SEC Company Response from WHITING PETROLEUM CORP (CIK 0001255474) — Dec 10, 2021
WHITING PETROLEUM CORP (CIK 0001255474)
Date: Dec. 10, 2021 · CIK: 0001255474 · Accession: 0001255474-21-000042
AI Filing Summary & Sentiment
File numbers found in text: 001-31899
Referenced dates: October 20, 2021, October 7, 2021
Letter
VIA EDGAR Division of Corporation Finance Office of Energy & Transportation Form 10-K for the Fiscal Year Ended December 31, 2020 Filed February 25, 2021 File No. 001-31899
Dear Mr. Arakawa:
On November 22, 2021, Whiting Petroleum Corporation (the “Company,” “we,” “us” or “our”) and you and additional representatives of the Division of Corporation Finance had a telephonic conversation to discuss the Company’s response to a letter from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) dated October 7, 2021 based on a review of the filing referenced above. During the telephonic conversation, the Staff requested a supplemental letter with additional information regarding our response to Comment 2 (included in a letter to the SEC dated October 20, 2021). As requested, our response in that letter included an illustration of the disclosure revisions resulting from the inclusion of abandonment costs within our disclosure of the standardized measure of discounted future net cash flows (the “Standardized Measure”) in accordance with FASB ASC 932. In that response, we indicated that we would include the revised disclosure for all future filings.
During the call on November 22, 2021, the Staff requested that the Company provide an explanation as to what type of accounting change the inclusion of abandonment costs within the Standardized Measure represents and further information on how the Company plans to execute this change in its SEC filings. Additionally, the Staff requested that the Company provide a materiality analysis of the proposed changes and that the Company further elaborate on the evaluation of the Company’s internal controls over financial reporting (“ICFR”) as well as its disclosure controls and procedures (“DCP”) and the assessments under those frameworks made at the time of disclosure. Finally, the Staff requested discussion of how analysts and investors utilize the Standardized Measure disclosures. Below are the Company’s detailed responses to those requests, as well as our proposed revised disclosure that we plan to present in our 2021 Form 10-K.
Accounting Change Required and Plan to Execute the Change
We believe that the change to include abandonment costs in our Standardized Measure disclosure represents a correction of an error. For the reasons articulated below, we have concluded that the omission of abandonment costs to our previously disclosed Standardized Measure is not material. We will correct this error in our 2021 Form 10-K and will revise the 2020 and 2019 disclosures. Because the corrections are not material, we will not amend any previous filings in accordance with the guidance prescribed in Staff Accounting Bulletin Topic 1N: Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements.
Mr. Craig Arakawa
U.S. Securities and Exchange Commission
December 10, 2021
Page 2
Materiality Considerations
To assess the materiality of the errors, we considered the criteria formulated under Staff Accounting Bulletin Topic 1M: Materiality (“Topic 1M”). Per Topic 1M, a matter is material if there is “substantial likelihood that a reasonable person would consider it important” or the “judgment of a reasonable person relying on the report would have been changed or influenced by the inclusion or correction of the item.” Although Topic 1M acknowledges that numerical thresholds may provide a basis for preliminary assessments of materiality, the bulletin emphasizes that materiality should also be assessed based on the facts in the context of the “surrounding circumstances” or the “total mix” of information. Accordingly, we have considered both quantitative and qualitative factors in assessing materiality.
Quantitatively, we considered the impact of including abandonment costs on the total Standardized Measure as well as the individual line items impacted for each period presented, as shown in the table below (dollars in thousands).
