LILIS ENERGY, INC. 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 aPermian 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 theDelaware 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. 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 inNovember 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. OnJune 16, 2020 , our board of directors revised the original directive and authority of the Special Committee to include evaluation of restructuring transactions. OnJune 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). As ofJune 30, 2020 , we had$88.4 million of indebtedness outstanding under our Revolving Credit Agreement (as defined below). 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 beforeJune 5, 2020 , untilJune 26, 2020 . The Company did not make the payment.
Voluntary Petitions under Chapter 11 of the Bankruptcy Code
OnJune 28, 2020 (the "Petition Date"),Lilis Energy, Inc. and its consolidated subsidiariesBrushy Resources, Inc. ,ImPetro Operating LLC, ImPetro Resources, LLC, Lilis Operating Company, LLC andHurricane 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 theUnited 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 reLilis Energy, Inc. , et al., Case No. 20-33274. We are currently operating our business as "debtors-in-possession" under the jurisdiction of theBankruptcy 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 theBankruptcy Court for various forms of customary relief designed to minimize the effect of bankruptcy on the Debtors' operations, customers and employees. OnJune 29, 2020 , theBankruptcy 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) certain pre-petition obligations, including, but not limited to: 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 theBankruptcy Court . 36 -------------------------------------------------------------------------------- OnJune 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 VärdePartners, 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 ofOctober 10, 2018 (as amended, the "Revolving Credit Agreement" and the loan facility, the "Revolving Credit Facility"), by and amongLilis 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 beforeAugust 18, 2020 . If on or prior toAugust 18, 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 VärdeEquity 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)
Petition Date (estimated to be
• 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
consultation with the Administrative Agent, and as a condition to the
effectiveness of the Plan (subject to certain exceptions provided in theRSA), 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 theBankruptcy 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 beforeAugust 18, 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. 37 --------------------------------------------------------------------------------
Initial DIP Facility, Replacement DIP Facility and Exit Facility.
The RSA contemplates that, upon the interim approval of theBankruptcy 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 super-priority 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 onJune 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. OnJune 29, 2020 , theBankruptcy 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 onJune 30, 2020 . A final hearing on the Initial DIP Facility and Initial DIP Credit Agreement is scheduled forAugust 18, 2020 . Subject to approval by theBankruptcy 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 theBankruptcy 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 toAugust 18, 2020 , to provide the Debtors with a Replacement DIP Facility or the VärdeEquity 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 VärdeEquity 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 super-priority 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 VärdeEquity 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 toAugust 18, 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 "VärdeEquity Investment "). The proceeds of the VärdeEquity 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
Acceleration of Our Existing Debt and Automatic Stay Due to Chapter 11 Filing
As ofJune 30, 2020 , we had$88.4 million of indebtedness outstanding under our Revolving Credit Agreement 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. OnJune 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 dueJune 5, 2020 , deliver certain financial statements when due, failure to comply with requirements related to the status of trade payables and related liens and failure to maintain the leverage ratio and asset coverage ratio required by the Revolving Credit Agreement as of the fiscal quarter endedJune 30, 2020 . The "Forbearance Period" commenced on the date of the Forbearance Agreement and expired at6:00 p.m., Central time , onJune 26, 2020 . 38
-------------------------------------------------------------------------------- The Forbearance Agreement also deferred the scheduled spring redetermination of the borrowing base under the Revolving Credit Agreement from on or aboutJune 5, 2020 to on or aboutJune 26, 2020 . The redetermination did not happen as a result of the Chapter 11 filing. 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 onJune 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. OnJune 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 were 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. In July, the remaining derivative contracts were terminated in conjunction with our bankruptcy proceedings. 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 its outstanding balance under the Revolving Credit Agreement as liabilities subject to compromise on its condensed consolidated balance sheet as ofJune 30, 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. These factors have restricted our access to liquidity and lead the company to seek relief through filing our 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. 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 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 theBankruptcy Court onJune 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, which we borrowed onJune 30, 2020 . 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 theBankruptcy 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
39
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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.
