CALLON PETROLEUM COMPANY General
The following management's discussion and analysis describes the principal factors affecting the Company's results of operations, liquidity, capital resources and contractual cash obligations. This discussion should be read in conjunction with the accompanying unaudited consolidated financial statements and our 2019 Annual Report on Form 10-K, which include additional information about our business practices, significant accounting policies, risk factors, and the transactions that underlie our financial results. Our website address is www.callon.com. All of our filings with theSEC are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, theSEC . Information on our website does not form part of this Quarterly Report on Form 10-Q. We are an independent oil and natural gas company incorporated in theState of Delaware in 1994, but our roots go back 70 years to our Company's establishment in 1950. We are focused on the acquisition, exploration and development of high-quality assets in the leading oil plays of South andWest Texas . Our activities are primarily focused on horizontal development in the Midland and Delaware Basins, both of which are part of the larger Permian Basis inWest Texas , as well as theEagle Ford Shale , which we entered into through the Carrizo Acquisition in late 2019. Our operating culture is centered on responsible development of hydrocarbon resources, safety and the environment, which we believe strengthens our operational performance. Our drilling activity is predominantly focused on the horizontal development of several prospective intervals in thePermian Basin , including multiple levels of the Wolfcamp formation and the Lower Spraberry shales, and more recently as a result of the Carrizo Acquisition, theEagle Ford Shale . We have assembled a multi-year inventory of potential horizontal well locations and intend to add to this inventory through delineation drilling of emerging zones on our existing acreage and through acquisition of additional locations through working interest acquisitions, leasing programs, acreage purchases, joint ventures and asset swaps. Recent Developments COVID-19 Outbreak and Global Industry Downturn The recent worldwide outbreak of COVID-19, the uncertainty regarding the impact of COVID-19 and various governmental actions taken to mitigate the impact of COVID-19, have resulted in an unprecedented decline in demand for oil and natural gas. At the same time, the decision bySaudi Arabia inMarch 2020 to drastically reduce export prices and increase oil production followed by curtailment agreements amongOPEC and other countries such asRussia further increased uncertainty and volatility around global oil supply-demand dynamics. As a result, there is an excess supply of oil inthe United States , which could continue for a sustained period; this is in addition to recent and continued excess supply of natural gas inthe United States . This excess supply has, in turn, resulted in transportation and storage capacity constraints inthe United States , and may even cause the elimination of available storage, including in thePermian Basin . The COVID-19 outbreak and its development into a pandemic inMarch 2020 have required that we take precautionary measures intended to help minimize the risk to our business, employees, customers, suppliers and the communities in which we operate. Our operational employees are currently still able to work on site. However, we have taken various precautionary measures with respect to such operational employees such as requiring them to verify they have not experienced any symptoms consistent with COVID-19, or been in close contact with someone showing such symptoms, before reporting to the work site, being prepared to quarantine any operational employees who have shown signs of COVID-19 (regardless of whether such employee has been confirmed to be infected), and imposing social distancing requirements on work sites, in accordance with the guidelines released by theCenter for Disease Control . In addition, most of our non-operational employees are now working remotely. We have not yet experienced any material operational disruptions (including disruptions from our suppliers and service providers) as a result of the COVID-19 outbreak, nor had any confirmed cases of COVID-19 on any of our work sites. Due to the decline in crude oil prices and ongoing uncertainty regarding the oil supply-demand macro environment, we have recently reduced our operations in order to preserve capital. We are in the process of completing current drilling projects which are underway but expect to reduce activity to one rig shortly and have temporarily suspended all completion activity. We expect to fund the remainder of our 2020 capital expenditures with cash flows from operations and borrowings under our revolving credit facility. In addition, given the weakness in realized oil prices, we are actively evaluating whether to voluntarily curtail or shut-in a substantial portion of our current production volumes and will continue to evaluate such a measure on a regular basis in response to market conditions and contractual obligations. As substantially all of our revenues are generated by the production and sale of hydrocarbons, the curtailment or shut-in of our production could adversely affect our business, financial condition, results of operations, liquidity, and ability to finance planned capital expenditures. We have been closely monitoring field level economics to make decisions regarding voluntary production curtailment decisions. We have shut-in approximately 1,500 Bbl/d (gross) through April and expect to reach over 3,000 Bbl/d during May. June volumes are currently under evaluation. In addition, we have deferred the flowback of a recently completed pad in the WildHorse area until expected netbacks strengthen. 30 -------------------------------------------------------------------------------- NYSE Delisting Notice OnApril 10, 2020 , we were notified by the NYSE that the average closing price of shares of our common stock had fallen below the minimum average closing price required to maintain listing on the NYSE. We initially had untilOctober 10, 2020 to regain compliance with the minimum share price requirement, but due to recent market turmoil the NYSE has filed a rule change tolling the compliance periods for price-based listing requirements throughJune 30, 2020 , which extended our compliance period untilDecember 18, 2020 . In order to regain compliance, on the last trading day of any calendar month during the cure period, our shares must have (i) a closing price of at least$1.00 per share and (ii) an average closing price of at least$1.00 per share over the 30-trading day period ending on the last trading day of such month. At our upcoming annual meeting of shareholders, we intend to seek approval for a proposal to permit the Company to effect a reverse stock split, which may increase the price of our shares and enable the Company to regain compliance with the NYSE's minimum share price requirement. If we effectuate a reverse stock