APPROACH RESOURCES, INC. The following discussion is intended to assist in understanding our results of operations and our financial condition. This section should be read in conjunction with management's discussion and analysis contained in our Annual Report on Form 10-K for the year endedDecember 31, 2018 , filed with theSecurities and Exchange Commission ("SEC") onMarch 18, 2019 . Our consolidated financial statements and the accompanying notes included elsewhere in this report contain additional information that should be referred to when reviewing this material. Certain statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, which could cause actual results to differ from those expressed in this report. A glossary containing the meaning of the oil and gas industry terms used in this management's discussion and analysis follows the "Results of Operations" table in this Item 2.
Cautionary Statement Regarding Forward-Looking Statements
Various statements in this report, including those that express a belief,
expectation or intention, as well as those that are not statements of historical
fact, are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The forward-looking statements may
include projections and estimates concerning the timing and success of specific
projects, typical well economics and our future reserves, production, revenues,
costs, income, capital spending, 3-D seismic operations, interpretation and
results and obtaining permits and regulatory approvals. When used in this
report, the words "will," "believe," "intend," "expect," "may," "should,"
"anticipate," "could," "estimate," "plan," "predict," "project," "potential" or
their negatives, other similar expressions or the statements that include those
words, are intended to identify forward-looking statements, although not all
forward-looking statements contain such identifying words.
These forward-looking statements are largely based on our expectations, which
reflect estimates and assumptions made by our management. These estimates and
assumptions reflect our best judgment based on currently known market conditions
and other factors. Although we believe such estimates and assumptions to be
reasonable, they are inherently uncertain and involve a number of risks and
uncertainties that are beyond our control. In addition, management's assumptions
about future events may prove to be inaccurate. We caution all readers that the
forward-looking statements contained in this report are not guarantees of future
performance, and we cannot assure any reader that such statements will be
realized or the forward-looking events and circumstances will occur. Actual
results may differ materially from those anticipated or implied in the
forward-looking statements due to the factors listed or referred to in the "Risk
Factors" section and elsewhere in this report. All forward-looking statements
speak only as of the date of this report. We disclaim any obligation to publicly
update or revise any forward-looking statements as a result of new information,
future events or otherwise, unless required by law. These cautionary statements
qualify all forward-looking statements attributable to us, or persons acting on
our behalf. The risks, contingencies and uncertainties relate to, among other
matters, the following:
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• potential adverse effects of the Chapter 11 Cases on our liquidity and
results of operations;
• our ability to obtain timely approval by the Court with respect to the
motions filed in the Chapter 11 Cases;
• objections to our sale process, DIP Facility, or other pleadings filed
that could protract the Chapter 11 Cases;
• employee attrition and our ability to retain senior management and other
key personnel due to the distractions and uncertainties, including our
ability to provide adequate compensation and benefits during the Chapter
11 Cases;
• our ability to successfully complete a sale process or emerge from Chapter
11;
• our ability to comply with the restrictions imposed by our DIP Facility
and other financing arrangements;
• our ability to maintain relationships with customers, employees and other
third parties and regulatory authorities as a result of our Chapter 11
filing;
• the effects of the Bankruptcy Petitions on us and on the interests of
various constituents, including holders of our common stock;
• the Court's rulings in the Chapter 11 Cases, including the approval of the
DIP Facility, and the outcome of the Chapter 11 Cases generally;
• the length of time that we will operate under Chapter 11 protection and
the continued availability of operating capital during the pendency of the
proceedings;
• risks associated with third party motions in the Chapter 11 Cases, which
may interfere with our ability to consummate a sale or emerge from Chapter
11;
• our ability to continue as a going concern;
• the outcome of our ongoing discussions during the ongoing Chapter 11 Cases
with significant stakeholders and lenders under our revolving credit
facility;
• uncertainties in drilling, exploring for and producing oil and gas;
• oil, NGLs and natural gas prices;
• overall
• domestic and foreign demand and supply for oil, NGLs, natural gas and the
products derived from such hydrocarbons;
• actions of the
and other state-controlled oil companies relating to oil price and
production controls;
• the negative impacts of the delisting of our common stock, including any
impacts from the Chapter 11 Cases, long-term adverse effects on our
ability to raise capital, loss of confidence in the Company by suppliers,
customers and employees, and the loss of institutional investor interest
in our common stock, among other negative impacts;
• our ability to obtain additional financing necessary to fund ouroperations and capital expenditures and to meet our other obligations;
• our ability to maintain a sound financial position;
• issuance of equity securities in connection with potential financing or
deleveraging transactions or other strategic alternatives that may cause
substantial dilution;
• our cash flows and liquidity;
• the effects of government regulation and permitting and other legal
requirements, including laws or regulations that could restrict or
prohibit hydraulic fracturing;
• disruption of credit and capital markets;
• disruptions to, capacity constraints in or other limitations on the
pipeline systems that deliver our oil, NGLs and natural gas and other
processing and transportation considerations;
• marketing of oil, NGLs and natural gas;
• high costs, shortages, delivery delays or unavailability of drilling and
completion equipment, materials, labor or other services;
21
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• competition in the oil and gas industry; • uncertainty regarding our future operating results; • profitability of drilling locations; • interpretation of 3-D seismic data; • replacing our oil, NGLs and natural gas reserves; • our ability to retain and attract key personnel;
• our business strategy, including our ability to recover oil, NGLs and
natural gas in place associated with our Wolfcamp shale oil resource play
in the Permian Basin ;
• development of our current asset base or property acquisitions;
• estimated quantities of oil, NGLs and natural gas reserves and present
value thereof;
• plans, objectives, expectations and intentions contained in this report
that are not historical; and
• other factors discussed in our Annual Report on Form 10-K for the year
ended
Overview
Approach Resources Inc. is an independent energy company focused on the exploration, development, production and acquisition of unconventional oil and gas reserves in theMidland Basin of the greaterPermian Basin inWest Texas , where we leased approximately 113,000 net acres as ofSeptember 30, 2019 . We believe our concentrated acreage position and extensive, integrated field infrastructure system provides us an opportunity to achieve cost, operating and recovery efficiencies in the development of our drilling inventory. We believe our business strategy is dependent on a successful restructuring of our balance sheet and the outcome of the Chapter 11 Cases. Assuming a successful restructuring of our balance sheet, our long-term business strategy is to create value by growing reserves and production in a cost efficient manner and at attractive rates of return. We intend to pursue that strategy by developing resource potential from the Wolfcamp shale oil formation and pursuing acquisitions that meet our strategic and financial objectives. Additional drilling targets could include the Clearfork,Canyon Sands ,Strawn and Ellenburger zones. We sometimes refer to our development project in thePermian Basin as "Project Pangea," which includes "Pangea West." Our management and technical teams have a proven track record of finding and developing reserves through advanced drilling and completion techniques. As the operator of all of our estimated proved reserves and production, we have a high degree of control over capital expenditures and other operating matters. AtDecember 31, 2018 , our estimated proved reserves were 180.1 million barrels of oil equivalent ("MMBoe"), made up of 29% oil, 31% NGLs and 40% gas. The proved developed reserves were 37% of our total proved reserves atDecember 31, 2018 . Substantially all of our proved reserves are located in thePermian Basin inCrockett andSchleicher counties,Texas . AtSeptember 30, 2019 , we owned working interests in 792 producing oil and gas wells.
