Overview
We are an onshore independent oil and natural gas company focused on the development, production and exploration of large, repeatable resource plays inNorth America . Our operations are located in the Eagle Ford formation in southTexas . Our strategy is to acquire and/or develop assets where we are operator and have high working interests, positioning us to efficiently control the pace and scope of our development and the allocation of our capital resources. We also believe that serving as operator allows us to control the drilling, completion, operations, and marketing of sold volumes. 26
Business and Industry Outlook
During the first six months of 2020, WTI oil spot prices ranged from an average of$57.52 in January and to an average of$16.55 in April, primarily due to drastic price cutting and increased production bySaudi Arabia coupled with a demand reduction caused by the global COVID-19 pandemic. More recently, WTI oil spot prices have slowly rebounded to the low$40 range. While market prices for crude oil, natural gas and NGLs are inherently volatile, the increase in supply and decrease in demand to historic extremes has impacted our entire industry. Given the dynamic nature of these macroeconomic conditions, we are unable to reasonably estimate the period of time that these market conditions will exist and the extent of the impact they will have on our business, liquidity, results of operations, financial condition, or the timing of any subsequent recovery. Specifically, due to the sharp decline in commodity prices and expectations for commodity prices in 2020, there is uncertainty as to our ability to remain in compliance with certain of the financial covenants and ratios throughout 2020 and the first half of 2021 (described further under Credit Facilities and in Note 1 under Going Concern). To mitigate our exposure to commodity price volatility and ensure our financial stability, we continue to execute a hedging program, and added contracts in late February prior to the sharp price decline. We have oil derivatives in place covering an average of 7,908 Bbls per day for July throughDecember 2020 at a weighted average floor price of$53.62 . As described below under Recent Developments, our capital expenditures for the periodMay 1, 2020 throughSeptember 30, 2020 are limited to$5 million . We expect total capital expenditures to be in the range of$40 -$45 million for 2020. We intend to continue to flexibly manage our operations, including capital expenditure levels, based on existing and expected market conditions to protect our balance sheet and retain liquidity. We expect to be able to fund our planned capital program for 2020 with cash flow generated from operating activities (which includes proceeds from settlements of hedging contracts) and cash on hand. At times, we may supplement our working capital through borrowings on our Revolving Facility. As of the date of this Quarterly Report, we had$33.6 million of borrowing capacity undrawn under our Revolving Facility. Recent Developments
The audit opinion included in our annual report for the year endedDecember 31, 2019 contained a going concern explanatory paragraph, which constitutes a default under our senior secured revolving credit facility (the "Revolving Facility") and second lien term loan facility (the "Term Loan"). We obtained waivers from our Revolving Facility and Term Loan lenders to waive the events of default arising from the inclusion of the going concern explanatory paragraph included in the audit report for the year endedDecember 31, 2019 and with respect to the defaults arising from a failure to deliver audited consolidated financial statements for the year endedDecember 31, 2019 and related reports and certificates by the applicable deadline. As a condition to the waivers, we agreed to amend our credit facilities.
On
? Increased the applicable interest rate margin from 8% to 10%, of which 2% of
the applicable margin is payable-in-kind, effective
Requires that 50% of excess cash flow (as defined in the Term Loan agreement)
("ECF") generated during each quarter, if any, be used to pay down the
? outstanding balance on our Revolving Facility, with a permanent corresponding
reduction in the borrowing base. If the outstanding balance on the Revolver is
zero, any required ECF amounts will be applied to reduce amounts outstanding
under the Term Loan;
? Limits our capital expenditures (as defined in the Term Loan agreement) for the
period from
Limits our general and administrative expense (as defined in the Term Loan
? agreement) for the second and third quarters of 2020 to
and
Requires that we negotiate in good faith with the Lenders by
? to reduce our total debt and leverage and explore transactions to increase our
capital, which may include asset sales, public or private issuance of debt or
equity, or any combination thereof. 27 In addition, onJune 24, 2020 , we entered into the fifth amendment to the Revolving Facility. The fifth amendment included corresponding changes to those made in the Term Loan, as described above. In addition, it reduced our borrowing base from$190 million to$170 million (as a result of our semi-annual borrowing base redetermination), and increased the margin on our interest rate by 25
basis points.
