The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this Quarterly Report. The
following discussion includes forward-looking statements, including, without
limitation, statements relating to our plans, strategies, objectives,
expectations, intentions and resources. Our actual results could differ
materially from those discussed in these forward-looking statements as a result
of many factors, including those discussed under "Risk Factors" and elsewhere in
this Quarterly Report.
Overview
We are a Permian Basin focused company engaged in the exploration, production,
development, and acquisition of oil, natural gas, and NGLs, with all of our
properties and operations in the Delaware Basin. Our focus is on the production
of "Liquids". In each of the past two years, over 90% of our revenues have been
generated from the sale of Liquids. We have a largely contiguous acreage
position with significant stacked-pay potential, which we believe includes at
least five to seven productive zones and more than 1,000 future drilling
locations.
As of March 31, 2020, we had $97.8 million of indebtedness outstanding and the
borrowing base under our Revolving Credit Agreement (as defined below), is $90.0
million, resulting in a remaining borrowing base deficiency of $7.8 million.
Upon completion of the sale of approximately 1,185 undeveloped net acres in Lea
County, New Mexico, we made a scheduled repayment of $17.3 million. Pursuant to
the Fourteenth Amendment to our Revolving Credit Agreement, the remaining $7.8
million was due on June 5, 2020, which the Company has not paid. Pursuant to the
Forbearance Agreement (as defined below), the administrative agent and requisite
lenders under our Revolving Credit Agreement agreed to refrain from exercising
certain of their rights and remedies under the Revolving Credit Agreement as a
result of certain specified defaults and events of default, including the
Company's failure to make the borrowing base deficiency on or before June 5,
2020, until June 26, 2020. In anticipation of a potential filing of the Chapter
11 Cases (as defined below), the Company did not make the payment.
In order to improve our liquidity, leverage position and current ratio to meet
the financial covenants under the Revolving Credit Agreement, our board of
directors formed a Special Committee in November 2019 which was tasked with
reviewing and evaluating strategic alternatives that could enhance the value of
the Company, including alternatives that could enable us to access further
sources of liquidity through financing alternatives or deleveraging
transactions. The Special Committee hired financial and legal advisors to advise
the committee on these matters. In the months leading to the commencement of the
Chapter 11 Cases, the Company, with the assistance of its advisors and
spearheaded by the Special Committee, ran an extensive marketing and sale
process and explored various strategic alternatives. On June 16, 2020, our board
of directors revised the original directive and authority of the Special
Committee to include evaluation of restructuring transactions. On June 28, 2020,
following recommendation by the Special Committee, our board of directors
approved the terms of the RSA (as defined below) and the filing of bankruptcy
petitions by the Debtors (as defined below).
Voluntary Petitions under Chapter 11 of the Bankruptcy Code
On June 28, 2020 (the "Petition Date"), Lilis Energy, Inc. and its consolidated
subsidiaries Brushy Resources, Inc., ImPetro Operating LLC, ImPetro Resources,
LLC, Lilis Operating Company, LLC and Hurricane Resources LLC (collectively, the
"Debtors") filed voluntary petitions seeking relief under Chapter 11 of Title 11
of the United States Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Southern District of Texas, Houston Division (the
"Bankruptcy Court") commencing cases for relief under Chapter 11 of the
Bankruptcy Code (the "Chapter 11 Cases"). The Chapter 11 Cases are being jointly
administered under the caption In re Lilis Energy, Inc., et al., Case No.
20-33274. We are currently operating our business as "debtors-in-possession"
under the jurisdiction of the Bankruptcy Court, in accordance with the
applicable provisions of the Bankruptcy Code.
To maintain and continue uninterrupted ordinary course operations during the
bankruptcy proceedings, the Debtors filed a variety of "first day" motions
seeking approval from the Bankruptcy Court for various forms of customary relief
designed to minimize the effect of bankruptcy on the Debtors' operations,
customers and employees. On June 29, 2020, the Bankruptcy Court entered orders
approving all requested "first day" relief. As a result, we are able to conduct
normal business activities and pay all associated obligations for the period
following our bankruptcy filing and (subject to caps applicable to payments of
certain pre-petition obligations) pre-petition employee wages and benefits,
pre-petition amounts owed to certain lienholders and critical vendors, and funds
belonging to third parties, including royalty interest and working interest
holders, and partners. During the pendency of the Chapter 11 Cases, all
transactions outside the ordinary course of our business require the prior
approval of the Bankruptcy Court.
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On June 28, 2020, the Debtors entered into a restructuring support agreement
(the "RSA") with (i) the lenders under our Revolving Credit Facility (other than
Värde) (each as defined below) (the "Consenting RBL Lenders") and (ii) certain
investment funds and entities affiliated with Värde Partners, Inc.
(collectively, "Värde"), which collectively own all of our outstanding preferred
stock and a subordinated participation in that certain Second Amended and
Restated Senior Secured Revolving Credit Agreement dated as of October 10, 2018
(as amended, the "Revolving Credit Agreement" and the loan facility, the
"Revolving Credit Facility"), by and among Lilis Energy, Inc., as borrower, the
other Debtors, as guarantors, BMO Harris Bank, N.A., as administrative agent
(the "Administrative Agent"), and the lenders party thereto ("RBL Lenders"), for
the purpose of supporting (a) the implementation of restructuring transactions,
including a chapter 11 plan of reorganization with terms consistent with those
set forth in the RSA (the "Plan"), (b) an initial debtor-in-possession credit
agreement (the "Initial DIP Credit Agreement") and related initial DIP credit
facility (the "Initial DIP Facility"), (c) the terms of a replacement
debtor-in-possession credit agreement (the "Replacement DIP Credit Agreement")
and replacement DIP credit facility (the "Replacement DIP Facility") and (d) the
form of an equity commitment letter contemplating an equity investment by one or
more Värde entities in the event that Värde elects in its sole discretion to
provide such a commitment to fund the Plan on or before August 17, 2020. If on
or prior to August 17, 2020, (i) Värde has not funded the Replacement DIP
Facility with sufficient cash such that the lenders' claims under the Initial
DIP Facility have not been repaid in full with proceeds from the Replacement DIP
Facility and (ii) Värde has not made a commitment to make the Värde Equity
Investment (which, if elected, will be funded on the effective date of the plan
of reorganization contemplated by the RSA (the "Plan")), the Debtors will pursue
a sale of substantially all their assets pursuant to bidding procedures agreed
to in the RSA to close on or before the 135th day following the Petition Date.
