Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
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: 001-32886
 _______________________________
logoa02a05.jpg
 CONTINENTAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
 _______________________________
Oklahoma
 
73-0767549
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
20 N. Broadway, Oklahoma City, Oklahoma
 
73102
(Address of principal executive offices)
 
(Zip Code)
(405) 234-9000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 _______________________________
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 x    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 x    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
 
x
  
Accelerated filer
  
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
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 x
374,530,174 shares of our $0.01 par value common stock were outstanding on October 31, 2016.




Table of Contents
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
When we refer to “us,” “we,” “our,” “Company,” or “Continental” we are describing Continental Resources, Inc. and our subsidiaries.




Glossary of Crude Oil and Natural Gas Terms

The terms defined in this section may be used throughout this report:
“Bbl” One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to crude oil, condensate or natural gas liquids.
“Boe” Barrels of crude oil equivalent, with six thousand cubic feet of natural gas being equivalent to one barrel of crude oil based on the average equivalent energy content of the two commodities.
“Btu” British thermal unit, which represents the amount of energy needed to heat one pound of water by one degree Fahrenheit and can be used to describe the energy content of fuels.
“completion” The process of treating a drilled well followed by the installation of permanent equipment for the production of crude oil and/or natural gas.
“DD&A” Depreciation, depletion, amortization and accretion.
“developed acreage” The number of acres allocated or assignable to productive wells or wells capable of production.
“development well” A well drilled within the proved area of a crude oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
“dry hole” Exploratory or development well that does not produce crude oil and/or natural gas in economically producible quantities.
“enhanced recovery” The recovery of crude oil and natural gas through the injection of liquids or gases into the reservoir, supplementing its natural energy. Enhanced recovery methods are sometimes applied when production slows due to depletion of the natural pressure.
“exploratory well” A well drilled to find crude oil or natural gas in an unproved area, to find a new reservoir in an existing field previously found to be productive of crude oil or natural gas in another reservoir, or to extend a known reservoir beyond the proved area.
“field” An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.
“formation” A layer of rock which has distinct characteristics that differs from nearby rock.
"gross acres" or "gross wells" Refers to the total acres or wells in which a working interest is owned.
“horizontal drilling” A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled horizontally within a specified interval.
“MBbl” One thousand barrels of crude oil, condensate or natural gas liquids.
“MBoe” One thousand Boe.
“Mcf” One thousand cubic feet of natural gas.
“MMBoe” One million Boe.
“MMBtu” One million British thermal units.
“MMcf” One million cubic feet of natural gas.
net acres” or "net wells" Refers to the sum of the fractional working interests owned in gross acres or gross wells.
“NYMEX” The New York Mercantile Exchange.
“play” A portion of the exploration and production cycle following the identification by geologists and geophysicists of areas with potential crude oil and natural gas reserves.

i



“productive well” A well found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes.
“prospect” A potential geological feature or formation which geologists and geophysicists believe may contain hydrocarbons. A prospect can be in various stages of evaluation, ranging from a prospect that has been fully evaluated and is ready to drill to a prospect that will require substantial additional seismic data processing and interpretation.
“proved reserves” The quantities of crude oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods, and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates renewal is reasonably certain.
“reservoir” A porous and permeable underground formation containing a natural accumulation of producible crude oil and/or natural gas that is confined by impermeable rock or water barriers and is separate from other reservoirs.
“royalty interest” Refers to the ownership of a percentage of the resources or revenues produced from a crude oil or natural gas property. A royalty interest owner does not bear exploration, development, or operating expenses associated with drilling and producing a crude oil or natural gas property.
“SCOOP” Refers to the South Central Oklahoma Oil Province, a term used to describe properties located in the Anadarko basin of Oklahoma in which we operate. Our SCOOP acreage extends across portions of Garvin, Grady, Stephens, Carter, McClain and Love Counties of Oklahoma and has the potential to contain hydrocarbons from a variety of conventional and unconventional reservoirs overlying and underlying the Woodford formation.
"STACK" Refers to Sooner Trend Anadarko Canadian Kingfisher, a term used to describe a resource play located in the Anadarko Basin of Oklahoma characterized by stacked geologic formations with major targets in the Meramec and Osage formations overlying the Woodford formation. A significant portion of our STACK acreage is located in over-pressured portions of Blaine, Dewey and Custer Counties of Oklahoma.
“undeveloped acreage” Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of crude oil and/or natural gas.
“unit” The joining of all or substantially all interests in a reservoir or field, rather than a single tract, to provide for development and operation without regard to separate property interests. Also, the area covered by a unitization agreement.
“working interest” The right granted to the lessee of a property to explore for and to produce and own crude oil, natural gas, or other minerals. The working interest owners bear the exploration, development, and operating costs on either a cash, penalty, or carried basis.
 


ii


Cautionary Statement for the Purpose of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
This report and information incorporated by reference in this report include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact, including, but not limited to, forecasts or expectations regarding the Company's business and statements or information concerning the Company’s future operations, performance, financial condition, production and reserves, schedules, plans, timing of development, rates of return, budgets, costs, business strategy, objectives, and cash flows, included in this report are forward-looking statements. The words “could,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “budget,” “plan,” “continue,” “potential,” “guidance,” “strategy” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.
Forward-looking statements may include, but are not limited to, statements about:
our strategy;
our business and financial plans;
our future operations;
our crude oil and natural gas reserves and related development plans;
technology;
crude oil, natural gas liquids, and natural gas prices and differentials;
the timing and amount of future production of crude oil and natural gas and flaring activities;
the amount, nature and timing of capital expenditures;
estimated revenues, expenses and results of operations;
drilling and completing of wells;
competition;
marketing of crude oil and natural gas;
transportation of crude oil, natural gas liquids, and natural gas to markets;
property exploitation or property acquisitions and dispositions;
costs of exploiting and developing our properties and conducting other operations;
our financial position;
general economic conditions;
credit markets;
our liquidity and access to capital;
the impact of governmental policies, laws and regulations, as well as regulatory and legal proceedings involving us and of scheduled or potential regulatory or legal changes;
our future operating and financial results;
our commodity or other hedging arrangements; and
the ability and willingness of current or potential lenders, hedging contract counterparties, customers, and working interest owners to fulfill their obligations to us or to enter into transactions with us in the future on terms that are acceptable to us.
Forward-looking statements are based on the Company’s current expectations and assumptions about future events and currently available information as to the outcome and timing of future events. Although the Company believes these assumptions and expectations are reasonable, they are inherently subject to numerous business, economic, competitive, regulatory and other risks and uncertainties, most of which are difficult to predict and many of which are beyond the Company's control. No assurance can be given that such expectations will be correct or achieved or that the assumptions are accurate or will not change over time. The risks and uncertainties that may affect the operations, performance and results of the business and forward-looking statements include, but are not limited to, those risk factors and other cautionary statements described under Part II, Item 1A. Risk Factors and elsewhere in this report, if any, our Annual Report on Form 10-K for the year ended December 31, 2015, registration statements we file from time to time with the Securities and Exchange Commission, and other announcements we make from time to time.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which such statement is made. Should one or more of the risks or uncertainties described in this report occur, or should underlying assumptions prove incorrect, the Company's actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements are expressly qualified in their entirety by this cautionary statement.
Except as expressly stated above or otherwise required by applicable law, the Company undertakes no obligation to publicly correct or update any forward-looking statement whether as a result of new information, future events or circumstances after the date of this report, or otherwise.

iii


PART I. Financial Information
ITEM 1.
Financial Statements
Continental Resources, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
 
 
September 30, 2016
 
December 31, 2015
In thousands, except par values and share data
 
(Unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
19,496

 
$
11,463

Receivables:
 
 
 
 
Crude oil and natural gas sales
 
335,570

 
378,622

Affiliated parties
 
62

 
122

Joint interest and other, net
 
278,501

 
232,293

Derivative assets
 
12,587

 
93,922

Inventories
 
92,894

 
94,151

Prepaid expenses and other
 
11,765

 
11,766

Total current assets
 
750,875

 
822,339

Net property and equipment, based on successful efforts method of accounting
 
13,094,683

 
14,063,328

Noncurrent derivative assets
 
1,676

 
14,560

Other noncurrent assets
 
18,018

 
19,581

Total assets
 
$
13,865,252

 
$
14,919,808

 
 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable trade
 
$
413,278

 
$
553,285

Revenues and royalties payable
 
173,223

 
187,000

Payables to affiliated parties
 
178

 
69

Accrued liabilities and other
 
199,694

 
176,947

Derivative liabilities
 
13,780

 
3,583

Current portion of long-term debt
 
2,197

 
2,144

Total current liabilities
 
802,350

 
923,028

Long-term debt, net of current portion
 
6,830,141

 
7,115,644

Other noncurrent liabilities:
 
 
 
 
Deferred income tax liabilities, net
 
1,847,947

 
2,090,228

Asset retirement obligations, net of current portion
 
104,938

 
101,251

Noncurrent derivative liabilities
 
4,299

 
3,706

Other noncurrent liabilities
 
14,879

 
17,051

Total other noncurrent liabilities
 
1,972,063

 
2,212,236

Commitments and contingencies (Note 7)
 
 
 


Shareholders’ equity:
 
 
 
 
Preferred stock, $0.01 par value; 25,000,000 shares authorized; no shares issued and outstanding
 

 

Common stock, $0.01 par value; 1,000,000,000 shares authorized; 374,537,423 shares issued and outstanding at September 30, 2016; 372,959,080 shares issued and outstanding at December 31, 2015
 
3,745

 
3,730

Additional paid-in capital
 
1,363,886

 
1,345,624

Accumulated other comprehensive loss
 
(2,485
)
 
(3,354
)
Retained earnings
 
2,895,552

 
3,322,900

Total shareholders’ equity
 
4,260,698

 
4,668,900

Total liabilities and shareholders’ equity
 
$
13,865,252

 
$
14,919,808



The accompanying notes are an integral part of these condensed consolidated financial statements.
1



Continental Resources, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Loss
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
In thousands, except per share data
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
 
Crude oil and natural gas sales
 
$
505,892

 
$
628,457

 
$
1,435,194

 
$
1,999,751

Crude oil and natural gas sales to affiliates
 

 

 

 
1,400

Gain (loss) on crude oil and natural gas derivatives, net
 
15,668

 
46,527

 
(24,477
)
 
74,545

Crude oil and natural gas service operations
 
4,639

 
7,685

 
19,867

 
28,991

Total revenues
 
526,199

 
682,669

 
1,430,584

 
2,104,687

 
 
 
 
 
 
 
 