During the three months ended
Results of Operations Revenues and Sales Volume. The following table provides the components of our revenues for the three and six months endedJune 30, 2020 and 2019, as well as each period's respective sales volumes: Three months ended Six
months ended
June 30, Change June 30, Change Revenue (In $ '000s): 2020 2019 $ % 2020 2019 $ % Oil sales$ 11,733 $ 46,147 $ (34,414) (75)$ 40,089 $ 86,943 $ (46,854) (54) Natural gas sales 1,191 3,516 (2,325) (66) 3,378 6,794 (3,416) (50) NGL sales 2,103 3,238 (1,135) (35) 3,903 6,904 (3,001) (43) Other 103 - 103 100 103
- 103 100
Total revenue
Three months ended Six months ended June 30, Change June 30, Change Net sales volumes: 2020 2019 Volume % 2020 2019 Volume % Oil (Bbls) 507,224 745,129 (237,905) (32) 1,151,752 1,467,525 (315,773) (22) Natural gas (Mcf) 836,040 1,688,005 (851,965) (50) 2,038,493 2,960,551 (922,058) (31) NGL (Bbls) 127,038 238,221 (111,183) (47) 272,586 410,957 (138,371) (34) Oil equivalent (Boe) 773,602 1,264,684 (491,082) (39) 1,764,087 2,371,907 (607,820) (26) Average daily production (Boe/d) 8,501 13,898 (5,397) (39)
9,693 13,104 (3,411) (26)
Sales volumes decreased by 491,082 Boe (5,397 Boe/d) to 773,602 Boe (8,501 Boe/d) for the three months endedJune 30, 2020 compared to 1,264,684 Boe (13,898 Boe/d) for the same prior year period. Sales volumes decreased by 607,820 Boe (3,411 Boe/d) to 1,764,087 Boe (9,693 Boe/d) for the six months endedJune 30, 2020 compared to 2,371,907 Boe (13,104 Boe/d) for the same prior year period. The lower volumes in both 2020 periods are primarily due to more wells coming onto production in late 2018 and early 2019 (11.0 new wells coming online in the fourth quarter of 2018 and 8.0 new operated wells in the first half of 2019) compared to late 2019 and the first half of 2020 (2.0 wells coming online in each of the fourth quarter of 2019 and first quarter of 2020 and insignificant production from the 4.0 net wells that came online in late second quarter 2020). This scaled back 2020 development plan is in a large part due to the decrease in oil prices beginning in earlyMarch 2020 and reflects capital limitations included in our recent credit agreement amendments. The three months and six months endedJune 30, 2019 also include approximately 1,400 Boe/d and 1,200 Boe/d of production from theDimmit County asset, which were sold inOctober 2019 . Our sales volume is oilweighted, with oil representing 66% and 65% of total sales volume for the three and six months endedJune 30, 2020 , respectively, and liquids (oil and NGLs) representing 82% and 81% of total sales volumes for the three and six months endedJune 30, 2020 , respectively. In 2019, the three and six months endedJune 30, 2019 had 59% and 62% and 78% and 79% of oil and liquids as a percentage of total sales volumes, respectively. 28 Oil sales. Oil sales decreased by$34.4 million (75%) to$11.7 million for the three months endedJune 30, 2020 from$46.1 million for the same prior year period. The decrease in oil revenue was driven by the significant decrease in market prices beginning inMarch 2020 ($19.7 million ) and lower sales volumes ($14.7 million ). The average realized price on the sale of our oil decreased by 63% to$23.13 per Bbl for the three months endedJune 30, 2020 . Oil sales volumes decreased 32% to 507,224 Bbls for the three months endedJune 30, 2020 compared to 745,129 Bbls for the prior year period. Oil sales decreased by$46.9 million (54%) to$40.1 million for the six months endedJune 30, 2020 from$86.9 million for the same prior year period, of which$28.1 million was the result of lower realized oil prices and$18.7 million was the result of lower sales volumes. The average realized price on the sale of our oil decreased by 41% to$34.81 per Bbl for the six months endedJune 30, 2020 . Oil sales volumes decreased 22% to 1,151,752 Bbls for the six months endedJune 30, 2020 compared to 1,467,525 Bbls for the prior year period. Natural gas sales. Natural gas sales decreased by$2.3 million (66%) to$1.2 million for the three months endedJune 30, 2020 from$3.5 million for the prior year period. The decrease in natural gas revenues was the result of lower product pricing ($0.6 million ) and lower sales volumes ($1.8 million ). Natural gas sales volumes decreased 50% to 836,040 Mcf for the three months endedJune 30, 2020 compared to 1,688,005 Mcf for the prior year period. As noted above, we sold ourDimmit County assets inOctober 2019 , which accounted for approximately 20% of our gas production for the six months endedJune 30, 2019 (but only 5% of our oil production). The average realized price on the sale of our natural gas decreased by 32% to$1.42 per Mcf (net of certain transportation and marketing costs) for the three months endedJune 30, 2020 from$2.08 per Mcf for the