split, the minimum share price deficiency will be deemed cured if the price of our shares promptly exceeds$1.00 , and remains above that level for at least the following 30 trading days. There can be no assurances that we will be able to regain compliance with the NYSE's minimum share price requirement or that our shares will remain listed on the NYSE. We are in compliance with all other NYSE continued listing standards. Overview First Quarter 2020 Highlights •Total production for the three months endedMarch 31, 2020 was 100,955 Boe/d, an increase of 150% from the three months endedMarch 31, 2019 , primarily due to production from the Carrizo Acquisition, partially offset by normal production decline and the sale of our Ranger assets in 2019. •Operated drilling and completion activity for the three months endedMarch 31, 2020 along with our drilled but uncompleted and producing wells as ofMarch 31, 2020 are summarized in the table below. Three Months Ended March 31, 2020 As of March 31, 2020 Drilled Completed Drilled But Uncompleted Producing Region Gross Net Gross Net Gross Net Gross Net Permian Basin 19 18.4 14 12.1 24 22.7 818 709.9 Eagle Ford Shale 21 21.0 22 18.7 25 25.0 621 558.4 Total 40 39.4 36 30.8 49 47.7 1,439 1,268.3 ?Operational capital expenditures, inclusive of leasehold and seismic, for the first quarter of 2020 were$277.6 million , of which approximately 64% were in thePermian Basin with the balance in the Eagle Ford. In response to the decline in commodity prices for oil and natural gas, we lowered our annual operational capital budget in March to a range of$700.0 million to$725.0 million , reflecting the initial reduction in capital development activity. We have further reduced activity relative to that plan, including the suspension of all completion activity in April and transitioning to one active drilling rig by mid-May. We currently forecast total operational capital expenditures of approximately$250.0 to$325.0 million over the remaining three quarters of 2020, assuming resumption of a reduced level of completion activities in the second half of the year. As a result, we currently expect annual operational capital expenditures to be a maximum of$525.0 to$600.0 million . See "-Liquidity and Capital Resources-2020 Capital Plan and Outlook" for additional details. •InJanuary 2020 , we paid$50.0 million as a result of the annual settlement of the Contingent ExL Consideration and received$10.0 million from the annual settlements of certain of the contingent consideration arrangements acquired by the Company as part of the Carrizo Acquisition as the specified pricing thresholds for fiscal year 2019 for each contingent consideration arrangement were exceeded. See "Note 7 - Derivative Instruments and Hedging Activities" for further discussion. •We recorded net income attributable to common stockholders for the three months endedMarch 31, 2020 of$216.6 million , or$0.55 per diluted share, as compared to net loss attributable to common stockholders for the three months endedMarch 31, 2019 of$21.4 million , or$0.09 per diluted share. The increase in net income attributable to common stockholders was driven primarily by a gain on derivative contracts of approximately$252.0 million during the first quarter of 2020 compared to a loss on derivative contracts of approximately$67.3 million during the first quarter of 2019 as well as an approximate 153% increase in total production for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , partially offset by an approximate 25% decrease in total average realized sales prices between the two periods. See "-Results of Operations" below for further details. 31 -------------------------------------------------------------------------------- Results of Operations The following table sets forth certain operating information with respect to the Company's oil and natural gas operations for the periods indicated: Three Months Ended March 31, 2020 2019 Change % Change Total production (1) Oil (MBbls) 5,847 2,858 2,989 105 % Natural gas (MMcf) 9,793 4,619 5,174 112 % NGLs (MBbls) 1,707 - 1,707 100 % Total barrels of oil equivalent (MBoe) 9,186 3,628 5,558 153 % Total daily production (Boe/d) 100,955 40,311 60,644 150 % Oil as % of total daily production 64 % 79 % Average realized sales price (excluding impact of settled derivatives) Oil (per Bbl)$45.45 $49.37 ($3.92 ) (8 %) Natural gas (per Mcf) 0.62 2.59 (1.97) (76 %) NGLs (per Bbl) 10.62 - 10.62 100 % Total (per Boe)$31.56 $42.18 ($10.62 ) (25 %) Revenues (in thousands) Oil$265,767 $141,098 $124,669 88 % Natural gas 6,029 11,949 (5,920) (50 %) NGLs 18,123 - 18,123 100 % Total revenues$289,919 $153,047 $136,872 89 % Benchmark prices (2) WTI (per Bbl)$46.08 $54.82 ($8.74 ) (16 %) Henry Hub (per Mcf) 1.87 2.92 (1.05) (36 %) (1) EffectiveJanuary 1, 2020 , certain of our natural gas processing agreements were modified to allow us to take title to NGLs resulting from the processing of our natural gas. As a result, sales and reserve volumes, prices, and revenues for NGLs and natural gas are presented separately for periods subsequent toJanuary 1, 2020 . For periods prior toJanuary 1, 2020 , except for sales and reserve volumes, prices, and revenues specifically associated with Carrizo, we presented our sales and reserves volumes, prices, and revenues for NGLs with natural gas. (2) Reflects calendar average daily spot market prices. Revenues The following table is intended to reconcile the change in oil, natural gas, NGLs, and total revenue for the respective period presented by reflecting the effect of changes in volume and in the underlying commodity prices: Oil Natural Gas NGLs Total (In thousands) Revenues for the three months ended March 31, 2019$141,098 $11,949 $-$153,047 Volume increase (decrease) 147,572 13,383 18,123 179,078 Price increase (decrease) (22,903) (19,303) - (42,206) Net increase (decrease) 124,669 (5,920) 18,123 136,872 Revenues for the three months ended March 31, 2020 (1)$265,767 $6,029 $18,123 $289,919 (1) EffectiveJanuary 1, 2020 , certain of our natural gas processing agreements were modified to allow us to take title to NGLs resulting from the processing of our natural gas. As a result, sales and reserve volumes, prices, and revenues for NGLs and natural gas are presented separately for periods subsequent toJanuary 1, 2020 . For periods prior toJanuary 1, 2020 , except for sales and reserve volumes, prices, and revenues specifically associated with Carrizo, we presented our sales and reserves volumes, prices, and revenues for NGLs with natural gas. 32 -------------------------------------------------------------------------------- Commodity Prices The prices for oil, natural gas, and NGLs remain extremely volatile and sometimes experience large fluctuations as a result of relatively small changes in supply, weather conditions, economic conditions and actions byOPEC and other countries and governments. Prices of oil, natural gas, and NGLs will affect the following aspects of our business: •our revenues, cash flows and earnings; •the amount of oil and natural gas that we are economically able to produce; •our