XNYS:LPR Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2012

 

OR

 

o         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 1-35191

 

LONE PINE RESOURCES INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

27-3779606

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

Suite 1100, 640-5th Avenue SW
Calgary, Alberta
Canada

 

T2P 3G4

(Address of Principal Executive Offices)

 

(Zip Code)

 

(403) 292-8000

(Registrant’s telephone number, including area code)

 

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. x Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of August 9, 2012, there were 85,098,773 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

 

 

 



Table of Contents

 

LONE PINE RESOURCES INC.

INDEX TO FORM 10-Q

June 30, 2012

 

Monetary Amounts and Exchange Rate Data

ii

Part I - FINANCIAL INFORMATION

1

Item 1 - Financial Statements

1

Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

1

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011

2

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011

2

Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2012 and 2011

3

Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2012

4

Notes to Condensed Consolidated Financial Statements

5

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

25

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

43

Item 4 - Controls and Procedures

45

Part II - OTHER INFORMATION

45

Item 1 - Legal Proceedings

45

Item 1A - Risk Factors

46

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 6 - Exhibits

46

Signatures

48

Exhibit Index

49

 

i



Table of Contents

 

MONETARY AMOUNTS AND EXCHANGE RATE DATA

 

In this Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 2012 (the “Quarterly Report”), references to “dollars,” “$” or “Cdn$” are to Canadian dollars and references to “U.S. dollars” or “US$” are to United States dollars. Effective October 1, 2011, we changed our reporting currency from the U.S. dollar to the Canadian dollar. Prior to changing our reporting currency, we obtained a no objection letter from the Securities and Exchange Commission (“SEC”). See Part I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note 2 of our financial statements for more information about our change in reporting currency, including the reasons for the change, the manner in which the change has been and will be applied to recast prior period financial statements, and a discussion of the major categories of items in the balance sheet, and statements of operations, comprehensive income and cash flows that are denominated in Canadian or U.S. dollars.

 

The noon-day Canadian to U.S. dollar exchange rates for Cdn$1.00, as reported by the Bank of Canada, were:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Year Ended

 

 

 

2012

 

2011

 

2012

 

2011

 

December 31, 2011

 

 

 

US$

 

US$

 

US$

 

US$

 

US$

 

Highest rate during the period

 

1.0197

 

1.0542

 

1.0197

 

1.0542

 

1.0583

 

Lowest rate during the period

 

0.9599

 

1.0141

 

0.9599

 

0.9978

 

0.9430

 

Average noon spot rate during the period(1)

 

0.9897

 

1.0331

 

0.9943

 

1.0238

 

1.0117

 

Rate at the end of the period

 

0.9813

 

1.0370

 

0.9813

 

1.0370

 

0.9833

 

 


(1) Determined by averaging the rates on each business day during the respective period.

 

On August 9, 2012, the noon-day exchange rate was US$1.0077 for Cdn$1.00.

 

ii



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

LONE PINE RESOURCES INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(Unaudited)

 

(In thousands of Canadian dollars)

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

880

 

$

276

 

Accounts receivable

 

18,453

 

28,804

 

Derivative instruments

 

21,595

 

19,786

 

Prepaid expenses and other current assets

 

5,194

 

5,560

 

Total current assets

 

46,122

 

54,426

 

Property and equipment, at cost:

 

 

 

 

 

Oil and natural gas properties, full cost method of accounting:

 

 

 

 

 

Proved, net of accumulated depletion of $1,390,445 and $1,203,755

 

618,628

 

704,232

 

Unproved

 

148,558

 

138,727

 

Net oil and natural gas properties

 

767,186

 

842,959

 

Other property and equipment, net of accumulated depreciation and amortization of $9,375 and $8,647

 

65,863

 

66,413

 

Net property and equipment

 

833,049

 

909,372

 

Derivative instruments

 

2,562

 

 

Goodwill

 

17,328

 

17,328

 

Other assets

 

12,145

 

11,175

 

 

 

$

911,206

 

$

992,301

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

39,795

 

$

75,702

 

Accrued interest

 

7,989

 

 

Capital lease obligation

 

1,186

 

1,156

 

Deferred income taxes

 

4,694

 

4,946

 

Other current liabilities

 

3,079

 

2,686

 

Total current liabilities

 

56,743

 

84,490

 

Long-term debt

 

425,343

 

331,000

 

Asset retirement obligations

 

15,279

 

15,412

 

Deferred income taxes

 

35,225

 

69,981

 

Capital lease obligation

 

5,137

 

5,738

 

Other liabilities

 

1,521

 

1,818

 

Total liabilities

 

539,248

 

508,439

 

Stockholders’ equity:

 

 

 

 

 

Common stock, 85,098,773 and 85,026,202 shares issued and outstanding

 

834

 

833

 

Capital surplus

 

981,508

 

978,880

 

Accumulated deficit

 

(610,502

)

(495,959

)

Accumulated other comprehensive income

 

118

 

108

 

Total stockholders’ equity

 

371,958

 

483,862

 

 

 

$

911,206

 

$

992,301

 

 

See accompanying notes to condensed consolidated financial statements.

 

1



Table of Contents

 

LONE PINE RESOURCES INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 

(In thousands of Canadian dollars, except per share amounts)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

(Recast*)

 

 

 

(Recast*)

 

Revenues:

 

 

 

 

 

 

 

 

 

Oil and natural gas

 

$

42,420

 

$

49,236

 

$

86,749

 

$

84,798

 

Interest and other

 

4

 

8

 

10

 

20

 

Total revenues

 

42,424

 

49,244

 

86,759

 

84,818

 

Costs, expenses and other:

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

14,160

 

8,615

 

28,609

 

16,664

 

Production and property taxes

 

832

 

598

 

1,685

 

1,189

 

Transportation and processing

 

4,311

 

4,216

 

8,464

 

7,766

 

General and administrative

 

5,840

 

2,497

 

9,946

 

5,887

 

Depreciation, depletion and amortization

 

31,882

 

19,919

 

58,312

 

38,560

 

Ceiling test write-down of oil and natural gas properties

 

128,870

 

 

128,870

 

 

Interest expense

 

8,242

 

2,237

 

13,993

 

3,590

 

Accretion of asset retirement obligations

 

341

 

267

 

677

 

537

 

Foreign currency exchange losses (gains)

 

4,269

 

2,564

 

3,973

 

(4,970

)

Losses (gains) on derivative instruments

 

(18,375

)

(4,948

)

(18,268

)

(4,948

)

Other, net

 

41

 

458

 

52

 

503

 

