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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

 

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

 

For the quarterly period ended September 30, 2014

 

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: 001-36120

 

ANTERO RESOURCES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

80-0162034

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

1615 Wynkoop Street
Denver, Colorado

 

80202

(Address of principal executive offices)

 

(Zip Code)

 

(303) 357-7310

(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   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   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.

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer

 

Smaller reporting company

(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)   Yes   No

 

The registrant had 262,067,246 shares of common stock outstanding as of October 31, 2014.

 

 

 


 

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TABLE OF CONTENTS

 

 

 

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 

    

2

PART I—FINANCIAL INFORMATION 

 

4

Item 1. 

    

Financial Statements

 

4

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

43

Item 4. 

 

Controls and Procedures

 

44

PART II—OTHER INFORMATION 

 

46

Item 1. 

 

Legal Proceedings

 

46

Item 1A. 

 

Risk Factors

 

46

Item 5. 

 

Disclosure pursuant to Section 13(r) of the Securities Exchange Act of 1934

 

46

Item 6. 

 

Exhibits

 

48

SIGNATURES 

 

49

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

The information in this report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q (this “10-Q”), regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” in this Form 10-Q.  These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.

 

Forward-looking statements may include statements about our:

 

·

business strategy, including the proposed initial public offering of gathering and compression business;

 

·

reserves;

 

·

financial strategy, liquidity and capital required for our development program;

 

·

realized natural gas, natural gas liquids (“NGLs”), and oil prices;

 

·

timing and amount of future production of natural gas, NGLs, and oil;

 

·

hedging strategy and results;

 

·

future drilling plans;

 

·

competition and government regulations;

 

·

pending legal or environmental matters;

 

·

marketing of natural gas, NGLs, and oil;

 

·

leasehold or business acquisitions;

 

·

costs of developing our properties and conducting our midstream operations;

 

·

general economic conditions;

 

·

credit markets;

 

·

uncertainty regarding our future operating results; and

 

·

plans, objectives, expectations and intentions contained in this report that are not historical.

 

We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the exploration for and development, production, gathering and sale of natural gas, NGLs, and oil. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of drilling and production equipment and services, environmental risks, drilling and other operating risks, marketing and transportation risks, regulatory changes, the uncertainty inherent in estimating natural gas, NGLs, and oil reserves and in projecting

2


 

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future rates of production, cash flow and access to capital, the timing of development expenditures, and the other risks described under the heading “Item 1A.  Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 (our “2013 Form 10-K”) on file with the Securities and Exchange Commission (the “SEC”) and in “Item 1A. Risk Factors” of this Form 10-Q.

 

Reserve engineering is a process of estimating underground accumulations of natural gas, NGLs, and oil that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reservoir engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of natural gas, NGLs, and oil that are ultimately recovered.

 

Should one or more of the risks or uncertainties described in this report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

 

All forward-looking statements, expressed or implied, included in this report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

 

Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Form 10-Q.

 

 

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PART I—FINANCIAL INFORMATION

ANTERO RESOURCES CORPORATION

Condensed Consolidated Balance Sheets

December 31, 2013 and September 30, 2014

(Unaudited)

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

Assets

    

2013

    

2014

 

Current assets:

 

 

 

 

  

 

 

Cash and cash equivalents

 

$

17,487 

 

 

6,308 

 

Accounts receivable – trade, net of allowance for doubtful accounts of $1,251 in 2013 and 2014

 

 

30,610 

 

 

66,755 

 

Accrued revenue

 

 

96,825 

 

 

144,014 

 

Derivative instruments

 

 

183,000 

 

 

280,959 

 

Other

 

 

5,642 

 

 

4,667 

 

Total current assets

 

 

333,564 

 

 

502,703 

 

Property and equipment:

 

 

 

 

 

 

 

Natural gas properties, at cost (successful efforts method):

 

 

 

 

 

 

 

Unproved properties

 

 

1,513,136 

 

 

1,915,683 

 

Proved properties

 

 

3,621,672 

 

 

5,605,619 

 

Fresh water distribution systems

 

 

231,684 

 

 

390,966 

 

Gathering systems and facilities

 

 

584,626 

 

 

1,064,855 

 

Other property and equipment

 

 

15,757 

 

 

32,593 

 

 

 

 

5,966,875 

 

 

9,009,716 

 

Less accumulated depletion, depreciation, and amortization

 

 

(407,219)

 

 

(722,731)

 

Property and equipment, net

 

 

5,559,656 

 

 

8,286,985 

 

Derivative instruments

 

 

677,780 

 

 

458,209 

 

Other assets, net

 

 

42,581 

 

 

67,983 

 

Total assets

 

$

6,613,581 

 

 

9,315,880 

 

 

See accompanying notes to condensed consolidated financial statements.

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ANTERO RESOURCES CORPORATION

Condensed Consolidated Balance Sheets

December 31, 2013 and September 30, 2014

(Unaudited)

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

    

2013

    

2014

 

Current liabilities:

 

 

 

 

  

 

 

Accounts payable

 

$

370,640 

 

 

598,538 

 

Accrued liabilities

 

 

77,126 

 

 

178,840 

 

Revenue distributions payable

 

 

96,589 

 

 

169,446 

 

Deferred income tax liability

 

 

69,191 

 

 

106,721 

 

Derivative instruments

 

 

646 

 

 

 —

 

Other

 

 

8,037 

 

 

10,491 

 

Total current liabilities

 

 

622,229 

 

 

1,064,036 

 

Long-term liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

2,078,999 

 

 

4,137,866 

 

Deferred income tax liability

 

 

278,580 

 

 

318,323 

 

Derivative instruments

 

 

 —

 

 

86 

 

Other long-term liabilities

 

 

35,113 

 

 

44,147 

 

Total liabilities

 

 

3,014,921 

 

 

5,564,458 

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value; authorized - 1,000,000,000 shares; issued and outstanding 262,049,659 shares and 262,051,067 shares, respectively

 

 

2,620 

 

 

2,621 

 

Preferred stock, $0.01 par value; authorized - 50,000,000 shares; none issued

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

3,402,180 

 

 

3,488,076 

 

Accumulated earnings

 

 

193,860 

 

 

260,725 

 

Total stockholders' equity

 

 

3,598,660 

 

 

3,751,422 

 

Total liabilities and stockholders' equity

 

$

6,613,581 

 

 

9,315,880 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

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ANTERO RESOURCES CORPORATION