ability to attract capital to finance our operations and cost of the capital; •the amount we are allowed to borrow under the revolving credit facility; and •the value of our oil and natural gas properties. Period over Period Variances The change in absolute value for the three months endedMarch 31, 2020 as compared toMarch 31, 2019 can be primarily attributed to the Carrizo Acquisition which closed inDecember 2019 , which had a material impact to our reported results of operations. In order to provide a more meaningful basis for comparison, we focused our discussion on per unit metrics and only expanded on changes in absolute value where appropriate. Oil revenue For the three months endedMarch 31, 2020 , oil revenues of$265.8 million increased$124.7 million , or 88%, compared to revenues of$141.1 million for the same period of 2019. The increase was primarily attributable to a 105% increase in production from our acquisition and development efforts, offset by an 8% decrease in the average realized sales price, which fell to$45.45 per Bbl from$49.37 per Bbl. Natural gas revenue For the three months endedMarch 31, 2020 , natural gas revenues of$6.0 million decreased$5.9 million , or 50%, compared to$11.9 million for the same period of 2019. The decrease was primarily attributable to a 76% decrease in the average realized sales price, which fell to$0.62 per Mcf from$2.59 per Mcf. The decrease in realized natural gas pricing was partially offset by a 112% increase in natural gas volumes. NGL revenue For the three months endedMarch 31, 2020 , NGL revenues were$18.1 million , or$10.62 per Bbl, compared to no revenues for the same period of 2019. The increase was due to the modification of certain of our natural gas processing agreements, which allowed us to take title to NGLs resulting from the processing of our natural gas. As a result, sales and reserve volumes, prices, and revenues for NGLs and natural gas are presented separately for periods subsequent toJanuary 1, 2020 . For periods prior toJanuary 1, 2020 , except for sales and reserve volumes, prices, and revenues specifically associated with Carrizo, we presented our sales and reserves volumes, prices, and revenues for NGLs with natural gas. Operating Expenses Three Months Ended March 31, Per Per Total Change Boe Change 2020 Boe 2019 Boe $ % $ % (In thousands, except per Boe and % amounts) Lease operating expenses$52,383 $5.70 $24,067 $6.63 $28,316 118 % ($0.93 ) (14 %) Production and ad valorem taxes 19,680 2.14 10,813 2.98 8,867 82 % (0.84) (28 %) Gathering, transportation and processing 14,378 1.57 - - 14,378 100 % 1.57 100 % Depreciation, depletion and amortization 131,463 14.31
60,184 16.59 71,279 118 % (2.28) (14 %)
General and administrative 8,325 0.91 14,777 4.07 (6,452) (44 %) (3.16) (78 %)
Merger and integration
expenses 15,830 1.72 - - 15,830 100 % 1.72 100 %
Lease operating expenses. These are daily costs incurred to extract oil, natural
gas and NGLs and maintain our producing properties. Such costs also include
maintenance, repairs, salt water disposal, insurance and workover expenses
related to our oil and natural gas properties.
Lease operating expenses for the three months ended March 31, 2020 increased
to $52.4 million compared to $24.1 million for the same period of 2019. The
increase in LOE was primarily related to a 153% increase in production over the
comparative periods, which carries a variable component for each unit of
production.
Lease operating expenses on a per unit basis decreased when comparing the first
quarter of 2020 to the same period in 2019. LOE per BOE decreased to $5.70 for
the first quarter of 2020, which represents a decrease of $0.93 per BOE from the
first quarter of 2019. The lower per unit metric reflects the distribution of
fixed costs spread over higher production volumes.
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Production and ad valorem taxes. In general, production taxes are based upon
current year commodity prices whereas ad valorem taxes are based upon prior year
commodity prices. Production taxes are paid on produced oil and natural gas
based on a percentage of revenues from products sold at fixed rates established
by federal, state or local taxing authorities. In the counties where our
production is located, we are also subject to ad valorem taxes, which are
generally based on the taxing jurisdictions' valuation of our oil and gas
properties. We benefit from tax credits and exemptions in our various taxing
jurisdictions where available.
Production taxes for the three months ended March 31, 2020 increased 82% to
$19.7 million compared to $10.8 million for the same period of 2019, which is
primarily related to higher revenues. Production taxes as a percentage of total
revenue were consistent across the comparable periods at approximately 7%.
Additionally, ad valorem taxes increased over the comparative periods due to a
higher valuation of our oil and gas properties by the taxing jurisdictions.
Gathering, transportation and processing expenses. Gathering, transportation and
processing costs for the three months ended March 31, 2020 were $14.4 million .
No expense was recognized for gathering, transportation and processing costs
during the same period of 2019. The change is due to the assumption of the
processing agreements assumed in the Carrizo acquisition and certain contract
modifications effective January 1, 2020 . As such, the Company now records
contractual fees associated with gathering, processing, treating and
compression, as well as any transportation fees incurred to deliver the product
to the purchaser, as gathering, transportation and processing expense. These
fees were historically recorded as a reduction of revenue depending on when
control transferred to the purchaser.
Depreciation, depletion and amortization ("DD&A"). Under the full cost
accounting method, we capitalize costs within a cost center and then
systematically amortize those costs on an equivalent unit-of-production method
based on production and estimated proved reserve quantities. Depreciation of
other property and equipment is computed using the straight line method over
their estimated useful lives, which range from three to twenty years. The
following table sets forth the components of our depreciation, depletion and
amortization for the periods indicated:
Three Months Ended
2020 2019
(In thousands, except per Boe amounts)
Amount Per Boe Amount Per Boe
DD&A of proved oil and gas properties $129,436 $14.09 $59,767 $16.47
Depreciation of other property and equipment 943 0.10 160 0.04
Amortization of other assets 262 0.03 16 0.01
Accretion of asset retirement obligations 822 0.09 241 0.07
DD&A $131,463 $14.31 $60,184 $16.59
For the three months ended March 31, 2020 , DD&A expense was $131.5 million
compared to $60.2 million for the same period of 2019. The additional DD&A was
related to a 153% increase in production volumes, which were partially offset by
lower DD&A rates between the periods. Those factors accounted for a $79.5
million increase and an $8.2 million offsetting decrease, respectively, during
the first quarter of 2020.