prior year period. Natural gas sales decreased by$3.4 million (50%) to$3.4 million for the six months endedJune 30, 2020 from$6.8 million for the prior year period, of which$2.1 million was the result of lower production volume and$1.3 million was the result of lower product pricing. Natural gas sales volumes decreased 31% to 2,038,493 Mcf for the six months endedJune 30, 2020 compared to 2,960,551 Mcf for the prior year period. The average realized price on the sale of our natural gas decreased by 28% to$1.66 per Mcf for the six months endedJune 30, 2020 from$2.29 per Mcf for the prior year period. NGL sales. NGL sales decreased by$1.1 million (35%) to$2.1 million for the three months endedJune 30, 2020 from$3.2 million for the prior year period. The decrease in NGL revenues was the result of lower sales volumes ($1.5 million ) offset by slightly higher product pricing ($0.4 million ). NGL sales volumes decreased 111,183 Bbls (47%) to 127,038 Bbls for the three months endedJune 30, 2020 compared to 238,221 Bbls for the prior year period. The average realized price on the sale of our NGLs increased by 22% to$16.55 per Bbl for the three months endedJune 30, 2020 from$13.59 per Bbl for the prior year period. NGL sales decreased by$3.0 million (43%) to$3.9 million for the six months endedJune 30, 2020 from$6.9 million for the prior year period, of which$2.3 million was due to lower sales volumes and$0.7 million was the result of lower product pricing. NGL sales volumes decreased 138,371 Bbls (34%) to 272,586 Bbls for the six months endedJune 30, 2020 compared to 410,957 Bbls for the prior year period. The average realized price on the sale of our NGLs decreased by 15% to$14.32 per Bbl for the six months endedJune 30, 2020 from$16.80 per Bbl for the prior year period. 29 The following table provides a summary of our operating expenses on a per Boe basis: Three months ended June 30, Change Six months ended June 30, Change Selected per Boe metrics 2020 2019 $ % 2020 2019 $ % Total oil, natural gas and NGL revenues (price received) $ 19.56 $ 41.83 (22.27) (53)$ 26.91 $ 42.43 (15.52) (37) Effect of commodity derivatives on average price 26.47 (0.13) 26.60 (20,462) 15.50 1.51 13.99 926 Total oil, natural gas and NGL revenues (price realized) $ 46.03 $ 41.70 4.33 10$ 42.41 $ 43.94 (1.53) (3) Lease operating expense (1)$ (6.94) $ (5.49) (1.45) (26)$ (6.84) $ (6.59) (0.25) (4) Workover expense (1)$ (0.02) $ (1.14) 1.12 98$ (0.84) $ (1.22) 0.38 31 Gathering, processing and transportation expense$ (3.53) $ (2.96) (0.57) (19)$ (3.60) $ (2.77) (0.83) (30) Production taxes $ 0.37$ (2.46) 2.83 115$ (0.98) $ (2.63) 1.65 63 Depreciation, depletion and amortization (2)$ (26.15) $ (18.05) (8.10) (45)$ (25.13) $ (18.63) (6.50) (35) General and administrative expense$ (5.13) $ (4.29) (0.84) (20)$ (5.40) $ (4.52) (0.88) (19)
(1) Lease operating expense and workover expense are included together in lease
operating and workover expenses on the consolidated statement of operations.
(2) Excludes depreciation related to corporate assets.
Lease operating expense. Our LOE decreased by$1.6 million (23%) to$5.4 million for the three months endedJune 30, 2020 from$6.9 million in the prior year period, but increased$1.45 per Boe to$6.94 per Boe from$5.49 per Boe. InMarch 2020 , we made field operating changes and renegotiated pricing with a number of our vendors due to the material drop in market oil prices, which reduced our costs on an absolute basis. We began realizing most of these new costs savings in the second quarter 2020. However, a portion of our costs are fixed, and the per Boe rate was negatively impacted by our lower production volumes. The three months endedJune 30, 2020 also includes a one-time fee to demobilize an amine facility of approximately$0.3 million . We are trying to recover a portion of that charge. LOE decreased by$3.6 million (23%) to$12.1 million for the six months endedJune 30, 2020 from$15.6 million in the prior period, but increased$0.25 per Boe to$6.84 per Boe from$6.59 per Boe for the reasons described above. Workover expense. Workover expense was immaterial for the three months endedJune 30, 2020 . As a result of the material drop in oil prices, we deferred workovers for low producing wells until it is economic to service the wells, which drove down absolute and per Boe workover expense for the three and six months endedJune 30, 2020 . In addition, we have reduced workover expense through conversion of rod pumps to gas lift and redesign of certain rod pump wells to reduce our well failure rates and the associated workover expense going forward. Gathering, processing and transportation expense ("GP&T"). GP&T decreased by$1.0 million (27%) to$2.7 million ($3.53 per Boe) for the three months endedJune 30, 2020 as compared to$3.7 million ($2.96 per Boe) for the three months endedJune 30, 2019 . In 2020, GP&T fees were primarily incurred on production