33,851			40,844
Abandonment and impairment of unproved properties	6,337			9,055			25,092			26,615
General and administrative	32,578			29,464			95,584			86,066
Net derivative (gain) loss	(100,889		)	178,026			(3,463		)	249,304
Other operating expenses, net	1,021			9,664			422			14,219
Total operating expenses	290,840			568,013			1,120,084			1,266,308
Income (loss) from operations	99,477			(108,644		)	18,335			406,572
Interest expense	(40,584		)	(38,111		)	(118,191		)	(122,850		)
Loss on extinguishment of debt	—			(26,722		)	—			(26,722		)
Other non-operating income (expense), net	(548		)	806			(1,427		)	3,017
Income (loss) before income taxes	58,345			(172,671		)	(101,283		)	260,017
Income tax (expense) benefit	(16,111		)	36,748			16,337			(61,342		)
Net income (loss)	$	42,234		$	(135,923	)	$	(84,946	)	$	198,675

Basic weighted-average common shares outstanding	112,804			112,107			112,441			111,836
Diluted weighted-average common shares outstanding	113,334			112,107			112,441			113,600
Basic net income (loss) per common share	$	0.37		$	(1.21	)	$	(0.76	)	$	1.78
Diluted net income (loss) per common share	$	0.37		$	(1.21	)	$	(0.76	)	$	1.75
Dividends per common share	$	0.05		$	0.05		$	0.10		$	0.10

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 September 30,					For the Nine Months Ended September 30,
	2019		2018			2019			2018
Net income (loss)	$	42,234	$	(135,923	)	$	(84,946	)	$	198,675
Other comprehensive income, net of tax:
Pension liability adjustment	190		263			572			721
Total other comprehensive income, net of tax	190		263			572			721
Total comprehensive income (loss)	$	42,424	$	(135,660	)	$	(84,374	)	$	199,396

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
Net income	—	—		—			42,234			—			42,234
Other comprehensive income	—	—		—			—			190			190
Cash dividends declared, $0.05 per share	—	—		—			(5,643		)	—			(5,643		)
Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings	331,530	4		(1,644		)	—			—			(1,640		)
Stock-based compensation expense	—	—		6,766			—			—			6,766
Balances, September 30, 2019	112,857,163	$	1,129	$	1,784,787		$	1,069,642		$	(11,808	)	$	2,843,750

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) (Continued)

(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, 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
Net loss	—	—		—			(135,923		)	—			(135,923		)
Other comprehensive income	—	—		—			—			263			263
Cash dividends declared, $0.05 per share	—	—		—			(5,607		)	—			(5,607		)
Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings	290,584	3		(2,968		)	—			—			(2,965		)
Stock-based compensation expense	—	—		7,004			—			—			7,004
Balances, September 30, 2018	112,137,582	$	1,121	$	1,758,205		$	856,111		$	(16,038	)	$	2,599,399

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 Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	(84,946	)	$	198,675
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net gain on divestiture activity	(323		)	(425,656		)
Depletion, depreciation, amortization, and asset retirement obligation liability accretion	595,201			483,343
Abandonment and impairment of unproved properties	25,092			26,615
Stock-based compensation expense	18,758			17,680
Net derivative (gain) loss	(3,463		)	249,304
Derivative settlement gain (loss)	23,843			(101,911		)
Amortization of debt discount and deferred financing costs	11,554			11,542
Loss on extinguishment of debt	—			26,722
Deferred income taxes	(13,620		)	60,672
Other, net	(2,291		)	(2,084		)
Net change in working capital	11,781			(3,725		)
Net cash provided by operating activities	581,586			541,177
Cash flows from investing activities:
Net proceeds from the sale of oil and gas properties ⁽¹⁾	12,520			743,199
Capital expenditures	(788,642		)	(1,032,588		)
Acquisition of proved and unproved oil and gas properties	(2,581		)	(24,571		)
Net cash used in investing activities	(778,703		)	(313,960		)
Cash flows from financing activities:
Proceeds from credit facility	1,124,500			—
Repayment of credit facility	(995,500		)	—
Net proceeds from Senior Notes	—			492,079
Cash paid to repurchase Senior Notes, including premium	—			(844,984		)
Net proceeds from sale of common stock	1,959			1,881
Dividends paid	(5,612		)	(5,584		)
Other, net	(2,684		)	(7,746		)
Net cash provided by (used in) financing activities	122,663			(364,354		)
Net change in cash, cash equivalents, and restricted cash	(74,454		)	(137,137		)
Cash, cash equivalents, and restricted cash at beginning of period	77,965			313,943
Cash, cash equivalents, and restricted cash at end of period	$	3,511		$	176,806