 
Operating costs and expenses
 
 
 
 
 
 
 
 
Production expenses
 
67,022

 
84,036

 
219,745

 
267,058

Production expenses to affiliates
 

 

 

 
1,654

Production taxes and other expenses
 
34,583

 
47,682

 
104,216

 
157,589

Exploration expenses
 
3,987

 
232

 
8,726

 
14,680

Crude oil and natural gas service operations
 
2,605

 
4,059

 
9,224

 
15,045

Depreciation, depletion, amortization and accretion
 
414,671

 
448,809

 
1,320,423

 
1,288,278

Property impairments
 
57,689

 
96,697

 
202,728

 
321,130

General and administrative expenses
 
44,389

 
53,798

 
113,043

 
143,368

Net gain on sale of assets and other
 
(5,564
)
 
(288
)
 
(104,690
)
 
(22,930
)
Total operating costs and expenses
 
619,382

 
735,025

 
1,873,415

 
2,185,872

Loss from operations
 
(93,183
)
 
(52,356
)
 
(442,831
)
 
(81,185
)
Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(82,074
)
 
(79,399
)
 
(244,949
)
 
(232,904
)
Other
 
360

 
588

 
1,178

 
1,474


 
(81,714
)
 
(78,811
)
 
(243,771
)
 
(231,430
)
Loss before income taxes
 
(174,897
)
 
(131,167
)
 
(686,602
)
 
(312,615
)
Benefit for income taxes
 
(65,276
)
 
(48,744
)
 
(259,254
)
 
(98,623
)
Net loss
 
$
(109,621
)
 
$
(82,423
)
 
$
(427,348
)
 
$
(213,992
)
Basic net loss per share
 
$
(0.30
)
 
$
(0.22
)
 
$
(1.15
)
 
$
(0.58
)
Diluted net loss per share
 
$
(0.30
)
 
$
(0.22
)
 
$
(1.15
)
 
$
(0.58
)
 
 
 
 
 
 
 
 
 
Comprehensive loss:
 
 
 
 
 
 
 
 
Net loss
 
$
(109,621
)
 
$
(82,423
)
 
$
(427,348
)
 
$
(213,992
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
418

 
(438
)
 
869

 
(2,918
)
Total other comprehensive income (loss), net of tax
 
418

 
(438
)
 
869

 
(2,918
)
Comprehensive loss
 
$
(109,203
)
 
$
(82,861
)
 
$
(426,479
)
 
$
(216,910
)


The accompanying notes are an integral part of these condensed consolidated financial statements.
2



Continental Resources, Inc. and Subsidiaries
Condensed Consolidated Statement of Shareholders’ Equity
 
In thousands, except share data
 
Shares
outstanding
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
loss
 
Retained
earnings
 
Total
shareholders’
equity
Balance at December 31, 2015
 
372,959,080

 
$
3,730

 
$
1,345,624

 
$
(3,354
)
 
$
3,322,900

 
$
4,668,900

Net loss (unaudited)
 

 

 

 

 
(427,348
)
 
(427,348
)
Other comprehensive income, net of tax (unaudited)
 

 

 

 
869

 

 
869

Stock-based compensation (unaudited)
 

 

 
34,259

 

 

 
34,259

Tax deficiency from stock-based compensation (unaudited)
 

 

 
(9,460
)
 

 

 
(9,460
)
Restricted stock:
 
 
 
 
 
 
 
 
 
 
 
 
Granted (unaudited)
 
2,025,885

 
20

 

 

 

 
20

Repurchased and canceled (unaudited)
 
(296,105
)
 
(3
)
 
(6,537
)
 

 

 
(6,540
)
Forfeited (unaudited)
 
(151,437
)
 
(2
)
 

 

 

 
(2
)
Balance at September 30, 2016 (unaudited)
 
374,537,423

 
$
3,745

 
$
1,363,886

 
$
(2,485
)
 
$
2,895,552

 
$
4,260,698



The accompanying notes are an integral part of these condensed consolidated financial statements.
3



Continental Resources, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
 
 
Nine months ended September 30,
In thousands
 
2016
 
2015
Cash flows from operating activities
 
 
Net loss
 
$
(427,348
)
 
$
(213,992
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion, amortization and accretion
 
1,322,280

 
1,286,158

Property impairments
 
202,728

 
321,130

Non-cash (gain) loss on derivatives, net
 
105,009

 
(26,011
)
Stock-based compensation
 
34,274

 
40,290

Benefit for deferred income taxes
 
(259,256
)
 
(98,645
)
Tax deficiency (benefit) from stock-based compensation
 
9,460

 
(13,177
)
Dry hole costs
 
233

 
8,183

Gain on sale of assets, net
 
(103,174
)
 
(22,930
)
Other, net
 
7,166

 
10,143

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(2,634
)
 
351,309

Inventories
 
1,257

 
9,137

Other current assets
 
390

 
64,271

Accounts payable trade
 
(43,131
)
 
(178,000
)
Revenues and royalties payable
 
(11,102
)
 
(45,030
)
Accrued liabilities and other
 
22,411

 
(78,947
)
Other noncurrent assets and liabilities
 
5,325

 
1,603

Net cash provided by operating activities
 
863,888

 
1,415,492

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Exploration and development
 
(878,928
)
 
(2,598,367
)
Purchase of producing crude oil and natural gas properties
 
(29
)
 
(557
)
Purchase of other property and equipment
 
(5,569
)
 
(31,991
)
Proceeds from sale of assets
 
334,305

 
33,216

Net cash used in investing activities
 
(550,221
)
 
(2,597,699
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Credit facility borrowings
 
915,000

 
1,780,000

Repayment of credit facility
 
(1,203,000
)
 
(600,000
)
Repayment of other debt
 
(1,601
)
 
(1,552
)
Debt issuance costs
 
(40
)
 
(2,110
)
Repurchase of restricted stock for tax withholdings
 
(6,540
)
 
(5,818
)
Tax (deficiency) benefit from stock-based compensation
 
(9,460
)
 
13,177

Net cash (used in) provided by financing activities
 
(305,641
)
 
1,183,697

Effect of exchange rate changes on cash
 
7

 
(8,916
)
Net change in cash and cash equivalents
 
8,033

 
(7,426
)
Cash and cash equivalents at beginning of period
 
11,463

 
24,381

Cash and cash equivalents at end of period
 
$
19,496

 
$
16,955


The accompanying notes are an integral part of these condensed consolidated financial statements.
4


Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Organization and Nature of Business
Continental Resources, Inc. (the “Company”) was originally formed in 1967 and is incorporated under the laws of the State of Oklahoma. The Company's principal business is crude oil and natural gas exploration, development and production with properties primarily located in the North, South, and East regions of the United States. The North region consists of properties north of Kansas and west of the Mississippi River and includes North Dakota Bakken, Montana Bakken and the Red River units. The South region includes all properties south of Nebraska and west of the Mississippi River including various plays in the SCOOP (South Central Oklahoma Oil Province), STACK (Sooner Trend Anadarko Canadian Kingfisher), Northwest Cana, and Arkoma Woodford areas of Oklahoma. The East region is comprised of undeveloped leasehold acreage east of the Mississippi River with no current drilling or production operations.
A substantial portion of the Company’s operations are concentrated in the North region, with that region comprising approximately 62% of the Company’s crude oil and natural gas production and approximately 71% of its crude oil and natural gas revenues for the nine months ended September 30, 2016. The Company's principal producing properties in the North region are located in the Bakken field of North Dakota and Montana. In recent years, the Company has significantly expanded its activity in the South region with its discovery of the SCOOP play and its increased activity in the Northwest Cana and STACK plays. The South region comprised approximately 38% of the Company's crude oil and natural gas production and approximately 29% of its crude oil and natural gas revenues for the nine months ended September 30, 2016.
The Company has focused its operations on the exploration and development of crude oil since the 1980s. For the nine months ended September 30, 2016, crude oil accounted for approximately 60% of the Company’s total production and approximately 84% of its crude oil and natural gas revenues.    
Note 2. Basis of Presentation and Significant Accounting Policies
Basis of presentation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are 100% owned, after all significant intercompany accounts and transactions have been eliminated upon consolidation.
This report has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information. Because this is an interim period filing presented using a condensed format, it does not include all disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”), although the Company believes the disclosures are adequate to make the information not misleading. You should read this Quarterly Report on Form 10-Q ("Form 10-Q") together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”), which includes a summary of the Company’s significant accounting policies and other disclosures.
The condensed consolidated financial statements as of September 30, 2016 and for the three and nine month periods ended September 30, 2016 and 2015 are unaudited. The condensed consolidated balance sheet as of December 31, 2015 was derived from the audited balance sheet included in the 2015 Form 10-K. The Company has evaluated events or transactions through the date this report on Form 10-Q was filed with the SEC in conjunction with its preparation of these condensed consolidated financial statements.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure and estimation of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. The most significant of the estimates and assumptions that affect reported results are the estimates of the Company’s crude oil and natural gas reserves, which are used to compute depreciation, depletion, amortization and impairment of proved crude oil and natural gas properties. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation in accordance with U.S. GAAP have been included in these unaudited interim condensed consolidated financial statements. The results of operations for any interim period are not necessarily indicative of the results of operations that may be expected for any other interim period or for an entire year.
Earnings per share
Basic and diluted net loss per share is computed by dividing net loss by the weighted-average number of shares outstanding for the period. In periods where the Company has net income, diluted earnings per share reflects the potential

5

Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

dilution of non-vested restricted stock awards, which are calculated using the treasury stock method. The following table presents the calculation of basic and diluted weighted average shares outstanding and net loss per share for the three and nine months ended September 30, 2016 and 2015.
 