from the properties we acquired inApril 2018 . Sales volumes from these assets decreased 15% during the three months endedJune 30, 2020 as compared to the prior year period. In addition, in 2019, we incurred$0.3 million of GP&T associated with theDimmit County assets, which were sold inOctober 2019 . The volume driven decrease in 2020 was partially offset by additional compression expense associated with our midstream partner's plant expansion in the three months endedJune 30, 2020 . GP&T decreased by$0.2 million (3%) to$6.3 million ($3.60 per Boe) for the six months endedJune 30, 2020 as compared to$6.6 million ($2.77 per Boe) for the six months endedJune 30, 2019 . Sales volumes from the assets that generate GP&T were relatively flat during the six months endedJune 30, 2020 as compared
to the prior year period. 30
Production taxes. Our production taxes decreased by$3.4 million (109%) to a credit (income) of$0.3 million for the three months endedJune 30, 2020 from$3.1 million for the prior year period, which was driven by our overall decrease in revenue and a severance tax refund from prior periods of at least$1.1 million that the Company expects to receive. Exclusive of the expected severance tax refund, production taxes decreased to 5.7% of total revenue for the three months endedJune 30, 2020 , as compared to 5.9% of total revenue for the three months endedJune 30, 2019 . Our production taxes decreased by$4.5 million (72%) to$1.7 million for the six months endedJune 30, 2020 from$6.2 million for the prior year period, which was also driven by our overall decrease in revenue and the aforementioned severance tax refund. Exclusive of the expected severance tax refund, production taxes decreased to 6.1% of total revenue for the six months endedJune 30, 2020 , as compared to 6.2% of total revenue for the six months endedJune 30, 2019 . Depletion, depreciation and amortization expense ("DD&A"). Our DD&A expense related to proved oil and natural gas properties decreased by$2.6 million (11%) to$20.2 million for the three months endedJune 30, 2020 from$22.8 million for the prior year period. On a per Boe basis, DD&A increased to$26.15 per Boe for the three months endedJune 30, 2020 compared to$18.05 per Boe for the prior year period. DD&A per Boe for the three months endedJune 30, 2019 , was diluted by production from theDimmit County assets, which were classified as held for sale and not subject to depletion. The assets were sold inOctober 2019 . For the six months endedJune 30, 2020 , DD&A expense related to proved oil and natural gas properties of$44.4 million was relatively flat as compared to the same prior year period. On a per Boe basis, DD&A increased to$25.13 per Boe for the six months endedJune 30, 2020 compared to$18.63 per Boe for the prior year period for the reason noted above. Impairment expense. We did not record any impairment expense during the three months or six months endedJune 30, 2020 . During the three and six months endedJune 30, 2019 , we recorded impairment expense of$5.8 million and$9.1 million related to ourDimmit County oil and gas properties, which were classified as held for sale as ofJune 30, 2019 and subsequently divested inOctober 2019 . Reserve estimates and related impairments of proved and unproved properties are difficult to predict in a volatile price environment. Due to the supply impacts associated with the competition betweenRussia andSaudi Arabia for crude oil market share and demand impacts associated with the global COVID-19 pandemic, we may experience proved or unproved property impairments in the future if commodity prices for the products we produce continue to decline, if we experience changes to our longer term development plans or if there are downward adjustments to our reserves. General and administrative expense ("G&A"). G&A decreased by$1.5 million (27%) to$4.0 million for the three months endedJune 30, 2020 as compared to$5.4 million for the prior year. During the three months endedJune 30, 2020 we incurred legal and advisory fees of$0.6 million ($0.83 per Boe) to amend our credit agreements and comply with certain covenants, including negotiations with the lenders under our credit agreements to reduce the our total debt and leverage and explore transactions to increase the our capital. During the three months endedJune 30, 2019 we incurred legal and accounting fees to complete our Redomiciliation to theU.S of$0.5 million ($0.38 per Boe). G&A, excluding the costs associated with these discrete transactions, decreased on an absolute basis as compared to prior year primarily due to lower salaries and wages as a result of the expected PPP loan forgiveness of$0.8 million attributable to the three months endedJune 30, 2020 and our workforce reduction of approximately 18% and also reduced salaries for certain positions, which occurred in earlyMay 2020 .
