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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2020

☐	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: 001-36511

Montage Resources Corporation

(Exact name of registrant as specified in its charter)

Delaware	46-4812998
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

122 West John Carpenter Freeway, Suite 300 Irving, TX	75039
(Address of principal executive offices)	(Zip code)

(469) 444-1647

(Registrant’s telephone number, including area code)

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, Par Value $0.01 Per Share		MR		New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

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

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

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

Number of shares of the registrant’s common stock outstanding at November 2, 2020: 36,023,973 shares

MONTAGE RESOURCES CORPORATION

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page

Cautionary Statement Regarding Forward-Looking Statements		3

PART I - Financial Information		5
Item 1.	Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	49

PART II - Other Information		50
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 6.	Exhibits	55

Signatures		57

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “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, regarding our strategy, future operations, financial position, estimated revenues and income or losses, projected costs and capital expenditures, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “will,” “plan,” “would,” “should,” “could,” “endeavor,” “believe,” “anticipate,” “intend,” “seek,” “estimate,” “expect,” “project,” “future,” “strategy,” “potential,” “continue,” “budget,” “forecast,” “assume” 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 or were, when made, based on our current expectations and assumptions about future events and are or were, when made, 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 in Part II, Item 1A of this Quarterly Report and “Item 1A. Risk Factors” of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2020.

Forward-looking statements may include statements about, among other things:

•

realized prices for natural gas, natural gas liquids (“NGLs”) and oil and the volatility of those prices;

•

write-downs of our natural gas and oil asset values due to declines in commodity prices;

•

our business strategy;

•

our reserves, including the impact of current commodity prices on our estimated year end reserves;

•

general economic conditions;

•

our financial strategy, liquidity and capital required for developing our properties and the timing related thereto;

•

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

•

our hedging strategy and results;

•

future drilling plans;

•

competition and government regulations, including those related to hydraulic fracturing;

•

the anticipated benefits under our commercial agreements;

•

marketing of natural gas, NGLs and oil;

•

leasehold and business acquisitions and joint ventures;

•

leasehold terms expiring before production can be established and our costs to extend such terms;

•

the costs, terms and availability of gathering, processing, fractionation and other midstream services;

•

credit markets;

•

uncertainty regarding our future operating results, including initial production rates and liquid yields in our type curve areas;

•

our pending merger with Southwestern Energy Company (“Southwestern”) and the expected timing of the consummation of the merger; and

•

plans, objectives, expectations and intentions contained in this Quarterly 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, the severity and continued duration of the COVID-19 pandemic, related economic effects and the resulting negative impact on the demand for natural gas, NGLs and oil, operational challenges relating to the COVID-19 pandemic, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of counterparty contracts and supply chain disruptions, legal and environmental risks, drilling and other operating risks, regulatory changes, including U.S. federal, state and local tax regulatory changes, commodity price volatility and declines in the price of natural gas, NGLs and oil, inflation, lack of availability of drilling, production and processing equipment and services, counterparty credit risk, the uncertainty inherent in estimating natural gas, NGLs and oil reserves and in projecting future rates of production, cash flow and access to capital, risks associated with our level of indebtedness, the timing of development expenditures, and the other risks described in Part II, Item 1A of this Quarterly Report and “Item 1A. Risk Factors” of our Annual Report on Form 10-K, filed with the SEC on March 10, 2020.

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 reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions could 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 Quarterly 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 Quarterly 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 new information obtained or events or circumstances that occur after the date of this Quarterly Report.

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

MONTAGE RESOURCES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

	September 30, 2020			December 31, 2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	4,013		$	12,056
Accounts receivable		63,483			77,402
Assets held for sale		1,544			1,047
Other current assets		8,984			35,509
Total current assets		78,024			126,014

PROPERTY AND EQUIPMENT
Oil and natural gas properties, successful efforts method:
Unproved properties		478,644			508,576
Proved oil and gas properties, net		1,216,836			1,251,105
Other property and equipment, net		10,311			11,226
Total property and equipment, net		1,705,791			1,770,907

OTHER NONCURRENT ASSETS
Other assets		5,353			7,616
Operating lease right-of-use assets		30,830			36,975
Assets held for sale		3,403			9,665
TOTAL ASSETS	$	1,823,401		$	1,951,177

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	120,785		$	119,907
Accrued capital expenditures		11,933			43,500
Accrued liabilities		61,963			53,866
Accrued interest payable		9,921			21,308
Liabilities associated with assets held for sale		3,711			2,815
Operating lease liability		12,773			12,666
Total current liabilities		221,086			254,062

NONCURRENT LIABILITIES
Debt, net of unamortized discount and debt issuance costs		502,622			500,541
Revolving credit facility		170,000			130,000
Asset retirement obligations		30,336			29,877
Other liabilities		31,421			8,029
Operating lease liability		18,805			24,569
Liabilities associated with assets held for sale		7,150			7,013
Total liabilities		981,420			954,091
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, 50,000,000 authorized, no shares issued and outstanding		—			—
Common stock, $0.01 par value, 1,000,000,000 authorized, 36,034,837 and 35,770,934 shares issued and outstanding, respectively		386			383
Additional paid in capital		2,355,890			2,352,309
Treasury stock, shares at cost; 2,600,672 and 2,508,485 shares, respectively		(10,511	)		(10,049	)
Accumulated deficit		(1,503,784	)		(1,345,557	)
Total stockholders’ equity		841,981			997,086
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,823,401		$	1,951,177

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

MONTAGE RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020			2019			2020			2019
REVENUES
Natural gas, oil and natural gas liquids sales	$	108,518		$	153,021		$	315,471		$	428,278
Brokered natural gas and marketing revenue		6,831			10,228			23,859			31,747
Other revenue		56			46			183			307
Total revenues		115,405			163,295			339,513			460,332

