Edgar Filing: SM Energy Co

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

Commission File Number 001-31539

SM ENERGY COMPANY

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction

of incorporation or organization)

41-0518430

(I.R.S. Employer

Identification No.)

1775 Sherman Street, Suite 1200, Denver, Colorado

(Address of principal executive offices)

80203

(Zip Code)

(303) 861-8140

(Registrant’s telephone number, including area code)

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

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 o

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 o

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 27, 2010 the registrant had 63,055,280 shares of common stock, $0.01 par value, outstanding.

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SM ENERGY COMPANY

INDEX

			PAGE

Part I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited)

		Condensed Consolidated Balance Sheets September 30, 2010, and December 31, 2009	3

		Condensed Consolidated Statements of Operations Three and Nine Months Ended September 30, 2010, and 2009	4

		Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) September 30, 2010, and 2009	5

		Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2010, and 2009	6

		Notes to Condensed Consolidated Financial Statements September 30, 2010	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk (included within the content of Item 2)	58

	Item 4.	Controls and Procedures	58

Part II.	OTHER INFORMATION

	Item 1A.	Risk Factors	58

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

	Item 6.	Exhibits	60

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share amounts)

	September 30,				December 31,
	2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	7,089			$	10,649
Accounts receivable		121,010				116,136
Refundable income taxes		1,371				32,773
Prepaid expenses and other		12,847				14,259
Derivative asset		56,199				30,295
Deferred income taxes		—				4,934
Total current assets		198,516				209,046

Property and equipment (successful efforts method), at cost:
Land		1,483				1,371
Proved oil and gas properties		3,137,262				2,797,341
Less - accumulated depletion, depreciation, and amortization		(1,234,802		)		(1,053,518		)
Unproved oil and gas properties, net of impairment allowance of $62,395 in 2010 and $66,570 in 2009		79,466				132,370
Wells in progress		129,102				65,771
Materials inventory, at lower of cost or market		27,810				24,467
Oil and gas properties held for sale less accumulated depletion, depreciation, and amortization		114,863				145,392
Other property and equipment, net of accumulated depreciation of $17,301 in 2010 and $14,550 in 2009		19,048				14,404
		2,274,232				2,127,598

Other noncurrent assets:
Derivative asset		29,444				8,251
Other noncurrent assets		16,805				16,041
Total other noncurrent assets		46,249				24,292

Total Assets		$	2,518,997			$	2,360,936

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	316,179			$	236,242
Derivative liability		53,732				53,929
Deposit associated with oil and gas properties held for sale		—				6,500
Deferred income taxes		1,143				—
Total current liabilities		371,054				296,671

Noncurrent liabilities:
Long-term credit facility		2,000				188,000
Senior convertible notes, net of unamortized discount of $14,096 in 2010, and $20,598 in 2009		273,404				266,902
Asset retirement obligation		64,286				60,289
Asset retirement obligation associated with oil and gas properties held for sale		3,076				18,126
Net Profits Plan liability		140,506				170,291
Deferred income taxes		422,021				308,189
Derivative liability		25,450				65,499
Other noncurrent liabilities		14,749				13,399
Total noncurrent liabilities		945,492				1,090,695

Commitments and contingencies (note 6)

Stockholders’ equity:
Common stock, $0.01 par value - authorized: 200,000,000 shares; issued: 63,147,613 shares in 2010 and 62,899,122 shares in 2009; outstanding, net of treasury shares: 63,044,978 shares in 2010 and 62,772,229 shares in 2009		631				629
Additional paid-in capital		183,203				160,516
Treasury stock, at cost: 102,635 shares in 2010 and 126,893 shares in 2009		(456		)		(1,204		)
Retained earnings		1,004,984				851,583
Accumulated other comprehensive income (loss)		14,089				(37,954		)
Total stockholders’ equity		1,202,451				973,570

Total Liabilities and Stockholders’ Equity		$	2,518,997			$	2,360,936

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

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SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share amounts)