As Previously Reported
As Revised
Change
% Change
As of December 31, 2020
Future development costs
$
(508,969)
$
(812,354)
$
(303,385)
59.6%
Future income tax expense
(13,879)
-
13,879
(100.0)%
Future net cash flows
2,031,634
1,742,128
(289,506)
(14.2)%
10% annual discount for estimated timing of cash flows
(840,855)
(670,151)
170,704
(20.3)%
Standardized measure of discounted future net cash flows
1,190,779
1,071,977
(118,802)
(10.0)%
As of December 31, 2019
Future development costs
$
(1,451,487)
$
(1,769,137)
$
(317,650)
21.9%
Future income tax expense
(88,960)
(78,280)
10,680
(12.0)%
Future net cash flows
6,176,649
5,869,679
(306,970)
(5.0)%
10% annual discount for estimated timing of cash flows
(2,474,320)
(2,220,945)
253,375
(10.2)%
Standardized measure of discounted future net cash flows
3,702,329
3,648,734
(53,595)
(1.4)%
As of December 31, 2018
Future development costs
$
(1,853,805)
$
(2,168,770)
$
(314,965)
17.0%
Future income tax expense
(1,065,686)
(990,221)
75,465
(7.1)%
Future net cash flows
9,867,776
9,628,276
(239,500)
(2.4)%
10% annual discount for estimated timing of cash flows
(4,661,666)
(4,475,527)
186,139
(4.0)%
Standardized measure of discounted future net cash flows
5,206,110
5,152,749
(53,361)
(1.0)%
Individual Line Item Analysis
When evaluating the impact of the error to the individual line items of the Standardized Measure calculation, there are quantitatively significant changes to some of these line items. However, we do not believe that these individual line items are material to the total mix of information included in the financial statements taken as a whole. To the extent that an investor is going to utilize this information, we believe they will evaluate the net discounted cash flow amount and not the individual components that are used to calculate that amount for the reasons articulated below.
Mr. Craig Arakawa
U.S. Securities and Exchange Commission
December 10, 2021
Page 3
The individual line items in the Standardized Measure are not comparable with the discounted net cash flow amount (i.e., there is not a linear relationship) due to the application of discounting. The undiscounted cash flows will be spent or received over a 50-year time horizon. As presented in the undiscounted numbers of the Standardized Measure disclosures, cash received or paid in one year has the same value as cash received or paid in 50 years. However, these same cash flows have significantly different values when presented on a discounted basis. Thus, without the appropriate discounting, certain cash flows can appear overweighted or underweighted in a particular line item depending on the timing of those cash flows in relation to others. For example, the vast majority of the future development costs in the Standardized Measure relate to the drilling and completion of proved undeveloped reserves existing as of each measurement date, and the Company must have plans to develop those proved undeveloped reserves within 5 years of their initial recognition. Accordingly, the costs associated with developing these reserves will all be incurred within the 5 years following each measurement date. In addition, these costs may vary significantly from measurement date to measurement date based on the actual timing of the development of our reserves and changes to future development plans. The Company’s abandonment costs, on the other hand, include costs related to all of the Company’s proved reserves and will be incurred over the next 50 years and are relatively stable from period to period as the majority of our proved reserves are already developed. When such amounts are collapsed into a single undiscounted number, as presented in the standardized measure disclosure, it skews the significance of abandonment costs to this line item. We believe a reasonable investor would not view undiscounted cash flows the same way they view discounted cash flows, and that a reasonable investor would consider the timing of when cash is received or paid in utilizing the information included in the individual line items of the Standardized Measure calculation.
Additionally, the future income taxes line item as of December 31, 2020 changes 100% as a result of the corrections to the Standardized Measure. However, this percentage change is misleading, as the total change in income taxes represents less than 2% of the total revised Standardized Measure. Because of net operating loss carryforwards, the Company was estimated to pay an insignificant amount of future income taxes in the original 2020 Standardized Measure calculation. The change in development costs as a result of including abandonment costs brings that expectation to zero, but it does not result in a material change in the Company’s overall estimated future income tax expense.
Standardized Measure Analysis
The changes in the overall Standardized Measure as of December 31, 2019 and 2018 as a result of the error correction are quantitatively immaterial and there are no qualitative factors that would indicate that these errors are material. Including abandonment costs in the Standardized Measure as of December 31, 2020, however, changes the net discounted cash flows by 10%. Although quantitatively more significant as of December 31, 2020, after further analysis the Company has determined that the change in the overall Standardized Measure is also immaterial for the reasons articulated below.