OPERATING EXPENSES
Lease operating		11,494			11,986			33,436			29,651
Transportation, gathering and compression		51,961			57,027			157,472			150,065
Production and ad valorem taxes		3,677			1,660			10,146			8,519
Brokered natural gas and marketing expense		7,345			10,574			24,349			32,017
Depreciation, depletion, amortization and accretion		53,153			45,456			140,058			113,950
Exploration		11,767			16,621			34,112			48,602
General and administrative		12,144			14,580			33,594			57,074
Rig termination and standby		303			1,221			303			1,221
Gain on sale of assets		(62	)		(733	)		(1,419	)		(731	)
Other expense		87			2			121			40
Total operating expenses		151,869			158,394			432,172			440,408
OPERATING INCOME (LOSS)		(36,464	)		4,901			(92,659	)		19,924
OTHER INCOME (EXPENSE)
Gain (loss) on derivative instruments		(40,535	)		15,812			(11,329	)		40,620
Interest expense, net		(14,402	)		(15,192	)		(44,166	)		(44,140	)
Other income		2			—			19			8
Total other income (expense), net		(54,935	)		620			(55,476	)		(3,512	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(91,399	)		5,521			(148,135	)		16,412
Income tax benefit (expense)		—			—			—			—
INCOME (LOSS) FROM CONTINUING OPERATIONS		(91,399	)		5,521			(148,135	)		16,412
Income (loss) from discontinued operations, net of income tax		(801	)		(1,237	)		(10,092	)		1,286
NET INCOME (LOSS)	$	(92,200	)	$	4,284		$	(158,227	)	$	17,698

EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Basic:
Weighted average common stock outstanding		36,035			35,684			35,889			32,343
Income (loss) from continuing operations	$	(2.54	)	$	0.15		$	(4.13	)	$	0.51
Income (loss) from discontinued operations		(0.02	)		(0.03	)		(0.28	)		0.04
Net income (loss)	$	(2.56	)	$	0.12		$	(4.41	)	$	0.55

Diluted:
Weighted average common stock outstanding		36,035			35,697			35,889			32,471
Income (loss) from continuing operations	$	(2.54	)	$	0.15		$	(4.13	)	$	0.51
Income (loss) from discontinued operations		(0.02	)		(0.03	)		(0.28	)		0.04
Net income (loss)	$	(2.56	)	$	0.12		$	(4.41	)	$	0.55

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

MONTAGE RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

	Number of Shares		Common Stock ($0.01 Par)			Additional Paid-in- Capital			Treasury Stock			Accumulated Deficit			Total
Balances, December 31, 2018		20,169,063	$	3,043		$	2,065,119		$	(3,357	)	$	(1,377,319	)	$	687,486
Stock-based compensation		—		—			6,001			—			—			6,001
Equity issuance costs		—		—			(30	)		—			—			(30	)
Shares of common stock issued in merger, net of equity issuance costs		15,013,520		150			275,609			—			—			275,759
Reverse split 1:15		—		(2,833	)		2,833			—			—			—
Issuance of common stock upon vesting of equity- based compensation awards, net of shares withheld for income tax withholdings		499,897		22			(5	)		(5,411	)		—			(5,394	)
Net loss		—		—			—			—			(14,098	)		(14,098	)
Balances, March 31, 2019		35,682,480	$	382		$	2,349,527		$	(8,768	)	$	(1,391,417	)	$	949,724
Stock-based compensation		—		—			552		—			—				552
Equity issuance costs		—		—			(925	)	—			—				(925	)
Issuance of common stock upon vesting of equity- based compensation awards, net of shares withheld for income tax withholdings		4,727		—			—			(26	)	—				(26	)
Net income		—	—			—			—				27,512			27,512
Balances, June 30, 2019		35,687,207	$	382		$	2,349,154		$	(8,794	)	$	(1,363,905	)	$	976,837
Stock-based compensation		—		—			1,061			—			—			1,061
Issuance of restricted stock		50,568		—			—			—			—			—
Issuance of common stock upon vesting of equity- based compensation awards, net of shares withheld for income tax withholdings		18,313		—			(143	)		(25	)		—			(168	)
Net income		—		—			—			—			4,284			4,284
Balances, September 30, 2019		35,756,088	$	382		$	2,350,072		$	(8,819	)	$	(1,359,621	)	$	982,014

	Number of Shares		Common Stock ($0.01 Par)		Additional Paid-in- Capital			Treasury Stock			Accumulated Deficit			Total
Balances, December 31, 2019		35,770,934	$	383	$	2,352,309		$	(10,049	)	$	(1,345,557	)	$	997,086
Stock-based compensation		—		—		860			—			—			860
Issuance of common stock upon vesting of equity- based compensation awards, net of shares withheld for income tax withholdings		33,610		—		—			(95	)		—			(95	)
Net income		—		—		—			—			2,827			2,827
Balances, March 31, 2020		35,804,544	$	383	$	2,353,169		$	(10,144	)	$	(1,342,730	)	$	1,000,678
Stock-based compensation	—		—			1,764		—			—				1,764
Issuance of common stock upon vesting of equity- based compensation awards, net of shares withheld for income tax withholdings		230,293		3		(4	)		(367	)		—			(368	)
Net loss	—		—		—			—				(68,854	)		(68,854	)
Balances, June 30, 2020		36,034,837	$	386	$	2,354,929		$	(10,511	)	$	(1,411,584	)	$	933,220
Stock-based compensation		—		—		961			—			—			961
Net loss		—		—		—			—			(92,200	)		(92,200	)
Balances, September 30, 2020		36,034,837	$	386	$	2,355,890		$	(10,511	)	$	(1,503,784	)	$	841,981