See Note 11 - Indebtedness to our condensed consolidated financial statements
for additional details about the Initial DIP Credit Agreement and Initial DIP
Facility. Below is a summary of the treatment that the stakeholders of the
Company would receive under the Plan contemplated in the RSA:
• each lender under the Revolving Credit Agreement that is unaffiliated with
Värde (each, a "Non-Affiliate RBL Lender") will receive its pro rata share
of (i) $9.2 million in cash plus all accrued and unpaid interest as of the
Petition Date (estimated to be $0.7 million), and (ii) participations in
$55 million of new loans under the Exit Facility as described below;
• Värde, on account of claims held by its affiliates as lenders under the
Revolving Credit Agreement and, if applicable, its claims under the
Replacement DIP Facility, will receive an aggregate of 100% of the new
common stock of the reorganized Lilis, and the treatment of the Company's
outstanding preferred stock, all of which is currently held by Värde,
remains undecided and will be agreed on by Värde, the Company and the
required Consenting RBL Lenders on or prior to the date the Replacement
DIP Facility closes;
• the treatment of allowed general unsecured claims will be determined no
later than August 17, 2020, which treatment must be acceptable to Värde in
consultation with the Administrative Agent, and as a condition to the
effectiveness of the Plan (subject to certain exceptions provided in the
RSA), the allowed general unsecured claims and allowed priority, other
secured, and priority tax claims, other than claims held by Värde and its
affiliates, must not exceed a total amount to be acceptable to Värde upon
receipt of reasonably acceptable diligence at the time of signing the
equity commitment letter providing for the Värde Equity Investment; and
• each outstanding share of the Company's common stock will be canceled for
no consideration.
The Company believes it is unlikely that the holders of shares of its common
stock will receive any consideration for their shares under any plan approved by
the Bankruptcy Court, irrespective of whether such plan contemplates terms
consistent with or similar to those agreed upon in the RSA.
The Plan contemplated in the RSA is contingent upon, among other things, Värde's
election in its sole discretion, on or before August 17, 2020, to provide (i) an
agreed commitment (which, if elected, will be funded on the effective date of
the Plan) to buy the common stock of the reorganized Lilis for $55.0 million in
cash less any funding provided by Värde under the Replacement DIP Facility (but
excluding any amount of interest or fees paid-in-kind and capitalized
thereunder), and (ii) certain Värde funds to provide for a Replacement DIP
Facility.
The Consenting RBL Lenders and Värde have the right to terminate the RSA, and
their support for the restructuring contemplated by the RSA (the
"Restructuring"), for customary reasons, including, among others, the failure to
timely achieve any of the milestones for the progress of the Chapter 11 Cases
that are in the RSA, which include the dates by which the Debtors are required
to, among other things, obtain certain court orders and consummate the
Restructuring.
There can be no assurance that the Debtors will confirm and consummate the Plan
as contemplated by the RSA or complete an alternative plan of reorganization.
For the duration of our Chapter 11 Cases, our operations and our ability to
develop and execute a business plan are subject to risks and uncertainties
associated with bankruptcy.
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Initial DIP Facility, Replacement DIP Facility and Exit Facility.
The RSA contemplates that, upon the interim approval of the Bankruptcy Court,
the Debtors, as borrower and guarantors, the Consenting RBL Lenders (in that
capacity, "Initial DIP Lenders") and the Administrative Agent would enter into a
Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (the
"Initial DIP Credit Agreement"), under which the Initial DIP Lenders would
provide a superpriority senior secured debtor-in-possession credit facility
providing for an aggregate principal amount of (i) $15.0 million of new money
revolving commitments, of which up to $5.0 million would be available on an
interim basis, with the remainder available on a final basis, plus (ii) a
tranche roll-up term loans to refinance $15.0 million of the outstanding loans
under the Revolving Credit Facility, including $1.5 million pre-petition bridge
loans that the Non-Affiliate RBL Lenders advanced to the Company on June 17,
2020, of which $1.5 million of roll-up term loans would be incurred upon entry
of an interim order, with the remaining $13.5 million to be incurred upon entry
of a final order. On June 29, 2020, the Bankruptcy Court entered an order (the
"Interim DIP Order") granting interim approval of the Initial DIP Facility,
thereby permitting the Company to incur up to $5.0 million new money loans on an
interim basis. The Initial DIP Credit Agreement was entered into on June 30,
2020. A final hearing on the Initial DIP Facility and Initial DIP Credit
Agreement is scheduled for August 18, 2020.
Subject to approval by the Bankruptcy Court, the proceeds of the Initial DIP
Facility will be used to pay fees, expenses and other expenditures of the
Debtors to be set forth in rolling budgets prepared as part of the Chapter 11
Cases, subject to approval by the Initial DIP Lenders. Closing the Initial DIP
Facility is contingent on the satisfaction of customary conditions, including
receipt of a final order by the Bankruptcy Court approving the Initial DIP
Facility and the Initial DIP Credit Agreement.
The RSA further contemplates that Värde may elect, in its sole discretion and on
or prior to August 17, 2020, to provide the Debtors with a Replacement DIP
Facility or the Värde Equity Investment or both. Among other things, Värde's
notification to the Administrative Agent or Debtors of its intention not to
provide the Replacement DIP Facility or the Värde Equity Investment will
constitute a termination event for the RSA. If Värde elects to provide a
Replacement DIP Facility, the RSA contemplates that the Replacement DIP Facility
will consist of a senior secured superpriority debtor-in-possession term loan
facility providing for $20 million new money loans. The proceeds of the
Replacement DIP Facility will be used to refinance in full the outstanding
obligations under the Initial DIP Facility, including accrued and unpaid
interest and the fees and expenses of the DIP Lenders, and pay fees, expenses
and other expenditures of the Debtors during the Chapter 11 Cases. Upon the
Debtors' emergence from the Chapter 11 Cases and to the extent any claims under
the Replacement DIP Facility have not otherwise been repaid, each holder of an
allowed claim under the Replacement DIP Facility will receive its pro rata share
of a certain percentage of the new common stock of the reorganized Lilis
(subject to dilution from the Värde Equity Investment, if applicable) such that
Värde and its affiliates will collectively own 100% of the outstanding common
stock of the reorganized Lilis on account of its claims under the Revolving
Credit Facility and the Replacement DIP Facility. In addition, Värde may elect,
in its sole discretion and on or prior to August 17, 2020, to purchase, upon the
Debtors' emergence from the Chapter 11 Cases, 100% of the common stock of the
reorganized Lilis in exchange for $55.0 million in cash (less any funding
provided by Värde pursuant to the Replacement DIP Facility (but excluding any
amount of interest or fees paid-in-kind and capitalized thereunder)) (the "Värde
Equity Investment"). The proceeds of the Värde Equity Investment will be used to
repay a portion of the claims of the Non-Affiliate RBL Lenders under the
Revolving Credit Facility on the effective date, to fund other distributions
under the Plan, and to fund the working capital of the reorganized Debtors.
Pursuant to the RSA, on the effective date of the Plan, the Consenting RBL
Lenders will provide a revolving credit facility to the reorganized Debtors in a
principal amount of $55.0 million, with a 36-month term to maturity and a
9-month borrowing base redetermination holiday (the "Exit Facility"). The
proceeds of the Exit Facility will be used to repay a portion of the
Non-Affiliate RBL Lenders' claims under the Revolving Credit Facility.