Total costs, expenses and other

 

180,413

 

36,423

 

236,313

 

64,778

 

Earnings (loss) before income taxes

 

(137,989

)

12,821

 

(149,554

)

20,040

 

Income tax expense (recovery)

 

(32,954

)

7,455

 

(35,011

)

9,383

 

Net earnings (loss)

 

$

(105,035

)

$

5,366

 

$

(114,543

)

$

10,657

 

Basic earnings (loss) per common share

 

$

(1.24

)

$

0.07

 

$

(1.35

)

$

0.15

 

Diluted earnings (loss) per common share

 

$

(1.24

)

$

0.07

 

$

(1.35

)

$

0.15

 

 


*      see notes 1 and 2

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(Unaudited)

 

(In thousands of Canadian dollars)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

(Recast*)

 

 

 

(Recast*)

 

Net earnings (loss)

 

$

(105,035

)

$

5,366

 

$

(114,543

)

$

10,657

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Amortization of minimum postretirement benefits liability, net of tax

 

5

 

 

10

 

 

Foreign currency translation adjustments, net of tax

 

 

(14

)

 

28

 

 

 

5

 

(14

)

10

 

28

 

Comprehensive income (loss)

 

$

(105,030

)

$

5,352

 

$

(114,533

)

$

10,685

 

 


*      see notes 1 and 2

 

See accompanying notes to condensed consolidated financial statements.

 

2



Table of Contents

 

LONE PINE RESOURCES INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

(In thousands of Canadian dollars)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

(Recast*)

 

 

 

(Recast*)

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

(105,035

)

$

5,366

 

$

(114,543

)

$

10,657

 

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

31,882

 

19,919

 

58,312

 

38,560

 

Amortization of deferred costs

 

621

 

349

 

1,102

 

434

 

Ceiling test write-down of oil and natural gas properties

 

128,870

 

 

128,870

 

 

Accretion of asset retirement obligations

 

341

 

267

 

677

 

537

 

Deferred income tax expense (recovery)

 

(32,954

)

7,455

 

(35,011

)

9,383

 

Unrealized foreign currency exchange losses (gains)

 

4,228

 

2,564

 

3,932

 

(4,970

)

Unrealized losses (gains) on derivative instruments

 

(9,540

)

(4,948

)

(4,371

)

(4,948

)

Stock-based compensation

 

1,001

 

19

 

1,720

 

19

 

Other, net

 

(738

)

29

 

(717

)

47

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

4,177

 

(1,085

)

10,351

 

4,285

 

Prepaid expenses and other current assets

 

1,496

 

2,884

 

1,188

 

2,676

 

Accounts payable and accrued liabilities

 

(8,196

)

(4,145

)

(21,752

)

(4,578

)

Accrued interest and other current liabilities

 

4,541

 

(24,457

)

8,150

 

(23,833

)

Net cash provided by operating activities

 

20,694

 

4,217

 

37,908

 

28,269

 

Investing activities:

 

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment:

 

 

 

 

 

 

 

 

 

Exploration, development and acquisition costs

 

(56,567

)

(139,566

)

(130,255

)

(187,730

)

Other fixed assets

 

(737

)

(1,062

)

(1,649

)

(9,899

)

Proceeds from divestiture of assets

 

280

 

62

 

280

 

468

 

Net cash used in investing activities

 

(57,024

)

(140,566

)

(131,624

)

(197,161

)

Financing activities:

 

 

 

 

 

 

 

 

 

Net proceeds from issuance of long-term debt

 

 

 

192,052

 

 

Debt issuance costs

 

(70

)

(4,078

)

(1,295

)

(4,078

)

Proceeds from bank borrowings

 

681,000

 

553,000

 

1,466,000

 

589,000

 

Repayments of bank borrowings

 

(639,000

)

(282,000

)

(1,568,000

)

(318,000

)

Proceeds from Forest Oil Corporation

 

 

72,833

 

 

108,677

 

Repayments to Forest Oil Corporation

 

 

(366,494

)

 

(366,494

)

Cash distribution to Forest Oil Corporation

 

 

(28,711

)

 

(28,711

)

Proceeds from issuance of common stock, net of offering costs

 

 

173,415

 

 

173,415

 

Change in bank overdrafts

 

(5,011

)

13,130

 

6,301

 

11,576

 

Proceeds from sale-leaseback

 

 

7,450

 

 

7,450

 

Capital lease payments

 

(454

)

 

(738

)

 

Other, net

 

 

17

 

 

7

 

Net cash provided by financing activities

 

36,465

 

138,562

 

94,320

 

172,842

 

Effect of exchange rate changes on cash

 

 

309

 

 

309

 

Net increase (decrease) in cash

 

135

 

2,522

 

604

 

4,259

 

Cash at beginning of period

 

745

 

2,310

 

276

 

573

 

Cash at end of period

 

$

880

 

$

4,832

 

$

880

 

$

4,832

 

 


*        see notes 1 and 2

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

LONE PINE RESOURCES INC.

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

(Unaudited)

 

(In thousands of Canadian dollars, except number of shares)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Capital

 

Accumulated

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Surplus

 

Deficit

 

Income

 

Equity

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2011

 

85,026

 

$

833

 

$

978,880

 

$

(495,959

)

$

108

 

$

483,862

 

Issuance of common stock

 

68

 

1

 

(1

)

 

 

 

Vesting of Phantom Stock Units

 

8

 

 

46

 

 

 

46

 

Tax withheld on vesting of Phantom Stock Units

 

(3

)

 

(18

)

 

 

(18

)

Amortization of stock-based compensation

 

 

 

2,601

 

 

 

2,601

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

 

 

 

(114,543

)

 

(114,543

)

Other comprehensive income

 

 

 

 

 

10

 

10

 

Balances at June 30, 2012

 

85,099

 

$

834

 

$

981,508

 

$

(610,502

)

$

118

 

$

371,958

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

LONE PINE RESOURCES INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

(1) ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

Lone Pine Resources Inc. (“Lone Pine” or the “Company”) is an independent oil and natural gas exploration, development and production company with operations in Canada. Lone Pine’s reserves, producing properties and exploration prospects are located in the provinces of Alberta, British Columbia and Quebec, and in the Northwest Territories. Lone Pine conducts operations in one industry segment, liquids and natural gas exploration, development and production, and in one country, Canada. The Company’s operations are primarily carried out by its operating subsidiary, Lone Pine Resources Canada Ltd. (“LPR Canada”).