Going Concern Uncertainty
Our liquidity and ability to comply with financial covenants under our revolving credit facility have been negatively impacted by the recent decrease in commodity prices, the severe natural gas price discount in thePermian Basin and restructuring expenses incurred during the nine months endedSeptember 30, 2019 . Our revolving credit facility contains three principal financial covenants: (i) a consolidated interest coverage ratio, (ii) a consolidated modified current ratio and (iii) a consolidated total leverage ratio. See Note 5 to our consolidated financial statements in this report for additional information regarding the financial covenants under our revolving credit facility. As ofSeptember 30, 2019 , we were not in compliance with the financial covenants under our revolving credit facility, which represents an event of default under our revolving credit facility. Our revolving credit facility matures onMay 7, 2020 , and we have classified the outstanding balance on our revolving credit facility as a current liability as ofSeptember 30, 2019 . These factors raise substantial doubt regarding our ability to continue as a going concern. Prior to the filing of the Bankruptcy Petitions (as defined below), we entered into a number of amendments to a limited forbearance agreement with the lenders under our revolving credit facility, pursuant to which the lenders agreed to forbear from exercising their rights and remedies under the revolving credit facility (and related loan documents) and applicable law with respect to the occurrence or continuance of events of default caused by our failure to comply with certain financial covenants in the credit facility. As amended, the forbearance agreement terminated onOctober 28, 2019 . 22 -------------------------------------------------------------------------------- In order to improve our leverage position, we pursued and considered a number of actions, including engaging in discussions withWilks Brothers, LLC , and its affiliateSDW Investments, LLC (collectively, "Wilks") regarding their investment in the Company. These discussions included a possible debt for equity exchange of approximately$62.3 million of 7% Senior Notes due 2021 (the "Senior Notes") currently held by Wilks and an additional capital infusion into Approach (the "Exchange Transaction"). In addition, we previously engaged in discussions and negotiations with the lenders under our revolving credit facility regarding a potential extension of and amendments to the existing credit agreement. An extension of and amendments to the existing credit agreement was contingent on the successful and timely consummation of an Exchange Transaction. Discussions and negotiations regarding the Exchange Transaction, and extension of and amendment to the existing credit agreement progressed throughout 2019. However, no definitive agreements ultimately were executed, and the negotiations currently are not active. We, including our previously-formed committee of independent directors, have continued our evaluation of deleveraging and restructuring alternatives throughout the third quarter and through early November.
Filings under Chapter 11 of the United States Bankruptcy Code
OnNovember 18, 2019 , (the "Petition Date"), we along with all of our subsidiaries (the "Filing Subsidiaries" and, together with the Company, the "Debtors") filed voluntary petitions (collectively, the "Bankruptcy Petitions") under Chapter 11 ("Chapter 11"), of Title 11 of theU.S. Code (the "Bankruptcy Code") in theUnited States Bankruptcy Court for the Southern District of Texas (the "Court"). The Debtors have filed a motion to have their Chapter 11 cases (collectively, the "Chapter 11 Cases") jointly administered under the caption In reApproach Resources Inc. , et al. Each Debtor will continue to operate its business and manage its properties as a "debtor in possession" under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court. On the Petition Date, the Debtors filed a number of motions with the Court generally designed to stabilize their operations and facilitate the Debtors' transition into Chapter 11. Certain of these motions seek authority from the Court for the Debtors to make payments upon, or otherwise honor, certain obligations that arose prior to the Petition Date, including obligations related to employee wages, salaries and benefits, taxes, and certain holders of royalty, working and other mineral interests as required by the Debtors' various leases and related agreements essential to the Debtors' businesses. In addition, the Debtors filed a motion (the "NOL Motion") seeking entry of an interim and final order establishing certain procedures (the "Procedures") with respect to direct and indirect trading and transfers of stock of the Company, and seeking related relief, in order to protect the potential value of the Company's net operating loss carryforwards ("NOL") and certain other of the Company's tax attributes for use in connection with the reorganization. If approved, in certain circumstances, the Procedures would, among other things, restrict transactions involving, and require notices of the holdings of and proposed transactions by, any person or group of persons that is or, as a result of such a transaction, would become, a Substantial Stockholder of the common stock issued by Approach (the "Common Stock"). For purposes of the Procedures, a "Substantial Stockholder" is any person or, in certain cases, group of persons that beneficially own, directly or indirectly (and/or owns options to acquire) at least 4.45 million shares of Common Stock (representing approximately 4.75% of all issued and outstanding shares of Common Stock). If the Procedures are approved, any prohibited transfer of stock of the Company would be null and void ab initio and may lead to contempt, compensatory damages, punitive damages, or sanctions being imposed by the Court. In addition, the Debtors have requested approval of additional procedures as part of the final order that set forth (i) certain future circumstances under which any person, group of persons, or entity holding, or which as a result of a proposed transaction may hold, a substantial amount of certain claims against the Debtors may be required to file notice of its holdings of such claims and of proposed transactions, which transactions may be restricted, and (ii) certain limited circumstances thereafter under which such person(s) may be required to sell, by a specified date following the confirmation of a Chapter 11 plan of the Debtors, all or a portion of any such claims acquired during the Chapter 11 Cases.
The Debtors are considering, among other things, sales of all or substantially all of their assets pursuant to Section 363 of the Bankruptcy Code.
For the duration of the Chapter 11 Cases, the Company's operations and its
ability to develop and execute its business plan are subject to risks and
uncertainties associated with the Chapter 11 Cases. As a result of these risks
and uncertainties, the Company's assets, liabilities, officers and/or directors
could be significantly different following the outcome of the Chapter 11 Cases,
and the description of its operations, properties and capital plans included in
these financial statements may not accurately reflect its operations, properties
and capital plans following the Chapter 11 Cases.
23
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Pursuant to Section 362 of the Bankruptcy Code, the filing of the Bankruptcy
Petitions automatically stayed most actions against the Debtors, including
actions to collect indebtedness incurred prior to the Petition Date or to
exercise control over the Debtors' property. Subject to certain exceptions under
the Bankruptcy Code, the filing of the Debtors' Chapter 11 Cases also
automatically stayed the continuation of most legal proceedings or the filing of
other actions against or on behalf of the Debtors or their property to recover
on, collect or secure a claim arising prior to the Petition Date or to exercise
control over property of the Debtors' bankruptcy estates, unless and until the
Court modifies or lifts the automatic stay as to any such claim. Notwithstanding
the general application of the automatic stay described above, governmental
authorities may determine to continue actions brought under their police and
regulatory powers.
Debtor-In-Possession Financing
In connection with the Bankruptcy Petitions, the Debtors filed a motion (the "DIP Motion") seeking, among other things, final approval of$16.5 million of debtor-in-possession financing (the "DIP Financing") on the terms and conditions set forth in a proposed Senior Secured Super Priority Debtor-In-Possession Credit Agreement (the "DIP Facility") as filed with the Court, among the Debtors, as borrower, and with certain of the lenders (the "DIP Lenders") party to the Amended and Restated Credit Agreement, dated as ofMay 7 2014 . The Debtors expect the DIP Financing will be available upon the entry of a final order of the Court. Upon approval by the Court and the satisfaction of the conditions set forth in the DIP Facility, the DIP Financing will provide the Debtors with valuable liquidity, which, along with cash on hand and cash generated from ongoing operations, will be used to support the business and any marketing and sale process.
