WPX ENERGY, INC. General
The following discussion should be read in conjunction with the selected
historical consolidated financial data and the consolidated financial statements
and the related notes included elsewhere in this Form 10-Q and our 2019 Annual
Report on Form 10-K. The matters discussed below may contain forward-looking
statements that reflect our plans, estimates and beliefs. Our actual results
could differ materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to these differences include,
but are not limited to, those discussed below and elsewhere in this Form 10-Q
and our 2019 Annual Report on Form 10-K.
Unless indicated otherwise, the following discussion relates to continuing
operations. See Note 3 of Notes to Consolidated Financial Statements for a
discussion of discontinued operations.
Overview
Composition of production (based on MBoe) and product revenue
Three months ended March 31 ,
Production Product Revenue
[[Image Removed: wpx-20200331_g2.jpg]]
The following table presents our production volumes and financial highlights for
the three months ended
Three months
ended March 31,
2020 2019
Production Sales Volume Data: Per day Per day
Oil (MBbls) 11,121 122.2 8,648 96.1
Natural gas (MMcf) 22,212 244.1 18,210 202.3
NGLs (MBbls) 3,097 34.0 2,288 25.4
Combined equivalent volumes (MBoe)(a) 17,921 196.9 13,971 155.2
Financial Data (millions): Total product revenues$ 502 $ 507 Total revenues$ 1,398 $ 359 Operating loss$ (226) $ (149) Capital expenditure activity$ 313 $ 425
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(a)MBoe are calculated using the ratio of six Mcf to one barrel of oil.
Our first quarter 2020 operating results were$77 million unfavorable compared to first quarter 2019. The primary items impacting the three months endedMarch 31, 2020 compared to the same period in 2019 include: 22 --------------------------------------------------------------------------------
•$1 billion impairments in 2020 on ourWilliston Basin ;$967 million of which related to proved properties reported in impairment expense and$49 million of which related to unproved leasehold impairment reported in exploration expenses; •$78 million higher operating costs including depreciation, depletion and amortization, lease and facility, gathering, processing and transportation, and taxes other than income; and •$27 million of acquisition costs for the Felix Acquisition in 2020. Offset by: •$1.1 billion favorable change in net gain (loss) on derivatives; Outlook Oil prices have deteriorated due to a softening of global demand caused by the COVID-19 (Coronavirus) pandemic and were highly volatile following actions of OPEC+ countries to relax or eliminate their production quotas and then agree to production quotas. Though the Company has put hedges in place that will largely protect its revenues in 2020, the duration and full impacts of the COVID-19 pandemic and any further actions by OPEC+ countries are unknown at this time. As further discussed below, the Company has taken steps to preserve liquidity, reduce its operating budget and curtail its near-term operations, but we can provide no assurance regarding the long-term impact of these developments on our business. As a company, we continue to manage the business to preserve the value of our reserves and conserve our assets in light of the demand impacts of the COVID-19 pandemic. Along with others in the energy industry, we are impacted by fundamentals driven by the duration of the pandemic and the impact on the economy. We have managed the business effectively through the market's downturns over the last several years and believe we are positioned to continue to do so, by leveraging our assets and implementing strategies outlined herein. Like most companies, uncertainty is our greatest obstacle right now. Our executive management team and our Board of Directors are continually monitoring, communicating, collaborating, and carefully considering our course of action. We are evaluating the extent of potential changes, as well as how such changes align with our goals of generating free cash flow and preserving our balance sheet strength. In mid-March, we communicated a 25 percent reduction to our 2020 planned capital spending and have further reduced our planned capital spending estimate for all of 2020 to approximately$900 million to$1.2 billion . However, we will be reactive to current market conditions and may further reduce our capital spending. We plan to exit 2020 with six rigs comprised of five in theDelaware and one in the Williston. Our completions activity will be limited in 2020 which will result in an inventory of drilled uncompleted wells ("DUC"s). The timing for completion of these wells is subject to multiple variables, including commodity