For the six months endedJune 30, 2020 , G&A decreased by$1.2 million (11%) to$9.5 million as compared to$10.7 million for the same prior year period. During the six months endedJune 30, 2020 we incurred legal and advisory fees of$0.6 million ($0.36 per Boe) related to the credit facility amendments as described above and$0.2 million ($0.12 per Boe) for legal and accounting fees to complete our Redomiciliation to theU.S. During the six months endedJune 30, 2019 we incurred legal and accounting fees related to the Redomiciliation of$1.0 million ($0.43 per Boe). G&A, excluding the costs associated with these discrete transactions, decreased on an absolute basis as compared to prior year primarily due to lower salaries and wages as a result of the expected PPP loan forgiveness of$0.8 million attributable to the six months endedJune 30, 2020 and our workforce and salary reductions. 31 As described under Credit Facilities, our G&A for the second and third quarter of 2020, is limited to$3 million per quarter (as defined in the agreements). After the adjustments provided for in the agreements, we were in compliance
with the covenant. Gain/loss on commodity derivative financial instruments. Our commodity derivative contracts are marked to market at the end of each reporting period with the changes in fair value being recognized as gain (loss) on commodity derivative financial instruments, net. Cash flow, however, is only impacted by the monthly settlements paid to or received by the counterparty, which are also recorded as gain(loss) on commodity derivative financial instruments, net. The components of gain (loss) on commodity derivative financial instruments was as follows (in thousands): Three months ended Six months ended June 30, June 30, 2020 2019 $ Change 2020 2019 $ Change Unrealized gains (losses)$ (43,498) $ 10,455 $ (53,953) $ 45,506 $ (26,639) $ 72,145 Realized gains (losses) 20,480 (168) 20,648 27,339 3,583 23,756 Total gain (loss) on commodity derivative financial instruments$ (23,018) $ 10,287 $ (33,305) $ 72,845 $ (23,056) $ 95,901
Interest expenses, net of amounts capitalized. The components of interest expense, net of amounts capitalized was as follows (in thousands):
Three months ended June 30, Change Six months ended June 30, Change Interest Expense 2020 2019 $ 2020 2019 $ Interest expense on Term Loan, Revolving Facility and other 7,585 8,177 (592) 15,375 16,174 (799) Amortization of debt issuance costs 909 832 77 1,843 1,597 246 Expense incurred with debt modification 143 - 143 1,199 - 1,199 Loss on interest rate swap 248 2,406 (2,158) 3,085 4,026 (941) Capitalized interest (241) (809) 568 (481) (1,412) 931 Total 8,644 10,606 (1,962) 21,021 20,385 636 The decrease in interest expense on our Term Loan, Revolving Facility and other for the three and six months endedJune 30, 2020 as compared to the same prior year period was driven by the decrease in the average market interest rates, partially offset by an increase in the amount of outstanding debt and additional 2% of paid-in-kind ("PIK") interest, which is added to the principal of the Term Loan. The PIK interest, effectiveMay 30, 2020 , was added as part of the Term Loan amendment inJune 2020 , and totaled$0.4 million for the three and six months endedJune 30, 2020 . Our weighted average debt outstanding during the three and six months endedJune 30, 2020 was$365.0 million versus$350.3 million and$337.9 million , respectively, during the three and six months ended June 30, 2019. At June 30, 2020, the stated weighted average interest rates on the Revolving Facility and the Term Loan were 3.43% and 11.46% (including 2% PIK interest added to the principal at each reporting period), respectively, as compared to 5.18% and 10.32%, respectively, atJune 30, 2019 . As described in Note 2, we entered into the fourth amendment to our Revolving Facility inJanuary 2020 , which among other things, appointedToronto Dominion (Texas) LLC , as the administrative agent (replacing Natixis). As a result of the former administrative agent exiting the facility and terminating its commitments, we wrote-off previously capitalized deferred financing fees of$1.1 million during the six months endedJune 30, 2020 in accordance with Accounting Standards Codification 470- Debt. We capitalized new financing and legal fees of$1.0 million , which will be amortized over the remaining loan term. InJune 2020 , we entered into the fifth amendment to our Revolving Facility, which among other things, reduced our borrowing base from$190 million and$170 million . As a result, we wrote-off deferred financing fees in proportion to the decrease in borrowing base of$0.1 million during the three months endedJune 30, 2020 . 32 We recognized a loss on our interest rate swap of$0.2 million and$2.4 million for the three months endedJune 30, 2020 and 2019, respectively, and$3.1 million and$4.0 million for the six months endedJune 30, 2020 and 2019, respectively. Our interest rate swaps are marked to market at the end of each reporting period, with the changes in fair value being recognized as interest expense. Cash settlements paid to or received by our counterparty are also recorded as interest expense. In the three months endedJune 30, 2020 , the loss on the interest rate swap consisted of$0.7 million of unrealized gains and$1.0 million of realized cash settlements. In the three months endedJune 30, 2019 , the loss on the interest rate swap consisted of$2.4 million of unrealized losses and immaterial realized cash settlements. In the six months endedJune 30, 2020 , the loss on the interest rate swap consisted of$1.6 million of unrealized losses and$1.5 million of realized cash settlements. In the six months endedJune 30, 2019 , the loss on the interest rate swap consisted of$4.1 million of unrealized losses and immaterial realized cash settlements. Other income (expense). In the second quarter 2020, we conveyed our non-core interest in the petroleum exploration license 570 located in theCooper Basin inAustralia ("PEL570") to the property's operator. At the time of the conveyance, we had accrued expenses related to exploratory drilling of approximately$3.7 million . As consideration for the property, the operator settled our outstanding liability for$0.9 million . The property had previously been fully impaired, and therefore the we recognized a gain on the conveyance of$2.8 million during the three and six months endedJune 30, 2020 , which is recorded in other income (expense) on the consolidated statement of operations. As a result of the conveyance, we were also relieved of our commitment to fund any further exploratory drilling for PEL570.