The DIP Facility, if approved by the Court as proposed, would contain the following terms:
• a senior secured super priority debtor-in-possession credit facility in
an aggregate principal amount of up to $41.25 million consisting of (i)
a new money revolving credit facility in the principal amount of $ 16.5 million (the "New Money DIP Loans") and (ii) a refinancing "roll-up"
term loan in the principal amount of
Loans" and, together with the New Money DIP Loans, the "DIP Loans");
• following approval by the Court, proceeds of the DIP Facility may be
used by the Debtors to (i) pay certain costs, fees and expenses related
to the Chapter 11 Cases; (ii) make payments provided for in the DIP
Motion, including in respect of certain "adequate protection"obligations and (iii) fund working capital needs, capital improvements
and other general corporate purposes of the Debtors, in all cases
subject to the terms of the DIP Facility and applicable orders of the
Court;
• the maturity date of the DIP Facility is expected to be the earliest to
occur of (i) seven months after the Petition Date; (ii) the entry of an
order approving a sale pursuant to Section 363 of the Bankruptcy Code;(iii) the effective date of any Acceptable Plan (as defined in the DIP
Facility) or any other Chapter 11 plan; (iv) the conversion of any of
the Debtors' cases to a case under Chapter 7 of the Bankruptcy Code; (v)
the entry of an order for dismissal of any of the Chapter 11 Cases; and
(vi) at the election of the administrative agent, the date on which any
event of default under the DIP Facility is continuing;
• interest will accrue at a rate per annum equal to the Adjusted LIBO Rate
(as defined in the DIP Facility) (with a floor of 2%) plus 6%, or the
agent bank's prime rate plus an applicable margin of 5%;
• the Company is required to pay the following fees: (i) a facility fee of
2% payable on the New Money DIP Loans and (ii) an unused commitment fee
of 1% per annum;
• the obligations and liabilities of the Debtors owed to the DIP Lenders
under the DIP Facility and related financing documents will be entitled
to super priority claims status and super priority security interests
and liens on all of the Debtors' assets, subject to limited exceptions;
• in addition to prepayment events and events of default, the proposed DIP
Facility will provide for certain customary covenants applicable to the
Company, including covenants requiring (i) weekly delivery of a proposed
operating debtor-in-possession budget (the "DIP Budget") and variance
report, with all permitted variances subject to capital expenditure
restrictions on certain leases; and (ii) compliance with the approved
DIP Budget subject to permitted variances of (A) 10% on aggregate weeklydisbursements, (B) 15% on individual line item weekly disbursements, and
(C) 10% on actual aggregate monthly production from the Debtor's oil and
gas properties from the aggregate amount of monthly production
forecasted in the DIP Budget; and
• the Debtors' Chapter 11 Cases are subject to certain milestones,
including, among others, the following deadlines: (i) entry of the
Court's final order approving the DIP Facility no later than 30 days
after the Petition Date; (ii) filing of the bid procedures and sale
motion seeking approval of a sale of substantially all of the Debtors'
assets no later than 20 days after the Petition Date; (iii) entry of the
Court's order approving bid procedures and setting a hearing date for
24
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approval of the sale no later than 50 days after the Petition Date; (iv)
entry of the Court's order approving the sale no later than 100 days
after the Petition Date; (v) filing of a plan of reorganization and
disclosure statement no later than 105 days after the Petition Date;(vi) entry of the Court's order approving the disclosure statement no
later than 135 days after the Petition Date; and (vii) entry of the
Court's order confirming the plan of reorganization no later than 180
days after the Petition Date.
The DIP Facility is subject to final approval by the Court, which has not been
obtained at this time. The Debtors anticipate the credit facilities under the
DIP Facility becoming effective promptly following approval by the Court of the
DIP Motion . The foregoing description of the DIP Facility does not purport to be
complete and is qualified in its entirety by reference to the DIP Facility, as
filed with the Court and subject to approval by the Court.
Third Quarter 2019 Activity
During the three months endedSeptember 30, 2019 , we produced 863 MBoe, or 9.4 MBoe/d. AtSeptember 30, 2019 , we had seven horizontal Wolfcamp wells waiting on completion. We currently have no rigs running in Project Pangea.
2019 Capital Expenditures
We currently are evaluating our annual capital budget, and our capital expenditures for the remainder of 2019, which will be dependent on the outcome of our discussions and negotiations surrounding the need to restructure our balance sheet, as well as the outcome of our Chapter 11 Cases. For the three months endedSeptember 30, 2019 , our capital expenditures totaled$0.7 million . The terms of our DIP Facility substantially restrict our ability to fund capital expenditures. Our 2019 capital budget excludes acquisitions and lease extensions and renewals and is subject to change depending upon a number of factors, including prevailing and anticipated prices for oil, NGLs and gas, results of horizontal drilling and completions, economic and industry conditions at the time of drilling, the availability of sufficient capital resources for drilling prospects, our financial results and the availability of lease extensions and renewals on reasonable terms. The impact of changes in these collective factors in the current commodity price environment is difficult to estimate. We will assess the impact of changes in these collective factors, as well as the results of the potential financing and deleveraging transactions on our development plan at the appropriate time, and we may respond to such changes by altering our capital budget or our development plan.
Key Employee Retention Plan
During the three months endedSeptember 30, 2019 , our board of directors approved retention plans for certain key level employees including an executive retention plan (the "Executive Retention Plan"). We recognized an expense of$2.5 million related to the retention plans, which is included in general and administrative expense in our consolidated statements of operations. OnSeptember 26, 2019 , the Company entered into Participation Agreements under the Executive Retention Plan with each member of the Company's executive management team (the "Executives" and each an "Executive"): (i) Mr.Sergei Krylov , President and Chief Executive Officer; (ii) Mr.Troy Hoefer , Executive Vice President - Operations; (iii) Mr.Joshua Dazey , Executive Vice President - Legal and Secretary; and (iv) Mr.Ian Shaw , Executive Vice President - Finance and Accounting. The Executive Retention Plan provides for a lump sum, one-time cash retention payment, less applicable tax withholdings, as soon as practicable in the following amounts: 180% of the annualized base salary forMr. Krylov ; 130% of the annualized base salary forMr. Hoefer ; 105% of the annualized base salary forMr. Dazey ; and 105% of the annualized base salary forMr. Shaw . In order to receive such retention payments, an Executive must have been employed by the Company or an affiliate on the payment date and must have signed and returned a release of claims and have not revoked his acceptance of the release, among other requirements. If an Executive ceases to be an employee of the Company or an affiliate at any time prior to the expiration of the retention period for any reason other than a "qualifying termination" (as such term is defined in the Executive Retention Plan), the Executive would be required to repay the amount received under the Executive Retention Plan to the Company. The retention period for each Executive commenced on the cash retention payment date and will end 12 months from such payment date; provided, however, that in the event of a change in control, such period will end instead on the earlier of (i) six months from the effective date of the change in control or (ii) 15 months after the cash retention payment date. The payments pursuant to the Executive Retention Plan and the associated terms of the Executive Retention Plan constitute all of the Company's and its affiliates' obligations to the Executives with respect to retention bonuses, retention payments, or similar compensation or remuneration or bonuses, payments, or similar compensation or remuneration upon or after a potential change in control or change in control. The Executive Retention Plan supersedes all oral or written plans, programs, agreements and policies of the Company and its affiliates with respect to the subject matter of the Executive Retention Plan, including any employment agreement or other plan providing for payments upon a change in control. 25
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NASDAQ Delisting OnNovember 1, 2019 , we received a letter from the Listing Qualifications department staff ofThe Nasdaq Stock Market LLC ("Nasdaq") notifying us of Nasdaq's determination to delist our common stock from the Nasdaq Global Select Market due to our inability to achieve compliance with the$1.00 per share minimum closing bid price required by the continued listing requirements of Nasdaq Listing Rule 5450(a)(1) (the "Minimum Bid Requirement"). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we previously had 180 calendar days, or untilOctober 29, 2019 , to regain compliance with the Minimum Bid Requirement. After we declined to request an appeal of this determination, trading in our securities was suspended at the opening of business onNovember 12, 2019 , and Nasdaq will file a Form 25-NSE with theSecurities and Exchange Commission to remove our securities from listing and registration on Nasdaq. EffectiveNovember 12, 2019 , our common stock commenced trading on the OTC Pink marketplace. We can provide no assurance that our common stock will continue to trade on the OTC Pink, whether broker-dealers will continue to provide public quotes of our common stock on the OTC Pink, whether the trading volume of our common stock will be sufficient to provide for an efficient trading market or whether quotes for our common stock may be blocked by OTC Markets Group in the future. Departure of Directors
Resignation of
On
Mr. Neff's resignation from the Board was not a result of a disagreement with the Company or on any matter relating to the Company's operations, policies or practices.