 

Basis of Presentation

 

These financial statements are presented in conformity with U.S. generally accepted accounting principles (“GAAP”). In these financial statements, unless otherwise indicated, all amounts are expressed in Canadian dollars. Certain amounts in prior periods’ financial statements have been reclassified to conform to the current period’s financial statement presentation.

 

The accompanying financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q as prescribed by the U.S. Securities Exchange Commission (“SEC”). Lone Pine’s Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Annual Report”) includes additional information related to the Company’s initial public offering (“IPO”) on June 1, 2011 as well as the Company’s spin-off from Forest Oil Corporation (“Forest”) on September 30, 2011 (the “Distribution”). The 2011 Annual Report also includes a summary of significant accounting policies and should be read in conjunction with this Quarterly Report. All material adjustments (consisting solely of normal recurring adjustments) that, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results to be expected for the full year.

 

The financial statements relating to the period from Lone Pine’s inception (September 30, 2010) through the completion of the IPO (June 1, 2011) reflect the financial position, results of operations, cash flows or other information, as the case may be, of Lone Pine and Lone Pine’s predecessor, LPR Canada, on a combined basis. The financial statements relating to the period subsequent to and including June 1, 2011 reflect the financial position, results of operations, cash flows or other information, as the case may be, of Lone Pine and its wholly-owned consolidated subsidiaries.

 

(2) CHANGE IN REPORTING AND FUNCTIONAL CURRENCY

 

Reporting Currency

 

The Company’s financial statements for periods up to and including September 30, 2011 were reported using the U.S. dollar, as this was the reporting currency used by Forest. Effective October 1, 2011, the Company changed its reporting currency to the Canadian dollar to better reflect the business of Lone Pine, which is primarily conducted in Canadian dollars. This change in reporting currency was also considered appropriate since there were only two major financial statement categories denominated in U.S. dollars at the time. One category was the liability to Forest (for periods prior to June 1, 2011) and the second category was the Stockholders’ Equity of Lone Pine (for periods after the IPO date of June 1, 2011).

 

With the change in reporting currency, all comparative financial information has been recast from U.S. dollars to Canadian dollars to reflect the Company’s financial statements as if they had been historically reported in Canadian dollars, consistent with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 830, Foreign Currency Matters.

 

The statements of operations, comprehensive income and cash flows for the three and six month periods ended June 30, 2011 were translated into Canadian dollars using the weighted average foreign exchange rate for the period. The resulting foreign currency translation adjustment was reported as a component of other comprehensive income and accumulated other comprehensive income.

 

5



Table of Contents

 

Functional Currency

 

The Company changed the functional currency of Lone Pine prospectively from October 1, 2011 from the U.S. dollar to the Canadian dollar. The change in functional currency did not have a significant impact on the Company’s financial statements as Lone Pine’s operations are primarily carried out by LPR Canada. The functional currency of LPR Canada has not changed and continues to be the Canadian dollar.

 

As a result of this change in functional currency, there is no difference between the reporting currency and the functional currency of the Company and any of its subsidiaries.

 

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

The Company’s significant accounting policies have not changed materially from those reported in its 2011 Annual Report. The following information supplements those policies.

 

Long-Term Debt

 

Original issue discounts and commissions associated with the issuance of long-term debt are recorded as a reduction in the carrying value of long-term debt and are amortized using the effective interest rate method over the term of the debt. Direct and incremental costs related to the issuance of long-term debt are capitalized and amortized over the term of the debt using the straight-line method, which approximates the effective interest rate method.

 

Recent Accounting Pronouncements

 

In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210) Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”), which requires that an entity disclose both gross and net information about instruments and transactions that are either eligible for offset in the balance sheet or subject to an agreement similar to a master netting agreement, including derivative instruments.  ASU 2011-11 was issued in order to facilitate comparisons between financial statements prepared under GAAP and International Financial Reporting Standards by requiring enhanced disclosures, but does not change existing GAAP that permits balance sheet offsetting.  This authoritative guidance is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods.  Lone Pine is currently evaluating the impact that the adoption of this authoritative guidance will have on its financial statements.

 

In December 2011, the FASB issued Accounting Standards Update No. 2011-12, Comprehensive Income, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”), which defers indefinitely the requirements in Accounting Standards Update No. 2011-05, Comprehensive Income, Presentation of Comprehensive Income (“ASU 2011-05”) to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income (see note 4 for additional information).  The adoption of this authoritative guidance will not have an impact on the Company’s financial statements until the specific changes that were proposed under ASU 2011-05 are finalized and issued by the FASB.

 

(4) ADOPTION OF NEW ACCOUNTING STANDARDS

 

In the fourth quarter of 2011, Lone Pine early adopted ASU 2011-05, except for the specific changes that have been deferred under ASU 2011-12, as noted above.  The adoption of ASU 2011-05 required the Company to present items of net income and other comprehensive income, and total comprehensive income either in a single continuous statement or in two separate consecutive statements and eliminated the option to report other comprehensive income and its components in the statement of stockholders’ equity.  Lone Pine elected to present two separate consecutive statements.  Other than a change in presentation, the adoption of ASU 2011-05 did not have any impact on the Company’s financial statements.

 

In the first quarter of 2012, the Company adopted Accounting Standards Update 2011-04, Fair Value Measurement and Disclosure Requirements (“ASU 2011-04”), which revised the existing guidance on fair value measurement under GAAP as part of the FASB’s joint project with the International Accounting Standards Board. Under the revised standard, the Company was required to provide additional disclosures about fair value measurements, including information about the unobservable inputs and assumptions used in Level 3 fair value measurements, a description of the valuation methodologies used in Level 3 fair value measurements and the level in the fair value hierarchy of items that are not measured at fair value but whose fair value disclosure is required. The adoption of ASU 2011-04 did not have a significant impact on the Company’s financial statements.

 

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In the first quarter of 2012, the Company adopted Accounting Standards Update No. 2011-08, Intangibles-Goodwill and Other (Topic 350), Testing Goodwill for Impairment (“ASU 2011-08”), which permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount to determine whether it is necessary to perform the two-step goodwill impairment test.  If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is unnecessary.  However, if an entity concludes otherwise, it is required to perform the first step of the two-step goodwill impairment test, which may then lead an entity to perform the second step as well.  Entities have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the first step of the two-step goodwill impairment test.  As a result of adopting ASU 2011-08, the Company will only consider qualitative factors for impairment testing purposes in its interim periods, but will continue to perform the full two-step goodwill impairment test at December 31 of each year.

