XNYS:WLL Whiting Petroleum Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
[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
 
[  ]
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:  001-31899
 
 
WHITING PETROLEUM CORPORATION
 
 
(Exact name of registrant as specified in its charter)
 
     
Delaware
 
20-0098515
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
1700 Broadway, Suite 2300
Denver, Colorado
 
80290-2300
(Address of principal executive offices)
 
(Zip code)
     
 
(303) 837-1661
 
 
(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.    Yes   T   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).       Yes   T   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 filerT
Accelerated filer    £
Non-accelerated filer£
Smaller reporting company   £
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       Yes£    No T
 
Number of shares of the registrant’s common stock outstanding at July 16, 2012: 117,631,451 shares.
 
 
 

 
 
 
TABLE OF CONTENTS
 
     
 
 
PART I – FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
PART II – OTHER INFORMATION
 
  Certification by the Chairman and Chief Executive Officer  
  Certification by the Vice President and Chief Financial Officer  
  Written Statement of the Chairman and Chief Executive Officer  
  Written Statement of the Vice President and Chief Financial Officer  

 
GLOSSARY OF CERTAIN DEFINITIONS

Unless the context otherwise requires, the terms “we,” “us,” “our” or “ours” when used in this report refer to Whiting Petroleum Corporation, together with its consolidated subsidiaries.  When the context requires, we refer to these entities separately.
 
We have included below the definitions for certain terms used in this report:
 
“Bbl” One stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to oil and other liquid hydrocarbons.
 
“Bcf” One billion cubic feet of natural gas.
 
“BOE” One stock tank barrel equivalent of oil, calculated by converting natural gas volumes to equivalent oil barrels at a ratio of six Mcf to one Bbl of oil.
 
“EBITDAX” Earnings before interest, income taxes, depreciation, depletion, amortization and exploration expense.
 
“FASB” Financial Accounting Standards Board.
 
“FASB ASC” The Financial Accounting Standards Board Accounting Standards Codification.
 
“GAAP” Generally accepted accounting principles in the United States of America.
 
“MBbl” One thousand barrels of oil or other liquid hydrocarbons.
 
“MBOE” One thousand BOE.
 
“MBOE/d” One MBOE per day.
 
“Mcf” One thousand cubic feet of natural gas.
 
“MMBbl” One million Bbl.
 
“MMBOE” One million BOE.
 
“MMBtu” One million British Thermal Units.
 
“MMcf” One million cubic feet of natural gas.
 
“MMcf/d” One MMcf per day.
 
“plugging and abandonment” Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface.  Regulations of many states require plugging of abandoned wells.
 
“proved reserves” Those reserves which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.  The project to extract the hydrocarbons must have commenced, or the operator must be reasonably certain that it will commence the project, within a reasonable time.
 
 
The area of the reservoir considered as proved includes all of the following:
 
a.  
The area identified by drilling and limited by fluid contacts, if any, and
 
b.  
Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.
 
Reserves that can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when both of the following occur:
 
a.  
Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based, and
 
b.  
The project has been approved for development by all necessary parties and entities, including governmental entities.
 
Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined.  The price shall be the average price during the 12-month period before the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
 
“working interest” The interest in a crude oil and natural gas property (normally a leasehold interest) that gives the owner the right to drill, produce and conduct operations on the property and a share of production, subject to all royalties, overriding royalties and other burdens and to all costs of exploration, development and operations and all risks in connection therewith.
 
 
PART I – FINANCIAL INFORMATION
 
Item 1.
Consolidated Financial Statements

WHITING PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share and per share data)

   
June 30,
   
December 31,
 
   
2012
   
2011
 
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 6,807     $ 15,811  
Accounts receivable trade, net
    293,672       262,515  
Prepaid expenses and other
    23,220       20,377  
Total current assets
    323,699       298,703  
Property and equipment:
               
Oil and gas properties, successful efforts method:
               
Proved properties
    7,765,534       7,221,550  
Unproved properties
    382,495       354,774  
Other property and equipment
    155,482       150,933  
Total property and equipment
    8,303,511       7,727,257  
Less accumulated depreciation, depletion and amortization
    (2,238,740 )     (2,088,517 )
Total property and equipment, net
    6,064,771       5,638,740  
Debt issuance costs
    29,735       33,306  
Other long-term assets
    92,379       74,860  
TOTAL ASSETS
  $ 6,510,584     $ 6,045,609  
                 
LIABILITIES AND EQUITY
 
Current liabilities:
               
Accounts payable trade
  $ 102,004     $ 56,673  
Accrued capital expenditures
    109,635       142,827  
Accrued liabilities and other
    146,012       157,214  
Revenues and royalties payable
    116,410       103,894  
Taxes payable
    35,099       31,195  
Derivative liabilities
    23,364       73,647  
Deferred income taxes
    11,140       1,584  
Total current liabilities
    543,664       567,034  
Long-term debt
    1,420,000       1,380,000  
Deferred income taxes
    960,284       823,643  
Derivative liabilities
    17,085       47,763  
Production Participation Plan liability
    80,641       80,659  
Asset retirement obligations
    55,184       61,984  
Deferred gain on sale
    126,932       29,619  
Other long-term liabilities
    26,973       25,776  
Total liabilities
    3,230,763       3,016,478  
Commitments and contingencies
               
Equity:
               
Preferred stock, $0.001 par value, 5,000,000 shares authorized; 6.25% convertible perpetual preferred stock, 172,391 shares issued and outstanding as of June 30, 2012 and December 31, 2011, aggregate liquidation preference of $17,239,100 at June 30, 2012
    -       -  
Common stock, $0.001 par value, 300,000,000 shares authorized; 118,584,788 issued and 117,631,451 outstanding as of June 30, 2012, 118,105,279 issued and 117,380,884 outstanding as of December 31, 2011
    119       118  
Additional paid-in capital
    1,557,345       1,554,223  
Accumulated other comprehensive income (loss)
    (951 )     240  
Retained earnings
    1,715,089       1,466,276  
Total Whiting shareholders’ equity
    3,271,602       3,020,857  
Noncontrolling interest
    8,219       8,274  
Total equity
    3,279,821       3,029,131  
TOTAL LIABILITIES AND EQUITY
  $ 6,510,584     $ 6,045,609  
                 
See notes to consolidated financial statements.
               
 

WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
REVENUES AND OTHER INCOME:
                       
Oil and natural gas sales
  $ 492,756     $ 473,865     $ 1,051,453     $ 899,548  
Gain on hedging activities
    759       2,391       1,886       5,454  
Amortization of deferred gain on sale
    8,892       3,570       12,645       6,937  
Gain (loss) on sale of properties
    (362 )     1,227       (362 )     1,227  
Interest income and other
    129       153       258       261  
Total revenues and other income
    502,174       481,206       1,065,880       913,427  
 
COSTS AND EXPENSES:
                               
Lease operating
    89,504       73,785       184,294       145,307  
Production taxes
    40,763       34,258       85,374       65,902  
Depreciation, depletion and amortization
    160,589       110,250       316,709       217,978  
Exploration and impairment
    27,902       20,171       55,480       42,408  
General and administrative
    25,209       20,913       59,577       39,326  
Interest expense
    17,905       15,279       36,361       29,737  
Change in Production Participation Plan liability
    (953 )     2,650       (18 )     2,207  
Commodity derivative (gain) loss, net
    (100,025 )     (113,618 )     (70,622 )     20,820  
Total costs and expenses
    260,894       163,688       667,155       563,685  
 
INCOME BEFORE INCOME TAXES
    241,280       317,518       398,725       349,742  
 
INCOME TAX EXPENSE:
                               
Current
    1,109       1,565       2,535       3,615  
Deferred
    89,320       112,804       146,893       123,564  
Total income tax expense
    90,429       114,369       149,428       127,179  
 
NET INCOME
    150,851       203,149       249,297       222,563  
Net loss attributable to noncontrolling interest
    31       -       55       -  
 
NET INCOME AVAILABLE TO SHAREHOLDERS
    150,882       203,149       249,352       222,563  
Preferred stock dividends
    (270 )     (269 )     (539 )     (539 )
 
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
  $ 150,612     $ 202,880     $ 248,813     $ 222,024  
 
EARNINGS PER COMMON SHARE:
                               
Basic
  $ 1.28     $ 1.73     $ 2.12     $ 1.89  
Diluted
  $ 1.27     $ 1.71     $ 2.10     $ 1.87  
 
WEIGHTED AVERAGE SHARES OUTSTANDING:
                               
Basic
    117,622       117,373       117,569       117,308  
Diluted
    118,853       118,659       118,889       118,707  
                                 
See notes to consolidated financial statements.
                               