Resignation of
On
Mr. Wilks's resignation from the Board was not a result of a disagreement with the Company or on any matter relating to the Company's operations, policies or practices.
Following
26
--------------------------------------------------------------------------------Results of Operations
The following table sets forth summary information regarding oil, NGLs and gas revenues, production, average product prices and average production costs and expenses for the three and nine months endedSeptember 30, 2019 and 2018. We determine a barrel of oil equivalent using the ratio of six Mcf of natural gas to one Boe, and one barrel of NGLs to one Boe. The ratios of six Mcf of natural gas to one Boe and one barrel of NGLs to one Boe do not assume price equivalency and, given price differentials, the price for a Boe for natural gas or NGLs may differ significantly from the price for a barrel of oil. Three Months Ended Nine Months Ended September 30, September 30, 2019 2018 2019 2018 Revenues (in thousands): Oil$ 10,309 $ 18,075 $ 32,926 $ 52,524 NGLs 3,370 10,690 12,568 26,874 Gas 1,737 3,797 3,885 12,262 Total oil, NGLs and gas sales 15,416 32,562
49,379 91,660
Net cash receipt (payment) on derivative settlements 778 (3,172 ) 2,893 (6,685 ) Total oil, NGLs and gas sales including derivative impact$ 16,194 $ 29,390 $ 52,272 $ 84,975 Production: Oil (MBbls) 194 269 614 819 NGLs (MBbls) 314 377 960 1,105 Gas (MMcf) 2,129 2,388 6,418 7,168 Total (MBoe) 863 1,043 2,644 3,119 Total (MBoe/d) 9.4 11.3 9.7 11.4 Average prices: Oil (per Bbl)$ 53.01 $ 67.28 $ 53.66 $ 64.13 NGLs (per Bbl) 10.74 28.38 13.09 24.31 Gas (per Mcf) 0.82 1.59 0.61 1.71 Total (per Boe) 17.86 31.21 18.68 29.39 Net cash receipt (payment) on derivative settlements (per Boe) 0.90 (3.04 ) 1.09 (2.14 ) Total including derivative impact (per Boe)$ 18.76 $ 28.17 $ 19.77 $ 27.25 Costs and expenses (per Boe): Lease operating$ 4.59 $ 5.57 $ 4.92 $ 5.17 Production and ad valorem taxes 1.98 2.03 1.96 2.30 Exploration 0.01 - 0.55 - General and administrative 5.49 5.35
4.85 5.84 Depletion, depreciation and amortization 15.19 13.90 15.05 15.08
Glossary
Bbl. One stock tank barrel, of 42 U.S. gallons liquid volume, used herein to reference oil, condensate or NGLs.
Boe. Barrel of oil equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil equivalent, and one Bbl of NGLs to one Bbl of oil equivalent.
MBbl. Thousand barrels of oil, condensate or NGLs.
MBoe. Thousand barrels of oil equivalent.
Mcf. Thousand cubic feet of natural gas.
MMBoe. Million barrels of oil equivalent.
27
--------------------------------------------------------------------------------MMBtu. Million British thermal units.
MMcf. Million cubic feet of natural gas.
NGLs. Natural gas liquids.
NYMEX.
/d. "Per day" when used with volumetric units or dollars.
Three Months Ended
Oil, NGLs and gas sales. Oil, NGLs and gas sales decreased$17.2 million , or 53%, for the three months endedSeptember 30, 2019 , to$15.4 million , compared to$32.6 million for the three months endedSeptember 30, 2018 . The decrease in oil, NGLs and gas sales was due to a decrease in average realized commodity prices ($11.5 million ) and a decrease in production volumes ($5.7 million ). Production volumes decreased as a result of no well completions since the third quarter of 2018. We expect oil, NGLs and gas sales to decrease in 2019 compared to 2018 due to a decrease in commodity prices and a decrease in production due to decreased well completion activity. Net loss. Net loss for the three months endedSeptember 30, 2019 , was$19.2 million , or$0.20 per diluted share, compared to$4.3 million , or$0.05 per diluted share, for the three months endedSeptember 30, 2018 . Net loss for the three months endedSeptember 30, 2019 , included restructuring expenses of$8.5 million and a commodity derivative gain of$0.3 million . The increase in the net loss for the three months endedSeptember 30, 2019 , was primarily due to a decrease in revenue ($17.2 million ) and the restructuring expenses of$8.5 million , partially offset by a decrease in other operating expenses ($4.3 million ). Oil, NGLs and gas production. Production for the three months endedSeptember 30, 2019 , totaled 863 MBoe (9.4 MBoe/d), compared to production of 1,043 MBoe (11.3 MBoe/d) in the prior-year period, a 17% decrease. Production for the three months endedSeptember 30, 2019 , was 23% oil, 36% NGLs and 41% gas compared to 26% oil, 36% NGLs and 38% gas for the three months endedSeptember 30, 2018 . Production volumes decreased during the three months endedSeptember 30, 2019 , as a result of no well completions since the third quarter of 2018. We expect production to decrease from current levels due to decreased well completion activity. Commodity derivative gain (loss). The following table sets forth the components of our commodity derivative gain (loss) for the three months endedSeptember 30, 2019 , and 2018 (dollars in thousands). Three Months EndedSeptember 30, 2019 2018
Net cash receipt (payment) on derivative settlements
Non-cash fair value loss on derivatives (432 ) (84 )
Commodity derivative gain (loss) $ 346 $(3,256 )