 

(5) BUSINESS COMBINATION

 

On April 29, 2011, the Company completed the acquisition of certain natural gas properties located in the Narraway/Ojay area for $74.4 million. The acquisition increased the Company’s working interests in certain properties already owned and operated by the Company, and provided additional capacity in gathering systems and a natural gas plant in the area. The following table shows the final estimates of fair value for the acquisition, which were based on an analysis of the properties acquired (in thousands).

 

Proved properties

 

$

 40,454

 

Unproved properties

 

26,285

 

Natural gas plant/pipelines

 

8,000

 

Asset retirement obligations

 

(292

)

 

 

$

74,447

 

 

The statements of operations for the three and six month periods ended June 30, 2011 include $2.1 million of revenue from these properties since their acquisition date of April 29, 2011, and increased net earnings by approximately $0.1 million. The disclosure of supplemental pro forma information, which would disclose Lone Pine’s consolidated revenue and earnings as though the business combination had occurred at January 1, 2010, is impractical. The disclosure is impractical since the Company does not have sufficient information regarding the revenues and costs related to the properties in previous periods and therefore, the pro forma disclosures would require significant estimates that could not be objectively or independently verified.

 

(6) PROPERTY AND EQUIPMENT

 

Full Cost Method of Accounting

 

The Company uses the full cost method of accounting for oil and natural gas activities. Under the full cost method of accounting for oil and natural gas activities, the ceiling test calculation uses prices that are based on the average of the first-day-of-the-month prices during the 12 month period prior to the reporting date.

 

All of the Company’s oil and natural gas operations are conducted in Canada. All costs incurred in the acquisition, exploration and development of properties (including costs of surrendered and abandoned leaseholds, dry holes and overhead directly related to exploration and development activities) and the fair value of estimated future costs of site restoration, dismantlement and abandonment activities are capitalized. Interest costs related to significant unproved properties that are under development are also capitalized to oil and natural gas properties.

 

Investments in unproved properties, including capitalized interest costs, are not depleted pending determination of the existence of proved reserves. Unproved properties are assessed periodically to ascertain whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, geographic and geologic data obtained relating to the properties and estimated discounted future net cash flows from the properties. Estimated discounted future net cash flows are based on discounted future net revenues associated with probable and possible reserves, risk adjusted as appropriate. Where it is not practicable to assess individually the amount of impairment of properties for which costs are not individually significant, such properties are grouped for purposes of assessing impairment. If an impairment is identified, the amount of the impairment assessed is added to the costs to be amortized.

 

The Company performs a ceiling test each quarter. The full cost ceiling test is a limitation on capitalized costs prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is not a fair value based measurement. Rather, it is a standardized

 

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mathematical calculation. The ceiling test provides that capitalized costs less related accumulated depletion and deferred income taxes for a cost center may not exceed the sum of: (1) the present value of future net revenue from estimated production of proved oil and natural gas reserves using 12 month average trailing prices (as discussed below), excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, at a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and natural gas properties. Should the net capitalized costs for a cost center exceed the sum of the components noted above, a ceiling test write-down would be recognized to the extent of the excess capitalized costs.

 

The prices used in the ceiling test are based on an average of the first-day-of-the-month prices during the 12 month period prior to the reporting date, pursuant to the SEC's Modernization of Oil and Gas Reporting rule, which was first effective for the ceiling test calculated as of December 31, 2009.

 

As required under the quarterly ceiling test calculation, the Company updated its internal estimate of proved oil and natural gas reserves, and the present value of future net revenue from those reserves. As a result of a decline in the 12 month average trailing natural gas price, the Company’s internal estimate of its proved undeveloped natural gas volumes decreased significantly at June 30, 2012. This decrease in natural gas volume reduced the Company’s internal estimate of the present value of future net revenue from proved reserves and resulted in the Company recognizing a ceiling test write-down of $128.9 million before tax for the three and six months ended June 30, 2012.

 

The Company believes that additional write-downs may be required in subsequent periods if natural gas or oil prices decline from June 30, 2012 levels, unproved property values decrease, estimated proved reserve volumes are revised downward or costs incurred in exploration, development or acquisition activities exceeds the discounted future net cash flows from the additional reserves.

 

(7) LONG-TERM DEBT

 

The Company’s long-term debt consisted of the following at June 30, 2012 and December 31, 2011.

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

(In thousands)

 

 

 

Principal

 

Unamortized
Discount

 

Total

 

Principal

 

Unamortized
Discount

 

Total

 

Bank credit facility

 

$

229,000

 

$

 

$

229,000

 

$

331,000

 

$

 

$

331,000

 

Senior Notes

 

203,811

 

(7,468

)

196,343

 

 

 

 

Total Long-term Debt

 

$

432,811

 

$

(7,468

)

$

425,343

 

$

331,000

 

$

 

$

331,000

 

 

Bank Credit Facility

 

Lone Pine maintains a $500 million bank credit facility with a syndicate of banks led by JPMorgan Chase Bank, N.A., Toronto Branch. The bank credit facility became effective upon the closing of the IPO and will mature on March 18, 2016. Availability under the bank credit facility is governed by a borrowing base. As of June 30, 2012, the borrowing base was set at $375 million and the Company had $229.0 million outstanding under its bank credit facility at a weighted average interest rate of 3.6162%, and remaining borrowing capacity of $144.4 million (after deducting $1.6 million of outstanding letters of credit). The determination of the borrowing base is made by the lenders, in their sole discretion, taking into consideration the estimated value of the Company’s oil and natural gas properties in accordance with the lenders’ customary practices for oil and gas loans. The borrowing base will be redetermined semi-annually and the available borrowing amount under the bank credit facility could increase or decrease based on such redetermination. The next scheduled redetermination of the borrowing base is expected to

 

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occur on or about November 1, 2012. In addition to the scheduled semi-annual redeterminations, the Company and the lenders each have discretion at any time, but not more often than once during any calendar year, to have the borrowing base redetermined.