 
 
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
NET INCOME
  $ 150,851     $ 203,149     $ 249,297     $ 222,563  
 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
                               
OCI amortization on de-designated hedges(1) 
    (479 )     (1,509 )     (1,191 )     (3,443 )
Total other comprehensive loss, net of tax
    (479 )     (1,509 )     (1,191 )     (3,443 )
 
COMPREHENSIVE INCOME
    150,372       201,640       248,106       219,120  
Comprehensive loss attributable to noncontrolling interest
    31       -       55       -  
 
COMPREHENSIVE INCOME ATTRIBUTABLE TO WHITING
  $ 150,403     $ 201,640     $ 248,161     $ 219,120  
 
 (1)  
Presented net of income tax expense of $280 and $882 for the three months ended June 30, 2012 and 2011, respectively, and $695 and $2,011 for the six months ended June 30, 2012 and 2011, respectively.
 
 
 See notes to consolidated financial statements.
 
 
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

   
Six Months Ended
June 30,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 249,297     $ 222,563  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, depletion and amortization
    316,709       217,978  
Deferred income tax expense
    146,893       123,564  
Amortization of debt issuance costs and debt discount
    4,691       4,241  
Stock-based compensation
    8,818       6,627  
Amortization of deferred gain on sale
    (12,645 )     (6,937 )
(Gain) loss on sale of properties
    362       (1,227 )
Undeveloped leasehold and oil and gas property impairments
    32,226       15,442  
Exploratory dry hole costs
    255       4,297  
Change in Production Participation Plan liability
    (18 )     2,207  
Unrealized gain on derivative contracts
    (93,370 )     (8,570 )
Other non-current
    (13,248 )     (4,955 )
Changes in current assets and liabilities:
               
Accounts receivable trade
    (31,157 )     (12,224 )
Prepaid expenses and other
    (1,624 )     (5,862 )
Accounts payable trade and accrued liabilities
    11,576       11,860  
Revenues and royalties payable
    12,516       18,311  
Taxes payable
    3,904       903  
Net cash provided by operating activities
    635,185       588,218  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Cash acquisition capital expenditures
    (89,858 )     (163,341 )
Drilling and development capital expenditures
    (979,522 )     (660,006 )
Proceeds from sale of oil and gas properties
    68,423       1,734  
Issuance of note receivable
    -       (25,000 )
Net proceeds from sale of 18,400,000 units in Whiting USA Trust II
    323,022       -  
Net cash used in investing activities
    (677,935 )     (846,613 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Contributions from noncontrolling interest
    -       2,500  
Preferred stock dividends paid
    (539 )     (539 )
Long-term borrowings under credit agreement
    1,150,000       910,000  
Repayments of long-term borrowings under credit agreement
    (1,110,000 )     (650,000 )
Debt issuance costs
    (20 )     (2,381 )
Restricted stock used for tax withholdings
    (5,695 )     (9,048 )
Net cash provided by (used in) financing activities
    33,746       250,532  
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (9,004 )     (7,863 )
CASH AND CASH EQUIVALENTS:
               
Beginning of period
    15,811       18,952  
End of period
  $ 6,807     $ 11,089  
                 
See notes to consolidated financial statements.
         
(Continued)
 
 
 
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

   
Six Months Ended
June 30,
 
   
2012
   
2011
 
NONCASH INVESTING ACTIVITIES:
           
Accrued capital expenditures
  $ 109,635     $ 96,005  
                 
NONCASH FINANCING ACTIVITIES:
               
Contributions from noncontrolling interest
  $ -     $ 5,833  
                 
See notes to consolidated financial statements.
         
(Concluded)
 
 
 
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
(In thousands)

   
Preferred Stock
   
Common Stock
     
Additional Paid-
     Accumulated Other Comprehensive      Retained      Total Whiting Shareholders’      Noncontrolling        
   
Shares
   
Amount
   
Shares
   
Amount
   
in Capital
   
Income (Loss)
   
 Earnings
   
 Equity
   
Interest
   
Total Equity
 
BALANCES-January 1, 2011
    173     $ -       117,968     $ 59     $ 1,549,822     $ 5,768     $ 975,666     $ 2,531,315     $ -     $ 2,531,315  
Net income
    -       -       -       -       -       -       222,563       222,563       -       222,563  
Other comprehensive income
    -       -       -       -       -       (3,443 )     -       (3,443 )     -       (3,443 )
Conversion of preferred stock to common
    (1 )     -       1       -       -       -       -       -       -       -  
Two-for-one stock split
    -       -       -       59       (59 )     -       -       -       -       -  
Contributions from noncontrolling interest
    -       -       -       -       -       -       -       -       8,333       8,333  
Restricted stock issued
    -       -       304       -       -       -       -       -       -       -  
Restricted stock forfeited
    -       -       (12 )     -       -       -       -       -       -       -  
Restricted stock used for tax withholdings
    -       -       (148 )     -       (9,048 )     -       -       (9,048 )     -       (9,048 )
Stock-based compensation
    -       -       -       -       6,627       -       -       6,627       -       6,627  
Preferred dividends paid
    -       -       -       -       -       -       (539 )     (539 )     -       (539 )
BALANCES-June 30, 2011
    172     $ -       118,113     $ 118     $ 1,547,342     $ 2,325     $ 1,197,690     $ 2,747,475     $ 8,333     $ 2,755,808  
                                                                                 
BALANCES-January 1, 2012
    172     $ -       118,105     $ 118     $ 1,554,223     $ 240     $ 1,466,276     $ 3,020,857     $ 8,274     $ 3,029,131  
Net income
    -       -       -       -       -       -       249,352       249,352       (55 )     249,297  
Other comprehensive income
    -       -       -       -       -       (1,191 )     -       (1,191 )     -       (1,191 )
Restricted stock issued
    -       -       592       1       (1 )     -       -       -       -       -  
Restricted stock forfeited
    -       -       (6 )     -       -       -       -       -       -       -  
Restricted stock used for tax withholdings
    -       -       (106 )     -       (5,695 )     -       -       (5,695 )     -       (5,695 )
Stock-based compensation
    -       -       -       -       8,818       -       -       8,818       -       8,818  
Preferred dividends paid
    -       -       -       -       -       -       (539 )     (539 )     -       (539 )
BALANCES-June 30, 2012
    172     $ -       118,585     $ 119     $ 1,557,345     $ (951 )   $ 1,715,089     $ 3,271,602     $ 8,219     $ 3,279,821  
                                                                                 
See notes to consolidated financial statements.
                         
                           
 
 
WHITING PETROLEUM CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
 
1.  
BASIS OF PRESENTATION
 
Description of Operations—Whiting Petroleum Corporation, a Delaware corporation, is an independent oil and gas company that explores for, develops, acquires and produces crude oil, natural gas and natural gas liquids primarily in the Rocky Mountains, Permian Basin, Mid-Continent, Michigan and Gulf Coast regions of the United States.  Unless otherwise specified or the context otherwise requires, all references in these notes to “Whiting” or the “Company” are to Whiting Petroleum Corporation and its consolidated subsidiaries.
 
Consolidated Financial Statements—The unaudited consolidated financial statements include the accounts of Whiting Petroleum Corporation, its consolidated subsidiaries and Whiting’s pro rata share of the accounts of Whiting USA Trust I (“Trust I”) pursuant to Whiting’s 15.8% ownership interest.  Investments in entities which give Whiting significant influence, but not control, over the investee are accounted for using the equity method.  Under the equity method, investments are stated at cost plus the Company’s equity in undistributed earnings and losses.  All intercompany balances and transactions have been eliminated upon consolidation.  These financial statements have been prepared in accordance with GAAP for interim financial reporting.  In the opinion of management, the accompanying financial statements include all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly, in all material respects, the Company’s interim results.  However, operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year.  Whiting’s 2011 Annual Report on Form 10-K includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q.  Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated financial statements included in Whiting’s 2011 Annual Report on Form 10-K.
 