	For the Three Months								For the Nine Months
	Ended September 30,								Ended September 30,
	2010				2009				2010				2009

Operating revenues and other income:
Oil and gas production revenue		$	197,354			$	152,651			$	586,128			$	428,347
Realized oil and gas hedge gain		8,847				28,331				20,771				127,230
Gain (loss) on divestiture activity		4,184				(11,277		)		132,183				(10,632		)
Marketed gas system and other operating revenue		16,499				16,082				59,634				45,260
Total operating revenues and other income		226,884				185,787				798,716				590,205

Operating expenses:
Oil and gas production expense		44,606				48,634				138,114				153,928
Depletion, depreciation, amortization, and asset retirement obligation liability accretion		83,800				66,958				241,335				229,061
Exploration		14,437				15,733				42,833				48,821
Impairment of proved properties		—				91				—				153,183
Abandonment and impairment of unproved properties		1,719				4,761				4,998				20,294
Impairment of materials inventory		—				2,114				—				13,449
General and administrative		26,219				20,790				75,103				55,349
Change in Net Profits Plan liability		4,086				6,804				(29,785		)		(14,038		)
Marketed gas system expense		14,697				14,360				52,550				41,352
Unrealized derivative (gain) loss		5,727				4,117				(4,095		)		17,251
Other expense		541				968				2,071				12,424
Total operating expenses		195,832				185,330				523,124				731,074

Income (loss) from operations		31,052				457				275,592				(140,869		)

Nonoperating income (expense):
Interest income		85				90				268				217
Interest expense		(6,339		)		(7,565		)		(19,469		)		(21,324		)

Income (loss) before income taxes		24,798				(7,018		)		256,391				(161,976		)
Income tax benefit (expense)		(9,346		)		2,603				(96,693		)		61,616

Net income (loss)		$	15,452			$	(4,415	)		$	159,698			$	(100,360	)

Basic weighted-average common shares outstanding		63,031				62,505				62,914				62,420

Diluted weighted-average common shares outstanding		64,794				62,505				64,599				62,420

Basic net income (loss) per common share		$	0.25			$	(0.07	)		$	2.54			$	(1.61	)

Diluted net income (loss) per common share		$	0.24			$	(0.07	)		$	2.47			$	(1.61	)

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

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SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In thousands, except share amounts)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Treasury Stock

Retained

Comprehensive

Stockholders’

Shares

Amount

Capital

Shares

Amount

Earnings

Income (Loss)

Equity

Balances, December 31, 2009	62,899,122	$	629	$	160,516		(126,893	)	$	(1,204	)	$	851,583		$	(37,954	)	$	973,570

Comprehensive income, net of tax:
Net income	—	—		—			—		—			159,698			—			159,698
Change in derivative instrument fair value	—	—		—			—		—			—			50,136			50,136
Reclassification to earnings	—	—		—			—		—			—			1,903			1,903
Minimum pension liability adjustment	—	—		—			—		—			—			4			4
Total comprehensive income																		211,741
Cash dividends, $ 0.10 per share	—	—		—			—		—			(6,297		)	—			(6,297		)
Issuance of common stock under Employee Stock Purchase Plan	27,456	—		799			—		—			—			—			799
Issuance of common stock upon settlement of RSUs following expiration of restriction period, net of shares used for tax withholdings, including income tax cost of RSUs	57,687	1		(909		)	—		—			—			—			(908		)
Sale of common stock, including income tax benefit of stock option exercises	163,348	1		3,692			—		—			—			—			3,693
Stock-based compensation expense	—	—		19,105			24,258		748			—			—			19,853

Balances, September 30, 2010	63,147,613	$	631	$	183,203		(102,635	)	$	(456	)	$	1,004,984		$	14,089		$	1,202,451

Balances, December 31, 2008	62,465,572	$	625	$	141,283		(176,987	)	$	(1,892	)	$	957,200		$	65,293		$	1,162,509