2020 Operational and Financial Updates
• Brought additional capital of
sale of certain undeveloped leasehold assets in
• Successfully tested gas treating system on the east side gas pipeline and
now in the final stages of contract negotiations for long-term pricing.
• In response to commodity price decreases in March and
Company elected to shut-in 31 wells during
identified as uneconomic after the significant decline in commodity prices
at that time. Twenty-eight of the shut-in wells have been brought back
online.
• Implemented well optimization program that includes: utilizing chemicals,
hot oiling, and swabbing; in combination with a proper preventative
maintenance program to maximize increases in daily production.
• 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
COVID-19 OnJanuary 30, 2020 , theWorld Health Organization ("WHO") announced a global health emergency due to the COVID-19 outbreak, which originated inWuhan, China , and the risks to the international community as the virus spreads globally beyond its point of origin. InMarch 2020 , theWHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. In addition, inMarch 2020 , OPEC+ countries failed to agree on production levels which has caused increased supply and led to a substantial sharp decrease in oil prices and an increasingly volatile market. The oil price and production dispute ended with an agreement among certain OPEC+ countries to cut global petroleum output but such cuts did not go far enough to offset the impact of COVID-19 pandemic on the worldwide economy reducing worldwide demand and pricing of oil. If depressed pricing continues for an extended period it may 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.
The substantial decrease in oil prices has resulted in a full-cost ceiling
impairment of
DuringApril 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. In late May, 16 of the shut-in wells were back on production. Another 12 shut-in wells were back on production in early June. After initially furloughing a portion of its employees, and as a result of continuing restricted liquidity further exacerbated by economic impacts of the COVID-19 pandemic, the Company laid off 44% of its remaining workforce inJune 2020 to further reduce general and administrative costs of the Company.
The economic impact of the COVID-19 pandemic and resulting reduction in oil prices is expected to continue to impact the Company for an indeterminate period.
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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 further 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
OnMarch 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 failedOPEC 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 resulting in lower cash inflow and impairment on our proved oil and gas properties, 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.
Results of Operations - For the Three and Six Months Ended
Sales Volumes and Revenues
The following table sets forth selected revenue and sales volume data for the
three months ended
Three Months Ended June 30,
2020 2019 Variance %
Net production:
Oil (Bbls) 172,416 357,176 (184,760 ) (52 )%
Natural gas (Mcf) 288,300 923,910 (635,610 ) (69 )%
NGL (Bbl) 18,260 65,903 (47,643 ) (72 )%
Total (BOE) 238,726 577,063 (338,337 ) (59 )%
Average daily production (BOE/d) 2,623 6,341 (3,718 ) (59 )%
Average realized sales price:
Oil (Bbl) $ 30.78 $ 55.94 $ (25.16 ) (45 )%
Natural gas (Mcf) $ 0.35 $ 0.38 $ (0.03 ) (8 )%
NGL (Bbl) $ 9.69 $ 18.82 $ (9.12 ) (48 )%
Total (BOE) $ 23.39 $ 37.38 $ (14.00 ) (37 )%
Oil, natural gas and NGL revenues (in
thousands):
Oil revenue $ 5,306 $ 19,982 $ (14,676 ) (73 )%
Natural gas revenue 100 350 (250 ) (71 )%
NGL revenue 177 1,240 (1,063 ) (86 )%
Total revenue $ 5,583 $ 21,572 $ (15,989 ) (74 )%
41
-------------------------------------------------------------------------------- Realized commodity prices were adversely impacted by COVID-19 which resulted in a decrease of our realized prices for the quarter, and was partially offset by recognition of deferred revenue, resulting in a decrease of 37% in realized price per BOE for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . Total revenue decreased$16.0 million to$5.6 million for the three months endedJune 30, 2020 , as compared to$21.6 million for the three months endedJune 30, 2019 , representing an 74% decrease. Oil revenue for the three months endedJune 30, 2020 includes recognition of$2.2 million of deferred revenue upon the termination of the ARM sales agreement. Total sales volumes decreased 59% to 238,726 BOE during the three months endedJune 30, 2020 , compared to 577,063 BOE for the 2019 quarter, a decrease of 338,337 BOE. Lower total sales volumes for the three months endedJune 30, 2020 was primarily the result of the shut-in of 31 of our wells in response to the sharp decline in commodity prices in March andApril 2020 . The decrease was partially offset by sales from 3.0 gross (2.5 net) wells placed on production afterJune 30, 2019 .