Earnings Per Share—Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each period.  Diluted earnings per common share is calculated by dividing adjusted net income available to common shareholders by the weighted average number of diluted common shares outstanding, which includes the effect of potentially dilutive securities.  Potentially dilutive securities for the diluted earnings per share calculations consist of unvested restricted stock awards and outstanding stock options using the treasury method, as well as convertible perpetual preferred stock using the if-converted method.  In the computation of diluted earnings per share, excess tax benefits that would be created upon the assumed vesting of unvested restricted shares or the assumed exercise of stock options (i.e. hypothetical excess tax benefits) are included in the assumed proceeds component of the treasury share method to the extent that such excess tax benefits are more likely than not to be realized.  When a loss from continuing operations exists, all potentially dilutive securities are anti-dilutive and are therefore excluded from the computation of diluted earnings per share.
 
2.  
ACQUISITIONS AND DIVESTITURES
 
2012 Acquisitions
 
On March 22, 2012, the Company completed the acquisition of approximately 13,300 net undeveloped acres in the Missouri Breaks prospect in Richland County, Montana for $33.3 million.
 
 
2012 Divestitures
 
On May 18, 2012, the Company sold a 50% ownership interest in its Belfield gas processing plant, natural gas gathering system, oil gathering system and related facilities located in Stark County, North Dakota for total cash proceeds of $66.2 million.  Whiting used the net proceeds from the sale to repay a portion of the debt outstanding under its credit agreement.
 
On March 28, 2012, the Company completed an initial public offering of units of beneficial interest in Whiting USA Trust II (“Trust II”), selling 18,400,000 Trust II units at $20.00 per unit, which generated net proceeds of $323.0 million after underwriters’ fees, offering expenses and post-close adjustments.  The Company used the net offering proceeds to repay a portion of the debt outstanding under its credit agreement.  The net proceeds from the sale of Trust II units to the public resulted in a deferred gain on sale of $129.5 million.  Immediately prior to the closing of the offering, Whiting conveyed a term net profits interest in certain of its oil and gas properties to Trust II in exchange for 18,400,000 trust units.
 
The net profits interest entitles Trust II to receive 90% of the net proceeds from the sale of oil and natural gas production from the underlying properties.  The net profits interest will terminate on the later to occur of (1) December 31, 2021, or (2) the time when 11.79 MMBOE have been produced from the underlying properties and sold.  This is the equivalent of 10.61 MMBOE in respect of Trust II’s right to receive 90% of the net proceeds from such reserves pursuant to the net profits interest.  The conveyance of the net profits interest to Trust II consisted entirely of proved reserves of 10.61 MMBOE as of the January 1, 2012 effective date, representing 3% of Whiting’s proved reserves as of December 31, 2011 and 5% (or 4.5 MBOE/d) of its March 2012 average daily net production.
 
2011 Acquisitions
 
On July 28, 2011, the Company completed the acquisition of approximately 23,400 net acres and one well in the Missouri Breaks prospect in Richland County, Montana for an unadjusted purchase price of $46.9 million.  Disclosures of pro forma revenues and net income for the acquisition of this one well are not material and have not been presented accordingly.
 
On March 18, 2011, Whiting and an unrelated third party formed Sustainable Water Resources, LLC (“SWR”) to develop a water project in the state of Colorado.  The Company contributed $25.0 million for a 75% interest in SWR, and the 25% noncontrolling interest in SWR was ascribed a fair value of $8.3 million, which consisted of $2.5 million in cash contributions, as well as $5.8 million in intangible and fixed assets contributed to the joint venture.
 
On February 15, 2011, the Company completed the acquisition of 6,000 net undeveloped acres and additional working interests in the Pronghorn field in the Billings and Stark counties of North Dakota, for an aggregate purchase price of $40.0 million.
 
2011 Divestiture
 
On September 29, 2011, Whiting sold its interest in several non-core oil and gas producing properties located in the Karnes, Live Oak and DeWitt counties of Texas for total cash proceeds of $64.8 million, resulting in a pre-tax gain on sale of $12.3 million.  Whiting used the net proceeds from the property sale to repay a portion of the debt outstanding under its credit agreement.
 
 
3.  
LONG-TERM DEBT
 
Long-term debt consisted of the following at June 30, 2012 and December 31, 2011 (in thousands):
 
 
   
June 30, 2012
   
December 31, 2011
 
Credit agreement
  $ 820,000     $ 780,000  
6.5% Senior Subordinated Notes due 2018
    350,000       350,000  
7% Senior Subordinated Notes due 2014
    250,000       250,000  
Total debt
  $ 1,420,000     $ 1,380,000  
 
Credit Agreement—Whiting Oil and Gas Corporation (“Whiting Oil and Gas”), the Company’s wholly-owned subsidiary, has a credit agreement with a syndicate of banks.  As of June 30, 2012, this credit facility had a borrowing base of $1.5 billion with $677.6 million of available borrowing capacity, which is net of $820.0 million in borrowings and $2.4 million in letters of credit outstanding.  The credit agreement provides for interest only payments until April 2016, when the agreement expires and all outstanding borrowings are due.
 
The borrowing base under the credit agreement is determined at the discretion of the lenders, based on the collateral value of the Company’s proved reserves that have been mortgaged to its lenders, and is subject to regular redeterminations on May 1 and November 1 of each year, as well as special redeterminations described in the credit agreement, in each case which may reduce the amount of the borrowing base.  A portion of the revolving credit facility in an aggregate amount not to exceed $50.0 million may be used to issue letters of credit for the account of Whiting Oil and Gas or other designated subsidiaries of the Company.  As of June 30, 2012, $47.6 million was available for additional letters of credit under the agreement.
 
Interest accrues at the Company’s option at either (i) a base rate for a base rate loan plus the margin in the table below, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.50% or an adjusted LIBOR rate plus 1.00%, or (ii) an adjusted LIBOR rate for a Eurodollar loan plus the margin in the table below.  Additionally, the Company also incurs commitment fees as set forth in the table below on the unused portion of the lesser of the aggregate commitments of the lenders or the borrowing base, and are included as a component of interest expense.  At June 30, 2012, the weighted average interest rate on the outstanding principal balance under the credit agreement was 2.3%.
 
Ratio of Outstanding Borrowings to Borrowing Base
 
Applicable Margin for
Base Rate Loans
 
Applicable Margin for
Eurodollar Loans
 
Commitment Fee
Less than 0.25 to 1.0
 
0.50%
 
1.50%
 
 0.375%
Greater than or equal to 0.25 to 1.0 but less than 0.50 to 1.0
 
0.75%
 
1.75%
 
 0.375%
Greater than or equal to 0.50 to 1.0 but less than 0.75 to 1.0
 
1.00%
 
2.00%
 
 0.50%
Greater than or equal to 0.75 to 1.0 but less than 0.90 to 1.0
 
1.25%
 
2.25%
 
 0.50%
Greater than or equal to 0.90 to 1.0
 
1.50%
 
2.50%
 
 0.50%
 
The credit agreement contains restrictive covenants that may limit the Company’s ability to, among other things, incur additional indebtedness, sell assets, make loans to others, make investments, enter into mergers, enter into hedging contracts, incur liens and engage in certain other transactions without the prior consent of its lenders.  Except for limited exceptions, which include the payment of dividends on the Company’s 6.25% convertible perpetual preferred stock, the credit agreement also restricts the Company’s ability to make any dividend payments or distributions on its common stock.  These restrictions apply to all of the net assets of Whiting Oil and Gas.  As of June 30, 2012, total restricted net assets were $3,205.9 million, and the amount of retained earnings free from restrictions was $18.5 million.  The credit agreement requires the Company, as of the last day of any quarter, (i) to not exceed a total debt to the last four quarters’ EBITDAX ratio (as defined in the credit agreement) of 4.25 to 1.0 for quarters ending prior to and on December 31, 2012 and 4.0 to 1.0 for the quarters ending March 31, 2013 and thereafter and (ii) to have a consolidated current assets to consolidated current liabilities ratio (as defined in the credit agreement and which includes an add back of the available borrowing capacity under the credit agreement) of not less than 1.0 to 1.0.  The Company was in compliance with its covenants under the credit agreement as of June 30, 2012.
 
