CARBON ENERGY CORPORATION The following discussion includes forward-looking statements about our business,
financial condition and results of operations, including discussions about
management's expectations for our business. These statements represent
projections, beliefs and expectations based on current circumstances and
conditions, and you should not construe these statements either as assurances of
performance or as promises of a given course of action. Instead, various known
and unknown factors may cause our actual performance and management's actions to
vary, and the results of these variances may be both material and adverse. A
description of material factors known to us that may cause our results to vary
or may cause management to deviate from its current plans and expectations, is
set forth under "Risk Factors." The following discussion should be read in
conjunction with "Forward-Looking Statements," "Risk Factors" and our unaudited
condensed consolidated financial statements, including the notes thereto
appearing elsewhere in this Quarterly Report on Form 10-Q and the information
included or incorporated by reference in the Company's Annual Report on Form
10-K for the fiscal year ended
General Overview
At
? Acquire and develop oil and gas producing properties that deliver
attractive risk adjusted rates of return, provide for field development
projects, and complement our existing asset base; and
? Develop, optimize and maintain a portfolio of low risk, long-lived oil and
natural gas properties that provide stable cash flows and attractive risk
adjusted rates of return.
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Factors That Significantly Affect Our Financial Condition and Results of Operations
Our revenue, profitability and future growth rate depend on many factors which are beyond our control, including but not limited to, economic, political and regulatory developments and competition from other industry participants. Our financial results are sensitive to fluctuations in oil and natural gas prices. Oil and gas prices historically have been volatile and may fluctuate widely in the future due to a variety of factors, including but not limited to, prevailing economic conditions, supply and demand of hydrocarbons in the marketplace, actions by speculators, and geopolitical events such as wars or natural disasters.
Like other oil and gas companies, our business is being adversely affected by
the COVID-19 pandemic and measures being taken to mitigate its impact. The
pandemic has resulted in widespread adverse impacts on the global economy and on
our employees, customers, suppliers and other parties with whom we have business
relations. As the coronavirus pandemic and government responses are rapidly
evolving, the extent of the impact on domestic exploration and production
companies remains unknown. Further, the impact of the pandemic, including the
resulting significant reduction in global demand for oil and gas, coupled with
the sharp decline in oil prices following the announcement of price reductions
and production increases in
We have modified certain business and workforce practices (including those related to employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences) to conform to government restrictions and best practices encouraged by governmental and regulatory authorities. However, the quarantine of personnel or the inability to access our facilities or customer sites could adversely affect our operations. Additionally, currently many of our employees are working remotely. We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties.
In the midst of the ongoing COVID-19 pandemic, oil prices declined significantly
due to potential increases in supply emanating from the disagreement on
production cuts among members of
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For example, in
2020 2019
Q1 Q1 Q2 Q3 Q4
Oil (Bbl) $ 45.78 $ 54.90 $ 59.96 $ 56.43 $ 56.87 Natural Gas (MMBtu)
Low oil, NGL and natural gas prices may decrease our revenues, may reduce the amount of oil, NGL and natural gas that we can produce economically and potentially lower our oil and natural gas reserves. Our estimated proved reserves may decrease if the economic life of underlying producing wells is shortened as a result of lower oil, NGL and natural gas prices. A substantial or extended decline in oil, NGL or natural gas prices may result in future impairments of our proved reserves and may materially and adversely affect our future business, financial condition, cash flows, results of operations or liquidity. Lower oil, NGL and natural gas prices may also reduce the amount of borrowing base under our bank credit facilities, which are determined at the discretion of our lenders and may make it more difficult to comply with the covenants and other restrictions under our bank credit facilities.
We use the full cost method of accounting for our oil and gas properties and
perform a ceiling test quarterly. The ceiling calculation utilizes a rolling
12-month average commodity price. We did not recognize an impairment for the
three months ended
Future write downs or impairments, if any, are difficult to predict and will depend not only on commodity prices, but also other factors that include, but are not limited to, incremental proved reserves that may be added each period, revisions to previous reserve estimates, capital expenditures and operating costs. There are numerous uncertainties inherent in the estimation of proved reserves and accounting for oil and natural gas properties in subsequent periods.
Impairment charges do not affect cash flows from operating activities but do adversely affect net income and stockholders' equity. An extended decline in oil or natural gas prices may materially and adversely affect our future business, financial condition, cash flows and liquidity.
We use commodity derivative instruments, such as swaps and costless collars, to manage and reduce price volatility and other market risks associated with our production. These arrangements are structured to reduce our exposure to commodity price decreases, but they can also limit the benefit we might otherwise receive from commodity price increases.