prices which will drive operating results from these wells. We will continue to evaluate supply and demand fundamentals, as well as our ability to generate free cash flow and preserve our balance sheet, in determining when to complete these wells. We are taking steps to reduce our gathering, processing and transportations expense along with our lease and facility operating costs. We intend to curtail our production in May and June, and further reduce production by delaying well completions. We also intend to reduce contractor services, workovers and equipment rentals, and renegotiate rates for ongoing services. We are also evaluating other cost reductions to personnel costs and other administrative expenses; however, no final decisions have been made, as we balance near-term concerns with long-term strategies of the company, including implementing a meaningful dividend, reducing our leverage metrics, and continuing to opportunistically repurchase our shares. Our focus is, in part, on the important metrics that will drive investor interest over the next 5 years and allow us to compete within any sector, not just energy. As a result of the current environment, the book values of our proved properties were evaluated for impairment as ofMarch 31, 2020 . This evaluation excludes the impact of derivatives and is based on management estimates of several inputs including estimated reserves, future commodity prices, development and operating costs and drilling plans. Following this review, we recorded$1 billion of impairment charges related to our Williston properties (see Note 5 of Notes to Consolidated Financial Statements). In the midst of these challenges, we closed on our acquisition ofFelix Energy Holdings II, LLC , or Felix (collectively, the "Felix Acquisition"), which included cash consideration of$939 million and 152,963,671 shares of our common stock. The funding of the cash portion primarily came from proceeds from a very successfulJanuary 2020 offering of$900 million of 4.50% Senior Notes due in 2030. See Note 2 of Notes to Consolidated Financial Statements for further discussion of the Felix Acquisition. This is a key acquisition, helping enhance our cash flow, the scale of our holdings and our longer-term upside. OnMarch 6, 2020 , Fitch upgraded us to an investment-grade credit rating, a reflection of the actions we have taken to reduce debt, obtain lower interest rates and maintain positive cash flow. Our liquidity atMarch 31, 2020 totaled approximately 23 --------------------------------------------------------------------------------
$1.4 billion , reflecting amounts available under the Credit Facility Agreement and cash on hand. Our next Senior Note maturity of$73 million is not due until 2022. As of this filing, our Credit Facility Agreement is subject to a$2.1 billion borrowing base with aggregate elected commitments of$1.5 billion and a maturity date ofApril 17, 2023 (see Note 8 of Notes to Consolidated Financial Statements for further discussion). In April, we completed the bank redetermination of borrowing base that was affirmed at$2.1 billion . Our next redetermination date isOctober 2020 . Overall, we believe we are well positioned for this near term disruption. However, the challenging and dynamic environment of the oil and gas industry, along with future market conditions, may alter these expectations or plans. If we foresee further changes in market conditions, including a prolonged depressed commodity prices, we will evaluate the appropriateness of adjustments to our plans. As we execute on our long-term strategy, we continue to operate with a focus on increasing shareholder value and investing in our businesses in a way that enhances our competitive position by: •sustainable, value driven and environmentally responsible development of our positions in theDelaware and Williston Basins; •successful integration of Felix; •continuing to pursue cost improvements and efficiency gains; •employing new technology and operating methods; •continuing to invest in projects to assess resources and add new development opportunities or opportunistic acquisitions to our portfolio; •retaining the flexibility to make adjustments to our planned levels and allocation of capital investment expenditures in response to changes in economic conditions or business opportunities; and •continuing to maintain an active economic hedging program around our commodity price risks. Potential risks or obstacles that could impact the execution of our plan include: •lower than anticipated recovery in demand for energy worldwide; •lower than anticipated energy commodity prices, including recovery from current levels; •disruptions to general economic conditions as a consequence of global pandemics, including the