Income tax expense (benefit). The components of our provision for income tax expense (benefit) and our effective income tax rates were as follows (in thousands):
Three months ended June 30, Six months ended June 30, Income tax expense (benefit) 2020 2019 Change in $ 2020 2019 Change in $ Current tax expense (benefit) 13 - 13 (70) - (70) Deferred tax expense/(benefit) (10,205) 323 (10,528) 1,445 (4,051) 5,496 Total income tax expense (benefit) (10,192) 323
(10,515) 1,375 (4,051) 5,426 Effective tax rate 22.2% 10.9% 5.3% 10.5%
Our effective income tax rate, as shown above, differs from the statutory rate (21%) primarily due to changes in our valuation allowance.
Adjusted EBITDAX. Management has historically used both GAAP and certain non-GAAP measures to assess our performance. Adjusted EBITDAX is a supplemental non-GAAP financial measure that is used by our management team for various purposes including as a measure of operating performance and as a basis for strategic planning and forecasting, and certain external users of our consolidated financial statements, such as investors and industry analysts.
We define "Adjusted EBITDAX" as earnings before interest expense, income taxes, DD&A, property impairments, gain/(loss) on sale of non-current assets, exploration expense, stock-based compensation, gains and losses on commodity hedging, net of settlements of commodity hedging and certain other non-cash or non-recurring income/expense items. Our computation of Adjusted EBITDAX may not be comparable to other similarly titled measures of other companies. Management believes Adjusted EBITDAX is useful because it allows us to more effectively evaluate our operating performance, identify operating trends (which may otherwise be masked by the excluded items) and compare the results of our operations from period to period without regard to our financing policies and capital structure. Adjusted EBITDAX should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with GAAP, or as an indicator of our operating performance or liquidity. 33 Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Reconciliation of Net Income (Loss) to Adjusted EBITDAX (in$ 000 's) Net income (loss) $
(35,771)
(10,192) 323 1,375 (4,051) Interest expense 8,644 10,606 21,021 20,385 Loss (gain) on commodity derivative financial instruments, net 23,018 (10,287) (72,845) 23,056 Settlement of commodity derivatives financial instruments 20,480 (168) 27,339 3,583 Depreciation, depletion and amortization expense 20,415 22,958 44,769 44,462 Impairment expense - 5,753 - 9,083 Exploration expense 24 7 173 22
Noncash stock-based compensation expense 91 142 195 277
Transaction-related expenses included in general and administrative expenses (1)
640 487 859 1,014
Reduction-in-force related expenses included in general and administrative expenses
188 - 188 - Other expense (income), net (2) (2,559) 230 (2,559) 210 Adjusted EBITDAX$ 24,978 $ 32,694 $ 44,986 $ 63,475 In 2019 and early 2020, we incurred one-time costs, primarily legal and
accounting fees, to complete our Redomiciliation to the
(1) 2020, we incurred costs to amend our credit facilities and explore
transactions to reduce our leverage (as required by the third amendment to
the Term Loan).
(2) Other income for the three and six months ended
million gain on the conveyance of PEL570 to the operator.
Liquidity and Capital Resources
AtJune 30, 2020 , our cash balance totaled$0.3 million and we had negative working capital of$3.7 million , which included the fair value of derivative assets of$33.7 million . We intend to fund our 2020 development plan primarily using our cash flow generated from operating activities (which includes proceeds from settlements of hedging contracts) and cash on hand. At times, we may supplement our working capital through borrowings on our Revolving Facility, as we did inJuly 2020 ($5 million draw). We expect the July draw to be repaid before year-end. We currently expect our 2020 capital program to be in the range of$40 -$45 million , of which, we had incurred$35.2 million throughJune 30,2020 (excluding the impact of asset retirement obligations). As described below in Credit Facilities, our capital expenditures for the periodMay 1, 2020 throughSeptember 30, 2020 are limited to$5 million . We plan to continue to respond flexibly to market conditions to protect our balance sheet and retain liquidity.