The following table sets forth selected revenue and sales volume data for the
six months ended
Six Months Ended June 30,
2020 2019 Variance %
Net production:
Oil (Bbls) 475,762 674,845 (199,083 ) (30 )%
Natural gas (Mcf) 573,519 1,842,517 (1,268,998 ) (69 )%
NGL (Bbl) 35,011 140,349 (105,338 ) (75 )%
Total (BOE) 606,360 1,122,280 (515,920 ) (46 )%
Average daily production (BOE/d) 3,332 6,166 (2,834 ) (46 )%
Average realized sales price:
Oil (Bbl) $ 37.13 $ 51.39 $ (14.26 ) (28 )%
Natural gas (Mcf) $ 0.50 $ 1.02 $ (0.51 ) (51 )%
NGL (Bbl) $ 11.31 $ 19.32 $ (8.00 ) (41 )%
Total (BOE) $ 30.27 $ 34.99 $ (4.73 ) (14 )%
Oil, natural gas and NGL revenues (in
thousands):
Oil revenue $ 17,667 $ 34,683 $ (17,016 ) (49 )%
Natural gas revenue 289 1,876 (1,587 ) (85 )%
NGL revenue 396 2,711 (2,315 ) (85 )%
Total revenue $ 18,352 $ 39,270 $ (20,918 ) (53 )%
42
-------------------------------------------------------------------------------- Realized commodity prices were adversely impacted by COVID-19 which resulted in a decrease of our realized prices and was partially offset by recognition of deferred revenue, resulting in a decrease of 14% in realized price per BOE for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Total revenue decreased$20.9 million to$18.4 million for the six months endedJune 30, 2020 , as compared to$39.3 million for the six months endedJune 30, 2019 , representing a 53% decrease. Oil revenue for the six months endedJune 30, 2020 includes recognition of$2.2 million of deferred revenue upon the termination of the ARM sales agreement. Total sales volumes decreased 46% to 606,360 BOE during the six months endedJune 30, 2020 , compared to 1,122,280 BOE for the 2019 period, a decrease of 515,920 BOE. Lower total sales volume was primarily the result of our gas purchaser's shut down of its system for seven days of the first quarter and the April shut-in of 31 of our wells in response to the sharp decline in commodity prices in March andApril 2020 . The decrease was partially offset by sales from 3.0 gross (2.5 net) wells placed on production afterJune 30, 2019 . Operating Expenses
The following table shows a comparison of operating expenses for the three
months ended
Three Months Ended June 30,
2020 2019 Change % Change
Production Costs per BOE:
Production costs $ 10.16 $ 6.69 $ 3.47 52 %
Gathering, processing and
transportation 1.52 2.14 (0.62 ) (29 )%
Production taxes 0.68 1.94 (1.26 ) (65 )%
General and administrative 26.56 16.26 10.30 63 %
Depreciation, depletion,
amortization and accretion 10.28 15.92 (5.64 ) (35 )%
Impairment of oil and properties 136.95 - 137 100 %
Total (BOE) $ 186.15 $ 42.95 $ 143.20 333 %
Operating Expenses:
Production costs $ 2,426 $ 3,859 $ (1,433 ) (37 )%
Gathering, processing and
transportation 363 1,235 (872 ) (71 )%
Production taxes 163 1,119 (956 ) (85 )%
General and administrative 6,340 9,383 (3,043 ) (32 )%
Depreciation, depletion,
amortization and accretion 2,453 9,188 (6,735 ) (73 )%
Impairment of oil and properties 32,694 - 32,694 100 %
Total Operating Expenses $ 44,439 $ 24,784 $ 19,655 79 %
Production Costs
Production costs decreased by $1.4 million to $2.4 million for the three months
ended June 30, 2020 , as a result of shut-in of certain wells as well as
cost-cutting measures in the current year offset by the addition of 3.0 gross
(2.5 net) producing wells since June 30, 2019 . Our production costs on a per BOE
basis increased by $3.47 , or 52%, to $10.16 for the three months ended June 30,
2020 , as compared to $6.69 per BOE for the three months ended June 30, 2019 . Our
production costs include fixed and variable costs, so in periods of lower
production volumes, our per BOE production cost is expected to be higher. The
increase in production costs per BOE was primarily the result of our lower
production volumes. Production costs were also higher due to increased water
disposal costs as a result of a suspension of access to water gathering and
disposal system in June.