Acceleration of Our Existing Debt and Automatic Stay Due to Chapter 11 Filing
As of March 31, 2020, we had $97.8 million of indebtedness outstanding, and the
borrowing base under our Revolving Credit Agreement was $90.0 million, resulting
in a borrowing base deficiency of $7.8 million. Pursuant to the Fourteenth
Amendment to the Revolving Credit Agreement, the remaining payment of $7.8
million was due June 5, 2020, which the Company did not pay.
On June 5, 2020, the Debtors, the Administrative Agent and certain lenders
entered into a Limited Forbearance Agreement to the Revolving Credit Agreement
(the "Forbearance Agreement"). Pursuant to the Forbearance Agreement, the
Administrative Agent and the Majority Lenders agreed to refrain from exercising
certain of their rights and remedies under the Revolving Credit Agreement and
related documents arising solely as a result of the occurrence or continuance of
certain specified defaults and events of default under the Revolving Credit
Agreement (the "Specified Defaults") during the Forbearance Period (as defined
below). The Specified Defaults include the Company's failure to make the
borrowing base deficiency payment due June 5, 2020, deliver certain financial
statements when due, failure to comply with requirements related to the status
of trade payables and related
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liens and failure to maintain the leverage ratio and asset coverage ratio
required by the Revolving Credit Agreement as of the fiscal quarter ended March
31, 2020. The "Forbearance Period" commenced on the date of the Forbearance
Agreement and expired at 6:00 p.m., Central time, on June 26, 2020.
The Forbearance Agreement also deferred the scheduled spring redetermination of
the borrowing base under the Revolving Credit Agreement from on or about June 5,
2020 to on or about June 26, 2020.
The Forbearance Agreement permitted the lenders under the Revolving Credit
Agreement, or the RBL Lenders, in their capacity as counterparties to the
Company's commodity swap agreements to unwind and liquidate such swap
arrangements during the Forbearance Period and to apply any net proceeds to pay
down the outstanding obligations under the Revolving Credit Agreement. The swap
positions of such lenders were liquidated on June 9, 2020 for net proceeds of
approximately $9.3 million, which was applied to reduce the outstanding
obligations of the Company under the Revolving Credit Agreement. On June 17,
2020, certain of the RBL Lenders permitted the Company to borrow $1.5 million
under the Revolving Credit Agreement. As of the filing of the Chapter 11 Cases,
the remaining outstanding principal on our Revolving Credit Agreement was $89.9
million, including $25.7 million of such principal held by an affiliate of Värde
which was subordinated to the indebtedness of the other RBL Lenders under the
Revolving Credit Agreement.
Our remaining derivative contracts with counterparties that were not our RBL
Lenders are governed by master agreements which generally specify that a default
under any of our indebtedness as well as any bankruptcy filing is an event of
default which may result in early termination of the derivative contracts. As a
result of our debt defaults and our bankruptcy petition, we are currently in
default under these remaining derivative contracts. We anticipate that our
remaining outstanding derivative contracts may be terminated in conjunction with
our bankruptcy proceedings. We have received notices from the four remaining
counterparties that they intend to terminate their master agreements with us.
Furthermore, since we are in default on our indebtedness and have a bankruptcy
filing, we will no longer be able to represent that we comply with the credit
default or bankruptcy covenants under our derivative master agreements and thus
may not be able to enter into new hedging transactions.
The commencement of a voluntary proceeding in bankruptcy constitutes an
immediate event of default under the Revolving Credit Agreement, resulting in
the automatic and immediate acceleration of all of the Company's outstanding
debt. The Company has classified all of its outstanding debt as a current
liability on its condensed consolidated balance sheet as of March 31, 2020.
Subject to certain exceptions, under the Bankruptcy Code, the filing of the
bankruptcy petitions on the Petition Date automatically enjoined, or stayed, the
continuation of most judicial or administrative proceedings or the filing of
other actions against the Debtors or their property to recover, collect or
secure a claim arising prior to the Petition Date. Creditors are stayed from
taking any actions against the Debtors as a result of debt defaults, subject to
certain limited exceptions permitted by the Bankruptcy Code.
Ability to Continue as a Going Concern
We have experienced losses and working capital deficiencies, and at times in the
past, negative cash flows from operations. Additionally, our liquidity and
operating forecasts have been negatively impacted by the recent decrease in
commodity prices and resulting temporary shut-in of wells, which has negatively
impacted our ability to comply with debt covenants under our Revolving Credit
Agreement. Commodity price volatility, as well as concerns about the COVID-19
pandemic, which has significantly decreased worldwide demand for oil and natural
gas. Our Revolving Credit Agreement contains financial covenants that require
the Company to maintain a ratio of total debt to EBITDAX (the "Leverage Ratio")
of not more than 4.00 to 1.00 and a ratio of current assets to current
liabilities (the "Current Ratio") of not less than 1.00 to 1.00 as of the last
day of each fiscal quarter. See Note 11-Indebtedness to our condensed
consolidated financial statements for additional information regarding the
financial covenants under our Revolving Credit Agreement. As of March 31, 2020,
the Company was not in compliance with the Leverage Ratio and Current Ratio
covenants under the Revolving Credit Agreement. Pursuant to the Fourteenth
Amendment (as defined in Note 11 - Indebtedness), the Company obtained a waiver
from the requisite lenders of its non-compliance with the Leverage Ratio and
Current Ratio covenants, among other waivers of default, as of March 31, 2020.
Pursuant to the Forbearance Agreement, the Administrative Agent and the Majority
Lenders agreed to refrain from exercising certain of their rights and remedies
under the Revolving Credit Agreement and related documents, during the
Forbearance Period as described above, that arose solely as a result of the
Company's breach of the Leverage Ratio and Current Ratio covenants, the
Company's failure to pay remaining borrowing base deficiency and certain other
defaults or events of default.
Fluctuations in oil and natural gas prices have a material impact on our
financial position, results of operations, cash flows and quantities of oil,
natural gas and NGL reserves that may be economically produced. Historically,
oil and natural gas prices have been volatile, and may be subject to wide
fluctuations in the future. If continued depressed prices persist, the Company
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will continue to experience impairment of oil and natural gas properties,
operating losses, negative cash flows from operating activities, and negative
working capital.
We face uncertainty regarding the adequacy of our liquidity and capital
resources and have extremely limited access to additional financing. The Interim
DIP Order entered by the Bankruptcy Court on June 29, 2020 approved the Initial
DIP Facility on an interim basis, thereby allowing us to borrow up to $5.0
million under the Initial DIP Facility. Our ability to borrow the additional
$10.0 million new money loans under the Initial DIP Facility is contingent on
the satisfaction of the conditions specified in the Initial DIP Credit
Agreement, including receipt of a final order by the Bankruptcy Court approving
the Initial DIP Facility and the Initial DIP Credit Agreement. In addition to
the cash requirement necessary to fund ongoing operations, we have incurred
significant professional fees and other costs in connection with preparation for
the Chapter 11 Cases and expect that we will continue to incur significant
professional fees, costs and other expenses throughout our Chapter 11 Cases.