 
Three months ended September 30,
 
Nine months ended September 30,
In thousands, except per share data
 
2016
 
2015
 
2016
 
2015
Loss (numerator):
 
 
 
 
 
 
 
 
Net loss - basic and diluted
 
$
(109,621
)
 
$
(82,423
)
 
$
(427,348
)
 
$
(213,992
)
Weighted average shares (denominator):
 
 
 
 
 
 
 
 
Weighted average shares - basic
 
370,483

 
369,599

 
370,327

 
369,499

Non-vested restricted stock (1)
 

 

 

 

Weighted average shares - diluted
 
370,483

 
369,599

 
370,327

 
369,499

Net loss per share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.30
)
 
$
(0.22
)
 
$
(1.15
)
 
$
(0.58
)
Diluted
 
$
(0.30
)
 
$
(0.22
)
 
$
(1.15
)
 
$
(0.58
)
(1)
For the three and nine months ended September 30, 2016, the Company had a net loss and therefore the potential dilutive effect of approximately 2,176,500 and 2,083,000 weighted average non-vested restricted shares, respectively, were not included in the calculation of diluted net loss per share because to do so would have been anti-dilutive to the computations. The Company also had net losses for the three and nine months ended September 30, 2015, and therefore approximately 688,800 and 1,521,000 weighted average non-vested restricted shares, respectively, were not included in the calculation of diluted net loss per share for those periods.
Inventories
Inventory is comprised of crude oil held in storage or as line fill in pipelines and tubular goods and equipment to be used in the Company's exploration and development activities. Crude oil inventories are valued at the lower of cost or market primarily using the first-in, first-out inventory method. Tubular goods and equipment are valued at the lower of cost or market, with cost determined primarily using a weighted average cost method applied to specific classes of inventory items.
The components of inventory as of September 30, 2016 and December 31, 2015 consisted of the following:
In thousands
 
September 30, 2016
 
December 31, 2015
Tubular goods and equipment
 
$
16,080

 
$
15,633

Crude oil
 
76,814

 
78,518

Total
 
$
92,894

 
$
94,151

Income taxes
Income taxes are accounted for using the liability method under which deferred income taxes are recognized for the future tax effects of temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities using the enacted statutory tax rates in effect at period-end. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. The Company’s policy is to recognize penalties and interest related to unrecognized tax benefits, if any, in income tax expense. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized. The Company recorded valuation allowances of $0.7 million and $1.0 million for the three and nine months ended September 30, 2016, respectively, and $0.9 million and $13.3 million for the three and nine months ended September 30, 2015, respectively, against deferred tax assets associated with operating loss carryforwards generated by its Canadian subsidiary for which the Company does not expect to realize a benefit.
New accounting pronouncements not yet adopted
Leases – In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which requires companies to recognize a right of use asset and related liability on the balance sheet for the rights and obligations arising from leases with durations greater than 12 months. The standard is effective for interim and annual reporting periods beginning after December 15, 2018 and requires adoption by application of a modified retrospective transition approach.

6

Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

The Company continues to evaluate the impact of ASU 2016-02 and is in the process of developing systems and processes to identify, classify, and account for leases within the scope of the new guidance. Adoption of ASU 2016-02 will ultimately result in an increase in long-term assets and liabilities on the Company's balance sheet, the effect of which cannot be predicted with certainty at this time.
Stock-based compensation – In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of share-based payment awards, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard is effective for interim and annual reporting periods beginning after December 15, 2016 and will be adopted either prospectively, retrospectively or using a modified retrospective transition approach depending on the topic covered in the standard.
Under ASU 2016-09, on a prospective basis companies will no longer record excess tax benefits and deficiencies in additional paid-in capital. Instead, excess tax benefits and deficiencies will be recognized as income tax expense or benefit in the income statement. This is expected to result in increased volatility in income tax expense/benefit and corresponding variations in the relationship between income tax expense/benefit and pre-tax income/loss from period to period, the effect of which cannot be predicted with certainty at this time.
ASU 2016-09 also removes the requirement to delay recognition of an excess tax benefit until it reduces current taxes payable. Under the new guidance, excess tax benefits will be recorded when they arise. This change is required to be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings upon adoption. The Company's cumulative effect adjustment is not expected to have a material impact on retained earnings upon adoption of ASU 2016-09 on January 1, 2017.
The Company expects to continue its current accounting practice of estimating forfeitures in determining the amount of stock-based compensation expense to recognize. Therefore, the adoption of ASU 2016-09 is not expected to have an impact on stock-based compensation expense to be recognized on non-vested restricted stock awards.

Note 3. Supplemental Cash Flow Information
The following table discloses supplemental cash flow information about cash paid for interest and income tax payments and refunds. Also disclosed is information about investing activities that affects recognized assets and liabilities but has not yet resulted in cash receipts or payments. 
 
 
Nine months ended September 30,
In thousands
 
2016
 
2015
Supplemental cash flow information:
 
 
 
 
Cash paid for interest
 
$
213,969

 
$
204,180

Cash paid for income taxes
 

 
27

Cash received for income tax refunds
 
174

 
59,117

Non-cash investing activities:
 
 
 
 
Asset retirement obligation additions and revisions, net
 
1,645

 
6,267


As of September 30, 2016 and December 31, 2015, the Company had $186.2 million and $282.8 million, respectively, of accrued capital expenditures included in "Net property and equipment" and "Accounts payable trade" in the condensed consolidated balance sheets. As of September 30, 2015 and December 31, 2014, the Company had $315.0 million and $797.5 million, respectively, of accrued capital expenditures.

Note 4. Derivative Instruments
Crude oil and natural gas derivatives
The Company may utilize crude oil and natural gas swap and collar derivative contracts to economically hedge against the variability in cash flows associated with future sales of crude oil and natural gas production. While the use of these derivative instruments limits the downside risk of adverse price movements, their use also limits future revenues from upward price movements.
The Company recognizes all crude oil and natural gas derivative instruments on the balance sheet as either assets or liabilities measured at fair value. The Company has not designated its crude oil and natural gas derivative instruments as hedges for accounting purposes and, as a result, marks such derivative instruments to fair value and recognizes the changes in fair

7

Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

value in the unaudited condensed consolidated statements of comprehensive loss under the caption “Gain (loss) on crude oil and natural gas derivatives, net”, which is a component of "Total revenues".
With respect to a crude oil or natural gas fixed price swap contract, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is less than the swap price, and the Company is required to make a payment to the counterparty if the settlement price for any settlement period is greater than the swap price. For a crude oil or natural gas collar contract, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the floor price, and the Company is required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling price. Neither party is required to make a payment to the other party if the settlement price for any settlement period is between the floor price and the ceiling price.
The Company’s crude oil and natural gas derivative contracts are settled based upon reported settlement prices on commodity exchanges, with crude oil derivative settlements based on Inter-Continental Exchange (“ICE”) pricing for Brent crude oil and natural gas derivative settlements based on NYMEX Henry Hub pricing. The estimated fair value of derivative contracts is based upon various factors, including commodity exchange prices, over-the-counter quotations, and, in the case of collars and written call options, volatility, the risk-free interest rate, and the time to expiration. The calculation of the fair value of collars and written call options requires the use of an option-pricing model. See Note 5. Fair Value Measurements.
At September 30, 2016, the Company had outstanding crude oil and natural gas derivative contracts with respect to future production as set forth in the tables below. The hedged volumes reflected below represent an aggregation of multiple derivative contracts that have varying durations and may not be realized on a ratable basis over the periods indicated.
Crude Oil - ICE Brent
 
 
 
 
 
 
 
 
 
Period and Type of Contract
 
Bbls
 
Ceiling Price
October 2016 - December 2016
 
 
 
 
Written call options - ICE Brent (1)
 
368,000

 
$
107.70

(1) Written call options represent the ceiling positions remaining from the Company's previous crude oil collar contracts. The floor positions of the collars were liquidated in the fourth quarter of 2014. For these written call options, the Company is required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling price.
 
 
 
 
 
 
Collars
Natural Gas - NYMEX Henry Hub
 
Swaps Weighted Average Price
 
Floors
 
Ceilings
 
 
 
 
 
 
 
Weighted Average Price
 
 
 
Weighted Average Price
Period and Type of Contract
 
MMBtus
 
 
Range
 
 
Range
 
October 2016 - December 2016
 
 
 
 
 
 
 
 
 
 
 
 
Swaps - Henry Hub
 
34,870,000

 
$
3.09

 
 
 
 
 
 
 
 
January 2017 - December 2017
 
 
 
 
 
 
 
 
 
 
 
 
Swaps - Henry Hub
 
25,550,000

 
$
3.35

 
 
 
 
 
 
 
 
Collars - Henry Hub
 
65,700,000

 
 
 
$2.40 - $3.00
 
$
2.47

 
$2.92 - $3.88
 
$
3.08



8

Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

Crude oil and natural gas derivative gains and losses
Cash receipts and payments in the following table reflect the gain or loss on derivative contracts which matured during the period, calculated as the difference between the contract price and the market settlement price of matured contracts. Non-cash gains and losses below represent the change in fair value of derivative instruments which continue to be held at period end and the reversal of previously recognized non-cash gains or losses on derivative contracts that matured during the period.
 
 
Three months ended September 30,
 
Nine months ended September 30,
In thousands
 
2016
 
2015
 
2016
 
2015
Cash received on derivatives:
 
 
 
 
 
 
 
 
Natural gas fixed price swaps
 
$
5,174

 
$
5,142

 
$
83,141

 
$
29,084

Natural gas collars
 

 
6,775

 

 
19,450

Cash received on derivatives, net
 
5,174

 
11,917

 
83,141

 
48,534

Non-cash gain (loss) on derivatives:
 
 
 
 
 
 
 
 
Crude oil written call options
 

 
617

 
38

 
4,544

Natural gas fixed price swaps
 
5,298

 
36,257

 
(93,617
)
 
33,453

Natural gas collars
 
5,196

 
(2,264
)
 
(14,039
)
 
(11,986
)
Non-cash gain (loss) on derivatives, net
 
10,494

 
34,610

 
(107,618
)
 
26,011

Gain (loss) on crude oil and natural gas derivatives, net
 
$
15,668

 
$
46,527

 
$
(24,477
)
 
$
74,545

Diesel fuel derivatives
In March 2016, the Company entered into diesel fuel swap derivative contracts to economically hedge against the variability in cash flows associated with future purchases of diesel fuel for use in drilling activities. The Company has hedged approximately 15 million gallons of diesel fuel over the period from October 2016 to December 2017 at a weighted average price of $1.42 per gallon. With respect to these diesel fuel swap contracts, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is greater than the swap price, and the Company is required to make a payment to the counterparty if the settlement price for any settlement period is less than the swap price. The diesel fuel swap contracts are settled based upon reported NYMEX settlement prices for New York Harbor ultra-low sulfur diesel fuel.
The Company recognizes its diesel fuel derivative instruments on the balance sheet as either assets or liabilities measured at fair value. The estimated fair value is based upon various factors, including commodity exchange prices, over-the-counter quotations, the risk-free interest rate, and time to expiration. The Company has not designated its diesel fuel derivative instruments as hedges for accounting purposes and, as a result, marks the derivative instruments to fair value and recognizes the changes in fair value in the unaudited condensed consolidated statements of comprehensive loss under the caption “Operating costs and expensesNet gain on sale of assets and other.” For both the three and nine months ended September 30, 2016, the Company recognized cash gains of $0.1 million on its matured diesel fuel derivatives. For the three and nine months ended September 30, 2016, the Company recognized a non-cash loss of $0.5 million and a non-cash gain of $2.6 million, respectively, on its diesel fuel derivatives.
Balance sheet offsetting of derivative assets and liabilities
The Company’s derivative contracts are recorded at fair value in the condensed consolidated balance sheets under the captions “Derivative assets”, “Noncurrent derivative assets”, “Derivative liabilities”, and “Noncurrent derivative liabilities”. Derivative assets and liabilities with the same counterparty that are subject to contractual terms which provide for net settlement are reported on a net basis in the condensed consolidated balance sheets.