Historically, we have not designated our derivative instruments as cash-flow hedges. Commodity derivative settlements are derived from the relative movement of commodity prices in relation to the fixed notional pricing in our derivative contracts for the respective years. As commodity prices increase or decrease, the fair value of the open portion of those positions decreases or increases, respectively. We record our open derivative instruments at fair value on our consolidated balance sheets as either derivative assets or liabilities. For commodity derivatives not designated as a cash-flow hedge, we record changes in such fair value in earnings on our consolidated statements of operations under the caption entitled "Commodity derivative gain (loss)." As ofSeptember 30, 2019 , we had no outstanding commodity derivative contracts designated as cash-flow hedges. InApril 2018 , we entered into basis swaps for the NYMEX Calendar Monthly Average Roll (the "CMA Roll") covering 2,000 Bbls per day forMay 2018 throughDecember 2018 at$0.66 /bbl. Basis swaps for the CMA Roll are pricing adjustments to the trade month versus the delivery month for contract pricing. These derivative contracts were designated as cash-flow hedges. The changes in fair value of the derivative contracts designated as cash-flow hedges, to the extent the hedge is effective, will be recognized in other comprehensive income until the hedged item is recognized in revenue. Oil, NGLs and gas sales includes a reduction in revenue of$85,000 related to this cash flow hedge for the three months endedSeptember 30, 2018 . Lease operating. Our lease operating expenses ("LOE") decreased$1.8 million , or 32%, for the three months endedSeptember 30, 2019 , to$4 million , or$4.59 per Boe, compared to$5.8 million , or$5.57 per Boe, for the three months endedSeptember 30, 2018 . 28 -------------------------------------------------------------------------------- The decrease in LOE for the three months endedSeptember 30, 2019 , was primarily due to a decrease in well repairs, workovers and maintenance and water handling. The following table summarizes LOE in millions and LOE per Boe. Three Months Ended September 30, 2019 2018 Change % Change $MM Boe $MM
Boe $MM Boe (Boe)
Compressor rental and repair
3.8 %
Well repairs, workovers and
maintenance 0.9 1.06 1.9 1.82 (1.0 ) (0.76 ) (41.8 )
Water handling and other 0.7 0.82 1.2 1.10 (0.5 ) (0.28 ) (25.5 )
Pumpers and supervision 0.7 0.78 0.8 0.79 (0.1 ) (0.01 ) (1.3 )
Total $ 4.0 $ 4.59 $ 5.8 $ 5.57 $ (1.8 ) $ (0.98 ) (17.6 )%
Production and ad valorem taxes. Our production and ad valorem taxes decreased
$0.4 million , or 19%, for the three months ended September 30, 2019 , to $1.7
million compared to $2.1 million for the three months ended September 30,
2018 . Production and ad valorem taxes were $1.98 per Boe and $2.03 per Boe and
approximately 11.1% and 6.5% of oil, NGLs and gas sales for the three months
ended September 30, 2019 and 2018, respectively. The decrease in production and
ad valorem taxes was primarily a function of the decrease in oil, NGLs and gas
sales between the two periods.
Exploration. We recorded exploration expense of
General and administrative. Our general and administrative expenses ("G&A")
decreased $0.9 million , or 15%, to $4.7 million , or $5.49 per Boe, for the three
months ended September 30, 2019 , compared to $5.6 million , or $5.35 per Boe, for
the three months ended September 30, 2018 . G&A for the three months ended
September 30, 2019 , includes (i) $2.5 million expense related to a retention
program for certain key employees and (ii) a benefit related to a contractual
settlement of $1.4 million , net of related professional fees. The decrease in
G&A and G &A per Boe was primarily due to the contractual settlement and a
decrease in salaries and benefits and share-based compensation due to the
departure of certain executives. This was partially offset by the employee
retention program. We expect G&A to decrease compared to 2018 due to a decrease
in salaries and benefits in connection with the departure of certain executives.
The following table summarizes G&A in millions and G&A per Boe.
Three Months Ended September 30,
2019 2018 Change
% Change
$MM Boe $MM Boe $MM Boe (Boe)
Salaries and benefits $ 4.5 $ 5.17 $ 3.1 $ 3.00 $ 1.4 $ 2.17 72.3 %
Share-based compensation 0.3 0.30 0.6 0.61 (0.3 ) (0.31 ) (50.8 )
Professional fees (1.2 ) (1.34 ) 0.6 0.54 (1.8 ) (1.88 ) (348.1 )
Other 1.1 1.36 1.3 1.20 (0.2 ) 0.16 13.3
Total $ 4.7 $ 5.49 $ 5.6 $ 5.35 $ (0.9 ) $ 0.14 2.6 %
Restructuring expenses. During the three months ended September 30, 2019 , we
recorded restructuring expenses of $8.5 million in connection with the
departures of certain executives and in connection with the review of the
potential financing and deleveraging transactions. We expect to continue to
recognize restructuring expenses in connection with the continued review of the
potential financing and deleveraging transactions.
Depletion, depreciation and amortization. Our depletion, depreciation and
amortization expense ("DD&A") decreased $1.4 million , or 10%, to $13.1 million
for the three months ended September 30, 2019 , compared to $14.5 million for the
three months ended September 30, 2018 . Our DD&A per Boe increased by $1.29 , or
9%, to $15.19 per Boe for the three months ended September 30, 2019 , compared to
$13.90 per Boe for the three months ended September 30, 2018 . The decrease in
DD&A over the prior-year period was primarily due to a decrease in production.
Interest expense, net. Our interest expense, net, increased $1.2 million , or
18%, to $7.6 million for the three months ended September 30, 2019 , compared to
$6.5 million for the three months ended September 30, 2018 . This increase was
primarily due to an increase in outstanding borrowings and floating interest
rates under our revolving credit facility. The weighted average interest rate
applicable to borrowings under our revolving credit facility for the three
months ended September 30, 2019 , was 7.2% compared to 6.1% for the three months
ended September 30, 2018 .