Comprehensive loss, net of tax:
Net loss	—	—		—			—		—			(100,360		)	—			(100,360		)
Change in derivative instrument fair value	—	—		—			—		—			—			(12,810		)	(12,810		)
Reclassification to earnings	—	—		—			—		—			—			(57,979		)	(57,979		)
Minimum pension liability adjustment	—	—		—			—		—			—			4			4
Total comprehensive loss																		(171,145		)
Cash dividends, $ 0.10 per share	—	—		—			—		—			(6,247		)	—			(6,247		)
Issuance of common stock under Employee Stock Purchase Plan	49,767	—		858			—		—			—			—			858
Issuance of common stock upon settlement of RSUs following expiration of restriction period, net of shares used for tax withholdings, including income tax cost of RSUs	89,236	1		(3,157		)	—		—			—			—			(3,156		)
Sale of common stock, including income tax benefit of stock option exercises	33,014	—		320			—		—			—			—			320
Stock-based compensation expense	1,250	—		12,316			50,094		662			—			—			12,978

Balances, September 30, 2009	62,638,839	$	626	$	151,620		(126,893	)	$	(1,230	)	$	850,593		$	(5,492	)	$	996,117

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

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SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

	For the Nine Months
	Ended September 30,
	2010				2009

Cash flows from operating activities:
Net income (loss)		$	159,698			$	(100,360	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
(Gain) loss on divestiture activity		(132,183		)		10,632
Depletion, depreciation, amortization, and asset retirement obligation liability accretion		241,335				229,061
Exploratory dry hole expense		289				4,849
Impairment of proved properties		—				153,183
Abandonment and impairment of unproved properties		4,998				20,294
Impairment of materials inventory		—				13,449
Stock-based compensation expense		19,853				12,978
Change in Net Profits Plan liability		(29,785		)		(14,038		)
Unrealized derivative (gain) loss		(4,095		)		17,251
Loss related to hurricanes		—				8,273
Amortization of debt discount and deferred financing costs		10,022				8,922
Deferred income taxes		85,695				(69,082		)
Plugging and abandonment		(7,106		)		(12,110		)
Other		(3,085		)		1,432
Changes in current assets and liabilities:
Accounts receivable		(4,937		)		58,844
Refundable income taxes		31,402				10,340
Prepaid expenses and other		512				(8,660		)
Accounts payable and accrued expenses		47,123				7,794
Excess income tax benefit from the exercise of stock options		(1,376		)		—
Net cash provided by operating activities		418,360				353,052

Cash flows from investing activities:
Net proceeds from sale of oil and gas properties		259,501				1,137
Proceeds from insurance settlement		—				15,336
Capital expenditures		(488,684		)		(292,466		)
Acquisition of oil and gas properties		(685		)		(58		)
Receipts from restricted cash		—				14,398
Receipts from short-term investments		—				1,002
Other		(6,492		)		—
Net cash used in investing activities		(236,360		)		(260,651		)

Cash flows from financing activities:
Proceeds from credit facility		315,059				1,898,500
Repayment of credit facility		(501,059		)		(1,963,500		)
Debt issuance costs related to credit facility		—				(11,074		)
Proceeds from sale of common stock		3,116				1,179
Dividends paid		(3,144		)		(3,120		)
Excess income tax benefit from the exercise of stock options		1,376				—
Other		(908		)		—
Net cash used in financing activities		(185,560		)		(78,015		)

Net change in cash and cash equivalents		(3,560		)		14,386
Cash and cash equivalents at beginning of period		10,649				6,131
Cash and cash equivalents at end of period		$	7,089			$	20,517

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

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SM ENERGY COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)

Supplemental schedule of additional cash flow information and noncash investing and financing activities:

	For the Nine Months
	Ended September 30,
	2010				2009
	(In thousands)

Cash paid for interest		$	9,091			$	11,150

Cash refunded for income taxes		$	(24,949	)		$	(10,119	)

As of September 30, 2010, and 2009, $133.3 million, and $59.8 million, respectively, are included as additions to oil and gas properties and accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets. These oil and gas additions are reflected as cash used in investing activities in the periods that the payables are settled.