 
The obligations of Whiting Oil and Gas under the amended credit agreement are secured by a first lien on substantially all of Whiting Oil and Gas’ properties included in the borrowing base for the credit agreement.  The Company has guaranteed the obligations of Whiting Oil and Gas under the credit agreement and has pledged the stock of Whiting Oil and Gas as security for its guarantee.
 
Senior Subordinated Notes—In October 2005, the Company issued at par $250.0 million of 7% Senior Subordinated Notes due February 2014.  The estimated fair value of these notes was $264.4 million as of June 30, 2012, based on quoted market prices for these debt securities, and such fair value is therefore designated as Level 1 within the valuation hierarchy.
 
In September 2010, the Company issued at par $350.0 million of 6.5% Senior Subordinated Notes due October 2018.  The estimated fair value of these notes was $371.0 million as of June 30, 2012, based on quoted market prices for these debt securities, and such fair value is therefore designated as Level 1 within the valuation hierarchy.
 
The notes are unsecured obligations of Whiting Petroleum Corporation and are subordinated to all of the Company’s senior debt, which currently consists of Whiting Oil and Gas’ credit agreement.  The Company’s obligations under the 2014 notes are fully, unconditionally, jointly and severally guaranteed by the Company’s 100%-owned subsidiaries, Whiting Oil and Gas and Whiting Programs, Inc. (the “2014 Guarantors”).  Additionally, the Company’s obligations under the 2018 notes are fully, unconditionally, jointly and severally guaranteed by the Company’s 100%-owned subsidiary, Whiting Oil and Gas (collectively with the 2014 Guarantors, the “Guarantors”).  Any subsidiaries other than the Guarantors are minor subsidiaries as defined by Rule 3-10(h)(6) of Regulation S-X of the Securities and Exchange Commission.  Whiting Petroleum Corporation has no assets or operations independent of this debt and its investments in guarantor subsidiaries.
 
4.  
ASSET RETIREMENT OBLIGATIONS
 
The Company’s asset retirement obligations represent the estimated future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage, and land restoration (including removal of certain onshore and offshore facilities in California) in accordance with applicable local, state and federal laws.  The Company follows FASB ASC Topic 410, Asset Retirement and Environmental Obligations, to determine its asset retirement obligation amounts by calculating the present value of the estimated future cash outflows associated with its plug and abandonment obligations.  The current portions at June 30, 2012 and December 31, 2011 were $11.3 million and $7.7 million, respectively, and are included in accrued liabilities and other.  Revisions to the liability could occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells.  The following table provides a reconciliation of the Company’s asset retirement obligations for the six months ended June 30, 2012 (in thousands):
 
Asset retirement obligation at January 1, 2012
  $ 69,721  
Additional liability incurred
    3,097  
Revisions in estimated cash flows
    (4,344 )
Accretion expense
    3,636  
Obligations on sold properties
    (4 )
Liabilities settled
    (5,664 )
Asset retirement obligation at June 30, 2012
  $ 66,442  
 
 
5.  
DERIVATIVE FINANCIAL INSTRUMENTS
 
The Company is exposed to certain risks relating to its ongoing business operations, and Whiting uses derivative instruments to manage its commodity price risk.  Whiting follows FASB ASC Topic 815, Derivatives and Hedging, to account for its derivative financial instruments.
 
Commodity Derivative ContractsHistorically, prices received for crude oil and natural gas production have been volatile because of seasonal weather patterns, supply and demand factors, worldwide political factors and general economic conditions.  Whiting enters into derivative contracts, primarily costless collars, to achieve a more predictable cash flow by reducing its exposure to commodity price volatility.  Commodity derivative contracts are thereby used to ensure adequate cash flow to fund the Company’s capital programs and to manage returns on acquisitions and drilling programs.  Costless collars are designed to establish floor and ceiling prices on anticipated future oil and gas production.  While the use of these derivative instruments limits the downside risk of adverse price movements, they may also limit future revenues from favorable price movements.  The Company does not enter into derivative contracts for speculative or trading purposes.
 
Whiting Derivatives.  The table below details the Company’s costless collar derivatives, including its proportionate share of Trust I and Trust II derivatives, entered into to hedge forecasted crude oil and natural gas production revenues, as of July 16, 2012.
 
   
Whiting Petroleum Corporation
   
Contracted Volumes
 
Weighted Average
NYMEX Price Collar Ranges
Period
 
Crude Oil
(Bbl)
 
Natural Gas
(Mcf)
 
Crude Oil
(per Bbl)
 
Natural Gas
(per Mcf)
Jul – Dec 2012
 
6,979,789
 
 186,427
 
$ 68.94 - $106.81
 
$ 6.49 - $13.93
Jan – Dec 2013
 
 3,143,700
 
 -
 
$ 48.20 - $  90.45
 
n/a
Jan – Dec 2014
 
 49,290
 
 -
 
$ 80.00 - $122.50
 
n/a
Total
 
10,172,779
 
 186,427
       
 
Derivatives Conveyed to Whiting USA Trust I.  In connection with the Company’s conveyance in April 2008 of a term net profits interest to Trust I and related sale of 11,677,500 Trust I units to the public, the right to any future hedge payments made or received by Whiting on certain of its derivative contracts have been conveyed to Trust I, and therefore such payments will be included in Trust I’s calculation of net proceeds.  Under the terms of the aforementioned conveyance, Whiting retains 10% of the net proceeds from the underlying properties.  Whiting’s retention of 10% of these net proceeds, combined with its ownership of 2,186,389 Trust I units, results in third-party public holders of Trust I units receiving 75.8%, and Whiting retaining 24.2%, of the future economic results of commodity derivative contracts conveyed to Trust I.  The relative ownership of the future economic results of such commodity derivatives is reflected in the tables below.  No additional hedges are allowed to be placed on Trust I assets.
 
The 24.2% portion of Trust I derivatives that Whiting has retained the economic rights to (and which are also included in the table above) are as follows:
 
 
   
Whiting Petroleum Corporation
   
Contracted Volumes
 
Weighted Average
NYMEX Price Collar Ranges
Period
 
Crude Oil
(Bbl)
 
Natural Gas
(Mcf)
 
Crude Oil
(per Bbl)
 
Natural Gas
(per Mcf)
Jul – Dec 2012
 
 51,379
 
 186,427
 
$ 74.00 - $141.95
 
$ 6.49 - $13.93
 
The 75.8% portion of Trust I derivative contracts of which Whiting has transferred the economic rights to third-party public holders of Trust I units (and which have not been reflected in the above tables) are as follows:
 
   
Third-party Public Holders of Trust I Units
   
Contracted Volumes
 
Weighted Average
NYMEX Price Collar Ranges
Period
 
Crude Oil
(Bbl)
 
Natural Gas
(Mcf)
 
Crude Oil
(per Bbl)
 
Natural Gas
(per Mcf)
Jul – Dec 2012
 
 160,931
 
 583,931
 
$ 74.00 - $141.95
 
$ 6.49 - $13.93
 
Derivatives Conveyed to Whiting USA Trust II.  In connection with the Company’s conveyance in March 2012 of a term net profits interest to Trust II and related sale of 18,400,000 Trust II units to the public, the right to any future hedge payments made or received by Whiting on certain of its derivative contracts have been conveyed to Trust II, and therefore such payments will be included in Trust II’s calculation of net proceeds.  Under the terms of the aforementioned conveyance, Whiting retains 10% of the net proceeds from the underlying properties, which results in third-party public holders of Trust II units receiving 90%, and Whiting retaining 10%, of the future economic results of commodity derivative contracts conveyed to Trust II.  The relative ownership of the future economic results of such commodity derivatives is reflected in the tables below.  No additional hedges are allowed to be placed on Trust II assets.
 