We understand that the Staff has made public comments indicating that one situation in which a quantitatively significant error can be immaterial is when a company has breakeven results. This can occur when events or transactions reduce the denominator used to calculate the percentage impact of an error to an unusually low amount. For example, assume a company historically has reported net income of $1 million but in the current year reports net income of $100 thousand. If there is an error of $10 thousand in the current year it would not necessarily be a material error even though it is 10% of pretax income in the current year. In this situation, it is necessary to evaluate the total mix of information and what a reasonable investor would consider to be material.
The Company believes the impact of its error within the Standardized Measure as of December 31, 2020 is analogous to the break-even results example above. As a result of the abnormally low oil price used to calculate the Standardized Measure as of December 31, 2020, discussed below, the net discounted cash flow amount is 21% and
Mr. Craig Arakawa
U.S. Securities and Exchange Commission
December 10, 2021
Page 4
29% of the same amount in 2018 and 2019, respectively. The undiscounted amount of the Company’s abandonment costs, however, is relatively consistent between all three years. As a result, the numerator in the calculation of the error impact remains consistent across all periods, but it is the dramatic change in the denominator that causes the error to be quantitively more significant as of December 31, 2020. For the year ended December 31, 2021, the 12-month average first-of-the-month prices (prior to any adjustments for location or quality differentials) for oil and natural gas to be used in the Standardized Measure are $66.56 per barrel and $3.60 per MMBtu, respectively, representing a significant increase over the December 31, 2020 prices of $39.57 per barrel of oil and $1.99 per MMBtu of gas. As a result of this improvement in these prices, we believe that if this error were compared to the Standardized Measure as of December 31, 2021 it would also be quantitatively immaterial as the impact would be more comparable to that of our 2018 and 2019 Standardized Measures.
Other Factors
● Impact to the financial statements and footnotes. The Standardized Measure is presented in the “Supplemental Disclosures about Oil and Gas Producing Activities” section of our Form 10-K, which follows the notes to the financial statements and is unaudited. It does not impact any amounts recorded in the Company’s primary financial statements, disclosed in the accompanying footnotes or any of the other items disclosed in the supplemental disclosures. Therefore, the corrections to our Standardized Measure to include abandonment costs cannot and will not have any impact to the rest of the financial statements or to metrics important to users of our financial statements, including the amounts recorded in our consolidated balance sheets for oil and gas properties and asset retirement obligations (“ARO”) or the amounts recorded in our consolidated statements of operations and cash flows for depletion, depreciation and amortization and impairment of our oil and gas properties.
● Impact to key performance metrics and loan covenants. The omission of abandonment costs from the Standardized Measure does not impact the Company’s earnings or any key performance metrics we believe are utilized by our investors. These key performance metrics include both GAAP measures and non-GAAP measures including production, revenue, net income, earnings per share, adjusted net income, EBITDA, adjusted EBITDAX, cash flow from operating activities and adjusted free cash flow. Additionally, the Company’s ARO liability is appropriately reflected in its balance sheet and complies with generally accepted accounting principles. Please refer to our earnings releases for the respective periods as reported on Form 8-K for definitions of the non-GAAP measures listed above. Additionally, the Company’s management is not compensated directly or indirectly based on the Standardized Measure calculation, and inclusion of abandonment costs in the Standardized Measure, or any of the respective line items in such disclosure, would not have increased or decreased management’s compensation. Management compensation, including base pay, short-term incentives and long-term incentives are based on actual results during each performance period relative to pre-established goals. Items that are forward-looking, such as the Standardized Measure and PV-10 of our reserves, have not been used in any compensation metrics. Finally, our ability to meet loan covenants and other contractual obligations is not contingent on the calculation of the Standardized Measure.