As part of the Chapter 11 Cases, the Company entered into the RSA described
above. The Company's operations and its ability to develop and execute its
business plan are subject to a high degree of risk and uncertainty associated
with the Chapter 11 Cases. The outcome of the Chapter 11 Cases is subject to a
high degree of uncertainty and is dependent upon factors that are outside of the
Company's control, including actions of the Bankruptcy Court and the Company's
creditors. There can be no assurance that the Company will confirm and
consummate a Plan as contemplated by the RSA or complete another plan of
reorganization with respect to the Chapter 11 Cases. As a result, the Company
has concluded these matters raise substantial doubt about the Company's ability
to continue as a going concern for a twelve-month period following the date of
issuance of these consolidated financial statements.
2020 Operational and Financial Updates
• Brought additional capital of $24.1 million into the Company through the sale
of certain undeveloped leasehold assets in New Mexico.
• Successfully installed gas treating system on certain well locations and are
now in the final stages of testing the treated gas that will flow to sales.
We anticipate all treated natural gas production to be flowing to sales
during the third quarter of 2020.
• In response to recent commodity prices and our efforts to strengthen our
capital through reducing operating costs, during April 2020 the Company
elected to shut-in 31 wells which were identified as uneconomic as a result
of the continued decline in commodity prices in 2020. Twenty-eight of the
shut-in wells have been brought back online.
• A portion of the Company's employees were placed on furlough in April. As a
result of continuing restricted liquidity due to economic impacts of
COVID-19, the Company laid off its furloughed employees, a 44% reduction in
workforce, in June 2020 to further reduce personnel costs of the Company.
COVID-19
On January 30, 2020, the World Health Organization ("WHO") announced a global
health emergency due to the COVID-19 outbreak, which originated in Wuhan, China,
and the risks to the international community as the virus spreads globally
beyond its point of origin. In March 2020, the WHO classified the COVID-19
outbreak as a pandemic, based on the rapid increase in exposure globally.
In addition, in March 2020, members of OPEC failed to agree on production levels
which has caused increased supply and led to a substantial decrease in oil
prices and an increasingly volatile market. The oil price war ended with a deal
to cut global petroleum output but did not go far enough to offset the impact of
COVID-19 on demand. If depressed pricing continues for an extended period it
will lead to i) reductions in availability under any reserve-based lending
arrangements we may enter into, ii) reductions in reserves, and iii) additional
impairment of proved and unproved oil and gas properties. We also expect
disclosures of supplemental oil and gas information to be impacted by price
declines.
In response to recent commodity prices and our efforts to strengthen our capital
through reducing operating costs, during April 2020 the Company elected to
shut-in 12 wells which were identified as uneconomic as a result of the
continued decline in commodity prices in 2020 and 19 additional wells were
identified for short term shut-in through May and June. The 19 wells identified
for short term shut-in are naturally flowing wells and have been brought back
online. After initially furloughing a portion of its employees, and as a result
of continuing restricted liquidity due to economic impacts of COVID-19, the
Company laid off 44% of its workforce in June 2020 to further reduce personnel
costs of the Company.
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The full impact of the COVID-19 outbreak and the oversupply and resulting
decline in oil prices continues to evolve as of the date of this Quarterly
Report. As such, it is uncertain as to the full magnitude that they will have on
the Company's financial condition, liquidity, and future results of operations.
Management is actively monitoring the global situation on its financial
condition, liquidity, operations, suppliers, industry, and workforce. Given the
daily evolution of the COVID-19 outbreak and the global responses to curb its
spread, the Company is not able to estimate the effects of the COVID-19 outbreak
on its results of operations, financial condition, or liquidity for fiscal year
2020.
These matters could have a continued material adverse impact on economic and
market conditions and trigger a period of global economic slowdown, which the
Company expects would impair the Company's asset values, including reserve
estimates. Further, consumer demand has decreased since the spread of the
outbreak and new travel restrictions placed by governments in an effort to
curtail the spread of the coronavirus. Although the Company cannot estimate the
length or gravity of the impacts of these events at this time, if the pandemic
and/or decreased oil prices continue, they will have a material adverse effect
on the Company's results of future operations, financial position, and liquidity
in fiscal year 2020.
Coronavirus Aid, Relief, and Economic Security Act
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief,
and Economic Security Act (the "CARES Act"). The CARES Act, among other things,
includes provisions relating to refundable payroll tax credits, deferment of
employer side social security payments, net operating loss carryback periods,
alternative minimum tax credit refunds, modifications to the net interest
deduction limitations, increased limitations on qualified charitable
contributions, and technical corrections to tax depreciation methods for
qualified improvement property.
It also appropriated funds for the SBA Paycheck Protection Program loans that
are forgivable in certain situations to promote continued employment, as well as
Economic Injury Disaster Loans to provide liquidity to small businesses harmed
by COVID-19. We are not eligible for these funds.
The CARES Act has not had a significant impact on our financial condition,
results of operations, or liquidity.
Market Conditions and Commodity Pricing
Our financial results depend on many factors, including the price of oil,
natural gas and NGLs and our ability to market our production on economically
attractive terms. We generate the majority of our revenues from sales of Liquids
and, to a lesser extent, sales of natural gas. The price of these products are
critical factors to our success and volatility in these prices could impact our
results of operations. In addition, our business requires substantial capital to
acquire properties and develop our non-producing properties. The price of oil,
natural gas and NGLs have fallen significantly since the beginning of 2020, due
in part to failed OPEC negotiations and to concerns about the COVID-19 pandemic,
which has significantly decreased worldwide demand for oil and natural gas. This
significant decline and any further declines in the price of oil, natural gas
and NGLs have reduced our revenues and result in lower cash inflow which have
made it more difficult for us to pursue our plans to acquire new properties and
develop our existing properties. Such declines in oil, natural gas, and NGL
prices also adversely affect our ability to obtain additional funding on
favorable terms.