Dividends of approximately $3.2 million have been declared by the Company’s Board of Directors, but not paid, as of September 30, 2010.

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

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SM ENERGY COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

September 30, 2010

Note 1 — The Company and Business

SM Energy Company (“SM Energy” or the “Company”), formerly named St. Mary Land & Exploration Company or referred to as St. Mary, is an independent energy company engaged in the exploration, exploitation, development, acquisition, and production of natural gas, natural gas liquids (“NGLs”), and crude oil. The Company’s operations are conducted entirely in the continental United States.

Note 2 — Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of SM Energy have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Regulation S-X. They do not include all information and notes required by generally accepted accounting principles (“GAAP”) for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to consolidated financial statements included in SM Energy’s Annual Report on Form 10-K for the year ended December 31, 2009, (the “2009 Form 10-K”). In the opinion of management, all adjustments, consisting of normal recurring accruals that are considered necessary for a fair presentation of the interim financial information, have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year. In connection with the preparation of the condensed consolidated financial statements of SM Energy, the Company evaluated subsequent events after the balance sheet date of September 30, 2010, through the filing date of this report.

Other Significant Accounting Policies

The accounting policies followed by the Company are set forth in Note 1 to the Company’s consolidated financial statements in the 2009 Form 10-K, and are supplemented throughout the notes to condensed consolidated financial statements in this report. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes included in the 2009 Form 10-K.

Note 3 —Divestitures and Assets Held for Sale

Southern Rockies Divestiture

In July 2010 the Company completed the divestiture related to the non-strategic assets that were classified as held for sale at June 30, 2010. The gain on sale related to the divestiture is approximately $2.6 million. The final sale price is subject to normal post-closing adjustments and is expected to be finalized in the fourth quarter of 2010. The estimated gain on sale related to the divestiture may be impacted by the forthcoming post-closing adjustments mentioned above. The Company determined that the sale did not qualify for discontinued operations accounting under financial statement presentation authoritative guidance.

Legacy Divestiture

In February 2010 the Company completed the divestiture of certain non-strategic oil properties located in Wyoming to Legacy Reserves Operating LP, a wholly-owned subsidiary of Legacy Reserves LP

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(“Legacy”). The transaction had an effective date of November 1, 2009. Total cash received, before commission costs and Net Profits Interest Bonus Plan (“Net Profits Plan”) payments, was $125.3 million, of which $6.5 million was received as a deposit in December 2009. The final gain on sale related to the divestiture is approximately $65.0 million. The Company determined that the sale did not qualify for discontinued operations accounting under financial statement presentation authoritative guidance. A portion of the transaction was structured to qualify as a like-kind exchange under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).

Sequel Divestiture

In March 2010 the Company completed the divestiture of certain non-strategic oil properties located in North Dakota to Sequel Energy Partners, LP, Bakken Energy Partners, LLC, and Three Forks Energy Partners, LLC (collectively referred to as “Sequel”). The transaction had an effective date of November 1, 2009. Total cash received, before commission costs and Net Profits Plan payments, was $129.1 million. The final sale price is subject to normal post-closing adjustments and is expected to be finalized during the fourth quarter of 2010. The estimated gain on sale related to the divestiture is approximately $52.9 million and may be impacted by the forthcoming post-closing adjustments mentioned above. The Company determined that the sale did not qualify for discontinued operations accounting under financial statement presentation authoritative guidance. A portion of the transaction was structured to qualify as a like-kind exchange under Section 1031 of the Internal Revenue Code.