9

Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

The following table presents the gross amounts of recognized crude oil, natural gas, and diesel fuel derivative assets and liabilities, the amounts offset under netting arrangements with counterparties, and the resulting net amounts presented in the condensed consolidated balance sheets for the periods presented, all at fair value. 
In thousands
 
September 30, 2016
 
December 31, 2015
Commodity derivative assets:
 
 
 
 
Gross amounts of recognized assets
 
$
25,241

 
$
120,385

Gross amounts offset on balance sheet
 
(10,978
)
 
(11,903
)
Net amounts of assets on balance sheet
 
14,263

 
108,482

Commodity derivative liabilities:
 
 
 
 
Gross amounts of recognized liabilities
 
(29,057
)
 
(19,192
)
Gross amounts offset on balance sheet
 
10,978

 
11,903

Net amounts of liabilities on balance sheet
 
$
(18,079
)
 
$
(7,289
)
 
The following table reconciles the net amounts disclosed above to the individual financial statement line items in the condensed consolidated balance sheets. 
In thousands
 
September 30, 2016
 
December 31, 2015
Derivative assets
 
$
12,587

 
$
93,922

Noncurrent derivative assets
 
1,676

 
14,560

Net amounts of assets on balance sheet
 
14,263

 
108,482

Derivative liabilities
 
(13,780
)
 
(3,583
)
Noncurrent derivative liabilities
 
(4,299
)
 
(3,706
)
Net amounts of liabilities on balance sheet
 
(18,079
)
 
(7,289
)
Total derivative assets (liabilities), net
 
$
(3,816
)
 
$
101,193


Note 5. Fair Value Measurements
The Company follows a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3: Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.
A financial instrument’s categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Level 1 inputs are given the highest priority in the fair value hierarchy while Level 3 inputs are given the lowest priority. The Company’s 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 hierarchy. As Level 1 inputs generally provide the most reliable evidence of fair value, the Company uses Level 1 inputs when available. The Company’s policy is to recognize transfers between the hierarchy levels as of the beginning of the reporting period in which the event or change in circumstances caused the transfer.

10

Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company's derivative instruments are reported at fair value on a recurring basis. In determining the fair values of swap contracts, a discounted cash flow method is used due to the unavailability of relevant comparable market data for the Company’s exact contracts. The discounted cash flow method estimates future cash flows based on quoted market prices for forward commodity prices and a risk-adjusted discount rate. The fair values of swap contracts are calculated mainly using significant observable inputs (Level 2). Calculation of the fair values of collars and written call options requires the use of an industry-standard option pricing model that considers various inputs including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. These assumptions are observable in the marketplace or can be corroborated by active markets or broker quotes and are therefore designated as Level 2 within the valuation hierarchy. The Company’s calculation of fair value for each of its derivative positions is compared to the counterparty valuation for reasonableness.
The following tables summarize the valuation of financial instruments by pricing levels that were accounted for at fair value on a recurring basis as of September 30, 2016 and December 31, 2015. 
 
 
Fair value measurements at September 30, 2016 using:
 
 
In thousands
 
Level 1
 
Level 2
 
Level 3
 
Total
Derivative assets (liabilities):
 
 
 
 
 
 
 
 
Swaps
 
$

 
$
13,418

 
$

 
$
13,418

Collars
 

 
(17,234
)
 

 
(17,234
)
Written call options
 

 

 

 

Total
 
$

 
$
(3,816
)
 
$

 
$
(3,816
)
 
 
 
 
 
 
 
 
 
 
 
Fair value measurements at December 31, 2015 using:
 
 
In thousands
 
Level 1
 
Level 2
 
Level 3
 
Total
Derivative assets (liabilities):
 
 
 
 
 
 
 
 
Swaps
 
$

 
$
104,426

 
$

 
$
104,426

Collars
 

 
(3,195
)
 

 
(3,195
)
Written call options
 

 
(38
)
 

 
(38
)
Total
 
$

 
$
101,193

 
$

 
$
101,193

Assets Measured at Fair Value on a Nonrecurring Basis
Certain assets are reported at fair value on a nonrecurring basis in the condensed consolidated financial statements. The following methods and assumptions were used to estimate the fair values for those assets.
Asset Impairments – Proved crude oil and natural gas properties are reviewed for impairment on a field-by-field basis each quarter. The estimated future cash flows expected in connection with the field are compared to the carrying amount of the field to determine if the carrying amount is recoverable. If the carrying amount of the field exceeds its estimated undiscounted future cash flows, the carrying amount of the field is reduced to its estimated fair value. Due to the unavailability of relevant comparable market data, a discounted cash flow method is used to determine the fair value of proved properties. The discounted cash flow method estimates future cash flows based on the Company's estimates of future crude oil and natural gas production, commodity prices based on commodity futures price strips adjusted for differentials, operating costs, and a risk-adjusted discount rate. The fair value of proved crude oil and natural gas properties is calculated using significant unobservable inputs (Level 3). The following table sets forth quantitative information about the significant unobservable inputs used by the Company to calculate the fair value of proved crude oil and natural gas properties using a discounted cash flow method. 
Unobservable Input
  
Assumption
Future production
  
Future production estimates for each property
Forward commodity prices
  
Forward NYMEX strip prices through 2020 (adjusted for differentials), escalating 3% per year thereafter
Operating costs
  
Estimated costs for the current year, escalating 3% per year thereafter
Productive life of field
  
Ranging from 0 to 33 years
Discount rate
  
10%

11

Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

Unobservable inputs to the fair value assessment are reviewed quarterly and are revised as warranted based on a number of factors, including reservoir performance, new drilling, crude oil and natural gas prices, changes in costs, technological advances, new geological or geophysical data, or other economic factors. Fair value measurements of proved properties are reviewed and approved by certain members of the Company’s management.
For the three and nine months ended September 30, 2016 and 2015, the Company determined the carrying amounts of certain proved properties were not recoverable from future cash flows, and therefore, were impaired. Impairments of proved properties totaled $2.9 million for year to date 2016, all of which were recognized in the third quarter primarily for properties in a non-core area of the North region. The impaired properties were written down to their estimated fair value of approximately $0.7 million as of September 30, 2016.
Impairments of proved properties for the three and nine months ended September 30, 2015 totaled $36.3 million and $111.3 million, respectively, and were primarily concentrated in an emerging area with minimal production and costly reserve additions ($42.5 million, including $1.3 million in the 2015 third quarter), the Buffalo Red River units ($26.3 million, all in the 2015 third quarter), the Medicine Pole Hills units ($22.9 million, including $8.2 million in the 2015 third quarter), various legacy areas in the South region ($11.4 million, including $0.4 million in the 2015 third quarter), and non-Bakken areas of North Dakota and Montana ($8.2 million, including $0.1 million in the 2015 third quarter). The impaired properties were written down to their estimated fair value totaling approximately $48.5 million as of September 30, 2015.
Certain unproved crude oil and natural gas properties were impaired during the three and nine months ended September 30, 2016 and 2015, reflecting recurring amortization of undeveloped leasehold costs on properties the Company expects will not be transferred to proved properties over the lives of the leases based on drilling plans, experience of successful drilling, and the average holding period.
The following table sets forth the non-cash impairments of both proved and unproved properties for the indicated periods. Proved and unproved property impairments are recorded under the caption “Property impairments” in the unaudited condensed consolidated statements of comprehensive loss.
 
 
Three months ended September 30,
 
Nine months ended September 30,
In thousands
 
2016
 
2015
 
2016
 
2015
Proved property impairments
 
$
2,895

 
$
36,302

 
$
2,895

 
$
111,346

Unproved property impairments
 
54,794

 
60,395

 
199,833

 
209,784

Total
 
$
57,689

 
$
96,697

 
$
202,728

 
$
321,130

Financial Instruments Not Recorded at Fair Value
The following table sets forth the estimated fair values of financial instruments that are not recorded at fair value in the condensed consolidated financial statements. 
 
 
September 30, 2016
 
December 31, 2015
In thousands
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
Amount
 
Estimated Fair Value
Debt:
 
 
Revolving credit facility
 
$
565,000

 
$
565,000

 
$
853,000

 
$
853,000

Term loan
 
498,710

 
500,000

 
498,274

 
500,000

Note payable
 
12,716

 
11,400

 
14,309

 
12,500

7.375% Senior Notes due 2020 (1)
 
197,036

 
205,200

 
196,574

 
179,200

7.125% Senior Notes due 2021 (1)
 
395,923

 
413,700

 
395,365

 
388,300

5% Senior Notes due 2022
 
1,997,095

 
1,970,100

 
1,996,831

 
1,480,400

4.5% Senior Notes due 2023
 
1,483,994

 
1,455,000

 
1,482,451

 
1,061,000

3.8% Senior Notes due 2024
 
990,702

 
920,000

 
989,932

 
700,300

4.9% Senior Notes due 2044
 
691,162

 
588,900

 
691,052

 
430,500

Total debt
 
$
6,832,338

 
$
6,629,300

 
$
7,117,788

 
$
5,605,200

(1) As discussed in Note 11. Subsequent Events, on October 4, 2016 the Company announced it will redeem the 7.375% Senior Notes due 2020 and the 7.125% Senior Notes due 2021 on November 10, 2016.