 

The agreement governing the bank credit facility includes terms and covenants that place limitations on certain types of activities, including restrictions or requirements with respect to additional debt, liens, asset sales, hedging activities, investments, dividends and mergers and acquisitions, and also includes a financial covenant. The bank credit facility provides that Lone Pine will not permit its ratio of total debt outstanding to consolidated earnings before interest, income taxes, depreciation and amortization (as defined by the terms of the bank credit facility and adjusted for non-cash charges) for a trailing 12 month period to be greater than 4.0 to 1.0. As at June 30, 2012, this ratio was approximately 3.3 to 1.0. If Lone Pine were to fail to perform its obligations under these covenants or other covenants and obligations, it could cause an event of default and the bank credit facility could be terminated and amounts outstanding could be declared immediately due and payable by the lenders, subject to notice and cure periods in certain cases. Such events of default include non-payment, breach of warranty, non-performance of financial covenants, default on other indebtedness, certain adverse judgments, change of control and a failure of the liens securing the bank credit facility. In addition, bankruptcy and insolvency events with respect to Lone Pine will result in an automatic acceleration of the indebtedness under the bank credit facility. An acceleration of the Company’s indebtedness under the bank credit facility could in turn result in an event of default under the indenture governing Lone Pine’s Senior Notes (discussed below), which in turn could result in the acceleration of payment of the Senior Notes. For example, the indenture governing Lone Pine’s Senior Notes includes as an event of default, among others, a default on indebtedness that results in the acceleration of indebtedness in an amount greater than US$20 million.

 

Borrowings under the Company’s bank credit facility bear interest at one of two rates that the Company elects. Borrowings bear interest at a rate that may be based on either: (1) the sum of the applicable bankers’ acceptance rate (as determined in accordance with the terms of the credit agreement governing the bank credit facility) and a stamping fee of between 175 to 275 basis points, depending on borrowing base utilization; or (2) the Canadian Prime Rate (as determined in accordance with the terms of Lone Pine’s bank credit facility) plus 75 to 175 basis points, depending on borrowing base utilization.

 

Senior Notes

 

On February 14, 2012, LPR Canada (the “Subsidiary Issuer”), an Alberta corporation and a wholly-owned subsidiary of the Company, issued US$200 million aggregate principal amount of 10.375% Senior Notes due February 15, 2017 (the “Senior Notes”). Interest is payable on the Senior Notes semi-annually in arrears on each February 15 and August 15, commencing August 15, 2012. The Senior Notes are guaranteed on a senior unsecured basis by the Company (the “Parent Guarantor”) and all of the Company’s subsidiaries, other than LPR Canada (together, the “Guarantors”). These guarantees are full and unconditional, and joint and several among the Guarantors. After the original issue discount of 1.423% and commissions of approximately $4.9 million, the issuance of the Senior Notes resulted in net proceeds to the Company of $192 million.

 

The Senior Notes were issued pursuant to an Indenture, dated February 14, 2012 (the “Indenture”), among LPR Canada, the Guarantors and U.S. Bank National Association, as trustee.

 

On or prior to February 15, 2015, LPR Canada may, from time to time, redeem up to 35% of the aggregate principal amount of the Senior Notes with the net cash proceeds of a public or private equity offering at a redemption price of 110.375% of the principal amount of the Senior Notes, plus any accrued and unpaid interest to the date of redemption, if at least 65% of the aggregate principal amount of the Senior Notes issued under the Indenture remains outstanding after such redemption, and the redemption occurs within 180 days after the closing of such equity offering.  Prior to February 15, 2015, LPR Canada may redeem all or part of the Senior Notes at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) a make-whole premium at the redemption date, plus accrued and unpaid interest, if any, to the redemption date. On or after February 15, 2015, LPR Canada may redeem all or part of the Senior Notes at redemption prices (expressed as percentages of principal amount of the Senior Notes) equal to 105.188% for the 12-month period beginning on February 15, 2015 and 100.00% for the 12-month period beginning on February 15, 2016 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date on the Senior Notes.

 

The Senior Notes were offered and sold to qualified institutional buyers in reliance on SEC Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and non-U.S. persons in reliance on SEC Regulation S under the Securities Act. The Senior Notes have not been registered under the Securities Act, or any state securities laws. In connection with the issuance of the Senior Notes, LPR Canada and the Guarantors entered into a Registration Rights Agreement that requires LPR Canada and the Guarantors to file a registration statement with respect to an offer to exchange the Senior Notes for substantially identical notes that are registered under the Securities Act. LPR Canada and the Guarantors agreed to use their commercially reasonable efforts to cause such exchange offer registration statement to become effective under the Securities Act.

 

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In addition, LPR Canada and the Guarantors agreed to use their commercially reasonable efforts to cause the exchange offer to be consummated not later than 365 days after February 14, 2012. Under some circumstances, in lieu of, or in addition to, a registered exchange offer, LPR Canada and the Guarantors have agreed to file a shelf registration statement with respect to the Senior Notes. LPR Canada and the Guarantors are required to pay additional interest if they fail to comply with their obligations to register the Senior Notes within the specified time period.

 

The Indenture contains customary covenants that restrict Lone Pine’s ability and the ability of certain of its subsidiaries to: (i) sell assets, including equity interests in its subsidiaries; (ii) pay distributions on, redeem or repurchase its common stock or redeem or repurchase its subordinated debt; (iii) make investments; (iv) incur or guarantee additional indebtedness or issue preferred stock; (v) create or incur certain liens; (vi) make certain acquisitions and investments; (vii) redeem or prepay other debt; (viii) enter into agreements that restrict distributions or other payments from its restricted subsidiaries to it; (ix) consolidate, merge or transfer all or substantially all of its assets; (x) engage in transactions with affiliates; (xi) create unrestricted subsidiaries; (xii) enter into sale and leaseback transactions; or (xiii) engage in certain business activities. These covenants are subject to a number of important exceptions and qualifications. If the Senior Notes achieve an investment grade rating from both of Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services and no Default (as defined in the Indenture) has occurred and is continuing, many of these covenants will terminate.

 

The Indenture contains customary events of default, including:

 

·                  default in any payment of interest on any Senior Note when due, continued for 30 days;

 

·                  default in the payment of principal of or premium, if any, on any Senior Note when due;

 

·                  failure by LPR Canada or any Guarantor to comply with its other obligations under the Indenture, in certain cases subject to notice and grace periods;

 

·                  default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Parent Guarantor or any of its restricted subsidiaries (or the payment of which is guaranteed by the Parent Guarantor or any of its restricted subsidiaries), other than indebtedness owed to the Parent Guarantor or a restricted subsidiary, whether such indebtedness or guarantee now exists, or is created after the date of the Indenture;

 

·                  certain events of bankruptcy, insolvency or reorganization of the Parent Guarantor, LPR Canada or a significant subsidiary or group of restricted subsidiaries that, taken together (as of the latest audited consolidated financial statements for the Parent Guarantor and its restricted subsidiaries), would constitute a significant subsidiary;

 

·                  failure by the Parent Guarantor, LPR Canada or any significant subsidiary or group of restricted subsidiaries that, taken together (as of the latest audited consolidated financial statements for the Parent Guarantor and its restricted subsidiaries), would constitute a significant subsidiary to pay final judgments aggregating in excess of US$20.0 million, within 60 days; and

 

·                  any guarantee of the Senior Notes by a Guarantor ceases to be in full force and effect, is declared null and void in a judicial proceeding or is denied or disaffirmed by its maker.