Assets Held for Sale

In accordance with property, plant, and equipment authoritative guidance, assets are classified as held for sale when the Company commits to a plan to sell the assets and there is reasonable certainty that the sale will take place within one year. Upon classification as held-for-sale, long-lived assets are no longer depreciated or depleted, and a measurement for impairment is performed to determine if there is any excess of carrying value over fair value less costs to sell. Subsequent changes to estimated fair value less the cost to sell will impact the measurement of assets held for sale if the fair value is determined to be less than the carrying value of the assets.

In August 2010 the Company engaged two outside firms to market for sale certain non-core oil and gas properties located in the Rocky Mountain, Mid-Continent, and Permian regions. The Mid-Continent properties being marketed include all of our Marcellus shale assets in North Central Pennsylvania. As of September 30, 2010, the accompanying condensed consolidated balance sheets (“accompanying balance sheets”) present $114.9 million in book value of assets held for sale, net of accumulated depletion, depreciation, and amortization. Additionally, the corresponding asset retirement obligation liability of $3.1 million is separately presented. The Company determined that these planned asset sales do not qualify for discontinued operations accounting under financial statement presentation authoritative guidance.

Note 4 — Income Taxes

Income tax (expense) benefit for the nine-month periods ended September 30, 2010, and 2009, differs from the amounts that would be provided by applying the statutory U.S. federal income tax rate to income (loss) before income taxes as a result of the estimated effect of the domestic production activities deduction, percentage depletion, the effect of state income taxes, and other permanent differences.

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The provision for income taxes consists of the following:

	For the Three Months Ended September 30,							For the Nine Months Ended September 30,
	2010			2009				2010			2009
	(In thousands)
Current portion of income tax (expense):
Federal		$	(2,194)		$	(2,881	)		$	(10,410)		$	(6,129)
State		(277)			(451		)		(588)			(1,337)
Deferred portion of income tax (expense) benefit		(6,875)			5,935				(85,695)			69,082
Total income tax (expense) benefit		$	(9,346)		$	2,603			$	(96,693)		$	61,616
Effective tax rate		37.7%			37.1%				37.7%			38.0%

A change in the Company’s effective tax rate between reported periods will generally reflect differences in its estimated highest marginal state tax rate due to changes in the composition of income between state tax jurisdictions resulting from Company activities. Non-core asset sales through September 30, 2010, and the Company’s anticipated drilling budget for the rest of 2010 applied against the Company’s cumulative temporary timing differences caused an increase in tax rate for the third quarter of 2010 when compared to the same period of 2009. The rate is also impacted period to period by estimates for the domestic production activities deduction, percentage depletion, and for potential permanent state tax items which affect the presented periods differently due to oil and gas price variability and the impact of non-core asset sales.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in various states. With few exceptions, the Company is no longer subject to U.S. federal or state income tax examinations by these tax authorities for years before 2007. During the first quarter of 2010, the Internal Revenue Service initiated an audit of SM Energy for the 2006 tax year as a result of a net operating loss carryback from the Company’s 2008 tax year. The audit was focused primarily on compensation related issues. The audit was successfully concluded in the second quarter of 2010 with no changes to Company reported amounts. As of September 30, 2010, the Company is awaiting approval from the Joint Committee on Taxation to receive a $5.5 million refund from its 2006 tax year net operating loss carryback claim, which is included in refundable income taxes on the accompanying balance sheets. On July 20, 2010, the Company received $22.9 million related to an initial claim for net operating loss carry back from its 2009 tax year to its 2005 tax year. The Company’s remaining refundable income tax balance at September 30, 2010, reflects additional net operating loss carry back from filing a revised income tax return for the 2009 tax year prior to the extended return due date. At the end of the third quarter of 2010, the Company was advised that the Internal Revenue Service will begin a full audit of the Company’s 2009 tax year in the fourth quarter of 2010.

The Company’s 2005 federal income tax audit was concluded in the first quarter of 2009 with a refund to the Company of $278,000 plus interest of $41,000. There was no change to the provision for income tax expense as a result of the 2005 examination.