For the three months ended March 31, 2020 , DD&A on a per unit basis decreased
to $14.31 per BOE compared to $16.59 per BOE for the same period of 2019. The
rate primarily decreased as a result of the Carrizo acquisition which
contributed to a significant increase in our proved reserves at a lower relative
cost per BOE than our historical DD&A rate.
General and administrative, net of amounts capitalized ("G&A"). G&A for the
three months ended March 31, 2020 decreased to $8.3 million compared to $14.8
million for the same period of 2019. The decrease was primarily due to a
share-based compensation benefit, net as a result of a decrease in the fair
value of the Cash-Settled RSU Awards and Cash SARs for the three months ended
March 31, 2020 as compared to share-based compensation expense, net for the
three months ended March 31, 2019 .
Merger and integration expense. For the three months ended March 31, 2020 , the
Company incurred $15.8 million of expenses associated with the Carrizo
Acquisition. See "Note 3 - Acquisitions and Divestitures" of the Notes to our
Consolidated Financial Statements for additional information regarding the
merger with Carrizo.
Other Income and Expenses
Three Months Ended March 31,
2020 2019 $ Change % Change
(In thousands, except % amounts)
Interest expense $44,463 $20,582 $23,881 116 %
Capitalized interest (23,985) (19,844) (4,141) 21 %
Interest expense, net of capitalized amounts 20,478 738 19,740 2,675 %
(Gain) loss on derivative contracts ($251,969 ) $67,260 ($319,229 ) (475 %)
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Interest expense, net of capitalized amounts. We finance a portion of our
capital expenditures, acquisitions and working capital requirements with
borrowings under our revolving credit facility or with term debt. We incur
interest expense that is affected by both fluctuations in interest rates and our
financing decisions. We reflect interest paid to our lender in interest expense,
net of capitalized amounts. In addition, we include the amortization of deferred
financing costs (including origination and amendment fees), commitment fees,
annual agency fees, and interest from our financing leases in interest expense.
Interest expense, net of capitalized amounts, incurred during the three months
ended March 31, 2020 increased $19.7 million to $20.5 million compared to $0.7
million for the same period of 2019. The increase is primarily due to debt that
was assumed as a result of the Carrizo Acquisition.
Gain (loss) on derivative contracts. We utilize commodity derivative financial
instruments to reduce our exposure to fluctuations in commodity prices. This
amount represents the (i) gain (loss) related to fair value adjustments on our
open derivative contracts and (ii) gains (losses) on settlements of derivative
contracts for positions that have settled within the period. The net gain (loss)
on derivative instruments for the periods indicated includes the following:
Three Months Ended
2020 2019
(In thousands)
Gain (loss) on oil derivatives $257,323 ($68,369 )
Gain (loss) on natural gas derivatives (6,829) 1,109
Gain on contingent consideration arrangements 1,475 -
Gain (loss) on derivative contracts $251,969 ($67,260 )
See "Note 7 - Derivative Instruments and Hedging Activities" and "Note 8 - Fair
Value Measurements" of the Notes to our Consolidated Financial Statements for
additional information.
Income tax expense. We use the asset and liability method of accounting for
income taxes, under which deferred tax assets and liabilities are recognized for
the future tax consequences of (1) temporary differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities
and (2) operating loss and tax credit carryforwards. Deferred income tax assets
and liabilities are based on enacted tax rates applicable to the future period
when those temporary differences are expected to be recovered or settled. The
effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period the rate change is enacted. When appropriate,
based on our analysis, we record a valuation allowance for deferred tax assets
when it is more likely than not that the deferred tax assets will not be
realized.
The Company recorded income tax expense of $64.0 million for the three months
ended March 31, 2020 , compared to income tax benefit of $5.1 million for the
same period of 2019. The change is primarily related to income before income
taxes for the three months ended March 31, 2020 of $280.6 million compared to a
loss before income taxes of $24.7 million for the same period in 2019. See "Note
9 - Income Taxes" of the Notes to our Consolidated Financial Statements for
additional information on income tax.
Preferred stock dividends. On July 18, 2019 , we redeemed all outstanding shares
of Preferred Stock, after which, the Preferred Stock was no longer deemed
outstanding and dividends ceased to accrue. As such, we did not make any
Preferred Stock dividend payments during the three months ended March 31, 2020 .
Preferred Stock dividends of $1.8 million were paid during the three months
ended March 31, 2019 .
Liquidity and Capital Resources
Our primary uses of capital have historically been for the acquisition,
development, and exploration of oil and natural gas properties. Our capital
program could vary depending upon factors, including, but not limited to, the
availability of drilling rigs and completion crews, the cost of completion
services, acquisitions and divestitures of oil and gas properties, land and
industry partner issues, our available cash flow and financing, success of
drilling programs, weather delays, commodity prices, market conditions, the
acquisition of leases with drilling commitments and other factors. In addition,
depending upon our actual and anticipated sources and uses of liquidity,
prevailing market conditions and other factors, we may, from time to time, seek
to retire or repurchase our outstanding debt or equity securities through cash
purchases in the open market or through privately negotiated transactions or
otherwise. The amounts involved in any such transactions, individually or in
aggregate, may be material.
Historically, our primary sources of capital have been cash flows from
operations, borrowings under our revolving credit facility, proceeds from the
issuance of debt securities and public equity offerings, and non-core asset
dispositions. We regularly consider which resources, including debt and equity
financings, are available to meet our future financial obligations, planned
capital expenditures and liquidity requirements.
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Overview of Cash Flow Activities. For the three months ended March 31, 2020 ,
cash and cash equivalents decreased $1.5 million to $14.8 million compared to
$13.3 million at December 31, 2019 .
Three Months Ended
2020 2019
(In thousands)
Net cash provided by operating activities $191,695 $74,559
Net cash used in investing activities (254,366) (207,279)
Net cash provided by (used in) financing activities 64,130 127,151
Net change in cash and cash equivalents $1,459 ($5,569 )
Operating activities. For the three months ended March 31, 2020 , net cash
provided by operating activities was $191.7 million compared to net cash
provided by operating activities of $74.6 million for the same period in 2019.