Gathering, Processing and Transportation
Gathering, processing and transportation costs decreased$0.9 million to$0.4 million for the three months endedJune 30, 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$2.14 for the three months endedJune 30, 2019 , to$1.52 for the three months endedJune 30, 2020 . The decrease was primarily attributable to a lower proportion of natural gas and NGLs in the product mix. For the three months endedJune 30, 2020 , natural gas and NGLs made up only 28% of total BOE sales as compared to 38% of total BOE sales for the 2019 quarter.
Production Taxes
Production taxes decreased$1.0 million to$0.2 million for the three months endedJune 30, 2020 , compared to$1.1 million for the same period in 2019. The decrease is consistent with the decrease in revenue for the current year quarter primarily due to decreased volumes. 43 --------------------------------------------------------------------------------
General and Administrative Expenses ("G&A")
G&A decreased by$3.0 million to$6.3 million for the three months endedJune 30, 2020 , as compared to$9.4 million for the three months endedJune 30, 2019 . The decrease of$3.0 million in G&A was primarily attributable to a decrease in personnel costs of$3.0 million including directors' fees and decrease in share-based compensation of$2.2 million , offset by an increase of$1.6 million in professional services. All professional fees incurred from the filing of the Chapter 11 Cases forward directly related to the bankruptcy, are reported in reorganization items, net in our condensed consolidation statements of operations.
Depreciation, Depletion, Amortization and Accretion ("DD&A")
DD&A expense was$2.5 million for the three months endedJune 30, 2020 , compared to$9.2 million for the three months endedJune 30, 2019 ; resulting in a decrease of$6.7 million . Our DD&A rate decreased by 35% to$10.28 per BOE for the three months endedJune 30, 2020 from$15.92 per BOE for the three months endedJune 30, 2019 . The rate decrease was primarily the result of lower oil and gas property net book values remaining atJune 30, 2020 after the$228.3 million impairment recorded in the last half of 2019 as well as impairment recorded in the second quarter 2020. To a smaller degree, DD&A expense was lower as a result of a 59% decrease in sales volumes for the three months endedJune 30, 2020 as compared to the 2019 quarter.