Condensed Consolidated Statements of Operations and Comprehensive Income

Three Months Ended September 30, 2013 and 2014

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

    

2013

    

2014

 

Revenue:

 

 

 

 

  

 

 

Natural gas sales

 

$

182,125 

 

 

310,390 

 

Natural gas liquids sales

 

 

31,956 

 

 

91,111 

 

Oil sales

 

 

8,473 

 

 

29,304 

 

Gathering, compression, and water distribution

 

 

 —

 

 

4,875 

 

Marketing

 

 

 —

 

 

17,835 

 

Commodity derivative fair value gains

 

 

161,968 

 

 

308,975 

 

Total revenue

 

 

384,522 

 

 

762,490 

 

Operating expenses:

 

 

 

 

 

 

 

Lease operating

 

 

2,697 

 

 

8,680 

 

Gathering, compression, processing, and transportation

 

 

58,383 

 

 

128,531 

 

Production and ad valorem taxes

 

 

11,851 

 

 

21,726 

 

Marketing

 

 

 —

 

 

32,192 

 

Exploration

 

 

5,372 

 

 

7,476 

 

Impairment of unproved properties

 

 

3,205 

 

 

4,542 

 

Depletion, depreciation, and amortization

 

 

65,697 

 

 

124,624 

 

Accretion of asset retirement obligations

 

 

266 

 

 

320 

 

General and administrative (including stock compensation expense of $24,210 in 2014)

 

 

14,443 

 

 

53,000 

 

Total operating expenses

 

 

161,914 

 

 

381,091 

 

Operating income

 

 

222,608 

 

 

381,399 

 

Other expenses:

 

 

 

 

 

 

 

Interest

 

 

(37,444)

 

 

(42,455)

 

Income from continuing operations before income taxes and discontinued operations

 

 

185,164 

 

 

338,944 

 

Provision for income tax expense

 

 

(67,370)

 

 

(135,035)

 

Income from continuing operations

 

 

117,794 

 

 

203,909 

 

Discontinued operations:

 

 

 

 

 

 

 

Income from sale of discontinued operations, net of income tax expense of $1,900 in 2013

 

 

3,100 

 

 

 —

 

Net income and comprehensive income

 

$

120,894 

 

 

203,909 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Continuing operations

 

$

0.45 

 

 

0.78 

 

Discontinued operations

 

 

0.01 

 

 

 —

 

Total

 

$

0.46 

 

 

0.78 

 

 

 

 

 

 

 

 

 

Earnings per common share - assuming dilution

 

 

 

 

 

 

 

Continuing operations

 

$

0.45 

 

 

0.78 

 

Discontinued operations

 

 

0.01 

 

 

 —

 

Total

 

$

0.46 

 

 

0.78 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

262,049,659 

 

 

262,049,948 

 

Diluted

 

 

262,049,659 

 

 

262,069,878 

 

 

See accompanying notes to condensed consolidated financial statements.

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ANTERO RESOURCES CORPORATION

Condensed Consolidated Statements of Operations and Comprehensive Income

Nine Months Ended September 30, 2013 and 2014

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

    

2013

    

2014

 

Revenue:

 

 

 

 

  

 

 

Natural gas sales

 

$

476,403 

 

 

936,877 

 

Natural gas liquids sales

 

 

59,772 

 

 

244,807 

 

Oil sales

 

 

11,435 

 

 

89,059 

 

Gathering, compression, and water distribution

 

 

 —

 

 

11,964 

 

Marketing

 

 

 —

 

 

23,048 

 

Commodity derivative fair value gains (losses)

 

 

285,510 

 

 

(63,720)

 

Total revenue

 

 

833,120 

 

 

1,242,035 

 

Operating expenses:

 

 

 

 

 

 

 

Lease operating

 

 

5,222 

 

 

18,570 

 

Gathering, compression, processing, and transportation

 

 

148,023 

 

 

315,878 

 

Production and ad valorem taxes

 

 

30,578 

 

 

64,123 

 

Marketing

 

 

 —

 

 

58,119 

 

Exploration

 

 

17,034 

 

 

21,176 

 

Impairment of unproved properties

 

 

9,564 

 

 

7,895 

 

Depletion, depreciation, and amortization

 

 

158,650 

 

 

320,984 

 

Accretion of asset retirement obligations

 

 

797 

 

 

931 

 

General and administrative (including stock compensation expense of $85,821 in 2014)

 

 

40,727 

 

 

162,342 

 

Total operating expenses

 

 

410,595 

 

 

970,018 

 

Operating income

 

 

422,525 

 

 

272,017 

 

Other expenses:

 

 

 

 

 

 

 

Interest

 

 

(100,840)

 

 

(111,057)

 

Loss on early extinguishment of debt

 

 

 —

 

 

(20,386)

 

Total other expenses

 

 

(100,840)

 

 

(131,443)

 

Income from continuing operations before income taxes and discontinued operations

 

 

321,685 

 

 

140,574 

 

Provision for income tax expense

 

 

(120,695)

 

 

(75,919)

 

Income from continuing operations

 

 

200,990 

 

 

64,655 

 

Discontinued operations:

 

 

 

 

 

 

 

Income from sale of discontinued operations, net of income tax expense of $1,900 and $1,354, respectively

 

 

3,100 

 

 

2,210 

 

Net income and comprehensive income

 

$

204,090 

 

 

66,865 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Continuing operations

 

$

0.77 

 

 

0.25 

 

Discontinued operations

 

 

0.01 

 

 

0.01 

 

Total

 

$

0.78 

 

 

0.26 

 

 

 

 

 

 

 

 

 

Earnings per common share - assuming dilution

 

 

 

 

 

 

 

Continuing operations

 

$

0.77 

 

 

0.25 

 

Discontinued operations

 

 

0.01 

 

 

0.01 

 

Total

 

$

0.78 

 

 

0.26 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

262,049,659 

 

 

262,049,756 

 

Diluted

 

 

262,049,659 

 

 

262,066,632 

 

 

See accompanying notes to condensed consolidated financial statements.