The change in operating activities was predominantly attributable to the
following:
•An increase in revenue due to a 153% increase in production volumes
predominantly as a result of the Carrizo Acquisition, which was partially offset
by a decrease in realized pricing,
•An offsetting increase in operating expenses as a result of higher production
volumes,
•Changes related to timing of working capital payments and receipts.
Production, realized prices, and operating expenses are discussed in Results of
Operations. See "Note 7 - Derivative Instruments and Hedging Activities" and
"Note 8 - Fair Value Measurements" of the Notes to our Consolidated Financial
Statements for a reconciliation of the components of the Company's derivative
contracts and disclosures related to derivative instruments including their
composition and valuation.
Investing activities. For the three months ended March 31, 2020 , net cash used
in investing activities was $254.4 million compared to $207.3 million for the
same period in 2019.
Our investing activities include the following for the periods indicated:
Three Months Ended March 31,
2020 2019 $ Change
(In thousands)
Capital expenditures $224,448 $193,211 $31,237
Acquisitions - 27,947 (27,947)
Proceeds from the sale of assets (10,240) (13,879) 3,639
Cash paid for settlements of contingent
consideration arrangements, net 40,000 - 40,000
Additions to other assets 158 - 158
Total investing activities $254,366 $207,279 $47,087
Capital expenditures increased by approximately $47.1 million for the three
months ended March 31, 2020 compared to the same period in 2019 due primarily to
$40.0 million of net cash payments for settlements of contingent consideration
arrangements.
Financing activities. We finance a portion of our capital expenditures,
acquisitions and working capital requirements with borrowings under our credit
facility, term debt and equity offerings. For the three months ended March 31,
2020 , net cash provided by financing activities was $64.1 million compared to
$127.2 million for the same period of 2019.
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Three Months Ended March 31,
2020 2019 $ Change
(In thousands)
Net borrowings on Credit Facility $65,000 $130,000 ($65,000 )
Payment of deferred financing costs (275) - (275)
Payment of preferred stock dividends(1) - (1,824) 1,824
Tax withholdings related to restricted stock units (313) (1,025) 712
Other, net (282) - -
Net cash provided by (used in) financing activities $64,130 $127,151 ($62,739 )
(1) On July 18, 2019 , we redeemed all outstanding shares of the Preferred Stock,
after which, the Preferred Stock were no longer deemed outstanding and dividends
on the Preferred Stock ceased to accrue.
See "Note 6 - Borrowings" and "Note 10 - Stockholders' Equity" of the Notes to
our Consolidated Financial Statements for additional information on our debt and
equity transactions.
Senior Secured Revolving Credit Facility. We have a senior secured revolving
credit facility with a syndicate of lenders that, as of March 31, 2020 , had a
borrowing base of $2.5 billion , with an elected commitment amount of $2.0
billion , borrowings outstanding of $1.35 billion at a weighted average interest
rate of 2.83%, and $17.7 million in letters of credit outstanding. The borrowing
base under the credit agreement is subject to regular redeterminations in the
spring and fall of each year, as well as special redeterminations described in
the credit agreement, which in each case may reduce the amount of the borrowing
base. The revolving credit facility is secured by first preferred mortgages
covering our major producing properties. The capitalized terms which are not
defined in this description of the revolving credit facility shall have the
meaning given to such terms in the credit agreement.
On May 7, 2020 , we entered into the first amendment to our credit agreement
governing the revolving credit facility. The amendment, among other things, (a)
establishes a new borrowing base as a result of the spring 2020 scheduled
redetermination in the amount of $1.7 billion and reduces the elected
commitments to $1.7 billion ; (b) permits the incurrence of, among other things,
new second lien notes in an aggregate principal amount of up to $400 million
(the "Second Lien Notes") so long as any such Second Lien Notes are subject to
an intercreditor agreement providing that the liens securing the Second Lien
Notes rank junior to the liens securing the credit agreement; (c) provides that
testing of the ratio of consolidated total debt to Adjusted EBITDAX on a
quarterly basis is suspended until March 31, 2022 , as of which testing date and
the last day of each fiscal quarter ending thereafter, such ratio may not exceed
4.00 to 1.00; (d) provides a new financial covenant testing the ratio of the
consolidated total secured debt to Adjusted EBITDAX and provides that such ratio
on a quarterly basis as of the last day of each quarter beginning with March 31,
2020 up to and including the quarter ending December 31, 2021 may not exceed
3.00 to 1.00; (e) provides that the testing of the ratio of current assets to
current liabilities is suspended until September 30, 2020 , as of which testing
date and the last day of each fiscal quarter ending thereafter, such ratio may
not be less than 1.00 to 1.00; (f) increases the applicable margins for
borrowings under the credit agreement for both LIBOR loans and base rate loans
by 75 basis points across all commitment utilization ranges; (g) introduces
customary anti-cash hoarding protections tested weekly, which restrict our
ability to maintain unrestricted cash on our balance sheet in amounts in the
excess of the lesser of (i) $125.0 million or (ii) 7.5% of the then current
borrowing base; (h) requires us to enter into and maintain minimum hedges for
the 12 month period starting January 1, 2021 through December 31, 2021 , for
which the net notional volumes on a barrel of oil equivalent basis are not less
than 40% of the reasonably anticipated production from our oil and gas
properties which are classified as proved developed producing reserves as of
April 1, 2020 ; (i) requires mortgage and title coverage on at least 90% of the
total value of proved oil and gas properties evaluated in the most recently
delivered reserve report; and (j) restricts our ability to make certain
investments and cash distributions by lowering the maximum leverage ratio
required to make such distributions to 2.50 to 1.00.
We expect to have sufficient liquidity to pay interest on our revolving credit
facility and our Senior Notes. However, there could be substantial doubt about
our ability to continue as a going concern if our borrowing base is redetermined
below our current outstanding borrowings and we are unable to repay the
deficiency promptly. If the current commodity price environment were to persist
for an extended period, our ability to remain in compliance with our restrictive
covenants could be challenged. If we are unable to remain in compliance with our
restrictive covenants, we could be subject to lender elections for default
resolution.