We and our wholly owned subsidiary, SEI, are parties to a syndicated$250.0 million Term Loan withMorgan Stanley Capital Administrators Inc. , as administrative agent, and the Revolving Facility, which is a syndicated reserve-based revolver withToronto Dominion (Texas) LLC , as administrative agent. We refer to our Revolving Facility and Term Loan collectively as our "credit facilities". AtJune 30, 2020 , the Revolving Facility had a borrowing base of$170.0 million , of which$115.0 million was outstanding as ofJune 30, 2020 , and$38.6 million undrawn (net of$16.4 million of outstanding letters of credit). OnJune 30, 2020 , we unwound certain of our derivative positions for proceeds of$1.4 million . Our credit agreements require that 90% of the proceeds from such transactions be used to repay the Revolving Facility balance with a corresponding reduction in the borrowing base. In July, the Company repaid$1.4 million , and then drew down an additional$5 million on the Revolving Facility to meet our working capital needs. Following these events, the borrowing base was$168.6 million with outstanding borrowings of$118.6 million and undrawn capacity of$33.6 million . 34
The Revolving Facility maturesOctober 23, 2022 , and the Term Loan matures onApril 23, 2023 . Our Term Loan and Revolving Facility require us to maintain a variety of financial ratios (described below under "Credit Facilities"). As a result of the recent sharp decrease in oil prices and the resulting scaled down development plan, our business is sensitive to the Asset Coverage ratio, particularly in the near term. If the economic downturn continues long-term, it could also impact our ability to meet our other financial covenants. The third amendment to the Term Loan requires that we have a reserve report prepared as ofJune 30, 2020 by a petroleum engineering firm selected by the lenders. Preparation of the reserve report is in process as of the date of this report, and is expected to be completed no later thanSeptember 30, 2020 . Except for the Asset Coverage Ratio which has not been calculated as of the date of this report, we were in compliance with the other restrictive and financial covenants in our credit facilities as ofJune 30, 2020 . Our liquidity is highly dependent on prices we receive for the sale of oil, gas, and NGLs we produce. Prices we receive are determined by prevailing market conditions and greatly influence our revenue, cash flow, profitability, ability to comply with financial and other covenants in our credit facilities, access to capital and future rate of growth. We expect that our commodity derivative positions will help us stabilize a portion of our expected cash flows from operations despite the recent decline in the price of oil and natural gas. At times, we may choose to liquidate derivative positions before the contract ends in order realize the current value of our existing positions, to the extent permitted by our credit facilities Please see Note 6 to our Consolidated Financial Statements for a summary of our outstanding derivative positions
as ofJune 30, 2020 . After the sharp decline in oil pricing inMarch 2020 , we renegotiated pricing with a number of our vendors and we entered into contractual arrangements with drilling and completion service providers at reduced costs. Additionally, we have changed our field operating procedures in response to the material drop in oil prices which further serves to reduce our cost structure. We have also focused on reducing G&A expense, including reducing our workforce inMay 2020 to right-size our employee structure for our expected development and operating plans. We are actively working to secure additional cost savings and if commodity prices remain low for a sustained period of time, we expect further reductions to our costs.
If commodity prices remain depressed for an extended period of time or the capital/credit markets become constrained, the borrowing capacity under our Revolving Facility could be reduced further and we may be required to repay some or all of our indebtedness prior to maturity.
The amount, timing and allocation of these and other future expenditures is largely discretionary. As a result, the amount of funds devoted to any particular activity may increase or decrease significantly, depending on available opportunities, timing of projects and market conditions.
Cash Flows Our cash flows for the six months endedJune 30, 2020 and 2019 are as follows: Six months ended June 30, (In $ '000s) 2020 2019
Net cash provided by operating activities
35 Cash flows provided by operating activities. Cash provided by operating activities for the six months endedJune 30, 2020 was$14.9 million , a decrease of$35.8 million compared to$50.8 million in the prior year period. This decrease was driven by lower revenues resulting from a decrease in production volumes. Including the effect of derivative settlements, including unwound positions, (as shown on page 30), our realized price per Boe increased 5% to$42.41 per Boe as compared to$43.94 per Boe. During the six months endedJune 30, 2020 , we had cash settlements from our derivative contracts of$27.0 million . In addition, we received$1.9 million of PPP proceeds, which we expect to be forgiven. Due to payment timing, our cash flows from operations for the six months endedJune 30, 2020 included three quarterly interest payments on our Term Loan, whereas, the six months endedJune 30, 2019 included two quarterly interest payments, which resulted in lower cash flows in 2020 of$6.5 million . Cash flows used in investing activities. Cash used in investing activities for the six months endedJune 30, 2020 decreased to$25.7 million as compared to$91.1 million in prior year period. Cash flows for both periods were primarily related to payment of drilling and completion costs. We slowed our pace of development in 2020 in order to fund our capital expenditures with operating cash flow and cash on hand. In 2019 the cash flows used in investing activities also included a$3.4 million reduction of the amount of capital expenditures in accounts payable and accrued expenditures, where as in 2020, the amount of capital expenditures included in accounts payable and accrued expenditures increased by$11.5 million . Cash flows provided by financing activities. We used$1.2 million for financing activities during the six months endedJune 30, 2020 , as compared to cash provided by financing activities of$39.7 million for the six months endedJune 30, 2019 . We have scaled our 2020 drilling program, so that it may be funded from cash on hand and cash flow from operations; as a result, we did not have any debt draws during period. InJanuary 2020 , we paid lender and legal fees totaling$1.0 million to amend our Revolving Facility to increase the borrowing base to$210 million (which was subsequently reduced to$170 million following the industry downturn). During 2019, we borrowed$40.0 million on our Revolving Facility to fund a portion of our 2019 drilling program. Capital Expenditures