12

Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

The fair values of revolving credit facility borrowings and the term loan approximate face value based on borrowing rates available to the Company for bank loans with similar terms and maturities and are classified as Level 2 in the fair value hierarchy.
The fair value of the note payable is determined using a discounted cash flow approach based on the interest rate and payment terms of the note payable and an assumed discount rate. The fair value of the note payable is significantly influenced by the discount rate assumption, which is derived by the Company and is unobservable. Accordingly, the fair value of the note payable is classified as Level 3 in the fair value hierarchy.
The fair values of the 7.375% Senior Notes due 2020 (“2020 Notes”), the 7.125% Senior Notes due 2021 (“2021 Notes”), the 5% Senior Notes due 2022 (“2022 Notes”), the 4.5% Senior Notes due 2023 (“2023 Notes”), the 3.8% Senior Notes due 2024 (“2024 Notes”), and the 4.9% Senior Notes due 2044 (“2044 Notes”) are based on quoted market prices and, accordingly, are classified as Level 1 in the fair value hierarchy.
The carrying values of all classes of cash and cash equivalents, trade receivables, and trade payables are considered to be representative of their respective fair values due to the short term maturities of those instruments.
Note 6. Long-Term Debt
Long-term debt, net of unamortized discounts, premiums, and debt issuance costs totaling $45.5 million and $49.6 million at September 30, 2016 and December 31, 2015, respectively, consists of the following.
In thousands
 
September 30, 2016
 
December 31, 2015
Revolving credit facility
 
$
565,000

 
$
853,000

Term loan
 
498,710

 
498,274

Note payable
 
12,716

 
14,309

7.375% Senior Notes due 2020 (1)
 
197,036

 
196,574

7.125% Senior Notes due 2021 (1)
 
395,923

 
395,365

5% Senior Notes due 2022
 
1,997,095

 
1,996,831

4.5% Senior Notes due 2023
 
1,483,994

 
1,482,451

3.8% Senior Notes due 2024
 
990,702

 
989,932

4.9% Senior Notes due 2044
 
691,162

 
691,052

Total debt
 
$
6,832,338

 
$
7,117,788

Less: Current portion of long-term debt
 
2,197

 
2,144

Long-term debt, net of current portion
 
$
6,830,141

 
$
7,115,644

(1) As discussed in Note 11. Subsequent Events, on October 4, 2016 the Company announced it will redeem the 7.375% Senior Notes due 2020 and the 7.125% Senior Notes due 2021 on November 10, 2016.
Revolving Credit Facility
The Company has an unsecured revolving credit facility, maturing on May 16, 2019, with aggregate commitments totaling $2.75 billion at September 30, 2016, which may be increased up to a total of $4.0 billion upon agreement between the Company and participating lenders.
The Company had $565 million and $853 million of outstanding borrowings on its revolving credit facility at September 30, 2016 and December 31, 2015, respectively. Borrowings bear interest at market-based interest rates plus a margin based on the terms of the borrowing and the credit ratings assigned to the Company's senior, unsecured, long-term indebtedness. The weighted-average interest rate on outstanding credit facility borrowings at September 30, 2016 was 2.28%.
The Company had approximately $2.18 billion of borrowing availability on its revolving credit facility at September 30, 2016 and incurs commitment fees based on currently assigned credit ratings of 0.30% per annum on the daily average amount of unused borrowing availability under its revolving credit facility.
The revolving credit facility contains certain restrictive covenants including a requirement that the Company maintain a consolidated net debt to total capitalization ratio of no greater than 0.65 to 1.00. This ratio represents the ratio of net debt (calculated as total face value of debt plus outstanding letters of credit less cash and cash equivalents) divided by the sum of net debt plus total shareholders' equity plus, to the extent resulting in a reduction of total shareholders’ equity, the amount of any non-cash impairment charges incurred, net of any tax effect, after June 30, 2014. The Company was in compliance with the revolving credit facility covenants at September 30, 2016.

13

Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

Senior Notes
The following table summarizes the face values, maturity dates, semi-annual interest payment dates, and optional redemption periods related to the Company’s outstanding senior note obligations at September 30, 2016. 
 
 
2020 Notes (3)
  
2021 Notes (3)
  
2022 Notes
 
2023 Notes
 
2024 Notes
 
2044 Notes
Face value (in thousands)
 
$200,000
 
$400,000
 
$2,000,000
 
$1,500,000
 
$1,000,000
 
$700,000
Maturity date
  
Oct 1, 2020
  
April 1, 2021
  
Sep 15, 2022
 
April 15, 2023
 
June 1, 2024
 
June 1, 2044
Interest payment dates
  
April 1, Oct 1
  
April 1, Oct 1
  
March 15, Sep 15
 
April 15, Oct 15
 
June 1, Dec 1
 
June 1, Dec 1
Call premium redemption period (1)
  
Oct 1, 2015
  
April 1, 2016
  
March 15, 2017
 
 
 
Make-whole redemption period (2)
  
  
  
March 15, 2017
 
Jan 15, 2023
 
Mar 1, 2024
 
Dec 1, 2043

(1)
On or after these dates, the Company has the option to redeem all or a portion of its senior notes of the applicable series at the decreasing redemption prices specified in the respective senior note indentures (together, the “Indentures”) plus any accrued and unpaid interest to the date of redemption.
(2)
At any time prior to these dates, the Company has the option to redeem all or a portion of its senior notes of the applicable series at the “make-whole” redemption prices or amounts specified in the Indentures plus any accrued and unpaid interest to the date of redemption.
(3)
As discussed in Note 11. Subsequent Events, on October 4, 2016 the Company announced it will redeem these senior notes on November 10, 2016.
The Company’s senior notes are not subject to any mandatory redemption or sinking fund requirements.
The indentures governing the Company's senior notes contain covenants that, among other things, limit the Company's ability to create liens securing certain indebtedness, enter into certain sale-leaseback transactions, and consolidate, merge or transfer certain assets. The senior note covenants are subject to a number of important exceptions and qualifications. The Company was in compliance with these covenants at September 30, 2016. Three of the Company’s subsidiaries, Banner Pipeline Company, L.L.C., CLR Asset Holdings, LLC, and The Mineral Resources Company, which have no material assets or operations, fully and unconditionally guarantee the senior notes on a joint and several basis. The Company’s other subsidiaries, the value of whose assets and operations are minor, do not guarantee the senior notes as of September 30, 2016.
Term Loan
In November 2015, the Company borrowed $500 million under a three-year term loan agreement, the proceeds of which were used to repay a portion of the borrowings then outstanding on the Company's revolving credit facility. The term loan matures in full on November 4, 2018 and bears interest at a variable market-based interest rate plus a margin based on the terms of the borrowing and the credit ratings assigned to the Company's senior, unsecured, long-term indebtedness. The interest rate on the term loan at September 30, 2016 was 2.02%.
The term loan contains certain restrictive covenants including a requirement that the Company maintain a consolidated net debt to total capitalization ratio of no greater than 0.65 to 1.0, consistent with the covenant requirement in the Company's revolving credit facility. The Company was in compliance with the term loan covenants at September 30, 2016.
Note Payable
In February 2012, 20 Broadway Associates LLC, a 100% owned subsidiary of the Company, borrowed $22 million under a 10-year amortizing term loan secured by the Company’s corporate office building in Oklahoma City, Oklahoma. The loan bears interest at a fixed rate of 3.14% per annum. Principal and interest are payable monthly through the loan’s maturity date of February 26, 2022. Accordingly, approximately $2.2 million is reflected as a current liability under the caption “Current portion of long-term debt” in the condensed consolidated balance sheets as of September 30, 2016.
Note 7. Commitments and Contingencies
Included below is a discussion of various future commitments of the Company as of September 30, 2016. The commitments under these arrangements are not recorded in the accompanying condensed consolidated balance sheets.

14

Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

Drilling commitments – As of September 30, 2016, the Company had drilling rig contracts with various terms extending to February 2020 to ensure rig availability in its key operating areas. Future commitments as of September 30, 2016 total approximately $250 million, of which $49 million is expected to be incurred in the remainder of 2016, $134 million in 2017, $44 million in 2018, $21 million in 2019, and $2 million in 2020.
Pipeline transportation commitments – The Company has entered into firm transportation commitments to guarantee pipeline access capacity on crude oil and natural gas pipelines. The commitments, which have varying terms extending as far as 2027, require the Company to pay per-unit transportation charges regardless of the amount of pipeline capacity used. Future commitments remaining as of September 30, 2016 under the pipeline transportation arrangements amount to approximately $849 million, of which $55 million is expected to be incurred in the remainder of 2016, $215 million in 2017, $208 million in 2018, $154 million in 2019, $47 million in 2020, and $170 million thereafter.
The Company’s pipeline commitments are for production primarily in the North region. The Company is not committed under these contracts to deliver fixed and determinable quantities of crude oil or natural gas in the future.
Litigation In November 2010, a putative class action was filed in the District Court of Blaine County, Oklahoma by Billy J. Strack and Daniela A. Renner as trustees of certain named trusts and on behalf of other similarly situated parties against the Company. The Petition alleged the Company improperly deducted post-production costs from royalties paid to plaintiffs and other royalty interest owners from crude oil and natural gas wells located in Oklahoma. The plaintiffs alleged a number of claims, including breach of contract, fraud, breach of fiduciary duty, unjust enrichment, and other claims and seek recovery of compensatory damages, interest, punitive damages and attorney fees on behalf of the proposed class. On November 3, 2014, plaintiffs filed an Amended Petition that did not add any substantive claims, but sought a “hybrid class action” in which they sought certification of certain claims for injunctive relief, reserving the right to seek a further class certification on money damages in the future. Plaintiffs filed an Amended Motion for Class Certification on January 9, 2015, that modified the proposed class to royalty owners in Oklahoma production from July 1, 1993, to the present (instead of 1980 to the present) and sought certification of over 45 separate “issues” for injunctive or declaratory relief, again, reserving the right to seek a further class certification of money damages in the future. The Company responded to the petition, its amendment, and the motions for class certification denying the allegations and raising a number of affirmative defenses and legal arguments to each of the claims and filings. Certain discovery was undertaken and the “hybrid” motion was briefed by plaintiffs and the Company. A hearing on the “hybrid” class certification was held on June 1st and 2nd, 2015. On June 11, 2015, the trial court certified a “hybrid” class as requested by plaintiffs. The Company has appealed the trial court’s class certification order, which will be reviewed de novo by the appellate court. The appeal briefing is complete and ready for determination by the court. An unsuccessful mediation was conducted on December 7, 2015. The parties have continued settlement negotiations. If such negotiations are unsuccessful, the Company intends to litigate the case to its conclusion. The Company is not currently able to estimate a reasonably possible loss or range of loss or what impact, if any, the action will have on its financial condition, results of operations or cash flows due to the preliminary status of the matter, the complexity and number of legal and factual issues presented by the matter and uncertainties with respect to, among other things, the nature of the claims and defenses, the potential size of the class, the scope and types of the properties and agreements involved, the production years involved, and the ultimate potential outcome of the matter. Although not currently at issue in the “hybrid” certification, plaintiffs have alleged underpayments in excess of $200 million that they may claim as damages, which may increase with the passage of time, a majority of which would be comprised of interest. The Company disputes plaintiffs’ claims, disputes that the case meets the requirements for a class action and is vigorously defending the case. The Company will continue to assert its defenses to the case as certified as well as any future attempt to certify a money damages class.
The Company is involved in various other legal proceedings including, but not limited to, commercial disputes, claims from royalty and surface owners, property damage claims, personal injury claims, disputes with tax authorities and other matters. While the outcome of these legal matters cannot be predicted with certainty, the Company does not expect them to have a material effect on its financial condition, results of operations or cash flows. As of both September 30, 2016 and December 31, 2015, the Company had recorded a liability in the condensed consolidated balance sheets under the caption “Other noncurrent liabilities” of $6.1 million for various matters, none of which are believed to be individually significant.
Environmental risk – Due to the nature of the crude oil and natural gas business, the Company is exposed to possible environmental risks. The Company is not aware of any material environmental issues or claims.