See "Note 6 - Borrowings" of the Notes to our Consolidated Financial Statements
for additional information.
37
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Hedging. As of April 30, 2020 , the Company had the following outstanding
derivative contracts:
For the Remainder For the Full Year
Oil contracts (WTI) of 2020 of 2021
Swap contracts
Total volume (Bbls) 14,000,720 -
Weighted average price per Bbl $41.31 $-
Swap contracts with short puts
Total volume (Bbls) 1,650,000 - Weighted average price per Bbl - Swap$56.06 $- Weighted average price per Bbl - Floor (short put)$42.50 $- Short call contracts Total volume (Bbls) 2,750,000 (1) 4,825,300 (1) Weighted average price per Bbl$45.59 $63.62
Oil contracts (WTI Calendar Month Average Roll)
Swap contracts
Total volume (Bbls) 5,697,500 - Weighted average price per Bbl ($2.66 ) $-
Oil contracts (Brent ICE differential)
Swap contracts Total volume (Bbls)
396,800
Weighted average price per Bbl
(
Oil contracts (Brent ICE swaps)
Swap contracts Total volume (Bbls) 366,000 - Weighted average price per Bbl$46.15 $-
Oil contracts (Midland basis differential)
Swap contracts
Total volume (Bbls) 6,574,800 4,015,100 Weighted average price per Bbl ($1.24 )$0.40
Oil contracts (Argus Houston MEH basis differential)
Swap contracts
Total volume (Bbls) 4,612,205 - Weighted average price per Bbl ($0.24 ) $-
Oil contracts (Argus Houston MEH swaps)
Swap contracts Total volume (Bbls) 504,500 - Weighted average price per Bbl$58.22 $-
Natural gas contracts (
Collar contracts
Total volume (MMBtu) 1,525,000 7,750,000 Weighted average price per MMBtu - Ceiling (short call)$3.25 $2.93 Weighted average price per MMBtu - Floor (long put)$2.67 $2.55 Collar contracts (three-way collars) Total volume (MMBtu) 3,665,000 1,350,000 Weighted average price per MMBtu - Ceiling (short call)$2.74 $2.70 Weighted average price per MMBtu - Floor (long put)$2.48 $2.42 Weighted average price per MMBtu - Floor (short put)$2.00 $2.00 Swap contracts Total volume (MMBtu) 9,170,000 8,675,000 Weighted average price per MMBtu$2.20 $2.70
Short call contracts
Total volume (MMBtu) 9,075,000 7,300,000 Weighted average price per MMBtu$3.50 $3.09
Natural gas contracts (Waha basis differential)
Swap contracts
Total volume (MMBtu) 18,982,000 - Weighted average price per MMBtu ($1.08 ) $- (1) Premiums from the sale of call options were used to increase the fixed price of certain simultaneously executed price swaps. Preferred Stock. Holders of the Preferred Stock were entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative cash dividends at a rate of 10% per annum of the$50.00 liquidation 38 -------------------------------------------------------------------------------- preference per share (equivalent to$5.00 per annum per share). Dividends were payable quarterly in arrears on the last day of each March, June, September and December when, as and if declared by the Board of Directors. Preferred Stock dividends were$1.8 million for the three months endedMarch 31, 2019 . OnJuly 18, 2019 (the "Redemption Date"), the Preferred Stock were redeemed at a redemption price equal to$50.00 per share, plus an amount equal to all accrued and unpaid dividends in an amount equal to$0.24 per share, for a total redemption price of$50.24 per share or$73.0 million (the "Redemption Price"). After the Redemption Date, the Preferred Stock were no longer deemed outstanding, dividends on the Preferred Stock ceased to accrue, and all rights of the holders with respect to such Preferred Stock were terminated, except the right of the holders to receive the Redemption Price, without interest. 2020 Capital Plan and Outlook Our original operational capital budget for 2020 was established at$975.0 million , which included running an average of eight to nine drilling rigs and an average of three completion crews. InMarch 2020 , we lowered our annual operational capital budget to a range of$700.0 million to$725.0 million , reflecting the initial reduction in capital development activity. We have further reduced activity relative to that plan, including the suspension of all completion activity in April and transitioning to one active drilling rig by mid-May. We currently forecast total operational capital expenditures of approximately$250.0 to$325.0 million over the remaining three quarters of 2020, assuming resumption of a reduced level of completion activities in the second half of the year. As a result, we currently expect annual operational capital expenditures to be a maximum of$525.0 to$600.0 million . Our revenues, earnings, liquidity and ability to grow are substantially dependent on the prices we receive for, and our ability to develop our proved reserves. Despite near-term challenges due to COVID-19, we believe the long-term outlook for our business is favorable due to our resource base, low cost structure, financial strength, risk management, and disciplined investment of capital. We monitor current and expected market conditions including the commodity price environment and our liquidity needs, and we may adjust our capital investment plan accordingly. Additionally, we may consider divesting certain properties or assets that are not part of our core business or are no longer deemed essential to our future growth, provided we are able to divest such assets on terms that are acceptable to us. Contractual Obligations The following table includes our current contractual obligations and purchase commitments as ofMarch 31, 2020 : Payments due by Period April - December 2020 2021 2022 2023 2024 and Thereafter Total (In thousands)
6.25% Senior Notes (1) $- $- $-$650,000 $-$650,000 6.125% Senior Notes (1) - - - - 600,000 600,000 8.25% Senior Notes (1) - - - - 250,000 250,000 6.375% Senior Notes (1) - - - - 400,000 400,000 Senior secured revolving credit facility (2) - - - - 1,350,000 1,350,000 Interest expense and other fees related to debt commitments (3) 131,327 151,935 151,935 131,623 181,694 748,514 Drilling rig leases (4) 26,240 3,249 - - - 29,489 Operating leases 11,328 10,033 5,369 5,012 22,990 54,732 Delivery commitments (5) 8,866 13,437 10,980 11,553 51,715 96,551 Produced water disposal commitments (6) 12,001 14,968 11,933 4,387 3,410 46,699 Asset retirement obligations (7) 883 820 419 191 49,101 51,414 Other commitments 1,516 845 508 392 39 3,300 Total contractual obligations$192,161 $195,287 $181,144 $803,158 $2,908,949 $4,280,699 (1)Includes the outstanding principal amount only. (2)The revolving credit facility has a maturity date ofDecember 20, 2024 , subject to springing maturity dates as discussed above. See "Note 6 - Borrowings" of the Notes to our Consolidated Financial Statements for additional information. (3)Includes estimated cash payments on the 6.25% Senior Notes, 6.125% Senior Notes, 8.25% Senior Notes, 6.375% Senior Notes, the Credit Facility and commitment fees calculated based on the unused portion of lender commitments as ofMarch 31, 2020 , at the applicable commitment fee rate. 39 -------------------------------------------------------------------------------- (4)Drilling rig leases represent future minimum expenditure commitments for drilling rig services under contracts to which the Company was a party onMarch 31, 2020 . The value in the table