● Investors’ and analysts’ knowledge of and use of the disclosure. It is disclosed within our filing and understood by our investors that abandonment costs have historically been excluded from our Standardized Measure calculation, and similar to our internal practice, such users look to the ARO recorded in the Company’s balance sheets and further described in the footnotes to estim
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CORRESP 1 filename1.htm 390.4293 1700 Lincoln, Suite 4700, Denver, CO 80203 Phone: 303.837.1661 | FAX: 303.390.4293 December 10, 2021 VIA EDGAR Craig Arakawa, Branch Chief U.S. Securities and Exchange Commission Division of Corporation Finance Office of Energy & Transportation 100 F Street, N.E. Washington, D.C. 20549-3561 Re: Whiting Petroleum Corporation Form 10-K for the Fiscal Year Ended December 31, 2020 Filed February 25, 2021 File No. 001-31899 Dear Mr. Arakawa: On November 22, 2021, Whiting Petroleum Corporation (the “Company,” “we,” “us” or “our”) and you and additional representatives of the Division of Corporation Finance had a telephonic conversation to discuss the Company’s response to a letter from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) dated October 7, 2021 based on a review of the filing referenced above. During the telephonic conversation, the Staff requested a supplemental letter with additional information regarding our response to Comment 2 (included in a letter to the SEC dated October 20, 2021). As requested, our response in that letter included an illustration of the disclosure revisions resulting from the inclusion of abandonment costs within our disclosure of the standardized measure of discounted future net cash flows (the “Standardized Measure”) in accordance with FASB ASC 932. In that response, we indicated that we would include the revised disclosure for all future filings. During the call on November 22, 2021, the Staff requested that the Company provide an explanation as to what type of accounting change the inclusion of abandonment costs within the Standardized Measure represents and further information on how the Company plans to execute this change in its SEC filings. Additionally, the Staff requested that the Company provide a materiality analysis of the proposed changes and that the Company further elaborate on the evaluation of the Company’s internal controls over financial reporting (“ICFR”) as well as its disclosure controls and procedures (“DCP”) and the assessments under those frameworks made at the time of disclosure. Finally, the Staff requested discussion of how analysts and investors utilize the Standardized Measure disclosures. Below are the Company’s detailed responses to those requests, as well as our proposed revised disclosure that we plan to present in our 2021 Form 10-K. Accounting Change Required and Plan to Execute the Change We believe that the change to include abandonment costs in our Standardized Measure disclosure represents a correction of an error. For the reasons articulated below, we have concluded that the omission of abandonment costs to our previously disclosed Standardized Measure is not material. We will correct this error in our 2021 Form 10-K and will revise the 2020 and 2019 disclosures. Because the corrections are not material, we will not amend any previous filings in accordance with the guidance prescribed in Staff Accounting Bulletin Topic 1N: Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements. Mr. Craig Arakawa U.S. Securities and Exchange Commission December 10, 2021 Page 2 Materiality Considerations To assess the materiality of the errors, we considered the criteria formulated under Staff Accounting Bulletin Topic 1M: Materiality (“Topic 1M”). Per Topic 1M, a matter is material if there is “substantial likelihood that a reasonable person would consider it important” or the “judgment of a reasonable person relying on the report would have been changed or influenced by the inclusion or correction of the item.” Although Topic 1M acknowledges that numerical thresholds may provide a basis for preliminary assessments of materiality, the bulletin emphasizes that materiality should also be assessed based on the facts in the context of the “surrounding circumstances” or the “total mix” of information. Accordingly, we have considered both quantitative and qualitative factors in assessing materiality. Quantitatively, we considered the impact of including abandonment costs on the total Standardized Measure as well as the individual line items impacted for each period presented, as shown in the table below (dollars in thousands). As Previously Reported As Revised Change % Change As of December 31, 2020 Future development costs $ (508,969) $ (812,354) $ (303,385) 59.6% Future income tax expense (13,879) - 13,879 (100.0)% Future net cash flows 2,031,634 1,742,128 (289,506) (14.2)% 10% annual discount for estimated timing of cash flows (840,855) (670,151) 170,704 (20.3)% Standardized measure of discounted future net cash flows 1,190,779 1,071,977 (118,802) (10.0)% As of December 31, 2019 