Note 5 — Earnings per Share

Basic net income or loss per common share of stock is calculated by dividing net income or loss available to common stockholders by the basic weighted-average common shares outstanding for the respective period. The shares represented by vested restricted stock units (“RSUs”) are included in the calculation of the basic weighted-average common shares outstanding. The earnings per share calculations reflect the impact of any repurchases of shares of common stock made by the Company.

Diluted net income or loss per common share of stock is calculated by dividing adjusted net income or loss by the diluted weighted-average common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for this calculation consist of unvested RSUs, in-the-money outstanding options to purchase the Company’s common stock, contingent Performance Share

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Awards (“PSAs”), and shares into which the 3.50% Senior Convertible Notes due 2027 (the “3.50% Senior Convertible Notes”) are convertible.

The Company’s 3.50% Senior Convertible Notes have a net-share settlement right whereby each $1,000 principal amount of notes may be surrendered for conversion to cash in an amount equal to the principal amount and, if applicable, shares of common stock or cash or any combination of common stock and cash for the amount of conversion value in excess of the principal amount. The treasury stock method is used to measure the potentially dilutive impact of shares associated with this conversion feature. The 3.50% Senior Convertible Notes have not been dilutive for any reporting period that they have been outstanding and therefore do not impact the diluted earnings per share calculation for the three-month or nine-month periods ended September 30, 2010, and 2009.

The PSAs represent the right to receive, upon settlement of the PSAs after the completion of the three-year performance period, a number of shares of the Company’s common stock that may be from zero to two times the number of PSAs granted on the award date. The number of potentially dilutive shares related to PSAs is based on the number of shares, if any, which would be issuable at the end of the respective reporting period, assuming that date was the end of the contingency period. For additional discussion on PSAs, please refer to Note 7 — Compensation Plans under the heading Performance Share Awards Under the Equity Incentive Compensation Plan.

The treasury stock method is used to measure the dilutive impact of stock options, RSUs, 3.50% Senior Convertible Notes, and PSAs. When there is a loss from continuing operations, all potentially dilutive shares will be anti-dilutive. There were no dilutive shares for the three-month or nine-month periods ended September 30, 2009, because the Company recorded a loss for each of those periods. Unvested RSUs, contingent PSAs, and in-the-money options had a dilutive impact for the three-month and nine-month periods ended September 30, 2010, as calculated in the table below.

The following table sets forth the calculation of basic and diluted earnings per share:

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2010		2009			2010		2009
	(In thousands, except per share amounts)

Net income (loss)	$	15,452	$	(4,415	)	$	159,698	$	(100,360	)

Basic weighted-average common stock outstanding	63,031		62,505			62,914		62,420
Add: dilutive effect of stock options, unvested RSUs, and contingent PSAs	1,763		—			1,685		—
Add: dilutive effect of 3.50% senior convertible notes	—		—			—		—
Diluted weighted-average common shares outstanding	64,794		62,505			64,599		62,420
Basic net income (loss) per common share	$	0.25	$	(0.07	)	$	2.54	$	(1.61	)
Diluted net income (loss) per common share	$	0.24	$	(0.07	)	$	2.47	$	(1.61	)

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Note 6 — Commitments and Contingencies

During the first nine months of 2010, the Company entered into two natural gas gathering through-put commitments that as of September 30, 2010, require a minimum volume delivery of 574 Bcf by the end of 2021. The Company will be required to make periodic deficiency payments for any shortfalls in delivering the minimum volume commitments. If a shortfall in the minimum volume commitment is projected, the Company has certain rights to arrange for 3rd party gas to deliver into the gathering lines and such volume will be counted towards the minimum commitment. In the third quarter of 2010 the Company entered into several new long-term drilling rig contracts that extend through 2014. The table below shows the undiscounted cash flows associated with the deficiency payments related to the Company’s through-put commitments, as well as commitments associated with the Company’s new drilling rig contracts as of September 30, 2010.