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ANTERO RESOURCES CORPORATION

Condensed Consolidated Statements of Equity

Nine Months Ended September 30, 2014

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

Additional

 

Accumulated

 

Total

 

 

    

Stock

    

paid-in capital

    

earnings

    

equity

 

Balances, December 31, 2013

 

$

2,620 

 

3,402,180 

 

193,860 

 

3,598,660 

 

Issuance of common stock upon vesting of stock-based compensation awards, net of awards withheld for income taxes due upon vesting

 

 

 

 —

 

 —

 

 

Stock compensation

 

 

 —

 

85,896 

 

 —

 

85,896 

 

Net income and comprehensive income

 

 

 —

 

 —

 

66,865 

 

66,865 

 

Balances, September 30, 2014

 

$

2,621 

 

3,488,076 

 

260,725 

 

3,751,422 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

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ANTERO RESOURCES CORPORATION

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2013 and 2014

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

    

2013

    

2014

 

Cash flows from operating activities:

 

 

 

 

  

 

 

Net income

 

$

204,090 

 

 

66,865 

 

Adjustment to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depletion, depreciation, amortization, and accretion

 

 

159,447 

 

 

321,915 

 

Impairment of unproved properties

 

 

9,564 

 

 

7,895 

 

Derivative fair value (gains) losses

 

 

(285,510)

 

 

63,720 

 

Cash receipts for settled derivatives

 

 

109,311 

 

 

57,333 

 

Deferred income tax expense

 

 

120,695 

 

 

75,919 

 

Stock compensation expense

 

 

 —

 

 

85,896 

 

Loss on early extinguishment of debt

 

 

 —

 

 

20,386 

 

Gain on sale of discontinued operations

 

 

(5,000)

 

 

(3,564)

 

Deferred income tax expense - discontinued operations

 

 

1,900 

 

 

1,354 

 

Other

 

 

3,911 

 

 

4,874 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(11,727)

 

 

(36,145)

 

Accrued revenue

 

 

(39,453)

 

 

(47,189)

 

Other current assets

 

 

1,702 

 

 

975 

 

Accounts payable

 

 

(4,602)

 

 

530 

 

Accrued liabilities

 

 

44,720 

 

 

105,278 

 

Revenue distributions payable

 

 

22,889 

 

 

72,857 

 

Other

 

 

 —

 

 

(153)

 

Net cash provided by operating activities

 

 

331,937 

 

 

798,746 

 

Cash flows used in investing activities:

 

 

 

 

 

 

 

Additions to unproved properties

 

 

(342,832)

 

 

(518,247)

 

Drilling and completion costs

 

 

(1,165,248)

 

 

(1,723,657)

 

Additions to fresh water distribution systems

 

 

(101,838)

 

 

(156,467)

 

Additions to gathering systems and facilities

 

 

(240,119)

 

 

(406,666)

 

Additions to other property and equipment

 

 

(3,225)

 

 

(12,539)

 

Change in other assets

 

 

(11,622)

 

 

(6,896)

 

Net cash used in investing activities

 

 

(1,864,884)

 

 

(2,824,472)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Issuance of senior notes

 

 

231,750 

 

 

1,102,500 

 

Repayment of senior notes

 

 

 —

 

 

(260,000)

 

Borrowings on bank credit facility, net

 

 

1,295,500 

 

 

1,217,000 

 

Make-whole premium on debt extinguished

 

 

 —

 

 

(17,383)

 

Payments of deferred financing costs

 

 

(8,334)

 

 

(27,570)

 

Other

 

 

6,626 

 

 

 —

 

Net cash provided by financing activities

 

 

1,525,542 

 

 

2,014,547 

 

Net decrease in cash and cash equivalents

 

 

(7,405)

 

 

(11,179)

 

Cash and cash equivalents, beginning of period

 

 

18,989 

 

 

17,487 

 

Cash and cash equivalents, end of period

 

$

11,584 

 

 

6,308 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

70,221 

 

 

67,299 

 

Supplemental disclosure of noncash investing activities:

 

 

 

 

 

 

 

Increase in accounts payable for additions to property and equipment

 

$

134,525 

 

 

227,368 

 

 

See accompanying notes to condensed consolidated financial statements. 

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ANTERO RESOURCES CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2013 and September 30, 2014

 

 

(1)Organization

 

(a)Business and Organization

 

Antero Resources Corporation and its consolidated subsidiaries (collectively referred to as the “Company,” “we,” or “our”) are engaged in the exploitation, development, and acquisition of natural gas, natural gas liquids (“NGLs”), and oil properties in the Appalachian Basin in West Virginia, Ohio, and Pennsylvania. We target large, repeatable resource plays where horizontal drilling and advanced fracture stimulation technologies provide the means to economically develop and produce natural gas, NGLs, and oil from unconventional formations. We also have gathering and compression and fresh water distribution operations in the Appalachian Basin. Our corporate headquarters are in Denver, Colorado.

 

Our consolidated financial statements include the accounts of Antero Resources Corporation and its subsidiaries, Antero Resources Midstream LLC (“Antero Midstream”) and Antero Midstream LLC (“Midstream Operating”).

 

(b)Corporate Reorganization and Initial Public Offering

 

Prior to October 16, 2013, the Company’s predecessor, Antero Resources LLC, filed reports with the Securities and Exchange Commission. Antero Resources LLC was formed in October 2009 by members of the Company’s management team and its sponsor investors. Antero Resources LLC owned 100% of the outstanding shares of Antero Resources Appalachian Corporation, which was formed in March 2008 and renamed Antero Resources Corporation in June 2013. In connection with our initial public offering (“IPO”) completed on October 16, 2013, all of the ownership interests in Antero Resources LLC were exchanged for similar interests in a newly formed limited liability company, Antero Resources Investment LLC (“Antero Investment”), and Antero Resources LLC was merged into Antero Resources Corporation. As a result of this reorganization, Antero Investment owned 100% of the issued and outstanding 224,375,000 shares of common stock of Antero Resources Corporation prior to the IPO.

 

On October 16, 2013, Antero Resources Corporation issued 37,674,659 additional shares of its common stock at $44.00 per share in the IPO, resulting in proceeds to the Company, net of underwriter discounts and expenses of the offering, of approximately $1.6 billion.

 

In 2013, the Company formed a subsidiary, Antero Midstream.  Prior to its initial public offering, the Company owned all of the common economic interest in Antero Midstream and Antero Investment indirectly owned a special membership interest. In connection with the initial public offering of Antero Midstream, the Company intends to contribute gathering and compression assets to Antero Midstream and intends to enter into commercial arrangements for services from Antero Midstream.  Following the initial public offering, the special membership interest will entitle Antero Investment to own the general partner interest in the MLP, which will allow Antero Investment to manage Antero Midstream’s business and affairs.  Antero Investment will also indirectly hold the incentive distribution rights in the MLP.  Antero Midstream will have an option to purchase the Company’s fresh water distribution systems at fair market value. 