During the six months endedJune 30, 2020 , we incurred approximately$32.2 million in drilling, completions and facility costs, primarily to complete and equip 6.0 net wells, which were turned to sales in February (2.0) and in lateJune 2020 . We completed our 2020 drilling program in earlyApril 2020 and released the rig shortly thereafter. A decision regarding timing for completing the 2.0 net drilled and uncompleted locations has not been made as of the date of this report. We expect total capital expenditures to be in the range of$40 -$45 million for the year endingDecember 31, 2020 . However, we intend to continue to flexibly manage our operations, including capital expenditure levels, based on existing and expected market conditions to protect our balance sheet and retain liquidity. We expect to be able to fund our planned capital program for 2020 with cash flow generated from operating activities (which includes settlements from derivatives) and cash on hand. Credit Facilities Interest on the Revolving Facility accrues at LIBOR plus a margin that ranges from 2.50% to 3.50% based upon the amount drawn. Interest on the Term Loan accrues at LIBOR (with a LIBOR floor of 1.0%) plus 10.0%., of which 2% of the applicable margin is payable-in-kind, (effectiveMay 30, 2020 ). 36
Under the Revolving Facility, we are required to maintain the following financial ratios:
a minimum Current Ratio, consisting of consolidated current assets (as defined
? in the Revolving Facility) including undrawn borrowing capacity to consolidated
current liabilities (as defined in the Revolving Facility), of not less than
1.0 to 1.0 as of the last day of any fiscal quarter;
a maximum Leverage Ratio, consisting of consolidated Total Debt to adjusted
? consolidated EBITDAX (as defined in the Revolving Facility), of not greater
than 3.5 to 1.0 as of the last day of any fiscal quarter; and
a minimum Interest Coverage Ratio, consisting of EBITDAX to Consolidated
? Interest Expense (as defined in the Revolving Facility), of not less than 1.5
to 1.0 as of the last day of any fiscal quarter (for such time as there is a
similar covenant under ours or SEI's subordinated indebtedness).
Under the Term Loan, we are required to maintain the following financial ratios:
a minimum Interest Coverage Ratio, consisting of EBITDAX to Consolidated
? Interest Expense (as defined in the Term Loan), of not less than 1.5 to 1.0 as
of the last day of any fiscal quarter (for such time as there is a similar
covenant under ours or SEI's subordinated indebtedness); and
? an Asset Coverage Ratio, consisting of Total Proved PV9% to Total Debt (as
defined in the Term Loan agreement), of not less than 1.50 to 1.0. In addition, the third amendment to the Term Loan and fifth amendment to the Revolving Facility established maximum capital expenditure ($5 million , as defined in the agreements) fromMay 1, 2020 throughSeptember 30, 2020 and general and administrative amounts ($3 million per quarter, as defined in the agreements) throughSeptember 30, 2020 . A breach of any covenants in our credit agreements will result in default under both our Term Loan and cross default on our Revolving Credit Facility, after any applicable grace period. A default, if not waived, could result in acceleration of the amounts outstanding under the Credit Facilities. In the event that some or all of the amounts outstanding under our Credit Facilities are accelerated and become immediately due and payable, we may not have the funds to repay, or the ability to refinance, such outstanding amounts and our lenders could foreclose upon our assets. If we are unable to remain in compliance with our financial and non-financial covenants, we intend to seek a waiver or covenant relief. However, no assurances can be given that we will be able to obtain
such relief. As ofJune 30, 2020 , we were in compliance with all of the financial covenants in our Revolving Facility and Term Loan that had been evaluated at the date of this report. As described above, we are required to maintain an Asset Coverage Ratio of not less than 1.5 to 1.0, which is calculated as the value of our Total Proved Reserves (PV 9%) using Nymex pricing and giving consideration to the value of our commodity derivative instruments, to Total Debt. The third amendment to the Term Loan requires that we have a reserve report prepared as ofJune 30, 2020 by a petroleum engineering firm selected by our lenders. Preparation of the reserve report was in process as of the date of this report, and is expected to be completed no later thanSeptember 30, 2020 . The Asset Coverage Ratio as ofJune 30, 2020 is due no later thanSeptember 30, 2020 . The value of our oil and gas reserves, (including "Total Proved Reserves" as described in the Term Loan agreement) is highly sensitive to future commodity prices. We regularly enter into commodity derivative contracts to protect the cash flows associated with our proved developed producing wells and to provide supplemental liquidity to mitigate decreases in revenue due to reductions in commodity prices. In addition, we have renegotiated pricing with a number of our vendors and have already realized cost savings on drilling and completion activities as compared to the rates in effect in 2019. We believe we have, or likely will, be able to implement plans to substantially mitigate any potential breach of covenant related to this pricing downturn. However, we are not able to assert that it is probable that we will remain in compliance with all of our covenants for the 12 months following the date of this Quarterly Report and cannot guarantee that we will be able to obtain waivers if a covenant is breached. This raises uncertainty about our ability to continue as a going
concern. 37
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial statements, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
There were no changes to our critical accounting policies from those disclosed
in our Annual Report on Form 10-K for the year ended
© Edgar Online, source