COVID-19 pandemic; •inability to successfully integrate Felix's operations or to realize cost savings, revenues or other anticipated benefits of the Felix Acquisition; •increase in the cost of, or shortages or delays in the availability of, drilling rigs and equipment supplies, skilled labor or transportation; •higher capital costs of developing our properties, including the impact of inflation; •lower than expected levels of cash flow from operations; •counterparty credit and performance risk; •general economic, financial markets or industry downturn including changes attributable to competition for market share among major oil-exporting countries; •unavailability of capital either under our revolver or access to capital markets; •changes in the political and regulatory environments; and •decreased drilling success. We continue to address certain of these risks through utilization of commodity hedging strategies, disciplined investment strategies and maintaining adequate liquidity. In addition, we use master netting agreements and collateral requirements with our counterparties to reduce credit risk and liquidity requirements. Further, we continue to monitor the long-term market outlooks and forecasts for potential indicators of further needed changes to our forecasted oil and natural gas prices. As noted above, the commodity prices are volatile and prices for a barrel of oil ranged from over$100 per barrel to less than$30 per barrel since 2014. Our forecasted price assumptions reflect a long-term view of pricing and also consider current prices consistent with pricing assumptions generally used in evaluating our drilling decisions and acquisition plans. In the first-quarter of 2020, we adjusted our forecasted commodity prices especially those in the next two years and evaluated our producing properties for impairment. This resulted in an impairment of our Williston properties. If the forecasted oil and natural gas prices were to further decline, we would need to perform additional reviews of proved properties for possible impairment. Because of the uncertainty inherent in these factors, we cannot predict when or if future impairment charges will be recorded. If further impairments were required, the charges could be significant. The net book value of our proved properties is approximately$6.4 billion . In addition, the net book value associated with unproved leasehold is approximately$2.0 billion and is primarily associated with ourDelaware Basin properties. See Note 5 of Notes to Consolidated Financial Statements herein and the 24 --------------------------------------------------------------------------------
Critical Accounting Estimates section of Item 7 in our Annual Report on Form 10-K for the year endedDecember 31, 2019 for further discussion. Three Month-Over-Three Month Results of Operations Revenue analysis Three months Favorable Favorable ended March 31, (Unfavorable) (Unfavorable) % 2020 2019 $ Change Change (Millions) Revenues: Oil sales$ 465 $ 449 $ 16 4 % Natural gas sales 13 25 (12) (48) % Natural gas liquid sales 24 33 (9) (27) % Total product revenues 502 507 (5) (1) % Net gain (loss) on derivatives 869 (207) 1,076 NM Commodity management 24 59 (35) (59) % Other 3 - 3 NM Total revenues$ 1,398 $ 359 $ 1,039 NM __________ NM: A percentage calculation is not meaningful due to change in signs, a zero-value denominator or a percentage change greater than 200. Significant variances in the respective line items of revenues are comprised of the following: •$16 million increase in oil sales reflects$128 million related to higher production sales volumes substantially offset by$112 million related to lower sales prices for the three months endedMarch 31, 2020 compared to 2019.The Delaware Basin production volumes were 60.1 MBbls per day compared to 44.4 MBbls per day for the three months endedMarch 31, 2020 and 2019, respectively. A portion of this increase in production volumes relates to the acquired Felix properties as ofMarch 6, 2020 , see Note 2 of Notes to Consolidated Financial Statements.The Williston Basin production volumes were 62.1 MBbls per day compared to 51.7 MBbls per day for the three months endedMarch 31, 2020 and 2019, respectively. The following table reflects oil sales prices, the price impact of our derivative settlements and production volumes for the three months endedMarch 31, 2020 and 2019: Three months ended March 31, 2020 2019 Oil sales (per barrel)
10.09 0.04
Oil net price including derivative settlements (per barrel) Oil production sales volumes (MBbls) 11,121 8,648 Per day oil production sales volumes (MBbls/d) 122.2 96.1
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(a) Included in net gain (loss) on derivatives on the Consolidated Statements of Operations.