 

In October 2014 Antero Midstream commenced the initial public offering and on November 4, 2014, Antero Midstream Partners LP (successor to Antero Midstream “the Partnership”) announced the pricing of its initial public offering of 40,000,000 common units representing limited partner interests in the Partnership at $25.00 per common unit.  The Partnership has also granted the underwriters a 30-day option to purchase up to an additional 6,000,000 common units.  The offering is expected to close on November 10, 2014, subject to the satisfaction of customary closing conditions.  For more information, please refer to the Partnership’s final prospectus filed with the SEC.

 

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ANTERO RESOURCES CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2013 and September 30, 2014

 

(c)Stock Compensation Charge in Connection with the Reorganization

 

In connection with its formation in October 2009, Antero Resources LLC issued profits interests to Antero Resources Employee Holdings LLC (“Employee Holdings”), which is owned solely by certain of our officers and employees. These profits interests provide for the participation in distributions upon liquidation events meeting certain requisite financial return thresholds. In turn, Employee Holdings issued membership interests to certain of our officers and employees. The Employee Holdings interests in Antero Resources LLC were exchanged for similar interests in Antero Investment in connection with the corporate reorganization on October 16, 2013.

 

The limited liability company agreement of Antero Investment provides a mechanism that demonstrates how the shares of the Company’s common stock will be allocated among the members of Antero Investment, including Employee Holdings. As a result of the adoption of the Antero Investment Limited Liability company agreement, the satisfaction of all performance and service conditions relative to the profits interests awards held by Employee Holdings in Antero Investment became probable. Accordingly, we recognized approximately $433 million of stock compensation expense for the vested profits interests from the date of the IPO through September 30, 2014 and will recognize approximately an additional $53 million over the remaining service period.  Stock compensation expense for the profits interests during the three and nine months ended September 30, 2014 was $15.7 million and $68.5 million, respectively.  Because consideration for the profits interests awards is deemed given by Antero Investment, the charge to stock compensation expense is accounted for as a capital contribution by Antero Investment to the Company and credited to additional paid-in capital.

 

(2)Summary of Significant Accounting Policies

 

(a)Basis of Presentation

 

These consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC applicable to interim financial information and should be read in the context of the December 31, 2013 consolidated financial statements and notes thereto for a more complete understanding of the Company’s operations, financial position, and accounting policies. The December 31, 2013 consolidated financial statements have been filed with the SEC in the Company’s 2013 Form 10-K.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, and, accordingly, do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal and recurring accruals) considered necessary to present fairly the Company’s financial position as of September 30, 2014, and the results of its operations for the three and nine months ended September 30, 2013 and 2014, and its cash flows for the nine months ended September 30, 2013 and 2014. The Company has no items of other comprehensive income or loss; therefore, our net income or loss is identical to our comprehensive income or loss. All significant intercompany accounts and transactions have been eliminated. Operating results for the period ended September 30, 2014 are not necessarily indicative of the results that may be expected for the full year because of the impact of fluctuations in prices received for natural gas, NGLs and oil, natural production declines, the uncertainty of exploration and development drilling results, and other factors.

 

The Company’s exploration and production activities are accounted for under the successful efforts method.

 

Income from discontinued operations for the nine months ended September 30, 2014 results from reducing certain liabilities recorded upon the sale of our Arkoma Basin assets in 2012 upon the resolution of such liabilities.

 

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ANTERO RESOURCES CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2013 and September 30, 2014

 

As of the date these financial statements were filed with the SEC, the Company completed its evaluation of potential subsequent events for disclosure and no items requiring disclosure were identified, except an amendment to our senior secured revolving bank credit facility as described in note 3, and the pricing of the initial public offering of common units of Antero Midstream Partners LP as described in note 1 (b).

 

(b)Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Changes in facts and circumstances or discovery of new information may result in revised estimates, and actual results could differ from those estimates.

 

The Company’s condensed consolidated financial statements are based on a number of significant estimates including estimates of gas and oil reserve quantities, which are the basis for the calculation of depreciation, depletion, amortization, and impairment of oil and gas properties. Reserve estimates by their nature are inherently imprecise.

 

(c)Risks and Uncertainties

 

Historically, the market for natural gas, NGLs, and oil has experienced significant price fluctuations. The price fluctuations can result from variations in weather, levels of production in the region, availability of transportation capacity to other regions of the country, and various other factors. Increases or decreases in prices received could have a significant impact on the Company’s future results of operations.

 

(d)Cash and Cash Equivalents

 

The Company considers all liquid investments purchased with an initial maturity of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the short-term nature of these instruments.

 

(e)Derivative Financial Instruments

 

In order to manage its exposure to oil and gas price volatility, the Company enters into derivative transactions from time to time, including commodity swap agreements, basis swap agreements, collar agreements, and other similar agreements relating to the price risk associated with a portion of its production. To the extent legal right of offset with a counterparty exists, the Company reports derivative assets and liabilities on a net basis. The Company has exposure to credit risk to the extent the counterparty is unable to satisfy its settlement obligation. The Company actively monitors the creditworthiness of counterparties and assesses the impact, if any, on its derivative position.

 

The Company records derivative instruments on the consolidated balance sheets as either an asset or liability measured at fair value and records changes in the fair value of derivatives in current earnings as they occur. Changes in the fair value of commodity derivatives are classified as revenues on the Company’s condensed consolidated statements of operations.

 

(f)Income Taxes

 

The Company recognizes deferred tax assets and liabilities for temporary differences resulting from net operating loss carryforwards for income tax purposes and the differences between the financial statement and tax basis of assets and liabilities. The effect of changes in the tax laws or tax rates is recognized in income in the period such changes are enacted.

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ANTERO RESOURCES CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2013 and September 30, 2014

 

Deferred tax assets are reduced by a valuation allowance, when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

Unrecognized tax benefits represent potential future tax obligations for uncertain tax positions taken on previously filed tax returns that may not ultimately be sustained. The Company recognizes interest expense related to unrecognized tax benefits in interest expense and fines and penalties for tax-related matters as income tax expense.