 

(8) DERIVATIVE INSTRUMENTS

 

Commodity Derivatives

 

Lone Pine enters into derivative instruments to manage its exposure to commodity price risk caused by fluctuations in commodity prices, which protects and provides certainty on a portion of the Company’s cash flows.  Lone Pine’s commodity derivative instruments generally serve as effective economic hedges of commodity price exposure, however, Lone Pine has elected not to designate its derivatives as hedging instruments for accounting purposes. As such, Lone Pine recognizes all changes in fair value of its derivative instruments as unrealized gains or losses on derivative instruments in the statements of operations.

 

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The table below sets forth Lone Pine’s outstanding commodity swaps as of June 30, 2012.

 

 

 

Commodity Swaps

 

 

 

Natural Gas
(NYMEX Henry Hub)

 

Oil
(NYMEX WTI)

 

Term

 

MMBtu/d

 

Weighted Average
Price
per MMBtu

 

bbls/d

 

Weighted Average
Price
per bbl

 

July 1 — December 31, 2012

 

25,000

 

US$

5.09

 

2,000

 

US$

102.35

 

July 1 — December 31, 2012

 

 

 

 

1,000

 

$

100.98

 

Calendar 2013

 

 

 

 

1,500

 

$

100.37

 

Calendar 2013

 

 

 

 

500

 

US$

101.00

 

 

In connection with a commodity swap entered into during the second quarter of 2012, the Company sold a call option to the counterparty in exchange for the Company receiving a premium fixed price on the commodity swap. The table below sets forth the outstanding option as of June 30, 2012.

 

 

 

Commodity Option

 

 

 

Oil (NYMEX WTI)

 

Term

 

Option Expiration

 

Underlying Swap
bbls/d

 

Weighted Average Price
per bbl

 

Monthly in 2013

 

Monthly in 2013

 

500

 

$

95.05

 

 

The Company also enters into commodity collar agreements with third parties. A collar agreement is similar to a swap agreement, except that the Company receives the difference between the floor price and the index price only if the index price is below the floor price, and the Company pays the difference between the ceiling price and the index price only if the index price is above the ceiling price. The table below sets forth the Company’s outstanding commodity collars as of June 30, 2012.

 

 

 

Commodity Collars

 

 

 

Natural Gas (NYMEX Henry Hub)

 

Term

 

MMBtu/d

 

Weighted Average
Floor Price per MMBtu

 

Weighted Average
Ceiling Price per MMBtu

 

Calendar 2013

 

15,000

 

US$

3.00

 

US$

4.00

 

 

Fair Value Amounts

 

The table below summarizes the location and fair value amounts of the Company’s derivative instruments reported in the balance sheets as of the dates indicated. See note 9 for additional information on the fair value of the Company’s derivative instruments.

 

 

 

June 30,
2012

 

December 31,
2011

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

Current assets

 

$

21,595

 

$

19,786

 

Long-term assets

 

2,562

 

 

 

 

$

24,157

 

$

19,786

 

 

The table below shows the derivative instrument gains and losses reported in the statements of operations as “Losses (gains) on derivative instruments” for the periods indicated. Due to the volatility of oil and natural gas prices, the estimated fair values of Lone Pine’s commodity derivative instruments are subject to large fluctuations from period to period.

 

 

 

Three Months Ended
 June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Realized losses (gains) on derivative instruments

 

$

(8,835

)

$

 

$

(13,897

)

$

 

Unrealized losses (gains) on derivative instruments

 

(9,540

)

(4,948

)

(4,371

)

(4,948

)

Losses (gains) on derivative instruments

 

$

(18,375

)

$

(4,948

)

$

(18,268

)

$

(4,948

)

 

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(9) FAIR VALUE MEASUREMENTS

 

The authoritative accounting guidance regarding fair value measurements for assets and liabilities establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value.  These tiers consist of: Level 1, defined as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs used when little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The fair values and carrying amounts of the Company’s financial instruments are summarized below.

 

 

 

Fair value

 

June 30, 2012

 

December 31, 2011

 

 

 

measurement
Level

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

 

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

$

880

 

$

880

 

$

276

 

$

276

 

Accounts receivable

 

 

18,453

 

18,453

 

28,804

 

28,804

 

Derivative instruments

 

2

 

24,157

 

24,157

 

19,786

 

19,786

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

39,795

 

39,795

 

75,702

 

75,702

 

Accrued interest

 

 

7,989

 

7,989

 

 

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

Bank credit facility

 

2

 

229,000

 

229,000

 

331,000

 

331,000

 

Senior Notes

 

1

 

196,343

 

192,738

 

 

 

Total Long-term debt

 

 

 

425,343

 

421,738

 

331,000

 

331,000

 

Capital lease obligation

 

2

 

6,323

 

6,323

 

6,894

 

6,894

 

 

The Company uses various assumptions and methods in estimating the fair values of its financial instruments. All of the estimates of fair value were determined using significant other observable inputs (Level 2), except for the fair value of the Senior Notes, which was determined based on the unadjusted quoted price in an active market (Level 1) given that the Senior Notes are actively traded in a private market with an independent quoted price available from a third party. The carrying amount of the Senior Notes has been reduced by the original issue discount of 1.423% and commissions of approximately $4.9 million, while the fair value of the Senior Notes is based on its face amount of US$200 million and June 30, 2012 market price of US$94.563 per US$100 face amount. The carrying amount of the bank credit facility approximates fair value since the borrowings bear interest at variable market rates. The carrying amount of the capital lease obligation approximates fair value, as interest rates have not materially changed since the lease was executed.

 

The Company’s derivative instrument assets and liabilities include commodity derivatives. See note 8 for additional information on these instruments.  The Company utilizes present value techniques to value its derivatives.  Inputs to the valuations include published forward prices and credit risk considerations, including the incorporation of published interest rates and credit spreads.  All of the significant inputs are observable, therefore, the Company’s derivative instruments are included within the Level 2 fair value hierarchy.

 

The fair values of the other financial instruments, including cash, accounts receivable, accrued interest, accounts payable and accrued liabilities, approximate their carrying amount due to their short-term nature.

 

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(10) EARNINGS (LOSS) PER SHARE

 

The following sets forth the calculation of basic and diluted earnings (loss) per common share for the periods presented.

