Chaparral Energy, Inc. (NYSE: CHAP) is an independent oil and natural gas exploration and production company headquartered inOklahoma City . Founded in 1988, Chaparral has over 207,000 net surface acres in the Mid-Continent region. The Company is focused in the oil window of theAnadarko Basin in the heart ofOklahoma , where it has approximately 120,000 net acres (our "Focus Areas"). The following discussion and analysis is intended to assist in understanding our financial condition and results of operations for the three months endedMarch 31, 2020 and 2019, as well as the current trends and uncertainties relevant to the Company's future financial and operational performance. The information should be read in conjunction with our unaudited consolidated financial statements and the notes thereto included in this quarterly report as well as the information included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Statements in our discussion may be forward-looking statements. These forward-looking statements involve risks and uncertainties. We caution that a number of factors could cause future production, revenues and expenses to differ materially from our expectations. For more information, see "Cautionary Note Regarding Forward-Looking Statements."
Early First Quarter Activity
At the beginning of the quarter endedMarch 31, 2020 , Chaparral management commenced a comprehensive cash improvement effort. The initiative, which involves the formation and collaboration of multiple working teams, is intended to identify, validate and implement opportunities to improve the Company's cash flow across all parts of its business - drilling and completions capital expenditures, lease operating expenses, production uptime and efficiency, development planning, and general and administrative expenses. Many of the measures identified by the teams have been implemented and are yielding expanded cash flow at the project level already. However, because of the extraordinary and unprecedented events affecting the oil and gas industry discussed below, initiatives that are scale-dependent are expected to be fully realized only when activity has resumed to more normal levels.
Macroeconomic Developments and Their Impact on the Oil and Gas Industry
The rapid, global spread of COVID-19 in the first quarter of 2020 and the resulting economic repercussions created significant volatility in the oil and gas industry. Stay-at-home and similar protective measures that were enacted by federal, foreign, state and local governments to slow the spread of the virus contributed to a significant deterioration in the domestic and global demand for oil and gas. Compounding the impact of COVID-19, the oil production output alliance betweenRussia ,Saudi Arabia and other oil producing nations ("OPEC+") broke down as both sides were unable to reach agreement in earlyMarch 2020 over how much to restrict production in order to stabilize crude oil prices. As a result,Saudi Arabia andRussia both initiated efforts to increase production, driving down oil prices. OPEC+ was later able to agree on approximately 9.7 million barrels of oil per day of production cuts, but that announcement has done little to aid in oil price recovery because of the significant drop in global demand. Even though the price for oil in the commodities futures markets currently reflect some price improvement (although still less than pre-March 2020 prices), the current cash prices have deteriorated significantly. OnApril 20, 2020 , the front-month futures contract for West Texas Intermediate ("WTI") prices dipped into the negative, and as of the time of this filing were less than$26.00 per barrel. The front-month contract is used to calculate our settlement price for crude sales in the current month as well as a price adjustment for the following month. Therefore, the price shock described above will be detrimental to our April andMay 2020 crude revenues. Furthermore, producers are not able to produce significant volumes of oil now and store it for later sale because little or no storage capacity remains available. This combination of events has led to an unprecedented supply-demand oil imbalance in the range of 25 million to 28 million barrels of oil per day duringApril 2020 , and has created a great deal of uncertainty in the oil and gas industry as producers make adjustments to their capital and budget strategies in reaction to these changes. In addition, the COVID-19 pandemic has increased volatility and caused negative pressure in the capital and credit markets. As a result, and in light of our debt incurrence restrictions in our existing debt documents, we do not expect to have access in the current environment to the capital markets or financing on terms we would find favorable, if at all. 30 --------------------------------------------------------------------------------
Chaparral's Response and 2020 Outlook
In response, Chaparral is taking material and unusual actions to maximize the value of its assets and improve its financial position. Because the Company has (a) a strong hedge position for crude oil in 2020, the proceeds of which do not require the physical delivery of any oil or gas and (b) no material volume commitments or other contractual obligations to produce oil or gas, we determined that it is not prudent or necessary to continue developing our inventory or sell all of our products at current market prices. Accordingly, we suspended all drilling and stimulation operations in early April, deferring completions of recently drilled wells. Further, the Company shut in the six-well Greenback pad that came online in early March even though it was performing above expectations. Since then, the Company has begun to shut-in operated production that is not associated with waterfloods or exposed to well-specific mechanical or other risks. Procedures and precautions were followed to help protect mechanical and reservoir integrity and to minimize the cost and timing of resuming production to help ensure that production can be resumed efficiently on these shut-in wells once commodity prices recover sufficiently. Furthermore, in order to facilitate a swift restart of sales when that price recovery occurs, we are taking steps now to increase crude storage in the tank batteries at our operated lease locations. Once tank batteries are full, we expect that the majority of our operated production will be curtailed, with future prices determining the timing of when the wells will be turned back online. These operational adjustments will result in lower production (with a resulting decline in revenues) and lower costs and capital spending requirements in the second quarter.
Liquidity and capital resources
Our primary sources of liquidity have historically been cash flows generated from operating activities, financing provided by our revolving credit facility or issuance of debt, and proceeds from hedge settlements. Cash Flows from Operating Activities. As described above, in light of the significant deterioration in commodity prices, we have shut in a substantial number of our producing wells and have suspended all drilling and stimulation operations. As a result, we expect the cash flows generated from our operating activities to decline significantly, offset by (a) the related reductions in expenses and capital expenditures and (b) proceeds from hedge settlements. The impact of this response on liquidity during the second quarter will depend on gas and NGL revenues prior to shut-in, how much variable lease operating expense can be eliminated and how long the shut-ins last. Proceeds from Revolving Credit Facility and Senior Notes Interest Payment. At the beginning ofApril 2020 , we significantly increased our cash balance by borrowing an additional$105 million , which increased the total amount outstanding under our Credit Agreement (as defined below) to$250.0 million . Contemporaneously with the additional borrowings under the Credit Agreement, the lenders under that agreement notified the Company regarding the Borrowing Base Redetermination (as defined below). The Company is required to repay the resulting$75 million borrowing base deficiency in six equal monthly installments, plus interest, beginning onMay 2, 2020 . Furthermore, our next semi-annual interest payment of$13.1 million on our 8.75% Senior Notes is due onJuly 15, 2020 . Hedging. As described above in "Note 6: Derivative Instruments" above in the accompanying financial statements, we have a strong hedge position for crude oil in 2020 the proceeds of which do not require the physical delivery of any oil or gas. In light of the significant difference between near-term commodity prices and future prices, one possible strategy would be for us to increase and lengthen our hedging position. This approach would align our hedges with our decision to suspend drilling and to shut-in a substantial amount of production until prices recover. However, our hedging counterparties (who are also lenders under our Credit Agreement) have informed us that they currently do not intend to enter into new hedges with us until we have cured the Borrowing Base Deficiency (as defined below). We believe that the actions that the Company has taken to draw down on its revolving credit facility and to implement material operational changes afford us the ability to diligently explore all credible operating and capitalization scenarios available to us. However, our profitability outlook based on current strip prices has resulted in a situation that raises substantial doubt about our ability to continue as a going concern within one year of the time of this filing. In that regard, the Company's Board of Directors has formed a Special Committee composed of independent directors to review and evaluate strategic alternatives to preserve and grow the value of the enterprise. We have also retained financial and legal advisors to assist in this evaluation process. No assurances can be given as to the outcome or timing of the evaluation, or whether any particular transaction may be pursued or consummated. 31 --------------------------------------------------------------------------------
Indebtedness
Debt consists of the following as of the dates indicated: (in thousands) March 31, 2020 December 31, 2019 8.75% Senior Notes due 2023$ 300,000 $ 300,000 Credit facility 145,000 130,000 Financing lease obligations 1,549 1,653 Installment note payable 58 371 Unamortized issuance costs (9,355 ) (10,038 ) Total debt, net$ 437,252 $ 421,986 Credit facility Pursuant to our Credit Agreement (the "Credit Agreement") with Royal Bank of Canada, as administrative agent and issuing bank, and the additional lenders party thereto, we have a$750.0 million credit facility collateralized by our oil and natural gas properties and is scheduled to mature onDecember 21, 2022 . Availability under our credit facility is subject to financial covenants (see "Note 4: Debt" in "Item 1. Financial Statements" of this report) and a borrowing base predicated on the value of our oil and natural gas properties and set by the banks semi-annually on or aroundMay 1 andNovember 1 of each year. As ofMarch 31, 2020 , our borrowing base on the credit facility was$325.0 million . Depending on how quickly supply and demand for oil return to balance and commodity prices reflect same, and the consequent duration of the production shut-ins described above, our ability to remain in compliance with the financial covenants referenced above may be materially negatively affected. The Credit Agreement contains covenants and events of default customary for oil and natural gas reserve-based lending facilities. Please see "Note 8: Debt" in "Item 8 Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , for a discussion of the material provisions of our Credit Agreement. OnApril 1, 2020 , we borrowed$15.0 million and onApril 2, 2020 , we provided notice to our lenders to borrow an additional$90.0 million (the latter herein referred to as the "Borrowing") which increased the total amount outstanding under the Credit Agreement to$250.0 million . The Borrowing was made by the Company as a precautionary measure in order to increase its cash position and thereby provide for flexibility in the current challenging business environment and associated uncertainties. Subsequent to the Borrowing, we were notified that our lenders had exercised their right to make an interim redetermination of the Company's borrowing base. The lenders' redetermination notice stated that the Company's borrowing base was decreased from$325.0 million to$175.0 million , effectiveApril 3, 2020 . Our lenders subsequently reaffirmed the borrowing base at the same level onMay 5, 2020 , in conjunction with the Company's scheduled semi-annual redetermination process. As a result of theApril 3, 2020 , borrowing base redetermination, the Borrowing, once funded, created a borrowing base deficiency in the amount of$75.0 million under the Credit Agreement (the "Borrowing Base Deficiency"). The Company notified the administrative agent for the Credit Facility onApril 14, 2020 , that it intends to eliminate such Borrowing Base Deficiency by repaying the amount of the Borrowing Base Deficiency in six equal monthly installments, with the first payment of$12.5 million plus interest made onMay 1, 2020 . No premium or penalty would be charged with respect to those repayments. If the Company is unable to repay the amount of the Borrowing Base Deficiency within the time period required under the Credit Agreement, an event of default would occur under the Credit Agreement.
8.75% Senior Notes
OnJune 29, 2018 , we issued at par$300.0 million in aggregate principal amount of our 8.75% Senior Notes maturing inJuly 15, 2023 in a private placement under Rule 144A and Regulation S of the Securities Act of 1933, as amended. The net proceeds were used to repay the outstanding balance on the credit facility at that time and for general corporate purposes.
Please see "Note 8: Debt" in "Item 8 Financial Statements and Supplementary
Data" of our Annual Report on Form 10-K for the year ended
Finance leases
We currently have financing leases that consist of fleet trucks and office
equipment. Please see "Note 17: Leases" in "Item 8. Financial Statements and
Supplementary Data" of our Annual Report on Form 10-K for the year ended
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Sources and uses of cash Our primary sources of liquidity have historically been cash flows generated from operating activities, financing provided by our revolving credit facility or issuance of debt, and proceeds from hedge settlements. Additionally, in recent years, asset dispositions have provided a source of cash flow for enhancing liquidity. Our business strategy and, in certain circumstances, the financial covenants contained in our debt instruments require that we continuously commit substantial investment to drill and develop our oil and natural gas properties such that production from new wells can offset the natural production decline from existing wells.
Our net change in cash is summarized as follows:
Three months ended March
31,
(in thousands) 2020
2019
Cash flows provided by operating activities
(36,670 ) (63,529 ) Cash flows provided by financing activities 14,483
28,647
Net decrease in cash during the period
Our cash flows from operating activities are derived substantially from the production and sale of oil and natural gas. Cash flows from operating activities for the three months endedMarch 31, 2020 , of$12.9 million increased compared to the prior year quarter primarily due to higher gross revenues and lower lease operating expenses partially offset by higher transportation and processing deductions.
We use the net cash provided by operations to partially fund our acquisition, exploration and development activities. During 2020, we also relied on borrowings from our credit facility and cash on hand to fund our capital expenditures.
Our cash flows from investing activities typically consist of cash outflows for capital expenditures, cash inflows from asset dispositions and derivative settlement payments or receipts.
Our actual costs incurred, including costs that we have accrued for during the three months endedMarch 31, 2020 , are summarized in the table below. (in thousands) Three months ended March 31, 2020 Acquisitions (1) $ 4,232 Drilling (2) 43,298 Enhancements 3,523 Operational capital expenditures incurred
51,053
Other (3)
4,651
Total capital expenditures incurred $
55,704
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(1) Includes$2.5 million recorded to unproved leasehold related to the drilling commitment obligation discussed above under "Contractual obligations."
(2) Includes
(3) For the three months endedMarch 31, 2020 , this amount includes$2.2 million for capitalized general and administrative expenses, and$2.3 million for capitalized interest. Net cash used in investing activities during the three months endedMarch 31, 2020 consisted of cash outflows for capital expenditure of$49.1 million partially offset by receipts for derivative settlements of$9.2 million and proceeds from asset sales of$3.2 million . The asset sale proceeds primarily consisted of proceeds from equipment, vehicles and real estate previously classified as held-for-sale on our balance sheet. Net cash used in investing activities during the three months endedMarch 31, 2019 consisted of cash outflows for capital expenditure of$64.0 million partially offset by receipts for derivative settlements of$0.5 million . Net cash from financing activities during the three months endedMarch 31, 2020 , consisted of borrowings on our credit facility of$15.0 million partially offset by cash outflows of$0.4 million for repayment of debt and$0.1 million for debt financing fees. Net cash from financing activities during the three months endedMarch 31, 2019 , consisted of borrowings on our Credit Facility of$30.0 33 --------------------------------------------------------------------------------
million partially offset by cash outflows for repayment of debt and financing
leases of
Contractual obligations
We have numerous contractual commitments in the ordinary course of business including debt service requirements, operating leases, financing leases, well drilling obligations and purchase obligations. Our operating leases currently consist of an office space lease at our headquarters and our financing leases consist of leases on our fleet vehicles and office equipment. We have a well drilling commitment under the terms of leasehold purchase agreements which we entered into in 2017. The drilling commitment requires the Company to drill and complete 10 wells on such leasehold in each of 2019, 2020, and 2021 and 15 wells in 2022. To the extent the Company does not drill and complete the minimum number of wells in a given year, it is required to pay the sellers of the acreage$250,000 for each deficient well. The Company has paid the deficiency amount related to its 2019 drilling commitment and recorded an accrual of$2.5 million inMarch 2020 for the deficiency on its 2020 drilling commitment as it does not intend to drill wells on the subject acreage in 2020 given the current commodity price environment. No determination has been made with respect to 2021 or 2022; however, if the Company fails to drill the prescribed number of wells in either year, it would be obligated to make additional payments to the sellers. Surety bonds totaling$3.4 million were posted on our behalf as ofMarch 31, 2020 . We pay premiums for such bonds and, under normal circumstances, are not required to post collateral of any kind to support their issuance. However, as a result of the current extraordinary macroeconomic situation and the Borrowing Base Deficiency discussed above, the surety for these bonds, onApril 15, 2020 , exercised its right to demand that the Company post cash collateral in respect of the bonds. The Company subsequently provided$0.5 million in such collateral. Other than additional borrowings under our credit facility and the Borrowing Base Deficiency described in "Note 4: Debt" in "Item 1: Financial Information" of this Quarterly Report on Form 10-Q, we have not had material changes to our contractual commitments sinceDecember 31, 2019 .
Results of operations
Highlights
Our financial and operating performance in the first quarter of 2020 includes the following highlights and comparisons to the prior year quarter:
• We generated net income for the three months ended
million. Included in our income were gains on commodity derivative instruments of$78.4 million partially offset by a ceiling impairment of$71.4 million . • Our gain on commodity derivatives for the three months endedMarch 31, 2020 , was attributable to$9.2 million of realized settlement gains and$69.2 million of noncash mark-to-market gains driven by the decline in crude oil and NGL prices.
• We grew net production by 49% to 2,793 MBoe for the three months ended
MBoe over the same time period. • We lowered our lease operating expense by 18% to$10.1 million for the
three months ended
despite an increase in production, as evidenced by the 45% decrease in lease operating expense per Boe to$3.61 .
• We lowered general and administrative expenses on a per Boe basis by 35% to
administrative expenses was reduced by 3% to
months ended
• Our oil and natural gas capital expenditures for the three months ended
drilling and completions and
activity during this period included completing and bringing online 15 wells, of which nine were drilled in the current quarter and six in the
prior year. We also drilled two wells scheduled to be completed subsequent
to quarter end. 34
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Production
Production volumes by area were as follows (MBoe)
Three months ended March 31, Increase/ Percent 2020 2019 (Decrease) Change Focus Areas: Kingfisher County 750 605 145 24.0 % Canadian County 1,382 476 906 190.3 % Garfield County 236 296 (60 ) (20.3 )% Other 36 57 (21 ) (36.8 )% Total Focus Areas 2,404 1,434 970 67.6 % Other 389 440 (51 ) (11.6 )% Total 2,793 1,874 919 49.0 % For the three months endedMarch 31, 2020 , our total net production increased compared to the prior year quarter. This increase is primarily due to increases in production in our Focus Areas, primarily inKingfisher County andCanadian County where we brought online an additional 62 wells during the period. This pattern of growth underscores our emphasis on developing our Focus Areas which includes bringing online 66 gross (57 net) operated new wells in the area in the last 12 months.
Revenues and transportation and processing
Our commodity sales are derived from the production and sale of oil, natural gas and natural gas liquids. These revenues do not include the effects of derivative instruments and may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices. 35 --------------------------------------------------------------------------------
The following table presents information about our production and commodity sales before the effects of commodity derivative settlements:
Three months ended March 31, Increase/ Percent 2020 2019 (Decrease) Change Commodity sales (in thousands): Oil$ 37,026 $ 32,802 $ 4,224 12.9 % Natural gas 8,655 11,206 (2,551 ) (22.8 )% Natural gas liquids 9,682 9,217 465 5.0 % Gross commodity sales$ 55,363 $ 53,225 $ 2,138 4.0 % Transportation and processing (6,512 ) (4,606 ) (1,906 ) 41.4 % Net commodity sales$ 48,851 $ 48,619 $ 232 0.5 % Production: Oil (MBbls) 840 618 222 35.9 % Natural gas (MMcf) 6,450 4,474 1,976 44.2 % Natural gas liquids (MBbls) 878 510 368 72.2 % MBoe 2,793 1,874 919 49.0 % Average daily production (Boe/d) 30,692 20,819 9,873 47.4 % Average sales prices (excluding derivative settlements): Oil per Bbl$ 44.08 $ 53.08 $ (9.00 ) (17.0 )% Natural gas per Mcf$ 1.34 $ 2.50 $ (1.16 ) (46.4 )% NGLs per Bbl$ 11.03 $ 18.07 $ (7.04 ) (39.0 )% Transportation and processing per Boe$ (2.33 ) $ (2.46 ) $ 0.13 (5.3 )% Average sales price per Boe$ 17.49 $ 25.95 $ (8.46 ) (32.6 )% Our gross commodity sales (excluding transportation and processing deductions) for the three months endedMarch 31, 2020 , increased due to an increase in production across all commodities, partially offset by price decreases on all three commodities. The table below discloses the impact of price and production volume changes on our revenues. Three months ended March 31, 2020 vs. 2019 Percentage Sales change (in thousands) change in sales Change in oil sales due to: Prices$ (7,560 ) (23.0 )% Production 11,784 35.9 % Total change in oil sales$ 4,224 12.9 % Change in natural gas sales due to: Prices$ (7,491 ) (66.8 )% Production 4,940 44.1 % Total change in natural gas sales$ (2,551 ) (22.8 )% Change in natural gas liquids sales due to: Prices$ (6,185 ) (67.1 )% Production 6,650 72.1 % Total change in natural gas liquids sales $ 465 5.0 % 36
-------------------------------------------------------------------------------- Transportation and processing revenue deductions principally consist of deductions by our customers for costs to prepare and transport production from the wellhead to a specified sales point and processing costs of gas into natural gas liquids. Transportation and processing deductions for the three months endedMarch 31, 2020 , were higher than the prior year periods due to increases in natural gas and natural gas liquids production.
Derivative activities
Our results of operations, financial condition and capital resources are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties. To mitigate a portion of this exposure, we have entered into various types of derivative instruments, including commodity price swaps and costless collars. Our realized prices are impacted by realized gains and losses resulting from commodity derivatives contracts. The following table presents information about the effects of derivative settlements on realized prices: Three months ended March 31, 2020 2019 Oil (per Bbl): Before derivative settlements$ 44.08 $ 53.08 After derivative settlements$ 49.03 $ 54.71 Post-settlement to pre-settlement price 111.2 % 103.1 % Natural gas liquids (per Bbl): Before derivative settlements$ 11.03 $ 18.07 After derivative settlements$ 14.82 $ 19.18 Post-settlement to pre-settlement price 134.4 % 106.1 % Natural gas (per Mcf): Before derivative settlements$ 1.34 $ 2.50 After derivative settlements$ 1.60 $ 2.27 Post-settlement to pre-settlement price 119.4 % 90.8 %
The estimated fair values of our oil, natural gas, and NGL derivative instruments are provided below. The associated carrying values of these instruments are equal to the estimated fair values. (in thousands)
March 31, 2020 December 31, 2019 Derivative assets (liabilities): Crude oil derivatives$ 45,436 $ (21,805 ) Natural gas derivatives 4,255 3,551 NGL derivatives 3,430 2,169
Net derivative assets (liabilities)
37 -------------------------------------------------------------------------------- Our derivative portfolio, which was in a net liability position at the end of 2019, reverted to a net asset of$53.1 million as ofMarch 31, 2020 . The change, which also corresponds to the non-cash fair value adjustment gain of$69.2 million in the table below, is primarily due to the steep decline in crude oil forward prices brought on by the COVID-19 pandemic. The effects of derivative activities on our results of operations and cash flows were as follows: Three months ended March 31, 2020 2019 Non-cash Non-cash fair value Settlements (paid) fair value Settlements (paid) (in thousands) adjustment received adjustment received Derivative gains (losses): Crude oil derivatives$ 67,240 $ 4,156$ (48,669 ) $ 1,011 Natural gas derivatives 705 1,688 (139 ) (1,061 ) NGL derivatives 1,261 3,330 (2,723 ) 565
Derivative gains (losses)
(51,531 ) $ 515
We do not apply hedge accounting to any of our derivative instruments. As a result, all gains and losses associated with our derivative contracts are recognized immediately as "Derivative gains (losses)" in our consolidated statements of operations. The fluctuation in derivative gains (losses) from period to period is due primarily to the significant volatility of oil, NGL and natural gas prices and to changes in our outstanding derivative contracts during these periods. Lease operating expenses Three months ended March 31, Increase/ Percent (in thousands, except per Boe data) 2020 2019 (Decrease) Change Lease operating expenses: Focus Areas $ 5,609$ 7,114 $ (1,505 ) (21.2 )% Other 4,479 5,180 (701 ) (13.5 )% Total lease operating expenses$ 10,088 $ 12,294 $ (2,206 ) (17.9 )% Lease operating expenses per Boe: Focus Areas $ 2.33$ 4.96 $ (2.63 ) (53.0 )% Other $ 11.51$ 11.77 $ (0.26 ) (2.2 )% Lease operating expenses per Boe $ 3.61$ 6.56 $
(2.95 ) (45.0 )%
Lease operating expenses ("LOE") are sensitive to changes in demand for field equipment, services, and qualified operational personnel, which is driven by demand for oil and natural gas. However, the timing of changes in operating costs may lag behind changes in commodity prices. LOE for the three months endedMarch 31, 2020 was lower on a total dollar basis and on a per Boe basis compared to the prior year quarter. The quarter over quarter decline in total LOE was primarily due to a decrease in water hauling costs in certain parts of our Focus Areas as pipeline infrastructure is expanded into the area and contract rates are locked in as well as due to reduced costs for well maintenance. In addition to these factors, LOE on a per Boe basis was also lower because of increased production in areas with lower per Boe costs.
Production taxes (which include severance and ad valorem taxes)
Three months endedMarch 31 ,
Increase/ Percent
2020 2019 (Decrease) Change Production taxes (in thousands)$ 2,750 $ 2,880 $ (130 ) (4.5 )% Production taxes per Boe$ 0.98 $ 1.54 $ (0.56 ) (36.4 )% Production taxes as % of commodity sales 5.0 % 5.4 % Production taxes for the three months endedMarch 31, 2020 were 5% lower than the prior year period. The quarter over quarter decrease on a dollar basis and on a per Boe basis was primarily a result of lower revenues driven by a decline in commodity pricing. 38 --------------------------------------------------------------------------------
Depreciation, depletion and amortization ("DD&A")
Three months ended March 31, Increase/ Percent 2020 2019 (Decrease) Change DD&A (in thousands): Oil and natural gas properties (1)$ 22,575 $ 21,881 $ 694 3.2 % Property and equipment 437 1,834 (1,397 ) (76.2 )% Total DD&A$ 23,012 $ 23,715 $ (703 ) (3.0 )% DD&A per Boe: Oil and natural gas properties (1) $ 8.08$ 11.67 $ (3.59 ) (30.8 )% Other fixed assets 0.16 0.98 (0.82 ) (83.7 )% Total DD&A per Boe $ 8.24$ 12.65 $ (4.41 ) (34.9 )%
_________________________________________
(1) Includes accretion of asset retirement obligations
We adjust our DD&A rate on oil and natural gas properties each quarter for changes in our estimates of oil and natural gas reserves and costs. Oil and natural gas DD&A for the three months endedMarch 31, 2020 of$22.6 million was 3% higher than the prior year periods due to higher production, partially offset by a lower DD&A rate driven by decreases in overall reserve values and future development costs as a result of decreasing commodity prices.
General and administrative expenses ("G&A")
Three months ended March 31, Increase/ Percent (in thousands) 2020 2019 (Decrease) Change G&A: Gross G&A expenses$ 10,293 $ 11,035 $ (742 ) (6.7 )% Capitalized exploration and development costs (2,225 ) (2,722 ) 497 (18.3 )% Net G&A expenses 8,068 8,313 (245 ) (2.9 )% Net G&A expense per Boe$ 2.89 $ 4.44 $ (1.55 ) (34.9 )% Net G&A of$8.1 million for the three months endedMarch 31, 2020 , decreased 3% from the prior year periods primarily due to reductions in payroll and benefits, stock based compensation and severance costs partially offset by an increase in bad debt expense. Payroll and benefits were lower as a result of a reduction in headcount. Stock compensation expense was lower because our executive stock grants awarded in 2017 were front loaded for three-year periods and subject to accelerated cost recognition which results in higher expense early during the life of a grant with graded vesting. To a lesser extent stock compensation expense was also lower due to forfeitures in the preceding twelve months. In addition, severance costs for employees impacted by our reductions in force during period were lower than the prior year period. These decreases were partially offset by an increase in credit losses on expected uncollectible receivables. We increased our allowance for uncollectible receivables pursuant to new accounting guidance that requires us to forecast uncollectible amounts under an "expected loss" model as well as in consideration of current industry conditions that have been adversely impacted by COVID-19. The table below discloses the impact of the items discussed above. Three months ended March 31, Increase/ Percent (in thousands) 2020 2019 (Decrease) Change Employee severance costs $ 733$ 1,058 $ (325 ) (30.7 )% Stock compensation, gross 660 1,419 (759 ) (53.5 )% Credit losses on receivables 1,517 (258 ) 1,775 * $ 2,910$ 2,219 $ 691 31.1 %
______________________________________________
* Not meaningful
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Subleases expense The expense consisted of our expense on operating leases for CO2 compressors that we subleased to another operator. Both originating leases and subleases were terminated during the third quarter of 2019. Please see "Note 1: Nature of operations and summary of significant accounting policies" and "Note 17: Leases" in "Item 8. Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , for a discussion of the sublease.
Full-cost ceiling impairment
Energy commodity prices are volatile and a decline in commodity prices negatively impacts our revenues, profitability, cash flows, liquidity (including our borrowing base availability), and reserves, which could lead us to consider reductions in our capital program, asset sales or organizational changes. Prices we receive are determined by prevailing market conditions, regional and worldwide economic and geopolitical activity, supply versus demand, weather, seasonality and other factors that influence market conditions and often result in significant volatility in commodity prices. We mitigate the effects of volatility in commodity prices primarily by hedging a substantial portion of our expected production, focusing on a competitive cost structure and maintaining flexibility in our capital investment program with limited long-term commitments. Price volatility also impacts our business through the full cost ceiling test calculation. The ceiling test calculation dictates that we use the unweighted arithmetic average price of crude oil and natural gas as of the first day of each month for the 12-month period ending on the balance sheet date. Since the prices used in the cost ceiling are based on a trailing 12-month period, the full impact of price changes on our financial statements may not be recognized immediately but could be spread over several reporting periods. We recorded a ceiling test impairment on our oil and natural gas properties of$71.4 million for the three months endedMarch 31, 2020 , primarily due to a decrease in the price of natural gas and NGLs used to estimate our reserves, as disclosed in the table below. March 31, December 31, Benchmark prices utilized in ceiling test 2020 2019 Oil (per Bbl)$ 55.77 $ 55.69 Natural gas (per MMbtu)$ 2.30 $ 2.58 Natural gas liquids (per Bbl)$ 14.97 $ 16.21 The precipitous crude oil price decline caused by COVD-19 has resulted in a first of the month price in April andMay 2020 of$20.31 /bbl and$19.78 /bbl, respectively. If commodity prices remain at their current level, decline, or do not recover to a level above$55.00 /bbl, we expect the trailing 12-month average price to decline as 2020 progresses and we believe that it is probable that we would record further ceiling test impairment losses in 2020. In addition to commodity prices, our production rates, levels of proved reserves, estimated future operating expenses, estimated future development costs, transfers of unevaluated properties and other factors will determine our actual ceiling test calculation and impairment analyses in future periods. Please see "Note 1: Nature of operations and summary of significant accounting policies and going concern" in "Item 1. Financial Statements" of this report for further discussion of our ceiling test. Income taxes We did not record any net deferred tax benefit for the three months endedMarch 31, 2020 , as any deferred tax asset arising from the benefit is reduced by a valuation allowance as utilization of the loss carryforwards and realization of other deferred tax assets cannot be reasonably assured. Please see "Note 12: Income Taxes" in "Item 8. Financial Statement and Supplementary Data" of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which contains additional information about our income taxes. As a result of the Chapter 11 reorganization and related transactions, upon emergence from bankruptcy, we experienced an ownership change within the meaning of IRC Section 382 which subjected certain of the Company's tax attributes, including our federal net operating loss carryforwards, to an IRC Section 382 limitation. If we were to experience an additional "ownership change," our ability to offset taxable income arising after the ownership change with NOLs generated prior to the ownership change would be limited, possibly substantially. See "Note 1: Nature of operations and summary of significant accounting policies and going concern" in "Item 1. Financial Statements" of this report for our discussion of the Section 382 limitation. 40 --------------------------------------------------------------------------------
Other income and expenses
Interest expense. The following table presents interest expense for the periods indicated: Three months ended March 31, (in thousands) 2020 2019 Credit facility$ 1,389 $ 150 Senior Notes 6,563 6,563 Bank fees, other interest and amortization of issuance costs 1,002 1,343 Interest expense, gross 8,954 8,056 Capitalized interest (2,318 ) (3,492 ) Total interest expense$ 6,636 $ 4,564 Average borrowings$ 446,840 $ 333,708 Interest expense for the three months endedMarch 31, 2020 , was higher than the prior year quarter due to both an increase in gross interest expense as well as a reduction in capitalized interest. Gross interest was higher due to increased borrowings on our credit facility as reflected in the average borrowings disclosed in the table above. We capitalize interest based on the carrying value of our unevaluated non-producing leasehold excluding any amounts that are the result of our fresh start fair value adjustment. Capitalized interest for the three months endedMarch 31, 2020 , was lower than the prior year period due to a lower average carrying balance on unevaluated non-producing leasehold, for which a large portion was impaired in the prior year.
