Unless the context clearly indicates otherwise, references in this Quarterly
Report on Form 10-Q to "Falcon," the "Company," "we," "our," "us" or similar
terms refer to
You should read the following discussion of our historical performance,
financial condition and future prospects in conjunction with our unaudited
financial statements and accompanying notes included herein and "Selected
Financial Data," and our audited financial statements and related notes thereto
included in our Annual Report on Form 10-K filed with the
Overview
We were formed to own and acquire royalty interests, mineral interests,
non-participating royalty interests and overriding royalty interests, or ORRIs,
("Royalties") in oil and natural gas properties in
We own Royalties that entitle us to a portion of the production of oil, natural gas and NGLs from the underlying acreage at the sales price received by the operator, net of production expenses and taxes. We have no obligation to fund finding and development costs, lease operating expenses or pay capital expenditures such as plugging and abandonment costs. As such, we have historically operated with high cash margins, converting a large percentage of revenue to free cash flow, the majority of which has been distributed to our stockholders in the form of a dividend.
Recent Developments
The COVID-19 pandemic has adversely affected the global economy, disrupted global supply chains and created significant volatility in the financial markets. In addition, the pandemic has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. To protect the health and well-being of our workforce in the wake of COVID-19, we have implemented remote work arrangements for all employees. We do not expect these arrangements to impact our ability to maintain operations.
The impact of the COVID-19 pandemic and geopolitical events that increased the supply of low-priced oil have also negatively affected the oil and natural gas business environment, significantly reducing prices of oil, natural gas, and NGLs. Our revenues and operating results depend significantly upon the prevailing prices for oil and natural gas. The current price environment may cause some of our operators' wells to become uneconomic, which may result in the future, in suspension of production from those wells or a significant reduction in or no royalty revenues from existing production. Some operators may also attempt to shut in producing wells and avoid lease termination or payment of shut-in royalties by claiming force majeure, if provided for in the applicable lease. Because these events have happened so recently, and no operator has, to our knowledge claimed force majeure, we have not been able to quantify their impact on our future revenues.
In a prolonged period of low commodity prices, we may be required to impair certain oil and gas producing properties and the borrowing base under our Credit Facility could be further reduced. In light of the challenging business environment and uncertainty caused by the pandemic, the Company's Board of Directors also approved a reduction in the quarterly dividend that reflects a decrease in the payout ratio as compared to previous quarters.
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Sources of Our Revenue
Our revenues are derived from royalty payments we receive from our operators
based on the sale of oil and natural gas production, as well as the sale of NGLs
that are extracted from natural gas during processing. As of
The following table presents the breakdown of our revenue for the following periods: Three Months Ended March 31, 2020 2019 Royalty Income: Oil sales 81 % 78 % Natural gas sales 12 % 16 % Natural gas liquids sales 7 % 6 % Total 100 % 100 % Commodity prices are inherently volatile, and changes in such prices have historically had an impact on our revenue. The following table sets forth the average realized prices for oil, natural gas and NGLs for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 Oil (Bbls)$ 43.10 $ 59.46 Natural gas (Mcf)$ 1.94 $ 3.29 Natural gas liquids (Bbls)$ 14.05 $ 18.23
The COVID-19 pandemic and related economic repercussions have resulted in a
significant reduction in demand for and prices of oil, natural gas and NGLs. The
effect of this was amplified late in the first quarter of 2020 when the
Principal Components of Our Cost Structure
Production and Ad Valorem Taxes
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 and local taxing authorities. Where available, we have historically benefited from tax credits and exemptions in our various taxing jurisdictions. We also directly paid ad valorem taxes in the counties where our production was located. Ad valorem taxes were generally based on the state government's appraisal of our oil and natural gas properties.
Marketing and Transportation
Marketing and transportation expenses include the costs to process and transport our production to applicable sales points. Generally, the terms of the lease governing the development of our properties permit the operator to pass through these expenses to us by deducting a pro rata portion of such expenses from our production revenues.
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Amortization
Our Royalties are recorded at cost and capitalized as tangible assets. Acquisition costs are amortized on a units of production basis over the life of the proved reserves.
General and Administrative
General and administrative expenses are costs not directly associated with the
production of oil, natural gas and NGLs and include the cost of executives and
employees and related benefits (including stock-based compensation expenses),
office expenses and fees for professional services. In addition, we incur
incremental G&A expenses relating to be a publicly traded company, including but
not limited to, expenses associated with
Interest Expense
We finance a portion of our working capital requirements and acquisitions with borrowings under our Credit Facility. As a result, we incur interest expense that is affected by both fluctuations in interest rates and our financing decisions. We reflect interest paid to the lenders under our credit facility in interest expense on our statement of operations. Please read "-Liquidity and Capital Resources-Indebtedness" for further details of our credit facility.