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

MONTAGE RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For the Nine Months Ended September 30,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(158,227	)	$	17,698
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation, depletion, amortization and accretion		140,579			114,331
Exploration expense		30,311			36,193
Stock-based compensation		3,585			7,614
Impairment of oil and gas properties		6,849			—
Net cash for plugging wells		(222	)		(444	)
(Gain) loss on derivative instruments		11,329			(40,620	)
Net cash receipts on settled derivatives		61,877			11,072
Gain on sale of assets		(1,478	)		(734	)
Amortization of deferred financing costs		2,041			2,160
Amortization of debt discount		1,000			998
Changes in operating assets and liabilities:
Accounts receivable		15,437			68,056
Other assets		(126	)		619
Accounts payable and accrued liabilities		(40,124	)		(40,634	)
Net cash provided by operating activities		72,831			176,309
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for oil and gas properties		(122,019	)		(268,768	)
Capital expenditures for other property and equipment		(271	)		(576	)
Proceeds from sale of assets		1,393			1,810
Cash acquired in merger		—			12,894
Change in deposits and other long-term assets		—			(53	)
Net cash used in investing activities		(120,897	)		(254,693	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from other notes payable		1,141			—
Debt issuance costs		(80	)		(4,242	)
Repayments of long-term debt		(575	)		(260	)
Proceeds from revolving credit facility		40,000			95,000
Equity issuance costs		—			(31	)
Employee tax withholding for settlement of equity compensation awards		(463	)		(6,511	)
Net cash provided by financing activities		40,023			83,956
Net increase (decrease) in cash and cash equivalents		(8,043	)		5,572
Cash and cash equivalents at beginning of period		12,056			5,959
Cash and cash equivalents at end of period	$	4,013		$	11,531
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	52,590		$	51,280
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Asset retirement obligations incurred, including changes in estimate	$	196		$	1,006
Additions to oil and natural gas properties - changes in accounts payable, accrued liabilities, and accrued capital expenditures	$	(18,541	)	$	16,583
BRMR Merger consideration	$	—		$	275,759

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

MONTAGE RESOURCES CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Organization and Nature of Operations

Montage Resources Corporation (the “Company”) is an independent exploration and production company engaged in the acquisition and development of oil and natural gas properties in the Appalachian Basin of the United States, which encompasses the Utica Shale, Indian Castle/Flat Creek Shales and Marcellus Shale prospective areas.

Note 2—Basis of Presentation

The accompanying Condensed Consolidated Financial Statements are unaudited except the Consolidated Balance Sheet at December 31, 2019, which is derived from the Company’s audited financial statements, and are presented in accordance with the requirements of accounting principles generally accepted in the United States (“U.S. GAAP”) for interim reporting. They do not include all disclosures normally made and contained in annual financial statements. In management’s opinion, all adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods disclosed have been made. All such adjustments are of a normal recurring nature. These interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements, and the notes to those statements, which are included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 10, 2020.

Operating results for interim periods may not necessarily be indicative of the results of operations for the full year ending December 31, 2020 or any other future periods, due to fluctuations in demand and the prices received for natural gas, NGLs and oil, the impacts of the COVID-19 pandemic, and other factors.

Preparation in accordance with U.S. GAAP requires the Company to (1) adopt accounting policies within accounting rules set by the Financial Accounting Standards Board (“FASB”) and (2) make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and other disclosed amounts. Note 3—Summary of Significant Accounting Policies describes our significant accounting policies. The Company’s management believes the major estimates and assumptions impacting the Condensed Consolidated Financial Statements are the following:

•

estimates of proved reserves of oil and natural gas, which affect the calculations of depreciation, depletion, amortization and accretion and impairment of capitalized costs of oil and natural gas properties;

•

estimates of asset retirement obligations;

•

estimates of the fair value of oil and natural gas properties the Company owns, particularly properties that the Company has not yet explored, or fully explored, by drilling and completing wells;

•

impairment of undeveloped properties and other assets; and

•

depreciation and depletion of property and equipment.

Actual results may differ from estimates and assumptions of future events and these revisions could be material. Future production may vary materially from estimated oil and natural gas proved reserves. Actual future prices may vary significantly from price assumptions.

Proposed Merger with Southwestern Energy Company

On August 12, 2020, the Company entered into an Agreement and Plan of Merger (the “Southwestern Merger Agreement”) with Southwestern, pursuant to which the Company will merge with and into Southwestern, with Southwestern continuing as the surviving corporation (the “merger”). On the terms and subject to the conditions set forth in the Southwestern Merger Agreement, upon consummation of the merger, each issued and outstanding share of the Company’s common stock will be converted into the right to receive 1.8656 shares of Southwestern common stock.

The merger is subject to various closing conditions, including, but not limited to, (i) the adoption of the Southwestern Merger Agreement by the holders of a majority of the Company’s outstanding common stock entitled to vote, (ii) the absence of any law, order or injunction prohibiting the merger, (iii) the expiration or earlier termination of the waiting period under the Hart–Scott–Rodino Antitrust Improvements Act of 1976, as amended (which termination was received on September 9, 2020), (iv) the SEC having declared effective Southwestern’s registration statement on Form S-4 filed in connection with the merger (which the SEC declared on October 6, 2020), (v) the shares of Southwestern common stock issuable in connection with the merger having been authorized for listing on the New York Stock Exchange, upon official notice of issuance, (vi) the accuracy of each party’s representations and warranties, and (vii) each party’s compliance with its covenants and agreements contained in the Southwestern Merger Agreement.

The Southwestern Merger Agreement provides for certain termination rights for both the Company and Southwestern, including the right of either party to terminate the Southwestern Merger Agreement if the merger is not consummated by February 12, 2021 (provided certain conditions are met). Upon termination of the Southwestern Merger Agreement under specified circumstances, the Company would be required to pay Southwestern a termination fee of $9.7 million.