29
-------------------------------------------------------------------------------- Income taxes. For the three months endedSeptember 30, 2019 , our income tax benefit was$4.9 million , compared to$0.9 million for the three months endedSeptember 30, 2018 . The following table reconciles our income tax benefit for the three months endedSeptember 30, 2019 , and 2018, to theU.S. federal statutory rates of 21% (dollars in thousands). September 30, September 30, 2019 2018 Statutory tax at 21%$ (5,059 ) $ (1,088 )
State taxes, net of federal impact 24 137
Share-based compensation tax shortfall - -
Nondeductible compensation 131
30
Other differences 1 -
Income tax benefit $ (4,903 ) $ (921 )
Nine Months Ended
Oil, NGLs and gas sales. Oil, NGLs and gas sales decreased$42.3 million , or 46%, for the nine months endedSeptember 30, 2019 , to$49.4 million , compared to$91.7 million for the nine months endedSeptember 30, 2018 . The decrease in oil, NGLs and gas sales was due to a decrease in average realized commodity prices ($28.3 million ) and a decrease in production volumes ($14 million ). Production volumes decreased as a result of no well completions since the third quarter of 2018. We expect oil, NGLs and gas sales to decrease in 2019 compared to 2018 due to a decrease in commodity prices and a decrease in production due to decreased well completion activity. Net loss. Net loss for the nine months endedSeptember 30, 2019 , was$49.6 million , or$0.53 per diluted share, compared to$20.8 million , or$0.22 per diluted share, for the nine months endedSeptember 30, 2018 . Net loss for the nine months endedSeptember 30, 2019 , included restructuring expenses of$15 million and a commodity derivative loss of$2.1 million . The increase in the net loss for the nine months endedSeptember 30, 2019 , was primarily due to a decrease in revenue ($42.3 million ) and the restructuring expenses of$15 million , partially offset by a decrease in other operating expenses ($15.9 million ) and a decrease in commodity derivative loss ($7.9 million ). Oil, NGLs and gas production. Production for the nine months endedSeptember 30, 2019 , totaled 2,644 MBoe (9.7 MBoe/d), compared to production of 3,119 MBoe (11.4 MBoe/d) in the prior-year period, a 15% decrease. Production for the nine months endedSeptember 30, 2019 , was 23% oil, 36% NGLs and 41% gas compared to 26% oil, 36% NGLs and 38% gas for the nine months endedSeptember 30, 2018 . Production volumes decreased during the nine months endedSeptember 30, 2019 , as a result of no well completions since the third quarter of 2018. We expect production to decrease from current levels due to decreased well completion activity. Commodity derivative loss. The following table sets forth the components of our commodity derivative loss for the nine months endedSeptember 30, 2019 , and 2018 (dollars in thousands). Nine Months EndedSeptember 30, 2019 2018
Net cash receipt (payment) on derivative settlements
Non-cash fair value loss on derivatives (5,038 ) (3,383 )
Commodity derivative loss $ (2,145 ) $ (10,068 )
Lease operating. Our LOE decreased $3.1 million , or 19%, for the nine months
ended September 30, 2019 , to $13 million , or $4.92 per Boe, compared to $16.1
million , or $5.17 per Boe, for the nine months ended September 30, 2018 . The
decrease in LOE per Boe for the nine months ended September 30, 2019 , was
primarily due to a decrease in well repairs, workovers and maintenance and water
handling. The following table summarizes LOE in millions and LOE per Boe.
Nine Months Ended September 30,
2019 2018 Change
% Change
$MM Boe $MM Boe $MM Boe (Boe)
Compressor rental and repair $ 5.3 $ 1.99 $ 5.3 $ 1.72 $ - $ 0.27 15.7 %
Well repairs, workovers and
maintenance 3.1 1.19 4.9 1.57 (1.8 ) (0.38 ) (24.2 )
Water handling and other 2.4 0.91 3.5 1.12 (1.1 ) (0.21 ) (18.8 )
Pumpers and supervision 2.2 0.83 2.4 0.76 (0.2 ) 0.07 9.2
Total $ 13.0 $ 4.92 $ 16.1 $ 5.17 $ (3.1 ) $ (0.25 ) (4.8 )%
30
-------------------------------------------------------------------------------- Production and ad valorem taxes. Our production and ad valorem taxes decreased$2 million , or 28%, for the nine months endedSeptember 30, 2019 , to$5.2 million compared to$7.2 million for the nine months endedSeptember 30, 2018 . Production and ad valorem taxes were$1.96 per Boe and$2.30 per Boe and approximately 10.5% and 7.8% of oil, NGLs and gas sales for the nine months endedSeptember 30, 2019 and 2018, respectively. The decrease in production and ad valorem taxes was primarily a function of the decrease in oil, NGLs and gas sales between the two periods. Exploration. We recorded exploration expense of$1.5 million for the nine months endedSeptember 30, 2019 , compared to$9,000 for the nine months endedSeptember 30, 2018 . The increase in exploration expense is due to lease expirations of approximately 2,400 net acres in the nine months endedSeptember 30, 2019 . General and administrative. Our G&A decreased$5.4 million , or 30%, to$12.8 million , or$4.85 per Boe, for the nine months endedSeptember 30, 2019 , compared to$18.2 million , or$5.84 per Boe, for the nine months endedSeptember 30, 2018 . G&A for the nine months endedSeptember 30, 2019 , includes (i) a benefit of$1.1 million related to the forfeiture of 960,890 unvested shares of restricted stock and 691,509 unvested cash-settled performance awards in connection with the departures of certain executives, (ii)$2.5 million expense related to a retention program for certain key employees and (iii) a benefit related to a contractual settlement of$0.9 million , net of related professional fees. The decrease in G&A and G &A per Boe was primarily due to a decrease in salaries and benefits and share-based compensation due to the departure of certain executives and the contractual settlement. This was partially offset by the employee retention program. We expect G&A to decrease compared to 2018 due to a decrease in salaries and benefits. The following table summarizes G&A in millions and G&A per Boe. Nine Months Ended September 30, 2019 2018 Change % Change $MM Boe $MM Boe $MM Boe (Boe) Salaries and benefits$ 8.3 $ 3.13 $ 10.5 $ 3.37 $ (2.2 ) $ (0.24 ) (7.1 )% Share-based compensation 0.1 0.06 2.1 0.68 (2.0 ) (0.62 ) (91.2 ) Professional fees 0.6 0.22 1.8 0.57 (1.2 ) (0.35 ) (61.4 ) Other 3.8 1.44 3.8 1.22 - 0.22 18.0 Total$ 12.8 $ 4.85 $ 18.2 $ 5.84 $ (5.4 ) $ (0.99 ) (17.0 )% Restructuring expenses. During the nine months endedSeptember 30, 2019 , we recorded restructuring expenses of$15 million in connection with the departures of certain executives and in connection with the review of the potential financing and deleveraging transactions. We expect to continue to recognize restructuring expenses in connection with the continued review of the potential financing and deleveraging transactions. Depletion, depreciation and amortization. Our DD&A decreased$7.2 million , or 15%, to$39.8 million for the nine months endedSeptember 30, 2019 , compared to$47 million for the nine months endedSeptember 30, 2018 . Our DD&A per Boe decreased by$0.03 , to$15.05 per Boe for the nine months endedSeptember 30, 2019 , compared to$15.08 per Boe for the nine months endedSeptember 30, 2018 . The decrease in DD&A over the prior-year period was primarily due to a decrease in production. Impairment. During the nine months endedSeptember 30, 2019 , we initiated a plan to market certain corporate assets for sale. The assets were available for immediate sale and were being actively marketed. The corporate assets held for sale were recorded at their estimated fair value less costs to sell as ofMarch 31, 2019 . As a result, we recognized an impairment loss of$0.3 million for the difference between the asset's carrying value and the estimated fair value less costs to sell during the nine months endedSeptember 30, 2019 . These assets were sold during the three months endedSeptember 30, 2019 , for$1 million , and we recognized a loss on the sale of$0.2 million . Interest expense, net. Our interest expense, net, increased$3.3 million , or 18%, to$21.8 million for the nine months endedSeptember 30, 2019 , compared to$18.5 million for the nine months endedSeptember 30, 2018 . This increase was primarily due to an increase in outstanding borrowings and floating interest rates under our revolving credit facility. The weighted average interest rate applicable to borrowings under our revolving credit facility for the nine months endedSeptember 30, 2019 , was 6.8% compared to 5.8% for the nine months endedSeptember 30, 2018 . Income taxes. For the nine months endedSeptember 30, 2019 , our income tax benefit was$12.6 million , compared to$4.8 million for the nine months endedSeptember 30, 2018 . The following table reconciles our income tax benefit for the nine months endedSeptember 30, 2019 , and 2018, to theU.S. federal statutory rates of 21% (dollars in thousands). 31 --------------------------------------------------------------------------------
September 30, September 30,
2019 2018
Statutory tax at 21% $ (13,057 ) $ (5,362 )
State taxes, net of federal impact 151 411
Share-based compensation tax shortfall 1 70