Reorganization items
Reorganization items reflect, where applicable, expenses, gains and losses incurred that are incremental and a direct result of the reorganization of the business. The reorganization items disclosed in our consolidated statement of operations consist of professional fees for continuing legal work to resolve outstanding bankruptcy claims and fees to theU.S. Bankruptcy Trustee, which we will continue to incur until our bankruptcy case is closed.
Non-GAAP financial measure and reconciliation
Management uses adjusted EBITDA (as defined below) as a supplemental financial measurement to evaluate our operational trends. Items excluded generally represent non-cash and/or non-recurring adjustments, the timing and amount of which cannot be reasonably estimated and are not considered by management when measuring our overall operating performance. In addition, Adjusted EBITDA is generally consistent with the EBITDAX calculation that is used in the Ratio of Total Debt to EBITDAX covenant under our credit facility. We consider compliance with this covenant to be material. Adjusted EBITDA is used as a supplemental financial measurement in the evaluation of our business and should not be considered as an alternative to net income, as an indicator of our operating performance, as an alternative to cash flows from operating activities, or as a measure of liquidity. Adjusted EBITDA is not defined under GAAP and, accordingly, it may not be a comparable measurement to those used by other companies. We define adjusted EBITDA as net income, adjusted to exclude (1) asset impairments, (2) interest and other financing costs, net of capitalized interest, (3) income taxes, (4) depreciation, depletion and amortization, (5) non-cash change in fair value of non-hedge derivative instruments, (6) interest income, (7) stock-based compensation expense, (8) gain or loss on disposed assets, (9) impairment charges, (10) other significant, unusual non-cash charges and (11) certain expenses related to our restructuring, cost reduction initiatives, reorganization, severance costs and fresh start accounting activities, some or all of which our lenders have permitted us to exclude when calculating covenant compliance. 41 -------------------------------------------------------------------------------- The following tables provide a reconciliation of net loss to adjusted EBITDA for the specified periods: Three months ended March 31, (in thousands) 2020 2019 Net income or loss$ 4,917 $ (103,540 ) Interest expense 6,636 4,564 Depreciation, depletion, and amortization 23,012 23,715
Non-cash change in fair value of derivative instruments (69,206 )
51,531 Impact of derivative repricing 702 - Stock-based compensation expense 406 802 (Gain) loss on sale of assets (102 ) 1 Loss on impairment of oil and gas assets 71,371 49,722 Loss on impairment of other assets 153 - Credit loss on uncollectible receivables 1,517 (258 ) Restructuring, reorganization and other 1,317 1,520 Adjusted EBITDA$ 40,723 $ 28,057 Our credit facility requires us to maintain a current ratio (as defined in Credit Agreement) of not less than 1.0 to 1.0. The definition of current assets and current liabilities used for determination of the current ratio computed for loan compliance purposes differs from current assets and current liabilities determined in compliance with GAAP. Since compliance with financial covenants is a material requirement under our Credit Agreement, we consider the current ratio calculated under our Credit Agreement to be a useful measure of our liquidity because it includes the funds available to us under our Credit Agreement and is not affected by the volatility in working capital caused by changes in the fair value of derivatives. The following table discloses the current ratio for our loan compliance compared to the ratio calculated per GAAP: (dollars in thousands) March 31, 2020 December 31, 2019 Current assets per GAAP$ 110,889 $
80,390
Plus-Availability under Credit Agreement 180,000
194,406
Less-Short term derivative instruments (48,458 ) (947 ) Current assets as adjusted$ 242,431 $ 273,849 Current liabilities per GAAP 100,379 122,669 Less-Current derivative instruments - (11,957 ) Less-Current operating lease obligation (1,295 ) (1,259 ) Less-Current asset retirement obligation (928 ) (2,083 ) Less-Current maturities of long term debt (497 ) (594 ) Current liabilities as adjusted$ 97,659 $
106,776
Current ratio per GAAP 1.10
0.66
Current ratio for loan compliance 2.48
2.56
Off-Balance Sheet Arrangements
At
Critical accounting policies
For a discussion of our critical accounting policies, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
Annual Report on Form 10-K for the year ended
Also see the footnote disclosures included in "Note 1: Nature of operations and summary of significant accounting policies and going concern" in "Item 1. Financial Statements" of this report.
42 --------------------------------------------------------------------------------
Recent accounting pronouncements
See recently adopted and issued accounting standards in "Note 1: Nature of operations and summary of significant accounting policies and going concern" in "Item 1. Financial Statements" of this report.
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