 

(g)Fair Value Measurements

 

FASB ASC Topic 820, Fair Value Measurements and Disclosures, clarifies the definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance also relates to all nonfinancial assets and liabilities that are not recognized or disclosed on a recurring basis (e.g., those measured at fair value in a business combination, the initial recognition of asset retirement obligations, and impairments of proved oil and gas properties, and other long-lived assets). The fair value is the price that the Company estimates would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is used to prioritize input to valuation techniques used to estimate fair value. An asset or liability subject to the fair value requirements is categorized within the hierarchy based on 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 highest priority (Level 1) is given to unadjusted quoted market prices in active markets for identical assets or liabilities, and the lowest priority (Level 3) is given to unobservable inputs. Level 2 inputs are data, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. Instruments which are valued using Level 2 inputs include non-exchange traded derivatives such as over-the-counter commodity price swaps, and basis swaps. Valuation models used to measure fair value of these instruments consider various Level 2 inputs including (i) quoted forward prices for commodities, (ii) time value, (iii) quoted forward interest rates, (iv) current market prices and contractual prices for the underlying instruments, (v) risk of nonperformance by the Company and the counterparty, and (vi) other relevant economic measures.

 

(h)Industry Segments and Geographic Information

 

Management has evaluated how the Company is organized and managed and have identified the following operating segments: (1) the exploration, development and production of natural gas, NGLs, and oil, (2) gathering and compression, (3) fresh water distribution, and (4) marketing of excess firm transportation capacity.

 

All of our assets are located in the United States and all of our revenues are attributable to customers located in the United States.

 

i)Marketing Revenues and Expenses

 

In 2014, the Company commenced activities to purchase and sell third-party natural gas and to market its excess firm transportation capacity in order to utilize this excess capacity.  Marketing revenues include sales of purchased third-party gas and revenues from the release of firm transportation capacity to others.  Marketing expenses include the cost of purchased third-party natural gas.  The Company classifies firm transportation costs related to capacity contracted for in advance of having sufficient production and infrastructure to fully utilize the capacity (excess capacity) as marketing expenses since it is marketing this excess capacity to third parties.  Firm transportation for which the Company has sufficient production capacity (even though it may not use the transportation capacity because of alternative delivery points with more favorable pricing) is considered unutilized capacity. The costs of unutilized capacity are charged to transportation expense.

 

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ANTERO RESOURCES CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2013 and September 30, 2014

 

(j)Reclassifications

 

Certain reclassifications have been made to prior periods’ financial information related to fresh water distribution assets to conform to the 2014 presentation.

 

(j)Earnings per common share.

 

Earnings per common share were calculated based on the weighted average number of shares outstanding of 262,049,948 and 262,049,756 for the three and nine months ended September 30, 2014, respectively.  Earnings per common share—assuming dilution for the three months ended September 30, 2014 was calculated based on the diluted weighted average number of shares outstanding of 262,069,878, including 19,930 dilutive shares attributable to non-vested restricted stock and restricted stock unit awards and stock options.  Earnings per common share—assuming dilution for the nine months ended September 30, 2014 was calculated based on the diluted weighted average number of shares outstanding of 262,066,632, including 16,876 dilutive shares attributable to non-vested restricted stock and restricted stock unit awards.

 

For the three months ended September 30, 2014, 1,906,778 non-vested shares of restricted stock and restricted stock unit awards and 60,000 stock options were anti-dilutive and therefore excluded from the calculation of diluted earnings per share.  For the nine months ended September 30, 2014, 929,223 non-vested shares of restricted stock and restricted stock awards and 70,339 stock options were anti-dilutive and therefore excluded from the calculation of diluted earnings per share.

 

Earnings per common share and earnings per common share—assuming dilution for the three and nine months ended September 30, 2013 were calculated as if the shares issued in the corporate reorganization and IPO described in note 1 were outstanding as of January 1, 2013.

 

(3)Long-Term Debt

 

The Company had long-term debt outstanding as follows at December 31, 2013 and September 30, 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

2013

    

2014

 

Bank credit facility(a)

 

$

288,000 

 

 

1,505,000 

 

7.25% senior notes due 2019(b)

 

 

260,000 

 

 

 —

 

6.00% senior notes due 2020(c)

 

 

525,000 

 

 

525,000 

 

5.375% senior notes due 2021(d)

 

 

1,000,000 

 

 

1,000,000 

 

5.125% senior notes due 2022(e)

 

 

 —

 

 

1,100,000 

 

Net unamortized premium

 

 

5,999 

 

 

7,866 

 

 

 

$

2,078,999 

 

 

4,137,866 

 


(a)Senior Secured Revolving Credit Facility

 

The Company has a senior secured revolving bank credit facility (the “Credit Facility”) with a consortium of bank lenders. The maximum amount of the Credit Facility was $3.5 billion at September 30, 2014. Borrowings under the Credit Facility are subject to borrowing base limitations based on the collateral value of our proved properties and commodity hedge positions and are subject to regular semiannual redeterminations. At September 30, 2014, the borrowing base was $3.0 billion and lender commitments were $2.5 billion, including $500 million of commitments under the Midstream Facility described below.

 

On October 16, 2014, the maximum amount of the Credit Facility was increased from $3.5 billion to $4.0 billion, the borrowing base was increased from $3.0 billion to $4.0 billion, and lender commitments were increased from $2.5 billion to $3.0 billion,

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ANTERO RESOURCES CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2013 and September 30, 2014

 

including $500 million of commitments under the Midstream Facility described below.  Lender commitments can be increased to the full amount of the borrowing base upon approval of the lending group.  The maturity date of the Credit Facility is May 5, 2019.  The next redetermination of the borrowing base is scheduled to occur in April 2015.

 

On February 28, 2014, the Company and Midstream Operating entered into a new midstream credit facility (the “Midstream Facility”) in order to provide for separate borrowings attributable to our midstream business which contains covenants that are substantially identical to those under the Credit Facility. In accordance with the Credit Facility and the Midstream Facility, borrowings under the Midstream Facility reduce availability under the Credit Facility on a dollar-for-dollar basis. The Midstream Facility will mature at the earlier of the closing of the MLP’s initial public offering or May 12, 2016.  If the MLP’s initial public offering is completed, it is expected that the MLP will enter into its own revolving credit facility.

 

The Credit Facility and the Midstream Facility are ratably secured by mortgages on substantially all of the Company’s properties and guarantees from the Company or its subsidiaries, as applicable. The Credit Facility and the Midstream Facility contain certain covenants, including restrictions on indebtedness and dividends, and, in the case of the Credit Facility, requirements with respect to working capital and interest coverage ratios. Interest is payable at a variable rate based on LIBOR or the prime rate based on the Company’s election at the time of borrowing. The Company was in compliance with all of the financial covenants under the Credit Facility as of December 31, 2013 and September 30, 2014.