15

Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

Note 8. Stock-Based Compensation
The Company has granted restricted stock to employees and directors pursuant to the Continental Resources, Inc. 2013 Long-Term Incentive Plan ("2013 Plan") as discussed below. The Company’s associated compensation expense, which is included in the caption “General and administrative expenses” in the unaudited condensed consolidated statements of comprehensive loss, was $13.2 million and $12.9 million for the three months ended September 30, 2016 and 2015, respectively, and $34.3 million and $40.3 million for the nine months ended September 30, 2016 and 2015, respectively.
In May 2013, the Company adopted the 2013 Plan and reserved 19,680,072 shares of common stock that may be issued pursuant to the plan. As of September 30, 2016, the Company had 15,220,886 shares of common stock available for long-term incentive awards to employees and directors under the 2013 Plan.
Restricted stock is awarded in the name of the recipient and constitutes issued and outstanding shares of the Company’s common stock for all corporate purposes during the period of restriction and, except as otherwise provided under the 2013 Plan or agreement relevant to a given award, includes the right to vote the restricted stock or to receive dividends, subject to forfeiture. Restricted stock grants generally vest over periods ranging from one to three years.
A summary of changes in non-vested restricted shares outstanding for the nine months ended September 30, 2016 is presented below. 
 
 
Number of
non-vested
shares
 
Weighted average
grant-date
fair value
Non-vested restricted shares outstanding at December 31, 2015
 
3,249,611

 
$
48.20

Granted
 
2,025,885

 
21.81

Vested
 
(1,084,804
)
 
39.90

Forfeited
 
(151,437
)
 
41.13

Non-vested restricted shares outstanding at September 30, 2016
 
4,039,255

 
$
37.46

The grant date fair value of restricted stock represents the closing market price of the Company’s common stock on the date of grant. Compensation expense for a restricted stock grant is a fixed amount determined at the grant date fair value and is recognized ratably over the vesting period as services are rendered by employees and directors. There are no post-vesting restrictions related to the Company’s restricted stock. The fair value at the vesting date of restricted stock that vested during the nine months ended September 30, 2016 was approximately $24.0 million. As of September 30, 2016, there was approximately $67 million of unrecognized compensation expense related to non-vested restricted stock. This expense is expected to be recognized over a weighted average period of 1.6 years.
Note 9. Accumulated Other Comprehensive Loss
Adjustments resulting from the process of translating foreign functional currency financial statements into U.S. dollars are included in "Accumulated other comprehensive loss" within shareholders’ equity on the condensed consolidated balance sheets. The following table summarizes the change in accumulated other comprehensive loss for the three and nine months ended September 30, 2016 and 2015:
 
 
Three months ended September 30,
 
Nine months ended September 30,
In thousands
 
2016
 
2015
 
2016
 
2015
Beginning accumulated other comprehensive loss, net of tax
 
$
(2,903
)
 
$
(2,865
)
 
$
(3,354
)
 
$
(385
)
Foreign currency translation adjustments
 
418

 
(438
)
 
869

 
(2,918
)
Income taxes (1)
 

 

 

 

Other comprehensive income (loss), net of tax
 
418

 
(438
)
 
869

 
(2,918
)
Ending accumulated other comprehensive loss, net of tax
 
$
(2,485
)
 
$
(3,303
)
 
$
(2,485
)
 
$
(3,303
)
(1)
A valuation allowance has been recognized against deferred tax assets associated with losses generated by the Company's Canadian operations, thereby resulting in no income taxes on other comprehensive income (loss).
Note 10. Property Dispositions
On September 30, 2016, the Company sold non-strategic properties in North Dakota and Montana to a third party for cash proceeds of $214.8 million, with no gain or loss recognized. The sale included approximately 68,000 net acres of

16

Continental Resources, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

leasehold primarily in western Williams County, North Dakota, and approximately 12,000 net acres of leasehold in Roosevelt County, Montana. The sale also included producing properties with production totaling approximately 2,700 barrels of oil equivalent per day. The disposed properties represented an immaterial portion of the Company’s proved reserves.
In April 2016, the Company sold approximately 132,000 net acres of undeveloped leasehold acreage located in Wyoming to a third party for cash proceeds of $110.0 million. In connection with the transaction, the Company recognized a pre-tax gain of $96.9 million. The disposed properties had no production or proved reserves.
See Note 11. Subsequent Events for discussion of an asset disposition that closed subsequent to September 30, 2016.
During the nine months ended September 30, 2015, the Company sold certain non-strategic properties in various areas to third parties for cash proceeds totaling $33.2 million. The proceeds primarily related to the assignment of certain non-producing leasehold acreage in Oklahoma to a third party for $25.9 million in May 2015. The Company recognized a pre-tax gain on that transaction of $20.5 million. The assigned properties represented an immaterial portion of the Company’s total acreage.
Note 11. Subsequent Events
Asset Disposition
On October 14, 2016, the Company sold approximately 30,000 net acres of non-strategic leasehold located in the SCOOP play in Oklahoma for cash proceeds totaling $295.6 million. The leasehold is located primarily in the eastern portion of the SCOOP play and includes producing properties with production totaling approximately 700 barrels of oil equivalent per day. In connection with the transaction, the Company expects to recognize a pre-tax gain of approximately $200 million, which will be reflected in fourth quarter 2016 results. The disposed properties represented an immaterial portion of the Company’s proved reserves.
Senior Note Redemptions
On October 4, 2016, the Company announced it will redeem all of its outstanding 7.375% Senior Notes due 2020 (the “2020 Notes”) and 7.125% Senior Notes due 2021 (the “2021 Notes”) on November 10, 2016.
The redemption price for the 2020 Notes will be equal to 102.458% of the principal amount plus accrued and unpaid interest to the redemption date of November 10, 2016 in accordance with the terms of the 2020 Notes and the related indenture under which the 2020 Notes were issued. The aggregate principal amount of the 2020 Notes outstanding is $200 million.
The redemption price for the 2021 Notes will be equal to 103.563% of the principal amount plus accrued and unpaid interest to the redemption date of November 10, 2016 in accordance with the terms of the 2021 Notes and the related indenture under which the 2021 Notes were issued. The aggregate principal amount of the 2021 Notes outstanding is $400 million.
The aggregate of the principal amounts, redemption premiums, and accrued interest payable upon redemption of the 2020 Notes and 2021 Notes is expected to total approximately $624 million. The Company expects to fund the redemptions using borrowings under its revolving credit facility. Such borrowings will serve to offset the Company's previous reduction of outstanding credit facility borrowings which used proceeds totaling approximately $630 million from asset dispositions completed in 2016 through October 31, 2016, resulting in no net increase in year to date debt associated with the redemptions.
The Company expects to record a pre-tax loss on extinguishment of debt related to the redemptions of approximately $26 million, which will be reflected in fourth quarter 2016 results and includes the call premiums and write-off of deferred financing costs and unaccreted debt discounts associated with the notes.

17



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

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this report and our historical consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2015. Our operating results for the periods discussed below may not be indicative of future performance. The following discussion and analysis includes forward-looking statements and should be read in conjunction with the risk factors described in Part II, Item 1A. Risk Factors included in this report, if any, and in our Annual Report on Form 10-K for the year ended December 31, 2015, along with Cautionary Statement for the Purpose of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 at the beginning of this report, for information about the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements.
Overview
We are an independent crude oil and natural gas company engaged in the exploration, development and production of crude oil and natural gas. We derive the majority of our operating income and cash flows from the sale of crude oil and natural gas and expect this to continue in the future. Our operations are primarily focused on exploration and development activities in the Bakken field of North Dakota and Montana and the SCOOP, STACK, and Northwest Cana areas of Oklahoma.
Business Environment and Outlook
Commodity prices have showed some signs of stabilization in recent months, but still remain volatile and unpredictable due to domestic and global supply and demand factors. In light of the challenges facing our industry, our primary business strategies continue to focus on: (1) optimizing cash flows through operating efficiencies and cost reductions, (2) high-grading investments based on rates of return and opportunities to convert undeveloped acreage to acreage held by production, and (3) balancing capital spending with cash flows to minimize new borrowings and maintain ample liquidity.
2016 Highlights
Production
Production for the third quarter of 2016 averaged 207,840 Boe per day, a decrease of 5% from the second quarter of 2016 and 9% lower than the third quarter of 2015. Year to date production averaged 219,280 Boe per day, a 1% decrease from the comparable 2015 period.
We curtailed a portion of our Bakken production in the third quarter of 2016 due to low commodity prices, which reduced our production in August and September by approximately 12,000 Boe per day. The curtailed production was brought back online at the end of the third quarter.
North Dakota Bakken production averaged 99,251 Boe per day for the third quarter of 2016, a 13% decrease from the second quarter of 2016, which resulted primarily from the aforementioned production curtailment, and 20% lower than the third quarter of 2015. Year to date, North Dakota Bakken production averaged 114,269 Boe per day, an 8% decrease from the comparable 2015 period.
SCOOP production averaged 67,462 Boe per day for the third quarter of 2016, an increase of 4% compared to the second quarter of 2016 and a decrease of 2% from the third quarter of 2015. Year to date, SCOOP production averaged 65,589 Boe per day, an 8% increase over the comparable 2015 period.
Production from STACK/Northwest Cana averaged 17,680 Boe per day for the third quarter of 2016, an increase of 21% from the second quarter of 2016 and 167% higher than the third quarter of 2015. Year to date, STACK/Northwest Cana production averaged 14,484 Boe per day, a 200% increase over the comparable 2015 period.
The South region comprised 42% of our total production for the 2016 third quarter compared to 38% for the 2016 second quarter and 35% for the 2015 third quarter. The South region comprised 38% of our total production for year to date 2016 compared to 32% for the comparable 2015 period.