The 10% portion of Trust II derivatives that Whiting has retained the economic rights to (and which are also included in the first derivative table above) are as follows:
 
   
Whiting Petroleum Corporation
 
Period
 
Contracted Crude Oil Volumes (Bbl)
 
NYMEX Price Collar Ranges for Crude Oil
(per Bbl)
Jul – Dec 2012
 
 28,410
 
$80.00 - $122.50
Jan – Dec 2013
 
 53,700
 
$80.00 - $122.50
Jan – Dec 2014
 
 49,290
 
$80.00 - $122.50
   
 131,400
   
 
The 90% portion of Trust II derivative contracts of which Whiting has transferred the economic rights to third-party public holders of Trust II units (and which have not been reflected in the above tables) are as follows:
 
 
   
Third-party Public Holders of Trust II Units
 
Period
 
Contracted Crude Oil Volumes (Bbl)
 
NYMEX Price Collar Ranges for Crude Oil
(per Bbl)
Jul – Dec 2012
 
 255,690
 
$80.00 - $122.50
Jan – Dec 2013
 
 483,300
 
$80.00 - $122.50
Jan – Dec 2014
 
                           443,610
 
$80.00 - $122.50
   
 1,182,600
   
 
Embedded Commodity Derivative ContractsAs of June 30, 2012, Whiting had entered into certain contracts for oil field goods or services, whereby the price adjustment clauses for such goods or services are linked to changes in NYMEX crude oil prices.  The Company has determined that the portions of these contracts linked to NYMEX oil prices are not clearly and closely related to the host contracts, and the Company has therefore bifurcated these embedded pricing features from their host contracts and reflected them at fair value in the consolidated financial statements.
 
Drilling Rig Contracts.  As of June 30, 2012, Whiting had entered into two contracts with drilling rig companies, whereby the rig day rates included price adjustment clauses that are linked to changes in NYMEX crude oil prices.  These drilling rig contracts have termination dates of April 2014 and September 2014.  The price adjustment formulas in the rig contracts stipulate that with every $10 increase or decrease in the price of NYMEX crude, the cost of drilling rig day rates to the Company will likewise increase or decrease by specific dollar amounts as set forth in each of the individual contracts.  As of June 30, 2012, the aggregate estimated fair value of the embedded derivatives in these drilling rig contracts was an asset of $0.8 million.
 
As global crude oil prices increase or decrease, the demand for drilling rigs in North America similarly increases and decreases.  Because the supply of onshore drilling rigs in North America is fairly inelastic, these changes in rig demand cause drilling rig day rates to increase or decrease in tandem with crude oil price fluctuations.  When the Company enters into a long-term drilling rig contract that has a fixed rig day rate, which does not increase or decrease with changes in oil prices, the Company is exposed to the risk of paying higher than the market day rate for drilling rigs in a climate of declining oil prices.  This in turn could have a negative impact on the Company’s oil and gas well economics.  As a result, the Company reduces its exposure to this risk by entering into certain drilling contracts which have day rates that fluctuate in tandem with changes in oil prices.
 
CO2 Purchase Contract.  In May 2011, Whiting entered into a long-term contract to purchase CO2 from 2015 through 2029 for use in its enhanced oil recovery project that is being carried out at its North Ward Estes field in Texas.  The price per Mcf of CO2 purchased under this agreement increases or decreases as the average price of NYMEX crude oil likewise increases or decreases.  As of June 30, 2012, the estimated fair value of the embedded derivative in this CO2 purchase contract was an asset of $17.7 million.
 
Although CO2 is not a commodity that is actively traded on a public exchange, the market price for CO2 generally fluctuates in tandem with increases or decreases in crude oil prices.  When Whiting enters into a long-term CO2 purchase contract where the price of CO2 is fixed and does not adjust with changes in oil prices, the Company is exposed to the risk of paying higher than the market rate for CO2 in a climate of declining oil and CO2 prices.  This in turn could have a negative impact on the project economics of the Company’s CO2 flood at North Ward Estes.  As a result, the Company reduces its exposure to this risk by entering into certain CO2 purchase contracts which have prices that fluctuate along with changes in crude oil prices.
 
 
Derivative Instrument ReportingAll derivative instruments are recorded on the consolidated balance sheet at fair value, other than derivative instruments that meet the “normal purchase normal sale” exclusion.  The following tables summarize the location and fair value amounts of all derivative instruments in the consolidated balance sheets (in thousands):
 
       
Fair Value
 
Not Designated as ASC 815 Hedges
 
Balance Sheet Classification
 
June 30,
 2012
   
December 31,
 2011
 
Derivative assets:
               
Commodity contracts
 
Prepaid expenses and other
  $ 7,039     $ 5,719  
Embedded commodity contracts
 
Prepaid expenses and other
    147       240  
Commodity contracts
 
Other long-term assets
    4,397       -  
Embedded commodity contracts
 
Other long-term assets
    18,375       13,347  
Total derivative assets
  $ 29,958     $ 19,306  
 
Derivative liabilities:
                   
Commodity contracts
 
Current derivative liabilities
  $ 23,364     $ 73,647  
Commodity contracts
 
Non-current derivative liabilities
    17,085       47,763  
Total derivative liabilities
  $ 40,449     $ 121,410  
 
The following tables summarize the effects of commodity derivatives instruments on the consolidated statements of income for the three and six months ended June 30, 2012 and 2011 (in thousands):
 
       
Gain Reclassified from OCI into Income (Effective Portion)
 
ASC 815 Cash Flow
     
Six Months Ended June 30,
 
Hedging Relationships
 
Income Statement Classification
 
2012
   
2011
 
Commodity contracts
 
Gain on hedging activities
  $ 1,886     $ 5,454  

       
Three Months Ended June 30,
 
       
2012
   
2011
 
Commodity contracts
 
Gain on hedging activities
  $ 759     $ 2,391  

       
(Gain) Loss Recognized in Income
 
Not Designated as
     
Six Months Ended June 30,
 
ASC 815 Hedges
 
Income Statement Classification
 
2012
   
2011
 
Commodity contracts
 
Commodity derivative (gain) loss, net
  $ (65,687 )   $ 21,294  
Embedded commodity contracts
 
Commodity derivative (gain) loss, net
    (4,935 )     (474 )
Total
  $ (70,622 )   $ 20,820  

       
Three Months Ended June 30,
 
       
2012
   
2011
 
Commodity contracts
 
Commodity derivative (gain) loss, net
  $ (89,524 )   $ (110,063 )
Embedded commodity contracts
 
Commodity derivative (gain) loss, net
    (10,501 )     (3,555 )
Total
  $ (100,025 )   $ (113,618 )
 
Contingent Features in Derivative Instruments.  None of the Company’s derivative instruments contain credit-risk-related contingent features.  Counterparties to the Company’s derivative contracts are high credit-quality financial institutions that are current or former lenders under Whiting’s credit agreement.  At the time Whiting enters into derivative contracts, the Company uses only credit agreement participants to hedge with, since these institutions are secured equally with the holders of Whiting’s bank debt, which eliminates the potential need to post collateral when Whiting is in a derivative liability position.  As a result, the Company is not required to post letters of credit or corporate guarantees for its derivative counterparties in order to secure contract performance obligations.
 
 
6.  
FAIR VALUE MEASUREMENTS
 
The Company follows FASB ASC Topic 820, Fair Value Measurement and Disclosure, which establishes a three-level valuation hierarchy for disclosure of fair value measurements.  The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement.  The three levels are defined as follows:
 
·  
Level 1:  Quoted Prices in Active Markets for Identical Assets – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
·  
Level 2:  Significant Other Observable Inputs – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
·  
Level 3:  Significant Unobservable Inputs – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.  The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level.
 
The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values (in thousands):
 
   
Level 1
   
Level 2
   
Level 3
   
Total Fair Value
June 30, 2012
 
Financial Assets
                       
Commodity derivatives – current
  $ -     $ 7,039     $ -     $ 7,039  
Embedded commodity derivatives – current
    -       147       -       147  
Commodity derivatives – non-current
    -       4,397       -       4,397  
Embedded commodity derivatives – non-current
    -       697       17,678       18,375  
Total financial assets
  $ -     $ 12,280     $ 17,678     $ 29,958  
Financial Liabilities
                               
Commodity derivatives – current
  $ -     $ 23,364     $ -     $ 23,364  
Commodity derivatives – non-current
    -       17,085       -       17,085  
Total financial liabilities
  $ -     $ 40,449     $ -     $ 40,449  
 
 
   
Level 1
   
Level 2
   
Level 3
   
Total Fair Value
December 31, 2011
 
Financial Assets
                       
Commodity derivatives – current
  $ -     $ 5,719     $ -     $ 5,719  
Embedded commodity derivatives – current
    -       240       -       240  
Embedded commodity derivatives – non-current
    -       367       12,980       13,347  
Total financial assets
  $ -     $ 6,326     $ 12,980     $ 19,306  
Financial Liabilities
                               
Commodity derivatives – current
  $ -     $ 73,647     $ -     $ 73,647  
Commodity derivatives – non-current
    -       47,763       -       47,763  
Total financial liabilities
  $ -     $ 121,410     $ -     $ 121,410  
 
The following methods and assumptions were used to estimate the fair values of the assets and liabilities in the tables above:
 
Commodity Derivatives.  Commodity derivative instruments consist primarily of costless collars for crude oil and natural gas.  The Company’s costless collars are valued based on an income approach.  These option models consider various assumptions, including quoted forward prices for commodities, time value and volatility factors.  These assumptions are observable in the marketplace throughout the full term of the contract, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace, and are therefore designated as Level 2 within the valuation hierarchy.  The discount rates used in the fair values of these instruments include a measure of either the Company’s or the counterparty’s nonperformance risk, as appropriate.  The Company utilizes counterparties’ valuations to assess the reasonableness of its own valuations.
 