Nondeductible compensation 298 123
Other differences 5 5
Income tax benefit $ (12,602 ) $ (4,753 ) Liquidity and Capital Resources
We believe the liquidity of our business is dependent on a successful restructuring of our balance sheet in the Chapter 11 Cases. In connection with the Bankruptcy Petitions, the Debtors filed a motion seeking, among other things, final approval of the DIP Facility including$16.5 million in borrowings available under the DIP Facility. Borrowings under the DIP Facility will not be available until the DIP Facility is approved by the Court. Upon approval by the Court and the satisfaction of the conditions set forth in the DIP Facility, the DIP Facility will provide the Debtors with valuable liquidity, which, along with cash on hand and cash generated from ongoing operations, will be used to support the business and any marketing and sale process. In order to preserve liquidity we did not make cash interest payments of$6.6 million due and payable under the revolving credit facility during the three months endedSeptember 30, 2019 . Our failure to comply with financial covenants and to make interest payments under the revolving credit facility represents an event of default. In the case of an event of default, the lenders (i) are not required to lend any additional amounts to us, (ii) could elect to declare all outstanding borrowings, together with accrued and unpaid interest and fees, to be due and payable, (iii) could require us to apply all of our available cash to repay these borrowings and (iv) could prevent us from making debt service payments under our other agreements. Prior to the filing of the Bankruptcy Petitions, we entered into a number of amendments to a limited forbearance agreement with the Lenders, pursuant to which the Lenders agreed to forbear from exercising their rights and remedies under the revolving credit facility (and related loan documents) and applicable law with respect to the occurrence or continuance of events of default caused by our failure to comply with certain financial covenants in the credit facility. As amended, the forbearance agreement terminated onOctober 28, 2019 . These factors raise substantial doubt about our ability to continue as a going concern. We generally would rely on cash generated from operations, to the extent available, borrowings under our revolving credit facility and, to the extent that credit and capital market conditions will allow, future equity and debt offerings to satisfy our liquidity needs. Due to our non-compliance with the financial covenants under our revolving credit facility, our current sources of liquidity include only cash generated from operations and our cash balance of$7 million as ofSeptember 30, 2019 . See Note 5 to our consolidated financial statements in this report for additional information regarding the financial covenants under our revolving credit facility. Our cash flow from operations is driven by commodity prices, production volumes and the effect of commodity derivatives. Cash flows from operations are primarily used to fund exploration and development of our oil and gas properties. Our ability to fund planned capital expenditures and to make acquisitions depends on a successful restructuring of our balance sheet during the Chapter 11 Cases. During the Chapter 11 Cases, our ability to fund capital expenditures is limited. We are continuing to minimize our capital expenditures, reduce costs and maximize cash flows from operations to improve our liquidity; however, our business and liquidity outlook has adversely changed as a result of prolonged commodity price declines and the events of default under our revolving credit facility. Please see "Going Concern Uncertainty" above.
Liquidity Before Filing Under Chapter 11 of the United States Bankruptcy Code
We have historically defined liquidity as funds available under our revolving credit facility and cash and cash equivalents. However, due to our non-compliance with financial covenants under our revolving credit facility, our liquidity as ofSeptember 30, 2019 , was limited to our then available cash of$7 million . See Note 5 to our consolidated financial statements in this report for additional information regarding the financial covenants under our revolving credit facility, and the remedies our lenders may exercise during an event of default under our revolving credit facility. As ofSeptember 30, 2019 , we had$322 million in outstanding borrowings under our revolving credit facility and liquidity of$7 million . As ofDecember 31, 2018 , we had$301.5 million in outstanding borrowings under our revolving credit facility and liquidity of$23.2 million .
Liquidity After Filing Under Chapter 11 of the United States Bankruptcy Code
Subject to certain exceptions under the Bankruptcy Code, the filing of the
Bankruptcy Petitions automatically enjoined, or stayed, the continuation of most
judicial or administrative proceedings or other actions against the Debtors or
their property to recover,
32
-------------------------------------------------------------------------------- collect or secure a claim arising prior to the filing of the Bankruptcy Petitions. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors' property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and until the Court lifts the automatic stay. Although we have lowered our capital budget and reduced the scale of our operations significantly, our business remains capital intensive. In addition to the cash requirements necessary to fund ongoing operations, we have incurred, and expect to continue to incur, significant professional fees and other costs in connection with our Chapter 11 proceedings. As ofSeptember 30, 2019 , our total available liquidity, consisting of cash on hand, was$7 million . We expect to continue using additional cash that will further reduce this liquidity. However, with the DIP Facility, we believe we have sufficient liquidity, including cash on hand and funds generated from ongoing operations, to fund anticipated cash requirements through the Chapter 11 proceedings for minimum operating and working capital purposes and excluding principal and interest payments on our outstanding debt. As such, we expect to pay vendor and royalty obligations on a go-forward basis according to the terms of our current contracts and consistent with applicable court orders, if any, approving such payments. There are no assurances that our current liquidity is sufficient to allow us to satisfy our obligations related to the Chapter 11 Cases or to pursue confirmation of a Chapter 11 plan of reorganization or plan of liquidation. We can provide no assurance that we will be able to secure additional interim financing or exit financing sufficient to meet our liquidity needs or, if sufficient funds are available, offered to us on acceptable terms. Our ability to maintain adequate liquidity through the Chapter 11 Cases depends on commodity prices, our ability to successfully operate our business, and our ability to appropriately manage operating expenses and capital spending. Our anticipated liquidity needs are highly sensitive to changes in each of these and other factors. If we are unable to meet our liquidity needs, we may have to take other actions to seek additional financing to the extent available or we could be forced to consider other alternatives to maximize potential recovery for the creditors, including possible liquidation under Chapter 7 of the Bankruptcy Code.
Working Capital
We had a working capital deficit of$418.5 million and$4.8 million atSeptember 30, 2019 , andDecember 31, 2018 , respectively. The change in working capital was primarily due to the classification of the outstanding borrowings under our revolving credit facility and our Senior Notes as current liabilities as ofSeptember 30, 2019 . Additionally, our working capital deficit increased$6.6 million due to the application of ASC 842, Leases. This was partially offset by an increase in cash and cash equivalents of$7 million .
Cash Flows
The following table summarizes our sources and uses of funds for the periods
noted (in thousands).
Nine Months Ended
September 30,
2019 2018
Cash (used in) provided by operating activities
Cash used in investing activities (2,727 ) (32,011 )
Cash provided by financing activities 18,820 2,662
Net increase in cash and cash equivalents $ 6,990 $ 1
Operating Activities
Cash used in operating activities increased by $38.5 million , to $9.1 million
during the nine months ended September 30, 2019 , compared to cash provided by
operating activities of $29.4 million in the prior-year period. The decrease in
our cash provided by operating activities was primarily due to a decrease in
revenue ($42.3 million ) and an increase in restructuring expenses ($15 million ),
partially offset by decreases in LOE ($3.1 million ), G&A ($5.4 million ) and cash
settlements under our commodity derivative contracts ($9.6 million ). In order to
preserve liquidity we did not make cash interest payments of $6.6 million due
and payable under the revolving credit facility during the three months ended
September 30, 2019 .