	Undiscounted
	Cash Outflows
Years Ending December 31,	(In thousands)
2010	$	7,775
2011	28,300
2012	36,068
2013	46,988
2014	33,147
Thereafter	119,873
Total	$	272,151

The above amounts include commitments under a gas services agreement entered into by the Company effective as of July 1, 2010, for natural gas production from the Company’s Eagle Ford shale assets. Under that agreement, the Company has committed Eagle Ford production up to a maximum level of 200,000 MMBTU per day over a ten-year term beginning in 2011, and in the event that no gas is delivered the aggregate deficiency payments will total $154.7 million.

Subsequent to September 30, 2010, the Company entered into a fracturing service agreement and an additional long-term drilling rig contract, which extends through 2013. The total commitment for both agreements is $79.8 million.

Note 7 — Compensation Plans

Cash Bonus Plan

During the first quarters of 2010 and 2009, the Company paid $7.7 million and $6.0 million for cash bonuses earned in the 2009 and 2008 performance years, respectively. Within the general and administrative expense and exploration expense line items in the accompanying condensed consolidated statements of operations (“accompanying statements of operations”) was $3.1 million and $3.2 million of cash bonus expense related to the specific performance year for the three-month periods ended September 30, 2010, and 2009, and $9.2 million and $8.5 million for the nine-month periods ended September 30, 2010, and 2009, respectively.

Performance Share Awards Under the Equity Incentive Compensation Plan

PSAs represent the right to receive, upon the completion of a three-year performance period, a number of shares of the Company’s common stock that may be from zero to two times the number of PSAs granted on the award date, depending on the extent to which the Company’s performance criteria have been achieved and the extent to which the PSAs have vested. The performance criteria for the PSAs are based on a combination of the Company’s total shareholder return (“TSR”) for the performance period and the relative performance of the Company’s TSR compared to an index of certain peer companies’ TSR for the performance period.

Total stock-based compensation expense related to PSAs for the three-month periods ended September 30, 2010, and 2009, was $5.6 million and $3.2 million, respectively, and $13.0 million and $5.7

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million for the nine-month periods ended September 30, 2010, and 2009, respectively. As of September 30, 2010, there was $29.0 million of total unrecognized compensation expense related to unvested PSAs that is being amortized through 2013.

A summary of the status and activity of PSAs for the nine-month period ended September 30, 2010, is presented in the following table:

	PSAs		Weighted- Average Grant- Date Fair Value
Non-vested, at January 1, 2010	1,069,090		$	32.52
Granted	387,651		$	52.35
Vested (1)	(210,801	)	$	31.17
Forfeited	(102,149	)	$	32.48
Non-vested and outstanding, at September 30, 2010	1,143,791		$	39.49

(1) The numbers of shares vested assume a one multiplier. The final number of shares vested may vary depending on the ending three-year multiplier, which ranges from zero to two.

On July 1, 2010, the Company granted 387,651 PSAs with a performance period ending June 30, 2013, and a fair value of $20.3 million. This grant was part of the Company’s regular annual compensation process. These PSAs will vest 1/7th on July 1, 2011, 2/7ths on July 1, 2012, and 4/7ths on July 1, 2013.

Restricted Stock Unit Incentive Program Under the Equity Incentive Compensation Plan

Total RSU compensation expense for both the three-month periods ended September 30, 2010, and 2009, was $2.1 million, and $5.7 million and $5.9 million for the nine-month periods ended September 30, 2010, and 2009, respectively. As of September 30, 2010, there was $8.2 million of total unrecognized compensation expense related to unvested RSU awards that is being amortized through 2013.

During the first nine months of 2010, the Company settled 83,008 RSUs that relate to awards granted in 2009, 2008 and 2007 through the issuance of shares of the Company’s common stock in accordance with the terms of the RSU awards. As a result, the Company issued 57,687 shares of common stock associated with these grants. The remaining 25,321 shares were withheld to satisfy income and payroll tax withholding obligations that occurred upon the delivery of the shares underlying those RSUs.