Supplemental schedule of additional cash flow information and non-cash activities:
Operating activities:
Cash paid for interest, net of capitalized interest	$	(113,122	)	$	(124,435	)
Net cash paid for income taxes	$	(1,469	)	$	(9,085	)
Investing activities:
Changes in capital expenditure accruals and other	$	34,878		$	19,811
Supplemental non-cash investing activities:
Carrying value of properties exchanged	$	70,808		$	95,121
Supplemental non-cash financing activities:
Non-cash loss on extinguishment of debt, net	$	—		$	6,334

Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents	$	10		$	176,806
Restricted cash ⁽¹⁾	3,501			—
Cash, cash equivalents, and restricted cash at end of period	$	3,511		$	176,806

____________________________________________


⁽¹⁾	As of September 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 September 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 unaudited condensed consolidated financial statements and related disclosures that have been issued but not yet adopted by the Company as of September 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 from its Midland Basin and South Texas assets. Following the divestiture of the Company’s remaining assets in the Rocky Mountain region during the first half of 2018, there has been no production revenue from this 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 nine months ended September 30, 2019, and 2018:



	Midland Basin						South Texas						Total
	Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,
	2019			2018			2019			2018			2019			2018
	(in thousands)
Oil production revenue	$	277,361		$	270,086		$	15,496		$	17,436		$	292,857		$	287,522
Gas production revenue	17,780			40,364			46,267			56,446			64,047			96,810
NGL production revenue	124			563			32,391			73,487			32,515			74,050
Total	$	295,265		$	311,013		$	94,154		$	147,369		$	389,419		$	458,382
Relative percentage	76		%	68		%	24		%	32		%	100		%	100		%

____________________________________________

Note: Amounts may not calculate due to rounding.



	Midland Basin						South Texas						Rocky Mountain						Total
	Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
	(in thousands)
Oil production revenue	$	791,055		$	703,516		$	45,007		$	56,365		$	—		$	54,851		$	836,062		$	814,732
Gas production revenue	49,821			96,974			144,563			161,414			—			1,595			194,384			259,983
NGL production revenue	102			816			106,201			167,505			—			790			106,303			169,111
Total	$	840,978		$	801,306		$	295,771		$	385,284		$	—		$	57,236		$	1,136,749		$	1,243,826
Relative percentage	74		%	64		%	26		%	31		%	—		%	5		%	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 purchaser, which may differ depending on the applicable contractual terms. 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 purchasers 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 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 purchaser 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 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 September 30, 2019, and December 31, 2018, were $106.3 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 nine months ended September 30, 2019, and 2018.

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

Divestitures

No material divestitures occurred during the first nine months of 2019, and there were no assets classified as held for sale as of September 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 $410.6 million for the nine months ended September 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 Williston Basin assets 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 $15.4 million for the nine months ended September 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 nine months 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 2,100 net acres, with $70.8 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. During the third quarter of 2018, the Company completed two non-monetary acreage trades of primarily undeveloped properties located in Howard and Martin Counties, Texas, which resulted in the exchange of approximately 2,650 net acres, with $95.1 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.

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 stock-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 forecasted net income or loss for each period presented, as reflected in the table below.