18



Revenues
Crude oil and natural gas revenues for the 2016 third quarter decreased 20% compared to the 2015 third quarter driven by a 12% decrease in realized commodity prices coupled with a 9% decrease in total sales volumes.
Year to date crude oil and natural gas revenues decreased 28% from the comparable 2015 period driven by a 28% decrease in realized commodity prices.
Average crude oil sales prices for the third quarter and year to date periods of 2016 decreased 3% and 21%, respectively, from the comparable 2015 periods.
Crude oil sales volumes for the third quarter and year to date periods of 2016 decreased 21% and 10%, respectively, from the comparable 2015 periods.
Average natural gas sales prices for the third quarter and year to date periods of 2016 decreased 9% and 34%, respectively, from the comparable 2015 periods.
Natural gas sales volumes for the third quarter and year to date periods of 2016 increased 13% and 19%, respectively, from the comparable 2015 periods.
Capital expenditures and drilling activity
Capital expenditures excluding acquisitions totaled approximately $238.7 million for the third quarter of 2016, bringing year to date 2016 non-acquisition capital expenditures to $768.0 million compared to $2.1 billion for year to date 2015.
For the third quarter of 2016 we participated in the drilling and completion of 91 gross (28 net) wells, bringing our 2016 year to date total to 256 gross (64 net) wells compared to 734 gross (235 net) wells for year to date 2015.
Our inventory of uncompleted wells in North Dakota totaled 173 gross (133 net) operated wells at September 30, 2016 compared to 135 gross (107 net) operated wells in North Dakota at December 31, 2015.
Our inventory of uncompleted wells in Oklahoma totaled 46 gross (23 net) operated wells at September 30, 2016 compared to 35 gross (25 net) operated wells in Oklahoma at December 31, 2015.
Property dispositions
In April 2016, we sold approximately 132,000 net acres of non-core undeveloped leasehold acreage located in Wyoming for $110.0 million. In connection with the transaction we recognized a pre-tax gain of approximately $96.9 million. The disposed properties had no production.
In September 2016, we sold non-strategic properties in North Dakota and Montana for $214.8 million, with no gain or loss recognized. The sale included approximately 80,000 net acres of leasehold and producing properties with production totaling approximately 2,700 Boe per day.
In October 2016, we sold non-strategic properties in the SCOOP play in Oklahoma for $295.6 million. The sale included approximately 30,000 net acres of leasehold and producing properties with production totaling approximately 700 Boe per day. In connection with the transaction, we expect to recognize a pre-tax gain of approximately $200 million, which will be reflected in fourth quarter 2016 results.
Senior note redemptions
On October 4, 2016, we announced we will redeem all of our outstanding 7.375% Senior Notes due 2020 ("2020 Notes") and 7.125% Senior Notes due 2021 ("2021 Notes") on November 10, 2016.
The redemption price for the 2020 Notes will be equal to 102.458% of the $200 million principal amount plus accrued and unpaid interest to the redemption date.
The redemption price for the 2021 Notes will be equal to 103.563% of the $400 million principal amount plus accrued and unpaid interest to the redemption date.    
We expect to record a pre-tax loss on extinguishment of debt related to the redemptions of approximately $26 million, which will be reflected in fourth quarter 2016 results.

19



Credit facility and liquidity
At September 30, 2016, we had $19.5 million of cash and cash equivalents and approximately $2.18 billion of borrowing availability on our credit facility after considering outstanding borrowings and letters of credit. We had $565 million of outstanding borrowings on our credit facility at September 30, 2016 compared to $885 million at June 30, 2016, $940 million at March 31, 2016 and $853 million at December 31, 2015. At October 31, 2016, outstanding credit facility borrowings were $295 million with approximately $2.45 billion of borrowing availability. The decrease in outstanding borrowings in October reflects the use of proceeds from our October 2016 SCOOP asset disposition to reduce outstanding debt.
We expect to borrow approximately $624 million under our credit facility on or around November 10, 2016 to fund the redemptions of our 2020 Notes and 2021 Notes. Such borrowings will serve to offset our previous reduction of outstanding credit facility borrowings which used proceeds totaling approximately $630 million from asset dispositions completed in 2016 through October 31, 2016, resulting in no net increase in year to date debt associated with the redemptions.
Financial and operating highlights
We use a variety of financial and operating measures to assess our performance. Among these measures are:
Volumes of crude oil and natural gas produced,
Crude oil and natural gas prices realized, and
Per unit operating and administrative costs.
The following table contains financial and operating highlights for the periods presented. Average sales prices exclude any effect of derivative transactions. Per-unit expenses have been calculated using sales volumes. 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Average daily production:
 
 
 
 
 

 

Crude oil (Bbl per day)
 
116,277

 
147,472

 
131,873

 
146,975

Natural gas (Mcf per day)
 
549,374

 
484,834

 
524,441

 
441,930

Crude oil equivalents (Boe per day)
 
207,840

 
228,278

 
219,280

 
220,630

Average sales prices:
 

 

 

 

Crude oil ($/Bbl)
 
$
37.66

 
$
38.95

 
$
33.51

 
$
42.60

Natural gas ($/Mcf)
 
$
2.02

 
$
2.23

 
$
1.57

 
$
2.39

Crude oil equivalents ($/Boe)
 
$
26.42

 
$
29.90

 
$
23.91

 
$
33.18

Crude oil sales price discount to NYMEX ($/Bbl)
 
$
(7.27
)
 
$
(7.54
)
 
$
(7.44
)
 
$
(8.54
)
Natural gas sales price discount to NYMEX ($/Mcf)
 
$
(0.80
)
 
$
(0.54
)
 
$
(0.73
)
 
$
(0.39
)
Production expenses ($/Boe)
 
$
3.50

 
$
4.00

 
$
3.66

 
$
4.45

Production taxes (% of oil and gas revenues)
 
6.8
%
 
7.6
%
 
7.3
%
 
7.8
%
DD&A ($/Boe)
 
$
21.66

 
$
21.36

 
$
22.00

 
$
21.36

Total general and administrative expenses ($/Boe) (1)
 
$
2.32

 
$
2.56

 
$
1.88

 
$
2.38

Net loss (in thousands)
 
$
(109,621
)
 
$
(82,423
)
 
$
(427,348
)
 
$
(213,992
)
Diluted net loss per share
 
$
(0.30
)
 
$
(0.22
)
 
$
(1.15
)
 
$
(0.58
)
 
(1)
Represents cash general and administrative expenses per Boe and non-cash equity compensation expenses per Boe. See Operating Costs and Expenses—General and Administrative Expenses below for the quarter and year to date periods for additional discussion of these components.

20



Three months ended September 30, 2016 compared to the three months ended September 30, 2015
Results of Operations
The following table presents selected financial and operating information for the periods presented. 
 
 
Three months ended September 30,
In thousands, except sales price data
 
2016
 
2015
Crude oil and natural gas sales
 
$
505,892

 
$
628,457

Gain on crude oil and natural gas derivatives, net
 
15,668

 
46,527

Crude oil and natural gas service operations
 
4,639

 
7,685

Total revenues
 
526,199

 
682,669

Operating costs and expenses
 
(619,382
)
 
(735,025
)
Other expenses, net
 
(81,714
)
 
(78,811
)
Loss before income taxes
 
(174,897
)
 
(131,167
)
Benefit for income taxes
 
65,276

 
48,744

Net loss
 
$
(109,621
)
 
$
(82,423
)
Production volumes:
 

 

Crude oil (MBbl)
 
10,698

 
13,567

Natural gas (MMcf)
 
50,542

 
44,605

Crude oil equivalents (MBoe)
 
19,121

 
21,002

Sales volumes:
 

 

Crude oil (MBbl)
 
10,724

 
13,582

Natural gas (MMcf)
 
50,542

 
44,605

Crude oil equivalents (MBoe)
 
19,148

 
21,016

Average sales prices:
 

 

Crude oil ($/Bbl)
 
$
37.66

 
$
38.95

Natural gas ($/Mcf)
 
2.02

 
2.23

Crude oil equivalents ($/Boe)
 
26.42

 
29.90

Production
The following tables reflect our production by product and region for the periods presented. 
 
 
Three months ended September 30,
 
Volume
increase (decrease)
 
Volume
percent
increase (decrease)
 
 
2016
 
2015
 
 
 
 
Volume
 
Percent
 
Volume
 
Percent
 
Crude oil (MBbl)
 
10,698

 
56
%
 
13,567

 
65
%
 
(2,869
)
 
(21
%)
Natural gas (MMcf)
 
50,542

 
44
%
 
44,605

 
35
%
 
5,937

 
13
%
Total (MBoe)
 
19,121

 
100
%
 
21,002

 
100
%
 
(1,881
)
 
(9
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Volume
increase (decrease)
 
Volume
percent
increase (decrease)
 
 
2016
 
2015
 
 
 
 
MBoe
 
Percent
 
MBoe
 
Percent
 
North Region
 
11,003

 
58
%
 
13,681

 
65
%
 
(2,678
)
 
(20
%)
South Region
 
8,118

 
42
%
 
7,321

 
35
%
 
797

 
11
%
Total
 
19,121

 
100
%
 
21,002

 
100
%
 
(1,881
)
 
(9
%)
The 21% decrease in crude oil production for the third quarter was driven by decreased production from our North region properties in North Dakota Bakken, Montana Bakken, and the Red River units due to natural declines in production coupled with a curtailment of production in the 2016 third quarter resulting from low crude oil prices. North Dakota Bakken crude oil production decreased 2,278 MBbls, or 24%, and Montana Bakken production decreased 273 MBbls, or 29%, while production in the Red River units decreased 135 MBbls, or 13%, over the prior year third quarter. Additionally, crude oil production in SCOOP decreased 454 MBbls, or 22%, resulting from a shift in our activities to liquids-rich natural gas areas of that play offering higher rates of return and opportunities to convert undeveloped acreage to acreage held by production. These decreases were partially offset by an increase of 292 MBbls in crude oil production from our STACK/Northwest Cana