Future development costs $ (1,451,487) $ (1,769,137) $ (317,650) 21.9% Future income tax expense (88,960) (78,280) 10,680 (12.0)% Future net cash flows 6,176,649 5,869,679 (306,970) (5.0)% 10% annual discount for estimated timing of cash flows (2,474,320) (2,220,945) 253,375 (10.2)% Standardized measure of discounted future net cash flows 3,702,329 3,648,734 (53,595) (1.4)% As of December 31, 2018 Future development costs $ (1,853,805) $ (2,168,770) $ (314,965) 17.0% Future income tax expense (1,065,686) (990,221) 75,465 (7.1)% Future net cash flows 9,867,776 9,628,276 (239,500) (2.4)% 10% annual discount for estimated timing of cash flows (4,661,666) (4,475,527) 186,139 (4.0)% Standardized measure of discounted future net cash flows 5,206,110 5,152,749 (53,361) (1.0)% Individual Line Item Analysis When evaluating the impact of the error to the individual line items of the Standardized Measure calculation, there are quantitatively significant changes to some of these line items. However, we do not believe that these individual line items are material to the total mix of information included in the financial statements taken as a whole. To the extent that an investor is going to utilize this information, we believe they will evaluate the net discounted cash flow amount and not the individual components that are used to calculate that amount for the reasons articulated below. Mr. Craig Arakawa U.S. Securities and Exchange Commission December 10, 2021 Page 3 The individual line items in the Standardized Measure are not comparable with the discounted net cash flow amount (i.e., there is not a linear relationship) due to the application of discounting. The undiscounted cash flows will be spent or received over a 50-year time horizon. As presented in the undiscounted numbers of the Standardized Measure disclosures, cash received or paid in one year has the same value as cash received or paid in 50 years. However, these same cash flows have significantly different values when presented on a discounted basis. Thus, without the appropriate discounting, certain cash flows can appear overweighted or underweighted in a particular line item depending on the timing of those cash flows in relation to others. For example, the vast majority of the future development costs in the Standardized Measure relate to the drilling and completion of proved undeveloped reserves existing as of each measurement date, and the Company must have plans to develop those proved undeveloped reserves within 5 years of their initial recognition. Accordingly, the costs associated with developing these reserves will all be incurred within the 5 years following each measurement date. In addition, these costs may vary significantly from measurement date to measurement date based on the actual timing of the development of our reserves and changes to future development plans. The Company’s abandonment costs, on the other hand, include costs related to all of the Company’s proved reserves and will be incurred over the next 50 years and are relatively stable from period to period as the majority of our proved reserves are already developed. When such amounts are collapsed into a single undiscounted number, as presented in the standardized measure disclosure, it skews the significance of abandonment costs to this line item. We believe a reasonable investor would not view undiscounted cash flows the same way they view discounted cash flows, and that a reasonable investor would consider the timing of when cash is received or paid in utilizing the information included in the individual line items of the Standardized Measure calculation. Additionally, the future income taxes line item as of December 31, 2020 changes 100% as a result of the corrections to the Standardized Measure. However, this percentage change is misleading, as the total change in income taxes represents less than 2% of the total revised Standardized Measure. Because of net operating loss carryforwards, the Company was estimated to pay an insignificant amount of future income taxes in the original 2020 Standardized Measure calculation. The change in development costs as a result of including abandonment costs brings that expectation to zero, but it does not result in a material change in the Company’s overall estimated future income tax expense. Standardized Measure Analysis The changes in the overall Standardized Measure as of December 31, 2019 and 2018 as a result of the error correction are quantitatively immaterial and there are no qualitative factors that would indicate that these errors are material. Including abandonment costs in the Standardized Measure as of December 31, 2020, however, changes the net discounted cash flows by 10%. Although quantitatively more significant as of December 31, 2020, after further analysis the Company has determined that the change in the overall Standardized Measure is also immaterial for the reasons articulated below. We understand that the Staff has made public comments indicating that one situation in which a quantitatively significant error