In connection with the merger, Southwestern filed with the SEC, on October 2, 2020, an amendment to the registration statement on Form S-4 that was originally filed on September 16, 2020, which includes a proxy statement of the Company. The proxy statement also constitutes a prospectus of Southwestern with respect to the shares of Southwestern common stock to be issued to the Company’s stockholders pursuant to the Southwestern Merger Agreement. The registration statement was declared effective by the SEC on October 6, 2020, and the Company commenced mailing the definitive proxy statement/prospectus to the Company’s stockholders on or about October 8, 2020. The Company will hold a special meeting of its stockholders on November 12, 2020 in connection with the merger. Subject to the satisfaction or waiver of the closing conditions, the merger is expected to close in the fourth quarter of 2020.

Additional information on the proposed merger is included in the Form S-4/A filed by Southwestern with the SEC on October 2, 2020, the definitive proxy statement/prospectus filed by the Company with the SEC on October 6, 2020, and this Quarterly Report, including Part II, Item 1A.

Note 3—Summary of Significant Accounting Policies

(a) Cash and Cash Equivalents

Cash and cash equivalents are comprised of cash in banks and highly liquid instruments with original maturities of three months or less, primarily consisting of bank time deposits and investments in institutional money market funds. The carrying amounts approximate fair value due to the short-term nature of these items. Cash in bank accounts at times may exceed federally insured limits.

(b) Accounts Receivable

Accounts receivable are carried at estimated net realizable value. Trade credit is generally extended on a short-term basis, and therefore, accounts receivable do not bear interest, although a finance charge may be applied to such receivables that are past due. A valuation allowance is provided for those accounts for which collection is estimated as doubtful and uncollectible accounts are written off and charged against the allowance. In estimating the allowance, management considers, among other things, how recently and how frequently payments have been received and the financial position of the counterparty. The Company had no significant accounts receivables determined to be uncollectible as of September 30, 2020 or December 31, 2019.

The Company accrues revenue due to timing differences between the delivery of natural gas, NGLs, and crude oil and the receipt of a delivery statement. These revenues are recorded based upon volumetric data from the Company’s records and management’s estimates of the related commodity sales prices and transportation and compression fees.

Oil and Natural Gas Properties

The Company follows the successful efforts method of accounting for its oil and natural gas operations. Acquisition costs for oil and natural gas properties, costs of drilling and equipping productive wells and costs of unsuccessful development wells are capitalized and amortized on an equivalent unit-of-production basis over the life of the remaining related oil and gas reserves. The estimated future costs of dismantlement, restoration, plugging and abandonment of oil and gas properties and related disposal are capitalized when asset retirement obligations are incurred and amortized as part of depreciation, depletion, amortization and accretion expense (see “Depreciation, Depletion, Amortization and Accretion” below).

Costs incurred to acquire producing and non-producing leaseholds are capitalized. All unproved leasehold acquisition costs are initially capitalized, including the cost of leasing agents, title work and due diligence. If the Company acquires leases in a prospective area, these costs are capitalized as unproved leasehold costs. If no leases are acquired by the Company with respect to the initial costs incurred or the Company discontinues leasing in a prospective area, the costs are charged to exploration expense. Unproved leasehold costs that are determined to have proved oil and gas reserves are transferred to proved leasehold costs.

Upon the sale or retirement of a complete field of a proved property, the cost is eliminated from the property accounts, and the resultant gain or loss is reclassified to the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Upon the sale of an individual well, the proceeds are credited to accumulated depreciation and depletion within the Company’s Condensed Consolidated Balance Sheets. Upon the sale of an entire interest in an unproved property where the property had been

assessed for impairment individually, a gain or loss is recognized in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Upon the sale of an entire interest in an unproved property where the property had been assessed for impairment on a group basis, no gain or loss is recognized in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) unless the proceeds exceed the original cost of the property, in which case a gain is recognized in the amount of such excess. If a partial interest in an unproved property is sold, any funds received are accounted for as a reduction of the cost in the interest retained.

A summary of property and equipment including oil and natural gas properties is as follows (in thousands):

	September 30, 2020			December 31, 2019
Oil and natural gas properties:
Unproved	$	478,644		$	508,576
Proved		2,885,622			2,783,232
Gross oil and natural gas properties		3,364,266			3,291,808
Less accumulated depreciation, depletion and amortization		(1,668,786	)		(1,532,127	)
Oil and natural gas properties, net		1,695,480			1,759,681
Other property and equipment		19,596			20,000
Less accumulated depreciation		(9,285	)		(8,774	)
Other property and equipment, net		10,311			11,226
Property and equipment, net	$	1,705,791		$	1,770,907

Exploration expenses, including geological and geophysical expenses and delay rentals for unevaluated oil and gas properties are charged to expense as incurred. Exploratory drilling costs are initially capitalized as unproved property, and not subject to depletion, but charged to expense if and when the well is determined not to have found proved oil and gas reserves.

Other Property and Equipment

Other property and equipment includes land, buildings, leasehold improvements, vehicles, computer equipment and software, telecommunications equipment, and furniture and fixtures. These items are recorded at cost, or fair value if acquired through a business acquisition.

(d) Revenue Recognition

Product Revenue

The Company’s revenues are primarily derived from the sale of natural gas and oil production, as well as the sale of NGLs that are extracted from the natural gas. Sales of natural gas, NGLs, and oil are recognized when the Company satisfies a performance obligation by transferring control of a product to a customer. Payment is generally received one month after the sale has occurred.

Natural Gas

Under the Company’s natural gas sales contracts, the Company delivers natural gas to the purchaser at an agreed upon delivery point. Natural gas is transported from the wellhead to delivery points specified under sales contracts. To deliver natural gas to these points, the Company uses third parties to gather, compress, process and transport the natural gas. The Company maintains control of the natural gas during gathering, compression, processing, and transportation. The Company’s sales contracts provide that it receives a specific index price adjusted for pricing differentials. The Company transfers control of the product at the delivery point and recognizes revenue based on the contract price. The costs to gather, compress, process and transport the natural gas are recorded as transportation, gathering and compression expense.