 

As of September 30, 2014, the Company had a total outstanding balance under the Credit Facility and Midstream Facility of $1.505 billion, with a weighted average interest rate of 2.44%, and outstanding letters of credit of $332 million.  As of December 31, 2013, the Company had an outstanding balance under the Credit Facility of $288 million, with a weighted average interest rate of 1.61%, and outstanding letters of credit of $32 million. Commitment fees on the unused portion of the Credit Facility are due quarterly at rates ranging from 0.375% to 0.50% based on utilization.

 

(b)7.25% Senior Notes Due 2019

 

On May 23, 2014, the Company redeemed the outstanding 7.25% senior notes due 2019 (the “2019 notes”) having a principal balance of $260 million at a redemption price of 100% of the principal amount plus a make-whole premium of $17.4 million.  The make-whole premium along with the write-off of $3 million of deferred financing costs was charged to Loss on early extinguishment of debt in the accompanying statement of operations.  The redemption was financed using a portion of the proceeds from the offering of the Company’s 5.125% senior notes due 2022 (the “2022 notes”) described below.

 

(c)6.00% Senior Notes Due 2020

 

On November 19, 2012, the Company issued $300 million of 6.00% senior notes due December 1, 2020 (the “2020 notes”) at par. On February 4, 2013, the Company issued an additional $225 million of 2020 notes at 103% of par. The 2020 notes are unsecured and effectively subordinated to the Company’s Credit Facility and the Midstream Facility to the extent of the value of the collateral securing such facilities. The 2020 notes rank pari passu to our other outstanding senior notes.  The 2020 notes are guaranteed on a senior unsecured basis by Antero Resources Midstream LLC and Antero Midstream LLC and certain of its future restricted subsidiaries. Interest on the 2020 notes is payable on June 1 and December 1 of each year. The Company may redeem all or part of the 2020 notes at any time on or after December 1, 2015 at redemption prices ranging from 104.50% on or after December 1, 2015 to 100.00% on or after December 1, 2018. In addition, on or before December 1, 2015, the Company may redeem up to 35% of the aggregate principal amount of the 2020 notes, with the net cash proceeds of certain equity offerings, if certain conditions are met, at a redemption price of 106.00% of the principal amount of the 2020 notes, plus accrued interest. At any time prior to December 1, 2015, the Company may redeem the 2020 notes, in whole or in part, at a price equal to 100% of the principal amount of the 2020 notes plus a “make-whole” premium and accrued interest. If the Company undergoes a change of control, the holders of the 2020 notes will have the right to require the

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ANTERO RESOURCES CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2013 and September 30, 2014

 

Company to repurchase all or a portion of the notes at a price equal to 101% of the principal amount of the 2020 notes, plus accrued interest.

 

(d)5.375% Senior Notes Due 2021

 

On November 5, 2013, the Company issued $1 billion of 5.375% senior notes due November 21, 2021 (the “2021 notes”) at par. The 2021 notes are unsecured and effectively subordinated to the Credit Facility and the Midstream Facility to the extent of the value of the collateral securing such facilities. The 2021 notes rank pari passu to our other outstanding senior notes.  The 2021 notes are guaranteed on a full and unconditional and joint and several basis by Antero Resources Midstream LLC and Antero Midstream LLC and certain of its future restricted subsidiaries. Interest on the 2021 notes is payable on May 1 and November 1 of each year. The Company may redeem all or part of the 2021 notes at any time on or after November 1, 2016 at redemption prices ranging from 104.031% on or after November 1, 2016 to 100.00% on or after November 1, 2019. In addition, on or before November 1, 2016, the Company may redeem up to 35% of the aggregate principal amount of the 2021 notes with the net cash proceeds of certain equity offerings, if certain conditions are met, at a redemption price of 105.375% of the principal amount of the 2021 notes, plus accrued interest. At any time prior to November 1, 2016, the Company may also redeem the 2021 notes, in whole or in part, at a price equal to 100% of the principal amount of the 2021 notes plus a “make-whole” premium and accrued interest. If the Company undergoes a change of control prior to May 1, 2015, it may redeem all, but not less than all, of the 2021 notes at a redemption price equal to 110% of the principal amount of the 2021 notes. If the Company undergoes a change of control, it may be required to offer to purchase the 2021 notes from the holders at a price equal to 101% of the principal amount of the 2021 notes, plus accrued interest.

 

(e)5.125% Senior Notes Due 2022

 

On May 6, 2014, the Company issued $600 million of 5.125% senior notes due December 1, 2022 (the “2022 notes”) at par. On September 18, 2014, the Company issued an additional $500 million of the 2022 notes at 100.5% of par.  The 2022 notes are unsecured and effectively subordinated to the Credit Facility and the Midstream Facility to the extent of the value of the collateral securing such facilities. The 2022 notes rank pari passu to our other outstanding senior notes. The 2022 notes are guaranteed on a full and unconditional and joint and several basis by Antero Resources Midstream LLC and Antero Midstream LLC and certain of its future restricted subsidiaries. Interest on the 2022 notes is payable on June 1 and December 1 of each year. The Company may redeem all or part of the 2022 notes at any time on or after June 1, 2017 at redemption prices ranging from 103.844% on or after June 1, 2017 to 100.00% on or after June 1, 2020. In addition, on or before June 1, 2017, the Company may redeem up to 35% of the aggregate principal amount of the 2022 notes, with the net cash proceeds of certain equity offerings, if certain conditions are met, at a redemption price of 105.125% of the principal amount of the 2022 notes, plus accrued interest. At any time prior to June 1, 2017, the Company may also redeem the 2022 notes, in whole or in part, at a price equal to 100% of the principal amount of the 2022 notes plus a “make-whole” premium and accrued interest. If the Company undergoes a change of control prior to December 1, 2015, it may redeem all, but not less than all, of the 2022 notes at a redemption price equal to 110% of the principal amount of the 2022 notes.  If the Company undergoes a change of control, the holders of the 2022 notes will have the right to require the Company to repurchase all or a portion of the notes at a price equal to 101% of the principal amount of the 2022 notes, plus accrued interest.

 

(f)Treasury Management Facility

 

The Company has a stand-alone revolving note with a lender under the Credit Facility which provides for up to $25.0 million of cash management obligations in order to facilitate the Company’s daily treasury management. Borrowings under the revolving note are secured by the collateral for the revolving credit facility. Borrowings under the facility bear interest at the lender’s prime rate plus 1.0%. The note matures on June 1, 2015. At December 31, 2013 and September 30, 2014, there were no outstanding borrowings under this facility.