Future property acquisitions or dispositions could have a material impact on our financial condition and results of operations by increasing or decreasing our reserves, production and revenues as well as expenses and future capital expenditures. We currently anticipate that we would finance any future acquisitions with available borrowings under our credit facilities, sales of properties or the issuance of additional equity or debt.
Operational Highlights
During 2019, we concentrated our efforts on the acquisition and development of
producing properties through the acquisitions consummated by Carbon California
and Carbon Appalachia in 2018. Our field development activities have consisted
principally of oil-related drilling, remediation and return to production and
recompletion projects in
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As of
Our oil and natural gas assets contain an inventory of field development projects which may provide growth opportunities when oil and natural gas commodity prices warrant capital investment to develop the properties.
We are continually evaluating producing property and land acquisition opportunities in our operating areas which would expand our operations and provide attractive risk adjusted rates of return on invested capital. The drilling of additional oil and natural gas wells is contingent on our expectation of future oil and natural gas prices.
Principal Components of Our Cost Structure
? Lease operating expenses. Lease operating expenses are costs incurred to
bring oil and natural gas out of the ground, together with the costs
incurred to maintain our producing properties. Such costs include
maintenance, repairs and workover expenses related to our oil and natural
gas properties.
? Pipeline operating expenses. Pipeline operating expenses are costs
incurred to accept, transport and deliver gas across our midstream assets.
? Transportation and gathering costs. Transportation and gathering costs are
incurred to bring oil and natural gas to market. Gathering refers to the
utilization of low-pressure pipelines to move the oil and natural gas from
the wellhead into a transportation pipeline, or in case of oil, into a
tank battery from which sales of oil are made.
? Production and property taxes. Production and property taxes consist of
severance, property and ad valorem taxes. Production and severance taxes
are paid on oil and natural gas produced based on a percentage of market
prices or at fixed rates established by federal, state or local taxing
authorities. Ad valorem tax rates, which can fluctuate by year, are
determined by individual counties where we have production and are
assessed on our sales one or two years in arrears depending on the
location of the production.
? Marketing gas purchases. Marketing gas purchases consist of third-party
purchases of gas associated with our midstream operations.
? Depreciation, amortization and impairment. We use the full cost method of
accounting for oil and gas properties. All costs incidental to the
acquisition, exploration and development of oil and gas properties,
including costs of undeveloped leasehold, dry holes and leasehold
equipment, are capitalized. We perform a quarterly ceiling test based on
average first-of-the-month prices during the twelve-month period prior to
the reporting date. The full cost ceiling test is a limitation on
capitalized costs prescribed by the SEC . The ceiling test is not a fair
value-based measurement; rather, it is a standardized mathematical
calculation that compares the net capitalized costs of our full cost pool
to estimated discounted cash flows. Should the net capitalized cost exceed
the sum of the estimated discounted cash flows, a ceiling test write-down
would be recognized to the extent of the excess.
? Depletion. Depletion is calculated using capitalized costs in the full
cost pool, including estimated asset retirement costs and estimated future
expenditures to be incurred in developing proved reserves, net of
estimated salvage values and depleted based on a unit-of-production
method.
? General and administrative expense. General and administrative expense
includes payroll and benefits for our corporate staff, non-cash
stock-based compensation, costs of maintaining our offices, costs of
managing our production, marketing, development and acquisition
operations, franchise taxes, audit, tax, legal and other professional fees
and legal compliance.
? Interest expense. We finance a portion of our working capital requirements
for drilling and completion activities and acquisitions with borrowings
under our bank credit facilities. As a result, we incur interest expense
that is affected by both fluctuations in interest rates and our financing
decisions. Interest expense, net is net of interest income.
? Income tax expense. We are subject to state and federal income taxes but
typically have not been in a tax paying position for regular federal
income taxes, primarily due to the current deductibility of intangible
drilling costs ("IDC") and until 2023 tangible drilling costs and net
operating loss ("NOL") carryforwards. We pay alternative minimum tax,
state income or franchise taxes where IDC or NOL deductions do not exceed
taxable income or where state income or franchise taxes are determined on
another basis.