Investing Activities
Cash used in investing activities decreased by $29.3 million for the nine months
ended September 30, 2019 , to $2.7 million , compared to the prior-year period.
Cash used in investing activities for the nine months ended September 30, 2019 ,
was primarily related to capital expenditures ($2.5 million ) and changes in
working capital associated with investing activities ($1.3 million ). Cash
33
--------------------------------------------------------------------------------
used in investing activities for the nine months ended
Financing Activities
Cash provided by financing activities increased by$16.2 million for the nine months endedSeptember 30, 2019 , compared to the prior-year period. During the nine months endedSeptember 30, 2019 , net cash provided by financing activities included net borrowings under our revolving credit facility of$20.5 million , tax withholdings related to restricted stock of$0.2 million and changes in working capital associated with financing activities of$1.5 million .
Revolving Credit Facility
AtSeptember 30, 2019 , the borrowing base and aggregate lender commitments under our revolving credit facility were$325 million , with maximum commitments from the lenders of$1 billion and a maturity date ofMay 7, 2020 . We had outstanding borrowings of$322 million and$301.5 million under our revolving credit facility atSeptember 30, 2019 , andDecember 31, 2018 , respectively. The weighted average interest rate applicable to borrowings under our revolving credit facility for the three months endedSeptember 30, 2019 , was 7.2%. The borrowing base is redetermined semi-annually based upon a number of factors, including commodity prices and reserve levels. We or the lenders can each request one additional borrowing base redetermination each calendar year. As a result of the events of default discussed below, we are not able to draw additional funds under our revolving credit facility. As ofSeptember 30, 2019 , we were not in compliance with the financial covenants under our revolving credit facility, which represents an event of default under our revolving credit facility. See Note 5 to our consolidated financial statements in this report for additional information regarding the financial covenants under our revolving credit facility. Our revolving credit facility matures onMay 7, 2020 , and we have classified the outstanding balance on our revolving credit facility as a current liability as ofSeptember 30, 2019 . In the case of an event of default, the lenders (i) are not required to lend any additional amounts to us, (ii) could elect to declare all outstanding borrowings, together with accrued and unpaid interest and fees to be payable, (iii) could require us to apply all of our available cash to repay these borrowings and (iv) could prevent us from making debt service payments under our other agreements. Prior to the filing of the Bankruptcy Petitions, we entered into a number of amendments to a limited forbearance agreement with the Lenders, pursuant to which the Lenders agreed to forbear from exercising their rights and remedies under the revolving credit facility (and related loan documents) and applicable law with respect to the occurrence or continuance of events of default caused by our failure to comply with certain financial covenants in the credit facility. As amended, the forbearance agreement terminated onOctober 28, 2019 . Senior Notes AtSeptember 30, 2019 , andDecember 31, 2018 ,$85.2 million of our 7% Senior Notes were outstanding. See Note 5 to our consolidated financial statements in this report for additional information regarding the Senior Notes. The filing of the Bankruptcy Petitions represents an event of default under our Senior Notes. As a result, our Senior Notes are classified as a current liability as ofSeptember 30, 2019 . Wilks, a related party, purchased a portion of our outstanding Senior Notes in the open market. The Company believes that Wilks held approximately$62.3 million of our outstanding Senior Notes as ofSeptember 30, 2019 . The Senior Notes held by Wilks are included in Senior Notes, net on our consolidated balance sheets. Our interest expense includes interest attributable to any Senior Notes held by Wilks on our consolidated statements of operations.
Debtor-In-Possession Financing
In connection with the Bankruptcy Petitions, the Debtors filed a motion seeking, among other things, final approval of debtor-in-possession financing on terms set forth in a proposed DIP Facility. The Debtors expect to enter into the$41.25 million DIP Facility, consisting of (i)$16.5 million of borrowings available under the DIP Facility and (ii) refinancing of$24.75 million of outstanding amounts under our existing revolving credit facility into the DIP Facility. Borrowings under the DIP Facility will not be available until the DIP Facility is approved by the Court. Borrowings under the DIP Facility will bear interest based on the agent bank's prime rate plus an applicable margin of 5%, or the LIBOR (with a floor of 2%) rate plus an applicable margin of 6%. See Note 1 to our consolidated financial statements in this report for additional information regarding the DIP Facility.
Contractual Obligations
Our contractual obligations include debt, operating lease obligations, asset retirement obligations and employment agreements with our executive officers. SinceDecember 31, 2018 , other than the restructuring expenses disclosed in Note 2 to our consolidated financial statements in this report, there have been no other material changes to our contractual obligations. 34 --------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
From time to time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As ofSeptember 30, 2019 , the off-balance sheet arrangements and transactions that we have entered into include undrawn letters of credit and short-term operating lease agreements. We do not believe that these arrangements have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
General Trends and Outlook
We believe the outlook for our business is dependent on a successful restructuring of our balance sheet in the Chapter 11 Cases.
Assuming a successful restructuring of our balance sheet, our financial results will further depend upon many factors, particularly the price of oil, NGLs and gas. Commodity prices are affected by changes in market demand, which is impacted by factors outside of our control, including domestic and foreign supply of oil, NGLs and gas, overall domestic and global economic conditions, commodity processing, gathering and transportation availability and the availability of refining capacity, price and availability of alternative fuels, price and quantity of foreign imports, domestic and foreign governmental regulations, political conditions in or affecting other oil and gas producing countries, weather and technological advances affecting oil, NGLs and gas consumption. As a result, we cannot accurately predict future oil, NGLs and gas prices, and therefore, we cannot determine what effect increases or decreases will have on our capital program, production volumes and future revenues. If the current oil or natural gas prices and differentials do not improve from current levels, they could have a material adverse effect on our business, financial condition and results of operations and quantities of oil, natural gas and NGLs reserves that may be economically produced and liquidity that may be accessed through our borrowing base under our revolving credit facility and through capital markets. In addition to production volumes and commodity prices, finding and developing sufficient amounts of oil and gas reserves at economical costs are critical to our long-term success. Future finding and development costs are subject to changes in the industry, including the costs of acquiring, drilling and completing our projects. We focus our efforts on increasing oil and gas reserves and production while controlling costs at a level that is appropriate for long-term operations. As commodity prices improve, service costs in our industry may also increase. Our future cash flow from operations will depend on our ability to manage our overall cost structure. Like all oil and gas production companies, we face the challenge of natural production declines. Oil and gas production from a given well naturally decreases over time. Additionally, our wells have a rapid initial production decline. We attempt to overcome this natural decline by drilling to develop and identify additional reserves, farm-ins or other joint drilling ventures, and by acquisitions. However, during times of severe price declines, we may from time to time reduce current capital expenditures and curtail drilling operations in order to preserve liquidity. A material reduction in capital expenditures and drilling activities could materially reduce our production volumes and revenues. During the Chapter 11 Cases, and under the terms of our DIP Facility, our ability to fund capital expenditures is limited.
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