NGLs

The Company sells NGLs directly to the NGLs purchaser. For these NGLs, the sales contracts provide that the Company deliver the product to the purchaser at an agreed upon delivery point and that the Company receives a specific index price adjusted for pricing differentials and certain downstream costs incurred by third parties. The Company transfers control of the product to the purchaser at the delivery point and recognizes revenue based on the contract price. The costs to process and transport NGLs prior to the delivery point are recorded as transportation, gathering and compression expense.

Oil

Under the Company’s oil sales contracts, the Company generally sells oil to the purchaser from storage tanks at central stabilization facilities and well pads and collects a contractually agreed upon index price, net of pricing differentials and certain costs incurred by third parties. The Company transfers control of the product from the central stabilization facilities and well pads to the purchaser and recognizes revenue based on the contract price.

Marketing Revenue

Brokered natural gas and marketing revenues are derived from activities to purchase and sell third-party natural gas and to market excess firm transportation capacity to third parties. The Company retains control of the purchased natural gas prior to delivery to the purchaser. The Company has concluded that it is the principal in these arrangements and therefore the Company recognizes revenue on a gross basis, with costs to purchase and transport natural gas presented as brokered natural gas and marketing expense. Contracts to sell third-party natural gas are generally subject to similar terms as contracts to sell the Company’s produced natural gas. The Company satisfies performance obligations to the purchaser by transferring control of the product at the delivery point and recognizes revenue based on the price received from the purchaser.

Disaggregation of Revenue

The following table illustrates the revenue disaggregated by type for the three and nine months ended September 30, 2020 and 2019:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues (in thousands)
Natural gas sales	$	72,926	$	87,841	$	217,604	$	264,030
NGL sales		18,439		20,200		44,949		60,841
Oil sales		17,153		44,980		52,918		103,407
Brokered natural gas and marketing revenue		6,831		10,228		23,859		31,747
Other revenue		56		46		183		307
Total revenues	$	115,405	$	163,295	$	339,513	$	460,332

Transaction Price Allocated to Remaining Performance Obligations

A significant number of the Company’s product sales are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient allowed in the revenue accounting standard that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligations are part of a contract that has an original expected duration of one year or less.

For any product sales that have a contract term greater than one year, the Company has also utilized the practical expedient that states that it is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these product sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required. Currently, any product sales that have a contractual term greater than one year have no long-term fixed considerations.

Contract Balances

Under the Company’s sales contracts, customers are invoiced once performance obligations have been satisfied, at which point payment is unconditional. Accordingly, the Company’s product sales contracts do not give rise to contract assets or liabilities. Accounts receivable attributable to the Company’s revenue contracts with customers was $53.5 million and $63.7 million as of September 30, 2020 and December 31, 2019, respectively.

(e) Concentration of Credit Risk

The Company’s principal exposures to credit risk are through the sale of its oil and natural gas production and related products and services, joint interest owner receivables and receivables resulting from derivative contracts. The inability or failure of the Company’s significant customers or counterparties to meet their obligations or their insolvency or liquidation may adversely affect the Company’s financial results. The following table summarizes the Company’s concentration of receivables, net of allowances (if any), by product or service as of September 30, 2020 and December 31, 2019 (in thousands):

	September 30, 2020		December 31, 2019
Receivables by product or service:
Sale of oil and natural gas and related products and services	$	53,466	$	63,730
Joint interest owners		6,983		12,156
Derivatives		1,728		210
Other		1,306		1,306
Total	$	63,483	$	77,402

Oil and natural gas customers include pipelines, distribution companies, producers, gas marketers and industrial users primarily located in the States of Ohio, Pennsylvania and West Virginia. As a general policy, collateral is not required for receivables, but customers’ financial condition and creditworthiness are evaluated regularly.

By using derivative instruments that are not traded on an exchange to hedge exposures to changes in commodity prices and interest rates, the Company exposes itself to the credit risk of the counterparties to these derivative instruments. Credit risk is the potential failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, the Company’s policy is to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market-makers. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company’s counterparties is subject to periodic review. Such counterparties are not required to provide credit support to the Company. The fair value of the Company’s unsettled derivative contracts was a net liability position of ($47.7) million and a net asset position of $27.1 million as of September 30, 2020 and December 31, 2019, respectively. Other than as provided by its revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under the Company’s derivative contracts. As of September 30, 2020 and December 31, 2019, the Company did not have past-due receivables from or payables to any of such counterparties.

(f) Depreciation, Depletion, Amortization and Accretion

Oil and Natural Gas Properties

Depreciation, depletion, amortization and accretion (“DD&A”) of capitalized costs of proved oil and natural gas properties is computed using the unit-of-production method on a field level basis using total estimated proved reserves. The reserve base used to calculate DD&A for leasehold acquisition costs and the cost to acquire proved properties is the sum of proved developed reserves and proved undeveloped reserves. The reserve base used to calculate DD&A for drilling, completion and well equipment costs, which include development costs and successful exploration drilling costs, includes only proved developed reserves. DD&A expense relating to proved oil and natural gas properties, including accretion expense, totaled approximately $52.8 million and $44.9 million for the three months ended September 30, 2020 and 2019, respectively, and $138.9 million and $112.4 million for the nine months ended September 30, 2020 and 2019, respectively, and is included in depreciation, depletion, amortization and accretion expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Other Property and Equipment

Depreciation with respect to other property and equipment is calculated using straight-line methods based on expected lives of the individual assets or groups of assets ranging from five to 40 years. Depreciation totaled approximately $0.4 million and $0.6 million for the three months ended September 30, 2020 and 2019, respectively, and $1.2 million and $1.6 million for the nine months ended September 30, 2020 and 2019, respectively, and is included in depreciation, depletion, amortization and accretion expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

(g) Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that an asset’s estimated future cash flows will not be sufficient to recover its carrying amount, an impairment charge will be recorded to reduce the carrying amount for that asset to its estimated fair value if such carrying amount exceeds the fair value.