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--------------------------------------------------------------------------------•$12 million decrease in natural gas sales reflects$18 million related to lower sales prices partially offset by$6 million related to higher production sales volumes for the three months endedMarch 31, 2020 compared to 2019. The increase in our production sales volumes primarily relates to ourDelaware Basin which had production volumes of 194.7 MMcf per day compared to 166.4 MMcf per day for the three months endedMarch 31, 2020 compared to 2019, respectively. A portion of this increase in sales relates to the Felix Acquisition as ofMarch 6, 2020 , see Note 2 of Notes to Consolidated Financial Statements. The following table reflects natural gas sales prices, the price impact of our derivative settlements and production volumes for the three months endedMarch 31, 2020 and 2019: Three months endedMarch 31, 2020 2019 Natural gas sales (per Mcf)
0.20 0.42
Natural gas net price including derivative settlements (per Mcf) Natural gas production sales volumes (MMcf) 22,212 18,210 Per day natural gas production sales volumes (MMcf/d) 244.1 202.3
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(a) Included in net gain (loss) on derivatives on the Consolidated Statements of Operations. •$9 million decrease in natural gas liquids sales primarily reflects$21 million related to lower sales prices offset by$12 million related to higher production sales volumes for the three months endedMarch 31, 2020 compared to 2019.Delaware Basin production volumes were 24.9 MBbls per day compared to 20.0 MBbls per day for the three months endedMarch 31, 2020 and 2019, respectively.Williston Basin production volumes were 9.1 MBbls per day compared to 5.4 MBbls per day for the three months endedMarch 31, 2020 and 2019, respectively. The following table reflects NGL production prices, the price impact of our derivative settlements and volumes for the three months endedMarch 31, 2020 and 2019: Three months ended March 31, 2020 2019 NGL net price (per barrel)$ 7.73 $ 14.47 NGL production sales volumes (MBbls) 3,097 2,288
Per day NGL production sales volumes (MBbls/d) 34.0 25.4
•$1,076 million favorable change in net gain (loss) on derivatives primarily reflects favorable change in crude oil derivatives which was a result of gains in 2020 due to decreases in 2020 of forward commodity prices relative to our hedge positions as opposed to losses in 2019 due to increases in 2019 of forward commodity prices relative to our hedge position at that time. Settlements to be received on derivatives totaled$117 million and$9 million for the three months endedMarch 31, 2020 and 2019, respectively. •$35 million decrease in commodity management revenues primarily due to lower natural gas volumes and lower prices on crude sales. Higher natural gas sales volumes in 2019 were a result of excess pipeline capacity in theDelaware Basin which we utilized to purchase natural gas at depressedDelaware Basin pricing and transport to sales points outside the Basin. Related commodity management costs and expenses decreased$15 million and are discussed below. 26 --------------------------------------------------------------------------------
Cost and operating expense and operating income analysis
Three months Favorable Favorable
ended March 31, (Unfavorable) (Unfavorable) % Per Boe Expense
2020 2019 $ Change Change 2020 2019
(Millions)
Costs and expenses:
Depreciation, depletion and amortization $ 259 $ 219 $ (40) (18) % $14.48 $15.68
Lease and facility operating 101 86 (15) (17) % $5.66 $6.13
Gathering, processing and transportation 62 42 (20) (48) % $3.47 $2.98
Taxes other than income 42 39 (3) (8) % $2.36 $2.79
Exploration 67 24 (43) (179) %
General and administrative:
General and administrative expenses 42 39 (3) (8) % $2.33 $2.81
Equity-based compensation 9 8 (1) (13) % $0.52 $0.56
Total general and administrative 51 47 (4) (9) % $2.85 Commodity management 34 49 15 31 % Impairment of proved properties 967 - (967) NM Acquisition costs 27 - (27) NM Other-net 14 2 (12) NM Total costs and expenses$ 1,624 $ 508 $ (1,116) NM Operating loss$ (226) $ (149) $ (77) 52 % __________ NM: A percentage calculation is not meaningful due to change in signs, a zero-value denominator or a percentage change greater than 200. Significant variances in our costs and expenses are comprised of the following: •$40 million increase in depreciation, depletion and amortization is primarily due to higher production volumes and approximately$15 million related to the acquired Felix properties; partially offset by a$1.20 per Boe decrease in rate compared toMarch 31, 2019 . The decrease