7. Long-Term Debt

As of December 31, 2015 and 2014, our long-term debt was as follows (in thousands):

Senior Notes

At December 31, 2015 and 2014, our outstanding senior notes, which bear an annual interest rate of 8.50% and mature on June 15, 2019 (the “8.50% Senior Notes”), were classified as long-term at their carrying value.  Interest on the 8.50% Senior Notes is payable semi-annually in arrears on June 15 and December 15.  The estimated annual effective interest rate on the 8.50% Senior Notes is 8.4%, which includes amortization of debt issuance costs and premiums.  We and our restricted subsidiaries are subject to certain covenants under the indenture governing the 8.50% Senior Notes, which limit our and our restricted subsidiaries’ ability to, among other things, make investments, incur additional indebtedness or issue preferred stock, sell assets, consolidate, merge or transfer all or substantially all of our assets, engage in transactions with affiliates, pay dividends or make other distributions on capital stock or subordinated indebtedness and create unrestricted subsidiaries.  We were in compliance with those covenants as of December 31, 2015.  See Note 1 related to a change in the classification of unamortized debt issuance costs on the Consolidated Balance Sheets.

Term Loan

In May 2015, we entered into the 9.00% Term Loan, which bears an annual interest rate of 9.00%, was issued at a 1% discount to par and matures on May 15, 2020.  The 9.00% Term Loan is secured by a second priority lien covering our oil and gas properties to the extent such properties secure first priority liens granted to secure indebtedness under our Credit Agreement.  Interest on the 9.00% Term Loan is payable in arrears semi-annually on May 15 and November 15.  The estimated annual effective interest rate on the 9.00% Term Loan is 9.7%, which includes amortization of debt issuance costs and discounts.  The net proceeds were used to repay a portion of the outstanding borrowings incurred under our revolving bank credit facility governed by the Credit Agreement.  We are subject to various covenants under the terms governing the 9.00% Term Loan including, without limitation, covenants that limit our ability to incur other debt, pay dividends or distributions on our equity, merge or consolidate with other entities and make certain investments in other entities.  We were in compliance with those covenants as of December 31, 2015.  See Note 1 related to a change in the classification of unamortized debt issuance costs on the Consolidated Balance Sheets.  

Credit Agreement

The Credit Agreement, as amended, provides a revolving bank credit facility.  Availability under the Credit Agreement is subject to a semi-annual borrowing base determination set at the discretion of our lenders, and the Company and the lenders may each request one additional determination per year.  The borrowing base as of December 31, 2015 was $350.0 million.  The amount of the borrowing base is calculated by our lenders based on their evaluation of our proved reserves and their own internal criteria.  Any determination by our lenders to change our borrowing base will result in a similar change in the availability under our revolving bank credit facility.  To the extent borrowings and letters of credit outstanding exceed the redetermined borrowing base, such excess or deficiency is required to be repaid within 90 days in three equal monthly payments.  Letters of credit may be issued in amounts up to $300.0 million, provided availability under the revolving bank credit facility exists.  The revolving bank credit facility is secured and is collateralized by our oil and natural gas properties.  The Credit Agreement terminates on November 8, 2018.  

The Credit Agreement contains covenants that limit, among other things, our ability to: (i) pay cash dividends; (ii) repurchase our common stock or outstanding 8.50% Senior Notes or outstanding 9.00% Term Loan, provided that such limitation will not apply to the repurchase of our existing 8.50% Senior Notes or 9.00% Term Loan in an aggregate principal amount equal to the aggregate principal amount of any new issuance of such debt; (iii) sell our assets; (iv) make certain loans or investments; (v) merge or consolidate; (vi) eliminate certain hedging contracts or enter into certain hedging contacts in excess of 75% of projected oil and gas  production on a monthly basis; (vii) enter into certain liens; and (viii) enter into certain other transactions, without the prior consent of the lenders.  We are permitted to issue additional indebtedness if certain conditions are met including: (i) the additional debt is subordinate in security and right of payment; (ii) the borrowers enter into an intercreditor agreement with terms acceptable to the Administrative Agent of the Credit Agreement; (iii) we are in compliance with the financial covenants after giving pro forma effect to the additional unsecured indebtedness; and (iv) such additional unsecured indebtedness matures after the maturity date of the Credit Agreement and is not subject to restrictive covenants materially more onerous than those provided for in the Credit Agreement.  We are permitted to redeem, repurchase, prepay or defease all or a portion of the 8.50% Senior Notes or the 9.00% Term loan if after giving effect of such redemption, repayment, prepayment or defeasance: (i) no amounts are outstanding on the revolving bank credit facility; (ii) letters of credit outstanding do not exceed $100.0 million; (iii) the then borrowing base is at least $200.0 million; and (iv) no event of default shall have occurred and be continuing, and no borrowing base deficiency shall have occurred and be continuing or result therefrom.

The Credit Agreement also contains various customary covenants for certain financial tests, as defined in the Credit Agreement and measured as of the end of each quarter, and for customary events of default.  These financial test ratios and limits as of December 31, 2015 and thereafter are: (i) the First Lien leverage Ratio must be less than 1.50 to 1.00; (ii) the Current Ratio must be greater than 0.75 to 1.00 as of December 31, 2015 and must be greater than 1.00 to 1.00 thereafter; and (iii) the Secured Debt Leverage Ratio must be less than 3.50 to 1.00.   The customary events of default include: (i) nonpayment of principal when due or nonpayment of interest or other amounts within three business days of when due; (ii) bankruptcy or insolvency with respect to the Company or any of its subsidiaries guaranteeing borrowings under the revolving bank credit facility; or (iii) a change of control.  The Credit Agreement contains cross-default clauses with the 8.50 %Senior Notes and the 9.00% Term, and these agreements contain similar cross-default clauses with the Credit Agreement.  We were in compliance with all applicable covenants of the Credit Agreement as of December 31, 2015.

Borrowings under the revolving bank credit facility bear interest at the applicable London Interbank Offered Rate (“LIBOR”) plus a margin that varies from 2.25% to 3.25% depending on the level of total borrowings under the Credit Agreement, or an alternative base rate equal to the greater of (a) Prime Rate, (b) Federal Funds Rate plus 0.5%, and (c) LIBOR plus 1.0%, plus applicable margin ranging from 1.25% to 2.25%.  The unused portion of the borrowing base is subject to a commitment fee ranging from 0.375% to 0.5%.  The estimated annual effective interest rate was 3.3% for 2015 for borrowings under the Credit Agreement.  The estimated annual effective interest rate includes amortization of debt issuance costs and excludes commitment fees and other costs.

During 2015, the borrowing base under the Credit Agreement was reduced to $350.0 million.  The reduction in the borrowing base resulted in proportional reduction in the unamortized costs related to the Credit Agreement of $3.2 million, which is included in the line Other (income)/expense, net on the Consolidated Statements of Operations.  

At December 31, 2015, we had no borrowings and $0.9 million in letters of credit outstanding under the revolving bank credit facility.  At December 31, 2014, we had $447.0 million in borrowings and $0.6 million in letters of credit outstanding under the revolving bank credit facility.   See Note 20 for borrowings outstanding subsequent to December 31, 2015.

For information about fair value measurements of our long-term debt, refer to Note 8.