The review for impairment of the Company’s oil and gas properties is performed by determining whether the historical cost of proved and unproved properties less the applicable accumulated DD&A and abandonment is less than the estimated expected undiscounted future cash flows. The expected future cash flows are estimated based on the Company’s plans to continue to produce and develop proved reserves and a risk-adjusted portion of probable reserves. Expected future cash flow from the sale of production of reserves is calculated based on estimated future prices. The Company estimates prices based upon current contracts in place, adjusted for basis differentials and market-related information, including published futures prices. The estimated future level of production is based on assumptions surrounding future prices and costs, field decline rates, market demand and supply and the economic and regulatory climates. If the carrying value exceeds the expected future cash flows, an impairment loss is recognized for the difference between the estimated fair market value (as determined by discounted future cash flows) and the carrying value of the assets. There were no impairments of proved properties held and used for the three months ended September 30, 2020 and 2019 or for the nine months ended September 30, 2020 and 2019. The Company recorded impairment of proved properties held for sale during the nine months ended September 30, 2020. See Note 5— Assets Held for Sale and Discontinued Operations.

When an impairment charge is recognized it represents a significant Level 3 measurement in the fair value hierarchy. The primary input used is the Company’s forecasted discount net cash flows.

The determination of oil and natural gas reserve estimates is a subjective process, and the accuracy of any reserve estimate depends on the quality of available data and the application of engineering and geological interpretation and judgment. Estimates of economically recoverable reserves and future net cash flows depend on a number of variable factors and assumptions that are difficult to predict and may vary considerably from actual results.

Unproved oil and natural gas properties are periodically assessed for impairment by considering future drilling and exploration plans, results of exploration activities, commodity price outlooks, planned future sales and expiration of all or a portion of the properties. An impairment charge is recorded if conditions indicate the Company will not explore the acreage prior to expiration of the applicable leases. The Company recorded impairment charges of unproved oil and gas properties related to lease expirations of approximately $11.0 million and $14.1 million for the three months ended September 30, 2020 and 2019, respectively, and $30.3 million and $36.2 million for the nine months ended September 30, 2020 and 2019, respectively. These costs are included in exploration expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

(h) Income Taxes

The Company accounts for income taxes under the liability method as set out in the FASB’s Accounting Standards Codification (“ASC”) Topic 740 “Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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.

ASC Topic 740 further provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not (i.e., a likelihood greater than 50 percent) that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of the uncertain tax position guidance and in subsequent periods. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has not recorded a reserve for any uncertain tax positions to date.

(i) Fair Value of Financial Instruments

The Company has established a hierarchy to measure its financial instruments at fair value, which requires it to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy defines three levels of inputs that may be used to measure fair value:

Level 1—Unadjusted quoted prices in active markets for identical, unrestricted assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability. The Company’s valuation models are primarily industry-standard models that consider various inputs including: (i) quoted forward prices for commodities, (ii) time value, (iii) current market and contractual prices for the underlying instruments and (iv) volatility factors, as well as other relevant economic measures.

Level 3—Unobservable inputs that reflect the entity’s own assumptions about the assumption market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.

Valuation techniques that maximize the use of observable inputs are favored. Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy.

(j) Derivative Financial Instruments

The Company uses derivative financial instruments to reduce exposure to fluctuations in the prices of the energy commodities it sells and to manage its exposure to interest rate volatility.

Derivatives are recorded at fair value and are included on the Condensed Consolidated Balance Sheets as current and noncurrent assets and liabilities. Derivatives are classified as current or noncurrent based on the contractual expiration date. Derivatives with expiration dates within the next 12 months are classified as current. The Company netted the fair value of derivatives by counterparty and type in the accompanying Condensed Consolidated Balance Sheets where the right to offset exists. The Company’s derivative instruments were not designated as hedges for accounting purposes for any of the periods presented. Accordingly, the changes in fair value are recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. Premiums for options are included in cash flows from operating activities.

The valuation of the Company’s derivative financial instruments represents a Level 2 measurement in the fair value hierarchy.

(k) Asset Retirement Obligation

The Company recognizes a legal liability for its asset retirement obligations (“ARO”) in accordance with ASC Topic 410, “Asset Retirement and Environmental Obligations,” associated with the retirement of a tangible long-lived asset, in the period in which it is incurred or becomes determinable, with an associated increase in the carrying amount of the related long-lived asset. The cost of the tangible asset, including the initially recognized asset retirement cost, is depreciated over the useful life of the asset and accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. The Company measures the fair value of its ARO using expected future cash outflows for abandonment discounted back to the date that the abandonment obligation was measured using an estimated credit adjusted rate.

Estimating the future ARO requires management to make estimates and judgments based on historical information regarding timing and existence of a liability, as well as what constitutes adequate restoration. Inherent in the fair value calculation are numerous assumptions and judgments including the ultimate costs, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the related asset.

Approximately $2.9 million and $2.0 million, representing the current portion of ARO liability, are included in “Accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, respectively. The following table sets forth the changes in the Company’s ARO liability for the nine months ended September 30, 2020 (in thousands):

	Nine Months Ended September 30, 2020
Asset retirement obligations, beginning of period	$	31,841
Accretion		2,245
Additional liabilities incurred		15
Obligation for wells drilled		181
Liabilities settled via plugging		(178	)
Liabilities sold/disposed		(901	)
Less: current ARO portion		(2,867	)
Asset retirement obligations, end of period	$	30,336

The inputs used to determine such fair value are primarily based upon costs incurred historically for similar work, as well as estimates from independent third parties for costs that would be incurred to restore leased property to the contractually stipulated condition. Additions to ARO represent a significant nonrecurring Level 3 measurement.