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Net earnings (loss)

 

$

(105,035

)

$

5,366

 

$

(114,543

)

$

10,657

 

Net earnings attributable to participating securities

 

 

(1

)

 

(1

)

Net earnings (loss) attributable to common stock

 

$

(105,035

)

$

5,365

 

$

(114,543

)

$

10,656

 

Weighted average number of common shares outstanding during the period for basic earnings per share

 

85,008

 

74,945

 

85,004

 

72,486

 

Dilutive effect of potential common shares

 

 

 

 

 

Weighted average number of common shares outstanding during the period, including the effects of dilutive potential common shares, for diluted earnings per share

 

85,008

 

74,945

 

85,004

 

72,486

 

Basic earnings (loss) per common share

 

$

(1.24

)

$

0.07

 

$

(1.35

)

$

0.15

 

Diluted earnings (loss) per common share

 

$

(1.24

)

$

0.07

 

$

(1.35

)

$

0.15

 

 

At June 30, 2012, approximately 1.8 million potential shares were excluded from the diluted earnings (loss) per common share calculation as the effect of their inclusion was anti-dilutive.  At June 30, 2011, no potential common shares were excluded from the diluted earnings per common share calculation.

 

(11) STOCK-BASED COMPENSATION

 

The following tables reconcile the change in number of units outstanding for each of Lone Pine’s long-term incentive plans for the six months ended June 30, 2012 and 2011.

 

 

 

Phantom
Stock Units

 

Stock
Options

 

Restricted
Stock

 

Total

 

Outstanding as of December 31, 2011

 

700,950

 

 

26,202

 

727,152

 

Awarded

 

1,007,130

 

650,636

 

67,935

 

1,725,701

 

Vested

 

(165,849

)

 

(11,539

)

(177,388

)

Forfeited

 

(36,800

)

(9,500

)

 

(46,300

)

Outstanding as of June 30, 2012

 

1,505,431

 

641,136

 

82,598

 

2,229,165

 

 

 

 

Phantom
Stock Units

 

Stock
Options

 

Restricted
Stock

 

Total

 

Outstanding as of December 31, 2010

 

 

 

 

 

Awarded

 

460,385

 

 

19,232

 

479,617

 

Outstanding as of June 30, 2011

 

460,385

 

 

19,232

 

479,617

 

 

(12) INCOME TAXES

 

The Company calculates its income tax expense for the period by estimating the annual effective income tax rate and applying that rate to the year-to-date earnings (loss) at the end of each period.

 

The Company’s effective income tax rate in any period is a function of the relationship between total income tax expense and the amount of earnings before income taxes for the period. The effective income tax rate differs from the statutory tax rate as it takes into consideration permanent differences (such as stock-based compensation that will be settled in shares of the Company), adjustments for changes in income tax rates and other income tax legislation, and the differences between the provision and the actual amounts subsequently reported on the income tax returns.

 

The Company’s combined Canadian federal and provincial statutory income tax rate was approximately 25% for the three and six months ended June 30, 2012 and 26.5% for the three and six months ended 2011. However, the Company’s effective income tax rates of 24% for the three months ended June 30, 2012 and 23% for the six months ended June 30, 2012 were lower than the Canadian statutory tax rate of 25%, primarily due to an increase in a valuation allowance (relating to deferred tax assets) that reduced the loss for income tax purposes, foreign exchange losses on the Senior Notes that are taxed at 50% of the statutory tax rate, as well as non-deductible stock-based

 

13



Table of Contents

 

compensation expense. The Company’s effective income tax rates of 58% for the three months ended June 30, 2011 and 47% for the six months ended June 30, 2011 were higher than the Canadian statutory tax rate of 26.5% primarily due to an increase in a valuation allowance (relating to deferred tax assets) that increased taxable income.

 

(13) SUBSEQUENT EVENTS

 

Commodity Derivatives

 

The following table summarizes additional commodity swaps that were entered into between July 1, 2012 and August 9, 2012.

 

 

 

Commodity Swaps

 

 

 

Natural Gas
(NYMEX Henry Hub)

 

Oil
(NYMEX WTI)

 

Term

 

MMBtu/d

 

Weighted Average Price
per MMBtu

 

bbls/d

 

Weighted Average
Price per bbl

 

September 1 — December 31, 2012

 

10,000

 

US$

3.31

 

 

 

Calendar 2013

 

 

 

500

 

$

93.30

 

 

The following table summarizes additional commodity collars that were entered into between July 1, 2012 and August 9, 2012.

 

 

 

Commodity Collars

 

 

 

Natural Gas (NYMEX Henry Hub)

 

Term

 

MMBtu/d

 

Weighted Average Floor
Price per MMBtu

 

Weighted Average Ceiling Price
per MMBtu

 

Calendar 2013

 

15,000

 

US$

3.50

 

US$

3.85

 

 

(14) CONDENSED CONSOLIDATING FINANCIAL INFORMATION

 

On February 14, 2012, LPR Canada issued US$200 million of Senior Notes (see note 7 — Long-term Debt for more information on the Senior Notes), which are guaranteed on a senior unsecured basis by the Guarantors. These guarantees are full and unconditional, and joint and several among the Guarantors.

 

The following financial information reflects consolidating financial information of the Subsidiary Issuer and the Guarantors on a combined basis, prepared on the equity basis of accounting. The Parent Guarantor has no independent assets or operations. The Subsidiary Issuer and the Guarantors other than Lone Pine Resources Inc. (the “Combined Guarantor Subsidiaries”), are 100% owned by the Parent Guarantor. The information is presented in accordance with the requirements of SEC Rule 3-10 of Regulation S-X.  The information may not necessarily be indicative of results of operations, cash flows or financial position had the Guarantors operated as independent entities.  The Company has not presented separate financial narrative information for each of the Guarantors because it believes such financial and narrative information would not provide any additional information that would be material in evaluating the sufficiency of the guarantees provided by the Guarantors.