in rate was a result of the addition of new wells with lower relative cost per Boe. •$15 million increase in lease and facility operating expenses primarily related to increased production volumes and approximately$8 million of the increase related to the acquired Felix properties. •$20 million increase in gathering, processing and transportation is due to growth in production volumes,$7 million related to the acquired Felix properties and aDelaware Basin related contract entered into in late 2019. •$43 million increase in exploration expense primarily relates to an impairment of unproved leasehold in theWilliston Basin in 2020. (See Note 5 of Notes to Consolidated Financial Statements). •$15 million decrease in commodity management expenses is primarily due to lower natural gas purchase volumes and depressedDelaware Basin pricing on physical natural gas cost of sales. These decreases are partially offset by lower-of-cost or market adjustments on long-term line fill of approximately$8 million in first quarter 2020. •$967 million impairment on Williston proved properties recorded in 2020. (See Note 5 of Notes to Consolidated Financial Statements). •$27 million of acquisition costs in 2020 for the Felix Acquisition. (See Note 2 of Notes to Consolidated Financial Statements). •$12 million increase in other expense primarily due to a lower-of-cost or market adjustment on materials and supplies inventory made in 2020. (See Note 6 of Notes to Consolidated Financial Statements). 27 --------------------------------------------------------------------------------
Results below operating income
Three months Favorable Favorable
ended March 31, (Unfavorable) (Unfavorable) %
2020 2019 $ Change Change
(Millions)
Operating loss $ (226) $ (149) $ (77) (52) %
Interest expense (48) (41) (7) (17) %
Gain on equity method investment
transaction - 126 (126) (100) %
Equity earnings 3 2 1 50 %
Other income 4 - 4 NM
Loss from continuing operations before
income taxes (267) (62) (205) NM
Benefit for income taxes (61) (14) (47) NM
Loss from continuing operations (206) (48) (158) NM
Loss from discontinued operations (180) - (180) NM
Net loss $ (386) $ (48) (338) NM
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NM: A percentage calculation is not meaningful due to change in signs, a
zero-value denominator or a percentage change greater than 200.
The increase in interest expense primarily relates to higher level of debt
outstanding in 2020 compared to 2019 as a result of the debt issued for the
Felix Acquisition. See Note 7 of Notes to Consolidated Financial Statements.
Gain on equity method investment transaction in 2019 related to the sale of our
equity interest in the Whitewater natural gas pipeline. See Note 5 of Notes to
Consolidated Financial Statements for details of this sale.
For the three months ended March 31, 2020 , we had a larger benefit for income
taxes compared to the same period for 2019 due to a larger loss from continuing
operations for 2020 compared to 2019. See Note 8 of Notes to Consolidated
Financial Statements for a discussion of the effective tax rates compared to the
federal statutory rate for 2020 and 2019.
Loss from discontinued operations in 2020 included a $184 million accrual for
performance guarantee related to gathering and processing contracts assumed by
the buyer of the properties in the San Juan Gallup. See Note 3 of Notes to
Consolidated Financial Statements for additional details.
Management's Discussion and Analysis of Financial Condition and Liquidity
Overview and Liquidity
We expect our capital structure will provide us financial flexibility to meet
our requirements for working capital and capital expenditures while maintaining
a sufficient level of liquidity. Our primary sources of liquidity in 2020 are
cash on hand, expected cash flows from operations, including derivatives,
contributions from noncontrolling interests, and, if necessary, borrowings on
our credit facility. We anticipate that the combination of these sources should
be sufficient to allow us to continue our operations through at least 2020. We
previously communicated our 2020 goals of implementing a meaningful dividend,
targeting a 7 percent to 10 percent free cash flow yield, driving down our
leverage metrics from current levels and continuing to opportunistically
repurchase our shares. These goals remain our focus but are subject to changes
as we navigate through the current world economic environment caused by the
COVID-19 pandemic and the world oil market disruptions. Additional sources of
liquidity, if needed and if available, include proceeds from asset sales, bank
financings and proceeds from the issuance of long-term debt and equity
securities.