(l) Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

(m) Segment Reporting

The Company operates in one industry segment: the oil and natural gas exploration and production industry in the United States. All of its operations are conducted in one geographic area of the United States. All revenues are derived from customers located in the United States.

(n) Debt Issuance Costs

The expenditures related to issuing debt, such as the Company’s 8.875% senior unsecured notes, are capitalized and reported as a reduction of the Company’s debt balance in the accompanying Condensed Consolidated Balance Sheets. These costs are amortized over the expected life of the related instruments using the effective interest rate method. Expenditures related to the Company’s revolving credit facility are capitalized and included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets and are amortized over the term of the revolving credit facility. When debt is retired before maturity or modifications significantly change the cash flows, related unamortized costs are expensed.

During the three and nine months ended September 30, 2020, the Company amortized $0.9 million and $3.0 million, respectively, of deferred financing costs and debt discount to interest expense using the effective interest method which includes $0.2 million of unamortized deferred financing costs that the Company wrote off during the second quarter of 2020 in connection with the borrowing base redetermination of the Company’s revolving credit facility (See Note 8— Debt). During the three and nine months ended September 30, 2019, the Company amortized $0.9 million and $3.2 million, respectively, of deferred financing costs and debt discount to interest expense using the effective interest method.

(o) Recent Accounting Pronouncements

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments”, and subsequently, the FASB issued several related ASUs to clarify the application of the credit loss standard. Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables and any other financial assets not excluded from its scope that have a contractual right to receive cash. The amendments are effective for smaller reporting companies for fiscal years and interim periods within the fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is assessing the impact, if any, this guidance may have on our consolidated results of operations, financial position and financial disclosures, but does not currently anticipate a material impact.

Note 4—Acquisitions

Merger with Blue Ridge Mountain Resources

On February 28, 2019, the Company completed its business combination transaction with Blue Ridge Mountain Resources, Inc. (“BRMR”) pursuant to that certain Agreement and Plan of Merger, dated as of August 25, 2018 and amended as of January 7, 2019 (the “BRMR Merger Agreement”), by and among the Company, Everest Merger Sub Inc. (“Merger Sub”), a Delaware corporation and a wholly owned subsidiary of the Company, and BRMR. Pursuant to the BRMR Merger Agreement, Merger Sub merged with and into BRMR with BRMR continuing as the surviving corporation and a wholly owned subsidiary of the Company (the “BRMR Merger”).

As a result of the BRMR Merger, each share of common stock, par value $0.01 per share, of BRMR issued and outstanding immediately prior to the effective time of the BRMR Merger, excluding certain Excluded Shares (as such term is defined in the BRMR Merger Agreement), was converted into the right to receive from the Company 0.29506 of a validly issued, fully-paid, and nonassessable share of common stock, par value $0.01 per share, of the Company. The exchange ratio reflects an adjustment to account for the 15-to-1 reverse stock split (See Note 11— Net Income (Loss) Per Share). Former stockholders of BRMR received cash for any fractional shares of the Company’s common stock to which they might otherwise have been entitled as a result of the BRMR Merger. In addition, upon completion of the BRMR Merger, all shares of BRMR restricted stock and all BRMR restricted stock units and performance interest awards were converted into the right to receive shares of common stock of the Company or cash, in each case as specified in the BRMR Merger Agreement.

In connection with the BRMR Merger, the Company incurred $3.3 million of costs for the three months ended September 30, 2019, and $0.2 million and $21.8 million for the nine months ended September 30, 2020 and 2019, respectively, which are included in general and administrative expense on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Company did not incur any costs during the three months ended September 30, 2020 in connection with the BRMR Merger. Approximately $100.5 million of revenues and approximately $16.0 million of net income from continuing operations attributed to the BRMR Merger are included in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the period from March 1, 2019 to September 30, 2019. Approximately $5.4 million of revenues and approximately $1.3 million of net income from discontinued operations attributed to the BRMR Merger are included in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the period from March 1, 2019 to September 30, 2019.

The following table summarizes the purchase price allocation and the values of assets acquired and liabilities assumed (in thousands):

Purchase Price	February 28, 2019
Fair value of the Company’s common stock issued	$	263,487
Fair value of BRMR share-based and other compensation		12,272
Total Fair Value of Consideration	$	275,759

Cash and cash equivalents		12,894
Accounts receivable		25,884
Assets held for sale - current		2,296
Other current assets		1,702
Unproved properties		80,843
Proved oil and gas properties		218,866
Other property and equipment		7,059
Other assets		2,461
Operating lease right-of-use asset		7,900
Assets held for sale - long-term		9,611
Total assets acquired	$	369,516
Accounts payable		(16,571	)
Accrued capital expenditures		(5,807	)
Accrued liabilities		(28,824	)
Operating lease liability - current		(1,979	)
Liabilities associated with assets held for sale - current		(7,683	)
Asset retirement obligations		(20,188	)
Operating lease liability - noncurrent		(5,923	)
Liabilities associated with assets held for sale - long-term		(6,782	)
Total liabilities assumed	$	(93,757	)

Net identifiable assets	$	275,759

The fair value measurements of oil and natural gas properties and asset retirement obligations are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of proved oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties included estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighed average cost of capital rate. The fair value of unproved properties was determined using a market approach utilizing recent transactions of a similar nature in the same basin. These inputs required significant judgements and estimates by management at the time of the valuation and are the most sensitive to possible future changes.

The following unaudited pro forma financial information represents the combined results for the Company as though the BRMR Merger had been completed on January 1, 2019. The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the BRMR Merger taken place on January 1, 2019; furthermore, the financial information is not intended to be a projection of future results.