represents the gross amount that we are committed to pay. However, we will record our proportionate share based on our working interest in our consolidated financial statements as incurred. (5)Delivery commitments represent contractual obligations we have entered into for certain gathering, processing and transportation service agreements which require minimum volumes of oil and natural gas to be delivered. The amounts in the table above reflect the aggregate undiscounted deficiency fees assuming no delivery of any oil or natural gas. (6)Produced water disposal commitments represent contractual obligations we have entered into for certain service agreements which require minimum volumes of produced water to be delivered. The amounts in the table above reflect the aggregate undiscounted deficiency fees assuming no delivery of any produced water. (7)Amounts represent our estimates of future asset retirement obligations. Because these costs typically extend many years into the future, estimating these future costs requires management to make estimates and judgments that are subject to future revisions based upon numerous factors, including the rate of inflation, changing technology and the political and regulatory environment. Critical Accounting Policies The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods reported. Certain of such estimates and assumptions are inherently unpredictable and will differ from actual results. We have identified the following critical accounting policies and estimates used in the preparation of our financial statements: use of estimates, oil and gas properties, oil and gas reserve estimates, derivative instruments, contingent consideration arrangements, income taxes, and commitments and contingencies. These policies and estimates are described in "Note 2 - Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in our 2019 Annual Report. See "Note 7 - Derivative Instruments and Hedging Activities" and "Note 8 - Fair Value Measurements" for details of the contingent consideration arrangements. We evaluate subsequent events through the date the financial statements are issued. The table below presents various pricing scenarios to demonstrate the sensitivity of ourMarch 31, 2020 cost center ceiling to changes in 12-month average benchmark crude oil and natural gas prices underlying the 12-Month Average Realized Prices. The sensitivity analysis is as ofMarch 31, 2020 and, accordingly, does not consider drilling and completion activity, acquisitions or dispositions of oil and gas properties, production, changes in crude oil and natural gas prices, and changes in development and operating costs occurring subsequent toMarch 31, 2020 that may require revisions to estimates of proved reserves. Increase (decrease) of cost center ceiling over Excess of cost net book center ceiling over value, less net book value, less related 12-Month Average related deferred deferred Realized Prices income taxes income taxes Crude Oil Natural Gas Full Cost Pool Scenarios ($/Bbl) ($/Mcf) (In millions) (In millions) March 31, 2020 Actual$54.63 $0.84 $402 Crude Oil and Natural Gas Price Sensitivity Crude Oil and Natural Gas +10%$60.21 $1.08 $1,180 $778 Crude Oil and Natural Gas -10%$49.05 $0.61 ($585 ) ($987 ) Crude Oil Price Sensitivity Crude Oil +10%$60.21 $0.84 $1,133 $731 Crude Oil -10%$49.05 $0.84 ($526 ) ($928 ) Natural Gas Price Sensitivity Natural Gas +10%$54.63 $1.08 $449 $47 Natural Gas -10%$54.63 $0.61 $346 ($56 ) We estimate that the second quarter of 2020 cost center ceiling will not exceed the net book value, less related deferred income taxes, resulting in a write-down of evaluated oil and gas properties. This estimate of the second quarter of 2020 cost center ceiling test is based on an estimated 12-Month Average Realized Price of crude oil of approximately$45.00 per barrel as ofJune 30, 2020 , which is based on the average realized price for sales of crude oil on the first calendar day of each month for the first 11 months and an estimate for the twelfth month based on a quoted forward price. Both of these estimates assume that all other inputs and assumptions are as ofMarch 31, 2020 , other than the price of crude oil, and remain unchanged. As such, drilling and completion activity, acquisitions or dispositions of oil and gas properties, production, and changes in development and operating costs occurring subsequent toMarch 31, 2020 may require revisions to estimates of proved reserves, which would impact the calculation of the cost center ceiling. 40 -------------------------------------------------------------------------------- Income taxes The amount of income taxes recorded requires interpretations of complex rules and regulations of federal and state tax jurisdictions. We recognize current tax expense based on estimated taxable income for the current period and the applicable statutory tax rates. We routinely assess potential uncertain tax positions and, if required, estimate and establish accruals for such amounts. We have recognized deferred tax assets and liabilities for temporary differences, operating losses and other tax carryforwards. We routinely assess our deferred tax assets and reduce such assets by a valuation allowance if we deem it is more likely than not that some portion or all of the deferred tax assets will not be realized. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and natural gas prices). The Company had no valuation allowance as ofMarch 31, 2020 and 2019. However, given our current estimate that we will recognize a write-down of our evaluated properties in the second quarter of 2020, it is possible that we will not be able to conclude that it is more likely than not that the deferred tax assets will be realized and we will record a valuation allowance against the net deferred tax assets later in 2020. Any valuation allowance recorded does not preclude us from utilizing the tax attributes if we recognize taxable income. See "Note 9 - Income Taxes" of the Notes to our Consolidated Financial Statements for additional information regarding income taxes. Recently Adopted and Recently Issued Accounting Pronouncements See "Note 1 - Description of Business and Basis of Presentation" for discussion of the pronouncements we recently adopted. Item 3. Quantitative and Qualitative Disclosures about Market Risk We are exposed to a variety of market risks including commodity price risk, interest rate risk and counterparty and customer credit risk. We mitigate these risks through a program of risk management including the use of commodity derivative instruments. Commodity price risk The Company's revenues are derived from the sale of its oil and natural gas production. The prices for oil and natural gas remain volatile and sometimes experience large fluctuations as a result of relatively small changes in supply, weather conditions, economic conditions and government actions. From time to time, the Company enters into derivative financial instruments to manage oil and natural gas price risk, related both to NYMEX benchmark prices and regional basis differentials. The total volumes we hedge through use of our derivative instruments varies from period to period. Generally our objective is to hedge