Embedded Commodity Derivatives.  Embedded commodity derivatives relate to long-term drilling rig contracts as well as a long-term CO2 purchase contract, which all have price adjustment clauses that are linked to changes in NYMEX crude oil prices.  Whiting has determined that the portions of these contracts linked to NYMEX oil prices are not clearly and closely related to the host drilling contracts, and the Company has therefore bifurcated these embedded pricing features from their host contracts and reflected them at fair value in its consolidated financial statements.  These embedded commodity derivatives are valued based on an income approach.  These option models consider various assumptions, including quoted forward prices for commodities, LIBOR discount rates and either the Company’s or the counterparty’s nonperformance risk, as appropriate.
 
The assumptions used in the valuation of the drilling rig contracts are observable in the marketplace throughout the full term of the contract, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace, and the fair value measurements of the drilling rig contracts are therefore designated as Level 2 within the valuation hierarchy.
 
The assumptions used in the CO2 contract valuation, however, include inputs that are both observable in the marketplace as well as unobservable during the term of the contract.  With respect to forward prices for NYMEX crude oil where there is a lack of price transparency in certain future periods, such unobservable oil price inputs are significant to the CO2 contract valuation methodology, and the contract’s fair value is therefore designated as Level 3 within the valuation hierarchy.
 
Level 3 Fair Value Measurements. A third-party valuation specialist is utilized on a quarterly basis to determine the fair value of the embedded commodity derivative instrument designated as Level 3.  The Company reviews these valuations (including the related model inputs and assumptions) and analyzes changes in fair value measurements between periods.  The Company corroborates such inputs, calculations and fair value changes using various methodologies, and Whiting reviews unobservable inputs for reasonableness utilizing relevant information from other published sources.
 
 
The following table presents a reconciliation of changes in the fair value of financial assets (liabilities) designated as Level 3 in the valuation hierarchy for the three and six months ended June 30, 2012 (in thousands):
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2012(2)
   
June 30, 2012(2)
 
Fair value asset, beginning of period
  $ 8,866     $ 12,980  
Unrealized gains (losses) on embedded commodity derivative contracts included in earnings(1)
    8,812       4,698  
Transfers into (out of) Level 3
    -       -  
Fair value asset, end of period
  $ 17,678     $ 17,678  
_____________________
(1)  
Included in commodity derivative (gain) loss, net in the consolidated statements of income.
(2)  
There were no recurring fair value measurements designated as Level 3 during the three and six months ended June 30, 2011.
 
Quantitative Information About Level 3 Fair Value Measurements.  The significant unobservable inputs used in the fair value measurement of the Company’s embedded commodity derivative contract designated as Level 3 are as follows:
 
   Fair Value at June 30, 2012 (in thousands)  
Valuation Technique
 
Unobservable
Input
 
Range
(per Bbl)
Embedded commodity derivative
 $
17,678
 
Option model
 
Future prices of NYMEX crude oil after June 30, 2018
 
$88.58-$122.73
 
Sensitivity To Changes In Significant Unobservable Inputs.  As presented in the table above, the significant unobservable inputs used in the fair value measurement of Whiting’s embedded commodity derivative within its CO2 purchase contract are the future prices of NYMEX crude oil from July 2018 to 2029.  Significant increases (decreases) in these unobservable inputs in isolation would result in a significantly lower (higher) fair value asset measurement.
 
Nonrecurring Fair Value Measurements.  The Company applies the provisions of the fair value measurement standard to its nonrecurring, non-financial measurements, including proved oil and gas property impairments.  The Company did not recognize any impairment write-downs with respect to its proved oil and gas properties during the 2012 or 2011 reporting periods presented.
 
7.  
DEFERRED COMPENSATION
 
Production Participation Plan—The Company has a Production Participation Plan (the “Plan”) in which all employees participate.  On an annual basis, interests in oil and gas properties acquired, developed or sold during the year are allocated to the Plan as determined annually by the Compensation Committee of the Company’s Board of Directors.  Once allocated, the interests (not legally conveyed) are fixed.  Interest allocations prior to 1995 consisted of 2%-3% overriding royalty interests.  Interest allocations since 1995 have been 2%-5% of oil and gas sales less lease operating expenses and production taxes.
 
Payments of 100% of the year’s Plan interests to employees and the vested percentages of former employees in the year’s Plan interests are made annually in cash after year-end.  Accrued compensation expense under the Plan for the six months ended June 30, 2012 and 2011 amounted to $27.7 million and $17.1 million, respectively, charged to general and administrative expense and $2.9 million and $2.2 million, respectively, charged to exploration expense.
 
 
Employees vest in the Plan ratably at 20% per year over a five-year period.  Pursuant to the terms of the Plan, (i) employees who terminate their employment with the Company are entitled to receive their vested allocation of future Plan year payments on an annual basis; (ii) employees will become fully vested at age 62, regardless of when their interests would otherwise vest; and (iii) any forfeitures inure to the benefit of the Company.
 
The Company uses average historical prices to estimate the vested long-term Production Participation Plan liability.  At June 30, 2012, the Company used three-year average historical NYMEX prices of $80.41 for crude oil and $3.93 for natural gas to estimate this liability.  If the Company were to terminate the Plan or upon a change in control of the Company (as defined in the Plan), all employees fully vest and the Company would distribute to each Plan participant an amount, based upon the valuation method set forth in the Plan, in a lump sum payment twelve months after the date of termination or within one month after a change in control event.  Based on current strip prices at June 30, 2012, if the Company elected to terminate the Plan or if a change of control event occurred, it is estimated that the fully vested lump sum cash payment to employees would approximate $156.7 million.  This amount includes $12.0 million attributable to proved undeveloped oil and gas properties and $30.6 million relating to the short-term portion of the Plan liability, which has been accrued as a current payable to be paid in February 2013.  The ultimate sharing contribution for proved undeveloped oil and gas properties will be awarded in the year of Plan termination or change of control.  However, the Company has no intention to terminate the Plan.
 
The following table presents changes in the Plan’s estimated long-term liability (in thousands):
 
Long-term Production Participation Plan liability at January 1
  $ 80,659  
Change in liability for accretion, vesting, changes in estimates and new Plan year activity
    30,611  
Cash payments accrued as compensation expense and reflected as a current payable
    (30,629 )
Long-term Production Participation Plan liability at June 30
  $ 80,641  
 
8.  
 SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTEREST
 
Common Stock—In May 2011, Whiting’s stockholders approved an amendment to the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 175,000,000 shares to 300,000,000 shares.
 
Stock Split.  On January 26, 2011, the Company’s Board of Directors approved a two-for-one split of the Company's shares of common stock to be effected in the form of a stock dividend.  As a result of the stock split, stockholders of record on February 7, 2011 received one additional share of common stock for each share of common stock held.  The additional shares of common stock were distributed on February 22, 2011.  Concurrently with the payment of such stock dividend in February 2011, there was a transfer from additional paid-in capital to common stock of $0.1 million, which amount represents $0.001 per share (being the par value thereof) for each share of common stock so issued.  The common stock dividend resulted in the conversion price for Whiting’s 6.25% Convertible Perpetual Preferred Stock being adjusted from $43.4163 to $21.70815.
 