	Three Months Ended September 30,		Nine Months Ended September 30,
(in thousands, except per share data) (unaudited)	2019		2019
Pro forma total revenues	$	163,295	$	502,989
Pro forma net income	$	4,543	$	24,834
Pro forma net income per share (basic)	$	0.13	$	0.70
Pro forma net income per share (diluted)	$	0.13	$	0.69

Note 5—Assets Held for Sale and Discontinued Operations

Assets Held for Sale

As a result of the BRMR Merger, the Company acquired certain assets that met the criteria for assets held for sale at the acquisition date, comprised of the net assets of Magnum Hunter Production, Inc. (“MHP”), a wholly-owned subsidiary of BRMR. These assets are located primarily in Kentucky and Tennessee.

The following summarizes assets and liabilities held for sale as of September 30, 2020 and December 31, 2019:

(in thousands)	September 30, 2020		December 31, 2019
Accounts receivable	$	758	$	343
Other current assets		786		704
Total current assets held for sale	$	1,544	$	1,047

Proved oil and gas properties, net	$	3,351	$	9,528
Other noncurrent assets		52		137
Total noncurrent assets held for sale	$	3,403	$	9,665

Accounts payable	$	2,104	$	2,067
Accrued liabilities		1,576		570
Other current liabilities		31		178
Total current liabilities associated with assets held for sale	$	3,711	$	2,815

Asset retirement obligations	$	7,146	$	6,488
Other liabilities		4		525
Total noncurrent liabilities associated with assets held for sale	$	7,150	$	7,013

Discontinued Operations

The Company determined that the planned divestiture of MHP met the assets held for sale criteria and the criteria for classification as discontinued operations as of the three and nine months ended September 30, 2020 and 2019. The Company included the results of operations for MHP for the three and nine months ended September 30, 2020 and 2019 in discontinued operations as follows:

(in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Revenues	$	698		$	1,874		$	2,948		$	5,402
Impairment of proved oil and natural gas properties		—			—			(6,849	)		—
Depreciation, depletion, amortization and accretion		(182	)		(168	)		(523	)		(380	)
Other operating expenses		(1,317	)		(2,943	)		(5,668	)		(3,738	)
Other income		—			—			—			2
Income (loss) from discontinued operations, net of tax	$	(801	)	$	(1,237	)	$	(10,092	)	$	1,286

The Company had maintained an accrued liability of $3.5 million related to litigation involving MHP and a third-party regarding certain royalty and overriding royalty deductions and related payments under several farm-out agreements. The litigation concluded in April 2019 and, as a result, the Company removed the accrued liability and recognized corresponding income from discontinued operations for the nine months ended September 30, 2019.

During the first quarter of 2020, the Company determined that due to the depressed commodity price environment, the carrying value of MHP’s proved oil and gas properties was no longer fully recoverable. The Company recorded an impairment of $6.8 million of its proved oil and gas properties in order to present the net assets and liabilities of MHP at the lower of carrying value and fair market value less costs to sell as of September 30, 2020.

Total operating and investing cash flows of discontinued operations for the nine months ended September 30, 2020 and 2019 were as follows:

(in thousands)	Nine Months Ended September 30,
	2020			2019
Net cash provided by operating activities	$	693		$	1,189
Net cash provided by (used in) investing activities	$	(82	)	$	14

Note 6—Derivative Instruments

All of the Company’s derivative instruments are used for risk management purposes and none is held for trading or speculative purposes. By using derivative instruments to hedge exposures to changes in commodity prices and interest rates, the Company is exposed to the credit risk of its counterparties. Credit risk is the potential failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The creditworthiness of counterparties is subject to periodic review. As of September 30, 2020, the Company’s derivative instruments were with Bank of Montreal, BP Energy Company, Capital One N.A., Citibank, Citizens Bank N.A., East West Bank, J Aron, KeyBank N.A., Morgan Stanley, Royal Bank of Canada, and Wells Fargo. The Company has not experienced any issues of non-performance by derivative counterparties.

Commodity Derivatives

The Company is exposed to market risk from changes in energy commodity prices within its operations. The Company utilizes derivatives to manage exposure to the variability in expected future cash flows from forecasted sales of natural gas and oil. The Company currently uses a mix of over-the-counter fixed price swaps, basis swaps, options and collars to manage its exposure to commodity price fluctuations.

Below is a summary of the Company’s derivative instrument positions, as of September 30, 2020, for future production periods:

Natural Gas Derivatives:

Description	Volume (MMBtu/d)		Production Period	Weighted Average Price ($/MMBtu)
Natural Gas Swaps:
		130,000	October 2020 – December 2020	$	2.42
		145,000	October 2020 – March 2021	$	2.58
		50,000	January 2021 – March 2022	$	2.51
		25,000	April 2021 – March 2022	$	2.47
Natural Gas Collars:
Floor purchase price (put)		25,000	January 2021 – December 2021	$	2.15
Ceiling sold price (call)		25,000	January 2021 – December 2021	$	3.03
Floor purchase price (put)		30,000	April 2021 – March 2022	$	2.40
Ceiling sold price (call)		30,000	April 2021 – March 2022	$	3.05
Floor purchase price (put)		15,000	August 2021 – December 2021	$	2.55
Ceiling sold price (call)		15,000	August 2021 – December 2021	$	3.13
Floor purchase price (put)		15,000	September 2021 – November 2021	$	2.52
Ceiling sold price (call)		15,000	September 2021 – November 2021	$	3.12
Floor purchase price (put)		5,000	August 2021	$	2.50
Ceiling sold price (call)		5,000	August 2021	$	3.05
Floor purchase price (put)		10,000	September 2021	$	2.50
Ceiling sold price (call)		10,000	September 2021	$	3.03
Natural Gas Three-way Collars:
Floor purchase price (put)		80,000	October 2020 – December 2020	$	2.60
Floor sold price (put)		80,000	October 2020 – December 2020	$	1.90
Ceiling sold price (call)		80,000

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Smaller reporting company

Emerging growth company

Montage Resources Corp 10-Q