Impairment of
The Company recorded an impairment of oil and gas properties of$32.7 million for the three months endedJune 30, 2020 . The net book value of the Company's oil and gas properties atJune 30, 2020 exceeded the ceiling limitation calculated as required under the full cost method of accounting. The impairment was the result of lower discounted future net cash flows as reported in ourJune 30, 2020 proved reserves report. The significant decrease in discounted future net cash flows forJune 30, 2020 as compared to the discounted future net cash flows forMarch 31, 2020 was primarily the result of an approximate 25% decrease in the oil and gas pricing underSEC rules used in theJune 30, 2020 report as compared toMarch 31, 2020 . Proved reserves volumes decreased 7%. The following table shows a comparison of operating expenses for the six months endedJune 30, 2020 and 2019: Six Months Ended June 30, 2020 2020 2019 Change % Change Production Costs per BOE: Production costs $ 11.75 $ 7.68$ 4.07 53 % Gathering, processing and transportation 1.14 2.15 (1.01 ) (47 )% Production taxes 1.28 1.80 (0.52 ) (29 )% General and administrative 20.06 16.99 3.07 18 % Depreciation, depletion, amortization and accretion 9.47 15.45 (5.98 ) (39 )% Impairment of oil and properties 53.92 - 53.92 100 % Total (BOE) $ 97.62 $ 44.07$ 53.55 122 % Operating Expenses: Production costs $ 7,122 $ 8,623$ (1,501 ) (17 )% Gathering, processing and transportation 690 2,413 (1,723 ) (71 )% Production taxes 776 2,025 (1,249 ) (62 )% General and administrative 12,166 19,062 (6,896 ) (36 )% Depreciation, depletion, amortization and accretion 5,745 17,342 (11,597 ) (67 )% Impairment of oil and properties 32,694 - 32,694 100 % Total Operating Expenses$ 59,193 $ 49,465 $ 9,728 20 % Production Costs Production costs decreased by$1.5 million to$7.1 million for the six months endedJune 30, 2020 , as a result of decreased production as well as cost-cutting measures in the current year offset by the addition of 3.0 gross (2.5 net) producing wells sinceJune 30, 2019 . Our production costs on a per BOE basis increased by$4.07 , or 53%, to$11.75 for the six months endedJune 30, 2020 , as compared to$7.68 per BOE for the six months endedJune 30, 2019 . Our production costs include fixed and variable costs, so in 44 -------------------------------------------------------------------------------- periods of lower production volumes, our per BOE cost is expected to be higher. The increase in production costs per BOE was primarily the result of higher compression, chemicals, and repair and maintenance costs. Production costs were also higher due to increased water disposal costs as a result of a suspension of access to water gathering and disposal system in June.
Gathering, Processing and Transportation
Gathering, processing and transportation costs decreased$1.7 million to$0.7 million for the six months endedJune 30, 2020 , compared to$2.4 million for the 2019 period. 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$2.15 for the six months endedJune 30, 2019 , to$1.14 for the six months endedJune 30, 2020 . The decrease was primarily attributable to a lower proportion of natural gas and NGLs in the product mix. For the six months endedJune 30, 2020 , natural gas and NGLs made up only 22% of total BOE sales as compared to 40% of total BOE sales for the 2019 period. Production Taxes Production taxes decreased$1.2 million to$0.8 million for the six months endedJune 30, 2020 , compared to$2.0 million for the same period in 2019. The decrease is consistent with the decrease in revenue for the six months endedJune 30, 2020 . On a per BOE basis, production taxes decreased$0.52 to$1.28 for the six months endedJune 30, 2020 , when compared to$1.80 for the six months endedJune 30, 2019 , primarily attributed to an increase ofNew Mexico production as percentage of total production, where production taxes are lower thanTexas .
General and Administrative Expenses
G&A decreased by$6.9 million to$12.2 million for the six months endedJune 30, 2020 , as compared to$19.1 million for the six months endedJune 30, 2019 . The decrease of$6.9 million in G&A was primarily attributable to a decrease in stock-based compensation of$4.8 million , a decrease in personnel costs of$3.0 million including severance costs and directors' fees, offset by a$1.1 million increase in professional services. All professional fees incurred from the filing of the Chapter 11 Cases forward directly related to the bankruptcy, are reported in reorganization items, net in our condensed consolidation statements of operations.
Depreciation, Depletion, Amortization and Accretion
DD&A expense was$5.7 million for the six months endedJune 30, 2020 , compared to$17.3 million for the six months endedJune 30, 2019 ; resulting in a decrease of$11.6 million . Our DD&A rate decreased by 39% to$9.47 per BOE for the six months endedJune 30, 2020 from$15.45 per BOE for the six months endedJune 30, 2019 . The rate decrease was primarily the result of lower oil and gas property net book values remaining atJune 30, 2020 after the$228.3 million impairment recorded in the last half of 2019 as well as the impairment recorded in the second quarter of 2020. To a smaller degree, DD&A expense was lower as a result of a 46% decrease in sales volumes for the six months endedJune 30, 2020 as compared to the 2019 period. 45
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Impairment of
The Company recorded an impairment of oil and gas properties of$32.7 million for the six months endedJune 30, 2020 . The net book value of the Company's oil and gas properties atJune 30, 2020 exceeded the ceiling limitation calculated as required under the full cost method of accounting. The impairment was the result of lower discounted future net cash flows as reported in ourJune 30, 2020 proved reserves report. The significant decrease in discounted future net cash flows forJune 30, 2020 as compared to the discounted future net cash flows forMarch 31, 2020 was primarily the result of an approximate 25% decrease in the oil and gas pricing underSEC rules used in theJune 30, 2020 report as compared toMarch 31, 2020 . Proved reserves volumes decreased 7%.
Other Income (Expenses)
The following table shows a comparison of other expenses for the three months endedJune 30, 2020 and 2019: Three Months Ended June 30, 2020 2019 Variance % (In Thousands) Other income (expense): Gain (loss) from commodity derivatives, net$ (5,066 ) $ 2,901 $ (7,967 ) (275 )% Change in fair values of financial instruments 20,601 - 20,601 100 % Interest expenses (1,602 ) (1,845 ) 243 (13 )% Reorganization items, net (2,357 ) - (2,357 ) (100 )% Other income (expense) 29 (114 ) 143 (125 )% Total other income (expenses)$ 11,605 $ 942$ 10,663 1,132 %
Gain (Loss) from Commodity Derivatives, net
Valuation of our commodity derivatives decreased by$5.1 million during the three months endedJune 30, 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 endedJune 30, 2020 , our net loss from commodity derivatives consisted primarily of net gains of$12.6 million from settled positions and loss of$17.7 million from mark-to-market adjustments on unsettled positions. During the three months endedJune 30, 2019 , our net loss from commodity derivatives consisted primarily of net losses of$1.6 million from settled positions and gain of$4.5 million from mark-to-market adjustments on unsettled positions.
Change in Fair Value of Financial Instruments
For the three months endedJune 30, 2020 , we recognized a gain of$20.6 million on the change in fair value of the embedded derivative associated with the ARM sales agreement as result of the cancelation of agreement onMay 8, 2020 . As ofDecember 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). See Note 9 - Derivatives to our condensed consolidated financial statements for information regarding the recognition of the net settlement mechanism as an embedded derivative. 46 --------------------------------------------------------------------------------
Interest Expense
Interest expense for the three months endedJune 30, 2020 was$1.6 million compared to$1.8 million for the three months endedJune 30, 2019 . For the three months endedJune 30, 2020 , interest expense included$1.3 million interest expense on principal balances outstanding under the Revolving Credit Agreement,$0.2 million from financing arrangements and$0.2 million for amortization debt issuance costs. For the three months endedJune 30, 2019 , we incurred interest expense of$1.8 million , which included$1.7 million for interest expense on principal balances outstanding under the Revolving Credit Agreement and$0.1 million for amortization of debt issuance costs.
Reorganization Items, net
ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the bankruptcy proceedings are recorded in "reorganization items, net" on our statements of operations. Reorganization items, net for the three months endedJune 30, 2020 is mainly made up of the write off of unamortized deferred financing costs of$2.0 million . The following table shows a comparison of other expenses for the six months endedJune 30, 2020 and 2019: Six Months Ended June 30, 2020 2019 Variance % (In Thousands) Other income (expense): Gain (loss) from commodity derivatives, net$ 16,132 $ (7,676 ) $ 23,808 (310 )% Change in fair values of financial instruments 3,238 (335 )$ 3,573 (1,067 )% Interest expenses (5,405 ) (6,673 )$ 1,268 (19 )% Reorganization items, net (2,357 ) -$ (2,357 ) (100 )% Other income (expense) 78 (83 )$ 161 (194 )% Total other income (expenses)$ 11,686 $ (14,767 ) $ 26,453 (179 )%
Gain (Loss) from Commodity Derivatives, net
Valuation of our commodity derivatives increased by$23.8 million during the six months endedJune 30, 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 six months endedJune 30, 2020 , our gain from commodity derivatives consisted primarily of net gains of$13.8 million from settled positions and$2.3 million from mark-to-market adjustments on unsettled positions. During the six months endedJune 30, 2019 , our net loss from commodity derivatives consisted primarily of net losses of$3.2 million from settled positions and$4.5 million from mark-to-market adjustments on unsettled positions.
Change in Fair Value of Financial Instruments
For the six months endedJune 30, 2020 , we recognized a gain of$3.2 million on the change in fair value of the embedded derivative associated with the ARM sales agreement as result of the cancelation of agreement onMay 8, 2020 . As ofDecember 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). See Note 9 - Derivatives to our condensed consolidated financial statements for information regarding the recognition of the net settlement mechanism as an embedded derivative. As ofJune 30, 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 inMarch 2019 , changes in our stock price directly affected the fair value of the embedded derivative. During the period fromJanuary 1, 2019 toMarch 5, 2019 (the date of extinguishment), we recognized a loss of$0.3 million on the embedded derivative. 47
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Interest Expense
Interest expense for the six months endedJune 30, 2020 was$5.4 million compared to$6.7 million for the six months endedJune 30, 2019 . For the six months endedJune 30, 2020 , interest expense included$2.8 million interest expense on principal balances outstanding under the Revolving Credit Agreement,$1.8 million from financing arrangements and$0.9 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 six months endedJune 30, 2019 , we incurred interest expense of$6.7 million , which included$3.1 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$0.3 for amortization of debt issuance costs.
Reorganization Items, net
ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the bankruptcy proceedings are recorded in "reorganization items, net" on our statements of operations. Reorganization items, net for the six months endedJune 30, 2020 is mainly made up of the write off of unamortized deferred financing costs of$2.0 million .
Going Concern and Liquidity
As of
OnJune 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 dueJune 5, 2020 . The "Forbearance Period" commenced on the date of the Forbearance Agreement and expired onJune 26, 2020 . 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 onJune 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. OnJune 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 theBankruptcy 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 in the past, significant 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 failedOPEC 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. 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 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. As a result, the Company has concluded 48 -------------------------------------------------------------------------------- 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. 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 theBankruptcy Court onJune 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, which we borrowed onJune 30, 2020 . 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 theBankruptcy 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 theBankruptcy 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.
Information about our cash flows for the six months ended
Six Months Ended June 30,
2020 2019Cash provided by (used in):
Operating activities $ 8,149 $ (13,066 )
Investing activities 13,530 (48,268 )
Financing activities (20,969 ) 47,208
Net change in cash and cash equivalents $ 710
Operating Activities For the six months endedJune 30, 2020 , net cash provided by operating activities was$7.5 million , compared to net cash used in operating activities of$13.1 million for the six months endedJune 30, 2019 . The$7.5 million provided by operating activities during the 2020 period was primarily made up the of net loss of$27.2 million , offset by non-cash adjustments to net income of$32.8 million offset by cash provided by a decrease in working capital of$2.0 million . The working capital decrease resulted from payments received on accounts receivable offset by a payments on accounts payable and accrued liabilities atJune 30, 2020 .
Investing Activities
For the six months endedJune 30, 2020 , net cash provided by investing activities was$13.5 million , compared to a use of$48.3 million for the same period in 2019. The$13.5 million in cash provided by investing activities during the six months endedJune 30, 2020 , was primarily attributable to the following:
• approximately
1,185 undeveloped net acres in
• cash payments of approximately
oil and gas properties.