6.25% Convertible Perpetual Preferred Stock—In June 2009, the Company completed a public offering of 6.25% convertible perpetual preferred stock (“preferred stock”), selling 3,450,000 shares at a price of $100.00 per share.  As of June 30, 2012, however, only 172,391 shares of preferred stock remained outstanding.
 
 
Each holder of the preferred stock is entitled to an annual dividend of $6.25 per share to be paid quarterly in cash, common stock or a combination thereof on March 15, June 15, September 15 and December 15, when and if such dividend has been declared by Whiting’s board of directors.  Each share of preferred stock has a liquidation preference of $100.00 per share plus accumulated and unpaid dividends and is convertible, at a holder’s option, into shares of Whiting’s common stock based on a conversion price of $21.70815, subject to adjustment upon the occurrence of certain events.  The preferred stock is not redeemable by the Company.  At any time on or after June 15, 2013, the Company may cause all outstanding shares of this preferred stock to be converted into shares of common stock if the closing price of our common stock equals or exceeds 120% of the then-prevailing conversion price for at least 20 trading days in a period of 30 consecutive trading days.  The holders of preferred stock have no voting rights unless dividends payable on the preferred stock are in arrears for six or more quarterly periods.
 
Noncontrolling InterestThe noncontrolling interest represents an unrelated third party’s 25% ownership interest in SWR.  The table below summarizes the activity for the equity attributable to the noncontrolling interest (in thousands):
 
   
Six Months Ended June 30,
 
   
2012
   
2011
 
Balance at January 1
  $ 8,274     $ -  
Contributions from noncontrolling interest
    -       8,333  
Net income (loss)
    (55 )     -  
Balance at June 30
  $ 8,219     $ 8,333  
 
9.  
INCOME TAXES
 
Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period.  The provision for income taxes for the three and six months ended June 30, 2012 and 2011 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 35% to pre-tax income primarily because of state income taxes and estimated permanent differences.
 
The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year.  The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.
 
 
10.  
EARNINGS PER SHARE
 
The reconciliations between basic and diluted earnings per share are as follows (in thousands, except per share data):
 
   
Three Months Ended June 30,
 
   
2012
   
2011
 
Basic Earnings Per Share
           
Numerator:
           
Net income available to shareholders
  $ 150,882     $ 203,149  
Preferred stock dividends
    (270 )     (269 )
Net income available to common shareholders, basic
  $ 150,612     $ 202,880  
Denominator:
               
Weighted average shares outstanding, basic
    117,622       117,373  
                 
Diluted Earnings Per Share
               
Numerator:
               
Net income available to common shareholders, basic
  $ 150,612     $ 202,880  
Preferred stock dividends
    270       269  
Adjusted net income available to common shareholders, diluted
  $ 150,882     $ 203,149  
Denominator:
               
Weighted average shares outstanding, basic
    117,622       117,373  
Restricted stock and stock options
    437       492  
Convertible perpetual preferred stock
    794       794  
Weighted average shares outstanding, diluted
    118,853       118,659  
                 
Earnings per common share, basic
  $ 1.28     $ 1.73  
Earnings per common share, diluted
  $ 1.27     $ 1.71  
 
For the three months ended June 30, 2012, the diluted earnings per share calculation excludes the effect of 25,984 common shares for stock options that were out-of-the-money and 138,148 incremental common shares for restricted stock that did not meet its market-based vesting criteria as of June 30, 2012.
 
   
Six Months Ended June 30,
 
   
2012
   
2011
 
Basic Earnings Per Share
           
Numerator:
           
Net income available to shareholders
  $ 249,352     $ 222,563  
Preferred stock dividends
    (539 )     (539 )
Net income available to common shareholders, basic
  $ 248,813     $ 222,024  
Denominator:
               
Weighted average shares outstanding, basic
    117,569       117,308  
                 
Diluted Earnings Per Share
               
Numerator:
               
Net income available to common shareholders, basic
  $ 248,813     $ 222,024  
Preferred stock dividends
    539       539  
Adjusted net income available to common shareholders, diluted
  $ 249,352     $ 222,563  
Denominator:
               
Weighted average shares outstanding, basic
    117,569       117,308  
Restricted stock and stock options
    526       605  
Convertible perpetual preferred stock
    794       794  
Weighted average shares outstanding, diluted
    118,889       118,707  
                 
Earnings per common share, basic
  $ 2.12     $ 1.89  
Earnings per common share, diluted
  $ 2.10     $ 1.87  

For the six months ended June 30, 2012, the diluted earnings per share calculation excludes the effect of 10,542 common shares for stock options that were out-of-the-money and 129,203 incremental common shares for restricted stock that did not meet its market-based vesting criteria as of June 30, 2012.
 
 
11.  
ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which provides amendments to FASB ASC Topic 820, Fair Value Measurement.  The objective of ASU 2011-04 is to create common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards (“IFRS”).  The amendments clarify existing fair value measurement and disclosure requirements and make changes to particular principles or requirements for measuring or disclosing information about fair value measurements.  ASU 2011-04 was effective for interim and annual periods beginning after December 15, 2011.  The Company adopted this standard effective January 1, 2012, which did not have an impact on the Company’s consolidated financial statements other than additional disclosures.
 
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income: Presentation of Comprehensive Income (“ASU 2011-05”), which provides amendments to FASB ASC Topic 220, Comprehensive Income.  The objective of ASU 2011-05 is to require an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity.  ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively.  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 the effective date of changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income.  The amendments in this update are effective at the same time as the amendments in ASU 2011-05.  The Company adopted the provisions of ASU 2011-05 and 2011-12 effective January 1, 2012, which did not have an impact on its consolidated financial statements other than requiring the Company to present its statements of comprehensive income separately from its statements of equity, as these statements were previously presented on a combined basis.
 
In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Balance Sheet: Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”).  The objective of ASU 2011-11 is to require an entity to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position.  ASU 2011-11 is effective for interim and annual reporting periods beginning on or after January 1, 2013 and should be applied retrospectively.  The adoption of this standard will not have a significant impact on the Company’s consolidated financial statements.
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Unless the context otherwise requires, the terms “Whiting,” “we,” “us,” “our” or “ours” when used in this Item refer to Whiting Petroleum Corporation, together with its consolidated subsidiaries, Whiting Oil and Gas Corporation and Whiting Programs, Inc.  When the context requires, we refer to these entities separately.  This document contains forward-looking statements, which give our current expectations or forecasts of future events.  Please refer to “Forward-Looking Statements” at the end of this Item for an explanation of these types of statements.
 
Overview
 
We are an independent oil and gas company engaged in exploration, development, acquisition and production activities primarily in the Rocky Mountains, Permian Basin, Mid-Continent, Michigan and Gulf Coast regions of the United States.  Prior to 2006, we generally emphasized the acquisition of properties that increased our production levels and provided upside potential through further development.  Since 2006, we have focused primarily on organic drilling activity and on the development of previously acquired properties, specifically on projects that we believe provide the opportunity for repeatable successes and production growth.  We believe the combination of acquisitions, subsequent development and organic drilling provides us a broad set of growth alternatives and allows us to direct our capital resources to what we believe to be the most advantageous investments.
 
As demonstrated by our recent capital expenditure programs, we are increasingly focused on a balanced exploration and development program, while continuing to selectively pursue acquisitions that complement our existing core properties.  We believe that our significant drilling inventory, combined with our operating experience and cost structure, provides us with meaningful organic growth opportunities.  Our growth plan is centered on the following activities:
 
 
pursuing the development of projects that we believe will generate attractive rates of return;
 
allocating a portion of our capital budget to leasing and exploring prospect areas;
 
maintaining a balanced portfolio of lower risk, long-lived oil and gas properties that provide stable cash flows; and
 
seeking property acquisitions that complement our core areas.
 
We have historically acquired operated and non-operated properties that exceed our rate of return criteria.  For acquisitions of properties with additional development and exploration potential, our focus has been on acquiring operated properties so that we can better control the timing and implementation of capital spending.  In some instances, we have been able to acquire non-operated property interests at attractive rates of return that established a presence in a new area of interest or that have complemented our existing operations.  We intend to continue to acquire both operated and non-operated interests to the extent we believe they meet our return criteria.  In addition, our willingness to acquire non-operated properties in new geographic regions provides us with geophysical and geologic data in some cases that leads to further acquisitions in the same region, whether on an operated or non-operated basis.  We sell properties when we believe that the sales price realized will provide an above average rate of return for the property or when the property no longer matches the profile of properties we desire to own.
 