21



properties due to additional wells being completed and producing as a result of a shift in our drilling and completion activities to high rate-of-return opportunities in that area.
The 13% increase in natural gas production for the third quarter was driven by increased production from our properties in the STACK, Northwest Cana and SCOOP plays due to additional wells being completed and producing subsequent to September 30, 2015. Natural gas production in STACK/Northwest Cana increased 4,350 MMcf, or 135%, and SCOOP production increased 1,802 MMcf, or 7%, over the prior year third quarter. Additionally, North Dakota Bakken natural gas production increased 248 MMcf, or 2%, due to an increase in gas capture from non-operated properties and resulting increase in volumes produced and delivered to market. These increases were partially offset by decreases in production from various areas in our North and South regions primarily due to natural declines in production.
The increase in natural gas production as a percentage of our total production from 35% in the third quarter of 2015 to 44% in the third quarter of 2016 primarily resulted from significant increases in STACK, Northwest Cana and SCOOP production over the past year due to a shift in our well completion activities away from the Bakken to higher rate-of-return areas in Oklahoma. Our properties in STACK, Northwest Cana and SCOOP typically produce a higher concentration of liquids-rich natural gas compared to oil-weighted properties in the Bakken.
Revenues
Our revenues primarily consist of sales of crude oil and natural gas and gains and losses resulting from changes in the fair value of our crude oil and natural gas derivative instruments.
Crude Oil and Natural Gas Sales. Crude oil and natural gas sales for the third quarter of 2016 were $505.9 million, a 20% decrease from sales of $628.5 million for the 2015 third quarter due to decreases in commodity prices and total sales volumes.
Our crude oil sales prices averaged $37.66 per barrel in the 2016 third quarter, a decrease of 3% compared to $38.95 for the 2015 third quarter due to lower crude oil market prices. The differential between NYMEX West Texas Intermediate ("WTI") calendar month crude oil prices and our realized crude oil prices averaged $7.27 per barrel for the 2016 third quarter compared to $7.54 for the 2015 third quarter. The improved differential was due to increased use of pipeline transportation to move our North region crude oil to market with less dependence on more costly rail transportation, along with an increased proportion of our total production coming from the South region which typically has lower transportation costs compared to the Bakken due to its relatively close proximity to regional refineries and the crude oil trading hub in Cushing, Oklahoma.
Our natural gas sales prices averaged $2.02 per Mcf for the 2016 third quarter, a 9% decrease compared to $2.23 per Mcf for the 2015 third quarter due primarily to the amendment of certain natural gas sales agreements in 2016. The amended contracts contributed to an increase in the discount between our realized natural gas sales prices and NYMEX Henry Hub calendar month natural gas prices from $0.54 per Mcf for the 2015 third quarter to $0.80 per Mcf for the 2016 third quarter. The majority of our natural gas production is sold at our lease locations to midstream purchasers with price realizations impacted by the volume and value of natural gas liquids ("NGLs") that purchasers extract from our sales stream.
For the third quarter of 2016, our crude oil sales volumes decreased 21% from the comparable 2015 period, while our natural gas sales volumes increased 13%, reflecting the shift in our well completion activities away from oil-weighted properties in the Bakken to areas in Oklahoma with higher concentrations of liquids-rich natural gas.
Derivatives. Changes in natural gas prices during the third quarter of 2016 had a favorable impact on the fair value of our natural gas derivatives, which resulted in positive revenue adjustments of $15.7 million for the period, representing $10.5 million of non-cash gains on derivatives and $5.2 million of cash gains. Our revenues may continue to be significantly impacted, either positively or negatively, by changes in the fair value of our derivative instruments as a result of volatility in natural gas prices.
Operating Costs and Expenses
Production Expenses. Production expenses decreased $17.0 million, or 20%, from $84.0 million for the third quarter of 2015 to $67.0 million for the third quarter of 2016. Production expenses on a per-Boe basis decreased to $3.50 for the 2016 third quarter compared to $4.00 for the 2015 third quarter. These decreases primarily resulted from reduced service costs being realized in response to depressed commodity prices, increased availability and use of water gathering and recycling facilities over the prior year period, and a higher portion of our production coming from wells in Oklahoma which typically have lower operating costs compared to wells in the Bakken.
Production Taxes and Other Expenses. Production taxes and other expenses decreased $13.1 million, or 27%, to $34.6 million for the third quarter of 2016 compared to $47.7 million for the third quarter of 2015 primarily due to lower crude oil and natural gas revenues resulting from decreases in commodity prices and total sales volumes over the prior year period.

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Production taxes are generally based on the wellhead values of production and vary by state. Production taxes as a percentage of crude oil and natural gas revenues were 6.8% for the third quarter of 2016 compared to 7.6% for the third quarter of 2015, the decrease of which resulted from significant growth over the past year in our STACK, Northwest Cana and SCOOP operations and resulting increase in revenues coming from Oklahoma, which has lower production tax rates compared to North Dakota. We expect our average production tax rate for the remainder of 2016 will continue to trend lower than 2015 levels as our operations in Oklahoma continue to grow in relative significance and given the passing of legislation in North Dakota in 2015 that decreased the production tax rate on crude oil revenues effective January 1, 2016.     
Exploration Expenses. Exploration expenses consist primarily of dry hole costs and exploratory geological and geophysical costs that are expensed as incurred. The following table shows the components of exploration expenses for the periods presented.
 

Three months ended September 30,
In thousands

2016

2015
Geological and geophysical costs
 
$
3,960

 
$
52

Exploratory dry hole costs
 
27

 
180

Exploration expenses
 
$
3,987

 
$
232

The increase in geological and geophysical expenses in the 2016 third quarter was due to changes in the timing and amount of costs incurred by the Company and billed to joint interest owners between periods.
Depreciation, Depletion, Amortization and Accretion (“DD&A”). Total DD&A decreased $34.1 million, or 8%, to $414.7 million for the third quarter of 2016 compared to $448.8 million for the third quarter of 2015 primarily due to a 9% decrease in total sales volumes. The following table shows the components of our DD&A on a unit of sales basis for the periods presented. 
 

Three months ended September 30,
$/Boe

2016
 
2015
Crude oil and natural gas
 
$
21.20

 
$
20.98

Other equipment
 
0.38

 
0.32

Asset retirement obligation accretion
 
0.08

 
0.06

Depreciation, depletion, amortization and accretion
 
$
21.66

 
$
21.36

Estimated proved reserves are a key component in our computation of DD&A expense. If commodity prices decline, downward revisions of proved reserves may occur in the future, which may be significant and would result in an increase in our DD&A rate. We are unable to predict the timing and amount of future reserve revisions or the impact such revisions may have on our future DD&A rate.
Property Impairments. Total property impairments decreased $39.0 million, or 40%, to $57.7 million for the 2016 third quarter compared to $96.7 million for the 2015 third quarter primarily due to a decrease in proved property impairments. Proved property impairments totaled $2.9 million for the 2016 third quarter compared to $36.3 million for the third quarter of 2015. This decrease resulted from differences in the timing and severity of commodity price declines and resulting impact on fair value assessments and impairments between periods. As a result of the impairments and DD&A recognized to date, our proved properties are carried at values that, when compared to estimated future net cash flows, required minimal impairment for the 2016 third quarter.
Estimated reserves are a key component in assessing proved properties for impairment. If commodity prices decline, downward revisions of reserves may be significant in the future and could result in additional impairments of proved properties. We are unable to predict the timing and amount of future reserve revisions or the impact such revisions may have on future impairments, if any.    
Impairments of non-producing properties decreased $5.6 million, or 9%, to $54.8 million for the 2016 third quarter compared to $60.4 million for the 2015 third quarter. The decrease was due to a lower balance of unamortized leasehold costs in the current year due in part to reduced land capital expenditures along with changes in the timing and magnitude of amortization of undeveloped leasehold costs between periods resulting from changes in the Company's estimates of undeveloped properties not expected to be developed before lease expiration.
General and Administrative ("G&A") Expenses. Total G&A expenses decreased $9.4 million, or 17%, to $44.4 million for the third quarter of 2016 from $53.8 million for third quarter of 2015. Total G&A expenses include non-cash charges for equity compensation of $13.2 million and $12.9 million for the third quarters of 2016 and 2015, respectively. G&A expenses

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other than equity compensation included in the total G&A expense figure above totaled $31.2 million for the 2016 third quarter, a decrease of $9.7 million, or 24%, compared to the 2015 third quarter primarily due to a reduction in employee related costs and other efforts to reduce spending in response to depressed commodity prices.
The following table shows the components of G&A expenses on a unit of sales basis for the periods presented. 
 

Three months ended September 30,
$/Boe

2016
 
2015
General and administrative expenses
 
$
1.63

 
$
1.95

Non-cash equity compensation
 
0.69

 
0.61

Total general and administrative expenses
 
$
2.32

 
$
2.56

Interest Expense. Interest expense increased $2.7 million, or 3%, to $82.1 million for the third quarter of 2016 compared to $79.4 million for the third quarter of 2015 due to higher borrowing costs incurred on our credit facility and three-year term loan resulting from downgrades of our credit rating in February 2016. Our weighted average outstanding long-term debt balance for the 2016 third quarter was approximately $7.1 billion with a weighted average interest rate of 4.4%, consistent with the 2015 third quarter. The 2016 third quarter includes approximately $11 million of interest expense associated with our 2020 Notes and 2021 Notes that will be redeemed on November 10, 2016.
Income Taxes. We recorded an income tax benefit for the third quarter of 2016 of $65.3 million compared to a benefit of $48.7 million for the third quarter of 2015, resulting in effective tax rates of approximately 37% for both periods after taking into account permanent taxable differences and valuation allowances. For the third quarters of 2016 and 2015, we provided for income taxes at a combined federal and state tax rate of 38% of pre-tax losses generated by our operations in the United States and 25% of pre-tax losses generated by our operations in Canada. Our consolidated effective tax rates for the third quarter periods were reduced as a result of valuation allowances totaling $0.7 million for the 2016 third quarter and $0.9 million for the 2015 third quarter being recognized against deferred tax assets arising from operating loss carryforwards generated by our Canadian subsidiary for which we do not believe we will realize a benefit.


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Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015
Results of Operations
The following table presents selected financial and operating information for the periods presented.
 
 
Nine months ended September 30,
In thousands, except sales price data
 
2016
 
2015
Crude oil and natural gas sales
 
$
1,435,194

 
$
2,001,151

Gain (loss) on crude oil and natural gas derivatives, net
 
(24,477
)
 
74,545

Crude oil and natural gas service operations
 
19,867

 
28,991

Total revenues
 
1,430,584

 
2,104,687

Operating costs and expenses (1)
 
(1,873,415
)
 
(2,185,872
)
Other expenses, net
 
(243,771
)
 
(231,430
)
Loss before income taxes
 
(686,602
)
 
(312,615
)
Benefit for income taxes
 
259,254

 
98,623

Net loss
 
$
(427,348
)
 
$
(213,992
)
Production volumes:
 
 
 
 
Crude oil (MBbl)
 
36,133

 
40,124

Natural gas (MMcf)
 
143,697

 
120,647

Crude oil equivalents (MBoe)
 
60,083

 
60,232

Sales volumes: