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 and six months ended June 30 ,
Production Product Revenue
[[Image Removed: wpx-20200630_g2.jpg]]
The following table presents our production volumes and financial highlights for
the three and six months ended
Three months Six months
ended June 30, ended June 30,
2020 2019 2020 2019
Production Sales Volume Data: Per day Per day Per day Per day
Oil (MBbls) 11,259 123.7 8,905 97.9 22,381 123.0 17,552 97
Natural gas (MMcf) 26,116 287.0 18,736 205.9 48,328 265.5 36,947 204.1
NGLs (MBbls) 3,222 35.4 2,493 27.4 6,320 34.7 4,781 26.4
Combined equivalent volumes
(MBoe)(a) 18,834 207.0 14,520 159.6 36,755 201.9 28,491 157.4
Financial Data (millions):
Total product revenues $ 274 $ 558 $ 776 $ 1,065
Total revenues(b) $ 33 $ 695 $ 1,431 $ 1,054
Operating income (loss) $ (471) $ 181 $ (697) $ 32
Capital expenditure activity $ 188 $ 341 $ 501 $ 766 __________
(a)MBoe are calculated using the ratio of six Mcf to one barrel of oil. (b)Includes net gain (loss) on derivatives.
23
--------------------------------------------------------------------------------Our second-quarter 2020 operating results were$652 million unfavorable compared to second-quarter 2019. The primary items impacting the three months endedJune 30, 2020 compared to the same period in 2019 include: •$435 million decrease in product revenues due to lower commodity prices; •$353 million unfavorable change in net gain (loss) on derivatives; and •$17 million higher operating costs including depreciation, depletion and amortization, lease and facility, gathering, processing and transportation, and taxes other than income. Offset by: •$151 million increase in product revenues due to higher overall production volumes primarily due to the Felix Acquisition. Our year-to-date 2020 operating results were$729 million unfavorable compared to 2019. The primary items impacting the six months endedJune 30, 2020 compared to the same period in 2019 include: •$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; •$586 million decrease in product revenues due to lower commodity prices; •$95 million higher operating costs including depreciation, depletion and amortization, lease and facility, gathering, processing and transportation, and taxes other than income; and •$30 million of acquisition costs for the Felix Acquisition in 2020. Offset by: •$723 million favorable change in net gain (loss) on derivatives; and •$297 million increase in product revenues related to higher overall production volumes due to the Felix Acquisition. Outlook During the first quarter of 2020, oil prices 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. With a modest increase in worldwide demand and production cuts across the globe, oil prices have improved since the lows seen in April and May. They remain volatile as the COVID-19 pandemic continues. Additionally, a recent court ruling inthe United States on the Dakota Access Pipeline ("DAPL"), if not stayed, will most likely impact the production and transportation costs of crude from theWilliston Basin inNorth Dakota . We are taking measures to mitigate our exposure toWilliston basis differentials including negotiating contracts for other pipeline capacity and sales via rail. 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 during the quarter, 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. We have opportunistically added economic hedges in 2021 and 2022 as forward prices increased above$40 /bbl. 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 and liquidity. Our planned capital spending estimate for all of 2020 is approximately$1.050 billion to$1.150 billion . This estimate is an approximate$650 million reduction of our originally planned capital spending. We will be reactive to current market conditions and may further reduce our capital spending. We communicated in first-quarter 2020 our plan to exit 2020 with six rigs comprised of five in theDelaware Basin and one in theWilliston Basin , however, we may continue to use two additional rigs in theDelaware Basin after contract terms expire in fourth-quarter 2020. Our completions activity will be limited in 2020 which will result in an inventory of drilled uncompleted wells ("DUC"s) although we currently expect to add two to three completion crews that will result in more completions activity towards the latter part of the year. 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 24 --------------------------------------------------------------------------------
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 have taken steps to reduce our gathering, processing and transportations expense along with our lease and facility operating costs. We curtailed our production in the second quarter, and further reduced production by delaying well completions. We also reduced contractor services and equipment rentals, and renegotiated rates for ongoing services. We will continue to pursue additional reductions in these areas and are also evaluating other 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 environment, specifically in first-quarter 2020, the book values of our proved properties were evaluated for impairment. This evaluation excluded 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 in the first quarter of 2020, we recorded$1 billion of impairment charges related to ourWilliston properties (see Note 5 of Notes to Consolidated Financial Statements). We do not believe there are new indicators of impairment in the second quarter of 2020 that would impact our impairment analysis. In the midst of these challenges, we closed on our acquisition ofFelix Energy Holdings II, LLC , or Felix (collectively, the "Felix Acquisition") onMarch 6, 2020 , which included cash consideration of$939 million and approximately 153 million 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 atJune 30, 2020 totaled approximately$1.9 billion , reflecting amounts available under the Credit Facility Agreement and cash on hand. A portion of our liquidity relates to proceeds from a senior notes offering inJune 2020 which will be used to retire other senior notes as discussed below. InJune 2020 , we issued$500 million 5.875% Senior Notes due in 2028 (the "2028 Notes") and concurrently launched a tender offer for up to$450 million of Senior Notes primarily targeting Senior Notes due in 2022 and 2023. OnJuly 2, 2020 , we closed and settled the tender offer retiring approximately$369 million of Senior Notes. We may use the remaining net proceeds from the 2028 Notes offering to opportunistically repurchase long-term debt through open market purchases or privately negotiated transactions or otherwise. Such repurchases, if any, will depend on market conditions, our liquidity requirements, contractual restrictions and other factors. After consideration of the tender offer discussed above, our next Senior Note maturity of$43 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 . Several peers had reductions in borrowing base and commitments during spring 2020 redeterminations. 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 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 25 --------------------------------------------------------------------------------
•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$20 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 ourWilliston properties in first quarter 2020. 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$6.3 billion and is primarily associated with ourDelaware Basin Properties . In addition, the net book value associated with unproved leasehold is approximately$2.1 billion and is also primarily associated with our Delaware Basin properties. See Note 5 of Notes to Consolidated Financial Statements herein and the Critical Accounting Estimates section of Item 7 in our Annual Report on Form 10-K for the year endedDecember 31, 2019 for further discussion. 26 --------------------------------------------------------------------------------
Results of Operations
Three Month-Over-Three Month Results of Operations
Revenue analysis
Three months Favorable Favorable
ended June 30, (Unfavorable) (Unfavorable) %
2020 2019 $ Change Change
(Millions)
Revenues:
Oil sales $ 241 $ 511 $ (270) (53) %
Natural gas sales 11 16 (5) (31) %
Natural gas liquid sales 22 31 (9) (29) %
Total product revenues 274 558 (284) (51) %
Net gain (loss) on derivatives (275) 78 (353) NM
Commodity management 32 58 (26) (45) %
Other 2 1 1 100 %
Total revenues $ 33 $ 695 $ (662) (95) %
__________
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:
•$270 million decrease in oil sales reflects $405 million related to lower sales
prices partially offset by $135 million related to higher production sales
volumes for the three months ended June 30, 2020 compared to 2019. The Delaware
Basin volumes increased to 76.6 MBbls per day from 46.5 MBbls per day for the
three months ended June 30, 2020 and 2019, respectively.The increase in
production sales volumes relates to the Felix properties acquired March 6, 2020
(see Note 2 of Notes to Consolidated Financial Statements). The Williston Basin
volumes decreased due in part to production curtailment in 2020 and were 47.1
MBbls per day as compared to 51.4 MBbls per day for the three months ended
June 30, 2020 and 2019, respectively. The following table reflects oil
production prices, the price impact of our derivative settlements and volumes
for the three months ended June 30, 2020 and 2019:
Three months
ended June 30,
2020 2019
Oil sales (per barrel)
30.17 (2.98)
Oil net price including derivative settlements (per barrel) Oil production sales volumes (MBbls) 11,259 8,905 Per day oil production sales volumes (MBbls/d) 123.7 97.9
__________
(a) Included in net gain (loss) on derivatives on the Consolidated Statements of Operations.
27
--------------------------------------------------------------------------------•$5 million decrease in natural gas sales reflects$12 million related to lower sales prices partially offset by$7 million related to higher production sales volumes for the three months endedJune 30, 2020 compared to 2019.The Delaware Basin volumes were 239.1 MMcf per day compared to 170.9 MMcf per day for the three months endedJune 30, 2020 and 2019, respectively. The increase in production sales volumes relates to the Felix properties acquiredMarch 6, 2020 (see Note 2 of Notes to Consolidated Financial Statements). The following table reflects natural gas production prices, the price impact of our derivative settlements and volumes for the three months endedJune 30, 2020 and 2019: Three months endedJune 30, 2020 2019 Natural gas sales (per Mcf)
(0.13) 0.88
Natural gas net price including derivative settlements (per Mcf) Natural gas production sales volumes (MMcf) 26,116 18,736 Per day natural gas production sales volumes (MMcf/d) 287.0 205.9
__________
(a) Included in net gain (loss) on derivatives on the Consolidated Statements of Operations. •$9 million decrease in natural gas liquids sales reflects$18 million related to lower sales price partially offset by$9 million related to higher production sales volumes for the three months endedJune 30, 2020 compared to 2019.The Delaware Basin volumes were 27.2 MBbls per day compared to 21.7 MBbls per day for the three months endedJune 30, 2020 and 2019, respectively. The increase in production sales volumes relates to the Felix properties acquiredMarch 6, 2020 (see Note 2 of Notes to Consolidated Financial Statements). The following table reflects NGL production prices and volumes for the three months endedJune 30, 2020 and 2019: Three months ended June 30, 2020 2019 NGL net price (per barrel)$ 6.74 $ 12.21 NGL production sales volumes (MBbls) 3,222 2,493 Per day NGL production sales volumes (MBbls/d) 35.4 27.4 •$353 million unfavorable change in net gain (loss) on derivatives primarily reflects unfavorable change in crude oil derivatives which was a result of losses in 2020 due to increase in 2020 of forward commodity prices relative to our hedge positions as opposed to gains in 2019 due to decreases in 2019 of forward commodity prices relative to our hedge position at that time. Settlements received on derivatives totaled$337 million for the three months endedJune 30, 2020 and settlements paid totaled$10 million for three months endedJune 30, 2019 . •$26 million decrease in commodity management revenues is primarily due to lower prices on crude sales and lower natural gas sales volumes partially offset by higher crude sales volumes. Higher natural gas sales volumes in 2019 were a result of excess pipeline capacity in the Delaware Basin which we utilized to purchase natural gas at depressed Delaware Basin pricing and transport to sales points outside the Basin. Crude sales volumes include purchases to fulfill certain sales commitments. Related commodity management costs and expenses decreased$9 million and are discussed below. 28 --------------------------------------------------------------------------------
Cost and operating expense and operating income analysis
Three months Favorable Favorable
ended June 30, (Unfavorable) (Unfavorable) % Per Boe Expense
2020 2019 $ Change Change 2020 2019
(Millions)
Costs and expenses:
Depreciation, depletion and amortization $ 229 $ 221 $ (8) (4) % $12.15 $15.24
Lease and facility operating 94 94 - - % $4.96 $6.50
Gathering, processing and transportation 67 40 (27) (68) % $3.53 $2.78
Taxes other than income 25 43 18 42 % $1.33 $2.95
Exploration 19 24 5 21 %
General and administrative:
General and administrative expenses 33 40 7 18 % $1.75 $2.73
Equity-based compensation 9 8 (1) (13) % $0.49 $0.56
Total general and administrative 42 48 6 13 % $2.24 $3.29
Commodity management 32 41 9 22 %
Acquisition costs 3 - (3) NM
Other-net (7) 3 10 NM
Total costs and expenses $ 504 $ 514 $ 10 2 %
Operating income (loss) $ (471) $ 181 $ (652) 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 our costs and expenses are comprised of the following:
•$8 million increase in depreciation, depletion and amortization primarily
reflects approximately $56 million related to the Felix properties acquired in
March 2020 that was substantially offset by a $3.09 per Boe decrease in rate
compared to June 30, 2019 . The decrease in rate was primarily the result of a
decrease to the depletable base following the impairment of proved properties in
the Williston Basin in the first quarter of 2020 (see Note 5 of Notes to
Consolidated Financial Statements), partially offset by the impact of lower
estimated proved reserves as compared to June 30, 2019 primarily due to a lower
trailing 12-month average price.
•Lease and facility operating expenses remained flat as approximately $27
million related to the acquired Felix properties was offset by a $1.56 per Boe
decrease in the overall rate per Boe for the three months ended June 30, 2020
compared to the same time in 2019.
•$27 million increase in gathering, processing and transportation primarily due
to $18 million related to the acquired Felix properties and a Delaware Basin
related contract entered into in late 2019.
•$18 million decrease in taxes other than income relate to decreased product
revenues as previously discussed.
•$6 million decrease in general and administrative expense for the three months
ended June 30, 2020 compared to the same period in 2019 due in part to lower
estimated employee incentive bonus in 2020. Our general and administrative
expenses per Boe decreased to an average $2.24 for the three months ended June
30, 2020 compared to $3.29 for the same period in 2019.
•$9 million decrease in commodity management expenses is primarily due to
depressed pricing resulting in lower crude oil cost of sales substantially
offset by higher crude purchase volumes.
•Other expense for 2020 includes a $5 million gain related to an exchange of
leasehold (see Note 12 of Notes to Consolidated Financial Statements).
29
--------------------------------------------------------------------------------Results below operating income
Three months Favorable Favorable
ended June 30, (Unfavorable) (Unfavorable) %
2020 2019 $ Change Change
(Millions)
Operating income (loss) $ (471) $ 181 $ (652) NM
Interest expense (49) (40) (9) (23) %
Gains on equity method investment
transactions 2 247 (245) 99 %
Equity earnings 5 1 4 NM
Investment income (loss) and other (1) - (1) NM
Income (loss) from continuing operations
before income
taxes (514) 389 (903) NM
Provision (benefit) for income taxes (101) 84 185 NM
Income (loss) from continuing operations (413) 305 (718) NM
Income from discontinued operations 5 - 5 NM
Net income (loss) $ (408) $ 305 (713) NM
__________
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.
During the second quarter of 2019, we recorded a gain related to our equity
method investment in the Oryx pipeline. See Note 5 of Notes to Consolidated
Financial Statements for detail of this transaction.
For the three months ended June 30, 2020 , we had a benefit for income taxes
compared to a provision for the same period of 2019 due to a loss from
continuing operations for 2020 compared to income from continuing operations for
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.
30--------------------------------------------------------------------------------
Six Month-Over-Six Month Results of Operations
Revenue analysis
Six months Favorable Favorable
ended June 30, (Unfavorable) (Unfavorable) %
2020 2019 $ Change Change
(Millions)
Revenues:
Oil sales $ 706 $ 960 $ (254) (26) %
Natural gas sales 24 41 (17) (41) %
Natural gas liquid sales 46 64 (18) (28) %
Total product revenues 776 1,065 (289) (27) %
Net gain (loss) on derivatives 594 (129) 723 NM
Commodity management 56 117 (61) (52) %
Other 5 1 4 NM
Total revenues $ 1,431 $ 1,054 $ 377 36 %
__________
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:
•$254 million decrease in oil sales reflects $518 million related to lower sales
prices partially offset by $264 million related to higher production sales
volumes for the six months ended June 30, 2020 compared to 2019. The Delaware
Basin production volumes were 68.4 MBbls per day compared to 45.4 MBbls per day
for the six months ended June 30, 2020 and 2019, respectively. The increase in
production volumes primarily relates to the Felix properties acquired March 6,
2020 , see Note 2 of Notes to Consolidated Financial Statements. The Williston
Basin production volumes were 54.6 MBbls per day compared to 51.6 MBbls per day
for the six months ended June 30, 2020 and 2019, respectively. The following
table reflects oil sales prices, the price impact of our derivative settlements
and production volumes for the six months ended June 30, 2020 and 2019:
Six months
ended June 30,
2020 2019
Oil sales (per barrel)
20.19 (1.50)
Oil net price including derivative settlements (per barrel) Oil production sales volumes (MBbls) 22,381 17,552 Per day oil production sales volumes (MBbls/d) 123.0 97.0
_________
(a) Included in net gain (loss) on derivatives on the Consolidated Statements of Operations.
31
--------------------------------------------------------------------------------•$17 million decrease in natural gas sales reflects$30 million related to lower sales prices partially offset by$13 million related to higher production sales volumes for the six months endedJune 30, 2020 compared to 2019. The increase in our production sales volumes primarily relates to our Delaware Basin which had production volumes of 216.9 MMcf per day compared to 168.7 MMcf per day for the six months endedJune 30, 2020 compared to 2019, respectively. This increase in sales primarily relates to the Felix properties acquiredMarch 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 six months endedJune 30, 2020 and 2019: Six months endedJune 30, 2020 2019 Natural gas sales (per Mcf)
0.02 0.65
Natural gas net price including derivative settlements (per Mcf) Natural gas production sales volumes (MMcf) 48,328 36,947 Per day natural gas production sales volumes (MMcf/d) 265.5 204.1
__________
(a) Included in net gain (loss) on derivatives on the Consolidated Statements of Operations. •$18 million decrease in natural gas liquids sales reflects$38 million related to lower sales prices partially offset by$20 million related to higher production sales volumes for the six months endedJune 30, 2020 compared to 2019. Delaware Basin production volumes were 26.0 MBbls per day compared to 20.8 MBbls per day for the six months endedJune 30, 2020 and 2019, respectively. The increase in production sales volumes relates to the Felix properties acquiredMarch 6, 2020 (see Note 2 of Notes to Consolidated Financial Statements).Williston Basin production volumes were 8.7 MBbls per day compared to 5.5 MBbls per day for the six months endedJune 30, 2020 and 2019, respectively. The following table reflects NGL production prices and volumes for the six months endedJune 30, 2020 and 2019: Six months endedJune 30, 2020 2019
NGL net price (per barrel) $ 7.23 $13.29
NGL production sales volumes (MBbls) 6,320 4,781
Per day NGL production sales volumes (MBbls/d) 34.7
26.4
•$723 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 received on derivatives totaled$454 million for the six month endedJune 30, 2020 and settlements paid totaled$1 million for the six months endedJune 30, 2019 . •$61 million decrease in commodity management revenues primarily due to lower prices on crude sales and lower natural gas volumes, partially offset by higher crude sales volumes. Higher natural gas sales volumes in 2019 were a result of excess pipeline capacity in the Delaware Basin which we utilized to purchase natural gas at depressed Delaware Basin pricing and transport to sales points outside the Basin. Related commodity management costs and expenses decreased$24 million and are discussed below. 32 --------------------------------------------------------------------------------
Cost and operating expense and operating income analysis
Six months Favorable Favorable
ended June 30, (Unfavorable) (Unfavorable) % Per Boe Expense
2020 2019 $ Change Change 2020 2019
(Millions)
Costs and expenses:
Depreciation, depletion and amortization $ 488 $ 440 $ (48) (11) % $13.29 $15.46
Lease and facility operating 195 180 (15) (8) % $5.30 $6.32
Gathering, processing and transportation 129 82 (47) (57) % $3.50 $2.88
Taxes other than income 67 82 15 18 % $1.83 $2.87
Exploration 86 48 (38) (79) %
General and administrative:
General and administrative expenses 75 79 4 5 % $2.04 $2.77
Equity-based compensation 18 16 (2) (13) % $0.50 $0.56
Total general and administrative 93 95 2 2 % $2.54 Commodity management 66 90 24 27 % Impairment of proved properties 967 - (967) NM Acquisition costs 30 - (30) NM Other-net 7 5 (2) (40) % Total costs and expenses$ 2,128 $ 1,022 $ (1,106) (108) % Operating income (loss)$ (697) $ 32 $ (729) 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 our costs and expenses are comprised of the following: •$48 million increase in depreciation, depletion and amortization, primarily reflects approximately$71 million from the Felix properties acquired inMarch 2020 , as well as higher production volumes. These increases were partially offset by a$2.17 per Boe decrease in rate compared toJune 30, 2019 . The decrease in rate was primarily the result of a decrease to the depletable base following the impairment of proved properties in theWilliston Basin in the first quarter of 2020 (see Note 5 of Notes to Consolidated Financial Statements), partially offset by the impact of lower estimated proved reserves as compared toJune 30, 2019 primarily due to a lower trailing 12-month average price. •$15 million increase in lease and facility operating expenses of which approximately$35 million related to the acquired Felix properties. This increase was substantially offset by a$1.02 per Boe decrease in rate for the six months endedJune 30, 2020 compared to the same time in 2019. •$47 million increase in gathering, processing and transportation primarily related to approximately$25 million from Felix properties acquiredMarch 6, 2020 , growth in production volumes and a Delaware Basin related contract entered into in late 2019. •$15 million decrease in taxes other than income relate to decreased product revenues, as previously discussed. •$38 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). •$24 million decrease in commodity management expenses is primarily due to depressed pricing resulting in lower crude cost of sales, lower natural gas purchase volumes and depressed Delaware Basin pricing on physical natural gas cost of sales. These decreases are partially offset by increased crude purchase volumes for 2020 and lower-of-cost or market adjustments on long-term line fill of approximately$8 million , recorded in first-quarter 2020. •$967 million impairment onWilliston proved properties recorded in 2020 (see Note 5 of Notes to Consolidated Financial Statements). •$30 million of acquisition costs in 2020 for the Felix Acquisition (see Note 2 of Notes to Consolidated Financial Statements). •Other expense in 2020 includes a$13 million lower-of-cost or market adjustment on materials and supplies inventory made in 2020 which was partially offset by a$5 million gain related to an exchange of leasehold in second-quarter 2020 (see Note 12 of Notes to Consolidated Financial Statements). 33 --------------------------------------------------------------------------------
Results below operating income
Six months Favorable Favorable
ended June 30, (Unfavorable) (Unfavorable) %
2020 2019 $ Change Change
(Millions)
Operating income (loss) $ (697) $ 32 $ (729) NM
Interest expense (97) (81) (16) (20) %
Gains on equity method investment
transactions 2 373 (371) (99) %
Equity earnings 8 3 5 167 %
Other income 3 - 3 NM
Income (loss) from continuing operations
before income taxes (781) 327 (1,108) NM
Provision (benefit) for income taxes (162) 70 (232) NM
Income (loss) from continuing operations (619) 257 (876) NM
Loss from discontinued operations (175) - (175) NM
Net income (loss) $ (794) $ 257 (1,051) NM
__________
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).
Gains on equity method investment transactions related to the 2019 sale of our
equity interest in the Whitewater natural gas pipeline and a 2019 distribution
received related to our 25 percent equity interest in the Oryx pipeline. See
Note 5 of Notes to Consolidated Financial Statements for details of this sale.
For the six months ended June 30, 2020 , we had a benefit for income taxes
compared to a provision for the same period of 2019 due to a loss from
continuing operations for 2020 compared to income from continuing operations for
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 a
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 $1.050 billion to $1.150 billion .
However, we will be reactive to current market conditions and may further reduce
our capital spending. As of June 30, 2020 , we have incurred $467 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.
34
--------------------------------------------------------------------------------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; •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 including the April and October borrowing base redeterminations; 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 ofJune 30, 2020 , WPX had no borrowings outstanding and$18 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$1,482 million as ofJune 30, 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 . Several peers have had reductions in borrowing base and commitments during spring 2020 redeterminations. As of the date of this filing, we are in compliance with all terms, conditions and financial covenants of the Credit Facility, as amended. Senior Notes During second-quarter 2020, we completed a debt offering of$500 million of 5.875% Senior Notes due 2028 ("2028 Notes"). Subsequent toJune 30, 2020 , we closed on the purchase of approximately$369 million of a portion of our 2022 Notes, 2023 Notes and 2024 Notes with an estimated loss on extinguishment of debt of$24 million to be recorded in third-quarter 2020. We may use the remaining net proceeds from the 2028 Notes offering to opportunistically repurchase long-term debt through open-market purchases or privately negotiated transactions or otherwise. Such repurchases, if any, will depend on market conditions, our liquidity requirements, contractual restrictions and other factors. See Note 7 of Notes to Consolidated Financial Statements for further discussion of our senior notes. 35 --------------------------------------------------------------------------------
Commodity Price Risk Management
To manage the commodity price risk and volatility of owning producing oil and
gas properties, we enter into derivative contracts for a portion of our future
production (see Note 13 of Notes to Consolidated Financial Statements). We chose
not to designate our derivative contracts associated with our future production
as cash flow hedges for accounting purposes. The following table sets forth, as
of the date of this filing, the derivative notional volumes of the net (long)
short positions for the remainder of 2020 and 2021 that are economic hedges of
our production volumes:
Crude Oil Jul - Dec 2020 2021
Volume Weighted Average Volume Weighted Average
(Bbls/d) Price ($/Bbl) (Bbls/d) Price ($/Bbl)
Fixed Price Swaps-WTI 91,800 $ 53.06 59,878 $ 40.78
Fixed Price Swaptions-WTI - $ - 20,000 $ 57.02
Fixed Price Swaptions-WTI - $ - 5,041 $ 40.12
Fixed Price Calls-WTI - $ - 5,000 $ 39.50
Fixed Price Costless Collars-WTI 20,000 $53.33 - $63.48 - $ -
Basis Swaps-Midland/Cushing 35,000 $ 0.63 15,000 $ 0.64
Basis Swaps-Nymex Calendar Monthly Avg Roll 51,685 $ (0.50) - $ -
Basis Swaps-Brent/WTI Spread 5,000 $ 8.36 1,000 $ 8.00
Basis Swaps-MEH/Midland 842 $ (0.85) - $ -
Natural Gas Jul - Dec 2020 2021
Volume Weighted Average Volume Weighted Average
(BBtu/d) Price ($/MMBtu) (BBtu/d) Price ($/MMBtu)
Fixed Price Swaps-Henry Hub - $ - 240 $ 2.62
Fixed Price Swaptions-Henry Hub - $ - 50 $ 2.68
Basis Swaps-Waha 100 $ (1.14) 80 $ (0.65)
Sources (Uses) of Cash
Six months
ended June 30,
2020 2019
(Millions)
Net cash provided by (used in):
Operating activities $ 532 $ 634
Investing activities (1,523) (195)
Financing activities 1,340 (330)
Net increase in cash and cash equivalents and restricted cash
Operating activities Net cash provided by operating activities decreased for the six months endedJune 30, 2020 compared to the same period in 2019 primarily due to lower commodity prices, higher operating costs, and acquisition costs in 2020, partially offset by higher realizations on our derivatives and higher production volumes. Net cash provided by operating activities for the six months endedJune 30, 2019 includes the receipt of approximately$38 million related to an alternative minimum tax credit refund. 36 --------------------------------------------------------------------------------
Investing activities
The table below reflects capital expenditures, exclusive of partnerships, for
the periods presented.
Six months
ended June 30,
2020 2019
(Millions)
Incurred capital expenditures:
Drilling, completions and facilities $ 467 $ 587
Land acquisitions 2 103
Infrastructure 15 65
Other 17 11
Total incurred capital expenditures 501 766
Changes in related accounts payable and accounts receivable 97 8
Cash capital expenditures reported on the Consolidated
Statements of
Cash Flows $ 598 $ 774
Net cash used in investing activities for the six months ended June 30, 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 six
months ended June 30, 2019 includes the proceeds from the sale of certain
non-core properties and proceeds related to transactions involving our equity
method investments including our 20 percent equity interest in Whitewater
natural gas pipeline and our 25 percent equity interest in the Oryx pipeline
(see Note 5 of Notes to Consolidated Financial Statements).
Financing activities
Net cash provided by financing activities for the six months ended June 30, 2020
includes approximately $1,377 million of net proceeds from the debt issuances in
the first and second quarters of 2020 (see Note 7 of Notes to Consolidated
Financial Statements), $44 million of payments for repurchases of common stock
under our share repurchase program (see Note 11 of Notes to Consolidated
Financial Statements) and $24 million of contributions from noncontrolling
interests in consolidated partnerships.
Net cash used in financing activities for the six months ended June 30, 2020 and
2019 also includes payment for shares withheld for taxes of $8 million and $15
million , respectively.
Contractual Obligations
As disclosed in our 2019 Annual Report on Form 10-K, our contractual obligations
table excluded $875 million of additional commitments associated with projects
for which the counterparty had not completed construction. Significant changes
in this $875 million include the following:
•$200 million reduction related to natural gas transportation capacity
associated with a project still under construction in the Delaware Basin.
•$287 million reduction after a counterparty cancelled plans to construct
certain crude transportation assets.
•$102 million that is now a commitment as the counterparty completed
construction on a project in the Delaware Basin with a total commitment of
approximately $102 million over a 7-year term (see Note 9 of Notes to
Consolidated Financial Statements).
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. See Note
2 of Notes to Consolidated Financial Statements for further discussion of the
Felix Acquisition.
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
37
--------------------------------------------------------------------------------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 atJune 30, 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 six 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. 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$255 million and$165 million atJune 30, 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$246 million and$151 million atJune 30, 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$238 million and net liability$24 million atJune 30, 2020 andDecember 31, 2019 , respectively. 38
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