 

14



Table of Contents

 

(14) CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

Condensed Consolidating Balance Sheet

 

(In thousands of Canadian dollars)

 

 

 

As of June 30, 2012

 

 

 

Parent
Guarantor

 

Combined
Guarantor
Subsidiaries

 

Subsidiary
Issuer

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

35

 

$

 

$

845

 

$

 

$

880

 

Accounts receivable

 

30

 

502

 

18,423

 

(502

)

18,453

 

Derivative instruments

 

 

 

21,595

 

 

21,595

 

Prepaid expenses and other current assets

 

500

 

 

4,694

 

 

5,194

 

Total current assets

 

565

 

502

 

45,557

 

(502

)

46,122

 

Property and equipment, at cost:

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas properties, full cost method of accounting:

 

 

 

 

 

 

 

 

 

 

 

Proved, net of accumulated depletion

 

 

 

618,628

 

 

618,628

 

Unproved

 

 

 

148,558

 

 

148,558

 

Net oil and natural gas properties

 

 

 

767,186

 

 

767,186

 

Other property and equipment, net of accumulated depreciation and amortization

 

 

 

65,863

 

 

65,863

 

Net property and equipment

 

 

 

833,049

 

 

833,049

 

Investment in affiliate

 

356,913

 

58,063

 

 

(414,976

)

 

Derivative instruments

 

 

 

2,562

 

 

2,562

 

Goodwill

 

 

 

17,328

 

 

17,328

 

Other assets

 

 

 

12,145

 

 

12,145

 

 

 

$

357,478

 

$

58,565

 

$

910,641

 

$

(415,478

)

$

911,206

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

704

 

$

 

$

39,593

 

$

(502

)

$

39,795

 

Accrued interest

 

 

 

7,989

 

 

7,989

 

Capital lease obligation

 

 

 

1,186

 

 

1,186

 

Deferred income taxes

 

 

 

4,694

 

 

4,694

 

Other current liabilities

 

 

 

3,079

 

 

3,079

 

Total current liabilities

 

704

 

 

56,541

 

(502

)

56,743

 

Long-term debt

 

 

 

425,343

 

 

425,343

 

Asset retirement obligations

 

 

 

15,279

 

 

15,279

 

Deferred income taxes

 

 

 

35,225

 

 

35,225

 

Capital lease obligation

 

 

 

5,137

 

 

5,137

 

Other liabilities

 

 

 

1,521

 

 

1,521

 

Total liabilities

 

704

 

 

539,046

 

(502

)

539,248

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

834

 

39,135

 

832,750

 

(871,885

)

834

 

Capital surplus

 

362,061

 

19,027

 

143,138

 

457,282

 

981,508

 

Retained earnings (accumulated deficit)

 

(6,526

)

403

 

(604,006

)

(373

)

(610,502

)

Accumulated other comprehensive income (loss)

 

405

 

 

(287

)

 

118

 

Total stockholders’ equity

 

356,774

 

58,565

 

371,595

 

(414,976

)

371,958

 

 

 

$

357,478

 

$

58,565

 

$

910,641

 

$

(415,478

)

$

911,206

 

 

15



Table of Contents

 

(14) CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

Condensed Consolidating Balance Sheet

 

(In thousands of Canadian dollars)

 

 

 

As of December 31, 2011

 

 

 

Parent
Guarantor

 

Combined
Guarantor
 Subsidiaries

 

Subsidiary
Issuer

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

273

 

$

 

$

3

 

$

 

$

276

 

Accounts receivable

 

 

504

 

28,804

 

(504

)

28,804

 

Derivative instruments

 

 

 

19,786

 

 

19,786

 

Prepaid expenses and other current assets

 

180

 

 

5,380

 

 

5,560

 

Total current assets

 

453

 

504

 

53,973

 

(504

)

54,426

 

Property and equipment, at cost:

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas properties, full cost method of accounting:

 

 

 

 

 

 

 

 

 

 

 

Proved, net of accumulated depletion

 

 

 

704,232

 

 

704,232

 

Unproved

 

 

 

138,727

 

 

138,727

 

Net oil and natural gas properties

 

 

 

842,959

 

 

842,959

 

Other property and equipment, net of accumulated depreciation and amortization

 

 

 

66,413

 

 

66,413

 

Net property and equipment

 

 

 

909,372

 

 

909,372

 

Investment in affiliate

 

356,913

 

58,063

 

 

(414,976

)

 

Goodwill

 

 

 

17,328

 

 

17,328

 

Other assets

 

 

 

11,175

 

 

11,175

 

 

 

$

357,366

 

$

58,567

 

$

991,848

 

$

(415,480

)

$

992,301

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

1,369

 

$

 

$

74,837

 

$

(504

)

$

75,702

 

Capital lease obligation

 

 

 

1,156

 

 

1,156

 

Deferred income taxes

 

 

 

4,946

 

 

4,946

 

Other current liabilities

 

 

 

2,686

 

 

2,686

 

Total current liabilities

 

1,369

 

 

83,625

 

(504

)

84,490

 

Long-term debt

 

 

 

331,000

 

 

331,000

 

Asset retirement obligations

 

 

 

15,412

 

 

15,412

 

Deferred income taxes

 

 

 

69,981

 

 

69,981

 

Capital lease obligation

 

 

 

5,738

 

 

5,738

 

Other liabilities

 

 

 

1,818

 

 

1,818

 

Total liabilities

 

1,369

 

 

507,574

 

(504

)

508,439

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

833

 

39,135

 

832,750

 

(871,885

)

833

 

Capital surplus

 

359,433

 

19,027

 

143,138

 

457,282

 

978,880

 

Retained earnings (accumulated deficit)

 

(4,674

)

405

 

(491,317

)

(373

)

(495,959

)

Accumulated other comprehensive income (loss)

 

405

 

 

(297

)

 

108

 

Total stockholders’ equity

 

355,997

 

58,567

 

484,274

 

(414,976

)

483,862

 

 

 

$

357,366

 

$

58,567

 

$

991,848

 

$

(415,480

)

$

992,301

 

 

16



Table of Contents

 

(14) CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

Condensed Consolidating Statement of Operations

 

(In thousands of Canadian dollars)

 

 

 

Three Months Ended June 30, 2012

 

 

 

Parent Guarantor

 

Combined
Guarantor
Subsidiaries

 

Subsidiary
Issuer

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas

 

$

 

$

 

$

42,420

 

$

 

$

42,420

 

Interest and other

 

 

 

4

 

 

4

 

Total revenues

 

 

 

42,424

 

 

42,424

 

Costs, expenses and other:

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

 

14,160

 

 

14,160

 

Production and property taxes

 

 

 

832

 

 

832

 

Transportation and processing

 

 

 

4,311

 

 

4,311

 

General and administrative

 

1,138

 

3

 

4,699

 

 

5,840

 

Depreciation, depletion, and amortization

 

 

 

31,882

 

 

31,882

 

Ceiling test write-down of oil and natural gas properties

 

 

 

128,870

 

 

128,870

 

Interest expense

 

 

 

8,242

 

 

8,242

 

Accretion of asset retirement obligations

 

 

 

341

 

 

341

 

Foreign currency exchange losses (gains)

 

53

 

(12

)