 

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ANTERO RESOURCES CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2013 and September 30, 2014

 

 

(4)Asset Retirement Obligations

 

The following is a reconciliation of the Company’s asset retirement obligations for the nine months ended September 30, 2014 (in thousands).  This amount is included in other long-term liabilities on the accompanying condensed consolidated Balance Sheet

 

 

 

 

 

 

 

Asset retirement obligations—beginning of period

    

$

11,859 

 

Obligations incurred

 

 

1,495 

 

Accretion expense

 

 

931 

 

Asset retirement obligations—end of period

 

$

14,285 

 

 

 

 

 

 

(5)Stock-Based Compensation

 

The Company is authorized to grant up to 16,906,500 stock-based compensation awards to employees and directors of the Company under the Antero Resources Corporation Long-Term Incentive Plan (the “Plan”). The Plan allows stock-based compensation awards to be granted in a variety of forms, including stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, dividend equivalent awards, and other types of awards. The terms and conditions of the awards granted are established by the Compensation Committee of the Company’s Board of Directors. A total of 14,839,533 shares are available for future grant under the Plan as of September 30, 2014.

 

Our stock-based compensation expense is as follows for the nine months ended September 30, 2014 (in thousands):

 

 

 

 

 

 

 

Profits interests awards (see note 1)

    

$

68,456 

 

Restricted stock awards

 

 

16,993 

 

Stock options

 

 

372 

 

Total expense

 

$

85,821 

 

 

Restricted Stock and Restricted Stock Unit Awards

 

Restricted stock and restricted stock unit awards vest subject to the satisfaction of service requirements. We recognize expense related to restricted stock and restricted stock unit awards on a straight-line basis over the requisite service period. The grant date fair values of these awards are determined based on the closing price of the Company’s common stock on the date of the grant. A summary of restricted stock and restricted stock unit awards activity during the nine months ended September 30, 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted
average

 

Aggregate

 

 

    

Number of
shares

    

grant date
fair value

    

intrinsic value
(in thousands)

  

Total awarded and unvested, December 31, 2013

 

45,093 

 

$

54.27 

 

$

2,861 

 

Granted

 

1,954,815 

 

$

64.92 

 

$

107,300 

 

Vested

 

(139)

 

$

53.52 

 

$

(8)

 

Forfeited

 

(4,549)

 

$

59.60 

 

$

(250)

 

Total awarded and unvested—September 30, 2014

 

1,995,220 

 

$

64.74 

 

$

109,518 

 

 

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ANTERO RESOURCES CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2013 and September 30, 2014

 

Unamortized expense of $111.8 million at September 30, 2014 is expected to be recognized over approximately 3 to 4 years.  Intrinsic values are based on the closing price of the Company’s stock on the referenced dates.

 

Stock Options

 

Stock options granted under the Plan to date vest over periods from one to four years and have a maximum contractual life of 10 years. We recognize expense related to stock options on a straight-line basis over the requisite service period, less awards expected to be forfeited. Stock options are granted with an exercise price equal to the market price of our common stock on the date of grant. A summary of stock option activity for the nine months ended September 30, 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted
average

 

average
remaining

 

Intrinsic

 

 

    

Stock
options

    

exercise
price

    

contractual
life

    

value
(in thousands)

  

Outstanding at December 31, 2013

 

70,339 

 

$

54.15 

 

9.79 

 

$

653 

 

Options granted

 

 

 

 

 

 

 

Options exercised

 

 

 

 

 

 

 

Options cancelled

 

 

 

 

 

 

 

Options expired

 

 

 

 

 

 

 

Outstanding at September 30, 2014

 

70,339 

 

$

54.15 

 

9.04 

 

$

52 

 

Expected to vest as of  September 30, 2014

 

70,339 

 

$

54.15 

 

9.04 

 

$

52 

 

Exercisable at September 30, 2014

 

 

 

 

 

 

 

 

Intrinsic value is based on the exercise price of the options and the closing price of the Company’s stock on the referenced dates.

 

We use a Black-Scholes option-pricing model to determine the grant-date fair value of our stock options. Expected volatility was derived from the volatility of the historical stock prices of a peer group of similar publicly traded companies’ stock prices. The risk-free interest rate was determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term approximating the expected life of the options. We assumed no dividend yield.

 

The following table presents information regarding the weighted average fair value for options granted and the assumptions used to determine fair value.

 

 

 

 

 

 

 

Dividend yield

    

 

%  

Volatility

 

 

35 

%  

Risk-free interest rate

 

 

1.48 

%  

Expected life (years)

 

 

6.17 

 

Weighted average fair value of options granted

 

$

20.20 

 

 

As of September 30, 2014, there was $0.9 million of unrecognized stock-based compensation expense related to nonvested stock options. That expense is expected to be recognized over a weighted average period of 3 years.

 

(6)Financial Instruments

 

The carrying values of trade receivables and trade payables at December 31, 2013 and September 30, 2014 approximated market value because of their short-term nature. The carrying value of the bank credit facility at December 31, 2013 and September 30, 2014 approximated fair value because the variable interest rates are reflective of current market conditions.

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ANTERO RESOURCES CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2013 and September 30, 2014

 

 

Based on Level 2 market data inputs, the fair value of the Company’s senior notes was approximately $1.9 billion at December 31, 2013 and $2.6 billion at September 30, 2014.

 

See note 7 for information regarding the fair value of derivative financial instruments.

 

(7)Derivative Instruments

 

(a)Commodity Derivatives

 

The Company periodically enters into natural gas and oil derivative contracts with counterparties to hedge the price risk associated with a portion of its production. These derivatives are not held for trading purposes. To the extent that changes occur in the market prices of natural gas and oil, the Company is exposed to market risk on these open contracts. This market risk exposure is generally offset by the change in market prices of natural gas and oil recognized upon the ultimate sale of the natural gas and oil produced.

 

For the nine months ended September 30, 2013 and 2014, the Company was party to natural gas and oil fixed price swaps. When actual commodity prices exceed the fixed price provided by the swap contracts, the Company pays the excess to the counterparty, and when actual commodity prices are below the contractually provided fixed price the Company receives the difference from the counterparty.  In addition, the Company has entered into basis swap contracts hedging the difference between the NYMEX index price and a local index price.  When the actual differential exceeds the fixed price provided by the basis swap contract, the Company receives the difference from the counterparty; when the differential is less than the fixed price provided by the basis swap contract, the Company pays the difference to the counterparty.  The Company’s natural gas and oil swaps have not been designated as hedges for accounting purposes; therefore, all gains and losses were recognized in our statements of operations.