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Results of Operations
Three Months Ended
The following discussion and analysis relates to items that have affected our
results of operations for the three months ended
Three Months Ended
March 31, Percent
(in thousands, except production and per unit data) 2020 2019 Change
Revenue:
Natural gas sales $ 8,434 $ 19,316 (56 %)
Natural gas liquids sales 152 247 (38 %)
Oil sales 7,216 8,989 (20 %)
Transportation and handling 633 734 (14 %)
Marketing gas sales 6,318 4,944 28 %
Commodity derivative gain (loss) 19,714 (9,306 ) *
Other income (2 ) 26 *
Total revenues 42,465 24,950 70 %
Expenses:
Lease operating expenses 7,372 6,616 11 %
Pipeline operating expenses 2,692 3,085 (13 %)
Transportation costs 2,576 1,669 54 %
Production and property taxes 10 2,010 (100 %)
Marketing gas purchases 3,472 6,302 (45 %)
General and administrative 3,303 4,689 (30 %)
Depreciation, depletion and amortization 3,811 3,980 (4 %)
Accretion of asset retirement obligations 478 394 21 %
Total expenses 23,714 28,745 (18 %)
Operating income (loss) $ 18,751 $ (3,795 ) *
Other income and (expense):
Interest expense (2,872 ) (2,914 ) *
Equity investment income (421 ) 19 *
Total other expense $ (3,293 ) $ (2,895 ) *
Production data:
Natural gas (Mcf) 5,240,381 5,544,052 (5 %)
Oil (Bbl) 146,525 147,492 (1 %)
Natural gas liquids (Bbl) 12,363 13,210 (6 %)
Combined (Mcfe) 6,193,709 6,508,264 (5 %)
Average prices before effects of hedges:
Natural gas (per Mcf) $ 1.61 $ 3.48 (54 %)
Oil (per Bbl) $ 49.24 $ 60.95 (19 %)
Natural gas liquids (per Bbl) $ 12.30 $ 18.67 (34 %)
Combined (per Mcfe) $ 2.55 $ 4.39 (42 %)
Average prices after effects of hedges**:
Natural gas (per Mcf) $ 2.18 $ 3.34 (35 %)
Oil (per Bbl) $ 49.85 $ 63.29 (21 %)
Natural gas liquids (per Bbl) $ 12.30 $ 18.67 (34 %)
Combined (per Mcfe) $ 3.04 $ 4.32 (30 %)
Average costs (per Mcfe):
Lease operating expenses $ 1.19 $ 1.02 17 %
Transportation costs $ 0.42 $ 0.26 62 %
Production and property taxes $ 0.00 $ 0.31 (100 %)
Cash-based general and administrative expenses $ 0.50 $ 0.69 (27 %)
Depreciation, depletion and amortization $ 0.61 $ 0.61 0 %
* Not meaningful or applicable
** Includes effect of settled commodity derivative gains and losses
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Natural gas, natural gas liquids, and oil sales - Sales of natural gas, natural
gas liquids and oil decreased approximately
Transportation and handling- Revenue from transportation and handling correlates to the price of natural gas, which decreased 54% compared to the same period in 2019.
Marketing gas sales - Sales from marketing gas increased
Commodity derivative gain (loss) - We do not designate our commodity derivatives
as cash flow hedges; therefore, they do not receive hedge accounting treatment
and all mark-to-market gains or losses, as well as settlement gains or losses on
the derivative instruments, are currently recognized in our results of
operations. The unrealized gains and losses represent the changes in the fair
value of these contracts as oil and natural gas futures prices fluctuate
relative to the fixed price we will receive from these contracts. For the three
months ended
Lease operating expenses- Lease operating expenses increased
Pipeline operating expenses- Pipeline operating expenses decreased
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Transportation costs - Transportation costs increased
Production and property taxes- Production and property taxes decreased
Marketing gas purchases- Marketing gas purchases decreased
Depreciation, depletion and amortization ("DD&A") - DD&A decreased
General and administrative expenses - General and administrative expenses
decreased
Three Months Ended
General and administrative expenses March 31,
(in thousands) 2020 2019
General and administrative expenses $ 3,303 $ 4,689 Adjustments:
Stock-based compensation 204 222
Cash-based general and administrative expense
Interest expense - Interest expense, net decreased
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash flows from
operations, borrowings under our credit facilities and Carbon California's
Senior Secured Revolving Notes issued to Prudential with an initial revolving
borrowing capacity of
As of
On
As of
On
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In
On
The Contemplated Transactions constitute a sale of substantially all of the
Company's assets under the Delaware General Corporation Law. Following
consummation of the Contemplated Transactions, the Company would continue to own
its membership interests in Carbon California and continue to conduct operations
in the
Upon consummation of the Contemplated Transactions, net of expected purchase
price adjustments, the Sellers expect to receive cash proceeds of
Access to additional capital within the current commodity price environment is limited and the terms of any available capital may not be acceptable to the Company.