49
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Capital Expenditure Breakdown
During the six months endedJune 30, 2020 , capital costs incurred were$7.7 million . Incurred costs include$1.6 million related to increases to Lilis' working interests for two wells due to non-consent elections that reduced accounts receivable from other working interest partners by that amount. Total capital costs incurred for the six months endedJune 30, 2020 is as follows (in thousands): 2019 Drilling & Completion Program$ 2,675 Facilities & Other Projects 5,007 Total Capital Spending$ 7,682 Financing Activities For the six months endedJune 30, 2020 , net cash used in financing activities was$20.4 million compared to cash provided by financing activities of$47.2 million during the same period in 2019. The$20.4 million of net cash used in financing activities included a$26.6 million repayment under the Revolving Credit Agreement and$6.5 million in proceeds from the Initial DIP Facility. 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
• Extended the date for the final borrowing base deficiency payment to June
5, 2020 and further to June 26, 2020 , did not happen as a result of the
Chapter 11 filing;
• Waived compliance with the Leverage and Current Ratio covenants as of
• 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
OnJune 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 super-priority 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 (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 onJune 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. OnJune 29, 2020 , theBankruptcy 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 forAugust 18, 2020 at2:30 p.m. prevailing Central Time. Subject to approval by theBankruptcy 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 theBankruptcy Court approving the Initial DIP Facility and the Initial DIP Credit Agreement. 50 -------------------------------------------------------------------------------- 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 super-priority 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 VärdePartners, Inc. are parties to the RSA. For additional information regarding the RSA, see "Overview - Voluntary Petitions under Chapter 11 of the Bankruptcy Code" above. OnApril 21, 2020 , VärdeInvestment Partners, L.P. , an affiliate of VärdePartners, 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 VärdeInvestment Partners, L.P. are subject to certain subordination provisions set forth in the Revolving Credit Agreement, as amended by the Fourteenth Amendment thereto datedApril 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 toWinkler Lea Royalty L.P. ("WLR") and a non-operated working interest in newly developed assets toWinkler Lea Working Interest L.P. ("WLWI"). For the three and six months endedJune 30, 2020 , WLR's proportionate share of revenue was none and$0.2 million , respectively. WLWI's net revenue (revenue less production costs) for the three and six months endedJune 30, 2020 were$0.2 million and$1.6 million , respectively. Both are included in interest expense on the Company's condensed consolidated statements of operations. Common Stock Under the Plan contemplated by the RSA entered into onJune 28, 2020 , 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 theBankruptcy Court , irrespective of whether such plan contemplates terms consistent with or similar to those agreed upon in the RSA. OnJune 30, 2020 , The Company received notification datedJune 29, 2020 from theNYSE 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'sJune 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 theU.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
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.
51
--------------------------------------------------------------------------------Commitments and Contractual Obligations
OnAugust 2, 2018 , the Company executed a five-year agreement withSCM Crude, LLC , an affiliate ofSalt Creek , to secure firm takeaway pipeline capacity and pricing on a long-haul pipeline to theGulf Coast region commencingJuly 1, 2019 . OnMarch 11, 2019 , the agreement was replaced with a five-year agreement between the Company and ARM, a related company toSalt Creek . The new agreement accelerated the start date toMarch 2019 and guarantees firm takeaway capacity on a long-haul pipeline toCorpus Christi, Texas , once completed, at a specified price. The Company received pricing differentials on the crude oil sales contract subject to minimum quantities of crude oil to be delivered, however, due to theMay 8, 2020 termination of this agreement with ARM, these minimum quantity commitments no longer existed atJune 30, 2020 . A table of the minimum quantities of crude oil under the canceled contract is below: Date Quantity (Barrels per Day)March 2019 -June 2019 5,000July 2019 -December 2019 4,000January 2020 -June 2020 5,000July 2020 -June 2021 6,000July 2021 -December 2024 (1) 7,500
(1) Extending to the later of
pipeline in-service date (February 2025).
Further, ARM has agreed to purchase crude from the Company based upon MagellanEast Houston pricing with a fixed "differential basis". As ofDecember 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. OnMay 8, 2020 , the Company terminated this agreement with ARM.
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