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands)
Current portion of income tax (expense) benefit:
Federal	$	3,826		$	—		$	3,826		$	—
State	(320		)	(85		)	(1,109		)	(670		)
Deferred portion of income tax (expense) benefit	(19,617		)	36,833			13,620			(60,672		)
Income tax (expense) benefit	$	(16,111	)	$	36,748		$	16,337		$	(61,342	)
Effective tax rate	27.6		%	21.3		%	16.1		%	23.6		%

The change in the effective tax rate for the three months ended September 30, 2019, compared with the same period in 2018, was primarily due to the differing effects of permanent items on income before income taxes for the three months ended September 30, 2019, compared to their impact on the loss before income taxes for the same period in 2018.

The change in the effective tax rate for the nine months ended September 30, 2019, compared with the same period in 2018, was primarily due to the differing effects of permanent items on the loss before income taxes for the nine months ended September 30, 2019, compared to their impact on income before income taxes for the same period in 2018. Additionally, the year-to-date 2018 rate was also impacted by the estimated highest marginal state tax rates 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.

Subsequent to September 30, 2019, the Company filed its 2018 federal income tax return claiming a $7.7 million refund for a portion of its deferred AMT credit carryover. 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

On September 19, 2019, the Company and its lenders entered into the Second Amendment to the Sixth Amended and Restated Credit Agreement which permitted the Company to enter into swap agreements with respect to the price of electricity in order to minimize exposure to electrical price volatility. As of September 30, 2019, the Company’s Sixth Amended and Restated Credit Agreement, as amended (the “Credit Agreement”), provided for a senior secured revolving credit facility with a maximum loan amount of $2.5 billion, a borrowing base of $1.6 billion, and aggregate lender commitments of $1.2 billion. Subsequent to September 30, 2019, the Company and its lenders completed the semi-annual borrowing base redetermination, which reaffirmed the Company’s borrowing base and aggregate lender commitments at existing levels. The next scheduled borrowing base redetermination date is April 1, 2020.

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 September 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 October 24, 2019, September 30, 2019, and December 31, 2018:



	As of October 24, 2019		As of September 30, 2019		As of December 31, 2018
	(in thousands)
Revolving credit facility ⁽¹⁾	$	143,000	$	129,000	$	—
Letters of credit ⁽²⁾	—		—		200
Available borrowing capacity	1,057,000		1,071,000		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 the other noncurrent assets line item on the accompanying balance sheets and totaled $6.3 million and $6.4 million as of September 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 September 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 (“2027 Senior Notes”, and all senior notes collectively referred to as the “Senior Notes”). The Senior Notes, net of unamortized deferred financing costs line item on the accompanying balance sheets as of September 30, 2019, and December 31, 2018, consisted of the following:



	As of September 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	$	3,170	$	473,626	$	476,796	$	3,921	$	472,875
5.0% Senior Notes due 2024	500,000		3,996		496,004		500,000		4,688		495,312
5.625% Senior Notes due 2025	500,000		5,130		494,870		500,000		5,808		494,192
6.75% Senior Notes due 2026	500,000		5,780		494,220		500,000		6,407		493,593
6.625% Senior Notes due 2027	500,000		6,834		493,166		500,000		7,533		492,467
Total	$	2,476,796	$	24,910	$	2,451,886	$	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 September 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.

On July 16, 2018, the Company redeemed its 6.50% Senior Notes due 2021 (“2021 Senior Notes”) which resulted in the payment of total cash consideration, including accrued interest, of $355.9 million. On August 20, 2018, the Company issued $500.0 million in aggregate principal amount of 2027 Senior Notes, which resulted in the receipt of net proceeds of $492.1 million after deducting fees of $7.9 million, which are being amortized as deferred financing costs over the life of the 2027 Senior Notes. The proceeds received from the issuance of the 2027 Senior Notes were used to fund the cash tender offer and redemption of all of the Company’s 6.50% Senior Notes due 2023 (“2023 Senior Notes”) and a portion of its 2022 Senior Notes during the third quarter of 2018. The Company paid total consideration, including accrued interest, of $