 

As of September 30, 2014, the Company’s fixed price natural gas and oil swaps positions from October 1, 2014 through December 31, 2019 were as follows (abbreviations in the table refer to the index to which the swap position is tied: TCO=Columbia Gas Transmission; NYMEX=Henry Hub; CGTLA=Columbia Gas Louisiana Onshore; CCG=Chicago City Gate; NYMEX-WTI=West Texas Intermediate):

 

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ANTERO RESOURCES CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2013 and September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Weighted

  

 

 

Natural gas

 

Oil

 

average index

 

 

 

MMbtu/day

 

Bbls/day

 

price

 

Three Months ending December 31, 2014

 

 

 

 

 

 

 

 

TCO

 

210,000 

 

 

 

$

5.24 

 

Dominion South

 

160,000 

 

 

 

$

5.27 

 

NYMEX

 

340,000 

 

 

 

$

4.18 

 

CGTLA

 

10,000 

 

 

 

$

3.98 

 

NYMEX-WTI

 

 —

 

3,000 

 

$

93.18 

 

Total

 

720,000 

 

3,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ending December 31, 2015:

 

 

 

 

 

 

 

 

TCO

 

120,000 

 

 

 

$

5.01 

 

Dominion South

 

230,000 

 

 

 

$

5.60 

 

NYMEX

 

260,000 

 

 

 

$

4.13 

 

CGTLA

 

40,000 

 

 

 

$

4.00 

 

2015 Total

 

650,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ending December 31, 2016:

 

 

 

 

 

 

 

 

TCO

 

60,000 

 

 

 

$

4.91 

 

Dominion South

 

272,500 

 

 

 

$

5.35 

 

NYMEX

 

140,000 

 

 

 

$

4.17 

 

CGTLA

 

170,000 

 

 

 

$

4.09 

 

2016 Total

 

642,500 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ending December 31, 2017:

 

 

 

 

 

 

 

 

NYMEX

 

290,000 

 

 

 

$

4.38 

 

CGTLA

 

420,000 

 

 

 

$

4.27 

 

CCG

 

70,000 

 

 

 

$

4.57 

 

2017 Total

 

780,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ending December 31, 2018:

 

 

 

 

 

 

 

 

NYMEX

 

1,062,500 

 

 

 

$

4.50 

 

 

 

 

 

 

 

 

 

 

Year ending December 31, 2019:

 

 

 

 

 

 

 

 

NYMEX

 

807,500 

 

 

 

$

4.41 

 

 

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ANTERO RESOURCES CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2013 and September 30, 2014

 

As of September 30, 2014, the Company’s  natural gas basis swap positions, which settle on the pricing index to basis differential of TCO to the NYMEX Henry Hub natural gas price, are as follows:

 

 

 

 

 

 

 

 

 

 

    

Natural gas MMbtu/day

    

Hedged Differential

 

 

 

 

 

 

 

 

Year ending December 31, 2015:

 

390,000 

 

$

(0.35)

 

 

 

 

 

 

 

 

Year ending December 31, 2016:

 

190,000 

 

$

(0.42)

 

 

 

 

 

 

 

 

Year ending December 31, 2017:

 

97,500 

 

$

(0.50)

 

 

(b)Summary

 

The following is a summary of the fair values of the Company’s derivative instruments and where such values are recorded in the consolidated balance sheets as of December 31, 2013 and September 30, 2014. None of the Company’s derivative instruments are designated as hedges for accounting purposes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2013

    

September 30, 2014

  

 

 

Balance sheet
location

 

Fair value

 

Balance sheet
location

 

Fair value

 

 

 

 

 

(In thousands)

 

 

 

(In thousands)

 

Asset derivatives not designated as hedges for accounting purposes:

 

                                        

 

 

 

 

                                        

 

 

 

 

Commodity contracts

 

Current assets

 

$

183,000 

 

Current assets

 

$

280,959 

 

Commodity contracts

 

Long-term assets

 

 

677,780 

 

Long-term assets

 

 

458,209 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total asset derivatives

 

 

 

 

860,780 

 

 

 

 

739,168 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability derivatives not designated as hedges for accounting purposes:

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Current liabilities

 

 

646 

 

Current liabilities

 

 

 —

 

Commodity contracts

 

Long-term liabilities

 

 

 

Long-term liabilities

 

 

86 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liability derivatives

 

 

 

 

646 

 

 

 

 

86 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net derivatives

 

 

 

$

860,134 

 

 

 

$

739,082 

 

 

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Table of Contents

ANTERO RESOURCES CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2013 and September 30, 2014

 

The following tables present the gross amounts of recognized derivative assets and liabilities, the amounts offset under netting arrangements with counterparties, and the resulting net amounts presented in the consolidated balance sheets for the periods presented, all at fair value (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

September 30, 2014

 

 

    

Gross
amounts on
balance sheet

    

Gross amounts
offset on
balance sheet

    

Net amounts
of assets
(liabilities)
on balance
sheet

    

Gross
amounts on
balance sheet

    

Gross amounts
offset on
balance sheet

    

Net amounts
of assets
(liabilities)
on balance
sheet

 

Commodity derivative assets

 

$

887,034 

 

(26,254)

 

860,780 

 

$

792,075 

 

(52,907)

 

739,168 

 

Commodity derivative liabilities

 

$

(646)

 

 —

 

(646)

 

$

(2,677)

 

2,591 

 

(86)

 

 

The following is a summary of derivative fair value gains (losses) and where such values are recorded in the condensed consolidated statements of operations for the three and nine months ended September 30, 2013 and 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of
operations

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

location

    

2013

    

2014

    

2013

    

2014

 

Commodity derivative fair value gains (losses)

 

Revenue

 

$

161,968 

 

 

308,975 

 

 

285,510 

 

 

(63,720)

 

 

The fair value of commodity derivative instruments was determined using Level 2 inputs.

 

(8)Contingencies

 

The Company is party to various legal proceedings and claims in the ordinary course of its business.  The Company believes certain of these matters will be covered by insurance and that the outcome of other matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

 

(9)Segment Information

 

The operating results and assets of the Company’s reportable segments were as follows for the three months ended September 30, 2013 and 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration
and