Commodity Derivatives
Our exploration, development and acquisition activities may require us to make significant operating and capital expenditures. Changes in the market prices for oil and natural gas directly impact our level of cash flow generated from operations. The prices we receive for our production are determined by prevailing market conditions and greatly influence our revenue, cash flow, profitability, access to capital and future rate of growth. We employ a commodity hedging strategy to moderate the effects of commodity price fluctuations on our cash flow.
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This hedge program mitigates uncertainty regarding cash flow that we will receive with respect to a portion of our expected production through 2022. Future hedging activities may result in reduced income or even financial losses to us. See "Risk Factors-The use of derivative instruments used in hedging arrangements could result in financial losses or reduce income," in our 2019 Annual Report on Form 10-K for further details of the risks associated with our hedging activities. In the future, we may determine to increase or decrease our hedging positions. See Note 12 - Commodity Derivatives in the unaudited condensed consolidated financial statements in Item 1 for more information, including our outstanding derivatives.
Sources and Uses of Cash
The following table presents net cash provided by or used in operating, investing and financing activities:
Three Months Ended
March 31,
(in thousands) 2020 2019
Net cash provided by operating activities $ 1,277 $ 8,311
Net cash used in investing activities $ (626 ) $ (336 ) Net cash provided by (used in) financing activities
Operating Activities
Net cash provided by operating activities is primarily affected by production
volumes and commodity prices, net of the effects of settlements of our
derivative contracts, and changes in working capital. Operating cash flows
decreased approximately
Investment Activities
Net cash used in investing activities is primarily comprised of the acquisition,
exploration and development of oil and natural gas properties, net of
dispositions of oil and natural gas properties. Net cash used in investing
activities increased approximately
Financing Activities
Net cash provided by or used in financing activities is primarily comprised of
activities associated with our credit facilities. During the three months ended
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Capital Expenditures
Capital expenditures incurred are summarized in the following table:
Three Months Ended
March 31,
(in thousands) 2020 2019
Drilling and development $ 793 $ 461
Other 220 39
Total capital expenditures $ 1,013 $ 500 Capital expenditures presented in the table above represent cash used for capital expenditures.
Due to low natural gas prices, the Company has focused on the optimization of our gathering facilities and marketing arrangements to provide greater flexibility in moving natural gas production to markets with more favorable pricing. Other factors impacting the level of our capital expenditures include the cost and availability of oil field services, general economic and market conditions, and weather disruptions.
Credit Facilities and Notes Payable
For a discussion of our long-term debt, see Note 6 - Credit Facilities and Notes Payable in the unaudited condensed consolidated financial statements in Item 1.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
Critical Accounting Policies, Estimates, Judgments, and Assumptions
Our critical accounting policies and estimates are set forth in "Part II. Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations- Critical Accounting Policies, Estimates, Judgments, and Assumptions"
in our 2019 Annual Report on Form 10-K. As of
Forward Looking Statements
The information in this Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Forward-looking statements are statements other than statements of historical or present facts, that address activities, events, outcomes, and other matters that the Company plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates, or anticipates (and other similar expressions) will, should, or may occur in the future. Generally, the words "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," "may," "will," "could," "should," "future," "potential," "continue," variations of such words, and similar expressions identify forward-looking statements. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events.
These forward-looking statements appear in several places in this report and include statements with respect to, among other things:
? estimates of our oil, natural gas liquids, and natural gas reserves;
? effect of the COVID-19 pandemic and the OPEC price war on our business
results;
? estimates of our future oil, natural gas liquids, and natural gas
production, including estimates of any increases or decreases in our
production;
? our future financial condition and results of operations;
? our future revenues, cash flows, and expenses;
? our access to capital and our anticipated liquidity;
? our future business strategy and other plans and objectives for future
operations and acquisitions;
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? our outlook on oil, natural gas liquids, and natural gas prices;
? the amount, nature, and timing of future capital expenditures, including
future development costs;
? our ability to access the capital markets to fund capital and other
expenditures;
? our assessment of our counterparty risk and the ability of our
counterparties to perform their future obligations; and
? the impact of federal, state and local political, regulatory, and
environmental developments in the United States of America We believe the expectations and forecasts reflected in our forward-looking statements are reasonable, but we can give no assurance that they will prove to be correct. We caution you that these forward-looking statements can be affected by inaccurate assumptions and are subject to all the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the exploration for and development, production, and sale of oil, natural gas liquids and natural gas. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading "Risk Factors" included in our 2019 Annual Report on Form 10-K.
Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
We caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report, and we undertake no obligation
to update this information to reflect events or circumstances after the filing
of this report with the
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