Our revenue, profitability and future growth rate depend on many factors which are beyond our control, such as economic, political and regulatory developments and competition from other sources of energy.  Oil and gas prices historically have been volatile and may fluctuate widely in the future.  The following table highlights the quarterly average NYMEX price trends for crude oil and natural gas prices since the first quarter of 2010:

 
 
2010
 
2011
 
2012
 
Q1
Q2
Q3
Q4
 
Q1
Q2
Q3
Q4
 
Q1
Q2
Crude Oil
$78.79
$77.99
$76.21
$85.18
 
$94.25
$102.55
$89.81
$94.02
 
$102.94
$93.51
Natural Gas
$5.30
$4.09
$4.39
$3.81
 
$4.10
$4.32
$4.20
$3.54
 
$2.72
$2.21
 
Lower oil and natural gas prices may not only decrease our revenues, but may also reduce the amount of oil and natural gas that we can produce economically and therefore potentially lower our oil and gas reserves.  A substantial or extended decline in oil or natural gas prices may result in impairments of our proved oil and gas properties and may materially and adversely affect our future business, financial condition, cash flows, results of operations, liquidity or ability to finance planned capital expenditures.  Lower oil and gas prices may also reduce the amount of our borrowing base under our credit agreement, which is determined at the discretion of the lenders and is based on the collateral value of our proved reserves that have been mortgaged to the lenders.  Alternatively, higher oil and natural gas prices may result in significant non-cash, mark-to-market losses being incurred on our commodity-based derivatives, which may in turn cause us to experience net losses.
 
2012 Highlights and Future Considerations
 
Operational Highlights.
 
Sanish.  Our Sanish field in Mountrail County, North Dakota targets the Bakken and Three Forks formations.  Net production in the Sanish field averaged 31.5 MBOE/d for the second quarter of 2012, representing a 10% increase from 28.8 MBOE/d in the first quarter of 2012.
 
Lewis & Clark/Pronghorn.  Our Lewis & Clark/Pronghorn prospects are located primarily in the Stark and Billings counties of North Dakota and run along the Bakken shale pinch-out in the southern Williston Basin.  In this area, the Upper Bakken shale is thermally mature, moderately over-pressured, and we believe that it has charged reservoir zones within the immediately underlying Pronghorn Sand and Three Forks formations.  Net production in the Lewis & Clark/Pronghorn prospects averaged 10.3 MBOE/d in the second quarter of 2012, representing a 13% increase from 9.1 MBOE/d in the first quarter of 2012.
 
In December 2011, we completed and commissioned the gas processing plant located south of Belfield, North Dakota, which will have a processing capacity of 30 MMcf/d and which will primarily process production from the Pronghorn area.  Currently, there is inlet compression in place to process 24 MMcf/d, and the plant is processing 13.1 MMcf/d.  In May 2012, we sold a 50% ownership interest in the plant, gathering systems and related facilities.  We retained a 50% ownership interest and will continue to operate the Belfield plant and facilities.
 
Hidden Bench/Tarpon.  Our Hidden Bench and Tarpon prospects in McKenzie County, North Dakota target the Bakken and Three Forks formations.  In the second quarter of 2012, production from the Hidden Bench/Tarpon prospects averaged 2.2 MBOE/d, which was consistent with production rates in the first quarter of 2012.
 
Big Island.  We have identified more than 50 vertical Red River prospects at our Big Island play in Golden Valley County, North Dakota using 3-D seismic interpretations as well as porosity anomalies.  As of June 30, 2012, five vertical Red River wells have been drilled at this prospect, and all have been completed as successful oil producers.
 
North Ward Estes.  The North Ward Estes field is located in the Ward and Winkler counties in Texas, and we continue to have significant development and related infrastructure activity in this field since we acquired it in 2005.  Our activity at North Ward Estes to date has resulted in substantial reserve additions and production increases, and our expansion of the CO2 flood in this area continues to generate positive results.
 
 
North Ward Estes has generally been responding positively to the water and CO2 floods that we initiated in May 2007.  Net production from North Ward Estes averaged 8.6 MBOE/d for the second quarter of 2012, which represents a 6% increase from 8.1 MBOE/d in the second quarter of 2011.  We are currently injecting approximately 330 MMcf/d of CO2 into the field, over half of which is recycled.
 
Postle.  The Postle field is located in Texas County, Oklahoma and produces from the Morrow sandstone.  Postle averaged 8.2 MBOE/d in the second quarter of 2012, which represents a 2% decrease from 8.3 MBOE/d in the first quarter of 2012.  We are currently injecting approximately 125 MMcf/d of CO2 into the field, over half of which is recycled.
 
Big Tex.  Our Big Tex prospect in Pecos, Reeves and Ward counties, Texas targets the Brushy Canyon, Bone Spring and Wolfcamp horizons.  We have increased our planned capital expenditures and drilling activity in the Big Tex prospect from a 13-well drilling program to a 17-well program.  These wells will be a mixture of vertical Wolfcamp and Wolfbone wells, horizontal Wolfcamp wells and horizontal Bone Spring wells.
 
Redtail.  Our Redtail prospect in Weld County, Colorado targets the Niobrara formation.  In late 2010, we initiated a seven-well exploratory drilling program (five horizontal and two vertical monitor wells) in the Niobrara formation.  Based on the results of our exploratory drilling program and recently acquired 3-D seismic data, we increased our previous eight-well drilling program for 2012 to a 17-well program, of which two were drilled in the first half of 2012.  We plan to continue drilling operations at our Redtail prospect during the latter half of 2012.
 
Acquisition and Divestiture Highlights.  On May 18, 2012, we sold a 50% ownership interest in our Belfield gas processing plant, natural gas gathering system, oil gathering system and related facilities located in Stark County, North Dakota for total cash proceeds of $66.2 million.  We used the net proceeds from the sale to repay a portion of the debt outstanding under our credit agreement.
 
On March 22, 2012, we completed the acquisition of approximately 13,300 net undeveloped acres in the Missouri Breaks prospect in Richland County, Montana for $33.3 million.
 
Whiting USA Trust II.  On March 28, 2012, we completed an initial public offering of units of beneficial interest in Whiting USA Trust II (“Trust II”), selling 18,400,000 Trust II units at $20.00 per unit, which generated net proceeds of $323.0 million after underwriters’ fees, offering expenses and post-close adjustments.  We used the net offering proceeds to repay a portion of the debt outstanding under our credit agreement.  The net proceeds from the sale of Trust II units to the public resulted in a deferred gain on sale of $129.5 million.  Immediately prior to the closing of the offering, we conveyed a term net profits interest in certain of our oil and gas properties to Trust II in exchange for 18,400,000 trust units.
 
The net profits interest entitles Trust II to receive 90% of the net proceeds from the sale of oil and natural gas production from the underlying properties.  The net profits interest will terminate on the later to occur of (1) December 31, 2021, or (2) the time when 11.79 MMBOE have been produced from the underlying properties and sold.  This is the equivalent of 10.61 MMBOE in respect of Trust II’s right to receive 90% of the net proceeds from such reserves pursuant to the net profits interest.  The conveyance of the net profits interest to Trust II consisted entirely of proved reserves of 10.61 MMBOE as of the January 1, 2012 effective date, representing 3% of our proved reserves as of December 31, 2011 and 5% (or 4.5 MBOE/d) of our March 2012 average daily net production.
 
 
Results of Operations
 
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
 
   
Six Months Ended June 30,
 
   
2012
   
2011
 
Net production:
           
Oil (MMBbls)
    12.5       9.6  
Natural gas (Bcf)
    13.0       13.3  
Total production (MMBOE)
    14.7       11.8  
Net sales (in millions):
               
Oil (1) 
  $ 1,008.0     $ 833.5  
Natural gas (1) 
    43.5       66.0  
Total oil and natural gas sales
  $ 1,051.5     $ 899.5  
Average sales prices:
               
Oil (per Bbl)
  $ 80.47     $ 87.18  
Effect of oil hedges on average price (per Bbl)
    (1.73 )     (2.56 )
Oil net of hedging (per Bbl)
  $ 78.74     $ 84.62  
Average NYMEX price (per Bbl)