We note the following assumptions for 2020:
•our estimated planned capital expenditures for full-year 2020, excluding
acquisitions, could range from approximately $900 million to $1.2 billion .
However, we will be reactive to current market conditions and may further reduce
our capital spending. As of March 31, 2020 , we have incurred $292 million of
drilling and completion capital expenditures including facilities; and
•we have hedged a significant portion of our anticipated 2020 oil and gas
production as disclosed in Commodity Price Risk Management following this
section.
Potential risks associated with our planned levels of liquidity and the planned
capital expenditures discussed above include:
•lower than expected levels of cash flow from operations, primarily resulting
from lower energy commodity prices or inflation of operating costs;
28
--------------------------------------------------------------------------------•our ability to successfully integrate Felix's operation or to realize costs savings, revenues or other anticipated benefits of the Felix Acquisition; •long-term disruptions to general economic conditions as a consequence of global pandemics, including the COVID-19 pandemic; •significantly lower than expected capital expenditures could result in the loss of undeveloped leasehold; •reduced access to our credit facility pursuant to our financial covenants or banking environment; and •higher than expected development costs, including the impact of inflation. Credit Facility Our Credit Facility, as amended, includes total commitments of$1.5 billion on a$2.1 billion Borrowing Base with a maturity date ofApril 17, 2023 , subject to a springing maturity onOctober 15, 2021 if available liquidity minus outstanding 2022 notes is less than$500 million (see Note 7 of Notes to Consolidated Financial Statements). Based on our current credit ratings, a Collateral Trigger Period applies which makes the Credit Facility subject to certain financial covenants and a Borrowing Base. The Credit Facility may be used for working capital, acquisitions, capital expenditures and other general corporate purposes. The financial covenants in the Credit Facility may limit our ability to borrow money, depending on the applicable financial metrics at any given time. For additional information regarding the terms of our Credit Facility, see Note 8 of Notes to Consolidated Financial Statements on our Annual Report on Form 10-K for the year endedDecember 31, 2019 . As ofMarch 31, 2020 , WPX had$114 million borrowings outstanding and$23 million of letters of credit issued under the Credit Facility and we were in compliance with our covenants under the credit agreement. Our unused borrowing availability was$1,363 million as ofMarch 31, 2020 . InApril 2020 , our annual redetermination confirmed our Borrowing Base of$2.1 billion and total commitments of$1.5 billion that will remain in effect until the next Redetermination Date, which is expected to be inOctober 2020 . As of the date of this filing, we are in compliance with all terms, conditions and financial covenants of the Credit Facility, as amended. Commodity Price Risk Management To manage the commodity price risk and volatility of owning producing oil and gas properties, we enter into derivative contracts for a portion of our future production (see Note 13 of Notes to Consolidated Financial Statements). We chose not to designate our derivative contracts associated with our future production as cash flow hedges for accounting purposes. The following table sets forth, as of the date of this filing, the derivative notional volumes of the net (long) short positions for the remainder of 2020 and 2021 that are economic hedges of our production volumes: Crude Oil Apr - Dec 2020 2021 Volume Weighted Average Volume Weighted Average (Bbls/d) Price ($/Bbl) (Bbls/d) Price ($/Bbl) Fixed Price Swaps-WTI 91,787 $ 57.88 9,959$ 39.81 Fixed Price Swaptions-WTI - $ - 25,041$ 53.61 Fixed Price Calls-WTI - $ - 5,000$ 39.50 Fixed Price Costless Collars-WTI 20,000$53.33 -$63.48 - $ - Basis Swaps-Midland/Cushing 32,320 $ 0.56 15,000 $ 0.64 Basis Swaps-Nymex Calendar Monthly Avg Roll 40,073 $ (0.76) - $ - Basis Swaps-Brent/WTI Spread 5,000 $ 8.36 1,000 $ 8.00 Natural Gas Apr - Dec 2020 2021 Volume Weighted Average Volume Weighted Average (BBtu/d) Price ($/MMBtu) (BBtu/d) Price ($/MMBtu) Fixed Price Swaps-Henry Hub - $ - 190 $ 2.60 Fixed Price Swaptions-Henry Hub - $ - 50 $ 2.57 Basis Swaps-Waha 100$ (1.14) 80$ (0.65) 29
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Sources (Uses) of Cash
Three months
ended March 31,
2020 2019
(Millions)
Net cash provided by (used in):
Operating activities $ 256 $ 272
Investing activities (1,225) (237)
Financing activities 972 (29)
Net increase in cash and cash equivalents and restricted cash