Income Tax Expense
Income taxes reflect the tax effects of transactions reported in the financial statements and consist of taxes currently payable plus deferred income taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred income tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when assets are recovered or settled. Deferred income taxes are also recognized for tax credits that are available to offset future income taxes. Deferred income taxes are measured by applying current tax rates to the differences between financial statement and income tax reporting. In assessing the realization of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, available taxes in carryback periods, projected future taxable income and tax planning strategies in making this assessment. We will continue to evaluate whether the valuation allowance is needed in future reporting periods. We are subject to taxation in many jurisdictions, and the calculation of our income tax liabilities involves dealing with uncertainties in the application of complex income tax laws and regulations in various taxing jurisdictions. We recognize certain income tax positions that meet a more-likely-than not recognition threshold. If we ultimately determine that the payment of these liabilities will be unnecessary, we will reverse the liability and recognize an income tax benefit during the period in which we determine the liability no longer applies.
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Overview of Our Results of Operations
The following table summarizes our revenue and expenses and production data for the periods indicated (in thousands, except production data).
Three Months Ended March 31, 2020 2019 Revenues: Oil and gas sales$ 13,600 $ 21,258 Expenses: Production and ad valorem taxes 854 1,128 Marketing and transportation 397 784 Amortization of royalty interests in oil and natural 3,674 3,511 gas properties General, administrative and other 3,073 2,504 Total operating expenses 7,998 7,927 Operating income 5,602 13,331 Other income (expense): Other income 31 31 Interest expense (680 ) (654 ) Total other income (expense) (649 ) (623 ) Income before income taxes 4,953 12,708 Provision for income taxes 444 1,405 Net income 4,509 11,303 Net income attributable to non-controlling interests (2,304 ) (5,921 )
Net income attributable to common shareholders
$ 10,057 $ 16,890
(1) Adjusted EBITDA is a non-GAAP financial measure. For additional information
regarding our calculation of Adjusted EBITDA as well as a reconciliation of net income to Adjusted EBITDA, please see "-Adjusted EBITDA" below. Three Months Ended March 31, 2020 2019 Production Data: Oil (Bbls) 253,528 274,978 Natural gas (BOE) 144,835 172,687 Natural gas liquids (Bbls) 70,474 72,891 Combined volumes (BOE) 468,837 520,556 Average daily combined volume (BOE/d) 5,152 5,784 % Oil 54 % 53 % Average sales prices: Oil (Bbls)$ 43.10 $ 59.46 Natural gas (Mcf)$ 1.94 $ 3.29 Natural gas liquids (Bbls)$ 14.05 $ 18.23 Combined per (BOE)$ 28.70 $ 39.63 Average Costs ($/BOE): Production and ad valorem taxes$ 1.82 $ 2.17 Marketing and transportation expense$ 0.85 $ 1.51 General and administrative$ 6.55 $ 4.81 Interest expense, net$ 1.45 $ 1.26 Depletion$ 7.84 $ 6.74 25
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Comparison of the three months ended
Oil and Gas Revenues
Oil and gas revenues decreased
Production and Ad Valorem Taxes
Production and ad valorem taxes decreased
Marketing and Transportation Expense
Marketing and transportation expense decreased
Amortization of Royalty Interests in Oil and Gas Properties Expense
Amortization of royalty interests in oil and gas properties expense increased
General, Administrative and Other Expense
General, administrative and other expense increased
Interest Expense
Interest expense increased by less than
Income Taxes
Income tax expense decreased by
Adjusted EBITDA
Adjusted EBITDA is a supplemental non-GAAP financial measure used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We believe Adjusted EBITDA is useful because it allows us to evaluate our performance and compare the results of our operations period to period without regard to our financing methods or capital structure. In addition, management uses Adjusted EBITDA to evaluate cash flow available to pay dividends to our common stockholders.
We define Adjusted EBITDA as net income plus interest expense, net, depletion expense, provision for (benefit from) income taxes and share-based compensation. Adjusted EBITDA is not a measure of net income as determined by GAAP. We exclude the items listed above from net income in arriving at Adjusted EBITDA because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as historic costs of depreciable assets, none of which are components of Adjusted EBITDA.
Adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income, royalty income, cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP. Our computations of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
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The following table presents a reconciliation of net income to Adjusted EBITDA, our most directly comparable GAAP financial measure for the periods indicated (in thousands). Three Months Ended March 31, 2020 2019 Net income$ 4,509 $ 11,303 Interest expense, net 680 654 Depletion 3,674 3,511 Depreciation 26 - Income taxes 444 1,405 Share-based compensation 724 17 Adjusted EBITDA$ 10,057 $ 16,890
Liquidity and Capital Resources
Overview
Our primary sources of liquidity have historically been cash flows from operations and equity and debt financings, and our primary uses of cash are for dividends and for the acquisition of additional Royalties. We intend to finance potential future acquisitions through a combination of cash on hand, borrowings under our Credit Facility and, subject to market conditions and other factors, proceeds from one or more capital market transactions, which may include debt or equity offerings. Our ability to generate cash is subject to a number of factors, some of which are beyond our control, including commodity prices and general economic, financial, competitive, legislative, regulatory and other factors, including weather.
Our shareholders agreement does not require us to distribute any of the cash we generate from operations. We believe, however, that it is in the best interests of our stockholders if we distribute a substantial portion of the cash we generate from operations. Cash dividends are made to the common stockholders of record on the applicable record date, generally within 60 days after the end of each quarter. Available cash for each quarter's dividend is determined by the Board of Directors following the end of such quarter. Available cash for each quarter generally equals Adjusted EBITDA reduced for cash needed for debt service, income tax requirements and other contractual obligations and fixed charges that the Board of Directors deems necessary or appropriate, if any.
The effects of the COVID-19 outbreak and the recent oil price decline could have significant adverse consequences for general economic, financial and business conditions, as well as for our business and financial position and the business and financial position of the operators of our mineral interests and may, among other things, impact our ability to generate cash flows from operations, access the capital markets on acceptable terms or at all, and affect our future need or ability to borrow under our Credit Facility. In addition to our potential sources of funding, the effects of such global events may impact our liquidity or need to alter our allocation or sources of capital, implement further cost reduction measures and change our financial strategy. Although the COVID-19 outbreak and the recent oil price decline could have a broad range of effects on our sources and uses of liquidity, the ultimate effect thereon, if any, will depend on future developments, which cannot be predicted at this time.
The following table presents cash distributions approved by the Board of Directors of our general partner for the periods presented.
Total Quarterly Dividend Per Class A Total Cash Stockholders Quarter Ended Common Share Dividends Payment Date Record Date March 31, 2020$ 0.0250 $ 1,149,695 June 8, 2020 May 25, 2020 December 31, 2019$ 0.1350 $ 6,205,102 March 9, 2020 February 25, 2020 September 30, 2019$ 0.1350 $ 6,203,347 December 3, 2019 November 20, 2019 June 30, 2019$ 0.1500 $ 6,879,245 September 6, 2019 August 26, 2019 March 31, 2019$ 0.1750 $ 8,025,786 May 29, 2019 May 17, 2019 Indebtedness Falcon Credit Facility
On the Closing Date, we entered into a credit facility with
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and, as of
Principal amounts borrowed are payable on the maturity date. We have a choice of
borrowing at the base rate or LIBOR, with such borrowings bearing interest,
payable quarterly in arrears for base rate loans and one month, two-month, three
month or six-month periods for LIBOR loans. LIBOR loans bear interest at a rate
per annum equal to the rate appearing on the Reuters Reference LIBOR01 or
LIBOR02 page as the LIBOR, for deposits in dollars at 12:00 noon (
Obligations under the Credit Facility are guaranteed by us and each of our existing and future, direct and indirect domestic subsidiaries (the "Credit Parties") and are secured by all of the present and future assets of the Credit Parties, subject to customary carve-outs.
The Credit Facility contains certain customary representations and warranties,
affirmative covenants, negative covenants and events of default. As of
Cash Flows
The following table presents our cash flows for the periods indicated (in thousands). For the Three Months Ended March 31, 2020 2019 Net cash flows provided by (used in): Operating activities $ 10,658 $ 15,926 Investing activities (2,115 ) (9,910 ) Financing activities (8,897 ) (10,245 ) Operating activities
Our operating cash flow has historically been sensitive to many variables, the most significant of which is the volatility of prices for the oil and natural gas for which we receive royalty revenue. Prices for these commodities are determined primarily by prevailing market conditions. Regional and worldwide economic activity, weather and other substantially variable factors influence market conditions for these products. These factors are beyond our control and are difficult to predict.
The decrease in cash flow provided by operating activities for the three months
ended
Investing activities
Investing activities are primarily related to the acquisition and disposition of
oil and natural gas interests. Cash used in investing activities for the three
months ended
Financing activities
Cash used in financing activities for the three months ended
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Facility of
Contractual Obligations
There were no material changes in our contractual obligations and other
commitments as disclosed in our Annual Report on Form 10-K for the year ended
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies and estimates
from those disclosed in our Annual Report on Form 10-K for the year ended
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