can be immaterial is when a company has breakeven results. This can occur when events or transactions reduce the denominator used to calculate the percentage impact of an error to an unusually low amount. For example, assume a company historically has reported net income of $1 million but in the current year reports net income of $100 thousand. If there is an error of $10 thousand in the current year it would not necessarily be a material error even though it is 10% of pretax income in the current year. In this situation, it is necessary to evaluate the total mix of information and what a reasonable investor would consider to be material. The Company believes the impact of its error within the Standardized Measure as of December 31, 2020 is analogous to the break-even results example above. As a result of the abnormally low oil price used to calculate the Standardized Measure as of December 31, 2020, discussed below, the net discounted cash flow amount is 21% and Mr. Craig Arakawa U.S. Securities and Exchange Commission December 10, 2021 Page 4 29% of the same amount in 2018 and 2019, respectively. The undiscounted amount of the Company’s abandonment costs, however, is relatively consistent between all three years. As a result, the numerator in the calculation of the error impact remains consistent across all periods, but it is the dramatic change in the denominator that causes the error to be quantitively more significant as of December 31, 2020. For the year ended December 31, 2021, the 12-month average first-of-the-month prices (prior to any adjustments for location or quality differentials) for oil and natural gas to be used in the Standardized Measure are $66.56 per barrel and $3.60 per MMBtu, respectively, representing a significant increase over the December 31, 2020 prices of $39.57 per barrel of oil and $1.99 per MMBtu of gas. As a result of this improvement in these prices, we believe that if this error were compared to the Standardized Measure as of December 31, 2021 it would also be quantitatively immaterial as the impact would be more comparable to that of our 2018 and 2019 Standardized Measures. Other Factors ● Impact to the financial statements and footnotes. The Standardized Measure is presented in the “Supplemental Disclosures about Oil and Gas Producing Activities” section of our Form 10-K, which follows the notes to the financial statements and is unaudited. It does not impact any amounts recorded in the Company’s primary financial statements, disclosed in the accompanying footnotes or any of the other items disclosed in the supplemental disclosures. Therefore, the corrections to our Standardized Measure to include abandonment costs cannot and will not have any impact to the rest of the financial statements or to metrics important to users of our financial statements, including the amounts recorded in our consolidated balance sheets for oil and gas properties and asset retirement obligations (“ARO”) or the amounts recorded in our consolidated statements of operations and cash flows for depletion, depreciation and amortization and impairment of our oil and gas properties. ● Impact to key performance metrics and loan covenants. The omission of abandonment costs from the Standardized Measure does not impact the Company’s earnings or any key performance metrics we believe are utilized by our investors. These key performance metrics include both GAAP measures and non-GAAP measures including production, revenue, net income, earnings per share, adjusted net income, EBITDA, adjusted EBITDAX, cash flow from operating activities and adjusted free cash flow. Additionally, the Company’s ARO liability is appropriately reflected in its balance sheet and complies with generally accepted accounting principles. Please refer to our earnings releases for the respective periods as reported on Form 8-K for definitions of the non-GAAP measures listed above. Additionally, the Company’s management is not compensated directly or indirectly based on the Standardized Measure calculation, and inclusion of abandonment costs in the Standardized Measure, or any of the respective line items in such disclosure, would not have increased or decreased management’s compensation. Management compensation, including base pay, short-term incentives and long-term incentives are based on actual results during each performance period relative to pre-established goals. Items that are forward-looking, such as the Standardized Measure and PV-10 of our reserves, have not been used in any compensation metrics. Finally, our ability to meet loan covenants and other contractual obligations is not contingent on the calculation of the Standardized Measure. ● Investors’ and analysts’ knowledge of and use of the disclosure. It is disclosed within our filing and understood by our investors that abandonment costs have historically been excluded from our Standardized Measure calculation, and similar to our internal practice, such users look to the ARO recorded in the Company’s balance sheets and further described in the footnotes to estim