A summary of the status and activity of RSUs for the nine-month period ended September 30, 2010, is presented in the following table:

	RSUs		Weighted- Average Grant- Date Fair Value
Non-vested, at January 1, 2010	407,123		$	34.67
Granted	126,821		$	40.17
Vested	(81,775	)	$	31.45
Forfeited	(31,358	)	$	36.46
Non-vested and outstanding, at September 30, 2010	420,811		$	36.82

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During the third quarter of 2010 the Company granted 126,821 RSUs with a fair value of $5.1 million, as part of its regular annual compensation process. Each RSU represents a right to receive one share of the Company’s common stock to be delivered upon settlement of the vested RSU. These RSUs will vest 1/7th on July 1, 2011, 2/7ths on July 1, 2012, and 4/7ths on July 1, 2013.

Stock Option Grants Under Prior Stock Option Plans

The following table summarizes stock option activity for the nine months ended September 30, 2010:

	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (In years)	Aggregate Intrinsic Value (In thousands)

Outstanding, beginning of period	1,274,920		$	13.31
Exercised	(163,348	)	$	14.19
Forfeited	—		$	—
Outstanding, end of period	1,111,572		$	13.18	2.4	$	26,988
Vested at end of period	1,111,572		$	13.18	2.4	$	26,988
Exercisable, end of period	1,111,572		$	13.18	2.4	$	26,988

As of September 30, 2010, there was no unrecognized compensation expense related to stock option awards.

Director Shares

In May 2010 and 2009 the Company issued 24,258 and 50,094 shares, respectively, of the Company’s common stock from treasury to the Company’s non-employee directors. The shares were issued pursuant to the Company’s Equity Incentive Compensation Plan. The Company recorded $33,000 and $26,000 of compensation expense for the three-month periods ended September 30, 2010, and 2009, respectively, and $748,000 and $662,000 for the nine-month periods ended September 30, 2010, and 2009, respectively.

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (the “ESPP”), eligible employees may purchase shares of the Company’s common stock through payroll deductions of up to 15 percent of eligible compensation. The purchase price of the stock is 85 percent of the lower of the fair market value of the stock on the first or last day of the purchase period, and shares issued under the ESPP are restricted for a period of six months from the date issued. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code. The Company has set aside 2,000,000 shares of its common stock to be available for issuance under the ESPP, of which 1,440,819 shares are available for issuance as of September 30, 2010. The fair value of ESPP grants is measured at the date of grant using the Black-Scholes option-pricing model. There were 27,456 and 49,767 shares issued under the ESPP during the first nine months of 2010 and 2009, respectively. The Company expensed $162,000 and $153,000 for the three-month periods ended September 30, 2010, and 2009, respectively, and $425,000 and $694,000 for the nine-month periods ended September 30, 2010, and 2009, respectively, based on the estimated fair values on the respective grant dates.

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Net Profits Plan

Prior to 2008, all oil and gas wells that were completed or acquired during each year were assigned to a specific pool for that respective year under the Company’s legacy Net Profits Plan. Key employees become entitled to payments under the Net Profits Plan after the Company has received net cash flows returning 100 percent of all costs associated with a pool. Thereafter, ten percent of future net cash flows generated by the pool are allocated among the participants and distributed at least annually. The portion of net cash flows from the pool to be allocated among the participants increases to 20 percent after the Company has recovered both 200 percent of the total costs for the pool and 100 percent of pool payments made under the Net Profits Plan at the ten percent level. The 2007 Net Profits Plan pool was the last pool established by the Company.

Cash payments made or accrued under the Net Profits Plan that have been recorded as either general and administrative expense or exploration expense are detailed in the table below:

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,

2010

2009

2010

2009

(In thousands)

General and administrative expense

3,918

5,168