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Results of Operations - For the Three Months Ended March 31, 2020 and 2019
Sales Volumes and Revenues
The following table sets forth selected revenue and sales volume data for the
three months ended March 31, 2020 and 2019:
Three Months Ended March 31,
2020 2019 Variance %
Net sales volume:
Oil (Bbl) 303,346 317,669 (14,323 ) (5 )%
Natural gas (Mcf) 285,219 918,607 (633,388 ) (69 )%
NGL (Bbl) 16,751 74,446 (57,695 ) (77 )%
Total (BOE) 367,634 545,217 (177,583 ) (33 )%
Average daily sales volume (BOE/d) 4,040 5,991 (1,951 ) (33 )%
Average realized sales price:
Oil ($/Bbl) $ 40.75 $ 46.28 $ (5.53 ) (12 )%
Natural gas ($/Mcf) 0.66 1.66 (1.00 ) (60 )%
NGL ($/Bbl) 13.07 19.75 (6.66 ) (34 )%
Total ($/BOE) $ 34.74 $ 32.46 $ 2.28 7 %
Oil, natural gas and NGL
revenues (in thousands):
Oil revenue $ 12,362 $ 14,701 $ (2,339 ) (16 )%
Natural gas revenue 189 1,526 (1,337 ) (88 )%
NGL revenue 219 1,470 (1,251 ) (85 )%
Total revenue $ 12,770 $ 17,697 $ (4,927 ) (28 )%
Total sales volumes decreased 33% to 367,634 BOE during the three months ended
March 31, 2020, compared to 545,217 BOE for the 2019 quarter, a decrease of
177,583 BOE. Lower total sales volume was primarily the result of our gas
purchaser's shut down of its system for seven days during the three months ended
March 31, 2020. The decrease was partially offset by sales from 6.0 gross (4.5
net) wells placed on production after March 31, 2019. Total revenue decreased
$4.9 million to $12.8 million for the three months ended March 31, 2020, as
compared to $17.7 million for the three months ended March 31, 2019,
representing a 28% decrease. The decrease was primarily attributable to lower
sales volumes.
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Operating Expenses
The following table shows a comparison of operating expenses for the three
months ended March 31, 2020 and 2019:
Three Months Ended March 31,
2020 2019 Variance %
Operating Expenses per BOE:
Production costs $ 12.77 $ 8.74 $ 4.03 46 %
Gathering, processing and
transportation 0.89 2.16 (1.27 ) (59 )%
Production taxes 1.67 1.66 0.01 1 %
General and administrative 15.85 17.75 (1.90 ) (11 )%
Depreciation, depletion, amortization
and accretion 8.95 14.95 (6.00 ) (40 )%
Total operating expenses per BOE $ 40.13 $ 45.26 $ (5.13 ) (11 )%
Operating Expenses (in thousands):
Production costs $ 4,696 $ 4,764 $ (68 ) (1 )%
Gathering, processing and
transportation 327 1,178 (851 ) (72 )%
Production taxes 613 906 (293 ) (32 )%
General and administrative 5,826 9,679 (3,853 ) (40 )%
Depreciation, depletion, amortization
and accretion 3,292 8,153 (4,861 ) (60 )%
Total operating expenses $ 14,754 $ 24,680 $ (9,926 ) (40 )%
Production Costs
Production costs decreased by $0.1 million to $4.7 million for the March 31,
2020, as a result of cost-cutting measures in the current year offset by the
addition of 6 gross (4.5 net) producing wells since March 31, 2019. Our
production costs on a per BOE basis increased by $4.03, or 46%, to $12.77 for
the three months ended March 31, 2020, as compared to $8.74 per BOE for the
three months ended March 31, 2019. The increase in production costs per BOE was
primarily the result of higher compression, chemicals, and repair and
maintenance costs.
Gathering, Processing and Transportation
Gathering, processing and transportation costs decreased $0.9 million to $0.3
million for the three months ended March 31, 2020, compared to $1.2 million for
the 2019 quarter. This cost decrease was primarily the result of lower sales
volumes of natural gas and NGLs. The cost on a per BOE basis decreased from
$2.16 for the three months ended March 31, 2019, to $0.89 for the three months
ended March 31, 2020. The decrease was primarily attributable to a lower
proportion of natural gas and NGLs in the product mix. For the three months
ended March 31, 2020, natural gas and NGLs made up only 17% of total BOE sales
as compared to 42% of total BOE sales for the 2019 quarter.
Production Taxes
Production taxes decreased $0.3 million to $0.6 million for the three months
ended March 31, 2020, compared to $0.9 million for the same period in 2019. The
decrease is consistent with the decrease in revenue for the current year
quarter. On a per BOE basis, production taxes were virtually unchanged for the
three months ended March 31, 2020, when compared to the three months ended
March 31, 2019.
General and Administrative Expenses ("G&A")
G&A decreased by $3.9 million to $5.8 million for the three months ended
March 31, 2020, as compared to $9.7 million for the three months ended March 31,
2019. The decrease of $3.9 million in G&A was primarily attributable to a
decrease in stock-based compensation of $2.6 million, a decrease in personnel
costs of $0.6 million including severance costs and directors fees, and a $0.7
million decrease in professional services.
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Depreciation, Depletion, Amortization and Accretion ("DD&A")
DD&A expense was $3.3 million for the three months ended March 31, 2020,
compared to $8.2 million for the three months ended March 31, 2019; resulting in
a decrease of $4.9 million. Our DD&A rate decreased by 40% to $8.95 per BOE for
the three months ended March 31, 2020 from $14.95 per BOE for the three months
ended March 31, 2019. The rate decrease was primarily the result of lower oil
and gas property net book values remaining at March 31, 2020 after the $228.3
million impairment recorded in the last half of 2019. To a smaller degree, DD&A
expense was lower as a result of a 33% decrease in sales volumes for the three
months ended March 31, 2020 as compared to the 2019 quarter.
Other Income (Expenses)
The following table shows a comparison of other expenses for the three months
ended March 31, 2020 and 2018:
Three Months Ended
2020 2019 Variance %
(In Thousands)
Other income (expense):
Gain (loss) from commodity derivatives, net $ 21,198 $ (10,577 ) $ 31,775 (300 )%
Change in fair value of financial instruments (17,363 ) (335 ) (17,028 ) 5083 %
Interest expense (3,802 ) (4,828 ) 1,026 (21 )%
Other income 47 31 16 52 %
Total other income (expenses) $ 80 $ (15,709 ) $ 15,789 (101 )%
Gain (Loss) from Commodity Derivatives, net
Valuation of our commodity derivatives increased by $31.8 million during the
three March 31, 2020, resulting primarily from changes in underlying commodity
prices as compared to the hedged prices within derivative instruments and the
monthly settlement of those instruments. Additionally, during the three months
ended March 31, 2020, our net loss from commodity derivatives consisted
primarily of net gains of $1.2 million from settled positions and $20.0 million
from mark-to-market adjustments on unsettled positions. During the three months
ended March 31, 2019, our net loss from commodity derivatives consisted
primarily of net losses of $1.6 million from settled positions and $9.0 million
from mark-to-market adjustments on unsettled positions.
Change in Fair Value of Financial Instruments
As of March 31, 2020, we recognized a loss of $17.4 million on the change in
fair value of the embedded derivative associated with the ARM sales agreement.
As of December 31, 2019, we determined the agreement no longer met the criteria
for the "normal purchase normal sales" exception under ASC 815, "Derivatives and
Hedging", as the Company was not meeting the minimum quantities deliverable
under the contract and the net settlement criteria being met (see Note 19 -
Commitments and Contingencies to our condensed consolidated financial
statements). The valuation loss was primarily the result of significant
decreases in the contractual pricing used to calculate net settlement. See Note
9 - Derivatives to our condensed consolidated financial statements for
information regarding the recognition of the net settlement mechanism as an
embedded derivative over the remainder of the contract.
As of March 31, 2019, the change in fair value of financial instruments is
attributable to embedded derivatives associated with the conversion feature of
the Second Lien Term Loan (as defined in Note 11 - Indebtedness to our condensed
consolidated financial statements). Prior to extinguishment of the Second Lien
Term Loan in March 2019, changes in our stock price directly affected the fair
value of the embedded derivative. During the period from January 1, 2019 to
March 5, 2019 (the date of extinguishment), we recognized a loss of $0.3 million
on the embedded derivative.
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Interest Expense
Interest expense for the three months ended March 31, 2020 was $3.8 million
compared to $4.8 million for the three months ended March 31, 2019. For the
three months ended March 31, 2020, interest expense included $1.5 million
interest expense on principal balances outstanding under the Revolving Credit
Agreement, $1.6 million from financing arrangements and $0.7 million for
amortization debt issuance costs including $0.5 million to recognize excess
deferred issuance costs resulting from the borrowing base reduction under our
Revolving Credit Agreement. For the three months ended March 31, 2019, we
incurred interest expense of $4.8 million, which included $1.4 million for
interest expense on principal balances outstanding under the Revolving Credit
Agreement, $1.6 million for PIK interest and $1.7 million related to
amortization of debt discount on our Second Lien Term Loan and $0.1 for
amortization of debt issuance costs.
Going Concern and Liquidity
As of March 31, 2020, we had $97.8 million of indebtedness outstanding and the
borrowing base under our Revolving Credit Agreement (as defined in Note 11 -
Indebtedness to our condensed consolidated financial statements), is $90.0
million, resulting in a remaining borrowing base deficiency of $7.8 million.
Pursuant to the Fourteenth Amendment to the Revolving Credit Agreement, the
remaining payment of $7.8 million was due June 5, 2020, which the Company has
not paid.
On June 5, 2020, the Company, the Guarantors, the Administrative Agent and
certain lenders entered into the Forbearance Agreement, under which the
Administrative Agent and the Majority Lenders agreed to refrain from exercising
certain of their rights and remedies under the Revolving Credit Agreement and
related documents arising solely as a result of the occurrence or continuance of
the Specified Defaults during the Forbearance Period including, among other
things, our failure to make the borrowing base deficiency payment due June 5,
2020. The "Forbearance Period" commenced on the date of the Forbearance
Agreement and expired on June 26, 2020. In anticipation of a potential filing of
the Chapter 11 Cases, the Company did not make the borrowing base deficiency
payment.
The Forbearance Agreement permitted the lenders under the Revolving Credit
Agreement, or the RBL Lenders, in their capacity as counterparties to the
Company's commodity swap agreements to unwind and liquidate such swap
arrangements during the Forbearance Period and to apply any net proceeds to pay
down the outstanding obligations under the Revolving Credit Agreement. The swap
positions of such lenders were liquidated on June 9, 2020 for net proceeds of
approximately $9.3 million, which was applied to reduce the outstanding
obligations of the Company under the Revolving Credit Agreement. On June 17,
2020, certain of the RBL Lenders permitted the Company to borrow $1.5 million
under the Revolving Credit Agreement. As of the filing of the Chapter 11 Cases,
the remaining outstanding principal on our Revolving Credit Agreement was $89.9
million, including $25.7 million of such principal held by an affiliate of Värde
which was subordinated to the indebtedness of the other RBL Lenders under the
Revolving Credit Agreement.
On the Petition Date, the Debtors filed voluntary petitions seeking relief under
the Bankruptcy Code in the Bankruptcy Court commencing cases for relief under
Chapter 11 of the Bankruptcy Code. Under the Plan contemplated by the RSA, each
Non-Affiliate RBL Lender will receive its pro rata share of (i) $9.2 million in
cash plus all accrued and unpaid interest as of the Petition Date (estimated to
be $0.7 million), and (ii) participations in $55 million of new loans under the
Exit Facility. See Note 2 - Chapter 11 Filing, Liquidity and Going Concern to
our condensed consolidated financial statements for a description of the terms
of the Chapter 11 Cases, the RSA and the Plan and the impact of the Chapter 11
Cases on the outstanding debt under our Revolving Credit Agreement.
We have experienced losses and working capital deficiencies, and at times in the
past, negative cash flows from operations. Additionally, our liquidity and
operating forecasts have been negatively impacted by the recent decrease in
commodity prices and resulting temporary shut-in of wells, which has negatively
impacted our ability to comply with debt covenants under our Revolving Credit
Agreement. The commodity prices have fallen significantly since the beginning of
2020, due in part to failed OPEC negotiations in the first quarter, which
ultimately were resolved but prices have been slow to recover, as well as
concerns about the COVID-19 pandemic, which has significantly decreased
worldwide demand for oil and natural gas. Our Revolving Credit Agreement
contains financial covenants that require the Company to maintain a Leverage
Ratio of not more than 4.00 to 1.00 and a Current Ratio of not less than 1.00 to
1.00 as of the last day of each fiscal quarter. See Note 11 - Indebtedness to
our condensed consolidated financial statements for additional information
regarding the financial covenants under our Revolving Credit Agreement. As of
March 31, 2020, the Company was not in compliance with the Leverage Ratio and
Current Ratio covenants under the Revolving Credit Agreement. Pursuant to the
Fourteenth Amendment (as defined in Note 11 - Indebtedness), the Company
obtained a waiver from the requisite lenders of its non-compliance with the
Leverage Ratio and Current Ratio covenants, among other waivers of default, as
of March 31, 2020. Pursuant to the Forbearance Agreement, the Administrative
Agent and the requisite lenders under the Revolving Credit Agreement agreed to
refrain from exercising certain of their rights and remedies under the Revolving
Credit Agreement and related documents during the Forbearance Period that arose
solely as a result of the Company's
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breach of the Leverage Ratio and Current Ratio covenants, the Company's failure
to pay remaining borrowing base deficiency and certain other defaults or events
of default.
Fluctuations in oil and natural gas prices have a material impact on our
financial position, results of operations, cash flows and quantities of oil,
natural gas and NGL reserves that may be economically produced. Historically,
oil and natural gas prices have been volatile, and may be subject to wide
fluctuations in the future. If continued depressed prices persist, the Company
will continue to experience operating losses, negative cash flows from operating
activities, and negative working capital.