approximately 60% of our anticipated internally forecast production for the next 12 to 24 months, subject to the covenants under our Credit Facility. Our hedge policies and objectives may change significantly with movements in commodities prices or futures prices. As ofMarch 31, 2020 , for the remainder of 2020, the Company had 15,606,220 Bbls of fixed price oil hedges across NYMEX WTI, ICE Brent and Argus WTI-Houston benchmarks. The Company also had 6,574,800 Bbls of WTI Midland-Cushing oil basis hedges and 4,612,205 Bbls of WTI Houston-Cushing oil basis hedges. Additionally, for the remainder of 2020, the Company had 12,835,000 MMBtus of fixed price NYMEX natural gas hedges and 18,982,000 MMBtus of Waha natural gas basis hedges. See "Note 7 - Derivative Instruments and Hedging Activities" of the Notes to our Consolidated Financial Statements for a description of the Company's outstanding derivative contracts as ofMarch 31, 2020 . The Company may utilize fixed price swaps, which reduce the Company's exposure to decreases in commodity prices and limit the benefit the Company might otherwise have received from any increases in commodity prices. Swap contracts may also be enhanced by the simultaneous sale of call or put options to effectively increase the effective swap price as a result of the receipt of premiums from the option sales. The Company may utilize price collars to reduce the risk of changes in oil and natural gas prices. Under these arrangements, no payments are due by either party as long as the applicable market price is above the floor price (purchased put option) and below the ceiling price (sold call option) set in the collar. If the price falls below the floor, the counterparty to the collar pays the difference to the Company, and if the price rises above the ceiling, the counterparty receives the difference from the Company. Additionally, the Company may sell put options at a price lower than the floor price in conjunction with a collar (three-way collar) and use the proceeds to increase either or both the floor or ceiling prices. In a three-way collar, to the extent that realized prices are below the floor price of the sold put option (or above the ceiling price of the sold call option), the Company's net realized benefit from the three-way collar will be reduced on a dollar-for-dollar basis. The Company may purchase puts, which reduce the Company's exposure to decreases in oil and natural gas prices while allowing realization of the full benefit from any increases in oil and natural gas prices. If the price falls below the floor, the counterparty pays the difference to the Company. The Company enters into these various agreements from time to time to reduce the effects of volatile oil and natural gas prices and does not enter into derivative transactions for speculative purposes. Presently, none of the Company's derivative positions are designated as hedges for accounting purposes. 41 -------------------------------------------------------------------------------- Interest rate risk The Company is subject to market risk exposure related to changes in interest rates on our indebtedness under our Credit Facility. As ofMarch 31, 2020 , the Company had$1.4 billion outstanding under the Credit Facility with a weighted average interest rate of 2.83%. An increase or decrease of 1.00% in the interest rate would have a corresponding increase or decrease in our annual net income of approximately$13.5 million , based on the balance outstanding atMarch 31, 2020 . See "Note 6 - Borrowings" of the Notes to our Consolidated Financial Statements for more information on the Company's interest rates on our Credit Facility. Counterparty and customer credit risk The Company's principal exposures to credit risk are through receivables from the sale of our oil and natural gas production, joint interest receivables and receivables resulting from derivative financial contracts. The Company markets its oil, natural gas and NGL production to energy marketing companies. We are subject to credit risk due to the concentration of our oil, natural gas and NGL receivables with several significant customers. The inability of our significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results. In order to mitigate potential exposure to credit risk, we may require from time to time for our customers to provide financial security. AtMarch 31, 2020 our total receivables from the sale of our oil and natural gas production were approximately$66.2 million . Joint interest receivables arise from billings to entities that own partial interests in the wells we operate. These entities participate in our wells primarily based on their ownership in leases on which we have or intend to drill. We have little ability to control whether these entities will participate in our wells. AtMarch 31, 2020 our joint interest receivables were approximately$23.0 million . Our oil and natural gas commodity derivative arrangements expose us to credit risk in the event of nonperformance by counterparties. All of the counterparties on our commodity derivative instruments currently in place are lenders under our Credit Facility. We are likely to enter into additional commodity derivative instruments with these or other lenders under our Credit Facility, representing institutions with investment grade ratings. We have existing ISDA Agreements with our commodity derivative counterparties. The terms of the ISDA Agreements provide us and the counterparties with rights of offset upon the occurrence of defined acts of default by either us or a counterparty to a commodity derivative, whereby the party not in default may offset all commodity derivative liabilities owed to the defaulting party against all commodity derivative asset receivables from the defaulting party. AtMarch 31, 2020 , we had a net commodity derivative asset position of$219.9 million . Item 4. Controls and Procedures Disclosure controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our principal executive and principal financial officers have concluded that the Company's disclosure controls and procedures were effective as ofMarch 31, 2020 . Changes in internal control over financial reporting. The Company recently completed the implementation ofEnertia Software ("Enertia"), which is an integrated enterprise solution for managing accounting and financial reporting information, and utilized Enertia for its accounting and reporting for the quarter endedMarch 31, 2020 . The Company believes the implementation of the system and related changes to internal controls will enhance internal controls over financial reporting. The Company has updated its internal controls, as applicable, to facilitate modifications to its business processes and accounting procedures and will continue to evaluate the operating effectiveness of related key controls during subsequent periods. The Company does not believe that the Enertia implementation has had an adverse effect on its internal control over financial reporting. There were no other changes to our internal control over financial reporting during the three months endedMarch 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 42
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