Operating activities Net cash provided by operating activities decreased for the three months endedMarch 31, 2020 compared to the same period in 2019 primarily due to higher operating costs, acquisition costs and lower commodity prices in 2020, partially offset by higher realizations on our derivatives and higher production volumes. Investing activities The table below reflects capital expenditures, exclusive of partnerships, for the periods presented. Three months ended March 31, 2020 2019 (Millions) Incurred capital expenditures: Drilling, completions and facilities$ 292 $ 296 Land acquisitions 1 102 Infrastructure 13 25 Other 7 2 Total incurred capital expenditures 313 425 Changes in related accounts payable and accounts receivable (11) 26 Cash capital expenditures reported on the Consolidated Statements of Cash Flows$ 302 $ 451 Net cash used in investing activities for the three months endedMarch 31, 2020 includes$915 million , net of cash acquired, paid for the successful completion of the Felix Acquisition. Net cash used in investing activities for the three months endedMarch 31, 2019 includes the sales of certain non-core properties and our 20 percent equity interest in Whitewater natural gas pipeline (see Note 5 of Notes to Consolidated Financial Statements). Financing activities Net cash provided by financing activities for the three months endedMarch 31, 2020 includes approximately$886 million of net proceeds from the debt issuance in first-quarter 2020 (see Note 7 of Notes to Consolidated Financial Statements),$114 million net borrowings on the Credit Facility, and$44 million of payments for repurchases of common stock under our share repurchase program (see Note 11 of Notes to Consolidated Financial Statements). Net cash used in financing activities for the three months endedMarch 31, 2020 and 2019 also includes payment for shares withheld for taxes of$8 million and$15 million , respectively. Contractual Obligations During the first quarter of 2020, we reduced our commitment to use natural gas transportation capacity associated with a project in theDelaware Basin for which the counterparty has not yet begun construction by approximately$200 million over a 10 year term, a reduction in annual demand payments of approximately$20 million per year over the term expected to begin during 2021. See Note 9 of Notes to Consolidated Financial Statements for a discussion of changes to other transportation commitments in 2020. 30 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates Our accounting policies and estimates that are critical or the most important to understand our financial condition and results of operations, and that require management to make the most difficult judgments, are described in our 2019 Annual Report on Form 10-K. There have been no material changes in these critical accounting policies and estimates, with the exception of Purchase Accounting as described below and as applied to the Felix Acquisition. For further discussion of Felix Acquisition, see Note 2 of Notes to Consolidated Financial Statements. Purchase Accounting We periodically acquire assets and assume liabilities in transactions accounted for as business combinations, such as the Felix Acquisition. In connection with a business combination, we must allocate the fair value of consideration given to the assets acquired and liabilities assumed based on estimated fair values as of the acquisition date. Deferred taxes must be recorded for any differences between the assigned values and tax bases of the acquired assets and assumed liabilities. Any excess or shortage of amounts assigned to assets and liabilities over or under the purchase price is recorded as a gain on bargain purchase or goodwill. The amount of goodwill or gain on bargain purchase recorded in any particular business combination can vary significantly depending upon the values attributed to assets acquired and liabilities assumed. In addition, estimates of fair value may not be completed as of the filing date and therefore, adjustments to the purchase price allocation would be finalized in future periods, not to exceed one year from the acquisition date. In estimating the fair values of assets acquired and liabilities assumed in a business combination, we must make various assumptions. The most significant assumptions relate to the estimated fair values assigned to proved and unproved oil and gas properties. If sufficient market data is not available regarding the fair values of proved and unproved properties, we must prepare estimates and/or engage the assistance of valuation experts. Significant judgments and assumptions are inherent in these estimates and include estimates of reserves quantities, estimates of future commodity prices (developed in consideration of market information, internal forecasts and published forward prices adjusted for locational basis differentials), drilling