We face uncertainty regarding the adequacy of our liquidity and capital
resources and have extremely limited access to additional financing. The Interim
DIP Order entered by the Bankruptcy Court on June 29, 2020 approved the Initial
DIP Facility on an interim basis, thereby allowing us to borrow up to $5.0
million under the Initial DIP Facility. Our ability to borrow the additional
$10.0 million new money loans under the Initial DIP Facility is contingent on
the satisfaction of the conditions specified in the Initial DIP Credit
Agreement, including receipt of a final order by the Bankruptcy Court approving
the Initial DIP Facility and the Initial DIP Credit Agreement. In addition to
the cash requirement necessary to fund ongoing operations, we have incurred
significant professional fees and other costs in connection with preparation for
the Chapter 11 Cases and expect that we will continue to incur significant
professional fees, costs and other expenses throughout our Chapter 11 Cases.
As part of the Chapter 11 Cases, the Company entered into the RSA described
above. The Company's operations and its ability to develop and execute its
business plan are subject to a high degree of risk and uncertainty associated
with the Chapter 11 Cases. The outcome of the Chapter 11 Cases is subject to a
high degree of uncertainty and is dependent upon factors that are outside of the
Company's control, including actions of the Bankruptcy Court and the Company's
creditors. There can be no assurance that the Company will confirm and
consummate a Plan as contemplated by the RSA or complete another plan of
reorganization with respect to the Chapter 11 Cases. As a result, the Company
has concluded that management's plans do not alleviate substantial doubt about
the Company's ability to continue as a going concern within twelve-month period
following the date of issuance of these consolidated financial statements.
Information about our cash flows for the three months ended March 31, 2020 and
2019, are presented in the following table (in thousands):
Three Months Ended March 31,
2020 2019
Cash provided by (used in):
Operating activities $ 7,020 $ (10,498 )
Investing activities 16,055 (28,709 )
Financing activities (17,538 ) 29,298
Net change in cash and cash equivalents $ 5,537 $ (9,909 )
Operating Activities
For the three months ended March 31, 2020, net cash provided by operating
activities was $7.0 million, compared to net cash used in operating activities
of $10.5 million for the three months ended March 31, 2019. The $7.0 million
provided by operating activities during the first quarter of 2020 was primarily
made up the of net loss of $1.9 million partially offset by non-cash adjustments
to net income of $1.0 million offset by cash provided by an increase in working
capital of $8.0 million. The working capital increase resulted from payments
made on accounts receivable and lower accrued revenue receivable at March 31,
2019.
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Investing Activities
For the three months ended March 31, 2020, net cash provided by investing
activities was $16.1 million, compared to a use of $28.7 million for the same
period in 2019. The $16.1 million in cash provided by investing activities
during the three months ended March 31, 2020, was primarily attributable to the
following:
• approximately $24.1 million in proceeds from the sale of approximately
1,185 undeveloped net acres in Lea County, New Mexico; partially offset
by
• cash payments of approximately $8.0 million for capital expenditures on
oil and gas properties.
Capital Expenditure Breakdown
During the three months ended March 31, 2020, capital cost incurred was $6.4
million. Incurred costs include $1.6 million related to increases to Lilis'
working interests for two wells due to non-consent elections that reduced
accounts receivable from other working interest partners by that amount. Total
capital incurred for the first quarter of 2020 is as follows (in thousands):
2019 Drilling & Completion Program $ 2,417
Facilities & Other Projects 3,947
Total Capital Spending $ 6,364
Financing Activities
For the three months ended March 31, 2020, net cash used in financing activities
was $17.5 million compared to cash provided by financing activities of $29.3
million during the same period in 2019. The $17.5 million of net cash used in
financing activities included a $17.3 million repayment under the Revolving
Credit Agreement.
Capital Structure
Revolving Credit Agreement
The Company has entered into the Seventh Amendment through the Fourteenth
Amendment to the Revolving Credit Agreement and the Forbearance Agreement, which
among other things, resulted in the following (see Note 11 - Indebtedness to our
condensed consolidated financial statements for additional information):
• Reduced our borrowing base to $90.0 million, resulting in a
borrowing base deficiency of $7.8 million at March 31, 2020;
• Extended the date for the final borrowing base deficiency payment to
June 5, 2020 and further to June 26, 2020;
• Waived compliance with the Leverage and Current Ratio covenants as
of December 31, 2019 and March 31, 2020; and
• Obtained the agreement of the Administrative Agent and the requisite
lenders to refrain from exercising certain rights and remedies under
the Revolving Credit Agreement arising as a result of certain
defaults and events of default, including our failure to make the
borrowing base deficiency payment on June 5, 2020.
As a result of the filing of the Chapter 11 Cases, all indebtedness under the
Revolving Credit Agreement was automatically accelerated and became due and
payable. As of the filing of the Chapter 11 Cases, the remaining outstanding
principal on our Revolving Credit Agreement was $89.9 million, including $25.7
million of such principal held by an affiliate of Värde which was subordinated
to the indebtedness of the other bank lenders under the Revolving Credit
Agreement.
Debtor-in-Possession Credit Agreement
On June 30, 2020, Lilis Energy, Inc., as borrower, and the other Debtors, as
guarantors, entered into a Senior Secured Super-Priority Debtor-in-Possession
Credit Agreement, or the DIP Credit Agreement, among the Debtors, the
Non-Affiliate RBL Lenders (also referred to as the Initial DIP Lenders), and the
Administrative Agent. Under the Initial DIP Facility, the Initial DIP Lenders
agreed to provide a superpriority senior secured debtor-in-possession credit
facility (also referred to as the Initial DIP Facility) providing for an
aggregate principal amount of (i) $15.0 million of new money revolving
commitments, of which up to $5.0 million became available upon entry of the
Interim DIP Order, with the remainder to become available on a final basis, plus
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(ii) a tranche of roll-up term loans to refinance $15.0 million of the
outstanding loans under the Revolving Credit Facility, including $1.5 million
pre-petition bridge loans that the Non-Affiliate RBL Lenders advanced to the
Company on June 17, 2020, of which $1.5 million of roll-up term loans were
incurred upon entry of the Interim DIP Order, with the remaining $13.5 million
to be incurred upon entry of a final order. On June 29, 2020, the Bankruptcy
Court entered the Interim DIP Order granting interim approval of the Initial DIP
Facility, thereby permitting the Debtors to incur up to $5.0 million new money
loans on an interim basis. A final hearing on the Initial DIP Facility and
Initial DIP Credit Agreement is scheduled for August 18, 2020 at 2:30 p.m.
prevailing Central Time.
Subject to approval by the Bankruptcy Court, the proceeds of the Initial DIP
Facility will be used to pay fees, expenses and other expenditures of the
Company RSA Parties to be set forth in rolling budgets prepared as part of the
Chapter 11 Cases, subject to approval by the Initial DIP Lenders. Closing the
Initial DIP Facility is contingent on the satisfaction of customary conditions,
including receipt of a final order by the Bankruptcy Court approving the Initial
DIP Facility and the Initial DIP Credit Agreement.
Borrowings under the Initial DIP Facility mature on the earliest of (i) November
30, 2020, (ii) the effective date of an approved plan of reorganization and
(iii) the date on which the Debtors consummate a sale of all or substantially
all of their assets pursuant to Section 363 of Chapter 11 of the Bankruptcy Code
or otherwise.
The Initial DIP Credit Agreement contains events of default customary for
debtor-in-possession financings, including events related to the Chapter 11
proceedings, the occurrence of which could cause the acceleration of the
Debtors' obligation to repay borrowings outstanding under the Initial DIP
Facility. The Debtors' obligations under the Initial DIP Credit Agreement are
secured by a security interest in, and lien on, substantially all present and
after-acquired property (whether tangible, intangible, real, personal or mixed)
of the Debtors, including a superpriority priming lien on the property of the
Debtors that secure their obligations under the Revolving Credit Facility.
Related Party Transactions
Certain investment funds and entities affiliated with Värde Partners, Inc. are
parties to the RSA. For additional information regarding the RSA, see "Overview
- Voluntary Petitions under Chapter 11 of the Bankruptcy Code" above.
On April 21, 2020, Värde Investment Partners, L.P., an affiliate of Värde
Partners, Inc., became a lender under our Revolving Credit Agreement by
acquiring, from a prior lender, loans and commitments under the Revolving Credit
Agreement in the principal amount of approximately $25.7 million. The loans and
commitments acquired by Värde Investment Partners, L.P. are subject to certain
subordination provisions set forth in the Revolving Credit Agreement, as amended
by the Fourteenth Amendment thereto dated April 21, 2020. For additional
information regarding our Revolving Credit Agreement, as amended, see Note 11 -
Indebtedness to our condensed consolidated financial statements.
Under two agreements entered into with affiliates of Värde in 2019 for the sale
of an overriding royalty interest to Winkler Lea Royalty L.P. ("WLR") and a
non-operated working interest in newly developed assets to Winkler Lea Working
Interest L.P. ("WLWI"). For the three months ended March 31, 2020, WLR's
proportionate share of revenue of $0.2 million, and WLWI's net revenue (revenue
less production costs) of $1.4 million are both included in interest expense on
the Company's condensed consolidated statements of operations.
Subsequent Events
On May 6, 2020, the Company terminated its Gathering Agreement in its entirety.
Additionally, in connection with the termination of the Gathering Agreement, the
Company declared force majeure and suspended deliveries of crude oil under that
Firm Sales Contract between the Company and ARM, then subsequently terminated
the Firm Sales Contract on or about May 8, 2020. On May 8, 2020, ARM, SCM Crude
and Salt Creek filed a petition asserting claims against the Company with
respect to its termination of certain midstream and marketing arrangements. See
Note 19 - Commitments and Contingencies to our condensed consolidated financial
statements for more information concerning these matters.
On June 5, 2020, the Company, the Guarantors, the Administrative Agent and
certain lenders entered the Forbearance Agreement. See Note 2 - Chapter 11
Filing, Liquidity and Going Concern to our condensed consolidated financial
statements for a description of the terms of the Forbearance Agreement and the
related subsequent events concerning the indebtedness under the Revolving Credit
Agreement.
On June 28, 2020, the Company and its consolidated subsidiaries filed voluntary
petitions as debtors seeking relief under Title 11 of the Bankruptcy Code in the
Bankruptcy Court commencing the Chapter 11 Cases. See Note 2 - Chapter 11
Filing,
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Liquidity and Going Concern to our condensed consolidated financial statements
for a description of the Chapter 11 Cases and the related subsequent events
concerning the indebtedness under the revolving Credit Agreement and its
derivative contracts and the impact of the Chapter 11 Cases on such
indebtedness, certain derivative contracts and business and operations of the
Company.
On June 30, 2020, The Company received notification dated June 29, 2020 from the
NYSE American LLC (the "NYSE American") that the Company's common stock has been
suspended from trading on the NYSE American and that the NYSE American has
determined to commence proceedings to delist the Company's common stock. The
NYSE American determined that the Company was no longer suitable for listing
under Section 1003(c)(iii) of the NYSE American Company Guide after the
Company's June 29, 2020 disclosure that it and certain of its subsidiaries filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code in the U.S. Bankruptcy Court for the Southern District of Texas, Houston
Division. The Company does not presently anticipate exercising its right to
appeal the NYSE American's delisting determination.
The Company's common stock has begun to be quoted on the OTC Pink marketplace on
June 30, 2020 under the symbol "LLEXQ".
Effects of Inflation and Pricing
The oil and gas industry is very cyclical and the demand for goods and services
of oil field companies, suppliers and others associated with the industry puts
pressure on the economic stability and pricing structure within the industry.
Typically, as prices for oil and natural gas increase, so do all associated
costs. Material changes in prices impact the current revenue stream, estimates
of future reserves, borrowing base calculations of bank loans and the value of
properties in purchase and sale transactions. Material changes in prices, such
as those experienced to date in 2020, can impact the value of oil and natural
gas companies and their ability to raise capital, borrow money and retain
personnel. We anticipate business costs will vary in accordance with commodity
prices for oil and natural gas, and the associated increase or decrease in
demand for services related to production and exploration.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
Commitments and Contractual Obligations
On August 2, 2018, the Company executed a five-year agreement with SCM Crude,
LLC, an affiliate of Salt Creek, to secure firm takeaway pipeline capacity and
pricing on a long-haul pipeline to the Gulf Coast region commencing July 1,
2019. On March 11, 2019, the agreement was replaced with a five-year agreement
between the Company and ARM, a related company to Salt Creek. The new agreement
accelerated the start date to March 2019 and guarantees firm takeaway capacity
on a long-haul pipeline to Corpus Christi, Texas, once completed, at a specified
price. Under the terms of the new contract, the Company received pricing
differentials on the crude oil sales contract subject to minimum quantities of
crude oil to be delivered as follows:
Date
Quantity (Barrels per Day)
March 2019 - June 2019 5,000
July 2019 - December 2019 4,000
January 2020 - June 2020 5,000
July 2020 - June 2021 6,000
July 2021 - December 2024 (1) 7,500
(1) Extending to the later of December 2024 or 5 years from the EPIC Crude Oil
pipeline in-service date (February 2025).
Further, ARM has agreed to purchase crude from the Company based upon Magellan
East Houston pricing with a fixed "differential basis". As of December 31, 2019,
we determined the agreement no longer met the criteria for the "normal purchase
normal sales" exception under ASC 815, "Derivatives and Hedging", as the Company
was not meeting the minimum quantities deliverable under the contract and the
net settlement criteria being met. See Note 9 - Derivatives to our condensed
consolidated financial statements for information regarding the recognition of
the net settlement mechanism as an embedded derivative over the remainder of the
contract. On May 8, 2020, the Company terminated this agreement with ARM.
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LILIS ENERGY, INC. 