plans, expected capital and lease operating costs and our estimate of an applicable discount rate commensurate with the risk of the underlying cash flow estimates. Estimated fair values assigned to assets acquired can have a significant effect on results of operations in the future. A higher fair value assigned to a property results in higher depreciation, depletion and amortization expense, which results in lower net earnings or a higher net loss. A lower fair value assigned to property and related deferred taxes may result in the recording of goodwill. Fair values are based on estimates of future commodity prices, reserves quantities, operating expenses and development costs. This increases the likelihood of impairment if future commodity prices or reserves quantities are lower than those originally used to determine fair value, or if future operating expenses or development costs are higher than those originally used to determine fair value. Impairment would have no effect on cash flows but would result in a decrease in net income or increase in net loss for the period in which the impairment is recorded. See Note 2 of Notes to Consolidated Financial Statements for additional information regarding our purchase price allocations. Off-Balance Sheet Financing Arrangements We had no guarantees of off-balance sheet debt to third parties or any other off-balance sheet arrangements atMarch 31, 2020 or atDecember 31, 2019 . Although not a financing arrangement, we have provided a guarantee for certain obligations transferred as part of a divestment (see Note 3 of Notes to Consolidated Financial Statements). Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk Our current interest rate risk exposure is primarily related to our debt portfolio and has not materially changed during the first three months of 2020. Commodity Price Risk We are exposed to the impact of fluctuations in the market price of oil, natural gas and natural gas liquids as well as other market factors, such as market volatility and energy commodity price correlations. We are exposed to these risks in connection with our owned energy-related assets, our long-term energy-related contracts and our marketing trading activities. We manage the risks associated with these market fluctuations using various derivatives and nonderivative energy-related contracts. The fair value of derivative contracts is subject to many factors, including changes in energy commodity market prices, the liquidity and volatility of the markets in which the contracts are transacted and changes in interest rates. See Notes 12 and 13 of Notes to Consolidated Financial Statements. 31 --------------------------------------------------------------------------------
An assumed increase in the forward prices used in the valuation of our crude oil and natural gas fixed price swap and option derivatives of$5.00 per Bbl and$0.25 per MMBtu would decrease our derivative valuation by approximately$172 million and$165 million atMarch 31, 2020 andDecember 31, 2019 , respectively. Conversely, an assumed decrease in forward prices of$5.00 per Bbl and$0.25 per MMBtu would increase our derivative valuation by$169 and$151 million atMarch 31, 2020 andDecember 31, 2019 , respectively. However, any cash derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production economically hedged by the derivative instruments. Contracts designated as normal purchases or sales and nonderivative energy contracts have been excluded from this sensitivity analysis. Our portfolio consists of derivative contracts that hedge or could potentially hedge the price risk exposure from our energy commodity purchases and sales. The fair value of our derivatives not designated as hedging instruments was a net asset of$849 million and net liability$24 million atMarch 31, 2020 andDecember 31, 2019 , respectively. Item 4. Controls and Procedures Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act) ("Disclosure Controls") or our internal control over financial reporting ("Internal Controls") will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and Internal Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls and Internal Controls will be modified as systems change and conditions warrant. Evaluation of Disclosure Controls and Procedures An evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these Disclosure Controls are effective at a reasonable assurance level. Changes in Internal Control over Financial Reporting Our assessment of our system of internal controls included the consideration that many of our control owners and control performers have been working remotely due to Federal and State social distancing guidelines. We concluded that, as of the end of the period covered in this report, there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 32
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